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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-15572
FIRST BANCORP
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(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
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(State of Incorporation) (I.R.S. Employer
Identification Number)
341 North Main Street, Troy, North Carolina 27371-0508
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (910) 576-6171
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $5 PAR VALUE
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to the Form 10-K. [ X ]
The aggregate market value of the voting stock, Common Stock, $5 par
value, held by non-affiliates of the registrant, based on the average bid and
asked prices of the Common Stock on January 31, 1998 as reported on the NASDAQ
National Market System, was approximately $70,700,000. Shares of Common Stock
held by each officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares of the Registrant's Common Stock outstanding on
January 31, 1998 was 3,020,370.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed pursuant to
Regulation 14A are incorporated herein by reference into Part III.
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CROSS REFERENCE INDEX
PART I Business:
Item I General Description
Statistical Information
Net Interest Income
Average Balances and Net Interest Income Analysis
Volume and Rate Variance Analysis
Provision for Loan Losses
Noninterest Income
Noninterest Expenses
Income Taxes
Distribution of Assets and Liabilities
Securities Portfolio Composition and Maturities
Loans
Nonperforming Assets
Allowance for Loan Losses and Loan Loss Experience
Deposits
Interest Rate Risk (Including Quantitative
and Qualitative Disclosures About Market Risk)
Off-Balance Sheet Risk
Return on Assets and Equity
Liquidity
Capital Resources, Components and Ratios
Year 2000 Issue
Inflation
Accounting Changes
Forward-Looking Statements
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Shareholders
PART II
Item 5 Market for the Registrant's Common Stock and Related
Shareholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Results of
Operations and Financial Condition
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8 Financial Statements and Supplementary Data:
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 1997
Consolidated Statements of Shareholders' Equity for each of
the years in the three-year period ended December 31, 1997
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended December 31, 1997
Notes to Consolidated Financial Statements for each of the
years in the three-year period ended December 31, 1997
Report of Independent Auditors
Selected Consolidated Financial Data
Quarterly Financial Summary
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
PART III
Item 10 Directors and Executive Officers of the Registrant; Compliance
with Section 16 (a) of the Exchange Act *
Item 11 Executive Compensation *
Item 12 Security Ownership of Certain Beneficial Owners and Management*
Item 13 Certain Relationships and Related Transactions *
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports of Form
8-K *
SIGNATURES
* Information called for by Part III (Items 10 through 13) is incorporated
herein by reference to the Registrant's definitive Proxy Statement for the
1998 Annual Meeting of Shareholders to be filed with Securities and
Exchange Commission.
PART I
Item 1. Business
General Description
The Company
First Bancorp (the "Company") is a one-bank holding company. The principal
activity of the Company is the ownership and operation of First Bank (the
"Bank"), a state chartered bank with its main office in Troy, North Carolina.
The Company also owns and operates two nonbank subsidiaries, Montgomery Data
Services, Inc. ("Montgomery Data"), a data processing company, and First Bancorp
Financial Services, Inc. ("First Bancorp Financial"), which currently owns and
operates various real estate. The Company also controls First Bank Insurance
Services, Inc. ("First Bank Insurance"), an insurance agency acquired in 1994 as
a subsidiary of the Bank. On December 29, 1995, the insurance agency operations
of First Bank Insurance were divested. First Bank Insurance continues to be a
subsidiary of the Bank, but is inactive at this time.
The Company was incorporated in North Carolina on December 8, 1983, as
Montgomery Bancorp, for the purpose of acquiring 100% of the outstanding common
stock of the Bank through stock-for-stock exchanges. On December 31, 1986, the
Company changed its name to First Bancorp to conform its name to the name of the
Bank, which had changed its name from Bank of Montgomery to First Bank in 1985.
The Bank was organized in 1934 and began banking operations in 1935 as the
Bank of Montgomery, named for the county in which it operated. With its 1995
acquisition of the Laurinburg and Rockingham offices of First Scotland Bank
("First Scotland") and its 1994 acquisition of Central State Bank ("Central
State"), High Point, North Carolina, the Bank operates in a 13 county area
centered in Troy, North Carolina. Troy, population 3,400, is located in the
center of Montgomery County, approximately 60 miles east of Charlotte, and 50
miles south of Greensboro. The Bank conducts business from 33 branches located
within a 60-mile radius of Troy, covering a geographical area from Laurinburg to
the southeast, to High Point to the north and to Kannapolis to the west. Ranked
by assets, the Bank was the 16th largest bank in North Carolina as of December
31, 1997, according to the Ofice of the Commissioner of Banks. The Bank provides
a full range of banking services, including the accepting of demand and time
deposits, the making of secured and unsecured loans to individuals and
businesses, discount brokerage services and self-directed IRA's (both offered
through a contractual relationship with a brokerage firm). In 1997, as in recent
prior years, the Bank accounted for substantially all of the Company's
consolidated net income.
The Company's principal executive offices are located at 341 North Main
Street, Troy, North Carolina 27371-0508, and its telephone number is (910)
576-6171. Unless the context otherwise requires, references to the "Company" in
this annual report on Form 10-K shall mean collectively First Bancorp and its
subsidiaries.
General Business
The Bank engages in a full range of banking activities, providing such
services as checking, savings, NOW and money market accounts and other time
deposits of various types; loans for business, agriculture, real estate,
personal uses, home improvement and automobiles; credit cards; letters of
credit; investment and discount brokerage services; IRA's; safe deposit box
rentals; bank money orders; and electronic funds transfer services, including
wire transfers and automated teller machines. Because the majority of the Bank's
customers are individuals and small to medium-sized businesses located in the
counties it serves, deposits and loans are well diversified. There are no
seasonal factors that would have any material effect on the Bank's business, and
the Bank does not rely on foreign sources of funds or income.
Montgomery Data provides electronic data processing services to financial
institutions. As of December 31, 1997, the Bank was Montgomery Data's only
customer and accounted for 82% of its data processing revenues in the most
recent fiscal year, excluding the early termination fee received from its last
nonaffiliated customer in November 1997. Ownership and operation of Montgomery
Data allows the Company to do all of its electronic data processing without
paying fees for such services to an independent provider. Maintaining its own
data processing system also allows the Company to adapt the system to its
individual needs and to the services and products it offers. Although not a
significant source of income, Montgomery Data has historically provided the
Company with additional revenues through fees it charged to its third-party data
processing customer(s). Management of Montgomery Data does not intend to
aggressively seek additional customers at this time, but plans instead to use
existing capacity to meet the increasing requirements of the Bank resulting from
its asset growth. Notwithstanding the foregoing, additional customers may be
taken on if it is deemed to be in the best interest of the Company.
First Bancorp Financial was organized under the name of First Recovery in
September of 1988 for the purpose of providing a back-up data processing site
for Montgomery Data and other financial and non-financial clients. First
Recovery's back-up data processing operations were divested on August 1, 1994.
First Bancorp Financial now owns and leases the First Recovery building. First
Bancorp Financial periodically purchases parcels of real estate from the Bank
that were acquired through foreclosure. The parcels purchased consist of real
estate having various purposes. First Bancorp Financial actively pursues the
sale of these properties.
Territory Served and Competition
The Company serves primarily the south central area of the Piedmont region
of North Carolina, with offices in Anson, Cabarrus, Chatham, Davidson, Guilford,
Harnett, Lee, Montgomery, Moore, Randolph, Richmond, Scotland and Stanly
counties. The Company's headquarters are located in Troy, Montgomery County. The
Company's 33 branches and facilities are all located in small communities whose
economies are based primarily on manufacturing and light industry. Although the
Company's market is predominantly small communities and rural areas, the area is
not dependent on agriculture. Textiles, furniture, mobile homes, electronics,
plastic and metal fabrication, forest products, food products and cigarettes are
among the leading manufacturing industries in the trade area. Leading producers
of socks, hosiery and area rugs are located in Montgomery County. The
Pinehurst-Southern Pines area is a widely known golf resort and retirement area.
The High Point area is widely known for its furniture market. Additionally,
several of the communities served by the Company are "bedroom" communities
serving Charlotte and Greensboro in addition to smaller cities such as
Albermarle, Asheboro, High Point, Pinehurst and Sanford.
The banking laws of North Carolina allow state-wide branching, and
consequently commercial banking in the state is highly competitive. The Company
competes in its various market areas with, among others, several large
interstate bank holding companies that are headquartered in North Carolina.
These large competitors have substantially greater resources than the Company,
including broader geographic markets, higher lending limits and the ability to
make greater use of large-scale advertising and promotions. A significant number
of interstate banking acquisitions have taken place in the past decade, thus
further increasing the size and financial resources of some of the Company's
competitors, three of which are among the largest bank holding companies in the
nation. See "Supervision and Regulation" below for a further discussion of
regulations in the Company's industry that affect competition.
The Company competes not only against banking organizations, but also
against a wide range of financial service providers including federally and
state chartered savings and loan institutions, credit unions, investment and
brokerage firms and small-loan or consumer finance companies. Competition among
financial institutions of all types is virtually unlimited with respect to legal
ability and authority to provide most financial services. However, the Company
believes it has certain advantages over its competition in the areas it serves.
The Company seeks to maintain a distinct local identity in each of the
communities it serves and actively sponsors and participates in local civic
affairs. Most lending and other customer-related business decisions can be made
without delays associated with larger systems. Additionally, employment of local
managers and personnel in various offices and low turnover of personnel enable
the Company to establish and maintain long-term relationships with individual
and corporate customers.
Lending Policy and Procedures
Conservative lending policies and procedures and appropriate underwriting
standards are high priorities of the Bank. Loans are approved under the Bank's
written loan policy, which provides that lending officers, principally branch
managers, have sole authority to approve loans of various amounts up to $75,000.
