UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 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 April 30, 2001, 8,760,186 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 - March 31, 2001 and 2000 (With Comparative Amounts at December 31, 2000) 3 CONSOLIDATED STATEMENTS OF INCOME - For the Periods Ended March 31, 2001 and 2000 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - For the Periods Ended March 31, 2001 and 2000 5 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - For the Periods Ended March 31, 2001 and 2000 6 CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Periods Ended March 31, 2001 and 2000 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 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 19 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> March 31, December 31, March 31, ($ in thousands-unaudited) 2001 2000 2000 - --------------------------------------------------------------------- ----------------- ------------------ ----------------- ASSETS <S> <C> <C> <C> Cash & due from banks, noninterest-bearing $ 24,944 20,940 22,143 Due from banks, interest-bearing 69,464 1,769 28,947 Federal funds sold 17,674 7,730 8,811 ----------------- ------------------ ----------------- Total cash and cash equivalents 112,082 30,439 59,901 ----------------- ------------------ ----------------- Securities available for sale (costs of $93,031, $69,214, and $114,948) 94,168 69,597 111,236 Securities held to maturity (fair values of $16,768, $47,661, and $50,327) 16,273 47,924 51,584 Presold mortgages in process of settlement 3,738 1,036 661 Loans 770,749 746,089 673,089 Less: Allowance for loan losses (8,386) (7,893) (6,908) ----------------- ------------------ ----------------- Net loans 762,363 738,196 666,181 ----------------- ------------------ ----------------- Premises and equipment 16,106 14,116 12,688 Accrued interest receivable 6,232 6,342 5,440 Intangible assets 18,910 4,630 5,104 Other 3,206 2,887 5,695 ----------------- ------------------ ----------------- Total assets $ 1,033,078 915,167 918,490 ================= ================== ================= LIABILITIES Deposits: Demand - noninterest-bearing $ 89,538 70,634 71,358 Savings, NOW, and money market 295,800 253,687 255,679 Time deposits of $100,000 or more 160,677 140,992 128,277 Other time deposits 341,798 305,066 276,078 ----------------- ------------------ ----------------- Total deposits 887,813 770,379 731,392 Borrowings 26,200 26,200 70,500 Accrued interest payable 4,322 4,254 3,660 Other liabilities 3,941 3,650 4,694 ----------------- ------------------ ----------------- Total liabilities 922,276 804,483 810,246 ----------------- ------------------ ----------------- SHAREHOLDERS' EQUITY Common stock, No par value per share Issued and outstanding: 8,755,161, 8,827,341, and 8,911,475 shares 48,476 50,148 51,106 Retained earnings 61,578 60,280 59,586 Accumulated other comprehensive income (loss) 748 256 (2,448) ----------------- ------------------ ----------------- Total shareholders' equity 110,802 110,684 108,244 ----------------- ------------------ ----------------- Total liabilities and shareholders' equity $ 1,033,078 915,167 918,490 ================= ================== ================= </TABLE> See notes to consolidated financial statements. 3
First Bancorp and Subsidiaries Consolidated Statements of Income <TABLE> <CAPTION> Three Months Ended March 31, ----------------------------------- ($ in thousands, except share data-unaudited) 2001 2000 - ----------------------------------------------------------------------------------------------------- INTEREST INCOME <S> <C> <C> Interest and fees on loans $ 16,422 14,171 Interest on investment securities: Taxable interest income 1,599 2,302 Tax-exempt interest income 206 230 Other, principally overnight investments 197 234 --------- --------- Total interest income 18,424 16,937 --------- --------- INTEREST EXPENSE Savings, NOW and money market 1,555 1,502 Time deposits of $100,000 or more 2,370 1,727 Other time deposits 4,656 3,604 Borrowings 524 710 --------- --------- Total interest expense 9,105 7,543 --------- --------- Net interest income 9,319 9,394 Provision for loan losses 220 310 --------- --------- Net interest income after provision for loan losses 9,099 9,084 --------- --------- NONINTEREST INCOME Service charges on deposit accounts 908 746 Other service charges, commissions and fees 580 507 Fees from presold mortgages 138 89 Commissions from sales of credit insurance 152 145 Data processing fees 47 20 Other gains (losses) 37 (10) --------- --------- Total noninterest income 1,862 1,497 --------- --------- NONINTEREST EXPENSES Salaries 2,791 2,525 Employee benefits 614 664 --------- --------- Total personnel expense 3,405 3,189 Net occupancy expense 402 378 Equipment related expenses 373 300 Intangibles amortization 182 158 Other operating expenses 1,703 1,621 --------- --------- Total noninterest expenses 6,065 5,646 --------- --------- Income before income taxes 4,896 4,935 Income taxes 1,672 1,697 --------- --------- NET INCOME $ 3,224 3,238 ========= ========= Earnings per share: Basic $ 0.37 0.37 Diluted 0.36 0.36 Weighted average common shares outstanding: Basic 8,774,877 8,865,941 Diluted 8,987,252 9,098,387 </TABLE> See notes to consolidated financial statements. 4
First Bancorp and Subsidiaries Consolidated Statements of Comprehensive Income <TABLE> <CAPTION> Three Months Ended March 31, --------------------------------- ($ in thousands-unaudited) 2001 2000 - ----------------------------------------------------------------------------------------------------- <S> <C> <C> Net income $ 3,224 3,238 --------------- --------------- Other comprehensive income (loss): Unrealized gains (losses) on securities available for sale: Unrealized holding gains (losses) arising during the period, pretax 754 (228) Tax benefit (expense) (262) 77 --------------- --------------- Other comprehensive income (loss) 492 (151) --------------- --------------- Comprehensive income $ 3,716 3,087 =============== =============== </TABLE> See notes to consolidated financial statements. 5
