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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number 0-15572
FIRST BANCORP
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
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(State of Incorporation) (I.R.S. Employer Identification Number)
341 North Main Street, Troy, North Carolina 27371-0508
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (910)576-6171
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $5 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, $5 par
value, held by non-affiliates of the registrant, based on the average bid and
asked prices of the Common Stock on January 31, 1999 as reported on the NASDAQ
National Market System, was approximately $56,461,000. 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
January 31, 1999 was 3,022,230.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed pursuant to
Regulation 14A are incorporated herein by reference into Part III.
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CROSS REFERENCE INDEX
PART I Business:
Item I General Description
Statistical Information
Net Interest Income
Average Balances and Net Interest Income Analysis
Volume and Rate Variance Analysis
Provision for Loan Losses
Noninterest Income
Noninterest Expenses
Income Taxes
Distribution of Assets and Liabilities
Securities Portfolio Composition and Maturities
Loans
Nonperforming Assets
Allowance for Loan Losses and Loan Loss Experience
Deposits
Interest Rate Risk (Including Quantitative
and Qualitative Disclosures About Market Risk)
Off-Balance Sheet Risk
Return on Assets and Equity
Liquidity
Capital Resources, Components and Ratios
Year 2000 Issue
Inflation
Accounting Changes
Forward-Looking Statements
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Shareholders
PART II
Item 5 Market for the Registrant's Common Stock and Related
Shareholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Results of
Operations and Financial Condition
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8 Financial Statements and Supplementary Data:
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 1998
Consolidated Statements of Comprehensive Income for each of the
years in the three-year period ended December 31, 1998
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
Selected Consolidated Financial Data
Quarterly Financial Summary
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
PART III
Item 10 Directors and Executive Officers of the Registrant; Compliance
with Section 16 (a) of the Exchange Act
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports of Form 8-K
SIGNATURES
* Information called for by Part III (Items 10 through 13) is incorporated
herein by reference to the Registrant's definitive Proxy Statement for the
1999 Annual Meeting of Shareholders to be filed with Securities and
Exchange Commission.
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 Company also controls First Bank Insurance
Services, Inc. ("First Bank Insurance"), an insurance agency acquired in 1994 as
a subsidiary of the Bank. On December 29, 1995, the insurance agency operations
of First Bank Insurance were divested. First Bank Insurance continues to be a
subsidiary of the Bank, but is inactive at this time.
The Company was incorporated in North Carolina on December 8, 1983, as
Montgomery Bancorp, for the purpose of acquiring 100% of the outstanding common
stock of the Bank through stock-for-stock exchanges. On December 31, 1986, the
Company changed its name to First Bancorp to conform its name to the name of the
Bank, which had changed its name from Bank of Montgomery to First Bank in 1985.
The Bank was organized in 1934 and began banking operations in 1935 as the
Bank of Montgomery, named for the county in which it operated. With its 1995
acquisition of the Laurinburg and Rockingham offices of First Scotland Bank
("First Scotland") and its 1994 acquisition of Central State Bank ("Central
State"), High Point, North Carolina, the Bank operates in a 14 county area
centered in Troy, North Carolina. Troy, population 3,400, is located in the
center of Montgomery County, approximately 60 miles east of Charlotte, and 50
miles south of Greensboro. The Bank conducts business from 35 branches located
within a 80-mile radius of Troy, covering a geographical area from Maxton to the
southeast, to High Point to the north, Kannapolis to the west, and Lillington to
the east. Ranked by assets, the Bank was the 15th largest bank in North Carolina
as of December 31, 1998, according to the Office of the Commissioner of Banks.
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, discount brokerage services and self-directed IRA's
(both offered through a contractual relationship with a brokerage firm). In
1998, 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.
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; investment and discount brokerage services; IRA's; safe
deposit box rentals; bank money orders; and electronic funds transfer services,
including wire transfers, automated teller machines, and bank-by-phone
capabilities. Because the majority of the Bank's customers are individuals and
small to medium-sized businesses located in the counties it serves, deposits and
loans are well diversified. There are no seasonal factors that would have any
material effect on the Bank's business, and the Bank does not rely on foreign
sources of funds or income.
Montgomery Data's primary business is to provide electronic data processing
services for the Bank, which accounted for 99% of its data processing revenues
in 1998 and 82% in both 1997 and 1996. Ownership and operation of Montgomery
Data allows the Company to do all of its electronic data processing without
paying fees for such services to an independent provider. Maintaining its own
data processing system also allows the Company to adapt the system to its
individual needs and to the services and products it offers. Although not a
significant source of income, Montgomery Data has historically made its excess
data processing capabilities available to area financial institutions for a fee.
The Company had one nonaffiliated customer in 1996 and for the first eleven
months of 1997, at which time the customer terminated its contract as a result
of being acquired by another institution and paid an early termination fee. The
Company did not have any nonaffiliated customers from December 1997 to December
1998. In December 1998, a contract was signed to provide data processing for a
nearby start-up bank. This customer is expected to contribute approximately
$40,000 in fees during 1999. Montgomery Data is not aggressively marketing this
service and has no other prospective customers at this time.
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 on August 1, 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.
Territory Served and Competition
The Company serves primarily the south central area of the Piedmont region
of North Carolina, with offices in Anson, Cabarrus, Chatham, Davidson, Guilford,
Harnett, Lee, Montgomery, Moore, Randolph, Richmond, Robeson, Scotland and
Stanly counties. The Company's headquarters are located in Troy, Montgomery
County. The Company's 35 branches and facilities are all located in small
communities whose economies are based primarily on manufacturing and light
industry. Although the Company's market is predominantly small communities and
rural areas, the area is not dependent on agriculture. Textiles, furniture,
mobile homes, electronics, plastic and metal fabrication, forest products, food
products and cigarettes are among the leading manufacturing industries in the
trade area. Leading producers of socks, hosiery and area rugs are located in
Montgomery County. The Pinehurst area is a widely known golf resort and
retirement area. The High Point area is widely known for its furniture market.
Additionally, several of the communities served by the Company are "bedroom"
communities serving Charlotte and Greensboro in addition to smaller cities such
as Albermarle, Asheboro, High Point, Pinehurst and Sanford.
The banking laws of North Carolina allow state-wide branching, and
consequently commercial banking in the state is highly competitive. The Company
competes in its various market areas with, among others, several large
interstate bank holding companies that are headquartered in North Carolina.
These large competitors have substantially greater resources than the Company,
including broader geographic markets, higher lending limits and the ability to
make greater use of large-scale advertising and promotions. A significant number
of interstate banking acquisitions have taken place in the past decade, thus
further increasing the size and financial resources of some of the Company's
competitors, three of which are among the largest bank holding companies in the
nation. See "Supervision and Regulation" below for a further discussion of
regulations in the Company's industry that affect competition.
The Company competes not only against banking organizations, but also
against a wide range of financial service providers including federally and
state chartered savings and loan institutions, credit unions, investment and
brokerage firms and small-loan or consumer finance companies. Competition among
financial institutions of all types is virtually unlimited with respect to legal
ability and authority to provide most financial services. However, the Company
believes it has certain advantages over its competition in the areas it serves.
The Company seeks to maintain a distinct local identity in each of the
communities it serves and actively sponsors and participates in local civic
affairs. Most lending and other customer-related business decisions can be made
without delays associated with larger systems. Additionally, employment of local
managers and personnel in various offices and low turnover of personnel enable
the Company to establish and maintain long-term relationships with individual
and corporate customers.
Lending Policy and Procedures
Conservative lending policies and procedures and appropriate underwriting
standards are high priorities of the Bank. Loans are approved under the Bank's
written loan policy, which provides that lending officers, principally branch
managers, have sole authority to approve loans of various amounts up to $75,000.
Each of the Bank's regional senior lending officers has sole discretion to
approve secured loans in principal amounts up to $250,000 and together can
approve loans up to $1,000,000. Lending limits may vary depending upon whether
the loan is secured or unsecured.
The Bank's board of directors reviews and approves loans that exceed
management's lending authority, loans to officers, directors, and their
affiliates and, in certain instances, other types of loans. New credit
extensions are reviewed daily by the Bank's senior management and at least
monthly by the board of directors.
The Bank continually monitors its loan portfolio to identify areas of
concern and to enable management to take corrective action. Lending officers and
the board of directors meet periodically to review past due loans and portfolio
quality, while assuring that the bank is appropriately meeting the credit needs
of the communities it serves. Individual lending officers are responsible for
pursuing collection of past-due amounts and monitoring any changes in the
financial status of the borrowers.
The Bank's internal audit department evaluates specific loans and overall
loan quality at individual branches as part of its regular branch reviews. The
internal audit department also maintains its own estimate of the required amount
of allowance for loan losses needed for the overall Company which is compared to
the loan department's estimate for consistency. See "Allowance for Loan Losses
and Loan Loss Experience" in Item 7 below.
The Bank also contracts with an independent consulting firm to review new
loan originations meeting certain criteria, as well as assign risk grades to
existing credits meeting certain thresholds. The consulting firm's 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 Bank has adopted an investment policy designed to optimize the Bank'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 Bank may
invest in federal, state and municipal obligations, federal agency obligations,
public housing authority bonds, industrial development revenue bonds, Federal
National Mortgage Association ("FNMA"), Government National Mortgage Association
("GNMA") and Student Loan Marketing Association ("SLMA") securities. The policy
also contains maximum amounts that the Bank can invest in certain types of
securities, including, at December 31, 1998, a maximum of $30 million that can
be invested in certain collateralized mortgage obligations and mortgage-backed
securities. The Bank'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 Bank may purchase non-rated municipal bonds only if such
bonds are in the Bank's general market area and determined by the Bank to have a
credit risk no greater than the minimum ratings referred to above. Industrial
development authority bonds, which normally are not rated, are purchased only if
they are judged to possess a high degree of credit soundness to assure
reasonably prompt sale at a fair value.
The Company's investment officers implement the investment policy, monitor
the investment portfolio, recommend portfolio strategies, and report to the
Bank'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 Bank's portfolio is compared with the portfolios of other North Carolina
banks of comparable size.
All of the Bank's securities are kept in safekeeping accounts at
correspondent banks.
Recent Acquisitions
As part of its operations, the Company regularly evaluates the potential
acquisition of or merger with, and holds discussions with, various financial
institutions.
On November 14, 1997, the Bank acquired a First Union National Bank branch
located in Lillington, North Carolina. Real and personal property acquired
totaled approximately $237,000 and deposits assumed totaled approximately
$14,345,000. No loans were included in the purchase.
On December 15, 1995, the Bank completed its cash acquisition of the
Laurinburg and Rockingham branch offices of First Scotland Bank. As of December
15, 1995, assets acquired were approximately $15.8 million. The acquisition
included earning assets of approximately $14.2 million, of which approximately
$8.9 million were loans. Deposit liabilities assumed were approximately $15
million.
On August 25, 1994, the Company completed its cash acquisition of Central
State Bank in High Point, North Carolina. Central State, a North Carolina
state-chartered commercial bank, had approximately $35 million in assets at the
time of the acquisition, with earning assets of approximately $32 million,
including approximately $27 million in loans. Central State also had
approximately $32 million in deposits at the time of the merger with the Bank.
For additional information on these acquisitions, please see Management's
Discussion and Analysis and note 2 to the consolidated financial statements.
Employees
As of December 31, 1998, the Company had 245 full-time and 41 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 Banking Commission. The Bank is subject to
supervision and examination by the Federal Deposit Insurance Corporation and the
North Carolina Banking Commission. 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 Commissioner of Banks (the "Commissioner") under the Bank
Holding Company Act of 1984.
A bank holding company is required to file with the Federal Reserve Board
quarterly reports and other information regarding its business operations and
those of its subsidiaries. It is also subject to examination by the Federal
Reserve Board and is required to obtain Federal Reserve Board approval prior to
making certain acquisitions of other institutions or voting securities. The
Commissioner of Banks 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.
The United States Congress and the North Carolina General Assembly have
periodically considered and adopted legislation that has resulted in, and could
result in further, deregulation of both banks and other financial institutions.
Such legislation could modify or eliminate geographic restrictions on banks and
bank holding companies and current restrictions on the ability of banks to
engage in certain nonbanking activities. For example, the Riegle-Neal Interstate
Banking Act, which was enacted several years ago, allows expansion of interstate
acquisitions by bank holding companies and banks. This and other legislative and
regulatory changes have increased the ability of financial institutions to
expand the scope of their operations, both in terms of services offered and
geographic coverage. Such legislative changes could place the Company in more
direct competition with other financial institutions, including mutual funds,
securities brokerage firms, insurance companies, and investment banking firms.
The effect of any such legislation on the business of the Company cannot be
predicted. The Company cannot predict what other legislation might be enacted or
what other regulations might be adopted or, if enacted or adopted, the effect
thereof.
Supervision and Regulation of the Bank
Federal banking regulations applicable to all depository financial
institutions, among other things, (i) provide federal bank regulatory agencies
with powers to prevent unsafe and unsound banking practices; (ii) restrict
preferential loans by banks to "insiders" of banks; (iii) require banks to keep
information on loans to major shareholders and executive officers; and (iv) bar
certain director and officer interlocks between financial institutions.
As a state chartered bank, the Bank is subject to the provisions of the
North Carolina banking statutes and to regulation by the Commissioner. The
Commissioner has a wide range of regulatory authority over the activities and
operations of the Bank, and the Commissioner's staff conducts periodic
examinations of banks and their affiliates to ensure compliance with state
banking regulations. Among other things, the Commissioner regulates the merger
and consolidations of state-chartered banks, the payment of dividends, loans to
officers and directors, recordkeeping, types and amounts of loans and
investments, and the establishment of branches. The Commissioner also has cease
and desist powers over state-chartered banks for violations of state banking
laws or regulations and for unsafe or unsound conduct that is likely to
jeopardize the interest of depositors.
The dividends that may be paid by the Bank to the Company are subject to
legal limitations under the North Carolina law. In addition, the regulatory
authorities may restrict dividends that may be paid by the Bank or the Company's
other subsidiaries. The ability of the Company to pay dividends to its
shareholders is largely dependent on the dividends paid to the Company by its
subsidiaries.
The Bank is a member of the Federal Deposit Insurance Corporation (the
"FDIC"), which currently insures the deposits of member banks. For this
protection, each bank pays a quarterly statutory assessment, based on its level
of deposits, and is subject to the rules and regulations of the FDIC. The FDIC
also is authorized to approve conversions, mergers, consolidations and
assumptions of deposit liability transactions between insured banks and
uninsured banks or institutions, and to prevent capital or surplus diminution in
such transactions where the resulting, continuing, or assumed bank is an insured
nonmember bank. In addition, the FDIC monitors the Bank's compliance with
several banking statutes, such as the Depository Institution Management
Interlocks Act and the Community Reinvestment Act of 1977. The FDIC also
conducts periodic examinations of the Bank to assess its compliance with banking
laws and regulations, and it has the power to implement changes in or
restrictions on a bank's operations if it finds that a violation is occurring or
is threatened.
Neither the Company nor the Bank can predict what other legislation might
be enacted or what other regulations might be adopted, or if enacted or adopted,
the effect thereof on the Bank's operations.
See "Capital Resources" under Item 7 - Management's Discussion and Analysis
below for a discussion of regulatory capital requirements.
Item 2. Properties
The main offices of First Bancorp, First 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 Services, 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 35 branches and
facilities, including the main office, in the trade area as follows: Troy - main
office and two additional full service branches and one teller-window facility;
Albemarle, Asheboro, High Point, and Sanford - two full service branches in
each; Pinehurst - one full service branch and one teller-window facility;
Aberdeen, Archdale, Biscoe, Bennett, Candor, Denton, Kannapolis, Laurel Hill,
Laurinburg, Lillington, Locust, Maxton, Pinebluff, Polkton, Richfield, Robbins,
Rockingham, Seagrove, Seven Lakes, Southern Pines, and Vass - one full service
branch in each. Following the close of business on December 31, 1998, the
Company consolidated its 36th branch, Wagram, with its Laurinburg branch. The
Company owns all its premises except seven branch offices for which the land and
buildings are leased and two branch offices for which the land is leased but the
buildings are owned. There are no other options to purchase or lease additional
properties. The Company considers its facilities adequate to meet current needs
and idle or vacant properties are insignificant.
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 which, in
management's opinion, 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 the shareholders during the fourth quarter of
1998.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters
The Company's common stock trades on the NASDAQ National Market System of
The NASDAQ Stock Market under the symbol FBNC. Tables 1 and 21, included in
"Management's Discussion and Analysis" below, set forth the high and low market
prices of the Company's common stock as traded by the brokerage firms that
maintain a market in the Company's common stock and the dividends declared for
the periods indicated. All per share amounts for reporting periods prior to 1996
have been restated from their originally reported amount to reflect the
two-for-one stock split that was distributed in September 1996. See "Business -
Supervision and Regulation" and note 14 to the consolidated financial statements
for a discussion of regulatory restrictions on the payment of dividends. As of
March 9, 1999 (the Company's record date for purposes of its 1999 Annual Meeting
of Shareholders), there were approximately 900 shareholders of record and an
estimated 800 shareholders whose stock is held in "street name."
Item 6. Selected Financial Data
Table 1 on page 28 sets forth selected financial data about the Company.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Management's discussion and analysis is intended to assist readers in
understanding the Company's results of operations and changes in financial
position for the past three years. This review should be read in conjunction
with the consolidated financial statements and accompanying notes beginning on
page 40 of this report and the supplemental financial data contained in Tables 1
through 21 included with this discussion and analysis. All per share amounts for
periods prior to 1996 have been restated to reflect the two-for-one stock split
distributed on September 13, 1996 to shareholders of record on August 30, 1996.
Mergers and Acquisitions
On November 14, 1997, First Bank acquired a First Union National Bank
branch located in Lillington, North Carolina. Deposits assumed totaled
approximately $14,345,000. No loans were included in the purchase.
In the fourth quarter of 1995, First Bank completed its cash acquisition of
the Laurinburg and Rockingham branch offices of First Scotland Bank. Assets
acquired were approximately $15.8 million including earning assets of
approximately $14.2 million, of which approximately $8.9 million were loans.
Deposit liabilities assumed were approximately $15 million.
During the third quarter of 1994, the Company completed its cash
acquisition of Central State Bank in High Point, North Carolina. Central State
had approximately $35 million in assets with earning assets of approximately $32
million, including approximately $27 million in loans. Central State also had
approximately $32 million in deposits.
For additional information on these acquisitions, please see "Analysis of
Results of Operations" and "Analysis of Financial Condition" below and note 2 to
the consolidated financial statements.
ANALYSIS OF RESULTS OF OPERATIONS
Net interest income, the "spread" between earnings on interest-earning
assets and the interest paid on interest-bearing liabilities, constitutes the
largest source of the Company's earnings. Other factors that significantly
affect operating results are the provision for loan losses, noninterest income
such as service fees and noninterest expenses such as salaries, occupancy
expense, equipment expense and other overhead costs, as well as the effects of
income taxes.
Overview - 1998 Compared to 1997
Net income for 1998 was a record $5,683,000, a 13.4% increase over the
$5,012,000 earned in 1997. The 1998 net income amounted to $1.88 per basic
share, a 13.3% increase over the $1.66 basic earnings per share in 1997.
Earnings per share on a diluted basis amounted to $1.83 in 1998 compared to
$1.62 in 1997, an increase of 13.0%. 1998 results included $227,000 (pretax) in
gains from commercial loan sales, which are not common from a historical
perspective but are the type of gain that may occur again in the future under
certain circumstances. 1997 results included $168,000 (pretax) in nonrecurring
income related to the receipt of an early termination fee for a data processing
contract.
