================================================================================
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
June 30, 2003
----------
Commission File Number 0-15572
FIRST BANCORP
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1421916
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
341 North Main Street, Troy, North Carolina 27371-0508
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (910) 576-6171
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|X| YES |_| NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.
|X| YES |_| NO
As of July 31, 2003, 9,376,944 shares of the registrant's Common Stock, no
par value, were outstanding. The registrant had no other classes of securities
outstanding.
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INDEX
FIRST BANCORP AND SUBSIDIARIES
Page
Part I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets -
June 30, 2003 and 2002
(With Comparative Amounts at December 31, 2002) 3
Consolidated Statements of Income -
For the Periods Ended June 30, 2003 and 2002 4
Consolidated Statements of Comprehensive Income -
For the Periods Ended June 30, 2003 and 2002 5
Consolidated Statements of Shareholders' Equity -
For the Periods Ended June 30, 2003 and 2002 6
Consolidated Statements of Cash Flows -
For the Periods Ended June 30, 2003 and 2002 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition 16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 26
Item 4 - Controls and Procedures 28
Part II. Other Information
Item 4 - Submission of Matters to a Vote of Shareholders 30
Item 6 - Exhibits and Reports on Form 8-K 30
Signatures 32
Page 2
Part I. Financial Information
Item 1 - Financial Statements
First Bancorp and Subsidiaries
Consolidated Balance Sheets
June 30, December 31, June 30,
($ in thousands-unaudited) 2003 2002 2002 (a)
=======================================================================================================
ASSETS
Cash & due from banks, noninterest-bearing $ 25,795 26,733 19,685
Due from banks, interest-bearing 20,011 30,753 49,067
Federal funds sold 18,710 16,167 16,653
----------- ---------- ----------
Total cash and cash equivalents 64,516 73,653 85,405
----------- ---------- ----------
Securities available for sale (costs of $74,539,
$64,380, and $84,811) 76,564 65,779 86,060
Securities held to maturity (fair values of $16,255,
$15,757, and $14,807) 15,305 14,990 14,129
Presold mortgages in process of settlement 3,526 19,268 3,099
Loans 1,107,997 998,547 969,409
Less: Allowance for loan losses (12,243) (10,907) (10,179)
----------- ---------- ----------
Net loans 1,095,754 987,640 959,230
----------- ---------- ----------
Premises and equipment 22,709 22,239 20,568
Accrued interest receivable 5,753 5,341 5,980
Intangible assets 36,667 25,169 24,451
Other 5,009 4,067 4,117
----------- ---------- ----------
Total assets $ 1,325,803 1,218,146 1,203,039
=========== ========== ==========
LIABILITIES
Deposits: Demand - noninterest-bearing $ 135,288 112,380 103,436
Savings, NOW, and money market 404,479 387,691 367,336
Time deposits of $100,000 or more 236,580 199,794 181,811
Other time deposits 375,622 356,092 349,560
----------- ---------- ----------
Total deposits 1,151,969 1,055,957 1,002,143
Borrowings 31,000 30,000 70,000
Accrued interest payable 2,383 2,466 2,444
Other liabilities 5,124 5,738 8,890
----------- ---------- ----------
Total liabilities 1,190,476 1,094,161 1,083,477
----------- ---------- ----------
SHAREHOLDERS' EQUITY
Common stock, No par value per share
Issued and outstanding: 9,363,404,
9,121,630, and 9,120,235 shares 54,162 48,313 48,860
Retained earnings 80,108 74,920 70,044
Accumulated other comprehensive income 1,057 752 658
----------- ---------- ----------
Total shareholders' equity 135,327 123,985 119,562
----------- ---------- ----------
Total liabilities and shareholders' equity $ 1,325,803 1,218,146 1,203,039
=========== ========== ==========
See notes to consolidated financial statements.
(a) As restated. See Note 2 to Consolidated Financial Statements.
