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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
September 30, 2002
Commission File Number 0-15572
FIRST BANCORP
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
- ------------------------------- ---------------------
North Carolina 56-1421916
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
341 North Main Street, Troy, North Carolina 27371-0508
- ------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (910) 576-6171
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] YES [ ] NO
As of October 31, 2002, 9,125,596 shares of the registrant's Common Stock,
no par value, were outstanding. The registrant had no other classes of
securities outstanding.
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INDEX
FIRST BANCORP AND SUBSIDIARIES
Page
----
Part I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets -
September 30, 2002 and 2001
(With Comparative Amounts at December 31, 2001) 3
Consolidated Statements of Income -
For the Periods Ended September 30, 2002 and 2001 4
Consolidated Statements of Comprehensive Income -
For the Periods Ended September 30, 2002 and 2001 5
Consolidated Statements of Shareholders' Equity -
For the Periods Ended September 30, 2002 and 2001 6
Consolidated Statements of Cash Flows -
For the Periods Ended September 30, 2002 and 2001 7
Notes To Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition 14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 26
Item 4 - Controls and Procedures 29
Part II. Other Information
Item 5 - Other Information 30
Item 6 - Exhibits and Reports on Form 8-K 30
Signatures 32
Certifications 33
Page 2
Part I. Financial Information
Item 1 - Financial Statements
First Bancorp and Subsidiaries
Consolidated Balance Sheets
September 30, December 31, September 30,
($ in thousands-unaudited) 2002 2001 2001
- ------------------------------------------------------------------------------------------------------------
ASSETS
Cash & due from banks, noninterest-bearing $ 24,332 34,019 33,567
Due from banks, interest-bearing 1,343 41,552 16,955
Federal funds sold 15,227 11,244 11,754
----------- --------- ---------
Total cash and cash equivalents 40,902 86,815 62,276
----------- --------- ---------
Securities available for sale (costs of $78,876,
$95,445, and $96,755) 80,630 96,469 98,500
Securities held to maturity (fair values of $15,056,
$16,746, and $16,980) 14,114 16,338 16,347
Presold mortgages in process of settlement 5,401 10,713 5,020
Loans 983,045 890,310 878,234
Less: Allowance for loan losses (10,524) (9,388) (9,187)
----------- --------- ---------
Net loans 972,521 880,922 869,047
----------- --------- ---------
Premises and equipment 21,613 18,518 17,934
Accrued interest receivable 5,661 5,880 6,434
Intangible assets 23,376 24,488 21,632
Other 3,963 4,548 3,465
----------- --------- ---------
Total assets $ 1,168,181 1,144,691 1,100,655
=========== ========= =========
LIABILITIES
Deposits: Demand - noninterest-bearing $ 106,521 96,065 92,824
Savings, NOW, and money market 369,670 353,439 318,799
Time deposits of $100,000 or more 188,888 189,948 188,392
Other time deposits 350,239 360,829 357,302
----------- --------- ---------
Total deposits 1,015,318 1,000,281 957,317
Borrowings 23,000 15,000 15,000
Accrued interest payable 2,411 3,480 3,772
Other liabilities 6,017 9,204 8,744
----------- --------- ---------
Total liabilities 1,046,746 1,027,965 984,833
----------- --------- ---------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Issued and outstanding: 9,126,019,
9,112,542, and 9,099,571 shares 48,557 50,134 50,147
Retained earnings 71,909 65,915 64,550
Accumulated other comprehensive income 969 677 1,125
----------- --------- ---------
Total shareholders' equity 121,435 116,726 115,822
----------- --------- ---------
Total liabilities and shareholders' equity $ 1,168,181 1,144,691 1,100,655
=========== ========= =========
See notes to consolidated financial statements.
Page 3
First Bancorp and Subsidiaries
Consolidated Statements of Income
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
($ in thousands, except share data-unaudited) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 17,140 17,762 50,010 51,263
Interest on investment securities:
Taxable interest income 1,236 1,605 3,977 4,893
Tax-exempt interest income 172 204 555 611
Other, principally overnight investments 122 327 598 1,256
----------- ------ ------ ------
Total interest income 18,670 19,898 55,140 58,023
----------- ------ ------ ------
INTEREST EXPENSE
Savings, NOW and money market 943 1,332 2,835 4,311
Time deposits of $100,000 or more 1,621 2,657 5,251 7,651
Other time deposits 2,832 4,754 9,697 14,579
Borrowings 258 258 718 1,113
----------- ------ ------ ------
Total interest expense 5,654 9,001 18,501 27,654
----------- ------ ------ ------
Net interest income 13,016 10,897 36,639 30,369
Provision for loan losses 575 238 1,790 766
----------- ------ ------ ------
Net interest income after provision
for loan losses 12,441 10,659 34,849 29,603
----------- ------ ------ ------
NONINTEREST INCOME
Service charges on deposit accounts 1,733 1,436 5,019 3,636
Other service charges, commissions and fees 548 489 1,758 1,529
Fees from presold mortgages 359 338 1,139 762
Commissions from sales of insurance and financial products 189 184 632 530
Data processing fees 78 55 234 151
Securities gains (losses) (2) 61 25 61
Other gains (losses) (16) 57 (20) 96
----------- ------ ------ ------
Total noninterest income 2,889 2,620 8,787 6,765
----------- ------ ------ ------
NONINTEREST EXPENSES
Salaries 3,840 3,281 11,147 9,152
Employee benefits 874 783 2,726 2,082
----------- ------ ------ ------
Total personnel expense 4,714 4,064 13,873 11,234
Net occupancy expense 517 443 1,545 1,282
Equipment related expenses 546 428 1,537 1,189
Intangibles amortization 364 458 1,092 1,065
Other operating expenses 2,348 2,116 6,959 5,887
----------- ------ ------ ------
Total noninterest expenses 8,489 7,509 25,006 20,657
----------- ------ ------ ------
Income before income taxes 6,841 5,770 18,630 15,711
Income taxes 2,414 2,006 6,513 5,456
----------- ------ ------ ------
NET INCOME $ 4,427 3,764 12,117 10,255
=========== ====== ====== ======
Earnings per share:
Basic $ 0.48 0.41 1.33 1.14
Diluted 0.48 0.40 1.30 1.11
Weighted average common shares outstanding:
Basic 9,131,922 9,223,600 9,144,704 9,006,940
Diluted 9,314,960 9,481,217 9,331,835 9,253,431
See notes to consolidated financial statements.
Page 4
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
($ in thousands-unaudited) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------
Net income $ 4,427 3,764 12,117 10,255
Other comprehensive income:
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains arising
during the period, pretax 503 1,045 755 1,397
Tax expense (193) (367) (347) (489)
Reclassification to realized losses (gains) 2 (61) (25) (61)
Tax expense (benefit) (1) 22 10 22
Adjustment to minimum pension liability:
Additional pension charge related to unfunded
pension liability -- -- (165) --
Tax benefit -- -- 64 --
------- ----- ------ ------
Other comprehensive income 311 639 292 869
------- ----- ------ ------
Comprehensive income $ 4,738 4,403 12,409 11,124
======= ===== ====== ======
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 Equity
- ----------------------------------------------------------------------------------------------------------------------------
Balances, January 1, 2001 8,827 $ 50,148 60,280 256 110,684
Net income 10,255 10,255
Cash dividends declared ($0.66 per share) (5,985) (5,985)
Common stock issued under
stock option plan 94 567 567
Common stock issued into
dividend reinvestment plan 13 291 291
Common stock issued in acquisitions 602 9,159 9,159
Purchases and retirement of common
stock (436) (10,018) (10,018)
Other comprehensive income 869 869
----- -------- ------ ----- -------
Balances, September 30, 2001 9,100 $ 50,147 64,550 1,125 115,822
===== ======== ====== ===== =======
Balances, January 1, 2002 9,113 $ 50,134 65,915 677 116,726
Net income 12,117 12,117
Cash dividends declared ($0.67 per share) (6,123) (6,123)
Common stock issued under
stock option plan 135 942 942
Common stock issued into
dividend reinvestment plan 37 867 867
Purchases and retirement of common
stock (159) (3,768) (3,768)
Tax benefit realized from exercise of
nonqualified stock options 382 382
Other comprehensive income 292 292
----- -------- ------ ----- -------
Balances, September 30, 2002 9,126 $ 48,557 71,909 969 121,435
===== ======== ====== ===== =======
See notes to consolidated financial statements.
