UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 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 October 31, 2003, 9,403,977 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 -
September 30, 2003 and 2002
(With Comparative Amounts at December 31, 2002) 3
Consolidated Statements of Income -
For the Periods Ended September 30, 2003 and 2002 4
Consolidated Statements of Comprehensive Income -
For the Periods Ended September 30, 2003 and 2002 5
Consolidated Statements of Shareholders' Equity -
For the Periods Ended September 30, 2003 and 2002 6
Consolidated Statements of Cash Flows -
For the Periods Ended September 30, 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 17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 29
Item 4 - Controls and Procedures 31
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K 33
Signatures 34
Page 2
Part I. Financial Information
Item 1 - Financial Statements
First Bancorp and Subsidiaries
Consolidated Balance Sheets
September 30, December 31, September 30,
($ in thousands-unaudited) 2003 2002 2002 (a)
======================================================================================================
ASSETS
Cash & due from banks, noninterest-bearing $ 30,671 26,733 24,332
Due from banks, interest-bearing 5,401 30,753 1,343
Federal funds sold 9,478 16,167 15,227
------------- ------------- -------------
Total cash and cash equivalents 45,550 73,653 40,902
------------- ------------- -------------
Securities available for sale (costs of $88,032,
$64,380, and $78,876) 89,480 65,779 80,630
Securities held to maturity (fair values of $15,085,
$15,757, and $15,056) 14,345 14,990 14,114
Presold mortgages in process of settlement 6,224 19,268 5,401
Loans 1,142,900 998,547 983,045
Less: Allowance for loan losses (12,700) (10,907) (10,524)
------------- ------------- -------------
Net loans 1,130,200 987,640 972,521
------------- ------------- -------------
Premises and equipment 23,187 22,239 21,613
Accrued interest receivable 5,230 5,341 5,661
Intangible assets 36,623 25,169 24,444
Other 6,383 4,067 3,589
------------- ------------- -------------
Total assets $ 1,357,222 1,218,146 1,168,875
============= ============= =============
LIABILITIES
Deposits: Demand - noninterest-bearing $ 130,521 112,380 106,521
Savings, NOW, and money market 413,511 387,691 369,670
Time deposits of $100,000 or more 228,906 199,794 188,888
Other time deposits 370,860 356,092 350,239
------------- ------------- -------------
Total deposits 1,143,798 1,055,957 1,015,318
Borrowings 66,000 30,000 23,000
Accrued interest payable 2,140 2,466 2,411
Other liabilities 7,196 5,738 6,017
------------- ------------- -------------
Total liabilities 1,219,134 1,094,161 1,046,746
------------- ------------- -------------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Issued and outstanding: 9,394,301,
9,121,630, and 9,126,019 shares 54,473 48,313 48,557
Retained earnings 82,909 74,920 72,603
Accumulated other comprehensive income 706 752 969
------------- ------------- -------------
Total shareholders' equity 138,088 123,985 122,129
------------- ------------- -------------
Total liabilities and shareholders' equity $ 1,357,222 1,218,146 1,168,875
============= ============= =============
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 Nine Months Ended
September 30, September 30,
------------------ -----------------
($ in thousands, except share data-unaudited) 2003 2002 (a) 2003 2002 (a)
===============================================================================================================
INTEREST INCOME
Interest and fees on loans $ 17,296 17,140 51,554 50,010
Interest on investment securities:
Taxable interest income 910 1,236 2,761 3,977
Tax-exempt interest income 143 172 527 555
Other, principally overnight investments 123 122 651 598
---------- ---------- ---------- ----------
Total interest income 18,472 18,670 55,493 55,140
---------- ---------- ---------- ----------
INTEREST EXPENSE
Savings, NOW and money market 480 943 1,682 2,835
Time deposits of $100,000 or more 1,435 1,621 4,560 5,251
Other time deposits 2,103 2,832 6,888 9,697
Borrowings 413 258 1,306 718
---------- ---------- ---------- ----------
Total interest expense 4,431 5,654 14,436 18,501
---------- ---------- ---------- ----------
Net interest income 14,041 13,016 41,057 36,639
Provision for loan losses 695 575 1,755 1,790
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 13,346 12,441 39,302 34,849
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 1,988 1,733 5,776 5,019
Other service charges, commissions and fees 667 548 2,076 1,758
Fees from presold mortgages 565 359 1,918 1,139
Commissions from sales of insurance and financial products 361 189 956 632
Data processing fees 90 78 242 234
Securities gains (losses) 82 (2) 82 25
Other gains (losses) 49 (16) 87 (20)
---------- ---------- ---------- ----------
Total noninterest income 3,802 2,889 11,137 8,787
---------- ---------- ---------- ----------
NONINTEREST EXPENSES
Salaries 4,437 3,840 13,028 11,147
Employee benefits 1,124 874 3,255 2,726
---------- ---------- ---------- ----------
Total personnel expense 5,561 4,714 16,283 13,873
Net occupancy expense 580 517 1,738 1,545
Equipment related expenses 651 546 1,920 1,537
Intangibles amortization 46 8 137 24
Other operating expenses 2,435 2,348 7,795 6,959
---------- ---------- ---------- ----------
Total noninterest expenses 9,273 8,133 27,873 23,938
---------- ---------- ---------- ----------
Income before income taxes 7,875 7,197 22,566 19,698
Income taxes 2,819 2,538 8,006 6,887
---------- ---------- ---------- ----------
NET INCOME $ 5,056 4,659 14,560 12,811
========== ========== ========== ==========
Earnings per share:
Basic $ 0.54 0.51 1.55 1.40
Diluted 0.53 0.50 1.52 1.37
Weighted average common shares outstanding:
Basic 9,378,865 9,131,922 9,376,581 9,144,704
Diluted 9,560,585 9,314,960 9,555,610 9,331,835
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 Nine Months Ended
September 30, September 30,
------- ------- ------- -------
($ in thousands-unaudited) 2003 2002 (a) 2003 2002 (a)
=============================================================================================
Net income $ 5,056 4,659 14,560 12,811
------- ------- ------- -------
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period, pretax (495) 503 131 755
Tax benefit (expense) 194 (193) (50) (347)
Reclassification to realized losses (gains) (82) 2 (82) (25)
Tax expense (benefit) 32 (1) 32 10
Adjustment to minimum pension liability:
Additional pension charge related to unfunded
pension liability -- -- (127) (165)
Tax benefit -- -- 50 64
------- ------- ------- -------
Other comprehensive income (loss) (351) 311 (46) 292
------- ------- ------- -------
Comprehensive income $ 4,705 4,970 14,514 13,103
======= ======= ======= =======
See notes to consolidated financial statements.