Page 3
First Bancorp and Subsidiaries
Consolidated Statements of Income
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ------------------------
($ in thousands, except share data-unaudited) 2003 2002 (a) 2003 2002 (a)
======================================================================================================================
INTEREST INCOME
Interest and fees on loans $ 17,249 16,666 34,258 32,870
Interest on investment securities:
Taxable interest income 911 1,336 1,851 2,741
Tax-exempt interest income 175 186 384 383
Other, principally overnight investments 222 188 528 476
----------- --------- --------- ----------
Total interest income 18,557 18,376 37,021 36,470
----------- --------- --------- ----------
INTEREST EXPENSE
Savings, NOW and money market 584 971 1,202 1,892
Time deposits of $100,000 or more 1,565 1,714 3,125 3,630
Other time deposits 2,318 3,151 4,785 6,865
Borrowings 416 210 893 460
----------- --------- --------- ----------
Total interest expense 4,883 6,046 10,005 12,847
----------- --------- --------- ----------
Net interest income 13,674 12,330 27,016 23,623
Provision for loan losses 540 775 1,060 1,215
----------- --------- --------- ----------
Net interest income after provision
for loan losses 13,134 11,555 25,956 22,408
----------- --------- --------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 1,927 1,691 3,788 3,286
Other service charges, commissions and fees 633 574 1,409 1,210
Fees from presold mortgages 651 334 1,353 780
Commissions from sales of insurance and financial products 335 178 595 443
Data processing fees 79 100 152 156
Securities gains -- 7 -- 27
Other gains (losses) (23) 17 38 (4)
----------- --------- --------- ----------
Total noninterest income 3,602 2,901 7,335 5,898
----------- --------- --------- ----------
NONINTEREST EXPENSES
Salaries 4,312 3,614 8,591 7,307
Employee benefits 1,084 932 2,131 1,852
----------- --------- --------- ----------
Total personnel expense 5,396 4,546 10,722 9,159
Net occupancy expense 568 523 1,158 1,028
Equipment related expenses 637 508 1,269 991
Intangibles amortization 46 8 91 16
Other operating expenses 2,705 2,478 5,360 4,611
----------- --------- --------- ----------
Total noninterest expenses 9,352 8,063 18,600 15,805
----------- --------- --------- ----------
Income before income taxes 7,384 6,393 14,691 12,501
Income taxes 2,573 2,232 5,187 4,349
----------- --------- --------- ----------
NET INCOME $ 4,811 4,161 9,504 8,152
=========== ========= ========= ==========
Earnings per share:
Basic $ 0.51 0.45 1.01 0.89
Diluted 0.50 0.45 0.99 0.87
Weighted average common shares outstanding:
Basic 9,390,186 9,152,497 9,375,439 9,151,095
Diluted 9,563,841 9,344,900 9,552,385 9,340,049
See notes to consolidated financial statements.
(a) As restated. See Note 2 to Consolidated Financial Statements.
Page 4
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
($ in thousands-unaudited) 2003 2002 (a) 2003 2002 (a)
====================================================================================================
Net income $ 4,811 4,161 9,504 8,152
------- ------ ------ ------
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains arising
during the period, pretax 839 1,307 626 252
Tax expense (327) (565) (244) (154)
Reclassification to realized gains -- (7) -- (27)
Tax expense -- 3 -- 11
Adjustment to minimum pension liability:
Additional pension charge related to unfunded
pension liability -- -- (127) (165)
Tax benefit -- -- 50 64
------- ------ ------ ------
Other comprehensive income (loss) 512 738 305 (19)
------- ------ ------ ------
Comprehensive income $ 5,323 4,899 9,809 8,133
======= ====== ====== ======
See notes to consolidated financial statements.
(a) As restated. See Note 2 to Consolidated Financial Statements.
Page 5
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Accumulated
Common Stock Other Share-
---------------------- Retained Comprehensive holders'
(In thousands, except per share - unaudited) Shares Amount Earnings (a) Income (Loss) Equity
======================================================================================================================
Balances, January 1, 2002 9,113 $ 50,134 65,915 677 116,726
Net income (as restated (a)) 8,152 8,152
Cash dividends declared ($0.44 per share) (4,023) (4,023)
Common stock issued under
stock option plan 108 685 685
Common stock issued into
dividend reinvestment plan 24 565 565
Purchases and retirement of common
stock (125) (2,906) (2,906)
Tax benefit realized from exercise of
nonqualified stock options 382 382
Other comprehensive loss (19) (19)
------ -------- ------ ------ --------
Balances, June 30, 2002 (as restated (a)) 9,120 $ 48,860 70,044 658 119,562
====== ======== ====== ====== ========
Balances, January 1, 2003 9,122 $ 48,313 74,920 752 123,985
Net income 9,504 9,504
Cash dividends declared ($0.46 per share) (4,316) (4,316)
Common stock issued under
stock option plan 84 618 618
Common stock issued into
dividend reinvestment plan 25 620 620
Purchases and retirement of common
stock (201) (4,971) (4,971)
Common stock issued in acquisition 333 9,284 9,284
Tax benefit realized from exercise of
nonqualified stock options 298 298
Other comprehensive income 305 305
------ -------- ------ ------ --------
Balances, June 30, 2003 9,363 $ 54,162 80,108 1,057 135,327
====== ======== ====== ====== ========
See notes to consolidated financial statements.
(a) As restated. See Note 2 to Consolidated Financial Statements.