Page 6
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
($ in thousands-unaudited) 2002 2001
- -------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 12,117 10,255
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses 1,790 766
Net security premium (discount) amortization 174 (30)
Gain on disposal of other real estate (11) (30)
Gain on sale of securities available for sale (25) (61)
Loss on disposal of premises and equipment 34 --
Gain on sale of loans (3) (9)
Proceeds from sales of loans 42 --
Loan fees and costs deferred, net of amortization 110 26
Depreciation of premises and equipment 1,347 1,038
Tax benefit realized from exercise of nonqualified stock options 382 --
Amortization of intangible assets 1,092 1,065
Deferred income tax expense (benefit) (728) 477
Decrease in accrued interest receivable 219 386
Decrease (increase) in other assets 6,665 (3,149)
Decrease in accrued interest payable (1,069) (1,240)
Increase (decrease) in other liabilities (3,024) 3,522
-------- ------
Net cash provided by operating activities 19,112 13,016
-------- ------
Cash Flows From Investing Activities
Purchases of securities available for sale (9,728) (28,001)
Purchases of securities held to maturity (2) (1)
Proceeds from maturities/issuer calls of securities available for sale 25,132 35,924
Proceeds from maturities/issuer calls of securities held to maturity 2,230 2,894
Proceeds from sales of securities available for sale 1,012 2,348
Net increase in loans (94,014) (26,654)
Purchases of premises and equipment (4,704) (2,781)
Net cash received in acquisition of insurance agencies -- 40
Net cash paid in acquisition of Century Bancorp -- (8,006)
Net cash received in purchase of branches -- 70,201
-------- ------
Net cash provided (used) by investing activities (80,074) 45,964
-------- ------
Cash Flows From Financing Activities
Net increase in deposits 15,037 12,620
Net proceeds (repayments) of borrowings 8,000 (24,700)
Cash dividends paid (6,029) (5,903)
Proceeds from issuance of common stock 1,809 858
Purchases and retirement of common stock (3,768) (10,018)
-------- ------
Net cash provided (used) by financing activities 15,049 (27,143)
-------- ------
Increase (Decrease) In Cash And Cash Equivalents (45,913) 31,837
Cash And Cash Equivalents, Beginning Of Period 86,815 30,439
-------- ------
Cash And Cash Equivalents, End Of Period $ 40,902 62,276
======== ======
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for:
Interest $ 19,570 28,649
Income taxes 10,936 735
Non-cash transactions:
Transfer of securities from held to maturity to available for sale -
fair value -- 31,220
Common stock issued in acquisitions -- 9,159
Unrealized gain on securities available for sale, net of taxes 393 869
Foreclosed loans transferred to other real estate 476 517
Premises and equipment transferred to other real estate 228 425
See notes to consolidated financial statements.
Page 7
First Bancorp and Subsidiaries
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
(unaudited) For the Periods Ended September 30, 2002 and 2001
- --------------------------------------------------------------------------------
Note 1 - Basis of Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the consolidated financial
position of the Company as of September 30, 2002 and 2001 and the consolidated
results of operations and consolidated cash flows for the periods ended
September 30, 2002 and 2001. Reference is made to the 2001 Annual Report on Form
10-K filed with the Securities and Exchange Commission (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 September 30, 2002
and 2001 are not necessarily indicative of the results to be expected for the
full year.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" (Statement 141), and SFAS No. 142, "Goodwill and Other Intangible
Assets" (Statement 142). Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet in order to be recognized and
reported apart from goodwill. The Company adopted this statement July 1, 2001.
Statement 142 requires that all goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 also
requires that identifiable intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Certain provisions of Statement 142 relating to business
combinations consummated after June 30, 2001 were adopted by the Company on July
1, 2001. The remaining provisions were adopted on January 1, 2002. In connection
with Statement 142's transitional goodwill impairment evaluation, the statement
required the Company to perform an assessment of whether there is an indication
that goodwill is impaired as of the date of adoption. The Company completed this
assessment during the first quarter of 2002 and determined that there was no
goodwill impairment. See Note 7 for additional disclosures related to Statement
142.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (Statement 144), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This standard provides guidance on differentiating between long-lived
assets to be held and used, long-lived assets to be disposed of other than by
sale and long-lived assets to be disposed of by sale. Statement 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Statement 144 also supersedes Accounting
Principals Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." This statement was
adopted by the Company on January 1, 2002 and did not have a material impact on
the Company's financial statements.
In August 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (Statement 146), which addresses
financial accounting and reporting costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on
the date that the entity committed itself to an exit plan. In Statement 146, the
Board acknowledges that an entity's commitment to a plan does not, by itself,
create a present obligation to other parties that meets the definition of a
liability. An obligation becomes a present obligation when a transaction or
Page 8
event occurs that leaves an entity little or no discretion to avoid the future
transfer or use of assets to settle the liability. Statement 146 also
establishes that fair value is the objective for the initial measurement of the
liability. Statement 146 will be effective for exit or disposal activities that
are initiated after December 31, 2002. The Company will adopt the provisions of
this statement effective January 1, 2003 and will apply the provisions to any
exit or disposal activities initiated after that date.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions" (Statement 147), which addresses the financial
accounting and reporting for the acquisition of all or part of a financial
institution. This standard removes certain acquisitions of financial
institutions from the scope of SFAS No. 72, "Accounting for Certain Acquisitions
of Bank or Thrift Institutions" (Statement 72). This statement requires
financial institutions to reclassify goodwill arising from a qualified business
acquisition from Statement 72 goodwill to goodwill subject to the provisions of
Statement 142. The reclassified goodwill will no longer be amortized but will be
subject to an annual impairment test, pursuant to Statement 142. The Company
will adopt Statement 147 in the fourth quarter of 2002. As of September 30,
2002, the Company had $17,248,000 in unamortized Statement 72 goodwill that
arose from various branch acquisitions over the years, with amortization expense
of Statement 72 goodwill amounting to $1,069,000 for the nine months ended
September 30, 2002. The Company has not yet determined how much, if any, of its
Statement 72 goodwill will meet the requirements of Statement 147 for
reclassification as Statement 142 goodwill. In the event that any portion of the
Company's Statement 72 goodwill is reclassified as Statement 142 goodwill,
Statement 147 will require the Company to retroactively restate its previously
issued 2002 financial statements to reverse reclassified Statement 72 goodwill
amortization expense recorded in the first three quarters of the 2002 fiscal
year.
Note 3 - Reclassifications
Certain amounts reported in the period ended September 30, 2001 have been
reclassified to conform with the presentation for September 30, 2002. These
reclassifications had no effect on net income or shareholders' equity for the
periods presented, nor did they materially impact trends in financial
information.
Note 4 - Earnings Per Share
Basic earnings per share were computed by dividing net income by the
weighted average common shares outstanding. Diluted earnings per share includes
the potentially dilutive effects of the Company's stock option plan. The
following is a reconciliation of the numerators and denominators used in
computing basic and diluted earnings per share:
For the Three Months Ended September 30,
-----------------------------------------------------------------------------
2002 2001
------------------------------------ -------------------------------------
Income Shares Income Shares
($ in thousands except per (Numer- (Denom- Per Share (Numer- (Denom- Per Share
share amounts) ator) inator) Amount ator) inator) Amount
- ----------------------------- ----- ------- ------ ----- ------- ------
Basic EPS
Net income $ 4,427 9,131,922 $ 0.48 $ 3,764 9,223,600 $ 0.41
======== =======
Effect of Dilutive Securities -- 183,038 -- 257,617
--------- --------- --------- ---------
Diluted EPS $ 4,427 9,314,960 $ 0.48 $ 3,764 9,481,217 $ 0.40
========= ========= ======== ========= ========= =======
Page 9
For the Nine Months Ended September 30,
-----------------------------------------------------------------------------
2002 2001
------------------------------------ -------------------------------------
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 $ 12,117 9,144,704 $ 1.33 $ 10,255 9,006,940 $ 1.14
======== =======
Effect of Dilutive Securities -- 187,131 -- 246,491
--------- --------- --------- ---------
Diluted EPS $ 12,117 9,331,835 $ 1.30 $ 10,255 9,253,431 $ 1.11
========= ========= ======== ========= ========= =======
For the three and nine month periods ended September 30, 2002, there were
options of 0 and 24,000, respectively, that were antidilutive since the exercise
price exceeded the average market price for their respective periods.