First Bancorp and Subsidiaries Consolidated Statements of Shareholders' Equity <TABLE> <CAPTION> Accumulated Other Share- Common Stock Retained Comprehensive holders' (In thousands, except per share - unaudited) Shares Amount Earnings Income (Loss) Equity - --------------------------------------------- ------------- ----------------- --------------- ---------------- --------------- <S> <C> <C> <C> <C> <C> Balances, January 1, 2000 8,849 $ 51,490 57,787 (2,297) 106,980 Net income 3,238 3,238 Cash dividends declared ($0.17 per share) (1,439) (1,439) Common stock issued under stock option plan 106 312 312 Purchases and retirement of common stock (44) (696) (696) Other comprehensive loss (151) (151) ------------- ----------------- --------------- ---------------- --------------- Balances, March 31, 2000 8,911 $ 51,106 59,586 (2,448) 108,244 ============= ================= =============== ================ =============== Balances, January 1, 2001 8,827 $ 50,148 60,280 256 110,684 Net income 3,224 3,224 Cash dividends declared ($0.22 per share) (1,926) (1,926) Common stock issued under 23 68 68 stock option plan Purchases and retirement of common stock (95) (1,740) (1,740) Other comprehensive income 492 492 ------------- ----------------- --------------- ---------------- --------------- Balances, March 31, 2001 8,755 $ 48,476 61,578 748 110,802 ============= ================= =============== ================ =============== </TABLE> See notes to consolidated financial statements. 6
First Bancorp and Subsidiaries Consolidated Statements of Cash Flows <TABLE> <CAPTION> Three Months Ended March 31, -------------------------------- ($ in thousands-unaudited) 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES <S> <C> <C> Net income $ 3,224 3,238 Reconciliation of net income to net cash provided by operating activities: Provision for loan losses 220 310 Net security premium amortization 22 139 Gain on disposal of other real estate (37) -- Loan fees and costs deferred, net of amortization (41) 41 Depreciation of premises and equipment 321 284 Amortization of intangible assets 182 158 Deferred income tax benefit (82) (101) Decrease (increase) in accrued interest receivable 110 (154) Increase in other assets (2,701) (231) Decrease in accrued interest payable (176) (183) Increase in other liabilities 297 534 --------- ------ Net cash provided by operating activities 1,339 4,035 --------- ------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities available for sale -- (4,886) Purchases of securities held to maturity (1) (167) Proceeds from maturities/issuer calls of securities available for sale 6,667 6,440 Proceeds from maturities/issuer calls of securities held to maturity 1,148 1,212 Net increase in loans (8,072) (29,982) Purchases of premises and equipment (870) (613) Net cash received in purchase of branches 70,201 -- --------- ------ Net cash provided (used) in investing activities 69,073 (27,996) --------- ------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 14,847 19,253 Net change in borrowings -- 8,000 Cash dividends paid (1,944) (1,348) Proceeds from issuance of common stock 68 312 Purchases and retirement of common stock (1,740) (696) --------- --------- Net cash provided by financing activities 11,231 25,521 --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 81,643 1,560 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 30,439 58,341 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 112,082 59,901 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 9,037 7,726 Income taxes 703 796 Non-cash transactions: Transfer of securities from held to maturity to available for sale - fair value 31,220 -- Unrealized gain (loss) on securities available for sale 754 (84) Foreclosed loans transferred to other real estate 121 -- Premises and equipment transferred to other real estate 425 -- </TABLE> See notes to consolidated financial statements. 7
First Bancorp And Subsidiaries Notes To Consolidated Financial Statements (unaudited) For the Periods Ended March 31, 2001 and 2000 - ------------------------------------------------------------------------------- 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 March 31, 2001 and 2000 and the consolidated results of operations and consolidated cash flows for the periods ended March 31, 2001 and 2000. Reference is made to the 2000 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 6 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. The results of operations for the periods ended March 31, 2001 and 2000 are not necessarily indicative of the results to be expected for the full year. NOTE 2 - Reclassifications Certain amounts reported in the period ended March 31, 2000 have been reclassified to conform with the presentation for March 31, 2001. 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 plan. The following is a reconciliation of the numerators and denominators used in computing basic and diluted earnings per share: <TABLE> <CAPTION> For the Three Months Ended March 31, ----------------------------------------------------------------------------- 2001 2000 ------------------------------------- ------------------------------------- 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 $ 3,224 8,774,877 $ 0.37 $ 3,238 8,865,941 $ 0.37 ======== ======== Effect of Dilutive Securities -- 212,375 -- 232,446 --------- --------- -------- --------- Diluted EPS $ 3,224 8,987,252 $ 0.36 $ 3,238 9,098,387 $ 0.36 ========= ========= ======== ======== ========= ======== </TABLE> 8
