UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 Commission File Number 0-15572 FIRST BANCORP --------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) North Carolina 56-1421916 - -------------------------------------- -------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 341 North Main Street, Troy, North Carolina 27371-0508 - --------------------------------------------------- -------------- (Address of Principal Executive Offices) (Zip Code) (Registrant's telephone number, including area code) (910) 576-6171 ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] YES [_] NO As of October 31, 2000, 8,943,834 shares of the registrant's Common Stock, no par value, were outstanding. The registrant had no other classes of securities outstanding.
INDEX FIRST BANCORP AND SUBSIDIARIES Page Part I. Financial Information Item 1 - Financial Statements CONSOLIDATED BALANCE SHEETS - September 30, 2000 and 1999 (With Comparative Amounts at December 31, 1999) 3 CONSOLIDATED STATEMENTS OF INCOME - For the Periods Ended September 30, 2000 and 1999 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - For the Periods Ended September 30, 2000 and 1999 5 CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Periods Ended September 30, 2000 and 1999 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition 11 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20 Part II. Other Information Item 5 - Other Information 22 Item 6 - Exhibits and Reports on Form 8-K 22 Signatures 26
Part I. Financial Information Item 1 - Financial Statements First Bancorp and Subsidiaries Consolidated Balance Sheets <TABLE> <CAPTION> September 30, December 31, September 30, ($ in thousands-unaudited) 2000 1999 1999 - ----------------------------------------------------------------------- --------------- ------------ ----------- <S> <C> <C> <C> ASSETS Cash & due from banks, noninterest-bearing $ 24,189 30,629 27,504 Due from banks, interest-bearing 10,848 15,432 22,307 Federal funds sold 33,050 12,280 2,285 ----------- ----------- ----------- Total cash and cash equivalents 68,087 58,341 52,096 ----------- ----------- ----------- Securities available for sale (costs of $58,826, $116,633, and $122,233) 58,216 113,005 119,997 Securities held to maturity (fair values of $48,079, $51,425, and $51,607) 49,083 52,637 52,671 Presold mortgages in process of settlement 1,178 1,121 636 Loans 730,134 643,224 612,954 Less: Allowance for loan losses (7,773) (6,674) (6,584) ----------- ----------- ----------- Net loans 722,361 636,550 606,370 ----------- ----------- ----------- Premises and equipment 14,154 12,359 12,218 Accrued interest receivable 5,833 5,286 5,366 Intangible assets 4,788 5,261 5,366 Other 5,120 4,971 4,135 ----------- ----------- ----------- Total assets $ 928,820 889,531 858,855 =========== =========== =========== LIABILITIES Deposits: Demand - noninterest-bearing $ 71,392 63,881 60,828 Savings, NOW, and money market 248,573 251,982 247,481 Time deposits of $100,000 or more 135,882 118,566 104,184 Other time deposits 313,161 277,710 272,039 ----------- ----------- ----------- Total deposits 769,008 712,139 684,532 Short-term borrowings 41,200 62,500 55,000 Accrued interest payable 3,727 3,635 3,653 Other liabilities 4,924 4,277 9,250 ----------- ----------- ----------- Total liabilities 818,859 782,551 752,435 ----------- ----------- ----------- SHAREHOLDERS' EQUITY Common stock, No par value per share Issued and outstanding: 8,928,729, 8,848,962, and 8,857,081 shares 51,881 51,490 51,509 Retained earnings 58,480 57,787 56,320 Accumulated other comprehensive loss (400) (2,297) (1,409) ----------- ----------- ----------- Total shareholders' equity 109,961 106,980 106,420 ----------- ----------- ----------- Total liabilities and shareholders' equity $ 928,820 889,531 858,855 =========== =========== ============ </TABLE> See notes to consolidated financial statements. 3
First Bancorp and Subsidiaries Consolidated Statements of Income <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ------------------------------- ($ in thousands, except share data-unaudited) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans $ 16,241 12,939 45,658 37,253 Interest on investment securities: Taxable interest income 2,255 2,225 6,816 6,234 Tax-exempt interest income 211 226 661 719 Other, principally overnight investments 285 221 755 836 ----------- ----------- ----------- ----------- Total interest income 18,992 15,611 53,890 45,042 ----------- ----------- ----------- ----------- INTEREST EXPENSE Savings, NOW and money market 1,679 1,494 4,729 4,421 Time deposits of $100,000 or more 2,162 1,350 5,679 3,993 Other time deposits 4,542 3,427 12,068 10,081 Short-term borrowings 914 346 2,584 619 ----------- ----------- ----------- ----------- Total interest expense 9,297 6,617 25,060 19,114 ----------- ----------- ----------- ----------- Net interest income 9,695 8,994 28,830 25,928 Provision for loan losses 705 205 1,365 665 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 8,990 8,789 27,465 25,263 ----------- ----------- ----------- ----------- NONINTEREST INCOME Service charges on deposit accounts 796 762 2,302 2,216 Other service charges, commissions and fees 471 410 1,500 1,281 Fees from presold mortgages 116 160 314 616 Commissions from insurance sales 56 62 256 207 Data processing fees 34 14 76 34 Securities gains (losses) (2,006) -- (1,917) 20 Loan sale gains -- 23 -- 25 Other gains (losses) -- (20) (11) (20) ----------- ----------- ----------- ----------- Total noninterest income (533) 1,411 2,520 4,379 ----------- ----------- ----------- ----------- NONINTEREST EXPENSES Salaries 2,608 2,427 7,567 6,911 Employee benefits 646 633 1,956 1,913 ----------- ----------- ----------- ----------- Total personnel expense 3,254 3,060 9,523 8,824 Net occupancy expense 399 358 1,139 1,030 Equipment related expenses 348 311 1,013 906 Merger expenses 3,188 -- 3,188 -- Other operating expenses 1,936 1,875 5,820 5,497 ----------- ----------- ----------- ----------- Total noninterest expenses 9,125 5,604 20,683 16,257 ----------- ----------- ----------- ----------- Income (loss) before income taxes (668) 4,596 9,302 13,385 Income taxes 255 1,505 3,703 4,636 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ (923) 3,091 5,599 8,749 =========== =========== =========== =========== Earnings (loss) per share: Basic $ (0.10) 0.35 0.63 0.98 Diluted (0.10) 0.33 0.61 0.94 Weighted average common shares outstanding: Basic 8,915,635 8,886,053 8,896,268 8,945,897 Diluted 9,103,653 9,247,120 9,111,044 9,336,047 </TABLE> 4 See notes to consolidated financial statements.