(a) As restated. See Note 2 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 Equity (a)
=======================================================================================================================
Balances, January 1, 2002 9,113 $ 50,134 65,915 677 116,726
Net income (a) 12,811 12,811
Cash dividends declared ($0.67 per share) (6,123) (6,123)
Common stock issued under
stock option plan 135 942 942
Common stock issued into
dividend reinvestment plan 37 867 867
Purchases and retirement of common
stock (159) (3,768) (3,768)
Tax benefit realized from exercise of
nonqualified stock options 382 382
Other comprehensive income 292 292
------------ ------------ ------------ ------------ ------------
Balances, September 30, 2002 (a) 9,126 $ 48,557 72,603 969 122,129
============ ============ ============ ============ ============
Balances, January 1, 2003 9,122 $ 48,313 74,920 752 123,985
Net income 14,560 14,560
Cash dividends declared ($0.70 per share) (6,571) (6,571)
Common stock issued under
stock option plan 112 840 840
Common stock issued into
dividend reinvestment plan 37 933 933
Purchases and retirement of common
stock (210) (5,195) (5,195)
Common stock issued in acquisition 333 9,284 9,284
Tax benefit realized from exercise of
nonqualified stock options 298 298
Other comprehensive loss (46) (46)
------------ ------------ ------------ ------------ ------------
Balances, September 30, 2003 9,394 $ 54,473 82,909 706 138,088
============ ============ ============ ============ ============
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
Nine Months Ended
September 30,
--------------------
($ in thousands-unaudited) 2003 2002 (a)
=====================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,560 12,811
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses 1,755 1,790
Net security premium amortization 282 174
Gain on disposal of other real estate (141) (11)
Gain on sale of securities available for sale (82) (25)
Other losses 54 34
Gain on sale of loans -- (3)
Proceeds from sales of loans -- 42
Loan fees and costs deferred, net of amortization (52) 110
Depreciation of premises and equipment 1,650 1,347
Tax benefit realized from exercise of nonqualified stock options 298 382
Amortization of intangible assets 137 24
Deferred income tax liability (benefit) 449 (728)
Decrease in presold mortgages in process of settlement 13,044 5,312
Decrease in accrued interest receivable 648 219
Decrease (increase) in other assets (1,197) 1,727
Decrease in accrued interest payable (543) (1,069)
Increase (decrease) in other liabilities 473 (3,024)
--------- ---------
Net cash provided by operating activities 31,335 19,112
--------- ---------
z
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (47,345) (9,728)
Purchases of securities held to maturity (236) (2)
Proceeds from maturities/issuer calls of securities available for sale 30,955 25,132
Proceeds from maturities/issuer calls of securities held to maturity 3,638 2,230
Proceeds from sales of securities available for sale 2,876 1,012
Net increase in loans (97,775) (94,014)
Purchases of premises and equipment (1,873) (4,704)
Net cash paid in acquisitions (2,820) --
--------- ---------
Net cash used by investing activities (112,580) (80,074)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 28,980 15,037
Proceeds from borrowings, net 34,000 8,000
Cash dividends paid (6,416) (6,029)
Proceeds from issuance of common stock 1,773 1,809
Purchases and retirement of common stock (5,195) (3,768)
--------- ---------
Net cash provided by financing activities 53,142 15,049
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (28,103) (45,913)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 73,653 86,815
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 45,550 40,902
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 14,979 $ 19,570
Income taxes 6,635 10,936
Non-cash transactions:
Unrealized gain on securities available for sale, net of taxes 31 393
Foreclosed loans transferred to other real estate 477 476
Premises and equipment transferred to other real estate -- 228
Common stock issued in acquisition 9,284 --
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 September 30, 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 September 30, 2003 and 2002 and the consolidated
results of operations and consolidated cash flows for the periods ended
September 30, 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 September 30, 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 September 30, 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 and $1,068,000 in amortization expense that had been
recorded for the three and nine month periods ended September 30, 2002,
respectively, was retroactively reversed by reducing the amortization expense
recognized during those periods and increasing intangible assets by the
aforementioned amounts. The associated income tax expense recorded related to
the reversal of amortization expense amounted to $124,000 and $374,000 for the
three and nine month periods ended September 30, 2002, respectively, resulting
in net income increasing by $232,000 (or $0.02 per diluted share) for the three
months ended September 30, 2002 from its originally reported amount and net
income increasing by $694,000 (or $0.07 per diluted share) for the nine months
ended September 30, 2002 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
Page 8
time they may be renewed for another year if both parties agree. At September
30, 2003, the Company had $2,835,000 in standby letters of credit outstanding.
The adoption of the recognition and measurement provisions of FIN 45 was
immaterial to the Company.
In January 2003, the FASB issued Financial Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 addresses the
consolidation by business enterprises of certain variable interest entities. The
provisions of this interpretation became effective for the Company on January
31, 2003 as it relates to variable interest entities created or purchased after
that date. For variable interest entities created or purchased before January
31, 2003, FIN 46 is effective for the Company begining January 1, 2004. The
adoption of FIN 46 did not have an impact on the Company's financial position or
results of operations. The Company has identified no investments in variable
interest entities that would require consolidation under FIN 46. The application
of Interpretation 46 may result in the de-consolidation of the trust that has
issued the trust preferred capital securities currently reported in the
consolidated financial statements; at this time final interpretation regarding
such application is pending. The trust preferred capital securities are
currently disclosed as long-term borrowings within the consolidated financial
statements. The potential de-consolidation of the trust would instead cause the
disclosure of junior subordinated debentures between the Company and the trust
subsidiary. Currently, the junior subordinated debentures are eliminated in
consolidation, resulting in the disclosure of long-term borrowings. The impact
of this change would not have a material effect on the Company's consolidated
financial statements. Treatment of trust preferred securities within the
Company's capital ratio calculations in light of FIN 46 is pending further
guidance from the banking regulators. If the banking regulators change the
capital treatment for trust preferred securities, the Company's tier 1 and total
capital could be reduced by the amount of outstanding trust preferred
securities, but the Company believes that its capital classifications would not
fall below the level of "adequately" capitalized.
In June 2002 the FASB issued SFAS 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for 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)." The provisions
of this statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
implementation of this statement did not impact the Company's consolidated
financial statements.
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 has furnished the expanded
disclosures in Note 4.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (Statement 149), "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities," which amends and clarifies financial accounting and
reporting for derivative instruments and for hedging activities under Statement
of Financial Accounting Standards No. 133. Adoption of Statement 149 on July 1,
2003 did not have a material effect on the Company's consolidated financial
statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (Statement 150), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", which establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a
Page 9
liability (or an asset in some circumstances). This Statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. It is to be implemented by reporting the cumulative effect of a change
in accounting principle for financial instruments created before the issuance
date of the Statement and still existing at the beginning of the interim period
of adoption. Adoption of Statement 150 on July 1, 2003 did not have a material
effect on the Company's consolidated financial statements.
