UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission File Number 0-15572 FIRST BANCORP - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) North Carolina 56-1421916 - -------------------------------------------------------------------------------- (State of Incorporation) (I.R.S. Employer Identification Number) 341 North Main Street, Troy, North Carolina 27371-0508 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (910) 576-6171 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, $5 PAR VALUE (Title of each class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] YES [ ] NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy of information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. [ X ]
The aggregate market value of the voting stock, Common Stock, $5 par value, held by non-affiliates of the registrant, based on the average bid and asked prices of the Common Stock on January 31, 1998 as reported on the NASDAQ National Market System, was approximately $70,700,000. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the Registrant's Common Stock outstanding on January 31, 1998 was 3,020,370. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement to be filed pursuant to Regulation 14A are incorporated herein by reference into Part III. ================================================================================
CROSS REFERENCE INDEX PART I Business: Item I General Description Statistical Information Net Interest Income Average Balances and Net Interest Income Analysis Volume and Rate Variance Analysis Provision for Loan Losses Noninterest Income Noninterest Expenses Income Taxes Distribution of Assets and Liabilities Securities Portfolio Composition and Maturities Loans Nonperforming Assets Allowance for Loan Losses and Loan Loss Experience Deposits Interest Rate Risk (Including Quantitative and Qualitative Disclosures About Market Risk) Off-Balance Sheet Risk Return on Assets and Equity Liquidity Capital Resources, Components and Ratios Year 2000 Issue Inflation Accounting Changes Forward-Looking Statements Item 2 Properties Item 3 Legal Proceedings Item 4 Submission of Matters to a Vote of Shareholders PART II Item 5 Market for the Registrant's Common Stock and Related Shareholder Matters Item 6 Selected Financial Data Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition Item 7A Quantitative and Qualitative Disclosures About Market Risk Item 8 Financial Statements and Supplementary Data: Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1997 Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 1997 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1997 Notes to Consolidated Financial Statements for each of the years in the three-year period ended December 31, 1997 Report of Independent Auditors Selected Consolidated Financial Data Quarterly Financial Summary Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
PART III Item 10 Directors and Executive Officers of the Registrant; Compliance with Section 16 (a) of the Exchange Act * Item 11 Executive Compensation * Item 12 Security Ownership of Certain Beneficial Owners and Management* Item 13 Certain Relationships and Related Transactions * PART IV Item 14 Exhibits, Financial Statement Schedules and Reports of Form 8-K * SIGNATURES * Information called for by Part III (Items 10 through 13) is incorporated herein by reference to the Registrant's definitive Proxy Statement for the 1998 Annual Meeting of Shareholders to be filed with Securities and Exchange Commission.
PART I Item 1. Business General Description The Company First Bancorp (the "Company") is a one-bank holding company. The principal activity of the Company is the ownership and operation of First Bank (the "Bank"), a state chartered bank with its main office in Troy, North Carolina. The Company also owns and operates two nonbank subsidiaries, Montgomery Data Services, Inc. ("Montgomery Data"), a data processing company, and First Bancorp Financial Services, Inc. ("First Bancorp Financial"), which currently owns and operates various real estate. The Company also controls First Bank Insurance Services, Inc. ("First Bank Insurance"), an insurance agency acquired in 1994 as a subsidiary of the Bank. On December 29, 1995, the insurance agency operations of First Bank Insurance were divested. First Bank Insurance continues to be a subsidiary of the Bank, but is inactive at this time. The Company was incorporated in North Carolina on December 8, 1983, as Montgomery Bancorp, for the purpose of acquiring 100% of the outstanding common stock of the Bank through stock-for-stock exchanges. On December 31, 1986, the Company changed its name to First Bancorp to conform its name to the name of the Bank, which had changed its name from Bank of Montgomery to First Bank in 1985. The Bank was organized in 1934 and began banking operations in 1935 as the Bank of Montgomery, named for the county in which it operated. With its 1995 acquisition of the Laurinburg and Rockingham offices of First Scotland Bank ("First Scotland") and its 1994 acquisition of Central State Bank ("Central State"), High Point, North Carolina, the Bank operates in a 13 county area centered in Troy, North Carolina. Troy, population 3,400, is located in the center of Montgomery County, approximately 60 miles east of Charlotte, and 50 miles south of Greensboro. The Bank conducts business from 33 branches located within a 60-mile radius of Troy, covering a geographical area from Laurinburg to the southeast, to High Point to the north and to Kannapolis to the west. Ranked by assets, the Bank was the 16th largest bank in North Carolina as of December 31, 1997, according to the Ofice of the Commissioner of Banks. The Bank provides a full range of banking services, including the accepting of demand and time deposits, the making of secured and unsecured loans to individuals and businesses, discount brokerage services and self-directed IRA's (both offered through a contractual relationship with a brokerage firm). In 1997, as in recent prior years, the Bank accounted for substantially all of the Company's consolidated net income. The Company's principal executive offices are located at 341 North Main Street, Troy, North Carolina 27371-0508, and its telephone number is (910) 576-6171. Unless the context otherwise requires, references to the "Company" in this annual report on Form 10-K shall mean collectively First Bancorp and its subsidiaries.
General Business The Bank engages in a full range of banking activities, providing such services as checking, savings, NOW and money market accounts and other time deposits of various types; loans for business, agriculture, real estate, personal uses, home improvement and automobiles; credit cards; letters of credit; investment and discount brokerage services; IRA's; safe deposit box rentals; bank money orders; and electronic funds transfer services, including wire transfers and automated teller machines. Because the majority of the Bank's customers are individuals and small to medium-sized businesses located in the counties it serves, deposits and loans are well diversified. There are no seasonal factors that would have any material effect on the Bank's business, and the Bank does not rely on foreign sources of funds or income. Montgomery Data provides electronic data processing services to financial institutions. As of December 31, 1997, the Bank was Montgomery Data's only customer and accounted for 82% of its data processing revenues in the most recent fiscal year, excluding the early termination fee received from its last nonaffiliated customer in November 1997. Ownership and operation of Montgomery Data allows the Company to do all of its electronic data processing without paying fees for such services to an independent provider. Maintaining its own data processing system also allows the Company to adapt the system to its individual needs and to the services and products it offers. Although not a significant source of income, Montgomery Data has historically provided the Company with additional revenues through fees it charged to its third-party data processing customer(s). Management of Montgomery Data does not intend to aggressively seek additional customers at this time, but plans instead to use existing capacity to meet the increasing requirements of the Bank resulting from its asset growth. Notwithstanding the foregoing, additional customers may be taken on if it is deemed to be in the best interest of the Company. First Bancorp Financial was organized under the name of First Recovery in September of 1988 for the purpose of providing a back-up data processing site for Montgomery Data and other financial and non-financial clients. First Recovery's back-up data processing operations were divested on August 1, 1994. First Bancorp Financial now owns and leases the First Recovery building. First Bancorp Financial periodically purchases parcels of real estate from the Bank that were acquired through foreclosure. The parcels purchased consist of real estate having various purposes. First Bancorp Financial actively pursues the sale of these properties. Territory Served and Competition The Company serves primarily the south central area of the Piedmont region of North Carolina, with offices in Anson, Cabarrus, Chatham, Davidson, Guilford, Harnett, Lee, Montgomery, Moore, Randolph, Richmond, Scotland and Stanly counties. The Company's headquarters are located in Troy, Montgomery County. The Company's 33 branches and facilities are all located in small communities whose economies are based primarily on manufacturing and light industry. Although the Company's market is predominantly small communities and rural areas, the area is not dependent on agriculture. Textiles, furniture, mobile homes, electronics, plastic and metal fabrication, forest products, food products and cigarettes are among the leading manufacturing industries in the trade area. Leading producers of socks, hosiery and area rugs are located in Montgomery County. The Pinehurst-Southern Pines area is a widely known golf resort and retirement area. The High Point area is widely known for its furniture market. Additionally, several of the communities served by the Company are "bedroom" communities serving Charlotte and Greensboro in addition to smaller cities such as Albermarle, Asheboro, High Point, Pinehurst and Sanford.
The banking laws of North Carolina allow state-wide branching, and consequently commercial banking in the state is highly competitive. The Company competes in its various market areas with, among others, several large interstate bank holding companies that are headquartered in North Carolina. These large competitors have substantially greater resources than the Company, including broader geographic markets, higher lending limits and the ability to make greater use of large-scale advertising and promotions. A significant number of interstate banking acquisitions have taken place in the past decade, thus further increasing the size and financial resources of some of the Company's competitors, three of which are among the largest bank holding companies in the nation. See "Supervision and Regulation" below for a further discussion of regulations in the Company's industry that affect competition. The Company competes not only against banking organizations, but also against a wide range of financial service providers including federally and state chartered savings and loan institutions, credit unions, investment and brokerage firms and small-loan or consumer finance companies. Competition among financial institutions of all types is virtually unlimited with respect to legal ability and authority to provide most financial services. However, the Company believes it has certain advantages over its competition in the areas it serves. The Company seeks to maintain a distinct local identity in each of the communities it serves and actively sponsors and participates in local civic affairs. Most lending and other customer-related business decisions can be made without delays associated with larger systems. Additionally, employment of local managers and personnel in various offices and low turnover of personnel enable the Company to establish and maintain long-term relationships with individual and corporate customers. Lending Policy and Procedures Conservative lending policies and procedures and appropriate underwriting standards are high priorities of the Bank. Loans are approved under the Bank's written loan policy, which provides that lending officers, principally branch managers, have sole authority to approve loans of various amounts up to $75,000. Each of the Bank's regional senior lending officers has sole discretion to approve secured loans in principal amounts up to $250,000 and together can approve loans up to $750,000. Lending limits may vary depending upon whether the loan is secured or unsecured. The Bank's board of directors reviews and approves loans that exceed management's lending authority, loans to officers, directors, and their affiliates and, in certain instances, other types of loans. New credit extensions are reviewed daily by the Bank's senior management and at least monthly by the board of directors. The Bank continually monitors its loan portfolio to identify areas of concern and to enable management to take corrective action. Lending officers and the board of directors meet periodically to review past due loans and portfolio quality, while assuring that the bank is appropriately meeting the credit needs of the communities it serves. Individual lending officers are responsible for pursuing collection of past-due amounts and monitoring any changes in the financial status of the borrowers. The Bank also contracts with an independent consulting firm to review new loan originations meeting certain criteria, as well as assign risk grades to existing credits meeting certain thresholds. The consulting firm's observations, comments and risk grades are shared with the Company's audit committee of the board of directors, and are considered by management in setting Bank policy, as well as in evaluating the adequacy of the allowance for loan losses.
Investment Policy and Procedures The Bank has adopted an investment policy designed to optimize the Bank's income from funds not needed to meet loan demand in a manner consistent with appropriate liquidity and risk objectives. Pursuant to this policy, the Bank may invest in federal, state and municipal obligations, federal agency obligations, public housing authority bonds, industrial development revenue bonds, Federal National Mortgage Association ("FNMA"), Government National Mortgage Association ("GNMA") and Student Loan Marketing Association ("SLMA") securities. The policy also contains maximum amounts that the Bank can invest in certain types of securities, including, at December 31, 1997, a maximum of $10 million that can be invested in certain collateralized mortgage obligations and mortgage-backed securities. The Bank's investments must be rated at least BAA by Moody's or BBB by Standard and Poor's. Securities rated below A are periodically reviewed for creditworthiness. The Bank may purchase non-rated municipal bonds only if such bonds are in the Bank's general market area and determined by the Bank to have a credit risk no greater than the minimum ratings referred to above. Industrial development authority bonds, which normally are not rated, are purchased only if they are judged to possess a high degree of credit soundness to assure reasonably prompt sale at a fair value. The Company's investment officers implement the investment policy, monitor the investment portfolio, recommend portfolio strategies, and report to the Bank's investment committee. Reports of all purchases, sales, net profits or losses and market appreciation or depreciation of the bond portfolio are reviewed by the Company's board of directors each month. Once a quarter, the Company's interest rate risk exposure is monitored by the board of directors. Once a year, the written investment policy is reviewed by the board of directors and the Bank's portfolio is compared with the portfolios of other North Carolina banks of comparable size. All of the Bank's securities are kept in safekeeping accounts at correspondent banks. Recent Acquisitions As part of its operations, the Company regularly evaluates the potential acquisition of or merger with, and holds discussions with, various financial institutions. On November 14, 1997, First Bank acquired a First Union banking branch located in Lillington, North Carolina. Real and personal property acquired totaled approximately $237,000 and deposits assumed totaled approximately $14,345,000. No loans were included in the purchase. On December 15, 1995, First Bank completed its cash acquisition of the Laurinburg and Rockingham branch offices of First Scotland Bank. As of December 15, 1995, assets acquired were approximately $15.8 million. The acquisition included earning assets of approximately $14.2 million, of which approximately $8.9 million were loans. Deposit liabilities assumed were approximately $15 million. On August 25, 1994, the Company completed its cash acquisition of Central State Bank in High Point, North Carolina. Central State, a North Carolina state-chartered commercial bank, had approximately $35 million in assets at the time of the acquisition, with earning assets of approximately $32 million, including approximately $27 million in loans. Central State also had approximately $32 million in deposits at the time of the merger with First Bank.
For additional information on these acquisitions, please see Management's Discussion and Analysis and note 2 to the consolidated financial statements. Employees As of December 31, 1997, the Company had 228 full-time and 37 part-time employees. The Company considers its employee relations to be good. Supervision and Regulation As a bank holding company, the Company is subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System and the North Carolina Banking Commission. The Bank is subject to supervision and examination by the Federal Deposit Insurance Corporation and the North Carolina Banking Commission. See also note 15 to the consolidated financial statements. Supervision and Regulation of the Company The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is required to register as such with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board" or "FRB"). The Company also is regulated by the North Carolina Commissioner of Banks (the "Commissioner") under the Bank Holding Company Act of 1984. A bank holding company is required to file with the Federal Reserve Board quarterly reports and other information regarding its business operations and those of its subsidiaries. It is also subject to examination by the Federal Reserve Board and is required to obtain Federal Reserve Board approval prior to making certain acquisitions of other institutions or voting securities. The Commissioner of Banks is empowered to regulate certain acquisitions of North Carolina banks and bank holding companies, issue cease and desist orders for violations of North Carolina banking laws, and promulgate rules necessary to effectuate the purposes of the Bank Holding Company Act of 1984. Regulatory authorities have cease and desist powers over bank holding companies and their nonbank subsidiaries where their actions would constitute a serious threat to the safety, soundness or stability of a subsidiary bank. Those authorities may compel holding companies to invest additional capital into banking subsidiaries upon acquisition or in the event of significant loan losses or rapid growth of loans or deposits. The United States Congress and the North Carolina General Assembly have periodically considered and adopted legislation that has resulted in, and could result in further, deregulation of both banks and other financial institutions. Such legislation could modify or eliminate geographic restrictions on banks and bank holding companies and current restrictions on the ability of banks to engage in certain nonbanking activities. For example, the recently-enacted Reigle-Neal Interstate Banking Act allows expansion of interstate acquisitions by bank holding companies and banks. This and other legislative and regulatory changes have increased the ability of financial institutions to expand the scope of their operations, both in terms of services offered and geographic coverage. Such legislative changes could place the Company in more direct competition with other financial institutions, including mutual funds, securities brokerage firms, insurance companies, and investment banking firms. The effect of any such legislation on the business of the Company cannot be predicted. The Company cannot predict what other legislation might be enacted or what other regulations might be adopted or, if enacted or adopted, the effect thereof.
Supervision and Regulation of the Bank Federal banking regulations applicable to all depository financial institutions, among other things, (i) provide federal bank regulatory agencies with powers to prevent unsafe and unsound banking practices; (ii) restrict preferential loans by banks to "insiders" of banks; (iii) require banks to keep information on loans to major shareholders and executive officers; and (iv) bar certain director and officer interlocks between financial institutions. As a state chartered bank, the Bank is subject to the provisions of the North Carolina banking statutes and to regulation by the Commissioner. The Commissioner has a wide range of regulatory authority over the activities and operations of the Bank, and the Commissioner's staff conducts periodic examinations of banks and their affiliates to ensure compliance with state banking regulations. Among other things, the Commissioner regulates the merger and consolidations of state-chartered banks, the payment of dividends, loans to officers and directors, recordkeeping, types and amounts of loans and investments, and the establishment of branches. The Commissioner also has cease and desist powers over state-chartered banks for violations of state banking laws or regulations and for unsafe or unsound conduct that is likely to jeopardize the interest of depositors. The dividends that may be paid by the Bank to the Company are subject to legal limitations under the North Carolina law. In addition, the regulatory authorities may restrict dividends that may be paid by the Bank or the Company's other subsidiaries. The ability of the Company to pay dividends to its shareholders is largely dependent on the dividends paid to the Company by its subsidiaries. The Bank is a member of the Federal Deposit Insurance Corporation (the "FDIC"), which currently insures the deposits of member banks. For this protection, each bank pays a quarterly statutory assessment, based on its level of deposits, and is subject to the rules and regulations of the FDIC. The FDIC also is authorized to approve conversions, mergers, consolidations and assumptions of deposit liability transactions between insured banks and uninsured banks or institutions, and to prevent capital or surplus diminution in such transactions where the resulting, continuing, or assumed bank is an insured nonmember bank. In addition, the FDIC monitors the Bank's compliance with several banking statutes, such as the Depository Institution Management Interlocks Act and the Community Reinvestment Act of 1977. The FDIC also conducts periodic examinations of the Bank to assess its compliance with banking laws and regulations, and it has the power to implement changes in or restrictions on a bank's operations if it finds that a violation is occurring or is threatened. Neither the Company nor the Bank can predict what other legislation might be enacted or what other regulations might be adopted, or if enacted or adopted, the effect thereof on the Bank's operations. Item 2. Properties The main offices of First Bancorp, First Bank and First Bancorp Financial are located in a three-story building in the central business district of Troy, North Carolina. The building houses administrative, training and bank teller facilities. The Bank's Operations Division, including customer accounting functions, offices and operations of Montgomery Data Services, and offices for loan operations, are housed in a one-story steel frame building approximately
one-half mile west off the main office. The Company operates 33 branches and facilities, including the main office, in the trade area as follows: Troy - main office and two additional full service branches and one teller-window facility; High Point and Albemarle - two full service branches in each; Pinehurst - one full service branch and one teller-window facility; Aberdeen, Asheboro, Archdale, Biscoe, Bennett, Candor, Denton, Kannapolis, Laurel Hill, Laurinburg, Lillington, Locust, Pinebluff, Polkton, Richfield, Robbins, Rockingham, Sanford, Seagrove, Seven Lakes, Southern Pines, Vass and Wagram - one full service branch in each. The Company owns all its premises except five branch offices for which the land and buildings are leased and two branch offices for which the land is leased but the buildings are owned. There are no other options to purchase or lease additional properties. The Company considers its facilities adequate to meet current needs and idle or vacant properties are insignificant. Item 3. Legal Proceedings Various legal proceedings may arise in the ordinary course of business and may be pending or threatened against the Company and/or its subsidiaries. The Company is not involved in any pending legal proceedings which, in management's opinion, could have a material effect on the consolidated financial position of the Company. Item 4. Submission of Matters to a Vote of Shareholders No matters were submitted to the shareholders during the fourth quarter of 1997. PART II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters The Company's common stock trades on the NASDAQ National Market System of The NASDAQ Stock Market under the symbol FBNC. Tables 1 and 21, included in "Management's Discussion and Analysis" below, set forth the high and low market prices of the Company's common stock as traded by the brokerage firms that maintain a market in the Company's common stock and the dividends declared for the periods indicated. All per share amounts for reporting periods prior to the third quarter of 1996 have been restated from their originally reported amount to reflect the two-for-one stock split that was distributed in September 1996. See "Business - Supervision and Regulation" and note 15 to the consolidated financial statements for a discussion of regulatory restrictions on the payment of dividends. As of December 31, 1997, there were 668 shareholders of record and an estimated 800 shareholders whose stock shares are held in "street name." Item 6. Selected Financial Data Table 1 on page 23 sets forth selected financial data about the Company.
