Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File Number 0-15572
FIRST BANCORP
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
-------------------------------- ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
341 North Main Street, Troy, North Carolina 27371-0508
- ---------------------------------------------- ----------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (910) 576-6171
-------------------------
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 16, 2001 as reported on the NASDAQ
National Market System, was approximately $127,417,000. 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 16, 2001 was 8,767,971.
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.
================================================================================
CROSS REFERENCE INDEX
Begins on
Page (s)
PART I Business:
Item I General Description 4
Statistical Information
Net Interest Income 15, 31
Average Balances and Net Interest Income Analysis 15, 31
Volume and Rate Variance Analysis 15, 32
Provision for Loan Losses 15, 37
Noninterest Income 16, 32
Noninterest Expenses 17, 32
Income Taxes 17, 33
Distribution of Assets and Liabilities 18, 33
Securities 18, 33
Loans 19, 35
Nonperforming Assets 20, 36
Allowance for Loan Losses and Loan Loss Experience 22, 36
Deposits 23, 37
Borrowings 24
Interest Rate Risk (Including Quantitative
and Qualitative Disclosures About Market Risk) 24, 38
Off-Balance Sheet Risk 25
Return on Assets and Equity 26, 39
Liquidity 26
Capital Resources and Shareholders' Equity 27, 40
Inflation 28
Current accounting matters 28
Forward-Looking Statements 29
Item 2 Properties 10
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Shareholders 10
PART II
Item 5 Market for the Registrant's Common Stock and Related
Shareholder Matters 10
Item 6 Selected Consolidated Financial Data 11, 30
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, 2000 and 1999 42
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2000 43
Consolidated Statements of Comprehensive Income for each of the
years in the three-year period ended December 31, 2000 44
Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended December 31, 2000 45
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2000 46
2
Begins on
Page (s)
Notes to Consolidated Financial Statements 47
Independent Auditors' Report 71
Selected Consolidated Financial Data 30
Quarterly Financial Summary 41
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 72
PART III
Item 10 Directors and Executive Officers of the Registrant; Compliance
with Section 16 (a) of the Exchange Act 72*
Item 11 Executive Compensation 72*
Item 12 Security Ownership of Certain Beneficial Owners and Management 72*
Item 13 Certain Relationships and Related Transactions 72*
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports of Form 8-K 72
SIGNATURES 76
* Information called for by Part III (Items 10 through 13) is incorporated
herein by reference to the Registrant's definitive Proxy Statement for the
2001 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. The Bank
currently operates in a 15 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 39 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 is the 9th largest bank in North Carolina
as of December 31, 2000.
On September 14, 2000, the Company completed the merger acquisition of
First Savings Bancorp, Inc. ("First Savings"). This merger was material to the
Company. The merger was accounted for as a pooling-of-interests and accordingly,
all financial results for prior periods have been restated to include the
combined results of the Company and First Savings. At the time of the merger,
First Savings had approximately $310 million in assets, and in connection with
merger the Company issued approximately 4.4 million shares of stock, nearly
doubling its number of shares outstanding.
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
2000, 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, management does not believe that the loss of a single
customer or group of customers would have a material adverse impact on the Bank.
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. Because the Bank operates entirely within the central Piedmont region of
North Carolina, the economic conditions within that area could have a material
impact on the Company - see additional discussion below in the section entitled
"Territory Served and Competition."
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 in 2000
and 1999 were approximately $112,000 and $7,000, respectively, and are reflected
in the line item entitled "Other service charges, commissions, and fees" in
Table 4 and in the Consolidated Statements of Income. The line item entitled
"Commissions from sales of credit 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 93% of Montgomery
Data's data processing revenue in 2000 compared to 97% in 1999 and 99% in 1998.
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. Montgomery Data 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. Montgomery Data
had two nonaffiliated customers in 1999 that generated $50,000 in gross revenue
and four nonaffiliated customers in 2000 that generated $117,000 in gross
revenue. Assuming Montgomery Data retains all four nonaffiliated customers for
2001, management estimates that gross revenue related to those customers will be
approximately $150,000.
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.
5
Territory Served and Competition
The Company's headquarters are located in Troy, Montgomery County. The
Company serves primarily the south central area of the Piedmont region of North
Carolina, with offices in 15 counties. The following table presents each county
the Company operates in, the number of bank branches within each of those
counties, and the approximate amount of deposits in each county.
No. of Deposits No. of Deposits
County Branches (in millions) County Branches (in millions)
- -------------------- ---------------- -------------- ------------------ --------------- ----------------
Anson 1 $13 Moore 10 $318
Cabarrus 1 20 Randolph 4 36
Chatham 2 26 Richmond 1 15
Davidson 1 29 Robeson 1 3
Guilford 1 34 Rowan 1 11
Harnett 3 50 Scotland 2 22
Lee 2 49 Stanly 4 52
Montgomery 5 92 --------------- ----------------
Total 39 $770
=============== ================
The Company's 39 branches and facilities are primarily located in small
communities whose economies are based primarily on services, 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 manufacturing industries in the
trade area. Leading producers of socks, hosiery and area rugs are located in
Montgomery County. The Pinehurst area within Moore County 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.
As shown in the table above, approximately 40% of the Company's deposit
base is in Moore County, and accordingly material changes in competition, the
economy or population of Moore County could materially impact the Company.
Montgomery County is the only other county that comprises more than 10% of the
Company's deposit base.
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. Moore County, which as noted above comprises a disproportionate share of
the Company's deposits, is a particularly competitive market with at least ten
other financial institutions having a physical presence. 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. The Company also
experiences competition from Internet banks, particularly as it relates to time
deposits.
6
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 authority to approve loans of various amounts up to $75,000. Each
of the Bank's regional senior lending officers has discretion to approve secured
loans in principal amounts up to $350,000 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 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 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.
7
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.
Merger Activity
As part of its operations, the Company regularly evaluates the potential
acquisition of, or merger with, and holds discussions with, various financial
institutions. See Item 7 - Management's Discussion and Analysis below for a
discussion of recently completed and pending mergers and acquisitions.
Employees
As of December 31, 2000, the Company had 306 full-time and 54 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 quarterly reports and other
information regarding its business operations and those of its subsidiaries with
the Federal Reserve Board. 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
8
risk to the safety or soundness of depository institutions or the financial
system generally. This Act made 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 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 significant new provisions relates to the financial privacy of consumers and
authorized federal banking regulators to adopt rules that would limit the
ability of banks and other financial entities to disclose non-public information
about consumers to non-affiliated entities. The rules that have subsequently
been adopted by the bank regulators require more disclosure to consumers
regarding the privacy of the information they provide, and in some
circumstances, will require consent by the consumer before information is
allowed to be provided to a third party. These rules take effect on July 1,
2001. The Company does not anticipate having any difficulties in complying with
the rules.
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 has placed the Company in more
direct competition with other financial institutions, including mutual funds,
securities brokerage firms, insurance companies, and investment banking firms.
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.
9
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.
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 and Shareholders' Equity" 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 39 branches and
facilities. The Company owns all its premises except twelve 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.
Item 4. Submission of Matters to a Vote of Shareholders
No matters were submitted to a vote of shareholders during the fourth
quarter of 2000.
10
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 amounts, except for the Company's stock price, have
been restated to include the combined results of First Bancorp and First
Savings. 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 January 31, 2001, there were approximately 2,000
shareholders of record and an estimated 2,200 shareholders whose stock is held
in "street name."
Item 6. Selected Financial Data
Table 1 on page 30 sets forth selected consolidated financial data for 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 42 of this report and the supplemental financial data contained in Tables 1
through 21 included with this discussion and analysis. The merger with First
Savings was accounted for as a pooling-of-interests and accordingly, all
financial results for prior periods have been restated to include the combined
results of First Bancorp and First Savings.
Completed Mergers, Acquisitions, and Divestitures
On September 14, 2000, the Company completed its merger with First Savings
Bancorp, Inc., the holding company for First Savings Bank of Moore County, SSB
(collectively referred to as "First Savings"). In accordance with the terms of
the merger agreement, each share of First Savings stock was exchanged for 1.2468
shares of the Company's stock. These terms resulted in the Company issuing
approximately 4,407,000 shares of stock to complete the transaction. At June 30,
2000, First Savings had total assets of $331 million, with loans of $232 million
and deposits of $224 million.
To gain Federal Reserve approval for the merger with First Savings, the
Company was required to divest the First Savings bank branch located in
Carthage, NC. This branch was sold to another North Carolina community bank in a
transaction that was completed in November 2000. At the time of the divestiture,
the Carthage branch had approximately $15.1 million in total deposits and $2.3
million in total loans. The sale of the branch resulted in a net gain of
$808,000.
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. The Bank recorded an
intangible asset of approximately $1,588,000 in connection with the transaction.
On December 15, 1995, the 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.
11
On August 25, 1994, the 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.
Pending Mergers and Acquisitions
The Company announced on September 13, 2000 that it had reached an
agreement with First Union National Bank to acquire four branches with aggregate
deposits of approximately $105 million and aggregate loans of approximately $19
million. The four branches to be acquired are Lumberton, Pembroke, St. Pauls
(all located in Robeson County, NC), and Laurinburg (Scotland County, NC). The
closing of the transaction and the data conversion are expected to occur in the
first quarter of 2001. Total intangible assets of $15.7 million are expected to
be recorded in connection with the purchase.
The Company announced on October 20, 2000 that it had reached a definitive
agreement to acquire Century Bancorp, Inc. ("Century"). Century is the holding
company for Home Savings, Inc., SSB, a one branch savings institution located in
Thomasville, NC. As of December 31, 2000, Century had total assets of $105
million, total loans of $91 million, and total deposits of $73 million. The
terms of the agreement call for shareholders of Century to have the option to
receive either $20.00 in cash or a fixed exchange ratio of 1.3333 shares of the
Company's common stock for each share of Century common stock that they own.
This election is subject to the requirement that, subject to certain possible
adjustments that may be necessary to achieve the intended tax treatment, 60% of
Century's shares outstanding will be exchanged for cash and 40% of Century's
shares outstanding will be exchanged for shares of the Company's stock. To the
extent that Century shareholders elect to receive more aggregate stock or cash
consideration than permitted by the agreement, pro rata allocations will be
made. This transaction is expect to close during the second quarter of 2001 and
will be accounted for as a purchase transaction.
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.
RESTATEMENT OF PRIOR PERIOD RESULTS AND DISCUSSION OF NONRECURRING ITEMS OF
INCOME AND EXPENSE
The results of operations for the year 2000 were significantly impacted by
the Company's merger-acquisition of First Savings. As noted above, in accordance
with pooling-of-interests accounting requirements, all financial results of the
Company have been restated to include the operations of First Savings. In
addition, there were several material nonrecurring items of income and expense
related to the merger, as follows:
o $3,188,000 in expenses ($2,593,000 after-tax) that were incurred in
completing the September 14, 2000 merger with First Savings. These
expenses consisted primarily of investment banker fees, attorney fees,
employment contract payments, accountant fees, and early termination
fees associated with vendor contracts. These expenses were all
recorded in the third quarter of 2000.
o $2,006,000 in losses ($1,218,000 after-tax) from sales of securities.
The merger with First Savings increased the company's liability
sensitive position. To reduce the company's interest rate risk
exposure, approximately $54.5 million in securities were sold at a
total loss of $2,006,000. The proceeds from the sale were first used
to repay short-term debt, with the remaining proceeds invested in
investments with a shorter average life and a higher yield than the
securities sold.
12
o $420,000 was recorded ($254,000 after-tax) as a one time adjustment to
the allowance for loan losses during the third quarter of 2000. This
provision for loan losses was recorded in order to align the credit
risk methodologies of the Company and First Savings.
o $808,000 was realized as a gain ($491,000 after-tax) from the sale of
the Company's Carthage branch during the fourth quarter of 2000. The
sale of this branch was a regulatory requirement for approval of the
merger with First Savings.
While less significant in amount, the years 1999 and 1998 also contained
items of a nonrecurring nature. Nonrecurring items are items that are not a part
of the Company's day-to-day operations and include items such as merger-related
expenses, gains and losses from securities sales, loan sales, fixed assets,
other real estate, and other items of a similar nature. The following table
presents a summary of items for each of the past three years that are
nonrecurring in nature. The "Impact on Net Income" and "Impact on Diluted
Earnings Per Share" columns reflect the after-tax amount of the nonrecurring
item at the blended federal and state tax rate.
Gross Amount Impact on Impact on Diluted
Income/(Expense) Net Income Earnings Per Share
----------------- -------------------- --------------------
2000
------------------------------------
Merger-related addition to provision
for loan losses $ (420) (254) (0.03)
----------------- -------------------- --------------------
Items affecting noninterest income
------------------------------------
Securities losses - merger-related (2,006) (1,218) (0.14)
Other securities gains, net 87 53 0.01
Branch sale gain 808 491 0.05
Other (6) (4) -
----------------- -------------------- --------------------
Impact on 2000 noninterest income (1,117) (678) (0.08)
----------------- -------------------- --------------------
Items affecting noninterest expense
Merger-related expenses (3,188) (2,593) (0.28)
----------------- -------------------- --------------------
Impact on 2000 noninterest expense (3,188) (2,593) (0.28)
----------------- -------------------- --------------------
Total impact on 2000 $ (4,725) (3,525) (0.39)
================= ==================== ====================
1999
------------------------------------
Items affecting noninterest income
------------------------------------
Individually insignificant amounts
of securities gains, loan
sale gains, and other, net $ 39 24 0.01
================= ==================== ====================
1998
------------------------------------
Items affecting noninterest income
------------------------------------
Loan sale gains $ 227 138 0.01
Securities gains and other, net 24 15 -
----------------- -------------------- --------------------
Total impact on 1998 $ 251 153 0.01
================= ==================== ====================
Overview - 2000 Compared to 1999
Net income for the year ended December 31, 2000 amounted to $9,342,000, a
21.2% decrease from the $11,854,000 recorded for 1999. The 2000 net income
amounted to basic earnings per share of $1.05, a 20.5% decrease from the $1.32
basic earnings per share reported for 1999. Diluted earnings per share for 2000
amounted to $1.03, an 18.9% decrease from the $1.27 reported for 1999. As
discussed above, net income for 2000 was significantly impacted by the merger
with First Savings.
13
Excluding the nonrecurring items discussed above, recurring net income for
the year ended December 31, 2000 amounted to $12,867,000, an 8.8% increase from
the $11,830,000 in recurring net income for 1999. The 2000 recurring net income
amounted to basic earnings per share of $1.45, a 9.8% increase from the $1.32
basic earnings per share in 1999. Diluted earnings per share on a recurring
basis for 2000 amounted to $1.42, a 12.7% increase from the recurring diluted
earnings per share amount of $1.26 reported for 1999.
The increase in recurring earnings is primarily a result of the growth the
Company has experienced in its loan and deposit bases. In 2000, loans grew by
16.0% and deposits grew by 8.2%. Additionally since January 1, 1999, the
Company's loans have grown by a total of 31.5% and deposits have increased by
17.4%. The effect of recognizing the net interest income on a full twelve months
of the 1999 loan and deposit growth, as well as the incremental impact of the
2000 growth, resulted in an increase in net interest income of 10.2% in 2000
compared to 1999. Partially offsetting the effects of the loan and deposit
growth on net interest income was a slight decrease in the Company's net
interest margin from 4.56% in 1999 to 4.53% in 2000.
The Company's provision for loan losses amounted to $1,605,000 in 2000
compared to $910,000 in 1999. As noted above, a provision for loan losses of
$420,000 was recorded at the time of the merger with First Savings to align the
credit risk methodologies of the two companies. Excluding this one time
provision, the provision for loan losses amounted to $1,185,000 in 2000, a 30.2%
increase over the $910,000 recorded for 1999. This increase in the provision for
loan losses is consistent with higher loan growth experienced in 2000 compared
to 1999. In 2000, loans outstanding increased by $102.9 million compared to net
loan growth of $76.0 million in 1999. Asset quality indicators remained strong
in 2000.
Reported noninterest income for 2000 was $4,729,000 compared to $5,647,000
reported for 1999. Noninterest income for 2000 was significantly impacted by the
merger with First Savings as a result of losses from securities sales that were
executed to reposition the Company's bond portfolio, as well as a gain realized
from the sale of a branch that was required to be divested to gain regulatory
approval. "Core" noninterest income, which excludes the merger related items
discussed above, as well as gains and losses from sales of securities, loans,
and other assets, increased $238,000, or 4.2%, during 2000, from $5,608,000 in
1999 to $5,846,000 in 2000. The increase in core noninterest income was
associated with the general growth of the Company.
Reported noninterest expense for 2000 amounted to $26,741,000 compared to
$21,752,000 for 1999. The year 2000 included $3,188,000 in merger expenses
incurred in connection with the merger with First Savings. Excluding the
merger-related expenses, noninterest expense amounted to $23,553,000, an 8.3%
increase from 1999. The increase in noninterest expense was also associated with
the general growth of the Company.
The Company's income taxes decreased 8.0% from $6,234,000 in 1999 to
$5,736,000 in 2000. The decrease in income tax expense was a result of lower
income before income taxes, which was partially offset by a higher effective tax
rate that was caused by the nondeductibility of certain merger-related expenses.
Overview - 1999 Compared to 1998
Net income for 1999 amounted to $11,854,000, an 8.0% increase over the
$10,973,000 recorded in 1998. The 1999 net income amounted to basic earnings per
share of $1.32, a 10.0% increase from the $1.20 basic earnings per share in
1999. Diluted earnings per share for 1999 amounted to $1.27, a 12.4% increase
from the $1.13 reported for 1998. Nonrecurring items of income and expense did
not have a significant effect on net income for either year.