Each of the Bank's regional senior lending officers has sole discretion to
approve secured loans in principal amounts up to $250,000 and together can
approve loans up to $750,000. Lending limits may vary depending upon whether the
loan is secured or unsecured.
The Bank's board of directors reviews and approves loans that exceed
management's lending authority, loans to officers, directors, and their
affiliates and, in certain instances, other types of loans. New credit
extensions are reviewed daily by the Bank's senior management and at least
monthly by the board of directors.
The Bank continually monitors its loan portfolio to identify areas of
concern and to enable management to take corrective action. Lending officers and
the board of directors meet periodically to review past due loans and portfolio
quality, while assuring that the bank is appropriately meeting the credit needs
of the communities it serves. Individual lending officers are responsible for
pursuing collection of past-due amounts and monitoring any changes in the
financial status of the borrowers.
The Bank also contracts with an independent consulting firm to review new
loan originations meeting certain criteria, as well as assign risk grades to
existing credits meeting certain thresholds. The consulting firm's observations,
comments and risk grades are shared with the Company's audit committee of the
board of directors, and are considered by management in setting Bank policy, as
well as in evaluating the adequacy of the allowance for loan losses.
Investment Policy and Procedures
The Bank has adopted an investment policy designed to optimize the Bank's
income from funds not needed to meet loan demand in a manner consistent with
appropriate liquidity and risk objectives. Pursuant to this policy, the Bank may
invest in federal, state and municipal obligations, federal agency obligations,
public housing authority bonds, industrial development revenue bonds, Federal
National Mortgage Association ("FNMA"), Government National Mortgage Association
("GNMA") and Student Loan Marketing Association ("SLMA") securities. The policy
also contains maximum amounts that the Bank can invest in certain types of
securities, including, at December 31, 1997, a maximum of $10 million that can
be invested in certain collateralized mortgage obligations and mortgage-backed
securities. The Bank's investments must be rated at least BAA by Moody's or BBB
by Standard and Poor's. Securities rated below A are periodically reviewed for
creditworthiness. The Bank may purchase non-rated municipal bonds only if such
bonds are in the Bank's general market area and determined by the Bank to have a
credit risk no greater than the minimum ratings referred to above. Industrial
development authority bonds, which normally are not rated, are purchased only if
they are judged to possess a high degree of credit soundness to assure
reasonably prompt sale at a fair value.
The Company's investment officers implement the investment policy, monitor
the investment portfolio, recommend portfolio strategies, and report to the
Bank's investment committee. Reports of all purchases, sales, net profits or
losses and market appreciation or depreciation of the bond portfolio are
reviewed by the Company's board of directors each month. Once a quarter, the
Company's interest rate risk exposure is monitored by the board of directors.
Once a year, the written investment policy is reviewed by the board of directors
and the Bank's portfolio is compared with the portfolios of other North Carolina
banks of comparable size.
All of the Bank's securities are kept in safekeeping accounts at
correspondent banks.
Recent Acquisitions
As part of its operations, the Company regularly evaluates the potential
acquisition of or merger with, and holds discussions with, various financial
institutions.
On November 14, 1997, First Bank acquired a First Union banking branch
located in Lillington, North Carolina. Real and personal property acquired
totaled approximately $237,000 and deposits assumed totaled approximately
$14,345,000. No loans were included in the purchase.
On December 15, 1995, First Bank completed its cash acquisition of the
Laurinburg and Rockingham branch offices of First Scotland Bank. As of December
15, 1995, assets acquired were approximately $15.8 million. The acquisition
included earning assets of approximately $14.2 million, of which approximately
$8.9 million were loans. Deposit liabilities assumed were approximately $15
million.
On August 25, 1994, the Company completed its cash acquisition of Central
State Bank in High Point, North Carolina. Central State, a North Carolina
state-chartered commercial bank, had approximately $35 million in assets at the
time of the acquisition, with earning assets of approximately $32 million,
including approximately $27 million in loans. Central State also had
approximately $32 million in deposits at the time of the merger with First Bank.
For additional information on these acquisitions, please see Management's
Discussion and Analysis and note 2 to the consolidated financial statements.
Employees
As of December 31, 1997, the Company had 228 full-time and 37 part-time
employees. The Company considers its employee relations to be good.
Supervision and Regulation
As a bank holding company, the Company is subject to supervision,
examination and regulation by the Board of Governors of the Federal Reserve
System and the North Carolina Banking Commission. The Bank is subject to
supervision and examination by the Federal Deposit Insurance Corporation and the
North Carolina Banking Commission. See also note 15 to the consolidated
financial statements.
Supervision and Regulation of the Company
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
required to register as such with the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board" or "FRB"). The Company also is regulated by
the North Carolina Commissioner of Banks (the "Commissioner") under the Bank
Holding Company Act of 1984.
A bank holding company is required to file with the Federal Reserve Board
quarterly reports and other information regarding its business operations and
those of its subsidiaries. It is also subject to examination by the Federal
Reserve Board and is required to obtain Federal Reserve Board approval prior to
making certain acquisitions of other institutions or voting securities. The
Commissioner of Banks is empowered to regulate certain acquisitions of North
Carolina banks and bank holding companies, issue cease and desist orders for
violations of North Carolina banking laws, and promulgate rules necessary to
effectuate the purposes of the Bank Holding Company Act of 1984.
Regulatory authorities have cease and desist powers over bank holding
companies and their nonbank subsidiaries where their actions would constitute a
serious threat to the safety, soundness or stability of a subsidiary bank. Those
authorities may compel holding companies to invest additional capital into
banking subsidiaries upon acquisition or in the event of significant loan losses
or rapid growth of loans or deposits.
The United States Congress and the North Carolina General Assembly have
periodically considered and adopted legislation that has resulted in, and could
result in further, deregulation of both banks and other financial institutions.
Such legislation could modify or eliminate geographic restrictions on banks and
bank holding companies and current restrictions on the ability of banks to
engage in certain nonbanking activities. For example, the recently-enacted
Reigle-Neal Interstate Banking Act allows expansion of interstate acquisitions
by bank holding companies and banks. This and other legislative and regulatory
changes have increased the ability of financial institutions to expand the scope
of their operations, both in terms of services offered and geographic coverage.
Such legislative changes could place the Company in more direct competition with
other financial institutions, including mutual funds, securities brokerage
firms, insurance companies, and investment banking firms. The effect of any such
legislation on the business of the Company cannot be predicted. The Company
cannot predict what other legislation might be enacted or what other regulations
might be adopted or, if enacted or adopted, the effect thereof.
Supervision and Regulation of the Bank
Federal banking regulations applicable to all depository financial
institutions, among other things, (i) provide federal bank regulatory agencies
with powers to prevent unsafe and unsound banking practices; (ii) restrict
preferential loans by banks to "insiders" of banks; (iii) require banks to keep
information on loans to major shareholders and executive officers; and (iv) bar
certain director and officer interlocks between financial institutions.
As a state chartered bank, the Bank is subject to the provisions of the
North Carolina banking statutes and to regulation by the Commissioner. The
Commissioner has a wide range of regulatory authority over the activities and
operations of the Bank, and the Commissioner's staff conducts periodic
examinations of banks and their affiliates to ensure compliance with state
banking regulations. Among other things, the Commissioner regulates the merger
and consolidations of state-chartered banks, the payment of dividends, loans to
officers and directors, recordkeeping, types and amounts of loans and
investments, and the establishment of branches. The Commissioner also has cease
and desist powers over state-chartered banks for violations of state banking
laws or regulations and for unsafe or unsound conduct that is likely to
jeopardize the interest of depositors.
The dividends that may be paid by the Bank to the Company are subject to
legal limitations under the North Carolina law. In addition, the regulatory
authorities may restrict dividends that may be paid by the Bank or the Company's
other subsidiaries. The ability of the Company to pay dividends to its
shareholders is largely dependent on the dividends paid to the Company by its
subsidiaries.
The Bank is a member of the Federal Deposit Insurance Corporation (the
"FDIC"), which currently insures the deposits of member banks. For this
protection, each bank pays a quarterly statutory assessment, based on its level
of deposits, and is subject to the rules and regulations of the FDIC. The FDIC
also is authorized to approve conversions, mergers, consolidations and
assumptions of deposit liability transactions between insured banks and
uninsured banks or institutions, and to prevent capital or surplus diminution in
such transactions where the resulting, continuing, or assumed bank is an insured
nonmember bank. In addition, the FDIC monitors the Bank's compliance with
several banking statutes, such as the Depository Institution Management
Interlocks Act and the Community Reinvestment Act of 1977. The FDIC also
conducts periodic examinations of the Bank to assess its compliance with banking
laws and regulations, and it has the power to implement changes in or
restrictions on a bank's operations if it finds that a violation is occurring or
is threatened.
Neither the Company nor the Bank can predict what other legislation might
be enacted or what other regulations might be adopted, or if enacted or adopted,
the effect thereof on the Bank's operations.
Item 2. Properties
The main offices of First Bancorp, First Bank and First Bancorp Financial
are located in a three-story building in the central business district of Troy,
North Carolina. The building houses administrative, training and bank teller
facilities. The Bank's Operations Division, including customer accounting
functions, offices and operations of Montgomery Data Services, and offices for
loan operations, are housed in a one-story steel frame building approximately
one-half mile west off the main office. The Company operates 33 branches and
facilities, including the main office, in the trade area as follows: Troy - main
office and two additional full service branches and one teller-window facility;
High Point and Albemarle - two full service branches in each; Pinehurst - one
full service branch and one teller-window facility; Aberdeen, Asheboro,
Archdale, Biscoe, Bennett, Candor, Denton, Kannapolis, Laurel Hill, Laurinburg,
Lillington, Locust, Pinebluff, Polkton, Richfield, Robbins, Rockingham, Sanford,
Seagrove, Seven Lakes, Southern Pines, Vass and Wagram - one full service branch
in each. The Company owns all its premises except five branch offices for which
the land and buildings are leased and two branch offices for which the land is
leased but the buildings are owned. There are no other options to purchase or
lease additional properties. The Company considers its facilities adequate to
meet current needs and idle or vacant properties are insignificant.
