================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission File Number 0-15572
FIRST BANCORP
---------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
- --------------------------- ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
341 North Main Street, Troy, North Carolina 27371-0508
- --------------------------------------------- ----------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (910) 576-6171
-------------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to the Form 10-K. [ ]
The aggregate market value of the voting stock, Common Stock, no par value,
held by non-affiliates of the registrant, based on the average bid and asked
prices of the Common Stock on February 22, 2002 as reported on the NASDAQ
National Market System, was approximately $151,888,000. Shares of Common Stock
held by each officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares of the Registrant's Common Stock outstanding on
February 22, 2002 was 9,135,373.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed pursuant to
Regulation 14A are incorporated herein by reference into Part III.
================================================================================
CROSS REFERENCE INDEX
Begins on
Page (s)
PART I
Item 1 Business 4
Item 2 Properties 11
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Shareholders 11
PART II
Item 5 Market for the Registrant's Common Stock and Related
Shareholder Matters 11
Item 6 Selected Consolidated Financial Data 11, 40
Item 7 Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
Disclosure of Certain Types of Financial Activities,
Arrangements, and Transactions 12
Critical Accounting Policies 12
Discussion Regarding Impact of Accounting Methods Used
in Mergers and Acquisitions 13
Merger and Acquisition Activity 14
Discussion of Nonrecurring Items of Income and Expense 16
Statistical Information
Net Interest Income 19, 41
Average Balances and Net Interest Income Analysis 19, 41
Volume and Rate Variance Analysis 19, 42
Provision for Loan Losses 20, 47
Noninterest Income 21, 42
Noninterest Expenses 22, 42
Income Taxes 23, 43
Distribution of Assets and Liabilities 25, 43
Securities 25, 43
Loans 27, 45
Nonperforming Assets 28, 46
Allowance for Loan Losses and Loan Loss Experience 29, 46
Deposits 31, 47
Borrowings 32
Interest Rate Risk (Including Quantitative
and Qualitative Disclosures About Market Risk) 32, 49
Return on Assets and Equity 33, 49
Liquidity 34
Capital Resources and Shareholders' Equity 35, 50
Inflation 37
Current Accounting Matters 37
Forward-Looking Statements 39
Item 7A Quantitative and Qualitative Disclosures About Market Risk 39
Item 8 Financial Statements and Supplementary Data:
Consolidated Balance Sheets as of December 31, 2001 and 2000 52
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2001 53
2
Consolidated Statements of Comprehensive Income for each of the
years in the three-year period ended December 31, 2001 54
Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended December 31, 2001 55
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2001 56
Notes to Consolidated Financial Statements 57
Independent Auditors' Report 81
Selected Consolidated Financial Data 40
Quarterly Financial Summary 51
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 82
PART III
Item 10 Directors and Executive Officers of the Registrant; Compliance
with Section 16 (a) of the Exchange Act 82*
Item 11 Executive Compensation 82*
Item 12 Security Ownership of Certain Beneficial Owners and Management 82*
Item 13 Certain Relationships and Related Transactions 82*
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports of Form 8-K 82
SIGNATURES 85
* Information called for by Part III (Items 10 through 13) is incorporated
herein by reference to the Registrant's definitive Proxy Statement for the 2002
Annual Meeting of Shareholders to be filed with Securities and Exchange
Commission.
3
PART I
Item 1. Business
General Description
The Company
First Bancorp (the "Company") is a one-bank holding company. The
principal activity of the Company is the ownership and operation of First Bank
(the "Bank"), a state chartered bank with its main office in Troy, North
Carolina. The Company also owns and operates two nonbank subsidiaries,
Montgomery Data Services, Inc. ("Montgomery Data"), a data processing company,
and First Bancorp Financial Services, Inc. ("First Bancorp Financial"), which
owns and operates various real estate. 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 Central
State Bank - see below. 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. The Bank
currently operates 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 45 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 9th largest bank in North Carolina as of December 31,
2001.
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
merger the Company issued approximately 4.4 million shares of stock, nearly
doubling its number of shares outstanding.
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 2001, as in recent prior years, the Bank accounted for substantially all of
4
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."
First Bank Insurance was an inactive subsidiary of the Bank from
December 1995 until October 1999. Beginning in October 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.
Commissions earned in 2001, 2000 and 1999 were approximately $342,000, $112,000
and $7,000, respectively, and are included, along with commissions earned by the
Bank from sales of credit insurance, in the line item entitled "Commissions from
sales of insurance and financial products" in Table 4 and in the Consolidated
Statements of Income.
Montgomery Data's primary business is to provide electronic data
processing services for the Bank, which accounted for approximately 91% of
Montgomery Data's data processing revenue in 2001 compared to 93% in 2000 and
97% in 1999. 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 had one nonaffiliated customer
in 1996 and for the first eleven months of 1997, at which time the customer
terminated its contract as a result of being acquired by another institution and
paid an early termination fee. The Company did not have any nonaffiliated
customers from December 1997 to December 1998. In December 1998, a contract was
signed to provide data processing for a nearby start-up bank. Montgomery Data
had two nonaffiliated customers in 1999 that generated $50,000 in gross revenue,
four nonaffiliated customers by the end of 2000 that generated $117,000 in gross
revenue, and the same four nonaffiliated customers generated $205,000 in 2001.
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.
5
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 each county
the Company operates in, the number of bank branches within each of those
counties, and the approximate amount of deposits in each county.
No. of Deposits No. of Deposits
County Branches (in millions) County Branches (in millions)
--------------- ----------- --------------- --------------- ------------ ----------------
Anson 1 $ 13 Moore 10 $ 307
Cabarrus 1 19 Randolph 4 44
Chatham 2 32 Richmond 1 15
Davidson 2 101 Robeson 4 88
Guilford 1 33 Rowan 2 40
Harnett 3 61 Scotland 2 40
Lee 2 64 Stanly 4 61
Montgomery 5 81 Wythe, VA 1 1
------------ -----------------
Total 45 1,000
============ =================
The Company's 45 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 31% 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.
Davidson County is the only other county that 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.
6
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 $75,000. 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 internal audit department also maintains its own estimate of the
required amount of allowance for loan losses needed for the overall Company
which is compared to the loan department's estimate for consistency. See
"Allowance for Loan Losses and Loan Loss Experience" in Item 7 below.
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.
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"),
7
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 up to 10% 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, 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. The 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. 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, 2001, the Company had 358 full-time and 69 part-time
employees. The Company is not a party to any collective bargaining agreements
and considers its employee relations to be good.
8
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 14 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
9
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
the significant new 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 consolidations 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 the North Carolina law. In addition, the 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
10
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.
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 45 branches and
facilities. The Company owns all its 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. 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. Submission of Matters to a Vote of Shareholders
No matters were submitted to a vote of shareholders during the fourth
quarter of 2001.
PART II
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 21, 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, 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 14 to the
consolidated financial statements for a discussion of regulatory restrictions on
the payment of dividends. As of January 31, 2002, there were approximately 2,300
shareholders of record and an estimated 2,400 shareholders whose stock is held
in "street name."
Item 6. Selected Financial Data
Table 1 on page 40 sets forth selected consolidated financial data for
the Company.
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 52 of this report and the supplemental financial data contained in Tables 1
through 21 included with this discussion and analysis.
11
DISCLOSURE OF CERTAIN TYPES OF FINANCIAL ACTIVIES, ARRANGEMENTS AND TRANSACTIONS
Certain types of financial activities and financial arrangements have
received heavy scrutiny in the media in recent months. Accordingly, the Company
desires to make the following disclosures.
Throughout each of the three years ended December 31, 2001:
o The Company has not had any form of involvement with any special
purpose entities (SPE's).
o The Company has not had a material ownership interest in any
unconsolidated subsidiaries or partnerships.
o The Company has not had any synthetic or capital leases.
o The Company has not entered into any sale-leaseback transactions.
o The Company has not been a party to any non-exchange traded contracts.
o The Company has not been a party to any asset securitization
activities.
o The Company has not engaged in any on-balance-sheet or
off-balance-sheet derivatives transactions required to be accounted
for under Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
The Company's related party transactions for the same three year period
have been limited to 1) loans made to executive officers and directors in the
ordinary course of business and 2) in connection with the Company's stock
repurchase program in place in 2001, the Company repurchased a block of stock
from a director at fair market value. At December 31, 2001, the Company has
loans outstanding to executive officers and directors and to their associates
totaling approximately $8.4 million. 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. The $8.4 million in outstanding related
party loans represents less than 1% of the Company's total loan portfolio. The
Company has never charged-off a loan to a related party.
CRITICAL ACCOUNTING POLICIES
Due to the estimation process and the potential materiality of the
amounts involved, the Company has identified the accounting for the allowance
for loan losses and the related provision for loan losses as an accounting
policy critical to the Company's financial statements. The provision for loan
losses charged to operations is an amount sufficient to bring the allowance for
loan losses to an estimated balance considered adequate to absorb losses
inherent in the portfolio.
Management's determination of the adequacy of the allowance is based
primarily on a mathematical model that estimates the appropriate allowance for
loan losses. This model has two components. The first component involves the
estimation of losses on loans defined as "impaired loans." A loan is considered
to be impaired when, based on current information and events, it is probable the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The estimated valuation allowance is the
difference, if any, between the loan balance outstanding and the value of the
impaired loan as determined by either 1) an estimate of the cash flows that the
12
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 inherent
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 of the
Company 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 additions to the
allowance based on the examiners' judgment about information available to them
at the time of their examinations.
For further discussion, see "Nonperforming Assets" and "Allowance for
Loan Losses and Loan Loss Experience" under "Analysis of Financial Condition and
Changes in Financial Conditions."
DISCUSSION REGARDING IMPACT OF ACCOUNTING METHODS USED IN MERGERS AND
ACQUISITIONS
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 four acquisitions in 2001 (see discussion below) were all
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 2001 acquisitions is more
evident.
13
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
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
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
During 2000 and 2001, the Company completed several acquisitions and
had one branch divestiture. 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.
See the section entitled "Current Accounting Matters" below and notes
1(r) and 2 to the consolidated financial statements for additional information
regarding intangible assets and their amortization under prior and new
accounting standards.
14
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:
Robeson and
Insurance Scotland
Assets acquired Salisbury branch agencies Century Counties branches Total
- ----------------------------- ----------------- ---------- --------- ----------------- -------
(in millions)
Cash $ 17.7 -- 5.9 70.2 93.8
Securities -- -- 9.0 -- 9.0
Loans, gross 9.3 -- 90.2 16.7 116.2
Allowance for loan losses (0.2) -- (0.6) (0.3) (1.1)
Property, plant and equipment 0.5 0.1 0.6 1.9 3.1
Other -- -- 1.4 -- 1.4
------- ------- ------- ------- -------
Total assets acquired 27.3 0.1 106.5 88.5 222.4
------- ------- ------- ------- -------
Liabilities assumed
- -------------------
Deposits 30.3 -- 71.7 102.6 204.6
Borrowings -- -- 13.5 -- 13.5
Other 0.2 -- 2.5 0.5 3.2
------- ------- ------- ------- -------
Total liabilities assumed 30.5 -- 87.7 103.1 221.3
------- ------- ------- ------- -------
Value of cash paid and/or
stock issued to stock-
holders of acquiree n/a 0.3 22.0 n/a 22.3
------- ------- ------- ------- -------
Intangible assets recorded $ 3.2 0.2 3.2 14.6 21.2
======= ======= ======= ======= =======
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.
15
The Company did not complete any acquisitions or divestitures during
1999.
There are no pending mergers, acquisitions or divestitures as of
December 31, 2001.
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.
Discussion Of Nonrecurring Items Of Income And Expense
As a part of its on-going operations, the Company periodically realizes
income and expense that it considers to be outside of its day-to-day operations.
These types of income and expense include items such as merger-related expenses,
gains and losses from securities sales, loan sales, fixed assets, other real
estate, and other items of a similar nature. The Company attempts to isolate
nonrecurring items of income and expense for internal purposes and in
communications with shareholders in order to present, on a pro forma basis, the
Company's earnings from its day-to-day operations, which some readers may find
more meaningful than the amounts reported in accordance with generally accepted
accounting principles.
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.
16
The following table presents a summary of items for each of the past
three years that are nonrecurring in nature. The "Impact on Net Income" and
"Impact on Diluted Earnings Per Share" columns reflect the after-tax amount of
the nonrecurring item at the blended federal and state tax rate.
Gross Amount Impact on Impact on Diluted
Income/(Expense) Net Income Earnings Per Share
---------------- ---------- ------------------
2001
-----------------------------------------
Items affecting noninterest income
Loan sale gains $ 9 6 --
Securities gains, net 61 40 --
Other gains 79 51 0.01
-------- -------- --------
Total impact on 2001 $ 149 97 0.01
======== ======== ========
2000
-----------------------------------------
Merger-related addition to provision for
loan losses
$ (420) (254) (0.03)
-------- -------- --------
Items affecting noninterest income
-----------------------------------------
Securities losses - merger-related (2,006) (1,218) (0.14)
Other securities gains, net 87 53 0.01
Branch sale gain 808 491 0.05
Other (6) (4) --
-------- -------- --------
Impact on 2000 noninterest income (1,117) (678) (0.08)
-------- -------- --------
Items affecting noninterest expense
-----------------------------------------
Merger-related expenses (3,188) (2,593) (0.28)
-------- -------- --------
Impact on 2000 noninterest expense (3,188) (2,593) (0.28)
-------- -------- --------
Total impact on 2000 $ (4,725) (3,525) (0.39)
======== ======== ========
1999
-----------------------------------------
Items affecting noninterest income
-----------------------------------------
Individually insignificant amounts of
securities gains, loan sale gains, and
other, net $ 39 24 0.01
======== ======== ========
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. The 2001
net income amounted to basic earnings per share of $1.51, a 43.8% increase from
the $1.05 basic earnings per share reported 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.
Excluding the nonrecurring items discussed above, recurring net income
for the year ended December 31, 2001 amounted to $13,519,000, a 5.1% increase
from the $12,867,000 in recurring net income for 2000. The 2001 recurring net
income amounted to basic earnings per share of $1.50, a 3.4% increase from the
$1.45 basic earnings per share in 2000. Diluted earnings per share on a
recurring basis for 2001 amounted to $1.46, a 2.8% increase from the recurring
diluted earnings per share amount of $1.42 reported 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
17
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 (tax-equivalent net interest income divided
by average earning assets) 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
recurring basis) and the 7.1% increase in noninterest expenses (21.6% increase
on a recurring basis) from the amounts recorded in 2000. Also increasing
noninterest income in 2001 were increased fees earned from presold mortgages,
which benefited from the low interest rate environment, and the introduction of
a deposit product 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 nondecuctible
merger-related expenses incurred in 2000 that had the effect of increasing the
effective tax rate.
Overview - 2000 Compared to 1999
Net income for the year ended December 31, 2000 amounted to $9,342,000,
a 21.2% decrease from the $11,854,000 recorded for 1999. The 2000 net income
amounted to basic earnings per share of $1.05, a 20.5% decrease from the $1.32
basic earnings per share reported for 1999. Diluted earnings per share for 2000
amounted to $1.03, an 18.9% decrease from the $1.27 reported for 1999. As
discussed above, net income for 2000 was significantly impacted by the merger
with First Savings.
Excluding the nonrecurring items discussed above, recurring net income
for the year ended December 31, 2000 amounted to $12,867,000, an 8.8% increase
from the $11,830,000 in recurring net income for 1999. The 2000 recurring net
income amounted to basic earnings per share of $1.45, a 9.8% increase from the
$1.32 basic earnings per share in 1999. Diluted earnings per share on a
recurring basis for 2000 amounted to $1.42, a 12.7% increase from the recurring
diluted earnings per share amount of $1.26 reported for 1999.
The increase in recurring earnings was primarily a result of the
internal growth the Company experienced in its loan and deposit bases. In 2000,
loans grew by 16.0% and deposits grew by 8.2%. Additionally from January 1, 1999
to December 31, 2000, the Company's loans grew by a total of 31.5% and deposits
increased by 17.4%. The effect of recognizing the net interest income on a full
twelve months of the 1999 loan and deposit growth, as well as the incremental
impact of the 2000 growth, resulted in an increase in net interest income of
10.2% in 2000 compared to 1999. Partially offsetting the effects of the loan and
deposit growth on net interest income was a slight decrease in the Company's net
interest margin from 4.56% in 1999 to 4.53% in 2000.
The Company's provision for loan losses amounted to $1,605,000 in 2000
compared to $910,000 in 1999. As noted above, a provision for loan losses of
$420,000 was recorded at the time of the merger with First Savings to align the
credit risk methodologies of the two companies. Excluding this one time
provision, the provision for loan losses amounted to $1,185,000 in 2000, a 30.2%
increase over the $910,000 recorded for 1999. This increase in the provision for
18
loan losses was consistent with the higher loan growth experienced in 2000
compared to 1999. In 2000, loans outstanding increased by $102.9 million
compared to net loan growth of $76.0 million in 1999. Asset quality indicators
remained strong in 2000.
Reported noninterest income for 2000 was $4,729,000 compared to
$5,647,000 reported for 1999. Noninterest income for 2000 was significantly
impacted by the merger with First Savings as a result of losses from securities
sales that were executed to reposition the Company's bond portfolio, as well as
a gain realized from the sale of a branch that was required to be divested to
gain regulatory approval. Recurring noninterest income, which excludes the
merger related items discussed above, as well as other gains and losses from
sales of securities, loans, and other assets, increased $238,000, or 4.2%,
during 2000, from $5,608,000 in 1999 to $5,846,000 in 2000. The increase in core
noninterest income was associated with the general growth of the Company.
Reported noninterest expense for 2000 amounted to $26,741,000 compared
to $21,752,000 for 1999. The year 2000 included $3,188,000 in merger expenses
incurred in connection with the merger with First Savings. Excluding the
merger-related expenses, noninterest expense amounted to $23,553,000, an 8.3%
increase from 1999. The increase in noninterest expense was also associated with
the general growth of the Company.
The Company's income taxes decreased 8.0% from $6,234,000 in 1999 to
$5,736,000 in 2000. The decrease in income tax expense was a result of lower
income before income taxes, which was partially offset by a higher effective tax
rate that was caused by the nondeductibility of certain merger-related expenses.
Net Interest Income
Net interest income on a taxable-equivalent basis amounted to
$41,645,000 in 2001, $39,289,000 in 2000, and $35,715,000 in 1999.
Table 2 analyzes net interest income on a taxable-equivalent basis. The
Company's net interest income on a taxable-equivalent basis increased by 6.0% in
2001 and 10.0% in 2000. 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.