Antidilutive options for the three and nine month periods ended September 30,
2001 amounted to 24,000 and 154,250, respectively. Antidilutive options have
been omitted from the calculation of diluted earnings per share for their
respective periods.
Note 5 - 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:
September 30, December 31, September 30,
($ in thousands) 2002 2001 2001
-------------------------------------------------------------------------------------------
Nonperforming loans:
Nonaccrual loans $3,009 3,808 4,540
Restructured loans 73 83 166
Accruing loans > 90 days past due -- -- --
------ ----- -----
Total nonperforming loans 3,082 3,891 4,706
Other real estate 1,277 1,253 1,146
------ ----- -----
Total nonperforming assets $4,359 5,144 5,852
====== ===== =====
Nonperforming loans to total loans 0.31% 0.44% 0.54%
Nonperforming assets as a percentage of loans
and other real estate 0.44% 0.58% 0.67%
Nonperforming assets to total assets 0.37% 0.45% 0.53%
Allowance for loan losses to total loans 1.07% 1.05% 1.05%
================================================================================
Note 6 - Deferred Loan Fees
Loans are shown on the Consolidated Balance Sheets net of net deferred loan
fees of approximately $768,000, $658,000, and $719,000 at September 30, 2002,
December 31, 2001, and September 30, 2001, respectively.
Page 10
Note 7 - Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated
amortization of amortized intangible assets as of September 30, 2002 and
December 31, 2001 and the carrying amount of unamortized intangible assets as of
September 30, 2002, and December 31, 2001. Amounts presented are prior to any
potential effects related to the fourth quarter 2002 adoption of Statement 147,
as discussed in Note 2 above.
September 30, 2002 December 31, 2001
-------------------------------- ----------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Amortized intangible assets:
Customer lists $ 243 19 243 7
Core deposit premium related to whole-bank
acquisition 335 257 335 246
Branch acquisitions 20,196 2,948 20,180 1,879
------- ----- ------ -----
Total $20,774 3,224 20,758 2,132
======= ===== ====== =====
Unamortized intangible assets:
Goodwill $ 5,609 5,609
======= =====
Pension $ 217 253
======= ===
The following table presents the estimated amortization expense for
intangible assets for each of the five calendar years ending December 31, 2006
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. The table does not reflect any potential effects related to
the fourth quarter 2002 adoption of Statement 147 as discussed in Note 2 above.
Estimated
(Dollars in thousands) Amortization Expense
--------------------
2002 $ 1,456
2003 1,454
2004 1,453
2005 1,448
2006 1,371
Thereafter 11,460
-------
Total $18,642
=======
Page 11
The following tables present the adjusted effect on net income and on basic
and diluted earnings per share excluding the amortization of goodwill for the
three months ended September 30, 2002 and 2001, the nine months ended September
30, 2002 and 2001, and for the years ended December 31, 2001, 2000 and 1999,
excluding any potential impact of the adoption of SFAS No. 147 in the fourth
quarter of 2002:
For the Three Months Ended September 30,
(Dollars in thousands, except ----------------------------------------
earnings per share amounts) 2002 2001
- --------------------------------------------- --------- -----
Reported net income $ 4,427 3,764
Add back: Goodwill amortization -- 147
--------- -----
Adjusted net income $ 4,427 3,911
========= =====
Basic earnings per share:
As reported $ 0.48 0.41
Goodwill amortization -- 0.01
--------- -----
Adjusted basic earnings per share $ 0.48 0.42
========= =====
Diluted earnings per share:
As reported $ 0.48 0.40
Goodwill amortization -- 0.01
--------- -----
Adjusted diluted earnings per share $ 0.48 0.41
========= =====
For the Nine Months Ended September 30,
(Dollars in thousands, except ----------------------------------------
earnings per share amounts) 2002 2001
- --------------------------------------------- --------- -----
Reported net income $ 12,117 10,255
Add back: Goodwill amortization -- 360
-------- ------
Adjusted net income $ 12,117 10,615
======== ======
Basic earnings per share:
As reported $ 1.33 1.14
Goodwill amortization -- 0.04
-------- ------
Adjusted basic earnings per share $ 1.33 1.18
======== ======
Diluted earnings per share:
As reported $ 1.30 1.11
Goodwill amortization -- 0.04
-------- ------
Adjusted diluted earnings per share $ 1.30 1.15
======== ======
For the Years Ended December 31,
(Dollars in thousands, except --------------------------------
earnings per share amounts) 2002 2001 1999
- --------------------------------------------- --------- ----- ----
Reported net income $ 13,616 9,342 11,854
Add back: Goodwill amortization 511 373 373
-------- ----- ------
Adjusted net income $ 14,127 9,715 12,227
======== ===== ======
Basic earnings per share:
As reported $ 1.51 1.05 1.32
Goodwill amortization 0.05 0.04 0.04
-------- ----- ------
Adjusted basic earnings per share $ 1.56 1.09 1.36
======== ===== ======
Diluted earnings per share:
As reported $ 1.47 1.03 1.27
Goodwill amortization 0.05 0.04 0.04
-------- ----- ------
Adjusted diluted earnings per share $ 1.52 1.07 1.31
======== ===== ======
Page 12
Note 8. Accumulated Other Comprehensive Income
Shareholders' equity includes a line item entitled "Accumulated Other
Comprehensive Income," which is comprised of the following components:
September 30, December 31, September 30,
2002 2001 2001
---- ---- ----
Unrealized gain on securities available for sale $ 1,754 1,024 1,745
Deferred tax liability (684) (347) (620)
------- ----- -----
Net unrealized gain on securities available for sale 1,070 677 1,125
------- ----- -----
Additional minimum pension liability (165) -- --
Deferred tax asset 64 -- --
------- ----- -----
Net additional minimum pension liability (101) -- --
------- ----- -----
Total accumulated other comprehensive income $ 969 677 1,125
======= ===== =====
Note 9 - Merger and Acquisition Activity
On April 30, 2002, the Company reported that it had agreed to purchase the
RBC Centura bank branch in Broadway, North Carolina. The branch has
approximately $11 million in deposits and $4 million in loans. The Company
agreed to pay RBC Centura a deposit premium of 7% of the average daily deposit
base in the month leading up to the completion of the purchase. The transaction
was completed on October 4, 2002. Intangible assets amounting to $722,000 were
recorded in connection with the completion of the transaction.
On July 16, 2002, the Company reported that it had agreed to acquire
Carolina Community Bancshares, Inc. (CCB). As of June 30, 2002, CCB had total
assets of approximately $67 million, with total loans of $46 million, total
deposits of $56 million, and total shareholders' equity of $8.4 million. CCB
operates out of three branches in Dillon County, South Carolina, with its
headquarters and one of its branches located in Latta, and two branches in the
city of Dillon. The terms of the agreement call for shareholders of Carolina
Community to receive 0.8 shares of First Bancorp stock and $20.00 in cash for
each share of Carolina Community stock they own. At the date of the
announcement, the total deal value amounted to approximately $17.7 million. The
transaction is expected to be completed in the first quarter of 2003. This
represents the Company's first entry into South Carolina. Dillon County, South
Carolina is contiguous to Robeson County, North Carolina, a county where the
Company operates four branches.
Also see Note 10 - Subsequent Event - Merger and Acquisition Activity
Note 10 - Subsequent Event - Merger and Acquisition Activity
On October 7, 2002, the Company announced that its insurance subsidiary,
First Bank Insurance Services, Inc., had reached an agreement to acquire
Uwharrie Insurance Group, a Montgomery County based property and casualty
insurance agency. With eight employees, Uwharrie Insurance Group, Inc. serves
approximately 5,000 customers, primarily from its Troy-based headquarters. The
transaction is subject to regulatory approval and is scheduled to be completed
on January 2, 2003.
