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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
-----------------------
Commission File Number 0-15572
FIRST BANCORP
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
------------------------------------------- ---------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
341 North Main Street, Troy, North Carolina 27371-0508
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(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (910) 576-6171
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer.
[ ] Large Accelerated Filer [X] Accelerated Filer [ ] Non-Accelerated Filer
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] YES [X] NO
The number of shares of the registrant's Common Stock outstanding on April 30,
2006 was 14,306,284.
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INDEX
FIRST BANCORP AND SUBSIDIARIES
Page
Part I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets -
March 31, 2006 and 2005
(With Comparative Amounts at December 31, 2005) 3
Consolidated Statements of Income -
For the Periods Ended March 31, 2006 and 2005 4
Consolidated Statements of Comprehensive Income -
For the Periods Ended March 31, 2006 and 2005 5
Consolidated Statements of Shareholders' Equity -
For the Periods Ended March 31, 2006 and 2005 6
Consolidated Statements of Cash Flows -
For the Periods Ended March 31, 2006 and 2005 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition 16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 28
Item 4 - Controls and Procedures 29
Part II. Other Information
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 6 - Exhibits 30
Signatures 33
Page 2
Part I. Financial Information
Item 1 - Financial Statements
First Bancorp and Subsidiaries
Consolidated Balance Sheets
March 31, December 31, March 31,
($ in thousands-unaudited) 2006 2005 (audited) 2005
------------------------------------------------------------------------------------------------
ASSETS
Cash & due from banks, noninterest-bearing $ 32,687 32,985 32,409
Due from banks, interest-bearing 82,331 41,655 25,938
Federal funds sold 25,294 28,883 23,252
----------- ----------- -----------
Total cash and cash equivalents 140,312 103,523 81,599
----------- ----------- -----------
Securities available for sale (costs of $113,840,
$114,662, and $114,703) 112,695 113,613 114,575
Securities held to maturity (fair values of $15,427,
$14,321, and $13,670) 15,331 14,172 13,376
Presold mortgages in process of settlement 2,086 3,347 2,400
Loans 1,553,371 1,482,611 1,395,324
Less: Allowance for loan losses (16,610) (15,716) (15,066)
----------- ----------- -----------
Net loans 1,536,761 1,466,895 1,380,258
----------- ----------- -----------
Premises and equipment 35,339 34,840 30,133
Accrued interest receivable 8,993 8,947 7,096
Intangible assets 49,131 49,227 49,445
Other 7,239 6,486 8,278
----------- ----------- -----------
Total assets $ 1,907,887 1,801,050 1,687,160
=========== =========== ===========
LIABILITIES
Deposits: Demand - noninterest-bearing $ 213,661 194,051 175,698
Savings, NOW, and money market 473,655 458,221 477,838
Time deposits of $100,000 or more 372,232 356,281 361,567
Other time deposits 505,492 486,024 433,589
----------- ----------- -----------
Total deposits 1,565,040 1,494,577 1,448,692
Securities sold under agreements to repurchase 32,939 33,530 --
Borrowings 131,739 100,239 76,239
Accrued interest payable 4,312 3,835 3,030
Other liabilities 14,886 13,141 8,420
----------- ----------- -----------
Total liabilities 1,748,916 1,645,322 1,536,381
----------- ----------- -----------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Issued and outstanding: 14,291,060,
14,229,148, and 14,138,379 shares 54,994 54,121 52,459
Retained earnings 104,926 102,507 98,660
Accumulated other comprehensive income (loss) (949) (900) (340)
----------- ----------- -----------
Total shareholders' equity 158,971 155,728 150,779
----------- ----------- -----------
Total liabilities and shareholders' equity $ 1,907,887 1,801,050 1,687,160
=========== =========== ===========
See notes to consolidated financial statements.
Page 3
First Bancorp and Subsidiaries
Consolidated Statements of Income
Three Months Ended
March 31,
----------------------------
($ in thousands, except share data-unaudited) 2006 2005
-----------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 26,762 21,359
Interest on investment securities:
Taxable interest income 1,329 1,155
Tax-exempt interest income 127 129
Other, principally overnight investments 497 272
------------ ------------
Total interest income 28,715 22,915
------------ ------------
INTEREST EXPENSE
Savings, NOW and money market 1,333 881
Time deposits of $100,000 or more 3,677 2,345
Other time deposits 4,432 2,474
Securities sold under agreements to repurchase 262 --
Borrowings 1,158 930
------------ ------------
Total interest expense 10,862 6,630
------------ ------------
Net interest income 17,853 16,285
Provision for loan losses 1,015 580
------------ ------------
Net interest income after provision
for loan losses 16,838 15,705
------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts 2,074 2,008
Other service charges, commissions and fees 1,205 1,054
Fees from presold mortgages 267 238
Commissions from sales of insurance and financial products 439 295
Data processing fees 36 147
Securities gains -- --
Other gains (losses) (67) (32)
------------ ------------
Total noninterest income 3,954 3,710
------------ ------------
NONINTEREST EXPENSES
Salaries 5,785 5,372
Employee benefits 1,781 1,514
------------ ------------
Total personnel expense 7,566 6,886
Net occupancy expense 816 739
Equipment related expenses 811 695
Intangibles amortization 61 73
Other operating expenses 3,475 3,322
------------ ------------
Total noninterest expenses 12,729 11,715
------------ ------------
Income before income taxes 8,063 7,700
Income taxes 3,072 2,984
------------ ------------
NET INCOME $ 4,991 4,716
============ ============
Earnings per share:
Basic 0.35 0.33
Diluted 0.35 0.33
Weighted average common shares outstanding:
Basic 14,254,785 14,105,577
Diluted 14,421,639 14,363,606
See notes to consolidated financial statements.
Page 4
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Three Months Ended
March 31,
-------------------
($ in thousands-unaudited) 2006 2005
--------------------------------------------------------------------------------
Net income $ 4,991 4,716
------- -------
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period, pretax (96) (1,314)
Tax benefit 37 512
Adjustment to minimum pension liability:
Additional pension charge related to unfunded
pension liability 16 (90)
Tax benefit (expense) (6) 35
------- -------
Other comprehensive income (loss) (49) (857)
------- -------
$ 4,942 3,859
======= =======
See notes to consolidated financial statements.
Page 5
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Accumulated
Common Stock Other Share-
--------------------------- Retained Comprehensive holders'
(In thousands, except per share - unaudited) Shares Amount Earnings Income (Loss) Equity
---------------------------------------------------------------------------------------------------------------------
Balances, January 1, 2005 14,084 $ 51,614 96,347 517 148,478
Net income 4,716 4,716
Cash dividends declared ($0.17 per share) (2,403) (2,403)
Common stock issued under
stock option plan 38 452 452
Common stock issued into
dividend reinvestment plan 16 393 393
Other comprehensive loss (857) (857)
------------ ------------ ------------ ------------ ------------
Balances, March 31, 2005 14,138 $ 52,459 98,660 (340) 150,779
============ ============ ============ ============ ============
Balances, January 1, 2006 14,229 $ 54,121 102,507 (900) 155,728
Net income 4,991 4,991
Cash dividends declared ($0.18 per share) (2,572) (2,572)
Common stock issued under
stock option plan 44 429 429
Common stock issued into
dividend reinvestment plan 18 397 397
Stock-based compensation -- 47 47
Other comprehensive loss (49) (49)
------------ ------------ ------------ ------------ ------------
Balances, March 31, 2006 14,291 $ 54,994 104,926 (949) 158,971
============ ============ ============ ============ ============
See notes to consolidated financial statements.
Page 6
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
----------------------
($ in thousands-unaudited) 2006 2005
---------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 4,991 4,716
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses 1,015 580
Net security premium amortization 21 6
Other losses 67 32
Decrease (increase) in net deferred loan fees and costs 107 (131)
Depreciation of premises and equipment 688 668
Stock-based compensation expense 47 --
Amortization of intangible assets 61 73
Deferred income tax benefit (416) (196)
Origination of presold mortgages in process of settlement (15,623) (13,872)
Proceeds from sales of presold mortgages in process of settlement 16,884 13,243
Increase in accrued interest receivable (46) (264)
Increase in other assets (62) (146)
Increase in accrued interest payable 477 353
Increase in other liabilities 1,778 1,382
--------- ---------
Net cash provided by operating activities 9,989 6,444
--------- ---------
Cash Flows From Investing Activities
Purchases of securities available for sale (6,495) (37,624)
Purchases of securities held to maturity (1,968) --
Proceeds from maturities/issuer calls of securities available for sale 7,300 10,283
Proceeds from maturities/issuer calls of securities held to maturity 751 632
Net increase in loans (71,238) (29,429)
Purchases of premises and equipment (1,187) (483)
--------- ---------
Net cash used by investing activities (72,837) (56,621)
--------- ---------
Cash Flows From Financing Activities
Net increase in deposits and repurchase agreements 69,872 59,924
Proceeds from (repayments of) borrowings, net 31,500 (16,000)
Cash dividends paid (2,561) (2,394)
Proceeds from issuance of common stock 826 845
--------- ---------
Net cash provided by financing activities 99,637 42,375
--------- ---------
Increase (decrease) in cash and cash equivalents 36,789 (7,802)
Cash and cash equivalents, beginning of period 103,523 89,401
--------- ---------
Cash and cash equivalents, end of period $ 140,312 81,599
========= =========
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for:
Interest $ 10,385 6,277
Income taxes 1,243 1
Non-cash transactions:
Unrealized gain (loss) on securities available for sale, net of taxes (59) (802)
Foreclosed loans transferred to other real estate 250 1,058
See notes to consolidated financial statements.
