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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File Number 0-15572
FIRST BANCORP
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
(State of Incorporation) (I.R.S. Employer 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
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| YES |_| NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to the Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). |X| YES |_| NO
The aggregate market value of the voting stock, Common Stock, no par
value, held by non-affiliates of the registrant, based on the average bid and
asked prices of the Common Stock as of the last trading day prior to June 30,
2002 as reported on the NASDAQ National Market System, was approximately
$194,803,000. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares of the Registrant's Common Stock outstanding on
February 14, 2003 was 9,375,660.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed pursuant to
Regulation 14A are incorporated herein by reference into Part III.
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CROSS REFERENCE INDEX
Begins on
Page (s)
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PART I
Item 1 Business 4
Item 2 Properties 11
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Shareholders 12
PART II
Item 5 Market for the Registrant's Common Stock and Related
Shareholder Matters 12
Item 6 Selected Consolidated Financial Data 12, 43
Item 7 Management's Discussion and Analysis of Results of
Operations and Financial Condition 12
Critical Accounting Policies 12
Discussion Regarding Impact of Accounting Methods Used
in Mergers and Acquisitions 13
Merger and Acquisition Activity 14
Note Regarding Pro Forma Information 17
Statistical Information
Net Interest Income 20, 44
Average Balances and Net Interest Income Analysis 20, 44
Volume and Rate Variance Analysis 20, 45
Provision for Loan Losses 22, 50
Noninterest Income 23, 45
Noninterest Expenses 24, 45
Income Taxes 25, 46
Distribution of Assets and Liabilities 27, 46
Securities 27, 46
Loans 29, 48
Nonperforming Assets 29, 49
Allowance for Loan Losses and Loan Loss Experience 31, 49
Deposits 33, 51
Borrowings 34
Liquidity 34, 52
Interest Rate Risk (Including Quantitative
and Qualitative Disclosures About Market Risk) 36, 52
Return on Assets and Equity 37, 53
Capital Resources and Shareholders' Equity 37, 53
Inflation 39
Current Accounting Matters 40
Item 7A Quantitative and Qualitative Disclosures About Market Risk 42
Forward-Looking Statements 42
Item 8 Financial Statements and Supplementary Data:
Consolidated Balance Sheets as of December 31, 2002 and 2001 55
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2002 56
Consolidated Statements of Comprehensive Income for each of the
years in the three-year period ended December 31, 2002 57
2
Begins on
Page (s)
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Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended December 31, 2002 58
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2002 59
Notes to Consolidated Financial Statements 60
Independent Auditors' Report 88
Selected Consolidated Financial Data 43
Quarterly Financial Summary 54
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 89
PART III
Item 10 Directors and Executive Officers of the Registrant; Compliance
with Section 16 (a) of the Exchange Act 89*
Item 11 Executive Compensation 89*
Item 12 Security Ownership of Certain Beneficial Owners and Management 89*
Item 13 Certain Relationships and Related Transactions 89*
Item 14 Controls and Procedures 89
Item 15 Exhibits, Financial Statement Schedules and Reports of Form 8-K 89
SIGNATURES 92
CERTIFICATIONS 94
* Information called for by Part III (Items 10 through 13) is incorporated
herein by reference to the Registrant's definitive Proxy Statement for the
2003 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission.
3
PART I
Item 1. Business
General Description
The Company
First Bancorp (the "Company") is a bank holding company. The principal
activity of the Company is the ownership and operation of First Bank (the
"Bank"), a state chartered bank with its main office in Troy, North Carolina.
The Company also owns and operates three nonbank subsidiaries, Montgomery Data
Services, Inc. ("Montgomery Data"), a data processing company, First Bancorp
Financial Services, Inc. ("First Bancorp Financial"), which owns and operates
various real estate, and First Bancorp Capital Trust I, a statutory business
trust created under the laws of the State of Delaware, that issued $20 million
in debt securities in October 2002. All of the Company's subsidiaries are fully
consolidated for financial reporting purposes.
The Bank has two wholly-owned subsidiaries, First Bank Insurance Services,
Inc. and First Montgomery Financial Services Corporation. First Bank Insurance
Services, Inc. ("First Bank Insurance") was acquired as an active insurance
agency in 1994 in connection with the Company's acquisition of a bank that had
an insurance subsidiary. On December 29, 1995, the insurance agency operations
of First Bank Insurance were divested. From December 1995 until October 1999,
First Bank Insurance was inactive. In October 1999, First Bank Insurance began
operations again as a provider of non-FDIC insured investments and insurance
products. First Montgomery Financial Services Corporation ("First Montgomery"),
a Virginia company incorporated on November 2, 2001, was formed to acquire real
estate in Virginia and lease the property to the Bank. First Troy Realty
Corporation ("First Troy") was incorporated on May 12, 1999 and is a subsidiary
of First Montgomery. First Troy allows the Bank to centrally manage a portion of
its residential, mortgage, and commercial real estate loan portfolio.
The Company was incorporated in North Carolina on December 8, 1983, as
Montgomery Bancorp, for the purpose of acquiring 100% of the outstanding common
stock of the Bank through stock-for-stock exchanges. On December 31, 1986, the
Company changed its name to First Bancorp to conform its name to the name of the
Bank, which had changed its name from Bank of Montgomery to First Bank in 1985.
The Bank was organized in 1934 and began banking operations in 1935 as the
Bank of Montgomery, named for the county in which it operated. As of December
31, 2002, the Bank operated in a 16 county area centered in Troy, North
Carolina. Troy, population 3,400, is located in the center of Montgomery County,
approximately 60 miles east of Charlotte, 50 miles south of Greensboro, and 80
miles southwest of Raleigh. The Bank conducts business from 48 branches located
primarily within an 80-mile radius of Troy, covering principally a geographical
area from Maxton to the southeast, to High Point to the north, Kannapolis to the
west, and Lillington to the east. The Bank also has a branch in Wytheville,
Virginia, which is 30 miles north of the North Carolina/Virginia border. The
Bank operates under the name "First Bank of Virginia" in the Wytheville branch.
Ranked by assets, the Bank is the 7th largest bank in North Carolina as of
December 31, 2002.
On September 14, 2000, the Company completed the merger acquisition of
First Savings Bancorp, Inc. ("First Savings"). This merger was material to the
Company. The merger was accounted for as a pooling-of-interests and accordingly,
all financial results for prior periods have been restated to include the
combined results of the Company and First Savings. At the time of the merger,
First Savings had approximately $310 million in assets, and in connection with
the merger the Company issued approximately 4.4 million shares of stock, nearly
doubling its number of shares outstanding. For information about other merger
and acquisition activity, including two acquisitions completed after December
31, 2002, see "Merger and Acquisition Activity" under Item 7 - Management's
Discussion and Analysis of Results of Operations and Financial Condition.
4
The Bank provides a full range of banking services, including the
accepting of demand and time deposits, the making of secured and unsecured loans
to individuals and businesses, and the offering of credit cards and debit cards.
In 2002, as in recent prior years, the Bank accounted for substantially all of
the Company's consolidated net income.
The Company's principal executive offices are located at 341 North Main
Street, Troy, North Carolina 27371-0508, and its telephone number is (910)
576-6171. Unless the context requires otherwise, references to the "Company" in
this annual report on Form 10-K shall mean collectively First Bancorp and its
subsidiaries.
General Business
The Bank engages in a full range of banking activities, providing such
services as checking, savings, NOW and money market accounts and other time
deposits of various types; loans for business, agriculture, real estate,
personal uses, home improvement and automobiles; credit cards; debit cards;
letters of credit; IRA's; safe deposit box rentals; bank money orders; and
electronic funds transfer services, including wire transfers, automated teller
machines, and bank-by-phone capabilities. Because the majority of the Bank's
customers are individuals and small to medium-sized businesses located in the
counties it serves, management does not believe that the loss of a single
customer or group of customers would have a material adverse impact on the Bank.
There are no seasonal factors that tend to have any material effect on the
Bank's business, and the Bank does not rely on foreign sources of funds or
income. Because the Bank operates primarily within the central Piedmont region
of North Carolina, the economic conditions within that area could have a
material impact on the Company - see additional discussion below in the section
entitled "Territory Served and Competition."
Beginning in 1999, First Bank Insurance began offering non-FDIC insured
investment and insurance products, including mutual funds, annuities, long-term
care insurance, life insurance, and company retirement plans, as well as
financial planning services. In May 2001, First Bank Insurance added to its
product line when it acquired two insurance agencies that specialized in the
placement of property and casualty insurance. First Bank Insurance collects
commissions for the services it provides.
Montgomery Data's primary business is to provide electronic data
processing services for the Bank. Ownership and operation of Montgomery Data
allows the Company to do all of its electronic data processing without paying
fees for such services to an independent provider. Maintaining its own data
processing system also allows the Company to adapt the system to its individual
needs and to the services and products it offers. Although not a significant
source of income, Montgomery Data has historically made its excess data
processing capabilities available to area financial institutions for a fee.
Montgomery Data now has four outside customers that provided gross revenues of
$303,000, $205,000, and $117,000 for the years ended December 31, 2002, 2001,
and 2000, respectively.
First Bancorp Financial was organized under the name of First Recovery in
September of 1988 for the purpose of providing a back-up data processing site
for Montgomery Data and other financial and non-financial clients. First
Recovery's back-up data processing operations were divested in 1994. First
Bancorp Financial now owns and leases the First Recovery building. First Bancorp
Financial periodically purchases parcels of real estate from the Bank that were
acquired through foreclosure or from branch closings. The parcels purchased
consist of real estate having various purposes. First Bancorp Financial actively
pursues the sale of these properties.
First Bancorp Capital Trust I was organized in October 2002 for the
purpose of issuing $20 million in debt securities. These borrowings are due on
November 7, 2032 and were structured as trust preferred capital securities,
which qualify as Tier I capital for regulatory capital adequacy requirements.
These debt securities are callable by the Company at par on any quarterly
interest payment date beginning on November 7, 2007. The interest rate on these
debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus
3.45%. This rate may not exceed 12.50% through November 2007.
5
First Montgomery was incorporated on November 2, 2001. First Montgomery's
business activities are currently limited to the selection and acquisition of
real estate in Virginia that is leased to the Bank for use as bank branches.
First Troy was incorporated on May 12, 1999 as a subsidiary of the Bank.
Upon the formation of First Montgomery as a subsidiary of the Bank, the Bank
contributed its interest in First Troy to First Montgomery, resulting in First
Troy becoming a subsidiary of First Montgomery. First Troy allows the Bank to
centrally manage a portion of its residential, mortgage, and commercial real
estate loan portfolio. First Troy has elected to be treated as a real estate
investment trust for tax purposes.
Territory Served and Competition
The Company's headquarters are located in Troy, Montgomery County. The
Company serves primarily the south central area of the Piedmont region of North
Carolina, with offices in 16 counties. The following table presents, for each
county the Company operates in, the number of bank branches operated by the
Company within each of those counties, the approximate amount of deposits with
the Company in each county as of December 31, 2002, the Company's approximate
market share, and the number of bank competitors located in the county.
No. of Deposits Market Number of
County Branches (in millions) Share Competitors
------ -------- ------------- ----- -----------
Anson 1 $ 11 5.2% 4
Cabarrus 2 22 1.2% 6
Chatham 2 35 7.5% 9
Davidson 2 100 6.5% 9
Guilford 1 32 0.5% 20
Harnett 3 71 9.0% 7
Lee 3 93 12.5% 6
Montgomery 5 84 33.7% 4
Moore 10 296 26.0% 10
Randolph 4 47 3.2% 11
Richmond 1 19 4.1% 4
Robeson 4 87 11.6% 9
Rowan 2 39 3.0% 10
Scotland 2 41 14.4% 5
Stanly 4 64 8.9% 5
Wake 1 6 0.0% 17
Wythe, VA 1 9 1.6% 8
-- ------
Total 48 $1,056
== ======
The Company's 48 branches and facilities are primarily located in small
communities whose economies are based primarily on services, manufacturing and
light industry. Although the Company's market is predominantly small communities
and rural areas, the area is not dependent on agriculture. Textiles, furniture,
mobile homes, electronics, plastic and metal fabrication, forest products, food
products and cigarettes are among the leading manufacturing industries in the
trade area. Leading producers of socks, hosiery and area rugs are located in
Montgomery County. The Pinehurst area within Moore County is a widely known golf
resort and retirement area. The High Point area is widely known for its
furniture market. Additionally, several of the communities served by the Company
are "bedroom" communities serving Charlotte and Greensboro in addition to
smaller cities such as Albermarle, Asheboro, High Point, Pinehurst and Sanford.
As shown in the table above, approximately 28% of the Company's deposit
base is in Moore County, and, accordingly, material changes in competition, the
economy or population of Moore County could materially impact the Company. No
other county comprises more than 10% of the Company's deposit base.
The Company competes in its various market areas with, among others,
several large interstate bank holding
6
companies that are headquartered in North Carolina. These large competitors have
substantially greater resources than the Company, including broader geographic
markets, higher lending limits and the ability to make greater use of
large-scale advertising and promotions. A significant number of interstate
banking acquisitions have taken place in the past decade, thus further
increasing the size and financial resources of some of the Company's
competitors, three of which are among the largest bank holding companies in the
nation. Moore County, which as noted above comprises a disproportionate share of
the Company's deposits, is a particularly competitive market, with at least ten
other financial institutions having a physical presence. See "Supervision and
Regulation" below for a further discussion of regulations in the Company's
industry that affect competition.
The Company competes not only against banking organizations, but also
against a wide range of financial service providers, including federally and
state chartered savings and loan institutions, credit unions, investment and
brokerage firms and small-loan or consumer finance companies. Competition among
financial institutions of all types is virtually unlimited with respect to legal
ability and authority to provide most financial services. The Company also
experiences competition from internet banks, particularly as it relates to time
deposits.
However, the Company believes it has certain advantages over its
competition in the areas it serves. The Company seeks to maintain a distinct
local identity in each of the communities it serves and actively sponsors and
participates in local civic affairs. Most lending and other customer-related
business decisions can be made without delays often associated with larger
systems. Additionally, employment of local managers and personnel in various
offices and low turnover of personnel enable the Company to establish and
maintain long-term relationships with individual and corporate customers.
Lending Policy and Procedures
Conservative lending policies and procedures and appropriate underwriting
standards are high priorities of the Bank. Loans are approved under the Bank's
written loan policy, which provides that lending officers, principally branch
managers, have authority to approve loans of various amounts up to $100,000.
Each of the Bank's regional senior lending officers has discretion to approve
secured loans in principal amounts up to $350,000 and together can approve loans
up to $2,000,000. Lending limits may vary depending upon whether the loan is
secured or unsecured.
The Bank's board of directors reviews and approves loans that exceed
management's lending authority, loans to officers, directors, and their
affiliates and, in certain instances, other types of loans. New credit
extensions are reviewed daily by the Bank's senior management and at least
monthly by the board of directors.
The Bank continually monitors its loan portfolio to identify areas of
concern and to enable management to take corrective action. Lending officers and
the board of directors meet periodically to review past due loans and portfolio
quality, while assuring that the Bank is appropriately meeting the credit needs
of the communities it serves. Individual lending officers are responsible for
pursuing collection of past-due amounts and monitoring any changes in the
financial status of the borrowers.
The Bank's internal audit department evaluates specific loans and overall
loan quality at individual branches as part of its regular branch reviews. The
Bank also contracts with an independent consulting firm to review new loan
originations meeting certain criteria, as well as assign risk grades to existing
credits meeting certain thresholds. The consulting firm's observations,
comments, and risk grades, including variances with the Bank's risk grades, are
shared with the Company's audit committee of the board of directors, and are
considered by management in setting Bank policy, as well as in evaluating the
adequacy of the allowance for loan losses. See "Allowance for Loan Losses and
Loan Loss Experience" in Item 7 below.
7
Investment Policy and Procedures
The Company has adopted an investment policy designed to optimize the
Company's income from funds not needed to meet loan demand in a manner
consistent with appropriate liquidity and risk objectives. Pursuant to this
policy, the Company may invest in federal, state and municipal obligations,
federal agency obligations, public housing authority bonds, industrial
development revenue bonds, Federal National Mortgage Association ("FNMA"),
Government National Mortgage Association ("GNMA"), and Student Loan Marketing
Association ("SLMA") securities. Additionally, during 2001 the Company's board
of directors approved limited investments in corporate bonds (see below). Except
for corporate bonds, the Company's investments must be rated at least BAA by
Moody's or BBB by Standard and Poor's. Securities rated below A are periodically
reviewed for creditworthiness. The Company may purchase non-rated municipal
bonds only if such bonds are in the Company's general market area and determined
by the Company to have a credit risk no greater than the minimum ratings
referred to above. Industrial development authority bonds, which normally are
not rated, are purchased only if they are judged to possess a high degree of
credit soundness to assure reasonably prompt sale at a fair value. In 2001, the
Company's board of directors authorized the Company to invest a portion of its
security portfolio in high quality corporate bonds, with the amount of bonds
related to any one issuer not to exceed the Company's legal lending limit. Prior
to purchasing a corporate bond, the Company's management performs due diligence
on the issuer of the bond, and the purchase is not made unless the Company
believes that the purchase of the bond bears no more risk to the Company than
would an unsecured loan to the same company.
The Company's investment officers implement the investment policy, monitor
the investment portfolio, recommend portfolio strategies, and report to the
Company's investment committee. Reports of all purchases, sales, issuer calls,
net profits or losses and market appreciation or depreciation of the bond
portfolio are reviewed by the Company's board of directors each month. Once a
quarter, the Company's interest rate risk exposure is monitored by the board of
directors. Once a year, the written investment policy is reviewed by the board
of directors and the Company's portfolio is compared with the portfolios of
other companies of comparable size.
Mergers and Acquisitions
As part of its operations, the Company has pursued an acquisition strategy
over the years to augment its internal growth and regularly evaluates the
potential acquisition of, or merger with, and holds discussions with, various
financial institutions. The Company's acquisitions to date have generally fallen
into one of three categories - 1) an acquisition of a financial institution or
branch thereof within a market the Company operates, 2) an acquisition of a
financial institution or branch thereof in a market contiguous to which the
Company operates, or 3) an acquisition of a company that has products or
services that the Company does not currently offer.
The Company believes that by pursuing these types of acquisition
opportunities the Company can enhance its earnings by any combination or all of
the following: 1) achieving cost efficiencies, 2) enhancing the acquiree's
earnings or gaining new customers by introducing a more successful banking model
with more products and services to the acquiree's market base, 3) increasing
customer satisfaction or gaining new customers by providing more locations for
the convenience of customers, and 4) leveraging the Company's customer base by
offering new products and services.
In the last three years, the Company has made acquisitions in all three of
the aforementioned categories of acquisitions. In 2002, the Company completed
the acquisition of a branch within its market geography (Broadway, located in
Lee County) with approximately $8.4 million in deposits and $3.1 million in
loans. In 2001, acquisitions resulted in the Company adding $116.2 million in
loans and $204.6 million in deposits, expansion into three contiguous markets
(Lumberton, Pembroke, St. Pauls), provided another branch for customers in one
of the Company's newer markets (Salisbury), and gave the Company the ability to
offer property and casualty insurance coverage. In addition, the Company had two
acquisitions pending completion at
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December 31, 2002 (both of which were completed in January 2003), one of which
is the acquisition of a financial institution in a market contiguous to a
current market, and the other is the acquisition of a property and casualty
insurance agency located in Montgomery County. The Company plans to continue to
evaluate acquisition opportunities that could potentially benefit the Company.
This may include acquisitions that do not fit the categories discussed above.
For a further discussion of recent acquisition activity, see "Merger and
Acquisition Activity" under Item 7 - Management's Discussion and Analysis.
Employees
As of December 31, 2002, the Company had 409 full-time and 75 part-time
employees. The Company is not a party to any collective bargaining agreements
and considers its employee relations to be good.
Supervision and Regulation
As a bank holding company, the Company is subject to supervision,
examination and regulation by the Board of Governors of the Federal Reserve
System and the North Carolina Office of the Commissioner of Banks. The Bank is
subject to supervision and examination by the Federal Deposit Insurance
Corporation and the North Carolina Office of the Commissioner of Banks. See also
Note 15 to the consolidated financial statements.
Supervision and Regulation of the Company
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
required to register as such with the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board" or "FRB"). The Company is also regulated by
the North Carolina Office of the Commissioner of Banks (the "Commissioner")
under the Bank Holding Company Act of 1984.
A bank holding company is required to file quarterly reports and other
information regarding its business operations and those of its subsidiaries with
the Federal Reserve Board. It is also subject to examination by the Federal
Reserve Board and is required to obtain Federal Reserve Board approval prior to
making certain acquisitions of other institutions or voting securities. The
Commissioner is empowered to regulate certain acquisitions of North Carolina
banks and bank holding companies, issue cease and desist orders for violations
of North Carolina banking laws, and promulgate rules necessary to effectuate the
purposes of the Bank Holding Company Act of 1984.
Regulatory authorities have cease and desist powers over bank holding
companies and their nonbank subsidiaries where their actions would constitute a
serious threat to the safety, soundness or stability of a subsidiary bank. Those
authorities may compel holding companies to invest additional capital into
banking subsidiaries upon acquisition or in the event of significant loan losses
or rapid growth of loans or deposits.
In 1999, the U.S. enacted legislation that allowed bank holding companies
to engage in a wider range of non-banking activities, including greater
authority to engage in securities and insurance activities. Under the
Gramm-Leach-Bliley Act (the "Act"), a bank holding company that elects to become
a financial holding company may engage in any activity that the Federal Reserve
Board, in consultation with the Secretary of the Treasury, determines by
regulation or order is (i) financial in nature, (ii) incidental to any such
financial activity, or (iii) complementary to any such financial activity and
does not pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. This Act made significant
changes in U.S. banking law, principally by repealing certain restrictive
provisions of the 1933 Glass-Steagall Act. The Act specifies certain activities
that are deemed to be financial in nature, including lending, exchanging,
transferring, investing for others, or safeguarding money or securities;
underwriting and selling insurance; providing financial, investment, or economic
advisory services; underwriting, dealing in or making a market in, securities;
and any activity currently permitted for bank holding companies by the Federal
Reserve Board under Section 4(c)(8) of the
9
Holding Company Act. The Act does not authorize banks or their affiliates to
engage in commercial activities that are not financial in nature. A bank holding
company may elect to be treated as a financial holding company only if all
depository institution subsidiaries of the holding company are well-capitalized,
well-managed and have at least a satisfactory rating under the Community
Reinvestment Act. At the present time, the Company does not anticipate applying
for status as a financial holding company under the Act.
National and state banks are also authorized by the Act to engage, through
"financial subsidiaries," in any activity that is permissible for a financial
holding company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve Board, determines is
financial in nature or incidental to any such financial activity, except (i)
insurance underwriting, (ii) real estate development or real estate investment
activities (unless otherwise permitted by law), (iii) insurance company
portfolio investments and (iv) merchant banking. The authority of a national or
state bank to invest in a financial subsidiary is subject to a number of
conditions, including, among other things, requirements that the bank must be
well-managed and well-capitalized (after deducting from the bank's capital
outstanding investments in financial subsidiaries).
The Act also contained a number of other provisions that affected the
Company's operations and the operations of all financial institutions. One of
those provisions related to the financial privacy of consumers and authorized
federal banking regulators to adopt rules that would limit the ability of banks
and other financial entities to disclose non-public information about consumers
to non-affiliated entities. The rules that have subsequently been adopted by the
bank regulators require more disclosure to consumers regarding the privacy of
the information they provide, and in some circumstances, require consent by the
consumer before information is allowed to be provided to a third party. These
rules took effect on July 1, 2001. The Company believes its operations are in
compliance with the rules.
The United States Congress and the North Carolina General Assembly have
periodically considered and adopted legislation that has resulted in, and could
result in further, deregulation of both banks and other financial institutions.
Such legislation could modify or eliminate geographic restrictions on banks and
bank holding companies and current restrictions on the ability of banks to
engage in certain nonbanking activities. For example, the Riegle-Neal Interstate
Banking Act, which was enacted several years ago, allows expansion of interstate
acquisitions by bank holding companies and banks. This and other legislative and
regulatory changes have increased the ability of financial institutions to
expand the scope of their operations, both in terms of services offered and
geographic coverage. Such legislative changes have placed the Company in more
direct competition with other financial institutions, including mutual funds,
securities brokerage firms, insurance companies, investment banking firms, and
internet banks. The Company cannot predict what other legislation might be
enacted or what other regulations might be adopted or, if enacted or adopted,
the effect thereof on the Company's business.
Supervision and Regulation of the Bank
Federal banking regulations applicable to all depository financial
institutions, among other things, (i) provide federal bank regulatory agencies
with powers to prevent unsafe and unsound banking practices; (ii) restrict
preferential loans by banks to "insiders" of banks; (iii) require banks to keep
information on loans to major shareholders and executive officers; and (iv) bar
certain director and officer interlocks between financial institutions.
As a state chartered bank, the Bank is subject to the provisions of the
North Carolina banking statutes and to regulation by the Commissioner. The
Commissioner has a wide range of regulatory authority over the activities and
operations of the Bank, and the Commissioner's staff conducts periodic
examinations of banks and their affiliates to ensure compliance with state
banking regulations. Among other things, the Commissioner regulates the merger
and consolidation of state-chartered banks, the payment of dividends, loans to
officers and directors, recordkeeping, types and amounts of loans and
investments, and the establishment of branches. The Commissioner also has cease
and desist powers over state-chartered banks for violations of state banking
laws or
10
regulations and for unsafe or unsound conduct that is likely to jeopardize the
interest of depositors.
The dividends that may be paid by the Bank to the Company are subject to
legal limitations under North Carolina law. In addition, regulatory authorities
may restrict dividends that may be paid by the Bank or the Company's other
subsidiaries. The ability of the Company to pay dividends to its shareholders is
largely dependent on the dividends paid to the Company by its subsidiaries.
The Bank is a member of the Federal Deposit Insurance Corporation (the
"FDIC"), which currently insures the deposits of member banks. For this
protection, each bank pays a quarterly statutory assessment, based on its level
of deposits, and is subject to the rules and regulations of the FDIC. The FDIC
also is authorized to approve conversions, mergers, consolidations and
assumptions of deposit liability transactions between insured banks and
uninsured banks or institutions, and to prevent capital or surplus diminution in
such transactions where the resulting, continuing, or assumed bank is an insured
nonmember bank. In addition, the FDIC monitors the Bank's compliance with
several banking statutes, such as the Depository Institution Management
Interlocks Act and the Community Reinvestment Act of 1977. The FDIC also
conducts periodic examinations of the Bank to assess its compliance with banking
laws and regulations, and it has the power to implement changes in or
restrictions on a bank's operations if it finds that a violation is occurring or
is threatened.
Neither the Company nor the Bank can predict what other legislation might
be enacted or what other regulations might be adopted, or if enacted or adopted,
the effect thereof on the Bank's operations.
See "Capital Resources and Shareholders' Equity" under Item 7 -
Management's Discussion and Analysis below for a discussion of regulatory
capital requirements.
Available Information
The Company maintains a corporate Internet site at www.firstbancorp.com.
This website is in the process of being substantially upgraded, and significant
enhancements of the site are expected in the near future. The Company has not
made its filings with the Securities and Exchange Commission available on its
website because of limitations within its current website, but such filings are
available from the Securities and Exchange Commission website at www.sec.gov or
free of charge upon written request to the Company's corporate secretary at the
Company's headquarters address. In connection with improvements to the Company's
Internet website that are currently in process, the Company expects to begin
making its periodic filings with the Securities and Exchange Commission
available on the Company's website in the near future.
Item 2. Properties
The main offices of the Company, the Bank and First Bancorp Financial are
located in a three-story building in the central business district of Troy,
North Carolina. The building houses administrative, training and bank teller
facilities. The Bank's Operations Division, including customer accounting
functions, offices and operations of Montgomery Data, and offices for loan
operations, are housed in a one-story steel frame building approximately
one-half mile west of the main office. The Company operates 48 bank branches and
facilities. The Company owns all its bank branch premises except ten branch
offices for which the land and buildings are leased and three branch offices for
which the land is leased but the building is owned. There are no other options
to purchase or lease additional properties. The Company considers its facilities
adequate to meet current needs.
Item 3. Legal Proceedings
Various legal proceedings may arise in the ordinary course of business and
may be pending or threatened against the Company and/or its subsidiaries. The
Company is not involved in any pending legal proceedings that management
believes could have a material effect on the consolidated financial position of
the Company.
11
Item 4. Submission of Matters to a Vote of Shareholders
No matters were submitted to a vote of shareholders during the fourth
quarter of 2002.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters
The Company's common stock trades on the NASDAQ National Market System of
the NASDAQ Stock Market under the symbol FBNC. Tables 1 and 22, included in
"Management's Discussion and Analysis" below, set forth the high and low market
prices of the Company's common stock as traded by the brokerage firms that
maintain a market in the Company's common stock and the dividends declared for
the periods indicated. All amounts prior to the Company's September 2000
acquisition of First Savings, except for the Company's stock price, have been
restated to include the combined results of First Bancorp and First Savings. See
"Business - Supervision and Regulation" and Note 15 to the consolidated
financial statements for a discussion of regulatory restrictions on the payment
of dividends. As of January 31, 2003, there were approximately 2,300
shareholders of record and another 2,300 shareholders whose stock is held in
"street name."
Item 6. Selected Financial Data
Table 1 on page 43 sets forth selected consolidated financial data for the
Company.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Management's discussion and analysis is intended to assist readers in
understanding the Company's results of operations and changes in financial
position for the past three years. This review should be read in conjunction
with the consolidated financial statements and accompanying notes beginning on
page 55 of this report and the supplemental financial data contained in Tables 1
through 22 included with this discussion and analysis.
