UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 1999
Commission File Number 0-15572
FIRST BANCORP
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
-------------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
341 North Main Street, Troy, North Carolina 27371-0508
------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (910) 576-6171
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] YES [ ] NO
As of March 31, 1999, 3,011,861 shares of the registrant's Common Stock,
$5 par value, were outstanding. The registrant had no other classes of
securities outstanding.
EXHIBIT INDEX BEGINS ON PAGE 27
<PAGE>
INDEX
FIRST BANCORP AND SUBSIDIARIES
Page
Part I. Financial Information
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEETS -
March 31, 1999 and 1998
(With Comparative Amounts at December 31, 1998) 3
CONSOLIDATED STATEMENTS OF INCOME -
For the Periods Ended March 31, 1999 and 1998 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME -
For the Periods Ended March 31, 1999 and 1998 5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -
For the Periods Ended March 31, 1999 and 1998 6
CONSOLIDATED STATEMENTS OF CASH FLOWS -
For the Periods Ended March 31, 1999 and 1998 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20
Part II. Other Information
Item 5 - Other Information 23
Item 6 - Exhibits and Reports on Form 8-K 23
Signatures 26
Exhibit Cross Reference Index 27
Page 2
<PAGE>
Part I. Financial Information
Item 1 - Financial Statements
<TABLE>
<CAPTION>
First Bancorp and Subsidiaries
Consolidated Balance Sheets
March 31, December 31, March 31,
($ in thousands-unaudited) 1999 1998 1998
- -------------------------- --------- ------- ------
<S> <C> <C> <C>
ASSETS
Cash & due from banks, noninterest-bearing ......... $ 15,525 22,073 15,592
Due from banks, interest-bearing ................... 24,207 8,398 10,004
Federal funds sold ................................. 3,018 8,295 5,811
--------- ------ ------
Total cash and cash equivalents ............... 42,750 38,766 31,407
--------- ------ ------
Securities available for sale (costs of $59,663,
$58,740, and $44,339) ......................... 59,482 58,800 44,507
Securities held to maturity (fair values of $18,552,
$19,223, and $20,619) ......................... 17,898 18,480 20,016
Presold mortgages in process of settlement ......... 1,879 2,619 1,909
Loans .............................................. 368,511 358,334 309,497
Less: Allowance for loan losses ................ (5,671) (5,504) (5,008)
--------- ------ ------
Net loans ....................................... 362,840 352,830 304,489
--------- ------ ------
Premises and equipment ............................. 9,120 9,091 8,752
Accrued interest receivable ........................ 3,232 2,789 2,812
Intangible assets .................................. 5,684 5,843 6,323
Other .............................................. 2,977 2,620 2,617
--------- ------ ------
Total assets ............................... $ 505,862 491,838 422,832
========= ======= =======
LIABILITIES
Deposits: Demand - noninterest-bearing ............. $ 58,242 62,479 53,288
Savings, NOW, and money market ........... 158,980 160,428 137,418
Time deposits of $100,000 or more ........ 63,570 60,720 47,064
Other time deposits ...................... 158,674 156,639 142,654
--------- ------ ------
Total deposits ...................... 439,466 440,266 380,424
Short-term borrowings .............................. 20,000 6,000 --
Accrued interest payable ........................... 3,095 3,080 2,412
Other liabilities .................................. 2,265 1,998 2,453
--------- ------ ------
Total liabilities ............................. 464,826 451,344 385,289
--------- ------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Bancorp and Subsidiaries
Consolidated Balance Sheets
March 31, December 31, March 31,
($ in thousands-unaudited) 1999 1998 1998
- -------------------------- --------- ------- ------
<S> <C> <C> <C>
SHAREHOLDERS' EQUITY
Common stock, $5 par value per share
Authorized: 12,500,000 shares
Issued and outstanding: 3,011,861,
3,021,270, and 3,020,370 shares ............ 15,059 15,106 15,102
Capital surplus .................................... 3,636 3,864 3,861
Retained earnings .................................. 22,450 21,487 18,469
Accumulated other comprehensive income ............. (109) 37 111
--------- ------ ------
Total shareholders' equity .................... 41,036 40,494 37,543
--------- ------ ------
Total liabilities and shareholders' equity $ 505,862 491,838 422,832
========= ======= =======
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE>
<TABLE>
<CAPTION>
First Bancorp and Subsidiaries
Consolidated Statements of Income
Three Months Ended
March 31,
--------------------------
($ in thousands, except per share data-unaudited) 1999 1998
- ------------------------------------------------- ---------- --------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans ..................... $ 7,919 6,919
Interest on investment securities:
Taxable interest income ................... 798 807
Tax-exempt interest income ................ 237 279
Other, principally overnight investments ....... 204 220
---------- --------
Total interest income ..................... 9,158 8,225
---------- --------
INTEREST EXPENSE
Savings, NOW and money market .................. 793 800
Time deposits of $100,000 or more .............. 885 603
Other time deposits ............................ 1,999 1,832
Short-term borrowings .......................... 35 --
---------- --------
Total interest expense .................... 3,712 3,235
---------- --------
Net interest income ............................ 5,446 4,990
Provision for loan losses ...................... 200 280
---------- --------
Net interest income after provision
for loan losses ............................. 5,246 4,710
---------- --------
NONINTEREST INCOME
Service charges on deposit accounts ............ 664 610
Fees from presold mortgages .................... 171 100
Commissions from insurance sales ............... 87 59
Other service charges, commissions and fees .... 371 274
Data processing fees ........................... 10 --
Securities gains ............................... 5 --
Loan sale gains ................................ -- 147
---------- --------
Total noninterest income .................. 1,308 1,190
---------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Bancorp and Subsidiaries
Consolidated Statements of Income
Three Months Ended
March 31,
--------------------------
($ in thousands, except per share data-unaudited) 1999 1998
- ------------------------------------------------- ---------- --------
<S> <C> <C>
NONINTEREST EXPENSES
Salaries ....................................... 1,866 1,725
Employee benefits .............................. 479 373
---------- --------
Total personnel expense ..................... 2,345 2,098
Net occupancy expense .......................... 297 246
Equipment related expenses ..................... 255 219
Other operating expenses ....................... 1,378 1,355
---------- --------
Total noninterest expenses ................ 4,275 3,918
---------- --------
Income before income taxes ..................... 2,279 1,982
Income taxes ................................... 803 676
---------- --------
NET INCOME ..................................... $ 1,476 1,306
========== ========
Earnings per share:
Basic ..................................... $ 0.49 0.43
Diluted ................................... 0.48 0.42
Weighted average common shares outstanding:
Basic ..................................... 3,015,384 3,020,370
Diluted ................................... 3,086,629 3,108,468
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE>
<TABLE>
<CAPTION>
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Three Months Ended
March 31,
----------------------
($ in thousands-unaudited) 1999 1998
- -------------------------- -------- -------
<S> <C> <C>
Net income ....................................... $ 1,476 $ 1,306
------- -------
Other comprehensive loss:
Unrealized losses on securities
available for sale:
Unrealized holding losses arising
during the period, pretax ............... (236) (115)
Tax benefit .......................... 93 40
Reclassification to realized gains .......... (5) --
Tax expense ....................... 2 --
------- -------
Other comprehensive loss ......................... (146) (75)
------- -------
Comprehensive income ............................. $ 1,330 1,231
======= =====
</TABLE>
See notes to consolidated financial statements.
