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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission File Number 0-15572
FIRST BANCORP
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(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
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(State of Incorporation) (I.R.S. Employer Identification Number)
341 North Main Street, Troy, North Carolina 27371-0508
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (910) 576-6171
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| YES |_| NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to the Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). |X| YES |_| NO
The aggregate market value of the voting stock, Common Stock, no par
value, held by non-affiliates of the registrant, based on the closing price of
the Common Stock as of June 30, 2004 as reported on the NASDAQ National Market
System, was approximately $251,936,000. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares of the registrant's Common Stock outstanding on
March 11, 2005 was 14,118,859.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed pursuant to
Regulation 14A are incorporated herein by reference into Part III.
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CROSS REFERENCE INDEX
Begins on
Page (s)
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PART I
Item 1 Business 4
Item 2 Properties 12
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a Vote of Shareholders 12
PART II
Item 5 Market for the Registrant's Common Stock, Related Shareholder
Matters, and Issuer Purchases of Equity Securities 12
Item 6 Selected Consolidated Financial Data 13,42
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Critical Accounting Policies 14
Merger and Acquisition Activity 16
Statistical Information
Net Interest Income 20,43
Provision for Loan Losses 21,49
Noninterest Income 22,44
Noninterest Expenses 24,44
Income Taxes 24,45
Stock-Based Compensation 24
Distribution of Assets and Liabilities 26,45
Securities 27,45
Loans 28,47
Nonperforming Assets 29,48
Allowance for Loan Losses and Loan Loss Experience 30,48
Deposits 32,50
Borrowings 33
Liquidity, Commitments, and Contingencies 34,51
Off-Balance Sheet Arrangements and Derivative Financial Instruments 35
Interest Rate Risk (Including Quantitative
and Qualitative Disclosures About Market Risk) 35,51
Return on Assets and Equity 37,52
Capital Resources and Shareholders' Equity 37,52
Inflation 39
Current Accounting and Regulatory Matters 39
Item 7A Quantitative and Qualitative Disclosures About Market Risk 41
Forward-Looking Statements 41
Item 8 Financial Statements and Supplementary Data:
Consolidated Balance Sheets as of December 31, 2004 and 2003 54
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2004 55
Consolidated Statements of Comprehensive Income for each of the
years in the three-year period ended December 31, 2004 56
2
Begins on
Page (s)
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Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended December 31, 2004 57
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2004 58
Notes to Consolidated Financial Statements 59
Independent Auditors' Report 89
Selected Consolidated Financial Data 42
Quarterly Financial Summary 53
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 90
Item 9A Controls and Procedures 90
Item 9B Other Information 90
PART III
Item 10 Directors and Executive Officers of the Registrant; Compliance
with Section 16 (a) of the Exchange Act 91*
Item 11 Executive Compensation 91*
Item 12 Security Ownership of Certain Beneficial Owners and Management 91*
Item 13 Certain Relationships and Related Transactions 92*
Item 14 Principal Accountant Fees and Services 92*
Part IV
Item 15 Exhibits and Financial Statement Schedules 92
SIGNATURES 95
* Information called for by portions of Part III (Items 10 through 14) is
incorporated herein by reference to the Registrant's definitive Proxy
Statement for the 2005 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission.
3
PART I
Item 1. Business
General Description
The Company
First Bancorp (the "Company") is a bank holding company. The principal
activity of the Company is the ownership and operation of First Bank (the
"Bank"), a state chartered bank with its main office in Troy, North Carolina.
The Company also owns and operates two nonbank subsidiaries: Montgomery Data
Services, Inc. ("Montgomery Data"), a data processing company, and First Bancorp
Financial Services, Inc. ("First Bancorp Financial"), which owns and operates
various real estate. Each of these subsidiaries are fully consolidated for
financial reporting purposes. The Company is also the parent to three statutory
business trusts created under the laws of the State of Delaware, which have
issued a total of $41.2 million in trust preferred debt securities. Under
current accounting requirements, these three statutory business trusts are not
consolidated for financial reporting purposes - see discussion of FIN 46 in
"Current Accounting and Regulatory Matters" under Item 7 below.
The Company was incorporated in North Carolina on December 8, 1983, as
Montgomery Bancorp, for the purpose of acquiring 100% of the outstanding common
stock of the Bank through stock-for-stock exchanges. On December 31, 1986, the
Company changed its name to First Bancorp to conform its name to the name of the
Bank, which had changed its name from Bank of Montgomery to First Bank in 1985.
The Bank was organized in 1934 and began banking operations in 1935 as the
Bank of Montgomery, named for the county in which it operated. As of December
31, 2004, the Bank operated in a 23 county area centered in Troy, North
Carolina. Troy, population 3,400, is located in the center of Montgomery County,
approximately 60 miles east of Charlotte, 50 miles south of Greensboro, and 80
miles southwest of Raleigh. The Bank conducts business from 59 branches located
within a 120-mile radius of Troy, covering principally a geographical area from
Latta, South Carolina to the southeast, to Wallace, North Carolina to the east,
to Radford, Virginia to the north, to Wytheville, Virginia to the northwest, and
Harmony, North Carolina to the west. Of the Bank's 59 branches, 53 are in North
Carolina, with three branches each in South Carolina and Virginia (where the
Bank operates under the name "First Bank of Virginia"). Ranked by assets, the
Bank was the 7th largest bank in North Carolina as of December 31, 2004.
The Bank has two wholly owned subsidiaries, First Bank Insurance Services,
Inc. ("First Bank Insurance") and First Montgomery Financial Services
Corporation ("First Montgomery"). First Bank Insurance was acquired as an active
insurance agency in 1994 in connection with the Company's acquisition of a bank
that had an insurance subsidiary. On December 29, 1995, the insurance agency
operations of First Bank Insurance were divested. From December 1995 until
October 1999, First Bank Insurance was inactive. In October 1999, First Bank
Insurance began operations again as a provider of non-FDIC insured investments
and insurance products. Currently, First Bank Insurance's primary business
activity is the placement of property and casualty insurance coverage. First
Montgomery, a Virginia company incorporated on November 2, 2001, was formed to
acquire real estate in Virginia and lease the property to the Bank. First Troy
Realty Corporation ("First Troy") was incorporated on May 12, 1999 and is a
subsidiary of First Montgomery. First Troy allows the Bank to centrally manage a
portion of its residential, mortgage, and commercial real estate loan portfolio.
As discussed in the last paragraph of "General Business" below, the Company
intends to dissolve First Montgomery and First Troy in 2005.
The Company's principal executive offices are located at 341 North Main
Street, Troy, North Carolina 27371-0508, and its telephone number is (910)
576-6171. Unless the context requires otherwise, references to the "Company" in
this annual report on Form 10-K shall mean collectively First Bancorp and its
consolidated subsidiaries.
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General Business
The Bank engages in a full range of banking activities, providing such
services as checking, savings, NOW and money market accounts and other time
deposits of various types; loans for business, agriculture, real estate,
personal uses, home improvement and automobiles; credit cards; debit cards;
letters of credit; IRAs; safe deposit box rentals; bank money orders; and
electronic funds transfer services, including wire transfers, automated teller
machines, and bank-by-phone capabilities. In December 2004, the Bank also began
offering its internet banking product, with on-line bill-pay and cash management
features. Because the majority of the Bank's customers are individuals and small
to medium-sized businesses located in the counties it serves, management does
not believe that the loss of a single customer or group of customers would have
a material adverse impact on the Bank. There are no seasonal factors that tend
to have any material effect on the Bank's business, and the Bank does not rely
on foreign sources of funds or income. Because the Bank operates primarily
within the central Piedmont region of North Carolina, the economic conditions
within that area could have a material impact on the Company. See additional
discussion below in the section entitled "Territory Served and Competition."
Beginning in 1999, First Bank Insurance began offering non-FDIC insured
investment and insurance products, including mutual funds, annuities, long-term
care insurance, life insurance, and company retirement plans, as well as
financial planning services (the "investments division"). In May 2001, First
Bank Insurance added to its product line when it acquired two insurance agencies
that specialized in the placement of property and casualty insurance. In October
2003, the "investment division" of First Bank Insurance became a part the Bank.
The primary activity of First Bank Insurance is now the placement of property
and casualty insurance products.
Montgomery Data's primary business is to provide electronic data
processing services for the Bank. Ownership and operation of Montgomery Data
allows the Company to do all of its electronic data processing without paying
fees for such services to an independent provider. Maintaining its own data
processing system also allows the Company to adapt the system to its individual
needs and to the services and products it offers. Although not a significant
source of income, Montgomery Data has historically made its excess data
processing capabilities available to area financial institutions for a fee. At
December 31, 2004, Montgomery Data had five outside customers that provided
gross revenues of $416,000, $333,000, and $303,000 for the years ended December
31, 2004, 2003, and 2002, respectively. However, three of the five customers
have notified Montgomery Data that they intend to terminate their services with
Montgomery Data and switch to a lower cost provider during the first half of
2005. These three customers provided $328,000 in gross revenue to Montgomery
Data in 2004.
First Bancorp Financial was organized under the name of First Recovery in
September of 1988 for the purpose of providing a back-up data processing site
for Montgomery Data and other financial and non-financial clients. First
Recovery's back-up data processing operations were divested in 1994. First
Bancorp Financial periodically purchases parcels of real estate from the Bank
that were acquired through foreclosure or from branch closings. First Bancorp
Financial actively pursues the sale of these properties.
First Bancorp Capital Trust I was organized in October 2002 for the
purpose of issuing $20.6 million in debt securities. These borrowings are due on
November 7, 2032 and were structured as trust preferred capital securities,
which qualify as capital for regulatory capital adequacy requirements. These
debt securities are callable by the Company at par on any quarterly interest
payment date beginning on November 7, 2007. The interest rate on these debt
securities adjusts on a quarterly basis at a rate of three-month LIBOR plus
3.45%. This rate may not exceed 12.50% through November 2007.
First Bancorp Capital Trust II and First Bancorp Capital Trust III were
organized in December 2003 for the purpose of issuing $20.6 million in debt
securities ($10.3 million were issued from each trust). These borrowings are due
on December 19, 2033 and were also structured as trust preferred capital
securities in order to qualify as
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regulatory capital. These debt securities are callable by the Company at par on
any quarterly interest payment date beginning on January 23, 2009. The interest
rate on these debt securities adjusts on a quarterly basis at a weighted average
rate of three-month LIBOR plus 2.70%.
First Montgomery was incorporated on November 2, 2001. First Montgomery's
business activities are currently limited to the selection and acquisition of
real estate in Virginia that is leased to the Bank for use as bank branches.
First Troy was incorporated on May 12, 1999 as a subsidiary of the Bank. Upon
the formation of First Montgomery as a subsidiary of the Bank, the Bank
contributed its interest in First Troy to First Montgomery, resulting in First
Troy becoming a subsidiary of First Montgomery. First Troy allows the Bank to
centrally manage a portion of its residential, mortgage, and commercial real
estate loan portfolio. First Troy has elected to be treated as a real estate
investment trust for tax purposes. In 2005, in response to evolving taxing
authority developments (discussed in more detail in "Liquidity, Commitments, and
Contingencies" under Item 7 below), the Company intends to dissolve and
liquidate First Montgomery and First Troy by transferring the assets and
liabilities of each of these subsidiaries up-stream to the Bank.
Territory Served and Competition
The Company's headquarters are located in Troy, Montgomery County, North
Carolina. The Company serves primarily the south central area of the Piedmont
region of North Carolina. The following table presents, for each county the
Company operates in, the number of bank branches operated by the Company within
the county, the approximate amount of deposits with the Company in the county as
of December 31, 2004, the Company's approximate market share, and the number of
bank competitors located in the county. The following table does not include the
Company's approximately $50 million in wholesale brokered deposits.
No. of Deposits Market Number of
County Branches (in millions) Share Competitors
--------------- ---------- --------------- -------- -----------
Anson, NC 1 $ 10 4.4% 4
Cabarrus, NC 2 25 1.3% 8
Chatham, NC 2 49 9.3% 9
Davidson, NC 2 106 6.6% 8
Dillon, SC 3 61 26.3% 2
Duplin, NC 2 40 10.2% 7
Guilford, NC 1 34 0.5% 22
Harnett, NC 3 87 10.3% 7
Iredell, NC 1 20 1.3% 14
Lee, NC 4 117 16.5% 6
Montgomery, NC 5 89 39.1% 4
Montgomery, VA 1 3 0.1% 9
Moore, NC 10 305 24.3% 10
Randolph, NC 4 50 3.6% 14
Richmond, NC 1 20 4.9% 5
Robeson, NC 5 123 14.1% 9
Rockingham, NC 1 8 0.6% 9
Rowan, NC 2 35 2.9% 10
Scotland, NC 2 41 15.8% 5
Stanly, NC 4 73 10.5% 5
Wake, NC 1 11 0.1% 21
Washington, VA 1 10 1.4% 12
Wythe, VA 1 22 5.4% 8
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Total 59 $ 1,339
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The Company's 59 branches and facilities are primarily located in small
communities whose economies are based primarily on services, manufacturing and
light industry. Although the Company's market is predominantly small communities
and rural areas, the area is not dependent on agriculture. Textiles, furniture,
mobile homes, electronics, plastic and metal fabrication, forest products, food
products and cigarettes are among the leading manufacturing industries in the
trade area. Leading producers of lumber, socks, hosiery and area rugs are
located
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in Montgomery County. The Pinehurst area within Moore County is a widely known
golf resort and retirement area. The High Point area is widely known for its
furniture market. Additionally, several of the communities served by the Company
are "bedroom" communities serving Charlotte, Raleigh and Greensboro in addition
to smaller cities such as Albemarle, Asheboro, High Point, Pinehurst and
Sanford.
Approximately 23% of the Company's non-brokered deposit base is in Moore
County, and, accordingly, material changes in competition, the economy or
population of Moore County could materially impact the Company. No other county
comprises more than 10% of the Company's deposit base.
The Company competes in its various market areas with, among others,
several large interstate bank holding companies that are headquartered in North
Carolina. These large competitors have substantially greater resources than the
Company, including broader geographic markets, higher lending limits and the
ability to make greater use of large-scale advertising and promotions. A
significant number of interstate banking acquisitions have taken place in the
past decade, thus further increasing the size and financial resources of some of
the Company's competitors, three of which are among the largest bank holding
companies in the nation. Moore County, which as noted above comprises a
disproportionate share of the Company's deposits, is a particularly competitive
market, with at least ten other financial institutions having a physical
presence. See "Supervision and Regulation" below for a further discussion of
regulations in the Company's industry that affect competition.
The Company competes not only against banking organizations, but also
against a wide range of financial service providers, including federally and
state chartered savings and loan institutions, credit unions, investment and
brokerage firms and small-loan or consumer finance companies. Competition among
financial institutions of all types is virtually unlimited with respect to legal
ability and authority to provide most financial services. The Company also
experiences competition from internet banks, particularly in the area of time
deposits.
However, the Company believes it has certain advantages over its
competition in the areas it serves. The Company seeks to maintain a distinct
local identity in each of the communities it serves and actively sponsors and
participates in local civic affairs. Most lending and other customer-related
business decisions can be made without delays often associated with larger
systems. Additionally, employment of local managers and personnel in various
offices and low turnover of personnel enable the Company to establish and
maintain long-term relationships with individual and corporate customers.
Lending Policy and Procedures
Conservative lending policies and procedures and appropriate underwriting
standards are high priorities of the Bank. Loans are approved under the Bank's
written loan policy, which provides that lending officers, principally branch
managers, have authority to approve loans of various amounts up to $100,000.
Each of the Bank's regional senior lending officers has discretion to approve
secured loans in principal amounts up to $350,000 and together can approve loans
up to $2,000,000. Lending limits may vary depending upon whether the loan is
secured or unsecured.
The Bank's board of directors reviews and approves loans that exceed
management's lending authority, loans to executive officers, directors, and
their affiliates and, in certain instances, other types of loans. New credit
extensions are reviewed daily by the Bank's senior management and at least
monthly by its board of directors.
The Bank continually monitors its loan portfolio to identify areas of
concern and to enable management to take corrective action. Lending officers and
the board of directors meet periodically to review past due loans and portfolio
quality, while assuring that the Bank is appropriately meeting the credit needs
of the communities it serves. Individual lending officers are responsible for
pursuing collection of past-due amounts and monitoring any changes in the
financial status of borrowers.
The Bank's internal audit department evaluates specific loans and overall
loan quality at individual branches
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as part of its regular branch reviews. The Bank also contracts with an
independent consulting firm to review new loan originations meeting certain
criteria, as well as to assign risk grades to existing credits meeting certain
thresholds. The consulting firm's observations, comments, and risk grades,
including variances with the Bank's risk grades, are shared with the audit
committee of the Company's board of directors, and are considered by management
in setting Bank policy, as well as in evaluating the adequacy of the allowance
for loan losses. For additional information, see "Allowance for Loan Losses and
Loan Loss Experience" under Item 7 below.
Investment Policy and Procedures
The Company has adopted an investment policy designed to optimize the
Company's income from funds not needed to meet loan demand in a manner
consistent with appropriate liquidity and risk objectives. Pursuant to this
policy, the Company may invest in federal, state and municipal obligations,
federal agency obligations, public housing authority bonds, industrial
development revenue bonds, and Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Mortgage Corporation and
Student Loan Marketing Association securities. Additionally, during 2001 the
Company's board of directors approved limited investments in corporate bonds.
Except for corporate bonds, the Company's investments must be rated at least Baa
by Moody's or BBB by Standard and Poor's. Securities rated below A are
periodically reviewed for creditworthiness. The Company may purchase non-rated
municipal bonds only if such bonds are in the Company's general market area and
determined by the Company to have a credit risk no greater than the minimum
ratings referred to above. Industrial development authority bonds, which
normally are not rated, are purchased only if they are judged to possess a high
degree of credit soundness to assure reasonably prompt sale at a fair value. In
2001, the Company's board of directors authorized the Company to invest a
portion of its security portfolio in high quality corporate bonds, with the
amount of bonds related to any one issuer not to exceed the Company's legal
lending limit. Prior to purchasing a corporate bond, the Company's management
performs due diligence on the issuer of the bond, and the purchase is not made
unless the Company believes that the purchase of the bond bears no more risk to
the Company than would an unsecured loan to the same company.
The Company's investment officers implement the investment policy, monitor
the investment portfolio, recommend portfolio strategies, and report to the
Company's investment committee. Reports of all purchases, sales, issuer calls,
net profits or losses and market appreciation or depreciation of the bond
portfolio are reviewed by the Company's board of directors each month. Once a
quarter, the Company's interest rate risk exposure is evaluated by the board of
directors. Once a year, the written investment policy is reviewed by the board
of directors, and the Company's portfolio is compared with the portfolios of
other companies of comparable size.
Mergers and Acquisitions
As part of its operations, the Company has pursued an acquisition strategy
over the years to augment its internal growth. The Company regularly evaluates
the potential acquisition of, or merger with, and holds discussions with,
various financial institutions. The Company's acquisitions to date have
generally fallen into one of three categories - 1) an acquisition of a financial
institution or branch thereof within a market in which the Company operates, 2)
an acquisition of a financial institution or branch thereof in a market
contiguous to a market in which the Company operates, or 3) an acquisition of a
company that has products or services that the Company does not currently offer.
The Company believes that it can enhance its earnings by pursuing these
types of acquisition opportunities through any combination or all of the
following: 1) achieving cost efficiencies, 2) enhancing the acquiree's earnings
or gaining new customers by introducing a more successful banking model with
more products and services to the acquiree's market base, 3) increasing customer
satisfaction or gaining new customers by providing more locations for the
convenience of customers, and 4) leveraging the Company's customer base by
offering new products and services.
In the last four years, the Company has made acquisitions in all three of
the aforementioned categories of
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acquisitions. In 2001, acquisitions resulted in the Company adding $116.2
million in loans and $204.6 million in deposits, expanding into four contiguous
markets (Lumberton, Pembroke, St. Pauls, and Thomasville), providing another
branch for customers in one of the Company's newer markets (Salisbury), and
giving the Company the ability to offer property and casualty insurance
coverage. In 2002, the Company completed the acquisition of a branch within its
market geography (Broadway, located in Lee County) with approximately $8.4
million in deposits and $3.1 million in loans. In 2003, the Company completed
acquisitions that added approximately $72.5 million in loans and $160.8 million
in deposits that were in the contiguous or nearly contiguous markets of Dillon
County SC, Duplin County NC, Harmony NC, and Fairmont NC. In 2003, the Company
also purchased another property and casualty insurance agency that provided
efficiencies of scale when combined with the agency purchased in 2001. The
Company did not complete any acquisitions during 2004.
The Company plans to continue to evaluate acquisition opportunities that
could potentially benefit the Company and its shareholders. These opportunities
may include acquisitions that do not fit the categories discussed above. For a
further discussion of recent acquisition activity, see "Merger and Acquisition
Activity" under Item 7 below.
Employees
As of December 31, 2004, the Company had 526 full-time and 74 part-time
employees. The Company is not a party to any collective bargaining agreements
and considers its employee relations to be good.
Supervision and Regulation
As a bank holding company, the Company is subject to supervision,
examination and regulation by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") and the North Carolina Office of the
Commissioner of Banks (the "Commissioner"). The Bank is subject to supervision
and examination by the Federal Deposit Insurance Corporation (the "FDIC") and
the Commissioner. For additional information, see also Note 15 to the
consolidated financial statements.
Supervision and Regulation of the Company
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended, and is required to register as such
with the Federal Reserve Board. The Company is also regulated by the
Commissioner under the Bank Holding Company Act of 1984.
A bank holding company is required to file quarterly reports and other
information regarding its business operations and those of its subsidiaries with
the Federal Reserve Board. It is also subject to examination by the Federal
Reserve Board and is required to obtain Federal Reserve Board approval prior to
making certain acquisitions of other institutions or voting securities. The
Commissioner is empowered to regulate certain acquisitions of North Carolina
banks and bank holding companies, issue cease and desist orders for violations
of North Carolina banking laws, and promulgate rules necessary to effectuate the
purposes of the Bank Holding Company Act of 1984.
Regulatory authorities have cease and desist powers over bank holding
companies and their nonbank subsidiaries where their actions would constitute a
serious threat to the safety, soundness or stability of a subsidiary bank. Those
authorities may compel holding companies to invest additional capital into
banking subsidiaries upon acquisitions or in the event of significant loan
losses or rapid growth of loans or deposits.
In 1999, the U.S. enacted legislation that allowed bank holding companies
to engage in a wider range of non-banking activities, including greater
authority to engage in securities and insurance activities. Under the
Gramm-Leach-Bliley Act (the "Act"), a bank holding company that elects to become
a financial holding company may engage in any activity that the Federal Reserve
Board, in consultation with the Secretary of the Treasury,
9
determines by regulation or order is (i) financial in nature, (ii) incidental to
any such financial activity, or (iii) complementary to any such financial
activity and does not pose a substantial risk to the safety or soundness of
depository institutions or the financial system generally. The Act made
significant changes in U.S. banking law, principally by repealing certain
restrictive provisions of the 1933 Glass-Steagall Act. The Act lists certain
activities that are deemed to be financial in nature, including lending,
exchanging, transferring, investing for others, or safeguarding money or
securities; underwriting and selling insurance; providing financial, investment,
or economic advisory services; underwriting, dealing in or making a market in,
securities; and any activity currently permitted for bank holding companies by
the Federal Reserve Board under Section 4(c)(8) of the Bank Holding Company Act.
The Act does not authorize banks or their affiliates to engage in commercial
activities that are not financial in nature. A bank holding company may elect to
be treated as a financial holding company only if all depository institution
subsidiaries of the holding company are well-capitalized, well-managed and have
at least a satisfactory rating under the Community Reinvestment Act. At the
present time, the Company does not anticipate applying for status as a financial
holding company under the Act.
National and state banks are also authorized by the Act to engage, through
"financial subsidiaries," in any activity that is permissible for a financial
holding company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve Board, determines is
financial in nature or incidental to any such financial activity, except (i)
insurance underwriting, (ii) real estate development or real estate investment
activities (unless otherwise permitted by law), (iii) insurance company
portfolio investments and (iv) merchant banking. The authority of a national or
state bank to invest in a financial subsidiary is subject to a number of
conditions, including, among other things, requirements that the bank be
well-managed and well-capitalized (after deducting from the bank's capital
outstanding investments in financial subsidiaries).
The United States Congress and the North Carolina General Assembly have
periodically considered and adopted legislation that has resulted in, and could
result in further, deregulation of both banks and other financial institutions.
Such legislation could modify or eliminate geographic restrictions on banks and
bank holding companies and current restrictions on the ability of banks to
engage in certain nonbanking activities. For example, the Riegle-Neal Interstate
Banking Act, which was enacted several years ago, allows expansion of interstate
acquisitions by bank holding companies and banks. This and other legislative and
regulatory changes have increased the ability of financial institutions to
expand the scope of their operations, both in terms of services offered and
geographic coverage. Such legislative changes have placed the Company in more
direct competition with other financial institutions, including mutual funds,
securities brokerage firms, insurance companies, investment banking firms, and
internet banks. The Company cannot predict what other legislation might be
enacted or what other regulations might be adopted or, if enacted or adopted,
the effect thereof on the Company's business.
After the September 11, 2001 terrorist attacks in New York and Washington,
D.C., the United States government acted in several ways to tighten control on
activities perceived to be connected to money laundering and terrorist funding.
A series of orders were issued that identify terrorists and terrorist
organizations and require the blocking of property and assets of, as well as
prohibiting all transactions or dealings with, such terrorists, terrorist
organizations and those that assist or sponsor them. The USA Patriot Act
substantially broadened existing anti-money laundering legislation and the
extraterritorial jurisdiction of the United States, imposed new compliance and
due diligence obligations, created new crimes and penalties, compelled the
production of documents located both inside and outside the United States,
including those of foreign institutions that have a correspondent relationship
in the United States, and clarified the safe harbor from civil liability to
customers. In addition, the United States Treasury Department issued regulations
in cooperation with the federal banking agencies, the Securities and Exchange
Commission, the Commodity Futures Trading Commission and the Department of
Justice to require customer identification and verification, expand the
money-laundering program requirement to the major financial services sectors,
including insurance and unregistered investment companies, such as hedge funds,
and facilitate and permit the sharing of information between law enforcement and
financial institutions, as well as among financial institutions themselves. The
United States Treasury Department also has created the Treasury USA Patriot Act
Task Force to work with other financial regulators, the regulated
10
community, law enforcement and consumers to continually improve the regulations.
The Company has established policies and procedures to ensure compliance with
the USA Patriot Act.
In 2002, the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") was
signed into law. The Sarbanes-Oxley Act represents a comprehensive revision of
laws affecting corporate governance, accounting obligations and corporate
reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or
debt securities registered under the Securities Exchange Act of 1934, as
amended. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements
for audit committees, including independence, expertise, and responsibilities;
(ii) additional responsibilities regarding financial statements for the Chief
Executive Officer and Chief Financial Officer of the reporting company; (iii)
new standards for auditors and regulation of audits; (iv) increased disclosure
and reporting obligations for the reporting company and their directors and
executive officers; and (v) new and increased civil and criminal penalties for
violation of the securities laws. The most significant expense associated with
compliance with the Sarbanes-Oxley Act has been the internal control
documentation and attestation requirements of Section 404 of the Act. In 2004,
the Company's incremental external costs associated with complying with Section
404 of the Sarbanes-Oxley Act amounted to approximately $190,000. The Company
expects to incur an additional $350,000-$400,000 in external costs related to
Section 404 in the first quarter of 2005 and an additional $150,000-$200,000 in
the second quarter of 2005. The incremental costs relate to higher external
audit fees and outside consultant fees. These amounts do not include the value
of the significant internal resources devoted to compliance. As permitted by the
Securities and Exchange Commission Release No. 34-50754, the registrant has not
filed in this report the internal control reports required by Section 404 of the
Sarbanes-Oxley Act. The Company expects to file these reports by May 2, 2005, as
permitted by the aforementioned release.
Supervision and Regulation of the Bank
Federal banking regulations applicable to all depository financial
institutions, among other things: (i) provide federal bank regulatory agencies
with powers to prevent unsafe and unsound banking practices; (ii) restrict
preferential loans by banks to "insiders" of banks; (iii) require banks to keep
information on loans to major shareholders and executive officers; and (iv) bar
certain director and officer interlocks between financial institutions.
As a state chartered bank, the Bank is subject to the provisions of the
North Carolina banking statutes and to regulation by the Commissioner. The
Commissioner has a wide range of regulatory authority over the activities and
operations of the Bank, and the Commissioner's staff conducts periodic
examinations of the Bank and its affiliates to ensure compliance with state
banking regulations. Among other things, the Commissioner regulates the merger
and consolidation of state chartered banks, the payment of dividends, loans to
officers and directors, recordkeeping, types and amounts of loans and
investments, and the establishment of branches. The Commissioner also has cease
and desist powers over state chartered banks for violations of state banking
laws or regulations and for unsafe or unsound conduct that is likely to
jeopardize the interest of depositors.
The dividends that may be paid by the Bank to the Company are subject to
legal limitations under North Carolina law. In addition, regulatory authorities
may restrict dividends that may be paid by the Bank or the Company's other
subsidiaries. The ability of the Company to pay dividends to its shareholders is
largely dependent on the dividends paid to the Company by its subsidiaries.
The Bank is a member of the FDIC, which currently insures the deposits of
member banks. For this protection, each bank pays a quarterly statutory
assessment, based on its level of deposits, and is subject to the rules and
regulations of the FDIC. The FDIC also is authorized to approve conversions,
mergers, consolidations and assumptions of deposit liability transactions
between insured banks and uninsured banks or institutions, and to prevent
capital or surplus diminution in such transactions where the resulting,
continuing, or assumed bank is an insured nonmember bank. In addition, the FDIC
monitors the Bank's compliance with several banking statutes, such as the
Depository Institution Management Interlocks Act and the Community Reinvestment
Act of
11
1977. The FDIC also conducts periodic examinations of the Bank to assess its
compliance with banking laws and regulations, and it has the power to implement
changes in or restrictions on a bank's operations if it finds that a violation
is occurring or is threatened.
Neither the Company nor the Bank can predict what other legislation might
be enacted or what other regulations might be adopted, or if enacted or adopted,
the effect thereof on the Bank's operations.
See "Capital Resources and Shareholders' Equity" under Item 7 below for a
discussion of regulatory capital requirements.
Available Information
The Company maintains a corporate Internet site at www.firstbancorp.com
which contains a link within the "Investor Relations" section of the site to
each of its filings with the Securities and Exchange Commission, including its
annual reports on Form 10-K, its quarterly reports on Form 10-Q, its current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. These filings
are available, free of charge, as soon as reasonably practicable after the
Company electronically files such material with, or furnishes it to, the
Securities and Exchange Commission. These filings can also be accessed at the
Securities and Exchange Commission's website located at www.sec.gov. Information
included on the Company's Internet site is not incorporated by reference into
this annual report.
Item 2. Properties
The main offices of the Company, the Bank and First Bancorp Financial are
owned by the Bank and are located in a three-story building in the central
business district of Troy, North Carolina. The building houses administrative,
training and bank teller facilities. The Bank's Operations Division, including
customer accounting functions, offices and operations of Montgomery Data, and
offices for loan operations, are housed in two one-story steel frame buildings
approximately one-half mile west of the main office. Both of these buildings are
owned by the Bank. The Company operates 59 bank branches. The Company owns all
its bank branch premises except eleven branch offices for which the land and
buildings are leased and four branch offices for which the land is leased but
the building is owned. In addition, the Company leases one loan production
office. There are no other options to purchase or lease additional properties.
The Company considers its facilities adequate to meet current needs.
Item 3. Legal Proceedings
Various legal proceedings may arise in the ordinary course of business and
may be pending or threatened against the Company and/or its subsidiaries.
However, neither the Company nor any of its subsidiaries is involved in any
pending legal proceedings that management believes could have a material effect
on the consolidated financial position of the Company.
Item 4. Submission of Matters to a Vote of Shareholders
No matters were submitted to a vote of shareholders during the fourth
quarter of 2004.
