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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2003
----------
Commission File Number 0-15572
FIRST BANCORP
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
341 North Main Street, Troy, North Carolina 27371-0508
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (910) 576-6171
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|X| YES |_| NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
As of April 30, 2003, 9,416,998 shares of the registrant's Common Stock,
no par value, were outstanding. The registrant had no other classes of
securities outstanding.
INDEX
FIRST BANCORP AND SUBSIDIARIES
Page
Part I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets -
March 31, 2003 and 2002
(With Comparative Amounts at December 31, 2002) 3
Consolidated Statements of Income -
For the Periods Ended March 31, 2003 and 2002 4
Consolidated Statements of Comprehensive Income -
For the Periods Ended March 31, 2003 and 2002 5
Consolidated Statements of Shareholders' Equity -
For the Periods Ended March 31, 2003 and 2002 6
Consolidated Statements of Cash Flows -
For the Periods Ended March 31, 2003 and 2002 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition 15
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 25
Item 4 - Controls and Procedures 27
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K 29
Signatures 30
Certifications 31
Page 2
Part I. Financial Information
Item 1 - Financial Statements
First Bancorp and Subsidiaries
Consolidated Balance Sheets
March 31, December 31, March 31,
($ in thousands-unaudited) 2003 2002 2002(a)
- -------------------------------------------------------------------------------------------------------
ASSETS
Cash & due from banks, noninterest-bearing $ 23,339 26,733 22,688
Due from banks, interest-bearing 42,613 30,753 25,468
Federal funds sold 28,677 16,167 20,439
----------- ---------- ----------
Total cash and cash equivalents 94,629 73,653 68,595
----------- ---------- ----------
Securities available for sale (costs of $77,965,
$64,380, and $90,494 79,151 65,779 90,528
Securities held to maturity (fair values of $17,540,
$15,757, and $16,644) 16,663 14,990 16,324
Presold mortgages in process of settlement 3,754 19,268 4,102
Loans 1,071,432 998,547 924,107
Less: Allowance for loan losses (11,898) (10,907) (9,729)
----------- ---------- ----------
Net loans 1,059,534 987,640 914,378
----------- ---------- ----------
Premises and equipment 22,906 22,239 19,932
Accrued interest receivable 5,489 5,341 5,920
Intangible assets 36,426 25,169 24,460
Other 5,095 4,067 5,538
----------- ---------- ----------
Total assets $ 1,323,647 1,218,146 1,149,777
=========== ========== ==========
LIABILITIES
Deposits: Demand - noninterest-bearing $ 132,929 112,380 101,331
Savings, NOW, and money market 401,773 387,691 362,777
Time deposits of $100,000 or more 231,055 199,794 183,939
Other time deposits 378,056 356,092 355,352
----------- ---------- ----------
Total deposits 1,143,813 1,055,957 1,003,399
Borrowings 36,000 30,000 15,000
Accrued interest payable 2,535 2,466 2,703
Other liabilities 7,748 5,738 10,407
----------- ---------- ----------
Total liabilities 1,190,096 1,094,161 1,031,509
----------- ---------- ----------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Issued and outstanding: 9,411,451,
9,121,630, and 9,167,697 shares 55,558 48,313 50,459
Retained earnings 77,448 74,920 67,889
Accumulated other comprehensive income (loss) 545 752 (80)
----------- ---------- ----------
Total shareholders' equity 133,551 123,985 118,268
----------- ---------- ----------
Total liabilities and shareholders' equity $ 1,323,647 1,218,146 1,149,777
=========== ========== ==========
See notes to consolidated financial statements.
(a) As restated. See Note 2 to consolidated financial statements.
Page 3
First Bancorp and Subsidiaries
Consolidated Statements of Income
Three Months Ended
March 31,
--------------------------
($ in thousands, except share data-unaudited) 2003 2002(a)
- ------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 17,009 16,204
Interest on investment securities:
Taxable interest income 940 1,405
Tax-exempt interest income 209 197
Other, principally overnight investments 306 288
---------- ----------
Total interest income 18,464 18,094
---------- ----------
INTEREST EXPENSE
Savings, NOW and money market 618 921
Time deposits of $100,000 or more 1,560 1,916
Other time deposits 2,467 3,714
Borrowings 477 250
---------- ----------
Total interest expense 5,122 6,801
---------- ----------
Net interest income 13,342 11,293
Provision for loan losses 520 440
---------- ----------
Net interest income after provision
for loan losses 12,822 10,853
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 1,861 1,595
Other service charges, commissions and fees 776 636
Fees from presold mortgages 702 446
Commissions from sales of insurance and financial products 260 265
Data processing fees 73 56
Securities gains -- 20
Other gains (losses) 61 (21)
---------- ----------
Total noninterest income 3,733 2,997
---------- ----------
NONINTEREST EXPENSES
Salaries 4,279 3,693
Employee benefits 1,047 920
---------- ----------
Total personnel expense 5,326 4,613
Net occupancy expense 590 505
Equipment related expenses 632 483
Intangibles amortization 45 8
Other operating expenses 2,655 2,133
---------- ----------
Total noninterest expenses 9,248 7,742
---------- ----------
Income before income taxes 7,307 6,108
Income taxes 2,614 2,117
---------- ----------
NET INCOME $ 4,693 3,991
========== ==========
Earnings per share:
Basic $ 0.50 0.44
Diluted 0.49 0.43
Weighted average common shares outstanding:
Basic 9,360,692 9,149,693
Diluted 9,539,351 9,338,366
See notes to consolidated financial statements.
(a) As restated. See Note 2 to consolidated financial statements.
Page 4
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Three Months Ended
March 31,
--------------------
($ in thousands-unaudited) 2003 2002
- ----------------------------------------------------------------------------
Net income $ 4,693 3,991
------- ------
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available for sale:
Unrealized holding losses arising
during the period, pretax (213) (1,055)
Tax benefit 83 411
Reclassification to realized gains -- (20)
Tax expense -- 8
Adjustment to minimum pension liability:
Additional pension charge related to unfunded
pension liability (127) (165)
Tax benefit 50 64
------- ------
Other comprehensive income (loss) (207) (757)
------- ------
Comprehensive income $ 4,486 3,234
======= ======
See notes to consolidated financial statements.
Page 5
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Accumulated
Common Stock Other Share-
--------------------- Retained Comprehensive holders'
(In thousands, except per share - unaudited) Shares Amount Earnings(a) Income (Loss) Equity
- ---------------------------------------------------------------------------------------------------------------------------
Balances, January 1, 2002 9,113 $ 50,134 65,915 677 116,726
Net income (as restated (a)) 3,991 3,991
Cash dividends declared ($0.22 per share) (2,017) (2,017)
Common stock issued under
stock option plan 84 551 551
Common stock issued into
dividend reinvestment plan 13 289 289
Purchases and retirement of common
stock (42) (897) (897)
Tax benefit realized from exercise of
nonqualified stock options 382 382
Other comprehensive loss (757) (757)
-------- ------------ -------- -------- ----------
Balances, March 31, 2002 (as restated(a)) 9,168 $ 50,459 67,889 (80) 118,268
======== ============ ======== ======== ==========
Balances, January 1, 2003 9,122 $ 48,313 74,920 752 123,985
Net income 4,693 4,693
Cash dividends declared ($0.23 per share) (2,165) (2,165)
Common stock issued under
stock option plan 60 462 462
Common stock issued into
dividend reinvestment plan 13 307 307
Purchases and retirement of common
stock (117) (2,808) (2,808)
Common stock issued in acquisition 333 9,284 9,284
Other comprehensive loss (207) (207)
-------- ------------ -------- -------- ----------
Balances, March 31, 2003 9,411 $ 55,558 77,448 545 133,551
======== ============ ======== ======== ==========
See notes to consolidated financial statements.