Page 13
Item 2 - Management's Discussion and Analysis of Consolidated Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
OVERVIEW
Net income for the three months ended September 30, 2002 amounted to
$4,427,000, or $0.48 per diluted share, a 20.0% increase in diluted earnings per
share over the net income of $3,764,000, or $0.40 per diluted share, recorded in
the third quarter of 2001. Effective January 1, 2002, in accordance with
Statement of Financial Accounting Standards No. 142, titled "Goodwill and Other
Intangible Assets" (Statement 142), the Company discontinued the amortization of
certain of its intangible assets, which effectively increased earnings by
$147,000, or 1.6 cents per share, over what would have been recorded under
previous accounting standards during the third quarter of 2002. Nonrecurring
items of income/expense were insignificant for the third quarter of 2002, while
nonrecurring gains of approximately one cent per share were realized in the
third quarter of 2001.
Net income for the nine months ended September 30, 2002 amounted to
$12,117,000, or $1.30 per diluted share, a 17.1% increase in diluted earnings
per share over the $1.11 per diluted share for the nine months ended September
30, 2001. For the nine months ended September 30, 2002, the discontinuation of
amortization of certain intangible assets effectively increased earnings by
$441,000, or 4.7 cents per diluted share, over what would have been recorded
prior to the adoption of Statement 142. Nonrecurring items of income/expense
were insignificant for the nine months ended September 30, 2002, while
nonrecurring gains of approximately one cent per share were realized in the nine
months ended September 30, 2001.
In October 2002, the Financial Accounting Standards Board issued Statement
No. 147, titled "Acquisitions of Certain Financial Institutions," which requires
companies to cease amortization of unidentifiable intangible assets associated
with certain branch acquisitions. The Company has not determined what effect, if
any, the adoption of this statement in the fourth quarter of 2002 will have on
the Company. See Notes 2 and 7 to the consolidated financial statements for
additional discussion.
The reported earnings for the third quarter of 2002 represent a return on
average assets of 1.51% and a return on average equity of 14.55%. Other key
performance indicators for the third quarter of 2002 were a net interest margin
of 4.78%, an efficiency ratio of 52.95%, a nonperforming asset to total asset
ratio of 0.37%, and an annualized net charge-offs to average loans ratio of
0.09%. The Company's annualized return on average assets for the first nine
months of 2002 was 1.41% compared to 1.34% for the first nine months of 2001.
The Company's return on average equity for the first nine months of 2002 was
13.51% compared to 11.91% for the first nine months of 2001.
The increases in earnings for the three and nine month periods in 2002
compared to the same periods in 2001 were primarily a result of higher net
interest income and noninterest income, the effects of which were partially
offset by an increase in the provision for loan losses and higher noninterest
expenses. Higher net interest margins and a higher level of average loans and
deposits caused the increases in net interest income. Noninterest income and
noninterest expense have increased in 2002 as a result of the Company's overall
growth. Noninterest income has also been positively affected by increased
mortgage loan refinancing activity that has increased mortgage origination fees,
as well as the offering of a check overdraft product beginning in August 2001
that has increased fees earned on deposit accounts. The increases in the
provision for loan losses in 2002 have been primarily a result of higher loan
growth in 2002 compared to 2001.
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
Page 14
interest income for the three and nine month periods ended September 30, 2002
amounted to $13,016,000 and $36,639,000, respectively, increases of $2,119,000
and $6,270,000, or 19.4% and 20.6%, over the amounts of $10,897,000 and
$30,369,000 recorded in the same three and nine month periods in 2001,
respectively.
There are two primary factors that cause changes in the amount of net
interest income recorded by the Company - 1) growth in loans and deposits, and
2) the Company's net interest margin. For the three and nine months ended
September 30, 2002, both factors contributed to the increase in the amount of
net interest income realized by the Company compared to the same periods in
2001.
The following tables present average balances and average rates earned/paid
by the Company for the periods indicated.
For the Three Months Ended September 30,
--------------------------------------------------------------------------
2002 2001
----------------------------------- ------------------------------------
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
------ ---- ------- ------ ---- -------
Assets
Loans (1) $ 979,489 6.94% $17,140 $ 873,959 8.06% $17,762
Taxable securities 82,822 5.92% 1,236 103,206 6.17% 1,605
Non-taxable securities (2) 13,930 8.52% 299 16,183 8.43% 344
Short-term investments,
principally federal funds 14,878 3.25% 122 24,882 5.21% 327
---------- ------ ---------- ------
Total interest-earning assets 1,091,119 6.83% 18,797 1,018,230 7.81% 20,038
------ ------
Liabilities
Savings, NOW and money
market deposits 370,519 1.01% 943 319,457 1.65% 1,332
Time deposits >$100,000 181,422 3.54% 1,621 179,022 5.89% 2,657
Other time deposits 348,301 3.23% 2,832 360,358 5.23% 4,754
--------- ------- --------- ------
Total interest-bearing deposits 900,242 2.38% 5,396 858,837 4.04% 8,743
Borrowings 28,430 3.60% 258 14,989 6.83% 258
--------- ------- --------- ------
Total interest-bearing liabilities 928,672 2.42% 5,654 873,826 4.09% 9,001
------- ------
Non-interest-bearing deposits 102,519 87,315
Net yield on interest-earning
assets and net interest income 4.78% $13,143 4.30% $11,037
======= =======
Interest rate spread 4.41% 3.72%
Average prime rate 4.75% 6.58%
(1) Average loans include nonaccruing loans, the effect of which is to lower
the average rate shown.
(2) Includes tax-equivalent adjustments of $127,000 and $140,000 in 2002 and
2001, respectively, to reflect the federal and state benefit of the
tax-exempt securities, reduced by the related nondeductible portion of
interest expense.
Page 15
For the Nine Months Ended September 30,
--------------------------------------------------------------------------
2002 2001
----------------------------------- ------------------------------------
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
------ ---- ------- ------ ---- -------
Assets
Loans (1) $ 943,017 7.09% $ 50,010 $ 814,105 8.42% $ 51,263
Taxable securities 88,102 6.04% 3,977 99,362 6.58% 4,893
Non-taxable securities (2) 15,118 8.48% 959 16,329 8.71% 1,064
Short-term investments,
principally federal funds 31,730 2.52% 598 34,462 4.87% 1,256
----------- -------- ---------- --------
Total interest-earning assets 1,077,967 6.89% 55,544 964,258 8.11% 58,476
-------- --------
Liabilities
Savings, NOW and money
market deposits 365,151 1.04% 2,835 290,513 1.98% 4,311
Time deposits >$100,000 182,772 3.84% 5,251 164,866 6.20% 7,651
Other time deposits 352,217 3.68% 9,697 341,612 5.71% 14,579
----------- -------- ---------- ---------
Total interest-bearing deposits 900,140 2.64% 17,783 796,991 4.45% 26,541
Borrowings 19,458 4.93% 718 22,659 6.57% 1,113
----------- -------- ---------- ---------
Total interest-bearing liabilities 919,598 2.69% 18,501 819,650 4.51% 27,654
-------- ---------
Non-interest-bearing deposits 100,824 81,135
Net yield on interest-earning
assets and net interest income 4.59% $ 37,043 4.27% $ 30,822
========= ========
Interest rate spread 4.20% 3.60%
Average prime rate 4.75% 7.50%
- ----------------------------------------------------------------------------------------------------------------------
(1) Average loans include nonaccruing loans, the effect of which is to lower
the average rate shown.
(2) Includes tax-equivalent adjustments of $404,000 and $453,000 in 2002 and
2001, respectively, to reflect the federal and state benefit of the
tax-exempt securities, reduced by the related nondeductible portion of
interest expense.
The increase in average loans and deposits in 2002 compared to 2001 has
been as a result of both 1) internally generated growth and 2) growth resulting
from acquisitions. While the Company did not complete any acquisitions in the
first nine months of 2002, during 2001 the Company completed three acquisitions
with total loans of $116.2 million and total deposits of $204.6 million. These
acquisitions took place in the first, second, and fourth quarters of 2001 and
thus only partially affected the average balances for 2001 in the tables above
(but are fully reflected in the 2002 average balances). Internally generated
loan and deposit growth also contributed to the higher amount of average loans
and deposits outstanding. See additional discussion regarding the nature of the
growth in loans and deposits in the section entitled "Financial Condition"
below. The effect of these higher amounts of average loans and deposits was to
increase net interest income in 2002.
