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________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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Commission file number 000-27205
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PEOPLES BANCORP OF NORTH CAROLINA, INC.
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(Exact Name of Registrant as Specified in Its Charter)
North Carolina 56-2132396
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
218 South Main Avenue
Newton, North Carolina 28658
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(Address of Principal Executive Offices) (Zip Code)
(828) 464-5620
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(Registrant's Telephone Number, Including Area Code)
Securities to be Registered Pursuant to Section 12(b) of the Act: None
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Securities to be Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ________
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Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing. $40,602,662 based on the closing
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price of such common stock on March 16, 2000, which was $13.875 per share.
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. 2,926,318 shares of common
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stock, outstanding at March 27, 2000.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report of Peoples Bancorp of North Carolina, Inc. for the
year ended December 31, 1999 (the "Annual Report"), which is included as an
Appendix to the Proxy Statement for the 2000 Annual Meeting of Shareholders, are
incorporated by reference into Part I, Part II and Part IV.
Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders of
Peoples Bancorp of North Carolina, Inc. to be held on May 4, 2000 (the "Proxy
Statement"), are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
General
Peoples Bancorp of North Carolina, Inc. (the "Company"), was formed in 1999
to serve as the holding company for Peoples Bank (the "Bank"). The Company is a
bank holding company registered with the Board of Governors of the Federal
Reserve System (the "Federal Reserve") under the Bank Holding Company Act of
1956, as amended (the "BHCA"). The Company's sole activity consists of owning
the Bank. The Company's principal source of income is any dividends which are
declared and paid by the Bank on its capital stock.
The Bank, founded in 1912, is a state-chartered commercial bank serving the
citizens and business interests of the Catawba Valley and surrounding
communities. The Bank's deposits are insured by the Bank Insurance Fund (the
"BIF") of the Federal Deposit Insurance Corporation (the "FDIC") to the maximum
amount permitted by law. It is also a member of the Federal Home Loan Bank
system. The Bank conducts its business from its corporate headquarters located
at 218 South Main Avenue, Newton, North Carolina and ten additional offices in
Newton, Denver, Triangle, Catawba, Conover, Maiden, Claremont, Hiddenite, and
Hickory, North Carolina. Ten branch offices provide automated teller machine
(ATM) access to Bank customers. The Bank also has a stand alone ATM located in a
retail establishment in Sherrills Ford. The Bank's training, mortgage loan
administration, network systems, bank card and finance department operations are
operated in leased office space in Newton, Conover and Hickory. At December 31,
1999, the Company had total assets of $432.4 million, net loans of $335.3
million, deposits of $376.6 million, investment securities of $63.8 million, and
shareholders' equity of $38.0 million.
The Bank is engaged primarily in the business of attracting retail and
commercial deposits from the general public and using those deposits to make
secured and unsecured loans. The Bank offers a full range of loan and deposit
products as well as non-deposit investment products. The Bank makes automobile,
credit card, mobile home, securities, first and second mortgage, boat and
recreational vehicle and deposit secured, as well as unsecured, consumer loans.
The Bank also offers a broad range of secured and unsecured commercial loan
products, including commercial construction/permanent loans, Small Business
Administration loans, Rural Economic and Community Development guaranteed loans,
commercial and standby letters of credit, equipment leasing for businesses and
municipalities, special community development loans, and agricultural loans.
The Bank has a diversified loan portfolio, with no foreign loans and few
agricultural loans. Real estate loans are predominately variable rate commercial
property loans. Commercial loans are spread throughout a variety of industries
with no one particular industry or group of related industries accounting for a
significant portion of the commercial loan portfolio. At December 31, 1999,
approximately 9% of the Bank's portfolio was unsecured. Unsecured loans
generally involve higher credit risk than secured loans, and in the event of
customer default, the Bank has a higher exposure to potential loan losses. The
Bank has sold, servicing retained, approximately 31% of its loan portfolio.
The majority of the Bank's deposit and loan customers are individuals and
small to medium-sized businesses located in the Bank's market area. Management
does not believe the Bank is dependent on a single customer or group of
customers concentrated in a particular industry whose loss or insolvency would
have a material adverse impact on operations.
The Bank's primary source of revenue is interest income from its lending
activities. The Bank's other major sources of revenue are interest and dividend
income from investments, interest-earning deposits in other depository
institutions, and transaction and fee income from lending, deposit and
subsidiary activities. The major expenses of the Bank are interest on deposits
and general and administrative expenses such as employee compensation and
benefits, and occupancy expenses.
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The operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies, including the
Federal Reserve, the FDIC and the North Carolina Commissioner of Banks (the
"Commissioner"). Deposit flows and cost of funds are influenced by interest
rates on competing investments and general market rates of interest. Lending
activities are affected by the demand for financing, which in turn are affected
by the interest rates at which financing may be offered and other factors
affecting local demand and availability of funds.
At December 31, 1999, the Bank employed 196 full-time equivalent employees.
The Company has no operations and conducts no business of its own other
than owning the Bank. Accordingly, the discussion of the business which follows
concerns the business conducted by the Bank, unless otherwise indicated.
Subsidiaries
The Bank is the Company's only subsidiary. The Bank has two subsidiaries,
Peoples Investment Services, Inc. and Peoples Real Estate and Appraisal
Services, Inc. Through a relationship with Raymond James Financial Services,
Inc., Peoples Investment Services, Inc. provides the Bank's customers access to
investment counseling and non-deposit investment products such as stocks, bonds,
mutual funds, tax deferred annuities, and related brokerage services. Peoples
Appraisal Services, Inc., provides real estate appraisal services to customers
of the Bank.
Market Area
The Bank's primary market consists of the communities in an approximately
25-mile radius around its headquarters office in Newton, North Carolina. This
area includes Catawba County, Alexander County, the western portion of Iredell
County, the northern portion of Lincoln County, and portions of northeast Gaston
County. The Bank is located only 40 miles north of Charlotte, North Carolina and
the Bank's primary market area is and will continue to be significantly affected
by its close proximity to this major metropolitan area.
Employment in the Bank's primary market area is diversified among
manufacturing, agricultural, retail and wholesale trade, technology, services
and utilities. Siecor (manufacturer of fiber optic cable and accessories) is the
largest employer in Catawba County. Other major employers include CommScope,
Inc. (manufacturer of fiber optic cable and accessories), Catawba County
Schools, and Frye Regional Medical Center, Inc. Employment in the Bank's primary
market area as of January 2000 was strong, with an unemployment rate below that
of North Carolina and national averages.
Competition
The Bank has operated in the Catawba Valley region for more than 85 years
and is the only financial institution headquartered in Newton. However, the Bank
faces strong competition both in attracting deposits and making loans. Its most
direct competition for deposits has historically come from other commercial
banks, credit unions and brokerage firms located in its primary market area,
including large financial institutions. Two national money center commercial
banks are headquartered in Charlotte, North Carolina, only 40 miles from the
Bank's primary market area. Based upon June 30, 1999 comparative data, the Bank
had 17.49% of the deposits in Catawba County, placing it second in deposit size
among a total of eleven banks with branch offices in Catawba County.
The Bank has also faced additional significant competition for investors'
funds from short-term money market securities and other corporate and government
securities. The Bank's deposit base has grown principally due to economic growth
in the Bank's market area coupled with the implementation of new and competitive
deposit products. The ability of the Bank to attract and retain deposits depends
on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.
The Bank experiences strong competition for loans from commercial banks and
mortgage banking companies. The Bank competes for loans primarily through the
interest rates and loan fees it charges and the efficiency and quality
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of services it provides borrowers. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions.
Supervision and Regulation
Bank holding companies and state savings banks are extensively regulated
under both federal and state law. The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company and
the Bank. This summary is qualified in its entirety by reference to the
particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.
Regulation of the Company
General. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank. As a bank holding company subject
to the BHCA, the Company is subject to certain regulations of the Federal
Reserve. Under the BHCA, the Company's activities and those of its subsidiaries
are limited to banking, managing or controlling banks, furnishing services to or
performing services for its subsidiaries or engaging in any other activity which
the Federal Reserve determines to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. Also, see " - The
Gramm-Leach-Bliley Act". The BHCA prohibits the Company from acquiring direct or
indirect control of more than 5% of the outstanding voting stock or
substantially all of the assets of any bank or savings bank or merging or
consolidating with another bank holding company or savings bank holding company
without prior approval of the Federal Reserve.
Additionally, the BHCA prohibits the Company from engaging in, or acquiring
ownership or control of, more than 5% of the outstanding voting stock of any
company engaged in a nonbanking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto. The BHCA does not place territorial restrictions on the
activities of such non-banking related activities.
Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company. Control
is conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the Company or controls in any manner
the election of a majority of the directors of the Company. Control is presumed
to exist if a person acquires more than 10% of any class of voting stock and the
stock is registered under Section 12 of the Exchange Act or the acquiror will be
the largest shareholder after the acquisition.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default. For example, to avoid
receivership of an insured depository institution subsidiary, a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" with the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal
banking agency up to the lesser of (i) an amount equal to 5% of the bank's total
assets at the time the bank became undercapitalized or (ii) the amount which is
necessary (or would have been necessary) to bring the bank into compliance with
all acceptable capital standards as of the time the bank fails to comply with
such capital restoration plan. Under a policy of the Federal Reserve with
respect to bank holding company operations, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. The Federal Reserve
under the BHCA also has the authority to require a bank holding company to
terminate any activity or to relinquish control of a nonbank subsidiary (other
than a nonbank subsidiary of a bank) upon the Federal Reserve's determination
that such activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank holding company.
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In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the Savings
Association Insurance Fund (the "SAIF") or the BIF as a result of the default of
a commonly controlled insured depository institution or for any assistance
provided by the FDIC to a commonly controlled insured depository institution in
danger of default. The FDIC may decline to enforce the cross-guarantee
provisions if it determines that a waiver is in the best interest of the SAIF or
the BIF or both. The FDIC's claim for damages is superior to claims of
stockholders of the insured depository institution or its holding company but is
subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institutions.
Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of ten
percent of its net worth during a rolling twelve month period unless the Company
(i) both before and after the redemption satisfies capital requirements for
"well capitalized" state member banks, (ii) received a one or two rating in its
last examination, and (iii) is not the subject of any unresolved supervisory
issues. As a result of the Company's ownership of the Bank, the Company is
registered under the bank holding company laws of North Carolina. Accordingly,
the Company is also subject to regulation and supervision by the Commissioner.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies subject to the Federal Reserve's capital adequacy
guidelines are required to comply with the Federal Reserve's risk-based capital
guidelines. Under these regulations, the minimum ratio of total capital to risk-
weighted assets (including certain off-balance sheet activities, such as standby
letters of credit) is 8%. At least half of the total capital is required to be
"Tier I capital," principally consisting of common stockholders' equity,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less certain goodwill items. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock, and a
limited amount of the general loan loss allowance. In addition to the risk-based
capital guidelines, the Federal Reserve has adopted a minimum Tier I capital
(leverage) ratio, under which a bank holding company must maintain a minimum
level of Tier I capital to average total consolidated assets of at least 3% in
the case of a bank holding company which has the highest regulatory examination
rating and is not contemplating significant growth or expansion. All other bank
holding companies are expected to maintain a Tier I capital (leverage) ratio of
at least 1% to 2% above the stated minimum.
Dividend and Repurchase Limitations. The Company must obtain Federal
Reserve approval prior to repurchasing Common Stock for in excess of 10% of its
net worth during any twelve-month period unless the Company (i) both before and
after the redemption satisfies capital requirements for "well capitalized" state
member banks; (ii) received a one or two rating in its last examination; and
(iii) is not the subject of any unresolved supervisory issues.
Although the payment of dividends and repurchase of stock by the Company
are subject to certain requirements and limitations of North Carolina corporate
law, except as set forth in this paragraph, neither the Commissioner nor the
FDIC have promulgated any regulations specifically limiting the right of the
Company to pay dividends and repurchase shares. However, the ability of the
Company to pay dividends or repurchase shares may be dependent upon the
Company's receipt of dividends from the Bank. The Bank's ability to pay
dividends is limited. See " -- Regulation of the Bank -- Dividends."
Federal Securities Law. The Company has registered its Common Stock with
the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934 (the
"Exchange Act"). As a result of such registration, the proxy and tender offer
rules, insider trading reporting requirements, annual and periodic reporting and
other requirements of the Exchange Act are applicable to the Company.
Regulation of the Bank
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Dividends. North Carolina commercial banks, such as the Bank, are subject
to legal limitations on the amounts of dividends they are permitted to pay.
Dividends may be paid by the Bank from undivided profits, which are determined
by deducting and charging certain items against actual profits, including any
contributions to surplus required by North Carolina law. Also, an insured
depository institution, such as the Bank, is prohibited from making capital
distributions, including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized" (as such term is
defined in the applicable law and regulations). Based on its current financial
condition, the Bank does not expect that this provision will have any impact on
the Bank's ability to pay dividends.
Capital Requirements. The Bank, as a North Carolina commercial bank, is
required to maintain a surplus account equal to 50% or more of its paid-in
capital stock. As a North Carolina chartered, FDIC-insured commercial bank which
is not a member of the Federal Reserve System, the Bank is also subject to
capital requirements imposed by the FDIC. Under the FDIC's regulations, state
nonmember banks that (a) receive the highest rating during the examination
process and (b) are not anticipating or experiencing any significant growth, are
required to maintain a minimum leverage ratio of 3% of total consolidated
assets; all other banks are required to maintain a minimum ratio of 1% or 2%
above the stated minimum, with a minimum leverage ratio of not less than 4%.
The Bank exceeded all applicable capital requirements as of December 31, 1999.
Deposit Insurance Assessments. The Bank is also subject to insurance
assessments imposed by the FDIC. Under current law, the insurance assessment to
be paid by the BIF members such as the Bank shall be as specified in a schedule
required to be issued by the FDIC. Effective January 1, 1997, the FDIC equalized
the assessment rates for BIF members as well as those institutions with deposits
insured by the SAIF. Thus, for the semi-annual period beginning January 1, 1997,
the assessments imposed on all FDIC deposits for deposit insurance have an
effective rate ranging from 0 to 27 basis points per $100 of insured deposits,
depending on the institution's capital position and other supervisory factors.
However, because legislation enacted in 1996 requires that both SAIF-insured and
BIF-insured deposits pay a pro rata portion of the interest due on the
obligations issued by the Financing Corporation, for the quarters ended or
ending December 31, 1999, March 31, 2000, and June 30, 2000, the FDIC is
assessing BIF-insured deposits an additional 1.184, 21.20, and 2.08 basis points
per $100 of deposits, respectively, and SAIF-insured deposits an additional
5.920, 2.120, and 2.08 basis points per $100 of deposits, respectively, to cover
those obligations. Based on the current financial condition and capital levels
of the Bank, the Bank does not expect that the FDIC insurance assessments will
have a material impact on the Bank's future earnings.
Transactions with Affiliates. Further, under current federal law,
depository institutions are subject to the restrictions contained in Section
22(h) of the Federal Reserve Act with respect to loans to directors, executive
officers and principal shareholders. Under Section 22(h), loans to directors,
executive officers and shareholders who own more than 10% of a depository
institution (18% in the case of institutions located in an area with less than
30,000 in population), and certain affiliated entities of any of the foregoing,
may not exceed, together with all other outstanding loans to such person and
affiliated entities, the institution's loans-to-one-borrower limit (as discussed
below). Section 22(h) also prohibits loans above amounts prescribed by the
appropriate federal banking agency to directors, executive officers and
shareholders who own more than 10% of an institution, and their respective
affiliates, unless such loans are approved in advance by a majority of the board
of directors of the institution. Any "interested" director may not participate
in the voting. The FDIC has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, pursuant to Section 22(h), the Federal
Reserve requires that loans to directors, executive officers, and principal
shareholders be made on terms substantially the same as offered in comparable
transactions with non-executive employees of the Bank. The FDIC has imposed
additional limits on the amount a bank can loan to an executive officer.
Loans to One Borrower. The Bank is subject to the Commissioner's loans to
one borrower limits which are substantially the same as those applicable to
national banks. Under these limits, no loans and extensions of credit to any
borrower outstanding at one time and not fully secured by readily marketable
collateral shall exceed 15% of the unimpaired capital and unimpaired surplus of
the bank. Loans and extensions of credit fully secured by readily marketable
collateral may comprise an additional 10% of unimpaired capital and unimpaired
surplus.
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Limits on Rates Paid on Deposits and Brokered Deposits. Regulations
promulgated by the FDIC place limitations on the ability of insured depository
institutions to accept, renew or roll-over deposits by offering rates of
interest which are significantly higher than the prevailing rates of interest on
deposits offered by other insured depository institutions having the same type
of charter in such depository institution's normal market area. Under these
regulations, "well capitalized" depository institutions may accept, renew or
roll-over such deposits without restriction, "adequately capitalized" depository
institutions may accept, renew or roll-over such deposits with a waiver from the
FDIC (subject to certain restrictions on payments of rates) and
"undercapitalized" depository institutions may not accept, renew, or roll-over
such deposits. The regulations contemplate that the definitions of "well
capitalized," "adequately capitalized" and "undercapitalized" will be the same
as the definitions adopted by the FDIC to implement the corrective action
provisions discussed below.
Only a "well capitalized" (as defined in the statute as significantly
exceeding each relevant minimum capital level) depository institutions may
accept brokered deposits without prior regulatory approval. "Adequately
capitalized" banks may accept brokered deposits with a waiver from the FDIC
(subject to certain restrictions on payment of rates), while "undercapitalized"
banks may not accept brokered deposits. The regulations contemplate that the
definitions of "well capitalized," "adequately capitalized" and
"undercapitalized" are the same as the definitions adopted by the agencies to
implement the prompt corrective action provisions discussed below.
Prompt Corrective Action. The FDIC has broad powers to take corrective
action to resolve the problems of insured depository institutions. The extent of
these powers will depend upon whether the institutions in question are "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized." Under the regulations, an
institution is considered "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" institution is defined as one that
has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-
based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater
(or 3% or greater in the case of an institution with the highest examination
rating). An institution is considered (A) "undercapitalized" if it has (i) a
total risk-based capital ratio of less than 8%, (ii) a Tier I risk-based capital
ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the
case of an institution with the highest examination rating); (B) "significantly
undercapitalized" if the institution has (i) a total risk-based capital ratio of
less than 6%, or (ii) a Tier I risk-based capital ratio of less than 3% or (iii)
a leverage ratio of less than 3% and (C) "critically undercapitalized" if the
institution has a ratio of tangible equity to total assets equal to or less than
2%.
Other. The federal banking agencies, including the FDIC, have developed
joint regulations requiring disclosure of contingent assets and liabilities and,
to the extent feasible and practicable, supplemental disclosure of the estimated
fair market value of assets and liabilities. Additional joint regulations
require annual examinations of all insured depository institutions by the
appropriate federal banking agency, with some exceptions for small, well-
capitalized institutions and state chartered institutions examined by state
regulators, and establish operational and managerial, asset quality, earnings
and stock valuation standards for insured depository institutions, as well as
compensation standards where such compensation would endanger the insured
depository institution or would constitute an unsafe practice.
The Bank is subject to examination by the FDIC and the Commissioner. In
addition, the Bank is subject to various other state and federal laws and
regulations, including state usury laws, laws relating to fiduciaries, consumer
credit and equal credit, fair credit reporting laws and laws relating to branch
banking. The Bank, as an insured North Carolina commercial bank, is prohibited
from engaging as a principal in activities that are not permitted for national
banks, unless (i) the FDIC determines that the activity would pose no
significant risk to the appropriate deposit insurance fund and (ii) the Bank is,
and continues to be, in compliance with all applicable capital standards.
Under Chapter 53 of the North Carolina General Statutes, if the capital
stock of a North Carolina commercial bank is impaired by losses or otherwise,
the Commissioner is authorized to require payment of the deficiency by
assessment upon the bank's shareholders, pro rata, and to the extent necessary,
if any such assessment is not paid by any shareholder, upon 30 days notice, to
sell as much as is necessary of the stock of such shareholder to make good the
deficiency.
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The Bank does not believe that these regulations have had or will have a
material adverse effect on its current operations.
The Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act (the "GLB Act") was signed into law on November
12, 1999 to remove barriers separating banking, securities and insurance firms
and to make other reforms. Certain provisions of the GLB Act were effective
immediately upon signing; other provisions generally take effect between 120
days and 18 months following enactment.
Financial Affiliations. Title I of the GLB Act facilitates affiliations
among banks, securities firms and insurance companies. Financial organizations
may structure new financial affiliations through a holding company structure, or
a financial subsidiary (with limitations on activities and appropriate
safeguards). A bank holding company may now qualify as a financial holding
company and expand into a wide variety of services that are financial in nature,
provided that its subsidiary depository institutions are well-managed, well-
capitalized and have received a "satisfactory" rating on their last Community
Reinvestment Act (the "CRA") examination. A bank holding company which does not
qualify as a financial holding company under the GLB Act is generally limited in
the types of activities in which it may engage to those that the Federal Reserve
had recognized as permissible for a bank holding company prior to the date of
enactment of the GLB Act.
National banks remain limited in the scope of activities they may exercise
directly within the bank, but an eligible national bank may have a financial
subsidiary that exercises many of the expanded financial services authorized for
a financial holding company. A national bank cannot engage in merchant banking
either directly or through a subsidiary, but a financial holding company is
authorized to have an affiliate company that engages in merchant banking.
State banks may have financial subsidiaries that, upon meeting eligibility
criteria, can engage in activities permitted for financial subsidiaries of
national banks.
Functional Regulation. The GLB Act designates the Federal Reserve as the
overall umbrella supervisor of the new financial services holding companies.
The GLB Act adopts a system of functional regulation where the primary regulator
is determined by the nature of activity rather than the type of institution.
Under this principle, securities activities are regulated by the SEC and other
securities regulators, insurance activities by the state insurance authorities,
and banking activities by the appropriate banking regulator.
Insurance. The GLB Act reaffirms that states are the regulators for
insurance activities of all persons, including acting as the functional
regulator for the insurance activities of federally-chartered banks. However,
states may not prevent depository institutions and their affiliates from
conducting insurance activities.
Privacy. The GLB Act imposes restrictions on the ability of financial
services firms to share customer information with nonaffiliated third parties.
The GLB Act: (i) requires financial services firms to establish privacy policies
and disclose them annually to customers, explaining how nonpublic personal
information is shared with affiliates and third parties; (ii) directs regulatory
agencies to adopt standards for sharing customer information; (iii) permits
customers to prohibit ("opt-out") of the disclosure of personal information to
nonaffiliated third parties; (iv) prohibits the sharing with marketers of credit
card and other account numbers; and, (v) prohibits "pretext" calling. The
privacy provisions do allow, however, a community bank to share information with
third parties that sell financial products, such as insurance companies or
securities firms.
Other. The GLB Act reforms the Federal Home Loan Bank System to provide
small banks with greater access to funds for making loans to small business and
small farmers. Also, the GLB Act obligates operators of automated teller
machines ("ATMs") to provide notices to customers regarding surcharge practices.
The GLB Act provides that CRA agreements between financial institutions and
community groups must be disclosed and reported to the public.
ITEM 2. PROPERTIES
9
<PAGE>
At December 31, 1999, the Bank conducted its business from the headquarters
office in Newton, North Carolina, and its ten other branch offices in Hickory,
Newton, Catawba, Conover, Claremont, Maiden, Denver, Triangle and Hiddenite,
North Carolina. The Bank also has a stand alone ATM located in a retail
establishment in Sherrills Ford. It operates training, mortgage loan
administration, network systems, bank card and finance department operations in
additional leased office space in Newton, Conover and Hickory. The following
table sets forth certain information regarding the Bank's properties at December
31, 1999. Unless indicated otherwise, all properties are owned by the Bank.
<TABLE>
<CAPTION>
Corporate Office Land Only
---------
<S> <C>
218 South Main Avenue
Newton, North Carolina 28658
2050 Catawba Valley Boulevard
2619 North Main Avenue Hickory, North Carolina 28601
Newton, North Carolina 28658
111 North Main Street
510 East West Street Catawba, North Carolina 28609
Newton, North Carolina 28658
(proposed corporate center)
213 1st Street, West
Conover, North Carolina 28613 Leased
------
3261 East Main Street 310 10th Street NE
Claremont, North Carolina 28610 Suite E 105-106
Conover, North Carolina 28613
6125 Highway 16 South (network systems and training)
Denver, North Carolina 28037
105A South Main Avenue
5153 N.C. Highway 90E Newton, North Carolina 28658
Hiddenite, North Carolina 28636 (bank card operation and finance)
department facilities)
200 Island Ford Road
Maiden, North Carolina 28650 1333 2nd Street NE
Hickory, North Carolina 28601
3310 Springs Road NE (permanent branch, mortgage loan
Hickory, North Carolina 28601 administration and appraisal services
facilities)
142 South Highway 16
Denver, North Carolina 28037
106 North Main Street
Catawba, North Carolina 28609
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, the Bank is not involved in any pending legal
proceedings other than routine, non-material proceedings occurring in the
ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
10
<PAGE>
No matter was submitted to a vote of the Bank's shareholders during the
quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information required by this Item is set forth under the section
captioned "Market for the Company's Common Equity and Related Shareholder
Matters" on page A-17 of the Annual Report, which section is incorporated herein
by reference. See "Item 1. BUSINESS--Supervision and Regulation--The Company"
above for regulatory restrictions which limit the ability of the Company to pay
dividends.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the table captioned
"Selected Financial Data" on page A-3 of the Annual Report, which table is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is set forth in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages A-4 to A-15 of the Annual Report, which section is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in the section captioned
"Quantitative and Qualitative Disclosures About Market Risk" on page A-16 of the
Annual Report, which section is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and supplementary data
set forth on pages A-19 through A-41 of the Annual Report are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item is set forth in the section captioned
"Change in Accountant" on page A-15 of the Annual Report, which section is
incorporated herein by reference.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors - Nominees" on pages 5 and 6 of the Proxy Statement and
"Proposal 1 - Election of Directors - Executive Officers" on page 8 of the Proxy
Statement, which sections are incorporated herein by reference.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 4 of the Proxy Statement, which section is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Director Compensation" on page 7
and "- Management Compensation," " - Stock Benefit Plan," "-Employment
Agreements," "- Incentive Compensation Plans," "- Profit Sharing and 401(k)
Plans," and "- Discretionary Bonuses and Service Awards," on pages 8 through 15
of the Proxy Statement, which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners" on pages 2
through 4 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the section captioned "Proposal 1 - Election of Directors -
Indebtedness of and Transactions with Management" on page 16 of the Proxy
Statement, which section is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a)1. Consolidated Financial Statements (contained in the Annual Report
attached hereto as Exhibit (13) and incorporated herein by reference)
(a) Independent Auditors' Report
(b) Consolidated Statements of Financial Condition as of December 31,
1999 and 1998
(c) Consolidated Statements of Earnings for the Years Ended December
31, 1999, 1998 and 1997
(d) Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997
(e) Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 1999, 1998 and 1997
12
<PAGE>
(f) Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
(g) Notes to Consolidated Financial Statements
14(a)2. Financial Consolidated Statement Schedules
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements, with the exception of the report of KPMG LLP which is
included as Exhibit 99 to this Form 10-K and incorporated herein by
reference, regarding years prior to the year ended December 31, 1998.
14(a)3. Exhibits
Exhibit (3)(i) Articles of Incorporation of Peoples Bancorp of
North Carolina, Inc., incorporated by reference
to Exhibit (3)(I) to the Form 8A filed with the
Securities and Exchange Commission on September
2, 1999
Exhibit (3)(ii) Bylaws of Peoples Bancorp of North Carolina,
Inc. incorporated by reference to Exhibit
(3)(II) to the Form 8A filed with the Securities
and Exchange Commission on September 2, 1999
Exhibit (4) Specimen Stock Certificate, incorporated by
reference to Exhibit (4) to the Form 8A filed
with the Securities and Exchange Commission on
September 2, 1999
Exhibit (10)(a) Employment Agreement between Peoples Bank and
Tony W. Wolfe
Exhibit (10)(b) Employment Agreement between Peoples Bank and
Joseph F. Beaman, Jr.
Exhibit (10)(c) Employment Agreement between Peoples Bank and
Clifton A. Wike
Exhibit (10)(d) Employment Agreement between Peoples Bank and
William D. Cable
Exhibit (10)(e) Employment Agreement between Peoples Bank and
Lance A. Sellers
Exhibit (10)(f) Peoples Bancorp of North Carolina, Inc. Omnibus
Stock Ownership and Long Term Incentive Plan
Exhibit (11) Statement regarding Computation of Per Share
Earnings
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) 1999 Annual Report of Peoples Bancorp of North
Carolina, Inc.
Exhibit (21) Subsidiaries of Peoples Bancorp of North
Carolina, Inc.
Exhibit (27) Financial Data Schedule
Exhibit (99) Report of KPMG LLP
14(b) The Company filed no reports on Form 8-K during the last quarter of
the fiscal year ended December 31, 1999.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Peoples Bancorp of North Carolina, Inc.
(Registrant)
By: /s/ Tony W. Wolfe
--------------------------------------
Tony W. Wolfe
President and Chief Executive Officer
Date: March 27, 2000
--------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Tony W. Wolfe President and Chief Executive Officer March 27, 2000
- ----------------------------- (Principal Executive Officer) --------------
Tony W. Wolfe
/s/ Robert C. Abernethy Chairman of the Board and Director March 24, 2000
- ----------------------------- --------------
Robert C. Abernethy
/s/ Joseph F. Beaman, Jr. Executive Vice President and Chief Financial March 24, 2000
- ----------------------------- Officer (Principal Financial and --------------
Joseph F. Beaman, Jr. Principal Accounting Officer)
/s/ James S. Abernethy Director March 24, 2000
- ----------------------------- --------------
James S. Abernethy
/s/ Bruce R. Eckard Director March 23, 2000
- ----------------------------- --------------
Bruce R. Eckard
/s/ John H. Elmore, Jr. Director March 23, 2000
- ----------------------------- --------------
John H. Elmore, Jr.
/s/ Charles F. Murray Director March 23, 2000
- ----------------------------- --------------
Charles F. Murray
/s/ Bobby E. Matthews Director March 24, 2000
- ----------------------------- --------------
Bobby E. Matthews
/s/ Larry E. Robinson Director March 23, 2000
- ----------------------------- --------------
Larry E. Robinson
/s/ Fred L. Sherrill, Jr. Director March 23, 2000
- ----------------------------- --------------
Fred L. Sherrill, Jr.
/s/ Dan Ray Timmerman, Sr. Director March 23, 2000
- ----------------------------- --------------
Dan Ray Timmerman, Sr.
/s/ Benjamin I. Zachary Director March 24, 2000
- ----------------------------- --------------
Benjamin I. Zachary
</TABLE>
14
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
Exhibit (10)(a) Employment Agreement between Peoples Bank and Tony W. Wolfe
Exhibit (10)(b) Employment Agreement between Peoples Bank and Joseph F.
Beaman, Jr.
Exhibit (10)(c) Employment Agreement between Peoples Bank and Clifton A.
Wike
Exhibit (10)(d) Employment Agreement between Peoples Bank and William D.
Cable
Exhibit (10)(e) Employment Agreement between Peoples Bank and Lance A.
Sellers
Exhibit (10)(f) Peoples Bancorp of North Carolina, Inc. Omnibus Stock
Ownership and Long Term Incentive Plan
Exhibit (11) Statement Regarding Computation of Per Share Earnings
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) 1999 Annual Report of Peoples Bancorp of North Carolina,
Inc.
Exhibit (21) Subsidiaries of Peoples Bancorp of North Carolina, Inc.
Exhibit (27) Financial Data Schedule
Exhibit (99) Report of KPMG LLP
15
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF CATAWBA
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), made as of the 1st day of
December, 1999, by and between PEOPLES BANK, Newton, North Carolina, a North
Carolina banking institution (the "Bank"), and TONY W. WOLFE (the "Employee")and
is joined in by PEOPLES BANCORP OF NORTH CAROLINA, INC., a North Carolina
corporation (the "Holding Company");
W I T N E S S E T H:
WHEREAS the Employee has heretofore been employed and currently is
rendering services to the Bank as President and Chief Executive Officer; and,
WHEREAS the Bank is a North Carolina banking corporation and the Holding
Company is a North Carolina bank holding company and the sole shareholder of the
Bank; and,
WHEREAS the Bank considers the continued availability of the Employee's
services to be important to the management and conduct of the Bank's and Holding
Company's business, and desires to secure for the Bank and Holding Company the
continued availability of the Employee's services; and,
WHEREAS the Employee is willing to make his services available to the Bank
on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows:
1. Employment. The Employee is employed as the President and Chief
---------------
Executive Officer of the Bank. The Employee shall render administrative and
management services to the Bank, such as are customarily performed by persons
situated in a similar executive capacity. He shall promote the business of the
Bank and Holding Company and perform such other duties as shall from
<PAGE>
time-to-time be reasonably described by the Board of Directors of the Bank (the
"Directors").
2. Compensation.
-----------------
A. Base Salary. The Bank shall pay the Employee during the term of
---------------
this Agreement a base salary at the rate of $167,306 per annum, payable in
cash in equal monthly installments or otherwise as agreed by the parties,
provided that the rate of such salary shall be reviewed by the Directors
not less often than annually. Such rate of salary, or increased rate of
salary, as the case may be, may be further increased (but not decreased)
from time-to-time in such amounts as the Directors, in their discretion,
may decide.
B. Management Incentive Plan. The Employee shall be entitled to
-----------------------------
participate in an equitable manner with other key management personnel of
the Bank in the Bank's management incentive plan adopted in 1998.
3. Discretionary Bonuses. The Employee shall be entitled to participate
--------------------------
in an equitable manner with all other key management personnel of the Bank in
discretionary bonuses authorized and declared by the Directors of the Bank. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Employee's right to participate in such discretionary bonuses when and
as are declared by the Board of Directors.
4. Additional Benefits.
------------------------
A. Participation in Retirement and Medical Plan.
-------------------------------------------------
The Employee shall be entitled to participate in any plan of the
Bank relating to pension, profit sharing or other retirement
benefits and medical and disability coverage, or reimbursement
plans that the Bank may adopt for the benefit of its employees
subject to the eligibility rules of such plan.
B. Officer Benefits/Expenses. The Employee shall be
------------------------------
eligible to participate in any fringe benefits which may be or
become applicable to the Bank's executive employees, commensurate
with the responsibilities and functions to be performed by the
Employee under this Agreement. Additionally, the Employee shall
be entitled to such vacation and sick
<PAGE>
leave as shall be established under uniform employee policies
promulgated by the Directors. The Bank shall reimburse the
Employee for all out-of-pocket reasonable and necessary business
expenses which the Employee shall incur in connection with his
services on behalf of the Bank.
Additionally, the Employee shall be entitled to four (4)
weeks vacation and sick leave as shall be established.
5. Term. The initial term of employment under this Agreement shall be
---------
for the period commencing December 1, 1999 and ending three (3) calendar years
after such date. At the end of each one-year period following such commencing
date, this Agreement shall automatically be extended for an additional one (1)
year period beyond the then-effective expiration date, unless written notice
from the Bank or the Employee is received sixty (60) days prior to an
anniversary date advising the other party that this Agreement shall not be
further extended.