Note 3 - Reclassifications
Certain amounts reported in the period ended September 30, 2002 have been
reclassified to conform with the presentation for September 30, 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 September 30, 2003, the Company had 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 Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
(In thousands except per share data) 2003 2002 2003 2002
--------- --------- --------- ---------
Net income, as reported $ 5,056 4,659 14,560 12,811
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (51) (40) (261) (209)
--------- --------- --------- ---------
Pro forma net income $ 5,005 4,619 14,299 12,602
========= ========= ========= =========
Earnings per share: Basic - As reported $ 0.54 0.51 1.55 1.40
Basic - Pro forma 0.53 0.51 1.52 1.38
Diluted - As reported 0.53 0.50 1.52 1.37
Diluted - Pro forma 0.52 0.50 1.50 1.35
Page 10
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 September 30,
--------------------------------- -----------------------------------
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 $ 5,056 9,378,865 $ 0.54 $ 4,659 9,131,922 $ 0.51
========= ===========
Effect of Dilutive Securities -- 181,720 -- 183,038
--------- --------- --------- ---------
Diluted EPS $ 5,056 9,560,585 $ 0.53 $ 4,659 9,314,960 $ 0.50
========= ========= ========= ========= ========= ===========
-----------------------------------------------------------------------
For the Nine Months Ended September 30,
--------------------------------- -----------------------------------
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 $ 14,560 9,376,581 $ 1.55 $ 12,811 9,144,704 $ 1.40
========= ===========
Effect of Dilutive Securities -- 179,029 -- 187,131
--------- --------- --------- ---------
Diluted EPS $ 14,560 9,555,610 $ 1.52 $ 12,811 9,331,835 $ 1.37
========= ========= ========= ========= ========= ===========
For the three months and nine months ended September 30, 2003 and the
three months ended September 30, 2002, there were no antidilutive options, as
exercise prices for all options were equal to or less than the average market
price for the period. For the nine month ended September 30, 2002, there were
24,000 options that were antidilutive since the exercise price exceeded the
average market price for their respective periods. Antidilutive options have
been omitted from the calculation of diluted earnings per share for the
respective periods.
Page 11
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:
September 30, December 31, September 30,
($ in thousands) 2003 2002 2002
=============================================================================================
Nonperforming loans:
Nonaccrual loans $ 4,343 2,976 3,009
Restructured loans 21 41 73
Accruing loans > 90 days past due -- -- --
-------------- -------------- --------------
Total nonperforming loans 4,364 3,017 3,082
Other real estate 929 1,384 1,277
-------------- -------------- --------------
Total nonperforming assets $ 5,293 4,401 4,359
============== ============== ==============
Nonperforming loans to total loans 0.38% 0.30% 0.31%
Nonperforming assets as a percentage of
loans and other real estate 0.46% 0.44% 0.44%
Nonperforming assets to total assets 0.39% 0.36% 0.37%
Allowance for loan losses to total loans 1.11% 1.09% 1.07%
Note 7 - Deferred Loan Fees
Loans are shown on the Consolidated Balance Sheets net of net deferred
loan fees of approximately $651,000, $702,000, and $768,000 at September 30,
2003, December 31, 2002, and September 30, 2002, respectively.
Note 8 - Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated
amortization of amortized intangible assets as of September 30, 2003, December
31, 2002, and September 30, 2002 and the carrying amount of unamortized
intangible assets as of those same dates. The amounts shown for September 30,
2002 include the effects of the restatement of the interim financial statements
in 2002 that is discussed in Note 2 above.
September 30, 2003 December 31, 2002 September 30, 2002
------------------------------- ------------------------------- -------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated Gross Carrying Accumulated
($ in thousands) Amount Amortization Amount Amortization Amount Amortization
- ----------------------------- --------------- --------------- --------------- --------------- --------------- --------------
Amortized intangible assets:
Customer lists $ 394 47 243 23 243 19
Noncompete agreements 50 18 -- -- -- --
Core deposit premiums 1,106 356 335 261 335 257
-------------- -------------- -------------- -------------- -------------- --------------
Total $ 1,550 421 578 284 578 276
============== ============== ============== ============== ============== ==============
Unamortized intangible
assets:
Goodwill $ 35,401 24,658 23,926
============== ============== ==============
Pension $ 93 217 217
============== ============== ==============
Amortization expense totaled $46,000 and $8,000 for the three months ended
September 30, 2003 and 2002, respectively. Amortization expense totaled $137,000
and $24,000 for the nine months ended September 30, 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 and includes the amortization expense associated with the
2003 acquisitions completed on or before September 30, 2003 discussed in Note 10
below.
Page 12
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. Accumulated Other Comprehensive Income
Shareholders' equity includes a line item entitled "Accumulated Other
Comprehensive Income," which is comprised of the following components:
September 30, December 31, September 30,
2003 2002 2002
------------- ------------ -------------
Unrealized gain on securities available for sale $ 1,448 1,399 1,754
Deferred tax liability (564) (546) (684)
------------- ------------ -------------
Net unrealized gain on securities available for sale 884 853 1,070
------------- ------------ -------------
Additional minimum pension liability (292) (165) (165)
Deferred tax asset 114 64 64
------------- ------------ -------------
Net additional minimum pension liability (178) (101) (101)
------------- ------------ -------------
Total accumulated other comprehensive income $ 706 752 969
============= ============ =============
Note 10 - Completed Acquisitions
The Company completed the following acquisitions during 2003. The results
of each acquired company are included in First Bancorp's results for the period
ended September 30, 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 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:
Page 13
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 $25.22, which was the average price of
Company stock during the five day period beginning two days before the
acquisition announcement and ending two days after the acquisition announcement.
The value of the employee stock options assumed was determined using the
Black-Scholes option-pricing model.
This acquisition has been accounted for using the purchase method of
accounting for business combinations, and accordingly, the assets and
liabilities of CCB were recorded based on estimates of fair values as of January
15, 2003, subject to possible adjustment during the one-year period from that
date. The following is a condensed balance sheet disclosing the amount assigned
to each major asset and liability caption of CCB as of January 15, 2003, and the
related fair value adjustments recorded by the Company to reflect the
acquisition. It is not expected that any portion of the intangible assets
recorded will be deductible for income tax purposes.
Page 14
As Fair As
($ in thousands) Recorded by Value Recorded by
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 1,270
-------------
Total cost of acquisition 18,876
-------------
Goodwill recorded through September 30, 2003 $ 10,400
=============
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.
Page 15
The following unaudited pro forma financial information presents the
combined results of the Company and 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 took place on January 15, 2003, pro forma
results for 2003 are not provided.