(a) As restated. See Note 2 to consolidated financial statements.
Page 6
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
----------------------
($ in thousands-unaudited) 2003 2002(a)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,693 3,991
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses 520 440
Net security premium amortization 67 73
Gain (loss) on disposal of other real estate (61) 21
Gain on sale of securities available for sale -- (20)
Loan fees and costs deferred, net of amortization (4) 59
Depreciation of premises and equipment 547 420
Tax benefit realized from exercise of nonqualified stock options -- 382
Amortization of intangible assets 45 8
Deferred income tax benefit (45) (319)
Decrease in presold mortgages in process of settlement 15,514 6,611
Decrease (increase) in accrued interest receivable 389 (40)
Increase (decrease) in other assets 536 (64)
Decrease in accrued interest payable (148) (777)
Increase in other liabilities 1,145 1,394
-------- -------
Net cash provided by operating activities 23,198 12,179
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (13,302) (4,901)
Purchases of securities held to maturity (202) (1)
Proceeds from maturities/issuer calls of securities available for sale 9,981 9,764
Proceeds from maturities/issuer calls of securities held to maturity 1,292 16
Proceeds from sales of securities available for sale -- 34
Net increase in loans (25,588) (34,304)
Purchases of premises and equipment (441) (2,062)
Net cash paid in acquisitions (2,820) --
-------- -------
Net cash used by investing activities (31,080) (31,454)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 28,995 3,118
Proceeds from borrowings, net 4,000 --
Cash dividends paid (2,098) (2,006)
Proceeds from issuance of common stock 769 840
Purchases and retirement of common stock (2,808) (897)
-------- -------
Net cash provided by financing activities 28,858 1,055
-------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,976 (18,220)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 73,653 86,815
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 94,629 68,595
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 5,270 7,578
Income taxes 3 41
Non-cash transactions:
Unrealized loss on securities available for sale, net of taxes (130) (644)
Foreclosed loans transferred to other real estate 143 349
Premises and equipment transferred to other real estate -- 228
See notes to consolidated financial statements.
(a) As restated. See Note 2 to consolidated financial statements.
Page 7
First Bancorp and Subsidiaries
Notes To Consolidated Financial Statements
(unaudited) For the Periods Ended March 31, 2003 and 2002
Note 1 - Basis of Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the consolidated financial
position of the Company as of March 31, 2003 and 2002 and the consolidated
results of operations and consolidated cash flows for the periods ended March
31, 2003 and 2002. Reference is made to the 2002 Annual Report on Form 10-K
filed with the SEC for a discussion of accounting policies and other relevant
information with respect to the financial statements. The results of operations
for the periods ended March 31, 2003 and 2002 are not necessarily indicative of
the results to be expected for the full year. The accompanying financial
statements as of and for the period ended March 31, 2002 have been restated from
their originally reported amounts in accordance with the requirements of the
adoption of a new accounting standard - see Note 2 below.
Note 2 - Newly Adopted Accounting Policies
In October 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 147, "Acquisitions of
Certain Financial Institutions" (Statement 147), which addressed the financial
accounting and reporting for the acquisition of all or part of a financial
institution. This standard removed 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 required
financial institutions to reclassify goodwill arising from a qualified business
acquisition from Statement 72 goodwill to goodwill subject to the provisions of
SFAS No. 142, "Goodwill and Other Intangible Assets" (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, $356,000 in amortization expense that had been recorded for
the three months ended March 31, 2002 was retroactively reversed by reducing the
amortization expense recognized during those three months and increasing
intangible assets. The associated income tax expense recorded related to the
reversal of amortization expense amounted to $125,000 for the three months ended
March 31, 2002 resulting in net income for that same three month period being
increased by $231,000 (or $0.02 per diluted share) from its originally reported
amount.
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 were
effective for interim and annual financial statements ending after December 15,
2002. The initial recognition and measurement provisions were effective for all
guarantees within the scope of FIN 45 issued or modified after December 31,
2002. 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 of one year, at which time they may
be renewed for another year if both parties agree. At March 31, 2003, the
Company had $2,381,000 in standby letters of credit outstanding. The adoption of
the recognition and measurement provisions of FIN 45 was immaterial to the
Company.
Page 8
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (Statement 148) an amendment of FASB Statement No. 123, "Accounting
for Stock-Based Compensation" (Statement 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, Statement 148
amends the disclosure requirements of Statement 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 Statement 148 requires enhanced disclosures for the Company's
stock-based employee compensation plan for the year ended December 31, 2002, and
subsequent interim and annual periods. 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 4.
Note 3 - Reclassifications
Certain amounts reported in the period ended March 31, 2002 have been
reclassified to conform with the presentation for March 31, 2003. These
reclassifications had no effect on net income or shareholders' equity for the
periods presented, nor did they materially impact trends in financial
information.
Note 4 - Stock Option Plans
At March 31, 2003, the Company has six stock-based employee compensation
plans, five of which were assumed in acquisitions. The Company accounts for each
plan 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.
Three Months Ended March 31,
----------------------------
(In thousands except per share data) 2003 2002
--------- ---------
Net income, as reported $ 4,693 3,991
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (51) (40)
--------- ---------
Pro forma net income $ 4,642 3,951
========= =========
Earnings per share: Basic - As reported $ 0.50 0.44
Basic - Pro forma 0.50 0.43
Diluted - As reported 0.49 0.43
Diluted - Pro forma 0.49 0.42
Page 9
Note 5 - Earnings Per Share
Basic earnings per share were computed by dividing net income by the
weighted average common shares outstanding. Diluted earnings per share includes
the potentially dilutive effects of the Company's stock option plan. The
following is a reconciliation of the numerators and denominators used in
computing basic and diluted earnings per share:
For the Three Months Ended March 31,
----------------------------------------------------------------------------
2003 2002
------------------------------------ ------------------------------------
Income Shares Income Shares
($ in thousands except per (Numer- (Denom- Per Share (Numer- (Denom- Per Share
share amounts) ator) inator) Amount ator) inator) Amount
--------- --------- -------- --------- --------- --------
Basic EPS
Net income $ 4,693 9,360,692 $ 0.50 $ 3,991 9,149,693 $ 0.44
======== ========
Effect of Dilutive Securities - 178,659 - 188,673
--------- --------- --------- ---------
Diluted EPS $ 4,693 9,539,351 $ 0.49 $ 3,991 9,338,366 $ 0.43
========= ========= ======== ========= ========= ========
For the three months ended March 31, 2003 and 2002, there were options of
0 and 143,250, respectively, that were antidilutive since the exercise price
exceeded the average market price for the period. These options have been
omitted from the calculation of diluted earnings per share for the respective
periods.
Note 6 - Asset Quality Information
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or
more days and still accruing interest, restructured loans and other real estate.
Nonperforming assets are summarized as follows:
March 31, December 31, March 31,
($ in thousands) 2003 2002 2002
------ ----- -----
Nonperforming loans:
Nonaccrual loans $2,941 2,976 3,343
Restructured loans 38 41 79
Accruing loans > 90 days past due -- -- --
------ ----- -----
Total nonperforming loans 2,979 3,017 3,422
Other real estate 1,326 1,384 1,800
------ ----- -----
Total nonperforming assets $4,305 4,401 5,222
====== ===== =====
Nonperforming loans to total loans 0.28% 0.30% 0.37%
Nonperforming assets as a percentage of loans
and other real estate 0.40% 0.44% 0.56%
Nonperforming assets to total assets 0.33% 0.36% 0.45%
Allowance for loan losses to total loans 1.11% 1.09% 1.05%
Note 7 - Deferred Loan Fees
Loans are shown on the Consolidated Balance Sheets net of net deferred
loan fees of approximately $698,000, $702,000, and $717,000 at March 31, 2003,
December 31, 2002, and March 31, 2002, respectively.