Item 3. Legal Proceedings
Various legal proceedings may arise in the ordinary course of business and
may be pending or threatened against the Company and/or its subsidiaries.
The Company is not involved in any pending legal proceedings which, in
management's opinion, could have a material effect on the consolidated financial
position of the Company.
Item 4. Submission of Matters to a Vote of Shareholders
No matters were submitted to the shareholders during the fourth quarter of
1997.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters
The Company's common stock trades on the NASDAQ National Market System of
The NASDAQ Stock Market under the symbol FBNC. Tables 1 and 21, included in
"Management's Discussion and Analysis" below, set forth the high and low market
prices of the Company's common stock as traded by the brokerage firms that
maintain a market in the Company's common stock and the dividends declared for
the periods indicated. All per share amounts for reporting periods prior to the
third quarter of 1996 have been restated from their originally reported amount
to reflect the two-for-one stock split that was distributed in September 1996.
See "Business - Supervision and Regulation" and note 15 to the consolidated
financial statements for a discussion of regulatory restrictions on the payment
of dividends. As of December 31, 1997, there were 668 shareholders of record and
an estimated 800 shareholders whose stock shares are held in "street name."
Item 6. Selected Financial Data
Table 1 on page 23 sets forth selected financial data about the Company.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Management's discussion and analysis is intended to assist readers in
understanding the Company's results of operations and changes in financial
position for the past three years. This review should be read in conjunction
with the consolidated financial statements and accompanying notes beginning on
page 35 of this report and the supplemental financial data contained in Tables 1
through 21 included with this discussion and analysis. All per share amounts for
periods prior to June 30, 1996 have been restated to reflect the two-for-one
stock split distributed on September 13, 1996 to shareholders of record on
August 30, 1996.
The Company adopted the provisions of the Statement of Financial Accounting
Standard Number 128, "Earnings Per Share" ("SFAS No. 128") as of December 31,
1997. SFAS No. 128 requires the Company to disclose two earnings per share
amounts - 1) basic earnings per share, and 2) diluted earnings per share. Basic
earnings per share uses the weighted average common shares outstanding as the
denominator in per share calculations, while diluted earnings per share includes
the potentially dilutive incremental share effects of options that have been
issued under the Company's stock option plan. As required by SFAS No. 128, all
prior year earnings per share amounts have been restated and computed under the
provisions of the new standard. See the "Accounting Changes" section of
management's discussion and analysis and note 1 to the consolidated financial
statements for additional discussion of this new standard. Unless otherwise
noted, per share disclosures are based on the basic earnings per share
calculation.
Mergers and Acquisitions
On November 14, 1997, First Bank acquired a First Union banking branch
located in Lillington, North Carolina. Real and personal property acquired
totaled approximately $237,000 and deposits assumed totaled approximately
$14,345,000. No loans were included in the purchase.
In the fourth quarter of 1995, First Bank completed its cash acquisition of
the Laurinburg and Rockingham branch offices of First Scotland Bank. Assets
acquired were approximately $15.8 million including earning assets of
approximately $14.2 million, of which approximately $8.9 million were loans.
Deposit liabilities assumed were approximately $15 million.
During the third quarter of 1994, the Company completed its cash
acquisition of Central State Bank in High Point, North Carolina. Central State
had approximately $35 million in assets with earning assets of approximately $32
million, including approximately $27 million in loans. Central State also had
approximately $32 million in deposits.
For additional information on these acquisitions, please see "Analysis of
Results of Operations" and "Analysis of Financial Condition" below and note 2 to
the consolidated financial statements.
ANALYSIS OF RESULTS OF OPERATIONS
Net interest income, the "spread" between earnings on interest-earning
assets and the interest paid on interest-bearing liabilities, constitutes the
largest source of the Company's earnings. Other factors that significantly
affect operating results are the loan loss provision, noninterest income such as
service fees and noninterest expenses such as salaries, FDIC insurance
assessments and other overhead costs, and the effect of income taxes.
Overview - 1997 Compared to 1996
First Bancorp's net income for 1997 was a record $5,012,000, or basic
earnings per share of $1.66, compared to $4,347,000, or basic earnings per share
of $1.44, for 1996. This represents a 15.3% increase in net income and basic
earnings per share over the prior year. Excluding the after-tax effects of
nonrecurring gains of $103,000, or $0.03 per share, in the fourth quarter of
1997 related to an early termination fee of a data processing contract and
$128,000, or $0.04 per share, in the third quarter of 1996 related to a branch
sale, the 1997 increase in net income and basic earnings per share would have
been 16.4% over 1996.
The primary reason for the increase in net income in 1997 was a 16.2%
increase in net interest income that was a result of strong loan and deposit
growth. The provision for loan losses increased 76.9% over the prior year, which
is primarily a reflection of the Company providing for the loan growth
experienced during the year. Noninterest income decreased 6.7% for the year and
noninterest expenses increased 7.4% for the year. See additional discussion
below.
Overview - 1996 Compared to 1995
Net income for 1996 was $4,347,000, or basic earnings per share of $1.44,
compared to $1,582,000, or basic earnings per share of $0.53, for 1995. The
primary reason for the significant increase in net income for 1996 was the
absence of two nonrecurring events that the Company experienced in 1995. The
Company incurred pretax nonrecurring charges totaling $2,691,000 ($1,638,000, or
$0.54 per share, on an after tax basis) in the fourth quarter of 1995 related to
1) a litigation settlement ($500,000 pretax in additional provision for loan
losses and $1,446,000 pretax in out of pocket settlement costs) and 2) unrelated
severance expenses related to two former senior managers ($745,000 pretax). In
addition to the nonrecurring 1995 fourth quarter charges, during 1995, the
Company incurred $789,000 pretax in legal fees related to the litigation that
are included in noninterest expense in the accompanying consolidated financial
statements. Excluding the 1996 nonrecurring gain from a branch sale discussed
above and the nonrecurring charges and related expenses incurred in 1995, the
Company's net income increased approximately 14.0% on a tax effected basis in
1996 compared to 1995.
Excluding the effects of the nonrecurring charges and related expenses,
First Bancorp experienced the following variances during 1996 compared to 1995 -
net interest income increased 9.9%, noninterest income increased 12.0%, the
provision for loan losses decreased 18.8%, and noninterest expenses increased
10.3%.
Net Interest Income
Net interest income on a tax-equivalent basis amounted to $18,808,000 in
1997, $16,256,000 in 1996 and $14,809,000 in 1995.
Table 2 analyzes net interest income on a taxable-equivalent basis. The
Company's net interest income on a taxable-equivalent basis increased by 16% in
1997 and 10% in 1996. These increases were primarily a result of a 12% increase
in average earning assets during 1997 and an 11% increase in 1996. Additionally,
in 1997 the yield realized on earning assets increased by 22 basis points from
1996, while the average yield the Company paid on interest-bearing liabilities
increased by only 3 basis points, resulting in an increase in net interest
margin (net yield on interest-earning assets) of 20 basis points to 5.65% from
the 5.45% yield realized in 1996. The increase in yield realized on earning
assets was primarily affected by a 20 basis point increase in the yield realized
on loans that was largely a result of the 25 basis point increase in the Bank's
prime lending rate that occurred in March 1997 and remained in effect for the
remainder of the year. The average rate paid on deposits, although 3 basis
points higher in 1997, was favorably impacted by higher growth in lower yielding
savings, NOW, and money market deposits (15% growth) versus higher yielding time
deposits (9% growth).
In 1996, the Company's net interest margin decreased by 5 basis points to
5.45% from 5.50% as a result of a slight compression of both average yields
earned and average rates paid. The average yield earned on loans decreased 28
basis points to 9.47%, primarily as a result of a lower average prime rate in
effect during the year. This was largely offset by a 62 basis point increase in
the yield realized on taxable securities. This increase in yield was primarily a
result of a strategic decision by the Company to invest in higher yielding
securities with longer maturities. The average yield on deposits increased by 2
basis points to 4.00% during 1996.
Changes in total interest income and total interest expense result from
changes in both volumes and rates in the related earning asset and
interest-bearing liability categories. Table 3 shows the quantitative effects on
net interest income of the changes in volumes and rates experienced by the
Company. As discussed above and illustrated in Table 3, changes in volumes have
been the primary cause of changes in the amounts of interest income and interest
expense recorded by the Company.
Provision for Loan Losses
The provision for loan losses charged to operations is an amount sufficient
to bring the allowance for loan losses to an estimated balance considered
adequate to absorb potential losses inherent in the portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, current economic conditions, historical loan loss experience and
other risk factors.
The Company made provisions for loan losses of $575,000 for 1997 compared
to $325,000 for 1996 and $900,000 for 1995. The increase in the provision for
loan losses in 1997 was largely in response to the high volume of loan growth
experienced by the Company, as the Company's asset quality ratios improved
during 1997. The Company originated $57.5 million in new loans, net of
repayments, in 1997 as compared to $11.5 million in 1996. The decrease in the
provision for loan losses from 1995 to 1996 is attributable to the Company
providing approximately $500,000 in 1995 for the purpose of replenishing the
allowance for loan losses that was depleted because of charge-offs of loans
related to the parties involved in the litigation that was settled on December
28, 1995. Management made the determination to record these charge-offs as a
result of the related settlement negotiations. For additional information,
please see note 12 to the consolidated financial statements.