Page 5
<PAGE>
<TABLE>
<CAPTION>
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Accumulated
Common Stock Other Share-
-------------------- Capital Retained Comprehensive holders'
(In thousands, except per share - unaudited) Shares Amount Surplus Earnings Income Equity
- ------------------------------------------- ------------ ------------- ------------ ----------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1998 3,020 $ 15,102 3,861 17,616 186 36,765
Net income 1,306 1,306
Cash dividends declared ($0.15 per share) (453) (453)
Other comprehensive loss (75) (75)
----- ---------- ----- ------ ---- ------
Balances, March 31, 1998 3,020 $ 15,102 3,861 18,469 111 37,543
===== ========== ===== ====== ==== ======
Balances, January 1, 1999 3,021 $ 15,106 3,864 21,487 37 40,494
Net income 1,476 1,476
Cash dividends declared ($0.17 per share) (513) (513)
Common stock issued under
stock option plan 1 5 5 10
Common stock issued into
dividend reinvestment plan 1 3 10 13
Purchases and retirement of common
stock (11) (55) (243) (298)
Other comprehensive loss (146) (146)
----- ---------- ----- ------ ---- ------
Balances, March 31, 1999 3,012 $ 15,059 3,636 22,450 (109) 41,036
===== ========== ===== ====== ==== ======
</TABLE>
See notes to consolidated financial statements.
Page 6
<PAGE>
<TABLE>
<CAPTION>
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
-----------------------
($ in thousands-unaudited) 1999 1998
- -------------------------- --------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................ $ 1,476 1,306
Reconciliation of net income to net cash provided by operating
activities:
Provision for loan losses ............................................ 200 280
Net security premium amortization .................................... 130 14
Gains on sales of loans .............................................. -- (147)
Proceeds from sales of loans ......................................... -- 2,947
Gains on sales of securities available for sale ...................... (5) --
Loan fees and costs deferred, net of amortization .................... (14) 9
Depreciation of premises and equipment ............................... 212 180
Amortization of intangible assets .................................... 159 164
Provision for deferred income taxes .................................. (46) 20
Decrease (increase) in accrued interest receivable ................... (443) 54
Decrease (increase) in other assets .................................. 552 (537)
Increase in accrued interest payable ................................. 15 113
Increase in other liabilities ........................................ 208 12
-------- --------
Net cash provided by operating activities ....................... 2,444 4,415
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale ........................... (9,591) (5,314)
Purchases of securities held to maturity ............................. (651) (3)
Proceeds from sales of securities available for sale ................. 2,017 --
Proceeds from maturities/issuer calls of securities available for sale 6,531 10,960
Proceeds from maturities/issuer calls of securities held to maturity . 1,230 838
Net increase in loans ................................................ (10,227) (31,844)
Purchases of premises and equipment .................................. (241) (93)
-------- --------
Net cash used in investing activities ........................... (10,932) (25,456)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits .................................. (800) 19,200
Proceeds from short-term borrowings, net ............................. 14,000 --
Cash dividends paid .................................................. (453) (393)
Proceeds from issuance of common stock ............................... 23 --
Purchases and retirement of common stock ............................. (298) --
-------- --------
Net cash provided by financing activities ....................... 12,472 18,807
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................... 3,984 (2,234)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................ 38,766 33,641
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 42,750 31,407
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
-----------------------
($ in thousands-unaudited) 1999 1998
- -------------------------- --------- ------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................................. $ 3,697 3,122
Income taxes ......................................................... 92 204
Non-cash transactions:
Foreclosed loans transferred to other real estate .................... 31 --
Unrealized loss on securities available for sale ..................... (241) (115)
</TABLE>
See notes to consolidated financial statements.
Page 7
<PAGE>
First Bancorp And Subsidiaries
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
(unaudited) For the Periods Ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1
In the opinion of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the consolidated financial position of the
Company as of March 31, 1999 and 1998 and the consolidated results of operations
and consolidated cash flows for the periods ended March 31, 1999 and 1998.
Reference is made to the 1998 Annual Report on Form 10-K filed with the SEC for
a discussion of accounting policies and other relevant information with respect
to the financial statements.
NOTE 2
The results of operations for the periods ended March 31, 1999 and 1998 are not
necessarily indicative of the results to be expected for the full year. Certain
amounts reported in the period ended March 31, 1998 have been reclassified to
conform with the presentation for March 31, 1999. These reclassifications had no
effect on net income or shareholders' equity for the periods presented, nor did
they materially impact trends in financial information.