First Bancorp and Subsidiaries Consolidated Statements of Comprehensive Income <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- ($ in thousands-unaudited) 2000 1999 2000 1999 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net income (loss) $ (923) 3,091 5,599 8,749 --------- --------- --------- --------- Other comprehensive income (loss): Unrealized gains (losses) on securities available for sale: Unrealized holding gains (losses) arising during the period, pretax 1,016 (595) 1,101 (2,735) Tax benefit (expense) (345) 215 (417) 919 Reclassification to realized losses (gains) 2,006 -- 1,917 (20) Tax benefit (expense) (682) -- (704) 8 --------- --------- --------- --------- Other comprehensive income (loss) 1,995 (380) 1,897 (1,828) --------- --------- --------- --------- Comprehensive income $ 1,072 2,711 7,496 6,921 ========= ========= ========= ========= </TABLE> See notes to consolidated financial statements. 5
First Bancorp and Subsidiaries Consolidated Statements of Cash Flows <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------ ($ in thousands-unaudited) 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,599 8,749 Reconciliation of net income to net cash provided by operating activities: Provision for loan losses 1,365 665 Net security premium amortization 43 415 Gains on sales of loans -- (25) Proceeds from sales of loans -- 1,226 Losses (gains) on sales of securities available for sale 1,917 (20) Loss on disposal of premises and equipment 98 -- Release of ESOP shares -- 183 Loan fees and costs deferred, net of amortization 49 (8) Depreciation of premises and equipment 908 786 Amortization of intangible assets 474 477 Deferred income tax benefit (289) (221) Increase in accrued interest receivable (547) (1,068) Decrease (increase) in other assets (525) 1,799 Increase in accrued interest payable 92 427 Decrease in other liabilities 379 5,470 -------- -------- Net cash provided by operating activities 9,563 18,855 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities available for sale (10,977) (50,260) Purchases of securities held to maturity (169) (27,322) Proceeds from sales of securities available for sale 54,490 3,017 Proceeds from maturities/issuer calls of securities available for sale 12,319 32,414 Proceeds from maturities/issuer calls of securities held to maturity 3,738 6,848 Net increase in loans (87,231) (47,135) Purchases of premises and equipment (2,801) (2,107) -------- -------- Net cash used in investing activities (30,631) (84,545) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 56,869 28,384 Net change in short-term borrowings (21,300) 49,000 Cash dividends paid (4,354) (4,209) Proceeds from issuance of common stock 524 635 Purchases and retirement of common stock (925) (7,072) -------- -------- Net cash provided by financing activities 30,814 66,738 -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 9,746 1,048 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 58,341 51,048 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 68,087 52,096 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 24,968 18,687 Income taxes 4,910 3,224 Non-cash transactions: Foreclosed loans transferred to other real estate -- 31 Unrealized gain (loss) on securities available for sale 3,022 (2,755) Premises and equipment transferred to other real estate -- 315 </TABLE> See notes to consolidated financial statements. 6
First Bancorp And Subsidiaries Notes To Consolidated Financial Statements - -------------------------------------------------------------------------------- (unaudited) For the Periods Ended September 30, 2000 and 1999 - -------------------------------------------------------------------------------- NOTE 1 - Basis of Presentation In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial position of the Company as of September 30, 2000 and 1999 and the consolidated results of operations and consolidated cash flows for the periods ended September 30, 2000 and 1999. Reference is made to the 1999 Annual Report on Form 10-K filed with the SEC for a discussion of accounting policies and other relevant information with respect to the financial statements. As discussed in Note 7 below, all prior period financial information has been restated to include historical information for a company acquired in a transaction accounted for as a pooling-of-interests. NOTE 2 - Reclassifications The results of operations for the periods ended September 30, 2000 and 1999 are not necessarily indicative of the results to be expected for the full year. Certain amounts reported in the period ended September 30, 1999 have been reclassified to conform with the presentation for September 30, 2000. These reclassifications had no effect on net income or shareholders' equity for the periods presented, nor did they materially impact trends in financial information. NOTE 3 - Earnings Per Share Basic earnings per share were computed by dividing net income by the weighted average common shares outstanding. Diluted earnings per share includes the potentially dilutive effects of the Company's stock option plans. The following is a reconciliation of the numerators and denominators used in computing basic and diluted earnings per share: <TABLE> <CAPTION> For the Three Months Ended September 30, ---------------------------------------------------------------------------------------- 2000 1999 -------------------------------------------- ---------------------------------------- Income Shares Income Shares ($ in thousands except per (Numer- (Denom- Per Share (Numer- (Denom- Per Share share amounts) ator) inator) Amount ator) inator) Amount - ------------------------------------ ----------- ------------ ----------- ---------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> Basic EPS Net income (loss) $ (923) 8,915,635 $ (0.10) $ 3,091 8,886,053 $ 0.35 ========= ======== Effect of Dilutive Securities -- 188,018 -- 361,067 ----------- ---------- --------- ---------- Diluted EPS $ (923) 9,103,653 $ (0.10) $ 3,091 9,247,120 $ 0.33 =========== ========== ========= ========= ========== ========== </TABLE> <TABLE> <CAPTION> For the Nine Months Ended September 30, --------------------------------------------------------------------------------------- 2000 1999 -------------------------------------------- ---------------------------------------- Income Shares Income Shares ($ in thousands except per (Numer- (Denom- Per Share (Numer- (Denom- Per Share share amounts) ator) inator) Amount ator) inator) Amount - ------------------------------------ ----------- ------------ ----------- ---------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> Basic EPS Net income $ 5,599 8,896,268 $ 0.63 $ 8,749 8,945,897 $ 0.98 ========= ========= Effect of Dilutive Securities -- 214,776 -- 390,150 ----------- ---------- --------- ---------- Diluted EPS $ 5,599 9,111,044 $ 0.61 $ 8,749 9,336,047 $ 0.94 =========== ========== ========= ========= ========== ========== </TABLE> 7
NOTE 4 - Asset Quality Information Nonperforming assets are defined as nonaccrual loans, loans past due 90 or more days and still accruing interest, restructured loans and other real estate. For each of the periods presented, the Company had no loans past due 90 or more days and still accruing interest. Nonperforming assets are summarized as follows: <TABLE> <CAPTION> September 30, December 31, September 30, ($ in thousands) 2000 1999 1999 ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Nonperforming loans: Nonaccrual loans $ 992 1,424 897 Restructured loans 243 257 260 ---------- ---------- ---------- Total nonperforming loans 1,235 1,681 1,157 Other real estate 738 906 855 ---------- ---------- ---------- Total nonperforming assets $ 1,973 2,587 2,012 ========== ========== ========== Nonperforming loans to total loans 0.17% 0.26% 0.19% Nonperforming assets as a percentage of loans and other real estate 0.27% 0.40% 0.33% Nonperforming assets to total assets 0.21% 0.29% 0.23% Allowance for loan losses to total loans 1.06% 1.04% 1.07% - ----------------------------------------------------------------------------------------------------------------- </TABLE> NOTE 5 - Deferred Loan Fees Loans are shown on the Consolidated Balance Sheets net of net deferred loan fees of approximately $753,000, $703,000, and $673,000 at September 30, 2000, December 31, 1999, and September 30, 1999, respectively. NOTE 6 - Changes in Stockholders' Equity Significant items that affected the Company's stockholders' equity for the nine months ended September 30, 2000 are as follows: $5,599,000 in net income, $4,906,000 in dividends declared, $925,000 in stock repurchases, a $791,000 increase to equity resulting from the tax benefit realized from the exercise of nonqualified stock options, proceeds of $524,000 from the issuance of common stock, and other comprehensive income of $1,897,000. NOTE 7 - Completed Acquisition On September 14, 2000, the Company completed the merger acquisition of First Savings Bancorp, Inc. ("First Savings"), the holding company for First Savings Bank of Moore County, Inc., SSB ("First Savings Bank"). At June 30, 2000, First Savings, headquartered in Southern Pines, North Carolina, had total assets of $331 million, with loans of $232 million and deposits of $224 million with six branch locations in Moore County, NC. In accordance with the terms of the merger agreement, each share of First Savings stock was exchanged for 1.2468 shares of First Bancorp stock. These terms resulted in First Bancorp issuing approximately 4,407,000 shares of stock to complete the transaction. The merger was accounted for as a pooling-of-interests and accordingly, all financial results for prior periods have been restated to include the combined results of First Bancorp and First Savings. Separate financial information of the combined entities as of and for the six months ended June 30, 2000 (the period immediately preceding the merger) is as follows: (in thousands) First Bancorp First Savings Combined ------------- ------------- -------- Total assets $ 624,390 330,497 954,887 Total revenue 25,612 12,339 37,951 Net interest income 13,087 6,048 19,135 Net income 3,728 2,794 6,522 8