6. Other Compensation. The Bank shall provide to the Employee an
-----------------------
automobile for use by the employee during his employment with the Bank. The
Employee shall select the make of the automobile, subject to the approval of the
Board of Directors, and the Employee shall assume and be responsible for all tax
consequences as same shall be determined by the accountants for the Bank with
regard to personal use, business use, and taxability of such benefit to the
employee. The Employee shall be compensated for maintenance, gas expense, and
other expenses associated with said automobile as same shall pertain to business
use only, and shall submit to the Bank a written summary with respect to the use
of said vehicle and the business expenses associated with same on a monthly
basis.
7. Loyalty/Non-Competition.
----------------------------
A. The Employee shall devote his full efforts and entire
business time to the performance of his duties under this
Agreement.
B. During the term of this Agreement, or any renewals or
extensions thereof, and for a period of one (1) year after
termination, the Employee shall not, within Catawba, Alexander,
Iredell or Lincoln Counties, North Carolina, directly or
indirectly, own, manage, operate, join, control or participate in
the
<PAGE>
management, operation or control of or be employed by or
connected in any manner with any depository institution or
financial services business which competes with the Bank or the
Holding Company without the prior written consent of the Bank.
Notwithstanding the foregoing, the Employee shall be free without
such consent to purchase or hold as an investment or otherwise up
to 5% of the outstanding stock or other securities of any
corporation which has its securities publicly traded on any
recognized securities exchange or in any over-the-counter market.
The Employee shall hold in confidence all knowledge or
information of a confidential nature with respect to the business
of the Bank or the Holding Company, received by him during the
term of this Agreement, and will not disclose or make use of such
information without the prior written consent of the Bank.
The Employee acknowledges that it would not be possible to
ascertain the amount of monetary damages in the event of a breach
by the Employee under the provisions of this Paragraph 7. The
Employee agrees that in the event of the breach of this
Paragraph, injunctive relief enforcing the terms of this
Paragraph is an appropriate remedy.
The Bank and Employee further agree that in the event the
Bank shall terminate the employment of the Employee for cause or
should the Employee resign his employment during any period of
the term of his employment contract, then and in that event, the
non-competition provisions of this Agreement shall be applicable.
If, however, the Bank should terminate the employment of the
Employee without cause during the last year of said Agreement,
the non-competition provisions of this Agreement shall not be
applicable, and the Bank shall not proceed with respect to the
remedies as set forth above.
8. Standards. The Employee shall perform his duties under this Agreement
--------------
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time-to-time by the Board of Directors. The Bank shall provide the Employee with
<PAGE>
the working facilities and staff customary for similar executives and necessary
for him to perform his duties.
9. Termination and Termination Pay.
------------------------------------
A. The Employee's employment under this Agreement shall be
terminated upon the following occurrences:
(1) The death of the Employee during the term of this
Agreement, in which the Employee's estate shall be entitled
to receive the compensation due the Employee through the
last day of the calendar month in which his death shall have
occurred and for a period of three (3) months thereafter.
(2) The Employee's employment under this Agreement may
be terminated at any time by a majority vote of the
Directors or by the Employee upon sixty (60) days written
notice to the Employee or the Bank, as the case may be. Upon
such termination by the Employee or by the Directors "for
cause," the Employee shall be entitled to receive
compensation under this Agreement through the effective date
of such termination and such other benefits, if any, as may
be provided by the terms of other plans and programs of the
Bank in the event of termination.
Any such termination by the Directors other than termination
"for cause" shall not prejudice the Employee's right to
compensation or benefits under this Agreement. The Employee
shall have no right to receive compensation or benefits for
any period after termination "for cause." Termination "for
cause" shall include termination because of the Employee's
personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic
violations or similar
<PAGE>
offenses), or final cease and desist order, or any material
breach of any provision of this Agreement.
(3) If the Employee is removed or permanently
prohibited from participating in the conduct of the Bank's
affairs by any order issued by any regulatory agency all
obligations of the Bank under this Agreement shall terminate
as of the effective date of the order. The rights of the
Employee vested prior to the date of such order shall not be
affected.
(4) All obligations under this Agreement may be
terminated:
(a) by the Federal Deposit Insurance
Corporation at the time it enters into an
agreement to provide assistance to or on
behalf of the Bank under the authority
contained in its Rules and Regulations; and,
(b) by any regulatory or supervisory
agency which enters any orders to resolve
problems related to the operation of the
Bank, or when the Bank is determined to be in
an unsafe or unsound condition. Any rights of
the Employee vested prior to such time shall
not be affected by any such determination or
order.
10. Suspension of Employment.
-----------------------------
A. The suspension of the Employee from office or temporary prohibition
from participation by the Employee in the conduct of the affairs of the Bank
pursuant to notice served by any supervisory or regulatory agency, unless stayed
by appropriate proceedings, shall suspend, as of the date of such service, all
obligations of the Bank under the terms of this Agreement.
<PAGE>
B. In the event the charges specified in a notice served as provided in
Subparagraph A of this Section shall be dismissed, the Bank shall:
(1) pay the Employee the compensation withheld from
such Employee pursuant to the suspension of the Bank's
obligation as required in Subparagraph A of this Section;
and,
(2) reinstate the obligations suspended as required in
Subparagraph A of this section.
11. Change in Control.
----------------------
A. In the event of a "Change in Control" (as defined in
Subparagraph (C) below), the term of employment under this Agreement
automatically shall be extended to a period of three (3) years
beginning on the date of the Change in Control, and the Bank or its
successor shall be bound by the terms of this Agreement and shall be
prohibited, during the remainder of such term, from:
(1) Assigning Employee any duties and/or
responsibilities that are inconsistent with his position,
duties, responsibilities or status at the time of the
Change in Control, or requiring that he report to any
person or body other than the Board of Directors of the
Bank and Holding Company; or
(2) Adjusting Employee's annual base salary rate
other than in accordance with the provisions of
Subparagraph (B) below; or
(3) Reducing in level, scope or coverage or
eliminating Employee's life insurance, medical or
hospitalization insurance, disability insurance, profit
sharing plans, stock option plans, stock purchase plans,
deferred compensation plans, management retention plans,
retirement plans, stock ownership plans or similar plans
or benefits being provided by the Bank
<PAGE>
or the Holding Company to the Employee other than those
arising from the Bank's management incentive plan as of
the effective date of the Change in Control; or
(4) Transferring Employee to a location which is an
unreasonable distance from his current principal work
location, without the Employee's express written consent.
B. In the event of a Change in Control, the Employee's base
salary shall be adjusted to include an amount equal to the average
of the two previous years" bonuses arising from the Bank's
management incentive plan, and/or discretionary bonuses, if any, and
such adjusted base salary shall be increased by not less than six
percent (6%) annually beginning at the date of the Change in Control
and continuing each year for the three-year term thereafter.
C. For the purposes of this Agreement, the term "Change in
Control" shall mean any of the following events:
(1) a change in control of a nature that would be
required to be reported in response to Item 1 of the
Current Report on Form 8-K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); or
(2) such time as any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act), other than
a person who beneficially owned as of January 1, 1998,
more than 5% of the Bank's securities, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of
the Holding Company or Bank representing 20 percent or
more of the combined voting power of the outstanding
Common Stock of the Holding Company or Common Stock of the
Bank, as applicable; or
<PAGE>
(3) individuals who constitute the Board or board of
directors of the Holding Company on the date hereof (the
"Incumbent Board" and "Incumbent Holding Company Board,"
respectively) cease for any reason to constitute at least
a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board or Incumbent
Holding Company Board, as applicable, or whose nomination
for election by the Bank's or Holding Company's
shareholders was approved by the Bank's or Holding
Company's Board of Directors or Nominating Committee, as
applicable, shall be considered as though he or she were a
member of the Incumbent Board or Incumbent Holding Company
Board, as applicable; or
(4) either the Holding Company or the Bank
consolidates or merges with or into another corporation,
association or entity or is otherwise reorganized, where
neither the Holding Company nor the Bank, respectively, is
the surviving corporation in such transaction; or
(5) all or substantially all of the assets of either
the Holding Company or the Bank are sold or otherwise
transferred to or are acquired by any other entity or
group.
Notwithstanding the other provisions of this Paragraph 11, a
transaction or event shall not be considered a Change in Control if,
prior to the consummation or occurrence of such transaction or
event, Employee, Bank and Holding Company agree in writing that the
same shall not be treated as a Change in Control for purposes of
this Agreement.
D. In the event any dispute shall arise between the Employee
and the Bank or Holding Company (or any successor) as to the terms
or interpretation of this Agreement, including this Paragraph 11,
whether instituted by formal legal proceedings or otherwise,
<PAGE>
including any action taken by the Employee to enforce the terms of
this Paragraph 11 or in defending against any action taken by the
Holding Company or the Bank, the Bank shall reimburse the Employee
for all costs and expenses incurred in such proceedings or actions,
including attorney's fees, in the event the Employee prevails in any
such action.
12. Disability. If, by reason of physical or mental disability during the
---------------
term hereof, Employee is unable to carry out the normal and usual duties of his
employment hereunder, the Employee shall receive his full salary from the Bank
for up to twenty (20) working days for which he is unable to work. Medical
disability shall require a doctor's statement indicating the date the Employee
became disabled as well as a statement that he is medically able to return to
work before he can resume his duties. If, after thirty (30) consecutive days (1
month), he is still unable to return to work, he will be covered by the
disability insurance policy of the Bank. The disability insurance policy of the
Bank shall pay 66-2/3% of full salary to a maximum of $7,500.00 per month. In
the event of total disability, hospitalization insurance as carried by the Bank
for the Employee shall continue for two (2) years, or until the Employee
qualifies under Social Security Health Insurance. While disabled, the Employee
will keep his original date of employment and all seniority benefits for up to
twelve (12) weeks. Group insurance will be kept in force (Employee will continue
to pay for dependent insurance); however, if the Employee does not return to
work from medical leave after twelve (12) weeks, the Bank may recover the
premiums paid to maintain the coverage. A "return to work" occurs when an
Employee returns to work for at least thirty (30) days. Upon returning to work
from such disability, the Employee shall be restored to his previous position or
to an equivalent position with equivalent benefits, pay, and other conditions of
employment.
13. Successors and Assigns.
----------------------------
A. This Employment Agreement shall enure to the benefit of
and be binding upon any corporate or other successor of the Bank
which shall acquire, directly or indirectly, by conversion, merger,
consolidation, purchase or otherwise, all or substantially all of
the assets of the Bank.
<PAGE>
B. Since the Bank is contracting for the unique and personal
skills of the Employee, the Employee shall be precluded from
assigning or delegating his rights or duties hereunder without first
obtaining the written consent of the Bank.
14. Amendments. No amendments or additions to this Agreement shall be
---------------
binding unless in writing by both parties, except as herein otherwise provided.
15. Applicable Law. This Agreement shall be governed by all respects
-------------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of North Carolina, except to the extent that federal law shall
be deemed to apply.
16. Severability. The provisions of this Agreement shall be deemed
-----------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Entire Agreement; Counterparts.
-----------------------------------
A. This Agreement constitutes the entire agreement between the
Employee and the Bank with respect to the subject matter hereof and
supersedes all prior agreements with respect thereto. This Agreement
may be executed in one or more counterparts, all of which taken
together shall constitute one and the same instrument.
B. This Agreement replaces the Agreement between the parties dated
February 22, 1994 and the Addendum to the original agreement and all
other agreements between the parties prior to the date hereof
respecting the subject matter hereof. Any and all prior agreements
shall be cancelled and have no further force or effect when this
Agreement becomes effective.
18. Notices. Any notice or other communication required or permitted
------------
under this Agreement shall be effective only if it is writing, delivered in
person or by reliable overnight courier service or deposited in the mail,
postage prepaid, return receipt requested and addressed as follows:
<PAGE>
Address of the Bank: Peoples Bank, Post Office Box 467, Newton, North
Carolina, 28658.
Address of the Holding Company: Peoples Bancorp of North Carolina, Inc.,
Post Office Box 467, Newton, North Carolina, 28658.
Address(es) of the Employee: Tony W. Wolfe, 3291 Blackburn Bridge Road,
Lincolnton, North Carolina 28092, with a duplicate copy to Tony W. Wolfe,
P.O. Box 204, Newton, North Carolina, 28658.
Notices given in person or by overnight courier service shall be deemed
given when delivered to the address required by this section, and notices given
by mail shall be deemed given three (3) days after deposit in the mail. Any
party hereto may designate, by written notice to the other party in accordance
herewith, any other address to which notices addressed to him shall be sent.
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first written.
PEOPLES BANK, a North Carolina banking
Corporation
By: /s/ Robert C. Abernethy
-------------------------------------
Robert C. Abernethy, Chairman
Board of Directors
/s/ Tony W. Wolfe
-------------------------------------
Tony W. Wolfe
The Foregoing Agreement is joined in and agreed to by Peoples Bancorp of North
Carolina, Inc.
PEOPLES BANCORP OF NORTH CAROLINA, INC.,
a North Carolina Corporation
by: /s/ Robert C. Abernethy
---------------------------------------
Robert C. Abernethy, Chairman
Board of Directors
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF CATAWBA
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), is made as of the 1st day of
December, 1999, by and between PEOPLES BANK, Newton, North Carolina, a North
Carolina banking institution (the "Bank"), and JOSEPH F. BEAMAN, JR. (the
"Employee")and is joined in by PEOPLES BANCORP OF NORTH CAROLINA, INC., a North
Carolina corporation (the "Holding Company");
W I T N E S S E T H :
WHEREAS the Employee has heretofore been employed and currently is
rendering services to the Bank as Executive Vice President, Chief Financial
Officer, and Corporate Secretary and,
WHEREAS the Bank is a North Carolina banking corporation and the Holding
Company is a North Carolina bank holding company and the sole shareholder of the
Bank; and,
WHEREAS the Bank considers the continued availability of the Employee's
services to be important to the management and conduct of the Bank's and Holding
Company's business, and desires to secure for the Bank and Holding Company the
continued availability of the Employee's services; and,
WHEREAS the Employee is willing to make his services available to the Bank
and Holding Company on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows:
1. Employment. The Employee is employed as Executive Vice President,
---------------
Chief Financial Officer, and Corporate Secretary. The Employee shall render
administrative and management services to the Bank, such as are customarily
performed by persons situated in a similar executive capacity. He shall promote
the business of the Bank and Holding Company
<PAGE>
and perform such other duties as shall from time to time be reasonably described
by the President of the Bank.
2. Compensation.
-----------------
A. Base Salary. The Bank shall pay the Employee during the term of
--------------
this Agreement a base salary at the rate of $127,752 per annum, payable in
monthly installments or more frequently as the Bank elects; provided, that
the rate of such salary shall be reviewed annually by the Bank. Such rate
of salary may be increased (but not decreased) from time to time in such
amounts as the Bank, in its discretion, may decide.
B. Management Incentive Plan. The Employee shall be entitled to
----------------------------
participate in an equitable manner with other key management personnel of
the Bank in the Bank's management incentive plan adopted in 1998.
C. Other Compensation. The Bank shall further pay to the Employee an
---------------------
automobile allowance in the amount of $250.00 for use by the employee for
his personal automobile during his employment with the Bank on a monthly
basis. The Employee shall assume and be responsible for all tax
consequences with respect to such additional compensation.
3. Discretionary Bonuses. The Employee shall be entitled to participate
--------------------------
in an equitable manner with all other key management personnel of the Bank in
discretionary bonuses authorized and declared by the Directors of the Bank. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Employee's right to participate in such discretionary bonuses when and
as are declared by the Board of Directors.
4. Additional Benefits.
------------------------
A. Participation in Retirement and Medical Plan. The Employee
--------------------------------------------------
shall be entitled to participate in any plan of the Bank relating to
pension, profit sharing or other retirement benefits and health, medical
and disability coverage, or reimbursement plans that the Bank may adopt for
the benefit of its
<PAGE>
employees subject to the eligibility rules of such plan.
B. Officer Benefits/Expenses. The Employee shall be eligible to
------------------------------
participate in any fringe benefits which may be or become applicable to the
Bank's executive employees, commensurate with the responsibilities and
functions to be performed by the Employee under this Agreement.
Additionally, the Employee shall be entitled to four (4) weeks of paid
vacation, as an exception to uniform employee policies promulgated by the
Directors, and such sick leave as is established by such policies. The Bank
shall reimburse the Employee for all out-of-pocket reasonable and necessary
business expenses which the Employee shall incur in connection with his
services on behalf of the Bank. Additionally, the Employee shall be
entitled to life insurance in the amount of two times his annual salary;
the same amount in accidental death and dismemberment insurance; dependent
life insurance upon his spouse in the amount of Two Thousand Dollars
($2,000.00); and disability insurance as which will compensate the Employee
66-2/3% of his salary after he is out of work pursuant to company policy
for thirty (30) calendar days. The Employer shall pay all premiums for the
insurance noted above.
5. Term. The initial term of employment under this Agreement shall be for
---------
the period commencing December 1, 1999 and ending three (3) calendar years after
such date. At the end of each one-year period following such commencing date,
this Agreement shall automatically be extended for an additional one (1) year
period beyond the then-effective expiration date, unless written notice from the
Bank or the Employee is received sixty (60) days prior to an anniversary date
advising the other party that this Agreement shall not be further extended, or
in the event the Employee and Employer agree to a further extension before the
expiration of this Agreement. The parties intend that this Agreement shall be a
continuing employment agreement, unless written notice is given as provided in
this Paragraph, or unless this Agreement is otherwise terminated as provided in
this Agreement.
<PAGE>
6. Loyalty/Non-Competition.
----------------------------
A. The Employee shall devote his full efforts and entire business
time to the performance of his duties under this Agreement.
B. During the term of this Agreement, or any renewals or extensions
thereof, and for a period of one (1) year after termination, the Employee
shall not, within Catawba, Alexander, Iredell or Lincoln Counties, North
Carolina, directly or indirectly, own, manage, operate, join, control or
participate in the management, operation or control of or be employed by or
connected in any manner with any depository institution or financial
services business which competes with the Bank or the Holding Company
without the prior written consent of the Bank. Notwithstanding the
foregoing, the Employee shall be free without such consent to purchase or
hold as an investment or otherwise up to 5% of the outstanding stock or
other securities of any corporation which has its securities publicly
traded on any recognized securities exchange or in any over-the-counter
market.
The Employee shall hold in confidence all knowledge or
information of a confidential nature with respect to the business of the
Bank or the Holding Company, received by him during the term of this
Agreement, and will not disclose or make use of such information without
the prior written consent of the Bank.
The Employee acknowledges that it would not be possible to
ascertain the amount of monetary damages in the event of a breach by the
Employee under the provisions of this Paragraph 6. The Employee agrees that
in the event of the breach of this Paragraph, injunctive relief enforcing
the terms of this Paragraph is an appropriate remedy.
The Bank and Employee further agree that in the event the Bank
shall terminate the employment of the Employee for cause or should the
Employee resign his employment during any period of the term of his
employment contract, then and in that event, the non-competition provisions
of this Agreement shall be applicable. If, however, the Bank should
terminate
<PAGE>
the employment of the Employee without cause during the last year of said
Agreement, the non-competition provisions of this Agreement shall not be
applicable, and the Bank shall not proceed with respect to the remedies as
set forth above.
7. Standards. The Employee shall perform his duties under this Agreement
--------------
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time-to-time by the Board of Directors. The Bank shall provide the Employee with
the working facilities and staff customary at the Bank for similar executives
and necessary for him to perform his duties.
8. Termination and Termination Pay.
------------------------------------
A. The Employee's employment under this Agreement shall be
terminated upon the following occurrences:
(1) The death of the Employee during the term of this Agreement,
in which event the Employee's estate shall be entitled to receive the
compensation due the Employee through the last day of the calendar
month in which his death shall have occurred and for a period of three
(3) months thereafter.
(2) The Employee's employment under this Agreement may be
terminated by the Bank at any time or by the Employee upon sixty (60)
days written notice to the Employee or the Bank, as the case may be.
Upon such termination by the Employee or by the Bank "for cause," the
Employee shall be entitled to receive compensation under this
Agreement through the effective date of such termination and such
other benefits, if any, as may be provided by the terms of other plans
and programs of the Bank in the event of termination.
Any such termination by the Bank other than termination "for cause"
shall not prejudice the Employee's right to compensation or benefits
under this Agreement. The Employee shall have no right to receive
compensation
<PAGE>
or benefits for any period after termination "for cause." Termination
"for cause" shall include termination because of Employee's personal
dishonesty, in-competence, willful misconduct, breach of fiduciary
duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than
traffic violations or similar offenses), or final cease and desist
order, or any material breach of any provision of this Agreement.
(3) If the Employee is removed or permanently prohibited from
participating in the conduct of the Bank's affairs by any order issued
by any regulatory agency, all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order. The
rights of the Employee vested prior to the date of such order shall not
be affected.
(4) All obligations under this Agreement may be terminated:
(a) by the Federal Deposit Insurance Corporation at the
time it enters into an agreement to provide assistance to or on
behalf of the Bank under the authority contained in its Rules and
Regulations; and,
(b) by any regulatory or supervisory agency which enters
any orders to resolve problems related to the operation of the
Bank, or when the Bank is determined to be in an unsafe or
unsound condition. Any rights of the Employee vested prior to
such time shall not be affected by any such determination or
order.
9. Suspension of Employment.
-----------------------------
<PAGE>
A. The suspension of the Employee from office or temporary
prohibition from participation by the Employee in the conduct of the
affairs of the Bank pursuant to notice served by any supervisory or
regulatory agency, unless stayed by appropriate proceedings, shall suspend,
as of the date of such service, all obligations of the Bank under the terms
of this Agreement.
B. In the event the charges specified in a notice served as provided
in Subparagraph A of this Section shall be dismissed, the Bank shall:
(1) pay the Employee the compensation withheld from such
Employee pursuant to the suspension of the Bank's obligation as
required in Subparagraph A of this Section; and,
(2) reinstate the obligations suspended as required in
Subparagraph A of this section.
10. Change in Control.
----------------------
A. In the event of a "Change in Control" (as defined in Subparagraph
(C) below), the term of employment under this Agreement automatically shall
be extended to a period of three (3) years beginning on the date of the
Change in Control, and the Bank or its successor shall be bound by the
terms of this Agreement and shall be prohibited, during the remainder of
such term, from:
(1) Assigning Employee any duties and/or responsibilities that
are inconsistent with his position, duties, responsibilities or status
at the time of the Change in Control or with his reporting
responsibilities or equivalent titles in effect at such time; or
(2) Adjusting Employee's annual base salary rate other than in
accordance with the provisions of Subparagraph (B) below; or
<PAGE>
(3) Reducing in level, scope or coverage or eliminating
Employee's life insurance, medical or hospitalization insurance,
disability insurance, profit sharing plans, stock option plans, stock
purchase plans, deferred compensation plans, management retention
plans, retirement plans, stock ownership plans or similar plans or
benefits being provided by the Bank or the Holding Company to the
Employee other than those arising from the Bank's management incentive
plan as of the effective date of the Change in Control; or
(4) Transferring Employee to a location which is an unreasonable
distance from his current principal work location, without the
Employee's express written consent.
B. In the event of a Change in Control, the Employee's base salary
shall be adjusted to include an amount equal to the average of the two
previous years' bonuses arising from the Bank's management incentive plan,
and/or discretionary bonuses, if any, and such adjusted base salary shall
be increased by not less than six percent (6%) annually beginning at the
date of the Change in Control and continuing each year for the three-year
term thereafter.
C. For the purposes of this Agreement, the term "Change in Control"
shall mean any of the following events:
(1) a change in control of a nature that would be required to be
reported in response to Item 1 of the Current Report on Form 8-K, as
in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); or
(2) such time as any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act), other than a person who beneficially
owned as of January 1, 1998, more than 5% of the Bank's securities, is
or
<PAGE>
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Holding
Company or Bank representing 20 percent or more of the combined voting
power of the outstanding Common Stock of the Holding Company or Common
Stock of the Bank, as applicable; or
(3) individuals who constitute the Board or board of directors
of the Holding Company on the date hereof (the "Incumbent Board" and
"Incumbent Holding Company Board," respectively) cease for any reason
to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board or Incumbent Holding Company Board, as
applicable, or whose nomination for election by the Bank's or Holding
Company's shareholders was approved by the Bank's or Holding Company's
Board of Directors or Nominating Committee, as applicable, shall be
considered as though he or she were a member of the Incumbent Board or
Incumbent Holding Company Board, as applicable; or
(4) either the Holding Company or the Bank consolidates or
merges with or into another corporation, association or entity or is
otherwise reorganized, where neither the Holding Company nor the Bank,
respectively, is the surviving corporation in such transaction; or
(5) all or substantially all of the assets of either the Holding
Company or the Bank are sold or otherwise transferred to or are
acquired by any other entity or group.
Notwithstanding the other provisions of this Paragraph 10, a
transaction or event shall not be considered a Change in Control if, prior
to the consummation or occurrence of such transaction or
<PAGE>
event, Employee, Bank and Holding Company agree in writing that the same
shall not be treated as a Change in Control for purposes of this Agreement.
D. In the event any dispute shall arise between the Employee and the
Bank or Holding Company (or any successor) as to the terms or
interpretation of this Agreement, including this Paragraph 10, whether
instituted by formal legal proceedings or otherwise, including any action
taken by the Employee to enforce the terms of this Paragraph 10 or in
defending against any action taken by the Holding Company or the Bank, the
Bank shall reimburse the Employee for all costs and expenses incurred in
such proceedings or actions, including attorney's fees, in the event the
Employee prevails in any such action.
11. Disability. If, by reason of physical or mental disability during
---------------
the term hereof, Employee is unable to carry out the normal and usual duties of
his employment hereunder, the Employee shall receive his full salary from the
Bank for up to twenty (20) working days for which he is unable to work. Medical
disability shall require a doctor's statement indicating the date the Employee
became disabled as well as a statement that he is medically able to return to
work before he can resume his duties. If, after thirty (30) consecutive days, he
is still unable to return to work, he will be covered by the disability
insurance policy of the Bank, if that policy applies under its terms. While
disabled, the Employee will keep his original date of employment and all
seniority benefits for up to twelve (12) weeks. Group insurance will be kept in
force (Employee will continue to pay for dependent insurance); however, if the
Employee does not return to work from medical leave after twelve (12) weeks, the
Bank may recover the premiums paid to maintain the coverage. A "return to work"
occurs when an Employee returns to work for at least thirty (30) days. Upon
returning to work from such disability, the Employee shall be restored to his
previous position or to an equivalent position with equivalent benefits, pay,
and other conditions of employment.
<PAGE>
12. Successors and Assigns.
---------------------------
A. This Employment Agreement shall enure to the benefit of and be
binding upon any corporate or other successor of the Bank which shall
acquire, directly or indirectly, by conversion, merger, consolidation,
purchase or otherwise, all or substantially all of the assets of the Bank.
B. Since the Bank is contracting for the unique and personal skills
of the Employee, the Employee shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the
written consent of the Bank.
13. Amendments. No amendments or additions to this Agreement shall be
---------------
binding unless in writing by both parties, except as herein otherwise provided.
14. Applicable Law. This Agreement shall be governed in all respects,
--------------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of North Carolina, except to the extent that federal law shall
be deemed to apply.
15. Severability. The provisions of this Agreement shall be deemed
-----------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Entire Agreement; Counterparts
-----------------------------------
A. This Agreement constitutes the entire agreement between the Employee
and the Bank with respect to the subject matter hereof and supersedes all
prior agreements with respect thereto. This Agreement may be executed in
one or more counterparts, all of which taken together shall constitute one
and the same instrument.
B. This Agreement replaces the Agreement between the parties dated
February 22, 1994 and the Addendum to the original Agreement and all other
agreements between the parties prior to the date hereof respecting the
subject matter hereof. Any and all prior agreements shall be cancelled and
have no
<PAGE>
further force or effect when this Agreement becomes effective.
17. Notices. Any notice or other communication required or permitted under
-------------
this Agreement shall be effective only if it is writing, delivered in person or
by reliable overnight courier service or deposited in the mail, postage prepaid,
return receipt requested and addressed as follows:
Address of the Bank: Peoples Bank, Post Office Box 467, Newton, North
Carolina, 28658.
Address of the Holding Company: Peoples Bancorp of North Carolina, Inc.,
Post Office Box 467, Newton, North Carolina, 28658.
Address of the Employee: Joseph F. Beaman, Jr., 1631 Brentwood Drive, Newton,
North Carolina 28658.
Notices given in person or by overnight courier service shall be deemed
given when delivered to the address required by this section, and notices given
by mail shall be deemed given three (3) days after deposit in the mail. Any
party hereto may designate, by written notice to the other party in accordance
herewith, any other address to which notices addressed to him shall be sent.
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first written.
PEOPLES BANK, a North Carolina banking
Corporation
By: /s/ Tony W. Wolfe
-------------------------------------
Tony W. Wolfe, President/
Chief Executive Officer
/s/ Joseph F. Beaman, Jr.
--------------------------------------
Joseph F. Beaman, Jr.
<PAGE>
The Foregoing Agreement is joined in and agreed to by Peoples Bancorp of North
Carolina, Inc.
PEOPLES BANCORP OF NORTH CAROLINA, INC., a
North Carolina Corporation
by: /s/ Tony W. Wolfe
------------------------------------------
Tony W. Wolfe
President/Chief Executive Officer
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF CATAWBA
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), is made as of the 1st day of
December, 1999, by and between PEOPLES BANK, Newton, North Carolina, a North
Carolina banking institution (the "Bank"), and CLIFTON A. WIKE (the
"Employee")and is joined in by PEOPLES BANCORP OF NORTH CAROLINA, INC., a North
Carolina corporation (the "Holding Company");
W I T N E S S E T H :
WHEREAS the Employee has heretofore been employed and currently is
rendering services to the Bank as Senior Vice President; Commercial Business
Development and,
WHEREAS the Bank is a North Carolina banking corporation and the
Holding Company is a North Carolina bank holding company and the sole
shareholder of the Bank; and,
WHEREAS the Bank considers the continued availability of the Employee's
services to be important to the management and conduct of the Bank's and Holding
Company's business, and desires to secure for the Bank and Holding Company the
continued availability of the Employee's services; and,
WHEREAS the Employee is willing to make his services available to the
Bank and Holding Company on the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereto agree as follows:
1. Employment. The Employee is employed as Senior Vice President,
----------------
Commercial Business Development. The Employee shall render administrative and
management services to the Bank, such as are customarily performed by persons
situated in a similar executive capacity. He shall promote the business of the
Bank and Holding Company and perform such other duties as shall from
<PAGE>
time to time be reasonably described by the President of the Bank.
2. Compensation.
------------------
A. Base Salary. The Bank shall pay the Employee during the term
---------------
of this Agreement a base salary at the rate of $93,482 per annum,
payable in monthly installments or more frequently as the Bank elects;
provided, that the rate of such salary shall be reviewed annually by
the Bank. Such rate of salary may be increased (but not decreased) from
time to time in such amounts as the Bank, in its discretion, may
decide.
B. Management Incentive Plan. The Employee shall be entitled to
-----------------------------
participate in an equitable manner with other key management personnel
of the Bank in the Bank's management incentive plan adopted in 1998.
3. Discretionary Bonuses. The Employee shall be entitled to
---------------------------
participate in an equitable manner with all other key management personnel of
the Bank in discretionary bonuses authorized and declared by the Directors of
the Bank. No other compensation provided for in this Agreement shall be deemed a
substitute for the Employee's right to participate in such discretionary bonuses
when and as are declared by the Board of Directors.
4. Additional Benefits.
-------------------------
A. Participation in Retirement and Medical Plan. The Employee
-------------------------------------------------
shall be entitled to participate in any plan of the Bank relating to
pension, profit sharing or other retirement benefits and health,
medical and disability coverage, or reimbursement plans that the Bank
may adopt for the benefit of its employees subject to the eligibility
rules of such plan.
B. Officer Benefits/Expenses. The Employee shall be eligible to
------------------------------
participate in any fringe benefits which may be or become applicable to
the Bank's executive employees, commensurate with the responsibilities
and functions to be performed by the Employee under this Agreement.
Additionally, the
<PAGE>
Employee shall be entitled to four (4) weeks of paid vacation, as an
exception to uniform employee policies promulgated by the Directors,
and such sick leave as is established by such policies. The Bank shall
reimburse the Employee for all out-of-pocket reasonable and necessary
business expenses which the Employee shall incur in connection with his
services on behalf of the Bank. Additionally, the Employee shall be
entitled to life insurance in the amount of two times his annual
salary; the same amount in accidental death and dismemberment
insurance; dependent life insurance upon his spouse in the amount of
Two Thousand Dollars ($2,000.00); and disability insurance as which
will compensate the Employee 66-2/3% of his salary after he is out of
work pursuant to company policy for thirty (30) calendar days. The
Employer shall pay all premiums for the insurance noted above.
5. Term. The initial term of employment under this Agreement shall
----------
be for the period commencing December 1, 1999 and ending three (3) calendar
years after such date. At the end of each one-year period following such
commencing date, this Agreement shall automatically be extended for an
additional one (1) year period beyond the then-effective expiration date, unless
written notice from the Bank or the Employee is received sixty (60) days prior
to an anniversary date advising the other party that this Agreement shall not be
further extended, or in the event the Employee and Employer agree to a further
extension before the expiration of this Agreement. The parties intend that this
Agreement shall be a continuing employment agreement, unless written notice is
given as provided in this Paragraph, or unless this Agreement is otherwise
terminated as provided in this Agreement.
6. Loyalty/Non-Competition.
-----------------------------
A. The Employee shall devote his full efforts and entire
business time to the performance of his duties under this Agreement.
B. During the term of this Agreement, or any renewals or
extensions thereof, and for a period of one (1) year after termination,
the Employee shall not, within Catawba, Alexander, Iredell or Lincoln
Counties, North Carolina, directly or indirectly, own, manage, operate,
join, control or participate in the
<PAGE>
management, operation or control of or be employed by or connected in
any manner with any depository institution or financial services
business which competes with the Bank or the Holding Company without
the prior written consent of the Bank. Notwithstanding the foregoing,
the Employee shall be free without such consent to purchase or hold as
an investment or otherwise up to 5% of the outstanding stock or other
securities of any corporation which has its securities publicly traded
on any recognized securities exchange or in any over-the-counter
market.
The Employee shall hold in confidence all knowledge or
information of a confidential nature with respect to the business of
the Bank or the Holding Company, received by him during the term of
this Agreement, and will not disclose or make use of such information
without the prior written consent of the Bank.
The Employee acknowledges that it would not be possible to
ascertain the amount of monetary damages in the event of a breach by
the Employee under the provisions of this Paragraph 6. The Employee
agrees that in the event of the breach of this Paragraph, injunctive
relief enforcing the terms of this Paragraph is an appropriate remedy.