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> March 31, December 31, March 31, ($ in thousands) 2001 2000 2000 ---------------------------------------------------- ---------------- ---------------- ----------------- <S> <C> <C> <C> Nonperforming loans: Nonaccrual loans $ 3,598 626 1,199 Restructured loans 231 237 252 ---------- ----- ----- Total nonperforming loans 3,829 863 1,451 Other real estate 1,324 893 997 ---------- ----- ----- Total nonperforming assets $ 5,153 1,756 2,448 ========== ===== ===== Nonperforming loans to total loans 0.50% 0.12% 0.22% Nonperforming assets as a percentage of loans and other real estate 0.67% 0.24% 0.36% Nonperforming assets to total assets 0.50% 0.19% 0.27% Allowance for loan losses to total loans 1.09% 1.06% 1.03% </TABLE> - ------------------------------------------------------------------------------- NOTE 5 - Deferred Loan Fees Loans are shown on the Consolidated Balance Sheets net of net deferred loan fees of approximately $670,000, $711,000, and $744,000 at March 31, 2001, December 31, 2000, and March 31, 2000, respectively. NOTE 6 - Merger and Acquisition Activity 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. 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. This branch was sold to another North Carolina community bank in a transaction that was completed in November 2000. At the time of the divestiture, the Carthage branch had approximately $15.1 million in total deposits and $2.3 million in total loans. The sale of the branch resulted in a net gain of $808,000. On March 26, 2001, the Company completed the purchase of four branches from First Union National Bank with aggregate deposits of approximately $102 million and aggregate loans of approximately $17 million. The four branches acquired are in Lumberton, Pembroke, St. Pauls (all located in Robeson County, NC), and Laurinburg (Scotland County, NC). Total intangible assets of $14.5 million were recorded in connection with the purchase. The following table presents a summary of the assets acquired and liabilities assumed in the purchase: 9
Assets acquired (in millions) - --------------- ------------- Cash $ 70.2 Loans, gross, primarily consumer installment 16.7 Allowance for loan losses (0.3) Property, plant and equipment 1.9 -------- 88.5 ======== Liabilities assumed - ------------------- Deposits 102.6 Accrued interest on deposits 0.2 Other 0.2 -------- 103.0 -------- Excess of liabilities assumed over assets acquired - recorded as an intangible asset $14.5 ======== 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 March 31, 2001, Century had total assets of $107 million, total loans of $90 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 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 expected to close during May of 2001. The definitive merger agreement for this transaction was filed on SEC Form 8-K on October 20, 2000. Note 7 - Implementation of New Accounting Standard On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (`SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. On January 1, 2001, the Company transferred, as permitted by the standard upon its adoption, held-to-maturity securities with an amortized cost of approximately $31.7 million to the available-for-sale category at fair value. The unrealized loss at the time of the transfer was approximately $513,000, and is included as a component of other comprehensive income, net of tax. The Company does not engage in any hedging activities and other than the aforementioned transfer of securities, the adoption of the statement had no impact on the Company. 10
Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition RESULTS OF OPERATIONS OVERVIEW Net income for the three months ended March 31, 2001 was $3,224,000, a 0.4% decrease from the $3,238,000 recorded in the first quarter of 2000. The net income recorded in the first quarter of 2001 and 2000 each amounted to diluted earnings of $0.36 per share. Nonrecurring income/expense was insignificant for each of the three month periods. The essentially flat earnings when comparing the first quarter of 2001 to the same quarter of 2000 were primarily the result of virtually unchanged net interest income after provision for loan losses, with offsetting increases in noninterest income and noninterest expenses. Net interest income for the first quarter of 2001 was 5.5% less than the amount of net interest income recorded in the fourth quarter of 2000. The Company attributes the decrease in net interest income on a consecutive quarter basis to the significant decrease in the interest rate environment that occurred in the first quarter of 2001. Noninterest income for the first quarter of 2001 increased 24.4% over the amount recorded in the first quarter of 2000, primarily as a result of increases in service charges on deposit accounts, growth in the company's customer base, and higher fees from presold mortgages resulting from a higher level of mortgage loan refinancings. Noninterest expenses for the first quarter of 2001 increased 7.4% over the first quarter of 2000 as a result of the company's 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 month period ended March 31, 2001 amounted to $9,319,000, a decrease of $75,000 from the $9,394,000 recorded in the first quarter of 2000. 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 months ended March 31, 2001, 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 period in 2000. Average loans outstanding for the first quarter of 2001 were $752.6 million, which was 14.4% higher than the average loans outstanding for the first quarter of 2000 ($657.7 million). Average deposits outstanding for the first quarter of 2001 were $773.5 million, which was 7.9% higher than the average amount of deposits outstanding in the first quarter of 2000 ($716.7 million). The net interest margin (tax equivalent net interest income divided by average earning assets) for the first quarter of 2001 was 4.35%, a 21 basis point decrease from the 4.56% net interest margin realized in the first quarter of 2000. The following tables present average balances and average rates earned/paid by the Company for the first quarter of 2001 compared to the first quarter of 2000. 11