In both 2001 and 2000, net interest income was positively impacted by
higher amounts of average loans and deposits outstanding and was negatively
impacted by lower net interest margins. 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 2001 and 2000.
In 2001, the average amount of loans outstanding increased 18.6% and the average
amount of deposits outstanding increased 20.8%. In 2000, the average amount of
loans outstanding grew by 17.3%, while the average amount of deposits increased
by 9.4%. As previously noted, in 2001 most of the Company's loan and deposit
growth was achieved in corporate acquisitions, whereas in 2000 all of the loan
and deposit growth was generated internally.
The effects of the increases in average loans and deposits on
taxable-equivalent net interest income in both 2001 and 2000 were partially
offset by a narrowing of the Company's interest rate spread in both years - see
Table 2. The Company's net interest margin (net yield on average
interest-earning assets) decreased 30 basis points to 4.23% in 2001 compared to
2000. 2000's net interest margin of 4.53% was 3 basis points lower than the
4.56% margin realized in 1999. The Company's interest rate spread (the
difference between the yield on interest-earning assets and the rate paid on
interest-bearing liabilities) also declined, with a decrease of 14 basis points
in 2001 to 3.61%. 2000's interest rate spread of 3.75% was 9 basis points lower
than the 3.84% realized in 1999.
A competitive banking environment, including several markets in which
the Company competes with de novo banks aggressively attempting to gain market
share, is partially responsible for the lower interest margins in 2001 and 2000.
There were two other significant factors that contributed to the lower net
19
interest margin realized in 2001 - 1) the significant rate cuts initiated by the
Federal Reserve Board and 2) the incremental impact on the net interest margin
from the Company's 2001 acquisitions.
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 been able to decrease rates on renewing time deposits during 2001 by the
corresponding decreases in the Federal Reserve discount rate because of the
competitive pressures in the Company's market.
Another negative factor affecting the Company's net interest margin in
2001 was the impact of the Company's acquisitions, especially the March 2001
acquisition of four branches and the May 2001 acquisition of Century. The March
2001 acquisition of four branches from First Union 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 (and continues to be) negatively impacted. The Company
acquired Century in May 2001. Because of Century's higher mix of single family
mortgage loans and time deposits (which are generally the lowest yielding type
of loan and highest rate type of deposit), the net interest margins earned on
these acquired loans and deposits was lower than the Company's historic margins.
Another factor that affects the Company's net interest margin is its
reliance on time deposits greater than $100,000 and borrowings (the two highest
cost source of funds for the Company). The Company's reliance on these funding
sources decreased in 2001 after increasing in 2000. The increase in these high
cost funds was achieved primarily to help fund high loan growth, comprising
22.2% of the Company's average total funding (up from 18.0% in 1999), which
negatively impacted net interest margins. In 2001, due largely to lower loan
growth and the deposits assumed in the branch acquisitions, which had only a
small percentage of time deposits greater than $100,000 and no borrowings, the
percentage of time deposits greater than $100,000 and borrowings to total
funding sources decreased to 20.8%, positively impacting the net interest
margin.
See additional information regarding net interest income on page 32 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.
20
The Company recorded provisions for loan losses of $1,151,000 in 2001
compared to $1,605,000 in 2000 and $910,000 in 1999. As noted earlier, in
connection with the merger with First Savings, a provision for $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 (see discussion below) during 2001 increased what would have
been an otherwise lower level of provision for loan losses in 2001.
The 2000 recurring provision of $1,185,000 (excludes the merger-related
$420,000 one time adjustment) was an increase from the $910,000 provision
recorded in 1999. With asset quality remaining relatively stable during 1999 and
2000, the variance in the provision for loan losses between the years was due
primarily to higher loan growth experienced in 2000 compared to 1999. Net new
loan growth for 2000 amounted to $102.9 million compared to $76.0 million in
1999, thus resulting in the higher provision in 2000 compared to 1999.
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 $9,655,000 in
2001, $4,729,000 in 2000, and $5,647,000 in 1999.
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 $9,506,000 in 2001, a 62.6% increase from the
$5,846,000 recorded in 2000. The 2000 core noninterest income of $5,846,000 was
4.2% higher than the $5,608,000 recorded in 1999.
See Table 4 and the following discussion for an understanding of the
components of noninterest income.
Service charges on deposit accounts in 2001 amounted to $5,265,000, a
68.9% increase compared to 2000. The 2000 amount of $3,118,000 was 4.2% higher
than the 1999 amount of $2,993,000. The significant increase in service charges
on deposit accounts realized in 2001 was primarily related to three events - 1)
an increase in the Company's service fee rate structure implemented in November
2000, 2) the Company's acquisition of four branches on March 26, 2001 - the
branches purchased had a high level of transaction accounts (non-time deposits),
$60.2 million in total, which afforded the Company the opportunity to earn
deposit service charges, and 3) the introduction of a product in August 2001
that charges a fee for allowing customers to overdraw their deposit account. The
4.2% increase in service charges on deposit accounts in 2000 compared to 1999
was generally proportional to the 2.7% increase in average demand deposit
accounts in 2000 compared to 1999.
Other service charges, commissions and fees amounted to $2,046,000 in
2001, a 17.6% increase from the $1,740,000 earned in 2000. The 2000 amount of
$1,740,000 was 8.1% higher than the $1,609,000 recorded in 1999. This category
of noninterest income includes items such as safety deposit box rentals, check
cashing fees, credit card and merchant 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,
21
including growth achieved from corporate acquisitions.
Fees from presold mortgages amounted to $1,259,000 in 2001, a 178%
increase from the 2000 amount of $453,000. The 2000 amount was a 33.9% decrease
from the $685,000 recorded in 1999. The increase in 2001 compared to 2000 was
primarily attributable to two factors - 1) a higher level of mortgage loan
refinancings caused by the lower interest rate environment, and 2) the decision
by the Company 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. The
decrease in fees from presold mortgages in 2000 compared to 1999 was primarily a
result of the higher interest rate environment in 2000 compared to 1999 that
slowed mortgage loan activity - the average prime rate was 9.26% in 2000
compared to 7.99% in 1999 (the average prime rate in 2001 was 6.93%).
Commissions from sales of insurance and financial products amounted to
$731,000 in 2001, $418,000 in 2000 and $271,000 in 1999. This line item includes
commissions the Company receives from three sources - 1) sales of credit
insurance associated with new loans ($389,000 in 2001, $307,000 in 2000, and
$264,000 in 1999), 2) commissions from the sales of investment, annuity, and
long-term care insurance products ($227,000 in 2001, $112,000 in 2000, and
$7,000 in 1999), and 3) commissions from the sale of property and casualty
insurance ($115,000 in 2001 and $0 in 2000 and 1999). Commissions from sales of
credit insurance increased both years due to growth in the Company's customer
base. Commission from the sale of investment, annuity, and long-term care
insurance products have steadily increased over the past two years after the
initial introduction of these products in late 1999. Commissions from the sale
of property and casualty insurance began to be realized upon the May 2001
completion of the purchase of two insurance companies that specialized in such
insurance.
Data processing fees amounted to $205,000 in 2001, $117,000 in 2000,
and $50,000 in 1999. 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 one client to four clients in the past three years.
Noninterest income not defined as "core" amounted to a net gain of
$149,000 in 2001, a net loss of $1,117,000 in 2000, and a net gain of $39,000 in
1999. 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. Net noncore noninterest income of $39,000 realized in
1999 primarily was comprised of immaterial gains and losses from sales of
securities and loans.
Noninterest Expenses
Noninterest expenses for 2001 were $28,634,000, compared to $26,741,000
in 2000 and $21,752,000 in 1999. Table 5 presents the components of the
Company's noninterest expense during the past three years.
The noninterest expenses recorded in 2000 included $3,188,000 in merger
expenses. 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.
Excluding the merger expenses recorded in 2000, the $28,634,000 in
noninterest expenses recorded by the Company in 2001 represented a 21.6%
increase from 2000. The recurring 2000 amount of $23,553,000 represented an 8.3%
increase from the $21,752,000 recorded in 1999. The increases in noninterest
22
expenses in the past two years occurred in almost all categories and were due
primarily to the Company's growth.
In 2001, the growth that resulted in additional noninterest expenses
primarily related to the Company's corporate acquisitions. As previously noted,
in 2001 the Company purchased a total of 5 branches, a savings institution with
one branch, and two insurance agencies. These acquisitions were primarily
responsible for an increase in the Company's branch network during 2001 from 39
branches to 45 branches and an increase in full time/part time employees from
306/55 at the beginning of the year to 358/69 at December 31, 2001. In addition
to the typical cash expenses associated with the growth, the Company also
recorded a total of $1,535,000 in non-cash amortization expense in 2001,
$904,000 more than in 2000 as a result of the $21.2 million in
acquisition-related intangible assets recorded in 2001. See the section below
entitled "Current Accounting Matters" for a discussion of impending changes to
the way the Company will account for its intangible assets in the future,
including ceasing amortization for a portion of the Company's intangible assets.
The 8.3% increase in noninterest expenses during 2000 (excluding merger
expenses) was primarily a result of additional expense incurred in order to
manage the Company's internal growth. The Company incurred higher expenses
throughout 1999 and 2000 in order to properly process, manage, and service the
32% increase in loans and 17% increase in deposits that occurred from the
beginning of 1999 through the end of 2000.
Income Taxes
The provision for income taxes was $7,307,000 in 2001, $5,736,000 in
2000, and $6,234,000 in 1999. The 27.4% increase in income tax expense in 2001
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.
The 8.0% decrease in tax expense in 2000 compared to 1999 was a result
of a 16.6% decrease in pretax income, which was partially offset by an increase
in the Company's effective tax rate from 34.5% in 1999 to 38.0% in 2000 caused
by the aforementioned nondeductible merger expenses.
Table 6 presents the components of tax expense and the related
effective tax rates.
23
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 2001, this growth was primarily related to
corporate acquisitions, whereas in 2000 the growth was generated from internal
operations. In 2001, the recessionary economy impacted the lower internal
growth, whereas in 2000 economic expansion contributed to the balance sheet
growth. The following table presents information regarding the nature of the
Company's growth in 2001 and 2000:
Balance at Balance at Total Percentage growth,
(in millions) beginning Internal Growth from end of percentage excluding
of period growth acquisitions period growth acquistions
--------- ------ ------------ ------ ------ -----------
2001
- ------------------------------
Loans $ 746,089 28,058 116,163 890,310 19.3% 3.8%
========= ========= ========= ========= ========= =========
Deposits - Noninterest bearing $ 70,634 2,978 22,453 96,065 36.0% 4.2%
Deposits - Savings, NOW, and
Money Market 253,687 18,684 81,068 353,439 39.3% 7.4%
Deposits - Time>$100,000 140,992 19,205 29,751 189,948 34.7% 13.6%
Deposits - Time<$100,000 305,066 (15,601) 71,364 360,829 18.3% -5.1%
--------- --------- --------- --------- --------- ---------
Total deposits $ 770,379 25,266 204,636 1,000,281 29.8% 3.3%
========= ========= ========= ========= ========= =========
2000
- ------------------------------
Loans $ 643,224 102,865 -- 746,089 16.0% 16.0%
========= ========= ========= ========= ========= =========
Deposits - Noninterest bearing $ 63,881 6,753 -- 70,634 10.6% 10.6%
Deposits - Savings, NOW, and
Money Market 251,982 1,705 -- 253,687 0.7% 0.7%
Deposits - Time>$100,000 118,566 22,426 -- 140,992 18.9% 18.9%
Deposits - Time<$100,000 277,710 27,356 -- 305,066 9.9% 9.9%
--------- --------- --------- --------- --------- ---------
Total deposits $ 712,139 58,240 -- 770,379 8.2% 8.2%
========= ========= ========= ========= ========= =========
In 2001, internal loan growth was substantially matched by a similar
rate of internal deposit growth. But in 2000, although internal deposit growth
was a strong $58.2 million, or 8.2%, it was far exceeded by the very high loan
growth of $102.9 million, or 16.0%. The Company believes that the higher loan
demand compared to deposit growth in the years leading up to 2001 was caused by
several factors, including economic expansion coupled with lower consumer
savings rates, increased competition for deposits, new types of competitors for
deposits including brokerage houses and the internet, and the stock market being
increasingly viewed as a savings vehicle. The Company believes the lower loan
demand and deposit growth in 2001 were a result of the recessionary economy and
the relatively lower interest rates paid on deposits as a result of the
declining interest rate environment.
The higher loan growth experienced in 2000 compared to deposit growth
resulted in a reduction of the Company's liquidity. As a result, in 2000 the
Company increased its use of borrowings, reduced its investment portfolio, and,
in an effort to fund loan growth as much as possible with deposits, aggressively
priced large time deposits. The increased use of borrowings and large time
deposits negatively impacted the Company's net interest margin, as previously
discussed. The approximately $90 million in net cash and securities that the
Company received in connection with its 2001 acquisitions served to improve
liquidity.
The impact of the assets acquired in the 2001 corporate acquisitions,
along with the significant amount of intangible assets recorded, served to
reduce the Company's capital ratios when compared to 2000. However, all three
24
regulatory capital ratios remain significantly above the minimum regulatory
thresholds.
The Company's asset quality ratios were very strong during the four
years leading up to 2001. In 2001, although asset quality ratios for the Company
remain in line with peers, the ratios for 2001 are less favorable than in prior
years. The negative change in asset quality indicators is a result of the
generally recessionary economy that has 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 Company does not believe it has any direct
exposure to the companies involved, there was, and continues to be in 2002, an
indirect negative impact on the Company's overall customer base and local
economy related to these events.
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, 2001, 2000, and 1999.
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
decreasing from 13% to 9% at December 31, 2001 and 2000, respectively.
The variances in the percentages for 2000 compared to 1999 reflect the
high loan and deposit growth experienced by the Company. The $102.9 million in
net loan growth in 2000 increased the Company's loans to total assets from 72%
to 81%. A portion of the loan growth was funded with proceeds from securities
maturities, which along with the sale of $54.5 million in securities in the
third quarter of 2000 (most of the proceeds of which were not reinvested in
securities), resulted in the percentage of total securities to total assets
decreasing from 19% at year end 1999 to 13% at year end 2001. The $58.2 million
in deposit growth in 2000 resulted in the Company's deposits to total assets
amounts increasing from 80% to 84%. As previously noted, the majority of the
Company's 2000 deposit growth occurred in time deposits. Time deposits of
$100,000 or more as a percentage of total assets increased from 13% to 15% in
2000 while "other time deposits" increased from 31% to 33% during the same
period. Borrowings at December 31, 1999 were significantly affected by the
Company's Y2K plan in which borrowings in excess of normal liquidity needs were
obtained as a contingency in the event of high customer withdrawals (which did
not occur).
Securities
Information regarding the Company's securities portfolio as of December
31, 2001, 2000, and 1999 is presented in Tables 8 and 9.
25
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
$112.8 million, $117.5 million, and $165.6 million at December 31, 2001, 2000,
and 1999, respectively. Although the total amount of the Company's securities
did not change materially from December 31, 2000 to December 31, 2001, 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. The decrease in total
securities at year end 2000 compared to 1999 was primarily due to the sale of
$54.5 million in securities at a loss of $2.0 million (discussed earlier), most
of which was not reinvested into securities, but rather used to pay down debt
and invested in overnight investments. In addition, a portion of the securities
portfolio that matured during the year was used to fund loan growth.
Over the past three years, the primary variance in the mix of the
securities portfolio has been a shift from U.S. Government agency debt to
mortgage-backed securities. U.S. Government agencies as percentage of total
securities decreased from 57% to 45% to 25% at December 31, 1999, 2000 and 2001,
respectively, while mortgage-backed securities increased from 25% to 31% to 46%
at each of the same period ends. The majority of the Company's U.S. Government
agency debt securities were 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.
Over the past two years, in an effort to enhance yield, while at the same time
managing interest rate exposure, the Company has invested more heavily in
mortgage-backed securities than U.S. Government agencies. Additionally, as noted
in "Investment Policy and Procedures" in Item I above, during 2001 the Company's
board of directors approved the purchase of corporate bonds, not to exceed 10%
of the securities portfolio. At December 31, 2001, the Company's investment in
corporate bonds amounted to $8.7 million, which was primarily comprised of trust
preferred securities issued by other North Carolina bank holding companies.
Included in mortgage-backed securities at December 31, 2001 were
collateralized mortgage obligations (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. Included in mortgage-backed securities at
December 31, 1999 were CMO's with an amortized cost of $10,955,000 and a fair
value of $10,824,000. The CMO's that the Company has invested in are
substantially all "early tranche" pieces of the CMO.
At December 31, 2001, net unrealized gains of $1,024,000 were included
in the carrying value of securities classified as available for sale, compared
to a net unrealized gain of $383,000 at December 31, 2000 and a net unrealized
loss of $3,628,000 at December 31, 1999. The increase in the unrealized gain
position at December 31, 2001 compared to December 31, 2000 is a result of the
lower interest rate environment in effect at the end of 2001. Approximately half
of the favorable $4,011,000 change experienced in the unrealized gain/loss
position of the available for sale portfolio in 2000 compared to 1999 was due to
the Company realizing $2.0 million in losses in connection with the
merger-related security sale, while the other half was due to an increase in the
value of the bond holdings as a result of the lower interest rate environment in
effect at the end of 2000. 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
(losses), net of applicable deferred income taxes, of $677,000, 256,000, and
$(2,297,000) have been reported as a separate component of shareholders' equity
as of December 31, 2001, 2000, and 1999, respectively.
26
The fair value of securities held to maturity, which the Company
carries at amortized cost, was more than the carrying value at December 31, 2001
by $408,000 and less than the carrying value at December 31, 2000 by $263,000.
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, 2001. 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 6.19% at December 31, 2001. The expected
weighted average life of the available for sale portfolio using the call date
for above-market callable bonds, the maturity date for all other
non-mortgage-backed securities, and the expected life for mortgage-backed
securities, was 4.5 years.
The weighted average taxable-equivalent yield for the securities held
to maturity portfolio was 7.39% at December 31, 2001. 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
4.0 years.
As of December 31, 2001 and 2000, 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 collateralized mortgage
obligations 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 $144.2 million, or 19.3%, to $890.3 million
during 2001. 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 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.