NOTE 3
Basic earnings per share were computed by dividing net income by the weighted
average common shares outstanding. Diluted earnings per share includes the
potentially dilutive effects of the Company's 1994 Stock Option Plan. The
following is a reconciliation of the numerators and denominators used in
computing basic and diluted earnings per share:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------------------------------------------------
1999 1998
----------------------------------- -------------------------------------
($ in thousands except per Income Shares Income Shares
share amounts) (Numer- (Denom- Per Share (Numer- (Denom- Per Share
ator) inator) Amount ator) inator) Amount
- -------------------------- -------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $ 1,476 3,015,384 $ 0.49 $ 1,306 3,020,370 $ 0.43
======== ========
Effect of Dilutive Securities
Effect of stock option plan - 71,245 - 88,098
-------- --------- --------- ---------
Diluted EPS
Net income plus assumed
exercises of options $ 1,476 3,086,629 $ 0.48 $ 1,306 3,108,468 $ 0.42
======== ========= ======== ========= ========= ========
</TABLE>
Page 8
<PAGE>
NOTE 4
Based on management's evaluation of the loan portfolio, current economic
conditions and other risk factors, the Company's allowance for loan losses was
$5,671,000 as of March 31, 1999 compared to $5,504,000 and $5,008,000 as of
December 31, 1998 and March 31, 1998, respectively. Nonperforming assets are
defined as nonaccrual loans, loans past due 90 or more days and still accruing
interest, restructured loans and foreclosed, repossessed and idled properties.
For each of the periods presented, the Company had no loans past due 90 or more
days and still accruing interest. Nonperforming assets are summarized as
follows:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
($ in thousands) 1999 1998 1998
- ---------------- --------- ------- -------
<S> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans ................... $ 596 601 633
Restructured loans ................. 258 248 256
--------- ------ ------
Total nonperforming loans .............. 854 849 889
Foreclosed, repossessed, and idled
properties (included in other assets) 525 505 377
--------- ------ ------
Total nonperforming assets ............. $ 1,379 1,354 1,266
========= ====== ======
Nonperforming loans to total loans ..... 0.23% 0.24% 0.29%
Allowance for loan losses to
nonperforming loans ................ 664.05% 648.29% 563.33%
Nonperforming assets as a percentage of
loans and foreclosed, repossessed, . 0.37% 0.38% 0.41%
and idled properties
Nonperforming assets to total assets ... 0.27% 0.28% 0.30%
Allowance for loan losses to total loans 1.54% 1.54% 1.62%
</TABLE>
NOTE 5
Loans are shown on the Consolidated Balance Sheets net of net deferred loan fees
of approximately $114,000, $128,000, and $135,000 at March 31, 1999, December
31, 1998, and March 31, 1998, respectively.
NOTE 6
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement requires management to
report selected financial data and descriptive information about reportable
operating segments. 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. Also, the Company has no foreign operations
or customers.
Page 9
<PAGE>
Item 2 - Management's Discussion and Analysis of Consolidated Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
OVERVIEW
Net income for the first quarter of 1999 totaled $1,476,000, an increase of
13.0% over the $1,306,000 reported for the first quarter of 1998. Basic earnings
per share for the three months ended March 31, 1999 were $0.49 compared to $0.43
reported for the first quarter of 1998, an increase of 14.0%. Earnings per share
on a diluted basis amounted to $0.48 per share for the first quarter of 1999
compared to $0.42 reported for the first quarter of 1998, a 14.3% increase. The
increase in first quarter net income from the prior year is primarily a result
of the 9.1% increase in net interest income. The increase in net interest income
is attributable to the loan and deposit growth experienced in the past year.
Average loans for the first quarter of 1999 were 24.1% higher than the average
amount of loans outstanding in the first quarter of 1998, and average deposits
for the first quarter of 1999 were 20.4% higher than in the first quarter of
1998. The provision for loan losses for the first quarter of 1999 was $200,000,
which is $80,000 less than it was for the first quarter of 1998. The decrease in
the provision for loan losses is primarily due to the lower loan growth
experienced in the first quarter of 1999 ($10 million) compared to the first
quarter of 1998 ($29 million), as well as continued excellent credit quality.
Noninterest income increased 9.9% and noninterest expenses increased 9.1% when
comparing the first quarter of 1999 to 1998. The increase in noninterest income
was primarily a result of the larger deposit and customer base compared to the
prior year, as increases were experienced in most categories of fees and
charges. The increase in noninterest expenses is primarily attributable to
expenses associated with the growth in the customer base and branch network over
the prior year.
COMPONENTS OF EARNINGS
Net interest income is the largest component of earnings, representing the
difference between interest and fees generated from earning assets and the
interest costs of deposits and other funds needed to support those assets. Net
interest income increased by $456,000, or 9.1%, when comparing the first quarter
of 1999 with the first quarter of 1998, primarily because of growth in loan and
deposit volumes experienced in the past year. At March 31, 1999, loans had
increased 19.1% to $368,511,000 from $309,497,000 at March 31, 1998, while
deposits had increased by 15.5%, from $380,424,000 at March 31, 1998 to
$439,466,000 at March 31, 1999.
Partially offsetting the positive effects on net interest income associated
with the loan and deposit growth was a decrease in the Company's net interest
margin. The Company's net interest margin was 4.97% for the first quarter of
1999 compared to 5.55% for the first quarter of 1998. The yield earned on loans,
the largest component of interest income, decreased 74 basis points, from 9.55%
in the first quarter of 1998 to 8.81% in the first quarter of 1999. This
decrease in yield is largely attributable to a 75 basis point lower average
prime rate in effect during the first quarter of 1999 compared to the first
quarter of 1998, as well as a highly competitive market and a continuing slight
shift in the Company's loan mix from higher yielding consumer installment loans,
to generally lower yielding, but less risky, real estate loans. This shift from
non-real estate to real estate loans has been partly due to a strategic shift
towards higher dollar loans, which tend to be secured by real estate in most
<PAGE>
cases, in order to more quickly leverage the Bank's balance sheet and extensive
branch network. Another significant factor contributing to the narrowing of the
interest rate spread was a lower yield earned on securities. The yield the
Company earned on its taxable securities decreased 134 basis points in the first
quarter of 1999 to 5.58%, compared to 6.92% in the first quarter of 1998, while
the tax equivalent yield on tax-exempt securities decreased 31 basis points when
comparing the same two quarters. These declines were primarily due to generally
declining rates in the bond market that have occurred over the past few years,
which have resulted in lower reinvestment yields of matured and called bonds, as
well as lower yields earned from the investment of cash generated from
operations. These factors contributed to the Company's yield on interest earning
assets decreasing by 77 basis points to 8.26% in the first quarter of 1999,
compared to 9.03% for the first quarter of 1998. Partially offsetting the
effects of the lower rates earned on assets was a decrease in the Company's cost
Page 10
<PAGE>
of funds. The rates the Company paid on its various categories of interest
bearing liabilities each decreased by approximately 20 to 40 basis points. This
decline in rates paid on deposits is due to the lower interest rate environment
in the first quarter of 1999 compared to the first quarter of 1998. However, the
Company has not been able to lower its cost of funds by as much as the decrease
in yields earned on assets because the Company has had to more competitively
price deposits in order to fund the strong loan growth experienced.
