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
June 30, 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 July 31, 2000, 4,517,770 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 29
INDEX
FIRST BANCORP AND SUBSIDIARIES
Page
Part I. Financial Information
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEETS -
June 30, 2000 and 1999
(With Comparative Amounts at December 31, 1999) 3
CONSOLIDATED STATEMENTS OF INCOME -
For the Periods Ended June 30, 2000 and 1999 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME -
For the Periods Ended June 30, 2000 and 1999 5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -
For the Periods Ended June 30, 2000 and 1999 6
CONSOLIDATED STATEMENTS OF CASH FLOWS -
For the Periods Ended June 30, 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 20
Part II. Other Information
Item 4 - Submission of Matters to a Vote of Shareholders 23
Item 5 - Other Information 24
Item 6 - Exhibits and Reports on Form 8-K 25
Signatures 28
Exhibit Cross Reference Index 29
2
Part I. Financial Information
Item 1 - Financial Statements
First Bancorp and Subsidiaries
Consolidated Balance Sheets
June 30, December 31, June 30,
($ in thousands-unaudited) 2000 1999 1999
- ------------------------------------------------------------------------------------------------
ASSETS
Cash & due from banks, noninterest-bearing $ 21,131 23,055 18,290
Due from banks, interest-bearing 30,594 15,231 28,242
Federal funds sold 11,829 12,280 847
--------- ------ ------
Total cash and cash equivalents 63,554 50,566 47,379
--------- ------ ------
Securities available for sale (costs of $55,340,
$56,231, and $57,188) 53,406 54,290 56,122
Securities held to maturity (fair values of $16,084,
$17,366, and $17,124) 16,217 17,518 16,978
Presold mortgages in process of settlement 496 1,121 2,402
Loans 472,546 419,163 387,755
Less: Allowance for loan losses (6,553) (6,078) (5,822)
--------- ------ ------
Net loans 465,993 413,085 381,933
--------- ------ ------
Premises and equipment 11,509 10,063 9,423
Accrued interest receivable 3,805 3,373 3,059
Intangible assets 4,946 5,261 5,525
Other 4,464 4,170 3,466
--------- ------ ------
Total assets $ 624,390 559,447 526,287
========= ======= =======
LIABILITIES
Deposits: Demand - noninterest-bearing $ 68,145 60,566 59,755
Savings, NOW, and money market 166,528 164,307 161,315
Time deposits of $100,000 or more 93,284 81,831 66,767
Other time deposits 200,452 173,319 163,519
--------- ------ ------
Total deposits 528,409 480,023 451,356
Short-term borrowings 45,000 30,000 28,000
Accrued interest payable 3,302 3,457 3,316
Other liabilities 2,061 2,025 1,887
--------- ------ ------
Total liabilities 578,772 515,505 484,559
--------- ------ ------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Issued and outstanding: 4,508,969,
4,551,641, and 4,525,292 shares 18,287 19,075 18,813
Retained earnings 28,605 26,051 23,565
Accumulated other comprehensive loss (1,274) (1,184) (650)
--------- ------ ------
Total shareholders' equity 45,618 43,942 41,728
--------- ------ ------
Total liabilities and shareholders' equity $ 624,390 559,447 526,287
========= ======= =======
See notes to consolidated financial statements.
3
First Bancorp and Subsidiaries
Consolidated Statements of Income
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -------------------------
($ in thousands, except share data-unaudited) 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 10,612 8,283 20,305 16,202
Interest on investment securities:
Taxable interest income 857 822 1,719 1,620
Tax-exempt interest income 205 229 419 466
Other, principally overnight investments 213 160 422 364
----------- ----------- ------ ------
Total interest income 11,887 9,494 22,865 18,652
----------- ----------- ------ ------
INTEREST EXPENSE
Savings, NOW and money market 907 788 1,746 1,581
Time deposits of $100,000 or more 1,266 898 2,500 1,783
Other time deposits 2,584 2,002 4,849 4,001
Short-term borrowings 414 63 683 98
----------- ----------- ------ ------
Total interest expense 5,171 3,751 9,778 7,463
----------- ----------- ------ ------
Net interest income 6,716 5,743 13,087 11,189
Provision for loan losses 350 260 660 460
----------- ----------- ------ ------
Net interest income after provision
for loan losses 6,366 5,483 12,427 10,729
----------- ----------- ------ ------
NONINTEREST INCOME
Service charges on deposit accounts 710 719 1,405 1,383
Other service charges, commissions and fees 396 304 842 675
Fees from presold mortgages 94 202 180 373
Commissions from insurance sales 55 58 200 145
Data processing fees 22 10 42 20
Securities gains 89 15 89 20
Loan sale gains -- 2 -- 2
Other gains (losses) (1) -- (11) --
----------- ----------- ------ ------
Total noninterest income 1,365 1,310 2,747 2,618
----------- ----------- ------ ------
NONINTEREST EXPENSES
Salaries 2,142 1,935 4,283 3,801
Employee benefits 472 471 1,011 950
----------- ----------- ------ ------
Total personnel expense 2,614 2,406 5,294 4,751
Net occupancy expense 324 282 632 579
Equipment related expenses 303 264 592 519
Other operating expenses 1,644 1,355 3,052 2,733
----------- ----------- ------ ------
Total noninterest expenses 4,885 4,307 9,570 8,582
----------- ----------- ------ ------
Income before income taxes 2,846 2,486 5,604 4,765
Income taxes 960 858 1,876 1,661
----------- ----------- ------ ------
NET INCOME $ 1,886 1,628 3,728 3,104
=========== ===== ===== =====
Earnings per share:
Basic $ 0.42 0.36 0.82 0.69
Diluted 0.41 0.35 0.81 0.67
Weighted average common shares outstanding:
Basic 4,510,654 4,521,708 4,523,977 4,522,392
Diluted 4,576,411 4,617,459 4,594,220 4,624,133
See notes to consolidated financial statements.