Loans increased by $102.9 million, or 16.0%, in 2000 to $746.1 million from the
$643.2 million held at December 31, 1999. The majority of the 2001 and 2000 loan
growth occurred in loans secured by real estate, with approximately $134.6
million, or 93.3%, in 2001 and $80.3 million, or 78.0%, in 2000 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, 2001, $763.8 million or 85.73% of the Company's loan
portfolio was secured by liens on real property. Included in this total are
$442.0 million, or 49.6% of total loans, in loans secured by liens on 1-4 family
residential properties and $321.8 million, or 36.1% of total loans, in loans
27
secured by liens on other types of real estate. The Company's $763.8 million in
real estate mortgage loans can be further classified as follows:
o $289.8 million, or 32.5% of total loans, are traditional
residential mortgage loans in which the borrower's personal
income is the primary repayment source.
o $234.0 million, or 26.3% of total loans, are primarily dependent
on cash flow from a commercial business for repayment.
o $97.6 million, or 11.0% of total loans, are personal consumer
installment loans in which the borrower has provided residential
real estate as collateral.
o $66.3 million, or 7.4% of total loans, are real estate
construction loans.
o $54.6 million, or 6.1% of total loans, are home equity loans.
o $21.5 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 19% of the Company's loans outstanding at December 31, 2001 mature
within one year and 63% of total loans mature within five years. The percentages
of variable rate loans and fixed rate loans as compared to total performing
loans were 42.6% and 57.4%, respectively, as of December 31, 2001. 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, 2001, 2000 and 1999 totaled $3,891,000, $863,000, and
$1,681,000, respectively. Nonperforming loans as a percentage of total loans
amounted to 0.44%, 0.12%, and 0.26%, at December 31, 2001, 2000, and 1999,
respectively. The variances in nonperforming loans over the past two years has
been primarily due to changes in nonaccrual loans, as restructured loans have
not changed significantly. The increase in nonperforming loans for 2001 compared
to 2000 is primarily attributable to four loans to the same borrower totaling
$1.9 million at December 31, 2001 that were placed on nonaccrual status during
the first quarter of 2001 as a result of the borrower having liquidity problems.
In addition to the $1.9 million in loans on nonaccrual status, the Company has
an additional $500,000 in loans to this same borrower at December 31, 2001 that
do not meet the Company's criteria for nonaccrual status. In addition to and
apart from this single large relationship, the Company has noted an increase in
bankruptcies and other financial difficulties among its borrowers, which the
Company attributes to the negative effects of the recessionary economy, leading
to a total of 60 loans being on nonaccrual status at December 31, 2001 compared
to 27 loans at December 31, 2000.
28
The decrease in nonaccrual loans from December 31, 1999 to December 31,
2000 was primarily a result of 1) a $394,000 loan that was paid off during the
second quarter of 2000, and 2) the removal of substantially all of the
nonaccrual loans on the books at December 31, 1999 by reason of payoff,
charge-off, foreclosure, or return to accrual status, with a lower amount of
loans being placed on nonaccrual status during 2000.
If the nonaccrual loans and restructured loans as of December 31, 2001,
2000 and 1999 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 $320,000,
$62,000 and $123,000 for nonaccrual loans and $10,000, $27,000 and $27,000 for
restructured loans would have been recorded for 2001, 2000 and 1999,
respectively. Interest income on such loans that was actually collected and
included in net income in 2001, 2000, and 1999 amounted to approximately
$76,000, $38,000 and $71,000 for nonaccrual loans (prior to their being placed
on nonaccrual status) and $7,000, $21,000 and $24,000 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,
2001 had 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, 2001
(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 $1,253,000 at December 31, 2001, $893,000 at December
31, 2000, and $906,000 at December 31, 1999. Other real estate represented
0.11%, 0.10%, and 0.10% of total assets at the end of 2001, 2000, and 1999,
respectively. The Company's management has reviewed recent appraisals of its
other real estate and believes that their fair values, less estimated costs to
sell, equal or exceed their respective carrying values at the dates presented.
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
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
29
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 $9,388,000 at December 31,
2001 compared to $7,893,000 as of December 31, 2000 and $6,674,000 at December
31, 1999. This represented 1.05%, 1.06%, and 1.04%, of loans outstanding as of
December 31, 2001, 2000, and 1999, respectively.
As noted in Table 12, the Company's allowance for loan losses as a
percentage of nonperforming loans ("coverage ratio") amounted to 241% at
December 31, 2001, compared to 914% at December 31, 2000 and 397% at December
31, 1999. 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 $9,343,000 at December
31, 2001 from $7,633,000 at December 31, 2000 and $5,646,000 at December 31,
1999. The 22.4% increase in the amount of the allocated allowance is consistent
with the 19.3% increase in total loans outstanding The increase in the allocated
amount during 2000 was primarily due to loan growth and the Company segregating
and assigning higher reserve percentages to particular loan types that were
identified during 2000 as having inherently higher risk. 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 which developed during 2000. 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 in 2001 compared to 2000. The general increase in the unallocated
portion of the allowance for loan losses through 1999 was consistent with
overall loan growth, while the decrease in 2000 was primarily associated with
the higher risk percentages assigned to a portion of the loan portfolio
discussed above.
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
30
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 increase in the dollar amount of
the allowance for loan losses during 2001 was also affected by $1,125,000 in
increases that the Company recorded to provide for loans assumed in corporate
acquisitions. Approximately $520,000 of the $1,125,00 related to $26.0 million
in mostly consumer loans assumed in the March and December 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 $781,000 in 2001,
$386,000 in 2000, and $336,000 in 1999. This represents 0.09%, 0.06%, and 0.06%
of average loans during 2001, 2000, and 1999 respectively. A rise in consumer
bankruptcy filings is primarily responsible for the 2001 increase in net
charge-offs.
Deposits
The average amounts of deposits of the Company and the average yield
paid for those deposits for the years ended December 31, 2001, 2000 and 1999 are
presented in Table 15. Average deposits grew to $900.0 million in 2001, an
increase of $155.2 million, or 20.8%, compared to growth of $64.1 million or
9.4% in 2000. As previously discussed, most of the Company's deposit growth in
2001 was related to its corporate acquisitions, which increased deposits a total
of $204.6 million when comparing the beginning of the year to the balance at the
end of the year, compared to internal growth of $25.3 million.
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 ($15.3 million increase, or 22.5%), interest-bearing demand deposits
($40.5 million increase, or 21.0%), and savings deposits ($7.8 million increase,
or 13.3%) - were primarily due to the March 2001 acquisition of the four First
Union branches, the deposits of which were comprised of approximately $60.2
million (59% of those branches' total deposits) of non-time deposits. The
increases in time deposits less than $100,000 ($49.0 million increase, or 16.5%)
and time deposits greater than $100,000 ($42.5 million increase, or 33.1%) were
primarily due to the remaining $42.4 million in First Union deposits, as well as
$51.2 million in time deposits 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 $19.2 million, or 13.6%, contributed
to the growth in this category, while a net decrease in internally generated
time deposits less than $100,000 of $15.6 million, or 5.1%, partially negated
the overall increase in this category.
In comparing 2000 to 1999, average time deposits greater than $100,000
experienced the highest percentage growth of any of the deposit categories. In
2000, average time deposits greater than $100,000 increased $28.1 million, or
28.0%. Time deposits in denominations of less than $100,000 was the other major
component of average deposit growth during 2000, with growth of $29.0 million,
or 10.9%, during the year. The primary reason for the high growth within these
categories of deposits was that the Company began more competitively pricing
time deposits in order to help fund the strong loan growth experienced in 2000.
Time deposits are generally more rate sensitive than the other categories of
deposits, and thus can be more easily accumulated by more aggressively pricing
their rates.
As of December 31, 2001, the Company held approximately $189.9 million
in time deposits of $100,000 or more and other time deposits of $360.8 million.
Table 16 is a maturity schedule of time deposits of $100,000 or more as of
December 31, 2001. This table shows that 92.3% 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.
31
Borrowings
The Company has three sources of borrowing capacity - 1) an
approximately $169,000,000 line of credit with the Federal Home Loan Bank
(FHLB), 2) a $35,000,000 overnight federal funds line of credit with a
correspondent bank, and 3) an approximately $37,000,000 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
$169,000,000 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, 2001, the Company had $15.0 million outstanding
under this line of credit compared to $26.2 million a year earlier. The decrease
in outstanding borrowings was due to $11.2 million in maturities in 2001. See
"Liquidity" below for a maturity table of the Company's borrowings. 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, 2001, the Company's
qualifying collateral amounted to 16.7 times the amount of borrowings
outstanding.
The Company also has a correspondent bank relationship established that
allows the Company to purchase up to $35,000,000 in federal funds on an
overnight, unsecured basis. The Company had no borrowings outstanding under this
line at December 31, 2001 or 2000. This line of credit was not drawn upon in
2001. There was insignificant use of this line during 1999 and 2000 with total
interest expense incurred amounting to approximately $5,000 each year.
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, 2001, the available line of
credit is approximately $37,000,000. 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.
Average short-term borrowings for each year presented were less than
thirty percent of total shareholders' equity at each period.
Interest Rate Risk (Including Quantitative and Qualitative Disclosures About
Market Risk - Item 7A.)
Net interest income is the Company's most significant component of
earnings. Notwithstanding changes in volumes of loans and deposits, the
Company's level of net interest income is continually at risk due to the effect
that changes in general market interest rate trends have on interest yields
earned and paid with respect to the various categories of earning assets and
interest-bearing liabilities. It is the Company's policy to maintain portfolios
of earning assets and interest-bearing liabilities with maturities and repricing
opportunities that will afford protection, to the extent practical, against wide
interest rate fluctuations. The Company's exposure to interest rate risk is
analyzed on a regular basis by management using standard GAP reports, maturity
reports, and an asset/liability software model that simulates future levels of
interest income and expense based on current interest rates, expected future
interest rates, and various intervals of "shock" interest rates. Over the years,
the Company has been able to maintain a fairly consistent yield on average
earning assets (net interest margin). Over the past five calendar years the
Company's net interest margin has ranged from a low of 4.23% (realized in 2001)
to a high of 4.88% (realized in 1997). During that five year period the prime
32
rate of interest has ranged from a low of 4.75% to a high of 9.50%. As discussed
above under the heading "Net Interest Income," the Company experienced downward
pressure in 2001 on its net interest margin, primarily as a result of the
significant decreases in the interest rate environment.
Table 17 sets forth the Company's interest rate sensitivity analysis as
of December 31, 2001, using stated maturities for all instruments except
mortgage-backed securities (which are allocated in the periods of their expected
payback) and securities and borrowings with call features that are expected to
be called (which are shown in the period of their expected call). As illustrated
by this table, the Company has $354.3 million more in interest-bearing
liabilities that are subject to interest rate changes within one year than
earning assets. This generally would indicate that net interest income would
experience downward pressure in a rising interest rate environment and would
benefit from a declining interest rate environment. However, this method of
analyzing interest sensitivity only measures the magnitude of the timing
differences and does not address earnings, market value, or management actions.
Also, interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. In addition to the effects of "when"
various rate-sensitive products reprice, market rate changes may not result in
uniform changes in rates among all products. For example, included in
interest-bearing liabilities at December 31, 2001 subject to interest rate
changes within one year are deposits totaling $353.4 million comprised of NOW,
savings, and certain types of money market deposits with interest rates set by
management. These types of deposits historically have not repriced, and did not
reprice during 2001, coincidentally with or in the same proportion as general
market indicators.
Thus, the Company believes that in the near term (twelve months), net
interest income would not likely experience significant downward pressure from
rising interest rates. Similarly, management would not expect a significant
increase in near term net interest income from falling interest rates (In fact,
as discussed above under the heading "Net Interest Income," a declining interest
rate environment during 2001 negatively impacted (at least temporarily) the
Company's net interest margin). Generally, when rates change, the Company's
interest-sensitive assets that are subject to adjustment reprice immediately at
the full amount of the change, while the Company's interest-sensitive
liabilities that are subject to adjustment reprice at a lag to the rate change
and typically not to the full extent of the rate change. The net effect is that
in the twelve month horizon, as rates change, the impact of having a higher
level of interest-sensitive liabilities is substantially negated by the later
and typically lower proportionate change these liabilities experience compared
to interest sensitive assets.
The Company has no market risk sensitive instruments held for trading
purposes, nor does it maintain any foreign currency positions. Table 18 presents
the expected maturities of the Company's other than trading market risk
sensitive financial instruments. Table 18 also presents the estimated fair
values of market risk sensitive instruments as estimated in accordance with
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments." The Company's fixed rate assets and liabilities
each have estimated fair values that are slightly higher than their carrying
value. This is due to the yields on these portfolios being higher than market
yields at December 31, 2001 for instruments with maturities similar to the
remaining term of the portfolios, due to the declining interest rate
environment.
See additional discussion regarding net interest income, as well as
discussion of the changes in the annual net interest margin in the section
entitled "Net Interest Income" above.
Return On Assets And Equity
Table 19 shows return on assets (net income divided by average total
assets), return on equity (net income divided by average shareholders' equity),
dividend payout ratio (dividends per share divided by net income per share) and
shareholders' equity to assets ratio (average shareholders' equity divided by
average total assets) for each of the years in the three-year period ended
December 31, 2001.
33
Return on assets, return on equity, and dividend payout ratio per basic
share for the year 2000 were significantly impacted by the nonrecurring
merger-related charges discussed previously. Excluding nonrecurring items,
return on assets, return on equity, and the dividend payout ratio for the year
2000 would have been 1.41%, 11.69% and 53.23%, respectively.
Liquidity
The Company's liquidity is determined by its ability to convert assets
to cash or acquire alternative sources of funds to meet the needs of its
customers who are withdrawing or borrowing funds, and to maintain required
reserve levels, pay expenses and operate the Company on an ongoing basis. The
Company's primary liquidity sources are net income from operations, cash and due
from banks, federal funds sold and other short-term investments. The Company's
securities portfolio is comprised almost entirely of readily marketable
securities which could also be sold to provide cash.
In addition to internally generated liquidity sources, the Company has
the ability to obtain borrowings from the following three sources - 1) an
approximately $169 million line of credit with the Federal Home Loan Bank
(FHLB), 2) a $35 million overnight federal funds line of credit with a
correspondent bank, and 3) an approximately $37 million line of credit through
the Federal Reserve Bank of Richmond's discount window. See the section above
entitled "Borrowings" for additional detail about these credit lines.
The Company's on-balance-sheet liquidity improved during 2001,
primarily as a result of corporate acquisitions. 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 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) increased from 18.7% of total deposits and borrowings at
December 31, 2000 to 20.7% at December 31, 2001.
In the years leading up to 2001, the Company's liquidity had steadily
decreased, primarily as a result of strong growth in loans that was not matched
by similar increases in deposits. The Company's loan to deposit ratio gradually
increased from 84.3% at December 31, 1997 to 96.8% at December 31, 2000, and the
level of liquid assets as a percent of deposits and borrowings had steadily
declined from 34.2% December 31, 1997 to 18.7% at December 31, 2000.
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.
The following table reflects the contractual obligations of the Company
outstanding as of December 31, 2001.
Payments Due by Period (in thousands)
----------------------------------------------------------------------------
On Demand or
Contractual Less After
Obligations Total than 1 Year 1-3 Years 4-5 Years 5 Years
--------------------------------------- ------------ ------------- ------------ ------------ ------------
Long-term debt $ 15,000 5,000 5,000 -- 5,000
Operating leases 902 250 233 117 302
------------ ------------- ------------ ------------ ------------
Total contractual cash obligations,
excluding deposits 15,902 5,250 5,233 117 5,302
Deposits 1,000,281 937,168 51,856 11,010 247
------------ ------------- ------------ ------------ ------------
Total contractual cash obligations,
including deposits $1,016,183 942,418 57,089 11,127 5,549
============ ============= ============ ============ ============
34
The $5 million in long-term debt that matures in the "After 5 Years"
column above has a call option whereby the lender (the FHLB) may call the debt
in 2004. Also as discussed above under the heading "Borrowings," 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, 2001, the Company's
qualifying collateral amounted to 16.7 times the amount of borrowings
outstanding.
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 from normal operations.
The following table reflects other commercial commitments of the
Company outstanding as of December 31, 2001.
Amount of Commitment Expiration Per Period (in thousands)
-----------------------------------------------------------------
Total
Other Commercial Amounts Less After
Commitments Committed than 1 Year 1-3 Years 4-5 Years 5 Years
------------------------------------ --------- ----------- --------- --------- -------
Credit cards $ 13,422 6,711 6,711 -- --
Lines of credit and loan commitments 140,772 77,695 7,882 1,827 53,368
Standby letters of credit 1,746 1,708 38 -- --
---------- ---------- ---------- ---------- ----------
Total commercial commitments $155,940 86,114 14,631 1,827 53,368
========== ========== ========== ========== ==========
Of the $154,194,000 in commitments related to credit cards and lines of
credit at December 31, 2001, $128,198,000 were at variable rates and $25,996,000
were at fixed rates. Included in outstanding loan commitments were unfunded
commitments of $76,395,000 on revolving credit plans, of which $69,068,000 were
at variable rates and $7,327,000 were at fixed rates. Additionally, as shown
above, standby letters of credit of approximately $1,746,000 were outstanding at
December 31, 2001. The Company's exposure to credit loss for the aforementioned
commitments in the event of nonperformance by the party to whom credit or
financial guarantees have been extended is represented by the contractual amount
of the financial instruments discussed above. However, management believes that
these commitments represent no more than the normal lending risk that the
Company commits to its borrowers. If these commitments are drawn, the Company
plans to obtain collateral if it is deemed necessary based on management's
credit evaluation of the counter-party. The types of collateral held varies but
may include accounts receivable, inventory and commercial or residential real
estate. Management expects any draws under existing commitments to be funded
through 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.
At December 31, 2001 (and at all times during years presented in this
report), the Company's management believes its liquidity sources, including
unused lines of credit, were at an acceptable level and remained adequate to
meet its operating needs.
Capital Resources and Shareholders' Equity
Shareholders' equity at December 31, 2001 amounted to $116.7 million
compared to $110.7 million at December 31, 2000. The two primary components
35
typically affecting the Company's shareholders' equity are net income, which
increases shareholders' equity, and dividends declared, which decreases
shareholders' equity. In 2001, net income of $13,616,000 increased equity, while
dividends declared of $7,981,000 reduced equity.
In 2001, two other items had a significant effect on shareholders'
equity - 1) common stock issued in acquisitions, which primarily related to the
Company's May 2001 acquisition of Century in which approximately 586,000 shares
of common stock were issued and 2) repurchases and retirement of the Company's
common stock, which amounted to $10,468,000 in 2001. In connection with the
October 2000 announcement that a definitive merger agreement had been executed
with Century Bancorp in a part cash-part stock transaction, the Company
announced its intent to repurchase, beginning immediately, up to the 586,000
shares that would be issued to complete the acquisition. Subsequent to the date
of the announcement and through December 31, 2000, the Company repurchased
approximately 125,000 shares at an average cost of $15.68 (59,000 shares had
been repurchased early in 2000 an average price of $15.74). In 2001, the Company
repurchased another 457,000 shares of common stock at an average repurchase
price of $22.93 per share.