Please see "Summary of Loan Loss Experience" below for a more detailed
discussion of the allowance for loan losses. The allowance is monitored and
analyzed regularly in conjunction with the Bank's loan analysis and grading
program, and adjustments are made to maintain an adequate allowance for loan
losses.
Noninterest Income
Noninterest income amounted to $4,150,000 in 1997, a 6.7% decrease from
$4,446,000 in 1996. The 1996 amount was $669,000, or 17.7%, higher than the
$3,777,000 recorded in 1995. The decrease in noninterest income in 1997 from
1996 was partially due to a decrease in nonrecurring gains of $43,000 and
changes in gains and losses from securities sales of $18,000. In 1996, the
Company sold one branch office, along with its loans and deposits, and sold a
vacated building which resulted in a net nonrecurring gain of $211,000. In 1997,
Montgomery Data realized a nonrecurring gain of $168,000 as a result of its last
nonaffiliated customer terminating its data processing agreement prior to its
contractually obligated term, and thus having to pay an early termination
penalty. Management of Montgomery Data does not intend to aggressively seek
additional customers at this time, but plans instead to use existing capacity to
meet the increasing requirements of the Bank resulting from its asset growth.
Notwithstanding the foregoing, additional customers may be taken on if it is
deemed to be in the best interest of the Company.
Service charges on deposit accounts amounted to $2,413,000 in 1997,
$2,561,000 in 1996 and $2,164,000 in 1995. Other service charges, commissions,
and fees amounted to $1,029,000 in 1997, $1,107,000 in 1996 and $1,109,000 in
1995. A factor in the decrease in service charges from 1996 to 1997 relates to
the Bank's decision during 1996 to increase fees for certain services to make
them more commensurate with the related expenses the Bank incurred in providing
the services. Also, an internal emphasis was placed on collecting the fees for
all such services. This initially had the effect of increasing gross service fee
revenue which resulted in higher total service charge revenues in 1996 as
compared to 1995. Subsequently, management believes customers became more
cognizant of the higher fees and made efforts to reduce their use of these
services, which resulted in a decline in these same revenues for the Bank during
1997 compared to 1996.
Commissions from insurance sales decreased by $35,000 in 1997 and $68,000
in 1996 as a result of lower commission fee rates negotiated with brokers, as
well as a higher percentage of the Bank's customers utilizing their home equity
lines of credit to finance consumer purchases versus obtaining consumer
installment loans, where the Bank has typically brokered more insurance
policies.
The increase in noninterest income from 1995 to 1996 was primarily a result
of the nonrecurring gain and increased service charge fees discussed above.
Table 4 sets forth the principal components of noninterest income.
Noninterest Expenses
Noninterest expenses were $14,088,000 in 1997, $13,113,000 in 1996, and
$14,868,000 in 1995. The 7.4% increase in noninterest expenses during 1997 was
primarily a result of the Bank opening three new branches early in 1997 and a
fourth late in 1997. These new branches were largely responsible for the
increases in personnel expense, occupancy expense, equipment expense, stationery
expense, and telephone expense during the year. The 1996 decrease was primarily
due to the absence of the two previously discussed nonrecurring events that
occurred in 1995 that resulted in charges of $745,000 in severance related
personnel expenses, $1,446,000 in litigation settlement, and $789,000 in legal
fees related to the litigation settlement. For additional information regarding
the litigation settlement, please see note 12 to the consolidated financial
statements. Excluding the effects of these nonrecurring charges and related
expenses, noninterest expenses increased by 10.3% in 1996 compared to 1995,
which was primarily a result of a full year of expenses related to the Company's
acquisition of two branches in the fourth quarter of 1995 that was previously
discussed. Table 5 sets forth the principal components of noninterest expenses.
Income Taxes
The provision for income taxes was $2,549,000 in 1997, $2,213,000 in 1996,
and $580,000 in 1995. The 15% increase in tax expense in 1997 compared to 1996
is a result of a 15% increase in pretax income, as the Company's effective tax
rate remained constant at 33.7%. The increase in tax expense in 1996 was due to
an increase in pretax income as well as an increase in state income taxes paid.
Table 6 presents the components of tax expense and the related effective tax
rates.
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
The following discussion focuses on the factors considered by management to
be important in assessing the Company's financial condition. The Company's
assets and deposits have continued to grow, reflecting growth in existing
markets and expansion into new geographic areas. Total assets were $403 million
at December 31, 1997, an increase of 20.0% over December 31, 1996. Assets during
1996 grew to $335 million at year end, a 4.3% increase over the $322 million at
December 31, 1995. Interest-earning assets at December 31, 1997 were $369
million, an increase of 20.7% over the $306 million held at December 31, 1996.
The 1996 amount was 4.1% higher that the $294 million held at December 31, 1995.
Loans, the primary interest-earning asset, grew 25.8% to $281 million in 1997
compared to 5.4% growth in 1996. Funding the 1997 asset growth was a $63.4
million, or 21.3%, increase in deposits. Funding the 1996 asset growth was a
$10.1 million, or 3.5%, increase in deposits. Approximately $14 million of the
1997 asset and deposit growth can be attributed to the previously mentioned
purchase of the First Union bank branch located in Lillington, N.C. Partially
offsetting the 1996 growth was the July 1996 sale of a branch with loans of $1.4
million and deposits of $3.5 million. The Company's assets and deposits have
experienced compound annual growth rates of approximately 11% over the last five
years.
Distribution of Assets and Liabilities
Table 7 sets forth the percentage relationships of significant components
of the Company's balance sheets at December 31, 1997, 1996, and 1995. The most
significant variance is the 1997 shift in asset mix from securities to loans
that is primarily due to strong loan growth that was partially funded with
proceeds from securities maturities and sales.
Securities
Information regarding the Company's securities portfolio as of December 31,
1997, 1996, and 1995 is presented in Tables 8 and 9. Total securities available
for sale and held to maturity amounted to $71.1 million, $76.3 million and $69.4
million at December 31, 1997, 1996, and 1995, respectively. The decrease in year
end securities at December 31, 1997 as compared to 1996 is due to the Company
investing more funds in overnight cash investments at year end to fund the
strong loan demand experienced by the Company near year end, as well as the lack
of yield incentive to invest in securities with maturities longer than overnight
due to the flattening of the yield curve. The increase in year end securities at
year end 1996 versus 1995 was a result of the Company having more of its excess
cash invested in securities as opposed to overnight cash investments, as well as
overall balance sheet growth. Average total securities were approximately $75.7
million during 1997 as compared to an average of $69.7 million in 1996 and $68.3
million in 1995. The increase in the average balance of securities during 1997
was due to a higher level of funds provided by the slightly higher growth in the
amount of average deposits during the year versus average loans, as well as
funds provided by earnings of the Company. The relatively small increase in
average securities of $1.4 million during 1996 compared to 1995 is a result of
the growth in average loans almost completely offsetting the funds provided by
the growth in average deposits.
The composition of the securities portfolios at December 31, 1997, 1996,
and 1995 reflects a shift in 1996 and 1997 from U.S. Treasuries to higher
yielding collateralized mortgage obligations. All of the Company's
collateralized mortgage obligations at each year end were issued by Fannie Mae
or Freddie Mac. At each year end, there were no collateralized mortgage
obligations considered to be "high risk" pursuant to existing bank regulatory
guidelines.
At December 31, 1997, net unrealized gains of $282,000 were included in the
carrying value of securities classified as available for sale compared to net
unrealized gains of $221,000 at December 31, 1996 and net unrealized gains of
$360,000 at December 31, 1995. Management evaluated any unrealized losses on
individual securities at each year end and determined them to be of a temporary
nature and caused by fluctuations in market interest rates, not by concerns
about the ability of the issuers to meet their obligations. Net unrealized
gains, net of applicable deferred income taxes, of $186,000, $146,000, and
$235,000, have been reported as a separate component of shareholders' equity as
of December 31, 1997, 1996, and 1995, respectively.
The market value of securities held to maturity, which the Company carries
at amortized cost, exceeded their carrying value by $656,000 at December 31,
1997, $394,000 at December 31, 1996, and $634,000 in 1995. Management evaluated
any unrealized losses on individual securities at each year end and determined
them to be of a temporary nature and caused by fluctuations in market interest
rates, not by concerns about the ability of the issuers to meet their
obligations.
Table 9 provides detail as to scheduled contractual maturities and book
yields on securities available for sale and securities held to maturity at
December 31, 1997. Approximately 78% of the available for sale portfolio matures
within 5 years, with the weighted average contractual life being 3.25 years. The
weighted average tax-equivalent yield for the securities available for sale
portfolio was 6.75% at December 31, 1997. The weighted average life of the
securities held to maturity portfolio was 5.17 years at December 31, 1997 with a
weighted average taxable-equivalent yield of 8.22%.
As of December 31, 1997 and 1996, the Company held no investment securities
of any one issuer, other than U.S. Treasury and U.S. Government agencies or
corporations, in which aggregate book values and approximate market values
exceeded 10% of shareholders' equity. Other than the collateralized mortgage
obligations previously discussed, the Company owned no securities considered by
regulatory authorities to be derivative instruments.
Loans
Table 10 provides a summary of the loan portfolio composition at each of
the past five year ends.
Loans increased by $57.5 million, or 25.8%, in 1997 to $280.5 million from
the $223.0 million balance at December 31, 1996. The 1996 year end amount was
5.4% higher than the $211.5 million balance at December 31, 1995. The loan
growth experienced by the Company in 1997 occurred in all significant loan
categories, while the 1996 growth was limited to the real estate mortgage and
real estate construction categories.
