Item 1. Business
General Description
The Company
First Bancorp (the "Company") is a bank holding company. The principal activity of the Company is the ownership and operation of First Bank (the "Bank"), a state chartered bank with its main office in Troy, North Carolina. The Company also owns and operates three nonbank subsidiaries, Montgomery Data Services, Inc. ("Montgomery Data"), a data processing company, First Bancorp Financial Services, Inc. ("First Bancorp Financial"), which owns and operates various real estate, and First Bancorp Capital Trust I, a statutory business trust created under the laws of the State of Delaware, that issued $20 million in debt securities in October 2002. All of the Company's subsidiaries are fully consolidated for financial reporting purposes.
The Bank has two wholly-owned subsidiaries, First Bank Insurance Services, Inc. and First Montgomery Financial Services Corporation. First Bank Insurance Services, Inc. ("First Bank Insurance") was acquired as an active insurance agency in 1994 in connection with the Company's acquisition of a bank that had an insurance subsidiary. On December 29, 1995, the insurance agency operations of First Bank Insurance were divested. From December 1995 until October 1999, First Bank Insurance was inactive. In October 1999, First Bank Insurance began operations again as a provider of non-FDIC insured investments and insurance products. First Montgomery Financial Services Corporation ("First Montgomery"), a Virginia company incorporated on November 2, 2001, was formed to acquire real estate in Virginia and lease the property to the Bank. First Troy Realty Corporation ("First Troy") was incorporated on May 12, 1999 and is a subsidiary of First Montgomery. First Troy allows the Bank to centrally manage a portion of its residential, mortgage, and commercial real estate loan portfolio.
The Company was incorporated in North Carolina on December 8, 1983, as Montgomery Bancorp, for the purpose of acquiring 100% of the outstanding common stock of the Bank through stock-for-stock exchanges. On December 31, 1986, the Company changed its name to First Bancorp to conform its name to the name of the Bank, which had changed its name from Bank of Montgomery to First Bank in 1985.
The Bank was organized in 1934 and began banking operations in 1935 as the Bank of Montgomery, named for the county in which it operated. As of December 31, 2002, the Bank operated in a 16 county area centered in Troy, North Carolina. Troy, population 3,400, is located in the center of Montgomery County, approximately 60 miles east of Charlotte, 50 miles south of Greensboro, and 80 miles southwest of Raleigh. The Bank conducts business from 48 branches located primarily within an 80-mile radius of Troy, covering principally a geographical area from Maxton to the southeast, to High Point to the north, Kannapolis to the west, and Lillington to the east. The Bank also has a branch in Wytheville, Virginia, which is 30 miles north of the North Carolina/Virginia border. The Bank operates under the name "First Bank of Virginia" in the Wytheville branch. Ranked by assets, the Bank is the 7th largest bank in North Carolina as of December 31, 2002.
On September 14, 2000, the Company completed the merger acquisition of First Savings Bancorp, Inc. ("First Savings"). This merger was material to the Company. The merger was accounted for as a pooling-of-interests and accordingly, all financial results for prior periods have been restated to include the combined results of the Company and First Savings. At the time of the merger, First Savings had approximately $310 million in assets, and in connection with the merger the Company issued approximately 4.4 million shares of stock, nearly doubling its number of shares outstanding. For information about other merger and acquisition activity, including two acquisitions completed after December 31, 2002, see "Merger and Acquisition Activity" under Item 7 - Management's Discussion and Analysis of Results of Operations and Financial Condition.
The Bank provides a full range of banking services, including the accepting of demand and time deposits, the making of secured and unsecured loans to individuals and businesses, and the offering of credit cards and debit cards. In 2002, as in recent prior years, the Bank accounted for substantially all of the Company's consolidated net income.
The Company's principal executive offices are located at 341 North Main Street, Troy, North Carolina 27371-0508, and its telephone number is (910) 576-6171. Unless the context requires otherwise, references to the "Company" in this annual report on Form 10-K shall mean collectively First Bancorp and its subsidiaries.
General Business
The Bank engages in a full range of banking activities, providing such services as checking, savings, NOW and money market accounts and other time deposits of various types; loans for business, agriculture, real estate, personal uses, home improvement and automobiles; credit cards; debit cards; letters of credit; IRA's; safe deposit box rentals; bank money orders; and electronic funds transfer services, including wire transfers, automated teller machines, and bank-by-phone capabilities. Because the majority of the Bank's customers are individuals and small to medium-sized businesses located in the counties it serves, management does not believe that the loss of a single customer or group of customers would have a material adverse impact on the Bank. There are no seasonal factors that tend to have any material effect on the Bank's business, and the Bank does not rely on foreign sources of funds or income. Because the Bank operates primarily within the central Piedmont region of North Carolina, the economic conditions within that area could have a material impact on the Company - see additional discussion below in the section entitled "Territory Served and Competition."
Beginning in 1999, First Bank Insurance began offering non-FDIC insured investment and insurance products, including mutual funds, annuities, long-term care insurance, life insurance, and company retirement plans, as well as financial planning services. In May 2001, First Bank Insurance added to its product line when it acquired two insurance agencies that specialized in the placement of property and casualty insurance. First Bank Insurance collects commissions for the services it provides.
Montgomery Data's primary business is to provide electronic data processing services for the Bank. Ownership and operation of Montgomery Data allows the Company to do all of its electronic data processing without paying fees for such services to an independent provider. Maintaining its own data processing system also allows the Company to adapt the system to its individual needs and to the services and products it offers. Although not a significant source of income, Montgomery Data has historically made its excess data processing capabilities available to area financial institutions for a fee. Montgomery Data now has four outside customers that provided gross revenues of $303,000, $205,000, and $117,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
First Bancorp Financial was organized under the name of First Recovery in September of 1988 for the purpose of providing a back-up data processing site for Montgomery Data and other financial and non-financial clients. First Recovery's back-up data processing operations were divested in 1994. First Bancorp Financial now owns and leases the First Recovery building. First Bancorp Financial periodically purchases parcels of real estate from the Bank that were acquired through foreclosure or from branch closings. The parcels purchased consist of real estate having various purposes. First Bancorp Financial actively pursues the sale of these properties.
First Bancorp Capital Trust I was organized in October 2002 for the purpose of issuing $20 million in debt securities. These borrowings are due on November 7, 2032 and were structured as trust preferred capital securities, which qualify as Tier I capital for regulatory capital adequacy requirements. These debt securities are callable by the Company at par on any quarterly interest payment date beginning on November 7, 2007. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 3.45%. This rate may not exceed 12.50% through November 2007.
First Montgomery was incorporated on November 2, 2001. First Montgomery's business activities are currently limited to the selection and acquisition of real estate in Virginia that is leased to the Bank for use as bank branches.
First Troy was incorporated on May 12, 1999 as a subsidiary of the Bank. Upon the formation of First Montgomery as a subsidiary of the Bank, the Bank contributed its interest in First Troy to First Montgomery, resulting in First Troy becoming a subsidiary of First Montgomery. First Troy allows the Bank to centrally manage a portion of its residential, mortgage, and commercial real estate loan portfolio. First Troy has elected to be treated as a real estate investment trust for tax purposes.
Territory Served and Competition
The Company's headquarters are located in Troy, Montgomery County. The Company serves primarily the south central area of the Piedmont region of North Carolina, with offices in 16 counties. The following table presents, for each county the Company operates in, the number of bank branches operated by the Company within each of those counties, the approximate amount of deposits with the Company in each county as of December 31, 2002, the Company's approximate market share, and the number of bank competitors located in the county.
The Company's 48 branches and facilities are primarily located in small communities whose economies are based primarily on services, manufacturing and light industry. Although the Company's market is predominantly small communities and rural areas, the area is not dependent on agriculture. Textiles, furniture, mobile homes, electronics, plastic and metal fabrication, forest products, food products and cigarettes are among the leading manufacturing industries in the trade area. Leading producers of socks, hosiery and area rugs are located in Montgomery County. The Pinehurst area within Moore County is a widely known golf resort and retirement area. The High Point area is widely known for its furniture market. Additionally, several of the communities served by the Company are "bedroom" communities serving Charlotte and Greensboro in addition to smaller cities such as Albermarle, Asheboro, High Point, Pinehurst and Sanford.
As shown in the table above, approximately 28% of the Company's deposit base is in Moore County, and, accordingly, material changes in competition, the economy or population of Moore County could materially impact the Company. No other county comprises more than 10% of the Company's deposit base.
The Company competes in its various market areas with, among others, several large interstate bank holding
companies that are headquartered in North Carolina. These large competitors have substantially greater resources than the Company, including broader geographic markets, higher lending limits and the ability to make greater use of large-scale advertising and promotions. A significant number of interstate banking acquisitions have taken place in the past decade, thus further increasing the size and financial resources of some of the Company's competitors, three of which are among the largest bank holding companies in the nation. Moore County, which as noted above comprises a disproportionate share of the Company's deposits, is a particularly competitive market, with at least ten other financial institutions having a physical presence. See "Supervision and Regulation" below for a further discussion of regulations in the Company's industry that affect competition.
The Company competes not only against banking organizations, but also against a wide range of financial service providers, including federally and state chartered savings and loan institutions, credit unions, investment and brokerage firms and small-loan or consumer finance companies. Competition among financial institutions of all types is virtually unlimited with respect to legal ability and authority to provide most financial services. The Company also experiences competition from internet banks, particularly as it relates to time deposits.
However, the Company believes it has certain advantages over its competition in the areas it serves. The Company seeks to maintain a distinct local identity in each of the communities it serves and actively sponsors and participates in local civic affairs. Most lending and other customer-related business decisions can be made without delays often associated with larger systems. Additionally, employment of local managers and personnel in various offices and low turnover of personnel enable the Company to establish and maintain long-term relationships with individual and corporate customers.
Lending Policy and Procedures
Conservative lending policies and procedures and appropriate underwriting standards are high priorities of the Bank. Loans are approved under the Bank's written loan policy, which provides that lending officers, principally branch managers, have authority to approve loans of various amounts up to $100,000. Each of the Bank's regional senior lending officers has discretion to approve secured loans in principal amounts up to $350,000 and together can approve loans up to $2,000,000. Lending limits may vary depending upon whether the loan is secured or unsecured.
The Bank's board of directors reviews and approves loans that exceed management's lending authority, loans to officers, directors, and their affiliates and, in certain instances, other types of loans. New credit extensions are reviewed daily by the Bank's senior management and at least monthly by the board of directors.
The Bank continually monitors its loan portfolio to identify areas of concern and to enable management to take corrective action. Lending officers and the board of directors meet periodically to review past due loans and portfolio quality, while assuring that the Bank is appropriately meeting the credit needs of the communities it serves. Individual lending officers are responsible for pursuing collection of past-due amounts and monitoring any changes in the financial status of the borrowers.
The Bank's internal audit department evaluates specific loans and overall loan quality at individual branches as part of its regular branch reviews. The Bank also contracts with an independent consulting firm to review new loan originations meeting certain criteria, as well as assign risk grades to existing credits meeting certain thresholds. The consulting firm's observations, comments, and risk grades, including variances with the Bank's risk grades, are shared with the Company's audit committee of the board of directors, and are considered by management in setting Bank policy, as well as in evaluating the adequacy of the allowance for loan losses. See "Allowance for Loan Losses and Loan Loss Experience" in Item 7 below.
Investment Policy and Procedures
The Company has adopted an investment policy designed to optimize the Company's income from funds not needed to meet loan demand in a manner consistent with appropriate liquidity and risk objectives. Pursuant to this policy, the Company may invest in federal, state and municipal obligations, federal agency obligations, public housing authority bonds, industrial development revenue bonds, Federal National Mortgage Association ("FNMA"), Government National Mortgage Association ("GNMA"), and Student Loan Marketing Association ("SLMA") securities. Additionally, during 2001 the Company's board of directors approved limited investments in corporate bonds (see below). Except for corporate bonds, the Company's investments must be rated at least BAA by Moody's or BBB by Standard and Poor's. Securities rated below A are periodically reviewed for creditworthiness. The Company may purchase non-rated municipal bonds only if such bonds are in the Company's general market area and determined by the Company to have a credit risk no greater than the minimum ratings referred to above. Industrial development authority bonds, which normally are not rated, are purchased only if they are judged to possess a high degree of credit soundness to assure reasonably prompt sale at a fair value. In 2001, the Company's board of directors authorized the Company to invest a portion of its security portfolio in high quality corporate bonds, with the amount of bonds related to any one issuer not to exceed the Company's legal lending limit. Prior to purchasing a corporate bond, the Company's management performs due diligence on the issuer of the bond, and the purchase is not made unless the Company believes that the purchase of the bond bears no more risk to the Company than would an unsecured loan to the same company.
The Company's investment officers implement the investment policy, monitor the investment portfolio, recommend portfolio strategies, and report to the Company's investment committee. Reports of all purchases, sales, issuer calls, net profits or losses and market appreciation or depreciation of the bond portfolio are reviewed by the Company's board of directors each month. Once a quarter, the Company's interest rate risk exposure is monitored by the board of directors. Once a year, the written investment policy is reviewed by the board of directors and the Company's portfolio is compared with the portfolios of other companies of comparable size.
Mergers and Acquisitions
As part of its operations, the Company has pursued an acquisition strategy over the years to augment its internal growth and regularly evaluates the potential acquisition of, or merger with, and holds discussions with, various financial institutions. The Company's acquisitions to date have generally fallen into one of three categories - 1) an acquisition of a financial institution or branch thereof within a market the Company operates, 2) an acquisition of a financial institution or branch thereof in a market contiguous to which the Company operates, or 3) an acquisition of a company that has products or services that the Company does not currently offer.
The Company believes that by pursuing these types of acquisition opportunities the Company can enhance its earnings by any combination or all of the following: 1) achieving cost efficiencies, 2) enhancing the acquiree's earnings or gaining new customers by introducing a more successful banking model with more products and services to the acquiree's market base, 3) increasing customer satisfaction or gaining new customers by providing more locations for the convenience of customers, and 4) leveraging the Company's customer base by offering new products and services.
In the last three years, the Company has made acquisitions in all three of the aforementioned categories of acquisitions. In 2002, the Company completed the acquisition of a branch within its market geography (Broadway, located in Lee County) with approximately $8.4 million in deposits and $3.1 million in loans. In 2001, acquisitions resulted in the Company adding $116.2 million in loans and $204.6 million in deposits, expansion into three contiguous markets (Lumberton, Pembroke, St. Pauls), provided another branch for customers in one of the Company's newer markets (Salisbury), and gave the Company the ability to offer property and casualty insurance coverage. In addition, the Company had two acquisitions pending completion at
December 31, 2002 (both of which were completed in January 2003), one of which is the acquisition of a financial institution in a market contiguous to a current market, and the other is the acquisition of a property and casualty insurance agency located in Montgomery County. The Company plans to continue to evaluate acquisition opportunities that could potentially benefit the Company. This may include acquisitions that do not fit the categories discussed above. For a further discussion of recent acquisition activity, see "Merger and Acquisition Activity" under Item 7 - Management's Discussion and Analysis.
Employees
As of December 31, 2002, the Company had 409 full-time and 75 part-time employees. The Company is not a party to any collective bargaining agreements and considers its employee relations to be good.
Supervision and Regulation
As a bank holding company, the Company is subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System and the North Carolina Office of the Commissioner of Banks. The Bank is subject to supervision and examination by the Federal Deposit Insurance Corporation and the North Carolina Office of the Commissioner of Banks. See also Note 15 to the consolidated financial statements.
Supervision and Regulation of the Company
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is required to register as such with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board" or "FRB"). The Company is also regulated by the North Carolina Office of the Commissioner of Banks (the "Commissioner") under the Bank Holding Company Act of 1984.
A bank holding company is required to file quarterly reports and other information regarding its business operations and those of its subsidiaries with the Federal Reserve Board. It is also subject to examination by the Federal Reserve Board and is required to obtain Federal Reserve Board approval prior to making certain acquisitions of other institutions or voting securities. The Commissioner is empowered to regulate certain acquisitions of North Carolina banks and bank holding companies, issue cease and desist orders for violations of North Carolina banking laws, and promulgate rules necessary to effectuate the purposes of the Bank Holding Company Act of 1984.
Regulatory authorities have cease and desist powers over bank holding companies and their nonbank subsidiaries where their actions would constitute a serious threat to the safety, soundness or stability of a subsidiary bank. Those authorities may compel holding companies to invest additional capital into banking subsidiaries upon acquisition or in the event of significant loan losses or rapid growth of loans or deposits.
In 1999, the U.S. enacted legislation that allowed bank holding companies to engage in a wider range of non-banking activities, including greater authority to engage in securities and insurance activities. Under the Gramm-Leach-Bliley Act (the "Act"), a bank holding company that elects to become a financial holding company may engage in any activity that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines by regulation or order is (i) financial in nature, (ii) incidental to any such financial activity, or (iii) complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. This Act made significant changes in U.S. banking law, principally by repealing certain restrictive provisions of the 1933 Glass-Steagall Act. The Act specifies certain activities that are deemed to be financial in nature, including lending, exchanging, transferring, investing for others, or safeguarding money or securities; underwriting and selling insurance; providing financial, investment, or economic advisory services; underwriting, dealing in or making a market in, securities; and any activity currently permitted for bank holding companies by the Federal Reserve Board under Section 4(c)(8) of the
Holding Company Act. The Act does not authorize banks or their affiliates to engage in commercial activities that are not financial in nature. A bank holding company may elect to be treated as a financial holding company only if all depository institution subsidiaries of the holding company are well-capitalized, well-managed and have at least a satisfactory rating under the Community Reinvestment Act. At the present time, the Company does not anticipate applying for status as a financial holding company under the Act.
National and state banks are also authorized by the Act to engage, through "financial subsidiaries," in any activity that is permissible for a financial holding company (as described above) and any activity that the Secretary of the Treasury, in consultation with the Federal Reserve Board, determines is financial in nature or incidental to any such financial activity, except (i) insurance underwriting, (ii) real estate development or real estate investment activities (unless otherwise permitted by law), (iii) insurance company portfolio investments and (iv) merchant banking. The authority of a national or state bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting from the bank's capital outstanding investments in financial subsidiaries).
The Act also contained a number of other provisions that affected the Company's operations and the operations of all financial institutions. One of those provisions related to the financial privacy of consumers and authorized federal banking regulators to adopt rules that would limit the ability of banks and other financial entities to disclose non-public information about consumers to non-affiliated entities. The rules that have subsequently been adopted by the bank regulators require more disclosure to consumers regarding the privacy of the information they provide, and in some circumstances, require consent by the consumer before information is allowed to be provided to a third party. These rules took effect on July 1, 2001. The Company believes its operations are in compliance with the rules.
The United States Congress and the North Carolina General Assembly have periodically considered and adopted legislation that has resulted in, and could result in further, deregulation of both banks and other financial institutions. Such legislation could modify or eliminate geographic restrictions on banks and bank holding companies and current restrictions on the ability of banks to engage in certain nonbanking activities. For example, the Riegle-Neal Interstate Banking Act, which was enacted several years ago, allows expansion of interstate acquisitions by bank holding companies and banks. This and other legislative and regulatory changes have increased the ability of financial institutions to expand the scope of their operations, both in terms of services offered and geographic coverage. Such legislative changes have placed the Company in more direct competition with other financial institutions, including mutual funds, securities brokerage firms, insurance companies, investment banking firms, and internet banks. The Company cannot predict what other legislation might be enacted or what other regulations might be adopted or, if enacted or adopted, the effect thereof on the Company's business.
Supervision and Regulation of the Bank
Federal banking regulations applicable to all depository financial institutions, among other things, (i) provide federal bank regulatory agencies with powers to prevent unsafe and unsound banking practices; (ii) restrict preferential loans by banks to "insiders" of banks; (iii) require banks to keep information on loans to major shareholders and executive officers; and (iv) bar certain director and officer interlocks between financial institutions.
As a state chartered bank, the Bank is subject to the provisions of the North Carolina banking statutes and to regulation by the Commissioner. The Commissioner has a wide range of regulatory authority over the activities and operations of the Bank, and the Commissioner's staff conducts periodic examinations of banks and their affiliates to ensure compliance with state banking regulations. Among other things, the Commissioner regulates the merger and consolidation of state-chartered banks, the payment of dividends, loans to officers and directors, recordkeeping, types and amounts of loans and investments, and the establishment of branches. The Commissioner also has cease and desist powers over state-chartered banks for violations of state banking laws or
regulations and for unsafe or unsound conduct that is likely to jeopardize the interest of depositors.
