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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2005
-----------------------
Commission File Number 0-15572
FIRST BANCORP
--------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
- ---------------------------------------- --------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
341 North Main Street, Troy, North Carolina 27371-0508
- ------------------------------------------------ --------------------------------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (910) 576-6171
--------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] YES [ ] NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.
[X] YES [ ] NO
As of April 30, 2005, 14,158,951 shares of the registrant's Common Stock,
no par value, were outstanding. The registrant had no other classes of
securities outstanding.
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INDEX
FIRST BANCORP AND SUBSIDIARIES
Page
Part I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets -
March 31, 2005 and 2004
(With Comparative Amounts at December 31, 2004) 3
Consolidated Statements of Income -
For the Periods Ended March 31, 2005 and 2004 4
Consolidated Statements of Comprehensive Income -
For the Periods Ended March 31, 2005 and 2004 5
Consolidated Statements of Shareholders' Equity -
For the Periods Ended March 31, 2005 and 2004 6
Consolidated Statements of Cash Flows -
For the Periods Ended March 31, 2005 and 2004 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition 13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 27
Item 4 - Controls and Procedures 28
Part II. Other Information
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 6 - Exhibits 29
Signatures 31
Page 2
Part I. Financial Information
Item 1 - Financial Statements
First Bancorp and Subsidiaries
Consolidated Balance Sheets
March 31, December 31, March 31,
($ in thousands-unaudited) 2005 2004 (audited) 2004
- ---------------------------------------------------------------------------------------------------------
ASSETS
Cash & due from banks, noninterest-bearing $ 32,409 28,486 28,939
Due from banks, interest-bearing 25,938 45,135 12,555
Federal funds sold 23,252 15,780 11,778
----------- ----------- -----------
Total cash and cash equivalents 81,599 89,401 53,272
----------- ----------- -----------
Securities available for sale (costs of $114,703,
$87,368, and $96,216) 114,575 88,554 98,796
Securities held to maturity (fair values of $13,670,
$14,451, and $14,854) 13,376 14,025 14,119
Presold mortgages in process of settlement 2,400 1,771 1,929
Loans 1,395,324 1,367,053 1,251,923
Less: Allowance for loan losses (15,066) (14,717) (13,917)
----------- ----------- -----------
Net loans 1,380,258 1,352,336 1,238,006
----------- ----------- -----------
Premises and equipment 30,133 30,318 25,273
Accrued interest receivable 7,096 6,832 5,729
Intangible assets 49,445 49,330 50,621
Other 8,278 6,346 6,673
----------- ----------- -----------
Total assets $ 1,687,160 1,638,913 1,494,418
=========== =========== ===========
LIABILITIES
Deposits: Demand - noninterest-bearing $ 175,698 165,778 158,961
Savings, NOW, and money market 477,838 472,811 471,705
Time deposits of $100,000 or more 361,567 334,756 253,738
Other time deposits 433,589 415,423 405,868
----------- ----------- -----------
Total deposits 1,448,692 1,388,768 1,290,272
Borrowings 76,239 92,239 51,000
Accrued interest payable 3,030 2,677 2,229
Other liabilities 8,420 6,751 6,988
----------- ----------- -----------
Total liabilities 1,536,381 1,490,435 1,350,489
----------- ----------- -----------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Issued and outstanding: 14,138,379, 52,459 51,614 54,581
14,083,856, and 14,187,200 shares
Retained earnings 98,660 96,347 87,952
Accumulated other comprehensive income (loss) (340) 517 1,396
----------- ----------- -----------
Total shareholders' equity 150,779 148,478 143,929
----------- ----------- -----------
Total liabilities and shareholders' equity $ 1,687,160 1,638,913 1,494,418
=========== =========== ===========
See notes to consolidated financial statements.
Page 3
First Bancorp and Subsidiaries
Consolidated Statements of Income
Three Months Ended
March 31,
-----------------------------
($ in thousands, except share data-unaudited) 2005 2004
- ---------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 21,359 18,003
Interest on investment securities:
Taxable interest income 1,155 1,155
Tax-exempt interest income 129 140
Other, principally overnight investments 272 86
------------ ----------
Total interest income 22,915 19,384
------------ ----------
INTEREST EXPENSE
Savings, NOW and money market 881 563
Time deposits of $100,000 or more 2,345 1,365
Other time deposits 2,474 2,025
Borrowings 930 658
------------ ----------
Total interest expense 6,630 4,611
------------ ----------
Net interest income 16,285 14,773
Provision for loan losses 580 570
------------ ----------
Net interest income after provision
for loan losses 15,705 14,203
------------ ----------
NONINTEREST INCOME
Service charges on deposit accounts 2,008 2,209
Other service charges, commissions and fees 1,054 896
Fees from presold mortgages 238 188
Commissions from sales of insurance and financial products 295 312
Data processing fees 147 96
Securities gains -- 92
Other gains (32) --
------------ ----------
Total noninterest income 3,710 3,793
------------ ----------
NONINTEREST EXPENSES
Salaries 5,372 4,923
Employee benefits 1,514 1,320
------------ ----------
Total personnel expense 6,886 6,243
Net occupancy expense 739 702
Equipment related expenses 695 754
Intangibles amortization 73 95
Other operating expenses 3,322 2,919
------------ ----------
Total noninterest expenses 11,715 10,713
------------ ----------
Income before income taxes 7,700 7,283
Income taxes 2,984 2,563
------------ ----------
NET INCOME $ 4,716 4,720
============ ==========
Earnings per share:
Basic $ 0.33 0.33
Diluted 0.33 0.33
Weighted average common shares outstanding:
Basic 14,105,577 14,201,057
Diluted 14,363,606 14,474,909
See notes to consolidated financial statements.
Page 4
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Three Months Ended
March 31,
-------------------
($ in thousands-unaudited) 2005 2004
- ----------------------------------------------------------------------------
Net income $ 4,716 4,720
------- ------
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period, pretax (1,314) 804
Tax (expense) benefit 512 (314)
Reclassification to realized gains -- (92)
Tax expense -- 36
Adjustment to minimum pension liability:
Additional pension charge related to unfunded
pension liability (90) --
Tax benefit 35 --
------- ------
Other comprehensive income (loss) (857) 434
------- ------
Comprehensive income $ 3,859 5,154
======= ======
See notes to consolidated financial statements.
Page 5
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Accumulated
Common Stock Other Share-
------------------------ Retained Comprehensive holders'
(In thousands, except per share - unaudited) Shares Amount Earnings Income (Loss) Equity
- ---------------------------------------------------------------------------------------------------------------------
Balances, January 1, 2004 14,153 $ 55,392 85,502 962 141,856
Net income 4,720 4,720
Cash dividends declared ($0.16
per share) (2,270) (2,270)
Common stock issued under
stock option plan 93 498 498
Common stock issued into
dividend reinvestment plan 16 358 358
Purchases and retirement of common
stock (75) (1,667) (1,667)
Other comprehensive income 434 434
--------- --------- --------- ------------- ---------
Balances, March 31, 2004 14,187 $ 54,581 87,952 1,396 143,929
========= ========= ========= ============= =========
Balances, January 1, 2005 14,084 $ 51,614 96,347 517 148,478
Net income 4,716 4,716
Cash dividends declared ($0.17 per share) (2,403) (2,403)
Common stock issued under
stock option plan 38 452 452
Common stock issued into
dividend reinvestment plan 16 393 393
Other comprehensive loss (857) (857)
--------- --------- --------- ------------- ---------
Balances, March 31, 2005 14,138 $ 52,459 98,660 (340) 150,779
========= ========= ========= ============= =========
See notes to consolidated financial statements.
