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
September 30, 2000
Commission File Number 0-15572
FIRST BANCORP
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(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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
----------------
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 October 31, 2000, 8,943,834 shares of the registrant's Common
Stock, no par value, were outstanding. The registrant had no other classes of
securities outstanding.
<PAGE>
INDEX
FIRST BANCORP AND SUBSIDIARIES
Page
Part I. Financial Information
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEETS -
September 30, 2000 and 1999
(With Comparative Amounts at December 31, 1999) 3
CONSOLIDATED STATEMENTS OF INCOME -
For the Periods Ended September 30, 2000 and 1999 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME -
For the Periods Ended September 30, 2000 and 1999 5
CONSOLIDATED STATEMENTS OF CASH FLOWS -
For the Periods Ended September 30, 2000 and 1999 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20
Part II. Other Information
Item 5 - Other Information 22
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 26
<PAGE>
Part I. Financial Information
Item 1 - Financial Statements
First Bancorp and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31, September 30,
($ in thousands-unaudited) 2000 1999 1999
----------------------------------------------------------------------- --------------- ------------ -----------
<S> <C> <C> <C>
ASSETS
Cash & due from banks, noninterest-bearing $ 24,189 30,629 27,504
Due from banks, interest-bearing 10,848 15,432 22,307
Federal funds sold 33,050 12,280 2,285
----------- ----------- -----------
Total cash and cash equivalents 68,087 58,341 52,096
----------- ----------- -----------
Securities available for sale (costs of $58,826,
$116,633, and $122,233) 58,216 113,005 119,997
Securities held to maturity (fair values of $48,079,
$51,425, and $51,607) 49,083 52,637 52,671
Presold mortgages in process of settlement 1,178 1,121 636
Loans 730,134 643,224 612,954
Less: Allowance for loan losses (7,773) (6,674) (6,584)
----------- ----------- -----------
Net loans 722,361 636,550 606,370
----------- ----------- -----------
Premises and equipment 14,154 12,359 12,218
Accrued interest receivable 5,833 5,286 5,366
Intangible assets 4,788 5,261 5,366
Other 5,120 4,971 4,135
----------- ----------- -----------
Total assets $ 928,820 889,531 858,855
=========== =========== ===========
LIABILITIES
Deposits: Demand - noninterest-bearing $ 71,392 63,881 60,828
Savings, NOW, and money market 248,573 251,982 247,481
Time deposits of $100,000 or more 135,882 118,566 104,184
Other time deposits 313,161 277,710 272,039
----------- ----------- -----------
Total deposits 769,008 712,139 684,532
Short-term borrowings 41,200 62,500 55,000
Accrued interest payable 3,727 3,635 3,653
Other liabilities 4,924 4,277 9,250
----------- ----------- -----------
Total liabilities 818,859 782,551 752,435
----------- ----------- -----------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Issued and outstanding: 8,928,729,
8,848,962, and 8,857,081 shares 51,881 51,490 51,509
Retained earnings 58,480 57,787 56,320
Accumulated other comprehensive loss (400) (2,297) (1,409)
----------- ----------- -----------
Total shareholders' equity 109,961 106,980 106,420
----------- ----------- -----------
Total liabilities and shareholders' equity $ 928,820 889,531 858,855
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
First Bancorp and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
($ in thousands, except share data-unaudited) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 16,241 12,939 45,658 37,253
Interest on investment securities:
Taxable interest income 2,255 2,225 6,816 6,234
Tax-exempt interest income 211 226 661 719
Other, principally overnight investments 285 221 755 836
----------- ----------- ----------- -----------
Total interest income 18,992 15,611 53,890 45,042
----------- ----------- ----------- -----------
INTEREST EXPENSE
Savings, NOW and money market 1,679 1,494 4,729 4,421
Time deposits of $100,000 or more 2,162 1,350 5,679 3,993
Other time deposits 4,542 3,427 12,068 10,081
Short-term borrowings 914 346 2,584 619
----------- ----------- ----------- -----------
Total interest expense 9,297 6,617 25,060 19,114
----------- ----------- ----------- -----------
Net interest income 9,695 8,994 28,830 25,928
Provision for loan losses 705 205 1,365 665
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 8,990 8,789 27,465 25,263
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 796 762 2,302 2,216
Other service charges, commissions and fees 471 410 1,500 1,281
Fees from presold mortgages 116 160 314 616
Commissions from insurance sales 56 62 256 207
Data processing fees 34 14 76 34
Securities gains (losses) (2,006) -- (1,917) 20
Loan sale gains -- 23 -- 25
Other gains (losses) -- (20) (11) (20)
----------- ----------- ----------- -----------
Total noninterest income (533) 1,411 2,520 4,379
----------- ----------- ----------- -----------
NONINTEREST EXPENSES
Salaries 2,608 2,427 7,567 6,911
Employee benefits 646 633 1,956 1,913
----------- ----------- ----------- -----------
Total personnel expense 3,254 3,060 9,523 8,824
Net occupancy expense 399 358 1,139 1,030
Equipment related expenses 348 311 1,013 906
Merger expenses 3,188 -- 3,188 --
Other operating expenses 1,936 1,875 5,820 5,497
----------- ----------- ----------- -----------
Total noninterest expenses 9,125 5,604 20,683 16,257
----------- ----------- ----------- -----------
Income (loss) before income taxes (668) 4,596 9,302 13,385
Income taxes 255 1,505 3,703 4,636
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (923) 3,091 5,599 8,749
=========== =========== =========== ===========
Earnings (loss) per share:
Basic $ (0.10) 0.35 0.63 0.98
Diluted (0.10) 0.33 0.61 0.94
Weighted average common shares outstanding:
Basic 8,915,635 8,886,053 8,896,268 8,945,897
Diluted 9,103,653 9,247,120 9,111,044 9,336,047
</TABLE>
4
See notes to consolidated financial statements.
