UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2000
Commission File Number 0-15572
FIRST BANCORP
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
- ------------------------------------ ------------------------------
State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
341 North Main Street, Troy, North Carolina 27371-0508
- ------------------------------------------- ------------------------------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, (910) 576-6171
including area code) ------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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.
[ X ] YES [ ] NO
As of April 30, 2000, 4,511,051 shares of the registrant's Common Stock,
no par value, were outstanding. The registrant had no other classes of
securities outstanding.
EXHIBIT INDEX BEGINS ON PAGE 27
INDEX
FIRST BANCORP AND SUBSIDIARIES
Page
Part I. Financial Information
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEETS -
March 31, 2000 and 1999
(With Comparative Amounts at December 31, 1999) 3
CONSOLIDATED STATEMENTS OF INCOME -
For the Periods Ended March 31, 2000 and 1999 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME -
For the Periods Ended March 31, 2000 and 1999 5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -
For the Periods Ended March 31, 2000 and 1999 6
CONSOLIDATED STATEMENTS OF CASH FLOWS -
For the Periods Ended March 31, 2000 and 1999 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information
Item 5 - Other Information 22
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 26
Exhibit Cross Reference Index 27
Part I. Financial Information
Item 1 - Financial Statements
First Bancorp and Subsidiaries
Consolidated Balance Sheets
March 31, December 31, March 31,
($ in thousands-unaudited) 2000 1999 1999
- ------------------------------------------------------------------------------------------------
ASSETS
Cash & due from banks, noninterest-bearing $ 18,201 23,055 15,525
Due from banks, interest-bearing 28,827 15,231 24,207
Federal funds sold 8,811 12,280 3,018
--------- ------ ------
Total cash and cash equivalents 55,839 50,566 42,750
--------- ------ ------
Securities available for sale (costs of $58,983,
$56,231, and $59,663) 57,114 54,290 59,482
Securities held to maturity (fair values of $16,878
$17,366, and $18,552) 17,080 17,518 17,898
Presold mortgages in process of settlement 661 1,121 1,879
Loans 442,728 419,163 368,511
Less: Allowance for loan losses (6,313) (6,078) (5,671)
--------- ------ ------
Net loans 436,415 413,085 362,840
--------- ------ ------
Premises and equipment 10,432 10,063 9,120
Accrued interest receivable 3,783 3,373 3,232
Intangible assets 5,104 5,261 5,684
Other 4,727 4,170 2,977
--------- ------ ------
Total assets $ 591,155 559,447 505,862
========= ======= =======
LIABILITIES
Deposits: Demand - noninterest-bearing $ 66,444 60,566 58,242
Savings, NOW, and money market 169,364 164,307 158,980
Time deposits of $100,000 or more 92,137 81,831 63,570
Other time deposits 172,779 173,319 158,674
--------- ------ ------
Total deposits 500,724 480,023 439,466
Short-term borrowings 40,000 30,000 20,000
Accrued interest payable 3,280 3,457 3,095
Other liabilities 2,604 2,025 2,265
--------- ------ ------
Total liabilities 546,608 515,505 464,826
--------- ------ ------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Issued and outstanding: 4,520,851,
4,551,641, and 4,517,792 shares 18,473 19,075 18,695
Retained earnings 27,306 26,051 22,450
Accumulated other comprehensive loss (1,232) (1,184) (109)
--------- ------ ------
Total shareholders' equity 44,547 43,942 41,036
--------- ------ ------
Total liabilities and shareholders' equity $ 591,155 559,447 505,862
========= ======= =======
See notes to consolidated financial statements.
3
First Bancorp and Subsidiaries
Consolidated Statements of Income
Three Months Ended
March 31,
----------------------------
($ in thousands, except share data-unaudited) 2000 1999
- --------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 9,693 7,919
Interest on investment securities:
Taxable interest income 862 798
Tax-exempt interest income 214 237
Other, principally overnight investments 209 204
---------- ----------
Total interest income 10,978 9,158
---------- ----------
INTEREST EXPENSE
Savings, NOW and money market 839 793
Time deposits of $100,000 or more 1,234 885
Other time deposits 2,265 1,999
Short-term borrowings 269 35
---------- ----------
Total interest expense 4,607 3,712
---------- ----------
Net interest income 6,371 5,446
Provision for loan losses 310 200
---------- ----------
Net interest income after provision
for loan losses 6,061 5,246
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 695 664
Other service charges, commissions and fees 446 371
Fees from presold mortgages 86 171
Commissions from insurance sales 145 87
Data processing fees 20 10
Securities gains -- 5
Other gains (losses) (10) --
---------- ----------
Total noninterest income 1,382 1,308
---------- ----------
NONINTEREST EXPENSES
Salaries 2,141 1,866
Employee benefits 539 479
---------- ----------
Total personnel expense 2,680 2,345
Net occupancy expense 308 297
Equipment related expenses 289 255
Other operating expenses 1,408 1,378
---------- ----------
Total noninterest expenses 4,685 4,275
---------- ----------
Income before income taxes 2,758 2,279
Income taxes 916 803
---------- ----------
NET INCOME $ 1,842 1,476
========== ==========
Earnings per share:
Basic $ 0.41 0.33
Diluted 0.40 0.32
Weighted average common shares outstanding:
Basic 4,537,300 4,523,076
Diluted 4,612,265 4,629,944
See notes to consolidated financial statements.
4
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Three Months Ended
March 31,
-----------------------
($ in thousands-unaudited) 2000 1999
- --------------------------------------------------------------------------------
Net income $ 1,842 1,476
Other comprehensive loss:
Unrealized losses on securities
available for sale:
Unrealized holding losses arising
during the period, pretax (72) (236)
Tax benefit 24 93
Reclassification to realized gains -- (5)
Tax expense -- 2
------- -----
Other comprehensive loss (48) (146)
------- -----
Comprehensive income $ 1,794 1,330
======= =====
See notes to consolidated financial statements.
5
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Accumulated
Common Stock Other Share-
---------------------- Retained Comprehensive holders'
(In thousands, except per share - unaudited) Shares Amount Earnings Income (Loss) Equity
- ---------------------------------------------------------------------------------------------------------------------------
Balances, January 1, 1999 3,021 $ 18,970 21,487 37 40,494
Effect of 1999 3-for-2 stock split 1,511
----- -------- ------ ------ ------
Balances, January 1, 1999 adjusted 4,532 18,970 21,487 37 40,494
Net income 1,476 1,476
Cash dividends declared ($0.1133 per share) (513) (513)
Common stock issued under
stock option plan 1 10 10
Common stock issued into
dividend reinvestment plan 2 13 13
Purchases and retirement of common
stock (17) (298) (298)
Other comprehensive loss (146) (146)
----- -------- ------ ------ ------
Balances, March 31, 1999 4,518 $ 18,695 22,450 (109) 41,036
===== ======== ====== ==== ======
Balances, January 1, 2000 4,552 $ 19,075 26,051 (1,184) 43,942
Net income 1,842 1,842
Cash dividends declared ($0.13 per share) (587) (587)
Common stock issued under
stock option plan 13 94 94
Purchases and retirement of common
stock (44) (696) (696)
Other comprehensive loss (48) (48)
----- -------- ------ ------ ------
Balances, March 31, 2000 4,521 $ 18,473 27,306 (1,232) 44,547
===== ======== ====== ====== ======
See notes to consolidated financial statements.