A primary contributor to the growth in earnings during 1998 was a 16.1%
increase in the Company's net interest income. This increase was a result of
strong growth in loans and deposits. Partially offsetting the effects on
earnings of the loan and deposit growth was a decrease in the Company's net
interest margin and a higher provision for loan losses. The increase in the
provision for loan losses from $575,000 in 1997 to $990,000 in 1998 was
primarily attributable to the significant loan growth experienced by the
Company, and not because of concerns about the Company's asset quality.
Also contributing to the growth in earnings was a 12.2% increase in the
Company's noninterest income, which grew from $4,150,000 in 1997 to $4,656,000
in 1998, an increase of $506,000. Core noninterest income, which the Company
defines as service charges on deposit accounts, commissions from insurance
sales, fees from presold mortgages, and other service charges, commissions, and
fees, increased $656,000, or 17.5%, during 1998, from $3,744,000 in 1997 to
$4,400,000 in 1998. Noninterest income not defined as "core" amounted to
$256,000 and $406,000 during 1998 and 1997, respectively, and is discussed in
more detail below.
Noninterest expenses increased $1,824,000, or 12.9%, from $14,088,000 in
1997 to $15,912,000 in 1998. These higher operating expenses were experienced in
all areas of the Company's operations and are associated with the growth in the
Company's branch network and customer base.
Overview - 1997 Compared to 1996
First Bancorp's net income for 1997 amounted to $5,012,000, or basic
earnings per share of $1.66, compared to $4,347,000, or basic earnings per share
of $1.44, for 1996. This represents a 15.3% increase in net income and basic
earnings per share over the prior year. Diluted earnings per share amounted to
$1.62 in 1998, a 13.3% increase over the $1.43 diluted earnings per share for
1996. Excluding the after-tax effects of nonrecurring gains of $103,000, or
$0.03 per share, in the fourth quarter of 1997 related to an early termination
fee of a data processing contract and $128,000, or $0.04 per share, in the third
quarter of 1996 related to a branch sale, the 1997 increase in net income and
basic earnings per share would have been 16.4% over 1996, and the increase in
diluted earnings per share would have been 14.4%.
The primary reason for the increase in net income in 1997 was a 16.2%
increase in net interest income that was a result of strong loan and deposit
growth. The provision for loan losses increased 76.9% over the prior year, which
is primarily a reflection of the Company providing for the loan growth
experienced during the year. Noninterest income decreased 6.7% for the year and
noninterest expenses increased 7.4% for the year. See additional discussion
below.
Net Interest Income
Net interest income on a taxable-equivalent basis amounted to $21,649,000
in 1998, $18,808,000 in 1997, and $16,256,000 in 1996.
Table 2 analyzes net interest income on a taxable-equivalent basis. The
Company's net interest income on a taxable-equivalent basis increased by 15% in
1998 and 16% in 1997. These increases were primarily a result of a 24% increase
in average earning assets in 1998 and a 12% increase in average earning assets
during 1997. The effects of the 24% increase in average earning assets on
taxable-equivalent net interest income in 1998 were partially offset by an
overall narrowing of the Company's interest rate spread. The Company's net
interest margin (net yield on average interest-earning assets) decreased 41
basis points to 5.24% in 1998 compared to 5.65% in 1997. The Company's interest
rate spread (the difference between the yield on interest-earning assets and the
rate paid on interest-bearing liabilities) decreased 39 basis points, from 4.96%
in 1997 to 4.57% in 1998.
A significant factor in this narrowing of the spread during 1998 was a
decrease in the average rate the Company earned on its loans. In 1998, the
average interest rate the Company earned on its loans decreased 40 basis points,
from 9.67% in 1997 to 9.27% in 1998. In addition to the effects of the average
prime rate decreasing from 8.44% in 1997 to 8.35% in 1998, other factors
contributing to the decline in the loan yield were a highly competitive market
and a continuing slight shift in the Company's loan mix from riskier, but higher
yielding, consumer installment loans, to less risky, but generally lower
yielding, real estate loans - see Table 10 and additional discussion below.
Another significant factor contributing to the narrowing of the interest rate
spread was a lower yield earned on taxable securities. The yield the Company
earned on its taxable securities decreased 35 basis points in 1998 to 6.37%,
compared to 6.72% in 1997. This decline was primarily due to generally declining
rates in the bond market that have occurred over the past few years, which has
resulted in lower reinvestment yields of matured and called bonds.
Despite the lower interest rate trend in the prime rate and bond market in
1998, the average rate that the Company paid on in its interest-bearing
liabilities increased 12 basis points from 4.03% to 4.15%. The increase in the
average rate paid on interest bearing deposits was due primarily to the Company
more competitively pricing its deposits to fund the strong loan growth and a
higher reliance on time deposits greater than $100,000, which generally carry
higher interest rates. Average time deposits greater than $100,000 increased 49%
during 1998 compared to a 25% increase for total average interest-bearing
liabilities.
In 1997, the effects of the 12% increase in average earning assets on
taxable-equivalent net interest income were enhanced by an increase in the
Company's interest rate spread by 19 basis points, from 4.77% in 1996 to 4.96%
in 1997. In 1997 the yield realized on earning assets increased by 22 basis
points from 1996, while the average yield the Company paid on interest-bearing
liabilities increased by only 3 basis points, resulting in an increase in net
interest margin of 20 basis points to 5.65% in 1997 from the 5.45% yield
realized in 1996. The increase in yield realized on earning assets was primarily
affected by a 20 basis point increase in the yield realized on loans that was
largely a result of the 25 basis point increase in the Bank's prime lending rate
that occurred in March 1997 and remained in effect for the remainder of the
year. The average rate paid on deposits, although 3 basis points higher in 1997
compared to 1996, was favorably impacted by higher growth in lower yielding
savings, NOW, and money market deposits (15% growth) versus higher yielding time
deposits (9% growth).
Changes in total interest income and total interest expense result from
changes in both volumes and rates in the related earning asset and
interest-bearing liability categories. Table 3 shows the quantitative effects on
net interest income of the changes in volumes and rates experienced by the
Company. As discussed above and illustrated in Table 3, changes in volumes have
been the primary cause of changes in the amounts of interest income and interest
expense recorded by the Company.
See additional information regarding net interest income on page 21 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 potential 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 $990,000 in 1998 compared to
$575,000 in 1997 and $325,000 in 1996. The increases in the provision for loan
losses in both 1998 and 1997 were largely in response to a higher volume of loan
growth experienced by the Company over the prior year's growth, as the Company's
asset quality ratios improved during both years. The Company originated $77.8
million in new loans, net of repayments, in 1998 compared to $57.5 million in
1997 and $11.5 million in 1996.
See the section entitled "Allowance for Loan Losses and Loan Loss
Experience" below for a more detailed discussion of the allowance for loan
losses. The allowance is monitored and analyzed regularly in conjunction with
the Bank's loan analysis and grading program, and adjustments are made to
maintain an adequate allowance for loan losses.
Noninterest Income
Noninterest income recorded by the Company amounted to $4,656,000 in 1998,
$4,150,000 in 1997, and $4,446,000 in 1996.
The 12.2% increase in 1998 noninterest income compared to 1997 was driven
by a $656,000, or 17.5%, increase in the amount of "core noninterest income"
earned by the Company. Core noninterest income, which includes service charges
on deposit accounts, commissions from insurance sales, fees from presold
mortgages, and other service charges, commissions, and fees increased from
$3,744,000 in 1997 to $4,400,000 in 1998. The 6.7% decrease in noninterest
income from 1996 to 1997 was driven largely by a $164,000 decrease in core
noninterest income. Noninterest income not defined as "core" amounted to
$256,000 during 1998, $406,000 in 1997, and $538,000 in 1996.
See Table 4 and the following discussion for an understanding of the
components of noninterest income.
Service charges on deposit accounts increased $182,000, or 7.5%, in 1998
after declining $148,000, or 5.8%, in 1997. The 1998 increase was due to, but
did not keep pace with, the growth rate of deposits. Management believes that
service charges on deposit accounts have not increased at the same rate as
deposits in the last two years primarily due to the mix of the Company's deposit
growth. The number of transaction accounts, which includes demand, savings, and
money market deposits and generates the majority of these fees, have not
increased at the same rate as the growth in time deposits, which have fewer
related fees. Additionally, the dollar increases that have occurred in the
outstanding balance of transaction accounts have been more heavily concentrated
in a fewer number of accounts with large balances. Another factor in the
essentially flat two-year deposit service charge growth relates to the Bank's
decision during 1996 to increase fees for certain services to make them more
commensurate with the related expenses the Bank incurred in providing the
services. Also, an internal emphasis was placed on collecting the fees for all
such services. This initially had the effect of increasing gross service fee
revenue which resulted in higher total service charge revenues in 1996 as
compared to 1995. Subsequently, management believes customers became more
cognizant of the higher fees and made efforts to reduce their use of these
services, which resulted in a decline in these same revenues for the Bank during
1997 compared to 1996.
Commissions from insurance sales decreased by $38,000 in 1998 and $35,000
in 1997 as a result of lower commission fee rates negotiated with brokers, as
well as a higher percentage of the Company's customers utilizing their home
equity lines of credit to finance consumer purchases versus obtaining consumer
installment loans, where the Company has typically brokered more insurance
policies.
Fees that the Company earns from presold mortgage loans grew by $253,000,
or 89% during 1998 and have more than doubled since 1996. A lower interest rate
environment conducive to mortgage loan refinancings and a dedicated staff of
mortgage loan originators are primarily responsible for this significant
increase.
Other service charges, commissions, and fees increased by $259,000, or 34%
in 1998 after being almost flat comparing 1997 to 1996. The primary reason for
the increase in this category of income was a surcharge that was levied on
non-customer ATM transactions beginning in March 1998. These revenues amounted
to $142,000 in 1998, which is helping to defray the significant capital
investment and maintenance expense incurred on ATM machines. The remainder of
the increase in this category is largely due to increases in transaction-related
fee activities such as credit card merchant income, check cashing fees, and
debit card income that were higher due to the growth in the Company's customer
base.
Noninterest income not classified as "core" by the Company in 1998 was
primarily comprised of gains from commercial loan sales. During 1998, the
Company sold approximately $6.4 million in newly originated commercial loans
that resulted in gains of $227,000. These sales were executed primarily to
maintain a proper balance between the amount of loans and deposits that the
Company maintains.
Noninterest income not classified as "core" by the Company in 1997 was
primarily comprised of data processing fees totaling $274,000 and an early
termination fee in the amount of $168,000 that Montgomery Data received from a
bank that terminated its data processing contract with Montgomery Data
prematurely. As noted earlier, Montgomery Data makes its excess data processing
capabilities available to area financial institutions for a fee. Montgomery Data
had one nonaffiliated customer 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 the early termination 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
start-up bank. This customer is expected to contribute approximately $40,000 in
fees during 1999. Montgomery Data is not aggressively marketing this service and
has no other prospective customers at this time.
Noninterest income not classified as "core" by the Company in 1996 was
primarily comprised of $248,000 for data processing fees related to the
nonaffiliated customer noted above and a net gain of $211,000 that the Company
realized from a sale of a branch premises and its related deposits.
Noninterest Expenses
Noninterest expenses for 1998 were $15,912,000, a 12.9% increase over the
$14,088,000 recorded in 1997. The 1997 amount was 7.4% higher than the
$13,113,000 incurred in 1996.
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 61% increase in loans and 48% increase in deposits that have
occurred over the past two years. In addition, the Company's branch network grew
from 30 to 36 branches from January 1, 1997 through December 1998 (the Wagram
office was consolidated with the Laurinburg office on December 31, 1998
resulting in 35 remaining branches). Personnel expense, the single largest
component of noninterest expense, increased 15.3% during 1998 and 12.3% during
1997. These increases were primarily due to additional employees associated with
the Company's growth, as well as normal annual wage increases. The total number
of employees of the Company increased 8% in 1998 and 10% in 1997.
The Company has announced plans to open a new branch in Angier, NC, in the
first quarter of 1999. In addition, the Company has announced plans to close two
branches by consolidating them with other branches in the same towns. The
effects of the net reduction in branches by one is not expected to have a
significant impact on the Company's overall noninterest expense.
Table 5 presents the components of the Company's noninterest expense during
the past three years.
Income Taxes
The provision for income taxes was $3,059,000 in 1998, $2,549,000 in 1997,
and $2,213,000 in 1996. The 20% increase in tax expense in 1998 compared to 1997
is a result of a 16% increase in pretax income, as well as an increase in the
Company's effective tax rate from 33.71% in 1997 to 34.99% in 1998. The increase
in the Company's effective tax rate occurred as a result of the Company deriving
a smaller percentage of its earnings from tax-exempt securities. The 15%
increase in taxes when comparing 1997 to 1996 was due entirely to the Company's
15% increase in pretax income, as the Company's effective tax rate remained
constant.
Table 6 presents the components of tax expense and the related effective
tax rates.
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
The following discussion focuses on the factors considered by management to
be important in assessing the Company's financial condition. The Company's
assets and deposits continued strong growth rates that began in 1997, reflecting
growth in existing markets and expansion into new geographic areas. As
previously noted, over the past two years, the Company's loans have grown by 61%
and deposits have grown by 48%.
Total assets were $491.8 million at December 31, 1998, an increase of 22.1%
over December 31, 1997. Assets during 1997 grew to $402.7 million at year end, a
20.0% increase over the $335.5 million at December 31, 1996. Interest-earning
assets amounted to $454.9 million at December 31, 1998, a 23.3% increase over
the amount at December 31, 1997. Interest-earning assets at December 31, 1997
were $369.0 million, an increase of 20.7% over the $305.7 million held at
December 31, 1996. Loans, the primary interest-earning asset, grew 27.7% in 1998
and 25.8% in 1997, with a total of $358.3 million at December 31, 1998.
Funding the 1998 and 1997 asset growth were increases in deposits. Deposits
increased 21.9%, or $79.0 million, during 1998, amounting to $440.3 million at
year end. In 1997, deposits grew 21.3%, or $63.4 million, to $361.2 million at
year end. Approximately $14 million of the 1997 asset and deposit growth can be
attributed to a fourth quarter 1997 purchase of a First Union National Bank
branch located in Lillington, N.C.
The Company's assets and deposits have experienced compound annual growth
rates of approximately 14% over the last five years.
Distribution of Assets and Liabilities
Table 7 sets forth the percentage relationships of significant components
of the Company's balance sheets at December 31, 1998, 1997, and 1996. The most
significant variance in this table is the shift in asset mix over the past two
years from securities to loans that is primarily due to strong loan growth that
was partially funded with proceeds from securities maturities and sales.
Securities
Information regarding the Company's securities portfolio as of December 31,
1998, 1997, and 1996 is presented in Tables 8 and 9. Total securities available
for sale and held to maturity amounted to $77.3 million, $71.1 million, and
$76.3 million at December 31, 1998, 1997, and 1996, respectively. The increase
in securities at December 31, 1998 compared to December 31, 1997 is largely due
to the Company purchasing approximately $19 million in securities during the
fourth quarter of 1998. Until the fourth quarter of 1998, because of the
relatively flat yield curve, the Company maintained its excess cash in overnight
investments. With the steepening of the yield curve that occurred with the three
successive 25 basis point rate cuts by the Federal Reserve beginning in early
October, management of the Company purchased securities to realize the higher
yield that could be obtained from securities versus overnight investments.
The decrease in year end securities at December 31, 1997 as compared to
1996 was due to the Company investing more funds in overnight cash investments
at year end to fund the strong loan demand experienced by the Company near year
end, as well as the lack of yield incentive to invest in securities with
maturities longer than overnight due to the flattening of the yield curve that
occurred near that time. Average total securities were approximately $65.0
million during 1998 compared to $75.7 million during 1997 and $69.7 million in
1996. The lower average balance in securities during 1998 was due to the Company
holding more cash in overnight investments versus investing in securities for
most of the year for the reasons discussed above. The increase in the average
balance of securities during 1997 was due to a higher level of funds provided by
the slightly higher growth in the amount of average deposits during the year
versus average loans, as well as funds provided by earnings of the Company.
The composition of the securities portfolios at December 31, 1998, 1997,
and 1996 reflects a shift in 1998 and 1997 from U.S. Treasuries and Government
Agencies to higher yielding mortgage-backed securities, including collateralized
mortgage obligations. Included in mortgage-backed securities at December 31,
1998 were collateralized mortgage obligations with an amortized cost of
$16,656,000 and a fair value of $16,620,000. Included in mortgage-backed
securities at December 31, 1997 were collateralized mortgage obligations with an
amortized cost of $5,157,000 and a fair value of $5,208,000.
.
At December 31, 1998, net unrealized gains of $60,000 were included in the
carrying value of securities classified as available for sale compared to net
unrealized gains of $282,000 at December 31, 1997 and $221,000 at December 31,
1996. 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, net of applicable
deferred income taxes, of $37,000, $186,000, and $146,000, have been reported as
a separate component of shareholders' equity as of December 31, 1998, 1997, and
1996, respectively.
The fair value of securities held to maturity, which the Company carries at
amortized cost, exceeded their carrying value by $743,000 at December 31, 1998,
$656,000 at December 31, 1997, and $394,000 in 1996. 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, 1998. Mortgage-backed securities are shown in the time periods
consistent with their estimated life based on expected prepayment speeds.
Approximately 66% of the available for sale portfolio has a maturity date within
5 years. The weighted average life of the available for sale portfolio using the
maturity date for non-mortgage-backed securities, and the expected life for
mortgage-backed securities was 4.1 years. If above-market callable bonds are
assumed to be called at their call date, the average expected life of the
available for sale portfolio drops to 3.1 years. The weighted average
taxable-equivalent yield for the securities available for sale portfolio was
5.93% at December 31, 1998.
The weighted average life of the securities held to maturity portfolio
based on maturity dates was 5.4 years at December 31, 1998 with a weighted
average taxable-equivalent yield of 8.04%. If above-market callable bonds are
assumed to be called on their call date, the weighted average maturity of the
held to maturity portfolio drops to 4.0 years.
As of December 31, 1998 and 1997, the Company held no investment securities
of any one issuer, other than U.S. Treasury and U.S. Government agencies or
corporations, in which aggregate book values and market values exceeded 10% of
shareholders' equity. Other than the collateralized mortgage obligations
previously discussed, the Company owned no securities considered by regulatory
authorities to be derivative instruments.
Loans
Table 10 provides a summary of the loan portfolio composition at each of
the past five year ends.
Loans increased by $77.8 million, or 27.7%, in 1998 to $358.3 million from
the $280.5 million held at December 31, 1997. The 1997 year end amount was $57.5
million, or 25.8%, higher than the $223.0 million balance at December 31, 1996.
The majority of the 1998 loan growth occurred in loans secured by real
estate, with approximately $69.1 million, or 89%, of the net 1998 loan growth
occurring in real estate mortgage or real estate construction loans. In 1998,
real estate mortgage loans grew 27.9%, real estate construction loans grew
89.2%, commercial, financial, and agricultural (CF&A) loans grew 15.4%, and
installment loans to individuals grew 5.6%. For four out of the past five years,
CF&A loans have comprised a lower percentage of the loan portfolio, and for five
straight years, installment loans to individuals have decreased in relation to
the overall portfolio. This shift from non-real estate to real estate loans has
been partially due to a strategic shift towards higher dollar loans, which tend
to be secured by real estate in most cases, in order to more quickly leverage
the Bank's balance sheet and extensive branch network. As noted earlier, the
shift to a higher percentage of real estate loans has contributed to the
decrease in the Bank's loan yields and net interest margin, as real estate loans
generally carry lower interest rates than non-real estate loans.
The loan growth in 1997 was also concentrated in real estate loans, with
real estate loans comprising 73% of the new loan growth. In 1997, real estate
mortgage loans grew 25.1%, real estate construction loans grew 33.3%, CF&A loans
grew 37.2%, and installment loans to individuals grew 11.6%.