Page 6
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
--------------------
($ in thousands-unaudited) 2005 2004
- --------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 4,716 4,720
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses 580 570
Net security premium amortization 6 63
Gain on sale of securities available for sale -- (92)
Other losses 32 --
Decrease in loan fees and costs deferred (131) (148)
Depreciation of premises and equipment 668 620
Amortization of intangible assets 73 95
Deferred income tax benefit (196) (67)
Increase in presold mortgages in process of settlement (629) (622)
Decrease (increase) in accrued interest receivable (264) 358
Decrease in other assets (146) (195)
Increase in accrued interest payable 353 91
Increase in other liabilities 1,382 572
-------- --------
Net cash provided by operating activities 6,444 5,965
-------- --------
Cash Flows From Investing Activities
Purchases of securities available for sale (37,624) (3,618)
Purchases of securities held to maturity -- (125)
Proceeds from maturities/issuer calls of securities available for sale 10,283 5,922
Proceeds from maturities/issuer calls of securities held to maturity 632 205
Proceeds from sales of securities available for sale -- 3,102
Net increase in loans (29,429) (33,389)
Purchases of premises and equipment (483) (537)
-------- --------
Net cash used by investing activities (56,621) (28,440)
-------- --------
Cash Flows From Financing Activities
Net increase in deposits 59,924 40,908
Repayments of borrowings, net (16,000) (25,000)
Cash dividends paid (2,394) (2,264)
Proceeds from issuance of common stock 845 856
Purchases and retirement of common stock -- (1,667)
-------- --------
Net cash provided by financing activities 42,375 12,833
-------- --------
Decrease In Cash And Cash Equivalents (7,802) (9,642)
Cash And Cash Equivalents, Beginning Of Period 89,401 62,914
-------- --------
Cash And Cash Equivalents, End Of Period $ 81,599 53,272
======== ========
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for:
Interest $ 6,277 4,520
Income taxes 1 535
Non-cash transactions:
Unrealized gain (loss) on securities available for sale, net of taxes (802) 434
Foreclosed loans transferred to other real estate 1,058 287
See notes to consolidated financial statements.
Page 7
First Bancorp and Subsidiaries
Notes To Consolidated Financial Statements
(unaudited) For the Periods Ended March 31, 2005 and 2004
- --------------------------------------------------------------------------------
Note 1 - Basis of Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
consolidated financial position of the Company as of March 31, 2005 and 2004 and
the consolidated results of operations and consolidated cash flows for the
periods ended March 31, 2005 and 2004. Reference is made to the 2004 Annual
Report on Form 10-K filed with the SEC for a discussion of accounting policies
and other relevant information with respect to the financial statements. The
results of operations for the periods ended March 31, 2005 and 2004 are not
necessarily indicative of the results to be expected for the full year.
Note 2 - Accounting Policies
Note 1 to the 2004 Annual Report on Form 10-K filed with the SEC contains
a description of the accounting policies followed by the Company and discussion
of recent accounting pronouncements. The following paragraph updates that
information as necessary.
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 previous 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 became effective for loans or debt
securities acquired by the Company beginning on January 1, 2005. The adoption of
this statement in the first quarter of 2005 did not have an impact on the
Company's financial statements; however it will change, on a prospective basis,
the way that the Company accounts for loans and debt securities that it acquires
in the future.
Note 3 - Reclassifications
Certain amounts reported in the period ended March 31, 2004 have been
reclassified to conform with the presentation for March 31, 2005. These
reclassifications had no effect on net income or shareholders' equity for the
periods presented, nor did they materially impact trends in financial
information.
Note 4 - Stock Option Plans
At March 31, 2005, the Company has six stock-based employee compensation
plans, four of which were assumed in acquisitions. The Company accounts for each
plan under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25 (APB Opinion No. 25), "Accounting for Stock Issued to
Employees," and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied
Page 8
the fair value recognition provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation.
Three Months Ended March 31,
----------------------------
(In thousands except per share data) 2005 2004
-------- --------
Net income, as reported $ 4,716 4,720
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (52) (52)
-------- --------
Pro forma net income $ 4,664 4,668
======== ========
Earnings per share: Basic - As reported $ 0.33 0.33
Basic - Pro forma 0.33 0.33
Diluted - As reported 0.33 0.33
Diluted - Pro forma 0.32 0.32
Note 5 - Earnings Per Share
Basic earnings per share were computed by dividing net income by the
weighted average common shares outstanding. Diluted earnings per share includes
the potentially dilutive effects of the Company's stock option plan. The
following is a reconciliation of the numerators and denominators used in
computing basic and diluted earnings per share:
For the Three Months Ended March 31,
--------------------------------------------------------------------------------
2005 2004
-------------------------------------- --------------------------------------
Income Shares Income Shares
($ in thousands except per (Numer- (Denom- Per Share (Numer- (Denom- Per Share
share amounts) ator) inator) Amount ator) inator) Amount
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ----------
Basic EPS
Net income $ 4,716 14,105,577 $ 0.33 $ 4,720 14,201,057 $ 0.33
========== ==========
Effect of Dilutive Securities -- 258,029 -- 273,852
---------- ---------- ---------- ----------
Diluted EPS $ 4,716 14,363,606 $ 0.33 $ 4,720 14,474,909 $ 0.33
========== ========== ========== ========== ========== ==========
For each of the three months ended March 31, 2005 and 2004, there were no
options that were antidilutive since the exercise price of all options
outstanding exceeded the average market price for the period.
Page 9
Note 6 - Asset Quality Information
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or
more days and still accruing interest, restructured loans and other real estate.
Nonperforming assets are summarized as follows:
March 31, December 31, March 31,
($ in thousands) 2005 2004 2004
- -------------------------------------------------------------------------------------------------
Nonperforming loans:
Nonaccrual loans $ 4,249 3,707 3,383
Restructured loans 15 17 20
Accruing loans > 90 days past due -- -- --
------------- ------------- -------------
Total nonperforming loans 4,264 3,724 3,403
Other real estate 2,401 1,470 1,585
------------- ------------- -------------
Total nonperforming assets $ 6,665 5,194 4,988
============= ============= =============
Nonperforming loans to total loans 0.31% 0.27% 0.27%
Nonperforming assets as a percentage of loans
and other real estate 0.48% 0.38% 0.40%
Nonperforming assets to total assets 0.40% 0.32% 0.33%
Allowance for loan losses to total loans 1.08% 1.08% 1.11%
Note 7 - Deferred Loan Fees
Loans are shown on the Consolidated Balance Sheets net of net deferred loan
fees of approximately $82,000, $213,000, and $455,000 at March 31, 2005,
December 31, 2004, and March 31, 2004, respectively.