6
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Balances, January 1, 19999 adjusted
Three Months Ended
March 31,
----------------------
($ in thousands-unaudited) 2000 1999
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,842 1,476
Reconciliation of net income to net cash provided by operating
activities:
Provision for loan losses 310 200
Net security premium amortization 31 130
Gains on sales of securities available for sale -- (5)
Loan fees and costs deferred, net of amortization 24 (14)
Depreciation of premises and equipment 244 212
Amortization of intangible assets 157 159
Provision for deferred income taxes (101) (46)
Increase in accrued interest receivable (410) (443)
Decrease (increase) in other assets (116) 552
Increase (decrease) in accrued interest payable (177) 15
Increase in other liabilities 508 208
-------- --------
Net cash provided by operating activities 2,312 2,444
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (4,721) (9,591)
Purchases of securities held to maturity (167) (651)
Proceeds from sales of securities available for sale -- 2,017
Proceeds from maturities/issuer calls of securities available for sale 1,940 6,531
Proceeds from maturities/issuer calls of securities held to maturity 603 1,230
Net increase in loans (23,664) (10,227)
Purchases of premises and equipment (613) (241)
-------- --------
Net cash used in investing activities (26,622) (10,932)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 20,701 (800)
Proceeds from short-term borrowings, net 10,000 14,000
Cash dividends paid (516) (453)
Proceeds from issuance of common stock 94 23
Purchases and retirement of common stock (696) (298)
-------- --------
Net cash provided by financing activities 29,583 12,472
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 5,273 3,984
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 50,566 38,766
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 55,839 42,750
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 4,784 3,697
Income taxes -- 92
Non-cash transactions:
Foreclosed loans transferred to other real estate -- 31
Unrealized loss on securities available for sale (72) (241)
See notes to consolidated financial statements.
7
First Bancorp And Subsidiaries
Notes To Consolidated Financial Statements
(unaudited) For the Periods Ended March 31, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 1
In the opinion of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the consolidated financial position of the
Company as of March 31, 2000 and 1999 and the consolidated results of operations
and consolidated cash flows for the periods ended March 31, 2000 and 1999.
Reference is made to the 1999 Annual Report on Form 10-K filed with the SEC for
a discussion of accounting policies and other relevant information with respect
to the financial statements.
NOTE 2
The results of operations for the periods ended March 31, 2000 and 1999 are not
necessarily indicative of the results to be expected for the full year. Certain
amounts reported in the period ended March 31, 1999 have been reclassified to
conform with the presentation for March 31, 2000. These reclassifications had no
effect on net income or shareholders' equity for the periods presented, nor did
they materially impact trends in financial information. Share data, including
earnings per share, have been adjusted to reflect the 3-for-2 stock split that
was paid on September 13, 1999 to shareholders of record as of August 30, 1999.
NOTE 3
Basic earnings per share were computed by dividing net income by the weighted
average common shares outstanding. Diluted earnings per share includes the
potentially dilutive effects of the Company's 1994 Stock Option Plan. The
following is a reconciliation of the numerators and denominators used in
computing basic and diluted earnings per share:
For the Three Months Ended March 31,
-----------------------------------------------------------------------------
2000 1999
------------------------------------- ------------------------------------
Income Shares Income Shares
($ in thousands except per (Numer- (Denom- Per Share (Numer- (Denom- Per Share
share amounts) ator) inator) Amount ator) inator) Amount
- ------------------------------------------------------------------------------------------------------------------------
Basic EPS
Net income $ 1,842 4,537,300 $ 0.41 $ 1,476 4,523,076 $ 0.33
======== ========
Effect of Dilutive Securities
Effect of stock option plan - 74,965 - 106,868
-------- --------- -------- ---------
Diluted EPS
Net income plus assumed
exercises of options $ 1,842 4,612,265 $ 0.40 $ 1,476 4,629,944 $ 0.32
======== ========= ======== ======== ========= ========
8
NOTE 4
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or more
days and still accruing interest, restructured loans and other real estate. For
each of the periods presented, the Company had no loans past due 90 or more days
and still accruing interest. Nonperforming assets are summarized as follows:
March 31, December 31, March 31,
($ in thousands) 2000 1999 1999
------------------------------------------------------------------------------------
Nonperforming loans:
Nonaccrual loans $ 429 595 596
Restructured loans 252 257 258
--------- ----- -----
Total nonperforming loans 681 852 854
Other real estate 888 906 525
--------- ----- -----
Total nonperforming assets $ 1,569 1,758 1,379
========= ===== =====
Nonperforming loans to total loans 0.15% 0.20% 0.23%
Nonperforming assets as a percentage of
loans and other real estate 0.35% 0.42% 0.37%
Nonperforming assets to total assets 0.27% 0.31% 0.27%
Allowance for loan losses to total loans 1.43% 1.45% 1.54%
NOTE 5
Loans are shown on the Consolidated Balance Sheets net of net deferred loan fees
of approximately $208,000, $184,000, and $114,000 at March 31, 2000, December
31, 1999, and March 31, 1999, respectively.
NOTE 6
On April 30, 1999, in an action approved by the Company's shareholders, the par
value of the Company's common stock was changed from $5 par value per share to
no par value per share. The consolidated financial statements for periods prior
to April 30, 1999 have been restated to reflect this change.
NOTE 7
On December 16, 1999, the Company announced the signing of a definitive merger
agreement with First Savings Bancorp, Inc., the holding company for First
Savings Bank of Moore County, SSB. At March 31, 2000 First Savings Bancorp,
headquartered in Southern Pines, North Carolina, had total assets of $327
million, with loans of $230 million and deposits of $231 million. The terms of
the transaction call for First Bancorp to exchange 1.2468 shares of its stock
for each share of First Savings Bancorp stock outstanding. The transaction is
expected to be consummated in July 2000 and is expected to be accounted for as a
pooling of interests.
8
Item 2 - Management's Discussion and Analysis of Consolidated Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
OVERVIEW
Net income for the first quarter of 2000 totaled $1,842,000, an increase of
24.8% over the $1,476,000 reported for the first quarter of 1999. Basic earnings
per share for the three months ended March 31, 2000 were $0.41 compared to $0.33
reported for the first quarter of 1999, an increase of 24.2%. Earnings per share
on a diluted basis amounted to $0.40 per share for the first quarter of 2000
compared to $0.32 reported for the first quarter of 1999, a 25.0% increase.
The increase in first quarter net income from the prior year was primarily
a result of the 17.0% increase in net interest income. The increase in net
interest income is attributable to the loan and deposit growth experienced over
the past twelve months. Average loans for the first quarter of 2000 were 18.0%
higher than the average amount of loans outstanding in the first quarter of
1999, and average deposits for the first quarter of 2000 were 10.5% higher than
in the first quarter of 1999. The provision for loan losses for the first
quarter of 2000 was $310,000, which is $110,000 more than it was for the first
quarter of 1999. The increase in the provision for loan losses is primarily due
to the higher loan growth experienced in the first quarter of 2000 ($23.6
million) compared to the first quarter of 1999 ($10.2 million), and not because
of credit quality concerns.