The following table presents average rates earned/paid by the Company for
the first quarter of 1999 compared to the first quarter of 1998:
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Yield on loans 8.81% 9.55%
Yield on taxable securities 5.58% 6.92%
Yield on tax-exempt securities (tax equivalent) 8.62% 8.93%
Yield on other interest earning assets,
primarily overnight funds 5.07% 5.74%
Yield on all interest earning assets 8.26% 9.03%
Weighted average rate on savings, NOW,
and money market deposits 2.00% 2.38%
Rate on time deposits greater than $100,000 5.64% 5.84%
Rate on other time deposits 5.15% 5.36%
Rate on short-term borrowings 4.63% n/a
Rate on all interest bearing liabilities 3.91% 4.14%
Interest rate spread 4.35% 4.89%
Net interest margin 4.97% 5.55%
Average prime rate 7.75% 8.50%
</TABLE>
See additional discussion regarding interest rate risk below in Item 3 -
Quantitative and Qualitative Disclosures About Market Risk.
The provision for loan losses decreased $80,000 in the first quarter of
1999 to $200,000 from $280,000 for the first quarter of 1998. The decrease in
the provision for loan losses is primarily due to the lower loan growth
experienced in the first quarter of 1999 ($10 million) compared to the first
quarter of 1998 ($29 million), as well as continued excellent credit quality.
Provisions for loan losses are based on management's evaluation of the loan
portfolio, as discussed under "Summary of Loan Loss Experience" below.
<PAGE>
Total noninterest income increased $118,000, or 9.9%, to $1,308,000 in the
first quarter of 1999 from the $1,190,000 recorded in the first quarter of 1998.
Core noninterest income, which includes service charges on deposit accounts,
fees from presold mortgages, commissions from insurance sales, and other service
charges, commissions, and fees, increased $250,000, or 24.0%, from quarter to
quarter, increasing from $1,043,000 in 1998 to $1,293,000 in 1999. This increase
in core noninterest income occurred in most categories and was due primarily to
growth in the Company's customer base. The lower interest rate environment in
1999 also contributed to heavy residential mortgage loan volume, which resulted
in higher fees from presold mortgages. Noninterest income not considered to be
"core" amounted to $15,000 in the first quarter of 1999 compared to $147,000 in
the first quarter of 1998. The 1999 amount was comprised of $5,000 in securities
sale gains and $10,000 earned from the Company's data processing customer. The
Company's data processing subsidiary, Montgomery Data Services, Inc. (Montgomery
Data) makes its excess data processing capabilities available to area financial
institutions for a fee. Montgomery Data did not have any nonaffiliated customers
Page 11
<PAGE>
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. The 1998 first quarter noninterest income of $147,000 not considered
to be "core" related to gains the Company realized from the sale of
approximately $3 million in newly originated commercial loans that were sold in
order to assist the Company in keeping a proper balance between the amount of
loans and deposits that the Company maintains. Similar sales that may also
result in gains (or losses) may be made in the future depending on the
circumstances. No such sales have occurred in 1999.
Noninterest expenses increased by $357,000, or 9.1%, from $3,918,000 in the
first quarter of 1998 to $4,275,000 in the first quarter of 1999. This increase
is primarily associated with the higher expenses that are necessary to properly
process, manage, and service the increases in loans and deposits experienced by
the Company. Also contributing to the increase in noninterest expenses was the
net addition of two branches and the annual wage increases that are granted to
substantially all employees in January of each year. The $15,000 increase in
other operating expenses shown in the table below was also due to generally
higher operating expenses associated with the Company's growth that were largely
offset by $150,000 in fewer non-credit losses experienced by the Company when
comparing the first quarter of 1999 to the first quarter of 1998. Non-credit
losses include miscellaneous operating losses experienced by the Company such as
robbery losses. The following table presents the significant components of the
Company's noninterest expenses in the first quarter of 1999 compared to the
first quarter of 1998.
<TABLE>
<CAPTION>
Noninterest Expenses Three Months Ended March 31,
-------------------- ----------------------------
(In thousands) 1999 1998
------ -----
<S> <C> <C>
Salaries ............................... $1,866 1,725
Employee benefits ...................... 479 373
------ -----
Total personnel expense ........... 2,345 2,098
Net occupancy expense .................. 297 246
Equipment related expenses ............. 255 219
Amortization of intangible assets ...... 159 164
Stationery and supplies ................ 203 186
Telephone .............................. 108 112
Other operating expenses ............... 908 893
------ -----
Total ....................... $4,275 3,918
====== =====
</TABLE>
Income taxes increased $127,000, or 18.8%, to $803,000 in the first quarter
of 1999 compared to the $676,000 recorded in the first quarter of 1998. This
reflects an effective tax rate of 35.2% for the first quarter of 1999 compared
to 34.1% for the first quarter of 1998. The increase in the effective tax rate
is due to the Company deriving a smaller percentage of its earnings from
tax-exempt securities.
<PAGE>
FINANCIAL CONDITION
The Company's total assets were $505.9 million at March 31, 1999, an
increase of $83.1 million, or 19.6%, from the $422.8 million at March 31, 1998.