Note 8 - Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated
amortization of amortizable intangible assets as of March 31, 2005, December 31,
2004, and March 31, 2004 and the carrying amount of unamortized intangible
assets as of those same dates.
March 31, 2005 December 31, 2004 March 31, 2004
---------------------------- ---------------------------- -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated Gross Carrying Accumulated
($ in thousands) Amount Amortization Amount Amortization Amount Amortization
- -------------------------- -------------- ------------ -------------- ------------ -------------- ------------
Amortizable intangible
assets:
Customer lists $ 394 93 394 85 394 62
Noncompete agreements 50 50 50 50 50 34
Core deposit premiums 2,441 816 2,441 751 2,441 507
-------- -------- -------- -------- -------- --------
Total $ 2,885 959 2,885 886 2,885 603
======== ======== ======== ======== ======== ========
Unamortizable intangible
assets:
Goodwill $ 47,247 47,247 48,246
======== ======== ========
Pension $ 272 84 93
======== ======== ========
Amortization expense totaled $73,000 and $95,000 for the three months
ended March 31, 2005 and 2004, respectively.
Page 10
The following table presents the estimated amortization expense 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
(Dollars in thousands) Expense
---------------------- ----------------------
2005 $ 290
2006 242
2007 220
2008 219
2009 218
Thereafter 810
----------
Total $ 1,999
==========
Note 9 - Pension Plans
The Company sponsors two defined benefit pension plans - a qualified
retirement plan (the "Pension Plan") which is generally available to all
employees, and a Supplemental Executive Retirement Plan (the "SERP Plan"), which
is for the benefit of certain senior management executives of the Company.
The Company recorded pension expense totaling $447,000 and $365,000 for
the three months ended March 31, 2005 and 2004, respectively, related to the
Pension Plan and the SERP Plan. The following table contains the components of
the pension expense.
For the Three Months Ended March 31,
--------------------------------------------------------------------------------
2005 2004 2005 2004 2005 Total 2004 Total
(in thousands) Pension Plan Pension Plan SERP Plan SERP Plan Both Plans Both Plans
------------ ------------ ----------- ----------- ---------- ----------
Service cost - benefits earned during the $ 284 245 62 39 346 284
period
Interest cost on projected benefit obligation 192 173 38 28 230 201
Expected return on plan assets (237) (200) - - (237) (200)
Net amortization and deferral 86 67 22 13 108 80
---------- ------ ------ ------ ------- ------
Net periodic pension cost $ 325 285 122 80 447 365
========== ====== ====== ====== ======= ======
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 during 2005.
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 Company estimates that its payments to
participants of the SERP Plan will be $121,000 in 2005.
Note 10 - Possible Contingency
Based on consultations with the Company's tax advisors, the Company's
organizational structure had historically been established in a way to minimize
its tax liabilities. In December 2004, state taxing authorities announced that
they would vigorously pursue taxpayers who have engaged in activities deemed to
be "income-shifting," and the Company is aware that state taxing authorities
have 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, in the first quarter of 2005, the Company
decided to discontinue certain elements of its operating structure to
Page 11
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.
Note 11 - Stock Split
The Company paid a 3-for-2 stock split on November 15, 2004. All
previously reported share amounts have been adjusted to retroactively reflect
the effect of the split.
Page 12
Item 2 - Management's Discussion and Analysis of Consolidated Results of
Operations and Financial Condition
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.
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.
Page 13
For further discussion, see "Nonperforming Assets" and "Summary of Loan
Loss Experience" below.
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 10 to the consolidated financial statements above 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, 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 insurance agency
acquisitions, the identifiable intangible assets related to the customer lists
were determined to have a life of ten to fifteen years, 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
Page 14
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.
Current Accounting Matters
See Note 2 to the Consolidated Financial Statements above as it relates to
accounting standards that have been recently adopted by the Company. The
following accounting standards will be adopted by the Company subsequent to
March 31, 2005 to the extent applicable.
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 were
included in Note 3 to the Company's 2004 Form 10-K. 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 were presented in Note 3 to the Company's 2004 Form 10-K. 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 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. Under the
original provisions of Statement 123(R), it was to have become effective as of
the first interim or annual reporting period that began after June 15, 2005.
However in April 2005, the Securities and Exchange Commission effectively
delayed the adoption of Statement 123(R) for the Company until January 1, 2006.
Based on the provisions of Statement 123(R) and the options that the Company
currently has outstanding, the Company's stock-based compensation expense
related to options currently outstanding will be approximately $123,000 and
$43,000 in 2006 and 2007, respectively. These expense amounts are lower than
they otherwise would have been had the Company required five year vesting in
Page 15
connection with approximately 157,000 options what were granted to employees on
April 1, 2004. Instead, no vesting periods were required for these options. 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.
New stock option grants that vest after January 1, 2006 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.
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.
RESULTS OF OPERATIONS
Overview
Net income for the three months ended March 31, 2005 was $4,716,000, a
0.1% decrease from the $4,720,000 recorded in the first quarter of 2004. The net
income for each three month period amounted to $0.33 per diluted share. Share
amounts for March 31, 2004 have been adjusted from their originally reported
amounts to reflect the 3-for-2 stock split paid on November 15, 2004. As
discussed below, the Company's 2005 results were negatively impacted by
approximately $325,000 ($195,000 on an after-tax basis) in incremental expenses
associated with complying with Section 404 of the Sarbanes-Oxley Act of 2002 and
a higher effective tax rate, which negatively impacted net income by
approximately $275,000.
Increases in loans and deposits of approximately 12% over the past twelve
months resulted in an increase in the Company's net interest income when
comparing the first quarter of 2005 to the first quarter of 2004. Net interest
income for the first quarter of 2005 amounted to $16.3 million, a 10.2% increase
over the $14.8 million recorded in the first quarter of 2004.
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 2005
compared to 2004. The Company's net interest margin (tax-equivalent net interest
income divided by average earning assets) for the first quarter of 2005 was
4.33% compared to 4.37% for the first quarter of 2004. After reaching a recent
low of 4.26% in the second quarter of 2004 largely as a result of declining
interest rates, the Company's net interest margin has risen slightly in each of
the past three quarters, mostly as a result of the rising interest rate
environment during those same periods. The positive impact of the rising
interest rate environment on the Company's net interest margin has been largely
offset by the mix of the Company's deposit growth being more concentrated in the
categories of time deposits and time deposits greater than $100,000, the
Company's highest cost categories of deposits.
The Company's provision for loan losses did not vary significantly in 2005
compared to 2004, amounting to $580,000 in the first quarter of 2005 versus
$570,000 in the first quarter of 2004. The Company's ratio of annualized net
charge-offs to average loans amounted to 7 basis points for each of those three
month periods.