4
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
($ in thousands-unaudited) 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------
Net income $ 1,886 1,628 3,728 3,104
------- ----- ----- -----
Other comprehensive income (loss):
Unrealized losses on securities
available for sale:
Unrealized holding gains (losses) arising
during the period, pretax 24 (870) 96 (1,106)
Tax benefit (expense) (7) 338 (127) 431
Reclassification to realized gains (89) (15) (89) (20)
Tax expense 30 6 30 8
------- ----- ----- -----
Other comprehensive loss (42) (541) (90) (687)
------- ----- ----- -----
Comprehensive income $ 1,844 1,087 3,638 2,417
======= ===== ===== =====
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 3,104 3,104
Cash dividends declared ($0.2266 per share) (1,026) (1,026)
Common stock issued under
stock option plan 3 20 20
Common stock issued into
dividend reinvestment plan 7 121 121
Purchases and retirement of common
stock (17) (298) (298)
Other comprehensive loss (687) (687)
----- -------- ------ ------ ------
Balances, June 30, 1999 4,525 $ 18,813 23,565 (650) 41,728
===== ======== ====== ====== ======
Balances, January 1, 2000 4,552 $ 19,075 26,051 (1,184) 43,942
Net income 3,728 3,728
Cash dividends declared ($0.26 per share) (1,174) (1,174)
Common stock issued under
stock option plan 13 98 98
Common stock issued into
dividend reinvestment plan 2 33 33
Purchases and retirement of common
stock (58) (919) (919)
Other comprehensive loss (90) (90)
----- -------- ------ ------ ------
Balances, June 30, 2000 4,509 $ 18,287 28,605 (1,274) 45,618
===== ======== ====== ====== ======
See notes to consolidated financial statements.
6
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
------------------------
($ in thousands-unaudited) 2000 1999
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,728 3,104
Reconciliation of net income to net cash provided by operating
activities:
Provision for loan losses 660 460
Net security premium amortization 52 209
Gains on sales of loans -- (2)
Proceeds from sales of loans -- 36
Gains on sales of securities available for sale (89) (20)
Loan fees and costs deferred, net of amortization 50 9
Depreciation of premises and equipment 507 436
Amortization of intangible assets 315 318
Deferred income benefit (220) (80)
Increase in accrued interest receivable (432) (270)
Decrease (increase) in other assets 454 (44)
Increase (decrease) in accrued interest payable (155) 236
Decrease in other liabilities (34) (171)
-------- -----
Net cash provided by operating activities 4,836 4,221
-------- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (4,721) (12,623)
Purchases of securities held to maturity (168) (2,319)
Proceeds from sales of securities available for sale 90 3,017
Proceeds from maturities/issuer calls of securities available for
sale 5,561 10,960
Proceeds from maturities/issuer calls of securities held to
maturity 1,467 3,830
Net increase in loans (53,618) (29,637)
Purchases of premises and equipment (1,953) (804)
-------- -----
Net cash used in investing activities (53,342) (27,576)
-------- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 48,386 11,090
Proceeds from short-term borrowings, net 15,000 22,000
Cash dividends paid (1,104) (965)
Proceeds from issuance of common stock 131 141
Purchases and retirement of common stock (919) (298)
-------- -----
Net cash provided by financing activities 61,494 31,968
-------- -----
INCREASE IN CASH AND CASH EQUIVALENTS 12,988 8,613
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 50,566 38,766
-------- -----
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 63,554 47,379
======== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 9,933 7,227
Income taxes 1,913 1,582
Non-cash transactions:
Foreclosed loans transferred to other real estate -- 31
Unrealized gain (loss) on securities available for sale 7 (1,126)
Premises and equipment transferred to other real estate -- 36
See notes to consolidated financial statements.