Interest-earning assets increased by 21.3%, from $391.7 million at March 31,
1998 to $475.0 million at March 31, 1999. Loans, the primary interest-earning
asset, grew from $309.5 million at March 31, 1998 to $368.5 million at March 31,
1999, an increase of $59.0 million, or 19.1%. Deposits also increased $59.0
million, or 15.5% to support the asset growth. The increases in deposits
occurred in all significant categories, with noninterest bearing demand deposits
increasing by $5.0 million, or 9.3%; savings, NOW and money market accounts
increasing by $21.6 million, or 15.7%; time deposits of $100,000 or more
increasing by $16.5 million, or 35.1%; and other time deposits increasing by
Page 12
<PAGE>
$16.0 million, or 11.2%. The 35.1% increase in time deposits of $100,000 or more
was due to the Company more aggressively pricing these deposits to provide
funding for the strong loan growth experienced. The Company has not
traditionally engaged in obtaining deposits through brokers and had no such
deposits in 1999 or 1998. Since December 31, 1998, the Company's loan and
deposit growth has slowed, with loans increasing at an annualized rate of 11%
and deposits being virtually flat through March 31, 1999.
NONPERFORMING ASSETS
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or
more days and still accruing interest, restructured loans and foreclosed,
repossessed and idled properties. For each of the periods presented, the Company
had no loans past due 90 or more days and still accruing interest. Nonperforming
assets are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
($ in thousands) 1999 1998 1998
- ---------------- --------- ------ -------
<S> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans ..................... $ 596 601 633
Restructured loans ................... 258 248 256
--------- ----- -----
Total nonperforming loans ............... 854 849 889
Foreclosed, repossessed, and idled
properties (included in other assets) 525 505 377
--------- ----- -----
Total nonperforming assets .............. $ 1,379 1,354 1,266
========= ===== =====
Nonperforming loans to total loans ...... 0.23% 0.24% 0.29%
Allowance for loan losses to
nonperforming loans ................. 664.05% 648.29% 563.33%
Nonperforming assets as a percentage of
loans and foreclosed, repossessed, ... 0.37% 0.38% 0.41%
and idled properties
Nonperforming assets to total assets .... 0.27% 0.28% 0.30%
Allowance for loan losses to total loans 1.54% 1.54% 1.62%
</TABLE>
Management has reviewed the collateral for the nonperforming assets,
including nonaccrual loans, and has included this review among the factors
considered in the evaluation of the allowance for loan losses discussed below.
A loan is placed on nonaccrual status when, in management's judgment, the
collection of interest appears doubtful. The accrual of interest is discontinued
on all loans that become 90 days past due with respect to principal or interest.
While a loan is on nonaccrual status, the Company's policy is that all cash
receipts are applied to principal. Once the recorded principal balance has been
reduced to zero, future cash receipts are applied to recoveries of any amounts
previously charged off. Further cash receipts are recorded as interest income to
the extent that any interest has been foregone. Loans are removed from
nonaccrual status when they become current as to both principal and interest and
when concern no longer exists as to the collectability of principal or interest.
In some cases, where borrowers are experiencing financial difficulties, loans
may be restructured to provide terms significantly different from the originally
contracted terms.
<PAGE>
Nonperforming loans are defined as nonaccrual loans and restructured loans.
As of March 31, 1999, December 31, 1998 and March 31, 1998, nonperforming loans
were approximately 0.23%, 0.24%, and 0.29%, respectively, of the total loans
outstanding at such dates. The total amount of nonaccrual loans has remained
relatively unchanged at each of the period ends presented. Total nonaccrual
loans amounted to $596,000 at March 31, 1999 compared to $601,000 at December
31, 1998 and $633,000 at March 31, 1998. The level of restructured loans and
foreclosed, repossessed and idled properties has also not varied by material
amounts for the periods presented.
Page 13
<PAGE>
As of March 31, 1999, the borrower with the largest nonaccrual loan owed a
balance of $220,000, while the average nonaccrual loan balance was approximately
$26,000. If the nonaccrual loans and restructured loans as of March 31, 1999 and
1998 had been current in accordance with their original terms and had been
outstanding throughout the three month periods (or since origination or
acquisition if held for part of the three month periods), gross interest income
in the amounts of approximately $14,000 and $15,000 for nonaccrual loans and
$6,000 and $7,000 for restructured loans would have been recorded for the three
months ended March 31, 1999 and 1998, respectively. Interest income on such
loans that was actually collected and included in net income in the three months
ended March 31, 1999 and 1998 amounted to approximately zero and $1,000,
respectively, for nonaccrual loans (prior to their being placed on nonaccrual
status) and $5,000 and $10,000, respectively, for restructured loans.
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.
At March 31, 1999, December 31, 1998, and March 31, 1998 the recorded
investment in loans that are considered to be impaired was $87,000, zero, and
$96,000, respectively, all of which were on a nonaccrual basis. The related
allowance for loan losses for these impaired loans was $12,000, zero, and
$14,000, respectively. There were no impaired loans for which there was no
related allowance. The average recorded investments in impaired loans during the
three month period ended March 31, 1999, the year ended December 31, 1998, and
the three months ended March 31, 1998 were approximately $44,000, $110,000, and
$247,000, respectively. For the same periods, the Company recognized no interest
income on those impaired loans during the period that they were considered to be
impaired.
In addition to the nonperforming loan amounts discussed above, management
believes that an estimated $1,200,000-$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. These loans were considered in determining the
appropriate level of the allowance for loan losses. See "Summary of Loan Loss
Experience" below. Loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed in the problem loan
amounts above do not represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources, or represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms.
<PAGE>
As of March 31, 1999, December 31, 1998 and March 31, 1998, the Company
owned foreclosed, repossessed, and idled assets totaling approximately $525,000,
$505,000, and $377,000, respectively, which consisted principally of several
parcels of foreclosed real estate. The Company's management has reviewed recent
appraisals of these properties and believes that their fair values, less
estimated costs to sell, exceed their respective carrying values at the dates
presented.
Page 14
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
The allowance for loan losses is created by direct charges to operations.
Losses on loans are charged against the allowance in the period in which such
loans, in management's opinion, become uncollectible. The recoveries realized
during the period are credited to this allowance.