Noninterest income increased 5.7% and noninterest expenses increased 9.6%
when comparing the first quarter of 2000 to 1999. The increase in noninterest
income was a result of higher amounts earned in most categories of fees and
charges that were partially offset by a decrease in fees from presold mortgages.
The increase in noninterest expenses is primarily attributable to expenses
associated with the growth in the customer base and branch network over the
prior year. The Company's effective tax rate decreased from 35.2% in the first
quarter of 1999 to 33.2% in the first quarter of 2000, primarily due to the
favorable state tax treatment realized by a subsidiary of the Company that was
incorporated in the second quarter of 1999.
COMPONENTS OF EARNINGS
Net interest income is the largest component of earnings, representing the
difference between interest and fees generated from earning assets and the
interest costs of deposits and other funds needed to support those assets. Net
interest income for the first quarter of 2000 amounted to $6,371,000, a 17.0%
increase from the first quarter of 1999 amount of $5,446,000. There are two
primary factors that cause changes in the amount of net interest income recorded
by the Company - 1) growth in loans and deposits, and 2) the Company's net
interest margin.
The primary driver of the increase in the Company's net interest income
continues to be growth in the Company's loan and deposit bases. From March 31,
1999 to March 31, 2000, total loans increased from $368.5 million to $442.7
million, an increase of 20.1%. During the same twelve month period, total
deposits increased from $439.5 million to $500.7 million, an increase of 13.9%.
As noted earlier, average loans outstanding during the first quarter of 2000
were 18.0% higher than for the first quarter of 1999, and average deposits
during the first quarter of 2000 were 10.5% higher than in the first quarter of
1999.
Also contributing to the increase in net interest income was a slightly
higher net interest margin realized by the Company when comparing the first
quarter of 2000 to the first quarter of 1999. The Company's net interest margin
was 5.03% for the first quarter of 2000 compared to 4.97% for the first quarter
of 1999. Over the past nine months, the prime rate of interest has risen from
7.75% to 9.00%, resulting in an average prime rate for the first three months of
2000 of 8.69%, or 94 basis points higher than the 7.75% average prime rate for
the first quarter of 1999. Due to the higher interest rate environment, the
yields that the Company realized on its interest earning assets and interest
bearing liabilities increased. The 8.59% yield the Company realized on its
average earning assets was 33 basis points higher than the 8.26% yield earned in
the first quarter of 1999. The average rate paid on interest bearing liabilities
increased by just 26 basis points comparing the same two time periods, rising to
4.17% from 3.91%.
10
The primary reason for the higher increase in the yield on average interest
earning assets compared to average interest bearing liabilities was that the
Company was able to maintain a fairly static average rate paid on its two
largest categories of deposits - 1) savings, NOW, and money market accounts, and
2) other time deposits. With those two categories of deposits each increasing by
only three basis points, the reason for the 26 basis point increase in the yield
on average interest bearing liabilities was a higher mix of borrowings and time
deposits greater than $100,000, along with higher rates being paid on these two
categories of interest sensitive liabilities. For the three months ended March
31, 2000, the average amount of borrowings and time deposits greater than
$100,000 outstanding was $102,159,000, or 23.0% of average interest bearing
liabilities, compared to $66,676,000, or 17.3% of average interest bearing
liabilities at March 31, 1999. The Company has had to rely more heavily on these
categories of liabilities in order to fund the strong loan growth experienced.
These types of interest bearing liabilities typically carry higher interest
rates and have rates that fluctuate more directly with the interest rate
environment than the rest of the Company's interest bearing liabilities. In the
first quarter of 2000, the average rate paid on time deposits greater than
$100,000 was 5.89%, or 25 basis points more than the 5.64% rate paid in the
first quarter of 1999, while the average rate paid on borrowings in the first
quarter of 2000 amounted to 5.95%, a 122 basis point increase over the average
rate paid on borrowings in the first quarter of 1999.
The following table presents average balances and average rates earned/paid
by the Company for the first quarter of 2000 compared to the first quarter of
1999:
For the Three Months Ended March 31,
-------------------------------------------------------------------
2000 1999
------------------------------- ------------------------------
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
- ------------------------------------------------------------------------------------------------------------
Assets
Loans $430,376 9.03% $ 9,693 364,597 8.81% $ 7,919
Taxable securities 56,924 6.07% 862 58,039 5.58% 798
Non-taxable securities (1) 17,389 8.21% 356 18,295 8.62% 389
Short-term investments,
principally federal funds 14,456 5.80% 209 16,306 5.07% 204
-------- -------- -------- --------
Total interest-earning assets 519,145 8.59% 11,120 457,237 8.26% 9,310
-------- --------
Liabilities
Savings, NOW and money
market deposits $165,947 2.03% 839 $160,708 2.00% $ 793
Time deposits >$100,000 84,027 5.89% 1,234 63,676 5.64% 885
Other time deposits 175,401 5.18% 2,265 157,557 5.15% 1,999
-------- -------- -------- -------
Total interest-bearing deposits 425,375 4.09% 4,338 381,941 3.90% 3,677
Short-term borrowings 18,132 5.95% 269 3,000 4.73% 35
-------- -------- -------- -------
Total interest-bearing liabilities 443,507 4.17% 4,607 384,941 3.91% 3,712
-------- -------
Non-interest-bearing deposits 60,678 58,017
Net yield on interest-earning
assets and net interest income 5.03% $ 6,513 4.97% $ 5,598
======== ========
Interest rate spread 4.42% 4.35%
Average prime rate 8.69% 7.75%
(1) Includes tax-equivalent adjustments of $142,000 and $152,000 in 2000 and
1999 respectively, to reflect the federal and state benefit of the
tax-exempt securities, reduced by the related nondeductible portion of
interest expense.
See additional discussion regarding interest rate risk below in Item 3 -
Quantitative and Qualitative Disclosures About Market Risk.
The provision for loan losses in the first quarter of 2000 was $310,000, a
$110,000 increase from the $200,000 provision recorded in the first quarter of
1999. The increase in the provision for loan losses is primarily due to the
11
higher loan growth experienced in the first quarter of 2000 ($23.6 million)
compared to the first quarter of 1999 ($10.2 million), and not credit quality
concerns. Credit quality indicators for the Company remained strong in the first
quarter. Provisions for loan losses are based on management's evaluation of the
loan portfolio, as discussed under "Summary of Loan Loss Experience" below.
Total noninterest income for the first quarter of 2000 amounted to
$1,382,000, a 5.7% increase over the $1,308,000 earned in the first quarter of
1999. For evaluation purposes, the Company classifies noninterest income into
two categories - core noninterest income and non-core noninterest income. Core
noninterest income includes fees and charges earned from the day to day
operations of the Company such as service charges on deposits, fees from presold
mortgages, and various other types of recurring income. Non-core noninterest
income consists of items that are less recurring in nature such as gains and
losses from securities sales, loans sales, fixed assets, other real estate, and
miscellaneous nonrecurring items.