<PAGE>
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
($ in thousands-unaudited) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (923) 3,091 5,599 8,749
--------- --------- --------- ---------
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period, pretax 1,016 (595) 1,101 (2,735)
Tax benefit (expense) (345) 215 (417) 919
Reclassification to realized losses (gains) 2,006 -- 1,917 (20)
Tax benefit (expense) (682) -- (704) 8
--------- --------- --------- ---------
Other comprehensive income (loss) 1,995 (380) 1,897 (1,828)
--------- --------- --------- ---------
Comprehensive income $ 1,072 2,711 7,496 6,921
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
($ in thousands-unaudited) 2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,599 8,749
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses 1,365 665
Net security premium amortization 43 415
Gains on sales of loans -- (25)
Proceeds from sales of loans -- 1,226
Losses (gains) on sales of securities available for sale 1,917 (20)
Loss on disposal of premises and equipment 98 --
Release of ESOP shares -- 183
Loan fees and costs deferred, net of amortization 49 (8)
Depreciation of premises and equipment 908 786
Amortization of intangible assets 474 477
Deferred income tax benefit (289) (221)
Increase in accrued interest receivable (547) (1,068)
Decrease (increase) in other assets (525) 1,799
Increase in accrued interest payable 92 427
Decrease in other liabilities 379 5,470
-------- --------
Net cash provided by operating activities 9,563 18,855
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (10,977) (50,260)
Purchases of securities held to maturity (169) (27,322)
Proceeds from sales of securities available for sale 54,490 3,017
Proceeds from maturities/issuer calls of securities available for sale 12,319 32,414
Proceeds from maturities/issuer calls of securities held to maturity 3,738 6,848
Net increase in loans (87,231) (47,135)
Purchases of premises and equipment (2,801) (2,107)
-------- --------
Net cash used in investing activities (30,631) (84,545)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 56,869 28,384
Net change in short-term borrowings (21,300) 49,000
Cash dividends paid (4,354) (4,209)
Proceeds from issuance of common stock 524 635
Purchases and retirement of common stock (925) (7,072)
-------- --------
Net cash provided by financing activities 30,814 66,738
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 9,746 1,048
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 58,341 51,048
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 68,087 52,096
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 24,968 18,687
Income taxes 4,910 3,224
Non-cash transactions:
Foreclosed loans transferred to other real estate -- 31
Unrealized gain (loss) on securities available for sale 3,022 (2,755)
Premises and equipment transferred to other real estate -- 315
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
First Bancorp And Subsidiaries
Notes To Consolidated Financial Statements
--------------------------------------------------------------------------------
(unaudited) For the Periods Ended September 30, 2000 and 1999
--------------------------------------------------------------------------------
NOTE 1 - Basis of Presentation
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 September 30, 2000 and 1999 and the consolidated
results of operations and consolidated cash flows for the periods ended
September 30, 2000 and 1999. Reference is made to the 1999 Annual Report on Form
10-K filed with the SEC for a discussion of accounting policies and other
relevant information with respect to the financial statements. As discussed in
Note 7 below, all prior period financial information has been restated to
include historical information for a company acquired in a transaction accounted
for as a pooling-of-interests.
NOTE 2 - Reclassifications
The results of operations for the periods ended September 30, 2000 and
1999 are not necessarily indicative of the results to be expected for the full
year. Certain amounts reported in the period ended September 30, 1999 have been
reclassified to conform with the presentation for September 30, 2000. These
reclassifications had no effect on net income or shareholders' equity for the
periods presented, nor did they materially impact trends in financial
information.
NOTE 3 - Earnings Per Share
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 stock option plans. 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 September 30,
----------------------------------------------------------------------------------------
2000 1999
-------------------------------------------- ----------------------------------------
Income Shares Income Shares
($ in thousands except per (Numer- (Denom- Per Share (Numer- (Denom- Per Share
share amounts) ator) inator) Amount ator) inator) Amount
------------------------------------ ----------- ------------ ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income (loss) $ (923) 8,915,635 $ (0.10) $ 3,091 8,886,053 $ 0.35
========= ========
Effect of Dilutive Securities -- 188,018 -- 361,067
----------- ---------- --------- ----------
Diluted EPS $ (923) 9,103,653 $ (0.10) $ 3,091 9,247,120 $ 0.33
=========== ========== ========= ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------------------------------------------------------
2000 1999
-------------------------------------------- ----------------------------------------
Income Shares Income Shares
($ in thousands except per (Numer- (Denom- Per Share (Numer- (Denom- Per Share
share amounts) ator) inator) Amount ator) inator) Amount
------------------------------------ ----------- ------------ ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $ 5,599 8,896,268 $ 0.63 $ 8,749 8,945,897 $ 0.98
========= =========
Effect of Dilutive Securities -- 214,776 -- 390,150
----------- ---------- --------- ----------
Diluted EPS $ 5,599 9,111,044 $ 0.61 $ 8,749 9,336,047 $ 0.94
=========== ========== ========= ========= ========== ==========
</TABLE>
7
<PAGE>
NOTE 4 - Asset Quality Information
Nonperforming assets are defined as nonaccrual loans, loans past due 90
or more days and still accruing interest, restructured loans and other real
estate. For each of the periods presented, the Company had no loans past due 90
or more days and still accruing interest. Nonperforming assets are summarized as
follows:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
($ in thousands) 2000 1999 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans $ 992 1,424 897
Restructured loans 243 257 260
---------- ---------- ----------
Total nonperforming loans 1,235 1,681 1,157
Other real estate 738 906 855
---------- ---------- ----------
Total nonperforming assets $ 1,973 2,587 2,012
========== ========== ==========
Nonperforming loans to total loans 0.17% 0.26% 0.19%
Nonperforming assets as a percentage of loans
and other real estate 0.27% 0.40% 0.33%
Nonperforming assets to total assets 0.21% 0.29% 0.23%
Allowance for loan losses to total loans 1.06% 1.04% 1.07%
-----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 5 - Deferred Loan Fees
Loans are shown on the Consolidated Balance Sheets net of net deferred
loan fees of approximately $753,000, $703,000, and $673,000 at September 30,
2000, December 31, 1999, and September 30, 1999, respectively.
NOTE 6 - Changes in Stockholders' Equity
Significant items that affected the Company's stockholders' equity for
the nine months ended September 30, 2000 are as follows: $5,599,000 in net
income, $4,906,000 in dividends declared, $925,000 in stock repurchases, a
$791,000 increase to equity resulting from the tax benefit realized from the
exercise of nonqualified stock options, proceeds of $524,000 from the issuance
of common stock, and other comprehensive income of $1,897,000.
NOTE 7 - Completed Acquisition
On September 14, 2000, the Company completed the merger acquisition of
First Savings Bancorp, Inc. ("First Savings"), the holding company for First
Savings Bank of Moore County, Inc., SSB ("First Savings Bank"). At June 30,
2000, First Savings, headquartered in Southern Pines, North Carolina, had total
assets of $331 million, with loans of $232 million and deposits of $224 million
with six branch locations in Moore County, NC. In accordance with the terms of
the merger agreement, each share of First Savings stock was exchanged for 1.2468
shares of First Bancorp stock. These terms resulted in First Bancorp issuing
approximately 4,407,000 shares of stock to complete the transaction.
The merger was accounted for as a pooling-of-interests and accordingly,
all financial results for prior periods have been restated to include the
combined results of First Bancorp and First Savings. Separate financial
information of the combined entities as of and for the six months ended June 30,
2000 (the period immediately preceding the merger) is as follows:
(in thousands) First Bancorp First Savings Combined
------------- ------------- --------
Total assets $ 624,390 330,497 954,887
Total revenue 25,612 12,339 37,951
Net interest income 13,087 6,048 19,135
Net income 3,728 2,794 6,522
8
<PAGE>
In connection with the merger, the Company recorded pre-tax
merger-related charges of $5,614,000 ($4,065,000 after-tax) during the three
months ended September 30, 2000. These charges were comprised of the following
categories:
o $3,188,000 in expenses ($2,593,000 after-tax) that were incurred in
completing the merger. These expenses consisted primarily of
investment banker fees, attorney fees, employment contract
payments, accountant fees, and early termination fees associated
with vendor contracts.
o $2,006,000 in losses ($1,218,000 after-tax) from sales of
available-for-sale securities. The merger with First Savings
increased the company's liability sensitive position. To reduce the
company's interest rate risk exposure, approximately $54.5 million
in securities were sold at a total loss of $2,006,000. The proceeds
from the sale were first used to repay short-term debt, with the
remaining proceeds invested in investments with a shorter average
life and a higher yield than the securities sold.
o $420,000 was recorded ($254,000 after-tax) as a one time adjustment
to the allowance for loan losses. This provision for loan losses
was recorded in order to align the credit risk methodologies of
First Bancorp and First Savings. (In addition to the one time
adjustment, First Bancorp recorded provisions for loan losses,
resulting from ongoing operations, of $285,000 and $945,000 for the
three and nine months ended September 30, 2000, respectively.)
