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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-15572
FIRST BANCORP
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(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
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(State of Incorporation) (I.R.S. Employer Identification Number)
341 North Main Street, Troy, North Carolina 27371-0508
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (910) 576-6171
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to the Form 10-K. [ ]
The aggregate market value of the voting stock, Common Stock, no par
value, held by non-affiliates of the registrant, based on the average bid and
asked prices of the Common Stock on February 29, 2000 as reported on the NASDAQ
National Market System, was approximately $47,959,296. Shares of Common Stock
held by each officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares of the Registrant's Common Stock outstanding on
February 29, 2000 was 4,534,666.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed pursuant to
Regulation 14A are incorporated herein by reference into
Part III.
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CROSS REFERENCE INDEX
Begins on
Page (s)
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PART I Business:
Item I General Description 4
Statistical Information
Net Interest Income 13, 32
Average Balances and Net Interest Income Analysis 13, 32
Volume and Rate Variance Analysis 13, 33
Provision for Loan Losses 15, 38
Noninterest Income 15, 33
Noninterest Expenses 16, 33
Income Taxes 17, 34
Distribution of Assets and Liabilities 17, 34
Securities Portfolio Composition and Maturities 18, 34
Loans 19, 36
Nonperforming Assets 20, 37
Allowance for Loan Losses and Loan Loss Experience 21, 37
Deposits 22, 38
Borrowings 24
Interest Rate Risk (Including Quantitative
and Qualitative Disclosures About Market Risk) 24, 39
Off-Balance Sheet Risk 26
Return on Assets and Equity 27, 40
Liquidity 27
Capital Resources, Components and Ratios 27, 41
Y2K Issue 29
Inflation 29
Current accounting matters 29
Forward-Looking Statements 29
Item 2 Properties 10
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Shareholders 11
PART II
Item 5 Market for the Registrant's Common Stock and Related
Shareholder Matters 11
Item 6 Selected Financial Data 11, 31
Item 7 Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
Item 7A Quantitative and Qualitative Disclosures About Market Risk 24
Item 8 Financial Statements and Supplementary Data:
Consolidated Balance Sheets as of December 31, 1999 and 1998 43
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 1999 44
Consolidated Statements of Comprehensive Income for each of the
years in the three-year period ended December 31, 1999 45
Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended December 31, 1999 46
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1999 47
Notes to Consolidated Financial Statements 48
Independent Auditors' Report 68
Selected Consolidated Financial Data 31
Quarterly Financial Summary 42
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 69
2
PART III
Item 10 Directors and Executive Officers of the Registrant; Compliance
with Section 16 (a) of the Exchange Act 69*
Item 11 Executive Compensation 69*
Item 12 Security Ownership of Certain Beneficial Owners and Management 69*
Item 13 Certain Relationships and Related Transactions 69*
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports of Form 8-K 69
SIGNATURES 73
* Information called for by Part III (Items 10 through 13) is incorporated
herein by reference to the Registrant's definitive Proxy Statement for the
2000 Annual Meeting of Shareholders to be filed with Securities and
Exchange Commission.
3
PART I
Item 1. Business
General Description
The Company
First Bancorp (the "Company") is a one-bank holding company. The principal
activity of the Company is the ownership and operation of First Bank (the
"Bank"), a state chartered bank with its main office in Troy, North Carolina.
The Company also owns and operates two nonbank subsidiaries, Montgomery Data
Services, Inc. ("Montgomery Data"), a data processing company, and First Bancorp
Financial Services, Inc. ("First Bancorp Financial"), which currently owns and
operates various real estate. The Bank has two wholly-owned subsidiaries, First
Bank Insurance Services, Inc. and First Troy Realty Corporation. First Bank
Insurance Services, Inc. ("First Bank Insurance"), formerly an insurance agency,
was acquired in 1994 in connection with the Company's acquisition of Central
State Bank - see below. On December 29, 1995, the insurance agency operations of
First Bank Insurance were divested. From December 1995 until October 1999, First
Bank Insurance was an inactive subsidiary of the Bank. In October 1999, First
Bank Insurance began operations again as a provider of non-FDIC insured
investments and insurance products. First Troy Realty Corporation ("First Troy")
was incorporated on May 12, 1999 as a subsidiary of the Bank. First Troy allows
the Bank to centrally manage a portion of its residential, mortgage, and
commercial real estate loan portfolio.
The Company was incorporated in North Carolina on December 8, 1983, as
Montgomery Bancorp, for the purpose of acquiring 100% of the outstanding common
stock of the Bank through stock-for-stock exchanges. On December 31, 1986, the
Company changed its name to First Bancorp to conform its name to the name of the
Bank, which had changed its name from Bank of Montgomery to First Bank in 1985.
The Bank was organized in 1934 and began banking operations in 1935 as the
Bank of Montgomery, named for the county in which it operated. With its 1995
acquisition of the Laurinburg and Rockingham offices of First Scotland Bank and
its 1994 acquisition of Central State Bank , High Point, North Carolina, the
Bank operates in a 14 county area centered in Troy, North Carolina. Troy,
population 3,400, is located in the center of Montgomery County, approximately
60 miles east of Charlotte, 50 miles south of Greensboro, and 80 miles southwest
of Raleigh. The Bank conducts business from 34 branches located within an
80-mile radius of Troy, covering a geographical area from Maxton to the
southeast, to High Point to the north, Kannapolis to the west, and Lillington to
the east. Ranked by assets, the Bank was the 16th largest bank in North Carolina
as of December 31, 1999, according to the North Carolina Office of the
Commissioner of Banks.
The Bank has three de novo branches scheduled to open in 2000. The Bank
plans to open branches in March or April of 2000 in Pittsboro, Chatham County,
North Carolina and Salisbury, Rowan County, North Carolina. The Bank plans to
open a branch in Apex, Wake County, North Carolina in the fall of 2000.
The Bank provides a full range of banking services, including the accepting
of demand and time deposits, the making of secured and unsecured loans to
individuals and businesses, and the offering of credit cards and debit cards. In
1999, as in recent prior years, the Bank accounted for substantially all of the
Company's consolidated net income.
The Company's principal executive offices are located at 341 North Main
Street, Troy, North Carolina 27371-0508, and its telephone number is (910)
576-6171. Unless the context otherwise requires, references to the "Company" in
this annual report on Form 10-K shall mean collectively First Bancorp and its
subsidiaries.
4
General Business
The Bank engages in a full range of banking activities, providing such
services as checking, savings, NOW and money market accounts and other time
deposits of various types; loans for business, agriculture, real estate,
personal uses, home improvement and automobiles; credit cards; debit cards;
letters of credit; IRA's; safe deposit box rentals; bank money orders; and
electronic funds transfer services, including wire transfers, automated teller
machines, and bank-by-phone capabilities. Because the majority of the Bank's
customers are individuals and small to medium-sized businesses located in the
counties it serves, deposits and loans are well diversified. There are no
seasonal factors that tend to have any material effect on the Bank's business,
and the Bank does not rely on foreign sources of funds or income.
First Bank Insurance was an inactive subsidiary of the Bank from December
1995 until October 1999. Beginning in October 1999, First Bank Insurance began
offering non-FDIC insured investment and insurance products, including mutual
funds, annuities, long-term care insurance, life insurance, and company
retirement plans, as well as financial planning services. First Bank Insurance
collects commissions for the services it provides. Commissions earned during
October to December 1999 were less than $10,000. The line item entitled
"Commissions from sales of insurance" in Table 4 and in the Consolidated
Statements of Income is primarily comprised of commissions from the Bank's sale
of credit life insurance associated with loans it originates.
Montgomery Data's primary business is to provide electronic data
processing services for the Bank, which accounted for approximately 97% of its
data processing revenue in 1999 compared to 99% of its data processing revenues
in 1998 and 82% in 1997. Ownership and operation of Montgomery Data allows the
Company to do all of its electronic data processing without paying fees for such
services to an independent provider. Maintaining its own data processing system
also allows the Company to adapt the system to its individual needs and to the
services and products it offers. Although not a significant source of income,
Montgomery Data has historically made its excess data processing capabilities
available to area financial institutions for a fee. The Company had one
nonaffiliated customer in 1996 and for the first eleven months of 1997, at which
time the customer terminated its contract as a result of being acquired by
another institution and paid an early termination fee. The Company 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 start-up
bank. This customer contributed approximately $40,000 in fees during 1999. In
March 1999, Montgomery Data was contracted to perform limited item processing
services for another de novo bank in the area at an annual rate that is
currently approximately $12,000.
First Bancorp Financial was organized under the name of First Recovery in
September of 1988 for the purpose of providing a back-up data processing site
for Montgomery Data and other financial and non-financial clients. First
Recovery's back-up data processing operations were divested in 1994. First
Bancorp Financial now owns and leases the First Recovery building. First Bancorp
Financial periodically purchases parcels of real estate from the Bank that were
acquired through foreclosure. The parcels purchased consist of real estate
having various purposes. First Bancorp Financial actively pursues the sale of
these properties.
First Troy was incorporated on May 12, 1999 as a subsidiary of the Bank.
First Troy allows the Bank to centrally manage a portion of its residential,
mortgage, and commercial real estate loan portfolio. First Troy has elected to
be treated as a real estate investment trust for tax purposes.
Territory Served and Competition
The Company serves primarily the south central area of the Piedmont region
of North Carolina, with offices in Anson, Cabarrus, Chatham, Davidson, Guilford,
Harnett, Lee, Montgomery, Moore, Randolph, Richmond, Robeson, Scotland and
Stanly counties. The Company's headquarters are located in Troy, Montgomery
County. The Company's 34 branches and facilities are all located in small
communities whose economies are based primarily on manufacturing and light
industry. Although the Company's market is predominantly small communities and
rural areas, the area is not dependent on agriculture. Textiles, furniture,
mobile homes, electronics, plastic and metal fabrication, forest products, food
products and cigarettes are among the leading
5
manufacturing industries in the trade area. Leading producers of socks, hosiery
and area rugs are located in Montgomery County. The Pinehurst area is a widely
known golf resort and retirement area. The High Point area is widely known for
its furniture market. Additionally, several of the communities served by the
Company are "bedroom" communities serving Charlotte and Greensboro in addition
to smaller cities such as Albermarle, Asheboro, High Point, Pinehurst and
Sanford.
The banking laws of North Carolina allow state-wide branching, and
consequently commercial banking in the state is highly competitive. The Company
competes in its various market areas with, among others, several large
interstate bank holding companies that are headquartered in North Carolina.
These large competitors have substantially greater resources than the Company,
including broader geographic markets, higher lending limits and the ability to
make greater use of large-scale advertising and promotions. A significant number
of interstate banking acquisitions have taken place in the past decade, thus
further increasing the size and financial resources of some of the Company's
competitors, four of which are among the largest bank holding companies in the
nation. See "Supervision and Regulation" below for a further discussion of
regulations in the Company's industry that affect competition.
The Company competes not only against banking organizations, but also
against a wide range of financial service providers, including federally and
state chartered savings and loan institutions, credit unions, investment and
brokerage firms and small-loan or consumer finance companies. Competition among
financial institutions of all types is virtually unlimited with respect to legal
ability and authority to provide most financial services. However, the Company
believes it has certain advantages over its competition in the areas it serves.
The Company seeks to maintain a distinct local identity in each of the
communities it serves and actively sponsors and participates in local civic
affairs. Most lending and other customer-related business decisions can be made
without delays often associated with larger systems. Additionally, employment of
local managers and personnel in various offices and low turnover of personnel
enable the Company to establish and maintain long-term relationships with
individual and corporate customers.
Lending Policy and Procedures
Conservative lending policies and procedures and appropriate underwriting
standards are high priorities of the Bank. Loans are approved under the Bank's
written loan policy, which provides that lending officers, principally branch
managers, have sole authority to approve loans of various amounts up to $75,000.
Each of the Bank's regional senior lending officers has sole discretion to
approve secured loans in principal amounts up to $250,000 and together can
approve loans up to $1,000,000. Lending limits may vary depending upon whether
the loan is secured or unsecured.
The Bank's board of directors reviews and approves loans that exceed
management's lending authority, loans to officers, directors, and their
affiliates and, in certain instances, other types of loans. New credit
extensions are reviewed daily by the Bank's senior management and at least
monthly by the board of directors.
The Bank continually monitors its loan portfolio to identify areas of
concern and to enable management to take corrective action. Lending officers and
the board of directors meet periodically to review past due loans and portfolio
quality, while assuring that the Bank is appropriately meeting the credit needs
of the communities it serves. Individual lending officers are responsible for
pursuing collection of past-due amounts and monitoring any changes in the
financial status of the borrowers.
The Bank's internal audit department evaluates specific loans and overall
loan quality at individual branches as part of its regular branch reviews. The
internal audit department also maintains its own estimate of the required amount
of allowance for loan losses needed for the overall Company which is compared to
the loan department's estimate for consistency. See "Allowance for Loan Losses
and Loan Loss Experience" in Item 7 below.
The Bank also contracts with an independent consulting firm to review new
loan originations meeting certain criteria, as well as assign risk grades to
existing credits meeting certain thresholds. The consulting firm's
6
observations, comments and risk grades are shared with the Company's audit
committee of the board of directors, and are considered by management in setting
Bank policy, as well as in evaluating the adequacy of the allowance for loan
losses.
Investment Policy and Procedures
The Company has adopted an investment policy designed to optimize the
Company's income from funds not needed to meet loan demand in a manner
consistent with appropriate liquidity and risk objectives. Pursuant to this
policy, the Company may invest in federal, state and municipal obligations,
federal agency obligations, public housing authority bonds, industrial
development revenue bonds, Federal National Mortgage Association ("FNMA"),
Government National Mortgage Association ("GNMA") and Student Loan Marketing
Association ("SLMA") securities. The policy also contains maximum amounts that
the Company can invest in certain types of securities, including, at December
31, 1999, a maximum of $30 million that can be invested in certain
collateralized mortgage obligations and mortgage-backed securities. The
Company's investments must be rated at least BAA by Moody's or BBB by Standard
and Poor's. Securities rated below A are periodically reviewed for
creditworthiness. The Company may purchase non-rated municipal bonds only if
such bonds are in the Company's general market area and determined by the
Company to have a credit risk no greater than the minimum ratings referred to
above. Industrial development authority bonds, which normally are not rated, are
purchased only if they are judged to possess a high degree of credit soundness
to assure reasonably prompt sale at a fair value.
The Company's investment officers implement the investment policy, monitor
the investment portfolio, recommend portfolio strategies, and report to the
Company's investment committee. Reports of all purchases, sales, net profits or
losses and market appreciation or depreciation of the bond portfolio are
reviewed by the Company's board of directors each month. Once a quarter, the
Company's interest rate risk exposure is monitored by the board of directors.
Once a year, the written investment policy is reviewed by the board of directors
and the Company's portfolio is compared with the portfolios of other companies
of comparable size.
All of the Company's securities are kept in safekeeping accounts at
correspondent banks.
Recent Acquisitions
As part of its operations, the Company regularly evaluates the potential
acquisition of or merger with, and holds discussions with, various financial
institutions.
On December 16, 1999, in a joint press release, First Bancorp and First
Savings Bancorp, Inc. (First Savings) announced the signing of a definitive
merger agreement, the basic terms of which call for the Company to issue 1.2468
shares of its stock in exchange for each share of First Savings stock. First
Savings is a savings institution headquartered in Southern Pines, North Carolina
with six offices and $330 million in total assets as of December 31, 1999. As of
the same date, First Savings had $224 million in loans and $232 million in
deposits. The merger is expected to be consummated in the second quarter of
2000.
On November 14, 1997, the Bank acquired a First Union National Bank branch
located in Lillington, North Carolina. Real and personal property acquired
totaled approximately $237,000 and deposits assumed totaled approximately
$14,345,000. No loans were included in the purchase.
On December 15, 1995, the Bank completed a cash acquisition of the
Laurinburg and Rockingham branch offices of First Scotland Bank. As of December
15, 1995, assets acquired were approximately $15.8 million. The acquisition
included earning assets of approximately $14.2 million, of which approximately
$8.9 million were loans. Deposit liabilities assumed were approximately $15
million.
On August 25, 1994, the Company completed a cash acquisition of Central
State Bank in High Point, North Carolina. Central State, a North Carolina
state-chartered commercial bank, had approximately $35 million in assets at the
time of the acquisition, with earning assets of approximately $32 million,
including approximately $27
7
million in loans. Central State also had approximately $32 million in deposits
at the time of the merger.
Employees
As of December 31, 1999, the Company had 254 full-time and 49 part-time
employees. The Company is not a party to any collective bargaining agreements
and considers its employee relations to be good.
Supervision and Regulation
As a bank holding company, the Company is subject to supervision,
examination and regulation by the Board of Governors of the Federal Reserve
System and the North Carolina Office of the Commissioner of Banks. The Bank is
subject to supervision and examination by the Federal Deposit Insurance
Corporation and the North Carolina Office of the Commissioner of Banks. See also
note 14 to the consolidated financial statements.
Supervision and Regulation of the Company
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
required to register as such with the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board" or "FRB"). The Company also is regulated by
the North Carolina Office of the Commissioner of Banks (the "Commissioner")
under the Bank Holding Company Act of 1984.
A bank holding company is required to file with the Federal Reserve Board
quarterly reports and other information regarding its business operations and
those of its subsidiaries. It is also subject to examination by the Federal
Reserve Board and is required to obtain Federal Reserve Board approval prior to
making certain acquisitions of other institutions or voting securities. The
Commissioner is empowered to regulate certain acquisitions of North Carolina
banks and bank holding companies, issue cease and desist orders for violations
of North Carolina banking laws, and promulgate rules necessary to effectuate the
purposes of the Bank Holding Company Act of 1984.
Regulatory authorities have cease and desist powers over bank holding
companies and their nonbank subsidiaries where their actions would constitute a
serious threat to the safety, soundness or stability of a subsidiary bank. Those
authorities may compel holding companies to invest additional capital into
banking subsidiaries upon acquisition or in the event of significant loan losses
or rapid growth of loans or deposits.
On November 12, 1999, President Clinton signed into law legislation that
allows bank holding companies to engage in a wider range of non-banking
activities, including greater authority to engage in securities and insurance
activities. Under the Gramm-Leach-Bliley Act (the "Act"), a bank holding company
that elects to become a financial holding company may engage in any activity
that the Federal Reserve Board, in consultation with the Secretary of the
Treasury, determines by regulation or order is (i) financial in nature, (ii)
incidental to any such financial activity, or (iii) complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. This Act
makes significant changes in U.S. banking law, principally by repealing certain
restrictive provisions of the 1933 Glass-Steagall Act. The Act specifies certain
activities that are deemed to be financial in nature, including lending,
exchanging, transferring, investing for others, or safeguarding money or
securities; underwriting and selling insurance; providing financial, investment,
or economic advisory services; underwriting, dealing in or making a market in,
securities; and any activity currently permitted for bank holding companies by
the Federal Reserve Board under Section 4(c)(8) of the Holding Company Act. The
Act does not authorize banks or their affiliates to engage in commercial
activities that are not financial in nature. A bank holding company may elect to
be treated as a financial holding company only if all depository institution
subsidiaries of the holding company are well-capitalized, well-managed and have
at least a satisfactory rating under the Community Reinvestment Act.
National and state banks are also authorized by the Act to engage, through
"financial subsidiaries," in any
8
activity that is permissible for a financial holding company (as described
above) and any activity that the Secretary of the Treasury, in consultation with
the Federal Reserve Board, determines is financial in nature or incidental to
any such financial activity, except (i) insurance underwriting, (ii) real estate
development or real estate investment activities (unless otherwise permitted by
law), (iii) insurance company portfolio investments and (iv) merchant banking.
The authority of a national or state bank to invest in a financial subsidiary is
subject to a number of conditions, including, among other things, requirements
that the bank must be well-managed and well-capitalized (after deducting from
the bank's capital outstanding investments in financial subsidiaries).
The Act also contains a number of other provisions that will affect the
Company's operations and the operations of all financial institutions. One of
the new provisions relates to the financial privacy of consumers, authorizing
federal banking regulators to adopt rules that will limit the ability of banks
and other financial entities to disclose non-public information about consumers
to non-affiliated entities. These limitations will likely require more
disclosure to consumers, and in some circumstances, will require consent by the
consumer before information is allowed to be provided to a third party.
At the present time, the Company does not anticipate applying for status as
a financial holding company under the Act. At this time, no predictions can be
made regarding the impact the Act may have upon the Company's financial
condition or results of operations.
The United States Congress and the North Carolina General Assembly have
periodically considered and adopted legislation that has resulted in, and could
result in further, deregulation of both banks and other financial institutions.
Such legislation could modify or eliminate geographic restrictions on banks and
bank holding companies and current restrictions on the ability of banks to
engage in certain nonbanking activities. For example, the Riegle-Neal Interstate
Banking Act, which was enacted several years ago, allows expansion of interstate
acquisitions by bank holding companies and banks. This and other legislative and
regulatory changes have increased the ability of financial institutions to
expand the scope of their operations, both in terms of services offered and
geographic coverage. Such legislative changes could place the Company in more
direct competition with other financial institutions, including mutual funds,
securities brokerage firms, insurance companies, and investment banking firms.
The effect of any such legislation on the business of the Company cannot be
predicted. The Company cannot predict what other legislation might be enacted or
what other regulations might be adopted or, if enacted or adopted, the effect
thereof on the Company's business.
Supervision and Regulation of the Bank
Federal banking regulations applicable to all depository financial
institutions, among other things, (i) provide federal bank regulatory agencies
with powers to prevent unsafe and unsound banking practices; (ii) restrict
preferential loans by banks to "insiders" of banks; (iii) require banks to keep
information on loans to major shareholders and executive officers; and (iv) bar
certain director and officer interlocks between financial institutions.
As a state chartered bank, the Bank is subject to the provisions of the
North Carolina banking statutes and to regulation by the Commissioner. The
Commissioner has a wide range of regulatory authority over the activities and
operations of the Bank, and the Commissioner's staff conducts periodic
examinations of banks and their affiliates to ensure compliance with state
banking regulations. Among other things, the Commissioner regulates the merger
and consolidations of state-chartered banks, the payment of dividends, loans to
officers and directors, recordkeeping, types and amounts of loans and
investments, and the establishment of branches. The Commissioner also has cease
and desist powers over state-chartered banks for violations of state banking
laws or regulations and for unsafe or unsound conduct that is likely to
jeopardize the interest of depositors.