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Management's discussion and analysis is intended to assist readers in understanding the Company's results of operations and changes in financial position for the past three years. This review should be read in conjunction with the consolidated financial statements and accompanying notes beginning on page 35 of this report and the supplemental financial data contained in Tables 1 through 21 included with this discussion and analysis. All per share amounts for periods prior to June 30, 1996 have been restated to reflect the two-for-one stock split distributed on September 13, 1996 to shareholders of record on August 30, 1996. The Company adopted the provisions of the Statement of Financial Accounting Standard Number 128, "Earnings Per Share" ("SFAS No. 128") as of December 31, 1997. SFAS No. 128 requires the Company to disclose two earnings per share amounts - 1) basic earnings per share, and 2) diluted earnings per share. Basic earnings per share uses the weighted average common shares outstanding as the denominator in per share calculations, while diluted earnings per share includes the potentially dilutive incremental share effects of options that have been issued under the Company's stock option plan. As required by SFAS No. 128, all prior year earnings per share amounts have been restated and computed under the provisions of the new standard. See the "Accounting Changes" section of management's discussion and analysis and note 1 to the consolidated financial statements for additional discussion of this new standard. Unless otherwise noted, per share disclosures are based on the basic earnings per share calculation. Mergers and Acquisitions On November 14, 1997, First Bank acquired a First Union banking branch located in Lillington, North Carolina. Real and personal property acquired totaled approximately $237,000 and deposits assumed totaled approximately $14,345,000. No loans were included in the purchase. In the fourth quarter of 1995, First Bank completed its cash acquisition of the Laurinburg and Rockingham branch offices of First Scotland Bank. Assets acquired were approximately $15.8 million including earning assets of approximately $14.2 million, of which approximately $8.9 million were loans. Deposit liabilities assumed were approximately $15 million. During the third quarter of 1994, the Company completed its cash acquisition of Central State Bank in High Point, North Carolina. Central State had approximately $35 million in assets with earning assets of approximately $32 million, including approximately $27 million in loans. Central State also had approximately $32 million in deposits. For additional information on these acquisitions, please see "Analysis of Results of Operations" and "Analysis of Financial Condition" below and note 2 to the consolidated financial statements. ANALYSIS OF RESULTS OF OPERATIONS Net interest income, the "spread" between earnings on interest-earning assets and the interest paid on interest-bearing liabilities, constitutes the largest source of the Company's earnings. Other factors that significantly affect operating results are the loan loss provision, noninterest income such as service fees and noninterest expenses such as salaries, FDIC insurance assessments and other overhead costs, and the effect of income taxes.
Overview - 1997 Compared to 1996 First Bancorp's net income for 1997 was a record $5,012,000, or basic earnings per share of $1.66, compared to $4,347,000, or basic earnings per share of $1.44, for 1996. This represents a 15.3% increase in net income and basic earnings per share over the prior year. Excluding the after-tax effects of nonrecurring gains of $103,000, or $0.03 per share, in the fourth quarter of 1997 related to an early termination fee of a data processing contract and $128,000, or $0.04 per share, in the third quarter of 1996 related to a branch sale, the 1997 increase in net income and basic earnings per share would have been 16.4% over 1996. The primary reason for the increase in net income in 1997 was a 16.2% increase in net interest income that was a result of strong loan and deposit growth. The provision for loan losses increased 76.9% over the prior year, which is primarily a reflection of the Company providing for the loan growth experienced during the year. Noninterest income decreased 6.7% for the year and noninterest expenses increased 7.4% for the year. See additional discussion below. Overview - 1996 Compared to 1995 Net income for 1996 was $4,347,000, or basic earnings per share of $1.44, compared to $1,582,000, or basic earnings per share of $0.53, for 1995. The primary reason for the significant increase in net income for 1996 was the absence of two nonrecurring events that the Company experienced in 1995. The Company incurred pretax nonrecurring charges totaling $2,691,000 ($1,638,000, or $0.54 per share, on an after tax basis) in the fourth quarter of 1995 related to 1) a litigation settlement ($500,000 pretax in additional provision for loan losses and $1,446,000 pretax in out of pocket settlement costs) and 2) unrelated severance expenses related to two former senior managers ($745,000 pretax). In addition to the nonrecurring 1995 fourth quarter charges, during 1995, the Company incurred $789,000 pretax in legal fees related to the litigation that are included in noninterest expense in the accompanying consolidated financial statements. Excluding the 1996 nonrecurring gain from a branch sale discussed above and the nonrecurring charges and related expenses incurred in 1995, the Company's net income increased approximately 14.0% on a tax effected basis in 1996 compared to 1995. Excluding the effects of the nonrecurring charges and related expenses, First Bancorp experienced the following variances during 1996 compared to 1995 - net interest income increased 9.9%, noninterest income increased 12.0%, the provision for loan losses decreased 18.8%, and noninterest expenses increased 10.3%. Net Interest Income Net interest income on a tax-equivalent basis amounted to $18,808,000 in 1997, $16,256,000 in 1996 and $14,809,000 in 1995. Table 2 analyzes net interest income on a taxable-equivalent basis. The Company's net interest income on a taxable-equivalent basis increased by 16% in 1997 and 10% in 1996. These increases were primarily a result of a 12% increase in average earning assets during 1997 and an 11% increase in 1996. Additionally, in 1997 the yield realized on earning assets increased by 22 basis points from 1996, while the average yield the Company paid on interest-bearing liabilities increased by only 3 basis points, resulting in an increase in net interest margin (net yield on interest-earning assets) of 20 basis points to 5.65% from the 5.45% yield realized in 1996. The increase in yield realized on earning assets was primarily affected by a 20 basis point increase in the yield realized on loans that was largely a result of the 25 basis point increase in the Bank's prime lending rate that occurred in March 1997 and remained in effect for the remainder of the year. The average rate paid on deposits, although 3 basis points higher in 1997, was favorably impacted by higher growth in lower yielding savings, NOW, and money market deposits (15% growth) versus higher yielding time deposits (9% growth).
In 1996, the Company's net interest margin decreased by 5 basis points to 5.45% from 5.50% as a result of a slight compression of both average yields earned and average rates paid. The average yield earned on loans decreased 28 basis points to 9.47%, primarily as a result of a lower average prime rate in effect during the year. This was largely offset by a 62 basis point increase in the yield realized on taxable securities. This increase in yield was primarily a result of a strategic decision by the Company to invest in higher yielding securities with longer maturities. The average yield on deposits increased by 2 basis points to 4.00% during 1996. Changes in total interest income and total interest expense result from changes in both volumes and rates in the related earning asset and interest-bearing liability categories. Table 3 shows the quantitative effects on net interest income of the changes in volumes and rates experienced by the Company. As discussed above and illustrated in Table 3, changes in volumes have been the primary cause of changes in the amounts of interest income and interest expense recorded by the Company. Provision for Loan Losses The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb potential losses inherent in the portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, current economic conditions, historical loan loss experience and other risk factors. The Company made provisions for loan losses of $575,000 for 1997 compared to $325,000 for 1996 and $900,000 for 1995. The increase in the provision for loan losses in 1997 was largely in response to the high volume of loan growth experienced by the Company, as the Company's asset quality ratios improved during 1997. The Company originated $57.5 million in new loans, net of repayments, in 1997 as compared to $11.5 million in 1996. The decrease in the provision for loan losses from 1995 to 1996 is attributable to the Company providing approximately $500,000 in 1995 for the purpose of replenishing the allowance for loan losses that was depleted because of charge-offs of loans related to the parties involved in the litigation that was settled on December 28, 1995. Management made the determination to record these charge-offs as a result of the related settlement negotiations. For additional information, please see note 12 to the consolidated financial statements. Please see "Summary of Loan Loss Experience" below for a more detailed discussion of the allowance for loan losses. The allowance is monitored and analyzed regularly in conjunction with the Bank's loan analysis and grading program, and adjustments are made to maintain an adequate allowance for loan losses. Noninterest Income Noninterest income amounted to $4,150,000 in 1997, a 6.7% decrease from $4,446,000 in 1996. The 1996 amount was $669,000, or 17.7%, higher than the $3,777,000 recorded in 1995. The decrease in noninterest income in 1997 from 1996 was partially due to a decrease in nonrecurring gains of $43,000 and changes in gains and losses from securities sales of $18,000. In 1996, the Company sold one branch office, along with its loans and deposits, and sold a vacated building which resulted in a net nonrecurring gain of $211,000. In 1997,
Montgomery Data realized a nonrecurring gain of $168,000 as a result of its last nonaffiliated customer terminating its data processing agreement prior to its contractually obligated term, and thus having to pay an early termination penalty. Management of Montgomery Data does not intend to aggressively seek additional customers at this time, but plans instead to use existing capacity to meet the increasing requirements of the Bank resulting from its asset growth. Notwithstanding the foregoing, additional customers may be taken on if it is deemed to be in the best interest of the Company. Service charges on deposit accounts amounted to $2,413,000 in 1997, $2,561,000 in 1996 and $2,164,000 in 1995. Other service charges, commissions, and fees amounted to $1,029,000 in 1997, $1,107,000 in 1996 and $1,109,000 in 1995. A factor in the decrease in service charges from 1996 to 1997 relates to the Bank's decision during 1996 to increase fees for certain services to make them more commensurate with the related expenses the Bank incurred in providing the services. Also, an internal emphasis was placed on collecting the fees for all such services. This initially had the effect of increasing gross service fee revenue which resulted in higher total service charge revenues in 1996 as compared to 1995. Subsequently, management believes customers became more cognizant of the higher fees and made efforts to reduce their use of these services, which resulted in a decline in these same revenues for the Bank during 1997 compared to 1996. Commissions from insurance sales decreased by $35,000 in 1997 and $68,000 in 1996 as a result of lower commission fee rates negotiated with brokers, as well as a higher percentage of the Bank's customers utilizing their home equity lines of credit to finance consumer purchases versus obtaining consumer installment loans, where the Bank has typically brokered more insurance policies. The increase in noninterest income from 1995 to 1996 was primarily a result of the nonrecurring gain and increased service charge fees discussed above. Table 4 sets forth the principal components of noninterest income. Noninterest Expenses Noninterest expenses were $14,088,000 in 1997, $13,113,000 in 1996, and $14,868,000 in 1995. The 7.4% increase in noninterest expenses during 1997 was primarily a result of the Bank opening three new branches early in 1997 and a fourth late in 1997. These new branches were largely responsible for the increases in personnel expense, occupancy expense, equipment expense, stationery expense, and telephone expense during the year. The 1996 decrease was primarily due to the absence of the two previously discussed nonrecurring events that occurred in 1995 that resulted in charges of $745,000 in severance related personnel expenses, $1,446,000 in litigation settlement, and $789,000 in legal fees related to the litigation settlement. For additional information regarding the litigation settlement, please see note 12 to the consolidated financial statements. Excluding the effects of these nonrecurring charges and related expenses, noninterest expenses increased by 10.3% in 1996 compared to 1995, which was primarily a result of a full year of expenses related to the Company's acquisition of two branches in the fourth quarter of 1995 that was previously discussed. Table 5 sets forth the principal components of noninterest expenses. Income Taxes The provision for income taxes was $2,549,000 in 1997, $2,213,000 in 1996, and $580,000 in 1995. The 15% increase in tax expense in 1997 compared to 1996 is a result of a 15% increase in pretax income, as the Company's effective tax
rate remained constant at 33.7%. The increase in tax expense in 1996 was due to an increase in pretax income as well as an increase in state income taxes paid. Table 6 presents the components of tax expense and the related effective tax rates. ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION The following discussion focuses on the factors considered by management to be important in assessing the Company's financial condition. The Company's assets and deposits have continued to grow, reflecting growth in existing markets and expansion into new geographic areas. Total assets were $403 million at December 31, 1997, an increase of 20.0% over December 31, 1996. Assets during 1996 grew to $335 million at year end, a 4.3% increase over the $322 million at December 31, 1995. Interest-earning assets at December 31, 1997 were $369 million, an increase of 20.7% over the $306 million held at December 31, 1996. The 1996 amount was 4.1% higher that the $294 million held at December 31, 1995. Loans, the primary interest-earning asset, grew 25.8% to $281 million in 1997 compared to 5.4% growth in 1996. Funding the 1997 asset growth was a $63.4 million, or 21.3%, increase in deposits. Funding the 1996 asset growth was a $10.1 million, or 3.5%, increase in deposits. Approximately $14 million of the 1997 asset and deposit growth can be attributed to the previously mentioned purchase of the First Union bank branch located in Lillington, N.C. Partially offsetting the 1996 growth was the July 1996 sale of a branch with loans of $1.4 million and deposits of $3.5 million. The Company's assets and deposits have experienced compound annual growth rates of approximately 11% over the last five years. Distribution of Assets and Liabilities Table 7 sets forth the percentage relationships of significant components of the Company's balance sheets at December 31, 1997, 1996, and 1995. The most significant variance is the 1997 shift in asset mix from securities to loans that is primarily due to strong loan growth that was partially funded with proceeds from securities maturities and sales. Securities Information regarding the Company's securities portfolio as of December 31, 1997, 1996, and 1995 is presented in Tables 8 and 9. Total securities available for sale and held to maturity amounted to $71.1 million, $76.3 million and $69.4 million at December 31, 1997, 1996, and 1995, respectively. The decrease in year end securities at December 31, 1997 as compared to 1996 is due to the Company investing more funds in overnight cash investments at year end to fund the strong loan demand experienced by the Company near year end, as well as the lack of yield incentive to invest in securities with maturities longer than overnight due to the flattening of the yield curve. The increase in year end securities at year end 1996 versus 1995 was a result of the Company having more of its excess cash invested in securities as opposed to overnight cash investments, as well as overall balance sheet growth. Average total securities were approximately $75.7 million during 1997 as compared to an average of $69.7 million in 1996 and $68.3 million in 1995. The increase in the average balance of securities during 1997 was due to a higher level of funds provided by the slightly higher growth in the amount of average deposits during the year versus average loans, as well as funds provided by earnings of the Company. The relatively small increase in average securities of $1.4 million during 1996 compared to 1995 is a result of the growth in average loans almost completely offsetting the funds provided by the growth in average deposits.
The composition of the securities portfolios at December 31, 1997, 1996, and 1995 reflects a shift in 1996 and 1997 from U.S. Treasuries to higher yielding collateralized mortgage obligations. All of the Company's collateralized mortgage obligations at each year end were issued by Fannie Mae or Freddie Mac. At each year end, there were no collateralized mortgage obligations considered to be "high risk" pursuant to existing bank regulatory guidelines. At December 31, 1997, net unrealized gains of $282,000 were included in the carrying value of securities classified as available for sale compared to net unrealized gains of $221,000 at December 31, 1996 and net unrealized gains of $360,000 at December 31, 1995. Management evaluated any unrealized losses on individual securities at each year end and determined them to be of a temporary nature and caused by fluctuations in market interest rates, not by concerns about the ability of the issuers to meet their obligations. Net unrealized gains, net of applicable deferred income taxes, of $186,000, $146,000, and $235,000, have been reported as a separate component of shareholders' equity as of December 31, 1997, 1996, and 1995, respectively. The market value of securities held to maturity, which the Company carries at amortized cost, exceeded their carrying value by $656,000 at December 31, 1997, $394,000 at December 31, 1996, and $634,000 in 1995. Management evaluated any unrealized losses on individual securities at each year end and determined them to be of a temporary nature and caused by fluctuations in market interest rates, not by concerns about the ability of the issuers to meet their obligations. Table 9 provides detail as to scheduled contractual maturities and book yields on securities available for sale and securities held to maturity at December 31, 1997. Approximately 78% of the available for sale portfolio matures within 5 years, with the weighted average contractual life being 3.25 years. The weighted average tax-equivalent yield for the securities available for sale portfolio was 6.75% at December 31, 1997. The weighted average life of the securities held to maturity portfolio was 5.17 years at December 31, 1997 with a weighted average taxable-equivalent yield of 8.22%. As of December 31, 1997 and 1996, the Company held no investment securities of any one issuer, other than U.S. Treasury and U.S. Government agencies or corporations, in which aggregate book values and approximate market values exceeded 10% of shareholders' equity. Other than the collateralized mortgage obligations previously discussed, the Company owned no securities considered by regulatory authorities to be derivative instruments. Loans Table 10 provides a summary of the loan portfolio composition at each of the past five year ends. Loans increased by $57.5 million, or 25.8%, in 1997 to $280.5 million from the $223.0 million balance at December 31, 1996. The 1996 year end amount was 5.4% higher than the $211.5 million balance at December 31, 1995. The loan growth experienced by the Company in 1997 occurred in all significant loan categories, while the 1996 growth was limited to the real estate mortgage and real estate construction categories.