Page 10
Note 8 - Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated
amortization of amortized intangible assets as of March 31, 2003, December 31,
2002, and March 31, 2002 and the carrying amount of unamortized intangible
assets as of those same dates. The amounts shown for March 31, 2002 include the
effects of the restatement of the interim financial statements in 2002 that is
discussed in Note 2 above.
March 31, 2003 December 31, 2002 March 31, 2002
----------------------------- ----------------------------- -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated Gross Carrying Accumulated
($ in thousands) Amount Amortization Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------ -------------- ------------
Amortized intangible assets:
Customer lists $ 394 31 243 23 243 11
Noncompete agreements 50 6 -- -- -- --
Core deposit premiums 1,106 293 335 261 335 250
------- ------- ------- ------- ------- -------
Total $ 1,550 330 578 284 578 261
======= ======= ======= ======= ======= =======
Unamortized intangible
assets:
Goodwill $35,113 24,658 23,926
======= ======= =======
Pension $ 93 217 217
======= ======= =======
Amortization expense totaled $45,000 and $8,000 for the three months ended
March 31, 2003 and 2002, respectively.
The following table presents the estimated amortization expense 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
(Dollars in thousands) Expense
---------------------- ----------------------
2003 $ 183
2004 165
2005 122
2006 107
2007 106
Thereafter 583
----------
Total $ 1,266
==========
Note 9 - Completed Acquisitions
The Company completed the following acquisitions during the three months
ended March 31, 2003. The results of each acquired company are included in First
Bancorp's results for the three months ended March 31, 2003 beginning on their
respective acquisition dates.
(a) Uwharrie Insurance Group - On January 2, 2003, the Company completed
the acquisition of 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. In accordance with the terms
of the merger agreement, the Company paid cash in the amount of $546,000 to
complete the acquisition. In addition, the Company incurred $18,000 in other
direct costs to complete the acquisition. As of the date of the acquisition, the
value of the assets of Uwharrie Insurance Group amounted to $20,000 (consisting
primarily of
Page 11
premises and equipment), which resulted in the Company recording an intangible
asset of approximately $544,000. Based on an independent appraisal, the
allocation among types of intangible assets and related amortization periods
are:
Type of Intangible Asset Allocated Amount Amortization Period
---------------- -------------------
Value of Noncompete Agreement $ 50,000 Two years - straight-line
Value of Customer List 151,000 Ten years - straight-line
Goodwill 343,000 Not applicable
---------------
Total Intangible Assets $ 544,000
===============
For tax purposes, each of the intangible assets recorded will result in
tax-deductible amortization expense. No pro forma earnings information has been
presented due to the immateriality of the acquisition.
(b) On January 15, 2003, the Company completed the acquisition of Carolina
Community Bancshares, Inc. (CCB), the parent company of Carolina Community Bank,
a South Carolina community bank with three branches in Dillon County, South
Carolina. This represented 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 that were valued at
approximately $8.4 million, and assuming employee stock options with an
intrinsic value of approximately $0.9 million. The value of the stock issued was
determined using a Company stock price of $25.22, which was the average price of
Company stock during the five day period beginning two days before the
acquisition announcement and ending two days after the acquisition announcement.
The value of the employee stock options assumed was determined using the
Black-Scholes option-pricing model.
This acquisition has been accounted for using the purchase method of
accounting for business combinations, and accordingly, the assets and
liabilities of CCB were recorded based on estimates of fair values as of January
15, 2003, subject to possible adjustment during the one-year period from that
date. The following is a condensed balance sheet disclosing the amount assigned
to each major asset and liability caption of CCB as of January 15, 2003, and the
related fair value adjustments recorded by the Company to reflect the
acquisition. It is not expected that any portion of the intangible assets
recorded will be deductible for income tax purposes.
Page 12
As Fair As
Recorded by Value Recorded by
($ in thousands) CCB Adjustments First Bancorp
----------- ----------- -------------
Assets
Cash and cash equivalents $ 7,048 -- 7,048
Securities 12,995 99 (a) 13,094
Loans, gross 47,716 -- 47,716
Allowance for loan losses (751) -- (751)
Premises and equipment 799 (45)(b) 754
Other - Identifiable intangible asset -- 771 (c) 771
Other 1,697 (243)(d) 1,454
-------- -------- ----------
Total 69,504 582 70,086
-------- -------- ----------
Liabilities
Deposits $ 58,861 -- 58,861
Borrowings 2,000 115 (e) 2,115
Other 722 (88)(f) 634
-------- -------- ----------
Total 61,583 27 61,610
-------- -------- ----------
Net identifiable assets acquired 8,476
Total cost of acquisition
Cash $ 8,322
Value of stock issued 8,395
Value of assumed options 889
Direct costs of acquisition 982
--------
Total cost of acquisition 18,588
----------
Goodwill recorded through March 31, 2003 $ 10,112
==========
Explanation of Fair Value Adjustments
(a) This fair value adjustment represents the net unrealized gain of CCB's
held-to-maturity securities portfolio. This fair value adjustment was
recorded by the Company as a premium on securities and will be amortized
as a reduction of investment interest income over the life of the related
securities, which have an average life of approximately four years.
(b) This fair value adjustment represents the book value of certain equipment
owned by CCB that became obsolete upon the acquisition.
(c) This fair value adjustment represents the value of the core deposit base
assumed in the acquisition based on a study performed by an independent
consulting firm. This amount was recorded by the Company as an
identifiable intangible asset and will be amortized as expense on an
accelerated basis over a ten year period based on an amortization schedule
provided by the consulting firm.
(d) This fair value adjustment represents the net deferred tax liability
recorded related to the other fair value adjustments.
(e) This fair value adjustment was recorded because the interest rates of
CCB's borrowings exceeded current interest rates on similar borrowings.
This amount will be amortized to reduce interest expense over the
remaining lives of the related borrowings, which have a weighted average
life of approximately 3.7 years.
(f) This fair value adjustment represents the carrying value of a retirement
plan liability that was terminated in accordance with the terms of the
merger agreement.
The following unaudited pro forma financial information presents the
combined results of the Company and
Page 13
CCB as if the acquisition had occurred as of January 1, 2002, after giving
effect to certain adjustments, including amortization of the core deposit
intangible, an assumed cost of funds related to the cash paid of 6%, and related
income tax effects. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had the Company and
CCB constituted a single entity during such period. Because the acquisition
occured just 15 days into the three month period ended March 31, 2003, the
actual results of operation for the three months ended March 31, 2003 do not
differ materially from pro forma results, and thus pro forma results have not
been presented.
Three Months Ended
($ in thousands) March 31, 2002
------------------
Net interest income $ 11,957
Noninterest income 3,177
Net income 4,200
Earnings per share
Basic 0.44
Diluted 0.43
Page 14
Item 2 - Management's Discussion and Analysis of Consolidated Results of
Operations and Financial Condition
CRITICAL ACCOUNTING POLICIES
Due to the estimation process and the potential materiality of the amounts
involved, the Company has identified the accounting for the allowance for loan
losses and the related provision for loan losses as an accounting policy
critical to the Company's financial statements. The provision for loan losses
charged to operations is an amount sufficient to bring the allowance for loan
losses to an estimated balance considered adequate to absorb losses inherent in
the portfolio.