Page 7
First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) For the Periods Ended March 31, 2006 and 2005
--------------------------------------------------------------------------------
Note 1 - Basis of Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
consolidated financial position of the Company as of March 31, 2006 and 2005 and
the consolidated results of operations and consolidated cash flows for the
periods ended March 31, 2006 and 2005. Reference is made to the 2005 Annual
Report on Form 10-K filed with the SEC for a discussion of accounting policies
and other relevant information with respect to the financial statements. The
results of operations for the periods ended March 31, 2006 and 2005 are not
necessarily indicative of the results to be expected for the full year.
Note 2 - Accounting Policies
Note 1 to the 2005 Annual Report on Form 10-K filed with the SEC contains a
description of the accounting policies followed by the Company and discussion of
recent accounting pronouncements. The following paragraph updates that
information as necessary.
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004) (Statement 123(R)), "Share-Based Payment."
Statement 123(R) replaces FASB Statement No. 123 (Statement 123), "Accounting
for Stock-Based Compensation," and supersedes Accounting Principles Board
Opinion No. 25 (Opinion 25), "Accounting for Stock Issued to Employees."
Statement 123(R) requires that the compensation cost relating to share-based
payment transactions be recognized in the financial statements. Statement 123(R)
permits public companies to adopt its requirements using one of two methods. The
"modified prospective" method recognizes compensation for all stock options
granted after the date of adoption and for all previously granted stock options
that become vested after the date of adoption. The "modified retrospective"
method includes the requirements of the "modified prospective" method described
above, but also permits entities to restate prior period results based on the
amounts previously presented under Statement 123 for purposes of pro-forma
disclosures. The Company has elected to adopt Statement 123(R) under the
"modified prospective" method and accordingly will not restate prior period
results. See Note 4 for a more detailed description the Company's adoption of
Statement 123(R).
In May 2005, the FASB issued Statement of Financial Accounting Standards
No. 154 (Statement 154), "Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement No. 3." Statement 154
applies to all voluntary changes in accounting principle as well as to changes
required by an accounting pronouncement that does not include specific
transition provisions. Statement 154 eliminates the previous requirement that
the cumulative effect of changes in accounting principle be reflected in the
income statement in the period of change. Instead, to enhance the comparability
of prior period financial statements, Statement 154 requires that changes in
accounting principle be retrospectively applied. Under retrospective
application, the new accounting principle is applied as of the beginning of the
first period presented, as if that principle had always been used. Statement 154
carries forward the requirement that an error be reported by restating prior
period financial statement as of the beginning of the first period. Statement
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The initial adoption of Statement 154
did not have a material impact on the Company's financial statements; however
the adoption of this statement could result in a material change to the way the
Company reflects future changes in accounting principles, depending on the
nature of future changes in accounting principles and whether specific
transition provisions are included.
Page 8
In December 2005, the FASB issued Staff Position SOP 94-6-1, "Terms of Loan
Products that May Give Rise to a Concentration of Credit Risk" ("FSP SOP
94-6-1"). FSP SOP 94-6-1 addresses 1) the circumstances under which the terms of
loan products give rise to a concentration of credit risk, and 2) the
disclosures or other accounting considerations that apply for entities that
originate, hold, guarantee, service, or invest in loan products with terms that
may give rise to a concentration of credit risk. The disclosures required by FSP
SOP 94-6-1 are required for interim and annual periods ending after December 19,
2005. Note 12 of the Company's 2005 Form 10-K contains this discussion and there
have been no material changes since that time.
Note 3 - Reclassifications
Certain amounts reported in the period ended March 31, 2005 have been
reclassified to conform with the presentation for March 31, 2006. These
reclassifications had no effect on net income or shareholders' equity for the
periods presented, nor did they materially impact trends in financial
information.
Note 4 - Equity-Based Compensation Plans
At March 31, 2006, the Company had the following equity-based compensation
plans, all of which are stock option plans: the First Bancorp 2004 Stock Option
Plan, the First Bancorp 1994 Stock Option Plan, and four plans that were assumed
from acquired entities, which are all described below. The Company's
shareholders approved all equity-based compensation plans, except for those
assumed from acquired companies. As of March 31, 2006, the First Bancorp 2004
Stock Option Plan is the only plan that had shares available for future grants.
The First Bancorp 2004 Stock Option Plan and its predecessor plan, the
First Bancorp 1994 Stock Option Plan, were intended to serve as a means of
attracting, retaining and motivating key employees and directors and to
associate the interests of the plans' participants with those of the Company and
its shareholders. Stock option grants to non-employee directors have
historically had no vesting requirements, whereas, except as discussed below,
stock option grants to employees have generally had five-year vesting schedules
(20% vesting each year). In April 2004, the Company granted 128,000 options to
employees with no vesting requirements. These options were granted without any
vesting requirements for two reasons - 1) the options were granted primarily as
a reward for past performance and therefore had already been "earned" in the
view of the Committee, and 2) to potentially minimize the impact that any change
in accounting standards for stock options could have on future years' reported
net income. Employee stock option grants since the April 2004 grant have
reverted to having five year vesting periods. The Company's options provide for
immediate vesting if there is a change in control (as defined in the plans).
Under the terms of these two plans, options can have a term of no longer than
ten years, and all options granted thus far under these plans have had a term of
ten years. Except for grants to directors (see below), the Company cannot
estimate the amount of future stock option grants at this time. In the past,
stock option grants to employees have been irregular, generally falling into
three categories - 1) to attract and retain new employees, 2) to recognize
changes in responsibilities of existing employees, and 3) to periodically reward
exemplary performance. As it relates to directors, the Company has historically
granted 2,250 stock options to each of the Company's non-employee directors in
June of each year, and expects to continue doing so for the foreseeable future.
At March 31, 2006, there were 647,220 options outstanding related to these two
plans with exercise prices ranging from $4.45 to $22.12. At March 31, 2006,
there were 1,211,590 shares remaining available to grant under the 2004 First
Bancorp Stock Option Plan.
The Company also has four stock option plans as a result of assuming plans
of acquired companies. At March 31, 2006, there were 53,686 stock options
outstanding in connection with these plans, with option prices ranging from
$4.17 to $11.49.
The Company issues new shares when options are exercised.
Prior to January 1, 2006, the Company accounted for all of these plans
using the intrinsic value method prescribed by Opinion 25 and related
interpretations. Because all of the Company's stock options had an exercise
price equal to
Page 9
the market value of the underlying common stock on the date of grant, no
compensation cost had ever been recognized. On January 1, 2006, the Company
adopted Statement 123(R). Statement 123(R) supersedes Opinion 25 (and related
interpretations) and requires that the compensation cost relating to share-based
payment transactions be recognized in the financial statements. Statement 123(R)
permits public companies to adopt its requirements using one of two methods. The
"modified prospective" method recognizes compensation for all stock options
granted after the date of adoption and for all previously granted stock options
that become vested after the date of adoption. The "modified retrospective"
method includes the requirements of the "modified prospective" method described
above, but also permits entities to restate prior period results based on the
amounts previously presented under Statement 123 for purposes of pro-forma
disclosures. The Company has elected to adopt Statement 123(R) under the
"modified prospective" method and accordingly will not restate prior period
results.
The Company measures the fair value of each option award on the date of
grant using the Black-Scholes option-pricing model. The Company determines the
assumptions used in the Black-Scholes option pricing model as follows: the
risk-free interest rate is based on the U.S. Treasury yield curve in effect at
the time of the grant; the dividend yield is based on the Company's dividend
yield at the time of the grant (subject to adjustment if the dividend yield on
the grant date is not expected to approximate the dividend yield over the
expected life of the option); the volatility factor is based on the historical
volatility of the Company's stock (subject to adjustment if historical
volatility is reasonably expected to differ from the past); the weighted-average
expected life is based on the historical behavior of employees related to
exercises, forfeitures and cancellations.
As noted above, prior to the adoption of Statement 123(R), the Company
applied Opinion 25 to account for its stock options. The following table
illustrates the effect on net income and earnings per share had the Company
accounted for share-based compensation in accordance with Statement 123(R) for
the period indicated:
Three Months
Ended March 31,
(In thousands except per share data) 2005
------------
Net income, as reported $ 4,716
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (52)
------------
Pro forma net income $ 4,664
============
Earnings per share: Basic - As reported $ 0.33
Basic - Pro forma 0.33
Diluted - As reported 0.33
Diluted - Pro forma 0.32
In the first quarter of 2006, the adoption of Statement 123(R) resulted in
stock-based compensation expense of $47,000, with no associated tax benefits,
which was classified as "salaries expense" on the Consolidated Statements of
Income and reduced both income before income taxes and net income by that same
amount. The impact on basic and diluted earnings per share was approximately
one-third of one cent per share. This expense related to the vesting of several
stock option grants made prior to January 1, 2006, as there were no option
grants in the first quarter of 2006. This compensation expense was reflected as
an adjustment to cash flows from operating activities on the Company's
Consolidated Statement of Cash Flows. At March 31, 2006, the Company had
$136,000 of unrecognized compensation costs related to unvested stock options.