The Bank and Employee further agree that in the event the
Bank shall terminate the employment of the Employee for cause or should
the Employee resign his employment during any period of the term of his
employment contract, then and in that event, the non-competition
provisions of this Agreement shall be applicable. If, however, the Bank
should terminate the employment of the Employee without cause during
the last year of said Agreement, the non-competition provisions of this
Agreement shall not be applicable, and the Bank shall not proceed with
respect to the remedies as set forth above.
7. Standards. The Employee shall perform his duties under this
---------------
Agreement in accordance with such reasonable standards expected of employees
with comparable positions in comparable organizations and as may be established
from time-to-time by the Board of Directors. The Bank shall provide the Employee
with
<PAGE>
the working facilities and staff customary at the Bank for similar executives
and necessary for him to perform his duties.
8. Termination and Termination Pay.
-------------------------------------
A. The Employee's employment under this Agreement shall be
terminated upon the following occurrences:
(1) The death of the Employee during the term of this which
event the Employee's estate shall be entitled to receive the
compensation due the Employee through the last day of the
calendar month in which his death shall have occurred and for a
period of three (3) months thereafter.
(2) The Employee's employment under this Agreement may be
terminated by the Bank at any time or by the Employee upon sixty
(60) days written notice to the Employee or the Bank, as the case
may be. Upon such termination by the Employee or by the Bank "for
cause," the Employee shall be entitled to receive compensation
under this Agreement through the effective date of such
termination and such other benefits, if any, as may be provided
by the terms of other plans and programs of the Bank in the event
of termination.
Any such termination by the Bank other than termination "for
cause" shall not prejudice the Employee's right to compensation
or benefits under this Agreement. The Employee shall have no
right to receive compensation or benefits for any period after
termination "for cause." Termination "for cause" shall include
termination because of Employee's personal dishonesty, in-
competence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other
than traffic violations or similar offenses), or final cease and
<PAGE>
desist order, or any material breach of any provision of this
Agreement.
(3) If the Employee is removed or permanently prohibited
from participating in the conduct of the Bank's affairs by any
order issued by any regulatory agency, all obligations of the
Bank under this Agreement shall terminate as of the effective
date of the order. The rights of the Employee vested prior to the
date of such order shall not be affected.
(4) All obligations under this Agreement may be terminated:
(a) by the Federal Deposit Insurance Corporation at
the time it enters into an agreement to provide assistance
to or on behalf of the Bank under the authority contained in
its Rules and Regulations; and,
(b) by any regulatory or supervisory agency which
enters any orders to resolve problems related to the
operation of the Bank, or when the Bank is determined to be
in an unsafe or unsound condition. Any rights of the
Employee vested prior to such time shall not be affected by
any such determination or order.
9. Suspension of Employment.
------------------------------
A. The suspension of the Employee from office or temporary
prohibition from participation by the Employee in the conduct of the
affairs of the Bank pursuant to notice served by any supervisory or
regulatory agency, unless stayed by appropriate proceedings, shall
suspend, as of the date of such service, all obligations of the Bank
under the terms of this Agreement.
<PAGE>
B. In the event the charges specified in a notice served as
provided in Subparagraph A of this Section shall be dismissed, the Bank
shall:
(1) pay the Employee the compensation withheld from such
Employee pursuant to the suspension of the Bank's obligation as
required in Subparagraph A of this Section; and,
(2) reinstate the obligations suspended as required in
Subparagraph A of this section.
10. Change in Control.
-----------------------
A. In the event of a "Change in Control" (as defined in
Subparagraph (C) below), the term of employment under this Agreement
automatically shall be extended to a period of three (3) years
beginning on the date of the Change in Control, and the Bank or its
successor shall be bound by the terms of this Agreement and shall be
prohibited, during the remainder of such term, from:
(1) Assigning Employee any duties and/or responsibilities
that are inconsistent with his position, duties, responsibilities
or status at the time of the Change in Control or with his
reporting responsibilities or equivalent titles in effect at such
time; or
(2) Adjusting Employee's annual base salary rate other than
in accordance with the provisions of Subparagraph (B) below; or
(3) Reducing in level, scope or coverage or eliminating
Employee's life insurance, medical or hospitalization insurance,
disability insurance, profit sharing plans, stock option plans,
stock purchase plans, deferred compensation plans, management
retention plans, retirement plans, stock ownership plans or
similar plans or benefits being provided by the Bank or the
Holding Company to the Employee
<PAGE>
other than those arising from the Bank's management incentive
plan as of the effective date of the Change in Control; or
(4) Transferring Employee to a location which is an
unreasonable distance from his current principal work location,
without the Employee's express written consent.
B. In the event of a Change in Control, the Employee's base
salary shall be adjusted to include an amount equal to the average of
the two previous years' bonuses arising from the Bank's management
incentive plan, and/or discretionary bonuses, if any, and such
adjusted base salary shall be increased by not less than six percent
(6%) annually beginning at the date of the Change in Control and
continuing each year for the three-year term thereafter.
C. For the purposes of this Agreement, the term "Change in
Control" shall mean any of the following events:
(1) a change in control of a nature that would be required to be
reported in response to Item 1 of the Current Report on Form 8-K,
as in effect on the date hereof, pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"); or
(2) such time as any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act), other than a person who
beneficially owned as of January 1, 1998, more than 5% of the
Bank's securities, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Holding Company or Bank
representing 20 percent or more of the combined voting power of
the outstanding Common Stock of the Holding Company or Common
Stock of the Bank, as applicable; or
<PAGE>
(3) individuals who constitute the Board or board of
directors of the Holding Company on the date hereof (the
"Incumbent Board" and "Incumbent Holding Company Board,"
respectively) cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a
vote of at least three-quarters of the directors comprising the
Incumbent Board or Incumbent Holding Company Board, as
applicable, or whose nomination for election by the Bank's or
Holding Company's shareholders was approved by the Bank's or
Holding Company's Board of Directors or Nominating Committee, as
applicable, shall be considered as though he or she were a member
of the Incumbent Board or Incumbent Holding Company Board, as
applicable; or
(4) either the Holding Company or the Bank consolidates or
merges with or into another corporation, association or entity or
is otherwise reorganized, where neither the Holding Company nor
the Bank, respectively, is the surviving corporation in such
transaction; or
(5) all or substantially all of the assets of either the
Holding Company or the Bank are sold or otherwise transferred to
or are acquired by any other entity or group.
Notwithstanding the other provisions of this Paragraph 10, a
transaction or event shall not be considered a Change in Control if,
prior to the consummation or occurrence of such transaction or event,
Employee, Bank and Holding Company agree in writing that the same
shall not be treated as a Change in Control for purposes of this
Agreement.
D. In the event any dispute shall arise between the Employee
and the Bank or Holding Company (or any successor) as to the terms or
interpretation of this Agreement, including this Paragraph 10, whether
instituted by formal legal proceedings or otherwise,
<PAGE>
including any action taken by the Employee to enforce the terms of
this Paragraph 10 or in defending against any action taken by the
Holding Company or the Bank, the Bank shall reimburse the Employee for
all costs and expenses incurred in such proceedings or actions,
including attorney's fees, in the event the Employee prevails in any
such action.
11. Disability. If, by reason of physical or mental disability
----------------
during the term hereof, Employee is unable to carry out the normal and usual
duties of his employment hereunder, the Employee shall receive his full salary
from the Bank for up to twenty (20) working days for which he is unable to work.
Medical disability shall require a doctor's statement indicating the date the
Employee became disabled as well as a statement that he is medically able to
return to work before he can resume his duties. If, after thirty (30)
consecutive days, he is still unable to return to work, he will be covered by
the disability insurance policy of the Bank, if that policy applies under its
terms. While disabled, the Employee will keep his original date of employment
and all seniority benefits for up to twelve (12) weeks. Group insurance will be
kept in force (Employee will continue to pay for dependent insurance); however,
if the Employee does not return to work from medical leave after twelve (12)
weeks, the Bank may recover the premiums paid to maintain the coverage. A
"return to work" occurs when an Employee returns to work for at least thirty
(30) days. Upon returning to work from such disability, the Employee shall be
restored to his previous position or to an equivalent position with equivalent
benefits, pay, and other conditions of employment.
12. Successors and Assigns.
---------------------------
A. This Employment Agreement shall enure to the benefit of and
be binding upon any corporate or other successor of the Bank which
shall acquire, directly or indirectly, by conversion, merger,
consolidation, purchase or otherwise, all or substantially all of the
assets of the Bank.
B. Since the Bank is contracting for the unique and personal
skills of the Employee, the Employee shall be precluded from assigning
or delegating his rights or duties hereunder without first obtaining
the written consent of the Bank.
<PAGE>
13. Amendments. No amendments or additions to this Agreement shall be
---------------
binding unless in writing by both parties, except as herein otherwise provided.
14. Applicable Law. This Agreement shall be governed in all respects,
--------------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of North Carolina, except to the extent that federal law shall
be deemed to apply.
15. Severability. The provisions of this Agreement shall be deemed
-----------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Entire Agreement; Counterparts.
-----------------------------------
A. This Agreement constitutes the entire agreement between the
Employee and the Bank with respect to the subject matter hereof and
supersedes all prior agreements with respect thereto. This Agreement
may be executed in one or more counterparts, all of which taken
together shall constitute one and the same instrument.
B. This Agreement replaces the Agreement between the parties dated
November 28, 1995 and all other agreements between the parties prior
to the date hereof respecting the subject matter hereof. Any and all
prior agreements shall be cancelled and have no further force or
effect when this Agreement becomes effective.
17. Notices. Any notice or other communication required or permitted
------------
under this Agreement shall be effective only if it is writing, delivered in
person or by reliable overnight courier service or deposited in the mail,
postage prepaid, return receipt requested and addressed as follows:
Address of the Bank: Peoples Bank, Post Office Box 467, Newton, North
Carolina, 28658.
Address of the Holding Company: Peoples Bancorp of North Carolina,
Inc., Post Office Box 467, Newton, North Carolina, 28658.
<PAGE>
Address of the Employee: Clifton A. Wike, Post Office Box 694, Catawba, North
Carolina 28609.
Notices given in person or by overnight courier service shall be
deemed given when delivered to the address required by this section, and notices
given by mail shall be deemed given three (3) days after deposit in the mail.
Any party hereto may designate, by written notice to the other party in
accordance herewith, any other address to which notices addressed to him shall
be sent.
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first written.
PEOPLES BANK, a North Carolina banking
Corporation
By: /s/ Tony W. Wolfe
---------------------------------------
Tony W. Wolfe, President/
Chief Executive Officer
/s/ Clifton A. Wike
---------------------------------------
Clifton A. Wike
The Foregoing Agreement is joined in and agreed to by Peoples Bancorp of North
Carolina, Inc.
PEOPLES BANCORP OF NORTH CAROLINA, INC., a
North Carolina Corporation
by: /s/ Toney W. Wolfe
--------------------------------------
Tony W. Wolfe
President/Chief Executive Officer
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF CATAWBA
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), is made as of the 1st day of
December, 1999, by and between PEOPLES BANK, Newton, North Carolina, a North
Carolina banking institution (the "Bank"), and WILLIAM D. CABLE (the
"Employee")and is joined in by PEOPLES BANCORP OF NORTH CAROLINA, INC., a North
Carolina corporation (the "Holding Company");
W I T N E S S E T H :
WHEREAS the Employee has heretofore been employed and currently is
rendering services to the Bank as Senior Vice President; Information Services
and,
WHEREAS the Bank is a North Carolina banking corporation and the
Holding Company is a North Carolina bank holding company and the sole
shareholder of the Bank; and,
WHEREAS the Bank considers the continued availability of the Employee's
services to be important to the management and conduct of the Bank's and Holding
Company's business, and desires to secure for the Bank and Holding Company the
continued availability of the Employee's services; and,
WHEREAS the Employee is willing to make his services available to the
Bank and Holding Company on the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereto agree as follows:
1. Employment. The Employee is employed as Senior Vice President,
----------------
Information Services. The Employee shall render administrative and management
services to the Bank, such as are customarily performed by persons situated in a
similar executive capacity. He shall promote the business of the Bank and
Holding
<PAGE>
Company and perform such other duties as shall from time to time be reasonably
described by the President of the Bank.
2. Compensation.
------------------
A. Base Salary. The Bank shall pay the Employee during the term
----------------
of this Agreement a base salary at the rate of $80,010 per annum,
payable in monthly installments or more frequently as the Bank elects;
provided, that the rate of such salary shall be reviewed annually by
the Bank. Such rate of salary may be increased (but not decreased) from
time to time in such amounts as the Bank, in its discretion, may
decide.
B. Management Incentive Plan. The Employee shall be entitled to
-------------------------------
participate in an equitable manner with other key management personnel
of the Bank in the Bank's management incentive plan adopted in 1998.
3. Discretionary Bonuses. The Employee shall be entitled to
---------------------------
participate in an equitable manner with all other key management personnel of
the Bank in discretionary bonuses authorized and declared by the Directors of
the Bank. No other compensation provided for in this Agreement shall be deemed a
substitute for the Employee's right to participate in such discretionary bonuses
when and as are declared by the Board of Directors.
4. Additional Benefits.
-------------------------
A. Participation in Retirement and Medical Plan. The Employee
-------------------------------------------------
shall be entitled to participate in any plan of the Bank relating to
pension, profit sharing or other retirement benefits and health,
medical and disability coverage, or reimbursement plans that the Bank
may adopt for the benefit of its employees subject to the eligibility
rules of such plan.
B. Officer Benefits/Expenses. The Employee shall be eligible
------------------------------
to participate in any fringe benefits which may be or become applicable
to the Bank's executive employees, commensurate with the
responsibilities and functions to be performed by the Employee under
this Agreement. Additionally, the
<PAGE>
Employee shall be entitled to four (4) weeks of paid vacation, as an
exception to uniform employee policies promulgated by the Directors,
and such sick leave as is established by such policies. The Bank shall
reimburse the Employee for all out-of-pocket reasonable and necessary
business expenses which the Employee shall incur in connection with
his services on behalf of the Bank. Additionally, the Employee shall
be entitled to life insurance in the amount of two times his annual
salary; the same amount in accidental death and dismemberment
insurance; dependent life insurance upon his spouse in the amount of
Two Thousand Dollars ($2,000.00); and disability insurance as which
will compensate the Employee 66-2/3% of his salary after he is out of
work pursuant to company policy for thirty (30) calendar days. The
Employer shall pay all premiums for the insurance noted above.
5. Term. The initial term of employment under this Agreement shall
---------
be for the period commencing December 1, 1999 and ending three (3) calendar
years after such date. At the end of each one-year period following such
commencing date, this Agreement shall automatically be extended for an
additional one (1) year period beyond the then-effective expiration date, unless
written notice from the Bank or the Employee is received sixty (60) days prior
to an anniversary date advising the other party that this Agreement shall not be
further extended, or in the event the Employee and Employer agree to a further
extension before the expiration of this Agreement. The parties intend that this
Agreement shall be a continuing employment agreement, unless written notice is
given as provided in this Paragraph, or unless this Agreement is otherwise
terminated as provided in this Agreement.
6. Loyalty/Non-Competition.
-----------------------------
A. The Employee shall devote his full efforts and entire
business time to the performance of his duties under this Agreement.
B. During the term of this Agreement, or any renewals or
extensions thereof, and for a period of one (1) year after
termination, the Employee shall not, within Catawba, Alexander,
Iredell or Lincoln Counties, North Carolina, directly or indirectly,
own, manage, operate, join, control or participate in the
<PAGE>
management, operation or control of or be employed by or connected in any
manner with any depository institution or financial services business which
competes with the Bank or the Holding Company without the prior written
consent of the Bank. Notwithstanding the foregoing, the Employee shall be
free without such consent to purchase or hold as an investment or otherwise
up to 5% of the outstanding stock or other securities of any corporation
which has its securities publicly traded on any recognized securities
exchange or in any over-the-counter market.
The Employee shall hold in confidence all knowledge or
information of a confidential nature with respect to the business of the
Bank or the Holding Company, received by him during the term of this
Agreement, and will not disclose or make use of such information without
the prior written consent of the Bank.
The Employee acknowledges that it would not be possible to
ascertain the amount of monetary damages in the event of a breach by the
Employee under the provisions of this Paragraph 6. The Employee agrees that
in the event of the breach of this Paragraph, injunctive relief enforcing
the terms of this Paragraph is an appropriate remedy.
The Bank and Employee further agree that in the event the Bank
shall terminate the employment of the Employee for cause or should the
Employee resign his employment during any period of the term of his
employment contract, then and in that event, the non-competition provisions
of this Agreement shall be applicable. If, however, the Bank should
terminate the employment of the Employee without cause during the last year
of said Agreement, the non-competition provisions of this Agreement shall
not be applicable, and the Bank shall not proceed with respect to the
remedies as set forth above.
7. Standards. The Employee shall perform his duties under this Agreement
--------------
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time-to-time by the Board of Directors. The Bank shall provide the Employee with
<PAGE>
the working facilities and staff customary at the Bank for similar executives
and necessary for him to perform his duties.
8. Termination and Termination Pay.
------------------------------------
A. The Employee's employment under this Agreement shall be
terminated upon the following occurrences:
(1) The death of the Employee during the term of this Agreement,
in which event the Employee's estate shall be entitled to receive the
compensation due the Employee through the last day of the calendar
month in which his death shall have occurred and for a period of three
(3) months thereafter.
(2) The Employee's employment under this Agreement may be
terminated by the Bank at any time or by the Employee upon sixty (60)
days written notice to the Employee or the Bank, as the case may be.
Upon such termination by the Employee or by the Bank "for cause," the
Employee shall be entitled to receive compensation under this
Agreement through the effective date of such termination and such
other benefits, if any, as may be provided by the terms of other plans
and programs of the Bank in the event of termination.
Any such termination by the Bank other than termination "for cause"
shall not prejudice the Employee's right to compensation or benefits
under this Agreement. The Employee shall have no right to receive
compensation or benefits for any period after termination "for cause."
Termination "for cause" shall include termination because of
Employee's personal dishonesty, in-competence, willful
misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar
offenses), or final cease and
<PAGE>
desist order, or any material breach of any provision of this
Agreement.
(3) If the Employee is removed or permanently prohibited from
participating in the conduct of the Bank's affairs by any order issued
by any regulatory agency, all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order. The
rights of the Employee vested prior to the date of such order shall
not be affected.
(4) All obligations under this Agreement may be terminated:
(a) by the Federal Deposit Insurance Corporation at the
time it enters into an agreement to provide assistance to or on
behalf of the Bank under the authority contained in its Rules and
Regulations; and,
(b) by any regulatory or supervisory agency which enters
any orders to resolve problems related to the operation of the
Bank, or when the Bank is determined to be in an unsafe or
unsound condition. Any rights of the Employee vested prior to
such time shall not be affected by any such determination or
order.
9. Suspension of Employment.
-----------------------------
A. The suspension of the Employee from office or temporary
prohibition from participation by the Employee in the conduct of the
affairs of the Bank pursuant to notice served by any supervisory or
regulatory agency, unless stayed by appropriate proceedings, shall suspend,
as of the date of such service, all obligations of the Bank under the terms
of this Agreement.
<PAGE>
B. In the event the charges specified in a notice served as provided
in Subparagraph A of this Section shall be dismissed, the Bank shall:
(1) pay the Employee the compensation withheld from such
Employee pursuant to the suspension of the Bank's obligation as
required in Subparagraph A of this Section; and,
(2) reinstate the obligations suspended as required in
Subparagraph A of this section.
10. Change in Control.
----------------------
A. In the event of a "Change in Control" (as defined in Subparagraph
(C) below), the term of employment under this Agreement automatically shall
be extended to a period of three (3) years beginning on the date of the
Change in Control, and the Bank or its successor shall be bound by the
terms of this Agreement and shall be prohibited, during the remainder of
such term, from:
(1) Assigning Employee any duties and/or responsibilities that
are inconsistent with his position, duties, responsibilities or status
at the time of the Change in Control or with his reporting
responsibilities or equivalent titles in effect at such time; or
(2) Adjusting Employee's annual base salary rate other than in
accordance with the provisions of Subparagraph (B) below; or
(3) Reducing in level, scope or coverage or eliminating
Employee's life insurance, medical or hospitalization insurance,
disability insurance, profit sharing plans, stock option plans, stock
purchase plans, deferred compensation plans, management retention
plans, retirement plans, stock ownership plans or similar plans or
benefits being provided by the Bank or the Holding Company to the
Employee
<PAGE>
other than those arising from the Bank's management incentive plan as
of the effective date of the Change in Control; or
(4) Transferring Employee to a location which is an unreasonable
distance from his current principal work location, without the
Employee's express written consent.
B. In the event of a Change in Control, the Employee's base salary
shall be adjusted to include an amount equal to the average of the two
previous years' bonuses arising from the Bank's management incentive plan,
and/or discretionary bonuses, if any, and such adjusted base salary shall
be increased by not less than six percent (6%) annually beginning at the
date of the Change in Control and continuing each year for the three-year
term thereafter.
C. For the purposes of this Agreement, the term "Change in Control"
shall mean any of the following events:
(1) a change in control of a nature that would be required to be
reported in response to Item 1 of the Current Report on Form 8-K, as
in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); or
(2) such time as any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act), other than a person who beneficially
owned as of January 1, 1998, more than 5% of the Bank's securities, is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Holding
Company or Bank representing 20 percent or more of the combined voting
power of the outstanding Common Stock of the Holding Company or Common
Stock of the Bank, as applicable; or
<PAGE>
(3) individuals who constitute the Board or board of directors
of the Holding Company on the date hereof (the "Incumbent Board" and
"Incumbent Holding Company Board," respectively) cease for any reason
to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board or Incumbent Holding Company Board, as
applicable, or whose nomination for election by the Bank's or Holding
Company's shareholders was approved by the Bank's or Holding Company's
Board of Directors or Nominating Committee, as applicable, shall be
considered as though he or she were a member of the Incumbent Board or
Incumbent Holding Company Board, as applicable; or
(4) either the Holding Company or the Bank consolidates or
merges with or into another corporation, association or entity or is
otherwise reorganized, where neither the Holding Company nor the Bank,
respectively, is the surviving corporation in such transaction; or
(5) all or substantially all of the assets of either the Holding
Company or the Bank are sold or otherwise transferred to or are
acquired by any other entity or group.
Notwithstanding the other provisions of this Paragraph 10, a
transaction or event shall not be considered a Change in Control if, prior
to the consummation or occurrence of such transaction or event, Employee,
Bank and Holding Company agree in writing that the same shall not be
treated as a Change in Control for purposes of this Agreement.
D. In the event any dispute shall arise between the Employee and the
Bank or Holding Company (or any successor) as to the terms or
interpretation of this Agreement, including this Paragraph 10, whether
instituted by formal legal proceedings or otherwise,
<PAGE>
including any action taken by the Employee to enforce the terms of this
Paragraph 10 or in defending against any action taken by the Holding
Company or the Bank, the Bank shall reimburse the Employee for all costs
and expenses incurred in such proceedings or actions, including attorney's
fees, in the event the Employee prevails in any such action.
11. Disability. If, by reason of physical or mental disability during
---------------
the term hereof, Employee is unable to carry out the normal and usual duties of
his employment hereunder, the Employee shall receive his full salary from the
Bank for up to twenty (20) working days for which he is unable to work. Medical
disability shall require a doctor's statement indicating the date the Employee
became disabled as well as a statement that he is medically able to return to
work before he can resume his duties. If, after thirty (30) consecutive days, he
is still unable to return to work, he will be covered by the disability
insurance policy of the Bank, if that policy applies under its terms. While
disabled, the Employee will keep his original date of employment and all
seniority benefits for up to twelve (12) weeks. Group insurance will be kept in
force (Employee will continue to pay for dependent insurance); however, if the
Employee does not return to work from medical leave after twelve (12) weeks, the
Bank may recover the premiums paid to maintain the coverage. A "return to work"
occurs when an Employee returns to work for at least thirty (30) days. Upon
returning to work from such disability, the Employee shall be restored to his
previous position or to an equivalent position with equivalent benefits, pay,
and other conditions of employment.
12. Successors and Assigns.
---------------------------
A. This Employment Agreement shall enure to the benefit of and be
binding upon any corporate or other successor of the Bank which shall
acquire, directly or indirectly, by conversion, merger, consolidation,
purchase or otherwise, all or substantially all of the assets of the Bank.
B. Since the Bank is contracting for the unique and personal skills
of the Employee, the Employee shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the
written consent of the Bank.
<PAGE>
13. Amendments. No amendments or additions to this Agreement shall be
---------------
binding unless in writing by both parties, except as herein otherwise provided.
14. Applicable Law. This Agreement shall be governed in all respects,
---------------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of North Carolina, except to the extent that federal law shall
be deemed to apply.
15. Severability. The provisions of this Agreement shall be deemed
------------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Entire Agreement; Counterparts.
-----------------------------------
A. This Agreement constitutes the entire agreement between the Employee
and the Bank with respect to the subject matter hereof and supersedes all
prior agreements with respect thereto. This Agreement may be executed in
one or more counterparts, all of which taken together shall constitute one
and the same instrument.
B. This Agreement replaces the Agreement between the parties dated
November 29, 1995 and all other agreements between the parties prior to the
date hereof respecting the subject matter hereof. Any and all prior
agreements shall be cancelled and have no further force or effect when this
Agreement becomes effective.
17. Notices. Any notice or other communication required or permitted under
------------
this Agreement shall be effective only if it is writing, delivered in person or
by reliable overnight courier service or deposited in the mail, postage prepaid,
return receipt requested and addressed as follows:
Address of the Bank: Peoples Bank, Post Office Box 467, Newton, North
Carolina, 28658.
Address of the Holding Company: Peoples Bancorp of North Carolina, Inc.,
Post Office Box 467, Newton, North Carolina, 28658.
<PAGE>
Address of the Employee: William D. Cable, 1033 Merrywood Drive, Newton, North
Carolina 28658.
Notices given in person or by overnight courier service shall be deemed
given when delivered to the address required by this section, and notices given
by mail shall be deemed given three (3) days after deposit in the mail. Any
party hereto may designate, by written notice to the other party in accordance
herewith, any other address to which notices addressed to him shall be sent.
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first written.
PEOPLES BANK, a North Carolina banking
Corporation
By: /s/ Tony W. Wolfe
------------------------------------
Tony W. Wolfe, President/
Chief Executive Officer
/s/ William D. Cable
-----------------------------------
William D. Cable
The Foregoing Agreement is joined in and agreed to by Peoples Bancorp of North
Carolina, Inc.
PEOPLES BANCORP OF NORTH CAROLINA, INC., a
North Carolina Corporation
by: /s/ Tony W. Wolfe
-------------------------------------
Tony W. Wolfe
President/Chief Executive Officer
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF CATAWBA
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), is made as of the 1st day of
December, 1999, by and between PEOPLES BANK, Newton, North Carolina, a North
Carolina banking institution (the "Bank"), and LANCE A. SELLERS (the
"Employee")and is joined in by PEOPLES BANCORP OF NORTH CAROLINA, INC., a North
Carolina corporation (the "Holding Company");
W I T N E S S E T H :
WHEREAS the Employee has heretofore been employed and currently is
rendering services to the Bank as Executive Vice President; Commercial Banking,
Credit Administration, and Mortgage Loans and,
WHEREAS the Bank is a North Carolina banking corporation and the
Holding Company is a North Carolina bank holding company and the sole
shareholder of the Bank; and,
WHEREAS the Bank considers the continued availability of the Employee's
services to be important to the management and conduct of the Bank's and Holding
Company's business, and desires to secure for the Bank and Holding Company the
continued availability of the Employee's services; and,
WHEREAS the Employee is willing to make his services available to the
Bank and Holding Company on the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereto agree as follows:
1. Employment. The Employee is employed as Executive Vice President,
--------------
Commercial Banking, Credit Administration, and Mortgage Loans. The Employee
shall render administrative and management services to the Bank, such as are
customarily performed by persons situated in a similar executive capacity.
<PAGE>
He shall promote the business of the Bank and Holding Company and perform such
other duties as shall from time to time be reasonably described by the President
of the Bank.
2. Compensation.
-----------------
A. Base Salary. The Bank shall pay the Employee during the term
---------------
of this Agreement a base salary at the rate of $110,000 per annum,
payable in monthly installments or more frequently as the Bank elects;
provided, that the rate of such salary shall be reviewed annually by
the Bank. Such rate of salary may be increased (but not decreased) from
time to time in such amounts as the Bank, in its discretion, may
decide.
B. Management Incentive Plan. The Employee shall be entitled to
-------------------------------
participate in an equitable manner with other key management personnel
of the Bank in the Bank's management incentive plan adopted in 1998.
3. Discretionary Bonuses. The Employee shall be entitled to
--------------------------
participate in an equitable manner with all other key management personnel of
the Bank in discretionary bonuses authorized and declared by the Directors of
the Bank. No other compensation provided for in this Agreement shall be deemed a
substitute for the Employee's right to participate in such discretionary bonuses
when and as are declared by the Board of Directors.
4. Additional Benefits.
------------------------
A. Participation in Retirement and Medical Plan. The Employee
------------------------------------------------
shall be entitled to participate in any plan of the Bank relating to
pension, profit sharing or other retirement benefits and health,
medical and disability coverage, or reimbursement plans that the Bank
may adopt for the benefit of its employees subject to the eligibility
rules of such plan.
B. Officer Benefits/Expenses. The Employee shall be eligible
-----------------------------
to participate in any fringe benefits which may be or become applicable
to the Bank's executive employees, commensurate with the
responsibilities and functions to be performed by the
<PAGE>
Employee under this Agreement. Additionally, the Employee shall be
entitled to four (4) weeks of paid vacation, as an exception to uniform
employee policies promulgated by the Directors, and such sick leave as
is established by such policies. The Bank shall reimburse the Employee
for all out-of-pocket reasonable and necessary business expenses which
the Employee shall incur in connection with his services on behalf of
the Bank. Additionally, the Employee shall be entitled to life
insurance in the amount of two times his annual salary; the same amount
in accidental death and dismemberment insurance; dependent life
insurance upon his spouse in the amount of Two Thousand Dollars
($2,000.00); and disability insurance as which will compensate the
Employee 66-2/3% of his salary after he is out of work pursuant to
company policy for thirty (30) calendar days. The Employer shall pay
all premiums for the insurance noted above.
5. Term. The initial term of employment under this Agreement shall be
---------
for the period commencing December 1, 1999 and ending three (3) calendar years
after such date. At the end of each one-year period following such commencing
date, this Agreement shall automatically be extended for an additional one (1)
year period beyond the then-effective expiration date, unless written notice
from the Bank or the Employee is received sixty (60) days prior to an
anniversary date advising the other party that this Agreement shall not be
further extended, or in the event the Employee and Employer agree to a further
extension before the expiration of this Agreement. The parties intend that this
Agreement shall be a continuing employment agreement, unless written notice is
given as provided in this Paragraph, or unless this Agreement is otherwise
terminated as provided in this Agreement.
6. Loyalty/Non-Competition.
---------------------------
A. The Employee shall devote his full efforts and entire business
time to the performance of his duties under this Agreement.
B. During the term of this Agreement, or any renewals or
extensions thereof, and for a period of one (1) year after termination,
the Employee shall not, within Catawba, Alexander, Iredell or Lincoln
Counties, North Carolina, directly or indirectly, own,
<PAGE>
manage, operate, join, control or participate in the management,
operation or control of or be employed by or connected in any manner
with any depository institution or financial services business which
competes with the Bank or the Holding Company without the prior written
consent of the Bank. Notwithstanding the foregoing, the Employee shall
be free without such consent to purchase or hold as an investment or
otherwise up to 5% of the outstanding stock or other securities of any
corporation which has its securities publicly traded on any recognized
securities exchange or in any over-the-counter market.
The Employee shall hold in confidence all knowledge or
information of a confidential nature with respect to the business of
the Bank or the Holding Company, received by him during the term of
this Agreement, and will not disclose or make use of such information
without the prior written consent of the Bank.
The Employee acknowledges that it would not be possible to
ascertain the amount of monetary damages in the event of a breach by
the Employee under the provisions of this Paragraph 6. The Employee
agrees that in the event of the breach of this Paragraph, injunctive
relief enforcing the terms of this Paragraph is an appropriate remedy.
The Bank and Employee further agree that in the event the
Bank shall terminate the employment of the Employee for cause or should
the Employee resign his employment during any period of the term of his
employment contract, then and in that event, the non-competition
provisions of this Agreement shall be applicable. If, however, the Bank
should terminate the employment of the Employee without cause during
the last year of said Agreement, the non-competition provisions of this
Agreement shall not be applicable, and the Bank shall not proceed with
respect to the remedies as set forth above.
7. Standards. The Employee shall perform his duties under this
--------------
Agreement in accordance with such reasonable standards expected of employees
with comparable positions in comparable organizations and as may be established
from time-to-time by the Board of Directors. The Bank shall provide the Employee
with
<PAGE>
the working facilities and staff customary at the Bank for similar executives
and necessary for him to perform his duties.
8. Termination and Termination Pay.
------------------------------------
A. The Employee's employment under this Agreement shall be
terminated upon the following occurrences:
(1) The death of the Employee during the term of this
Agreement, in which event the Employee's estate shall be entitled
to receive the compensation due the Employee through the last day
of the calendar month in which his death shall have occurred and
for a period of three (3) months thereafter.
(2) The Employee's employment under this Agreement may be
terminated by the Bank at any time or by the Employee upon sixty
(60) days written notice to the Employee or the Bank, as the case
may be. Upon such termination by the Employee or by the Bank "for
cause," the Employee shall be entitled to receive compensation
under this Agreement through the effective date of such
termination and such other benefits, if any, as may be provided by
the terms of other plans and programs of the Bank in the event of
termination.
Any such termination by the Bank other than termination "for
cause" shall not prejudice the Employee's right to compensation or
benefits under this Agreement. The Employee shall have no right to
receive compensation or benefits for any period after termination
"for cause." Termination "for cause" shall include termination
because of the Employee's personal dishonesty, in-competence,
willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic
violations or similar offenses), or final cease and
<PAGE>
desist order, or any material breach of any provision of this
Agreement.
(3) If the Employee is removed or permanently prohibited
from participating in the conduct of the Bank's affairs by any
order issued by any regulatory agency, all obligations of the Bank
under this Agreement shall terminate as of the effective date of
the order. The rights of the Employee vested prior to the date of
such order shall not be affected.
(4) All obligations under this Agreement may be terminated:
(a) by the Federal Deposit Insurance Corporation at
the time it enters into an agreement to provide assistance
to or on behalf of the Bank under the authority contained in
its Rules and Regulations; and,
(b) by any regulatory or supervisory agency which
enters any orders to resolve problems related to the
operation of the Bank, or when the Bank is determined to be
in an unsafe or unsound condition. Any rights of the
Employee vested prior to such time shall not be affected by
any such determination or order.
9. Suspension of Employment.
-----------------------------
A. The suspension of the Employee from office or temporary
prohibition from participation by the Employee in the conduct of the
affairs of the Bank pursuant to notice served by any supervisory or
regulatory agency, unless stayed by appropriate proceedings, shall
suspend, as of the date of such service, all obligations of the Bank
under the terms of this Agreement.