A large portion of the Company's loan portfolio has historically been
comprised of loans secured by various types of real estate. At December 31,
1998, $274.4 million or 76.5% of the Company's loan portfolio was secured by
liens on real property. Included in this total are $134.4 million, or 37.5% of
total loans, in credit secured by liens on 1-4 family residential properties and
$140.0 million, or 39.0% of total loans, in credit secured by liens on other
types of real estate.
Table 11 provides a summary of scheduled loan maturities over certain time
periods, with fixed rate loans and adjustable rate loans shown separately.
Approximately 33% of the Bank's loans outstanding at December 31, 1998 mature
within one year and 82% of total loans mature within five years. These
percentages are approximately the same as they were at December 31, 1997. The
percentages of variable rate loans and fixed rate loans to total performing
loans were 46.5% and 53.5% as of December 31, 1998 compared to 51.9% and 48.1%,
respectively, as of December 31, 1997. The bank intentionally makes a blend of
fixed and variable rate loans so as to reduce interest rate risk. The yield on
performing loans as of December 31, 1998 was 8.63% compared to 9.23% at December
31, 1997 and 9.17% at December 31, 1996. The decrease in the yield at December
31, 1998 is primarily due to a 75 basis point lower prime rate when compared to
a year earlier. The slight increase in yield at December 31, 1997 was primarily
a result of a higher prime rate in effect at year end. Both years were affected
by the Company's general trend, beginning in the second half of 1997, of
originating larger balance real estate loans with slightly lower yields.
See additional information regarding interest rate risk on page 21 in the
section entitled "Interest Rate Risk."
Nonperforming Assets
Nonperforming assets include nonaccrual loans, loans past due 90 or more
days and still accruing interest, restructured loans and foreclosed, repossessed
and idled properties. As a matter of policy the Company places all loans that
are past due 90 or more days on nonaccrual basis, and thus there were no such
loans at any of the past five year ends that were 90 days past due and still
accruing interest. Table 12 summarizes the Company's nonperforming assets at the
dates indicated.
Nonaccrual loans are loans on which interest income is no longer being
recognized or accrued because management has determined that the collection of
interest is doubtful. The placing of loans on nonaccrual status negatively
impacts earnings because (i) interest accrued but unpaid as of the date a loan
is placed on nonaccrual status is either deducted from interest income or is
charged-off, (ii) future accruals of interest income are not recognized until it
becomes highly probable that both principal and interest will be paid and (iii)
principal charged-off, if appropriate, may necessitate additional provisions for
loan losses that are charged against earnings. In some cases, where borrowers
are experiencing financial difficulties, loans may be restructured to provide
terms significantly different from the originally contracted terms.
Nonperforming loans (which includes nonaccrual loans and restructured
loans) as of December 31, 1998, 1997 and 1996 totaled $849,000, $1,283,000, and
$2,186,000, respectively. Nonperforming loans as a percentage of total loans
amounted to 0.24%, 0.46%, and 0.98%, at December 31, 1998, 1997, and 1996,
respectively. The decrease in nonperforming loans from 1997 to 1998 is primarily
due to improved overall loan quality, as well as the pay-out of a $230,000 loan
in the first quarter of 1998 that was on nonaccrual status at December 31, 1997.
The decrease in nonperforming loans at December 31, 1997 as compared to December
31, 1996 is primarily attributable to the resolution of several relationships
that resulted in partial charge-offs during the year, as well as generally
improved loan quality. The increase in nonperforming loans at December 31, 1996
compared to December 31, 1995 was largely due to $1,300,000 more in loans on
nonaccrual status that were assumed in corporate acquisitions occurring in 1994
and 1995. These nonaccrual loans that were originated by other institutions
amounted to $1,461,000 at December 31, 1996 compared to $161,000 at December 31,
1995. As of December 31, 1998, the largest nonaccrual balance to any one
borrower was $220,000, with the average balance for the 29 nonaccrual loans
being approximately $21,000.
If the nonaccrual loans and restructured loans as of December 31, 1998, 1997
and 1996 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 $60,000, $91,000
and $183,000 for nonaccrual loans and $25,000, $34,000 and $41,000 for
restructured loans would have been recorded for 1998, 1997 and 1996,
respectively. Interest income on such loans that was actually collected and
included in net income in 1998, 1997 and 1996 amounted to approximately $22,000,
$32,000 and $81,000 for nonaccrual loans (prior to their being placed on
nonaccrual status) and $24,000, $25,000 and $30,000 for restructured loans,
respectively.
In addition to the nonperforming loan amounts included above, management
believes that an estimated $1,200,000-$1,400,000 of loans that are currently
performing in accordance with their contractual terms may potentially develop
problems depending upon the particular financial situations of the borrowers and
economic conditions in general. Management has taken these potential problem
loans into consideration when evaluating the adequacy of the allowance for loan
losses at December 31, 1998 (see discussion below).
Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been disclosed in the problem loan amounts and the
potential problem loan amounts discussed above do not represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or represent
material credits about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
Foreclosed, repossessed, and idled properties have changed only slightly in
total amount over the past two years, amounting to $505,000 at December 31, 1998
compared to $560,000 at December 31, 1997, and $572,000 at December 31, 1996.
Foreclosed, repossessed, and idled properties represented 0.10%, 0.14%, and
0.17% of total assets at the end of 1998, 1997, and 1996, respectively. The
Company's management has reviewed recent appraisals of these properties and
believes that their fair values, less estimated costs to sell, exceed the
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 possible future losses and current economic
conditions.
The Bank uses a loan analysis and grading program to facilitate its
evaluation of possible future loan losses and the adequacy of its allowance for
loan losses. In this program, risk grades are assigned by management and tested
by the Bank'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 $5,504,000 at December 31, 1998
compared to $4,779,000 as of December 31, 1997 and $4,726,000 at December 31,
1996. This represented 1.54%, 1.70%, and 2.12%, of loans outstanding as of
December 31, 1998, 1997, and 1996, respectively. The allowance for loan losses
as a percentage of total loans has been gradually decreasing since its high of
2.81% at September 30, 1994. The September 30, 1994 high of 2.81% was an
increase from the 1.79% ratio at June 30, 1994 due primarily to an addition to
the allowance of $2.5 million that was recorded in the third quarter of 1994 in
connection with a corporate acquisition in which a higher risk loan portfolio
was acquired. The general decrease in the ratio of allowance for loan losses to
total loans since then has been largely due to charge-offs associated with that
portfolio, strong recent loan growth, as well as generally improved overall loan
quality. As noted in Table 12, the Company's allowance for loan losses as a
percentage of nonperforming loans amounted to 648.29% at December 31, 1998
compared to 372.49% at December 31, 1997 and 216.19% at December 31, 1996.
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 $3,789,000 at December 31, 1997
to $4,220,000 at December 31, 1998. This increase was due to growth in the
Company's loan portfolio, as the Company reserves a minimum percentage for all
loans outstanding. The allocated allowance decreased in 1997 to $3,789,000 from
$4,104,000 at December 31, 1996. This decrease was due to significant
improvement in the Company's loan quality, which was partially offset by the
effects of the minimum reserve percentage on the Company's high 1997 loan
growth. In addition to the allocated portion of the allowance for loan losses,
the Company maintains an unallocated portion that is not assigned to any
specific category of loans, but rather is intended to reserve for the inherent
risk in the overall portfolio and the intrinsic inaccuracies associated with the
estimation of the allowance for loan losses and its allocation to specific loan
categories. The general increase in the unallocated portion of the allowance for
loan losses has been consistent with overall loan growth.
Management considers the allowance for loan losses adequate to cover
possible 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 future 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 Bank 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 $265,000 in 1998, $522,000 in 1997, and $186,000 in 1996. This
represents 0.08%, 0.21%, and 0.09% of average loans during 1998, 1997, and 1996,
respectively. In the current economic environment, the Company generally
projects annual net charge-offs to average loans of approximately 0.20% to
0.30%. For the year ended 1996, several large recoveries were primarily
responsible for the low 0.09% net charge-off percentage. For 1998, unusually low
gross charge-offs of $434,000 were primarily responsible for the low net
charge-off percentage of 0.08%. Charge-offs in 1995 included approximately
$590,000 of loans related to the parties involved in a litigation matter that
was settled on December 28, 1995.
Deposits
The average amounts of deposits of the Company for the years ended December
31, 1998, 1997 and 1996 are presented in Table 15. Average deposits grew $76.3
million, or 23.8%, during 1998 to $397.0 million. Average deposits for 1997 grew
by 10.4% over the 1996 average to $320.7 million.
The $44.8 million in growth in the two time deposit categories accounted
for 58.7% of the 1998 growth, with average time deposits greater than $100,000
increasing by $17.0 million, or 48.6%, during the year and average other time
deposits growing by $27.9 million, or 23.4%. The increase in time deposits
during 1998 was due to expansion of the Company's customer base, as well as the
Company more competitively pricing time deposits in order to help fund the
strong loan growth. Despite the slightly lower interest rate environment during
1998, this more competitive pricing increased the average rate that the Company
paid on time deposits greater than $100,000 from 5.75% in 1997 to 5.91% in 1998,
and increased the average rate that the Company paid on other time deposits from
5.28% in 1997 to 5.34% in 1998. While time deposits experienced the highest
growth rates, the growth rates of the other deposit categories were also strong,
with average interest-bearing demand deposits growing by 17.4%, average savings
deposits growing by 19.9%, and average non-interest bearing deposits growing by
21.1%. The four basis point decrease in the average rate paid on
interest-bearing demand deposits in 1998 can be attributed to reductions in the
rates that the Company paid on these accounts that were made when the prime and
federal funds rates were decreased in the last quarter of the year. The five
basis point increase in the average rate paid on savings deposits is largely a
result of most of the growth in this category occurring in the Company's higher
yielding preferred savings sweep account.
The category of deposits with the largest percentage increase during 1997
was interest-bearing demand deposits, which increased by 20.0%. This increase
can be partially attributed to the Company restructuring several of its accounts
within this category to offer more competitive rates. This resulted in a 24
basis point increase in the average rate paid on interest-bearing demand
deposits for the year. For 1997, average savings deposits increased by 2.7%,
average time deposits increased by 8.8%, and average noninterest-bearing
deposits grew by 4.5%, over the averages from 1996.
The Company has a large, stable base of time deposits with little
dependence on volatile public deposits of $100,000 or more. The time deposits
are principally certificates of deposit and individual retirement accounts
obtained from individual customers. Deposits of certain local governments and
municipal entities represented 4.2% of the Bank's total deposits at December 31,
1998. All such public funds are collateralized by investment securities. The
Company does not purchase brokered deposits.
As of December 31, 1997, the Company held approximately $60,720,000 in time
deposits of $100,000 or more and other time deposits of $156,639,000. Table 16
is a maturity schedule of time deposits of $100,000 or more as of December 31,
1998. This table shows that 86.7% of the Company's time deposits greater than
$100,000 mature within one year.
Interest Rate Risk (Including Quantitative and Qualitative Disclosures About
Market Risk - Item 7A.)
Net interest income is the Company's most significant component of
earnings. Notwithstanding changes in volumes of loans and deposits, the
Company's level of net interest income is continually at risk due to the effect
that changes in general market interest rate trends have on interest yields
earned and paid with respect to the various categories of earning assets and
interest-bearing liabilities. It is the Company's policy to maintain portfolios
of earning assets and interest-bearing liabilities with maturities and repricing
opportunities that will afford protection, to the extent practical, against wide
interest rate fluctuations. The Company's exposure to interest rate risk is
analyzed on a regular basis by management using standard GAP reports, maturity
reports, and an asset/liability software model that simulates future levels of
interest income and expense based on current interest rates, expected future
interest rates, and various intervals of "shock" interest rates. Over the years,
the Company has been able to maintain a fairly consistent yield on average
earning assets (net interest margin). Over the past ten years the net interest
margin has not varied in any single year by more than the 41 basis point change
experienced by the Company in 1998, and the lowest net interest margin realized
over that same period is within 60 basis points of the highest. Prior to 1998,
the most that the Company's net interest margin varied from one year to the next
was 20 basis points.
The Company reported a net interest margin of 5.03% in the fourth quarter
of 1998 compared to 5.14% in the third quarter of 1998, 5.30% in the second
quarter of 1998 and 5.55% in the first quarter of 1998. Management believes,
that assuming a relatively static interest rate environment, the net interest
margin should stabilize. At the end of the third quarter of 1998, when changes
in the prime rate began to occur, the Company's interest sensitivity position
was similar to that at December 31, 1998 as illustrated in Table 17. Table 17
illustrates that the Company is more liability sensitive in the "over 3 to 12
month" horizon than in the "3 months or less" horizon. As the effects of the
fourth quarter drop in the prime rate continue to manifest, the Company expects
to have more liabilities repricing at the lower prime-adjusted rate than assets.
The positive effects on net interest income of this scenario are likely to be
offset by continued competitive pricing pressures, as well as securities that
are expected to be called. While the Company can not guarantee stability in the
net interest margin in the future, at this time, management does not expect
significant fluctuations.
See additional discussion of the Company's net interest margin in the "Net
Interest Income" section above.
Table 17 sets forth the Company's interest rate sensitivity analysis as of
December 31, 1998, using stated maturities for all instruments except
mortgage-backed securities which are shown as a lump sum in the period
consistent with their weighted average estimated life. As illustrated by this
table, the Company has $110.7 million more in interest-bearing liabilities that
are subject to interest rate changes within one year than earning assets (this
amount is reduced by approximately $10 million if above-rate callable bonds are
assumed to be called on their call date). 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,
1998 subject to interest rate changes within one year are deposits totaling
$160.4 million comprised of NOW, savings, and certain types of money market
deposits with interest rates set by management. These types of deposits
historically have not repriced coincidentally with or in the same proportion as
general market indicators. Thus, the Company believes that near term net
interest income would not likely experience significant downward pressure from
rising interest rates. Similarly, management would not expect a significant
increase in near term net interest income from falling interest rates. As of
December 31, 1998, approximately 83% of interest-earning assets could be
repriced within five years and substantially all interest-bearing liabilities
could be repriced within five years.
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions. Table 18 presents
the expected maturities of the Company's other than trading market risk
sensitive financial instruments. Table 18 also presents the fair values of
market risk sensitive instruments as estimated in accordance with Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments." The Company's fixed rate earning assets have estimated
fair values that are slightly higher than their carrying value. This is due to
the yields on these portfolios being slightly higher than market yields at
December 31, 1998 for instruments with maturities similar to the remaining term
of the portfolios due to a generally declining interest rate environment at year
end. The estimated fair value of the Company's time deposits is higher than its
book value for the same reason.
Off-Balance Sheet Risk
In the normal course of business there are various outstanding commitments
and contingent liabilities, such as commitments to extend credit, which are not
reflected in the financial statements. These commitments are not recorded as an
asset or liability until exercised. As of December 31, 1998, the Company had
outstanding loan commitments of $84,383,000, of which $70,851,000 were at
variable rates and $13,532,000 were at fixed rates. Included in outstanding loan
commitments were unfunded commitments of $33,996,000 on revolving credit plans,
of which $29,726,000 were at variable rates and $4,270,000 were at fixed rates.
Additionally, standby letters of credit of approximately $924,000 and $1,108,000
were outstanding at December 31, 1998 and 1997, 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.
Derivative financial instruments include futures, forwards, interest rate
swaps, options contracts, and other financial instruments with similar
characteristics. The Company does not engage in 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 per share divided by net income per
share) and shareholders' equity to assets ratio (average shareholders' equity
divided by average total assets) for each of the years in the three-year period
ended December 31, 1998.
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, the Bank has the ability, on a
short-term basis, to purchase $15 million in federal funds from other financial
institutions and has a $50 million line of credit with the Federal Home Loan
Bank (the "FHLB") in place that can provide short or long term financing. The
Company has not historically had to rely on these sources of credit as a source
of liquidity. The Company has experienced an increase in its loan to deposit
ratio over the past two years, from 74.9% at December 31, 1996 to 77.7% at
December 31, 1997 to 81.4% at December 31, 1998, as a result of the significant
loan growth experienced. This strong loan growth has reduced the Company's
liquidity sources. To further enhance available liquidity sources, during 1998
the Company increased its available line of credit with the FHLB from $36
million to $50 million. Beginning in the third quarter of 1998, although the
Company did not have any liquidity or funding difficulties, the Company began
making periodic draws and repayments on this line of credit on an overnight
basis to maintain liquidity ratios at internally targeted levels. At December
31, 1998, the Company had outstanding short-term borrowings totaling $6 million,
while the average amount outstanding for the year was $2.5 million. The
Company's management believes its liquidity sources are at an acceptable level
and remain adequate to meet its operating needs.
Capital Resources
The Company is regulated by the Board of Governors of the Federal Reserve
Board ("FRB") 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 State
Banking Commission. 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 FRB and FDIC. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on both
the Company's and the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. These capital standards require the Company to
maintain minimum ratios of "Tier 1" capital to total risk-weighted assets and
total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1
capital is comprised of total shareholders' equity calculated in accordance with
generally accepted accounting principles less intangible assets, and total
capital is comprised of Tier 1 capital plus certain adjustments, the largest of
which for the Company is the allowance for loan losses. Risk-weighted assets
refer to the on- and off-balance sheet exposures of the Company adjusted for
their related risk levels using formulas set forth in FRB and FDIC regulations.
In addition to the risk-based capital requirements described above, the
Company is subject to a leverage capital requirement, which calls for a minimum
ratio of Tier 1 capital (as defined above) to quarterly average total assets of
3.00% to 5.00%, depending upon the institution's composite ratings as determined
by its regulators. The FRB has not advised the Company of any requirement
specifically applicable to it.
In addition to the minimum capital requirements described above, the
regulatory framework for prompt corrective action also contains specific capital
guidelines for classification as "well capitalized," which are presented with
the minimum ratios and the Company's ratios at December 31, 1998, 1997 and 1996
in Table 20.
At December 31, 1998, 1997 and 1996, the Company was in compliance with all
existing capital requirements. Although the Company continues to exceed even the
regulatory thresholds for "well capitalized" status, the Company's capital
ratios have been steadily declining with the strong growth the Company has
experienced. The Company's Total Risk-Based Capital to Tier II Risk Adjusted
Assets ratio of 10.75% at December 31, 1998, compared to the "well capitalized"
threshold of 10.00%, is the only one of the three regulatory ratios that is
within 200 basis points of falling below the "well capitalized" threshold. The
Company has plans in place to correct any ratio that falls below the "well
capitalized" threshold.
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.
Year 2000 Issue
The Company recognizes and is addressing the potentially severe
implications of the "Year 2000 Issue." The "Year 2000 Issue" (also known as
"Y2K") is a general term used to describe the various problems that may result
from the improper processing of dates and date-sensitive calculations as the
year 2000 approaches. This issue is caused by the fact that many of the world's
existing computer programs use only two digits to identify the year in the date
field of a program. These programs were designed and developed without
considering the impact of the upcoming change in the century and could
experience serious malfunctions when the last two digits of the year change to
"00" as a result of identifying a year designated "00" as the year 1900 rather
than the year 2000. This misidentification could prevent the Company from being
able to engage in normal business operations, including, among other things,
miscalculating interest accruals and the inability to process customer
transactions. Because of the potentially serious ramifications of the Year 2000
Issue, the Company is taking the Year 2000 Issue very seriously.
The Company's Technology Committee, which is comprised of a cross-section
of the Company's employees, is leading the Company's Year 2000 efforts and
involving all employees of the Company in ensuring that the Company is properly
prepared for the Year 2000. The Company's Board of Directors has approved a plan
submitted by the Technology Committee that was developed in accordance with
guidelines set forth by the Federal Financial Institutions Examination Council.
This plan has three primary phases related to internal Year 2000 compliance.