In connection with the merger, the Company recorded pre-tax merger-related charges of $5,614,000 ($4,065,000 after-tax) during the three months ended September 30, 2000. These charges were comprised of the following categories: o $3,188,000 in expenses ($2,593,000 after-tax) that were incurred in completing the merger. These expenses consisted primarily of investment banker fees, attorney fees, employment contract payments, accountant fees, and early termination fees associated with vendor contracts. o $2,006,000 in losses ($1,218,000 after-tax) from sales of available-for-sale securities. The merger with First Savings increased the company's liability sensitive position. To reduce the company's interest rate risk exposure, approximately $54.5 million in securities were sold at a total loss of $2,006,000. The proceeds from the sale were first used to repay short-term debt, with the remaining proceeds invested in investments with a shorter average life and a higher yield than the securities sold. o $420,000 was recorded ($254,000 after-tax) as a one time adjustment to the allowance for loan losses. This provision for loan losses was recorded in order to align the credit risk methodologies of First Bancorp and First Savings. (In addition to the one time adjustment, First Bancorp recorded provisions for loan losses, resulting from ongoing operations, of $285,000 and $945,000 for the three and nine months ended September 30, 2000, respectively.) The following table indicates the primary components of the $3,188,000 in merger expenses, including the amounts utilized through September 30, 2000, and the amounts remaining as accrued expenses in "other liabilities" at September 30, 2000: <TABLE> <CAPTION> Total Merger- Utilized through Remaining Accrual (in thousands) Related Charges September 30, 2000 at September 30, 2000 ------------------ --------------------- ------------------------ <S> <C> <C> <C> Professional costs $ 1,601 1,601 -- Employment contract payments 958 958 -- Early termination fees associated with vendor contracts 251 -- 251 Equipment write-downs 98 98 -- Printing and filing fees 97 97 -- Other 183 35 148 ------------------ --------------------- ------------------------ Total $ 3,188 2,789 399 ================== ===================== ======================== </TABLE> NOTE 8 - Pending Merger and Acquisition Activity As previously announced, to gain Federal Reserve approval for the merger with First Savings, the Company was required to divest the First Savings Bank branch located in Carthage, NC. The Carthage branch has approximately $15.5 million in total deposits and $2.5 million in total loans. On August 22, 2000, the Company reported the signing of a purchase and assumption agreement with Bank of Davie to acquire the Carthage branch. The sale of the branch is anticipated to occur during the fourth quarter of 2000 and is expected to result in the recording of a gain of approximately $850,000. The Company announced on September 13, 2000 that it had reached an agreement with First Union National Bank to acquire four branches with aggregate deposits of approximately $105 million and aggregate loans of approximately $19 million. The four branches to be acquired are Lumberton, Pembroke, St. Pauls (all located in Robeson County, NC), and Laurinburg (Scotland County, NC). The closing of the transaction and the data conversion are expected to occur in the first quarter of 2001. Total intangible assets of approximately $15.7 million are expected to be recorded in connection with the purchase. The Company announced on October 20, 2000 that it had reached a definitive agreement to acquire Century Bancorp, Inc. ("Century"). Century is the holding company for Home Savings, Inc., SSB, a one branch savings institution located in Thomasville, NC. As of June 30, 2000, Century had total assets of $101 million, total loans of $88 million, and total deposits of $74 million. The terms of the agreement call for shareholders of Century to have the option to receive either $20.00 in cash or a fixed exchange ratio of 1.3333 shares of First Bancorp common stock for each share of Century common stock that they own. This election is subject to the requirement that, subject to certain possible adjustments that may be necessary to achieve the intended tax treatment, 60% of 9
Century's shares outstanding will be exchanged for cash and 40% of Century's shares outstanding will be exchanged for shares of First Bancorp stock. To the extent that Century shareholders elect to receive more aggregate stock or cash consideration than permitted by the agreement, pro rata allocations will be made. This transaction is expect to close during the first half of 2001. 10
Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition RESULTS OF OPERATIONS RESTATEMENT OF PRIOR PERIOD RESULTS AND DISCUSSION OF MERGER-RELATED CHARGES As discussed in Note 7 to the financial statements above, during the three months ended September 30, 2000, the Company completed the merger acquisition of First Savings Bancorp, Inc. and its wholly-owned subsidiary, First Savings Bank of Moore County, Inc., SSB (collectively referred to as "First Savings"). In accordance with the terms of the merger agreement, each share of First Savings stock was exchanged for 1.2468 shares of First Bancorp stock. These terms resulted in First Bancorp issuing approximately 4,407,000 shares of stock to complete the transaction. The merger was accounted for as a pooling-of-interests and accordingly, all financial results for prior periods have been restated to include the combined results of First Bancorp and First Savings. In connection with the First Savings merger acquisition, the Company recorded pre-tax merger-related charges of $5,614,000 ($4,065,000 after-tax) during the three months ended September 30, 2000. These charges were comprised of the following categories: o $3,188,000 in expenses ($2,593,000 after-tax) that were incurred in completing the merger. These expenses consisted primarily of investment banker fees, attorney fees, employment contract payments, accountant fees, and early termination fees associated with vendor contracts. o $2,006,000 in losses ($1,218,000 after-tax) from sales of available for sale securities. The merger with First Savings increased the company's liability sensitive position. To reduce the company's interest rate risk exposure, approximately $54.5 million in securities were sold at a total loss of $2,006,000. The proceeds from the sale were first used to repay short-term debt, with the remaining proceeds invested in investments with a shorter average life and a higher yield than the securities sold. o $420,000 was recorded ($254,000 after-tax) as a one time adjustment to the allowance for loan losses. This provision for loan losses was recorded in order to align the credit risk methodologies of First Bancorp and First Savings. (In addition to the one time adjustment, First Bancorp recorded provisions for loan losses, resulting from ongoing operations, of $285,000 and $945,000 for the three and nine months ended September 30, 2000, respectively.) In the discussion that follows, the term "recurring" will exclude the effects of the merger-related charges described above incurred during the three months ended September 30, 2000. OVERVIEW Recurring net income for the three months ended September 30, 2000 was $3,142,000, a 1.6% increase over the net income of $3,091,000 recorded in the third quarter of 1999. Recurring earnings per share on a diluted basis for the third quarter of 2000 amounted to $0.35, which is a 6.1% increase over the $0.33 recorded for the third quarter of 1999. Recurring net income for the nine months ended September 30, 2000 was $9,664,000, a 10.5% increase over the net income of $8,749,000 recorded for the same nine months of 1999. Recurring earnings per share on a diluted basis for the nine months ended September 30, 2000 amounted to $1.06, which is a 12.8% increase over the $0.94 recorded for the same nine months of 1999. Including the merger-related charges, the Company recorded a net loss of $923,000, or $0.10 per diluted share, for the three months ended September 30, 2000, and net income of $5,599,000, or $0.61 per diluted share, for the nine months ended September 30, 2000. 11