In October 2001, the Company's board of directors extended the share
repurchase program for the Company to repurchase an additional 150,000 shares of
common stock. The extension of the share repurchase plan was authorized in order
to provide the Company flexibility in managing its capital and enhance
shareholder value.
Other items affecting shareholders' equity in 2001 were 1) proceeds of
$731,000 received from common stock issued as a result of stock option
exercises, 2) proceeds of $564,000 received from the issuance of stock into the
Company's dividend reinvestment plan, and 3) other comprehensive income, which
for the Company is comprised entirely of the change in the unrealized gain or
loss of the Company's available for sale securities and amounted to $421,000 in
2001 (see additional discussion under the heading "Securities" above)
In 2000, in addition to net income and dividends, there were two other
items that had a significant effect on shareholders' equity - 1) other
comprehensive income related to the Company's available for sale securities of
$2,553,000 in 2000 (see additional discussion under the heading "Securities"
above) and 2) repurchases and retirement of 184,000 shares common stock
amounting to $2,884,000.
In addition to the items noted above that affected shareholders' equity
in 2000, the Company received proceeds of $408,000 in connection with the
issuance of 140,000 shares related to exercises of stock options, issued 22,000
shares and received $344,000 in proceeds from issuances of stock into the
Company's dividend reinvestment plan, and recorded a $790,000 increase to equity
related to the tax benefit that the Company realized due to exercises of
nonqualified stock options.
The Company is regulated by the Board of Governors of the Federal
Reserve Board (FED) and is subject to securities registration and public
reporting regulations of the Securities and Exchange Commission. The Bank is
regulated by the Federal Deposit Insurance Corporation (FDIC) and the North
Carolina Office of the Commissioner of Banks. The Company is not aware of any
recommendations of regulatory authorities or otherwise which, if they were to be
implemented, would have a material effect on its liquidity, capital resources,
or operations.
The Company 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
36
maintain minimum ratios of "Tier 1" capital to total risk-weighted assets ("Tier
I Capital Ratio") and total capital to risk-weighted assets ("Total Capital
Ratio") of 4.00% and 8.00%, respectively. Tier 1 capital is comprised of total
shareholders' equity calculated in accordance with generally accepted accounting
principles, 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.
Table 20 presents the Company's regulatory capital ratios as of
December 31, 2001, 2000, and 1999. The Company's regulatory capital ratios,
while continuing to far exceed regulatory minimums, decreased significantly in
2001 as a result of the Company's acquisitions, which increased assets and
decreased tangible capital.
In addition to the minimum capital requirements described above, the
regulatory framework for prompt corrective action also contains specific capital
guidelines for a bank's classification as "well capitalized." The specific
guidelines are as follows - Tier I Capital Ratio of at least 6.00%, Total
Capital Ratio of at least 10.00%, and a Leverage Ratio of at least 5.00%. The
Bank's regulatory ratios are not materially different from the Company's ratios,
and thus exceeded the threshold for "well-capitalized" status at December 31,
2001, 2000 and 1999.
See "Supervision and Regulation" under "Business" above and note 14 to
the consolidated financial statements for discussion of other matters that may
affect the Company's capital resources.
Inflation
Since the assets and liabilities of a bank are primarily monetary in
nature (payable in fixed determinable amounts), the performance of a bank is
affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may not be the same. The effect of inflation on banks is
normally not as significant as its influence on those businesses that have large
investments in plant and inventories. During periods of high inflation, there
are normally corresponding increases in the money supply, and banks will
normally experience above average growth in assets, loans and deposits. Also,
general increases in the price of goods and services will result in increased
operating expenses.
Current Accounting Matters
The Company prepares its financial statements and related disclosures
in conformity with standards established by, among others, the Financial
Accounting Standards Board (the "FASB"). Because the information needed by users
of financial reports is dynamic, the FASB frequently issues new rules and
proposed new rules for companies to apply in reporting their activities.
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
37
value. The unrealized loss at the time of the transfer was approximately
$513,000, and is 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 issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." 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 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 will be adopted on January 1, 2002. Unamortized goodwill on
the books of the Company amounted to $5,609,000 and $2,900,000 at December 31,
2001 and 2000, respectively. Amortization of goodwill (under previous accounting
standards) amounted to $511,000, $373,000, and $373,000 for the years ended
December 31, 2001, 2000, and 1999, respectively. Had Statement 142 not been
issued, the Company expected to amortize $588,000 (on a pretax basis, which is
the same as its after-tax effect because of the nondeductiblity for tax purposes
of the related intangible asset), or approximately 6 cents per diluted share,
during 2002 relating to goodwill recorded as of December 31, 2001.
At December 31, 2001 and 2000, the Company had $325,000 and $106,000,
respectively, in identifiable intangible assets that are subject to the
provisions of Statement 142. Approximately $236,000 of the December 31, 2001
amount relates to the Company's acquisition of two insurance agencies during
2001. Approximately $89,000 of the December 31, 2001 amount and all of the
December 31, 2000 amount relates to core deposit premium associated with one of
the Company's whole-bank acquisitions. As noted above, Statement 142 requires
that identifiable intangible assets be amortized over their respective estimated
useful lives to their estimated residual values. A 15 year straight-line
amortization schedule has been established for the vast majority of the
Company's identifiable intangible assets. Amortization of the Company's
identifiable intangible assets amounted to $25,000, $21,000, and $26,000, for
the years ended December 31, 2001, 2000, and 1999, respectively. Under the
Company's current amortization schedule, the Company expects to amortize $31,000
(none of which is tax deductible) in 2002 related to identifiable intangible
assets recorded as of December 31, 2001.
Under current accounting standards, the Company will continue to record
significant amounts of amortization expense, as a majority of the Company's
intangible assets continue to be subject to the provisions of SFAS No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Acquisitions." Of the
$24,488,000 in intangible assets at December 31, 2001, $18,301,000 is subject to
the provisions of SFAS No. 72 ("SFAS No. 72 Intangible Assets"). The Company had
$1,486,000 in SFAS No. 72 Intangible Assets (with total intangible assets of
$4,630,000) at December 31, 2000. The Company's SFAS No. 72 Intangible Assets
will continue to be amortized over the approximate estimated lives of the
related acquired deposit relationships. In accordance with the Company's
estimate of the approximate lives of the acquired deposit relationships, a 15
year straight-line amortization schedule has been established for a majority of
the Company's SFAS No. 72 Intangible Assets. The Company will continue to
evaluate amortization periods for its SFAS No. 72 Intangible Assets, and such
amortization periods could be revised downwards (but not upwards) in the future
if circumstances warrant. Amortization of SFAS No. 72 Intangible Assets amounted
to $999,000, $237,000, and $237,000 for the years ended December 31, 2001, 2000
and 1999, respectively. Under the Company's current amortization schedule, the
Company expects to amortize $1,424,000 (all of which is tax deductible) in 2002
related to SFAS No. 72 Intangible Assets recorded as of December 31, 2001.
38
In connection with Statement 142's transitional goodwill impairment
evaluation, the Statement will require the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings. The Company has not completed the assessment of impaired goodwill, but
at this time does not expect the results of the assessment to indicate any
goodwill impairment.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets," which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This standard provides guidance for
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. SFAS No. 144 supersedes SFAS No. 121. SFAS No. 144 also supersedes
Accounting Principals 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 is effective for the Company beginning on January 1, 2002. The
adoption of this statement is not expected to have a material impact on the
Company's financial statements.
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, actions of government regulators, the level of market interest rates,
and general economic conditions.
39
- ----------------------------------------------------------------------------------------------------------------------------
Table 1 Selected Consolidated Financial Data
- ----------------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share Year Ended December 31,
and nonfinancial data) -------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- -------- ------- ------- -------
Income Statement Data
Interest income $ 76,773 72,915 61,591 57,612 50,858
Interest expense 35,720 34,220 26,488 25,070 21,835
Net interest income 41,053 38,695 35,103 32,542 29,023
Provision for loan losses 1,151 1,605 910 990 575
Net interest income after provision 39,902 37,090 34,193 31,552 28,448
Noninterest income 9,655 4,729 5,647 5,218 4,526
Noninterest expense 28,634 26,741 21,752 19,665 17,504
Income before income taxes 20,923 15,078 18,088 17,105 15,470
Income taxes 7,307 5,736 6,234 6,132 5,448
Net income 13,616 9,342 11,854 10,973 10,022
Earnings per share - basic 1.51 1.05 1.32 1.20 1.10
Earnings per share - diluted 1.47 1.03 1.27 1.13 1.05
Pro Forma Data
After-tax effect of nonrecurring items -
gains (losses) 97 (1)(3,525) 24 153 90
Net income, excluding nonrecurring items 13,519 12,867 11,830 10,820 9,932
Earnings per share - diluted, excluding
nonrecurring items 1.46 1.42 1.26 1.12 1.04
- ----------------------------------------------------------------------------------------------------------------------------
Per Share Data
Cash dividends declared $ 0.88 0.77 0.63 0.60 0.51
Market Price
High 28.08 17.25 20.00 28.00 23.33
Low 15.50 12.06 13.31 16.00 12.33
Close 22.55 15.75 16.50 19.33 23.33
Book value 12.81 12.54 12.09 12.02 11.51
- ----------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data (at year end)
Loans $ 890,310 746,089 643,224 567,224 481,525
Allowance for loan losses 9,388 7,893 6,674 6,100 5,383
Intangible assets 24,488 4,630 5,261 5,843 6,487
Total assets 1,144,691 915,167 889,531 779,639 703,485
Deposits 1,000,281 770,379 712,139 656,148 571,132
Borrowings 15,000 26,200 62,500 6,000 20,000
Total shareholders' equity 116,726 110,684 106,980 109,989 105,258
- ----------------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Assets $1,046,030 909,800 823,571 740,872 645,350
Loans 831,817 701,317 597,951 531,929 438,330
Earning assets 983,628 867,269 782,492 702,814 610,589
Deposits 899,989 744,835 680,749 609,685 524,598
Interest-bearing liabilities 837,563 724,152 643,921 568,780 489,800
Shareholders' equity 115,620 110,093 107,913 108,247 102,393
- ----------------------------------------------------------------------------------------------------------------------------
Ratios
Return on average assets 1.30% 1.03% 1.44% 1.48% 1.55%
Return on average equity 11.78% 8.49% 10.98% 10.14% 9.79%
Net interest margin (taxable-equivalent basis) 4.23% 4.53% 4.56% 4.73% 4.88%
Shareholders' equity to assets at year end 10.20% 12.09% 12.03% 14.11% 14.96%
Loans to deposits at year end 89.01% 96.85% 90.32% 86.45% 84.31%
Net charge-offs to average loans 0.09% 0.06% 0.06% 0.05% 0.12%
- ----------------------------------------------------------------------------------------------------------------------------
(1) Relates primarily to merger-related charges.
40
- ------------------------------------------------------------------------------------------------------------------------------------
Table 2 Average Balances and Net Interest Income Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------- ----------------------------- -----------------------------------
Interest Interest Interest
Average Average Earned Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid Volume Rate or Paid
------- ------- -------- -------- ------- -------- -------- ------- ---------
Assets
Loans (1) $831,817 8.18% $ 68,055 $701,317 8.91% $ 62,474 $597,951 8.48% $ 50,725
Taxable securities 98,645 6.46% 6,372 131,833 6.43% 8,482 141,592 6.06% 8,581
Non-taxable securities (2) 16,280 8.60% 1,400 17,664 8.27% 1,460 19,093 8.18% 1,561
Short-term investments,
principally federal funds 36,886 4.17% 1,538 16,455 6.64% 1,093 23,856 5.60% 1,336
---------- -------- -------- -------- -------- --------
Total interest-
earning assets 983,628 7.87% 77,365 867,269 8.48% 73,509 782,492 7.95% 62,203
-------- -------- --------
Cash and due from banks 25,618 22,562 22,183
Bank premises and
equipment, net 16,781 13,395 11,889
Other assets 20,003 6,574 7,007
---------- -------- --------
Total assets $1,046,030 $909,800 $823,571
========== ======== ========
Liabilities and Equity
Savings, NOW and money
market deposits $300,387 1.78% 5,354 $251,995 2.56% 6,462 $249,190 2.39% 5,952
Time deposits >$100,000 171,096 5.88% 10,058 128,562 6.13% 7,882 100,462 5.52% 5,542
Other time deposits 345,350 5.48% 18,941 296,392 5.69% 16,862 267,366 5.09% 13,613
---------- ------ -------- -------- --------- -------
Total interest-bearing
deposits 816,833 4.21% 34,353 676,949 4.61% 31,206 617,018 4.07% 25,107
Borrowings 20,729 6.59% 1,367 47,203 6.39% 3,014 26,903 5.13% 1,381
---------- ------ -------- -------- --------- -------
Total interest-
bearing liabilities 837,563 4.26% 35,720 724,152 4.73% 34,220 643,921 4.11% 26,488
Non-interest- ------ ------ ------
bearing deposits 83,156 67,886 63,731
Other liabilities 9,692 7,669 8,006
Shareholders' equity 115,620 110,093 107,913
------- -------- --------
Total liabilities and
shareholders' equity $1,046,030 $909,800 $823,571
========== ======== ========
Net yield on interest-
earning assets and
net interest income 4.23% $41,645 4.53% $ 39,289 4.56% $ 35,715
======= ======== ========
Interest rate spread 3.61% 3.75% 3.84%
Average prime rate 6.93% 9.26% 7.99%
- ------------------------------------------------------------------------------------------------------------------------------------
(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 $738,000, $586,000, and $568,000 for 2001, 2000, and 1999,
respectively.
(2) Includes tax-equivalent adjustments of $592,000, $594,000, and $612,000 in
2001, 2000, and 1999, respectively, to reflect the federal and state benefit
of the tax-exempt securities, reduced by the related nondeductible portion of
interest expense.
41
- ------------------------------------------------------------------------------------------------------------------------------------
Table 3 Volume and Rate Variance Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001 Year Ended December 31, 2000
------------------------------------------- -----------------------------------------
Change Attributable to Change Attributable to
------------------------------------------- -----------------------------------------
Total Total
Changes Changes Increase Changes Changes Increase
(In thousands) in Volumes in Rates (Decrease) in Volumes in Rates (Decrease)
---------- -------- ---------- ---------- -------- ----------
Interest income (tax-equivalent):
Loans $ 11,151 (5,570) 5,581 $ 8,988 2,761 11,749
Taxable securities (2,140) 30 (2,110) (610) 511 (99)
Non-taxable securities (117) 57 (60) (117) 16 (101)
Short-term investments, principally
federal funds sold 1,104 (659) 445 (453) 210 (243)
-------- ------ ----- ------- ----- -----
Total interest income 9,998 (6,142) 3,856 7,808 3,498 11,306
-------- ------ ----- ------- ----- -----
Interest expense:
Savings, NOW and money
market deposits 1,052 (2,160) (1,108) 69 441 510
Time deposits>$100,000 2,554 (378) 2,176 1,636 704 2,340
Other time deposits 2,735 (656) 2,079 1,565 1,684 3,249
-------- ------ ----- ------- ----- -----
Total interest-bearing deposits 6,341 (3,194) 3,147 3,270 2,829 6,099
Borrowings (1,718) 71 (1,647) 1,169 464 1,633
-------- ------ ----- ------- ----- -----
Total interest expense 4,623 (3,123) 1,500 4,439 3,293 7,732
-------- ------ ----- ------- ----- -----
Net interest income $ 5,375 (3,019) 2,356 $ 3,369 205 3,574
======== ====== ===== ======= ===== =====
(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) 2001 2000 1999
---- ---- ----
Service charges on deposit accounts $5,265 3,118 2,993
Other service charges, commissions, and fees 2,046 1,740 1,609
Fees from presold mortgages 1,259 453 685
Commissions from sales of insurance and
financial products 731 418 271
Data processing fees 205 117 50
------ ------ -----
Total core noninterest income 9,506 5,846 5,608
Loan sale gains 9 -- 34
Securities gains (losses), net 61 (1,919) 20
Branch sale gain -- 808 --
Other gains (losses), net 79 (6) (15)
------ ------ -----
Total $9,655 4,729 5,647
====== ===== =====
- --------------------------------------------------------------------------------
Table 5 Noninterest Expenses
- --------------------------------------------------------------------------------
Year Ended December 31,
(In thousands) 2001 2000 1999
---- ---- ----
Salaries $12,534 10,138 9,241
Employee benefits 3,083 2,543 2,468
------- ------ ------
Total personnel expense 15,617 12,681 11,709
Occupancy expense 1,734 1,507 1,417
Equipment related expenses 1,631 1,353 1,186
Amortization of intangible assets 1,535 631 636
Stationery and supplies 1,279 1,174 893
Telephone 688 600 516
Non-credit losses 167 60 34
Merger expenses -- 3,188 --
Other operating expenses 5,983 5,547 5,361
------- ------ ------
Total $28,634 26,741 21,752
======= ====== ======
42
- --------------------------------------------------------------------------------
Table 6 Income Taxes
- --------------------------------------------------------------------------------
(In thousands) 2001 2000 1999
---- ---- ----
Current - Federal $ 7,256 6,108 6,035
- State 102 174 382
Deferred - Federal (51) (546) (183)
------- ----- -----
Total $ 7,307 5,736 6,234
======= ===== =====
Effective tax rate 34.9% 38.0% 34.5%
======= ===== =====
- ----------------------------------------------------------------------------------------------------
Table 7 Distribution of Assets and Liabilities
- ----------------------------------------------------------------------------------------------------
As of December 31,
---------------------------------
2001 2000 1999
Assets
Interest-earning assets
Net loans 77% 81% 72%
Securities available for sale 8 8 13
Securities held to maturity 1 5 6
Short term investments 6 1 3
---- ---- ----
Total interest-earning assets 92 95 94
Noninterest-earning assets
Cash and due from banks 3 2 3
Premises and equipment 2 2 1
Other assets 3 1 2
---- ---- ----
Total assets 100% 100% 100%
==== ==== ====
Liabilities and shareholders' equity
Demand deposits - noninterest bearing 8% 8% 7%
Savings, NOW, and money market deposits 31 28 29
Time deposits of $100,000 or more 17 15 13
Other time deposits 32 33 31
---- ---- ----
Total deposits 88 84 80
Borrowings 1 3 7
Accrued expenses and other liabilities 1 1 1
---- ---- ----
Total liabilities 90 88 88
Shareholders' equity 10 12 12
---- ---- ----
Total liabilities and shareholders' equity 100% 100% 100%
==== ==== ====
- --------------------------------------------------------------------------------------------------------------
Table 8 Securities Portfolio Composition
- --------------------------------------------------------------------------------------------------------------
As of December 31,
------------------
(In thousands) 2001 2000 1999
---- ---- ----
Securities available for sale:
U.S. Treasury $ 512 5,527 5,600
U.S. Government agencies 28,111 40,797 82,176
Mortgage-backed securities 52,227 16,922 19,035
Corporate bonds 8,663 -- --
State and local governments -- 1,249 2,619
Equity securities 6,956 5,102 3,575
-------- ------- -------
Total securities available for sale 96,469 69,597 113,005
-------- ------- -------
Securities held to maturity:
U.S. Government agencies -- 11,854 13,015
Mortgage-backed securities -- 19,879 22,104
State and local governments 16,130 15,935 17,221
Other 208 256 297
-------- ------- -------
Total securities held to maturity 16,338 47,924 52,637
-------- ------- -------
Total securities $112,807 117,521 165,642
======== ======= =======
Average total securities during year $114,925 149,497 160,685
======== ======= =======
43
- ----------------------------------------------------------------------------------------------
Table 9 Securities Portfolio Maturity Schedule
- ----------------------------------------------------------------------------------------------
As of December 31,
2001
------------------------------------------
Book Fair Book
Value Value Yield (1)
----- ----- ---------
($ in thousands)
Securities available for sale:
U.S. Treasury
Due within one year $ 500 512 7.31%
------- ------ ----
Total 500 512 7.31%
------- ------ ----
U.S. Government agencies
Due within one year 12,848 13,111 6.35%
Due after one but within five years 5,430 5,620 6.65%
Due after five but within ten years 8,944 9,380 7.14%
------- ------ ----
Total 27,222 28,111 6.67%
------- ------ ----
Mortgage-backed securities
Due within one year 2,427 2,456 5.20%
Due after one but within five years 38,532 38,839 5.61%
Due after five but within ten years 7,950 7,940 5.43%
Due after ten years 2,992 2,992 6.03%
------- ------ ----
Total 51,901 52,227 5.58%
------- ------ ----
Corporate debt securities
Due after five but within ten years 828 843 6.50%
Due after ten years 8,017 7,820 8.18%
------- ------ ----
Total 8,845 8,663 8.02%
------- ------ ----
Equity securities 6,977 6,956 6.25%
------- ------ ----
Total securities available for sale
Due within one year 15,775 16,079 6.20%
Due after one but within five years 43,962 44,459 5.78%
Due after five but within ten years 17,722 18,163 6.34%
Due after ten years 17,986 17,768 7.07%
------- ------ ----
Total $95,445 96,469 6.19%
======= ====== ====
Securities held to maturity:
State and local governments
Due within one year 2,111 2,136 6.98%
Due after one but within five years 4,770 4,916 7.57%
Due after five but within ten years 7,810 8,058 7.41%
Due after ten years 1,439 1,428 7.25%
------- ------ ----
Total 16,130 16,538 7.39%
------- ------ ----
Other
Due after one but within five years 208 208 7.47%
------- ------ ----
Total 208 208 7.47%
------- ------ ----
Total securities held to maturity
Due within one year 2,111 2,136 6.98%
Due after one but within five years 4,978 5,124 7.57%
Due after five but within ten years 7,810 8,058 7.41%
Due after ten years 1,439 1,428 7.25%
------- ------ ----
Total $16,338 16,746 7.39%
======= ====== ====
(1) Yields on tax-exempt investments have been adjusted to a taxable equivalent
basis using a 35% tax rate.