Core noninterest income for the first quarter of 2000 amounted to
$1,392,000, a 6.8% increase over the $1,303,000 recorded in the first quarter of
1999. The increase in core noninterest income is primarily due to the following
factors: 1) increases in service charges earned on deposit accounts caused by
the increase in the Company's deposit base, as well as a slightly higher fee
schedule that was implemented in March 1999, 2) increases in other service
charges, commissions, and fees, which includes items such as safety deposit box
rentals, check cashing fees, merchant card income, and ATM surcharges, due
primarily to the Company's larger customer base, and 3) a $65,000 higher
"experience bonus" paid to the Company from the company that provides the credit
life insurance that the Company earns commissions from selling. The amount of
any experience bonus payment is computed once per year and is dependent on the
actual loss experience on credit insurance policies that the Company sold. In
the first quarter of 2000, the Company received an experience bonus of $89,000,
compared to $24,000 received in the first quarter of 1999. The increases in core
noninterest income just noted were partially offset by lower fees from presold
mortgages earned in the first quarter of 2000 compared to the first quarter of
1999. In the first quarter of 2000, the Company earned $86,000 from fees from
presold mortgages compared to $171,000 earned in the first quarter of 1999. The
lower amount of fees earned is primarily due to the higher interest rate
environment, which has reduced the demand for mortgage loans, particularly
refinancings.
Also contributing to the increase in first quarter 2000 core noninterest
income were higher fees earned from the Company's data processing subsidiary,
Montgomery Data Services, Inc. (Montgomery Data). The Company recorded $20,000
in the first quarter of 2000 compared to $10,000 in the first quarter of 1999
related to data processing services provided to two de novo banks in the area.
Montgomery Data makes its excess data processing capabilities available to area
financial institutions for a fee. Montgomery Data did not have any nonaffiliated
customers from December 1997 to December 1998. In December 1998, a contract was
signed to provide data processing for a nearby de novo bank. In May 1999, a
contract to provide limited item processing services was signed with another de
novo bank. Slightly higher fees earned from the first client and the recording
of fees in 2000 related to the second client are the causes for the increase in
this category of noninterest income.
Non-core noninterest income amounting to a net loss of $10,000 in the first
quarter of 2000 compared to a net gain of $5,000 in the first quarter of 1999
was insignificant for the periods presented.
Noninterest expenses for the first quarter of 2000 amounted to $4,685,000,
a 9.6% increase over the $4,275,000 recorded in the first quarter of 1999. The
increase is primarily associated with the higher expenses that are necessary to
properly process, manage, and service the increases in loans and deposits
experienced by the Company. Also contributing to the increase in noninterest
expenses was the continued expansion of the Company's branch network and the
annual wage increases that are granted to substantially all employees in January
of each year.
The provision for income taxes was $916,000 in the first quarter of 2000
compared to $803,000 in the first quarter of 1999. The 14.1% increase is a
result of a 21.0% increase in pretax income, which was partially offset by a
decrease in the Company's effective tax rate from 35.2% in the first quarter of
1999 to 33.2% in the first quarter
12
of 2000, primarily due to the favorable state tax treatment realized by a
subsidiary of the Company that was incorporated in the second quarter of 1999.
FINANCIAL CONDITION
The Company's total assets were $591.2 million at March 31, 2000, an
increase of $85.3 million, or 16.9%, from the $505.9 million at March 31, 1999.
Interest-earning assets also increased by 16.9%, from $475.0 million at March
31, 1999 to $555.2 million at March 31, 2000. Loans, the primary
interest-earning asset, grew from $368.5 million at March 31, 1999 to $442.7
million at March 31, 2000, an increase of $74.2 million, or 20.1%.
Deposits have increased $61.3 million, or 13.9%, supporting the asset
growth since March 31, 1999. The increases in deposits since March 31, 1999 have
occurred primarily in the categories of time deposits of $100,000 or more and
other time deposits, with $42.7 million of the deposit growth occurring in those
two categories. The increase in time deposits has been due to the Company more
aggressively pricing these deposits in order to fund the strong loan growth
experienced. Noninterest-bearing demand deposits increased from $58.2 million at
March 31, 1999 to $66.4 million at March 31, 2000, an increase of 14.1%, while
savings, NOW and money market deposits increased from $159.0 million to $169.4
million, an increase of 6.5%.
Due to loan growth that has exceeded deposit growth over the past year, the
Company has relied more heavily on borrowings. Total borrowings amounted to $40
million at March 31, 2000 compared to $20 million at March 31, 1999. See
"LIQUIDITY" below for a discussion of the Company's sources of borrowings.
Since December 31, 1999, the Company has experienced annualized increases
of 22.5%, 22.7%, and 17.3% in loans, total assets and deposits, respectively.
13
NONPERFORMING ASSETS
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or more
days and still accruing interest, restructured loans and other real estate. For
each of the periods presented, the Company had no loans past due 90 or more days
and still accruing interest. Nonperforming assets are summarized as follows:
March 31, December 31, March 31,
($ in thousands) 2000 1999 1999
- -------------------------------------------------------------------------------------------
Nonperforming loans:
Nonaccrual loans $ 429 595 596
Restructured loans 252 257 258
------ ----- -----
Total nonperforming loans 681 852 854
Other real estate 888 906 525
------ ----- -----
Total nonperforming assets $1,569 1,758 1,379
====== ===== =====
Nonperforming loans to total loans 0.15% 0.20% 0.23%
Nonperforming assets as a percentage of
loans and other real estate 0.35% 0.42% 0.37%
Nonperforming assets to total assets 0.27% 0.31% 0.27%
Allowance for loan losses to total loans 1.43% 1.45% 1.54%
Management has reviewed the collateral for the nonperforming assets,
including nonaccrual loans, and has included this review among the factors
considered in the evaluation of the allowance for loan losses discussed below.
A loan is placed on nonaccrual status when, in management's judgment, the
collection of interest appears doubtful. The accrual of interest is discontinued
on all loans that become 90 days past due with respect to principal or interest.
While a loan is on nonaccrual status, the Company's policy is that all cash
receipts are applied to principal. Once the recorded principal balance has been
reduced to zero, future cash receipts are applied to recoveries of any amounts
previously charged off. Further cash receipts are recorded as interest income to
the extent that any interest has been foregone. Loans are removed from
nonaccrual status when they become current as to both principal and interest and
when concern no longer exists as to the collectability of principal or interest.
In some cases, where borrowers are experiencing financial difficulties, loans
may be restructured to provide terms significantly different from the originally
contracted terms.
Nonperforming loans are defined as nonaccrual loans and restructured loans.
As of March 31, 2000, December 31, 1999 and March 31, 1999, nonperforming loans
were approximately 0.15%, 0.20%, and 0.23%, respectively, of the total loans
outstanding at such dates. The level of nonaccrual and restructured loans, which
comprises the Company's nonperforming loans, did not change materially among any
of the periods presented.
As of March 31, 2000, the borrower with the largest nonaccrual loan owed a
balance of $120,000, while the average nonaccrual loan balance was approximately
$18,000. If the nonaccrual loans and restructured loans as of March 31, 2000 and
1999 had been current in accordance with their original terms and had been
outstanding throughout the three month periods (or since origination or
acquisition if held for part of the three month periods), gross interest income
in the amounts of approximately $10,000 and $14,000 for nonaccrual loans and
$7,000 and $6,000 for restructured loans would have been recorded for the three
months ended March 31, 2000 and 1999, respectively. Interest income on such
loans that was actually collected and included in net income in the three month
periods ended March 31, 2000 and 1999 was negligible for both periods for
nonaccrual loans (prior to their being placed on nonaccrual status) and was
approximately $5,000 for restructured loans for each three month period.