<TABLE> <CAPTION> For the Three Months Ended March 31, ---------------------------------------------------------------------------------------- 2001 2000 ----------------------------------------- --------------------------------------------- Interest Interest Average Average Earned Average Average Earned ($ in thousands) Volume Rate or Paid Volume Rate or Paid ---------------- ------------- ----------- ---------------- ------------ --------------- Assets <S> <C> <C> <C> <C> <C> <C> Loans (1) $ 752,557 8.85% $ 16,422 $ 657,730 8.64% $ 14,171 Taxable securities 96,843 6.70% 1,599 148,313 6.23% 2,302 Non-taxable securities (2) 16,547 8.55% 349 18,687 8.18% 381 Short-term investments, principally federal funds 14,878 5.37% 197 15,282 6.14% 234 ---------------- ----------- ---------------- --------------- Total interest-earning assets 880,825 8.54% 18,567 840,012 8.16% 17,088 ----------- --------------- Liabilities Savings, NOW and money market deposits $ 248,688 2.54% 1,555 $ 252,942 2.38% $ 1,502 Time deposits >$100,000 146,233 6.57% 2,370 120,465 5.75% 1,727 Other time deposits 309,970 6.09% 4,656 279,246 5.18% 3,604 ---------------- ----------- ---------------- --------------- Total interest-bearing deposits 704,891 4.94% 8,581 652,653 4.20% 6,833 Borrowings 32,933 6.45% 524 50,632 5.62% 710 ---------------- ----------- ---------------- --------------- Total interest-bearing liabilities 737,824 5.00% 9,105 703,285 4.30% 7,543 ----------- --------------- Non-interest-bearing deposits 68,571 64,031 Net yield on interest-earning assets and net interest income 4.35% $ 9,462 4.56% $ 9,545 =========== =============== Interest rate spread 3.54% 3.86% Average prime rate 8.64% 8.69% </TABLE> (1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. (2) Includes tax-equivalent adjustments of $143,000 and $151,000 in 2001 and 2000 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 related to the significant decrease in interest rates that occurred during the first quarter of 2001. Between January 1, 2001 and March 31, 2001, the Federal Reserve decreased key interest rates by a total of 150 basis points. Although at January 1, 2001 the company had more interest-sensitive liabilities than interest-sensitive assets subject to repricing in the three month horizon, the company's interest-sensitive assets repriced sooner (generally the day following the interest rate cut) and by a larger percentage (generally by the same number of basis points that the Federal Reserve discount rate was decreased) than did the company's interest-sensitive liabilities that were subject to repricing within that same period. The company's interest-sensitive liabilities at January 1, 2001 in the three month horizon consisted of the following 1) savings, NOW, and money market deposits, and 2) time deposits. Interest rates paid on savings, NOW and money market deposits are set by management of the company, and although the interest rates on these accounts were decreased by the company within days of each of the Federal Reserve rate cuts, due to the already relatively low rates paid on these types of accounts, it was not possible to further reduce the interest rates by the full amount of the Federal Reserve cuts. Interest rates paid on time deposits are generally fixed and not subject to automatic adjustment. When time deposits mature, the company has the opportunity, at the customers' discretion, to renew the time deposit at a rate set by the company. Because time deposits that are interest-sensitive in a three month horizon mature throughout the three month period, any change in the renewal rate will only affect a portion of the three month period. Also, although changes in interest rates on renewing time deposits generally track rate changes in the interest rate environment, due to competitive pressures, the company was not able to decrease rates on renewing time deposits in the first quarter of 2001 by the corresponding decreases in the Federal Reserve discount rate. 12
Other factors contributing to the decrease in the net interest margin included a higher reliance on time deposits to fund strong loan growth, and a very competitive environment for deposits which has required the Company to offer higher rates than in the past to attract deposits. The provision for loan losses for the first quarter of 2001 was $220,000, $90,000 lower than the $310,000 recorded in the first quarter of 2000. The decrease in the provision for loan losses recorded in 2001 compared to 2000 was primarily a result of the lower loan growth experienced. Net loan growth for the first quarter of 2001 (excluding loans purchased in branch acquisition) amounted to $7.9 million compared to $29.9 million in the first quarter of 2000. Although nonperforming assets were significantly higher at March 31, 2001 compared to a year earlier, the primary reason for the increase was related to a single relationship that the company believes is adequately collateralized (see additional discussion below), and thus the increased level of nonperforming assets did not significantly impact the amount of provision recorded in the first quarter of 2001. Noninterest income for the first quarter of 2001 amounted to $1,862,000, a 24.4% increase over the $1,497,000 recorded in the first quarter of 2000. Within noninterest income, services charges on deposit accounts experienced the largest increase in the first quarter of 2001 compared to 2000, amounting to $908,000, a 21.7% increase over the $746,000 recorded in the same quarter of 2000. The increase in service charges on deposit accounts is primarily related to an increase in the Company's service fee rate structure implemented in November 2000. The higher level of deposits also contributed to the increase. Also contributing to the increase in noninterest income was "other service charges, commissions, and fees," which experienced a 14.4% increase, rising from $507,000 in the first quarter of 2000 to $580,000 in the first quarter of 2001. This category of noninterest income includes items such as safety deposit box rentals, check cashing fees, credit card and merchant income, and ATM surcharges. This category of income grew primarily because of increases in these activity-related fee services as a result of overall growth