Three Months Ended Nine Months Ended
($ in thousands, except share data) September 30, 2002 September 30, 2002
------------------ ------------------
Net interest income $ 13,732 38,729
Noninterest income 3,083 9,342
Net income 4,904 13,479
Earnings per share
Basic 0.52 1.42
Diluted 0.51 1.39
Note 11 - Acquisition Completed Subsequent to Period End
On October 24, 2003, the Company completed the acquisition of four branches
of RBC Centura Bank located in Fairmont, Harmony, Kenansville, and Wallace, all
in North Carolina. As of the date of the acquisition, the branches had a total
of approximately $102 million in deposits and $25 million in loans. The terms of
the agreement called for the Company to acquire the premises and equipment for
each location, as well as assume substantially all of the deposits and loans of
each branch. Subject to certain limitations, the Company paid a deposit premium
of 14.1% for the branches, which resulted in the Company recording an intangible
asset of approximately $14 million. Based on a consultant's study being
performed in the fourth quarter of 2003, a portion of this intangible will be
classified as core deposit intangible and amortized in future periods, while the
remainder will be classified as goodwill. In accordance with Statement 147
discussed in Note 2 above, the goodwill portion will not be systematically
amortized, but rather will be subject to an annual impairment test.
Page 16
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" below.
CURRENT ACCOUNTING MATTERS
See Note 2 to the Consolidated Financial Statements above.
Page 17
RESULTS OF OPERATIONS
OVERVIEW
In the discussion below and the financial statements above, amounts as of
and for the three and nine month periods ended September 30, 2002 have been
restated from their originally reported amounts in accordance with the adoption
of a new accounting standard - see Note 2 to the consolidated financial
statements above.
Net income for the three months ended September 30, 2003 was $5,056,000,
or $0.53 per diluted share, a 6.0% increase in diluted earnings per share over
the net income of $4,659,000, or $0.50 per diluted share, recorded in the third
quarter of 2002. Net income for the nine months ended September 30, 2003
amounted to $14,560,000, or $1.52 per diluted share, a 10.9% increase in diluted
earnings per share over the net income of $12,811,000, or $1.37 per diluted
share, reported for the nine months ended September 30, 2002.
The increase in the Company's earnings in 2003 compared to 2002 was
primarily due to the Company's overall growth, which included an increase in
loans of 16.3% and an increase in deposits of 12.7% when comparing September 30,
2003 to September 30, 2002. The Company's growth resulted in increases in net
interest income and noninterest income, the positive benefits of which were
partially offset by higher operating expenses that were also associated with the
Company's growth.
The Company's net interest margin of 4.52% for the third quarter of 2003
was slightly lower that the 4.78% net interest margin realized in the third
quarter of 2002, with the decrease being caused primarily by the effects of the
interest rate cuts initiated by the Federal Reserve subsequent to September 30,
2002. The Company's net interest margin for the nine months ended September 30,
2003 and 2002 did not vary significantly, amounting to 4.54% and 4.59%,
respectively.
The provisions for loan losses recorded by the Company for the nine month
periods ended September 30, 2003 and 2002 were virtually the same, amounting to
approximately $1.8 million for each nine month period. The provision for loan
losses of $695,000 for the third quarter of 2003 was slightly higher than the
provision for loan losses for the third quarter of 2002 of $575,000 due to
higher loan growth.
The Company's asset quality ratios have remained sound in 2003. For the
three and nine months ended September 30, 2003, annualized net charge-offs as a
percentage of average loans amounted to 8 basis points and 9 basis points,
respectively, compared to 9 basis points for each of the comparable periods in
2002. The Company's nonperforming assets to total assets ratio of 0.39% at
September 30, 2003 is slightly higher than the same ratio of 0.37% a year
earlier, but remains significantly lower than a June 30, 2003 North Carolina
state bank average of 0.60%.
The Company's annualized return on average assets for the third quarter of
2003 was 1.50% compared to 1.59% for the third quarter of 2002. The Company's
annualized return on average assets for the nine months ended September 30, 2003
and September 30, 2002 were each 1.49%.
The Company's annualized return on average equity for the third quarter of
2003 was 14.57% compared to 15.31% for the third quarter of 2002. The Company's
annualized return on average equity for the nine months ended September 30, 2003
was 14.33% compared to 14.29% for the first nine months of 2002.
As discussed in the next two paragraphs, the Company completed two
acquisitions during the first nine months of 2003. The results of each acquired
company are included in First Bancorp's 2003 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
Page 18
5,000 customers in Montgomery and neighboring counties. Uwharrie Insurance 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.
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 and nine month periods ended September 30, 2003
amounted to $14,041,000 and $41,057,000, respectively, increases of $1,025,000
and $4,418,000, or 7.9% and 12.1%, over the amounts of $13,016,000 and
$36,639,000 recorded in the same three and nine month periods in 2002,
respectively.
There are two primary factors that cause changes in the amount of net
interest income recorded by the Company - 1) growth in loans and deposits, and
2) the Company's net interest margin. For the three and nine months ended
September 30, 2003, growth in loans and deposits caused the increase in net
interest income, as the Company's net interest margin was slightly lower for the
three and nine month periods ended September 30, 2003 compared to the same
periods in 2002.
The following tables analyze net interest income on a taxable-equivalent
basis:
For the Three Months Ended September 30,
-------------------------------------------------------------------------------
2003 2002
-------------------------------------- -------------------------------------
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
---------- ---------- ---------- ---------- ---------- ----------
Assets
Loans (1) $1,127,947 6.08% $ 17,296 $ 979,489 6.94% $ 17,140
Taxable securities 78,753 4.58% 910 82,822 5.92% 1,236
Non-taxable securities (2) 13,215 7.87% 262 13,930 8.52% 299
Short-term investments,
principally federal funds 23,280 2.10% 123 14,878 3.25% 122
---------- ---------- ---------- ----------
Total interest-earning assets 1,243,195 5.93% 18,591 1,091,119 6.83% 18,797
Liabilities
Savings, NOW and money
market deposits $ 410,729 0.46% $ 480 370,519 1.01% 943
Time deposits >$100,000 231,722 2.46% 1,435 181,422 3.54% 1,621
Other time deposits 372,427 2.24% 2,103 348,301 3.23% 2,832
---------- ---------- ---------- ----------
Total interest-bearing deposits 1,014,878 1.57% 4,018 900,242 2.38% 5,396
Borrowings 42,480 3.86% 413 28,430 3.60% 258
---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,057,358 1.66% 4,431 928,672 2.42% 5,654
---------- ----------
Non-interest-bearing deposits 131,805 102,519
Net yield on interest-earning
assets and net interest income 4.52% $ 14,160 4.78% $ 13,143
========== ==========
Interest rate spread 4.27% 4.41%
Average prime rate 4.00% 4.75%
(1) Average loans include nonaccruing loans, the effect of which is to lower
the average rate shown.
Page 19
(2) Includes tax-equivalent adjustments of $119,000 and $127,000 in 2003 and
2002, respectively, to reflect the tax benefit that the Company receives
related to its tax-exempt securities, which carry interest rates lower
than similar taxable investments due to their tax exempt status. This
amount has been computed assuming a 35% tax rate and is reduced by the
related nondeductible portion of interest expense.