7
First Bancorp And Subsidiaries
Notes To Consolidated Financial Statements
(unaudited) For the Periods Ended June 30, 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 June 30, 2000 and 1999 and the consolidated results of operations
and consolidated cash flows for the periods ended June 30, 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 June 30, 2000 and 1999 are not
necessarily indicative of the results to be expected for the full year. Certain
amounts reported in the period ended June 30, 1999 have been reclassified to
conform with the presentation for June 30, 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 June 30,
----------------------------------------------------------------------------
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 $ 1,886 4,510,654 $ 0.42 $ 1,628 4,521,708 $ 0.36
======== ========
Effect of Dilutive Securities - 65,757 - 95,751
-------- --------- -------- ---------
Diluted EPS $ 1,886 4,576,411 $ 0.41 $ 1,628 4,617,459 $ 0.35
======== ========= ======== ======== ========= ========
For the Six Months Ended June 30,
----------------------------------------------------------------------------
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 $ 3,728 4,523,977 $ 0.82 $ 3,104 4,522,392 $ 0.69
======== ========
Effect of Dilutive Securities - 70,243 - 101,741
-------- --------- -------- ---------
Diluted EPS $ 3,728 4,594,220 $ 0.81 $ 3,104 4,624,133 $ 0.67
======== ========= ======== ======== ========= ========
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:
June 30, December 31, June 30,
($ in thousands) 2000 1999 1999
----------------------------------------------------------------------------------------------------------
Nonperforming loans:
Nonaccrual loans $ 430 595 621
Restructured loans 249 257 254
--------- --- ---
Total nonperforming loans 679 852 875
Other real estate 767 906 546
--------- --- ---
Total nonperforming assets $ 1,446 1,758 1,421
========= ===== =====
Nonperforming loans to total loans 0.14% 0.20% 0.23%
Nonperforming assets as a percentage of
loans and other real estate 0.31% 0.42% 0.37%
Nonperforming assets to total assets 0.23% 0.31% 0.27%
Allowance for loan losses to total loans 1.39% 1.45% 1.50%
NOTE 5
Loans are shown on the Consolidated Balance Sheets net of net deferred loan fees
of approximately $235,000, $184,000, and $137,000 at June 30, 2000, December 31,
1999, and June 30, 1999, respectively.
NOTE 6
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 June 30, 2000 First Savings Bancorp,
headquartered in Southern Pines, North Carolina, had total assets of $331
million, with loans of $232 million and deposits of $224 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. Shareholders of both
companies have approved the merger and it is expected to be consummated in the
third quarter of 2000. The merger is expected to be accounted for as a pooling
of interests. First Bancorp expects to record after tax merger-related charges
of between $2.3 million and $2.8 million in the quarter of consummation.
9
Item 2 - Management's Discussion and Analysis of Consolidated Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
OVERVIEW
Net income for the three months ended June 30, 2000 was $1,886,000, a 15.8%
increase over the $1,628,000 reported in the second quarter of 1999. Basic
earnings per share for the three months ended June 30, 2000 were $0.42 compared
to $0.36 reported for the second quarter of 1999, an increase of 16.7%. Earnings
per share on a diluted basis amounted to $0.41 per share for the second quarter
of 2000 compared to $0.35 reported for the second quarter of 1999, a 17.1%
increase.
Net income for the six months ended June 30, 2000 was $3,728,000, a 20.1%
increase over the $3,104,000 reported for the first six months of 1999. Basic
earnings per share for the six months ended June 30, 2000 increased 18.8% to
$0.82 per share compared to $0.69 per share reported for the same six month
period in 1999. Earnings per share on a diluted basis amounted to $0.81 per
share for the six months ended June 30, 2000, a 20.9% increase over the $0.67
per share for the same six months of 1999.
The increase in net income for the three and six month periods ended June
30, 2000 is primarily due to an increase in net interest income earned by the
Company. Net interest income increased 16.9% and 17.0% for the three and six
month periods ended June 30, 2000, respectively, when compared to the same three
and six month periods in 1999. The increases in net interest income are
primarily attributable to loan and deposit growth, as the Company's net interest
margin did not vary significantly among the periods presented. Loans outstanding
at June 30, 2000 were 21.9% higher than at June 30, 1999, while deposits
increased 17.1% from June 30, 1999 to June 30, 2000.
The Company recorded higher provisions for loan losses for the three and
six month periods ended June 30, 2000 compared to the same periods in 1999. The
provision for loan losses amounted to $350,000 for the second quarter of 2000
compared to $260,000 for the second quarter of 2000, while for the six months
ended June 30, 2000 the provision for loan losses amounted to $660,000 compared
to $460,000 for the same six months in 1999. The increases in the provisions for
loan losses are due to the higher loan growth experienced in 2000 compared to
1999, and not because of credit quality concerns. Net loan growth for the first
six months of 2000 amounted to $53.4 million compared to $29.4 million for the
first six months of 1999.
Noninterest income increased 4.2% and 4.9% for the three and six month
periods ended June 30, 2000, respectively, when compared to the same periods in
1999. Noninterest income excluding nonrecurring items (see additional discussion
below) was basically flat when comparing the three and six month periods in 2000
to the same periods in 1999 as a result of lower fees realized from mortgage
originations due to the higher interest rate environment, which largely offset
increases experienced in "other service charges, commissions, and fees" realized
as a result of the Company's larger customer base. Noninterest expenses
increased by 13.4% and 11.5% for the three and six month periods ended June 30,
2000, respectively, when compared to the same periods of 1999, as a result of
the Company's larger customer base and branch network.
The Company experienced slightly lower effective tax rates for the three
and six months ended June 30, 2000 compared to the same periods in 1999,
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
10
interest income for the three and six month periods ended June 30, 2000 amounted
to $6,716,000 and $13,087,000, respectively, increases of $973,000 and
$1,898,000, or 16.9% and 17.0%, over the amounts of $5,743,000 and $11,189,000,
recorded in the same three and six month periods in 1999, respectively. 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 June 30,
1999 to June 30, 2000, total loans increased from $387.8 million to $472.5
million, an increase of 21.9%. During the same twelve month period, total
deposits increased from $451.4 million to $528.4 million, an increase of 17.1%.