A large portion of the Company's loan portfolio has historically been
comprised of loans secured by various types of real estate. At December 31,
1997, $205.3 million or 73.2% of the Company's loan portfolio was secured by
liens on real property. Included in this total are $104.1 million, or 37.1% of
total loans, in credit secured by liens on 1-4 family residential properties and
$101.2 million, or 36.1% of total loans, in credit secured by liens on other
types of real estate.
Table 11 provides a summary of scheduled loan maturities over certain time
periods, broken out between fixed rate loans and adjustable rate loans.
Approximately 33% of the Bank's loans outstanding at December 31, 1997 mature
within one year and 83% of total loans mature within five years. These
percentages are approximately the same as they were at December 31, 1996. The
percentages of variable rate loans and fixed rate loans to total performing
loans were 52% and 48%, respectively, as of December 31, 1997 compared to 51%
and 49% as of December 31, 1996. The bank intentionally makes a blend of fixed
and variable rate loans so as to reduce interest rate risk. The yield on
performing loans as of December 31, 1997 was 9.23% compared to 9.17% at December
31, 1996 and 9.40% at December 31, 1995. The slight increase in yield at
December 31, 1997 is a result of a higher prime rate in effect at year end
offset by the Company's trend in the second half of the year of originating
larger balance loans with slightly lower yields. The decrease in yield from 1995
to 1996 is primarily a result of a lower prime rate in effect at the respective
year ends.
See additional information regarding interest rate risk below.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, loans past due 90 or more
days and still accruing interest, restructured loans and foreclosed, repossessed
and idled properties. As a matter of policy the Company places all loans that
are past due 90 or more days on nonaccrual basis, and thus there were no such
loans at any of the past five year ends that were 90 days past due and still
accruing interest. Table 12 summarizes the Company's nonperforming assets at the
dates indicated.
Nonaccrual loans are loans on which interest income is no longer being
recognized or accrued because management has determined that the collection of
interest is doubtful. The placing of loans on nonaccrual status negatively
impacts earnings because (i) interest accrued but unpaid as of the date a loan
is placed on nonaccrual status is either deducted from interest income or is
charged-off, (ii) future accruals of interest income are not recognized until it
becomes highly probable that both principal and interest will be paid and (iii)
principal charged-off, if appropriate, may necessitate additional provisions for
loan losses that are charged against earnings. In some cases, where borrowers
are experiencing financial difficulties, loans may be restructured to provide
terms significantly different from the originally contracted terms.
Nonperforming loans (which includes nonaccrual loans and restructured
loans) as of December 31, 1997, 1996 and 1995 totaled $1,283,000, $2,186,000,
and $1,298,000, respectively. Nonperforming loans as a percentage of total loans
amounted to 0.46%, 0.98% and 0.61%, at December 31, 1997, 1996, and 1995
respectively. The decrease in nonperforming loans at December 31, 1997 as
compared to December 31, 1996 is primarily attributable to the resolution of
several relationships that resulted in partial charge-offs during the year, as
well as generally improved loan quality. The increase in nonperforming loans at
December 31, 1996 compared to December 31, 1995 was largely due to $1,300,000
more in loans on nonaccrual status that were assumed in corporate acquisitions
occurring in 1994 and 1995. These nonaccrual loans that were originated by other
institutions amounted to $1,461,000 at December 31, 1996 compared to $161,000 at
December 31, 1995. These loans had a reduced risk of loss to the Company because
of certain loss-reimbursement provisions contained in the acquisition
agreements. Substantially all such loans were resolved during 1997 by means of
receipt of payment-in-full from the borrower, foreclosure and disposition of
collateral, or sale of the loan back to the original owner of the loan prior to
the expirations of the reimbursement provisions of the agreements in 1997. As of
December 31, 1997, the largest nonaccrual balance to any one borrower was
$231,000 with the average balance for the 29 nonaccrual loans being
approximately $33,000.
If the nonaccrual loans and restructured loans as of December 31, 1997, 1996
and 1995 had been current in accordance with their original terms and had been
outstanding throughout the period (or since origination if held for part of the
period), gross interest income in the amounts of approximately $91,000, $183,000
and $82,000 for nonaccrual loans and $34,000, $41,000 and $52,000 for
restructured loans would have been recorded for 1997, 1996 and 1995,
respectively. Interest income on such loans that was actually collected and
included in net income in 1997, 1996 and 1995 amounted to approximately $32,000,
$81,000 and $36,000 for nonaccrual loans (prior to their being placed on
nonaccrual status) and $25,000, $30,000 and $50,000 for restructured loans,
respectively.
In addition to the nonperforming loan amounts included above, management
believes that an estimated $1,000,000-$1,500,000 of loans that are currently
performing in accordance with their contractual terms may potentially develop
problems depending upon the particular financial situations of the borrowers and
economic conditions in general. Management has taken these potential problem
loans into consideration when evaluating the adequacy of the allowance for loan
losses at December 31, 1997 (see discussion below).
Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been disclosed in the problem loan amounts and the
potential problem loan amounts discussed above do not represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or represent
material credits about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
Foreclosed, repossessed, and idled properties amounted to $560,000 at
December 31, 1997, compared to $572,000 at December 31, 1996 and $1,393,000 at
December 31, 1995. Approximately $391,000 of the 1996 decrease from 1995 relates
to the disposition of properties assumed in the Central State acquisition.
Foreclosed, repossessed, and idled properties represented 0.14%, 0.17% and 0.43%
of total assets at the end of 1997, 1996, and 1995, respectively. The Company's
management has reviewed recent appraisals of these properties and has concluded
that their fair values, less estimated costs to sell, exceeds the respective
carrying values at December 31, 1997.
Allowance for Loan Losses and Loan Loss Experience
The allowance for loan losses is created by direct charges to operations.
Losses on loans are charged against the allowance in the period in which such
loans, in management's opinion, become uncollectible. The recoveries realized
during the period are credited to this allowance.
The factors that influence management's judgment in determining the amount
charged to operating expense include past loan loss experience, composition of
the loan portfolio (including off-balance sheet commitments), evaluation of
possible future losses and current economic conditions.
The Bank uses a loan analysis and grading program to facilitate its
evaluation of possible future loan losses and the adequacy of its allowance for
loan losses. In this program, risk grades are assigned by management and tested
by the Bank's Internal Audit Department and an independent third party
consulting firm. The program evaluates a sample of new loans, loans that
management identifies as having potential credit weaknesses, loans past due 90
days or more, nonaccrual loans and any other loans identified during previous
regulatory and other examinations.
The Company strives to maintain its loan portfolio in accordance with what
management believes are conservative loan underwriting policies that result in
loans specifically tailored to the needs of the Company's market areas. Every
effort is made to identify and minimize the credit risks associated with such
lending strategies. The Company has no foreign loans, few agricultural loans and
does not engage in significant lease financing or highly leveraged transactions.
Commercial loans are diversified among a variety of industries. The majority of
loans captioned in the tables discussed below as "real estate" loans are
primarily various personal and commercial loans where real estate provides
additional security for the loan. Collateral for virtually all of these loans is
located within the Company's principal market area.
The allowance for loan losses amounted to $4,779,000 as of December 31,
1997 as compared to $4,726,000 at December 31, 1996 and $4,587,000 at December
31, 1995. This represented 1.70%, 2.12%, and 2.17% of loans outstanding as of
December 31, 1997, 1996, and 1995, respectively. The decrease in the allowance
for loan losses as a percentage of total loans at year end 1997 is a result of
generally improved loan quality, as well as the resolution during 1997 of
several large nonaccrual and problem loans that resulted in partial charge-offs.
As noted in Table 12, the Company's allowance for loan losses as a percentage of
nonperforming loans amounted to 372.49% at December 31, 1997 as compared to
216.19% at December 31, 1996, and 353.39% at December 31, 1995.
Table 13 sets forth the allocation of the allowance for loan losses at the
dates indicated. The portion of these reserves that was allocated to known
weaknesses in the loan portfolio decreased from $4,104,000 at December 31, 1996
to $3,789,000 at December 31, 1997. The year end 1996 amount was virtually
unchanged from the $4,093,000 at December 31, 1995.
Management considers the allowance for loan losses adequate to cover
possible loan losses on the loans outstanding as of each reporting date. It must
by emphasized, however, that the determination of the allowance using the
Company's procedures and methods rests upon various judgments and assumptions
about future economic conditions and other factors affecting loans. No assurance
can be given that the Company will not in any particular period sustain loan
losses that are sizable in relation to the amount reserved or that subsequent
evaluations of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowances for loan losses and
losses on foreclosed real estate. Such agencies may require the Bank to
recognize additions to the allowances based on the examiners' judgments about
information available to them at the time of their examinations.
For the years indicated, Table 14 summarizes the Company's balances of
loans outstanding, average loans outstanding, changes in the allowance arising
from charge-offs and recoveries by category, and additions to the allowance that
have been charged to expense. The Company's net loan charge offs were
approximately $522,000 in 1997, $186,000 in 1996 and $1,509,000 in 1995. This
represents 0.21%, 0.09%, and 0.79% of average loans during 1997, 1996, and 1995,
respectively. As previously discussed, during 1997 the Company resolved several
large nonperforming loans that resulted in partial charge-offs. Charge-offs in
1995 included approximately $590,000 of loans related to the parties involved in
the litigation that was settled on December 28, 1995. For additional
information, see note 12 to the consolidated financial statements.