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 probable 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
12
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 adjustments to
the allowance based on the examiners' judgment about information available to
them at the time of their examinations.
For further discussion including a review of the range of provisions for
loan losses and its impact on reported results in recent periods, see
"Nonperforming Assets" and "Allowance for Loan Losses and Loan Loss Experience"
under "Analysis of Financial Condition and Changes in Financial Condition."
DISCUSSION REGARDING IMPACT OF ACCOUNTING METHODS USED IN MERGERS AND
ACQUISITIONS
While merger and acquisition activity was relatively insignificant in
2002, the years ended December 31, 2001 and 2000 were both significantly
impacted by merger and acquisition activity, as discussed below. The merger and
acquisition activities for each year were recorded using different methods of
accounting. The different methods of accounting impacted the financial
information presented in this Form 10-K in different ways.
As previously noted, in 2000 the Company completed the merger-acquisition
of First Savings Bancorp, Inc, which just prior to the merger date had total
assets equaling 52% of the Company's total assets and had 43% more shareholders'
equity than the Company. Because this merger was accounted for under
pooling-of-interests accounting, the financial reporting rules required that the
Company restate all historical financial results by retroactively combining the
past results that each company achieved separately and presenting them as the
Company's historical financial results - as if the two companies had always
operated together. Therefore, except in specifically noted circumstances, there
is no incremental impact to the Company's financial information presented herein
that can be discerned as a result of the acquisition of First Savings.
The Company's one acquisition in 2002 and all four acquisitions in 2001
(see discussion below) were accounted for using the purchase method of
accounting. The purchase method of accounting requires that the assets and
liabilities acquired be reflected as part of the Company's assets and
liabilities as of the date of the acquisition. Therefore, the incremental impact
of each of the acquisitions since 2000 is more evident.
Other significant differences in pooling-of-interests accounting and
purchase accounting relate to the treatment of certain merger expenses and the
method of recording the assets and liabilities of the acquired entity, as
discussed in the following two paragraphs.
In accordance with pooling-of-interests accounting, all merger costs (e.g.
attorney fees, investment banker fees, accounting fees, employment contract
payments) related to the First Savings acquisition were recognized as expense in
the income statement. Conversely, purchase accounting requires that the direct
costs related to a
13
merger be treated as part of the purchase price of the acquisition, and
therefore all such direct merger costs were effectively capitalized and
increased the amount of goodwill recorded in each purchase transaction.
In accordance with pooling-of-interests accounting, the Company recorded
the acquisition of First Savings using the historical cost basis for all of
First Savings' assets and liabilities. The excess of the assets over liabilities
recorded (i.e. First Savings shareholders' equity) was added to the
shareholders' equity of the Company. The value of the stock that the Company
issued as merger consideration was not considered in the accounting entries, and
therefore under pooling-of-interests accounting, no intangible assets were
recognized. Under the purchase accounting method used for the Company's 2001 and
2002 acquisitions, the Company valued all assets and liabilities of the acquired
entities at their fair market value. Because for each of the Company's 2001 and
2002 acquisitions, the value of the consideration paid exceeded the net fair
market value of its assets less its liabilities, intangible assets were recorded
for the differences between the two.
MERGER AND ACQUISITION ACTIVITY
Over the past three fiscal years, the Company has completed several
acquisitions and had one branch divestiture. Significant amounts of intangible
assets have been recorded in connection with the Company's acquisitions, as
detailed below. The accounting for intangible assets changed significantly in
2002 with the Company being required under new accounting standards to cease the
amortization of virtually all of its intangible assets. See the section entitled
"Current Accounting Matters" below and Note 2 and Note 6 to the consolidated
financial statements for additional information regarding intangible assets and
their amortization under previous and new accounting standards.
The Company completed one acquisition in 2002 as follows:
(a) Broadway branch purchase - On October 4, 2002, the Company completed
the purchase of a branch of RBC Centura located in Broadway, North Carolina. The
Company assumed the branch's $8 million in deposits and $3 million in loans. The
primary reason for this acquisition was to increase the Company's presence in
Lee County, a market that the Company already had two branches in with a large
customer base. An intangible asset of $0.7 million, all of which was allocated
to goodwill, was recorded in connection with this acquisition.
The Company's acquisitions completed during 2001 were as follows:
(a) Salisbury branch purchase - On December 17, 2001, the Company
completed the purchase of a branch of First Union National Bank located in
Salisbury, North Carolina. The Company assumed the branch's $30 million in
deposits and $9 million in loans. An intangible asset of $3.2 million was
recorded in connection with this acquisition.
(b) Insurance agency acquisitions - On May 30, 2001, the Company completed
the purchase of two insurance agencies - Aberdeen Insurance & Realty Company and
Hobbs Insurance and Realty Company. Both agencies were located in Moore County
and specialized in placing property and casualty insurance coverage for
individuals and businesses in the Moore County area. In completing the
acquisition, the agencies were merged into First Bank Insurance Services, Inc.
Approximately 16,000 shares of Company stock were issued in connection with the
acquisition of the two agencies. An intangible asset of $243,000 was recorded in
connection with the acquisition.
(c) Century Bancorp, Inc. - On May 17, 2001, the Company completed the
purchase of Century Bancorp, Inc. ("Century"). Century was the holding Company
for Home Savings, Inc., SSB, a one branch savings institution located in
Thomasville, NC. Century had total assets of $107 million, total loans of $90
million, and total deposits of $72 million. In accordance with the terms of the
merger agreement, the Company issued approximately 586,000 shares of common
stock and paid cash of approximately $13.2 million to Century shareholders in
exchange for all shares of Century outstanding. An intangible asset of $3.2
million was recorded
14
in connection with this acquisition.
(d) Robeson and Scotland counties branch purchase - On March 26, 2001, the
Company completed the purchase of four branches from First Union National Bank
with aggregate deposits of approximately $103 million and aggregate loans of
approximately $17 million. The four branches acquired were in Lumberton,
Pembroke, St. Pauls (all located in Robeson County, NC), and Laurinburg
(Scotland County, NC). Total intangible assets of $14.6 million were recorded in
connection with the purchase.
As discussed above, each of the above transactions was accounted for using
the purchase method of accounting. The following table presents a summary of the
fair market value of assets acquired and liabilities assumed in the purchases
described above:
Robeson and
Salisbury Insurance Scotland
Assets acquired branch agencies Century counties branches Total
- --------------- ------ -------- ------- ----------------- -----
(in millions)
Cash $17.7 -- 5.9 70.2 93.8
Securities -- -- 9.0 -- 9.0
Loans, gross 9.3 -- 90.2 16.7 116.2
Allowance for loan losses (0.2) -- (0.6) (0.3) (1.1)
Premises and equipment 0.5 0.1 0.6 1.9 3.1
Other -- -- 1.4 -- 1.4
----- ----- ----- ----- -----
Total assets acquired 27.3 0.1 106.5 88.5 222.4
----- ----- ----- ----- -----
Liabilities assumed
Deposits 30.3 -- 71.7 102.6 204.6
Borrowings -- -- 13.5 -- 13.5
Other 0.2 -- 2.5 0.5 3.2
----- ----- ----- ----- -----
Total liabilities assumed 30.5 -- 87.7 103.1 221.3
----- ----- ----- ----- -----
Value of cash paid and/or
stock issued to stock-
holders of acquiree n/a 0.3 22.0 n/a 22.3
----- ----- ----- ----- -----
Intangible assets recorded $ 3.2 0.2 3.2 14.6 21.2
===== ===== ===== ===== =====
There are many factors that the Company considers when evaluating how much
to offer for potential acquisition candidates - in the form of a purchase price
comprised of cash and/or stock for a whole company purchase or a deposit premium
in a branch purchase. Most significantly, the Company compares expectations of
future earnings per share on a stand-alone basis with projected future earnings
per share assuming completion of the acquisition under various pricing
scenarios. Significant assumptions that affect this analysis include the
estimated future earnings stream of the acquisition candidate, the amount of
cost efficiencies that can be realized, and the interest rate earned/lost on the
cash received/paid. In addition to the earnings per share comparison, the
Company also considers other factors including (but not limited to): marketplace
acquisition statistics, location of the candidate in relation to the Company's
expansion strategy, market growth potential, management of the candidate,
potential integration issues (including corporate culture), and the size of the
acquisition candidate.
The generally higher amounts of intangible assets recorded relative to
assets and deposits acquired in the branch purchases shown above compared to the
Century acquisition are primarily a result of the branches having a higher
relative earnings stream, due largely to having a higher mix of
transaction-oriented deposit accounts that carried low interest rates and high
potential for service charge income.
The lone acquisition during 2000 was the September 14, 2000 merger
acquisition of First Savings Bancorp, Inc. - the holding company for First
Savings Bank of Moore County, SSB (collectively referred to as "First Savings").
Each share of First Savings stock was exchanged for 1.2468 shares of the
Company's stock, resulting in the Company issuing approximately 4,407,000 shares
of stock to complete the transaction. At June 30, 2000, First Savings had total
assets of $331 million, with loans of $232 million and deposits of $224 million.
15
To gain Federal Reserve approval for the merger with First Savings, the
Company was required to divest the First Savings Bank branch located in
Carthage, NC. This branch was sold to another North Carolina community bank in a
transaction that was completed in November 2000. At the time of the divestiture,
the Carthage branch had approximately $15.1 million in total deposits and $2.3
million in total loans. The sale of the branch resulted in a net gain of
$808,000.
The Company had two pending acquisitions as of December 31, 2002, as
follows:
(a) Uwharrie Insurance Group - On October 7, 2002, the Company announced
that its insurance subsidiary, First Bank Insurance, 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, and has annual commissions of approximately $500,000. The primary
reason for the acquisition was to gain efficiencies of scale with the Company's
existing property and casualty insurance business. The transaction was completed
on January 2, 2003, with the Company paying cash in the amount of $546,000. The
tangible assets of Uwharrie Insurance Group on the date of acquisition were
approximately $20,000, which resulted in the Company recording an intangible
asset of approximately $526,000. The Company is currently in the process of
determining what portion of the intangible asset will be allocated to
identifiable intangible assets and what portion will be allocated as goodwill.
(b) On July 16, 2002, the Company reported that it had agreed to acquire
Carolina Community Bancshares, Inc. (CCB), a South Carolina community bank with
total assets of approximately $70 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. 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. The terms of the agreement called 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 owned. The transaction was
completed on January 15, 2003 with the Company paying cash of $8.3 million,
issuing 332,888 shares of common stock valued at approximately $7.9 million, and
assuming employee stock options with an intrinsic value of approximately $0.9
million, for a total deal value of approximately $17.1 million. The following is
a condensed unaudited balance sheet, as reported by CCB, as of the acquisition
date of January 15, 2003.
CCB
-------------
Assets (in millions)
------
Cash and cash equivalents $ 7.0
Securities 13.0
Loans, gross 47.7
Allowance for loan losses (0.8)
Premises and equipment 0.8
Intangible assets 0.8
Other 1.7
-----
Total assets $70.2
=====
Liabilities
-----------
Deposits $58.7
Borrowings 2.0
Other 0.7
-----
Total liabilities 61.4
-----
Shareholders' equity 8.8
-----
Total liabilities and shareholders' equity $70.2
=====
16
ANALYSIS OF RESULTS OF OPERATIONS
Net interest income, the "spread" between earnings on interest-earning
assets and the interest paid on interest-bearing liabilities, constitutes the
largest source of the Company's earnings. Other factors that significantly
affect operating results are the provision for loan losses, noninterest income
such as service fees and noninterest expenses such as salaries, occupancy
expense, equipment expense and other overhead costs, as well as the effects of
income taxes.
Note Regarding Pro Forma Information
In an effort to enhance the comparability of the core operating results of
the Company between years, the Company has presented certain pro forma financial
data in "Table 1 - Selected Consolidated Financial Data" and at various times in
the discussion below will refer to pro forma data. In Table 1, the pro forma
data is presented as adjustments to reported earnings, with the resulting pro
forma diluted earnings per share shown. Performance ratios have not been
adjusted to reflect the effects of the pro forma data.
Two types of pro forma adjustments have been made. The first adjustment
identifies the net after-tax effects of unusual or nonrecurring gains or losses.
Examples of these types of items are merger expenses, securities gains/losses,
fixed asset gains/losses, and foreclosed property gains/losses. These types of
gains or losses occur at irregular intervals and are not considered by the
Company to be an indication of the core operating results of the Company. To
eliminate the effects of these nonrecurring items, net gains are deducted from
reported income and net losses are added to reported income.
In the past five years, only net income for the year 2000 included
nonrecurring income or expense that impacted net income by more than 2%. The
results of operations for the year 2000 were significantly impacted by the
Company's merger-acquisition of First Savings. In connection with this
acquisition, there were several material nonrecurring items of income and
expense related to the transaction, as follows:
o $3,188,000 in expenses ($2,593,000 after-tax) that were incurred in
completing the merger. These expenses consisted primarily of
investment banker fees, attorney fees, employment contract payments,
accountant fees, and early termination fees associated with vendor
contracts. These expenses were all recorded in the third quarter of
2000.
o $2,006,000 in losses ($1,218,000 after-tax) from sales of
securities. The merger with First Savings increased the Company's
liability sensitive position. To reduce the Company's interest rate
risk exposure, approximately $54.5 million in securities were sold
at a total loss of $2,006,000. The proceeds from the sale were first
used to repay short-term debt, with the remaining proceeds invested
in investments with a shorter average life and a higher yield than
the securities sold.
o $420,000 was recorded ($254,000 after-tax) as a one time adjustment
to the allowance for loan losses during the third quarter of 2000.
This provision for loan losses was recorded in order to align the
credit risk methodologies of the Company and First Savings.
o $808,000 was realized as a gain ($491,000 after-tax) from the sale
of the Company's Carthage branch during the fourth quarter of 2000.
The sale of this branch was a regulatory requirement for approval of
the merger with First Savings.
17
The following table presents a summary of items for each of the past three
years that the Company considers to be nonrecurring in nature. The "Impact on
Net Income" and "Impact on Diluted Earnings Per Share" columns reflect the
after-tax amount of the pro forma data at the blended federal and state tax
rate.
($ in thousands, except per share data) Gross Amount Impact on Impact on Diluted
Income/(Expense) Net Income Earnings Per Share
---------------- ---------- ------------------
2002
----------------------------------------------------
Items affecting noninterest income
----------------------------------------------------
Individually insignificant amounts of
securities gains, loan sale gains, and
other, net $ 22 14 --
======= ======= =======
2001
----------------------------------------------------
Items affecting noninterest income
----------------------------------------------------
Loan sale gains $ 9 6 --
Securities gains, net 61 40 --
Other gains 79 51 0.01
------- ------- -------
Total impact on 2001 $ 149 97 0.01
======= ======= =======
2000
----------------------------------------------------
Merger-related addition to provision for loan losses
$ (420) (254) (0.03)
------- ------- -------
Items affecting noninterest income
----------------------------------------------------
Securities losses - merger-related (2,006) (1,218) (0.14)
Other securities gains, net 87 53 0.01
Branch sale gain 808 491 0.05
Other (6) (4) --
------- ------- -------
Impact on 2000 noninterest income (1,117) (678) (0.08)
------- ------- -------
Items affecting noninterest expense
----------------------------------------------------
Merger-related expenses (3,188) (2,593) (0.28)
------- ------- -------
Impact on 2000 noninterest expense (3,188) (2,593) (0.28)
------- ------- -------
Total impact on 2000 $(4,725) (3,525) (0.39)
======= ======= =======
The second pro forma adjustment, shown in the following table, relates to
two new accounting standards adopted by the Company in 2002 related to
accounting for mergers and acquisitions - Financial Accounting Standards Board
Statement No. 142 entitled "Goodwill and Other Intangible Assets" and No. 147
entitled "Acquisitions of Certain Financial Institutions." Under these
standards, as of January 1, 2002, the Company was required to cease the
systematic amortization (as expense) of virtually all of its intangible assets.
The elimination of this type of expense for 2002 but not for previous years (as
required by the standards) affects the comparability of the Company's financial
results between 2002 and all previous years. To enhance comparability, in Table
1 for years prior to 2002, the after-tax effect of the amortization of
intangible assets that were no longer amortized beginning in 2002 is shown as a
positive adjustment to adjust the Company's net income for each year to reflect
what it would have been had the new accounting standards been applicable to
previous years.
The following table presents gross amortization expense for each of the
past three years, along with the amounts of amortization expense related to
intangible assets that ceased to be amortized beginning on January 1, 2002. The
table also includes the after-tax effects on net income and diluted earnings per
share associated with this amortization expense that represents the additional
amounts the Company would have reported had the amortization provisions of
Statements 142 and 147 been applicable in those years.
18
Impact on Diluted
Amortization Earnings Per Share
Expense Related to of Amortization
Intangible Assets Expense Related to
Gross Amortization Expense Related that Ceased to be Intangible Assets
Amortization to Intangible Assets that Amortized on that Ceased to be
Expense Ceased to be Amortized on January 1, 2002, Amortized on
Recorded January 1, 2002 Net of Taxes January 1, 2002
------------ ----------------------------- ------------------ -------------------
($ in thousands, except per share data)
2002 $ 31 -- -- --
2001 1,535 1,510 1,160 0.12
2000 631 610 527 0.06
Overview - 2002 Compared to 2001
Net income for the year ended December 31, 2002 amounted to $17,230,000,
or $1.85 per diluted share, a 25.9% increase in diluted earnings per share over
the $1.47 per diluted share for the year ended December 31, 2001. As noted
above, in 2002, in accordance with the adoption of two new accounting standards,
the Company discontinued the amortization of most of its intangible assets. If
the newly adopted standards had been applicable in 2001, the Company would have
recorded additional net income of $1,160,000, or approximately $0.12 per diluted
share, for the twelve months ended December 31, 2001. Nonrecurring items of
income/expense were insignificant for the year ended December 31, 2002, while
nonrecurring gains of approximately one cent per share were realized for the
twelve months ended December 31, 2001.
Adjusting for the pro forma items discussed in the paragraph above and in
the section entitled "Note Regarding Pro Forma Information" above, the Company's
pro forma net income for 2002 amounted to $17,216,000, a 17.3% increase from pro
forma net income for 2001 of $14,679,000. Pro forma diluted earnings per share
for 2002 remained unchanged from the unadjusted reported amount of $1.85 per
share, 17.1% higher than pro forma diluted earnings per share of $1.58 for 2001.
The most significant factor in the Company's increase in net income from
2001 to 2002 was an $8.3 million, or 20.3%, increase in net interest income. As
discussed in more detail below in the section entitled "Net Interest Income,"
the increase in net interest income was a result of a higher level of average
earning assets and a higher net interest margin. Average earning assets
increased 10.9% in 2002, while the Company's net interest margin (tax-equivalent
net interest income divided by average earning assets) increased from 4.23% in
2001 to 4.58% in 2002.
Partially offsetting the increase in net interest income was a higher
provision for loan losses. Although asset quality ratios generally improved in
2002, the Company's provision for loan losses more than doubled due to high loan
growth, amounting to $2,545,000 in 2002 compared to $1,151,000 in 2001. In 2002,
First Bancorp experienced $105 million in internal loan growth compared to $28
million in 2001.
Noninterest income increased 24.0% and noninterest expense increased 12.8%
in 2002 compared to 2001, primarily as a result of the Company's growth,
including a full year's impact of the acquisitions completed in 2001.
Noninterest income was also positively affected in 2002 by increased mortgage
loan refinancing activity that increased mortgage origination fees, as well as
the offering of a check overdraft product beginning in August 2001 that
increased fees earned on deposit accounts for a full 12 months in 2002.
The increase in noninterest expenses was partially offset by the near
elimination of amortization expense related to intangible assets. As noted above
in the section entitled "Note Regarding Pro Forma Information," in 2002 the
Company adopted two new accounting standards that required the Company to cease
amortization of
19
virtually all of its intangible assets. Excluding amortization expense in 2001
related to intangible assets that ceased to be amortized in 2002, the Company's
noninterest expenses increased 19.1% in 2002.
The Company's income taxes increased 27.0% from $7,307,000 in 2001 to
$9,282,000 in 2002. The increase in income tax expense was a result of higher
income before income taxes. The effective tax rate for both years was
approximately 35%.
Overview - 2001 Compared to 2000
Net income for the year ended December 31, 2001 amounted to $13,616,000, a
45.8% increase from the $9,342,000 recorded for 2000. Diluted earnings per share
for 2001 amounted to $1.47, a 42.7% increase from the $1.03 reported for 2000.
As discussed above, net income for 2000 was significantly impacted by the merger
with First Savings.
Adjusting for the pro forma items discussed above, pro forma net income
for the year ended December 31, 2001 amounted to $14,679,000, a 9.6% increase
from the $13,394,000 in pro forma net income for 2000. Diluted earnings per
share on a pro forma basis for 2001 amounted to $1.58, a 6.8% increase from the
pro forma diluted earnings per share amount of $1.48 for 2000.
The Company's net income and most individual components of net income for
2001 were significantly impacted by the acquisitions completed during the year.
As a result of the 2001 acquisitions, the Company's loans increased by $116.2
million and deposits increased by $204.6 million, whereas internally generated
loan and deposit growth amounted to only $28.1 million and $25.3 million,
respectively. As a result of the incremental impact of these acquired loans and
deposits, net interest income for the year increased 6.1% despite a decrease in
the net interest margin from 4.53% in 2000 to 4.23% in 2001.
The provision for loan losses for 2001 amounted to $1,151,000, which is
comparable to the recurring provision for loan losses of $1,185,000 recorded in
2000 (the 2000 amount excludes the one time $420,000 acquisition related
provision previously discussed). The slightly lower provision in 2001 compared
to the recurring 2000 provision was a result of lower net internal loan growth
in 2001. In 2001, the Company's net internal loan growth amounted to $28.1
million compared to $102.9 million in 2000. An increase in nonperforming assets
during 2001 increased what otherwise would have been an even lower level of
provision for loan losses in 2001.
The incremental impact of the 2001 acquisitions also contributed
significantly to the 104.2% increase in noninterest income (62.6% increase on a
pro forma basis when nonrecurring gains/losses are excluded) and the 7.1%
increase in noninterest expenses from the amounts recorded in 2000 (18.2%
increase on a pro forma basis). Also increasing noninterest income in 2001 were
increased fees earned from presold mortgages, which benefited from a lower
interest rate environment, and the introduction of a deposit product in August
2001 which, for a fee, allows checking account customers to overdraw their
deposit account.
The Company's income taxes increased 27.4% from $5,736,000 in 2000 to
$7,307,000 in 2001. The increase in income tax expense was a result of higher
income before income taxes. The effective tax rate for 2001 of 34.9% was lower
than the 38.0% effective tax rate in 2000, primarily due to nondeductible
merger-related expenses incurred in 2000 that had the effect of increasing the
effective tax rate.
Net Interest Income
Net interest income on a reported basis amounted to $49,390,000 in 2002,
$41,053,000 in 2001, and $38,695,000 in 2000. For internal purposes and in the
discussion that follows, the Company evaluates its net interest income on a
tax-equivalent basis by adding the tax benefit realized from tax-exempt
securities to reported interest income. Net interest income on a
taxable-equivalent basis amounted to $49,925,000 in 2002, $41,645,000 in 2001,
and $39,289,000 in 2000.
20
Table 2 analyzes net interest income on a taxable-equivalent basis. The
Company's net interest income on a taxable-equivalent basis increased by 19.9%
in 2002 and 6.0% in 2001. 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 (tax-equivalent net
interest income divided by average interest-earning assets).
In both 2002 and 2001, net interest income was positively impacted by
higher amounts of average loans and deposits outstanding. Table 3 illustrates
that the change in the average volume of loans and deposits was the predominant
factor in the higher amounts of net interest income realized by the Company in
2002 and 2001. In 2002, the average amount of loans outstanding grew by 14.8%,
while the average amount of deposits increased by 12.3%. In 2001, the average
amount of loans outstanding increased 18.6% and the average amount of deposits
outstanding increased 20.8%. The higher amounts of loans and deposits
outstanding in 2001 and 2002 were a result of both internal growth, as well as
growth achieved in corporate acquisitions. In 2001, most of the loan and deposit
growth was achieved in acquisitions, with 81% of the year's $144 million in loan
growth and 89% of the year's $230 million deposit growth coming by way of
acquisition. In 2002, the increase in the average amount of loans and deposits
outstanding was partially a result of a full year's effect of the 2001 growth as
well as growth realized in 2002, most all of which was internally generated. In
2002, loans grew by $108 million, with all but $3 million of the growth
internally generated, while deposits grew by $56 million, with all but $8
million internally generated.
The effects on net interest income of the higher amounts of average loans
and deposits outstanding in 2002 were enhanced by a higher net interest margin
in 2002 compared to 2001. The Company's net interest margin for 2002 was 4.58%
compared to 4.23% in 2001. The 4.23% net interest margin for 2001 was a decrease
from the 4.53% margin realized in 2000. The variations in net interest margin
over the past two years have been largely a result of the Federal Reserve's
interest rate policies during that time.
In 2001, the Company's interest rate spreads were negatively impacted by
the Federal Reserve Board cutting interest rates 11 times totaling 475 basis
points. Although at January 1, 2001 the Company had more interest-sensitive
liabilities than interest-sensitive assets subject to repricing within twelve
months, the Company's interest-sensitive assets repriced sooner (generally the
day following the interest rate cut) and by a larger percentage (generally by
the same number of basis points that the Federal Reserve discount rate was
decreased) than did the Company's interest-sensitive liabilities that were
subject to repricing. The Company's primary interest-sensitive liabilities at
January 1, 2001 in the twelve month horizon consisted of the following 1)
savings, NOW, and money market deposits, and 2) time deposits. Interest rates
paid on savings, NOW and money market deposits are set by management of the
Company, and although the interest rates on these accounts were decreased by the
Company within days of each of the Federal Reserve rate cuts, it was not
possible to reduce the interest rates by the full amount of the Federal Reserve
cuts due to competitive considerations and the already relatively low rates paid
on these types of accounts. Interest rates paid on time deposits are generally
fixed and not subject to automatic adjustment. When time deposits mature, the
Company has the opportunity, at the customers' discretion, to renew the time
deposit at a rate set by the Company. Because time deposits that are
interest-sensitive in a twelve month horizon mature throughout the twelve month
period, any change in the renewal rate will only affect a portion of the twelve
month period. Also, although changes in interest rates on renewing time deposits
generally track rate changes in the interest rate environment, the Company was
not able to decrease rates on renewing time deposits during 2001 by the
corresponding decreases in the Federal Reserve discount rate because of
competitive pressures in the Company's market.
In 2002, there were no changes to interest rates initiated by the Federal
Reserve for the first ten months of the year. This allowed a significant portion
of the Company's time deposit portfolio that had been originated when rates were
higher to mature and reprice at lower rates - as noted above, much of the
Company's interest-sensitive assets had repriced immediately in 2001 when the
rate cuts were made and did not experience further declines. The 50 basis point
rate cut announced by the Federal Reserve on November 6, 2002 negatively
impacted the Company's net interest margin in much the same way as the 2001 rate
cuts did. The Company's fourth quarter of
21
2002 net interest margin decreased to 4.53% from the 4.78% margin realized in
the third quarter of 2002.
Another factor affecting the Company's net interest margin in 2001 and
2002 was the reinvestment of funds received in the Company's 2001 acquisitions
and the mix of loans and deposits assumed in the acquisitions. The March 2001
acquisition of four branches from First Union National Bank resulted in the
Company receiving $70.2 million in cash. The Company was not able to immediately
redeploy the cash received into a mix of higher yielding investments and loans
consistent with the Company's historic asset mix, and therefore the Company's
net interest margin was negatively impacted. In 2002, due to the high loan
growth experienced by the Company, a significant portion of this cash was
redeployed into loans with higher interest rates than the short-term investments
in which the cash had been invested. Additionally, in connection with the
acquisition of Century in May 2001, the Company assumed a high mix of
residential mortgage loans and time deposits (which are generally the lowest
yielding type of loan and highest rate type of deposit). This mix of loans and
deposits negatively impacted net interest margins in 2001. In 2002, many of
Century's loans were refinanced by the borrower and then resold in the secondary
market by the Company, with the resulting funds used to fund the Company's
commercial loan growth (which generally has higher interest rates than
residential mortgages). In addition, many of Century's time deposits also had
the opportunity to reprice at lower rates in 2002, thus positively impacting the
net interest margin.
See additional information regarding net interest income on page 36 in the
section entitled "Interest Rate Risk."
Provision for Loan Losses
The provision for loan losses charged to operations is an amount
sufficient to bring the allowance for loan losses to an estimated balance
considered appropriate to absorb probable losses inherent in the portfolio.
Management's determination of the adequacy of the allowance is based on the
level of loan growth, an evaluation of the portfolio, current economic
conditions, historical loan loss experience and other risk factors.
The Company recorded provisions for loan losses of $2,545,000 in 2002
compared to $1,151,000 in 2001 and $1,605,000 in 2000.
The increase in the provision for loan losses for 2002 compared to 2001
was primarily a result of higher internal loan growth, as asset quality ratios
generally improved during the year. In 2002, the Company generated $105.2
million in internal loan growth compared to $28.1 million in internal growth in
2001. The remainder of the $3.1 million in loan growth in 2002 and $116.2
million in loan growth in 2001 came by way of acquisitions with a preexisting
allocation for loan losses already in place.
The decrease in the provision for loan losses in 2001 compared to 2000 was
impacted by the Company's merger with First Savings. As noted earlier, in
connection with the merger with First Savings, a provision of $420,000 was
recorded in 2000 in order to align the risk methodologies of the two merging
companies. Excluding the merger-related 2000 provision, the Company's 2001
provision for loan losses was approximately 3% less than the recurring 2000
provision of $1,185,000. The decrease in the recurring provision for loan losses
was a result of significantly lower loan growth experienced. Net internal loan
growth (excludes loans assumed in acquisitions) for 2001 amounted to $28.1
million compared to $102.9 million for 2000. An increase in nonperforming assets
and net charge-offs during 2001 increased what would have been an otherwise
lower level of provision for loan losses in 2001.