Despite the Company's liability sensitive balance sheet and the rising
interest rate environment experienced over the past 12-16 months, the Company's
net interest margin (tax equivalent net interest income divided by average
earning assets) did not vary significantly when comparing the three and six
month periods in 2000 to the same periods in 1999. For the three months ended
June 30, 2000, the Company's net interest margin was 5.04%, the same margin as
was realized in the second quarter of 1999. For the six months ended June 30,
2000, the Company realized a net interest margin of 5.03%, three basis points
higher than the margin realized for the same six months in 1999. The Company has
been able to maintain a relatively stable net interest margin by increasing its
average balance of noninterest-bearing deposits, as well as carefully monitoring
the rates paid on interest-bearing deposits.
The following tables present average balances and average rates earned/paid
by the Company for the second quarter of 2000 compared to the second quarter of
1999 and the six months ended June 30, 2000 compared to the six months ended
June 30, 1999.
For the Three Months Ended June 30,
----------------------------------------------------------------------------------
2000 1999
-------------------------------------- ---------------------------------------
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
------ ---- ------- ------ ---- -------
Assets
Loans $ 459,716 9.26% $ 10,612 $ 380,335 8.74% $ 8,283
Taxable securities 56,390 6.10% 857 58,021 5.68% 822
Non-taxable securities (1) 16,401 8.41% 344 18,429 8.23% 378
Short-term investments,
principally federal funds 13,311 6.42% 213 12,308 5.21% 160
----------- -------- ----------- ----------
Total interest-earning assets 545,818 8.84% 12,026 469,093 8.25% 9,643
-------- ----------
Liabilities
Savings, NOW and money
market deposits $ 167,513 2.17% 907 $ 162,746 1.94% $ 788
Time deposits >$100,000 87,403 5.81% 1,266 65,660 5.49% 898
Other time deposits 184,659 5.61% 2,584 161,167 4.98% 2,002
----------- -------- ----------- ----------
Total interest-bearing deposits 439,575 4.34% 4,757 389,573 3.80% 3,688
Short-term borrowings 24,868 6.68% 414 4,934 5.12% 63
----------- -------- ----------- ----------
Total interest-bearing liabilities 464,443 4.47% 5,171 394,507 3.81% 3,751
-------- ----------
Non-interest-bearing deposits 65,206 59,653
Net yield on interest-earning
assets and net interest income 5.04% $ 6,855 5.04% $ 5,892
======== =========
Interest rate spread 4.37% 4.44%
Average prime rate 9.25% 7.75%
(1) Includes tax-equivalent adjustments of $139,000 and $149,000 in 2000 and
1999 respectively, to reflect the federal and state benefit of the
tax-exempt securities, reduced by the related nondeductible portion of
interest expense.
11
For the Six Months Ended June 30,
-----------------------------------------------------------------------------------
2000 1999
-------------------------------------- ----------------------------------------
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
- ---------------- ------ ---- ------- ------ ---- -------
Assets
Loans $ 445,046 9.15% $ 20,305 $ 372,466 8.77% $ 16,202
Taxable securities 56,657 6.08% 1,719 58,030 5.63% 1,620
Non-taxable securities (1) 16,895 8.31% 700 18,362 8.42% 767
Short-term investments,
principally federal funds 13,882 6.10% 422 14,307 5.13 364
----------- -------- ----------- ----------
Total interest-earning assets 532,480 8.72% 23,146 463,165 8.25% 18,953
-------- ----------
Liabilities
Savings, NOW and money
market deposits $ 166,730 2.10% 1,746 $ 161,727 1.97% $ 1,581
Time deposits >$100,000 85,715 5.85% 2,500 64,668 5.56% 1,783
Other time deposits 180,030 5.40% 4,849 159,362 5.06% 4,001
----------- -------- ----------- ----------
Total interest-bearing deposits 432,475 4.22% 9,095 385,757 3.85% 7,365
Short-term borrowings 21,500 6.37% 683 3,967 4.98% 98
----------- -------- ----------- ----------
Total interest-bearing liabilities 453,975 4.32% 9,778 389,724 3.86% 7,463
-------- ----------
Non-interest-bearing deposits 62,942 58,835
Net yield on interest-earning
assets and net interest income 5.03% $ 13,368 5.00% $ 11,490
======== ==========
Interest rate spread 4.40% 4.39%
Average prime rate 8.97% 7.75%
- ------------------
(1) Includes tax-equivalent adjustments of $281,000 and $301,000 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 for the second quarter of 2000 was $350,000,
$90,000 higher than the $260,000 recorded in the second quarter of 1999. For the
six months ended June 30, 2000, the provision for loan losses was $660,000
compared to $460,000 for the six months ended June 30, 1999. The increases in
the provisions for loan losses recorded in 2000 compared to 1999 have been a
result of the higher loan growth experienced and not because of credit quality
concerns. Net loan growth for the second quarter of 2000 amounted to $29.8
million compared to $19.2 million in the second quarter of 1999. Net loan growth
for the first six months of 2000 amounted to $53.4 million compared to $29.4
million for the first six months of 1999. Credit quality indicators for the
Company remained strong in the second quarter of 2000. 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 second quarter of 2000 amounted to
$1,365,000, a 4.2% increase over the $1,310,000 earned in the second quarter of
1999, while noninterest income for the six months ended June 30, 2000 amounted
to $2,747,000, a 4.9% increase over the $2,618,000 recorded in the same six
months 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.