PART II
Item 5. Market for the Registrant's Common Stock, Related Shareholder Matters,
and Issuer Purchases of Equity Securities
The Company's common stock trades on the NASDAQ National Market System of
the NASDAQ Stock Market under the symbol FBNC. Table 22, included in
"Management's Discussion and Analysis" below, set
12
forth the high and low market prices of the Company's common stock as traded by
the brokerage firms that maintain a market in the Company's common stock and the
dividends declared for the periods indicated. See "Business - Supervision and
Regulation" above and Note 15 to the consolidated financial statements for a
discussion of regulatory restrictions on the payment of dividends. As of
December 31, 2004, there were approximately 2,600 shareholders of record and
another 3,000 shareholders whose stock is held in "street name." There were no
sales of unregistered securities during the year ended December 31, 2004.
Issuer Purchases of Equity Securities
Pursuant to authorizations by the Company's board of directors, the
Company has repurchased shares of common stock in private transactions and in
open-market purchases. The most recent board of director authorization was
announced on July 30, 2004 and authorized the repurchase of 375,000 shares of
the Company's stock. During 2004, the Company repurchased a total of 300,816
shares of its common stock at an average price of $21.65. The following table
sets forth information about the Company's stock repurchases for the three
months ended December 31, 2004.
Issuer Purchases of Equity Securities
- ---------------------------------------------------------------------------------------------------------------------------
Total Number of Shares Maximum Number of
Purchased as Part of Shares that May Yet Be
Total Number of Average Price Paid Publicly Announced Purchased Under the
Period Shares Purchased (2) per Share Plans or Programs (1) Plans or Programs (3)
- ----------------------------- --------------------- ------------------ ---------------------- -----------------------
Month #1 (October 1, 2004 to
October 31, 2004) 12,251 $ 24.47 12,251 315,165
Month #2 (November 1, 2004
to November 30, 2004) 150 25.55 150 315,015
Month #3 (December 1, 2004
to December 31, 2004) -- -- -- 315,015
------- ------- ------- --------
Total 12,401 $ 24.49 12,401 315,015
======= ======= ======= ========
Footnotes to the Above Table
(1) All amounts prior to November 15, 2004 have been adjusted to reflect the
3-for-2 stock split paid by the Company on November 15, 2004.
(2) All shares were repurchased pursuant to publicly announced share
repurchase authorizations. On July 30, 2004, the Company announced that
its Board of Directors had approved the repurchase of 375,000 shares of
the Company's common stock. The repurchase authorization does not have an
expiration date. There are no plans or programs the issuer has determined
to terminate prior to expiration, or under which the issuer does not
intend to make further purchases.
(3) The shares included in the table above do not include shares that were
used by option holders to satisfy the exercise price of the Company's call
options issued by the Company to its employees and directors pursuant to
the 1994 First Bancorp Stock Option Plan. In October 2004, 3,200 shares of
the Company's common stock with a weighted average price of $25.57 were
used to satisfy the exercise price of employee option exercises. In
November 2004, 477 shares of the Company's common stock, with a weighted
average market price of $25.20 were used to satisfy such exercises. In
December 2004, 842 shares of the Company's common stock, with a weighted
average market price of $29.30 were used to satisfy such exercises.
Item 6. Selected Consolidated Financial Data
Table 1 sets forth selected consolidated financial data for the Company.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis is intended to assist readers in
understanding the Company's results of operations and changes in financial
position for the past three years. This review should be read in conjunction
with the consolidated financial statements and accompanying notes beginning on
page 54 of this report and the supplemental financial data contained in Tables 1
through 22 included with this discussion and analysis. All share data has been
adjusted to reflect the 3-for-2 stock split paid on November 15, 2004.
CRITICAL ACCOUNTING POLICIES
The accounting principles followed by the Company and the methods of
applying these principles conform with accounting principles generally accepted
in the United States of America and with general practices followed by the
banking industry. Certain of these principles involve a significant amount of
judgment and/or use of estimates based on the Company's best assumptions at the
time of the estimation. The Company has identified three policies as being more
sensitive in terms of judgments and estimates, taking into account their overall
potential impact to the Company's consolidated financial statements - 1) the
allowance for loan losses, 2) tax uncertainties, and 3) intangible assets.
Allowance for Loan Losses
Due to the estimation process and the potential materiality of the amounts
involved, the Company has identified the accounting for the allowance for loan
losses and the related provision for loan losses as an accounting policy
critical to the Company's consolidated financial statements. The provision for
loan losses charged to operations is an amount sufficient to bring the allowance
for loan losses to an estimated balance considered adequate to absorb losses
inherent in the portfolio.
Management's determination of the adequacy of the allowance is based
primarily on a mathematical model that estimates the appropriate allowance for
loan losses. This model has two components. The first component involves the
estimation of losses on loans defined as "impaired loans." A loan is considered
to be impaired when, based on current information and events, it is probable the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The estimated valuation allowance is the
difference, if any, between the loan balance outstanding and the value of the
impaired loan as determined by either 1) an estimate of the cash flows that the
Company expects to receive from the borrower discounted at the loan's effective
rate, or 2) in the case of a collateral-dependent loan, the fair value of the
collateral.
The second component of the allowance model is to estimate losses for all
loans not considered to be impaired loans. First, loans that have been risk
graded by the Company as having more than "standard" risk but are not considered
to be impaired are assigned estimated loss percentages generally accepted in the
banking industry. Loans that are classified by the Company as having normal
credit risk are segregated by loan type, and estimated loss percentages are
assigned to each loan type, based on the historical losses, current economic
conditions, and operational conditions specific to each loan type.
The reserve estimated for impaired loans is then added to the reserve
estimated for all other loans. This becomes the Company's "allocated allowance."
In addition to the allocated allowance derived from the model, management also
evaluates other data such as the ratio of the allowance for loan losses to total
loans, net loan growth information, nonperforming asset levels and trends in
such data. Based on this additional analysis, the Company may determine that an
additional amount of allowance for loan losses is necessary to reserve for
probable losses. This additional amount, if any, is the Company's "unallocated
allowance." The sum of the allocated allowance and the unallocated allowance is
compared to the actual allowance for loan losses recorded on the books of the
Company and any adjustment necessary for the recorded allowance to equal the
computed allowance is recorded as a provision for loan losses. The provision for
loan losses is a direct charge to earnings in the period recorded.
14
Although management uses the best information available to make
evaluations, future adjustments may be necessary if economic, operational, or
other conditions change. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance based on the examiners' judgment about information
available to them at the time of their examinations.
For further discussion including a review of the range of provisions for
loan losses and its impact on reported results in recent periods, see
"Nonperforming Assets" and "Allowance for Loan Losses and Loan Loss Experience"
under "Analysis of Financial Condition and Changes in Financial Condition."
Tax Uncertainties
The Company reserves for tax uncertainties in instances when it has taken
a position on a tax return that may differ from the opinion of the applicable
taxing authority. In accounting for tax contingencies, the Company assesses the
relative merits and risks of certain tax transactions, taking into account
statutory, judicial and regulatory guidance in the context of the Company's tax
position. For those matters where it is probable that the Company will have to
pay additional taxes, interest or penalties and a loss or range of losses can be
reasonably estimated, the Company records reserves in the consolidated financial
statements. For those matters where it is reasonably possible but not probable
that the Company will have to pay additional taxes, interest or penalties and
the loss or range of losses can be reasonably estimated, the Company only makes
disclosures in the notes and does not record reserves in the consolidated
financial statements. The process of concluding that a loss is reasonably
possible or probable and estimating the amount of loss or range of losses and
related tax reserves is inherently subjective and future changes to the reserve
may be necessary based on changes in management's intent, tax law or related
interpretations, or other functions.
The section below entitled "Liquidity, Commitments, and Contingencies" and
Note 12 to the consolidated financial statements includes the disclosure of a
tax uncertainty that the Company has concluded requires disclosure, but not loss
accrual.
Intangible Assets
Due to the estimation process and the potential materiality of the amounts
involved, the Company has also identified the accounting for intangible assets
as an accounting policy critical to the Company's consolidated financial
statements.
When the Company completes an acquisition transaction, the excess of the
purchase price over the amount by which the fair market value of assets acquired
exceeds the fair market value of liabilities assumed represents an intangible
asset. The Company must then determine the identifiable portions of the
intangible asset, with any remaining amount classified as goodwill. Identifiable
intangible assets associated with these acquisitions are generally amortized
over the estimated life of the related asset, whereas goodwill is tested
annually for impairment, but not systematically amortized. Assuming no goodwill
impairment, it is beneficial to the Company's future earnings to have a lower
amount assigned to identifiable intangible assets and higher amount of goodwill
as opposed to having a higher amount considered to be identifiable intangible
assets and a lower amount classified as goodwill.
For the Company, the primary identifiable intangible asset typically
recorded in connection with a whole-bank or bank branch acquisition is the value
of the core deposit intangible, whereas when the Company acquires an insurance
agency, the primary identifiable intangible asset is the value of the acquired
customer list. Determining the amount of identifiable intangible assets and
their average lives involves multiple assumptions and estimates and is typically
determined by performing a discounted cash flow analysis, which involves a
combination of any or all of the following assumptions: customer
attrition/runoff, alternative funding costs,
15
deposit servicing costs, and discount rates. The Company typically engages a
third party consultant to assist in each analysis. For the whole-bank and bank
branch transactions recorded to date, the core deposit intangible in each case
has been estimated to have a ten year life, with an accelerated rate of
amortization. For the 2003 insurance agency acquisition, the identifiable
intangible asset related to the customer list was determined to have a ten year
life, with amortization occurring on a straight-line basis.
Subsequent to the initial recording of the identifiable intangible assets
and goodwill, the Company amortizes the identifiable intangible assets over
their estimated average lives, as discussed above. In addition, on at least an
annual basis, goodwill is evaluated for impairment by comparing the fair value
of the Company's reporting units to their related carrying value, including
goodwill (the Company's community banking operation is its only material
reporting unit). At its last evaluation, the fair value of the Company's
community banking operation exceeded its carrying value, including goodwill. If
the carrying value of a reporting unit were ever to exceed its fair value, the
Company would determine whether the implied fair value of the goodwill, using a
discounted cash flow analysis, exceeded the carrying value of the goodwill. If
the carrying value of the goodwill exceeded the implied fair value of the
goodwill, an impairment loss would be recorded in an amount equal to that
excess. Performing such a discounted cash flow analysis would involve the
significant use of estimates and assumptions.
The Company reviews identifiable intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. The Company's policy is that an impairment loss is recognized,
equal to the difference between the asset's carrying amount and its fair value,
if the sum of the expected undiscounted future cash flows is less than the
carrying amount of the asset. Estimating future cash flows involves the use of
multiple estimates and assumptions, such as those listed above.
The foregoing accounting policy was adopted by the Company effective on
January 1, 2002 in accordance with newly issued accounting standards for
goodwill and other intangible assets. For acquisitions occurring prior to
January 1, 2002, the Company generally did not separately identify its
identifiable intangible assets from its goodwill, as all intangible assets were
amortized under accounting standards then in effect. According to the transition
provisions of the accounting standards that changed the Company's accounting
policy to that described above, the entire amount of those combined intangible
assets was accounted for entirely as non-amortizable goodwill.
MERGER AND ACQUISITION ACTIVITY
Over the past three fiscal years, the Company has completed several
acquisitions, which have resulted in significant amounts of intangible assets
being recorded by the Company, as detailed below. As noted above, the accounting
for intangible assets changed significantly in 2002 with the Company being
required under new accounting standards to cease the amortization of goodwill.
See Note 2 and Note 6 to the consolidated financial statements for additional
information regarding intangible assets.
The Company did not announce or complete any acquisitions in 2004. The
Company completed the following acquisitions during 2003:
(a) On January 2, 2003, the Company completed the acquisition of Uwharrie
Insurance Group, Inc. ("Uwharrie"), a Montgomery County based property and
casualty insurance agency. Uwharrie was subsequently merged into First Bank
Insurance. With eight employees, Uwharrie served approximately 5,000 customers,
primarily from its Troy-based headquarters, and had annual commissions of
approximately $500,000. The primary reason for the acquisition was to gain
efficiencies of scale with the Company's existing property and casualty
insurance business. The acquisition resulted in the Company recording an
intangible asset of approximately $544,000. Based on an independent appraisal,
$50,000 of the intangible asset recorded was determined to be attributable to
the value of the noncompete agreement signed as part of the transaction and is
being amortized over its two year life, $151,000 was determined to be
attributable to the value of the customer
16
list and is being amortized on a straight-line basis over ten years, and the
remaining $343,000 was determined to be goodwill and thus is not being
systematically amortized, but rather is subject to an annual impairment test.
(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 already operated 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. In this transaction, the
shareholders of CCB received 1.2 shares of the Company's stock and $20.00 in
cash for each share of CCB stock they owned at the time of closing. The
transaction was completed on January 15, 2003, with the Company paying cash of
$8.3 million, issuing 499,332 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. As of the date of the
acquisition, CCB had approximately $48 million in loans, $59 million in deposits
and $70 million in total assets. In connection with the acquisition of CCB, the
Company recorded total intangible assets of $10.2 million, of which $771,000 was
determined to be the value of the core deposit base and is being amortized on an
accelerated basis over ten years, and $9.4 million was determined to be goodwill
and thus is not being systematically amortized, but rather is subject to an
annual impairment test.
(c) 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 primary reason for the acquisition was to expand into new markets and
increase the Company's customer base. Subject to certain limitations, the
Company paid a deposit premium of 14.1% for the branches, which resulted in the
Company recording intangible assets relating to this purchase of $14.2 million.
The identifiable intangible asset associated with the fair value of the core
deposit base, as determined by an independent consulting firm, was valued at
approximately $1.3 million and is being amortized as expense on an accelerated
basis over a ten year period. The remaining intangible asset of $12.9 million
has been classified as goodwill, and thus is not being systematically amortized,
but rather is subject to an annual impairment test.
The following table contains a condensed balance sheet that indicates the
amount assigned to each major asset and liability as of the respective
acquisition dates for the 2003 acquisitions described above.
Uwharrie Carolina RBC
Insurance Community Centura
Assets acquired Group Bank Branches Total
------------------------------ --------- ----------- ------------- ----------
(in millions)
Cash $ -- 7.0 62.4 69.4
Securities -- 13.1 -- 13.1
Loans, gross -- 47.7 24.8 72.5
Allowance for loan losses -- (0.8) (0.3) (1.1)
Premises and equipment -- 0.8 1.0 1.8
Other -- 2.5 0.2 2.7
------- ----- ------ ------
Total assets acquired -- 70.3 88.1 158.4
------- ----- ------ ------
Liabilities assumed
------------------------------
Deposits -- 58.9 102.0 160.9
Borrowings -- 2.1 -- 2.1
Other -- 0.6 0.3 0.9
------- ----- ------ ------
Total liabilities assumed -- 61.6 102.3 163.9
------- ----- ------ ------
Value of cash paid and/or
stock issued to
stock-holders of acquiree
0.5 18.9 n/a 19.4
------- ----- ------ ------
Intangible assets recorded $ 0.5 10.2 14.2 24.9
======= ===== ====== ======
17
The Company completed one acquisition in 2002 as follows:
(a) On October 4, 2002, the Company completed the purchase of a branch of
RBC Centura Bank located in Broadway, North Carolina. The Company assumed the
branch's $8 million in deposits and $3 million in loans. The primary reason for
this acquisition was to increase the Company's presence in Lee County, a market
where the Company already had two branches with a large customer base. An
intangible asset of $0.7 million, all of which was allocated to goodwill, was
recorded in connection with this acquisition.
There are many factors that the Company considers when evaluating how much
to offer for potential acquisition candidates - in the form of a purchase price
comprised of cash and/or stock for a whole company purchase or a deposit premium
in a branch purchase. Most significantly, the Company compares expectations of
future earnings per share on a stand-alone basis with projected future earnings
per share assuming completion of the acquisition under various pricing
scenarios. Significant assumptions that affect this analysis include the
estimated future earnings stream of the acquisition candidate, the amount of
cost efficiencies that can be realized, and the interest rate earned/lost on the
cash received/paid. In addition to the earnings per share comparison, the
Company also considers other factors including (but not limited to): marketplace
acquisition statistics, location of the candidate in relation to the Company's
expansion strategy, market growth potential, management of the candidate,
potential integration issues (including corporate culture), and the size of the
acquisition candidate.
ANALYSIS OF RESULTS OF OPERATIONS
Net interest income, the "spread" between earnings on interest-earning
assets and the interest paid on interest-bearing liabilities, constitutes the
largest source of the Company's earnings. Other factors that significantly
affect operating results are the provision for loan losses, noninterest income
such as service fees and noninterest expenses such as salaries, occupancy
expense, equipment expense and other overhead costs, as well as the effects of
income taxes.
Overview - 2004 Compared to 2003
Net income for the year ended December 31, 2004 amounted to $20,114,000,
or $1.40 per diluted share, a 3.6% increase in net income and a 3.7% increase in
diluted earnings per share over the net income of $19,417,000, or $1.35 per
diluted share, reported for 2003. All per share amounts have been adjusted to
reflect the 3-for-2 stock split paid on November 15, 2004.
Total assets at December 31, 2004 amounted to $1.64 billion, 11.1% higher
than a year earlier. Total loans at December 31, 2004 amounted to $1.37 billion,
a 12.2% increase from a year earlier, and total deposits amounted to $1.39
billion at December 31, 2004, an 11.2% increase from a year earlier.
Approximately $50 million of the total 2004 deposit increase of $139 million
related to wholesale brokered deposits that the Company gathered in order to
help fund the high loan growth experienced during 2004.
The increase in loans and deposits over the past twelve months resulted in
an increase in the Company's net interest income from 2003 to 2004. Net interest
income for the year ended December 31, 2004 amounted to $61.3 million, a 9.9%
increase over the $55.8 million recorded in 2003. The positive impact on net
interest income from the increases in loans and deposits more than offset a
lower net interest margin realized in 2004 compared to 2003. The Company's net
interest margin (tax-equivalent net interest income divided by average earning
assets) for 2004 was 4.31% compared to the 4.52% in 2003. The Company's net
interest margin was negatively impacted by the thirteen interest rate cuts
initiated by the Federal Reserve from 2001 to 2003 and the Company's shift
toward originating more adjustable rate loans compared to fixed rate loans to
protect the Company from anticipated increases in interest rates. The Federal
Reserve increased interest rates by 125 basis points in the second half of 2004
which was responsible for the Company's net interest margin increasing during
the third and fourth quarters of 2004 after having decreased for the immediately
preceding five consecutive quarters.
18
The Company's provision for loan losses did not vary significantly in 2004
compared to 2003, amounting to $2,905,000 in 2004 compared to $2,680,000 in
2003. The Company's asset quality ratios remained sound in 2004, with a
net-charge off ratio (net charge-offs divided by average loans) of 0.14% in 2004
compared to 0.10% in 2003, and a December 31, 2004 nonperforming asset to total
asset ratio of 0.32%, compared to 0.39% at the prior year end.
For the year ended 2004, noninterest income amounted to $15.9 million, a
6.3% increase from $14.9 million in 2003. Except for fees from presold
mortgages, most components of noninterest income increased for the year ended
2004 compared to 2003 as a result of the Company's overall growth, particularly
the Company's October 2003 acquisition of four bank branches with $102 million
in deposits, which impacted the Company's noninterest income for all twelve
months of 2004 compared to only three months in 2003. Fees from presold
mortgages decreased significantly in 2004 as a result of a decline in mortgage
refinancing activity caused by higher mortgage interest rates. Fees from presold
mortgages decreased from $2.3 million in 2003 to $1.0 million in 2004. The
Company realized securities gains and other gains of $648,000 in 2004 compared
to $306,000 in 2003.
Noninterest expenses for the year ended December 31, 2004 amounted to
$43.7 million, a 15.2% increase from the $38.0 million recorded in 2003. The
increase in noninterest expenses is primarily attributable to growth in the
Company's branch network, which increased by eight branches since October 2003.
The Company's effective tax rates were slightly lower for 2004 compared to
2003, amounting to 34.1% in 2004 compared to 35.3% for 2003. The lower effective
tax rate in 2004 was caused by several factors including higher amounts of state
tax exempt income, higher amounts of low income housing investment tax credits,
and the reversal of an $89,000 tax liability that was recorded in connection
with a previous corporate acquisition.
Overview - 2003 Compared to 2002
Net income for the year ended December 31, 2003 amounted to $19,417,000,
or $1.35 per diluted share, a 12.7% increase in net income and a 9.8% increase
in diluted earnings per share over the net income of $17,230,000, or $1.23 per
diluted share, reported for the twelve months ended December 31, 2002.
The increase in net income in 2003 was primarily attributable to an
increase in net interest income. Net interest income for the year ended December
31, 2003 amounted to $55.8 million, an increase of $6.4 million, or 12.9%, over
the $49.4 million recorded in 2002. The increase in net interest income was
caused primarily by growth in the Company's loans and deposits. Average loans
outstanding during 2003 were $1.11 billion, or 16.6% higher than in 2002, while
average deposits outstanding increased by 14.1% in 2003 to $1.15 billion.
The positive impact on net interest income from the increases in loans and
deposits more than offset a slightly lower net interest margin realized in 2003
compared to 2002. The Company's net interest margin (tax-equivalent net interest
income divided by average earning assets) for the year ended December 31, 2003
was 4.52% compared to the 4.58% net interest margin realized for 2002. The
slight decrease in net interest margin was caused primarily by the negative
impact of the interest rate cuts initiated by the Federal Reserve in the fourth
quarter of 2002 and the second quarter of 2003.
The provision for loan losses did not vary significantly in 2003 compared
to 2002, amounting to $2,680,000 and $2,545,000, respectively. The Company's
asset quality ratios were sound in both years, with a net-charge off ratio (net
charge-offs divided by average loans) of 0.10% in 2003 compared to 0.11% in
2002, and a December 31, 2003 nonperforming asset to total asset ratio of 0.39%,
compared to 0.36% at the prior year end.
Most components of noninterest income and noninterest expense also
increased in 2003 as a result of the Company's overall growth. Noninterest
income for 2003 was also positively impacted by 1) high refinancing activity
driven by a low interest rate environment that increased the amount of fees from
presold mortgages, 2)
19
the acquisition of Uwharrie Insurance Group, which increased commissions from
financial product sales, and 3) securities gains.
The Company's income taxes increased 14.4% from $9,282,000 in 2002 to
$10,617,000 in 2003. The increase in income tax expense was a result of higher
income before income taxes. The effective income tax rate for both years was
approximately 35%.
Net Interest Income
Net interest income on a reported basis amounted to $61,290,000 in 2004,
$55,760,000 in 2003, and $49,390,000 in 2002. For internal purposes and in the
discussion that follows, the Company evaluates its net interest income on a
tax-equivalent basis by adding the tax benefit realized from tax-exempt
securities to reported interest income. Net interest income on a tax-equivalent
basis amounted to $61,765,000 in 2004, $56,278,000 in 2003, and $49,925,000 in
2002.
Table 2 analyzes net interest income on a tax-equivalent basis. The
Company's net interest income on a taxable-equivalent basis increased by 9.7% in
2004 and 12.7% in 2003. There are two primary factors that cause changes in the
amount of net interest income recorded by the Company - 1) growth in loans and
deposits, and 2) the Company's net interest margin (tax-equivalent net interest
income divided by average interest-earning assets).
As illustrated in Table 3, in both 2004 and 2003, net interest income was
positively impacted by higher amounts of average loans and deposits outstanding.
In 2004, the average amount of loans outstanding increased 16.4%, and the
average amount of deposits outstanding increased 13.3%. In 2003, the average
amount of loans outstanding increased 16.6%, and the average amount of deposits
outstanding increased 14.1%. The higher amounts of average loans and deposits
outstanding in 2004 and 2003 were a result of both internal growth, as well as
growth achieved in corporate acquisitions. Although the Company did not complete
any acquisitions in 2004, the increases in the Company's average loan and
deposit amounts in 2004 compared to 2003 were impacted by acquisitions completed
in 2003, as the loans and deposits assumed in the 2003 acquisitions were
outstanding for the full year in 2004 compared to only a partial year in 2003
(from the date of the respective acquisitions). For additional analysis
regarding the nature of the Company's loan and deposit growth see "Analysis of
Financial Condition and Changes in Financial Condition - Overview" below.
Table 3 also illustrates that changes in interest rates resulted in
reductions in interest income and interest expense in 2003 and 2004. In 2003,
interest rates earned/paid were both lower due to a lower interest rate
environment. In 2004, although the average prime rate was slightly higher than
in 2003, the average yields realized on earning assets and the average rates
paid on interest-bearing liabilities for the year were both lower than in 2003.
The average yield on earning assets was lower in 2004 than in 2003 due to a
growing percentage of adjustable rate loans, which carry lower initial rates
than fixed rate loans (see below for additional discussion), and lower
renewal/reinvestment rates earned on fixed rate earning assets that matured
during 2004 that had been originated during periods of higher interest rates.
The average rate paid on interest-bearing liabilities was lower in 2004 than in
2003 due to the interest rates on deposits that are set by management not being
increased at the same time, or by the full amount, as increases in the prime
rate of interest that occurred in 2004. Also, interest expense on time deposits
was otherwise lower as a result of time deposits that were originated prior to
the increases in interest rates, with maturities subsequent to the dates of the
rate changes. The reduction in interest income for both years was more than the
reduction in interest expense, and thus changes in interest rates negatively
impacted the Company's net interest income in both years. However, the positive
impact of having higher amounts of loans and deposits more than offset the
negative impact that rates had on the Company, resulting in the increases in net
interest income experienced in 2003 and 2004.
The Company measures the spread between the yield on its earning assets
and the cost of its funding primarily in terms of the ratio entitled "net
interest margin" which is defined as tax-equivalent net interest income divided
by average earning assets. The Company's net interest margin has declined in
each of the past two years, amounting to 4.31% in 2004, 4.52% in 2003, and 4.58%
in 2002.
20
The Company's net interest margin was negatively impacted by the interest
rate environment and a shift towards originating more adjustable rate loans
compared to fixed rate loans to protect the Company from an expected rise in
interest rates. The mostly declining interest rate environment in effect from
2001 until June 30, 2004, and the level to which it dropped, resulted in the
Company being unable to reset deposit rates by an amount that would offset the
negative impact of the lower yields earned on the Company's interest earning
assets. In the declining rate environment, the Company's interest-sensitive
assets repriced sooner (most on 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. Additionally, as
fixed rate earning assets originated during periods of higher interest rates
matured, they were generally replaced with lower yielding earning assets. The
Company was unable to reset deposit rates by the full amount of the interest
rate cuts because of their already near-zero rates and because of competitive
pricing pressures. Also, interest rates paid on time deposits are generally
fixed and are 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 affect only 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 found
it especially difficult 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 areas.
The shift in the Company's loan mix from fixed rate loans to adjustable
rate loans has occurred primarily over the past three years. At December 31,
2001, the Company's loan portfolio was comprised of 57% fixed rate loans and 43%
adjustable rate loans. Since that time, the ratio gradually shifted as the
Company has originated more adjustable rate loans than fixed rate loans. At
December 31, 2004, the Company's loan portfolio was comprised of 60% adjustable
rate loans and 40% fixed rate loans. The primary reason for this shift was that
with interest rates at historically low levels, the Company more attractively
priced adjustable rate loans in order to avoid locking in fixed rate loans at a
time when most economists believed that rates would inevitably rise. Although
the Company believes that this strategy was prudent given the historically low
interest rate environment, it has had a negative effect on the Company's
recently realized net interest margins because adjustable rate loans carry lower
initial rates than fixed rate loans of similar maturities. Additionally, the
generally declining rate environment experienced from 2001 through June 2004
resulted in the Company's adjustable rate loans repricing to lower levels
following each rate cut.
Another factor affecting the Company's net interest margin over the past
two years has been an increased reliance on time deposit greater than $100,000
and borrowings. Time deposits greater than $100,000 and borrowings are generally
the highest cost sources of funds for the Company and their increased usage has
been necessary to fund high loan growth that has exceeded core retail deposit
growth. The ratio of the average amount of time deposits greater than $100,000
and borrowings to total funding (total deposits plus borrowings) increased from
20.1% in 2002, to 22.7% in 2003, to 25.6% in 2004.
In the second half of 2004, the Federal Reserve increased interest rates
by a total of 125 basis points, which was largely responsible for the Company's
net interest margin increasing for each of last two quarters of 2004, rising
from 4.26% in the second quarter of 2004 to 4.28% in the third quarter of 2004
and to 4.32% in the fourth quarter of 2004.
See additional information regarding net interest income in the section
entitled "Interest Rate Risk."
Provision for Loan Losses
The provision for loan losses charged to operations is an amount
sufficient to bring the allowance for loan losses to an estimated balance
considered appropriate to absorb probable losses inherent in the portfolio.
21
Management's determination of the adequacy of the allowance is based on the
level of loan growth, an evaluation of the portfolio, current economic
conditions, historical loan loss experience and other risk factors.
The provision for loan losses recorded by the Company did not vary
significantly over the past three years, amounting to $2,905,000 in 2004
compared to $2,680,000 in 2003 and $2,545,000 in 2002. Internal loan growth was
strong for each of those years, amounting to $148 million in both 2004 and 2003
and $105 million in 2002. There was no external/acquired loan growth in 2004,
while in 2003 and 2002 there was acquired growth of $72.5 million and $3.1
million, respectively, for which a preexisting allocation for loan losses was
already in place. Asset quality ratios were stable during each of the three
years in the period ended December 31, 2004.
See the section entitled "Allowance for Loan Losses and Loan Loss
Experience" below for a more detailed discussion of the allowance for loan
losses. The allowance is monitored and analyzed regularly in conjunction with
the Company's loan analysis and grading program, and adjustments are made to
maintain an adequate allowance for loan losses.
Noninterest Income
Noninterest income recorded by the Company amounted to $15,864,000 in
2004, $14,918,000 in 2003, and $11,968,000 in 2002.
As shown in Table 4, core noninterest income, which excludes gains and
losses from sales of securities, loans, and other assets, amounted to
$15,216,000 in 2004, a 4.1% increase from $14,612,000 in 2003. The 2003 core
noninterest income of $14,612,000 was 22.3% higher than the $11,946,000 recorded
in 2002.
See Table 4 and the following discussion for an understanding of the
components of noninterest income.
Service charges on deposit accounts in 2004 amounted to $9,064,000, a
14.2% increase compared to the $7,938,000 recorded in 2003. The 2003 amount of
$7,938,000 was 15.8% higher than the 2002 amount of $6,856,000. The primary
factors that have increased the amount of service charges on deposits have been
1) periodic rate increases, 2) service charges earned from internally generated
deposit growth, and 3) service charges earned from acquired deposits. Deposit
service charge rates are generally increased 2%-4% per year, while internal
growth among deposit transaction accounts was 4%-5% in both 2004 and 2003. The
deposits assumed in the acquisition of the four RBC Centura branches on October
24, 2003 generated approximately $720,000 in service charges for the full year
of 2004 compared to $125,000 realized during the partial period in 2003
subsequent to the acquisition. This incremental income of $595,000 accounted for
approximately 7.5% of the 14.2% increase in service charges on deposit accounts.
In comparing 2003 to 2002, the $125,000 realized in 2003 from the four RBC
Centura branches along with the $650,000 in deposit service charges realized
from CCB subsequent to its January 15, 2003 acquisition date accounted for
approximately 11.3% of the 15.8% increase in service charges on deposit accounts
in 2003. The Company's income from service charges on deposit accounts in the
fourth quarter of 2004 was essentially flat when compared to the fourth quarter
of 2003, which was a result of a higher customer deposit base, the positive
effects of which were offset by the negative impact that higher short term
interest rates that occurred in the second half of 2004 had on service charges
that the Company earned from its commercial depositors - in the Company's
commercial account service charge rate structure, commercial depositors are
given "earnings credits" (negatively impacting service charges) on their average
deposit balances that are tied to short term interest rates. For this reason,
the Company expects little or no growth in this category of income in 2005.
