-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BBMGVmSRdXGR+nWPpC9vUFdMCLC9ieM5Myl22goxosuyFSjIytfg3gm0Nqam2NUh 8LUqlxi6QSFZxePj0Xyb2Q== 0000916641-00-000398.txt : 20000331 0000916641-00-000398.hdr.sgml : 20000331 ACCESSION NUMBER: 0000916641-00-000398 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES BANCORP OF NORTH CAROLINA INC CENTRAL INDEX KEY: 0001093672 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 562132396 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27205 FILM NUMBER: 585804 BUSINESS ADDRESS: STREET 1: P.O. BOX 467 STREET 2: 218 SOUTH MAIN STREET CITY: NEWTON STATE: NC ZIP: 28658 BUSINESS PHONE: 8284645620 MAIL ADDRESS: STREET 1: P.O. BOX 467 CITY: NEWTON STATE: NC ZIP: 28658 10-K 1 FORM 10-K ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ 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 ------------------- 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) 218 South Main Avenue Newton, North Carolina 28658 -------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (828) 464-5620 ---------------------- (Registrant's Telephone Number, Including Area Code) Securities to be Registered Pursuant to Section 12(b) of the Act: None -------- Securities to be Registered Pursuant to Section 12(g) of the Act: Common Stock, no par value ------------------------------------------ (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 ________ ------ 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 -------------------------------- price of such common stock on March 16, 2000, which was $13.875 per share. - --------------------------------------------------------------------------- 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 -------------------------- stock, outstanding at March 27, 2000. - ------------------------------------ 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. 2 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. 3 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 4 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. 5 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 6 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. 7 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. 8 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 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.
Corporate Office Land Only --------- 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
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 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 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 (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 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:
Signature Title Date - --------- ----- ---- /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
14 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 EX-10.A 2 EMPLOYMENT AGREEMENT TONY W. WOLFE 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 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 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 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 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 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. 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 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 (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, 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. 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: 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 EX-10.B 3 EMPLOYMENT AGREEMENT JOSEPH F. BEAMAN, JR 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 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 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. 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 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 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. ----------------------------- 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 (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 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 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. 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 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. 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 EX-10.C 4 EMPLOYMENT AGREEMENT CLIFTON A. WIKE 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 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 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 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 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 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. 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 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 (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, 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. 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. 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 EX-10.D 5 EMPLOYMENT AGREEMENT WILLIAM D. CABLE 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 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 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 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 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 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. 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 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 (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, 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. 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. 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 EX-10.E 6 EMPLOYMENT AGREEMENT LANCE A. SELLERS 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. 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 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, 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 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 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. 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 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 (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, 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. 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 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 EX-10.F 7 OMNIBUS STOCK OWNERSHIP PLAN 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. 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 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 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 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 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. 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 (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). (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 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 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. 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. (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. 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 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 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 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"). (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 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 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 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. 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. EX-11 8 STMNT REGARDING COMP OF PER SHARE EARNINGS 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. EX-12 9 STMNT REGARDING COMPUTATION OF RATIOS STATEMENT REGARDING COMPUTATION OF RATIOS The averages used in computing the performance ratios provided in Item 6 represent average daily balances. EX-13 10 ANNUAL REPORT ________________________________ PEOPLES BANCORP OF NORTH CAROLINA, INC. ________________________________ Notice of 2000 Annual Meeting _______________________ Proxy Statement _______________________ Annual Financial Statements and Review of Operations 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 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
SELECTED FINANCIAL DATA Dollars in Thousands Except Per Share Amounts 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------
* 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 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 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.