<PAGE>
B. In the event the charges specified in a notice served as
provided in Subparagraph A of this Section shall be dismissed, the Bank
shall:
(1) pay the Employee the compensation withheld from such
Employee pursuant to the suspension of the Bank's obligation as
required in Subparagraph A of this Section; and,
(2) reinstate the obligations suspended as required in
Subparagraph A of this section.
10. Change in Control.
----------------------
A. In the event of a "Change in Control" (as defined in
Subparagraph (C) below), the term of employment under this Agreement
automatically shall be extended to a period of three (3) years
beginning on the date of the Change in Control, and the Bank or its
successor shall be bound by the terms of this Agreement and shall be
prohibited, during the remainder of such term, from:
(1) Assigning Employee any duties and/or responsibilities
that are inconsistent with his position, duties, responsibilities
or status at the time of the Change in Control or with his
reporting responsibilities or equivalent titles in effect at such
time; or
(2) Adjusting Employee's annual base salary rate other than
in accordance with the provisions of Subparagraph (B) below; or
(3) Reducing in level, scope or coverage or eliminating
Employee's life insurance, medical or hospitalization insurance,
disability insurance, profit sharing plans, stock option plans,
stock purchase plans, deferred compensation plans, management
retention plans, retirement plans, stock ownership plans or
similar plans or benefits being provided by the Bank or the
Holding Company to the Employee
<PAGE>
other than those arising from the Bank's management incentive plan
as of the effective date of the Change in Control; or
(4) Transferring Employee to a location which is an
unreasonable distance from his current principal work location,
without the Employee's express written consent.
B. In the event of a Change in Control, the Employee's base
salary shall be adjusted to include an amount equal to the average of
the two previous years' bonuses arising from the Bank's management
incentive plan, and/or discretionary bonuses, if any, and such adjusted
base salary shall be increased by not less than six percent (6%)
annually beginning at the date of the Change in Control and continuing
each year for the three-year term thereafter.
C. For the purposes of this Agreement, the term "Change in
Control" shall mean any of the following events:
(1) a change in control of a nature that would be required to be
reported in response to Item 1 of the Current Report on Form
8-K, as in effect on the date hereof, pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"); or
(2) such time as any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act), other than a person who
beneficially owned as of January 1, 1998, more than 5% of the
Bank's securities, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Holding Company or Bank
representing 20 percent or more of the combined voting power
of the outstanding Common Stock of the Holding Company or
Common Stock of the Bank, as applicable; or
<PAGE>
(3) individuals who constitute the Board or board of
directors of the Holding Company on the date hereof (the
"Incumbent Board" and "Incumbent Holding Company Board,"
respectively) cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a
vote of at least three-quarters of the directors comprising
the Incumbent Board or Incumbent Holding Company Board, as
applicable, or whose nomination for election by the Bank's or
Holding Company's shareholders was approved by the Bank's or
Holding Company's Board of Directors or Nominating Committee,
as applicable, shall be considered as though he or she were a
member of the Incumbent Board or Incumbent Holding Company
Board, as applicable; or
(4) either the Holding Company or the Bank consolidates
or merges with or into another corporation, association or
entity or is otherwise reorganized, where neither the Holding
Company nor the Bank, respectively, is the surviving
corporation in such transaction; or
(5) all or substantially all of the assets of either the
Holding Company or the Bank are sold or otherwise transferred
to or are acquired by any other entity or group.
Notwithstanding the other provisions of this Paragraph 10, a
transaction or event shall not be considered a Change in Control if,
prior to the consummation or occurrence of such transaction or event,
Employee, Bank and Holding Company agree in writing that the same shall
not be treated as a Change in Control for purposes of this Agreement.
D. In the event any dispute shall arise between the Employee
and the Bank or Holding Company (or any successor) as to the terms or
interpretation of this Agreement, including this Paragraph 10, whether
instituted by formal legal proceedings or otherwise,
<PAGE>
including any action taken by the Employee to enforce the terms of this
Paragraph 10 or in defending against any action taken by the Holding
Company or the Bank, the Bank shall reimburse the Employee for all
costs and expenses incurred in such proceedings or actions, including
attorney's fees, in the event the Employee prevails in any such action.
11. Disability. If, by reason of physical or mental disability during
---------------
the term hereof, Employee is unable to carry out the normal and usual duties of
his employment hereunder, the Employee shall receive his full salary from the
Bank for up to twenty (20) working days for which he is unable to work. Medical
disability shall require a doctor's statement indicating the date the Employee
became disabled as well as a statement that he is medically able to return to
work before he can resume his duties. If, after thirty (30) consecutive days, he
is still unable to return to work, he will be covered by the disability
insurance policy of the Bank, if that policy applies under its terms. While
disabled, the Employee will keep his original date of employment and all
seniority benefits for up to twelve (12) weeks. Group insurance will be kept in
force (Employee will continue to pay for dependent insurance); however, if the
Employee does not return to work from medical leave after twelve (12) weeks, the
Bank may recover the premiums paid to maintain the coverage. A "return to work"
occurs when an Employee returns to work for at least thirty (30) days. Upon
returning to work from such disability, the Employee shall be restored to his
previous position or to an equivalent position with equivalent benefits, pay,
and other conditions of employment.
12. Successors and Assigns.
---------------------------
A. This Employment Agreement shall enure to the benefit of and be
binding upon any corporate or other successor of the Bank which shall
acquire, directly or indirectly, by conversion, merger, consolidation,
purchase or otherwise, all or substantially all of the assets of the
Bank.
B. Since the Bank is contracting for the unique and personal
skills of the Employee, the Employee shall be precluded from assigning
or delegating his rights or duties hereunder without first obtaining
the written consent of the Bank.
<PAGE>
13. Amendments. No amendments or additions to this Agreement shall be
---------------
binding unless in writing by both parties, except as herein otherwise provided.
14. Applicable Law. This Agreement shall be governed in all respects,
--------------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of North Carolina, except to the extent that federal law shall
be deemed to apply.
15. Severability. The provisions of this Agreement shall be deemed
-----------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Entire Agreement; Counterparts.
-----------------------------------
A. This Agreement constitutes the entire agreement between the
Employee and the Bank with respect to the subject matter hereof and
supersedes all prior agreements with respect thereto. This Agreement
may be executed in one or more counterparts, all of which taken
together shall constitute one and the same instrument.
17. Notices. Any notice or other communication required or permitted
------------
under this Agreement shall be effective only if it is writing, delivered in
person or by reliable overnight courier service or deposited in the mail,
postage prepaid, return receipt requested and addressed as follows:
Address of the Bank: Peoples Bank, Post Office Box 467, Newton, North
Carolina, 28658.
Address of the Holding Company: Peoples Bancorp of North Carolina,
Inc., Post Office Box 467, Newton, North Carolina, 28658.
Address of the Employee: Lance A. Sellers, 134 37th Avenue Place Northwest,
Hickory, North Carolina 28601
Notices given in person or by overnight courier service shall be deemed
given when delivered to the address required by this section, and notices given
by mail shall be deemed given three (3) days after deposit in the mail. Any
party hereto may designate, by written notice to the other party in accordance
<PAGE>
herewith, any other address to which notices addressed to him shall be sent.
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first written.
PEOPLES BANK, a North Carolina banking
Corporation
By:/s/ Tony W. Wolfe
--------------------------------------
Tony W. Wolfe, President/
Chief Executive Officer
/s/ Lance A. Sellers
---------------------------------------
Lance A. Sellers
The Foregoing Agreement is joined in and agreed to by Peoples Bancorp of North
Carolina, Inc.
PEOPLES BANCORP OF NORTH CAROLINA, INC., a North
Carolina Corporation
by: /s/ Tony W. Wolfe
------------------------------------
Tony W. Wolfe
President/Chief Executive Officer
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
OMNIBUS STOCK OWNERSHIP AND
LONG TERM INCENTIVE PLAN
THIS IS THE OMNIBUS STOCK OWNERSHIP AND LONG TERM INCENTIVE PLAN ("Plan")
of Peoples Bancorp of North Carolina, Inc. (the "Company"), a North Carolina
corporation with its principal office in Newton, Catawba County, North Carolina,
under which Incentive Stock Options and Non-Qualified Options to acquire shares
of the Stock, Restricted Stock, Stock Appreciation Rights, Units, and/or Book
Value Shares may be granted from time to time to Eligible Directors and Eligible
Employees of the Company and of any of its Subsidiaries (the "Subsidiaries"),
subject to the following provisions:
ARTICLE I
DEFINITIONS
The following terms shall have the meanings set forth below. Additional
terms defined in this Plan shall have the meanings ascribed to them when first
used herein.
Bank. Peoples Bank, Newton, North Carolina.
----
Board. The Board of Directors of Peoples Bancorp of North Carolina, Inc.
-----
Book Value Share. The Right of a BVS Recipient (as defined in Section 7.1)
----------------
to receive cash compensation when, as and in the amounts described in Article
VII.
Book Value Share Agreement. The agreement between the Company and the BVS
--------------------------
Recipient with respect to Book Value Shares granted to such BVS Recipient,
including such terms and provisions as are necessary or appropriate under
Article VII.
Change In Control Transaction. A transaction in which (i) any "person" (as
-----------------------------
such term is defined in Section 3(a)(9) and 13(d)(3) of the 1934 Act), directly
or indirectly, acquires beneficial ownership of voting stock, or acquires
irrevocable proxies or any combination of voting stock and irrevocable proxies,
representing twenty-five percent (25%) or more of any class of voting securities
of either the Company or the Bank, or acquires in any manner control of the
election of a majority of the directors of either the Company or the Bank, (ii)
either the Company or the Bank consolidates or merges with or into another
corporation, association or entity, or is otherwise reorganized, where neither
the Company nor the Bank is the surviving corporation in such transaction, or
(iii) all or substantially all of the assets of either the Company or the Bank
are sold or otherwise transferred to, or are acquired by, any other entity or
group.
Code. The Internal Revenue Code of 1986, as amended.
----
Committee. The Compensation Committee of the Board.
---------
Common Stock. The Common Stock, no par value, of the Company.
------------
Death. The date and time of death of an Eligible Director or Eligible
-----
Employee who has received Rights, as established by the relevant death
certificate.
<PAGE>
Disability. The date on which (A) an Eligible Employee who has received
----------
Rights becomes totally and permanently disabled as determined (i) by the
Company's disability insurance carrier (if the Eligible Employee is covered by a
Company-owned disability policy) or by his or her disability insurance carrier
(if the Eligible Employee is not covered by a Company-owned disability policy),
(ii) under federal Social Security laws and regulations, or (iii) by a physician
acceptable to the Company; and (B) an Eligible Director who has received Rights
becomes totally and permanently disabled as determined (i) under federal Social
Security laws or (ii) by a physician acceptable to the Company.
Effective Date. Pursuant to the action of the Board adopting the Plan, the
--------------
date as of which this Plan is effective shall be the date it is approved by the
Company's shareholders.
Eligible Directors. Those individuals who are duly elected directors of
------------------
the Company or any of its subsidiaries who are serving in such capacity, who are
not members of the Committee and who have been selected by the Committee as a
person to whom a Right or Rights shall be granted under the Plan.
Eligible Employees. Those individuals who meet the following eligibility
------------------
requirements:
(i) Such individual must be a full time employee of the Company or a
Subsidiary. For this purpose, an individual shall be considered to be an
"employee" only if there exists between the Company or a Subsidiary and the
individual the legal and bona fide relationship of employer and employee.
In determining whether such relationship exists, the regulations of the
United States Treasury Department relating to the determination of such
relationship for the purpose of collection of income tax at the source on
wages shall be applied.
(ii) If the Registration shall not have occurred, such individual
must have such knowledge and experience in financial and business matters
that he or she is capable of evaluating the merits and risks of the
investment involved in the receipt and/or exercise of a Right.
(iii) Such individual, being otherwise an Eligible Employee under the
foregoing items, shall have been selected by the Committee as a person to
whom a Right or Rights shall be granted under the Plan.
Fair Market Value. With respect to the Company's Common Stock, the market
-----------------
price per share of such Common Stock determined by the Committee, consistent
with the requirements of Section 422 of the Code and to the extent consistent
therewith, as follows, as of the date specified in the context within which such
term is used: (i) if the Common Stock was traded on a stock exchange on the date
in question, then the Fair Market Value will be equal to the closing price
reported by the applicable composite-transactions report for such date; (ii) if
transactions in the Common Stock were quoted on the Nasdaq National Market on
the date in question, then the Fair Market Value will be equal to the last-
transaction price quoted by the Nasdaq National Market; (iii) if transactions in
the Common Stock were quoted on a system of The Nasdaq Stock Market, Inc., but
not the Nasdaq National Market, then the Fair Market Value will be equal to the
average of the last reported representative bid and asked prices quoted by The
National Stock Market, Inc. for such date; and (iv) if none of the foregoing
provisions is applicable, then the Fair Market Value will be determined by the
Committee in good faith on such basis as it deems appropriate. The Committee
shall maintain a written record of its method of determining Fair Market Value.
ISO. An "incentive stock option" as defined in Section 422 of the Code.
---
Non-Qualified Option. Any Option granted under Article III whether
--------------------
designated by the Committee as a Non-Qualified Option or otherwise, other than
an Option designated by the Committee as an ISO, or any Option
<PAGE>
so designated but which, for any reason, fails to qualify as an ISO pursuant to
Section 422 of the Code and the rules and regulations thereunder.
Option Agreement. The agreement between the Company and an Optionee with
----------------
respect to Options granted to such Optionee, including such terms and provisions
as are necessary or appropriate under Article III.
Options. ISOs and Non-Qualified Options are collectively referred to
-------
herein as "Options;" provided, however, whenever reference is specifically made
only to ISOs or Non-Qualified Options, such reference shall be deemed to be made
to the exclusion of the other.
Plan Pool. A total of 292,600 shares of authorized, but unissued, Common
---------
Stock, as adjusted pursuant to Section 2.3(b), which shall be available as Stock
under this Plan.
Registration. The registration by the Company under the 1933 Act and
------------
applicable state "Blue Sky" and securities laws of this Plan, the offering of
Rights under this Plan, the offering of Stock under this Plan, and/or the Stock
acquirable under this Plan.
Restricted Stock. The Stock which a Holder (as defined in Section 4.1(a))
----------------
shall be entitled to receive when, as and in the amounts described in Article
IV.
Restricted Stock Agreement. The agreement between the Company and a Holder
--------------------------
with respect to Rights to receive Restricted Stock, including such terms and
provisions as are necessary or appropriate under Article IV.
Rights. The rights to exercise, purchase or receive the Options,
------
Restricted Stock, Units, SARs and Book Value Shares described herein.
Rights Agreement. An Option Agreement, a Restricted Stock Agreement, a
----------------
Unit Agreement, a SAR Agreement or a Book Value Share Agreement.
SAR. The Right of a SAR Recipient (as defined in Section 6.1(a)) to
---
receive cash when, as and in the amounts described in Article VI.
SAR Agreement. The agreement between the Company and a SAR Recipient with
-------------
respect to the SAR awarded to the SAR Recipient, including such terms and
conditions as are necessary or appropriate under Article VI.
SEC. The Securities and Exchange Commission.
---
Stock. The shares of Common Stock in the Plan Pool available for issuance
-----
pursuant to the valid exercise of a Right or on which the cash value of a Right
is to be based.
Tax Withholding Liability. All federal and state income taxes, social
-------------------------
security tax, and any other taxes applicable to the compensation income arising
from the transaction required by applicable law to be withheld by the Company.
Transfer. The sale, assignment, transfer, conveyance, pledge,
--------
hypothecation, encumbrance, loan, gift, attachment, levy upon, assignment for
the benefit of creditors, by operation of law (by will or descent and
<PAGE>
distribution), transfer by a qualified domestic relations order, a property
settlement or maintenance agreement, transfer by result of the bankruptcy laws
or otherwise of a share of Stock or of a Right.
Units. The Right of a Unit Recipient (as defined in Section 5.1(a)) to
-----
receive a combination of cash and Stock when, as and in the amounts described in
Article V.
Unit Agreement. The agreement between the Company and Unit Recipient with
--------------
respect to the award of Units to the Unit Recipient, including such terms and
conditions as are necessary or appropriate under Article V.
1933 Act. The Securities Act of 1933, as amended.
--------
1934 Act. The Securities Exchange Act of 1934, as amended.
--------
ARTICLE II
GENERAL
Section 2.1. Purpose. The purposes of this Plan are to encourage and
----------- -------
motivate directors and key employees to contribute to the successful performance
of the Company and its Subsidiaries and the growth of the market value of the
Common Stock; to achieve a unity of purpose among such directors, key employees
and the Company's shareholders by providing ownership opportunities, and a unity
of interest among such parties in the achievement of the Company's primary long
term performance objectives; and to retain key employees by rewarding them with
potentially tax-advantageous future compensation. These objectives will be
promoted through the granting of Rights to designated Eligible Directors and
Eligible Employees pursuant to the terms of this Plan.
Section 2.2. Administration.
----------- --------------
(a) The Plan shall be administered by the Committee which meets, and
shall continue to meet, the standards of Rule 16b-3(d)(1) promulgated by
the SEC under the 1934 Act. Subject to the provisions of SEC Rule 16b-
3(d)(1), the Committee may designate any officers or employees of the
Company or any Subsidiary to assist in the administration of the Plan, to
execute documents on behalf of the Committee and to perform such other
ministerial duties as may be delegated to them by the Committee.
(b) Subject to the provisions of the Plan, the determinations and the
interpretation and construction of any provision of the Plan by the
Committee shall be final and conclusive upon all persons affected thereby.
By way of illustration and not of limitation, the Committee shall have the
discretion (a) to construe and interpret the Plan and all Rights granted
hereunder and to determine the terms and provisions (and amendments
thereof) of the Rights granted under the Plan (which need not be
identical); (b) to define the terms used in the Plan and in the Rights
granted hereunder; (c) to prescribe, amend and rescind the rules and
regulations relating to the Plan; (d) to determine the Eligible Employees
to whom and the time or times at which such Rights shall be granted, the
number of shares of Stock, as and when applicable, to be subject to each
Right, the exercise, other relevant purchase price or value pertaining to a
Right, and the determination of leaves of absence which may be granted to
Eligible Employees without constituting a termination of their employment
for the purposes of the Plan; and (e) to make all other determinations
necessary or advisable for the administration of the Plan. Only the full
Board of Directors has the discretion to determine the Eligible Directors
to whom and the time or times at which such Rights shall be granted , the
number of shares of Stock, as and when applicable, to be subject to each
Right, the exercise, and other relevant purchase price or
<PAGE>
value pertaining to a Right. References to the Committee contained in this
Agreement will also mean the Board wherever Rights of Eligible Directors
are addressed.
(c) It shall be in the discretion of the Committee to grant Options
to purchase shares of Stock which qualify as ISOs under the Code or which
will be given tax treatment as Non-Qualified Options. Any Options granted
which fail to satisfy the requirements for ISOs shall become Non-Qualified
Options.
(d) The intent of the Company is to register the (i) offering of
shares of Stock pertaining to or underlying the Rights and the offering of
Rights pursuant to this Plan, (ii) this Plan and (iii) the Rights, to the
extent required, under the 1933 Act and applicable state securities and
"Blue Sky" laws (the "Registration"). In such event, the Company shall make
available to Eligible Directors and Eligible Employees receiving Rights,
and/or shares of Stock in connection therewith, all disclosure documents
required under such federal and state laws. If such Registration shall not
occur, the Committee shall be responsible for supplying the recipient of a
Right, and/or shares of Stock in connection therewith, with such
information about the Company as is contemplated by the federal and state
securities laws in connection with exemptions from the registration
requirements of such laws, as well as providing the recipient of a Right
with the opportunity to ask questions and receive answers concerning the
Company and the terms and conditions of the Rights granted under this Plan.
In addition, if such Registration shall not occur, the Committee shall be
responsible for determining the maximum number of Eligible Directors and
Eligible Employees and the suitability of particular persons to be Eligible
Directors and Eligible Employees in order to comply with applicable federal
and state securities statutes and regulations governing such exemptions.
(e) In determining the Eligible Directors and Eligible Employees to
whom Rights shall be granted and the number of shares of stock to be
covered by each Right, the Committee shall take into account the nature of
the services rendered by such Eligible Directors and Eligible Employees,
their present and potential contributions to the success of the Company
and/or the Subsidiaries and such other factors as the Committee shall deem
relevant. An Eligible Director or Eligible Employee who has been granted a
Right under the Plan may be granted additional Rights under the Plan if the
Committee shall so determine.
If, pursuant to the terms of the Plan, or otherwise in connection with
the Plan, it is necessary that the percentage of stock ownership of an
Eligible Director or Eligible Employee be determined, the ownership
attribution provisions set forth in Section 424(d) of the Code shall be
controlling.
(f) The granting of Rights pursuant to this Plan is in the exclusive
discretion of the Committee, and until the Committee acts, no individual
shall have any rights under this Plan. The terms of this Plan shall be
interpreted in accordance with this intent.
Section 2.3. Stock Available For Rights.
----------- --------------------------
(a) Shares of the Stock shall be subject to, or underlying, grants of
Options, Restricted Stock, SARs, Units and Book Value Shares under this
Plan. The total number of shares of Stock for which, or with respect to
which, Rights may be granted (including the number of shares of Stock in
respect of which SARs, Units and Book Value Shares may be granted) under
this Plan shall be those designated in the Plan Pool. In the event that a
Right granted under the Plan to any Eligible Director or Eligible Employee
expires or is terminated unexercised as to any shares of Stock covered
thereby, such shares thereafter shall be deemed available in the Plan Pool
for the granting of Rights under this Plan; provided, however, if the
expiration or termination date of a Right is beyond the term of the Plan as
described in Section 8.3, then any shares of Stock
<PAGE>
covered by unexercised or terminated Rights shall not reactivate the
existence of this Plan and therefore shall not be available for additional
grants of Rights under this Plan.
(b) In the event the outstanding shares of Common Stock are
increased, decreased, changed into or exchanged for a different number or
kind of securities as a result of a stock split, reverse stock split, stock
dividend, recapitalization, merger, share exchange acquisition, combination
or reclassification appropriate proportionate adjustments will be made in:
(i) the aggregate number and/or kind of shares of Stock in the Plan Pool
that may be issued pursuant to the exercise of, or that are underlying,
Rights granted hereunder; (ii) the exercise or other purchase price and the
number and/or kind of shares of Stock called for with respect to, or
underlying, each outstanding Right granted hereunder; and (iii) other
rights and matters determined on a per share basis under this Plan or any
Rights Agreement. Any such adjustments will be made only by the Committee,
subject to ratification by the Board, and when so made will be effective,
conclusive and binding for all purposes with respect to this Plan and all
Rights then outstanding. Except as provided in Section 6.2(g), no such
adjustments will be required by reason of (i) the issuance or sale by the
Company for cash of additional shares of its Common Stock or securities
convertible into or exchangeable for shares of its Common Stock, or (ii)
the issuance of shares of Common Stock in exchange for shares of the
capital stock of any corporation, financial institution or other
organization acquired by the Company or any subsidiary in connection
therewith.
(c) The grant of a Right pursuant to this Plan shall not affect in
any way the right or power of the Company to make adjustments,
reclassification, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell,
or transfer all or any part of its business or assets.
(d) No fractional shares of Stock shall be issued under this Plan for
any adjustment under Section 2.3(b).
ARTICLE III
OPTIONS
Section 3.1. Grant of Options.
----------- ----------------
(a) The Company may grant Options to Eligible Directors and Eligible
Employees as provided in this Article III. Options will be deemed granted
pursuant to this Article III only upon (i) authorization by the Committee,
and (ii) the execution and delivery of an Option Agreement by the Eligible
Director or Eligible Employee optionee (the "Optionee") and a duly
authorized officer of the Company. Options will not be deemed granted
hereunder merely upon authorization of such grant by the Committee. The
aggregate number of shares of Stock potentially acquirable under all
Options granted shall not exceed the total number of shares of Stock in the
Plan Pool, less all shares of Stock potentially acquired under, or
underlying, all other Rights outstanding under this Plan.
(b) The Committee shall designate Options at the time a grant is
authorized as either ISOs or Non-Qualified Options. The aggregate Fair
Market Value (determined as of the time an ISO is granted) of the shares of
Stock as to which an ISO may first become exercisable by an Optionee in a
particular calendar year (pursuant to Article III and all other plans of
the Company and/or its Subsidiaries) may not exceed $100,000 (the "$100,000
Limitation"). If an Optionee is granted Options in excess of the $100,000
Limitation, or if such Options otherwise become exercisable with respect to
the number of shares of Stock which would exceed the $100,000 Limitation,
such excess Options shall be Non-Qualified Options.
<PAGE>
Section 3.2. Exercise Price. The exercise price of each Option granted
----------- --------------
under the Plan (the "Exercise Price") shall be not less than one hundred percent
(100%) of the Fair Market Value of the Common Stock on the date of grant of the
Option. In the case of ISOs granted to a shareholder who owns capital stock of
the Company possessing more than ten percent (10%) of the total combined voting
power of all classes of the capital stock of the Company (a "10% Shareholder"),
the Exercise Price of each Option granted under the Plan to such 10% Shareholder
shall not be less than one hundred and ten percent (110%) of the Fair Market
Value of the Common Stock on the date of grant of the Option.
Section 3.3. Terms and Conditions of Options.
----------- -------------------------------
(a) All Options must be granted within ten (10) years of the
Effective Date.
(b) The Committee may grant ISOs and Non-Qualified Options, either
separately or jointly, to an Eligible Employee.
(c) The grant of Options shall be evidenced by an Option Agreement in
form and substance satisfactory to the Committee in its discretion,
consistent with the provisions of this Article III.
(d) At the discretion of the Committee, an Optionee, as a condition
to the granting of the Option, must execute and deliver to the Company a
confidential information agreement approved by the Committee.
(e) Nothing contained in Article III, any Option Agreement or in any
other agreement executed in connection with the granting of an Option under
this Article III will confer upon any Optionee any right with respect to
the continuation of his or her status as an employee or director of the
Company or any of its Subsidiaries.
(f) Except as otherwise provided herein, each Option Agreement may
specify the period or periods of time within which each Option or portion
thereof will first become exercisable (the "Vesting Period") with respect
to the total number of shares of Stock acquirable thereunder. Such Vesting
Periods will be fixed by the Committee in its discretion, and may be
accelerated or shortened by the Committee in its discretion; provided that
the Committee may, at the time of grant of an Option, designate that,
notwithstanding any otherwise applicable Vesting Period, such Option shall
vest immediately prior and subject to the consummation of a Change In
Control Transaction(which may cause an Option granted as an ISO to be
deemed a Non-Qualified Option).
(g) Not less than one hundred (100) shares of Stock may be purchased
at any one time through the exercise of an Option unless the number
purchased is the total number at that time purchasable under all Options
granted to the Optionee.
(h) An Optionee shall have no rights as a shareholder of the Company
with respect to any shares of Stock underlying such Option until payment in
full of the Exercise Price by such Optionee for the stock being purchased.
No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other
rights for which the record date is prior to the date such Stock is fully
paid for, except as provided in Section 2.3(b).
(i) All shares of Stock obtained pursuant to an Option which
qualifies as an ISO shall be held in escrow for a period which ends on the
later of (i) two (2) years from the date of the granting of the ISO or
<PAGE>
(ii) one (1) year after the issuance of such shares pursuant to the
exercise of the ISO. Such shares of Stock shall be held by the Company or
its designee. The Optionee who has exercised the ISO shall have all rights
of a shareholder, including, but not limited, to the rights to vote,
receive dividends and sell such shares. The sole purpose of the escrow is
to inform the Company of a disqualifying disposition of the shares of Stock
acquired within the meaning of Section 422 of the Code, and it shall be
administered solely for this purpose.
Section 3.4. Exercise of Options.
----------- -------------------
(a) An Optionee must at all times be an Eligible Employee from the
date of grant until the exercise of the Options granted, except as provided
in Section 3.5(b).
(b) An Option may be exercised to the extent exercisable (i) by
giving written notice of exercise to the Company, specifying the number of
shares of Stock to be purchased and, if applicable, accompanied by full
payment of the Exercise Price thereof and the amount of withholding taxes
pursuant to Section 3.4(c) below; and (ii) by giving assurances
satisfactory to the Company that the shares of Stock to be purchased upon
such exercise are being purchased for investment and not with a view to
resale in connection with any distribution of such shares in violation of
the 1933 Act; provided, however, that in the event of the prior occurrence
of the Registration or in the event resale of such Stock without such
Registration would otherwise be permissible, the second condition will be
inoperative if, in the opinion of counsel for the Company, such condition
is not required under the 1933 Act or any other applicable law, regulation
or rule of any governmental agency.
(c) As a condition to the issuance of the Stock upon full or partial
exercise of a Non-Qualified Option, the Optionee will pay to the Company in
cash, or in such other form as the Committee may determine in its
discretion, the amount of the Company's Tax Withholding Liability required
in connection with such exercise.
(d) The Exercise Price of an Option shall be payable to the Company
either (i) in United States dollars, in cash or by check, bank draft or
money order payable to the order of the Company, or (ii) at the discretion
of the Committee, through the delivery of outstanding shares of the Common
Stock owned by the Optionee with a Fair Market Value at the date of
delivery equal to the Exercise Price, or (iii) at the discretion of the
Committee by a combination of (i) and (ii) above. No shares of Stock shall
be delivered until full payment has been made. Except as provided in
Section 2.3(b), the Committee may not approve a reduction of such Exercise
Price in any such Option, or the cancellation of any such Options and the
regranting thereof to the same Optionee at a lower Exercise Price, at a
time when the Fair Market Value of the Common Stock is lower than it was
when such Option was granted.
Section 3.5. Term and Termination of Option.
----------- ------------------------------
(a) The Committee shall determine, and each Option Agreement shall
state, the expiration date or dates of each Option, but such expiration
date shall be not later than ten (10) years after the date such Option is
granted (the "Option Period"). In the event an ISO is granted to a 10%
Shareholder, the expiration date or dates of each Option Period shall be
not later than five (5) years after the date such Option is granted. The
Committee, in its discretion, may extend the expiration date or dates of an
Option Period after such date was originally set; provided, however, such
expiration date may not exceed the maximum expiration date described in
this Section 3.5(a).
<PAGE>
(b) To the extent not previously exercised, each Option will terminate
upon the expiration of the Option Period specified in the Option Agreement;
provided, however, that each such Option will terminate upon the earlier
of: (i) twelve (12) months after the date that the Optionee ceases to be an
Eligible Employee by reason of Death or Disability; or (ii) immediately as
of the date that the Optionee ceases to be an Eligible Director or Eligible
Employee for any reason other than Death or Disability. Any portions of
Options not exercised within the foregoing periods shall terminate.
Section 3.6. Change in Control Transaction. All or any part of the Options
----------- ----------------------------
theretofore granted under this Article III shall become immediately exercisable
in full and may thereafter be exercised on the date of consummation of the
Change in Control Transaction (except as otherwise provided in Article II
hereof, and except to the extent that such acceleration of exercisability would
result in an "excess parachute payment" within the meaning of Section 280G of
the Code). Any Option that has not been fully exercised on or before the date of
consummation of the Change in Control Transaction shall terminate on such date,
unless a provision has been made in writing in connection with such transaction
for the assumption of all Options theretofore granted, or the substitution for
such Options of options to acquire the voting stock of a successor employer
corporation, or a parent or a subsidiary thereof, with appropriate adjustments
in the number and kind of shares and prices, in which event the Options
theretofore granted shall continue in the manner and under the terms so
provided.
Section 3.7. Restrictions On Transfer. An Option granted under Article
----------- ------------------------
III may not be Transferred except by will or the laws of descent and
distribution and, during the lifetime of the Optionee to whom it was granted,
may be exercised only by such Optionee.
Section 3.8. Stock Certificates. Certificates representing the Stock
----------- ------------------
issued pursuant to the exercise of Options will bear all legends required by law
and necessary to effectuate the provisions hereof. The Company may place a
"stop transfer" order against such shares of Stock until all restrictions and
conditions set forth in this Article III, the applicable Option Agreement, and
in the legends referred to in this Section 3.8 have been complied with.
Section 3.9. Amendment and Discontinuance. The Board may at any time
----------- ----------------------------
alter, suspend, terminate or discontinue the Plan, subject to any applicable
regulatory requirements and any required shareholder approval or any shareholder
approval which the Board may deem advisable for any reason, such as for the
purpose of obtaining or retaining any statutory or regulatory benefits under
tax, securities or other laws or satisfying applicable stock exchange or
quotation system listing requirements. The Board may not, without the consent
of the holder of an Option previously granted, make any alteration which would
deprive the optionee of his rights with respect thereto.
Section 3.10. Compliance with Rule 16b-3. With respect to persons subject
------------ --------------------------
to Section 16 of the 1934 Act, transactions under this Article III are intended
to comply with all applicable conditions of Rule 16b-3 or its successors under
the 1934 Act. To the extent any provision of this Article III or action by the
Board or the Committee fails so to comply, it shall be deemed null and void, to
the extent permitted by law and deemed advisable by the Committee.
ARTICLE IV
RESTRICTED STOCK GRANTS
Section 4.1. Grants of Restricted Stock.
----------- --------------------------
(a) The Company may grant Restricted Stock to Eligible Directors and
Eligible Employees as provided in this Article IV. Shares of Restricted
Stock will be deemed granted only upon (i) authorization by the Committee
and (ii) the execution and delivery of a Restricted Stock Agreement by the
Eligible
<PAGE>
Director or Eligible Employee to whom such Restricted Stock is to be issued
(the "Holder") and a duly authorized officer of the Company. Restricted
Stock will not be deemed to have been granted merely upon authorization by
the Committee. The aggregate number of shares of Restricted Stock
potentially acquirable under all Rights to acquire Restricted Stock shall
not exceed the total number of shares of Stock in the Plan Pool, less all
shares of Stock potentially acquirable under, or underlying, all other
Rights outstanding under this Plan.
(b) Each grant of Restricted Stock pursuant to this Article IV will
be evidenced by a Restricted Stock Agreement between the Company and the
Holder in form and substance satisfactory to the Committee in its sole
discretion, consistent with this Article IV. Each Restricted Stock
Agreement will specify the purchase price per share (the "Purchase Price"),
if any, with respect to the Restricted Stock to be issued to the Holder
thereunder. The purchase price will be fixed by the Committee in its
discretion. The Purchase Price will be payable to the Company in United
States dollars in cash or by check or, such other legal consideration as
may be approved by the Committee, in its discretion.
(c) Without limiting the foregoing, each Restricted Stock Agreement
shall include the following terms and conditions:
(i) Nothing contained in this Article IV, any Restricted Stock
Agreement or in any other agreement executed in connection with the
issuance of Restricted Stock under this Article IV will confer upon
any Holder any right with respect to the continuation of his or her
status as an employee or director of the Company or any of its
Subsidiaries.
(ii) Except as otherwise provided herein, each Restricted Stock
Agreement may specify the period or periods of time within which each
Restricted Stock or portion thereof will first become exercisable (the
"Vesting Period") with respect to the total number of shares of
Restricted Stock acquirable thereunder. Such Vesting Periods will be
fixed by the Committee in its discretion, and may be accelerated or
shortened by the Committee in its discretion; provided that the
Committee may, at the time of grant of a Restricted Stock, designate
that, notwithstanding any otherwise applicable Vesting Period, such
Restricted Stock shall vest immediately prior and subject to the
consummation of a Change In Control Transaction.