Other service charges, commissions and fees amounted to $3,361,000 in
2004, a 24.0% increase from the $2,710,000 earned in 2003. The 2003 amount of
$2,710,000 was 16.0% higher than the $2,336,000 recorded in 2002. This category
of noninterest income includes items such as credit card interchange income
related to merchants and customers, debit card interchange income, ATM charges,
safety deposit box rentals, fees from sales of personalized checks, and check
cashing fees. This category of income grew primarily because of
22
increases in these activity-related fee services as a result of credit and debit
card promotions that increased card use and the overall growth in the Company's
total customer base, including growth achieved from corporate acquisitions.
Fees from presold mortgages amounted to $969,000 in 2004, a 58.4% decrease
from the 2003 amount of $2,327,000. The 2003 amount was a 35.8% increase from
the $1,713,000 recorded in 2002. Fees from presold mortgages peaked in 2003 as a
result of a high level of mortgage loan refinancings caused by a very low
residential mortgage interest rate environment. In 2004, the high levels of
mortgage loan refinancings slowed because 1) many homeowners had already
refinanced their mortgages in previous years, and 2) there was a slight rise in
residential mortgage interest rates.
Commissions from sales of insurance and financial products amounted to
$1,406,000 in 2004, $1,304,000 in 2003, and $738,000 in 2002. This line item
includes commissions the Company receives from three sources - 1) sales of
credit insurance associated with new loans, 2) commissions from the sales of
investment, annuity, and long-term care insurance products, and 3) commissions
from the sale of property and casualty insurance. The following table presents
the contribution of each of the three sources to the total amount recognized in
this line item:
2004 2003 2002
($ in thousands) ------ ------ ------
Commissions earned from:
----------------------------------
Sales of credit insurance $ 291 300 326
Sales of investments, annuities,
and long term care insurance 291 299 210
Sales of property and casualty
insurance 824 705 202
------ ------ ------
Total $1,406 1,304 738
====== ====== ======
The increase in commissions from sales of investments, annuities, and long
term care insurance from 2002 to 2003 is primarily due to the hiring of
additional staff in this area during 2003. As it relates to commissions earned
from the sale of property and casualty insurance, the significant increase in
this income in 2003 was a result of the acquisition of Uwharrie Insurance Group,
which was completed on January 2, 2003. See "Merger and Acquisition Activity"
above for additional discussion.
Data processing fees amounted to $416,000 in 2004, $333,000 in 2003, and
$303,000 in 2002. As noted earlier, Montgomery Data makes its excess data
processing capabilities available to area financial institutions for a fee. At
December 31, 2004, the Company processed for five area banks. These fees have
increased as a result of an increase in the size and number of transactions
generated by those clients. The Company has been notified by three of the five
financial institutions that utilize this service that they intend to terminate
their contracts with the Company effective in the first half of 2005 - each
client is switching to a lower cost service provider. Fees from these three
institutions amounted to $328,000 in 2004. Montgomery Data intends to continue
to market this service to area banks, but does not currently have any near-term
prospects for additional business.
Noninterest income not considered to be "core" amounted to net gains of
$648,000 in 2004, $306,000 in 2003, and $22,000 in 2002. The 2004 net gain of
$648,000 included securities gains of $299,000, which were effected primarily in
order to realize current income. Also in 2004, the Company sold a former bank
branch building that resulted in a gain of approximately $350,000. The 2003 net
gain of $306,000 primarily related to securities gains of $218,000 effected
primarily to realize current income and an $82,000 gain from a sale of vacant
land located beside one of the Company's existing branches. The 2002 net gain of
$22,000 primarily related to miscellaneous securities gains of $25,000.
23
Noninterest Expenses
Noninterest expenses for 2004 were $43,717,000, compared to $37,964,000 in
2003 and $32,301,000 in 2002. Table 5 presents the components of the Company's
noninterest expense during the past three years.
Based on the recorded amounts noted above, noninterest expenses increased
15.2% in 2004 and 17.5% in 2003. The increases in noninterest expenses over the
past two years have occurred in nearly every line item of expense and have been
primarily as a result of the significant growth experienced by the Company, both
internally and by acquisition. Over the past two years, the number of the
Company's branches has increased from 48 to 59, and the number of full time
equivalent employees has increased from 447 at December 31, 2002 to 563 at
December 31, 2004. Additionally, from December 31, 2002 to December 31, 2004,
the amount of loans outstanding increased 37% and deposits increased 32%. The
incremental expense associated with the January 2003 acquisition of CCB was
approximately $1.7 million for each of 2003 and 2004. The incremental expense
associated with the acquisition of the four RBC Centura branches in October 2003
was approximately $380,000 in 2003 and $1.9 million in 2004. In 2004, the
Company's incremental external costs associated with complying Section 404 of
the Sarbanes-Oxley Act amounted to approximately $190,000. The Company expects
to incur an additional $350,000-$400,000 in external costs related to Section
404 in the first quarter of 2005 and an additional $150,000-$200,000 in the
second quarter of 2005. The incremental costs relate to higher external audit
fees and outside consultant fees. These amounts do not include the value of the
significant internal resources devoted to compliance.
Income Taxes
The provision for income taxes was $10,418,000 in 2004, $10,617,000 in
2003, and $9,282,000 in 2002.
The effective tax rate for 2004 was approximately 34% in 2004 compared to
approximately 35% in each of 2003 and 2002. The slightly lower effective tax
rate in 2004 was caused by several factors including higher amounts of state tax
exempt income, higher amounts of low income housing investment tax credits, and
the reversal of an $89,000 tax liability that was recorded in connection with a
previous corporate acquisition.
The section below entitled "Liquidity, Commitments, and Contingencies"
contains discussion regarding possible loss exposure related to taxes. As
described in that section, the Company plans to discontinue certain elements of
the Company's operating structure, which is expected to increase the Company's
effective tax rate from approximately the 34%-35% experienced in recent years to
approximately 39%. If the Company's effective tax rate had been 39% in 2004, the
Company's net income would have been lower by approximately $1.3 million.
Table 6 presents the components of tax expense and the related effective
tax rates.
Stock-Based Compensation
For the three years ended December 31, 2004, the Company was not required
to record an expense for the value of stock options granted to employees. As
discussed in more detail below in the next to last paragraph of the section
entitled "Current Accounting and Regulatory Matters," a new accounting standard
("Statement 123(R)", as defined below) will require the Company to record the
value of stock options as an expense in the income statement beginning July 1,
2005. Note 1(k) to the consolidated financial statements contains pro forma net
income and earnings per share information as if the Company applied the fair
value recognition provisions required by the new standard. Note 1(k) indicates
that the Company's stock-based employee compensation expense would have been
$1,291,000, $319,000, and $256,000 for the three years ended December 31, 2004,
2003, and 2002, respectively. The significant increase in expense in 2004
compared to 2003 and 2002 is primarily due to the Company granting 128,000
employee options in April 2004 with immediate vesting (under the new standard,
expense related to the fair market value of options is recognized when the
options vest). Prior to that grant, all previous employee option grants had five
year vesting periods (20% vesting each year), and thus the amount of
24
expense related to options was generally spread over the five year vesting
period. The Compensation Committee of the Board of Directors of the Company
granted the April 2004 options without any vesting requirements for two reasons
- - 1) the options were granted primarily as a reward for past performance and
therefore had already been "earned" in the view of the Committee, and 2) to
potentially minimize the impact that any change in accounting standards for
stock options could have on future years' reported net income. The Company
expects that future employee stock option grants will revert to having five year
vesting periods.
As noted above, beginning on July 1, 2005, the Company will be required to
expense, within its income statement, the value of stock option grants that vest
from that date forward. The Company currently has outstanding stock options with
a fair value of $103,000 that will vest on a pro-rata basis between July 1, 2005
and December 31, 2005, with $52,000 vesting in the third quarter of 2005 and
$51,000 vesting in the fourth quarter of 2005. In 2006 and 2007, the Company's
stock-based compensation expense related to options currently outstanding will
be approximately $123,000 and $43,000, respectively. New stock option grants
that vest after July 1, 2005 will increase the amount of stock-based
compensation expense recorded by the Company. Except for grants to directors
(see below), the Company cannot estimate the amount of future stock option
grants at this time. In the past, stock option grants to employees have been
irregular, generally falling into three categories - 1) to attract and retain
new employees, 2) to recognize changes in responsibilities of existing
employees, and 3) to periodically reward exemplary performance. As it relates to
director stock option grants, the Company expects to continue to grant 2,250
stock options to each of the Company's directors on June 1 of each year until
the 2014 expiration of the current stock option plan. In 2004, the amount of pro
forma expense associated with the director grants was $126,000.
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Overview
Over the past two years, the Company has achieved high increases in its
levels of loans and deposits through a combination of internal growth and growth
from acquisitions. The following table presents information regarding the nature
of the Company's growth in 2004 and 2003:
Balance at Balance at Total Percentage growth,
(in thousands) beginning Internal Growth from end of percentage excluding
of period growth acquisitions period growth acquisitions
------------- ----------- --------------- ----------- ----------- -------------------
2004
- ------------------------------
Loans $1,218,895 148,158 -- 1,367,053 12.2% 12.2%
========== ========= ========= ========= ========= =========
Deposits - Noninterest bearing 146,499 19,279 -- 165,778 13.2% 13.2%
Deposits - Savings, NOW, and
Money Market 462,876 9,935 -- 472,811 2.1% 2.1%
Deposits - Time>$100,000 238,535 96,221 -- 334,756 40.3% 40.3%
Deposits - Time<$100,000 401,454 13,969 -- 415,423 3.5% 3.5%
---------- --------- --------- --------- --------- ---------
Total deposits $1,249,364 139,404 -- 1,388,768 11.2% 11.2%
========== ========= ========= ========= ========= =========
2003
- ------------------------------
Loans $ 998,547 147,821 72,527 1,218,895 22.1% 14.8%
========== ========= ========= ========= ========= =========
Deposits - Noninterest bearing 112,380 (3,714) 37,833 146,499 30.4% -3.3%
Deposits - Savings, NOW, and
Money Market 387,691 24,583 50,602 462,876 19.4% 6.3%
Deposits - Time>$100,000 199,794 21,525 17,216 238,535 19.4% 10.8%
Deposits - Time<$100,000 356,092 (9,814) 55,176 401,454 12.7% -2.8%
---------- --------- --------- --------- --------- ---------
Total deposits $1,055,957 32,580 160,827 1,249,364 18.3% 3.1%
========== ========= ========= ========= ========= =========
As shown in the table above, the Company experienced high internal growth
in loans in 2004 and 2003 with
25
internal growth of 12.2% and 14.8%, respectively. Growth from acquisitions
increased the loan growth rate in 2003 to 22.1%.
Deposits increased 11.2% in 2004 and 18.3% in 2003. In 2004, of the $96
million in growth in the category "Deposits - Time>$100,000," $50 million
related to brokered deposits that the Company attracted in order to fund the
strong loan growth experienced. Excluding the brokered deposits, the Company's
deposit growth in 2004 was 7.2%. In 2003, internal deposit growth was 3.1%, with
deposits assumed in acquisitions boosting total deposit growth from 3.1% to
18.3%.
The Company believes the significantly higher internal growth rates for
loans compared to deposits over the past two years is largely attributable to
the type of customers the Company has been able to attract. Most of the
Company's loan growth has come from small-business customers that need loans in
order to expand their business, and have few deposits. Additionally, the Company
has found it difficult to compete for retail deposits in recent years. The
Company frequently competes against banks in the marketplace that either 1) are
so large that they enjoy better economies of scale over the Company and can thus
offer higher rates, or 2) are recently started banks that are focused on
building market share, and not necessarily positive earnings, by offering high
deposit rates. The Company enjoys advantages in the loan marketplace by having
seasoned lenders in place that have the experience necessary to oversee the
completion of a loan and the autonomy to be able to make timely decisions.
With loan growth exceeding deposit growth over each of the past two years,
the Company's liquidity has been reduced. The Company increased its borrowings
from $30 million at December 31, 2002 to $76 million at December 31, 2003 to $92
million at December 31, 2004 in order to help fund the excess loan growth.
Additionally, the Company entered the brokered deposit market for the first time
in 2004 and gathered $50 million in brokered deposits to help fund loan growth.
In 2004, regulatory capital ratios declined slightly as asset growth
exceeded capital growth. In 2002 and 2003, as a result of the negative impact
that acquisition growth had on the Company's regulatory capital ratios, the
Company raised capital in each of the fourth quarters of 2002 and 2003 by
issuing $20.6 million each year (for a total of $41.2 million) in trust
preferred debt securities, which qualify as regulatory capital for the Company.
All of the Company's capital ratios have significantly exceeded the minimum
regulatory thresholds for all periods covered by this report.
Although the Company's market area, the central Piedmont region of North
Carolina, has experienced recessionary times over most of the past several
years, the Company's asset quality ratios have remained fairly stable over the
past three years with net charge-offs to average loans ranging from 10 basis
points to 14 basis points and nonperforming assets to total assets ranging from
32 basis points to 36 basis points.
Distribution of Assets and Liabilities
Table 7 sets forth the percentage relationships of significant components
of the Company's balance sheets at December 31, 2004, 2003, and 2002.
The relative size of the components of the balance sheet has not varied
significantly over the past two years with loans comprising 81%-82% of total
assets and deposits comprising 84%-87%. The most significant variance in Table 7
is the increase in 2004 in the percentage of time deposits of $100,000 or more,
which increased from 16% at December 31, 2003 to 21% at December 31, 2004. The
Company aggressively attracted large time deposits in 2004, including gathering
the $50 million in brokered deposits, in order to help fund the strong loan
growth experienced that was not able to be fully funded with core retail
deposits.
26
Securities
Information regarding the Company's securities portfolio as of December
31, 2004, 2003, and 2002 is presented in Tables 8 and 9.
The composition of the investment securities portfolio reflects the
Company's investment strategy of maintaining an appropriate level of liquidity
while providing a relatively stable source of income. The investment portfolio
also provides a balance to interest rate risk and credit risk in other
categories of the balance sheet while providing a vehicle for the investment of
available funds, furnishing liquidity, and supplying securities to pledge as
required collateral for certain deposits.
Total securities available for sale and held to maturity amounted to
$102.6 million, $117.7 million, and $80.8 million at December 31, 2004, 2003,
and 2002, respectively. The decrease in securities from December 31, 2003 to
December 31, 2004 was primarily attributable to called and maturing bonds, as
well as a high level of principal repayments on mortgage-backed securities due
to the low interest rate environment. Instead of reinvesting the
maturities/paydowns back into securities, the proceeds were used to fund loan
growth. The increase in securities available for sale from December 31, 2002 to
December 31, 2003 was primarily attributable to securities purchased with a
portion of the $62 million in funds received from the October 2003 RBC Centura
branch purchase.
The mix of the types of the Company's securities was similar at December
31, 2004 compared to December 31, 2003. In comparing 2003 to 2002, the mix of
securities changed in 2003 due to the mix of new securities purchased with a
portion of the $62 million in funds received in the acquisition of the four RBC
Centura branches. The Company purchased primarily U.S. Government agency
securities with these funds in order to assure a portfolio mix consistent with
the Company's investment policy, which limits the amount of mortgage-backed
securities and corporate bonds in which the Company can invest.
The majority of the Company's U.S. Government agency debt securities are
issued by the Federal Home Loan Bank and carry one maturity date, often with an
issuer call feature, while the mortgage-backed securities have been primarily
issued by Freddie Mac and Fannie Mae and vary in their repayment in correlation
with the underlying pools of home mortgage loans. The Company's investment in
corporate bonds is primarily comprised of trust preferred securities issued by
other North Carolina bank holding companies.
Included in mortgage-backed securities at December 31, 2004 were
collateralized mortgage obligations ("CMOs") with an amortized cost of
$15,928,000 and a fair value of $15,831,000. Included in mortgage-backed
securities at December 31, 2003 were CMOs with an amortized cost of $21,649,000
and a fair value of $21,458,000. Included in mortgage-backed securities at
December 31, 2002 were CMOs with an amortized cost of $12,590,000 and a fair
value of $12,720,000. The CMOs that the Company has invested in are
substantially all "early tranche" portions of the CMOs, which minimizes
long-term interest rate risk to the Company.
At December 31, 2004, a net unrealized gain of $1,186,000 was included in
the carrying value of securities classified as available for sale, compared to a
net unrealized gain of $1,868,000 at December 31, 2003 and a net unrealized gain
of $1,399,000 at December 31, 2002. The lower unrealized gain position at
December 31, 2004 compared to December 31, 2003 was caused primarily by a higher
interest rate environment in effect at year end 2004 compared to year end 2003.
Higher interest rates negatively impact the value of fixed income securities.
Another factor was the Company's sale of a portion of its bond portfolio that
had unrealized gains at December 31, 2003. The increase in the unrealized gain
position from 2002 to 2003 was a result of the lower interest rate environment
in effect at year end 2003 compared to year end 2002. Management evaluated any
unrealized losses on individual securities at each year end and determined them
to be of a temporary nature and caused by fluctuations in market interest rates,
not by concerns about the ability of the issuers to meet their obligations. Net
unrealized gains, net of applicable deferred income taxes, of $723,000,
$1,140,000, and $853,000 have been reported as part of a separate component of
shareholders' equity (accumulated other comprehensive income) as
27
of December 31, 2004, 2003, and 2002, respectively.
The fair value of securities held to maturity, which the Company carries
at amortized cost, was more than the carrying value at December 31, 2004 and
2003 by $426,000 and $700,000, respectively. Management evaluated any unrealized
losses on individual securities at each year end and determined them to be of a
temporary nature and caused by fluctuations in market interest rates, not by
concerns about the ability of the issuers to meet their obligations.
Table 9 provides detail as to scheduled contractual maturities and book
yields on securities available for sale and securities held to maturity at
December 31, 2004. Mortgage-backed and other amortizing securities are shown
maturing in the time periods consistent with their estimated lives based on
expected prepayment speeds.
The weighted average taxable-equivalent yield for the securities available
for sale portfolio was 4.50% at December 31, 2004. The expected weighted average
life of the available for sale portfolio using the call date for above-market
callable bonds, the maturity date for all other non-mortgage-backed securities,
and the expected life for mortgage-backed securities, was 4.6 years.
The weighted average taxable-equivalent yield for the securities held to
maturity portfolio was 5.65% at December 31, 2004. The expected weighted average
life of the held to maturity portfolio using the call date for above-market
callable bonds and the maturity date for all other securities, was 2.3 years.
As of December 31, 2004 and 2003, the Company held no investment
securities of any one issuer, other than U.S. Treasury and U.S. Government
agencies or corporations, in which aggregate book values and market values
exceeded 10% of shareholders' equity.
Loans
Table 10 provides a summary of the loan portfolio composition at each of
the past five year ends.
The loan portfolio is the largest category of the Company's earning assets
and is comprised of commercial loans, real estate mortgage loans, real estate
construction loans, and consumer loans. The Company restricts virtually all of
its lending to its 23 county market area, which is located in the central
Piedmont region of North Carolina, three counties in Virginia and one county in
South Carolina. The diversity of the region's economic base has historically
provided a stable lending environment.
In 2004, loans outstanding increased $148.2 million, or 12.2%, to $1.36
billion. All of the loan growth in 2004 was internally generated, as the Company
did not complete any acquisitions during the year. In 2003, loans outstanding
increased $220.3 million, or 22.1%, to $1.22 billion. Approximately $148 million
of the 2003 growth was from net internal loan growth, while $73 million was
assumed in acquisitions. The majority of the 2004 and 2003 loan growth occurred
in loans secured by real estate, with approximately $143.1 million, or 96.6% in
2004, and $174.5 million, or 79.2%, in 2003 of the net loan growth occurring in
real estate mortgage or real estate construction loans.
Over the years, the Company's loan mix has remained fairly consistent,
with real estate loans (mortgage and construction) comprising approximately 85%
of the loan portfolio, commercial, financial, and agricultural loans comprising
10%, and consumer installment loans comprising approximately 5% of the
portfolio.
At December 31, 2004, $1.181 billion, or 86.4%, of the Company's loan
portfolio was secured by liens on real property. Included in this total are
$630.5 million, or 46.1% of total loans, in loans secured by liens on 1-4 family
residential properties and $550.4 million, or 40.3% of total loans, in loans
secured by liens on other types of real estate. At December 31, 2003, $1.038
billion, or 85.1%, of the Company's loan portfolio was secured by liens on real
property. Included in this total are $549.9 million, or 45.1% of total loans, in
loans secured by liens
28
on 1-4 family residential properties and $487.9 million, or 40.0% of total
loans, in loans secured by liens on other types of real estate. The Company's
$1.181 billion in real estate mortgage loans at December 31, 2004 can be further
classified as follows - for comparison purposes, the classification of the
Company's $1.038 billion real estate loan portfolio at December 31, 2003 is
shown in parenthesis:
o $411.7 million, or 30.1% of total loans (vs. $360.8 million,
or 29.6% of total loans), are traditional residential mortgage
loans in which the borrower's personal income is the primary
repayment source.
o $389.0 million, or 28.5% of total loans (vs. $361.2 million,
or 29.6% of total loans), are primarily dependent on cash flow
from a commercial business for repayment.
o $117.2 million, or 8.6% of total loans (vs. $98.2 million, or
8.1% of total loans), are real estate construction loans.
o $120.6 million, or 8.8% of total loans (vs. $95.8 million, or
7.9% of total loans), are home equity loans.
o $110.6 million, or 8.1% of total loans (vs. $93.3 million, or
7.7% of total loans), are personal consumer installment loans
in which the borrower has provided residential real estate as
collateral.
o $31.8 million, or 2.3% of total loans (vs. $28.5 million, or
2.3% of total loans), are primarily dependent on cash flow
from agricultural crop sales.
Table 11 provides a summary of scheduled loan maturities over certain time
periods, with fixed rate loans and adjustable rate loans shown separately.
Approximately 22% of the Company's loans outstanding at December 31, 2004 mature
within one year and 73% of total loans mature within five years. The percentages
of variable rate loans and fixed rate loans as compared to total performing
loans were 59.8% and 40.2%, respectively, as of December 31, 2004. The Company
intentionally makes a blend of fixed and variable rate loans so as to reduce
interest rate risk. As noted in the section above entitled "Net Interest
Income," the Company has experienced a significant shift in its loan mix over
the past two years from fixed rate loans to variable rate loans.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, loans past due 90 or more
days and still accruing interest, restructured loans and other real estate. As a
matter of policy the Company places all loans that are past due 90 or more days
on nonaccrual basis, and thus there were no loans at any of the past five year
ends that were 90 days past due and still accruing interest. Table 12 summarizes
the Company's nonperforming assets at the dates indicated.
Nonaccrual loans are loans on which interest income is no longer being
recognized or accrued because management has determined that the collection of
interest is doubtful. Placing loans on nonaccrual status negatively impacts
earnings because (i) interest accrued but unpaid as of the date a loan is placed
on nonaccrual status is either deducted from interest income or is charged-off,
(ii) future accruals of interest income are not recognized until it becomes
probable that both principal and interest will be paid and (iii) principal
charged-off, if appropriate, may necessitate additional provisions for loan
losses that are charged against earnings. In some cases, where borrowers are
experiencing financial difficulties, loans may be restructured to provide terms
significantly different from the originally contracted terms.
Nonperforming loans (which includes nonaccrual loans and restructured
loans) as of December 31, 2004, 2003 and 2002 totaled $3,724,000, $4,295,000,
and $3,017,000, respectively. Nonperforming loans as a percentage of total loans
amounted to 0.27%, 0.35%, and 0.30%, at December 31, 2004, 2003, and 2002,
respectively. The variances in nonperforming loans over the past two years have
been primarily due to changes in nonaccrual loans, as restructured loans have
not changed significantly. The increase in nonaccrual loans from December 31,
2002 to December 31, 2003 related primarily to five loans totaling $1,300,000
placed on nonaccrual basis during the year. Each of these unrelated loans had an
outstanding loan balance of between $225,000 and $325,000, and each loan was
secured by real estate. Each of the five loans was removed from
29
nonaccrual status in 2004 without material loss to the Company. Three of the
five loans were liquidated, while the other two loans were foreclosed upon and
the collateral transferred to other real estate. The decrease in nonaccrual
loans from 2003 to 2004 was also impacted by the resolution of the Company's
largest nonaccrual loan relationship during 2004. This nonaccrual relationship
amounted to $663,000 at December 31, 2003. In 2004, the loan was reduced to zero
through a combination of payments received, property foreclosures, and
charge-offs. In total, the Company received payments of $65,000, foreclosed on
property with a value of $100,000, and charged-off the remaining balance of
$498,000. The Company's largest nonaccrual relationship at December 31, 2004
amounted to $404,000.
If the nonaccrual loans and restructured loans as of December 31, 2004,
2003 and 2002 had been current in accordance with their original terms and had
been outstanding throughout the period (or since origination if held for part of
the period), gross interest income in the amounts of approximately $247,000,
$319,000 and $246,000 for nonaccrual loans and $2,000, $2,000 and $6,000 for
restructured loans would have been recorded for 2004, 2003 and 2002,
respectively. Interest income on such loans that was actually collected and
included in net income in 2004, 2003 and 2002 amounted to approximately
$120,000, $102,000 and $55,000 for nonaccrual loans (prior to their being placed
on nonaccrual status) and $2,000, $2,000 and $6,000 for restructured loans,
respectively.
Management routinely monitors the status of certain large loans that, in
management's opinion, have credit weaknesses that could cause them to become
nonperforming loans. In addition to the nonperforming loan amounts discussed
above, management believes that an estimated $5.5-$6.0 million of loans that
were performing in accordance with their contractual terms at December 31, 2004
have the potential to develop problems depending upon the particular financial
situations of the borrowers and economic conditions in general. Management has
taken these potential problem loans into consideration when evaluating the
adequacy of the allowance for loan losses at December 31, 2004 (see discussion
below).
Loans classified for regulatory purposes as loss, doubtful, substandard,
or special mention that have not been disclosed in the problem loan amounts and
the potential problem loan amounts discussed above do not represent or result
from trends or uncertainties that management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or represent
material credits about which management is aware of any information that causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
Other real estate includes foreclosed, repossessed, and idled properties.
Other real estate has not varied materially at any of the past three year ends,
amounting to $1,470,000 at December 31, 2004, $1,398,000 at December 31, 2003,
and $1,384,000 at December 31, 2002. Other real estate represented 0.09%, 0.09%,
and 0.11% of total assets at the end of 2004, 2003, and 2002, respectively. The
Company's management believes that the fair values of the items of other real
estate, less estimated costs to sell, equal or exceed their respective carrying
values at the dates presented.
Allowance for Loan Losses and Loan Loss Experience
The allowance for loan losses is created by direct charges to operations.
Losses on loans are charged against the allowance in the period in which such
loans, in management's opinion, become uncollectible. The recoveries realized
during the period are credited to this allowance. The Company considers its
procedures for recording the amount of the allowance for loan losses and the
related provision for loan losses to be a critical accounting policy. See the
heading "Critical Accounting Policies" above for further discussion.
The factors that influence management's judgment in determining the amount
charged to operating expense include past loan loss experience, composition of
the loan portfolio, evaluation of probable inherent losses and current economic
conditions.
30
The Company uses a loan analysis and grading program to facilitate its
evaluation of probable inherent loan losses and the adequacy of its allowance
for loan losses. In this program, risk grades are assigned by management and
tested by the Company's internal audit department and an independent third party
consulting firm. The testing program includes an evaluation of a sample of new
loans, loans that management identifies as having potential credit weaknesses,
loans past due 90 days or more, nonaccrual loans and any other loans identified
during previous regulatory and other examinations.
The Company strives to maintain its loan portfolio in accordance with what
management believes are conservative loan underwriting policies that result in
loans specifically tailored to the needs of the Company's market areas. Every
effort is made to identify and minimize the credit risks associated with such
lending strategies. The Company has no foreign loans, few agricultural loans and
does not engage in significant lease financing or highly leveraged transactions.
Commercial loans are diversified among a variety of industries. The majority of
loans captioned in the tables discussed below as "real estate" loans are
primarily various personal and commercial loans where real estate provides
additional security for the loan. Collateral for virtually all of these loans is
located within the Company's principal market area.
The allowance for loan losses amounted to $14,717,000 at December 31, 2004
compared to $13,569,000 as of December 31, 2003 and $10,907,000 at December 31,
2002. This represented 1.08%, 1.11%, and 1.09%, of loans outstanding as of
December 31, 2004, 2003, and 2002, respectively. As noted in Table 12, the
Company's allowance for loan losses as a percentage of nonperforming loans
("coverage ratio") amounted to 395% at December 31, 2004, compared to 316% at
December 31, 2003 and 362% at December 31, 2002. Due to the secured nature of
virtually all of the Company's loans that are on nonaccrual status, the variance
in the coverage ratio is not necessarily indicative of the relative adequacy of
the allowance for loan losses.
Table 13 sets forth the allocation of the allowance for loan losses at the
dates indicated. The portion of these reserves that was allocated to specific
loan types in the loan portfolio increased to $14,643,000 at December 31, 2004
from $13,416,000 at December 31, 2003 and $10,883,000 at December 31, 2002. The
9.1% increase in the amount of the allocated allowance during 2004 is consistent
with the 12.2% increase in total loans outstanding during the year. Similarly,
the 23.3% increase in the amount of the allocated allowance during 2003 is
consistent with the 22.1% increase in total loans outstanding during the year.
In addition to the allocated portion of the allowance for loan losses, the
Company maintains an unallocated portion that is not assigned to any specific
category of loans, but rather is intended to reserve for the inherent risk in
the overall portfolio and the intrinsic inaccuracies associated with the
estimation of the allowance for loan losses and its allocation to specific loan
categories. The amount of the unallocated portion of the allowance for loan
losses did not vary materially at any of the past three year ends.
Management considers the allowance for loan losses adequate to cover
probable loan losses on the loans outstanding as of each reporting date. It must
by emphasized, however, that the determination of the allowance using the
Company's procedures and methods rests upon various judgments and assumptions
about economic conditions and other factors affecting loans. No assurance can be
given that the Company will not in any particular period sustain loan losses
that are sizable in relation to the amount reserved or that subsequent
evaluations of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowances for loan losses and
losses on foreclosed real estate. Such agencies may require the Company to
recognize additions to the allowances based on the examiners' judgments about
information available to them at the time of their examinations.
For the years indicated, Table 14 summarizes the Company's balances of
loans outstanding, average loans outstanding, and a detailed rollforward of the
allowance for loan losses. In addition to the increases to the allowance for
31
loan losses related to normal provisions, the increases in the dollar amounts of
the allowance for loan losses in 2003 and 2002 were also affected by amounts
recorded to provide for loans assumed in corporate acquisitions. In 2003, the
Company recorded $1,083,000 to the allowance for loan losses related to loans
assumed in two corporate acquisitions. Approximately $333,000 of the $1,083,000
related to $24.8 million in loans assumed in the October 2003 RBC Centura branch
acquisition, while $750,000 related to the CCB acquisition. The $750,000
addition related to CCB represented the book value of CCB's allowance for loan
losses on the date of the acquisition. In 2002, $50,000 was recorded for loans
assumed in the Broadway branch acquisition in which the Company assumed
approximately $3 million in loans.
The Company's net loan charge offs amounted to $1,757,000 in 2004,
$1,101,000 in 2003, and $1,076,000 in 2002. This represents 0.14%, 0.10%, and
0.11% of average loans during 2004, 2003, and 2002 respectively. The slightly
higher amount of net charge-offs in 2004 is largely attributable to the $498,000
charge-off recorded in 2004 related to the disposition of a large nonaccrual
relationship that is discussed above in the section entitled "Nonperforming
Assets."
Deposits
At December 31, 2004, deposits outstanding amounted to $1.390 billion, an
increase of $139 million, or 11.2%, from December 31, 2003. In 2003, deposits
grew from $1.056 billion to $1.249 billion, an increase of $193 million, or
18.3%. Although all of the deposit growth in 2004 was internally generated (the
Company did not complete any acquisitions during the year), approximately $50
million of the increase related to wholesale brokered deposits that the Company
gathered in order to help fund the high loan growth experienced during 2004.