The relatively flat recurring net income for the third quarter of 2000 compared to the third quarter of 1999 resulted from net interest income growth and recurring noninterest income growth of 7.8% and 4.4%, respectively, which were largely offset by a higher recurring provision for loans losses and recurring noninterest expense growth of 5.9%. The 10.5% increase in recurring net income for the nine months ended September 30, 2000 compared to the same nine months of 1999, resulted primarily from an increase in net interest income of 11.2%, which, when coupled with a 3.4% increase in noninterest income growth, more than offset a higher recurring provision for loan losses and a 7.6% increase in noninterest expense growth. The 7.8% and 11.2% net interest income growth for the third quarter of 2000 and for the nine months ended September 30, 2000, respectively, resulted from two offsetting factors. Strong increases in loans and deposits had a positive effect on net interest income, while lower net interest margins had a negative impact on net interest income (see additional discussion below). The net interest margin experienced more pressure in the third quarter of 2000 than it did in for the first six months of 2000, resulting in the lower percentage increase in net interest income for third quarter of 2000 compared to the same quarter of 1999 than it did for the nine month comparisons of each year. The higher recurring provisions for loan losses during 2000 were a result of higher loan growth than in 1999, and not due to concerns regarding credit quality. The 3%-4% increases in recurring noninterest income and 6%-8% increases in recurring noninterest expenses were due to general growth in the customer base and the overhead necessary to service the growth. COMPONENTS OF EARNINGS Net interest income is the largest component of earnings, representing the difference between interest and fees generated from earning assets and the interest costs of deposits and other funds needed to support those assets. Net interest income for the three and nine month periods ended September 30, 2000 amounted to $9,695,000 and $28,830,000, respectively, increases of $701,000 and $2,902,000, or 7.8% and 11.2%, respectively, over the amounts of $8,994,000 and $25,928,000, recorded in the same three and nine month periods in 1999, respectively. There are two primary factors that cause changes in the amount of net interest income recorded by the Company - 1) growth in loans and deposits, and 2) the Company's net interest margin. For the three and nine months ended September 30, 2000, the growth in loans and deposits had a positive impact on net interest income, while a declining net interest margin had a negative impact on net interest income, when compared to the same periods in 1999. Loans outstanding at September 30, 2000 amounted to $730.1 million, a 19.1% increase from September 30, 1999, while deposits outstanding at September 30, 2000 amounted to $769.0 million, a 12.3% increase from a year earlier. The net interest margin (tax equivalent net interest income divided by average earning assets) for the third quarter of 2000 was 4.41%, a 20 basis point decrease from the 4.61% realized for the third quarter of 1999. The net interest margin for the nine months ended September 30, 2000 was 4.51%, or 10 basis points lower than the 4.61% margin realized for the first nine months of 1999. The following tables present average balances and average rates earned/paid by the Company for the third quarter of 2000 compared to the third quarter of 1999 and the nine months ended September 30, 2000 compared to the nine months ended September 30, 1999. 12
<TABLE> <CAPTION> For the Three Months Ended September 30, --------------------------------------------------------------------------------- 2000 1999 -------------------------------------- --------------------------------------- Interest Interest Average Average Earned Average Average Earned ($ in thousands) Volume Rate or Paid Volume Rate or Paid ----------- ------- --------- ------------ -------- ----------- <S> <C> <C> <C> <C> <C> <C> Assets Loans $ 718,301 8.97% $ 16,241 $ 603,517 8.51% $ 12,939 Taxable securities 132,323 6.76% 2,255 149,635 5.90% 2,225 Non-taxable securities (1) 17,149 8.26% 357 18,600 8.04% 377 Short-term investments, principally federal funds 18,072 6.26% 285 14,560 6.02% 221 ----------- --------- ------------ ----------- Total interest-earning assets 885,845 8.57% 19,138 786,312 7.95% 15,762 --------- ----------- Liabilities Savings, NOW and money market deposits $ 249,569 2.67% 1,679 $ 249,788 2.37% $ 1,494 Time deposits >$100,000 133,896 6.41% 2,162 97,317 5.50% 1,350 Other time deposits 310,886 5.80% 4,542 269,964 5.04% 3,427 ----------- --------- ------------ ----------- Total interest-bearing deposits 694,351 4.79% 8,383 617,069 4.03% 6,271 Short-term borrowings 50,605 7.17% 914 26,998 5.08% 346 ----------- --------- ------------ ----------- Total interest-bearing liabilities 744,956 4.95% 9,297 644,067 4.08% 6,617 --------- ----------- Non-interest-bearing deposits 66,443 66,135 Net yield on interest-earning assets and net interest income 4.41% $ 9,841 4.61% $ 9,145 ========= =========== Interest rate spread 3.62% 3.87% Average prime rate 9.50% 8.10% - --------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Includes tax-equivalent adjustments of $146,000 and $151,000 in 2000 and 1999 respectively, to reflect the federal and state benefit of the tax-exempt securities, reduced by the related nondeductible portion of interest expense. <TABLE> <CAPTION> For the Nine Months Ended September 30, --------------------------------------------------------------------------------- 2000 1999 -------------------------------------- --------------------------------------- Interest Interest Average Average Earned Average Average Earned ($ in thousands) Volume Rate or Paid Volume Rate or Paid ----------- ------- --------- ------------ -------- ----------- <S> <C> <C> <C> <C> <C> <C> Assets Loans $ 688,947 8.82% $ 45,658 $ 588,225 8.47% $ 37,253 Taxable securities 142,303 6.38% 6,816 139,071 5.99% 6,234 Non-taxable securities (1) 17,829 8.26% 1,106 19,160 8.28% 1,187 Short-term investments, principally federal funds 15,880 6.33% 755 19,700 5.67% 836 ----------- --------- ------------ ----------- Total interest-earning assets 864,959 8.37% 54,335 766,156 7.94% 45,510 --------- --------- Liabilities Savings, NOW and money market deposits $ 251,005 2.51% 4,729 $ 248,338 2.38% $ 4,421 Time deposits >$100,000 126,042 6.00% 5,679 96,459 5.53% 3,993 Other time deposits 292,224 5.50% 12,068 265,140 5.08% 10,081 ----------- --------- ------------ ----------- Total interest-bearing deposits 669,271 4.47% 22,476 609,937 4.05% 18,495 Short-term borrowings 54,097 6.36% 2,584 17,358 4.77% 619 ----------- --------- ------------ ----------- Total interest-bearing liabilities 723,368 4.61% 25,060 627,295 4.07% 19,114 --------- ----------- Non-interest-bearing deposits 66,907 62,811 Net yield on interest-earning assets and net interest income 4.51% $ 29,275 4.61% $ 26,396 ========= =========== Interest rate spread 3.76% 3.87% Average prime rate 9.15% 7.87% - --------------------------------------------------------------------------------------------------------------------------- </TABLE> 13
(1) Includes tax-equivalent adjustments of $445,000 and $468,000 in 2000 and 1999 respectively, to reflect the federal and state benefit of the tax-exempt securities, reduced by the related nondeductible portion of interest expense. The decrease in the Company's net interest margin is primarily due to the following three factors - 1) the Company is liability sensitive in the one year horizon, meaning that more of its interest-bearing liabilities have repriced within the past year at higher interest rates (due to the rising interest rate environment) than have its interest-earning assets, 2) a higher reliance on time deposits and short-term borrowings (which are the categories that generally carry the highest interest rates) to fund strong loan growth, and 3) a very competitive environment for deposits has required the Company to offer higher rates than in the past to attract deposits. The recurring provision for loan losses for the third quarter of 2000 was $285,000, $80,000 higher than the $205,000 recorded in the third quarter of 2000. For the nine months ended September 30, 2000, the recurring provision for loan losses was $945,000 compared to $665,000 for the nine months ended September 30, 1999. The increases in the recurring provisions for loan losses recorded in 2000 compared to 1999 have been a result of the higher loan growth experienced and not because of credit quality concerns. Net loan growth for the third quarter of 2000 amounted to $25.4 million compared to $15.9 million in the third quarter of 1999. Net loan growth for the first nine months of 2000 amounted to $86.9 million compared to $45.7 million for the first nine months of 1999. Credit quality indicators for the Company remained strong in the third quarter of 2000. As discussed above, in addition to the recurring provisions for loan losses recorded in 2000, the Company recorded a one time