Page 16
Although the Company's nonaccrual loans were 25.6% higher at March 31, 2005
($4.2 million) compared to March 31, 2004 ($3.4 million), the Company's level of
internally classified loans, which includes nonaccrual loans, decreased slightly
over that same period. The Company's ratio of nonperforming assets to total
assets of 0.40% at March 31, 2005 continues to compare favorably to a December
31, 2004 North Carolina state bank average of 0.51%.
Noninterest income amounted to $3,710,000 for the first quarter of 2005, a
2.2% decrease from the first quarter of 2004. The decrease was primarily a
result of a 9.1% decline in service charges on deposit accounts. Service charges
on deposit accounts have decreased primarily as a result of the negative impact
that higher short term interest rates have on the service charges that the
Company earns 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. Also, the Company had
security and other losses of $32,000 in the first quarter of 2005 compared to
securities gains of $92,000 in the first quarter of 2004, a negative change of
$124,000.
Noninterest expenses amounted to $11.7 million in the first quarter of
2005, a 9.4% increase over the $10.7 million in the first quarter of 2004. The
increase in noninterest expenses is primarily attributable to costs related to
the Company's overall growth, as well as annual salary increases. In addition,
in the first quarter of 2005, the Company incurred approximately $325,000
($195,000 on an after-tax basis) in incremental external audit and consultant
expenses associated with complying with Section 404 of the Sarbanes-Oxley Act of
2002.
The Company's effective tax rate was 38.8% in the first quarter of 2005
compared to 35.2% for the first quarter of 2004. The increase in the effective
tax rate was a result of the Company changing certain elements of its operating
structure in order to avoid potential controversy with state taxing authorities.
The higher incremental tax rate negatively impacted the Company's net income by
approximately $275,000. For additional information, see Note 10 to the
consolidated financial statements above and the section below entitled
"Liquidity, Commitments, and Contingencies."
The Company's annualized return on average assets for the first quarter of
2005 was 1.16% compared to 1.28% for the first quarter of 2004. The Company's
return on average equity for the first quarter of 2005 was 12.57% compared to
13.09% for the first quarter of 2004.
Components of Earnings
Net interest income is the largest component of earnings, representing the
difference between interest and fees generated from earning assets and the
interest costs of deposits and other funds needed to support those assets. Net
interest income for the three month period ended March 31, 2005 amounted to
$16,285,000, an increase of $1,512,000, or 10.2% from the $14,773,000 recorded
in the first quarter of 2004. Net interest income on a taxable equivalent basis
for the three month period ended March 31, 2005 amounted to $16,398,000, an
increase of $1,502,000, or 10.1% from the $14,896,000 recorded in the first
quarter of 2004.
There are two primary factors that cause changes in the amount of net
interest income recorded by the Company - 1) growth in loans and deposits, and
2) the Company's net interest margin. For the three months ended March 31, 2005,
growth in loans and deposits increased net interest income, the effects of which
were partially offset by a decrease in the Company's net interest margin in the
first quarter of 2005 compared to the first quarter of 2004.
Page 17
For the Three Months Ended March 31,
-------------------------------------------------------------------------------
2005 2004
-------------------------------------- -------------------------------------
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
---------- ---------- ---------- ---------- ---------- ----------
Assets
Loans (1) $1,383,216 6.26% $ 21,359 $1,236,076 5.86% $ 18,003
Taxable securities 103,248 4.54% 1,155 100,100 4.64% 1,155
Non-taxable securities (2) 11,340 8.65% 242 12,915 8.19% 263
Short-term investments,
principally federal funds 39,361 2.80% 272 23,018 1.50% 86
---------- ---------- ---------- ----------
Total interest-earning assets 1,537,165 6.08% 23,028 1,372,109 5.72% 19,507
---------- ----------
Liabilities
Savings, NOW and money
market deposits $ 474,683 0.75% $ 881 $ 463,120 0.49% $ 563
Time deposits >$100,000 342,487 2.78% 2,345 246,120 2.23% 1,365
Other time deposits 424,878 2.36% 2,474 402,040 2.03% 2,025
---------- ---------- ---------- ----------
Total interest-bearing deposits 1,242,048 1.86% 5,700 1,111,280 1.43% 3,953
Borrowings 76,683 4.92% 930 71,604 3.70% 658
---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,318,731 2.04% 6,630 1,182,884 1.57% 4,611
---------- ----------
Non-interest-bearing deposits 172,673 148,813
Net yield on interest-earning
assets and net interest income 4.33% $ 16,398 4.37% $ 14,896
========== ==========
Interest rate spread 4.04% 4.15%
Average prime rate 5.44% 4.00%
- --------------------------------------------------------------------------------------------------------------------
(1) Average loans include nonaccruing loans, the effect of which is to lower
the average rate shown.
(2) Includes tax-equivalent adjustments of $113,000 and $123,000 in 2005 and
2004, respectively, to reflect the tax benefit that the Company receives
related to its tax-exempt securities, which carry interest rates lower
than similar taxable investments due to their tax exempt status. This
amount has been computed assuming a 39% tax rate and is reduced by the
related nondeductible portion of interest expense.
Average loans outstanding for the first quarter of 2005 were $1.383
billion, which was 11.9% higher than the average loans outstanding for the first
quarter of 2004 ($1.236 billion). The mix of the Company's loan portfolio
remained substantially the same at March 31, 2005 compared to December 31, 2004
with approximately 85% of the Company's loans being real estate loans, 10% being
commercial, financial, and agricultural loans, and the remaining 5% being
consumer installment loans.
Average deposits outstanding for the first quarter of 2005 were $1.415
billion, which was 12.3% higher than the average amount of deposits outstanding
in the first quarter of 2004 ($1.260 billion). Generally, the Company can
reinvest funds from deposits at higher yields than the interest rate being paid
on those deposits, and therefore increases in deposits typically result in
higher amounts of net interest income for the Company.
See additional discussion regarding the nature of the growth in loans and
deposits in the section entitled "Financial Condition" below. The effect of the
higher amounts of average loans and deposits was to increase net interest income
in 2005.
As shown in the table above, yields on interest earning assets and
liabilities both generally increased in 2005 compared to 2004 as a result of the
rising rate environment that began in the third quarter of 2004. From July 1,
2004 to March 31, 2005, the Federal Reserve raised interest rates seven times
totaling 175 basis points. However, in comparing the first quarter of 2005 to
the first quarter of 2004, the increase in the average yield of the Company's
interest-bearing liabilities of 47 basis points exceeded the increase in yield
on interest-earning assets of 36 basis points, thus resulting in a lower net
interest margin. The Company's net interest margin (tax-equivalent net interest
income divided by average earning assets) for the first quarter of 2005 was
4.33% compared to 4.37% for the first
Page 18
quarter of 2004. After reaching a recent low of 4.26% in the second quarter of
2004 largely as a result of declining interest rates in effect until the third
quarter of 2004, the Company's net interest margin has risen slightly in each of
the past three quarters, mostly as a result of the rising interest rate
environment during those same periods. The positive impact of the rising
interest rate environment on the Company's net interest margin was substantially
offset by the mix of the Company's deposit growth being more concentrated in the
categories of time deposits and time deposits greater than $100,000, the
Company's highest cost categories of deposits.