See the section entitled "Allowance for Loan Losses and Loan Loss
Experience" below for a more detailed discussion of the allowance for loan
losses. The allowance is monitored and analyzed regularly in conjunction with
the Company's loan analysis and grading program, and adjustments are made to
maintain an adequate allowance for loan losses.
22
Noninterest Income
Noninterest income recorded by the Company amounted to $11,968,000 in
2002, $9,655,000 in 2001, and $4,729,000 in 2000.
Noninterest income for 2000 was significantly impacted by losses incurred
from sales of securities that were partially offset by a gain realized from the
sale of a branch. Both the securities losses and the branch sale gain were
related to the merger acquisition of First Savings - see additional discussion
below. As shown in Table 4, core noninterest income, which excludes gains and
losses from sales of securities, loans, and other assets, as well as
nonrecurrring items, amounted to $11,946,000 in 2002 a 25.7% increase from the
$9,506,000 in 2001. The 2001 core noninterest income of $9,506,000 was 62.6%
higher than the $5,846,000 recorded in 2000.
See Table 4 and the following discussion for an understanding of the
components of noninterest income.
Service charges on deposit accounts in 2002 amounted to $6,856,000, a
30.2% increase compared to the $5,265,000 recorded in 2001. The 2001 amount of
$5,265,000 was 68.9% higher than the 2000 amount of $3,118,000. In addition to
incremental service fee income associated with the Company's internally
generated deposit growth and periodic deposit rate fee increases, there have
been two primary factors driving the high growth in service charges - 1) the
acquisition of five First Union branches during 2001 - four bank branches were
acquired in March 2001 and one branch was acquired in December 2001. These
branches had a high level of transaction accounts (non-time deposits), $83.4
million in total, which afforded the Company the opportunity to earn deposit
service charges, and 2) 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 $125,000 in fees per month (net of related
expenses) since its introduction.
Other service charges, commissions and fees amounted to $2,336,000 in
2002, a 14.2% increase from the $2,046,000 earned in 2001. The 2001 amount of
$2,046,000 was 17.6% higher than the $1,740,000 recorded in 2000. This category
of noninterest income includes items such as safety deposit box rentals, fees
from sales of personalized checks, check cashing fees, credit card and merchant
income, debit card income, and ATM charges. 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 corporate acquisitions.
Fees from presold mortgages amounted to $1,713,000 in 2002, a 36.1%
increase from the 2001 amount of $1,259,000. The 2001 amount was a 178% increase
from the $453,000 recorded in 2000. The increases in the past two years have
been primarily attributable to two factors - 1) a higher level of mortgage loan
refinancings caused by the progressively lower interest rate environments, and
2) the decision by the Company in late 2000 to sell a higher percentage of
single family home loan originations into the secondary market as opposed to
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.
Commissions from sales of insurance and financial products amounted to
$738,000 in 2002, $731,000 in 2001, and $418,000 in 2000. This line item
includes commissions the Company receives from three sources - 1) sales of
credit insurance associated with new loans, 2) commissions from the sales of
investment, annuity, and long-term care insurance products, and 3) commissions
from the sale of property and casualty insurance. The following table presents
the contribution of each of the three sources to the total amount recognized in
this line item:
23
($ in thousands) 2002 2001 2000
Commissions earned from: ---- ---- ----
------------------------
Sales of credit insurance $326 389 306
Sales of investments, annuities,
and long term care insurance 210 227 112
Sales of property and casualty
insurance 202 115 --
---- ---- ----
Total $738 731 418
==== ==== ====
The variance in the commissions from sales of credit insurance has been
primarily due to fluctuations in the annual profit sharing bonus that the
Company received from the insurance carriers for which the Company acts as a
broker. Commissions from sales of investments, annuities, and long term care
insurance increased throughout 2000 and 2001 after its late 1999 introduction
and decreased slightly in 2002 as a result of a lower amount of investment
transactions, possibly due to the declining stock market. Commissions from the
sale of property and casualty insurance have increased since the May 2001
completion of the purchase of two insurance companies that specialize 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 was completed on January 2, 2003.
See the section above entitled "Merger and Acquisition Activity" for additional
discussion.
Data processing fees amounted to $303,000 in 2002, $205,000 in 2001, and
$117,000 in 2000. As noted earlier, Montgomery Data makes its excess data
processing capabilities available to area financial institutions for a fee.
These fees have increased as a result of an increase in data processing clients
from two clients to four clients in the past three years, as well as an increase
in the size and number of transactions generated by those clients.
Noninterest income not defined as "core" amounted to a net gain of $22,000
in 2002, a net gain of $149,000 in 2001, and a net loss of $1,117,000 in 2000.
The 2002 net gain of $22,000 primarily related to miscellaneous securities gains
of $25,000. The 2001 net gain of $149,000 primarily relates to a $79,000 gain
from the sale of two buildings that the Company previously operated as branches
that were consolidated with other branches in the same towns, and securities
that were sold at a $61,000 gain. The net losses of $1,117,0000 recorded in 2000
primarily related to two merger-related events - a $2,006,000 loss resulting
from a third quarter 2000 restructuring of the combined investment portfolio to
reduce the Company's liability sensitive position and an $808,000 gain realized
from the fourth quarter sale of a branch that was required to be divested in
order to gain regulatory approval.
Noninterest Expenses
Noninterest expenses for 2002 were $32,301,000, compared to $28,634,000 in
2001 and $26,741,000 in 2000. Table 5 presents the components of the Company's
noninterest expense during the past three years.
Based on the recorded amounts noted above, noninterest expenses increased
12.8% in 2002 and 7.1% in 2001. Those growth rates were impacted by two factors,
both of which served to reduce the year to year percentage increases. First, as
noted earlier, amortization expense was significantly lower in 2002 than in
previous years as a result of adopting two new accounting standards in 2002 that
resulted in the Company ceasing to record amortization expense related to nearly
all of its intangible assets as of January 1, 2002. Second, the Company recorded
$3,188,000 in merger expenses in the third quarter of 2000. These expenses
consisted primarily of investment banker fees, attorney fees, employment
contract payments, accountant fees, and early termination fees associated with
vendor contracts. Adjusting the reported amounts in 2001 and 2000 to exclude
amortization expense related to intangible assets that ceased to be amortized
beginning on January 1, 2002 and excluding merger expenses recorded in 2000, the
increases in noninterest expenses were 19.1% in 2002 and 18.2% in 2001 over the
prior year amounts.
24
The increases in noninterest expenses over the past two years have
occurred in nearly every line item of expense and have been primarily as a
result of the significant growth experienced by the Company. Over the past two
years, the number of the Company's branches has increased from 40 to 48, and the
number of full time/part time employees has increased from 306/55 at December
31, 2000 to 409/75 at December 31, 2002. Additionally, from December 31, 2000 to
December 31, 2002, the amount of loans outstanding has increased 34% and
deposits have increased 37%.
Income Taxes
The provision for income taxes was $9,282,000 in 2002, $7,307,000 in 2001,
and $5,736,000 in 2000. The 27.0% increase in income tax expense in 2002
compared to 2001 was a result of a 26.7% increase in income before income taxes.
The effective tax rate for each of the years ended December 31, 2002 and 2001
was approximately 35%.
The 27.4% increase in income tax expense in 2001 compared to 2000 was a
result of a 38.8% increase in pretax income, which was partially offset by a
lower effective tax rate - 34.9% in 2001 compared to 38.0% in 2000. The lower
effective tax rate in 2001 was due to the 2000 effective tax rate being inflated
because of the nondeductibility for tax purposes of certain merger expenses.
Table 6 presents the components of tax expense and the related effective
tax rates.
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Overview
Over the past two years the Company has achieved high increases in its
levels of loans and deposits. In 2002, most of the increase was internally
generated whereas in 2001, this growth was primarily related to corporate
acquisitions. The following table presents information regarding the nature of
the Company's growth in 2002 and 2001:
Balance at Balance at Total Percentage growth,
(in thousands) beginning Internal Growth from end of percentage excluding
of period growth acquisitions period growth acquisitions
---------- ---------- ------------ ---------- ---------- ------------------
2002
- -----------------------------
Loans $ 890,310 105,154 3,083 998,547 12.2% 11.8%
========== ========== ========== ========== ====== ======
Deposits - Noninterest bearing 96,065 14,665 1,650 112,380 17.0% 15.3%
Deposits - Savings, NOW, and
Money Market 353,439 30,930 3,322 387,691 9.7% 8.8%
Deposits - Time>$100,000 189,948 9,846 -- 199,794 5.2% 5.2%
Deposits - Time<$100,000 360,829 (8,206) 3,469 356,092 -1.3% -2.3%
---------- ---------- ---------- ---------- ------ ------
Total deposits $1,000,281 47,235 8,441 1,055,957 5.6% 4.7%
========== ========== ========== ========== ====== ======
2001
- -----------------------------
Loans $ 746,089 28,058 116,163 890,310 19.3% 3.8%
========== ========== ========== ========== ====== ======
Deposits - Noninterest bearing $ 70,634 2,978 22,453 96,065 36.0% 4.2%
Deposits - Savings, NOW, and
Money Market 253,687 18,684 81,068 353,439 39.3% 7.4%
Deposits - Time>$100,000 140,992 19,205 29,751 189,948 34.7% 13.6%
Deposits - Time<$100,000 305,066 (15,601) 71,364 360,829 18.3% -5.1%
---------- ---------- ---------- ---------- ------ ------
Total deposits $ 770,379 25,266 204,636 1,000,281 29.8% 3.3%
========== ========== ========== ========== ====== ======
25
As noted above, in 2002 the Company's growth was primarily internally
generated and loan growth more than doubled deposit growth. Most of the
Company's internal loan growth occurred in the first half of the year ($79
million of the $105 million in total internal growth) as the Company experienced
strong growth in several of the markets it had entered in 2001. In the second
half of the year, loan growth slowed due to the Company having met the initial
credit demand in the new markets it had entered, and due to the continued
effects of the recessionary economy. New loan originations throughout the year
were partially offset by a large volume of loan customers that refinanced their
home loans with the Company, which the Company subsequently sold into the
secondary market instead of maintaining in the Company's loan portfolio. As
noted above in the section entitled "Noninterest Income," in late 2000, the
Company decided to sell a higher percentage of single family home loan
originations into the secondary market as opposed to 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.
In the first half of 2002, the Company's deposit growth continued the low
internal growth rates experienced in recent years, with just $2 million in net
deposit growth. However, internal deposit growth increased significantly in the
second half of 2002, amounting to $45 million, which the Company believes was
partially due to investors taking their money out of the chronically declining
stock market and depositing it into FDIC insured bank deposits.
In 2001, the Company's corporate acquisitions were the primary reason for
the increases in loans and deposits. Internal loan growth was substantially
matched by a similar rate of internal deposit growth. The rates of internal
growth were less than 5% for each. The Company believes the relatively low loan
demand and deposit growth in 2001 were a result of the recessionary economy and
the lower interest rates paid on deposits as a result of the declining interest
rate environment.
The higher loan growth experienced in 2002 compared to deposit growth
resulted in a reduction of the Company's liquidity. The Company's liquidity had
improved significantly in 2001 as a result of receiving $81 million in net cash
in connection with the 2001 acquisitions. These funds served as the primary
source of funding needs in 2002.
The Company issued $20 million in trust preferred securities in 2002,
which qualify as Tier I capital. As a result, the Company's capital ratios
improved in 2002 after declining in 2001 as a result of the acquisitions
completed during the year. All three regulatory capital ratios have
significantly exceeded the minimum regulatory thresholds for all periods covered
by this report.
The Company's asset quality ratios generally improved in 2002 and remain
favorable compared to peers. In 2001, the Company's asset quality ratios
declined slightly as a result of the generally recessionary economy that caused
an increase in delinquencies and bankruptcies, as well as one large credit that
was placed on nonaccrual status in the first quarter of 2001.
In the years leading up to 2001, the Company's market area, the central
Piedmont region of North Carolina, had a healthy economy, with low unemployment
and a low business failure rate. During 2001, the economy in this area, as well
as the rest of the nation, slowed. In the second half of 2001, there were
announcements of corporate bankruptcies, layoffs and plant closings in the
Company's market area. While the economy in the Company's market area remained
recessionary in 2002, it did not significantly worsen from 2001, and the
Company's credit losses remained stable during the year.
The Company does not participate in large syndicated credits that have
resulted in large credit losses at several other North Carolina-based banks.
26
Distribution of Assets and Liabilities
Table 7 sets forth the percentage relationships of significant components
of the Company's balance sheets at December 31, 2002, 2001, and 2000.
The most significant variance in the percentages from 2001 to 2002 is the
relative percentage of loans to total assets - this amount increased from 77% at
December 31, 2001 to 81% at December 31, 2002. The increase in this percentage
primarily reflects the high loan growth experienced by the Company in 2002 of
$108.2 million, which outpaced deposit growth of $55.7 million. The funding for
this loan growth primarily came from maturities of securities available for
sale, which decreased by three percentage points as a percent of total assets
during 2002. Within deposit categories, there was a slight shift from time
deposits to demand deposits and savings, NOW, and money market deposits. The
Company believes this may be due to customers deciding that it is advantageous
to have their funds in more liquid investments due to the relatively small
difference in rates paid on non-time deposits compared to the rates paid on time
deposits in today's interest rate environment.
The variances in the percentages from 2001 to 2000 reflect the effects of
the Company's acquisitions during 2001, as internal growth, as noted above, did
not materially impact the Company's balance sheet. The total growth in deposits
of $229.9 million exceeded the $144.2 million in total loan growth, which
resulted in net loans to total assets decreasing from 81% at year end 2000 to
77% at year end 2001, and deposits to total assets increasing from 84% to 88%
over the same period. The Company assumed $80.6 million in net cash related to
the 2001 acquisitions which was not fully reinvested in securities or loans,
resulting in the percentage of short-term investments to total assets increasing
from 1% to 6%. A slight decrease in the dollar amount of total securities
outstanding, coupled with the significant increase in the Company's total
assets, had the effect of reducing the percentage of total securities to total
assets from 13% at December 31, 2000 to 9% at December 31, 2001.
Securities
Information regarding the Company's securities portfolio as of December
31, 2002, 2001, and 2000 is presented in Tables 8 and 9.
The composition of the investment securities portfolio reflects the
Company's investment strategy of maintaining an appropriate level of liquidity
while providing a relatively stable source of income. The investment portfolio
also provides a balance to interest rate risk and credit risk in other
categories of the balance sheet while providing a vehicle for the investment of
available funds, furnishing liquidity, and supplying securities to pledge as
required collateral for certain deposits.
Total securities available for sale and held to maturity amounted to $80.8
million, $112.8 million, and $117.5 million at December 31, 2002, 2001, and
2000, respectively. The decrease in securities from December 31, 2001 to
December 31, 2002 was primarily attributable to called and maturing bonds, as
well as a high level of principal repayments on mortgage-backed securities due
to the low interest rate environment. Instead of reinvesting the
maturities/paydowns back into securities, the proceeds were used to fund the
high loan growth experienced. In comparing December 31, 2001 to December 31,
2000, although the total amount of the Company's securities did not change
materially, upon the adoption of Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," the Company
transferred on January 1, 2001, as permitted by the standard upon its adoption,
held-to-maturity securities with an amortized cost of approximately $31.7
million to the available-for-sale category at fair value.
From 2000 to 2001, the primary variance in the mix of the securities
portfolio was a shift from U.S. Government agency debt to mortgage-backed
securities and corporate bonds. Obligations of U.S. Government agencies as a
percentage of total securities decreased from 45% at December 31, 2000 to 25% at
December 31, 2001, while mortgage-backed securities increased from 31% at
December 31, 2000 to 46% at December 31, 2001
27
and corporate bonds increased from 0% to 8% of total securities over that same
one year period. During 2001, in an effort to enhance yield, while at the same
time managing interest rate exposure, the Company invested more heavily in
mortgage-backed securities and corporate bonds than U.S. Government agencies. In
2002, the change in the mix of securities was primarily due to variances in the
receipt of maturities/paydowns of the various categories of investments, as the
Company purchased very few securities as a result of the proceeds of the
maturities/paydowns being used to fund loan growth.
The majority of the Company's U.S. Government agency debt securities are
issued by the Federal Home Loan Bank and carry one maturity date, often with an
issuer call feature, while the mortgage-backed securities have been primarily
issued by Freddie Mac and Fannie Mae and vary in their repayment in correlation
with the underlying pools of home mortgage loans. The Company's investment in
corporate bonds is primarily comprised of trust preferred securities issued by
other North Carolina bank holding companies.
Included in mortgage-backed securities at December 31, 2002 were
collateralized mortgage obligations (CMO's) with an amortized cost of
$12,590,000 and a fair value of $12,720,000. Included in mortgage-backed
securities at December 31, 2001 were CMO's with an amortized cost of $21,703,000
and a fair value of $21,886,000. Included in mortgage-backed securities at
December 31, 2000 were CMO's with an amortized cost of $13,543,000 and a fair
value of $13,521,000. The CMO's that the Company has invested in are
substantially all "early tranche" pieces of the CMO, which minimizes the
prepayment risk to the Company.
At December 31, 2002, net unrealized gains of $1,399,000 were included in
the carrying value of securities classified as available for sale, compared to a
net unrealized gain of $1,024,000 at December 31, 2001 and a net unrealized gain
of $383,000 at December 31, 2000. The increase in the unrealized gain position
at each of the past two year ends is a result of the progressively lower
interest rate environment in effect at each period end. Management evaluated any
unrealized losses on individual securities at each year end and determined them
to be of a temporary nature and caused by fluctuations in market interest rates,
not by concerns about the ability of the issuers to meet their obligations. Net
unrealized gains, net of applicable deferred income taxes, of $853,000,
$677,000, and $256,000 have been reported as part of a separate component of
shareholders' equity (accumulated other comprehensive income) as of December 31,
2002, 2001, and 2000, respectively.
The fair value of securities held to maturity, which the Company carries
at amortized cost, was more than the carrying value at December 31, 2002 and
2001 by $767,000 and $408,000, respectively. Management evaluated any unrealized
losses on individual securities at each year end and determined them to be of a
temporary nature and caused by fluctuations in market interest rates, not by
concerns about the ability of the issuers to meet their obligations.
Table 9 provides detail as to scheduled contractual maturities and book
yields on securities available for sale and securities held to maturity at
December 31, 2002. Mortgage-backed and other amortizing securities are shown
maturing in the time periods consistent with their estimated lives based on
expected prepayment speeds.
The weighted average taxable-equivalent yield for the securities available
for sale portfolio was 5.45% at December 31, 2002. The expected weighted average
life of the available for sale portfolio using the call date for above-market
callable bonds, the maturity date for all other non-mortgage-backed securities,
and the expected life for mortgage-backed securities, was 5.1 years.
The weighted average taxable-equivalent yield for the securities held to
maturity portfolio was 7.13% at December 31, 2002. The expected weighted average
life of the held to maturity portfolio using the call date for above-market
callable bonds and the maturity date for all other securities, was 2.8 years.
As of December 31, 2002 and 2001, the Company held no investment
securities of any one issuer, other than U.S. Treasury and U.S. Government
agencies or corporations, in which aggregate book values and market values
exceeded 10% of shareholders' equity. Other than the CMO's previously discussed,
the Company owned no
28
securities considered by regulatory authorities to be derivative instruments.
Loans
Table 10 provides a summary of the loan portfolio composition at each of
the past five year ends.
The loan portfolio is the largest category of the Company's earning assets
and is comprised of commercial loans, real estate mortgage loans, real estate
construction loans, and consumer loans. The Company restricts virtually all of
its lending to its 16 county market area, which is located in the central
Piedmont region of North Carolina, and one county in Virginia. The diversity of
the region's economic base has historically provided a stable lending
environment.
Loans outstanding increased $108.2 million, or 12.2%, to $998.5 million
during 2002. Approximately $105 million of the 2002 growth was from net internal
loan growth, while $3 million was assumed in acquisitions. In 2001, loans
outstanding increased $144.2 million, or 19.3%, to $890.3 million. Approximately
$28 million of the growth was from net internal loan growth, while $116 million
was assumed in acquisitions. The most significant acquisition contributing to
the 2001 loan growth was the May 2001 acquisition of Century Bancorp, which had
$90.2 million in loans outstanding on the date of the acquisition. The great
majority of Century's loans were 1-4 family home loans. The majority of the 2002
and 2001 loan growth occurred in loans secured by real estate, with
approximately $99.5 million, or 91.9% in 2002, and $134.6 million, or 93.3%, in
2001 of the net loan growth occurring in real estate mortgage or real estate
construction loans.
Over the years, the Company's loan mix has remained fairly consistent,
with real estate loans (mortgage and construction) comprising approximately 85%
of the loan portfolio, commercial, financial, and agricultural loans comprising
10%, and consumer installment loans comprising approximately 5% of the
portfolio.
At December 31, 2002, $863.3 million, or 86.4%, of the Company's loan
portfolio was secured by liens on real property. Included in this total are
$466.5 million, or 46.7% of total loans, in loans secured by liens on 1-4 family
residential properties and $396.8 million, or 39.7% of total loans, in loans
secured by liens on other types of real estate. The Company's $863.3 million in
real estate mortgage loans can be further classified as follows:
o $306.5 million, or 30.7% of total loans, are traditional residential
mortgage loans in which the borrower's personal income is the
primary repayment source.
o $305.0 million, or 30.5% of total loans, are primarily dependent on
cash flow from a commercial business for repayment.
o $87.3 million, or 8.7% of total loans, are personal consumer
installment loans in which the borrower has provided residential
real estate as collateral.
o $68.1 million, or 6.8% of total loans, are real estate construction
loans.
o $72.7 million, or 7.3% of total loans, are home equity loans.
o $23.7 million, or 2.4% of total loans, are primarily dependent on
cash flow from agricultural crop sales.
Table 11 provides a summary of scheduled loan maturities over certain time
periods, with fixed rate loans and adjustable rate loans shown separately.
Approximately 20% of the Company's loans outstanding at December 31, 2002 mature
within one year and 70% of total loans mature within five years. The percentages
of variable rate loans and fixed rate loans as compared to total performing
loans were 47.0% and 53.0%, respectively, as of December 31, 2002. The Company
intentionally makes a blend of fixed and variable rate loans so as to reduce
interest rate risk.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, loans past due 90 or more
days and still accruing interest,
29
restructured loans and other real estate. As a matter of policy the Company
places all loans that are past due 90 or more days on nonaccrual basis, and thus
there were no loans at any of the past five year ends that were 90 days past due
and still accruing interest. Table 12 summarizes the Company's nonperforming
assets at the dates indicated.
Nonaccrual loans are loans on which interest income is no longer being
recognized or accrued because management has determined that the collection of
interest is doubtful. The placing of loans on nonaccrual status negatively
impacts earnings because (i) interest accrued but unpaid as of the date a loan
is placed on nonaccrual status is either deducted from interest income or is
charged-off, (ii) future accruals of interest income are not recognized until it
becomes probable that both principal and interest will be paid and (iii)
principal charged-off, if appropriate, may necessitate additional provisions for
loan losses that are charged against earnings. In some cases, where borrowers
are experiencing financial difficulties, loans may be restructured to provide
terms significantly different from the originally contracted terms.
Nonperforming loans (which includes nonaccrual loans and restructured
loans) as of December 31, 2002, 2001 and 2000 totaled $3,017,000, $3,891,000,
and $863,000, respectively. Nonperforming loans as a percentage of total loans
amounted to 0.30%, 0.44%, and 0.12%, at December 31, 2002, 2001, and 2000,
respectively. The variances in nonperforming loans over the past two years have
been primarily due to changes in nonaccrual loans, as restructured loans have
not changed significantly. The variances in nonaccrual loans at each of the past
two year ends relate primarily to the same loan relationship. During 2001, the
Company placed a loan relationship on nonaccrual status that had an outstanding
balance of $1.9 million at December 31, 2001. This relationship, secured
primarily by real estate, was placed on nonaccrual status due to liquidity
problems experienced by the borrower. The borrower has been actively working to
sell real estate to pay down the balance, and during 2002 several sales were
completed that resulted in the Company receiving paydowns of approximately
$900,000. At December 31, 2002, the Company had accepted a nonbinding proposal
from a third party that would result in the receipt of approximately $750,000 of
the $1.0 million outstanding in the first half of 2003, with the remaining
$250,000 to be charged-off by the Company. At December 31, 2002, the Company had
a specific impaired loan valuation allowance of $250,000 assigned to this
relationship.
Also contributing to the increase in nonaccrual loans at December 31, 2001
compared to December 31, 2000 was a general increase in bankruptcies and other
financial difficulties experienced among the Company's borrowers. The Company
attributed this increase to the negative effects of the recessionary economy and
manufacturing plant shutdowns in the Company's market area. This led to a total
of 60 loans being on nonaccrual status at December 31, 2001 compared to 27 loans
at December 31, 2000. During 2002, the number of loans on nonaccrual status
remained comparable to the level during 2001, with 66 loans on nonaccrual status
at December 31, 2002.
If the nonaccrual loans and restructured loans as of December 31, 2002,
2001 and 2000 had been current in accordance with their original terms and had
been outstanding throughout the period (or since origination if held for part of
the period), gross interest income in the amounts of approximately $246,000,
$320,000 and $62,000 for nonaccrual loans and $6,000, $10,000 and $27,000 for
restructured loans would have been recorded for 2002, 2001 and 2000,
respectively. Interest income on such loans that was actually collected and
included in net income in 2002, 2001 and 2000 amounted to approximately $55,000,
$76,000 and $38,000 for nonaccrual loans (prior to their being placed on
nonaccrual status) and $6,000, $7,000 and $21,000 for restructured loans,
respectively.
Management routinely monitors the status of certain large loans that, in
management's opinion, have credit weaknesses that could cause them to become
nonperforming loans. In addition to the nonperforming loan amounts discussed
above, management believes that an estimated $6.5-$7.0 million of large loans
that were performing in accordance with their contractual terms at December 31,
2002 have the potential to develop problems depending upon the particular
financial situations of the borrowers and economic conditions in general.
Management has taken these potential problem loans into consideration when
evaluating the adequacy of the
30
allowance for loan losses at December 31, 2002 (see discussion below).
Loans classified for regulatory purposes as loss, doubtful, substandard,
or special mention that have not been disclosed in the problem loan amounts and
the potential problem loan amounts discussed above do not represent or result
from trends or uncertainties that management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or represent
material credits about which management is aware of any information that causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
Other real estate includes foreclosed, repossessed, and idled properties.
Other real estate has not varied materially at any of the past three year ends,
amounting to $1,384,000 at December 31, 2002, $1,253,000 at December 31, 2001,
and $893,000 at December 31, 2000. Other real estate represented 0.11%, 0.11%,
and 0.10% of total assets at the end of 2002, 2001, and 2000, respectively. The
Company's management believes that the fair values of the items of other real
estate, less estimated costs to sell, equal or exceed their respective carrying
values at the dates presented.
Allowance for Loan Losses and Loan Loss Experience
The allowance for loan losses is created by direct charges to operations.
Losses on loans are charged against the allowance in the period in which such
loans, in management's opinion, become uncollectible. The recoveries realized
during the period are credited to this allowance. The Company considers its
procedures for recording the amount of the allowance for loan losses and the
related provision for loan losses to be a critical accounting policy. See the
heading "CRITICAL ACCOUNTING POLICIES" above for further discussion.
The factors that influence management's judgment in determining the amount
charged to operating expense include past loan loss experience, composition of
the loan portfolio, evaluation of probable inherent losses and current economic
conditions.
The Company uses a loan analysis and grading program to facilitate its
evaluation of probable inherent loan losses and the adequacy of its allowance
for loan losses. In this program, risk grades are assigned by management and
tested by the Company's internal audit department and an independent third party
consulting firm. The testing program includes an evaluation of a sample of new
loans, loans that management identifies as having potential credit weaknesses,
loans past due 90 days or more, nonaccrual loans and any other loans identified
during previous regulatory and other examinations.
The Company strives to maintain its loan portfolio in accordance with what
management believes are conservative loan underwriting policies that result in
loans specifically tailored to the needs of the Company's market areas. Every
effort is made to identify and minimize the credit risks associated with such
lending strategies. The Company has no foreign loans, few agricultural loans and
does not engage in significant lease financing or highly leveraged transactions.
Commercial loans are diversified among a variety of industries. The majority of
loans captioned in the tables discussed below as "real estate" loans are
primarily various personal and commercial loans where real estate provides
additional security for the loan. Collateral for virtually all of these loans is
located within the Company's principal market area.
The allowance for loan losses amounted to $10,907,000 at December 31, 2002
compared to $9,388,000 as of December 31, 2001 and $7,893,000 at December 31,
2000. This represented 1.09%, 1.05%, and 1.06%, of loans outstanding as of
December 31, 2002, 2001, and 2000, respectively. The four basis point increase
in this percentage is primarily 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
31
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.
As noted in Table 12, the Company's allowance for loan losses as a
percentage of nonperforming loans ("coverage ratio") amounted to 362% at
December 31, 2002, compared to 241% at December 31, 2001 and 915% at December
31, 2000. The change in the coverage ratio is inversely proportional to the
level of nonperforming loans at each period end. Due to the secured nature of
virtually all of the Company's loans that are on nonaccrual status, the variance
in the coverage ratio is not necessarily indicative of the relative adequacy of
the allowance for loan losses.