For the Nine Months Ended September 30,
-------------------------------------------------------------------------------
2003 2002
-------------------------------------- -------------------------------------
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
---------- ---------- ---------- ---------- ---------- ----------
Assets
Loans (1) $1,088,553 6.33% $ 51,554 $ 943,017 7.09% $ 50,010
Taxable securities 75,874 4.87% 2,761 88,102 6.04% 3,977
Non-taxable securities (2) 14,680 8.38% 920 15,118 8.48% 959
Short-term investments,
principally federal funds 40,253 2.16% 651 31,730 2.52% 598
---------- ---------- ---------- ----------
Total interest-earning assets 1,219,360 6.13% 55,886 1,077,967 6.89% 55,544
---------- ----------
Liabilities
Savings, NOW and money
market deposits $ 403,327 0.56% $ 1,682 365,151 1.04% 2,835
Time deposits >$100,000 228,039 2.67% 4,560 182,772 3.84% 5,251
Other time deposits 375,016 2.46% 6,888 352,217 3.68% 9,697
---------- ---------- ---------- ----------
Total interest-bearing deposits 1,006,382 1.74% 13,130 900,140 2.64% 17,783
Borrowings 35,955 4.86% 1,306 19,458 4.93% 718
---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,042,337 1.85% 14,436 919,598 2.69% 18,501
---------- ----------
Non-interest-bearing deposits 124,393 100,824
Net yield on interest-earning
assets and net interest income 4.54% $ 41,450 4.59% $ 37,043
========== ==========
Interest rate spread 4.28% 4.20%
Average prime rate 4.16% 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 $393,000 and $404,000 in 2003 and
2002, respectively, to reflect the tax benefit that the Company receives
related to its tax-exempt securities, which carry interest rates lower
than similar taxable investments due to their tax exempt status. This
amount has been computed assuming a 35% tax rate and is reduced by the
related nondeductible portion of interest expense.
Average loans outstanding for the third quarter of 2003 were $1.128
billion, which was 15.2% higher than the average loans outstanding for the third
quarter of 2002 ($979 million). Average loans outstanding for the nine months
ended September 30, 2003 were $1.089 billion, which was 15.4% higher than the
average loans outstanding for the nine months ended June 30, 2002 ($943
million).
Average deposits outstanding for the third quarter of 2003 were $1.147
billion, which was 14.4% higher than the average deposits outstanding for the
third quarter of 2002 ($1.003 billion). Average deposits outstanding for the
nine months ended September 30, 2003 were $1.131 billion, which was 13.0% higher
than the average deposits outstanding for the nine months ended September 30,
2002 ($1.001 billion).
The increases in the average loans and deposits in 2003 compared to 2002
were a result of both internally generated growth as well as growth realized
from acquisitions. See additional discussion regarding the nature of the growth
in loans and deposits in the section entitled "Financial Condition" below. The
effect of the higher amounts of average loans and deposits was to increase net
interest income in 2003.
The positive impact on net interest income of the increases in loans and
deposits more than offset the effects of the slightly lower net interest margins
realized in 2003 compared to 2002. The Company's 4.52% net interest margin
(tax-equivalent net interest income divided by average earning assets) for the
third quarter of 2003 was within 7 basis points of the net interest margin
recorded in each of the three preceding quarters, but was less than
Page 20
the 4.78% net interest margin recorded in the third quarter of 2002. The
decrease in the net interest margin was caused primarily by the negative impact
of the interest rate cuts initiated by the Federal Reserve subsequent to
September 30, 2002. Generally, when rates change, net interest income is
negatively impacted (at least temporarily) because the Company's
interest-sensitive assets that are subject to adjustment (primarily adjustable
rate loans) reprice immediately at the full amount of the rate change, while the
Company's interest-sensitive liabilities (primarily savings, NOW and money
market accounts and time deposits) 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 Company's net interest margin for the nine months ended September 30, 2003
and 2002 did not differ significantly, amounting to 4.54% and 4.59%,
respectively. See additional discussion regarding the Company's net interest
margin and the impact that recent interest rate cuts have had on it in Item 3
below entitled - INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK).
Asset quality ratios, including net charge-offs, have remained fairly
stable in 2003 compared to 2002. The primary cause for differences in the
provision for loan losses in 2003 compared to 2002 has been the amount of loan
growth experienced by the Company. In the third quarter of 2003, net internal
loan growth ("internal loan growth" excludes loans assumed in acquisitions for
which preestablished reserves have been recorded) amounted to $34 million
compared to $14 million in the third quarter of 2002, which was largely
responsible for the Company recording a higher provision for loan losses in 2003
($695,000) compared to the same quarter in 2002 ($575,000). The provision for
loan losses for the nine months ended September 30, 2003 and 2002 did not vary
significantly, amounting to $1,755,00 and $1,790,000, respectively, with
internal net loan growth of approximately $95 million for each nine month
period.
Noninterest income for the three and nine month periods ended September
30, 2003 amounted to $3,802,000 and $11,137,000, respectively, increases of
31.6% and 26.7% over the amounts recorded in the same three and nine month
periods in 2002.
The primary factors affecting the increase in noninterest income were -1)
internal growth in the Company's business - for the twelve months ended
September 30, 2003, excluding the Company's CCB acquisition, loans increased 11%
and deposits increased 6%, which have provided the Company with fee income
opportunities, 2) the CCB acquisition - CCB has contributed approximately
$180,000 in each of the first three quarters of 2003 in noninterest income
(primarily service charges on deposit accounts), and 3) as a result of the high
refinancing activity driven by the very low interest rate environment, fees that
the Company earns from mortgage loans presold into the secondary market amounted
to $565,000 and $1,918,000 for the three and nine months ended September 30,
2003, respectively, increases of 57% and 68%, respectively, over the amounts
recorded in the three and nine months ended September 30, 2002, respectively.
The $565,000 in fees from presold mortgages recorded in the third quarter of
2003 was a decrease from $651,000 recorded in the second quarter of 2003. The
decrease in these fees is primarily a result of the increase in mortgage
interest rates that occurred subsequent to June 30, 2003. With the additional
increases in mortgage loan rates that occurred in September and October 2003,
the Company believes it is likely that these fees will continue to decrease on a
linked-quarter basis.
Also contributing to the increases in noninterest income in 2003 were
higher amounts of commissions from sales of insurance and financial products.