Comparing 1999 to 1998, increases of 8%-10% were experienced in net
interest income, noninterest income, and noninterest expenses as a result of
growth in the Company's business. Loans increased 13.4% and deposits increased
8.5% during 1999. Partially offsetting the positive effects that growth in loans
in deposits has on net interest income and net income was a decrease in the
Company's net interest margin from 4.73% in 1998 to 4.56% in 1999.
Due to lower loan growth experienced during the year, the Company's
provision for loan losses in 1999 was 8.1% lower compared to 1998, amounting to
$910,000 compared to the 1998 amount of $990,000.
The Company's effective tax rate during 1999 was 34.5% compared to an
effective rate of 35.8% in 1998. The reduction in the effective tax rate was
largely due to the favorable tax treatment of the Company's real estate
investment trust (First Troy).
14
Net Interest Income
Net interest income on a taxable-equivalent basis amounted to $39,289,000
in 2000, $35,715,000 in 1999, and $33,237,000 in 1998.
Table 2 analyzes net interest income on a taxable-equivalent basis. The
Company's net interest income on a taxable-equivalent basis increased by 10.0%
in 2000 and 7.5% in 1999. As illustrated in Table 3, these increases in net
interest income were primarily a result of increases in the amount of average
loans and deposits outstanding when comparing 2000 to 1999 and 1999 to 1998. In
2000, the average amount of loans outstanding grew by 17.3%, while the average
amount of deposits increased by 9.4%. In 1999, the average amount of loans
outstanding increased 12.4% and the average amount of deposits outstanding
increased 11.7%.
The effects of the increases in average loans and deposits on
taxable-equivalent net interest income in both 2000 and 1999 were partially
offset by a slight narrowing of the Company's interest rate spread. The
Company's net interest margin (net yield on average interest-earning assets)
decreased 3 basis points to 4.53% in 2000 compared to 4.56% in 1999. 1999's net
interest margin of 4.56% was 17 basis points lower than the 4.73% margin
realized in 1998. 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 9 basis points in 2000 to 3.75%
from 3.84% in 1999. 1999's interest rate spread of 3.84% was 5 basis points
lower than the 3.89% realized in 1998.
The decrease in the net interest margin and spread is primarily related to
the Company's increasing reliance on higher cost sources of funding. In 1998,
average time deposits greater than $100,000 and borrowings (the two highest cost
source of funds for the Company) comprised 15.3% of the Company's average total
funding sources. In 1999, the average percentage of these higher cost funds to
total funds increased to 18.0%, and in 2000 the percentage was 22.2%. The
increased reliance on higher cost funding sources has been due to the need to
fund the strong loan demand experienced by the Company.
See additional information regarding net interest income on page 24 in the
section entitled "Interest Rate Risk."
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 $1,605,000 in 2000 compared
to $910,000 in 1999 and $990,000 in 1998. As noted earlier, in connection with
the merger with First Savings, a provision for $420,000 was recorded in order to
align the risk methodologies of the two merging companies. Excluding the
merger-related provision, the Company recorded loan loss provisions of
$1,185,000 in 2000, a 30.2% increase over the 1999 provision of $910,000. With
asset quality remaining relatively stable and strong during 1998, 1999, and
2000, the variance in the provision for loan losses for each year has been due
primarily to variances in the amount of loan growth experienced. Net new loan
growth for 2000 amounted to $102.9 million compared to $76.0 million in 1999,
thus resulting in the higher provision in 2000 compared to 1999. The $76.0
million in net loan growth during 1999 was less than the $85.7 million net loan
growth experienced in 1998, thus resulting in the lower provision in 1999
compared to 1998.
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 Company's loan analysis and grading program, and adjustments are made to
maintain an adequate allowance for loan losses.
15
Noninterest Income
Noninterest income recorded by the Company amounted to $4,729,000 in 2000,
$5,647,000 in 1999, and $5,218,000 in 1998.
The decrease in noninterest income for 2000 was due to losses incurred from
sales of securities that were made in relation to the merger acquisition of
First Savings - see additional discussion below. As shown in Table 4, core
noninterest income, which excludes gains and losses from sales of securities,
loans, and other assets, as well as nonrecurrring items, amounted to $5,846,000
in 2000, an increase of 4.2% over the $5,608,000 recorded in 1999. The 1999 core
noninterest income of $5,608,000 was 12.9% higher than the $4,967,000 recorded
in 1998.
See Table 4 and the following discussion for an understanding of the
components of noninterest income.
Service charges on deposit accounts increased 4.2% in 2000 to $3,118,000
from $2,993,000 in 1999. The 1999 amount of $2,993,000 was 9.7% higher than the
1998 amount of $2,728,000. The majority of charges in this category relate to
fees earned on transaction accounts. Therefore changes in this account generally
track the changes in the amount of transaction accounts held by the Company.
Average transaction deposit accounts increased 2.7% in 2000 and 12.4% in 1999.
Other service charges, commissions and fees amounted to $1,852,000 in 2000,
a 14.6% increase from the $1,616,000 earned in 1999. The 1999 amount of
$1,616,000 was 24.5% higher than the $1,298,000 recorded 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, and is thus
more dependent on the overall level of total customers of the Company. This
category of income grew primarily because of increases in these activity-related
fee services as a result of overall growth in the Company's total customer base.
Fees from presold mortgages amounted to $453,000 in 2000, a 33.9% decrease
from the 1999 amount of $685,000. The 1999 amount was substantially the same as
the $696,000 earned in 1998. The decrease in these fees in 2000 compared to 1999
and 1998 was due to the significantly higher interest rate environment in effect
during 2000. Higher interest rates generally reduce mortgage origination
activity, particularly refinancings. The average prime rate in 2000 was 9.26%
compared to 8.00% in 1999 and 8.35% in 1998.
Commissions from sales of credit insurance amounted to $306,000 in 2000
compared to $264,000 in 1999 and $240,000 in 1998. The changes in this line item
over that three year period have been primarily due to fluctuations in the
"experience bonus" paid to the Company from the company that provides the credit
life insurance that the Company earns commissions from selling. The amount of
any experience bonus payment is computed once per year and is dependent on the
actual loss experience on credit insurance policies that the Company sold. In
the first quarter of 2000, the Company received an experience bonus of $89,000,
compared to $24,000 received in the first quarter of 1999, while no bonus was
received in 1998.
Data processing fees amounted to $117,000 in 2000, $50,000 in 1999, and
$5,000 in 1998. As noted earlier, Montgomery Data makes its excess data
processing capabilities available to area financial institutions for a fee.
Montgomery Data did not have any nonaffiliated customers from December 1997 to
December 1998. In December 1998, a contract was signed to provide data
processing for a nearby de novo bank. Since that time, Montgomery Data has added
three additional nonaffiliated clients. Assuming Montgomery Data retains all
four nonaffiliated customers for 2001, the Company estimates that gross revenue
related to those customers will be approximately $150,000.
16
Noninterest income not defined as "core" amounted to net losses of
$1,117,000 in 2000 compared to gains of $39,000 in 1999, and gains of $251,000
during 1998. The net losses of $1,117,0000 recorded in 2000 primarily related to
two merger-related events - a $2,006,000 loss resulting from a restructuring of
the combined company's investment portfolio and an $808,000 gain realized from
the fourth quarter sale of a branch that was required to be divested in order to
gain regulatory approval. At the time of the merger, the Company analyzed the
combined investment portfolio in relation to its overall asset-liability
management. The merger with First Savings increased the Company's liability
sensitive position. To reduce the Company's interest rate risk exposure,
approximately $54.5 million in available for sale securities were sold at a
total loss of $2,006,000 during the third quarter of 2000. The proceeds from the
sale were first used to repay short-term debt, with the remaining proceeds
invested in investments with a shorter average life and a higher yield than the
securities sold. Partially offsetting the $2,006,000 in losses related to this
transaction were net gains of $87,000, primarily related to gains realized from
the second quarter sale of equity securities that were received as a result of
an investment in a North Carolina partnership that promoted new business in the
state.
Net noncore noninterest income of $39,000 realized in 1999 primarily was
comprised of immaterial gains and losses from sales of securities and loans.
Noncore noninterest income in 1998 amounting to $251,000 primarily related to
loan sale gains of $227,000 transacted by the Company in order 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 maintained.
Noninterest Expenses
Noninterest expenses for 2000 were $26,741,000 compared to $21,752,000 in
1999 and $19,665,000 in 1998. Table 5 presents the components of the Company's
noninterest expense during the past three years.
The noninterest expense recorded in 2000 includes $3,188,000 in merger
expenses. These expenses consisted primarily of investment banker fees, attorney
fees, employment contract payments, accountant fees, and early termination fees
associated with vendor contracts. These expenses were all recorded in the third
quarter of 2000.
Excluding merger expenses, noninterest expenses recorded by the Company in
2000 amounted to $23,553,000, an 8.3% increase from the $21,752,000 recorded in
1999. The 1999 amount represented a 10.6% increase over the $19,665,000 recorded
in 1998. 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 32% increase in loans and 17% increase in deposits that have
occurred over the past two years.
Income Taxes
The provision for income taxes was $5,736,000 in 2000, $6,234,000 in 1999,
and $6,132,000 in 1998. The 8.0% decrease in tax expense in 2000 compared to
1999 is a result of a 16.6% decrease in pretax income, which was partially
offset by an increase in the Company's effective tax rate from 34.5% in 1999 to
38.0% in 2000. The increase in the effective tax rate for 2000 is due to the
nondeductibility for tax purposes of certain merger expenses.
The 1.7% increase in tax expense in 1999 compared to 1998 is a result of a
5.7% increase in pretax income, which was partially offset by a reduction in the
Company's effective tax rate from 35.8% in 1998 to 34.5% in 1999. The reduction
in the effective tax rate for 1999 is largely due to the favorable tax treatment
of the Company's real estate investment trust (First Troy).
Table 6 presents the components of tax expense and the related effective
tax rates.
17
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Overview
Over the past two years the Company has experienced strong loan growth,
with loans increasing by $102.9 million, or 16.0%, in 2000 and $76.0 million, or
13.4%, in 1999. Deposit growth, while strong by industry standards, has not
occurred at comparable rates. Deposits outstanding grew $58.2 million, or 8.2%,
in 2000 and $56.0 million, or 8.5%, in 1999. The Company believes higher loan
demand compared to deposit growth has been caused by several factors including
economic expansion coupled with lower consumer savings rates, increased
competition for deposits, new types of competitors for deposits including
brokerage houses and the internet, and the stock market being increasingly
viewed as a savings vehicle.
The higher loan growth when compared to deposit growth has resulted in a
reduction of the Company's liquidity. The Company has increased its use of
borrowings over the past two years, reduced its investment portfolio, and, in an
effort to fund loan growth as much as possible with deposits, has aggressively
priced large time deposits. The increased use of borrowings and large time
deposits has impacted the Company's net interest margin, as discussed above.
Asset quality has been strong over the past three years. The Company's
market area, the central Piedmont region of North Carolina, has had a healthy
economy in recent years, with low unemployment rate and low business failure
rate. The Company does not participate in large syndicated credits that have
resulted in large credit losses at several other North Carolina-based banks.
The Company's and Bank's capital ratios are strong and far exceed the
minimum regulatory thresholds for classification as a "well capitalized"
institution.
Distribution of Assets and Liabilities
Table 7 sets forth the percentage relationships of significant components
of the Company's balance sheets at December 31, 2000, 1999, and 1998. The most
significant variance in this table is the relative increase in loans compared to
total assets. The higher reliance on time deposits greater than $100,000 and
borrowings over the past two years can also be seen in this table (the level of
borrowings at December 31, 1999 was affected by excess borrowings obtained for
Y2K liquidity concerns).
Securities
Information regarding the Company's securities portfolio as of December 31,
2000, 1999, and 1998 is presented in Tables 8 and 9.
The composition of the investment securities portfolio reflects the
Company's investment strategy of maintaining an appropriate level of liquidity
while providing a relatively stable source of income. The investment portfolio
also provides a balance to interest rate risk and credit risk in other
categories of the balance sheet while providing a vehicle for the investment of
available funds, furnishing liquidity, and supplying securities to pledge as
required collateral for certain deposits.
Total securities available for sale and held to maturity amounted to $117.5
million, $165.6 million, and $140.6 million at December 31, 2000, 1999, and
1998, respectively. The decrease in securities in 2000 was primarily due to the
sale of $54.5 million in securities at a loss of $2.0 million (discussed
earlier), most of which was not reinvested into securities, but rather used to
pay down debt and invested in overnight investments. In addition, a portion of
the securities portfolio that matured during the year was used to fund loan
growth. The increase in securities held at December 31, 1999 compared to
December 31, 1998 was primarily due to a higher level of borrowings ($62.5
million in 1999 compared to $6.0 million in 1998), the proceeds of which were
partially invested in securities.
18
Over the past three years, the composition of the securities portfolio has
not varied significantly, with the majority of the securities comprised of U.S.
Government agencies and mortgage-backed securities issued by government
agencies. These two categories of investments generally provide the company with
the preferred balance of yield and credit quality. Included in mortgage-backed
securities at December 31, 2000 were collateralized mortgage obligations (CMO's)
with an amortized cost of $13,543,000 and a fair value of $13,521,000. Included
in mortgage-backed securities at December 31, 1999 were CMO's with an amortized
cost of $10,955,000 and a fair value of $10,824,000. The CMO's that the Company
has invested in are substantially all "early tranche" pieces of the CMO.
At December 31, 2000, net unrealized gains of $383,000 were included in the
carrying value of securities classified as available for sale compared to a net
unrealized loss of $3,628,000 at December 31, 1999 and a net unrealized gain of
$639,000 at December 31, 1998. Approximately half of the favorable $4,011,000
change experienced in 2000 in the unrealized gain/loss position of the available
for sale portfolio was due to the Company realizing $2.0 million in losses in
connection with the merger-related security sale, while the other half was due
to an increase in the value of the bond holdings as a result of the lower
interest rate environment in effect at the end of 2000. The $4,267,000
unfavorable change in the unrealized gain/loss position of the available for
sale portfolio experienced in 1999 was caused by the generally rising rate
environment experienced in 1999. 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 $256,000, ($2,297,000),
and $419,000, have been reported as a separate component of shareholders' equity
as of December 31, 2000, 1999, and 1998, 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, 2000 and 1999
by $263,000 and $1,212,000, respectively. 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 and securities held to maturity at
December 31, 2000. Mortgage-backed securities, by nature, have lives that are
shorter than their contractual life due to prepayment volatility and monthly
returns of principal.
The weighted average taxable-equivalent yield for the securities available
for sale portfolio was 6.62% at December 31, 2000. The expected weighted average
life of the available for sale portfolio using the call date for above-market
callable bonds, the maturity date for all other non-mortgage-backed securities,
and the expected life for mortgage-backed securities, was 2.8 years.
The weighted average taxable-equivalent yield for the securities held to
maturity portfolio was 7.07% at December 31, 2000. The expected weighted average
life of the available for sale portfolio using the call date for above-market
callable bonds, the maturity date for all other non-mortgage-backed securities,
and the expected life for mortgage-backed securities, was 5.3 years.
As of December 31, 2000 and 1999, 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.
19
Loans
Table 10 provides a summary of the loan portfolio composition at each of
the past five year ends.
The loan portfolio is the largest category of the Company's earning assets
and is comprised of commercial loans, real estate mortgage loans, real estate
construction loans, and consumer loans. The Company restricts virtually all of
its lending to its 15 county market area, which is located in the central
Piedmont region of North Carolina. The diversity of the region's economic base
has historically provided a stable lending environment.
Loans increased by $102.9 million, or 16.0%, in 2000 to $746.1 million from
the $643.2 million held at December 31, 1999. The 1999 year end amount was $76.0
million, or 13.4%, higher than the $567.2 million balance at December 31, 1998.
The majority of the 2000 and 1999 loan growth occurred in loans secured by real
estate, with approximately $80.3 million, or 78.0% in 2000 and $68.2 million, or
89.8%, in 1999 of the net loan growth occurring in real estate mortgage or real
estate construction loans.
Over the years, the Company's loan mix has remained fairly consistent, with
real estate loans (mortgage and construction) comprising approximately 85% of
the loan portfolio, commercial, financial, and agricultural loans comprising
10%, and consumer installment loans comprising approximately 5% of the
portfolio.
At December 31, 2000, $629.2 million or 84.26% of the Company's loan
portfolio was secured by liens on real property. Included in this total are
$380.4 million, or 60.5% of total real estate loans, in loans secured by liens
on 1-4 family residential properties and $248.8 million, or 39.5% of total real
estate loans, in loans secured by liens on other types of real estate. The
Company's $629.2 million in real estate mortgage loans can be further classified
as follows:
o $249.7 million, or 39.7%, are traditional residential mortgage loans
in which the borrower's personal income is the primary repayment
source.
o $177.4 million, or 28.2%, are primarily dependent on cash flow from a
commercial business for repayment.
o $81.9 million, or 13.0%, are for personal consumer installment loans
in which the borrower has provided real estate as collateral.
o $57.6 million, or 9.2%, are for real estate construction loans.
o $48.8 million, or 7.8%, are home equity loans.
o $13.8 million, or 2.2%, are primarily dependent on cash flow from
agricultural crop sales.
Table 11 provides a summary of scheduled loan maturities over certain time
periods, with fixed rate loans and adjustable rate loans shown separately.