12
Core noninterest income for the second quarter of 2000 amounted to
$1,277,000, a 1.2% decrease over the $1,293,000 recorded in the second quarter
of 1999. The relatively flat second quarter core noninterest income was due to
two offsetting factors: a $92,000 increase 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, that was offset by $108,000 in fewer fees
that the Company earned from originating presold mortgages as a result of the
higher interest rate environment, which has reduced the demand for mortgage
loans, particularly refinancings.
Core noninterest income for the six months ended June 30, 2000 amounted to
$2,669,000 compared to $2,596,000, an increase of 2.8%. In addition to the same
two factors noted above that increased "other service charges, commissions, and
fees," by $167,000 and decreased fees from presold mortgages by $193,000, the
Company realized 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.
Contributing to core noninterest income in 2000 were higher fees earned
from the Company's data processing subsidiary, Montgomery Data Services, Inc.
(Montgomery Data). The Company recorded $22,000 in the second quarter of 2000
compared to $10,000 in the second quarter of 1999, while for the first six
months of 2000, the Company recorded $42,000 in data processing fees compared to
$20,000 earned in the first six months of 1999. 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. Since December 1998, Montgomery Data has signed contracts with
four area banks to provide data processing.
Non-core noninterest income for the three and six months ended June 30,
2000 is primarily comprised of $89,000 in securities gains. As a result of an
investment in a North Carolina partnership that promoted new business in the
state, the Company was the recipient of shares of common stock in a technology
company. Upon receipt of these shares in June 2000, the Company sold them at a
net gain of $89,000.
Noninterest expenses for the three and six months ended June 30, 2000
increased 13.4% and 11.5%, respectively when compared to the same periods of
1999. The increases are 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 $960,000 in the second quarter of 2000
compared to $858,000 in the second quarter of 1999, while income tax expense for
the six months ended June 30, 2000 amounted to $1,876,000 compared to $1,661,000
for the same period in 1999. The increases in 2000 are a result of a higher
pretax income, which were partially offset by decreases in the Company's
effective tax rate from 34.5% in the second quarter of 1999 to 33.7% in the
second quarter of 2000, and from 34.9% for the first six months of 1999 to 33.5%
for the first six months 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 $624.4 million at June 30, 2000, an
increase of $98.1 million, or 18.6%, from the $526.3 million at June 30, 1999.
Interest-earning assets increased by 18.8%, from $492.3 million at June 30, 1999
to $585.1 million at June 30, 2000. Loans, the primary interest-earning asset,
grew from $387.8 million at June 30, 1999 to $472.6 million at June 30, 2000, an
increase of $84.8 million, or 21.9%.
Deposits have increased $77.1 million, or 17.1%, supporting the asset
growth since June 30, 1999. The
13
increases in deposits since June 30, 1999 have occurred primarily in the
categories of time deposits of $100,000 or more and other time deposits, with
$63.5 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 $59.8 million at June 30,
1999 to $68.1 million at June 30, 2000, an increase of 14.0%, while savings, NOW
and money market deposits increased from $161.3 million to $166.5 million, an
increase of 3.2%.
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 $45
million at June 30, 2000 compared to $28 million at June 30, 1999. See
"LIQUIDITY" below for a discussion of the Company's sources of borrowings.
Since December 31, 1999, the Company has experienced annualized increases
of 25.5%, 23.2%, and 20.2% in loans, total assets and deposits, respectively.
NONPERFORMING ASSETS
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or
more days and still accruing interest, restructured loans other real estate. For
each of the periods presented, the Company had no loans past due 90 or more days
and still accruing interest. Nonperforming assets are summarized as follows:
June 30, December 31, June 30,
($ in thousands) 2000 1999 1999
----------------------------------------------------------------------------------------------------------
Nonperforming loans:
Nonaccrual loans $ 430 595 $ 621
Restructured loans 249 257 254
--------- ----- ---------
Total nonperforming loans 679 852 875
Other real estate 767 906 546
--------- ----- ---------
Total nonperforming assets $ 1,446 1,758 $ 1,421
========= ===== =========
Nonperforming loans to total loans 0.14% 0.20% 0.23%
Nonperforming assets as a percentage of
loans and other real estate 0.31% 0.42% 0.37%
Nonperforming assets to total assets 0.23% 0.31% 0.27%
Allowance for loan losses to total loans 1.39% 1.45% 1.50%
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 June 30, 2000, December
14
31, 1999 and June 30, 1999, nonperforming loans were approximately 0.14%, 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 June 30, 2000, the borrower with the largest nonaccrual loan owed a
balance of $117,000, while the average nonaccrual loan balance was approximately
$25,000. If the nonaccrual loans and restructured loans as of June 30, 2000 and
1999 had been current in accordance with their original terms and had been
outstanding throughout the six month periods (or since origination or
acquisition if held for part of the six month periods), gross interest income in
the amounts of approximately $22,000 and $30,000 for nonaccrual loans and
$13,000 and $12,000 for restructured loans would have been recorded for the six
months ended June 30, 2000 and 1999, respectively. Interest income on such loans
that was actually collected and included in net income in the six month periods
ended June 30, 2000 and 1999 was $1,000 and $8,000, respectively, for nonaccrual
loans (prior to their being placed on nonaccrual status) and $11,000 for
restructured loans for each six month period.
