UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2002 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ------------ Commission File Number 000-27205 --------- PEOPLES BANCORP OF NORTH CAROLINA, INC. --------------------------------------- (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-2132396 -------------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 518 WEST C STREET NEWTON, NORTH CAROLINA 28658 ---------------------- ----- (Address of principal executive office) (Zip Code) (828) 464-5620 -------------- (Registrant's telephone number, including area code) 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 --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 3,145,547 SHARES OF COMMON STOCK, NO PAR VALUE, OUTSTANDING AT MAY 14, 2002. - ----------------------------------------------------------------------------
<TABLE> <CAPTION> INDEX <S> <C> <C> PART I - FINANCIAL INFORMATION PAGE(S) Item 1. Financial Statements Consolidated Balance Sheets at March 31, 2002 (Unaudited) and December 31, 2001 3 Consolidated Statements of Earnings for the three months ended March 31, 2002 and March 31, 2001 (Unaudited) 4 Consolidated Statements of Comprehensive Income for the three months ended March 31, 2002 and March 31, 2001 (Unaudited) 5 Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and March 31, 2001 (Unaudited) 6-7 Notes to Consolidated Financial Statements (Unaudited) 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 PART II - OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Use of Proceeds 14 Item 3. Defaults upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14-15 Signatures 16 </TABLE> This Form 10-Q 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 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. 2
<TABLE> <CAPTION> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES Consolidated Balance Sheets March 31, December 31, Assets 2002 2001 ------ ---- ---- (Unaudited) <S> <C> <C> Cash and due from banks $ 10,765,832 13,042,320 Federal funds sold 9,329,000 2,261,000 ------------- ------------- Cash and cash equivalents 20,094,832 15,303,320 Investment securities available for sale 79,833,431 84,286,037 Other investments 4,902,773 4,602,773 ------------- ------------- Total securities 84,736,204 88,888,810 Mortgage loans held for sale 3,881,822 5,338,931 Loans, net 488,742,811 484,517,151 Premises and equipment, net 14,679,262 14,679,191 Cash surrender value of life insurance 4,644,427 4,583,000 Accrued interest receivable and other assets 6,504,616 6,194,301 ------------- ------------- Total assets $623,283,974 619,504,704 ============= ============= Liabilities and Shareholders' Equity ------------------------------------ Deposits: Non-interest bearing demand $ 59,919,920 56,826,130 NOW, MMDA & savings 149,289,823 145,591,866 Time, $100,000 or more 162,755,529 156,034,091 Other time 126,508,256 131,771,102 ------------- ------------- Total deposits 498,473,528 490,223,189 Demand notes payable to U.S. Treasury 1,600,000 117,987 FHLB borrowings 62,142,857 68,214,286 Trust preferred securities 14,000,000 14,000,000 Accrued interest payable and other liabilities 2,357,442 1,548,139 ------------- ------------- Total liabilities 578,573,827 574,103,601 ------------- ------------- 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 3,145,547 shares in 2002 and 3,218,714 shares in 2001 35,265,773 36,407,798 Retained earnings 10,486,737 9,915,399 Accumulated other comprehensive income (1,042,363) (922,094) ------------- ------------- Total shareholders' equity 44,710,147 45,401,103 ------------- ------------- Total liabilities and shareholders' equity $623,283,974 619,504,704 ============= ============= </TABLE> See accompanying notes to consolidated financial statements. 3
<TABLE> <CAPTION> PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES Consolidated Statements of Earnings (Unaudited) Three months ended March 31, 2002 and 2001 2002 2001 ---------- ----------- <S> <C> <C> Interest income: Interest and fees on loans $7,815,535 9,796,891 Interest on federal funds sold 10,748 31,676 Interest on investment securities: U.S. Government agencies 965,107 794,591 States and political subdivisions 176,032 247,422 Other 121,732 64,146 ---------- ----------- Total interest income 9,089,154 10,934,726 ---------- ----------- Interest expense: NOW, MMDA & Savings deposits 510,353 872,875 Time deposits 3,218,866 4,692,374 FHLB borrowings 684,909 317,414 Trust preferred securities 183,750 - Other 9,634 21,905 ---------- ----------- Total interest expense 4,607,512 5,904,568 ---------- ----------- Net interest income 4,481,642 5,030,158 Provision for loan losses 