A large portion of the Company's loan portfolio has historically been comprised of loans secured by various types of real estate. At December 31, 1997, $205.3 million or 73.2% of the Company's loan portfolio was secured by liens on real property. Included in this total are $104.1 million, or 37.1% of total loans, in credit secured by liens on 1-4 family residential properties and $101.2 million, or 36.1% of total loans, in credit secured by liens on other types of real estate. Table 11 provides a summary of scheduled loan maturities over certain time periods, broken out between fixed rate loans and adjustable rate loans. Approximately 33% of the Bank's loans outstanding at December 31, 1997 mature within one year and 83% of total loans mature within five years. These percentages are approximately the same as they were at December 31, 1996. The percentages of variable rate loans and fixed rate loans to total performing loans were 52% and 48%, respectively, as of December 31, 1997 compared to 51% and 49% as of December 31, 1996. The bank intentionally makes a blend of fixed and variable rate loans so as to reduce interest rate risk. The yield on performing loans as of December 31, 1997 was 9.23% compared to 9.17% at December 31, 1996 and 9.40% at December 31, 1995. The slight increase in yield at December 31, 1997 is a result of a higher prime rate in effect at year end offset by the Company's trend in the second half of the year of originating larger balance loans with slightly lower yields. The decrease in yield from 1995 to 1996 is primarily a result of a lower prime rate in effect at the respective year ends. See additional information regarding interest rate risk below. Nonperforming Assets Nonperforming assets include nonaccrual loans, loans past due 90 or more days and still accruing interest, restructured loans and foreclosed, repossessed and idled properties. As a matter of policy the Company places all loans that are past due 90 or more days on nonaccrual basis, and thus there were no such loans at any of the past five year ends that were 90 days past due and still accruing interest. Table 12 summarizes the Company's nonperforming assets at the dates indicated. Nonaccrual loans are loans on which interest income is no longer being recognized or accrued because management has determined that the collection of interest is doubtful. The placing of loans on nonaccrual status negatively impacts earnings because (i) interest accrued but unpaid as of the date a loan is placed on nonaccrual status is either deducted from interest income or is charged-off, (ii) future accruals of interest income are not recognized until it becomes highly probable that both principal and interest will be paid and (iii) principal charged-off, if appropriate, may necessitate additional provisions for loan losses that are charged against earnings. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the originally contracted terms. Nonperforming loans (which includes nonaccrual loans and restructured loans) as of December 31, 1997, 1996 and 1995 totaled $1,283,000, $2,186,000, and $1,298,000, respectively. Nonperforming loans as a percentage of total loans amounted to 0.46%, 0.98% and 0.61%, at December 31, 1997, 1996, and 1995 respectively. The decrease in nonperforming loans at December 31, 1997 as compared to December 31, 1996 is primarily attributable to the resolution of several relationships that resulted in partial charge-offs during the year, as
well as generally improved loan quality. The increase in nonperforming loans at December 31, 1996 compared to December 31, 1995 was largely due to $1,300,000 more in loans on nonaccrual status that were assumed in corporate acquisitions occurring in 1994 and 1995. These nonaccrual loans that were originated by other institutions amounted to $1,461,000 at December 31, 1996 compared to $161,000 at December 31, 1995. These loans had a reduced risk of loss to the Company because of certain loss-reimbursement provisions contained in the acquisition agreements. Substantially all such loans were resolved during 1997 by means of receipt of payment-in-full from the borrower, foreclosure and disposition of collateral, or sale of the loan back to the original owner of the loan prior to the expirations of the reimbursement provisions of the agreements in 1997. As of December 31, 1997, the largest nonaccrual balance to any one borrower was $231,000 with the average balance for the 29 nonaccrual loans being approximately $33,000. If the nonaccrual loans and restructured loans as of December 31, 1997, 1996 and 1995 had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period), gross interest income in the amounts of approximately $91,000, $183,000 and $82,000 for nonaccrual loans and $34,000, $41,000 and $52,000 for restructured loans would have been recorded for 1997, 1996 and 1995, respectively. Interest income on such loans that was actually collected and included in net income in 1997, 1996 and 1995 amounted to approximately $32,000, $81,000 and $36,000 for nonaccrual loans (prior to their being placed on nonaccrual status) and $25,000, $30,000 and $50,000 for restructured loans, respectively. In addition to the nonperforming loan amounts included above, management believes that an estimated $1,000,000-$1,500,000 of loans that are currently performing in accordance with their contractual terms may potentially develop problems depending upon the particular financial situations of the borrowers and economic conditions in general. Management has taken these potential problem loans into consideration when evaluating the adequacy of the allowance for loan losses at December 31, 1997 (see discussion below). Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed in the problem loan amounts and the potential problem loan amounts discussed above do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Foreclosed, repossessed, and idled properties amounted to $560,000 at December 31, 1997, compared to $572,000 at December 31, 1996 and $1,393,000 at December 31, 1995. Approximately $391,000 of the 1996 decrease from 1995 relates to the disposition of properties assumed in the Central State acquisition. Foreclosed, repossessed, and idled properties represented 0.14%, 0.17% and 0.43% of total assets at the end of 1997, 1996, and 1995, respectively. The Company's management has reviewed recent appraisals of these properties and has concluded that their fair values, less estimated costs to sell, exceeds the respective carrying values at December 31, 1997.
Allowance for Loan Losses and Loan Loss Experience The allowance for loan losses is created by direct charges to operations. Losses on loans are charged against the allowance in the period in which such loans, in management's opinion, become uncollectible. The recoveries realized during the period are credited to this allowance. The factors that influence management's judgment in determining the amount charged to operating expense include past loan loss experience, composition of the loan portfolio (including off-balance sheet commitments), evaluation of possible future losses and current economic conditions. The Bank uses a loan analysis and grading program to facilitate its evaluation of possible future loan losses and the adequacy of its allowance for loan losses. In this program, risk grades are assigned by management and tested by the Bank's Internal Audit Department and an independent third party consulting firm. The program evaluates a sample of new loans, loans that management identifies as having potential credit weaknesses, loans past due 90 days or more, nonaccrual loans and any other loans identified during previous regulatory and other examinations. The Company strives to maintain its loan portfolio in accordance with what management believes are conservative loan underwriting policies that result in loans specifically tailored to the needs of the Company's market areas. Every effort is made to identify and minimize the credit risks associated with such lending strategies. The Company has no foreign loans, few agricultural loans and does not engage in significant lease financing or highly leveraged transactions. Commercial loans are diversified among a variety of industries. The majority of loans captioned in the tables discussed below as "real estate" loans are primarily various personal and commercial loans where real estate provides additional security for the loan. Collateral for virtually all of these loans is located within the Company's principal market area. The allowance for loan losses amounted to $4,779,000 as of December 31, 1997 as compared to $4,726,000 at December 31, 1996 and $4,587,000 at December 31, 1995. This represented 1.70%, 2.12%, and 2.17% of loans outstanding as of December 31, 1997, 1996, and 1995, respectively. The decrease in the allowance for loan losses as a percentage of total loans at year end 1997 is a result of generally improved loan quality, as well as the resolution during 1997 of several large nonaccrual and problem loans that resulted in partial charge-offs. As noted in Table 12, the Company's allowance for loan losses as a percentage of nonperforming loans amounted to 372.49% at December 31, 1997 as compared to 216.19% at December 31, 1996, and 353.39% at December 31, 1995. Table 13 sets forth the allocation of the allowance for loan losses at the dates indicated. The portion of these reserves that was allocated to known weaknesses in the loan portfolio decreased from $4,104,000 at December 31, 1996 to $3,789,000 at December 31, 1997. The year end 1996 amount was virtually unchanged from the $4,093,000 at December 31, 1995. Management considers the allowance for loan losses adequate to cover possible loan losses on the loans outstanding as of each reporting date. It must by emphasized, however, that the determination of the allowance using the Company's procedures and methods rests upon various judgments and assumptions
about future economic conditions and other factors affecting loans. No assurance can be given that the Company will not in any particular period sustain loan losses that are sizable in relation to the amount reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowances for loan losses and losses on foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowances based on the examiners' judgments about information available to them at the time of their examinations. For the years indicated, Table 14 summarizes the Company's balances of loans outstanding, average loans outstanding, changes in the allowance arising from charge-offs and recoveries by category, and additions to the allowance that have been charged to expense. The Company's net loan charge offs were approximately $522,000 in 1997, $186,000 in 1996 and $1,509,000 in 1995. This represents 0.21%, 0.09%, and 0.79% of average loans during 1997, 1996, and 1995, respectively. As previously discussed, during 1997 the Company resolved several large nonperforming loans that resulted in partial charge-offs. Charge-offs in 1995 included approximately $590,000 of loans related to the parties involved in the litigation that was settled on December 28, 1995. For additional information, see note 12 to the consolidated financial statements. Deposits The average amounts of deposits of the Company for the years ended December 31, 1997, 1996 and 1995 are presented in Table 15. Average deposits for 1997 grew by 10.4% over the 1996 average to $320.7 million. The 1996 average amount of deposits was $290.5 million, a 10.5% increase from 1995. The category of deposits with the largest percentage increase during 1997 was interest-bearing demand deposits, which increased by 20.0%. This increase can be partially attributed to the Company restructuring several of its accounts within this category to offer more competitive rates. This resulted in a 24 basis point increase in the average rate paid on interest-bearing demand deposits for the year. For 1997, average savings accounts increased by 2.7%, average time deposits increased by 8.8%, and average noninterest-bearing deposits grew by 4.5%, over the averages from 1996. In 1996, average interest-bearing demand deposits increased by 4.5%, average savings accounts increased by 7.4%, average time deposits increased by 14.1%, and average noninterest-bearing deposits grew by 12.6%, over the averages from 1995. The Company has a large, stable base of time deposits with little dependence on volatile deposits of $100,000 or more. The time deposits are principally certificates of deposit and individual retirement accounts obtained from individual customers. Deposits of certain local governments and municipal entities represented 1.5% of the Bank's total deposits at December 31, 1997. All such public funds are collateralized by investment securities. The Company does not purchase brokered deposits. As of December 31, 1997, the Company held approximately $40,200,000 in time deposits of $100,000 or more and other time deposits of $134,298,000. Table 16 is a maturity schedule of time deposits of $100,000 or more as of December 31, 1997.
Interest Rate Risk (Including Quantitative and Qualitative Disclosures About Market Risk - Item 7A.) Net interest income is the Company's most significant component of earnings. Notwithstanding changes in volumes of loans and deposits, the Company's level of net interest income is continually at risk due to the effect that changes in general market interest rate trends have on interest yields earned and paid with respect to the various categories of earnings assets and interest-bearing liabilities. It is the Company's policy to maintain portfolios of earning assets and interest-bearing liabilities with maturities and repricing opportunities that will afford protection, to the extent practical, against wide interest rate fluctuations. The Company's exposure to interest rate risk is analyzed on a regular basis by management using standard GAP reports, maturity reports, and an asset/liability software model that simulates future levels of interest income and expense based on current interest rates, expected future interest rates, and various intervals of "shock" interest rates. Over the years, the Company has been able to maintain a fairly consistent yield on average earning assets (net interest margin). Over the past ten years the net interest margin has not varied by more than 25 basis points in any single year and the lowest net interest margin realized over that same period is within 60 basis points of the highest. While the Company can not guarantee similar stability in the net interest margin in the future, at this time, management does not expect significant fluctuations. See additional discussion of the Company's net interest margin in the "Net Interest Income" above. Table 17 sets forth the Company's interest rate sensitivity analysis as of December 31, 1997. As illustrated by this table, the Company has $69.5 million more in interest-bearing liabilities that are subject to interest rate changes within one year than earning assets. This generally would indicate that net interest income would experience downward pressure in a rising interest rate environment and would benefit from a declining interest rate environment. However, this method of analyzing interest sensitivity only measures the magnitude of the timing differences and does not address earnings, market value, or management actions. Also, interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. In addition to the effects of "when" various rate-sensitive products reprice, market rate changes may not result in uniform changes in rates among all products. For example, included in interest-bearing liabilities at December 31, 1997 subject to interest rate changes within one year are deposits totaling $135.8 million comprised of NOW, savings, and certain types of money market deposits with interest rates set by management. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators. Thus, the Company believes that near term net interest income would not likely experience significant downward pressure from rising interest rates. Similarly, management would not expect a significant increase in near term net interest income from falling interest rates. As of December 31, 1997, approximately 90% of interest-earning assets could be repriced within five years and substantially all interest-bearing liabilities could be repriced within five years. The Company has no market risk sensitive instruments held for trading purposes, nor does it maintain any foreign currency positions. Table 18 presents the expected maturities of the Company's other than trading market risk sensitive financial instruments. Table 18 also presents the fair values of
market risk sensitive instruments as estimated in accordance with Statement of Financial Accounting Standard No. 107, "Disclosures About Fair Value of Financial Instruments." The Company's fixed rate earning assets have estimated fair values that are slightly higher than their carrying value. This is due to the yields on these portfolios being slightly higher than market yields at December 31, 1997 for instruments with maturities similar to the remaining term of the portfolios due to a generally declining interest rate environment at year end. The estimated fair value of the Company's time deposits is higher than its book value for the same reason. Off-Balance Sheet Risk In the normal course of business there are various outstanding commitments and contingent liabilities such as commitments to extend credit, which are not reflected in the financial statements. These commitments are not recorded as an asset or liability until exercised. As of December 31, 1997, the Company had outstanding loan commitments of $63,219,000 of which $54,845,000 were at variable rates and $8,374,000 were at fixed rates. Included in outstanding loan commitments were unfunded commitments of $22,730,000 on revolving credit plans, of which $18,592,000 were at variable rates and $4,138,000 were at fixed rates. Additionally, standby letters of credit of approximately $1,108,000 and $646,000 were outstanding at December 31, 1997 and 1996, respectively. The Company's exposure to credit loss for the aforementioned commitments in the event of nonperformance by the party to whom credit or financial guarantees have been extended is represented by the contractual amount of the financial instruments discussed above. However, management believes that these commitments represent no more than the normal lending risk that the Company commits to its borrowers. If these commitments are drawn, the Company plans to obtain collateral if it is deemed necessary based on management's credit evaluation of the counter party. The type of collateral held varies but may include accounts receivable, inventory and commercial or residential real estate. Management expects these commitments, if drawn, to be funded through normal operations. Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. The Company does not engage in derivatives activities. Return On Assets And Equity Table 19 shows return on assets (net income divided by average total assets), return on equity (net income divided by average shareholders' equity), dividend payout ratio (dividends declared per share divided by net income per share) and shareholders' equity to assets ratio (average shareholders' equity divided by average total assets) for each of the years in the three-year period ended December 31, 1997. The return on assets and return on equity ratios for 1995 were significantly impacted by the nonrecurring charges previously discussed. Liquidity The Company's primary source of liquidity is dividends from the Bank. See "Business - Supervision and Regulation" and note 15 to the consolidated financial statements for a discussion of regulatory restrictions on the payment of dividends. The Bank'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 reserve requirements, pay expenses and operate the Bank on an ongoing basis. The Bank's
primary liquidity sources are cash and due from banks, federal funds sold, as well as the securities available for sale portfolio. The Company also has in place available lines of credit totaling $36,000,000 should funding or liquidity needs arise. These lines of credit are secured by the Company's Federal Home Loan Bank stock and a blanket lien on its one-to-four family residential loan portfolio. The Company also has correspondent bank relationships established that allow the Company to purchase up to $10,000,000 in federal funds on an overnight basis. The Bank typically has not had to rely on the purchase of federal funds as a source of liquidity. The Bank's management believes its liquidity sources are 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. At December 31, 1997 and 1996, the Company was in compliance with all existing capital requirements, as summarized in Table 20. See "Supervision and Regulation" under "Business" above and note 15 to the consolidated financial statements for discussion of other matters that may affect the Company's capital resources.
Year 2000 Issue As has been widely reported in the media, 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" (Year 2000 Issue). Due to the highly automated and computerized nature of the Company's transaction processing and operations as a whole, the Company is taking the Year 2000 Issue very seriously. The Company's Technology Committee, which is comprised of a cross-section of the Company's employees, is leading the Company's Year 2000 efforts and involving all employees of the Company in ensuring that the Company is properly prepared for the Year 2000. The Company uses third-party software vendors for most of its computer programs and micro-chip related processes. 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. The Company's second phase in addressing the Year 2000 Issue was to contact all such vendors and request documentation regarding their Year 2000 compliance efforts. This phase is now virtually complete and the Company is currently analyzing the responses. The next phase for the Company is to implement a comprehensive testing of all known processes. Initially, processes will be tested on a stand-alone basis and then the testing will involve multiple interfacing processes. All testing is scheduled to be completed by the end of 1998. 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 first quarter of 1999. To date the Company has not identified any processes that will require significant expenditures to address the Year 2000 Issue. Currently, the Company's estimate of the range of total costs to address the Year 2000 Issue is $100,000 to $150,000. The majority of these costs are expected to be incurred and expensed by the Company in 1998. Inflation Since the assets and liabilities of a bank are primarily monetary in nature (payable in fixed determinable amounts), the performance of a bank is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same. The effect of inflation on banks is normally not as significant as its influence on those businesses that have large investments in plant and inventories. During periods of high inflation, there are normally corresponding increases in the money supply, and banks will normally experience above average growth in assets, loans and deposits. Also, general increases in the price of goods and services will result in increased operating expenses.
Accounting Changes The Company prepares its financial statements and related disclosures in conformity with standards established by, among others, the Financial Accounting Standards Board (the "FASB"). Because the information needed by users of financial reports is dynamic, the FASB frequently issues new rules and proposed new rules for companies to apply in reporting their activities. The only new standard adopted during 1997 that significantly changed the way the Company has prepared its financial statements was the adoption of Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which is discussed in the following paragraph. The Company adopted Statement of Financial Standard Number 128, "Earnings Per Share" ("SFAS No. 128") as of December 31, 1997. SFAS No. 128 superseded Accounting Principles Board Opinion No. 15, "Earnings Per Share" ("APB No. 15") which the Company had properly followed until the adoption of SFAS No. 128. For companies that have potentially issuable stock (complex capital structures), such as the Company because of its stock option plan, SFAS No. 128 requires that two earnings per share amounts be disclosed - 1) Basic Earnings Per Share and 2) Diluted Earnings Per Share. Basic Earnings Per Share is calculated by dividing net income available to common stockholders by the weighted average number of common stock shares outstanding during the period. The Basic Earnings Per Share computation for the Company is the same method the Company previously used to calculate and report earnings per share under APB No. 15. Diluted Earnings Per Share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. Currently, the Company's only dilutive potential common stock issuances relate to options issued under the Company's stock option plan - see note 14 to the consolidated financial statements for additional information regarding the stock option plan. In computing Diluted Earnings Per Share, it is assumed that all such dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of options assumed to be exercised and the number of shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate Diluted Earnings Per Share for the Company. The FASB has also issued three new standards that must be adopted by the Company for reporting periods beginning with the first quarter of 1998. Those standards are discussed in the following three paragraphs. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. Comprehensive income is defined as the change in equity during a period for non-owner transactions and is divided into net income and other comprehensive income. Other comprehensive income includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. This statement does not change or modify the reporting or display in the income statement. SFAS No. 130 is effective for interim and annual periods beginning after December 31, 1997 although early adoption is permitted. Comparative financial statements provided for earlier periods are required to be reclassified to reflect the application of this statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The statement requires management to report selected financial and descriptive information about reportable operating segments. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Generally, disclosures are required for segments internally identified to evaluate performance and resource allocation. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for prior periods is to be restated, if it is practical to do so. SFAS No. 131 does not have to be applied to interim financial statements in the initial year of application, but, comparative information must be provided for interim periods in the second year of application. This statement is not expected to affect the Company's financial statement presentation. In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits." This statement standardizes the disclosure requirements of pensions and other postretirement benefits. This statement does not change any measurement or recognition provisions, and thus will not materially impact the Company. This statement is effective for fiscal years beginning after December 15, 1997. FORWARD-LOOKING STATEMENTS The foregoing discussion may contain statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," or other statements concerning opinions or judgment of the Company and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of the Company's customers, actions of government regulators, the level of market interest rates, and general economic conditions.