The factors that influence management's judgment in determining the amount
charged to operating expense include past loan loss experience, composition of
the loan portfolio, evaluation of possible future losses and current economic
conditions.
The Bank uses a loan analysis and grading program to facilitate its
evaluation of 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
Company's real estate loans are primarily various personal and commercial loans
where real estate provides additional security for the loan. Collateral for
virtually all of these loans is located within the Company's principal market
area.
Based on management's evaluation of the loan portfolio and economic
conditions, a provision for loan losses of $200,000 was added to the allowance
for loan losses during the first quarter of 1999. This provision for loan losses
was $80,000 less than the $280,000 provision made during the corresponding
period of 1998. The decrease was due primarily to the lower loan growth
experienced by the Company and continued excellent credit quality. The net
increase in loans outstanding was $10 million in the first quarter of 1999 as
compared to a $29 million increase experienced in the first quarter of 1998. At
March 31, 1999, the allowance amounted to $5,671,000, compared to $5,504,000 at
December 31, 1998 and $5,008,000 at March 31, 1998. At March 31, 1999, the
allowance for loan losses was approximately 664% of total nonperforming loans,
compared to corresponding percentages of 648% at December 31, 1998 and 563% at
March 31, 1998.
The allowance for loan losses was 1.54%, 1.54% and 1.62% of total loans as
of March 31, 1999, December 31, 1998 and March 31, 1998, respectively.
Management believes the Company's reserve levels are adequate to cover probable
loan losses on the loans outstanding as of each reporting date. It must be
emphasized, however, that the determination of the reserve using the Company's
procedures and methods rests upon various judgments and assumptions about
economic conditions and other factors affecting loans. No assurance can be given
that the Company will not in any particular period sustain loan losses that are
sizable in relation to the amounts reserved or that subsequent evaluations of
the loan portfolio, in light of conditions and factors then prevailing, will not
require significant changes in the allowance for loan losses or future charges
to earnings.
<PAGE>
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowances for loan
losses and losses on other real estate. Such agencies may require the Company to
recognize adjustments to the allowances based on their judgments about
information available at the time of their examinations.
For the periods indicated, the following table summarizes the Company's
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<PAGE>
balances of loans outstanding, average loans outstanding, changes in the
allowance for loan losses arising from charge-offs and recoveries by category,
and additions to the allowance for loan losses that have been charged to
expense.
<TABLE>
<CAPTION>
Three Months Year Three Months
Ended Ended Ended
March 31, December 31, March 31,
($ in thousands) 1999 1998 1998
--------- ------- -------
<S> <C> <C> <C>
Loans outstanding at end of year ............................ $ 368,511 358,334 309,497
========= ======= =======
Average amount of loans outstanding ......................... $ 364,597 325,477 293,838
========= ======= =======
Allowance for loan losses, at
beginning of year ........................................ $ 5,504 4,779 4,779
Loans charged off:
Commercial, financial and agricultural ................... -- (92) (15)
Real estate - mortgage ................................... (11) (97) --
Installment loans to individuals ......................... (54) (245) (58)
--------- ------- -------
Total charge-offs .................................... (65) (434) (73)
--------- ------- -------
Recoveries of loans previously charged-off
Commercial, financial and agricultural ................... 5 51 3
Real estate - mortgage ................................... 2 18 2
Installment loans to individuals ......................... 25 100 17
--------- ------- -------
Total recoveries ..................................... 32 169 22
--------- ------- -------
Net charge-offs ................................. (33) (265) (51)
Additions to the allowance charged to expense ............... 200 990 280
--------- ------- -------
Allowance for loan losses, at end of year ................... $ 5,671 5,504 5,008
========= ======= =======
Ratios:
Net charge-offs (annualized) as a percent of average loans 0.04% 0.08% 0.07%
Allowance for loan losses as a
percent of loans at end of period ................. 1.54% 1.54% 1.62%
</TABLE>
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
<PAGE>
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") 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 and a quarter years, from 74.9% at December 31, 1996 to 77.7%
at December 31, 1997 to 81.4% at December 31, 1998, to 83.9% at March 31, 1999,
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. Since the third quarter of
1998, although the Company has not had any liquidity or funding difficulties,
the Company has periodically made draws and repayments on this line of credit on
an overnight basis to maintain liquidity ratios at internally targeted levels.
Page 16
<PAGE>
At March 31, 1999, the Company had outstanding short-term borrowings totaling
$20 million, while the average amount outstanding for the quarter was $3.0
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 March 31, 1999, December 31,
1998, and March 31, 1998 in the table below.
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 10.83% at
March 31, 1999, compared to the "well capitalized" threshold of 10.00%, is the
only one of the three regulatory ratios that is within 200 basis points of
falling below the "well capitalized" threshold. The Company has plans in place
to improve any ratio that falls below the "well capitalized" threshold.
Page 17
<PAGE>
As of March 31, 1999, December 31, 1998 and March 31, 1998, the Company was
in compliance with all existing regulatory capital requirements, as summarized
in the following table:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
($ in thousands) 1999 1998 1998
--------- --------- ---------
<S> <C> <C> <C>
Risk-Based and Leverage Capital
Tier I capital:
Common shareholders' equity ..................... $ 41,036 40,494 37,543
Intangible assets ............................... (5,684) (5,843) (6,323)
Unrealized (gain) loss on securities
available for sale, net of taxes ........... 109 (37) (111)
--------- --------- ---------
Total Tier I leverage capital ......... 35,461 34,614 31,109
--------- --------- ---------
Tier II capital:
Allowable allowance for loan losses ............. 4,565 4,493 3,773
--------- --------- ---------
Tier II capital additions ............. 4,565 4,493 3,773
--------- --------- ---------
Total risk-based capital ............................. $ 40,026 39,107 34,882
========= ========= =========
Risk adjusted assets ................................. $ 370,764 365,288 308,257
Tier I risk-adjusted assets
(includes Tier I capital adjustments) adjustments) 365,189 359,408 301,823
Tier II risk-adjusted assets
(includes Tiers I and II capital .................. 369,754 363,901 305,596
Quarterly average total assets ....................... 488,851 475,698 407,233
Adjusted quarterly average total assets
(includes Tier I capital adjustments) ............. 483,276 469,818 400,799
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets ..... 9.71% 9.63% 10.31%
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 ................ 10.83% 10.75% 11.41%
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 ........ 7.34% 7.37% 7.76%
Minimum required Tier I leverage capital .......... 4.00% 4.00% 4.00%
Threshold for well-capitalized status ............. 5.00% 5.00% 5.00%
</TABLE>
<PAGE>
UPDATE ON YEAR 2000
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.