The cost is expected to be amortized over a weighted-average life of 1.12 years,
with $46,000 being expensed in the second quarter of 2006, $22,000 being
expensed in the third quarter of 2006, $12,000 being expensed in the fourth
quarter of 2006, $47,000 being expensed in 2007 equally distributed among each
of the four quarters, and $3,000 being expensed in each of 2008, 2009 and 2010,
equally distributed among each of the four quarters of each year. In addition,
as discussed above, the Company expects to grant 2,250 options, without vesting
Page 10
requirements, to each of its non-employee directors on June 1, 2006 and on June
1 of each year thereafter. In 2005, the amount of pro forma expense associated
with the June director grants was $127,000.
As noted above, certain of the Company's stock option grants contain terms
that provide for a graded vesting schedule whereby portions of the award vest in
increments over the requisite service period. As provided for under Statement
123(R), the Company has elected to recognize compensation expense for awards
with graded vesting schedules on a straight-line basis over the requisite
service period for the entire award. Statement 123(R) requires companies to
recognize compensation expense based on the estimated number of stock options
and awards for which service is to be rendered. Over the past five years, there
has been only one forfeiture or expiration, totaling 600 options, and therefore
the Company assumes that all options granted will become vested.
There were no option grants during either of the first quarters of 2005 or
2006.
The following table presents information regarding the activity during the
first three months of 2006 related to all of the Company's stock options
outstanding:
All Options Outstanding
---------------------------------------------------------
Weighted-
Average
Weighted- Remaining Aggregate
Number of Average Contractual Intrinsic Value
Three months ended March 31, 2006 Shares Exercise Price Term ($000)
------------------------------------------ ------------ ------------ ------------ ------------
Outstanding at the beginning of the period 746,882 $ 15.75
Granted during the period -- --
Exercised during the period 45,976 10.22
Forfeited or expired during the period -- --
------------
Outstanding at end of period 700,906 $ 16.12 5.7 $ 4,449
============ ============ ============ ============
Exercisable at March 31, 2006 649,281 $ 16.14 5.6 $ 4,104
============ ============ ============ ============
The Company received $429,000 and $452,000 as a result of stock option
exercises during the three months ended March 31, 2006 and 2005, respectively.
The intrinsic value of the stock options exercised during the three months ended
March 31, 2006 and 2005 was $527,000 and $444,000, respectively. No nonqualified
stock options were exercised during the first quarter of 2006, and thus the
Company did not record any associated tax benefits.
The following table presents information regarding the activity during the
first three months of 2006 related to the Company's stock options outstanding
that are nonvested:
Nonvested Options
Weighted-Average
Number of Grant-Date
Three months ended March 31, 2006 Shares Fair Value
------------------------------------------------------------ ------------ ------------
Nonvested options outstanding at the beginning of the period 67,999 $ 4.75
Granted during the period -- --
Vested during the period (16,374) 4.83
Forfeited or expired during the period -- --
------------
Nonvested options outstanding at end of period 51,625 $ 4.74
============ ============
Page 11
Note 5 - Earnings Per Share
Basic earnings per share were computed by dividing net income by the
weighted average common shares outstanding. Diluted earnings per share includes
the potentially dilutive effects of the Company's stock option plan. The
following is a reconciliation of the numerators and denominators used in
computing basic and diluted earnings per share:
For the Three Months Ended March 31,
---------------------------------------------------------------------------
2006 2005
------------------------------------ ------------------------------------
Income Shares Income Shares
($ in thousands except per (Numer- (Denom- Per Share (Numer- (Denom- Per Share
share amounts) ator) inator) Amount ator) inator) Amount
----------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Basic EPS
Net income $ 4,991 14,254,785 $ 0.35 $ 4,716 14,105,577 $ 0.33
========== ==========
Effect of Dilutive Securities -- 166,854 -- 258,029
---------- ---------- ---------- ----------
Diluted EPS $ 4,991 14,421,639 $ 0.35 $ 4,716 14,363,606 $ 0.33
========== ========== ========== ========== ========== ==========
For the three months ended March 31, 2006 there were 191,730 options that
were antidilutive because the exercise price exceeded the average market price
for the period, and these options were excluded from the calculation of the
effect of dilutive securities. For the three months ended March 31, 2005, there
were no antidilutive options.
Note 6 - Asset Quality Information
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or
more days and still accruing interest, restructured loans and other real estate.
Nonperforming assets are summarized as follows:
March 31, December 31, March 31,
($ in thousands) 2006 2005 2005
---------------------------------------------------------------------------------------
Nonperforming loans:
Nonaccrual loans $ 3,283 1,640 4,249
Restructured loans 12 13 15
Accruing loans > 90 days past due -- -- --
------------ ------------ ------------
Total nonperforming loans 3,295 1,653 4,264
Other real estate 1,451 1,421 2,401
------------ ------------ ------------
Total nonperforming assets $ 4,746 3,074 6,665
============ ============ ============
Nonperforming loans to total loans 0.21% 0.11% 0.31%
Nonperforming assets as a percentage of
loans and other real estate 0.31% 0.21% 0.48%
Nonperforming assets to total assets 0.25% 0.17% 0.40%
Allowance for loan losses to total loans 1.07% 1.06% 1.08%
Note 7 - Deferred Loan Fees
Loans are shown on the Consolidated Balance Sheets net of net deferred loan
costs (fees) of approximately $76,000, $184,000, and ($82,000) at March 31,
2006, December 31, 2005, and March 31, 2005, respectively.
Page 12
Note 8 - Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated
amortization of amortizable intangible assets as of March 31, 2006, December 31,
2005, and March 31, 2005 and the carrying amount of unamortized intangible
assets as of those same dates.
March 31, 2006 December 31, 2005 March 31, 2005
---------------------------- ---------------------------- ----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated Gross Carrying Accumulated
($ in thousands) Amount Amortization Amount Amortization Amount Amortization
------------- ------------ ------------- ------------ ------------- ------------
Amortizable intangible
assets:
Customer lists $ 394 123 394 115 394 93
Noncompete agreements 50 50 50 50 50 50
Core deposit premiums 2,441 1,064 2,441 1,011 2,441 816
------------ ------------ ------------ ------------ ------------ ------------
Total $ 2,885 1,237 2,885 1,176 2,885 959
============ ============ ============ ============ ============ ============
Unamortizable intangible
assets:
Goodwill $ 47,247 47,247 47,247
============ ============ ============
Pension $ 237 273 272
============ ============ ============
Amortization expense totaled $61,000 and $73,000 for the three months ended
March 31, 2006 and 2005, respectively.
The following table presents the estimated amortization expense for each of
the five calendar years ending December 31, 2010 and the estimated amount
amortizable thereafter. These estimates are subject to change in future periods
to the extent management determines it is necessary to make adjustments to the
carrying value or estimated useful lives of amortized intangible assets.
Estimated Amortization
(Dollars in thousands) Expense
---------------------- -----------------------
2006 $ 242
2007 220
2008 219
2009 218
2010 218
Thereafter 592
----------
Total $ 1,709
==========
Page 13
Note 9 - Pension Plans
The Company sponsors two defined benefit pension plans - a qualified
retirement plan (the "Pension Plan") which is generally available to all
employees, and a Supplemental Executive Retirement Plan (the "SERP Plan"), which
is for the benefit of certain senior management executives of the Company.
The Company recorded pension expense totaling $581,000 and $447,000 for the
three months ended March 31, 2006 and 2005, respectively, related to the Pension
Plan and the SERP Plan. The following table contains the components of the
pension expense.
For the Three Months Ended March 31,
----------------------------------------------------------------------------------
2006 2005 2006 2005 2006 Total 2005 Total
(in thousands) Pension Plan Pension Plan SERP Plan SERP Plan Both Plans Both Plans
------------ ------------ ----------- ----------- ----------- -----------
Service cost - benefits earned during the period $ 341 284 79 62 420 346
Interest cost on projected benefit obligation 227 192 52 38 279 230
Expected return on plan assets (268) (237) -- -- (268) (237)
Net amortization and deferral 119 86 31 22 150 108
----------- ----------- ----------- ----------- ----------- -----------
Net periodic pension cost $ 419 325 162 122 581 447
=========== =========== =========== =========== =========== ===========
The Company's contributions to the Pension Plan are based on computations
by independent actuarial consultants and are intended to provide the Company
with the maximum deduction for income tax purposes. The contributions are
invested to provide for benefits under the Pension Plan. The Company estimates
that its contribution to the Pension Plan will be $945,000 during 2006.
The Company's funding policy with respect to the SERP Plan is to fund the
related benefits through investments in life insurance policies, which are not
considered plan assets for the purpose of determining the SERP Plan's funded
status. The cash surrender values of the life insurance policies are included in
the line item "other assets." The Company estimates that its payments to
participants of the SERP Plan will be $164,000 in 2006.
Page 14
Note 10 - Contingency
The Company recorded a loss amount of $6,320,000, or $0.44 per diluted
share, in the third quarter of 2005 to accrue for contingent tax loss exposure
involving the North Carolina Department of Revenue. In February 2006, the North
Carolina Department of Revenue announced a "Settlement Initiative" that offered
companies with certain transactions that had been challenged by the North
Carolina Department of Revenue the opportunity to resolve such matters with
reduced penalties by agreeing to participate in the initiative by June 15, 2006.