Table 13 sets forth the allocation of the allowance for loan losses at the
dates indicated. The portion of these reserves that was allocated to specific
loan types in the loan portfolio increased to $10,883,000 at December 31, 2002
from $9,343,000 at December 31, 2001 and $7,633,000 at December 31, 2000. The
16.5% increase in the amount of the allocated allowance during 2002 is
consistent with the 12.2% increase in total loans outstanding. Similarly, the
22.4% increase in the allocated reserve when comparing December 31, 2001 to
December 31, 2000 is consistent with the 19.3% increase in loans outstanding
experienced in 2001. The slightly higher increase in the allocated allowance
compared to the increase in loan growth for each of the past two years relates
to the Company's loan mix shifting slightly from residential real estate loans
to commercial real estate loans (which carry a higher reserve allocation in the
Company's allowance model) as discussed two paragraphs above. In addition to the
allocated portion of the allowance for loan losses, the Company maintains an
unallocated portion that is not assigned to any specific category of loans, but
rather is intended to reserve for the inherent risk in the overall portfolio and
the intrinsic inaccuracies associated with the estimation of the allowance for
loan losses and its allocation to specific loan categories. The amount of the
unallocated portion of the allowance for loan losses did not vary materially at
any of the past three year ends, while the decrease in the unallocated allowance
from 1999 to 2000 was related to the Company segregating and assigning higher
reserve percentages to particular loan types that were identified during 2000 as
having inherently higher risk (this resulted in a portion of the allowance for
loan losses shifting from "unallocated" to "allocated"). These additional risk
characteristics were noted by management as a part of its ongoing analysis and
review of its loan portfolio and historical charge-off experience, and did not
result from any deterioration of the portfolio during 2000.
Management considers the allowance for loan losses adequate to cover
probable loan losses on the loans outstanding as of each reporting date. It must
by emphasized, however, that the determination of the allowance using the
Company's procedures and methods rests upon various judgments and assumptions
about economic conditions and other factors affecting loans. No assurance can be
given that the Company will not in any particular period sustain loan losses
that are sizable in relation to the amount reserved or that subsequent
evaluations of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowances for loan losses and
losses on foreclosed real estate. Such agencies may require the Company to
recognize additions to the allowances based on the examiners' judgments about
information available to them at the time of their examinations.
For the years indicated, Table 14 summarizes the Company's balances of
loans outstanding, average loans outstanding, and a detailed rollforward of the
allowance for loan losses. In addition to the increases to the allowance for
loan losses related to normal provisions, the increases in the dollar amounts of
the allowance for loan losses in 2002 and 2001 were also affected by amounts
recorded to provide for loans assumed in corporate acquisitions. In 2002,
$50,000 was provided for loans assumed in the Broadway branch acquisition in
which the Company assumed approximately $3 million in loans. In 2001, the
Company recorded $1,125,000 to the allowance for loan losses related to loans
assumed in two corporate acquisitions. Approximately $520,000 of the
32
$1,125,000 related to $26.0 million in mostly consumer loans assumed in the
March 2001 and December 2001 branch acquisitions, while $605,000 related to the
Century acquisition. The $605,000 addition related to Century represented the
book value of Century's allowance for loan losses on the date of the
acquisition.
The Company's net loan charge offs were approximately $1,076,000 in 2002,
$781,000 in 2001, and $386,000 in 2000. This represents 0.11%, 0.09%, and 0.06%
of average loans during 2002, 2001, and 2000 respectively. A rise in consumer
bankruptcy filings is primarily responsible for the increase in net charge-offs
in 2001, while the increase in 2002 is primarily related to several commercial
loans that were secured by equipment and inventory.
Deposits
The average amounts of deposits of the Company and the average yield paid
for those deposits for the years ended December 31, 2002, 2001 and 2000 are
presented in Table 15. Average deposits grew to $1.011 billion in 2002, an
increase of $110.7 million, or 12.3%. In 2001, the Company's average deposits
experienced growth of $155.2 million, or 20.8%. Approximately half of the
increase in average deposits in 2002 and a large majority of the 2001 average
deposit growth relate to corporate acquisitions completed in 2001, which
increased deposits outstanding a total of $204.6 million over the course of the
year. The effect of having the acquired 2001 deposits for all 12 months in 2002
coupled with the 5.6% increase in the year end balance at December 31, 2002
compared to December 31, 2001 resulted in the 12.3% increase in average deposits
for the year.
The 12.3% increase in average deposits in 2002 was primarily driven by
increases in the non-time deposit categories. During 2002, average
noninterest-bearing demand deposits increased 23.6%, interest-bearing demand
deposits increased 21.8%, and savings deposits increased 26.3%. Average time
deposits and time deposits greater than $100,000 increased at lower rates of
2.2% and 8.8% respectively. The higher increases in non-time deposits were
primarily a result of the mix of the Company's 2001 deposit acquisitions and the
mix of the Company's 2002 deposit growth. The Company's 2001 acquisitions were
comprised of a high mix of non-time deposits, while in 2002 the Company noted
that many customers deposited their maturing time deposits into other categories
of deposits rather than renew their time deposits at the historically low rates
in effect.
The 2001 growth in average deposits occurred in all types of deposits,
with each category experiencing an increase of at least 13%. The increases in
the average amounts of non-time deposits - which include noninterest-bearing
deposits (22.5%), interest-bearing demand deposits (21.0%), and savings deposits
(13.3%) - were primarily due to the March 2001 acquisition of the four First
Union branches, the deposits of which were comprised of a high percentage of
non-time deposits (59% of those branches' total deposits). The increases in time
deposits less than $100,000 (16.5%) and time deposits greater than $100,000
(33.1%) were primarily due to the First Union time deposits, as well as the time
deposits ($51.2 million) assumed in the May 2001 Century acquisition. Internal
growth during 2001 of approximately 4-7% for noninterest-bearing deposits,
interest-bearing demand deposits and savings deposits contributed to the deposit
growth in non-time deposits. Internal growth in time deposits greater than
$100,000 of 13.6% contributed to the growth in this category, while a net
decrease in internally generated time deposits less than $100,000 of 5.1%
partially negated the overall increase in this category.
As of December 31, 2002, the Company held approximately $199.8 million in
time deposits of $100,000 or more and other time deposits of $356.1 million.
Table 16 is a maturity schedule of time deposits of $100,000 or more as of
December 31, 2002. This table shows that 84.3% of the Company's time deposits
greater than $100,000 mature within one year.
The Company does not issue any time deposits through foreign offices, nor
does the Company believe that it holds any deposits by foreign depositors.
33
Borrowings
At December 31, 2002, the Company had three sources of readily available
borrowing capacity - 1) an approximately $182,000,000 line of credit with the
Federal Home Loan Bank (FHLB), of which $10 million was outstanding, 2) a
$50,000,000 overnight federal funds line of credit with a correspondent bank,
and 3) an approximately $42,000,000 line of credit through the Federal Reserve
Bank of Richmond's (FRB) discount window.
The Company's line of credit with the FHLB totaling approximately
$182,000,000 can be structured as either short-term or long-term borrowings,
depending on the particular funding or liquidity need, and is secured by the
Company's FHLB stock and a blanket lien on its one-to-four family residential
loan portfolio. At December 31, 2002, the Company had $10 million in outstanding
borrowings under this line of credit, with $5 million at a fixed rate of 7.49%
due in May 2003 and $5 million at a fixed rate of 5.26% due in April 2009, with
a call date by the FHLB in April 2004.
The Company also has a correspondent bank relationship established that
allows the Company to purchase up to $50,000,000 in federal funds on an
overnight, unsecured basis. The Company had no borrowings outstanding under this
line at December 31, 2002 or 2001. This line of credit was not drawn upon in
2002 or 2001. There was insignificant use of this line during 2000, with total
interest expense incurred amounting to approximately $5,000.
The Company also has a line of credit with the FRB discount window. This
line is secured by a blanket lien on a portion of the Company's commercial,
consumer and real estate portfolio (excluding 1-4 family residences). Based on
the collateral owned by the Company as of December 31, 2002, the available line
of credit is approximately $42,000,000. This line of credit was established
primarily in connection with the Company's Y2K liquidity contingency plan and
has not been drawn on since inception. The FRB has indicated that it would not
expect lines of credit that have been granted to financial institutions to be a
primary borrowing source. The Company plans to maintain this line of credit,
although it is not expected that it will be drawn upon except in unusual
circumstances.
In addition to the lines of credit described above in which the Company
has $10 million outstanding, the Company issued $20 million in borrowings on
October 29, 2002. These borrowings are due on November 7, 2032 and were
structured as trust preferred capital securities that qualify as Tier I capital
for regulatory capital adequacy requirements. These debt securities are callable
by the Company at par on any quarterly interest payment date beginning on
November 7, 2007. The interest rate on these debt securities adjusts on a
quarterly basis at a rate of three-month LIBOR plus 3.45%. This rate may not
exceed 12.5% through November 2007.
Average short-term borrowings for each of the past five years were less
than thirty percent of total shareholders' equity at all times during each
period.
Liquidity
The Company's liquidity is determined by its ability to convert assets to
cash or acquire alternative sources of funds to meet the needs of its customers
who are withdrawing or borrowing funds, and to maintain required reserve levels,
pay expenses and operate the Company on an ongoing basis. The Company's primary
liquidity sources are net income from operations, cash and due from banks,
federal funds sold and other short-term investments. The Company's securities
portfolio is comprised almost entirely of readily marketable securities which
could also be sold to provide cash.
As noted above, in addition to internally generated liquidity sources, the
Company has the ability to obtain borrowings from the following three sources -
1) an approximately $182 million line of credit with the FHLB, 2)
34
a $50 million overnight federal funds line of credit with a correspondent bank,
and 3) an approximately $42 million line of credit through the Federal Reserve
Bank of Richmond's (FRB) discount window.
The Company's on-balance-sheet liquidity declined in 2002 as a result of
the strong loan growth ($108 million) that outpaced deposit growth ($56 million)
during the year. The imbalance in the loan growth compared to the deposit growth
in 2002 increased the loan to deposit ratio from 89.0% at December 31, 2001 to
94.6% at December 31, 2002. Additionally, the percentage of balance sheet assets
that are generally regarded as being liquid (consisting of cash, due from banks,
federal funds sold, presold mortgages in process of settlement and securities)
decreased from 20.7% of total deposits and borrowings at December 31, 2001 to
16.0% at December 31, 2002.
In 2001, liquidity indicators increased as a result of the corporate
acquisitions completed during the year. In connection with the acquisitions, the
Company received a net of $89.6 million in cash and securities, $116.2 million
in loans, and $204.6 million in deposits. As a result, the Company's loan to
deposit ratio decreased from 96.8% at December 31, 2000 to 89.0% at December 31,
2001. Additionally, the percentage of liquid balance sheet assets increased from
18.7% of total deposits and borrowings at December 31, 2000 to 20.7% at December
31, 2001.
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.
Table 18 reflects the contractual obligations and other commercial
commitments of the Company outstanding as of December 31, 2002. Of the $25
million in long-term debt maturing in more than five years, $5 million relates
to FHLB debt that has a call option whereby 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 December 31, 2002,
the Company's qualifying collateral amounted to 26.3 times the amount of
borrowings outstanding.
In the normal course of business there are various outstanding commitments
and contingent liabilities, such as commitments to extend credit, which are not
reflected in the financial statements. Table 18 also reflects other commercial
commitments of the Company outstanding as of December 31, 2002. This table
reflects that as of December 31, 2002, the Company had outstanding loan
commitments of $178,989,000 (the sum of credit cards and lines of credit and
loan commitments line items), of which $160,894,000 were at variable rates and
$18,095,000 were at fixed rates. Included in outstanding loan commitments were
unfunded commitments of $89,367,000 on revolving credit plans, of which
$82,203,000 were at variable rates and $7,164,000 were at fixed rates.
In addition to the credit card and other loan commitments described above,
at December 31, 2002, the Company had $2,279,000 in standby letters of credit
outstanding. The Company has no carrying amount for these standby letters of
credit. The nature of the standby letters of credit is a guarantee made on
behalf the Company's customers to suppliers of the customers to guarantee
payments owed to the supplier by the customer. The standby letters of credit
have two to three year terms, and the payment of the guarantees would generally
be triggered by a continued nonpayment of an obligation owed by the customer to
the supplier. The maximum potential amount of future payments (undiscounted) the
Company could be required to make under the guarantees in the event of
nonperformance by the parties to whom credit or financial guarantees have been
extended is represented by the contractual amount of the financial instruments
discussed above. In the event that the Company is required to honor a standby
letter of credit, a note, already executed with the customer, is triggered which
provides repayment terms and any collateral. Over the past ten years, the
Company has had to honor one standby letter of credit, which was repaid by the
borrower without any loss to the Company.
35
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 and existing commitments from normal operations.
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.
Despite the decline in on-balance-sheet liquidity levels in 2002 discussed
above, 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.
Interest Rate Risk (Including Quantitative and Qualitative Disclosures About
Market Risk - Item 7A.)
Net interest income is the Company's most significant component of
earnings. Notwithstanding changes in volumes of loans and deposits, the
Company's level of net interest income is continually at risk due to the effect
that changes in general market interest rate trends have on interest yields
earned and paid with respect to the various categories of 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 4.73% (realized in 1998). During that five year period the prime
rate of interest has ranged from a low of 4.25% 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.
Consistent with what occurred in 2001, the 50 basis point (0.50%) rate cut
initiated by the Federal Reserve on November 6, 2002 negatively impacted the
Company's net interest margin as interest-sensitive assets repriced downwards
sooner and by a greater amount than did the Company's interest-sensitive
liabilities. The Company's net interest margin for the fourth quarter of 2002
was 4.53%, a 25 basis point decrease from the third quarter of 2002. Assuming
rates remain unchanged in 2003, the Company expects the net interest margin to
rebound as the Company's time deposits reprice at lower rates upon their
maturity. Competitive pressures in the marketplace could limit or eliminate the
expected increase in the net interest margin.
36
Table 17 sets forth the Company's interest rate sensitivity analysis as of
December 31, 2002, using stated maturities for all instruments except
mortgage-backed securities (which are allocated in the periods of their expected
payback) and securities and borrowings with call features that are expected to
be called (which are shown in the period of their expected call). As illustrated
by this table, the Company had $308.2 million more in interest-bearing
liabilities that are subject to interest rate changes within one year than
earning assets. This generally would indicate that net interest income would
experience downward pressure in a rising interest rate environment and would
benefit from a declining interest rate environment. However, this method of
analyzing interest sensitivity only measures the magnitude of the timing
differences and does not address earnings, market value, or management actions.
Also, interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. In addition to the effects of "when"
various rate-sensitive products reprice, market rate changes may not result in
uniform changes in rates among all products. For example, included in
interest-bearing liabilities at December 31, 2002 subject to interest rate
changes within one year are deposits totaling $387.7 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 lower amount of change these liabilities experience compared to
interest sensitive assets.
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions. Table 19 presents
the expected maturities of the Company's other than trading market risk
sensitive financial instruments. Table 19 also presents the estimated 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." The Company's assets and 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
December 31, 2002 for instruments with maturities similar to the remaining term
of the portfolios, due to the declining interest rate environment.
See additional discussion regarding net interest income, as well as
discussion of the changes in the annual net interest margin in the section
entitled "Net Interest Income" above.
Return on Assets and Equity
Table 20 shows return on assets (net income divided by average total
assets), return on equity (net income divided by average shareholders' equity),
dividend payout ratio (dividends per share divided by net income per share) and
shareholders' equity to assets ratio (average shareholders' equity divided by
average total assets) for each of the years in the three-year period ended
December 31, 2002. Return on assets, return on equity, and dividend payout ratio
per basic share for the year 2000 were significantly impacted by the
nonrecurring merger-related charges discussed previously.
Capital Resources and Shareholders' Equity
Shareholders' equity at December 31, 2002 amounted to $124.0 million
compared to $116.7 million at
37
December 31, 2001. The two basic components typically affecting the Company's
shareholders' equity are net income, which increases shareholders' equity, and
dividends declared, which decreases shareholders' equity. In 2002, net income of
$17,230,000 increased equity, while dividends declared of $8,225,000 reduced
equity.
In addition to the two basic components affecting shareholders' equity,
during the past three years shareholders' equity has also been significantly
impacted by repurchases of the Company's common stock. In connection with the
October 2000 announcement that a definitive merger agreement had been executed
with Century Bancorp in a part cash-part stock transaction, the Company
announced its intent to repurchase, beginning immediately, up to the 586,000
shares that would be issued to complete the acquisition. Subsequent to the date
of the announcement and through December 31, 2000, the Company repurchased
approximately 125,000 shares at an average cost of $15.68 (59,000 shares had
been repurchased early in 2000 at an average price of $15.74). In 2001, the
Company repurchased another 457,000 shares of common stock at an average
repurchase price of $22.93 per share. After completing the repurchase of the
586,000 shares in the first quarter of 2002, the Company continued to repurchase
stock under additional authorizations granted by the Company's board of
directors. The extensions of the share repurchase authorizations have been
intended to provide the Company flexibility in managing its capital and enhance
shareholder value. In total, during the year ended December 31, 2002, the
Company repurchased 185,000 shares of stock at an average price of $23.85 per
share. At December 31, 2002, the Company had a remaining authorization to
repurchase 170,000 shares of stock.
Other items affecting shareholders' equity in 2002 were 1) proceeds of
$1,033,000 received from common stock issued as a result of stock option
exercises, 2) proceeds of $1,174,000 received from the issuance of stock into
the Company's dividend reinvestment plan, 3) a $382,000 increase to equity
related to the tax benefit that the Company realized due to exercises of
nonqualified stock options, and 4) other comprehensive income of $75,000, which
was comprised of the $176,000 increase in the net unrealized gain, net of taxes,
of the Company's available for sale securities that was reduced by an adjustment
to the Company's pension liability of $101,000, net of taxes.
In 2001, one other item had a significant effect on shareholders' equity -
common stock issued in acquisitions, which primarily related to the Company's
May 2001 acquisition of Century in which approximately 586,000 shares of common
stock were issued. The issuance of stock in connection with the Company's
acquisitions increased shareholders' equity by $9.2 million in 2001.
Other items affecting shareholders' equity in 2001 were 1) proceeds of
$731,000 received from common stock issued as a result of stock option
exercises, 2) proceeds of $564,000 received from the issuance of stock into the
Company's dividend reinvestment plan, and 3) other comprehensive income, which
was comprised entirely of the change in the unrealized gain or loss, net of
taxes, of the Company's available for sale securities and amounted to $421,000
in 2001.
In 2000, in addition to net income and dividends, there were two other
items that had a significant effect on shareholders' equity - 1) other
comprehensive income related to the Company's available for sale securities of
$2,553,000 and 2) repurchases and retirement of 184,000 shares of common stock
amounting to $2,884,000.
In addition to the items noted above that affected shareholders' equity in
2000, the Company received proceeds of $408,000 in connection with the issuance
of 140,000 shares related to exercises of stock options, issued 22,000 shares
and received $344,000 in proceeds from issuances of stock into the Company's
dividend reinvestment plan, and recorded a $790,000 increase to equity related
to the tax benefit that the Company realized due to exercises of nonqualified
stock options.
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 Bank 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
38
otherwise which, if they were to be implemented, would have a material effect on
its liquidity, capital resources, or operations.
The Company and the Bank must comply with regulatory capital requirements
established by the 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 and the Bank 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 and Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. These capital standards
require the Company and the Bank to maintain minimum ratios of "Tier 1" capital
to total risk-weighted assets ("Tier I Capital Ratio") and total capital to
risk-weighted assets ("Total Capital Ratio") of 4.00% and 8.00%, respectively.
Tier 1 capital is comprised of total shareholders' equity, excluding unrealized
gains or losses from the securities available for sale, less intangible assets,
and total capital is comprised of Tier 1 capital plus certain adjustments, the
largest of which for the Company and the Bank is the allowance for loan losses.
Risk-weighted assets refer to the on- and off-balance sheet exposures of the
Company and the Bank, 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 and the Bank are subject to a leverage capital requirement, which calls
for a minimum ratio of Tier 1 capital (as defined above) to quarterly average
total assets ("Leverage Ratio) 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.
Table 21 presents the Company's regulatory capital ratios as of December
31, 2002, 2001, and 2000. In 2001, while at all times the Company's regulatory
capital ratios far exceeded regulatory minimums, the ratios decreased
significantly as a result of the Company's acquisitions, which increased assets
and decreased tangible capital. In 2002, as a result of the Company forecasting
that its strategic growth goals would likely result in the need for additional
capital, the Company issued $20 million in debt structured as trust preferred
capital securities that qualify as Tier I capital for regulatory capital
adequacy requirements - see "Borrowings" above for further discussion. As a
result of the issuance of the trust preferred securities, the Company's capital
ratios increased significantly at December 31, 2002 compared to December 31,
2001.
In addition to the minimum capital requirements described above, the
regulatory framework for prompt corrective action also contains specific capital
guidelines for a bank's classification as "well capitalized." The specific
guidelines are as follows - Tier I Capital Ratio of at least 6.00%, Total
Capital Ratio of at least 10.00%, and a Leverage Ratio of at least 5.00%. The
Bank's regulatory ratios exceeded the threshold for "well-capitalized" status at
December 31, 2002, 2001 and 2000.
See "Supervision and Regulation" under "Business" above and Note 15 to the
consolidated financial statements for discussion of other matters that may
affect the Company's capital resources.
Inflation
Since the assets and liabilities of a bank are primarily monetary in
nature (payable in fixed determinable amounts), the performance of a bank is
affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may not be the same. The effect of inflation on banks is
normally not as significant as its influence on those businesses that have large
investments in plant and inventories. During periods of high inflation, there
are normally corresponding increases in the money supply, and banks will
normally experience above average growth in assets, loans and deposits. Also,
general increases in the price of goods and services will result in increased
operating expenses.
39
Current Accounting Matters
The Company prepares its financial statements and related disclosures in
conformity with standards established by, among others, the Financial Accounting
Standards Board (the "FASB"). Because the information needed by users of
financial reports is dynamic, the FASB frequently issues new rules and proposes
new rules for companies to apply in reporting their activities. The following
paragraphs contain information regarding recently adopted accounting standards
that affected the Company and new standards that have not yet been adopted that
have the potential to affect the Company.
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. On January 1, 2001, the Company transferred, as permitted by the
standard upon its adoption, held-to-maturity securities with an amortized cost
of approximately $31.7 million to the available-for-sale category at fair value.
The unrealized loss at the time of the transfer was approximately $513,000, and
is included as a component of other comprehensive income, net of tax. The
Company does not engage in any hedging activities and, other than the
aforementioned transfer of securities, the adoption of the statement had no
impact on the Company.
In June 2001, the Financial Accounting Standards Board (FASB) issued 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 was 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 6 to the
consolidated financial statements 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
Principles 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
40
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 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 is no longer amortized but is subject
to an annual impairment test, pursuant to Statement 142. The Company adopted
Statement 147 in the fourth quarter of 2002, but effective as of January 1,
2002. Statement 147 required the Company to retroactively restate its previously
issued 2002 interim consolidated financial statements to reverse reclassified
Statement 72 goodwill amortization expense recorded in the first three quarters
of the 2002 fiscal year. Accordingly, $1,068,000 in amortization expense that
had been recorded during the first nine months of 2002 was retroactively
reversed by reducing the respective quarters' amortization expense and
increasing intangible assets. The associated income tax expense recorded related
to the reversal of amortization expense amounted to $374,000 for that same nine
month period.
In November 2002, the FASB issued Financial Interpretation No. 45 (FIN
45), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", which addresses the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. FIN 45 requires the guarantor
to recognize a liability for the non-contingent component of the guarantee, such
as the obligation to stand ready to perform in the event that specified
triggering events or conditions occur. The initial measurement of this liability
is the fair value of the guarantee at inception. The recognition of the
liability is required even if it is not probable that payments will be required
under the guarantee or if the guarantee was issued with a premium payment or as
part of a transaction with multiple events. The disclosure requirements are
effective for interim and annual financial statements ending after December 15,
2002 and are contained in Note 12 to the accompanying consolidated financial
statements. The initial recognition and measurement provisions are effective for
all guarantees within the scope of FIN 45 issued or modified after December 31,
2002, the impacts of which are not expected to be material to the Company. The
Company issues standby letters of credit whereby the Company guarantees
performance if a specified triggering event or condition occurs, primarily
nonpayment by the Company's customer to their supplier. The standby letters of
credit are generally for terms for one year, at which time they may be renewed
for another year if both parties agree.
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (FAS 148) an amendment of FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123), which
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, FAS 148 amends the disclosure requirements of FAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The transition provisions of the statement are
effective for financial statements for fiscal years ending after December 15,
2002 while the disclosure requirements are effective for interim periods
beginning after December 15, 2002, with early application encouraged. The
adoption of SFAS 148 requires enhanced disclosures for the Company's stock-
41
based employee compensation plan for the year ended December 31, 2002. The
Company does not have any plans to change its method of accounting for
stock-based employee compensation, but has furnished the expanded disclosures in
Note 1(k) to the accompanying consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information responsive to this Item is found in Item 7 under the
caption "Interest Rate Risk."
FORWARD-LOOKING STATEMENTS
The discussion in Part I and Part II 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.
42
================================================================================
Table 1 Selected Consolidated Financial Data
================================================================================
Year Ended December 31,
($ in thousands, except per share -----------------------------------------------------------------------
and nonfinancial data) 2002 2001 2000 1999 1998
----------- ---------- ------- -------- --------
Income Statement Data
Interest income $ 73,261 76,773 72,915 61,591 57,612
Interest expense 23,871 35,720 34,220 26,488 25,070
Net interest income 49,390 41,053 38,695 35,103 32,542
Provision for loan losses 2,545 1,151 1,605 910 990
Net interest income after provision 46,845 39,902 37,090 34,193 31,552
Noninterest income 11,968 9,655 4,729 5,647 5,218
Noninterest expense 32,301 28,634 26,741 21,752 19,665
Income before income taxes 26,512 20,923 15,078 18,088 17,105
Income taxes 9,282 7,307 5,736 6,234 6,132
Net income 17,230 13,616 9,342 11,854 10,973
Earnings per share - basic 1.89 1.51 1.05 1.32 1.20
Earnings per share - diluted 1.85 1.47 1.03 1.27 1.13
Pro Forma Data (1)
Nonrecurring items, net of taxes (14) (97) (2)3,525 (24) (153)
Pro forma amortization adjustment, net of taxes -- 1,160 527 528 542
Net income, pro forma 17,216 14,679 13,394 12,358 11,362
Pro forma diluted earnings per share 1.85 1.58 1.48 1.32 1.18
===========================================================================================================================
Per Share Data
Cash dividends declared $ 0.90 0.88 0.77 0.63 0.60
Market Price
High 27.52 28.08 17.25 20.00 28.00
Low 20.20 15.50 12.06 13.31 16.00
Close 23.51 22.55 15.75 16.50 19.33
Book value - stated 13.59 12.81 12.54 12.09 12.02
Tangible book value 10.83 10.12 12.01 11.50 11.38
===========================================================================================================================
Selected Balance Sheet Data (at year end)
Total assets $ 1,218,146 1,144,691 915,167 889,531 779,639
Loans 998,547 890,310 746,089 643,224 567,224
Allowance for loan losses 10,907 9,388 7,893 6,674 6,100
Intangible assets 25,169 24,488 4,630 5,261 5,843
Deposits 1,055,957 1,000,281 770,379 712,139 656,148
Borrowings 30,000 15,000 26,200 62,500 6,000
Total shareholders' equity 123,985 116,726 110,684 106,980 109,989
===========================================================================================================================
Selected Average Balances
Assets $ 1,162,708 1,046,030 909,800 823,571 740,872
Loans 954,885 831,817 701,317 597,951 531,929
Earning assets 1,090,666 983,628 867,269 782,492 702,814
Deposits 1,010,693 899,989 744,835 680,749 609,685
Interest-bearing liabilities 928,686 837,563 724,152 643,921 568,780
Shareholders' equity 120,943 115,620 110,093 107,913 108,247
===========================================================================================================================
Ratios
Return on average assets 1.48% 1.30% 1.03% 1.44% 1.48%
Return on average equity 14.25% 11.78% 8.49% 10.98% 10.14%
Net interest margin (taxable-equivalent basis) 4.58% 4.23% 4.53% 4.56% 4.73%
Shareholders' equity to assets at year end 10.18% 10.20% 12.09% 12.03% 14.11%
Loans to deposits at year end 94.56% 89.01% 96.85% 90.32% 86.45%
Net charge-offs to average loans 0.11% 0.09% 0.06% 0.06% 0.05%
Efficiency ratio 52.19% 55.82% 60.75% 52.59% 51.13%
===========================================================================================================================
(1) See "Note Regarding Pro Forma Information" on page 17.
(2) Relates primarily to merger-related charges.