Prior to 2004, the Company had never utilized brokered deposits. In 2003, $161
million of the $193 million increase in deposits was related to acquisitions -
the Company's January 2003 acquisition of CCB with $59 million in deposits and
the October 2003 acquisition of four RBC Centura branches with $102 million in
deposits.
The nature of the Company's deposit growth is illustrated in the table on
page 25. The following table reflects the mix of the Company's deposits at each
of the past three year ends:
2004 2003 2002
------ ------ ------
Noninterest-bearing deposits 12% 12% 10%
Savings, NOW and Money Market deposits 34% 37% 37%
Time deposits > $100,000 24% 19% 19%
Time deposits < $100,000 30% 32% 34%
------ ------ ------
Total deposits 100% 100% 100%
====== ====== ======
The slight shift in 2002 to 2003 from time deposits less than $100,000 to
noninterest-bearing deposits was primarily the result of the mix of the deposits
acquired in 2003, which had a high concentration of noninterest-bearing
deposits. In 2004, there was a significant increase in the percentage of time
deposits greater than $100,000. The increase in this category was largely a
result of the Company offering competitive interest rates on this product and
the $50 million in wholesale brokered deposits gathered by the Company. Both of
the factors driving the increase in time deposits greater than $100,000 were
necessitated by the combination of strong loan growth and modest core retail
deposit growth experienced by the Company in 2004. As noted earlier, competition
for deposits in the Company's market area is strong.
Table 15 presents the average amounts of deposits of the Company and the
average yield paid for those deposits for the years ended December 31, 2004,
2003, and 2002.
As of December 31, 2004, the Company held approximately $334.8 million in
time deposits of $100,000 or more. Table 16 is a maturity schedule of time
deposits of $100,000 or more as of December 31, 2004. This table shows that
86.6% of the Company's time deposits greater than $100,000 mature within one
year.
At each of the past three year ends, the Company had no deposits issued
through foreign offices, nor did the
32
Company believe that it held any deposits by foreign depositors.
Borrowings
The Company had borrowings outstanding of $92.2 million at December 31,
2004 compared to $76.0 million at December 31, 2003. As shown in Table 2,
average borrowings has increased over the past two years, amounting to $20.7
million in 2002, $42.1 million in 2003, and rising to $84.9 million in 2004. The
increases in borrowings over the past two years has been necessary for two
reasons - 1) to help fund the Company's high loan growth which has exceeded
deposit growth and 2) to enhance the Company's regulatory capital ratios - as
noted below, the Company's trust preferred security borrowings qualify as Tier I
capital for regulatory capital adequacy requirements.
At December 31, 2004, the Company has three sources of readily available
borrowing capacity - 1) an approximately $296 million line of credit with the
FHLB, of which $51 million was outstanding at December 31, 2004 and $36 million
was outstanding at December 31, 2003, 2) a $50 million overnight federal funds
line of credit with a correspondent bank, none of which was outstanding at
December 31, 2004 or 2003, and 3) an approximately $58 million line of credit
through the Federal Reserve Bank of Richmond's (FRB) discount window, none of
which was outstanding at December 31, 2004 or 2003.
The Company's line of credit with the FHLB totaling approximately $296
million can be structured as either short-term or long-term borrowings,
depending on the particular funding or liquidity need and is secured by the
Company's FHLB stock and a blanket lien on most of its real estate loan
portfolio. The Company had $51 million outstanding under this line of credit at
December 31, 2004, with $40 million outstanding on an overnight basis and the
other $11 million maturing in $1 million to $5 million increments in each of the
years from 2005 to 2009.
The Company's correspondent bank relationship allows the Company to
purchase up to $50 million in federal funds on an overnight, unsecured basis.
The Company had no borrowings outstanding under this line at December 31, 2004
or 2003. This line of credit was not drawn upon during any of the past three
years.
The Company also has a line of credit with the FRB discount window. This
line is secured by a blanket lien on a portion of the Company's commercial and
consumer loan portfolio (excluding real estate). Based on the collateral owned
by the Company as of December 31, 2004, the available line of credit is
approximately $58 million. This line of credit was established primarily in
connection with the Company's Y2K liquidity contingency plan and has not been
drawn on since inception. The FRB has indicated that it would not expect lines
of credit that have been granted to financial institutions to be a primary
borrowing source. The Company plans to maintain this line of credit, although it
is not expected that it will be drawn upon except in unusual circumstances.
In addition to the lines of credit described above, in which the Company
had $51 million outstanding as of December 31, 2004, the Company also had a
total of $41.2 million in trust preferred security debt outstanding at December
31, 2004. The Company issued $20.6 million of this debt on October 29, 2002 and
an additional $20.6 million on December 19, 2003. These borrowings each have 30
year final maturities and were structured as trust preferred capital securities
that qualify as Tier I capital for regulatory capital adequacy requirements.
These debt securities are callable by the Company at par on any quarterly
interest payment date five years after their issue date. The interest rate on
these debt securities adjusts on a quarterly basis at a rate of three-month
LIBOR plus 3.45% for the securities issued in 2002 and three-month LIBOR plus
2.70% for the securities issued in 2003.
Average short-term borrowings for each of the past five years were less
than 30% of total shareholders' equity at all times during each period.
33
Liquidity, Commitments, and Contingencies
The Company's liquidity is determined by its ability to convert assets to
cash or to acquire alternative sources of funds to meet the needs of its
customers who are withdrawing or borrowing funds, and its ability to maintain
required reserve levels, pay expenses and operate the Company on an ongoing
basis. The Company's primary liquidity sources are net income from operations,
cash and due from banks, federal funds sold and other short-term investments.
The Company's securities portfolio is comprised almost entirely of readily
marketable securities which could also be sold to provide cash.
As noted above, in addition to internally generated liquidity sources, the
Company has the ability to obtain borrowings from the following three sources -
1) an approximately $296 million line of credit with the FHLB, 2) a $50 million
overnight federal funds line of credit with a correspondent bank, and 3) an
approximately $58 million line of credit through the Federal Reserve Bank of
Richmond's discount window.
The Company's on-balance-sheet liquidity declined in both 2004 and 2003 as
a result of the strong loan growth that outpaced deposit growth during each
year. The imbalance in loan growth compared to deposit growth increased the loan
to deposit ratio from 94.6% at December 31, 2002 to 97.6% at December 31, 2003
to 98.4% at December 31, 2004. The increasing loan to deposit ratio has resulted
in the Company relying more heavily on borrowings during each of the past two
years in order to achieve internally targeted liquidity ratios. Average
borrowings outstanding were $20.7 million in 2002, $42.0 million in 2003 and
$84.9 million in 2004.
Despite the higher reliance on borrowings, 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
In the normal course of business there are various outstanding contractual
obligations of the Company that will require future cash outflows. In addition,
there are commitments and contingent liabilities, such as commitments to extend
credit, that may or may not require future cash outflows.
Table 18 reflects the contractual obligations and other commercial
commitments of the Company outstanding as of December 31, 2004. Any of the
Company's $51 million in outstanding borrowings with the FHLB may be accelerated
immediately by the FHLB in certain circumstances, including material adverse
changes in the condition of the Company or if the Company's qualifying
collateral amounts to less than 1.25 times the amount of borrowings outstanding.
At December 31, 2004, the Company's qualifying collateral amounted to 7.2 times
the amount of borrowings outstanding.
In the normal course of business there are various outstanding commitments
and contingent liabilities, such as commitments to extend credit, which are not
reflected in the financial statements. Table 18 also reflects other commercial
commitments of the Company outstanding as of December 31, 2004. This table
reflects that as of December 31, 2004, the Company had outstanding loan
commitments of $232,248,000 (the sum of credit cards and lines of credit and
loan commitments line items). Of that amount, $208,241,000 were at variable
rates and $24,007,000 were at fixed rates. Included in outstanding loan
commitments were unfunded commitments of $123,535,000 on revolving credit plans,
of which $115,024,000 were at variable rates and $8,511,000 were at fixed rates.
In addition to the credit card and other loan commitments described above,
at December 31, 2004 and 2003, the Company had $3,762,000 and $3,320,000 in
standby letters of credit outstanding, respectively. The Company has no carrying
amount for these standby letters of credit. The nature of the standby letters of
credit is a guarantee made on behalf the Company's customers to suppliers of the
customers to guarantee payments owed to the supplier by the customer. The
standby letters of credit have two to three year terms, and the payment of the
guarantees would generally be triggered by a continued nonpayment of an
obligation owed by the customer to the supplier. The maximum potential amount of
future payments (undiscounted) the Company could be required to make under the
guarantees in the event of nonperformance by the parties to whom credit or
financial
34
guarantees have been extended is represented by the contractual amount of the
financial instruments discussed above. In the event that the Company is required
to honor a standby letter of credit, a note, already executed with the customer,
is triggered which provides repayment terms and any collateral requirements.
Over the past ten years, the Company has had to honor one standby letter of
credit, which was repaid by the borrower without any loss to the Company.
It has been the experience of the Company that deposit withdrawals are
generally replaced with new deposits, thus not requiring any net cash outflow.
Based on that assumption, management believes that it can meet its contractual
cash obligations and existing commitments from normal operations.
The Company is not involved in any legal proceedings that, in management's
opinion, could have a material effect on the consolidated financial position of
the Company; however, the following paragraph describes a potential exposure
related to taxes.
Based on consultations with the Company's tax advisors, the Company's
organizational structure has been established in a way to minimize its tax
liabilities. State taxing authorities have recently announced that they will
vigorously pursue taxpayers who have engaged in activities deemed to be
"income-shifting," and the Company is aware that state taxing authorities have
recently challenged a bank holding company with a similar operating structure as
the Company that they deem to result in "income-shifting." While the Company
believes its tax position is sound, it has decided to discontinue certain
elements of its operating structure during 2005 to avoid controversy with state
taxing authorities. If the Company's position with regard to its operating
structure were to be challenged by state taxing authorities for past years and
resulted in an assessment, the Company estimates that its exposure could be $5.8
million (net of federal tax benefit), including interest and penalties. If such
an assessment were to occur, the Company would vigorously contest the assessment
based on the belief that it has fully complied with relevant tax laws.
Accordingly, the Company has not accrued a liability for this possibility. As a
result of discontinuing certain elements of the Company's operating structure,
the Company estimates that its effective tax rate will increase from
approximately 34% in 2004 to approximately 39% in 2005. If the Company's
effective tax rate had been 39% in 2004, the Company's net income would have
been lower by approximately $1.3 million.
Off-Balance Sheet Arrangements and Derivative Financial Instruments
Off-balance sheet arrangements include transactions, agreements, or other
contractual arrangements in which the Company has obligations or provides
guarantees on behalf of an unconsolidated entity. The Company has no off-balance
sheet arrangements of this kind other than repayment guarantees associated with
its trust preferred securities.
Derivative financial instruments include futures, forwards, interest rate
swaps, options contracts, and other financial instruments with similar
characteristics. The Company has not engaged in significant derivatives
activities through December 31, 2004 and has no current plans to do so.
Interest Rate Risk (Including Quantitative and Qualitative Disclosures About
Market Risk - Item 7A.)
Net interest income is the Company's most significant component of
earnings. Notwithstanding changes in volumes of loans and deposits, the
Company's level of net interest income is continually at risk due to the effect
that changes in general market interest rate trends have on interest yields
earned and paid with respect to the various categories of earning assets and
interest-bearing liabilities. It is the Company's policy to maintain portfolios
of earning assets and interest-bearing liabilities with maturities and repricing
opportunities that will afford protection, to the extent practical, against wide
interest rate fluctuations. The Company's exposure to
35
interest rate risk is analyzed on a regular basis by management using standard
GAP reports, maturity reports, and an asset/liability software model that
simulates future levels of interest income and expense based on current interest
rates, expected future interest rates, and various intervals of "shock" interest
rates. Over the years, the Company has been able to maintain a fairly consistent
yield on average earning assets (net interest margin). Over the past five
calendar years the Company's net interest margin has ranged from a low of 4.23%
(realized in 2001) to a high of 4.58% (realized in 2002). During that five year
period the prime rate of interest has ranged from a low of 4.00% to a high of
9.50%.
Table 17 sets forth the Company's interest rate sensitivity analysis as of
December 31, 2004, using stated maturities for all instruments except
mortgage-backed securities (which are allocated in the periods of their expected
payback) and securities and borrowings with call features that are expected to
be called (which are shown in the period of their expected call). As illustrated
by this table, at December 31, 2004, the Company had $289.7 million more in
interest-bearing liabilities that are subject to interest rate changes within
one year than earning assets. This generally would indicate that net interest
income would experience downward pressure in a rising interest rate environment
and would benefit from a declining interest rate environment. However, this
method of analyzing interest sensitivity only measures the magnitude of the
timing differences and does not address earnings, market value, or management
actions. Also, interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. In addition to the
effects of "when" various rate-sensitive products reprice, market rate changes
may not result in uniform changes in rates among all products. For example,
included in interest-bearing liabilities subject to interest rate changes within
one year at December 31, 2004 are deposits totaling $473 million comprised of
NOW, savings, and certain types of money market deposits with interest rates set
by management. These types of deposits historically have not repriced
coincidentally with or in the same proportion as general market indicators.
Thus, the Company believes that in the near term (twelve months), net
interest income would not likely experience significant downward pressure from
rising interest rates. Similarly, management would not expect a significant
increase in near term net interest income from falling interest rates (In fact,
it has been the Company's experience that each interest rate cut occurring
during the past three years has negatively impacted (at least temporarily) the
Company's net interest margin). Generally, when rates change, the Company's
interest-sensitive assets that are subject to adjustment reprice immediately at
the full amount of the change, while the Company's interest-sensitive
liabilities that are subject to adjustment reprice at a lag to the rate change
and typically not to the full extent of the rate change. The net effect is that
in the twelve month horizon, as rates change, the impact of having a higher
level of interest-sensitive liabilities is substantially negated by the later
and typically lower proportionate change these liabilities experience compared
to interest sensitive assets. However, the rate cuts totaling 75 basis points
that occurred in late 2002 and mid-2003 had a more pronounced and a longer
lasting negative impact on the Company's net interest margin than previous rate
cuts because of the inability of the Company to reset deposit rates by an amount
(because of their already near-zero rates) that would offset the negative impact
of the rate cut on the yields earned on the Company's interest earning assets.
Additionally, as previously discussed, over the past two years, the Company has
originated significantly more adjustable rate loans compared to fixed rate
loans. Adjustable rate loans generally carry lower initial interest rates than
fixed rate loans. For these reasons, the second quarter of 2004 marked the fifth
consecutive quarter of declining net interest margins. In the second half of
2004, the Federal Reserve increased interest rates three times totaling 125
basis points, which was largely responsible for the Company's net interest
margin reversing its downward trend and increasing from 4.26% in the second
quarter of 2004 to 4.28% in the third quarter of 2004 and to 4.32% in the fourth
quarter of 2004. Assuming no changes in interest rates in 2005, the Company
would expect, as discussed above, its net interest margin to be negatively
impacted as a result of time deposits maturing and repricing in 2005 that were
originated in periods when rates were lower. However, many economists have
stated that they believe that interest rates will continue to rise in 2005, and
in fact the Federal Reserve raised interest rates by 0.25% in February 2005. If
rates were to increase in 2005 by approximately 1.00%, the Company expects that
the negative impact of higher rates paid on maturing time deposits would be
largely negated by increases in yields on earning assets, and that the Company's
net interest margin for the year will be continue to
36
be in the recently realized range of 4.25%-4.35%. However in determining this
range, the Company had to make certain assumptions about its ability to manage
changes in rates paid on deposits, which will depend largely on actions taken by
the Company's competitors and could be significantly different from the
assumptions made.
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions. Table 19 presents
the expected maturities of the Company's other than trading market risk
sensitive financial instruments. Table 19 also presents the estimated fair
values of market risk sensitive instruments as estimated in accordance with
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments." The Company's assets and liabilities each have
estimated fair values that do not vary significantly from their carrying values.
See additional discussion regarding net interest income, as well as
discussion of the changes in the annual net interest margin in the section
entitled "Net Interest Income" above.
Return on Assets and Equity
Table 20 shows return on assets (net income divided by average total
assets), return on equity (net income divided by average shareholders' equity),
dividend payout ratio (dividends per share divided by net income per share) and
shareholders' equity to assets ratio (average shareholders' equity divided by
average total assets) for each of the years in the three-year period ended
December 31, 2004.
Capital Resources and Shareholders' Equity
Shareholders' equity at December 31, 2004 amounted to $148.5 million
compared to $141.9 million at December 31, 2003. The two basic components that
typically have the largest impact on the Company's shareholders' equity are net
income, which increases shareholders' equity, and dividends declared, which
decreases shareholders' equity.
In 2004, net income of $20,114,000 increased equity, while dividends
declared of $9,269,000 reduced equity. Also, the Company continued to actively
manage its capital and number of common shares outstanding through stock
repurchases. In 2004, the Company repurchased a total of 300,816 shares of its
common stock at an average price of $21.65, which reduced shareholders' equity
by $6.5 million. At December 31, 2004, the Company had a remaining authorization
from its board of directors to repurchase 315,015 shares of stock. As discussed
below, the Company expects to repurchase fewer shares of stock in 2005 than it
did in 2004 in order to prudently manage its capital ratios.
Other items affecting shareholders' equity in 2004 were 1) proceeds of
$1,081,000 received from common stock issued as a result of stock option
exercises, 2) proceeds of $1,466,000 received from the issuance of stock into
the Company's dividend reinvestment plan, 3) a $203,000 increase to equity
related to the tax benefit that the Company realized due to exercises of
nonqualified stock options, and 4) other comprehensive loss of $445,000, which
was comprised of the $417,000 decrease in the net unrealized gain, net of taxes,
of the Company's available for sale securities and an adjustment to the
Company's pension liability of $28,000, net of taxes.
In 2003, net income of $19,417,000 increased equity, while dividends
declared of $8,835,000 reduced equity. Two other items significantly impacted
shareholders' equity in 2003. In connection with the Company's acquisition of
CCB in January 2003, the Company issued 1.2 shares of stock for each share of
CCB stock outstanding, which resulted in the Company issuing a total of 500,000
shares of stock valued at $9.3 million, which increased shareholders equity.
Also in 2003, the Company repurchased a total of 315,000 shares of its common
stock at an average price of $16.49, which reduced shareholders' equity by $5.2
million.
37
Other items affecting shareholders' equity in 2003 were 1) proceeds of
$1,167,000 received from common stock issued as a result of stock option
exercises, 2) proceeds of $1,277,000 received from the issuance of stock into
the Company's dividend reinvestment plan, 3) a $546,000 increase to equity
related to the tax benefit that the Company realized due to exercises of
nonqualified stock options, and 4) other comprehensive income of $210,000, which
was comprised of the $287,000 increase in the net unrealized gain, net of taxes,
of the Company's available for sale securities that was reduced by an adjustment
to the Company's pension liability of $77,000, net of taxes.
In 2002, net income of $17,230,000 increased equity, while dividends
declared of $8,225,000 reduced equity. Also in 2002, the Company repurchased
277,500 shares of stock totaling $4,410,000, which reduced equity. Other items
affecting shareholders' equity were 1) proceeds of $1,033,000 received from
common stock issued as a result of stock option exercises, 2) proceeds of
$1,174,000 received from the issuance of stock into the Company's dividend
reinvestment plan, 3) a $382,000 increase to equity related to the tax benefit
that the Company realized due to exercises of nonqualified stock options, and 4)
other comprehensive income of $75,000, which was comprised of the $176,000
increase in the net unrealized gain, net of taxes, of the Company's available
for sale securities that was reduced by an adjustment to the Company's pension
liability of $101,000, net of taxes.
The Company is not aware of any recommendations of regulatory authorities
or otherwise which, if they were to be implemented, would have a material effect
on its liquidity, capital resources, or operations.
The Company and the Bank must comply with regulatory capital requirements
established by the FRB and the FDIC. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's and Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. These capital standards require the Company and the Bank to
maintain minimum ratios of "Tier 1" capital to total risk-weighted assets ("Tier
I Capital Ratio") and total capital to risk-weighted assets ("Total Capital
Ratio") of 4.00% and 8.00%, respectively. Tier 1 capital is comprised of total
shareholders' equity, excluding unrealized gains or losses from the securities
available for sale, less intangible assets, and total capital is comprised of
Tier 1 capital plus certain adjustments, the largest of which for the Company
and the Bank is the allowance for loan losses. Risk-weighted assets refer to the
on- and off-balance sheet exposures of the Company and the Bank, adjusted for
their related risk levels using formulas set forth in FRB and FDIC regulations.
In addition to the risk-based capital requirements described above, the
Company and the Bank are subject to a leverage capital requirement, which calls
for a minimum ratio of Tier 1 capital (as defined above) to quarterly average
total assets ("Leverage Ratio) of 3.00% to 5.00%, depending upon the
institution's composite ratings as determined by its regulators. The FRB has not
advised the Company of any requirement specifically applicable to it.
Table 21 presents the Company's regulatory capital ratios as of December
31, 2004, 2003, and 2002. In 2002, as a result of the Company forecasting that
its strategic growth goals would likely result in the need for additional
capital, the Company issued $20.6 million in debt structured as trust preferred
capital securities that qualify as capital for regulatory capital adequacy
requirements - see "Borrowings" above for further discussion. As a result of the
issuance of the trust preferred securities, the Company's capital ratios
increased significantly at December 31, 2002 compared to December 31, 2001. In
2003, although the Company's regulatory capital ratios at all times far exceeded
regulatory minimums, the ratios decreased significantly as a result of the
Company's acquisitions, which increased assets and decreased tangible capital.
The Company's issuance of an additional $20.6 million in trust preferred
securities in December 2003 partially offset the decrease in regulatory capital
ratios resulting from the effects of the acquisitions. In 2004, the Company's
regulatory capital
38
ratios declined slightly due to assets growing at a higher rate than did the
Company's equity. Assuming similar growth rates in 2005, the Company expects to
repurchase less stock in 2005 than in recent years in order to maintain its
capital ratios at approximately their same levels.
In addition to the minimum capital requirements described above, the
regulatory framework for prompt corrective action also contains specific capital
guidelines for a bank's classification as "well capitalized." The specific
guidelines are as follows - Tier I Capital Ratio of at least 6.00%, Total
Capital Ratio of at least 10.00%, and a Leverage Ratio of at least 5.00%. The
Bank's regulatory ratios exceeded the threshold for "well-capitalized" status at
December 31, 2004, 2003 and 2002.
The Company's goal is to maintain its "well-capitalized" status at all
times. Based on the Company's capital position at December 31, 2004 and the fact
that there are no pending acquisitions or material capital expenditures planned,
the Company does not anticipate needing to raise capital in the foreseeable
future. The Company estimates, based on criteria provided by trust preferred
security pool underwriters, that it has the credit capacity to issue
approximately $20 million more in trust preferred securities. The Company also
believes that it has the ability to raise capital in a secondary stock offering
should the need arise.
See "Supervision and Regulation" under "Business" above and Note 15 to the
consolidated financial statements for discussion of other matters that may
affect the Company's capital resources.
Inflation
Because the assets and liabilities of a bank are primarily monetary in
nature (payable in fixed determinable amounts), the performance of a bank is
affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may not be the same. The effect of inflation on banks is
normally not as significant as its influence on those businesses that have large
investments in plant and inventories. During periods of high inflation, there
are normally corresponding increases in the money supply, and banks will
normally experience above average growth in assets, loans and deposits. Also,
general increases in the price of goods and services will result in increased
operating expenses.
Current Accounting and Regulatory Matters
The Company prepares its consolidated financial statements and related
disclosures in conformity with standards established by, among others, the
Financial Accounting Standards Board (the "FASB"). Because the information
needed by users of financial reports is dynamic, the FASB frequently issues new
rules and proposes new rules for companies to apply in reporting their
activities. The following paragraphs contain information regarding recently
adopted accounting standards that affected the Company and new standards that
have not yet been adopted that have the potential to affect the Company.
In January 2003, the FASB issued Financial Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which was subsequently revised in
December 2003. 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. In December 2003, the FASB issued
a revision to FIN 46 (FIN 46R), which clarified and interpreted certain of the
provisions of FIN 46, without changing the basic accounting model in FIN 46. The
provisions of FIN 46R were effective no later than March 31, 2004. The adoption
of FIN 46 did not have an impact on the Company's financial position or results
of operations, as the Company had no investments in variable interest entities
that required consolidation under FIN 46. The application of FIN 46R during 2004
resulted in the de-consolidation of two trusts that the Company established in
order to issue $40 million in trust preferred capital securities. The de-
consolidation of the trusts resulted in the Company recording the amount of the
junior subordinated debentures between the Company and the trust subsidiary in
the amount of $1,239,000. Previously, the junior subordinated
39
debentures were eliminated in consolidation. The impact of this change was to
increase both securities (held-to-maturity) and borrowings by $1,239,000 each.
In November 2003, the FASB ratified a consensus reached by its Emerging
Issues Task Force ("EITF") regarding quantitative and qualitative disclosures
required by EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments." EITF Issue No. 03-1 requires
certain quantitative and qualitative disclosures as it relates to investments
that have unrealized losses that have not been recognized as
other-than-temporary impairments and is effective for fiscal years ending after
December 15, 2003. The additional disclosures required for the Company are
included in Note 3. In March 2004, the EITF released Consensus 03-1 (EITF 03-1).
EITF 03-1 as released, codified the provisions of SEC Staff Accounting Bulletin
No. 59 and required additional information about unrealized losses associated
with debt and equity securities and also provided more detailed criteria that
must be followed in evaluating whether to record losses on impaired debt and
equity securities. The disclosure requirements were applicable for annual
reporting periods ending after June 15, 2004 and are presented in Note 3. The
impairment accounting requirements were to have been effective for periods
beginning after June 15, 2004. However, in September 2004, the FASB indefinitely
delayed the effective date of the requirement to record impairment losses caused
by the effect of increases in interest rates or "sector spreads."
In December 2003, the FASB issued Statement of Financial Accounting
Standards No. 132 (revised 2003) (Statement 132(R)), "Employers' Disclosures
about Pensions and Other Postretirement Benefits." Statement 132(R) revises
employers' disclosures about pension plans and other postretirement plans, but
does not change the measurement or recognition of those plans. Statement No.
132(R) requires additional disclosures about the assets, obligations, cash
flows, and net periodic pension cost of defined benefit plans and other defined
benefit postretirement plans. Most of the provisions of Statement 132(R) became
effective for financial statements with fiscal years after December 15, 2003,
with certain provisions becoming effective for fiscal years ending after June
15, 2004. The additional disclosures required for the Company are included in
Note 11 in the accompanying audited consolidated financial statements.
In December 2003, the American Institute of Certified Public Accountants
issued Statement of Position 03-3 (SOP 03-3), "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer." SOP 03-3 provides guidance on the
accounting for differences between contractual and expected cash flows from the
purchaser's initial investment in loans or debt securities acquired in a
transfer, if those differences are attributable, at least in part, to credit
quality. The scope of SOP 03-3 includes loans that have shown evidence of
deterioration of credit quality since origination, and includes loans acquired
individually, in pools or as part of a business combination. Among other things,
SOP 03-3: (1) prohibits the recognition of the excess of contractual cash flows
over expected cash flows as an adjustment of yield, loss accrual or valuation
allowance at the time of purchase; (2) requires that subsequent increases in
expected cash flows be recognized prospectively through an adjustment of yield;
and (3) requires that subsequent decreases in expected cash flows be recognized
as impairment. In addition, SOP 03-3 prohibits the creation or carrying over of
a valuation allowance in the initial accounting of all loans within the scope
that are acquired in a transfer. Under SOP 03-3, the difference between expected
cash flows and the purchase price is accreted as an adjustment to yield over the
life of the loans. For loans acquired in a business combination that have shown
deterioration of credit quality since origination, SOP 03-3 represents a
significant change from the current purchase accounting practice whereby the
acquiree's allowance for loan losses is typically added to the acquirer's
allowance for loan losses. SOP 03-3 becomes effective for loans or debt
securities acquired in fiscal years beginning after December 15, 2004. The
Company does not expect the adoption of this statement to have a material impact
on the Company's financial statements.
In March 2004, the SEC issued Staff Accounting Bulletin Number 105 (SAB
105), "Application of Accounting Principles to Loan Commitments." SAB 105
summarizes the views of the SEC staff regarding the application of generally
accepted accounting principles to loan commitments accounted for as derivatives,
and its provisions were required for such loan commitments entered into
subsequent to March 31, 2004. The adoption of SAB 105 did not have a material
impact on the Company's consolidated financial statements.
40
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004) (Statement 123(R)), "Share-Based Payment."
Statement 123(R) replaces FASB Statement No. 123 (Statement 123), "Accounting
for Stock-Based Compensation," and supersedes APB Opinion No. 25 (Opinion 25),
"Accounting for Stock Issued to Employees." Statement 123, as originally issued
in 1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, Statement 123
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Statement 123(R)
requires that the compensation cost relating to share-based payment transactions
be recognized in financial statements. That cost will be measured based on the
fair value of the equity or liability instruments issued. Statement 123(R)
covers a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. Currently, the only share-based
compensation arrangement utilized by the Company is stock options. The Company
will be required to apply Statement 123(R) as of the first interim or annual
reporting period that begins after June 15, 2005. See "Stock-Based Compensation"
above for further discussion, including the potential quantitative impact of
adopting this statement.
In March 2005, the FRB issued a final rule concerning the regulatory
capital treatment of Trust Preferred Securities ("TPS") by bank holding
companies. After a five-year transition period ending March 31, 2009, the
aggregate amount of TPS and certain other capital elements will be limited to
25% of Tier I capital elements - net of goodwill, less any associated deferred
tax liability. Amounts of restricted core capital elements in excess of these
limits generally may be included in Tier 2 capital. The Company does not expect
this rule to materially impact the Company's capital ratios.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information responsive to this Item is found in Item 7 under the
caption "Interest Rate Risk."
FORWARD-LOOKING STATEMENTS
The discussion in Part I and Part II of this report contains statements
that could be deemed forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 and the Private Securities Litigation
Reform Act, which statements are inherently subject to risks and uncertainties.
Forward-looking statements are statements that include projections, predictions,
expectations or beliefs about future events or results or otherwise are not
statements of historical fact. Such statements are often characterized by the
use of qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgment of the Company and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the financial success or changing strategies of the Company's
customers, the Company's level of success in integrating acquisitions, actions
of government regulators, the level of market interest rates, and general
economic conditions.