Management's determination of the adequacy of the allowance is based
primarily on a mathematical model that estimates the appropriate allowance for
loan losses. This model has two components. The first component involves the
estimation of losses on loans defined as "impaired loans." A loan is considered
to be impaired when,based on current information and events, it is probable the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The estimated valuation allowance is the
difference, if any, between the loan balance outstanding and the value of the
impaired loan as determined by either 1) an estimate of the cash flows that the
Company expects to receive from the borrower discounted at the loan's effective
rate, or 2) in the case of a collateral-dependent loan, the fair value of the
collateral.
The second component of the allowance model is to estimate losses for all
loans not considered to be impaired loans. First, loans that have been risk
graded by the Company as having more than "standard" risk but are not considered
to be impaired are assigned estimated loss percentages generally accepted in the
banking industry. Loans that are classified by the Company as having normal
credit risk are segregated by loan type, and estimated loss percentages are
assigned to each loan type, based on the historical losses, current economic
conditions, and operational conditions specific to each loan type.
The reserve estimated for impaired loans is then added to the reserve
estimated for all other loans. This becomes the Company's "allocated allowance."
In addition to the allocated allowance derived from the model, management also
evaluates other data such as the ratio of the allowance for loan losses to total
loans, net loan growth information, nonperforming asset levels and trends in
such data. Based on this additional analysis, the Company may determine that an
additional amount of allowance for loan losses is necessary to reserve for
probable losses. This additional amount, if any, is the Company's "unallocated
allowance." The sum of the allocated allowance and the unallocated allowance is
compared to the actual allowance for loan losses recorded on the books of the
Company and any adjustment necessary for the recorded allowance to equal the
computed allowance is recorded as a provision for loan losses. The provision for
loan losses is a direct charge to earnings in the period recorded.
While management uses the best information available to make evaluations,
future adjustments may be necessary if economic, operational, or other
conditions change. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Company's allowance for
loan losses. Such agencies may require the Company to recognize additions to the
allowance based on the examiners' judgment about information available to them
at the time of their examinations.
For further discussion, see "SUMMARY OF LOAN LOSS EXPERIENCE" above.
CURRENT ACCOUNTING MATTERS
See Note 2 to the Consolidated Financial Statements above.
Page 15
RESULTS OF OPERATIONS
OVERVIEW
In the discussion below and the financial statements above, amounts as of
and for the period ended March 31, 2002 have been restated from their originally
reported amounts in accordance with the adoption of a new accounting standard -
see Note 2 to the financial statements above.
Net income for the three months ended March 31, 2003 was $4,693,000, a
17.6% increase from the $3,991,000 recorded in the first quarter of 2002. The
net income recorded in the first quarter of 2003 amounted to diluted earnings of
$0.49 per share, compared to $0.43 per share for the first quarter of 2002, an
increase of 14.0%.
The increase in the Company's earnings in the first quarter of 2003
compared to the first quarter of 2002 was primarily due to the Company's overall
growth, which resulted in increases in net interest income and noninterest
income, the positive benefits of which were partially offset by higher operating
expenses. Also contributing to the increase in net interest income was an
improved net interest margin of 4.59% in the first quarter of 2003 compared to
4.36% in the first quarter of 2002.
As discussed in the next two paragraphs, the Company completed two
acquisitions in the first quarter of 2003. The results of each acquired company
are included in First Bancorp's first quarter results beginning on their
respective acquisition dates.
On January 2, 2003, the Company completed the acquisition of Uwharrie
Insurance Group (Uwharrie Insurance), a property and casualty insurance agency
located in Troy, with eight employees and approximately 5,000 customers in
Montgomery and neighboring counties. Uwharrie Insurance Group was merged with
the Company's existing insurance subsidiary, First Bank Insurance Services, Inc.
On January 15, 2003, the Company completed the acquisition of Carolina
Community Bancshares, Inc. (CCB), the parent company of Carolina Community Bank,
a South Carolina community bank with three branches in Dillon County, South
Carolina. This represented 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. As of the acquisition date, CCB had
total assets of $70.2 million, with loans of $47.7 million, deposits of $58.9
million, and shareholders' equity of $8.8 million.
The Company's asset quality ratios remained sound in the first quarter of
2003. Annualized net charge-offs as a percentage of average loans for the first
quarter of 2003 amounted to 11 basis points, and the Company's total
nonperforming assets as a percentage of total assets ratio of 0.33% is the
lowest the Company has had at any quarter end in over two years.
The Company's annualized return on average assets for the first quarter of
2003 was 1.49% compared to 1.42% for the first quarter of 2002. The Company's
return on average equity for the first quarter of 2003 was 14.25% compared to
13.62% for the first quarter of 2002.
COMPONENTS OF EARNINGS
Net interest income is the largest component of earnings, representing the
difference between interest and fees generated from earning assets and the
interest costs of deposits and other funds needed to support those assets. Net
interest income for the three month period ended March 31, 2003 amounted to
$13,342,000, an increase of $2,049,000, or 18.1% from the $11,293,000 recorded
in the first quarter of 2002.
Page 16
There are two primary factors that cause changes in the amount of net
interest income recorded by the Company - 1) growth in loans and deposits, and
2) the Company's net interest margin. For the three months ended March 31, 2003,
both factors contributed to the increase in net interest income realized by the
Company compared to the same three month period in 2002.
For the Three Months Ended March 31,
------------------------------------------------------------------------------------
2003 2002
--------------------------------------- ----------------------------------------
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
------------ ------- --------- ----------- ------- ---------
Assets
Loans (1) $ 1,049,781 6.57% $ 17,009 $ 903,283 7.28% $ 16,204
Taxable securities 73,905 5.16% 940 93,239 6.11% 1,405
Non-taxable securities (2) 15,739 9.02% 350 16,130 8.50% 338
Short-term investments,
principally federal funds 53,010 2.34% 306 50,053 2.33% 288
------------ -------- ----------- ---------
Total interest-earning assets 1,192,435 6.33% 18,605 1,062,705 6.96% 18,235
-------- ---------
Liabilities
Savings, NOW and money
market deposits $ 396,173 0.63% $ 618 $ 354,349 1.05% $ 921
Time deposits >$100,000 218,177 2.90% 1,560 186,657 4.16% 1,916
Other time deposits 375,026 2.67% 2,467 357,328 4.22% 3,714
------------ -------- ----------- ---------
Total interest-bearing deposits 989,376 1.90% 4,645 898,334 2.96% 6,551
Borrowings 32,511 5.95% 477 15,000 6.76% 250
------------ -------- ----------- ---------
Total interest-bearing liabilities 1,021,887 2.03% 5,122 913,334 3.02% 6,801
-------- ---------
Non-interest-bearing deposits 115,958 96,902
Net yield on interest-earning
assets and net interest income 4.59% $ 13,483 4.36% $ 11,434
======== =========
Interest rate spread 4.30% 3.94%
Average prime rate 4.25% 4.75%
(1) Average loans include nonaccruing loans, the effect of which is to lower
the average rate shown.
(2) Includes tax-equivalent adjustments of $141,000 in each three month period
to reflect the tax benefit that the Company receives related to its
tax-exempt securities, which carry interest rates lower than similar
taxable investments due to their tax exempt status. This amount has been
computed assuming a 35% tax rate and is reduced by the related
nondeductible portion of interest expense.
Average loans outstanding for the first quarter of 2003 were $1.050
billion, which was 16.2% higher than the average loans outstanding for the first
quarter of 2002 ($903 million). Average deposits outstanding for the first
quarter of 2003 were $1.105 billion, which was 11.1% higher than the average
amount of deposits outstanding in the first quarter of 2002 ($995 million). See
additional discussion regarding the nature of the growth in loans and deposits
in the section entitled "Financial Condition" below. The effect of these higher
amounts of average loans and deposits was to increase net interest income in
2003.
