UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2002
Commission File Number 0-15572
FIRST BANCORP
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
- ------------------------------ ----------------------
State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
341 North Main Street, Troy, North Carolina 27371-0508
- ------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (910) 576-6171
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] YES [ ] NO
As of April 30, 2002, 9,167,697 shares of the registrant's Common Stock, no
par value, were outstanding. The registrant had no other classes of securities
outstanding.
- --------------------------------------------------------------------------------
INDEX
FIRST BANCORP AND SUBSIDIARIES
Page
Part I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets -
March 31, 2002 and 2001
(With Comparative Amounts at December 31, 2001) 3
Consolidated Statements Of Income -
For the Periods Ended March 31, 2002 and 2001 4
Consolidated Statements Of Comprehensive Income -
For the Periods Ended March 31, 2002 and 2001 5
Consolidated Statements Of Shareholders' Equity -
For the Periods Ended March 31, 2002 and 2001 6
Consolidated Statements Of Cash Flows -
For the Periods Ended March 31, 2002 and 2001 7
Notes To Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition 12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20
Part II. Other Information
Item 5 - Other Information 23
Item 6 - Exhibits and Reports on Form 8-K 23
Signatures 25
2
Part I. Financial Information
Item 1 - Financial Statements
First Bancorp and Subsidiaries
Consolidated Balance Sheets
March 31, December 31, March 31,
($ in thousands-unaudited) 2002 2001 2001
- -------------------------- ---- ---- ----
ASSETS
Cash & due from banks, noninterest-bearing $ 22,688 $ 34,019 24,944
Due from banks, interest-bearing 25,468 41,552 69,464
Federal funds sold 20,439 11,244 17,674
----------- --------- ---------
Total cash and cash equivalents 68,595 86,815 112,082
----------- --------- ---------
Securities available for sale (costs of $90,494,
$95,445, and $93,031) 90,528 96,469 94,168
Securities held to maturity (fair values of $16,644,
$16,746, and $16,768) 16,324 16,338 16,273
Presold mortgages in process of settlement 4,102 10,713 3,738
Loans 924,107 890,310 770,749
Less: Allowance for loan losses (9,729) (9,388) (8,386)
----------- --------- ---------
Net loans 914,378 880,922 762,363
----------- --------- ---------
Premises and equipment 19,932 18,518 16,106
Accrued interest receivable 5,920 5,880 6,232
Intangible assets 24,104 24,488 18,910
Other 5,663 4,548 3,206
----------- --------- ---------
Total assets $ 1,149,546 1,144,691 1,033,078
=========== ========= =========
LIABILITIES
Deposits: Demand - nonintere $ 101,331 96,065 89,538
Savings, NOW, and money market 362,777 353,439 295,800
Time deposits of $100,000 or more 183,939 189,948 160,677
Other time deposits 355,352 360,829 341,798
----------- --------- ---------
Total deposits 1,003,399 1,000,281 887,813
Borrowings 15,000 15,000 26,200
Accrued interest payable 2,703 3,480 4,322
Other liabilities 10,407 9,204 3,941
----------- --------- ---------
Total liabilities 1,031,509 1,027,965 922,276
----------- --------- ---------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Issued and outstanding: 9,167,697,
9,112,542, and 8,755,161 shares 50,459 50,134 48,476
Retained earnings 67,658 65,915 61,578
Accumulated other comprehensive income (loss) (80) 677 748
----------- --------- ---------
Total shareholders' equity 118,037 116,726 110,802
----------- --------- ---------
Total liabilities and shareholders' equity $ 1,149,546 1,144,691 1,033,078
=========== ========= =========
See notes to consolidated financial statements.
3
First Bancorp and Subsidiaries
Consolidated Statements of Income
Three Months Ended
March 31,
-------------------------
($ in thousands, except share data-unaudited) 2002 2001
- --------------------------------------------- ---- ----
INTEREST INCOME
Interest and fees on loans $ 16,204 16,422
Interest on investment securities:
Taxable interest income 1,405 1,599
Tax-exempt interest income 197 206
Other, principally overnight investments 288 197
----------- ------
Total interest income 18,094 18,424
----------- ------
INTEREST EXPENSE
Savings, NOW and money market 921 1,555
Time deposits of $100,000 or more 1,916 2,370
Other time deposits 3,714 4,656
Borrowings 250 524
----------- ------
Total interest expense 6,801 9,105
----------- ------
Net interest income 11,293 9,319
Provision for loan losses 440 220
----------- ------
Net interest income after provision
for loan losses 10,853 9,099
----------- ------
NONINTEREST INCOME
Service charges on deposit accounts 1,595 908
Other service charges, commissions and fees 636 526
Fees from presold mortgages 446 138
Commissions from sales of insurance and financial products 265 206
Data processing fees 56 47
Securities gains 20 --
Other gains (losses) (21) 37
----------- ------
Total noninterest income 2,997 1,862
----------- ------
NONINTEREST EXPENSES
Salaries 3,693 2,791
Employee benefits 920 614
----------- ------
Total personnel expense 4,613 3,405
Net occupancy expense 505 402
Equipment related expenses 483 373
Intangibles amortization 364 182
Other operating expenses 2,133 1,703
----------- ------
Total noninterest expenses 8,098 6,065
----------- ------
Income before income taxes 5,752 4,896
Income taxes 1,992 1,672
----------- ------
NET INCOME $ 3,760 3,224
=========== =====
Earnings per share:
Basic $ 0.41 0.37
Diluted 0.40 0.36
Weighted average common shares outstanding:
Basic 9,149,693 8,774,877
Diluted 9,338,366 8,987,252
See notes to consolidated financial statements.
4
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Three Months Ended
March 31,
-------------------
($ in thousands-unaudited) 2002 2001
- -------------------------- ---- ----
Net income $ 3,760 3,224
------- -----
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period, pretax (1,055) 754
Tax benefit (expense) 411 (262)
Reclassification to realized gains (20) --
Tax expense 8 --
Adjustment to minimum pension liability:
Additional pension charge related to unfunded
pension liability (165) --
Tax benefit 64 --
------- -----
Other comprehensive income (loss) (757) 492
------- -----
Comprehensive income $ 3,003 3,716
======= =====
See notes to consolidated financial statements.