41
- ---------------------------------------------------------------------------------------------------------------------------------
Table 1 Selected Consolidated Financial Data
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
($ in thousands, except per share --------------------------------------------------------------------------
and nonfinancial data) 2004 2003 2002 2001 2000 (1)
---------- --------- --------- --------- ----------
Income Statement Data
Interest income $ 81,593 74,667 73,261 76,773 72,915
Interest expense 20,303 18,907 23,871 35,720 34,220
Net interest income 61,290 55,760 49,390 41,053 38,695
Provision for loan losses 2,905 2,680 2,545 1,151 1,605
Net interest income after provision 58,385 53,080 46,845 39,902 37,090
Noninterest income 15,864 14,918 11,968 9,655 4,729
Noninterest expense 43,717 37,964 32,301 28,634 26,741
Income before income taxes 30,532 30,034 26,512 20,923 15,078
Income taxes 10,418 10,617 9,282 7,307 5,736
Net income 20,114 19,417 17,230 13,616 9,342
Earnings per share - basic 1.42 1.38 1.26 1.00 0.70
Earnings per share - diluted 1.40 1.35 1.23 0.98 0.69
- ---------------------------------------------------------------------------------------------------------------------------------
Per Share Data (2)
Cash dividends declared $ 0.66 0.63 0.60 0.59 0.51
Market Price
High 29.73 21.49 18.35 18.72 11.50
Low 18.47 15.30 13.47 10.33 8.04
Close 27.17 20.80 15.67 15.03 10.50
Book value - stated 10.54 10.02 9.06 8.54 8.36
Tangible book value 7.04 6.44 7.22 6.75 8.01
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data (at year end)
Total assets $1,638,913 1,475,769 1,218,146 1,144,691 915,167
Loans 1,367,053 1,218,895 998,547 890,310 746,089
Allowance for loan losses 14,717 13,569 10,907 9,388 7,893
Intangible assets 49,330 50,701 25,169 24,488 4,630
Deposits 1,388,768 1,249,364 1,055,957 1,000,281 770,379
Borrowings 92,239 76,000 30,000 15,000 26,200
Total shareholders' equity 148,478 141,856 123,985 116,726 110,684
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Assets $1,545,332 1,339,823 1,162,708 1,046,030 909,800
Loans 1,295,682 1,113,426 954,885 831,817 701,317
Earning assets 1,434,425 1,245,679 1,090,666 983,628 867,269
Deposits 1,306,404 1,153,385 1,010,693 899,989 744,835
Interest-bearing liabilities 1,232,130 1,065,950 928,686 837,563 724,152
Shareholders' equity 146,683 137,293 120,943 115,620 110,093
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios
Return on average assets 1.30% 1.45% 1.48% 1.30% 1.03%
Return on average equity 13.71% 14.14% 14.25% 11.78% 8.49%
Net interest margin (taxable-equivalent basis) 4.31% 4.52% 4.58% 4.23% 4.53%
Shareholders' equity to assets at year end 9.06% 9.61% 10.18% 10.20% 12.09%
Loans to deposits at year end 98.44% 97.56% 94.56% 89.01% 96.85%
Allowance for loan losses to total loans 1.08% 1.11% 1.09% 1.05% 1.06%
Nonperforming assets to total assets at year end 0.32% 0.39% 0.36% 0.45% 0.19%
Net charge-offs to average loans 0.14% 0.10% 0.11% 0.09% 0.06%
Efficiency ratio 56.32% 53.32% 52.19% 55.82% 60.75%
- ---------------------------------------------------------------------------------------------------------------------------------
Nonfinancial Data
Number of branches 59 57 48 45 39
Number of employees - Full time equivalents 563 550 447 393 334
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Results for the year ended December 31, 2000 were significantly impacted
by merger-related charges.
(2) All share data has been adjusted to reflect the 3-for-2 stock split paid
on November 15, 2004.
- --------------------------------------------------------------------------------
42
- -----------------------------------------------------------------------------------------------------------------------------------
Table 2 Average Balances and Net Interest Income Analysis
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------------------------------------------------
2004 2003 2002
---------------------------------- ---------------------------------- --------------------------------
Interest Interest Interest
Average Avg. Earned Average Avg. Earned Average Avg. Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid Volume Rate or Paid
---------- -------- --------- ----------- --------- --------- ---------- -------- ----------
Assets
Loans (1) $1,295,682 5.87% $ 76,093 $ 1,113,426 6.23% $ 69,318 $ 954,885 6.99% $ 66,742
Taxable securities 98,016 4.52% 4,428 81,211 4.80% 3,902 83,642 5.93% 4,961
Non-taxable securities(2) 12,082 8.30% 1,003 14,238 8.33% 1,186 14,823 8.51% 1,262
Short-term investments,
primarily federal funds 28,645 1.90% 544 36,804 2.12% 779 37,316 2.23% 831
---------- --------- ----------- --------- ---------- --------
Total interest-
earning assets 1,434,425 5.72% 82,068 1,245,679 6.04% 75,185 1,090,666 6.77% 73,796
--------- --------- --------
Cash and due from banks 32,594 31,189 26,330
Bank premises and
equipment, net 25,915 23,371 20,769
Other assets 52,398 39,584 24,943
---------- ----------- ----------
Total assets $1,545,332 $ 1,339,823 $1,162,708
========== =========== ==========
Liabilities and Equity
Savings, NOW and
money market deposits $ 468,177 0.54% 2,530 $ 414,525 0.53% 2,215 $ 368,807 0.97% 3,588
Time deposits >$100,000 271,448 2.34% 6,362 229,758 2.56% 5,892 186,178 3.67% 6,825
Other time deposits 407,602 2.04% 8,334 379,603 2.37% 9,001 352,964 3.51% 12,376
---------- --------- ----------- --------- ---------- --------
Total interest-bearing
deposits 1,147,227 1.50% 17,226 1,023,886 1.67% 17,108 907,949 2.51% 22,789
Borrowings 84,903 3.62% 3,077 42,064 4.28% 1,799 20,737 5.22% 1,082
---------- --------- ----------- --------- ---------- --------
Total interest-
bearing liabilities 1,232,130 1.65% 20,303 1,065,950 1.77% 18,907 928,686 2.57% 23,871
--------- --------- --------
Non-interest-
bearing deposits 159,177 129,499 102,744
Other liabilities 7,342 7,081 10,335
Shareholders' equity 146,683 137,293 120,943
---------- ----------- ----------
Total liabilities and
shareholders' equity $1,545,332 $ 1,339,823 $1,162,708
========== =========== ==========
Net yield on interest-
earning assets and
net interest income 4.31% $ 61,765 4.52% $ 56,278 4.58% $ 49,925
========= ========= ========
Interest rate spread 4.07% 4.26% 4.20%
Average prime rate 4.34% 4.12% 4.67%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Average loans include nonaccruing loans, the effect of which is to lower
the average rate shown. Interest earned includes recognized loan fees in
the amounts of $1,244,000, $1,235,000, and $938,000 for 2004, 2003, and
2002, respectively.
(2) Includes tax-equivalent adjustments of $475,000, $519,000, and $535,000 in
2004, 2003, and 2002, respectively, to reflect the federal and state
benefit of the tax-exempt securities, reduced by the related nondeductible
portion of interest expense.
- --------------------------------------------------------------------------------
43
- --------------------------------------------------------------------------------------------------------------------------------
Table 3 Volume and Rate Variance Analysis
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2004 Year Ended December 31, 2003
---------------------------------------- ----------------------------------------
Change Attributable to Change Attributable to
------------------------- -------------------------
Total Total
Changes Changes Increase Changes Changes Increase
(In thousands) in Volumes in Rates (Decrease) in Volumes in Rates (Decrease)
---------- ---------- ---------- ---------- ---------- ----------
Interest income (tax-equivalent):
Loans $ 11,025 (4,250) 6,775 $ 10,476 (7,900) 2,576
Taxable securities 783 (257) 526 (130) (929) (1,059)
Non-taxable securities (179) (4) (183) (49) (27) (76)
Short-term investments, principally
federal funds sold (164) (71) (235) (11) (41) (52)
---------- ---------- ---------- ---------- ---------- ----------
Total interest income 11,465 (4,582) 6,883 10,286 (8,897) 1,389
---------- ---------- ---------- ---------- ---------- ----------
Interest expense:
Savings, NOW and money
market deposits 288 27 315 345 (1,718) (1,373)
Time deposits>$100,000 1,023 (553) 470 1,358 (2,291) (933)
Other time deposits 618 (1,285) (667) 783 (4,158) (3,375)
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits 1,929 (1,811) 118 2,486 (8,167) (5,681)
Borrowings 1,692 (414) 1,278 1,012 (295) 717
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense 3,621 (2,225) 1,396 3,498 (8,462) (4,964)
---------- ---------- ---------- ---------- ---------- ----------
Net interest income $ 7,844 (2,357) 5,487 $ 6,788 (435) 6,353
========== ========== ========== ========== ========== ==========
Changes attributable to both volume and rate are allocated equally between
rate and volume variances.
- --------------------------------------------------------------------------------
Table 4 Noninterest Income
- --------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------
(In thousands) 2004 2003 2002
-------- -------- --------
Service charges on deposit accounts $ 9,064 7,938 6,856
Other service charges, commissions, and fees 3,361 2,710 2,336
Fees from presold mortgages 969 2,327 1,713
Commissions from sales of insurance and
financial products 1,406 1,304 738
Data processing fees 416 333 303
-------- -------- --------
Total core noninterest income 15,216 14,612 11,946
Loan sale gains 2 2 11
Securities gains, net 299 218 25
Other gains (losses), net 347 86 (14)
-------- -------- --------
Total $ 15,864 14,918 11,968
======== ======== ========
- -------------------------------------------------------------------------------
Table 5 Noninterest Expenses
- -------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------
(In thousands) 2004 2003 2002
-------- -------- --------
Salaries $ 20,116 17,756 15,079
Employee benefits 5,488 4,381 3,388
-------- -------- --------
Total personnel expense 25,604 22,137 18,467
Occupancy expense 2,754 2,366 2,077
Equipment related expenses 2,956 2,555 2,128
Amortization of intangible assets 378 224 31
Stationery and supplies 1,523 1,498 1,445
Telephone 1,345 1,229 932
Non-credit losses 187 198 97
Other operating expenses 8,970 7,757 7,124
-------- -------- --------
Total $ 43,717 37,964 32,301
======== ======== ========
- --------------------------------------------------------------------------------
44
- --------------------------------------------------------------------------------
Table 6 Income Taxes
- --------------------------------------------------------------------------------
(In thousands) 2004 2003 2002
-------- -------- --------
Current - Federal $ 10,407 9,578 8,964
- State 228 614 464
Deferred - Federal (192) 425 (146)
- State (25) -- --
-------- -------- --------
Total $ 10,418 10,617 9,282
======== ======== ========
Effective tax rate 34.1% 35.3% 35.0%
======== ======== ========
- ---------------------------------------------------------------------------------------------
Table 7 Distribution of Assets and Liabilities
- ---------------------------------------------------------------------------------------------
As of December 31,
------------------------------------
2004 2003 2002
-------- -------- --------
Assets
Interest-earning assets
Net loans 82% 82% 81%
Securities available for sale 5 7 5
Securities held to maturity 1 1 1
Short term investments 4 2 6
-------- -------- --------
Total interest-earning assets 92 92 93
Noninterest-earning assets
Cash and due from banks 2 2 2
Premises and equipment 2 2 2
Other assets 4 4 3
-------- -------- --------
Total assets 100% 100% 100%
======== ======== ========
Liabilities and shareholders' equity
Demand deposits - noninterest bearing 10% 10% 9%
Savings, NOW, and money market deposits 29 31 32
Time deposits of $100,000 or more 21 16 17
Other time deposits 25 27 29
-------- -------- --------
Total deposits 85 84 87
Borrowings 5 5 2
Accrued expenses and other liabilities 1 1 1
-------- -------- --------
Total liabilities 91 90 90
Shareholders' equity 9 10 10
-------- -------- --------
Total liabilities and shareholders' equity 100% 100% 100%
======== ======== ========
- ----------------------------------------------------------------------------------------------
Table 8 Securities Portfolio Composition
- ----------------------------------------------------------------------------------------------
As of December 31,
------------------------------------
(In thousands) 2004 2003 2002
-------- -------- --------
Securities available for sale:
U.S. Government agencies $ 29,810 35,808 13,529
Mortgage-backed securities 41,062 48,473 35,208
Corporate bonds 12,084 13,415 11,507
Equity securities 5,598 5,759 5,535
-------- -------- --------
Total securities available for sale 88,554 103,455 65,779
-------- -------- --------
Securities held to maturity:
State and local governments 11,605 12,947 13,951
Other 2,420 1,259 1,039
-------- -------- --------
Total securities held to maturity 14,025 14,206 14,990
-------- -------- --------
Total securities $102,579 117,661 80,769
======== ======== ========
Average total securities during year $110,098 95,449 98,465
======== ======== ========
- --------------------------------------------------------------------------------
45
- ----------------------------------------------------------------------------------------------
Table 9 Securities Portfolio Maturity Schedule
- ----------------------------------------------------------------------------------------------
As of December 31,
-------------------------------------
2004
-------------------------------------
Book Fair Book
($ in thousands) Value Value Yield (1)
-------- -------- ---------
Securities available for sale:
U.S. Government agencies
Due within one year $ 1,753 1,773 4.01%
Due after one but within five years 19,078 18,941 3.41%
Due after five but within ten years 8,947 9,096 4.85%
-------- -------- --------
Total 29,778 29,810 3.89%
-------- -------- --------
Mortgage-backed securities
Due within one year 333 338 5.28%
Due after one but within five years 28,380 28,338 4.21%
Due after five but within ten years 12,248 12,228 4.23%
Due after ten years 155 158 4.82%
-------- -------- --------
Total 41,116 41,062 4.23%
-------- -------- --------
Corporate debt securities
Due after ten years 10,909 12,084 7.59%
-------- -------- --------
Total 10,909 12,084 7.59%
-------- -------- --------
Equity securities 5,565 5,598 3.75%
-------- -------- --------
Total securities available for sale
Due within one year 2,086 2,111 4.21%
Due after one but within five years 47,458 47,279 3.89%
Due after five but within ten years 21,195 21,324 4.49%
Due after ten years 11,064 12,242 7.55%
Equity securities 5,565 5,598 3.75%
-------- -------- --------
Total $ 87,368 88,554 4.50%
======== ======== ========
Securities held to maturity:
State and local governments
Due within one year $ 1,157 1,164 5.58%
Due after one but within five years 7,483 7,765 6.68%
Due after five but within ten years 2,817 2,941 7.00%
Due after ten years 148 161 8.58%
-------- -------- --------
Total 11,605 12,031 6.68%
-------- -------- --------
Other
Due after one but within five years 2,420 2,420 0.74%
-------- -------- --------
Total 2,420 2,420 0.74%
-------- -------- --------
Total securities held to maturity
Due within one year 1,157 1,164 5.58%
Due after one but within five years 9,903 10,185 5.23%
Due after five but within ten years 2,817 2,941 7.00%
Due after ten years 148 161 8.58%
-------- -------- --------
Total $ 14,025 14,451 5.65%
======== ======== ========
(1) Yields on tax-exempt investments have been adjusted to a taxable
equivalent basis using a 35% tax rate.
- --------------------------------------------------------------------------------
46
- ----------------------------------------------------------------------------------------------------------------------------------
Table 10 Loan Portfolio Composition
- ----------------------------------------------------------------------------------------------------------------------------------
As of December 31,
-------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------------- --------------------- ------------------- -------------------- -------------------
% of % of % of % of % of
($ in Total Total Total Total Total
thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
----------- -------- --------- -------- -------- -------- --------- -------- -------- --------
Commercial,
financial, &
agricultural $ 122,501 8.96% 117,287 9.62% $ 88,291 8.84% $ 79,695 8.94% $ 76,507 10.24%
Real estate-
construction 117,158 8.57% 98,189 8.05% 68,162 6.82% 66,304 7.44% 57,608 7.71%
Real estate-
mortgage(1) 1,063,694 77.80% 939,578 77.05% 795,148 79.57% 697,498 78.29% 571,638 76.55%
Installment
loans to
individuals 63,913 4.67% 64,444 5.28% 47,648 4.77% 47,471 5.33% 41,047 5.50%
----------- -------- --------- -------- -------- -------- --------- -------- -------- --------
Loans, gross 1,367,266 100.00% 1,219,498 100.00% 999,249 100.00% 890,968 100.00% 746,800 100.00%
======== ======== ======== ======== ========
Unamortized
net deferred
loan fees &
unearned
income (213) (603) (702) (658) (711)
----------- --------- -------- --------- --------
Total loans,
net $ 1,367,053 1,218,895 $998,547 $ 890,310 $746,089
=========== ========= ======== ========= ========
(1) The majority of these loans are various personal and commercial loans
where real estate provides additional security for the loan.
- ------------------------------------------------------------------------------------------------------------------------------
Table 11 Loan Maturities
- ------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2004
---------------------------------------------------------------------------------------------
Due within Due after one year but Due after five
one year within five years years Total
--------------------- ---------------------- -------------------- --------------------
($ in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- ------- -------- -------
Variable Rate Loans:
Commercial, financial, and
agricultural $ 41,041 5.60% $ 26,788 5.63% $ 2,698 5.56% $ 70,527 5.61%
Real estate - construction 84,142 5.80% 11,636 5.64% 2,603 5.38% 98,381 5.77%
Real estate - mortgage 90,376 5.68% 251,029 5.65% 295,498 5.59% 636,903 5.63%
Installment loans
to individuals 1,242 5.55% 6,704 7.55% 1,139 7.49% 9,085 7.27%
-------- -------- -------- ----------
Total at variable rates 216,801 5.71% 296,157 5.69% 301,938 5.60% 814,896 5.66%
-------- -------- -------- ----------
Fixed Rate Loans:
Commercial, financial, and
agricultural 12,143 6.47% 34,353 6.19% 5,813 5.70% 52,309 6.20%
Real estate - construction 19,855 6.01% 1,534 5.73% 645 4.63% 22,034 5.95%
Real estate - mortgage 39,256 6.96% 316,312 6.33% 64,387 7.00% 419,955 6.49%
Installment loans
to individuals 8,577 7.72% 43,995 8.52% 1,580 7.01% 54,152 8.35%
-------- -------- -------- ----------
Total at fixed rates 79,831 6.73% 396,194 6.56% 72,425 6.87% 548,450 6.62%
-------- -------- -------- ----------
Subtotal 296,632 5.98% 692,351 6.19% 374,363 5.85% 1,363,346 6.05%
Nonaccrual loans 3,707 -- -- 3,707
-------- -------- -------- ----------
Loans, gross $300,339 $692,351 $374,363 $1,367,053
======== ======== ======== ==========
The above table is based on contractual scheduled maturities. Early repayment of
loans or renewals at maturity are not considered in this table.
- --------------------------------------------------------------------------------
47
- -------------------------------------------------------------------------------------------------------
Table 12 Nonperforming Assets
- -------------------------------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------------
($ in thousands) 2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Nonaccrual loans $ 3,707 4,274 2,976 3,808 626
Restructured loans 17 21 41 83 237
Accruing loans >90 days past due -- -- -- -- --
-------- -------- -------- -------- --------
Total nonperforming loans 3,724 4,295 3,017 3,891 863
Other real estate (included in other assets) 1,470 1,398 1,384 1,253 893
-------- -------- -------- -------- --------
Total nonperforming assets $ 5,194 5,693 4,401 5,144 1,756
======== ======== ======== ======== ========
Nonperforming loans as a percentage
of total loans 0.27% 0.35% 0.30% 0.44% 0.12%
Nonperforming assets as a percentage of
loans and other real estate 0.38% 0.47% 0.44% 0.58% 0.24%
Nonperforming assets as a percentage of
total assets 0.32% 0.39% 0.36% 0.45% 0.19%
Allowance for loan losses as a percentage
of nonperforming loans 395.19% 315.93% 361.52% 241.27% 914.60%
- ----------------------------------------------------------------------------------------------
Table 13 Allocation of the Allowance for Loan Losses
- ----------------------------------------------------------------------------------------------
As of December 31,
----------------------------------------------------
($ in thousands) 2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Commercial, financial, and agricultural $ 2,453 2,420 1,890 1,643 1,574
Real estate - construction 757 641 483 449 393
Real estate - mortgage 9,965 8,920 7,416 6,230 4,849
Installment loans to individuals 1,468 1,435 1,094 1,021 817
-------- -------- -------- -------- --------
Total allocated 14,643 13,416 10,883 9,343 7,633
Unallocated 74 153 24 45 260
-------- -------- -------- -------- --------
Total $ 14,717 13,569 10,907 9,388 7,893
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------
48
- --------------------------------------------------------------------------------------------------------------------------
Table 14 Loan Loss and Recovery Experience
- --------------------------------------------------------------------------------------------------------------------------
As of December 31,
-----------------------------------------------------------------------
($ in thousands) 2004 2003 2002 2001 2000
----------- ---------- ---------- ---------- ----------
Loans outstanding at end of year $ 1,367,053 1,218,895 998,547 890,310 746,089
=========== ========== ========== ========== ==========
Average amount of loans outstanding $ 1,295,682 1,113,426 954,885 831,817 701,317
=========== ========== ========== ========== ==========
Allowance for loan losses, at
beginning of year $ 13,569 10,907 9,388 7,893 6,674
Provision for loan losses 2,905 2,680 2,545 1,151 1,605
Additions related to loans assumed in
corporate acquisitions -- 1,083 50 1,125 --
----------- ---------- ---------- ---------- ----------
16,474 14,670 11,983 10,169 8,279
----------- ---------- ---------- ---------- ----------
Loans charged off:
Commercial, financial and agricultural (247) (205) (598) (89) (171)
Real estate - mortgage (1,143) (705) (230) (181) (3)
Installment loans to individuals (548) (431) (383) (642) (301)
----------- ---------- ---------- ---------- ----------
Total charge-offs (1,938) (1,341) (1,211) (912) (475)
----------- ---------- ---------- ---------- ----------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 45 73 33 27 10
Real estate - mortgage 63 30 15 48 20
Installment loans to individuals 73 137 87 56 59
----------- ---------- ---------- ---------- ----------
Total recoveries 181 240 135 131 89
----------- ---------- ---------- ---------- ----------
Net charge-offs (1,757) (1,101) (1,076) (781) (386)
----------- ---------- ---------- ---------- ----------
Allowance for loan losses, at end of year $ 14,717 13,569 10,907 9,388 7,893
=========== ========== ========== ========== ==========
Ratios:
Net charge-offs as a percent of average loans 0.14% 0.10% 0.11% 0.09% 0.06%
Allowance for loan losses as a
percent of loans at end of year 1.08% 1.11% 1.09% 1.05% 1.06%
Allowance for loan losses as a multiple
of net charge-offs 8.38x 12.32x 10.14x 12.02x 20.45x
Provision for loan losses as a percent of net
charge-offs 165.33% 243.42% 236.52% 147.38% 415.80%
Recoveries of loans previously charged-off
as a percent of loans charged-off 9.34% 17.90% 11.15% 14.36% 18.74%
- --------------------------------------------------------------------------------
49
- -----------------------------------------------------------------------------------------------------------------
Table 15 Average Deposits
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------
2004 2003 2002
----------------------- ---------------------- -------------------------
Average Average Average Average Average Average
($ in thousands) Amount Rate Amount Rate Amount Rate
---------- --------- --------- --------- ---------- -----------
Interest-bearing demand deposits $ 338,831 0.47% 308,750 0.47% $ 284,657 0.93%
Savings deposits 129,346 0.73% 105,775 0.72% 84,150 1.13%
Time deposits 407,602 2.04% 379,603 2.37% 352,964 3.67%
Time deposits > $100,000 271,448 2.34% 229,758 2.56% 186,178 3.51%
---------- --------- ----------
Total interest-bearing deposits 1,147,227 1.50% 1,023,886 1.67% 907,949 2.51%
Noninterest-bearing deposits 159,177 -- 129,499 -- 102,744 --
---------- --------- ----------
Total deposits $1,306,404 1.32% 1,153,385 1.48% $1,010,693 2.25%
========== ========= ==========
- -------------------------------------------------------------------------------------------------------
Table 16 Maturities of Time Deposits of $100,000 or More
- -------------------------------------------------------------------------------------------------------
As of December 31, 2004
----------------------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
(In thousands) or Less Months Months Months Total
-------- -------- -------- -------- --------
Time deposits of $100,000 or more $113,113 94,172 82,565 44,906 334,756
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
Table 17 Interest Rate Sensitivity Analysis
- -------------------------------------------------------------------------------------------------------------------------
Repricing schedule for interest-earning assets and interest-bearing
liabilities held as of December 31, 2004
--------------------------------------------------------------------
3 Months Over 3 to 12 Total Within Over 12
($ in thousands) or Less Months 12 Months Months Total
--------- ------------ ------------ --------- ---------
Earning assets:
Loans, net of deferred fees $ 709,420 73,931 783,351 583,702 1,367,053
Securities available for sale 8,614 24,423 33,037 55,517 88,554
Securities held to maturity 778 489 1,267 13,184 14,451
Short-term investments 62,686 -- 62,686 -- 62,686
--------- --------- ---------- --------- ---------
Total earning assets $ 781,498 98,843 880,341 652,403 1,532,744
========= ========= ========== ========= =========
Percent of total earning assets 50.99% 6.45% 57.44% 42.56% 100.00%
Cumulative percent of total earning assets 50.99% 57.44% 57.44% 100.00% 100.00%
Interest-bearing liabilities:
Savings, NOW and money market deposits $ 472,811 -- 472,811 -- 472,811
Time deposits of $100,000 or more 113,113 176,737 289,850 44,906 334,756
Other time deposits 126,138 199,030 325,168 90,255 415,423
Borrowings 82,239 -- 82,239 10,000 92,239
--------- --------- ---------- --------- ---------
Total interest-bearing liabilities $ 794,301 375,767 1,170,068 145,161 1,315,229
========= ========= ========== ========= =========
Percent of total interest-bearing liabilities 60.39% 28.57% 88.96% 11.04% 100.00%
Cumulative percent of total interest-
bearing liabilities 60.39% 88.96% 88.96% 100.00% 100.00%
Interest sensitivity gap $(12,803) (276,924) (289,727) 507,242 217,515
Cumulative interest sensitivity gap (12,803) (289,727) (289,727) 217,515 217,515
Cumulative interest sensitivity gap
as a percent of total earning assets -0.84% -18.90% -18.90% 14.19% 14.19%
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 98.39% 75.24% 75.24% 116.54% 116.54%
- --------------------------------------------------------------------------------
50
- -------------------------------------------------------------------------------------------------------
Table 18 Contractual Obligations and Other Commercial Commitments
- -------------------------------------------------------------------------------------------------------
Payments Due by Period (in thousands)
Contractual ---------------------------------------------------------------
Obligations On Demand or
- ------------------------------------- Less After
As of December 31, 2004 Total than 1 Year 1-3 Years 4-5 Years 5 Years
- ------------------------------------- ---------- ------------ ---------- ---------- ----------
Borrowings $ 92,239 41,000 4,000 6,000 41,239
Operating leases 2,258 379 542 347 990
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations,
excluding deposits 94,497 41,379 4,542 6,347 42,229
Deposits 1,388,768 1,256,511 96,299 35,372 586
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations,
including deposits $1,483,265 1,297,890 100,841 41,719 42,815
========== ========== ========== ========== ==========
Contractual Amount of Commitment Expiration Per Period (in thousands)
Other Commercial ---------------------------------------------------------------
Commitments Total
- ------------------------------------ Amounts Less After
As of December 31, 2004 Committed than 1 Year 1-3 Years 4-5 Years 5 Years
- ------------------------------------- ---------- ------------ ---------- ---------- ----------
Credit cards $ 16,091 8,046 8,045 -- --
Lines of credit and loan commitments 216,157 105,980 10,027 2,060 98,090
Standby letters of credit 3,762 3,702 5 55 --
---------- ---------- ---------- ---------- ----------
Total commercial commitments $ 236,010 117,728 18,077 2,115 98,090
========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------
Table 19 Market Risk Sensitive Instruments
- -----------------------------------------------------------------------------------------------------------------------
Expected Maturities of Market Sensitive Instruments Held
at December 31, 2004 Occurring in Indicated Year
------------------------------------------------------------------ Average Estimated
Interest Fair
($ in thousands) 2005 2006 2007 2008 2009 Beyond Total Rate Value
---------- ------- ------- ------- ------- ------- --------- --------- ----------
Due from banks,
interest-bearing $ 45,135 -- -- -- -- -- 45,135 2.25% $ 45,135
Federal funds sold 15,780 -- -- -- -- -- 15,780 2.25% 15,780
Presold mortgages in
process of settlement 1,771 -- -- -- -- -- 1,771 5.50% 1,771
Debt Securities- at
amortized cost (1) (2) 18,605 16,050 19,032 25,721 4,956 11,464 95,828 4.71% 97,407
Loans - fixed (3) (4) 95,725 83,522 102,088 93,683 119,078 54,356 548,452 6.64% 548,383
Loans - adjustable (3) (4) 251,363 63,153 85,812 126,535 130,187 157,848 814,898 5.65% 815,629
---------- ------- ------- ------- ------- ------- --------- --------- ----------
Total $ 428,379 162,725 206,932 245,939 254,221 223,668 1,521,864 5.81% $1,524,105
========== ======= ======= ======= ======= ======= ========= ========= ==========
Savings, NOW, and
money market
deposits $ 472,811 -- -- -- -- -- 472,811 0.65% $ 472,811
Time deposits 617,921 59,703 36,596 19,966 15,407 586 750,179 2.36% 750,405
Borrowings - fixed (2) 1,000 2,000 2,000 1,000 5,000 -- 11,000 4.23% 11,220
Borrowings - adjustable 40,000 -- -- -- -- 41,239 81,239 3.95% 81,239
---------- ------- ------- ------- ------- ------- --------- --------- ----------
Total $1,131,732 61,703 38,596 20,966 20,407 41,825 1,315,229 1.86% $1,315,675
========== ======= ======= ======= ======= ======= ========= ========= ==========
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 35%
tax rate.
(2) Securities and borrowings with call dates within 12 months of December 31,
2004 that have above market interest rates are assumed to mature at their
call date for purposes of this table. Mortgage securities are assumed to
mature in the period of their expected repayment based on estimated
prepayment speeds.
(3) Excludes nonaccrual loans.
(4) Single-family mortgage loans are assumed to mature in the period of their
expected repayment based on estimated prepayment speeds. All other loans
are shown in the period of their contractual maturity.