The Company's net interest margin increased for the third consecutive
quarter, amounting to 4.78% in the third quarter of 2002 compared to the 4.30%
margin realized in the third quarter of 2001. The Company's net interest margin
for the first nine months of 2002 was 4.59% compared to 4.27% for the first nine
months of 2001. The increase in the Company's net interest margin in 2002 has
been primarily due to the stable interest rate environment experienced during
the year - for the first nine months of 2002, there were no changes to interest
rates initiated by the Federal Reserve. This allowed a significant portion of
the Company's time deposits that were originated during periods of higher
interest rates and matured during 2002 to reprice at lower levels. A majority of
the Company's rate sensitive interest-earning assets repriced lower immediately
upon the rate cuts by the Federal Reserve in 2001, and thus have not experienced
further rate reductions in 2002. As discussed in "Item 3 - Quantitative and
Qualitative Disclosures About Market Risk", the November 6, 2002 50 basis point
reduction in interest rates initiated by the the Federal Reserve is expected to
negatively impact (at least temporarily) the Company's net interest margin.
The provision for loan losses for the third quarter of 2002 was $575,000,
$337,000 more than the $238,000 recorded in the third quarter of 2001. For the
nine months ended September 30, 2002, the provision for loan losses was
$1,790,000 compared to $766,000 for the nine months ended September 30, 2001.
The increases in the provision for loan losses in 2002 have primarily been a
result of significantly higher loan growth. Net internal loan
Page 16
growth (excludes loans assumed in acquisitions) for the third quarter of 2002
amounted to $13.6 million compared to $9.0 million in the third quarter of 2001.
Net internal loan growth for first nine months of 2002 amounted to $92.7 million
compared to $25.3 million in the first nine months of 2001. Asset quality ratios
have generally improved slightly when comparing September 30, 2002 to the prior
year.
Noninterest income for the three and nine month periods ended September 30,
2002 amounted to $2,889,000 and $8,787,000 respectively, increases of 10.3% and
29.9% over the amounts recorded in the same three and nine month periods in
2001. Within noninterest income, service charges on deposit accounts experienced
the largest increase in 2002, amounting to $1,733,000 in the third quarter of
2002, a 20.7% increase over the $1,436,000 recorded in the same quarter of 2001,
and $5,019,000 for the first nine months of 2002, a 38.0% increase over the
$3,636,000 recorded in the first nine months of 2001. In addition to an
approximate 10% growth in the Company's transaction accounts over the past
twelve months, another significant reason for the increase in service charges on
deposit accounts when comparing the third quarter of 2002 to the third quarter
of 2001 is the introduction of a product in August 2001 that charges a fee for
allowing customers to overdraw their deposit account. This product has generated
approximately $100,000-$125,000 in fees per month (net of related expenses)
since its introduction. As it relates to comparing service charges on deposit
accounts for the first nine months in 2002 to the same period in 2001, in
addition to the aforementioned overdraft deposit product, in 2002, the Company
realized a full nine months of service charges relating to the acquisition of
four bank branches on March 26, 2001 and one branch in December 2001. These
branches had a high level of transaction accounts (non-time deposits), $84.8
million in total, which afforded the Company the opportunity to earn deposit
service charges.
Also contributing to the increase in noninterest income was "other service
charges, commissions, and fees," which increased from $489,000 in the third
quarter of 2001 to $548,000 in the third quarter of 2002, a 12.1% increase. For
the nine months ended September 30, 2002, this category of noninterest income
amounted to $1,758,000, a 15.0% increase compared to the $1,529,000 recorded in
the first nine months of 2001. This category of noninterest income includes
items such as safety deposit box rentals, check cashing fees, credit card and
merchant income, and ATM surcharges. This category of income grew primarily
because of increases in these activity-related fee services as a result of
overall growth in the Company's total customer base, including growth achieved
from acquisitions.
Fees from presold mortgages for the three and nine month periods ended
September 30, 2002 amounted to $359,000 and $1,139,000, respectively, increases
of 6.2% and 49.5% over the amounts recorded in the comparable periods in 2001.
The increases in 2002 have been due to a higher level of mortgage loan
refinancings caused by the lower interest rate environment.
Commissions from sales of insurance and financial products for the three
and nine month periods ended September 30, 2002 amounted to $189,000 and
$632,000, respectively, increases of 2.7% and 19.2% over the amounts recorded in
the comparable periods in 2001. This line item includes commissions the Company
receives from three sources - 1) sales of credit insurance associated with new
loans, 2) commissions from the sales of investment, annuity, and long-term care
insurance products, and 3) commissions from the sale of property and casualty
insurance. The following table presents these components for the three and nine
month periods ended September 30, 2002 compared to the same periods in 2001:
Page 17
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------------------------------------------
2002 2001 $ Change % Change 2002 2001 $ Change % Change
---- ---- -------- -------- ---- ---- -------- --------
Commissions earned from:
Sales of credit insurance $ 66 74 (8) (10.8)% $305 298 7 2.3%
Sales of investment, annuity, and long
term care insurance 65 64 1 1.6% 177 176 1 0.6%
Sales of property and casualty insurance 58 46 12 26.1% 150 56 94 167.9%
---- --- -- ---- ---- --- --- -----
Total $189 184 5 2.7% $632 530 102 19.2%
==== === == ==== ==== === === =====
Commissions from the sale of property and casualty insurance began to be
realized upon the May 2001 completion of the purchase of two insurance companies
that specialized in such insurance. Property and casualty insurance commissions
are expected to further increase beginning in the first quarter of 2003 as a
result of the pending acquisition of Uwharrie Insurance Group, which is
scheduled to be completed on January 2, 2003. See Note 10 to the consolidated
financial statements for additional discussion.
Data processing fees for the three and nine month periods ended September
30, 2002 amounted to $78,000 and $234,000, respectively, increases of 41.8% and
55.0% over the amounts recorded in the comparable periods in 2001. Data
processing fees have increased as a result of increases in transactions
processed - the institutions that the Company provides data processing services
to have increased in size. In addition, the nine month period of 2002 benefited
from fees the Company earned as a result of a special project completed for one
of its data processing clients in the second quarter of 2002.
Noninterest expenses for the three and nine months ended September 30, 2002
amounted to $8,489,000 and $25,006,000, respectively, increases of 13.1% and
21.1% from the amounts recorded in the same three and nine month periods in
2001. 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, including the incremental expenses associated with
the Company's acquisitions. In addition to the typical cash expenses associated
with the growth, the Company also recorded a total of $364,000 and $1,092,000 in
non-cash intangible amortization expense in the three and nine month periods
ended September 30, 2002, respectively, compared to $458,000 and $1,065,000 for
the same periods in 2001. See Notes 2 and 7 to the financial statements above
for additional discussion regarding the accounting for intangible assets,
including changes in accounting that may impact the Company beginning in the
fourth quarter of 2002.
The provision for income taxes was $2,414,000 in the third quarter of 2002
compared to $2,006,000 in the third quarter of 2001. The provision for income
taxes for the nine months ended September 30, 2002 amounted to $6,513,000
compared to $5,456,000 for the first nine months of 2001. The effective tax
rates did not vary significantly among the periods presented, amounting to
approximately 35%. In the normal course of business, the Company carries out
various tax planning initiatives in order to control its effective tax rate.
FINANCIAL CONDITION
During 2001, the Company's financial condition was materially impacted by
three acquisitions:
o On March 26, 2001, the Company acquired four branches from First Union
National Bank with $103 million in deposits and $17 million in loans.
o On May 17, 2001, the Company acquired Century Bancorp, a one branch savings
institution with $72 million in deposits and $90 million in loans.
o On December 17, 2001, the Company acquired another branch from First Union
(Salisbury) with $30 million in deposits and $9 million in loans.
The assets and liabilities assumed in the first two acquisitions above were
reflected in the Company's September 30, 2001 balance sheet, and thus when
comparing the balance sheet at September 30, 2002 to September 30, 2001, the
only external growth affecting overall growth is the December branch purchase
(Salisbury
Page 18
branch). Income and expense associated with the acquisitions affected the
Company's 2001 income statement beginning on their respective acquisition dates.
The following table presents information regarding the nature of the
Company's growth since September 30, 2001.