adjustment of $420,000 to the allowance for loan losses in order to align the credit risk methodologies of First Bancorp and First Savings. Provisions for loan losses are based on management's evaluation of the loan portfolio, as discussed under "Summary of Loan Loss Experience" below. Total recurring noninterest income for the third quarter of 2000 amounted to $1,473,000, a 4.4% increase over total noninterest income of $1,411,000 earned in the third quarter of 1999, while noninterest income for the nine months ended September 30, 200, excluding the merger-related bond sale, amounted to $4,526,000, a 3.4% increase over total noninterest income of $4,379,000 recorded in the same nine months of 1999. During the three and nine months ended September 30, 2000, the Company experienced increases from the same periods in 1999 in the categories of service charges on deposit accounts and other service charges, commissions, and fees as a result of its larger customer base. These increases were partially offset by fewer fees earned from originating presold mortgages as a result of the higher interest rate environment, which has reduced the demand for mortgage loans, particularly refinancings. Also increasing noninterest income for the nine months ended September 30, 2000 compared to the same nine months of 1999 was a $49,000 increase in commissions earned from insurance sales that resulted from a $65,000 higher "experience bonus" paid to the Company from the company that provides the credit life insurance that the Company earns commissions from selling. The amount of any experience bonus payment is computed once per year and is dependent on the actual loss experience on credit insurance policies that the Company sold. In the first quarter of 2000, the Company received an experience bonus of $89,000, compared to $24,000 received in the first quarter of 1999. Another factor contributing to the higher noninterest income for both periods in 2000 compared to 1999 was higher fees earned from the Company's data processing subsidiary, Montgomery Data Services, Inc. (Montgomery Data). The Company recorded $34,000 in the third quarter of 2000 compared to $14,000 in the third quarter of 1999, while for the first nine months of 2000, the Company recorded $76,000 in data processing fees compared to $34,000 earned in the first nine months of 1999. Montgomery Data makes its excess data processing capabilities available to area financial institutions for a fee. Montgomery Data did not have any nonaffiliated customers from December 1997 to December 1998. Since December 1998, Montgomery Data has signed contracts with four area banks to provide data processing. 14
Also included in the caption "noninterest income" for 2000 are losses that were incurred in September 2000 related to a nonrecurring repositioning of the Company's bond portfolio that was necessary as a result of the merger with First Savings. The merger with First Savings increased the company's liability sensitive position. To reduce the company's interest rate risk exposure, approximately $54.5 million in securities were sold at a total loss of $2,006,000. The proceeds from the sale were first used to repay short-term debt, with the remaining proceeds invested in investments with a shorter average life and a higher yield than the securities sold. Recurring noninterest expenses for the three and nine months ended September 30, 2000 increased 5.9% and 7.6%, respectively when compared to the same periods of 1999. The increases are primarily associated with the higher expenses that are necessary to properly process, manage, and service the increases in loans and deposits experienced by the Company. Also contributing to the increase in noninterest expenses was the continued expansion of the Company's branch network and annual wage increases. Also included in noninterest expenses on the statements of income for the three and nine months ended September 30, 2000 was $3,188,000 in expenses ($2,593,000 after-tax) that were incurred in completing the merger with First Savings. These expenses consisted primarily of investment banker fees, attorney fees, employment contract payments, accountant fees, and early termination fees associated with vendor contracts. The provision for income taxes was $255,000 in the third quarter of 2000 compared to $1,505,000 in the third quarter of 1999, while income tax expense for the nine months ended September 30, 2000 amounted to $3,703,000 compared to $4,636,000 for the same period in 1999. The decreases in 2000 are a result of a lower pretax income, which were partially offset by an increase in the Company's effective tax rate as a result of the nondeductibilty for tax purposes of certain merger-related expenses. FINANCIAL CONDITION The Company's total assets were $928.8 million at September 30, 2000, an increase of $70.0 million, or 8.1%, from the $858.8 million at September 30, 2000. Interest-earning assets increased by 8.8%, from $810.9 million at September 30, 1999 to $882.5 million at September 30, 2000. Loans, the primary interest-earning asset, grew from $613.0 million at September 30, 1999 to $730.1 million at September 30, 2000, an increase of $117.2 million, or 19.1%. Deposits have increased $84.5 million, or 12.3%, supporting the asset growth since September 30, 1999. The increases in deposits since September 30, 1999 have occurred primarily in the categories of time deposits of $100,000 or more and other time deposits, with $72.8 million of the deposit growth occurring in those two categories. The increase in time deposits has been due to the Company more aggressively pricing these deposits in order to fund the strong loan growth experienced. Noninterest-bearing demand deposits increased from $60.8 million at September 30, 1999 to $71.4 million at September 30, 2000, an increase of 17.4%, while savings, NOW and money market deposits increased from $247.5 million to $248.6 million, an increase of 0.4%. Due to loan growth that has exceeded deposit growth over the past year, the Company has relied more heavily on borrowings. While borrowings were reduced at September 30, 2000 as a result of the bond sale discussed above, average total borrowings for the nine months ended September 30, 2000 were $54.1 million compared to average borrowings for the same nine months in 1999 of $17.4 million. See "LIQUIDITY" below for a discussion of the Company's sources of borrowings. Since December 31, 1999, the Company has experienced annualized increases of 18.0%, 5.9%, and 10.6% in loans, total assets and deposits, respectively. The smaller annualized increase in total assets is primarily due to excess cash obtained through borrowings by the Company at December 31, 1999 for possible Year 2000 cash contingencies, as well as short-term borrowings that were repaid during the third quarter as a result of the bond sale discussed above. 15
NONPERFORMING ASSETS Nonperforming assets are defined as nonaccrual loans, loans past due 90 or more days and still accruing interest, restructured loans and other real estate. For each of the periods presented, the Company had no loans past due 90 or more days and still accruing interest. Nonperforming assets are summarized as follows: <TABLE> <CAPTION> September 30, December 31, September 30, ($ in thousands) 2000 1999 1999 -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Nonperforming loans: Nonaccrual loans $ 992 1,424 897 Restructured loans 243 257 260 --------- --------- --------- Total nonperforming loans 1,235 1,681 1,157 Other real estate 738 906 855 --------- --------- --------- Total nonperforming assets $ 1,973 2,587 2,012 ========= ========= ========= Nonperforming loans to total loans 0.17% 0.26% 0.19% Nonperforming assets as a percentage of loans and other real estate 0.27% 0.40% 0.33% Nonperforming assets to total assets 0.21% 0.29% 0.23% Allowance for loan losses to total loans 1.06% 1.04% 1.07% </TABLE> Management has reviewed the collateral for the nonperforming assets, including nonaccrual loans, and has included this review among the factors considered in the evaluation of the allowance for loan losses discussed below. Nonaccrual loans decreased from $1,424,000 at December 31, 1999 to $992,000 at September 30, 2000 primarily as a result of a $394,000 loan that paid off during the second quarter of 2000. The level of restructured loans did not vary materially among the periods presented. At September 30, 2000, December 31, 1999, and September 30, 1999, the recorded investment in loans considered to be impaired was $60,000, $281,000, and $124,000, respectively, all of which were on nonaccrual status. The related allowance for loan losses for these impaired loans was $9,000, $42,000, and $19,000, respectively. There were no impaired loans for which there was no related allowance. The average recorded investments in impaired loans during the nine month period ended September 30, 2000, the year ended December 31, 1999, and the nine months ended September 30, 1999 were approximately $200,000, $123,000, and $83,000, respectively. For the same periods, the Company recognized no interest income on those impaired loans during the period that they were considered to be impaired. In addition to the nonperforming loan amounts discussed above, management believes that an estimated $3,500,000-$4,000,000 of loans that are currently performing in accordance with their contractual terms may potentially develop problems. These loans were considered in determining the appropriate level of the allowance for loan losses. See "Summary of Loan Loss Experience" below. Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed in the problem loan amounts above do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. As of September 30, 2000, December 31, 1999 and September 30, 1999, the Company's level of owned other real estate has not varied materially, totaling approximately $738,000, $906,000, and $855,000, respectively, which consisted principally of several parcels of real estate. The Company's management has reviewed recent appraisals of its other real estate and believes that their fair values, less estimated costs to sell, equal or exceed their respective carrying values at the dates presented. 16