Table 1 Selected Consolidated Financial Data <TABLE> <CAPTION> Year Ended December 31, Five-Year ($ in thousands except per share ------------------------------------------------------------ Compound and nonfinancial data) 1997 1996 1995 1994 1993 Growth ---------- ------- ------- ------- ------- ----- <S> <C> <C> <C> <C> <C> <C> Income Statement Data Interest income $ 29,197 25,468 23,106 18,873 17,530 9.6% Interest expense 11,123 9,916 8,953 6,257 6,056 8.1% Net interest income 18,074 15,552 14,153 12,616 11,474 10.6% Provision for loan losses 575 325 900 387 590 2.6% Net interest income after provision 17,499 15,227 13,253 12,229 10,884 10.9% Noninterest income 4,150 4,446 3,777 3,293 2,796 8.4% Noninterest expense 14,088 13,113 14,868 11,380 9,958 7.7% Income before income taxes 7,561 6,560 2,162 4,142 3,722 16.8% Income taxes 2,549 2,213 580 1,155 1,021 20.1% Net income 5,012 4,347 1,582 2,987 2,701 15.4% - ------------------------------------------------------------------------------------------------------------------------------ Per Share Data Earnings - basic $ 1.66 1.44 0.53 0.99 0.90 15.1% Earnings - diluted 1.62 1.43 0.52 0.99 0.90 14.6% Cash dividends declared 0.52 0.44 0.35 0.33 0.29 19.9% Dividend payout per basic share 31.33% 30.56% 66.04% 33.33% 32.22% 4.1% Market Price High $ 35.00 19.50 14.75 11.50 10.50 32.0% Low 18.50 11.50 10.25 9.00 7.38 27.5% Close 35.00 18.50 12.75 10.50 10.50 35.6% Stated book value 12.17 11.02 10.04 9.57 9.12 7.4% Tangible book value 10.02 9.08 7.95 7.48 8.67 3.9% - ------------------------------------------------------------------------------------------------------------------------------ Selected Balance Sheet Data (at year end) Securities $ 71,133 76,265 69,397 67,092 65,746 0.8% Loans, net of unearned income 280,513 223,032 211,522 185,749 157,279 14.2% Allowance for loan losses 4,779 4,726 4,587 5,009 2,797 13.6% Intangible assets 6,487 5,834 6,306 6,279 1,374 57.0% Total assets 402,669 335,450 321,739 289,613 257,339 10.7% Deposits 361,224 297,861 287,715 258,430 227,043 10.9% Total shareholders' equity 36,765 33,232 30,277 28,790 27,443 7.5% - ------------------------------------------------------------------------------------------------------------------------------ Selected Average Balances Assets $ 359,879 326,221 296,400 267,227 247,717 8.8% Loans 245,596 217,900 192,035 168,167 149,247 10.9% Earning assets 333,029 298,308 269,313 244,708 226,563 8.9% Deposits 320,659 290,510 262,846 236,725 218,795 8.9% Interest-bearing liabilities 276,148 247,883 225,006 204,141 193,988 7.9% Shareholders' equity 35,024 31,896 30,461 28,197 26,751 7.2% - ------------------------------------------------------------------------------------------------------------------------------ Ratios Return on average equity 14.31% 13.63% 5.19% 10.59% 10.10% Return on average assets 1.39% 1.33% 0.53% 1.12% 1.09% Net interest margin (taxable-equivalent basis) 5.65% 5.45% 5.50% 5.41% 5.32% Average shareholders' equity to average assets 9.73% 9.78% 10.28% 10.55% 10.80% Average loans to average deposits 76.59% 75.01% 73.06% 71.04% 68.21% Net charge-offs to average loans 0.21% 0.09% 0.79% 0.39% 0.21% - ------------------------------------------------------------------------------------------------------------------------------ </TABLE>
Table 1 Selected Consolidated Financial Data (continued) <TABLE> <CAPTION> Year Ended December 31, Five-Year ($ in thousands except per share ------------------------------------------------------------ Compound and nonfinancial data) 1997 1996 1995 1994 1993 Growth ---------- ------- ------- ------- ------- ----- <S> <C> <C> <C> <C> <C> <C> Nonfinancial Data Number of shareholders of record 668 669 675 692 702 Number of employees (full/part time) 228/37 213/29 201/25 198/26 171/34 Number of banking offices 33 31 32 28 26 - ------------------------------------------------------------------------------------------------------------------------------ </TABLE> (1) 1997 results include a fourth quarter nonrecurring gain of $168,000 before tax, or $103,000 after tax ($0.03 per share), related to a customer's early termination fee of a data processing contract. 1996 results include a nonrecurring net gain of $211,000 before tax, or $128,000 after tax ($0.04 per share), from the third quarter 1996 sale of a branch office and a vacated building. 1995 results include a nonrecurring net loss of $2,691,000 before tax, or $1,638,000 after tax (or $0.54 per share) from the fourth quarter settlement of litigation and unrelated severance expenses for two senior managers. 1995 results also include $789,000 pretax in noninterest expenses related to the litigation settlement. (2) Per share amounts for 1995 and before have been restated to reflect the two-for-one stock split distributed in September 1996. (3) Earnings per share amounts for all years have been computed under the provisions of accounting standard number 128, "Earnings Per Share" which was adopted on December 31, 1997. All previously reported earnings per share have been computed and restated under the provisions of the standard. Diluted earnings per share include the potentially dilutive effects of the Company's 1994 Stock Option Plan.
Table 2 Average Balances and Net Interest Income Analysis <TABLE> <CAPTION> Year Ended December 31, 1997 1996 1995 ------------------------------ ----------------------------- ----------------------------- Interest Interest Interest ($ in thousands) Average Average Earned Average Average Earned Average Average Earned Volume Rate or Paid Volume Rate or Paid Volume Rate or Paid ------ ---- ------- ------ ---- ------- ------ ---- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Assets Loans (1) $245,596 9.67% $ 23,754 $217,900 9.47% $ 20,644 $192,035 9.75% $ 18,720 Taxable securities 53,710 6.72% 3,610 49,617 6.27% 3,110 48,871 5.65% 2,762 Non-taxable securities (2) 21,994 8.74% 1,923 20,074 9.09% 1,825 19,436 8.95% 1,739 Short-term investments, principally federal funds 11,729 5.49% 644 10,717 5.53% 593 8,971 6.03% 541 -------- --------- -------- --------- -------- --------- Total interest- earning assets 333,029 8.99% 29,931 298,308 8.77% 26,172 269,313 8.82% 23,762 --------- --------- --------- Cash and due from banks 12,748 12,906 11,575 Bank premises and equipment, net 8,096 7,920 7,799 Other assets 6,006 7,087 7,713 -------- -------- -------- Total assets $359,879 $326,221 $296,400 ======== ======== ======== Liabilities and Equity Savings, NOW and money market deposits 122,063 2.31% 2,820 106,273 2.15% 2,284 100,893 2.23% 2,247 Time deposits (greater than) $100,000 34,872 5.75% 2,004 31,524 5.74% 1,811 27,570 6.03% 1,662 Other time deposits 119,158 5.28% 6,296 110,079 5.29% 5,820 96,536 5.22% 5,044 -------- --------- -------- --------- -------- --------- Total interest-bearing deposits 276,093 4.03% 11,120 247,876 4.00% 9,915 224,999 3.98% 8,953 Short-term borrowings 55 5.45% 3 7 5.72% 1 7 - - -------- --------- -------- --------- -------- --------- Total interest- bearing liabilities 276,148 4.03% 11,123 247,883 4.00% 9,916 225,006 3.98% 8,953 --------- --------- ---------- Non-interest- bearing deposits 44,566 42,634 37,847 Other liabilities 4,141 3,808 3,086 Shareholders' equity 35,024 31,896 30,461 -------- -------- -------- Total liabilities and shareholders' equity $359,879 $326,221 $296,400 ======== ======== ======== Net yield on interest- earning assets and net interest income 5.65% $ 18,808 5.45% $ 16,256 5.50% $ 14,809 ========= ========= ========= Interest rate spread 4.96% 4.77% 4.84% </TABLE>
(1) Net of unearned income of $0, $5,000, and $10,000 in 1997, 1996, and 1995 respectively. Average loans includes nonaccruing loans, the effect of which is to lower the average rate shown. Interest earned includes recognized loan fees in the amounts of $583,000, $512,000, and $464,000 for 1997, 1996, and 1995, respectively. (2) Includes tax-equivalent adjustments of $734,000, $704,000, and $656,000 in 1997, 1996, and 1995 respectively, to reflect the federal and state benefit of the tax-exempt securities, reduced by the related nondeductible portion of interest expense.
Table 3 Volume and Rate Variance Analysis <TABLE> <CAPTION> Year Ended December 31, 1997 Year Ended December 31, 1996 ---------------------------- ---------------------------- Change Attributable to Change Attributable to ---------------------- ---------------------- Total Total (In thousands) Changes Changes Increase Changes Changes Increase in Volumes in Rates (Decrease) in Volumes in Rates (Decrease) ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> Interest income (tax-equivalent): Loans $2,651 $ 459 $3,110 $2,486 $ (562) $1,924 Taxable securities 266 234 500 44 304 348 Non-taxable securities 171 (73) 98 58 28 86 Short-term investments, principally federal funds sold 56 (5) 51 101 (49) 52 ------ ------ ------ ------ ------ ------ Total interest income 3,144 615 3,759 2,689 (279) 2,410 ------ ------ ------ ------ ------ ------ Interest expense: Savings, NOW and money market deposits 352 184 536 118 (81) 37 Time deposits greater than$100,000 192 1 193 233 (84) 149 Other time deposits 480 (4) 476 712 64 776 ------ ------ ------ ------ ------ ------ Total interest-bearing deposits 1,024 181 1,205 1,063 (101) 962 Short-term borrowings 5 (3) 2 -- 1 1 ------ ------ ------ ------ ------ ------ Total interest expense 1,029 178 1,207 1,063 (100) 963 ------ ------ ------ ------ ------ ------ Net interest income $2,115 $ 437 $2,552 $1,626 $ (179) $1,447 ====== ====== ====== ====== ====== ====== </TABLE> (1) Changes attributable to both volume and rate are allocated equally between rate and volume variances.
Table 4 Noninterest Income <TABLE> <CAPTION> Year Ended December 31, ------------------------------------ (In thousands) 1997 1996 1995 ------- ------- ------- <S> <C> <C> <C> Service charges on deposit accounts $ 2,413 $ 2,561 $ 2,164 Commissions from insurance sales 278 313 381 Other service charges, commissions, and fees 1,029 1,107 1,109 Data processing fees 274 248 123 Securities gains (losses), net (12) 6 -- Other nonrecurring net gains 168 211 -- ------- ------- ------- Total $ 4,150 $ 4,446 $ 3,777 ======= ======= ======= </TABLE>
Table 5 Noninterest Expenses <TABLE> <CAPTION> Year Ended December 31, ----------------------------------- (In thousands) 1997 1996 1995 ------- ------- ------- <S> <C> <C> <C> Salaries $ 6,225 $ 5,447 $ 5,866 Employee benefits 1,315 1,268 1,222 ------- ------- ------- Total personnel expense 7,540 6,715 7,088 Net occupancy expense 954 904 858 Equipment related expenses 858 833 798 Litigation settlement -- -- 1,446 Amortization of intangible assets 546 568 501 FDIC Insurance 39 2 269 Legal and audit 181 207 955 Stationery and supplies 756 605 579 Telephone 424 334 293 Other operating expenses 2,790 2,945 2,081 ------- ------- ------- Total $14,088 $13,113 $14,868 ======= ======= ======= </TABLE> Table 6 Income Taxes <TABLE> <CAPTION> (In thousands) 1997 1996 1995 ------- ------- ------- <S> <C> <C> <C> Current - Federal $ 2,321 $ 1,685 $ 767 - State 290 268 -- Deferred - Federal (62) 260 (187) ------- ------- ------- Total $ 2,549 $ 2,213 $ 580 ======= ======= ======= Effective tax rate 33.71% 33.73% 26.83% ======= ======= ======= </TABLE>
Table 7 Distribution of Assets and Liabilities <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Assets Interest-earning assets Net loans 69% 65% 64% Securities available for sale 13 16 15 Securities held for maturity 5 7 6 Short term investments 4 2 4 --- --- --- Total interest-earning assets 91 90 89 Non-interest-earning assets Cash and due from banks 4 5 4 Premises and equipment 2 2 2 Other assets 3 3 5 --- --- --- Total assets 100% 100% 100% === === === Liabilities and shareholders' equity Demand deposits-noninterest bearing 13% 13% 13% Savings, NOW, and money market deposits 34 32 33 Time deposits of $100,000 or more 10 10 10 Other time deposits 33 33 33 --- --- --- Total deposits 90 88 89 Accrued expenses and other liabilities 1 2 2 --- --- --- Total liabilities 91 90 91 Shareholders' equity 9 10 9 --- --- --- Total liabilities and shareholders' equity 100% 100% 100% === === === </TABLE>
Table 8 Securities Portfolio Composition <TABLE> <CAPTION> As of December 31, ----------------------------------- (In thousands) 1997 1996 1995 ------- ------- ------- <S> <C> <C> <C> Securities available for sale: U.S. Treasury $ 534 $ 5,537 $ 9,590 U.S. Government agencies 38,569 42,239 39,054 Collateralized mortgage obligations 9,243 5,530 389 State and local governments 906 613 601 Equity securities 1,025 23 23 ------- ------- ------- Total securities available for sale 50,277 53,942 49,657 ------- ------- ------- Securities held to maturity: State and local governments 20,460 21,869 19,357 Other 396 454 383 ------- ------- ------- Total securities held to maturity 20,856 22,323 19,740 ------- ------- ------- Total securities $71,133 $76,265 $69,397 ======= ======= ======= Average total securities during year $75,704 $69,691 $68,307 ======= ======= ======= </TABLE>
Table 9 Securities Portfolio Maturity Schedule <TABLE> <CAPTION> As of December 31, 1997 ------------------------------------ Book Fair Book ($ in thousands) Value Value Yield (1) ----- ----- --------- <S> <C> <C> <C> Securities available for sale: U.S. Treasury Due after one but within five years $ 503 $ 534 7.30% ------- ------- ---- Total 503 534 7.30% ------- ------- ---- U.S. Government agencies Due within one year 9,328 9,359 6.99% Due after one but within five years 22,556 22,659 6.61% Due after five but within ten years 6,496 6,551 6.68% ------- ------- ---- Total 38,380 38,569 6.71% ------- ------- ---- Collateralized mortgage obligations Due after one but within five years 5,931 5,927 6.88% Due after five but within ten years 3,250 3,316 7.39% ------- ------- ---- Total 9,181 9,243 7.06% ------- ------- ---- State and local governments Due within one year 906 906 4.38% ------- ------- ---- Total 906 906 4.38% ------- ------- ---- Equity securities 1,025 1,025 7.25% ------- ------- ---- Total securities available for sale Due within one year 10,234 10,265 6.76% Due after one but within five years 28,990 29,120 6.68% Due after five but within ten years 9,746 9,867 6.92% Due after ten years 1,025 1,025 7.25% ------- ------- ---- Total $49,995 $50,277 6.75% ======= ======= ==== Securities held to maturity State and local governments Due within one year $ 3,324 $ 3,354 9.00% Due after one but within five years 8,113 8,348 8.30% Due after five but within ten years 5,736 5,939 7.88% Due after ten years 3,287 3,475 8.09% ------- ------- ---- Total 20,460 21,116 8.26% ------- ------- ---- Other Due after five but within ten years 396 396 6.00% ------- ------- ---- Total 396 396 6.00% ------- ------- ---- </TABLE>
Table 9 Securities Portfolio Maturity Schedule (continued) <TABLE> <CAPTION> As of December 31, ------------------------------------ 1997 ------------------------------------ Book Fair Book ($ in thousands) Value Value Yield (1) ----- ----- --------- <S> <C> <C> <C> Total securities held to maturity Due within one year 3,324 3,354 9.00% Due after one but within five years 8,113 8,348 8.30% Due after five but within ten years 6,132 6,335 7.76% Due after ten years 3,287 3,475 8.09% ------- ------- ---- Total $20,856 $21,512 8.22% ======= ======= ==== </TABLE> (1) Yields on tax-exempt investments have been adjusted to a taxable equivalent basis using a 34% tax rate. Table 10 Loan Portfolio Composition <TABLE> <CAPTION> As of December 31, ---------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------------ ------------------ ------------------ ------------------ ------------------ ($ in % of % of % of % of % of thousands) Total Total Total Total Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial, financial, & agricultural $ 45,417 16.18% $ 33,100 14.83% $ 34,438 16.27% $ 34,187 18.38% $ 26,900 17.09% Real estate - construction 19,323 6.89% 14,498 6.50% 10,052 4.75% 9,767 5.25% 8,651 5.49% Real estate - mortgage(1) 185,927 66.25% 148,667 66.63% 139,567 65.95% 116,200 62.48% 100,285 63.71% Installment loans to individuals 29,971 10.68% 26,860 12.04% 27,566 13.03% 25,815 13.89% 21,576 13.71% -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Loans, gross 280,638 100.00% 223,125 100.00% 211,623 100.00% 185,969 100.00% 157,412 100.00% ====== ====== ====== ====== ====== Unamortized net deferred loan fees & unearned income (125) (93) (101) (220) (133) -------- -------- -------- -------- -------- Total loans, net $280,513 $223,032 $211,522 $185,749 $157,279 ======== ======== ======== ======== ======== </TABLE> (1) The majority of these loans are various personal and commercial loans where real estate provides additional security for the loan.
Table 11 Loan Maturities <TABLE> <CAPTION> As of December 31, 1997 ---------------------------------------------------------------------------------------------- Due after one year Due within but Due after five one year within five years years Total ---------------------- --------------------- -------------------- ------------------- ($ in thousands) Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> Variable Rate Loans: Commercial, financial, and agricultural $ 20,911 9.00% $ 6,107 9.22% $ 3,515 9.05% $ 30,533 9.05% Real estate - construction 13,777 9.25% 1,875 9.25% 132 10.45% 15,784 9.26% Real estate - mortgage 24,172 9.17% 36,291 9.02% 34,572 9.27% 95,035 9.15% Installment loans to individuals 908 9.34% 2,509 10.55% 468 9.67% 3,885 10.16% ---------- --------- --------- -------- Total at variable rates 59,768 9.13% 46,782 9.14% 38,687 9.26% 145,237 9.17% ---------- --------- --------- -------- Fixed Rate Loans: Commercial, financial, and agricultural 4,097 9.08% 9,860 9.08% 1,213 6.08% 15,170 8.84% Real estate - construction 2,092 9.32% 1,159 8.45% 342 8.49% 3,593 8.96% Real estate - mortgage 22,212 9.05% 59,246 8.96% 8,158 8.84% 89,616 8.97% Installment loans to individuals 4,855 10.29% 20,806 10.91% 404 8.57% 26,065 10.76% ---------- --------- --------- -------- Total at fixed rates 33,256 9.25% 91,071 9.41% 10,117 8.49% 134,444 9.30% ---------- --------- --------- -------- Subtotal 93,024 9.17% 137,853 9.32% 48,804 9.10% 279,681 9.23% Nonaccrual loans 957 957 ---------- --------- --------- --------- Loans, gross $ 93,981 $ 137,853 $ 48,804 $ 280,638 ========== ========= ========= ========= </TABLE> The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in this table.