The net interest margin (tax equivalent net interest income divided by
average earning assets) for the first quarter of 2003 was 4.59%, a 23 basis
point increase from the 4.36% net interest margin realized in the first quarter
of 2002. The higher first quarter 2003 net interest margin was primarily a
result of the more stable interest rate environment that has prevailed over the
past several quarters compared to the rapidly declining interest rate
environment in 2001 that negatively impacted the net interest margin in the
first quarter of 2002. In the short term, the Company's interest-sensitive
assets generally reprice sooner and by greater amounts than do its
interest-sensitive liabilities, which in a declining interest rate environment
has the effect of negatively impacting the Company's net interest margin until
its interest-sensitive liabilities can reset at lower rates.
The 4.59% net interest margin realized by the Company in the first quarter
of 2003 was also a 6 basis point increase from the 4.53% net interest margin
realized in the fourth quarter of 2002. This increase in the net interest margin
was a net result of two factors that had a positive effect on net interest
margin and one factor that had a
Page 17
negative impact. The positive factors were - 1) there were no interest rate cuts
by the Federal Reserve in the first quarter of 2003 which allowed the Company's
net interest margin to rebound slightly after the fourth quarter 2002 rate cut
of 50 basis points (0.50%) initiated by the Federal Reserve that negatively
impacted the Company's net interest margin (for the reasons discussed in the
paragraph above), and 2) the acquisition of CCB increased the Company's net
interest margin slightly as CCB had a higher net interest margin than the
Company. The negative factor affecting the Company's net interest margin was
that a higher percentage of its loan originations were structured as adjustable
rate loans in first quarter of 2003 compared to the Company's historical mix of
new loan originations - in fiscal year 2002, approximately 51% of the Company's
new loan originations were adjustable rate loans, whereas in the first quarter
of 2003, 64% of loan originations were adjustable rate loans. This negatively
impacted the Company's net interest margin because in the current interest rate
environment adjustable rate loans generally have interest rates that are 1%-3%
lower than fixed rate loans of similar maturities. At December 31, 2002, the
Company's loan portfolio was comprised of 47% of adjustable rate loans. At March
31, 2003 the percentage of adjustable rate loans had risen to 50%.
The Company recorded a $520,000 provision for loan losses during the first
quarter of 2003 compared to a provision for loan losses of $440,000 recorded in
the first quarter of 2002. The slightly higher provision for loan losses was a
result of higher amounts of specific reserves assigned to impaired loans in the
first quarter of 2003 compared to 2002, which was partially offset by lower
internal loan growth ("internal loan growth" excludes loans assumed in
acquisitions for which preestablished reserves have been recorded).
Noninterest income for the first quarter of 2003 amounted to $3,733,000, a
24.6% increase over the $2,997,000 recorded in the first quarter of 2002. The
primary factors affecting the increase in noninterest income were -1) internal
growth in the Company's business - for the twelve months ended March 31, 2003,
excluding the Company's CCB acquisition, loans increased 11% and deposits
increased 8%, which have provided the Company with fee income opportunities, 2)
the CCB acquisition - CCB contributed $186,000 in noninterest income (primarily
service charges on deposit accounts), or approximately 25% of the total increase
in noninterest income, and 3) the fees that the Company earns from mortgage
loans presold into the secondary market increased by $256,000, or 57%, in the
first quarter of 2003 compared to the first quarter of 2002 as a result of the
high refinancing activity driven by the very low interest rate environment.
Within noninterest income, commissions from sales of insurance and
financial products amounted to $260,000 in the first quarter of 2003 compared to
the $265,000 in the first quarter of 2002. This line item includes commissions
the Company receives from three sources - 1) sales of credit insurance
associated with new loans, 2) commissions from the sales of investment, annuity,
and long-term care insurance products, and 3) commissions from the sale of
property and casualty insurance. The following table presents these components
for the three month period ended March 31, 2003 compared to the same period in
2002:
Three Months Ended March 31,
----------------------------------------
($ in thousands) 2003 2002 $ Change % Change
------ ----- -------- --------
Commissions earned from:
Sales of credit insurance $ 78 167 (89) (53.3)%
Sales of investments,
annuities, and long term
care insurance 22 58 (36) (62.1)%
Sales of property and
casualty insurance 160 40 120 300.0%
------ ----- ------ ------
Total $ 260 265 (5) (1.9)%
====== ===== ====== ======
In comparing the first quarter of 2003 to the first quarter of 2002, the
decrease in commissions earned from sales from credit insurance is primarily
related to an approximately $70,000 decrease in the "experience bonus" that is
received annually in the first quarter of each year from the insurance companies
that the Company acts as an agent for. The experience bonus can fluctuate
depending on the actual loss experience that the insurance
Page 18
companies experience related to the Company's customers. Also in comparing 2003
to 2002, commissions earned from sales of investments, annuities, and long term
care insurance decreased due to a lower amount of related transactions involving
these products, possibly due to the declining stock market. The increase in
commissions earned from sales of property and casualty insurance is primarily
due to the acquisition of Uwharrie Insurance, which was effective on January 2,
2003 - see Note 9 to the consolidated financial statements above.
Noninterest expenses for the three months ended March 31, 2003 increased
19.5% to $9,248,000 from $7,742,000 in the first quarter of 2002. The increase
in noninterest expenses occurred in all categories and is associated with the
overall growth of the Company in terms of branch network, employees and customer
base. The acquisitions of Uwharrie Insurance and CCB resulted in incremental
expense of approximately $500,000, or 33% of the total increase. In addition to
the overall growth experienced, the Company made significant technology
investments in mid-2002, including check imaging technology (which was
introduced in July 2002) and a company-wide computer network that increased
equipment depreciation expense.
The provision for income taxes was $2,614,000 in the first quarter of 2003
compared to $2,117,000 in the first quarter of 2002. The effective tax rates for
the first quarter of 2003 and 2002 were 35.8% and 34.7%, respectively. The
slightly higher effective tax rate in 2003 is primarily a result of a higher
percentage of the Company's interest income being subject to federal and/or
state taxes due to having a relatively lower amount of tax-exempt loans and
securities.
FINANCIAL CONDITION
Total assets at March 31, 2003 amounted to $1.32 billion, 15.1% higher
than a year earlier. Total loans at March 31, 2003 amounted to $1.07 billion, a
15.9% increase from a year earlier, and total deposits amounted to $1.14 billion
at March 31, 2003, a 14.0% increase from a year earlier. A significant portion
of the Company's growth from a year ago is due to the Company's January 2003
acquisition of CCB, and to a lesser degree the Company's purchase of a bank
branch in Broadway, North Carolina in October 2002. As of their respective
acquisition dates, CCB had total assets of $70.2 million, with loans of $47.7
million and deposits of $58.9 million, while the Broadway branch had $3.1
million in loans and $8.4 million in deposits.
Page 19
The following tables present information regarding the nature of the
Company's growth since March 31, 2002.