500,000 429,500 ---------- ----------- Net interest income after provision for loan losses 3,981,642 4,600,658 ---------- ----------- Other income: Service charges 660,496 609,960 Other service charges and fees 162,868 128,374 Gain (loss) on sale of securities - (8,736) Mortgage banking income 229,954 204,827 Insurance and brokerage commissions 96,232 55,043 Miscellaneous 374,393 612,431 ---------- ----------- Total other income 1,523,943 1,601,899 ---------- ----------- Other expense: Salaries and employee benefits 2,437,002 2,447,965 Occupancy 759,342 694,800 Other 1,018,365 1,016,975 ---------- ----------- Total other expenses 4,214,709 4,159,740 ---------- ----------- Earnings before income taxes 1,290,876 2,042,817 Income taxes 405,000 671,800 ---------- ----------- Net earnings $ 885,876 1,371,017 ========== =========== Net earnings per share $ 0.28 0.43 ========== =========== Diluted earnings per share $ 0.28 0.43 ========== =========== Cash dividends declared per share $ 0.10 0.10 ========== =========== </TABLE> See accompanying notes to consolidated financial statements. 4
<TABLE> <CAPTION> PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited) Three months ended March 31, 2002 and 2001 2002 2001 ---------- --------- <S> <C> <C> Net earnings $ 885,876 1,371,017 ---------- --------- Other comprehensive income, net of tax: Unrealized gains (losses) on investment securities available for sale: Unrealized gains (losses) arising during the period, net of taxes of $(76,732) and $424,247, respectively (120,269) 664,962 Reclassification adjustment for (gains) losses included in net earnings, net of taxes of $0 and $3,403, respectively - 5,333 ---------- --------- Other comprehensive income (120,269) 670,295 ---------- --------- Comprehensive income $ 765,607 2,041,312 ========== ========= </TABLE> See accompanying notes to consolidated financial statements. 5
<TABLE> <CAPTION> PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, 2002 and 2001 2002 2001 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net earnings $ 885,876 1,371,017 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, amortization and accretion 373,361 323,280 Provision for loan losses 500,000 429,500 Loss on sale of investment securities - 8,736 Gain on sale of mortgage loans (16,852) (5,095) Loss on sale of premises and equipment - 1,819 Loss (gain) on sale of other real estate (12,290) 4,419 Change in: Other assets (412,167) (315,492) Other liabilities 809,303 499,497 Mortgage loans held for sale 1,473,961 (1,536,645) ------------ ------------ Net cash provided by operating activities 3,601,192 781,036 ------------ ------------ Cash flows from investing activities: Purchases of investment securities available-for-sale (500,000) (11,822,733) Proceeds from calls and maturities of investment securities available for sale 4,753,519 6,727,219 Proceeds from sales of investment securities available for sale - 8,458,750 Change in other investments (300,000) (3,000,000) Change in cash value life insurance (61,427) - Net change in loans (4,725,660) (21,395,615) Purchases of premises and equipment (327,946) (4,430,092) Proceeds from sale of premises and equipment - 2,499,306 Proceeds from sale of other real estate 183,173 12,731 ------------ ------------ Net cash used in investing activities (978,341) (22,950,434) ------------ ------------ Cash flows from financing activities: Net change in deposits 8,250,339 19,342,747 Net change in demand notes payable to U.S. Treasury 1,482,013 (1,183,946) Net change in FHLB borrowings (6,071,429) 928,572 Transaction costs associated with trust preferred securities (35,699) - Common stock repurchased (1,146,250) - Proceeds from exercise of options 4,225 - Cash dividends (314,538) (321,872) ------------ ------------ Net cash provided by financing activities 2,168,661 18,765,501 ------------ ------------ Net change in cash and cash equivalents 4,791,512 (3,403,897) Cash and cash equivalents at beginning of the period 15,303,320 18,639,197 ------------ ------------ Cash and cash equivalents at end of the period $20,094,832 15,235,300 ============ ============ </TABLE> 6
<TABLE> <CAPTION> PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, 2002 and 2001 (Continued) 2002 2001 ---------- ---------- <S> <C> <C> Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $4,655,903 5,717,225 Income taxes $ - 136,593 Noncash investing and financing activities: Change in net unrealized gain (loss) on investment securities available for sale, net of tax $ (120,269) 670,295 Transfer of loans to other real estate $ - 195,000 </TABLE> See accompanying notes to consolidated financial statements. 7