The dividends that may be paid by the Bank to the Company are subject to legal limitations under North Carolina law. In addition, regulatory authorities may restrict dividends that may be paid by the Bank or the Company's other subsidiaries. The ability of the Company to pay dividends to its shareholders is largely dependent on the dividends paid to the Company by its subsidiaries.
The Bank is a member of the Federal Deposit Insurance Corporation (the "FDIC"), which currently insures the deposits of member banks. For this protection, each bank pays a quarterly statutory assessment, based on its level of deposits, and is subject to the rules and regulations of the FDIC. The FDIC also is authorized to approve conversions, mergers, consolidations and assumptions of deposit liability transactions between insured banks and uninsured banks or institutions, and to prevent capital or surplus diminution in such transactions where the resulting, continuing, or assumed bank is an insured nonmember bank. In addition, the FDIC monitors the Bank's compliance with several banking statutes, such as the Depository Institution Management Interlocks Act and the Community Reinvestment Act of 1977. The FDIC also conducts periodic examinations of the Bank to assess its compliance with banking laws and regulations, and it has the power to implement changes in or restrictions on a bank's operations if it finds that a violation is occurring or is threatened.
Neither the Company nor the Bank can predict what other legislation might be enacted or what other regulations might be adopted, or if enacted or adopted, the effect thereof on the Bank's operations.
See "Capital Resources and Shareholders' Equity" under Item 7 - Management's Discussion and Analysis below for a discussion of regulatory capital requirements.
Available Information
The Company maintains a corporate Internet site at www.firstbancorp.com. This website is in the process of being substantially upgraded, and significant enhancements of the site are expected in the near future. The Company has not made its filings with the Securities and Exchange Commission available on its website because of limitations within its current website, but such filings are available from the Securities and Exchange Commission website at www.sec.gov or free of charge upon written request to the Company's corporate secretary at the Company's headquarters address. In connection with improvements to the Company's Internet website that are currently in process, the Company expects to begin making its periodic filings with the Securities and Exchange Commission available on the Company's website in the near future.
Item 2.
Item 2. Properties
The main offices of the Company, the Bank and First Bancorp Financial are located in a three-story building in the central business district of Troy, North Carolina. The building houses administrative, training and bank teller facilities. The Bank's Operations Division, including customer accounting functions, offices and operations of Montgomery Data, and offices for loan operations, are housed in a one-story steel frame building approximately one-half mile west of the main office. The Company operates 48 bank branches and facilities. The Company owns all its bank branch premises except ten branch offices for which the land and buildings are leased and three branch offices for which the land is leased but the building is owned. There are no other options to purchase or lease additional properties. The Company considers its facilities adequate to meet current needs.
Item 3.
Item 3. Legal Proceedings
Various legal proceedings may arise in the ordinary course of business and may be pending or threatened against the Company and/or its subsidiaries. The Company is not involved in any pending legal proceedings that management believes could have a material effect on the consolidated financial position of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Shareholders
No matters were submitted to a vote of shareholders during the fourth quarter of 2002.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters
The Company's common stock trades on the NASDAQ National Market System of the NASDAQ Stock Market under the symbol FBNC. Tables 1 and 22, included in "Management's Discussion and Analysis" below, set forth the high and low market prices of the Company's common stock as traded by the brokerage firms that maintain a market in the Company's common stock and the dividends declared for the periods indicated. All amounts prior to the Company's September 2000 acquisition of First Savings, except for the Company's stock price, have been restated to include the combined results of First Bancorp and First Savings. See "Business - Supervision and Regulation" and Note 15 to the consolidated financial statements for a discussion of regulatory restrictions on the payment of dividends. As of January 31, 2003, there were approximately 2,300 shareholders of record and another 2,300 shareholders whose stock is held in "street name."
Item 6.
Item 6. Selected Financial Data
Table 1 on page 43 sets forth selected consolidated financial data for the Company.
Item 7.
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
Management's discussion and analysis is intended to assist readers in understanding the Company's results of operations and changes in financial position for the past three years. This review should be read in conjunction with the consolidated financial statements and accompanying notes beginning on page 55 of this report and the supplemental financial data contained in Tables 1 through 22 included with this discussion and analysis.
CRITICAL ACCOUNTING POLICIES
Due to the estimation process and the potential materiality of the amounts involved, the Company has identified the accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy critical to the Company's financial statements. The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb probable losses inherent in the portfolio.
Management's determination of the adequacy of the allowance is based primarily on a mathematical model that estimates the appropriate allowance for loan losses. This model has two components. The first component involves the estimation of losses on loans defined as "impaired loans." A loan is considered to be impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The estimated valuation allowance is the difference, if any, between the loan balance outstanding and the value of the impaired loan as determined by either 1) an estimate of the cash flows that the Company expects to receive from the borrower discounted at the loan's effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral.
The second component of the allowance model is to estimate losses for all loans not considered to be impaired loans. First, loans that have been risk graded by the Company as having more than "standard" risk but are not considered to be impaired are assigned estimated loss percentages generally accepted in the banking industry. Loans that are classified by the Company as having normal credit risk are segregated by loan type, and estimated loss percentages are assigned to each loan type, based on the historical losses, current economic conditions, and
operational conditions specific to each loan type.
The reserve estimated for impaired loans is then added to the reserve estimated for all other loans. This becomes the Company's "allocated allowance." In addition to the allocated allowance derived from the model, management also evaluates other data such as the ratio of the allowance for loan losses to total loans, net loan growth information, nonperforming asset levels and trends in such data. Based on this additional analysis, the Company may determine that an additional amount of allowance for loan losses is necessary to reserve for probable losses. This additional amount, if any, is the Company's "unallocated allowance." The sum of the allocated allowance and the unallocated allowance is compared to the actual allowance for loan losses recorded on the books of the Company and any adjustment necessary for the recorded allowance to equal the computed allowance is recorded as a provision for loan losses.
While management uses the best information available to make evaluations, future adjustments may be necessary if economic, operational, or other conditions change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on the examiners' judgment about information available to them at the time of their examinations.
For further discussion including a review of the range of provisions for loan losses and its impact on reported results in recent periods, see "Nonperforming Assets" and "Allowance for Loan Losses and Loan Loss Experience" under "Analysis of Financial Condition and Changes in Financial Condition."
DISCUSSION REGARDING IMPACT OF ACCOUNTING METHODS USED IN MERGERS AND ACQUISITIONS
While merger and acquisition activity was relatively insignificant in 2002, the years ended December 31, 2001 and 2000 were both significantly impacted by merger and acquisition activity, as discussed below. The merger and acquisition activities for each year were recorded using different methods of accounting. The different methods of accounting impacted the financial information presented in this Form 10-K in different ways.
As previously noted, in 2000 the Company completed the merger-acquisition of First Savings Bancorp, Inc, which just prior to the merger date had total assets equaling 52% of the Company's total assets and had 43% more shareholders' equity than the Company. Because this merger was accounted for under pooling-of-interests accounting, the financial reporting rules required that the Company restate all historical financial results by retroactively combining the past results that each company achieved separately and presenting them as the Company's historical financial results - as if the two companies had always operated together. Therefore, except in specifically noted circumstances, there is no incremental impact to the Company's financial information presented herein that can be discerned as a result of the acquisition of First Savings.
The Company's one acquisition in 2002 and all four acquisitions in 2001 (see discussion below) were accounted for using the purchase method of accounting. The purchase method of accounting requires that the assets and liabilities acquired be reflected as part of the Company's assets and liabilities as of the date of the acquisition. Therefore, the incremental impact of each of the acquisitions since 2000 is more evident.
Other significant differences in pooling-of-interests accounting and purchase accounting relate to the treatment of certain merger expenses and the method of recording the assets and liabilities of the acquired entity, as discussed in the following two paragraphs.
In accordance with pooling-of-interests accounting, all merger costs (e.g. attorney fees, investment banker fees, accounting fees, employment contract payments) related to the First Savings acquisition were recognized as expense in the income statement. Conversely, purchase accounting requires that the direct costs related to a
merger be treated as part of the purchase price of the acquisition, and therefore all such direct merger costs were effectively capitalized and increased the amount of goodwill recorded in each purchase transaction.
In accordance with pooling-of-interests accounting, the Company recorded the acquisition of First Savings using the historical cost basis for all of First Savings' assets and liabilities. The excess of the assets over liabilities recorded (i.e. First Savings shareholders' equity) was added to the shareholders' equity of the Company. The value of the stock that the Company issued as merger consideration was not considered in the accounting entries, and therefore under pooling-of-interests accounting, no intangible assets were recognized. Under the purchase accounting method used for the Company's 2001 and 2002 acquisitions, the Company valued all assets and liabilities of the acquired entities at their fair market value. Because for each of the Company's 2001 and 2002 acquisitions, the value of the consideration paid exceeded the net fair market value of its assets less its liabilities, intangible assets were recorded for the differences between the two.
MERGER AND ACQUISITION ACTIVITY
Over the past three fiscal years, the Company has completed several acquisitions and had one branch divestiture. Significant amounts of intangible assets have been recorded in connection with the Company's acquisitions, as detailed below. The accounting for intangible assets changed significantly in 2002 with the Company being required under new accounting standards to cease the amortization of virtually all of its intangible assets. See the section entitled "Current Accounting Matters" below and Note 2 and Note 6 to the consolidated financial statements for additional information regarding intangible assets and their amortization under previous and new accounting standards.
The Company completed one acquisition in 2002 as follows:
(a) Broadway branch purchase - On October 4, 2002, the Company completed the purchase of a branch of RBC Centura located in Broadway, North Carolina. The Company assumed the branch's $8 million in deposits and $3 million in loans. The primary reason for this acquisition was to increase the Company's presence in Lee County, a market that the Company already had two branches in with a large customer base. An intangible asset of $0.7 million, all of which was allocated to goodwill, was recorded in connection with this acquisition.
The Company's acquisitions completed during 2001 were as follows:
(a) Salisbury branch purchase - On December 17, 2001, the Company completed the purchase of a branch of First Union National Bank located in Salisbury, North Carolina. The Company assumed the branch's $30 million in deposits and $9 million in loans. An intangible asset of $3.2 million was recorded in connection with this acquisition.
(b) Insurance agency acquisitions - On May 30, 2001, the Company completed the purchase of two insurance agencies - Aberdeen Insurance & Realty Company and Hobbs Insurance and Realty Company. Both agencies were located in Moore County and specialized in placing property and casualty insurance coverage for individuals and businesses in the Moore County area. In completing the acquisition, the agencies were merged into First Bank Insurance Services, Inc. Approximately 16,000 shares of Company stock were issued in connection with the acquisition of the two agencies. An intangible asset of $243,000 was recorded in connection with the acquisition.
(c) Century Bancorp, Inc. - On May 17, 2001, the Company completed the purchase of Century Bancorp, Inc. ("Century"). Century was the holding Company for Home Savings, Inc., SSB, a one branch savings institution located in Thomasville, NC. Century had total assets of $107 million, total loans of $90 million, and total deposits of $72 million. In accordance with the terms of the merger agreement, the Company issued approximately 586,000 shares of common stock and paid cash of approximately $13.2 million to Century shareholders in exchange for all shares of Century outstanding. An intangible asset of $3.2 million was recorded
in connection with this acquisition.
(d) Robeson and Scotland counties branch purchase - On March 26, 2001, the Company completed the purchase of four branches from First Union National Bank with aggregate deposits of approximately $103 million and aggregate loans of approximately $17 million. The four branches acquired were in Lumberton, Pembroke, St. Pauls (all located in Robeson County, NC), and Laurinburg (Scotland County, NC). Total intangible assets of $14.6 million were recorded in connection with the purchase.
As discussed above, each of the above transactions was accounted for using the purchase method of accounting. The following table presents a summary of the fair market value of assets acquired and liabilities assumed in the purchases described above:
There are many factors that the Company considers when evaluating how much to offer for potential acquisition candidates - in the form of a purchase price comprised of cash and/or stock for a whole company purchase or a deposit premium in a branch purchase. Most significantly, the Company compares expectations of future earnings per share on a stand-alone basis with projected future earnings per share assuming completion of the acquisition under various pricing scenarios. Significant assumptions that affect this analysis include the estimated future earnings stream of the acquisition candidate, the amount of cost efficiencies that can be realized, and the interest rate earned/lost on the cash received/paid. In addition to the earnings per share comparison, the Company also considers other factors including (but not limited to): marketplace acquisition statistics, location of the candidate in relation to the Company's expansion strategy, market growth potential, management of the candidate, potential integration issues (including corporate culture), and the size of the acquisition candidate.
The generally higher amounts of intangible assets recorded relative to assets and deposits acquired in the branch purchases shown above compared to the Century acquisition are primarily a result of the branches having a higher relative earnings stream, due largely to having a higher mix of transaction-oriented deposit accounts that carried low interest rates and high potential for service charge income.
The lone acquisition during 2000 was the September 14, 2000 merger acquisition of First Savings Bancorp, Inc. - the holding company for First Savings Bank of Moore County, SSB (collectively referred to as "First Savings"). Each share of First Savings stock was exchanged for 1.2468 shares of the Company's stock, resulting in the Company issuing approximately 4,407,000 shares of stock to complete the transaction. At June 30, 2000, First Savings had total assets of $331 million, with loans of $232 million and deposits of $224 million.
To gain Federal Reserve approval for the merger with First Savings, the Company was required to divest the First Savings Bank branch located in Carthage, NC. This branch was sold to another North Carolina community bank in a transaction that was completed in November 2000. At the time of the divestiture, the Carthage branch had approximately $15.1 million in total deposits and $2.3 million in total loans. The sale of the branch resulted in a net gain of $808,000.
The Company had two pending acquisitions as of December 31, 2002, as follows:
(a) Uwharrie Insurance Group - On October 7, 2002, the Company announced that its insurance subsidiary, First Bank Insurance, had reached an agreement to acquire Uwharrie Insurance Group, a Montgomery County based property and casualty insurance agency. With eight employees, Uwharrie Insurance Group, Inc. serves approximately 5,000 customers, primarily from its Troy-based headquarters, and has annual commissions of approximately $500,000. The primary reason for the acquisition was to gain efficiencies of scale with the Company's existing property and casualty insurance business. The transaction was completed on January 2, 2003, with the Company paying cash in the amount of $546,000. The tangible assets of Uwharrie Insurance Group on the date of acquisition were approximately $20,000, which resulted in the Company recording an intangible asset of approximately $526,000. The Company is currently in the process of determining what portion of the intangible asset will be allocated to identifiable intangible assets and what portion will be allocated as goodwill.
(b) On July 16, 2002, the Company reported that it had agreed to acquire Carolina Community Bancshares, Inc. (CCB), a South Carolina community bank with total assets of approximately $70 million. CCB operates out of three branches in Dillon County, South Carolina, with its headquarters and one of its branches located in Latta, and two branches in the city of Dillon. This represents the Company's first entry into South Carolina. Dillon County, South Carolina is contiguous to Robeson County, North Carolina, a county where the Company operates four branches. The terms of the agreement called for shareholders of Carolina Community to receive 0.8 shares of First Bancorp stock and $20.00 in cash for each share of Carolina Community stock they owned. The transaction was completed on January 15, 2003 with the Company paying cash of $8.3 million, issuing 332,888 shares of common stock valued at approximately $7.9 million, and assuming employee stock options with an intrinsic value of approximately $0.9 million, for a total deal value of approximately $17.1 million. The following is a condensed unaudited balance sheet, as reported by CCB, as of the acquisition date of January 15, 2003.
CCB ------------- Assets (in millions) ------ Cash and cash equivalents $ 7.0 Securities 13.0 Loans, gross 47.7 Allowance for loan losses (0.8) Premises and equipment 0.8 Intangible assets 0.8 Other 1.7 ----- Total assets $70.2 =====
Liabilities ----------- Deposits $58.7 Borrowings 2.0 Other 0.7 ----- Total liabilities 61.4 ----- Shareholders' equity 8.8 ----- Total liabilities and shareholders' equity $70.2 =====
ANALYSIS OF RESULTS OF OPERATIONS
Net interest income, the "spread" between earnings on interest-earning assets and the interest paid on interest-bearing liabilities, constitutes the largest source of the Company's earnings. Other factors that significantly affect operating results are the provision for loan losses, noninterest income such as service fees and noninterest expenses such as salaries, occupancy expense, equipment expense and other overhead costs, as well as the effects of income taxes.
Note Regarding Pro Forma Information
In an effort to enhance the comparability of the core operating results of the Company between years, the Company has presented certain pro forma financial data in "Table 1 - Selected Consolidated Financial Data" and at various times in the discussion below will refer to pro forma data. In Table 1, the pro forma data is presented as adjustments to reported earnings, with the resulting pro forma diluted earnings per share shown. Performance ratios have not been adjusted to reflect the effects of the pro forma data.
Two types of pro forma adjustments have been made. The first adjustment identifies the net after-tax effects of unusual or nonrecurring gains or losses. Examples of these types of items are merger expenses, securities gains/losses, fixed asset gains/losses, and foreclosed property gains/losses. These types of gains or losses occur at irregular intervals and are not considered by the Company to be an indication of the core operating results of the Company. To eliminate the effects of these nonrecurring items, net gains are deducted from reported income and net losses are added to reported income.
In the past five years, only net income for the year 2000 included nonrecurring income or expense that impacted net income by more than 2%. The results of operations for the year 2000 were significantly impacted by the Company's merger-acquisition of First Savings. In connection with this acquisition, there were several material nonrecurring items of income and expense related to the transaction, as follows:
o $3,188,000 in expenses ($2,593,000 after-tax) that were incurred in completing the merger. These expenses consisted primarily of investment banker fees, attorney fees, employment contract payments, accountant fees, and early termination fees associated with vendor contracts. These expenses were all recorded in the third quarter of 2000.
o $2,006,000 in losses ($1,218,000 after-tax) from sales of securities. The merger with First Savings increased the Company's liability sensitive position. To reduce the Company's interest rate risk exposure, approximately $54.5 million in securities were sold at a total loss of $2,006,000. The proceeds from the sale were first used to repay short-term debt, with the remaining proceeds invested in investments with a shorter average life and a higher yield than the securities sold.
o $420,000 was recorded ($254,000 after-tax) as a one time adjustment to the allowance for loan losses during the third quarter of 2000. This provision for loan losses was recorded in order to align the credit risk methodologies of the Company and First Savings.
o $808,000 was realized as a gain ($491,000 after-tax) from the sale of the Company's Carthage branch during the fourth quarter of 2000. The sale of this branch was a regulatory requirement for approval of the merger with First Savings.
The following table presents a summary of items for each of the past three years that the Company considers to be nonrecurring in nature. The "Impact on Net Income" and "Impact on Diluted Earnings Per Share" columns reflect the after-tax amount of the pro forma data at the blended federal and state tax rate.
The second pro forma adjustment, shown in the following table, relates to two new accounting standards adopted by the Company in 2002 related to accounting for mergers and acquisitions - Financial Accounting Standards Board Statement No. 142 entitled "Goodwill and Other Intangible Assets" and No. 147 entitled "Acquisitions of Certain Financial Institutions." Under these standards, as of January 1, 2002, the Company was required to cease the systematic amortization (as expense) of virtually all of its intangible assets. The elimination of this type of expense for 2002 but not for previous years (as required by the standards) affects the comparability of the Company's financial results between 2002 and all previous years. To enhance comparability, in Table 1 for years prior to 2002, the after-tax effect of the amortization of intangible assets that were no longer amortized beginning in 2002 is shown as a positive adjustment to adjust the Company's net income for each year to reflect what it would have been had the new accounting standards been applicable to previous years.
The following table presents gross amortization expense for each of the past three years, along with the amounts of amortization expense related to intangible assets that ceased to be amortized beginning on January 1, 2002. The table also includes the after-tax effects on net income and diluted earnings per share associated with this amortization expense that represents the additional amounts the Company would have reported had the amortization provisions of Statements 142 and 147 been applicable in those years.