14
A loan is considered to be impaired when, based on current information and
events, it is probable the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. The value of impaired
loans is measured using either 1) an estimate of the cash flows that the Company
expects to receive from the borrower discounted at the loan's original effective
rate, or 2) in the case of a collateral-dependent loan, the estimated fair value
of the collateral. While a loan is considered to be impaired, the Company's
policy is that interest accrual is discontinued and all cash receipts are
applied to principal. Once the recorded principal balance has been reduced to
zero, future cash receipts are applied to recoveries of any amounts previously
charged off. Further cash receipts are recorded as interest income to the extent
that any interest has been foregone.
At March 31, 2000, December 31, 1999, and March 31, 1999, the recorded
investment in loans considered to be impaired was $201,000, $281,000, and
$87,000, respectively, all of which were on nonaccrual status. The related
allowance for loan losses for these impaired loans was $30,000, $42,000, and
$12,000, respectively. There were no impaired loans for which there was no
related allowance. The average recorded investments in impaired loans during the
three month period ended March 31, 2000, the year ended December 31, 1999, and
the three months ended March 31, 1999 were approximately $241,000, $123,000, and
$44,000, respectively. For the same periods, the Company recognized no interest
income on those impaired loans during the period that they were considered to be
impaired.
In addition to the nonperforming loan amounts discussed above, management
believes that an estimated $1,000,000-$1,500,000 of loans that are currently
performing in accordance with their contractual terms may potentially develop
problems. These loans were considered in determining the appropriate level of
the allowance for loan losses. See "Summary of Loan Loss Experience" below.
Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been disclosed in the problem loan amounts above
do not represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources, or represent material credits about which management is
aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.
As of March 31, 2000, December 31, 1999 and March 31, 1999, the Company
owned other real estate totaling approximately $888,000, $906,000, and $525,000,
respectively, which consisted principally of several parcels of real estate. The
increase in the level of other real estate owned at March 31, 2000 compared to
March 31, 1999 is primarily attributable to the reclassification of two bank
branches that were closed during 1999 from premises and equipment to other real
estate. The Company's management has reviewed recent appraisals of its other
real estate and believes that their fair values, less estimated costs to sell,
exceed their respective carrying values at the dates presented.
SUMMARY OF LOAN LOSS EXPERIENCE
The allowance for loan losses is created by direct charges to operations.
Losses on loans are charged against the allowance in the period in which such
loans, in management's opinion, become uncollectible. The recoveries realized
during the period are credited to this allowance.
The factors that influence management's judgment in determining the amount
charged to operating expense include past loan loss experience, composition of
the loan portfolio, probable losses inherent in the portfolio and current
economic conditions.
The Company uses a loan analysis and grading program to facilitate its
evaluation of probable loan losses and the adequacy of its allowance for loan
losses. In this program, risk grades are assigned by management and tested by
the Company's internal audit department and an independent third party
consulting firm. The testing program includes an evaluation of a sample of new
loans, loans that management identifies as having credit weaknesses, loans past
due 90 days or more, nonaccrual loans and any other loans identified during
previous regulatory and other examinations.
15
The Company has no foreign loans, few agricultural loans and does not
engage in significant lease financing or highly leveraged transactions.
Commercial loans are diversified among a variety of industries. The majority of
the Company's real estate loans are primarily various personal and commercial
loans where real estate provides additional security for the loan. Collateral
for virtually all of these loans is located within the Company's principal
market area.
The provision for loan losses in the first quarter of 2000 was $310,000, a
$110,000 increase from the $200,000 provision recorded in the first quarter of
1999. The increase in the provision for loan losses is primarily due to the
higher loan growth experienced in the first quarter of 2000 ($23.6 million)
compared to the first quarter of 1999 ($10.2 million), and not credit quality
concerns. Credit quality indicators as of and for the three months ended March
31, 2000 remained strong, and did not vary significantly among the periods
presented.
At March 31, 2000, the allowance for loan losses amounted to $6,313,000,
compared to $6,078,000 at December 31, 1999 and $5,671,000 at March 31, 1999.
The allowance for loan losses was 1.43%, 1.45% and 1.54% of total loans as of
March 31, 2000, December 31, 1999, and March 31, 1999, respectively.
Management believes the Company's reserve levels are adequate to cover
probable loan losses on the loans outstanding as of each reporting date. It must
be emphasized, however, that the determination of the reserve using the
Company's procedures and methods rests upon various judgments and assumptions
about economic conditions and other factors affecting loans. No assurance can be
given that the Company will not in any particular period sustain loan losses
that are sizable in relation to the amounts reserved or that subsequent
evaluations of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan losses
and value of other real estate. Such agencies may require the Company to
recognize adjustments to the allowance or the carrying value of other real
estate based on their judgments about information available at the time of their
examinations.
16
For the periods indicated, the following table summarizes the Company's
balances of loans outstanding, average loans outstanding, changes in the
allowance for loan losses arising from charge-offs and recoveries by category,
and additions to the allowance for loan losses that have been charged to
expense.
Three Months Year Three Months
Ended Ended Ended
March 31, December 31, March 31,
($ in thousands) 2000 1999 1999
--------- ------- -------
Loans outstanding at end of period $ 442,728 419,163 368,511
========= ===== =====
Average amount of loans outstanding $ 430,376 386,365 364,597
========= ===== =====
Allowance for loan losses, at
beginning of year $ 6,078 5,504 5,504
Loans charged off:
Commercial, financial and agricultural (40) (53) --
Real estate - mortgage -- (126) (11)
Installment loans to individuals (57) (269) (54)
--------- ----- -----
Total charge-offs (97) (448) (65)
--------- ----- -----
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 5 27 5
Real estate - mortgage 2 17 2
Installment loans to individuals 15 68 25
--------- ----- -----
Total recoveries 22 112 32
--------- ----- -----
Net charge-offs (75) (336) (33)
Additions to the allowance charged to expense 310 910 200
--------- ----- -----
Allowance for loan losses, at end of period $ 6,313 6,078 5,671
========= ===== =====
Ratios:
Net charge-offs (annualized) as a percent of average loans 0.07% 0.09% 0.04%
Allowance for loan losses as a
percent of loans at end of period 1.43% 1.45% 1.54%
Based on the results of the aforementioned loan analysis and grading
program and management's evaluation of the allowance for loan losses at March
31, 2000, there have been no material changes to the allocation of the allowance
for loan losses among the various categories since December 31, 1999.
LIQUIDITY
The Company's liquidity is determined by its ability to convert assets to
cash or acquire alternative sources of funds to meet the needs of its customers
who are withdrawing or borrowing funds, and to maintain required reserve levels,
pay expenses and operate the Company on an ongoing basis. The Company's primary
liquidity sources are net income from operations, cash and due from banks,
federal funds sold and other short-term investments. The Company's securities
portfolio is comprised almost entirely of readily marketable securities which
could also be sold to provide cash.
In addition to internally generated liquidity sources, the Company has the
ability to obtain borrowings from the following three sources - 1) an
approximately $62,000,000 line of credit with the Federal Home Loan Bank (FHLB),
2) a $15,000,000 overnight federal funds line of credit with a correspondent
bank, and 3) an approximately $27,000,000 line of credit through the Federal
Reserve Bank of Richmond's discount window.