See additional information regarding net interest income in the section
entitled "Interest Rate Risk."
The Company's provision for loan losses did not vary significantly in 2005
compared to 2004, amounting to $580,000 in the first quarter of 2005 versus
$570,000 in the first quarter of 2004. The Company's ratio of annualized net
charge-offs to average loans amounted to 7 basis points for each of those three
month periods. Additionally, net internal loan growth did not vary materially
when comparing the first quarter of 2005 ($28 million) to the first quarter of
2004 ($34 million). Although the Company's nonaccrual loans were 25.6% higher at
March 31, 2005 ($4.2 million) compared to March 31, 2004 ($3.4 million), the
Company's level of internally classified loans, which includes nonaccrual loans,
decreased slightly over that same period. The Company's ratio of nonperforming
assets to total assets of 0.40% at March 31, 2005 continues to compare favorably
to a December 31, 2004 North Carolina state bank average of 0.51%.
Noninterest income amounted to $3,710,000 for the first quarter of 2005, a
2.2% decrease from the first quarter of 2004. The decrease was primarily a
result of a 9.1% decline in service charges on deposit accounts, which amounted
to $2,008,000 in the first quarter of 2005, a $201,000 decrease from the
$2,209,000 recorded in the first quarter of 2004. Service charges on deposit
accounts decreased primarily as a result of the negative impact that higher
short term interest rates have on the service charges that the Company earns
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.
Other service charges, commissions, and fees rose from $896,000 in the
first quarter of 2004 to $1,054,000 in the first quarter of 2005, an increase of
$158,000, or 17.6%. This increase was primarily a result of growth in credit
card merchant income as a result of growth in the Company's merchant card base,
and debit card income as a result of growing acceptance and usage by customers.
Fees from presold mortgages amounted to $238,000 in the first quarter of
2005 compared to $188,000 in the first quarter of 2004. After averaging $582,000
per quarter in these fees during the high refinance calendar year of 2003, over
the past five quarters, fees from presold mortgages have ranged from $188,000 to
$290,000 per quarter, with an average of $241,000 per quarter.
Commissions from sales of insurance and financial products amounted to
$295,000 in the first quarter of 2005 compared to the $312,000 in the first
quarter of 2004. This line item includes commissions the Company receives from
three sources - 1) sales of credit insurance associated with new loans, 2)
commissions from the sales of investment, annuity, and long-term care insurance
products, and 3) commissions from the sale of property and casualty insurance.
The following table presents these components for the three month period ended
March 31, 2005 compared to the same period in 2004:
Page 19
Three Months Ended March 31,
--------------------------------------
($ in thousands) $ %
2005 2004 Change Change
------ ------ ------ ------
Commissions earned from:
- ------------------------
Sales of credit insurance $ 71 59 12 20.3%
Sales of investments,
annuities, and long term
care insurance 32 54 (22) (40.7)%
Sales of property and
casualty insurance 192 199 (7) (3.5)%
------ ------ ------ ------
Total $ 295 312 (17) (5.4)%
====== ====== ====== ======
The Company's data processing subsidiary makes its excess data processing
capabilities available to area financial institutions for a fee. At January 1,
2005, the Company had five community bank customers using this service. Data
processing fees earned by the Company amounted to $147,000 and $96,000 for the
three months ended March 31, 2005 and 2004, respectively. During the fourth
quarter of 2004, the Company was notified by three of the five financial
institutions that utilize this service that they intended to terminate their
contracts with the Company effective in the first half of 2005, with each
customer switching to a lower cost service provider. One of the customers
switched providers in the first quarter of 2005, while the other two customers
are expected to switch in the second quarter of 2005. Data processing fees from
these three institutions amounted to $122,000 of the $147,000 recorded in the
first quarter of 2005. The Company is actively pursuing new customers for this
service, but does not have any new contracts in place at this time.
Also, the Company had security and other losses of $32,000 in the first
quarter of 2005 compared to securities gains of $92,000 in the first quarter of
2004, a negative change of $124,000.
Noninterest expenses for the three months ended March 31, 2005 increased
9.4% to $11,715,000 from $10,713,000 in the first quarter of 2004. The increase
in noninterest expenses occurred in all categories and is associated with the
overall growth of the Company in terms of branch network, employees and customer
base. In addition, in the first quarter of 2005, the Company incurred
approximately $325,000 ($195,000 on an after-tax basis) in incremental external
audit and consultant expenses associated with complying with Section 404 of the
Sarbanes-Oxley Act of 2002. The Company also expects to incur additional
Sarbanes-Oxley expenses of approximately $200,000 ($121,000 on an after-tax
basis) in the second quarter of 2005.
The provision for income taxes was $2,984,000 in the first quarter of
2005, an effective tax rate of 38.8%, compared to $2,563,000 in the first
quarter of 2004, an effective tax rate of 35.2%. The increase in the effective
tax rate in 2005 was a result of the Company changing certain elements of its
operating structure in order to avoid potential controversy with state taxing
authorities, as discussed in more detail in Note 10 to the consolidated
financial statements and in the section below entitled "Liquidity, Commitments,
and Contingencies." The higher incremental tax rate negatively impacted the
Company's net income by approximately $275,000. The Company expects its
effective tax rate to remain at approximately 39% for the foreseeable future.
The Consolidated Statements of Comprehensive Income reflect "Other
Comprehensive Loss" of $857,000 during the first quarter of 2005, related
primarily to unrealized available for sale security holding losses of $1,314,000
occurring during the quarter. The unrealized security holding losses were caused
due to an increase in market yields for fixed income securities during the
quarter. The Company's available for sale securities portfolio is predominantly
comprised of fixed income securities that decline in value when market yields
for fixed income securities increase.
Page 20
FINANCIAL CONDITION
Total assets at March 31, 2005 amounted to $1.69 billion, 12.9% higher
than a year earlier. Total loans at March 31, 2005 amounted to $1.40 billion, an
11.5% increase from a year earlier, and total deposits amounted to $1.45 billion
at March 31, 2005, a 12.3% increase from a year earlier.
The following tables present information regarding the nature of the
Company's growth since March 31, 2004.