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 June 30, 2000, December 31, 1999, and June 30, 1999, the recorded
investment in loans considered to be impaired was $257,000, $281,000, and
$123,000, respectively, all of which were on nonaccrual status. The related
allowance for loan losses for these impaired loans was $39,000, $42,000, and
$18,000, respectively. There were no impaired loans for which there was no
related allowance. The average recorded investments in impaired loans during the
six month period ended June 30, 2000, the year ended December 31, 1999, and the
six months ended June 30, 1999 were approximately $246,000, $123,000, and
$70,000, 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 June 30, 2000, December 31, 1999 and June 30, 1999, the Company owned
other real estate totaling approximately $767,000, $906,000, and $546,000,
respectively, which consisted principally of several parcels of real estate. The
increase in the level of other real estate owned at June 30, 2000 compared to
June 30, 1999 is primarily attributable to the reclassification of a bank branch
that was 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, equal or
exceed their respective carrying values at the dates presented.
15
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.
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 for the second quarter of 2000 was $350,000,
$90,000 higher than the $260,000 recorded in the second quarter of 1999. For the
six months ended June 30, 2000, the provision for loan losses was $660,000
compared to $460,000 for the six months ended June 30, 1999. The increases in
the provisions for loan losses recorded in 2000 compared to 1999 have been a
result of the higher loan growth experienced and not because of credit quality
concerns. Net loan growth for the second quarter of 2000 amounted to $29.8
million compared to $19.2 million in the second quarter of 1999. Net loan growth
for the first six months of 2000 amounted to $53.4 million compared to $29.4
million for the first six months of 1999. Credit quality indicators for the
Company remained strong in the second quarter of 2000.
At June 30, 2000, the allowance for loan losses amounted to $6,553,000,
compared to $6,078,000 at December 31, 1999 and $5,822,000 at June 30, 1999. The
allowance for loan losses was 1.39%, 1.45% and 1.50% of total loans as of June
30, 2000, December 31, 1999, and June 30, 1999, respectively.
Management believes the Company's reserve levels are adequate to cover
probable loan losses on the loans outstanding as of each reporting date. It must
be emphasized, however, that the determination of the reserve using the
Company's procedures and methods rests upon various judgments and assumptions
about economic conditions and other factors affecting loans. No assurance can be
given that the Company will not in any particular period sustain loan losses
that are sizable in relation to the amounts reserved or that subsequent
evaluations of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan losses
and value of other real estate. Such agencies may require the Company to
recognize adjustments to the allowance or the carrying value of other real
estate based on their judgments about information available at the time of their
examinations
16
For the periods indicated, the following table summarizes the Company's
balances of loans outstanding, average loans outstanding, changes in the
allowance for loan losses arising from charge-offs and recoveries by category,
and additions to the allowance for loan losses that have been charged to
expense.
Six Months Year Six Months
Ended Ended Ended
June 30, December 31, June 30,
($ in thousands) 2000 1999 1999
----------- ------- -----------
Loans outstanding at end of period $ 472,546 419,163 $ 387,755
=========== ======= ===========
Average amount of loans outstanding $ 445,046 386,365 $ 372,466
=========== ======= ===========
Allowance for loan losses, at
beginning of year $ 6,078 5,504 $ 5,504
Loans charged off:
Commercial, financial and agricultural (114) (53) (14)
Real estate - mortgage - (126) (101)
Installment loans to individuals (110) (269) (81)
----------- ------- -----------
Total charge-offs (224) (448) (196)
----------- ------- -----------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 8 27 9
Real estate - mortgage 5 17 4
Installment loans to individuals 26 68 41
----------- ------- -----------
Total recoveries 39 112 54
----------- ------- -----------
Net charge-offs (185) (336) (142)
Additions to the allowance charged to expense 660 910 460
----------- ------- -----------
Allowance for loan losses, at end of period $ 6,553 6,078 $ 5,822
=========== ======= ===========
Ratios:
Net charge-offs (annualized) as a percent of average loans 0.08% 0.09% 0.08%
Allowance for loan losses as a
percent of loans at end of period 1.39% 1.45% 1.50%
Based on the results of the aforementioned loan analysis and grading
program and management's evaluation of the allowance for loan losses at June 30,
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 June 30, 2000 level of 89.4% 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 second quarter of 2000 amounted to $24.9 million compared
to $4.9 million for the second 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 June 30, 2000, December 31, 1999,
and June 30, 1999 in the table below.