Although the Company believed that its tax returns complied with the relevant
statutes, the board of directors of the Company decided that it was in the best
interests of the Company to settle this matter by participating in the
initiative. Based on the terms of the initiative, the Company estimated that its
total liability to settle the matter will be approximately $4.3 million, net of
the federal tax benefit, or $2.0 million less than the amount that was
originally accrued. Accordingly, in March 2006, the Company adjusted its
originally reported 2005 earnings to reflect the impact of this subsequent event
by reducing originally reported tax expense for the three and twelve months
ended December 31, 2005 by $1,982,000, or $0.14 per diluted share. The Company
believes it has fully reserved for this liability and does not have any
additional state income tax exposure other than the ongoing interest that will
continue to accrue ($65,000 per quarter on an after-tax basis) until the
Settlement Initiative is completed and the Company pays the amounts due in
accordance with the settlement, which is expected to occur in the fourth quarter
of this year.
Note 11 - Pending Acquisitions and Subsequent Events
On January 20, 2006, the Company reported that it had agreed to purchase a
bank branch in Dublin, Virginia with approximately $20 million in deposits from
another financial institution. This transaction is expected to close in July
2006.
On April 26, 2006, the Company reported that it had agreed to purchase a
bank branch in Carthage, North Carolina from another financial institution. This
transaction is expected to close in September 2006.
On April 13, 2006, the Company borrowed $25.8 million in the form of trust
preferred capital securities. These securities have a floating interest rate of
3-month LIBOR plus 1.39% and qualify as regulatory capital. These securities
have a thirty year maturity, but can be redeemed at par by the Company after
five years.
Page 15
Item 2 - Management's Discussion and Analysis of Consolidated Results of
Operations and Financial Condition
CRITICAL ACCOUNTING POLICIES
The accounting principles followed by the Company and the methods of
applying these principles conform with accounting principles generally accepted
in the United States of America and with general practices followed by the
banking industry. Certain of these principles involve a significant amount of
judgment and/or use of estimates based on the Company's best assumptions at the
time of the estimation. The Company has identified three policies as being more
sensitive in terms of judgments and estimates, taking into account their overall
potential impact to the Company's consolidated financial statements - 1) the
allowance for loan losses, 2) tax uncertainties, and 3) intangible assets.
Allowance for Loan Losses
Due to the estimation process and the potential materiality of the amounts
involved, the Company has identified the accounting for the allowance for loan
losses and the related provision for loan losses as an accounting policy
critical to the Company's consolidated financial statements. The provision for
loan losses charged to operations is an amount sufficient to bring the allowance
for loan losses to an estimated balance considered adequate to absorb losses
inherent in the portfolio.
Management's determination of the adequacy of the allowance is based
primarily on a mathematical model that estimates the appropriate allowance for
loan losses. This model has two components. The first component involves the
estimation of losses on loans defined as "impaired loans." A loan is considered
to be impaired when, based on current information and events, it is probable the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The estimated valuation allowance is the
difference, if any, between the loan balance outstanding and the value of the
impaired loan as determined by either 1) an estimate of the cash flows that the
Company expects to receive from the borrower discounted at the loan's effective
rate, or 2) in the case of a collateral-dependent loan, the fair value of the
collateral.
The second component of the allowance model is to estimate losses for all
loans not considered to be impaired loans. First, loans that have been risk
graded by the Company as having more than "standard" risk but are not considered
to be impaired are assigned estimated loss percentages generally accepted in the
banking industry. Loans that are classified by the Company as having normal
credit risk are segregated by loan type, and estimated loss percentages are
assigned to each loan type, based on the historical losses, current economic
conditions, and operational conditions specific to each loan type.
The reserve estimated for impaired loans is then added to the reserve
estimated for all other loans. This becomes the Company's "allocated allowance."
In addition to the allocated allowance derived from the model, management also
evaluates other data such as the ratio of the allowance for loan losses to total
loans, net loan growth information, nonperforming asset levels and trends in
such data. Based on this additional analysis, the Company may determine that an
additional amount of allowance for loan losses is necessary to reserve for
probable losses. This additional amount, if any, is the Company's "unallocated
allowance." The sum of the allocated allowance and the unallocated allowance is
compared to the actual allowance for loan losses recorded on the books of the
Company and any adjustment necessary for the recorded allowance to equal the
computed allowance is recorded as a provision for loan losses. The provision for
loan losses is a direct charge to earnings in the period recorded.
Although management uses the best information available to make
evaluations, future adjustments may be necessary if economic, operational, or
other conditions change. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance based on the examiners' judgment about information
available to them at the time of their examinations.
Page 16
For further discussion, see "Nonperforming Assets" and "Summary of Loan
Loss Experience" below.
Tax Uncertainties
The Company reserves for tax uncertainties in instances when it has taken a
position on a tax return that may differ from the opinion of the applicable
taxing authority. In accounting for tax contingencies, the Company assesses the
relative merits and risks of certain tax transactions, taking into account
statutory, judicial and regulatory guidance in the context of the Company's tax
position. For those matters where it is probable that the Company will have to
pay additional taxes, interest or penalties and a loss or range of losses can be
reasonably estimated, the Company records reserves in the consolidated financial
statements. For those matters where it is reasonably possible but not probable
that the Company will have to pay additional taxes, interest or penalties and
the loss or range of losses can be reasonably estimated, the Company only makes
disclosures in the notes and does not record reserves in the consolidated
financial statements. The process of concluding that a loss is reasonably
possible or probable and estimating the amount of loss or range of losses and
related tax reserves is inherently subjective, and future changes to the reserve
may be necessary based on changes in management's intent, tax law or related
interpretations, or other functions.
See Note 10 to the Consolidated Financial Statements above for information
related to a tax loss contingency accrual that was recorded in 2005.
Intangible Assets
Due to the estimation process and the potential materiality of the amounts
involved, the Company has also identified the accounting for intangible assets
as an accounting policy critical to the Company's consolidated financial
statements.
When the Company completes an acquisition transaction, the excess of the
purchase price over the amount by which the fair market value of assets acquired
exceeds the fair market value of liabilities assumed represents an intangible
asset. The Company must then determine the identifiable portions of the
intangible asset, with any remaining amount classified as goodwill. Identifiable
intangible assets associated with these acquisitions are generally amortized
over the estimated life of the related asset, whereas goodwill is tested
annually for impairment, but not systematically amortized. Assuming no goodwill
impairment, it is beneficial to the Company's future earnings to have a lower
amount assigned to identifiable intangible assets and a higher amount to
goodwill as opposed to having a higher amount considered to be identifiable
intangible assets and a lower amount classified as goodwill.
For the Company, the primary identifiable intangible asset typically
recorded in connection with a whole bank or bank branch acquisition is the value
of the core deposit intangible, whereas when the Company acquires an insurance
agency, the primary identifiable intangible asset is the value of the acquired
customer list. Determining the amount of identifiable intangible assets and
their average lives involves multiple assumptions and estimates and is typically
determined by performing a discounted cash flow analysis, which involves a
combination of any or all of the following assumptions: customer
attrition/runoff, alternative funding costs, deposit servicing costs, and
discount rates. The Company typically engages a third party consultant to assist
in each analysis. For the whole bank and bank branch transactions recorded to
date, the core deposit intangible in each case has been estimated to have a ten
year life, with an accelerated rate of amortization. For the 2003 insurance
agency acquisition, the identifiable intangible asset related to the customer
list was determined to have a ten year life, with amortization occurring on a
straight-line basis.
Subsequent to the initial recording of the identifiable intangible assets
and goodwill, the Company amortizes the identifiable intangible assets over
their estimated average lives, as discussed above. In addition, on at least an
annual basis, goodwill is evaluated for impairment by comparing the fair value
of the Company's reporting units to their related carrying value, including
goodwill (the Company's community banking operation is its only material
reporting unit). At its last evaluation, the fair value of the Company's
community banking operation exceeded its
Page 17
carrying value, including goodwill. If the carrying value of a reporting unit
were ever to exceed its fair value, the Company would determine whether the
implied fair value of the goodwill, using a discounted cash flow analysis,
exceeded the carrying value of the goodwill. If the carrying value of the
goodwill exceeded the implied fair value of the goodwill, an impairment loss
would be recorded in an amount equal to that excess. Performing such a
discounted cash flow analysis would involve the significant use of estimates and
assumptions.
The Company reviews identifiable intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. The Company's policy is that an impairment loss is recognized,
equal to the difference between the asset's carrying amount and its fair value,
if the sum of the expected undiscounted future cash flows is less than the
carrying amount of the asset. Estimating future cash flows involves the use of
multiple estimates and assumptions, such as those listed above.
Current Accounting Matters
See Note 2 to the Consolidated Financial Statements above as it relates to
accounting standards that have been recently adopted by the Company.
RESULTS OF OPERATIONS
Overview
Net income for the three months ended March 31, 2006 was $4,991,000, a 5.8%
increase from the $4,716,000 recorded in the first quarter of 2005. The net
income for the three month period ended March 31, 2006 amounted to $0.35 per
diluted share, a 6.1% increase over the $0.33 net income per diluted share for
the same period in 2005.
Total assets at March 31, 2006 amounted to $1.91 billion, 13.1% higher
than a year earlier. Total loans at March 31, 2006 amounted to $1.55 billion, an
11.3% increase from a year earlier, and total deposits were $1.57 billion, an
8.0% increase from a year earlier.