Approximately 21% of the Company's loans outstanding at December 31, 2000 mature
within one year and 61% of total loans mature within five years. The percentages
of variable rate loans and fixed rate loans as compared to total performing
loans were 43.8% and 56.2%, respectively, as of December 31, 2000. The Company
intentionally makes a blend of fixed and variable rate loans so as to reduce
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
20
status is either deducted from interest income or is charged-off, (ii) future
accruals of interest income are not recognized until it becomes 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, 2000, 1999 and 1998 totaled $863,000, $1,681,000, and
$1,946,000, respectively. Nonperforming loans as a percentage of total loans
amounted to 0.12%, 0.26%, and 0.34%, at December 31, 2000, 1999, and 1998,
respectively. The decrease in nonperforming loans over the past two years has
been primarily due to a decrease in nonaccrual loans, as restructured loans have
not changed significantly. The decrease in nonaccrual loans from December 31,
1999 to December 31, 2000 was primarily a result of 1) a $394,000 loan that was
paid off during the second quarter of 2000, and 2) the removal of substantially
all of the nonaccrual loans on the books at December 31, 1999 by reason of
payoff, charge-off, foreclosure, or return to accrual status, with a lower
amount of loans being placed on nonaccrual status during 2000.
As of December 31, 2000, the largest nonaccrual balance to any one borrower
was $109,000, with the average balance for the 27 nonaccrual loans being
approximately $23,000.
If the nonaccrual loans and restructured loans as of December 31, 2000, 1999
and 1998 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 $62,000, $123,000
and $143,000 for nonaccrual loans and $27,000, $27,000 and $25,000 for
restructured loans would have been recorded for 2000, 1999 and 1998,
respectively. Interest income on such loans that was actually collected and
included in net income in 2000, 1999, and 1998 amounted to approximately
$38,000, $71,000 and $94,000 for nonaccrual loans (prior to their being placed
on nonaccrual status) and $21,000, $24,000 and $24,000 for restructured loans,
respectively.
Management routinely monitors the status of certain large loans that, in
management's opinion, have credit weaknesses that could cause them to become
nonperforming loans. In addition to the nonperforming loan amounts included
above, management believes that an estimated $5.5-$6.0 million of large loans
that were performing in accordance with their contractual terms at December 31,
2000 had the potential to 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, 2000
(see discussion below).
Approximately $3.9 million of the potential problem loans just discussed
relate to one borrower that has liquidity problems. The loans related to this
borrower are collateralized by real estate, the value of which the Company
believes exceeds the outstanding loan balance. The borrower has been actively
selling the real estate to pay down the loan balance. However, several real
estate sales scheduled for 2001 did not occur due to the filing of a lawsuit
against the borrower during the first quarter of 2001. As a result of this
development, management determined that $2.4 million in loans related to this
borrower should be placed on nonaccrual status, and they were classified as such
in February 2001.
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 that 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 that causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
21
Other real estate includes foreclosed, repossessed, and idled properties.
Other real estate totaled $893,000 at December 31, 2000 compared to $906,000 at
December 31, 1999, and $505,000 at December 31, 1998. Other real estate
represented 0.10%, 0.10%, and 0.06% of total assets at the end of 2000, 1999,
and 1998, respectively. The increase in the level of other real estate at
December 31, 1999 compared to December 31, 1998 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 $7,893,000 at December 31, 2000
compared to $6,674,000 as of December 31, 1999 and $6,100,000 at December 31,
1998. This represented 1.06%, 1.04%, and 1.08%, of loans outstanding as of
December 31, 2000, 1999, and 1998, respectively.
As noted in Table 12, the Company's allowance for loan losses as a
percentage of nonperforming loans amounted to 914% at December 31, 2000,
compared to 397% at December 31, 1999 and 313% at December 31, 1998. As noted
above, a $2.4 million loan relationship was placed on nonaccrual status
subsequent to December 31, 2000. If this loan had been classified as nonaccrual
at December 31, 2000, the ratio of the allowance to nonperforming loans would
have been 242%.
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 $5,646,000 at December 31, 1999
to $7,633,000 at December 31, 2000. The December 31, 1999 allocated amount of
$5,646,000 was an increase from the December 31, 1998 amount of $5,192,000. The
increase in the allocated amount during 2000 was primarily due to loan growth
and the Company segregating and assigning higher reserve percentages to
particular loan types that were identified during 2000 as having inherently
higher risk. These additional risk characteristics were noted by management as a
part of its ongoing analysis and review of its loan portfolio and historical
charge-off experience, and did not result from any deterioration of the
portfolio which developed during 2000. The increase in the allocated amounts for
1999 was primarily due to growth in the Company's loan
22
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 through 1999 was consistent with overall loan growth, while the
decrease in 2000 was primarily associated with the higher risk percentages
assigned to a portion of the loan portfolio discussed above.
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 $386,000 in 2000, $336,000 in 1999, and $273,000 in 1998. This
represents 0.06%, 0.06%, and 0.05% of average loans during 2000, 1999, and 1998,
respectively.
Deposits
The average amounts of deposits of the Company and the average yield paid
for those deposits for the years ended December 31, 2000, 1999 and 1998 are
presented in Table 15. Average deposits grew $64.1 million or 9.4% in 2000 to
$744.8 million. Average deposits for 1999 grew $71.1 million, or 11.7%, over the
1998 average to $680.7 million.
Average time deposits greater than $100,000 experienced the highest
percentage growth of any of the deposit categories in each of the past two
years. In 2000, average time deposits greater than $100,000 increased $28.1
million, or 28.0%, while in 1999 these deposits increased $20.1 million, or
25.0%. Time deposits in denominations of less than $100,000 was the other major
component of average deposit growth during 2000 with growth of $29.0 million, or
10.9%, during the year. The primary reason for the high growth within these
categories of deposits is that the Company began more competitively pricing time
deposits in order to help fund the strong loan growth experienced in both years.
Time deposits are generally more rate sensitive than the other categories of
deposits, and thus can be more easily accumulated by more aggressively pricing
their rates.
As noted above, in each of the past three years, the Company's growth in
deposits has not keep pace with loan growth. The Company believes higher loan
demand compared to deposit growth has been caused by several factors including
economic expansion coupled with lower consumer savings rates, increased
competition for deposits, new types of competitors for deposits including
brokerage houses and the internet, and the stock market being increasingly
viewed as a savings vehicle. Accordingly, the Company anticipates that, in order
to continue to provide funding for loan growth, it will have to continue to
aggressively price deposits, particularly time deposits, and that heavier
reliance on alternative funding sources may be necessary.
As of December 31, 2000, the Company held approximately $141.0 million in
time deposits of $100,000 or more and other time deposits of $305.1 million.
Table 16 is a maturity schedule of time deposits of $100,000 or more as of
December 31, 2000. This table shows that 78.8% of the Company's time deposits
greater than $100,000 mature within one year.
The Company does not issue any time deposits through foreign offices, nor
does the Company believe that it holds any deposits by foreign depositors.
23
Borrowings
The Company has three sources of borrowing capacity - 1) an approximately
$120 million line of credit with the Federal Home Loan Bank (FHLB), 2) a $15
million overnight federal funds line of credit with a correspondent bank, and 3)
an approximately $35 million line of credit through the Federal Reserve Bank of
Richmond's (FRB) discount window.
The Company's line of credit with the FHLB totaling approximately $120
million 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. As of December 31, 2000, $6.2 million of the $26.2 million in
outstanding FHLB borrowings were due within one year and $20.0 million were due
beyond one year. The Company had a total of $62.5 million in borrowings
outstanding at December 31, 1999, with $47.5 million of those borrowings being
due within one year. The higher level of borrowings outstanding at December 31,
1999 was due to the Company's Y2K liquidity plan, as well as the Company's use
of a portion of the proceeds from the 2000 merger-related security sale (see
above) to pay down outstanding borrowings.
The Company also has a correspondent bank relationship established that
allows the Company to purchase up to $15 million in federal funds on an
overnight, unsecured basis. The Company had no borrowings outstanding under this
line at December 31, 2000 or 1999. There was insignificant use of this line for
the three years ended December 31, 2000, 1999 and 1998, with total interest
expense incurred amounting to approximately $5,000 each year.
During 1999, the Company established a line of credit 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). Based
on the collateral owned by the Company as of December 31, 2000, the available
line of credit is approximately $35 million. This line of credit was established
primarily in connection with the Company's Y2K liquidity contingency plan. This
line of credit has not been drawn on since inception and subsequent to December
31, 1999, the FRB stated that it would 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 $47.2 million in 2000 compared
to $26.9 million in 1999 and $15.5 million in 1998. 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.
Average short-term borrowings for each year presented were less than thirty
percent of total shareholders' equity at each period. Note 8 to the consolidated
financial statements contains additional information regarding the Company's
borrowings.
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 five years the Company's net
interest margin has ranged from a low of 4.53% (realized in 2000) to a high of
4.88% (realized in 1997). During that five year period the prime rate of
interest has ranged from a low of 7.75% to a high of 9.50%.
24
Table 17 sets forth the Company's interest rate sensitivity analysis as of
December 31, 2000, using stated maturities for all instruments except
mortgage-backed securities (which are allocated in the periods of their expected
payback) and securities and borrowings with call features that are expected to
be called (which are shown in the period of their expected call). As illustrated
by this table, the Company has $242.7 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, 2000 subject to interest rate
changes within one year are deposits totaling $253.7 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 in the near term (twelve months), 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.
Generally, when rates change, the Company's interest-sensitive assets that are
subject to adjustment reprice immediately at the full amount of the change,
while the Company's interest-sensitive liabilities that are subject to
adjustment reprice at a lag to the rate change and typically not to the full
amount of the rate change. The net effect is that in the twelve month horizon,
as rates change, the impact of having a higher level of interest-sensitive
liabilities is substantially negated by the later and typically lower
proportionate change they experience compared to interest sensitive assets.
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 the higher funding costs to the Company (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 estimated 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 difference between the carrying values and
the estimated fair values of the Company's market sensitive assets and market
sensitive liabilities is not material, with each varying by less than 1%.
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.
25
Off-Balance Sheet Risk
In the normal course of business there are various outstanding commitments
and contingent liabilities, such as commitments to extend credit, that are not
reflected in the financial statements. As of December 31, 2000, the Company had
outstanding loan commitments of $140,559,000, of which $107,337,000 were at
variable rates and $33,222,000 were at fixed rates. Included in outstanding loan
commitments were unfunded commitments of $65,889,000 on revolving credit plans,
of which $61,339,000 were at variable rates and $4,550,000 were at fixed rates.
Additionally, standby letters of credit of approximately $2,836,000 and
$2,332,000 were outstanding at December 31, 2000 and 1999, 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 Company is not involved in any legal proceedings that, in management's
opinion, could have a material effect on the consolidated financial position of
the Company.
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.
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 divided by net income) 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, 2000.
Return on assets, return on equity, and dividend payout ratio per basic
share for the year 2000 were significantly impacted by the nonrecurring
merger-related charges discussed previously. Excluding nonrecurring items,
return on assets, return on equity, and the dividend payout ratio for the year
2000 would have been 1.41%, 11.69% and 53.23%, respectively.
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 $120 million line of credit with the Federal Home Loan Bank
(FHLB), 2) a $15 million overnight federal funds line of credit with a
correspondent bank, and 3) an approximately $35 million 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 (but has chosen to do so at various times
instead of selling securities), the Company has experienced an increase in its
loan to deposit ratio over the past three years, from 84.3% at December 31, 1997
to 86.4% at December 31, 1998 to 90.3% at December 31, 1999 to 96.8% at December
31, 2000, as a result of strong loan growth that has outpaced deposit growth.
This strong loan growth has reduced the Company's liquidity sources. At December
31, 1997, balance sheet assets that are generally regarded as being liquid
(consisting of cash, due from banks, federal funds sold, presold mortgages in
process of settlement and securities) amounted to 34.2% of total deposits and
borrowings. At December 31, 2000, this percentage had been reduced to 18.7%.
26
Although liquidity has lessened in recent years, the Company's management
believes its liquidity sources, including unused lines of credit, are at an
acceptable level and remain adequate to meet its operating needs.
Capital Resources and Shareholders' Equity
Shareholders' equity at December 31, 2000 amounted to $110.7 million
compared to $107.0 million at December 31, 1999. The two primary components
affecting shareholders' equity are net income, which increases shareholders'
equity, and dividends declared, which decreases shareholders' equity. In 2000,
net income of $9,342,000 increased equity, while dividends declared of
$6,849,000 reduced equity.
In 2000, two other items had a significant effect on shareholders' equity -
1) other comprehensive income, which for the Company is comprised entirely of
the change in the unrealized gain or loss of the Company's available for sale
securities and amounted to $2,553,000 in 2000 (see additional information in the
"Securities" discussion above) and 2) purchases and retirement of common stock,
which amounted to $2,884,000 in 2000. 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.
Approximately 59,000 shares of the Company's common stock were repurchased under
this authorization during the first four months of 2000 at an average price of
$15.74. Prior to the Company's acquisition of First Savings, this authorization
was rescinded.
On October 20, 2000, the Company announced an agreement to acquire Century
Bancorp in a part cash-part stock transaction. In connection with this
transaction, the Company announced its intent to repurchase up to the number of
shares that is expected to be issued to complete the acquisition (approximately
585,000 shares). Subsequent to the date of the announcement and through December
31, 2000, the Company repurchased approximately 125,000 shares at an average
cost of $15.68.
In addition to the items noted above that affected shareholders' equity in
2000, the Company received proceeds of $408,000 in connection with the issuance
of 140,000 shares related to exercises of stock options, issued 22,000 shares
and received $344,000 in proceeds from issuances of stock into the Company's
dividend reinvestment plan, and recorded a $790,000 increase to equity related
to the tax benefit that the Company realized due to exercises of nonqualified
stock options.
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 Bank 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 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 the
Company'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 assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's and 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 and the Bank to maintain minimum ratios of "Tier 1" capital
to total risk-weighted assets ("Tier I Capital Ratio") and total capital to
risk-weighted assets of 4.00% and 8.00% ("Total Capital Ratio"), respectively.
Tier 1 capital is comprised of total shareholders' equity calculated in
accordance with generally accepted accounting principles, excluding unrealized
gains or losses from the securities available for sale, less intangible assets,
and total capital is comprised of Tier 1 capital plus certain adjustments, the
largest of which for the Company and the Bank is the allowance for loan losses.
Risk-weighted assets refer to the on- and off-balance sheet exposures of the
Company and the Bank, adjusted for their related risk levels using formulas set
forth in FED and FDIC regulations.
27
In addition to the risk-based capital requirements described above, the
Company and the Bank are subject to a leverage capital requirement, which calls
for a minimum ratio of Tier 1 capital (as defined above) to quarterly average
total assets ("Leverage Ratio) 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.
Table 20 presents the Company's regulatory capital ratios as of December
31, 2000, 1999, and 1998.
In addition to the minimum capital requirements described above, the
regulatory framework for prompt corrective action also contains specific capital
guidelines for a bank's classification as "well capitalized." The specific
guidelines are as follows - Tier I Capital Ratio of at least 6.00%, Total
Capital Ratio of at least 10.00%, and a Leverage Ratio of at least 5.00%. The
Bank's regulatory ratios are not materially different from the Company's ratios,
and thus exceeded the threshold for "well-capitalized" status at December 31,
2000, 1999 and 1998.
Due to the increase in assets and the addition of intangible assets that
will be recorded in connection with the Company's pending acquisition of Century
Bancorp and the four First Union branches, regulatory capital ratios will be
significantly impacted. If the acquisitions had taken place on December 31,
2000, the Company estimates that the Tier I capital ratio would have been
12.23%, the total risk-based capital ratio would have been 13.23%, and the
leverage capital ratio would have been 8.63%, all of which would have continued
to exceed the minimum required regulatory ratios.
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.
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 Statement of Financial Accounting Standards (`SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards
28
for derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. This Statement, as amended, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000, and was adopted by the Company on
January 1, 2001. On January 1, 2001, the Company transferred held-to-maturity
securities with an amortized cost of approximately $19.9 million to the
available-for-sale category at fair value as allowed by SFAS No. 133. Such
transfers from the held-to-maturity category at the date of initial adoption
shall not call into question the Company's intent to hold other debt securities
to maturity in the future. The unrealized loss at the time of the transfer was
approximately $240,000. The Company does not engage in any hedging activities
and other than the aforementioned transfer of securities, the adoption of the
statement had no impact on the Company.
The FASB has also issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125." It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. This statement is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. This statement is effective for the recognition and
reclassification of collateral and disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
This Statement is not expected to materially impact the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information responsive to this Item is found in Item 7 under the
caption "Interest Rate Risk."
FORWARD-LOOKING STATEMENTS
The discussion in Part I and Part II of this report contains statements that
could be deemed forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934 and the Private Securities Litigation Reform
Act, which statements are inherently subject to risks and uncertainties.
Forward-looking statements are statements that include projections, predictions,
expectations or beliefs about future events or results or otherwise are not
statements of historical fact. Such statements are often characterized by the
use of qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgment of the Company and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the financial success or changing strategies of the Company's
customers, actions of government regulators, the level of market interest rates,
and general economic conditions.