Growth from
Balance at acquisitions Balance at Total Percentage growth,
beginning Internal (Salisbury end of percentage excluding
October 1, 2001 to of period growth branch period growth acquisitions
September 30, 2002 purchase)
--------------------------- ---------- -------- ------------ ---------- ---------- ------------------
Loans $ 878,234 95,540 9,271 983,045 11.9% 10.9%
========== ====== ====== ========= ==== ====
Deposits - Noninterest bearing $ 92,824 8,911 4,786 106,521 14.8% 9.6%
Deposits - Savings, NOW, and Money Market 318,799 32,488 18,383 369,670 16.0% 10.2%
Deposits - Time>$100,000 188,392 (619) 1,115 188,888 0.3% (0.3%)
Deposits - Time<$100,000 357,302 (13,097) 6,034 350,239 (2.0)% (3.7%)
---------- ------ ------ --------- --- ---
Total deposits $ 957,317 27,683 30,318 1,015,318 6.1% 2.9%
========== ====== ====== ========= === ===
January 1, 2002 to
September 30, 2002
---------------------------
Loans $ 890,310 92,735 -- 983,045 10.4% 10.4%
========== ====== ====== ========= === ===
Deposits - Noninterest bearing $ 96,065 10,456 -- 106,521 10.9% 10.9%
Deposits - Savings, NOW, and Money Market 353,439 16,231 -- 369,670 4.6% 4.6%
Deposits - Time>$100,000 189,948 (1,060) -- 188,888 (0.6%) (0.6%)
Deposits - Time<$100,000 360,829 (10,590) -- 350,239 (2.9%) (2.9%)
---------- ------ ------ --------- --- ---
Total deposits $1,000,281 15,037 -- 1,015,318 1.5% 1.5%
========== ====== ====== ========= === ===
The first table presents the Company's growth in loans and deposits for the
twelve months ended September 30, 2002. This table reflects that almost all of
the Company's growth in loans has been as a result of internal growth, whereas a
majority of the Company's deposit growth came from its branch acquisition.
The second table presents the Company's growth in loans and deposits for
the nine months ended September 30, 2002. This table reflects the high growth
rate of loans (13.9% annualized) experienced by the Company and the relatively
flat deposit growth. Both tables reflect a slight shift in the Company's mix of
deposits from time deposits to non-time deposits. The Company views this shift
as favorable, as non-time deposits generally carry lower rates and present more
opportunities for fees than do time deposits.
The Company's level of borrowings did not vary materially among the periods
presented, amounting to $23 million at September 30, 2002, compared to $15
million at December 31, 2001 and September 30, 2001. See "LIQUIDITY AND
COMMITMENTS AND CONTINGENCIES" below for further discussion.
Total assets at September 30, 2002 amounted to $1,168,181,000, 6.1% higher
than a year earlier. Total loans at September 30, 2002 amounted to $983,045,000,
an 11.9% increase from a year earlier, and total deposits amounted to
$1,015,318,000 at September 30, 2002, a 6.1% increase from a year earlier.
NONPERFORMING ASSETS
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or
more days and still accruing interest, restructured loans and other real estate.
Nonperforming assets are summarized as follows:
Page 19
September 30, December 31, September 30,
($ in thousands) 2002 2001 2001
- ---------------------------------------------------------------------------------------------
Nonperforming loans:
Nonaccrual loans $3,009 3,808 4,540
Restructured loans 73 83 166
Accruing loans > 90 days past due -- -- --
------ ----- -----
Total nonperforming loans 3,082 3,891 4,706
Other real estate 1,277 1,253 1,146
------ ----- -----
Total nonperforming assets $4,359 5,144 5,852
====== ===== =====
Nonperforming loans to total loans 0.31% 0.44% 0.54%
Nonperforming assets as a percentage of loans
and other real estate 0.44% 0.58% 0.67%
Nonperforming assets to total assets 0.37% 0.45% 0.53%
Allowance for loan losses to total loans 1.07% 1.05% 1.05%
Management has reviewed the collateral for the nonperforming loans and has
included this review among the factors considered in the evaluation of the
allowance for loan losses discussed below.
The level of nonaccrual loans has decreased during 2002, amounting to $3.0
million at September 30, 2002, compared to $3.8 million at December 31, 2001 and
$4.5 million at September 30, 2001. The decrease in the level of nonaccrual
loans is primarily the result of paydowns received on one large credit. During
the first half of 2001, the Company placed $2.9 million in loans related to one
borrower on nonaccrual status. The borrower of this credit has liquidity
problems. The loans related to this borrower are collateralized by various real
estate properties, which the borrower has been actively selling to pay down the
loan balance. The nonaccrual balance of this credit amounted to $1.2 million,
$1.9 million, and $2.7 million as of September 30, 2002, December 31, 2001, and
September 30, 2001, respectively. The level of restructured loans did not vary
materially among the periods presented.
At September 30, 2002, December 31, 2001, and September 30, 2001, the
recorded investment in loans considered to be impaired was $1,564,000,
$2,482,000, and $3,140,000, respectively, all of which were on nonaccrual
status. The majority of the impaired loans for each of the three periods
presented relates to the same credit noted above that is on nonaccrual status.
At September 30, 2002, December 31, 2001, and September 30, 2001, the related
allowance for loan losses for these impaired loans was $120,000 (related to two
loans with balances totaling $1,209,000, with the remainder of impaired loans
having no valuation allowance), $100,000 (related to two loans with a total
balance of $271,000, with the remainder of the impaired loans having no
valuation allowance), and $75,000 (related to one loan with a balance of
$221,000, with the remainder of the impaired loans having no valuation
allowance), respectively. The average recorded investments in impaired loans
during the nine month period ended September 30, 2002, the year ended December
31, 2001, and the nine months ended September 30, 2001 were approximately
$1,919,000, $2,450,000, and $2,442,000, 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 level of the Company's other real estate owned did not vary materially
among the periods presented, amounting to $1,277,000, $1,253,000, and
$1,146,000, of September 30, 2002, December 31, 2001 and September 30, 2001,
respectively. Other real estate owned consists principally of several parcels of
real estate.
Page 20
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 provision for loan losses for the third quarter of 2002 was $575,000,
$337,000 more than the $238,000 recorded in the third quarter of 2001. For the
nine months ended September 30, 2002, the provision for loan losses was
$1,790,000 compared to $766,000 for the nine months ended September 30, 2001.
The increases in the provision for loan losses in 2002 have primarily been a
result of significantly higher loan growth. Net internal loan growth (excludes
loans assumed in acquisitions) for the third quarter of 2002 amounted to $13.6
million compared to $9.0 million in the third quarter of 2001. Net internal loan
growth for first nine months of 2002 amounted to $92.7 million compared to $25.3
million in the first nine months of 2001. Asset quality ratios have generally
improved slightly when comparing September 30, 2002 to the prior year.
At September 30, 2002, the allowance for loan losses amounted to
$10,524,000, compared to $9,388,000 at December 31, 2001 and $9,187,000 at
September 30, 2001. The allowance for loan losses was 1.07% of total loans as of
September 30, 2002 compared to 1.05% as of December 31, 2001 and September 30,
2001. The two basis point increase in this percentage is a result of a slight
shift in the composition of the Company's loan portfolio from residential
mortgage loans to commercial loans - commercial loans carry a higher reserve
percentage in the Company's allowance for loan loss model than do residential
mortgage loans. The slight shift from residential mortgage loans to commercial
loans has been intentional. Two of the Company's recent bank acquisitions (First
Savings Bancorp in September 2000 and Century Bancorp in May 2001) had loan
portfolios that were highly concentrated in residential mortgage loans. As many
of those loans have refinanced at lower rates over the past 12 months, the
Company chose to sell them in the secondary market instead of holding them in
the Company's loan portfolio. This strategy was implemented in an effort to
shift the Company's loan portfolio to having a higher percentage of commercial
loans, which are generally shorter term in nature and have higher interest
rates.
Management believes the Company's allowance 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 allowance using the
Company's procedures and methods rests upon various judgments and assumptions
about economic conditions and other factors affecting loans. No assurance can be
given that the Company will not in any particular period sustain loan losses
that are sizable in relation to the amounts reserved or that subsequent
evaluations of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan losses
and value of other real estate. Such agencies may require the Company to
recognize adjustments to the allowance or the carrying value of other real
estate based on their judgments about information available at the time of their
examinations.