Table 12 Nonperforming Assets <TABLE> <CAPTION> As of December 31, ---------------------------------------------------------- ($ in thousands) 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> Nonaccrual loans (1) $ 957 $1,836 $ 772 $1,724 $1,987 Restructured loans 326 350 526 215 545 ------ ------ ------ ------ ------ Total nonperforming loans 1,283 2,186 1,298 1,939 2,532 Foreclosed, repossessed, and idled properties (included in other assets) 560 572 1,393 2,976 1,781 ------ ------ ------ ------ ------ Total nonperforming assets $1,843 $2,758 $2,691 $4,915 $4,313 ====== ====== ====== ====== ====== Nonperforming loans as a percentage of total loans 0.46% 0.98% 0.61% 1.04% 1.61% Allowance for loan losses as a percentage of nonperforming loans 372.49% 216.19% 353.39% 258.33% 110.47% Nonperforming assets as a percentage of loans and foreclosed and repossessed assets 0.66% 1.23% 1.26% 2.60% 2.71% Nonperforming assets as a percentage of total assets 0.46% 0.82% 0.84% 1.70% 1.68% </TABLE> (1) Nonaccrual loans in the amounts of $1,461,000, $161,000, and $275,000 as of December 31, 1996, 1995, and 1994, respectively, were loans acquired from other financial institutions and were subject to certain loss reimbursement provisions from the sellers of the loans. Thus the Company's loss exposure was limited. The provisions providing for the reimbursements expired during 1997. Table 13 Allocation of the Allowance for Loan Losses <TABLE> <CAPTION> As of December 31, ------------------------------------------------------ ($ in thousands) 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> Commercial, financial, and agricultural $ 577 $ 462 $ 758 $ 795 $ 346 Real estate - construction 201 191 199 214 203 Real estate - mortgage 2,394 2,810 2,516 2,704 1,802 Installment loans to individuals 617 641 620 835 266 ------ ------ ------ ------ ------ Total allocated 3,789 4,104 4,093 4,548 2,617 Unallocated 990 622 494 461 180 ------ ------ ------ ------ ------ Total $4,779 $4,726 $4,587 $5,009 $2,797 ====== ====== ====== ====== ====== </TABLE>
Table 14 Loan Loss and Recovery Experience <TABLE> <CAPTION> As of December 31, ----------------------------------------------------------------------------- ($ in thousands) 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> Loans outstanding at end of year $ 280,513 $ 223,032 $ 211,522 $ 185,749 $ 157,279 ========= ========= ========= ========= ========= Average amount of loans outstanding $ 245,596 $ 217,900 $ 192,035 $ 168,167 $ 149,247 ========= ========= ========= ========= ========= Allowance for loan losses, at beginning of year $ 4,726 $ 4,587 $ 5,009 $ 2,797 $ 2,526 Provision for loan losses 575 325 900 387 590 Allowance of purchased banks -- -- 187 2,487 -- --------- --------- --------- --------- --------- 5,301 4,912 6,096 5,671 3,116 Loans charged off: Commercial, financial and agricultural (61) (209) (885) (242) (87) Real estate - mortgage (449) (196) (184) (207) (158) Installment loans to individuals (311) (311) (531) (354) (226) --------- --------- --------- --------- --------- Total charge-offs (821) (716) (1,600) (803) (471) --------- --------- --------- --------- --------- Recoveries of loans previously charged-off Commercial, financial and agricultural 89 114 23 11 61 Real estate - mortgage 38 127 6 79 9 Installment loans to individuals 141 113 62 51 82 Other 31 176 -- -- -- --------- --------- --------- --------- --------- Total recoveries 299 530 91 141 152 --------- --------- --------- --------- --------- Net charge-offs (522) (186) (1,509) (662) (319) --------- --------- --------- --------- --------- Allowance for loan losses, at end of year $ 4,779 $ 4,726 $ 4,587 $ 5,009 $ 2,797 ========= ========= ========= ========= ========= Ratios: Net charge-offs as a percent of average loans 0.21% 0.09% 0.79% 0.39% 0.21% Allowance for loan losses as a percent of loans at end of year 1.70% 2.12% 2.17% 2.70% 1.78% Allowance for loan losses as a multiple of net charge-offs 9.16x 25.41x 3.04x 7.57x 8.77x Provision for loan losses as a percent of net charge-offs 110.15% 174.73% 59.64% 58.46% 184.95% Recoveries of loans previously charged-off as a percent of loans charged-off 36.42% 74.02% 5.69% 17.56% 32.27% </TABLE>
Table 15 Average Deposits <TABLE> <CAPTION> Year Ended December 31, ------------------------------------------------------------------------------ 1997 1996 1995 ------------------------ ----------------------- -------------------- ($ in thousands) Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate --------- ---- --------- ---- --------- ---- <S> <C> <C> <C> <C> <C> <C> Interest-bearing demand deposits $ 89,717 2.27% $ 74,778 2.03% 71,571 2.09% Savings deposits 32,346 2.42% 31,495 2.42% 29,322 2.56% Time deposits 154,030 5.39% 141,603 5.39% 124,106 5.40% --------- --------- --------- Total interest-bearing deposits 276,093 4.03% 247,876 4.00% 224,999 3.98% Non-interest bearing deposits 44,566 - 42,634 - 37,847 - --------- --------- --------- $ 320,659 3.47% $ 290,510 3.41% $ 262,846 3.41% ========= ==== ========= ==== ========= ==== </TABLE> Table 16 Maturities of Time Deposits of $100,000 or More <TABLE> <CAPTION> As of December 31, 1997 ------------------------------------------------------------------ 3 Months Over 3 to 6 Over 6 to 12 Over 12 ($ in thousands) or Less Months Months Months Total ------- ------ ------ ------ ----- <S> <C> <C> <C> <C> <C> Time certificates of deposits of $100,000 or more $15,930 $ 9,213 $10,007 $ 5,050 $40,200 ======= ======= ======= ======= ======= </TABLE>
Table 17 Interest Rate Sensitivity Analysis <TABLE> <CAPTION> Repricing schedule for interest-earning assets and interest-bearing liabilities held as of December 31, 1997 ------------------------------------------------------------------------ 3 Months Over 3 to 12 Total Within Over 12 or Less Months 12 Months Months Total --------- --------- ---------- --------- --------- ($ in thousands) <S> <C> <C> <C> <C> <C> Earning assets: Loans, net of deferred fees $ 156,308 $ 22,185 $ 178,493 $ 102,020 $ 280,513 Securities available for sale 6,513 3,752 10,265 40,012 50,277 Securities held to maturity 825 2,499 3,324 17,532 20,856 Short-term investments 17,307 -- 17,307 -- 17,307 --------- --------- --------- --------- --------- Total earning assets $ 180,953 $ 28,436 $ 209,389 $ 159,564 $ 368,953 ========= ========= ========= ========= ========= Percent of total earning assets 49.04% 7.71% 56.75% 43.25% 100.00% Cumulative percent of total earning assets 49.04% 56.75% 56.75% 100.00% 100.00% Interest-bearing liabilities: Savings, NOW and money market deposits $ 135,805 $ -- $ 135,805 $ -- $ 135,805 Time deposits of $100,000 or more 16,037 19,220 35,257 4,943 40,200 Other time deposits 42,858 64,953 107,811 26,487 134,298 --------- --------- --------- --------- --------- Total interest-bearing liabilities $ 194,700 $ 84,173 $ 278,873 $ 31,430 $ 310,303 ========= ========= ========= ========= ========= Percent of total interest-bearing liabilities 62.74% 27.13% 89.87% 10.13% 100.00% Cumulative percent of total interest- bearing liabilities 62.74% 89.87% 89.87% 100.00% 100.00% Interest sensitivity gap $ (13,747) $ (55,737) $ (69,484) $ 128,134 $ 58,650 Cumulative interest sensitivity gap (13,747) (69,484) (69,484) 58,650 58,650 Cumulative interest sensitivity gap as a percent of total earning assets -3.73% -18.83% -18.83% 15.90% 15.90% Cumulative ratio of interest-sensitive assets to interest-sensitiveliabilities 92.94% 75.08% 75.08% 118.90% 118.90% </TABLE>
Table 18 Market Risk Sensitive Instruments <TABLE> <CAPTION> Expected Maturities of Market Sensitive Instruments Held at December 31, 1997 Occurring in Indicated Year -------------------------------------------------------------------------------- Average Estimated Interest Fair ($ in thousands) 1998 1999 2000 2001 2002 Beyond Total Rate (1) Value -------- ------ ------ ------ ------ ------ ------- ---- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Debt Securities- at amortized cost (2) $ 28,636 16,773 5,972 4,978 2,124 11,343 69,826 7.18% $ 70,764 Loans - fixed (3) 33,256 23,226 36,394 11,847 19,604 10,117 134,444 9.30% 134,862 Loans - adjustable (3) 59,768 16,736 15,943 5,173 8,930 38,687 145,237 9.17% 145,237 -------- ------ ------ ------ ------ ------ ------- -------- Total $121,660 56,735 58,309 21,998 30,658 60,147 349,507 8.82% $350,863 ======== ====== ====== ====== ====== ====== ======= ==== ======== Savings, NOW, and money market deposits $135,805 -- -- -- -- -- 135,805 2.43% $135,805 Time deposits 141,277 18,638 10,580 2,244 1,746 13 174,498 5.40% 174,884 -------- ------ ------ ------ ------ ------ ------- -------- Total $277,082 18,638 10,580 2,244 1,746 13 310,303 4.10% $310,689 ======== ====== ====== ===== ===== == ======= ==== ======== </TABLE> (1) Tax-exempt securities are reflected at a tax-equivalent basis using a 34% tax rate. (2) Callable securities with above market interest rates at December 31, 1997 are assumed to mature at their call date for purposes of this table. (3) Excludes nonaccrual loans and allowance for loan losses. Table 19 Return on Assets and Equity <TABLE> <CAPTION> As of December 31, ------------------------------ (In thousands) 1997 1996 1995 ------ ------ ------ <S> <C> <C> <C> Return on assets 1.39% 1.33% 0.53% Return on equity 14.31% 13.63% 5.19% Dividend payout ratio per basic share 31.33% 30.56% 66.04% Average shareholders' equity to average assets 9.73% 9.78% 10.28% </TABLE>
Table 20 Risk-Based and Leverage Capital Ratios <TABLE> <CAPTION> As of December 31, ------------------------------------------- ($ in thousands) 1997 1996 1995 --------- --------- --------- <S> <C> <C> <C> Risk-Based and Leverage Capital Tier I capital: Common shareholders' equity $ 36,765 $ 33,232 $ 30,277 Intangible assets (6,487) (5,834) (6,306) Unrealized gain on securities available for sale, net of taxes (186) (146) (235) --------- --------- --------- Total Tier I leverage capital 30,092 27,252 23,736 --------- --------- --------- Tier II capital: Allowable allowance for loan losses 3,466 2,789 2,661 --------- --------- --------- Tier II capital additions 3,466 2,789 2,661 --------- --------- --------- Total risk-based capital $ 33,558 $ 30,041 $ 26,397 ========= ========= ========= Risk adjusted assets $ 283,924 $ 229,084 $ 219,439 Tier I risk-adjusted assets (includes Tier I capital adjustments) 277,251 223,104 212,898 Tier II risk-adjusted assets 215,559 (includes Tiers I and II capital adjustments) 280,717 225,893 215,559 Fourth quarter average assets 386,291 333,337 309,996 Adjusted fourth quarter average assets (includes Tier I capital adjustments) 379,618 327,357 303,455 Risk-based capital ratios: Tier I capital to Tier I risk adjusted assets 10.85% 12.21% 11.15% Minimum required Tier I capital 4.00% 4.00% 4.00% Total risk-based capital to Tier II risk-adjusted assets 11.95% 13.30% 12.25% Minimum required total risk-based capital 8.00% 8.00% 8.00% Leverage Capital Ratios: Tier I leverage capital to adjusted fourth quarter average assets 7.93% 8.32% 7.82% Minimum required Tier I leverage capital 3-5.00% 3-5.00% 3-5.00% </TABLE>
Table 21 Quarterly Financial Summary <TABLE> <CAPTION> 1997 1996 ------------------------------------------------ ---------------------------------------------- ($ in thousands except Fourth Third Second First Fourth Third Second First per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Income Statement Data Interest income, taxable equivalent $ 8,061 $ 7,650 $ 7,346 $ 6,874 $ 6,713 $ 6,641 $ 6,492 $ 6,326 Interest expense 3,082 2,835 2,673 2,533 2,530 2,472 2,445 2,469 Net interest income, taxable equivalent 4,979 4,815 4,673 4,341 4,183 4,169 4,047 3,857 Taxable equivalent, adjustment 170 177 191 196 186 177 170 171 Net interest income 4,809 4,638 4,482 4,145 3,997 3,992 3,877 3,686 Provision for loan losses 250 125 125 75 100 75 75 75 Net interest income after provision for losses 4,559 4,513 4,357 4,070 3,897 3,917 3,802 3,611 Noninterest income 1,070 1,007 1,008 1,065 1,011 1,296 1,075 1,064 Noninterest expense 3,496 3,601 3,506 3,485 3,292 3,379 3,275 3,167 Income before income taxes 2,133 1,919 1,859 1,650 1,616 1,834 1,602 1,508 Income taxes 754 651 620 524 525 626 559 503 Net income 1,379 1,268 1,239 1,126 1,091 1,208 1,043 1,005 - ----------------------------------------------------------------------------------------------------------------------------------- Per Share Data Earnings - basic $ 0.46 $ 0.42 $ 0.41 $ 0.37 $ 0.36 $ 0.40 $ 0.35 $ 0.33 Earnings - diluted 0.45 0.41 0.40 0.36 0.36 0.40 0.34 0.33 Cash dividends declared 0.13 0.13 0.13 0.13 0.11 0.11 0.11 0.11 Dividend payout per basic share 28.26% 30.95% 31.71% 35.14% 30.56% 27.50% 31.43% 33.33% Market Price High 35.00 27.75 24.25 26.75 19.50 17.00 15.25 13.50 Low 26.00 22.50 21.75 18.50 14.75 14.50 12.63 11.50 Close 35.00 27.75 22.50 23.38 18.50 16.00 14.63 12.88 Stated book value 12.17 11.84 11.52 11.16 11.02 10.68 10.37 10.23 Tangible book value 10.02 10.12 9.76 9.35 9.08 8.70 8.34 8.16 - ----------------------------------------------------------------------------------------------------------------------------------- Selected Average Balances Assets $ 386,291 $362,601 $350,746 $339,878 $333,337 $327,005 $325,912 $318,630 Loans 269,929 254,265 235,912 222,278 222,064 218,184 217,643 213,709 Earning assets 358,442 335,658 324,617 312,530 306,129 299,995 297,245 289,863 Deposits 345,253 322,813 312,311 302,259 296,024 290,546 290,919 284,551 Interest-bearing liabilities 297,691 278,179 268,974 259,748 251,903 248,125 247,539 243,965 Shareholders' equity 36,473 35,487 34,275 33,861 33,039 32,139 31,519 30,887 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE>
Table 21 Quarterly Financial Summary (continued) <TABLE> <CAPTION> 1997 1996 ------------------------------------------------ ---------------------------------------------- ($ in thousands except Fourth Third Second First Fourth Third Second First per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Ratios Return on average assets 1.43% 1.40% 1.41% 1.33% 1.31% 1.48% 1.28% 1.26% Return on average equity 15.12% 14.29% 14.46% 13.30% 13.21% 15.03% 13.24% 13.02% Average equity to average assets 9.44% 9.79% 9.77% 9.96% 9.91% 9.83% 9.67% 9.69% Risk-based capital ratios: Tier I capital 10.85% 11.79% 11.97% 12.48% 12.21% 11.89% 11.45% 11.27% Total risk-based capital 11.95% 12.88% 13.06% 13.56% 13.30% 13.01% 12.57% 12.39% Tier I leverage capital 7.93% 8.50% 8.50% 8.48% 8.32% 8.20% 7.91% 7.83% Average loans to average deposits 78.18% 78.77% 75.54% 73.54% 75.02% 75.09% 74.81% 75.10% Average earning assets to interest-bearing 120.41% 120.66% 120.69% 120.32% 121.53% 120.90% 120.08% 118.81% liabilities Net interest margin 5.56% 5.74% 5.76% 5.56% 5.47% 5.56% 5.45% 5.32% Nonperforming loans as a percent of total loans 0.46% 0.55% 0.39% 0.74% 0.98% 0.76% 0.84% 1.02% Allowance for loan losses as a percentage of nonperforming loans 372.49% 328.56% 489.70% 286.05% 216.19% 282.46% 256.77% 215.14% Nonperforming assets as a percent of loans and foreclosed, repossessed, and idled properties 0.66% 0.71% 0.56% 0.92% 1.23% 1.04% 1.22% 1.68% Nonperforming assets as a percent of total assets 0.46% 0.50% 0.39% 0.60% 0.82% 0.70% 0.82% 1.14% </TABLE>
Item 8. Financial Statements and Supplementary Data <TABLE> <CAPTION> First Bancorp and Subsidiaries Consolidated Balance Sheets December 31, 1997 and 1996 ($ in thousands) 1997 1996 - ------------------------------------------------------------------------------------ <S> <C> <C> ASSETS Cash & due from banks, noninterest-bearing $ 17,664 15,882 Due from banks, interest-bearing 13,081 -- Federal funds sold 2,896 5,025 --------- --------- Total cash and cash equivalents 33,641 20,907 --------- --------- Securities available for sale (costs of $49,995 and $53,721) 50,277 53,942 Securities held to maturity (approximate fair values of $21,512 and $22,717) 20,856 22,323 Presold mortgages in process of settlement 1,330 1,395 Loans, net of unearned income 280,513 223,032 Less: Allowance for loan losses (4,779) (4,726) --------- --------- Net loans 275,734 218,306 --------- --------- Premises and equipment, net 8,839 7,722 Accrued interest receivable 2,866 2,412 Intangible assets, net 6,487 5,834 Other assets 2,639 2,609 --------- --------- Total assets $ 402,669 335,450 ========= ========= LIABILITIES Deposits: Demand - noninterest bearing $ 50,921 45,002 Savings, NOW and money market 135,805 107,605 Time deposits of $100,000 or more 40,200 33,526 Other time deposits 134,298 111,728 --------- --------- Total deposits 361,224 297,861 Accrued interest payable 2,299 1,882 Other liabilities 2,381 2,475 --------- --------- Total liabilities 365,904 302,218 --------- --------- </TABLE>
<TABLE> <CAPTION> First Bancorp and Subsidiaries Consolidated Balance Sheets December 31, 1997 and 1996 (continued) ($ in thousands) 1997 1996 - ------------------------------------------------------------------------------------ <S> <C> <C> SHAREHOLDERS' EQUITY Common stock, $5 par value per share Authorized: 12,500,000 shares Issued and outstanding: 3,020,370, and 3,016,370 15,102 15,082 Capital surplus 3,861 3,831 Retained earnings 17,616 14,173 Unrealized gain on securities available for sale, net of income taxes 186 146 --------- --------- Total shareholders' equity 36,765 33,232 --------- --------- Total liabilities and shareholders' equity $ 402,669 335,450 ========= ========= </TABLE> See accompanying Notes to Consolidated Financial Statements.
<TABLE> <CAPTION> First Bancorp and Subsidiaries Consolidated Statements of Income Years Ended December 31, 1997, 1996 and 1995 ($ in thousands except per share data) 1997 1996 1995 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> INTEREST INCOME Interest and fees on loans $ 23,754 20,644 18,720 Interest on investment securities Taxable interest income 3,610 3,110 2,762 Exempt from income taxes 1,189 1,121 1,083 Other, principally federal funds sold 644 593 541 ----------- ----------- ----------- Total interest income 29,197 25,468 23,106 ----------- ----------- ----------- INTEREST EXPENSE Savings, NOW and money market 2,820 2,284 2,247 Time deposits of $100,000 or more 2,004 1,811 1,662 Other time and savings deposits 6,296 5,820 5,044 Federal funds purchased 3 1 -- ----------- ----------- ----------- Total interest expense 11,123 9,916 8,953 ----------- ----------- ----------- Net interest income 18,074 15,552 14,153 Provision for loan losses 575 325 900 ----------- ----------- ----------- Net interest income after provision for loan losses 17,499 15,227 13,253 ----------- ----------- ----------- NONINTEREST INCOME Service charges on deposit accounts 2,413 2,561 2,164 Commissions from insurance sales 278 313 381 Other service charges, commissions and fees 1,029 1,107 1,109 Data processing fees 274 248 123 Securities gains (losses), net (12) 6 -- Other nonrecurring net gains 168 211 -- ----------- ----------- ----------- Total noninterest income 4,150 4,446 3,777 ----------- ----------- ----------- </TABLE>
<TABLE> <CAPTION> First Bancorp and Subsidiaries Consolidated Statements of Income Years Ended December 31, 1997, 1996 and 1995 ($ in thousands except per share data) 1997 1996 1995 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> NONINTEREST EXPENSES Salaries 6,225 5,447 5,866 Employee benefits 1,315 1,268 1,222 ----------- ----------- ----------- Total personnel expense 7,540 6,715 7,088 Net occupancy expense 954 904 858 Equipment related expenses 858 833 798 Litigation settlement -- -- 1,446 Other operating expenses 4,736 4,661 4,678 ----------- ----------- ----------- Total noninterest expenses 14,088 13,113 14,868 ----------- ----------- ----------- Income before income taxes 7,561 6,560 2,162 Income taxes 2,549 2,213 580 ----------- ----------- ----------- NET INCOME $ 5,012 4,347 1,582 =========== =========== =========== Weighted Average Common Shares Outstanding - Basic 3,017,236 3,014,573 3,009,172 =========== =========== =========== Weighted Average Common Shares Outstanding - Diluted 3,085,928 3,040,839 3,018,950 =========== =========== =========== Earnings Per Share - Basic $ 1.66 1.44 0.53 Earnings Per Share - Diluted 1.62 1.43 0.52 Cash Dividends Declared Per Share 0.52 0.44 0.35 </TABLE> See accompanying Notes to Consolidated Financial Statements.