Deposits
The average amounts of deposits of the Company for the years ended December
31, 1997, 1996 and 1995 are presented in Table 15. Average deposits for 1997
grew by 10.4% over the 1996 average to $320.7 million. The 1996 average amount
of deposits was $290.5 million, a 10.5% increase from 1995. The category of
deposits with the largest percentage increase during 1997 was interest-bearing
demand deposits, which increased by 20.0%. This increase can be partially
attributed to the Company restructuring several of its accounts within this
category to offer more competitive rates. This resulted in a 24 basis point
increase in the average rate paid on interest-bearing demand deposits for the
year. For 1997, average savings accounts increased by 2.7%, average time
deposits increased by 8.8%, and average noninterest-bearing deposits grew by
4.5%, over the averages from 1996. In 1996, average interest-bearing demand
deposits increased by 4.5%, average savings accounts increased by 7.4%, average
time deposits increased by 14.1%, and average noninterest-bearing deposits grew
by 12.6%, over the averages from 1995.
The Company has a large, stable base of time deposits with little
dependence on volatile deposits of $100,000 or more. The time deposits are
principally certificates of deposit and individual retirement accounts obtained
from individual customers. Deposits of certain local governments and municipal
entities represented 1.5% of the Bank's total deposits at December 31, 1997. All
such public funds are collateralized by investment securities. The Company does
not purchase brokered deposits.
As of December 31, 1997, the Company held approximately $40,200,000 in time
deposits of $100,000 or more and other time deposits of $134,298,000. Table 16
is a maturity schedule of time deposits of $100,000 or more as of December 31,
1997.
Interest Rate Risk (Including Quantitative and Qualitative Disclosures About
Market Risk - Item 7A.)
Net interest income is the Company's most significant component of
earnings. Notwithstanding changes in volumes of loans and deposits, the
Company's level of net interest income is continually at risk due to the effect
that changes in general market interest rate trends have on interest yields
earned and paid with respect to the various categories of earnings assets and
interest-bearing liabilities. It is the Company's policy to maintain portfolios
of earning assets and interest-bearing liabilities with maturities and repricing
opportunities that will afford protection, to the extent practical, against wide
interest rate fluctuations. The Company's exposure to interest rate risk is
analyzed on a regular basis by management using standard GAP reports, maturity
reports, and an asset/liability software model that simulates future levels of
interest income and expense based on current interest rates, expected future
interest rates, and various intervals of "shock" interest rates. Over the years,
the Company has been able to maintain a fairly consistent yield on average
earning assets (net interest margin). Over the past ten years the net interest
margin has not varied by more than 25 basis points in any single year and the
lowest net interest margin realized over that same period is within 60 basis
points of the highest. While the Company can not guarantee similar stability in
the net interest margin in the future, at this time, management does not expect
significant fluctuations. See additional discussion of the Company's net
interest margin in the "Net Interest Income" above.
Table 17 sets forth the Company's interest rate sensitivity analysis as of
December 31, 1997. As illustrated by this table, the Company has $69.5 million
more in interest-bearing liabilities that are subject to interest rate changes
within one year than earning assets. This generally would indicate that net
interest income would experience downward pressure in a rising interest rate
environment and would benefit from a declining interest rate environment.
However, this method of analyzing interest sensitivity only measures the
magnitude of the timing differences and does not address earnings, market value,
or management actions. Also, interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates. In
addition to the effects of "when" various rate-sensitive products reprice,
market rate changes may not result in uniform changes in rates among all
products. For example, included in interest-bearing liabilities at December 31,
1997 subject to interest rate changes within one year are deposits totaling
$135.8 million comprised of NOW, savings, and certain types of money market
deposits with interest rates set by management. These types of deposits
historically have not repriced coincidentally with or in the same proportion as
general market indicators. Thus, the Company believes that near term net
interest income would not likely experience significant downward pressure from
rising interest rates. Similarly, management would not expect a significant
increase in near term net interest income from falling interest rates. As of
December 31, 1997, approximately 90% of interest-earning assets could be
repriced within five years and substantially all interest-bearing liabilities
could be repriced within five years.
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions. Table 18 presents
the expected maturities of the Company's other than trading market risk
sensitive financial instruments. Table 18 also presents the fair values of
market risk sensitive instruments as estimated in accordance with Statement of
Financial Accounting Standard No. 107, "Disclosures About Fair Value of
Financial Instruments." The Company's fixed rate earning assets have estimated
fair values that are slightly higher than their carrying value. This is due to
the yields on these portfolios being slightly higher than market yields at
December 31, 1997 for instruments with maturities similar to the remaining term
of the portfolios due to a generally declining interest rate environment at year
end. The estimated fair value of the Company's time deposits is higher than its
book value for the same reason.
Off-Balance Sheet Risk
In the normal course of business there are various outstanding commitments
and contingent liabilities such as commitments to extend credit, which are not
reflected in the financial statements. These commitments are not recorded as an
asset or liability until exercised. As of December 31, 1997, the Company had
outstanding loan commitments of $63,219,000 of which $54,845,000 were at
variable rates and $8,374,000 were at fixed rates. Included in outstanding loan
commitments were unfunded commitments of $22,730,000 on revolving credit plans,
of which $18,592,000 were at variable rates and $4,138,000 were at fixed rates.
Additionally, standby letters of credit of approximately $1,108,000 and $646,000
were outstanding at December 31, 1997 and 1996, respectively. The Company's
exposure to credit loss for the aforementioned commitments in the event of
nonperformance by the party to whom credit or financial guarantees have been
extended is represented by the contractual amount of the financial instruments
discussed above. However, management believes that these commitments represent
no more than the normal lending risk that the Company commits to its borrowers.
If these commitments are drawn, the Company plans to obtain collateral if it is
deemed necessary based on management's credit evaluation of the counter party.
The type of collateral held varies but may include accounts receivable,
inventory and commercial or residential real estate. Management expects these
commitments, if drawn, to be funded through normal operations.
Derivative financial instruments include futures, forwards, interest rate
swaps, options contracts, and other financial instruments with similar
characteristics. The Company does not engage in derivatives activities.
Return On Assets And Equity
Table 19 shows return on assets (net income divided by average total
assets), return on equity (net income divided by average shareholders' equity),
dividend payout ratio (dividends declared per share divided by net income per
share) and shareholders' equity to assets ratio (average shareholders' equity
divided by average total assets) for each of the years in the three-year period
ended December 31, 1997. The return on assets and return on equity ratios for
1995 were significantly impacted by the nonrecurring charges previously
discussed.
Liquidity
The Company's primary source of liquidity is dividends from the Bank. See
"Business - Supervision and Regulation" and note 15 to the consolidated
financial statements for a discussion of regulatory restrictions on the payment
of dividends. The Bank's liquidity is determined by its ability to convert
assets to cash or acquire alternative sources of funds to meet the needs of its
customers who are withdrawing or borrowing funds, and to maintain reserve
requirements, pay expenses and operate the Bank on an ongoing basis. The Bank's
primary liquidity sources are cash and due from banks, federal funds sold, as
well as the securities available for sale portfolio. The Company also has in
place available lines of credit totaling $36,000,000 should funding or liquidity
needs arise. These lines of credit are secured by the Company's Federal Home
Loan Bank stock and a blanket lien on its one-to-four family residential loan
portfolio. The Company also has correspondent bank relationships established
that allow the Company to purchase up to $10,000,000 in federal funds on an
overnight basis. The Bank typically has not had to rely on the purchase of
federal funds as a source of liquidity. The Bank's management believes its
liquidity sources are adequate to meet its operating needs.
Capital Resources
The Company is regulated by the Board of Governors of the Federal Reserve
Board ("FRB") and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Bank is regulated by
the Federal Deposit Insurance Corporation ("FDIC") and the North Carolina State
Banking Commission. The Company is not aware of any recommendations of
regulatory authorities or otherwise which, if they were to be implemented, would
have a material effect on its liquidity, capital resources, or operations.
The Company and the Bank must comply with regulatory capital requirements
established by the FRB and FDIC. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on both
the Company's and the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. These capital standards require the Company to
maintain minimum ratios of Tier 1 capital to total risk-weighted assets and
total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1
capital is comprised of total shareholders' equity calculated in accordance with
generally accepted accounting principles less intangible assets, and total
capital is comprised of Tier 1 capital plus certain adjustments, the largest of
which for the Company is the allowance for loan losses. Risk-weighted assets
refer to the on- and off-balance sheet exposures of the Company adjusted for
their related risk levels using formulas set forth in FRB and FDIC regulations.
In addition to the risk-based capital requirements described above, the
Company is subject to a leverage capital requirement, which calls for a minimum
ratio of Tier 1 capital (as defined above) to quarterly average total assets of
3.00% to 5.00%, depending upon the institution's composite ratings as determined
by its regulators. The FRB has not advised the Company of any requirement
specifically applicable to it.
At December 31, 1997 and 1996, the Company was in compliance with all
existing capital requirements, as summarized in Table 20. See "Supervision and
Regulation" under "Business" above and note 15 to the consolidated financial
statements for discussion of other matters that may affect the Company's capital
resources.
Year 2000 Issue
As has been widely reported in the media, many of the world's existing
computer programs use only two digits to identify the year in the date field of
a program. These programs were designed and developed without considering the
impact of the upcoming change in the century and could experience serious
malfunctions when the last two digits of the year change to "00" (Year 2000
Issue). Due to the highly automated and computerized nature of the Company's
transaction processing and operations as a whole, the Company is taking the Year
2000 Issue very seriously. The Company's Technology Committee, which is
comprised of a cross-section of the Company's employees, is leading the
Company's Year 2000 efforts and involving all employees of the Company in
ensuring that the Company is properly prepared for the Year 2000. The Company
uses third-party software vendors for most of its computer programs and
micro-chip related processes. The first phase of the Company's efforts to
address the Year 2000 Issue was to inventory all known Company processes that
could reasonably be expected to be impacted by the Year 2000 Issue and their
related vendors, if applicable. This inventory of processes and vendors included
not only typical computer processes such as the Company's transaction
applications systems, but all known processes that could be impacted by
micro-chip malfunctions. These include but are not limited to the Company's
alarm system, phone system, check ordering process, and ATM network. The
Company's second phase in addressing the Year 2000 Issue was to contact all such
vendors and request documentation regarding their Year 2000 compliance efforts.