The dividends that may be paid by the Bank to the Company are subject to
legal limitations under the North Carolina law. In addition, the regulatory
authorities may restrict dividends that may be paid by the Bank or the Company's
other subsidiaries. The ability of the Company to pay dividends to its
shareholders is largely dependent on the dividends paid to the Company by its
subsidiaries.
9
The Bank is a member of the Federal Deposit Insurance Corporation (the
"FDIC"), which currently insures the deposits of member banks. For this
protection, each bank pays a quarterly statutory assessment, based on its level
of deposits, and is subject to the rules and regulations of the FDIC. The FDIC
also is authorized to approve conversions, mergers, consolidations and
assumptions of deposit liability transactions between insured banks and
uninsured banks or institutions, and to prevent capital or surplus diminution in
such transactions where the resulting, continuing, or assumed bank is an insured
nonmember bank. In addition, the FDIC monitors the Bank's compliance with
several banking statutes, such as the Depository Institution Management
Interlocks Act and the Community Reinvestment Act of 1977. The FDIC also
conducts periodic examinations of the Bank to assess its compliance with banking
laws and regulations, and it has the power to implement changes in or
restrictions on a bank's operations if it finds that a violation is occurring or
is threatened.
Neither the Company nor the Bank can predict what other legislation might
be enacted or what other regulations might be adopted, or if enacted or adopted,
the effect thereof on the Bank's operations.
See "Capital Resources" under Item 7 - Management's Discussion and Analysis
below for a discussion of regulatory capital requirements.
Item 2. Properties
The main offices of the Company, the Bank and First Bancorp Financial
are located in a three-story building in the central business district of Troy,
North Carolina. The building houses administrative, training and bank teller
facilities. The Bank's Operations Division, including customer accounting
functions, offices and operations of Montgomery Data, and offices for loan
operations, are housed in a one-story steel frame building approximately
one-half mile west of the main office. The Company operates 34 branches and
facilities, including the main office, in the trade area as follows: Troy - main
office and one additional full service branch and one teller-window facility;
Albemarle, Asheboro, and Sanford - two full service branches in each; Pinehurst
- - one full service branch and one teller-window facility; Aberdeen, Angier,
Archdale, Biscoe, Bennett, Candor, Denton, High Point, Kannapolis, Laurel Hill,
Laurinburg, Lillington, Locust, Maxton, Pinebluff, Polkton, Richfield, Robbins,
Rockingham, Seagrove, Seven Lakes, Southern Pines, and Vass - one full service
branch in each. The Company owns all its premises except eight branch offices
for which the land and buildings are leased and one branch office for which the
land is leased but the building is owned. There are no other options to purchase
or lease additional properties. The Company considers its facilities adequate to
meet current needs.
Item 3. Legal Proceedings
Various legal proceedings may arise in the ordinary course of business and
may be pending or threatened against the Company and/or its subsidiaries. The
Company is not involved in any pending legal proceedings that management
believes could have a material effect on the consolidated financial position of
the Company.
10
Item 4. Submission of Matters to a Vote of Shareholders
No matters were submitted to the shareholders during the fourth quarter of
1999.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters
The Company's common stock trades on the NASDAQ National Market System of
The NASDAQ Stock Market under the symbol FBNC. Tables 1 and 21, included in
"Management's Discussion and Analysis" below, set forth the high and low market
prices of the Company's common stock as traded by the brokerage firms that
maintain a market in the Company's common stock and the dividends declared for
the periods indicated. All per share amounts have been restated from their
originally reported amount to reflect the three-for-two stock split distributed
in September 1999 and the two-for-one stock split that was distributed in
September 1996. See "Business - Supervision and Regulation" and note 14 to the
consolidated financial statements for a discussion of regulatory restrictions on
the payment of dividends. As of February 29, 2000, there were approximately
1,000 shareholders of record and an estimated 800 shareholders whose stock is
held in "street name."
Item 6. Selected Financial Data
Table 1 on page 31 sets forth selected financial data about the Company.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Management's discussion and analysis is intended to assist readers in
understanding the Company's results of operations and changes in financial
position for the past three years. This review should be read in conjunction
with the consolidated financial statements and accompanying notes beginning on
page 43 of this report and the supplemental financial data contained in Tables 1
through 21 included with this discussion and analysis. All per share amounts
have been restated to reflect the three-for-two stock split distributed on
September 13, 1999 to shareholders of record on August 30, 1999 and the
two-for-one stock split distributed on September 13, 1996 to shareholders of
record on August 30, 1996.
Mergers and Acquisitions
On December 16, 1999, in a joint press release, First Bancorp and First
Savings Bancorp, Inc. (First Savings) announced the signing of a definitive
merger agreement, the basic terms of which call for the Company to issue 1.2468
shares of its stock in exchange for each share of First Savings stock. First
Savings is a savings institution headquartered in Southern Pines, North Carolina
with six offices and $330 million in total assets as of December 31, 1999. As of
the same date, First Savings had $224 million in loans and $232 million in
deposits. The merger is expected to be consummated in the second quarter of
2000.
On November 14, 1997, First Bank acquired a First Union National Bank
branch located in Lillington, North Carolina. Deposits assumed totaled
approximately $14,345,000. No loans were included in the purchase.
In the fourth quarter of 1995, First Bank completed a cash acquisition of
the Laurinburg and Rockingham branch offices of First Scotland Bank. Assets
acquired were approximately $15.8 million including earning assets of
approximately $14.2 million, of which approximately $8.9 million were loans.
Deposit liabilities assumed were approximately $15 million.
During the third quarter of 1994, the Company completed a cash acquisition
of Central State Bank in High Point, North Carolina. Central State had
approximately $35 million in assets with earning assets of approximately $32
million, including approximately $27 million in loans. Central State also had
approximately $32 million in deposits.
11
ANALYSIS OF RESULTS OF OPERATIONS
Net interest income, the "spread" between earnings on interest-earning
assets and the interest paid on interest-bearing liabilities, constitutes the
largest source of the Company's earnings. Other factors that significantly
affect operating results are the provision for loan losses, noninterest income
such as service fees and noninterest expenses such as salaries, occupancy
expense, equipment expense and other overhead costs, as well as the effects of
income taxes.
Overview - 1999 Compared to 1998
Net income for the year ended December 31, 1999 was a record $6,619,000, a
16.5% increase over the $5,683,000 reported for 1998. The 1999 net income
amounted to basic earnings per share of $1.46, a 16.8% increase over the $1.25
basic earnings per share in 1998. Diluted earnings per share for 1999 amounted
to $1.43, a 17.2% increase from the $1.22 reported for 1998.
The increase in earnings is primarily a result of the strong recent growth
the Company has experienced in its loan and deposit bases. In 1999, loans grew
by 17.0% and deposits grew by 9.0%. Additionally since January 1, 1998, the
Company's loans have grown by a total of 49.4% and deposits have increased by
32.9%. The effect of recognizing the net interest income on a full twelve months
of the 1998 loan and deposit growth, as well as the incremental impact of the
1999 growth resulted in an increase in net interest income of 11.9% in 1999
compared to 1998. Partially offsetting the effects of the loan and deposit
growth on net interest income was a decrease in the Company's net interest
margin from 5.24% in 1998 to 5.01% in 1999.
Because the Company's asset quality remained sound in 1999, and due to the
lower loan growth experienced in 1999 compared to 1998, the Company's provision
for loan losses of $910,000 in 1999 was slightly less than the $990,000
provision recorded in 1998.
The strong growth in the Company's loan and deposit bases has also driven
the Company's increase in noninterest income by providing access to more
customers to whom the Company can provide fee based services. In 1999, total
noninterest income increased 10.0% from $4,656,000 in 1998 to $5,121,000 in
1999. "Core" noninterest income, which excludes gains and losses from sales of
securities, loans, and other assets, as well as nonrecurrring items, increased
$677,000, or 15.4%, during 1999, from $4,405,000 in 1998 to $5,082,000 in 1999.
Noninterest income not defined as "core" amounted to $39,000 and $251,000 during
1999 and 1998, respectively, and is discussed in more detail below.
Noninterest expenses increased $1,904,000, or 12.0%, from $15,912,000 in
1998 to $17,816,000 in 1999. These higher operating expenses were experienced in
all areas of the Company's operations and are associated with the growth in the
Company's branch network and customer base.
The Company's income taxes increased 6.6% from $3,059,000 in 1998 to
$3,260,000 in 1999. The Company's effective tax rate decreased in 1999 to 33.0%
from 35.0% in 1998. The reduction in the effective tax rate is largely due to
the favorable state tax treatment of the real estate investment trust (First
Troy).
Overview - 1998 Compared to 1997
Net income for 1998 amounted to $5,683,000, a 13.4% increase over the
$5,012,000 earned in 1997. The 1998 net income amounted to $1.25 basic earnings
per share, a 12.6% increase over the $1.11 basic earnings per share in 1997.
Earnings per share on a diluted basis amounted to $1.22 in 1998 compared to
$1.08 in 1997, an increase of 13.0%. 1998 results included $227,000 (pretax) in
gains from commercial loan sales, which had not been common from a historical
perspective but were the type of gain that could occur again under certain
circumstances (and did occur, though to a lesser extent, in 1999). 1997 results
included $168,000 (pretax) in
12
nonrecurring income related to the receipt of an early termination fee for a
data processing contract.
A primary contributor to the growth in earnings during 1998 was a 16.1%
increase in the Company's net interest income. This increase was a result of
strong growth in loans and deposits. Partially offsetting the effects on
earnings of the loan and deposit growth was a decrease in the Company's net
interest margin and a higher provision for loan losses. The increase in the
provision for loan losses from $575,000 in 1997 to $990,000 in 1998 was
primarily attributable to the significant loan growth experienced by the
Company, and not because of concerns about the Company's asset quality.
Also contributing to the growth in earnings was a 12.2% increase in the
Company's noninterest income, which grew from $4,150,000 in 1997 to $4,656,000
in 1998, an increase of $506,000. Core noninterest income increased $387,000, or
9.6%, during 1998, from $4,018,000 in 1997 to $4,405,000 in 1998. Noninterest
income not defined as "core" amounted to $251,000 and $132,000 during 1998 and
1997, respectively, and is discussed in more detail below.
Noninterest expenses increased $1,824,000, or 12.9%, from $14,088,000 in
1997 to $15,912,000 in 1998. These higher operating expenses were experienced in
all areas of the Company's operations and were associated with the growth in the
Company's branch network and customer base.
Net Interest Income
Net interest income on a taxable-equivalent basis amounted to $24,058,000
in 1999, $21,649,000 in 1998, and $18,808,000 in 1997.
Table 2 analyzes net interest income on a taxable-equivalent basis. The
Company's net interest income on a taxable-equivalent basis increased by 11.1%
in 1999 and 15.1% in 1998. These increases in net interest income were primarily
a result of increases in the amount of average loans and deposits outstanding
when comparing 1999 to 1998 and 1998 to 1997. In 1999, the average amount of
loans outstanding grew by 18.7%, while the average amount of deposits increased
by 14.3%. In 1998, the average amount of loans outstanding increased 32.5% and
the average amount of deposits outstanding increased 23.8%.
The effects of the increases in average loans and deposits on
taxable-equivalent net interest income in both 1999 and 1998 were partially
offset by an overall narrowing of the Company's interest rate spread. The
Company's net interest margin (net yield on average interest-earning assets)
decreased 23 basis points to 5.01% in 1999 compared to 5.24% in 1998. 1998's
yield of 5.24% was 41 basis points lower than the 5.65% margin realized in 1997.
The Company's interest rate spread (the difference between the yield on
interest-earning assets and the rate paid on interest-bearing liabilities) also
declined with a decrease of 16 basis points in 1999 to 4.41% from 4.57% in 1998.
1998's interest rate spread of 4.57% was 39 basis points lower than the 4.96%
realized in 1997. Part of the reason for the Company's narrowing net interest
margin in 1999 was due to the Company's Y2K liquidity plan that was implemented
in the fourth quarter of 1999. The Company estimates that excluding the effects
of the excess liquidity called for by the plan that the net interest margin for
1999 would have been 5.06% and the interest rate spread would have been 4.46%.
Average interest rates over the past two years have been lower than the
immediately preceding year. The average prime rate in 1999 was 8.00% compared to
8.35% in 1998 and 8.44% in 1997. The lower interest rates have resulted in lower
yields earned on interest earning assets, as well as lower rates paid on
interest-bearing liabilities. However, over the past two years, the Company's
yields on its interest-earning assets have decreased by more than the average
rates paid on interest-bearing liabilities.
In 1999, the average loan yield decreased 44 basis points from 9.27% in
1998 to 8.83% in 1999. The 1998 yield of 9.27% was 40 basis points lower than
the 9.67% yield in 1997. The Company believes that there are two likely reasons
that the Company's loan yield has decreased at a greater rate than interest
rates in general. First, the Company's loan mix has experienced a continuing
slight shift from loans not secured by real estate to loans
13
secured by real estate. As Table 10 illustrates, loans secured by real estate
(construction and mortgage) as a percentage of the overall loan portfolio have
increased from 73.14% of the total portfolio at year end 1997 to 76.55% at year
end 1998 to 78.38% at year end 1999. The Company's loans secured by real estate
generally carry lower interest rates than loans not secured by real estate
because they typically are judged to have a lower risk of credit loss than loans
not secured by real estate. The disproportionate growth in loans secured by real
estate is associated with a strategic effort by the Company to more fully
leverage its balance sheet and branch network. The Company's average loans and
deposits per branch has historically been and continues to be low when compared
with industry averages. In the last two to three years, the Company has
implemented a high growth strategy to better leverage its branch network and
provide higher returns on shareholders' equity. This strategy has resulted in
the Company targeting higher balance loans, loans for which the Company
generally requires real estate as collateral. As noted above, loans secured by
real estate generally carry lower interest rates than loans not secured by real
estate. While lower interest rate loans have negatively impacted the Company's
net interest margin yields, they have incrementally added to the Company's
earnings. The second reason for decreasing loan yields has been that a
substantial amount of the Company's loan growth has occurred in markets that are
highly competitive. While the Company operates in some markets where competition
is more limited, a large percentage of the Company's loan growth in the past two
to three years has been in growing markets in the state where the Company faces
intense competition and must price its loans accordingly.
The yields the Company earns on its investment portfolio have also
declined. The yield earned on the Company's taxable investments, the large
majority of the Company's portfolio, declined from 6.72% in 1997 to 6.37% in
1998 to 5.75% in 1999. This decrease over the past two years has been due to the
lower trend in interest rates in the bond market and has been accelerated by
issuer calls of securities that had call options.
The average rates paid on interest-bearing liabilities have decreased less
than the decreases in yields on interest-earning assets. In 1999, the average
rate paid on interest bearing liabilities was 3.89%, or 26 basis points less
than the 4.15% average rate paid in 1998. The 1998 rate was 12 basis points
higher than the average rate paid of 4.03% in 1997. The primary reasons that
rates paid on interest bearing liabilities have not decreased at the same pace
as the decreases in yields on interest earning assets are that the Company has
more competitively priced its deposits to fund its strong loan growth and a
higher reliance on time deposits greater than $100,000 and borrowed funds, both
of which generally carry higher interest rates. In 1997, the average balance of
time deposits greater than $100,000 and borrowings comprised 12.6% of total
average interest-bearing liabilities. In 1998, this percentage increased to
15.7% and in 1999 the percentage further increased to 19.5%. The increase in the
reliance on time deposits greater than $100,000 and borrowed funds has been
necessary because of the need to fund the strong loan growth, the lower growth
rates of the other liabilities that have lower interest rates, and the strategy
to leverage the Company's branches discussed above.
Changes in total interest income and total interest expense result from
changes in both volumes and rates in the related earning asset and
interest-bearing liability categories. Table 3 shows the quantitative effects on
net interest income of the changes in volumes and rates experienced by the
Company. As discussed above and illustrated in Table 3, changes in volumes have
been the primary cause of changes in the amounts of interest income and interest
expense recorded by the Company.
See additional information regarding net interest income on page 24 in the
section entitled "Interest Rate Risk."
14
Provision for Loan Losses
The provision for loan losses charged to operations is an amount sufficient
to bring the allowance for loan losses to an estimated balance considered
adequate to absorb probable losses inherent in the portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, current economic conditions, historical loan loss experience and
other risk factors.
The Company made provisions for loan losses of $910,000 in 1999 compared to
$990,000 in 1998 and $575,000 in 1997. The changes in the provisions for loan
losses over the past three years have been primarily due to variances in new
loan volumes experienced, and not due to changes in the Company's asset quality.
Net loan growth in 1999 amounted to $60.8 million compared to $77.8 million in
1998. As discussed in the section entitled "Nonperforming Assets" below, asset
quality ratios for 1999 were very consistent with those for 1998. The Company's
$77.8 million in net loan growth in 1998 was substantially more than the $57.5
million originated in 1997 and resulted in the increase in the provision for
loan losses despite the improved asset quality ratios in 1998 compared to 1997.
See the section entitled "Allowance for Loan Losses and Loan Loss
Experience" below for a more detailed discussion of the allowance for loan
losses. The allowance is monitored and analyzed regularly in conjunction with
the Bank's loan analysis and grading program, and adjustments are made to
maintain an adequate allowance for loan losses.
Noninterest Income
Noninterest income recorded by the Company amounted to $5,121,000 in 1999,
$4,656,000 in 1998, and $4,150,000 in 1997.
The 10.0% increase in 1999 noninterest income compared to 1998 was driven
by a $677,000, or 15.4%, increase in the amount of core noninterest income
earned by the Company. Core noninterest income, which excludes gains and losses
from sales of securities, loans, and other assets, as well as nonrecurrring
items, increased from $4,405,000 in 1998 to $5,082,000 in 1999. The 12.2%
increase in total noninterest income from 1997 to 1998 was also driven largely
by an increase in core noninterest income. Core noninterest income increased
$387,000, or 9.6% in 1998 compared to 1997. Noninterest income not defined as
"core" amounted to a net of $39,000 in 1999, $251,000 during 1998, and $132,000
in 1997.
See Table 4 and the following discussion for an understanding of the
components of noninterest income.
Service charges on deposit accounts increased $240,000 or 9.2% in 1999
after increasing $182,000, or 7.5%, in 1998. The 1999 increase was due primarily
to a higher service fee schedule that was implemented in March 1999, as well as
an increase in deposit accounts. The 1998 increase was due to the growth in
deposits. However, excluding the effects of the higher fee schedule, service
charges on deposit accounts have not increased at the same rate as deposits over
the last two years. The Company believes that this is primarily due to the mix
of the Company's deposit growth. The growth in transaction accounts, which
includes demand, savings, and money market deposits and generates the majority
of these fees, has not been as great as the growth in time deposits, which have
fewer related fees. Additionally, the dollar increases that have occurred in the
outstanding balance of transaction accounts have been more heavily concentrated
in a fewer number of accounts with large balances as a result of the Company's
growth strategy discussed above.
Other service charges, commissions, and fees increased by $283,000, or
27.5% in 1999, after increasing by $259,000, or 33.7% in 1998. This category of
noninterest income includes items such as safety deposit box rentals, check
cashing fees, credit card and merchant income, and ATM surcharges. This category
of income grew primarily because of increases in these transaction-related fee
services as a result of overall growth in the Company's customer base. Increases
in fees earned from surcharges levied on non-customer ATM transactions, which
began in March 1998, also enhanced the growth in this category of income. ATM
surcharge revenue
15
amounted to $176,000 in 1999 and $142,000 in 1998, and is helping to defray the
significant capital investment and maintenance expense incurred on ATM machines.
Fees that the Company earns from presold mortgage loans grew by $85,000 in
1999, or 15.8% after increasing by $253,000, or 89.1% during 1998. The lower
interest rate environment experienced over the past two years, which has been
conducive to mortgage loan refinancings, was largely responsible for the
increase in these fees. Due to the rising interest rate environment toward the
end of 1999, the amount of these fees decreased substantially in the fourth
quarter of 1999 and lower levels of these fees will likely continue into the
year 2000.
Commissions from insurance sales increased by $24,000 in 1999 after
decreasing by $38,000 in 1998. The 1999 increase was due to a $24,000
"experience bonus" paid to the Company from the company that provides the credit
life insurance that the Company earns commissions from selling. This payment was
due to favorable loss experience on credit insurance policies that the Company
sold. The amount of this payment is computed annually and is dependent on the
amount of losses that result from policies that the Company sells and thus may
be more or less than the 1999 amount in future years. The Company did not
receive an experience bonus in 1998 or 1997. The $35,000 decrease in commissions
from insurance sales in 1997 was a result of lower commission fee rates
negotiated with brokers, as well as a higher percentage of the Company's
customers utilizing their home equity lines of credit to finance consumer
purchases versus obtaining consumer installment loans, where the Company has
typically sold more insurance policies.
Data processing fees amounted to $50,000 in 1999, $5,000 in 1998, and
$274,000 in 1997. As noted earlier, Montgomery Data makes its excess data
processing capabilities available to area financial institutions for a fee.
Montgomery Data had one nonaffiliated customer for the first eleven months of
1997, at which time the customer terminated its contract as a result of being
acquired by another institution. This customer was responsible for the $274,000
in data processing fees earned in 1997. 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. This
customer was charged $5,000 in December 1998 and $40,000 for the year of 1999 in
data processing services. In March 1999, Montgomery Data was contracted to
perform limited item processing services for another de novo bank in the area at
an annual rate that is currently approximately $12,000. Montgomery Data earned
$10,000 from this customer in 1999.
Noninterest income not defined as "core" amounted to a net of $39,000 in
1999, $251,000 during 1998, and $132,000 in 1997. The primary reason for the
variance between 1999 and 1998 was fewer gains from commercial loan sales.