29
- --------------------------------------------------------------------------------
Table 1 Selected Consolidated Financial Data
- --------------------------------------------------------------------------------
Year Ended December 31,
($ in thousands, except per share --------------------------------------------------------------------------------
and nonfinancial data) 2000 1999 1998 1997 1996
---------------- --------------- --------------- --------------- ---------------
Income Statement Data
Interest income $ 72,915 61,591 57,612 50,858 44,444
Interest expense 34,220 26,488 25,070 21,835 19,137
Net interest income 38,695 35,103 32,542 29,023 25,307
Provision for loan losses 1,605 910 990 575 325
Net interest income after provision 37,090 34,193 31,552 28,448 24,982
Noninterest income 4,729 5,647 5,218 4,526 4,709
Noninterest expense 26,741 21,752 19,665 17,504 17,827
Income before income taxes 15,078 18,088 17,105 15,470 11,864
Income taxes 5,736 6,234 6,132 5,448 4,046
Net income 9,342 11,854 10,973 10,022 7,818
Earnings per share - basic 1.05 1.32 1.20 1.10 0.86
Earnings per share - diluted 1.03 1.27 1.13 1.05 0.82
Pro Forma Data
After-tax effect of nonrecurring items -
gains (losses) (1)(3,525) 24 153 90 (2)(523)
Net income, excluding nonrecurring items 12,867 11,830 10,820 9,932 8,341
Earnings per share - diluted,
excluding nonrecurring items 1.42 1.26 1.12 1.04 0.88
- ---------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Cash dividends declared $ 0.77 0.63 0.60 0.51 0.41
Market Price
High 17.25 20.00 28.00 23.33 13.00
Low 12.06 13.31 16.00 12.33 7.67
Close 15.75 16.50 19.33 23.33 12.33
Book value 12.54 12.09 12.02 11.51 10.93
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data (at year end)
Loans $746,089 643,224 567,224 481,525 408,241
Allowance for loan losses 7,893 6,674 6,100 5,383 5,335
Intangible assets 4,630 5,261 5,843 6,487 5,834
Total assets 915,167 889,531 779,639 703,485 601,338
Deposits 770,379 712,139 656,148 571,132 494,560
Borrowings 26,200 62,500 6,000 20,000 -
Total shareholders' equity 110,684 106,980 109,989 105,258 99,730
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Assets $909,800 823,571 740,872 645,350 586,277
Loans 701,317 597,951 531,929 438,330 395,714
Earning assets 867,269 782,492 702,814 610,589 550,407
Deposits 744,835 680,749 609,685 524,598 480,210
Interest-bearing liabilities 724,152 643,921 568,780 489,800 436,656
Shareholders' equity 110,093 107,913 108,247 102,393 98,838
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios
Return on average assets 1.03% 1.44% 1.48% 1.55% 1.33%
Return on average equity 8.49% 10.98% 10.14% 9.79% 7.91%
Net interest margin (taxable-equivalent basis) 4.53% 4.56% 4.73% 4.88% 4.74%
Shareholders' equity to assets at year end 12.09% 12.03% 14.11% 14.96% 16.58%
Loans to deposits at year end 96.85% 90.32% 86.45% 84.31% 82.55%
Net charge-offs to average loans 0.06% 0.06% 0.05% 0.12% 0.05%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Relates primarily to merger-related charges.
(2) Relates primarily to SAIF assessment.
30
- --------------------------------------------------------------------------------
Table 2 Average Balances and Net Interest Income Analysis
- --------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ------------------------------- --------------------------------
Interest Interest Interest
Average Average Earned Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid Volume Rate or Paid
--------- -------- --------- --------- ------- --------- --------- --------- ---------
Assets
Loans (1) $701,317 8.91% $ 62,474 $597,951 8.48% $50,725 $531,929 8.80% $46,836
Taxable securities 131,833 6.43% 8,482 141,592 6.06% 8,581 122,857 6.66% 8,179
Non-taxable securities (2) 17,664 8.27% 1,460 19,093 8.18% 1,561 20,424 8.72% 1,781
Short-term investments,
principally federal funds 16,455 6.64% 1,093 23,856 5.60% 1,336 27,604 5.47% 1,511
--------- --------- --------- --------- --------- ---------
Total interest-
earning assets 867,269 8.48% 73,509 782,492 7.95% 62,203 702,814 8.30% 58,307
--------- --------- ---------
Cash and due from banks 22,562 22,183 18,286
Bank premises and
equipment, net 13,395 11,889 10,806
Other assets 6,574 7,007 8,966
--------- --------- ---------
Total assets $909,800 $823,571 $740,872
========= ========= =========
Liabilities and Equity
Savings, NOW and money
market deposits $251,995 2.56% 6,462 $249,190 2.39% 5,952 222,574 2.65% 5,890
Time deposits >$100,000 128,562 6.13% 7,882 100,462 5.52% 5,542 80,349 5.95% 4,781
Other time deposits 296,392 5.69% 16,862 267,366 5.09% 13,613 250,334 5.39% 13,503
--------- --------- --------- --------- --------- ---------
Total interest-bearing
deposits 676,949 4.61% 31,206 617,018 4.07% 25,107 553,257 4.37% 24,174
Borrowings 47,203 6.39% 3,014 26,903 5.13% 1,381 15,523 5.77% 896
--------- --------- --------- --------- --------- ---------
Total interest-
bearing liabilities 724,152 4.73% 34,220 643,921 4.11% 26,488 568,780 4.41% 25,070
--------- --------- ---------
Non-interest-
bearing deposits 67,886 63,731 56,428
Other liabilities 7,669 8,006 7,417
Shareholders' equity 110,093 107,913 108,247
--------- --------- ---------
Total liabilities and
shareholders' equity $909,800 $823,571 $740,872
========= ========= =========
Net yield on interest-
earning assets and
net interest income 4.53% $ 39,289 4.56% $35,715 4.73% $33,237
========= ========= =========
Interest rate spread 3.75% 3.84% 3.89%
- --------------------------------------------------------------------------------
(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 $586,000, $568,000, and $858,000 for 2000, 1999, and 1998,
respectively.
(2) Includes tax-equivalent adjustments of $594,000, $612,000, and $695,000 in
2000, 1999, and 1998, respectively, to reflect the federal and state benefit
of the tax-exempt securities, reduced by the related nondeductible portion
of interest expense.
31
- --------------------------------------------------------------------------------
Table 3 Volume and Rate Variance Analysis
- --------------------------------------------------------------------------------
Year Ended December 31, 2000 Year Ended December 31, 1999
---------------------------- ----------------------------
Change Attributable to Change Attributable to
------------------------------------- --------------------------------------
Total Total
Changes Changes Increase Changes Changes Increase
(In thousands) in Volumes in Rates (Decrease) in Volumes in Rates (Decrease)
----------- ----------- ----------- ------------ ----------- -----------
Interest income (tax-equivalent):
Loans $ 8,988 2,761 11,749 $ 5,707 (1,818) 3,889
Taxable securities (610) 511 (99) 1,191 (789) 402
Non-taxable securities (117) 16 (101) (112) (108) (220)
Short-term investments, principally
federal funds sold (453) 210 (243) (208) 33 (175)
----------- ----------- ----------- ------------ ----------- -----------
Total interest income 7,808 3,498 11,306 6,578 (2,682) 3,896
----------- ----------- ----------- ------------ ----------- -----------
Interest expense:
Savings, NOW and money
market deposits 69 441 510 670 (608) 62
Time deposits>$100,000 1,636 704 2,340 1,153 (392) 761
Other time deposits 1,565 1,684 3,249 893 (783) 110
----------- ----------- ----------- ------------ ----------- -----------
Total interest-bearing deposits 3,270 2,829 6,099 2,716 (1,783) 933
Borrowings 1,169 464 1,633 621 (136) 485
----------- ----------- ----------- ------------ ----------- -----------
Total interest expense 4,439 3,293 7,732 3,337 (1,919) 1,418
----------- ----------- ----------- ------------ ----------- -----------
Net interest income $ 3,369 205 3,574 $ 3,241 (763) 2,478
=========== =========== =========== ============ =========== ===========
(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) 2000 1999 1998
-------- -------- -------
Service charges on deposit accounts $ 3,118 2,993 2,728
Other service charges, commissions, and fees 1,852 1,616 1,298
Fees from presold mortgages 453 685 696
Commissions from sales of credit insurance 306 264 240
Data processing fees 117 50 5
-------- -------- -------
Total core noninterest income 5,846 5,608 4,967
Loan sale gains - 34 227
Securities gains (losses), net (1,919) 20 29
Branch sale gain 808 - -
Other gains (losses), net (6) (15) (5)
-------- -------- -------
Total $ 4,729 5,647 5,218
======== ======== =======
- --------------------------------------------------------------------------------
Table 5 Noninterest Expenses
- --------------------------------------------------------------------------------
Year Ended December 31,
(In thousands) 2000 1999 1998
-------- ------- -------
Salaries $ 10,138 9,241 8,385
Employee benefits 2,543 2,468 2,292
-------- ------- -------
Total personnel expense 12,681 11,709 10,677
Net occupancy expense 1,507 1,417 1,201
Equipment related expenses 1,353 1,186 954
Amortization of intangible assets 632 636 655
Stationery and supplies 1,174 893 827
Telephone 600 516 481
Non-credit losses 60 34 205
Merger expenses 3,188 - -
Other operating expenses 5,546 5,361 4,665
-------- ------- -------
Total $ 26,741 21,752 19,665
======== ======= =======
32
- --------------------------------------------------------------------------------
Table 6 Income Taxes
- --------------------------------------------------------------------------------
(In thousands) 2000 1999 1998
----------- ---------- ----------
Current - Federal $ 6,108 6,035 5,221
- State 174 382 719
Deferred - Federal (546) (183) 192
----------- ---------- ----------
Total $ 5,736 6,234 6,132
=========== ========== ==========
Effective tax rate 38.0% 34.5% 35.8%
=========== ========== ==========
- --------------------------------------------------------------------------------
Table 7 Distribution of Assets and Liabilities
- --------------------------------------------------------------------------------
As of December 31,
--------------------------------
2000 1999 1998
-------- -------- ---------
Assets
Interest-earning assets
Net loans 81% 72% 72%
Securities available for sale 8 13 14
Securities held for maturity 5 6 4
Short term investments 1 3 3
-------- -------- ---------
Total interest-earning assets 95 94 93
Noninterest-earning assets
Cash and due from banks 2 3 3
Premises and equipment 2 1 2
Other assets 1 2 2
-------- -------- ---------
Total assets 100% 100% 100%
======== ======== =========
Liabilities and shareholders' equity
Demand deposits - noninterest bearing 8% 7% 8%
Savings, NOW, and money market deposits 28 29 31
Time deposits of $100,000 or more 15 13 12
Other time deposits 33 31 33
-------- -------- ---------
Total deposits 84 80 84
Borrowings 3 7 1
Accrued expenses and other liabilities 1 1 1
-------- -------- ---------
Total liabilities 88 88 86
Shareholders' equity 12 12 14
-------- -------- ---------
Total liabilities and
shareholders' equity 100% 100% 100%
======== ======== =========
- --------------------------------------------------------------------------------
Table 8 Securities Portfolio Composition
- --------------------------------------------------------------------------------
As of December 31,
----------------------------------------
(In thousands) 2000 1999 1998
--------- --------- ----------
Securities available for sale:
U.S. Treasury $ 5,527 5,600 24,029
U.S. Government agencies 40,797 82,176 51,783
Mortgage-backed securities 16,922 19,035 27,406
State and local governments 1,249 2,619 1,886
Equity securities 5,102 3,575 3,298
--------- --------- ----------
Total securities available for sale 69,597 113,005 108,402
--------- --------- ----------
Securities held to maturity:
U.S. Government agencies 11,854 13,015 -
Mortgage-backed securities 19,879 22,104 13,748
State and local governments 15,935 17,221 18,121
Other 256 297 359
--------- --------- ----------
Total securities held to maturity 47,924 52,637 32,228
--------- --------- ----------
Total securities $ 117,521 165,642 140,630
========= ========= ==========
Average total securities during year $ 149,497 160,685 143,281
========= ========= ==========
33
- --------------------------------------------------------------------------------
Table 9 Securities Portfolio Maturity Schedule
- --------------------------------------------------------------------------------
As of December 31,
------------------------------------------------------
2000
------------------------------------------------------
Book Fair Book
Value Value Yield (1)
----------- ----------- -------------
($ in thousands)
Securities available for sale:
U.S. Treasury
Due within one year $ 5,007 5,013 6.48%
Due after one but within five years 501 514 7.31%
----------- ----------- -------------
Total 5,508 5,527 6.55%
----------- ----------- -------------
U.S. Government agencies
Due within one year 2,987 3,005 6.53%
Due after one but within five years 24,407 24,591 6.15%
Due after five but within ten years 13,015 13,201 7.10%
----------- ----------- -------------
Total 40,409 40,797 6.48%
----------- ----------- -------------
Mortgage-backed securities
Due after five but within ten years 7,082 7,103 6.64%
Due after ten years 9,860 9,819 6.68%
----------- ----------- -------------
Total 16,942 16,922 6.66%
----------- ----------- -------------
State and local governments
Due within one year 280 280 5.34%
Due after one but within five years 950 969 8.10%
----------- ----------- -------------
Total 1,230 1,249 7.47%
----------- ----------- -------------
Equity securities 5,125 5,102 7.50%
----------- ----------- -------------
Total securities available for sale
Due within one year 8,274 8,298 6.46%
Due after one but within five years 25,858 26,074 6.24%
Due after five but within ten years 20,097 20,304 6.94%
Due after ten years 14,985 14,921 6.96%
----------- ----------- -------------
Total $ 69,214 69,597 6.62%
=========== =========== =============
Securities held to maturity:
U.S. Government agencies
Due after five but within ten years $ 11,854 11,578 6.81%
----------- ----------- -------------
Total 11,854 11,578 6.81%
----------- ----------- -------------
Mortgage-backed securities
Due within one year 12 12 6.78%
Due after one but within five years 69 70 9.10%
Due after five but within ten years 17 17 10.46%
Due after ten years 19,781 19,543 6.66%
----------- ----------- -------------
Total 19,879 19,642 6.67%
----------- ----------- -------------
State and local governments
Due within one year 1,802 1,806 10.01%
Due after one but within five years 5,142 5,203 7.65%
Due after five but within ten years 7,066 7,234 7.28%
Due after ten years 1,925 1,942 7.52%
----------- ----------- -------------
Total 15,935 16,185 7.74%
----------- ----------- -------------
Other
Due after one but within five years 256 256 7.80%
----------- ----------- -------------
Total 256 256 7.80%
----------- ----------- -------------
Total securities held to maturity
Due within one year 1,814 1,818 9.99%
Due after one but within five years 5,467 5,529 7.67%
Due after five but within ten years 18,937 18,829 6.99%
Due after ten years 21,706 21,485 6.74%
----------- ----------- -------------
Total $ 47,924 47,661 7.07%
=========== =========== =============
(1) Yields on tax-exempt investments have been adjusted to a taxable equivalent
basis using a 34% tax rate.
34
- --------------------------------------------------------------------------------
Table 10 Loan Portfolio Composition
- --------------------------------------------------------------------------------
As of December 31,
------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------- -------------------- -------------------- -------------------- --------------------
% of % of % of % of % of
Total Total Total Total Total
($ in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Commercial,
financial, &
agricultural $ 76,507 10.24% $58,574 9.10% $52,415 9.23% $45,417 9.42% $33,100 8.10%
Real estate -
construction 57,608 7.71% 36,823 5.72% 38,265 6.74% 20,250 4.20% 16,710 4.09%
Real estate -
mortgage(1) 571,638 76.55% 512,080 79.52% 442,389 77.90% 384,029 79.64% 329,894 80.69%
Installment
loans to
individuals 41,047 5.50% 36,450 5.66% 34,836 6.13% 32,487 6.74% 29,153 7.12%
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Loans, gross 746,800 100.00% 643,927 100.00% 567,905 100.00% 482,183 100.00% 408,857 100.00%
========= ========= ========= ========= =========
Unamortized net
deferred loan
fees & unearned
income (711) (703) (681) (658) (616)
--------- --------- --------- --------- ---------
Total loans,
net $746,089 $643,224 $567,224 $481,525 $408,241
========= ========= ========= ========= =========
(1) The majority of these loans are various personal and commercial loans where
real estate provides additional security for the loan.
- --------------------------------------------------------------------------------
Table 11 Loan Maturities
- --------------------------------------------------------------------------------
As of December 31, 2000
------------------------------------------------------------------------------------------
Due within Due after one year but Due after five
one year within five years years Total
-------------------- --------------------- --------------------- --------------------
($ in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
--------- --------- ---------- ------- --------- ---------- --------- --------
Variable Rate Loans:
Commercial, financial, and
agricultural $ 27,943 9.81% $ 10,488 9.96% $ 1,059 9.82% $ 39,490 9.85%
Real estate - construction 36,016 10.02% 4,623 9.84% 83 10.23% 40,722 10.00%
Real estate - mortgage 30,589 10.03% 43,101 9.95% 166,779 8.62% 240,469 9.04%
Installment loans
to individuals 346 9.89% 4,513 11.82% 1,028 10.15% 5,887 11.41%
--------- ---------- --------- ---------
Total at variable rates 94,894 9.96% 62,725 10.08% 168,949 8.64% 326,568 9.30%
--------- ---------- --------- ---------
Fixed Rate Loans:
Commercial, financial, and
agricultural 12,219 8.13% 21,715 8.65% 3,785 7.34% 37,719 8.35%
Real estate - construction 15,835 8.71% 1,994 8.35% 317 8.68% 18,146 8.67%
Real estate - mortgage 29,127 8.68% 185,420 8.42% 113,394 8.34% 327,941 8.42%
Installment loans
to individuals 4,874 10.34% 27,558 10.64% 2,657 8.33% 35,089 10.42%
--------- ---------- --------- ---------
Total at fixed rates 62,055 8.71% 236,687 8.70% 120,153 8.31% 418,895 8.59%
--------- ---------- --------- ---------
Subtotal 156,949 9.47% 299,412 8.99% 289,102 8.50% 745,463 8.90%
Nonaccrual loans 626 - - 626
--------- ---------- --------- ---------
Loans, gross $157,575 $299,412 $289,102 $746,089
========= ========== ========= =========
The above table is based on contractual scheduled maturities. Early repayment of
loans or renewals at maturity are not considered in this table.