17
Although the Company has not historically had to rely on these sources of
credit as a source of liquidity, the Company has experienced a gradual increase
in its loan to deposit ratio over the past several years. At December 31, 1996,
the Company's loan to deposit ratio was 74.9%. Since then it has steadily
increased to its March 31, 2000 level of 88.4% as a result of the significant
loan growth experienced which has outpaced deposit growth. This imbalance in
growth has reduced the Company's liquidity sources. Beginning in the third
quarter of 1998, although the Company has not had any liquidity or funding
difficulties, the Company began making periodic draws and repayments on its
lines of credit, predominantly on an overnight basis to maintain liquidity
ratios at internally targeted levels. As the Company's loan to deposit ratio has
increased, so has the Company's reliance on borrowings. Average borrowings
outstanding during the first quarter of 2000 amounted to $18.1 million compared
to $3.0 million for the first quarter of 1999. The Company expects to
increasingly rely on its available lines of credit in the future due to
anticipation of continued difficulty in funding new loan growth solely with
deposits.
The Company's management believes its liquidity sources are at an
acceptable level and remain adequate to meet its operating needs.
CAPITAL RESOURCES
The Company is regulated by the Board of Governors of the Federal Reserve
Board (FED) and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Company's banking
subsidiary is regulated by the Federal Deposit Insurance Corporation (FDIC) and
the North Carolina Office of the Commissioner of Banks. The Company is not aware
of any recommendations of regulatory authorities or otherwise which, if they
were to be implemented, would have a material effect on its liquidity, capital
resources, or operations.
The Company must comply with regulatory capital requirements established by
the FED and FDIC. 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 Company's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. These capital standards require the Company to
maintain minimum ratios of "Tier 1" capital to total risk-weighted assets and
total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1
capital is comprised of total shareholders' equity calculated in accordance with
generally accepted accounting principles, excluding accumulated other
comprehensive income (loss), less intangible assets, and total capital is
comprised of Tier 1 capital plus certain adjustments, the largest of which for
the Company is the allowance for loan losses. Risk-weighted assets refer to the
on- and off-balance sheet exposures of the Company, adjusted for their related
risk levels using formulas set forth in FED and FDIC regulations.
In addition to the risk-based capital requirements described above, the
Company is subject to a leverage capital requirement, which calls for a minimum
ratio of Tier 1 capital (as defined above) to quarterly average total assets of
3.00% to 5.00%, depending upon the institution's composite ratings as determined
by its regulators. The FED has not advised the Company of any requirement
specifically applicable to it.
In addition to the minimum capital requirements described above, the
regulatory framework for prompt corrective action also contains specific capital
guidelines for classification as "well capitalized," which are presented with
the minimum ratios and the Company's ratios at March 31, 2000, December 31,
1999, and March 31, 1999 in the table below.
18
March 31, December 31, March 31,
2000 1999 1999
---- ---- ----
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets 9.32% 9.66% 9.71%
Minimum required Tier I capital 4.00% 4.00% 4.00%
Threshold for well-capitalized status 6.00% 6.00% 6.00%
Total risk-based capital to
Tier II risk-adjusted assets 10.44% 10.78% 10.83%
Minimum required total risk-based capital 8.00% 8.00% 8.00%
Threshold for well-capitalized status 10.00% 10.00% 10.00%
Leverage capital ratios:
Tier I leverage capital to
adjusted fourth quarter average assets 7.38% 7.30% 7.34%
Minimum required Tier I leverage capital 4.00% 4.00% 4.00%
Threshold for well-capitalized status 5.00% 5.00% 5.00%
Although the Company continues to exceed even the regulatory thresholds for
"well capitalized" status, the Company's capital ratios have been steadily
declining with the strong growth the Company has experienced. The Company's
Total Risk-Based Capital to Tier II Risk Adjusted Assets ratio of 10.44% at
March 31, 2000, compared to the "well capitalized" threshold of 10.00%, is the
only one of the three regulatory ratios that is within 200 basis points of
falling below the "well capitalized" threshold. The Company has plans in place
to improve any ratio that falls below the "well capitalized" threshold.
In light of market conditions during the first quarter of 2000, the Company
resumed purchases of stock under its 100,000 share repurchase authorization.
During the first quarter of 2000, the Company repurchased a total of 43,900
shares at an average cost of $15.86 per share.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK)
Net interest income is the Company's most significant component of
earnings. Notwithstanding changes in volumes of loans and deposits, the
Company's level of net interest income is continually at risk due to the effect
that changes in general market interest rate trends have on interest yields
earned and paid with respect to the various categories of earning assets and
interest-bearing liabilities. It is the Company's policy to maintain portfolios
of earning assets and interest-bearing liabilities with maturities and repricing
opportunities that will afford protection, to the extent practical, against wide
interest rate fluctuations. The Company's exposure to interest rate risk is
analyzed on a regular basis by management using standard GAP reports, maturity
reports, and an asset/liability software model that simulates future levels of
interest income and expense based on current interest rates, expected future
interest rates, and various intervals of "shock" interest rates. Over the years,
the Company has been able to maintain a fairly consistent yield on average
earning assets (net interest margin). Over the past ten years the net interest
margin has not varied in any single calendar year by more than the 41 basis
point change experienced by the Company in 1998, and the lowest net interest
margin realized over that same period is within 65 basis points of the highest.
Additionally, over the past seven quarters (excluding the one time impact that
the Company's Y2K liquidity contingency plan had on the Company's net interest
margin), the Company's net interest margin has not varied by more than 16 basis
points in any one quarter and the highest margin during those seven quarters is
within 17 basis points of the lowest margin during that same period. While the
Company can not guarantee stability in its net interest margin in the future, at
this time management does not expect significant fluctuations.
At March 31, 2000, the Company has $165 million more in interest-bearing
liabilities that are subject to interest rate changes within one year than
earning assets. This generally would indicate that net interest income would
experience downward pressure in a rising interest rate environment and would
benefit from a declining
19
interest rate environment. However, this method of analyzing interest
sensitivity only measures the magnitude of the timing differences and does not
address earnings, market value, or management actions. Also, interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. In addition to the effects of "when" various
rate-sensitive products reprice, market rate changes may not result in uniform
changes in rates among all products. For example, included in interest-bearing
liabilities at March 31, 2000 subject to interest rate changes within one year
are deposits totaling $169 million comprised of NOW, savings, and certain types
of money market deposits with interest rates set by management. These types of
deposits historically have not repriced coincidentally with or in the same
proportion as general market indicators. Thus, the Company believes that near
term net interest income would not likely experience significant downward
pressure from rising interest rates. Similarly, management would not expect a
significant increase in near term net interest income from falling interest
rates. In fact, as discussed below, management believes the opposite to be true,
that the recent short-term effects of a rising interest rate environment have
generally had a positive impact on the Company's net interest income and that
the near term effects of a decrease in rates would generally have a negative
effect on net interest income. The Company has relatively little long-term
interest rate exposure, with approximately 86% of interest-earning assets
subject to repricing within five years and substantially all interest-bearing
liabilities subject to repricing within five years.