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (1) Summary of Significant Accounting Policies ------------------------------------------ The consolidated financial statements include the financial statements of Peoples Bancorp of North Carolina, Inc. and its wholly owned subsidiaries, PEBK Capital Trust I and Peoples Bank, along with its wholly owned subsidiaries, Peoples Investment Services, Inc. and Real Estate Advisory Services, Inc. (collectively called the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. A description of the Company's significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company's 2002 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 2, 2002 Annual Meeting of Shareholders. The consolidated financial statements in this report are unaudited. In the opinion of management, all adjustments (none of which were other than normal accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Management of the Company has made a number of estimates and assumptions relating to reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) Allowance for Loan Losses ---------------------------- The following is an analysis of the allowance for loan losses for the three months ended March 31, 2002 and 2001: <TABLE> <CAPTION> 2002 2001 ----------- ---------- <S> <C> <C> Balance, beginning of period $6,090,570 4,713,227 Provision for loan losses 500,000 429,500 Less: Charge-offs (153,956) (63,637) Recoveries 45,280 36,151 ----------- ---------- Net charge-offs (108,676) (27,486) ----------- ---------- Balance, end of period $6,481,894 5,115,241 =========== ========== </TABLE> (3) Net Earnings Per Share ------------------------- Net 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. The average market price during the year is used to compute equivalent shares. For the three months ended March 31, 2002 and March 31, 2001, "net earnings per share" equaled "diluted earnings per share", as the potential common shares outstanding during the period had no effect on the computation. Net earnings per share for the period ended March 31, 2002 and 2001 are computed based on weighted average shares outstanding of 3,186,238 and 3,218,714, respectively. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Summary. Net income for the first quarter of 2002 was $886,000, a decrease of $485,000 or 35% from the $1.4 million earned in the same period in 2001. Basic and diluted net income per share for the quarter ended March 31, 2002 decreased to $0.28 or 35% from $0.43 in the comparable period of 2001. This decrease is primarily attributable to a decrease in net interest income, a reduction in non-interest income and an increase in the provision for loan losses. Annualized return on average assets was 0.57% for the three months ended March 31, 2002 compared to 1.04% for the same period in 2001, and annualized return on average shareholders' equity was 7.67% for the three months ended March 31, 2002 compared to 12.28% for the same period in 2001. Net Interest Income. Net interest income, the major component of the Company's net income, was $4.5 million for the three months ended March 31, 2002 a decrease of 11% from the $5.0 million earned in the same period in 2001. The decrease from 2001 first quarter net interest income was primarily attributable to the decline in interest rates. Interest income decreased $1.8 million or 17% for the three months ended March 31, 2002 compared with the same period in 2001. The decrease was due to a decrease in the yield on earning assets, which is primarily attributable to decreases in Peoples Bank's ("Bank") prime commercial lending rate. Interest expense decreased $1.3 million or 22% for the three months ended March 31, 2002 compared with the same period in 2001. The decrease in interest expense was due to a decrease in the cost of funds to 3.61% for the three months ended March 31, 2002 from 5.56% for the same period in 2001, partially offset by an increase in volume of interest bearing liabilities. Provision for Loan Losses. For the three months ended March 31, 2002 a contribution of $500,000 was made to the provision for loan losses compared to a $430,000 contribution to the provision for loan losses for the three months ended March 31, 2001. This reflects management's assessment of current economic conditions in the Company's market area. Non-Interest Income. Total non-interest income was $1.5 million in the first quarter of 2002 compared to $1.6 million earned in the first quarter of 2001. This decrease reflects a decrease in miscellaneous income, which was partially offset by an increase in service charges and other service charges and fees. During the first quarter of 