During 1998, the Company sold approximately $6.4 million in newly originated
commercial loans that resulted in gains of $227,000. These sales were executed
primarily to manage the significant loan growth experienced in 1998, as well as
to maintain a proper balance between the amount of loans and deposits that the
Company maintains. In 1999, loan growth slowed and the Company did not believe
it was necessary to sell as many commercial loans as in 1998. In 1999, $3.7
million in commercial loan sales were made at a total gain of $34,000. In 1997,
noninterest income not classified as "core" was primarily comprised of an early
termination fee in the amount of $168,000 that Montgomery Data received from the
bank discussed above that terminated its data processing contract with
Montgomery Data prematurely.
Noninterest Expenses
Noninterest expenses for 1999 were $17,816,000, a 12.0% increase over the
1998 amount of $15,912,000. The 1998 amount was 12.9% higher than the
$14,088,000 incurred in 1997. Table 5 presents the components of the Company's
noninterest expense during the past three years.
The increases in noninterest expenses in the past two years occurred in
almost all categories and were due primarily to the Company's growth. The
Company incurred higher expenses in order to properly process, manage, and
service the 49% increase in loans and 33% increase in deposits that have
occurred over the past two years.
16
Personnel expense, the single largest component of noninterest expense,
increased 12.2% in 1999 and 15.3% during 1998. These increases were primarily
due to additional employees associated with the Company's growth, as well as
normal annual wage increases. The total number of employees of the Company
increased 6% in 1999 and 8% in 1998. Also included in noninterest expenses in
1999 are professional fees and other expenses totaling approximately $268,000
incurred in connection with the Company's 1999 formation of First Troy, a
subsidiary formed as a real estate investment trust that allows the Company to
centrally manage a portion of its residential, mortgage, and commercial real
estate loan portfolio.
Income Taxes
The provision for income taxes was $3,260,000 in 1999, $3,059,000 in 1998,
and $2,549,000 in 1997. The 6.6% increase in tax expense in 1999 compared to
1998 is a result of a 13.0% increase in pretax income, which was largely offset
by a decrease in the Company's effective tax rate from 35.0% in 1998 to 33.0% in
1999. The reduction in the effective tax rate for 1999 is largely due to the
favorable state tax treatment of the real estate investment trust (First Troy).
The 20% increase in tax expense in 1998 compared to 1997 is a result of a
16% increase in pretax income, as well as an increase in the Company's effective
tax rate from 33.7% in 1997 to 35.0% in 1998. The increase in the Company's
effective tax rate occurred as a result of the Company deriving a smaller
percentage of its earnings from tax-exempt securities.
Table 6 presents the components of tax expense and the related effective
tax rates.
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
The following discussion focuses on the factors considered by management to
be important in assessing the Company's financial condition. The Company's
assets and deposits continued strong growth rates that began in 1997, reflecting
growth in existing markets and expansion into new geographic areas. As
previously noted, over the past two years, the Company's loans have grown by
49.4% and deposits have grown by 32.9%. Growth rates over the past three years
have been 87.9% for loans and 61.2% for deposits.
Total assets were $559.4 million at December 31, 1999, an increase of 13.7%
over December 31, 1998. Assets during 1998 grew to $491.8 million at year end, a
22.1% increase over the $402.7 million at December 31, 1997. Interest-earning
assets amounted to $519.6 million at December 31, 1999, a 14.2% increase over
the amount at December 31, 1998. Interest-earning assets at December 31, 1998
were $454.9 million, an increase of 23.3% over the $369.0 million held at
December 31, 1997. Loans, the primary interest-earning asset, grew 17.0% in 1999
and 27.7% in 1998, with a total of $419.2 million at December 31, 1999.
Deposits were the primary funding source in 1999 and 1998 for the growth in
loans. Deposits increased 9.0%, or $39.8 million, during 1999, amounting to
$480.0 million at year end. In 1998, deposits grew 21.9%, or $79.0 million, to
$440.3 million at year end.
The Company's assets, loans, and deposits experienced compound annual
growth rates of approximately 14.1%, 17.7%, and 13.2%, respectively, over the
last five years ended December 31, 1999.
Distribution of Assets and Liabilities
Table 7 sets forth the percentage relationships of significant components
of the Company's balance sheets at December 31, 1999, 1998, and 1997. The most
significant variance in this table is the shift in asset mix over the past two
years from securities to loans that is primarily due to strong loan growth that
was partially funded with proceeds from securities maturities and sales.
17
Securities
Information regarding the Company's securities portfolio as of December 31,
1999, 1998, and 1997 is presented in Tables 8 and 9. Total securities available
for sale and held to maturity amounted to $71.8 million, $77.3 million, and
$71.1 million at December 31, 1999, 1998, and 1997, respectively. The decrease
in securities in 1999 was primarily due to two reasons - 1) the Company's
decision not to reinvest security paydowns and maturities during the last four
months of 1999 as part of the Company's Y2K liquidity plan and 2) security
proceeds were used to help fund loan growth, which exceeded deposit growth in
1999. Because of the uncertainty regarding possible increased customer
withdrawals of deposits due to Y2K fears, the Company's Y2K liquidity plan
called for, among other things, the Company not to reinvest proceeds from
security paydowns and maturities into additional securities, but rather to
invest the proceeds in highly liquid overnight interest-bearing accounts. The
second reason for the decrease in securities at year end was loan growth that
exceeded deposit growth, which required using securities to partially fund the
loan growth. As previously noted, loan growth during 1999 was $60.8 million
compared to deposit growth of $39.8 million.
The increase in securities at December 31, 1998 compared to December 31,
1997 was largely due to the Company purchasing approximately $19 million in
securities during the fourth quarter of 1998. Until the fourth quarter of 1998,
because of the relatively flat yield curve, the Company maintained its excess
cash in overnight investments. With the steepening of the yield curve that
occurred with the three successive 25 basis point rate cuts by the Federal
Reserve beginning in early October 1998, management of the Company purchased
securities to realize the higher yield that could be obtained from securities
versus overnight investments.
Average total securities were approximately $74.8 million during 1999
compared to $65.0 million during 1998 and $75.7 million in 1997. The higher
average balance in securities during 1999 was due to the effects of the $19
million in securities that the Company purchased in the fourth quarter of 1998.
The lower average balance in securities during 1998 compared to 1997 was due to
the Company holding more cash in overnight investments versus investing in
securities for most of the year for the reasons discussed above.
The composition of the securities portfolios at December 31, 1999 compared
to 1998 reflects the Company's decision not to reinvest proceeds received from
paydowns, calls, and maturities of the Company's mortgage-backed security
portfolio during the last four months of the year as part of the Company's Y2K
liquidity plan, as discussed above. Comparing 1998 to 1997 reflects a shift from
U.S. Treasuries and Government Agencies to higher yielding mortgage-backed
securities, including collateralized mortgage obligations. Included in
mortgage-backed securities at December 31, 1999 were collateralized mortgage
obligations with an amortized cost of $10,955,000 and a fair value of
$10,824,000. Included in mortgage-backed securities at December 31, 1998 were
collateralized mortgage obligations with an amortized cost of $16,656,000 and a
fair value of $16,620,000.
At December 31, 1999, net unrealized losses of $1,941,000 were included in
the carrying value of securities classified as available for sale compared to
net unrealized gains of $60,000 and $282,000 at December 31, 1998 and 1997,
respectively. The generally higher bond interest rate environment in effect at
each of the past two year ends has been the primary factor in the decline in the
fair value of the Company's available for sale securities compared to their
cost. Management evaluated any unrealized losses on individual securities at
each year end and determined them to be of a temporary nature and caused by
fluctuations in market interest rates, not by concerns about the ability of the
issuers to meet their obligations. Net unrealized gains (losses), net of
applicable deferred income taxes, of ($1,184,000), $37,000, and $186,000, have
been reported as a separate component of shareholders' equity as of December 31,
1999, 1998, and 1997, respectively.
The fair value of securities held to maturity, which the Company carries at
amortized cost, was less than the carrying value at December 31, 1999 by
$152,000, while their fair value exceeded their carrying value by $743,000 at
December 31, 1998, and $656,000 at December 31, 1997. Management evaluated any
unrealized losses on individual securities at each year end and determined them
to be of a temporary nature and caused by fluctuations in market interest rates,
not by concerns about the ability of the issuers to meet their obligations.
Table 9 provides detail as to scheduled contractual maturities and book
yields on securities available for sale
18
and securities held to maturity at December 31, 1999. Mortgage-backed securities
are shown in the time periods consistent with their estimated life based on
expected prepayment speeds. Approximately 77% of the available for sale
portfolio has a maturity date within 5 years. The weighted average life of the
available for sale portfolio using the maturity date for non-mortgage-backed
securities, and the expected life for mortgage-backed securities, was 4.1 years.
In the rate environment in effect at December 31, 1999, none of the Company's
callable bonds in the available for sale portfolio are expected to be called,
and thus the expected life of the portfolio is also 4.1 years. The weighted
average taxable-equivalent yield for the securities available for sale portfolio
was 6.06% at December 31, 1999.
The weighted average life of the securities held to maturity portfolio
based on maturity dates was 5.9 years at December 31, 1999 with a weighted
average taxable-equivalent yield of 7.53%. If above-market callable bonds are
assumed to be called on their call date, the weighted average maturity of the
held to maturity portfolio drops slightly to 5.7 years.
As of December 31, 1999 and 1998, the Company held no investment securities
of any one issuer, other than U.S. Treasury and U.S. Government agencies or
corporations, in which aggregate book values and market values exceeded 10% of
shareholders' equity. Other than the collateralized mortgage obligations
previously discussed, the Company owned no securities considered by regulatory
authorities to be derivative instruments.
Loans
Table 10 provides a summary of the loan portfolio composition at each of
the past five year ends.
Loans increased by $60.8 million, or 17.0%, in 1999 to $419.2 million from
the $358.3 million held at December 31, 1998. The 1998 year end amount was $77.8
million, or 27.7%, higher than the $280.5 million balance at December 31, 1997.
The majority of the 1999 and 1998 loan growth occurred in loans secured by
real estate, with approximately $54.3 million, or 89.2% in 1999 and $69.1
million, or 88.9%, in 1998 of the net loan growth occurring in real estate
mortgage or real estate construction loans. In 1999, real estate mortgage loans
grew 24.3%, real estate construction loans decreased 9.8%, commercial,
financial, and agricultural (CF&A) loans grew 11.7%, and installment loans to
individuals grew 1.5%. In 1998, real estate mortgage loans grew 27.9%, real
estate construction loans grew 89.2%, CF&A loans grew 15.4%, and installment
loans to individuals grew 5.6%. For four out of the past five years, CF&A loans
have comprised a lower percentage of the loan portfolio, and for five straight
years, installment loans to individuals have decreased in relation to the
overall portfolio. As discussed above in the section entitled "Net Interest
Income", this shift from non-real estate to real estate loans has been partially
due to a strategic shift towards higher dollar loans, which tend to be secured
by real estate in most cases, in order to more quickly leverage the Bank's
balance sheet and branch network. As noted earlier, the shift to a higher
percentage of real estate loans has contributed to the decrease in the Bank's
loan yields and net interest margin, as real estate loans generally carry lower
interest rates than non-real estate loans.
A large portion of the Company's loan portfolio has historically been
comprised of loans secured by various types of real estate. At December 31,
1999, $328.7 million or 78.38% of the Company's loan portfolio was secured by
liens on real property. Included in this total are $157.6 million, or 37.6% of
total loans, in credit secured by liens on 1-4 family residential properties and
$171.1 million, or 40.8% of total loans, in credit secured by liens on other
types of real estate.
Table 11 provides a summary of scheduled loan maturities over certain time
periods, with fixed rate loans and adjustable rate loans shown separately.
Approximately 30% of the Company's loans outstanding at December 31, 1999 mature
within one year and 82% of total loans mature within five years. These
percentages are approximately the same as they were at December 31, 1998. The
percentages of variable rate loans and fixed rate loans as compared to total
performing loans were 41.4% and 58.6%, respectively, as of December 31, 1999
compared to 46.5% and 53.5%, respectively, as of December 31, 1998. The Company
intentionally makes a blend of fixed and
19
variable rate loans so as to reduce interest rate risk. The yield on performing
loans as of December 31, 1999 was 8.79% compared to 8.63% at December 31, 1998
and 9.23% at December 31, 1997. The increase in the yield at December 31, 1999
compared to a year earlier is due to an increase in the prime rate of interest
of 75 basis points during 1999. The lower yield at December 31, 1998 compared to
December 31, 1997 is primarily due to a 75 basis point lowering of the prime
rate during 1998. Both years were affected by the Company's general trend,
beginning in the second half of 1997, of originating larger balance real estate
loans with slightly lower yields as discussed previously.
See additional information regarding interest rate risk on page 24 in the
section entitled "Interest Rate Risk."
Nonperforming Assets
Nonperforming assets include nonaccrual loans, loans past due 90 or
more days and still accruing interest, restructured loans and other real estate.
As a matter of policy the Company places all loans that are past due 90 or more
days on nonaccrual basis, and thus there were no such loans at any of the past
five year ends that were 90 days past due and still accruing interest. Table 12
summarizes the Company's nonperforming assets at the dates indicated.
Nonaccrual loans are loans on which interest income is no longer being
recognized or accrued because management has determined that the collection of
interest is doubtful. The placing of loans on nonaccrual status negatively
impacts earnings because (i) interest accrued but unpaid as of the date a loan
is placed on nonaccrual status is either deducted from interest income or is
charged-off, (ii) future accruals of interest income are not recognized until it
becomes highly probable that both principal and interest will be paid and (iii)
principal charged-off, if appropriate, may necessitate additional provisions for
loan losses that are charged against earnings. 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 (which includes nonaccrual loans and restructured
loans) as of December 31, 1999, 1998 and 1997 totaled $852,000, $849,000, and
$1,283,000, respectively. Nonperforming loans as a percentage of total loans
amounted to 0.20%, 0.24%, and 0.46%, at December 31, 1999, 1998, and 1997,
respectively. Although the amount of nonperforming loans at December 31, 1999 of
$852,000 is almost the same as the $849,000 from a year earlier, as it relates
to the nonaccrual loans, virtually all of the borrowers comprising the
nonaccrual balance are different between the two year ends, reflecting the
resolution of 1998's nonaccrual loans via payoff, charge-off, or return to
accrual status. The decrease in nonperforming loans from 1997 to 1998 was
primarily due to improved overall loan quality, as well as the pay-out of a
$230,000 loan in the first quarter of 1998 that was on nonaccrual status at
December 31, 1997. The decrease in nonperforming loans at December 31, 1997 as
compared to December 31, 1996 is primarily attributable to the resolution of
several relationships that resulted in partial charge-offs during the year, as
well as generally improved loan quality. The increase in nonperforming loans at
December 31, 1996 compared to December 31, 1995 was largely due to $1,300,000
more in loans on nonaccrual status that were assumed in corporate acquisitions
occurring in 1994 and 1995. These nonaccrual loans that were originated by other
institutions amounted to $1,461,000 at December 31, 1996 compared to $161,000 at
December 31, 1995. As of December 31, 1999, the largest nonaccrual balance to
any one borrower was $124,000, with the average balance for the 23 nonaccrual
loans being approximately $26,000.
If the nonaccrual loans and restructured loans as of December 31, 1999,
1998 and 1997 had been current in accordance with their original terms and had
been outstanding throughout the period (or since origination if held for part of
the period), gross interest income in the amounts of approximately $58,000,
$60,000 and $91,000 for nonaccrual loans and $27,000, $25,000 and $34,000 for
restructured loans would have been recorded for 1999, 1998 and 1997,
respectively. Interest income on such loans that was actually collected and
included in net income in 1999, 1998 and 1997 amounted to approximately $22,000,
$22,000 and $32,000 for nonaccrual loans (prior to their being placed on
nonaccrual status) and $24,000, $24,000 and $25,000 for restructured loans,
respectively.
In addition to the nonperforming loan amounts included above, management
believes that an estimated
20
$1,000,000-$1,500,000 of loans that are currently performing in accordance with
their contractual terms may potentially develop problems depending upon the
particular financial situations of the borrowers and economic conditions in
general. Management has taken these potential problem loans into consideration
when evaluating the adequacy of the allowance for loan losses at December 31,
1999 (see discussion below).
Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been disclosed in the problem loan amounts and the
potential problem loan amounts discussed 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.
Other real estate includes foreclosed, repossessed, and idled properties.
Other real estate totaled $906,000 at December 31, 1999 compared to $505,000 at
December 31, 1998, and $560,000 at December 31, 1997. Other real estate
represented 0.16%, 0.10%, and 0.14% of total assets at the end of 1999, 1998,
and 1997, respectively. The increase in the level of other real estate at
December 31, 1999 when compared to the prior two year ends primarily relates 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.
Allowance for Loan Losses and 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, evaluation of probable inherent losses and current economic
conditions.
The Company uses a loan analysis and grading program to facilitate its
evaluation of probable inherent 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 potential credit weaknesses,
loans past due 90 days or more, nonaccrual loans and any other loans identified
during previous regulatory and other examinations.
.
The Company strives to maintain its loan portfolio in accordance with what
management believes are conservative loan underwriting policies that result in
loans specifically tailored to the needs of the Company's market areas. Every
effort is made to identify and minimize the credit risks associated with such
lending strategies. 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
loans captioned in the tables discussed below as "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 allowance for loan losses amounted to $6,078,000 at December 31, 1999
compared to $5,504,000 as of December 31, 1998 and $4,779,000 at December 31,
1997. This represented 1.45%, 1.54%, and 1.70%, of loans outstanding as of
December 31, 1999, 1998, and 1997, respectively. The allowance for loan losses
as a percentage of total loans has been gradually decreasing since its high of
2.81% at September 30, 1994. The September 30, 1994 high of 2.81% was an
increase from the 1.79% ratio at June 30, 1994 due primarily to an addition to
the allowance of $2.5 million that was recorded in the third quarter of 1994 in
connection with a corporate acquisition in which a higher risk loan portfolio
was acquired. The general decrease in the ratio of allowance for loan losses to
21
total loans since then has been largely due to charge-offs associated with that
portfolio, strong recent loan growth, as well as generally improved overall loan
quality. As noted in Table 12, the Company's allowance for loan losses as a
percentage of nonperforming loans amounted to 713.38% at December 31, 1999,
compared to 648.29% at December 31, 1998 and 372.49% at December 31, 1997.
Table 13 sets forth the allocation of the allowance for loan losses at the
dates indicated. The portion of these reserves that was allocated to specific
loan types in the loan portfolio increased from $4,220,000 at December 31, 1998
to $4,647,000 at December 31, 1999. The December 31, 1998 allocated amount of
$4,220,000 was an increase from the December 31, 1997 amount of $3,789,000. The
increase in the allocated amounts for both years was primarily due to growth in
the Company's loan portfolio. In addition to the allocated portion of the
allowance for loan losses, the Company maintains an unallocated portion that is
not assigned to any specific category of loans, but rather is intended to
reserve for the inherent risk in the overall portfolio and the intrinsic
inaccuracies associated with the estimation of the allowance for loan losses and
its allocation to specific loan categories. The general increase in the
unallocated portion of the allowance for loan losses has been consistent with
overall loan growth.
Management considers the allowance for loan losses adequate to cover
probable loan losses on the loans outstanding as of each reporting date. It must
by emphasized, however, that the determination of the allowance 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 amount 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 allowances for loan losses and
losses on foreclosed real estate. Such agencies may require the Company to
recognize additions to the allowances based on the examiners' judgments about
information available to them at the time of their examinations.
For the years indicated, Table 14 summarizes the Company's balances of
loans outstanding, average loans outstanding, changes in the allowance arising
from charge-offs and recoveries by category, and additions to the allowance that
have been charged to expense. The Company's net loan charge offs were
approximately $336,000 in 1999, $265,000 in 1998, and $522,000 in 1997. This
represents 0.09%, 0.08%, and 0.21% of average loans during 1999, 1998, and 1997,
respectively.
Deposits
The average amounts of deposits of the Company for the years ended December
31, 1999, 1998 and 1997 are presented in Table 15. Average deposits grew $56.7
million or 14.3% in 1999 to $453.6 million. Average deposits for 1998 grew by
23.8% over the 1997 average to $397.0 million.
Average time deposits greater than $100,000 have experienced the highest
percentage growth of any of the deposit categories in each of the past two
years. In 1999, average time deposits greater than $100,000 increased $16.3
million or 31.4%, while in 1998 these deposits increased $17.0 million, or
48.6%. The primary reason for the high growth within this category of deposits
is that the Company began more competitively pricing this category of deposits
in order to help fund the strong loan growth experienced both years and to
leverage the branch network, as has been discussed previously. The Company also
priced time deposits greater than $100,000 especially competitively toward the
end of 1999 in order to provide funding for potential Y2K related withdrawals.
While not as high as the growth rates of time deposits greater than $100,000,
the growth in the other categories of deposits has been strong over the past two
years. Average interest-bearing demand deposits increased 12.4% in 1999 and
17.4% in 1998. Average savings deposits increased 15.3% in 1999 and 19.9% in
1998. Average interest-bearing time deposits increased 11.4% in 1999 and 23.4%
in 1998. Average noninterest-bearing demand deposits increased 8.5% in 1999 and
21.1% in 1998.
22
The Company's growth in deposits did not keep pace with its growth in loans
during 1999. Comparing year ends, total loan growth in 1999 was $60.8 million,
while deposit growth was $39.8 million. The Company attributes this trend
partially to Y2K deposit withdrawals or non-deposits. However, the Company also
believes that due to increased competition from sources that can more easily
take deposits than can originate loans (such as brokerage houses, internet
banks, and the stock market in general), this trend is likely to continue.
Accordingly, the Company anticipates that in order to continue to provide
funding for loan growth, rates paid on deposits will continue to rise in
comparison to the general market, and alternative funding sources such as
long-term borrowings may be necessary.
As noted in the net interest income section above, the average yield on the
Company's interest-bearing deposits did not decrease in 1999 as much as the
average interest rate environment in general. This is primarily due to the
Company having a higher mix of time deposits greater than $100,000 for the
reasons noted above. The average rates paid in the various individual deposit
categories in 1999 generally tracked the lower market interest rates in effect
during most of 1999 compared to 1998. The average interest rate paid on
interest-bearing demand deposits decreased 41 basis points during 1999 from
2.23% to 1.82%. The average interest rate paid on savings accounts decreased
only 13 basis points during 1999 to 2.34% from 2.47% in 1998. This lower rate of
decrease in the average rate paid is associated with this category achieving a
majority of its growth in the highest rate savings account that the Company
offers - the preferred savings account. The average rate paid on time deposits
decreased 32 basis points in 1999 from 5.34% to 5.02%, while the average rate
paid on time deposits greater than $100,000 decreased 40 basis points in 1999,
from 5.91% to 5.51%.