5
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Accumulated
Common Stock Other Share-
------------------ Retained Comprehensive holders'
(In thousands, except per share - unaudited) Shares Amount Earnings Income (Loss) Equity
- -------------------------------------------- ------ ------ -------- ------------- ------
Balances, January 1, 2001 8,827 $ 50,148 60,280 256 110,684
Net income 3,224 3,224
Cash dividends declared ($0.22 per share) (1,926) (1,926)
Common stock issued under
stock option plan 23 68 68
Purchases and retirement of common
stock (95) (1,740) (1,740)
Other comprehensive income 492 492
----- -------- ------ --- -------
Balances, March 31, 2001 8,755 $ 48,476 61,578 748 110,802
===== ======== ====== === =======
Balances, January 1, 2002 9,113 $ 50,134 65,915 677 116,726
Net income 3,760 3,760
Cash dividends declared ($0.22 per share) (2,017) (2,017)
Common stock issued under
stock option plan 84 551 551
Common stock issued into
dividend reinvestment plan 13 289 289
Purchases and retirement of common
stock (42) (897) (897)
Tax benefit realized from exercise of
nonqualified stock options 382 382
Other comprehensive loss (757) (757)
----- -------- ------ --- -------
Balances, March 31, 2002 9,168 $ 50,459 67,658 (80) 118,037
===== ======== ====== === =======
See notes to consolidated financial statements.
6
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
---------------------
($ in thousands-unaudited) 2002 2001
- -------------------------- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,760 3,224
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses 440 220
Net security premium amortization 73 22
Loss (gain) on disposal of other real estate 21 (37)
Gain on sale of securities available for sale (20) --
Loan fees and costs deferred, net of amortization 59 (41)
Depreciation of premises and equipment 420 321
Tax benefit realized from exercise of nonqualified stock options 382 --
Amortization of intangible assets 364 182
Deferred income tax benefit (444) (82)
Decrease (increase) in accrued interest receivable (40) 110
Decrease (increase) in other assets 6,547 (2,701)
Decrease in accrued interest payable (777) (176)
Increase in other liabilities 1,394 297
-------- -------
Net cash provided by operating activities 12,179 1,339
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (4,901) --
Purchases of securities held to maturity (1) (1)
Proceeds from maturities/issuer calls of securities available for sale 9,764 6,667
Proceeds from maturities/issuer calls of securities held to maturity 16 1,148
Proceeds from sales of securities available for sale 34 --
Net increase in loans (34,304) (8,072)
Purchases of premises and equipment (2,062) (870)
Net cash received in purchase of branches -- 70,201
-------- -------
Net cash provided (used) by investing activities (31,454) 69,073
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 3,118 14,847
Cash dividends paid (2,006) (1,944)
Proceeds from issuance of common stock 840 68
Purchases and retirement of common stock (897) (1,740)
-------- -------
Net cash provided by financing activities 1,055 11,231
-------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,220) 81,643
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 86,815 30,439
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 68,595 112,082
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 7,578 9,037
Income taxes 41 703
Non-cash transactions:
Transfer of securities from held to maturity to available for sale - fair value -- 31,220
Unrealized gain (loss) on securities available for sale, net of taxes (644) 492
Foreclosed loans transferred to other real estate 349 121
Premises and equipment transferred to other real estate 228 425
See notes to consolidated financial statements.
7
First Bancorp And Subsidiaries
Notes To Consolidated Financial Statements
(unaudited) For the Periods Ended March 31, 2002 and 2001
- --------------------------------------------------------------------------------
Note 1 - Basis of Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the consolidated financial
position of the Company as of March 31, 2002 and 2001 and the consolidated
results of operations and consolidated cash flows for the periods ended March
31, 2002 and 2001. Reference is made to the 2001 Annual Report on Form 10-K
filed with the SEC for a discussion of accounting policies and other relevant
information with respect to the financial statements. The results of operations
for the periods ended March 31, 2002 and 2001 are not necessarily indicative of
the results to be expected for the full year.
Note 2 - Newly Adopted Accounting Policies
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 were adopted on January 1, 2002. In connection with
Statement 142's transitional goodwill impairment evaluation, the Statement
required the Company to perform an assessment of whether there is an indication
that goodwill is impaired as of the date of adoption. The Company completed this
assessment during the first quarter of 2002 and determined that there was no
goodwill impairment. See Note 7 for additional disclosures related to Statement
No. 142.
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 SFAS 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 was adopted by the Company on January 1, 2002 and
did not have a material impact on the Company's financial statements.
Note 3 - Reclassifications
Certain amounts reported in the period ended March 31, 2001 have been
reclassified to conform with the presentation for March 31, 2002. These
reclassifications had no effect on net income or shareholders' equity for the
periods presented, nor did they materially impact trends in financial
information.
8
Note 4 - Earnings Per Share
Basic earnings per share were computed by dividing net income by the
weighted average common shares outstanding. Diluted earnings per share includes
the potentially dilutive effects of the Company's stock option plan. The
following is a reconciliation of the numerators and denominators used in
computing basic and diluted earnings per share:
For the Three Months Ended March 31,
------------------------------------------------------------------------------
2002 2001
------------------------------------ -------------------------------------
Income Shares Income Shares
($ in thousands except per (Numer- (Denom- Per Share (Numer- (Denom- Per Share
share amounts) ator) inator) Amount ator) inator) Amount
-------------- ------- ------- --------- ------- -------- --------
Basic EPS
Net income $ 3,760 9,149,693 $ 0.41 $ 3,224 8,774,877 $ 0.37
======== ========
Effect of Dilutive Securities -- 188,673 -- 212,375
--------- --------- --------- ---------
Diluted EPS $ 3,760 9,338,366 $ 0.40 $ 3,224 8,987,252 $ 0.36
========= ========= ======== ========= ========= ========
Note 5 - Asset Quality Information
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or
more days and still accruing interest, restructured loans and other real estate.