SUMMARY OF LOAN LOSS EXPERIENCE The allowance for loan losses is created by direct charges to operations. Losses on loans are charged against the allowance in the period in which such loans, in management's opinion, become uncollectible. The recoveries realized during the period are credited to this allowance. The factors that influence management's judgment in determining the amount charged to operating expense include past loan loss experience, composition of the loan portfolio, probable losses inherent in the portfolio and current economic conditions. The Company uses a loan analysis and grading program to facilitate its evaluation of probable loan losses and the adequacy of its allowance for loan losses. In this program, risk grades are assigned by management and tested by the Company's internal audit department and an independent third party consulting firm. The testing program includes an evaluation of a sample of new loans, loans that management identifies as having credit weaknesses, loans past due 90 days or more, nonaccrual loans and any other loans identified during previous regulatory and other examinations. The Company has no foreign loans, few agricultural loans and does not engage in significant lease financing or highly leveraged transactions. Commercial loans are diversified among a variety of industries. The majority of the Company's real estate loans are primarily various personal and commercial loans where real estate provides additional security for the loan. Collateral for virtually all of these loans is located within the Company's principal market area. The recurring provision for loan losses for the third quarter of 2000 was $285,000, $80,000 higher than the $205,000 recorded in the third quarter of 2000. For the nine months ended September 30, 2000, the recurring provision for loan losses was $945,000 compared to $665,000 for the nine months ended September 30, 1999. The increases in the provisions for loan losses recorded in 2000 compared to 1999 have been a result of the higher loan growth experienced and not because of credit quality concerns. Net loan growth for the third quarter of 2000 amounted to $25.4 million compared to $15.9 million in the third quarter of 1999. Net loan growth for the first nine months of 2000 amounted to $86.9 million compared to $45.7 million for the first nine months of 1999. As discussed above, in addition to the recurring provisions for loan losses recorded in 2000, the Company recorded a one time adjustment of $420,000 to the allowance for loan losses during the third quarter in order to align the credit risk methodologies of First Bancorp and First Savings. Credit quality indicators for the Company remained strong in the third quarter of 2000. At September 30, 2000, the allowance for loan losses amounted to $7,773,000, compared to $6,674,000 at December 31, 1999 and $6,584,000 at September 30, 1999. The allowance for loan losses was 1.06%, 1.04% and 1.07% of total loans as of September 30, 2000, December 31, 1999, and September 30, 1999, respectively. Management believes the Company's reserve levels are adequate to cover probable loan losses on the loans outstanding as of each reporting date. It must be emphasized, however, that the determination of the reserve using the Company's procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that the Company will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and value of other real estate. Such agencies may require the Company to recognize adjustments to the allowance or the carrying value of other real estate based on their judgments about information available at the time of their examinations. 17
For the periods indicated, the following table summarizes the Company's balances of loans outstanding, average loans outstanding, changes in the allowance for loan losses arising from charge-offs and recoveries, and additions to the allowance for loan losses that have been charged to expense. <TABLE> <CAPTION> Nine Months Year Nine Months Ended Ended Ended September 30, December 31, September 30, ($ in thousands) 2000 1999 1999 ------------- ------------ ------------- <S> <C> <C> <C> Loans outstanding at end of period $ 730,134 643,224 612,954 ============= ============ ============= Average amount of loans outstanding $ 688,947 597,951 588,225 ============= ============ ============= Allowance for loan losses, at beginning of year $ 6,674 6,100 6,100 Total charge-offs (333) (448) (272) Total recoveries 67 112 91 ------------- ------------ ------------- Net charge-offs (266) (336) (181) ------------- ------------ ------------- Additions to the allowance charged to expense 1,365 910 665 ------------- ------------ ------------- Allowance for loan losses, at end of period $ 7,773 6,674 6,584 ============= ============ ============= Ratios: Net charge-offs (annualized) as a percent of average loans 0.05% 0.06% 0.04% Allowance for loan losses as a percent of loans at end of period 1.06% 1.04% 1.07% </TABLE> Based on the results of the aforementioned loan analysis and grading program and management's evaluation of the allowance for loan losses at September 30, 2000, there have been no material changes to the allocation of the allowance for loan losses among the various categories of loans since December 31, 1999. LIQUIDITY The Company's liquidity is determined by its ability to convert assets to cash or acquire alternative sources of funds to meet the needs of its customers who are withdrawing or borrowing funds, and to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. The Company's primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments. The Company's securities portfolio is comprised almost entirely of readily marketable securities which could also be sold to provide cash. In addition to internally generated liquidity sources, the Company has the ability to obtain borrowings from the following three sources - 1) an approximately $125,000,000 line of credit with the Federal Home Loan Bank (FHLB), 2) a $15,000,000 overnight federal funds line of credit with a correspondent bank, and 3) an approximately $27,000,000 line of credit through the Federal Reserve Bank of Richmond's discount window. Although the Company has not historically had to rely on these sources of credit as a source of liquidity, the Company has experienced a gradual increase in its loan to deposit ratio over the past several years. At December 31, 1996, the Company's loan to deposit ratio was 82.3%. Since then it has steadily increased to its September 30, 2000 level of 94.9% as a result of significant loan growth that has outpaced deposit growth. This imbalance in growth has reduced the Company's liquidity sources. As the Company's loan to deposit ratio has increased, so has the Company's reliance on borrowings. Average borrowings outstanding during the third quarter of 2000 amounted to $50.6 million compared to $27.0 million for the third quarter of 1999. Notwithstanding potential purchases of deposits, including the pending 18