Overview - 2002 Compared to 2001
Net income for the year ended December 31, 2002 amounted to $17,230,000, or $1.85 per diluted share, a 25.9% increase in diluted earnings per share over the $1.47 per diluted share for the year ended December 31, 2001. As noted above, in 2002, in accordance with the adoption of two new accounting standards, the Company discontinued the amortization of most of its intangible assets. If the newly adopted standards had been applicable in 2001, the Company would have recorded additional net income of $1,160,000, or approximately $0.12 per diluted share, for the twelve months ended December 31, 2001. Nonrecurring items of income/expense were insignificant for the year ended December 31, 2002, while nonrecurring gains of approximately one cent per share were realized for the twelve months ended December 31, 2001.
Adjusting for the pro forma items discussed in the paragraph above and in the section entitled "Note Regarding Pro Forma Information" above, the Company's pro forma net income for 2002 amounted to $17,216,000, a 17.3% increase from pro forma net income for 2001 of $14,679,000. Pro forma diluted earnings per share for 2002 remained unchanged from the unadjusted reported amount of $1.85 per share, 17.1% higher than pro forma diluted earnings per share of $1.58 for 2001.
The most significant factor in the Company's increase in net income from 2001 to 2002 was an $8.3 million, or 20.3%, increase in net interest income. As discussed in more detail below in the section entitled "Net Interest Income," the increase in net interest income was a result of a higher level of average earning assets and a higher net interest margin. Average earning assets increased 10.9% in 2002, while the Company's net interest margin (tax-equivalent net interest income divided by average earning assets) increased from 4.23% in 2001 to 4.58% in 2002.
Partially offsetting the increase in net interest income was a higher provision for loan losses. Although asset quality ratios generally improved in 2002, the Company's provision for loan losses more than doubled due to high loan growth, amounting to $2,545,000 in 2002 compared to $1,151,000 in 2001. In 2002, First Bancorp experienced $105 million in internal loan growth compared to $28 million in 2001.
Noninterest income increased 24.0% and noninterest expense increased 12.8% in 2002 compared to 2001, primarily as a result of the Company's growth, including a full year's impact of the acquisitions completed in 2001. Noninterest income was also positively affected in 2002 by increased mortgage loan refinancing activity that increased mortgage origination fees, as well as the offering of a check overdraft product beginning in August 2001 that increased fees earned on deposit accounts for a full 12 months in 2002.
The increase in noninterest expenses was partially offset by the near elimination of amortization expense related to intangible assets. As noted above in the section entitled "Note Regarding Pro Forma Information," in 2002 the Company adopted two new accounting standards that required the Company to cease amortization of
virtually all of its intangible assets. Excluding amortization expense in 2001 related to intangible assets that ceased to be amortized in 2002, the Company's noninterest expenses increased 19.1% in 2002.
The Company's income taxes increased 27.0% from $7,307,000 in 2001 to $9,282,000 in 2002. The increase in income tax expense was a result of higher income before income taxes. The effective tax rate for both years was approximately 35%.
Overview - 2001 Compared to 2000
Net income for the year ended December 31, 2001 amounted to $13,616,000, a 45.8% increase from the $9,342,000 recorded for 2000. Diluted earnings per share for 2001 amounted to $1.47, a 42.7% increase from the $1.03 reported for 2000. As discussed above, net income for 2000 was significantly impacted by the merger with First Savings.
Adjusting for the pro forma items discussed above, pro forma net income for the year ended December 31, 2001 amounted to $14,679,000, a 9.6% increase from the $13,394,000 in pro forma net income for 2000. Diluted earnings per share on a pro forma basis for 2001 amounted to $1.58, a 6.8% increase from the pro forma diluted earnings per share amount of $1.48 for 2000.
The Company's net income and most individual components of net income for 2001 were significantly impacted by the acquisitions completed during the year. As a result of the 2001 acquisitions, the Company's loans increased by $116.2 million and deposits increased by $204.6 million, whereas internally generated loan and deposit growth amounted to only $28.1 million and $25.3 million, respectively. As a result of the incremental impact of these acquired loans and deposits, net interest income for the year increased 6.1% despite a decrease in the net interest margin from 4.53% in 2000 to 4.23% in 2001.
The provision for loan losses for 2001 amounted to $1,151,000, which is comparable to the recurring provision for loan losses of $1,185,000 recorded in 2000 (the 2000 amount excludes the one time $420,000 acquisition related provision previously discussed). The slightly lower provision in 2001 compared to the recurring 2000 provision was a result of lower net internal loan growth in 2001. In 2001, the Company's net internal loan growth amounted to $28.1 million compared to $102.9 million in 2000. An increase in nonperforming assets during 2001 increased what otherwise would have been an even lower level of provision for loan losses in 2001.
The incremental impact of the 2001 acquisitions also contributed significantly to the 104.2% increase in noninterest income (62.6% increase on a pro forma basis when nonrecurring gains/losses are excluded) and the 7.1% increase in noninterest expenses from the amounts recorded in 2000 (18.2% increase on a pro forma basis). Also increasing noninterest income in 2001 were increased fees earned from presold mortgages, which benefited from a lower interest rate environment, and the introduction of a deposit product in August 2001 which, for a fee, allows checking account customers to overdraw their deposit account.
The Company's income taxes increased 27.4% from $5,736,000 in 2000 to $7,307,000 in 2001. The increase in income tax expense was a result of higher income before income taxes. The effective tax rate for 2001 of 34.9% was lower than the 38.0% effective tax rate in 2000, primarily due to nondeductible merger-related expenses incurred in 2000 that had the effect of increasing the effective tax rate.
Net Interest Income
Net interest income on a reported basis amounted to $49,390,000 in 2002, $41,053,000 in 2001, and $38,695,000 in 2000. For internal purposes and in the discussion that follows, the Company evaluates its net interest income on a tax-equivalent basis by adding the tax benefit realized from tax-exempt securities to reported interest income. Net interest income on a taxable-equivalent basis amounted to $49,925,000 in 2002, $41,645,000 in 2001, and $39,289,000 in 2000.
Table 2 analyzes net interest income on a taxable-equivalent basis. The Company's net interest income on a taxable-equivalent basis increased by 19.9% in 2002 and 6.0% in 2001. There are two primary factors that cause changes in the amount of net interest income recorded by the Company - 1) growth in loans and deposits, and 2) the Company's net interest margin (tax-equivalent net interest income divided by average interest-earning assets).
In both 2002 and 2001, net interest income was positively impacted by higher amounts of average loans and deposits outstanding. Table 3 illustrates that the change in the average volume of loans and deposits was the predominant factor in the higher amounts of net interest income realized by the Company in 2002 and 2001. In 2002, the average amount of loans outstanding grew by 14.8%, while the average amount of deposits increased by 12.3%. In 2001, the average amount of loans outstanding increased 18.6% and the average amount of deposits outstanding increased 20.8%. The higher amounts of loans and deposits outstanding in 2001 and 2002 were a result of both internal growth, as well as growth achieved in corporate acquisitions. In 2001, most of the loan and deposit growth was achieved in acquisitions, with 81% of the year's $144 million in loan growth and 89% of the year's $230 million deposit growth coming by way of acquisition. In 2002, the increase in the average amount of loans and deposits outstanding was partially a result of a full year's effect of the 2001 growth as well as growth realized in 2002, most all of which was internally generated. In 2002, loans grew by $108 million, with all but $3 million of the growth internally generated, while deposits grew by $56 million, with all but $8 million internally generated.
The effects on net interest income of the higher amounts of average loans and deposits outstanding in 2002 were enhanced by a higher net interest margin in 2002 compared to 2001. The Company's net interest margin for 2002 was 4.58% compared to 4.23% in 2001. The 4.23% net interest margin for 2001 was a decrease from the 4.53% margin realized in 2000. The variations in net interest margin over the past two years have been largely a result of the Federal Reserve's interest rate policies during that time.
In 2001, the Company's interest rate spreads were negatively impacted by the Federal Reserve Board cutting interest rates 11 times totaling 475 basis points. Although at January 1, 2001 the Company had more interest-sensitive liabilities than interest-sensitive assets subject to repricing within twelve months, the Company's interest-sensitive assets repriced sooner (generally the day following the interest rate cut) and by a larger percentage (generally by the same number of basis points that the Federal Reserve discount rate was decreased) than did the Company's interest-sensitive liabilities that were subject to repricing. The Company's primary interest-sensitive liabilities at January 1, 2001 in the twelve month horizon consisted of the following 1) savings, NOW, and money market deposits, and 2) time deposits. Interest rates paid on savings, NOW and money market deposits are set by management of the Company, and although the interest rates on these accounts were decreased by the Company within days of each of the Federal Reserve rate cuts, it was not possible to reduce the interest rates by the full amount of the Federal Reserve cuts due to competitive considerations and the already relatively low rates paid on these types of accounts. Interest rates paid on time deposits are generally fixed and not subject to automatic adjustment. When time deposits mature, the Company has the opportunity, at the customers' discretion, to renew the time deposit at a rate set by the Company. Because time deposits that are interest-sensitive in a twelve month horizon mature throughout the twelve month period, any change in the renewal rate will only affect a portion of the twelve month period. Also, although changes in interest rates on renewing time deposits generally track rate changes in the interest rate environment, the Company was not able to decrease rates on renewing time deposits during 2001 by the corresponding decreases in the Federal Reserve discount rate because of competitive pressures in the Company's market.
In 2002, there were no changes to interest rates initiated by the Federal Reserve for the first ten months of the year. This allowed a significant portion of the Company's time deposit portfolio that had been originated when rates were higher to mature and reprice at lower rates - as noted above, much of the Company's interest-sensitive assets had repriced immediately in 2001 when the rate cuts were made and did not experience further declines. The 50 basis point rate cut announced by the Federal Reserve on November 6, 2002 negatively impacted the Company's net interest margin in much the same way as the 2001 rate cuts did. The Company's fourth quarter of
2002 net interest margin decreased to 4.53% from the 4.78% margin realized in the third quarter of 2002.
Another factor affecting the Company's net interest margin in 2001 and 2002 was the reinvestment of funds received in the Company's 2001 acquisitions and the mix of loans and deposits assumed in the acquisitions. The March 2001 acquisition of four branches from First Union National Bank resulted in the Company receiving $70.2 million in cash. The Company was not able to immediately redeploy the cash received into a mix of higher yielding investments and loans consistent with the Company's historic asset mix, and therefore the Company's net interest margin was negatively impacted. In 2002, due to the high loan growth experienced by the Company, a significant portion of this cash was redeployed into loans with higher interest rates than the short-term investments in which the cash had been invested. Additionally, in connection with the acquisition of Century in May 2001, the Company assumed a high mix of residential mortgage loans and time deposits (which are generally the lowest yielding type of loan and highest rate type of deposit). This mix of loans and deposits negatively impacted net interest margins in 2001. In 2002, many of Century's loans were refinanced by the borrower and then resold in the secondary market by the Company, with the resulting funds used to fund the Company's commercial loan growth (which generally has higher interest rates than residential mortgages). In addition, many of Century's time deposits also had the opportunity to reprice at lower rates in 2002, thus positively impacting the net interest margin.
See additional information regarding net interest income on page 36 in the section entitled "Interest Rate Risk."
Provision for Loan Losses
The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered appropriate to absorb probable losses inherent in the portfolio. Management's determination of the adequacy of the allowance is based on the level of loan growth, an evaluation of the portfolio, current economic conditions, historical loan loss experience and other risk factors.
The Company recorded provisions for loan losses of $2,545,000 in 2002 compared to $1,151,000 in 2001 and $1,605,000 in 2000.
The increase in the provision for loan losses for 2002 compared to 2001 was primarily a result of higher internal loan growth, as asset quality ratios generally improved during the year. In 2002, the Company generated $105.2 million in internal loan growth compared to $28.1 million in internal growth in 2001. The remainder of the $3.1 million in loan growth in 2002 and $116.2 million in loan growth in 2001 came by way of acquisitions with a preexisting allocation for loan losses already in place.
The decrease in the provision for loan losses in 2001 compared to 2000 was impacted by the Company's merger with First Savings. As noted earlier, in connection with the merger with First Savings, a provision of $420,000 was recorded in 2000 in order to align the risk methodologies of the two merging companies. Excluding the merger-related 2000 provision, the Company's 2001 provision for loan losses was approximately 3% less than the recurring 2000 provision of $1,185,000. The decrease in the recurring provision for loan losses was a result of significantly lower loan growth experienced. Net internal loan growth (excludes loans assumed in acquisitions) for 2001 amounted to $28.1 million compared to $102.9 million for 2000. An increase in nonperforming assets and net charge-offs during 2001 increased what would have been an otherwise lower level of provision for loan losses in 2001.
See the section entitled "Allowance for Loan Losses and Loan Loss Experience" below for a more detailed discussion of the allowance for loan losses. The allowance is monitored and analyzed regularly in conjunction with the Company's loan analysis and grading program, and adjustments are made to maintain an adequate allowance for loan losses.
Noninterest Income
Noninterest income recorded by the Company amounted to $11,968,000 in 2002, $9,655,000 in 2001, and $4,729,000 in 2000.
Noninterest income for 2000 was significantly impacted by losses incurred from sales of securities that were partially offset by a gain realized from the sale of a branch. Both the securities losses and the branch sale gain were related to the merger acquisition of First Savings - see additional discussion below. As shown in Table 4, core noninterest income, which excludes gains and losses from sales of securities, loans, and other assets, as well as nonrecurrring items, amounted to $11,946,000 in 2002 a 25.7% increase from the $9,506,000 in 2001. The 2001 core noninterest income of $9,506,000 was 62.6% higher than the $5,846,000 recorded in 2000.
See Table 4 and the following discussion for an understanding of the components of noninterest income.
Service charges on deposit accounts in 2002 amounted to $6,856,000, a 30.2% increase compared to the $5,265,000 recorded in 2001. The 2001 amount of $5,265,000 was 68.9% higher than the 2000 amount of $3,118,000. In addition to incremental service fee income associated with the Company's internally generated deposit growth and periodic deposit rate fee increases, there have been two primary factors driving the high growth in service charges - 1) the acquisition of five First Union branches during 2001 - four bank branches were acquired in March 2001 and one branch was acquired in December 2001. These branches had a high level of transaction accounts (non-time deposits), $83.4 million in total, which afforded the Company the opportunity to earn deposit service charges, and 2) the introduction of a product in August 2001 that charges a fee for allowing customers to overdraw their deposit account. This product has generated approximately $125,000 in fees per month (net of related expenses) since its introduction.
Other service charges, commissions and fees amounted to $2,336,000 in 2002, a 14.2% increase from the $2,046,000 earned in 2001. The 2001 amount of $2,046,000 was 17.6% higher than the $1,740,000 recorded in 2000. This category of noninterest income includes items such as safety deposit box rentals, fees from sales of personalized checks, check cashing fees, credit card and merchant income, debit card income, and ATM charges. This category of income grew primarily because of increases in these activity-related fee services as a result of overall growth in the Company's total customer base, including growth achieved from corporate acquisitions.
Fees from presold mortgages amounted to $1,713,000 in 2002, a 36.1% increase from the 2001 amount of $1,259,000. The 2001 amount was a 178% increase from the $453,000 recorded in 2000. The increases in the past two years have been primarily attributable to two factors - 1) a higher level of mortgage loan refinancings caused by the progressively lower interest rate environments, and 2) the decision by the Company in late 2000 to sell a higher percentage of single family home loan originations into the secondary market as opposed to holding them in the Company's loan portfolio. This strategy was implemented in an effort to shift the Company's loan portfolio to having a higher percentage of commercial loans, which are generally shorter term in nature and have higher interest rates.
Commissions from sales of insurance and financial products amounted to $738,000 in 2002, $731,000 in 2001, and $418,000 in 2000. This line item includes commissions the Company receives from three sources - 1) sales of credit insurance associated with new loans, 2) commissions from the sales of investment, annuity, and long-term care insurance products, and 3) commissions from the sale of property and casualty insurance. The following table presents the contribution of each of the three sources to the total amount recognized in this line item:
($ in thousands) 2002 2001 2000 Commissions earned from: ---- ---- ---- ------------------------ Sales of credit insurance $326 389 306 Sales of investments, annuities, and long term care insurance 210 227 112 Sales of property and casualty insurance 202 115 -- ---- ---- ---- Total $738 731 418 ==== ==== ====
The variance in the commissions from sales of credit insurance has been primarily due to fluctuations in the annual profit sharing bonus that the Company received from the insurance carriers for which the Company acts as a broker. Commissions from sales of investments, annuities, and long term care insurance increased throughout 2000 and 2001 after its late 1999 introduction and decreased slightly in 2002 as a result of a lower amount of investment transactions, possibly due to the declining stock market. Commissions from the sale of property and casualty insurance have increased since the May 2001 completion of the purchase of two insurance companies that specialize in such insurance. Property and casualty insurance commissions are expected to further increase beginning in the first quarter of 2003 as a result of the pending acquisition of Uwharrie Insurance Group, which was completed on January 2, 2003. See the section above entitled "Merger and Acquisition Activity" for additional discussion.
Data processing fees amounted to $303,000 in 2002, $205,000 in 2001, and $117,000 in 2000. As noted earlier, Montgomery Data makes its excess data processing capabilities available to area financial institutions for a fee. These fees have increased as a result of an increase in data processing clients from two clients to four clients in the past three years, as well as an increase in the size and number of transactions generated by those clients.
Noninterest income not defined as "core" amounted to a net gain of $22,000 in 2002, a net gain of $149,000 in 2001, and a net loss of $1,117,000 in 2000. The 2002 net gain of $22,000 primarily related to miscellaneous securities gains of $25,000. The 2001 net gain of $149,000 primarily relates to a $79,000 gain from the sale of two buildings that the Company previously operated as branches that were consolidated with other branches in the same towns, and securities that were sold at a $61,000 gain. The net losses of $1,117,0000 recorded in 2000 primarily related to two merger-related events - a $2,006,000 loss resulting from a third quarter 2000 restructuring of the combined investment portfolio to reduce the Company's liability sensitive position and an $808,000 gain realized from the fourth quarter sale of a branch that was required to be divested in order to gain regulatory approval.
Noninterest Expenses
Noninterest expenses for 2002 were $32,301,000, compared to $28,634,000 in 2001 and $26,741,000 in 2000. Table 5 presents the components of the Company's noninterest expense during the past three years.
Based on the recorded amounts noted above, noninterest expenses increased 12.8% in 2002 and 7.1% in 2001. Those growth rates were impacted by two factors, both of which served to reduce the year to year percentage increases. First, as noted earlier, amortization expense was significantly lower in 2002 than in previous years as a result of adopting two new accounting standards in 2002 that resulted in the Company ceasing to record amortization expense related to nearly all of its intangible assets as of January 1, 2002. Second, the Company recorded $3,188,000 in merger expenses in the third quarter of 2000. These expenses consisted primarily of investment banker fees, attorney fees, employment contract payments, accountant fees, and early termination fees associated with vendor contracts. Adjusting the reported amounts in 2001 and 2000 to exclude amortization expense related to intangible assets that ceased to be amortized beginning on January 1, 2002 and excluding merger expenses recorded in 2000, the increases in noninterest expenses were 19.1% in 2002 and 18.2% in 2001 over the prior year amounts.
The increases in noninterest expenses over the past two years have occurred in nearly every line item of expense and have been primarily as a result of the significant growth experienced by the Company. Over the past two years, the number of the Company's branches has increased from 40 to 48, and the number of full time/part time employees has increased from 306/55 at December 31, 2000 to 409/75 at December 31, 2002. Additionally, from December 31, 2000 to December 31, 2002, the amount of loans outstanding has increased 34% and deposits have increased 37%.
Income Taxes
The provision for income taxes was $9,282,000 in 2002, $7,307,000 in 2001, and $5,736,000 in 2000. The 27.0% increase in income tax expense in 2002 compared to 2001 was a result of a 26.7% increase in income before income taxes. The effective tax rate for each of the years ended December 31, 2002 and 2001 was approximately 35%.
The 27.4% increase in income tax expense in 2001 compared to 2000 was a result of a 38.8% increase in pretax income, which was partially offset by a lower effective tax rate - 34.9% in 2001 compared to 38.0% in 2000. The lower effective tax rate in 2001 was due to the 2000 effective tax rate being inflated because of the nondeductibility for tax purposes of certain merger expenses.