in the company's total customer base. Fees from presold mortgages increased 55.1% to $138,000 due to a higher level of mortgage loan refinancings caused by the low interest rate environment. Data processing fees increased from $20,000 in the first quarter of 2000 to $47,000 in the first quarter of 2001 due to an increase from two data processing clients to four clients since March 31, 2000. Noninterest expenses for the three months ended March 31, 2001 increased 7.4% to $6,065,000, from $5,646,000 in the first quarter of 2000. The increase in noninterest expenses occurred in all categories and is associated with the overall growth of the company in terms of branch network, employees and customer base. Certain efficiencies realized as a result of the company's acquisition of First Savings that occurred in the third quarter of 2000 partially offset otherwise recorded noninterest expense in the first quarter of 2001. Amortization of intangible assets increased from $158,000 in the first quarter of 2000 to $182,000 in the first quarter of 2001. The increase is associated with the company's aforementioned March 26, 2001 purchase of four branch offices with deposits of $102 million and loans of $17 million. The company has recorded intangible assets related to the purchase of approximately $14,462,000, which is being amortized on a straight-line basis over fifteen years. The provision for income taxes was $1,672,000 in the first quarter of 2001 compared to $1,697,000 in the first quarter of 2000. The effective tax rates for each period were virtually the same - 34.2% for the first quarter of 2001 compared to 34.4% for the first quarter of 2000. FINANCIAL CONDITION The Company's financial condition was materially impacted by the purchase of the four First Union branches that occurred during the first quarter of 2001. The purchase increased the company's loans by 2.2%, intangible assets by 325.1%, and deposits by 13.1%. The following table presents the impact of the purchase on selected balance sheet levels and growth rates during the time periods indicated. 13
<TABLE> <CAPTION> Growth, (in millions) Balance at excluding Balance at Total Percentage growth, beginning of branch Increase from end of percentage excluding branch period purchase branch purchase period growth purchase April 1, 2000 to ------------- ----------- --------------- ---------- ---------- ------------------ March 31, 2001 - ------------------------------ <S> <C> <C> <C> <C> <C> <C> Loans $ 673,089 80,930 16,730 770,749 14.5% 12.0% ============= =========== =============== ========== ========== ================== Deposits - Noninterest bearing $ 71,358 864 17,316 89,538 25.5% 1.2% Deposits - Savings, NOW, and Money Market 255,679 (2,781) 42,902 295,800 15.7% (1.1%) Deposits - Time 404,355 55,751 42,369 502,475 24.3% 13.8% ------------- ----------- --------------- ---------- ---------- ------------------ Total deposits $ 731,392 53,834 102,587 887,813 21.4% 7.4% ============= =========== =============== ========== ========== ================== January 1, 2001 to March 31, 2001 - ------------------------------ Loans $ 746,089 7,930 16,730 770,749 3.3% 1.1% ============= =========== =============== ========== ========== ================== Deposits - Noninterest bearing $ 70,634 1,588 17,316 89,538 26.8% 2.2% Deposits - Savings, NOW, and Money Market 253,687 (789) 42,902 295,800 16.6% (0.3%) Deposits - Time 446,058 14,048 42,369 502,475 12.6% 3.1% ------------- ----------- --------------- ---------- ---------- ------------------ Total deposits $ 770,379 14,847 102,587 887,813 15.2% 1.9% ============= =========== =============== ========== ========== ================== </TABLE> The net loan growth during the first quarter of 2001, excluding purchased loans, of $7,930,000 was the lowest quarterly net loan growth in two years, as the company experienced lower loan demand. As can be seen from the table above, the company's internal growth in deposits has continued its trend of concentration among time deposits. The company has experienced difficulty in raising non-time deposits, thus relying on competitively priced time deposits to fund loan demand. The branch purchase improved the company's liquidity position, while reducing the company's tangible capital level. At December 31, 2000, balance sheet assets that are generally regarded as being liquid (consisting of cash, due from banks, federal funds sold, presold mortgages in process of settlement and securities) amounted to 18.7% of total deposits and borrowings, while at March 31, 2001 the percentage was 24.8%. The company's tangible equity to total assets ratio decreased from 11.6% at December 31, 2000 to 8.9% at March 31, 2001. The Company's total assets were $1.03 billion at March 31, 2001, an increase of $114.6 million, or 12.5%, from the $918.5 million at March 31, 2000. The primary reason for the increase in total assets was the purchase of the branches, which added approximately $103.0 million in total assets. 14
NONPERFORMING ASSETS Nonperforming assets are defined as nonaccrual loans, loans past due 90 or more days and still accruing interest, restructured loans and other real estate. For each of the periods presented, the Company had no loans past due 90 or more days and still accruing interest. Nonperforming assets are summarized as follows: <TABLE> <CAPTION> March 31, December 31, March 31, ($ in thousands) 2001 2000 2000 - ---------------------------------------------------- ---------------- ---------------- ----------------- Nonperforming loans: <S> <C> <C> <C> Nonaccrual loans $ 3,598 626 1,199 Restructured loans 231 237 252 ---------- ----- ----- Total nonperforming loans 3,829 863 1,451 Other real estate 1,324 893 997 ---------- ----- ----- Total nonperforming assets $ 5,153 1,756 2,448 ========== ===== ===== Nonperforming loans to total loans 0.50% 0.12% 0.22% Nonperforming assets as a percentage of loans and other real estate 0.67% 0.24% 0.36% Nonperforming assets to total assets 0.50% 0.19% 0.27% Allowance for loan losses to