- --------------------------------------------------------------------------------
51
- --------------------------------------------------------------------------------
Table 20 Return on Assets and Equity
- --------------------------------------------------------------------------------
For the Year Ended December 31,
--------------------------------------
2004 2003 2002
-------- -------- --------
Return on assets 1.30% 1.45% 1.48%
Return on equity 13.71% 14.14% 14.25%
Dividend payout ratio 46.48% 45.41% 47.62%
Average shareholders' equity to average assets 9.49% 10.25% 10.40%
- ------------------------------------------------------------------------------------------------------
Table 21 Risk-Based and Leverage Capital Ratios
- ------------------------------------------------------------------------------------------------------
As of December 31,
-----------------------------------------------
($ in thousands) 2004 2003 2002
----------- ---------- ----------
Risk-Based and Leverage Capital
Tier I capital:
Common shareholders' equity $ 148,478 141,856 123,985
Trust preferred securities 40,000 40,000 20,000
Intangible assets (49,330) (50,701) (25,169)
Accumulated other
comprehensive income (517) (962) (752)
----------- ---------- ----------
Total Tier I leverage capital 138,631 130,193 118,064
----------- ---------- ----------
Tier II capital:
Allowable allowance for loan losses 14,717 13,569 10,907
----------- ---------- ----------
Tier II capital additions 14,717 13,569 10,907
----------- ---------- ----------
Total risk-based capital $ 153,348 143,762 128,971
=========== ========== ==========
Risk adjusted assets $ 1,315,755 1,182,966 957,158
Tier I risk-adjusted assets
(includes Tier I capital adjustments) 1,265,908 1,131,303 931,237
Tier II risk-adjusted assets
(includes Tiers I and II capital adjustments) 1,280,625 1,144,872 942,144
Fourth quarter average assets 1,608,146 1,431,031 1,195,930
Adjusted fourth quarter average assets
(includes Tier I capital adjustments) 1,558,299 1,379,368 1,170,009
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets 10.95% 11.51% 12.68%
Minimum required Tier I capital 4.00% 4.00% 4.00%
Total risk-based capital to
Tier II risk-adjusted assets 11.97% 12.56% 13.69%
Minimum required total risk-based capital 8.00% 8.00% 8.00%
Leverage capital ratios:
Tier I leverage capital to
adjusted fourth quarter average assets 8.90% 9.44% 10.09%
Minimum required Tier I leverage capital 4.00% 4.00% 4.00%
- --------------------------------------------------------------------------------
52
- ----------------------------------------------------------------------------------------------------------------------------------
Table 22 Quarterly Financial Summary
- ----------------------------------------------------------------------------------------------------------------------------------
2004 2003
----------------------------------------------- ------------------------------------------------
($ in thousands except Fourth Third Second First Fourth Third Second First
per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
---------- --------- --------- --------- --------- --------- --------- ---------
Income Statement Data
Interest income, taxable
equivalent $ 22,026 20,852 19,684 19,507 19,299 18,591 18,690 18,605
Interest expense 5,793 5,193 4,706 4,611 4,471 4,431 4,883 5,122
Net interest income,
taxable equivalent 16,233 15,659 14,978 14,896 14,828 14,160 13,807 13,483
Taxable equivalent,
adjustment 116 118 119 123 125 119 133 141
Net interest income 16,117 15,541 14,859 14,773 14,703 14,041 13,674 13,342
Provision for loan losses 825 770 740 570 925 695 540 520
Net interest income after
provision for losses 15,292 14,771 14,119 14,203 13,778 13,346 13,134 12,822
Noninterest income 3,844 4,296 3,912 3,812 3,781 3,802 3,602 3,733
Noninterest expense 11,271 11,092 10,622 10,732 10,091 9,273 9,352 9,248
Income before income taxes 7,865 7,975 7,409 7,283 7,468 7,875 7,384 7,307
Income taxes 2,554 2,778 2,523 2,563 2,611 2,819 2,573 2,614
Net income 5,311 5,197 4,886 4,720 4,857 5,056 4,811 4,693
- ----------------------------------------------------------------------------------------------------------------------------------
Per Share Data (1)
Earnings per share - basic $ 0.38 0.37 0.34 0.33 0.34 0.36 0.34 0.33
Earnings per share - diluted 0.37 0.36 0.34 0.33 0.34 0.35 0.34 0.33
Cash dividends declared 0.17 0.17 0.16 0.16 0.16 0.16 0.15 0.15
Market Price
High $ 29.73 22.65 22.77 23.26 21.49 20.67 17.99 17.55
Low 22.33 19.01 18.47 20.33 18.71 16.77 16.15 15.30
Close 27.17 22.48 22.29 20.99 20.80 18.67 17.27 16.78
Book value 10.54 10.36 10.13 10.15 10.02 9.80 9.63 9.46
- ----------------------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Assets $1,608,146 1,563,548 1,524,169 1,482,987 1,431,031 1,334,177 1,315,792 1,278,293
Loans 1,352,589 1,320,391 1,273,672 1,236,076 1,188,045 1,127,947 1,087,932 1,049,781
Earning assets 1,495,139 1,453,879 1,414,095 1,372,109 1,324,635 1,243,195 1,222,448 1,192,438
Deposits 1,363,557 1,301,703 1,300,263 1,260,093 1,221,215 1,146,683 1,140,309 1,105,333
Interest-bearing liabilities 1,282,404 1,249,440 1,211,314 1,182,884 1,136,788 1,057,358 1,047,765 1,021,886
Shareholders' equity 150,163 145,757 145,776 145,036 141,629 137,655 136,360 133,529
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios
Return on average assets 1.31% 1.32% 1.29% 1.28% 1.35% 1.50% 1.47% 1.49%
Return on average equity 14.07% 14.18% 13.48% 13.09% 13.61% 14.57% 14.15% 14.25%
Average equity to
average assets 9.34% 9.32% 9.56% 9.78% 9.90% 10.32% 10.36% 10.45%
Equity to assets at
end of period 9.06% 9.04% 9.19% 9.63% 9.61% 10.17% 10.21% 10.09%
Tangible equity to assets
at end of period 6.05% 5.92% 5.95% 6.24% 6.18% 7.48% 7.44% 7.34%
Average loans to
average deposits 99.20% 101.44% 97.95% 98.09% 97.28% 98.37% 95.41% 94.97%
Average earning assets to
interest-bearing 116.59% 116.36% 116.74% 116.00% 116.52% 117.58% 116.67% 116.69%
liabilities
Net interest margin 4.32% 4.28% 4.26% 4.37% 4.44% 4.52% 4.53% 4.59%
Allowance for loan losses
to gross loans 1.08% 1.07% 1.10% 1.11% 1.11% 1.11% 1.10% 1.11%
Nonperforming loans as a
percent of total loans 0.27% 0.27% 0.26% 0.27% 0.35% 0.38% 0.34% 0.28%
Nonperforming assets as a
percent of loans and other 0.38% 0.41% 0.40% 0.40% 0.47% 0.46% 0.45% 0.40%
real estate
Nonperforming assets as a
percent of total assets 0.32% 0.34% 0.33% 0.33% 0.39% 0.39% 0.37% 0.33%
Net charge-offs as a percent
of average loans 0.14% 0.22% 0.11% 0.07% 0.13% 0.08% 0.07% 0.11%
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Per share amounts have been adjusted to reflect the 3-for-2 stock split
paid on November 15, 2004.
53
Item 8. Financial Statements
and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 2004 and 2003
($ in thousands) 2004 2003
- -------------------------------------------------------------------------------------
ASSETS
Cash & due from banks, noninterest-bearing $ 28,486 36,315
Due from banks, interest-bearing 45,135 12,632
Federal funds sold 15,780 13,967
----------- ----------
Total cash and cash equivalents 89,401 62,914
----------- ----------
Securities available for sale (costs of
$87,368 in 2004 and $101,587 in 2003) 88,554 103,455
Securities held to maturity (fair values of
$14,451 in 2004 and $14,906 in 2003) 14,025 14,206
Presold mortgages in process of settlement 1,771 1,307
Loans 1,367,053 1,218,895
Less: Allowance for loan losses (14,717) (13,569)
----------- ----------
Net loans 1,352,336 1,205,326
----------- ----------
Premises and equipment 30,318 25,356
Accrued interest receivable 6,832 6,087
Intangible assets 49,330 50,701
Other assets 6,346 6,417
----------- ----------
Total assets $ 1,638,913 1,475,769
=========== ==========
LIABILITIES
Deposits: Demand - noninterest-bearing $ 165,778 146,499
Savings, NOW, and money market 472,811 462,876
Time deposits of $100,000 or more 334,756 238,535
Other time deposits 415,423 401,454
----------- ----------
Total deposits 1,388,768 1,249,364
Borrowings 92,239 76,000
Accrued interest payable 2,677 2,138
Other liabilities 6,751 6,411
----------- ----------
Total liabilities 1,490,435 1,333,913
----------- ----------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Authorized: 20,000,000 shares
Issued and outstanding: 14,083,856 shares in 2004 and
14,152,941 shares in 2003 51,614 55,392
Retained earnings 96,347 85,502
Accumulated other comprehensive income 517 962
----------- ----------
Total shareholders' equity 148,478 141,856
----------- ----------
Total liabilities and shareholders' equity $ 1,638,913 1,475,769
=========== ==========
See accompanying notes to consolidated financial statements.
54
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2004, 2003 and 2002
($ in thousands, except per share data) 2004 2003 2002
- --------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 76,093 69,318 66,742
Interest on investment securities:
Taxable interest income 4,428 3,902 4,961
Tax-exempt interest income 528 668 727
Other, principally overnight investments 544 779 831
----------- ---------- -----------
Total interest income 81,593 74,667 73,261
----------- ---------- -----------
INTEREST EXPENSE
Savings, NOW and money market 2,530 2,215 3,588
Time deposits of $100,000 or more 6,362 5,892 6,825
Other time deposits 8,334 9,001 12,376
Borrowings 3,077 1,799 1,082
----------- ---------- -----------
Total interest expense 20,303 18,907 23,871
----------- ---------- -----------
Net interest income 61,290 55,760 49,390
Provision for loan losses 2,905 2,680 2,545
----------- ---------- -----------
Net interest income after provision for loan losses 58,385 53,080 46,845
----------- ---------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 9,064 7,938 6,856
Other service charges, commissions and fees 3,361 2,710 2,336
Fees from presold mortgage loans 969 2,327 1,713
Commissions from sales of insurance and financial products 1,406 1,304 738
Data processing fees 416 333 303
Securities gains 299 218 25
Other gains (losses) 349 88 (3)
----------- ---------- -----------
Total noninterest income 15,864 14,918 11,968
----------- ---------- -----------
NONINTEREST EXPENSES
Salaries 20,116 17,756 15,079
Employee benefits 5,488 4,381 3,388
----------- ---------- -----------
Total personnel expense 25,604 22,137 18,467
Occupancy expense 2,754 2,366 2,077
Equipment related expenses 2,956 2,555 2,128
Intangibles amortization 378 224 31
Other operating expenses 12,025 10,682 9,598
----------- ---------- -----------
Total noninterest expenses 43,717 37,964 32,301
----------- ---------- -----------
Income before income taxes 30,532 30,034 26,512
Income taxes 10,418 10,617 9,282
----------- ---------- -----------
NET INCOME $ 20,114 19,417 17,230
=========== ========== ===========
Earnings per share:
Basic $ 1.42 1.38 1.26
Diluted 1.40 1.35 1.23
Weighted average common shares outstanding:
Basic 14,138,513 14,076,471 13,708,125
Diluted 14,395,152 14,351,106 13,981,082
See accompanying notes to consolidated financial statements.
55
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2004, 2003 and 2002
($ in thousands) 2004 2003 2002
- ---------------------------------------------------------------------------------------
Net income $ 20,114 19,417 17,230
Other comprehensive income:
Unrealized gains on securities
available for sale:
Unrealized holding gains (losses) arising
during the period, pretax (383) 688 400
Tax expense (benefit) 148 (268) (209)
Reclassification to realized gains (299) (218) (25)
Tax expense 117 85 10
Adjustment to minimum pension liability:
Additional pension charge related to unfunded
pension liability (46) (127) (165)
Tax benefit 18 50 64
-------- -------- --------
Other comprehensive income (loss) (445) 210 75
-------- -------- --------
Comprehensive income $ 19,669 19,627 17,305
======== ======== ========
See accompanying notes to consolidated financial statements.
56
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 2004, 2003 and 2002
Accumulated Total
Common Stock Other Share-
----------------------- Retained Comprehensive holders'
(In thousands, except per share) Shares Amount Earnings Income Equity
- --------------------------------------------------------------------------------------------------------------------
Balances, January 1, 2002 13,670 $ 50,134 65,915 677 116,726
-------- -------- -------- -------- --------
Net income 17,230 17,230
Cash dividends declared ($0.60 per share) (8,225) (8,225)
Common stock issued under
stock option plans 216 1,033 1,033
Common stock issued into
dividend reinvestment plan 75 1,174 1,174
Tax benefit realized from exercise of
nonqualified stock options 382 382
Purchases and retirement of common stock (278) (4,410) (4,410)
Other comprehensive income 75 75
-------- -------- -------- -------- --------
Balances, December 31, 2002 13,683 48,313 74,920 752 123,985
-------- -------- -------- -------- --------
Net income 19,417 19,417
Cash dividends declared ($0.63 per share) (8,835) (8,835)
Common stock issued in acquisition 500 9,284 9,284
Common stock issued under
stock option plans 211 1,167 1,167
Common stock issued into
dividend reinvestment plan 74 1,277 1,277
Tax benefit realized from exercise of
nonqualified stock options 546 546
Purchases and retirement of common stock (315) (5,195) (5,195)
Other comprehensive income 210 210
-------- -------- -------- -------- --------
Balances, December 31, 2003 14,153 55,392 85,502 962 141,856
-------- -------- -------- -------- --------
Net income 20,114 20,114
Cash dividends declared ($0.66 per share) (9,269) (9,269)
Common stock issued under
stock option plans 165 1,081 1,081
Common stock issued into
dividend reinvestment plan 67 1,466 1,466
Tax benefit realized from exercise of
nonqualified stock options 203 203
Purchases and retirement of common stock (301) (6,528) (6,528)
Other comprehensive loss (445) (445)
-------- -------- -------- -------- --------
Balances, December 31, 2004 14,084 $ 51,614 96,347 517 148,478
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
57
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002
($ in thousands) 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 20,114 19,417 17,230
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses 2,905 2,680 2,545
Net security premium amortization 152 362 240
Gains on sales of loans (2) (2) (11)
Gains on sales of securities available for sale (299) (218) (25)
Loss on disposal of premises and equipment -- -- 33
Gain on sales of other real estate (427) -- --
Other nonoperating losses (gains) 80 (86) (19)
Loan fees and costs deferred, net of amortization (390) (99) 45
Depreciation of premises and equipment 2,553 2,236 1,875
Tax benefit realized from exercise of nonqualified stock options 203 546 382
Amortization of intangible assets 378 224 31
Deferred income tax expense (benefit) (217) 425 (322)
Decrease (increase) in presold mortgages in process of settlement (464) 17,961 (8,555)
Decrease (increase) in accrued interest receivable (745) 29 574
Decrease (increase) in other assets 2,331 (1,338) 1,287
Increase (decrease) in accrued interest payable 539 (601) (1,024)
Increase (decrease) in other liabilities 1,175 (67) (3,306)
--------- --------- --------
Net cash provided by operating activities 27,886 41,469 10,980
--------- --------- --------
Cash Flows From Investing Activities
Proceeds from sales of loans 49 41 104
Purchases of securities available for sale (30,354) (73,663) (12,723)
Purchases of securities held to maturity (707) (317) (252)
Proceeds from sales of securities available for sale 12,060 7,750 1,012
Proceeds from maturities/issuer calls of securities available for sale 32,673 38,908 41,929
Proceeds from maturities/issuer calls of securities held to maturity 2,033 3,850 2,235
Net increase in loans (151,103) (149,877) (107,192)
Purchases of premises and equipment (7,335) (3,666) (5,643)
Net cash received in purchase of branches -- 62,427 4,493
Net cash received paid in insurance agency acquisitions -- (564) --
Net cash paid in bank acquisitions -- (2,256) --
--------- --------- --------
Net cash used by investing activities (142,684) (117,367) (76,037)
--------- --------- --------
Cash Flows From Financing Activities
Net increase in deposits 139,404 32,580 47,234
Proceeds from borrowings, net 15,000 44,000 15,000
Cash dividends paid (9,138) (8,670) (8,136)
Proceeds from issuance of common stock 2,547 2,444 2,207
Purchases and retirement of common stock (6,528) (5,195) (4,410)
--------- --------- --------
Net cash provided by financing activities 141,285 65,159 51,895
--------- --------- --------
Increase (Decrease) In Cash And Cash Equivalents 26,487 (10,739) (13,162)
Cash And Cash Equivalents, Beginning Of Year 62,914 73,653 86,815
--------- --------- --------
Cash And Cash Equivalents, End Of Year $ 89,401 62,914 73,653
========= ========= ========
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for:
Interest $ 19,764 19,508 24,885
Income taxes 9,738 9,858 14,167
Non-cash transactions:
Foreclosed loans transferred to other real estate 1,531 537 825
Additions to held to maturity securities and borrowings related to
deconsolidation of subsidiary trusts 1,239 -- --
Unrealized gain (loss) on securities available for sale, net of taxes (417) 287 176
Premises and equipment transferred to other real estate -- -- 228
Other real estate transferred to premises and equipment 180 -- --
See accompanying notes to consolidated financial statements.
58
First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2004
Note 1. Summary of Significant Accounting Policies
(a) Basis of Presentation - The consolidated financial statements include
the accounts of First Bancorp (the Company) and its wholly owned subsidiaries:
First Bank (the Bank); Montgomery Data Services, Inc. (Montgomery Data); and
First Bancorp Financial Services, Inc. (First Bancorp Financial). The Bank has
two wholly owned subsidiaries: First Bank Insurance Services, Inc. (First Bank
Insurance), and First Montgomery Financial Services Corporation (First
Montgomery). First Montgomery has one wholly owned subsidiary - First Troy
Realty Corporation (First Troy). All significant intercompany accounts and
transactions have been eliminated.
The Company is a bank holding company. The principal activity of the
Company is the ownership and operation of First Bank, a state chartered bank
with its main office in Troy, North Carolina. Other subsidiaries include
Montgomery Data, a data processing company whose primary client is First Bank,
and First Bancorp Financial, a real estate investment subsidiary, both of which
are headquartered in Troy. The Company is also the parent company for three
statutory trusts that were formed in 2002 and 2003 for the purpose of issuing a
total of $40 million in debt securities. These securities qualify as Tier I
capital for regulatory capital adequacy requirements. As described further in
Note 1(s), subsequent to the adoption of FIN 46 and FIN 46R in 2004, the Company
does not consolidate these trusts in its consolidated financial statements.
Although these trusts are reflected in the accompanying financial statements on
a consolidated basis for all periods prior to 2004, the comparability of the
accompanying financial statements is not materially impacted. First Bank
Insurance is a provider of non-FDIC insured investment and insurance products.
First Montgomery is a Virginia incorporated company that acquires real estate in
Virginia and leases the property to the Bank. First Troy was formed in 1999 and
allows the Bank to centrally manage a portion of its real estate loan portfolio.
First Troy has elected to be treated as a real estate investment trust for tax
purposes.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates made by the Company in the preparation of its
consolidated financial statements are the determination of the allowance for
loan losses, the valuation of other real estate, and fair value estimates for
financial instruments.
(b) Cash and Cash Equivalents - The Company considers all highly liquid
assets such as cash on hand, noninterest-bearing and interest-bearing amounts
due from banks and federal funds sold to be "cash equivalents."
(c) Securities - Debt securities that the Company has the positive intent
and ability to hold to maturity are classified as "held-to-maturity" and carried
at amortized cost. Securities not classified as held-to-maturity are classified
as "available-for-sale" and carried at fair value, with unrealized gains and
losses being reported as other comprehensive income and reported as a separate
component of shareholders' equity.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed to be other than temporary
results in a reduction in carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is established. Any
equity security that is in an unrealized loss position for twelve consecutive
months is presumed to be permanently impaired and an impairment charge is
recorded.
59
Gains and losses on sales of securities are recognized at the time of sale
based upon the specific identification method. Premiums and discounts are
amortized into income on a level yield basis, with premiums being amortized to
the earliest call date and discounts being accreted to the stated maturity date.
(d) Premises and Equipment - Premises and equipment are stated at cost
less accumulated depreciation. Depreciation, computed by the straight-line
method, is charged to operations over the estimated useful lives of the
properties, which range from 5 to 40 years or, in the case of leasehold
improvements, over the term of the lease, if shorter. Maintenance and repairs
are charged to operations in the year incurred. Gains and losses on dispositions
are included in current operations.
(e) Loans - Loans are stated at the principal amount outstanding, less
unearned income and deferred nonrefundable loan fees, net of certain origination
costs. Interest on loans is accrued on the unpaid principal balance outstanding.
Net deferred loan origination costs/fees are capitalized and recognized as a
yield adjustment over the life of the related loan. Unearned income for each of
the reporting periods was immaterial.
A loan is placed on nonaccrual status when, in management's judgment, the
collection of interest appears doubtful. The accrual of interest is discontinued
on all loans that become 90 days or more past due with respect to principal or
interest. The past due status of loans is based on the contractual payment
terms. While a loan is on nonaccrual status, the Company's policy is that all
cash receipts are applied to principal. Once the recorded principal balance has
been reduced to zero, future cash receipts are applied to recoveries of any
amounts previously charged off. Further cash receipts are recorded as interest
income to the extent that any interest has been foregone. Loans are removed from
nonaccrual status when they become current as to both principal and interest and
when concern no longer exists as to the collectibility of principal or interest.
In some cases, where borrowers are experiencing financial difficulties, loans
may be restructured to provide terms significantly different from the originally
contracted terms.
Commercial loans greater than $100,000 that are on nonaccrual status are
evaluated regularly for impairment. A loan is considered to be impaired when,
based on current information and events, it is probable the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Impaired loans are measured using either 1) an estimate of the cash
flows that the Company expects to receive from the borrower discounted at the
loan's effective rate, or 2) in the case of a collateral-dependent loan, the
fair value of the collateral is used to value the loan. While a loan is
considered to be impaired, the Company's policy is that interest accrual is
discontinued and all cash receipts are applied to principal. Once the recorded
principal balance has been reduced to zero, future cash receipts are applied to
recoveries of any amounts previously charged off. Further cash receipts are
recorded as interest income to the extent that any interest has been foregone.
(f) Presold Mortgages in Process of Settlement and Loans Held for Sale -
As a part of normal business operations, the Company originates residential
mortgage loans that have been pre-approved by secondary investors. The terms of
the loans are set by the secondary investors, and the purchase price that the
investor will pay for the loan is agreed to prior to the funding of the loan by
the Company. Generally within three weeks after funding, the loans are
transferred to the investor in accordance with the agreed-upon terms. The
Company records gains from the sale of these loans on the settlement date of the
sale equal to the difference between the proceeds received and the carrying
amount of the loan. The gain generally represents the portion of the proceeds
attributed to service release premiums received from the investors and the
realization of origination fees received from borrowers which were deferred as
part of the carrying amount of the loan. Between the initial funding of the
loans by the Company and the subsequent reimbursement by the investors, the
Company carries the loans on its balance sheet at cost.
Periodically, the Company originates commercial loans that are intended
for resale. The Company carries these loans at the lower of cost or fair value
at each reporting date. There were no such loans held for sale as of December
31, 2004 or 2003.
60
(g) Allowance for Loan Losses - The allowance for loan losses is
established through a provision for loan losses charged to expense. Loans are
charged-off against the allowance for loan losses when management believes that
the collectibility of the principal is unlikely. The provision for loan losses
charged to operations is an amount sufficient to bring the allowance for loan
losses to an estimated balance considered adequate to absorb losses inherent in
the portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, current economic conditions, historical
loan loss experience and other risk factors. While management uses the best
information available to make evaluations, future adjustments may be necessary
if economic and other conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on the examiners' judgment about information available to them at the time of
their examinations.
(h) Other Real Estate - Other real estate owned consists primarily of real
estate acquired by the Company through legal foreclosure or deed in lieu of
foreclosure. The property is initially carried at the lower of cost (generally
the loan balance plus additional costs incurred for improvements to the
property) or estimated fair value of the property less estimated selling costs.
If there are subsequent declines in fair value, the property is written down to
its fair value through a charge to expense. Capital expenditures made to improve
the property are capitalized. Costs of holding real estate, such as property
taxes, insurance and maintenance, less related revenues during the holding
period, are charged to operations.
(i) Income Taxes - Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are reduced, if necessary, by
the amount of such benefits that are not expected to be realized based upon
available evidence. The Company's investment tax credits, which for the Company
are low income housing tax credits, are recorded in the period that they are
affirmed by the tax credit fund, which is in the year immediately subsequent to
the period that they relate.
(j) Intangible Assets - Business combinations are accounted for using the
purchase method of accounting. Identifiable intangible assets are recognized
separately and are amortized over their estimated useful lives, which for the
Company has generally been ten years and at an accelerated rate. Goodwill is
recognized in business combinations to the extent that the price paid exceeds
the fair value of the net assets acquired, including any identifiable intangible
assets. As discussed in Note 1(n), goodwill is not amortized, but is subject to
fair value impairment tests on at least an annual basis.
In accordance with applicable accounting standards, the Company records an
intangible asset in connection with a defined benefit pension plan to fully
accrue for its liability. This intangible asset is adjusted annually in
accordance with actuarially determined amounts. The amount of this intangible
asset was $84,000 and $93,000 at December 31, 2004 and 2003, respectively.
(k) Stock Option Plan - At December 31, 2004, the Company had six
stock-based employee compensation plans, which are described more fully in Note
14. The Company accounts for those plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25 (APB Opinion No. 25),
"Accounting for Stock Issued to Employees," and related interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant.
61
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. For options with vesting
requirements, the amount of compensation expense recognized in each period is on
a straight-line basis over the vesting period.
Year Ended December 31,
--------------------------------------
(In thousands except per share data) 2004 2003 2002
-------- -------- --------
Net income, as reported $ 20,114 19,417 17,230
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (1,291) (319) (256)
-------- -------- --------
Pro forma net income $ 18,823 19,098 16,974
======== ======== ========
Earnings per share: Basic - As reported $ 1.42 1.38 1.26
Basic - Pro forma 1.33 1.36 1.24
Diluted - As reported 1.40 1.35 1.23
Diluted - Pro forma 1.31 1.33 1.21
(l) Per Share Amounts - Basic Earnings Per Share is calculated by dividing
net income by the weighted average number of common shares outstanding during
the period. Diluted Earnings Per Share is computed by assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
reporting period. Currently, the Company's only potential dilutive common stock
issuances relate to options that have been issued under the Company's stock
option plans. In computing Diluted Earnings Per Share, it is assumed that all
such dilutive stock options are exercised during the reporting period at their
respective exercise prices, with the proceeds from the exercises used by the
Company to buy back stock in the open market at the average market price in
effect during the reporting period. The difference between the number of shares
assumed to be exercised and the number of shares bought back is added to the
number of weighted average common shares outstanding during the period. The sum
is used as the denominator to calculate Diluted Earnings Per Share for the
Company.
The following is a reconciliation of the numerators and denominators used
in computing Basic and Diluted Earnings Per Share:
For the Years Ended December 31,
--------------------------------------------------------------------------------------------------------------
2004 2003 2002
--------------------------------- ------------------------------------ -----------------------------------
($ in thousands, Income Shares Per Income Shares Per Income Shares Per
except per share (Numer (Denom- Share (Numer- (Denom- Share (Numer- (Denom- Share
amounts) -ator) inator) Amount ator) inator) Amount ator) inator) Amount
------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------
Basic EPS $20,114 14,138,513 $ 1.42 $ 19,417 14,076,471 $ 1.38 $ 17,230 13,708,125 $ 1.26
========== ========== ========
Effect of dilutive
securities -- 256,639 -- 274,635 -- 272,957
------- ---------- ---------- ---------- ---------- ----------
Diluted EPS $20,114 14,395,152 $ 1.40 $ 19,417 14,351,106 $ 1.35 $ 17,230 13,981,082 $ 1.23
======= ========== ========== ========== ========== ========== ========== ========== ========
For the years ended December 31, 2004, and 2003, there were no
antidilutive options since the exercise price for each option outstanding was
less that the average market price for the year. For the year ended December 31,
2002, there were 24,000 options that were antidilutive since the exercise price
exceeded the average market price for the year. These options were omitted from
the calculation of diluted earnings per share for 2002.
62
(m) Fair Value of Financial Instruments - Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments" (SFAS No. 107), requires that the Company disclose estimated fair
values for its financial instruments. Fair value methods and assumptions are set
forth below for the Company's financial instruments.
Cash and Due from Banks, Federal Funds Sold, Presold Mortgages in Process
of Settlement, Accrued Interest Receivable, and Accrued Interest Payable - The
carrying amounts approximate their fair value because of the short maturity of
these financial instruments.
Available for Sale and Held to Maturity Securities - Fair values are based
on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
financial and agricultural, real estate construction, real estate mortgages and
installment loans to individuals. Each loan category is further segmented into
fixed and variable interest rate terms. For variable rate loans, the carrying
value is a reasonable estimate of the fair value. For fixed rate loans, fair
value is determined by discounting scheduled future cash flows using current
interest rates offered on loans with similar risk characteristics. Fair values
for impaired loans are estimated based on discounted cash flows or underlying
collateral values, where applicable.
Deposits - The fair value of deposits with no stated maturity, such as
non-interest-bearing demand deposits, savings, NOW, and money market accounts,
is equal to the amount payable on demand as of the valuation date. The fair
value of certificates of deposit is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
Borrowings - The fair value of borrowings is based on the discounted value
of contractual cash flows. The discount rate is estimated using the rates
currently offered by the Company's lenders for debt of similar remaining
maturities.
Commitments to Extend Credit and Standby Letters of Credit - At December
31, 2004 and 2003, the Company's off-balance sheet financial instruments had no
carrying value. The large majority of commitments to extend credit and standby
letters of credit are at variable rates and/or have relatively short terms to
maturity. Therefore, the fair value for these financial instruments is
considered to be immaterial.
(n) Impairment - Goodwill is evaluated for impairment on at least an
annual basis by comparing the fair value of its reporting units to their related
carrying value. If the carrying value of a reporting unit exceeds its fair
value, the Company determines whether the implied fair value of the goodwill,
using a discounted cash flow analysis, exceeds the carrying value of the
goodwill. If the carrying value of the goodwill exceeds the implied fair value
of the goodwill, an impairment loss is recorded in an amount equal to that
excess.
For all other long-lived assets, including identifiable intangible assets,
the Company reviews them for impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. The
Company's policy is that an impairment loss is recognized if the sum of the
undiscounted future cash flows is less than the carrying amount of the asset.
Any of long-lived assets to be disposed of are reported at the lower of the
carrying amount or fair value, less costs to sell.
To date, the Company has not had to record any impairment write-downs of
its long-lived assets or goodwill.
(o) Comprehensive Income - Comprehensive income is defined as the change
in equity during a period for non-owner transactions and is divided into net
income and other comprehensive income. Other comprehensive
63
income includes revenues, expenses, gains, and losses that are excluded from
earnings under current accounting standards. The components of accumulated other
comprehensive income for the Company are as follows:
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
Unrealized gain on securities
available for sale $ 1,186 1,868 1,399
Deferred tax liability (463) (728) (546)
------- ------- -------
Net unrealized gain on securities
available for sale 723 1,140 853
------- ------- -------
Additional minimum pension
liability (338) (292) (165)
Deferred tax asset 132 114 64
------- ------- -------
Net additional minimum pension
liability (206) (178) (101)
------- ------- -------
Total accumulated other
comprehensive income $ 517 962 752
======= ======= =======
(p) Segment Reporting - SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" requires management to report selected
financial and descriptive information about reportable operating segments. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Generally, disclosures are required for
segments internally identified to evaluate performance and resource allocation.
The Company's operations are primarily within the banking segment, and the
financial statements presented herein reflect the results of that segment. Also,
the Company has no foreign operations or customers.
(q) Reclassifications - Certain amounts for prior years have been
reclassified to conform to the 2004 presentation. The reclassifications had no
effect on net income or shareholders' equity as previously presented, nor did
they materially impact trends in financial information.
(r) Stock Split - The Company paid a 3-for-2 stock split on November 15,
2004. All previously reported share totals and per share amounts have been
adjusted to retroactively reflect the effect of the split.
(s) Recent Accounting Pronouncements - In January 2003, the FASB issued
Financial Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities," which was subsequently revised in December 2003. 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. In December 2003, the FASB issued a revision to FIN 46 (FIN 46R),
which clarified and interpreted certain of the provisions of FIN 46, without
changing the basic accounting model in FIN 46. The provisions of FIN 46R were
effective no later than March 31, 2004. The adoption of FIN 46 did not have an
impact on the Company's financial position or results of operations, as the
Company had no investments in variable interest entities that required
consolidation under FIN 46. The application of FIN 46R during 2004 resulted in
the de-consolidation of three trusts that the Company established in order to
issue $40 million in trust preferred capital securities. The de-consolidation of
the trusts resulted in the Company recording the amount of the junior
subordinated debentures between the Company and the trust subsidiary in the
amount of $1,239,000. Previously, the junior subordinated debentures were
eliminated in consolidation. The impact of this change was to increase both
securities (held-to-maturity) and borrowings by $1,239,000 each. Additional
information regarding the Company's trust preferred securities is included in
Note 9.
In November 2003, the FASB ratified a consensus reached by its Emerging
Issues Task Force ("EITF") regarding quantitative and qualitative disclosures
required by EITF Issue No. 03-1, "The Meaning of Other-Than-
64
Temporary Impairment and Its Application to Certain Investments." EITF Issue No.
03-1 requires certain quantitative and qualitative disclosures as it relates to
investments that have unrealized losses that have not been recognized as
other-than-temporary impairments and is effective for fiscal years ending after
December 15, 2003. The additional disclosures required for the Company are
included in Note 3. In March 2004, the EITF released Consensus 03-1 (EITF 03-1).
EITF 03-1 as released, codified the provisions of SEC Staff Accounting Bulletin
No. 59 and required additional information about unrealized losses associated
with debt and equity securities and also provided more detailed criteria that
must be followed in evaluating whether to record losses on impaired debt and
equity securities. The disclosure requirements were applicable for annual
reporting periods ending after June 15, 2004 and are presented in Note 3. The
impairment accounting requirements were to have been effective for periods
beginning after June 15, 2004. However, in September 2004, the FASB indefinitely
delayed the effective date of the requirement to record impairment losses caused
by the effect of increases in interest rates or "sector spreads."
In December 2003, the FASB issued Statement of Financial Accounting
Standards No. 132 (revised 2003) (Statement 132(R)), "Employers' Disclosures
about Pensions and Other Postretirement Benefits." Statement 132(R) revises
employers' disclosures about pension plans and other postretirement plans, but
does not change the measurement or recognition of those plans. Statement No.