In 1998, despite a slightly lower interest rate environment compared to
1997, three of the four categories of interest-bearing deposits experienced
increases in the average rates paid and the fourth, interest-bearing demand
deposits, only experienced a 4 basis point decrease. This was largely due to two
reasons - 1) the Company priced all of its deposits more competitively in an
attempt to fund the significant loan growth experienced in 1998, and 2) as it
relates to the interest-bearing demand deposits and the savings deposits
categories, the majority of the growth within these two categories was within
the highest yielding account types within these categories.
The Company has a large, stable base of time deposits with little
dependence on volatile public deposits of $100,000 or more. The time deposits
are principally certificates of deposit and individual retirement accounts
obtained from individual customers. Deposits of local governments and municipal
entities represented 3.9% of the Company's total deposits at December 31, 1999.
All such public funds are collateralized by investment securities. The Company
does not purchase brokered deposits.
As of December 31, 1999, the Company held approximately $81,831,000 in time
deposits of $100,000 or more and other time deposits of $173,319,000. Table 16
is a maturity schedule of time deposits of $100,000 or more as of December 31,
1999. This table shows that 85.4% of the Company's time deposits greater than
$100,000 mature within one year.
23
Borrowings
The Company has three sources of borrowing capacity - 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 (FRB) discount window. The Company did not obtain any
long-term borrowings under these any of these credit lines during 1999, 1998 or
1997.
The Company's line of credit with the FHLB totaling approximately
$62,000,000 can be structured as either short-term or long-term borrowings,
depending on the particular funding or liquidity need, and is secured by the
Company's FHLB stock and a blanket lien on its one-to-four family residential
loan portfolio. During 1999 and 1998, the Company periodically used this line of
credit as a short-term, overnight borrowing to meet internally targeted
liquidity levels that carried an interest rate that was approximately 25 basis
points higher than the national discount rate. In addition, on October 29, 1999,
the Company obtained a three month $15,000,000 borrowing from the FHLB at a
fixed interest rate of 5.98% in connection with the Company's Y2K liquidity
plan. At December 31, 1999, a total of $30,000,000 was outstanding under the
FHLB line of credit, $15,000,000 of which was the three month borrowing at 5.98%
and $15,000,000 which was an overnight, adjustable rate borrowing that had an
interest rate of 4.55% on December 31, 1999. There was no amount outstanding
under this line of credit at December 31, 1998 or 1997.
The Company also has a correspondent bank relationship established that
allows the Company to purchase up to $15,000,000 in federal funds on an
overnight, unsecured basis. The Company had no borrowings under this line at
December 31, 1999. At December 31, 1998, the Company had $6,000,000 outstanding
under this arrangement at an interest rate of approximately 5.25%.
During 1999, the Company established a line of credit totaling
approximately $27,000,000 with the FRB discount window. This line is secured by
a blanket lien on a portion of the Company's commercial, consumer and real
estate portfolio (not including 1-4 family). This line of credit was established
primarily in connection with the Company's Y2K liquidity contingency plan. This
line of credit was not drawn on during 1999, and subsequent to December 31,
1999, the FRB has stated that it does not expect lines of credit that have been
granted to financial institutions to be a primary borrowing source. The Company
plans to maintain this line of credit, although it is not expected that it will
be drawn upon except in unusual circumstances.
The total amount of average borrowings was $11,211,000 in 1999 compared to
$2,523,000 in 1998 and $55,000 in 1997. The general increase in the amount of
borrowings that the Company has had outstanding has been associated with strong
loan growth that the Company has experienced, which has outpaced deposit growth.
As noted in "Deposits" above, the Company expects it to be increasingly
difficult to fund all loan growth with deposits. Accordingly, the Company
expects average borrowings to continue to increase. Additionally, in the future
the Company may structure a portion of its borrowings as long-term depending on
market conditions.
Interest Rate Risk (Including Quantitative and Qualitative Disclosures
About Market Risk - Item 7A.)
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
24
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.
Table 17 sets forth the Company's interest rate sensitivity analysis as of
December 31, 1999, using stated maturities for all instruments except
mortgage-backed securities which are shown as a lump sum in the period
consistent with their weighted average estimated life. As illustrated by this
table, the Company has $147.8 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 December 31, 1999 subject to interest rate changes within one
year are deposits totaling $164.3 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 85% of interest-earning assets
subject to repricing within five years and all interest-bearing liabilities
subject to repricing within five years.
The net interest margin for the fourth quarter of 1999 was 4.88% and
for the year of 1999 it was 5.01%. However, the fourth quarter ratio was
impacted by approximately 20 basis points and the percentage for the year was
impacted by approximately 5 basis points as a result of the Company's Y2K
liquidity plan, which called for the Company to increase its short-term
borrowings in order to provide more immediate liquidity to fund potentially high
rates of deposit withdrawals. The 20 and 5 basis point amounts only consider the
effects of the additional borrowings on the net interest margin and do not
include the related impact on the net interest margin of pricing the Company's
time deposits and time deposits greater than $100,000 more aggressively in order
to enhance liquidity. The remainder of this analysis will discuss the net
interest margin in terms of 5.08% for the fourth quarter of 1999 and 5.06% for
the year of 1999, the margins the Company believes it would have experienced if
not for the Y2K liquidity plan.
See additional discussion regarding net interest income, as well as
discussion of the changes in the annual net interest margin in the section
entitled "Net Interest Income" above. The following paragraph includes a more
detailed discussion of recent changes in interest rates and the impact that they
have had on the Company's quarterly net interest margin.
In the fourth quarter of 1998, the prime rate of interest decreased by 75
basis points. As of September 30, 1998 and December 31, 1998, although the
Company was liability sensitive in the "3 months or less" horizon, the Company
was significantly more liability sensitive in the "3 to 12 month" horizon, which
reflects maturities of the Company's significant time deposit portfolio. The
primary impact of the decrease in prime rate on the Company's interest earning
assets was that all of the Company's approximately $167 million in adjustable
rate loans (as of September 30, 1998) immediately repriced downward by 75 basis
points. On the interest-bearing liabilities side, the component of the Company's
interest bearing liabilities that reprice within three months were primarily the
Company's low interest-bearing deposits - interest-bearing savings, NOW, and
money market deposits - which the Company was not able to reprice downward by
the full 75 basis points. The effect of the different impact that the decrease
in rates had on the Company's assets and liabilities resulted in the Company's
net interest margin initially going down. In the third quarter of 1998, the
Company's net interest margin was 5.14%, while in the fourth
25
quarter of 1998, the net interest margin decreased to 5.03% and in the first
quarter of 1999 the net interest margin further decreased to 4.97%. In the
second quarter of 1999, the Company began to experience the positive effects
that the repricing at lower rates of the Company's time deposit portfolio had on
the net interest margin. The second quarter of 1999 net interest margin
increased to 5.04%. In the third quarter of 1999, the Company continued to
experience the positive effects of the time deposit repricing, and additionally
the prime rate of interest increased by 50 basis points. The general effect of
these increases in interest rates was the opposite of the negative consequences
experienced from the rate cuts discussed above - the Company's adjustable rate
loans immediately repriced by the full 50 basis points, while the Company was
able to maintain a relatively static average rate paid on deposits. These
factors resulted in the Company's net interest margin increasing to 5.16% in the
third quarter of 1999. The decrease in net interest margin to the adjusted 5.08%
in the fourth quarter of 1999 was largely due to a higher percentage of the
Company's deposits being comprised of time deposits greater than $100,000, the
category of deposits that pays the highest rate of interest.
Over the past six quarters, the Company's net interest margin, as adjusted,
has not varied from one quarter to the next by more than 16 basis points, and
the highest net interest margin over those six quarters is within 20 basis
points of the lowest net interest margin over the same time frame. While the
Company can not guarantee stability in its net interest margin in the future, at
this time management does not expect significant fluctuations. However, assuming
a static interest rate environment, the Company does expect that its net
interest margin will continue to experience gradual pressure because of
continued difficulties expected in growing deposits at their historical rate
spreads and at rates sufficient to fund loan growth, which could result in
additional reliance on borrowings (which generally carry higher rates than
deposits). See additional discussion in the section entitled "Deposits" above.
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions. Table 18 presents
the expected maturities of the Company's other than trading market risk
sensitive financial instruments. Table 18 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." 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
December 31, 1999 for instruments with maturities similar to the remaining term
of the portfolios, due to a generally increasing interest rate environment at
year end. The estimated fair value of the Company's time deposits is higher than
its book value due to the highly competitive deposit rates the Company offered
in the fourth quarter of 1999 to fund loan growth and prepare for possible Y2K
withdrawals.
Off-Balance Sheet Risk
In the normal course of business there are various outstanding commitments
and contingent liabilities such as commitments to extend credit, which are not
reflected in the financial statements. As of December 31, 1999, the Company had
outstanding loan commitments of $96,385,000, of which $80,162,000 were at
variable rates and $16,223,000 were at fixed rates. Included in outstanding loan
commitments were unfunded commitments of $36,137,000 on revolving credit plans,
of which $31,799,000 were at variable rates and $4,338,000 were at fixed rates.
Additionally, standby letters of credit of approximately $2,332,000 and $924,000
were outstanding at December 31, 1999 and 1998, respectively. The Company's
exposure to credit loss for the aforementioned commitments in the event of
nonperformance by the party to whom credit or financial guarantees have been
extended is represented by the contractual amount of the financial instruments
discussed above. However, management believes that these commitments represent
no more than the normal lending risk that the Company commits to its borrowers.
If these commitments are drawn, the Company plans to obtain collateral if it is
deemed necessary based on management's credit evaluation of the counter-party.
The types of collateral held varies but may include accounts receivable,
inventory and commercial or residential real estate. Management expects any
draws under existing commitments to be funded through normal operations.
Off-balance-sheet derivative financial instruments include futures,
forwards, interest rate swaps, options contracts, and other financial
instruments with similar characteristics. The Company does not engage in
off-balance-sheet derivatives activities.
26
Return On Assets And Equity
Table 19 shows return on assets (net income divided by average total
assets), return on equity (net income divided by average shareholders' equity),
dividend payout ratio (dividends declared per share divided by net income per
share) and shareholders' equity to assets ratio (average shareholders' equity
divided by average total assets) for each of the years in the three-year period
ended 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. See the section above entitled
"Borrowings" for additional detail about these credit lines.
Although the Company has not historically had to rely on these sources of
credit as a source of liquidity, the Company has experienced an increase in its
loan to deposit ratio over the past three years, from 74.9% at December 31, 1996
to 77.7% at December 31, 1997 to 81.4% at December 31, 1998 to 87.3% at December
31, 1999, as a result of the significant loan growth experienced. This strong
loan growth has reduced the Company's liquidity sources. Beginning in the third
quarter of 1998, although the Company did not have 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 noted in the section entitled
"Deposits" above, 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
27
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 December 31, 1999, 1998 and 1997
in Table 20.
Although the Company has continually exceeded the regulatory thresholds for
"well capitalized" status, the Company's capital ratios steadily declined
throughout 1997 and 1998 as a result of the strong growth the Company
experienced. At December 31 1999, the Company's capital ratios remained
approximately what they were at December 31, 1998 for the following reasons - 1)
while the loan and deposit growth was still strong by historical standards, it
was slower than in the previous two years - loan growth was 17.0% in 1999
compared to 27.7% in 1998 and 25.8% in 1997, while deposit growth was 9.0% in
1999 compared to 21.9% in 1998 and 21.3% in 1997, and 2) exercises of stock
options and issuances of stock into the Company's dividend reinvestment plan
(see below) resulted in $463,000 being added to capital, which more than offset
the $358,000 reduction in capital realized as a result of common stock
repurchases (see below). Although the capital ratios at December 31, 1999
continue to be low compared to historical levels, the Company's Total Risk-Based
Capital to Tier II Risk Adjusted Assets ratio of 10.78%, 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 action plans in place to improve any ratio that falls
below the "well capitalized" threshold.
In December 1998, the Company announced that its board of directors had
authorized stock repurchases for up to 100,000 shares of the Company's common
stock. This authorization was designed to provide the Company flexibility in
managing its capital and enhance shareholder value. Under this authorization,
shares are periodically purchased in the open market, at the discretion of the
Company, to offset share issuances under other plans or when market conditions
are attractive. In 1998, 300 shares of common stock were repurchased at a total
cost of $5,875, or an average cost of $19.58 per share. In 1999, 19,454 shares
were repurchased at a total cost of $358,187, or an average cost of $18.41 per
share.
Prior to January 1999, all shares needed for the dividend reinvestment plan
were purchased by the administrator in the open market. In January 1999, the
Company filed the necessary documents to allow it a choice of how shares are
purchased in the Company's dividend reinvestment plan. By filing the required
documents, the Company is allowed the option, depending on capital needs and
market conditions, of selling newly-issued shares into the plan at the
prevailing market price. From March 1999 through October 1999, the Company chose
the option of selling newly issued shares into the plan. A total of 16,159
shares were issued into the plan, resulting in proceeds of $296,244, or an
average sales price of $18.33 per share.
See "Supervision and Regulation" under "Business" above and note 14 to the
consolidated financial statements for discussion of other matters that may
affect the Company's capital resources.
28
Y2K Issue
The Company successfully addressed the Y2K issue through implementation
of a systematic, disciplined plan. Other than the time and costs involved in
preparing for Y2K, the Company is not aware of any negative consequences
involving the Company itself, its suppliers, or its customers as a result of the
Y2K issue. The Company spent a total of $105,000 during 1998 and 1999 preparing
for Y2K as follows - $20,000 in the third quarter of 1998, $12,000 in the fourth
quarter of 1998, $26,000 in the first quarter of 1999, $12,000 in the second
quarter of 1999, $21,000 in the third quarter of 1999 and $14,000 in the fourth
quarter of 1999.
The Y2K costs noted above only include direct external costs associated
with Y2K readiness, and do not include any amounts attributable to the
significant time that management and the staff of the Company spent planning,
preparing and testing for Y2K. The Y2K costs discussed in the paragraph above
also do not include estimates of the monetary impact to the Company's net
interest income as a result of the increased liquidity called for by the
Company's Y2K plan and implemented in the fourth quarter of 1999 - see
discussion of the impact of these costs in the sections entitled "Net Interest
Income" and "Interest Rate Risk" above. Although funding of the Y2K project
costs came from normal operating cash flow, the external expenses associated
with the Y2K issue directly reduced otherwise reported net income for the
Company.
Inflation
Since the assets and liabilities of a bank are primarily monetary in nature
(payable in fixed determinable amounts), the performance of a bank is affected
more by changes in interest rates than by inflation. Interest rates generally
increase as the rate of inflation increases, but the magnitude of the change in
rates may not be the same. The effect of inflation on banks is normally not as
significant as its influence on those businesses that have large investments in
plant and inventories. During periods of high inflation, there are normally
corresponding increases in the money supply, and banks will normally experience
above average growth in assets, loans and deposits. Also, general increases in
the price of goods and services will result in increased operating expenses.
Current Accounting Matters
The Company prepares its financial statements and related disclosures in
conformity with standards established by, among others, the Financial Accounting
Standards Board (the "FASB"). Because the information needed by users of
financial reports is dynamic, the FASB frequently issues new rules and proposed
new rules for companies to apply in reporting their activities.
The FASB 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. 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 discussion in Part I of this report contains statements that could be
deemed forward-looking statements within the meaning of Section 21E of the
29
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.
30
- ----------------------------------------------------------------------------------------------------------------------------------
Table 1 Selected Consolidated Financial Data
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, Five-Year
($ in thousands, except per share ------------------------------------------------------------ Compound
and nonfinancial data) 1999 1998 1997 1996 1995 Growth
-------- ------ ------ ------ ------ ----
Income Statement Data (1)
Interest income $ 39,294 35,344 29,197 25,468 23,106 15.8%
Interest expense 15,810 14,356 11,123 9,916 8,953 20.4%
Net interest income 23,484 20,988 18,074 15,552 14,153 13.2%
Provision for loan losses 910 990 575 325 900 18.6%
Net interest income after provision 22,574 19,998 17,499 15,227 13,253 13.0%
Noninterest income 5,121 4,656 4,150 4,446 3,777 9.2%
Noninterest expense 17,816 15,912 14,088 13,113 14,868 9.4%
Income before income taxes 9,879 8,742 7,561 6,560 2,162 19.0%
Income taxes 3,260 3,059 2,549 2,213 580 23.1%
Net income 6,619 5,683 5,012 4,347 1,582 17.2%
- ----------------------------------------------------------------------------------------------------------------------------------
Per Share Data (1) (2)
Earnings - basic $ 1.46 1.25 1.11 0.96 0.35 17.2%
Earnings - diluted 1.43 1.22 1.08 0.95 0.35 16.7%
Cash dividends declared 0.45 0.40 0.35 0.29 0.23 15.6%
Dividend payout per basic share 30.82% 32.00% 31.53% 30.21% 65.71% -1.4%
Market Price
High $ 20.00 28.00 23.33 13.00 9.83 21.1%
Low 13.31 16.00 12.33 7.67 6.83 17.3%
Close 16.50 19.33 23.33 12.33 8.50 18.7%
Stated book value 9.65 8.94 8.11 7.34 6.70 8.6%
Tangible book value 8.50 7.65 6.68 6.06 5.30 11.2%
- ----------------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data (at year end)
Securities $ 71,808 77,280 71,133 76,265 69,397 1.4%
Loans 419,163 358,334 280,513 223,032 211,522 17.7%
Allowance for loan losses 6,078 5,504 4,779 4,726 4,587 3.9%
Intangible assets 5,261 5,843 6,487 5,834 6,306 -3.5%
Total assets 559,447 491,838 402,669 335,450 321,739 14.1%
Deposits 480,023 440,266 361,224 297,861 287,715 13.2%
Total shareholders' equity 43,942 40,494 36,765 33,232 30,277 8.8%
----------------------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Assets $512,557 443,214 359,879 326,221 296,400 13.9%
Loans 386,365 325,477 245,596 217,900 192,035 18.1%
Earning assets 480,111 412,858 333,029 298,308 269,313 14.4%
Deposits 453,641 396,987 320,659 290,510 262,846 13.9%
Interest-bearing liabilities 406,285 345,528 276,148 247,883 225,006 14.8%
Shareholders' equity 42,525 38,946 35,024 31,896 30,461 8.6%
----------------------------------------------------------------------------------------------------------------------------------
Ratios
Return on average equity 15.56% 14.59% 14.31% 13.63% 5.19%
Return on average assets 1.29% 1.28% 1.39% 1.33% 0.53%
Net interest margin (taxable-equivalent basis) 5.01% 5.24% 5.65% 5.45% 5.50%
Shareholders' equity to assets at year end 7.85% 8.23% 9.13% 9.91% 9.41%
Loans to deposits at year end 87.32% 81.39% 77.66% 74.88% 73.52%
Net charge-offs to average loans 0.09% 0.08% 0.21% 0.09% 0.79%
----------------------------------------------------------------------------------------------------------------------------------
Nonfinancial Data
Number of employees (full/part time) 254/49 245/41 228/37 213/29 201/25
Number of banking offices 34 35 33 30 30
----------------------------------------------------------------------------------------------------------------------------------
(1) 1997 results include a fourth quarter nonrecurring gain of $168,000 before
tax, or $103,000 after tax ($0.02 per share), related to a customer's early
termination fee of a data processing contract. 1996 results include a
nonrecurring net gain of $211,000 before tax, or $128,000 after tax ($0.03
per share), from the third quarter 1996 sale of a branch office and a
vacated building. 1995 results include nonrecurring net charges of
$2,691,000 before tax, or $1,638,000 after tax (or $0.36 per share), from
the fourth quarter settlement of litigation and unrelated severance
expenses for two senior managers. 1995 results also include pretax
noninterest expenses of $789,000 related to the litigation settlement.
(2) Per share amounts for 1998 and before have been restated to reflect the
three-for-two stock split distributed in September 1999. Per share amounts
for 1995 have been restated to reflect the two-for-one stock split
distributed in September 1996.
31
- ------------------------------------------------------------------------------------------------------------------------------------
Table 2 Average Balances and Net Interest Income Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------ ------------------------------
Interest Interest Interest
Average Average Earned Average Average Earned Average Average Earned
Volume Rate or Paid Volume Rate or Paid Volume Rate or Paid
------ ---- ------- ------ ---- ------- ------ ---- -------
($ in thousands)
Assets
Loans (1) $386,365 8.83% $34,120 $325,477 9.27% $30,186 $245,596 9.67% $23,754
Taxable securities 56,912 5.75% 3,271 45,496 6.37% 2,898 53,710 6.72% 3,610
Non-taxable securities (2) 17,907 8.18% 1,464 19,474 8.71% 1,696 21,994 8.74% 1,923
Short-term investments,
principally federal funds 18,927 5.35% 1,013 22,411 5.47% 1,225 11,729 5.49% 644
-------- ------- -------- ------- -------- -------
Total interest-
earning assets 480,111 8.30% 39,868 412,858 8.72% 36,005 333,029 8.99% 29,931
------ ------- -------
Cash and due from banks 17,394 14,659 12,748
Bank premises and
equipment, net 9,591 8,783 8,096
Other assets 5,461 6,914 6,006
-------- -------- --------
Total assets $512,557 $443,214 $359,879
======== ======== ========
Liabilities and Equity
Savings, NOW and money
market deposits $163,097 1.96% 3,202 $144,133 2.29% 3,305 122,063 2.31% 2,820
Time deposits >$100,000 68,128 5.51% 3,755 51,836 5.91% 3,063 34,872 5.75% 2,004
Other time deposits 163,849 5.02% 8,230 147,036 5.34% 7,845 119,158 5.28% 6,296
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits 395,074 3.84% 15,187 343,005 4.14% 14,213 276,093 4.03% 11,120
Short-term borrowings 11,211 5.56% 623 2,523 5.67% 143 55 5.45% 3
-------- ------- -------- ------- -------- -------
Total interest-
bearing liabilities 406,285 3.89% 15,810 345,528 4.15% 14,356 276,148 4.03% 11,123
------- ------- -------
Non-interest-
bearing deposits 58,567 53,982 44,566
Other liabilities 5,180 4,758 4,141
Shareholders' equity 42,525 38,946 35,024
-------- -------- --------
Total liabilities and
shareholders' equity $512,557 $443,214 $359,879
======== ======== ========
Net yield on interest-
earning assets and
net interest income 5.01% $24,058 5.24% $21,649 5.65% $18,808
======= ======= =======
Interest rate spread 4.41% 4.57% 4.96%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Average loans include nonaccruing loans, the effect of which is to lower
the average rate shown. Interest earned includes recognized loan fees in
the amounts of $378,000, $642,000, and $583,000 for 1999, 1998, and 1997,
respectively.