total loans 1.09% 1.06% 1.03% </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 increased from $626,000 at December 31, 2000 to $3,598,000 at March 31, 2001. The increase is primarily attributable to two loans to the same borrower totaling $2.4 million that were placed on nonaccrual status during the first quarter of 2001. The company has a total of approximately $3.6 million in loans ($1.2 million of which do not meet the company's criteria for nonaccrual status) to this borrower with liquidity problems. The loans related to this borrower are collateralized by real estate, the value of which the Company believes exceeds the outstanding loan balance. The borrower has been actively selling the real estate to pay down the loan balance. However, several real estate sales scheduled for 2001 did not occur due to the filing of a lawsuit against the borrower during the first quarter of 2001. As a result of this development, management determined that $2.4 million in loans related to this borrower should be placed on nonaccrual status, and they were classified as such in February 2001. The level of restructured loans did not vary materially among the periods presented. At March 31, 2001, December 31, 2000, and March 31, 2000, the recorded investment in loans considered to be impaired was $2,907,000, $293,000, and $201,000, respectively, all of which were on nonaccrual status. The increase in impaired loans is due to the same loans noted above that were placed on nonaccrual status. The related allowance for loan losses for these impaired loans was $436,000, $44,000, and $30,000, respectively. There were no impaired loans for which there was no related allowance. The average recorded investments in impaired loans during the three month period ended March 31, 2001, the year ended December 31, 2000, and the three months ended March 31, 2000 were approximately $1,600,000, $218,000, and $241,000, 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. 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 15
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 March 31, 2001, December 31, 2000 and March 31, 2000, the Company's other real estate owned amounted to $1,324,000, $893,000, and $997,000, respectively, which consisted principally of several parcels of real estate. The increase in the level of other real estate owned at March 31, 2001 is primarily attributable to the transfer from property, plant and equipment to other real estate of the company's former Lauringburg branch as a result of the company consolidating it with a newly purchased branch located in the same city. 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. 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 provision for loan losses for the first quarter of 2001 was $220,000, $90,000 lower than the $310,000 recorded in the first quarter of 2000. The decrease in the provision for loan losses recorded in 2001 compared to 2000 was primarily a result of the lower loan growth experienced. Net loan growth for the first quarter of 2001 (excluding loans purchased in branch acquisition) amounted to $7.9 million compared to $29.9 million in the first quarter of 2000. Although nonperforming assets were significantly higher at March 31, 2001 compared to a year earlier, the primary reason for the increase was related to a single relationship that the company believes is adequately collateralized (see additional discussion above), and thus the increased level of nonperforming assets did not significantly impact the amount of provision recorded in the first quarter of 2001. At March 31, 2001, the allowance for loan losses amounted to $8,386,000, compared to $7,893,000 at December 31, 2000 and $6,908,000 at March 31, 2000. The allowance for loan losses was 1.09%, 1.06% and 1.03% of total loans as of March 31, 2001, December 31, 2000, and March 31, 2000, respectively. The increase in the allowance percentage during 2001 is primarily related to the consumer installment loan portfolio obtained in the branch purchase. Due to their nature, consumer installment loans are assigned a higher allowance percentage than most of the company's other types of loans. Management believes the Company's reserve levels are adequate to cover probable loan losses on the loans 16
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. 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 and additions that were recorded related to the branch purchase. <TABLE> <CAPTION> Three Months Year Three Months Ended Ended Ended March 31, December 31, March 31, ($ in thousands) 2001 2000 2000 ----------- ------------ ----------- <S> <C> <C> <C> Loans outstanding at end of period $ 770,749 746,089 673,089 =========== ============ =========== Average amount of loans outstanding $ 752,557 701,317 657,730 =========== ============ =========== Allowance for loan losses, at beginning of year $ 7,893 6,674 6,674 Total charge-offs (98) (475) (98) Total recoveries 36 89 22 ----------- ------------ ----------- Net charge-offs (62) (386) (76) ----------- ------------ ----------- Additions to the allowance charged to expense 220 1,605 310 ----------- ------------ ----------- Addition related to loans of purchased branches 335 - - ----------- ------------ ----------- Allowance for loan losses, at end of period $ 8,386 7,893 6,908 =========== ============ =========== Ratios: Net charge-offs (annualized) as a percent of average loans 0.03% 0.06% 0.05% Allowance for loan losses as a percent of loans at end of period 1.09% 1.06% 1.03% </TABLE> Based on the results of the aforementioned loan analysis and grading program and management's evaluation of the allowance for loan losses at March 31, 2001, there have been no material changes to the allocation of the allowance for loan losses among the various categories of loans since December 31, 2000. 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. 17