132(R) requires additional disclosures about the assets, obligations, cash
flows, and net periodic pension cost of defined benefit plans and other defined
benefit postretirement plans. Most of the provisions of Statement 132(R) became
effective for financial statements with fiscal years after December 15, 2003,
with certain provisions becoming effective for fiscal years ending after June
15, 2004. The additional disclosures required for the Company are included in
Note 11.
In March 2004, the SEC issued Staff Accounting Bulletin Number 105 (SAB
105), "Application of Accounting Principles to Loan Commitments." SAB 105
summarizes the views of the SEC staff regarding the application of generally
accepted accounting principles to loan commitments accounted for as derivatives,
and its provisions were required for such loan commitments entered into
subsequent to March 31, 2004. The adoption of SAB 105 did not have a material
impact on the Company's consolidated financial statements.
65
Note 2. Completed Acquisitions
Since January 1, 2002, the Company has completed several acquisitions.
There were no acquisitions during 2004.
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 December 31, 2003 beginning on their respective acquisition dates.
(a) 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:
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 1.2 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 499,332 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 $16.81, 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 (adjusted for the November 15, 2004 stock split). 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. Except as noted beginning in the next sentence, the table below is a
condensed balance sheet disclosing the amount assigned to each major asset and
liability caption of CCB on January 15, 2003, and the related fair value
adjustments recorded by the Company to reflect the acquisition. The "Other"
category in the table below amounting to $755,000 consists solely of the net tax
asset recorded in connection with the acquisition and was originally a liability
of $243,000. In 2004, the Company recorded three adjustments to the purchase
66
price allocation totaling $998,000, each of which related to taxes, as explained
in the following sentences. It was determined in 2004 that $895,000 of the
amount originally recorded as goodwill at the acquisition date was deductible
for tax purposes. The tax impact of these deductions was approximately $353,000.
It was also determined in 2004 that a deferred tax valuation allowance that had
been recorded by CCB in the amount of $224,000 was no longer necessary.
Additionally the Company has realized $421,000 in tax benefits related to the
exercise of nonqualified stock options that were assumed in the merger.
Accordingly, in 2004, the Company reduced its tax liability by $998,000, with a
corresponding decrease to goodwill. The table below includes the impact of the
2004 adjustments.
As Fair As
($ 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 1,697 755 (d) 2,452
-------- -------- --------
Total 69,504 1,580 71,084
-------- -------- --------
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 9,474
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 related to acquisition of CCB $ 9,402
========
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.
67
(d) This fair value adjustment represents the net tax asset recorded related
to the accounting for the acquisition.
(e) This fair value adjustment was recorded because the interest rates of
CCB's borrowings exceeded current interest rates on similar borrowings.
This amount will be amortized to reduce interest expense over the
remaining lives of the related borrowings, which have a weighted average
life of approximately 3.7 years.
(f) This fair value adjustment represents the carrying value of a retirement
plan liability that was terminated in accordance with the terms of the
merger agreement.
The following unaudited pro forma financial information presents the
combined results of the Company and 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.
($ in thousands, except share data) Year Ended
December 31, 2002
-----------------
Net interest income $ 52,200
Noninterest income 12,717
Net income 17,748
Earnings per share
Basic 1.25
Diluted 1.22
The above pro forma results include charges recorded by CCB in the fourth
quarter of 2002 related to the impending merger with the Company. These expenses
amounted to $255,375 on a pretax basis and $198,432 on an after-tax basis.
(c) 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 primary reason for the acquisition was to expand into new markets and
increase the Company's customer base. Subject to certain limitations, the
Company paid a deposit premium of 14.1% for the branches, which resulted in the
Company recording intangible assets relating to this purchase of $14.2 million,
all of which is deductible for tax purposes. The identifiable intangible asset
associated with the fair value of the core deposit base, as determined by an
independent consulting firm, was determined to be approximately $1.3 million and
is being amortized as expense on an accelerated basis over a ten year period
based on an amortization schedule provided by the consulting firm. The remaining
intangible asset of $12.9 million has been classified as goodwill, and thus is
not being systematically amortized, but rather is subject to an annual
impairment test. The primary factors that contributed to a purchase price that
resulted in recognition of goodwill were the Company's desire to expand in four
new markets with facilities, operations and experienced staff in place. These
four branches' operations are included in the accompanying Consolidated
Statements of Income beginning on the acquisition date of October 24, 2003.
Historical financial information related to the four branches while owned by RBC
Centura Bank is not available, and thus pro forma results of operations have not
been presented.
68
The following table contains a condensed balance sheet that indicates the
amount assigned to each major asset and liability as of the respective
acquisition dates for the 2003 acquisitions described above.
Uwharrie Carolina RBC
Insurance Community Centura
Assets acquired Group Bank Branches Total
- ------------------------------- ---------- --------- ---------- ---------
(in millions)
Cash $ -- 7.0 62.4 69.4
Securities -- 13.1 -- 13.1
Loans, gross -- 47.7 24.8 72.5
Allowance for loan losses -- (0.8) (0.3) (1.1)
Premises and equipment -- 0.8 1.0 1.8
Other -- 2.5 0.2 2.7
----- ----- ----- -----
Total assets acquired -- 70.3 88.1 158.4
----- ----- ----- -----
Liabilities assumed
- -------------------------------
Deposits -- 58.9 102.0 160.9
Borrowings -- 2.1 -- 2.1
Other -- 0.6 0.3 0.9
----- ----- ----- -----
Total liabilities assumed -- 61.6 102.3 163.9
----- ----- ----- -----
Value of cash paid and/or
stock issued to
stock-holders of acquiree 0.5 18.9 n/a 19.4
----- ----- ----- -----
Intangible assets recorded $ 0.5 10.2 14.2 24.9
===== ===== ===== =====
The Company completed one acquisition in 2002 as follows:
(a) On October 4, 2002, the Company completed the purchase of a branch of
RBC Centura located in Broadway, North Carolina. The Company assumed the
branch's $8 million in deposits and $3 million in loans. The primary reason for
this acquisition was to increase the Company's presence in Lee County, a market
in which the Company already had two branches with a large customer base. An
intangible asset of $0.7 million, all of which is deductible for tax purposes,
was recorded in connection with this acquisition. The entire intangible asset
was determined to be goodwill. The primary factors that contributed to a
purchase price that resulted in recognition of goodwill were the Company's
desire to expand in Lee County with a facility, operations, and experienced
staff in place. The Broadway branch's operations are included in the
accompanying Consolidated Statements of Income beginning on the acquisition date
of October 4, 2002.
69
Note 3. Securities
The book values and approximate fair values of investment securities at
December 31, 2004 and 2003 are summarized as follows:
2004 2003
------------------------------------------- ---------------------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Gains (Losses) Cost Value Gains (Losses)
--------- ------- -------- -------- --------- --------- -------- ---------
(In thousands)
Securities available for sale:
U.S. Government agencies $29,778 29,810 169 (137) 35,225 35,808 590 (7)
Mortgage-backed securities 41,116 41,062 240 (294) 48,455 48,473 410 (392)
Corporate bonds 10,909 12,084 1,194 (19) 12,154 13,415 1,261 --
Equity securities 5,565 5,598 39 (6) 5,753 5,759 24 (18)
------- ------ ----- ---- ------- ------- ----- ----
Total available for sale $87,368 88,554 1,642 (456) 101,587 103,455 2,285 (417)
======= ====== ===== ==== ======= ======= ===== ====
Securities held to maturity:
State and local governments $11,605 12,031 435 (9) 12,947 13,647 700 --
Other 2,420 2,420 -- -- 1,259 1,259 -- --
------- ------ ----- ---- ------- ------- ----- ----
Total held to maturity $14,025 14,451 435 (9) 14,206 14,906 700 --
======= ====== ===== ==== ======= ======= ===== ====
Included in mortgage-backed securities at December 31, 2004 were
collateralized mortgage obligations with an amortized cost of $15,928,000 and a
fair value of $15,831,000. Included in mortgage-backed securities at December
31, 2003 were collateralized mortgage obligations with an amortized cost of
$21,649,000 and a fair value of $21,458,000.
The Company owned Federal Home Loan Bank stock with a cost and fair value
of $5,247,000 at December 31, 2004 and $5,550,000 at December 31, 2003, which is
included in equity securities above and serves as part of the collateral for the
Company's line of credit with the Federal Home Loan Bank (see Note 9 for
additional discussion). The investment in this stock is a requirement for
membership in the Federal Home Loan Bank system.
The following table presents information regarding securities with
unrealized losses at December 31, 2004:
Securities in an Securities in an
Unrealized Loss Unrealized Loss
Position for Position for
Less than 12 Months More than 12 Months Total
------------------------ ----------------------- ------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------- ---------- ---------- ---------- ---------- ----------
U.S. Government agencies $16,731 137 -- -- 16,731 137
Mortgage-backed securities 4,533 30 16,361 264 20,894 294
Corporate bonds 3,081 19 -- -- 3,081 19
Equity securities 53 6 -- -- 53 6
State and local governments 925 9 -- -- 925 9
------- ------- ------- ------- ------- -------
Total temporarily impaired securities $25,323 201 16,361 264 41,684 465
======= ======= ======= ======= ======= =======
In the above table, all of the non-equity securities that are in an
unrealized loss position at December 31, 2004 are bonds that the company has
determined are in a loss position due to interest rate factors, and not because
of credit quality concerns. Therefore, the Company expects to collect the full
par value of each bond upon maturity with no accounting loss. The Company has
concluded that each of the equity securities in an unrealized loss position at
December 31, 2004 is due to minor temporary fluctuations in the market prices of
the securities. The Company will record an impairment charge for any of these
equity securities that remains in an unrealized loss position for twelve
consecutive months.
70
The aggregate carrying amount of cost-method investments was $6,508,000
and $6,876,000 at December 31, 2004 and 2003, respectively, which included the
Federal Home Loan Bank stock discussed above. The Company determined that none
of the its cost-method investments were impaired at either year end.
The book values and approximate fair values of investment securities at
December 31, 2004, by contractual maturity, are summarized in the table below.
Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Securities Available for Sale Securities Held to Maturity
----------------------------- ----------------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
--------- ---------- --------- -------
Debt securities
Due within one year $ 1,753 1,773 $ 1,157 1,164
Due after one year but within five years 19,078 18,941 9,903 10,185
Due after five years but within ten years 8,947 9,096 2,817 2,941
Due after ten years 10,909 12,084 148 161
Mortgage-backed securities 41,116 41,062 -- --
-------- -------- -------- --------
Total debt securities 81,803 82,956 14,025 14,451
Equity securities 5,565 5,598 -- --
-------- -------- -------- --------
Total securities $ 87,368 88,554 $ 14,025 14,451
======== ======== ======== ========
At December 31, 2004 and 2003, investment securities with book values of
$43,315,000 and $37,719,000, respectively, were pledged as collateral for public
and private deposits.
Sales of securities available for sale with aggregate proceeds of
$12,060,000 in 2004, $7,750,000 in 2003, and $1,012,000 in 2002 resulted in
gross gains of $299,000 and no gross losses in 2004, resulted in gross gains of
$218,000 and no gross losses in 2003, and gross gains of $27,000 and gross
losses of $2,000 in 2002.
Note 4. Loans and Allowance for Loan Losses
Loans at December 31, 2004 and 2003 are summarized as follows:
(In thousands) 2004 2003
----------- ----------
Commercial, financial, and agricultural $ 122,501 117,287
Real estate - construction 117,158 98,189
Real estate - mortgage 1,063,694 939,578
Installment loans to individuals 63,913 64,444
----------- ----------
Subtotal 1,367,266 1,219,498
Unamortized net deferred loan fees (213) (603)
----------- ----------
Loans, net of deferred fees $ 1,367,053 1,218,895
=========== ==========
Loans described above as "Real estate - mortgage" included loans in the
amounts of $999,384,000 and $549,900,000 as of December 31, 2004 and 2003,
respectively, which are being pledged as collateral for certain borrowings (see
Note 9). The loans above also include loans to executive officers and directors
and to their associates totaling approximately $13,764,000 and $9,775,000 at
December 31, 2004 and 2003, respectively. During 2004, additions to such loans
were approximately $5,715,000 and repayments totaled approximately $1,726,000.
These loans were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other non-related borrowers. Management does not believe these loans involve
more than the normal risk of collectibility or present other unfavorable
features.
71
Nonperforming assets at December 31, 2004 and 2003 are as follows:
(In thousands) 2004 2003
------ ------
Loans: Nonaccrual loans $3,707 4,274
Restructured loans 17 21
Accruing loans greater than 90 days past due -- --
------ ------
Total nonperforming loans 3,724 4,295
Other real estate (included in other assets) 1,470 1,398
------ ------
Total nonperforming assets $5,194 5,693
====== ======
If the nonaccrual loans and restructured loans as of December 31, 2004,
2003 and 2002 had been current in accordance with their original terms and had
been outstanding throughout the period (or since origination if held for part of
the period), gross interest income in the amounts of approximately $247,000,
$319,000 and $246,000 for nonaccrual loans and $2,000, $2,000 and $6,000 for
restructured loans would have been recorded for 2004, 2003 and 2002,
respectively. Interest income on such loans that was actually collected and
included in net income in 2004, 2003 and 2002 amounted to approximately
$120,000, $102,000 and $55,000 for nonaccrual loans (prior to their being placed
on nonaccrual status) and $2,000, $2,000 and $6,000 for restructured loans,
respectively. At December 31, 2004 and 2003, the Company had no commitments to
lend additional funds to debtors whose loans were nonperforming.
Activity in the allowance for loan losses for the years ended December 31,
2004, 2003 and 2002 is as follows:
(In thousands) 2004 2003 2002
-------- -------- --------
Balance, beginning of year $ 13,569 10,907 9,388
Provision for loan losses 2,905 2,680 2,545
Recoveries of loans charged-off 181 240 135
Loans charged-off (1,938) (1,341) (1,211)
Allowance recorded related to loans
assumed in corporate acquisitions -- 1,083 50
-------- -------- --------
Balance, end of year $ 14,717 13,569 10,907
======== ======== ========
At December 31, 2004 and 2003, the recorded investment in loans considered
to be impaired was $1,578,000 and $1,449,000, respectively, of which all were on
a nonaccrual basis at each year end. The related allowance for loan losses for
the impaired loans at December 31, 2004 and 2003 was $370,000 and $341,000,
respectively. At December 31, 2004 and 2003, there was $532,000 and $242,000 in
impaired loans for which there was no related allowance. The average recorded
investments in impaired loans during the years ended December 31, 2004, 2003,
and 2002 were approximately $1,317,000, $1,590,000, and $1,822,000,
respectively. For the years ended December 31, 2004, 2003, and 2002, the Company
recognized no interest income on those impaired loans during the period that
they were considered to be impaired.
72
Note 5. Premises and Equipment
Premises and equipment at December 31, 2004 and 2003 consist of the
following:
(In thousands) 2004 2003
-------- -------
Land $ 7,812 5,829
Buildings 21,725 18,492
Furniture and equipment 17,388 15,895
Leasehold improvements 1,236 645
-------- -------
Total cost 48,161 40,861
Less accumulated depreciation and amortization (17,843) (15,505)
-------- -------
Net book value of premises and equipment $ 30,318 25,356
======== =======
Note 6. Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated
amortization of amortized intangible assets as of December 31, 2004 and December
31, 2003 and the carrying amount of unamortized intangible assets as of December
31, 2004 and December 31, 2003.
December 31, 2004 December 31, 2003
------------------------------ ------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
(In thousands) Amount Amortization Amount Amortization
- ----------------------------------- -------------- -------------- -------------- -------------
Amortized intangible assets:
Customer lists $ 394 85 394 54
Noncompete agreements 50 50 50 25
Core deposit premiums 2,441 751 2,441 429
------- ------- ------- -------
Total $ 2,885 886 2,885 508
======= ======= ======= =======
Unamortized intangible assets:
Goodwill $47,247 48,231
======= =======
Pension $ 84 93
======= =======
The following table presents the estimated amortization expense for
intangible assets for each of the five calendar years ending December 31, 2009
and the estimated amount amortizable thereafter. These estimates are subject to
change in future periods to the extent management determines it is necessary to
make adjustments to the carrying value or estimated useful lives of amortized
intangible assets.
Estimated
Amortization Expense
(In thousands)
-------------------- ---------------------------
2005 $ 290
2006 242
2007 220
2008 219
2009 218
Thereafter 810
--------
Total $ 1,999
========
73
Note 7. Income Taxes
Total income taxes for the years ended December 31, 2004, 2003 and 2002
were allocated as follows:
(In thousands) 2004 2003 2002
-------- -------- --------
Allocated to net income $ 10,418 10,617 9,282
Allocated to stockholders' equity, for unrealized holding gain on
debt and equity securities for financial reporting purposes (265) 183 199
Allocated to stockholders' equity, for tax benefit of additional pension charge (18) (50) (64)
-------- -------- --------
Total income taxes $ 10,135 10,750 9,417
======== ======== ========
The components of income tax expense (benefit) for the years ended
December 31, 2004, 2003 and 2002 are as follows:
(In thousands) 2004 2003 2002
-------- -------- --------
Current - Federal $ 10,407 9,578 8,964
- State 228 614 464
Deferred - Federal (192) 425 (146)
- State (25) -- --
-------- -------- --------
Total $ 10,418 10,617 9,282
======== ======== ========
The sources and tax effects of temporary differences that give rise to
significant portions of the deferred tax assets (liabilities) at December 31,
2004 and 2003 are presented below:
(In thousands) 2004 2003
-------- --------
Deferred tax assets:
Allowance for loan losses $ 5,456 4,300
Excess book over tax SERP retirement plan cost 550 372
Basis of investment in subsidiary 69 69
Net loan fees recognized for tax reporting purposes 55 166
Reserve for employee medical expense for financial reporting purposes 20 20
Deferred compensation 156 149
State net operating loss carryforwards 352 214
Trust preferred security issuance costs 128 49
Accruals, book versus tax 160 193
Minimum pension liability adjustment 132 114
All other 35 57
-------- --------
Gross deferred tax assets 7,113 5,703
Less: Valuation allowance (367) (214)
-------- --------
Net deferred tax assets 6,746 5,489
-------- --------
Deferred tax liabilities:
Loan fees (1,050) (978)
Excess tax over book pension cost (559) (754)
Depreciable basis of fixed assets (1,906) (1,493)
Amortizable basis of intangible assets (2,378) (1,606)
Unrealized gain on securities available for sale (464) (729)
FHLB stock dividends (439) (439)
Book versus tax basis difference - securities (46) (84)
All other -- (2)
-------- --------
Gross deferred tax liabilities (6,842) (6,085)
-------- --------
Net deferred tax liability - included in other assets $ (96) (596)
======== ========
A portion of the annual change in the net deferred tax liability relates
to unrealized gains and losses on securities available for sale. The related
2004 and 2003 deferred tax (benefit) expense of approximately ($265,000) and
$183,000, respectively, has been recorded directly to shareholders' equity.
Additionally, a
74
portion of the annual change in the net deferred tax liability relates to an
additional pension charge. The related 2004 and 2003 deferred tax benefit of
$18,000 and $50,000, respectively, has been recorded directly to shareholders'
equity. Purchase acquisitions also increased the net deferred tax liability by
$320,000 in 2003. The balance of the 2004 and 2003 increase (decrease) in the
net deferred tax asset (liability) of ($217,000) and 425,000, respectively, is
reflected as a deferred income tax expense (benefit) in the consolidated
statement of income.
The valuation allowances for 2003 and 2004 relate primarily to state net
operating loss carryforwards. It is management's belief that the realization of
the remaining net deferred tax assets is more likely than not.
See Note 12 for discussion regarding possible state taxing authority
exposure.
Retained earnings at December 31, 2004 and 2003 includes approximately
$6,869,000 representing pre-1988 tax bad debt reserve base year amounts for
which no deferred income tax liability has been provided since these reserves
are not expected to reverse or may never reverse. Circumstances that would
require an accrual of a portion or all of this unrecorded tax liability are a
reduction in qualifying loan levels relative to the end of 1987, failure to meet
the definition of a bank, dividend payments in excess of accumulated tax
earnings and profits, or other distributions in dissolution, liquidation or
redemption of the Bank's stock.
The following is a reconcilement of federal income tax expense at the
statutory rate of 35% to the income tax provision reported in the financial
statements.
(In thousands) 2004 2003 2002
-------- ------- -------
Tax provision at statutory rate $ 10,686 10,512 9,279
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income (263) (286) (300)
Low income housing tax credits (98) (20) --
Non-deductible interest expense 14 16 24
State income taxes, net of federal benefit 132 361 290
Change in valuation allowance 153 78 12
Other, net (206) (44) (23)
-------- ------- -------
Total $ 10,418 10,617 9,282
======== ======= =======
Note 8. Deposits
At December 31, 2004, the scheduled maturities of time deposits are as
follows:
(In thousands)
2005 $ 617,921
2006 59,703
2007 36,596
2008 19,966
2009 15,407
Thereafter 586
------------
$ 750,179
============
75
Note 9. Borrowings and Borrowings Availability
The following table presents information regarding the Company's
outstanding borrowings at December 31, 2004 and 2003:
Description Due date Call Feature Amount Interest Rate
- ----------------- ---------------------- ----------------------- ------------ -------------------------
2004
- -----------------
FHLB Overnight January 1, 2005, None $ 40,000,000 2.55% subject to
Borrowings renewable daily change daily
FHLB Term Note Due January 16, 2005 None 1,000,000 4.01% fixed
FHLB Term Note Due March 13, 2006 None 2,000,000 2.44% fixed
FHLB Term Note Due March 13, 2007 None 2,000,000 2.91% fixed
FHLB Term Note Due June 23, 2008 None 1,000,000 5.51% fixed
FHLB Term Note Due on April 21, 2009 Expired (One time call 5,000,000 5.26% fixed
option in 2004 not
exercised by FHLB)
Trust Preferred Due on November 7, 2032 By Company on a 20,619,000 5.73% at Dec. 31, 2004
Securities quarterly basis adjustable rate
beginning on November 3 month LIBOR + 3.45%
7, 2007
Trust Preferred Due on January 23, 2034 By Company on a 20,620,000 4.86% at Dec. 31, 2004
Securities quarterly basis adjustable rate
beginning 3 month LIBOR + 2.70%
on January 23, 2009
------------ ----------------------
Total borrowings/
weighted 3.98% (5.07% excluding
average rate $ 92,239,000 overnight borrowings)
============ ======================
2003
- -----------------
FHLB Overnight January 1, 2004, None $ 25,000,000 1.20% subject to
Borrowings renewable daily change daily
FHLB Term Note Due January 16, 2005 None 1,000,000 4.01% fixed
FHLB Term Note Due March 13, 2006 None 2,000,000 2.44% fixed
FHLB Term Note Due March 13, 2007 None 2,000,000 2.91% fixed
FHLB Term Note Due June 23, 2008 None 1,000,000 5.51% fixed
FHLB Term Note Due on April 21, 2009 By FHLB on April 21, 5,000,000 5.26% fixed
2004
Trust Preferred Due on November 7, 2032 By Company on a 20,000,000 4.60% at Dec. 31, 2003
Securities quarterly basis adjustable rate
beginning on November 3 month LIBOR + 3.45%
7, 2007
Trust Preferred Due on January 23, 2034 By Company on a 20,000,000 3.85% at Dec. 31, 2003
Securities quarterly basis adjustable rate
beginning 3 month LIBOR + 2.70%
on January 23, 2009
------------ ----------------------
Total borrowings/
weighted 3.23% (4.23% excluding
average rate $ 76,000,000 overnight borrowings)
============ =======================
In the tables above, only the $5 million due to the FHLB on April 21, 2009
had a lender call provision, which allowed the FHLB, at their option, to call
the bond on April 21, 2004. The call provision provided interest rate protection
to the FHLB in the event that prevailing market interest rates were higher than
the note rate on the date of the call. This call option was not exercised by the
FHLB at the April 21, 2004 call date. In addition to the call option, all
outstanding FHLB borrowings may be accelerated immediately by the FHLB in
certain circumstances including material adverse changes in the condition of the
Company or if the Company's qualifying collateral amounts to less than 1.25
times the amount of FHLB borrowings outstanding. At December 31, 2004, the
76
Company's qualifying collateral amounted to 7.2 times the amount of FHLB
borrowings outstanding.
In the above table, the $20.6 million in borrowings due on November 7,
2032 relate to borrowings structured as trust preferred capital securities that
were issued by First Bancorp Capital Trust I, an unconsolidated subsidiary of
the Company, on October 29, 2002 and qualify as Tier I capital for regulatory
capital adequacy requirements. These debt securities are callable by the Company
at par on any quarterly interest payment date beginning on November 7, 2007. The
interest rate on these debt securities adjusts on a quarterly basis at a rate of
three-month LIBOR plus 3.45%. This rate may not exceed 12.50% through November
2007. The Company incurred approximately $615,000 in debt issuance costs related
to the issuance that were recorded as prepaid expenses and are included in the
"Other Assets" line item of the consolidated balance sheet. These debt issuance
costs are being amortized as interest expense until the earliest possible call
date of November 7, 2007.
In the above table, the $20.6 million in borrowings due on January 23,
2034 relate to borrowings structured as trust preferred capital securities that
were issued by First Bancorp Capital Trusts II and III ($10.3 million by each
trust), unconsolidated subsidiaries of the Company, on December 19, 2003 and
qualify as Tier I capital for regulatory capital adequacy requirements. These
debt securities are callable by the Company at par on any quarterly interest
payment date beginning on January 23, 2009. The interest rate on these debt
securities adjusts on a quarterly basis at a rate of three-month LIBOR plus
2.70%. The Company incurred approximately $580,000 of debt issuance costs
related to the issuance that were recorded as prepaid expenses and are included
in the "Other Assets" line item of the consolidated balance sheet. These debt
issuance costs are being amortized as interest expense until the earliest
possible call date of January 23, 2009.
At December 31, 2004, the Company has three sources of readily available
borrowing capacity - 1) an approximately $296 million line of credit with the
FHLB, of which $51 million was outstanding at December 31, 2004 and $36 million
was outstanding at December 31, 2003, 2) a $50 million overnight federal funds
line of credit with a correspondent bank, none of which was outstanding at
December 31, 2004 or 2003, and 3) an approximately $58 million line of credit
through the Federal Reserve Bank of Richmond's (FRB) discount window, none of
which was outstanding at December 31, 2004 or 2003.
The Company's line of credit with the FHLB totaling approximately $296
million can be structured as either short-term or long-term borrowings,
depending on the particular funding or liquidity need and is secured by the
Company's FHLB stock and a blanket lien on most of its real estate loan
portfolio.
The Company's correspondent bank relationship allows the Company to
purchase up to $50 million in federal funds on an overnight, unsecured basis.
The Company had no borrowings outstanding under this line at December 31, 2004
or 2003. This line of credit was not drawn upon during any of the past three
years.
The Company also has a line of credit with the FRB discount window. This
line is secured by a blanket lien on a portion of the Company's commercial and
consumer loan portfolio (excluding real estate). Based on the collateral owned
by the Company as of December 31, 2004, the available line of credit is
approximately $58 million. This line of credit was established primarily in
connection with the Company's Y2K liquidity contingency plan and has not been
drawn on since inception. The FRB has indicated that it would not expect lines
of credit that have been granted to financial institutions to be a primary
borrowing source. The Company plans to maintain this line of credit, although it
is not expected that it will be drawn upon except in unusual circumstances.
Note 10. Leases
Certain bank premises are leased under operating lease agreements.
Generally, operating leases contain renewal options on substantially the same
basis as current rental terms. Rent expense charged to operations under all
operating lease agreements was $452,000 in 2004, $324,000 in 2003, and $280,000
in 2002.
77
Future obligations for minimum rentals under noncancelable operating
leases at December 31, 2004 are as follows:
(In thousands)
Year ending December 31:
2005 $ 379
2006 294
2007 248
2008 190
2009 157
Later years 990
-------
Total $ 2,258
=======
Note 11. Employee Benefit Plans
401(k) Plan. The Company sponsors a retirement savings plan pursuant to
Section 401(k) of the Internal Revenue Code. Employees who have completed one
year of service are eligible to participate in the plan. An eligible employee
may contribute up to 15% of annual salary to the plan. The Company contributes
an amount equal to 75% of the first 6% of the employee's salary contributed.
Participants vest in Company contributions at the rate of 20% after one year of
service, and 20% for each additional year of service, with 100% vesting after
five years of service. The Company's matching contribution expense was $607,000,
$528,000, and $450,000, for the years ended December 31, 2004, 2003 and 2002,
respectively. Additionally, the Company made additional discretionary matching
contributions to the plan of $175,000 in 2004, $175,000 in 2003, and $150,000 in
2002. The Company's matching and discretionary contributions are made in the
form of Company stock. Employees are not permitted to invest their own
contributions in Company stock.
Pension Plan. The Company sponsors a noncontributory defined benefit
retirement plan (the "Pension Plan"), which is intended to qualify under Section
401(a) of the Internal Revenue Code. Employees who have attained age 21 and
completed one year of service are eligible to participate in the Pension Plan.
The Pension Plan provides for a monthly payment, at normal retirement age of 65,
equal to one-twelfth of the sum of (i) 0.75% of Final Average Annual
Compensation (5 highest consecutive calendar years' earnings out of the last 10
years of employment) multiplied by the employee's years of service not in excess
of 40 years, and (ii) 0.65% of Final Average Annual Compensation in excess of
"covered compensation" multiplied by years of service not in excess of 35 years.
"Covered compensation" means the average of the social security taxable wage
base during the 35 year period ending with the year the employee attains social
security retirement age. Early retirement, with reduced monthly benefits, is
available at age 55 after 15 years of service. The Pension Plan provides for
100% vesting after 5 years of service, and provides for a death benefit to a
vested participant's surviving spouse. The costs of benefits under the Pension
Plan, which are borne by First Bancorp and/or its subsidiaries, are computed
actuarially and defrayed by earnings from the Pension Plan's investments. The
compensation covered by the Pension Plan includes total earnings before
reduction for contributions to a cash or deferred profit-sharing plan (such as
the 401(k) plan described above) and amounts used to pay group health insurance
premiums and includes bonuses (such as amounts paid under the incentive
compensation plan). Compensation for the purposes of the Pension Plan may not
exceed statutory limits; such limit was $205,000 in 2004 and $200,000 in 2003
and 2002.
The Company's contributions to the Pension Plan are based on computations
by independent actuarial consultants and are intended to provide the Company
with the maximum deduction for income tax purposes. The contributions are
invested to provide for benefits under the Pension Plan. The Company estimates
that its contribution to the Pension Plan will be $700,000 in 2005.
Funds in the Pension Plan are invested in a mix of investment types in
accordance with the Pension Plan's investment policy, which is intended to
provide a reasonable return while maintaining proper diversification. Except for
Company stock, all of the Pension Plan's assets are invested in an unaffiliated
bank money market account or mutual funds. The investment policy of the Pension
Plan does not permit the use of derivatives,
78
except to the extent that derivatives are used by any of the mutual funds
invested in by the Pension Plan. The following table presents information
regarding the mix of investments of the Pension Plan's assets at December 31,
2004 and its targeted mix, as set out by the Plan's investment policy:
Balance at % of Total Assets at Targeted %
Investment type December 31, 2004 December 31, 2004 of Total Assets
----------------------------- ----------------------- ---------------------- ------------------
(Dollars in thousands)
Fixed income investments
Money market account $ 294 3% 3-5%
US government bond fund 1,201 12% 10-20%
US corporate bond fund 945 10% 0-10%
Equity investments
Large cap value fund 2,313 23% 20-30%
Large cap growth fund 2,679 27% 20-30%
Mid-small cap growth fund 1,764 18% 15-25%
Foreign equity fund -- -- 0-10%
Company stock 711 7% 0-10%
------------ ------
Total $ 9,907 100%
============ ======
For the three years ended December 31, 2004, the Company used an expected
long-term rate-of-return-on-assets assumption of 9.00%. The Company arrived at
this rate based primarily on a third-party investment consulting firm's
historical analysis of investment returns, which indicated that the mix of the
Pension Plan's assets (generally 75% equities and 25% fixed income) can be
expected to return approximately 9% on a long term basis.