Table 6 presents the components of tax expense and the related effective tax rates.
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Overview
Over the past two years the Company has achieved high increases in its levels of loans and deposits. In 2002, most of the increase was internally generated whereas in 2001, this growth was primarily related to corporate acquisitions. The following table presents information regarding the nature of the Company's growth in 2002 and 2001:
As noted above, in 2002 the Company's growth was primarily internally generated and loan growth more than doubled deposit growth. Most of the Company's internal loan growth occurred in the first half of the year ($79 million of the $105 million in total internal growth) as the Company experienced strong growth in several of the markets it had entered in 2001. In the second half of the year, loan growth slowed due to the Company having met the initial credit demand in the new markets it had entered, and due to the continued effects of the recessionary economy. New loan originations throughout the year were partially offset by a large volume of loan customers that refinanced their home loans with the Company, which the Company subsequently sold into the secondary market instead of maintaining in the Company's loan portfolio. As noted above in the section entitled "Noninterest Income," in late 2000, the Company decided to sell a higher percentage of single family home loan originations into the secondary market as opposed to holding them in the Company's loan portfolio. This strategy was implemented in an effort to shift the Company's loan portfolio to having a higher percentage of commercial loans, which are generally shorter term in nature and have higher interest rates.
In the first half of 2002, the Company's deposit growth continued the low internal growth rates experienced in recent years, with just $2 million in net deposit growth. However, internal deposit growth increased significantly in the second half of 2002, amounting to $45 million, which the Company believes was partially due to investors taking their money out of the chronically declining stock market and depositing it into FDIC insured bank deposits.
In 2001, the Company's corporate acquisitions were the primary reason for the increases in loans and deposits. Internal loan growth was substantially matched by a similar rate of internal deposit growth. The rates of internal growth were less than 5% for each. The Company believes the relatively low loan demand and deposit growth in 2001 were a result of the recessionary economy and the lower interest rates paid on deposits as a result of the declining interest rate environment.
The higher loan growth experienced in 2002 compared to deposit growth resulted in a reduction of the Company's liquidity. The Company's liquidity had improved significantly in 2001 as a result of receiving $81 million in net cash in connection with the 2001 acquisitions. These funds served as the primary source of funding needs in 2002.
The Company issued $20 million in trust preferred securities in 2002, which qualify as Tier I capital. As a result, the Company's capital ratios improved in 2002 after declining in 2001 as a result of the acquisitions completed during the year. All three regulatory capital ratios have significantly exceeded the minimum regulatory thresholds for all periods covered by this report.
The Company's asset quality ratios generally improved in 2002 and remain favorable compared to peers. In 2001, the Company's asset quality ratios declined slightly as a result of the generally recessionary economy that caused an increase in delinquencies and bankruptcies, as well as one large credit that was placed on nonaccrual status in the first quarter of 2001.
In the years leading up to 2001, the Company's market area, the central Piedmont region of North Carolina, had a healthy economy, with low unemployment and a low business failure rate. During 2001, the economy in this area, as well as the rest of the nation, slowed. In the second half of 2001, there were announcements of corporate bankruptcies, layoffs and plant closings in the Company's market area. While the economy in the Company's market area remained recessionary in 2002, it did not significantly worsen from 2001, and the Company's credit losses remained stable during the year.
The Company does not participate in large syndicated credits that have resulted in large credit losses at several other North Carolina-based banks.
Distribution of Assets and Liabilities
Table 7 sets forth the percentage relationships of significant components of the Company's balance sheets at December 31, 2002, 2001, and 2000.
The most significant variance in the percentages from 2001 to 2002 is the relative percentage of loans to total assets - this amount increased from 77% at December 31, 2001 to 81% at December 31, 2002. The increase in this percentage primarily reflects the high loan growth experienced by the Company in 2002 of $108.2 million, which outpaced deposit growth of $55.7 million. The funding for this loan growth primarily came from maturities of securities available for sale, which decreased by three percentage points as a percent of total assets during 2002. Within deposit categories, there was a slight shift from time deposits to demand deposits and savings, NOW, and money market deposits. The Company believes this may be due to customers deciding that it is advantageous to have their funds in more liquid investments due to the relatively small difference in rates paid on non-time deposits compared to the rates paid on time deposits in today's interest rate environment.
The variances in the percentages from 2001 to 2000 reflect the effects of the Company's acquisitions during 2001, as internal growth, as noted above, did not materially impact the Company's balance sheet. The total growth in deposits of $229.9 million exceeded the $144.2 million in total loan growth, which resulted in net loans to total assets decreasing from 81% at year end 2000 to 77% at year end 2001, and deposits to total assets increasing from 84% to 88% over the same period. The Company assumed $80.6 million in net cash related to the 2001 acquisitions which was not fully reinvested in securities or loans, resulting in the percentage of short-term investments to total assets increasing from 1% to 6%. A slight decrease in the dollar amount of total securities outstanding, coupled with the significant increase in the Company's total assets, had the effect of reducing the percentage of total securities to total assets from 13% at December 31, 2000 to 9% at December 31, 2001.
Securities
Information regarding the Company's securities portfolio as of December 31, 2002, 2001, and 2000 is presented in Tables 8 and 9.
The composition of the investment securities portfolio reflects the Company's investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits.
Total securities available for sale and held to maturity amounted to $80.8 million, $112.8 million, and $117.5 million at December 31, 2002, 2001, and 2000, respectively. The decrease in securities from December 31, 2001 to December 31, 2002 was primarily attributable to called and maturing bonds, as well as a high level of principal repayments on mortgage-backed securities due to the low interest rate environment. Instead of reinvesting the maturities/paydowns back into securities, the proceeds were used to fund the high loan growth experienced. In comparing December 31, 2001 to December 31, 2000, although the total amount of the Company's securities did not change materially, upon the adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," the Company transferred on January 1, 2001, as permitted by the standard upon its adoption, held-to-maturity securities with an amortized cost of approximately $31.7 million to the available-for-sale category at fair value.
From 2000 to 2001, the primary variance in the mix of the securities portfolio was a shift from U.S. Government agency debt to mortgage-backed securities and corporate bonds. Obligations of U.S. Government agencies as a percentage of total securities decreased from 45% at December 31, 2000 to 25% at December 31, 2001, while mortgage-backed securities increased from 31% at December 31, 2000 to 46% at December 31, 2001
and corporate bonds increased from 0% to 8% of total securities over that same one year period. During 2001, in an effort to enhance yield, while at the same time managing interest rate exposure, the Company invested more heavily in mortgage-backed securities and corporate bonds than U.S. Government agencies. In 2002, the change in the mix of securities was primarily due to variances in the receipt of maturities/paydowns of the various categories of investments, as the Company purchased very few securities as a result of the proceeds of the maturities/paydowns being used to fund loan growth.
The majority of the Company's U.S. Government agency debt securities are issued by the Federal Home Loan Bank and carry one maturity date, often with an issuer call feature, while the mortgage-backed securities have been primarily issued by Freddie Mac and Fannie Mae and vary in their repayment in correlation with the underlying pools of home mortgage loans. The Company's investment in corporate bonds is primarily comprised of trust preferred securities issued by other North Carolina bank holding companies.
Included in mortgage-backed securities at December 31, 2002 were collateralized mortgage obligations (CMO's) with an amortized cost of $12,590,000 and a fair value of $12,720,000. Included in mortgage-backed securities at December 31, 2001 were CMO's with an amortized cost of $21,703,000 and a fair value of $21,886,000. Included in mortgage-backed securities at December 31, 2000 were CMO's with an amortized cost of $13,543,000 and a fair value of $13,521,000. The CMO's that the Company has invested in are substantially all "early tranche" pieces of the CMO, which minimizes the prepayment risk to the Company.
At December 31, 2002, net unrealized gains of $1,399,000 were included in the carrying value of securities classified as available for sale, compared to a net unrealized gain of $1,024,000 at December 31, 2001 and a net unrealized gain of $383,000 at December 31, 2000. The increase in the unrealized gain position at each of the past two year ends is a result of the progressively lower interest rate environment in effect at each period end. Management evaluated any unrealized losses on individual securities at each year end and determined them to be of a temporary nature and caused by fluctuations in market interest rates, not by concerns about the ability of the issuers to meet their obligations. Net unrealized gains, net of applicable deferred income taxes, of $853,000, $677,000, and $256,000 have been reported as part of a separate component of shareholders' equity (accumulated other comprehensive income) as of December 31, 2002, 2001, and 2000, respectively.
The fair value of securities held to maturity, which the Company carries at amortized cost, was more than the carrying value at December 31, 2002 and 2001 by $767,000 and $408,000, respectively. Management evaluated any unrealized losses on individual securities at each year end and determined them to be of a temporary nature and caused by fluctuations in market interest rates, not by concerns about the ability of the issuers to meet their obligations.
Table 9 provides detail as to scheduled contractual maturities and book yields on securities available for sale and securities held to maturity at December 31, 2002. Mortgage-backed and other amortizing securities are shown maturing in the time periods consistent with their estimated lives based on expected prepayment speeds.
The weighted average taxable-equivalent yield for the securities available for sale portfolio was 5.45% at December 31, 2002. The expected weighted average life of the available for sale portfolio using the call date for above-market callable bonds, the maturity date for all other non-mortgage-backed securities, and the expected life for mortgage-backed securities, was 5.1 years.
The weighted average taxable-equivalent yield for the securities held to maturity portfolio was 7.13% at December 31, 2002. The expected weighted average life of the held to maturity portfolio using the call date for above-market callable bonds and the maturity date for all other securities, was 2.8 years.
As of December 31, 2002 and 2001, the Company held no investment securities of any one issuer, other than U.S. Treasury and U.S. Government agencies or corporations, in which aggregate book values and market values exceeded 10% of shareholders' equity. Other than the CMO's previously discussed, the Company owned no
securities considered by regulatory authorities to be derivative instruments.
Loans
Table 10 provides a summary of the loan portfolio composition at each of the past five year ends.
The loan portfolio is the largest category of the Company's earning assets and is comprised of commercial loans, real estate mortgage loans, real estate construction loans, and consumer loans. The Company restricts virtually all of its lending to its 16 county market area, which is located in the central Piedmont region of North Carolina, and one county in Virginia. The diversity of the region's economic base has historically provided a stable lending environment.
Loans outstanding increased $108.2 million, or 12.2%, to $998.5 million during 2002. Approximately $105 million of the 2002 growth was from net internal loan growth, while $3 million was assumed in acquisitions. In 2001, loans outstanding increased $144.2 million, or 19.3%, to $890.3 million. Approximately $28 million of the growth was from net internal loan growth, while $116 million was assumed in acquisitions. The most significant acquisition contributing to the 2001 loan growth was the May 2001 acquisition of Century Bancorp, which had $90.2 million in loans outstanding on the date of the acquisition. The great majority of Century's loans were 1-4 family home loans. The majority of the 2002 and 2001 loan growth occurred in loans secured by real estate, with approximately $99.5 million, or 91.9% in 2002, and $134.6 million, or 93.3%, in 2001 of the net loan growth occurring in real estate mortgage or real estate construction loans.
Over the years, the Company's loan mix has remained fairly consistent, with real estate loans (mortgage and construction) comprising approximately 85% of the loan portfolio, commercial, financial, and agricultural loans comprising 10%, and consumer installment loans comprising approximately 5% of the portfolio.
At December 31, 2002, $863.3 million, or 86.4%, of the Company's loan portfolio was secured by liens on real property. Included in this total are $466.5 million, or 46.7% of total loans, in loans secured by liens on 1-4 family residential properties and $396.8 million, or 39.7% of total loans, in loans secured by liens on other types of real estate. The Company's $863.3 million in real estate mortgage loans can be further classified as follows:
o $306.5 million, or 30.7% of total loans, are traditional residential mortgage loans in which the borrower's personal income is the primary repayment source.
o $305.0 million, or 30.5% of total loans, are primarily dependent on cash flow from a commercial business for repayment.
o $87.3 million, or 8.7% of total loans, are personal consumer installment loans in which the borrower has provided residential real estate as collateral.
o $68.1 million, or 6.8% of total loans, are real estate construction loans.
o $72.7 million, or 7.3% of total loans, are home equity loans.
o $23.7 million, or 2.4% of total loans, are primarily dependent on cash flow from agricultural crop sales.
Table 11 provides a summary of scheduled loan maturities over certain time periods, with fixed rate loans and adjustable rate loans shown separately. Approximately 20% of the Company's loans outstanding at December 31, 2002 mature within one year and 70% of total loans mature within five years. The percentages of variable rate loans and fixed rate loans as compared to total performing loans were 47.0% and 53.0%, respectively, as of December 31, 2002. The Company intentionally makes a blend of fixed and variable rate loans so as to reduce interest rate risk.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, loans past due 90 or more days and still accruing interest,
restructured loans and other real estate. As a matter of policy the Company places all loans that are past due 90 or more days on nonaccrual basis, and thus there were no loans at any of the past five year ends that were 90 days past due and still accruing interest. Table 12 summarizes the Company's nonperforming assets at the dates indicated.
Nonaccrual loans are loans on which interest income is no longer being recognized or accrued because management has determined that the collection of interest is doubtful. The placing of loans on nonaccrual status negatively impacts earnings because (i) interest accrued but unpaid as of the date a loan is placed on nonaccrual status is either deducted from interest income or is charged-off, (ii) future accruals of interest income are not recognized until it becomes probable that both principal and interest will be paid and (iii) principal charged-off, if appropriate, may necessitate additional provisions for loan losses that are charged against earnings. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the originally contracted terms.
Nonperforming loans (which includes nonaccrual loans and restructured loans) as of December 31, 2002, 2001 and 2000 totaled $3,017,000, $3,891,000, and $863,000, respectively. Nonperforming loans as a percentage of total loans amounted to 0.30%, 0.44%, and 0.12%, at December 31, 2002, 2001, and 2000, respectively. The variances in nonperforming loans over the past two years have been primarily due to changes in nonaccrual loans, as restructured loans have not changed significantly. The variances in nonaccrual loans at each of the past two year ends relate primarily to the same loan relationship. During 2001, the Company placed a loan relationship on nonaccrual status that had an outstanding balance of $1.9 million at December 31, 2001. This relationship, secured primarily by real estate, was placed on nonaccrual status due to liquidity problems experienced by the borrower. The borrower has been actively working to sell real estate to pay down the balance, and during 2002 several sales were completed that resulted in the Company receiving paydowns of approximately $900,000. At December 31, 2002, the Company had accepted a nonbinding proposal from a third party that would result in the receipt of approximately $750,000 of the $1.0 million outstanding in the first half of 2003, with the remaining $250,000 to be charged-off by the Company. At December 31, 2002, the Company had a specific impaired loan valuation allowance of $250,000 assigned to this relationship.
Also contributing to the increase in nonaccrual loans at December 31, 2001 compared to December 31, 2000 was a general increase in bankruptcies and other financial difficulties experienced among the Company's borrowers. The Company attributed this increase to the negative effects of the recessionary economy and manufacturing plant shutdowns in the Company's market area. This led to a total of 60 loans being on nonaccrual status at December 31, 2001 compared to 27 loans at December 31, 2000. During 2002, the number of loans on nonaccrual status remained comparable to the level during 2001, with 66 loans on nonaccrual status at December 31, 2002.
If the nonaccrual loans and restructured loans as of December 31, 2002, 2001 and 2000 had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period), gross interest income in the amounts of approximately $246,000, $320,000 and $62,000 for nonaccrual loans and $6,000, $10,000 and $27,000 for restructured loans would have been recorded for 2002, 2001 and 2000, respectively. Interest income on such loans that was actually collected and included in net income in 2002, 2001 and 2000 amounted to approximately $55,000, $76,000 and $38,000 for nonaccrual loans (prior to their being placed on nonaccrual status) and $6,000, $7,000 and $21,000 for restructured loans, respectively.
Management routinely monitors the status of certain large loans that, in management's opinion, have credit weaknesses that could cause them to become nonperforming loans. In addition to the nonperforming loan amounts discussed above, management believes that an estimated $6.5-$7.0 million of large loans that were performing in accordance with their contractual terms at December 31, 2002 have the potential to develop problems depending upon the particular financial situations of the borrowers and economic conditions in general. Management has taken these potential problem loans into consideration when evaluating the adequacy of the
allowance for loan losses at December 31, 2002 (see discussion below).
Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed in the problem loan amounts and the potential problem loan amounts discussed above do not represent or result from trends or uncertainties that management reasonably expects will materially impact future operating results, liquidity, or capital resources, or represent material credits about which management is aware of any information that causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.
Other real estate includes foreclosed, repossessed, and idled properties. Other real estate has not varied materially at any of the past three year ends, amounting to $1,384,000 at December 31, 2002, $1,253,000 at December 31, 2001, and $893,000 at December 31, 2000. Other real estate represented 0.11%, 0.11%, and 0.10% of total assets at the end of 2002, 2001, and 2000, respectively. The Company's management believes that the fair values of the items of other real estate, less estimated costs to sell, equal or exceed their respective carrying values at the dates presented.
Allowance for Loan Losses and Loan Loss Experience
The allowance for loan losses is created by direct charges to operations. Losses on loans are charged against the allowance in the period in which such loans, in management's opinion, become uncollectible. The recoveries realized during the period are credited to this allowance. The Company considers its procedures for recording the amount of the allowance for loan losses and the related provision for loan losses to be a critical accounting policy. See the heading "CRITICAL ACCOUNTING POLICIES" above for further discussion.
The factors that influence management's judgment in determining the amount charged to operating expense include past loan loss experience, composition of the loan portfolio, evaluation of probable inherent losses and current economic conditions.
The Company uses a loan analysis and grading program to facilitate its evaluation of probable inherent loan losses and the adequacy of its allowance for loan losses. In this program, risk grades are assigned by management and tested by the Company's internal audit department and an independent third party consulting firm. The testing program includes an evaluation of a sample of new loans, loans that management identifies as having potential credit weaknesses, loans past due 90 days or more, nonaccrual loans and any other loans identified during previous regulatory and other examinations.
The Company strives to maintain its loan portfolio in accordance with what management believes are conservative loan underwriting policies that result in loans specifically tailored to the needs of the Company's market areas. Every effort is made to identify and minimize the credit risks associated with such lending strategies. The Company has no foreign loans, few agricultural loans and does not engage in significant lease financing or highly leveraged transactions. Commercial loans are diversified among a variety of industries. The majority of loans captioned in the tables discussed below as "real estate" loans are primarily various personal and commercial loans where real estate provides additional security for the loan. Collateral for virtually all of these loans is located within the Company's principal market area.
The allowance for loan losses amounted to $10,907,000 at December 31, 2002 compared to $9,388,000 as of December 31, 2001 and $7,893,000 at December 31, 2000. This represented 1.09%, 1.05%, and 1.06%, of loans outstanding as of December 31, 2002, 2001, and 2000, respectively. The four basis point increase in this percentage is primarily a result of a slight shift in the composition of the Company's loan portfolio from residential mortgage loans to commercial loans - - commercial loans carry a higher reserve percentage in the Company's allowance for loan loss model than do residential mortgage loans. The slight shift from residential mortgage loans to commercial loans has been intentional. Two of the Company's recent bank acquisitions (First Savings Bancorp in September 2000 and Century Bancorp in May 2001) had loan portfolios that were highly
concentrated in residential mortgage loans. As many of those loans have refinanced at lower rates over the past 12 months, the Company chose to sell them in the secondary market instead of holding them in the Company's loan portfolio. This strategy was implemented in an effort to shift the Company's loan portfolio to having a higher percentage of commercial loans, which are generally shorter term in nature and have higher interest rates.
As noted in Table 12, the Company's allowance for loan losses as a percentage of nonperforming loans ("coverage ratio") amounted to 362% at December 31, 2002, compared to 241% at December 31, 2001 and 915% at December 31, 2000. The change in the coverage ratio is inversely proportional to the level of nonperforming loans at each period end. Due to the secured nature of virtually all of the Company's loans that are on nonaccrual status, the variance in the coverage ratio is not necessarily indicative of the relative adequacy of the allowance for loan losses.