Percentage
Balance at Balance at Total growth,
April 1, 2004 to beginning of Internal Growth from end of percentage excluding
March 31, 2005 period Growth Acquisitions period growth acquisitions
- ------------------------------ ------------ -------- -------------- ---------- ----------- ------------
($ in thousands)
Loans $1,251,923 143,401 -- 1,395,324 11.5% 11.5%
========== ======= ======= ========= ======= =======
Deposits - Noninterest bearing $ 158,961 16,737 -- 175,698 10.5% 10.5%
Deposits - Savings, NOW, and
Money Market 471,705 6,133 -- 477,838 1.3% 1.3%
Deposits - Time>$100,000 253,738 107,829 -- 361,567 42.5% 42.5%
Deposits - Time<$100,000 405,868 27,721 -- 433,589 6.8% 6.8%
---------- ------- ------- --------- ------- -------
Total deposits $1,290,272 158,420 -- 1,448,692 12.3% 12.3%
========== ======= ======= ========= ======= =======
January 1, 2005 to
March 31, 2005
- ------------------------------
Loans $1,367,053 28,271 -- 1,395,324 2.1% 2.1%
========== ======= ======= ========= ======= =======
Deposits - Noninterest bearing $ 165,778 9,920 -- 175,698 6.0% 6.0%
Deposits - Savings, NOW, and
Money Market 472,811 5,027 -- 477,838 1.1% 1.1%
Deposits - Time>$100,000 334,756 26,811 -- 361,567 8.0% 8.0%
Deposits - Time<$100,000 415,423 18,166 -- 433,589 4.4% 4.4%
---------- ------- ------- --------- ------- -------
Total deposits $1,388,768 59,924 -- 1,448,692 4.3% 4.3%
========== ======= ======= ========= ======= =======
Approximately $50 million of the year-over-year deposit increase of $158
million relates to wholesale brokered deposits that the Company gathered in the
second half of 2004 in order to help fund high loan growth. The Company
experienced solid loan and deposit growth during the first quarter of 2005, with
loans increasing by $28 million, or 8.3% on an annualized basis, and deposits
increasing by $60 million, or 17.3% on an annualized basis. There was no change
in the level of the Company's brokered deposits in the first quarter of 2005.
The Company opened two de novo branches in 2004, which contributed to the
internal growth.
The mix of the Company's loan portfolio remains substantially the same at
March 31, 2005 compared to December 31, 2004 with approximately 85% of the
Company's loans being real estate loans, 10% being commercial, financial, and
agricultural loans, and the remaining 5% being consumer installment loans.
Among deposits, the time deposits greater than $100,000 category has
experienced significantly more growth than the other deposit categories due to
the following reasons: 1) the Company has attractively priced time deposits
greater than $100,000 in order to fund loan growth, and 2) during the second
half of 2004, the Company entered the "brokered deposit" market and gathered $50
million in such deposits.
Page 21
Nonperforming Assets
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or
more days and still accruing interest, restructured loans and other real estate.
Nonperforming assets are summarized as follows:
March 31, December 31, March 31,
($ in thousands) 2005 2004 2004
- -----------------------------------------------------------------------------------------
Nonperforming loans:
Nonaccrual loans $ 4,249 3,707 3,383
Restructured loans 15 17 20
Accruing loans > 90 days past due -- -- --
-------- -------- --------
Total nonperforming loans 4,264 3,724 3,403
Other real estate 2,401 1,470 1,585
-------- -------- --------
Total nonperforming assets $ 6,665 5,194 4,988
======== ======== ========
Nonperforming loans to total loans 0.31% 0.27% 0.27%
Nonperforming assets as a percentage of loans
and other real estate 0.48% 0.38% 0.40%
Nonperforming assets to total assets 0.40% 0.32% 0.33%
Allowance for loan losses to total loans 1.08% 1.08% 1.11%
Management has reviewed the collateral for the nonperforming assets,
including nonaccrual loans, and has included this review among the factors
considered in the evaluation of the allowance for loan losses discussed below.
Nonperforming loans (which includes nonaccrual loans and restructured
loans) as of March 31, 2005, December 31, 2004, and March 31, 2004 totaled
$4,264,000, $3,724,000, and $3,403,000, respectively. Nonperforming loans as a
percentage of total loans amounted to 0.31%, 0.27%, and 0.27%, at March 31,
2005, December 31, 2004, and March 31, 2004, respectively. The variances in
nonperforming loans among the periods has been primarily due to changes in
nonaccrual loans, as restructured loans have not changed significantly. The
increases in nonaccrual loans among the periods shown in the table above
primarily relate to one commercial loan relationship secured by real estate. A
portion of the loan relationship amounting to $404,000 was put on nonaccrual
status in the fourth quarter of 2004 and another portion of the same loan
relationship amounting to $712,000 was put on nonaccrual status in the first
quarter of 2005. Principal repayments resulted in the outstanding balance of
this relationship amounting to $991,000 at March 31, 2005. The Company evaluated
the underlying collateral securing this loan relationship and established a
specific reserve of $275,000 at March 31, 2005. The next largest nonaccrual
relationship at March 31, 2005 amounted to $337,000. Although nonaccrual loans
have increased over the past year, the level of the Company's "classified" loans
(which includes nonaccrual loans) decreased slightly at March 31, 2005,
amounting to $13.1 million, $13.3 million, and $12.9 million at March 31, 2004,
December 31, 2004 and March 31, 2005, respectively.
At March 31, 2005, December 31, 2004, and March 31, 2004, the recorded
investment in loans considered to be impaired was $2,138,000, $1,578,000, and
$1,275,000, respectively, all of which were on nonaccrual status. The increase
in impaired loans over the three periods presented is primarily related to the
same credit noted above that is on nonaccrual status. At March 31, 2005,
December 31, 2004, and March 31, 2004, the related allowance for loan losses for
all impaired loans was $619,000, $532,000, and $435,000, respectively. At March
31, 2005, December 31, 2004, and March 31, 2004, there was $1,045,000, $532,000,
and $0 in impaired loans for which there was no related allowance. The average
recorded investments in impaired loans during the three month period ended March
31, 2005, the year ended December 31, 2004, and the three months ended March 31,
2004 were approximately $1,858,000, $1,317,000, and $1,362,000, respectively.
For the same periods, the Company recognized no interest income on those
impaired loans during the period that they were considered to be impaired.
The Company's other real estate owned amounted to $2,401,000, $1,470,000,
and $1,585,000 at March 31,
Page 22
2005, December 31, 2004 and March 31, 2004, respectively. The increase in other
real estate owned primarily relates to a lake-front single family residence that
the Company foreclosed on in the first quarter of 2005 with a balance of
$559,000. This property was subsequently sold in April 2005 at loss of less than
$20,000 to the Company. The Company's management has reviewed recent appraisals
of its other real estate and believes that their fair values, less estimated
costs to sell, equal or exceed their respective carrying values at the dates
presented.
Summary of Loan Loss Experience
The allowance for loan losses is created by direct charges to operations.
Losses on loans are charged against the allowance in the period in which such
loans, in management's opinion, become uncollectible. The recoveries realized
during the period are credited to this allowance.
The Company has no foreign loans, few agricultural loans and does not
engage in significant lease financing or highly leveraged transactions.
Commercial loans are diversified among a variety of industries. The majority of
the Company's real estate loans are primarily various personal and commercial
loans where real estate provides additional security for the loan. Collateral
for virtually all of these loans is located within the Company's principal
market area.
The Company's provision for loan losses did not vary significantly in 2005
compared to 2004, amounting to $580,000 in the first quarter of 2005 versus
$570,000 in the first quarter of 2004. The Company's ratio of annualized net
charge-offs to average loans amounted to 7 basis points for each of those three
month periods. Additionally, net internal loan growth did not vary materially
when comparing the first quarter of 2005 ($28 million) to the first quarter of
2004 ($34 million). Although the Company's nonaccrual loans were 25.6% higher at
March 31, 2005 ($4.2 million) compared to March 31, 2004 ($3.4 million), the
Company's level of internally classified loans, which includes nonaccrual loans,
decreased slightly over that same period. The Company's ratio of nonperforming
assets to total assets of 0.40% at March 31, 2005 continues to compare favorably
to a December 31, 2004 North Carolina state bank average of 0.51%.