35
- --------------------------------------------------------------------------------
Table 12 Nonperforming Assets
- --------------------------------------------------------------------------------
As of December 31,
------------------------------------------------------------------------
($ in thousands) 2000 1999 1998 1997 1996
----------- ------------ ----------- ----------- -----------
Nonaccrual loans $ 626 1,424 1,698 1,553 2,079
Restructured loans 237 257 248 326 350
----------- ------------ ----------- ----------- -----------
Total nonperforming loans 863 1,681 1,946 1,879 2,429
Other real estate (included in other assets) 893 906 505 560 572
----------- ------------ ----------- ----------- -----------
Total nonperforming assets $ 1,756 2,587 2,451 2,439 3,001
=========== ============ =========== =========== ===========
Nonperforming loans as a percentage
of total loans 0.12% 0.26% 0.34% 0.39% 0.59%
Nonperforming assets as a percentage of
loans and other real estate 0.24% 0.40% 0.43% 0.51% 0.73%
Nonperforming assets as a percentage of
total assets 0.19% 0.29% 0.31% 0.35% 0.50%
Allowance for loan losses as a percentage
of nonperforming loans 914.60% 397.03% 313.46% 286.48% 219.64%
- --------------------------------------------------------------------------------
Table 13 Allocation of the Allowance for Loan Losses
- --------------------------------------------------------------------------------
As of December 31,
-----------------------------------------------------
($ in thousands) 2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
Commercial, financial, and agricultural $ 1,574 726 646 577 462
Real estate - construction 393 255 256 205 202
Real estate - mortgage 4,849 4,078 3,612 3,344 3,729
Installment loans to individuals 817 587 678 629 653
-------- -------- -------- -------- -------
Total allocated 7,633 5,646 5,192 4,755 5,046
Unallocated 260 1,028 908 628 289
-------- -------- -------- -------- -------
Total $ 7,893 6,674 6,100 5,383 5,335
======== ======== ======== ======== =======
36
- --------------------------------------------------------------------------------
Table 14 Loan Loss and Recovery Experience
- --------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------------------------------
($ in thousands) 2000 1999 1998 1997 1996
------------ ---------- ----------- ----------- -----------
Loans outstanding at end of year $ 746,089 643,224 567,224 481,525 408,241
============ ========== =========== =========== ===========
Average amount of loans outstanding $ 701,317 597,951 531,929 438,330 395,714
============ ========== =========== =========== ===========
Allowance for loan losses, at
beginning of year $ 6,674 6,100 5,383 5,335 5,196
Provision for loan losses 1,605 910 990 575 325
------------ ---------- ----------- ----------- -----------
8,279 7,010 6,373 5,910 5,521
Loans charged off:
Commercial, financial and agricultural (171) (53) (92) (61) (209)
Real estate - mortgage (3) (126) (97) (449) (196)
Installment loans to individuals (301) (269) (253) (316) (311)
------------ ---------- ----------- ----------- -----------
Total charge-offs (475) (448) (442) (826) (716)
------------ ---------- ----------- ----------- -----------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 10 27 51 89 114
Real estate - mortgage 20 17 18 38 127
Installment loans to individuals 59 68 100 141 113
Other - - - 31 176
------------ ---------- ----------- ----------- -----------
Total recoveries 89 112 169 299 530
------------ ---------- ----------- ----------- -----------
Net charge-offs (386) (336) (273) (527) (186)
------------ ---------- ----------- ----------- -----------
Allowance for loan losses, at end of year $ 7,893 6,674 6,100 5,383 5,335
============ ========== =========== =========== ===========
Ratios:
Net charge-offs as a percent of average loans 0.06% 0.06% 0.05% 0.12% 0.05%
Allowance for loan losses as a
percent of loans at end of year 1.06% 1.04% 1.08% 1.12% 1.31%
Allowance for loan losses as a multiple
of net charge-offs 20.45x 19.86x 22.34x 10.21x 28.68x
Provision for loan losses as a percent of net
charge-offs 415.80% 270.83% 362.64% 109.11% 174.73%
Recoveries of loans previously charged-off
as a percent of loans charged-off 18.74% 25.00% 38.24% 36.20% 74.02%
- --------------------------------------------------------------------------------
Table 15 Average Deposits
- --------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ -----------------------
Average Average Average Average Average Average
($ in thousands) Amount Rate Amount Rate Amount Rate
---------- ------------ ----------- ----------- ----------- ----------
Interest-bearing demand deposits $193,222 2.53% $ 190,566 2.35% $ 169,724 2.65%
Savings deposits 58,773 2.66% 58,624 2.51% 52,850 2.64%
Time deposits 296,392 5.69% 267,366 5.09% 250,334 5.39%
Time deposits > $100,000 128,562 6.13% 100,462 5.52% 80,349 5.95%
---------- ----------- -----------
Total interest-bearing deposits 676,949 4.61% 617,018 4.07% 553,257 4.37%
Noninterest-bearing deposits 67,886 - 63,731 - 56,428 -
---------- ----------- -----------
Total deposits $744,835 4.19% $ 680,749 3.69% $ 609,685 3.96%
========== =========== ===========
37
- --------------------------------------------------------------------------------
Table 16 Maturities of Time Deposits of $100,000 or More
- --------------------------------------------------------------------------------
As of December 31, 2000
-----------------------------------------------------------------------------
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 $ 41,811 33,371 35,851 29,959 140,992
========= ====== ====== ====== =======
- --------------------------------------------------------------------------------
Table 17 Interest Rate Sensitivity Analysis
- --------------------------------------------------------------------------------
Repricing schedule for interest-earning assets and interest-bearing
liabilities held as of December 31, 2000
------------------------------------------------------------------------------
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 $ 236,475 72,623 309,098 436,991 746,089
Securities available for sale 8,600 10,595 19,195 50,402 69,597
Securities held to maturity 6,415 5,887 12,302 35,622 47,924
Short-term investments 10,535 - 10,535 - 10,535
-------------- -------------- -------------- -------------- -------------
Total earning assets $ 262,025 89,105 351,130 523,015 874,145
============== ============== ============== ============== =============
Percent of total earning assets 29.98% 10.19% 40.17% 59.83% 100.00%
Cumulative percent of total earning
assets 29.98% 40.17% 40.17% 100.00% 100.00%
Interest-bearing liabilities:
Savings, NOW and money market deposits $ 253,687 - 253,687 - 253,687
Time deposits of $100,000 or more 41,811 69,222 111,033 29,959 140,992
Other time deposits 71,517 146,387 217,904 87,162 305,066
Borrowings - 11,200 11,200 15,000 26,200
-------------- -------------- -------------- -------------- -------------
Total interest-bearing liabilities $ 367,015 226,809 593,824 132,121 725,945
============== ============== ============== ============== =============
Percent of total interest-bearing
liabilities 50.56% 31.24% 81.80% 18.20% 100.00%
Cumulative percent of total interest-
bearing liabilities 50.56% 81.80% 81.80% 100.00% 100.00%
Interest sensitivity gap $(104,990) (137,704) (242,694) 390,894 148,200
Cumulative interest sensitivity gap (104,990) (242,694) (242,694) 148,200 148,200
Cumulative interest sensitivity gap
as a percent of total earning assets -12.01% -27.76% -27.76% 16.95% 16.95%
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 71.39% 59.13% 59.13% 120.41% 120.41%
38
- --------------------------------------------------------------------------------
Table 18 Market Risk Sensitive Instruments
- --------------------------------------------------------------------------------
Expected Maturities of Market Sensitive Instruments Held
at December 31, 2000 Occurring in Indicated Year
----------------------------------------------------------------------------
Average
Interest Fair
($ in thousands) 2001 2002 2003 2004 2005 Beyond Total Rate Value
--------- --------- --------- --------- ---------- --------- --------- -------- ---------
Due from banks,
interest-bearing $ 1,769 - - - - - 1,769 6.35% $ 1,769
Federal funds sold 7,730 - - - - - 7,730 6.35% 7,730
Debt Securities- at
amortized cost (1) (2) 27,198 28,645 13,460 19,169 7,690 15,851 112,013 6.76% 112,155
Loans - fixed (3) 63,050 35,477 69,980 56,802 73,433 120,153 418,895 8.59% 411,686
Loans - adjustable (3) 104,619 25,400 24,226 23,985 23,083 125,255 326,568 9.30% 326,568
--------- --------- --------- --------- ---------- --------- --------- ---------
Total $204,366 89,522 107,666 99,956 104,206 261,259 866,975 8.60% $859,908
========= ========= ========= ========= ========== ========= ========= ======== =========
Savings, NOW,
and money market
deposits $253,687 - - - - - 253,687 2.76% $253,687
Time deposits 329,060 95,085 13,151 2,984 4,413 1,365 446,058 6.24% 446,850
Borrowings (2) 11,200 5,000 5,000 5,000 - - 26,200 6.53% 26,367
--------- --------- --------- --------- ---------- --------- --------- ---------
Total $593,947 100,085 18,151 7,984 4,413 1,365 725,945 5.03% $726,904
========= ========= ========= ========= ========== ========= ========= ======== =========
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 34%
tax rate.
(2) Callable securities and borrowings with favorable market interest rates at
December 31, 2000 are assumed to mature at their call date for purposes of
this table.
(3) Excludes nonaccrual loans and allowance for loan losses.
- --------------------------------------------------------------------------------
Table 19 Return on Assets and Equity
- --------------------------------------------------------------------------------
For the Year Ended December 31,
-------------------------------------------------------------------
2000 1999 1998
-------------------- ------------------- --------------------
Return on assets 1.03% 1.44% 1.48%
Return on equity 8.49% 10.98% 10.14%
Dividend payout ratio 73.31% 47.71% 50.18%
Average shareholders' equity to average assets 12.10% 13.10% 14.61%
39
- --------------------------------------------------------------------------------
Table 20 Risk-Based and Leverage Capital Ratios
- --------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------------------
($ in thousands) 2000 1999 1998
---------------- ---------------- -------------
Risk-Based and Leverage Capital Tier I capital:
Common shareholders' equity $ 110,684 106,980 109,989
Intangible assets (4,630) (5,261) (5,843)
Unrealized (gains) losses on
securities available for sale (256) 2,297 (419)
---------------- ---------------- -------------
Total Tier I leverage capital 105,798 104,016 103,727
---------------- ---------------- -------------
Tier II capital:
Allowable allowance for loan losses 7,893 6,674 6,100
---------------- ---------------- -------------
Tier II capital additions 7,893 6,674 6,100
---------------- ---------------- -------------
Total risk-based capital $ 113,691 110,690 109,827
================ ================ =============
Risk adjusted assets $ 690,368 584,384 511,508
Tier I risk-adjusted assets
(includes Tier I capital adjustments) 685,482 581,420 505,246
Tier II risk-adjusted assets
(includes Tiers I and II capital adjustments) 693,375 588,094 511,346
Fourth quarter average assets 916,691 876,557 767,282
Adjusted fourth quarter average assets
(includes Tier I capital adjustments) 911,805 873,593 761,020
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets 15.43% 17.89% 20.53%
Minimum required Tier I capital 4.00% 4.00% 4.00%
Total risk-based capital to
Tier II risk-adjusted assets 16.40% 18.82% 21.48%
Minimum required total risk-based capital 8.00% 8.00% 8.00%
Leverage capital ratios:
Tier I leverage capital to
adjusted fourth quarter average assets 11.60% 11.91% 13.63%
Minimum required Tier I leverage capital 4.00% 4.00% 4.00%
40
- --------------------------------------------------------------------------------
Table 21 Quarterly Financial Summary
- --------------------------------------------------------------------------------
2000 1999
------------------------------------------------ ------------------------------------------------
($ 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 $ 19,174 19,138 18,109 17,088 16,693 15,762 15,174 14,574
Interest expense 9,160 9,297 8,220 7,543 7,374 6,617 6,371 6,126
Net interest income,
taxable equivalent 10,014 9,841 9,889 9,545 9,319 9,145 8,803 8,448
Taxable equivalent,
adjustment 149 146 148 151 144 151 157 160
Net interest income 9,865 9,695 9,741 9,394 9,175 8,994 8,646 8,288
Provision for loan losses 240 705 350 310 245 205 260 200
Net interest income
after provision for
losses 9,625 8,990 9,391 9,084 8,930 8,789 8,386 8,088
Noninterest income 2,280 (555) 1,507 1,497 1,367 1,381 1,444 1,455
Noninterest expense 6,129 9,103 5,863 5,646 5,594 5,574 5,315 5,269
Income before income taxes 5,776 (668) 5,035 4,935 4,703 4,596 4,515 4,274
Income taxes 2,033 255 1,751 1,697 1,598 1,505 1,594 1,537
Net income (loss) 3,743 (923) 3,284 3,238 3,105 3,091 2,921 2,737
- -------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Earnings - basic $ 0.42 (0.10) 0.37 0.37 0.35 0.35 0.33 0.30
Earnings - diluted 0.41 (0.10) 0.36 0.36 0.34 0.33 0.31 0.29
Cash dividends declared 0.22 0.22 0.17 0.17 0.16 0.16 0.16 0.16
Market Price
High $ 16.13 15.50 16.94 17.25 20.00 19.67 18.17 19.83
Low 14.25 13.50 12.63 12.06 15.50 15.71 14.67 16.00
Close 15.75 15.50 13.88 12.06 16.50 19.00 18.00 17.33
Book value 12.54 12.32 12.43 12.15 12.09 12.02 11.91 11.90
- -------------------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Assets $ 916,691 925,899 912,626 883,984 876,557 826,489 811,650 779,588
Loans 738,427 718,301 690,810 657,730 627,129 603,517 588,544 572,614
Earning assets 874,199 885,845 869,020 840,012 831,500 786,312 772,734 739,422
Deposits 770,806 760,794 731,053 716,687 704,752 683,204 674,548 660,492
Interest-bearing liabilities 726,504 744,956 721,863 703,285 693,799 644,067 634,706 603,112
Shareholders' equity 111,701 110,545 109,782 108,344 107,697 107,369 107,607 108,979
- -------------------------------------------------------------------------------------------------------------------------------
Ratios
Return on average assets 1.62% (0.40)% 1.44% 1.47% 1.41% 1.48% 1.44% 1.42%
Return on average equity 13.29% (3.31)% 12.00% 11.99% 11.44% 11.42% 10.89% 10.19%
Average equity to average
assets 12.19% 11.94% 12.03% 12.26% 12.29% 12.99% 13.26% 13.98%
Equity to assets at
end of period 12.09% 11.84% 11.59% 11.78% 12.03% 12.39% 12.62% 13.34%
Tangible equity to assets
at end of period 11.59% 11.32% 11.08% 11.23% 11.44% 11.77% 11.96% 12.63%
Average loans to
average deposits 95.80% 94.41% 94.50% 91.77% 88.99% 88.34% 87.25% 86.70%
Average earning assets to
interest-bearing
liabilities 120.33% 118.91% 120.39% 119.44% 119.85% 122.09% 121.75% 122.60%
Net interest margin 4.54% 4.41% 4.56% 4.56% 4.45% 4.61% 4.57% 4.58%
Nonperforming loans as a
percent of total loans 0.12% 0.17% 0.14% 0.22% 0.26% 0.19% 0.15% 0.15%
Nonperforming assets as a
percent of loans and other
real estate 0.24% 0.27% 0.25% 0.36% 0.40% 0.33% 0.24% 0.24%
Nonperforming assets as a
percent of total assets 0.19% 0.21% 0.18% 0.27% 0.29% 0.23% 0.17% 0.17%
Net charge-offs as a percent
of average loans 0.06% 0.04% 0.07% 0.05% 0.10% 0.03% 0.07% 0.02%
- -------------------------------------------------------------------------------------------------------------------------------
41
Item 8. Financial Statements
and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 2000 and 1999
($ in thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------
ASSETS
Cash & due from banks, noninterest-bearing $ 20,940 30,629
Due from banks, interest-bearing 1,769 15,432
Federal funds sold 7,730 12,280
----------- -----------
Total cash and cash equivalents 30,439 58,341
----------- -----------
Securities available for sale (costs of
$69,214 in 2000 and $116,633 in 1999) 69,597 113,005
Securities held to maturity (fair values of
$47,661 in 2000 and $51,425 in 1999) 47,924 52,637
Presold mortgages in process of settlement 1,036 1,121
Loans 746,089 643,224
Less: Allowance for loan losses (7,893) (6,674)
----------- -----------
Net loans 738,196 636,550
----------- -----------
Premises and equipment 14,116 12,359
Accrued interest receivable 6,342 5,286
Intangible assets 4,630 5,261
Other 2,887 4,971
----------- -----------
Total assets $ 915,167 889,531
=========== ===========
LIABILITIES
Deposits: Demand - noninterest-bearing $ 70,634 63,881
Savings, NOW, and money market 253,687 251,982
Time deposits of $100,000 or more 140,992 118,566
Other time deposits 305,066 277,710
----------- -----------
Total deposits 770,379 712,139
Borrowings 26,200 62,500
Accrued interest payable 4,254 3,635
Other liabilities 3,650 4,277
----------- -----------
Total liabilities 804,483 782,551
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Authorized: 12,500,000 shares
Issued and outstanding: 8,827,341 shares in 2000 and
8,848,962 shares in 1999 50,148 51,490
Retained earnings 60,280 57,787
Accumulated other comprehensive income (loss) 256 (2,297)
----------- -----------
Total shareholders' equity 110,684 106,980
----------- -----------
Total liabilities and shareholders' equity $ 915,167 889,531
=========== ===========
See accompanying notes to consolidated financial statements.