Page 18
<PAGE>
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 and borrowers is
substantially complete. 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.
Page 19
<PAGE>
In the Company's 1998 Form 10-K, the Company revised its projection of
total costs to address the Year 2000 Issue to approximately $100,000. Based on
ongoing evaluations of the Company's current Year 2000 status, it is
management's continued belief that total Year 2000 costs will be approximately
$100,000, which are being expensed as they occur. In 1998, the Company expensed
approximately $32,000 in Year 2000 Issue related costs, none of which was
expensed in the first quarter of 1998. In the first quarter of 1999, the Company
expensed $26,000 in Year 2000 related costs. The Company's remaining Year 2000
Issue costs are expected to consist primarily of consulting expenses, as the
Company tests and retests processes with the assistance of outside experts, and
printing expenses associated with periodic mailings of updated Year 2000
readiness statements to customers. These expenses are expected to be incurred
over the remainder 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
are directly reducing 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. The discussion in this section contains year 2000
readiness disclosures within the meaning of the Year 2000 Information and
Readiness Disclosure Act of 1998.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK)
Net interest income is the Company's most significant component of
earnings. Notwithstanding changes in volumes of loans and deposits, the
Company's level of net interest income is continually at risk due to the effect
that changes in general market interest rate trends have on interest yields
earned and paid with respect to the various categories of earning assets and
interest-bearing liabilities. It is the Company's policy to maintain portfolios
Page 20
<PAGE>
of earning assets and interest-bearing liabilities with maturities and repricing
opportunities that will afford protection, to the extent practical, against wide
interest rate fluctuations. The Company's exposure to interest rate risk is
analyzed on a regular basis by management using standard GAP reports, maturity
reports, and an asset/liability software model that simulates future levels of
interest income and expense based on current interest rates, expected future
interest rates, and various intervals of "shock" interest rates. Over the years,
the Company has been able to maintain a fairly consistent yield on average
earning assets (net interest margin). Over the past ten years the net interest
margin has not varied in any single calendar year by more than the 41 basis
point change experienced by the Company in 1998, and the lowest net interest
margin realized over that same period is within 60 basis points of the highest.
Prior to 1998, the most that the Company's net interest margin varied from one
calendar year to the next was 20 basis points.
The Company reported a net interest margin of 4.97% in the first quarter of
1999, compared to 5.03% in the fourth quarter of 1998, 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. The 6 basis point decrease in net interest margin experienced
in the first quarter of 1999 from the fourth quarter of 1998 was the lowest
quarter-to-quarter drop in net interest margin for the past four quarters.
Management believes that, assuming a relatively static interest rate
environment, the net interest margin should continue to stabilize. At the end of
the third quarter of 1998, when changes in the prime rate began to occur, the
Company was more liability sensitive in the "over 3 to 12 month" horizon than in
the "3 months or less" horizon. As the effects of the 1998 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. Management
believes that 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
"Components of Earnings" section above.
As of March 31, 1999, the Company had approximately $132 million more in
interest-bearing liabilities that are subject to interest rate changes within
one year than earning assets. This generally would indicate that net interest
income would experience downward pressure in a rising interest rate environment
and would benefit from a declining interest rate environment. However, this
method of analyzing interest sensitivity only measures the magnitude of the
timing differences and does not address earnings, market value, or management
actions. Also, interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. In addition to the
effects of "when" various rate-sensitive products reprice, market rate changes
may not result in uniform changes in rates among all products. For example,
included in interest-bearing liabilities at March 31, 1999 subject to interest
rate changes within one year are deposits totaling $159.0 million comprised of
NOW, savings, and certain types of money market deposits with interest rates set
by management. These types of deposits historically have not repriced
coincidentally with or in the same proportion as general market indicators.
<PAGE>
Thus, the Company believes that near term net interest income would not likely
experience significant downward pressure from rising interest rates. Similarly,
management would not expect a significant increase in near term net interest
income from falling interest rates. As of March 31, 1999, approximately 84% of
interest-earning assets could be repriced within five years and all
interest-bearing liabilities could be repriced within five years.
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions. The following
table presents the expected maturities of the Company's other than trading
market risk sensitive financial instruments.
Page 21
<PAGE>
The following table also presents the fair values of market risk sensitive
instruments as estimated in accordance with Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments."
<TABLE>
<CAPTION>
Expected Maturities of Market Sensitive
Instruments Held at March 31, 1999
------------------------------------------------------------------------------ Average Estimated
Interest Fair
($ in thousands) 1 Year 2 Years 3 Years 4 Years 5 Years Beyond Total Rate (1) Value
- ---------------- ------ ------- ------- ------- ------- ------ ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt Securities- at
amortized cost (2) $ 25,089 16,182 2,639 4,292 11,751 15,749 75,702 6.32% $ 76,188
Loans - fixed (3) 37,013 26,828 29,339 27,061 48,946 30,556 199,743 8.77% 200,675
Loans - adjustable (3) 83,803 17,578 13,728 14,457 22,624 15,982 168,172 8.36% 168,172
--------- ------ ----- ----- ------ ------ ------ ---------
Total $ 145,905 60,588 45,706 45,810 83,321 62,287 443,617 8.20% $ 445,035
========= ====== ===== ===== ====== ====== ====== ==== =========
Savings, NOW, and
money market
deposits $ 158,980 - - - - - 158,980 1.97% $ 158,980
Time deposits 188,668 24,356 4,546 2,072 2,602 - 222,244 5.15% 223,420
--------- ------ ----- ----- ------ ------ ------ ---------
Total $ 347,648 24,356 4,546 2,072 2,602 - 381,224 3.82% $ 382,400
========= ====== ===== ===== ====== ====== ====== ==== =========
</TABLE>
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 34%
tax rate.