The increase in loans and deposits over the past twelve months resulted in
an increase in the Company's net interest income when comparing the first
quarter of 2006 to the first quarter of 2005. Net interest income for the first
quarter of 2006 amounted to $17.9 million, a 9.6% increase over the $16.3
million recorded in the first quarter of 2005.
The Company's net interest margin (tax-equivalent net interest income
divided by average earning assets) was 4.33% for the first quarter of 2006,
which is the same as it was in the first quarter of 2005. This net interest
margin was a four basis point decrease from the 4.37% realized in the fourth
quarter of 2005. The slight decrease in margin from the previous quarter was
primarily a result of the average rates paid on deposits rising by more than the
corresponding increases in average yields realized from loans.
The Company's provision for loan losses amounted to $1,015,000 in the first
quarter of 2006 compared to $580,000 in the first quarter of 2005. The increase
was primarily the result of strong loan growth in 2006, as asset quality ratios
remained stable. Loan growth was $71 million in the first quarter of 2006
compared to $28 million in the first quarter of 2005. The Company's ratio of
annualized net charge-offs to average loans amounted to 3 basis points for the
first quarter of 2006 compared to 7 basis points for the first quarter of 2005.
The Company's ratio of nonperforming assets to total assets was 0.25% at March
31, 2006 compared to 0.40% at March 31, 2005.
Noninterest income amounted to $4.0 million for the first quarter of 2006,
a 6.6% increase from the first quarter of 2005. Noninterest expenses amounted to
$12.7 million in the first quarter of 2006, an 8.7% increase over 2005. There
were no unusual items of noninterest income or expense that were significant in
either period. In
Page 18
accordance with the new accounting requirements regarding stock-based
compensation (FASB Statement 123(R)) that were effective on January 1, 2006, the
Company recorded $47,000 in expense related to stock options in the first
quarter of 2006.
The Company's effective tax rate remained relatively unchanged in comparing
the first quarter of 2006 to the first quarter of 2005 - 38.1% in the first
quarter of 2006 compared to 38.8% for the first quarter of 2005.
The Company's annualized return on average assets for the first quarter of
2006 was 1.12% compared to 1.16% for the first quarter of 2005. The Company's
annualized return on average equity for the first quarter of 2006 was 12.78%
compared to 12.57% for the first quarter of 2005.
Components of Earnings
Net interest income is the largest component of earnings, representing the
difference between interest and fees generated from earning assets and the
interest costs of deposits and other funds needed to support those assets. Net
interest income for the three month period ended March 31, 2006 amounted to
$17,853,000, an increase of $1,568,000, or 9.6% from the $16,285,000 recorded in
the first quarter of 2005. Net interest income on a taxable equivalent basis for
the three month period ended March 31, 2006 amounted to $17,979,000, an increase
of $1,581,000, or 9.6% from the $16,398,000 recorded in the first quarter of
2005. Management believes that analysis of net interest income on a
tax-equivalent basis is useful and appropriate because it allows a comparison of
net interest income amounts in different periods without taking into account the
different mix of taxable versus non-taxable investments that may have existed
during those periods.
There are two primary factors that cause changes in the amount of net
interest income recorded by the Company - 1) growth in loans and deposits, and
2) the Company's net interest margin. For the three months ended March 31, 2006,
the increase in net interest income was caused by growth in loans and deposits,
as the Company's net interest margin of 4.33% in the first quarter of 2006 was
unchanged from the first quarter of 2005.
The following table presents net interest income analysis on a
taxable-equivalent basis.
Page 19
For the Three Months Ended March 31,
-----------------------------------------------------------------------------
2006 2005
------------------------------------- -------------------------------------
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
---------- ---------- ---------- ---------- ---------- ----------
Assets
Loans (1) $1,516,456 7.16% $ 26,762 $ 1,383,216 6.26% $ 21,359
Taxable securities 114,910 4.69% 1,329 103,248 4.54% 1,155
Non-taxable securities (2) 11,822 8.68% 253 11,340 8.65% 242
Short-term investments,
principally federal funds 39,347 5.12% 497 39,361 2.80% 272
---------- ---------- ---------- ----------
Total interest-earning assets 1,682,535 6.95% 28,841 1,537,165 6.08% 23,028
---------- ----------
Liabilities
Savings, NOW and money
market deposits $ 467,760 1.16% $ 1,333 $ 474,683 0.75% $ 881
Time deposits >$100,000 365,465 4.08% 3,677 342,487 2.78% 2,345
Other time deposits 494,847 3.63% 4,432 424,878 2.36% 2,474
---------- ---------- ---------- ----------
Total interest-bearing deposits 1,328,072 2.88% 9,442 1,242,048 1.86% 5,700
Securities sold under agreements
to repurchase 30,314 3.51% 262 -- -- --
Borrowings 73,550 6.39% 1,158 76,683 4.92% 930
---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,431,936 3.08% 10,862 1,318,731 2.04% 6,630
---------- ----------
Non-interest-bearing deposits 197,095 172,673
Net yield on interest-earning
assets and net interest income 4.33% $ 17,979 4.33% $ 16,398
========== ==========
Interest rate spread 3.87% 4.04%
Average prime rate 7.42% 5.44%
--------------------------------------------------------------------------------------------------------------------
(1) Average loans include nonaccruing loans, the effect of which is to lower the
average rate shown.
(2) Includes tax-equivalent adjustments of $126,000 and $113,000 in 2006 and
2005, respectively, to reflect the tax benefit that the Company receives
related to its tax-exempt securities, which carry interest rates lower than
similar taxable investments due to their tax exempt status. This amount has
been computed assuming a 39% tax rate and is reduced by the related
nondeductible portion of interest expense.
Average loans outstanding for the first quarter of 2006 were $1.516
billion, which was 9.6% higher than the average loans outstanding for the first
quarter of 2005 ($1.383 billion). The mix of the Company's loan portfolio
remained substantially the same at March 31, 2006 compared to December 31, 2005,
with approximately 86% of the Company's loans being real estate loans, 9% being
commercial, financial, and agricultural loans, and the remaining 5% being
consumer installment loans. The majority of the Company's real estate loans are
primarily various personal and commercial loans where real estate provides
additional security for the loan.
Average deposits outstanding for the first quarter of 2006 were $1.525
billion, which was 7.8% higher than the average amount of deposits outstanding
in the first quarter of 2005 ($1.415 billion). Generally, the Company can
reinvest funds from deposits at higher yields than the interest rate being paid
on those deposits, and therefore increases in deposits typically result in
higher amounts of net interest income for the Company.
See additional discussion regarding the nature of the growth in loans and
deposits in the section entitled "Financial Condition" below. The effect of the
higher amounts of average loans and deposits was to increase net interest income
in 2006.
As shown in the table above, yields on interest earning assets and
liabilities both generally increased in 2006 compared to 2005 as a result of the
rising rate environment that began in the third quarter of 2004. In 2005, the
Federal Reserve increased interest rates eight times totaling 200 basis points,
which followed five rate increases totaling 125 basis points that occurred in
the second half of 2004. In the first quarter of 2006, the Federal Reserve
increased interest rates two times by a total of 50 basis points.
Page 20
See additional information regarding net interest income in the section
entitled "Interest Rate Risk."
The Company's provision for loan losses increased significantly in 2006
compared to 2005, amounting to $1,015,000 in the first quarter of 2006 versus
$580,000 in the first quarter of 2005. The increase was primarily the result of
the strong loan growth realized in 2006, as asset quality ratios remained
stable. Loan growth was $71 million in the first quarter of 2006 compared to $28
million in the first quarter of 2005. The Company's ratio of annualized net
charge-offs to average loans amounted to 3 basis points for the first quarter of
2006 compared to 7 basis points for the first quarter of 2005. The Company's
ratio of nonperforming assets to total assets was 0.25% at March 31, 2006
compared to 0.40% at March 31, 2005.
Noninterest income amounted to $3,954,000 for the first quarter of 2006, a
6.6% increase from the $3,710,000 recorded in the first quarter of 2005. The
increase was primarily a result of general growth in the Company's customer
base, increased usage of credit cards and debit cards by the Company's customers
(which impacted the line item "other service charges, commissions and fees"),
and increased commissions from financial product sales resulting from increased
sales, as well as $55,000 more in "experience bonuses" recorded by the Company.
Experience bonuses are received annually in the first quarter of each year from
the insurance companies that the Company acts as an agent for and can fluctuate
depending on the actual loss experience that the insurance companies experience
related to the Company's customers.
These increases were partially offset by a $111,000 decrease in data
processing income in the first quarter of 2006 compared to 2005. The Company's
data processing subsidiary makes its excess data processing capabilities
available to area financial institutions for a fee. At January 1, 2005, the
Company had five community bank customers using this service. Three of these
customers terminated their contracts with the Company in the latter half of
2005, which resulted in the decrease in data processing fee income. The Company
intends to continue to market this service to area banks, but does not currently
have any near-term prospects for additional business.
Noninterest expenses for the three months ended March 31, 2006 increased
8.7% to $12,729,000 from $11,715,000 in the first quarter of 2005. The increase
in noninterest expenses occurred in all categories and is associated with the
overall growth of the Company in terms of branch network, employees and customer
base. In accordance with the new accounting requirements regarding stock-based
compensation that were effective on January 1, 2006, the Company recorded
$47,000 in expense related to stock options in the first quarter of 2006 - see
Note 4 to the Consolidated Financial Statements above for additional discussion.