(2) Includes tax-equivalent adjustments of $574,000, $661,000, and $734,000 in
1999, 1998, and 1997 respectively, to reflect the federal and state benefit
of the tax-exempt securities, reduced by the related nondeductible portion
of interest expense.
32
- -------------------------------------------------------------------------------------------------------------------------
Table 3 Volume and Rate Variance Analysis
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 Year Ended December 31, 1998
--------------------------------- --------------------------------
Change Attributable to Change Attributable to
---------------------- ----------------------
Total Total
Changes Changes Increase Changes Changes Increase
in Volumes in Rates (Decrease) in Volumes in Rates (Decrease)
---------- -------- ---------- ---------- -------- ----------
(In thousands)
Interest income (tax-equivalent):
Loans $ 5,512 (1,578) 3,934 $ 7,567 (1,135) 6,432
Taxable securities 692 (319) 373 (538) (174) (712)
Non-taxable securities (132) (100) (232) (220) (7) (227)
Short-term investments, principally
federal funds sold (188) (24) (212) 585 (4) 581
Total interest income ------- ------- ------- ------- ------- -------
5,884 (2,021) 3,863 7,394 (1,320) 6,074
------- ------- ------- ------- ------- -------
Interest expense:
Savings, NOW and money
market deposits 404 (507) (103) 508 (23) 485
Time deposits>$100,000 930 (238) 692 989 70 1,059
Other time deposits 871 (486) 385 1,480 69 1,549
------- ------- ------- ------- ------- -------
Total interest-bearing deposits 2,205 (1,231) 974 2,977 116 3,093
Short-term borrowings 488 (8) 480 137 3 140
------- ------- ------- ------- ------- -------
Total interest expense 2,693 (1,239) 1,454 3,114 119 3,233
------- ------- ------- ------- ------- -------
Net interest income $ 3,191 (782) 2,409 $ 4,280 (1,439) 2,841
======= ======= ======= ======= ======= =======
(1) Changes attributable to both volume and rate are allocated equally between
rate and volume variances.
- ------------------------------------------------------------------------------------------------------------------------------------
Table 4 Noninterest Income
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------
(In thousands) 1999 1998 1997
---- ---- ----
Service charges on deposit accounts $ 2,835 2,595 2,413
Other service charges, commissions, and fees 1,311 1,028 769
Fees from presold mortgages 622 537 284
Commissions from insurance sales 264 240 278
Data processing fees 50 5 274
-------- ----- -----
Total core noninterest income 5,082 4,405 4,018
Loan sale gains 34 227 -
Securities gains (losses), net 20 29 (12)
Other losses, net (15) (5) (24)
Other - nonrecurring net gains - - 168
-------- ----- -----
Total $ 5,121 4,656 4,150
======== ===== =====
- ------------------------------------------------------------------------------------------------------------------------------------
Table 5 Noninterest Expenses
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------
(In thousands) 1999 1998 1997
---- ---- ----
Salaries $ 7,909 7,127 6,225
Employee benefits 1,837 1,563 1,315
---------- ------- ------
Total personnel expense 9,746 8,690 7,540
Net occupancy expense 1,165 1,017 954
Equipment related expenses 1,133 918 858
Amortization of intangible assets 636 655 546
Stationery and supplies 839 786 756
Telephone 482 455 424
Non-credit losses 37 194 17
Other operating expenses 3,778 3,197 2,993
---------- ------- ------
Total $ 17,816 15,912 14,088
========== ====== ======
33
- ------------------------------------------------------------------------------------------------------------------------------------
Table 6 Income Taxes
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
---- ---- ----
Current - Federal $ 3,339 2,466 2,321
- State 83 413 290
Deferred - Federal (162) 180 (62)
---------- ---------- ------
Total $ 3,260 3,059 2,549
========== ========== ======
Effective tax rate 33.0% 35.0% 33.7%
========== ========== ======
- ------------------------------------------------------------------------------------------------------------------------------------
Table 7 Distribution of Assets and Liabilities
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Assets
Interest-earning assets
Net loans 74 % 72 % 69 %
Securities available for sale 10 12 13
Securities held for maturity 3 4 5
Short term investments 5 4 4
----- ----- -----
Total interest-earning assets 92 92 91
Non-interest-earning assets
Cash and due from banks 4 4 4
Premises and equipment 2 2 2
Other assets 2 2 3
----- ----- -----
Total assets 100 % 100 % 100 %
===== ===== =====
Liabilities and shareholders' equity
Demand deposits - noninterest bearing 11 % 13 % 13 %
Savings, NOW, and money market deposits 29 33 34
Time deposits of $100,000 or more 15 12 10
Other time deposits 31 32 33
----- ----- -----
Total deposits 86 90 90
Short-term borrowings 5 1 -
Accrued expenses and other liabilities 1 1 1
----- ----- -----
Total liabilities 92 92 91
Shareholders' equity 8 8 9
----- ----- -----
Total liabilities and shareholders'equity 100 % 100 % 100 %
===== ===== =====
- ------------------------------------------------------------------------------------------------------------------------------------
Table 8 Securities Portfolio Composition
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31,
------------------------------------------------------
(In thousands) 1999 1998 1997
---- ---- ----
Securities available for sale:
U.S. Treasury $ 514 544 534
U.S. Government agencies 31,873 28,636 38,569
Mortgage-backed securities 19,035 27,406 9,243
State and local governments 1,272 896 906
Equity securities 1,596 1,318 1,025
----------- ------ ------
Total securities available for sale 54,290 58,800 50,277
----------- ------ ------
Securities held to maturity:
State and local governments 17,221 18,121 20,460
Other 297 359 396
----------- ------ ------
Total securities held to maturity 17,518 18,480 20,856
----------- ------ ------
Total securities $ 71,808 77,280 71,133
=========== ====== ======
Average total securities during year $ 74,819 64,970 75,704
=========== ====== ======
34
- ---------------------------------------------------------------------------------------------------------------------------------
Table 9 Securities Portfolio Maturity Schedule
- ---------------------------------------------------------------------------------------------------------------------------------
As of December 31,
---------------------------------------------------
1999
---------------------------------------------------
Book Fair Book
Value Value Yield (1)
------- -------- ----------
($ in thousands)
Securities available for sale:
U.S. Treasury
Due after one but within five years $ 502 514 7.31%
---------- ------ ----
Total 502 514 7.31%
---------- ------ ----
U.S. Government agencies
Due within one year 2,003 1,996 4.98%
Due after one but within five years 23,493 22,408 5.78%
Due after five but within ten years 7,912 7,469 5.89%
---------- ------ ----
Total 33,408 31,873 5.76%
---------- ------ ----
Mortgage-backed securities
Due within one year 4,913 4,807 6.05%
Due after one but within five years 11,086 10,943 6.73%
Due after five but within ten years 1,862 1,767 5.94%
Due after ten years 1,563 1,518 7.12%
---------- ------ ----
Total 19,424 19,035 6.51%
---------- ------ ----
State and local governments
Due within one year 1,272 1,272 5.12%
---------- ------ ----
Total 1,272 1,272 5.12%
---------- ------ ----
Equity securities 1,625 1,596 7.00%
---------- ------ ----
Total securities available for sale
Due within one year 8,188 8,075 5.64%
Due after one but within five years 35,081 33,865 6.10%
Due after five but within ten years 9,774 9,236 5.90%
Due after ten years 3,188 3,114 7.06%
---------- ------ ----
Total $ 56,231 54,290 6.06%
========== ====== ====
Securities held to maturity
State and local governments
Due within one year $ 1,236 1,240 7.84%
Due after one but within five years 6,271 6,338 7.80%
Due after five but within ten years 7,752 7,625 7.25%
Due after ten years 1,962 1,866 7.52%
---------- ------ ----
Total 17,221 17,069 7.52%
---------- ------ ----
Other
Due after one but within five years 297 297 7.80%
---------- ------ ----
Total 297 297 7.80%
---------- ------ ----
Total securities held to maturity
Due within one year 1,236 1,240 7.84%
Due after one but within five years 6,568 6,635 7.80%
Due after five but within ten years 7,752 7,625 7.25%
Due after ten years 1,962 1,866 7.52%
---------- ------ ----
Total $ 17,518 17,366 7.53%
========== ====== ====
(1) Yields on tax-exempt investments have been adjusted to a taxable equivalent
basis using a 34% tax rate.
35
- ------------------------------------------------------------------------------------------------------------------------------
Table 10 Loan Portfolio Composition
- ------------------------------------------------------------------------------------------------------------------------------
As of December 31,
----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ----------------- ---------------- -----------------
% of % of % of % of % of
Total Total Total Total Total
($ in Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
thousands) ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial,
financial, &
agricultural $58,549 13.96% $52,415 14.62% $45,417 16.18% $33,100 14.83% $34,438 16.27%
Real estate -
construction 32,991 7.87% 36,565 10.20% 19,323 6.89% 14,498 6.50% 10,052 4.75%
Real estate -
mortgage(1) 295,694 70.51% 237,833 66.35% 185,927 66.25% 148,667 66.63% 139,567 65.95%
Installment
loans to
individuals 32,113 7.66% 31,649 8.83% 29,971 10.68% 26,860 12.04% 27,566 13.03%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Loans, gross 419,347 100.00% 358,462 100.00% 280,638 100.00% 223,125 100.00% 211,623 100.00%
====== ====== ====== ====== ======
Unamortized
net deferred
loan fees &
unearned
income (184) (128) (125) (93) (101)
------- ------- ------- ------- -------
Total loans,
net $419,163 $358,334 $280,513 $223,032 $211,522
======== ======== ======== ======== ========
(1) The majority of these loans are various personal and commercial loans where
real estate provides additional security for the loan.
- ------------------------------------------------------------------------------------------------------------------------------
Table 11 Loan Maturities
- ------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1999
-----------------------------------------------------------------------------------------
Due within Due after one year Due after five
one year within five years years Total
------------------- --------------------- ------------------- --------------------
($ in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
Variable Rate Loans:
Commercial, financial, and
agricultural $ 20,992 8.90% $ 9,113 8.83% $ 866 9.28% $ 30,971 8.89%
Real estate - construction 25,320 9.11% 2,407 8.99% - - 27,727 9.10%
Real estate - mortgage 31,336 9.08% 43,779 8.91% 35,832 9.21% 110,947 9.05%
Installment loans
to individuals 199 8.95% 2,772 11.07% 538 9.65% 3,509 10.73%
-------- ------- ----- --------
Total at variable rates 77,847 9.04% 58,071 9.00% 37,236 9.22% 173,154 9.07%
-------- ------- ----- --------
Fixed Rate Loans:
Commercial, financial, and
agricultural 9,011 7.10% 16,442 8.46% 2,845 7.00% 28,298 7.88%
Real estate - construction 4,442 8.09% 1,614 8.28% - - 6,056 8.14%
Real estate - mortgage 27,686 8.70% 118,959 8.35% 36,121 8.42% 182,766 8.42%
Installment loans
to individuals 4,893 10.18% 22,552 10.69% 1,033 8.74% 28,478 10.53%
--------- --------- -------- ---------
Total at fixed rates 46,032 8.49% 159,567 8.69% 39,999 8.33% 245,598 8.59%
--------- --------- -------- ---------
Subtotal 123,879 8.84% 217,638 8.77% 77,235 8.76% 418,752 8.79%
Nonaccrual loans 595 595
--------- --------- -------- ---------
Loans, gross $ 124,474 $ 217,638 $ 77,235 $ 419,347
========= ========= ======== =========
The above table is based on contractual scheduled maturities. Early repayment of
loans or renewals at maturity are not considered in this table.
36
- ------------------------------------------------------------------------------------------------------------------------------
Table 12 Nonperforming Assets
- ------------------------------------------------------------------------------------------------------------------------------
As of December 31,
----------------------------------------------------------------------
($ in thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Nonaccrual loans $ 595 601 957 1,836 772
Restructured loans 257 248 326 350 526
-------- ----- ----- ----- -----
Total nonperforming loans 852 849 1,283 2,186 1,298
Other real estate (included in other assets) 906 505 560 572 1,393
-------- ----- ----- ----- -----
Total nonperforming assets $ 1,758 1,354 1,843 2,758 2,691
======== ===== ===== ===== =====
Nonperforming loans as a percentage
of total loans 0.20% 0.24% 0.46% 0.98% 0.61%
Nonperforming assets as a percentage of
loans and other real estate 0.42% 0.38% 0.66% 1.23% 1.26%
Nonperforming assets as a percentage of
total assets 0.31% 0.28% 0.46% 0.82% 0.84%
Allowance for loan losses as a percentage
of nonperforming loans 713.38% 648.29% 372.49% 216.19% 353.39%
- ------------------------------------------------------------------------------------------------------------------------------
Table 13 Allocation of the Allowance for Loan Losses
- ------------------------------------------------------------------------------------------------------------------------------
As of December 31,
----------------------------------------------------------------------
($ in thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Commercial, financial, and agricultural $ 726 646 577 462 758
Real estate - construction 238 248 201 191 199
Real estate - mortgage 3,115 2,663 2,394 2,810 2,516
Installment loans to individuals 568 663 617 641 620
-------- ----- ----- ----- -----
Total allocated 4,647 4,220 3,789 4,104 4,093
Unallocated 1,431 1,284 990 622 494
-------- ----- ----- ----- -----
Total $ 6,078 5,504 4,779 4,726 4,587
======== ===== ===== ===== =====
37
- ------------------------------------------------------------------------------------------------------------------------------
Table 14 Loan Loss and Recovery Experience
- ------------------------------------------------------------------------------------------------------------------------------
As of December 31,
------------------------------------------------------------------------
($ in thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Loans outstanding at end of year $ 419,163 358,334 280,513 223,032 211,522
========== ======= ======= ======= =======
Average amount of loans outstanding $ 386,365 325,477 245,596 217,900 192,035
========== ======= ======= ======= =======
Allowance for loan losses, at
beginning of year $ 5,504 4,779 4,726 4,587 5,009
Provision for loan losses 910 990 575 325 900
Allowance of purchased banks - - - - 187
---------- ------- ------- ------- -------
6,414 5,769 5,301 4,912 6,096
Loans charged off:
Commercial, financial and agricultural (53) (92) (61) (209) (885)
Real estate - mortgage (126) (97) (449) (196) (184)
Installment loans to individuals (269) (245) (311) (311) (531)
---------- ------- ------- ------- -------
Total charge-offs (448) (434) (821) (716) (1,600)
---------- ------- ------- ------- -------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 27 51 89 114 23
Real estate - mortgage 17 18 38 127 6
Installment loans to individuals 68 100 141 113 62
Other - - 31 176 -
---------- ------- ------- ------- -------
Total recoveries 112 169 299 530 91
---------- ------- ------- ------- -------
Net charge-offs (336) (265) (522) (186) (1,509)
---------- ------- ------- ------- -------
Allowance for loan losses, at end of year $ 6,078 5,504 4,779 4,726 4,587
========== ======= ======= ======= =======
Ratios:
Net charge-offs as a percent of average loans 0.09% 0.08% 0.21% 0.09% 0.79%
Allowance for loan losses as a
percent of loans at end of year 1.45% 1.54% 1.70% 2.12% 2.17%
Allowance for loan losses as a multiple
of net charge-offs 18.09x 20.77x 9.16x 25.41x 3.04x
Provision for loan losses as a percent of net
charge-offs 270.83% 373.58% 110.15% 174.73% 59.64%
Recoveries of loans previously charged-off
as a percent of loans charged-off 25.00% 38.94% 36.42% 74.02% 5.69%
- ----------------------------------------------------------------------------------------------------------------------------
Table 15 Average Deposits
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- -------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
($ in thousands)
Interest-bearing demand deposits $ 118,345 1.82% $ 105,336 2.23% $ 89,717 2.27%
Savings deposits 44,752 2.34% 38,797 2.47% 32,346 2.42%
Time deposits 163,849 5.02% 147,036 5.34% 119,158 5.28%
Time deposits > $100,000 68,128 5.51% 51,836 5.91% 34,872 5.75%
--------- --------- ---------
Total interest-bearing deposits 395,074 3.84% 343,005 4.14% 276,093 4.03%
Noninterest bearing deposits 58,567 - 53,982 - 44,566 -
--------- --------- ---------
$ 453,641 3.35% $ 396,987 3.58% $ 320,659 3.47%
========= ========= =========
38
- ---------------------------------------------------------------------------------------------------------------------------
Table 16 Maturities of Time Deposits of $100,000 or More
- --------------------------------------------------------------------------------------------------------------------------
As of December 31, 1999
------------------------------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or Less Months Months Months Total
------- ------ ------ ------ -----
(In thousands)
Time deposits of $100,000 or more $ 35,782 16,175 17,963 11,911 81,831
========== ====== ====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------------
Table 17 Interest Rate Sensitivity Analysis
- ------------------------------------------------------------------------------------------------------------------------------
Repricing schedule for interest-earning assets and interest-bearing
liabilities held as of December 31, 1999
--------------------------------------------------------------------------
3 Months Over 3 to 12 Total Within Over 12
or Less Months 12 Months Months Total
------- ------ --------- ------ -----
($ in thousands)
Earning assets:
Loans, net of deferred fees $ 190,499 31,545 222,044 197,119 419,163
Securities available for sale 1,272 6,803 8,075 46,215 54,290
Securities held to maturity 540 696 1,236 16,282 17,518
Short-term investments 28,632 - 28,632 - 28,632
---------- ------ ------- ------- -------
Total earning assets $ 220,943 39,044 259,987 259,616 519,603
========== ====== ======= ======= =======
Percent of total earning assets 42.52% 7.52% 50.04% 49.96% 100.00%
Cumulative percent of total earning assets 42.52% 50.04% 50.04% 100.00% 100.00%
Interest-bearing liabilities:
Savings, NOW and money market deposits $ 164,307 - 164,307 - 164,307
Time deposits of $100,000 or more 35,915 34,140 70,055 11,776 81,831
Other time deposits 54,702 88,735 143,437 29,882 173,319
Short-term borrowings 30,000 - 30,000 - 30,000
---------- ------ ------- ------- -------
Total interest-bearing liabilities $ 284,924 122,875 407,799 41,658 449,457
========== ======= ======= ====== =======
Percent of total interest-bearing
liabilities 63.39% 27.34% 90.73% 9.27% 100.00%
Cumulative percent of total interest-
bearing liabilities 63.39% 90.73% 90.73% 100.00% 100.00%
Interest sensitivity gap $ (63,981) (83,831) (147,812) 217,958 70,146
Cumulative interest sensitivity gap (63,981) (147,812) (147,812) 70,146 70,146
Cumulative interest sensitivity gap
as a percent of total earning assets -12.31% -28.45% -28.45% 13.50% 13.50%
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 77.54% 63.75% 63.75% 115.61% 115.61%
39
- ------------------------------------------------------------------------------------------------------------------------------------
Table 18 Market Risk Sensitive Instruments
- ------------------------------------------------------------------------------------------------------------------------------------
Expected Maturities of Market Sensitive Instruments Held
at December 31, 1999 Occurring in Indicated Year
-------------------------------------------------------------------------
Average Estimated
Interest Fair
($ in thousands) 2000 2001 2002 2003 2004 Beyond Total Rate (1) Value
---- ---- ---- ---- ---- ------ ----- --------- ---------
Debt Securities- at
amortized cost (2) $ 9,575 3,365 8,182 15,894 14,183 20,925 72,124 6.39% $ 70,060
Loans - fixed (3) 46,759 23,248 36,543 43,810 53,627 39,998 243,985 8.59% 243,224
Loans - adjustable (3) 83,071 17,411 19,406 15,680 23,232 15,783 174,583 9.07% 174,583
-------- ------ ------ ------ ------ ------ ------- ---------
Total $139,405 44,024 64,131 75,384 91,042 76,706 490,692 8.44% $487,867
======== ====== ====== ====== ====== ====== ======= ==== =========
Savings, NOW, and
money market
deposits $164,307 -- -- -- -- -- 164,307 2.02% $164,307
Time deposits 213,492 28,398 5,732 3,256 2,313 1,959 255,150 5.22% 255,464
Short-term borrowings 30,000 -- -- -- -- -- 30,000 5.27% 30,000
-------- ------ ------ ------ ------ ------ ------- ---------
Total $407,799 28,398 5,732 3,256 2,313 1,959 449,457 4.06% $449,771
======== ====== ====== ====== ====== ====== ======= ==== =========
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 34%
tax rate.
(2) Callable securities with above market interest rates at December 31, 1999
are assumed to mature at their call date for purposes of this table.
(3) Excludes nonaccrual loans and allowance for loan losses.