Page 6
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
----------------------
($ in thousands-unaudited) 2003 2002 (a)
======================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,504 8,152
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses 1,060 1,215
Net security premium amortization 145 128
Loss (gain) on disposal of other real estate (61) 7
Gain on sale of securities available for sale -- (27)
Other losses 23 --
Gain on sale of loans -- (3)
Proceeds from sales of loans -- 42
Loan fees and costs deferred, net of amortization 10 98
Depreciation of premises and equipment 1,101 861
Tax benefit realized from exercise of nonqualified stock options 298 382
Amortization of intangible assets 91 16
Deferred income tax liability (benefit) 668 (1,019)
Decrease in presold mortgages in process of settlement 15,742 7,614
Decrease (increase) in accrued interest receivable 125 (100)
Decrease (increase) in other assets (530) 1,642
Decrease in accrued interest payable (300) (1,036)
Decrease in other liabilities (1,498) (48)
-------- -------
Net cash provided by operating activities 26,378 17,924
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (22,356) (9,095)
Purchases of securities held to maturity (235) (1)
Proceeds from maturities/issuer calls of securities available for sale 22,380 18,611
Proceeds from maturities/issuer calls of securities held to maturity 2,686 2,212
Proceeds from sales of securities available for sale -- 1,010
Net increase in loans (62,510) (80,115)
Purchases of premises and equipment (815) (3,139)
Net cash paid in acquisitions (2,820) --
-------- -------
Net cash used by investing activities (63,670) (70,517)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 37,151 1,862
Proceeds from (repayments of) borrowings, net (1,000) 55,000
Cash dividends paid (4,263) (4,023)
Proceeds from issuance of common stock 1,238 1,250
Purchases and retirement of common stock (4,971) (2,906)
-------- -------
Net cash provided by financing activities 28,155 51,183
-------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (9,137) (1,410)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 73,653 86,815
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 64,516 85,405
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 10,305 13,883
Income taxes 4,863 4,553
Non-cash transactions:
Unrealized gain on securities available for sale, net of taxes 382 82
Foreclosed loans transferred to other real estate 291 455
Premises and equipment transferred to other real estate -- 228
Common stock issued in acquisition 9,284 --
See notes to consolidated financial statements.
(a) As restated. See Note 2 to Consolidated Financial Statements.
Page 7
First Bancorp and Subsidiaries
Notes To Consolidated Financial Statements
(unaudited) For the Periods Ended June 30, 2003 and 2002
================================================================================
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 June 30, 2003 and 2002 and the consolidated
results of operations and consolidated cash flows for the periods ended June 30,
2003 and 2002. Reference is made to the 2002 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 June 30, 2003 and 2002 are not necessarily indicative of
the results to be expected for the full year. The accompanying financial
statements as of and for the period ended June 30, 2002 have been restated from
their originally reported amounts in accordance with the requirements of the
adoption of a new accounting standard - see Note 2 below.
Note 2 - Newly Adopted Accounting Policies
In October 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 147, "Acquisitions of
Certain Financial Institutions" (Statement 147), which addressed the financial
accounting and reporting for the acquisition of all or part of a financial
institution. This standard removed certain acquisitions of financial
institutions from the scope of SFAS No. 72, "Accounting for Certain Acquisitions
of Bank or Thrift Institutions" (Statement 72). This statement required
financial institutions to reclassify goodwill arising from a qualified business
acquisition from Statement 72 goodwill to goodwill subject to the provisions of
SFAS No. 142, "Goodwill and Other Intangible Assets" (Statement 142). The
reclassified goodwill is no longer amortized but is subject to an annual
impairment test, pursuant to Statement 142. The Company adopted Statement 147 in
the fourth quarter of 2002, but effective as of January 1, 2002. Statement 147
required the Company to retroactively restate its previously issued 2002 interim
consolidated financial statements to reverse reclassified Statement 72 goodwill
amortization expense recorded in the first three quarters of the 2002 fiscal
year. Accordingly, $356,000 and $712,000 in amortization expense that had been
recorded for the three and six month periods ended June 30, 2002, respectively,
was retroactively reversed by reducing the amortization expense recognized
during those periods and increasing intangible assets by the aforementioned
amounts. The associated income tax expense recorded related to the reversal of
amortization expense amounted to $125,000 and $250,000 for the three and six
month periods ended June 30, 2002, respectively, resulting in net income
increasing by $231,000 (or $0.02 per diluted share) for the three months ended
June 30, 2002 from its originally reported amount and net income increasing by
$462,000 (or $0.05 per diluted share) for the six months ended June 30, 2002
from its originally reported amount.