Table 13 sets forth the allocation of the allowance for loan losses at the dates indicated. The portion of these reserves that was allocated to specific loan types in the loan portfolio increased to $10,883,000 at December 31, 2002 from $9,343,000 at December 31, 2001 and $7,633,000 at December 31, 2000. The 16.5% increase in the amount of the allocated allowance during 2002 is consistent with the 12.2% increase in total loans outstanding. Similarly, the 22.4% increase in the allocated reserve when comparing December 31, 2001 to December 31, 2000 is consistent with the 19.3% increase in loans outstanding experienced in 2001. The slightly higher increase in the allocated allowance compared to the increase in loan growth for each of the past two years relates to the Company's loan mix shifting slightly from residential real estate loans to commercial real estate loans (which carry a higher reserve allocation in the Company's allowance model) as discussed two paragraphs above. In addition to the allocated portion of the allowance for loan losses, the Company maintains an unallocated portion that is not assigned to any specific category of loans, but rather is intended to reserve for the inherent risk in the overall portfolio and the intrinsic inaccuracies associated with the estimation of the allowance for loan losses and its allocation to specific loan categories. The amount of the unallocated portion of the allowance for loan losses did not vary materially at any of the past three year ends, while the decrease in the unallocated allowance from 1999 to 2000 was related to the Company segregating and assigning higher reserve percentages to particular loan types that were identified during 2000 as having inherently higher risk (this resulted in a portion of the allowance for loan losses shifting from "unallocated" to "allocated"). These additional risk characteristics were noted by management as a part of its ongoing analysis and review of its loan portfolio and historical charge-off experience, and did not result from any deterioration of the portfolio during 2000.
Management considers the allowance for loan losses adequate to cover probable loan losses on the loans outstanding as of each reporting date. It must by emphasized, however, that the determination of the allowance using the Company's procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that the Company will not in any particular period sustain loan losses that are sizable in relation to the amount reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowances for loan losses and losses on foreclosed real estate. Such agencies may require the Company to recognize additions to the allowances based on the examiners' judgments about information available to them at the time of their examinations.
For the years indicated, Table 14 summarizes the Company's balances of loans outstanding, average loans outstanding, and a detailed rollforward of the allowance for loan losses. In addition to the increases to the allowance for loan losses related to normal provisions, the increases in the dollar amounts of the allowance for loan losses in 2002 and 2001 were also affected by amounts recorded to provide for loans assumed in corporate acquisitions. In 2002, $50,000 was provided for loans assumed in the Broadway branch acquisition in which the Company assumed approximately $3 million in loans. In 2001, the Company recorded $1,125,000 to the allowance for loan losses related to loans assumed in two corporate acquisitions. Approximately $520,000 of the
$1,125,000 related to $26.0 million in mostly consumer loans assumed in the March 2001 and December 2001 branch acquisitions, while $605,000 related to the Century acquisition. The $605,000 addition related to Century represented the book value of Century's allowance for loan losses on the date of the acquisition.
The Company's net loan charge offs were approximately $1,076,000 in 2002, $781,000 in 2001, and $386,000 in 2000. This represents 0.11%, 0.09%, and 0.06% of average loans during 2002, 2001, and 2000 respectively. A rise in consumer bankruptcy filings is primarily responsible for the increase in net charge-offs in 2001, while the increase in 2002 is primarily related to several commercial loans that were secured by equipment and inventory.
Deposits
The average amounts of deposits of the Company and the average yield paid for those deposits for the years ended December 31, 2002, 2001 and 2000 are presented in Table 15. Average deposits grew to $1.011 billion in 2002, an increase of $110.7 million, or 12.3%. In 2001, the Company's average deposits experienced growth of $155.2 million, or 20.8%. Approximately half of the increase in average deposits in 2002 and a large majority of the 2001 average deposit growth relate to corporate acquisitions completed in 2001, which increased deposits outstanding a total of $204.6 million over the course of the year. The effect of having the acquired 2001 deposits for all 12 months in 2002 coupled with the 5.6% increase in the year end balance at December 31, 2002 compared to December 31, 2001 resulted in the 12.3% increase in average deposits for the year.
The 12.3% increase in average deposits in 2002 was primarily driven by increases in the non-time deposit categories. During 2002, average noninterest-bearing demand deposits increased 23.6%, interest-bearing demand deposits increased 21.8%, and savings deposits increased 26.3%. Average time deposits and time deposits greater than $100,000 increased at lower rates of 2.2% and 8.8% respectively. The higher increases in non-time deposits were primarily a result of the mix of the Company's 2001 deposit acquisitions and the mix of the Company's 2002 deposit growth. The Company's 2001 acquisitions were comprised of a high mix of non-time deposits, while in 2002 the Company noted that many customers deposited their maturing time deposits into other categories of deposits rather than renew their time deposits at the historically low rates in effect.
The 2001 growth in average deposits occurred in all types of deposits, with each category experiencing an increase of at least 13%. The increases in the average amounts of non-time deposits - which include noninterest-bearing deposits (22.5%), interest-bearing demand deposits (21.0%), and savings deposits (13.3%) - were primarily due to the March 2001 acquisition of the four First Union branches, the deposits of which were comprised of a high percentage of non-time deposits (59% of those branches' total deposits). The increases in time deposits less than $100,000 (16.5%) and time deposits greater than $100,000 (33.1%) were primarily due to the First Union time deposits, as well as the time deposits ($51.2 million) assumed in the May 2001 Century acquisition. Internal growth during 2001 of approximately 4-7% for noninterest-bearing deposits, interest-bearing demand deposits and savings deposits contributed to the deposit growth in non-time deposits. Internal growth in time deposits greater than $100,000 of 13.6% contributed to the growth in this category, while a net decrease in internally generated time deposits less than $100,000 of 5.1% partially negated the overall increase in this category.
As of December 31, 2002, the Company held approximately $199.8 million in time deposits of $100,000 or more and other time deposits of $356.1 million. Table 16 is a maturity schedule of time deposits of $100,000 or more as of December 31, 2002. This table shows that 84.3% of the Company's time deposits greater than $100,000 mature within one year.
The Company does not issue any time deposits through foreign offices, nor does the Company believe that it holds any deposits by foreign depositors.
Borrowings
At December 31, 2002, the Company had three sources of readily available borrowing capacity - 1) an approximately $182,000,000 line of credit with the Federal Home Loan Bank (FHLB), of which $10 million was outstanding, 2) a $50,000,000 overnight federal funds line of credit with a correspondent bank, and 3) an approximately $42,000,000 line of credit through the Federal Reserve Bank of Richmond's (FRB) discount window.
The Company's line of credit with the FHLB totaling approximately $182,000,000 can be structured as either short-term or long-term borrowings, depending on the particular funding or liquidity need, and is secured by the Company's FHLB stock and a blanket lien on its one-to-four family residential loan portfolio. At December 31, 2002, the Company had $10 million in outstanding borrowings under this line of credit, with $5 million at a fixed rate of 7.49% due in May 2003 and $5 million at a fixed rate of 5.26% due in April 2009, with a call date by the FHLB in April 2004.
The Company also has a correspondent bank relationship established that allows the Company to purchase up to $50,000,000 in federal funds on an overnight, unsecured basis. The Company had no borrowings outstanding under this line at December 31, 2002 or 2001. This line of credit was not drawn upon in 2002 or 2001. There was insignificant use of this line during 2000, with total interest expense incurred amounting to approximately $5,000.
The Company also has a line of credit with the FRB discount window. This line is secured by a blanket lien on a portion of the Company's commercial, consumer and real estate portfolio (excluding 1-4 family residences). Based on the collateral owned by the Company as of December 31, 2002, the available line of credit is approximately $42,000,000. This line of credit was established primarily in connection with the Company's Y2K liquidity contingency plan and has not been drawn on since inception. The FRB has indicated that it would not expect lines of credit that have been granted to financial institutions to be a primary borrowing source. The Company plans to maintain this line of credit, although it is not expected that it will be drawn upon except in unusual circumstances.
In addition to the lines of credit described above in which the Company has $10 million outstanding, the Company issued $20 million in borrowings on October 29, 2002. These borrowings are due on November 7, 2032 and were structured as trust preferred capital securities that qualify as Tier I capital for regulatory capital adequacy requirements. These debt securities are callable by the Company at par on any quarterly interest payment date beginning on November 7, 2007. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 3.45%. This rate may not exceed 12.5% through November 2007.
Average short-term borrowings for each of the past five years were less than thirty percent of total shareholders' equity at all times during each period.
Liquidity
The Company's liquidity is determined by its ability to convert assets to cash or acquire alternative sources of funds to meet the needs of its customers who are withdrawing or borrowing funds, and to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. The Company's primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments. The Company's securities portfolio is comprised almost entirely of readily marketable securities which could also be sold to provide cash.
As noted above, in addition to internally generated liquidity sources, the Company has the ability to obtain borrowings from the following three sources - 1) an approximately $182 million line of credit with the FHLB, 2)
a $50 million overnight federal funds line of credit with a correspondent bank, and 3) an approximately $42 million line of credit through the Federal Reserve Bank of Richmond's (FRB) discount window.
The Company's on-balance-sheet liquidity declined in 2002 as a result of the strong loan growth ($108 million) that outpaced deposit growth ($56 million) during the year. The imbalance in the loan growth compared to the deposit growth in 2002 increased the loan to deposit ratio from 89.0% at December 31, 2001 to 94.6% at December 31, 2002. Additionally, the percentage of balance sheet assets that are generally regarded as being liquid (consisting of cash, due from banks, federal funds sold, presold mortgages in process of settlement and securities) decreased from 20.7% of total deposits and borrowings at December 31, 2001 to 16.0% at December 31, 2002.
In 2001, liquidity indicators increased as a result of the corporate acquisitions completed during the year. In connection with the acquisitions, the Company received a net of $89.6 million in cash and securities, $116.2 million in loans, and $204.6 million in deposits. As a result, the Company's loan to deposit ratio decreased from 96.8% at December 31, 2000 to 89.0% at December 31, 2001. Additionally, the percentage of liquid balance sheet assets increased from 18.7% of total deposits and borrowings at December 31, 2000 to 20.7% at December 31, 2001.
In the normal course of business there are various outstanding contractual obligations of the Company that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit, that may or may not require future cash outflows.
Table 18 reflects the contractual obligations and other commercial commitments of the Company outstanding as of December 31, 2002. Of the $25 million in long-term debt maturing in more than five years, $5 million relates to FHLB debt that has a call option whereby the FHLB may call the debt in 2004. Also, any outstanding borrowings with the FHLB may be accelerated immediately by the FHLB in certain circumstances, including material adverse changes in the condition of the Company or if the Company's qualifying collateral amounts to less than 1.33 times the amount of borrowings outstanding. At December 31, 2002, the Company's qualifying collateral amounted to 26.3 times the amount of borrowings outstanding.
In the normal course of business there are various outstanding commitments and contingent liabilities, such as commitments to extend credit, which are not reflected in the financial statements. Table 18 also reflects other commercial commitments of the Company outstanding as of December 31, 2002. This table reflects that as of December 31, 2002, the Company had outstanding loan commitments of $178,989,000 (the sum of credit cards and lines of credit and loan commitments line items), of which $160,894,000 were at variable rates and $18,095,000 were at fixed rates. Included in outstanding loan commitments were unfunded commitments of $89,367,000 on revolving credit plans, of which $82,203,000 were at variable rates and $7,164,000 were at fixed rates.
In addition to the credit card and other loan commitments described above, at December 31, 2002, the Company had $2,279,000 in standby letters of credit outstanding. The Company has no carrying amount for these standby letters of credit. The nature of the standby letters of credit is a guarantee made on behalf the Company's customers to suppliers of the customers to guarantee payments owed to the supplier by the customer. The standby letters of credit have two to three year terms, and the payment of the guarantees would generally be triggered by a continued nonpayment of an obligation owed by the customer to the supplier. The maximum potential amount of future payments (undiscounted) the Company could be required to make under the guarantees in the event of nonperformance by the parties to whom credit or financial guarantees have been extended is represented by the contractual amount of the financial instruments discussed above. In the event that the Company is required to honor a standby letter of credit, a note, already executed with the customer, is triggered which provides repayment terms and any collateral. Over the past ten years, the Company has had to honor one standby letter of credit, which was repaid by the borrower without any loss to the Company.
It has been the experience of the Company that deposit withdrawals are generally replaced with new deposits, thus not requiring any net cash outflow. Based on that assumption, management believes that it can meet its contractual cash obligations and existing commitments from normal operations.
The Company is not involved in any legal proceedings that, in management's opinion, could have a material effect on the consolidated financial position of the Company.
Off-balance-sheet derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. The Company does not engage in off-balance-sheet derivatives activities.
Despite the decline in on-balance-sheet liquidity levels in 2002 discussed above, the Company's management believes its liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet its operating needs in the foreseeable future. The Company will continue to monitor its liquidity position carefully and will explore and implement strategies to increase liquidity if deemed appropriate.
Interest Rate Risk (Including Quantitative and Qualitative Disclosures About Market Risk - Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information responsive to this Item is found in Item 7 under the caption "Interest Rate Risk."
FORWARD-LOOKING STATEMENTS
The discussion in Part I and Part II of this report contains statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," or other statements concerning opinions or judgment of the Company and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of the Company's customers, the Company's level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions.
================================================================================ Table 1 Selected Consolidated Financial Data ================================================================================
(1) See "Note Regarding Pro Forma Information" on page 17.
(2) Relates primarily to merger-related charges. ================================================================================
================================================================================ Table 2 Average Balances and Net Interest Income Analysis ================================================================================
(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. Interest earned includes recognized loan fees in the amounts of $938,000, $738,000, and $586,000 for 2002, 2001, and 2000, respectively.
(2) Includes tax-equivalent adjustments of $535,000, $592,000, and $594,000 in 2002, 2001, and 2000, respectively, to reflect the federal and state benefit of the tax-exempt securities, reduced by the related nondeductible portion of interest expense. ================================================================================
================================================================================ Table 3 Volume and Rate Variance Analysis ================================================================================
(1) Changes attributable to both volume and rate are allocated equally between rate and volume variances.
================================================================================ Table 4 Noninterest Income ================================================================================
Year Ended December 31, -------------------------------- (In thousands) 2002 2001 2000 -------- ------ ------- Service charges on deposit accounts $ 6,856 5,265 3,118 Other service charges, commissions, and fees 2,336 2,046 1,740 Fees from presold mortgages 1,713 1,259 453 Commissions from sales of insurance and financial products 738 731 418 Data processing fees 303 205 117 -------- ------ ------- Total core noninterest income 11,946 9,506 5,846 Loan sale gains 11 9 -- Securities gains (losses), net 25 61 (1,919) Branch sale gain -- -- 808 Other gains (losses), net (14) 79 (6) -------- ------ ------- Total $ 11,968 9,655 4,729 ======== ====== =======
================================================================================ Table 5 Noninterest Expenses ================================================================================
Year Ended December 31, -------------------------------- (In thousands) 2002 2001 2000 -------- ------ ------- Salaries $ 15,079 12,534 10,138 Employee benefits 3,388 3,083 2,543 -------- ------ ------- Total personnel expense 18,467 15,617 12,681 Occupancy expense 2,077 1,734 1,507 Equipment related expenses 2,128 1,631 1,353 Amortization of intangible assets 31 1,535 631 Stationery and supplies 1,445 1,279 1,174 Telephone 932 688 600 Non-credit losses 97 167 60 Merger expenses -- -- 3,188 Other operating expenses 7,124 5,983 5,547 -------- ------ ------- Total $ 32,301 28,634 26,741 ======== ====== =======
================================================================================
================================================================================ Table 6 Income Taxes ================================================================================
(In thousands) 2002 2001 2000 ------- ----- ----- Current - Federal $ 8,964 7,256 6,108 - State 464 102 174 Deferred - Federal (146) (51) (546) ------- ----- ----- Total $ 9,282 7,307 5,736 ======= ===== =====
Effective tax rate 35.0% 34.9% 38.0% ======= ===== =====
================================================================================ Table 7 Distribution of Assets and Liabilities ================================================================================
================================================================================ Table 8 Securities Portfolio Composition ================================================================================
================================================================================
================================================================================ Table 9 Securities Portfolio Maturity Schedule ================================================================================
As of December 31, ------------------------------- ------------------------------- Book Fair Book ($ in thousands) Value Value Yield (1) ------- ------ --------- Securities available for sale:
U.S. Government agencies Due within one year $ 500 503 6.00% Due after one but within five years 6,499 6,626 4.44% Due after five but within ten years 5,954 6,400 7.07% ------- ------ ----- Total 12,953 13,529 5.71% ------- ------ -----
Mortgage-backed securities Due within one year 6,045 6,169 4.19% Due after one but within five years 28,215 29,033 4.89% Due after five but within ten years 5 6 12.93% ------- ------ ----- Total 34,265 35,208 4.77% ------- ------ -----
Corporate debt securities Due after five but within ten years 817 870 6.50% Due after ten years 10,796 10,637 8.33% ------- ------ ----- Total 11,613 11,507 8.20% ------- ------ -----
Equity securities 5,549 5,535 5.00% ------- ------ -----
Total securities available for sale Due within one year 6,545 6,672 4.33% Due after one but within five years 34,714 35,659 4.80% Due after five but within ten years 6,776 7,276 7.01% Due after ten years 16,345 16,172 7.20% ------- ------ ----- Total $64,380 65,779 5.45% ======= ====== =====
Securities held to maturity:
State and local governments Due within one year $ 1,056 1,072 7.86% Due after one but within five years 5,721 6,013 7.32% Due after five but within ten years 6,578 7,017 7.75% Due after ten years 596 616 7.15% ------- ------ ----- Total 13,951 14,718 7.56% ------- ------ -----
Other Due after one but within five years 1,039 1,039 1.33% ------- ------ ----- Total 1,039 1,039 1.33% ------- ------ -----
Total securities held to maturity Due within one year 1,056 1,072 7.86% Due after one but within five years 6,760 7,052 6.40% Due after five but within ten years 6,578 7,017 7.75% Due after ten years 596 616 7.15% ------- ------ ----- Total $14,990 15,757 7.13% ======= ====== =====
(1) Yields on tax-exempt investments have been adjusted to a taxable equivalent basis using a 35% tax rate.
================================================================================
================================================================================ Table 10 Loan Portfolio Composition ================================================================================
(1) The majority of these loans are various personal and commercial loans where real estate provides additional security for the loan.
================================================================================ Table 11 Loan Maturities ================================================================================
The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in this table.
================================================================================
================================================================================ Table 12 Nonperforming Assets ================================================================================
================================================================================ Table 13 Allocation of the Allowance for Loan Losses ================================================================================
================================================================================
================================================================================ Table 14 Loan Loss and Recovery Experience ================================================================================
================================================================================
================================================================================ Table 15 Average Deposits ================================================================================
================================================================================ Table 16 Maturities of Time Deposits of $100,000 or More ================================================================================
================================================================================ Table 17 Interest Rate Sensitivity Analysis ================================================================================
================================================================================
================================================================================ Table 18 Contractual Obligations and Other Commercial Commitments ================================================================================
================================================================================ Table 19 Market Risk Sensitive Instruments ================================================================================
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 35% tax rate.
(2) Securities and borrowings with call dates within 12 months of December 31, 2002 that have above market interest rates are assumed to mature at their call date for purposes of this table. Mortgage securities are assumed to mature in the period of their expected repayment based on estimated prepayment speeds.
(3) Excludes nonaccrual loans.
(4) Single-family mortgage loans are assumed to mature in the period of their expected repayment based on estimated prepayment speeds. All other loans are shown in the period of their contractual maturity.
================================================================================
================================================================================ Table 20 Return on Assets and Equity ================================================================================
For the Year Ended December 31, ------------------------------- 2002 2001 2000 ----- ----- ----- Return on assets 1.48% 1.30% 1.03% Return on equity 14.25% 11.78% 8.49% Dividend payout ratio 47.62% 58.28% 73.33% Average shareholders' equity to average assets 10.40% 11.05% 12.10%
================================================================================ Table 21 Risk-Based and Leverage Capital Ratios ================================================================================
================================================================================
================================================================================ Table 22 Quarterly Financial Summary ================================================================================
================================================================================
Item 8.
Item 8. Financial Statements and Supplementary Data
First Bancorp and Subsidiaries Consolidated Balance Sheets December 31, 2002 and 2001
See accompanying notes to consolidated financial statements.