2001, miscellaneous income included an increase in value of an interest rate floor contract. The Company did not have any derivative financial instruments for the period ended March 31, 2002. Non-Interest Expense. Total non-interest expense was $4.2 million in the first quarter of 2002 and 2001. Salary and employee benefits totaled $2.4 million for the three months ended March 31, 2002 and 2001. Occupancy expense increased 9% due to increased overhead expenses associated with new branches and the Company's new corporate headquarters. Non-interest expense balances as of March 31, 2002 reflect management's focused efforts to control expenses. Income Taxes. The Company reported income taxes of $405,000 and $672,000 for the first quarters of 2002 and 2001, respectively. This represented effective tax rates of 31% and 33% for the respective periods. ANALYSIS OF FINANCIAL CONDITION Investment Securities. Available-for-sale securities amounted to $79.8 million at March 31, 2002 compared to $84.3 million at December 31, 2001. This decrease is attributable to paydowns on mortgage backed securities and maturities during first quarter 2002. Average investment securities for the three months ended March 31, 2002 amounted to $83.5 million compared to $81.1 million for the year ended December 31, 2001. 9
Loans. At March 31, 2002, loans amounted to $495.2 million compared to $490.6 million at December 31, 2001, an increase of $4.6 million. Average loans represented 84% of total earning assets for the three months ended March 31, 2002, compared to 83% for the year ended December 31, 2001. Mortgage loans held for sale were $3.9 million at March 31, 2002, a decrease of 27% from the December 31, 2001 balance of $5.3 million. The decrease in mortgage loans held for sale reflects a decrease in mortgage loan volume resulting from an increase in mortgage loan rates. Allowance for Loan Losses. The allowance for loan losses reflects management's assessment and estimate of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. The Bank periodically analyzes the loan portfolio in an effort to review asset quality and to establish an allowance for loan losses that management believes will be adequate in light of anticipated risks and loan losses. In assessing the adequacy of the allowance, size, quality and risk of loans in the portfolio are reviewed. Other factors considered are: - the Bank's loan loss experience; - the amount of past due and nonperforming loans; - specific known risks; - the status and amount of other past due and nonperforming assets; - underlying estimated values of collateral securing loans; - current and anticipated economic conditions; and - other factors which management believes affect the allowance for potential credit losses. An analysis of the credit quality of the loan portfolio and the adequacy of the allowance for loan losses is prepared by the Bank's credit administration area and presented to the Bank's Executive and Loan Committee on a regular basis. In addition, the Bank has engaged an outside loan review consultant to perform, and report on an annual basis, an independent review of the quality of the loan portfolio relative to the accurateness of the Bank's loan grading system. 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. An allowance for loan losses is also established, as necessary, for individual loans considered to be impaired in accordance with Statement of Financial Accounting Standards ("SFAS") No. 114. A loan is considered 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. 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 collateral if the loan is collateral dependent. At March 31, 2002 and December 31, 2001, the recorded investment in loans that were considered to be impaired under SFAS No. 114 was approximately $4.6 million and $4.4 million, respectively, with related allowance for loan losses of approximately $768,000 and $699,000, respectively. The Bank's allowance for loan losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses compared to a group of peer banks identified by the regulators. During their routine examinations of banks, the FDIC and the North Carolina Commissioner of Banks may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. While it is the Bank's policy to charge off in the current period loans for which a loss is considered probable, there are additional risks of future losses which cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, management's judgment as to the adequacy of the allowance is necessarily approximate and imprecise. The Company grants loans and extensions of credit primarily within the Catawba Valley region of North Carolina, which encompasses Catawba, Alexander, Iredell and Lincoln counties. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market. Non-real estate 10