Section 4.2. Restrictions on Transfer of Restricted Stock.
----------- --------------------------------------------
(a) Rights to acquire Restricted Stock may not be Transferred, and
shares of Restricted Stock acquired by a Holder may be Transferred only in
accordance with the specific limitations on the Transfer of Restricted
Stock imposed by applicable state or federal securities laws and set forth
below, and subject to certain undertakings of the transferee set forth in
Section 4.2(c). All Transfers of Restricted Stock not meeting the
conditions set forth in this Section 4.2(a) are expressly prohibited.
(b) Any Transfer of Rights to acquire Restricted Stock and any
prohibited Transfer of Restricted Stock is void and of no effect. Should
such a Transfer purport to occur, the Company may refuse to carry out the
Transfer on its books, attempt to set aside the Transfer, enforce any
undertaking or right under this Section 4.2(b), or exercise any other legal
or equitable remedy.
(c) Any Transfer of Restricted Stock that would otherwise be
permitted under the terms of this Plan is prohibited unless the transferee
executes such documents as the Company may reasonably require to ensure the
Company's rights under a Restricted Stock Agreement and this Article IV are
adequately protected
<PAGE>
with respect to the Restricted Stock so Transferred. Such documents may
include, without limitation, an agreement by the transferee to be bound by
all of the terms of this Plan applicable to Restricted Stock, and of the
applicable Restricted Stock Agreement, as if the transferee were the
original Holder of such Restricted Stock.
(d) To facilitate the enforcement of the restrictions on Transfer set
forth in this Article IV, the Committee may, at its discretion, require the
Holder of shares of Restricted Stock to deliver the certificate(s) for such
shares with a stock power executed in blank by Holder and Holder's spouse,
to the Secretary of the Company or his or her designee, to hold said
certificate(s) and stock power(s) in escrow and to take all such actions
and to effectuate all such Transfers and/or releases as are in accordance
with the terms of this Plan. The certificates may be held in escrow so long
as the shares of Restricted Stock whose ownership they evidence are subject
to any restriction on Transfer under this Article IV or under a Restricted
Stock Agreement. Each Holder acknowledges that the Secretary of the
Company (or his or her designee) is so appointed as the escrow holder with
the foregoing authorities as a material inducement to the issuance of
shares of Restricted Stock under this Article IV, that the appointment is
coupled with an interest, and that it accordingly will be irrevocable. The
escrow holder will not be liable to any party to a Restricted Stock
Agreement (or to any other party) for any actions or omissions unless the
escrow holder is grossly negligent relative thereto. The escrow holder may
rely upon any letter, notice or other document executed by any signature
purported to be genuine.
Section 4.3. Termination.
----------- -----------
(a) The Committee shall determine, and each Restricted Stock
Agreement shall state, the expiration date or dates of each grant of
Restricted Stock, but such expiration date shall not be later than ten (10)
years after the date such grant of Restricted Stock is granted (the
"Restricted Stock Period"). The Committee, in its discretion, may extend
the expiration date or dates of a Restricted Stock Period after such date
was originally set; provided, however, such expiration date may not exceed
the maximum expiration date described in this Section 4.3(a).
(b) To the extent not previously exercised, each grant of Restricted
Stock will terminate upon the expiration of the Restricted Stock Period
specified in the Restricted Stock Agreement; provided, however, that each
such grant of Restricted Stock will terminate upon the earlier of: (i)
twelve (12) months after the date that the Holder ceases to be an Eligible
Director or Eligible Employee by reason of Death or Disability; or (ii)
immediately as of the date that the Holder ceases to be an Eligible
Employee for any reason other than death or disability. Any portions of
the grant of Restricted Stock to a Holder not exercised within the
foregoing periods shall terminate.
Section 4.4. Change in Control Transaction. All or any part of the grants
----------- -----------------------------
of Restricted Stock theretofore made under the Plan shall become immediately
exercisable in full and may thereafter be exercised on the date of consummation
of the Change in Control Transaction (except as otherwise provided in Article II
hereof, and except to the extent that such acceleration of exercisability would
result in an "excess parachute payment" within the meaning of Section 280G of
the Code). Any grant of Restricted Stock that has not been fully exercised on
or before the date of consummation of the Change in Control Transaction shall
terminate on such date, unless a provision has been made in writing in
connection with such transaction for the assumption of all grants of restricted
stock theretofore made, or the substitution for such grants of Restricted Stock
of grants of restricted stock to acquire the voting stock of a successor
employer corporation, or a parent or a subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices, in which event the
grants of Restricted Stock theretofore made shall continue in the manner and
under the terms so provided.
<PAGE>
Section 4.5. Compliance with Law. Notwithstanding any other provision of
----------- -------------------
this Article IV, Restricted Stock may be issued pursuant to this Article IV only
after there has been compliance with all applicable federal and state securities
laws, and such issuance will be subject to this overriding condition. The
Company may include shares of Restricted Stock in a Registration, but will not
be required to register or qualify Restricted Stock with the SEC or any state
agency, except that the Company will register with, or as required by local law,
file for and secure an exemption from such registration requirements from, the
applicable securities administrator and other officials of each jurisdiction in
which an Eligible Director or Eligible Employee would be issued Restricted Stock
hereunder prior to such issuance.
Section 4.6. Stock Certificates. Certificates representing the Restricted
----------- ------------------
Stock issued pursuant to this Article IV will bear all legends required by law
and necessary to effectuate the provisions hereof. The Company may place a "stop
transfer" order against shares of Restricted Stock until all restrictions and
conditions set forth in this Article IV, the applicable Restricted Stock
Agreement and in the legends referred to in this Section 4.6, have been complied
with.
Section 4.7. Market Standoff. To the extent requested by the Company and
----------- ---------------
any underwriter of securities of the Company in connection with a firm
commitment underwriting, no Holder of any shares of Restricted Stock will sell
or otherwise Transfer any such shares not included in such underwriting, or not
previously registered in a Registration, during the one hundred twenty (120) day
period following the effective date of the registration statement filed with the
SEC in connection with such offering.
Section 4.8. Amendment and Discontinuance. The Board may at any time
----------- ----------------------------
alter, suspend, terminate or discontinue the Plan, subject to any applicable
regulatory requirements and any required shareholder approval or any shareholder
approval which the Board may deem advisable for any reason, such as for the
purpose of obtaining or retaining any statutory or regulatory benefits under
tax, securities or other laws or satisfying applicable stock exchange or
quotation system listing requirements. The Board may not, without the consent of
the Holder of a Restricted Share previously granted, make any alteration which
would deprive the Holder of his rights with respect thereto.
Section 4.9. Compliance with Rule 16b-3. With respect to persons subject
----------- --------------------------
to Section 16 of the 1934 Act, transactions under this Article IV are intended
to comply with all applicable conditions of Rule 16b-3 or its successors under
the 1934 Act. To the extent any provision of this Article IV or action by the
Board or the Committee fails so to comply, it shall be deemed null and void, to
the extent permitted by law and deemed advisable by the Committee.
ARTICLE V
LONG-TERM INCENTIVE COMPENSATION UNITS
Section 5.1. Awards of Units.
----------- ---------------
(a) The Committee may grant awards of Units to Eligible Directors and
Eligible Employees as provided in this Article V. Units will be deemed
granted only upon (i) authorization by the Committee and (ii) the execution
and delivery of a Unit Agreement by the Eligible Director or Eligible
Employee to whom Units are to be granted (a "Unit Recipient") and an
authorized officer of the Company. Units will not be deemed granted merely
upon authorization by the Committee. Units may be granted in such amounts
and to such Unit Recipients as the Committee may determine in its sole
discretion subject to the limitation in Section 5.2 below.
<PAGE>
(b) Each grant of Units pursuant to this Article V will be evidenced
by a Unit Award Agreement between the Company and the Unit Recipient in
form and substance satisfactory to the Committee in its sole discretion,
consistent with this Article V.
(c) Except as otherwise provided herein, Units will be distributed
only after the end of a performance period of two or more years
("Performance "Period") beginning with the year in which such Units were
awarded. The Performance Period shall be set by the Committee for each
year's awards.
(d) The percentage of the Units awarded under this Section 5.1 or
credited pursuant to Section 5.5 that will be distributed to Unit
Recipients shall depend on the levels of financial performance and other
performance objectives achieved during each year of the Performance Period;
provided, however, that the Committee may adopt one or more performance
categories or eliminate all performance categories other than financial
performance. Financial performance shall be based on the consolidated
results of the Company and its Subsidiaries prepared on the same basis as
the financial statements published for financial reporting purposes and
determined in accordance with Section 5.1(e) below. Other performance
categories adopted by the Committee shall be based on measurements of
performance as the Committee shall deem appropriate.
(e) Distributions of Units awarded will be based on the Company's
financial performance with results from other performance categories
applied as a factor, not exceeding one, against financial results. The
annual financial and other performance results will be averaged over the
Performance Period and translated into percentage factors according to
graduated criteria established by the Committee for the entire Performance
Period. The resulting percentage factors shall determine the percentage of
Units to be distributed.
No distributions of Units, based on financial performance and other
performance, shall be made if a minimum average percentage of the
applicable measurement of performance, to be established by the Committee,
is not achieved for the Performance Period. The performance levels
achieved for each Performance Period and percentage of Units to be
distributed shall be conclusively determined by the Committee.
(f) The percentage of Units awarded and which Unit Recipients become
entitled to receive based on the levels of performance (including those
Units credited under Section 5.5) will be determined as soon as practicable
after each Performance Period and are called "Retained Units."
(g) As soon as practical after determination of the number of
Retained Units, such Retained Units shall be distributed in the form of a
combination of shares and cash. The Committee, in its sole discretion, will
determine how much of the Retained Unit will be distributed in cash and how
much will be distributed in shares of stock. The Units awarded, but which
Unit Recipients do not become entitled to receive, shall be cancelled.
(h) Notwithstanding any other provision in this Article V, the
Committee, if it determines in its sole discretion that it is necessary or
advisable under the circumstances, may adopt rules pursuant to which
Eligible Employees by virtue of hire, or promotion or upgrade to a higher
employee grade classification, or special individual circumstances, may be
granted the total award of Units or any portion thereof, with respect to
one or more Performance Periods that began in prior years and at the time
of the awards have not yet been completed.
<PAGE>
Section 5.2. Limitations. The aggregate number of shares of Stock
----------- -----------
potentially distributable under all Units granted, including those Units
credited pursuant to Section 5.5, shall not exceed the total number of shares of
Stock in the Plan Pool, less all shares of Stock potentially acquirable under,
or underlying, all other Rights outstanding under this Plan.
Section 5.3. Terms and Conditions.
----------- --------------------
(a) All awards of Units must be made within ten (10) years of the
Effective Date.
(b) The award of Units shall be evidenced by a Unit Award Agreement
in form and substance satisfactory to the Committee in its discretion,
consistent with the provisions of this Article V.
(c) Nothing contained in this Article V, any Unit Award Agreement or
in any other agreement executed in connection with the award of Units under
this Article V will confer upon any Unit Recipient any right with respect
to the continuation of his or her status as an employee or director of the
Company or any of its Subsidiaries.
(d) A Unit Recipient shall have no rights as a shareholder of the
Company with respect to any Units until the distribution of shares of Stock
in connection therewith. No adjustment shall be made in the number of Units
for dividends (ordinary or extraordinary, whether in cash, securities or
other property) or distributions or other rights for which the record date
is prior to the date such Stock is fully paid for, except as provided in
Sections 2.3(b) and 5.6(a).
Section 5.4. Special Distribution Rules.
----------- --------------------------
(a) Except as otherwise provided in this Section 5.4, a Unit
Recipient must be an Eligible Director or Eligible Employee from the date a
Unit is awarded to him or her continuously through and including the date
of distribution of such Unit.
(b) In case of the Death or Disability of a Unit Recipient prior to
the end of any Performance Period, whether before or after any event set
forth in Section 5.4(b) below, the number of Units awarded to the Unit
Recipient for such Performance Period shall be reduced pro rata based on
the number of months remaining in the Performance Period after the month of
Death or Disability. The remaining Units, reduced in the discretion of the
Committee to the percentage indicated by the levels of performance achieved
prior to the date of Death or Disability, if any, shall be distributed
within a reasonable time after Death or Disability. All other Units awarded
to the Unit Recipient for such Performance Period shall be cancelled.
(c) In case of the termination of the Unit Recipient's status as an
Eligible Director or Eligible Employee prior to the end of any Performance
Period for any reason other than Death or Disability, all Units awarded to
the Unit Recipient with respect to any such Performance Period shall be
immediately forfeited and cancelled.
(d) Upon a Unit Recipient's promotion to a higher employee grade
classification, the Committee may award to the Unit Recipient the total
Units, or any portion thereof, which are associated with the higher
employee grade classification for the current Performance Period.
Notwithstanding any other provision of the Plan, the Committee may
reduce or eliminate awards to a Unit Recipient who has been demoted to a
lower employee grade classification, and where circumstances
<PAGE>
warrant, may permit continued participation, proration or early
distribution, or a combination thereof, of awards which would otherwise be
cancelled.
Section 5.5. Dividend Equivalent Units. On each record date for dividends
----------- -------------------------
on the Common Stock, an amount equal to the dividend payable on one share of
Common Stock will be determined and credited (the "Dividend Equivalent Credit")
on the payment date to each Unit Recipient's account for each Unit which has
been awarded to the Unit Recipient and not distributed or cancelled. Such amount
will be converted within the account to an additional number of Units equal to
the number of shares of Common Stock that could be purchased at Fair Market
Value on such dividend payment date. These Units will be treated for purposes of
this Article V in the same manner as those Units granted pursuant to Section
5.1.
Section 5.6. Adjustments.
----------- -----------
(a) In addition to the provisions of Section 2.3(b), if an
extraordinary change occurs during a Performance Period which significantly
alters the basis upon which the performance levels were established under
Section 5.1 for that Performance Period, to avoid distortion in the
operation of this Article V, but subject to Section 5.2, the Committee may
make adjustments in such performance levels to preserve the incentive
features of this Article V, whether before or after the end of the
Performance Period, to the extent it deems appropriate in its sole
discretion, which adjustments shall be conclusive and binding upon all
parties concerned. Such changes may include, without limitation, adoption
of, or changes in, accounting practices, tax laws and regulatory or other
laws or regulations; economic changes not in the ordinary course of
business cycles; or compliance with judicial decrees or other legal
authorities.
(b) All or any part of the Units theretofore awarded under this
Article V shall become immediately distributable (reduced pro rata based on
the number of months remaining in the Performance Period after the
consummation of the Change in Control Transaction) and may thereafter be
distributed on the date of consummation of the Change in Control
Transaction (except as otherwise provided in Article II hereof, and except
to the extent that such acceleration of distribution would result in an
"excess parachute payment" within the meaning of Section 280G of the Code).
Any Units that have not been distributed on or before the date of
consummation of the Change in Control Transaction shall terminate on such
date, unless a provision has been made in writing in connection with such
transaction for the assumption of all awards of Units theretofore made, or
the substitution for such Units of awards of compensation units having
comparable characteristics under a long term incentive award plan of a
successor employer corporation, or a parent or a subsidiary thereof, with
appropriate adjustments, in which event the awards of Units theretofore
made shall continue in the manner and under the terms so provided.
Section 5.7. Other Conditions.
----------- ----------------
(a) No person shall have any claim to be granted an award of Units
under this Article V and there is no obligation for uniformity of treatment
of Eligible Employees or Unit Recipients under this Article IV. Units under
this Article V may not be Transferred.
(b) The Company shall have the right to deduct from any distribution
or payment in cash under this Article V, and the Unit Recipient or other
person receiving shares of Stock under this Article V shall be required to
pay to the Company, any Tax Withholding Liability. The number of shares of
Stock to be distributed to any individual Unit Recipient may be reduced by
the number of shares of Stock, the Fair Market Value on the Distribution
Date (as defined in Section 5.7(d) below) of which is equivalent to the
cash necessary to pay any Tax Withholding Liability, where the cash to be
distributed is not sufficient to pay such
<PAGE>
Tax Withholding Liability or the Unit Recipient may deliver to the Company
cash sufficient to pay such Tax Withholding Liability.
(c) Any distribution of shares of Stock under this Article V may be
delayed until the requirements of any applicable laws or regulations, and
any stock exchange or Nasdaq National Market requirements, are satisfied.
The shares of Stock distributed under this Article V shall be subject to
such restrictions and conditions on disposition as counsel for the Company
shall determine to be desirable or necessary under applicable law.
(d) For the purpose of distribution of Units in cash, the value of a
Unit shall be the Fair Market Value on the Distribution Date. The
"Distribution Date" shall be the first business day of April in the year of
distribution, except that in the case of special distributions the
Distribution Date shall be the first business day of the month in which the
Committee determines the distribution.
(e) Notwithstanding any other provision of this Article V, no
Dividend Equivalent Credits shall be made and no distributions of Units
shall be made if at the time a Dividend Equivalent Credit or distribution
would otherwise have been made:
(i) The regular quarterly dividend on the Common Stock has been
omitted and not subsequently paid or there exists any default in
payment of dividends on any such outstanding shares of capital stock
of the Company;
(ii) The rate of dividends on the Common Stock is lower than at
the time the Units to which the Dividend Equivalent Credit relates
were awarded, adjusted for any change of the type referred to in
Section 2.3(b).
(iii) Estimated consolidated net income of the Company for the
twelve-month period preceding the month the Dividend Equivalent Credit
or distribution would otherwise have been made is less than the sum of
the amount of the Dividend Equivalent Credits and Units eligible for
distribution under this Article V in that month plus all dividends
applicable to such period on an accrual basis, either paid, declared
or accrued at the most recently paid rate, on all outstanding shares
of Common Stock; or
(iv) The Dividend Equivalent Credit or distribution would result
in a default in any agreement by which the Company is bound.
(f) In the event net income available under Section 5.7(e) above for
Dividend Equivalent Credits and awards eligible for distribution under this
Article V is sufficient to cover part but not all of such amounts, the
following order shall be applied in making payments: (i) Dividend
Equivalent Credits, (ii) Units eligible for distribution under this Article
V.
Section 5.8. Designation of Beneficiaries. A Unit Recipient may designate a
----------- ----------------------------
beneficiary or beneficiaries to receive all or part of the Stock and/or cash to
be distributed to the Unit Recipient under this Article V in case of Death. A
designation of beneficiary may be replaced by a new designation or may be
revoked by the Unit Recipient at any time. A designation or revocation shall be
on a form to be provided for that purpose and shall be signed by the Unit
Recipient and delivered to the Company prior to the Unit Recipient's Death. In
case of the Unit Recipient's Death, the amounts to be distributed to the Unit
Recipient under this Article V with respect to which a designation of
beneficiary has been made (to the extent it is valid and enforceable under
applicable law) shall be
<PAGE>
distributed in accordance with this Article V to the designated beneficiary or
beneficiaries. The amount distributable to a Unit Recipient upon Death and not
subject to such a designation shall be distributed to the Unit Recipient's
estate. If there shall be any question as to the legal right of any beneficiary
to receive a distribution under this Article V, the amount in question may be
paid to the estate of the Unit Recipient, in which event the Company shall have
no further liability to anyone with respect to such amount.
Section 5.9. Restrictions On Transfer. Units granted under Article V may
----------- ------------------------
not be Transferred except as provided in Section 5.8, during the lifetime of the
Unit Recipient to whom it was awarded, cash and stock receivable with respect to
Units may be received only by such Unit Recipient.
Section 5.10. Amendment and Discontinuance. The Board may at any time
------------ ----------------------------
alter, suspend, terminate or discontinue the Plan, subject to any applicable
regulatory requirements and any required shareholder approval or any shareholder
approval which the Board may deem advisable for any reason, such as for the
purpose of obtaining or retaining any statutory or regulatory benefits under
tax, securities or other laws or satisfying applicable stock exchange or
quotation system listing requirements. The Board may not, without the consent of
the Unit Recipient, make any alteration which would deprive the Unit Recipient
of his rights with respect thereto.
Section 5.11. Compliance with Rule 16b-3. With respect to persons subject
------------ --------------------------
to Section 16 of the 1934 Act, transactions under this Article V are intended to
comply with all applicable conditions of Rule 16b-3 or its successors under the
1934 Act. To the extent any provision of this Article V or action by the Board
or the Committee fails so to comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.
ARTICLE VI
STOCK APPRECIATION RIGHTS
Section 6.1. Grants of SARs.
----------- --------------
(a) The Company may grant SARs to Eligible Directors and Eligible
Employees under this Article VI. SARs will be deemed granted only upon (i)
authorization by the Committee and (ii) the execution and delivery of a SAR
Agreement by the Eligible Director or Eligible Employee to whom the SARs
are to be granted (the "SAR Recipient") and a duly authorized officer of
the Company. SARs will not be deemed granted merely upon authorization by
the Committee. The aggregate number of shares of Stock which shall underlie
SARs granted hereunder shall not exceed the total number of shares of Stock
in the Plan Pool, less all shares of Stock potentially acquirable under, or
underlying, all other Rights outstanding under this Plan.
(b) Each grant of SARs pursuant to this Article VI shall be evidenced
by a SAR Agreement between the Company and the SAR Recipient, in form and
substance satisfactory to the Committee in its sole discretion, consistent
with this Article VI.
Section 6.2. Terms and Conditions of SARs.
----------- ----------------------------
(a) All SARs must be granted within ten (10) years of the Effective
Date.
(b) Each SAR issued pursuant to this Article VI shall have an initial
base value (the "Base Value") equal to the Fair Market Value of a share of
Common Stock on the date of issuance of the SAR (the "SAR Issuance Date").
<PAGE>
(c) In its discretion and subject to the provisions of Section 6.2(b)
(as to the establishment of the Base Value of a SAR), the Committee may
establish that the Base Value of a SAR shall be adjusted, upward or
downward, on a quarterly basis, based upon the market value performance of
the Common Stock in comparison with the aggregate market value performance
of a selected index or at a stated annual percentage rate.
(d) Nothing contained in this Article VI, any SAR Agreement or in any
other agreement executed in connection with the granting of a SAR under
this Article VI will confer upon any SAR Recipient any right with respect
to the continuation of his or her status as an employee or director of the
Company or any of its Subsidiaries.
(e) Except as otherwise provided herein, each SAR Agreement may
specify the period or periods of time within which each SAR or portion
thereof will first become exercisable (the "SAR Vesting Period") with
respect to the total Cash Payment (as defined in Section 6.4(b)) receivable
thereunder. Such SAR Vesting Periods will be fixed by the Committee in its
discretion, and may be accelerated or shortened by the Committee in its
discretion.
(f) SARs relating to no less than one hundred (100) shares of Stock
may be exercised at any one time unless the number exercised is the total
number at that time exercisable under all SARs granted to the SAR
Recipient.
(g) A SAR Recipient shall have no rights as a shareholder of the
Company with respect to any shares of Stock covered by such SAR. However,
adjustment shall be made to each SAR granted for dividends (ordinary or
extraordinary, whether in cash, securities or other property), and upon the
sale by the Company for cash of additional shares of its Common Stock.
Section 6.3. Restrictions on Transfer of SARs. Each SAR granted under this
----------- --------------------------------
Article VI may not be Transferred except by will or the laws of descent and
distribution and, during the lifetime of the SAR Recipient to whom it was
granted, may be exercised only by such SAR Recipient.
Section 6.4. Exercise of SARs.
----------- ----------------
(a) A SAR Recipient, or his or her executors or administrators, or
heirs or legatees, shall exercise a SAR of the SAR Recipient by giving
written notice of such exercise to the Company. SARs may be exercised only
upon the completion of the SAR Vesting Period applicable to such SAR.
(b) Within ten (10) days of the SAR Exercise Date applicable to a SAR
exercised in accordance with Section 6.4(a), the SAR Recipient shall be
paid in cash the difference between the Base Value of such SAR (as
adjusted, if applicable, under Section 6.2(f) as of the most recently
preceding quarterly period) and the Fair Market Value of the Common Stock
as of the SAR Exercise Date, reduced by the Tax Withholding Liability
arising from such exercise.
Section 6.5. Termination of SARs.
----------- -------------------
(a) The Committee shall determine in its sole discretion, and each
SAR Agreement shall state, the expiration date or dates of each SAR, but
such expiration date shall not be later than ten (10) years after the date
such SAR is granted (the "SAR Period"). The Committee, in its discretion,
may extend the expiration
<PAGE>
date or dates of a SAR Period after such date was originally set; provided,
however, such expiration date may not exceed the maximum expiration date
described in this Section 6.5(a).
(b) To the extent not previously exercised, each SAR will terminate
upon the expiration of the SAR Period specified in the SAR Agreement;
provided, however, that each such SAR will terminate upon the earlier of:
(i) twelve (12) months after the date that the SAR Recipient ceases to be
an Eligible Director or Eligible Employee by reason of Death or Disability;
or (ii) immediately as of the date that the SAR Recipient ceases to be an
Eligible Director or Eligible Employee for any reason other than by Death
or Disability. Any SARs not exercised within the foregoing periods shall
terminate.
Section 6.6. Change in Control Transaction. All or any part of the SARs
----------- -----------------------------
theretofore granted under this Article VI shall become immediately exercisable
in full and may thereafter be exercised on the date of consummation of the
Change in Control Transaction (except as otherwise provided in Article II
hereof, and except to the extent that such acceleration of exercisability would
result in an "excess parachute payment" within the meaning of Section 280G of
the Code). Any SAR that has not been fully exercised on or before the date of
consummation of the Change in Control Transaction shall terminate on such date,
unless a provision has been made in writing in connection with such transaction
for the assumption of all SARs theretofore granted, or the substitution for such
SARs of grants of stock appreciation rights having comparable characteristics
under a stock appreciation rights plan of a successor employer corporation, or a
parent or a subsidiary thereof, with appropriate adjustments, in which event the
SARs theretofore granted shall continue in the manner and under the terms so
provided.
Section 6.7. Designation of Beneficiaries. A SAR Recipient may designate
----------- ----------------------------
a beneficiary or beneficiaries to receive all or part of the cash to be paid to
the SAR Recipient under this Article VI in case of Death. A designation of
beneficiary may be replaced by a new designation or may be revoked by the SAR
Recipient at any time. A designation or revocation shall be on a form to be
provided for that purpose and shall be signed by the SAR Recipient and delivered
to the Company prior to the SAR Recipient's Death. In case of the SAR
Recipient's Death, the amounts to be distributed to the SAR Recipient under this
Article VI with respect to which a designation of beneficiary has been made (to
the extent it is valid and enforceable under applicable law) shall be
distributed in accordance with this Article VI to the designated beneficiary or
beneficiaries. The amount distributable to a SAR Recipient upon Death and not
subject to such a designation shall be distributed to the SAR Recipient's
estate. If there shall be any question as to the legal right of any beneficiary
to receive a distribution under this Article VI, the amount in question may be
paid to the estate of the SAR Recipient, in which event the Company shall have
no further liability to anyone with respect to such amount.
Section 6.8. Amendment and Discontinuance. The Board may at any time
----------- ----------------------------
alter, suspend, terminate or discontinue the Plan, subject to any applicable
regulatory requirements and any required shareholder approval or any shareholder
approval which the Board may deem advisable for any reason, such as for the
purpose of obtaining or retaining any statutory or regulatory benefits under
tax, securities or other laws or satisfying applicable stock exchange or
quotation system listing requirements. The Board may not, without the consent of
the SAR Recipient, make any alteration which would deprive the SAR Recipient of
his rights with respect thereto.
Section 6.9. Compliance With Rule 16b-3. With respect to persons subject
----------- --------------------------
to Section 16 of the 1934 Act, transactions under this Article VI are intended
to comply with all applicable conditions of Rule 16b-3 or its successors under
the 1934 Act. To the extent any provision of this Article VI
or action by the Board or the Committee fails so to comply, it shall be deemed
null and void, to the extent permitted by law and deemed advisable by the
Committee.
ARTICLE VII
<PAGE>
BOOK VALUE SHARES
Section 7.1. Grant of Book Value Shares. The Company may grant Book Value
----------------------------------------
Shares to Eligible Directors and Eligible Employees (the "BVS Recipient") as
provided in this Article VII. Book Value Shares will be deemed granted pursuant
to this Article VII only upon vote by the Committee, effective on even date
thereon, and shall require the immediate execution and delivery of a Book Value
Share Agreement by the BVS Recipient and a duly authorized officer of the
Company. Book Value Shares will not be deemed granted hereunder merely upon
authorization of such grant by the Committee. The aggregate number of Book Value
Shares potentially granted shall not exceed the total number of shares in the
Plan Pool, less all other rights to shares outstanding under this Plan.
Section 7.2 Initial Value. The initial value of each Book Value Share
---------------------------
granted under this Plan (the "Initial Value") shall be the book value of the
Common Stock on the day of issuance.
Section 7.3. Terms and Conditions of Book Value Shares.
-------------------------------------------------------
(a) All Book Value Shares must be granted within ten (10) years of
the Effective Date.
(b) The Committee may make more than one grant of Book Value Shares
to a BVS Recipient.
(c) Each grant of Book Value Shares shall be evidenced by a Book
Value Share Agreement in form and substance satisfactory to the Committee
in its discretion, consistent with the provisions of this Article VII.
(d) Nothing contained in Article VII, any Book Value Share Agreement
or in any other agreement executed in connection with the granting of Book
Value Shares under this Article VII will confer upon any BVS Recipient any
right with respect to the continuation of his or her status as an employee
or director of the Company or any of its Subsidiaries.
(e) Except as otherwise provided herein, each Book Value Share
Agreement may specify the period or periods of time within which each Book
Value Share or portion thereof will first become redeemable (the "Vesting
Period") with respect to the total number of Book Value Shares acquirable
thereunder. Such Vesting Periods will be fixed by the Committee in its
discretion, and may be accelerated or shortened by the Committee in its
discretion.
(f) A BVS Recipient shall have no rights as a shareholder of the
Company with respect to any shares of Common Stock represented by the Book
Value Shares. An adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the
date such Book Value Shares is redeemed, except as provided in Sections
2.3(b).
Section 7.4. Redemption of Book Value Shares.
----------------------------------------------
(a) A BVS Recipient must be an Eligible Employee or Eligible Director
at all times from the date of grant until the redemption of the Book Value
Shares granted, except as provided in Section 7.5(b).
(b) A Book Value Share may be redeemed to the extent redeemable (i)
by giving written notice of redemption to the Company, specifying the
number of full Book Value Shares to be redeemed and, if
<PAGE>
applicable, accompanied by full payment of the amount of the Tax
Withholding Liability pursuant to Section 7.4(c) below.
(c) As a condition to the redemption, in full or in part, of the Book
Value Shares, the BVS Recipient will pay to the Company in cash, or in such
other form as the Committee may determine in its discretion, the amount of
the Tax Withholding Liability required in connection with such exercise.
(d) Book Value Shares shall be redeemed for the then current book
value of the Common Stock, adjusted for the effects of dividends, and the
premium or discount resulting from the issuance of additional Common Stock
as noted otherwise herein, less the Initial Value per share.
(e) The monies due shall be payable to the BVS Recipient either in
United States dollars, in cash or by check, draft or money order payable to
the order of the BVS Recipient.
Section 7.5. Term and Termination of Book Value Shares.
-------------------------------------------------------
(a) The Committee shall determine, and each Book Value Share
Agreement shall state, the expiration date or dates of such Book Value
Shares, but such expiration date shall be not later than ten (10) years
after the date such Book Value Share was granted (the "Book Value Share
Period").
(b) To the extent not previously redeemed, each Book Value Share held
by a BVS Recipient will terminate upon the expiration of the Book Value
Share Period specified in the Book Value Share Agreement; provided,
however, that, subject to the provisions of Section 7.5(a), each such Book
Value Share will terminate upon the earlier of: (i) immediately as of the
date that the BVS Recipient ceases to be an Eligible Employee or Eligible
Director for any reason, other than by reason of Death or Disability, or
(ii) twelve (12) months after the date that the BVS Recipient ceases to be
an Eligible Employee or Eligible Director by reason of Death or Disability.
Any portions of Book Value Shares not redeemed within the foregoing periods
shall terminate. The Committee may, in its discretion, specify in the
agreement other events that will result in the termination of the Book
Value Shares.
Section 7.6 Change in Control Transaction. All or any part of the Book
------------------------------------------
Value Shares theretofore granted under this Article VII shall become immediately
redeemable in full and may thereafter be redeemed on the date of consummation of
the Change in Control Transaction (except as otherwise provided in Article II
hereof, and except to the extent that such acceleration of redeemability would
result in an "excess parachute payment" within the meaning of Section 280G of
the Code). Any Book Value Shares that have not been fully redeemed on or before
the date of consummation of the Change in Control Transaction shall terminate on
such date, unless a provision has been made in writing in connection with such
transaction for the assumption of all Book Value Shares theretofore granted, or
the substitution for such Book Value Shares of book value shares of the
successor employer corporation, or a parent or a subsidiary thereof, with
appropriate adjustments as to the number and kind of shares and prices, in which
event the Book Value Shares theretofore granted shall continue in the manner and
under the terms so provided.
Section 7.7 Restrictions on Transfer. A Book Value Share granted under
-------------------------------------
Article VII may not be Transferred and during the lifetime of the BVS Recipient
and may be exercised only by such BVS Recipient.
Section 7.8 Evidence of Participation. In lieu of certificates
--------------------------------------
representing the Book Value Shares issued pursuant to this Agreement, the Book
Value Share Agreement shall serve as evidence of ownership.
<PAGE>
Section 7.9. Amendment and Discontinuance. The Board may at any time
-------------------------------------------
alter, suspend, terminate or discontinue the Plan, subject to any applicable
regulatory requirements and any required shareholder approval or any shareholder
approval which the Board may deem advisable for any reason, such as for the
purpose of obtaining or retaining any statutory or regulatory benefits under
tax, securities or other laws or satisfying applicable stock exchange or
quotation system listing requirements. The Board may not, without the consent of
the BVS Recipient, make any alteration which would deprive the BVS Recipient of
his rights with respect thereto.
ARTICLE VIII
MISCELLANEOUS
Section 8.1. Application of Funds. The proceeds received by the Company
----------- --------------------
from the sale of Stock pursuant to the exercise of Rights will be used for
general corporate purposes.
Section 8.2. No Obligation to Exercise Right. The granting of a Right
----------- -------------------------------
shall impose no obligation upon the recipient to exercise such Right.
Section 8.3. Term of Plan. Except as otherwise specifically provided
----------- ------------
herein, Rights may be granted pursuant to this Plan from time to time within ten
(10) years from the Effective Date.
Section 8.4. Captions and Headings; Gender and Number. Captions and
----------- ----------------------------------------
paragraph headings used herein are for convenience only, do not modify or affect
the meaning of any provision herein, are not a part, and shall not serve as a
basis for interpretation or construction of this Plan. As used herein, the
masculine gender shall include the feminine and neuter, and the singular number
shall include the plural, and vice versa, whenever such meanings are
appropriate.