First Bancorp and Subsidiaries Consolidated Statements of Income Years Ended December 31, 2002, 2001 and 2000
See accompanying notes to consolidated financial statements.
First Bancorp and Subsidiaries Consolidated Statements of Comprehensive Income Years Ended December 31, 2002, 2001 and 2000
See accompanying notes to consolidated financial statements.
First Bancorp and Subsidiaries Consolidated Statements of Shareholders' Equity Years Ended December 31, 2002, 2001 and 2000
See accompanying notes to consolidated financial statements.
First Bancorp and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 2002, 2001 and 2000
See accompanying notes to consolidated financial statements.
First Bancorp and Subsidiaries Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
(a) Basis of Presentation - The consolidated financial statements include the accounts of First Bancorp (the Company) and its wholly owned subsidiaries: First Bank (the Bank); Montgomery Data Services, Inc. (Montgomery Data); First Bancorp Financial Services, Inc. (First Bancorp Financial), and First Bancorp Capital Trust I. The Bank has two wholly owned subsidiaries: First Bank Insurance Services, Inc. (First Bank Insurance), and First Montgomery Financial Services Corporation (First Montgomery). First Montgomery has one wholly owned subsidiary - First Troy Realty Corporation (First Troy). All significant intercompany accounts and transactions have been eliminated.
The Company is a bank holding company. The principal activity of the Company is the ownership and operation of First Bank, a state chartered bank with its main office in Troy, North Carolina. Other subsidiaries include Montgomery Data, a data processing company whose primary client is First Bank, and First Bancorp Financial, a real estate investment subsidiary, both of which are headquartered in Troy. First Bancorp Capital Trust I is also a wholly owned subsidiary of the Company that was created as a statutory business trust under the laws of the State of Delaware in October 2002 and was formed primarily to issue $20 million in debt securities. These securities qualify as Tier I capital for regulatory capital adequacy requirements. First Bank Insurance is a provider of non-FDIC insured investment and insurance products. First Montgomery is a Virginia incorporated company that acquires real estate in Virginia and leases the property to the Bank. First Troy was formed in 1999 and allows the Bank to centrally manage a portion of its real estate loan portfolio. First Troy has elected to be treated as a real estate investment trust for tax purposes.
As discussed in Note 2 below, in September 2000 the Company completed the merger acquisition of First Savings Bancorp, Inc. This transaction was accounted for as a pooling-of-interests and, accordingly, all financial information prior to that date was restated to include the combined results of the Company and First Savings Bancorp, Inc.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates made by the Company in the preparation of its consolidated financial statements are the determination of the allowance for loan losses, the valuation of other real estate, the valuation allowance for deferred tax assets and fair value estimates for financial instruments.
(b) Cash and Cash Equivalents - The Company considers all highly liquid assets such as cash on hand, noninterest-bearing and interest-bearing amounts due from banks and federal funds sold to be "cash equivalents."
(c) Securities - Securities classified as available for sale are purchased with the intent to hold to maturity. However, infrequent sales may be necessary due to liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital and investment requirements, or changes in market conditions, including interest rates and market values of securities held in the portfolio. Investments in securities available for sale are stated at fair value with the resultant unrealized gains and losses included as a component of shareholders' equity, net of applicable deferred income taxes.
Securities are classified as held to maturity at the time of purchase when the Company has the ability and positive intent to hold such securities to maturity. Investments in securities held to maturity are stated at
amortized cost.
A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established.
Gains and losses on sales of securities are recognized at the time of sale based upon the specific identification method. Premiums and discounts are amortized into income on a level yield basis.
(d) Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation. Depreciation, computed by the straight-line method, is charged to operations over the estimated useful lives of the properties, which range from 5 to 40 years or, in the case of leasehold improvements, over the term of the lease, if shorter. Maintenance and repairs are charged to operations in the year incurred. Gains and losses on dispositions are included in current operations.
(e) Loans - Loans are stated at the principal amount outstanding, less unearned income and deferred nonrefundable loan fees, net of certain origination costs. Interest on loans is accrued on the unpaid principal balance outstanding. Net deferred loan origination costs/fees are capitalized and recognized as a yield adjustment over the life of the related loan. Unearned income for each of the reporting periods was immaterial.
A loan is placed on nonaccrual status when, in management's judgment, the collection of interest appears doubtful. The accrual of interest is discontinued on all loans that become 90 days or more past due with respect to principal or interest. While a loan is on nonaccrual status, the Company's policy is that all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to recoveries of any amounts previously charged off. Further cash receipts are recorded as interest income to the extent that any interest has been foregone. Loans are removed from nonaccrual status when they become current as to both principal and interest and when concern no longer exists as to the collectibility of principal or interest. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the originally contracted terms.
Commercial loans greater than $100,000 that are on nonaccrual status are evaluated regularly for impairment. A loan is considered to be impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured using either 1) an estimate of the cash flows that the Company expects to receive from the borrower discounted at the loan's effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral is used to value the loan. While a loan is considered to be impaired, the Company's policy is that interest accrual is discontinued and all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to recoveries of any amounts previously charged off. Further cash receipts are recorded as interest income to the extent that any interest has been foregone.
(f) Presold Mortgages in Process of Settlement and Loans Held for Sale - As a part of normal business operations, the Company originates residential mortgage loans that have been pre-approved by secondary investors. The terms of the loans are set by the secondary investors, and the purchase price that the investor will pay for the loan is agreed to prior to the funding of the loan by the Company. Generally within three weeks after funding, the loans are transferred to the investor in accordance with the agreed-upon terms. The Company receives origination fees from borrowers and servicing release premiums from the investors that are recognized on the income statement, on the sale date, in the line item "fees from presold mortgages." Between the initial funding of the loans by the Company and the subsequent reimbursement by the investors, the Company carries the loans on its balance sheet at cost.
Periodically, the Company originates commercial loans that are intended for resale. The Company carries these loans at the lower of cost or fair value at each reporting date. There were no such loans held for sale as of
December 31, 2002 or 2001.
(g) Allowance for Loan Losses - The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb losses inherent in the portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, current economic conditions, historical loan loss experience and other risk factors. While management uses the best information available to make evaluations, future adjustments may be necessary if economic and other conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on the examiners' judgment about information available to them at the time of their examinations.
(h) Other Real Estate - Other real estate owned consists primarily of real estate acquired by the Company through legal foreclosure or deed in lieu of foreclosure. The property is initially carried at the lower of cost (generally the loan balance plus additional costs incurred for improvements to the property) or estimated fair value of the property less estimated selling costs. If there are subsequent declines in fair value, the property is written down to its fair value through a charge to expense. Capital expenditures made to improve the property are capitalized. Costs of holding real estate, such as property taxes, insurance and maintenance, less related revenues during the holding period, are charged to operations.
(i) Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon available evidence.
(j) Intangible Assets - The Company has adopted Statement of Financial Standards (SFAS) No. 141, entitled "Business Combinations" (Statement 141), SFAS No. 142, entitled "Goodwill and Other Intangible Assets" (Statement 142) and SFAS No. 147, entitled "Acquisitions of Certain Financial Institutions" (Statement 147). Certain provisions of Statement 142 relating to business combinations consummated after June 30, 2001 were adopted by the Company on July 1, 2001. The remaining provisions of Statement 142 and all provisions of Statement 141 and Statement 147 were adopted effective January 1, 2002.
Under these standards, all business combinations must be accounted for using the purchase method of accounting. Identifiable intangible assets are recognized separately and are amortized over their estimated useful lives. Goodwill is recognized in business combinations to the extent that the price paid exceeds the fair value of the net assets acquired, including any identifiable intangible assets. Goodwill is not amortized, but is subject to fair value impairment tests on at least an annual basis. The Company's impairment tests conducted in 2002 indicated no goodwill impairment. See Note 1(r) for additional discussion.
Prior to January 1, 2002, the Company's policy was to amortize all acquisition-related intangible assets on a straight-line basis over their estimated useful lives, with a minimum amortization period of 5 years and a maximum amortization period of 15 years.
In accordance with applicable accounting standards, the Company records an intangible asset in connection with a defined benefit pension plan to fully accrue for its liability. This intangible asset is adjusted annually in accordance with actuarially determined amounts. The amount of this intangible asset was $217,000 and
$253,000 at December 31, 2002 and 2001, respectively.
(k) Stock Option Plan - At December 31, 2002, the Company has five stock-based employee compensation plans, which are described more fully in Note 14. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (APB Opinion No. 25), "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
(l) Per Share Amounts - Basic Earnings Per Share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted Earnings Per Share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. Currently, the Company's only potential dilutive common stock issuances relate to options that have been issued under the Company's stock option plans. In computing Diluted Earnings Per Share, it is assumed that all such dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate Diluted Earnings Per Share for the Company.
The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Earnings Per Share:
For the years ended December 31, 2002, 2001, and 2000, there were options of 24,000, 144,250, and 255,244, respectively, that were antidilutive since the exercise price exceeded the average market price for the year. These options have been omitted from the calculation of diluted earnings per share for their respective years.
(m) Fair Value of Financial Instruments - Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS No. 107), requires that the Company disclose estimated fair values for its financial instruments. Fair value methods and assumptions are set forth below for the Company's financial instruments.
Cash and Due from Banks, Federal Funds Sold, Presold Mortgages in Process of Settlement, Accrued Interest Receivable, and Accrued Interest Payable - The carrying amounts approximate their fair value because of the short maturity of these financial instruments.
Available for Sale and Held to Maturity Securities - Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, financial and agricultural, real estate construction, real estate mortgages and installment loans to individuals. Each loan category is further segmented into fixed and variable interest rate terms. For variable rate loans, the carrying value is a reasonable estimate of the fair value. For fixed rate loans, fair value is determined by discounting scheduled future cash flows using current interest rates offered on loans with similar risk characteristics. Fair values for impaired loans are estimated based on discounted cash flows or underlying collateral values, where applicable.
Deposits - The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, NOW, and money market accounts, is equal to the amount payable on demand as of the valuation date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Borrowings - The fair value of borrowings is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered by the Company's lenders for debt of similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit - At December 31, 2002 and 2001, the Company's off-balance sheet financial instruments had no carrying value. The large majority of commitments to extend credit and standby letters of credit are at variable rates and/or have relatively short terms to maturity. Therefore, the fair value for these financial instruments is considered to be immaterial.
(n) Impairment - Goodwill is evaluated for impairment on at least an annual basis by comparing the fair value of its reporting units to their related carrying value. Any excess of the carrying value over the fair value of a reporting unit is expensed as an impairment loss.
For long-lived assets other than goodwill, the Company reviews them for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company's policy is that an impairment loss is recognized if the sum of the undiscounted future cash flows is less than the carrying amount of the asset. Those assets to be disposed of are to be reported at the lower of the carrying amount or fair value, less costs to sell.
To date, the Company has not had to record any impairment write-downs of its long-lived assets or goodwill. See Note 1(r) for additional discussion regarding recent accounting standards related to impairment.
(o) Comprehensive Income - Comprehensive income is defined as the change in equity during a period for non-owner transactions and is divided into net income and other comprehensive income. Other comprehensive income includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. The components of accumulated other comprehensive income for the Company are as follows:
(p) Segment Reporting - SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" requires management to report selected financial and descriptive information about reportable operating segments. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Generally, disclosures are required for segments internally identified to evaluate performance and resource allocation. The Company's operations are primarily within the commercial banking segment, and the financial statements presented herein reflect the results of that segment. Also, the Company has no foreign operations or customers.
(q) Reclassifications - Certain amounts for prior years have been reclassified to conform to the 2002 presentation. The reclassifications had no effect on net income or shareholders' equity as previously presented, nor did they materially impact trends in financial information.
(r) Recent Accounting Pronouncements - On January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. On January 1, 2001, the Company transferred, as permitted by the standard upon its adoption, held-to-maturity securities with an amortized cost of approximately $31.7 million to the available for sale category at fair value. The unrealized loss at the time of the transfer was approximately $513,000, and was included as a component of other comprehensive income, net of tax. The Company does not engage in any hedging activities and, other than the aforementioned transfer of securities, the adoption of the statement had no impact on the Company.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations" (Statement 141), and SFAS No. 142, "Goodwill and Other Intangible Assets" (Statement 142). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet in order to be recognized and reported apart from goodwill. The Company adopted this statement July 1, 2001. Statement 142 requires that all goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that identifiable intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Certain provisions of Statement 142 relating to business combinations consummated after June 30, 2001 were adopted by the Company on July 1, 2001. The remaining provisions were adopted on January 1, 2002. In connection with Statement 142's transitional goodwill impairment evaluation, the statement required the Company to perform an assessment of whether there was an indication that goodwill is impaired as of the date of adoption. The Company completed this assessment during the first quarter of 2002 and determined that there was no goodwill impairment. See Note 6 for additional disclosures related to Statement 142.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This standard provides guidance on differentiating between long-lived assets to be held and used, long-lived assets to be disposed of other than by sale and long-lived assets to be disposed of by sale. Statement 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Statement 144 also supersedes Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This statement was adopted by the Company on January 1, 2002 and did not have a material impact on the Company's financial statements.
In August 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (Statement 146), which addresses financial accounting and reporting costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. In Statement 146, the Board acknowledges that an entity's commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. An obligation becomes a present obligation when a transaction or event occurs that leaves an entity little or no discretion to avoid the future transfer or use of assets to settle the liability. Statement 146 also establishes that fair value is the objective for the initial measurement of the liability. Statement 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The Company will adopt the provisions of this statement effective January 1, 2003 and will apply the provisions to any exit or disposal activities initiated after that date.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions" (Statement 147), which addresses the financial accounting and reporting for the acquisition of all or part of a financial institution. This standard removes certain acquisitions of financial institutions from the scope of SFAS No. 72, "Accounting for Certain Acquisitions of Bank or Thrift Institutions" (Statement 72). This statement requires financial institutions to reclassify goodwill arising from a qualified business acquisition from Statement 72 goodwill to goodwill subject to the provisions of Statement 142. The reclassified goodwill is no longer amortized but is subject to an annual impairment test, pursuant to Statement 142. The Company adopted Statement 147 in the fourth quarter of 2002, but effective as of January 1, 2002. Statement 147 required the Company to retroactively restate its previously issued 2002 interim consolidated financial statements to reverse reclassified Statement 72 goodwill amortization expense recorded in the first three quarters of the 2002 fiscal year. Accordingly, $1,068,000 in amortization expense that had been recorded during the first nine months of 2002 was retroactively reversed by reducing the respective quarters' amortization expense and increasing intangible assets. The associated income tax expense recorded related to the reversal of amortization expense amounted to $374,000 for that same nine month period.
In November 2002, the FASB issued Financial Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its
obligations under guarantees. FIN 45 requires the guarantor to recognize a liability for the non-contingent component of the guarantee, such as the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple events. The disclosure requirements are effective for interim and annual financial statements ending after December 15, 2002 and are contained in Note 12. The initial recognition and measurement provisions are effective for all guarantees within the scope of FIN 45 issued or modified after December 31, 2002, the impacts of which are not expected to be material to the Company. The Company issues standby letters of credit whereby the Company guarantees performance if a specified triggering event or condition occurs, primarily nonpayment by the Company's customer to their supplier. The standby letters of credit are generally for terms for one year, at which time they may be renewed for another year if both parties agree. See Note 12.
In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (FAS 148) an amendment of FASB Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123), which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition provisions of the statement are effective for financial statements for fiscal years ending after December 15, 2002 while the disclosure requirements are effective for interim periods beginning after December 15, 2002, with early application encouraged. The adoption of SFAS 148 requires enhanced disclosures for the Company's stock-based employee compensation plan for the year ended December 31, 2002. The Company does not have any plans to change its method of accounting for stock-based employee compensation, but has furnished the expanded disclosures in Note 1(k).
Note 2. Acquisitions and Divestitures - Completed and Pending
Since January 1, 2000, the Company has completed several acquisitions and had one branch divestiture.
The Company completed one acquisition in 2002 as follows:
(a) Broadway branch purchase - On October 4, 2002, the Company completed the purchase of a branch of RBC Centura located in Broadway, North Carolina. The Company assumed the branch's $8 million in deposits and $3 million in loans. The primary reason for this acquisition was to increase the Company's presence in Lee County, a market in which the Company already had two branches with a large customer base. An intangible asset of $0.7 million, all of which is deductible for tax purposes, was recorded in connection with this acquisition. The entire intangible asset was determined to be goodwill that is not subject to amortization (see Note 1(r)). The primary factors that contributed to a purchase price that resulted in recognition of goodwill were the Company's desire to expand in Lee County with a facility, operations, and experienced staff in place. The Broadway branch's operations are included in the accompanying Consolidated Statements of Income beginning on the acquisition date of October 4, 2002.
The Company completed one whole-company acquisition and several branch purchases in 2001. The following is a brief description of each purchase, which is then followed by a table containing a condensed balance sheet that indicates the amount assigned to each major asset and liability of the entities purchased as of their respective acquisition date.
(a) Salisbury branch purchase - On December 17, 2001, the Company completed the purchase of a branch of First Union National Bank located in Salisbury, North Carolina. The Company assumed the branch's $30 million
in deposits and $9 million in loans. The primary reason for this acquisition was to increase the Company's presence in Salisbury, a market that the Company entered in 2000 with the opening of a de novo branch. An intangible asset of $3.2 million, all of which is deductible for tax purposes, was recorded in connection with this acquisition. This intangible asset was amortized on a straight-line basis over 15 years until the Company adopted Statement 147 (see Note 1(r)) as of January 1, 2002, at which time it ceased to be amortized. The primary factors that contributed to a purchase price that resulted in recognition of goodwill were the Company's desire to expand in Salisbury with a facility, operations, and experienced staff in place. The Salisbury branch's operations are included in the accompanying Consolidated Statements of Income beginning on the acquisition date of December 17, 2001.
(b) Insurance agency acquisitions - On May 30, 2001, the Company completed the purchase of two insurance agencies - Aberdeen Insurance & Realty Company and Hobbs Insurance and Realty Company. Both agencies were located in Moore County and specialized in placing property and casualty insurance coverage for individuals and businesses in the Moore County area. The primary reason for this acquisition was to give the Company the platform to offer property and casualty insurance to its entire customer base. In completing the acquisition, the agencies were merged into First Bank Insurance Services, Inc. Approximately 16,000 shares of Company stock were issued in connection with the acquisition of the two agencies. An intangible asset of $243,000 was recorded in connection with the acquisition, none of which is deductible for tax purposes, and is being amortized on a straight-line basis over 15 years. This intangible asset has been determined to be an identifiable intangible asset as defined in Statement 142 (see discussion in Note 1(r)) and thus continues to be amortized. The insurance agencies' operations are included in the accompanying Consolidated Statements of Income beginning on the acquisition date of May 30, 2001. No pro forma earnings information has been presented due to the immateriality of the acquisitions.
(c) Century Bancorp, Inc. - On May 17, 2001, the Company completed the purchase of Century Bancorp, Inc. ("Century"). Century was the holding company for Home Savings, Inc., SSB, a one branch savings institution located in Thomasville, NC. Century had total assets of $107 million, total loans of $90 million, and total deposits of $72 million. The primary reason for the acquisition was to expand into a contiguous market. In accordance with the terms of the merger agreement, the Company issued approximately 586,000 shares of common stock and paid cash of approximately $13.2 million to Century shareholders in exchange for all shares of Century outstanding. An intangible asset of $3.2 million, none of which is deductible for tax purposes, was recorded in connection with this acquisition and was amortized on a straight-line basis over 15 years until the Company's January 1, 2002 adoption of Statement 142 (see Note 1(r)), at which time it ceased to be amortized. The primary factors that contributed to a purchase price that resulted in recognition of goodwill were the Company's desire to expand into Century's market area with a facility, operations and experienced staff in place.