Although the Company is liability sensitive in the one year horizon, the
Company believes that over the past few years that rises in interest rates have
generally had a slightly positive effect on near term (less than six months) net
interest income and decreases in interest rates have had a slightly negative
effect on near term net interest income. It is the Company's belief that in the
declining interest rate environment of late 1998, the Company was not able to
fully adjust deposit rates downward by the same magnitude that it was
contractually obligated to decrease adjustable rate loans by. This resulted in
slight decreases in the Company's net interest margin. Conversely, the Company
believes that in the rising interest rate environment experienced in the second
half of 1999 and in the first quarter of 2000 that it was able to maintain
relatively static rates paid on its non-time deposits, while adjustable rate
loans were immediately increased in accordance with their loan terms. This
resulted in a slight increase in net interest income. Beyond the six month
horizon, the Company's time deposits which have an average maturity of
approximately 8 months tend to reprice more directly with the existing interest
rate environment and offset the initial positive or negative effects of changes
in interest rates. This has had the effect that over the longer term, as noted
above, the Company has been able to maintain a relatively stable net interest
margin.
Other factors that have impacted the Company's net interest margin in
recent years have been an increase in the Company's loan to deposit ratio, a
higher concentration of loans secured by real estate, and a higher mix of time
deposits greater than $100,000 and borrowings. Because loans typically yield
more than other types of investments, the increase in the Company's loan to
deposit ratio has generally had a positive impact on the net interest margin.
Partially offsetting the positive impact of the higher loan to deposit ratio has
been higher growth in loans secured by real estate (which generally have lower
interest rates than other types of loans) and a higher mix of time deposits
greater than $100,000 and borrowings (both of which carry higher rates of
interest than the Company's other funding sources). The higher mix of loans
secured by real estate has been due to emphasis on larger loans, which the
Company generally requires to be secured by real estate, in order to implement a
high growth strategy to better leverage the Company's branch network. The higher
mix of these higher rate deposits has been necessary to fund the strong loan
growth experienced.
See additional discussion of the Company's net interest margin in the
"Components of Earnings" section above.
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions. The following
table presents the expected maturities of the Company's other than trading
market risk sensitive financial instruments. The following table also presents
the fair values of market risk sensitive instruments as estimated in accordance
with Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments."
20
Expected Maturities of Market Sensitive
Instruments Held at March 31, 2000
---------------------------------------------------------------------------
Average Estimated
Interest Fair
($ in thousands) 1 Year 2 Years 3 Years 4 Years 5 Years Beyond Total Rate (1) Value
------ ------- ------- ------- ------- ------ ----- -------- -----
Due from banks,
interest bearing $28,827 - - - - - 28,827 5.75% $ 28,827
Federal funds sold 8,811 - - - - - 8,811 5.75% 8,811
Debt securities- at
amortized cost (2) 7,229 5,804 10,608 20,131 10,968 17,412 72,152 6.48% 70,315
Loans - fixed (3) 46,394 24,384 41,893 49,490 63,410 37,848 263,419 8.58% 262,459
Loans - adjustable (3) 87,610 18,455 21,128 20,144 16,463 15,080 178,880 9.51% 178,880
-------- ------ ----- ----- ----- ----- ------- ---- ---------
Total $178,871 48,643 73,629 89,765 90,841 70,340 552,089 8.41% $ 549,292
======== ====== ====== ====== ====== ====== ======= ==== =========
Savings, NOW, and
money market
deposits $169,364 - - - - - 169,364 2.09% $ 169,364
Time deposits 224,379 27,529 4,340 3,226 3,683 1,759 264,916 5.46% 264,821
Short-term
borrowings 40,000 - - - - - 40,000 6.05% 40,000
-------- ------ ----- ----- ----- ----- ------- ---- ---------
Total $433,743 27,529 4,340 3,226 3,683 1,759 474,280 4.31% $ 474,185
======== ====== ===== ===== ===== ===== ======= ==== =========
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 34%
tax rate.
(2) Callable securities with above market interest rates at March 31, 2000 are
assumed to mature at their call date for purposes of this table.
(3) Excludes nonaccrual loans and allowance for loan losses.
The Company's fixed rate earning assets have estimated fair values that are
slightly lower than their carrying value. This is due to the yields on these
portfolios being slightly lower than market yields at March 31, 2000 for
instruments with maturities similar to the remaining term of the portfolios, due
to the generally rising interest rate environment over the past year. The
estimated fair value of the Company's time deposits is lower than its book value
for the same reason.
PENDING ACQUISITION
On December 16, 1999, the Company announced the signing of a definitive
merger agreement with First Savings Bancorp, Inc., the holding company for First
Savings Bank of Moore County, SSB. At March 31, 2000 First Savings Bancorp,
headquartered in Southern Pines, North Carolina, had total assets of $327
million, with loans of $230 million and deposits of $231 million. The terms of
the transaction call for First Bancorp to exchange 1.2468 shares of its stock
for each share of First Savings Bancorp stock outstanding. All terms of the
proposed merger are described in greater detail in the Company's filing on Form
8-K filed December 21, 1999 and filing under Rule 425 filed March 24, 2000. The
transaction is expected to be consummated in July 2000 and is expected to be
accounted for as a pooling of interests.
21
CURRENT ACCOUNTING MATTERS
The Financial Accounting Standards Board has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. This
Statement, as amended, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000, and will be adopted by the Company on January 1,
2001. Because the Company has not historically and does not currently employ the
use of derivatives, this Statement is not expected to impact the Company.
FORWARD-LOOKING STATEMENTS
The foregoing discussion contains statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgment of the Company and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the financial success or changing strategies of the Company's
customers, actions of government regulators, the level of market interest rates,
and general economic conditions.
Part II. Other Information
Item 5 - Other Information
The bylaws of the Company establish an advance notice procedure for
shareholder proposals to be brought before a meeting of shareholders of the
Company. Subject to any other applicable requirements, only such business may be
conducted at a meeting of the shareholders as has been brought before the
meeting by, or at the direction of, the Board of Directors or by a shareholder
who has given to the Secretary of the Company timely written notice, in proper
form, of the shareholder's intention to bring that business before the meeting.
The presiding officer at such meeting has the authority to make such
determinations.
To be timely, notice of other business to be brought before any meeting must
generally be received by the Secretary of the Company within 60 to 90 days in
advance of the shareholders' meeting. The notice of any shareholder proposal
must set forth the various information required under the bylaws. The person
submitting the notice must provide, among other things, the name and address
under which such Shareholder appears on the Company's books and the class and
number of shares of the Company's capital stock that are beneficially owned by
such Shareholder. Any shareholder desiring a copy of the Company's bylaws will
be furnished one without charge upon written request to the Secretary of the
Company at the Company's headquarters.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed with this report or, as noted, are
incorporated by reference. Management contracts, compensatory plans
and arrangements are marked with an asterisk (*).
3.a.i Copy of Articles of Incorporation of the Registrant and amendments
thereto, was filed as Exhibit 3(a) to the Registrant's Registration
Statement Number 33-12692, and is incorporated herein by reference.
22
3.a.ii Copy of the amendment to Articles of Incorporation - adding a new
Article Nine, was filed as Exhibit 3(e) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1988, and is
incorporated herein by reference.
3.a.iii Copy of the amendment to Articles of Incorporation - adding a new
Article Ten, was filed as Exhibit 3.a.iii to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999, and is
incorporated herein by reference.
3.a.iv Copy of the amendment to Article IV of the Articles of Incorporation
was filed as Exhibit 3.a.iv to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999, and is incorporated herein
by reference.