18
As of June 30, 2000, December 31, 1999 and June 30, 1999, the Company was
in compliance with all existing regulatory capital requirements, as summarized
in the following table:
June 30, December 31, June 30,
($ in thousands) 2000 1999 1999
--------- ------- -------
Risk-Based and Leverage Capital Tier I capital:
Common shareholders' equity $ 45,618 43,942 41,728
Intangible assets (4,946) (5,261) (5,525)
Unrealized loss on securities
available for sale, net of taxes 1,274 1,184 650
--------- ------- -------
Total Tier I leverage capital 41,946 39,865 36,853
--------- ------- -------
Tier II capital:
Allowable allowance for loan losses 5,879 5,158 4,825
--------- ------- -------
Tier II capital additions 5,879 5,158 4,825
--------- ------- -------
Total risk-based capital $ 47,825 45,023 41,678
========= ====== ======
Risk adjusted assets $ 474,028 416,693 390,884
Tier I risk-adjusted assets
(includes Tier I capital adjustments) 470,356 412,616 386,009
Tier II risk-adjusted assets
(includes Tiers I and II capital adjustments) 476,235 417,774 390,834
Quarterly average total assets 580,339 550,078 500,953
Adjusted quarterly average total assets
(includes Tier I capital adjustments) 576,667 546,001 496,078
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets 8.92% 9.66% 9.55%
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 10.04% 10.78% 10.66%
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 7.27% 7.30% 7.43%
Minimum required Tier I leverage capital 4.00% 4.00% 4.00%
Threshold for well-capitalized status 5.00% 5.00% 5.00%
The Company's Total Risk-Based Capital to Tier II Risk Adjusted Assets
ratio of 10.04% at June 30, 2000, compared to the "well capitalized" threshold
of 10.00%, is within 4 basis points of falling below the well-capitalized
threshold. This is the only one of the three regulatory ratios that is within
200 basis points of falling below the "well-capitalized" threshold.
Additionally, the total risk-based capital ratio for the Company's banking
subsidiary, First Bank, is below the threshold necessary to be classified as
"well-capitalized" (9.86%). The Company's pending acquisition of First Savings
Bancorp, Inc. and the resultant merger of the two bank subsidiaries (discussed
below) is expected to result in the Company and First Bank having capital ratios
well in excess of the thresholds necessary for well-capitalized status with
total risk-based capital ratios for each projected to exceed 15%.
In light of market conditions during 2000, the Company resumed purchases of
stock under its 100,000 share repurchase authorization. From January 1, 2000
through May 10, 2000 (the date of the last repurchase), the Company repurchased
a total of 58,300 shares at an average cost of $15.75 per share.
19
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 eight 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 eight quarters is
within 19 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 June 30, 2000, the Company has $168 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 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 June 30, 2000 subject to interest rate changes
within one year are deposits totaling $167 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 87% 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 last
twelve months,
20
rates paid on its deposits, especially non-time deposits, did not increase by
the full amount of the change in the prime rate of interest 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 $100,000 and borrowings (both of which carry higher rates of
interest than the Company's other funding sources). The higher mix of loans
secured by real estate has been due to emphasis on larger loans, which the
Company generally requires to be secured by real estate, in order to implement a
high growth strategy to better leverage the Company's branch network. The higher
mix of higher rate deposits and borrowings has been necessary to fund the strong
loan growth experienced.
See additional discussion of the Company's net interest margin in the
"Components of Earnings" section above.
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions. The following
table presents the expected maturities of the Company's other than trading
market risk sensitive financial instruments. The following table also presents
the fair values of market risk sensitive instruments as estimated in accordance
with Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments."
Expected Maturities of Market Sensitive
Instruments Held at June 30, 2000
---------------------------------------------------------------------------
Average Estimated
Interest Fair
($ in thousands) 1 Year 2 Years 3 Years 4 Years 5 Years Beyond Total Rate (1) Value
------ ------- ------- ------- ------- ------ ----- -------- -----
Due from banks,
interest bearing $30,594 - - - - - 30,594 6.50% 30,594
Federal funds sold 11,829 - - - - - 11,829 6.50% 11,829
Debt securities- at
amortized cost (2) 6,326 6,342 9,449 21,649 9,688 15,898 69,352 6.53% 67,325
Loans - fixed (3) 49,445 25,339 52,326 49,953 68,509 39,730 285,302 8.63% 283,705
Loans - adjustable (3) 96,127 16,313 20,429 21,925 18,267 13,753 186,814 10.05% 186,814
-------- ------ ----- ----- ----- ----- ------- ---- ---------
Total $194,321 47,994 82,204 93,527 96,464 69,381 583,891 8.68% $ 580,267
======== ====== ====== ====== ====== ====== ======= ==== =========
Savings, NOW, and
money market
deposits $166,528 - - - - - $166,528 2.25% $ 166,528
Time deposits 238,711 34,445 9,185 7,035 4,242 1,286 294,904 5.87% 295,013
Short-term
borrowings 45,000 - - - - - 45,000 6.80% 45,000
-------- ------ ----- ----- ----- ----- ------- ---- ---------
Total $450,239 34,445 9,185 7,035 4,242 1,286 506,432 4.77% $ 506,541
======== ====== ===== ===== ===== ===== ======= ==== =========
(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 June 30, 2000 are
assumed to mature at their call date for purposes of this table.
(3) Excludes nonaccrual loans and allowance for loan losses.