purchase of approximately $105 million in deposits (see discussion below), the Company expects to increasingly rely on its available lines of credit in the future due to anticipation of continued difficulty in funding new loan growth solely with deposits. The Company's management believes its liquidity sources are at an acceptable level and remain adequate to meet its operating needs. CAPITAL RESOURCES The Company is regulated by the Board of Governors of the Federal Reserve Board (FED) and is subject to securities registration and public reporting regulations of the Securities and Exchange Commission. The Company's banking subsidiaries are regulated by the Federal Deposit Insurance Corporation (FDIC) and the respective state of NC bank/savings regulators. The Company is not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on its liquidity, capital resources, or operations. The Company must comply with regulatory capital requirements established by the FED and FDIC. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. These capital standards require the Company to maintain minimum ratios of "Tier 1" capital to total risk-weighted assets and total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1 capital is comprised of total shareholders' equity calculated in accordance with generally accepted accounting principles, excluding accumulated other comprehensive income (loss), less intangible assets, and total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which for the Company is the allowance for loan losses. Risk-weighted assets refer to the on- and off-balance sheet exposures of the Company, adjusted for their related risk levels using formulas set forth in FED and FDIC regulations. In addition to the risk-based capital requirements described above, the Company is subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution's composite ratings as determined by its regulators. The FED has not advised the Company of any requirement specifically applicable to it. At September 30, 2000, the Company's capital ratios significantly exceeded the regulatory minimum ratios discussed above with a Tier 1 capital ratio to Tier 1 risk adjusted ratio of 16.03%, a total capital to total risk adjusted asset ratio of 17.03%, and a leverage ratio of 11.46%. The Company's bank subsidiaries are also subject to similar capital requirements as those discussed above. At September 30, 2000, each of the Company's bank subsidiaries exceeded the minimum ratios established by the FED and FDIC. SHARE REPURCHASES In light of market conditions during 2000, the Company resumed purchases of stock under its 100,000 share repurchase authorization. From January 1, 2000 through May 10, 2000 (the date of the last repurchase), the Company repurchased a total of 58,300 shares at an average cost of $15.75 per share. This 100,000 share repurchase authorization was rescinded by the Board of Directors in May 2000. However in connection with the definitive agreement to acquire Century Bancorp, Inc. (see discussion below), the Company's Board of Directors has again authorized stock repurchases up to the amount of shares expected to be issued at the closing of the Century acquisition, which is currently expected to be approximately 585,000 shares. 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK) Net interest income is the Company's most significant component of earnings. Notwithstanding changes in volumes of loans and deposits, the Company's level of net interest income is continually at risk due to the effect that changes in general market interest rate trends have on interest yields earned and paid with respect to the various categories of earning assets and interest-bearing liabilities. It is the Company's policy to maintain portfolios of earning assets and interest-bearing liabilities with maturities and repricing opportunities that will afford protection, to the extent practical, against wide interest rate fluctuations. The Company's exposure to interest rate risk is analyzed on a regular basis by management using standard GAP reports, maturity reports, and an asset/liability software model that simulates future levels of interest income and expense based on current interest rates, expected future interest rates, and various intervals of "shock" interest rates. Over the years, the Company has been able to maintain a fairly consistent yield on average earning assets (net interest margin). Over the past five years, the net interest margin has not varied in any single calendar year by more than 16 basis points. While the Company can not guarantee stability in its net interest margin in the future, at this time management does not expect significant fluctuations. As discussed above, the Company has recently experienced pressure on its net interest margin, particularly during the three months ended September 30, 2000. See additional discussion of the Company's net interest margin in the "Components of Earnings" section above. The Company has no market risk sensitive instruments held for trading purposes, nor does it maintain any foreign currency positions. Management does not believe there has been any significant change in the overall analysis of financial instruments considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and estimated fair values, since the analysis' prepared and presented in connection with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, and First Savings' Annual Report on Form 10-K for the fiscal year ended June 30, 1999. PENDING MERGER AND ACQUISITION ACTIVITY, INCLUDING SUBSEQUENT EVENTS As previously announced, to gain Federal Reserve approval for the merger with First Savings, the Company was required to divest the First Savings Bank branch located in Carthage, NC. The Carthage branch has approximately $15.5 million in total deposits and $2.5 million in total loans. On August 22, 2000, the Company reported the signing of a purchase and assumption agreement with Bank of Davie to acquire the Carthage branch. The sale of the branch is anticipated to occur during the fourth quarter of 2000 and is expected to result in the recording of a gain of approximately $850,000. The Company announced on September 13, 2000 that it had reached an agreement with First Union National Bank to acquire four branches with aggregate deposits of approximately $105 million and aggregate loans of approximately $19 million. The four branches to be acquired are Lumberton, Pembroke, St. Pauls (all located in Robeson County, NC), and Laurinburg (Scotland County, NC). The closing of the transaction and the data conversion are expected to occur in the first quarter of 2001. Total intagible assets of approximately $15.7 million are expected to be recorded in connection with the purchase. The Company announced on October 20, 2000 that it had reached a definitive agreement to acquire Century Bancorp, Inc. ("Century"). Century is the holding company for Home Savings, Inc., SSB, a one branch savings institution located in Thomasville, NC. As of June 30, 2000, Century had total assets of $101 million, total loans of $88 million, and total deposits of $74 million. The terms of the agreement call for shareholders of Century to have the 20
option to receive either $20.00 in cash or a fixed exchange ratio of 1.3333 shares of First Bancorp common stock for each share of Century common stock that they own. This election is subject to the requirement that, subject to certain possible adjustments that may be necessary to achieve the intended tax treatment, 60% of Century's shares outstanding will be exchanged for cash and 40% of Century's shares outstanding will be exchanged for shares of First Bancorp stock. To the extent that Century shareholders elect to receive more aggregate stock or cash consideration than permitted by the agreement, pro rata allocations will be made. This transaction is expect to close during the first half of 2001. The definitive merger agreement for this transaction was filed on SEC Form 8-K on October 20, 2000. CURRENT ACCOUNTING MATTERS The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards (`SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. This Statement, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000, and will be adopted by the Company on January 1, 2001. This Statement is not expected to materially impact the Company. The FASB has also issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125." It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This Statement is not expected to materially impact the Company. FORWARD-LOOKING STATEMENTS The foregoing discussion contains statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," or other statements concerning opinions or judgment of the Company and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of the Company's customers, the Company's level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions. 21
Part II. Other Information Item 5 - Other Information The bylaws of the Company establish an advance notice procedure for shareholder proposals to be brought before a meeting of shareholders of the Company. Subject to any other applicable requirements, only such business may be conducted at a meeting of the shareholders as has been brought before the meeting by, or at the direction of, the Board of Directors or by a shareholder who has given to the Secretary of the Company timely written notice, in proper form, of the shareholder's intention to bring that business before the meeting. The presiding officer at such meeting has the authority to make such determinations. To be timely, notice of other business to be brought before any meeting must generally be received by the Secretary of the Company within 60 to 90 days in advance of the shareholders' meeting. The notice of any shareholder proposal must set forth the various information required under the bylaws. The person submitting the notice must provide, among other things, the name and address under which such shareholder appears on the Company's books and the class and number of shares of the Company's capital stock that are beneficially owned by such shareholder. Any shareholder desiring a copy of the Company's bylaws will be furnished one without charge upon written request to the Secretary of the Company at the Company's headquarters. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed with this report or, as noted, are incorporated by reference. Management contracts, compensatory plans and arrangements are marked with an asterisk (*). 3.a.i Copy of Articles of Incorporation of the Registrant and amendments thereto, was filed as Exhibit 3(a) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. 3.a.ii Copy of the amendment to Articles of Incorporation - adding a new Article Nine, was filed as Exhibit 3(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, and is incorporated herein by reference. 3.a.iii Copy of the amendment to Articles of Incorporation - adding a new Article Ten, was filed as Exhibit 3.a.iii to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference. 3.a.iv Copy of the amendment to Article IV of the Articles of Incorporation was filed as Exhibit 3.a.iv to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference. 3.b.i Copy of the Bylaws of the Registrant and amendments thereto, was filed as Exhibit 3(b) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994, and is incorporated herein by reference. 3.b.ii Copy of the amendment to the Bylaws replacing Section 3.04 of Article Three was filed as Exhibit 3.b.ii to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference. 3.b.iii Copy of the amendment to the Bylaws amending Section 3.19 of Article Three was filed as Exhibit 3.b.iii to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference. 22