At March 31, 2005, the allowance for loan losses amounted to $15,066,000,
compared to $14,717,000 at December 31, 2004 and $13,917,000 at March 31, 2004.
The allowance for loan losses as a percentage of total loans was 1.08% at March
31, 2005 and December 31, 2004, and 1.11% at March 31, 2004. The decrease in
this percentage at March 31, 2005 and December 31, 2004 compared to March 31,
2004 is due to a $498,000 charge-off that the Company recorded in the third
quarter of 2004.
Management believes the Company's reserve levels are adequate to cover
probable loan losses on the loans outstanding as of each reporting date. It must
be emphasized, however, that the determination of the reserve using the
Company's procedures and methods rests upon various judgments and assumptions
about economic conditions and other factors affecting loans. No assurance can be
given that the Company will not in any particular period sustain loan losses
that are sizable in relation to the amounts reserved or that subsequent
evaluations of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan losses
and value of other real estate. Such agencies may require the Company to
recognize adjustments to the allowance or the carrying value of other real
estate based on their judgments about information available at the time of their
examinations.
Page 23
For the periods indicated, the following table summarizes the Company's
balances of loans outstanding, average loans outstanding, changes in the
allowance for loan losses arising from charge-offs and recoveries, and additions
to the allowance for loan losses that have been charged to expense and additions
that were recorded related to acquisitions.
Three Months Twelve Months Three Months
Ended Ended Ended
March 31, December 31, March 31,
($ in thousands) 2005 2004 2004
------------ ------------- ------------
Loans outstanding at end of period $ 1,395,324 1,367,053 1,251,923
=========== =========== ===========
Average amount of loans outstanding $ 1,383,216 1,295,682 1,236,076
=========== =========== ===========
Allowance for loan losses, at $ 14,717 13,569 13,569
beginning of period
Total charge-offs (298) (1,938) (266)
Total recoveries 67 181 44
----------- ----------- -----------
Net charge-offs (231) (1,757) (222)
----------- ----------- -----------
Additions to the allowance charged to expense 580 2,905 570
----------- ----------- -----------
Allowance for loan losses, at end of period $ 15,066 14,717 13,917
=========== =========== ===========
Ratios:
Net charge-offs (annualized) as a percent of average loans 0.07% 0.14% 0.07%
Allowance for loan losses as a
percent of loans at end of period 1.08% 1.08% 1.11%
Based on the results of the Company's loan analysis and grading program
and management's evaluation of the allowance for loan losses at March 31, 2005,
there have been no material changes to the allocation of the allowance for loan
losses among the various categories of loans since December 31, 2004.
Liquidity, Commitments, and Contingencies
The Company's liquidity is determined by its ability to convert assets to
cash or acquire alternative sources of funds to meet the needs of its customers
who are withdrawing or borrowing funds, and to maintain required reserve levels,
pay expenses and operate the Company on an ongoing basis. The Company's primary
liquidity sources are net income from operations, cash and due from banks,
federal funds sold and other short-term investments. The Company's securities
portfolio is comprised almost entirely of readily marketable securities, which
could also be sold to provide cash.
In addition to internally generated liquidity sources, the Company has the
ability to obtain borrowings from the following three sources - 1) an
approximately $297 million line of credit with the Federal Home Loan Bank (of
which $35 million had been drawn at March 31, 2005), 2) a $50 million overnight
federal funds line of credit with a correspondent bank (none of which was
outstanding at March 31, 2005), and 3) an approximately $59 million line of
credit through the Federal Reserve Bank of Richmond's discount window (none of
which was outstanding at March 31, 2005).
The Company's liquidity increased slightly from December 31, 2004 to March
31, 2005, as a result of deposit growth that exceeded loan growth during the
quarter. The Company's loan to deposit ratio was 96.3% at March 31, 2005
compared to 98.4% at December 31, 2004. The level of the Company's liquid assets
(consisting of cash, due from banks, federal funds sold, presold mortgages in
process of settlement and securities) as a percentage of deposits and borrowings
was 13.9% at March 31, 2005 compared to 13.1% at December 31, 2004.
Page 24
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.
The amount and timing of the Company's contractual obligations and
commercial commitments has not changed materially since December 31, 2004,
detail of which is presented in Table 18 on page 51 of the Company's 2004 Form
10-K.
The Company is not involved in any legal proceedings that, in management's
opinion, could have a material effect on the consolidated financial position of
the Company.
Based on consultations with the Company's tax advisors, the Company's
organizational structure had historically been established in a way to minimize
its tax liabilities. In December 2004, state taxing authorities announced that
they would vigorously pursue taxpayers who have engaged in activities deemed to
be "income-shifting," and the Company is aware that state taxing authorities
have 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, in the first quarter of 2005, the Company
decided to discontinue certain elements of its operating structure to avoid
potential 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
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 derivative
activities through March 31, 2005, and has no current plans to do so.
Capital Resources
The Company is regulated by the Board of Governors of the Federal Reserve
Board (FED) and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Company's banking
subsidiary is regulated by the Federal Deposit Insurance Corporation (FDIC) and
the North Carolina Office of the Commissioner of Banks. The Company is not aware
of any recommendations of regulatory authorities or otherwise which, if they
were to be implemented, would have a material effect on its liquidity, capital
resources, or operations.
The Company must comply with regulatory capital requirements established
by the FED and FDIC. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under
Page 25
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. These capital standards require the Company to maintain minimum ratios
of "Tier 1" capital to total risk-weighted assets and total capital to
risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1 capital is
comprised of total shareholders' equity calculated in accordance with generally
accepted accounting principles, excluding accumulated other comprehensive income
(loss), less intangible assets, and total capital is comprised of Tier 1 capital
plus certain adjustments, the largest of which for the Company is the allowance
for loan losses. Risk-weighted assets refer to the on- and off-balance sheet
exposures of the Company, adjusted for their related risk levels using formulas
set forth in FED and FDIC regulations.
In addition to the risk-based capital requirements described above, the
Company is subject to a leverage capital requirement, which calls for a minimum
ratio of Tier 1 capital (as defined above) to quarterly average total assets of
3.00% to 5.00%, depending upon the institution's composite ratings as determined
by its regulators. The FED has not advised the Company of any requirement
specifically applicable to it.
At March 31, 2005, the Company's capital ratios exceeded the regulatory
minimum ratios discussed above. The following table presents the Company's
capital ratios and the regulatory minimums discussed above for the periods
indicated.