3.b.i Copy of the Bylaws of the Registrant and amendments thereto, was
filed as Exhibit 3(b) to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1994, and is incorporated herein by
reference.
3.b.ii Copy of the amendment to the Bylaws replacing Section 3.04 of Article
Three was filed as Exhibit 3.b.ii to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 and is incorporated
herein by reference.
3.b.iii Copy of the amendment to the Bylaws amending Section 3.19 of Article
Three was filed as Exhibit 3.b.iii to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 and is incorporated
herein by reference.
4 Form of Common Stock Certificate was filed as Exhibit 3.a.iv to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999, and is incorporated herein by reference.
10 Material Contracts
10.a Data processing Agreement dated October 1, 1984 by and between Bank
of Montgomery (First Bank) and Montgomery Data Services, Inc. was
filed as Exhibit 10(k) to the Registrant's Registration Statement
Number 33-12692, and is incorporated herein by reference.
10.b First Bank Salary and Incentive Plan, as amended, was filed as
Exhibit 10(m) to the Registrant's Registration Statement Number
33-12692, and is incorporated herein by reference. (*)
10.c First Bancorp Savings Plus and Profit Sharing Plan (401(k) savings
incentive plan and trust), as amended January 25, 1994 and July 19,
1994, was filed as Exhibit 10(c) to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1994, and is incorporated
herein by reference. (*)
10.d Directors and Officers Liability Insurance Policy of First Bancorp,
dated July 16, 1991, was filed as Exhibit 10(g) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991, and
is incorporated herein by reference.
10.e Indemnification Agreement between the Company and its Directors and
Officers was filed as Exhibit 10(t) to the Registrant's Registration
Statement Number 33-12692, and is incorporated herein by reference.
10.f First Bancorp Employees' Pension Plan, as amended on August 16, 1994,
was filed as Exhibit 10(g) to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1994, and is incorporated
herein by reference. (*)
23
10.g First Bancorp Senior Management Supplemental Executive Retirement
Plan dated May 31, 1993, was filed as Exhibit 10(k) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993,
and is incorporated herein by reference. (*)
10.h First Bancorp Senior Management Split-Dollar Life Insurance
Agreements between the Company and the Executive Officers, as amended
on December 22, 1994, was filed as Exhibit 10(i) to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1994,
and is incorporated herein by reference. (*)
10.i First Bancorp 1994 Stock Option Plan was filed as Exhibit 10(n) to
the Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1994, and is incorporated herein by reference. (*)
10.j Amendment to the First Bancorp Savings Plus and Profit Sharing Plan
(401(k) savings incentive plan and trust), dated December 17, 1996,
was filed as Exhibit 10(m) to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996, and is incorporated
herein by reference. (*)
10.k Employment Agreement between the Company and James H. Garner dated
August 17, 1998 was filed as Exhibit 10(l) to the Company's Annual
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference. (*)
10.l Employment Agreement between the Company and Anna G. Hollers dated
August 17, 1998 was filed as Exhibit 10(m) to the Company's Annual
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference. (*)
10.m Employment Agreement between the Company and Teresa C. Nixon dated
August 17, 1998 was filed as Exhibit 10(n) to the Company's Annual
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference. (*)
10.n First Amendment to the First Bancorp Senior Management Executive
Retirement Plan dated April 21, 1998 was filed as Exhibit 10(o) to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998, and is incorporated herein by reference. (*)
10.o Employment Agreement between the Company and Eric P. Credle dated
August 17, 1998 was filed as Exhibit 10(p) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, and is
incorporated herein by reference. (*)
10.p Amendments 1 and 2 to the Company's 1994 Stock Option Plan was filed
as Exhibit 10.q to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, and is incorporated herein by
reference.
(*)
10.q Employment Agreement between the Company and David G. Grigg dated
August 17, 1998 was filed as Exhibit 10.r to the Company's Annual
Report on Form 10-K for the year ended December 31, 19999 and is
incorporated herein by reference. (*)
10.r Definitive merger agreement with First Savings Bancorp, Inc. dated
December 16, 1999 was filed.
10.s Amendment and Waiver to Merger Agreement with First Savings Bancorp,
Inc. dated March 24, 2000.
21 List of Subsidiaries of Registrant was filed as Exhibit 21 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999, and is incorporated herein by reference.
24
27 Financial Data Schedule pursuant to Article 9 of Regulation S-X.
(b) There were no reports filed on Form 8-K during the three months ended March
31, 2000.
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO: FIRST BANCORP, ANNA G.
HOLLERS, EXECUTIVE VICE PRESIDENT, P.O. BOX 508, TROY, NC 27371
25
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST BANCORP
May 8, 2000 BY: /s/James H. Garner
------------------
James H. Garner
President
(Principal Executive Officer),
Treasurer and Director
May 8, 2000 BY: /s/Anna G. Hollers
------------------
Anna G. Hollers
Executive Vice President
and Secretary
May 8, 2000 BY: /s/Eric P. Credle
-----------------
Eric P. Credle
Senior Vice President
and Chief Financial Officer
26
EXHIBIT CROSS REFERENCE INDEX
Exhibit Page(s)
------- -------
3.a.i Copy of Articles of Incorporation of the Registrant *
3.a.ii Copy of the amendment to Articles of Incorporation *
3.a.iii Copy of the amendment to Articles of Incorporation - adding a new
Article Ten *
3.a.iv. Copy of the amendment to Article IV of the Articles of
Incorporation *
3.b.i Copy of the Bylaws of the Registrant *
3.b.ii. Copy of the amendment to the Bylaws replacing Section 3.04 of
Article 3 *
3.b.iii Copy of the amendment to the Bylaws amending Section 3.19 of
Article Three *
10.a Data processing Agreement by and between Bank of Montgomery
(First Bank) and Montgomery Data Services, Inc. *
10.b First Bank Salary and Incentive Plan, as amended *
10.c First Bancorp Savings Plus and Profit Sharing Plan (401(k)
savings incentive plan and trust), as amended *
10.d Directors and Officers Liability Insurance Policy of First
Bancorp *
10.e Indemnification Agreement between the Company and its Directors
and Officers *
10.f First Bancorp Employees' Pension Plan *
10.g First Bancorp Senior Management Supplemental Executive Retirement
Plan *
10.h First Bancorp Senior Management Split-Dollar Life Insurance
Agreements between the Company and the Executive Officers *
10.i First Bancorp 1994 Stock Option Plan *
10.j Amendment to the First Bancorp Savings Plus and Profit Sharing
Plan *
10.k Employment Agreement between the Company and James H. Garner *
10.l Employment Agreement between the Company and Anna G. Hollers *
10.m Employment Agreement between the Company and Teresa C. Nixon *
10.n First Amendment to the First Bancorp Supplemental Executive
Retirement Plan *
10.o Employment Agreement between the Company and Eric P. Credle *
10.p Amendments 1 and 2 to the Company's 1994 Stock Option Plan *
10.q Employment Agreement between the Company and David G. Grigg *
10.r Definitive merger agreement with First Savings Bancorp, Inc. *
10.s Amendment and Waiver to Merger Agreement with First Savings
Bancorp, Inc. 29
27
21 List of Subsidiaries of Registrant *
27 Financial Data Schedule pursuant to Article 9 of Regulation S-X 32
* Incorporated herein by reference.
28