- ---------------------------------------------------------------------------------------------------------------------
Table 19 Return on Assets and Equity
- ---------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
---- ---- ----
Return on assets 1.29% 1.28% 1.39%
Return on equity 15.56% 14.59% 14.31%
Dividend payout ratio per basic share 30.82% 32.00% 31.53%
Average shareholders' equity to average assets 8.30% 8.79% 9.73%
40
- ----------------------------------------------------------------------------------------------------------------------
Table 20 Risk-Based and Leverage Capital Ratios
- ----------------------------------------------------------------------------------------------------------------------
As of December 31,
----------------------------------------------------------
($ in thousands) 1999 1998 1997
---- ---- ----
Risk-Based and Leverage Capital
Tier I capital:
Common shareholders' equity $ 43,942 40,494 36,765
Intangible assets (5,261) (5,843) (6,487)
Accumulated other comprehensive loss (income) 1,184 (37) (186)
----------- ------ ------
Total Tier I leverage capital 39,865 34,614 30,092
----------- ------ ------
Tier II capital:
Allowable allowance for loan losses 5,158 4,493 3,466
----------- ------ ------
Tier II capital additions 5,158 4,493 3,466
----------- ------ ------
Total risk-based capital $ 45,023 39,107 33,558
=========== ====== ======
Risk adjusted assets $ 416,693 365,288 283,924
Tier I risk-adjusted assets
(includes Tier I capital adjustments) 412,616 359,408 277,251
Tier II risk-adjusted assets
(includes Tiers I and II capital adjustments) 417,774 363,901 280,717
Fourth quarter average assets 550,078 475,698 386,291
Adjusted fourth quarter average assets
(includes Tier I capital adjustments) 546,001 469,818 379,618
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets 9.66% 9.63% 10.85%
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 10.78% 10.75% 11.95%
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 7.30% 7.37% 7.93%
Minimum required Tier I leverage capital 4.00% 4.00% 4.00%
Threshold for well-capitalized status 5.00% 5.00% 5.00%
41
- --------------------------------------------------------------------------------------------------------------------------------
Table 21 Quarterly Financial Summary
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998
--------------------------------------------- ----------------------------------------------
($ in thousands except Fourth Third Second First Fourth Third Second First
per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Income Statement Data
Interest income, taxable
equivalent $ 10,814 10,101 9,643 9,310 $ 9,413 9,339 8,851 8,401
Interest expense 4,467 3,880 3,751 3,712 3,780 3,815 3,526 3,235
Net interest income,
taxable equivalent 6,347 6,221 5,892 5,598 5,633 5,524 5,325 5,166
Taxable equivalent,
adjustment 130 143 149 152 160 157 167 176
Net interest income 6,217 6,078 5,743 5,446 5,473 5,367 5,158 4,990
Provision for loan losses 245 205 260 200 250 250 210 280
Net interest income
after provision for losses 5,972 5,873 5,483 5,246 5,223 5,117 4,948 4,710
Noninterest income 1,261 1,242 1,310 1,308 1,210 1,173 1,083 1,190
Noninterest expense 4,628 4,606 4,307 4,275 4,099 4,003 3,892 3,918
Income before income taxes 2,605 2,509 2,486 2,279 2,334 2,287 2,139 1,982
Income taxes 828 771 858 803 829 805 749 676
Net income 1,777 1,738 1,628 1,476 1,505 1,482 1,390 1,306
- ------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Earnings - basic $ 0.39 0.38 0.36 0.33 $ 0.33 0.33 0.31 0.29
Earnings - diluted 0.38 0.37 0.35 0.32 0.32 0.32 0.30 0.28
Cash dividends declared 0.1133 0.1133 0.1133 0.1133 0.10 0.10 0.10 0.10
Dividend payout per
basic share 29.05% 29.82% 31.47% 34.33% 30.30% 30.30% 32.26% 34.48%
Market Price
High $ 20.00 19.67 18.17 19.83 $ 22.00 22.67 24.67 28.00
Low 15.50 15.71 14.67 16.00 16.00 19.33 20.67 19.50
Close 16.50 19.00 18.00 17.33 19.33 19.33 22.67 25.17
Stated book value 9.65 9.46 9.22 9.08 8.94 8.76 8.50 8.29
Tangible book value 8.50 8.27 8.00 7.83 7.65 7.43 7.14 6.89
- ------------------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Assets $ 550,078 510,346 500,953 488,851 $475,698 456,878 433,047 407,233
Loans 407,545 392,983 380,335 364,597 350,443 337,967 319,660 293,838
Earning assets 515,478 478,636 469,093 457,237 444,553 426,473 403,033 377,373
Deposits 472,490 452,890 449,226 439,958 427,212 405,188 390,264 365,284
Interest-bearing liabilities 440,581 405,108 394,507 384,941 372,087 357,023 336,151 316,851
Shareholders' equity 43,965 42,885 41,995 41,255 40,497 39,489 38,328 37,470
- ------------------------------------------------------------------------------------------------------------------------------
Ratios
Return on average assets 1.28% 1.35% 1.30% 1.22% 1.26% 1.29% 1.29% 1.30%
Return on average equity 16.04% 16.08% 15.55% 14.51% 14.74% 14.89% 14.55% 14.14%
Average equity to
average assets 7.99% 8.40% 8.38% 8.44% 8.51% 8.64% 8.85% 9.20%
Risk-based capital ratios:
Tier I capital 9.66% 9.70% 9.55% 9.71% 9.63% 10.00% 10.15% 10.31%
Total risk-based capital 10.78% 10.81% 10.66% 10.83% 10.75% 11.11% 11.25% 11.41%
Tier I leverage capital 7.30% 7.58% 7.43% 7.34% 7.37% 7.41% 7.55% 7.76%
Average loans to
average deposits 86.25% 86.77% 84.66% 82.87% 82.03% 83.41% 81.91% 80.44%
Average earning assets to
interest-bearing liabilities 117.00% 118.15% 118.91% 118.78% 119.48% 119.45% 119.90% 119.10%
Net interest margin 4.88% 5.16% 5.04% 4.97% 5.03% 5.14% 5.30% 5.55%
Nonperforming loans as a
percent of total loans 0.20% 0.20% 0.23% 0.23% 0.24% 0.24% 0.18% 0.29%
Nonperforming assets as a
percent of loans and
other real estate 0.42% 0.41% 0.37% 0.37% 0.38% 0.39% 0.36% 0.41%
Nonperforming assets as a
percent of total assets 0.31% 0.31% 0.27% 0.27% 0.28% 0.28% 0.27% 0.30%
Net charge-offs as a percent
of average loans 0.15% 0.04% 0.11% 0.04% 0.16% 0.02% 0.07% 0.07%
- ------------------------------------------------------------------------------------------------------------------------------
42
Item 8. Financial Statements
and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 1999 and 1998
($ in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------
ASSETS
Cash & due from banks, noninterest-bearing $ 23,055 22,073
Due from banks, interest-bearing 15,231 8,398
Federal funds sold 12,280 8,295
---------- -------
Total cash and cash equivalents 50,566 38,766
---------- -------
Securities available for sale (costs of
$56,231 in 1999 and $58,740 in 1998) 54,290 58,800
Securities held to maturity (fair values of
$17,366 in 1999 and $19,223 in 1998) 17,518 18,480
Presold mortgages in process of settlement 1,121 2,619
Loans 419,163 358,334
Less: Allowance for loan losses (6,078) (5,504)
---------- -------
Net loans 413,085 352,830
---------- -------
Premises and equipment 10,063 9,091
Accrued interest receivable 3,373 2,789
Intangible assets 5,261 5,843
Other 4,170 2,620
---------- -------
Total assets $ 559,447 491,838
========== =======
LIABILITIES
Deposits: Demand - noninterest-bearing $ 60,566 62,479
Savings, NOW, and money market 164,307 160,428
Time deposits of $100,000 or more 81,831 60,720
Other time deposits 173,319 156,639
---------- -------
Total deposits 480,023 440,266
Short-term borrowings 30,000 6,000
Accrued interest payable 3,457 3,080
Other liabilities 2,025 1,998
---------- -------
Total liabilities 515,505 451,344
---------- -------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Authorized: 12,500,000 shares
Issued and outstanding: 4,551,641 shares in 1999 and
4,531,905 shares in 1998 19,075 18,970
Retained earnings 26,051 21,487
Accumulated other comprehensive income (loss) (1,184) 37
---------- -------
Total shareholders' equity 43,942 40,494
---------- -------
Total liabilities and shareholders' equity $ 559,447 491,838
========== =======
See accompanying notes to consolidated financial statements.
43
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997
($ in thousands, except per share data) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 34,120 30,186 23,754
Interest on investment securities:
Taxable interest income 3,271 2,898 3,610
Tax-exempt interest income 890 1,035 1,189
Other, principally overnight investments 1,013 1,225 644
--------- --------- ---------
Total interest income 39,294 35,344 29,197
--------- --------- ---------
INTEREST EXPENSE
Savings, NOW and money market 3,202 3,305 2,820
Time deposits of $100,000 or more 3,755 3,063 2,004
Other time deposits 8,230 7,845 6,296
Short-term borrowings 623 143 3
--------- --------- ---------
Total interest expense 15,810 14,356 11,123
--------- --------- ---------
Net interest income 23,484 20,988 18,074
Provision for loan losses 910 990 575
--------- --------- ---------
Net interest income after provision for loan losses 22,574 19,998 17,499
--------- --------- ---------
NONINTEREST INCOME
Service charges on deposit accounts 2,835 2,595 2,413
Other service charges, commissions and fees 1,311 1,028 769
Fees from presold mortgage loans 622 537 284
Commissions from insurance sales 264 240 278
Data processing fees 50 5 274
Loan sale gains 34 227 -
Securities gains (losses) 20 29 (12)
Other losses, net (15) (5) (24)
Other nonrecurring net gains - - 168
--------- --------- ---------
Total noninterest income 5,121 4,656 4,150
--------- --------- ---------
NONINTEREST EXPENSES
Salaries 7,909 7,127 6,225
Employee benefits 1,837 1,563 1,315
--------- --------- ---------
Total personnel expense 9,746 8,690 7,540
Net occupancy expense 1,165 1,017 954
Equipment related expenses 1,133 918 858
Other operating expenses 5,772 5,287 4,736
--------- --------- ---------
Total noninterest expenses 17,816 15,912 14,088
--------- --------- ---------
Income before income taxes 9,879 8,742 7,561
Income taxes 3,260 3,059 2,549
--------- --------- ---------
NET INCOME $ 6,619 5,683 5,012
======== ========= =========
Earnings per share:
Basic $ 1.46 1.25 1.11
Diluted 1.43 1.22 1.08
Weighted average common shares outstanding:
Basic 4,528,132 4,531,092 4,525,854
Diluted 4,632,233 4,657,746 4,628,892
See accompanying notes to consolidated financial statements.
44
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 1999, 1998 and 1997
($ in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Net income $ 6,619 5,683 5,012
------- ----- -----
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period, pretax (1,981) (193) 49
Tax benefit (expense) 773 62 (17)
Reclassification to realized (gains) losses (20) (29) 12
Tax expense (benefit) 7 11 (4)
------- ----- -----
Other comprehensive income (loss) (1,221) (149) 40
------- ----- -----
Comprehensive income $ 5,398 5,534 5,052
======= ===== =====
See accompanying notes to consolidated financial statements.
45
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1999, 1998 and 1997
Accumulated Total
Common Stock Other Share-
--------------------- Retained Comprehensive holders'
(In thousands, except per share) Shares Amount Earnings Income (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------
Balances, January 1, 1997 3,016 $ 18,913 14,173 146 33,232
Effect of 1999 3-for-2 stock split 1,509
------ -------- ------ ------ ------
Balances, January 1, 1997 adjusted 4,525 18,913 14,173 146 33,232
Net income 5,012 5,012
Cash dividends declared ($0.3467 per share) (1,569) (1,569)
Common stock issued under
stock option plans 6 50 50
Other comprehensive income 40 40
------ -------- ------ ------ ------
Balances, December 31, 1997 4,531 18,963 17,616 186 36,765
------ -------- ------ ------ ------
Net income 5,683 5,683
Cash dividends declared ($0.4000 per share) (1,812) (1,812)
Common stock issued under
stock option plans 1 13 13
Purchases and retirement of common stock (6) (6)
Other comprehensive loss (149) (149)
------ -------- ------ ------ ------
Balances, December 31, 1998 4,532 18,970 21,487 37 40,494
------ -------- ------ ------ ------
Net income 6,619 6,619
Cash dividends declared ($0.4533 per share) (2,055) (2,055)
Common stock issued under
stock option plans 23 167 167
Common stock issued into
dividend reinvestment plan 16 296 296
Purchases and retirement of common stock (19) (358) (358)
Other comprehensive loss (1,221) (1,221)
------ -------- ------ ------ ------
Balances, December 31, 1999 4,552 $ 19,075 26,051 (1,184) 43,942
====== ======== ====== ====== ======
See accompanying notes to consolidated financial statements.
46
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
($ in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 6,619 5,683 5,012
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses 910 990 575
Net security premium amortization (discount accretion) 300 223 (15)
Gains on sales of loans (34) (227) -
Proceeds from sales of loans 3,688 6,664 -
Losses (gains) on sales of securities available for sale (20) (29) 12
Loss on disposal of premises and equipment 38 27 10
Loan fees and costs deferred, net of amortization 56 2 33
Depreciation of premises and equipment 967 761 715
Amortization of intangible assets 636 655 546
Provision for deferred income taxes (162) 180 (62)
Decrease (increase) in accrued interest receivable (584) 77 (454)
Decrease (increase) in other assets 1,270 (1,152) 776
Increase in accrued interest payable 377 781 370
Decrease in other liabilities (36) (443) (149)
--------- ------ ------
Net cash provided by operating activities 14,025 14,192 7,369
--------- ------ ------
Cash Flows From Investing Activities
Purchases of securities available for sale (17,455) (47,180) (37,289)
Purchases of securities held to maturity (2,897) (759) (2,399)
Proceeds from sales of securities available for sale 3,017 8,053 8,361
Proceeds from maturities/issuer calls of securities available for 16,664 30,209 32,678
sale 3,863 3,113 3,846
Proceeds from maturities/issuer calls of securities held to
maturity (64,995) (84,554) (58,208)
Net increase in loans
Purchases of premises and equipment (2,292) (1,246) (1,842)
Net cash received in purchase of deposits - - 12,658
--------- ------ ------
Net cash used in investing activities (64,095) (92,364) (42,195)
--------- ------ ------
Cash Flows From Financing Activities
Net increase in deposits 39,757 79,042 49,018
Proceeds from short-term borrowings, net 24,000 6,000 -
Cash dividends paid (1,992) (1,752) (1,508)
Proceeds from issuance of common stock 463 13 50
Purchases and retirement of common stock (358) (6) -
--------- ------ ------
Net cash provided by financing activities 61,870 83,297 47,560
--------- ------ ------
Increase In Cash And Cash Equivalents 11,800 5,125 12,734
Cash And Cash Equivalents, Beginning Of Period 38,766 33,641 20,907
--------- ------ ------
Cash And Cash Equivalents, End Of Period $ 50,566 38,766 33,641
========= ====== ======
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for:
Interest $ 15,433 13,575 10,753
Income taxes 3,629 2,963 2,350
Non-cash transactions:
Foreclosed loans transferred to other real estate 120 29 172
Increase (decrease) in fair value of securities available for sale (2,001) (222) 61
Premises and equipment transferred to other real estate 315 206 -
Loans to facilitate sales of other real estate - - 61
See accompanying notes to consolidated financial statements.
47
First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
(a) Basis of Presentation - The consolidated financial statements include
the accounts of First Bancorp (the Company) and its wholly owned subsidiaries:
First Bank (the Bank) and its wholly owned subsidiaries - First Bank Insurance
Services, Inc. (First Bank Insurance) and First Troy Realty Corporation (First
Troy; Montgomery Data Services, Inc. (Montgomery Data); and First Bancorp
Financial Services, Inc., (First Bancorp Financial), formerly First Recovery,
Inc. All significant intercompany accounts and transactions have been
eliminated. The Company is a bank holding company. The principal activity of the
Company is the ownership and operation of First Bank, a state chartered bank
with its main office in Troy, North Carolina. The Company also owns and operates
Montgomery Data, a data processing company, and First Bancorp Financial, a real
estate investment subsidiary, both of which are also headquartered in Troy.
First Bank Insurance is a provider of non-FDIC insured investment and insurance
products. First Troy was formed in 1999 as a real estate investment trust and
allows the Bank to centrally manage a portion of its real estate portfolio
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant estimates
made by the Company in the preparation of its consolidated financial statements
are the determination of the allowance for loan losses, the valuation of other
real estate, the valuation allowance for deferred tax assets and fair value
estimates for financial instruments.
(b) Cash and Cash Equivalents - The Company considers all highly liquid
assets such as cash on hand, noninterest-bearing and interest-bearing amounts
due from banks and federal funds sold to be "cash equivalents."
(c) Securities - Securities classified as available for sale are purchased
with the intent to hold to maturity. However, infrequent sales may be necessary
due to liquidity needs arising from unanticipated deposit and loan fluctuations,
changes in regulatory capital and investment requirements, or significant
unforeseen changes in market conditions, including interest rates and market
values of securities held in the portfolio. Investments in securities available
for sale are stated at fair value with the resultant unrealized gains and losses
included as a component of shareholders' equity, net of applicable deferred
income taxes.
Securities are classified as held to maturity at the time of purchase when
the Company has the ability and positive intent to hold such securities to
maturity. Investments in securities held to maturity are stated at amortized
cost.
Gains and losses on sales of securities are recognized at the time of sale
based upon the specific identification method. Premiums and discounts are
amortized into income on a level yield basis.
(d) Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Depreciation, computed by the straight-line method, is
charged to operations over the estimated useful lives of the properties, which
range from 5 to 40 years or, in the case of leasehold improvements, over the
term of the lease, if shorter. Maintenance and repairs are charged to operations
in the year incurred. Gains and losses on dispositions are included in current
operations.
(e) Loans - Loans are stated at the principal amount outstanding, less
unearned income and deferred nonrefundable loan fees, net of certain origination
costs. Interest on loans is accrued on the unpaid principal balance outstanding.
Net deferred loan origination costs/fees are capitalized and recognized as a
yield adjustment over the life of the related loan. Unearned income for each of
the reporting periods was immaterial.
48
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 collectibility 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.
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. Impaired loans are
measured using either 1) an estimate of the cash flows that the Company expects
to receive from the borrower discounted at the loan's effective rate, or 2) in
the case of a collateral-dependent loan, the fair value of the collateral is
used to value the loan. 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.
(f) Presold Mortgages in Process of Settlement and Loans Held for Sale - As
a part of normal business operations, the Company originates residential
mortgage loans that have been pre-approved by secondary investors. The terms of
the loans are set by the secondary investors and are transferred to them at par
within several weeks of the Company initially funding the loan. The Company
receives origination fees from borrowers and servicing release premiums from the
investors that are recognized on the income statement in the line item "fees
from presold mortgages." Between the initial funding of the loans by the Company
and the subsequent reimbursement by the investors, the Company carries the loans
on its balance sheet at cost.
Periodically, the Company originates commercial loans that are intended for
resale. The Company carries these loans at the lower of cost or fair value at
each reporting date. There were no loans held for sale as of December 31, 1999
or 1998.
(g) Allowance for Loan Losses - The provision for loan losses charged to
operations is an amount sufficient to bring the allowance for loan losses to an
estimated balance considered adequate to absorb losses inherent in the
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio, current economic conditions, historical loan
loss experience and other risk factors. While management uses the best
information available to make evaluations, future adjustments may be necessary
if economic and other conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on the examiners' judgment about information available to them at the time of
their examinations.
(h) Other Real Estate - Other real estate, which includes foreclosed,
repossessed, and idled properties, is recorded at the lower of cost or fair
value based on recent appraisals, less estimated costs to sell. Declines in the
fair value of other real estate are recorded by a charge to expense during the
period of decline.
(i) Income Taxes - The Company accounts for income taxes using the asset and
liability method as provided under Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes." The objective of the asset and
liability method is to establish deferred tax assets and liabilities for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities at enacted rates expected to be in effect
when such amounts are realized or settled. Deferred tax assets are reduced, if
necessary, by the amount of such benefits that are not expected to be realized
based upon available evidence.
49
(j) Intangible Assets - The Company has recorded certain intangible assets
in connection with branch and business acquisitions, principally deposit base
premiums and goodwill. These intangibles are amortized on a straight-line basis
over their estimated useful lives, ranging from 5 to 15 years. At December 31,
1999 and 1998, acquisition related intangibles that had not been fully amortized
totaled $8,145,000, less accumulated amortization of $3,022,000 and $2,386,000,
respectively. These intangible assets are subject to periodic review and are
adjusted for any impairment in value.
In accordance with applicable accounting standards, the Company records an
intangible asset in connection with a defined benefit pension plan to fully
accrue for its liability. This intangible asset is adjusted annually in
accordance with actuarially determined amounts. The amount of this intangible
asset was $138,000 and $84,000 at December 31, 1999 and 1998, respectively.
(k) Stock Option Plan - Prior to January 1, 1996, the Company accounted for
its stock option plan in accordance with the provisions of Accounting Principles
Board Opinion No. 25 (APB Opinion No. 25), "Accounting for Stock Issued to
Employees," and related interpretations. As such, compensation expense was
recorded on the date of grant only if the market price of the underlying stock
on the date of grant exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123), which permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
(l) Per Share Amounts - Basic Earnings Per Share is calculated by dividing
net income by the weighted average number of common shares outstanding during
the period. Diluted Earnings Per Share is computed by assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
reporting period. Currently, the Company's only potential dilutive common stock
issuances relate to options that have been issued under the Company's stock
option plan. In computing Diluted Earnings Per Share, it is assumed that all
such dilutive stock options are exercised during the reporting period at their
respective exercise prices, with the proceeds from the exercises used by the
Company to buy back stock in the open market at the average market price in
effect during the reporting period. The difference between the number of shares
assumed to be exercised and the number of shares bought back is added to the
number of weighted average common shares outstanding during the period. The sum
is used as the denominator to calculate Diluted Earnings Per Share for the
Company.
50
The following is a reconciliation of the numerators and denominators used
in computing Basic and Diluted Earnings Per Share:
For the Years Ended December 31,
-------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------- ------------------------------- ------------------------------
($ in thousands, Income Shares Income Shares Income Shares
except per (Numer- (Denom- Per Share (Numer- (Denom- Per Share (Numer- (Denom- Per Share
share amounts) ator inator Amount ator) inator Amount Amount ator) Amount
------- --------- -------- ------ --------- ------- ------- --------- --------
Basic EPS $6,619 4,528,132 $ 1.46 $5,683 4,531,092 $ 1.25 $5,012 4,525,854 $ 1.11
======= ======= =======
Effect of Dilutive
Securities - 104,101 - 126,654 - 103,038
------ --------- ------ --------- ------ ---------
Diluted EPS $6,619 4,632,233 $ 1.43 $5,683 4,657,746 $ 1.22 $5,012 4,628,892 $ 1.08
====== ========= ======= ====== ========= ======= ====== ========= =======
(m) Fair Value of Financial Instruments - SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS No. 107), requires that the Company
disclose estimated fair values for its financial instruments. Fair value methods
and assumptions are set forth below for the Company's financial instruments.