For each of the periods presented, the Company had no loans past due 90 or more
days and still accruing interest. Nonperforming assets are summarized as
follows:
March 31, December 31, March 31,
($ in thousands) 2002 2001 2001
---------------- ---- ---- ----
Nonperforming loans:
Nonaccrual loans $ 3,343 3,808 3,598
Restructured loans 79 83 231
---------- ----- -----
Total nonperforming loans 3,422 3,891 3,829
Other real estate 1,800 1,253 1,324
---------- ----- -----
Total nonperforming assets $ 5,222 5,144 5,153
========== ===== =====
Nonperforming loans to total loans 0.37% 0.44% 0.50%
Nonperforming assets as a percentage of
loans and other real estate 0.56% 0.58% 0.67%
Nonperforming assets to total assets 0.45% 0.45% 0.50%
Allowance for loan losses to total loans 1.05% 1.05% 1.09%
- --------------------------------------------------------------------------------
Note 6 - Deferred Loan Fees
Loans are shown on the Consolidated Balance Sheets net of net deferred loan
fees of approximately $717,000, $658,000, and $670,000 at March 31, 2002,
December 31, 2001, and March 31, 2001, respectively.
9
Note 7 - Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated
amortization of amortized intangible assets as of March 31, 2002 and December
31, 2001 and the carrying amount of unamortized intangible assets as of March
31, 2002, and December 31, 2001:
March 31, 2002 December 31, 2001
-------------- -----------------
Gross Carrying Accumulated Gross Carrying Accumulated
(Dollars in thousands) Amount Amortization Amount Amortization
- ---------------------- ------ ------------ ------ ------------
Amortized intangible assets:
Customer lists $ 243 11 243 7
Core deposit premium related to
whole-bank acquisition 335 250 335 246
Branch acquisitions 20,196 2,235 20,180 1,879
------- ----- ------ -----
Total $20,774 2,496 20,758 2,132
======= ===== ====== =====
Unamortized intangible assets:
Goodwill $ 5,609 5,609
======= ======
Pension $ 217 253
======= ======
Amortization expense totaled $364,000 and $182,000 for the three months
ended March 31, 2002 and 2001, respectively.
The following table presents the estimated amortization expense for each of
the five fiscal years ending December 31, 2006 and the estimated amount
amortizable thereafter. These estimates are subject to change in future periods
to the extent management determines it is necessary to make adjustments to the
carrying value or estimated useful lives of amortized intangible assets.
Estimated Amortization
(Dollars in thousands) Expense
---------------------- ----------------------
2002 $ 1,456
2003 1,454
2004 1,453
2005 1,448
2006 1,371
Thereafter 11,460
------------
Total $ 18,642
============
10
The following tables present the adjusted effect on net income and on basic
and diluted earnings per share excluding the amortization of goodwill for the
three months ended March 31, 2002 and 2001 and for the years ended December 31,
2001, 2000 and 1999:
For the Three Months Ended March 31,
------------------------------------
(Dollars in thousands, except
earnings per share amounts) 2002 2001
- --------------------------- ---- ----
Reported net income $ 3,760 3,224
Add back: Goodwill amortization -- 93
------- -----
Adjusted net income $ 3,760 3,317
======= =====
Basic earnings per share:
As reported $ 0.41 0.37
Goodwill amortization -- 0.01
------- -----
Adjusted basic earnings per share $ 0.41 0.38
======= ====
Diluted earnings per share:
As reported $ 0.40 0.36
Goodwill amortization -- 0.01
------- -----
Adjusted diluted earnings per share $ 0.40 0.37
======= =====
For the Years Ended December 31,
--------------------------------
(Dollars in thousands, except
earnings per share amounts) 2001 2000 1999
- --------------------------- ---- ---- ----
Reported net income $ 13,616 9,342 11,854
Add back: Goodwill amortization 511 373 373
--------- ----- ------
Adjusted net income $ 14,127 9,715 12,227
========= ==== ====
Basic earnings per share:
As reported $ 1.51 1.05 1.32
Goodwill amortization 0.05 0.04 0.04
--------- ----- ------
Adjusted basic earnings per share $ 1.56 1.09 1.36
========= ==== ====
Diluted earnings per share:
As reported $ 1.47 1.03 1.27
Goodwill amortization 0.05 0.04 0.04
--------- ----- ------
Adjusted diluted earnings per share $ 1.52 1.07 1.31
========= ==== ====
11
Item 2 - Management's Discussion and Analysis of Consolidated Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
OVERVIEW
Net income for the three months ended March 31, 2002 was $3,760,000, a
16.6% increase from the $3,224,000 recorded in the first quarter of 2001. The
net income recorded in the first quarter of 2002 amounted to diluted earnings of
$0.40 per share, compared to $0.36 per share for the first quarter of 2001, an
increase of 11.1%. Nonrecurring income/expense was insignificant for each of the
three month periods. Effective January 1, 2002, in accordance with new
accounting pronouncements, the Company discontinued the amortization of certain
of its intangible assets, which effectively increased earnings by $147,000, or
1.6 cents per share, over what would have otherwise been recorded under previous
accounting standards.
The increase in earnings for 2002 from 2001 was primarily a result of
higher net interest income and noninterest income, the effects of which were
partially offset by an increase in the provision for loan losses and higher
noninterest expenses. A significant increase in average loans and deposits
resulting primarily from acquisition activity was the primary factor in the
increase in net interest income, noninterest income and noninterest expenses. A
higher level of internally generated loan growth in 2002 resulted in a higher
provision for loan losses than in 2001.
The Company's annualized return on average assets for the first quarter of
2002 was 1.34% compared to 1.41% for the first quarter of 2001. The Company's
return on average equity for the first quarter of 2002 was 12.83% compared to
11.73% for the first quarter of 2001.
COMPONENTS OF EARNINGS
Net interest income is the largest component of earnings, representing the
difference between interest and fees generated from earning assets and the
interest costs of deposits and other funds needed to support those assets. Net
interest income for the three month period ended March 31, 2002 amounted to
$11,293,000, an increase of $1,974,000, or 21.2%, from the $9,319,000 recorded
in the first quarter of 2001. There are two primary factors that cause changes
in the amount of net interest income recorded by the Company - 1) growth in
loans and deposits, and 2) the Company's net interest margin.
For the three months ended March 31, 2002, growth in loans and deposits was
the primary reason for the increase in net interest income, as the Company's net
interest margin was nearly the same for the first quarter of 2002 as it was for
the first quarter of 2001.