The following table indicates the primary components of the $3,188,000
in merger expenses, including the amounts utilized through September 30, 2000,
and the amounts remaining as accrued expenses in "other liabilities" at
September 30, 2000:
<TABLE>
<CAPTION>
Total Merger- Utilized through Remaining Accrual
(in thousands) Related Charges September 30, 2000 at September 30, 2000
------------------ --------------------- ------------------------
<S> <C> <C> <C>
Professional costs $ 1,601 1,601 --
Employment contract payments 958 958 --
Early termination fees associated
with vendor contracts 251 -- 251
Equipment write-downs 98 98 --
Printing and filing fees 97 97 --
Other 183 35 148
------------------ --------------------- ------------------------
Total $ 3,188 2,789 399
================== ===================== ========================
</TABLE>
NOTE 8 - Pending Merger and Acquisition Activity
As previously announced, to gain Federal Reserve approval for the merger
with First Savings, the Company was required to divest the First Savings Bank
branch located in Carthage, NC. The Carthage branch has approximately $15.5
million in total deposits and $2.5 million in total loans. On August 22, 2000,
the Company reported the signing of a purchase and assumption agreement with
Bank of Davie to acquire the Carthage branch. The sale of the branch is
anticipated to occur during the fourth quarter of 2000 and is expected to result
in the recording of a gain of approximately $850,000.
The Company announced on September 13, 2000 that it had reached an
agreement with First Union National Bank to acquire four branches with aggregate
deposits of approximately $105 million and aggregate loans of approximately $19
million. The four branches to be acquired are Lumberton, Pembroke, St. Pauls
(all located in Robeson County, NC), and Laurinburg (Scotland County, NC). The
closing of the transaction and the data conversion are expected to occur in the
first quarter of 2001. Total intangible assets of approximately $15.7 million
are expected to be recorded in connection with the purchase.
The Company announced on October 20, 2000 that it had reached a
definitive agreement to acquire Century Bancorp, Inc. ("Century"). Century is
the holding company for Home Savings, Inc., SSB, a one branch savings
institution located in Thomasville, NC. As of June 30, 2000, Century had total
assets of $101 million, total loans of $88 million, and total deposits of $74
million. The terms of the agreement call for shareholders of Century to have the
option to receive either $20.00 in cash or a fixed exchange ratio of 1.3333
shares of First Bancorp common stock for each share of Century common stock that
they own. This election is subject to the requirement that, subject to certain
possible adjustments that may be necessary to achieve the intended tax
treatment, 60% of
9
<PAGE>
Century's shares outstanding will be exchanged for cash and 40% of Century's
shares outstanding will be exchanged for shares of First Bancorp stock. To the
extent that Century shareholders elect to receive more aggregate stock or cash
consideration than permitted by the agreement, pro rata allocations will be
made. This transaction is expect to close during the first half of 2001.
10
<PAGE>
Item 2 - Management's Discussion and Analysis of Consolidated Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
RESTATEMENT OF PRIOR PERIOD RESULTS AND DISCUSSION OF MERGER-RELATED CHARGES
As discussed in Note 7 to the financial statements above, during the
three months ended September 30, 2000, the Company completed the merger
acquisition of First Savings Bancorp, Inc. and its wholly-owned subsidiary,
First Savings Bank of Moore County, Inc., SSB (collectively referred to as
"First Savings"). In accordance with the terms of the merger agreement, each
share of First Savings stock was exchanged for 1.2468 shares of First Bancorp
stock. These terms resulted in First Bancorp issuing approximately 4,407,000
shares of stock to complete the transaction. The merger was accounted for as a
pooling-of-interests and accordingly, all financial results for prior periods
have been restated to include the combined results of First Bancorp and First
Savings.
In connection with the First Savings merger acquisition, the Company
recorded pre-tax merger-related charges of $5,614,000 ($4,065,000 after-tax)
during the three months ended September 30, 2000. These charges were comprised
of the following categories:
o $3,188,000 in expenses ($2,593,000 after-tax) that were incurred in
completing the merger. These expenses consisted primarily of
investment banker fees, attorney fees, employment contract
payments, accountant fees, and early termination fees associated
with vendor contracts.
o $2,006,000 in losses ($1,218,000 after-tax) from sales of available
for sale securities. The merger with First Savings increased the
company's liability sensitive position. To reduce the company's
interest rate risk exposure, approximately $54.5 million in
securities were sold at a total loss of $2,006,000. The proceeds
from the sale were first used to repay short-term debt, with the
remaining proceeds invested in investments with a shorter average
life and a higher yield than the securities sold.
o $420,000 was recorded ($254,000 after-tax) as a one time adjustment
to the allowance for loan losses. This provision for loan losses
was recorded in order to align the credit risk methodologies of
First Bancorp and First Savings. (In addition to the one time
adjustment, First Bancorp recorded provisions for loan losses,
resulting from ongoing operations, of $285,000 and $945,000 for the
three and nine months ended September 30, 2000, respectively.)
In the discussion that follows, the term "recurring" will exclude the
effects of the merger-related charges described above incurred during the three
months ended September 30, 2000.
OVERVIEW
Recurring net income for the three months ended September 30, 2000 was
$3,142,000, a 1.6% increase over the net income of $3,091,000 recorded in the
third quarter of 1999. Recurring earnings per share on a diluted basis for the
third quarter of 2000 amounted to $0.35, which is a 6.1% increase over the $0.33
recorded for the third quarter of 1999.
Recurring net income for the nine months ended September 30, 2000 was
$9,664,000, a 10.5% increase over the net income of $8,749,000 recorded for the
same nine months of 1999. Recurring earnings per share on a diluted basis for
the nine months ended September 30, 2000 amounted to $1.06, which is a 12.8%
increase over the $0.94 recorded for the same nine months of 1999.
Including the merger-related charges, the Company recorded a net loss of
$923,000, or $0.10 per diluted share, for the three months ended September 30,
2000, and net income of $5,599,000, or $0.61 per diluted share, for the nine
months ended September 30, 2000.
11
<PAGE>
The relatively flat recurring net income for the third quarter of 2000
compared to the third quarter of 1999 resulted from net interest income growth
and recurring noninterest income growth of 7.8% and 4.4%, respectively, which
were largely offset by a higher recurring provision for loans losses and
recurring noninterest expense growth of 5.9%.
The 10.5% increase in recurring net income for the nine months ended
September 30, 2000 compared to the same nine months of 1999, resulted primarily
from an increase in net interest income of 11.2%, which, when coupled with a
3.4% increase in noninterest income growth, more than offset a higher recurring
provision for loan losses and a 7.6% increase in noninterest expense growth.