44
- --------------------------------------------------------------------------------------------------------------------------------
Table 10 Loan Portfolio Composition
- --------------------------------------------------------------------------------------------------------------------------------
As of December 31,
---------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------ ------------------ ---------------- ---------------- -----------------
% of % of % of % of % of
Total Total Total Total Total
($ in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial,
financial, &
agricultural $ 79,695 8.94% $ 76,507 10.24% $ 58,574 9.10% $ 52,415 9.23% $ 45,417 9.42%
Real estate -
construction 66,304 7.44% 57,608 7.71% 36,823 5.72% 38,265 6.74% 20,250 4.20%
Real estate -
mortgage(1) 697,498 78.29% 571,638 76.55% 512,080 79.52% 442,389 77.90% 384,029 79.64%
Installment
loans to
individuals 47,471 5.33% 41,047 5.50% 36,450 5.66% 34,836 6.13% 32,487 6.74%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Loans, gross 890,968 100.00% 746,800 100.00% 643,927 100.00% 567,905 100.00% 482,183 100.00%
====== ====== ====== ====== ======
Unamortized
net deferred
loan fees &
unearned
income (658) (711) (703) (681) (658)
--------- --------- --------- --------- ---------
Total loans,
net $ 890,310 $ 746,089 $ 643,224 $ 567,224 $ 481,525
========= ========= ========= ========= =========
(1) The majority of these loans are various personal and commercial loans where
real estate provides additional security for the loan.
- ---------------------------------------------------------------------------------------------------------------------------------
Table 11 Loan Maturities
- ---------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2001
-------------------------------------------------------------------------------------------
Due within Due after one year but Due after five
one year within five years years Total
----------------- --------------------- ---------------------- --------------------
($ in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
Variable Rate Loans:
Commercial, financial, and
agricultural $ 29,570 5.34% $ 14,818 5.13% $ 553 5.28% $ 44,941 5.27%
Real estate - construction 48,328 5.29% 5,239 4.78% -- -- 53,567 5.24%
Real estate - mortgage 36,228 5.35% 74,011 5.41% 162,294 7.22% 272,533 6.48%
Installment loans
to individuals 436 7.13% 6,593 7.81% 1,118 7.40% 8,147 7.72%
--------- --------- --------- ---------
Total at variable rates 114,562 5.33% 100,661 5.49% 163,965 7.21% 379,188 6.19%
--------- --------- --------- ---------
Fixed Rate Loans:
Commercial, financial, and
agricultural 9,105 8.03% 22,047 8.31% 3,979 7.54% 35,131 8.15%
Real estate - construction 11,871 7.52% 1,587 7.60% 157 8.45% 13,615 7.54%
Real estate - mortgage 26,786 8.13% 235,136 7.87% 157,606 7.71% 419,528 7.83%
Installment loans
to individuals 5,133 9.42% 31,097 10.36% 2,810 8.24% 39,040 10.08%
--------- --------- --------- ---------
Total at fixed rates 52,895 8.10% 289,867 8.17% 164,552 7.72% 507,314 8.02%
--------- --------- --------- ---------
Subtotal 167,457 6.20% 390,528 7.48% 328,517 7.47% 886,502 7.24%
Nonaccrual loans 3,808 -- -- 3,808
--------- --------- --------- ---------
Loans, gross $ 171,265 $ 390,528 $ 328,517 $ 890,310
========= ========= ========= =========
The above table is based on contractual scheduled maturities. Early repayment of
loans or renewals at maturity are not considered in this table.
45
- ---------------------------------------------------------------------------------------------------------------------------------
Table 12 Nonperforming Assets
- ---------------------------------------------------------------------------------------------------------------------------------
As of December 31,
----------------------------------------------------------------------------
($ in thousands) 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Nonaccrual loans $3,808 626 1,424 1,698 1,553
Restructured loans 83 237 257 248 326
Accruing loans >90 days past due -- -- -- -- --
------ ----- ----- ----- -----
Total nonperforming loans 3,891 863 1,681 1,946 1,879
Other real estate (included in other assets) 1,253 893 906 505 560
------ ----- ----- ----- -----
Total nonperforming assets $5,144 1,756 2,587 2,451 2,439
====== ===== ===== ===== =====
Nonperforming loans as a percentage
of total loans 0.44% 0.12% 0.26% 0.34% 0.39%
Nonperforming assets as a percentage of
loans and other real estate 0.58% 0.24% 0.40% 0.43% 0.51%
Nonperforming assets as a percentage of
total assets 0.45% 0.19% 0.29% 0.31% 0.35%
Allowance for loan losses as a percentage
of nonperforming loans 241.27% 914.60% 397.03% 313.46% 286.48%
- ---------------------------------------------------------------------------------------------------------------------------------
Table 13 Allocation of the Allowance for Loan Losses
- ---------------------------------------------------------------------------------------------------------------------------------
As of December 31,
------------------------------------------------------------------------------
($ in thousands) 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Commercial, financial, and agricultural $1,643 1,574 726 646 577
Real estate - construction 449 393 255 256 205
Real estate - mortgage 6,230 4,849 4,078 3,612 3,344
Installment loans to individuals 1,021 817 587 678 629
------ ----- ----- ----- -----
Total allocated 9,343 7,633 5,646 5,192 4,755
Unallocated 45 260 1,028 908 628
------ ----- ----- ----- -----
Total $9,388 7,893 6,674 6,100 5,383
====== ===== ===== ===== =====
46
- ------------------------------------------------------------------------------------------------------------------------------
Table 14 Loan Loss and Recovery Experience
- ------------------------------------------------------------------------------------------------------------------------------
As of December 31,
($ in thousands) 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Loans outstanding at end of year $ 890,310 746,089 643,224 567,224 481,525
========= ======= ======= ======= =======
Average amount of loans outstanding $ 831,817 701,317 597,951 531,929 438,330
========= ======= ======= ======= =======
Allowance for loan losses, at
beginning of year $ 7,893 $ 6,674 6,100 5,383 5,335
Provision for loan losses 1,151 1,605 910 990 575
Additions related to loans assumed in
corporate acquisitions 1,125 -- -- -- --
--------- ------- ------- ------- -------
10,169 8,279 7,010 6,373 5,910
--------- ------- ------- ------- -------
Loans charged off:
Commercial, financial and agricultural (89) (171) (53) (92) (61)
Real estate - mortgage (181) (3) (126) (97) (449)
Installment loans to individuals (642) (301) (269) (253) (316)
--------- ------- ------- ------- -------
Total charge-offs (912) (475) (448) (442) (826)
--------- ------- ------- ------- -------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 27 10 27 51 89
Real estate - mortgage 48 20 17 18 38
Installment loans to individuals 56 59 68 100 141
Other -- -- -- -- 31
--------- ------- ------- ------- -------
Total recoveries 131 89 112 169 299
--------- ------- ------- ------- -------
Net charge-offs (781) (386) (336) (273) (527)
--------- ------- ------- ------- -------
Allowance for loan losses, at end of year $ 9,388 $ 7,893 6,674 6,100 5,383
========= ========= ===== ===== =====
Ratios:
Net charge-offs as a percent of average loans 0.09% 0.06% 0.06% 0.05% 0.12%
Allowance for loan losses as a
percent of loans at end of year 1.05% 1.06% 1.04% 1.08% 1.12%
Allowance for loan losses as a multiple
of net charge-offs 12.02x 20.45x 19.86x 22.34x 10.21x
Provision for loan losses as a percent of net
charge-offs 147.38% 415.80% 270.83% 362.64% 109.11%
Recoveries of loans previously charged-off
as a percent of loans charged-off 14.36% 18.74% 25.00% 38.24% 36.20%
- ----------------------------------------------------------------------------------------------------------------------------
Table 15 Average Deposits
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------
2001 2000 1999
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
($ in thousands)
Interest-bearing demand deposits $233,770 1.77% 193,222 2.53% $190,566 2.35%
Savings deposits 66,617 1.82% 58,773 2.66% 58,624 2.51%
Time deposits 345,350 5.48% 296,392 5.69% 267,366 5.09%
Time deposits > $100,000 171,096 5.88% 128,562 6.13% 100,462 5.52%
-------- ------- -------
Total interest-bearing deposits 816,833 4.21% 676,949 4.61% 617,018 4.07%
Noninterest-bearing deposits 83,156 -- 67,886 -- 63,731 --
-------- ------- -------
Total deposits $899,989 3.82% 744,835 4.19% $680,749 3.69%
======== ======= ========
47
- -------------------------------------------------------------------------------------------------------------------------
Table 16 Maturities of Time Deposits of $100,000 or More
- -------------------------------------------------------------------------------------------------------------------------
As of December 31, 2001
--------------------------------------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or Less Months Months Months Total
-------- ----------- ------------ -------- -----
(In thousands)
Time deposits of $100,000 or more $ 80,416 48,763 47,033 13,736 189,948
========= ====== ====== ====== =======
- -----------------------------------------------------------------------------------------------------------------------------
Table 17 Interest Rate Sensitivity Analysis
- -----------------------------------------------------------------------------------------------------------------------------
Repricing schedule for interest-earning assets and interest-bearing
liabilities held as of December 31, 2001
-----------------------------------------------------------------------
3 Months Over 3 to 12 Total Within Over 12
or Less Months 12 Months Months Total
------- ------ --------- ------ -----
($ in thousands)
Earning assets:
Loans, net of deferred fees $ 312,819 65,078 377,897 512,413 890,310
Securities available for sale 21,050 27,765 48,815 47,654 96,469
Securities held to maturity 295 1,941 2,236 14,102 16,338
Short-term investments 63,509 -- 63,509 -- 63,509
--------- ------- ------- ------ -------
Total earning assets $ 397,673 94,784 492,457 574,169 1,066,626
========= ====== ======= ======= =========
Percent of total earning assets 37.28% 8.89% 46.17% 53.83% 100.00%
Cumulative percent of total earning assets 37.28% 46.17% 46.17% 100.00% 100.00%
Interest-bearing liabilities:
Savings, NOW and money market deposits $ 353,439 -- 353,439 -- 353,439
Time deposits of $100,000 or more 80,416 95,796 176,212 13,736 189,948
Other time deposits 116,971 195,158 312,129 48,700 360,829
Borrowings -- 5,000 5,000 10,000 15,000
--------- ------- ------- ------ -------
Total interest-bearing liabilities $ 550,826 295,954 846,780 72,436 919,216
========= ======= ======= ====== =======
Percent of total interest-bearing liabilities 59.92% 32.20% 92.12% 7.88% 100.00%
Cumulative percent of total interest-
bearing liabilities 59.92% 92.12% 92.12% 100.00% 100.00%
Interest sensitivity gap $(153,153) (201,170) (354,323) 501,733 147,410
Cumulative interest sensitivity gap (153,153) (354,323) (354,323) 147,410 147,410
Cumulative interest sensitivity gap
as a percent of total earning assets -14.36% -33.22% -33.22% 13.82% 13.82%
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 72.20% 58.16% 58.16% 116.04% 116.04%
48
- -----------------------------------------------------------------------------------------------------------------------------------
Table 18 Market Risk Sensitive Instruments
- -----------------------------------------------------------------------------------------------------------------------------------
Expected Maturities of Market Sensitive Instruments Held
at December 31, 2001 Occurring in Indicated Year
---------------------------------------------------------
Average Estimated
Interest Fair
($ in thousands) 2002 2003 2004 2005 2006 Beyond Total Rate Value
---- ---- ---- ---- ---- ------ ----- ---- -----
Due from banks,
interest-bearing $ 41,552 -- -- -- -- -- 41,552 1.70% $ 41,552
Federal funds sold 11,244 -- -- -- -- -- 11,244 1.70% 11,244
Debt Securities- at
amortized cost (1) (2) 35,626 18,661 22,280 9,979 6,057 12,203 104,806 6.38% 106,259
Loans - fixed (3) (4) 75,776 67,024 98,596 73,539 116,933 70,456 502,324 8.03% 513,643
Loans - adjustable (3) (4) 142,887 45,159 57,233 49,125 56,678 33,096 384,178 6.19% 384,178
-------- ------- ------- ------- ------- ------- --------- ---- ----------
Total $307,085 130,844 178,109 132,643 179,668 115,755 1,044,104 6.87% $1,056,876
======== ======= ======= ======= ======= ======= ========= ==== ==========
Savings, NOW, and money market
deposits $353,439 -- -- -- -- -- 353,439 1.15% $ 353,439
Time deposits 488,406 43,078 8,282 6,563 4,200 248 550,777 4.61% 554,760
Borrowings (2) 5,000 5,000 5,000 -- -- -- 15,000 6.73% 15,557
-------- ------- ------- ------- ------- ------- --------- ---- ----------
Total $846,845 48,078 13,282 6,563 4,200 248 919,216 3.31% $ 923,756
======== ======= ======= ======= ======= ======= ========= ==== ==========
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 35%
tax rate.
(2) Callable securities and borrowings with above market interest rates at
December 31, 2001 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 and allowance for loan losses.
(4) Single-family mortgage loans are assumed to mature in the period of their
expected repayment based on estimated prepayment speeds. All other loans
are shown in the period of their contractual maturity.