Balance at Balance at Total Percentage growth,
April 1, 2002 to beginning Internal Growth from end of percentage excluding
March 31, 2003 of period Growth Acquisitions period growth acquisitions
---------- ---------- ------------ ---------- ---------- ------------------
($ in thousands)
Loans $ 924,107 96,526 50,799 1,071,432 15.9% 10.4%
========== ========== ========== ========== ========== ==========
Deposits - Noninterest bearing $ 101,331 21,171 10,427 132,929 31.2% 20.9%
Deposits - Savings, NOW, and
Money Market 362,777 20,739 18,257 401,773 10.7% 5.7%
Deposits - Time>$100,000 183,939 34,550 12,566 231,055 25.6% 18.8%
Deposits - Time<$100,000 355,352 (3,348) 26,052 378,056 6.4% (0.9%)
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $1,003,399 73,112 67,302 1,143,813 14.0% 7.3%
========== ========== ========== ========== ========== ==========
January 1, 2003 to
March 31, 2003
Loans $ 998,547 25,169 47,716 1,071,432 7.3% 2.5%
========== ========== ========== ========== ========== ==========
Deposits - Noninterest bearing $ 112,380 11,772 8,777 132,929 18.3% 10.5%
Deposits - Savings, NOW, and
Money Market 387,691 (853) 14,935 401,773 3.6% (0.2%)
Deposits - Time>$100,000 199,794 18,695 12,566 231,055 15.6% 9.4%
Deposits - Time<$100,000 356,092 (619) 22,583 378,056 6.2% (0.2%)
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $1,055,957 28,995 58,861 1,143,813 8.3% 2.7%
========== ========== ========== ========== ========== ==========
As can be seen in the first table, over the past twelve months the
Company's internal growth rates for loans and deposits were 10.4% and 7.3%
respectively, with the growth assumed in acquisitions increasing the overall
growth in loans to 15.9% and deposits to 14.0%. As can be seen in the second
table, the Company experienced steady internal growth of 2.5% in loans (10.0%
annualized) and 2.7% in deposits (10.8% annualized) during the first quarter of
2003. The CCB acquisition increased overall loan and deposit growth by 5%-6%.
The deposit categories of noninterest-bearing demand deposits and time deposits
greater than $100,000 have experienced the highest percentage increases in
internal growth during the periods shown.
Page 20
NONPERFORMING ASSETS
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or
more days and still accruing interest, restructured loans and other real estate.
Nonperforming assets are summarized as follows:
March 31, December 31, March 31,
($ in thousands) 2003 2002 2002
--------- ------------ ---------
Nonperforming loans:
Nonaccrual loans $2,941 2,976 3,343
Restructured loans 38 41 79
Accruing loans > 90 days past due -- -- --
------ ----- -----
Total nonperforming loans 2,979 3,017 3,422
Other real estate 1,326 1,384 1,800
------ ----- -----
Total nonperforming assets $4,305 4,401 5,222
====== ===== =====
Nonperforming loans to total loans 0.28% 0.30% 0.37%
Nonperforming assets as a percentage of loans
and other real estate 0.40% 0.44% 0.56%
Nonperforming assets to total assets 0.33% 0.36% 0.45%
Allowance for loan losses to total loans 1.11% 1.09% 1.05%
Management has reviewed the collateral for the nonperforming assets,
including nonaccrual loans, and has included this review among the factors
considered in the evaluation of the allowance for loan losses discussed below.
The level of nonaccrual loans has not varied materially among the periods
presented, amounting to $2.9 million at March 31, 2003, compared to $3.0 million
at December 31, 2002 and $3.3 million at March 31, 2002. The Company continues
to have one large credit that was on nonaccrual basis as of each of the three
dates presented. The nonaccrual balance of this credit amounted to $750,000,
$1.0 million, and $1.8 million as of March 31, 2003, December 31, 2002, and
March 31, 2002, respectively. The borrower of this credit, which is secured by
real estate, has liquidity problems. During the last nine months of 2002, the
borrower sold several pieces of the real estate collateral that provided
$800,000 in paydowns, resulting in the $1.0 million outstanding balance at
December 31, 2002. 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. During the first quarter of 2003, because of the increasing
likelihood that the terms of the nonbinding proposal would happen, the Company
charged-off the $250,000 specific reserve that had been established, resulting
in the $750,000 balance for this credit at March 31, 2003.
At March 31, 2003, December 31, 2002, and March 31, 2002, the recorded
investment in loans considered to be impaired was $1,780,000, $1,431,000, and
$2,077,000, respectively, all of which were on nonaccrual status. A significant
portion of the impaired loans for each of the three periods presented is the
same credit noted above that is on nonaccrual status. At March 31, 2003,
December 31, 2002, and March 31, 2002, the related allowance for loan losses for
all impaired loans was $190,000 (eight of the eleven impaired loans totaling
$949,000 at March 31, 2003 had an assigned valuation allowance), $290,000
(related to three of the four impaired loans with a total balance of
$1,269,000), and $25,000 (related to one loan with a balance of $171,000, with
the remainder of impaired loans having no valuation allowance), respectively. As
noted above, in the first quarter of 2003, the Company charged-off $250,000
related to the nonaccrual/impaired loan discussed above that had a specific
reserve of $250,000 at December 31, 2002. Excluding that loan, specific reserves
related to impaired loans increased from $40,000 at December 31, 2002 to
$190,000 at March 31, 2003. The average recorded investments in impaired loans
during the three month period ended March 31, 2003, the year ended December 31,
2002, and the three
Page 21
months ended March 31, 2002 were approximately $1,656,000, $1,882,000, and
$2,280,000, respectively. For the same periods, the Company recognized no
interest income on those impaired loans during the period that they were
considered to be impaired.
As of March 31, 2003, December 31, 2002 and March 31, 2002, the Company's
other real estate owned amounted to $1,326,000, $1,384,000, and $1,800,000,
respectively, which consisted principally of several parcels of real estate. The
decrease in the level of other real estate owned at March 31, 2003 compared to
March 31, 2002 is due to several property sales. The Company's management has
reviewed recent appraisals of its other real estate and believes that their fair
values, less estimated costs to sell, equal or exceed their respective carrying
values at the dates presented.
SUMMARY OF LOAN LOSS EXPERIENCE
The allowance for loan losses is created by direct charges to operations.
Losses on loans are charged against the allowance in the period in which such
loans, in management's opinion, become uncollectible. The recoveries realized
during the period are credited to this allowance.
The Company has no foreign loans, few agricultural loans and does not
engage in significant lease financing or highly leveraged transactions.
Commercial loans are diversified among a variety of industries. The majority of
the Company's real estate loans are primarily various personal and commercial
loans where real estate provides additional security for the loan. Collateral
for virtually all of these loans is located within the Company's principal
market area.
The Company recorded a $520,000 provision for loan losses during the first
quarter of 2003 compared to a provision for loan losses of $440,000 recorded in
the first quarter of 2002. The slightly higher provision for loan losses was a
result of higher amounts of specific reserves assigned to impaired loans in the
first quarter of 2003 compared to 2002 (see discussion above), which was
partially offset by lower internal loan growth ("internal loan growth" excludes
loans assumed in acquisitions for which preestablished reserves have been
recorded).
At March 31, 2003, the allowance for loan losses amounted to $11,898,000,
compared to $10,907,000 at December 31, 2002 and $9,729,000 at March 31, 2002.
The allowance for loan losses was 1.11%, 1.09% and 1.05% of total loans as of
March 31, 2003, December 31, 2002, and March 31, 2002, respectively. The slight
increase in the allowance for loan losses since December 31, 2002 is primarily
the result of the CCB acquisition. At the time of the acquisition, CCB's
allowance for loan losses amounted to 1.57% of gross loans. The increase in the
allowance percentage from March 31, 2002 was also caused by a slight shift in
the composition of the Company's loan portfolio from residential mortgage loans
to commercial loans - commercial loans carry a higher reserve percentage in the
Company's allowance for loan loss model than do residential mortgage loans. The
slight shift from residential mortgage loans to commercial loans has been
intentional. Two of the Company's recent bank acquisitions (First Savings
Bancorp in September 2000 and Century Bancorp in May 2001) had loan portfolios
that were highly concentrated in residential mortgage loans. As many of those
loans have refinanced at lower rates over the past 12 months, the Company chose
to sell them in the secondary market instead of holding them in the Company's
loan portfolio. This strategy was implemented in an effort to shift the
Company's loan portfolio to having a higher percentage of commercial loans,
which are generally shorter term in nature and have higher interest rates.