This line item includes commissions the Company receives from three sources - 1)
sales of credit insurance associated with new loans, 2) commissions from the
sales of investment, annuity, and long-term care insurance products, and 3)
commissions from the sale of property and casualty insurance. The following
table presents these components for the three month and nine month periods ended
September 30, 2003 compared to the same periods in 2002:
Page 21
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- --------------------------------------
($ in thousands) 2003 2002 $ Change % Change 2003 2002 $ Change % Change
----- -------- ---------- -------- ------ ------- --------- ---------
Commissions earned from:
Sales of credit insurance $ 73 66 7 10.6% $ 221 305 (84) (27.5)%
Sales of investments,
annuities, and long term
care insurance 68 65 3 4.6% 190 177 13 7.3%
Sales of property and
casualty insurance 220 58 162 279.3% 545 150 395 245.0%
----- ----- ----- ----- ----- ----- ----- -----
Total $ 361 189 172 91.0% $ 956 632 324 51.3%
===== ===== ===== ===== ===== ===== ===== =====
The decrease in commissions earned from sales from credit insurance for
the nine months ended September 30, 2003 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 for
which the Company acts as an agent. The experience bonus can fluctuate depending
on the actual loss experience that the insurance companies experience related to
the Company's customers. The increase in commissions from sales of investments,
annuities, and long term care insurance for both the three and nine month
periods in 2003 compared to 2002 is primarily due to the hiring of an additional
staff person in this area. 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 10 to the
consolidated financial statements above.
Miscellaneous components of noninterest income, including securities gains
and "other" gains/losses (comprised primarily of sales of other real estate),
were higher in 2003 than in 2002, contributing approximately $0.01 of diluted
earnings per share to the Company's reported earnings in the three and nine
months ended September 30, 2003. For the same three and nine month periods in
2002, there was no impact to diluted earnings per share from the net effect of
these two components of noninterest income.
Noninterest expenses for the three and nine months ended September 30,
2003 amounted to $9,273,000 and $27,873,000, respectively, increases of 14.0%
and 16.4% from the amounts recorded in the same three and nine month periods in
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 have
resulted in incremental noninterest expense of approximately $600,000 per
quarter. 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 $2,819,000 in the third quarter of 2003
compared to $2,538,000 in the third quarter of 2002, an increase of 11.1%. The
provision for income taxes for the nine months ended September 30, 2003 amounted
to $8,006,000 compared to $6,887,000 for the first nine months of 2002. The
effective tax rates did not vary significantly among the periods presented,
amounting to approximately 35-36% in each period. In the normal course of
business, the Company carries out various tax planning initiatives in order to
control its effective tax rate.
FINANCIAL CONDITION
Total assets at September 30, 2003 amounted to $1.357 billion, 16.1%
higher than a year earlier. Total loans at September 30, 2003 amounted to $1.143
billion, a 16.3% increase from a year earlier, and total deposits amounted to
$1.144 billion at September 30, 2003, a 12.7% increase from a year earlier. In
addition to internal growth, 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
Page 22
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 $8.4 million in deposits.
The following tables present information regarding the nature of the
Company's growth since September 30, 2002.
Balance at Balance at Total Percentage growth,
October 1, 2002 to beginning Internal Growth from end of percentage excluding
September 30, 2003 of period Growth Acquisitions period growth acquisitions
------------ ------------ -------------- ------------- -------------- --------------------
($ in thousands)
Loans $ 983,045 109,056 50,799 1,142,900 16.3% 11.1%
=========== ========== =========== ============ ========= ============
Deposits - Noninterest bearing $ 106,521 13,573 10,427 130,521 22.5% 12.7%
Deposits - Savings, NOW, and
Money Market 369,670 25,584 18,257 413,511 11.9% 6.9%
Deposits - Time>$100,000 188,888 27,452 12,566 228,906 21.2% 14.5%
Deposits - Time<$100,000 350,239 (5,431) 26,052 370,860 5.9% (1.6)%
----------- ---------- ----------- ------------ --------- ------------
Total deposits $ 1,015,318 61,178 67,302 1,143,798 12.7% 6.0%
=========== ========== =========== ============ ========= ============
January 1, 2003 to
September 30, 2003
Loans $ 998,547 96,637 47,716 1,142,900 14.5% 9.7%
=========== ========== =========== ============ ========= ============
Deposits - Noninterest bearing $ 112,380 9,364 8,777 130,521 16.1% 8.3%
Deposits - Savings, NOW, and
Money Market 387,691 10,885 14,935 413,511 6.7% 2.8%
Deposits - Time>$100,000 199,794 16,546 12,566 228,906 14.6% 8.3%
Deposits - Time<$100,000 356,092 (7,815) 22,583 370,860 4.1% (2.2%)
----------- ---------- ----------- ------------ --------- ------------
Total deposits $ 1,055,957 28,980 58,861 1,143,798 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 11.1% and 6.0%
respectively, with the growth assumed in acquisitions increasing the overall
growth in loans to 16.3% and deposits to 12.7%. As can be seen in the second
table, the Company experienced internal growth of 9.7% in loans (12.9%
annualized) and 2.7% in deposits (3.6% annualized) during the first nine months
of 2003. The CCB acquisition increased overall loan and deposit growth by 5%-6%.
The very low interest rate environment over the past twelve months has
encouraged customers to borrow money at low rates, while the low rates have
presented a challenge to attracting deposits, particularly consumer time
deposits.
Page 23
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:
September 30, December 31, September 30,
($ in thousands) 2003 2002 2002
------------ ------------ ------------
Nonperforming loans:
Nonaccrual loans $ 4,343 2,976 3,009
Restructured loans 21 41 73
Accruing loans > 90 days past due -- -- --
------------ ------------ ------------
Total nonperforming loans 4,364 3,017 3,082
Other real estate 929 1,384 1,277
------------ ------------ ------------
Total nonperforming assets $ 5,293 4,401 4,359
============ ============ ============
Nonperforming loans to total loans 0.38% 0.30% 0.31%
Nonperforming assets as a percentage of
loans and other real estate 0.46% 0.44% 0.44%
Nonperforming assets to total assets 0.39% 0.36% 0.37%
Allowance for loan losses to total loans 1.11% 1.09% 1.07%
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 increased in 2003, amounting to $4.3
million at September 30, 2003, compared to $3.0 million at December 31, 2002 and
September 30, 2002. The primary reason for the increase is due to the Company
placing four loans on nonaccrual status during the second quarter of 2003, each
with an outstanding balance of between $110,000 and $340,000. Each loan is
secured by a single family residence, and the Company does not anticipate
significant losses on any of the loans.
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 $664,000, $1.0 million, and $1.2 million as of September 30,
2003, December 31, 2002, and September 30, 2002, respectively. The borrower of
this credit, which is secured by real estate, has liquidity problems. During the
last three months of 2002, the borrower sold several pieces of the real estate
collateral that provided $200,000 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 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 occur, the
Company charged-off the $250,000 specific reserve that had been established,
resulting in a $750,000 balance. During the third quarter of 2003, the borrower
sold a piece of real estate, the net proceeds of which were used to pay down the
principal balance by $86,000. The Company continues to expect that the payment
associated with the nonbinding proposal discussed above will be received (net of
the $86,000 in paydowns), but delays have occurred relating to how the third
party wishes to legally structure the transaction, and therefore the Company
does not know when the payment will be received.