- --------------------------------------------------------------------------------------------
Table 19 Return on Assets and Equity
- --------------------------------------------------------------------------------------------
For the Year Ended December 31,
------------------------------------
2001 2000 1999
---- ---- ----
Return on assets 1.30% 1.03% 1.44%
Return on equity 11.78% 8.49% 10.98%
Dividend payout ratio 58.28% 73.31% 47.71%
Average shareholders' equity to average assets 11.05% 12.10% 13.10%
49
- --------------------------------------------------------------------------------------------------
Table 20 Risk-Based and Leverage Capital Ratios
- --------------------------------------------------------------------------------------------------
As of December 31,
-------------------------------------------
($ in thousands) 2001 2000 1999
---- ---- ----
Risk-Based and Leverage Capital Tier I capital:
Common shareholders' equity $ 116,726 110,684 106,980
Intangible assets (24,488) (4,630) (5,261)
Unrealized (gains) losses on
securities available for sale (677) (256) 2,297
----------- ------- -------
Total Tier I leverage capital 91,561 105,798 104,016
----------- ------- -------
Tier II capital:
Allowable allowance for loan losses 9,388 7,893 6,674
----------- ------- -------
Tier II capital additions 9,388 7,893 6,674
----------- ------- -------
Total risk-based capital $ 100,949 113,691 110,690
=========== ======= =======
Risk adjusted assets $ 857,933 690,368 584,384
Tier I risk-adjusted assets
(includes Tier I capital adjustments) 832,768 685,482 581,420
Tier II risk-adjusted assets
(includes Tiers I and II capital adjustments) 842,156 693,375 588,094
Fourth quarter average assets 1,109,460 916,691 876,557
Adjusted fourth quarter average assets
(includes Tier I capital adjustments) 1,084,295 911,805 873,593
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets 10.99% 15.43% 17.89%
Minimum required Tier I capital 4.00% 4.00% 4.00%
Total risk-based capital to
Tier II risk-adjusted assets 11.99% 16.40% 18.82%
Minimum required total risk-based capital 8.00% 8.00% 8.00%
Leverage capital ratios:
Tier I leverage capital to
adjusted fourth quarter average assets 8.44% 11.60% 11.91%
Minimum required Tier I leverage capital 4.00% 4.00% 4.00%
50
- ---------------------------------------------------------------------------------------------------------------------------------
Table 21 Quarterly Financial Summary
- ---------------------------------------------------------------------------------------------------------------------------------
2001 2000
---------------------------------------------- -------------------------------------------------
($ in thousands except Fourth Third Second First Fourth Third Second First
per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Income Statement Data
Interest income, taxable
equivalent $ 18,889 19,969 19,871 18,567 19,174 19,138 18,109 17,088
Interest expense 8,066 9,001 9,548 9,105 9,160 9,297 8,220 7,543
Net interest income,
taxable equivalent 10,823 10,968 10,323 9,462 10,014 9,841 9,889 9,545
Taxable equivalent,
adjustment 139 140 170 143 149 146 148 151
Net interest income 10,684 10,828 10,323 9,319 9,865 9,695 9,741 9,394
Provision for loan losses 385 238 308 220 240 705 350 310
Net interest income after
provision for losses 10,299 10,590 9,845 9,099 9,625 8,990 9,391 9,084
Noninterest income 2,890 2,620 2,283 1,862 2,280 (555) 1,507 1,497
Noninterest expense 7,977 7,440 7,083 6,065 6,129 9,103 5,863 5,646
Income before income taxes 5,212 5,770 5,045 4,896 5,776 (668) 5,035 4,935
Income taxes 1,851 2,006 1,778 1,672 2,033 255 1,751 1,697
Net income (loss) 3,361 3,764 3,267 3,224 3,743 (923) 3,284 3,238
- ---------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Earnings (loss) - basic $ 0.37 0.41 0.36 0.37 0.42 (0.10) 0.37 0.37
Earnings (loss) - diluted 0.36 0.40 0.35 0.36 0.41 (0.10) 0.36 0.36
Cash dividends declared 0.22 0.22 0.22 0.22 0.22 0.22 0.17 0.17
Market Price
High $ 24.00 25.75 28.08 22.25 16.13 15.50 16.94 17.25
Low 21.03 21.00 18.00 15.50 14.25 13.50 12.63 12.06
Close 22.55 24.00 24.63 21.25 15.75 15.50 13.88 12.06
Book value 12.81 12.73 12.69 12.66 12.54 12.32 12.43 12.15
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Assets $ 1,109,460 1,090,592 1,059,085 924,985 916,691 925,899 912,626 883,984
Loans 884,952 873,958 815,799 752,557 738,427 718,301 690,810 657,730
Earning assets 1,041,740 1,018,229 992,589 881,955 874,199 885,845 869,020 840,012
Deposits 965,577 946,152 914,764 773,462 770,806 760,794 731,053 716,687
Interest-bearing liabilities 891,298 873,828 847,300 737,824 726,504 744,956 721,863 703,285
Shareholders' equity 117,061 118,230 115,699 111,491 111,701 110,545 109,782 108,344
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios
Return on average assets 1.20% 1.37% 1.24% 1.41% 1.62% (0.40)% 1.44% 1.47%
Return on average equity 11.39% 12.63% 11.33% 11.73% 13.29% (3.31)% 12.00% 11.99%
Average equity to average
assets 10.55% 10.84% 10.92% 12.05% 12.19% 11.94% 12.03% 12.26%
Equity to assets at
end of period: 10.20% 10.52% 10.70% 10.73% 12.09% 11.84% 11.59% 11.78%
Tangible equity to assets
at end of period 8.06% 8.56% 8.64% 8.89% 11.59% 11.32% 11.08% 11.23%
Average loans to average
deposits 91.65% 92.37% 89.18% 97.30% 95.80% 94.41% 94.50% 91.77%
Average earning assets to
interest-bearing liabilities 116.87% 116.53% 117.15% 119.54% 120.33% 118.91% 120.39% 119.44%
Net interest margin 4.12% 4.30% 4.17% 4.35% 4.54% 4.41% 4.56% 4.56%
Nonperforming loans as a
percent of total loans 0.44% 0.54% 0.61% 0.50% 0.12% 0.17% 0.14% 0.22%
Nonperforming assets as a
percent of loans and other
real estate 0.58% 0.67% 0.78% 0.67% 0.24% 0.27% 0.25% 0.36%
Nonperforming assets as a
percent of total assets 0.45% 0.53% 0.62% 0.50% 0.19% 0.21% 0.18% 0.27%
Net charge-offs as a percent
of average loans 0.17% 0.08% 0.09% 0.03% 0.06% 0.04% 0.07% 0.05%
- ---------------------------------------------------------------------------------------------------------------------------------
51
Item 8. Financial Statements
and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 2001 and 2000
($ in thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------
ASSETS
Cash & due from banks, noninterest-bearing 34,019 20,940
Due from banks, interest-bearing 41,552 1,769
Federal funds sold 11,244 7,730
------------- -------
Total cash and cash equivalents 86,815 30,439
------------- -------
Securities available for sale (costs of
$95,445 in 2001 and $69,214 in 2000) 96,469 69,597
Securities held to maturity (fair values of
$16,746 in 2001 and $47,661 in 2000) 16,338 47,924
Presold mortgages in process of settlement 10,713 1,036
Loans 890,310 746,089
Less: Allowance for loan losses (9,388) (7,893)
------------- -------
Net loans 880,922 738,196
------------- -------
Premises and equipment 18,518 14,116
Accrued interest receivable 5,880 6,342
Intangible assets 24,488 4,630
Other 4,548 2,887
------------- -------
Total assets $ 1,144,691 915,167
============= =======
LIABILITIES
Deposits: Demand - noninterest-bearing $ 96,065 70,634
Savings, NOW, and money market 353,439 253,687
Time deposits of $100,000 or more 189,948 140,992
Other time deposits 360,829 305,066
------------- -------
Total deposits 1,000,281 770,379
Borrowings 15,000 26,200
Accrued interest payable 3,480 4,254
Other liabilities 9,204 3,650
------------- -------
Total liabilities 1,027,965 804,483
------------- -------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Authorized: 12,500,000 shares
Issued and outstanding: 9,112,542 shares in 2001 and
8,827,341 shares in 2000 50,134 50,148
Retained earnings 65,915 60,280
Accumulated other comprehensive income 677 256
------------- -------
Total shareholders' equity 116,726 110,684
------------- -------
Total liabilities and shareholders' equity $ 1,144,691 915,167
============= =======
See accompanying notes to consolidated financial statements.
52
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2001, 2000 and 1999
($ in thousands, except per share data) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 68,055 62,474 50,725
Interest on investment securities:
Taxable interest income 6,372 8,482 8,581
Tax-exempt interest income 808 866 949
Other, principally overnight investments 1,538 1,093 1,336
---------- ------ ------
Total interest income 76,773 72,915 61,591
---------- ------ ------
INTEREST EXPENSE
Savings, NOW and money market 5,354 6,462 5,952
Time deposits of $100,000 or more 10,058 7,882 5,542
Other time deposits 18,941 16,862 13,613
Borrowings 1,367 3,014 1,381
---------- ------ ------
Total interest expense 35,720 34,220 26,488
---------- ------ ------
Net interest income 41,053 38,695 35,103
Provision for loan losses 1,151 1,605 910
---------- ------ ------
Net interest income after provision for loan losses 39,902 37,090 34,193
---------- ------ ------
NONINTEREST INCOME
Service charges on deposit accounts 5,265 3,118 2,993
Other service charges, commissions and fees 2,046 1,740 1,609
Fees from presold mortgage loans 1,259 453 685
Commissions from sales of insurance and financial products 731 418 271
Data processing fees 205 117 50
Loan sale gains 9 -- 34
Securities gains (losses), net 61 (1,919) 20
Branch sale gain -- 808 --
Other gains (losses) 79 (6) (15)
---------- ------ ------
Total noninterest income 9,655 4,729 5,647
---------- ------ ------
NONINTEREST EXPENSES
Salaries 12,534 10,138 9,241
Employee benefits 3,083 2,543 2,468
---------- ------ ------
Total personnel expense 15,617 12,681 11,709
Occupancy expense 1,734 1,507 1,417
Equipment related expenses 1,631 1,353 1,186
Intangibles amortization 1,535 631 636
Merger expenses -- 3,188 --
Other operating expenses 8,117 7,381 6,804
---------- ------ ------
Total noninterest expenses 28,634 26,741 21,752
---------- ------ ------
Income before income taxes 20,923 15,078 18,088
Income taxes 7,307 5,736 6,234
---------- ------ ------
NET INCOME $ 13,616 9,342 11,854
========== ===== ======
Earnings per share:
Basic $ 1.51 1.05 1.32
Diluted 1.47 1.03 1.27
Weighted average common shares outstanding:
Basic 9,032,453 8,897,966 8,966,921
Diluted 9,273,769 9,070,125 9,363,031
See accompanying notes to consolidated financial statements.
53
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2001, 2000 and 1999
($ in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------------------
Net income $ 13,616 9,342 11,854
-------- ----- ------
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period, pretax 702 2,092 (4,247)
Tax benefit (expense) (242) (806) 1,544
Reclassification to realized (gains) losses (61) 1,919 (20)
Tax expense (benefit) 22 (652) 7
-------- ------ -----
Other comprehensive income (loss) 421 2,553 (2,716)
-------- ------ -----
Comprehensive income $ 14,037 11,895 9,138
======== ====== =====
See accompanying notes to consolidated financial statements.
54
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 2001, 2000 and 1999
Accumulated Total
Common Stock Other Share-
----------------------- Unearned Retained Comprehensive holders'
(In thousands, except per share) Shares Amount Compensation Earnings Income (Loss) Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balances, January 1, 1999 9,154 $ 53,645 (87) 56,012 419 109,989
----- --------- ----- ------ ------- -------
Net income 11,854 11,854
Cash dividends declared ($0.63 per share) (5,656) (5,656)
Common stock issued under
stock option plans 179 539 539
Common stock issued into
dividend reinvestment plan 16 296 296
Purchases and retirement of common stock (500) (3,086) (4,423) (7,509)
Earned ESOP compensation 96 87 183
Other comprehensive loss (2,716) (2,716)
----- --------- ----- ------ ------- -------
Balances, December 31, 1999 8,849 51,490 -- 57,787 (2,297) 106,980
----- --------- ----- ------ ------- -------
Net income 9,342 9,342
Cash dividends declared ($0.77 per share) (6,849) (6,849)
Common stock issued under
stock option plans 140 408 408
Tax benefit realized from exercise of
nonqualified stock options 790 790
Common stock issued into
dividend reinvestment plan 22 344 344
Purchases and retirement of common stock (184) (2,884) (2,884)
Other comprehensive income 2,553 2,553
----- --------- ----- ------ ------- -------
Balances, December 31, 2000 8,827 50,148 -- 60,280 256 110,684
----- --------- ----- ------ ------- -------
Net income 13,616 13,616
Cash dividends declared ($0.88 per share) (7,981) (7,981)
Common stock issued under
stock option plans 116 731 731
Common stock issued into
dividend reinvestment plan 25 564 564
Common stock issued in acquisitions 602 9,159 9,159
Purchases and retirement of common stock (457) (10,468) (10,468)
Other comprehensive income 421 421
----- --------- ----- ------ ------- -------
Balances, December 31, 2001 9,113 $ 50,134 -- 65,915 677 116,726
===== ========= ===== ====== ======= =======
See accompanying notes to consolidated financial statements.
55
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2001, 2000 and 1999
($ in thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 13,616 9,342 11,854
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses 1,151 1,605 910
Net security premium amortization 50 60 483
Gains on sales of loans (9) -- (34)
Proceeds from sales of loans -- -- 3,688
Losses (gains) on sales of securities available for sale (61) 1,919 (20)
Gain from sale of branch -- (808) --
Loss on disposal of premises and equipment -- 98 38
Other losses (gains) (79) 6 15
Loan fees and costs deferred, net of amortization (35) 8 22
Depreciation of premises and equipment 1,424 1,217 1,117
Amortization of intangible assets 1,535 631 636
Release of ESOP shares -- -- 183
Deferred income tax expense (benefit) (51) (546) (183)
Decrease (increase) in accrued interest receivable 983 (1,077) (988)
Decrease (increase) in other assets (8,822) 1,294 661
Increase (decrease) in accrued interest payable (1,559) 714 617
Increase (decrease) in other liabilities 3,873 (325) 553
-------- ------ ------
Net cash provided by operating activities 12,016 14,138 19,552
-------- ------ ------
Cash Flows From Investing Activities
Purchases of securities available for sale (39,750) (21,967) (53,960)
Purchases of securities held to maturity (2) (170) (27,926)
Proceeds from sales of securities available for sale 2,348 54,494 3,017
Proceeds from maturities/issuer calls of securities available for sale 48,903 12,914 41,664
Proceeds from maturities/issuer calls of securities held to maturity 2,905 4,881 7,464
Net increase in loans (30,112) (105,581) (80,132)
Purchases of premises and equipment (3,216) (3,312) (2,579)
Net cash received (paid) in purchase (sale) of branches 87,892 (11,869) --
Net cash received in acquisition of insurance agencies 40 -- --
Net cash paid in acquisition of Century Bancorp (8,112) -- --
-------- ------ ------
Net cash provided (used) by investing activities 60,896 (70,610) (112,452)
-------- ------ ------
Cash Flows From Financing Activities
Net increase in deposits 25,266 73,320 55,991
Proceeds from (repayments of) borrowings, net (24,700) (36,300) 56,500
Cash dividends paid (7,929) (6,318) (5,624)
Proceeds from issuance of common stock 1,295 752 835
Purchases and retirement of common stock (10,468) (2,884) (7,509)
-------- ------ ------
Net cash provided (used) by financing activities (16,536) 28,570 100,193
-------- ------ ------
Increase (Decrease) In Cash And Cash Equivalents 56,376 (27,902) 7,293
Cash And Cash Equivalents, Beginning Of Period 30,439 58,341 51,048
-------- ------ ------
Cash And Cash Equivalents, End Of Period $ 86,815 30,439 58,341
======== ====== ======
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for:
Interest $ 37,034 33,601 25,871
Income taxes 2,865 6,126 6,511
Non-cash transactions:
Transfer of securities from held to maturity to available for sale 31,220 -- --
Foreclosed loans transferred to other real estate 820 -- 120
Unrealized gain (loss) on securities available for sale, net of taxes 421 2,553 (2,716)
Premises and equipment transferred to other real estate 425 85 315
See accompanying notes to consolidated financial statements.
56
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; Montgomery Data Services, Inc. (Montgomery Data); and
First Bancorp Financial Services, Inc., (First Bancorp Financial). The Bank has
two wholly owned subsidiaries: First Bank Insurance Services, Inc. (First Bank
Insurance) and First Montgomery Financial Services Corporation (First
Montgomery). First Montgomery has one wholly owned subsidiary - First Troy
Realty Corporation (First Troy). All significant intercompany accounts and
transactions have been eliminated.
The Company is a bank holding company. The principal activity of the
Company is the ownership and operation of First Bank, a state chartered bank
with its main office in Troy, North Carolina. Other subsidiaries include
Montgomery Data, a data processing company whose primary client is First Bank,
and First Bancorp Financial, a real estate investment subsidiary, both of which
are headquartered in Troy. 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, during 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 has
been 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.
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.
57
(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 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 are transferred to them at par
within several weeks of the Company initially funding the loan. The Company
receives origination fees from borrowers and servicing release premiums from the
investors that are recognized on the income statement 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, 2001 or 2000.
(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.
58
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, which includes foreclosed,
repossessed, and idled properties, is recorded at the lower of cost or fair
value based on recent appraisals, less estimated costs to sell. Declines in the
fair value of other real estate are recorded by a charge to expense during the
period of decline.
(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.
(j) Intangible Assets - Branch and business acquisitions typically result
in the Company recording certain intangible assets, principally deposit base
premiums and goodwill. The Company's policy is to amortize these 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. The acquisition-related intangible assets, including intangible assets
subject to Statement of Financial Accounting Standards No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions," outstanding at each
period end presented are being amortized predominantly over 15 years. These
intangible assets and their useful lives are subject to periodic review and are
adjusted for any impairment in value. As discussed in Note 1(r) below, recently
issued accounting pronouncements will significantly affect the way the Company
records and accounts for acquisition related intangible assets in future
periods.
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 $253,000 and $138,000 at December 31, 2001 and 2000, respectively.
(k) Stock Option Plan - The Company accounts for its stock option plans
in accordance with the provisions of Accounting Principles Board Opinion No. 25
(APB Opinion No. 25), "Accounting for Stock Issued to Employees," and related
interpretations. As such, no compensation expense has been recorded for stock
options in the consolidated financial statements. As required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), the Company provides pro forma net income and pro
forma earnings per share disclosures for employee stock option grants made since
1995 as if the fair-value-based method defined in SFAS No. 123 had been applied.
(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.
59
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,
--------------------------------------------------------------------------------------------------------
2001 2000 1999
-------------------------------- -------------------------------- -------------------------------
($ in thousands, Income Shares Per Income Shares Per Income Shares Per
except per share (Numer (Denom Share (Numer (Denom Share (Numer (Denom Share
amounts) -ator) -inator) Amount -ator) -inator) Amount -ator) -inator) Amount
------ -------- ------ ------ -------- ------ ------ -------- ------
Basic EPS $13,616 9,032,453 $ 1.51 $ 9,342 8,897,966 $ 1.05 $ 11,854 8,966,921 $ 1.32
======== ======== =========
Effect of dilutive
securities -- 241,316 -- 172,159 -- 396,110
------- --------- -------- --------- -------- ---------
Diluted EPS $13,616 9,273,769 $ 1.47 $ 9,342 9,070,125 $ 1.03 $ 11,854 9,363,031 $ 1.27
======= ========= ======== ======== ========= ======== ======== ========= ========
For the years ended December 31, 2001, 2000, and 1999, there were
options of 144,250, 255,244, and 42,750, 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.
60
Commitments to Extend Credit and Standby Letters of Credit - At
December 31, 2001 and 2000, 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 - The Company reviews its long-lived assets and goodwill
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. As discussed in Note 1(r) below, recently
issued accounting standards will significantly alter the way the Company
measures certain of its long-lived assets for 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. As of and for the periods presented, the sole
component of other comprehensive income for the Company has consisted of the
unrealized gains and losses, net of taxes, of the Company's available for sale
securities portfolio.
(p) Segment Reporting - Statement of Financial Accounting Standards 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 2001 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 is 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," and SFAS No. 142, "Goodwill and Other
Intangible Assets." 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 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
61
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 will be adopted on January 1, 2002.