The following tables present average balances and average rates earned/paid
by the Company for the first quarter of 2002 compared to the first quarter of
2001.
12
For the Three Months Ended March 31,
------------------------------------
2002 2001
---- ----
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
- ---------------- ------ ---- ------- ------ ---- -------
Assets
Loans (1) $ 903,283 7.28% $ 16,204 $ 752,557 8.85% $ 16,422
Taxable securities 93,239 6.11% 1,405 96,843 6.70% 1,599
Non-taxable securities (2) 16,130 8.50% 338 16,547 8.55% 349
Short-term investments,
principally federal funds 50,053 2.33% 288 16,008 4.99% 197
---------- ---------- ---------- ----------
Total interest-earning assets 1,062,705 6.96% 18,235 881,955 8.54% 18,567
---------- ----------
Liabilities
Savings, NOW and money
market deposits $ 354,349 1.05% 921 $ 248,688 2.54% 1,555
Time deposits >$100,000 186,657 4.16% 1,916 146,233 6.57% 2,370
Other time deposits 357,328 4.22% 3,714 309,970 6.09% 4,656
---------- ---------- ---------- ----------
Total interest-bearing deposits 898,334 2.96% 6,551 704,891 4.94% 8,581
Borrowings 15,000 6.76% 250 32,933 6.45% 524
---------- ---------- ---------- ----------
Total interest-bearing liabilities 913,334 3.02% 6,801 737,824 5.00% 9,105
---------- ----------
Non-interest-bearing deposits 96,902 68,571
Net yield on interest-earning
assets and net interest income 4.36% $ 11,434 4.35% $ 9,462
========== ==========
Interest rate spread 3.94% 3.54%
Average prime rate 4.75% 8.64%
- --------------------------------------------------------------------------------
(1) Average loans include nonaccruing loans, the effect of which is to lower
the average rate shown.
(2) Includes tax-equivalent adjustments of $141,000 and $143,000 in 2002 and
2001 respectively, to reflect the federal and state benefit of the
tax-exempt securities, reduced by the related nondeductible portion of
interest expense.
Average loans outstanding for the first quarter of 2002 were $903.3
million, which was 20.0% higher than the average loans outstanding for the first
quarter of 2001 ($752.6 million). Average deposits outstanding for the first
quarter of 2002 were $995.2 million, which was 28.7% higher than the average
amount of deposits outstanding in the first quarter of 2001 ($773.5 million).
See additional discussion regarding the nature of the growth in loans and
deposits in the section entitled "Financial Condition" below. The effect of
these higher amounts of average loans and deposits was to increase net interest
income in 2002.
The net interest margin (tax equivalent net interest income divided by
average earning assets) for the first quarter of 2002 was 4.36%, a 1 basis point
increase from the 4.35% net interest margin realized in the first quarter of
2001, and a 24 basis point increase from the 4.12% net interest margin realized
in the fourth quarter of 2001. The increase in the 2002 net interest margin
compared to the fourth quarter of 2001 represented the first quarter-to-quarter
increase in the net interest margin since the fourth quarter of 2000. In 2001,
as the Federal Reserve decreased key interest rates, the Company's assets that
were subject to repricing, mostly loans, repriced downward faster and by a
greater amount than the Company's liabilities that were subject to repricing -
mostly deposits. This resulted in a narrowing of the Company's net interest
margin. The increase in the Company's net interest margin in 2002 was due
primarily to a stable interest rate environment in which, for the first time in
five quarters, there were no decreases in interest rates initiated by the
Federal Reserve. This allowed a significant portion of the Company's time
deposits that were originated during periods of higher interest rates and
matured during the quarter to reprice at lower levels. A majority of the
Company's rate sensitive, interest-earning assets repriced lower immediately
upon the rate cuts by the Federal Reserve in 2001, and thus did not experience
further rate reductions in 2002.
13
The Company recorded a $440,000 provision for loan losses during the first
quarter of 2002, double that of the $220,000 recorded in the first quarter of
2001. The primary factor resulting in the increase in the provision was higher
internal loan growth experienced in the first quarter of 2002 compared to the
first quarter of 2001 - $33.8 million in net growth in 2002 compared to $7.9
million in 2001 (excluding loans assumed in acquisitions for which an allowance
had already been established). The level of nonperforming assets and other asset
quality indicators for the first quarter of 2002 were consistent with those of
the first quarter of 2001.
Noninterest income for the first quarter of 2002 amounted to $2,997,000, a
61.0% increase over the $1,862,000 recorded in the first quarter of 2001. Within
noninterest income, services charges on deposit accounts experienced the largest
increase in the first quarter of 2002 compared to 2001, amounting to $1,595,000,
a 75.7% increase over the $908,000 recorded in the same quarter of 2001. This
significant increase is primarily attributable to two factors - 1) the Company's
acquisition of four branches on March 26, 2001 and one branch in December 2001 -
the branches purchased had a high level of transaction accounts (non-time
deposits), $83.4 million in total, which afforded the Company the opportunity to
earn deposit service charges, and 2) the introduction of a product in August
2001 that charges a fee for allowing customers to overdraw their deposit
account.
Also contributing to the increase in noninterest income was "other service
charges, commissions, and fees," which experienced a 20.9% increase, rising from
$526,000 in the first quarter of 2001 to $636,000 in the first quarter of 2002.
This category of noninterest income includes items such as safety deposit box
rentals, check cashing fees, credit card and merchant income, and ATM
surcharges. This category of income grew primarily because of increases in these
activity-related fee services as a result of overall growth in the Company's
total customer base, including growth achieved from acquisitions.
Fees from presold mortgages increased 223%, from $138,000 in the first
quarter of 2001 to $446,000 in the first quarter of 2002. This increase 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.
Commissions from sales of insurance and financial products amounted to
$265,000 in 2001, a 28.6% increase from the $206,000 recorded in the first
quarter of 2001. This line item includes commissions the Company receives from
three sources - 1) sales of credit insurance associated with new loans ($167,000
in 2002 compared to $152,000 in 2001), 2) commissions from the sales of
investment, annuity, and long-term care insurance products ($58,000 in 2002
compared to $54,000 in 2001), and 3) commissions from the sale of property and
casualty insurance ($40,000 in 2002 compared to $0 in 2001). 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.