Cash and Due from Banks, Federal Funds Sold, Presold Mortgages in Process
of Settlement, Accrued Interest Receivable, Short-Term Borrowings and Accrued
Interest Payable - The carrying amounts approximate their fair value because of
the short maturity of these financial instruments.
Available for Sale and Held to Maturity Securities - Fair values are based
on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
financial and agricultural, real estate construction, real estate mortgages and
installment loans to individuals. Each loan category is further segmented into
fixed and variable interest rate terms. For variable rate loans, the carrying
value is a reasonable estimate of the fair value. For fixed rate loans, fair
value is determined by discounting scheduled future cash flows using current
interest rates offered on loans with similar risk characteristics. Fair values
for impaired loans are estimated based on discounted cash flows or underlying
collateral values, where applicable.
Deposit Liabilities - The fair value of deposits with no stated maturity,
such as non-interest-bearing demand deposits, savings, NOW, and money market
accounts, is equal to the amount payable on demand as of December 31, 1999 and
1998. The fair value of certificates of deposit is based on the discounted value
of contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit - At December
31, 1999 and 1998, the Company's off-balance sheet financial instruments had no
carrying value. The large majority of commitments to extend credit and standby
letters of credit are at variable rates and/or have relatively short terms to
maturity. Therefore, the fair value for these financial instruments is
considered to be immaterial.
(n) Impairment - The Company reviews its long-lived assets and goodwill for
impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. The Company's policy is that an
impairment loss is recognized if the sum of the undiscounted future cash flows
is less than the carrying amount of the asset. Those assets to be disposed of
are to be reported at the lower of the carrying amount or fair value, less costs
to sell. To date, the Company has not had to record any impairment write-downs
of its long-lived assets or
51
goodwill.
(o) Comprehensive Income - Comprehensive income is defined as the change in
equity during a period for non-owner transactions and is divided into net income
and other comprehensive income. Other comprehensive income includes revenues,
expenses, gains, and losses that are excluded from earnings under current
accounting standards. As of and for the periods presented, the sole component of
other comprehensive income for the Company has consisted of the unrealized gains
and losses, net of taxes, of the Company's available for sale securities
portfolio.
(p) Segment Reporting - Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" requires
management to report selected financial and descriptive information about
reportable operating segments. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Generally, disclosures are required for segments internally identified to
evaluate performance and resource allocation. In all material respects, the
Company's operations are entirely within the commercial banking segment, and the
financial statements presented herein reflect the results of that segment. Also,
the Company has no foreign operations or customers.
(q) Reclassifications - Certain amounts for prior years have been
reclassified to conform to the 1999 presentation. The reclassifications had no
effect on net income or shareholders' equity as previously presented, nor did
they materially impact trends in financial information.
Note 2. Acquisitions
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. First Savings Bancorp, headquartered in
Southern Pines, North Carolina, has total assets of $330 million, with loans of
$224 million and deposits of $232 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 the second quarter of 2000.
On November 14, 1997, First Bank acquired a First Union National Bank
branch located in Lillington, North Carolina. Real and personal property
acquired totaled approximately $237,000 and deposits assumed totaled
approximately $14,345,000. No loans were included in the purchase. First Bank
recorded an intangible asset of approximately $1,588,000 in connection with the
transaction.
On December 15, 1995, First Bank completed a cash acquisition of the
Laurinburg and Rockingham branches of First Scotland Bank. A $786,000 intangible
asset was recorded in addition to the approximately $15 million in assets and
deposits that were acquired.
On August 25, 1994, First Bank completed a cash acquisition of Central
State Bank in High Point, North Carolina. The purchase of this institution, with
approximately $35 million in assets, resulted in the Company recording
intangible assets totaling approximately $5.8 million.
52
Note 3. Securities
The book values and approximate fair values of investment securities at
December 31, 1999 and 1998 are summarized as follows:
1999 1998
--------------------------------------------- ---------------------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Gains (Losses) Cost Value Gains (Losses)
---- ----- ----- -------- ---- ----- ----- --------
(In thousands)
Securities available for sale:
U.S. Treasury $ 502 514 12 -- 503 544 41 --
U.S. Government agencies 33,408 31,873 -- (1,535) 28,560 28,636 130 (54)
Mortgage-backed securities 19,424 19,035 20 (409) 27,454 27,406 89 (137)
State and local governments 1,272 1,272 -- -- 896 896 -- --
Equity securities 1,625 1,596 -- (29) 1,327 1,318 1 (10)
------- ------ --- ------ ------ ------ --- ----
Total available for sale $56,231 54,290 32 (1,973) 58,740 58,800 261 (201)
======= ====== ==== ====== ====== ====== ==== ====
Securities held to maturity:
State and local governments $17,221 17,069 153 (305) 18,121 18,864 743 --
Other 297 297 -- -- 359 359 -- --
------- ------ --- ------ ------ ------ --- ----
Total held to maturity $17,518 17,366 153 (305) 18,480 19,223 743 --
======= ====== ==== ====== ====== ====== ==== ====
Included in mortgage-backed securities at December 31, 1999 were
collateralized mortgage obligations with an amortized cost of $10,955,000 and a
fair value of $10,824,000. Included in mortgage-backed securities at December
31, 1998 were collateralized mortgage obligations with an amortized cost of
$16,656,000 and a fair value of $16,620,000.
The Company owned Federal Home Loan Bank stock with a cost and fair value
of $1,500,000 at December 31, 1999 and $1,204,000 at December 31, 1998, which is
reflected as equity securities above and serves as part of the collateral for
the Company's line of credit with the Federal Home Loan Bank (see Note 8 for
additional discussion). The investment in this stock is a requirement for
membership in the Federal Home Loan Bank system.
The book values and approximate fair values of investment securities at
December 31, 1999, by contractual maturity, are summarized as in the table
below. Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.
Securities Available for Sale Securities Held to Maturity
----------------------------- ---------------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
--------- ------ --------- ------
Debt securities
Due within one year $ 3,275 3,268 $ 1,236 1,240
Due after one year but within five years 23,995 22,922 6,568 6,635
Due after five years but within ten years 7,912 7,469 7,752 7,625
Due after ten years - - 1,962 1,866
Mortgage-backed securities 19,424 19,035 - -
--------- ------ --------- ------
Total debt securities 54,606 52,694 17,518 17,366
Equity securities 1,625 1,596 - -
--------- ------ --------- ------
Total securities $ 56,231 54,290 $ 17,518 17,366
========= ====== ========= ======
At December 31, 1999 and 1998, investment securities with book values of
$18,553,000 and $18,384,000, respectively, were pledged as collateral for public
deposits.
Sales of securities available for sale with aggregate proceeds of $3,017,000
in 1999, $8,053,000 in 1998, and $8,361,000 in 1997 resulted in gross gains of
$20,000 in 1999, gross gains of $32,000 and gross losses of $3,000
53
in 1998, and gross losses of $12,000 in 1997.
Note 4. Loans And Allowance For Loan Losses
Loans at December 31, 1999 and 1998 are summarized as follows:
(In thousands) 1999 1998
--------- -------
Commercial, financial, and agricultural $ 58,549 52,415
Real estate - construction 32,991 36,565
Real estate - mortgage 295,694 237,833
Installment loans to individuals 32,113 31,649
--------- -------
Subtotal 419,347 358,462
Unamortized net deferred loan fees (184) (128)
--------- -------
Loans, net of deferred fees $ 419,163 358,334
========= =======
Loans described above as "Real estate - mortgage" included loans secured by
1-4 family dwellings in the amounts of $157,610,000 and $134,389,000 as of
December 31, 1999 and 1998, respectively. The loans above also include loans to
executive officers and directors and to their associates totaling approximately
$6,729,000 and $7,895,000 at December 31, 1999 and 1998, respectively. During
1999, additions to such loans were approximately $2,445,000 and repayments
totaled approximately $3,611,000. These loans were made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other non-related borrowers. Management
does not believe these loans involve more than the normal risk of collectibility
or present other unfavorable features.
Nonperforming assets at December 31, 1999 and 1998 are as follows:
(In thousands) 1999 1998
------ -----
Loans: Nonaccrual loans $ 595 601
Restructured loans 257 248
------ -----
Total nonperforming loans 852 849
Other real estate (included in other assets) 906 505
------ -----
Total nonperforming assets $1,758 1,354
====== =====
At December 31, 1999 and 1998 there were no loans 90 days or more past due
that were still accruing interest.
If the nonaccrual loans and restructured loans as of December 31, 1999, 1998
and 1997 had been current in accordance with their original terms and had been
outstanding throughout the period (or since origination if held for part of the
period), gross interest income in the amounts of approximately $58,000, $60,000
and $91,000 for nonaccrual loans and $27,000, $25,000 and $34,000 for
restructured loans would have been recorded for 1999, 1998 and 1997,
respectively. Interest income on such loans that was actually collected and
included in net income in 1999, 1998 and 1997 amounted to approximately $22,000,
$22,000 and $32,000 for nonaccrual loans (prior to their being placed on
nonaccrual status) and $24,000, $24,000 and $25,000 for restructured loans,
respectively.
54
Activity in the allowance for loan losses for the years ended December 31,
1999, 1998 and 1997 is as follows:
(In thousands) 1999 1998 1997
------- ----- -----
Balance, beginning of year $ 5,504 4,779 4,726
Provision for loan losses 910 990 575
Recoveries of loans charged-off 112 169 299
Loans charged-off (448) (434) (821)
------- ----- -----
Balance, end of year $ 6,078 5,504 4,779
======= ===== =====
At December 31, 1999, the recorded investment in loans that are considered
to be impaired was $281,000, of which all were on a nonaccrual basis. At
December 31, 1998, the Company had no loans that were considered to be impaired.
The related allowance for loan losses for the impaired loans at December 31,
1999 was $42,000. There were no impaired loans at December 31, 1999 for which
there was no related allowance. The average recorded investments in impaired
loans during the years ended December 31, 1999, 1998 and 1997 were approximately
$123,000, $110,000, and $654,000, respectively. For the years ended December 31,
1999, 1998 and 1997, the Company recognized no interest income on those impaired
loans during the period that they were considered to be impaired.
Note 5. Premises And Equipment
Premises and equipment at December 31, 1999 and 1998 consist of the
following:
(In thousands) 1999 1998
-------- -----
Land $ 2,165 1,801
Buildings 8,023 7,603
Furniture and equipment 7,120 6,151
Leasehold improvements 528 528
-------- -----
Total cost 17,836 16,083
Less accumulated depreciation and amortization (7,773) (6,992)
-------- -----
Net book value of premises and equipment $ 10,063 9,091
======== =====
Note 6. Income Taxes
The components of income tax expense (benefit) for the years ended December
31, 1999, 1998 and 1997 are as follows:
(In thousands) 1999 1998 1997
------- ----- -----
Current - Federal $ 3,339 2,466 2,321
- State 83 413 290
Deferred - Federal (162) 180 (62)
------- ----- -----
Total $ 3,260 3,059 2,549
======= ===== =====
55
The sources and tax effects of temporary differences that give rise to
significant portions of the deferred tax assets (liabilities) at December 31,
1999 and 1998 are presented below:
(In thousands) 1999 1998
--------- ---------
Deferred tax assets:
Allowance for loan losses $ 2,019 1,655
Excess book over tax retirement plan cost 102 70
Basis of investment in subsidiary 68 69
Net loan fees recognized for tax reporting purposes 71 50
Reserve for employee medical expense for financial reporting purposes 12 12
Deferred compensation 40 43
Excess of book over tax related to intangible assets 83 33
Unrealized loss on securities available for sale 757 -
All other 99 165
----- -----
Gross deferred tax assets 3,251 2,097
Less: Valuation allowance (118) (99)
----- -----
Net deferred tax assets 3,133 1,998
----- -----
Deferred tax liabilities:
Loan fees (667) (492)
Excess tax over book pension cost (125) (170)
Depreciable basis of fixed assets (562) (562)
Amortizable basis of intangible assets (49) (59)
Unrealized gain on securities available for sale - (24)
Book over tax basis in unconsolidated subsidiary (56) -
All other (48) (8)
--------- -------
Gross deferred tax liabilities (1,507) (1,315)
--------- -------
Net deferred tax asset (included in other assets) $ 1,626 683
========= =======
A portion of the change in the net deferred tax asset relates to unrealized
gains and losses on securities available for sale. The related current period
deferred tax benefit of approximately $780,000 as of December 31, 1999 and
deferred tax benefit of approximately $73,000 as of December 31, 1998 have been
recorded directly to shareholders' equity. The balance of the 1999 change in the
net deferred tax asset of $162,000 is reflected as a deferred income tax benefit
in the consolidated statement of income.
The valuation allowance applies primarily to offset the recognition of
deferred tax benefits on certain temporary differences for state income tax
purposes. It is management's belief that the realization of the remaining net
deferred tax assets is more likely than not.
The following is a reconcilement of federal income tax expense at the
statutory rate of 34% to the income tax provision reported in the financial
statements.
(In thousands) 1999 1998 1997
------- ----- -----
Tax provision at statutory rate $ 3,359 2,972 2,571
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income (339) (378) (425)
Non-deductible interest expense 41 45 48
Non-deductible portion of amortization of
intangible assets 126 132 142
State income taxes, net of federal benefit 55 273 191
Other, net 18 15 22
------- ----- -----
Total $ 3,260 3,059 2,549
======= ===== =====
56
Note 7. Deposits
At December 31, 1999, the scheduled maturities of time deposits are as
follows:
(In thousands)
2000 $ 213,492
2001 28,398
2002 5,732
2003 3,256
2004 2,313
Thereafter 1,959
------------
$ 255,150
============
Note 8. Borrowings
The Company has three sources of borrowing capacity - 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 (FRB) discount window. The Company did not obtain any
long-term borrowings under any of these credit lines during 1999, 1998 or 1997.
The Company's line of credit with the FHLB totaling approximately
$62,000,000 can be structured as either short-term or long-term borrowings,
depending on the particular funding or liquidity need and is secured by the
Company's FHLB stock and a blanket lien on its one-to-four family residential
loan portfolio. During 1999 and 1998, the Company periodically used this line of
credit as a short-term, overnight borrowing to meet internally targeted
liquidity levels. These short-term borrowings generally carried an interest rate
that was approximately 25 basis points higher than the national discount rate.
In addition, on October 29, 1999, the Company obtained a three month $15,000,000
borrowing from the FHLB at a fixed interest rate of 5.98% in connection with the
Company's Y2K liquidity contingency plan. At December 31, 1999, a total of
$30,000,000 was outstanding under the FHLB line of credit, $15,000,000 of which
was the three month borrowing at 5.98% and $15,000,000 which was an overnight,
adjustable rate borrowing that had an interest rate of 4.55% on December 31,
1999. There was no amount outstanding under this line of credit at December 31,
1998 or 1997. During 1999, the average amount outstanding for this line of
credit was approximately $11,058,000 and carried a weighted average interest
rate of 5.57%. During 1999, the highest month end balance under this line of
credit was $45,000,000. During 1998, the average amount outstanding for this
line of credit was approximately $2,508,000 and carried a weighted average
interest rate of 5.67%. During 1998, the highest month end balance under this
line of credit was $16,000,000. There were no amounts drawn under this line of
credit in 1997.
The Company also has a correspondent bank relationship established that
allows the Company to purchase up to $15,000,000 in federal funds on an
overnight, unsecured basis. The Company had no borrowings under this line at
December 31, 1999. At December 31, 1998, the Company had $6,000,000 outstanding
under this arrangement at an interest rate of approximately 5.25%. During 1999,
the average amount outstanding for this line of credit was approximately
$153,000 and carried a weighted average interest rate of 4.58%. During 1999,
there were no amounts outstanding at any month end during the year. During 1998,
the average amount outstanding for this line of credit was approximately $16,000
and carried a weighted average interest rate of 5.25%. During 1998, the highest
month end balance under this line was $6,000,000. Insignificant purchases of
federal funds in 1997 resulted in $3,000 in interest expense during 1997.
During 1999, the Company established a line of credit totaling
approximately $27,000,000 with the FRB discount window. This line is secured by
a blanket lien on a portion of the Company's commercial, consumer and real
estate portfolio (not including 1-4 family). This line of credit was established
primarily in connection with the Company's Y2K liquidity contingency plan. This
line of credit was not drawn on during 1999, and subsequent to December 31,
1999, the FRB has stated that it does not expect lines of credit that have been
granted
57
to financial institutions to be a primary borrowing source. The Company plans to
maintain this line of credit, although it is not expected that it will be drawn
upon except in unusual circumstances.
Note 9. Leases
Certain bank premises are leased under operating lease agreements.
Generally, operating leases contain renewal options on substantially the same
basis as current rental terms. Rent expense charged to operations under all
operating lease agreements was $197,000 in 1999, $154,000 in 1998, and $139,000
in 1997.
Future obligations for minimum rentals under noncancelable operating leases
at December 31, 1999 are as follows:
(In thousands)
Year ending December 31:
2000 $ 157
2001 97
2002 63
2003 29
2004 13
Later years 40
-----
Total $ 399
=====
Note 10. Employee Benefit Plans
Salary Reduction Profit Sharing Plan. The Company sponsors a salary
reduction profit sharing plan pursuant to Section 401(k) of the Internal Revenue
Code. Employees who have completed one year of service are eligible to
participate in the plan. An eligible employee may contribute up to 14% of annual
salary to the plan. The Company contributes an amount equal to 75% (50% in 1997)
of the first 6% of the employee's salary contributed. Participants vest in
Company contributions at the rate of 20% after one year of service, and 20% for
each additional year of service, with 100% vesting after five years of service.
The Company's matching contribution expense was $239,000, $196,000 and $110,000
for the years ended December 31, 1999, 1998 and 1997, respectively. The Company
made additional discretionary matching contributions to the plan of $100,000 in
1999, 1998 and 1997.
Incentive Compensation Plan. The Company also has an incentive compensation
plan covering certain management and staff employees. Payments pursuant to the
plan are based on achievement of certain performance goals. The Company's
incentive compensation plan expense was $815,000, $625,000 and $502,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. There were 97, 85,
and 79 employees who participated in this plan during 1999, 1998, and 1997,
respectively.
Retirement Plan. The Company sponsors a noncontributory defined benefit
retirement plan (the "Retirement Plan"), which is intended to qualify under
Section 401(a) of the Internal Revenue Code. Employees who have attained age 21
and completed one year of service are eligible to participate in the Retirement
Plan. The Retirement Plan provides for a monthly payment, at normal retirement
age of 65, equal to one-twelfth of the sum of (i) 0.75% of Final Average Annual
Compensation (5 highest consecutive calendar years earnings out of the last 10
years of employment) multiplied by the employee's years of service not in excess
of 40 years, and (ii) 0.65% of Final Average Annual Compensation in excess of
"covered compensation" multiplied by years of service not in excess of 35 years.
"Covered compensation" means the average of the social security taxable wage
base during the 35 year period ending with the year the employee attains social
security retirement age. Early retirement, with reduced monthly benefits, is
available at age 55 after 15 years of service. The Retirement Plan provides for
100% vesting after 5 years of service, and provides for a death benefit to a
vested participant's surviving spouse. The costs of benefits under the
Retirement Plan, which are borne by First Bancorp and/or its subsidiaries, are
computed actuarially and defrayed by earnings from the Retirement Plan's
investments. The compensation covered by the Retirement Plan includes total
earnings before reduction for contributions to a cash or deferred profit-sharing
plan (such as the 401(k) feature of the Profit Sharing Plan described above) and
amounts used to pay group health
58
insurance premiums and includes bonuses (such as amounts paid under the
incentive compensation plan). Compensation for the purposes of the Retirement
Plan may not exceed statutory limits; such limit in 1999, 1998 and 1997 was
$160,000.
The Company's contributions to the Retirement Plan are based on
computations by independent actuarial consultants and are intended to provide
the Company with the maximum deduction for income tax purposes. The
contributions are invested to provide for benefits under the Retirement Plan. At
December 31, 1999, the Retirement Plan's assets were invested in Company common
stock (8%), equity mutual funds (61%), and fixed income mutual funds (31%).
The following table reconciles the beginning and ending balances of the
Retirement Plan's benefit obligation, as computed by the Company's independent
actuarial consultants:
(In thousands) 1999 1998 1997
------- ----- -----
Benefit obligation at beginning of year $ 4,052 3,254 2,323
Service cost 282 201 146
Interest cost 277 235 199
Actuarial loss (gain) (609) 473 666
Benefits paid (123) (111) (80)
------- ----- -----
Benefit obligation at end of year $ 3,879 4,052 3,254
======= ===== =====
The following table reconciles the beginning and ending balances of the
Retirement Plan's assets:
(In thousands) 1999 1998 1997
------- ----- -----
Plan assets at beginning of year $ 3,582 2,994 2,237
Actual return on plan assets 804 504 619
Employer contributions 216 195 218
Benefits paid (123) (111) (80)
------- ----- -----
Plan assets at end of year $ 4,479 3,582 2,994
======= ===== =====
The following tables presents information regarding the funded status of the
Retirement Plan, the amounts not recognized in the consolidated balance sheets,
and the amounts recognized in the consolidated balance sheets:
(In thousands) 1999 1998
----- -----
Funded status $ 600 (470)
Unrecognized net actuarial (gain) loss (875) 202
Unrecognized prior service cost 650 755
Unrecognized transition obligation 57 59
----- -----
Prepaid pension cost $ 432 546
===== =====
Net pension cost for the Retirement Plan included the following components
for the years ended December 31, 1999, 1998 and 1997:
(In thousands) 1999 1998 1997
----- --- ---
Service cost - benefits earned during the period $ 282 201 146
Interest cost on projected benefit obligation 277 235 199
Expected return on plan assets (340) (239) (180)
Net amortization and deferral 111 107 96
----- --- ---
Net periodic pension cost $ 330 304 261
===== === ===
Supplemental Executive Retirement Plan. The Company sponsors a Supplemental
Executive Retirement Plan (the "SERP Plan") for the benefit of certain senior
management executives of the Company. The purpose of the
59
SERP Plan is to provide additional monthly pension benefits to ensure that each
such senior management executive would receive lifetime monthly pension benefits
equal to 3% of his or her final average compensation multiplied by his or her
years of service (maximum of 20 years) to the Company or its subsidiaries,
subject to a maximum of 60% of his or her final average compensation. The amount
of a participant's monthly SERP benefit is reduced by (i) the amount payable
under the Company's qualified Retirement Plan (described above), and (ii) fifty
percent (50%) of the participant's primary social security benefit. Final
average compensation means the average of the 5 highest consecutive calendar
years of earnings during the last 10 years of service prior to termination of
employment.