21
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 June 30, 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. Due to the
short-term nature of the Company's time deposits, their estimated fair value
does not vary significantly from their carrying value.
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 June 30, 2000 First Savings Bancorp,
headquartered in Southern Pines, North Carolina, had total assets of $331
million, with loans of $232 million and deposits of $224 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
S-4 dated April 6, 2000 and Amendment No. 1 thereto dated May 16, 2000
(Registration No. 333-34216). Both companies' shareholders have approved the
merger, and the transaction is expected to be consummated in the third quarter
of 2000. The merger is expected to be accounted for as a pooling of interests.
First Bancorp expects to record after tax merger-related charges of between $2.3
million and $2.8 million in the quarter of consummation.
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. This Statement is not expected to materially 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.
22
Part II. Other Information
Item 4 - Submission of Matters to a Vote of Shareholders
The following proposals were considered and acted upon at the special and
annual meeting of shareholders of the Company held on June 27, 2000:
Proposal 1
A proposal to consider and vote on the merger agreement dated as of
December 15, 1999 among First Bancorp, First Bank, First Savings
Bancorp, Inc. and First Savings Bank of Moore County, Inc., SSB and
the related plan of merger pursuant to which First Savings will merge
into First Bancorp, with First Bancorp being the surviving
corporation.
For 3,342,336 Against 58,302 Abstain 6,813
--------- ------ -----
Proposal 2
A proposal to approve the issuance of shares of First Bancorp common
stock in connection with the merger.
For 3,332,856 Against 66,323 Abstain 8,241
--------- ------ -----
Proposal 3
A proposal to amend the bylaws of First Bancorp to increase the
maximum number of directors of First Bancorp to 18 and to change the
method by which the number of directors is fixed. The increase in the
number of directors is conditional on the completion of the merger
between First Bancorp and First Savings Bancorp, Inc.
For 3,314,244 Against 82,382 Abstain 10,824
--------- ------ ------
23
Proposal 4
A proposal to elect 18 directors to serve until the next annual
meeting of shareholders and until their successors are elected and
qualified.
Voted Withheld
Nominee For Authority
------- --------- ---------
Jack D. Briggs 3,775,356 27,321
David L. Burns 3,775,356 27,321
Jesse S. Capel 3,775,356 27,321
James H. Garner 3,775,356 27,321
George R. Perkins, Jr. 3,775,356 27,321
G. T. Rabe, Jr. 3,775,356 27,321
Edward T. Taws 3,775,356 27,321
Frederick H. Taylor 3,775,356 27,321
Goldie H. Wallace 3,775,356 27,321
A. Jordan Washburn 3,775,356 27,321
John C. Willis 3,775,356 27,321
Conditional Nominees*
---------------------
Virginia C. Brandt 3,772,379 30,298
H. David Bruton 3,771,969 30,298
John F. Burns 3,771,969 30,298
Felton J. Capel 3,771,969 30,298
Frank G. Hardister 3,771,969 30,298
Thomas F. Philips 3,771,969 30,298
William E. Samuels 3,771,969 30,298
* The election of these directors is conditional on the completion
of the merger between First Bancorp and First Savings Bancorp,
Inc.
Proposal 5
A proposal to ratify the appointment of KPMG LLP as the independent
auditors of the Company for the current fiscal year.
For 3,782,618 Against 5,651 Abstain 14,408
--------- ------ ------
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
24
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.
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.
3.b.iv Copy of the amendment to the Bylaws replacing Section 3.02.
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
25
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. (*)
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. (*)
26
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, 1999 and is
incorporated herein by reference. (*)
10.r Definitive merger agreement with First Savings Bancorp, Inc. dated
December 16, 1999 was filed on Form 8-K on December 21, 1999 and is
incorporated herein by reference.
10.s Amendment and Waiver to Merger Agreement with First Savings Bancorp,
Inc. dated March 24, 2000 was filed as Exhibit 10.s to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000
and is incorporated herein by reference. (*).
10.t Second Amendment and Waiver to Merger Agreement dated as of May 15,
2000 was filed as Exhibit 2.3 to the Company's Amendment No. 1 to
Registration Statement on Form S-4 (Registration No. 333-34216) dated
May 16, 2000 and is incorporated herein by reference.
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.
27 Financial Data Schedule pursuant to Article 9 of Regulation S-X.
(b) There were no reports filed on Form 8-K during the six months ended
June 30, 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
27
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
August 11, 2000 BY: /s/James H. Garner
------------------
James H. Garner
President
(Principal Executive Officer),
Treasurer and Director
August 11, 2000 BY: /s/Anna G. Hollers
------------------
Anna G. Hollers
Executive Vice President
and Secretary
August 11, 2000 BY: /s/Eric P. Credle
-----------------
Eric P. Credle
Senior Vice President
and Chief Financial Officer
28
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 *
3.b.iv Copy of the amendment to the Bylaws replacing Section 3.02. 31
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. *
29
10.s Amendment and Waiver to Merger Agreement with First Savings
Bancorp, Inc. *
10.t Second Amendment and waiver to Merger Agreement with First
Savings Bancorp, Inc. *
21 List of Subsidiaries of Registrant *
27 Financial Data Schedule pursuant to Article 9 of Regulation
S-X 32
* Incorporated herein by reference.
30