The 7.8% and 11.2% net interest income growth for the third quarter of
2000 and for the nine months ended September 30, 2000, respectively, resulted
from two offsetting factors. Strong increases in loans and deposits had a
positive effect on net interest income, while lower net interest margins had a
negative impact on net interest income (see additional discussion below). The
net interest margin experienced more pressure in the third quarter of 2000 than
it did in for the first six months of 2000, resulting in the lower percentage
increase in net interest income for third quarter of 2000 compared to the same
quarter of 1999 than it did for the nine month comparisons of each year.
The higher recurring provisions for loan losses during 2000 were a
result of higher loan growth than in 1999, and not due to concerns regarding
credit quality.
The 3%-4% increases in recurring noninterest income and 6%-8% increases
in recurring noninterest expenses were due to general growth in the customer
base and the overhead necessary to service the growth.
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 for the three and nine month periods ended September 30, 2000
amounted to $9,695,000 and $28,830,000, respectively, increases of $701,000 and
$2,902,000, or 7.8% and 11.2%, respectively, over the amounts of $8,994,000 and
$25,928,000, recorded in the same three and nine month periods in 1999,
respectively. There are two primary factors that cause changes in the amount of
net interest income recorded by the Company - 1) growth in loans and deposits,
and 2) the Company's net interest margin.
For the three and nine months ended September 30, 2000, the growth in
loans and deposits had a positive impact on net interest income, while a
declining net interest margin had a negative impact on net interest income, when
compared to the same periods in 1999.
Loans outstanding at September 30, 2000 amounted to $730.1 million, a
19.1% increase from September 30, 1999, while deposits outstanding at September
30, 2000 amounted to $769.0 million, a 12.3% increase from a year earlier. The
net interest margin (tax equivalent net interest income divided by average
earning assets) for the third quarter of 2000 was 4.41%, a 20 basis point
decrease from the 4.61% realized for the third quarter of 1999. The net interest
margin for the nine months ended September 30, 2000 was 4.51%, or 10 basis
points lower than the 4.61% margin realized for the first nine months of 1999.
The following tables present average balances and average rates
earned/paid by the Company for the third quarter of 2000 compared to the third
quarter of 1999 and the nine months ended September 30, 2000 compared to the
nine months ended September 30, 1999.
12
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
---------------------------------------------------------------------------------
2000 1999
-------------------------------------- ---------------------------------------
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
----------- ------- --------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans $ 718,301 8.97% $ 16,241 $ 603,517 8.51% $ 12,939
Taxable securities 132,323 6.76% 2,255 149,635 5.90% 2,225
Non-taxable securities (1) 17,149 8.26% 357 18,600 8.04% 377
Short-term investments,
principally federal funds 18,072 6.26% 285 14,560 6.02% 221
----------- --------- ------------ -----------
Total interest-earning assets 885,845 8.57% 19,138 786,312 7.95% 15,762
--------- -----------
Liabilities
Savings, NOW and money
market deposits $ 249,569 2.67% 1,679 $ 249,788 2.37% $ 1,494
Time deposits >$100,000 133,896 6.41% 2,162 97,317 5.50% 1,350
Other time deposits 310,886 5.80% 4,542 269,964 5.04% 3,427
----------- --------- ------------ -----------
Total interest-bearing deposits 694,351 4.79% 8,383 617,069 4.03% 6,271
Short-term borrowings 50,605 7.17% 914 26,998 5.08% 346
----------- --------- ------------ -----------
Total interest-bearing liabilities 744,956 4.95% 9,297 644,067 4.08% 6,617
--------- -----------
Non-interest-bearing deposits 66,443 66,135
Net yield on interest-earning
assets and net interest income 4.41% $ 9,841 4.61% $ 9,145
========= ===========
Interest rate spread 3.62% 3.87%
Average prime rate 9.50% 8.10%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes tax-equivalent adjustments of $146,000 and $151,000 in 2000 and
1999 respectively, to reflect the federal and state benefit of the
tax-exempt securities, reduced by the related nondeductible portion of
interest expense.
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------------------------------------------------
2000 1999
-------------------------------------- ---------------------------------------
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
----------- ------- --------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans $ 688,947 8.82% $ 45,658 $ 588,225 8.47% $ 37,253
Taxable securities 142,303 6.38% 6,816 139,071 5.99% 6,234
Non-taxable securities (1) 17,829 8.26% 1,106 19,160 8.28% 1,187
Short-term investments,
principally federal funds 15,880 6.33% 755 19,700 5.67% 836
----------- --------- ------------ -----------
Total interest-earning assets 864,959 8.37% 54,335 766,156 7.94% 45,510
--------- ---------
Liabilities
Savings, NOW and money
market deposits $ 251,005 2.51% 4,729 $ 248,338 2.38% $ 4,421
Time deposits >$100,000 126,042 6.00% 5,679 96,459 5.53% 3,993
Other time deposits 292,224 5.50% 12,068 265,140 5.08% 10,081
----------- --------- ------------ -----------
Total interest-bearing deposits 669,271 4.47% 22,476 609,937 4.05% 18,495
Short-term borrowings 54,097 6.36% 2,584 17,358 4.77% 619
----------- --------- ------------ -----------
Total interest-bearing liabilities 723,368 4.61% 25,060 627,295 4.07% 19,114
--------- -----------
Non-interest-bearing deposits 66,907 62,811
Net yield on interest-earning
assets and net interest income 4.51% $ 29,275 4.61% $ 26,396
========= ===========
Interest rate spread 3.76% 3.87%
Average prime rate 9.15% 7.87%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
(1) Includes tax-equivalent adjustments of $445,000 and $468,000 in 2000 and
1999 respectively, to reflect the federal and state benefit of the
tax-exempt securities, reduced by the related nondeductible portion of
interest expense.
The decrease in the Company's net interest margin is primarily due to
the following three factors - 1) the Company is liability sensitive in the one
year horizon, meaning that more of its interest-bearing liabilities have
repriced within the past year at higher interest rates (due to the rising
interest rate environment) than have its interest-earning assets, 2) a higher
reliance on time deposits and short-term borrowings (which are the categories
that generally carry the highest interest rates) to fund strong loan growth, and
3) a very competitive environment for deposits has required the Company to offer
higher rates than in the past to attract deposits.
The recurring provision for loan losses for the third quarter of 2000
was $285,000, $80,000 higher than the $205,000 recorded in the third quarter of
2000. For the nine months ended September 30, 2000, the recurring provision for
loan losses was $945,000 compared to $665,000 for the nine months ended
September 30, 1999. The increases in the recurring provisions for loan losses
recorded in 2000 compared to 1999 have been a result of the higher loan growth
experienced and not because of credit quality concerns. Net loan growth for the
third quarter of 2000 amounted to $25.4 million compared to $15.9 million in the
third quarter of 1999. Net loan growth for the first nine months of 2000
amounted to $86.9 million compared to $45.7 million for the first nine months of
1999. Credit quality indicators for the Company remained strong in the third
quarter of 2000. As discussed above, in addition to the recurring provisions for
loan losses recorded in 2000, the Company recorded a one time adjustment of
$420,000 to the allowance for loan losses in order to align the credit risk
methodologies of First Bancorp and First Savings. Provisions for loan losses are
based on management's evaluation of the loan portfolio, as discussed under
"Summary of Loan Loss Experience" below.