42
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2000, 1999 and 1998
($ in thousands, except per share data) 2000 1999 1998
--------------- --------------- ---------------
INTEREST INCOME
Interest and fees on loans $ 62,474 50,725 46,836
Interest on investment securities:
Taxable interest income 8,482 8,581 8,179
Tax-exempt interest income 866 949 1,086
Other, principally overnight investments 1,093 1,336 1,511
--------------- --------------- ---------------
Total interest income 72,915 61,591 57,612
--------------- --------------- ---------------
INTEREST EXPENSE
Savings, NOW and money market 6,462 5,952 5,890
Time deposits of $100,000 or more 7,882 5,542 4,781
Other time deposits 16,862 13,613 13,503
Borrowings 3,014 1,381 896
--------------- --------------- ---------------
Total interest expense 34,220 26,488 25,070
--------------- --------------- ---------------
Net interest income 38,695 35,103 32,542
Provision for loan losses 1,605 910 990
--------------- --------------- ---------------
Net interest income after provision for loan losses 37,090 34,193 31,552
--------------- --------------- ---------------
NONINTEREST INCOME
Service charges on deposit accounts 3,118 2,993 2,728
Other service charges, commissions and fees 1,852 1,616 1,298
Fees from presold mortgage loans 453 685 696
Commissions from sales of credit insurance 306 264 240
Data processing fees 117 50 5
Loan sale gains - 34 227
Securities gains (losses), net (1,919) 20 29
Branch sale gain 808 - -
Other gains (losses) (6) (15) (5)
--------------- --------------- ---------------
Total noninterest income 4,729 5,647 5,218
--------------- --------------- ---------------
NONINTEREST EXPENSES
Salaries 10,138 9,241 8,385
Employee benefits 2,543 2,468 2,292
--------------- --------------- ---------------
Total personnel expense 12,681 11,709 10,677
Net occupancy expense 1,507 1,417 1,201
Equipment related expenses 1,353 1,186 954
Merger expenses 3,188 - -
Other operating expenses 8,012 7,440 6,833
--------------- --------------- ---------------
Total noninterest expenses 26,741 21,752 19,665
--------------- --------------- ---------------
Income before income taxes 15,078 18,088 17,105
Income taxes 5,736 6,234 6,132
--------------- --------------- ---------------
NET INCOME $ 9,342 11,854 10,973
=============== =============== ===============
Earnings per share:
Basic $ 1.05 1.32 1.20
Diluted 1.03 1.27 1.13
Weighted average common shares outstanding:
Basic 8,897,966 8,966,921 9,149,143
Diluted 9,070,125 9,363,031 9,669,318
See accompanying notes to consolidated financial statements.
43
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2000, 1999 and 1998
($ in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Net income $ 9,342 11,854 10,973
----------------- ---------------- ----------------
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period, pretax 2,092 (4,247) (190)
Tax benefit (expense) (806) 1,544 62
Reclassification to realized (gains) losses 1,919 (20) (29)
Tax expense (benefit) (652) 7 10
----------------- --------------- ----------------
Other comprehensive income (loss) 2,553 (2,716) (147)
----------------- --------------- ----------------
Comprehensive income $ 11,895 9,138 10,826
================= ================ ================
See accompanying notes to consolidated financial statements.
44
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 2000, 1999 and 1998
Accumulated Total
Common Stock Other Share-
--------------------- Unearned Retained Comprehensive holders'
(In thousands, except per share) Shares Amount Compensation Earnings Income (Loss) Equity
- -------------------------------------------- --------- ----------- --------------- ------------ ---------------- --------------
Balances, January 1, 1998 9,144 $54,374 (227) 50,545 566 105,258
Net income 10,973 10,973
Cash dividends declared ($0.60 per share) (5,506) (5,506)
Common stock issued under
stock option plans 47 218 218
Purchases and retirement of common stock (37) (1,136) (1,136)
Earned ESOP compensation 189 140 329
Other comprehensive loss (147) (147)
--------- ----------- --------------- ------------ ---------------- --------------
Balances, December 31, 1998 9,154 53,645 (87) 56,012 419 109,989
--------- ----------- --------------- ------------ ---------------- --------------
Net income 11,854 11,854
Cash dividends declared ($0.63 per share) (5,656) (5,656)
Common stock issued under
stock option plans 179 539 539
Common stock issued into
dividend reinvestment plan 16 296 296
Purchases and retirement of common stock (500) (3,086) (4,423) (7,509)
Earned ESOP compensation 96 87 183
Other comprehensive loss (2,716) (2,716)
--------- ----------- --------------- ------------ ---------------- --------------
Balances, December 31, 1999 8,849 51,490 - 57,787 (2,297) 106,980
--------- ----------- --------------- ------------ ---------------- --------------
Net income 9,342 9,342
Cash dividends declared ($0.77 per share) (6,849) (6,849)
Common stock issued under
stock option plans 140 408 408
Tax benefit realized from exercise of
nonqualified stock options 790 790
Common stock issued into
dividend reinvestment plan 22 344 344
Purchases and retirement of common stock (184) (2,884) (2,884)
Other comprehensive income 2,553 2,553
--------- ----------- --------------- ------------ ---------------- --------------
Balances, December 31, 2000 8,827 $50,148 - 60,280 256 110,684
========= =========== =============== ============ ================ ==============
See accompanying notes to consolidated financial statements.
45
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2000, 1999 and 1998
($ in thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 9,342 11,854 10,973
Reconciliation of net income to net cash provided by operating
activities:
Provision for loan losses 1,605 910 990
Net security premium amortization 60 483 422
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 1,919 (20) (29)
Gain from sale of branch (808) - -
Loss on disposal of premises and equipment 98 38 27
Loan fees and costs deferred, net of amortization 8 22 21
Depreciation of premises and equipment 1,217 1,117 861
Amortization of intangible assets 632 636 655
Release of ESOP shares - 183 329
Provision for deferred income taxes (546) (183) 192
Decrease (increase) in accrued interest receivable (1,077) (988) 391
Decrease (increase) in other assets 1,299 676 (979)
Increase in accrued interest payable 714 617 688
Increase (decrease) in other liabilities (325) 553 (466)
-------------- ------------- -------------
Net cash provided by operating activities 14,138 19,552 20,512
-------------- ------------- -------------
Cash Flows From Investing Activities
Purchases of securities available for sale (21,967) (53,960) (69,180)
Purchases of securities held to maturity (170) (27,926) (5,759)
Proceeds from sales of securities available for sale 54,494 3,017 8,053
Proceeds from maturities/issuer calls of
securities available for sale 12,914 41,664 82,209
Proceeds from maturities/issuer calls of
securities held to maturity 4,881 7,464 5,271
Net increase in loans (105,581) (80,132) (92,459)
Purchases of premises and equipment (3,312) (2,579) (1,539)
Net cash paid in sale of branch (11,869) - -
-------------- ------------- -------------
Net cash used in investing activities (70,610) (112,452) (73,404)
-------------- ------------- -------------
Cash Flows From Financing Activities
Net increase in deposits 73,320 55,991 85,016
Proceeds from (repayments of) borrowings, net (36,300) 56,500 (14,000)
Cash dividends paid (6,318) (5,624) (5,334)
Proceeds from issuance of common stock 752 835 218
Purchases and retirement of common stock (2,884) (7,509) (1,136)
-------------- ------------- -------------
Net cash provided by financing activities 28,570 100,193 64,764
-------------- ------------- -------------
Increase (Decrease) In Cash And Cash Equivalents (27,902) 7,293 11,872
Cash And Cash Equivalents, Beginning Of Period 58,341 51,048 39,176
-------------- ------------- -------------
Cash And Cash Equivalents, End Of Period $ 30,439 58,341 51,048
============== ============= =============
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for:
Interest $ 33,601 25,871 24,382
Income taxes 6,126 6,511 6,079
Non-cash transactions:
Foreclosed loans transferred to other real estate - 120 29
Increase (decrease) in fair value of securities available for sale 4,011 (4,267) (219)
Premises and equipment transferred to other real estate 85 315 206
See accompanying notes to consolidated financial statements.
46
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.
As discussed in Note 2 below, during 2000 the Company completed the merger
acquisition of First Savings Bancorp, Inc. This transaction was accounted for as
a pooling-of-interests and, accordingly, all prior periods have been restated to
include the combined results of the Company and First Savings Bancorp, Inc.
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.
47
(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.
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 or more 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 such loans held for sale as of December 31,
2000 or 1999.
(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.
48
(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.
(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,
2000 and 1999, acquisition related intangibles that had not been fully amortized
totaled $7,945,000, less accumulated amortization of $3,454,000 and $2,822,000,
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 at December 31, 2000 and 1999, 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.
49
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,
--------------------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------- ---------------------------------- ---------------------------------
($ in thousands, Income Shares Per Income Shares Per Income Shares Per
except per share (Numer (Denom- Share (Numer (Denom- Share (Numer (Denom- Share
amounts) -ator) inator) Amount -ator) inator) Amount -ator) inator) Amount
-------- ----------- ---------- ---------- ----------- --------- ---------- ---------- ---------
Basic EPS $9,342 8,897,966 $ 1.05 $11,854 8,966,921 $ 1.32 $10,973 9,149,143 $ 1.20
========== ========= =========
Effect of dilutive
securities - 172,159 - 396,110 - 520,175
-------- ----------- ---------- ----------- ---------- ----------
Diluted EPS $9,342 9,070,125 $ 1.03 $11,854 9,363,031 $ 1.27 $10,973 9,669,318 $ 1.13
======== =========== ========== ========== =========== ========= ========== ========== =========
For the years ended December 31, 2000, 1999, and 1998, there were 255,244,
42,750, and 10,000 options, respectively, that were antidilutive since the
exercise price exceeded the average market price for the year. These common
stock equivalents have been omitted from the calculation of diluted earnings per
share for their respective years.
(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, 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.
Deposits - 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, 2000 and 1999. 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.
Borrowings - The fair value of borrowings is based on the discounted value
of contractual cash flows. The discount rate is estimated using the rates
currently offered by the Company's lenders for debt of similar remaining
maturities.
Commitments to Extend Credit and Standby Letters of Credit - At December
31, 2000 and 1999, 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.
50
(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 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. The Company's operations are
primarily 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 2000 presentation. The reclassifications had no
effect on net income or shareholders' equity as previously presented, nor did
they materially impact trends in financial information.
51
Note 2. Completed and Pending Acquisitions and Divestitures
The Company has completed the following acquisitions:
(a) First Savings Bancorp, Inc. - On September 14, 2000, the Company
completed its merger with First Savings Bancorp, Inc., the holding company for
First Savings Bank of Moore County, SSB (collectively referred to as "First
Savings"). In accordance with the terms of the merger agreement, each share of
First Savings stock was exchanged for 1.2468 shares of the Company's stock.
These terms resulted in the Company issuing approximately 4,407,000 shares of
stock to complete the transaction.
The merger was accounted for as a pooling-of-interests and, accordingly,
all financial results for prior periods have been restated to include the
combined results of the Company and First Savings. Separate financial
information of the combined entities as of and for the years ending December 31,
1999 and 1998 is as follows:
First Bancorp First Savings Combined
------------- -------------- --------
1999 (in thousands)
-------------------------------
Total assets $ 559,447 330,084 889,531
Total revenue 44,415 22,823 67,238
Net interest income 23,484 11,619 35,103
Net income 6,619 5,235 11,854
1998
-------------------------------
Total assets $ 491,838 287,801 779,639
Total revenue 40,000 22,830 62,830
Net interest income 20,988 11,554 32,542
Net income 5,683 5,290 10,973
The Company incurred $3,188,000 in merger expenses in completing the
transaction. The following table indicates the primary components of the
$3,188,000 in merger expenses, including the amounts utilized through December
31, 2000, and the amounts remaining as accrued expenses in "other liabilities"
at December 31, 2000:
Total Merger- Utilized through Remaining Accrual
(in thousands) Related Charges December 31, 2000 at December 31, 2000
---------------- ------------------- ----------------------
Professional costs $ 1,601 1,601 -
Employment contract payments 958 958 -
Early termination fees associated with
vendor contracts 251 171 80
Equipment write-downs 98 98 -
Printing and filing fees 97 97 -
Other 183 128 55
---------------- ------------------- ----------------------
Total $ 3,188 3,053 135
================ =================== ======================
To gain Federal Reserve approval for the merger with First Savings, the
Company was required to divest the First Savings Bank branch located in
Carthage, NC. This branch was sold to another North Carolina community bank in a
transaction that was completed in November 2000. At the time of the divestiture,
the Carthage branch had approximately $15.1 million in total deposits and $2.3
million in total loans. The sale of the branch resulted in a net gain of
$808,000.
(b) First Union Lillington branch - 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.
52
(c) First Scotland Bank Laurinburg and Rockingham branches - 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.
(d) Central State Bank - 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.
The Company has the following acquisitions pending:
(a) First Union branch purchases in Scotland and Robeson Counties - The
Company announced on September 13, 2000 that it had reached an agreement with
First Union National Bank to acquire four branches with aggregate deposits of
approximately $105 million and aggregate loans of approximately $19 million. The
four branches to be acquired are Lumberton, Pembroke, St. Pauls (all located in
Robeson County, NC), and Laurinburg (Scotland County, NC). The closing of the
transaction and the data conversion are expected to occur in the first quarter
of 2001. Total intangible assets of approximately $15.7 million are expected to
be recorded in connection with the purchase.
(b) Century Bancorp, Inc. - The Company announced on October 20, 2000 that
it had reached a definitive agreement to acquire Century Bancorp, Inc.
("Century"). Century is the holding company for Home Savings, Inc., SSB, a one
branch savings institution located in Thomasville, NC. As of December 31, 2000,
Century had total assets of $105 million, total loans of $91 million, and total
deposits of $73 million. The terms of the agreement call for shareholders of
Century to have the option to receive either $20.00 in cash or a fixed exchange
ratio of 1.3333 shares of the Company's common stock for each share of Century
common stock that they own. This election is subject to the requirement that,
subject to certain possible adjustments that may be necessary to achieve the
intended tax treatment, 60% of Century's shares outstanding will be exchanged
for cash and 40% of Century's shares outstanding will be exchanged for shares of
the Company's stock. To the extent that Century shareholders elect to receive
more aggregate stock or cash consideration than permitted by the agreement, pro
rata allocations will be made. This transaction is expect to close during the
second quarter of 2001 and will be accounted for as a purchase transaction.
53
Note 3. Securities
The book values and approximate fair values of investment securities at
December 31, 2000 and 1999 are summarized as follows:
2000 1999
---------------------------------------------- ---------------------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Gains (Losses) Cost Value Gains (Losses)
--------- ------- ------- ---------- --------- ------- ------- ----------
(In thousands)
Securities available for sale:
U.S. Treasury $ 5,508 5,527 19 - 5,558 5,600 42 -
U.S. Government agencies 40,409 40,797 422 (34) 85,443 82,176 18 (3,285)
Mortgage-backed securities 16,942 16,922 87 (107) 19,424 19,035 20 (409)
State and local governments 1,230 1,249 19 - 2,604 2,619 16 (1)
Equity securities 5,125 5,102 - (23) 3,604 3,575 - (29)
--------- ------- ------- ---------- --------- ------- ------- ----------
Total available for sale $ 69,214 69,597 547 (164) 116,633 113,005 96 (3,724)
========= ======= ======= ========== ========= ======= ======= ==========
Securities held to maturity:
U.S. Government agencies $ 11,854 11,578 - (276) 13,015 13,000 - (15)
Mortgage-backed securities 19,879 19,642 12 (249) 22,104 21,059 17 (1,062)
State and local governments 15,935 16,185 328 (78) 17,221 17,069 153 (305)
Other 256 256 - - 297 297 - -
--------- ------- ------- ---------- --------- ------- ------- ----------
Total held to maturity $ 47,924 47,661 340 (603) 52,637 51,425 170 (1,382)
========= ======= ======= ========== ========= ======= ======= ==========
Included in mortgage-backed securities at December 31, 2000 were
collateralized mortgage obligations with an amortized cost of $13,543,000 and a
fair value of $13,521,000. 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.
The Company owned Federal Home Loan Bank stock with a cost and fair value
of $4,692,000 at December 31, 2000 and $1,500,000 at December 31, 1999, which is
included in 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, 2000, 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 $ 8,274 8,298 $ 1,802 1,806
Due after one year but within five years 25,858 26,074 5,398 5,459
Due after five years but within ten years 13,015 13,201 18,920 18,812
Due after ten years - - 1,925 1,942
Mortgage-backed securities 16,942 16,922 19,879 19,642
------------ ------------ ------------ ---------
Total debt securities 64,089 64,495 47,924 47,661
Equity securities 5,125 5,102 - -
------------ ------------ ------------ ---------
Total securities $ 69,214 69,597 $ 47,924 47,661
============ ============ ============ =========
At December 31, 2000 and 1999, investment securities with book values of
$32,156,000 and $22,941,000, respectively, were pledged as collateral for public
and private deposits.
54
Sales of securities available for sale with aggregate proceeds of
$54,494,000 in 2000, $3,017,000 in 1999, and $8,053,000 in 1998 resulted in
gross gains of $89,000 and gross losses of $2,008,000 in 2000, gross gains of
$20,000 in 1999, and gross gains of $32,000 and gross losses of $3,000 in 1998.