Noninterest expenses for the three months ended March 31, 2002 increased
33.5% to $8,098,000 from $6,065,000 in the first quarter of 2001. The increase
in noninterest expenses occurred in all categories and is associated with the
overall growth of the Company in terms of branch network, employees and customer
base. The Company operated 46 branches for most of the first quarter of 2002
with average assets of $1.14 billion compared to 39 branches for the majority of
the first quarter of 2001 with average assets of $925 million. In addition to
the typical cash expenses associated with the growth, the Company also recorded
a total of $364,000 in non-cash amortization expense in the first quarter of
2002, double that of the $182,000 recorded in the first quarter of 2001. This
increase was as a result of the $21.2 million in acquisition-related intangible
assets recorded in 2001. See Notes 2 and 7 to the financial statements above for
additional discussion regarding the accounting for intangible assets.
14
The provision for income taxes was $1,992,000 in the first quarter of 2002
compared to $1,672,000 in the first quarter of 2001. The effective tax rates for
each period were virtually the same - 34.6% for the first quarter of 2002
compared to 34.2% for the first quarter of 2001.
FINANCIAL CONDITION
The Company's financial condition was materially impacted by several
acquisitions completed during 2001. The Company acquired four branches from
First Union National Bank on March 26, 2001 with $103 million in deposits and
$17 million in loans, the effects of which are reflected on the balance sheet as
of March 31, 2001, but impacted income and expense for only five days during the
first quarter of 2001. In May 2001, the Company acquired Century Bancorp, a one
branch savings institution with $72 million in deposits and $90 million in
loans. In December, the Company acquired another branch from First Union with
$30 million in deposits and $9 million in loans. The May and December
acquisitions significantly increased the amounts of loans and deposits of the
Company when comparing March 31, 2002, to March 31, 2001.
The following table presents information regarding the nature of the
Company's growth since March 31, 2001
Balance at Balance at Total Percentage growth,
beginning Internal Growth from end of percentage excluding
of period Growth Acquisitions period growth acquisitions
--------- ------ ------------ ------ ------ ------------
(in thousands)
April 1, 2001 to
March 31, 2002
- ------------------------------
Loans $ 770,749 53,925 99,433 924,107 19.9% 7.0%
========== ====== ====== ======= ==== ===
Deposits - Noninterest bearing $ 89,538 6,656 5,137 101,331 13.2% 7.4%
Deposits - Savings, NOW, and
Money Market 295,800 28,811 38,166 362,777 22.6% 9.7%
Deposits - Time>$100,000 160,677 3,429 19,833 183,939 14.5% 2.1%
Deposits - Time<$100,000 341,798 (25,359) 38,913 355,352 4.0% (7.4%)
---------- ------ ------- --------- ---- ---
Total deposits $ 887,813 13,537 102,049 1,003,399 13.0% 1.5%
========== ====== ======= ========= ==== ===
January 1, 2002 to
March 31, 2002
- ------------------------------
Loans $ 890,310 33,797 -- 924,107 3.8% 3.8%
========== ===== ======= ========= === ===
Deposits - Noninterest bearing $ 96,065 5,266 -- 101,331 5.5% 5.5%
Deposits - Savings, NOW, and
Money Market 353,439 9,338 -- 362,777 2.6% 2.6%
Deposits - Time>$100,000 189,948 (6,009) -- 183,939 (3.2%) (3.2%)
Deposits - Time<$100,000 360,829 (5,477) -- 355,352 (1.5%) (1.5%)
---------- ------ ------- --------- ---- ---
Total deposits $1,000,281 3,118 -- 1,003,399 0.3% 0.3%
========== ====== ======= ========= === ===
As can be seen in the first table, most of the Company's growth in loans
and deposits over the past 12 months has been a result of acquisitions with
internal loan growth comprising 7.0% of the total increase of 19.9% and internal
deposit growth making up 1.5% of the total growth of 13.0%.
As can be seen in the second table, the Company experienced strong
internal loan growth (15.2% annualized) in the first quarter of 2002, while
deposit growth was virtually flat. Although total deposit growth was only 0.3%
for the quarter, the Company's noninterest bearing deposits experienced growth
of 5.5% and savings, NOW, and money market accounts experienced growth of 2.6%,
the effects of which were mostly offset by decreases in time deposits.
15
The Company's total assets were $1.15 billion at March 31, 2002, an
increase of $116.4 million, or 11.3%, from the $1.03 billion at March 31, 2001.
The primary reason for the increase in total assets were the May 2001
acquisition of Century and the December branch purchase, which added
approximately $124 million in total assets.
NONPERFORMING ASSETS
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or
more days and still accruing interest, restructured loans and other real estate.
For each of the periods presented, the Company had no loans past due 90 or more
days and still accruing interest. Nonperforming assets are summarized as
follows:
March 31, December 31, March 31,
($ in thousands) 2002 2001 2001
---------------- ---- ---- ----
Nonperforming loans:
Nonaccrual loans $ 3,343 3,808 3,598
Restructured loans 79 83 231
---------- ----- -----
Total nonperforming loans 3,422 3,891 3,829
Other real estate 1,800 1,253 1,324
---------- ----- -----
Total nonperforming assets $ 5,222 5,144 5,153
========== ===== =====
Nonperforming loans to total loans 0.37% 0.44% 0.50%
Nonperforming assets as a percentage of
loans and other real estate 0.56% 0.58% 0.67%
Nonperforming assets to total assets 0.45% 0.45% 0.50%
Allowance for loan losses to total loans 1.05% 1.05% 1.09%
Management has reviewed the collateral for the nonperforming assets,
including nonaccrual loans, and has included this review among the factors
considered in the evaluation of the allowance for loan losses discussed below.
The level of nonaccrual loans has not varied materially among the periods
presented, amounting to $3.3 million at March 31, 2002, compared to $3.8 million
at December 31, 2001 and $3.6 million at March 31, 2001. The Company continues
to have one large credit that was on nonaccrual basis as of each of the three
dates presented. The nonaccrual balance of this credit amounted to $1.8 million,
$1.9 million, and $2.4 million as of March 31, 2002, December 31, 2001, and
March 31, 2001, respectively. The borrower of this credit has liquidity
problems. The loans related to this borrower are collateralized by real estate,
the value of which the Company believes exceeds the outstanding loan balance.