<TABLE> <CAPTION> First Bancorp and Subsidiaries Consolidated Statements of Shareholders' Equity Years Ended December 31, 1997, 1996 and 1995 Unrealized Gain/(Loss) on Securities Share- Common Stock Capital Retained Available holders' ($ in thousands, except per share data) Shares Amount Surplus Earnings for Sale, net Equity - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balances, January 1, 1995 3,008 $ 15,042 3,787 10,624 (663) 28,790 Net income 1,582 1,582 Cash dividends declared ($0.35 per share) (1,054) (1,054) Common stock issued under stock option plans 6 29 32 61 Net adjustment for securities available for sale 898 898 ----- -------- ----- ------- ---- ------ Balances, December 31, 1995 3,014 $ 15,071 3,819 11,152 235 30,277 ----- -------- ----- ------- ---- ------ Net income 4,347 4,347 Cash dividends declared ($0.44 per share) (1,326) (1,326) Common stock issued under stock option plans 2 11 12 23 Net adjustment for securities available for sale (89) (89) ----- -------- ----- ------- ---- ------ Balances, December 31, 1996 3,016 $ 15,082 3,831 14,173 146 33,232 ----- -------- ----- ------- ---- ------ Net income 5,012 5,012 Cash dividends declared ($0.52 per share) (1,569) (1,569) Common stock issued under stock option plans 4 20 30 50 Net adjustment for securities available for sale 40 40 ----- -------- ----- ------- ---- ------ Balances, December 31, 1997 3,020 $ 15,102 3,861 17,616 186 36,765 ===== ======== ===== ====== === ====== </TABLE> See accompanying Notes to Consolidated Financial Statements.
<TABLE> <CAPTION> First Bancorp and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 1997, 1996 and 1995 ($ in thousands) 1997 1996 1995 -------- -------- ------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,012 4,347 1,582 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 575 325 900 Net security discount accretion (15) (17) (44) Loan fees and costs deferred, net of amortization 33 10 (43) Depreciation of premises and equipment 715 723 726 Amortization of intangible assets 546 568 501 Realized and unrealized other real estate losses 65 49 78 Provision for deferred income taxes (62) 260 (187) Loss (gain) on sale of securities 12 (6) -- Net gain from sale of branch facilities and deposits -- (211) -- Loss on disposal of premises 10 -- -- Changes in operating assets and liabilities: Increase in accrued interest receivable (454) (40) (7) Decrease (increase) in intangible assets 386 (96) 161 Decrease in other assets 325 842 1,941 Increase (decrease) in accrued interest payable 370 (7) 728 Increase (decrease) in other liabilities (149) 556 513 -------- -------- ------- Net cash provided by operating activities 7,369 7,303 6,849 -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities available for sale (37,289) (41,816) (26,269) Purchases of securities held to maturity (2,399) (4,386) (1,683) Proceeds from sale of securities available for sale 8,361 1,146 -- Proceeds from maturities/issuer calls of securities available for sale 32,678 36,222 27,789 Proceeds from maturities/issuer calls of securities held to maturity 3,846 1,855 2,240 Net increase in loans (58,208) (13,525) (18,600) Net purchases of premises and equipment (1,842) (632) (1,323) Net cash received (paid) in purchase (sale) of deposits 12,658 (1,722) -- Net cash acquired in acquisition of a financial institution -- -- 2,417 -------- -------- ------- Net cash used in investing activities (42,195) (22,858) (15,429) -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 49,018 13,690 14,325 Cash dividends paid (1,508) (1,267) (1,038) Proceeds from issuance of common stock 50 23 61 -------- -------- ------- Net cash provided by financing activities 47,560 12,446 13,348 -------- -------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,734 (3,109) 4,768 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 20,907 24,016 19,248 -------- -------- ------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 33,641 20,907 24,016 ======== ====== ====== </TABLE>
<TABLE> <CAPTION> First Bancorp and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 1997, 1996 and 1995 (continued) ($ in thousands) 1997 1996 1995 -------- -------- ------- <S> <C> <C> <C> SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 10,753 9,923 8,225 Income taxes 2,350 2,023 1,362 Non-cash transactions: Foreclosed loans transferred to other real estate 172 439 259 Loans to facilitate the sale of other real estate 61 93 1,199 Increase (decrease) in fair value of securities available for 62 (134) 1,459 sale Book value of premises exchanged in acquisition of net assets from another financial institution -- -- 219 </TABLE> See accompanying Notes to Consolidated Financial Statements.
First Bancorp and Subsidiaries Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies (a) Basis of Presentation - The consolidated financial statements include the accounts of First Bancorp (the Company) and its wholly owned subsidiaries, First Bank (the Bank) and its wholly owned subsidiary First Bank Insurance Services, Inc. (First Bank Insurance), Montgomery Data Services, Inc. (Montgomery Data), and First Bancorp Financial Services, Inc., (First Bancorp Financial), formerly First Recovery, Inc. All significant intercompany accounts and transactions have been eliminated. The Company is a bank holding company. The principal activity of the Company is the ownership and operation of First Bank, a state chartered bank with its main office in Troy, North Carolina. The Company also owns and operates Montgomery Data, a data processing company, and First Bancorp Financial, a real estate investment subsidiary, both of which are also headquartered in Troy. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates made by the Company in the preparation of its consolidated financial statements are the determination of the allowance for loan losses, the valuation of other real estate, the valuation allowance for deferred tax assets and fair value estimates for financial instruments. (b) Cash and Cash Equivalents - The Company considers all highly liquid assets such as cash on hand, noninterest-bearing and interest-bearing amounts due from banks and federal funds sold to be "cash equivalents". (c) Securities - Securities classified as available for sale are purchased with the intent to hold to maturity, however, infrequent sales may be necessary due to liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital and investment requirements, or significant unforeseen changes in market conditions, including interest rates and market values of securities held in the portfolio. Investments in securities available for sale are stated at fair value with the resultant unrealized gains and losses included as a component of shareholders' equity, net of applicable deferred income taxes. Securities are classified as held to maturity at the time of purchase when the Company has the ability and positive intent to hold such securities to maturity. Investments in securities held to maturity are stated at amortized cost. Gains and losses on sales of securities are recognized at the time of sale based upon the specific identification method. Premiums and discounts are amortized into income on a level yield basis.
(d) Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation. Depreciation, computed by the straight-line method, is charged to operations over the estimated useful lives of the properties, which range from 5 to 40 years or, in the case of leasehold improvements, over the term of the lease, if shorter. Maintenance and repairs are charged to operations in the year incurred. Gains and losses on dispositions are included in current operations. (e) Loans - Loans are stated at the principal amount outstanding, less unearned income and deferred nonrefundable loan fees, net of certain origination costs. Interest on loans is accrued on the unpaid principal balance outstanding. Net deferred loan origination costs/fees are capitalized and recognized as a yield adjustment over the life of the related loan. Unearned income for each of the reporting periods was immaterial. A loan is placed on nonaccrual status when, in management's judgment, the collection of interest appears doubtful. The accrual of interest is discontinued on all loans that become 90 days past due with respect to principal or interest. While a loan is on nonaccrual status, the Company's policy is that all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to recoveries of any amounts previously charged off. Further cash receipts are recorded as interest income to the extent that any interest has been foregone. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the originally contracted terms. The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS No. 114), which requires that all creditors value all specifically reviewed loans for which it is probable that the creditor will be unable to collect all amounts due according to the terms of the loan agreement at the present value of expected cash flows, market price of the loan, if available, or value of the underlying collateral. Expected cash flows are required to be discounted at the loan's effective interest rate. The FASB also has issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," that amends Standard No. 114 to allow a creditor to use existing methods for recognizing interest income on an impaired loan and by requiring additional disclosures about how a creditor recognizes interest income related to impaired loans. SFAS No.'s 114 and 118 do not apply to large groups of smaller-balance homogenous loans that are collectively evaluated for impairment. For the Company, these loans include residential mortgage and consumer installment loans. Consistent with SFAS No. 114, management considers loans 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 the discounted expected cash flows or the value of collateral method. While a loan is considered to be impaired, 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.
(f) Allowance for Loan Losses - The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb losses inherent in the portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, current economic conditions, historical loan loss experience and other risk factors. While management uses the best information available to make evaluations, future adjustments may be necessary if economic and other conditions differ substantially from the assumptions used. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and losses on foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowances based on the examiners' judgments about information available to them at the time of their examinations. (g) Real Estate Acquired by Foreclosure - Real estate acquired by foreclosure is recorded at the lower of cost or fair value based on recent appraisals, less estimated costs to sell. Declines in the fair value of real estate acquired by foreclosure are recorded by a charge to expense during the period of decline. (h) Income Taxes - The Company accounts for income taxes using the asset and liability method as provided under SFAS No. 109, "Accounting for Income Taxes." The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted rates expected to be in effect when such amounts are realized or settled. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon available evidence. (i) Income and Expense - The Company and its subsidiaries use the accrual method of accounting. (j) Intangible Assets - The Company has recorded certain intangible assets in connection with branch and business acquisitions, principally deposit base premiums and goodwill. These intangibles are amortized over their estimated useful lives, ranging from 5 to 15 years. At December 31, 1997 and 1996, these acquisition related intangibles totaled $10,583,000 and $9,086,000, less accumulated amortization of $4,168,000 and $3,622,000, respectively. These intangible assets are subject to periodic review and are adjusted for any impairment in value. In accordance with applicable accounting standards, the Company records an intangible asset in connection with a defined benefit pension plan to fully accrue for its liability. This intangible asset is adjusted annually in accordance with actuarially determined amounts. The amount of this intangible asset was $72,000 and $135,000 at December 31, 1997 and 1996, respectively. (k) Stock Option Plan - Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB Opinion No. 25), "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense was recorded on the date of grant only if the market price of the underlying stock on the date of grant exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation"(SFAS No. 123), which permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (l) Per Share Amounts - The Company adopted SFAS No. 128, "Earnings Per Share" (SFAS No. 128) as of December 31, 1997. SFAS No. 128 superseded Accounting Principles Board Opinion No. 15, "Earnings Per Share" (APB No. 15) which the Company had properly followed until the adoption of SFAS No. 128. For companies that have potentially issuable stock (complex capital structures), such as First Bancorp with its stock option plan, SFAS No. 128 requires that two earnings per share amounts be disclosed - 1) Basic Earnings Per Share and 2) Diluted Earnings Per Share. Basic Earnings Per Share is calculated by dividing net income available to common stockholders by the weighted average number of common stock shares outstanding during the period. The Basic Earnings Per Share computation for the Company is the same method the Company previously used to calculate and report earnings per share under APB No. 15. Diluted Earnings Per Share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. Currently, the Company's only dilutive potential common stock issuances relate to options that have been issued under the Company's stock option plan. In computing Diluted Earnings Per Share, it is assumed that all such dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate Diluted Earnings Per Share for the Company. As required by SFAS No. 128, all prior year earnings per share amounts have been restated and computed under the provisions of the new standard. The number of common shares outstanding for 1995 has also been adjusted from the originally reported amount to reflect the 2-for-1 stock split that was distributed during 1996.
The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Earnings Per Share: <TABLE> <CAPTION> For the Years Ended December 31, --------------------------------------------------------------------------------------------------------------- 1997 1996 1995 --------------------------------- ----------------------------------- ------------------------------------ ($ in thousands except per share Income Shares Income Shares Income Shares Per Share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Basic EPS Net income $ 5,012 3,017,236 $ 1.66 $ 4,347 3,014,573 $ 1.44 $ 1,582 3,009,172 $ 0.53 ====== ====== ======= Effect of Dilutive Securities Effect of stock option plan -- 68,692 -- 26,266 -- 9,778 -------- --------- -------- ---------- -------- --------- Diluted EPS Net income plus assumed conversions $ 5,012 3,085,928 $ 1.62 $ 4,347 3,040,839 $ 1.43 $ 1,582 3,018,950 $ 0.52 ======== ========= ====== ======== ========= ====== ======== ========= ======= </TABLE> (m) Fair Value of Financial Instruments - SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS No. 107), requires that the Company disclose estimated fair values for its financial instruments. Fair value methods and assumptions are set forth below for the Company's financial instruments. Cash, Federal Funds Sold, Accrued Interest Receivable, Short-Term Borrowings and Accrued Interest Payable- The carrying amounts for cash, federal funds sold, accrued interest receivable, short-term borrowings and accrued interest payable approximate their fair value because of the short maturity of these financial instruments. Available for Sale and Held to Maturity Securities - Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, financial and agricultural, real estate construction, real estate mortgages and installment loans to individuals. Each loan category is further segmented into fixed and variable interest rate terms. For variable rate loans, the carrying value is a reasonable estimate of the fair value. For fixed rate loans, fair value is determined by discounting scheduled future cash flows using current interest rates offered on loans with similar risk characteristics. Fair values for impaired loans are estimated based on discounted cash flows or underlying collateral values, where applicable.
Deposit Liabilities - Under SFAS No. 107, the fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, NOW and money market accounts, is equal to the amount payable on demand as of December 31, 1997 and 1996. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Commitments to Extend Credit and Standby Letters of Credit - At December 31, 1997 and 1996, the Company's off-balance sheet financial instruments had no carrying value. The large majority of commitments to extend credit and standby letters of credit are at variable rates and/or have relatively short terms to maturity. Therefore, the fair value for these financial instruments is considered to be immaterial. (n) Impairment of Long-Lived Assets - In March 1995, the FASB issued SFAS No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121), which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for those to be disposed of. This statement requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss should be recognized if the sum of the undiscounted future cash flows is less than the carrying amount of the asset. Those assets to be disposed of are to be reported at the lower of the carrying amount or fair value, less costs to sell. Adoption of SFAS No. 121 was required for fiscal years beginning after December 15, 1995. The Company adopted SFAS No. 121 on January 1, 1996 with no material impact on the consolidated financial statements. (o) Reclassifications. Certain amounts for prior years have been reclassified to conform to the 1997 presentation. The reclassifications have had no effect on net income or shareholders' equity as previously presented, nor did they materially impact trends in financial information. Note 2. Acquisitions On November 14, 1997, First Bank acquired a First Union banking branch located in Lillington, North Carolina. Real and personal property acquired totaled approximately $237,000 and deposits assumed totaled approximately $14,345,000. No loans were included in the purchase. First Bank recorded an intangible asset of approximately $1,588,000 in connection with the transaction. On December 15, 1995, First Bank completed its cash acquisition of the Laurinburg and Rockingham branches of First Scotland Bank. As of December 15, 1995, assets acquired were approximately $15,814,000, including approximately $8,898,000 in loans, while liabilities assumed were approximately $15,058,000, including deposits of $14,960,000. The purchase price of $1,296,000 to acquire these two branches, and the additional costs of closing of $150,000, exceeded the value assigned to the net assets acquired and resulted in recording an intangible asset of approximately $786,000. On August 25, 1994, First Bank completed its cash acquisition of Central State Bank in High Point, North Carolina. First Bank paid cash of $538.05 ($535.50 purchase price plus $2.55 in interest due to a closing delay) for each of Central State's 13,000 shares outstanding. Intangible assets, principally
goodwill, of approximately $5,824,000 resulted from the excess of the total purchase price of $6,962,000 and additional costs of closing of $517,000 over the fair value of assets acquired of $35,005,000 less liabilities assumed of $33,350,000. The transaction was accounted for as a purchase, and, accordingly, the results of Central State were included in the consolidated financial statements since the date of acquisition. At the date of acquisition, Central State, a North Carolina state-chartered commercial bank, had earning assets of approximately $32 million including $27 million in loans. Central State also had approximately $32 million in deposits. Note 3. Stock Split The Company paid a two-for-one stock split on September 13, 1996 to shareholders of record August 30, 1996. All share and per share data for years prior to 1996 have been restated to reflect the impact of the stock split for all periods presented.
Note 4. Securities The book values and approximate fair values of investment securities at December 31, 1997 and 1996 are summarized as follows: <TABLE> <CAPTION> 1997 1996 ---------------------------------------------- ---------------------------------------------- Amortized Fair Unrealized Amortized Fair Unrealized Cost Value Gains (Losses) Cost Value Gains (Losses) -------- ------ --- --- ------ ------ --- --- (In thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> Securities available for sale: U.S. Treasury $ 503 534 31 -- 5,500 5,537 42 (5) U.S. Government agencies 38,380 38,569 202 (13) 42,075 42,239 251 (87) Collateralized mortgage obligations 9,181 9,243 89 (27) 5,510 5,530 24 (4) State and local governments 906 906 -- -- 613 613 -- -- Equity securities 1,025 1,025 -- -- 23 23 -- -- ------- ------ --- --- ------ ------ --- ---- Total available for sale $49,995 50,277 322 (40) 53,721 53,942 317 (96) ======= ====== === === ====== ====== === === Securities held to maturity: State and local governments $20,460 21,116 682 (26) 21,869 22,263 538 (144) Other 396 396 -- -- 454 454 -- -- ------- ------ --- --- ------ ------ --- ---- Total held to maturity $20,856 21,512 682 (26) 22,323 22,717 538 (144) ======= ====== === === ====== ====== === ==== </TABLE> At December 31 1997 and 1996, the Company owned $1,001,000 and $0, respectively, of Federal Home Loan Bank stock which is reflected as equity securities above and serves as part of the collateral for the Company's line of credit with the Federal Home Loan Bank (see note 9 for additional discussion). As of December 31, 1997 and 1996, there were no collateralized mortgage obligations considered to be "high risk" pursuant to existing bank regulatory guidelines, and the Company held no investments in structured notes.