The provision for income taxes was $3,072,000 in the first quarter of 2006,
an effective tax rate of 38.1%, compared to $2,984,000 in the first quarter of
2005, an effective tax rate of 38.8%. The Company expects its effective tax rate
to remain at approximately 38-39% for the foreseeable future.
The Consolidated Statements of Comprehensive Income reflect "Other
Comprehensive Loss" of $49,000 and $857,000 during the first quarters of 2006
and 2005, respectively, related primarily to unrealized available for sale
security holding losses occurring during the quarter. The unrealized security
holding losses were caused by an increase in market yields for fixed income
securities during each quarter. The Company's available for sale securities
portfolio is predominantly comprised of fixed income securities that decline in
value when market yields for fixed income securities increase.
Page 21
FINANCIAL CONDITION
Total assets at March 31, 2006 amounted to $1.91 billion, 13.1% higher than
a year earlier. Total loans at March 31, 2006 amounted to $1.55 billion, an
11.3% increase from a year earlier, and total deposits amounted to $1.57 billion
at March 31, 2006, an 8.0% increase from a year earlier.
The following tables present information regarding the nature of the
Company's growth since March 31, 2005.
Balance at Change in Balance at Total Internal growth,
April 1, 2005 to beginning of Internal brokered end of percentage excluding change in
March 31, 2006 period Growth deposits period growth brokered deposits
------------------------------- ------------- ------------- ------------- ------------- ------------- -----------------
($ in thousands)
Loans $ 1,395,324 158,047 -- 1,553,371 11.3% 11.3%
============= ============= ============= ============= ============= =============
Deposits - Noninterest bearing $ 175,698 37,963 -- 213,661 21.6% 21.6%
Deposits - Savings, NOW, and
Money Market 477,838 (4,183) -- 473,655 -0.9% -0.9%
Deposits - Time>$100,000 361,567 60,538 (49,873) 372,232 2.9% 16.7%
Deposits - Time<$100,000 433,589 71,903 -- 505,492 16.6% 16.6%
------------- ------------- ------------- -------------
Total deposits $ 1,448,692 166,221 (49,873) 1,565,040 8.0% 11.5%
============= ============= ============= ============= ============= =============
January 1, 2006 to
March 31, 2006
------------------------------
Loans $ 1,482,611 70,760 -- 1,553,371 4.8% 4.8%
============= ============= ============= ============= ============= =============
Deposits - Noninterest bearing $ 194,051 19,610 -- 213,661 10.1% 10.1%
Deposits - Savings, NOW, and
Money Market 458,221 15,434 -- 473,655 3.4% 3.4%
Deposits - Time>$100,000 356,281 15,951 -- 372,232 4.5% 4.5%
Deposits - Time<$100,000 486,024 19,468 -- 505,492 4.0% 4.0%
------------- ------------- ------------- -------------
Total deposits $ 1,494,577 70,463 -- 1,565,040 4.7% 4.7%
============= ============= ============= ============= ============= =============
In the second and third quarters of 2005, $50 million in brokered deposits
that had been gathered in 2004 matured and were paid off, without renewing.
The Company experienced strong loan and deposit growth during the first
quarter of 2006, with loans increasing by $71 million, or 19.5% on an annualized
basis, and deposits increasing by $70 million, or 19.1% on an annualized basis.
The mix of the Company's loan portfolio remains substantially the same at
March 31, 2006 compared to December 31, 2005, with approximately 86% of the
Company's loans being real estate loans, 9% being commercial, financial, and
agricultural loans, and the remaining 5% being consumer installment loans. The
majority of the Company's real estate loans are primarily various personal and
commercial loans where real estate provides additional security for the loan.
Page 22
Nonperforming Assets
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or
more days and still accruing interest, restructured loans and other real estate.
Nonperforming assets are summarized as follows:
March 31, December 31, March 31,
($ in thousands) 2006 2005 2005
---------------------------------------- ------------ ------------ ------------
Nonperforming loans:
Nonaccrual loans $ 3,283 1,640 4,249
Restructured loans 12 13 15
Accruing loans > 90 days past due -- -- --
------------ ------------ ------------
Total nonperforming loans 3,295 1,653 4,264
Other real estate 1,451 1,421 2,401
------------ ------------ ------------
Total nonperforming assets $ 4,746 3,074 6,665
============ ============ ============
Nonperforming loans to total loans 0.21% 0.11% 0.31%
Nonperforming assets as a percentage of
loans and other real estate 0.31% 0.21% 0.48%
Nonperforming assets to total assets 0.25% 0.17% 0.40%
Allowance for loan losses to total loans 1.07% 1.06% 1.08%
Management has reviewed the collateral for the nonperforming assets,
including nonaccrual loans, and has included this review among the factors
considered in the evaluation of the allowance for loan losses discussed below.
Nonperforming loans (which includes nonaccrual loans and restructured
loans) as of March 31, 2006, December 31, 2005, and March 31, 2005 totaled
$3,295,000, $1,653,000, and $4,264,000, respectively. Nonperforming loans as a
percentage of total loans amounted to 0.21%, 0.11%, and 0.31%, at March 31,
2006, December 31, 2005, and March 31, 2005, respectively. The variances in
nonperforming loans among the periods has been primarily due to changes in
nonaccrual loans, as restructured loans have not changed significantly. In the
fourth quarter of 2005, the collection process for several of the Company's
largest nonaccrual loan relationships reached a conclusion and their principal
balances were reduced to zero either as a result of cash received or the
recording of a charge-off. This resulted in the amount of the Company's
nonperforming loans at December 31, 2005 reaching their lowest level in over
five years. In the first quarter of 2006, the Company experienced more typical
activity within its nonaccrual loan category, and the amount of nonaccrual loans
rebounded upwards. Although nonperforming loans increased from December 31, 2005
to March 31, 2006, the 0.21% ratio of nonperforming loans to total loans at
March 31, 2006 is lower than the 0.31% ratio at March 31, 2005 and compares
favorably to industry averages. The largest nonaccrual relationship at March 31,
2006 amounted to $308,000.
At March 31, 2006, December 31, 2005, and March 31, 2005, the recorded
investments in loans considered to be impaired were $1,205,000, $338,000, and
$2,138,000, respectively, all of which were on nonaccrual status. At March 31,
2006, December 31, 2005, and March 31, 2005, the related allowances for loan
losses for all impaired loans were $298,000, $100,000, and $619,000,
respectively. At March 31, 2006, December 31, 2005, and March 31, 2005, there
was $124,000, $0, and $1,045,000 in impaired loans for which there was no
related allowance. The average recorded investments in impaired loans during the
three month period ended March 31, 2006, the year ended December 31, 2005, and
the three months ended March 31, 2005 were approximately $772,000, $1,474,000,
and $1,858,000, respectively. For the same periods, the Company recognized no
interest income on those impaired loans during the period that they were
considered to be impaired.
The Company's other real estate owned amounted to $1,451,000, $1,421,000,
and $2,401,000 at March 31, 2006, December 31, 2005 and March 31, 2005,
respectively. The decrease in other real estate owned from March 31, 2005
relates primarily to a lake-front single family residence that the Company
foreclosed on in the first quarter
Page 23
of 2005 with a balance of $559,000. This property was subsequently sold in April
2005 at a loss of less than $20,000 to the Company. The Company's management has
reviewed recent appraisals of its other real estate and believes that their fair
values, less estimated costs to sell, equal or exceed their respective carrying
values at the dates presented.
Summary of Loan Loss Experience
The allowance for loan losses is created by direct charges to operations.
Losses on loans are charged against the allowance in the period in which such
loans, in management's opinion, become uncollectible. The recoveries realized
during the period are credited to this allowance.
The Company has no foreign loans, few agricultural loans and does not
engage in significant lease financing or highly leveraged transactions.
Commercial loans are diversified among a variety of industries. The majority of
the Company's real estate loans are primarily various personal and commercial
loans where real estate provides additional security for the loan. Collateral
for virtually all of these loans is located within the Company's principal
market area.
The Company's provision for loan losses increased significantly in 2006
compared to 2005, amounting to $1,015,000 in the first quarter of 2006 versus
$580,000 in the first quarter of 2005. The increase was primarily the result of
the strong loan growth realized in 2006, as asset quality ratios remained
stable. Loan growth was $71 million in the first quarter of 2006 compared to $28
million in the first quarter of 2005. The Company's ratio of annualized net
charge-offs to average loans amounted to 3 basis points for the first quarter of
2006 compared to 7 basis points for the first quarter of 2005. The Company's
ratio of nonperforming assets to total assets was 0.25% at March 31, 2006
compared to 0.40% at March 31, 2005.
At March 31, 2006, the allowance for loan losses amounted to $16,610,000,
compared to $15,716,000 at December 31, 2005 and $15,066,000 at March 31, 2004.
The allowance for loan losses as a percentage of total loans was 1.07% at March
31, 2006, 1.06% at December 31, 2005, and 1.08% at March 31, 2005.