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 $35,000,000 overnight federal funds line of credit with a correspondent bank, and 3) an approximately $35,000,000 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 (but has chosen to do so at various times instead of selling securities), in recent years the Company has experienced an increase in its loan to deposit ratio which has reduced the company's liquidity. From December 31, 1997 to December 31, 2000, the company's loan to deposit ratio increased from 84.3% to 96.8% and the company's liquid assets (consisting of cash, due from banks, federal funds sold, presold mortgages in process of settlement and securities) as a percentage of deposits decreased during that same period from 34.2% to 18.7%. As noted above the branch purchase completed in the first quarter of 2001 improved the company's liquidity. The company's loans to deposits ratio at March 31, 2001 decreased to 86.8%, and the company's liquid assets to deposits ratio increased to 24.8% Although liquidity has generally lessened in recent years, the Company's management believes its liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet its operating needs in the foreseeable future. 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 North Carolina bank and 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 March 31, 2001, the Company's capital ratios exceeded the regulatory minimum ratios discussed above with a Tier 1 capital ratio to Tier 1 risk adjusted ratio of 12.52%, a total capital to total risk adjusted asset ratio of 13.51%, and a leverage ratio of 10.07%. The company's two risk based ratios each reflect decreases of approximately 300 basis points from December 31, 2000, and the leverage ratio is approximately 150 basis points 18
lower than at December 31, 2000. Each of the decreases is primarily related to the company's branch purchase, which reduced tangible capital by $14.5 million. The Company's bank subsidiary is also subject to similar capital requirements as those discussed above. At March 31, 2001, the Company's bank subsidiary exceeded the minimum ratios established by the FED and FDIC. SHARE REPURCHASES As noted earlier, on October 20, 2000, the Company announced an agreement to acquire Century Bancorp, Inc. in a part cash-part stock transaction. In connection with this transaction, the Company announced its intent to repurchase up to the number of shares that is expected to be issued to complete the acquisition (approximately 585,000 shares). Subsequent to the date of the announcement and through December 31, 2000, the Company repurchased 124,938 shares at an average cost of $15.68. During the first quarter of 2001, an additional 94,627 shares of common stock were repurchased at an average price of $18.39 per share, bringing total share repurchases since the Century announcement to 219,565 shares at an average price of $16.85 per share. The share repurchase program has been suspended due to the pending shareholder vote by Century's shareholders to approve the proposed transaction. 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 calendar years the Company's net interest margin has ranged from a low of 4.53% (realized in 2000) to a high of 4.88% (realized in 1997). During that five year period the prime rate of interest has ranged from a low of 7.75% to a high of 9.50%. As discussed above, the Company has recently experienced pressure on its net interest margin, particularly during the three months ended March 31, 2001 when the company's net interest margin was 4.35%. Using stated maturities for all instruments except mortgage-backed securities (which are allocated in the periods of their expected payback) and securities and borrowings with call features that are expected to be called (which are shown in the period of their expected call), at March 31, 2001 the Company had $261.9 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, as noted above, interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. In addition to the effects of "when" various rate-sensitive products reprice, market rate changes may not result in uniform changes in rates among all products. For example, included in interest-bearing liabilities at March 31, 2001 subject to interest rate changes within one year are deposits totaling $295.8 million comprised of NOW, savings, and certain types of money market deposits with interest rates set by management. These types 19
of deposits historically have not repriced, and did not reprice during the first quarter of 2001, coincidentally with or in the same proportion as general market indicators. Thus, the Company believes that in the near term (twelve months), 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. Generally, when rates change, the Company's interest-sensitive assets that are subject to adjustment reprice immediately at the full amount of the change, while the Company's interest-sensitive liabilities that are subject to adjustment reprice at a lag to the rate change and typically not to the full amount of the rate change. The net effect is that in the twelve month horizon, as rates change, the impact of having a higher level of interest-sensitive liabilities is substantially negated by the later and typically lower proportionate change these liabilities experience compared to interest sensitive assets. While the Company can not guarantee stability in its net interest margin in the future, at this time management does not expect significant fluctuations. However, assuming a static interest rate environment, the Company does expect that its net interest margin will continue to experience gradual pressure because of continued difficulties expected in growing deposits at their historical rate spreads and at rates sufficient to fund loan growth, which could result in additional reliance on higher cost funding sources (time deposits and borrowings). See additional discussion above. The Company has no market risk sensitive instruments held for trading purposes, nor does it maintain any foreign currency positions. The following table presents the expected maturities of the Company's other than trading market risk sensitive