December 31, 1999 December 31, 1998 December 31, 1997 ------------------------------------------------------------------------------------- Average Yield / Average Yield / Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------- 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 ====================================================================================================================================
A-5 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
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) --------------------------------------- ---------------------------------------- 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
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 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 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
Over 5 years (Dollars in Thousands) Immediate 1-3 months 4-12 months 1 - 5 years & non-sensitive Total - ------------------------------------------------------------------------------------------------------------------------------------ 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%
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 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
Year ended Year ended Year ended December 31, December 31, December 31, (Dollars in Thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- 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
A-9 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
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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%
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 Table 6 - Loan Portfolio
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 ========= ========= ========== ========== =========
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
After one year Within one through five After five (Dollars in Thousands) year or less years years Total Loans - ----------------------------------------------------------------------------------------------------------- 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 ===========================================================================================================
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 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
(Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------ Year 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ 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%
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 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
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 ==================================================================================================================================== 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%
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 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 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 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
(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 ========================================================================================================================= 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 - - - - Thereafter Total Fair Value =============================================================================================== 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 -
A-16 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
Cash Dividend Low Bid High Bid Per Share * 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
* Shares outstanding and per share computations have been restated to reflect a 3 for 2 stock split during first quarter 1999. A-17 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 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 [LEFT INTENTIONALLY BLANK] A-20 PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Balance Sheets December 31, 1999 and 1998 Assets ------
1999 1998 ---- ---- 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 ============ ===========
See accompanying notes to consolidated financial statements. A-21 PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Earnings For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- 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 =========== ========== ==========
See accompanying notes to consolidated financial statements. A-22 PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Changes in Shareholders' Equity For the Years Ended December 31, 1999, 1998 and 1997
Accumulated Other Common Stock Retained Comprehensive ------------ Shares Amount Earnings Income Total ------ ------ -------- ------ ----- 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 ========= =========== ========== =========== ==========
See accompanying notes to consolidated financial statements. A-23 PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Comprehensive Income For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- 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 =========== ========= =========
See accompanying notes to consolidated financial statements. A-24 PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- 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 ============ =========== ===========
A-25 PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows, continued For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------------ ---------- ---------- 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 - -
See accompanying notes to consolidated financial statements. A-26 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 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 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 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:
Net Earnings Common Share Per Share (Numerator) (Denominator) Amount ------------- ------------- --------- 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
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 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:
December 31, 1999 ----------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ---------- ---------- ---------- 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 =========== ======= ========= ========== December 31, 1999 ----------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ---------- ---------- ---------- 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 =========== ======= ====== ==========
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.
Amortized Estimated Cost Fair Value ----------- ---------- 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 =========== ==========
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 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:
1999 1998 ---- ---- 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 ============ ===========
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:
1999 1998 1997 ---- ---- ---- 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 ========== ========= =========
A-32 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:
1999 1998 ---- ---- 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 =========== ==========
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: 2000 $182,291,995 2001 27,701,335 2002 3,623,378 2003 53,618 2004 and thereafter 148,560 ------------ $213,818,886 ============
(7) FHLB Borrowings FHLB borrowings at December 31, 1999 and 1998 consist of the following:
Interest Rate Maturity Date Rate Type 1999 1998 ------------------------------------------------------------------------------------------------ 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 =========== ==========
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 PEOPLES BANCORP OF NORTH CAROLINA, INC. Notes to Consolidated Financial Statements, continued (8) Income Taxes The provision for income taxes is summarized as follows:
1999 1998 1997 ---- ---- ---- 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 ========== ========= =========
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:
1999 1998 1997 ---- ---- ---- 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 ========== ========= =========
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.
1999 1998 ---- ---- 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 ========== =========
A-34 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: Beginning balance $ 12,235,842 New loans 15,664,125 Repayments (15,391,497) ------------ Ending balance $ 12,508,470 ============
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:
Year Amount ---- ------ 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 ==========
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.
Contractual Amount ------------------ 1999 1998 ---- ---- 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
A-35 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:
1999 1998 ---- ---- 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 ======== =======
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 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.
1999 ---- 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
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.
Remaining Notional Floor/Cap Contractual Amount Rate Term (Years) ------ ---- ------------ Interest rate cap $4,000,000 7.10% 3.75
A-37 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:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions --------------- ------------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------- ------ --------- -------- -------- -------- (dollars in thousands) 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%
A-38 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:
1999 1998 1997 ---- ---- ---- 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
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 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 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:
1999 1998 ---- ---- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- (In thousands) (In thousands) 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
(17) Quarterly Operating Results (unaudited)
1999 1998 ---- ---- (in thousands, except per share amounts) First Second Third Fourth First Second Third Fourth ----- ------ ----- ------ ----- ------ ----- ------ 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 ====== ===== ===== ===== ===== ===== ===== =====
A-41 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 ------ 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 $ - ===========
A-42 EX-21 11 SUBSIDIARIES OF PEOPLES BANCORP 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. EX-27 12 FDS
9 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 14,067,311 31,752,477 2,930,000 0 62,498,359 0 0 339,197,924 (3,924,348) 432,434,854 376,634,369 11,142,857 1,702,006 3,376,287 0 0 31,729,462 6,269,017 432,434,854 28,375,391 3,587,707 338,942 32,302,039 14,009,018 14,790,271 17,511,768 425,000 (34,824) 3,863,652 6,635,325 0 0 0 4,541,945 1.55 0 4.54 2,865,950 645,182 0 0 4,136,690 (705,277) 67,935 3,924,348 0 0 0
EX-99 13 REPORT OF KPMG LLP 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 -----END PRIVACY-ENHANCED MESSAGE-----