Century's operations are included in the accompanying Consolidated Statements of Income beginning on the acquisition date of May 17, 2001. The following table reflects the pro forma combined results of operations, assuming the Century acquisition had occurred at the beginning of 2001 and 2000:
2001 2000 ------- ------ Net interest income $42,028 41,013 Net income 13,793 9,513 Earnings per share - diluted 1.45 0.99
(d) Robeson and Scotland Counties branch purchase - On March 26, 2001, the Company completed the purchase of four branches from First Union National Bank with aggregate deposits of approximately $103 million and aggregate loans of approximately $17 million. The four branches acquired were in Lumberton, Pembroke, St. Pauls (all located in Robeson County, NC), and Laurinburg (Scotland County, NC). The primary reason for the acquisition was to leverage the Company's capital by expanding into three contiguous markets (Lumberton, Pembroke and St. Pauls) and increase market share in one market (Laurinburg). An intangible asset of $14.6 million, all of which is deductible for tax purposes was recorded in connection with this purchase. This
intangible asset was amortized on a straight-line basis over 15 years until the Company adopted Statement 147 (see Note 1(r)) as of January 1, 2002, at which time it ceased to be amortized. The primary factors that contributed to a purchase price that resulted in recognition of goodwill were the Company's desire to expand in three contiguous markets and increase market share in an existing market with facilities, operations and experienced staff in place. These four branches' operations are included in the accompanying Consolidated Statements of Income beginning on the acquisition date of March 26, 2001.
The following table contains a condensed balance sheet that indicates the amount assigned to each major asset and liability as of the respective acquisition dates for the 2001 acquisitions described above.
The lone acquisition during 2000 was the September 14, 2000 merger acquisition of First Savings Bancorp, Inc. - the holding company for First Savings Bank of Moore County, SSB (collectively referred to as "First Savings"). The primary reason for the acquisition was to increase market share in Moore County. Each share of First Savings stock was exchanged for 1.2468 shares of the Company's stock, resulting in the Company issuing approximately 4,407,000 shares of stock to complete the transaction. As of the acquisition date, First Savings had total assets of $310 million, with loans of $232 million and deposits of $223 million. The merger was accounted for as a pooling-of-interests and, accordingly, all financial results for periods prior to the acquisition were restated to include the combined results of the Company and First Savings.
To gain Federal Reserve approval for the merger with First Savings, the Company was required to divest the First Savings Bank branch located in Carthage, NC. This branch was sold to another North Carolina community bank in a transaction that was completed in November 2000. At the time of the divestiture, the Carthage branch had approximately $15.1 million in total deposits and $2.3 million in total loans. The sale of the branch resulted in a net gain of $808,000.
At December 31, 2002, the Company has the following acquisitions pending:
(a) Uwharrie Insurance Group - On October 7, 2002, the Company announced that its insurance subsidiary, First Bank Insurance, had reached an agreement to acquire Uwharrie Insurance Group, a Montgomery County based property and casualty insurance agency. With eight employees, Uwharrie Insurance Group, Inc. serves approximately 5,000 customers, primarily from its Troy-based headquarters, and has annual commissions of approximately $500,000. The primary reason for the acquisition was to gain efficiencies of scale with the Company's existing property and casualty insurance business. The transaction was completed on January 2,
2003, with the Company paying cash in the amount of $546,000. The tangible assets of Uwharrie Insurance Group on the date of acquisition were approximately $20,000, which resulted in the Company recording an intangible asset of approximately $526,000. The Company is currently in the process of determining what portion of the intangible asset will be allocated to identifiable intangible assets and what portion will be allocated as goodwill.
(b) On July 16, 2002, the Company reported that it had agreed to acquire Carolina Community Bancshares, Inc. (CCB), a South Carolina community bank with total assets of approximately $70 million. CCB operates out of three branches in Dillon County, South Carolina, with its headquarters and one of its branches located in Latta, and two branches in the city of Dillon. This represents the Company's first entry into South Carolina. Dillon County, South Carolina is contiguous to Robeson County, North Carolina, a county where the Company operates four branches. The Company's primary reason for the acquisition was to expand into a contiguous market with facilities, operations and experienced staff in place. The terms of the agreement called for shareholders of Carolina Community to receive 0.8 shares of First Bancorp stock and $20.00 in cash for each share of Carolina Community stock they own. The transaction was completed on January 15, 2003 with the Company paying cash of $8.3 million, issuing 332,888 shares of common stock valued at approximately $7.9 million, and assuming employee stock options with an intrinsic value of approximately $0.9 million, for a total deal value of approximately $17.1 million. It is not expected that any portion of the intangible asset to be recorded will be deductible for income tax purposes. Due to the acquisition having been recently completed, the purchase price allocation has not been finalized. The following is a condensed unaudited balance sheet, as reported by CCB, as of the acquisition date of January 15, 2003.
CCB ------------- Assets (in millions) Cash and cash equivalents $ 7.0 Securities 13.0 Loans, gross 47.7 Allowance for loan losses (0.8) Premises and equipment 0.8 Intangible assets 0.8 Other 1.7 ----- Total assets $70.2 =====
Liabilities Deposits $58.7 Borrowings 2.0 Other 0.7 ----- Total liabilities 61.4 ----- Shareholders' equity 8.8 ----- Total liabilities and shareholders' equity $70.2 =====
Note 3. Securities
The book values and approximate fair values of investment securities at December 31, 2002 and 2001 are summarized as follows:
Included in mortgage-backed securities at December 31, 2002 were collateralized mortgage obligations with an amortized cost of $12,590,000 and a fair value of $12,720,000. Included in mortgage-backed securities at December 31, 2001 were collateralized mortgage obligations with an amortized cost of $21,703,000 and a fair value of $21,886,000.
The Company owned Federal Home Loan Bank stock with a cost and fair value of $5,352,000 at December 31, 2002 and $5,806,000 at December 31, 2001, which is included in equity securities above and serves as part of the collateral for the Company's line of credit with the Federal Home Loan Bank (see Note 9 for additional discussion). The investment in this stock is a requirement for membership in the Federal Home Loan Bank system.
The book values and approximate fair values of investment securities at December 31, 2002, by contractual maturity, are summarized in the table below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
At December 31, 2002 and 2001, investment securities with book values of $37,902,000 and $38,797,000, respectively, were pledged as collateral for public and private deposits.
Sales of securities available for sale with aggregate proceeds of $1,012,000 in 2002, $2,348,000 in 2001, and $54,494,000 in 2000 resulted in gross gains of $27,000 and gross losses of $2,000 in 2002, gross gains of $61,000 in 2001, and gross gains of $89,000 and gross losses of $2,008,000 in 2000.
Note 4. Loans and Allowance for Loan Losses
Loans at December 31, 2002 and 2001 are summarized as follows:
(In thousands) 2002 2001 --------- -------- Commercial, financial, and agricultural $ 88,291 79,695 Real estate - construction 68,162 66,304 Real estate - mortgage 795,148 697,498 Installment loans to individuals 47,648 47,471 --------- -------- Subtotal 999,249 890,968 Unamortized net deferred loan fees (702) (658) --------- -------- Loans, net of deferred fees $ 998,547 890,310 ========= ========
Loans described above as "Real estate - mortgage" included loans secured by 1-4 family dwellings in the amounts of $466,600,000 and $442,000,000 as of December 31, 2002 and 2001, respectively, with such loans being pledged as collateral for certain borrowings (see Note 9). The loans above also include loans to executive officers and directors and to their associates totaling approximately $9,552,000 and $8,405,000 at December 31, 2002 and 2001, respectively. During 2002, additions to such loans were approximately $3,269,000 and repayments totaled approximately $2,122,000. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other non-related borrowers. Management does not believe these loans involve more than the normal risk of collectibility or present other unfavorable features.
Nonperforming assets at December 31, 2002 and 2001 are as follows:
(In thousands) 2002 2001 --------- -------- Loans: Nonaccrual loans $ 2,976 3,808 Restructured loans 41 83 Accruing loans greater than 90 days past due -- -- --------- -------- Total nonperforming loans 3,017 3,891 Other real estate (included in other assets) 1,384 1,253 --------- -------- Total nonperforming assets $ 4,401 5,144 ========= ========
If the nonaccrual loans and restructured loans as of December 31, 2002, 2001 and 2000 had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period), gross interest income in the amounts of approximately $246,000, $320,000 and $62,000 for nonaccrual loans and $6,000, $10,000 and $27,000 for restructured loans would have been recorded for 2002, 2001 and 2000, respectively. Interest income on such loans that was actually collected and included in net income in 2002, 2001 and 2000 amounted to approximately $55,000, $76,000 and $38,000 for nonaccrual loans (prior to their being placed on nonaccrual status) and $6,000, $7,000 and $21,000 for restructured loans, respectively.
Activity in the allowance for loan losses for the years ended December 31, 2002, 2001 and 2000 is as follows:
(In thousands) 2002 2001 2000 -------- ------ ------ Balance, beginning of year $ 9,388 7,893 6,674 Provision for loan losses 2,545 1,151 1,605 Recoveries of loans charged-off 135 131 89 Loans charged-off (1,211) (912) (475) Allowance recorded related to loans assumed in corporate acquisitions 50 1,125 -- -------- ------ ------ Balance, end of year $ 10,907 9,388 7,893 ======== ====== ======
At December 31, 2002 and 2001, the recorded investment in loans considered to be impaired was $1,431,000 and $2,482,000, respectively, of which all were on a nonaccrual basis at each year end. The related allowance for loan losses for the impaired loans at December 31, 2002 and 2001 was $290,000 and $432,000, respectively. There was $162,000 in impaired loans at December 31, 2002 for which there was no related allowance. At December 31, 2001 there were no impaired loans for which there was no related allowance. The average recorded investments in impaired loans during the years ended December 31, 2002, 2001, and 2000 were approximately $1,822,000, $2,450,000, and $218,000, respectively. For the years ended December 31, 2002, 2001, and 2000, the Company recognized no interest income on those impaired loans during the period that they were considered to be impaired.
Note 5. Premises and Equipment
Premises and equipment at December 31, 2002 and 2001 consist of the following:
(In thousands) 2002 2001 -------- ------- Land $ 4,486 4,455 Buildings 16,212 14,138 Furniture and equipment 14,093 10,957 Leasehold improvements 569 569 -------- ------- Total cost 35,360 30,119 Less accumulated depreciation and amortization (13,121) (11,601) -------- ------- Net book value of premises and equipment $ 22,239 18,518 ======== =======
Note 6. Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated amortization of amortized intangible assets as of December 31, 2002 and December 31, 2001 and the carrying amount of unamortized intangible assets as of December 31, 2002 and December 31, 2001.
The following table presents the estimated amortization expense for intangible assets for each of the five calendar years ending December 31, 2007 and the estimated amount amortizable thereafter. These estimates are subject to change in future periods to the extent management determines it is necessary to make adjustments to the carrying value or estimated useful lives of amortized intangible assets.
Estimated Amortization Expense (In thousands) ---------- -------------------- 2003 $ 29 2004 27 2005 26 2006 24 2007 23 Thereafter 165 ---- Total $294 ====
The following tables present the adjusted effect on net income and on basic and diluted earnings per share excluding the amortization of goodwill for the years ended December 31, 2002, 2001 and 2000. See Note 1(r) for discussion.
Note 7. Income Taxes
Total income taxes for the years ended December 31, 2002, 2001 and 2000 were allocated as follows:
The components of income tax expense (benefit) for the years ended December 31, 2002, 2001 and 2000 are as follows:
(In thousands) 2002 2001 2000 ------- ------ ------ Current - Federal $ 8,964 7,256 6,108 - State 464 102 174 Deferred - Federal (146) (51) (546) ------- ------ ------ Total $ 9,282 7,307 5,736 ======= ====== ======
The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2002 and 2001 are presented below:
A portion of the change in the net deferred tax asset relates to unrealized gains and losses on securities available for sale. The related current period deferred tax expense of approximately $199,000 as of December 31, 2002 has been recorded directly to shareholders' equity. Additionally, a portion of the current year change in the net deferred tax asset relates to an additional pension charge. The related 2002 deferred tax benefit of $64,000 has been recorded directly to shareholders' equity. The balance of the 2002 change in the net deferred tax asset of $146,000 is reflected as a deferred income tax benefit in the consolidated statement of income.
The valuation allowance applies primarily to offset the recognition of deferred tax benefits on certain temporary differences for state income tax purposes. It is management's belief that the realization of the remaining net deferred tax assets is more likely than not.
Retained earnings at December 31, 2002 and 2001 includes approximately $6,869,000 representing pre-1988 tax bad debt reserve base year amounts for which no deferred income tax liability has been provided since these reserves are not expected to reverse or may never reverse. Circumstances that would require an accrual of a portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987, failure to meet the definition of a bank, dividend payments in excess of accumulated tax earnings and profits, or other distributions in dissolution, liquidation or redemption of the Bank's stock.
The following is a reconcilement of federal income tax expense at the statutory rate of 35% for 2002 and 2001 and 34% for 2000 to the income tax provision reported in the financial statements.
Note 8. Deposits
At December 31, 2002, the scheduled maturities of time deposits are as follows:
(In thousands) 2003 $457,301 2004 56,795 2005 15,257 2006 5,850 2007 19,785 Thereafter 898 -------- $555,886 ========
Note 9. Borrowings and Borrowings Availability
The following table presents information regarding the Company's outstanding borrowings at December 31, 2002 and 2001:
In the table above, the $5 million in borrowings due on May 5, 2003 and the $5 million in borrowings due on April 21, 2009 are payable to the Federal Home Loan Bank (FHLB). The call provisions noted in the table above provide interest rate protection to the FHLB in the event that prevailing market interest rates are higher than the note rate on the date of the call. Additionally, the outstanding borrowings noted above may be accelerated immediately by the FHLB in certain circumstances including material adverse changes in the condition of the Company or if the Company's qualifying collateral amounts to less than 1.33 times the amount of FHLB borrowings outstanding. At December 31, 2002, the Company's qualifying collateral amounted to 26.3 times the amount of FHLB borrowings outstanding.
In the above table, the $20 million in borrowings due on November 7, 2032 relate to borrowings structured as trust preferred capital securities that were issued by First Bancorp Capital Trust I, a subsidiary of the Company, on October 29, 2002 and qualify as Tier I capital for regulatory capital adequacy requirements. These debt securities are callable by the Company at par on any quarterly interest payment date beginning on November 7, 2007. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 3.45%. This rate may not exceed 12.50% through November 2007. The Company incurred approximately $615,000 in debt issuance costs related to the issuance that were recorded as prepaid expenses and are included in the "Other Assets" line item of the consolidated balance sheet. These debt issuance costs are being amortized as interest expense until the earliest possible call date of November 7, 2007.
At December 31, 2002, the Company has three sources of readily available borrowing capacity - 1) an approximately $182,000,000 line of credit with the FHLB, of which $10 million was outstanding, 2) a $50,000,000 overnight federal funds line of credit with a correspondent bank, and 3) an approximately $42,000,000 line of credit through the Federal Reserve Bank of Richmond's (FRB) discount window.
The Company's line of credit with the FHLB totaling approximately $182,000,000 can be structured as either short-term or long-term borrowings, depending on the particular funding or liquidity need and is secured by the Company's FHLB stock and a blanket lien on its one-to-four family residential loan portfolio.
The Company also has a correspondent bank relationship established that allows the Company to purchase up to $50,000,000 in federal funds on an overnight, unsecured basis. The Company had no borrowings outstanding under this line at December 31, 2002 or 2001. This line of credit was not drawn upon in 2002 or 2001. There was insignificant use of this line during 2000 with total interest expense incurred amounting to approximately $5,000.
The Company also has a line of credit with the FRB discount window. This line is secured by a blanket lien on a portion of the Company's commercial, consumer and real estate portfolio (excluding 1-4 family). Based on the collateral owned by the Company as of December 31, 2002, the available line of credit is approximately $42,000,000. This line of credit was established primarily in connection with the Company's Y2K liquidity contingency plan and has not been drawn on since inception. The FRB has indicated that it would not expect lines of credit that have been granted to financial institutions to be a primary borrowing source. The Company plans to maintain this line of credit, although it is not expected that it will be drawn upon except in unusual circumstances.
Note 10. Leases
Certain bank premises are leased under operating lease agreements. Generally, operating leases contain renewal options on substantially the same basis as current rental terms. Rent expense charged to operations under all operating lease agreements was $280,000 in 2002, $243,000 in 2001, and $234,000 in 2000.
Future obligations for minimum rentals under noncancelable operating leases at December 31, 2002 are as follows:
(In thousands) Year ending December 31: 2003 $ 255 2004 193 2005 180 2006 166 2007 163 Later years 290 ------ Total $1,247 ======
Note 11. Employee Benefit Plans
401(k) Plan. The Company sponsors a retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code. Employees who have completed one year of service are eligible to participate in the plan. An eligible employee may contribute up to 14% of annual salary to the plan. The Company contributes an amount equal to 75% of the first 6% of the employee's salary contributed. Participants vest in Company contributions at the rate of 20% after one year of service, and 20% for each additional year of service, with 100% vesting after five years of service. The Company's matching contribution expense was $450,000, $382,000, and $292,000, for the years ended December 31, 2002, 2001 and 2000, respectively. Based on meeting certain financial goals, the Company made additional discretionary matching contributions to the plan of $150,000 in 2002, $100,000 in 2001, and $150,000 in 2000. The Company's matching and discretionary contributions are made in the form of Company stock. Employees are not permitted to invest their own contributions in Company stock.
Pension Plan. The Company sponsors a noncontributory defined benefit retirement plan (the "Pension Plan"), which is intended to qualify under Section 401(a) of the Internal Revenue Code. Employees who have attained age 21 and completed one year of service are eligible to participate in the Retirement Plan. The Pension Plan provides for a monthly payment, at normal retirement age of 65, equal to one-twelfth of the sum of (i) 0.75% of Final Average Annual Compensation (5 highest consecutive calendar years' earnings out of the last 10 years of employment) multiplied by the employee's years of service not in excess of 40 years, and (ii) 0.65% of Final Average Annual Compensation in excess of "covered compensation" multiplied by years of service not in excess of 35 years. "Covered compensation" means the average of the social security taxable wage base during the 35 year period ending with the year the employee attains social security retirement age. Early retirement, with reduced monthly benefits, is available at age 55 after 15 years of service. The Pension Plan provides for 100% vesting after 5 years of service, and provides for a death benefit to a vested participant's surviving spouse. The costs of benefits under the Retirement Plan, which are borne by First Bancorp and/or its subsidiaries, are computed actuarially and defrayed by earnings from the Retirement Plan's investments. The compensation covered by the Pension Plan includes total earnings before reduction for contributions to a cash or deferred profit-sharing plan (such as the 401(k) plan described above) and amounts used to pay group health insurance premiums and includes bonuses (such as amounts paid under the incentive compensation plan). Compensation for the purposes of the Pension Plan may not exceed statutory limits; such limit was $200,000 in 2002, and $170,000 in 2001 and 2000.
The Company's contributions to the Pension Plan are based on computations by independent actuarial consultants and are intended to provide the Company with the maximum deduction for income tax purposes. The contributions are invested to provide for benefits under the Retirement Plan. At December 31, 2002, the Retirement Plan's assets were invested in Company common stock (7%), equity mutual funds (66%), and fixed income mutual funds (27%).
The following table reconciles the beginning and ending balances of the Pension Plan's benefit obligation, as computed by the Company's independent actuarial consultants:
(In thousands) 2002 2001 2000 ------- ------ ------ Benefit obligation at beginning of year $ 6,082 4,704 3,879 Service cost 492 357 260 Interest cost 427 375 324 Actuarial loss 441 709 392 Effect of amendments 70 -- -- Benefits paid (37) (63) (151) ------- ------ ------ Benefit obligation at end of year $ 7,475 6,082 4,704 ======= ====== ======
The following table reconciles the beginning and ending balances of the Pension Plan's assets:
(In thousands) 2002 2001 2000 ------- ------ ------ Plan assets at beginning of year $ 4,893 4,005 4,479 Actual return on plan assets (610) (49) (323) Employer contributions 880 1,000 -- Benefits paid (37) (63) (151) ------- ------ ------ Plan assets at end of year $ 5,126 4,893 4,005 ======= ====== ======
The following table presents information regarding the funded status of the Pension Plan, the amounts not recognized in the consolidated balance sheets, and the amounts recognized in the consolidated balance sheets:
(In thousands) 2002 2001 ------- ------ Funded status $(2,349) (1,189) Unrecognized net actuarial loss 2,884 1,405 Unrecognized prior service cost 398 439 Unrecognized transition obligation 51 53 ------- ------ Prepaid pension cost $ 984 708 ======= ======
Net pension cost for the Pension Plan included the following components for the years ended December 31, 2002, 2001 and 2000:
(In thousands) 2002 2001 2000 ----- ---- ---- Service cost - benefits earned during the period $ 492 357 260 Interest cost on projected benefit obligation 427 375 324 Expected return on plan assets (475) (387) (417) Net amortization and deferral 159 107 105 ----- ---- ---- Net periodic pension cost $ 603 452 272 ===== ==== ====
Supplemental Executive Retirement Plan. The Company sponsors a Supplemental Executive Retirement Plan (the "SERP Plan") for the benefit of certain senior management executives of the Company. The purpose of the SERP Plan is to provide additional monthly pension benefits to ensure that each such senior management executive would receive lifetime monthly pension benefits equal to 3% of his or her final average compensation multiplied by his or her years of service (maximum of 20 years) to the Company or its subsidiaries, subject to a maximum of 60% of his or her final average compensation. The amount of a participant's monthly SERP benefit is reduced by (i) the amount payable under the Company's qualified Retirement Plan (described above), and (ii) fifty percent (50%) of the participant's primary social security benefit. Final average compensation means the average of the 5 highest consecutive calendar years of earnings during the last 10 years of service prior to termination of employment.