================================================================================
43
================================================================================
Table 2 Average Balances and Net Interest Income Analysis
================================================================================
Year Ended December 31,
---------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------ ------------------------------ ----------------------------
Interest Interest Interest
Average Average Earned Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid Volume Rate or Paid
---------- ------- -------- ---------- ------- -------- -------- ------- --------
Assets
Loans (1) $ 954,885 6.99% $66,742 $ 831,817 8.18% $68,055 $701,317 8.91% $62,474
Taxable securities 83,642 5.93% 4,961 98,645 6.46% 6,372 131,833 6.43% 8,482
Non-taxable securities (2) 14,823 8.51% 1,262 16,280 8.60% 1,400 17,664 8.27% 1,460
Short-term investments,
principally federal funds 37,316 2.23% 831 36,886 4.17% 1,538 16,455 6.64% 1,093
---------- ------- ---------- ------- -------- -------
Total interest-
earning assets 1,090,666 6.77% 73,796 983,628 7.87% 77,365 867,269 8.48% 73,509
------- ------- -------
Cash and due from banks 26,330 25,618 22,562
Bank premises and
equipment, net 20,769 16,781 13,395
Other assets 24,943 20,003 6,574
---------- ---------- --------
Total assets $1,162,708 $1,046,030 $909,800
========== ========== ========
Liabilities and Equity
Savings, NOW and money
market deposits $ 368,807 0.97% 3,588 $ 300,387 1.78% 5,354 $251,995 2.56% 6,462
Time deposits >$100,000 186,178 3.67% 6,825 171,096 5.88% 10,058 128,562 6.13% 7,882
Other time deposits 352,964 3.51% 12,376 345,350 5.48% 18,941 296,392 5.69% 16,862
---------- ------- ---------- ------- -------- -------
Total interest-bearing
deposits 907,949 2.51% 22,789 816,833 4.21% 34,353 676,949 4.61% 31,206
Borrowings 20,737 5.22% 1,082 20,729 6.59% 1,367 47,203 6.39% 3,014
---------- ------- ---------- ------- -------- -------
Total interest-
bearing liabilities 928,686 2.57% 23,871 837,563 4.26% 35,720 724,152 4.73% 34,220
------- ------- -------
Non-interest-
bearing deposits 102,744 83,156 67,886
Other liabilities 10,335 9,692 7,669
Shareholders' equity 120,943 115,620 110,093
---------- ---------- --------
Total liabilities and
shareholders' equity $1,162,708 $1,046,030 $909,800
========== ========== ========
Net yield on interest-
earning assets and
net interest income 4.58% $49,925 4.23% $41,645 4.53% $39,289
======= ======= =======
Interest rate spread 4.20% 3.61% 3.75%
Average prime rate 4.67% 6.93% 9.26%
- --------------------------------------------------------------------------------------------------------------------------------
(1) Average loans include nonaccruing loans, the effect of which is to lower
the average rate shown. Interest earned includes recognized loan fees in
the amounts of $938,000, $738,000, and $586,000 for 2002, 2001, and 2000,
respectively.
(2) Includes tax-equivalent adjustments of $535,000, $592,000, and $594,000 in
2002, 2001, and 2000, respectively, to reflect the federal and state
benefit of the tax-exempt securities, reduced by the related nondeductible
portion of interest expense.
================================================================================
44
================================================================================
Table 3 Volume and Rate Variance Analysis
================================================================================
Year Ended December 31, 2002 Year Ended December 31, 2001
------------------------------------ -------------------------------------
Change Attributable to Change Attributable to
---------------------- -----------------------
Total Total
Changes Changes Increase Changes Changes Increase
(In thousands) in Volumes in Rates (Decrease) in Volumes in Rates (Decrease)
---------- -------- ---------- ---------- -------- ----------
Interest income (tax-equivalent):
Loans $ 9,335 (10,648) (1,313) $ 11,151 (5,570) 5,581
Taxable securities (929) (482) (1,411) (2,140) 30 (2,110)
Non-taxable securities (125) (13) (138) (117) 57 (60)
Short-term investments, principally
federal funds sold 14 (721) (707) 1,104 (659) 445
------- ------- ------- -------- ------ ------
Total interest income 8,295 (11,864) (3,569) 9,998 (6,142) 3,856
------- ------- ------- -------- ------ ------
Interest expense:
Savings, NOW and money
market deposits 943 (2,709) (1,766) 1,052 (2,160) (1,108)
Time deposits>$100,000 720 (3,953) (3,233) 2,554 (378) 2,176
Other time deposits 342 (6,907) (6,565) 2,735 (656) 2,079
------- ------- ------- -------- ------ ------
Total interest-bearing deposits 2,005 (13,569) (11,564) 6,341 (3,194) 3,147
Borrowings -- (285) (285) (1,718) 71 (1,647)
------- ------- ------- -------- ------ ------
Total interest expense 2,005 (13,854) (11,849) 4,623 (3,123) 1,500
------- ------- ------- -------- ------ ------
Net interest income $ 6,290 1,990 8,280 $ 5,375 (3,019) 2,356
======= ======= ======= ======== ====== ======
(1) Changes attributable to both volume and rate are allocated equally between
rate and volume variances.
================================================================================
Table 4 Noninterest Income
================================================================================
Year Ended December 31,
--------------------------------
(In thousands) 2002 2001 2000
-------- ------ -------
Service charges on deposit accounts $ 6,856 5,265 3,118
Other service charges, commissions, and fees 2,336 2,046 1,740
Fees from presold mortgages 1,713 1,259 453
Commissions from sales of insurance and
financial products 738 731 418
Data processing fees 303 205 117
-------- ------ -------
Total core noninterest income 11,946 9,506 5,846
Loan sale gains 11 9 --
Securities gains (losses), net 25 61 (1,919)
Branch sale gain -- -- 808
Other gains (losses), net (14) 79 (6)
-------- ------ -------
Total $ 11,968 9,655 4,729
======== ====== =======
================================================================================
Table 5 Noninterest Expenses
================================================================================
Year Ended December 31,
--------------------------------
(In thousands) 2002 2001 2000
-------- ------ -------
Salaries $ 15,079 12,534 10,138
Employee benefits 3,388 3,083 2,543
-------- ------ -------
Total personnel expense 18,467 15,617 12,681
Occupancy expense 2,077 1,734 1,507
Equipment related expenses 2,128 1,631 1,353
Amortization of intangible assets 31 1,535 631
Stationery and supplies 1,445 1,279 1,174
Telephone 932 688 600
Non-credit losses 97 167 60
Merger expenses -- -- 3,188
Other operating expenses 7,124 5,983 5,547
-------- ------ -------
Total $ 32,301 28,634 26,741
======== ====== =======
================================================================================
45
================================================================================
Table 6 Income Taxes
================================================================================
(In thousands) 2002 2001 2000
------- ----- -----
Current - Federal $ 8,964 7,256 6,108
- State 464 102 174
Deferred - Federal (146) (51) (546)
------- ----- -----
Total $ 9,282 7,307 5,736
======= ===== =====
Effective tax rate 35.0% 34.9% 38.0%
======= ===== =====
================================================================================
Table 7 Distribution of Assets and Liabilities
================================================================================
As of December 31,
---------------------------------
2002 2001 2000
------- ------- -------
Assets
Interest-earning assets
Net loans 81% 77% 81%
Securities available for sale 5 8 8
Securities held to maturity 1 1 5
Short term investments 6 6 1
------- ------- -------
Total interest-earning assets 93 92 95
Noninterest-earning assets
Cash and due from banks 2 3 2
Premises and equipment 2 2 2
Other assets 3 3 1
------- ------- -------
Total assets 100% 100% 100%
======= ======= =======
Liabilities and shareholders' equity
Demand deposits - noninterest bearing 9% 8% 8%
Savings, NOW, and money market deposits 32 31 28
Time deposits of $100,000 or more 17 17 15
Other time deposits 29 32 33
------- ------- -------
Total deposits 87 88 84
Borrowings 2 1 3
Accrued expenses and other liabilities 1 1 1
------- ------- -------
Total liabilities 90 90 88
Shareholders' equity 10 10 12
------- ------- -------
Total liabilities and shareholders' equity 100% 100% 100%
======= ======= =======
================================================================================
Table 8 Securities Portfolio Composition
================================================================================
As of December 31,
---------------------------------
(In thousands) 2002 2001 2000
------- ------- -------
Securities available for sale:
U.S. Treasury $ -- 512 5,527
U.S. Government agencies 13,529 28,111 40,797
Mortgage-backed securities 35,208 52,227 16,922
Corporate bonds 11,507 8,663 --
State and local governments -- -- 1,249
Equity securities 5,535 6,956 5,102
------- ------- -------
Total securities available for sale 65,779 96,469 69,597
======= ======= =======
Securities held to maturity:
U.S. Government agencies -- -- 11,854
Mortgage-backed securities -- -- 19,879
State and local governments 13,951 16,130 15,935
Other 1,039 208 256
------- ------- -------
Total securities held to maturity 14,990 16,338 47,924
------- ------- -------
Total securities $80,769 112,807 117,521
======= ======= =======
Average total securities during year $98,465 114,925 149,497
======= ======= =======
================================================================================
46
================================================================================
Table 9 Securities Portfolio Maturity Schedule
================================================================================
As of December 31,
-------------------------------
2002
-------------------------------
Book Fair Book
($ in thousands) Value Value Yield (1)
------- ------ ---------
Securities available for sale:
U.S. Government agencies
Due within one year $ 500 503 6.00%
Due after one but within five years 6,499 6,626 4.44%
Due after five but within ten years 5,954 6,400 7.07%
------- ------ -----
Total 12,953 13,529 5.71%
------- ------ -----
Mortgage-backed securities
Due within one year 6,045 6,169 4.19%
Due after one but within five years 28,215 29,033 4.89%
Due after five but within ten years 5 6 12.93%
------- ------ -----
Total 34,265 35,208 4.77%
------- ------ -----
Corporate debt securities
Due after five but within ten years 817 870 6.50%
Due after ten years 10,796 10,637 8.33%
------- ------ -----
Total 11,613 11,507 8.20%
------- ------ -----
Equity securities 5,549 5,535 5.00%
------- ------ -----
Total securities available for sale
Due within one year 6,545 6,672 4.33%
Due after one but within five years 34,714 35,659 4.80%
Due after five but within ten years 6,776 7,276 7.01%
Due after ten years 16,345 16,172 7.20%
------- ------ -----
Total $64,380 65,779 5.45%
======= ====== =====
Securities held to maturity:
State and local governments
Due within one year $ 1,056 1,072 7.86%
Due after one but within five years 5,721 6,013 7.32%
Due after five but within ten years 6,578 7,017 7.75%
Due after ten years 596 616 7.15%
------- ------ -----
Total 13,951 14,718 7.56%
------- ------ -----
Other
Due after one but within five years 1,039 1,039 1.33%
------- ------ -----
Total 1,039 1,039 1.33%
------- ------ -----
Total securities held to maturity
Due within one year 1,056 1,072 7.86%
Due after one but within five years 6,760 7,052 6.40%
Due after five but within ten years 6,578 7,017 7.75%
Due after ten years 596 616 7.15%
------- ------ -----
Total $14,990 15,757 7.13%
======= ====== =====
(1) Yields on tax-exempt investments have been adjusted to a taxable
equivalent basis using a 35% tax rate.
================================================================================
47
================================================================================
Table 10 Loan Portfolio Composition
================================================================================
As of December 31,
---------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------- ------------------- ------------------- ------------------- -------------------
% of % of % of % of % of
($ in thousands) Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Commercial,
financial, &
agricultural $ 88,291 8.84% $ 79,695 8.94% $ 76,507 10.24% $ 58,574 9.10% $ 52,415 9.23%
Real estate -
construction 68,162 6.82% 66,304 7.44% 57,608 7.71% 36,823 5.72% 38,265 6.74%
Real estate -
mortgage(1) 795,148 79.57% 697,498 78.29% 571,638 76.55% 512,080 79.52% 442,389 77.90%
Installment
loans to
individuals 47,648 4.77% 47,471 5.33% 41,047 5.50% 36,450 5.66% 34,836 6.13%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Loans, gross 999,249 100.00% 890,968 100.00% 746,800 100.00% 643,927 100.00% 567,905 100.00%
====== ====== ====== ====== ======
Unamortized
net deferred
loan fees &
unearned
income (702) (658) (711) (703) (681)
--------- --------- --------- --------- ---------
Total loans,
net $ 998,547 $ 890,310 $ 746,089 $ 643,224 $ 567,224
========= ========= ========= ========= =========
(1) The majority of these loans are various personal and commercial loans
where real estate provides additional security for the loan.
================================================================================
Table 11 Loan Maturities
================================================================================
As of December 31, 2002
--------------------------------------------------------------------------------
Due within Due after one year but Due after five
one year within five years years Total
----------------- ----------------- ----------------- -----------------
($ in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- -------- ----- -------- ----- -------- -----
Variable Rate Loans:
Commercial, financial, and
agricultural $ 32,773 4.76% $ 17,661 4.59% $ 388 4.64% $ 50,822 4.70%
Real estate - construction 53,373 4.99% 5,600 4.36% 2,583 4.21% 61,556 4.90%
Real estate - mortgage 55,325 4.79% 109,145 4.77% 183,193 6.02% 347,663 5.43%
Installment loans
to individuals 822 5.08% 5,867 7.38% 1,335 6.20% 8,024 6.95%
-------- -------- -------- --------
Total at variable rates 142,293 4.86% 138,273 4.84% 187,499 5.99% 468,065 5.31%
-------- -------- -------- --------
Fixed Rate Loans:
Commercial, financial, and
agricultural 8,527 7.58% 24,714 7.54% 4,917 6.46% 38,158 7.41%
Real estate - construction 9,756 6.63% 1,370 7.36% -- -- 11,126 6.72%
Real estate - mortgage 34,152 7.79% 296,251 7.24% 108,729 7.52% 439,132 7.35%
Installment loans
to individuals 5,438 8.57% 31,844 9.67% 1,808 7.88% 39,090 9.43%
-------- -------- -------- --------
Total at fixed rates 57,873 7.64% 354,179 7.48% 115,454 7.48% 527,506 7.50%
-------- -------- -------- --------
Subtotal 200,166 5.66% 492,452 6.74% 302,953 6.56% 995,571 6.47%
Nonaccrual loans 2,976 -- -- 2,976
-------- -------- -------- --------
Loans, gross $203,142 $492,452 $302,953 $998,547
======== ======== ======== ========
The above table is based on contractual scheduled maturities. Early repayment of
loans or renewals at maturity are not considered in this table.
================================================================================
48
================================================================================
Table 12 Nonperforming Assets
================================================================================
As of December 31,
-----------------------------------------------
($ in thousands) 2002 2001 2000 1999 1998
------- ----- ----- ----- -----
Nonaccrual loans $ 2,976 3,808 626 1,424 1,698
Restructured loans 41 83 237 257 248
Accruing loans >90 days past due -- -- -- -- --
------- ----- ----- ----- -----
Total nonperforming loans 3,017 3,891 863 1,681 1,946
Other real estate (included in other assets) 1,384 1,253 893 906 505
------- ----- ----- ----- -----
Total nonperforming assets $ 4,401 5,144 1,756 2,587 2,451
======= ===== ===== ===== =====
Nonperforming loans as a percentage
of total loans 0.30% 0.44% 0.12% 0.26% 0.34%
Nonperforming assets as a percentage of
loans and other real estate 0.44% 0.58% 0.24% 0.40% 0.43%
Nonperforming assets as a percentage of
total assets 0.36% 0.45% 0.19% 0.29% 0.31%
Allowance for loan losses as a percentage
of nonperforming loans 361.52% 241.27% 914.60% 397.03% 313.46%
================================================================================
Table 13 Allocation of the Allowance for Loan Losses
================================================================================
As of December 31,
-----------------------------------------------
($ in thousands) 2002 2001 2000 1999 1998
------- ----- ----- ----- -----
Commercial, financial, and agricultural $ 1,890 1,643 1,574 726 646
Real estate - construction 483 449 393 255 256
Real estate - mortgage 7,416 6,230 4,849 4,078 3,612
Installment loans to individuals 1,094 1,021 817 587 678
------- ----- ----- ----- -----
Total allocated 10,883 9,343 7,633 5,646 5,192
Unallocated 24 45 260 1,028 908
------- ----- ----- ----- -----
Total $10,907 9,388 7,893 6,674 6,100
======= ===== ===== ===== =====
================================================================================
49
================================================================================
Table 14 Loan Loss and Recovery Experience
================================================================================
As of December 31,
-----------------------------------------------------------------
($ in thousands) 2002 2001 2000 1999 1998
--------- -------- -------- -------- --------
Loans outstanding at end of year $ 998,547 890,310 746,089 643,224 567,224
========= ======== ======== ======== ========
Average amount of loans outstanding $ 954,885 831,817 701,317 597,951 531,929
========= ======== ======== ======== ========
Allowance for loan losses, at
beginning of year $ 9,388 7,893 6,674 6,100 5,383
Provision for loan losses 2,545 1,151 1,605 910 990
Additions related to loans assumed in
corporate acquisitions 50 1,125 -- -- --
--------- -------- -------- -------- --------
11,983 10,169 8,279 7,010 6,373
--------- -------- -------- -------- --------
Loans charged off:
Commercial, financial and agricultural (598) (89) (171) (53) (92)
Real estate - mortgage (230) (181) (3) (126) (97)
Installment loans to individuals (383) (642) (301) (269) (253)
--------- -------- -------- -------- --------
Total charge-offs (1,211) (912) (475) (448) (442)
--------- -------- -------- -------- --------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 33 27 10 27 51
Real estate - mortgage 15 48 20 17 18
Installment loans to individuals 87 56 59 68 100
--------- -------- -------- -------- --------
Total recoveries 135 131 89 112 169
--------- -------- -------- -------- --------
Net charge-offs (1,076) (781) (386) (336) (273)
--------- -------- -------- -------- --------
Allowance for loan losses, at end of year $ 10,907 9,388 7,893 6,674 6,100
========= ======== ======== ======== ========
Ratios:
Net charge-offs as a percent of average loans 0.11% 0.09% 0.06% 0.06% 0.05%
Allowance for loan losses as a
percent of loans at end of year 1.09% 1.05% 1.06% 1.04% 1.08%
Allowance for loan losses as a multiple
of net charge-offs 10.14x 12.02x 20.45x 19.86x 22.34x
Provision for loan losses as a percent of net
charge-offs 236.52% 147.38% 415.80% 270.83% 362.64%
Recoveries of loans previously charged-off
as a percent of loans charged-off 11.15% 14.36% 18.74% 25.00% 38.24%
================================================================================
50
================================================================================
Table 15 Average Deposits
================================================================================
Year Ended December 31,
------------------------------------------------------------------------
2002 2001 2000
---------------------- -------------------- --------------------
Average Average Average Average Average Average
($ in thousands) Amount Rate Amount Rate Amount Rate
---------- ------- -------- ------- -------- -------
Interest-bearing demand deposits $ 284,657 0.93% $233,770 1.77% $193,222 2.53%
Savings deposits 84,150 1.13% 66,617 1.82% 58,773 2.66%
Time deposits 352,964 3.67% 345,350 5.48% 296,392 5.69%
Time deposits > $100,000 186,178 3.51% 171,096 5.88% 128,562 6.13%
---------- -------- --------
Total interest-bearing deposits 907,949 2.51% 816,833 4.21% 676,949 4.61%
Noninterest-bearing deposits 102,744 -- 83,156 -- 67,886 --
---------- -------- --------
Total deposits $1,010,693 2.25% $899,989 3.82% $744,835 4.19%
========== ======== ========
================================================================================
Table 16 Maturities of Time Deposits of $100,000 or More
================================================================================
As of December 31, 2002
--------------------------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
(In thousands) or Less Months Months Months Total
--------- ----------- ------------ ------- ---------
Time deposits of $100,000 or more $ 69,115 57,677 41,586 31,416 199,794
========= ======== ======== ======= =========
================================================================================
Table 17 Interest Rate Sensitivity Analysis
================================================================================
Repricing schedule for interest-earning assets and interest-bearing
liabilities held as of December 31, 2002
--------------------------------------------------------------------
3 Months Over 3 to 12 Total Within Over 12
or Less Months 12 Months Months Total
--------- ------------ ------------ ------- ---------
($ in thousands)
Earning assets:
Loans, net of deferred fees $ 405,311 59,567 464,878 533,669 998,547
Securities available for sale 16,073 14,183 30,256 35,523 65,779
Securities held to maturity 655 401 1,056 13,934 14,990
Short-term investments 66,188 -- 66,188 -- 66,188
--------- -------- -------- ------- ---------
Total earning assets $ 488,227 74,151 562,378 583,126 1,145,504
========= ======== ======== ======= =========
Percent of total earning assets 42.62% 6.47% 49.09% 50.91% 100.00%
Cumulative percent of total earning assets 42.62% 49.09% 49.09% 100.00% 100.00%
Interest-bearing liabilities:
Savings, NOW and money market deposits $ 387,691 -- 387,691 -- 387,691
Time deposits of $100,000 or more 69,115 99,263 168,378 31,416 199,794
Other time deposits 116,813 172,772 289,585 66,507 356,092
Borrowings 20,000 5,000 25,000 5,000 30,000
--------- -------- -------- ------- ---------
Total interest-bearing liabilities $ 593,619 277,035 870,654 102,923 973,577
========= ======== ======== ======= =========
Percent of total interest-bearing liabilities 60.97% 28.46% 89.43% 10.57% 100.00%
Cumulative percent of total interest-
bearing liabilities 60.97% 89.43% 89.43% 100.00% 100.00%
Interest sensitivity gap $(105,392) (202,884) (308,276) 480,203 171,927
Cumulative interest sensitivity gap (105,392) (308,276) (308,276) 171,927 171,927
Cumulative interest sensitivity gap
as a percent of total earning assets -9.20% -26.91% -26.91% 15.01% 15.01%
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 82.25% 64.59% 64.59% 117.66% 117.66%
================================================================================
51
================================================================================
Table 18 Contractual Obligations and Other Commercial Commitments
================================================================================
Payments Due by Period (in thousands)
-----------------------------------------------------------
Contractual On Demand or
Obligations Less After
--------------------------------------
As of December 31, 2002 Total than 1 Year 1-3 Years 4-5 Years 5 Years
-------------------------------------- ---------- ----------- --------- --------- -------
Long-term debt $ 30,000 5,000 -- -- 25,000
Operating leases 1,247 255 373 330 289
---------- ------- ------ ------ ------
Total contractual cash obligations,
excluding deposits 31,247 5,255 373 330 25,289
Deposits 1,055,957 957,372 72,052 25,635 898
---------- ------- ------ ------ ------
Total contractual cash obligations,
including deposits $1,087,204 962,627 72,425 25,965 26,187
========== ======= ====== ====== ======
Amount of Commitment Expiration Per Period (in thousands)
------------------------------------------------------------
Other Commercial
Commitments Total
-------------------------------------- Amounts Less After
As of December 31, 2002 Committed than 1 Year 1-3 Years 4-5 Years 5 Years
-------------------------------------- ---------- ----------- --------- --------- -------
Credit cards $ 13,444 6,722 6,722 -- --
Lines of credit and loan commitments 165,545 88,577 7,715 1,074 68,179
Standby letters of credit 2,279 2,248 31 -- --
---------- ------- ------ ------ ------
Total commercial commitments $ 181,268 97,547 14,468 1,074 68,179
========== ======= ====== ====== ======
================================================================================
Table 19 Market Risk Sensitive Instruments
================================================================================
Expected Maturities of Market Sensitive Instruments Held
at December 31, 2002 Occurring in Indicated Year
----------------------------------------------------------------------
Average Estimated
Interest Fair
($ in thousands) 2003 2004 2005 2006 2007 Beyond Total Rate Value
-------- ------- ------- ------- ------- ------- --------- -------- ----------
Due from banks,
interest-bearing $ 30,753 -- -- -- -- -- 30,753 1.15% $ 30,753
Federal funds sold 16,167 -- -- -- -- -- 16,167 1.15% 16,167
Presold mortgages in
process of settlement 19,268 -- -- -- -- -- 19,268 5.75% 19,268
Debt Securities- at
amortized cost (1) (2) 27,237 15,387 5,029 1,900 1,619 22,649 73,821 5.97% 76,001
Loans - fixed (3) (4) 83,152 79,419 99,033 83,052 120,810 55,617 521,083 7.52% 530,083
Loans - adjustable (3) (4) 168,610 55,398 55,232 54,763 71,601 68,884 474,488 5.31% 476,104
-------- ------- ------- ------- ------- ------- --------- ---- ----------
Total $345,187 150,204 159,294 139,715 194,030 147,150 1,135,580 6.20% $1,148,376
======== ======= ======= ======= ======= ======= ========= ==== ==========
Savings, NOW, and
money market
deposits $387,691 -- -- -- -- -- 387,691 0.71% $ 387,691
Time deposits 457,301 56,795 15,257 5,850 19,785 898 555,886 2.89% 558,498
Borrowings - fixed (2) 5,000 -- -- -- -- 5,000 10,000 6.38% 10,447
Borrowings - adjustable -- -- -- -- -- 20,000 20,000 5.27% 20,000
-------- ------- ------- ------- ------- ------- --------- ---- ----------
Total $849,992 56,795 15,257 5,850 19,785 25,898 973,577 2.11% $ 976,636
======== ======= ======= ======= ======= ======= ========= ==== ==========
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 35%
tax rate.
(2) Securities and borrowings with call dates within 12 months of December 31,
2002 that have above market interest rates are assumed to mature at their
call date for purposes of this table. Mortgage securities are assumed to
mature in the period of their expected repayment based on estimated
prepayment speeds.
(3) Excludes nonaccrual loans.
(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.
================================================================================
52
================================================================================
Table 20 Return on Assets and Equity
================================================================================
For the Year Ended December 31,
-------------------------------
2002 2001 2000
----- ----- -----
Return on assets 1.48% 1.30% 1.03%
Return on equity 14.25% 11.78% 8.49%
Dividend payout ratio 47.62% 58.28% 73.33%
Average shareholders' equity to average assets 10.40% 11.05% 12.10%
================================================================================
Table 21 Risk-Based and Leverage Capital Ratios
================================================================================
($ in thousands) 2002 2001 2000
----------- ---------- --------
Risk-Based and Leverage Capital
Tier I capital:
Common shareholders' equity $ 123,985 116,726 110,684
Trust preferred securities 20,000 -- --
Intangible assets (25,169) (24,488) (4,630)
Accumulated other
comprehensive income (752) (677) (256)
----------- ---------- --------
Total Tier I leverage capital 118,064 91,561 105,798
----------- ---------- --------
Tier II capital:
Allowable allowance for loan losses 10,907 9,388 7,893
----------- ---------- --------
Tier II capital additions 10,907 9,388 7,893
----------- ---------- --------
Total risk-based capital $ 128,971 100,949 113,691
=========== ========== ========
Risk adjusted assets $ 957,158 857,933 690,368
Tier I risk-adjusted assets
(includes Tier I capital adjustments) 931,237 832,768 685,482
Tier II risk-adjusted assets
(includes Tiers I and II capital adjustments) 942,144 842,156 693,375
Fourth quarter average assets 1,195,930 1,109,460 916,691
Adjusted fourth quarter average assets
(includes Tier I capital adjustments) 1,170,009 1,084,295 911,805
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets 12.68% 10.99% 15.43%
Minimum required Tier I capital 4.00% 4.00% 4.00%
Total risk-based capital to
Tier II risk-adjusted assets 13.69% 11.99% 16.40%
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 10.09% 8.44% 11.60%
Minimum required Tier I leverage capital 4.00% 4.00% 4.00%
================================================================================
53
================================================================================
Table 22 Quarterly Financial Summary
================================================================================
2002 2001
----------------------------------------------- -------------------------------------------
($ in thousands except Fourth Third Second First Fourth Third Second First
per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
---------- --------- --------- --------- --------- --------- --------- -------
Income Statement Data
Interest income, taxable
equivalent $ 18,252 18,797 18,512 18,235 18,889 20,038 19,871 18,567
Interest expense 5,370 5,654 6,046 6,801 8,066 9,001 9,548 9,105
Net interest income,
taxable equivalent 12,882 13,143 12,466 11,434 10,823 11,037 10,323 9,462
Taxable equivalent,
adjustment 131 127 136 141 139 140 170 143
Net interest income 12,751 13,016 12,330 11,293 10,684 10,897 10,153 9,319
Provision for loan losses 755 575 775 440 385 238 308 220
Net interest income after
provision for losses 11,996 12,441 11,555 10,853 10,299 10,659 9,845 9,099
Noninterest income 3,181 2,889 2,901 2,997 2,890 2,620 2,283 1,862
Noninterest expense 8,363 8,133 8,063 7,742 7,977 7,509 7,083 6,065
Income before income taxes 6,814 7,197 6,393 6,108 5,212 5,770 5,045 4,896
Income taxes 2,395 2,538 2,232 2,117 1,851 2,006 1,778 1,672
Net income 4,419 4,659 4,161 3,991 3,361 3,764 3,267 3,224
- -------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Earnings per share - basic $ 0.48 0.51 0.45 0.44 0.37 0.41 0.36 0.37
Earnings per share - diluted 0.48 0.50 0.45 0.43 0.36 0.40 0.35 0.36
Cash dividends declared 0.23 0.23 0.22 0.22 0.22 0.22 0.22 0.22
Market Price
High $ 25.79 27.50 27.52 23.74 24.00 25.75 28.08 22.25
Low 22.15 22.01 21.85 20.20 21.03 21.00 18.00 15.50
Close 23.51 24.71 27.51 22.82 22.55 24.00 24.63 21.25
Book value 13.59 13.31 13.06 12.88 12.81 12.73 12.69 12.66
- -------------------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Assets $1,195,930 1,163,122 1,151,723 1,140,057 1,109,460 1,090,592 1,059,085 924,985
Loans 990,489 979,489 946,279 903,283 884,952 873,958 815,799 752,557
Earning assets 1,128,763 1,091,119 1,080,077 1,062,705 1,041,740 1,018,229 992,589 881,955
Deposits 1,039,880 1,002,770 1,004,886 995,236 965,577 946,152 914,764 773,462
Interest-bearing liabilities 955,950 928,672 916,788 913,334 891,298 873,828 847,300 737,824
Shareholders' equity 124,081 120,731 120,136 118,824 117,061 118,230 115,699 111,491
- -------------------------------------------------------------------------------------------------------------------------------
Ratios
Return on average assets 1.47% 1.59% 1.45% 1.42% 1.20% 1.37% 1.24% 1.41%
Return on average equity 14.13% 15.31% 13.89% 13.62% 11.39% 12.63% 11.33% 11.73%
Average equity to average
assets 10.38% 10.38% 10.43% 10.42% 10.55% 10.84% 10.92% 12.05%
Equity to assets at
end of period 10.18% 10.45% 9.94% 10.29% 10.20% 10.52% 10.70% 10.73%
Tangible equity to assets
at end of period 8.11% 8.36% 7.91% 8.16% 8.06% 8.56% 8.64% 8.89%
Average loans to average
deposits 95.25% 97.68% 94.17% 90.76% 91.65% 92.37% 89.18% 97.30%
Average earning assets to
interest-bearing liabilities 118.08% 117.49% 117.81% 116.35% 116.87% 116.53% 117.15% 119.54%
Net interest margin 4.53% 4.78% 4.63% 4.36% 4.12% 4.30% 4.17% 4.35%
Nonperforming loans as a
percent of total loans 0.30% 0.31% 0.29% 0.37% 0.44% 0.54% 0.61% 0.50%
Nonperforming assets as a
percent of loans and other
real estate 0.44% 0.44% 0.42% 0.56% 0.58% 0.67% 0.78% 0.67%
Nonperforming assets as a
percent of total assets 0.36% 0.37% 0.34% 0.45% 0.45% 0.53% 0.62% 0.50%
Net charge-offs as a percent
of average loans 0.17% 0.09% 0.14% 0.04% 0.17% 0.08% 0.09% 0.03%
================================================================================
54
Item 8. Financial Statements and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 2002 and 2001
($ in thousands) 2002 2001
- -----------------------------------------------------------------------------------------
ASSETS
Cash & due from banks, noninterest-bearing $ 26,733 34,019
Due from banks, interest-bearing 30,753 41,552
Federal funds sold 16,167 11,244
----------- ----------
Total cash and cash equivalents 73,653 86,815
----------- ----------
Securities available for sale (costs of
$64,380 in 2002 and $95,445 in 2001) 65,779 96,469
Securities held to maturity (fair values of
$15,757 in 2002 and $16,746 in 2001) 14,990 16,338
Presold mortgages in process of settlement 19,268 10,713
Loans 998,547 890,310
Less: Allowance for loan losses (10,907) (9,388)
----------- ----------
Net loans 987,640 880,922
----------- ----------
Premises and equipment 22,239 18,518
Accrued interest receivable 5,341 5,880
Intangible assets 25,169 24,488
Other assets 4,067 4,548
----------- ----------
Total assets $ 1,218,146 1,144,691
=========== ==========
LIABILITIES
Deposits: Demand - noninterest-bearing $ 112,380 96,065
Savings, NOW, and money market 387,691 353,439
Time deposits of $100,000 or more 199,794 189,948
Other time deposits 356,092 360,829
----------- ----------
Total deposits 1,055,957 1,000,281
Borrowings 30,000 15,000
Accrued interest payable 2,466 3,480
Other liabilities 5,738 9,204
----------- ----------
Total liabilities 1,094,161 1,027,965
----------- ----------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Authorized: 20,000,000 shares
Issued and outstanding: 9,121,630 shares in 2002 and
9,112,542 shares in 2001 48,313 50,134
Retained earnings 74,920 65,915
Accumulated other comprehensive income 752 677
----------- ----------
Total shareholders' equity 123,985 116,726
----------- ----------
Total liabilities and shareholders' equity $ 1,218,146 1,144,691
=========== ==========
See accompanying notes to consolidated financial statements.