Total recurring noninterest income for the third quarter of 2000
amounted to $1,473,000, a 4.4% increase over total noninterest income of
$1,411,000 earned in the third quarter of 1999, while noninterest income for the
nine months ended September 30, 200, excluding the merger-related bond sale,
amounted to $4,526,000, a 3.4% increase over total noninterest income of
$4,379,000 recorded in the same nine months of 1999. During the three and nine
months ended September 30, 2000, the Company experienced increases from the same
periods in 1999 in the categories of service charges on deposit accounts and
other service charges, commissions, and fees as a result of its larger customer
base. These increases were partially offset by fewer fees earned from
originating presold mortgages as a result of the higher interest rate
environment, which has reduced the demand for mortgage loans, particularly
refinancings.
Also increasing noninterest income for the nine months ended September
30, 2000 compared to the same nine months of 1999 was a $49,000 increase in
commissions earned from insurance sales that resulted from a $65,000 higher
"experience bonus" paid to the Company from the company that provides the credit
life insurance that the Company earns commissions from selling. The amount of
any experience bonus payment is computed once per year and is dependent on the
actual loss experience on credit insurance policies that the Company sold. In
the first quarter of 2000, the Company received an experience bonus of $89,000,
compared to $24,000 received in the first quarter of 1999.
Another factor contributing to the higher noninterest income for both
periods in 2000 compared to 1999 was higher fees earned from the Company's data
processing subsidiary, Montgomery Data Services, Inc. (Montgomery Data). The
Company recorded $34,000 in the third quarter of 2000 compared to $14,000 in the
third quarter of 1999, while for the first nine months of 2000, the Company
recorded $76,000 in data processing fees compared to $34,000 earned in the first
nine months of 1999. Montgomery Data makes its excess data processing
capabilities available to area financial institutions for a fee. Montgomery Data
did not have any nonaffiliated customers from December 1997 to December 1998.
Since December 1998, Montgomery Data has signed contracts with four area banks
to provide data processing.
14
<PAGE>
Also included in the caption "noninterest income" for 2000 are losses
that were incurred in September 2000 related to a nonrecurring repositioning of
the Company's bond portfolio that was necessary as a result of the merger with
First Savings. The merger with First Savings increased the company's liability
sensitive position. To reduce the company's interest rate risk exposure,
approximately $54.5 million in securities were sold at a total loss of
$2,006,000. The proceeds from the sale were first used to repay short-term debt,
with the remaining proceeds invested in investments with a shorter average life
and a higher yield than the securities sold.
Recurring noninterest expenses for the three and nine months ended
September 30, 2000 increased 5.9% and 7.6%, respectively when compared to the
same periods of 1999. The increases are primarily associated with the higher
expenses that are necessary to properly process, manage, and service the
increases in loans and deposits experienced by the Company. Also contributing to
the increase in noninterest expenses was the continued expansion of the
Company's branch network and annual wage increases.
Also included in noninterest expenses on the statements of income for
the three and nine months ended September 30, 2000 was $3,188,000 in expenses
($2,593,000 after-tax) that were incurred in completing the merger with First
Savings. These expenses consisted primarily of investment banker fees, attorney
fees, employment contract payments, accountant fees, and early termination fees
associated with vendor contracts.
The provision for income taxes was $255,000 in the third quarter of 2000
compared to $1,505,000 in the third quarter of 1999, while income tax expense
for the nine months ended September 30, 2000 amounted to $3,703,000 compared to
$4,636,000 for the same period in 1999. The decreases in 2000 are a result of a
lower pretax income, which were partially offset by an increase in the Company's
effective tax rate as a result of the nondeductibilty for tax purposes of
certain merger-related expenses.
FINANCIAL CONDITION
The Company's total assets were $928.8 million at September 30, 2000, an
increase of $70.0 million, or 8.1%, from the $858.8 million at September 30,
2000. Interest-earning assets increased by 8.8%, from $810.9 million at
September 30, 1999 to $882.5 million at September 30, 2000. Loans, the primary
interest-earning asset, grew from $613.0 million at September 30, 1999 to $730.1
million at September 30, 2000, an increase of $117.2 million, or 19.1%.
Deposits have increased $84.5 million, or 12.3%, supporting the asset
growth since September 30, 1999. The increases in deposits since September 30,
1999 have occurred primarily in the categories of time deposits of $100,000 or
more and other time deposits, with $72.8 million of the deposit growth occurring
in those two categories. The increase in time deposits has been due to the
Company more aggressively pricing these deposits in order to fund the strong
loan growth experienced. Noninterest-bearing demand deposits increased from
$60.8 million at September 30, 1999 to $71.4 million at September 30, 2000, an
increase of 17.4%, while savings, NOW and money market deposits increased from
$247.5 million to $248.6 million, an increase of 0.4%.
Due to loan growth that has exceeded deposit growth over the past year,
the Company has relied more heavily on borrowings. While borrowings were reduced
at September 30, 2000 as a result of the bond sale discussed above, average
total borrowings for the nine months ended September 30, 2000 were $54.1 million
compared to average borrowings for the same nine months in 1999 of $17.4
million. See "LIQUIDITY" below for a discussion of the Company's sources of
borrowings.
Since December 31, 1999, the Company has experienced annualized
increases of 18.0%, 5.9%, and 10.6% in loans, total assets and deposits,
respectively. The smaller annualized increase in total assets is primarily due
to excess cash obtained through borrowings by the Company at December 31, 1999
for possible Year 2000 cash contingencies, as well as short-term borrowings that
were repaid during the third quarter as a result of the bond sale discussed
above.
15
<PAGE>
NONPERFORMING ASSETS
Nonperforming assets are defined as nonaccrual loans, loans past due 90
or more days and still accruing interest, restructured loans and other real
estate. For each of the periods presented, the Company had no loans past due 90
or more days and still accruing interest. Nonperforming assets are summarized as
follows:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
($ in thousands) 2000 1999 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans $ 992 1,424 897
Restructured loans 243 257 260
--------- --------- ---------
Total nonperforming loans 1,235 1,681 1,157
Other real estate 738 906 855
--------- --------- ---------
Total nonperforming assets $ 1,973 2,587 2,012
========= ========= =========
Nonperforming loans to total loans 0.17% 0.26% 0.19%
Nonperforming assets as a percentage of loans
and other real estate 0.27% 0.40% 0.33%
Nonperforming assets to total assets 0.21% 0.29% 0.23%
Allowance for loan losses to total loans 1.06% 1.04% 1.07%
</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.
Nonaccrual loans decreased from $1,424,000 at December 31, 1999 to
$992,000 at September 30, 2000 primarily as a result of a $394,000 loan that
paid off during the second quarter of 2000. The level of restructured loans did
not vary materially among the periods presented.
At September 30, 2000, December 31, 1999, and September 30, 1999, the
recorded investment in loans considered to be impaired was $60,000, $281,000,
and $124,000, respectively, all of which were on nonaccrual status. The related
allowance for loan losses for these impaired loans was $9,000, $42,000, and
$19,000, respectively. There were no impaired loans for which there was no
related allowance. The average recorded investments in impaired loans during the
nine month period ended September 30, 2000, the year ended December 31, 1999,
and the nine months ended September 30, 1999 were approximately $200,000,
$123,000, and $83,000, 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 $3,500,000-$4,000,000 of loans that are
currently performing in accordance with their contractual terms may potentially
develop problems. These loans were considered in determining the appropriate
level of the allowance for loan losses. See "Summary of Loan Loss Experience"
below. Loans classified for regulatory purposes as loss, doubtful, substandard,
or special mention that have not been disclosed in the problem loan amounts
above do not represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources, or represent material credits about which management is
aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.