The book values and approximate fair values of investment securities at December 31, 1997, by contractual maturity, are summarized as in the table below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. <TABLE> <CAPTION> Securities Available for Sale Securities Held to Maturity ----------------------------- --------------------------- Amortized Fair Amortized Fair (In thousands) Cost Value Cost Value -------- ------ -------- ------ <S> <C> <C> <C> <C> Debt securities Due within one year $ 10,234 10,265 $ 3,324 3,354 Due after one year but within five years 28,990 29,120 8,113 8,348 Due after five years but within ten years 9,746 9,867 6,132 6,335 Due after ten years - - 3,287 3,475 -------- ------ -------- ------ Total debt securities 48,970 49,252 20,856 21,512 Equity securities 1,025 1,025 - - -------- ------ -------- ------ Total securities $ 49,995 50,277 $ 20,856 21,512 ======== ====== ========= ====== </TABLE> At December 31, 1997 and 1996, investment securities with book values of $13,570,000 and $9,964,000, respectively, were pledged as collateral for public deposits. Sales of securities available for sale with aggregate proceeds of $8,361,000 in 1997 and $1,146,000 in 1996 resulted in gross and net losses of $12,000 in 1997 and gross and net gains of $6,000 in 1996. There were no security sales in 1995. Note 5. Loans And Allowance For Loan Losses Loans at December 31, 1997 and 1996 are summarized as follows: <TABLE> <CAPTION> (In thousands) 1997 1996 --------- ------- <S> <C> <C> Commercial, financial, and agricultural $ 45,417 33,100 Real estate - construction 19,323 14,498 Real estate - mortgage 185,927 148,667 Installment loans to individuals 29,971 26,860 --------- ------- Subtotal 280,638 223,125 Unamortized net deferred loan fees (125) (93) --------- ------- Loans, net of deferred fees $ 280,513 223,032 ========= ======= </TABLE>
Loans described above as "Real estate - mortgage" included loans secured by 1-4 family dwellings in the amounts of $104,061,000 and $76,966,000 as of December 31, 1997 and 1996, respectively. The loans above also include loans to executive officers and directors and to their associates totaling approximately $6,276,000 and $5,749,000 at December 31, 1997 and 1996, respectively. During 1997, additions to such loans were approximately $1,532,000 and repayments totaled approximately $1,005,000. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other non-related borrowers. Management does not believe these loans involve more than the normal risk of collectibility or present other unfavorable features. Nonperforming assets at December 31, 1997 and 1996 are as follows: <TABLE> <CAPTION> (In thousands) 1997 1996 ------ ----- <S> <C> <C> Loans: Nonaccrual loans $ 957 1,836 Restructured loans 326 350 ------ ----- Total nonperforming loans 1,283 2,186 Foreclosed, repossessed and idled properties (included in other assets) 560 572 ------ ----- Total nonperforming assets $1,843 2,758 ====== ===== </TABLE> At December 31, 1997 and 1996 there were no loans 90 days or more past due that were still accruing interest. If the nonaccrual loans and restructured loans as of December 31, 1997, 1996 and 1995 had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period), gross interest income in the amounts of approximately $91,000, $183,000 and $82,000 for nonaccrual loans and $34,000, $41,000 and $52,000 for restructured loans would have been recorded for 1997, 1996 and 1995, respectively. Interest income on such loans that was actually collected and included in net income in 1997, 1996 and 1995 amounted to approximately $32,000, $81,000 and $36,000 for nonaccrual loans (prior to their being placed on nonaccrual status) and $25,000, $30,000 and $50,000 for restructured loans, respectively. Activity in the allowance for loan losses for the years ended December 31, 1997, 1996 and 1995 is as follows: <TABLE> <CAPTION> (In thousands) 1997 1996 1995 ------- ----- ------ <S> <C> <C> <C> Balance, beginning of year $ 4,726 4,587 5,009 Provision for loan losses 575 325 900 Allowance of purchased bank - - 187 Recoveries of loans charged-off 299 530 91 Loans charged-off (821) (716) (1,600) ------- ----- ------ Balance, end of year $ 4,779 4,726 4,587 ======= ===== ===== </TABLE>
At December 31, 1997 and 1996, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $398,000 and $1,228,000, respectively, of which all were on a nonaccrual basis. The related allowance for loan losses for these impaired loans as determined in accordance with SFAS No. 114 was $60,000 and $184,000, respectively. There were no impaired loans for which there was no related allowance determined in accordance with this statement. The average recorded investments in impaired loans during the years ended December 31, 1997, 1996 and 1995 were approximately $654,000, $859,000, and $997,000, respectively. For the years ended December 31, 1997, 1996 and 1995, the Company recognized no interest income on those impaired loans during the period that they were considered to be impaired. Note 6. PREMISES AND EQUIPMENT Premises and equipment at December 31, 1997 and 1996 consist of the following: <TABLE> <CAPTION> (In thousands) 1997 1996 -------- ------ <S> <C> <C> Land $ 1,869 1,338 Buildings 7,307 6,902 Furniture and equipment 5,471 4,679 Leasehold improvements 453 388 -------- ------ Total cost 15,100 13,307 Less accumulated depreciation and amortization (6,261) (5,585) -------- ------ Net book value of premises and equipment $ 8,839 7,722 ======== ===== </TABLE> Note 7. INCOME TAXES The components of income tax expense (benefit) for the years ended December 31, 1997, 1996 and 1995 are as follows: <TABLE> <CAPTION> (In thousands) 1997 1996 1995 ------- ----- ------ <S> <C> <C> <C> Current - Federal $ 2,321 1,685 767 - State 290 268 - Deferred - Federal (62) 260 (187) ------- ----- ---- Total $ 2,549 2,213 580 ======= ===== === </TABLE>
The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 1997, 1996 and 1995 are presented below: <TABLE> <CAPTION> (In thousands) 1997 1996 ------- ------ <S> <C> <C> Deferred tax assets: Allowance for loan losses $ 1,481 1,501 Excess book over tax retirement plan cost 52 37 Basis of investment in subsidiary 69 69 Net loan fees recognized for tax reporting purposes 49 36 Reserve for employee medical expense for financial reporting purposes 21 60 Deferred compensation 46 47 Deferred payments under severance arrangements 80 138 All other 262 149 ------- ------ Gross deferred tax assets 2,060 2,037 Less: Valuation allowance (120) (123) ------- ------ Net deferred tax assets $ 1,940 1,914 ------- ------ Deferred tax liabilities SFAS No. 91 loan expenses (285) (214) Excess tax over book pension cost (213) (230) Depreciable basis of fixed assets (498) (481) Amortizable basis of intangible assets (49) (144) Unrealized gain on securities available for sale (96) (75) All other (9) (21) ------- ------ Gross deferred tax liabilities (1,150) (1,165) ------- ------ Net deferred tax asset (included in other assets) $ 790 749 ======= === </TABLE> A portion of the change in the net deferred tax asset relates to unrealized gains and losses on securities available for sale. The related current period deferred tax expense of approximately $21,000 as of December 31, 1997 and deferred tax benefit of approximately $44,000 as of December 31, 1996 have been recorded directly to shareholders' equity. The balance of the 1997 change in the net deferred tax asset of $62,000 is reflected as a deferred income tax benefit in the consolidated statement of income. The valuation allowance applies primarily to offset the recognition of deferred tax benefits on certain temporary differences for state income tax purposes. It is management's belief that the realization of the net deferred tax assets is more likely than not.
The following is a reconcilement of federal income tax expense at the statutory rate of 34% to the income tax provision reported in the financial statements. <TABLE> <CAPTION> (In thousands) 1997 1996 1995 ------- ----- ---- <S> <C> <C> <C> Tax provision at statutory rate $ 2,571 2,230 735 Increase (decrease) in income taxes resulting from: Tax exempt interest income (425) (400) (371) Non-deductible interest expense 48 43 40 Non-deductible portion of amortization of intangible assets 142 151 160 State income taxes, net of federal benefit 191 177 -- Other, net 22 12 16 ------- ----- ---- Total $ 2,549 2,213 580 ======= ===== === </TABLE> Note 8. DEPOSITS At December 31, 1997, the scheduled maturities of time deposits are as follows: (In thousands) 1998 $ 141,277 1999 18,638 2000 10,580 2001 2,244 2002 1,746 Thereafter 13 --------- $ 174,498 ========= Note 9. BORROWINGS The Company did not have any long-term borrowings outstanding during 1995, 1996, or 1997. However the Company has in place available lines of credit totaling $36,000,000 should funding or liquidity needs arise. These lines of credit are secured by the Company's Federal Home Loan Bank stock and a blanket lien on its one-to-four family residential loan portfolio. The Company also has correspondent bank relationships established that allow the Company to purchase up to $10,000,000 in federal funds on an overnight basis. Note 10. LEASES Certain bank premises are leased under operating lease agreements. Generally, operating leases contain renewal options on substantially the same basis as current rental terms. Rent expense charged to operations under all operating lease agreements was $139,000 in 1997, $103,000 in 1996, and $93,000 in 1995.
Future obligations for minimum rentals under noncancelable operating leases at December 31, 1997 are as follows: (In thousands) Year ending December 31: 1998 $ 83 1999 76 2000 61 2001 59 2002 56 Later years 85 -------- Total $ 420 ======== Note 11. EMPLOYEE BENEFIT PLANS SALARY REDUCTION PROFIT SHARING PLAN. The Company sponsors a salary reduction profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code. Employees who have completed one year of service are eligible to participate in the plan. An eligible employee may contribute up to 14% of annual salary to the plan. The Company contributes an amount equal to 50% (75% as of January 1, 1998) of the first 6% of the employee's salary contributed. Participants vest in Company contributions at the rate of 20% after one year of service, and 20% for each additional year of service, with 100% vesting after five years of service. The Company's matching contribution expense was $110,000, $100,000 and $102,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company made additional discretionary profit sharing contributions to the plan of $100,000 in 1997 and 1996. INCENTIVE COMPENSATION PLAN. The Company also has an incentive compensation plan covering certain management and staff employees. Payments pursuant to the plan are based on achievement of certain performance goals. The Company's incentive compensation plan expense was $502,000, $467,000 and $407,000 for the years ended December 31, 1997, 1996 and 1995, respectively. RETIREMENT PLAN. The Company sponsors a noncontributory defined benefit retirement plan (the "Retirement Plan"), which is intended to qualify under Section 401(a) of the Internal Revenue Code. Employees who have attained age 21 and completed one year of service are eligible to participate in the Retirement Plan. The Retirement Plan provides for a monthly payment, at normal retirement age of 65, equal to one-twelfth of the sum of (i) 0.75% of Final Average Annual Compensation (5 highest consecutive calendar years earnings out of the last 10 years of employment) multiplied by the employee's years of service not in excess of 40 years, and (ii) 0.65% of Final Average Annual Compensation in excess of "covered compensation" multiplied by years of service not in excess of 35 years. "Covered compensation" means the average of the social security taxable wage base during the 35 year period ending with the year the employee attains social security retirement age. Early retirement, with reduced monthly benefits, is available at age 55 after 15 years of service. The Retirement Plan provides for 100% vesting after 5 years of service, and provides for a death benefit to a vested participant's surviving spouse. The costs of benefits under the Retirement Plan, which are borne by First Bancorp and/or its subsidiaries, are computed actuarially and defrayed by earnings from the Retirement Plan's investments. The compensation covered by the Retirement Plan includes total
earnings before reduction for contributions to a cash or deferred profit-sharing plan (such as the 401(k) feature of the Profit Sharing Plan described above) and amounts used to pay group health insurance premiums and includes bonuses (such as amounts paid under the incentive compensation plan). Compensation for the purposes of the Retirement Plan may not exceed statutory limits; such limit in 1997 was $160,000, and in 1996 and 1995 it was $150,000. The following table sets forth the estimated funded status of the Retirement Plan and amounts recognized in the Company's consolidated financial statements as of December 31, 1997 and 1996, as computed by independent actuarial consultants: <TABLE> <CAPTION> (In thousands) 1997 1996 ------- ------ <S> <C> <C> Actuarial present value of benefit obligations: Accumulated benefit obligation (ABO) including vested benefits of $2,268 in 1997 and $1,696 in 1996 $(2,350) (1,711) ======= ====== Projected benefit obligation (PBO) for service rendered to date $(3,254) (2,323) Plan assets at fair value--primarily listed common stocks, U.S. Government and agency securities, and collective funds 2,994 2,235 ------- ------ Plan assets less than PBO (260) (88) Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (7) (106) Unrecognized net transition obligation 61 63 Unrecognized prior service cost 751 720 ------- ------ Prepaid pension cost $ 545 589 ======= === </TABLE> Net pension cost for the Retirement Plan included the following components for the years ended December 31, 1997, 1996 and 1995: <TABLE> <CAPTION> (In thousands) 1997 1996 1995 ----- ---- ---- <S> <C> <C> <C> Service cost - benefits earned during the period $ 146 123 108 Interest cost on projected benefit obligation 199 165 149 Actual return on plan assets (619) (337) (357) Net amortization and deferral 535 262 279 ----- ---- ---- Net periodic pension cost $ 261 213 179 ===== === === </TABLE>
The Company's contributions to the Retirement Plan are based on computations by independent actuarial consultants and are intended to provide the Company with the maximum deduction for income tax purposes. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Company sponsors a Supplemental Executive Retirement Plan (the "SERP Plan") for the benefit of certain senior management executives of the Company. The purpose of the SERP Plan is to provide additional monthly pension benefits to ensure that each such senior management executive would receive lifetime monthly pension benefits equal to 3% of his or her final average compensation multiplied by his or her years of service (maximum of 20 years) to the Company or its subsidiaries, subject to a maximum of 60% of his or her final average compensation. The amount of a participant's monthly SERP benefit is reduced by (i) the amount payable under the Company's qualified Retirement Plan (described above), and (ii) fifty percent (50%) of the participant's primary social security benefit. Final average compensation means the average of the 5 highest consecutive calendar years of earnings during the last 10 years of service prior to termination of employment. The following table sets forth the estimated funded status of the SERP Plan as of December 31, 1997 and 1996: <TABLE> <CAPTION> (In thousands) 1997 1996 ----- ---- <S> <C> <C> Actuarial present value of benefit obligations: Accumulated benefit obligation (ABO) including vested benefits of $182 in 1997 and $209 in 1996 $(223) (234) ===== ==== Projected benefit obligation (PBO) for service rendered to date $(347) (331) ----- ---- Plan assets less than PBO (347) (331) Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (98) (107) Unrecognized prior service cost 294 339 Adjustment to recognize minimum liability (72) (135) ----- ---- Accrued pension cost $(223) (234) ===== ==== </TABLE> Net pension cost for the SERP Plan included the following components for the years ended December 31, 1997, 1996 and 1995: <TABLE> <CAPTION> (In thousands) 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Service cost - benefits earned during the period $ 10 8 17 Interest cost on projected benefit obligation 23 25 37 Net amortization and deferral 26 25 33 Net periodic pension cost ----- -- -- $ 59 58 87 ===== == == </TABLE>
The Company's funding policy with respect to the SERP Plan is to fund the related benefits through investments in insurance policies, which are not considered plan assets for the purpose of determining the SERP Plan's funded status. The following assumptions were used in determining the actuarial information for the Retirement Plan and the SERP Plan for the years ended December 31, 1997, 1996 and 1995: <TABLE> <CAPTION> 1997 1996 1995 --------------------- -------------------- --------------------- Retirement SERP Retirement SERP Retirement SERP Plan Plan Plan Plan Plan Plan ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> Discount rate used to determine net periodic pension cost 7.75% 7.75% 7.25% 8.00% 8.00% 8.00% Discount rate used to calculate end of year liability disclosures 7.00% 7.00% 7.75% 7.75% 7.25% 7.25% Expected long-term rate of return on assets 8.00% n/a 8.00% n/a 8.00% n/a Rate of compensation increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% </TABLE> Included in intangible assets at December 31, 1997 and 1996 are approximately $72,000 and $135,000, respectively, which were recognized in connection with the accrual of the additional minimum liability for the SERP Plan. SPLIT DOLLAR LIFE INSURANCE PLAN. Effective January 1, 1993, the Company adopted a Split Dollar Life Insurance Plan (the "Split Dollar Plan") whereby individual whole life insurance is made available to certain senior management executives designated and approved by the Board of Directors. Coverage ranges from $100,000 to $250,000. The Company pays the premiums under this plan and maintains a collateral interest in each participant's policy equal to the sum of premiums paid. If a policy is terminated or becomes payable because of the death of a participant, the premiums paid by the Company are recovered before any payment is made to the participant or the participant's beneficiary. In addition, the Company will recover its investment in the policy before transfer of the policy to the participant. Upon the death of a participant, the participant's designated beneficiary will receive a death benefit equal to the amount of coverage under his or her policy that is in excess of the amount of cumulative premiums paid by the Company. The amounts of insurance premiums paid by the Company in 1997, 1996 and 1995 under the Split-Dollar Plan on behalf of all executive officers as a group were $14,000, $19,000 and $27,000, respectively. Note 12. COMMITMENTS AND CONTINGENCIES See note 10 with respect to future obligations under noncancelable operating leases. In the normal course of business there are various outstanding commitments and contingent liabilities such as commitments to extend credit, which are not reflected in the financial statements. As of December 31, 1997, the Company had outstanding loan commitments of $63,219,000 of which $54,845,000 were at variable rates and $8,374,000 were at fixed rates. Included in outstanding loan commitments were unfunded commitments of $22,730,000 on revolving credit plans, of which $18,592,000 were at variable rates and $4,138,000 were at fixed rates.
Additionally, standby letters of credit of approximately $1,108,000 and $646,000 were outstanding at December 31, 1997 and 1996, respectively. The Company's exposure to credit loss for the aforementioned commitments in the event of nonperformance by the party to whom credit or financial guarantees have been extended is represented by the contractual amount of the financial instruments discussed above. However, management believes that these commitments represent no more than the normal lending risk that the Company commits to its borrowers. If these commitments are drawn, the Company plans to obtain collateral if it is deemed necessary based on management's credit evaluation of the counter party. The types of collateral held varies but may include accounts receivable, inventory and commercial or residential real estate. Management expects these commitments, if drawn, to be funded through normal operations. The Bank grants primarily commercial and installment loans to customers throughout its market area, which consists of Anson, Cabarrus, Chatham, Davidson, Guilford, Harnett, Lee, Montgomery, Moore, Randolph, Richmond, Scotland and Stanly Counties in North Carolina. The real estate loan portfolio can be affected by the condition of the local real estate market. The commercial and installment loan portfolios can be affected by local economic conditions. The Company is not involved in any legal proceedings which, in management's opinion, could have a material effect on the consolidated financial position of the Company. During the quarter ended December 31, 1995, First Bank reached a settlement among all parties involved in litigation brought by Prudential Securities, Inc. and filed on August 8, 1994 in the United States District Court for the Middle District of North Carolina, against one of First Bank's customers and First Bank, arising out of loans made by Prudential and secured by certificates of deposit issued by First Bank. First Bank's records indicated that the certificates of deposit were issued for amounts far less than those shown on the documents held by Prudential. The First Bank branch manager involved in the issuance of the certificates of deposit died on August 5, 1994. After significant discovery and a mediation conference held in early December of 1995, First Bancorp concluded that it was in the best interests of its shareholders, customers and employees to settle the Prudential litigation and other related litigation and avoid costly trials. Because First Bancorp's fidelity bond coverage limit was not sufficient to cover the entire cost of the settlement, the Company reported significant expenses in connection with resolving the litigation. The settlement resulted in a nonrecurring fourth quarter pretax charge of approximately $1,946,000 which equates to approximately $1,185,000 after-tax, or 39 cents per share (basic). Included in the pretax charge were the out-of-pocket costs to settle claims in the pretax amount of approximately $1,446,000 and additional provisions for loan losses of $500,000 which First Bancorp recorded due to charge-offs of loans related to the litigating parties. Before the settlement-related charge, First Bank had already incurred approximately $789,000 in pretax expenses in 1995 for legal services and other expenses incurred in matters related to the litigation. Note 13. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates as of December 31, 1997 and 1996 and limitations thereon are set forth below for the Company's financial instruments. Please see Note 1 for a discussion of fair value methods and assumptions, as well as fair value information for off balance sheet financial instruments.