Section 8.5. Expenses of Administration of Plan. All costs and expenses
----------- ----------------------------------
incurred in the operation and administration of this Plan shall be borne by the
Company or by one or more Subsidiaries. The Company shall indemnify, defend and
hold each member of the Committee harmless against all claims, expenses and
liabilities arising out of or related to the exercise of the Committee's powers
and the discharge of the Committee's duties hereunder.
Section 8.6. Governing Law. Without regard to the principles of conflicts
----------- -------------
of laws, the laws of the State of North Carolina shall govern and control the
validity, interpretation, performance, and enforcement of this Plan.
Section 8.7. Inspection of Plan. A copy of this Plan, and any amendments
----------- ------------------
thereto, shall be maintained by the Secretary of the Company and shall be shown
to any proper person making inquiry about it.
Section 8.8. Severable Provisions. The Company intends that the provisions
----------- --------------------
of Articles III, IV, V, VI and VII, in each case together with Articles I, II
and VIII, shall each be deemed to be effective on an independent basis, and that
if one or more of such Articles, or the operative provisions thereof, shall be
deemed invalid, void or voidable, the remainder of such Articles shall continue
in full force and effect.
<PAGE>
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Basic earnings per common share of $1.55 for the year ended December 31,
1999 was calculated by dividing net income of $4.5 million for the period
January 1, 1999 to December 31, 1999 by the weighted-average number of common
shares outstanding of 2,926,318.
<PAGE>
STATEMENT REGARDING COMPUTATION OF RATIOS
The averages used in computing the performance ratios provided in Item 6
represent average daily balances.
<PAGE>
________________________________
PEOPLES BANCORP
OF NORTH CAROLINA, INC.
________________________________
Notice of 2000 Annual Meeting
_______________________
Proxy Statement
_______________________
Annual Financial Statements
and Review of Operations
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
General Description of Business
Peoples Bancorp of North Carolina, Inc. (the "Company" or "Peoples
Bancorp"), was formed in 1999 to serve as the holding company for Peoples Bank
(the "Bank"). The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the
Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company's sole
activity consists of owning the Bank. The Company's principal source of income
is any dividends which are declared and paid by the Bank on its capital stock.
The Bank, founded in 1912, is a state-chartered commercial bank serving the
citizens and business interests of the Catawba Valley and surrounding
communities. The Bank's deposits are insured by the Bank Insurance Fund (the
"BIF") of the Federal Deposit Insurance Corporation (the "FDIC") to the maximum
amount permitted by law. It is also a member of the Federal Home Loan Bank
system. The Bank conducts its business from its corporate headquarters located
at 218 South Main Avenue, Newton, North Carolina and ten additional offices in
Newton, Denver, Triangle, Catawba, Conover, Maiden, Claremont, Hiddenite, and
Hickory, North Carolina. Ten branch offices provide automated teller machine
(ATM) access to Bank customers. The Bank also has a stand alone ATM located in a
retail establishment in Sherrills Ford. The Bank's training, mortgage loan
administration, bank card, finance department, and network systems operations
are operated in leased office space in Newton and Hickory. At December 31, 1999,
the Company had total assets of $432.4 million, net loans of $335.3 million,
deposits of $376.6 million, investment securities of $63.8 million, and
shareholders' equity of $38.0 million.
The Bank is engaged primarily in the business of attracting retail and
commercial deposits from the general public and using those deposits to make
secured and unsecured loans. The Bank offers a full range of loan and deposit
products as well as non-deposit investment products. The Bank makes automobile,
credit card, mobile home, securities, first and second mortgage, boat and
recreational vehicle and deposit secured, as well as unsecured, consumer loans.
The Bank also offers a broad range of secured and unsecured commercial loan
products, including commercial construction/permanent loans, Small Business
Administration loans, Rural Economic and Community Development guaranteed loans,
commercial and standby letters of credit, equipment leasing for businesses and
municipalities, special community development loans, and agricultural loans.
The Bank has a diversified loan portfolio, with no foreign loans and few
agricultural loans. Real estate loans are predominately variable rate commercial
property loans. Commercial loans are spread throughout a variety of industries
with no one particular industry or group of related industries accounting for a
significant portion of the commercial loan portfolio. At December 31, 1999,
approximately 9% of the Bank's portfolio was unsecured. Unsecured loans
generally involve higher credit risk than secured loans, and in the event of
customer default, the Bank has a higher exposure to potential loan losses. The
Bank has sold, servicing retained, approximately 31% of its loan portfolio.
The majority of the Bank's deposit and loan customers are individuals and
small to medium-sized businesses located in the Bank's market area. Management
does not believe the Bank is dependent on a single customer or group of
customers concentrated in a particular industry whose loss or insolvency would
have a material adverse impact on operations.
The Bank's primary source of revenue is interest income from its lending
activities. The Bank's other major sources of revenue are interest and dividend
income from investments, interest-earning deposits in other depository
institutions, and transaction and fee income from lending, deposit and
subsidiary activities. The major expenses of the Bank are interest on deposits
and general and administrative expenses such as employee compensation and
benefits, and occupancy expenses.
The operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies, including the
Federal Reserve, the FDIC and the North Carolina Commissioner of Banks (the
"Commissioner"). Deposit flows and cost of funds are influenced by interest
rates on competing investments and general market rates of interest. Lending
activities are affected by the demand for financing, which in turn are affected
by the interest rates at which financing may be offered and other factors
affecting local demand and availability of funds.
At December 31, 1999, the Bank employed 196 full-time equivalent employees.
The Company has no operations and conducts no business of its own other
than owning the Bank. Accordingly, the discussion of the business which follows
concerns the business conducted by the Bank, unless otherwise indicated.
A-1
<PAGE>
Subsidiaries
The Bank is the Company's only subsidiary. The Bank has two subsidiaries,
Peoples Investment Services, Inc. and Peoples Real Estate and Appraisal
Services, Inc. Through a relationship with Raymond James Financial Services,
Inc, Peoples Investment Services, Inc. provides the Bank's customers access to
investment counseling and non-deposit investment products such as stocks, bonds,
mutual funds, tax deferred annuities, and related brokerage services. Peoples
Real Estate and Appraisal Services, Inc. provides real estate appraisal services
to customers of the Bank.
Market Area
The Bank's primary market consists of the communities in an approximately
25-mile radius around its headquarters office in Newton, North Carolina. This
area includes Catawba County, Alexander County, the western portion of Iredell
County, the northern portion of Lincoln County, and portions of northeast Gaston
County. The Bank is located only 40 miles north of Charlotte, North Carolina
and the Bank's primary market area is and will continue to be significantly
affected by its close proximity to this major metropolitan area.
Employment in the Bank's primary market area is diversified among
manufacturing, agricultural, retail and wholesale trade, technology, services
and utilities. Siecor (manufacturer of fiber optic cable and accessories) is the
largest employer in Catawba County. Other major employers include CommScope,
Inc. (manufacturer of fiber optic cable and accessories), Catawba County
Schools, and Frye Regional Medical Center, Inc. Employment in the Bank's primary
market area as of January 2000 was strong, with an unemployment rate below that
of North Carolina and national averages.
Competition
The Bank has operated in the Catawba Valley region for more than 85 years
and is the only financial institution headquartered in Newton. However, the Bank
faces strong competition both in attracting deposits and making loans. Its most
direct competition for deposits has historically come from other commercial
banks, credit unions and brokerage firms located in its primary market area,
including large financial institutions. Two national money center commercial
banks are headquartered in Charlotte, North Carolina, only 40 miles from the
Bank's primary market area. Based upon June 30, 1999 comparative data, the Bank
had 17.49% of the deposits in Catawba County, placing it second in deposit size
among a total of eleven banks with branch offices in Catawba County.
The Bank has also faced additional significant competition for investors'
funds from short-term money market securities and other corporate and government
securities. The Bank's deposit base has grown principally due to economic growth
in the Bank's market area coupled with the implementation of new and competitive
deposit products. The ability of the Bank to attract and retain deposits depends
on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.
The Bank experiences strong competition for loans from commercial banks and
mortgage banking companies. The Bank competes for loans primarily through the
interest rates and loan fees it charges and the efficiency and quality of
services it provides borrowers. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions.
This Annual Report contains forward-looking statements. These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
changes in the interest rate environment, management's business strategy,
national, regional and local market conditions and legislative and regulatory
conditions.
Readers should not place undue reliance on forward-looking statements, which
reflect management's view only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect
subsequent events or circumstances. Readers should also carefully review the
risk factors described in other documents the Company files from time to time
with the Securities and Exchange Commission
A-2
<PAGE>
<TABLE>
<CAPTION>
SELECTED
FINANCIAL DATA
Dollars in Thousands Except Per Share Amounts
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income 32,302 29,215 23,783 18,956 16,407
Interest expense 14,790 14,540 11,179 8,586 7,027
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 17,512 14,675 12,604 10,370 9,380
Provision for loan losses 425 445 696 980 700
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 17,087 14,230 11,908 9,390 8,680
Non-interest income 3,380 3,646 2,060 1,475 1,111
Non-interest expense 13,832 12,020 10,413 8,118 7,404
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 6,635 5,856 3,555 2,747 2,387
Income taxes 2,093 1,847 1,149 722 653
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 4,542 4,009 2,406 2,025 1,734
- ----------------------------------------------------------------------------------------------------------------------------------
Selected Year-End Balances
Assets 432,435 402,273 326,853 257,467 222,096
Available-for-sale securities 62,498 63,228 53,307 56,995 57,125
Loans 336,959 306,748 238,449 179,304 143,777
Interest-earning assets 411,734 383,270 308,852 244,038 208,702
Deposits 376,634 350,067 275,393 231,346 198,283
Interest-bearing liabilities 339,243 315,387 258,685 197,255 166,684
Shareholders' equity 37,998 35,924 24,930 22,911 22,120
Shares outstanding* 2,926,318 2,926,500 2,553,000 2,321,225 2,321,225
- ----------------------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Assets 417,387 369,864 295,879 243,094 204,352
Available-for-sale securities 60,642 59,824 57,508 53,294 50,302
Loans 324,651 271,819 215,789 164,865 133,960
Interest-earning assets 396,606 351,730 281,215 229,631 192,144
Deposits 363,692 321,371 252,998 216,052 180,914
Interest-bearing liabilities 326,164 293,631 233,901 186,101 152,690
Shareholders' equity 39,348 33,303 24,117 22,478 21,348
Shares outstanding* 2,926,318 2,780,145 2,553,000 2,553,000 2,553,000
- ----------------------------------------------------------------------------------------------------------------------------------
Profitability Ratios
Return on average total assets 1.09% 1.08% 0.81% 0.83% 0.85%
Return on average shareholders' equity 11.54% 12.04% 9.98% 9.01% 8.12%
Dividend payout ratio 23.84% 22.61% 33.18% 36.67% 38.65%
- ----------------------------------------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loans to deposit 89.27% 84.58% 85.29% 76.31% 74.05%
Shareholders' equity to total assets 9.43% 9.00% 8.15% 9.25% 10.45%
- ----------------------------------------------------------------------------------------------------------------------------------
Per share of common stock*
Net income 1.55 1.44 0.94 0.79 0.68
Cash dividends 0.37 0.32 0.31 0.29 0.26
Book value 12.99 12.28 9.77 9.87 9.53
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Shares outstanding and per share computations have been restated to reflect a
3 for 2 stock split during first quarter 1999, the 10% stock dividend
distributed during second quarter 1997 and the 15% stock dividend in fourth
quarter 1995. Prior to 1999 represents Bank only.
A-3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
Management's discussion and analysis of earnings and related data are
presented to assist in understanding the consolidated financial condition and
results of operations of Peoples Bancorp of North Carolina, Inc. (the
"Company"), for the years ended December 31, 1999, 1998 and 1997. The Company is
a registered bank holding company operating under the supervision of the Federal
Reserve Board and the parent company of Peoples Bank (the "Bank"). The Bank is a
North Carolina-chartered bank, with offices in Catawba, Lincoln and Alexander
Counties, operating under the banking laws of North Carolina and the Rules and
Regulations of the Federal Deposit Insurance Corporation (the "FDIC").
This discussion and related financial data should be read in conjunction
with the audited consolidated financial statements and related footnotes.
Results of Operations
Summary
The Company reported earnings of $4.5 million in 1999, or $1.55 basic
income per share, a 13% increase as compared to $4.0 million, or $1.44 basic
income per share, for 1998. Net income for 1998 represented an increase of 22%
as compared to 1997 net income of $2.4 million before recurring charges for
$855,000 associated with the Bank's profit sharing plan. Net income for 1998
increased 67% over 1997 after giving effect to the one-time charge to earnings
in 1997. The growth in net income in 1999 was due to effective management of the
Bank's net interest margin combined with an improvement in the Bank's loan
portfolio, resulting in increased net interest income. This increase was
partially offset by growth in non-interest expense during 1999. The increase in
net income in 1998 compared to 1997 resulted from increased net interest income
and non-interest income, partially offset by non-interest expense.
Return on average assets in 1999 was 1.09%, compared to 1.08% in 1998 and
0.81% in 1997. Return on average shareholders' equity was 11.54% in 1999
compared to 12.04% in 1998 and 9.98% in 1997, including recurring charges.
Net Interest Income
Net interest income, the largest component of the Company's income, is the
amount by which interest and fees generated by earning assets exceed the total
cost of funds used to carry them. Net interest income is affected by changes in
the volume and mix of earning assets and interest bearing liabilities, as well
as changes in the yields earned and rates paid. Net interest margin is
calculated by dividing tax-equivalent net interest income by average earning
assets, and represents the Company's net yield on its earning assets.
Net interest income on a tax-equivalent basis totaled $18.0 million in
1999, an increase of 19% or $2.8 million over the comparable figure in 1998. The
increase in net interest income on a tax equivalent basis in 1998 over 1997 was
$2.0 million or 16%. The interest rate spread, which represents the rate earned
on interest earning assets less the rate paid on interest bearing liabilities
increased to 3.74% during 1999 compared to 3.49% during 1998, slightly lower
than the 3.85% achieved in 1997. The net interest margin on earning assets
increased to 4.54% in 1999 from 4.30% in 1998, following a decrease from the
1997 net interest margin of 4.65%.
A-4
<PAGE>
Table 1 sets forth for each category of earning assets and interest-bearing
liabilities, the average amounts outstanding, the interest incurred on such
amounts and the average rate earned or incurred for the years ended December 31,
1999, 1998 and 1997. The table also sets forth the average rate earned on total
earning assets, the average rate paid on total interest-bearing liabilities, and
the net interest margin on average total earning assets for the same periods.
Nonaccrual loans and the interest income that was recorded on these loans, if
any, are included in the yield calculations for loans in all periods reported.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
-------------------------------------------------------------------------------------
Average Yield / Average Yield / Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans: Net of unearned income 324,651 28,375 8.74% $271,819 $24,885 9.16% $215,789 $19,991 9.27%
Investments - taxable 39,122 2,348 6.00% 40,434 2,322 5.74% 37,448 2,390 6.38%
Investments - nontaxable 21,520 1,475 6.86% 19,390 1,335 6.88% 20,060 1,420 7.08%
Federal funds sold 6,780 339 5.00% 5,950 323 5.43% 2,603 144 5.55%
Other 4,533 266 5.87% 14,137 804 5.69% 5,315 320 6.03%
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 396,606 32,803 8.27% 351,730 29,669 8.44% 281,215 24,265 8.63%
Cash and due from banks 10,667 9,677 8,448
Other assets 14,192 13,053 10,311
Allowance for loan losses (4,079) (4,596) (4,095)
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $417,387 $369,864 $295,879
====================================================================================================================================
Interest bearing liabilities:
Deposits:
NOW accounts $31,003 $429 1.38% $27,642 $547 1.98% $23,820 $585 2.45%
Regular savings accounts 26,258 490 1.87% 26,302 625 2.37% 29,031 698 2.40%
Insured money market accounts 54,757 2,435 4.45% 37,264 1,848 4.96% 12,426 388 3.12%
Certificates of deposit $100,000 or more 83,845 4,475 5.34% 72,628 2,993 4.12% 55,037 3,228 5.87%
Other time deposits 115,786 6,178 5.34% 113,597 7,603 6.69% 95,132 5,254 5.52%
FHLB borrowings 13,532 736 5.44% 15,277 875 5.73% 16,749 966 5.78%
Demand notes payable to U.S. Treasury 899 41 4.56% 898 47 5.23% 1,125 24 2.13%
Other 83 5 5.95% 23 2 8.70% 581 35 6.02%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 326,163 14,789 4.53% 293,631 14,540 4.95% 233,901 11,177 4.78%
Demand deposits 51,988 43,938 37,552
Other liabilities 2,166 1,088 309
Shareholder's equity 39,348 33,303 24,117
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $419,665 $371,960 $295,879
====================================================================================================================================
Net interest spread 18,014 3.74% 15,129 3.49% 13,088 3.85%
====================================================================================================================================
Net yield on earning assets 4.54% 4.30% 4.65%
====================================================================================================================================
Taxable equivalent adjustment
Investment securities 454 454 483
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 17,560 14,675 12,605
====================================================================================================================================
</TABLE>
A-5
<PAGE>
Changes in interest income and interest expense can result from variances
in both volume and rates. Table 2 describes the impact on the Company's tax
equivalent net interest income resulting from changes in average balances and
average rates for the periods indicated. The changes in interest due to both
volume and rate have been allocated to volume and rate changes in proportion to
the relationship of the absolute dollar amounts of the changes in each.
Table 2 - Rate/Volume Variance Analysis
Tax Equivalent Basis
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------------------- ----------------------------------------
Changes in Changes in Total Changes in Changes in Total
average average Increase average average Increase
volume rates (Decrease) volume rates (Decrease)
--------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans: Net of unearned income $4,724 ($1,234) $3,490 $5,169 (275) $4,894
Investments - taxable (77) 103 26 181 (249) (68)
Investments - nontaxable 146 (6) 140 (47) (38) (85)
Federal funds sold 43 (27) 16 184 (5) 179
Other (512) (26) (538) 449 35 484
--------------------------------------- ---------------------------------------
Total interest income $4,324 (1,190) $3,134 $5,936 (532) $5,404
Interest bearing liabilities:
Deposits:
NOW accounts 57 (174) (117) 85 (123) (38)
Regular savings accounts (1) (134) (135) (65) (8) (73)
Insured money market accounts 823 (236) 587 1,003 457 1,460
Certificates of deposit $100,000 or more 530 952 1,482 878 (1,113) (235)
Other time deposits 132 (1,557) (1,425) 1,128 1,221 2,349
FHLB Borrowings (95) (44) (139) (84) (7) (91)
Demand notes payable to U.S. Treasury 0 (6) (6) (8) 31 23
Other 3 (0) 3 (269) 236 (33)
--------------------------------------- ---------------------------------------
Total interest expense $1,449 (1,199) $250 $2,668 694 $3,362
--------------------------------------- ---------------------------------------
Net interest income $2,875 9 $2,884 $3,268 (1,226) $2,042
</TABLE>
The increase in net interest income in 1999 was primarily attributable to
an increase in the volume of loans. The yield on earning assets decreased to
8.27% in 1999 from 8.44% in 1998. This decrease reflects a decrease in the
Company's average prime commercial lending rate in 1999, when compared to 1998.
The average balance of earning assets increased by $44.9 million, to $396.6
million in 1999 from $351.7 million in 1998. The increase in average loans
comprised $52.8 million of this amount. Interest-bearing liabilities increased
by $32.5 million, to $326.2 million in 1999 from $293.6 million in 1998. This
growth in interest-bearing liabilities is a direct result of the increase in
interest bearing deposits, which increased by $34.3 million, to $311.7 million
in 1999 from $277.4 million in 1998. The increase in interest bearing deposits
was primarily attributable to the growth in insured money market accounts which
increased $17.5 million to $54.8 million in 1999 from $37.3 million in 1998, as
well as the growth in certificates of deposit over $100,000 and other time
deposits which increased $13.4 million to $199.6 million in 1999 from $186.2
million in 1998. The cost of funds decreased from 4.95% in 1998 to 4.53% in
1999, mainly as a result of the decrease in the cost of deposits. The increase
in net interest margin in 1999 is primarily attributable to the increase in
volume of average interest earning assets, combined with a decrease in the
average rate paid on interest bearing liabilities.
Tax-equivalent interest income on loans in 1999 increased $3.5 million or
14% from the $24.9 million recorded for 1998, following an increase of $4.9
million or 25% in 1998 over 1997. This increase was due to a $52.8 million
increase in average loans outstanding in 1999 compared to 1998, slightly offset
by a lower tax-equivalent yield on loans of 8.74% in 1999 compared to 9.16% in
1998. The increase in the net interest spread to 3.74% in 1999 from 3.49% in
1998 resulted from the decrease in the yield on earning assets to 8.27% in 1999
from 8.44% in 1998, while the cost of funds decreased to 4.53% in 1999 from
4.95% in 1998.
Interest expense on FHLB borrowings totaled $736,000 during 1999 at an
average rate of 5.44% compared to $875,000 in 1998 at an average rate of 5.73%,
and $967,000 in 1997 at an average rate of 5.78%. Interest expense on federal
funds purchased, promissory notes and demand notes payable to the U.S. Treasury
totaled $46,000, $49,000 and $59,000 for 1999, 1998 and 1997, respectively.
A-6
<PAGE>
Provision for Loan Losses
Provisions for loan losses are charged to income in order to bring the
total allowance for loan losses to a level deemed appropriate by management of
the Company based on such factors as management's judgment as to losses within
the Company's loan portfolio, loan growth, net charge-offs, changes in the
composition of the loan portfolio, delinquencies and management's assessment of
the quality of the loan portfolio and general economic climate.
The provision for loan losses was $425,000, $445,000, and $696,500 for the
years ended December 31, 1999, 1998 and 1997, respectively. The ratio of net
charge-offs to total loans was 0.20% in 1999, 0.25% in 1998 and 0.03% in 1997.
Net charge-offs for 1999 were $638,000. Included in this amount is approximately
$476,000, which represents a charge-off related to one borrower. The ratio of
non-performing loans to total loans was 1.03% at December 31, 1999, as compared
to 1.20% and 1.52% at December 31, 1998 and 1997, respectively.
on-interest Income
Non-interest income for 1999 totaled $3.4 million, a decrease of $265,000
or 6% from non-interest income of $3.7 million for 1998. The decrease in non-
interest income for 1999 resulted from a reduction in mortgage banking income of
$309,000 from 1998 due to an increase on mortgage loan rates during third
quarter of 1999 which resulted in a decrease in mortgage loan applications as
well as a loss on mortgage loans sold in the secondary market. The Company also
recognized a loss on sale on securities of approximately $35,000 during 1999
compared to a gain on sale of securities of approximately $168,000 during 1998.
During 1997 a loss of sale of securities of approximately $8,000 was recognized.
Non-interest income for 1998 increased $1.6 million or 76% over non-interest
income of $2.1 million for 1997. Service charge income increased $140,000, or
12% from 1998 to 1999, as a result of an increase in deposit volume and
associated charges.
Increases in non-interest income for 1998 were attributable to an increase
in service charge income and mortgage banking income. Service charge income
increased $275,000, or 30% in 1998 compared to 1997. Mortgage banking income
increased $659,000 or 169% over 1997 levels, due to the growth of the Company's
mortgage operations during 1998.
Non-interest Expense
Total non-interest expense for 1999 amounted to $13.8 million. This was a
15% increase over the $12.0 million reported in 1998, and followed a 15%
increase in 1998 over the $10.4 million reported in 1997.
Salary and employee benefit expense was $7.7 million in 1999, compared to
$6.4 million during 1998, an increase of $1.3 million or 20%, following a $1.7
million or 36% increase in salary and employee benefit expense in 1998 over
1997. The increase during 1999 resulted from merit increases, additional
participation in management and employee incentive plans, and increased staffing
levels to support overall Company growth. Increases during 1998 reflect merit
increases and the cost of additional personnel to staff two new branches.
The Company recorded occupancy expense of $2.2 million in 1999, compared to
$2.0 million during 1998, an increase of $275,000 or 14%, following a $392,000
or 25% increase in occupancy expenses in 1998 over 1997. The increase in 1999
reflects additional leased properties due to Company growth, an increase in
property tax rates during 1999 and a full year of depreciation expense on a
teller platform and wide area network implemented in 1998. The increase during
1998 represents depreciation expense associated with new branches opened in 1997
and 1998 and implementation of a new teller platform system and wide area
network in 1998.
The total of all other operating expenses increased $153,000 or 4% during
1999. This increase is primarily attributable to expenses associated with Year
2000 preparation incurred in 1999. Other operating expense decreased $407,000 or
10% in 1998 over 1997. Included in the 1997 amount is approximately $855,000 in
nonrecurring charges associated with the Bank's profit sharing plan.
Income Taxes
Total income tax expense was $2.1 million in 1999 compared with $1.8
million in 1998 and $1.1 million in 1997. The primary reason for the increase in
taxes was the increase in pretax income. The Company's effective tax rates were
31.55%, 31.53% and 32.32% in 1999, 1998 and 1997, respectively.
Liquidity
The Company's liquidity position is generally determined by the need to
respond to short term demand for funds created by deposit withdrawals and the
need to provide resources to fund assets, typically in the form of loans. How
the Company responds to these needs is affected by the Company's ability to
attract deposits, the maturity of the loans and securities, the
A-7
<PAGE>
flexibility of assets within the securities portfolio, the current earnings of
the Company, and the ability to borrow funds from other sources. The Company's
primary sources of liquidity are cash and cash equivalents, available-for-sale
securities, deposit growth, and the cash flows from principal and interest
payments on loans and other earning assets. In addition, the Company is able, on
a short-term basis, to borrow funds from the Federal Reserve System, the Federal
Home Loan Bank of Atlanta (the "FHLB") and The Banker's Bank, and is also able
to purchase federal funds from other financial institutions. The liquidity ratio
for the Company, which is defined as net cash, interest bearing deposits with
banks, Federal Funds sold, certain investment securities and certain FHLB
advances, as a percentage of net deposits and short-term liabilities was 20.41%
at December 31, 1999, 26.49% at December 31, 1998, and 21.23% at December 31,
1997.
As disclosed in the Company's Consolidated Statements of Cash Flows
included elsewhere herein, net cash provided by operating activities was
approximately $13.6 million during 1999. Net cash used in investing activities
of $42.1 million consisted primarily of a net change in loans of $38.3 million
and securities purchased of $23.7 million funded largely by sales, maturities
and paydowns of investment securities of $15.1 million. These changes resulted
from management's continued efforts to reinvest new funds in higher-yielding
loans rather than investment securities. Net cash provided by financing
activities consisted primarily of a $26.6 million net increase in deposits.
Asset Liability Management
The Company's asset liability management strategies are designed to
minimize interest rate risk between interest-earning assets and interest-bearing
liabilities at various maturities, while maintaining the objective of assuring
adequate liquidity and maximizing net interest income. Table 3 presents an
interest rate sensitivity analysis for the interest earning assets and interest-
bearing liabilities for the year ended December 31, 1999.
Table 3 - Interest Sensitivity Analysis
<TABLE>
<CAPTION> Over 5 years
(Dollars in Thousands) Immediate 1-3 months 4-12 months 1 - 5 years & non-sensitive Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans $223,376 $9,599 $19,668 $42,711 $43,844 $339,198
Mortgage loans available for sale 1,685 0 0 0 0 1,685
Investment securities 0 596 1,831 24,528 35,543 62,498
Federal funds sold 2,930 0 0 0 0 2,930
Interest bearing deposit account -FHLB 3,383 0 0 0 0 3,383
Other earning assets 0 0 0 0 1,345 1,345
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets $231,374 $10,195 $21,499 $67,239 $80,732 $411,039
- ------------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
NOW, savings, and money market deposits $109,309 $0 $0 $0 $0 $109,309
Certificates of deposit of $100,000 or more 7,816 14,068 56,498 10,924 0 89,306
Other time deposits 7,725 16,117 80,068 20,602 0 124,512
Other short term borrowings 1,616 0 0 0 0 1,616
Other borrowed money 0 10,000 0 1,500 3,000 14,500
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $126,466 $40,185 $136,566 $33,026 $3,000 $339,243
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-sensitive gap 104,908 (29,990) (115,067) 34,213 77,732 71,796
Cumulative interest-sensitive gap 104,908 74,918 (40,149) (5,936) 71,796
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive gap
to total earning assets 25.52% 18.23% -9.83% -1.44% 17.47%
</TABLE>
Management tries to minimize interest rate risk between interest earning
assets and interest bearing liabilities by attempting to minimize wide
fluctuations in net interest income due to interest rate movements. The ability
to control these fluctuations has a direct impact on the profitability of the
Company. Management monitors this activity on a regular basis through analysis
of its portfolios to determine the difference between rate sensitive assets and
rate sensitive liabilities.
In addition, the Company performs analysis on a monthly basis to determine
the approximate change in net interest income based upon a presumed positive and
negative shift in interest rates of 100 basis points. This analysis model is
based on an immediate change in interest rate levels of rate sensitive assets
and liabilities, with the change in rate levels sustained for a period of one
year. Management uses the rate sensitive gap (interest-earning assets less
interest-bearing liabilities) as a percentage of total assets to measure the
rate sensitivity of the Company's assets and liabilities. Management believes
that if this ratio is within a range of positive 15% to negative 15%, the rise
or fall in interest rates should not have a material impact on the Company's net
income. However, if the rate sensitive gap is greater than positive 15%, the
Company's net income will have a direct relationship with the rise or fall in
interest rates. If the rate sensitive gap is less than negative 15%, the
Company's net income will have an indirect relationship with the rise or fall in
interest rates.
A-8
<PAGE>
To determine the impact of interest rate changes to net interest income,
each category of interest-earning assets and interest-bearing liabilities is
weight adjusted by an earnings change ratio, which represents the approximate
rate sensitivity of that asset or liability type in the banking industry. Due to
their diversity and composition, the pricing indexes of the different types of
interest-earning assets and interest-bearing liabilities do not respond to a
change in interest rates in the same manner. The impact of changes in interest
rates for each type may also be different in a rising interest rate environment
than in a declining interest rate environment. The Company therefore utilizes
earnings change ratios to appropriately account for these varying rate
sensitivities. Management relies on information provided by several banking
industry publications to determine the earnings change ratios for its gap
analysis model.
At December 31, 1999, the Company's gap analysis indicated that an
immediate downward shift of 100 basis points in the Company's prime rate of
interest would result in a decrease in net interest income of $352,000 over the
next twelve months. An immediate upward shift of 100 basis points in the prime
rate of interest would subsequently result in an increase in net interest income
of $308,000 over the next twelve months. On December 31, 1999, the one year
cumulative interest sensitivity gap was a negative $53.4 million, for a ratio of
interest sensitive assets to interest sensitive liabilities of 82.45%. At
December 31, 1999, the Company's adjusted rate sensitive gap in a declining rate
environment was positive 8.13%, while the adjusted rate sensitive gap in a
rising rate environment was positive 7.12%.
Peoples Bancorp's rate sensitive assets are those earning interest at
variable rates and those maturing within one year. Rate sensitive assets
therefore include both loans and available-for-sale securities. Rate sensitive
liabilities include interest-bearing checking accounts, money market deposit
accounts, savings accounts, certificates of deposit and borrowed funds. At
December 31, 1999, 64% of the Company's interest earning assets, excluding non-
accrual loans could be repriced within one year, compared to 89% of interest-
bearing liabilities. Rate sensitive assets at December 31, 1999 totaled $411.7
million, exceeding rate sensitive liabilities of approximately $339.2 million by
$72.5 million.
Based upon the Company's asset liability management strategies, sensitivity
comparisons, and rate shift analysis, management does not anticipate the
Company's net interest margins to be materially affected by inflation and
changing prices.
An analysis of the Company's financial condition and growth can be made by
examining the changes and trends in interest-earning assets and interest-bearing
liabilities, and a discussion of these changes and trends follows.
Analysis of Financial Condition
Investment Securities
All of the Company's investment securities are held in the available-for-
sale ("AFS") category. At December 31, 1999 the market value of AFS securities
totaled $62.5 million, compared to $63.2 million and $53.3 million at December
31, 1998 and 1997, respectively. Table 4 presents the market value of the
presently held AFS securities for the years ended December 31, 1999, 1998 and
1997.
Table 4 - Summary of Investment Portfolio
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
(Dollars in Thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States government securities:
Market Value 900 912 2,118
Obligations of United States government
agencies and corporations:
Market Value 23,374 20,169 10,983
Obligations of states and political subdivisions:
Market Value 22,012 22,192 20,141
Mortgage backed securities:
Market Value 16,212 19,955 20,065
Total securities:
Market Value 62,498 63,228 53,307
</TABLE>
A-9
<PAGE>
The composition of the investment securities portfolio reflects the
Company's investment strategy of maintaining an appropriate level of liquidity
while providing a relatively stable source of income. The investment portfolio
also provides a balance to interest rate risk and credit risk in other
categories of the balance sheet while providing a vehicle for the investment of
available funds, furnishing liquidity, and supplying securities to pledge as
required collateral for certain deposits.
The Company's investment portfolio consists of U.S. government agency
securities, municipal securities, U.S. government agency sponsored mortgage-
backed securities, and U.S. Treasury securities. At December 31, 1999 and 1998,
U.S. government agency securities and municipal securities represented
substantially all of the Company's investment portfolio, with U.S. Treasury
securities representing approximately 1.4% of the portfolio at December 31, 1999
and 1998. AFS securities averaged $60.6 million in 1999, $59.8 million in 1998
and $53.3 million in 1997. Table 5 presents the AFS securities held by the
Company by maturity category at December 31, 1999.
Table 5 - Maturity Distribution and Weighted Average Yield on Investments
<TABLE>
<CAPTION>
One Year or Less After One Year After 5 Years After 10 Years Totals
Through 5 Years Through 10 Years
(Dollars in Thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Book Value:
United States Government securities $ 900 5.60% $ - - $ - - $ - - $900 5.60%
United States Government agencies - - 14,487 6.09% 9,344 7.08% - - 23,831 6.48%
States and political subdivisions 1,522 7.44% 10,340 6.96% 7,197 6.66% 3,329 6.96% 22,388 6.90%
Mortgage backed securities - - - - - - 16,887 6.22% 16,887 6.21%
====================================================================================================================================
Total securities $2,422 6.76% $24,827 6.45% $16,541 6.90% $20,216 6.34% $64,006 6.54%
</TABLE>
Loans
The loan portfolio is the largest category of the Company's earnings assets
and is comprised of commercial loans, real estate mortgage loans, real estate
construction loans and consumer loans. The Company restricts its primary lending
market to within the Catawba Valley region of North Carolina, which encompasses
Catawba and Alexander counties and portions of Iredell and Lincoln counties. The
mix of the loan portfolio consists primarily of loans secured by real estate and
commercial loans. In management's opinion, there are no significant
concentrations of credit with particular borrowers engaged in similar
activities.
In the normal course of business, there are various commitments outstanding
to extend credit that are not reflected in the financial statements. At December
31, 1999, outstanding loan commitments totaled $68.3 million. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in a contract. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The composition of the Company's loan portfolio is presented in Table 6.