As of September 30, 2000, December 31, 1999 and September 30, 1999, the
Company's level of owned other real estate has not varied materially, totaling
approximately $738,000, $906,000, and $855,000, respectively, which consisted
principally of several parcels of real estate. The Company's management has
reviewed recent appraisals of its other real estate and believes that their fair
values, less estimated costs to sell, equal or exceed their respective carrying
values at the dates presented.
16
<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, probable losses inherent in the portfolio and
current economic conditions.
The Company uses a loan analysis and grading program to facilitate its
evaluation of probable loan losses and the adequacy of its allowance for loan
losses. In this program, risk grades are assigned by management and tested by
the Company's internal audit department and an independent third party
consulting firm. The testing program includes an evaluation of a sample of new
loans, loans that management identifies as having credit weaknesses, loans past
due 90 days or more, nonaccrual loans and any other loans identified during
previous regulatory and other examinations.
The Company has no foreign loans, few agricultural loans and does not
engage in significant lease financing or highly leveraged transactions.
Commercial loans are diversified among a variety of industries. The majority of
the Company's real estate loans are primarily various personal and commercial
loans where real estate provides additional security for the loan. Collateral
for virtually all of these loans is located within the Company's principal
market area.
The recurring provision for loan losses for the third quarter of 2000
was $285,000, $80,000 higher than the $205,000 recorded in the third quarter of
2000. For the nine months ended September 30, 2000, the recurring provision for
loan losses was $945,000 compared to $665,000 for the nine months ended
September 30, 1999. The increases in the provisions for loan losses recorded in
2000 compared to 1999 have been a result of the higher loan growth experienced
and not because of credit quality concerns. Net loan growth for the third
quarter of 2000 amounted to $25.4 million compared to $15.9 million in the third
quarter of 1999. Net loan growth for the first nine months of 2000 amounted to
$86.9 million compared to $45.7 million for the first nine months of 1999. As
discussed above, in addition to the recurring provisions for loan losses
recorded in 2000, the Company recorded a one time adjustment of $420,000 to the
allowance for loan losses during the third quarter in order to align the credit
risk methodologies of First Bancorp and First Savings. Credit quality indicators
for the Company remained strong in the third quarter of 2000.
At September 30, 2000, the allowance for loan losses amounted to
$7,773,000, compared to $6,674,000 at December 31, 1999 and $6,584,000 at
September 30, 1999. The allowance for loan losses was 1.06%, 1.04% and 1.07% of
total loans as of September 30, 2000, December 31, 1999, and September 30, 1999,
respectively.
Management believes the Company's reserve levels are adequate to cover
probable loan losses on the loans outstanding as of each reporting date. It must
be emphasized, however, that the determination of the reserve using the
Company's procedures and methods rests upon various judgments and assumptions
about economic conditions and other factors affecting loans. No assurance can be
given that the Company will not in any particular period sustain loan losses
that are sizable in relation to the amounts reserved or that subsequent
evaluations of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan losses
and value of other real estate. Such agencies may require the Company to
recognize adjustments to the allowance or the carrying value of other real
estate based on their judgments about information available at the time of their
examinations.
17
<PAGE>
For the periods indicated, the following table summarizes the Company's
balances of loans outstanding, average loans outstanding, changes in the
allowance for loan losses arising from charge-offs and recoveries, and additions
to the allowance for loan losses that have been charged to expense.
<TABLE>
<CAPTION>
Nine Months Year Nine Months
Ended Ended Ended
September 30, December 31, September 30,
($ in thousands) 2000 1999 1999
------------- ------------ -------------
<S> <C> <C> <C>
Loans outstanding at end of period $ 730,134 643,224 612,954
============= ============ =============
Average amount of loans outstanding $ 688,947 597,951 588,225
============= ============ =============
Allowance for loan losses, at
beginning of year $ 6,674 6,100 6,100
Total charge-offs (333) (448) (272)
Total recoveries 67 112 91
------------- ------------ -------------
Net charge-offs (266) (336) (181)
------------- ------------ -------------
Additions to the allowance charged to expense 1,365 910 665
------------- ------------ -------------
Allowance for loan losses, at end of period $ 7,773 6,674 6,584
============= ============ =============
Ratios:
Net charge-offs (annualized) as a percent of average loans 0.05% 0.06% 0.04%
Allowance for loan losses as a
percent of loans at end of period 1.06% 1.04% 1.07%
</TABLE>
Based on the results of the aforementioned loan analysis and grading
program and management's evaluation of the allowance for loan losses at
September 30, 2000, there have been no material changes to the allocation of the
allowance for loan losses among the various categories of loans since December
31, 1999.
LIQUIDITY
The Company's liquidity is determined by its ability to convert assets
to cash or acquire alternative sources of funds to meet the needs of its
customers who are withdrawing or borrowing funds, and to maintain required
reserve levels, pay expenses and operate the Company on an ongoing basis. The
Company's primary liquidity sources are net income from operations, cash and due
from banks, federal funds sold and other short-term investments. The Company's
securities portfolio is comprised almost entirely of readily marketable
securities which could also be sold to provide cash.
In addition to internally generated liquidity sources, the Company has
the ability to obtain borrowings from the following three sources - 1) an
approximately $125,000,000 line of credit with the Federal Home Loan Bank
(FHLB), 2) a $15,000,000 overnight federal funds line of credit with a
correspondent bank, and 3) an approximately $27,000,000 line of credit through
the Federal Reserve Bank of Richmond's discount window.
Although the Company has not historically had to rely on these sources
of credit as a source of liquidity, the Company has experienced a gradual
increase in its loan to deposit ratio over the past several years. At December
31, 1996, the Company's loan to deposit ratio was 82.3%. Since then it has
steadily increased to its September 30, 2000 level of 94.9% as a result of
significant loan growth that has outpaced deposit growth. This imbalance in
growth has reduced the Company's liquidity sources. As the Company's loan to
deposit ratio has increased, so has the Company's reliance on borrowings.
Average borrowings outstanding during the third quarter of 2000 amounted to
$50.6 million compared to $27.0 million for the third quarter of 1999.
Notwithstanding potential purchases of deposits, including the pending
18
<PAGE>
purchase of approximately $105 million in deposits (see discussion below), the
Company expects to increasingly rely on its available lines of credit in the
future due to anticipation of continued difficulty in funding new loan growth
solely with deposits.
The Company's management believes its liquidity sources are at an
acceptable level and remain adequate to meet its operating needs.
CAPITAL RESOURCES
The Company is regulated by the Board of Governors of the Federal
Reserve Board (FED) and is subject to securities registration and public
reporting regulations of the Securities and Exchange Commission. The Company's
banking subsidiaries are regulated by the Federal Deposit Insurance Corporation
(FDIC) and the respective state of NC bank/savings regulators. The Company is
not aware of any recommendations of regulatory authorities or otherwise which,
if they were to be implemented, would have a material effect on its liquidity,
capital resources, or operations.