The first phase of the Company's efforts to address the Year 2000 Issue was
to inventory all known Company processes that could reasonably be expected to be
impacted by the Year 2000 Issue and their related vendors, if applicable. This
inventory of processes and vendors included not only typical computer processes
such as the Company's transaction applications systems, but all known processes
that could be impacted by micro-chip malfunctions. These include but are not
limited to the Company's alarm system, phone system, check ordering process, and
ATM network. This phase is complete, although it is periodically updated as
necessary.
The Company's second phase in addressing the Year 2000 Issue was to contact
all third party vendors, request documentation regarding their Year 2000
compliance efforts, and analyze the responses. This was a significant phase
because the Company does not perform in-house programming, and thus is dependent
on external vendors to ensure and modify, if necessary, the hardware, software,
or service they provide to the Company to be Year 2000 compliant. This phase is
now virtually complete and the Company is currently following up on any issues
or concerns identified in the responses received, as necessary.
The next phase for the Company under the Plan is to complete a
comprehensive testing of all known processes. Under the plan, processes are
initially to be tested on a stand-alone basis and then they are to be tested on
an integrated basis with other processes. Testing of the Company's processes on
a stand-alone basis is substantially complete. Testing on a integrated basis is
scheduled to be complete by May 31, 1999. Management plans for any corrective
actions to be implemented to ensure that the Company is fully prepared for the
year 2000 by the end of the second quarter of 1999. The most significant phase
of testing is the testing of the Company's core software applications. Upgrades
of the core software applications currently used by the Company were received
from the software vendor in June 1998 and were represented to be Year 2000
compliant by the vendor. These applications were successfully loaded onto the
Company's hardware system in July 1998 and Year 2000 testing began in September
1998. The testing of the core applications on a stand-alone basis revealed no
problems and none are expected to be encountered during the integrated testing.
Another part of the Company's Year 2000 plan is to assess the Year 2000
readiness of its significant borrowers and depositors. Through the use of
questionnaires and personal contacts, the Company has gathered information
regarding the Year 2000 readiness of significant borrowers and depositors of the
Company. The assessment of the Company's significant depositors is complete. The
assessment of the Company's significant borrowers is currently in process and is
expected to be complete by the end of the first quarter of 1999. Customers who
the Company has Year 2000 concerns about are being counseled on the Year 2000
Issue, urged to take action, and placed on an internal watch list that will be
updated on a quarterly basis and reviewed and monitored by the Company for any
potential effects on the Company. Based on the evaluation to date, management of
the Company does not believe that the number or magnitude of customers with
potential Year 2000 problems will be significant. Prospective new loan customers
are also assessed for Year 2000 compliance as a part of the underwriting process
of significant loans.
Management is also working closely with outside consultants and the FDIC on
the Company's Year 2000 readiness.
In the Company's 1997 Form 10-K, the Company disclosed an estimated range
of total costs to address the Year 2000 Issue to be from $100,000 to $150,000.
During the second quarter of 1998, management believed that the estimated cost
to modify the Company's automated teller machines (ATMs) would likely be higher
than originally projected. As a result, the Company projected the total costs to
address the Year 2000 Issue to be from $175,000 to $200,000. In the fourth
quarter of 1998, the Company's Year 2000 testing of its existing ATMs was
successful, and now the Company does not believe that there will be any
significant Year 2000 costs associated with the Company's ATMs. Based on an
evaluation of the Company's current Year 2000 status, it is now management's
belief that total Year 2000 costs will be approximately $100,000, which are
being expensed as they occur. In 1998 and to date, the Company expensed
approximately $32,000 in Year 2000 Issue related costs. The majority of the
remainder of the Year 2000 Issue costs are expected to occur in the first half
of 1999. The estimated and actual Year 2000 costs include only direct external
costs associated with Year 2000 readiness, and do not include any amounts
attributable to the significant time that management and the staff of the
Company has spent planning, preparing and testing for Year 2000 readiness.
Although funding of the Year 2000 project costs will come from normal operating
cash flow, the external expenses associated with the Year 2000 Issue will
directly reduce otherwise reported net income for the Company.
Management of the Company believes that the potential effects on the
Company's internal operations of the Year 2000 Issue can and will be addressed
prior to the Year 2000. However, if required modifications or conversions are
not made or are not completed on a timely basis prior to the Year 2000, the Year
2000 Issue could disrupt normal business operations. The most reasonably likely
worst case Year 2000 scenarios foreseeable at this time would include the
Company temporarily not being able to process, in some combination, various
types of customer transactions. This could affect the ability of the Company to,
among other things, originate new loans, post loan payments, accept deposits or
allow immediate withdrawals, and, depending on the amount of time such a
scenario lasted, could have a material adverse effect on the Company. Because of
the serious implications of these scenarios, the primary emphasis of the
Company's Year 2000 efforts is to correct, with complete replacement if
necessary, any systems or processes whose Year 2000 test results are not
satisfactory prior to the year 2000. Nevertheless, should one of the most
reasonably likely worst case scenarios occur in the year 2000, the Company is
currently refining a contingency plan that would allow for limited transactions,
including the ability to make certain deposit withdrawals, until the Year 2000
problems are remediated.
The costs of the Year 2000 project and the date on which the Company plans
to complete Year 2000 compliance are based on management's best estimates, which
were derived using numerous assumptions of future events such as the
availability of certain resources (including internal and external resources),
third party vendor plans and other factors. However, there can be no guarantee
that these estimates will be achieved at the cost disclosed or within the time
frame indicated, and actual results could differ materially from these plans.
Factors that might affect the timely and efficient completion of the Company's
Year 2000 project include, but are not limited to, vendors' abilities to
adequately correct or convert software and the effect on the Company's ability
to test its systems, the availability and cost of personnel trained in the Year
2000 area, the ability to identify and correct all relevant computer programs
and similar uncertainties.
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.
Accounting Changes
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. During 1998, the
Company adopted three new accounting standards: Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information" and
SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement
Benefits." None of the three standards adopted in 1998 changed the way Company
measures its assets, liabilities, income or expense. The three standards adopted
in 1998 are discussed below.
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which established standards for reporting and display of
comprehensive income and its components in a full set of financial statements.
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. This
statement does not change or modify the reporting or display in the income
statement. SFAS No. 130 was effective for interim and annual periods beginning
after December 15, 1997. Comparative financial statements for earlier periods
have been presented to reflect the application of this statement.
The FASB has issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
statement 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. SFAS No. 131 was
effective for financial statements for periods beginning after December 15,
1997. In all material respects, the Company's operations are entirely within the
commercial banking segment, and the information presented herein reflects the
results of that segment.
On January 1, 1998, the Company adopted SFAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits." This statement
standardized the disclosure requirements of pensions and other postretirement
benefits. This statement did not change any measurement or recognition
provisions, and thus did not materially impact the Company. The Company has two
defined benefit plans that were subject to the disclosures required by this
statement. See the required disclosures in note 10 to the consolidated financial
statements.
The Financial Accounting Standards Board has also issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. This
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Because the Company has not historically and does not currently
employ the use of derivatives, this Statement is not expected to impact the
Company.
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
affected the way the Company measured and presented its earnings per share
information.
The Company adopted SFAS No. 128, "Earnings Per Share" (SFAS No. 128) as of
December 31, 1997. SFAS No. 128 superseded Accounting Principles Board Opinion
No. 15, "Earnings Per Share" (APB No. 15) which the Company had followed until
the adoption of SFAS No. 128. For companies that have potentially issuable stock
(complex capital structures), such as First Bancorp with its stock option plan,
SFAS No. 128 requires that two earnings per share amounts be disclosed - 1)
Basic Earnings Per Share and 2) Diluted Earnings Per Share. 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 dilutive potential common stock issuances relate to options that have been
issued under the Company's stock option plan- see note 13 to the consolidated
financial statements for additional information regarding the 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.
FORWARD-LOOKING STATEMENTS
The foregoing discussion may contain 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.
Table 1 Selected Consolidated Financial Data
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, Five-Year
($ in thousands except per share Compound
and nonfinancial data) 1998 1997 1996 1995 1994 Growth
-------- ------ ------ ------ ------ ----
Income Statement Data
Interest income $ 35,344 29,197 25,468 23,106 18,873 15.1%
Interest expense 14,356 11,123 9,916 8,953 6,257 18.8%
Net interest income 20,988 18,074 15,552 14,153 12,616 12.8%
Provision for loan losses 990 575 325 900 387 10.9%
Net interest income after provision 19,998 17,499 15,227 13,253 12,229 12.9%
Noninterest income 4,656 4,150 4,446 3,777 3,293 10.7%
Noninterest expense 15,912 14,088 13,113 14,868 11,380 9.8%
Income before income taxes 8,742 7,561 6,560 2,162 4,142 18.6%
Income taxes 3,059 2,549 2,213 580 1,155 24.5%
Net income 5,683 5,012 4,347 1,582 2,987 16.0%
-------- ------ ------ ------ ------ ----
Per Share Data
Earnings - basic $ 1.88 1.66 1.44 0.53 0.99 15.9%
Earnings - diluted 1.83 1.62 1.43 0.52 0.99 15.3%
Cash dividends declared 0.60 0.52 0.44 0.35 0.33 15.7%
Dividend payout per basic share 31.91% 31.33% 30.56% 66.04% 33.33% -0.2%
Market Price
High $ 42.00 35.00 19.50 14.75 11.50 32.0%
Low 24.00 18.50 11.50 10.25 9.00 26.6%
Close 29.00 35.00 18.50 12.75 10.50 22.5%
Stated book value 13.40 12.17 11.02 10.04 9.57 8.0%
Tangible book value 11.47 10.02 9.08 7.95 7.48 5.8%
-------- ------ ------ ------ ------ ----
Selected Balance Sheet Data (at year end)
Securities $ 77,280 71,133 76,265 69,397 67,092 3.3%
Loans 358,334 280,513 223,032 211,522 185,749 17.9%
Allowance for loan losses 5,504 4,779 4,726 4,587 5,009 14.5%
Intangible assets 5,843 6,487 5,834 6,306 6,279 33.6%
Total assets 491,838 402,669 335,450 321,739 289,613 13.8%
Deposits 440,266 361,224 297,861 287,715 258,430 14.2%
Total shareholders' equity 40,494 36,765 33,232 30,277 28,790 8.1%
-------- ------ ------ ------ ------ ----
Selected Average Balances
Assets $ 443,214 359,879 326,221 296,400 267,227 12.3%
Loans 325,477 245,596 217,900 192,035 168,167 16.9%
Earning assets 412,858 333,029 298,308 269,313 244,708 12.8%
Deposits 396,987 320,659 290,510 262,846 236,725 12.7%
Interest-bearing liabilities 345,528 276,148 247,883 225,006 204,141 12.2%
Shareholders' equity 38,946 35,024 31,896 30,461 28,197 7.8%
-------- ------ ------ ------ ------ ----
Year Ended December 31, Five-Year
($ in thousands except per share Compound
and nonfinancial data) 1998 1997 1996 1995 1994 Growth
-------- ------ ------ ------ ------ ----
Ratios
Return on average equity 14.59% 14.31% 13.63% 5.19% 10.59%
Return on average assets 1.28% 1.39% 1.33% 0.53% 1.12%
Net interest margin (taxable-equivalent basis) 5.24% 5.65% 5.45% 5.50% 5.41%
Average shareholders' equity to average assets 8.79% 9.73% 9.78% 10.28% 10.55%
Average loans to average deposits 82.00% 76.59% 75.01% 73.06% 71.04%
Net charge-offs to average loans 0.08% 0.21% 0.09% 0.79% 0.39%
-------- ------ ------ ------ ------ ----
Nonfinancial Data
Number of employees (full/part time) 245/41 228/37 213/29 201/25 198/26
Number of banking offices 35 33 30 30 28
-------- ------ ------ ------ ------ ----
(1) 1997 results include a fourth quarter nonrecurring gain of $168,000 before
tax, or $103,000 after tax ($0.03 per share), related to a customer's early
termination fee of a data processing contract. 1996 results include a
nonrecurring net gain of $211,000 before tax, or $128,000 after tax ($0.04
per share), from the third quarter 1996 sale of a branch office and a
vacated building. 1995 results include nonrecurring net charges of
$2,691,000 before tax, or $1,638,000 after tax (or $0.54 per share), from
the fourth quarter settlement of litigation and unrelated severance
expenses for two senior managers. 1995 results also include pretax
noninterest expenses of $789,000 related to the litigation settlement.
(2) Per share amounts for 1995 and before have been restated to reflect the
two-for-one stock split distributed in September 1996.
Table 2 Average Balances and Net Interest Income Analysis
- --------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- ------------------------------
Interest Interest Interest
($ in thousands) Average Average Earned Average Average Earned Average Average Earned
Volume Rate or Paid Volume Rate or Paid Volume Rate or Paid
------ ---- ------- ------ ---- ------- ------ ---- -------
Assets
Loans (1) $325,477 9.27% $ 30,186 $245,596 9.67% $ 23,754 $217,900 9.47% $ 20,644
Taxable securities 45,496 6.37% 2,898 53,710 6.72% 3,610 49,617 6.27% 3,110
Non-taxable securities (2) 19,474 8.71% 1,696 21,994 8.74% 1,923 20,074 9.09% 1,825
Short-term investments,
principally federal funds 22,411 5.47% 1,225 11,729 5.49 644 10,717 5.53% 593
-------- --------- -------- --------- -------- ---------
Total interest-
earning assets 412,858 8.72% 36,005 333,029 8.99% 29,931 298,308 8.77% 26,172
--------- --------- ---------
Cash and due from banks 14,659 12,748 12,906
Bank premises and
equipment, net 8,783 8,096 7,920
Other assets 6,914 6,006 7,087
-------- -------- --------
Total assets $443,214 $359,879 $326,221
======== ======== ========
Liabilities and Equity
Savings, NOW and money
market deposits $144,133 2.29% 3,305 122,063 2.31% 2,820 106,273 2.15% 2,284
Time deposits greater
than $100,000 51,836 5.91% 3,063 34,872 5.75% 2,004 31,524 5.74% 1,811
Other time deposits 147,036 5.34% 7,845 119,158 5.28% 6,296 110,079 5.29% 5,820
-------- --------- -------- --------- -------- ---------
Total interest-
bearing deposits 343,005 4.14% 14,213 276,093 4.03% 11,120 247,876 4.00% 9,915
Short-term borrowings 2,523 5.67% 143 55 5.45% 3 7 5.72% 1
-------- --------- -------- --------- -------- ---------
Total interest-
bearing liabilities 345,528 4.15% 14,356 276,148 4.03% 11,123 247,883 4.00% 9,916
--------- --------- ---------
Non-interest-
bearing deposits 53,982 44,566 42,634
Other liabilities 4,758 4,141 3,808
Shareholders' equity 38,946 35,024 31,896
-------- -------- --------
Total liabilities and
shareholders' equity $443,214 $359,879 $326,221
======== ======== ========
Net yield on interest-
earning assets and
net interest income 5.24% $ 21,649 5.65% $ 18,808 5.45% $ 16,256
========= ========= =========
Interest rate spread 4.57% 4.96% 4.77%
(1) Net of unearned income of $0, $0, and $5,000 in 1998, 1997, and 1996
respectively. Average loans includes nonaccruing loans, the effect of
which is to lower the average rate shown. Interest earned includes
recognized loan fees in the amounts of $642,000, $583,000, and $512,000
for 1998, 1997, and 1996, respectively.
(2) Includes tax-equivalent adjustments of $661,000, $734,000, and $704,000
in 1998, 1997, and 1996 respectively, to reflect the federal and state
benefit of the tax-exempt securities, reduced by the related
nondeductible portion of interest expense.
Table 3 Volume and Rate Variance Analysis
- --------------------------------------------------------------------------------
Year Ended December 31, 1998 Year Ended December 31, 1997
-------------------------------------- ---------------------------------------
Change Attributable to Change Attributable to
---------------------- ----------------------
Total Total
(In thousands) Changes Changes Increase Changes Changes Increase
in Volumes in Rates (Decrease) in Volumes in Rates (Decrease)
---------- -------- ---------- ---------- -------- ----------
Interest income (tax-equivalent):
Loans .............................. $ 7,567 (1,135) 6,432 $ 2,651 459 3,110
Taxable securities ................. (538) (174) (712) 266 234 500
Non-taxable securities ............. (220) (7) (227) 171 (73) 98
Short-term investments, principally
federal funds sold ........... 585 (4) 581 56 (5) 51
--------- ------ ----- --------- --- -----
Total interest income .... 7,394 (1,320) 6,074 3,144 615 3,759
--------- ------ ----- --------- --- -----
Interest expense:
Savings, NOW and money
market deposits ............... 508 (23) 485 352 184 536
Time deposits greater than $ 100,000 989 70 1,059 192 1 193
Other time deposits ................ 1,480 69 1,549 480 (4) 476
--------- ------ ----- --------- --- -----
Total interest-bearing deposits 2,977 116 3,093 1,024 181 1,205
Short-term borrowings .............. 137 3 140 5 (3) 2
--------- ------ ----- --------- --- -----
Total interest expense .... 3,114 119 3,233 1,029 178 1,207
--------- ------ ----- --------- --- -----
Net interest income $ 4,280 (1,439) 2,841 $ 2,115 437 2,552
========= ====== ===== ========= === =====
(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) 1998 1997 1996
------- ----- -----
Service charges on deposit accounts ............... $ 2,595 2,413 2,561
Commissions from insurance sales .................. 240 278 313
Fees from presold mortgages ....................... 537 284 254
Other service charges, commissions, and fees ...... 1,028 769 780
------- ----- -----
Total core noninterest income ................ 4,400 3,744 3,908
Data processing fees .............................. 5 274 248
Loan sale gains ................................... 227 -- --
Securities gains (losses), net .................... 29 (12) 6
Loss on disposal of premises and equipment ........ (27) (10) --
Gains (losses) on disposal of foreclosed properties 22 (14) 73
Other - nonrecurring net gains .................... -- 168 211
------- ----- -----
Total ................................... $ 4,656 4,150 4,446
======= ===== =====
Table 5 Noninterest Expenses
- --------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------
(In thousands) 1998 1997 1996
------- ------ ------
Salaries ............................... $ 7,127 6,225 5,447
Employee benefits ..................... 1,563 1,315 1,268
------- ------ ------
Total personnel expense ........... 8,690 7,540 6,715
Net occupancy expense .................. 1,017 954 904
Equipment related expenses ............. 918 858 833
Amortization of intangible assets ...... 655 546 568
Stationery and supplies ................ 786 756 605
Telephone .............................. 455 424 334
Non-credit losses ...................... 194 17 141
Other operating expenses ............... 3,197 2,993 3,013
------- ------ ------
Total ........................ $15,912 14,088 13,113
======= ====== ======
Table 6 Income Taxes
- --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
------ ----- -----
Current - Federal $2,466 2,321 1,685
- State 413 290 268
Deferred - Federal 180 (62) 260
------ ----- -----
Total $3,059 2,549 2,213
====== ====== ======
Effective tax rate 34.99% 33.71% 33.73%
====== ====== ======
Table 7 Distribution of Assets and Liabilities
- --------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Assets
Interest-earning assets
Net loans ............................. 72 % 69 % 65 %
Securities available for sale ......... 12 13 16
Securities held for maturity .......... 4 5 7
Short term investments ................ 4 4 2
---- ---- ----
Total interest-earning assets .... 92 91 90
Non-interest-earning assets
Cash and due from banks ............... 4 4 5
Premises and equipment ................ 2 2 2
Other assets .......................... 2 3 3
---- ---- ----
Total assets ................... 100 % 100 % 100 %
==== ==== ====
Liabilities and shareholders' equity
Demand deposits - noninterest bearing .... 13 % 13 % 13 %
Savings, NOW, and money market deposits .. 33 34 32
Time deposits of $100,000 or more ........ 12 10 10
Other time deposits ...................... 32 33 33
---- ---- ----
Total deposits ..................... 90 90 88
Short-term borrowings .................... 1 -- --
Accrued expenses and other liabilities ... 1 1 2
---- ---- ----
Total liabilities ................ 92 91 90
Shareholders' equity ......................... 8 9 10
---- ---- ----
Total liabilities and shareholders' equity 100 % 100 % 100 %
==== ==== ====
Table 8 Securities Portfolio Composition
- --------------------------------------------------------------------------------
As of December 31,
-----------------------------------
(In thousands) 1998 1997 1996
------- ------ ------
Securities available for sale:
U.S. Treasury ............................. $ 544 534 5,537
U.S. Government agencies .................. 28,636 38,569 42,239
Mortgage-backed securities ................ 27,406 9,243 5,530
State and local governments ............... 896 906 613
Equity securities ......................... 1,318 1,025 23
------- ------ ------
Total securities available for sale 58,800 50,277 53,942
------- ------ ------
Securities held to maturity:
State and local governments ............... 18,121 20,460 21,869
Other ..................................... 359 396 454
------- ------ ------
Total securities held to maturity . 18,480 20,856 22,323
------- ------ ------
Total securities ........ $77,280 71,133 76,265
======= ====== ======
Average total securities during year ........... $64,970 75,704 69,691
======= ====== ======
Table 9 Securities Portfolio Maturity Schedule
As of December 31,
----------------------------------
1998
----------------------------------
Book Fair Book
($ in thousands) Value Value Yield (1)
------- ------- ---------
Securities available for sale:
U.S. Treasury
Due after one but within five years . $ 503 $ 544 7.30%
------- ------- ----
Total ........................ 503 544 7.30%
------- ------- ----
U.S. Government agencies
Due within one year ................. 1,693 1,695 6.42%
Due after one but within five years . 17,884 17,950 5.75%
Due after five but within ten years . 8,983 8,991 5.88%
------- ------- ----
Total ......................... 28,560 28,636 5.83%
------- ------- ----
Mortgage-backed securities
Due within one year ................. 3,606 3,597 3.18%
Due after one but within five years . 14,198 14,199 6.74%
Due after five but within ten years . 8,674 8,634 6.00%
Due after ten years ................. 976 976 5.47%
------- ------- ----
Total ......................... 27,454 27,406 5.99%
------- ------- ----
State and local governments
Due within one year ................. 896 896 4.55%
------- ------- ----
Total ......................... 896 896 4.55%
------- ------- ----
Equity securities ....................... 1,327 1,318 7.00%
------- ------- ----
Total securities available for sale
Due within one year ................. 6,195 6,188 4.26%
Due after one but within five years . 32,585 32,693 6.20%
Due after five but within ten years . 17,657 17,625 5.94%
Due after ten years ................. 2,303 2,294 6.35%
------- ------- ----
Total ......................... $58,740 $58,800 5.93%
======= ======= ====
Securities held to maturity
State and local governments
Due within one year .................. $ 2,732 $ 2,754 9.03%
Due after one but within five years .. 6,856 7,095 8.11%
Due after five but within ten years .. 5,842 6,178 7.70%
Due after ten years .................. 2,691 2,837 7.65%
------- ------- ----
Total .......................... 18,121 18,864 8.05%
------- ------- ----
As of December 31,
----------------------------------
1998
----------------------------------
Book Fair Book
($ in thousands) Value Value Yield (1)
------- ------- ---------
Other
Due after five but within ten years .. 359 359 7.90%
------- ------- ----
Total .......................... 359 359 7.90%
------- ------- ----
Total securities held to maturity
Due within one year .................. 2,732 2,754 9.03%
Due after one but within five years .. 6,856 7,095 8.11%
Due after five but within ten years .. 6,201 6,537 7.71%
Due after ten years .................. 2,691 2,837 7.65%
------- ------- ----
Total .......................... $18,480 $19,223 8.04%
======= ======= ====
(1) Yields on tax-exempt investments have been adjusted to a taxable
equivalent basis using a 34% tax rate.