A-10
<PAGE>
Table 6 - Loan Portfolio
<TABLE>
<CAPTION>
Year ended Year ended Year ended Year ended Year ended
December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995
(Dollars in Thousands) Amount % of Loans Amount % of Loans Amount % of Loans Amount % of Loans Amount % of Loans
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Breakdown of loan receivables:
Commercial, financial &
agricultural $83,644 24.66% $89,536 29.68% $80,230 33.42% $59,624 32.57% $55,241 37.41%
Real Estate - Mortgage 190,921 56.29% 157,167 52.11% 115,768 48.22% 90,156 49.25% 64,266 43.52%
Real Estate - Construction 39,340 11.60% 29,927 9.92% 24,291 10.12% 14,875 8.13% 9,198 6.23%
Consumer 25,293 7.46% 24,995 8.29% 19,793 8.24% 18,394 10.05% 18,952 12.84%
-----------------------------------------------------------------------------------------------
Total loans $339,198 100.00% $301,625 100.00% $240,082 100.00% $183,049 100.00% $147,657 100.00%
Less: Allowance for Loan Losses 3,924 4,137 4,375 3,745 3,880
--------- --------- ---------- ---------- ---------
Net Loans $335,274 $297,488 $235,707 $179,304 $143,777
========= ========= ========== ========== =========
</TABLE>
As of December 31, 1999, gross loans outstanding were $339.2 million, an
increase of $37.6 million or 12% over the December 31, 1998 balance of $301.6
million. Most of this growth was attributable to growth in real estate loans.
Real estate mortgage loans grew $33.8 million in 1999, while real estate
construction loans grew $9.4 million in 1999. The Company experienced a slight
decrease of $5.9 million in the commercial loan portfolio arising from
management's efforts to securitize various relationships in its loan portfolio.
This decrease was primarily attributable to the pay down of one significant
relationship due to industry consolidation activities. As a percentage of the
Company's total loan portfolio, real estate mortgage loans represented 56.29% in
1999, 52.11% in 1998 and 48.22% in 1997. Over the same period commercial loans
represented 24.66%, 29.68% and 33.42% of the Company's total loan portfolio,
respectively. Real estate construction loans made up 11.60%, 9.92% and 10.12% of
the Company's total loan portfolio at December 31, 1999, 1998 and 1997,
respectively. Consumer loans represented 7.46%, 8.29% and 8.24% of the Company's
total loan portfolio at December 31, 1999, 1998 and 1997, respectively.
Mortgage loans held for sale were $1.7 million at December 31, 1999, a
decrease of $7.6 million over the December 31, 1998 balance of $9.3 million
which represented an increase of $6.6 million over the December 31, 1997 balance
of $2.7 million.
Table 7 identifies the maturities of all loans as of December 31, 1999 and
addresses the sensitivity of these loans to changes in interest rates.
Table 7 - Maturity and Repricing Data for Loans
<TABLE>
<CAPTION>
After one year
Within one through five After five
(Dollars in Thousands) year or less years years Total Loans
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial & agricultural $69,920 $8,530 $5,194 $83,644
Real Estate - Mortgage 131,694 12,835 46,392 190,921
Real Estate - Construction 33,671 1,801 3,868 39,340
Consumer 10,108 11,707 3,478 25,293
- -----------------------------------------------------------------------------------------------------------
Total Loans $245,393 $34,873 $58,932 $339,198
===========================================================================================================
Total fixed rate loans 10,433 34,873 58,932 104,238
Total floating rate loans 234,960 0 0 234,960
- -----------------------------------------------------------------------------------------------------------
Total loans $245,393 $34,873 $58,932 $339,198
===========================================================================================================
</TABLE>
Asset Quality
At December 31, 1999, approximately 9% of the Company's portfolio was not
secured by any type of collateral. Unsecured loans generally involve higher
credit risk than secured loans and, in the event of customer default, the
Company has a higher exposure to potential loan losses. Additionally, the real
estate loan portfolio can be affected by the condition of the local real estate
markets. Non-real estate commercial loans also can be affected by local economic
conditions.
A-11
<PAGE>
The allowance for loan losses is established through charges to expense in
the form of a provision for loan losses. Loan losses and recoveries are charged
and credited directly to the allowance. The amount of the provision and level of
the allowance is based on management's judgment of potential losses within the
Company's loan portfolio, loan growth, net charge-offs, changes in the
composition of the loan portfolio, delinquencies, management's assessment of the
quality of the loan portfolio and general economic climate.
Non-performing Assets
Nonperforming assets, comprised of nonaccrual loans, other real estate owned
and loans for which payments are more than 90 days past due totaled $3.6 million
at December 31, 1999 compared to $4.2 million at December 31, 1998.
It is the general policy of the Company to stop accruing interest income
and place the recognition of interest on a cash basis when a loan is placed on
nonaccrual status and any interest previously accrued but not collected is
reversed against current income.
A summary of non-performing assets at December 31 for each of the years
presented is shown in table 8.
Table 8 - Non-performing Assets
<TABLE>
<CAPTION>
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------
Year 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $2,866 $3,292 $3,075 $3,961 $4,389
Loans 90 days or more past due and still accruing 645 328 586 1,143 261
Total non-performing loans 3,511 3,620 3,661 5,094 4,650
All other real estate owned 44 545 - 333 67
Total non-performing assets 3,555 4,165 $3,661 $5,427 $4,717
As a percent of total loans at year end
Non-accrual loans 0.84% 1.09% 1.28% 2.16% 2.97%
Loans 90 days or more past due and still accruing 0.19% 0.11% 0.24% 0.62% 0.18%
Total non-performing assets 1.05% 1.38% 1.52% 2.96% 3.20%
</TABLE>
At December 31, 1999 the Company had non-performing loans, defined as non-
accrual and accruing loans past due more than ninety days, of $3.5 million or
1.03% of total loans. Non-performing loans for 1998 and 1997 were $3.6 million,
or 1.20% of total loans and $3.7 million, or 1.52% of total loans, respectively.
Interest that would have been recorded on non-accrual loans for the years ended
December 31, 1999, 1998 and 1997, had they performed in accordance with their
original terms, amounted to approximately $333,000, $398,000 and $326,000
respectively. Interest income on non-accrual loans included in the results of
operations for 1999, 1998, and 1997 amounted to approximately $61,000, $305,000
and $64,000, respectively. The interest income collected on non-accrual loans
in 1998 consists primarily of income collected through the restructuring of one
large commercial relationship in December 1998.
Management continually monitors the loan portfolio to ensure that all loans
potentially having a material adverse impact on future operating results,
liquidity or capital resources have been classified as non-performing. Should
economic conditions deteriorate, the inability of distressed customers to
service their existing debt could cause higher levels of non-performing loans.
Allowance for Loan Losses
The allowance for loan losses totaled $3.9 million, representing 1.16% of
total loans outstanding at December 31, 1999. For December 31, 1998 and 1997,
the allowance for loan losses amounted to $4.1 million, or 1.37% of total loans
outstanding
A-12
<PAGE>
and $4.4 million, or 1.82% of total loans outstanding, respectively. To
determine the allowance needed, management evaluates the risk characteristics of
the loan portfolio under current economic conditions and considers such factors
as the financial condition of the borrower, fair market value of collateral and
other items that, in management's opinion, deserve current recognition in
estimating possible credit losses.
Whenever a loan, or portion thereof, is considered by management to be
uncollectible, it is charged against the allowance for loan losses. Management
considers the established allowance for loan losses adequate to absorb inherent
losses that relate to loans outstanding at December 31, 1999, although future
additions to the reserve may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company's to recognize additions to the
allowances based on their judgments about information available to them at the
time of their examination.
The Company does not currently allocate the allowance for loan losses to
the various loan categories. There were no significant changes in the methods
and assumptions used to determine the adequacy of the allowance during 1999.
Management does not expect the level of net loan charge-offs as a percentage of
total loans for 2000 to be significantly different from the amount recorded in
1999.
The reduction in the allowance for loan losses during 1999 reflects
management's belief in the improved quality of the loan portfolio, changes in
underwriting policies, and the belief that the allowance for loan losses
adequately covers anticipated losses. The Company has experienced a declining
trend of non-performing assets as a percentage of total loans. Management has
also increased staffing at the executive level to provide additional credit
administration oversight. Total non-performing assets were $3.6 million in 1999,
$4.2 million in 1998 and $3.7 million in 1997. The ratio of net charge-offs to
average total loans was 0.20% in 1999, 0.25% in 1998 and 0.03% in 1997. The
ratio of non-performing assets to total loans was 1.05% at December 31, 1999, as
compared to 1.38% and 1.52% at December 31, 1998 and 1997, respectively.
Table 9 presents an analysis of the allowance for loan losses, including
charge-off activity.
Table 9 - Analysis of Allowance for Loan Losses
<TABLE>
<CAPTION>
Year ended Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31, December 31,
(Dollars in Thousands) 1999 1998 1997 1996 1995
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Reserve for loan losses at beginning $4,137 $4,375 $3,745 $3,880 $3,360
Loans charged off:
Commercial, financial, and agriculture 485 608 8 1,012 133
Real estate - mortgage 25 - - - 38
Real estate - construction - - - - -
Consumer 195 138 131 129 98
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans charged off $ 705 $ 746 $ 139 $1,141 $ 269
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries of losses previously charged off:
Commercial, financial, and agriculture 24 39 60 - 23
Real estate - mortgage - - - - 38
Real estate - construction - - - - -
Consumer 43 24 12 26 28
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries $ 67 $ 63 $ 72 $ 26 $ 89
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans charged off 638 $ 683 $ 67 $1,115 $ 180
Provision for loan losses 425 445 697 980 700
- ------------------------------------------------------------------------------------------------------------------------------------
Reserve for loan losses at end of year $3,924 $4,137 $4,375 $3,745 $3,880
- ------------------------------------------------------------------------------------------------------------------------------------
Loans charged off net of recoveries, as
a percent of average loans outstanding 0.20% 0.25% 0.03% 0.68% 0.13%
</TABLE>
Deposits
The Company primarily uses deposits to fund its loans and investment
portfolio. The Company offers a variety of deposit accounts to individuals and
businesses. Deposit accounts include checking, savings, money market and
certificates of
A-13
<PAGE>
deposit. Certificates of deposit in amounts of $100,000 or more totaled $89.3
million at December 31, 1999, $75.1 million and $65.2 million at December 31,
1998 and 1997, respectively. Many of these deposits are from long-standing
customers and, therefore, are believed by the bank to be as stable as, and for
all practical purposes, no more rate sensitive than core deposits.
As of December 31, 1999, total deposits were $376.6 million, an increase of
$26.5 million or 8% increase over the December 31, 1998 balance of $350.1
million. The increase in deposits in 1999 was a result of a deposit growth
campaign implemented in the fourth quarter of 1999.
Table 10 is a summary of the maturity distribution of certificates of deposit in
amounts of $100,000 or more as of December 31, 1999.
Table 10 - Maturities of Time Deposits over $100,000
(Dollars in Thousands)
- -------------------------------------------------------------------------------
Maturity Period Amount
- -------------------------------------------------------------------------------
Three months or less $21,884
Over three months through six months 23,286
Over six months through twelve months 33,212
Over twelve months 10,924
----------------
Total $89,306
=======
Borrowed Funds
The Company has access to various short-term borrowings, including the
purchase of Federal Funds and borrowing arrangements from the FHLB and other
financial institutions. At December 31, 1999, FHLB borrowings totaled $14.5
million compared to $13.6 million at December 31, 1998 and $21.8 million at
December 31, 1997. Average FHLB borrowings for 1999 were $13.5 million, compared
to average balances of $15.3 million for 1998 and $16.7 million for 1997. The
maximum amount of outstanding FHLB borrowings was $14.5 million in 1999, and
$21.8 in 1998 and 1997. The FHLB advances outstanding at December 31, 1999 had
both fixed and adjustable interest rates ranging from 4.55% to 5.86%.
Approximately $11 million of the FHLB advances outstanding mature prior to
December 31, 2000. Additional information regarding FHLB advances is provided in
note 7 to the consolidated financial statements.
Demand notes payable to the U. S. Treasury amounted to approximately $1.6
million, $139,000, and $1.8 million at December 31, 1999, 1998 and 1997
respectively.
Capital Resources
Shareholders' equity at December 31, 1999 was $38.0 million compared to
$35.9 million and $24.9 million at December 31, 1998 and 1997, respectively. At
December 31, 1999, unrealized gains and losses in the available-for-sale
securities portfolio amounted to a loss of $920,000. For the years ended
December 31, 1998 and 1997, unrealized gains and losses in the available-for-
sale securities portfolio amounted to gains of $459,000 and $355,000,
respectively. Average shareholders' equity as a percentage of total average
assets is one measure used to determine capital strength. The return on average
shareholders' equity to average assets was 11.54% at December 31, 1999 as
compared to 12.04% and 9.98% as of December 31, 1998 and December 31, 1997,
respectively.
Under the regulatory capital guidelines of the FDIC, financial institutions
are currently required to maintain a total risk-based capital ratio of 8.0% or
greater, with a Tier 1 risk-based capital ratio of 4.0% or greater. Tier 1
capital is generally defined as shareholders' equity less all intangible assets
and goodwill. The Company's Tier I capital ratio was 10.99%, 11.04% and 9.41% at
December 31, 1999, 1998 and 1997, respectively. Total risk based capital is
defined as Tier 1 capital plus supplementary capital. Supplementary capital, or
Tier 2 capital, consists of the Company's allowance for loan losses, not
exceeding 1.25% of the Company's risk-weighted assets. Total risk-based capital
ratio is therefore defined as the ratio of total capital (Tier 1 capital and
Tier 2 capital) to risk-weighted assets. The Company's total risk based capital
ratio was 12.11%, 12.29% and 10.67% at December 31, 1999, 1998 and 1997,
respectively. In addition to the Tier I and total risk-based capital
requirements, financial institutions are also required by the FDIC to maintain a
leverage ratio of Tier 1 capital to total average assets of 4.0% or greater. The
Company's Tier I leverage capital ratio was 9.21%, 9.41% and 7.40% at
December 31, 1999, 1998 and 1997, respectively.
A-14
<PAGE>
A Bank is considered to be "well capitalized" if it has a total risk-based
capital ratio of 10.0 % or greater, a Tier I risk-based capital ratio of 6.0% or
greater, and has a leverage ratio of 5.0% or greater. Based upon these
guidelines, the Bank was considered to be "well capitalized" at December 31,
1999, 1998 and 1997, respectively.
The Company's key equity ratios as of December 31, 1999, 1998 and 1997 are
presented in Table 11:
Table 11 - Equity Ratios
Years Ended December 31,
1999 1998 1997
- ----------------------------------------------------------------------------
Return on average assets 1.09% 1.08% 0.81%
Return on average equity 11.54% 12.04% 9.98%
Dividend payout ratio 23.84% 22.61% 33.18%
Average equity to average assets 9.43% 9.00% 8.15%
Company Reorganization
Effective August 31, 1999, the Bank completed the process of converting to
the holding company form of organization. The Bank is now a subsidiary of the
Company, a one-bank holding company, headquartered in Newton, North Carolina.
As a result of the reorganization, each share of the Bank's common stock
was automatically converted into one share of the Company's common stock. The
Company is now the sole shareholder of the Bank. The corporate reorganization
was accounted for in a manner similar to a pooling of interests.
The Company's Board of Directors is composed of the same persons who are
directors of the Bank. Robert C. Abernethy, Chairman of the Board of the Bank,
is also Chairman of the Company's Board of Directors. The Bank's President and
Chief Executive Officer, Tony W. Wolfe, is also President and Chief Executive
Officer of the Company. Joseph F. Beaman, Jr., who serves as Executive Vice
President and Corporate Secretary of the Bank will also serve as Executive Vice
President, Corporate Secretary and Treasurer of the Company.
Change in Accountants
On October 21, 1998, the Board of Directors approved the dismissal of the
KPMG LLP, accounting firm ("KPMG"). On the same date, the Board engaged Porter
Keadle Moore, LLP ("PKM"). During the two years ended December 31, 1997 and
1996, and the subsequent interim period ended October 31, 1998, the Bank had not
consulted PKM with regard to either: (i) application of accounting principles to
a specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Bank's financial statements, or (ii) any
matter that was either the subject of a disagreement or a reportable event.
KPMG's report on the financial statements for either of the two years ended
December 31, 1997 and 1996, contained neither an adverse opinion nor a
disclaimer of opinion, nor was it qualified as to uncertainty, audit scope, or
accounting principles. Furthermore, there were no disagreements with the former
accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure during the Bank's two most
recent fiscal years and any subsequent interim period through October 21, 1998.
A-15
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse
changes in market prices and interest rates. This risk of loss can be reflected
in either diminished current market values or reduced potential net interest
income in future periods.
The Company's market risk arises primarily from interest rate risk inherent
in its lending and deposit taking activities. The structure of the Company's
loan and deposit portfolios is such that a significant decline (increase) in
interest rates may adversely impact net market values and interest income.
Management seeks to manage the risk through the utilization of its investment
securities and off balance sheet derivative instruments. During the years ended
December 31, 1999, 1998 and 1997, the Company has used interest rate contracts
to manage market risk. Interest rate floors are used to protect certain
designated variable rate financial instruments from the downward effects of
their repricing in the event of a decreasing rate environment. The Company is
using this financial instrument as a hedge against variable rate commercial
loans. In 1998, the Company entered into an interest rate cap to protect certain
designated deposit accounts from the upward effects of repricing in the event of
an increasing rate environment. The total cost of the interest rate floor and
cap arrangements was $92,000 and $21,600, respectively, which will be expensed
on a straight-line basis for the life of the instrument. For the years ended
December 31, 1999, 1998 and 1997, the Company expensed $22,944, $31,747 and
$30,667, respectively, related to these financial instruments.
Table 12 presents in tabular form the contractual balances and the
estimated fair value of the Company's on-balance sheet financial instruments and
the notional amount and estimated fair value of the Company's off-balance sheet
derivative instruments at their expected maturity dates for the period ended
December 31, 1999. The expected maturity categories take into consideration
historical prepayment experience as well as management's expectations based on
the interest rate environment at December 31, 1999. For core deposits without
contractual maturity (i.e. interest bearing checking, savings, and money market
accounts), the table presents principal cash flows based on management's
judgment concerning their most likely runoff or repricing behaviors.
Table 12- Market Risk Table
<TABLE>
<CAPTION>
(In Thousands) Principal/Notional Amount Maturing in:
Year Ended
Year Ended Year Ended Year Ended December 31, 2003 &
Loans Receivable December 31, 2000 December 31, 2001 December 31, 2002 2004
=========================================================================================================================
<S> <C> <C> <C> <C>
Fixed rate $ 22,678 $ 9,672 $ 8,081 $ 20,268
Average interest rate 9.43% 9.01% 8.99% 8.75%
Variable rate $ 233,294 $ 436 $ 608 $ 2,333
Average interest rate 8.08% 9.21% 8.10% 7.81%
Investment Securities
=========================================================================================================================
Interest bearing cash $ 3,383 $ - - $ -
Average interest rate 4.97% - - -
Federal funds sold $ 2,930 $ - $ - $ -
Average interest rate 5.10% - - -
Securities available for sale $ 2,427 $ 2,017 $ 4,026 $ 18,485
Average interest rate 6.76% 5.08% 6.45% 6.45%
Nonmarketable equity securities $ - $ - $ - $ -
Average interest rate - - - -
Debt Obligations
=========================================================================================================================
Deposits $ 216,575 $ 58,548 $ 36,186 $ 32,761
Average interest rate 5.41% 5.67% 5.33% 5.45%
Advances from FHLB $ 11,000 $ - $ - $ 500
Average interest rate 4.93% - - 5.86%
Derivative Financial Instruments
=========================================================================================================================
Interest rate cap $ - $ - $ - $ 4,000
Average interest rate - - - n/a
Interest rate floor $ - $ - $ - $ -
Average interest rate - - - -
<CAPTION>
Thereafter Total Fair Value
===============================================================================================
<S> <C> <C> <C>
Loans Receivable
Fixed rate $ 38,370 $ 99,068 $ 96,904
Average interest rate 8.44%
Variable rate $ 3,460 $ 240,130 $ 239,996
Average interest rate 8.16%
Investment Securities
===============================================================================================
Interest bearing cash $ - $ 3,383 $ 3,383
Average interest rate -
Federal funds sold $ - $ 2,930 $ 2,930
Average interest rate -
Securities available for sale $ 35,543 $ 62,498 $ 62,498
Average interest rate 6.60%
Nonmarketable equity securities $ 1,345 $ 1,345 $ 1,345
Average interest rate
Debt Obligations
===============================================================================================
Deposits $ 32,564 $ 376,634 $ 384,430
Average interest rate 5.00%
Advances from FHLB $ 3,000 $ 14,500 $ 14,195
Average interest rate 5.07%
Derivative Financial Instruments
===============================================================================================
Interest rate cap $ - $ 4,000 $ 28
Average interest rate -
Interest rate floor $ - $ - $ -
Average interest rate -
</TABLE>
A-16
<PAGE>
MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
Peoples Bancorp common stock is traded on the over-the counter (OTC) market
and quoted on the Nasdaq National Market, under the symbol "PEBK". Peoples
Bancorp stock is marketed by IJL/Wachovia and Scott & Stringfellow, Inc.
Although the payment of dividends by the Company is subject to certain
requirements and limitations of North Carolina corporate law, except as set
forth in this paragraph, neither the Commissioner nor the FDIC have promulgated
any regulations specifically limiting the right of the Company to pay dividends
and repurchase shares. However, the ability of the Company to pay dividends and
repurchase shares may be dependent upon the Company's receipt of dividends from
the Bank. The Bank's ability to pay dividends is limited.
As of March 1, 2000, the Company had 623 shareholders of record, not
including the number of persons or entries whose stock is held in nominee or
street name through various brokerage firms or banks. The market price for the
Company's common stock was $13.88 on March 16, 2000.
Following is certain market and dividend information for the last two
fiscal years. Information for quarters prior to the third quarter of 1999
relates to the Bank's common stock. Over-the-counter quotations reflect inter-
dealer prices, without retail mark-up, mark down or commission and may not
necessarily represent actual transactions.
MARKET AND DIVIDEND DATA
<TABLE>
<CAPTION>
Cash Dividend
Low Bid High Bid Per Share *
<S> <C> <C> <C>
1999
First Quarter $ 16.833 $ 21.50 $ 0.09
Second Quarter 19.00 21.50 0.09
Third Quarter 17.50 20.00 0.09
Fourth Quarter 14.50 18.00 0.10
1998
First Quarter $ 21.17 $ 22.93 $ 0.07
Second Quarter 21.17 24.25 0.08
Third Quarter 17.33 22.50 0.08
Fourth Quarter 16.67 18.92 0.08
</TABLE>
* Shares outstanding and per share computations have been restated to reflect
a 3 for 2 stock split during first quarter 1999.
A-17
<PAGE>
DIRECTORS AND OFFICERS OF THE COMPANY
DIRECTORS
- ---------
Robert C. Abernethy - Chairman
- ------------------------------
Chairman of the Board, Peoples Bancorp of North Carolina, Inc. and Peoples Bank;
President, Secretary and Treasurer, Carolina Glove Company, Inc. (glove
manufacturer)
James S. Abernethy
- ------------------
President and Assistant Secretary, Midstate Contractors, Inc. (paving company)
Bruce R. Eckard
- ---------------
President, Eckard Vending Company, Inc. (vending machine servicer)
John H. Elmore, Jr.
- -------------------
Chairman of the Board, Chief Executive Officer and Treasurer; Elmore
Construction Co., Inc.
B. E. Matthews
- --------------
President and Director, Matthews Construction Company of Conover, Inc.
Charles F. Murray
- -----------------
President, Murray's Hatchery, Inc.
Larry E. Robinson
- -----------------
President and Chief Executive Officer, Blue Ridge Distributing Co., Inc. (beer
and wine distributor) & President and Chief Executive Officer, Associated
Brands, Inc. (beer and wine distributor)
Fred L. Sherrill, Jr.
- ---------------------
President and Chief Executive Officer, Conover Chair Company, Inc.
Dan Ray Timmerman, Sr.
- ----------------------
President, Timmerman Manufacturing, Inc. (wrought iron furniture manufacturer)
Benjamin I. Zachary
- -------------------
General Manager, Treasurer, Secretary and Member of the Board of Directors,
Alexander Railroad Company
OFFICERS
- --------
Tony W. Wolfe
- -------------
President and Chief Executive Officer
Joseph F. Beaman, Jr.
- ---------------------
Executive Vice President, Chief Financial Officer, Corporate Secretary and
Treasurer
George S. Earp
- --------------
Vice President - Finance and Assistant Treasurer
N. Michael Hamra
- ----------------
Vice President - Risk Management Services and Assistant Corporate Secretary
Krissy O. Price
- ---------------
Assistant Vice President and Assistant Corporate Secretary
A-18
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Peoples Bancorp of North Carolina, Inc.
Newton, North Carolina:
We have audited the accompanying consolidated balance sheets of Peoples Bancorp
of North Carolina, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, changes in shareholders' equity,
comprehensive income and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements for 1997 were audited by other
auditors whose report dated January 30, 1998 expressed an unqualified opinion on
those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1999 and 1998 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Peoples Bancorp of North Carolina, Inc. as of December 31, 1999 and 1998, and
the results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Porter Keadle Moore, LLP
Atlanta, Georgia
January 14, 2000
A-19
<PAGE>
[LEFT INTENTIONALLY BLANK]
A-20
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Balance Sheets
December 31, 1999 and 1998
Assets
------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash and due from banks, including reserve requirements
of $4,009,000 and $3,907,000 $ 14,067,311 11,844,077
Federal funds sold 2,930,000 5,910,000
------------ -----------
Cash and cash equivalents 16,997,311 17,754,077
Investment securities available for sale 62,498,359 63,227,690
Other investments 1,345,100 1,495,300
Mortgage loans held for sale 1,685,472 9,259,817
Loans, net 335,273,577 297,488,443
Premises and equipment, net 9,342,582 7,806,827
Accrued interest receivable and other assets 5,292,453 5,240,878
------------ -----------
$432,434,854 402,273,032
============ ===========
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Demand $ 53,506,430 48,474,480
Interest-bearing demand 31,752,477 31,034,112
Savings 77,556,576 78,686,479
Time, $100,000 or more 89,306,653 75,099,131
Other time 124,512,233 116,773,176
------------ ------------
Total deposits 376,634,369 350,067,378
Demand notes payable to U. S. Treasury 1,600,000 139,235
FHLB borrowings 14,500,000 13,642,857
Accrued interest payable and other liabilities 1,702,006 2,499,427
------------ -----------
Total liabilities 394,436,375 366,348,897
------------ -----------
Commitments
Shareholders' equity:
Preferred stock, no par value; authorized 5,000,000 shares;
no shares issued and outstanding - -
Common stock, no par value; authorized 20,000,000 shares;
issued and outstanding 2,926,318 in 1999 and 2,926,500 in 1998 31,729,462 31,730,372
Retained earnings 7,189,417 3,735,171
Accumulated other comprehensive income (920,400) 458,592
------------ -----------
Total shareholders' equity 37,998,479 35,924,135
------------ -----------
$432,434,854 402,273,032
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
A-21
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Earnings
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $28,375,391 24,885,434 19,991,450
Interest on federal funds sold 338,941 323,149 144,483
Interest on investment securities:
U. S. Treasuries 50,221 85,079 346,660
U. S. Government agencies 2,297,645 2,236,446 2,043,005
State and political subdivisions 973,744 881,058 937,123
Other 266,097 803,939 320,190
----------- ---------- ----------
Total interest income 32,302,039 29,215,105 23,782,911
----------- ---------- ----------
Interest expense:
Interest-bearing demand deposits 430,253 547,343 584,578
Savings deposits 2,925,123 2,472,910 1,085,808
Time deposits 10,653,642 10,596,180 8,482,758
FHLB borrowings 735,752 874,896 966,437
Other 45,501 48,639 59,132
----------- ---------- ----------
Total interest expense 14,790,271 14,539,968 11,178,713
----------- ---------- ----------
Net interest income 17,511,768 14,675,137 12,604,198
Provision for loan losses 425,000 445,000 696,500
----------- ---------- ----------
Net interest income after provision for loan losses 17,086,768 14,230,137 11,907,698
----------- ---------- ----------
Other income:
Service charges 1,326,810 1,186,600 911,102
Other service charges and fees 298,454 281,542 205,581
Gain (loss) on sale of securities (34,824) 168,448 (8,438)
Mortgage banking income 740,031 1,049,402 389,917
Insurance and brokerage commissions 129,786 152,630 135,711
Miscellaneous 919,804 807,331 426,571
----------- ---------- ----------
Total other income 3,380,061 3,645,953 2,060,444
----------- ---------- ----------
Other expenses:
Salaries and employee benefits 7,737,404 6,353,745 4,731,154
Occupancy 2,230,448 1,955,803 1,563,902
Other operating 3,863,652 3,710,861 4,117,785
----------- ---------- ----------
Total other expenses 13,831,504 12,020,409 10,412,841
----------- ---------- ----------
Earnings before income taxes 6,635,325 5,855,681 3,555,301
Income tax expense 2,093,380 1,846,483 1,148,904
----------- ---------- ----------
Net earnings $ 4,541,945 4,009,198 2,406,397
=========== ========== ==========
Net earnings per share $ 1.55 1.44 0.94
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
A-22
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Retained Comprehensive
------------
Shares Amount Earnings Income Total
------ ------ -------- ------ -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 2,321,225 $20,389,014 2,583,806 (62,266) 22,910,554
Cash dividends declared
($.31 per share) - - (798,419) - (798,419)
10% stock dividend 231,775 3,553,891 (3,553,891) - -
Cash paid in lieu of
fractional shares - - (5,320) - (5,320)
Net earnings - - 2,406,397 - 2,406,397
Change in net unrealized
gain (loss) on investment
securities available for
sale, net of tax - - - 417,277 417,277
--------- ----------- ---------- ----------- ----------
Balance, December 31, 1997 2,553,000 23,942,905 632,573 355,011 24,930,489
Issuance of common stock 373,500 7,787,467 - - 7,787,467
Cash dividends declared
($.32 per share) - - (906,600) - (906,600)
Net earnings - - 4,009,198 - 4,009,198
Change in net unrealized
gain (loss) on investment
securities available for
sale, net of tax - - - 103,581 103,581
--------- ----------- ---------- ----------- ----------
Balance, December 31, 1998 2,926,500 31,730,372 3,735,171 458,592 35,924,135
Redemption of fractional shares
associated with stock split (182) (910) (4,961) - (5,871)
Cash dividends declared
($0.37 per share) - - (1,082,738) - (1,082,738)
Net earnings - - 4,541,945 - 4,541,945
Change in net unrealized
gain (loss) on investment
securities available for
sale, net of tax - - - (1,378,992) (1,378,992)
--------- ----------- ---------- ----------- ----------
Balance, December 31, 1999 2,926,318 $31,729,462 7,189,417 (920,400) 37,998,479
========= =========== ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
A-23
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net earnings $ 4,541,945 4,009,198 2,406,397
----------- --------- ---------
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment
securities available for sale: (2,293,615) 338,115 672,238
Less reclassification adjustment for gains (losses) on
sales of investment securities available for sale (34,824) 168,448 (8,438)
----------- --------- ---------
Total other comprehensive income (loss),
before income taxes (2,258,791) 169,667 680,676
----------- --------- ---------
Income tax expense (benefit) related to other comprehensive income:
Unrealized holding gains (losses) on investment
securities available for sale (893,363) 131,696 260,112
Less reclassification adjustment for gains (losses) on
sales of investment securities available for sale (13,564) 65,610 (3,287)
----------- --------- ---------
Total income tax expense (benefit) related to
other comprehensive income (879,799) 66,086 263,399
----------- --------- ---------
Total other comprehensive income (loss),
net of tax (1,378,992) 103,581 417,277
----------- --------- ---------
Total comprehensive income $ 3,162,953 4,112,779 2,823,674
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
A-24
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 4,541,945 4,009,198 2,406,397
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Depreciation, amortization and accretion 1,794,646 1,642,559 1,268,566
Provision for loan losses 425,000 445,000 696,500
Provision for deferred taxes 915,285 359,486 (382,654)
Loss (gain) on sale of loans - - 3,495
Loss (gain) on sale of investment securities 34,824 (168,448) 8,438
Loss (gain) on sale of premises and equipment 12,925 (1,503) (90)
Loss (gain) on sale of mortgage loans 369,583 44,659 (8,421)
Loss (gain) on sale of other real estate 64,943 (30,009) -
Change in:
Other assets (1,006,947) (763,080) (317,361)
Other liabilities (797,420) (427,536) 1,155,805
Mortgage loans held for sale 7,204,762 (6,562,004) (2,734,051)
------------ ----------- -----------
Net cash provided (used) by operating activities 13,559,546 (1,451,678) 2,096,624
------------ ----------- -----------
Cash flows from investing activities:
Purchase of investment securities available for sale (23,737,969) (43,374,408) (11,617,463)
Proceeds from calls and maturities of investment securities
available for sale 15,076,886 25,818,882 12,841,737
Proceeds from sales of investment securities available
for sale 6,896,296 7,616,174 2,991,562
Change in other investments 150,200 1,524,300 (2,293,600)
Net change in loans (38,273,585) (62,974,283) (58,306,616)
Purchases of premises and equipment (1,857,657) (2,109,610) (2,429,224)
Proceeds from sale of premises and equipment 4,500 4,900 419,633
Construction in progress (870,284) - -
Proceeds from sale of loans - - 1,135,071
Improvements to other real estate (241,951) (167,445) -
Proceeds from sale of other real estate 740,962 400,138 -
------------ ----------- -----------
Net cash used by investing activities (42,112,602) (73,261,352) (57,258,900)
------------ ----------- -----------
Cash flows from financing activities:
Net change in deposits 26,566,991 74,674,475 44,132,391
Net change in demand notes payable to U. S. Treasury 1,460,765 (1,677,366) 885,225
Net change in FHLB borrowings 857,143 (8,142,823) 20,857,108
Cash dividends (1,082,738) (906,600) (798,419)
Proceeds from issuance of common stock, net of offering costs - 7,787,467 -
Cash paid in lieu of fractional shares (5,871) - (5,320)
------------ ----------- -----------
Net cash provided by financing activities 27,796,290 71,735,153 65,070,985
------------ ----------- -----------
Net change in cash and cash equivalents (756,766) (2,977,877) 9,908,709
Cash and cash equivalents at beginning of year 17,754,077 20,731,954 10,823,245
------------ ----------- -----------
Cash and cash equivalents at end of year $ 16,997,311 17,754,077 20,731,954
============ =========== ===========
</TABLE>
A-25
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $14,812,486 14,563,557 11,152,480
Income taxes $ 1,000,000 2,029,431 1,154,147
Noncash investing and financing activities:
Change in net unrealized gain (loss) on investment
securities available for sale, net of tax $(1,378,992) 103,581 417,277
Transfer of loans to other real estate $ 123,451 747,538 -
Financed sales of other real estate $ 60,000 - -
</TABLE>
See accompanying notes to consolidated financial statements.