55
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2002, 2001 and 2000
($ in thousands, except per share data) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 66,742 68,055 62,474
Interest on investment securities:
Taxable interest income 4,961 6,372 8,482
Tax-exempt interest income 727 808 866
Other, principally overnight investments 831 1,538 1,093
----------- --------- ----------
Total interest income 73,261 76,773 72,915
----------- --------- ----------
INTEREST EXPENSE
Savings, NOW and money market 3,588 5,354 6,462
Time deposits of $100,000 or more 6,825 10,058 7,882
Other time deposits 12,376 18,941 16,862
Borrowings 1,082 1,367 3,014
----------- --------- ----------
Total interest expense 23,871 35,720 34,220
----------- --------- ----------
Net interest income 49,390 41,053 38,695
Provision for loan losses 2,545 1,151 1,605
----------- --------- ----------
Net interest income after provision for loan losses 46,845 39,902 37,090
----------- --------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 6,856 5,265 3,118
Other service charges, commissions and fees 2,336 2,046 1,740
Fees from presold mortgage loans 1,713 1,259 453
Commissions from sales of insurance and financial products 738 731 418
Data processing fees 303 205 117
Loan sale gains 11 9 --
Securities gains (losses), net 25 61 (1,919)
Branch sale gain -- -- 808
Other gains (losses) (14) 79 (6)
----------- --------- ----------
Total noninterest income 11,968 9,655 4,729
----------- --------- ----------
NONINTEREST EXPENSES
Salaries 15,079 12,534 10,138
Employee benefits 3,388 3,083 2,543
----------- --------- ----------
Total personnel expense 18,467 15,617 12,681
Occupancy expense 2,077 1,734 1,507
Equipment related expenses 2,128 1,631 1,353
Intangibles amortization 31 1,535 631
Merger expenses -- -- 3,188
Other operating expenses 9,598 8,117 7,381
----------- --------- ----------
Total noninterest expenses 32,301 28,634 26,741
----------- --------- ----------
Income before income taxes 26,512 20,923 15,078
Income taxes 9,282 7,307 5,736
----------- --------- ----------
NET INCOME $ 17,230 13,616 9,342
=========== ========= ==========
Earnings per share:
Basic $ 1.89 1.51 1.05
Diluted 1.85 1.47 1.03
Weighted average common shares outstanding:
Basic 9,138,750 9,032,453 8,897,966
Diluted 9,320,721 9,273,769 9,070,125
See accompanying notes to consolidated financial statements.
56
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2002, 2001 and 2000
($ in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------
Net income $ 17,230 13,616 9,342
-------- ------- -------
Other comprehensive income:
Unrealized gains on securities
available for sale:
Unrealized holding gains arising
during the period, pretax 400 702 2,092
Tax expense (209) (242) (806)
Reclassification to realized (gains) losses (25) (61) 1,919
Tax expense (benefit) 10 22 (652)
Adjustment to minimum pension liability:
Additional pension charge related to unfunded
pension liability (165) -- --
Tax benefit 64 -- --
-------- ------- -------
Other comprehensive income 75 421 2,553
-------- ------- -------
Comprehensive income $ 17,305 14,037 11,895
======== ======= =======
See accompanying notes to consolidated financial statements.
57
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 2002, 2001 and 2000
Accumulated Total
Common Stock Other Share-
----------------------- Retained Comprehensive holders'
(In thousands, except per share) Shares Amount Earnings Income (Loss) Equity
- ---------------------------------------------------------------------------------------------------------------------
Balances, January 1, 2000 8,849 $ 51,490 57,787 (2,297) 106,980
------ -------- ------ ------ --------
Net income 9,342 9,342
Cash dividends declared ($0.77 per share) (6,849) (6,849)
Common stock issued under
stock option plans 140 408 408
Common stock issued into
dividend reinvestment plan 22 344 344
Tax benefit realized from exercise of
nonqualified stock options 790 790
Purchases and retirement of common stock (184) (2,884) (2,884)
Other comprehensive income 2,553 2,553
------ -------- ------ ------ --------
Balances, December 31, 2000 8,827 50,148 60,280 256 110,684
------ -------- ------ ------ --------
Net income 13,616 13,616
Cash dividends declared ($0.88 per share) (7,981) (7,981)
Common stock issued under
stock option plans 116 731 731
Common stock issued into
dividend reinvestment plan 25 564 564
Common stock issued in acquisitions 602 9,159 9,159
Purchases and retirement of common stock (457) (10,468) (10,468)
Other comprehensive income 421 421
------ -------- ------ ------ --------
Balances, December 31, 2001 9,113 50,134 65,915 677 116,726
------ -------- ------ ------ --------
Net income 17,230 17,230
Cash dividends declared ($0.90 per share) (8,225) (8,225)
Common stock issued under
stock option plans 144 1,033 1,033
Common stock issued into
dividend reinvestment plan 50 1,174 1,174
Tax benefit realized from exercise of
nonqualified stock options 382 382
Purchases and retirement of common stock (185) (4,410) (4,410)
Other comprehensive income 75 75
------ -------- ------ ------ --------
Balances, December 31, 2002 9,122 $ 48,313 74,920 752 123,985
====== ======== ====== ====== ========
See accompanying notes to consolidated financial statements.
58
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000
($ in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 17,230 13,616 9,342
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses 2,545 1,151 1,605
Net security premium amortization 240 50 60
Gains on sales of loans (11) (9) --
Proceeds from sales of loans 104 378 --
Losses (gains) on sales of securities available for sale (25) (61) 1,919
Gain from sale of branch -- -- (808)
Loss on disposal of premises and equipment 33 -- 98
Other losses (gains) (19) (79) 6
Loan fees and costs deferred, net of amortization 45 (35) 8
Depreciation of premises and equipment 1,875 1,424 1,217
Tax benefit realized from exercise of nonqualified stock options 382 -- 790
Amortization of intangible assets 31 1,535 631
Deferred income tax benefit (322) (51) (546)
Decrease (increase) in presold mortgages in process of settlement (8,555) (9,677) 85
Decrease (increase) in accrued interest receivable 574 983 (1,077)
Decrease (increase) in other assets 1,287 855 419
Increase (decrease) in accrued interest payable (1,024) (1,559) 714
Increase (decrease) in other liabilities (3,306) 3,873 (325)
--------- ------- --------
Net cash provided by operating activities 11,084 12,394 14,138
--------- ------- --------
Cash Flows From Investing Activities
Purchases of securities available for sale (12,723) (39,750) (21,967)
Purchases of securities held to maturity (252) (2) (170)
Proceeds from sales of securities available for sale 1,012 2,348 54,494
Proceeds from maturities/issuer calls of securities available for sale 41,929 48,903 12,914
Proceeds from maturities/issuer calls of securities held to maturity 2,235 2,905 4,881
Net increase in loans (107,192) (30,490) (105,581)
Purchases of premises and equipment (5,643) (3,216) (3,312)
Net cash received (paid) in purchase (sale) of branches 4,493 87,892 (11,869)
Net cash received in acquisition of insurance agencies -- 40 --
Net cash paid in acquisition of Century Bancorp -- (8,112) --
--------- ------- --------
Net cash provided (used) by investing activities (76,141) 60,518 (70,610)
--------- ------- --------
Cash Flows From Financing Activities
Net increase in deposits 47,234 25,266 73,320
Proceeds from (repayments of) borrowings, net 15,000 (24,700) (36,300)
Cash dividends paid (8,136) (7,929) (6,318)
Proceeds from issuance of common stock 2,207 1,295 752
Purchases and retirement of common stock (4,410) (10,468) (2,884)
--------- ------- --------
Net cash provided (used) by financing activities 51,895 (16,536) 28,570
--------- ------- --------
Increase (Decrease) In Cash And Cash Equivalents (13,162) 56,376 (27,902)
Cash And Cash Equivalents, Beginning Of Period 86,815 30,439 58,341
--------- ------- --------
Cash And Cash Equivalents, End Of Period $ 73,653 86,815 30,439
========= ======= ========
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for:
Interest $ 24,885 37,034 33,601
Income taxes 14,167 2,865 6,126
Non-cash transactions:
Transfer of securities from held to maturity to available for sale -- 31,220 --
Foreclosed loans transferred to other real estate 825 820 --
Unrealized gain on securities available for sale, net of taxes 176 421 2,553
Premises and equipment transferred to other real estate 228 425 85
See accompanying notes to consolidated financial statements.
59
First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
(a) Basis of Presentation - The consolidated financial statements include
the accounts of First Bancorp (the Company) and its wholly owned subsidiaries:
First Bank (the Bank); Montgomery Data Services, Inc. (Montgomery Data); First
Bancorp Financial Services, Inc. (First Bancorp Financial), and First Bancorp
Capital Trust I. The Bank has two wholly owned subsidiaries: First Bank
Insurance Services, Inc. (First Bank Insurance), and First Montgomery Financial
Services Corporation (First Montgomery). First Montgomery has one wholly owned
subsidiary - First Troy Realty Corporation (First Troy). All significant
intercompany accounts and transactions have been eliminated.
The Company is a bank holding company. The principal activity of the
Company is the ownership and operation of First Bank, a state chartered bank
with its main office in Troy, North Carolina. Other subsidiaries include
Montgomery Data, a data processing company whose primary client is First Bank,
and First Bancorp Financial, a real estate investment subsidiary, both of which
are headquartered in Troy. First Bancorp Capital Trust I is also a wholly owned
subsidiary of the Company that was created as a statutory business trust under
the laws of the State of Delaware in October 2002 and was formed primarily to
issue $20 million in debt securities. These securities qualify as Tier I capital
for regulatory capital adequacy requirements. First Bank Insurance is a provider
of non-FDIC insured investment and insurance products. First Montgomery is a
Virginia incorporated company that acquires real estate in Virginia and leases
the property to the Bank. First Troy was formed in 1999 and allows the Bank to
centrally manage a portion of its real estate loan portfolio. First Troy has
elected to be treated as a real estate investment trust for tax purposes.
As discussed in Note 2 below, in September 2000 the Company completed the
merger acquisition of First Savings Bancorp, Inc. This transaction was accounted
for as a pooling-of-interests and, accordingly, all financial information prior
to that date was restated to include the combined results of the Company and
First Savings Bancorp, Inc.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates made by the Company in the preparation of its
consolidated financial statements are the determination of the allowance for
loan losses, the valuation of other real estate, the valuation allowance for
deferred tax assets and fair value estimates for financial instruments.
(b) Cash and Cash Equivalents - The Company considers all highly liquid
assets such as cash on hand, noninterest-bearing and interest-bearing amounts
due from banks and federal funds sold to be "cash equivalents."
(c) Securities - Securities classified as available for sale are purchased
with the intent to hold to maturity. However, infrequent sales may be necessary
due to liquidity needs arising from unanticipated deposit and loan fluctuations,
changes in regulatory capital and investment requirements, or changes in market
conditions, including interest rates and market values of securities held in the
portfolio. Investments in securities available for sale are stated at fair value
with the resultant unrealized gains and losses included as a component of
shareholders' equity, net of applicable deferred income taxes.
Securities are classified as held to maturity at the time of purchase when
the Company has the ability and positive intent to hold such securities to
maturity. Investments in securities held to maturity are stated at
60
amortized cost.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed to be other than temporary
results in a reduction in carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is established.
Gains and losses on sales of securities are recognized at the time of sale
based upon the specific identification method. Premiums and discounts are
amortized into income on a level yield basis.
(d) Premises and Equipment - Premises and equipment are stated at cost
less accumulated depreciation. Depreciation, computed by the straight-line
method, is charged to operations over the estimated useful lives of the
properties, which range from 5 to 40 years or, in the case of leasehold
improvements, over the term of the lease, if shorter. Maintenance and repairs
are charged to operations in the year incurred. Gains and losses on dispositions
are included in current operations.
(e) Loans - Loans are stated at the principal amount outstanding, less
unearned income and deferred nonrefundable loan fees, net of certain origination
costs. Interest on loans is accrued on the unpaid principal balance outstanding.
Net deferred loan origination costs/fees are capitalized and recognized as a
yield adjustment over the life of the related loan. Unearned income for each of
the reporting periods was immaterial.
A loan is placed on nonaccrual status when, in management's judgment, the
collection of interest appears doubtful. The accrual of interest is discontinued
on all loans that become 90 days or more past due with respect to principal or
interest. While a loan is on nonaccrual status, the Company's policy is that all
cash receipts are applied to principal. Once the recorded principal balance has
been reduced to zero, future cash receipts are applied to recoveries of any
amounts previously charged off. Further cash receipts are recorded as interest
income to the extent that any interest has been foregone. Loans are removed from
nonaccrual status when they become current as to both principal and interest and
when concern no longer exists as to the collectibility of principal or interest.
In some cases, where borrowers are experiencing financial difficulties, loans
may be restructured to provide terms significantly different from the originally
contracted terms.
Commercial loans greater than $100,000 that are on nonaccrual status are
evaluated regularly for impairment. 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. Impaired loans are measured using 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 is used to value the loan. While a loan is
considered to be impaired, the Company's policy is that interest accrual is
discontinued and all cash receipts are applied to principal. Once the recorded
principal balance has been reduced to zero, future cash receipts are applied to
recoveries of any amounts previously charged off. Further cash receipts are
recorded as interest income to the extent that any interest has been foregone.
(f) Presold Mortgages in Process of Settlement and Loans Held for Sale -
As a part of normal business operations, the Company originates residential
mortgage loans that have been pre-approved by secondary investors. The terms of
the loans are set by the secondary investors, and the purchase price that the
investor will pay for the loan is agreed to prior to the funding of the loan by
the Company. Generally within three weeks after funding, the loans are
transferred to the investor in accordance with the agreed-upon terms. The
Company receives origination fees from borrowers and servicing release premiums
from the investors that are recognized on the income statement, on the sale
date, in the line item "fees from presold mortgages." Between the initial
funding of the loans by the Company and the subsequent reimbursement by the
investors, the Company carries the loans on its balance sheet at cost.
Periodically, the Company originates commercial loans that are intended
for resale. The Company carries these loans at the lower of cost or fair value
at each reporting date. There were no such loans held for sale as of
61
December 31, 2002 or 2001.
(g) Allowance for Loan Losses - The provision for loan losses charged to
operations is an amount sufficient to bring the allowance for loan losses to an
estimated balance considered adequate to absorb losses inherent in the
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio, current economic conditions, historical loan
loss experience and other risk factors. While management uses the best
information available to make evaluations, future adjustments may be necessary
if economic and other conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on the examiners' judgment about information available to them at the time of
their examinations.
(h) Other Real Estate - Other real estate owned consists primarily of real
estate acquired by the Company through legal foreclosure or deed in lieu of
foreclosure. The property is initially carried at the lower of cost (generally
the loan balance plus additional costs incurred for improvements to the
property) or estimated fair value of the property less estimated selling costs.
If there are subsequent declines in fair value, the property is written down to
its fair value through a charge to expense. Capital expenditures made to improve
the property are capitalized. Costs of holding real estate, such as property
taxes, insurance and maintenance, less related revenues during the holding
period, are charged to operations.
(i) Income Taxes - Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are reduced, if necessary, by
the amount of such benefits that are not expected to be realized based upon
available evidence.
(j) Intangible Assets - The Company has adopted Statement of Financial
Standards (SFAS) No. 141, entitled "Business Combinations" (Statement 141), SFAS
No. 142, entitled "Goodwill and Other Intangible Assets" (Statement 142) and
SFAS No. 147, entitled "Acquisitions of Certain Financial Institutions"
(Statement 147). 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 of Statement 142 and all provisions of
Statement 141 and Statement 147 were adopted effective January 1, 2002.
Under these standards, all business combinations must be accounted for
using the purchase method of accounting. Identifiable intangible assets are
recognized separately and are amortized over their estimated useful lives.
Goodwill is recognized in business combinations to the extent that the price
paid exceeds the fair value of the net assets acquired, including any
identifiable intangible assets. Goodwill is not amortized, but is subject to
fair value impairment tests on at least an annual basis. The Company's
impairment tests conducted in 2002 indicated no goodwill impairment. See Note
1(r) for additional discussion.
Prior to January 1, 2002, the Company's policy was to amortize all
acquisition-related intangible assets on a straight-line basis over their
estimated useful lives, with a minimum amortization period of 5 years and a
maximum amortization period of 15 years.
In accordance with applicable accounting standards, the Company records an
intangible asset in connection with a defined benefit pension plan to fully
accrue for its liability. This intangible asset is adjusted annually in
accordance with actuarially determined amounts. The amount of this intangible
asset was $217,000 and
62
$253,000 at December 31, 2002 and 2001, respectively.
(k) Stock Option Plan - At December 31, 2002, the Company has five
stock-based employee compensation plans, which are described more fully in Note
14. The Company accounts for those plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25 (APB Opinion No. 25),
"Accounting for Stock Issued to Employees," and related interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation.
Year Ended December 31,
----------------------------------------
(In thousands except per share data) 2002 2001 2000
---------- ---------- ----------
Net income, as reported $ 17,230 13,616 9,342
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (249) (273) (621)
---------- ---------- ----------
Pro forma net income $ 16,981 13,343 8,721
========== ========== ==========
Earnings per share: Basic - As reported $ 1.89 1.51 1.05
Basic - Pro forma 1.86 1.48 0.98
Diluted - As reported 1.85 1.47 1.03
Diluted - Pro forma 1.82 1.44 0.96
(l) Per Share Amounts - Basic Earnings Per Share is calculated by dividing
net income by the weighted average number of common shares outstanding during
the period. Diluted Earnings Per Share is computed by assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
reporting period. Currently, the Company's only potential dilutive common stock
issuances relate to options that have been issued under the Company's stock
option plans. In computing Diluted Earnings Per Share, it is assumed that all
such dilutive stock options are exercised during the reporting period at their
respective exercise prices, with the proceeds from the exercises used by the
Company to buy back stock in the open market at the average market price in
effect during the reporting period. The difference between the number of shares
assumed to be exercised and the number of shares bought back is added to the
number of weighted average common shares outstanding during the period. The sum
is used as the denominator to calculate Diluted Earnings Per Share for the
Company.
The following is a reconciliation of the numerators and denominators used
in computing Basic and Diluted Earnings Per Share:
For the Years Ended December 31,
----------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ----------------------------- ----------------------------
($ in thousands, Income Shares Per Income Shares Per Income Shares Per
except per share (Numer- (Denom- Share (Numer- (Denom- Share (Numer- (Denom- Share
amounts) ator) inator) Amount ator) inator) Amount ator) inator) Amount
------- --------- ------ ------- --------- ------ ------ --------- ------
Basic EPS $17,230 9,138,750 $1.89 $13,616 9,032,453 $1.51 $9,342 8,897,966 $1.05
====== ====== ======
Effect of dilutive
securities -- 181,971 -- 241,316 -- 172,159
------- --------- ------- --------- ------ ---------
Diluted EPS $17,230 9,320,721 $1.85 $13,616 9,273,769 $1.47 $9,342 9,070,125 $1.03
======= ========= ===== ======= ========= ===== ====== ========= =====
63
For the years ended December 31, 2002, 2001, and 2000, there were options
of 24,000, 144,250, and 255,244, respectively, that were antidilutive since the
exercise price exceeded the average market price for the year. These options
have been omitted from the calculation of diluted earnings per share for their
respective years.
(m) Fair Value of Financial Instruments - Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments" (SFAS No. 107), requires that the Company disclose estimated fair
values for its financial instruments. Fair value methods and assumptions are set
forth below for the Company's financial instruments.
Cash and Due from Banks, Federal Funds Sold, Presold Mortgages in Process
of Settlement, Accrued Interest Receivable, and Accrued Interest Payable - The
carrying amounts approximate their fair value because of the short maturity of
these financial instruments.
Available for Sale and Held to Maturity Securities - Fair values are based
on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
financial and agricultural, real estate construction, real estate mortgages and
installment loans to individuals. Each loan category is further segmented into
fixed and variable interest rate terms. For variable rate loans, the carrying
value is a reasonable estimate of the fair value. For fixed rate loans, fair
value is determined by discounting scheduled future cash flows using current
interest rates offered on loans with similar risk characteristics. Fair values
for impaired loans are estimated based on discounted cash flows or underlying
collateral values, where applicable.
Deposits - The fair value of deposits with no stated maturity, such as
non-interest-bearing demand deposits, savings, NOW, and money market accounts,
is equal to the amount payable on demand as of the valuation date. The fair
value of certificates of deposit is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
Borrowings - The fair value of borrowings is based on the discounted value
of contractual cash flows. The discount rate is estimated using the rates
currently offered by the Company's lenders for debt of similar remaining
maturities.
Commitments to Extend Credit and Standby Letters of Credit - At December
31, 2002 and 2001, the Company's off-balance sheet financial instruments had no
carrying value. The large majority of commitments to extend credit and standby
letters of credit are at variable rates and/or have relatively short terms to
maturity. Therefore, the fair value for these financial instruments is
considered to be immaterial.
(n) Impairment - Goodwill is evaluated for impairment on at least an
annual basis by comparing the fair value of its reporting units to their related
carrying value. Any excess of the carrying value over the fair value of a
reporting unit is expensed as an impairment loss.
For long-lived assets other than goodwill, the Company reviews them for
impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. The Company's policy is that an
impairment loss is recognized if the sum of the undiscounted future cash flows
is less than the carrying amount of the asset. Those assets to be disposed of
are to be reported at the lower of the carrying amount or fair value, less costs
to sell.
To date, the Company has not had to record any impairment write-downs of
its long-lived assets or goodwill. See Note 1(r) for additional discussion
regarding recent accounting standards related to impairment.
64
(o) Comprehensive Income - Comprehensive income is defined as the change
in equity during a period for non-owner transactions and is divided into net
income and other comprehensive income. Other comprehensive income includes
revenues, expenses, gains, and losses that are excluded from earnings under
current accounting standards. The components of accumulated other comprehensive
income for the Company are as follows:
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Unrealized gain on securities
available for sale $ 1,399 1,024 383
Deferred tax liability (546) (347) (127)
------- ------ ----
Net unrealized gain on securities
available for sale 853 677 256
------- ------ ----
Additional minimum pension
liability (165) -- --
Deferred tax asset 64 -- --
------- ------ ----
Net additional minimum pension
liability (101) -- --
------- ------ ----
Total accumulated other
comprehensive income $ 752 677 256
======= ====== ====
(p) Segment Reporting - SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" requires management to report selected
financial and descriptive information about reportable operating segments. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Generally, disclosures are required for
segments internally identified to evaluate performance and resource allocation.
The Company's operations are primarily within the commercial banking segment,
and the financial statements presented herein reflect the results of that
segment. Also, the Company has no foreign operations or customers.
(q) Reclassifications - Certain amounts for prior years have been
reclassified to conform to the 2002 presentation. The reclassifications had no
effect on net income or shareholders' equity as previously presented, nor did
they materially impact trends in financial information.
(r) Recent Accounting Pronouncements - On January 1, 2001, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. On January
1, 2001, the Company transferred, as permitted by the standard upon its
adoption, held-to-maturity securities with an amortized cost of approximately
$31.7 million to the available for sale category at fair value. The unrealized
loss at the time of the transfer was approximately $513,000, and was included as
a component of other comprehensive income, net of tax. The Company does not
engage in any hedging activities and, other than the aforementioned transfer of
securities, the adoption of the statement had no impact on the Company.
In June 2001, the Financial Accounting Standards Board (FASB) issued 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
65
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 was 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 6 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
Principles 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
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 is no longer amortized but is subject
to an annual impairment test, pursuant to Statement 142. The Company adopted
Statement 147 in the fourth quarter of 2002, but effective as of January 1,
2002. Statement 147 required the Company to retroactively restate its previously
issued 2002 interim consolidated financial statements to reverse reclassified
Statement 72 goodwill amortization expense recorded in the first three quarters
of the 2002 fiscal year. Accordingly, $1,068,000 in amortization expense that
had been recorded during the first nine months of 2002 was retroactively
reversed by reducing the respective quarters' amortization expense and
increasing intangible assets. The associated income tax expense recorded related
to the reversal of amortization expense amounted to $374,000 for that same nine
month period.
In November 2002, the FASB issued Financial Interpretation No. 45 (FIN
45), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", which addresses the
disclosure to be made by a guarantor in its interim and annual financial
statements about its
66
obligations under guarantees. FIN 45 requires the guarantor to recognize a
liability for the non-contingent component of the guarantee, such as the
obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment or as part of a
transaction with multiple events. The disclosure requirements are effective for
interim and annual financial statements ending after December 15, 2002 and are
contained in Note 12. The initial recognition and measurement provisions are
effective for all guarantees within the scope of FIN 45 issued or modified after
December 31, 2002, the impacts of which are not expected to be material to the
Company. The Company issues standby letters of credit whereby the Company
guarantees performance if a specified triggering event or condition occurs,
primarily nonpayment by the Company's customer to their supplier. The standby
letters of credit are generally for terms for one year, at which time they may
be renewed for another year if both parties agree. See Note 12.
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (FAS 148) an amendment of FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123), which
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, FAS 148 amends the disclosure requirements of FAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The transition provisions of the statement are
effective for financial statements for fiscal years ending after December 15,
2002 while the disclosure requirements are effective for interim periods
beginning after December 15, 2002, with early application encouraged. The
adoption of SFAS 148 requires enhanced disclosures for the Company's stock-based
employee compensation plan for the year ended December 31, 2002. The Company
does not have any plans to change its method of accounting for stock-based
employee compensation, but has furnished the expanded disclosures in Note 1(k).
Note 2. Acquisitions and Divestitures - Completed and Pending
Since January 1, 2000, the Company has completed several acquisitions and
had one branch divestiture.
The Company completed one acquisition in 2002 as follows:
(a) Broadway branch purchase - On October 4, 2002, the Company completed
the purchase of a branch of RBC Centura located in Broadway, North Carolina. The
Company assumed the branch's $8 million in deposits and $3 million in loans. The
primary reason for this acquisition was to increase the Company's presence in
Lee County, a market in which the Company already had two branches with a large
customer base. An intangible asset of $0.7 million, all of which is deductible
for tax purposes, was recorded in connection with this acquisition. The entire
intangible asset was determined to be goodwill that is not subject to
amortization (see Note 1(r)). The primary factors that contributed to a purchase
price that resulted in recognition of goodwill were the Company's desire to
expand in Lee County with a facility, operations, and experienced staff in
place. The Broadway branch's operations are included in the accompanying
Consolidated Statements of Income beginning on the acquisition date of October
4, 2002.