Table 10 Loan Portfolio Composition
- --------------------------------------------------------------------------------
As of December 31,
----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------- ------------------- ------------------- -------------------
% of % of % of % of % of
($ in Total Total Total Total Total
thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ---------- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial,
financial, &
agricultural $ 52,415 14.62% $ 45,417 16.18% $ 33,100 14.83% $ 34,438 16.27% $ 34,187 18.38%
Real estate -
construction 36,565 10.20% 19,323 6.89% 14,498 6.50% 10,052 4.75% 9,767 5.25%
Real estate-
mortgage(1) 237,833 66.35% 185,927 66.25% 148,667 66.63% 139,567 65.95% 116,200 62.48%
Installment
loans to
individuals 31,649 8.83% 29,971 10.68% 26,860 12.04% 27,566 13.03% 25,815 13.89%
--------- ------ --------- ------ --------- ------ --------- ------ -------- ------
Loans, gross 358,462 100.00% 280,638 100.00% 223,125 100.00% 211,623 100.00% 185,969 100.00%
======= ====== ====== ====== ======
Unamortized
net deferred
loan fees &
unearned income (128) (125) (93) (101) (220)
-------- -------- -------- -------- --------
Total
loans, net $358,334 $280,513 $223,032 $211,522 $185,749
======== ======== ======== ======== ========
(1) The majority of these loans are various personal and commercial loans where
real estate provides additional security for the loan.
Table 11 Loan Maturities
- --------------------------------------------------------------------------------
As of December 31, 1998
-------------------------------------------------------------------------------------------
Due within Due after one year but Due after five
one year within five years years Total
------------------ ------------------ ------------------ --------------------
($ in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
-------- ---- -------- ---- -------- ---- -------- ----
Variable Rate Loans:
Commercial, financial, and
agricultural ................. $ 19,169 8.18% $ 9,688 8.21% $ 2,952 8.30% $ 31,809 8.20%
Real estate - construction ...... 25,424 8.28% 4,531 8.08% -- -- 29,955 8.25%
Real estate - mortgage .......... 35,708 8.32% 31,022 8.24% 34,267 8.66% 100,997 8.41%
Installment loans
to individuals ........... 639 8.18% 2,671 10.12% 479 9.05% 3,789 9.66%
-------- -------- -------- --------
Total at variable rates 80,940 8.27% 47,912 8.32% 37,698 8.64% 166,550 8.37%
-------- -------- -------- --------
Fixed Rate Loans:
Commercial, financial, and
agricultural ................. 6,756 8.13% 11,802 8.92% 2,142 7.45% 20,700 8.51%
Real estate - construction ...... 5,902 8.06% 1,101 8.31% 104 8.83% 7,107 8.11%
Real estate - mortgage .......... 20,679 8.79% 89,972 8.56% 25,027 8.54% 135,678 8.59%
Installment loans
to individuals ........... 4,686 10.11% 22,295 10.78% 845 8.95% 27,826 10.61%
-------- -------- -------- --------
Total at fixed rates . 38,023 8.72% 125,170 8.99% 28,118 8.47% 191,311 8.86%
-------- -------- -------- --------
Subtotal ......... 118,963 8.41% 173,082 8.80% 65,816 8.57% 357,861 8.63%
Nonaccrual loans ............... 601 601
--------- -------- -------- ---------
Loans, gross $ 119,564 $173,082 $ 65,816 $ 358,462
========= ======== ======== =========
The above table is based on contractual scheduled maturities. Early repayment of
loans or renewals at maturity are not considered in this table.
Table 12 Nonperforming Assets
- --------------------------------------------------------------------------------
As of December 31,
------------------------------------------------------
($ in thousands) 1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Nonaccrual loans ............................ $ 601 $ 957 $1,836 $ 772 $1,724
Restructured loans .......................... 248 326 350 526 215
------ ------ ------ ------ ------
Total nonperforming loans ............... 849 1,283 2,186 1,298 1,939
Foreclosed, repossessed, and idled
properties (included in other assets) ..... 505 560 572 1,393 2,976
------ ------ ------ ------ ------
Total nonperforming assets .............. $1,354 $1,843 $2,758 $2,691 $4,915
====== ====== ====== ====== ======
Nonperforming loans as a percentage
of total loans ............................ 0.24% 0.46% 0.98% 0.61% 1.04%
Allowance for loan losses as a
percentage of nonperforming loans ......... 648.29% 372.49% 216.19% 353.39% 258.33%
Nonperforming assets as a percentage of
loans and foreclosed and repossessed assets 0.38% 0.66% 1.23% 1.26% 2.60%
Nonperforming assets as a percentage of
total assets .............................. 0.28% 0.46% 0.82% 0.84% 1.70%
Table 13 Allocation of the Allowance for Loan Losses
- --------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------
($ in thousands) 1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Commercial, financial, and agricultural $ 646 $ 577 $ 462 $ 758 $ 795
Real estate - construction ............ 248 201 191 199 214
Real estate - mortgage ................ 2,663 2,394 2,810 2,516 2,704
Installment loans to individuals ...... 663 617 641 620 835
------ ------ ------ ------ ------
Total allocated ....................... 4,220 3,789 4,104 4,093 4,548
Unallocated ........................... 1,284 990 622 494 461
------ ------ ------ ------ ------
Total ................................. $5,504 $4,779 $4,726 $4,587 $5,009
====== ====== ====== ====== ======
Table 14 Loan Loss and Recovery Experience
- --------------------------------------------------------------------------------
As of December 31,
-------------------------------------------------------------------------
($ in thousands) 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Loans outstanding at end of year ................ $ 358,334 $ 280,513 $ 223,032 $ 211,522 $ 185,749
========= ========= ========= ========= =========
Average amount of loans outstanding ............. $ 325,477 $ 245,596 $ 217,900 $ 192,035 $ 168,167
========= ========= ========= ========= =========
Allowance for loan losses, at
beginning of year ........................... $ 4,779 $ 4,726 $ 4,587 $ 5,009 $ 2,797
Provision for loan losses ....................... 990 575 325 900 387
Allowance of purchased banks .................... -- -- -- 187 2,487
--------- --------- --------- --------- ---------
5,769 5,301 4,912 6,096 5,671
Loans charged off:
Commercial, financial and agricultural ....... (92) (61) (209) (885) (242)
Real estate - mortgage ....................... (97) (449) (196) (184) (207)
Installment loans to individuals ............. (245) (311) (311) (531) (354)
--------- --------- --------- --------- ---------
Total charge-offs ........................ (434) (821) (716) (1,600) (803)
--------- --------- --------- --------- ---------
Recoveries of loans previously charged-off
Commercial, financial and agricultural ....... 51 89 114 23 11
Real estate - mortgage ....................... 18 38 127 6 79
Installment loans to individuals ............. 100 141 113 62 51
Other ........................................ -- 31 176 -- --
--------- --------- --------- --------- ---------
Total recoveries ......................... 169 299 530 91 141
--------- --------- --------- --------- ---------
Net charge-offs ..................... (265) (522) (186) (1,509) (662)
--------- --------- --------- --------- ---------
Allowance for loan losses, at end of year ....... $ 5,504 $ 4,779 $ 4,726 $ 4,587 $ 5,009
========= ========= ========= ========= =========
Ratios:
Net charge-offs as a percent of average loans 0.08% 0.21% 0.09% 0.79% 0.39%
Allowance for loan losses as a
percent of loans at end of year ....... 1.54% 1.70% 2.12% 2.17% 2.70%
Allowance for loan losses as a multiple
of net charge-offs ...................... 20.77x 9.16x 25.41x 3.04x 7.57x
Provision for loan losses as a percent of net
charge-offs ............................. 373.58% 110.15% 174.73% 59.64% 58.46%
Recoveries of loans previously charged-off
as a percent of loans charged-off ....... 38.94% 36.42% 74.02% 5.69% 17.56%
Table 15 Average Deposits
- --------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------------------------
1998 1997 1996
----------------------- ---------------------- -----------------------
($ in thousands) Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
Interest-bearing demand deposits ... $105,336 2.23 $ 89,717 2.27% $ 74,778 2.03%
Savings deposits ................... 38,797 2.47% 32,346 2.42% 31,495 2.42%
Time deposits ...................... 147,036 5.34% 119,158 5.28% 110,079 5.29%
Time deposits greater than $100,000 51,836 5.91% 34,872 5.75% 31,524 5.74%
-------- -------- --------
Total interest-bearing deposits 343,005 4.14% 276,093 4.03% 247,876 4.00%
Non-interest bearing deposits ...... 53,982 -- 44,566 -- 42,634 --
-------- -------- --------
$396,987 3.58% $320,659 3.47% $290,510 3.41%
======== ======== ========
Table 16 Maturities of Time Deposits of $100,000 or More
- --------------------------------------------------------------------------------
As of December 31, 1998
-----------------------------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
(In thousands) or Less Months Months Months Total
-------- -------- -------- -------- --------
Time deposits of $100,000 or more $ 21,866 $ 13,552 $ 17,226 $ 8,076 $ 60,720
======== ======== ======== ======== ========
Table 17 Interest Rate Sensitivity Analysis
- --------------------------------------------------------------------------------
Repricing schedule for interest-earning assets and interest-bearing
liabilities held as of December 31, 1998
-----------------------------------------------------------------------------
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 $ 186,164 21,624 207,788 150,546 358,334
Securities available for sale 2,591 3,597 6,188 52,612 58,800
Securities held to maturity 965 1,767 2,732 15,748 18,480
Short-term investments 19,312 - 19,312 - 19,312
------------- ------ ------- ------- -------
Total earning assets $ 209,032 26,988 236,020 218,906 454,926
============= ====== ======= ======= =======
Percent of total earning assets 45.95% 5.93% 51.88% 48.12% 100.00%
Cumulative percent of total earning 45.95% 51.88% 51.88% 100.00% 100.00%
assets
Interest-bearing liabilities:
Savings, NOW and money market deposits $ 160,428 - 160,428 - 160,428
Time deposits of $100,000 or more 21,972 30,779 52,751 7,969 60,720
Other time deposits 49,043 78,543 127,586 29,053 156,639
Short-term borrowings 6,000 - 6,000 - 6,000
------------- ------ ------- ------- -------
Total interest-bearing liabilities $ 237,443 109,322 346,765 37,022 383,787
============= ======= ======= ====== =======
Percent of total interest-bearing
liabilities 61.87% 28.48% 90.35% 9.65% 100.00%
Cumulative percent of total interest-
bearing liabilities 61.87% 90.35% 90.35% 100.00% 100.00%
Interest sensitivity gap $ (28,411) (82,334) (110,745) 181,884 71,139
Cumulative interest sensitivity gap (28,411) (110,745) (110,745) 71,139 71,139
Cumulative interest sensitivity gap
as a percent of total earning assets (6.25%) (24.34%) (24.34%) 15.64% 15.64%
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 88.03% 68.06% 68.06% 118.54% 118.54%
Table 18 Market Risk Sensitive Instruments
- --------------------------------------------------------------------------------
Expected Maturities of Market Sensitive Instruments Held
at December 31, 1998 Occurring in Indicated Year
-------------------------------------------------------------------------- Average Estimated
Interest Fair
($ in thousands) 1999 2000 2001 2002 2003 Beyond Total Rate (1) Value
---- ---- ---- ---- ---- ------ ----- -------- -----
Debt Securities- at
amortized cost (2) $ 18,797 15,562 6,880 6,907 6,068 21,679 75,893 6.43% $ 76,705
Loans - fixed (3) 38,443 27,280 28,327 20,760 45,037 28,121 187,968 8.86% 188,844
Loans - adjustable (3) 86,044 20,329 15,183 12,736 18,956 16,517 169,765 8.37% 169,765
-------- ------ ------ ------ ------ ------ ------- --------
Total $143,284 63,171 50,390 40,403 70,061 66,317 433,626 8.24% $435,314
======== ====== ====== ====== ====== ====== ======= ==== ========
Savings, NOW, and
money market
deposits $160,428 -- -- -- -- -- 160,428 1.95% $160,428
Time deposits 179,696 27,937 5,071 2,110 2,535 10 217,359 5.32% 218,078
-------- ------ ------ ------ ------ ------ ------- --------
Total $340,124 27,937 5,071 2,110 2,535 10 377,787 3.89% $378,506
======== ====== ====== ====== ====== ====== ======= ==== ========
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 34%
tax rate.
(2) Callable securities with above market interest rates at December 31, 1998
are assumed to mature at their call date for purposes of this table.
(3) Excludes nonaccrual loans and allowance for loan losses.