Management believes the Company's reserve levels are adequate to cover
probable loan losses on the loans outstanding as of each reporting date. It must
be emphasized, however, that the determination of the reserve using the
Company's procedures and methods rests upon various judgments and assumptions
about economic conditions and other factors affecting loans. No assurance can be
given that the Company will not in any particular period sustain loan losses
that are sizable in relation to the amounts reserved or that subsequent
evaluations of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings.
Page 22
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan losses
and value of other real estate. Such agencies may require the Company to
recognize adjustments to the allowance or the carrying value of other real
estate based on their judgments about information available at the time of their
examinations.
For the periods indicated, the following table summarizes the Company's
balances of loans outstanding, average loans outstanding, changes in the
allowance for loan losses arising from charge-offs and recoveries, and additions
to the allowance for loan losses that have been charged to expense and additions
that were recorded related to acquisitions.
Three Months Year Three Months
Ended Ended Ended
March 31, December 31, March 31,
($ in thousands) 2003 2002 2002
----------- ------------ ------------
Loans outstanding at end of period $1,071,432 998,547 924,107
========== ========= =========
Average amount of loans outstanding $1,049,781 954,885 903,283
========== ========= =========
Allowance for loan losses, at
beginning of period $ 10,907 9,388 9,388
Total charge-offs (388) (1,211) (128)
Total recoveries 108 135 29
---------- --------- ---------
Net charge-offs (280) (1,076) (99)
---------- --------- ---------
Additions to the allowance charged to expense 520 2,545 440
---------- --------- ---------
Addition related to loans assumed in corporate
acquisitions 751 50 --
---------- --------- ---------
Allowance for loan losses, at end of period $ 11,898 10,907 9,729
========== ========= =========
Ratios:
Net charge-offs (annualized) as a percent of average loans 0.11% 0.11% 0.04%
Allowance for loan losses as a
percent of loans at end of period 1.11% 1.09% 1.05%
Based on the results of the Company's loan analysis and grading program
and management's evaluation of the allowance for loan losses at March 31, 2003,
there have been no material changes to the allocation of the allowance for loan
losses among the various categories of loans since December 31, 2002.
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.
In addition to internally generated liquidity sources, the Company has the
ability to obtain borrowings from the following three sources - 1) an
approximately $165 million line of credit with the Federal Home Loan Bank (of
which $16 million has been drawn), 2) a $50 million overnight federal funds line
of credit with a correspondent bank (none of which was outstanding at March 31,
2003), and 3) an approximately $39 million line of credit through the Federal
Reserve Bank of Richmond's discount window (none of which was outstanding at
March 31, 2003).
Page 23
The Company's liquidity did not change materially from December 31, 2002
to March 31, 2003, as deposit growth and loan growth did not vary significantly.
The Company's loan to deposit ratio was 93.7% at March 31, 2003 compared to
94.6% at December 31, 2002. The level of the Company's liquid assets (consisting
of cash, due from banks, federal funds sold, presold mortgages in process of
settlement and securities) as a percentage of deposits and borrowings was 16.5%
at March 31, 2003 compared to 16.0% at December 31, 2002.
The amount and timing of the Company's contractual obligations and
commercial commitments has not changed materially since December 31, 2002,
detail of which is presented in Table 18 on page 52 of the Company's 2002 Form
10-K.
The Company is not involved in any legal proceedings that, in management's
opinion, could have a material effect on the consolidated financial position of
the Company.
Off-balance-sheet derivative financial instruments include futures,
forwards, interest rate swaps, options contracts, and other financial
instruments with similar characteristics. The Company does not engage in
off-balance-sheet derivatives activities.
The Company's management believes its liquidity sources, including unused
lines of credit, are at an acceptable level and remain adequate to meet its
operating needs in the foreseeable future. The Company will continue to monitor
its liquidity position carefully and will explore and implement strategies to
increase liquidity if deemed appropriate.
CAPITAL RESOURCES
The Company is regulated by the Board of Governors of the Federal Reserve
Board (FED) and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Company's banking
subsidiary is regulated by the Federal Deposit Insurance Corporation (FDIC) and
the North Carolina Office of the Commissioner of Banks. The Company is not aware
of any recommendations of regulatory authorities or otherwise which, if they
were to be implemented, would have a material effect on its liquidity, capital
resources, or operations.
The Company must comply with regulatory capital requirements established
by the FED and FDIC. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. These capital standards require the Company to
maintain minimum ratios of "Tier 1" capital to total risk-weighted assets and
total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1
capital is comprised of total shareholders' equity calculated in accordance with
generally accepted accounting principles, excluding accumulated other
comprehensive income (loss), less intangible assets, and total capital is
comprised of Tier 1 capital plus certain adjustments, the largest of which for
the Company is the allowance for loan losses. Risk-weighted assets refer to the
on- and off-balance sheet exposures of the Company, adjusted for their related
risk levels using formulas set forth in FED and FDIC regulations.
In addition to the risk-based capital requirements described above, the
Company is subject to a leverage capital requirement, which calls for a minimum
ratio of Tier 1 capital (as defined above) to quarterly average total assets of
3.00% to 5.00%, depending upon the institution's composite ratings as determined
by its regulators. The FED has not advised the Company of any requirement
specifically applicable to it.
Page 24
At March 31, 2003, the Company's capital ratios exceeded the regulatory
minimum ratios discussed above. The following table presents the Company's
capital ratios and the regulatory minimums discussed above for the periods
indicated.
March 31, December 31, March 31,
2003 2002 2002
--------- ------------ ---------
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets 11.70% 12.68% 10.99%
Minimum required Tier I capital 4.00% 4.00% 4.00%
Total risk-based capital to
Tier II risk-adjusted assets 12.74% 13.69% 11.99%
Minimum required total risk-based capital 8.00% 8.00% 8.00%
Leverage capital ratios:
Tier I leverage capital to
adjusted first quarter average assets 9.39% 10.09% 8.42%
Minimum required Tier I leverage capital 4.00% 4.00% 4.00%
The Company's capital ratios declined in the first quarter of 2003 as a
result of the acquisition of CCB.
The Company's bank subsidiaries are also subject to similar capital
requirements as those discussed above. The bank subsidiary's capital ratios do
not vary materially from the Company's capital ratios presented above. At March
31, 2003, the Company's bank subsidiaries exceeded the minimum ratios
established by the FED and FDIC.
SHARE REPURCHASES
The Company repurchased 117,214 shares of its own common stock at an
average price of $23.95 per share during the first quarter of 2003. At March 31,
2003, the Company had approximately 50,000 shares available for repurchase under
existing authority from its board of directors. On April 23, 2003, the Company
announced that its board of directors had approved the repurchase of an
additional 200,000 shares. The Company will repurchase these shares in open
market and privately negotiated transactions, as market conditions and the
Company's liquidity warrant, subject to compliance with applicable regulations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK)
Net interest income is the Company's most significant component of
earnings. Notwithstanding changes in volumes of loans and deposits, the
Company's level of net interest income is continually at risk due to the effect
that changes in general market interest rate trends have on interest yields
earned and paid with respect to the various categories of earning assets and
interest-bearing liabilities. It is the Company's policy to maintain portfolios
of earning assets and interest-bearing liabilities with maturities and repricing
opportunities that will afford protection, to the extent practical, against wide
interest rate fluctuations. The Company's exposure to interest rate risk is
analyzed on a regular basis by management using standard GAP reports, maturity
reports, and an asset/liability software model that simulates future levels of
interest income and expense based on current interest rates, expected future
interest rates, and various intervals of "shock" interest rates. Over the years,
the Company has been able to maintain a fairly consistent yield on average
earning assets (net interest margin). Over the past five calendar years the
Company's net interest margin has ranged from a low of 4.23% (realized in 2001)
to a high of 4.73% (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%. The net
interest margin (tax equivalent net interest income divided by average earning
assets) for the first quarter of 2003 was 4.59%, a 23 basis point increase from
the 4.36% net interest margin realized in the first quarter of 2002 and a six
basis point increase from the 4.53% net interest margin realized in the fourth
quarter of 2002. See "Components of Earnings" above for discussion regarding
variances in the Company's net interest margin for the noted quarters in 2003
and 2002.