The recorded investment in loans considered to be impaired under FASB
Statement 114 did not vary significantly among the periods presented, amounting
to $1,571,000, $1,431,000, and $1,564,000 at September 30, 2003, December 31,
2002, and September 30, 2002, 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 large credit noted above
Page 24
that is on nonaccrual status. At September 30, 2003, December 31, 2002, and
September 30, 2002, the related allowance for loan losses for all impaired loans
was $331,000 (five of the seven impaired loans totaling $889,000 at September
30, 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 $120,000 (related
to two loans with a balance of $1,209,000, with the remainder of impaired loans
having no valuation allowance), respectively. The average recorded investments
in impaired loans during the nine month period ended September 30, 2003, the
year ended December 31, 2002, and the nine months ended September 30, 2002 were
approximately $1,625,000, $1,882,000, and $1,919,000, 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 September 30, 2003, December 31, 2002 and September 30, 2002, the
amount of the Company's other real estate amounted to $929,000, $1,384,000, and
$1,277,000, respectively, which consisted principally of several parcels of real
estate. The primary reason for the decrease in other real estate from December
31, 2002 to September 30, 2003 was the sale of a piece of undeveloped land with
a book value of $210,000, which resulted in a gain of $80,000. 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.
Asset quality ratios, including net charge-offs, have remained fairly
stable in 2003 compared to 2002. The primary cause of any differences in the
provision for loan losses in 2003 compared to 2002 has been the amount of loan
growth experienced by the Company. In the third quarter of 2003, net internal
loan growth ("internal loan growth" excludes loans assumed in acquisitions for
which preestablished reserves have been recorded) amounted to $34 million
compared to $14 million in the third quarter of 2002, which was largely
responsible for the Company recording a higher provision for loan losses in 2003
($695,000) compared to the same quarter in 2002 ($575,000). The provision for
loan losses for the nine months ended September 30, 2003 and 2002 did not differ
significantly, amounting to $1,755,00 and $1,790,000, respectively, with the
Company experiencing net internal loan growth of approximately $95 million for
each nine month period.
At September 30, 2003, the allowance for loan losses amounted to
$12,700,000, compared to $10,907,000 at December 31, 2002 and $10,524,000 at
September 30, 2002. The allowance for loan losses was 1.11%, 1.09% and 1.07% of
total loans as of September 30, 2003, December 31, 2002, and September 30, 2002,
respectively. The slight increase in the allowance for loan losses since
December 31, 2002 is primarily the result of the CCB acquisition (see note 10 to
the Consolidated Financial Statements for a description of recently completed
acquisitions). 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
September 30, 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 the refinanced loans in
the
Page 25
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.
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.
Nine Months Year Nine Months
Ended Ended Ended
September 30, December 31, September 30,
($ in thousands) 2003 2002 2002
------------- ------------ -------------
Loans outstanding at end of period $ 1,142,900 998,547 983,045
============= ============ =============
Average amount of loans outstanding $ 1,088,553 954,885 943,017
============= ============ =============
Allowance for loan losses, at
beginning of period $ 10,907 9,388 $ 9,388
Total charge-offs (904) (1,211) (761)
Total recoveries 191 135 107
------------- ------------ -------------
Net charge-offs (713) (1,076) (654)
------------- ------------ -------------
Additions to the allowance charged to expense 1,755 2,545 1,790
------------- ------------ -------------
Addition related to loans assumed in corporate acquisitions 751 50 --
------------- ------------ -------------
Allowance for loan losses, at end of period $ 12,700 10,907 $ 10,524
============= ============ =============
Ratios:
Net charge-offs (annualized) as a percent of average loans 0.09% 0.11% 0.09%
Allowance for loan losses as a
percent of loans at end of period 1.11% 1.09% 1.07%
Based on the results of the Company's loan analysis and grading program
and management's evaluation of the allowance for loan losses at September 30,
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.
Page 26
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 $173 million line of credit with the Federal Home Loan Bank (of
which $46 million has been drawn), 2) a $50 million overnight federal funds line
of credit with a correspondent bank (none of which was outstanding at September
30, 2003), and 3) an approximately $55 million line of credit through the
Federal Reserve Bank of Richmond's discount window (none of which was
outstanding at September 30, 2003).
The Company's liquidity lessened slightly from December 31, 2002 to
September 30, 2003, as loan growth exceeded deposit growth in the first nine
months of 2003. The Company's loan to deposit ratio was 99.9% at September 30,
2003 compared to 94.6% at December 31, 2002. As a result of the lower amount of
deposit growth compared to loan growth, the Company funded a portion of its 2003
loan growth with borrowed funds which resulted in the Company's borrowings
outstanding amounting to $66 million at September 30, 2003 compared to $30
million 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 12.9% at September 30, 2003 compared to 16.0% at December 31, 2002.
The Company's liquidity improved subsequent to September 30, 2003 upon the
October 24, 2003 completion of a purchase from RBC Centura Bank ("RBC") of four
branches with approximately $25 million in loans and $102 million in deposits -
see note 11 to the Consolidated Financial Statements. The completion of this
purchase resulted in a net cash payment of approximately $61 million being
received by the Company from RBC. As a result of this branch purchase
transaction, the Company's pro forma loan to deposit ratio decreased to 93.7%
and the level of liquid assets as a percentage of deposits and borrowings
increased to 16.5%.
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.
Derivative financial instruments include futures, forwards, interest rate
swaps, options contracts, and other financial instruments with similar
characteristics. The Company does not engage in these types of 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
Page 27
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.
At September 30, 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.
September 30, December 31, September 30,
2003 2002 2002
------------- ------------ -------------
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets 11.38% 12.68% 10.77%
Minimum required Tier I capital 4.00% 4.00% 4.00%
Total risk-based capital to
Tier II risk-adjusted assets 12.42% 13.69% 11.80%
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 9.33% 10.09% 8.53%
Minimum required Tier I leverage capital 4.00% 4.00% 4.00%
After increasing in the fourth quarter of 2002 as a result of issuing $20
million in trust preferred securities in October 2002, the Company's capital
ratios declined in 2003 primarily as a result of the acquisition of CCB (see
Note 11 to the Consolidated Financial Statements).
As a result of the RBC branch acquisition discussed above in note 11 to
the Consolidated Financial Statements, each of the Company's capital ratios
noted above decreased by 150-200 basis points subsequent to September 30, 2003.
To partially offset the decrease in these ratios, the Company plans to issue an
additional $20 million in trust preferred securities in December 2003, the pro
forma effects of which would result in the total risk based capital ratio to
tier II risk-adjusted assets ratio decreasing by only 14 basis points and the
other two ratios decreasing by only 110 basis points.
The Company's bank subsidiary is also subject to similar capital
requirements as those discussed above. The bank subsidiary's capital ratios do
not vary materially from the Company's capital ratios presented above. At
Page 28
September 30, 2003, the Company's bank subsidiary exceeded the minimum ratios
established by the FED and FDIC.