The Company completed one whole-company acquisition and several branch
purchases in 2001. The following is a brief description of each purchase, which
is then followed by a table containing a condensed balance sheet that indicates
the amount assigned to each major asset and liability of the entities purchased
as of their respective acquisition date.
(a) Salisbury branch purchase - On December 17, 2001, the Company
completed the purchase of a branch of First Union National Bank located in
Salisbury, North Carolina. The Company assumed the branch's $30 million
67
in deposits and $9 million in loans. The primary reason for this acquisition was
to increase the Company's presence in Salisbury, a market that the Company
entered in 2000 with the opening of a de novo branch. An intangible asset of
$3.2 million, all of which is deductible for tax purposes, was recorded in
connection with this acquisition. This intangible asset was amortized on a
straight-line basis over 15 years until the Company adopted Statement 147 (see
Note 1(r)) as of January 1, 2002, at which time it ceased to be amortized. The
primary factors that contributed to a purchase price that resulted in
recognition of goodwill were the Company's desire to expand in Salisbury with a
facility, operations, and experienced staff in place. The Salisbury branch's
operations are included in the accompanying Consolidated Statements of Income
beginning on the acquisition date of December 17, 2001.
(b) Insurance agency acquisitions - On May 30, 2001, the Company completed
the purchase of two insurance agencies - Aberdeen Insurance & Realty Company and
Hobbs Insurance and Realty Company. Both agencies were located in Moore County
and specialized in placing property and casualty insurance coverage for
individuals and businesses in the Moore County area. The primary reason for this
acquisition was to give the Company the platform to offer property and casualty
insurance to its entire customer base. In completing the acquisition, the
agencies were merged into First Bank Insurance Services, Inc. Approximately
16,000 shares of Company stock were issued in connection with the acquisition of
the two agencies. An intangible asset of $243,000 was recorded in connection
with the acquisition, none of which is deductible for tax purposes, and is being
amortized on a straight-line basis over 15 years. This intangible asset has been
determined to be an identifiable intangible asset as defined in Statement 142
(see discussion in Note 1(r)) and thus continues to be amortized. The insurance
agencies' operations are included in the accompanying Consolidated Statements of
Income beginning on the acquisition date of May 30, 2001. No pro forma earnings
information has been presented due to the immateriality of the acquisitions.
(c) Century Bancorp, Inc. - On May 17, 2001, the Company completed the
purchase of Century Bancorp, Inc. ("Century"). Century was the holding company
for Home Savings, Inc., SSB, a one branch savings institution located in
Thomasville, NC. Century had total assets of $107 million, total loans of $90
million, and total deposits of $72 million. The primary reason for the
acquisition was to expand into a contiguous market. In accordance with the terms
of the merger agreement, the Company issued approximately 586,000 shares of
common stock and paid cash of approximately $13.2 million to Century
shareholders in exchange for all shares of Century outstanding. An intangible
asset of $3.2 million, none of which is deductible for tax purposes, was
recorded in connection with this acquisition and was amortized on a
straight-line basis over 15 years until the Company's January 1, 2002 adoption
of Statement 142 (see Note 1(r)), at which time it ceased to be amortized. The
primary factors that contributed to a purchase price that resulted in
recognition of goodwill were the Company's desire to expand into Century's
market area with a facility, operations and experienced staff in place.
Century's operations are included in the accompanying Consolidated
Statements of Income beginning on the acquisition date of May 17, 2001. The
following table reflects the pro forma combined results of operations, assuming
the Century acquisition had occurred at the beginning of 2001 and 2000:
2001 2000
------- ------
Net interest income $42,028 41,013
Net income 13,793 9,513
Earnings per share - diluted 1.45 0.99
(d) Robeson and Scotland Counties branch purchase - On March 26, 2001, the
Company completed the purchase of four branches from First Union National Bank
with aggregate deposits of approximately $103 million and aggregate loans of
approximately $17 million. The four branches acquired were in Lumberton,
Pembroke, St. Pauls (all located in Robeson County, NC), and Laurinburg
(Scotland County, NC). The primary reason for the acquisition was to leverage
the Company's capital by expanding into three contiguous markets (Lumberton,
Pembroke and St. Pauls) and increase market share in one market (Laurinburg). An
intangible asset of $14.6 million, all of which is deductible for tax purposes
was recorded in connection with this purchase. This
68
intangible asset was amortized on a straight-line basis over 15 years until the
Company adopted Statement 147 (see Note 1(r)) as of January 1, 2002, at which
time it ceased to be amortized. The primary factors that contributed to a
purchase price that resulted in recognition of goodwill were the Company's
desire to expand in three contiguous markets and increase market share in an
existing market with facilities, operations and experienced staff in place.
These four branches' operations are included in the accompanying Consolidated
Statements of Income beginning on the acquisition date of March 26, 2001.
The following table contains a condensed balance sheet that indicates the
amount assigned to each major asset and liability as of the respective
acquisition dates for the 2001 acquisitions described above.
Robeson and
Salisbury Insurance Scotland
Assets acquired branch agencies Century counties branches Total
- ------------------------- --------- --------- ------- ----------------- -----
(in millions)
Cash $17.7 -- 5.9 70.2 93.8
Securities -- -- 9.0 -- 9.0
Loans, gross 9.3 -- 90.2 16.7 116.2
Allowance for loan losses (0.2) -- (0.6) (0.3) (1.1)
Premises and equipment 0.5 0.1 0.6 1.9 3.1
Other -- -- 1.4 -- 1.4
----- ----- ----- ----- -----
Total assets acquired 27.3 0.1 106.5 88.5 222.4
----- ----- ----- ----- -----
Liabilities assumed
Deposits 30.3 -- 71.7 102.6 204.6
Borrowings -- -- 13.5 -- 13.5
Other 0.2 -- 2.5 0.5 3.2
----- ----- ----- ----- -----
Total liabilities assumed 30.5 -- 87.7 103.1 221.3
----- ----- ----- ----- -----
Value of cash paid and/or
stock issued to stock-
holders of acquiree n/a 0.3 22.0 n/a 22.3
----- ----- ----- ----- -----
Intangible assets recorded $ 3.2 0.2 3.2 14.6 21.2
===== ===== ===== ===== =====
The lone acquisition during 2000 was the September 14, 2000 merger
acquisition of First Savings Bancorp, Inc. - the holding company for First
Savings Bank of Moore County, SSB (collectively referred to as "First Savings").
The primary reason for the acquisition was to increase market share in Moore
County. Each share of First Savings stock was exchanged for 1.2468 shares of the
Company's stock, resulting in the Company issuing approximately 4,407,000 shares
of stock to complete the transaction. As of the acquisition date, First Savings
had total assets of $310 million, with loans of $232 million and deposits of
$223 million. The merger was accounted for as a pooling-of-interests and,
accordingly, all financial results for periods prior to the acquisition were
restated to include the combined results of the Company and First Savings.
To gain Federal Reserve approval for the merger with First Savings, the
Company was required to divest the First Savings Bank branch located in
Carthage, NC. This branch was sold to another North Carolina community bank in a
transaction that was completed in November 2000. At the time of the divestiture,
the Carthage branch had approximately $15.1 million in total deposits and $2.3
million in total loans. The sale of the branch resulted in a net gain of
$808,000.
At December 31, 2002, the Company has the following acquisitions pending:
(a) Uwharrie Insurance Group - On October 7, 2002, the Company announced
that its insurance subsidiary, First Bank Insurance, 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, and has annual commissions of approximately $500,000. The primary
reason for the acquisition was to gain efficiencies of scale with the Company's
existing property and casualty insurance business. The transaction was completed
on January 2,
69
2003, with the Company paying cash in the amount of $546,000. The tangible
assets of Uwharrie Insurance Group on the date of acquisition were approximately
$20,000, which resulted in the Company recording an intangible asset of
approximately $526,000. The Company is currently in the process of determining
what portion of the intangible asset will be allocated to identifiable
intangible assets and what portion will be allocated as goodwill.
(b) On July 16, 2002, the Company reported that it had agreed to acquire
Carolina Community Bancshares, Inc. (CCB), a South Carolina community bank with
total assets of approximately $70 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. 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. The Company's primary reason for the acquisition was to
expand into a contiguous market with facilities, operations and experienced
staff in place. The terms of the agreement called 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. The transaction was completed
on January 15, 2003 with the Company paying cash of $8.3 million, issuing
332,888 shares of common stock valued at approximately $7.9 million, and
assuming employee stock options with an intrinsic value of approximately $0.9
million, for a total deal value of approximately $17.1 million. It is not
expected that any portion of the intangible asset to be recorded will be
deductible for income tax purposes. Due to the acquisition having been recently
completed, the purchase price allocation has not been finalized. The following
is a condensed unaudited balance sheet, as reported by CCB, as of the
acquisition date of January 15, 2003.
CCB
-------------
Assets (in millions)
Cash and cash equivalents $ 7.0
Securities 13.0
Loans, gross 47.7
Allowance for loan losses (0.8)
Premises and equipment 0.8
Intangible assets 0.8
Other 1.7
-----
Total assets $70.2
=====
Liabilities
Deposits $58.7
Borrowings 2.0
Other 0.7
-----
Total liabilities 61.4
-----
Shareholders' equity 8.8
-----
Total liabilities and shareholders' equity $70.2
=====
70
Note 3. Securities
The book values and approximate fair values of investment securities at
December 31, 2002 and 2001 are summarized as follows:
2002 2001
--------------------------------------------- ---------------------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Gains (Losses) Cost Value Gains (Losses)
--------- ------- ------- -------- --------- ------- ------- --------
(In thousands)
Securities available for sale:
U.S. Treasury $ -- -- -- -- 500 512 12 --
U.S. Government agencies 12,953 13,529 576 -- 27,222 28,111 898 (9)
Mortgage-backed securities 34,265 35,208 968 (25) 51,901 52,227 482 (156)
Corporate bonds 11,613 11,507 101 (207) 8,845 8,663 14 (196)
Equity securities 5,549 5,535 -- (14) 6,977 6,956 -- (21)
------- ------- ------- ------- ------- ------- ------- -------
Total available for sale $64,380 65,779 1,645 (246) 95,445 96,469 1,406 (382)
======= ======= ======= ======= ======= ======= ======= =======
Securities held to maturity:
State and local governments $13,951 14,718 767 -- 16,130 16,538 462 (54)
Other 1,039 1,039 -- -- 208 208 -- --
------- ------- ------- ------- ------- ------- ------- -------
Total held to maturity $14,990 15,757 767 -- 16,338 16,746 462 (54)
======= ======= ======= ======= ======= ======= ======= =======
Included in mortgage-backed securities at December 31, 2002 were
collateralized mortgage obligations with an amortized cost of $12,590,000 and a
fair value of $12,720,000. Included in mortgage-backed securities at December
31, 2001 were collateralized mortgage obligations with an amortized cost of
$21,703,000 and a fair value of $21,886,000.
The Company owned Federal Home Loan Bank stock with a cost and fair value
of $5,352,000 at December 31, 2002 and $5,806,000 at December 31, 2001, which is
included in equity securities above and serves as part of the collateral for the
Company's line of credit with the Federal Home Loan Bank (see Note 9 for
additional discussion). The investment in this stock is a requirement for
membership in the Federal Home Loan Bank system.
The book values and approximate fair values of investment securities at
December 31, 2002, by contractual maturity, are summarized in the table below.
Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Securities Available for Sale Securities Held to Maturity
----------------------------- ---------------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
--------- ------- --------- -------
Debt securities
Due within one year $ 500 503 $ 1,056 1,072
Due after one year but within five years 6,499 6,626 6,760 7,052
Due after five years but within ten years 6,771 7,270 6,578 7,017
Due after ten years 10,796 10,637 596 616
Mortgage-backed securities 34,265 35,208 -- --
------- ------- ------- -------
Total debt securities 58,831 60,244 14,990 15,757
Equity securities 5,549 5,535 -- --
------- ------- ------- -------
Total securities $64,380 65,779 $14,990 15,757
======= ======= ======= =======
At December 31, 2002 and 2001, investment securities with book values of
$37,902,000 and $38,797,000, respectively, were pledged as collateral for public
and private deposits.
71
Sales of securities available for sale with aggregate proceeds of
$1,012,000 in 2002, $2,348,000 in 2001, and $54,494,000 in 2000 resulted in
gross gains of $27,000 and gross losses of $2,000 in 2002, gross gains of
$61,000 in 2001, and gross gains of $89,000 and gross losses of $2,008,000 in
2000.
Note 4. Loans and Allowance for Loan Losses
Loans at December 31, 2002 and 2001 are summarized as follows:
(In thousands) 2002 2001
--------- --------
Commercial, financial, and agricultural $ 88,291 79,695
Real estate - construction 68,162 66,304
Real estate - mortgage 795,148 697,498
Installment loans to individuals 47,648 47,471
--------- --------
Subtotal 999,249 890,968
Unamortized net deferred loan fees (702) (658)
--------- --------
Loans, net of deferred fees $ 998,547 890,310
========= ========
Loans described above as "Real estate - mortgage" included loans secured
by 1-4 family dwellings in the amounts of $466,600,000 and $442,000,000 as of
December 31, 2002 and 2001, respectively, with such loans being pledged as
collateral for certain borrowings (see Note 9). The loans above also include
loans to executive officers and directors and to their associates totaling
approximately $9,552,000 and $8,405,000 at December 31, 2002 and 2001,
respectively. During 2002, additions to such loans were approximately $3,269,000
and repayments totaled approximately $2,122,000. These loans were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other non-related
borrowers. Management does not believe these loans involve more than the normal
risk of collectibility or present other unfavorable features.
Nonperforming assets at December 31, 2002 and 2001 are as follows:
(In thousands) 2002 2001
--------- --------
Loans: Nonaccrual loans $ 2,976 3,808
Restructured loans 41 83
Accruing loans greater than 90 days past due -- --
--------- --------
Total nonperforming loans 3,017 3,891
Other real estate (included in other assets) 1,384 1,253
--------- --------
Total nonperforming assets $ 4,401 5,144
========= ========
If the nonaccrual loans and restructured loans as of December 31, 2002,
2001 and 2000 had been current in accordance with their original terms and had
been outstanding throughout the period (or since origination if held for part of
the period), gross interest income in the amounts of approximately $246,000,
$320,000 and $62,000 for nonaccrual loans and $6,000, $10,000 and $27,000 for
restructured loans would have been recorded for 2002, 2001 and 2000,
respectively. Interest income on such loans that was actually collected and
included in net income in 2002, 2001 and 2000 amounted to approximately $55,000,
$76,000 and $38,000 for nonaccrual loans (prior to their being placed on
nonaccrual status) and $6,000, $7,000 and $21,000 for restructured loans,
respectively.
72
Activity in the allowance for loan losses for the years ended December 31,
2002, 2001 and 2000 is as follows:
(In thousands) 2002 2001 2000
-------- ------ ------
Balance, beginning of year $ 9,388 7,893 6,674
Provision for loan losses 2,545 1,151 1,605
Recoveries of loans charged-off 135 131 89
Loans charged-off (1,211) (912) (475)
Allowance recorded related to loans
assumed in corporate acquisitions 50 1,125 --
-------- ------ ------
Balance, end of year $ 10,907 9,388 7,893
======== ====== ======
At December 31, 2002 and 2001, the recorded investment in loans considered
to be impaired was $1,431,000 and $2,482,000, respectively, of which all were on
a nonaccrual basis at each year end. The related allowance for loan losses for
the impaired loans at December 31, 2002 and 2001 was $290,000 and $432,000,
respectively. There was $162,000 in impaired loans at December 31, 2002 for
which there was no related allowance. At December 31, 2001 there were no
impaired loans for which there was no related allowance. The average recorded
investments in impaired loans during the years ended December 31, 2002, 2001,
and 2000 were approximately $1,822,000, $2,450,000, and $218,000, respectively.
For the years ended December 31, 2002, 2001, and 2000, the Company recognized no
interest income on those impaired loans during the period that they were
considered to be impaired.
Note 5. Premises and Equipment
Premises and equipment at December 31, 2002 and 2001 consist of the
following:
(In thousands) 2002 2001
-------- -------
Land $ 4,486 4,455
Buildings 16,212 14,138
Furniture and equipment 14,093 10,957
Leasehold improvements 569 569
-------- -------
Total cost 35,360 30,119
Less accumulated depreciation and amortization (13,121) (11,601)
-------- -------
Net book value of premises and equipment $ 22,239 18,518
======== =======
Note 6. Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated
amortization of amortized intangible assets as of December 31, 2002 and December
31, 2001 and the carrying amount of unamortized intangible assets as of December
31, 2002 and December 31, 2001.
December 31, 2002 December 31, 2001
-------------------------------- -------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
(In thousands) Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
Customer lists $ 243 23 243 7
Core deposit premium related to
whole-bank acquisition 335 261 335 246
------- --- ------ ----
Total $ 578 284 578 253
======= === ====== ===
Unamortized intangible assets:
Goodwill $24,658 23,910
======= ======
Pension $ 217 253
======= ======
73
The following table presents the estimated amortization expense for
intangible assets for each of the five calendar years ending December 31, 2007
and the estimated amount amortizable thereafter. These estimates are subject to
change in future periods to the extent management determines it is necessary to
make adjustments to the carrying value or estimated useful lives of amortized
intangible assets.
Estimated
Amortization Expense
(In thousands)
---------- --------------------
2003 $ 29
2004 27
2005 26
2006 24
2007 23
Thereafter 165
----
Total $294
====
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 years ended December 31, 2002, 2001 and 2000. See Note 1(r) for discussion.
For the Years Ended December 31,
----------------------------------------
(Dollars in thousands, except
earnings per share amounts) 2002 2001 2000
---------- ---------- ----------
Reported net income $ 17,230 13,616 9,342
Add back: Goodwill amortization, net of taxes -- 1,160 527
---------- ---------- ----------
Adjusted net income $ 17,230 14,776 9,869
========== ========== ==========
Basic earnings per share:
As reported $ 1.89 1.51 1.05
Goodwill amortization -- 0.13 0.06
---------- ---------- ----------
Adjusted basic earnings per share $ 1.89 1.64 1.11
========== ========== ==========
Diluted earnings per share:
As reported $ 1.85 1.47 1.03
Goodwill amortization -- 0.12 0.06
---------- ---------- ----------
Adjusted diluted earnings per share $ 1.85 1.59 1.09
========== ========== ==========
Note 7. Income Taxes
Total income taxes for the years ended December 31, 2002, 2001 and 2000
were allocated as follows:
(In thousands) 2002 2001 2000
------- ----- -----
Net income $ 9,282 7,307 5,736
Stockholders' equity, for unrealized holding gain on
debt and equity securities for financial reporting purposes 199 220 1,458
Stockholders' equity, for tax benefit of additional pension charge (64) -- --
------- ----- -----
Total income taxes $ 9,417 7,527 7,194
======= ===== =====
74
The components of income tax expense (benefit) for the years ended
December 31, 2002, 2001 and 2000 are as follows:
(In thousands) 2002 2001 2000
------- ------ ------
Current - Federal $ 8,964 7,256 6,108
- State 464 102 174
Deferred - Federal (146) (51) (546)
------- ------ ------
Total $ 9,282 7,307 5,736
======= ====== ======
The sources and tax effects of temporary differences that give rise to
significant portions of the deferred tax assets (liabilities) at December 31,
2002 and 2001 are presented below:
(In thousands) 2002 2001
------- ------
Deferred tax assets:
Allowance for loan losses $ 3,658 3,058
Excess book over tax retirement plan cost 278 207
Basis of investment in subsidiary 69 69
Net loan fees recognized for tax reporting purposes 166 113
Reserve for employee medical expense for financial reporting purposes 20 12
Deferred compensation 145 146
Excess of book over tax related to intangible assets -- 147
State net operating loss carryforwards 62 --
All other 209 140
------- ------
Gross deferred tax assets 4,607 3,892
Less: Valuation allowance (135) (123)
------- ------
Net deferred tax assets 4,472 3,769
------- ------
Deferred tax liabilities:
Loan fees (1,282) (916)
Excess tax over book pension cost (346) (237)
Depreciable basis of fixed assets (1,051) (944)
Amortizable basis of intangible assets (413) (35)
Unrealized gain on securities available for sale (546) (347)
Book versus tax basis difference - FHLMC stock -- (426)
FHLB stock dividends (439) (439)
All other (113) (154)
------- ------
Gross deferred tax liabilities (4,190) (3,498)
------- ------
Net deferred tax asset (included in other assets) $ 282 271
======= ======
A portion of the change in the net deferred tax asset relates to
unrealized gains and losses on securities available for sale. The related
current period deferred tax expense of approximately $199,000 as of December 31,
2002 has been recorded directly to shareholders' equity. Additionally, a portion
of the current year change in the net deferred tax asset relates to an
additional pension charge. The related 2002 deferred tax benefit of $64,000 has
been recorded directly to shareholders' equity. The balance of the 2002 change
in the net deferred tax asset of $146,000 is reflected as a deferred income tax
benefit in the consolidated statement of income.
The valuation allowance applies primarily to offset the recognition of
deferred tax benefits on certain temporary differences for state income tax
purposes. It is management's belief that the realization of the remaining net
deferred tax assets is more likely than not.
Retained earnings at December 31, 2002 and 2001 includes approximately
$6,869,000 representing pre-1988 tax bad debt reserve base year amounts for
which no deferred income tax liability has been provided since these reserves
are not expected to reverse or may never reverse. Circumstances that would
require an accrual of a portion or all of this unrecorded tax liability are a
reduction in qualifying loan levels relative to the end of 1987, failure to meet
the definition of a bank, dividend payments in excess of accumulated tax
earnings and profits, or other distributions in dissolution, liquidation or
redemption of the Bank's stock.
75
The following is a reconcilement of federal income tax expense at the
statutory rate of 35% for 2002 and 2001 and 34% for 2000 to the income tax
provision reported in the financial statements.
(In thousands) 2002 2001 2000
------- ------ ------
Tax provision at statutory rate $ 9,279 7,323 5,127
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income (300) (341) (350)
Non-deductible interest expense 24 46 49
Non-deductible portion of amortization of
intangible assets -- 178 127
State income taxes, net of federal benefit 290 66 114
Nondeductible acquisition costs -- -- 572
Change in valuation allowance 12 5 70
Other, net (23) 30 27
------- ------ ------
Total $ 9,282 7,307 5,736
======= ====== ======
Note 8. Deposits
At December 31, 2002, the scheduled maturities of time deposits are as
follows:
(In thousands)
2003 $457,301
2004 56,795
2005 15,257
2006 5,850
2007 19,785
Thereafter 898
--------
$555,886
========
Note 9. Borrowings and Borrowings Availability
The following table presents information regarding the Company's
outstanding borrowings at December 31, 2002 and 2001:
Call Feature Amount Interest Rate
-------------------------- ----------- -------------------------
2002
Due on May 5, 2003 None $ 5,000,000 7.49% fixed
Due on April 21, 2009 Callable by lender on 5,000,000 5.26% fixed
April 21, 2004
Due on November 7, 2032 Callable by Company on a 20,000,000 5.27% at Dec. 31, 2002
quarterly basis beginning adjustable rate
on November 7, 2007 3 month LIBOR + 3.45%
----------- -------------------------
Total borrowings/
weighted average rate $30,000,000 5.64%
=========== =========================
2001
Due on May 6, 2002 None $ 5,000,000 7.43% fixed
Due on May 5, 2003 None 5,000,000 7.49% fixed
Due on April 21, 2009 Callable by FHLB on April 5,000,000 5.26% fixed
21, 2004
----------- -------------------------
Total borrowings/
weighted average rate $15,000,000 6.73%
=========== =========================
76
In the table above, the $5 million in borrowings due on May 5, 2003 and
the $5 million in borrowings due on April 21, 2009 are payable to the Federal
Home Loan Bank (FHLB). The call provisions noted in the table above provide
interest rate protection to the FHLB in the event that prevailing market
interest rates are higher than the note rate on the date of the call.
Additionally, the outstanding borrowings noted above 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 FHLB borrowings
outstanding. At December 31, 2002, the Company's qualifying collateral amounted
to 26.3 times the amount of FHLB borrowings outstanding.
In the above table, the $20 million in borrowings due on November 7, 2032
relate to borrowings structured as trust preferred capital securities that were
issued by First Bancorp Capital Trust I, a subsidiary of the Company, on October
29, 2002 and qualify as Tier I capital for regulatory capital adequacy
requirements. These debt securities are callable by the Company at par on any
quarterly interest payment date beginning on November 7, 2007. The interest rate
on these debt securities adjusts on a quarterly basis at a rate of three-month
LIBOR plus 3.45%. This rate may not exceed 12.50% through November 2007. The
Company incurred approximately $615,000 in debt issuance costs related to the
issuance that were recorded as prepaid expenses and are included in the "Other
Assets" line item of the consolidated balance sheet. These debt issuance costs
are being amortized as interest expense until the earliest possible call date of
November 7, 2007.
At December 31, 2002, the Company has three sources of readily available
borrowing capacity - 1) an approximately $182,000,000 line of credit with the
FHLB, of which $10 million was outstanding, 2) a $50,000,000 overnight federal
funds line of credit with a correspondent bank, and 3) an approximately
$42,000,000 line of credit through the Federal Reserve Bank of Richmond's (FRB)
discount window.
The Company's line of credit with the FHLB totaling approximately
$182,000,000 can be structured as either short-term or long-term borrowings,
depending on the particular funding or liquidity need and is secured by the
Company's FHLB stock and a blanket lien on its one-to-four family residential
loan portfolio.
The Company also has a correspondent bank relationship established that
allows the Company to purchase up to $50,000,000 in federal funds on an
overnight, unsecured basis. The Company had no borrowings outstanding under this
line at December 31, 2002 or 2001. This line of credit was not drawn upon in
2002 or 2001. There was insignificant use of this line during 2000 with total
interest expense incurred amounting to approximately $5,000.
The Company also has a line of credit with the FRB discount window. This
line is secured by a blanket lien on a portion of the Company's commercial,
consumer and real estate portfolio (excluding 1-4 family). Based on the
collateral owned by the Company as of December 31, 2002, the available line of
credit is approximately $42,000,000. This line of credit was established
primarily in connection with the Company's Y2K liquidity contingency plan and
has not been drawn on since inception. The FRB has indicated that it would not
expect lines of credit that have been granted to financial institutions to be a
primary borrowing source. The Company plans to maintain this line of credit,
although it is not expected that it will be drawn upon except in unusual
circumstances.
Note 10. Leases
Certain bank premises are leased under operating lease agreements.
Generally, operating leases contain renewal options on substantially the same
basis as current rental terms. Rent expense charged to operations under all
operating lease agreements was $280,000 in 2002, $243,000 in 2001, and $234,000
in 2000.
77
Future obligations for minimum rentals under noncancelable operating
leases at December 31, 2002 are as follows:
(In thousands)
Year ending December 31:
2003 $ 255
2004 193
2005 180
2006 166
2007 163
Later years 290
------
Total $1,247
======
Note 11. Employee Benefit Plans
401(k) Plan. The Company sponsors a retirement savings plan pursuant to
Section 401(k) of the Internal Revenue Code. Employees who have completed one
year of service are eligible to participate in the plan. An eligible employee
may contribute up to 14% of annual salary to the plan. The Company contributes
an amount equal to 75% of the first 6% of the employee's salary contributed.
Participants vest in Company contributions at the rate of 20% after one year of
service, and 20% for each additional year of service, with 100% vesting after
five years of service. The Company's matching contribution expense was $450,000,
$382,000, and $292,000, for the years ended December 31, 2002, 2001 and 2000,
respectively. Based on meeting certain financial goals, the Company made
additional discretionary matching contributions to the plan of $150,000 in 2002,
$100,000 in 2001, and $150,000 in 2000. The Company's matching and discretionary
contributions are made in the form of Company stock. Employees are not permitted
to invest their own contributions in Company stock.
Pension Plan. The Company sponsors a noncontributory defined benefit
retirement plan (the "Pension Plan"), which is intended to qualify under Section
401(a) of the Internal Revenue Code. Employees who have attained age 21 and
completed one year of service are eligible to participate in the Retirement
Plan. The Pension Plan provides for a monthly payment, at normal retirement age
of 65, equal to one-twelfth of the sum of (i) 0.75% of Final Average Annual
Compensation (5 highest consecutive calendar years' earnings out of the last 10
years of employment) multiplied by the employee's years of service not in excess
of 40 years, and (ii) 0.65% of Final Average Annual Compensation in excess of
"covered compensation" multiplied by years of service not in excess of 35 years.
"Covered compensation" means the average of the social security taxable wage
base during the 35 year period ending with the year the employee attains social
security retirement age. Early retirement, with reduced monthly benefits, is
available at age 55 after 15 years of service. The Pension Plan provides for
100% vesting after 5 years of service, and provides for a death benefit to a
vested participant's surviving spouse. The costs of benefits under the
Retirement Plan, which are borne by First Bancorp and/or its subsidiaries, are
computed actuarially and defrayed by earnings from the Retirement Plan's
investments. The compensation covered by the Pension Plan includes total
earnings before reduction for contributions to a cash or deferred profit-sharing
plan (such as the 401(k) plan described above) and amounts used to pay group
health insurance premiums and includes bonuses (such as amounts paid under the
incentive compensation plan). Compensation for the purposes of the Pension Plan
may not exceed statutory limits; such limit was $200,000 in 2002, and $170,000
in 2001 and 2000.
The Company's contributions to the Pension Plan are based on computations
by independent actuarial consultants and are intended to provide the Company
with the maximum deduction for income tax purposes. The contributions are
invested to provide for benefits under the Retirement Plan. At December 31,
2002, the Retirement Plan's assets were invested in Company common stock (7%),
equity mutual funds (66%), and fixed income mutual funds (27%).