The following table reconciles the beginning and ending balances of the
Pension Plan's projected benefit obligation, as computed by the Company's
independent actuarial consultants. The Pension Plan's accumulated benefit
obligation is also presented:
(In thousands) 2004 2003 2002
-------- -------- --------
Projected benefit obligation at beginning of year $ 9,892 7,475 6,082
Service cost 955 690 492
Interest cost 642 527 427
Actuarial loss 1,013 1,175 441
Effect of amendments -- 85 70
Benefits paid (57) (60) (37)
-------- -------- --------
Projected benefit obligation at end of year $ 12,445 9,892 7,475
======== ======== ========
Accumulated benefit obligation at end of year $ 7,817 6,164 4,647
======== ======== ========
79
The following table reconciles the beginning and ending balances of the
Pension Plan's assets:
(In thousands) 2004 2003 2002
------- ------ ------
Plan assets at beginning of year $ 8,498 5,126 4,893
Actual return on plan assets 816 1,387 (610)
Employer contributions 650 2,045 880
Benefits paid (57) (60) (37)
------- ------ ------
Plan assets at end of year $ 9,907 8,498 5,126
======= ====== ======
The following table presents information regarding the funded status of
the Pension Plan, the amounts not recognized in the consolidated balance sheets,
and the amounts recognized in the consolidated balance sheets:
(In thousands) 2004 2003
-------- --------
Funded status $ (2,538) (1,394)
Unrecognized net actuarial loss 3,764 2,997
Unrecognized prior service cost 249 366
Unrecognized transition obligation 47 49
-------- --------
Prepaid pension cost $ 1,522 2,018
======== ========
Net pension cost for the Pension Plan included the following components
for the years ended December 31, 2004, 2003 and 2002:
(In thousands) 2004 2003 2002
-------- -------- --------
Service cost - benefits earned during the period $ 955 690 492
Interest cost on projected benefit obligation 642 527 427
Expected return on plan assets (759) (507) (475)
Net amortization and deferral 307 301 159
-------- -------- --------
Net periodic pension cost $ 1,145 1,011 603
======== ======== ========
The following table is an estimate of the benefits that will be paid in
accordance with the Pension Plan during the indicated time periods:
(In thousands)
Estimated
benefit
payments
--------
Year ending December 31, 2005 $ 145
Year ending December 31, 2006 181
Year ending December 31, 2007 195
Year ending December 31, 2008 238
Year ending December 31, 2009 262
Years ending December 31, 2010-2014 2,884
Supplemental Executive Retirement Plan. The Company sponsors a
Supplemental Executive Retirement Plan (the "SERP Plan") for the benefit of
certain senior management executives of the Company. The purpose of the SERP
Plan is to provide additional monthly pension benefits to ensure that each such
senior management executive would receive lifetime monthly pension benefits
equal to 3% of his or her final average compensation multiplied by his or her
years of service (maximum of 20 years) to the Company or its subsidiaries,
subject to a maximum of 60% of his or her final average compensation. The amount
of a participant's monthly SERP benefit is reduced by (i) the amount payable
under the Company's qualified Pension Plan (described above), and (ii) fifty
percent (50%) of the participant's primary social security benefit. Final
average compensation means the average of the 5 highest consecutive calendar
years of earnings during the last 10 years of service prior to termination of
80
employment.
The Company's funding policy with respect to the SERP Plan is to fund the
related benefits through investments in life insurance policies, which are not
considered plan assets for the purpose of determining the SERP Plan's funded
status. The cash surrender values of the life insurance policies are included in
the line item "other assets."
The following table reconciles the beginning and ending balances of the
SERP Plan's benefit obligation, as computed by the Company's independent
actuarial consultants:
(In thousands) 2004 2003 2002
------ ------ ------
Projected benefit obligation at beginning of year $1,631 1,248 1,070
Service cost 242 105 69
Interest cost 128 88 73
Actuarial loss 329 179 140
Effect of amendments 223 11 (104)
Benefits paid -- -- --
------ ------ ------
Projected benefit obligation at end of year $2,553 1,631 1,248
====== ====== ======
Accumulated benefit obligation at end of year $2,119 1,391 1,115
====== ====== ======
The following table presents information regarding the funded status of
the SERP Plan, the amounts not recognized in the consolidated balance sheets,
and the amounts recognized in the consolidated balance sheets:
(In thousands) 2004 2003
-------- --------
Funded status $ (2,553) (1,631)
Unrecognized net actuarial loss 862 578
Unrecognized prior service cost 273 84
Additional minimum liability (422) (385)
-------- --------
Accrued pension cost $ (1,840) (1,354)
======== ========
Net pension cost for the SERP Plan included the following components for
the years ended December 31, 2004, 2003 and 2002:
(In thousands) 2004 2003 2002
------ ------ ------
Service cost - benefits earned during the period $ 242 105 69
Interest cost on projected benefit obligation 128 88 73
Net amortization and deferral 80 45 36
------ ------ ------
Net periodic pension cost $ 450 238 178
====== ====== ======
The following table is an estimate of the benefits that will be paid in
accordance with the SERP Plan during the indicated time periods:
(In thousands)
Estimated
benefit
payments
--------
Year ending December 31, 2005 $ 121
Year ending December 31, 2006 139
Year ending December 31, 2007 132
Year ending December 31, 2008 126
Year ending December 31, 2009 118
Years ending December 31, 2010-2014 1,075
81
The following assumptions were used in determining the actuarial
information for the Pension Plan and the SERP Plan for the years ended December
31, 2004, 2003 and 2002:
2004 2003 2002
--------------------- ------------------- -------------------
Pension SERP Pension SERP Pension SERP
Plan Plan Plan Plan Plan Plan
--------- -------- -------- ------ --------- ------
Discount rate used to determine net periodic
pension cost 6.25% 6.25% 6.75% 6.75% 7.25% 7.25%
Discount rate used to calculate end of year
liability disclosures 6.00% 6.00% 6.25% 6.25% 6.75% 6.75%
Expected long-term rate of return on assets 9.00% n/a 9.00% n/a 9.00% n/a
Rate of compensation increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Included in intangible assets at December 31, 2004 and 2003 is $84,000 and
$93,000, respectively, that has been recognized in connection with the accrual
of the additional minimum liability for the SERP Plan.
Note 12. Commitments and Contingencies
See Note 10 with respect to future obligations under noncancelable
operating leases.
Based on consultations with the Company's tax advisors, the Company's
organizational structure has been established in a way to minimize its tax
liabilities. State taxing authorities have recently announced that they will
vigorously pursue taxpayers who have engaged in activities deemed to be
"income-shifting," and the Company is aware that state taxing authorities have
recently challenged a bank holding company with a similar operating structure as
the Company that they deem to result in "income-shifting." While the Company
believes its tax position is sound, it has decided to discontinue certain
elements of its operating structure during 2005 to avoid controversy with state
taxing authorities. If the Company's position with regard to its operating
structure were to be challenged by state taxing authorities for past years and
resulted in an assessment, the Company estimates that its exposure could be $5.8
million (net of federal tax benefit), including interest and penalties. If such
an assessment were to occur, the Company would vigorously contest the assessment
based on the belief that it has fully complied with relevant tax laws.
Accordingly, the Company has not accrued a liability for this possibility.
In the normal course of business there are various outstanding commitments
and contingent liabilities such as commitments to extend credit, which are not
reflected in the financial statements. As of December 31, 2004, the Company had
outstanding loan commitments of $232,248,000, of which $208,241,000 were at
variable rates and $24,007,000 were at fixed rates. Included in outstanding loan
commitments were unfunded commitments of $123,535,000 on revolving credit plans,
of which $115,024,000 were at variable rates and $8,511,000 were at fixed rates.
At December 31, 2004 and 2003, the Company had $3,762,000 and $3,320,000,
respectively in standby letters of credit outstanding. The Company has no
carrying amount for these standby letters of credit at either of those dates.
The nature of the standby letters of credit is a guarantee made on behalf of the
Company's customers to suppliers of the customers to guarantee payments owed to
the supplier by the customer. The standby letters of credit are generally for
terms for one year, at which time they may be renewed for another year if both
parties agree. The payment of the guarantees would generally be triggered by a
continued nonpayment of an obligation owed by the customer to the supplier. The
maximum potential amount of future payments (undiscounted) the Company could be
required to make under the guarantees in the event of nonperformance by the
parties to whom credit or financial guarantees have been extended is represented
by the contractual amount of the financial instruments discussed above. In the
event that the Company is required to honor a standby letter of credit, a note,
already executed with the customer, is triggered which provides repayment terms
and any collateral. Over the past ten years, the Company has had to honor one
standby letter of credit, which was repaid by the borrower without any loss to
the Company. Management expects any draws under existing commitments
82
to be funded through normal operations.
The Bank grants primarily commercial and installment loans to customers
throughout its market area, which consists of Anson, Cabarrus, Chatham,
Davidson, Duplin, Guilford, Harnett, Iredell, Lee, Montgomery, Moore, Randolph,
Richmond, Robeson, Rockingham, Rowan, Scotland, Stanly and Wake Counties in
North Carolina, Dillon County in South Carolina, and Wythe, Washington, and
Montgomery Counties in Virginia. The real estate loan portfolio can be affected
by the condition of the local real estate market. The commercial and installment
loan portfolios can be affected by local economic conditions.
The Company is not involved in any legal proceedings which, in
management's opinion, could have a material effect on the consolidated financial
position of the Company.
Note 13. Fair Value of Financial Instruments
Fair value estimates as of December 31, 2004 and 2003 and limitations
thereon are set forth below for the Company's financial instruments. Please see
Note 1 for a discussion of fair value methods and assumptions, as well as fair
value information for off-balance sheet financial instruments.
December 31, 2004 December 31, 2003
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Cash and due from banks,
noninterest-bearing $ 28,486 28,486 $ 36,315 36,315
Due from banks, interest-bearing 45,135 45,135 12,632 12,632
Federal funds sold 15,780 15,780 13,967 13,967
Securities available for sale 88,554 88,554 103,455 103,455
Securities held to maturity 14,025 14,451 14,206 14,906
Presold mortgages in process
of settlement 1,771 1,771 1,307 1,307
Loans, net of allowance 1,352,336 1,352,998 1,205,326 1,213,803
Accrued interest receivable 6,832 6,832 6,087 6,087
Deposits 1,388,768 1,388,994 1,249,364 1,251,402
Borrowings 92,239 92,459 76,000 76,383
Accrued interest payable 2,677 2,677 2,138 2,138
Limitations Of Fair Value Estimates. Fair value estimates are made at a
specific point in time, based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. Because no highly liquid
market exists for a significant portion of the Company's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include net premises and equipment,
intangible and other assets such as foreclosed properties, deferred income
taxes, prepaid expense accounts, income taxes currently payable and other
various accrued expenses. In addition, the income tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in any of the estimates.
83
Note 14. Stock Option Plan
Pursuant to provisions of the Company's 2004 Stock Option Plan (the
"Option Plan"), options to purchase up to 1,275,000 shares of First Bancorp's
authorized but unissued common stock may be granted to employees ("Employee
Options") and directors ("Nonemployee Director Options") of the Company and its
subsidiaries. The purposes of the Option Plan are (i) to align the interests of
participating employees and directors with the Company's shareholders by
reinforcing the relationship between shareholder gains and participant rewards,
(ii) to encourage equity ownership in the Company by participants, and (iii) to
provide an incentive to employee participants to continue their employment with
the Company.
Since the inception of the Option Plan and its predecessor plan (the 1994
Stock Option Plan), each nonemployee director has been granted 2,250 Nonemployee
Director Options on June 1 of each year. Employee Options were granted to
substantially all officers at the inception of the 1994 Stock Option Plan and
since then have been granted to new officers, officers that have assumed
increased responsibilities, and for performance rewards. For both Employee and
Nonemployee Director Options, the option price is the fair market value of the
stock at the date of grant. Employee Options may require a vesting period.
Director Options are 100% vested on the date of grant. All options expire not
more than 10 years from the date of grant. Forfeited options become available
for future grants.
In addition to the Option Plan and its predecessor plan, the Company has
four stock option plans that were assumed in connection with mergers and
acquisitions of the companies that originally established those plans. As of
December 31, 2004, a total of 96,040 shares of common stock were issuable upon
exercise under those assumed plans. The weighted average exercise price of those
outstanding options is $10.26 per share. No additional options may be granted
under those assumed plans. The tables on the following page include these
options.
At December 31, 2004, there were 1,253,090 additional shares available for
grant under the Option Plan. The per share weighted-average fair value of
options granted during 2004, 2003, and 2002 was $7.07, $5.03, and $4.50,
respectively on the date(s) of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
2004 2003 2002
------- ------- -------
Expected dividend yield 2.97% 3.73% 3.79%
Risk-free interest rate 3.49% 3.30% 4.60%
Expected life 7 years 8 years 8 years
Expected volatility 36.67% 33.08% 33.50%
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Note 1(k) reflects the pro forma effects had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123.
84
The following table sets forth a summary of the activity of the Company's
outstanding options since December 31, 2001:
Options Exercisable
Options Outstanding at Year End
---------------------------- ----------------------------
Weighted- Weighted-
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
------------ ------------ ----------- -------------
Balance at December 31, 2001 1,068,786 $ 9.52 881,661 $ 8.39
Granted 31,500 15.37
Exercised (250,263) 6.19
Forfeited -- --
Expired -- --
Balance at December 31, 2002 850,023 10.69 702,123 9.81
Granted 76,500 16.35
Assumed in corporate
acquisition 78,000 4.17
Exercised (226,764) 6.38
Forfeited -- --
Expired -- --
Balance at December 31, 2003 777,759 11.85 626,583 11.05
Granted 183,230 21.35
Exercised (181,663) 7.83
Forfeited (600) 15.32
Expired -- --
Balance at December 31, 2004 778,726 $ 15.01 668,260 $ 14.88
The following table summarizes information about the stock options outstanding
at December 31, 2004:
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/04 Contractual Life Price at 12/31/04 Price
--------------- ----------- ------------------ ------------ ------------ -----------
$ 4.00 to $7.99 52,324 1.9 $ 6.96 52,324 $ 6.96
$8.00 to $11.99 208,918 4.3 10.90 205,918 10.92
$12.00 to $15.99 268,254 6.4 15.08 170,004 14.86
$16.00 to $19.99 99,000 8.0 17.59 99,000 17.59
$20.00 to $22.00 150,230 9.2 21.70 141,014 21.70
-------- ------ -------- --------- ---------
778,726 6.3 $ 15.01 668,260 $ 14.88
======== ====== ======== ========= =========
Note 15. Regulatory Restrictions
The Company is regulated by the Board of Governors of the Federal Reserve
System ("FED") and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Bank is regulated by
the Federal Deposit Insurance Corporation ("FDIC") and the North Carolina Office
of the Commissioner of Banks.
The primary source of funds for the payment of dividends by First Bancorp
is dividends received from its
85
subsidiary, First Bank. The Bank, as a North Carolina banking corporation, may
pay dividends only out of undivided profits as determined pursuant to North
Carolina General Statutes Section 53-87. As of December 31, 2004, the Bank had
undivided profits of approximately $104,820,000 which were available for the
payment of dividends. As of December 31, 2004, approximately $75,518,000 of the
Company's investment in the Bank is restricted as to transfer to the Company
without obtaining prior regulatory approval.
The average reserve balance maintained by the Bank under the requirements
of the Federal Reserve was approximately $638,000 for the year ended December
31, 2004.
The Company and the Bank must comply with regulatory capital requirements
established by the FED and FDIC. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of the
Company's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's and Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. These capital standards
require the Company and the Bank to maintain minimum ratios of "Tier 1" capital
to total risk-weighted assets ("Tier I Capital Ratio") and total capital to
risk-weighted assets of 4.00% and 8.00% ("Total Capital Ratio"), respectively.
Tier 1 capital is comprised of total shareholders' equity, excluding unrealized
gains or losses from the securities available for sale, less intangible assets,
and total capital is comprised of Tier 1 capital plus certain adjustments, the
largest of which for the Company and the Bank is the allowance for loan losses.
Risk-weighted assets refer to the on- and off-balance sheet exposures of the
Company and the Bank, adjusted for their related risk levels using formulas set
forth in FED and FDIC regulations.
In addition to the risk-based capital requirements described above, the
Company and the Bank are subject to a leverage capital requirement, which calls
for a minimum ratio of Tier 1 capital (as defined above) to quarterly average
total assets ("Leverage Ratio) of 3.00% to 5.00%, depending upon the
institution's composite ratings as determined by its regulators. The FED has not
advised the Company of any requirement specifically applicable to it.
86
In addition to the minimum capital requirements described above, the
regulatory framework for prompt corrective action also contains specific capital
guidelines applicable to banks for classification as "well capitalized," which
are presented with the minimum ratios, the Company's ratios and the Bank's
ratios as of December 31, 2004 and 2003 in the following table. Based on the
most recent notification from its regulators, the Bank is well capitalized under
the framework for prompt corrective action. There are no conditions or events
since that notification that management believes have changed the Company's
category.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ------------------------ ------------------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
---------- ------- ---------- -------- ---------- ---------
(must equal or exceed) (must equal or exceed)
As of December 31, 2004
Total Capital Ratio
Company $ 153,348 11.97% $ 102,450 8.00% $ N/A N/A
Bank 146,377 11.49% 102,252 8.00% 127,815 10.00%
Tier I Capital Ratio
Company 138,631 10.95% 50,636 4.00% N/A N/A
Bank 131,660 10.46% 50,537 4.00% 75,806 6.00%
Leverage Ratio
Company 138,631 8.90% 62,332 4.00% N/A N/A
Bank 131,660 8.50% 62,191 4.00% 77,739 5.00%
As of December 31, 2003
Total Capital Ratio
Company $ 143,762 12.56% $ 91,575 8.00% $ N/A N/A
Bank 122,832 10.83% 91,429 8.00% 114,286 10.00%
Tier I Capital Ratio
Company 130,193 11.51% 45,252 4.00% N/A N/A
Bank 109,263 9.76% 45,179 4.00% 67,768 6.00%
Leverage Ratio
Company 130,193 9.44% 55,175 4.00% N/A N/A
Bank 109,263 8.00% 55,140 4.00% 68,925 5.00%
Note 16. Supplementary Income Statement Information
Components of other operating expenses exceeding 1% of total income for
any of the years ended December 31, 2004, 2003 and 2002 are as follows:
(In thousands) 2004 2003 2002
------ ----- -----
Stationery and supplies $1,523 1,498 1,445
Telephone 1,345 1,229 932
Professional fees 989 650 662
87
Note 17. Condensed Parent Company Information
Condensed financial data for First Bancorp (parent company only) follows:
CONDENSED BALANCE SHEETS As of December 31,
----------------------
(In thousands) 2004 2003
-------- --------
Assets
Cash on deposit with bank subsidiary $ 5,935 20,794
Investment in wholly-owned subsidiaries, at equity 184,316 162,224
Land 7 7
Other assets 2,170 1,056
-------- --------
Total assets $192,428 184,081
======== =======
Liabilities and shareholders' equity
Borrowings $ 41,239 40,000
Other liabilities 2,711 2,225
-------- --------
Total liabilities 43,950 42,225
Shareholders' equity 148,478 141,856
-------- --------
Total liabilities and shareholders' equity $192,428 184,081
======== ========
CONDENSED STATEMENTS OF INCOME Year Ended December 31,
--------------------------------------
(In thousands) 2004 2003 2002
-------- -------- --------
Dividends from wholly-owned subsidiaries $ -- 3,400 8,650
Undistributed earnings of wholly-owned subsidiaries 22,332 17,453 9,207
Interest expense (2,086) (1,110) (205)
All other income and expenses, net (132) (326) (422)
-------- -------- --------
Net income $ 20,114 19,417 17,230
======== ======== ========
CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31,
--------------------------------------
(In thousands) 2004 2003 2002
-------- -------- --------
Operating Activities:
Net income $ 20,114 19,417 17,230
Dividends received in excess of earnings (equity in
undistributed earnings) of subsidiaries (22,332) (17,453) (9,207)
Tax benefit realized from
exercise of nonqualified stock options -- -- 382
Amortization of securities and intangible assets -- 60 --
Decrease (increase) in other assets 122 (667) (595)
Increase (decrease) in other liabilities 356 90 (157)
-------- -------- --------
Total - operating activities (1,740) 1,447 7,653
-------- -------- --------
Investing Activities:
Net cash paid in acquisitions -- (9,050) --
-------- -------- --------
Total - investing activities -- (9,050) --
-------- -------- --------
Financing Activities:
Proceeds from borrowings -- 20,000 20,000
Payment of cash dividends (9,138) (8,670) (8,136)
Proceeds from issuance of common stock 2,547 2,444 2,207
Purchases and retirement of common stock (6,528) (5,195) (4,410)
-------- -------- --------
Total - financing activities (13,119) 8,579 9,661
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (14,859) 976 17,314
Cash and cash equivalents, beginning of year 20,794 19,818 2,504
-------- -------- --------
Cash and cash equivalents, end of year $ 5,935 20,794 19,818
======== ======== ========
88
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Shareholders
First Bancorp:
We have audited the accompanying consolidated balance sheets of First
Bancorp and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Bancorp and subsidiaries as of December 31, 2004 and 2003, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Charlotte, North Carolina
March 6, 2005
89
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During the two years ended December 31, 2004, and any subsequent interim
periods, there were no changes in accountants and/or disagreements on any
matters of accounting principles or practices or financial statement
disclosures.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on the
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic reports
with the Securities and Exchange Commission. It should be noted that the design
of any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote. In addition, no change in our internal control over
financial reporting has occurred during, or subsequent to, the period covered by
this report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
As permitted by the Securities and Exchange Commission Release No. 50754,
the registrant has not filed in this report the following two reports - 1)
Management's Annual Report on Internal Control Over Financial Reporting as
required by Item 308(a) of Regulation S-K, and 2) the related Attestation Report
of the Registered Public Accounting Firm as required by Item 308(b) of
Regulation S-K. The Company expects to file these reports by May 2, 2005, as
permitted by the aforementioned release.
Item 9B. Other Information
On January 18, 2005, Frederick H. Taylor notified the Company that he
would not stand for re-election to the Board of Directors at the next annual
meeting of shareholders. Additionally, Jesse S. Capel confirmed his retirement
from the Board of Directors, in accordance with Company policy, effective with
the 2005 annual meeting of shareholders.
90
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated herein by reference is the information under the captions
"Directors, Nominees and Executive Officers," "Section 16(a) Beneficial
Ownership Reporting Compliance," and "Corporate Governance" from the Company's
definitive proxy statement to be filed pursuant to Regulation 14A.
Item 11. Executive Compensation
Incorporated herein by reference is the information under the captions
"Compensation of Executive Officers" and "Board Committees, Attendance, and
Compensation" from the Company's definitive proxy statement to be filed pursuant
to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference is the information under the captions
"Principal Holders of First Bancorp Voting Securities" and "Directors, Nominees
and Executive Officers" from the Company's definitive proxy statement to be
filed pursuant to Regulation 14A.
Additional Information Regarding the Registrant's Equity Compensation Plans
At December 31, 2004, the Company had six equity compensation plans. Each
of these plans is a stock option plan. Four of the six plans were assumed in
corporate acquisitions. The Company's 2004 Stock Option Plan is the only one of
the six plans for which new grants of stock options are possible.
The following table presents information as of December 31, 2004 regarding
shares of the Company's stock that may be issued pursuant to the Company's stock
options plans. The table does not include information with respect to shares
subject to outstanding options granted under stock incentive plans assumed by
the Company in connection with mergers and acquisitions of companies that
originally granted those options. Footnote (2) to the table indicates the total
number of shares of common stock issuable upon the exercise of options under the
assumed plans as of December 31, 2004, and the weighted average exercise price
of those options. No additional options may be granted under those assumed
plans. The Company has no warrants or stock appreciation rights outstanding.
As of December 31, 2004
--------------------------------------------------------------------------------------
(a) (b) (c)
Number of securities available for
Number of securities to Weighted-average future issuance under equity
be issued upon exercise exercise price of compensation plans (excluding
Plan category of outstanding options outstanding options securities reflected in column (a))
- ---------------------- ----------------------- -------------------- -----------------------------------
Equity compensation
plans approved by
security holders (1) 682,686 $ 15.68 1,253,090(1)
Equity compensation
plans not approved
by security holders -- -- --
------- --------- ---------
Total 682,686 $ 15.68 1,253,090(1)
======= ========= =========
(1) Consists of (A) the Company's 2004 Stock Option Plan, which is currently in
effect and (B) the Company's 1994 Option Plan, each of which was approved by
shareholders.
(2) The table does not include information for stock incentive plans that the
Company assumed in connection with mergers and acquisitions of the companies
that originally established those plans. As of December 31,
91
2004, a total of 96,040 shares of common stock were issuable upon exercise under
those assumed plans. The weighted average exercise price of those outstanding
options is $10.26 per share. No additional options may be granted under those
assumed plans.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference is the information under the caption
"Certain Transactions" from the Company's definitive proxy statement to be filed
pursuant to Regulation 14A.
Item 14. Principal Accountant Fees and Services
Incorporated herein by reference is the information under the caption
"Principal Accountant Fees and Services" from the Company's definitive proxy
statement to be filed pursuant to Regulation 14A.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements - See Item 8 and the Cross Reference Index on
page 2 for information concerning the Company's consolidated
financial statements and report of independent auditors.
2. Financial Statement Schedules - not applicable
3. Exhibits
The following exhibits are filed with this report or, as noted, are
incorporated by reference. Management contracts, compensatory plans
and arrangements are marked with an asterisk (*).
3.a Copy of Articles of Incorporation of the Company and amendments
thereto were filed as Exhibits 3.a.i through 3.a.v to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 2002,
and are incorporated herein by reference.
3.b Copy of the Amended and Restated Bylaws of the Company was filed as
Exhibit 3.b to the Company's Annual Report on Form 10-K for the year
ended December 31, 2003, and is incorporated herein by reference.
4 Form of Common Stock Certificate was filed as Exhibit 4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999, and is incorporated herein by reference.
10 Material Contracts
10.a Data Processing Agreement dated October 1, 1984 by and between Bank
of Montgomery (First Bank) and Montgomery Data Services, Inc. was
filed as Exhibit 10(k) to the Registrant's Registration Statement
Number 33-12692, and is incorporated herein by reference.
10.b First Bancorp Annual Incentive Plan was filed as Exhibit 10(a) to
the Form 8-K filed on January 26, 2005 and is incorporated herein by
reference. (*)
10.c Indemnification Agreement between the Company and its Directors and
Officers was filed as Exhibit 10(t) to the Registrant's Registration
Statement Number 33-12692, and is incorporated herein by reference.
10.d First Bancorp Senior Management Supplemental Executive Retirement
Plan was filed as Exhibit 10(d)
92
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, and is incorporated herein by reference. (*)
10.e First Bancorp 1994 Stock Option Plan was filed as Exhibit 10(f) to
the Company's Annual Report on Form 10-K for the year ended December
31, 2001, and is incorporated herein by reference. (*)
10.f First Bancorp 2004 Stock Option Plan was filed as Exhibit B to the
Registrant's Form Def 14A filed on March 30, 2004 and is
incorporated herein by reference. (*)
10.g Employment Agreement between the Company and James H. Garner dated
August 17, 1998 was filed as Exhibit 10(l) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, and is incorporated by reference (Commission File Number
000-15572). (*)
10.h Employment Agreement between the Company and Anna G. Hollers dated
August 17, 1998 was filed as Exhibit 10(m) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, and is incorporated by reference (Commission File Number
000-15572). (*)
10.i Employment Agreement between the Company and Teresa C. Nixon dated
August 17, 1998 was filed as Exhibit 10(n) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, and is incorporated by reference (Commission File Number
000-15572). (*)
10.j Employment Agreement between the Company and Eric P. Credle dated
August 17, 1998 was filed as Exhibit 10(p) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, and is
incorporated herein by reference (Commission File Number 333-71431).
(*)
10.k Employment Agreement between the Company and John F. Burns dated
September 14, 2000 was filed as Exhibit 10.w to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000 and is incorporated herein by reference. (*)
10.l Employment Agreement between the Company and James G. Hudson, Jr.
dated May 17, 2001 was filed as Exhibit 10(p) to the Company's
Annual Report on Form 10-K for the year ended December 31, 2001, and
is incorporated herein by reference. (*)
10.m Employment Agreement between the Company and R. Walton Brown dated
January 15, 2003, was filed as Exhibit 10(b) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
and is incorporated herein by reference. (*)
10.n Amendment to the employment agreement between the Company and R.
Walton Brown dated March 8, 2005. (*)
10.o Copy of First Bancorp Long Term Care Insurance Plan was filed as
Exhibit 10(o) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, and is incorporated by reference.
(*)
10.p Description of Director Compensation pursuant to Item 601 (b)(10)
(iii)(A) of Regulation S-K
21 List of Subsidiaries of Registrant was filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2003, and is incorporated herein by reference.
23.a Consent of Independent Auditors of Registrant, KPMG LLP
31.a 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.b Chief Financial Officer Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to
93
Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.a 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.b 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) Exhibits - see (a)(3) above
(c) No financial statement schedules are filed herewith.
Copies of exhibits are available upon written request to: First Bancorp, Anna G.
Hollers, Executive Vice President, P.O. Box 508, Troy, NC 27371
94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, FIRST BANCORP has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Troy, and State of North Carolina, on the 8th day of March 2005.
First Bancorp
By: /s/ James H. Garner
--------------------
James H. Garner
President, Chief Executive Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on behalf of the Company by the following persons and in
the capacities and on the dates indicated.
Executive Officers
------------------
/s/ James H. Garner
-------------------
James H. Garner
President, Chief Executive Officer and Treasurer
/s/ Anna G. Hollers /s/ Eric P. Credle
- ------------------- ------------------
Anna G. Hollers Eric P. Credle
Executive Vice President Senior Vice President
Secretary Chief Financial Officer
March 8, 2005 (Principal Accounting Officer)
March 8, 2005
Board of Directors
------------------
/s/ David L. Burns /s/ William E. Samuels
- ------------------ ----------------------
David L. Burns William E. Samuels
Chairman of the Board Vice-Chairman of the Board
Director Director
March 8, 2005 March 8, 2005
/s/ Jack D. Briggs /s/ George R. Perkins, Jr.
- ------------------ --------------------------
Jack D. Briggs George R. Perkins, Jr.
Director Director
March 8, 2005 March 8, 2005
/s/ R. Walton Brown /s/ Thomas F. Phillips
- ------------------- ----------------------
R. Walton Brown Thomas F. Phillips
Director Director
March 8, 2005 March 8, 2005
/s/ H. David Bruton /s/ Edward T. Taws, Jr.
- ------------------- -----------------------
H. David Bruton Edward T. Taws, Jr.
Director Director
March 8, 2005 March 8, 2005
/s/ John F. Burns /s/ Frederick H. Taylor
- ----------------- -----------------------
John F. Burns Frederick H. Taylor
Director Director
March 8, 2005 March 8, 2005
95
/s/ Jesse S. Capel /s/ Virginia C. Thomasson
- ------------------ -------------------------
Jesse S. Capel Virginia C. Thomasson
Director Director
March 8, 2005 March 8, 2005
/s/ Goldie H. Wallace-Gainey /s/ A. Jordan Washburn
- ---------------------------- ----------------------
Goldie H. Wallace-Gainey A. Jordan Washburn
Director Director
March 8, 2005 March 8, 2005
/s/ James H. Garner /s/ Dennis A. Wicker
------------------ --------------------
James H. Garner Dennis A. Wicker
Director Director
March 8, 2005 March 8, 2005
/s/ James G. Hudson, Jr. /s/ John C. Willis
- ------------------------ ------------------
James G. Hudson, Jr. John C. Willis
Director Director
March 8, 2005 March 8, 2005
96