For the periods indicated, the following table summarizes the Company's
balances of loans outstanding, average loans outstanding, changes in the
allowance for loan losses arising from charge-offs and recoveries, and additions
to the allowance for loan losses that have been charged to expense and additions
that were recorded related to acquisitions.
Page 21
Nine Months Year Nine Months
Ended Ended Ended
September 30, December 31, September 30,
($ in thousands) 2002 2001 2001
---- ---- ----
Loans outstanding at end of period $ 983,045 890,310 878,234
========= ======= =======
Average amount of loans outstanding $ 943,017 831,817 814,105
========= ======= =======
Allowance for loan losses, at $ 9,388 7,893 7,893
beginning of period
Total charge-offs (761) (912) (527)
Total recoveries 107 131 119
--------- ------- -------
Net charge-offs (654) (781) (408)
--------- ------- -------
Additions to the allowance charged to expense 1,790 1,151 766
--------- ------- -------
Addition related to loans assumed in corporate acquisitions -- 1,125 936
--------- ------- -------
Allowance for loan losses, at end of period $ 10,524 9,388 9,187
========= ===== =====
Ratios:
Net charge-offs (annualized) as a percent of average loans 0.09% 0.09% 0.07%
Allowance for loan losses as a
percent of loans at end of period 1.07% 1.05% 1.05%
There have been no material changes to the allocation of the allowance for
loan losses among the various categories of loans since December 31, 2001.
LIQUIDITY AND 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 $175 million line of credit with the Federal Home Loan Bank (of
which $23 million has been drawn as of September 30, 2002), 2) a $50 million
overnight federal funds line of credit with a correspondent bank (none of which
was outstanding at September 30, 2002), and 3) an approximately $40 million line
of credit through the Federal Reserve Bank of Richmond's discount window (none
of which was outstanding at September 30, 2002).
The Company's liquidity declined during the first nine months of 2002 as a
result of loan growth of $92.7 million outpacing deposit growth of $15.0
million. This resulted in the Company's loan to deposit ratio increasing from
89.0% at December 31, 2001 to 96.8% at September 30, 2002, and 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 decreasing from 20.7% at December 31, 2001 to 13.6% at
September 30, 2002.
In the normal course of business, there are various outstanding contractual
obligations of the Company that will require future cash outflows. In addition,
there are commitments and contingent liabilities, such as commitments to extend
credit, that may or may not require future cash outflows.
Page 22
The following table reflects the contractual obligations of the Company
outstanding as of September 30, 2002.
Payments Due by Period (in thousands)
--------------------------------------------------------------------------------
On
Demand or
Contractual Less After
Obligations Total than 1 Year 1-3 Years 4-5 Years 5 Years
- -------------------------------------- --------------- ---------------- ------------- ----------- ----------
Overnight borrowings $ 13,000 13,000 -- -- --
Long-term debt 10,000 5,000 -- -- 5,000
Operating leases 902 250 233 117 302
---------- ------- ------ ------ -----
Total contractual bligations, excluding
deposits 23,902 18,250 233 117 5,302
Deposits 1,015,318 934,810 60,595 19,696 217
---------- ------- ------ ------ -----
Total contractual obligations, including
deposits $1,039,220 953,060 60,828 19,813 5,519
========== ======= ====== ====== =====
The $5 million in long-term debt that matures in the "After 5 Years" column
above has a call option whereby the lender (the FHLB) may call the debt in 2004.
Also, any outstanding borrowings with the FHLB may be accelerated immediately by
the FHLB in certain circumstances, including material adverse changes in the
condition of the Company or if the Company's qualifying collateral amounts to
less than 1.33 times the amount of borrowings outstanding. At September 30,
2002, the Company's qualifying collateral amounted to 11.4 times the amount of
borrowings outstanding.
It has been the experience of the Company that deposit withdrawals are
generally replaced with new deposits, thus not requiring any net cash outflow.
Based on that assumption, management believes that it can meet its contractual
cash obligations from normal operations.
The amount and expiration period of the Company's other commercial
commitments outstanding as of September 30, 2002 has not changed materially
since December 31, 2001, detail of which is presented on page 35 of the
Company's 2001 Form 10-K.
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 derivative financial instruments include futures,
forwards, interest rate swaps, options contracts, and other financial
instruments with similar characteristics. The Company does not engage in
off-balance-sheet derivatives activities.
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.
CAPITAL RESOURCES
The Company is regulated by the Board of Governors of the Federal Reserve
Board (FED) and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Company's banking
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.
Page 23
The Company must comply with regulatory capital requirements established by
the FED and FDIC. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. These capital standards require the Company to
maintain minimum ratios of "Tier 1" capital to total risk-weighted assets and
total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1
capital is comprised of total shareholders' equity calculated in accordance with
generally accepted accounting principles, excluding accumulated other
comprehensive income (loss), less intangible assets, and total capital is
comprised of Tier 1 capital plus certain adjustments, the largest of which for
the Company is the allowance for loan losses. Risk-weighted assets refer to the
on- and off-balance sheet exposures of the Company, adjusted for their related
risk levels using formulas set forth in FED and FDIC regulations.
In addition to the risk-based capital requirements described above, the
Company is subject to a leverage capital requirement, which calls for a minimum
ratio of Tier 1 capital (as defined above) to quarterly average total assets of
3.00% to 5.00%, depending upon the institution's composite ratings as determined
by its regulators. The FED has not advised the Company of any requirement
specifically applicable to it.
At September 30, 2002, 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.
September 30, December 31, September 30,
2002 2001 2001
---- ---- ----
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets 10.77% 10.99% 11.29%
Minimum required Tier I capital 4.00% 4.00% 4.00%
Total risk-based capital to
Tier II risk-adjusted assets 11.80% 11.99% 12.26%
Minimum required total risk-based capital 8.00% 8.00% 8.00%
Leverage capital ratios:
Tier I leverage capital to
adjusted fourth quarter average assets 8.53% 8.44% 8.71%
Minimum required Tier I leverage capital 4.00% 4.00% 4.00%
The Company's capital ratios at September 30, 2002 do not vary materially
from their respective amounts at December 31, 2001, whereas the ratios are
slightly less than at September 30, 2001. The decrease over the past twelve
months has been primarily a result of the Company's growth and the fourth
quarter of 2001 acquisition of a branch that resulted in the recording of an
intangible asset of $3.2 million.
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
September 30, 2002, the Company's bank subsidiary exceeded the minimum ratios
established by the FED and FDIC.
Page 24
SHARE REPURCHASES
On August 28, 2002, the Company announced an extension of its share
repurchase authorization by an additional 200,000 shares. The repurchase of the
previous 150,000 share authorization was completed in the third quarter of 2002.
During the third quarter of 2002, the Company repurchased 34,600 shares of its
own common stock at an average price of $24.84 per share. Total repurchases in
the first nine months of 2002 amounted to 159,195 shares at an average price of
$23.67 per share.
CRITICAL ACCOUNTING POLICIES
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 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.
While 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.
For further discussion, see "SUMMARY OF LOAN LOSS EXPERIENCE" above.
Page 25
CURRENT ACCOUNTING MATTERS
See Notes 2 and 7 to the Consolidated Financial Statements above.
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 4.88% (realized in 1997). During that five year period the prime
rate of interest has ranged from a low of 4.75% to a high of 9.50%.
In 2001, the Company experienced downward pressure on its net interest
margin, primarily as a result of the significant decreases in the interest rate
environment - the Company's interest-earning assets adjusted downwards quicker
and by a greater amount than did the Company's interest-bearing liabilities. In
the first quarter of 2002, the Company's 4.36% net interest margin was the
highest it had been since the fourth quarter of 2000, primarily as a result of
the stable interest rate environment, when for the first time in five quarters,
there were no decreases in rates initiated by the Federal Reserve. This allowed
a significant portion of the Company's time deposits that were originated during
periods of higher interest rates and matured during the quarter to reprice at
lower levels, whereas the Company's rate sensitive interest-earning assets had
repriced lower immediately upon the rate cuts by the Federal Reserve in 2001,
and thus did not experience further rate reductions. There were also no changes
in rates in the second or third quarters of 2002, which allowed the Company's
time deposits to continue to mature and reprice at lower levels. As a result,
the Company's net interest margin for the third quarter of 2002 was 4.78%, its
highest level since the Company's merger with First Savings Bancorp in 2000.