The Company's funding policy with respect to the SERP Plan is to fund the
related benefits through investments in life insurance policies, which are not
considered plan assets for the purpose of determining the SERP Plan's funded
status.
The following table reconciles the beginning and ending balances of the SERP
Plan's benefit obligation, as computed by the Company's independent actuarial
consultants:
(In thousands) 1999 1998 1997
----- --- ---
Benefit obligation at beginning of year $ 442 347 331
Effects of change in census information -- 34 (25)
Service cost 30 12 10
Interest cost 33 27 23
Actuarial loss 19 22 28
Benefits paid (16) -- (20)
----- ----- -----
Benefit obligation at end of year $ 508 442 347
===== ===== =====
The following table presents information regarding the funded status of the
SERP Plan, the amounts not recognized in the consolidated balance sheets, and
the amounts recognized in the consolidated balance sheets:
(In thousands) 1999 1998
----- ----
Funded status $(508) (442)
Unrecognized net actuarial gain (71) (89)
Unrecognized prior service cost 290 327
Adjustment for minimum liability (111) (95)
----- ----
Accrued pension cost $(400) (299)
===== ====
Net pension cost for the SERP Plan included the following components for
the years ended December 31, 1999, 1998 and 1997:
(In thousands) 1999 1998 1997
---- -- --
Service cost - benefits earned during the period $ 30 12 10
Interest cost on projected benefit obligation 33 27 23
Net amortization and deferral 37 27 26
---- --- ---
Net periodic pension cost $100 66 59
==== === ===
60
The following assumptions were used in determining the actuarial
information for the Retirement Plan and the SERP Plan for the years ended
December 31, 1999, 1998 and 1997:
1999 1998 1997
--------------------- -------------------- --------------------
Retirement SERP Retirement SERP Retirement SERP
Plan Plan Plan Plan Plan Plan
---- ---- ---- ---- ---- ----
Discount rate used to determine net
periodic pension cost 6.50% 6.50% 7.00% 7.00% 7.75% 7.75%
Discount rate used to calculate end of
year liability disclosures 7.75% 7.75% 6.50% 6.50% 7.00% 7.00%
Expected long-term rate of return on assets 9.50% n/a 8.00% n/a 8.00% n/a
Rate of compensation increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Included in intangible assets at December 31, 1999 and 1998 are approximately
$138,000 and $84,000, respectively, which were recognized in connection with the
accrual of the additional minimum liability for the SERP Plan.
Split Dollar Life Insurance Plan. Effective January 1, 1993, the Company
adopted a Split Dollar Life Insurance Plan (the "Split Dollar Plan") whereby
individual whole life insurance is made available to certain senior management
executives designated and approved by the Board of Directors. Coverages for each
executive are approximately $100,000. The Company pays the premiums under this
plan and maintains a collateral interest in each participant's policy equal to
the sum of premiums paid. If a policy is terminated or becomes payable because
of the death of a participant, the premiums paid by the Company are recovered
before any payment is made to the participant or the participant's beneficiary.
In addition, the Company will recover its investment in the policy before
transfer of the policy to the participant. Upon the death of a participant, the
participant's designated beneficiary will receive a death benefit equal to the
amount of coverage under his or her policy that is in excess of the amount of
cumulative premiums paid by the Company. The amounts of insurance premiums paid
by the Company in 1999, 1998 and 1997 under the Split-Dollar Plan on behalf of
all executive officers as a group were $24,000, $22,000 and $14,000,
respectively.
Note 11. Commitments And Contingencies
See Note 9 with respect to future obligations under noncancelable operating
leases.
In the normal course of business there are various outstanding commitments
and contingent liabilities such as commitments to extend credit, which are not
reflected in the financial statements. As of December 31, 1999, the Company had
outstanding loan commitments of $96,385,000, of which $80,162,000 were at
variable rates and $16,223,000 were at fixed rates. Included in outstanding loan
commitments were unfunded commitments of $36,137,000 on revolving credit plans,
of which $31,799,000 were at variable rates and $4,338,000 were at fixed rates.
Additionally, standby letters of credit of approximately $2,332,000 and $924,000
were outstanding at December 31, 1999 and 1998, respectively. The Company's
exposure to credit loss for the aforementioned commitments in the event of
nonperformance by the party to whom credit or financial guarantees have been
extended is represented by the contractual amount of the financial instruments
discussed above. However, management believes that these commitments represent
no more than the normal lending risk that the Company commits to its borrowers.
If these commitments are drawn, the Company plans to obtain collateral if it is
deemed necessary based on management's credit evaluation of the counter-party.
The types of collateral held varies but may include accounts receivable,
inventory and commercial or residential real estate. Management expects any
draws under existing commitments to be funded through normal operations.
The Bank grants primarily commercial and installment loans to customers
throughout its market area, which consists of Anson, Cabarrus, Chatham,
Davidson, Guilford, Harnett, Lee, Montgomery, Moore, Randolph, Richmond,
Robeson, Scotland and Stanly Counties in North Carolina. The real estate loan
portfolio can be affected by the condition of the local real estate market. The
commercial and installment loan portfolios can be
61
affected by local economic conditions.
The Company is not involved in any legal proceedings which, in management's
opinion, could have a material effect on the consolidated financial position of
the Company.
Note 12. Fair Value Of Financial Instruments
Fair value estimates as of December 31, 1999 and 1998 and limitations
thereon are set forth below for the Company's financial instruments. Please see
Note 1 for a discussion of fair value methods and assumptions, as well as fair
value information for off-balance sheet financial instruments.
December 31, 1999 December 31, 1998
------------------------------ -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ------ ------ ------
(In thousands)
Cash and due from banks,
noninterest-bearing $ 23,055 23,055 22,073 22,073
Due from banks, interest-bearing 15,231 15,231 8,398 8,398
Federal funds sold 12,280 12,280 8,295 8,295
Securities available for sale 54,290 54,290 58,800 58,800
Securities held to maturity 17,518 17,366 18,480 19,223
Presold mortgages in process
of settlement 1,121 1,121 2,619 2,619
Loans, net of allowance 413,085 412,324 352,830 353,706
Accrued interest receivable 3,373 3,373 2,789 2,789
Deposits 480,023 480,337 440,266 440,985
Short-term borrowings 30,000 30,000 6,000 6,000
Accrued interest payable 3,457 3,457 3,080 3,080
Limitations Of Fair Value Estimates. Fair value estimates are made at a
specific point in time, based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include net premises and equipment,
intangible and other assets such as foreclosed properties, deferred income
taxes, prepaid expense accounts, income taxes currently payable and other
various accrued expenses. In addition, the income tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in any of the estimates.
Note 13. Stock Option Plan
Pursuant to provisions of the Company's 1994 Stock Option Plan (the "Option
Plan"), options to purchase up to 555,000 shares of First Bancorp's authorized
but unissued common stock may be granted to employees ("Employee Options") and
directors ("Nonemployee Director Options") of the Company and its subsidiaries.
The purposes of the Option Plan are (i) to align the interests of participating
employees and directors with the Company's shareholders by reinforcing the
relationship between shareholder gains and participant rewards, (ii) to
encourage equity ownership in the Company by participants, and (iii) to provide
an incentive to employee participants to continue their employment with the
Company. Since the inception of the Option Plan, each
62
nonemployee director has been granted 1,500 Nonemployee Director Options on June
1 of each year. Employee Options were granted to substantially all officers at
the inception of the Option Plan and since then have been granted to new
officers, officers that have assumed increased responsibilities, and for
performance rewards. For both Employee and Nonemployee Director Options, the
option price is the fair market value of the stock at the date of grant.
Employee Options vest 20% per year over a five-year period. However, upon
consummation of the acquisition of First Savings Bancorp, Inc. discussed in Note
2, all Employee Options outstanding at the time of the consummation will
automatically become 100% vested due to change-in-control provisions contained
in the Employee Options. Director Options are 100% vested on the date of grant.
All options expire not more than 10 years from the date of grant. Forfeited
options become available for future grants.
At December 31, 1999, there were 189,600 additional shares available for
grant under the Option Plan. The per share weighted-average fair value of
options granted during 1999, 1998, and 1997 was $5.75, $7.33, and $5.53,
respectively on the date(s) of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
1999 1998 1997
---- ---- ----
Expected dividend yield 2.70% 1.90% 2.05%
Risk-free interest rate 5.47% 5.50% 6.20%
Expected life 8 years 8 years 8 years
Expected volatility 31.00% 25.00% 21.50%
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
(In thousands except per share data) 1999 1998 1997
--------- ----- -----
Net income: As reported $ 6,619 5,683 5,012
Pro forma 6,414 5,542 4,892
Earnings per share: Basic - As reported 1.46 1.25 1.11
Basic - Pro forma 1.42 1.22 1.08
Diluted - As reported 1.43 1.22 1.08
Diluted - Pro forma 1.38 1.19 1.06
Pro forma net income and earnings per share reflect only options granted
since January 1, 1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the pro forma net
income and earnings per share amounts presented above because compensation cost
is reflected over the options' vesting period of 5 years and compensation cost
for options granted prior to January 1, 1995 is not considered. Consequently,
the effects of applying SFAS No. 123 pro forma disclosures during the initial
phase-in period may not be representative of the effects on reported net income
in future periods.
63
The following table sets forth a summary of the activity of the Option Plan
since December 31, 1996:
Options Exercisable
Options Outstanding at Year End
----------------------- -----------------------
Weighted- Weighted-
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
------ ----- ------ -----
Balance at December 31, 1996 234,300 $ 8.61 93,720 $ 7.53
Granted 45,000 17.34
Exercised (6,000) 8.25
Forfeited (11,250) 10.51
Expired - -
Balance at December 31, 1997 262,050 10.03 141,630 8.73
Granted 22,500 21.55
Exercised (1,650) 7.93
Forfeited (8,400) 17.28
Expired - -
Balance at December 31, 1998 274,500 10.77 197,940 9.89
Granted 72,000 17.19
Exercised (23,314) 7.39
Forfeited (600) 18.50
Expired (150) 18.50
Balance at December 31, 1999 322,436 $ 12.43 236,186 $ 11.04
======= ======= ======= =======
The following table summarizes information about the stock options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Weighted-
Average Weighted- Average Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/99 Life Price at 12/31/99 Price
--------------- ----------- ---- ----- ----------- -----
$6 to $7.99 119,486 5.0 $ 7.06 119,486 $ 7.06
$8 to $11.99 71,700 6.8 11.35 48,600 11.16
$12 to $15.99 16,500 7.4 15.33 16,500 15.33
$16 to $19.99 92,250 9.0 17.48 35,100 17.32
$20 to $22 22,500 8.5 21.56 16,500 21.88
------- ------ -------- ------- ---------
322,436 6.9 $ 12.43 236,186 $ 11.04
======= ====== ======== ======= =========
Note 14. Regulatory Restrictions
The Company is regulated by the Board of Governors of the Federal Reserve
System ("FED") and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Bank is regulated by
the Federal Deposit Insurance Corporation ("FDIC") and the North Carolina Office
of the Commissioner of Banks.
The primary source of funds for the payment of dividends by First Bancorp
is dividends received from its subsidiary, First Bank. The Bank, as a North
Carolina banking corporation, may pay dividends only out of undivided profits as
determined pursuant to North Carolina General Statutes Section 53-87. As of
December 31, 1999, the Bank had undivided profits of approximately $29,302,000
which were available for the payment of
64
dividends. As of December 31, 1999, approximately $14,305,000 of the Company's
investment in the Bank is restricted as to transfer to the Company without
obtaining prior regulatory approval.
The Company and the Bank 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 both
the Company's and the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank'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 as of December 31, 1999 in the
following table.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ --------------------- ----------------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------- ------ ----- ------ ----- ------ -----
(must equal or exceed) (must equal or exceed)
As of December 31, 1999
Total Capital
(to Risk Weighted Assets) $ 45,023 10.78% 33,422 8.00% 41,777 10.00%
Tier I Capital
(to Risk Weighted Assets) 39,865 9.66% 16,505 4.00% 24,757 6.00%
Tier I Capital
(to Average Assets) 39,865 7.30% 21,840 4.00% 27,300 5.00%
As of December 31, 1998
Total Capital
(to Risk Weighted Assets) $ 39,107 10.75% 29,112 8.00% 36,390 10.00%
Tier I Capital
(to Risk Weighted Assets) 34,614 9.63% 14,376 4.00% 21,564 6.00%
Tier I Capital
(to Average Assets) 34,614 7.37% 18,793 4.00% 23,491 5.00%
The average reserve balance maintained under the requirements of the
Federal Reserve was approximately $8,261,000 for the year ended December 31,
1999.
Note 15. Supplementary Income Statement Information
The "other nonrecurring net gains" line item in the amount of $168,000 on
the Consolidated Statement of
65
Income for 1997 relates to an early termination fee received on a data
processing contract.
Components of other operating expenses exceeding 1% of total income for any
of the years ended December 31, 1999, 1998 and 1997 are as follows:
(In thousands) 1999 1998 1997
- -------------- ---- ---- ----
Amortization of intangible assets $636 655 546
Stationery and supplies 839 786 756
Telephone 482 455 424
Note 16. Condensed Parent Company Information
Condensed financial data for First Bancorp (parent company only) follows:
CONDENSED BALANCE SHEETS As of December 31,
-------------------
(In thousands) 1999 1998
------- -------
Assets
Cash on deposit with bank subsidiary $ 41 54
Securities available for sale at fair value:
State and local governments (amortized costs of $710 in 1999 and $672 in 1998) 710 672
Other securities (amortized costs of $1 in 1999 and 1998) 1 1
------- -------
Total securities available for sale 711 673
------- -------
Investment in subsidiaries, at equity:
First Bank and subsidiaries 42,441 38,844
Montgomery Data Services, Inc. 193 139
First Bancorp Financial Services, Inc. 1,138 1,276
------- -------
Total investments in subsidiaries 43,772 40,259
------- -------
Land 7 7
Other assets 15 25
------- -------
Total assets $44,546 41,018
======= =======
Liabilities and shareholders' equity
Other liabilities 604 524
Shareholders' equity 43,942 40,494
------- -------
Total liabilities and shareholders' equity $44,546 41,018
======= =======
CONDENSED STATEMENTS OF INCOME Year Ended December 31,
---------------------------------
(In thousands) 1999 1998 1997
------- ----- -----
Equity in earnings (losses) of subsidiaries
Dividends - First Bank and subsidiaries $ 1,875 1,950 1,100
- Montgomery Data Services 150 100 475
- First Bancorp Financial Services, Inc. 150 -- 300
Undistributed - First Bank and subsidiaries 4,806 3,756 3,842
- Montgomery Data Services 54 52 (158)
- First Bancorp Financial Services, Inc. (127) 20 (287)
All other income and expenses, net (289) (195) (260)
------- ----- -----
Net Income $ 6,619 5,683 5,012
======= ===== =====
66
CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31,
---------------------------------
(In thousands) 1999 1998 1997
------- ------- -------
Operating Activities:
Net income $ 6,619 5,683 5,012
Equity in undistributed earnings of subsidiaries (4,733) (3,828) (3,397)
Decrease (increase) in other assets 10 7 (30)
Increase (decrease) in other liabilities 16 (20) 90
------- ------- -------
Total - operating activities 1,912 1,842 1,675
------- ------- -------
Investing Activities:
Purchases of securities available for sale (2,413) (2,204) (2,048)
Sales of securities available for sale 2,375 2,132 1,835
------- ------- -------
Total - investing activities (38) (72) (213)
------- ------- -------
Financing Activities
Payment of cash dividends (1,992) (1,752) (1,508)
Proceeds from issuance of common stock 463 13 50
Purchases and retirement of common stock (358) (6) --
------- ------- -------
Total - financing activities (1,887) (1,745) (1,458)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (13) 25 4
Cash and cash equivalents, beginning of year 54 29 25
------- ------- -------
Cash and cash equivalents, end of year $ 41 54 29
======= ======= =======
Note 17. Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards 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. Because the Company has not
historically and does not currently employ the use of derivatives, this
Statement is not expected to impact the Company.
67
Independent Auditors' Report
The Board of Directors
First Bancorp
We have audited the accompanying consolidated balance sheets of First
Bancorp and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1999. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Bancorp and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/KPMG LLP
-----------
KPMG LLP
Raleigh, North Carolina
January 18, 2000
68
Part II. Other Information
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During the two years ended December 31, 1999, and any subsequent interim
periods, there were no changes in accountants and/or disagreements on any
matters of accounting principles or practices or financial statement
disclosures.
PART III
Item 10. Directors and Executive Officers of the Registrant; Compliance with
Section 16(a) of the Exchange Act
Incorporated herein by reference is the information under the caption
"Directors, Nominees and Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" from the Company's definitive proxy statement to
be filed pursuant to Regulation 14A.
Item 11. Executive Compensation
Incorporated herein by reference is the information under the caption
"Compensation of Executive Officers" and "Board Committees, Attendance, and
Compensation" from the Company's definitive proxy statement to be filed pursuant
to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference is the information under the captions
"Principal Holders of First Bancorp Voting Securities" and "Directors, Nominees
and Executive Officers" from the Company's definitive proxy statement to be
filed pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference is the information under the caption
"Certain Transactions" from the Company's definitive proxy statement to be filed
pursuant to Regulation 14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements - See Item 8, Cross Reference Index on page 2,
for information concerning the Company's consolidated financial
statements and report of independent auditors.
2. Financial Statement Schedules - not applicable
3. 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
69
incorporated herein by reference.
3.a.iii Copy of the amendment to Articles of Incorporation - adding a new
Article Ten, was filed as Exhibit 3a.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.
3.b.iii Copy of the amendment to the Bylaws amending Section 3.19 of Article
Three.
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. (*)
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
70
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 Severance Agreement between the Company and Patrick A. Meisky dated
December 29, 1995 was filed as Exhibit 10(o) to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995, and is
incorporated by reference. (*)
10.k 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.l 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.m 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.n 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.o 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.p 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.q 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.r Employment Agreement between the Company and David G. Grigg dated
August 17, 1998. (*)
10.s 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.
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.
23.a Consent of Independent Auditors of Registrant, KPMG LLP.
27 Financial Data Schedule pursuant to Article 9 of Regulation S-X.
(b) The Registrant filed one report on Form 8-K during the quarter ended
December 31, 1999, which was filed on December 21, 1999 and disclosed
under Item 5, its signing of a definitive merger agreement with First
Savings Bancorp, Inc.
71
(c) Exhibits - see (a)(3) above
(d) No financial statement schedules are filed herewith.
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO: FIRST BANCORP, ANNA G.
HOLLERS, EXECUTIVE VICE PRESIDENT, P.O. BOX 508, TROY, NC 27371
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, FIRST BANCORP has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Troy, and State of North Carolina, on the 21st day of March,
2000.
First Bancorp
By: /s/ James H. Garner
-------------------
James H. Garner
President, Chief Executive Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on behalf of the Company by the following persons and in
the capacities and on the dates indicated.
Executive Officers
/s/ James H. Garner
-------------------
James H. Garner
President, Chief Executive Officer and Treasurer
/s/ Anna G. Hollers /s/ Eric P. Credle
------------------- ------------------
Anna G. Hollers Eric P. Credle
Executive Vice President Senior Vice President
Executive Secretary Chief Financial Officer
March 21, 2000 March 21, 2000
Board of Directors
/s/ Jack D. Briggs /s/ Edward T. Taws
------------------ ------------------
Jack D. Briggs Edward T. Taws
Chairman of the Board Director
Director March 21, 2000
March 21, 2000
/s/ David L. Burns /s/ Frederick H. Taylor
------------------ -----------------------
David L. Burns Frederick H. Taylor
Director Director
March 21, 2000 March 21, 2000
/s/ Jesse S. Capel /s/ Goldie H. Wallace
----------------- ---------------------
Jesse S. Capel Goldie H. Wallace
Director Director
March 21, 2000 March 21, 2000
/s/ George R. Perkins /s/ A. Jordan Washburn
--------------------- ----------------------
George R. Perkins A. Jordan Washburn
Director Director
March 21, 2000 March 21, 2000
/s/ G.T. Rabe, Jr. /s/ John C. Willis
------------------ ------------------
G.T. Rabe, Jr. John C. Willis
Director Director
March 21, 2000 March 21, 2000
73
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 76
3.b.iii Copy of the amendment to the Bylaws amending Section 3.19 of
Article Three 77
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 Severance Agreement between the Company and Patrick A.
Meisky *
10.k Amendment to the First Bancorp Savings Plus and Profit
Sharing Plan *
10.l Employment Agreement between the Company and James H. Garner *
10.m Employment Agreement between the Company and Anna G. Hollers *
10.n Employment Agreement between the Company and Teresa C. Nixon *
10.o First Amendment to the First Bancorp Supplemental Executive
Retirement Plan *
10.p Employment Agreement between the Company and Eric P. Credle *
10.q Amendments 1 and 2 to the Company's 1994 Stock Option Plan *
10.r Employment Agreement between the Company and David G. Grigg 78
10.s Definitive merger agreement with First Savings Bancorp, Inc. *
74
21 List of Subsidiaries of Registrant *
23.a Consent of Independent Auditors of Registrant, KPMG LLP 83
27 Financial Data Schedule pursuant to Article 9 of Regulation S-X 84
* Incorporated herein by reference.
75