Unamortized goodwill on the books of the Company amounted to $5,609,000 and
$2,900,000 at December 31, 2001 and 2000, respectively. Amortization of goodwill
(under previous accounting standards) amounted to $511,000, $373,000, and
$373,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
At December 31, 2001 and 2000, the Company had $325,000 and $106,000,
respectively, in identifiable intangible assets that are subject to the
provisions of Statement 142. Approximately $236,000 of the December 31, 2001
amount relates to the Company's acquisition of two insurance agencies during
2001. Approximately $89,000 of the December 31, 2001 amount and all of the
December 31, 2000 amount relates to core deposit premium associated with one of
the Company's whole-bank acquisitions. As noted above, Statement 142 requires
that identifiable intangible assets be amortized over their respective estimated
useful lives to their estimated residual values. A 15 year straight-line
amortization schedule has been established for the vast majority of the
Company's identifiable intangible assets. Amortization of the Company's
identifiable intangible assets amounted to $25,000, $21,000, and $26,000, for
the years ended December 31, 2001, 2000, and 1999, respectively.
Under current accounting standards, the Company will continue to record
significant amounts of amortization expense, as a majority of the Company's
intangible assets continue to be subject to the provisions of SFAS No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Acquisitions." Of the
$24,488,000 in intangible assets at December 31, 2001, $18,301,000 is subject to
the provisions of SFAS No. 72 ("SFAS No. 72 Intangible Assets"). The Company had
$1,486,000 in SFAS No. 72 Intangible Assets (with total intangible assets of
$4,630,000) at December 31, 2000. The Company's SFAS No. 72 Intangible Assets
will continue to be amortized over the approximate estimated lives of the
related acquired deposit relationships. In accordance with the Company's
estimate of the approximate lives of the acquired deposit relationships, a 15
year straight-line amortization schedule has been established for a majority of
the Company's SFAS No. 72 Intangible Assets. The Company will continue to
evaluate amortization periods for its SFAS No. 72 Intangible Assets, and such
amortization periods could be revised downwards (but not upwards) in the future
if circumstances warrant. Amortization of SFAS No. 72 Intangible Assets amounted
to $999,000, $237,000, and $237,000 for the years ended December 31, 2001, 2000
and 1999, respectively.
In connection with Statement 142's transitional goodwill impairment
evaluation, the Statement will require the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings. The Company has not completed the assessment of impaired goodwill, but
at this time does not expect the results of the assessment to indicate any
goodwill impairment.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets," which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This standard provides guidance of
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. SFAS No. 144 supersedes FASB Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". SFAS No. 144 also supersedes Accounting Principals
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 is effective for
the Company beginning on January 1, 2002. The adoption of this statement is not
expected to have a material impact on the Company's financial statements.
62
Note 2. Acquisitions and Divestitures
Since January 1, 1999, the Company has completed several acquisitions
and had one branch divestiture. 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. 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 was recorded in connection with this acquisition and is being amortized
on a straight-line basis over 15 years. This is a SFAS No. 72 Intangible Asset
(see definition in note 1(r) above) and thus will continue to be amortized.
(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 and is being amortized on a straight-line basis over 15
years. This intangible asset is an identifiable intangible asset under Statement
142 (see discussion in note 1(r) above) and thus will continue to be amortized.
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 was recorded in connection with this acquisition and is
being amortized on a straight-line basis over 15 years. This intangible asset
meets the criteria for being classified as goodwill (see discussion in note 1(r)
above) under Statement 142 and thus amortization related to this intangible
asset will cease as of January 1, 2002. Periodic assessments (at least annually)
for impairment of this goodwill will be performed.
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,
63
Pembroke and St. Pauls) and increase market share in one market (Laurinburg).
Total intangible assets of $14.6 million were recorded in connection with the
purchase and are being amortized on a straight-line basis over 15 years. These
intangible assets are SFAS No. 72 Intangible Assets (see definition in note 1(r)
above) and thus will continue to be amortized.
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:
Robeson and
Salisbury Insurance Scotland
Assets acquired branch agencies Century Counties branches Total
- --------------- --------- --------- ------- ------------------- -----
(in millions)
Cash $ 17.7 -- 5.9 70.2 93.8
Securities -- -- 9.0 -- 9.0
Loans, gross 9.3 -- 90.2 16.7 116.2
Allowance for loan losses (0.2) -- (0.6) (0.3) (1.1)
Property, plant and equipment 0.5 0.1 0.6 1.9 3.1
Other -- -- 1.4 -- 1.4
------- ---- ---- ----- -----
Total assets acquired 27.3 0.1 106.5 88.5 222.4
------- ---- ---- ----- -----
Liabilities assumed
Deposits 30.3 -- 71.7 102.6 204.6
Borrowings -- -- 13.5 -- 13.5
Other 0.2 -- 2.5 0.5 3.2
------- ---- ---- ----- -----
Total liabilities assumed 30.5 -- 87.7 103.1 221.3
------- ---- ---- ----- -----
Value of cash paid and/or
stock issued to stock-
holders of
acquiree n/a 0.3 22.0 n/a 22.3
------- ---- ---- ----- -----
Intangible assets recorded $ 3.2 0.2 3.2 14.6 21.2
======= ==== ==== ===== =====
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.
The merger was accounted for as a pooling-of-interests and,
accordingly, all financial results periods prior to the acquisition have been
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.
The Company did not complete any acquisitions or divestitures during
1999.
There are no pending mergers, acquisitions or divestitures as of
December 31, 2001.
64
Note 3. Securities
The book values and approximate fair values of investment securities at
December 31, 2001 and 2000 are summarized as follows:
2001 2000
----------------------------------------------- --------------------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Gains (Losses) Cost Value Gains (Losses)
--------- ----- ----- -------- ---- ----- ----- --------
(In thousands)
Securities available for sale:
U.S. Treasury $ 500 512 12 -- 5,508 5,527 19 --
U.S. Government agencies 27,222 28,111 898 (9) 40,409 40,797 422 (34)
Mortgage-backed securities 51,901 52,227 482 (156) 16,942 16,922 87 (107)
Corporate bonds 8,845 8,663 14 (196) -- -- -- --
State and local governments -- -- -- -- 1,230 1,249 19 --
Equity securities 6,977 6,956 -- (21) 5,125 5,102 -- (23)
------- ------ ----- ---- ------ ------ ---- -----
Total available for sale $95,445 96,469 1,406 (382) 69,214 69,597 547 (164)
======= ====== ===== ==== ====== ====== ==== =====
Securities held to maturity:
State and local governments $16,130 16,538 462 (54) 15,935 16,185 328 (78)
Other 208 208 -- -- 256 256 -- --
U.S. Government agencies -- -- -- -- 11,854 11,578 -- (276)
Mortgage-backed securities -- -- -- -- 19,879 19,642 12 (249)
------- ------ ----- ---- ------ ------ ---- -----
Total held to maturity $16,338 16,746 462 (54) 47,924 47,661 340 (603)
======= ====== ===== ==== ====== ====== ==== =====
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. Included in mortgage-backed securities at December
31, 2000 were collateralized mortgage obligations with an amortized cost of
$13,543,000 and a fair value of $13,521,000.
The Company owned Federal Home Loan Bank stock with a cost and fair
value of $5,806,000 at December 31, 2001 and $4,962,000 at December 31, 2000,
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 8 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, 2001, by contractual maturity, are summarized in the table below.
Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Securities Available for Sale Securities Held to Maturity
----------------------------- ---------------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
------------- ------------- ------------- -----------
Debt securities
Due within one year $12,494 12,775 $ 2,111 2,136
Due after one year but within five years 5,000 5,193 4,978 5,124
Due after five years but within ten years 11,056 11,498 7,810 8,058
Due after ten years 8,017 7,820 1,439 1,428
Mortgage-backed securities 51,901 52,227 -- --
------- ------- ------- -------
Total debt securities 88,468 89,513 16,338 16,746
Equity securities 6,977 6,956 -- --
------- ------- ------- -------
Total securities $95,445 96,469 $16,338 16,746
======= ====== ======= ======
At December 31, 2001 and 2000, investment securities with book values
of $38,797,000 and $32,156,000, respectively, were pledged as collateral for
public and private deposits.
65
Sales of securities available for sale with aggregate proceeds of
$2,348,000 in 2001, $54,494,000 in 2000, and $3,017,000 in 1999, resulted in
gross gains of $61,000 in 2001, gross gains of $89,000 and gross losses of
$2,008,000 in 2000, gross gains of $20,000 in 1999.
Note 4. Loans And Allowance For Loan Losses
Loans at December 31, 2001 and 2000 are summarized as follows:
(In thousands) 2001 2000
--------- --------
Commercial, financial, and agricultural $ 79,695 76,507
Real estate - construction 66,304 57,608
Real estate - mortgage 697,498 571,638
Installment loans to individuals 47,471 41,047
--------- -------
Subtotal 890,968 746,800
Unamortized net deferred loan fees (658) (711)
--------- -------
Loans, net of deferred fees $ 890,310 746,089
========= =======
Loans described above as "Real estate - mortgage" included loans secured
by 1-4 family dwellings in the amounts of $442,000,000 and $380,400,000 as of
December 31, 2001 and 2000, respectively, with such loans being pledged as
collateral for certain borrowings (see note 8). The loans above also include
loans to executive officers and directors and to their associates totaling
approximately $8,405,000 and $8,578,000 at December 31, 2001 and 2000,
respectively. During 2001, additions to such loans were approximately $2,650,000
and repayments totaled approximately $2,823,000. 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, 2001 and 2000 are as follows:
(In thousands) 2001 2000
------ ------
Loans: Nonaccrual loans $3,808 626
Restructured loans 83 237
------ -----
Total nonperforming loans 3,891 863
Other real estate (included in other assets) 1,253 893
------ -----
Total nonperforming assets $5,144 1,756
====== =====
At December 31, 2001 and 2000 there were no loans 90 days or more past
due that were still accruing interest
If the nonaccrual loans and restructured loans as of December 31, 2001,
2000 and 1999 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 $320,000,
$62,000 and $123,000 for nonaccrual loans and $10,000, $27,000 and $27,000 for
restructured loans would have been recorded for 2001, 2000 and 1999,
respectively. Interest income on such loans that was actually collected and
included in net income in 2001, 2000, and 1999 amounted to approximately
$76,000, $38,000 and $71,000 for nonaccrual loans (prior to their being placed
on nonaccrual status) and $7,000, $21,000 and $24,000 for restructured loans,
respectively.
66
Activity in the allowance for loan losses for the years ended December
31, 2001, 2000 and 1999 is as follows:
(In thousands) 2001 2000 1999
---- ---- ----
Balance, beginning of year $ 7,893 6,674 6,100
Provision for loan losses 1,151 1,605 910
Recoveries of loans charged-off 131 89 112
Loans charged-off (912) (475) (448)
Allowance recorded related to loans
assumed in corporate acquisitions 1,125 -- --
------- ------- -------
Balance, end of year $ 9,388 7,893 6,674
======= ======= =======
At December 31, 2001 and 2000, the recorded investment in loans
considered to be impaired was $2,482,000 and $293,000, 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, 2001 and 2000 was $432,000 and
$44,000, respectively. There were no impaired loans at December 31, 2001 or 2000
for which there was no related allowance. The average recorded investments in
impaired loans during the years ended December 31, 2001, 2000, and 1999 were
approximately $2,450,000, $218,000, and $123,000, respectively. For the years
ended December 31, 2001, 2000, and 1999, 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, 2001 and 2000 consist of the
following:
(In thousands) 2001 2000
---- ----
Land $ 4,455 2,759
Buildings 14,138 11,555
Furniture and equipment 10,957 9,339
Leasehold improvements 569 569
-------- ------
Total cost 30,119 24,222
Less accumulated depreciation and amortization (11,601) (10,106)
-------- ------
Net book value of premises and equipment $ 18,518 14,116
======== ======
Note 6. Income Taxes
Total income taxes for the years ended December 31, 2001, 2000 and 1999
were allocated as follows:
(In thousands) 2001 2000 1999
---- ---- ----
Net income $7,307 5,736 6,234
Stockholders' equity, for unrealized holding gain (loss) on
debt and equity securities for financial reporting purposes 220 1,458 (1,551)
------ ----- -----
Total income taxes $7,527 7,194 4,683
====== ===== =====
67
The components of income tax expense (benefit) for the years ended
December 31, 2001, 2000 and 1999 are as follows:
(In thousands) 2001 2000 1999
---- ---- ----
Current - Federal $ 7,256 6,108 6,035
- State 102 174 382
Deferred - Federal (51) (546) (183)
------- ------- -------
Total $ 7,307 5,736 6,234
======= ======= =======
The sources and tax effects of temporary differences that give rise to
significant portions of the deferred tax assets (liabilities) at December 31,
2001 and 2000 are presented below:
(In thousands) 2001 2000
---- ----
Deferred tax assets:
Allowance for loan losses $ 3,058 2,231
Excess book over tax retirement plan cost 207 142
Basis of investment in subsidiary 69 69
Net loan fees recognized for tax reporting purposes 113 72
Reserve for employee medical expense for financial reporting purposes 12 12
Deferred compensation 146 37
Excess of book over tax related to intangible assets 147 114
All other 140 144
------- -----
Gross deferred tax assets 3,892 2,821
Less: Valuation allowance (123) (118)
------- -----
Net deferred tax assets 3,769 2,703
------- -----
Deferred tax liabilities:
Loan fees (916) (562)
Excess tax over book pension cost (237) (25)
Depreciable basis of fixed assets (944) (791)
Amortizable basis of intangible assets (35) (42)
Unrealized gain on securities available for sale (347) (127)
Book versus tax basis difference - FHLMC stock (426) --
FHLB stock dividends (439) (329)
All other (154) (42)
------- -----
Gross deferred tax liabilities (3,498) (1,918)
------- -----
Net deferred tax asset (included in other assets) $ 271 785
======= =====
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 $220,000 as of December 31,
2001 has been recorded directly to shareholders' equity. Purchase acquisitions
also decreased the net deferred tax asset by $345,000 in 2001. The balance of
the 2001 change in the net deferred tax asset of $51,000 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 income at December 31, 2001 and 2000 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.
68
The following is a reconcilement of federal income tax expense at the
statutory rate of 35% for 2001 and 34% for 2000 and 1999 to the income tax
provision reported in the financial statements.
(In thousands) 2001 2000 1999
---- ---- ----
Tax provision at statutory rate $ 7,323 5,127 6,150
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income (341) (350) (357)
Non-deductible interest expense 46 49 41
Non-deductible portion of amortization of
intangible assets 178 127 126
State income taxes, net of federal benefit 66 114 252
Nondeductible acquisition costs -- 572 --
Other, net 35 97 22
------- ----- -----
Total $ 7,307 5,736 6,234
======= ===== =====
Note 7. Deposits
At December 31, 2001, the scheduled maturities of time deposits are as
follows:
(In thousands)
2002 $ 488,341
2003 42,649
2004 8,530
2005 6,810
2006 4,200
Thereafter 247
---------
$ 550,777
=========
Note 8. Borrowings
The Company has three sources of borrowing capacity - 1) an
approximately $169,000,000 line of credit with the Federal Home Loan Bank
(FHLB), 2) a $35,000,000 overnight federal funds line of credit with a
correspondent bank, and 3) an approximately $37,000,000 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
$169,000,000 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 following table presents information regarding the Company's
outstanding FHLB borrowings at December 31, 2001 and 2000:
69
Call Feature Amount Interest Rate
---------------------------------- ------------ -------------
2001
- ---------------------
Due on May 6, 2002 None $ 5,000,000 7.43% fixed
Due on May 5, 2003 None 5,000,000 7.49% fixed
Due on April 21, 2009 Callable by FHLB on April 21, 2004 5,000,000 5.26% fixed
------------ -----------
Total FHLB borrowings/
weighted average rate $ 15,000,000 6.73%
============ ==========
2000
Due on May 8, 2001 None $ 5,000,000 7.27% fixed
Due on May 31, 2001 None 1,200,000 7.41% fixed
Due on May 6, 2002 None 5,000,000 7.43% fixed
Due on May 5, 2003 None 5,000,000 7.49% fixed
Due on April 22, 2004 Callable by FHLB on April 22, 2001 5,000,000 5.01% fixed
Due on April 21, 2009 Callable by FHLB on April 21, 2004 5,000,000 5.26% fixed
------------ -----------
Total FHLB borrowings/
weighted average rate $ 26,200,000 6.53%
============ ===========
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 borrowings outstanding. At December 31, 2001, the Company's qualifying
collateral amounted to 16.7 times the amount of borrowings outstanding.
The Company also has a correspondent bank relationship established that
allows the Company to purchase up to $35,000,000 in federal funds on an
overnight, unsecured basis. The Company had no borrowings outstanding under this
line at December 31, 2001 or 2000. This line of credit was not drawn upon in
2001. There was insignificant use of this line during 1999 and 2000 with total
interest expense incurred amounting to approximately $5,000 each year.
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, 2001, the available line of
credit is approximately $37,000,000. 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 9. 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 $243,000 in 2001, $234,000 in 2000, and $213,000
in 1999.
70
Future obligations for minimum rentals under noncancelable operating
leases at December 31, 2001 are as follows:
(In thousands)
Year ending December 31:
2002 $ 250
2003 153
2004 80
2005 66
2006 51
Later years 302
-----
Total $ 902
=====
Note 10. Employee Benefit Plans
401(k) Plan. The Company sponsors a salary reduction profit sharing
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 $370,000, $292,000, and $239,000 for the years ended December 31,
2001, 2000 and 1999, respectively. The Company made additional discretionary
matching contributions to the plan of $100,000 in 2001, $150,000 in 2000 and
$100,000 in 1999. 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 $170,000 in 2001 and 2000 and
$160,000 in 1999.
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, 2001, the Retirement Plan's assets were invested in Company common
stock (7%), equity mutual funds (69%), and fixed income mutual funds (24%).