Page 25
Using stated maturities for all instruments except mortgage-backed
securities (which are allocated in the periods of their expected payback) and
securities and borrowings with call features that are expected to be called
(which are included in the period of their expected call), at March 31, 2003 the
Company had $309.4 million more in interest-bearing liabilities that are subject
to interest rate changes within one year than earning assets. This generally
would indicate that net interest income would experience downward pressure in a
rising interest rate environment and would benefit from a declining interest
rate environment. However, this method of analyzing interest sensitivity only
measures the magnitude of the timing differences and does not address earnings,
market value, or management actions. Also, interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. In addition to the effects of "when" various rate-sensitive products
reprice, market rate changes may not result in uniform changes in rates among
all products. For example, included in interest-bearing liabilities at March 31,
2003 subject to interest rate changes within one year are deposits totaling
$401.8 million comprised of NOW, savings, and certain types of money market
deposits with interest rates set by management. These types of deposits
historically have not repriced coincidentally with or in the same proportion as
general market indicators.
Thus, the Company believes that in the near term (twelve months), net
interest income would not likely experience significant downward pressure from
rising interest rates. Similarly, management would not expect a significant
increase in near term net interest income from falling interest rates (In fact,
a declining interest rate environment during 2001 negatively impacted (at least
temporarily) the Company's net interest margin). Generally, when rates change,
the Company's interest-sensitive assets that are subject to adjustment reprice
immediately at the full amount of the change, while the Company's
interest-sensitive liabilities that are subject to adjustment reprice at a lag
to the rate change and typically not to the full extent of the rate change. The
net effect is that in the twelve month horizon, as rates change, the impact of
having a higher level of interest-sensitive liabilities is substantially negated
by the later and typically lower proportionate change these liabilities
experience compared to interest sensitive assets.
Page 26
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions. The following
table presents the expected maturities of the Company's other than trading
market risk sensitive financial instruments. The following table also presents
the fair values of market risk sensitive instruments as estimated in accordance
with Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments."
Expected Maturities of Market Sensitive
Instruments Held at March 31, 2003
--------------------------------------------------------------------------- Average Estimated
Interest Fair
($ in thousands) 1 Year 2 Years 3 Years 4 Years 5 Years Beyond Total Rate (1) Value
-------- -------- -------- -------- --------- -------- ---------- -------- ----------
Due from banks,
interest bearing $ 42,613 -- -- -- -- -- 42,613 1.15% $ 42,613
Federal funds sold 28,677 -- -- -- -- -- 28,677 1.15% 28,677
Presold mortgages in process
of settlement 3,754 -- -- -- -- -- 3,754 5.25% 3,754
Debt securities- at
amortized cost (1) (2) 30,806 14,582 12,018 6,823 1,794 22,698 88,721 5.44% 90,923
Loans - fixed (3) (4) 98,690 83,195 74,363 100,168 113,619 65,810 535,845 7.45% 545,879
Loans - adjustable (3) (4) 207,221 62,464 48,205 49,504 79,569 85,683 532,646 5.22% 534,089
-------- -------- -------- -------- --------- -------- ---------- ------ ----------
Total $411,761 160,241 134,586 156,495 194,982 174,191 1,232,256 5.97% $1,245,935
======== ======== ======== ======== ========= ======== ========== ====== ==========
Savings, NOW, and
money market
deposits $401,773 -- -- -- -- -- 401,773 0.61% $ 401,773
Time deposits 492,104 71,594 14,601 6,931 22,342 1,539 609,111 2.63% 611,427
Borrowings - fixed (2) 9,000 1,000 -- -- 1,000 5,000 16,000 4.94% 16,604
Borrowings - adjustable -- -- -- -- -- 20,000 20,000 5.41% 20,000
-------- -------- -------- -------- --------- -------- ---------- ------ ----------
Total $902,877 72,594 14,601 6,931 23,342 26,539 1,046,884 1.94% $1,049,804
======== ======== ======== ======== ========= ======== ========== ====== ==========
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 35%
tax rate.
(2) Callable securities and borrowings with above market interest rates at
March 31, 2003 are assumed to mature at their call date for purposes of
this table. Mortgage-backed securities are assumed to mature in the period
of their expected repayment based on estimated prepayment speeds.
(3) Excludes nonaccrual loans and allowance for loan losses.
(4) Single-family mortgage loans are assumed to mature in the period of their
expected repayment based on estimated prepayment speeds. All other loans
are shown in the period of their contractual maturity.
The Company's market-sensitive 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 March 31, 2003
for instruments with maturities similar to the remaining term of the portfolios,
due to the declining interest rate environment.
See additional discussion of the Company's net interest margin in the
"Components of Earnings" section above.
Item 4. Controls and Procedures
Within 90 days of the filing of this report, the Company conducted a
review and evaluation of its disclosure controls and procedures, under the
supervision and with the participation of the Company's Chief Executive Officer
and Chief Finanical Officer. Based upon this review, the Chief Executive Officer
and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures were adequate and effective to ensure that information
required to be disclosed is recorded, processed, summarized, and reported in a
timely manner.
Page 27
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation described above, nor were there any significant
deficiencies or material weaknesses in the controls which required corrective
action.
FORWARD-LOOKING STATEMENTS
Part I of this report contains statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgment of the Company and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the financial success or changing strategies of the Company's
customers, the Company's level of success in integrating acquisitions, actions
of government regulators, the level of market interest rates, and general
economic conditions.
Page 28
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed with this report or, as noted, are
incorporated by reference. Management contracts, compensatory plans and
arrangements are marked with an asterisk (*).
3.a 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.
10.a Definitive Merger Agreement with Carolina Community Bancshares, Inc. dated
July 16, 2002 was filed as Exhibit 99.2 to the Company's current report on
Form 8-K on July 17, 2002 and is incorporated herein by reference.
21 List of Subsidiaries of the Company was filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2002,
and is incorporated herein by reference.
99.a Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.b Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) There were no reports filed on Form 8-K during the quarter ended March 31,
2003.
Copies of exhibits are available upon written request to: First Bancorp, Anna G.
Hollers, Executive Vice President, P.O. Box 508, Troy, NC 27371
Page 29
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST BANCORP
May 13, 2003 BY: James H. Garner
---------------------------
James H. Garner
President
(Principal Executive Officer),
Treasurer and Director
May 13, 2003 BY: Anna G. Hollers
---------------------------
Anna G. Hollers
Executive Vice President
and Secretary
May 13, 2003 BY: Eric P. Credle
---------------------------
Eric P. Credle
Senior Vice President
and Chief Financial Officer
Page 30
I, James H. Garner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Bancorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ James H. Garner
James H. Garner
Chief Executive Officer
May 13, 2003
Page 31
I, Eric P. Credle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Bancorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Eric P. Credle
Eric P. Credle
Chief Financial Officer
May 13, 2003
Page 32