The borrower has been actively selling the real estate to pay down the loan
balance. The level of restructured loans did not vary materially among the
periods presented.
At March 31, 2002, December 31, 2001, and March 31, 2001, the recorded
investment in loans considered to be impaired was $2,077,000, $2,482,000, and
$2,907,000, respectively, all of which were on nonaccrual status. The majority
of the impaired loans for each of the three periods presented is the same credit
noted above that is on nonaccrual status. At March 31, 2002, December 31, 2001,
and March 31, 2001, the related allowance for loan losses for these impaired
loans was $25,000 (related to one loan with a balance of $171,000, with the
remainder of impaired loans having no valuation allowance), $100,000 (related to
two loans with a total balance of $271,000, with the remainder of the impaired
loans have no valuation allowance), and $436,000 (all impaired loans at March
31, 2001 had a valuation allowance), respectively. The average recorded
investments in impaired loans during the three month period ended March 31,
2002, the year ended December 31, 2001, and the three months ended March 31,
2001 were approximately $2,280,000, $2,450,000, and $1,600,000, respectively.
For the same periods, the Company recognized no interest income on those
impaired loans during the period that they were considered to be impaired.
16
As of March 31, 2002, December 31, 2001 and March 31, 2001, the Company's
other real estate owned amounted to $1,800,000, $1,253,000, and $1,324,000,
respectively, which consisted principally of several parcels of real estate. The
increase in the level of other real estate owned at March 31, 2002 is
attributable to two foreclosures of real estate totaling $336,000 and the
transfer of property with a value of $180,000 from premises and equipment to
other real estate due to a decision to delay the construction of a bank branch
at the location indefinitely. The Company's management has reviewed recent
appraisals of its other real estate and believes that their fair values, less
estimated costs to sell, equal or exceed their respective carrying values at the
dates presented.
SUMMARY OF LOAN LOSS EXPERIENCE
The allowance for loan losses is created by direct charges to operations.
Losses on loans are charged against the allowance in the period in which such
loans, in management's opinion, become uncollectible. The recoveries realized
during the period are credited to this allowance. The Company has 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.
See "CRITICAL ACCOUNTING POLICIES" below for additional discussion.
The Company has no foreign loans, few agricultural loans and does not
engage in significant lease financing or highly leveraged transactions.
Commercial loans are diversified among a variety of industries. The majority of
the Company's real estate loans are primarily various personal and commercial
loans where real estate provides additional security for the loan. Collateral
for virtually all of these loans is located within the Company's principal
market area.
The Company recorded a $440,000 provision for loan losses during the first
quarter of 2002, double that of the $220,000 recorded in the first quarter of
2001. The primary factor resulting in the increase in the provision was higher
internal loan growth experienced in the first quarter of 2002 compared to the
first quarter of 2001 - $33.8 million in net growth in 2002 compared to $7.9
million in 2001 (excluding loans assumed in acquisitions for which an allowance
had already been established). The level of nonperforming assets and other asset
quality indicators for the first quarter of 2002 were consistent with those of
the first quarter of 2001.
At March 31, 2002, the allowance for loan losses amounted to $9,729,000,
compared to $9,388,000 at December 31, 2001 and $8,386,000 at March 31, 2001.
The allowance for loan losses was 1.05%, 1.05% and 1.09% of total loans as of
March 31, 2002, December 31, 2001, and March 31, 2001, respectively. The slight
decrease in the allowance percentage since March 31, 2001 is primarily related
to the effects of the May 2001 Century acquisition, the recorded allowance of
which amounted to 0.67% of total loans, as a result of Century's relatively low
risk loan portfolio comprised almost exclusively of loans secured by single
family residences.
Management believes the Company's reserve levels are adequate to cover
probable loan losses on the loans outstanding as of each reporting date. It must
be emphasized, however, that the determination of the reserve using the
Company's procedures and methods rests upon various judgments and assumptions
about economic conditions and other factors affecting loans. No assurance can be
given that the Company will not in any
17
particular period sustain loan losses that are sizable in relation to the
amounts reserved or that subsequent evaluations of the loan portfolio, in light
of conditions and factors then prevailing, will not require significant changes
in the allowance for loan losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan losses
and value of other real estate. Such agencies may require the Company to
recognize adjustments to the allowance or the carrying value of other real
estate based on their judgments about information available at the time of their
examinations.
For the periods indicated, the following table summarizes the Company's
balances of loans outstanding, average loans outstanding, changes in the
allowance for loan losses arising from charge-offs and recoveries, and additions
to the allowance for loan losses that have been charged to expense and additions
that were recorded related to acquisitions.
Three Months Year Three Months
Ended Ended Ended
March 31, December 31, March 31,
($ in thousands) 2002 2001 2001
---------------- ---- ---- ----
Loans outstanding at end of period $ 924,107 890,310 $ 770,749
========= ======= =========
Average amount of loans outstanding $ 903,283 831,817 $ 752,557
========= ======= =========
Allowance for loan losses, at
beginning of period $ 9,388 7,893 $ 7,893
Total charge-offs (128) (912) (98)
Total recoveries 29 131 36
--------- ----- ---------
Net charge-offs (99) (781) (62)
--------- ----- ---------
Additions to the allowance charged to expense 440 1,151 220
--------- ----- ---------
Addition related to loans assumed in acquisitions -- 1,125 335
--------- ----- ---------
Allowance for loan losses, at end of period $ 9,729 9,388 $ 8,386
========= ===== =========
Ratios:
Net charge-offs (annualized) as a percent of average loans 0.04% 0.09% 0.03%
Allowance for loan losses as a
percent of loans at end of period 1.05% 1.05% 1.09%
Based on the results of the aforementioned loan analysis and grading
program and management's evaluation of the allowance for loan losses at March
31, 2002, there have been no material changes to the allocation of the allowance
for loan losses among the various categories of loans since December 31, 2001.
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 $171 million line of credit with the Federal Home Loan Bank
18
(of which $15 million has been drawn), 2) a $35 million overnight federal funds
line of credit with a correspondent bank, and 3) an approximately $38 million
line of credit through the Federal Reserve Bank of Richmond's discount window.