<TABLE> <CAPTION> December 31, 1997 December 31, 1996 ------------------------------ ------------------------------- Carrying Estimated Carrying Estimated (In thousands) Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- <S> <C> <C> <C> <C> Cash and due from banks, noninterest-bearing $ 17,664 17,664 15,882 15,882 Due from banks, interest-bearing 13,081 13,081 - - Federal funds sold 2,896 2,896 5,025 5,025 Securities available for sale 50,277 50,277 53,942 53,942 Securities held to maturity 20,856 21,512 22,323 22,717 Presold mortgages in process of settlement 1,330 1,330 1,395 1,395 Loans, net of allowance 275,734 276,152 218,306 221,694 Accrued interest receivable 2,866 2,866 2,412 2,412 Deposits 361,224 361,610 297,861 298,309 Accrued interest payable 2,299 2,299 1,882 1,882 </TABLE> LIMITATIONS OF FAIR VALUE ESTIMATES. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include net premises and equipment, intangible and other assets such as foreclosed properties, deferred income taxes, prepaid expense accounts, income taxes currently payable and other various accrued expenses. In addition, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Note 14. STOCK OPTION PLAN Pursuant to provisions of the Company's 1994 Stock Option Plan (the "Option Plan"), options to purchase up to 270,000 shares of First Bancorp's authorized but unissued common stock may be granted to employees ("Employee Options") and directors ("Nonemployee Director Options") of the Company and its subsidiaries. The purposes of the Option Plan are (i) to align the interests of participating employees and directors with the Company's shareholders by reinforcing the relationship between shareholder gains and participant rewards, (ii) to encourage equity ownership in the Company by participants and (iii) to provide
an incentive to employee participants to continue their employment with the Company. For both Employee and Nonemployee Director Options, the option price is the fair market value of the stock at the date of grant. Employee Options vest over a five-year period, with the first 20% becoming vested on June 1, 1995. Director Options are granted over a five year period, and are 100% vested on the date of grant. All options are to expire not more than 10 years from the date of grant. Forfeited options become available for future grants. At December 31, 1997, there were 83,300 additional shares available for grant under the Option Plan. The per share weighted-average fair value of options granted during 1997, 1996, and 1995 was $8.30, $4.44, and $2.72, respectively on the date(s) of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1997 - expected dividend yield 2.05%, risk-free interest rate of 6.20%, expected life of 8 years, and expected volatility of 21.5% over the expected life; 1996-expected dividend yield of 2.93%, risk-free interest rate of 6.36%, expected life of 8 years, and expected volatility of 19% over the expected life; 1995-expected dividend yield of 3.17%, risk-free interest rate of 6.40%, expected life of 8 years, and expected volatility of 19% over the expected life. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: <TABLE> <CAPTION> (In thousands except per share data) 1997 1996 1995 ------- ----- ----- <S> <C> <C> <C> Net income As reported $ 5,012 4,347 1,582 Pro forma 4,892 4,299 1,552 Earnings per share Basic - As reported 1.66 1.44 0.53 Basic - Pro forma 1.62 1.43 0.52 Diluted - As reported 1.62 1.43 0.52 Diluted - Pro forma 1.58 1.41 0.51 </TABLE> Pro forma net income and earnings per share reflect only options granted in 1997, 1996, and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income and earnings per share amounts presented above because compensation cost is reflected over the options' vesting period of 5 years and compensation cost for options granted prior to January 1, 1995 is not considered. Consequently, the effects of applying SFAS No. 123 pro forma disclosures during the initial phase-in period may not be representative of the effects on reported net income in future periods.
The following table sets forth a summary of the activity of the Option Plan since December 31, 1994: <TABLE> <CAPTION> Options Exercisable Options Outstanding at Year End ------------------- ------------------------ Weighted- Weighted- Average Average Number of Exercise Number of Exercise Shares Price Shares Price -------- --------- ------ --------- <S> <C> <C> <C> <C> Balance at December 31, 1994 120,700 $ 10.66 11,000 $ 10.00 Granted 11,000 10.88 Exercised (5,800) 10.52 Forfeited (19,200) 10.63 Expired - - Balance at December 31, 1995 106,700 10.59 38,140 10.53 Granted 56,000 17.06 Exercised (2,200) 10.45 Forfeited (4,300) 10.63 Expired - - Balance at December 31, 1996 156,200 12.91 62,480 11.30 Granted 30,000 26.01 Exercised (4,000) 12.38 Forfeited (7,500) 15.76 Expired - Balance at December 31, 1997 174,700 15.05 94,420 13.09 ======= ===== ====== ===== </TABLE> The following table summarizes information about the stock options outstanding at December 31, 1997: <TABLE> <CAPTION> Options Outstanding Options Exercisable --------------------------------------------- ---------------------------- Weighted- Weighted- Weighted- Number Average Average Number Average Range of Outstanding Remaining Exercise Exercisable Exercise Exercise Prices at 12/31/97 Contractual Life Price at 12/31/97 Price --------------- ----------- ---------------- ----- ----------- ----- <S> <C> <C> <C> <C> <C> $10 to $15 106,200 7.1 $ 11.02 75,720 $ 11.18 $16 to $20 38,500 8.9 17.63 7,700 17.63 $21 to $25 11,000 9.4 23.00 11,000 23.00 $26 to $27.75 19,000 9.8 27.75 -- -- ------- --- ------- ------ --------- 174,700 7.9 $ 15.05 94,420 $ 13.09 ======= === ======= ====== ========= </TABLE>
Note 15. REGULATORY RESTRICTIONS The Company is regulated by the Board of Governors of the Federal Reserve System ("FRB") and is subject to securities registration and public reporting regulations of the Securities and Exchange Commission. The Bank is regulated by the Federal Deposit Insurance Corporation ("FDIC"), the North Carolina State Banking Commission and the FRB. The primary source of funds for the payment of dividends by First Bancorp is dividends received from its subsidiary, First Bank. The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. As of December 31, 1997, the Bank had undivided profits of approximately $20,740,000 which were available for the payment of dividends. As of December 31, 1997, approximately $14,492,000 of the Company's investment in the Bank is restricted as to transfer to the Company without obtaining prior regulatory approval. The Company and the Bank must comply with regulatory capital requirements established by the FRB and FDIC. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on both the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. These capital standards require the Company to maintain minimum ratios of Tier 1 capital to total risk-weighted assets and total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1 capital is comprised of total shareholders' equity calculated in accordance with generally accepted accounting principles less intangible assets, and total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which for the Company is the allowance for loan losses. Risk-weighted assets refer to the on- and off-balance sheet exposures of the Company adjusted for their related risk levels using formulas set forth in FRB and FDIC regulations. In addition to the risk-based capital requirements described above, the Company is subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution's composite ratings as determined by its regulators. The FRB has not advised the Company of any requirement specifically applicable to it.
At December 31, 1997, the Company was in compliance with all of the aforementioned capital requirements, as set forth in the table below. <TABLE> <CAPTION> To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------------- ------------------- --------------------- ($ in thousands) Amount Ratio Amount Ratio Amount Ratio - ---------------- ------ ----- ------ ----- ------ ----- (must equal or exceed) (must equal or exceed) <S> <C> <C> <C> <C> <C> <C> As of December 31, 1997 Total Capital (to Risk Weighted Assets) $33,558 $ 11.95% 22,457 8.00% 28,072 10.00% Tier I Capital (to Risk Weighted Assets) 30,092 10.85% 11,090 4.00% 16,635 6.00% Tier I Capital (to Average Assets) 30,092 7.93% 15,185 4.00% 18,981 5.00% As of December 31, 1996 Total Capital (to Risk Weighted Assets) $30,041 13.30% 18,071 8.00% 22,589 10.00% Tier I Capital (to Risk Weighted Assets) 27,252 12.21% 8,924 4.00% 13,386 6.00% Tier I Capital (to Average Assets) 27,252 8.32% 13,094 4.00% 16,368 5.00% </TABLE> The average reserve balance maintained under the requirements of the Federal Reserve was approximately $5,002,000 for the year ended December 31, 1997. Note 16. SUPPLEMENTARY INCOME STATEMENT INFORMATION Components of other operating expenses exceeding 1% of total income for any of the years ended December 31, 1997, 1996 and 1995 are as follows: <TABLE> <CAPTION> (In thousands) 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Amortization of intangible assets $ 546 568 501 FDIC Insurance 39 2 269 Legal and audit 181 207 955 Stationery and supplies 756 605 579 Telephone 424 334 293 </TABLE> Legal and audit expense for 1995 includes approximately $789,000 in fees incurred related to the litigation settlement discussed in note 12.
Note 17. CONDENSED PARENT COMPANY INFORMATION Condensed financial data for First Bancorp (parent company only) follows: <TABLE> <CAPTION> CONDENSED BALANCE SHEETS As of December 31, ------------------- (In thousands) 1997 1996 ------- ------ <S> <C> <C> Assets Cash on deposit with bank subsidiary $ 29 25 Securities available for sale at fair value: State and local governments (amortized costs of $600 in 1997 and $387 in 1996) 600 387 Other securities (amortized costs of $1 in 1997 and 1996) 1 1 ------- ------ Total securities available for sale 601 388 ------- ------ Investment in subsidiaries, at equity: First Bank and subsidiary 35,232 31,349 Montgomery Data Services, Inc. 88 246 First Bancorp Financial Services, Inc. 1,262 1,549 ------- ------ Total investments in subsidiaries 36,582 33,144 ------- ------ Land 7 7 Other assets 30 -- ------- ------ Total assets $37,249 33,564 ======= ====== Liabilities and shareholders' equity Other liabilities 484 332 Shareholders' equity 36,765 33,232 ------- ------ Total liabilities and shareholders' equity $37,249 33,564 ======= ====== <CAPTION> CONDENSED STATEMENTS OF INCOME Year Ended December 31, --------------------------------- (In thousands) 1997 1996 1995 ------- ----- ----- <S> <C> <C> <C> Equity in earnings (losses) of subsidiaries Dividends - First Bank and subsidiary $ 1,100 1,350 1,546 - Montgomery Data Services 475 -- 375 - First Bancorp Financial Services, Inc. 300 -- -- Undistributed - First Bank and subsidiary 3,842 2,990 85 - Montgomery Data Services (158) 167 (266) - First Bancorp Financial Services, Inc. (287) 5 (10) All other income and expenses, net (260) (165) (148) ------- ----- ----- Net Income $ 5,012 4,347 1,582 ======= ===== ===== </TABLE>
<TABLE> <CAPTION> CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31, --------------------------------- (In thousands) 1997 1996 1995 ------- ------ ------ <S> <C> <C> <C> Operating Activities: Net income $ 5,012 4,347 1,582 Equity in undistributed earnings of subsidiaries (3,397) (3,162) 191 Increase (decrease) in other assets (30) 1 3 Increase in other liabilities 90 -- -- ------- ------ ------ Total - operating activities 1,675 1,186 1,776 ------- ------ ------ Investing Activities: Purchases of securities available for sale (2,048) (1,493) (1,799) Sales of securities available for sale 1,835 1,564 1,424 Increase in investment in subsidiaries -- -- (415) ------- ------ ------ Total - investing activities (213) 71 (790) ------- ------ ------ Financing Activities Payment of cash dividends (1,508) (1,267) (1,038) Proceeds from issuance of common stock 50 23 61 ------- ------ ------ Total - financing activities (1,458) (1,244) (977) ------- ------ ------ Net increase in cash and cash equivalents 4 13 9 Cash and cash equivalents, beginning of year 25 12 3 ------- ------ ------ Cash and cash equivalents, end of year $ 29 25 12 ======= == == </TABLE> Note 18. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. Comprehensive income is defined as the change in equity during a period for non-owner transactions and is divided into net income and other comprehensive income. Other comprehensive income includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. This statement does not change or modify the reporting or display in the income statement. SFAS No. 130 is effective for interim and annual periods beginning after December 31, 1997. Comparative financial statements provided for earlier periods are required to be reclassified to reflect the application of this statement. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The statement requires management to report selected financial and descriptive information about reportable operating segments. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Generally, disclosures are required for segments internally identified to evaluate performance and resource allocation. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application, comparative information for prior periods is to be restated, if it is practical to do so. SFAS No. 131 does not have to be applied to interim financial statements in the initial year of application, but, comparative information must be provided for interim periods in the second year of application. In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits." This statement standardizes the disclosure requirements of pensions and other postretirement benefits. This statement does not change any measurement or recognition provisions, and thus will not materially impact the Company. This statement is effective for fiscal years beginning after December 15, 1997.
Independent Auditors' Report The Board of Directors First Bancorp We have audited the accompanying consolidated balance sheets of First Bancorp and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Bancorp and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP --------------------- KPMG Peat Marwick LLP Raleigh, North Carolina January 16, 1998
Part II. Other Information Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure During the two years ended December 31, 1997, and any subsequent interim periods, there were no changes in accountants and/or disagreements on any matters of accounting principles or practices or financial statement disclosures. PART III Item 10. Directors and Executive Officers of the Registrant; Compliance with Section 16(a) of the Exchange Act Incorporated herein by reference is the information under the caption "Nominees and Executive Officers" from the Company's definitive proxy statement to be filed pursuant to Regulation 14A. Item 11. Executive Compensation Incorporated herein by reference is the information under the caption "Compensation of Directors and Executive Officers" from the Company's definitive proxy statement to be filed pursuant to Regulation 14A. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated herein by reference is the information under the captions "Voting Securities" and"Directors, Nominees and Executive Officers" from the Company's definitive proxy statement to be filed pursuant to Regulation 14A. Item 13. Certain Relationships and Related Transactions Incorporated herein by reference is the information under the caption "Certain Transactions" from the Company's definitive proxy statement to be filed pursuant to Regulation 14A. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements - Reference Item 8, Cross Reference Index on page 2, for information concerning the Company's consolidated financial statements and report of independent auditors. 2. Financial Statement Schedules - not applicable 3. Exhibits The following exhibits are filed with this report or, as noted, are incorporated by reference. Management contracts, compensatory plans and arrangements are marked with an asterisk (*). 3.a.i Copy of Articles of Incorporation of the Registrant and amendments thereto, was filed as Exhibit 3(a) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference.
3.a.ii Copy of the amendment to Articles of Incorporation - adding a new Article Nine, filed as exhibit 3(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, and is incorporated herein by reference. 3.b.i Copy of the Bylaws of the Registrant and amendments thereto, was filed as Exhibit 3(b) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994, and is incorporated herein by reference. 4 Form of Common Stock Certificate was filed as Exhibit 4 to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. 10 Material Contracts 10.a Data processing Agreement dated October 1, 1984 by and between Bank of Montgomery (First Bank) and Montgomery Data Services, Inc. was filed as Exhibit 10(k) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. 10.b First Bank Salary and Incentive Plan, as amended, was filed as Exhibit 10(m) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. (*) 10.c First Bancorp Savings Plus and Profit Sharing Plan (401(k) savings incentive plan and trust), as amended January 25, 1994 and July 19, 1994, was filed as Exhibit 10(c) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994, and is incorporated herein by reference. (*) 10.d Directors and Officers Liability Insurance Policy of First Bancorp, dated July 16, 1991, was filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, and is incorporated herein by reference. 10.e Indemnification Agreement between the Company and its Directors and Officers was filed as Exhibit 10(t) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. 10.f First Bancorp Employees' Pension Plan, as amended on August 16, 1994, was filed as Exhibit 10(g) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994, and is incorporated herein by reference. (*) 10.g First Bancorp Senior Management Supplemental Executive Retirement Plan dated May 31, 1993, was filed as Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and is incorporated herein by reference. (*) 10.h First Bancorp Senior Management Split-Dollar Life Insurance Agreements between the Company and the Executive Officers, as amended on December 22, 1994, was filed as Exhibit 10(i) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994, and is incorporated herein by reference. (*)
10.i First Bancorp 1994 Stock Option Plan was filed as Exhibit 10(n) to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1994, and is incorporated herein by reference. (*) 10.j Severance Agreement between the Company and James A. Gunter dated October 12, 1995 was filed as Exhibit 10(m) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995, and is incorporated by reference. (*) 10.k Settlement Agreement dated December 29, 1995 among the Company's bank subsidiary, First Bank, and Prudential Securities, Incorporated; Cranford B. Garner, Timothy E. Garner, C.B. Garner Incorporated and others was filed as Exhibit 10(n) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995, and is incorporated herein by reference. 10.l 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.m 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.n Purchase and Assumption Agreement dated June 18, 1997 between First Union National Bank and First Bank was filed as Exhibit 10(m) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and is incorporated by reference. 21 List of Subsidiaries of Registrant was filed as Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference. 23.1 Consent of Independent Auditors of Registrant, KPMG Peat Marwick LLP. 27 Financial Data Schedule pursuant to Article 9 of Regulation S-X. (b) There were no reports filed on Form 8-K during the quarter ended December 31, 1997. (c) Exhibits - see (a)(3) above (d) No financial statement schedules are filed herewith.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, FIRST BANCORP has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Troy, and State of North Carolina, on the 17th day of March, 1998. First Bancorp By: /s/ James H. Garner ------------------- James H. Garner President, Chief Executive Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on behalf of the Company by the following persons and in the capacities and on the dates indicated. Executive Officers /s/ James H. Garner ------------------ James H. Garner President, Chief Executive Officer and Treasurer /s/ Anna G. Hollers /s/ Eric P. Credle ------------------- ------------------ Anna G. Hollers Eric P. Credle Executive Vice President Vice President Executive Secretary Chief Financial Officer March 17, 1998 March 17, 1998 Board of Directors /s/ Jack D. Briggs /s/ Edward T. Taws ------------------ ------------------ Jack D. Briggs Edward T. Taws Chairman of the Board Director Director March 17, 1998 March 17, 1998 /s/ David L. Burns /s/ Frederick H. Taylor ------------------ ----------------------- David L. Burns Frederick H. Taylor Director Director March 17, 1998 March 17, 1998 /s/ Jesse S. Capel /s/ Goldie H. Wallace ------------------ --------------------- Jesse S. Capel Goldie H. Wallace Director Director March 17, 1998 March 17, 1998 /s/ George R. Perkins /s/ A. Jordan Washburn --------------------- ---------------------- George R. Perkins A. Jordan Washburn Director Director March 17, 1998 March 17, 1998
/s/ G.T. Rabe, Jr. /s/ John C. Willis ------------------ ------------------ G.T. Rabe, Jr. John C. Willis Director Director March 17, 1998 March 17, 1998 /s/ John J. Russell ------------------- John J. Russell Director March 17, 1998
EXHIBIT CROSS REFERENCE INDEX Exhibit 3.a.i Copy of Articles of Incorporation of the Registrant * 3.a.ii Copy of the amendment to Articles of Incorporation 3.b.i Copy of the Bylaws of the Registrant * 10.a Data processing Agreement by and between Bank of Montgomery (First Bank) and Montgomery Data Services, Inc. * 10.b First Bank Salary and Incentive Plan, as amended * 10.c First Bancorp Savings Plus and Profit Sharing Plan (401(k) savings incentive plan and trust), as amended * 10.d Directors and Officers Liability Insurance Policy of First Bancorp * 10.e Indemnification Agreement between the Company and its Directors and Officers * 10.f First Bancorp Employees' Pension Plan * 10.g First Bancorp Senior Management Supplemental Executive Retirement Plan * 10.h First Bancorp Senior Management Split-Dollar Life Insurance Agreements between the Company and the Executive Officers * 10.i First Bancorp 1994 Stock Option Plan * 10.j Severance Agreement between the Company and James A. Gunter * 10.k Severance Agreement between the Company and Patrick A. Meisky * 10.l Amendment to the First Bancorp Savings Plus and Profit Sharing Plan (401(k) savings incentive plan and trust) * 10.m Amendment to the First Bancorp Savings Plus and Profit Sharing Plan * 10. n Purchase and Assumption Agreement between First Union National Bank and First Bank * 21 List of Subsidiaries of Registrant * 23.1 Consent of Independent Auditors of Registrant, KPMG Peat Marwick LLP 27 Financial Data Schedule pursuant to Article 9 of Regulation S-X * Incorporated herein by reference.