Table 19 Return on Assets and Equity
- --------------------------------------------------------------------------------
As of December 31,
-----------------------------------------------------
1998 1997 1996
---- ---- ----
Return on assets 1.28% 1.39% 1.33%
Return on equity 14.59% 14.31% 13.63%
Dividend payout ratio per basic share 31.91% 31.33% 30.56%
Average shareholders' equity to average assets 8.79% 9.73% 9.78%
Table 20 Risk-Based and Leverage Capital Ratios
- --------------------------------------------------------------------------------
As of December 31,
---------------------------------------------------------
($ in thousands) 1998 1997 1996
Risk-Based and Leverage Capital
Tier I capital:
Common shareholders' equity $ 40,494 $ 36,765 $ 33,232
Intangible assets (5,843) (6,487) (5,834)
Unrealized gain on securities
available for sale, net of taxes (37) (186) (146)
--------- ----------- -----------
Total Tier I leverage capital 34,614 30,092 27,252
--------- ----------- -----------
Tier II capital:
Allowable allowance for loan losses 4,493 3,466 2,789
--------- ----------- -----------
Tier II capital additions 4,493 3,466 2,789
--------- ----------- -----------
Total risk-based capital $ 39,107 $ 33,558 $ 30,041
========== ============ ============
Risk adjusted assets $ 365,288 $ 283,924 $ 229,084
Tier I risk-adjusted assets
(includes Tier I capital adjustments) 359,408 277,251 223,104
Tier II risk-adjusted assets
(includes Tiers I and II capital adjustments) 363,901 280,717 225,893
Fourth quarter average assets 475,698 386,291 333,337
Adjusted fourth quarter average assets
(includes Tier I capital adjustments) 469,818 379,618 327,357
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets 9.63% 10.85% 12.21%
Minimum required Tier I capital 4.00% 4.00% 4.00%
Threshold for well-capitalized status 6.00% 6.00% 6.00%
Total risk-based capital to
Tier II risk-adjusted assets 10.75% 11.95% 13.30%
Minimum required total risk-based capital 8.00% 8.00% 8.00%
Threshold for well-capitalized status 10.00% 10.00% 10.00%
Leverage capital ratios:
Tier I leverage capital to
adjusted fourth quarter average assets 7.37% 7.93% 8.32%
Minimum required Tier I leverage capital 4.00% 4.00% 4.00%
Threshold for well-capitalized status 5.00% 5.00% 5.00%
Table 21 Quarterly Financial Summary
- --------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------------------
($ 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 $ 9,413 9,339 8,851 8,401 8,061 7,650 7,346 6,874
Interest expense 3,780 3,815 3,526 3,235 3,082 2,835 2,673 2,533
Net interest income,
taxable equivalent 5,633 5,524 5,325 5,166 4,979 4,815 4,673 4,341
Taxable equivalent,
adjustment 160 157 167 176 170 177 191 196
Net interest income 5,473 5,367 5,158 4,990 4,809 4,638 4,482 4,145
Provision for loan losses 250 250 210 280 250 125 125 75
Net interest income
after provision for losses 5,223 5,117 4,948 4,710 4,559 4,513 4,357 4,070
Noninterest income 1,210 1,173 1,083 1,190 1,070 1,007 1,008 1,065
Noninterest expense 4,099 4,003 3,892 3,918 3,496 3,601 3,506 3,485
Income before income taxes 2,334 2,287 2,139 1,982 2,133 1,919 1,859 1,650
Income taxes 829 805 749 676 754 651 620 524
Net income 1,505 1,482 1,390 1,306 1,379 1,268 1,239 1,126
---------- ----- ----- ----- ----- ----- ----- -----
Per Share Data
Earnings - basic $ 0.50 0.49 0.46 0.43 0.46 0.42 0.41 0.37
Earnings - diluted 0.49 0.48 0.45 0.42 0.45 0.41 0.40 0.36
Cash dividends declared 0.15 0.15 0.15 0.15 0.13 0.13 0.13 0.13
Dividend payout per
basic share 30.00% 30.61% 32.61% 34.88% 28.26% 30.95% 31.71% 35.14%
Market Price
High $ 33.00 34.00 37.00 42.00 35.00 27.75 24.25 26.75
Low 24.00 29.00 31.00 29.25 26.00 22.50 21.75 18.50
Close 29.00 29.00 34.00 37.75 35.00 27.75 22.50 23.38
Stated book value 13.40 13.12 12.75 12.43 12.17 11.84 11.52 11.16
Tangible book value 11.47 11.13 10.71 10.34 10.02 10.12 9.76 9.35
---------- ----- ----- ----- ----- ----- ----- -----
Selected Average Balances
Assets $ 475,698 456,878 433,047 407,233 386,291 362,601 350,746 339,878
Loans 350,443 337,967 319,660 293,838 269,929 254,265 235,912 222,278
Earning assets 444,553 426,473 403,033 377,373 358,442 335,658 324,617 313,399
Deposits 427,212 405,188 390,264 365,284 345,253 322,813 312,311 302,259
Interest-bearing liabilities 372,087 357,023 336,151 316,851 297,691 278,179 268,974 259,748
Shareholders' equity 40,497 39,489 38,328 37,470 36,473 35,487 34,275 33,861
---------- ----- ----- ----- ----- ----- ----- -----
1998 1997
------------------------------------------------------------------------------------------------
($ in thousands except Fourth Third Second First Fourth Third Second First
per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
---------- ----- ----- ----- ----- ----- ----- -----
Ratios
Return on average assets 1.26% 1.29% 1.29% 1.30% 1.42% 1.39% 1.42% 1.34%
Return on average equity 14.74% 14.89% 14.55% 14.14% 15.00% 14.18% 14.50% 13.49%
Average equity to
average assets 8.51% 8.64% 8.85% 9.20% 9.44% 9.79% 9.77% 9.96%
Risk-based capital ratios:
Tier I capital 9.63% 10.00% 10.15% 10.31% 10.85% 11.79% 11.97% 12.48%
Total risk-based capital 10.75% 11.11% 11.25% 11.41% 11.95% 12.88% 13.06% 13.56%
Tier I leverage capital 7.37% 7.41% 7.55% 7.76% 7.93% 8.50% 8.50% 8.48%
Average loans to
average deposits 82.03% 83.41% 81.91% 80.44% 78.18% 78.77% 75.54% 73.54%
Average earning assets to
interest-bearing
liabilities 119.48% 119.45% 119.90% 119.10% 120.41% 120.66% 120.69% 120.32%
Net interest margin 5.03% 5.14% 5.30% 5.55% 5.51% 5.69% 5.77% 5.62%
Nonperforming loans as a
percent of total loans 0.24% 0.24% 0.18% 0.29% 0.46% 0.55% 0.39% 0.74%
Allowance for loan losses
as a percentage of
nonperforming loans 648.29% 652.66% 861.44% 563.33% 372.49% 328.56% 489.70% 286.05%
Nonperforming assets as a
percent of loans and
foreclosed, repossessed,
and idled properties 0.38% 0.39% 0.36% 0.41% 0.66% 0.71% 0.56% 0.92%
Nonperforming assets as a
percent of total assets 0.28% 0.28% 0.27% 0.30% 0.46% 0.50% 0.39% 0.60%
Item 8. Financial Statements
and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
($ in thousands) 1998 1997
--------- --------
ASSETS
Cash & due from banks, noninterest-bearing ......... $ 22,073 17,664
Due from banks, interest-bearing ................... 8,398 13,081
Federal funds sold ................................. 8,295 2,896
--------- --------
Total cash and cash equivalents ............... 38,766 33,641
--------- --------
Securities available for sale (costs of
$58,740 in 1998 and $49,995 in 1997) .......... 58,800 50,277
Securities held to maturity (fair values of
$19,223 in 1998 and $21,512 in 1997) .......... 18,480 20,856
Presold mortgages in process of settlement ......... 2,619 1,330
Loans .............................................. 358,334 280,513
Less: Allowance for loan losses ................ (5,504) (4,779)
--------- --------
Net loans ....................................... 352,830 275,734
--------- --------
Premises and equipment ............................. 9,091 8,839
Accrued interest receivable ........................ 2,789 2,866
Intangible assets .................................. 5,843 6,487
Other .............................................. 2,620 2,639
--------- --------
Total assets ............................. $ 491,838 402,669
========= ========
LIABILITIES
Deposits: Demand - noninterest bearing $ 62,479 50,921
Savings, NOW, and money market ......... 160,428 135,805
Time deposits of $100,000 or more ...... 60,720 40,200
Other time deposits .................... 156,639 134,298
--------- --------
Total deposits ...................... 440,266 361,224
Short-term borrowings .............................. 6,000 --
Accrued interest payable ........................... 3,080 2,299
Other liabilities .................................. 1,998 2,381
--------- --------
Total liabilities ............................. 451,344 365,904
--------- --------
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
(continued)
($ in thousands) 1998 1997
--------- --------
SHAREHOLDERS' EQUITY
Common stock, $5 par value per share
Authorized: 12,500,000 shares
Issued and outstanding: 3,021,270 in 1998 and
3,020,370 shares in 1997 ............... 15,106 15,102
Capital surplus .................................... 3,864 3,861
Retained earnings .................................. 21,487 17,616
Accumulated other comprehensive income ............. 37 186
--------- --------
Total shareholders' equity .................... 40,494 36,765
--------- --------
Total liabilities and shareholders' equity $ 491,838 402,669
========= ========
See accompanying notes to consolidated financial statements.
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
($ in thousands, except per share data) 1998 1997 1996
----------- ----------- ----------
INTEREST INCOME
Interest and fees on loans ........................ $ 30,186 23,754 20,644
Interest on investment securities:
Taxable interest income ...................... 2,898 3,610 3,110
Tax-exempt interest income ................... 1,035 1,189 1,121
Other, principally overnight investments .......... 1,225 644 593
----------- ----------- ----------
Total interest income ........................ 35,344 29,197 25,468
----------- ----------- ----------
INTEREST EXPENSE
Savings, NOW and money market ..................... 3,305 2,820 2,284
Time deposits of $100,000 or more ................. 3,063 2,004 1,811
Other time deposits ............................... 7,845 6,296 5,820
Short-term borrowings ............................. 143 3 1
----------- ----------- ----------
Total interest expense ....................... 14,356 11,123 9,916
----------- ----------- ----------
Net interest income ............................... 20,988 18,074 15,552
Provision for loan losses ......................... 990 575 325
----------- ----------- ----------
Net interest income after provision for loan losses 19,998 17,499 15,227
----------- ----------- ----------
NONINTEREST INCOME
Service charges on deposit accounts ............... 2,595 2,413 2,561
Commissions from insurance sales .................. 240 278 313
Other service charges, commissions and fees ....... 1,565 1,053 1,034
Data processing fees .............................. 5 274 248
Loan sale gains ................................... 227 -- --
Securities gains (losses) ......................... 29 (12) 6
Loss on disposal of premises and equipment ........ (27) (10) --
Gains (losses) on foreclosed properties ........... 22 (14) 73
Other nonrecurring net gains ...................... -- 168 211
----------- ----------- ----------
Total noninterest income ..................... 4,656 4,150 4,446
----------- ----------- ----------
First Bancorp and Subsidiaries
of Income
Years Ended December 31, 1998, 1997 and 1996
($ in thousands, except per share data) 1998 1997 1996
----------- ----------- ----------
NONINTEREST EXPENSES
Salaries .......................................... 7,127 6,225 5,447
Employee benefits ................................. 1,563 1,315 1,268
----------- ----------- ----------
Total personnel expense ........................ 8,690 7,540 6,715
Net occupancy expense ............................. 1,017 954 904
Equipment related expenses ........................ 918 858 833
Other operating expenses .......................... 5,287 4,736 4,661
----------- ----------- ----------
Total noninterest expenses ................... 15,912 14,088 13,113
----------- ----------- ----------
Income before income taxes ........................ 8,742 7,561 6,560
Income taxes ...................................... 3,059 2,549 2,213
----------- ----------- ----------
NET INCOME ....................................... $ 5,683 5,012 4,347
=========== =========== ==========
Earnings per share:
Basic ........................................ $ 1.88 1.66 1.44
Diluted ...................................... 1.83 1.62 1.43
Weighted average common shares outstanding:
Basic ........................................ 3,020,728 3,017,236 3,014,573
Diluted ...................................... 3,105,164 3,085,928 3,040,839
See accompanying notes to consolidated financial statements.
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 1998, 1997 and 1996
($ in thousands) 1998 1997 1996
------- ------ ------
Net income .................................................... $ 5,683 5,012 4,347
------- ------ ------
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period, pretax ............................. (193) 49 (133)
Tax benefit (expense) ............................... 62 (17) 48
Reclassification to realized (gains) losses .............. (29) 12 (6)
Tax expense (benefit) ............................... 11 (4) 2
------- ------ ------
Other comprehensive income (loss) ............................. (149) 40 (89)
------- ------ ------
Comprehensive income .......................................... $ 5,534 5,052 4,258
======= ====== ======
See accompanying notes to consolidated financial statements.
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1998, 1997 and 1996
Accumulated
Common Stock Other Share-
------------------ Capital Retained Comprehensive holders'
(In thousands, except per share) Shares Amount Surplus Earnings Income Equity
------ ------ ------- -------- ------ ------
Balances, January 1, 1996 3,014 $ 15,071 3,819 11,152 235 30,277
Net income 4,347 4,347
Cash dividends declared ($0.44 per share) (1,326) (1,326)
Common stock issued under
stock option plans 2 11 12 23
Other comprehensive loss (89) (89)
----- --------- ----- ------ ----- ------
Balances, December 31, 1996 3,016 15,082 3,831 14,173 146 33,232
----- --------- ----- ------ ----- ------
Net income 5,012 5,012
Cash dividends declared ($0.52 per share) (1,569) (1,569)
Common stock issued under
stock option plans 4 20 30 50
Other comprehensive income 40 40
----- --------- ----- ------ ----- ------
Balances, December 31, 1997 3,020 15,102 3,861 17,616 186 36,765
----- --------- ----- ------ ----- ------
Net income 5,683 5,683
Cash dividends declared ($0.60 per share) (1,812) (1,812)
Common stock issued under
stock option plans 1 5 8 13
Purchases and retirement of
common stock - (1) (5) (6)
Other comprehensive loss (149) (149)
----- --------- ----- ------ ----- ------
Balances, December 31, 1998 3,021 $ 15,106 3,864 21,487 37 40,494
===== ========= ===== ====== ===== ======
See accompanying notes to consolidated financial statements.
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
($ in thousands) 1998 1997 1996
--------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,683 5,012 4,347
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses 990 575 325
Net security premium amortization (discount accretion) 223 (15) (17)
Gains on sales of loans (227) - -
Proceeds from sales of loans 6,664 - -
Losses (gains) on sales of securities available for sale (29) 12 (6)
Loss on disposal of premises and equipment 27 10 -
Loan fees and costs deferred, net of amortization 2 33 10
Depreciation of premises and equipment 761 715 723
Amortization of intangible assets 655 546 568
Realized and unrealized foreclosed property (gains) losses (22) 14 (73)
Provision for deferred income taxes 180 (62) 260
Decrease (increase) in accrued interest receivable 77 (454) (40)
Decrease (increase) in other assets (1,130) 762 657
Increase (decrease) in accrued interest payable 781 370 (7)
Increase (decrease) in other liabilities (443) (149) 556
--------- --------- --------
Net cash provided by operating activities 14,192 7,369 7,303
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (47,180) (37,289) (41,816)
Purchases of securities held to maturity (759) (2,399) (4,386)
Proceeds from sales of securities available for sale 8,053 8,361 1,146
Proceeds from maturities/issuer calls of securities available
for sale 30,209 32,678 36,222
Proceeds from maturities/issuer calls of securities held to
maturity 3,113 3,846 1,855
Net increase in loans (84,554) (58,208) (13,525)
Purchases of premises and equipment (1,246) (1,842) (632)
Net cash received (paid) in purchase (sale) of deposits - 12,658 (1,722)
--------- --------- --------
Net cash used in investing activities (92,364) (42,195) (22,858)
--------- --------- --------
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
(continued)
($ in thousands) 1998 1997 1996
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 79,042 49,018 13,690
Proceeds from short-term borrowings, net 6,000 - -
Cash dividends paid (1,752) (1,508) (1,267)
Proceeds from issuance of common stock 13 50 23
Purchases and retirement of common stock (6) - -
--------- --------- --------
Net cash provided by financing activities 83,297 47,560 12,446
--------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,125 12,734 (3,109)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 33,641 20,907 24,016
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 38,766 33,641 20,907
========= ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 13,575 10,753 9,923
Income taxes 2,963 2,350 2,023
Non-cash transactions:
Foreclosed loans transferred to other real estate 29 172 439
Increase (decrease) in fair value of securities available for
sale (222) 61 (139)
Premises and equipment transferred to other real estate 206 - -
Loans to facilitate sales of other real estate - 61 93
See accompanying notes to consolidated financial statements.
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 subsidiary First Bank Insurance
Services, Inc. (First Bank Insurance); 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant estimates
made by the Company in the preparation of its consolidated financial statements
are the determination of the allowance for loan losses, the valuation of other
real estate, the valuation allowance for deferred tax assets and fair value
estimates for financial instruments.
(b) Cash and Cash Equivalents - The Company considers all highly liquid
assets such as cash on hand, noninterest-bearing and interest-bearing amounts
due from banks and federal funds sold to be "cash equivalents".
(c) Securities - Securities classified as available for sale are purchased
with the intent to hold to maturity. However, infrequent sales may be necessary
due to liquidity needs arising from unanticipated deposit and loan fluctuations,
changes in regulatory capital and investment requirements, or significant
unforeseen changes in market conditions, including interest rates and market
values of securities held in the portfolio. Investments in securities available
for sale are stated at fair value with the resultant unrealized gains and losses
included as a component of shareholders' equity, net of applicable deferred
income taxes.
Securities are classified as held to maturity at the time of purchase when
the Company has the ability and positive intent to hold such securities to
maturity. Investments in securities held to maturity are stated at amortized
cost.
Gains and losses on sales of securities are recognized at the time of sale
based upon the specific identification method. Premiums and discounts are
amortized into income on a level yield basis.
(d) Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Depreciation, computed by the straight-line method, is
charged to operations over the estimated useful lives of the properties, which
range from 5 to 40 years or, in the case of leasehold improvements, over the
term of the lease, if shorter. Maintenance and repairs are charged to operations
in the year incurred. Gains and losses on dispositions are included in current
operations.
(e) Loans - Loans are stated at the principal amount outstanding, less
unearned income and deferred nonrefundable loan fees, net of certain origination
costs. Interest on loans is accrued on the unpaid principal balance outstanding.
Net deferred loan origination costs/fees are capitalized and recognized as a
yield adjustment over the life of the related loan. Unearned income for each of
the reporting periods was immaterial.
A loan is placed on nonaccrual status when, in management's judgment, the
collection of interest appears doubtful. The accrual of interest is discontinued
on all loans that become 90 days past due with respect to principal or interest.
While a loan is on nonaccrual status, the Company's policy is that all cash
receipts are applied to principal. Once the recorded principal balance has been
reduced to zero, future cash receipts are applied to recoveries of any amounts
previously charged off. Further cash receipts are recorded as interest income to
the extent that any interest has been foregone. Loans are removed from
nonaccrual status when they become current as to both principal and interest and
when concern no longer exists as to the collectability of principal or interest.
In some cases, where borrowers are experiencing financial difficulties, loans
may be restructured to provide terms significantly different from the originally
contracted terms.
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 "other
service charges, commissions and fees" - see Note 15 for additional information.
Between the initial funding of the loans by the Company and the subsequent
reimbursement by the investors, the Company carries the loans on its balance
sheet at cost.
Periodically, the Company originates commercial loans that are intended for
resale. The Company carries these loans at the lower of cost or fair value at
each reporting date. There were no loans held for sale as of December 31, 1998
or 1997.
(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
and losses on foreclosed real estate. Such agencies may require the Bank to
recognize additions to the allowances based on the examiners' judgments about
information available to them at the time of their examinations.
(h) Real Estate Acquired by Foreclosure - Real estate acquired by
foreclosure 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 real
estate acquired by foreclosure 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) Income and Expense - The Company and its subsidiaries use the accrual
method of accounting.
(k) 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,
1998 and 1997, acquisition related intangibles that had not been fully amortized
totaled $8,650,000, less accumulated amortization of $2,891,000 and $2,235,000,
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 $84,000 and $72,000 at December 31, 1998 and 1997, respectively.
(l) Pension Plans - On January 1, 1998, the Company adopted SFAS No. 132,
"Employers Disclosures about Pensions and Other Postretirement Benefits." This
statement standardized the disclosure requirements of pensions and other
postretirement benefits. This statement did not change any measurement or
recognition provisions, and thus did not materially impact the Company. The
Company has two defined benefit plans that were subject to the disclosures
required by this statement.
(m) 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.
(n) Per Share Amounts - The Company adopted SFAS No. 128, "Earnings Per
Share" (SFAS No. 128) as of December 31, 1997. SFAS No. 128 superseded
Accounting Principles Board Opinion No. 15, "Earnings Per Share" (APB No. 15)
which the Company had followed until the adoption of SFAS No. 128. For companies
that have potentially issuable stock (complex capital structures), such as First
Bancorp with its stock option plan, SFAS No. 128 requires that two earnings per
share amounts be disclosed - 1) Basic Earnings Per Share and 2) Diluted Earnings
Per Share. 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 dilutive potential 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.
As required by SFAS No. 128, all prior year earnings per share amounts were
restated and computed under the provisions of the new standard.
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,
-------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------- -------------------------------- --------------------------------
($ in thousands, Income Shares Income Shares Income Shares
except per share (Numer- (Denom- Per Share (Numer- (Denom- Per Share (Numer- (Denom- Per Share
amounts) ator) inator) Amount ator) inator) Amount ator) inator) Amount
-------- --------- --------- -------- --------- --------- ------- --------- -------
Basic EPS $ 5,683 3,020,728 $ 1.88 $ 5,012 3,017,236 $ 1.66 $ 4,347 3,014,573 $ 1.44
========= ========= =======
Effect of Dilutive
Securities
Effect of stock
option plan - 84,436 - 68,692 - 26,266
-------- --------- -------- --------- -------- ---------
Diluted EPS $ 5,683 3,105,164 $ 1.83 $ 5,012 3,085,928 $ 1.62 $ 4,347 3,040,839 $ 1.43
======== ========= ========= ======== ========= ========= ======== ========= =======
(o) Fair Value of Financial Instruments - SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS No. 107), requires that the Company
disclose estimated fair values for its financial instruments. Fair value methods
and assumptions are set forth below for the Company's financial instruments.
Cash and Due from Banks, Federal Funds Sold, Presold Mortgages in Process
of Settlement, Accrued Interest Receivable, Short-Term Borrowings and Accrued
Interest Payable - The carrying amounts approximate their fair value because of
the short maturity of these financial instruments.