March 31, December 31, March 31,
2005 2004 2004
--------- ------------ ---------
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets 10.88% 10.95% 11.44%
Minimum required Tier I capital 4.00% 4.00% 4.00%
Total risk-based capital to
Tier II risk-adjusted assets 11.90% 11.97% 12.49%
Minimum required total risk-based capital 8.00% 8.00% 8.00%
Leverage capital ratios:
Tier I leverage capital to
adjusted most recent quarter average assets 8.85% 8.90% 9.22%
Minimum required Tier I leverage capital 4.00% 4.00% 4.00%
The Company's capital ratios decreased from March 31, 2004 to December 31,
2004 primarily as a result of stock repurchases and the Company's balance sheet
growth. In the first quarter of 2005, although the Company's balance sheet
growth was strong, the Company did not repurchase any stock, resulting in only a
slight decrease in capital ratios.
The Company's bank subsidiary is also subject to similar capital
requirements as those discussed above. The bank subsidiary's capital ratios do
not vary materially from the Company's capital ratios presented above. At March
31, 2005, the Company's bank subsidiary exceeded the minimum ratios established
by the FED and FDIC.
SHARE REPURCHASES
During the first quarter of 2005, the Company did not repurchase any of
its own common stock. At March 31, 2005, the Company had approximately 315,000
shares available for repurchase under existing authority from its board of
directors. The Company may repurchase these shares in open market and privately
negotiated transactions, as market conditions and the Company's liquidity
warrant, subject to compliance with applicable regulations. See also Part II,
Item 2 "Unregistered Sales of Equity Securities and Use of Proceeds."
Page 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK)
Net interest income is the Company's most significant component of
earnings. Notwithstanding changes in volumes of loans and deposits, the
Company's level of net interest income is continually at risk due to the effect
that changes in general market interest rate trends have on interest yields
earned and paid with respect to the various categories of earning assets and
interest-bearing liabilities. It is the Company's policy to maintain portfolios
of earning assets and interest-bearing liabilities with maturities and repricing
opportunities that will afford protection, to the extent practical, against wide
interest rate fluctuations. The Company's exposure to interest rate risk is
analyzed on a regular basis by management using standard GAP reports, maturity
reports, and an asset/liability software model that simulates future levels of
interest income and expense based on current interest rates, expected future
interest rates, and various intervals of "shock" interest rates. Over the years,
the Company has been able to maintain a fairly consistent yield on average
earning assets (net interest margin). Over the past five calendar years the
Company's net interest margin has ranged from a low of 4.23% (realized in 2001)
to a high of 4.58% (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%.
Using stated maturities for all instruments except mortgage-backed
securities (which are allocated in the periods of their expected payback) and
securities and borrowings with call features that are expected to be called
(which are included in the period of their expected call), at March 31, 2005 the
Company had $308.9 million more in interest-bearing liabilities that are subject
to interest rate changes within one year than earning assets. This generally
would indicate that net interest income would experience downward pressure in a
rising interest rate environment and would benefit from a declining interest
rate environment. However, this method of analyzing interest sensitivity only
measures the magnitude of the timing differences and does not address earnings,
market value, or management actions. Also, interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. In addition to the effects of "when" various rate-sensitive products
reprice, market rate changes may not result in uniform changes in rates among
all products. For example, included in interest-bearing liabilities at March 31,
2005 subject to interest rate changes within one year are deposits totaling
$477.8 million comprised of NOW, savings, and certain types of money market
deposits with interest rates set by management. These types of deposits
historically have not repriced coincidentally with or in the same proportion as
general market indicators.
Thus, the Company believes that in the near term (twelve months), net
interest income would not likely experience significant downward pressure from
rising interest rates. Similarly, management would not expect a significant
increase in near term net interest income from falling interest rates (In fact,
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 and that interest rate increases occurring since
July 1, 2004 have positively 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,
over the past few years, the Company has originated significantly more
adjustable rate loans compared to fixed rate loans in an effort to protect
itself from an anticipated rise in the interest rate environment. Adjustable
rate loans generally carry lower
Page 27
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. Since the second half of 2004, the Federal Reserve increased interest
rates seven times totaling 175 basis points, which was largely responsible for
the Company's net interest margin reversing its downward trend and increasing
slightly during each of the past three quarters. The immediate positive impact
of the rising interest rate environment on the Company's net interest margin has
been largely offset by the mix of the Company's deposit growth being more
concentrated in the categories of time deposits and time deposits greater than
$100,000, the Company's highest cost categories of deposits.
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions.
See additional discussion of the Company's net interest margin in the
"Components of Earnings" section above.
Item 4. 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. 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.
FORWARD-LOOKING STATEMENTS
Part I of this report contains statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgment of the Company and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the financial success or changing strategies of the Company's
customers, the Company's level of success in integrating acquisitions, actions
of government regulators, the level of market interest rates, and general
economic conditions.
Page 28
Part II. Other Information
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
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 per Publicly Announced Plans Purchased Under the
Period Shares Purchased Share or Programs Plans or Programs (1)
- ----------------------------- ------------------- ------------------------ ------------------------ ------------------------
January 1, 2005 to January
31, 2005 -- -- -- 315,015
February 1, 2005 to February
29, 2005 -- -- -- 315,015
March 1, 2005 to March 31,
2005 -- -- -- 315,015
----------- ------------ ------------ ---------
Total -- -- -- 315,015(2)
=========== ============ ============ =========
Footnotes to the Above Table
- ----------------------------
(1) All shares available for repurchase are 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.
(2) The above table above does 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 Company's
stock option plans. There were no such exercises during the three months
ended March 31, 2005.
Item 6 - Exhibits
The following exhibits are filed with this report or, as noted, are
incorporated by reference. Management contracts, compensatory plans and
arrangements are marked with an asterisk (*).
3.a Copy of Articles of Incorporation of the Company and amendments thereto
were filed as Exhibits 3.a.i through 3.a.v to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 2002, and are
incorporated herein by reference.
3.b Copy of the Bylaws of the Company was filed as Exhibit 3.b to the
Company's Annual Report on Form 10-K for the year ended December 31, 2003,
and is incorporated herein by reference.
10.a Copy of the Company's Magement Incentive Plan was filed as Exhibit 10(a)
to the Company's Form 8-K filed on January 26, 2005, and is incorporated
herein by reference. *
10.b The 2005 base salaries for certain of the Company's executive officers and
disclosure that the Compensation Committee had recommended to the Board of
Directors the 2005 earnings target for the
Page 29
Company's Management Incentive Plan was disclosed in the Company's Form
8-K filed on February 18, 2005, and is incorporated herein by reference. *
10.c Copy of the Advances and Security Agreement with the Federal Home Loan
Bank of Atlanta dated February 15, 2005 was attached as Exhibit 99(a) to
the Form 8-K filed on February 22, 2005, and is incorporated herein by
reference.
31.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Copies of exhibits are available upon written request to: First Bancorp, Anna G.
Hollers, Executive Vice President, P.O. Box 508, Troy, NC 27371
Page 30
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST BANCORP
May 9, 2005 BY: James H. Garner
---------------------------
James H. Garner
President
(Principal Executive Officer),
Treasurer and Director
May 9, 2005 BY: Anna G. Hollers
---------------------------
Anna G. Hollers
Executive Vice President
and Secretary
May 9, 2005 BY: Eric P. Credle
---------------------------
Eric P. Credle
Senior Vice President
and Chief Financial Officer
Page 31