71
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) 2001 2000 1999
---- ---- ----
Benefit obligation at beginning of year $ 4,704 3,879 4,052
Service cost 357 260 282
Interest cost 375 324 277
Actuarial loss (gain) 709 392 (609)
Benefits paid (63) (151) (123)
------- ----- -----
Benefit obligation at end of year $ 6,082 4,704 3,879
======= ===== =====
The following table reconciles the beginning and ending balances of the
Pension Plan's assets:
(In thousands) 2001 2000 1999
---- ---- ----
Plan assets at beginning of year $ 4,005 4,479 3,582
Actual return on plan assets (49) (323) 804
Employer contributions 1,000 -- 216
Benefits paid (63) (151) (123)
------- ----- -----
Plan assets at end of year $ 4,893 4,005 4,479
======= ===== =====
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) 2001 2000
---- ----
Funded status $(1,189) (699)
Unrecognized net actuarial loss 1,405 260
Unrecognized prior service cost 439 544
Unrecognized transition obligation 53 55
------- ----
Prepaid pension cost $ 708 160
======= ====
Net pension cost for the Pension Plan included the following components
for the years ended December 31, 2001, 2000 and 1999:
(In thousands) 2001 2000 1999
---- ---- ----
Service cost - benefits earned during the period $ 357 260 282
Interest cost on projected benefit obligation 375 324 277
Expected return on plan assets (387) (417) (340)
Net amortization and deferral 107 105 111
----- ---- ----
Net periodic pension cost $ 452 272 330
===== ==== ====
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.
72
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) 2001 2000 1999
---- ---- ----
Benefit obligation at beginning of year $ 765 508 442
Service cost 52 25 30
Interest cost 67 52 33
Actuarial loss 190 196 19
Benefits paid (4) (16) (16)
------- ---- ----
Benefit obligation at end of year $ 1,070 765 508
======= ==== ====
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) 2001 2000
---- ----
Funded status $(1,070) (765)
Unrecognized net actuarial loss 302 122
Unrecognized prior service cost 217 253
Adjustment for minimum liability 28 (118)
------- ----
Accrued pension cost $ (523) (508)
======= ====
Net pension cost for the SERP Plan included the following components
for the years ended December 31, 2001, 2000 and 1999:
(In thousands) 2001 2000 1999
---- ---- ----
Service cost - benefits earned during the period $ 52 25 30
Interest cost on projected benefit obligation 67 52 33
Net amortization and deferral 48 39 37
---- ---- ----
Net periodic pension cost $167 116 100
==== ==== ====
The following assumptions were used in determining the actuarial
information for the Retirement Plan and the SERP Plan for the years ended
December 31, 2001, 2000 and 1999:
2001 2000 1999
-------------------- ------------------- --------------------
Retirement SERP Retirement SERP Retirement SERP
Plan Plan Plan Plan Plan Plan
---------- ---- ---------- ---- ---------- ----
Discount rate used to determine net periodic
pension cost 7.75% 7.75% 7.75% 7.75% 6.50% 6.50%
Discount rate used to calculate end of year
liability disclosures 7.25% 7.25% 7.75% 7.75% 7.75% 7.75%
Expected long-term rate of return on assets 9.50% n/a 9.50% n/a 9.50% n/a
Rate of compensation increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Included in intangible assets at December 31, 2001 and 2000 is $253,000
and $138,000, respectively, that has been recognized in connection with the
accrual of the additional minimum liability for the SERP Plan.
73
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 2001, 2000
and 1999 under the Split-Dollar Plan on behalf of all executive officers as a
group were $29,000, $26,000 and $24,000, respectively.
First Savings Plans - First Savings maintained a defined contribution
plan and an employee stock ownership plan ("ESOP") for its employees. The
defined contribution plan was a profit sharing plan in which First Savings made
annual contributions to the plan on behalf of eligible employees at levels
determined by its board of directors based on company goals. The ESOP was
created in 1994 at the time First Savings converted to stock form. At the time
of the conversion, the ESOP borrowed $648,000 to purchase shares of First
Savings stock. The loan was paid off over time from discretionary contributions
made by First Savings.
The defined contribution plan and the ESOP became inactive during 2000
as a result of the Company's acquisition of First Savings and have been
terminated. Total expenses recorded in the accompanying Consolidated Statements
of Income for the years presented are as follows. Such amounts are in addition
to benefit plan expenses noted earlier in this note.
2001 2000 1999
---- ---- ----
First Savings Defined Contribution Plan $ -- 163 143
First Savings ESOP -- -- 133
Note 11. Commitments And Contingencies
See Note 9 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, 2001,
the Company had outstanding loan commitments of $154,194,000, of which
$128,198,000 were at variable rates and $25,996,000 were at fixed rates.
Included in outstanding loan commitments were unfunded commitments of
$76,395,000 on revolving credit plans, of which $69,068,000 were at variable
rates and $7,327,000 were at fixed rates. Additionally, standby letters of
credit of approximately $1,746,000 and $2,836,000 were outstanding at December
31, 2001 and 2000, respectively. The Company's exposure to credit loss for the
aforementioned commitments in the event of nonperformance by the party to whom
credit or financial guarantees have been extended is represented by the
contractual amount of the financial instruments discussed above. However,
management believes that these commitments represent no more than the normal
lending risk that the Company commits to its borrowers. If these commitments are
drawn, the Company plans to obtain collateral if it is deemed necessary based on
management's credit evaluation of the counter-party. The types of collateral
held varies but may include accounts receivable, inventory and commercial or
residential real estate. 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
74
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 12. Fair Value Of Financial Instruments
Fair value estimates as of December 31, 2001 and 2000 and limitations
thereon are set forth below for the Company's financial instruments. Please see
Note 1 for a discussion of fair value methods and assumptions, as well as fair
value information for off-balance sheet financial instruments.
December 31, 2001 December 31, 2001
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In thousands)
Cash and due from banks,
noninterest-bearing $ 34,019 34,019 20,940 20,940
Due from banks, interest-bearing 41,552 41,552 1,769 1,769
Federal funds sold 11,244 11,244 7,730 7,730
Securities available for sale 96,469 96,469 69,597 69,597
Securities held to maturity 16,338 16,746 47,924 47,661
Presold mortgages in process
of settlement 10,713 10,713 1,036 1,036
Loans, net of allowance 880,922 892,241 738,196 730,987
Accrued interest receivable 5,880 5,880 6,342 6,342
Deposits 1,000,281 1,004,264 770,379 771,171
Borrowings 15,000 15,557 26,200 26,367
Accrued interest payable 3,480 3,480 4,254 4,254
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 13. 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.
75
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, 2001, there were 26,400 additional shares available for
grant under the Option Plan. The per share weighted-average fair value of
options granted during 2001, 2000, and 1999 was $6.87, $4.50, and $4.28,
respectively on the date(s) of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
2001 2000 1999
---- ---- ----
Expected dividend yield 3.80% 4.67% 3.96%
Risk-free interest rate 5.09% 6.15% 5.49%
Expected life 8 years 8 years 7.25 years
Expected volatility 35.00% 34.00% 25.00%
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. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below. The pro forma net income for 2000 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.
(In thousands except per share data) 2001 2000 1999
---- ---- ----
Net income: As reported $ 13,616 9,342 11,854
Pro forma 13,343 8,721 11,548
Earnings per share: Basic - As reported 1.51 1.05 1.32
Basic - Pro forma 1.48 0.98 1.29
Diluted - As reported 1.47 1.03 1.27
Diluted - Pro forma 1.44 0.96 1.23
76
The following table sets forth a summary of the activity of the Company's
outstanding options, including the options related to First Savings, since
December 31, 1998:
Options Exercisable
Options Outstanding at Year End
------------------------ ------------------------
Weighted- Weighted-
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
------ ----- ------ -----
Balance at December 31, 1998 917,340 $ 8.84 729,059 $ 8.53
Granted 171,744 16.73
Exercised (171,995) 7.93
Forfeited (600) 18.50
Expired (150) 18.50
Balance at December 31, 1999 916,339 10.77 693,183 9.43
Granted 25,000 15.30
Exercised (241,244) 7.99
Forfeited (1,200) 13.44
Expired -- --
Balance at December 31, 2000 698,895 11.50 688,895 11.45
Granted 140,750 23.05
Assumed in corporate
acquisition 18,656 15.33
Exercised (145,777) 9.52
Forfeited -- --
Expired -- --
Balance at December 31, 2001 712,524 $ 14.28 587,774 $ 12.58
======= ========= ======= =========
The following table summarizes information about the stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/01 Contractual Life Price at 12/31/01 Price
- --------------- ----------- ---------------- ----- ----------- -----
$6.66 to $8.99 266,195 2.3 $ 7.75 266,195 $ 7.75
$9 to $11.99 57,900 4.7 11.40 57,900 11.40
$12 to $14.99 10,000 8.7 14.63 2,000 14.63
$15 to $17.99 197,179 7.3 16.49 197,179 16.49
$18 to $20.99 27,000 5.9 19.10 27,000 19.10
$21 to $24 154,250 9.3 22.96 37,500 23.28
------- --- --------- ------- ---------
712,524 5.6 $ 14.28 587,774 $ 12.58
======= === ========= ======= =========
Note 14. 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
77
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, 2001, the Bank had undivided profits of approximately
$51,727,000 which were available for the payment of dividends. As of December
31, 2001, approximately $62,339,000 of the Company's investment in the Bank is
restricted as to transfer to the Company without obtaining prior regulatory
approval.
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 calculated in accordance with generally accepted accounting
principles, 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, 2001 and 2000 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.
78
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- --------------------- ---------------------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------- ------ ----- ------ ----- ------ -----
(must equal or exceed) (must equal or exceed)
As of December 31, 2001
Total Capital Ratio
Company $100,949 11.99% 67,372 8.00% N/A N/A
Bank 98,967 11.77% 67,289 8.00% 84,111 10.00%
Tier I Capital Ratio
Company 91,561 10.99% 33,311 4.00% N/A N/A
Bank 89,579 10.77% 33,269 4.00% 49,904 6.00%
Leverage Ratio
Company 91,561 8.44% 43,371 4.00% N/A N/A
Bank 89,579 8.27% 43,327 4.00% 54,158 5.00%
As of December 31, 2000
Total Capital Ratio
Company $113,691 16.40% 55,470 8.00% N/A N/A
Bank 111,332 16.08% 55,384 8.00% 69,230 10.00%
Tier I Capital Ratio
Company 105,798 15.43% 27,419 4.00% N/A N/A
Bank 103,439 15.11% 27,376 4.00% 41,064 6.00%
Leverage Ratio
Company 105,798 11.60% 36,472 4.00% N/A N/A
Bank 103,439 11.36% 36,432 4.00% 45,540 5.00%
The average reserve balance maintained under the requirements of the
Federal Reserve was approximately $14,358,000 for the year ended December 31,
2001.
Note 15. Supplementary Income Statement Information
Components of other operating expenses exceeding 1% of total income for
any of the years ended December 31, 2001, 2000 and 1999 are as follows:
(In thousands) 2001 2000 1999
---- ---- ----
Stationery and supplies $ 1,279 1,174 893
Note 16. Condensed Parent Company Information
Condensed financial data for First Bancorp (parent company only) follows:
CONDENSED BALANCE SHEETS As of December 31,
- ------------------------ ------------------------
(In thousands) 2001 2000
---- ----
Assets
- ------
Cash on deposit with bank subsidiary $ 2,504 2,861
Investment in wholly-owned subsidiaries, at equity 116,243 109,791
Land 7 7
Other assets 9 49
-------- -------
Total assets $118,763 112,708
======== =======
Liabilities and shareholders' equity
- ------------------------------------
Other liabilities $ 2,037 2,024
Shareholders' equity 116,726 110,684
-------- -------
Total liabilities and shareholders' equity $118,763 112,708
======== =======
79
CONDENSED STATEMENTS OF INCOME Year Ended December 31,
(In thousands) ------------------------------------------
2001 2000 1999
Dividends from wholly-owned subsidiaries $ 16,300 9,025 2,175
Undistributed earnings of wholly-owned subsidiaries -- 1,387 10,017
Dividends received from wholly-owned subsidiaries in excess of
earnings (2,280)
Merger expenses incurred by parent company -- (810) --
All other income and expenses, net (404) (260) (338)
-------- ------ -------
Net income $ 13,616 9,342 11,854
======== ====== =======
CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31,
(In thousands) ------------------------------------------
2001 2000 1999
Operating Activities:
Net income $ 13,616 9,342 11,854
Equity in undistributed earnings of subsidiaries 2,280 (1,387) (10,017)
Decrease (increase) in other assets 40 804 (320)
Decrease in other liabilities (48) (6) (67)
-------- ------ -------
Total - operating activities 15,888 8,753 1,450
-------- ------ -------
Investing Activities:
Net cash paid in acquisition of Century (12,447) -- --
Purchases of securities available for sale -- -- (2,413)
Sales of securities available for sale -- 711 12,452
-------- ------ -------
Total - investing activities (12,447) 711 10,039
-------- ------ -------
Financing Activities
Advance from subsidiary 13,304 -- --
Payment of cash dividends (7,929) (6,318) (5,624)
Proceeds from issuance of common stock 1,295 752 835
Purchases and retirement of common stock (10,468) (2,884) (7,509)
-------- ------ -------
Total - financing activities (3,798) (8,450) (12,298)
-------- ------ -------
Net increase (decrease) in cash and cash equivalents (357) 1,014 (809)
Cash and cash equivalents, beginning of year 2,861 1,847 2,656
-------- ------ -------
Cash and cash equivalents, end of year $ 2,504 2,861 1,847
======== ====== =======
Supplemental Disclosures of Cash Flow Information:
Non-cash transactions:
Repayment of cash advance from subsidiary
with non-cash assets $ 13,304 -- --
80
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
------------
Raleigh, North Carolina
January 18, 2002
81
Part II. Other Information
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During the two years ended December 31, 2001, 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. 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. 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. 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. 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.
PART IV
Item 14. 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.i Copy of Articles of Incorporation of the Registrant and
amendments thereto, was filed as Exhibit 3(a) to the
82
Registrant's Registration Statement Number 33-12692, and
is incorporated herein by reference.
3.a.ii Copy of the amendment to Articles of Incorporation -
adding a new Article Nine, was filed as Exhibit 3(e) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1988, and is incorporated herein by
reference.
3.a.iii Copy of the amendment to Articles of Incorporation -
adding a new Article Ten, was filed as Exhibit 3.a.iii to
the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, and is incorporated herein
by reference.
3.a.iv Copy of the amendment to Article IV of the Articles of
Incorporation was filed as Exhibit 3.a.iv to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999, and is incorporated herein by
reference.
3.b Copy of the Bylaws of the Registrant.
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. (*)
10.e First Bancorp Senior Management Split-Dollar Life
Insurance Agreements between the Company and the
Executive Officers. (*)
10.f First Bancorp 1994 Stock Option Plan. (*)
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 Annual 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 Annual Report on Form 10-Q for the
quarter ended September 30, 1998, and is incorporated by
reference. (*)
83
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 Annual 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 Purchase and Assumption Agreement with Bank of Davie,
dated August 22, 2000 was filed as Exhibit 10.u 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 Purchase and Assumption Agreement with First Union
National Bank, dated September 13, 2000 was filed as
Exhibit 10.v to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2000 and is
incorporated herein by reference.
10.n 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.o Definitive Merger Agreement with Century Bancorp, Inc.
dated October 19, 2000 was filed on Form 8-K on October
20, 2000 and is incorporated herein by reference.
10.p Employment Agreement between the Company James G. Hudson,
Jr. dated May 17, 2001. (*)
21 List of Subsidiaries of Registrant.
23.a Consent of Independent Auditors of Registrant, KPMG LLP
(b) There were no reports filed on Form 8-K during the
quarter ended December 31, 2001
(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
84
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 12th day of March,
2002.
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 12, 2002 (Principal Accounting Officer)
March 12, 2002
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 12, 2002 March 12, 2002
/s/ Jack D. Briggs /s/ Thomas F. Phillips
------------------ ----------------------
Jack D. Briggs Thomas F. Phillips
Director Director
March 12, 2002 March 12, 2002
/s/ H. David Bruton /s/ Edward T. Taws
------------------- ------------------
H. David Bruton Edward T. Taws
Director Director
March 12, 2002 March 12, 2002
/s/ David L. Burns /s/ Frederick H. Taylor
------------------ -----------------------
David L. Burns Frederick H. Taylor
Director Director
March 12, 2002 March 12, 2002
/s/ John F. Burns /s/ Virginia C. Thomasson
----------------- -------------------------
John F. Burns Virginia C. Thomasson
Director Director
March 12, 2002 March 12, 2002
85
/s/ Felton J. Capel /s/ Goldie H. Wallace
------------------ ---------------------
Felton J. Capel Goldie H. Wallace
Director Director
March 12, 2002 March 12, 2002
/s/ James H. Garner /s/ A. Jordan Washburn
------------------ ----------------------
James H. Garner A. Jordan Washburn
Director Director
March 12, 2002 March 12, 2002
/s/ Frank G. Hardister /s/ Dennis A. Wicker
--------------------- --------------------
Frank G. Hardister Dennis A. Wicker
Director Director
March 12, 2002 March 12, 2002
/s/ James G. Hudson /s/ John C. Willis
------------------- ------------------
James G. Hudson John C. Willis
Director Director
March 12, 2002 March 12, 2002
/s/ George R. Perkins
---------------------
George R. Perkins
Director
March 12, 2002
86
EXHIBIT CROSS REFERENCE INDEX
Exhibit Page(s)
------- -------
3.a.i Copy of Articles of Incorporation of the Registrant *
3.a.ii Copy of the amendment to Articles of Incorporation *
3.a.iii Copy of the amendment to Articles of Incorporation -
adding a new Article Ten *
3.a.iv Copy of the amendment to Article IV of the Articles
of Incorporation *
3.b Copy of the Bylaws of the Registrant 88-107
4 Form of common Stock Certificate *
10.a Data processing Agreement by and between Bank of
Montgomery (First Bank) and Montgomery Data Services,
Inc. *
10.b First Bank Salary and Incentive Plan, as amended *
10.c Indemnification Agreement between the Company and its
Directors and Officers *
10.d First Bancorp Senior Management Supplemental
Executive Retirement Plan 108-130
10.e First Bancorp Senior Management Split-Dollar Life
Insurance Agreements between the Company and the
Executive Officers 131-135
10.f First Bancorp 1994 Stock Option Plan 136-146
10.g Employment Agreement between the Company and James H.
Garner *
10.h Employment Agreement between the Company and Anna G.
Hollers *
10.i Employment Agreement between the Company and Teresa
C. Nixon *
10.j Employment Agreement between the Company and Eric P.
Credle *
10.k Employment Agreement between the Company and David G.
Grigg *
10.l Purchase and Assumption Agreement with Bank of Davie *
10.m Purchase and Assumption Agreement with First Union
National Bank *
10.n Employment Agreement between the Company and John F.
Burns *
10.o Definitive Merger Agreement with Century Bancorp,
Inc. *
10.p Employment Agreement between the Company and James G.
Hudson, Jr. 147-153
21 List of Subsidiaries of Registrant 154
23.a Consent of Independent Auditors 155
* Incorporated herein by reference.
87