Available for Sale and Held to Maturity Securities - Fair values are based
on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
financial and agricultural, real estate construction, real estate mortgages and
installment loans to individuals. Each loan category is further segmented into
fixed and variable interest rate terms. For variable rate loans, the carrying
value is a reasonable estimate of the fair value. For fixed rate loans, fair
value is determined by discounting scheduled future cash flows using current
interest rates offered on loans with similar risk characteristics. Fair values
for impaired loans are estimated based on discounted cash flows or underlying
collateral values, where applicable.
Deposit Liabilities - The fair value of deposits with no stated maturity,
such as non-interest-bearing demand deposits, savings, NOW and money market
accounts, is equal to the amount payable on demand as of December 31, 1998 and
1997. The fair value of certificates of deposit is based on the discounted value
of contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit - At December
31, 1998 and 1997, 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.
(p) Impairment of Long-Lived Assets - 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.
(q) Comprehensive Income - On January 1, 1998, the Company adopted SFAS No.
130, "Reporting Comprehensive Income" which established standards for reporting
and display of comprehensive income and its components in a full set of
financial statements. 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. This statement does not change or modify the reporting or display in
the income statement. SFAS No. 130 was effective for interim and annual periods
beginning after December 15, 1997. Comparative financial statements for earlier
periods have been presented to reflect the application of this statement. Also,
the Company has no foreign operations or customers.
(r) Segment Reporting - The Financial Accounting Standards Board (FASB) has
issued Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The statement 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. SFAS No. 131 was effective for
financial statements for periods beginning after December 15, 1997. In all
material respects, the Company's operations are entirely within the commercial
banking segment, and the financial statements presented herein reflect the
results of that segment.
(s) Reclassifications - Certain amounts for prior years have been
reclassified to conform to the 1998 presentation. The reclassifications had no
effect on net income or shareholders' equity as previously presented, nor did
they materially impact trends in financial information.
Note 2. Acquisitions
On November 14, 1997, First Bank acquired a First Union National Bank branch
located in Lillington, North Carolina. Real and personal property acquired
totaled approximately $237,000 and deposits assumed totaled approximately
$14,345,000. No loans were included in the purchase. First Bank recorded an
intangible asset of approximately $1,588,000 in connection with the transaction.
On December 15, 1995, First Bank completed its cash acquisition of the
Laurinburg and Rockingham branches of First Scotland Bank. A $786,000 intangible
asset was recorded in addition to the approximately $15 million in assets and
deposits that were acquired.
On August 25, 1994, First Bank completed its 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.
Note 3. Securities
The book values and approximate fair values of investment securities at
December 31, 1998 and 1997 are summarized as follows:
1998 1997
----------------------------------------------------------------------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Gains (Losses) Cost Value Gains (Losses)
---- ----- ----- -------- ---- ----- ----- --------
(In thousands)
Securities available for
sale:
U.S. Treasury $ 503 544 41 - 503 534 31 -
U.S. Government agencies 28,560 28,636 130 (54) 38,380 38,569 202 (13)
Mortgage-backed securities 27,454 27,406 89 (137) 9,181 9,243 89 (27)
State and local governments 896 896 - - 906 906 - -
Equity securities 1,327 1,318 1 (10) 1,025 1,025 - -
---------- ------ --- ---- ------ ------ --- ---
Total available for sale $ 58,740 58,800 261 (201) 49,995 50,277 322 (40)
========== ====== === ==== ====== ====== === ===
Securities held to
maturity:
State and local governments $ 18,121 18,864 743 - 20,460 21,116 682 (26)
Other 359 359 - - 396 396 - -
---------- ------ --- ---- ------ ------ --- ---
Total held to maturity $ 18,480 19,223 743 - 20,856 21,512 682 (26)
========== ====== === ==== ====== ====== === ===
Included in mortgage-backed securities at December 31, 1998 were
collateralized mortgage obligations with an amortized cost of $16,656,000 and a
fair value of $16,620,000. Included in mortgage-backed securities at December
31, 1997 were collateralized mortgage obligations with an amortized cost of
$5,157,000 and a fair value of $5,208,000.
The Company owned Federal Home Loan Bank stock with a cost and fair value
of $1,204,000 at December 31, 1998 and $1,001,000 at December 31, 1997, which is
reflected as equity securities above and serves as part of the collateral for
the Company's line of credit with the Federal Home Loan Bank (see Note 8 for
additional discussion). The investment in this stock is a requirement for
membership in the Federal Home Loan Bank system.
The book values and approximate fair values of investment securities at
December 31, 1998, 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 $ 2,589 2,591 $ 2,732 2,754
Due after one year but within five years 18,387 18,494 6,856 7,095
Due after five years but within ten years 8,983 8,991 6,201 6,537
Due after ten years - - 2,691 2,837
Mortgage-backed securities 27,454 27,406 - -
-------- ------ --------- ------
Total debt securities 57,413 57,482 18,480 19,223
Equity securities 1,327 1,318 - -
-------- ------ --------- ------
Total securities $ 58,740 58,800 $ 18,480 19,223
======== ====== ========= ======
At December 31, 1998 and 1997, investment securities with book values of
$18,384,000 and $13,570,000, respectively, were pledged as collateral for public
deposits.
Sales of securities available for sale with aggregate proceeds of
$8,053,000 in 1998, $8,361,000 in 1997 and $1,146,000 in 1996 resulted in gross
gains of $32,000 and gross losses of $3,000 in 1998, gross losses of $12,000 in
1997 and gross gains of $6,000 in 1996.
Note 4. Loans And Allowance For Loan Losses
Loans at December 31, 1998 and 1997 are summarized as follows:
(In thousands) 1998 1997
--------- ------
Commercial, financial, and agricultural $ 52,415 45,417
Real estate - construction 36,565 19,323
Real estate - mortgage 237,833 185,927
Installment loans to individuals 31,649 29,971
--------- ------
Subtotal 358,462 280,638
Unamortized net deferred loan fees (128) (125)
--------- ------
Loans, net of deferred fees $ 358,334 280,513
========= =======
Loans described above as "Real estate - mortgage" included loans secured by
1-4 family dwellings in the amounts of $134,389,000 and $104,061,000 as of
December 31, 1998 and 1997, respectively. The loans above also include loans to
executive officers and directors and to their associates totaling approximately
$7,895,000 and $5,378,000 at December 31, 1998 and 1997, respectively. During
1998, additions to such loans were approximately $7,285,000 and repayments
totaled approximately $4,768,000. 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, 1998 and 1997 are as follows:
(In thousands) 1998 1997
------- -----
Loans: Nonaccrual loans $ 601 957
Restructured loans 248 326
------- -----
Total nonperforming loans 849 1,283
Foreclosed, repossessed and idled properties (included in other assets) 505 560
------- -----
Total nonperforming assets $ 1,354 1,843
======= =====
At December 31, 1998 and 1997 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, 1998, 1997
and 1996 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 $60,000, $91,000
and $183,000 for nonaccrual loans and $25,000, $34,000 and $41,000 for
restructured loans would have been recorded for 1998, 1997 and 1996,
respectively. Interest income on such loans that was actually collected and
included in net income in 1998, 1997 and 1996 amounted to approximately $22,000,
$32,000 and $81,000 for nonaccrual loans (prior to their being placed on
nonaccrual status) and $24,000, $25,000 and $30,000 for restructured loans,
respectively.
Activity in the allowance for loan losses for the years ended December 31,
1998, 1997 and 1996 is as follows:
(In thousands) 1998 1997 1996
------- ------ ------
Balance, beginning of year $ 4,779 4,726 4,587
Provision for loan losses 990 575 325
Recoveries of loans charged-off 169 299 530
Loans charged-off (434) (821) (716)
------- ----- -----
Balance, end of year $ 5,504 4,779 4,726
======= ===== =====
At December 31, 1998, the Company had no loans that it considered to be
impaired. At December 31, 1997, the recorded investment in loans that are
considered to be impaired was $398,000, of which all were on a nonaccrual basis.
The related allowance for loan losses for these impaired loans was $60,000 at
December 31, 1997. There were no impaired loans at December 31, 1997 for which
there was no related allowance. The average recorded investments in impaired
loans during the years ended December 31, 1998, 1997 and 1996 were approximately
$110,000, $654,000, and $859,000, respectively. For the years ended December 31,
1998, 1997 and 1996, 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, 1998 and 1997 consist of the
following:
(In thousands) 1998 1997
-------- ------
Land $ 1,801 1,869
Buildings 7,603 7,307
Furniture and equipment 6,151 5,471
Leasehold improvements 528 453
-------- ------
Total cost 16,083 15,100
Less accumulated depreciation and amortization (6,992) (6,261)
-------- ------
Net book value of premises and equipment $ 9,091 8,839
======== =======
Note 6. Income Taxes
The components of income tax expense (benefit) for the years ended December
31, 1998, 1997 and 1996 are as follows:
(In thousands) 1998 1997 1996
--------- ------- -------
Current - Federal $ 2,466 2,321 1,685
- State 413 290 268
Deferred - Federal 180 (62) 260
--------- ------- -------
Total $ 3,059 2,549 2,213
========= ======= =======
The sources and tax effects of temporary differences that give rise to
significant portions of the deferred tax assets (liabilities) at December 31,
1998 and 1997 are presented below:
(In thousands) 1998 1997
------- ------
Deferred tax assets:
Allowance for loan losses ........................................... $ 1,655 1,481
Excess book over tax retirement plan cost ........................... 70 52
Basis of investment in subsidiary ................................... 69 69
Net loan fees recognized for tax reporting purposes ................. 50 49
Reserve for employee medical expense for financial reporting purposes 12 21
Deferred compensation ............................................... 43 46
Deferred payments under severance arrangements ...................... 33 80
All other ........................................................... 165 262
------- ------
Gross deferred tax assets ........................................ 2,097 2,060
Less: Valuation allowance ....................................... (99) (120)
------- ------
Net deferred tax assets .................................... 1,998 1,940
------- ------
Deferred tax liabilities:
Loan fees ........................................................... (492) (285)
Excess tax over book pension cost ................................... (170) (213)
Depreciable basis of fixed assets ................................... (562) (498)
Amortizable basis of intangible assets .............................. (59) (49)
Unrealized gain on securities available for sale .................... (24) (96)
All other ........................................................... (8) (9)
------- ------
Gross deferred tax liabilities ................................. (1,315) (1,150)
------- ------
Net deferred tax asset (included in other assets) .......... $ 683 790
======= ======
A portion of the change in the net deferred tax asset relates to unrealized
gains and losses on securities available for sale. The related current period
deferred tax benefit of approximately $72,000 as of December 31, 1998 and
deferred tax expense of approximately $21,000 as of December 31, 1997 have been
recorded directly to shareholders' equity. The balance of the 1998 change in the
net deferred tax asset of $180,000 is reflected as a deferred income tax expense
in the consolidated statement of income.
The valuation allowance applies primarily to offset the recognition of
deferred tax benefits on certain temporary differences for state income tax
purposes. It is management's belief that the realization of the remaining net
deferred tax assets is more likely than not.
The following is a reconcilement of federal income tax expense at the
statutory rate of 34% to the income tax provision reported in the financial
statements.
(In thousands) 1998 1997 1996
--------- ------- ------
Tax provision at statutory rate $ 2,972 2,571 2,230
Increase (decrease) in income taxes resulting from:
Tax exempt interest income (378) (425) (400)
Non-deductible interest expense 45 48 43
Non-deductible portion of amortization of
intangible assets 132 142 151
State income taxes, net of federal benefit 273 191 177
Other, net 15 22 12
------- ------ ------
Total $ 3,059 2,549 2,213
======= ====== ======
Note 7. Deposits
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
(In thousands)
1999 $ 179,696
2000 27,937
2001 5,071
2002 2,110
2003 2,535
Thereafter 10
----------
$ 217,359
==========
Note 8. Borrowings
The Company did not have any long-term borrowings outstanding during 1996,
1997, or 1998. However the Company has in place an available line of credit with
the Federal Home Loan Bank (FHLB) totaling $50,000,000 should funding or
liquidity needs arise that can be structured as either short-term or long-term
borrowings. During 1998, the Company periodically used this line of credit as a
short-term, overnight borrowing to meet internally targeted liquidity levels
that carried an interest rate that was approximately 25 basis points higher than
the national discount rate. There was no amount outstanding under this line of
credit at December 31, 1998 or 1997. This line of credit is secured by the
Company's FHLB stock and a blanket lien on its one-to-four family residential
loan portfolio. During 1998, the average amount outstanding for this line of
credit was approximately $2,508,000 and carried a weighted average interest rate
of 5.67%. During 1998, the highest month end balance under this line of credit
was $16,000,000. There were no amounts drawn under this line of credit in 1997
or 1996.
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. At December 31, 1998, the Company had $6,000,000
outstanding under this arrangement at an interest rate of approximately 5.25%.
During 1998, the average amount outstanding for this line of credit was
approximately $16,000 and carried a weighted average interest rate of 5.25%.
During 1998, the highest month end balance under this line was $6,000,000.
Insignificant purchases of federal funds in 1997 and 1996 resulted in $3,000 and
$1,000 in interest expense during 1997 and 1996, respectively.
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 $154,000 in 1998, $139,000 in 1997, and $103,000
in 1996.
Future obligations for minimum rentals under noncancelable operating leases
at December 31, 1998 are as follows:
(In thousands)
Year ending December 31:
1999 $ 145
2000 107
2001 71
2002 61
2003 29
Later years 53
--------
Total $ 466
========
Note 10. Employee Benefit Plans
Salary Reduction Profit Sharing Plan. The Company sponsors a salary
reduction profit sharing plan pursuant to Section 401(k) of the Internal Revenue
Code. Employees who have completed one year of service are eligible to
participate in the plan. An eligible employee may contribute up to 14% of annual
salary to the plan. The Company contributes an amount equal to 75% (50% in 1997
and 1996) 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 $196,000, $110,000 and
$100,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The
Company made additional discretionary matching contributions to the plan of
$100,000 in 1998, 1997 and 1996.
Incentive Compensation Plan. The Company also has an incentive compensation
plan covering certain management and staff employees. Payments pursuant to the
plan are based on achievement of certain performance goals. The Company's
incentive compensation plan expense was $625,000, $502,000 and $467,000 for the
years ended December 31, 1998, 1997 and 1996, respectively. There were 85, 79,
and 65 employees who participated in this plan during 1998, 1997, and 1996,
respectively.
Retirement Plan. The Company sponsors a noncontributory defined benefit
retirement plan (the "Retirement Plan"), which is intended to qualify under
Section 401(a) of the Internal Revenue Code. Employees who have attained age 21
and completed one year of service are eligible to participate in the Retirement
Plan. The Retirement Plan provides for a monthly payment, at normal retirement
age of 65, equal to one-twelfth of the sum of (i) 0.75% of Final Average Annual
Compensation (5 highest consecutive calendar years earnings out of the last 10
years of employment) multiplied by the employee's years of service not in excess
of 40 years, and (ii) 0.65% of Final Average Annual Compensation in excess of
"covered compensation" multiplied by years of service not in excess of 35 years.
"Covered compensation" means the average of the social security taxable wage
base during the 35 year period ending with the year the employee attains social
security retirement age. Early retirement, with reduced monthly benefits, is
available at age 55 after 15 years of service. The Retirement Plan provides for
100% vesting after 5 years of service, and provides for a death benefit to a
vested participant's surviving spouse. The costs of benefits under the
Retirement Plan, which are borne by First Bancorp and/or its subsidiaries, are
computed actuarially and defrayed by earnings from the Retirement Plan's
investments. The compensation covered by the Retirement Plan includes total
earnings before reduction for contributions to a cash or deferred profit-sharing
plan (such as the 401(k) feature of the Profit Sharing Plan described above) and
amounts used to pay group health insurance premiums and includes bonuses (such
as amounts paid under the incentive compensation plan). Compensation for the
purposes of the Retirement Plan may not exceed statutory limits; such limit in
1998 and 1997 was $160,000, and in 1996 it was $150,000.
The following table reconciles the beginning and ending balances of the
Retirement Plan's benefit obligation, as computed by the Company's independent
actuarial consultants:
(In thousands) 1998 1997 1996
-------- ------- -------
Benefit obligation at beginning of year $ 3,254 2,323 2,048
Service cost 201 146 123
Interest cost 235 199 165
Actuarial loss 473 666 175
Benefits paid (111) (80) (188)
-------- ------- -------
Benefit obligation at end of year $ 4,052 3,254 2,323
======== ======= =======
The Company's contributions to the Retirement Plan are based on computations
by independent actuarial consultants and are intended to provide the Company
with the maximum deduction for income tax purposes. The contributions are
invested to provide for benefits under the Retirement Plan. At December 31,
1998, the Retirement Plan's assets were invested in Company common stock (11%),
equity mutual funds (63%), and fixed income mutual funds (26%).
The following table reconciles the beginning and ending balances of the
Retirement Plan's plan assets:
(In thousands) 1998 1997 1996
------- ------- -------
Plan assets at beginning of year $ 2,994 2,237 1,963
Actual return on plan assets 504 619 339
Employer contributions 195 218 123
Benefits paid (111) (80) (188)
------- ------- -------
Plan assets at end of year $ 3,582 2,994 2,237
======= ======= =======
The following tables presents information regarding the funded status of the
Retirement Plan, the amounts not recognized in the consolidated balance sheets,
and the amounts recognized in the consolidated balance sheets:
(In thousands) 1998 1997
------ ----
Funded status $ (470) (260)
Unrecognized net actuarial (gain) loss 202 (7)
Unrecognized prior service cost 755 751
Unrecognized transition obligation 59 61
Other adjustments - 109
------ ----
Prepaid pension cost $ 546 654
====== ===
Net pension cost for the Retirement Plan included the following components
for the years ended December 31, 1998, 1997 and 1996:
(In thousands) 1998 1997 1996
----- ---- ----
Service cost - benefits earned during the period $ 201 146 123
Interest cost on projected benefit obligation .. 235 199 165
Expected return on plan assets ................. (239) (180) (157)
Net amortization and deferral .................. 107 96 82
----- ---- ----
Net periodic pension cost ................. $ 304 261 213
===== ==== ====
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.
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) 1998 1997 1996
- -------------- ---- ---- ----
Benefit obligation at beginning of year ..... $347 331 469
Effects of change in census information ..... 34 (25) (139)
Service cost ................................ 12 10 8
Interest cost ............................... 27 23 25
Actuarial (gain) loss ....................... 22 28 (32)
Benefits paid ............................... -- (20) --
---- --- ---
Benefit obligation at end of year ........... $442 347 331
==== === ===
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) 1998 1997
- -------------- ---- ----
Funded status .................................. $(442) (347)
Unrecognized net actuarial loss ................ (89) (98)
Unrecognized prior service cost ................ 327 306
Adjustment for minimum liability ............... (95) (84)
----- ----
Accrued pension cost ........................... $(299) (223)
===== ====
Net pension cost for the SERP Plan included the following components for
the years ended December 31, 1998, 1997 and 1996:
(In thousands) 1998 1997 1996
---- ---- ----
Service cost - benefits earned during the period ....... $12 10 8
Interest cost on projected benefit obligation .......... 27 23 25
Net amortization and deferral .......................... 27 26 25
--- --- ---
Net periodic pension cost ......................... $66 59 58
=== === ===
The following assumptions were used in determining the actuarial
information for the Retirement Plan and the SERP Plan for the years ended
December 31, 1998, 1997 and 1996:
1998 1997 1996
------------------ ---------------- -----------------
Retirement SERP Retirement SERP Retirement SERP
Plan Plan Plan Plan Plan Plan
---- ---- ---- ---- ---- ----
Discount rate used to determine net
periodic pension cost ................... 7.00% 7.00% 7.75% 7.75% 7.25% 8.00%
Discount rate used to calculate end of
year liability disclosures .............. 6.50% 6.50% 7.00% 7.00% 7.75% 7.75%
Expected long-term rate of return on assets 8.00% n/a 8.00% n/a 8.00% n/a
Rate of compensation increase .............. 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Included in intangible assets at December 31, 1998 and 1997 are approximately
$84,000 and $72,000, respectively, which were recognized in connection with the
accrual of the additional minimum liability for the SERP Plan.