The Company's liquidity declined slightly during the first quarter of 2002
as a result of loan growth of $33.8 million outpacing deposit growth of $3.1
million. This resulted in the Company's loan to deposit ratio increasing from
89.0% at December 31, 2001 to 92.1% at March 31, 2002, and the level of the
Company's liquid assets (consisting of cash, due from banks, federal funds sold,
presold mortgages in process of settlement and securities) as a percentage of
deposits and borrowings decreasing from 20.7% at December 31, 2001 to 17.6% at
March 31, 2002.
The amount and timing of the Company's contractual obligations and
commercial commitments has not changed materially since December 31, 2001,
detail of which is presented on pages 34 and 35 of the Company's 2001 Form 10-K.
The Company's management believes its liquidity sources, including unused
lines of credit, are at an acceptable level and remain adequate to meet its
operating needs in the foreseeable future.
CAPITAL RESOURCES
The Company is regulated by the Board of Governors of the Federal Reserve
Board (FED) and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Company's banking
subsidiaries are regulated by the Federal Deposit Insurance Corporation (FDIC)
and the respective state of North Carolina bank and savings regulators. The
Company is not aware of any recommendations of regulatory authorities or
otherwise which, if they were to be implemented, would have a material effect on
its liquidity, capital resources, or operations.
The Company must comply with regulatory capital requirements established by
the FED and FDIC. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. These capital standards require the Company to
maintain minimum ratios of "Tier 1" capital to total risk-weighted assets and
total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1
capital is comprised of total shareholders' equity calculated in accordance with
generally accepted accounting principles, excluding accumulated other
comprehensive income (loss), less intangible assets, and total capital is
comprised of Tier 1 capital plus certain adjustments, the largest of which for
the Company is the allowance for loan losses. Risk-weighted assets refer to the
on- and off-balance sheet exposures of the Company, adjusted for their related
risk levels using formulas set forth in FED and FDIC regulations.
In addition to the risk-based capital requirements described above, the
Company is subject to a leverage capital requirement, which calls for a minimum
ratio of Tier 1 capital (as defined above) to quarterly average total assets of
3.00% to 5.00%, depending upon the institution's composite ratings as determined
by its regulators. The FED has not advised the Company of any requirement
specifically applicable to it.
At March 31, 2002, the Company's capital ratios exceeded the regulatory
minimum ratios discussed above with a Tier 1 capital ratio to Tier 1 risk
adjusted ratio of 10.99%, a total capital to total risk adjusted asset ratio of
19
11.99%, and a leverage ratio of 8.42%. All of the Company's regulatory risk
based ratios are within two basis points of what they were at December 31, 2001.
The Company's bank subsidiary is also subject to similar capital
requirements as those discussed above. At March 31, 2002, the Company's bank
subsidiary exceeded the minimum ratios established by the FED and FDIC.
SHARE REPURCHASES
The Company's share repurchase program announced on October 20, 2000 in
connection with the execution of the merger agreement to purchase Century
Bancorp, Inc. was completed during the first quarter of 2002 with the repurchase
of 5,000 shares at a weighted average cost of $21.05. In connection with this
program, a total of 586,000 shares of stock were repurchased at an average cost
of $21.37. As previously disclosed, the Company's board of directors has
authorized the repurchase of an additional 150,000 shares. The Company
repurchased 37,000 shares under this authorization during the first quarter of
2002 at an average cost of $21.65. In total during the first quarter of 2002,
approximately 42,000 shares of stock were repurchased at an average cost of
$21.58.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK)
Net interest income is the Company's most significant component of
earnings. Notwithstanding changes in volumes of loans and deposits, the
Company's level of net interest income is continually at risk due to the effect
that changes in general market interest rate trends have on interest yields
earned and paid with respect to the various categories of earning assets and
interest-bearing liabilities. It is the Company's policy to maintain portfolios
of earning assets and interest-bearing liabilities with maturities and repricing
opportunities that will afford protection, to the extent practical, against wide
interest rate fluctuations. The Company's exposure to interest rate risk is
analyzed on a regular basis by management using standard GAP reports, maturity
reports, and an asset/liability software model that simulates future levels of
interest income and expense based on current interest rates, expected future
interest rates, and various intervals of "shock" interest rates. Over the years,
the Company has been able to maintain a fairly consistent yield on average
earning assets (net interest margin). Over the past five calendar years the
Company's net interest margin has ranged from a low of 4.23% (realized in 2001)
to a high of 4.88% (realized in 1997). During that five year period the prime
rate of interest has ranged from a low of 4.75% to a high of 9.50%. As discussed
above under the heading "Components of Earnings," 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. In the first quarter
of 2002, the Company's net interest margin increased to its highest level since
the fourth quarter of 2000, primarily as a result of the stable interest rate
environment, when for the first time in five quarters, there were no decreases
in rates initiated by the Federal Reserve. This allowed a significant portion of
the Company's time deposits that were originated during periods of higher
interest rates and matured during the quarter to reprice at lower levels. A
majority of the Company's rate sensitive interest-earning assets repriced lower
immediately upon the rate cuts by the Federal Reserve in 2001, and thus did not
experience further rate reductions in 2002.
Using stated maturities for all instruments except mortgage-backed
securities (which are allocated in the periods of their expected payback) and
securities and borrowings with call features that are expected to be called
(which are included in the period of their expected call), at March 31, 2002 the
Company had $373.2 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
20
earnings, market value, or management actions. Also, interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. In addition to the effects of "when" various rate-sensitive
products reprice, market rate changes may not result in uniform changes in rates
among all products. For example, included in interest-bearing liabilities at
March 31, 2002 subject to interest rate changes within one year are deposits
totaling $362.8 million comprised of NOW, savings, and certain types of money
market deposits with interest rates set by management. These types of deposits
historically have not repriced coincidentally with or in the same proportion as
general market indicators.
Thus, the Company believes that in the near term (twelve months), net
interest income would not likely experience significant downward pressure from
rising interest rates. Similarly, management would not expect a significant
increase in near term net interest income from falling interest rates (In fact,
as discussed above under the heading "Components of Earnings," 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. The following
table presents the expected maturities of the Company's other than trading
market risk sensitive financial instruments. The following table also presents
the fair values of market risk sensitive instruments as estimated in accordance
with Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments."