3.b.iv Copy of the amendment to the Bylaws replacing Section 3.02 was filed as Exhibit 3.b.iv to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and is incorporated herein by reference. 4 Form of Common Stock Certificate was filed as Exhibit 3.a.iv to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference. 10 Material Contracts 10.a Data processing Agreement dated October 1, 1984 by and between Bank of Montgomery (First Bank) and Montgomery Data Services, Inc. was filed as Exhibit 10(k) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. 10.b First Bank Salary and Incentive Plan, as amended, was filed as Exhibit 10(m) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. (*) 10.c First Bancorp Savings Plus and Profit Sharing Plan (401(k) savings incentive plan and trust), as amended January 25, 1994 and July 19, 1994, was filed as Exhibit 10(c) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994, and is incorporated herein by reference. (*) 10.d Directors and Officers Liability Insurance Policy of First Bancorp, dated July 16, 1991, was filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, and is incorporated herein by reference. 10.e Indemnification Agreement between the Company and its Directors and Officers was filed as Exhibit 10(t) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. 10.f First Bancorp Employees' Pension Plan, as amended on August 16, 1994, was filed as Exhibit 10(g) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994, and is incorporated herein by reference. (*) 10.g First Bancorp Senior Management Supplemental Executive Retirement Plan dated May 31, 1993, was filed as Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and is incorporated herein by reference. (*) 10.h First Bancorp Senior Management Split-Dollar Life Insurance Agreements between the Company and the Executive Officers, as amended on December 22, 1994, was filed as Exhibit 10(i) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994, and is incorporated herein by reference. (*) 10.i First Bancorp 1994 Stock Option Plan was filed as Exhibit 10(n) to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1994, and is incorporated herein by reference. (*) 10.j Amendment to the First Bancorp Savings Plus and Profit Sharing Plan (401(k) savings incentive plan and trust), dated December 17, 1996, was filed as Exhibit 10(m) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996, and is incorporated herein by reference. (*) 10.k Employment Agreement between the Company and James H. Garner dated August 17, 1998 was filed as Exhibit 10(l) to the Company's Annual Report on Form 10-Q for the quarter ended September 30, 1998, and is incorporated by reference. (*) 23
10.l Employment Agreement between the Company and Anna G. Hollers dated August 17, 1998 was filed as Exhibit 10(m) to the Company's Annual Report on Form 10-Q for the quarter ended September 30, 1998, and is incorporated by reference. (*) 10.m Employment Agreement between the Company and Teresa C. Nixon dated August 17, 1998 was filed as Exhibit 10(n) to the Company's Annual Report on Form 10-Q for the quarter ended September 30, 1998, and is incorporated by reference. (*) 10.n First Amendment to the First Bancorp Senior Management Executive Retirement Plan dated April 21, 1998 was filed as Exhibit 10(o) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and is incorporated herein by reference. (*) 10.o Employment Agreement between the Company and Eric P. Credle dated August 17, 1998 was filed as Exhibit 10(p) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and is incorporated herein by reference. (*) 10.p Amendments 1 and 2 to the Company's 1994 Stock Option Plan was filed as Exhibit 10.q to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference. (*) 10.q Employment Agreement between the Company and David G. Grigg dated August 17, 1998 was filed as Exhibit 10.r to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference. (*) 10.r Definitive Merger Agreement with First Savings Bancorp, Inc. dated December 16, 1999 was filed on Form 8-K on December 21, 1999 and is incorporated herein by reference. 10.s Amendment and Waiver to Merger Agreement with First Savings Bancorp, Inc. dated March 24, 2000 was filed as Exhibit 10.s to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and is incorporated herein by reference. (*). 10.t Second Amendment and Waiver to Merger Agreement dated as of May 15, 2000 was filed as Exhibit 2.3 to the Company's Amendment No. 1 to Registration Statement on Form S-4 (Registration No. 333-34216) dated May 16, 2000 and is incorporated herein by reference. 10.u Purchase and Assumption Agreement with Bank of Davie, dated August 22, 2000. 10.v Purchase and Assumption Agreement with First Union National Bank, dated September 13, 2000. 10.w Employment Agreement between the Company and John F. Burns dated September 14, 2000. (*) 21 List of Subsidiaries of Registrant. 27 Financial Data Schedule pursuant to Article 9 of Regulation S-X for the nine months ended September 30, 2000 and Restated Financial Data Schedule for the nine months ended September 30, 1999. (b) The Registrant filed one report on Form 8-K during the nine months ended September 30, 2000. On September 29, 2000, a report on Form 8-K was filed disclosing under Item 2, Acquisition or Disposition of Assets, the completion of the merger of First Savings Bancorp, Inc. into First Bancorp. The following unaudited interim financial statements of First Savings Bancorp, Inc. were filed as Exhibit 99.1 to the Current Report on Form 8-K: (i) Consolidated Statements of Financial Condition as of March 31, 2000 and 1999; 24
(ii) Consolidated Statement of Income for the nine-month period ended March 31, 2000 and 1999; and (iii) Consolidated Statement of Cash Flows for the nine-month period ended March 31, 2000 and 1999. The following audited annual financial statements of First Savings Bancorp, Inc. were filed as Exhibit 99.2 and 99.3 to the Current Report on Form 8-K: (i) Report of Independent Auditors relating to Consolidated Financial Statements; (ii) Consolidated Statements of Financial Condition as of June 30, 1999 and 1998; (iii) Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1999, 1998, and 1997; and (iv) Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1999, 1998, and 1997; and (v) Notes to Consolidated Financial Statements. The following unaudited pro forma financial information with respect to the merger of First Savings Bancorp, Inc. into First Bancorp was filed as Exhibit 99.4 to the Current Report on Form 8-K: (i) Unaudited Pro Form Combined Condensed Balance Sheet as of March 31, 2000; (ii) Unaudited Pro Forma Combined Condensed Income Statement for the Three Months Ended March 31, 2000; (iii) Unaudited Pro Forma Combined Condensed Income Statement for the Three Months Ended March 31, 1999; (iv) Unaudited Pro Forma Combined Condensed Income Statement for the Year Ended December 31, 1999; (v) Unaudited Pro Forma Combined Condensed Income Statement for the Year Ended December 31, 1998; (vi) Unaudited Pro Forma Combined Condensed Income Statement for the Year Ended December 31, 1997; and (viii) Notes to Pro Forma Combined Condensed Financial Information COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO: FIRST BANCORP, ANNA G. HOLLERS, EXECUTIVE VICE PRESIDENT, P.O. BOX 508, TROY, NC 27371 25
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST BANCORP November 13, 2000 BY: /s/ James H. Garner -------------------------------- James H. Garner President (Principal Executive Officer), Treasurer and Director November 13, 2000 BY: /s/ Anna G. Hollers -------------------------------- Anna G. Hollers Executive Vice President and Secretary November 13, 2000 BY: /s/ Eric P. Credle -------------------------------- Eric P. Credle Senior Vice President and Chief Financial Officer 26