Management believes the Company's reserve levels are adequate to cover
probable loan losses on the loans outstanding as of each reporting date. It must
be emphasized, however, that the determination of the reserve using the
Company's procedures and methods rests upon various judgments and assumptions
about economic conditions and other factors affecting loans. No assurance can be
given that the Company will not in any particular period sustain loan losses
that are sizable in relation to the amounts reserved or that subsequent
evaluations of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan losses
and value of other real estate. Such agencies may require the Company to
recognize adjustments to the allowance or the carrying value of other real
estate based on their judgments about information available at the time of their
examinations.
Page 24
For the periods indicated, the following table summarizes the Company's
balances of loans outstanding, average loans outstanding, changes in the
allowance for loan losses arising from charge-offs and recoveries, and additions
to the allowance for loan losses that have been charged to expense and additions
that were recorded related to acquisitions.
Three Months Twelve Months Three Months
Ended Ended Ended
March 31, December 31, March 31,
($ in thousands) 2006 2005 2005
----------- ----------- -----------
Loans outstanding at end of period $ 1,553,371 1,482,611 1,395,324
=========== =========== ===========
Average amount of loans outstanding $ 1,516,456 1,422,419 1,383,216
=========== =========== ===========
Allowance for loan losses, a
beginning of period $ 15,716 14,717 14,717
Total charge-offs (208) (2,363) (298)
Total recoveries 87 322 67
----------- ----------- -----------
Net charge-offs (121) (2,041) (231)
----------- ----------- -----------
Additions to the allowance charged to expense 1,015 3,040 580
----------- ----------- -----------
Allowance for loan losses, at end of period $ 16,610 15,716 15,066
=========== =========== ===========
Ratios:
Net charge-offs (annualized) as a percent of average loans 0.03% 0.14% 0.07%
Allowance for loan losses as a
percent of loans at end of period 1.07% 1.06% 1.08%
Based on the results of the Company's loan analysis and grading program and
management's evaluation of the allowance for loan losses at March 31, 2006,
there have been no material changes to the allocation of the allowance for loan
losses among the various categories of loans since December 31, 2005.
Liquidity, Commitments, and Contingencies
The Company's liquidity is determined by its ability to convert assets to
cash or acquire alternative sources of funds to meet the needs of its customers
who are withdrawing or borrowing funds, and to maintain required reserve levels,
pay expenses and operate the Company on an ongoing basis. The Company's primary
liquidity sources are net income from operations, cash and due from banks,
federal funds sold and other short-term investments. The Company's securities
portfolio is comprised almost entirely of readily marketable securities, which
could also be sold to provide cash.
In addition to internally generated liquidity sources, the Company has the
ability to obtain borrowings from the following three sources - 1) an
approximately $380 million line of credit with the Federal Home Loan Bank (of
which $90.5 million was outstanding at March 31, 2006), 2) a $50 million
overnight federal funds line of credit with a correspondent bank (none of which
was outstanding at March 31, 2006), and 3) an approximately $69 million line of
credit through the Federal Reserve Bank of Richmond's discount window (none of
which was outstanding at March 31, 2006).
The Company's liquidity remained stable during the first quarter of 2006.
The Company's loan to deposit ratio was 99.3% at March 31, 2006 compared to
99.2% at December 31, 2005. The level of the Company's liquid assets (consisting
of cash, due from banks, federal funds sold, presold mortgages in process of
settlement and securities) as a percentage of deposits and borrowings was 15.6%
at March 31, 2006 compared to 14.4% at December 31, 2005.
Page 25
The Company's management believes its liquidity sources, including unused
lines of credit, are at an acceptable level and remain adequate to meet its
operating needs in the foreseeable future. The Company will continue to monitor
its liquidity position carefully and will explore and implement strategies to
increase liquidity if deemed appropriate.
The amount and timing of the Company's contractual obligations and
commercial commitments has not changed materially since December 31, 2005,
detail of which is presented in Table 18 on page 56 of the Company's 2005 Form
10-K.
See Note 10 to the Consolidated Financial Statements above for information
related to a tax contingency.
The Company is not involved in any legal proceedings that, in management's
opinion, could have a material effect on the consolidated financial position of
the Company.
Off-Balance Sheet Arrangements and Derivative Financial Instruments
Off-balance sheet arrangements include transactions, agreements, or other
contractual arrangements in which the Company has obligations or provides
guarantees on behalf of an unconsolidated entity. The Company has no off-balance
sheet arrangements of this kind other than repayment guarantees associated with
trust preferred securities.
Derivative financial instruments include futures, forwards, interest rate
swaps, options contracts, and other financial instruments with similar
characteristics. The Company has not engaged in derivative activities through
March 31, 2006, and has no current plans to do so.
Capital Resources
The Company is regulated by the Board of Governors of the Federal Reserve
Board (FED) and is subject to the securities registration and public reporting
regulations of the Securities and Exchange Commission. The Company's banking
subsidiary is regulated by the Federal Deposit Insurance Corporation (FDIC) and
the North Carolina Office of the Commissioner of Banks. The Company is not aware
of any recommendations of regulatory authorities or otherwise which, if they
were to be implemented, would have a material effect on its liquidity, capital
resources, or operations.
The Company must comply with regulatory capital requirements established by
the FED and FDIC. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. These capital standards require the Company to
maintain minimum ratios of "Tier 1" capital to total risk-weighted assets and
total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1
capital is comprised of total shareholders' equity calculated in accordance with
generally accepted accounting principles, excluding accumulated other
comprehensive income (loss), less intangible assets, and total capital is
comprised of Tier 1 capital plus certain adjustments, the largest of which for
the Company is the allowance for loan losses. Risk-weighted assets refer to the
on- and off-balance sheet exposures of the Company, adjusted for their related
risk levels using formulas set forth in FED and FDIC regulations.
In addition to the risk-based capital requirements described above, the
Company is subject to a leverage capital requirement, which calls for a minimum
ratio of Tier 1 capital (as defined above) to quarterly average total assets of
3.00% to 5.00%, depending upon the institution's composite ratings as determined
by its regulators. The FED has not advised the Company of any requirement
specifically applicable to it.
Page 26
At March 31, 2006, the Company's capital ratios exceeded the regulatory
minimum ratios discussed above. The following table presents the Company's
capital ratios and the regulatory minimums discussed above for the periods
indicated.
March 31, December 31, March 31,
2006 2005 2005
----------- ----------- ----------
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets 10.16% 10.52% 10.88%
Minimum required Tier I capital 4.00% 4.00% 4.00%
Total risk-based capital to
Tier II risk-adjusted assets 11.15% 11.51% 11.90%
Minimum required total risk-based capital 8.00% 8.00% 8.00%
Leverage capital ratios:
Tier I leverage capital to
adjusted most recent quarter average assets 8.59% 8.62% 8.85%
Minimum required Tier I leverage capital 4.00% 4.00% 4.00%
The Company's capital ratios have decreased since March 31, 2005 primarily
as a result of the Company's strong balance sheet growth. In April 2006, the
Company issued an additional $25 million in trust preferred securities, which
increased the Tier I capital ratio by approximately 80 basis points, the total
risk based capital ratio by approximately 165 basis points, and the Tier I
leverage ratio by approximately 70 basis points.
The Company's bank subsidiary is also subject to similar capital
requirements as those discussed above. The bank subsidiary's capital ratios do
not vary materially from the Company's capital ratios presented above. At March
31, 2006, the Company's bank subsidiary exceeded the minimum ratios established
by the FED and FDIC.
SHARE REPURCHASES
During the first quarter of 2006, the Company did not repurchase any of
its own common stock. At March 31, 2006, the Company had approximately 315,000
shares available for repurchase under existing authority from its board of
directors. The Company may repurchase these shares in open market and privately
negotiated transactions, as market conditions and the Company's liquidity
warrant, subject to compliance with applicable regulations. See also Part II,
Item 2 "Unregistered Sales of Equity Securities and Use of Proceeds."
Page 27
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK)
Net interest income is the Company's most significant component of
earnings. Notwithstanding changes in volumes of loans and deposits, the
Company's level of net interest income is continually at risk due to the effect
that changes in general market interest rate trends have on interest yields
earned and paid with respect to the various categories of earning assets and
interest-bearing liabilities. It is the Company's policy to maintain portfolios
of earning assets and interest-bearing liabilities with maturities and repricing
opportunities that will afford protection, to the extent practical, against wide
interest rate fluctuations. The Company's exposure to interest rate risk is
analyzed on a regular basis by management using standard GAP reports, maturity
reports, and an asset/liability software model that simulates future levels of
interest income and expense based on current interest rates, expected future
interest rates, and various intervals of "shock" interest rates. Over the years,
the Company has been able to maintain a fairly consistent yield on average
earning assets (net interest margin). Over the past five calendar years the
Company's net interest margin has ranged from a low of 4.23% (realized in 2001)
to a high of 4.58% (realized in 2002). During that five year period, the prime
rate of interest has ranged from a low of 4.00% to a high of 9.50%.