78
The following table reconciles the beginning and ending balances of the
Pension Plan's benefit obligation, as computed by the Company's independent
actuarial consultants:
(In thousands) 2002 2001 2000
------- ------ ------
Benefit obligation at beginning of year $ 6,082 4,704 3,879
Service cost 492 357 260
Interest cost 427 375 324
Actuarial loss 441 709 392
Effect of amendments 70 -- --
Benefits paid (37) (63) (151)
------- ------ ------
Benefit obligation at end of year $ 7,475 6,082 4,704
======= ====== ======
The following table reconciles the beginning and ending balances of the
Pension Plan's assets:
(In thousands) 2002 2001 2000
------- ------ ------
Plan assets at beginning of year $ 4,893 4,005 4,479
Actual return on plan assets (610) (49) (323)
Employer contributions 880 1,000 --
Benefits paid (37) (63) (151)
------- ------ ------
Plan assets at end of year $ 5,126 4,893 4,005
======= ====== ======
The following table presents information regarding the funded status of
the Pension Plan, the amounts not recognized in the consolidated balance sheets,
and the amounts recognized in the consolidated balance sheets:
(In thousands) 2002 2001
------- ------
Funded status $(2,349) (1,189)
Unrecognized net actuarial loss 2,884 1,405
Unrecognized prior service cost 398 439
Unrecognized transition obligation 51 53
------- ------
Prepaid pension cost $ 984 708
======= ======
Net pension cost for the Pension Plan included the following components
for the years ended December 31, 2002, 2001 and 2000:
(In thousands) 2002 2001 2000
----- ---- ----
Service cost - benefits earned during the period $ 492 357 260
Interest cost on projected benefit obligation 427 375 324
Expected return on plan assets (475) (387) (417)
Net amortization and deferral 159 107 105
----- ---- ----
Net periodic pension cost $ 603 452 272
===== ==== ====
Supplemental Executive Retirement Plan. The Company sponsors a
Supplemental Executive Retirement Plan (the "SERP Plan") for the benefit of
certain senior management executives of the Company. The purpose of the SERP
Plan is to provide additional monthly pension benefits to ensure that each such
senior management executive would receive lifetime monthly pension benefits
equal to 3% of his or her final average compensation multiplied by his or her
years of service (maximum of 20 years) to the Company or its subsidiaries,
subject to a maximum of 60% of his or her final average compensation. The amount
of a participant's monthly SERP benefit is reduced by (i) the amount payable
under the Company's qualified Retirement Plan (described above), and (ii) fifty
percent (50%) of the participant's primary social security benefit. Final
average compensation means the average of the 5 highest consecutive calendar
years of earnings during the last 10 years of service prior to termination of
employment.
79
The Company's funding policy with respect to the SERP Plan is to fund the
related benefits through investments in life insurance policies, which are not
considered plan assets for the purpose of determining the SERP Plan's funded
status.
The following table reconciles the beginning and ending balances of the
SERP Plan's benefit obligation, as computed by the Company's independent
actuarial consultants:
(In thousands) 2002 2001 2000
------- ------ ----
Benefit obligation at beginning of year $ 1,070 765 508
Service cost 69 52 25
Interest cost 73 67 52
Actuarial loss 140 190 196
Effect of amendments (104) -- --
Benefits paid -- (4) (16)
------- ------ ----
Benefit obligation at end of year $ 1,248 1,070 765
======= ====== ====
The following table presents information regarding the funded status of
the SERP Plan, the amounts not recognized in the consolidated balance sheets,
and the amounts recognized in the consolidated balance sheets:
(In thousands) 2002 2001
------- ------
Funded status $(1,248) (1,070)
Unrecognized net actuarial loss 425 302
Unrecognized prior service cost 93 217
Additional minimum liability (382) (253)
------- ------
Accrued pension cost $(1,112) (804)
======= ======
Net pension cost for the SERP Plan included the following components for
the years ended December 31, 2002, 2001 and 2000:
(In thousands) 2002 2001 2000
---- ---- ----
Service cost - benefits earned during the period $ 69 52 25
Interest cost on projected benefit obligation 73 67 52
Net amortization and deferral 36 48 39
---- --- ---
Net periodic pension cost $178 167 116
==== === ===
The following assumptions were used in determining the actuarial
information for the Retirement Plan and the SERP Plan for the years ended
December 31, 2002, 2001 and 2000:
2002 2001 2000
------------------- ------------------- -------------------
Retirement SERP Retirement SERP Retirement SERP
Plan Plan Plan Plan Plan Plan
---------- ---- ---------- ---- ---------- ----
Discount rate used to determine net periodic
pension cost 7.25% 7.25% 7.75% 7.75% 7.75% 7.75%
Discount rate used to calculate end of year
liability disclosures 6.75% 6.75% 7.25% 7.25% 7.75% 7.75%
Expected long-term rate of return on assets 9.00% n/a 9.50% n/a 9.50% n/a
Rate of compensation increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Included in intangible assets at December 31, 2002 and 2001 is $217,000
and $253,000, respectively, that has been recognized in connection with the
accrual of the additional minimum liability for the SERP Plan.
Split Dollar Life Insurance Plan. Effective January 1, 1993, the Company
adopted a Split Dollar Life
80
Insurance Plan (the "Split Dollar Plan") whereby individual whole life insurance
is made available to certain senior management executives designated and
approved by the Board of Directors. Coverages for each executive are
approximately $100,000. The Company pays the premiums under this plan and
maintains a collateral interest in each participant's policy equal to the sum of
premiums paid. If a policy is terminated or becomes payable because of the death
of a participant, the premiums paid by the Company are recovered before any
payment is made to the participant or the participant's beneficiary. In
addition, the Company will recover its investment in the policy before transfer
of the policy to the participant. Upon the death of a participant, the
participant's designated beneficiary will receive a death benefit equal to the
amount of coverage under his or her policy that is in excess of the amount of
cumulative premiums paid by the Company. The amounts of insurance premiums paid
by the Company in 2002, 2001 and 2000 under the Split-Dollar Plan on behalf of
all executive officers as a group were $32,000, $29,000 and $26,000,
respectively.
Note 12. Commitments and Contingencies
See Note 10 with respect to future obligations under noncancelable
operating leases.
In the normal course of business there are various outstanding commitments
and contingent liabilities such as commitments to extend credit, which are not
reflected in the financial statements. As of December 31, 2002, the Company had
outstanding loan commitments of $178,989,000, of which $160,894,000 were at
variable rates and $18,095,000 were at fixed rates. Included in outstanding loan
commitments were unfunded commitments of $89,367,000 on revolving credit plans,
of which $82,203,000 were at variable rates and $7,164,000 were at fixed rates.
At December 31, 2002 and 2001, the Company had $2,279,000 and $1,746,000,
respectively in standby letters of credit outstanding. The Company has no
carrying amount for these standby letters of credit at either of those dates.
The nature of the standby letters of credit is a guarantee made on behalf of the
Company's customers to suppliers of the customers to guarantee payments owed to
the supplier by the customer. The standby letters of credit are generally for
terms for one year, at which time they may be renewed for another year if both
parties agree. The payment of the guarantees would generally be triggered by a
continued nonpayment of an obligation owed by the customer to the supplier. The
maximum potential amount of future payments (undiscounted) the Company could be
required to make under the guarantees in the event of nonperformance by the
parties to whom credit or financial guarantees have been extended is represented
by the contractual amount of the financial instruments discussed above. In the
event that the Company is required to honor a standby letter of credit, a note,
already executed with the customer, is triggered which provides repayment terms
and any collateral. Over the past ten years, the Company has had to honor one
standby letter of credit, which was repaid by the borrower without any loss to
the Company. Management expects any draws under existing commitments to be
funded through normal operations.
The Bank grants primarily commercial and installment loans to customers
throughout its market area, which consists of Anson, Cabarrus, Chatham,
Davidson, Guilford, Harnett, Lee, Montgomery, Moore, Randolph, Richmond,
Robeson, Rowan, Scotland and Stanly Counties in North Carolina and Wythe County
in Virginia. The real estate loan portfolio can be affected by the condition of
the local real estate market. The commercial and installment loan portfolios can
be affected by local economic conditions.
The Company is not involved in any legal proceedings which, in
management's opinion, could have a material effect on the consolidated financial
position of the Company.
Note 13. Fair Value of Financial Instruments
Fair value estimates as of December 31, 2002 and 2001 and limitations
thereon are set forth below for the Company's financial instruments. Please see
Note 1 for a discussion of fair value methods and assumptions, as well as fair
value information for off-balance sheet financial instruments.
81
December 31, 2002 December 31, 2001
----------------------------- -----------------------------
Carrying Estimated Fair Carrying Estimated Fair
(In thousands) Amount Value Amount Value
---------- -------------- ---------- --------------
Cash and due from banks,
noninterest-bearing $ 26,733 26,733 $ 34,019 34,019
Due from banks, interest-bearing 30,753 30,753 41,552 41,552
Federal funds sold 16,167 16,167 11,244 11,244
Securities available for sale 65,779 65,779 96,469 96,469
Securities held to maturity 14,990 15,757 16,338 16,746
Presold mortgages in process
of settlement 19,268 19,268 10,713 10,713
Loans, net of allowance 987,640 998,256 880,922 892,241
Accrued interest receivable 5,341 5,341 5,880 5,880
Deposits 1,055,957 1,058,569 1,000,281 1,004,264
Borrowings 30,000 30,447 15,000 15,557
Accrued interest payable 2,466 2,466 3,480 3,480
Limitations Of Fair Value Estimates. Fair value estimates are made at a
specific point in time, based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include net premises and equipment,
intangible and other assets such as foreclosed properties, deferred income
taxes, prepaid expense accounts, income taxes currently payable and other
various accrued expenses. In addition, the income tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in any of the estimates.
Note 14. Stock Option Plan
Pursuant to provisions of the Company's 1994 Stock Option Plan (the
"Option Plan"), options to purchase up to 555,000 shares of First Bancorp's
authorized but unissued common stock may be granted to employees ("Employee
Options") and directors ("Nonemployee Director Options") of the Company and its
subsidiaries. The purposes of the Option Plan are (i) to align the interests of
participating employees and directors with the Company's shareholders by
reinforcing the relationship between shareholder gains and participant rewards,
(ii) to encourage equity ownership in the Company by participants, and (iii) to
provide an incentive to employee participants to continue their employment with
the Company.
Since the inception of the Option Plan, each nonemployee director has been
granted 1,500 Nonemployee Director Options on June 1 of each year. Employee
Options were granted to substantially all officers at the inception of the
Option Plan and since then have been granted to new officers, officers that have
assumed increased responsibilities, and for performance rewards. For both
Employee and Nonemployee Director Options, the option price is the fair market
value of the stock at the date of grant. Employee Options vest 20% per year over
a five-year period. However, as a result of the merger acquisition of First
Savings Bancorp, Inc. discussed in Note 2, all Employee Options granted prior to
September 14, 2000 outstanding as of that same date became 100% vested due to
change-in-control provisions contained in the Employee Options. Director Options
are 100% vested on the date of grant. All options expire not more than 10 years
from the date of grant. Forfeited options
82
become available for future grants.
At December 31, 2002, there were 5,400 additional shares available for
grant under the Option Plan. The per share weighted-average fair value of
options granted during 2002, 2001, and 2000 was $6.57, $6.87, and $4.50,
respectively on the date(s) of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
2002 2001 2000
------- ------- -------
Expected dividend yield 3.79% 3.80% 4.67%
Risk-free interest rate 4.60% 5.09% 6.15%
Expected life 8 years 8 years 8 years
Expected volatility 33.50% 35.00% 34.00%
The Company assumed three stock option plans in connection with its merger
acquisition of First Savings. The three plans included two nonqualified plans
for directors and an incentive plan for employees. In connection with the
assumption of these three plans, 391,584 options (after adjusting for the
exchange ratio) for shares of stock previously granted by First Savings were
assumed. All unvested options of First Savings that were outstanding on
September 14, 2000 became immediately vested as a result of change-in-control
provisions contained in the plans that were triggered by the merger. The Company
also assumed a stock option plan in connection with its merger acquisition of
Century. A total of 18,656 options (after adjusting for the exchange ratio) for
shares of stock previously granted by Century were assumed and became
immediately vested as a result of change-in-control provisions contained in the
plan that were triggered by the merger. No additional option grants will be made
under the provisions of the assumed plans. Instead, all option grants subsequent
to the merger dates are made from the Company's Option Plan.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Note 1(k) reflects the pro forma effects had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123. The pro forma net income for 2000 in
Note 1(k) reflects the expense associated with the immediate vesting of all
unvested options outstanding of the Company (the Company's options also all
vested as a result of the merger) and First Savings as of September 14, 2000.
83
The following table sets forth a summary of the activity of the Company's
outstanding options, including the options related to First Savings and Century,
since December 31, 1999:
Options Exercisable
Options Outstanding at Year End
------------------------- ------------------------
Weighted- Weighted-
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
--------- --------- --------- ---------
Balance at December 31, 1999 916,339 $ 10.77 693,183 $ 9.43
Granted 25,000 15.30
Exercised (241,244) 7.99
Forfeited (1,200) 13.44
Expired -- --
Balance at December 31, 2000 698,895 11.50 688,895 11.45
Granted 140,750 23.05
Assumed in corporate
acquisition 18,656 15.33
Exercised (145,777) 9.52
Forfeited -- --
Expired -- --
Balance at December 31, 2001 712,524 14.28 587,774 12.58
Granted 21,000 23.05
Exercised (166,842) 9.28
Forfeited -- --
Expired -- --
Balance at December 31, 2002 566,682 $ 16.04 468,082 $ 14.71
The following table summarizes information about the stock options outstanding
at December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/02 Contractual Life Price at 12/31/02 Price
--------------- ----------- ---------------- -------- ----------- ---------
$6.66 to $8.99 132,047 1.4 $ 7.66 132,047 $ 7.66
$9 to $11.99 51,112 3.8 11.42 51,112 11.42
$12 to $14.99 10,000 7.7 14.63 4,000 14.63
$15 to $17.99 175,023 6.3 16.49 175,023 16.49
$18 to $20.99 26,250 5.0 19.12 26,250 19.12
$21 to $24 172,250 8.4 22.99 79,650 23.14
------- --- ------ ------- ------
566,682 5.5 $16.04 468,082 $14.71
======= === ====== ======= ======
Note 15. Regulatory Restrictions
The Company is regulated by the Board of Governors of the Federal Reserve
System ("FED") and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Bank is regulated by
the Federal Deposit Insurance Corporation ("FDIC") and the North Carolina Office
of the Commissioner of Banks.
The primary source of funds for the payment of dividends by First Bancorp
is dividends received from its
84
subsidiary, First Bank. The Bank, as a North Carolina banking corporation, may
pay dividends only out of undivided profits as determined pursuant to North
Carolina General Statutes Section 53-87. As of December 31, 2002, the Bank had
undivided profits of approximately $60,528,000 which were available for the
payment of dividends. As of December 31, 2002, approximately $62,589,000 of the
Company's investment in the Bank is restricted as to transfer to the Company
without obtaining prior regulatory approval.
The average reserve balance maintained by the Bank under the requirements
of the Federal Reserve was approximately $4,234,000 for the year ended December
31, 2002.
The Company and the Bank 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 and the Bank 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 and Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. These capital standards
require the Company and the Bank to maintain minimum ratios of "Tier 1" capital
to total risk-weighted assets ("Tier I Capital Ratio") and total capital to
risk-weighted assets of 4.00% and 8.00% ("Total Capital Ratio"), respectively.
Tier 1 capital is comprised of total shareholders' equity, excluding unrealized
gains or losses from the securities available for sale, less intangible assets,
and total capital is comprised of Tier 1 capital plus certain adjustments, the
largest of which for the Company and the Bank is the allowance for loan losses.
Risk-weighted assets refer to the on- and off-balance sheet exposures of the
Company and the Bank, 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 and the Bank are subject to a leverage capital requirement, which calls
for a minimum ratio of Tier 1 capital (as defined above) to quarterly average
total assets ("Leverage Ratio) 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.
In addition to the minimum capital requirements described above, the
regulatory framework for prompt corrective action also contains specific capital
guidelines applicable to banks for classification as "well capitalized," which
are presented with the minimum ratios, the Company's ratios and the Bank's
ratios as of December 31, 2002 and 2001 in the following table. Based on the
most recent notification from its regulators, the Bank is well capitalized under
the framework for prompt corrective action. There are no conditions or events
since that notification that management believes have changed the Company's
category.
85
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- -------------------- -----------------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- ------- ------
(must equal or exceed) (must equal or exceed)
As of December 31, 2002
Total Capital Ratio
Company $128,971 13.69% $ 75,372 8.00% $ N/A N/A
Bank 108,855 11.57% 75,245 8.00% 94,056 10.00%
Tier I Capital Ratio
Company 118,064 12.68% 37,249 4.00% N/A N/A
Bank 97,948 10.54% 37,186 4.00% 55,779 6.00%
Leverage Ratio
Company 118,064 10.09% 46,800 4.00% N/A N/A
Bank 97,948 8.38% 46,745 4.00% 58,432 5.00%
As of December 31, 2001
Total Capital Ratio
Company $100,949 11.99% $ 67,372 8.00% $ N/A N/A
Bank 98,967 11.77% 67,289 8.00% 84,111 10.00%
Tier I Capital Ratio
Company 91,561 10.99% 33,311 4.00% N/A N/A
Bank 89,579 10.77% 33,269 4.00% 49,904 6.00%
Leverage Ratio
Company 91,561 8.44% 43,371 4.00% N/A N/A
Bank 89,579 8.27% 43,327 4.00% 54,158 5.00%
Note 16. Supplementary Income Statement Information
Components of other operating expenses exceeding 1% of total income for
any of the years ended December 31, 2002, 2001 and 2000 are as follows:
(In thousands) 2002 2001 2000
------ ------ ------
Stationery and supplies $1,445 1,279 1,174
Telephone 932 688 600
Note 17. Condensed Parent Company Information
Condensed financial data for First Bancorp (parent company only) follows:
CONDENSED BALANCE SHEETS As of December 31,
--------------------
(In thousands) 2002 2001
-------- --------
Assets
Cash on deposit with bank subsidiary $ 19,818 2,504
Investment in wholly-owned subsidiaries, at equity 125,525 116,243
Land 7 7
Other assets 604 9
-------- --------
Total assets $145,954 118,763
======== ========
Liabilities and shareholders' equity
Borrowings $ 20,000 --
Other liabilities 1,969 2,037
-------- --------
Total liabilities 21,969 2,037
Shareholders' equity 123,985 116,726
-------- --------
Total liabilities and shareholders' equity $145,954 118,763
======== ========
86
CONDENSED STATEMENTS OF INCOME Year Ended December 31,
----------------------------------
(In thousands) 2002 2001 2000
-------- -------- --------
Dividends from wholly-owned subsidiaries $ 8,650 16,300 9,025
Undistributed earnings of wholly-owned subsidiaries 9,207 -- 1,387
Dividends received from wholly-owned subsidiaries in excess of
earnings -- (2,280) --
Merger expenses incurred by parent company -- -- (810)
Interest expense (205) -- --
All other income and expenses, net (422) (404) (260)
-------- -------- --------
Net income $ 17,230 13,616 9,342
======== ======== ========
CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31,
----------------------------------
(In thousands) 2002 2001 2000
-------- -------- --------
Operating Activities:
Net income $ 17,230 13,616 9,342
Dividends received in excess of earnings (equity in
undistributed earnings) of subsidiaries (9,207) 2,280 (1,387)
Tax benefit realized from
exercise of nonqualified stock options 382 -- --
Decrease (increase) in other assets (595) 40 804
Decrease in other liabilities (157) (48) (6)
-------- -------- --------
Total - operating activities 7,653 15,888 8,753
-------- -------- --------
Investing Activities:
Net cash paid in acquisition of Century -- (12,447) --
Sales of securities available for sale -- -- 711
-------- -------- --------
Total - investing activities -- (12,447) 711
-------- -------- --------
Financing Activities:
Advance from subsidiary -- 13,304 --
Proceeds from borrowings 20,000 -- --
Payment of cash dividends (8,136) (7,929) (6,318)
Proceeds from issuance of common stock 2,207 1,295 752
Purchases and retirement of common stock (4,410) (10,468) (2,884)
-------- -------- --------
Total - financing activities 9,661 (3,798) (8,450)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 17,314 (357) 1,014
Cash and cash equivalents, beginning of year 2,504 2,861 1,847
-------- -------- --------
Cash and cash equivalents, end of year $ 19,818 2,504 2,861
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Non-cash transactions:
Repayment of cash advance from subsidiary
with non-cash assets $ -- 13,304 --
87
Independent Auditors' Report
The Board of Directors
First Bancorp
We have audited the accompanying consolidated balance sheets of First
Bancorp and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Bancorp and subsidiaries as of December 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, on
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," and on October 1, 2002, the
Company adopted Statement of Financial Accounting Standards No. 147,
"Acquisitions of Certain Financial Institutions."
/s/ KPMG LLP
Raleigh, North Carolina
January 21, 2003
88
Part II. Other Information
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During the two years ended December 31, 2002, and any subsequent interim
periods, there were no changes in accountants and/or disagreements on any
matters of accounting principles or practices or financial statement
disclosures.
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated herein by reference is the information under the caption
"Directors, Nominees and Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" from the Company's definitive proxy statement to
be filed pursuant to Regulation 14A.
Item 11. Executive Compensation
Incorporated herein by reference is the information under the caption
"Compensation of Executive Officers" and "Board Committees, Attendance, and
Compensation" from the Company's definitive proxy statement to be filed pursuant
to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference is the information under the captions
"Principal Holders of First Bancorp Voting Securities" and "Directors, Nominees
and Executive Officers" from the Company's definitive proxy statement to be
filed pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference is the information under the caption
"Certain Transactions" from the Company's definitive proxy statement to be filed
pursuant to Regulation 14A.
Item 14. 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 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.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements - See Item 8 and the Cross Reference Index on
page 2 for information concerning the Company's consolidated
financial statements and report of independent auditors.
2. Financial Statement Schedules - not applicable
89
3. Exhibits
The following exhibits are filed with this report or, as noted, are
incorporated by reference. Management contracts, compensatory plans
and arrangements are marked with an asterisk (*).
3.a Copy of Articles of Incorporation of the Company and amendments
thereto were filed as Exhibits 3.a.i through 3.a.v to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 2002,
and are incorporated herein by reference.
3.b Copy of the 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.
4 Form of Common Stock Certificate was filed as Exhibit 4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999, and is incorporated herein by reference.
10 Material Contracts
10.a Data processing Agreement dated October 1, 1984 by and between Bank
of Montgomery (First Bank) and Montgomery Data Services, Inc. was
filed as Exhibit 10(k) to the Registrant's Registration Statement
Number 33-12692, and is incorporated herein by reference.
10.b First Bank Salary and Incentive Plan, as amended, was filed as
Exhibit 10(m) to the Registrant's Registration Statement Number
33-12692, and is incorporated herein by reference. (*)
10.c Indemnification Agreement between the Company and its Directors and
Officers was filed as Exhibit 10(t) to the Registrant's Registration
Statement Number 33-12692, and is incorporated herein by reference.
10.d First Bancorp Senior Management Supplemental Executive Retirement
Plan was filed as Exhibit 10(d) to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, and is incorporated
herein by reference. (*)
10.e First Bancorp Senior Management Split-Dollar Life Insurance
Agreements between the Company and the Executive Officers was filed
as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001, and is incorporated herein by
reference. (*)
10.f First Bancorp 1994 Stock Option Plan was filed as Exhibit 10(f) to
the Company's Annual Report on Form 10-K for the year ended December
31, 2001, and is incorporated herein by reference. (*)
10.g Employment Agreement between the Company and James H. Garner dated
August 17, 1998 was filed as Exhibit 10(l) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, and is incorporated by reference. (*)
10.h Employment Agreement between the Company and Anna G. Hollers dated
August 17, 1998 was filed as Exhibit 10(m) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, and is incorporated by reference. (*)
10.i Employment Agreement between the Company and Teresa C. Nixon dated
August 17, 1998 was filed as Exhibit 10(n) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, and is incorporated by reference. (*)
10.j Employment Agreement between the Company and Eric P. Credle dated
August 17, 1998 was filed as
90
Exhibit 10(p) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, and is incorporated herein by
reference. (*)
10.k Employment Agreement between the Company and David G. Grigg dated
August 17, 1998 was filed as Exhibit 10.r to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 and is
incorporated herein by reference. (*)
10.l Employment Agreement between the Company and John F. Burns dated
September 14, 2000 was filed as Exhibit 10.w to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000 and is incorporated herein by reference. (*)
10.m Employment Agreement between the Company James G. Hudson, Jr. dated
May 17, 2001 was filed as Exhibit 10(p) to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001, and is
incorporated herein by reference. (*)
10.n 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 Registrant.
23.a Consent of Independent Auditors of Registrant, KPMG LLP
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.
(b) There were no reports filed on Form 8-K during the quarter ended
December 31, 2002
(c) Exhibits - see (a)(3) above
(d) No financial statement schedules are filed herewith.
Copies of exhibits are available upon written request to: First Bancorp, Anna G.
Hollers, Executive Vice President, P.O. Box 508, Troy, NC 27371
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, FIRST BANCORP has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Troy, and State of North Carolina, on the 18th day of March,
2003.
First Bancorp
By: /s/ James H. Garner
----------------------
James H. Garner
President, Chief Executive Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on behalf of the Company by the following persons and in
the capacities and on the dates indicated.
Executive Officers
/s/ James H. Garner
----------------------
James H. Garner
President, Chief Executive Officer and Treasurer
/s/ Anna G. Hollers /s/ Eric P. Credle
- --------------------------- ---------------------------------
Anna G. Hollers Eric P. Credle
Executive Vice President Senior Vice President
Secretary Chief Financial Officer
March 18, 2003 (Principal Accounting Officer)
March 18, 2003
Board of Directors
/s/ Jesse S. Capel /s/ William E. Samuels
- --------------------------- ---------------------------------
Jesse S. Capel William E. Samuels
Chairman of the Board Vice-Chairman of the Board
Director Director
March 18, 2003 March 18, 2003
/s/ Jack D. Briggs /s/ Edward T. Taws
- --------------------------- ---------------------------------
Jack D. Briggs Edward T. Taws
Director Director
March 18, 2003 March 18, 2003
/s/ H. David Bruton /s/ Frederick H. Taylor
- --------------------------- ---------------------------------
H. David Bruton Frederick H. Taylor
Director Director
March 18, 2003 March 18, 2003
/s/ David L. Burns /s/ Virginia C. Thomasson
- --------------------------- ---------------------------------
David L. Burns Virginia C. Thomasson
Director Director
March 18, 2003 March 18, 2003
/s/ John F. Burns /s/ Goldie H. Wallace-Gainey
- --------------------------- ---------------------------------
John F. Burns Goldie H. Wallace-Gainey
Director Director
March 18, 2003 March 18, 2003
92
/s/ James H. Garner /s/ A. Jordan Washburn
- --------------------------- ---------------------------------
James H. Garner A. Jordan Washburn
Director Director
March 18, 2003 March 18, 2003
/s/ James G. Hudson /s/ Dennis A. Wicker
- --------------------------- ---------------------------------
James G. Hudson Dennis A. Wicker
Director Director
March 18, 2003 March 18, 2003
/s/ George R. Perkins, Jr. /s/ John C. Willis
- --------------------------- ---------------------------------
George R. Perkins, Jr. John C. Willis
Director Director
March 18, 2003 March 18, 2003
/s/ Thomas F. Phillips
- ---------------------------
Thomas F. Phillips
Director
March 18, 2003
93
I, James H. Garner, certify that:
1. I have reviewed this annual report on Form 10-K of First Bancorp;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual
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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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;
6. The registrant's other certifying officers and I have indicated in this
annual 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
March 18, 2003
94
I, Eric P. Credle, certify that:
1. I have reviewed this annual report on Form 10-K of First Bancorp;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual
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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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;
6. The registrant's other certifying officers and I have indicated in this
annual 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
Eric P. Credle
Chief Financial Officer
March 18, 2003
95
EXHIBIT CROSS REFERENCE INDEX
Exhibit Page(s)
- ------- -------
3.a Copy of Articles of Incorporation of the Registrant and amendments thereto *
3.b Copy of the Bylaws of the Registrant *
4 Form of Common Stock Certificate *
10.a Data processing Agreement by and between Bank of Montgomery (First Bank) and
Montgomery Data Services, Inc. *
10.b First Bank Salary and Incentive Plan, as amended *
10.c Indemnification Agreement between the Company and its Directors and Officers *
10.d First Bancorp Senior Management Supplemental Executive Retirement Plan *
10.e First Bancorp Senior Management Split-Dollar Life Insurance Agreements between
the Company and the Executive Officers *
10.f First Bancorp 1994 Stock Option Plan *
10.g Employment Agreement between the Company and James H. Garner *
10.h Employment Agreement between the Company and Anna G. Hollers *
10.i Employment Agreement between the Company and Teresa C. Nixon *
10.j Employment Agreement between the Company and Eric P. Credle *
10.k Employment Agreement between the Company and David G. Grigg *
10.l Employment Agreement between the Company and John F. Burns *
10.m Employment Agreement between the Company and James G. Hudson, Jr. *
10.n Definitive Merger Agreement with Carolina Community Bancshares, Inc. *
21 List of Subsidiaries of Registrant 97
23.a Consent of Independent Auditors 98
99.a Certification Pursuant to 18 U.S.C. Section 1350 of Sarbanes-Oxley Act of 2002 99
99.b Certification Pursuant to 18 U.S.C. Section 1350 of Sarbanes-Oxley Act of 2002 100
* Incorporated herein by reference.
96