This phase is now virtually complete and the Company is currently analyzing the
responses. The next phase for the Company is to implement a comprehensive
testing of all known processes. Initially, processes will be tested on a
stand-alone basis and then the testing will involve multiple interfacing
processes. All testing is scheduled to be completed by the end of 1998.
Management plans for any corrective actions to be implemented to ensure that the
Company is fully prepared for the Year 2000 by the end of the first quarter of
1999.
To date the Company has not identified any processes that will require
significant expenditures to address the Year 2000 Issue. Currently, the
Company's estimate of the range of total costs to address the Year 2000 Issue is
$100,000 to $150,000. The majority of these costs are expected to be incurred
and expensed by the Company in 1998.
Inflation
Since the assets and liabilities of a bank are primarily monetary in nature
(payable in fixed determinable amounts), the performance of a bank is affected
more by changes in interest rates than by inflation. Interest rates generally
increase as the rate of inflation increases, but the magnitude of the change in
rates may not be the same. The effect of inflation on banks is normally not as
significant as its influence on those businesses that have large investments in
plant and inventories. During periods of high inflation, there are normally
corresponding increases in the money supply, and banks will normally experience
above average growth in assets, loans and deposits. Also, general increases in
the price of goods and services will result in increased operating expenses.
Accounting Changes
The Company prepares its financial statements and related disclosures in
conformity with standards established by, among others, the Financial Accounting
Standards Board (the "FASB"). Because the information needed by users of
financial reports is dynamic, the FASB frequently issues new rules and proposed
new rules for companies to apply in reporting their activities. The only new
standard adopted during 1997 that significantly changed the way the Company has
prepared its financial statements was the adoption of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," which is discussed in the
following paragraph.
The Company adopted Statement of Financial Standard Number 128, "Earnings
Per Share" ("SFAS No. 128") as of December 31, 1997. SFAS No. 128 superseded
Accounting Principles Board Opinion No. 15, "Earnings Per Share" ("APB No. 15")
which the Company had properly followed until the adoption of SFAS No. 128. For
companies that have potentially issuable stock (complex capital structures),
such as the Company because of its stock option plan, SFAS No. 128 requires that
two earnings per share amounts be disclosed - 1) Basic Earnings Per Share and 2)
Diluted Earnings Per Share. Basic Earnings Per Share is calculated by dividing
net income available to common stockholders by the weighted average number of
common stock shares outstanding during the period. The Basic Earnings Per Share
computation for the Company is the same method the Company previously used to
calculate and report earnings per share under APB No. 15. Diluted Earnings Per
Share is computed by assuming the issuance of common shares for all dilutive
potential common shares outstanding during the reporting period. Currently, the
Company's only dilutive potential common stock issuances relate to options
issued under the Company's stock option plan - see note 14 to the consolidated
financial statements for additional information regarding the stock option plan.
In computing Diluted Earnings Per Share, it is assumed that all such dilutive
stock options are exercised during the reporting period at their respective
exercise prices, with the proceeds from the exercises used by the Company to buy
back stock in the open market at the average market price in effect during the
reporting period. The difference between the number of options assumed to be
exercised and the number of shares bought back is added to the number of
weighted average common shares outstanding during the period. The sum is used as
the denominator to calculate Diluted Earnings Per Share for the Company.
The FASB has also issued three new standards that must be adopted by the
Company for reporting periods beginning with the first quarter of 1998. Those
standards are discussed in the following three paragraphs.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
which establishes standards for reporting and display of comprehensive income
and its components in a full set of financial statements. Comprehensive income
is defined as the change in equity during a period for non-owner transactions
and is divided into net income and other comprehensive income. Other
comprehensive income includes revenues, expenses, gains, and losses that are
excluded from earnings under current accounting standards. This statement does
not change or modify the reporting or display in the income statement. SFAS No.
130 is effective for interim and annual periods beginning after December 31,
1997 although early adoption is permitted. Comparative financial statements
provided for earlier periods are required to be reclassified to reflect the
application of this statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The statement requires management to
report selected financial and descriptive information about reportable operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. Generally, disclosures are
required for segments internally identified to evaluate performance and resource
allocation. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for prior periods is to be restated, if it is practical
to do so. SFAS No. 131 does not have to be applied to interim financial
statements in the initial year of application, but, comparative information must
be provided for interim periods in the second year of application. This
statement is not expected to affect the Company's financial statement
presentation.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits." This statement standardizes the
disclosure requirements of pensions and other postretirement benefits. This
statement does not change any measurement or recognition provisions, and thus
will not materially impact the Company. This statement is effective for fiscal
years beginning after December 15, 1997.
FORWARD-LOOKING STATEMENTS
The foregoing discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgment of the Company and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the financial success or changing strategies of the Company's
customers, actions of government regulators, the level of market interest rates,
and general economic conditions.
Table 1 Selected Consolidated Financial Data
Year Ended December 31, Five-Year
($ in thousands except per share ------------------------------------------------------------ Compound
and nonfinancial data) 1997 1996 1995 1994 1993 Growth
---------- ------- ------- ------- ------- -----
Income Statement Data
Interest income $ 29,197 25,468 23,106 18,873 17,530 9.6%
Interest expense 11,123 9,916 8,953 6,257 6,056 8.1%
Net interest income 18,074 15,552 14,153 12,616 11,474 10.6%
Provision for loan losses 575 325 900 387 590 2.6%
Net interest income after provision 17,499 15,227 13,253 12,229 10,884 10.9%
Noninterest income 4,150 4,446 3,777 3,293 2,796 8.4%
Noninterest expense 14,088 13,113 14,868 11,380 9,958 7.7%
Income before income taxes 7,561 6,560 2,162 4,142 3,722 16.8%
Income taxes 2,549 2,213 580 1,155 1,021 20.1%
Net income 5,012 4,347 1,582 2,987 2,701 15.4%
- ------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Earnings - basic $ 1.66 1.44 0.53 0.99 0.90 15.1%
Earnings - diluted 1.62 1.43 0.52 0.99 0.90 14.6%
Cash dividends declared 0.52 0.44 0.35 0.33 0.29 19.9%
Dividend payout per basic share 31.33% 30.56% 66.04% 33.33% 32.22% 4.1%
Market Price
High $ 35.00 19.50 14.75 11.50 10.50 32.0%
Low 18.50 11.50 10.25 9.00 7.38 27.5%
Close 35.00 18.50 12.75 10.50 10.50 35.6%
Stated book value 12.17 11.02 10.04 9.57 9.12 7.4%
Tangible book value 10.02 9.08 7.95 7.48 8.67 3.9%
- ------------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data (at year end)
Securities $ 71,133 76,265 69,397 67,092 65,746 0.8%
Loans, net of unearned income 280,513 223,032 211,522 185,749 157,279 14.2%
Allowance for loan losses 4,779 4,726 4,587 5,009 2,797 13.6%
Intangible assets 6,487 5,834 6,306 6,279 1,374 57.0%
Total assets 402,669 335,450 321,739 289,613 257,339 10.7%
Deposits 361,224 297,861 287,715 258,430 227,043 10.9%
Total shareholders' equity 36,765 33,232 30,277 28,790 27,443 7.5%
- ------------------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Assets $ 359,879 326,221 296,400 267,227 247,717 8.8%
Loans 245,596 217,900 192,035 168,167 149,247 10.9%
Earning assets 333,029 298,308 269,313 244,708 226,563 8.9%
Deposits 320,659 290,510 262,846 236,725 218,795 8.9%
Interest-bearing liabilities 276,148 247,883 225,006 204,141 193,988 7.9%
Shareholders' equity 35,024 31,896 30,461 28,197 26,751 7.2%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios
Return on average equity 14.31% 13.63% 5.19% 10.59% 10.10%
Return on average assets 1.39% 1.33% 0.53% 1.12% 1.09%
Net interest margin (taxable-equivalent basis) 5.65% 5.45% 5.50% 5.41% 5.32%
Average shareholders' equity to average assets 9.73% 9.78% 10.28% 10.55% 10.80%
Average loans to average deposits 76.59% 75.01% 73.06% 71.04% 68.21%
Net charge-offs to average loans 0.21% 0.09% 0.79% 0.39% 0.21%
- ------------------------------------------------------------------------------------------------------------------------------
Table 1 Selected Consolidated Financial Data (continued)
Year Ended December 31, Five-Year
($ in thousands except per share ------------------------------------------------------------ Compound
and nonfinancial data) 1997 1996 1995 1994 1993 Growth
---------- ------- ------- ------- ------- -----
Nonfinancial Data
Number of shareholders of record 668 669 675 692 702
Number of employees (full/part time) 228/37 213/29 201/25 198/26 171/34
Number of banking offices 33 31 32 28 26
- ------------------------------------------------------------------------------------------------------------------------------
(1) 1997 results include a fourth quarter nonrecurring gain of $168,000 before
tax, or $103,000 after tax ($0.03 per share), related to a customer's early
termination fee of a data processing contract. 1996 results include a
nonrecurring net gain of $211,000 before tax, or $128,000 after tax ($0.04
per share), from the third quarter 1996 sale of a branch office and a
vacated building. 1995 results include a nonrecurring net loss of
$2,691,000 before tax, or $1,638,000 after tax (or $0.54 per share) from
the fourth quarter settlement of litigation and unrelated severance
expenses for two senior managers. 1995 results also include $789,000 pretax
in noninterest expenses related to the litigation settlement.