The Company's funding policy with respect to the SERP Plan is to fund the related benefits through investments in life insurance policies, which are not considered plan assets for the purpose of determining the SERP Plan's funded status.
The following table reconciles the beginning and ending balances of the SERP Plan's benefit obligation, as computed by the Company's independent actuarial consultants:
(In thousands) 2002 2001 2000 ------- ------ ---- Benefit obligation at beginning of year $ 1,070 765 508 Service cost 69 52 25 Interest cost 73 67 52 Actuarial loss 140 190 196 Effect of amendments (104) -- -- Benefits paid -- (4) (16) ------- ------ ---- Benefit obligation at end of year $ 1,248 1,070 765 ======= ====== ====
The following table presents information regarding the funded status of the SERP Plan, the amounts not recognized in the consolidated balance sheets, and the amounts recognized in the consolidated balance sheets:
(In thousands) 2002 2001 ------- ------ Funded status $(1,248) (1,070) Unrecognized net actuarial loss 425 302 Unrecognized prior service cost 93 217 Additional minimum liability (382) (253) ------- ------ Accrued pension cost $(1,112) (804) ======= ======
Net pension cost for the SERP Plan included the following components for the years ended December 31, 2002, 2001 and 2000:
(In thousands) 2002 2001 2000 ---- ---- ---- Service cost - benefits earned during the period $ 69 52 25 Interest cost on projected benefit obligation 73 67 52 Net amortization and deferral 36 48 39 ---- --- --- Net periodic pension cost $178 167 116 ==== === ===
The following assumptions were used in determining the actuarial information for the Retirement Plan and the SERP Plan for the years ended December 31, 2002, 2001 and 2000:
Included in intangible assets at December 31, 2002 and 2001 is $217,000 and $253,000, respectively, that has been recognized in connection with the accrual of the additional minimum liability for the SERP Plan.
Split Dollar Life Insurance Plan. Effective January 1, 1993, the Company adopted a Split Dollar Life
Insurance Plan (the "Split Dollar Plan") whereby individual whole life insurance is made available to certain senior management executives designated and approved by the Board of Directors. Coverages for each executive are approximately $100,000. The Company pays the premiums under this plan and maintains a collateral interest in each participant's policy equal to the sum of premiums paid. If a policy is terminated or becomes payable because of the death of a participant, the premiums paid by the Company are recovered before any payment is made to the participant or the participant's beneficiary. In addition, the Company will recover its investment in the policy before transfer of the policy to the participant. Upon the death of a participant, the participant's designated beneficiary will receive a death benefit equal to the amount of coverage under his or her policy that is in excess of the amount of cumulative premiums paid by the Company. The amounts of insurance premiums paid by the Company in 2002, 2001 and 2000 under the Split-Dollar Plan on behalf of all executive officers as a group were $32,000, $29,000 and $26,000, respectively.
Note 12. Commitments and Contingencies
See Note 10 with respect to future obligations under noncancelable operating leases.
In the normal course of business there are various outstanding commitments and contingent liabilities such as commitments to extend credit, which are not reflected in the financial statements. As of December 31, 2002, the Company had outstanding loan commitments of $178,989,000, of which $160,894,000 were at variable rates and $18,095,000 were at fixed rates. Included in outstanding loan commitments were unfunded commitments of $89,367,000 on revolving credit plans, of which $82,203,000 were at variable rates and $7,164,000 were at fixed rates.
At December 31, 2002 and 2001, the Company had $2,279,000 and $1,746,000, respectively in standby letters of credit outstanding. The Company has no carrying amount for these standby letters of credit at either of those dates. The nature of the standby letters of credit is a guarantee made on behalf of the Company's customers to suppliers of the customers to guarantee payments owed to the supplier by the customer. The standby letters of credit are generally for terms for one year, at which time they may be renewed for another year if both parties agree. The payment of the guarantees would generally be triggered by a continued nonpayment of an obligation owed by the customer to the supplier. The maximum potential amount of future payments (undiscounted) the Company could be required to make under the guarantees in the event of nonperformance by the parties to whom credit or financial guarantees have been extended is represented by the contractual amount of the financial instruments discussed above. In the event that the Company is required to honor a standby letter of credit, a note, already executed with the customer, is triggered which provides repayment terms and any collateral. Over the past ten years, the Company has had to honor one standby letter of credit, which was repaid by the borrower without any loss to the Company. Management expects any draws under existing commitments to be funded through normal operations.
The Bank grants primarily commercial and installment loans to customers throughout its market area, which consists of Anson, Cabarrus, Chatham, Davidson, Guilford, Harnett, Lee, Montgomery, Moore, Randolph, Richmond, Robeson, Rowan, Scotland and Stanly Counties in North Carolina and Wythe County in Virginia. The real estate loan portfolio can be affected by the condition of the local real estate market. The commercial and installment loan portfolios can be affected by local economic conditions.
The Company is not involved in any legal proceedings which, in management's opinion, could have a material effect on the consolidated financial position of the Company.
Note 13. Fair Value of Financial Instruments
Fair value estimates as of December 31, 2002 and 2001 and limitations thereon are set forth below for the Company's financial instruments. Please see Note 1 for a discussion of fair value methods and assumptions, as well as fair value information for off-balance sheet financial instruments.
Limitations Of Fair Value Estimates. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include net premises and equipment, intangible and other assets such as foreclosed properties, deferred income taxes, prepaid expense accounts, income taxes currently payable and other various accrued expenses. In addition, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.
Note 14. Stock Option Plan
Pursuant to provisions of the Company's 1994 Stock Option Plan (the "Option Plan"), options to purchase up to 555,000 shares of First Bancorp's authorized but unissued common stock may be granted to employees ("Employee Options") and directors ("Nonemployee Director Options") of the Company and its subsidiaries. The purposes of the Option Plan are (i) to align the interests of participating employees and directors with the Company's shareholders by reinforcing the relationship between shareholder gains and participant rewards, (ii) to encourage equity ownership in the Company by participants, and (iii) to provide an incentive to employee participants to continue their employment with the Company.
Since the inception of the Option Plan, each nonemployee director has been granted 1,500 Nonemployee Director Options on June 1 of each year. Employee Options were granted to substantially all officers at the inception of the Option Plan and since then have been granted to new officers, officers that have assumed increased responsibilities, and for performance rewards. For both Employee and Nonemployee Director Options, the option price is the fair market value of the stock at the date of grant. Employee Options vest 20% per year over a five-year period. However, as a result of the merger acquisition of First Savings Bancorp, Inc. discussed in Note 2, all Employee Options granted prior to September 14, 2000 outstanding as of that same date became 100% vested due to change-in-control provisions contained in the Employee Options. Director Options are 100% vested on the date of grant. All options expire not more than 10 years from the date of grant. Forfeited options
become available for future grants.
At December 31, 2002, there were 5,400 additional shares available for grant under the Option Plan. The per share weighted-average fair value of options granted during 2002, 2001, and 2000 was $6.57, $6.87, and $4.50, respectively on the date(s) of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
2002 2001 2000 ------- ------- ------- Expected dividend yield 3.79% 3.80% 4.67% Risk-free interest rate 4.60% 5.09% 6.15% Expected life 8 years 8 years 8 years Expected volatility 33.50% 35.00% 34.00%
The Company assumed three stock option plans in connection with its merger acquisition of First Savings. The three plans included two nonqualified plans for directors and an incentive plan for employees. In connection with the assumption of these three plans, 391,584 options (after adjusting for the exchange ratio) for shares of stock previously granted by First Savings were assumed. All unvested options of First Savings that were outstanding on September 14, 2000 became immediately vested as a result of change-in-control provisions contained in the plans that were triggered by the merger. The Company also assumed a stock option plan in connection with its merger acquisition of Century. A total of 18,656 options (after adjusting for the exchange ratio) for shares of stock previously granted by Century were assumed and became immediately vested as a result of change-in-control provisions contained in the plan that were triggered by the merger. No additional option grants will be made under the provisions of the assumed plans. Instead, all option grants subsequent to the merger dates are made from the Company's Option Plan.
The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Note 1(k) reflects the pro forma effects had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123. The pro forma net income for 2000 in Note 1(k) reflects the expense associated with the immediate vesting of all unvested options outstanding of the Company (the Company's options also all vested as a result of the merger) and First Savings as of September 14, 2000.
The following table sets forth a summary of the activity of the Company's outstanding options, including the options related to First Savings and Century, since December 31, 1999:
The following table summarizes information about the stock options outstanding at December 31, 2002:
Note 15. Regulatory Restrictions
The Company is regulated by the Board of Governors of the Federal Reserve System ("FED") and is subject to securities registration and public reporting regulations of the Securities and Exchange Commission. The Bank is regulated by the Federal Deposit Insurance Corporation ("FDIC") and the North Carolina Office of the Commissioner of Banks.
The primary source of funds for the payment of dividends by First Bancorp is dividends received from its
subsidiary, First Bank. The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. As of December 31, 2002, the Bank had undivided profits of approximately $60,528,000 which were available for the payment of dividends. As of December 31, 2002, approximately $62,589,000 of the Company's investment in the Bank is restricted as to transfer to the Company without obtaining prior regulatory approval.
The average reserve balance maintained by the Bank under the requirements of the Federal Reserve was approximately $4,234,000 for the year ended December 31, 2002.
The Company and the Bank must comply with regulatory capital requirements established by the FED and FDIC. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. These capital standards require the Company and the Bank to maintain minimum ratios of "Tier 1" capital to total risk-weighted assets ("Tier I Capital Ratio") and total capital to risk-weighted assets of 4.00% and 8.00% ("Total Capital Ratio"), respectively. Tier 1 capital is comprised of total shareholders' equity, excluding unrealized gains or losses from the securities available for sale, less intangible assets, and total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which for the Company and the Bank is the allowance for loan losses. Risk-weighted assets refer to the on- and off-balance sheet exposures of the Company and the Bank, adjusted for their related risk levels using formulas set forth in FED and FDIC regulations.
In addition to the risk-based capital requirements described above, the Company and the Bank are subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets ("Leverage Ratio) of 3.00% to 5.00%, depending upon the institution's composite ratings as determined by its regulators. The FED has not advised the Company of any requirement specifically applicable to it.
In addition to the minimum capital requirements described above, the regulatory framework for prompt corrective action also contains specific capital guidelines applicable to banks for classification as "well capitalized," which are presented with the minimum ratios, the Company's ratios and the Bank's ratios as of December 31, 2002 and 2001 in the following table. Based on the most recent notification from its regulators, the Bank is well capitalized under the framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company's category.
Note 16. Supplementary Income Statement Information
Components of other operating expenses exceeding 1% of total income for any of the years ended December 31, 2002, 2001 and 2000 are as follows:
(In thousands) 2002 2001 2000 ------ ------ ------ Stationery and supplies $1,445 1,279 1,174 Telephone 932 688 600
Note 17. Condensed Parent Company Information
Condensed financial data for First Bancorp (parent company only) follows:
CONDENSED BALANCE SHEETS As of December 31, -------------------- (In thousands) 2002 2001 -------- -------- Assets Cash on deposit with bank subsidiary $ 19,818 2,504 Investment in wholly-owned subsidiaries, at equity 125,525 116,243 Land 7 7 Other assets 604 9 -------- -------- Total assets $145,954 118,763 ======== ========
Liabilities and shareholders' equity Borrowings $ 20,000 -- Other liabilities 1,969 2,037 -------- -------- Total liabilities 21,969 2,037
Shareholders' equity 123,985 116,726 -------- --------
Total liabilities and shareholders' equity $145,954 118,763 ======== ========
Independent Auditors' Report
The Board of Directors First Bancorp
We have audited the accompanying consolidated balance sheets of First Bancorp and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Bancorp and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and on October 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 147, "Acquisitions of Certain Financial Institutions."
/s/ KPMG LLP
Raleigh, North Carolina January 21, 2003
Part II. Other Information
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
During the two years ended December 31, 2002, and any subsequent interim periods, there were no changes in accountants and/or disagreements on any matters of accounting principles or practices or financial statement disclosures.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Incorporated herein by reference is the information under the caption "Directors, Nominees and Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" from the Company's definitive proxy statement to be filed pursuant to Regulation 14A.
Item 11.
Item 11. Executive Compensation
Incorporated herein by reference is the information under the caption "Compensation of Executive Officers" and "Board Committees, Attendance, and Compensation" from the Company's definitive proxy statement to be filed pursuant to Regulation 14A.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference is the information under the captions "Principal Holders of First Bancorp Voting Securities" and "Directors, Nominees and Executive Officers" from the Company's definitive proxy statement to be filed pursuant to Regulation 14A.
Item 13.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference is the information under the caption "Certain Transactions" from the Company's definitive proxy statement to be filed pursuant to Regulation 14A.
Item 14.
Item 14. Controls and Procedures
Within 90 days of the filing of this report, the Company conducted a review and evaluation of its disclosure controls and procedures, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer. Based upon this review, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were adequate and effective to ensure that information required to be disclosed is recorded, processed, summarized, and reported in a timely manner.
There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation described above, nor were there any significant deficiencies or material weaknesses in the controls which required corrective action.
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements - See Item 8 and the Cross Reference Index on page 2 for information concerning the Company's consolidated financial statements and report of independent auditors.
2. Financial Statement Schedules - not applicable
3. Exhibits
The following exhibits are filed with this report or, as noted, are incorporated by reference. Management contracts, compensatory plans and arrangements are marked with an asterisk (*).
3.a Copy of Articles of Incorporation of the Company and amendments thereto were filed as Exhibits 3.a.i through 3.a.v to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002, and are incorporated herein by reference.
3.b Copy of the Bylaws of the Company was filed as Exhibit 3.b to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, and is incorporated herein by reference.
4 Form of Common Stock Certificate was filed as Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference.
10 Material Contracts
10.a Data processing Agreement dated October 1, 1984 by and between Bank of Montgomery (First Bank) and Montgomery Data Services, Inc. was filed as Exhibit 10(k) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference.
10.b First Bank Salary and Incentive Plan, as amended, was filed as Exhibit 10(m) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. (*)
10.c Indemnification Agreement between the Company and its Directors and Officers was filed as Exhibit 10(t) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference.
10.d First Bancorp Senior Management Supplemental Executive Retirement Plan was filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, and is incorporated herein by reference. (*)
10.e First Bancorp Senior Management Split-Dollar Life Insurance Agreements between the Company and the Executive Officers was filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, and is incorporated herein by reference. (*)
10.f First Bancorp 1994 Stock Option Plan was filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, and is incorporated herein by reference. (*)
10.g Employment Agreement between the Company and James H. Garner dated August 17, 1998 was filed as Exhibit 10(l) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, and is incorporated by reference. (*)
10.h Employment Agreement between the Company and Anna G. Hollers dated August 17, 1998 was filed as Exhibit 10(m) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, and is incorporated by reference. (*)
10.i Employment Agreement between the Company and Teresa C. Nixon dated August 17, 1998 was filed as Exhibit 10(n) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, and is incorporated by reference. (*)
10.j Employment Agreement between the Company and Eric P. Credle dated August 17, 1998 was filed as
Exhibit 10(p) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and is incorporated herein by reference. (*)
10.k Employment Agreement between the Company and David G. Grigg dated August 17, 1998 was filed as Exhibit 10.r to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference. (*)
10.l Employment Agreement between the Company and John F. Burns dated September 14, 2000 was filed as Exhibit 10.w to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and is incorporated herein by reference. (*)
10.m Employment Agreement between the Company James G. Hudson, Jr. dated May 17, 2001 was filed as Exhibit 10(p) to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, and is incorporated herein by reference. (*)
10.n Definitive Merger Agreement with Carolina Community Bancshares, Inc. dated July 16, 2002 was filed as Exhibit 99.2 to the Company's current report on Form 8-K on July 17, 2002 and is incorporated herein by reference.
21 List of Subsidiaries of Registrant.
23.a Consent of Independent Auditors of Registrant, KPMG LLP
99.a Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.b Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) There were no reports filed on Form 8-K during the quarter ended December 31, 2002
(c) Exhibits - see (a)(3) above
(d) No financial statement schedules are filed herewith.
Copies of exhibits are available upon written request to: First Bancorp, Anna G. Hollers, Executive Vice President, P.O. Box 508, Troy, NC 27371
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, FIRST BANCORP has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Troy, and State of North Carolina, on the 18th day of March, 2003.
First Bancorp
By: /s/ James H. Garner ---------------------- James H. Garner President, Chief Executive Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on behalf of the Company by the following persons and in the capacities and on the dates indicated.
Executive Officers
/s/ James H. Garner ---------------------- James H. Garner President, Chief Executive Officer and Treasurer
/s/ Anna G. Hollers /s/ Eric P. Credle - --------------------------- --------------------------------- Anna G. Hollers Eric P. Credle Executive Vice President Senior Vice President Secretary Chief Financial Officer March 18, 2003 (Principal Accounting Officer) March 18, 2003
Board of Directors
/s/ Jesse S. Capel /s/ William E. Samuels - --------------------------- --------------------------------- Jesse S. Capel William E. Samuels Chairman of the Board Vice-Chairman of the Board Director Director March 18, 2003 March 18, 2003
/s/ Jack D. Briggs /s/ Edward T. Taws - --------------------------- --------------------------------- Jack D. Briggs Edward T. Taws Director Director March 18, 2003 March 18, 2003
/s/ H. David Bruton /s/ Frederick H. Taylor - --------------------------- --------------------------------- H. David Bruton Frederick H. Taylor Director Director March 18, 2003 March 18, 2003
/s/ David L. Burns /s/ Virginia C. Thomasson - --------------------------- --------------------------------- David L. Burns Virginia C. Thomasson Director Director March 18, 2003 March 18, 2003
/s/ John F. Burns /s/ Goldie H. Wallace-Gainey - --------------------------- --------------------------------- John F. Burns Goldie H. Wallace-Gainey Director Director March 18, 2003 March 18, 2003
/s/ James H. Garner /s/ A. Jordan Washburn - --------------------------- --------------------------------- James H. Garner A. Jordan Washburn Director Director March 18, 2003 March 18, 2003
/s/ James G. Hudson /s/ Dennis A. Wicker - --------------------------- --------------------------------- James G. Hudson Dennis A. Wicker Director Director March 18, 2003 March 18, 2003
/s/ George R. Perkins, Jr. /s/ John C. Willis - --------------------------- --------------------------------- George R. Perkins, Jr. John C. Willis Director Director March 18, 2003 March 18, 2003
/s/ Thomas F. Phillips - --------------------------- Thomas F. Phillips Director March 18, 2003
I, James H. Garner, certify that:
1. I have reviewed this annual report on Form 10-K of First Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls;
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ James H. Garner James H. Garner Chief Executive Officer March 18, 2003
I, Eric P. Credle, certify that:
1. I have reviewed this annual report on Form 10-K of First Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls;
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ Eric P. Credle Eric P. Credle Chief Financial Officer March 18, 2003
EXHIBIT CROSS REFERENCE INDEX
* Incorporated herein by reference.