SPLIT DOLLAR LIFE INSURANCE PLAN. Effective January 1, 1993, the Company
adopted a Split Dollar Life Insurance Plan (the "Split Dollar Plan") whereby
individual whole life insurance is made available to certain senior management
executives designated and approved by the Board of Directors. Coverages for each
executive are approximately $100,000. The Company pays the premiums under this
plan and maintains a collateral interest in each participant's policy equal to
the sum of premiums paid. If a policy is terminated or becomes payable because
of the death of a participant, the premiums paid by the Company are recovered
before any payment is made to the participant or the participant's beneficiary.
In addition, the Company will recover its investment in the policy before
transfer of the policy to the participant. Upon the death of a participant, the
participant's designated beneficiary will receive a death benefit equal to the
amount of coverage under his or her policy that is in excess of the amount of
cumulative premiums paid by the Company. The amounts of insurance premiums paid
by the Company in 1998, 1997 and 1996 under the Split-Dollar Plan on behalf of
all executive officers as a group were $22,000, $14,000 and $19,000,
respectively.
Note 11. Commitments And Contingencies
See Note 9 with respect to future obligations under noncancelable operating
leases.
In the normal course of business there are various outstanding commitments
and contingent liabilities such as commitments to extend credit, which are not
reflected in the financial statements. As of December 31, 1998, the Company had
outstanding loan commitments of $84,383,000 of which $70,851,000 were at
variable rates and $13,532,000 were at fixed rates. Included in outstanding loan
commitments were unfunded commitments of $33,996,000 on revolving credit plans,
of which $29,726,000 were at variable rates and $4,270,000 were at fixed rates.
Additionally, standby letters of credit of approximately $924,000 and $1,108,000
were outstanding at December 31, 1998 and 1997, 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.
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, 1998 and 1997 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, 1998 December 31, 1997
--------------------------------- --------------------------------
Carrying Estimated Fair Carrying Estimated Fair
(In thousands) Amount Value Amount Value
---------- ------ ------ ------
Cash and due from banks,
noninterest-bearing $ 22,073 22,073 17,664 17,664
Due from banks, interest-bearing 8,398 8,398 13,081 13,081
Federal funds sold 8,295 8,295 2,896 2,896
Securities available for sale 58,800 58,800 50,277 50,277
Securities held to maturity 18,480 19,223 20,856 21,512
Presold mortgages in process
of settlement 2,619 2,619 1,330 1,330
Loans, net of allowance 352,830 353,706 275,734 276,152
Accrued interest receivable 2,789 2,789 2,866 2,866
Deposits 440,266 440,985 361,224 361,610
Short-term borrowings 6,000 6,000 - -
Accrued interest payable 3,080 3,080 2,299 2,299
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 270,000 shares of First Bancorp's authorized
but unissued common stock may be granted to employees ("Employee Options") and
directors ("Nonemployee Director Options") of the Company and its subsidiaries.
The purposes of the Option Plan are (i) to align the interests of participating
employees and directors with the Company's shareholders by reinforcing the
relationship between shareholder gains and participant rewards, (ii) to
encourage equity ownership in the Company by participants and (iii) to provide
an incentive to employee participants to continue their employment with the
Company. Since the inception of the Option Plan, each nonemployee director has
been granted 1,000 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 primarily to new officers and
officers that have assumed increased responsibilities. 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 over a five-year period, with
the first 20% becoming vested on June 1, 1995. Director Options are granted over
a five year period, and are 100% vested on the date of grant. All options are to
expire not more than 10 years from the date of grant. Forfeited options become
available for future grants.
At December 31, 1998, there were 73,900 additional shares available for
grant under the Option Plan. The per share weighted-average fair value of
options granted during 1998, 1997, and 1996 was $10.99, $8.30, and $4.44,
respectively on the date(s) of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
1998 1997 1996
---- ---- ----
Expected dividend yield 1.90% 2.05% 2.93%
Risk-free interest rate 5.50% 6.20% 6.36%
Expected life 8 years 8 years 8 years
Expected volatility 25.00% 21.50% 19.00%
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
(In thousands except per share data) 1998 1997 1996
------- ----- -----
Net income: As reported $ 5,683 5,012 4,347
Pro forma 5,542 4,892 4,299
Earnings per share: Basic - As reported 1.88 1.66 1.44
Basic - Pro forma 1.83 1.62 1.43
Diluted - As reported 1.83 1.62 1.43
Diluted - Pro forma 1.78 1.58 1.41
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 Option Plan
since December 31, 1995:
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, 1995 .. 106,700 $ 10.59 38,140 $ 10.53
Granted .................... 56,000 17.06
Exercised .................. (2,200) 10.45
Forfeited .................. (4,300) 10.63
Expired .................... -- --
Balance at December 31, 1996 .. 156,200 12.91 62,480 11.30
Granted .................... 30,000 26.01
Exercised .................. (4,000) 12.38
Forfeited .................. (7,500) 15.76
Expired .................... -- --
Balance at December 31, 1997 .. 174,700 15.05 94,420 13.09
Granted .................... 15,000 32.33
Exercised .................. (1,100) 11.90
Forfeited .................. (5,600) 25.92
Expired .................... -- --
Balance at December 31, 1998 . 183,000 $ 16.15 131,960 $ 14.84
======= ========= ======= =========
The following table summarizes information about the stock options outstanding
at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------- ---------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Contractual Life Price at 12/31/98 Price
--------------- ----------- ---------------- ----- ----------- -----
$10 to $15 104,700 6.1 $ 11.03 92,960 $ 11.08
$16 to $20 38,300 7.9 17.63 15,200 17.63
$21 to $25 11,000 8.4 23.00 11,000 23.00
$26 to $28 14,000 8.8 27.75 2,800 27.75
$29 to $33 15,000 9.5 32.33 10,000 33.00
------- --- --------- ------ ---------
183,000 7.1 $ 16.15 131,960 $ 14.84
======= === ========= ======= =========
Note 14. Regulatory Restrictions
The Company is regulated by the Board of Governors of the Federal Reserve
System ("FRB") 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 State
Banking Commission.
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, 1998, the Bank had undivided profits of approximately $24,495,000
which were available for the payment of dividends. As of December 31, 1998,
approximately $14,348,000 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 FRB and FDIC. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on both
the Company's and the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. These capital standards require the Company to
maintain minimum ratios of Tier 1 capital to total risk-weighted assets and
total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1
capital is comprised of total shareholders' equity calculated in accordance with
generally accepted accounting principles less intangible assets, and total
capital is comprised of Tier 1 capital plus certain adjustments, the largest of
which for the Company is the allowance for loan losses. Risk-weighted assets
refer to the on- and off-balance sheet exposures of the Company adjusted for
their related risk levels using formulas set forth in FRB and FDIC regulations.
In addition to the risk-based capital requirements described above, the
Company is subject to a leverage capital requirement, which calls for a minimum
ratio of Tier 1 capital (as defined above) to quarterly average total assets of
3.00% to 5.00%, depending upon the institution's composite ratings as determined
by its regulators. The FRB has not advised the Company of any requirement
specifically applicable to it.
In addition to the minimum capital requirements described above, the
regulatory framework for prompt corrective action also contains specific capital
guidelines for classification as "well capitalized," which are presented with
the minimum ratios and the Company's ratios as of December 31, 1998 in the
following table.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- -------------------- ----------------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------- ------ ----- ------ ----- ------ -----
(must equal or exceed) (must equal or exceed)
As of December 31, 1998
Total Capital
(to Risk Weighted Assets) $39,107 10.75% 29,112 8.00% 36,390 10.00%
Tier I Capital
(to Risk Weighted Assets) 34,614 9.63% 14,376 4.00% 21,564 6.00%
Tier I Capital
(to Average Assets) ..... 34,614 7.37% 18,793 4.00% 23,491 5.00%
As of December 31, 1997
Total Capital
(to Risk Weighted Assets) $33,558 11.95% 22,457 8.00% 28,072 10.00%
Tier I Capital
(to Risk Weighted Assets) 30,092 10.85% 11,090 4.00% 16,635 6.00%
Tier I Capital
(to Average Assets) ..... 30,092 7.93% 15,185 4.00% 18,981 5.00%
The average reserve balance maintained under the requirements of the
Federal Reserve was approximately $6,380,000 for the year ended December 31,
1998.
Note 15. Supplementary Income Statement Information
Included in other service charges, commissions, and fees for the years ended
December 31, 1998, 1997 and 1996 are fees that the Company earned from
originating presold mortgages in the amount of $537,000, $284,000, and $254,000,
respectively.
The "other nonrecurring net gains" line item included on the Consolidated
Statements of Income includes $168,000 in 1997 that was realized from an early
termination fee related to a data processing contract. The $211,000 recorded in
1996 relates to the net gain realized from a sale of a branch facility and its
related deposits.
Components of other operating expenses exceeding 1% of total income for any
of the years ended December 31, 1998, 1997 and 1996 are as follows:
(In thousands) 1998 1997 1996
- -------------- ---- ---- ----
Amortization of intangible assets $ 655 546 568
Stationery and supplies 786 756 605
Telephone 455 424 334
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) 1998 1997
------- ------
Assets
Cash on deposit with bank subsidiary .............................................. $ 54 29
Securities available for sale at fair value:
State and local governments (amortized costs of $672 in 1998 and $600 in 1997) 672 600
Other securities (amortized costs of $1 in 1998 and 1997) .................... 1 1
------- ------
Total securities available for sale ..................................... 673 601
------- ------
Investment in subsidiaries, at equity:
First Bank and subsidiary .................................................... 38,844 35,232
Montgomery Data Services, Inc. ............................................... 139 88
First Bancorp Financial Services, Inc. ....................................... 1,276 1,262
------- ------
Total investments in subsidiaries ........................................ 40,259 36,582
------- ------
Land .............................................................................. 7 7
Other assets ...................................................................... 25 30
------- ------
Total assets ............................................................. $41,018 37,249
======= ======
Liabilities and shareholders' equity
Other liabilities ................................................................. 524 484
Shareholders' equity .............................................................. 40,494 36,765
------- ------
Total liabilities and shareholders' equity ............................... $41,018 37,249
======= ======
CONDENSED STATEMENTS OF INCOME Year Ended December 31,
---------------------------------
(In thousands) 1998 1997 1996
------- ----- -----
Equity in earnings (losses) of subsidiaries
Dividends - First Bankand subsidiary ....................... $ 1,950 1,100 1,350
- Montgomery Data Services ....................... 100 475 --
- First Bancorp Financial Services Inc. .......... -- 300 --
Undistributed - First Bank and subsidiary ...................... 3,756 3,842 2,990
- Montgomery Data Services ....................... 52 (158) 167
- First Bancorp Financial Services Inc. .......... 20 (287) 5
All other income and expenses, net .................................. (195) (260) (165)
------- ----- -----
Net Income ................................................ $ 5,683 5,012 4,347
======= ===== =====
CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31,
-----------------------------------------------------
(In thousands) 1998 1997 1996
-------- ------- ------
Operating Activities:
Net income $ 5,683 5,012 4,347
Equity in undistributed earnings of subsidiaries (3,828) (3,397) (3,162)
Decrease (increase) in other assets 7 (30) 1
Increase (decrease) in other liabilities (20) 90 -
-------- ------- ------
Total - operating activities 1,842 1,675 1,186
-------- ------- ------
Investing Activities:
Purchases of securities available for sale (2,204) (2,048) (1,493)
Sales of securities available for sale 2,132 1,835 1,564
-------- ------- ------
Total - investing activities (72) (213) 71
-------- ------- ------
Financing Activities
Payment of cash dividends (1,752) (1,508) (1,267)
Proceeds from issuance of common stock 13 50 23
Purchases and retirement of common stock (6) - -
-------- ------- ------
Total - financing activities (1,745) (1,458) (1,244)
-------- ------- ------
Net increase in cash and cash equivalents 25 4 13
Cash and cash equivalents, beginning of year 29 25 12
-------- ------- ------
Cash and cash equivalents, end of year $ 54 29 25
======== ======= ======
Note 17. Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Because the Company has not historically and does
not currently employ the use of derivatives, this Statement is not expected to
impact the Company.
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, 1998 and 1997, 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, 1998. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Bancorp and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/KPMG LLP
-----------
KPMG LLP
Raleigh, North Carolina
January 22, 1999
Part II. Other Information
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During the two years ended December 31, 1998, and any subsequent interim
periods, there were no changes in accountants and/or disagreements on any
matters of accounting principles or practices or financial statement
disclosures.
PART III
Item 10. Directors and Executive Officers of the Registrant; Compliance with
Section 16(a) of the Exchange Act
Incorporated herein by reference is the information under the caption
"Directors, Nominees and Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" from the Company's definitive proxy statement to
be filed pursuant to Regulation 14A.
Item 11. Executive Compensation
Incorporated herein by reference is the information under the caption
"Compensation of Directors and Executive Officers" 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
"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, filed as exhibit 3(e) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1988, and is incorporated
herein by reference.
3.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.
4 Form of Common Stock Certificate was filed as Exhibit 4 to the
Registrant's Registration Statement Number 33-12692, and is
incorporated herein by reference.
10 Material Contracts
10.a Data processing Agreement dated October 1, 1984 by and between Bank
of Montgomery (First Bank) and Montgomery Data Services, Inc. was
filed as Exhibit 10(k) to the Registrant's Registration Statement
Number 33-12692, and is incorporated herein by reference.
10.b First Bank Salary and Incentive Plan, as amended, was filed as
Exhibit 10(m) to the Registrant's Registration Statement Number
33-12692, and is incorporated herein by reference. (*)
10.c First Bancorp Savings Plus and Profit Sharing Plan (401(k) savings
incentive plan and trust), as amended January 25, 1994 and July 19,
1994, was filed as Exhibit 10(c) to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1994, and is incorporated
herein by reference. (*)
10.d Directors and Officers Liability Insurance Policy of First Bancorp,
dated July 16, 1991, was filed as Exhibit 10(g) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991, and
is incorporated herein by reference.
10.e Indemnification Agreement between the Company and its Directors and
Officers was filed as Exhibit 10(t) to the Registrant's Registration
Statement Number 33-12692, and is incorporated herein by reference.
10.f First Bancorp Employees' Pension Plan, as amended on August 16, 1994,
was filed as Exhibit 10(g) to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1994, and is incorporated
herein by reference. (*)
10.g First Bancorp Senior Management Supplemental Executive Retirement
Plan dated May 31, 1993, was filed as Exhibit 10(k) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993,
and is incorporated herein by reference. (*)
10.h First Bancorp Senior Management Split-Dollar Life Insurance
Agreements between the Company and the Executive Officers, as amended
on December 22, 1994, was filed as Exhibit 10(i) to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1994,
and is incorporated herein by reference. (*)
10.i First Bancorp 1994 Stock Option Plan was filed as Exhibit 10(n) to
the Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1994, and is incorporated herein by reference. (*)
10.j Severance Agreement between the Company and Patrick A. Meisky dated
December 29, 1995 was filed as Exhibit 10(o) to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995, and is
incorporated by reference. (*)
10.k Amendment to the First Bancorp Savings Plus and Profit Sharing Plan
(401(k) savings incentive plan and trust), dated December 17, 1996,
was filed as Exhibit 10(m) to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996, and is incorporated
herein by reference. (*)
10.l Employment Agreement between the Company and James H. Garner dated
August 17, 1998 was filed as Exhibit 10(l) to the Company's Annual
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference. (*)
10.m Employment Agreement between the Company and Anna G. Hollers dated
August 17, 1998 was filed as Exhibit 10(m) to the Company's Annual
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference. (*)
10.n Employment Agreement between the Company and Teresa C. Nixon dated
August 17, 1998 was filed as Exhibit 10(n) to the Company's Annual
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference. (*)
10.o First Amendment to the First Bancorp Senior Management Executive
Retirement Plan dated April 21, 1998. (*)
10.p Employment Agreement between the Company and Eric P. Credle dated
August 17, 1998. (*)
21 List of Subsidiaries of Registrant was filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994, and is incorporated herein by reference.
23.a Consent of Independent Auditors of Registrant, KPMG LLP.
27 Financial Data Schedule pursuant to Article 9 of Regulation S-X.
(b) There were no reports filed on Form 8-K during the quarter ended December
31, 1998.
(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
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 16th day of March,
1999.
First Bancorp
By: /s/ James H. Garner
-------------------
James H. Garner
President, Chief Executive Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on behalf of the Company by the following persons and in
the capacities and on the dates indicated.
Executive Officers
------------------
/s/ James H. Garner
-------------------
James H. Garner
President, Chief Executive Officer and Treasurer
/s/ Anna G. Hollers /s/ Eric P. Credle
------------------- ------------------
Anna G. Hollers Eric P. Credle
Executive Vice President Senior Vice President
Executive Secretary Chief Financial Officer
March 16, 1999 March 16, 1999
Board of Directors
------------------
/s/ Jack D. Briggs /s/ Edward T. Taws
------------------ ------------------
Jack D. Briggs Edward T. Taws
Chairman of the Board Director
Director March 16, 1999
March 16, 1999
/s/ David L. Burns /s/ Frederick H. Taylor
------------------ -----------------------
David L. Burns Frederick H. Taylor
Director Director
March 16, 1999 March 16, 1999
/s/ Jesse S. Capel /s/ Goldie H. Wallace
------------------ ---------------------
Jesse S. Capel Goldie H. Wallace
Director Director
March 16, 1999 March 16, 1999
/s/ George R. Perkins /s/ A. Jordan Washburn
--------------------- ----------------------
George R. Perkins A. Jordan Washburn
Director Director
March 16, 1999 March 16, 1999
/s/ G.T. Rabe, Jr. /s/ John C. Willis
------------------ ------------------
G.T. Rabe, Jr. John C. Willis
Director Director
March 16, 1999 March 16, 1999
EXHIBIT CROSS REFERENCE INDEX
Exhibit
-------
3.a.i Copy of Articles of Incorporation of the Registrant
3.a.ii Copy of the amendment to Articles of Incorporation
3.b.i Copy of the Bylaws of the Registrant
10.a Data processing Agreement by and between Bank of Montgomery (First Bank) and
Montgomery Data Services, Inc.
10.b First Bank Salary and Incentive Plan, as amended
10.c First Bancorp Savings Plus and Profit Sharing Plan (401(k) savings incentive plan
and trust), as amended
10.d Directors and Officers Liability Insurance Policy of First Bancorp
10.e Indemnification Agreement between the Company and its Directors and Officers
10.f First Bancorp Employees' Pension Plan
10.g First Bancorp Senior Management Supplemental Executive Retirement Plan
10.h First Bancorp Senior Management Split-Dollar Life Insurance Agreements between
the Company and the Executive Officers
10.i First Bancorp 1994 Stock Option Plan
10.j Severance Agreement between the Company and Patrick A. Meisky
10.k Amendment to the First Bancorp Savings Plus and Profit Sharing Plan
10.l Employment Agreement between the Company and James H. Garner
10.m Employment Agreement between the Company and Anna G. Hollers
10.n Employment Agreement between the Company and Teresa C. Nixon
10.o First Amendment to the First Bancorp Supplemental Executive Retirement Plan
10.p Employment Agreement between the Company and Eric P. Credle
21 List of Subsidiaries of Registrant
23.a Consent of Independent Auditors of Registrant, KPMG LLP
27 Financial Data Schedule pursuant to Article 9 of Regulation S-X
* Incorporated herein by reference.