loans also can be affected by local economic conditions. At March 31, 2002, approximately 8% 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. Total non-performing loans were $4.6 million and $4.4 million at March 31, 2002 and December 31, 2001, respectively. The ratio of non-performing loans to total loans was 0.92% at March 31, 2002, as compared to 0.90% at December 31, 2001. The allowance for loan losses at March 31, 2002 amounted to $6.5 million or 1.31% of total loans compared to $6.1 million or 1.24% of total loans at December 31, 2001. This increase reflects management's assessment of current economic conditions in the Company's market area. Asset Quality. Non-performing assets totaled $4.6 million at March 31, 2002 or 0.74% of total assets, compared to $4.7 million at December 31, 2001, or 0.75% of total assets. Non-accrual loans were $4.5 million at March 31, 2002, an increase of $716,000 from non-accruals of $3.8 million at December 31, 2001. As a percentage of total loans outstanding, non-accrual loans were 0.90% at March 31, 2002 compared to 0.77% at December 31, 2001. The Bank had loans ninety days past due and still accruing at March 31, 2002 of $ 79,000 as compared to $655,000 at December 31, 2001. Deposits. Total deposits at March 31, 2002 were $498.5 million, an increase of 2% over deposits of $490.2 million at December 31, 2001. Certificates of deposit in amounts greater than $100,000 or more totaled $162.8 million at March 31, 2002, which included approximately $14.0 million in brokered deposits purchased during the first quarter of 2002, as compared to $156.0 million at December 31, 2001. Borrowed Funds. Federal Home Loan Bank borrowings were $62.1 million at March 31, 2002 compared to $68.2 million at December 31, 2001. The average balance of Federal Home Loan Bank borrowings for the three months ended March 31, 2002 was $66.9 million compared to $42.5 million for the year ended December 31, 2001. At March 31, 2002, Federal Home Loan Bank borrowing with maturities exceeding one year amounted to $58.0 million. The Company had no federal funds purchased as of March 31, 2002 or December 31, 2001. Capital Structure. Shareholders' equity at March 31, 2002 was $44.7 million compared to $45.4 million at December 31, 2001. At March 31, 2002 and December 31, 2001, unrealized losses, net of taxes, in the available-for-sale securities portfolio amounted to $1.0 million and $922,000, respectively. Annualized return on average equity for the three months ended March 31, 2002 was 7.67% compared to 9.65% for the year ended December 31, 2001. Total cash dividends paid as of March 31, 2002 amounted to $315,000 a decrease of 2% compared to total cash dividends of $322,000 paid for the first three months of 2001. This decrease is attributable to a reduction in shares outstanding due to stock repurchase activity. The Company has repurchased $1.1 million, or 73,500 shares of its common stock as of March 31, 2002 as part of the stock repurchase plan implemented in February 2002. The Company's Board of Directors has authorized aggregate stock repurchases of up to $3.0 million. Under the regulatory capital guidelines, 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 and Trust Preferred Securities less all intangible assets and goodwill. The Company's Tier I capital ratio was 11.02% and 11.14% at March 31, 2002 and December 31, 2001, 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 12.22% and 12.27% at March 31, 2002 and December 31, 2001, respectively. In addition to the Tier I and total risk-based capital requirements, financial institutions are also required 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 9.62% and 10.46% at March 31, 2002 and December 31, 2001, respectively. 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 11
guidelines, the Bank was considered to be "well capitalized" at March 31, 2002 and December 31, 2001. Liquidity. The Bank'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 Bank responds to these needs is affected by the Bank's ability to attract deposits, the maturity of the loans and securities, the flexibility of assets within the securities portfolio, the current earnings of the Bank, and the ability to borrow funds from other sources. The Bank'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 Bank is able, on a short-term basis, to borrow funds from the Federal Reserve System, the Federal Home Loan Bank of Atlanta (FHLB) and The Bankers Bank, and is also able to purchase federal funds from