A-26
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Organization
------------
Peoples Bancorp of North Carolina, Inc. (Bancorp) received regulatory
approval to operate as a bank holding company on July 22, 1999, and became
effective August 31, 1999. Bancorp is primarily regulated by the Federal
Reserve Bank, and serves as the one bank holding company for Peoples Bank.
Peoples Bank (the "Bank") commenced business in 1912 upon receipt of its
banking charter from the North Carolina State Banking Commission (the
"SBC"). The Bank is primarily regulated by the SBC and the Federal Deposit
Insurance Corporation and undergoes periodic examinations by these
regulatory agencies. The Bank, whose main office is in Newton, North
Carolina, provides a full range of commercial and consumer banking services
primarily in Catawba, Alexander and Lincoln counties in North Carolina.
Peoples Investment Services, Inc. is a wholly owned subsidiary of the Bank
which began operations in 1996 to provide investment and trust services
through agreements with an outside party.
Peoples Real Estate and Appraisal Services, Inc. is a wholly owned
subsidiary of the Bank which began operations in 1997 to provide real
estate appraisal and property management services to individuals and
commercial customers of the Bank.
Principles of Consolidation
---------------------------
The consolidated financial statements include the financial statements of
Peoples Bancorp of North Carolina, Inc. and its wholly owned subsidiary,
Peoples Bank, along with its wholly owned subsidiaries, Peoples Investment
Services, Inc. and Peoples Real Estate and Appraisal Services, Inc.
(collectively called the "Company"). All significant intercompany balances
and transactions have been eliminated in consolidation.
Basis of Presentation
---------------------
The accounting principles followed by the Company, and the methods of
applying these principles, conform with generally accepted accounting
principles ("GAAP") and with general practices in the banking industry. In
preparing the financial statements in conformity with GAAP, management is
required to make estimates and assumptions that affect the reported amounts
in the financial statements. Actual results could differ significantly from
these estimates. Material estimates common to the banking industry that are
particularly susceptible to significant change in the near term include,
but are not limited to, the determination of the allowance for loan losses
and valuation of real estate acquired in connection with or in lieu of
foreclosure on loans.
Investment Securities
---------------------
The Company classifies its securities in one of three categories: trading,
available for sale, or held to maturity. Trading securities are bought and
held principally for sale in the near term. Held to maturity securities are
those securities for which the Company has the ability and intent to hold
the security until maturity. All other securities not included in trading
or held to maturity are classified as available for sale. At December 31,
1999 and 1998, the Company had classified all of its investment securities
as available for sale.
Available for sale securities are recorded at fair value. Held to maturity
securities are recorded at cost, adjusted for the amortization or accretion
of premiums or discounts. Unrealized holding gains and losses, net of the
related tax effect, on securities available for sale are excluded from
earnings and are reported as a separate component of shareholders' equity
until realized.
A decline in the market value of any available for sale investment below
cost that is deemed other than temporary is charged to earnings and
establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to the yield. Realized gains and losses
for securities classified as available for sale are included in earnings
and are derived using the specific identification method for determining
the cost of securities sold.
Other Investments
-----------------
Other investments include equity securities with no readily determinable
fair value. These investments are carried at cost.
A-27
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Mortgage Loans Held for Sale
----------------------------
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value. At December 31, 1999 and 1998, the cost of mortgage loans
held for sale approximates the market value.
Loans and Allowance for Loan Losses
-----------------------------------
Loans are stated at principal amount outstanding, net of the allowance for
loan losses. Interest on loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding.
Impaired loans are measured based on the present value of expected future
cash flows, discounted at the loan's effective interest rate, or at the
loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. A loan is impaired when, based on current
information and events, it is probable that all amounts due according to
the contractual terms of the loan will not be collected.
Accrual of interest is discontinued on a loan when management believes,
after considering economic conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is
doubtful. Interest previously accrued but not collected is reversed against
current period earnings when such loans are placed on nonaccrual status.
The allowance for loan losses is established through a provision for loan
losses charged to earnings. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the
principal is unlikely. The allowance represents an amount which, in
management's judgment, will be adequate to absorb probable losses on
existing loans that may become uncollectible.
Management's judgment in determining the adequacy of the allowance is based
on evaluations of the collectibility of loans. These evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, current economic conditions that may affect the borrower's
ability to pay, overall portfolio quality, and review of specific problem
loans.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on judgments different than those of
management.
Mortgage Banking Activities
---------------------------
Mortgage banking income represents net gains from the sale of mortgage
loans and fees received from borrowers and loan investors related to the
Company's origination of single-family residential mortgage loans.
As of December 31, 1999 and 1998, $970,318 and $574,027, respectively, were
capitalized in connection with originating and acquiring the right to
service mortgage loans.
Mortgage loans serviced for others are not included in the accompanying
balance sheets. The unpaid principal balances of mortgage loans serviced
for others was $91,194,374 and $49,724,063 at December 31, 1999 and 1998,
respectively.
A-28
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed primarily using the straight-line method over the
estimated useful lives of the assets. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts, and any gain or loss is reflected in earnings for the period.
The cost of maintenance and repairs which do not improve or extend the
useful life of the respective asset is charged to income as incurred,
whereas significant renewals and improvements are capitalized. The range of
estimated useful lives for premises and equipment are generally as follows:
Buildings and improvements 10 - 50 years
Furniture and equipment 3 - 10 years
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Additionally, the recognition of future tax benefits, such as
net operating loss carryforwards, is required to the extent that
realization of such benefits is more likely than not. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which the assets and liabilities are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income tax expense in
the period that includes the enactment date.
In the event the future tax consequences of differences between the
financial reporting bases and the tax bases of the Company's assets and
liabilities results in deferred tax assets, an evaluation of the
probability of being able to realize the future benefits indicated by such
asset is required. A valuation allowance is provided for the portion of the
deferred tax asset when it is more likely than not that some portion or all
of the deferred tax asset will not be realized. In assessing the
realizability of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies.
Intangible Assets
-----------------
Deposit base premiums, representing the cost of acquiring deposits from
other financial institutions, are being amortized by charges to earnings
over seven years using the straight-line method. Amortization of deposit
base premiums was approximately $174,000 for 1999, 1998 and 1997.
Derivative Financial Instruments
--------------------------------
All derivative financial instruments held by the Company are held for
purposes other than trading. The Company uses interest rate floors and caps
for interest rate risk management. The net interest payable or receivable
on floors and caps is accrued and recognized as an adjustment to interest
income or interest expense of the related asset or liability. Premiums paid
for purchased floors and caps are amortized over the shorter of the term of
the instrument or the related asset or liability. Upon early termination,
the net proceeds received or paid, including premiums, are deferred and
included in other assets or liabilities and amortized over the shorter of
the remaining contract life or the maturity of the related asset or
liability. Upon disposition or settlement of the asset or liability being
hedged, deferral accounting is discontinued and any other related premium
is recognized in earnings.
A-29
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Net Earnings Per Common Share
-----------------------------
The Company is required to report earnings per common share on the face of
the statements of earnings with and without the dilutive effects of
potential common stock issuances from instruments such as options,
convertible securities and warrants. Earnings per common share is based on
the weighted average number of common shares outstanding during the period
while the effects of potential common shares outstanding during the period
are included in diluted earnings per share. Additionally, the Company must
reconcile the amounts used in the computation of both "basic earnings per
share" and "diluted earnings per share."
Stock options granted in 1999 have not been included in the computation of
"diluted earnings per share" as the effect of inclusion would be
antidilutive. Additionally, the Company had no potential common stock
issuances outstanding for the years ended December 31, 1998 and 1997.
Therefore, since "basic earnings per share" and "diluted earnings per
share" are the same for the years ended December 31, 1999, 1998 and 1997,
the Company has chosen to present the calculation of basic earnings per
share as follows:
<TABLE>
<CAPTION>
Net Earnings Common Share Per Share
(Numerator) (Denominator) Amount
------------- ------------- ---------
<S> <C> <C> <C>
For the Year Ended December 31, 1999 $4,541,945 2,926,318 $1.55
For the Year Ended December 31, 1998 $4,009,198 2,780,145 $1.44
For the Year Ended December 31, 1997 $2,406,397 2,553,000 $0.94
</TABLE>
During 1997, the Company declared and distributed a 10% stock dividend to
its shareholders. Additionally, the Company declared a 3 for 2 stock split
in February, 1999. All previously reported per share amounts have been
restated to reflect the stock dividend and stock split.
Recent Accounting Pronouncements
--------------------------------
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for hedging derivatives and for
derivative instruments including derivative instruments embedded in other
contracts. It requires the fair value recognition of derivatives as assets
or liabilities in the financial statements. The accounting for the changes
in the fair value of a derivative depends on the intended use of the
derivative instruments at inception. Fair value changes on instruments used
as fair value hedges are recorded in the earnings of the period
simultaneous with accounting for the fair value change of the item being
hedged. Fair value changes on cash flow hedges are recorded in
comprehensive income rather than earnings. Fair value changes on derivative
instruments that are not intended as a hedge are recorded in the earnings
of the period of the change. In 1999, the FASB issued SFAS No. 137 which
deferred implementation of SFAS No. 133 to become effective for all fiscal
quarters beginning after June 15, 2000, but initial application of the
Statement must be made as of the beginning of the quarter. At the date of
initial application, an entity may transfer any held to maturity security
into the available for sale or trading categories without calling into
question the entity's intent to hold other securities to maturity in the
future. The Company believes the adoption of these standards will not have
a material impact on its financial position, results of operations or
liquidity.
A-30
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(2) Corporate Reorganization
Effective August 31, 1999, Peoples Bank completed the process of converting
to a holding company form of operation. Peoples Bancorp of North Carolina,
Inc. has become the parent of Peoples Bank. Bancorp is a North Carolina,
one-bank holding company, headquartered in Newton, North Carolina.
Peoples Bank's shareholders approved the holding company reorganization at
the Bank's annual meeting held in May, 1999. Regulatory approval was
received on July 22, 1999. The holding company conversion was completed
successfully on August 31, 1999. As a result of the conversion, each share
of Bank $5 par value common stock was converted into one share of Bancorp
no par value stock, and the Bank's common stock and additional paid-in
capital accounts were combined into Bancorp's common stock account. Certain
shareholders representing 182 shares were paid cash of $5,871 in lieu of
the issuance of fractional shares. Bancorp is now the sole shareholder of
the Bank.
(3) Investment Securities
Investment securities available for sale at December 31, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasuries $ 900,117 - 398 899,719
U.S. Government agencies 23,830,736 - 456,322 23,374,414
Mortgage-backed securities 16,886,862 22,058 696,722 16,212,198
States and political subdivisions 22,388,260 96,955 473,187 22,012,028
----------- ------- --------- ----------
Total $64,005,975 119,013 1,626,629 62,498,359
=========== ======= ========= ==========
<CAPTION>
December 31, 1999
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasuries $ 900,473 11,902 - 912,375
U.S. Government agencies 20,032,421 136,137 - 20,168,558
Mortgage-backed securities 19,894,887 82,923 23,309 19,954,501
States and political subdivisions 21,648,735 572,049 28,528 22,192,256
----------- ------- ------ ----------
Total $62,476,516 803,011 51,837 63,227,690
=========== ======= ====== ==========
</TABLE>
The amortized cost and fair value of investment securities available for
sale at December 31, 1999, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
----------- ----------
<S> <C> <C>
Due within one year $ 2,422,170 2,427,262
Due from one to five years 24,826,931 24,527,774
Due from five to ten years 16,541,074 16,274,569
Due after ten years 3,328,938 3,056,556
Mortgage-backed securities 16,886,862 16,212,198
----------- ----------
$64,005,975 62,498,359
=========== ==========
</TABLE>
Proceeds from sales of securities available for sale during 1999, 1998 and
1997 were $6,896,296, $7,616,174 and $2,991,562, respectively. Gross gains
of $39,788 and $168,448 for 1999 and 1998, respectively, along with gross
losses of $74,612 and $8,438 for 1999 and 1997, respectively, were realized
on those sales.
Securities with a carrying value of approximately $20,113,000 and
$14,787,000 at December 31, 1999 and 1998, respectively, were pledged to
secure public deposits and for other purposes as required by law.
A-31
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(4) Loans
Major classifications of loans at December 31, 1999 and 1998 are summarized
as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commercial $ 83,644,317 89,535,616
Real estate - mortgage 190,920,815 157,167,284
Real estate - construction 39,339,857 29,927,275
Consumer 25,292,936 24,994,958
------------ -----------
Total loans 339,197,925 301,625,133
Less allowance for loan losses 3,924,348 4,136,690
------------ -----------
Total net loans $335,273,577 297,488,443
============ ===========
</TABLE>
The Company grants loans and extensions of credit primarily within the
Catawba Valley region of North Carolina which encompasses Catawba and
Alexander counties and portions of Iredell and Lincoln counties.
At December 31, 1999 and 1998, the Company had nonaccrual loans
approximating $2,866,000 and $3,292,000, respectively. In addition, the
Company had approximately $645,000 and $328,000 in loans past due more than
ninety days and still accruing interest at December 31, 1999 and 1998,
respectively. Interest income that would have been recorded on nonaccrual
loans for the years ended December 31, 1999, 1998 and 1997, had they
performed in accordance with their original terms, amounted to
approximately $333,000, $398,000 and $326,000, respectively. Interest
income on nonaccrual loans included in the results of operations for 1999,
1998 and 1997 amounted to approximately $61,000, $305,000 and $64,000,
respectively.
At December 31, 1999 and 1998, the recorded investment in loans that were
considered to be impaired under SFAS No. 114 was approximately $3,718,000
and $3,670,000, respectively, of which approximately $2,866,000 at December
31, 1999 and $3,292,000 at December 31, 1998 was on nonaccrual. The related
allowance for loan losses on these loans was approximately $711,000 and
$866,000 at December 31, 1999 and 1998, respectively. The average recorded
investment in impaired loans for the twelve months ended December 31, 1999
and 1998 was approximately $4,000,000 and $5,097,000, respectively. For the
years ended December 31, 1999, 1998 and 1997, the Company recognized
approximately $61,000, $264,000 and $82,000, respectively, of interest
income on impaired loans.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $4,136,690 4,374,641 3,745,211
Amounts charged off (705,277) (746,280) (139,415)
Recoveries on amounts previously charged off 67,935 63,329 72,345
Provision for loan losses 425,000 445,000 696,500
---------- --------- ---------
Balance at end of year $3,924,348 4,136,690 4,374,641
========== ========= =========
</TABLE>
A-32
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(5) Premises and Equipment
Major classifications of premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 2,655,024 1,964,996
Buildings and improvements 5,744,736 5,438,922
Furniture and equipment 7,751,921 6,954,135
----------- ----------
16,151,681 14,358,053
Less accumulated depreciation 7,679,383 6,551,226
----------- ----------
8,472,298 7,806,827
Construction in progress 870,284 -
----------- ----------
$ 9,342,582 7,806,827
=========== ==========
</TABLE>
Depreciation expense was $1,174,761, $988,988 and $947,603 for the years
ended December 31, 1999, 1998 and 1997, respectively.
(6) Deposits
At December 31, 1999, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<S> <C>
2000 $182,291,995
2001 27,701,335
2002 3,623,378
2003 53,618
2004 and thereafter 148,560
------------
$213,818,886
============
</TABLE>
(7) FHLB Borrowings
FHLB borrowings at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
Interest Rate
Maturity Date Rate Type 1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
March 27, 2000 5.31% Adjustable $10,000,000 10,000,000
December 20, 2000 4.55% Adjustable Daily 1,000,000 -
September 24, 2002 5.66% Fixed - 3,000,000
February 3, 2003 (with semi-annual
principal payments of $71,429) 5.86% Fixed 500,000 642,857
September 30, 2009 5.07% Fixed 3,000,000 -
----------- ----------
$14,500,000 13,642,857
=========== ==========
</TABLE>
These borrowings are extended to the Bank under a $30,000,000 extension of
credit. The Bank is required to purchase and hold certain amounts of FHLB
stock in order to obtain FHLB borrowings. No ready market exists for the
FHLB stock, and it has no quoted market value. The stock is redeemable at
$100 per share subject to certain limitations set by the FHLB. At December
31, 1999 and 1998 the Bank owned FHLB stock amounting to approximately
$1,206,900 and $1,436,000, respectively.
At December 31, 1999 and 1998, a blanket assignment on all residential
first mortgage loans that the Bank owns was pledged as collateral for these
borrowings.
Additionally, the Company has $11,000,000 available for the purchase of
overnight federal funds from two correspondent financial institutions.
A-33
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(8) Income Taxes
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $1,134,834 1,368,106 1,344,907
State 43,261 118,891 186,651
---------- --------- ---------
1,178,095 1,486,997 1,531,558
---------- --------- ---------
Deferred:
Federal 814,506 290,996 (210,105)
State 100,779 68,490 (172,549)
---------- --------- ---------
915,285 359,486 (382,654)
---------- --------- ---------
Total $2,093,380 1,846,483 1,148,904
========== ========= =========
</TABLE>
The differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to earnings
before income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pre-tax income at statutory rates (34%) $2,256,010 1,990,932 1,208,802
Differences:
Tax exempt interest income (343,143) (299,560) (319,570)
Nondeductible interest and other expense 54,805 32,789 295,475
Other, net 30,642 (1,349) 4,763
State taxes, net of federal benefit 95,066 123,671 106,122
Change in the beginning of year valuation allowance
for deferred tax assets - - (146,688)
---------- --------- ---------
Total $2,093,380 1,846,483 1,148,904
========== ========= =========
</TABLE>
The following summarizes the tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and deferred tax
liabilities. The net deferred tax asset is included as a component of other
assets at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $1,124,657 1,258,707
Amortizable intangible assets 199,584 139,169
Accrued retirement expense 245,784 279,340
Accrued contingent liabilities 85,098 104,254
Foreclosed real estate 25,098 36,656
Income from non-accrual loans 155,826 88,242
Unrealized loss on available for sale securities 587,216 -
Other 41,308 11,273
---------- ---------
Total gross deferred tax assets 2,464,571 1,917,641
---------- ---------
Deferred tax liabilities:
Unrealized gain on available for sale securities - 292,583
Prepaid FDIC premiums - 9,466
Deferred loan fees 1,200,305 522,167
Fixed assets 219,430 164,256
Deferred income from servicing rights 374,737 223,584
---------- ---------
Total gross deferred tax liabilities 1,794,472 1,212,056
---------- ---------
Net deferred tax asset $ 670,099 705,585
========== =========
</TABLE>
A-34
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(9) Related Party Transactions
The Company conducts transactions with directors and executive officers,
including companies in which they have beneficial interests, in the normal
course of business. It is the policy of the Company that loan transactions
with directors and officers be made on substantially the same terms as
those prevailing at the time made for comparable loans to other persons.
The following is a summary of activity for related party loans for 1999:
<TABLE>
<S> <C>
Beginning balance $ 12,235,842
New loans 15,664,125
Repayments (15,391,497)
------------
Ending balance $ 12,508,470
============
</TABLE>
At December 31, 1999 and 1998, the Company had deposit relationships with
related parties of $7,949,415 and $8,186,192, respectively.
(10) Commitments
The Company leases various office space for banking and operational
facilities under operating lease arrangements. Future minimum lease
payments required for all operating leases having a remaining term in
excess of one year at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
2000 $ 253,216
2001 210,428
2002 222,428
2003 222,428
2004 222,428
Thereafter 1,337,750
----------
Total minimum obligation $2,468,678
==========
</TABLE>
The total rent expense was approximately $262,000, $249,000 and $38,000 for
1999, 1998 and 1997, respectively.
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, standby letters of credit and financial guarantees. Those
instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the balance sheet. The contract amounts of
those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented
by the contractual amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
In most cases, the Company does require collateral or other security to
support financial instruments with credit risk.
<TABLE>
<CAPTION>
Contractual Amount
------------------
1999 1998
---- ----
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $68,330,000 66,828,000
Standby letters of credit $ 4,006,000 3,456,000
</TABLE>
A-35
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(10) Commitments, continued
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company, upon extension of
credit is based on management's credit evaluation. Collateral held varies
but may include unimproved and improved real estate, certificates of
deposit, or personal property.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to
businesses in the Company's delineated trade area. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Company holds real estate,
equipment, automobiles and customer deposits as collateral supporting those
commitments for which collateral is deemed necessary.
(11) Employee and Director Benefit Programs
The Company has a 401(k) plan for the use of employees. Under this plan,
the Company matches employee contributions to a maximum of five percent of
annual compensation. The Company's contribution pursuant to this formula
was approximately $163,000, $138,000 and $130,000 for the years of 1999,
1998 and 1997, respectively. Investments of the plan are determined by the
compensation committee consisting of selected outside directors and senior
executive officers. No investments in Company stock have been made by the
plan.
The Company also has a profit sharing plan covering substantially all
employees who have at least one year of continuous service. The Board of
Directors elected not to make a discretionary contribution in 1999, 1998 or
1997. Investments of the plan are determined by the compensation committee
consisting of selected outside directors and senior executive officers. No
investments in Company stock have been made by the plan.
Both the 401(k) and the profit sharing plans for the Company require that
the employee be employed for one full year in order to meet
eligibility/participation requirements. The vesting schedule for both plans
begins at 20 percent after three years of employment and graduates 20
percent each year until reaching 100 percent after seven years of
employment.
The Company is currently paying medical benefits for certain retired
employees. Postretirement benefits, including amortization of the
transition obligation, were approximately $28,830, $25,253 and $23,010 for
the years ended December 31, 1999, 1998 and 1997, respectively. The
following table sets forth the accumulated postretirement benefit
obligation as of December 31, 1999 and 1998, which represents the liability
for accrued postretirement benefit costs:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation $179,815 175,637
Unrecognized transition obligation (52,231) (69,643)
Unrecognized gain 2,029 9,306
-------- -------
Net liability recognized at
December 31, 1999 and 1998 $129,613 115,300
======== =======
</TABLE>
Effective May 13, 1999, the Company adopted an Omnibus Stock Ownership and
Long Term Incentive Plan (the "Plan") whereby certain stock-based rights,
such as stock options, restricted stock, performance units, stock
appreciation rights, or book value shares, may be granted to eligible
directors and employees. A total of 292,600 shares were reserved for
possible issuance under this Plan. All rights must be granted or awarded
within ten years from the effective date.
Under the Plan, the Company awarded 4,877 book value shares to each of its
ten directors with vesting for nine of the directors over a five year
period, effective September 28, 1999, and immediate vesting for one
director. Any recipient of book value shares shall have no rights as a
shareholder with respect to such book value shares. The initial value of
the book value shares awarded during 1999 was determined to be $12.60 per
share. The Company recorded an expense of $3,414 associated with the
benefits of this plan in the year ended December 31, 1999.
A-36
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(11) Employee and Director Benefit Programs, continued
Also under the Plan, the Company granted incentive stock options to certain
eligible employees in order that they may purchase Company stock at a price
equal to the fair market value on the date of the grant. The options vest
over a five year period and expire after ten years.
A total of 25,136 incentive stock options were granted to certain eligible
employees in 1999 at an option price of $18.00 per share. The weighted
average grant-date fair value of options granted in 1999 was $6.48. The
total number of employee incentive stock options outstanding at December
31, 1999 was 25,136, none of which are currently exercisable. The options
have a weighted average remaining contractual life of approximately 10
years.
The Plan is accounted for under Accounting Principles Board Opinion No. 25
and related interpretations. No compensation expense has been recognized
related to the grant of the incentive stock options. Had compensation cost
been determined based upon the fair value of the options at the grant
dates, the Company's net earnings and net earnings per share would have
been reduced to the proforma amounts indicated below.
<TABLE>
<CAPTION>
1999
----
<S> <C> <C>
Net earnings As reported $4,541,945
Proforma $4,440,959
Basic earnings per share As reported $ 1.55
Proforma $ 1.52
Diluted earnings per share As reported $ 1.55
Proforma $ 1.52
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 1999 - dividend yield of 2.5%, risk free
interest rate of 7%, and an expected life of 10 years. For disclosure
purposes, the Company immediately recognized the expense associated with
the option grants assuming that all awards will vest.
(12) Derivative Financial Instruments
Off-balance-sheet derivative financial instruments, such as interest rate
swaps, interest rate floor and cap arrangements and interest rate futures
and option contracts are available to the Company to assist in managing
interest rate risks. In 1998, the Company entered into an interest rate cap
to protect certain designated deposit accounts from the upward effects of
repricing in the event of an increasing rate environment. The total cost of
the interest rate cap arrangement was $21,600, which is expensed on a
straight-line basis for the life of the instrument. For the years ended
December 31, 1999, 1998 and 1997, the Company expensed $22,944, $31,747 and
$30,667, respectively, related to derivative financial instruments. The
table below summarizes the Company's off-balance-sheet derivative financial
instruments at December 31, 1999.
<TABLE>
<CAPTION>
Remaining
Notional Floor/Cap Contractual
Amount Rate Term (Years)
------ ---- ------------
<S> <C> <C> <C>
Interest rate cap $4,000,000 7.10% 3.75
</TABLE>
A-37
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(13) Regulatory Matters
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Company must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities and certain off-balance-
sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital to
average assets (as defined). Management believes, as of December 31, 1999,
that Bancorp and the Bank meet all capital adequacy requirements to which
they are subject.
As of December 31, 1999 the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank
must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are presented in the following
table as the consolidated ratios are not materially different than the
Bank's ratios:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions
--------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ --------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets) $42,319 12.11% 27,949 8.0% 34,937 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 38,395 10.99% 13,975 4.0% 20,962 6.0%
Tier 1 Capital
(to Average Assets) 38,395 9.21% 16,675 4.0% 20,843 5.0%
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) 38,741 12.29% 25,228 8.0% 31,534 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 34,800 11.04% 12,614 4.0% 18,921 6.0%
Tier 1 Capital
(to Average Assets) 34,800 9.41% 14,795 4.0% 18,493 5.0%
</TABLE>
A-38
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(14) Shareholders' Equity
On June 12, 1998, the Company completed a public offering of 373,500 shares
of common stock at a price of $23.00 per share. The net proceeds of this
offering of $7,787,467 (after deducting issuance costs of $803,033) were
used to increase the Bank's regulatory capital ratios and for general
corporate purposes.
On February 11, 1999, the Board of Directors of the Company declared a 3
for 2 stock split to be effected in the form of a 50% stock dividend. On
the date of distribution, 182 shares, representing all fractional shares,
were paid cash of $5,871 representing the February 22, 1999 market price.
In 1997, the Company declared and distributed a 10% stock dividend to its
shareholders. All share and per share amounts have been changed to reflect
the stock split and stock dividend as if it had occurred on December 31,
1996.
The Board of Directors, at its discretion, can issue shares of preferred
stock up to a maximum of 5,000,000 shares. The Board is authorized to
determine the number of shares, voting powers, designations, preferences,
limitations and relative rights.
The Board of Directors of the Bank may declare a dividend of all of its
retained earnings as it may deem appropriate, subject to the requirements
of the General Statutes of North Carolina, without prior approval from the
requisite regulatory authorities. As of December 31, 1999, this amount was
approximately $ 7,338,000.
(15) Other Operating Expense
Other operating expense for the years ended December 31 included the
following items that exceeded one percent of total revenues:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Advertising $207,425 272,924 269,682
Office supplies 317,670 300,117 263,365
Telephone 353,536 358,506 256,511
Education and Consulting 366,488 214,918 211,989
</TABLE>
During 1997, other operating expense also included nonrecurring charges of
approximately $855,000 associated with the Company's profit sharing plan.
(16) Fair Value of Financial Instruments
The Company is required to disclose fair value information about financial
instruments, whether or not recognized on the face of the balance sheet,
for which it is practicable to estimate that value. The assumptions used in
the estimation of the fair value of the Company's financial instruments are
detailed below. Where quoted prices are not available, fair values are
based on estimates using discounted cash flows and other valuation
techniques. The use of discounted cash flows can be significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. The following disclosures should not be considered a
surrogate of the liquidation value of the Company, but rather a good faith
estimate of the increase or decrease in value of financial instruments held
by the Company since purchase, origination, or issuance.
Cash and Cash Equivalents
-------------------------
For cash, due from banks and federal funds sold, the carrying amount is a
reasonable estimate of fair value.
Investment Securities
---------------------
Fair values for investment securities are based on quoted market prices.
Other Investments
-----------------
The carrying amount of other investments approximates fair value.
Loans and Mortgage Loans Held for Sale
--------------------------------------
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings. For variable rate loans, the
carrying amount is a reasonable estimate of fair value. Mortgage loans held
for sale are valued based on the current price at which these loans could
be sold into the secondary market.
A-39
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(16) Fair Value of Financial Instruments, continued
Interest Rate Contracts
-----------------------
The fair value of the interest rate contracts is obtained from dealer
quotes. This value represents the estimated amount the Company would
receive to terminate the agreement, taking into account current interest
rates and, when appropriate, the current credit worthiness of the
counterparty.
Mortgage Servicing Rights
-------------------------
Fair value of mortgage servicing rights is determined by estimating the
present value of the future net servicing income, on a disaggregated basis,
using anticipated prepayment assumptions.
Deposits and Demand Notes Payable
---------------------------------
The fair value of demand deposits, interest-bearing demand deposits,
savings, and demand notes payable to U.S. Treasury is the amount payable on
demand at the reporting date. The fair value of fixed maturity certificates
of deposit is estimated by discounting the future cash flows using the
rates currently offered for deposits of similar remaining maturities.
FHLB Borrowings
---------------
The fair value of FHLB borrowings is estimated based upon discounted future
cash flows using a discount rate comparable to the current market rate for
such borrowings.
Commitments to Extend Credit and Standby Letters of Credit
----------------------------------------------------------
Because commitments to extend credit and standby letters of credit are made
using variable rates, the contract value is a reasonable estimate of fair
value.
Limitations
-----------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates are
based on many judgments. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include the
deferred income taxes and premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in the estimates.
A-40
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(16) Fair Value of Financial Instruments, continued
The carrying amount and estimated fair values of the Company's financial
instruments at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 16,997 16,997 17,754 17,754
Investment securities available for sale 62,498 62,498 63,228 63,228
Other investments 1,345 1,345 1,495 1,495
Loans 335,274 332,975 297,488 297,154
Mortgage loans held for sale 1,685 1,685 9,260 9,260
Mortgage servicing rights 970 970 574 574
Interest rate contracts 16 28 49 50
Liabilities:
Deposits and demand notes payable 378,234 386,030 350,207 351,217
FHLB borrowings 14,500 14,195 13,643 13,593
Unrecognized financial instruments:
Commitments to extend credit 68,330 68,330 66,828 66,828
Standby letters of credit 4,006 4,006 3,456 3,456
</TABLE>
(17) Quarterly Operating Results (unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
(in thousands, except per share amounts)
First Second Third Fourth First Second Third Fourth
----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income $7,551 7,851 8,187 8,713 6,769 7,319 7,651 7,476
Total interest expense 3,653 3,600 3,656 3,881 3,318 3,670 3,803 3,749
------ ----- ----- ----- ----- ----- ----- -----
Net interest income 3,898 4,251 4,531 4,832 3,451 3,649 3,848 3,727
Provision for loan losses - - 25 400 175 165 80 25
Other income 902 868 866 744 667 754 920 1,305
Other expense 3,218 3,434 3,719 3,461 2,596 2,753 3,183 3,488
------ ----- ----- ----- ----- ----- ----- -----
Income before income taxes 1,582 1,685 1,653 1,715 1,347 1,485 1,505 1,519
Income taxes 507 542 526 518 480 451 513 403
------ ----- ----- ----- ----- ----- ----- -----
Net income $1,075 1,143 1,127 1,197 867 1,034 992 1,116
====== ===== ===== ===== ===== ===== ===== =====
Net income per share $ 0.37 0.39 0.38 0.41 0.34 0.38 0.34 0.38
====== ===== ===== ===== ===== ===== ===== =====
</TABLE>
A-41
<PAGE>
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements, continued
(18) Peoples Bancorp of North Carolina, Inc. (Parent Company Only) Condensed
Financial Statements
Balance Sheet
December 31, 1999
Assets
------
<TABLE>
<S> <C>
Investment in Bank $37,998,479
===========
Liabilities and Stockholders' Equity
------------------------------------
Stockholders' equity $37,998,479
===========
Statement of Earnings
For the Year Ended December 31, 1999
Dividends from Bank $ 1,082,738
-----------
Income before equity in undistributed income of Bank 1,082,738
Equity in undistributed income of Bank 3,459,207
-----------
Net earnings $ 4,541,945
===========
Statement of Cash Flows
For the Year Ended December 31, 1999
Cash flows from operating activities:
Net earnings $ 4,541,945
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in undistributed income of the Bank (3,459,207)
Change in other 5,871
-----------
Net cash provided by operating activities $ 1,088,609
-----------
Cash flows from financing activities:
Cash paid in lieu of fractional shares (5,871)
Dividends paid (1,082,738)
-----------
Net cash used in financing activities $(1,088,609)
-----------
Net change in cash -
Cash at beginning of year -
-----------
Cash at end of year $ -
===========
</TABLE>
A-42
<PAGE>
SUBSIDIARIES OF PEOPLES BANCORP OF NORTH CAROLINA, INC.
Peoples Bancorp of North Carolina, Inc. has one subsidiary, Peoples Bank, a
commercial bank organized under the laws of North Carolina.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,067,311
<INT-BEARING-DEPOSITS> 31,752,477
<FED-FUNDS-SOLD> 2,930,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,498,359
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 339,197,924
<ALLOWANCE> (3,924,348)
<TOTAL-ASSETS> 432,434,854
<DEPOSITS> 376,634,369
<SHORT-TERM> 11,142,857
<LIABILITIES-OTHER> 1,702,006
<LONG-TERM> 3,376,287
0
0
<COMMON> 31,729,462
<OTHER-SE> 6,269,017
<TOTAL-LIABILITIES-AND-EQUITY> 432,434,854
<INTEREST-LOAN> 28,375,391
<INTEREST-INVEST> 3,587,707
<INTEREST-OTHER> 338,942
<INTEREST-TOTAL> 32,302,039
<INTEREST-DEPOSIT> 14,009,018
<INTEREST-EXPENSE> 14,790,271
<INTEREST-INCOME-NET> 17,511,768
<LOAN-LOSSES> 425,000
<SECURITIES-GAINS> (34,824)
<EXPENSE-OTHER> 3,863,652
<INCOME-PRETAX> 6,635,325
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,541,945
<EPS-BASIC> 1.55
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.54
<LOANS-NON> 2,865,950
<LOANS-PAST> 645,182
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,136,690
<CHARGE-OFFS> (705,277)
<RECOVERIES> 67,935
<ALLOWANCE-CLOSE> 3,924,348
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Peoples Bancorp of North Carolina, Inc.:
We have audited the consolidated statements of earnings, changes in
shareholders' equity, comprehensive income, and cash flows of Peoples Bancorp of
North Carolina, Inc. and subsidiary (the "Company") for the year ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Peoples Bancorp of North Carolina, Inc., and subsidiary for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Charlotte, North Carolina
January 30, 1998