(2) Per share amounts for 1995 and before have been restated to reflect the
two-for-one stock split distributed in September 1996.
(3) Earnings per share amounts for all years have been computed under the
provisions of accounting standard number 128, "Earnings Per Share" which
was adopted on December 31, 1997. All previously reported earnings per
share have been computed and restated under the provisions of the standard.
Diluted earnings per share include the potentially dilutive effects of the
Company's 1994 Stock Option Plan.
Table 2 Average Balances and Net Interest Income Analysis
Year Ended December 31,
1997 1996 1995
------------------------------ ----------------------------- -----------------------------
Interest Interest Interest
($ in thousands) Average Average Earned Average Average Earned Average Average Earned
Volume Rate or Paid Volume Rate or Paid Volume Rate or Paid
------ ---- ------- ------ ---- ------- ------ ---- -------
Assets
Loans (1) $245,596 9.67% $ 23,754 $217,900 9.47% $ 20,644 $192,035 9.75% $ 18,720
Taxable securities 53,710 6.72% 3,610 49,617 6.27% 3,110 48,871 5.65% 2,762
Non-taxable securities (2) 21,994 8.74% 1,923 20,074 9.09% 1,825 19,436 8.95% 1,739
Short-term investments,
principally federal funds 11,729 5.49% 644 10,717 5.53% 593 8,971 6.03% 541
-------- --------- -------- --------- -------- ---------
Total interest-
earning assets 333,029 8.99% 29,931 298,308 8.77% 26,172 269,313 8.82% 23,762
--------- --------- ---------
Cash and due from banks 12,748 12,906 11,575
Bank premises and
equipment, net 8,096 7,920 7,799
Other assets 6,006 7,087 7,713
-------- -------- --------
Total assets $359,879 $326,221 $296,400
======== ======== ========
Liabilities and Equity
Savings, NOW and money
market deposits 122,063 2.31% 2,820 106,273 2.15% 2,284 100,893 2.23% 2,247
Time deposits
(greater than) $100,000 34,872 5.75% 2,004 31,524 5.74% 1,811 27,570 6.03% 1,662
Other time deposits 119,158 5.28% 6,296 110,079 5.29% 5,820 96,536 5.22% 5,044
-------- --------- -------- --------- -------- ---------
Total interest-bearing
deposits 276,093 4.03% 11,120 247,876 4.00% 9,915 224,999 3.98% 8,953
Short-term borrowings 55 5.45% 3 7 5.72% 1 7 - -
-------- --------- -------- --------- -------- ---------
Total interest-
bearing liabilities 276,148 4.03% 11,123 247,883 4.00% 9,916 225,006 3.98% 8,953
--------- --------- ----------
Non-interest-
bearing deposits 44,566 42,634 37,847
Other liabilities 4,141 3,808 3,086
Shareholders' equity 35,024 31,896 30,461
-------- -------- --------
Total liabilities and
shareholders' equity $359,879 $326,221 $296,400
======== ======== ========
Net yield on interest-
earning assets and
net interest income 5.65% $ 18,808 5.45% $ 16,256 5.50% $ 14,809
========= ========= =========
Interest rate spread 4.96% 4.77% 4.84%
(1) Net of unearned income of $0, $5,000, and $10,000 in 1997, 1996, and 1995
respectively. Average loans includes nonaccruing loans, the effect of which
is to lower the average rate shown. Interest earned includes recognized loan
fees in the amounts of $583,000, $512,000, and $464,000 for 1997, 1996, and
1995, respectively.
(2) Includes tax-equivalent adjustments of $734,000, $704,000, and $656,000 in
1997, 1996, and 1995 respectively, to reflect the federal and state benefit
of the tax-exempt securities, reduced by the related nondeductible portion
of interest expense.
Table 3 Volume and Rate Variance Analysis
Year Ended December 31, 1997 Year Ended December 31, 1996
---------------------------- ----------------------------
Change Attributable to Change Attributable to
---------------------- ----------------------
Total Total
(In thousands) Changes Changes Increase Changes Changes Increase
in Volumes in Rates (Decrease) in Volumes in Rates (Decrease)
------ ------ ------ ------ ------ ------
Interest income (tax-equivalent):
Loans $2,651 $ 459 $3,110 $2,486 $ (562) $1,924
Taxable securities 266 234 500 44 304 348
Non-taxable securities 171 (73) 98 58 28 86
Short-term investments, principally
federal funds sold 56 (5) 51 101 (49) 52
------ ------ ------ ------ ------ ------
Total interest income 3,144 615 3,759 2,689 (279) 2,410
------ ------ ------ ------ ------ ------
Interest expense:
Savings, NOW and money
market deposits 352 184 536 118 (81) 37
Time deposits greater than$100,000 192 1 193 233 (84) 149
Other time deposits 480 (4) 476 712 64 776
------ ------ ------ ------ ------ ------
Total interest-bearing deposits 1,024 181 1,205 1,063 (101) 962
Short-term borrowings 5 (3) 2 -- 1 1
------ ------ ------ ------ ------ ------
Total interest expense 1,029 178 1,207 1,063 (100) 963
------ ------ ------ ------ ------ ------
Net interest income $2,115 $ 437 $2,552 $1,626 $ (179) $1,447
====== ====== ====== ====== ====== ======
(1) Changes attributable to both volume and rate are allocated equally between
rate and volume variances.
Table 4 Noninterest Income
Year Ended December 31,
------------------------------------
(In thousands) 1997 1996 1995
------- ------- -------
Service charges on deposit accounts $ 2,413 $ 2,561 $ 2,164
Commissions from insurance sales 278 313 381
Other service charges, commissions, and fees 1,029 1,107 1,109
Data processing fees 274 248 123
Securities gains (losses), net (12) 6 --
Other nonrecurring net gains 168 211 --
------- ------- -------
Total $ 4,150 $ 4,446 $ 3,777
======= ======= =======
Table 5 Noninterest Expenses
Year Ended December 31,
-----------------------------------
(In thousands) 1997 1996 1995
------- ------- -------
Salaries $ 6,225 $ 5,447 $ 5,866
Employee benefits 1,315 1,268 1,222
------- ------- -------
Total personnel expense 7,540 6,715 7,088
Net occupancy expense 954 904 858
Equipment related expenses 858 833 798
Litigation settlement -- -- 1,446
Amortization of intangible assets 546 568 501
FDIC Insurance 39 2 269
Legal and audit 181 207 955
Stationery and supplies 756 605 579
Telephone 424 334 293
Other operating expenses 2,790 2,945 2,081
------- ------- -------
Total $14,088 $13,113 $14,868
======= ======= =======
Table 6 Income Taxes
(In thousands) 1997 1996 1995
------- ------- -------
Current - Federal $ 2,321 $ 1,685 $ 767
- State 290 268 --
Deferred - Federal (62) 260 (187)
------- ------- -------
Total $ 2,549 $ 2,213 $ 580
======= ======= =======
Effective tax rate 33.71% 33.73% 26.83%
======= ======= =======
Table 7 Distribution of Assets and Liabilities
1997 1996 1995
---- ---- ----
Assets
Interest-earning assets
Net loans 69% 65% 64%
Securities available for sale 13 16 15
Securities held for maturity 5 7 6
Short term investments 4 2 4
--- --- ---
Total interest-earning assets 91 90 89
Non-interest-earning assets
Cash and due from banks 4 5 4
Premises and equipment 2 2 2
Other assets 3 3 5
--- --- ---
Total assets 100% 100% 100%
=== === ===
Liabilities and shareholders' equity
Demand deposits-noninterest bearing 13% 13% 13%
Savings, NOW, and money market deposits 34 32 33
Time deposits of $100,000 or more 10 10 10
Other time deposits 33 33 33
--- --- ---
Total deposits 90 88 89
Accrued expenses and other liabilities 1 2 2
--- --- ---
Total liabilities 91 90 91
Shareholders' equity 9 10 9
--- --- ---
Total liabilities and shareholders' equity 100% 100% 100%
=== === ===
Table 8 Securities Portfolio Composition
As of December 31,
-----------------------------------
(In thousands) 1997 1996 1995
------- ------- -------
Securities available for sale:
U.S. Treasury $ 534 $ 5,537 $ 9,590
U.S. Government agencies 38,569 42,239 39,054
Collateralized mortgage obligations 9,243 5,530 389
State and local governments 906 613 601
Equity securities 1,025 23 23
------- ------- -------
Total securities available for sale 50,277 53,942 49,657
------- ------- -------
Securities held to maturity:
State and local governments 20,460 21,869 19,357
Other 396 454 383
------- ------- -------
Total securities held to maturity 20,856 22,323 19,740
------- ------- -------
Total securities $71,133 $76,265 $69,397
======= ======= =======
Average total securities during year $75,704 $69,691 $68,307
======= ======= =======
Table 9 Securities Portfolio Maturity Schedule
As of December 31, 1997
------------------------------------
Book Fair Book
($ in thousands) Value Value Yield (1)
----- ----- ---------
Securities available for sale:
U.S. Treasury
Due after one but within five years $ 503 $ 534 7.30%
------- ------- ----
Total 503 534 7.30%
------- ------- ----
U.S. Government agencies
Due within one year 9,328 9,359 6.99%
Due after one but within five years 22,556 22,659 6.61%
Due after five but within ten years 6,496 6,551 6.68%
------- ------- ----
Total 38,380 38,569 6.71%
------- ------- ----