Using stated maturities for all instruments except mortgage-backed
securities (which are allocated in the periods of their expected payback) and
securities and borrowings with call features that are expected to be called
(which are included in the period of their expected call), at March 31, 2006 the
Company had $324.2 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 March 31,
2006 subject to interest rate changes within one year are deposits totaling
$473.7 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 in the near term (twelve months), net
interest income would not likely experience significant downward pressure from
rising interest rates. Similarly, management would not expect a significant
increase in near term net interest income from falling interest rates (In fact,
it has been the Company's experience that the interest rate cuts that occurred
in 2001-2003 negatively impacted (at least temporarily) the Company's net
interest margin and that interest rate increases occurring since July 1, 2004
have positively impacted (at least temporarily) the Company's net interest
margin). Generally, when rates change, the Company's interest-sensitive assets
that are subject to adjustment reprice immediately at the full amount of the
change, while the Company's interest-sensitive liabilities that are subject to
adjustment reprice at a lag to the rate change and typically not to the full
extent of the rate change. The net effect is that in the twelve month horizon,
as rates change, the impact of having a higher level of interest-sensitive
liabilities is substantially negated by the later and typically lower
proportionate change these liabilities experience compared to interest sensitive
assets. However, the rate cuts totaling 75 basis points that occurred in late
2002 and mid-2003 had a more pronounced and a longer lasting negative impact on
the Company's net interest margin than previous rate cuts because of the
inability of the Company to reset deposit rates by an amount (because of their
already near-zero rates) that would offset the negative impact of the rate cut
on the yields earned on the Company's interest earning assets. Additionally,
from 2001 - 2004, the Company originated significantly more adjustable rate
loans compared to fixed rate loans in an effort to protect itself from an
anticipated rise in the interest rate environment. Adjustable rate loans
generally
Page 28
carry lower initial interest rates than fixed rate loans. For these reasons, the
second quarter of 2004 marked the fifth consecutive quarter of declining net
interest margins. Since the second half of 2004, the Federal Reserve increased
interest rates fifteen times totaling 375 basis points, which was largely
responsible for the Company's net interest margin reversing its downward trend.
Over the past six quarters, the Company's net interest margin has been within a
fairly tight range - from a low of 4.31% to a high of 4.37%. The immediate
positive impact of increases in interest rates has been largely offset by the
mix of the Company's deposit growth being more concentrated in the categories of
time deposits and time deposits greater than $100,000. These are the Company's
highest cost categories of deposits and adjust upwards when rates change to a
greater extent than the Company's other categories of deposits.
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions.
See additional discussion of the Company's net interest margin in the
"Components of Earnings" section above.
Item 4 - Controls and Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on the
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic reports
with the Securities and Exchange Commission. In addition, no change in our
internal control over financial reporting has occurred during, or subsequent to,
the period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
Part I of this report contains statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgment of the Company and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the financial success or changing strategies of the Company's
customers, the Company's level of success in integrating acquisitions, actions
of government regulators, the level of market interest rates, and general
economic conditions.
Page 29
Part II. Other Information
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
-------------------------------------------------------------------------------------------------------------------------------
Total Number of Shares Maximum Number of
Purchased as Part of Shares that May Yet Be
Total Number of Average Price Paid per Publicly Announced Purchased Under the
Period Shares Purchased Share Plans or Programs Plans or Programs (1)
--------------------- ------------------------ ----------------------- -----------------------
January 1, 2006 to January
31, 2006 -- -- -- 315,015
February 1, 2006 to
February 28, 2006 -- -- -- 315,015
March 1, 2006 to March 31,
2006 -- -- -- 315,015
--------------------- ------------------------ ----------------------- -----------------------
Total -- -- -- 315,015 (2)
===================== ======================== ======================= =======================
Footnotes to the Above Table
----------------------------
(1) All shares available for repurchase are pursuant to publicly announced
share repurchase authorizations. On July 30, 2004, the Company announced
that its Board of Directors had approved the repurchase of 375,000 shares
of the Company's common stock. The repurchase authorization does not have
an expiration date. There are no plans or programs the issuer has
determined to terminate prior to expiration, or under which the issuer does
not intend to make further purchases.
(2) The above table above does not include shares that were used by option
holders to satisfy the exercise price of the Company's call options issued
by the Company to its employees and directors pursuant to the Company's
stock option plans. There were three such exercises during the three months
ended March 31, 2006. In January 2006, 439 shares of the Company's common
stock, with a market price of $22.50 per share, were used to satisfy an
exercise of options. In February 2006, 125 shares of the Company's common
stock, with a market price of $21.30 per share, were used to satisfy an
exercise of options. In March 2006, 1,086 shares of the Company's common
stock, with a market price of $22.70 per share, were used to satisfy an
exercise of options.
Item 6 - Exhibits
The following exhibits are filed with this report or, as noted, are
incorporated by reference. Management contracts, compensatory plans and
arrangements are marked with an asterisk (*).
3.a. Copy of Articles of Incorporation of the Company and amendments thereto
were filed as Exhibits 3.a.i through 3.a.v to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 2002, and are
incorporated herein by reference.
3.b Copy of the Amended and Restated Bylaws of the Company was filed as
Exhibit 3.b to the Company's Annual Report on Form 10-K for the year
ended December 31, 2003, and is incorporated herein by reference.
4 Form of Common Stock Certificate was filed as Exhibit 4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, and is incorporated herein by reference.
Page 30
10 Material Contracts
10.a Data Processing Agreement dated October 1, 1984 by and between Bank of
Montgomery (First Bank) and Montgomery Data Services, Inc. was filed as
Exhibit 10(k) to the Registrant's Registration Statement Number
33-12692, and is incorporated herein by reference.
10.b First Bancorp Annual Incentive Plan was filed as Exhibit 10(a) to the
Form 8-K filed on January 26, 2005 and is incorporated herein by
reference. (*)
10.c Indemnification Agreement between the Company and its Directors and
Officers was filed as Exhibit 10(t) to the Registrant's Registration
Statement Number 33-12692, and is incorporated herein by reference.
10.d First Bancorp Senior Management Supplemental Executive Retirement Plan
was filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001, and is incorporated herein by
reference. (*)
10.e First Bancorp 1994 Stock Option Plan was filed as Exhibit 10(f) to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001, and is incorporated herein by reference. (*)
10.f First Bancorp 2004 Stock Option Plan was filed as Exhibit B to the
Registrant's Form Def 14A filed on March 30, 2004 and is incorporated
herein by reference. (*)
10.g Employment Agreement between the Company and James H. Garner dated
August 17, 1998 was filed as Exhibit 10(l) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference (Commission File Number 000-15572). (*)
10.h Employment Agreement between the Company and Anna G. Hollers dated
August 17, 1998 was filed as Exhibit 10(m) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference (Commission File Number 000-15572). (*)
10.i Employment Agreement between the Company and Teresa C. Nixon dated
August 17, 1998 was filed as Exhibit 10(n) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, and is
incorporated by reference (Commission File Number 000-15572). (*)
10.j Employment Agreement between the Company and Eric P. Credle dated
August 17, 1998 was filed as Exhibit 10(p) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, and is
incorporated herein by reference (Commission File Number 333-71431).(*)
10.k Employment Agreement between the Company and John F. Burns dated
September 14, 2000 was filed as Exhibit 10.w to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000 and is
incorporated herein by reference. (*)
10.l Employment Agreement between the Company and James G. Hudson, Jr. dated
May 17, 2001 was filed as Exhibit 10(p) to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001, and is incorporated
herein by reference. (*)
10.m Amendment to the employment agreement between the Company and James G.
Hudson, Jr. dated April 26, 2005 was filed as Exhibit 10.a to the Form
8-K filed on April 29, 2005 and is incorporated herein by reference.
(*)
Page 31
10.n Employment Agreement between the Company and R. Walton Brown dated
January 15, 2003 was filed as Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003 and is
incorporated herein by reference. (*)
10.o Amendment to the employment agreement between the Company and R. Walton
Brown dated March 8, 2005 was filed as Exhibit 10.n to the Company's
Annual Report on Form 10-K for the year ended December 31, 2004 and is
incorporated herein by reference. (*)
10.p Employment Agreement between the Company and Jerry L. Ocheltree was
filed as Exhibit 10.1 to the Form 8-K filed on January 25, 2006, and is
incorporated herein by reference. (*)
10.q First Bancorp Long Term Care Insurance Plan was filed as Exhibit 10(o)
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004, and is incorporated by reference. (*)
10.r Description of Director Compensation pursuant to Item
601(b)(10)(iii)(A) of Regulation S-K.
10.s Advances and Security Agreement with the Federal Home Loan Bank of
Atlanta dated February 15, 2005 was attached as Exhibit 99(a) to the
Form 8-K filed on February 22, 2005, and is incorporated herein by
reference
10.t The 2006 base salaries for certain of the Company's executive officers,
and disclosure that the Compensation Committee had recommended to the
Board of Directors the 2006 earnings target for the Company's Annual
Incentive Plan, was disclosed in the Company's Form 8-K filed on
January 25, 2006, and is incorporated herein by reference. (*)
21 List of Subsidiaries of Registrant was filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2003, and is incorporated herein by reference.
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Copies of exhibits are available upon written request to: First Bancorp, Anna G.
Hollers, Executive Vice President, P.O. Box 508, Troy, NC 27371
Page 32
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST BANCORP
May 9, 2006 BY: James H. Garner
---------------------------
James H. Garner
President
(Principal Executive Officer),
Treasurer and Director
May 9, 2006 BY: Anna G. Hollers
---------------------------
Anna G. Hollers
Executive Vice President,
Secretary
and Chief Operating Officer
May 9, 2006 BY: Eric P. Credle
---------------------------
Eric P. Credle
Senior Vice President
and Chief Financial Officer
Page 33