The Company must comply with regulatory capital requirements established
by the FED and FDIC. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. These capital standards require the Company to
maintain minimum ratios of "Tier 1" capital to total risk-weighted assets and
total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1
capital is comprised of total shareholders' equity calculated in accordance with
generally accepted accounting principles, excluding accumulated other
comprehensive income (loss), less intangible assets, and total capital is
comprised of Tier 1 capital plus certain adjustments, the largest of which for
the Company is the allowance for loan losses. Risk-weighted assets refer to the
on- and off-balance sheet exposures of the Company, adjusted for their related
risk levels using formulas set forth in FED and FDIC regulations.
In addition to the risk-based capital requirements described above, the
Company is subject to a leverage capital requirement, which calls for a minimum
ratio of Tier 1 capital (as defined above) to quarterly average total assets of
3.00% to 5.00%, depending upon the institution's composite ratings as determined
by its regulators. The FED has not advised the Company of any requirement
specifically applicable to it.
At September 30, 2000, the Company's capital ratios significantly
exceeded the regulatory minimum ratios discussed above with a Tier 1 capital
ratio to Tier 1 risk adjusted ratio of 16.03%, a total capital to total risk
adjusted asset ratio of 17.03%, and a leverage ratio of 11.46%.
The Company's bank subsidiaries are also subject to similar capital
requirements as those discussed above. At September 30, 2000, each of the
Company's bank subsidiaries exceeded the minimum ratios established by the FED
and FDIC.
SHARE REPURCHASES
In light of market conditions during 2000, the Company resumed purchases
of stock under its 100,000 share repurchase authorization. From January 1, 2000
through May 10, 2000 (the date of the last repurchase), the Company repurchased
a total of 58,300 shares at an average cost of $15.75 per share. This 100,000
share repurchase authorization was rescinded by the Board of Directors in May
2000. However in connection with the definitive agreement to acquire Century
Bancorp, Inc. (see discussion below), the Company's Board of Directors has again
authorized stock repurchases up to the amount of shares expected to be issued at
the closing of the Century acquisition, which is currently expected to be
approximately 585,000 shares.
19
<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
of earning assets and interest-bearing liabilities with maturities and repricing
opportunities that will afford protection, to the extent practical, against wide
interest rate fluctuations. The Company's exposure to interest rate risk is
analyzed on a regular basis by management using standard GAP reports, maturity
reports, and an asset/liability software model that simulates future levels of
interest income and expense based on current interest rates, expected future
interest rates, and various intervals of "shock" interest rates. Over the years,
the Company has been able to maintain a fairly consistent yield on average
earning assets (net interest margin). Over the past five years, the net interest
margin has not varied in any single calendar year by more than 16 basis points.
While the Company can not guarantee stability in its net interest margin in the
future, at this time management does not expect significant fluctuations. As
discussed above, the Company has recently experienced pressure on its net
interest margin, particularly during the three months ended September 30, 2000.
See additional discussion of the Company's net interest margin in the
"Components of Earnings" section above.
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions.
Management does not believe there has been any significant change in the
overall analysis of financial instruments considered market risk sensitive, as
measured by the factors of contractual maturities, average interest rates and
estimated fair values, since the analysis' prepared and presented in connection
with the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1999, and First Savings' Annual Report on Form 10-K for the fiscal year
ended June 30, 1999.
PENDING MERGER AND ACQUISITION ACTIVITY, INCLUDING SUBSEQUENT EVENTS
As previously announced, to gain Federal Reserve approval for the merger
with First Savings, the Company was required to divest the First Savings Bank
branch located in Carthage, NC. The Carthage branch has approximately $15.5
million in total deposits and $2.5 million in total loans. On August 22, 2000,
the Company reported the signing of a purchase and assumption agreement with
Bank of Davie to acquire the Carthage branch. The sale of the branch is
anticipated to occur during the fourth quarter of 2000 and is expected to result
in the recording of a gain of approximately $850,000.
The Company announced on September 13, 2000 that it had reached an
agreement with First Union National Bank to acquire four branches with aggregate
deposits of approximately $105 million and aggregate loans of approximately $19
million. The four branches to be acquired are Lumberton, Pembroke, St. Pauls
(all located in Robeson County, NC), and Laurinburg (Scotland County, NC). The
closing of the transaction and the data conversion are expected to occur in the
first quarter of 2001. Total intagible assets of approximately $15.7 million are
expected to be recorded in connection with the purchase.
The Company announced on October 20, 2000 that it had reached a
definitive agreement to acquire Century Bancorp, Inc. ("Century"). Century is
the holding company for Home Savings, Inc., SSB, a one branch savings
institution located in Thomasville, NC. As of June 30, 2000, Century had total
assets of $101 million, total loans of $88 million, and total deposits of $74
million. The terms of the agreement call for shareholders of Century to have the
20
<PAGE>
option to receive either $20.00 in cash or a fixed exchange ratio of 1.3333
shares of First Bancorp common stock for each share of Century common stock that
they own. This election is subject to the requirement that, subject to certain
possible adjustments that may be necessary to achieve the intended tax
treatment, 60% of Century's shares outstanding will be exchanged for cash and
40% of Century's shares outstanding will be exchanged for shares of First
Bancorp stock. To the extent that Century shareholders elect to receive more
aggregate stock or cash consideration than permitted by the agreement, pro rata
allocations will be made. This transaction is expect to close during the first
half of 2001. The definitive merger agreement for this transaction was filed on
SEC Form 8-K on October 20, 2000.
CURRENT ACCOUNTING MATTERS
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards (`SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. This Statement, as amended, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
and will be adopted by the Company on January 1, 2001. This Statement is not
expected to materially impact the Company.
The FASB has also issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125." It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. This statement is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. This Statement is not expected to materially impact the
Company.
FORWARD-LOOKING STATEMENTS
The foregoing discussion contains statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgment of the Company and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the financial success or changing strategies of the Company's
customers, the Company's level of success in integrating acquisitions, actions
of government regulators, the level of market interest rates, and general
economic conditions.
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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, was filed as Exhibit 3(e) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1988, and is incorporated
herein by reference.
3.a.iii Copy of the amendment to Articles of Incorporation - adding a new
Article Ten, was filed as Exhibit 3.a.iii to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999, and is
incorporated herein by reference.
3.a.iv Copy of the amendment to Article IV of the Articles of Incorporation
was filed as Exhibit 3.a.iv to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999, and is incorporated herein by
reference.
3.b.i Copy of the Bylaws of the Registrant and amendments thereto, was filed
as Exhibit 3(b) to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1994, and is incorporated herein by reference.
3.b.ii Copy of the amendment to the Bylaws replacing Section 3.04 of Article
Three was filed as Exhibit 3.b.ii to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 and is incorporated
herein by reference.
3.b.iii Copy of the amendment to the Bylaws amending Section 3.19 of Article
Three was filed as Exhibit 3.b.iii to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 and is incorporated
herein by reference.
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3.b.iv Copy of the amendment to the Bylaws replacing Section 3.02 was filed as
Exhibit 3.b.iv to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, and is incorporated herein by reference.
4 Form of Common Stock Certificate was filed as Exhibit 3.a.iv to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, and is incorporated herein by reference.