other financial institutions. At March 31, 2002, the Bank had a significant amount of deposits in amounts greater than $100,000 including brokered deposits. The balance and cost of these deposits are more susceptible to changes in the interest rate environment. The Bank had a line of credit with the FHLB equal to 20% of the Bank's total assets, with an outstanding balance of $62.1 millionat March 31, 2002. The Bank also has the ability to borrow up to $26.5 million for the purchase of overnight federal funds from three correspondent financial institutions. The liquidity ratio for the Bank, 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 (adjusted for deposit runoff projections) and short-term liabilities was 27.99% at March 31, 2002 and 20.62% at December 31, 2001. 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the quantitative and qualitative disclosures about market risks as of March 31, 2002 from that presented in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. 13
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the opinion of management, the Company is not involved in any pending legal proceedings other than routine, non-material proceedings occurring in the ordinary course of business. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit (3)(i) Articles of Incorporation of Peoples Bancorp of North Carolina, Inc., incorporated by reference to Exhibit (3)(i) to the Form 8-A filed with the Securities and Exchange Commission on September 2, 1999 Exhibit (3)(ii) Amended and Restated Bylaws of Peoples Bancorp of North Carolina, Inc., incorporated by reference to Exhibit (3)(ii) to the Form 10-K filed with the Securities and Exchange Commission on March 28, 2002 Exhibit (4) Specimen Stock Certificate, incorporated by reference to Exhibit (4) to the Form 8-A filed with the Securities and Exchange Commission on September 2, 1999 Exhibit (10)(a) Employment Agreement between Peoples Bank and Tony W. Wolfe incorporated by reference to Exhibit (10)(a) to the Form 10-K filed with the Securities and Exchange Commission on March 30, 2000 Exhibit (10)(b) Employment Agreement between Peoples Bank and Joseph F. Beaman, Jr. incorporated by reference to Exhibit (10)(b) to the 14
Form 10-K filed with the Securities and Exchange Commission on March 30, 2000 Exhibit (10)(c) Employment Agreement between Peoples Bank and Clifton A. Wike incorporated by reference to Exhibit (10)(c) to the Form 10-K filed with the Securities and Exchange Commission on March 30, 2000 Exhibit (10)(d) Employment Agreement between Peoples Bank and William D. Cable incorporated by reference to Exhibit (10)(d) to the Form 10-K filed with the Securities and Exchange Commission on March 30, 2000 Exhibit (10)(e) Employment Agreement between Peoples Bank and Lance A. Sellers incorporated by reference to Exhibit (10)(e) to the Form 10-K filed with the Securities and Exchange Commission on March 30, 2000 Exhibit (10)(f) Peoples Bancorp of North Carolina, Inc. Omnibus Stock Ownership and Long Term Incentive Plan incorporated by reference to Exhibit (10)(f) to the Form 10-K filed with the Securities and Exchange Commission on March 30, 2000 Exhibit (10)(g) Employment Agreement between Peoples Bank and A. Joseph Lampron incorporated by reference to Exhibit (10)(g) to the Form 10-K filed with the Securities and Exchange Commission on March 28, 2002 Exhibit (10)(h) Peoples Bank Directors' and Officers' Deferral Plan, incorporated by reference to Exhibit (10)(h) to the Form 10-K filed with the Securities and Exchange Commission on March 28, 2002 Exhibit (10)(i) Rabbi Trust for the Peoples Bank Directors' and Officers' Deferral Plan, incorporated by reference to Exhibit (10)(i) to the Form 10-K filed with the Securities and Exchange Commission on March 28, 2002 (b) Reports on Form 8-K During the quarter ended March 31, 2002 the Company filed two reports on Form 8-K. The Company filed a Form 8-K on February 7, 2002, announcing a Stock Repurchase Plan authorizing the repurchase of outstanding shares totaling up to $2.0 million in a 12-month period. On February 27, 2002, the Company filed a Form 8-K announcing the authorization to use up to an additional $1.0 million for the repurchase of the Company's common stock. 15
SIGNATURES Pursuant to the requirements 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. May 14, 2002 By: /s/ Tony W. Wolfe ---------------- -------------------- Date Tony W. Wolfe President and Chief Executive Officer (Principal Executive Officer) May 14, 2002 By: /s/ A. Joseph Lampron ---------------- ------------------------ Date A. Joseph Lampron Executive Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer) 16