Expected Maturities of Market Sensitive
Instruments Held at March 31, 2002
---------------------------------------
Average Estimated
Interest Fair
($ in thousands) 1 Year 2 Years 3 Years 4 Years 5 Years Beyond Total Rate (1) Value
- ---------------- ------ ------- ------- ------- ------- ------ ----- -------- -----
Due from banks,
interest bearing $ 25,468 -- -- -- -- -- 25,468 1.65% $ 25,468
Federal funds sold 20,439 -- -- -- -- -- 20,439 1.65% 20,439
Debt securities- at
amortized cost (1) (2) 33,534 17,535 19,080 6,925 5,550 17,219 99,843 6.37% 100,433
Loans - fixed (3) (4) 91,472 87,847 109,423 48,309 116,337 60,563 513,951 7.84% 519,944
Loans - adjustable (3) (4) 148,327 56,227 57,101 53,715 44,538 46,905 406,813 6.01% 406,813
--------- ------- ------- ------- ------- ------- --------- ---- ----------
Total $ 319,240 161,609 185,604 108,949 166,425 124,687 1,066,514 6.74% $1,073,097
========= ======= ======= ======= ======= ======= ========= ==== ==========
Savings, NOW, and
money market
deposits $ 362,777 -- -- -- -- -- 362,777 1.03% $ 362,777
Time deposits 480,403 37,830 9,715 6,030 5,167 146 539,291 3.84% 542,975
Borrowings (2) 5,000 5,000 5,000 -- -- -- 15,000 6.73% 15,414
--------- ------- ------- ------- ------- ------- --------- ---- ---------
Total $ 848,180 42,830 14,715 6,030 5,167 146 917,068 2.78% $ 921,166
========= ====== ====== ===== ===== ======= ======= ==== =========
(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
March 31, 2002 are assumed to mature at their call date for purposes of
this table. Mortgage-backed securities are assumed to mature in the period
of their expected repayment based on estimated prepayment speeds.
(3) Excludes nonaccrual loans and allowance for loan losses.
(4) Single-family mortgage loans are assumed to mature in the period of their
expected repayment based on estimated prepayment speeds. All other loans
are shown in the period of their contractual maturity.
21
The Company's fixed rate assets and liabilites 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 March 31, 2002 for
instruments with maturities similar to the remaining term of the portfolios, due
to the declining interest rate environment.
See additional discussion of the Company's net interest margin in the
"Components of Earnings" section above.
CRITICAL ACCOUNTING POLICIES
Due to the estimation process and the potential materiality of the amounts
involved, the Company has identified the accounting for the allowance for loan
losses and the related provision for loan losses as an accounting policy
critical to the Company's financial statements. The provision for loan losses
charged to operations is an amount sufficient to bring the allowance for loan
losses to an estimated balance considered adequate to absorb losses inherent in
the portfolio.
Management's determination of the adequacy of the allowance is based
primarily on a mathematical model that estimates the appropriate allowance for
loan losses. This model has two components. The first component involves the
estimation of losses on loans defined as "impaired loans." A loan is considered
to be impaired when, based on current information and events, it is probable the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The estimated valuation allowance is the
difference, if any, between the loan balance outstanding and the value of the
impaired loan as determined by either 1) an estimate of the cash flows that the
Company expects to receive from the borrower discounted at the loan's effective
rate, or 2) in the case of a collateral-dependent loan, the fair value of the
collateral.
The second component of the allowance model is to estimate 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 "SUMMARY OF LOAN
LOSS EXPERIENCE" above.
CURRENT ACCOUNTING MATTERS
See Notes 2 and 7 to the Consolidated Financial Statements above.
FORWARD-LOOKING STATEMENTS
Part I of this report contains statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgment of the Company and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the financial success or changing strategies of the Company's
customers, the Company's level of success in integrating acquisitions, actions
of government regulators, the level of market interest rates, and general
economic conditions.
22
Part II. Other Information
Item 5 - Other Information
The bylaws of the Company establish an advance notice procedure for
shareholder proposals to be brought before a meeting of shareholders of the
Company. Subject to any other applicable requirements, only such business may be
conducted at a meeting of the shareholders as has been brought before the
meeting by, or at the direction of, the Board of Directors or by a shareholder
who has given to the Secretary of the Company timely written notice, in proper
form, of the shareholder's intention to bring that business before the meeting.
The presiding officer at such meeting has the authority to make such
determinations.
To be timely, notice of other business to be brought before any meeting
must generally be received by the Secretary of the Company within 60 to 90 days
in advance of the shareholders' meeting. The notice of any shareholder proposal
must set forth the various information required under the bylaws. The person
submitting the notice must provide, among other things, the name and address
under which such shareholder appears on the Company's books and the class and
number of shares of the Company's capital stock that are beneficially owned by
such shareholder. Any shareholder desiring a copy of the Company's bylaws will
be furnished one without charge upon written request to the Secretary of the
Company at the Company's headquarters.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed with this report or, as noted, are
incorporated by reference. Management contracts, compensatory plans
and arrangements are marked with an asterisk (*).
3.a.i Copy of Articles of Incorporation of the Registrant and amendments
thereto, was filed as Exhibit 3(a) to the 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 was filed as Exhibit 3.b to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001, and is incorporated herein by reference.
4 Form of Common Stock Certificate was filed as Exhibit 4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999, and is incorporated herein by reference.
23
21 List of Subsidiaries of Registrant was filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001, and is incorporated herein by reference.
(b) There were no reports filed on Form 8-K during the quarter ended
March 31, 2002.
Copies Of Exhibits Are Available Upon Written Request To: First Bancorp, Anna G.
Hollers, Executive Vice President, P.O. Box 508, Troy, NC 27371
24
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST BANCORP
May 13, 2002 BY: /s/ James H. Garner
----------------------------
James H. Garner
President
(Principal Executive Officer),
Treasurer and Director
May 13, 2002 BY: /s/ Anna G. Hollers
----------------------------
Anna G. Hollers
Executive Vice President
and Secretary
May 13, 2002 BY: /s/ Eric P. Credle
----------------------------
Eric P. Credle
Senior Vice President
and Chief Financial Officer