10 Material Contracts
10.a Data processing Agreement dated October 1, 1984 by and between Bank of
Montgomery (First Bank) and Montgomery Data Services, Inc. was filed as
Exhibit 10(k) to the Registrant's Registration Statement Number
33-12692, and is incorporated herein by reference.
10.b First Bank Salary and Incentive Plan, as amended, was filed as Exhibit
10(m) to the Registrant's Registration Statement Number 33-12692, and
is incorporated herein by reference. (*)
10.c First Bancorp Savings Plus and Profit Sharing Plan (401(k) savings
incentive plan and trust), as amended January 25, 1994 and July 19,
1994, was filed as Exhibit 10(c) to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1994, and is incorporated herein
by reference. (*)
10.d Directors and Officers Liability Insurance Policy of First Bancorp,
dated July 16, 1991, was filed as Exhibit 10(g) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991, and is
incorporated herein by reference.
10.e Indemnification Agreement between the Company and its Directors and
Officers was filed as Exhibit 10(t) to the Registrant's Registration
Statement Number 33-12692, and is incorporated herein by reference.
10.f First Bancorp Employees' Pension Plan, as amended on August 16, 1994,
was filed as Exhibit 10(g) to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1994, and is incorporated herein
by reference. (*)
10.g First Bancorp Senior Management Supplemental Executive Retirement Plan
dated May 31, 1993, was filed as Exhibit 10(k) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and
is incorporated herein by reference. (*)
10.h First Bancorp Senior Management Split-Dollar Life Insurance Agreements
between the Company and the Executive Officers, as amended on December
22, 1994, was filed as Exhibit 10(i) to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1994, and is incorporated
herein by reference. (*)
10.i First Bancorp 1994 Stock Option Plan was filed as Exhibit 10(n) to the
Company's Quarterly Report on Form 10-QSB for the quarter ended March
31, 1994, and is incorporated herein by reference. (*)
10.j Amendment to the First Bancorp Savings Plus and Profit Sharing Plan
(401(k) savings incentive plan and trust), dated December 17, 1996, was
filed as Exhibit 10(m) to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996, and is incorporated herein by
reference. (*)
10.k Employment Agreement between the Company and James H. Garner dated
August 17, 1998 was filed as Exhibit 10(l) to the Company's Annual
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference. (*)
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10.l Employment Agreement between the Company and Anna G. Hollers dated
August 17, 1998 was filed as Exhibit 10(m) to the Company's Annual
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference. (*)
10.m Employment Agreement between the Company and Teresa C. Nixon dated
August 17, 1998 was filed as Exhibit 10(n) to the Company's Annual
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference. (*)
10.n First Amendment to the First Bancorp Senior Management Executive
Retirement Plan dated April 21, 1998 was filed as Exhibit 10(o) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998, and is incorporated herein by reference. (*)
10.o Employment Agreement between the Company and Eric P. Credle dated
August 17, 1998 was filed as Exhibit 10(p) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, and is
incorporated herein by reference. (*)
10.p Amendments 1 and 2 to the Company's 1994 Stock Option Plan was filed as
Exhibit 10.q to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, and is incorporated herein by reference.
(*)
10.q Employment Agreement between the Company and David G. Grigg dated
August 17, 1998 was filed as Exhibit 10.r to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 and is
incorporated herein by reference. (*)
10.r Definitive Merger Agreement with First Savings Bancorp, Inc. dated
December 16, 1999 was filed on Form 8-K on December 21, 1999 and is
incorporated herein by reference.
10.s Amendment and Waiver to Merger Agreement with First Savings Bancorp,
Inc. dated March 24, 2000 was filed as Exhibit 10.s to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and
is incorporated herein by reference. (*).
10.t Second Amendment and Waiver to Merger Agreement dated as of May 15,
2000 was filed as Exhibit 2.3 to the Company's Amendment No. 1 to
Registration Statement on Form S-4 (Registration No. 333-34216) dated
May 16, 2000 and is incorporated herein by reference.
10.u Purchase and Assumption Agreement with Bank of Davie, dated August 22,
2000.
10.v Purchase and Assumption Agreement with First Union National Bank, dated
September 13, 2000.
10.w Employment Agreement between the Company and John F. Burns dated
September 14, 2000. (*)
21 List of Subsidiaries of Registrant.
27 Financial Data Schedule pursuant to Article 9 of Regulation S-X for the
nine months ended September 30, 2000 and Restated Financial Data
Schedule for the nine months ended September 30, 1999.
(b) The Registrant filed one report on Form 8-K during the nine months
ended September 30, 2000. On September 29, 2000, a report on Form 8-K
was filed disclosing under Item 2, Acquisition or Disposition of
Assets, the completion of the merger of First Savings Bancorp, Inc.
into First Bancorp.
The following unaudited interim financial statements of First Savings
Bancorp, Inc. were filed as Exhibit 99.1 to the Current Report on Form
8-K:
(i) Consolidated Statements of Financial Condition as of March 31,
2000 and 1999;
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(ii) Consolidated Statement of Income for the nine-month period ended
March 31, 2000 and 1999; and
(iii) Consolidated Statement of Cash Flows for the nine-month period
ended March 31, 2000 and 1999.
The following audited annual financial statements of First Savings
Bancorp, Inc. were filed as Exhibit 99.2 and 99.3 to the Current Report
on Form 8-K:
(i) Report of Independent Auditors relating to Consolidated
Financial Statements;
(ii) Consolidated Statements of Financial Condition as of June 30,
1999 and 1998;
(iii) Consolidated Statements of Cash Flows for the fiscal years ended
June 30, 1999, 1998, and 1997; and
(iv) Consolidated Statements of Cash Flows for the fiscal years ended
June 30, 1999, 1998, and 1997; and
(v) Notes to Consolidated Financial Statements.
The following unaudited pro forma financial information with respect to
the merger of First Savings Bancorp, Inc. into First Bancorp was filed
as Exhibit 99.4 to the Current Report on Form 8-K:
(i) Unaudited Pro Form Combined Condensed Balance Sheet as of March
31, 2000;
(ii) Unaudited Pro Forma Combined Condensed Income Statement for the
Three Months Ended March 31, 2000;
(iii) Unaudited Pro Forma Combined Condensed Income Statement for the
Three Months Ended March 31, 1999;
(iv) Unaudited Pro Forma Combined Condensed Income Statement for the
Year Ended December 31, 1999;
(v) Unaudited Pro Forma Combined Condensed Income Statement for the
Year Ended December 31, 1998;
(vi) Unaudited Pro Forma Combined Condensed Income Statement for the
Year Ended December 31, 1997; and
(viii) Notes to Pro Forma Combined Condensed Financial Information
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO: FIRST BANCORP, ANNA G.
HOLLERS, EXECUTIVE VICE PRESIDENT, P.O. BOX 508, TROY, NC 27371
25
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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
November 13, 2000 BY: /s/ James H. Garner
--------------------------------
James H. Garner
President
(Principal Executive Officer),
Treasurer and Director
November 13, 2000 BY: /s/ Anna G. Hollers
--------------------------------
Anna G. Hollers
Executive Vice President
and Secretary
November 13, 2000 BY: /s/ Eric P. Credle
--------------------------------
Eric P. Credle
Senior Vice President
and Chief Financial Officer
26