SHARE REPURCHASES
During the third quarter of 2003, the Company repurchased 8,666 shares of
its own common stock at an average price of $26.01 per share. For the nine
months ended September 30, 2003, the Company repurchased 209,380 shares of its
own common stock at an average price of $24.83 per share. At September 30, 2003,
the Company had approximately 161,000 shares available for repurchase under
existing authority from its board of directors. The Company plans to 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 Company's 4.52% net interest margin (tax-equivalent net interest
income divided by average earning assets) for the third quarter of 2003 was
within 7 basis points of the net interest margin recorded in each of the three
preceding quarters, but was less than the 4.78% net interest margin recorded in
the third quarter of 2002. The decrease in the net interest margin was caused
primarily by the negative impact of two interest rate cuts totaling 50 basis
points initiated by the Federal Reserve subsequent to September 30, 2002 - as
discussed below, at least in the short-term, the Company's net interest margin
is negatively impacted by rate decreases. The Company's net interest margins for
the nine months ended September 30, 2003 and 2002 did not differ significantly,
amounting to 4.54% and 4.59%, respectively - both nine month periods were
affected by recent interest rate cuts. See "Components of Earnings" above for
additional discussion regarding variances in the Company's net interest margin.
For each of the periods presented in this report, although the Company has
had more interest-sensitive liabilities than interest-sensitive assets subject
to repricing within twelve months, the Company's interest-sensitive assets have
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 assets are its interest-bearing cash, maturing investments,
and adjustable rate loans (which are typically 45%-50% of the Company's total
loan portfolio), while its primary interest-sensitive liabilities consist 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 that have occurred in recent years, it has not
Page 29
been 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 has
not been able in recent years to decrease rates on renewing time deposits by the
corresponding decreases in the Federal Reserve discount rate because of
competitive pressures in the Company's market.
Thus, the Company believes that in the near term (twelve months), net
interest income would not likely experience significant downward pressure from
rising interest rates. Similarly, management would not expect a significant
increase in near term net interest income from falling interest rates (In fact,
it has been the Company's experience that each interest rate cut occurring
during the past three years has negatively impacted (at least temporarily) the
Company's net interest margin). Generally, as discussed above, when rates
change, the Company's interest-sensitive assets that are subject to adjustment
reprice immediately at the full amount of the change, while the Company's
interest-sensitive liabilities that are subject to adjustment reprice at a lag
to the rate change and typically not to the full extent of the rate change. The
net effect is that in the twelve month horizon, as rates change, the impact of
having a higher level of interest-sensitive liabilities is substantially negated
by the later and typically lower proportionate change these liabilities
experience compared to interest sensitive assets. However, recent rate cuts,
particularly the two rate cuts totaling 50 basis points that have occurred since
September 30, 2002, may have a more pronounced and a longer lasting negative
impact on the Company's net interest margin than previous rate cuts because of
the inability of the Company to reset deposit rates by an amount (because of
their already near-zero rates) that would offset the negative impact of the rate
cut on the yields earned on the Company's interest earning assets.
Page 30
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions. The following
table presents the expected maturities of the Company's other than trading
market risk sensitive financial instruments. The following table also presents
the fair values of market risk sensitive instruments as estimated in accordance
with Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments."
Expected Maturities of Market Sensitive
Instruments Held at September 30, 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 $ 5,401 -- -- -- -- -- 5,401 0.97% $ 5,401
Federal funds sold 9,478 -- -- -- -- -- 9,478 0.97% 9,478
Presold mortgages in 6,224 -- -- -- -- -- 6,224 5.25% 6,224
process of settlement
Debt securities- at
amortized cost (1) (2) 30,274 15,028 14,164 9,131 2,488 25,544 96,629 4.97% 98,817
Loans - fixed (3) (4) 89,600 68,686 84,480 98,655 98,065 67,846 507,332 7.13% 516,642
Loans - adjustable (3) (4) 204,817 65,768 59,943 64,994 116,192 119,511 631,225 4.88% 631,604
-------- ------- ------- ------- ------- ------- --------- -------- ----------
Total $345,794 149,482 158,587 172,780 216,745 212,901 1,256,289 5.74% $1,268,166
======== ======= ======= ======= ======= ======= ========= ======== ==========
Savings, NOW, and
money market
deposits $413,511 -- -- -- -- -- 413,511 0.47% $ 413,511
Time deposits 508,128 46,225 11,020 16,691 16,271 1,431 599,766 2.44% 602,010
Borrowings - fixed (2) -- 1,000 2,000 2,000 1,000 5,000 11,000 4.23% 11,544
Borrowings - adjustable 35,000 -- -- -- -- 20,000 55,000 2.49% 55,000
-------- ------- ------- ------- ------- ------- --------- -------- ----------
Total $956,639 47,225 13,020 18,691 17,271 26,431 1,079,277 1.57% $1,082,065
======== ======= ======= ======= ======= ======= ========= ======== ==========
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 35%
tax rate.
(2) Callable securities and borrowings with above market interest rates at
September 30, 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 September 30,
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
(a) The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
as of September 30, 2003, and they have concluded that these controls and
procedures are effective.
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(b) There were no changes in the Company's internal control over financial
reporting that occurred during the quarter ended September 30, 2003 that have
materially affected, or are reasonably likely to materially affect the Company's
internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
Part I of this report contains statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgment of the Company and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the financial success or changing strategies of the Company's
customers, the Company's level of success in integrating acquisitions, actions
of government regulators, the level of market interest rates, and general
economic conditions.
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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 Purchase and Assumption Agreement with RBC Centura Bank, dated August 13,
2003.
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.
31.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer 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 three reports on Form 8-K filed during the quarter ended
September 30, 2003.
On July 23, 2003, the Company filed a report on Form 8-K regarding its
July 23, 2003 news release in which it announced its earnings for the
quarter ended June 30, 2003. The full text of the news release dated July
23, 2003 was attached as Exhibit 99(a) to this Form 8-K filing.
On August 14, 2003, the Company filed a report on Form 8-K regarding its
August 14, 2003 news release in which it announced that it had reached an
agreement to purchase four bank branches from RBC Centura Bank. The full
text of the news release dated August 14, 2003 was attached as Exhibit
99(a) to this Form 8-K filing.
On September 3, 2003, the Company filed a report on Form 8-K regarding its
September 3, 2003 news release in which the Company refuted a published
article about a potential merger transaction with Capital Bank. The full
text of the news release dated September 3, 2003 was attached as Exhibit
99(a) to this Form 8-K filing.
Copies of exhibits are available upon written request to: First Bancorp, Anna G.
Hollers, Executive Vice President, P.O. Box 508, Troy, NC 27371
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST BANCORP
November 13, 2003 BY: James H. Garner
---------------------------
James H. Garner
President
(Principal Executive Officer),
Treasurer and Director
November 13, 2003 BY: Anna G. Hollers
---------------------------
Anna G. Hollers
Executive Vice President
and Secretary
November 13, 2003 BY: Eric P. Credle
---------------------------
Eric P. Credle
Senior Vice President
and Chief Financial Officer
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