Note 4. Loans And Allowance For Loan Losses
Loans at December 31, 2000 and 1999 are summarized as follows:
(In thousands) 2000 1999
--------- ---------
Commercial, financial, and agricultural $ 76,507 58,574
Real estate - construction 57,608 36,823
Real estate - mortgage 571,638 512,080
Installment loans to individuals 41,047 36,450
--------- ---------
Subtotal 746,800 643,927
Unamortized net deferred loan fees (711) (703)
--------- ---------
Loans, net of deferred fees $ 746,089 643,224
========= =========
Loans described above as "Real estate - mortgage" included loans secured by
1-4 family dwellings in the amounts of $380,400,000 and $345,519,000 as of
December 31, 2000 and 1999, respectively. The loans above also include loans to
executive officers and directors and to their associates totaling approximately
$8,578,000 and $6,997,000 at December 31, 2000 and 1999, respectively. During
2000, additions to such loans were approximately $2,979,000 and repayments
totaled approximately $1,398,000. 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, 2000 and 1999 are as follows:
(In thousands) 2000 1999
--------- ---------
Loans: Nonaccrual loans $ 626 1,424
Restructured loans 237 257
--------- ---------
Total nonperforming loans 863 1,681
Other real estate (included in other assets) 893 906
--------- ---------
Total nonperforming assets $ 1,756 2,587
========= =========
At December 31, 2000 and 1999 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, 2000, 1999
and 1998 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 $62,000, $123,000
and $143,000 for nonaccrual loans and $27,000, $27,000 and $25,000 for
restructured loans would have been recorded for 2000, 1999 and 1998,
respectively. Interest income on such loans that was actually collected and
included in net income in 2000, 1999, and 1998 amounted to approximately
$38,000, $71,000 and $94,000 for nonaccrual loans (prior to their being placed
on nonaccrual status) and $21,000, $24,000 and $24,000 for restructured loans,
respectively.
55
Activity in the allowance for loan losses for the years ended December 31,
2000, 1999 and 1998 is as follows:
(In thousands) 2000 1999 1998
------- ------- -------
Balance, beginning of year $ 6,674 6,100 5,383
Provision for loan losses 1,605 910 990
Recoveries of loans charged-off 89 112 169
Loans charged-off (475) (448) (442)
------- ------- -------
Balance, end of year $ 7,893 6,674 6,100
======= ======= =======
At December 31, 2000 and 1999, the recorded investment in loans considered
to be impaired was $293,000 and $281,000, respectively, of which all were on a
nonaccrual basis at each year end. The related allowance for loan losses for the
impaired loans at December 31, 2000 and 1999 was $44,000 and $42,000,
respectively. There were no impaired loans at December 31, 2000 or 1999 for
which there was no related allowance. The average recorded investments in
impaired loans during the years ended December 31, 2000, 1999, and 1998 were
approximately $218,000, $123,000, and $110,000, respectively. For the years
ended December 31, 2000, 1999, and 1998, 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, 2000 and 1999 consist of the
following:
(In thousands) 2000 1999
--------- --------
Land $ 2,759 2,544
Buildings 11,555 10,276
Furniture and equipment 9,339 8,344
Leasehold improvements 569 580
--------- --------
Total cost 24,222 21,744
Less accumulated depreciation and amortization (10,106) (9,385)
--------- --------
Net book value of premises and equipment $ 14,116 12,359
========= ========
Note 6. Income Taxes
The components of income tax expense (benefit) for the years ended December
31, 2000, 1999 and 1998 are as follows:
(In thousands) 2000 1999 1998
-------- -------- ---------
Current - Federal $ 6,108 6,035 5,221
- State 174 382 719
Deferred - Federal (546) (183) 192
-------- -------- ---------
Total $ 5,736 6,234 6,132
======== ======== =========
56
The sources and tax effects of temporary differences that give rise to
significant portions of the deferred tax assets (liabilities) at December 31,
2000 and 1999 are presented below:
(In thousands) 2000 1999
--------- --------
Deferred tax assets:
Allowance for loan losses $ 2,231 1,779
Excess book over tax retirement plan cost 142 102
Basis of investment in subsidiary 69 68
Net loan fees recognized for tax reporting purposes 72 71
Reserve for employee medical expense for financial reporting purposes 12 12
Deferred compensation 37 40
Excess of book over tax related to intangible assets 114 83
Unrealized loss on securities available for sale - 1,330
All other 144 109
--------- --------
Gross deferred tax assets 2,821 3,594
Less: Valuation allowance (118) (48)
--------- --------
Net deferred tax assets 2,703 3,546
--------- --------
Deferred tax liabilities:
Loan fees (562) (486)
Excess tax over book pension cost (25) (125)
Depreciable basis of fixed assets (791) (750)
Amortizable basis of intangible assets (42) (49)
Unrealized gain on securities available for sale (130) -
Book over tax basis in unconsolidated subsidiary - (56)
FHLB stock dividends (329) (333)
All other (39) (48)
--------- --------
Gross deferred tax liabilities (1,918) (1,847)
--------- --------
Net deferred tax asset (included in other assets) $ 785 1,699
========= ========
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 expense of approximately $1,460,000 as of December 31, 2000 has
been recorded directly to shareholders' equity. The balance of the 2000 change
in the net deferred tax asset of $546,000 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.
Retained income at December 31, 2000 and 1999 includes approximately
$5,300,000 representing pre-1988 tax bad debt reserve base year amounts for
which no deferred income tax liability has been provided since these reserves
are not expected to reverse or may never reverse. Circumstances that would
require an accrual of a portion or all of this unrecorded tax liability are a
reduction in qualifying loan levels relative to the end of 1987, failure to meet
the definition of a bank, dividend payments in excess of accumulated tax
earnings and profits, or other distributions in dissolution, liquidation or
redemption of the Bank's stock.
57
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) 2000 1999 1998
--------- ------- -------
Tax provision at statutory rate $ 5,127 6,150 5,816
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income (350) (357) (393)
Non-deductible interest expense 49 41 45
Non-deductible portion of amortization of
intangible assets 127 126 132
State income taxes, net of federal benefit 114 252 475
Nondeductible acquisition costs 572 - -
Other, net 97 22 57
--------- ------- -------
Total $ 5,736 6,234 6,132
========= ======= =======
Note 7. Deposits
At December 31, 2000, the scheduled maturities of time deposits are as
follows:
(In thousands)
2001 $ 328,336
2002 95,327
2003 13,392
2004 3,223
2005 4,415
Thereafter 1,365
------------
$ 446,058
============
Note 8. Borrowings
The Company has three sources of borrowing capacity - 1) an approximately
$120,000,000 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 $35,000,000 line of credit through the Federal Reserve
Bank of Richmond's (FRB) discount window.
58
The Company's line of credit with the FHLB totaling approximately
$120,000,000 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. The following table presents information regarding the Company's
outstanding FHLB borrowings at December 31, 2000 and 1999:
2000 Call Feature Amount Interest Rate
- -------------------------- ---------------------------- ----------------------------- -----------------------------
Due on May 8, 2001 None $ 5,000,000 7.27% fixed
Due on May 31, 2001 None 1,200,000 7.41% fixed
Due on May 6, 2002 None 5,000,000 7.43% fixed
Due on May 5, 2003 None 5,000,000 7.49% fixed
Due on April 22, 2004 Callable by FHLB on April 5,000,000 5.01% fixed
22, 2001
Due on April 21, 2009 Callable by FHLB on April 5,000,000 5.26% fixed
21, 2004 ----------------------------- -----------------------------
Total FHLB
borrowings/ weighted
average rate $ 26,200,000 6.53%
============================= =============================
1999
- --------------------------
Overnight borrowing Not applicable $ 32,500,000 4.55% adjusts daily
Due on January 29, 2000 None 15,000,000 5.98% fixed
Due on April 22, 2004 Callable by FHLB on April 5,000,000 5.01% fixed
22, 2001
Due on May 12, 2004 Called by FHLB on 5,000,000 4.92% fixed
May 14, 2000
Due on April 21, 2009 Callable by FHLB on April 5,000,000 5.26% fixed
21, 2004 ----------------------------- -----------------------------
Total FHLB
borrowings/ weighted
average rate $ 62,500,000 5.02%
============================= =============================
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 outstanding under this
line at December 31, 2000 or 1999. There was insignificant use of this line for
the three years ended December 31, 2000, 1999 and 1998 with total interest
expense incurred amounting to approximately $5,000 each year.
During 1999, the Company established a line of credit 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). Based
on the collateral owned by the Company as of December 31, 2000, the available
line of credit is approximately $35,000,000. This line of credit was established
primarily in connection with the Company's Y2K liquidity contingency plan. This
line of credit has not been drawn on since inception and subsequent to December
31, 1999, the FRB stated that it would 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.
59
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 $234,000 in 2000, $213,000 in 1999, and $164,000
in 1998.
Future obligations for minimum rentals under noncancelable operating leases
at December 31, 2000 are as follows:
(In thousands)
Year ending December 31:
2001 $ 185
2002 130
2003 66
2004 31
2005 28
Later years 26
-----
Total $ 466
=====
Note 10. Employee Benefit Plans
401(k) 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% 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 $292,000, $239,000 and $196,000 for the years ended December 31,
2000, 1999 and 1998, respectively. The Company made additional discretionary
matching contributions to the plan of $150,000 in 2000 and $100,000 in 1999 and
1998.
Pension Plan. The Company sponsors a noncontributory defined benefit
retirement plan (the "Pension 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 Pension 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 Pension 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 Pension Plan includes total
earnings before reduction for contributions to a cash or deferred profit-sharing
plan (such as the 401(k) plan described above) and amounts used to pay group
health insurance premiums and includes bonuses (such as amounts paid under the
incentive compensation plan). Compensation for the purposes of the Pension Plan
may not exceed statutory limits; such limit was $170,000 in 2000 and $160,000 in
1999 and 1998.
The Company's contributions to the Pension 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,
2000, the Retirement Plan's assets were invested in Company common stock (8%),
equity mutual funds (62%), and fixed income mutual funds (30%).
60
The following table reconciles the beginning and ending balances of the
Pension Plan's benefit obligation, as computed by the Company's independent
actuarial consultants:
(In thousands) 2000 1999 1998
------- ------- -------
Benefit obligation at beginning of year $ 3,879 4,052 3,254
Service cost 260 282 201
Interest cost 324 277 235
Actuarial loss (gain) 392 (609) 473
Benefits paid (151) (123) (111)
------- ------- -------
Benefit obligation at end of year $ 4,704 3,879 4,052
======== ======= =======
The following table reconciles the beginning and ending balances of the
Pension Plan's assets:
(In thousands) 2000 1999 1998
------- ------- -------
Plan assets at beginning of year $ 4,479 3,582 2,994
Actual return on plan assets (323) 804 504
Employer contributions - 216 195
Benefits paid (151) (123) (111)
------- ------- -------
Plan assets at end of year $ 4,005 4,479 3,582
======== ======= =======
The following table presents information regarding the funded status of the
Pension Plan, the amounts not recognized in the consolidated balance sheets, and
the amounts recognized in the consolidated balance sheets:
(In thousands) 2000 1999
-------- -------
Funded status $ (699) 600
Unrecognized net actuarial (gain) loss 260 (875)
Unrecognized prior service cost 544 650
Unrecognized transition obligation 55 57
-------- -------
Prepaid pension cost $ 160 432
======= ===
Net pension cost for the Pension Plan included the following components for
the years ended December 31, 2000, 1999 and 1998:
(In thousands) 2000 1999 1998
------ ------ ------
Service cost - benefits earned during the period $ 260 282 201
Interest cost on projected benefit obligation 324 277 235
Expected return on plan assets (417) (340) (239)
Net amortization and deferral 105 111 107
------ ------ ------
Net periodic pension cost $ 272 330 304
====== ====== ======
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 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.
61
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) 2000 1999 1998
-------- ---------- ---------
Benefit obligation at beginning of year $ 508 442 347
Effects of change in census information - - 34
Service cost 25 30 12
Interest cost 52 33 27
Actuarial loss 196 19 22
Benefits paid (16) (16) -
-------- ---------- ---------
Benefit obligation at end of year $ 765 508 442
======== ========== =========
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) 2000 1999
---------- ---------
Funded status $ (765) (508)
Unrecognized net actuarial (gain)/loss 122 (71)
Unrecognized prior service cost 253 290
Adjustment for minimum liability (118) (111)
---------- ---------
Accrued pension cost $ (508) (400)
========== =========
Net pension cost for the SERP Plan included the following components for
the years ended December 31, 2000, 1999 and 1998:
(In thousands) 2000 1999 1998
------ ------ ------
Service cost - benefits earned during the period $ 25 30 12
Interest cost on projected benefit obligation 52 33 27
Net amortization and deferral 39 37 27
------ ------ ------
Net periodic pension cost $ 116 100 66
====== ====== ======
The following assumptions were used in determining the actuarial
information for the Retirement Plan and the SERP Plan for the years ended
December 31, 2000, 1999 and 1998:
2000 1999 1998
------------------------- ------------------------ -------------------------
Retirement SERP Retirement SERP Retirement SERP
Plan Plan Plan Plan Plan Plan
----------- ------------ ----------- ----------- ------------ -----------
Discount rate used to determine net
periodic pension cost 7.75% 7.75% 6.50% 6.50% 7.00% 7.00%
Discount rate used to calculate end of
year liability disclosures 7.75% 7.75% 7.75% 7.75% 6.50% 6.50%
Expected long-term rate of return on assets 9.50% n/a 9.50% 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, 2000 and 1999 is
approximately $138,000 that has been recognized in connection with the accrual
of the additional minimum liability for the SERP Plan.
62
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 2000, 1999 and 1998 under the Split-Dollar Plan on behalf of
all executive officers as a group were $26,000, $24,000 and $22,000,
respectively.
First Savings Plans - First Savings maintained a defined contribution plan
and an employee stock ownership plan ("ESOP") for its employees. The defined
contribution plan was a profit sharing plan in which First Savings made annual
contributions to the plan on behalf of eligible employees at levels determined
by its board of directors based on company goals. The ESOP was created in 1994
at the time First Savings converted to stock form. At the time of the
conversion, the ESOP borrowed $648,000 to purchase shares of First Savings
stock. The loan was paid off over time from discretionary contributions made by
First Savings.
The defined contribution plan and the ESOP became inactive during 2000 as a
result of the Company's acquisition of First Savings. The Company plans to
terminate these plans as soon as permissible. No further contributions will be
made to either plan. Total expenses recorded in the accompanying Consolidated
Statements of Income for the years presented are as follows:
2000 1999 1998
------ ------ ------
First Savings Defined Contribution Plan $ 163 143 163
First Savings ESOP - 133 274
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, 2000, the Company had
outstanding loan commitments of $140,559,000, of which $107,337,000 were at
variable rates and $33,222,000 were at fixed rates. Included in outstanding loan
commitments were unfunded commitments of $65,889,000 on revolving credit plans,
of which $61,339,000 were at variable rates and $4,550,000 were at fixed rates.
Additionally, standby letters of credit of approximately $2,836,000 and
$2,332,000 were outstanding at December 31, 2000 and 1999, 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 affected by local economic
conditions.
63
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, 2000 and 1999 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, 2000 December 31, 1999
----------------------------------- ------------------------------------
Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
------------ ---------------- ------------ -----------------
(In thousands)
Cash and due from banks,
noninterest-bearing $ 20,940 20,940 30,629 30,629
Due from banks, interest-bearing 1,769 1,769 15,432 15,432
Federal funds sold 7,730 7,730 12,280 12,280
Securities available for sale 69,597 69,597 113,005 113,005
Securities held to maturity 47,924 47,661 52,637 51,425
Presold mortgages in process
of settlement 1,036 1,036 1,121 1,121
Loans, net of allowance 738,196 730,987 636,550 635,789
Accrued interest receivable 6,342 6,342 5,286 5,286
Deposits 770,379 771,171 712,379 712,693
Borrowings 26,200 26,367 62,500 62,044
Accrued interest payable 4,254 4,254 3,635 3,635
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.
64
Since the inception of the Option Plan, each 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, as a result of the merger acquisition of First
Savings Bancorp, Inc. discussed in Note 2, all Employee Options granted prior to
September 14, 2000 outstanding as of that same date became 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, 2000, there were 164,600 additional shares available for
grant under the Option Plan. The per share weighted-average fair value of
options granted during 2000, 1999, and 1998 was $4.50, $4.28, and $7.33,
respectively on the date(s) of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
2000 1999 1998
------- ---------- -------
Expected dividend yield 4.67% 3.96% 1.90%
Risk-free interest rate 6.15% 5.49% 5.50%
Expected life 8 years 7.25 years 8 years
Expected volatility 34.00% 25.00% 25.00%
The Company also assumed three stock option plans in connection with its
merger acquisition of First Savings. The three plans included two nonqualified
plans for directors and an incentive plan for employees. In connection with the
assumption of these three plans, 391,584 options (after adjusting for the
exchange ratio) for shares of stock previously granted by First Savings were
assumed. All unvested options of First Savings that were outstanding on
September 14, 2000 became immediately vested as a result of change-in-control
provisions contained in the plans that were triggered by the merger.
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. The pro forma net income for 2000 reflects the
expense associated with the immediate vesting of all unvested options
outstanding of the Company (the Company's options also all vested as a result of
the merger) and First Savings as of September 14, 2000.
65
(In thousands except per share data) 2000 1999 1998
-------- ------ -------
Net income: As reported $ 9,342 11,854 10,973
Pro forma 8,721 11,548 10,832
Earnings per share: Basic - As reported 1.05 1.32 1.20
Basic - Pro forma 0.98 1.29 1.18
Diluted - As reported 1.03 1.27 1.13
Diluted - Pro forma 0.96 1.23 1.12
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.