(2) Callable securities with above market interest rates at March 31, 1999 are
assumed to mature at their call date for purposes of this table.
(3) Excludes nonaccrual loans and allowance for loan losses.
The Company's fixed rate earning assets have estimated fair values that are
slightly higher than their carrying value. This is due to the yields on these
portfolios being slightly higher than market yields at March 31, 1999 for
instruments with maturities similar to the remaining term of the portfolios, due
to the generally declining interest rate environment over the past year. The
estimated fair value of the Company's time deposits is higher than its book
value for the same reason.
ACCOUNTING CHANGES
The Financial Accounting Standards Board has also 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.
<PAGE>
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, as well as the factors identified in the last
paragraph of the section above entitled "Update on Year 2000."
Page 22
<PAGE>
Part II. Other Information
Item 5 - Other Information
The bylaws of the Company establish an advance notice procedure for
shareholder proposals to be brought before a meeting of shareholders of the
Company. Subject to any other applicable requirements, only such business may be
conducted at a meeting of the shareholders as has been brought before the
meeting by, or at the direction of, the Board of Directors or by a shareholder
who has given to the Secretary of the Company timely written notice, in proper
form, of the shareholder's intention to bring that business before the meeting.
The presiding officer at such meeting has the authority to make such
determinations.
To be timely, notice of other business to be brought before any meeting must
generally be received by the Secretary of the Company within 60 to 90 days in
advance of the shareholders' meeting. The notice of any shareholder proposal
must set forth the various information required under the bylaws. The person
submitting the notice must provide, among other things, the name and address
under which such Shareholder appears on the Company's books and the class and
number of shares of the Company's capital stock that are beneficially owned by
such Shareholder. Any shareholder desiring a copy of the Company's bylaws will
be furnished one without charge upon written request to the Secretary of the
Company at the Company's headquarters.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed with this report or, as noted, are
incorporated by reference. Management contracts, compensatory plans
and arrangements are marked with an asterisk (*).
3.a.i Copy of Articles of Incorporation of the Registrant and amendments
thereto, was filed as Exhibit 3(a) to the Registrant's Registration
Statement Number 33-12692, and is incorporated herein by reference.
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.
<PAGE>
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. (*)
Page 23
<PAGE>
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 First Amendment to the First Bancorp Senior Management Executive
Retirement Plan dated April 21, 1998 was filed as Exhibit 10.(o) to
the Company's Annual Report on Form 10-k for the year ended December
31, 1998, and is incorporated herein by reference. (*)
10.m Employment Agreement between the Company and James H. Garner dated
August 17, 1998 was filed as Exhibit 10(l) to the Company's
Quarterly 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 Anna G. Hollers dated
August 17, 1998 was filed as Exhibit 10(m) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, and is incorporated by reference. (*)
<PAGE>
10.o Employment Agreement between the Company and Teresa C. Nixon dated
August 17, 1998 was filed as Exhibit 10(n) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, and is incorporated by reference. (*)
10.p Employment Agreement between the Company and Eric P. Credle dated
August 17, 1998 was filed as Exhibit 10.p to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, and is
incorporated herein by reference. (*)
Page 24
<PAGE>
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
March 31, 1999.
Page 25
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST BANCORP
May 13, 1999 BY: /s/James H. Garner
------------------
James H. Garner
President
(Principal Executive Officer),
Treasurer and Director
May 13, 1999 BY: /s/Anna G. Hollers
------------------
Anna G. Hollers
Executive Vice President
and Secretary
May 13, 1999 BY: /s/Eric P. Credle
-----------------
Eric P. Credle
Senior Vice President
and Chief Financial Officer
Page 26
<PAGE>
EXHIBIT CROSS REFERENCE INDEX
Exhibit Page(s)
- ------- -------
3.a.i Copy of Articles of Incorporation of the Registrant *
3.a.ii Copy of the amendment to Articles of Incorporation *
3.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 First Amendment to the First Bancorp Supplemental Executive
Retirement Plan *
10.m Employment Agreement between the Company and James H.
Garner *
10.n Employment Agreement between the Company and Anna G.
Hollers *
10.o Employment Agreement between the Company and Teresa C.
Nixon *
<PAGE>
10.p Employment Agreement between the Company and Eric P. Credle *
21 List of Subsidiaries of Registrant *
27 Financial Data Schedule pursuant to Article 9 of Regulation
S-X for the three months ended March 31, 1999 28
* Incorporated herein by reference.
Page 27
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,525
<INT-BEARING-DEPOSITS> 24,207
<FED-FUNDS-SOLD> 3,018
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 59,482
<INVESTMENTS-CARRYING> 17,898
<INVESTMENTS-MARKET> 18,552
<LOANS> 368,511
<ALLOWANCE> 5,671
<TOTAL-ASSETS> 505,862
<DEPOSITS> 439,466
<SHORT-TERM> 20,000
<LIABILITIES-OTHER> 5,360
<LONG-TERM> 0
0
0
<COMMON> 15,059
<OTHER-SE> 25,977
<TOTAL-LIABILITIES-AND-EQUITY> 505,862
<INTEREST-LOAN> 7,919
<INTEREST-INVEST> 1,035
<INTEREST-OTHER> 204
<INTEREST-TOTAL> 9,158
<INTEREST-DEPOSIT> 3,677
<INTEREST-EXPENSE> 3,712
<INTEREST-INCOME-NET> 5,446
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 4,275
<INCOME-PRETAX> 2,279
<INCOME-PRE-EXTRAORDINARY> 2,279
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,476
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.48
<YIELD-ACTUAL> 4.97
<LOANS-NON> 596
<LOANS-PAST> 0
<LOANS-TROUBLED> 258
<LOANS-PROBLEM> 1,400
<ALLOWANCE-OPEN> 5,504
<CHARGE-OFFS> 65
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 5,671
<ALLOWANCE-DOMESTIC> 4,183
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,488
</TABLE>