financial instruments. The following table also presents the fair values of market risk sensitive instruments as estimated in accordance with Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments." <TABLE> <CAPTION> Expected Maturities of Market Sensitive Instruments Held at March 31, 2001 Average Estimated ($ in thousands) Interest Fair 1 Year 2 Years 3 Years 4 Years 5 Years Beyond Total Rate (1) Value --------- ---------- --------- ---------- --------- ---------- --------- -------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Due from banks, interest bearing $ 69,464 - - - - - 69,464 5.10% $ 69,464 Federal funds sold 17,674 - - - - - 17,674 5.10% 17,674 Debt securities- at amortized cost (2) 33,437 27,516 13,817 13,856 7,585 7,962 104,173 6.66% 105,830 Loans - fixed (3) 58,743 38,607 75,863 65,971 64,663 119,831 423,678 8.64% 424,122 Loans - adjustable (3) 108,998 25,964 30,131 21,781 28,410 128,189 343,473 8.43% 343,473 --------- ---------- --------- ---------- --------- ---------- --------- -------- ------------ Total $288,316 92,087 119,811 101,608 100,658 255,982 958,462 8.03% $ 960,563 ========= ========== ========= ========== ========= ========== ========= ======== ============ Savings, NOW, and money market deposits $295,800 - - - - - 295,800 2.44% $295,800 Time deposits 381,978 96,263 13,899 4,935 3,987 1,413 502,475 6.12% 505,246 Borrowings (2) 11,200 5,000 5,000 5,000 - - 26,200 6.54% 26,604 --------- ---------- --------- ---------- --------- ---------- --------- -------- ------------ Total $688,978 101,263 18,899 9,935 3,987 1,413 824,475 4.81% $827,650 ========= ========== ========= ========== ========= ========== ========= ======== ============ </TABLE> (1) Tax-exempt securities are reflected at a tax-equivalent basis using a 35% tax rate. (2) Callable securities and borrowings with above market interest rates at March 31, 2001 are assumed to mature at their call date for purposes of this table. (3) Excludes nonaccrual loans and allowance for loan losses. The Company's fixed rate assets and liabilites each have estimated fair values that are slightly higher than their carrying value. This is due to the yields on these portfolios being higher than market yields at March 31, 2001 for instruments with maturities similar to the remaining term of the portfolios, due to the declining interest rate environment. 20
See additional discussion of the Company's net interest margin in the "Components of Earnings" section above. MERGER AND ACQUISITION ACTIVITY See Note 6 to consolidated financial statements above. CURRENT ACCOUNTING MATTERS 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. On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (`SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. On January 1, 2001, the Company transferred, as permitted by the standard upon its adoption, held-to-maturity securities with an amortized cost of approximately $31.2 million to the available-for-sale category at fair value. The unrealized loss at the time of the transfer was approximately $513,000, and is included as a component of other comprehensive income, net of tax.. The Company does not engage in any hedging activities and other than the aforementioned transfer of securities, the adoption of the statement had no impact on the Company. The FASB has 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 effective for the recognition and reclassification of collateral and disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. This Statement is not expected to materially impact the Company. FORWARD-LOOKING STATEMENTS Part I of this report 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 4 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 was filed as Exhibit 10.u to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and is incorporated herein by reference. 10.v Purchase and Assumption Agreement with First Union National Bank, dated September 13, 2000 was filed as Exhibit 10.v to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and is incorporated herein by reference. 10.w Employment Agreement between the Company and John F. Burns dated September 14, 2000 was filed as Exhibit 10.w to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and is incorporated herein by reference. (*) 10.x Definitive Merger Agreement with Century Bancorp, Inc. dated October 19, 2000 was filed on Form 8-K on October 20, 2000 and is incorporated herein by reference. 10.y Employee Stock Option Plan of First Savings Bank of Moore County, Inc., SSB, was filed by First Savings Bancorp, Inc. as Exhibit (10)(ii)(a) to its Registration Statement on Form 8-A, Registration No. 0-27-098, dated October 26, 1995, and is incorporated herein by reference. (*) 24
10.z Director Stock Option Plan of First Savings Bank of Moore County, Inc., SSB, was filed by First Savings Bancorp, Inc. as Exhibit (10)(ii)(b) to its Registration Statement on Form 8-A, Registration No. 0-27-098, dated October 26, 1995, and is incorporated herein by reference. (*) 10.aa First Savings Bancorp, Inc. Second Nonqualified Stock Option Plan for Directors, dated June 30, 1999 was filed as Exhibit (10)(ii)(g) to its Form 10-K for the twelve months ended June 30, 1999, and is incorporated herein 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, 2000, and is incorporated herein by reference. (b) The Registrant filed one report on Form 8-K during the quarter ended March 31, 2001 which was filed on April 23, 2001 and disclosed under Items 5 and 7, reporting its first quarter 2001 financial results that were issued in a press release on that same day. 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 May 13, 2001 BY: James H. Garner ------------------------------ James H. Garner President (Principal Executive Officer), Treasurer and Director May 13, 2001 BY: Anna G. Hollers --------------------------- Anna G. Hollers Executive Vice President and Secretary May 13, 2001 BY: Eric P. Credle --------------------------- Eric P. Credle Senior Vice President and Chief Financial Officer 26