The following table sets forth a summary of the activity of the Company's
outstanding options, including the options related to First Savings, since
December 31, 1997:
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, 1997 985,861 $ 8.55 708,586 $ 8.16
Granted 22,500 21.55
Exercised (82,621) 8.02
Forfeited (8,400) 17.28
Expired - -
Balance at December 31, 1998 917,340 8.84 729,059 8.53
Granted 171,744 16.73
Exercised (171,995) 7.93
Forfeited (600) 18.50
Expired (150) 18.50
Balance at December 31, 1999 916,339 10.77 693,183 9.43
Granted 25,000 15.30
Exercised (241,244) 7.99
Forfeited (1,200) 13.44
Expired - -
Balance at December 31, 2000 698,895 $ 11.50 688,895 $ 11.45
66
The following table summarizes information about the stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------------
Weighted-Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/00 Life Price at 12/31/00 Price
--------------- ------------- ---------------- ----------- --------------- -------------
$6 to $8.99 376,851 3.3 $ 7.76 376,851 $ 7.76
$9 to $11.99 66,800 5.8 11.32 66,800 11.32
$12 to $14.99 10,000 9.7 14.63 - -
$15 to $17.99 203,244 8.4 16.54 203,244 16.54
$18 to $20.99 27,000 7.0 19.10 27,000 19.10
$21 to $22 15,000 7.4 22.00 15,000 22.00
------------- ---------------- ----------- --------------- -------------
698,895 5.3 $ 11.50 688,895 $ 11.45
============= ================ =========== =============== =============
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, 2000, the Bank had undivided profits of approximately $54,041,000
which were available for the payment of dividends. As of December 31, 2000,
approximately $54,028,000 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 the
Company'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 assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's and 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 and the Bank to maintain minimum ratios of "Tier 1" capital
to total risk-weighted assets ("Tier I Capital Ratio") and total capital to
risk-weighted assets of 4.00% and 8.00% ("Total Capital Ratio"), respectively.
Tier 1 capital is comprised of total shareholders' equity calculated in
accordance with generally accepted accounting principles, excluding unrealized
gains or losses from the securities available for sale, less intangible assets,
and total capital is comprised of Tier 1 capital plus certain adjustments, the
largest of which for the Company and the Bank is the allowance for loan losses.
Risk-weighted assets refer to the on- and off-balance sheet exposures of the
Company and the Bank, 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 and the Bank are subject to a leverage capital requirement, which calls
for a minimum ratio of Tier 1 capital (as defined above) to quarterly average
total assets ("Leverage Ratio) 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.
67
In addition to the minimum capital requirements described above, the
regulatory framework for prompt corrective action also contains specific capital
guidelines applicable to banks for classification as "well capitalized," which
are presented with the minimum ratios, the Company's ratios and the Bank's
ratios as of December 31, 2000 and 1999 in the following table. Based on the
most recent notification from its regulators, the Bank is well capitalized under
the framework for prompt corrective action. There are no conditions or events
since that notification that management believes have changed the Company's
category.
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, 2000
Total Capital Ratio
Company $ 113,691 16.40% 55,470 8.00% N/A N/A
Bank 111,332 16.08% 55,384 8.00% 69,230 10.00%
Tier I Capital Ratio
Company 105,798 15.43% 27,419 4.00% N/A N/A
Bank 103,439 15.11% 27,376 4.00% 41,064 6.00%
Leverage Ratio
Company 105,798 11.60% 36,472 4.00% N/A N/A
Bank 103,439 11.36% 36,432 4.00% 45,540 5.00%
As of December 31, 1999
Total Capital Ratio
Company $ 110,690 18.82% 47,048 8.00% N/A N/A
Bank 108,837 18.47% 46,967 8.00% 58,708 10.00%
Tier I Capital Ratio
Company 104,016 17.89% 23,257 4.00% N/A N/A
Bank 100,944 17.36% 23,216 4.00% 34,824 6.00%
Leverage Ratio
Company 104,016 11.91% 34,944 4.00% N/A N/A
Bank 100,944 11.56% 34,943 4.00% 43,679 5.00%
The average reserve balance maintained under the requirements of the
Federal Reserve was approximately $12,000,000 for the year ended December 31,
2000.
Note 15. Supplementary Income Statement Information
Components of other operating expenses exceeding 1% of total income for any
of the years ended December 31, 2000, 1999 and 1998 are as follows:
(In thousands) 2000 1999 1998
-------- -------- --------
Amortization of intangible assets $ 632 636 655
Stationery and supplies 1,174 893 827
68
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) 2000 1999
--------- --------
Assets
- ------
Cash on deposit with bank subsidiary $ 2,861 1,847
Securities available for sale at fair value - 711
Investment in wholly-owned subsidiaries, at equity 109,791 105,062
Land 7 7
Other assets 49 853
--------- --------
Total assets $ 112,708 108,480
========= ========
Liabilities and shareholders' equity
- ------------------------------------
Other liabilities $ 2,024 1,500
Shareholders' equity 110,684 106,980
--------- --------
Total liabilities and shareholders' equity $ 112,708 108,480
========= ========
CONDENSED STATEMENTS OF INCOME Year Ended December 31,
----------------------------------------------------------
(In thousands) 2000 1999 1998
------------ ------------ -------------
Dividends from wholly-owned subsidiaries $ 9,025 2,175 2,050
Undistributed earnings of wholly-owned subsidiaries 1,387 10,017 8,777
Merger expenses incurred by parent company (810) - -
All other income and expenses, net (260) (338) 146
------------ ------------ -------------
Net income $ 9,342 11,854 10,973
============ ============ =============
CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31,
------------------------------------------------------
(In thousands) 2000 1999 1998
------------ ----------- -----------
Operating Activities:
Net income $ 9,342 11,854 10,973
Equity in undistributed earnings of subsidiaries (1,387) (10,017) (8,777)
Decrease (increase) in other assets 804 (320) 1,879
Decrease in other liabilities (6) (67) (20)
------------ ----------- -----------
Total - operating activities 8,753 1,450 4,055
------------ ----------- -----------
Investing Activities:
Purchases of securities available for sale - (2,413) (2,204)
Sales of securities available for sale 711 12,452 2,264
------------ ----------- -----------
Total - investing activities 711 10,039 60
------------ ----------- -----------
Financing Activities
Payment of cash dividends (6,318) (5,624) (5,334)
Proceeds from issuance of common stock 752 835 218
Purchases and retirement of common stock (2,884) (7,509) (1,136)
------------ ----------- -----------
Total - financing activities (8,450) (12,298) (6,252)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,014 (809) (2,137)
Cash and cash equivalents, beginning of year 1,847 2,656 4,793
------------ ----------- -----------
Cash and cash equivalents, end of year $ 2,861 1,847 2,656
============ =========== ===========
69
Note 17. Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards (`SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. This Statement, as amended, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
and was adopted by the Company on January 1, 2001. On January 1, 2001, the
Company transferred held-to-maturity securities with an amortized cost of
approximately $19.9 million to the available-for-sale category at fair value as
allowed by SFAS No. 133. Such transfers from the held-to-maturity category at
the date of initial adoption shall not call into question the Company's intent
to hold other debt securities to maturity in the future. The unrealized loss at
the time of the transfer was approximately $240,000. The Company does not engage
in any hedging activities, and other than the aforementioned transfer of
securities, the adoption of the statement had no impact on the Company.
The FASB has also issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125." It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. This statement is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. This statement is effective for the recognition and
reclassification of collateral and disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
This Statement is not expected to materially impact the Company.
70
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, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Raleigh, North Carolina
January 24, 2001
Part II. Other Information
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During the two years ended December 31, 2000, 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
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
incorporated herein by reference.
72
3.a.iii Copy of the amendment to Articles of Incorporation - adding a new
Article Ten, was filed as Exhibit 3.a.iii to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999, and is
incorporated herein by reference.
3.a.iv Copy of the amendment to Article IV of the Articles of Incorporation
was filed as Exhibit 3.a.iv to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999, and is incorporated herein
by reference.
3.b.i Copy of the Bylaws of the Registrant and amendments thereto, was
filed as Exhibit 3(b) to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1994, and is incorporated herein by
reference.
3.b.ii Copy of the amendment to the Bylaws replacing Section 3.04 of Article
Three was filed as Exhibit 3.b.ii to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 and is incorporated
herein by reference.
3.b.iii Copy of the amendment to the Bylaws amending Section 3.19 of Article
Three was filed as Exhibit 3.b.iii to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 and is incorporated
herein by reference.
3.b.iv Copy of the amendment to the Bylaws replacing Section 3.02 was filed
as Exhibit 3.b.iv to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000, and is incorporated herein by
reference.
4 Form of Common Stock Certificate was filed as Exhibit 4 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.
73
10.f First Bancorp Employees' Pension Plan, as amended on August 16, 1994,
was filed as Exhibit 10(g) to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1994, and is incorporated
herein by reference. (*)
10.g First Bancorp Senior Management Supplemental Executive Retirement
Plan dated May 31, 1993, was filed as Exhibit 10(k) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993,
and is incorporated herein by reference. (*)
10.h First Bancorp Senior Management Split-Dollar Life Insurance
Agreements between the Company and the Executive Officers, as amended
on December 22, 1994, was filed as Exhibit 10(i) to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1994,
and is incorporated herein by reference. (*)
10.i First Bancorp 1994 Stock Option Plan was filed as Exhibit 10(n) to
the Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1994, and is incorporated herein by reference. (*)
10.j Amendment to the First Bancorp Savings Plus and Profit Sharing Plan
(401(k) savings incentive plan and trust), dated December 17, 1996,
was filed as Exhibit 10(m) to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996, and is incorporated
herein by reference. (*)
10.k Employment Agreement between the Company and James H. Garner dated
August 17, 1998 was filed as Exhibit 10(l) to the Company's Annual
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference. (*)
10.l Employment Agreement between the Company and Anna G. Hollers dated
August 17, 1998 was filed as Exhibit 10(m) to the Company's Annual
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference. (*)
10.m Employment Agreement between the Company and Teresa C. Nixon dated
August 17, 1998 was filed as Exhibit 10(n) to the Company's Annual
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference. (*)
10.n First Amendment to the First Bancorp Senior Management Executive
Retirement Plan dated April 21, 1998 was filed as Exhibit 10(o) to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998, and is incorporated herein by reference. (*)
10.o Employment Agreement between the Company and Eric P. Credle dated
August 17, 1998 was filed as Exhibit 10(p) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, and is
incorporated herein by reference. (*)
10.p Amendments 1 and 2 to the Company's 1994 Stock Option Plan was filed
as Exhibit 10.q to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, and is incorporated herein by
reference. (*)
10.q Employment Agreement between the Company and David G. Grigg dated
August 17, 1998 was filed as Exhibit 10.r to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 and is
incorporated herein by reference. (*)
10.r Definitive Merger Agreement with First Savings Bancorp, Inc. dated
December 16, 1999 was filed on Form 8-K on December 21, 1999 and is
incorporated herein by reference.
10.s Amendment and Waiver to Merger Agreement with First Savings Bancorp,
Inc. dated March 24, 2000 was filed as Exhibit 10.s to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000
and is incorporated herein by reference. (*).
74
10.t Second Amendment and Waiver to Merger Agreement dated as of May 15,
2000 was filed as Exhibit 2.3 to the Company's Amendment No. 1 to
Registration Statement on Form S-4 (Registration No. 333-34216) dated
May 16, 2000 and is incorporated herein by reference.
10.u Purchase and Assumption Agreement with Bank of Davie, dated August
22, 2000 was filed as Exhibit 10.u to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000 and is
incorporated herein by reference.
10.v Purchase and Assumption Agreement with First Union National Bank,
dated September 13, 2000 was filed as Exhibit 10.v to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000 and is incorporated herein by reference.
10.w Employment Agreement between the Company and John F. Burns dated
September 14, 2000 was filed as Exhibit 10.w to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000 and is incorporated herein by reference. (*)
10.x Definitive Merger Agreement with Century Bancorp, Inc. dated October
19, 2000 was filed on Form 8-K on October 20, 2000 and is
incorporated herein by reference.
10.y Employee Stock Option Plan of First Savings Bank of Moore County,
Inc., SSB, was filed by First Savings Bancorp, Inc. as Exhibit
(10)(ii)(a) to its Registration Statement on Form 8-A, Registration
No. 0-27-098, dated October 26, 1995, and is incorporated herein by
reference. (*)
10.z Director Stock Option Plan of First Savings Bank of Moore County,
Inc., SSB, was filed by First Savings Bancorp, Inc. as Exhibit
(10)(ii)(b) to its Registration Statement on Form 8-A, Registration
No. 0-27-098, dated October 26, 1995, and is incorporated herein by
reference. (*)
10.aa First Savings Bancorp, Inc. Second Nonqualified Stock Option Plan for
Directors, dated June 30, 1999 was filed as Exhibit (10)(ii)(g) to
its Form 10-K for the twelve months ended June 30, 1999, and is
incorporated herein by reference. (*)
21 List of Subsidiaries of Registrant.
23.a Consent of Independent Auditors of Registrant, KPMG LLP
(b) The Registrant filed one report on Form 8-K during the quarter ended
December 31, 2000, which was filed on October 20, 2000 and disclosed
under Item 7, reporting its signing of a definitive merger agreement
with Century Bancorp, Inc.
(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
75
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 20th day of February,
2001.
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
Secretary Chief Financial Officer
February 20, 2001 (Principal Accounting Officer)
February 20, 2001
Board of Directors
/s/ Jack D. Briggs /s/ William E. Samuels
- ------------------ ----------------------
Jack D. Briggs William E. Samuels
Chairman of the Board Vice-Chairman of the Board
Director Director
February 20, 2001 February 20, 2001
/s/ H. David Bruton /s/ Thomas F. Phillips
- ------------------- ----------------------
H. David Bruton Thomas F. Phillips
Director Director
February 20, 2001 February 20, 2001
/s/ David L. Burns /s/ G.T. Rabe, Jr.
- ------------------ ------------------
David L. Burns G.T. Rabe, Jr.
Director Director
February 20, 2001 February 20, 2001
/s/ John F. Burns /s/ Edward T. Taws
- ----------------- ------------------
John F. Burns Edward T. Taws
Director Director
February 20, 2001 February 20, 2001
/s/ Felton J. Capel /s/ Frederick H. Taylor
------------------ -----------------------
Felton J. Capel Frederick H. Taylor
Director Director
February 20, 2001 February 20, 2001
76
/s/ Jesse S. Capel /s/ Virginia C. Thomasson
----------------- -------------------------
Jesse S. Capel Virginia C. Thomasson
Director Director
February 20, 2001 February 20, 2001
/s/ James H. Garner /s/ Goldie H. Wallace
------------------ ---------------------
James H. Garner Goldie H. Wallace
Director Director
February 20, 2001 February 20, 2001
/s/ Frank G. Hardister /s/ A. Jordan Washburn
--------------------- ----------------------
Frank G. Hardister A. Jordan Washburn
Director Director
February 20, 2001 February 20, 2001
/s/ George R. Perkins /s/ John C. Willis
- --------------------- ------------------
George R. Perkins John C. Willis
Director Director
February 20, 2001 February 20, 2001
77
EXHIBIT CROSS REFERENCE INDEX
Exhibit Page(s)
------- -------
3.a.i Copy of Articles of Incorporation of the Registrant *
3.a.ii Copy of the amendment to Articles of Incorporation *
3.a.iii Copy of the amendment to Articles of Incorporation - adding a new Article Ten *
3.a.iv. Copy of the amendment to Article IV of the Articles of Incorporation *
3.b.i Copy of the Bylaws of the Registrant *
3.b.ii. Copy of the amendment to the Bylaws replacing Section 3.04 of Article 3 *
3.b.iii Copy of the amendment to the Bylaws amending Section 3.19 of Article Three *
3.b.iv Copy of the amendment to the Bylaws replacing Section 3.02 *
10.a Data processing Agreement by and between Bank of Montgomery (First Bank) and
Montgomery Data Services, Inc. *
10.b First Bank Salary and Incentive Plan, as amended *
10.c First Bancorp Savings Plus and Profit Sharing Plan (401(k) savings incentive plan
and trust), as amended *
10.d Directors and Officers Liability Insurance Policy of First Bancorp *
10.e Indemnification Agreement between the Company and its Directors and Officers *
10.f First Bancorp Employees' Pension Plan *
10.g First Bancorp Senior Management Supplemental Executive Retirement Plan *
10.h First Bancorp Senior Management Split-Dollar Life Insurance Agreements between
the Company and the Executive Officers *
10.i First Bancorp 1994 Stock Option Plan *
10.j Amendment to the First Bancorp Savings Plus and Profit Sharing Plan *
10.k Employment Agreement between the Company and James H. Garner *
10.l Employment Agreement between the Company and Anna G. Hollers *
10.m Employment Agreement between the Company and Teresa C. Nixon *
10.n First Amendment to the First Bancorp Supplemental Executive Retirement Plan *
78
Exhibit Page(s)
------- -------
10.o Employment Agreement between the Company and Eric P. Credle *
10.p Amendments 1 and 2 to the Company's 1994 Stock Option Plan *
10.q Employment Agreement between the Company and David G. Grigg *
10.r Definitive Merger Agreement with First Savings Bancorp, Inc. *
10.s Amendment and Waiver to Merger Agreement with First Savings Bancorp, Inc. *
10.t Second Amendment and Waiver to Merger Agreement with First Savings Bancorp, Inc. *
10.u Purchase and Assumption Agreement with Bank of Davie *
10.v Purchase and Assumption Agreement with First Union National Bank *
10.w Employment Agreement between the Company and John F. Burns *
10.x Definitive Merger Agreement with Century Bancorp, Inc. *
10.y Employee Stock Option Plan of First Savings Bank of Moore County, Inc., SSB *
10.z Director Stock Option Plan of First Savings Bank of Moore County, Inc., SSB *
10.aa First Savings Bancorp, Inc. Second Nonqualified Stock Option Plan for Directors *
21 List of Subsidiaries of Registrant 80
23.a Consent of Independent Auditors 81
* Incorporated herein by reference.
79