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 September 30, 2002
the Company had $355.0 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 September 30,
Page 26
2002 subject to interest rate changes within one year are deposits totaling
$369.7 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,
as discussed above under the heading "Components of Earnings," a declining
interest rate environment during 2001 negatively 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 and
in an amount that is close to 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.
The Company expects that the impact of the 50 basis point (0.50%) rate cut
initiated by the Federal Reserve on November 6, 2002 will be consistent with the
foregoing - the Company's net interest margin is expected to be immediately
negatively impacted as the Company's interest-sensitive assets reprice downwards
sooner and by a greater amount than the Company's interest-sensitive
liabilities, followed by a subsequent increase in the net interest margin as the
Company's time deposits reprice at lower rates upon their maturity. Competitive
pressures in the marketplace could limit or eliminate the subsequent increase in
the expected net interest margin.
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions. The following
table presents the expected maturities of the Company's other than trading
market risk sensitive financial instruments. The following table also presents
the fair values of market risk sensitive instruments as estimated in accordance
with Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments."
Expected Maturities of Market Sensitive
Instruments Held at September 30, 2002
--------------------------------------------------------------------------------
Average Estimated
Interest Fair
($ in thousands) 1 Year 2 Years 3 Years 4 Years 5 Years Beyond Total Rate (1) Value
------ ------- ------- ------- ------- ------ ----- -------- -----
Due from banks,
interest bearing $ 1,343 -- -- -- -- -- 1,343 1.65% $ 1,343
Federal funds sold 15,227 -- -- -- -- -- 15,227 1.65% 15,227
Debt securities- at
amortized cost (1) (2) 37,239 13,278 10,276 861 1,619 22,919 86,192 6.24% 87,964
Loans - fixed (3) (4) 99,384 94,543 81,673 68,922 130,224 58,183 532,929 7.62% 542,879
Loans - adjustable (3) (4) 165,740 54,909 67,735 40,111 58,402 60,210 447,107 5.78% 448,969
---------- ------- ------- ------- ------- ------- --------- ---- ----------
Total $ 318,933 162,730 159,684 109,894 190,245 141,312 1,082,798 6.66% $1,096,382
========== ======= ======= ======= ======= ======= ========= ==== ==========
Savings, NOW, and money
market deposits $ 369,670 -- -- -- -- -- 369,670 0.91% $ 369,670
Time deposits 457,552 47,655 13,650 4,221 15,832 217 539,127 3.15% 540,918
Borrowings (2) 18,000 -- -- -- -- 5,000 23,000 3.87% 23,356
---------- ------- ------- ------- ------- ------- --------- ---- ----------
Total $ 845,222 47,655 13,650 4,221 15,832 5,217 931,797 2.28% $ 933,944
========== ====== ====== ======= ====== ===== ======= ==== ==========
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 35%
tax rate.
(2) Callable securities and borrowings with above market interest rates at
September 30, 2002 are assumed to mature at their call date for purposes of
this table. Mortgage-backed securities are assumed to mature in the period
of their expected repayment based on estimated prepayment speeds.
(3) Excludes nonaccrual loans and allowance for loan losses.
(4) Single-family mortgage loans are assumed to mature in the period of their
expected repayment based on estimated prepayment speeds. All other loans
are shown in the period of their contractual maturity.
The Company's long-term interest-earning assets and interest-bearing
liabilities each have estimated fair values that are slightly higher than their
carrying value. This is due to the yields on these portfolios being higher than
market yields at September 30, 2002 for instruments with maturities similar to
the remaining term of the portfolios, due to the declining interest rate
environment.
Page 27
See additional discussion of the Company's net interest margin in the
"Components of Earnings" section above.
Page 28
Item 4. Controls and Procedures
Within 90 days of the filing of this report, the Company conducted a review
and evaluation of its disclosure controls and procedures, under the supervision
and with the participation of the Company's Chief Executive Officer and Chief
Financial Officer. Based upon this review, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures were adequate and effective to ensure that information required to be
disclosed is recorded, processed, summarized, and reported in a timely manner.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation described above, nor were there any significant
deficiencies or material weaknesses in the controls which required corrective
action.
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 5 - Other Information
Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934,
as added by Section 202 of the Sarbanes-Oxley Act of 2002, the Company is
describing in this report the non-audit services approved in the third quarter
of 2002 by the Company's Audit Committee to be performed by KPMG LLP, the
Company's external auditor. Non-audit services are defined in the law as
services other than those provided in connection with an audit or a review of
the financial statements of the company. The Audit Committee has approved the
engagement of KPMG for (1) certain tax compliance matters, and (2) issuance of
an opinion regarding tax matters associated with the Company's pending
acquisition of Carolina Community Bancshares, Inc.
The bylaws of the Company establish an advance notice procedure for
shareholder proposals to be brought before a meeting of shareholders of the
Company. Subject to any other applicable requirements, only such business may be
conducted at a meeting of the shareholders as has been brought before the
meeting by, or at the direction of, the Board of Directors or by a shareholder
who has given to the Secretary of the Company timely written notice, in proper
form, of the shareholder's intention to bring that business before the meeting.
The presiding officer at such meeting has the authority to make such
determinations. To be timely, notice of other business to be brought before any
meeting must generally be received by the Secretary of the Company within 60 to
90 days in advance of the shareholders' meeting. The notice of any shareholder
proposal must set forth the various information required under the bylaws. The
person submitting the notice must provide, among other things, the name and
address under which such shareholder appears on the Company's books and the
class and number of shares of the Company's capital stock that are beneficially
owned by such shareholder. Any shareholder desiring a copy of the Company's
bylaws will be furnished one without charge upon written request to the
Secretary of the Company at the Company's headquarters.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed with this report or, as noted, are
incorporated by reference. Management contracts, compensatory plans
and arrangements are marked with an asterisk (*).
3.a.i Copy of Articles of Incorporation of the Company and amendments
thereto was filed as Exhibit 3.a.i to the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 2002, and is incorporated
herein by reference.
3.a.ii Copy of the amendment to Articles of Incorporation - adding a new
Article Nine was filed as Exhibit 3.a.ii to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 2002, and is
incorporated herein by reference.
3.a.iii Copy of the amendment to Articles of Incorporation - adding a new
Article Ten was filed as Exhibit 3.a.iii to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 2002, and is
incorporated herein by reference.
Page 30
3.a.iv Copy of the amendment to Article IV of the Articles of Incorporation
was filed as Exhibit 3.a.iv to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 2002, and is incorporated herein by
reference.
3.a.v Copy of the amendment to Article IV of the Articles of Incorporation
was filed as Exhibit 3.a.v to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 2002, and is incorporated herein by
reference.
3.b Copy of the 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,
2001, and is incorporated herein by reference.
10.s Definitive Merger Agreement with Carolina Community Bancshares, Inc.
dated July 16, 2002 was filed as Exhibit 99.2 to the Company's current
report on Form 8-K on July 17, 2002 and is incorporated herein by
reference.
21 List of Subsidiaries of the Company was filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001, and is incorporated herein by reference.
99.a Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.b 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
(b) The Company filed one report on Form 8-K during the quarter ended
September 30, 2002, which was filed on July 17, 2002 reporting its
signing of a definitive merger agreement with Carolina Community
Bancshares, Inc. The Form 8-K included the original press release
announcing the transaction and the related merger agreement.
Page 31
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST BANCORP
November 13, 2002 BY: /s/ James H. Garner
----------------------------------------
James H. Garner
President
(Principal Executive Officer),
Treasurer and Director
November 13, 2002 BY: /s/ Anna G. Hollers
----------------------------------------
Anna G. Hollers
Executive Vice President
and Secretary
November 13, 2002 BY: /s/ Eric P. Credle
----------------------------------------
Eric P. Credle
Senior Vice President
and Chief Financial Officer
Page 32
I, James H. Garner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ James H. Garner
- -----------------------
James H. Garner
Chief Executive Officer
November 13, 2002
Page 33
I, Eric P. Credle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Eric P. Credle
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Eric P. Credle
Chief Financial Officer
November 13, 2002
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