In November 2002, the FASB issued Financial Interpretation No. 45 (FIN
45), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," which addresses the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. FIN 45 requires the guarantor
to recognize a liability for the non-contingent component of the guarantee, such
as the obligation to stand ready to perform in the event that specified
triggering events or conditions occur. The initial measurement of this liability
is the fair value of the guarantee at inception. The recognition of the
liability is required even if it is not probable that payments will be required
under the guarantee or if the guarantee was issued with a premium payment or as
part of a transaction with multiple events. The disclosure requirements were
effective for interim and annual financial statements ending after December 15,
2002. The initial recognition and measurement provisions were effective for all
guarantees within the scope of FIN 45 issued or modified after December 31,
2002. The Company issues standby letters of credit whereby the Company
guarantees performance if a specified triggering event or condition occurs,
primarily nonpayment by the Company's customer to their supplier. The standby
letters of credit are generally for terms of one year, at which time they may be
renewed for another year if both parties agree. At June 30, 2003, the Company
had $2,528,000.
Page 8
in standby letters of credit outstanding. The adoption of the recognition and
measurement provisions of FIN 45 was immaterial to the Company.
In January 2003, the FASB issued Financial Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 addresses the
consolidation by business enterprises of certain variable interest entities. The
provisions of this interpretation became effective for the Company on January
31, 2003. The adoption of FIN 46 did not have an impact on the Company's
financial position or results of operations.
In June 2002 the FASB issued SFAS 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. Management
does not anticipate the implementation of this statement to have a material
impact on the Company's consolidated financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (Statement 148) an amendment of FASB Statement No. 123, "Accounting
for Stock-Based Compensation" (Statement 123), which provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, Statement 148
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition provisions of the statement are
effective for financial statements for fiscal years ending after December 15,
2002 while the disclosure requirements are effective for interim periods
beginning after December 15, 2002, with early application encouraged. The
adoption of Statement 148 requires enhanced disclosures for the Company's
stock-based employee compensation plan for the year ended December 31, 2002, and
subsequent interim and annual periods. The Company does not have any plans to
change its method of accounting for stock-based employee compensation, but has
furnished the expanded disclosures in Note 4.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (Statement 149), "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities," which amends and clarifies financial accounting and
reporting for derivative instruments and for hedging activities under Statement
of Financial Accounting Standards No. 133. Adoption of Statement 149 on July 1,
2003 did not have a material effect on the Company's consolidated financial
statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (Statement 150), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", which establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. It is to be implemented by reporting the cumulative effect of a change in
accounting principle for financial instruments created before the issuance date
of the Statement and still existing at the beginning of the interim period of
adoption. Adoption of Statement 150 on July 1, 2003 did not have a material
effect on the Company's consolidated financial statements.
Note 3 - Reclassifications
Certain amounts reported in the period ended June 30, 2002 have been
reclassified to conform with the presentation for June 30, 2003. These
reclassifications had no effect on net income or shareholders' equity for the
periods presented, nor did they materially impact trends in financial
information.
Note 4 - Stock Option Plans
At June 30, 2003, the Company has six stock-based employee compensation
plans, five of which were assumed in acquisitions. The Company accounts for each
plan under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25 (APB Opinion No. 25), "Accounting for Stock Issued to
Employees," and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," to stock-based employee compensation.
Page 9
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(In thousands except per share data) 2003 2002 2003 2002
--------- --------- --------- ---------
Net income, as reported $ 4,811 4,161 9,504 8,152
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (159) (129) (210) (169)
--------- --------- --------- ---------
Pro forma net income $ 4,652 4,032 9,294 7,983
========= ========= ========= =========
Earnings per share: Basic - As reported $ 0.51 0.45 1.01 0.89
Basic - Pro forma 0.50 0.44 0.99 0.87
Diluted - As reported 0.50 0.45 0.99 0.87
Diluted - Pro forma 0.49 0.43 0.97 0.85
Note 5 - Earnings Per Share
Basic earnings per share were computed by dividing net income by the
weighted average common shares outstanding. Diluted earnings per share includes
the potentially dilutive effects of the Company's stock option plan. The
following is a reconciliation of the numerators and denominators used in
computing basic and diluted earnings per share:
For the Three Months Ended June 30,
------------------------------------------------------------------------
2003 2002
---------------------------------- -----------------------------------
Income Shares Income Shares
($ in thousands except per (Numer- (Denom- Per Share (Numer- (Denom- Per Share
share amounts) ator) inator) Amount ator) inator) Amount
- ----------------------------- ------- --------- --------- ------- --------- ---------
Basic EPS
Net income $4,811 9,390,186 $0.51 $4,161 9,152,497 $0.45
===== =====
Effect of Dilutive Securities -- 173,655 -- 192,403
------ --------- ------ ---------
Diluted EPS $4,811 9,563,841 $0.50 $4,161 9,344,900 $0.45
====== ========= ===== ====== ========= =====
For the Six Months Ended June 30,
------------------------------------------------------------------------
2003 2002
---------------------------------- -----------------------------------
Income Shares Income Shares
($ in thousands except per (Numer- (Denom- Per Share (Numer- (Denom- Per Share
share amounts) ator) inator) Amount ator) inator) Amount
- ----------------------------- ------- --------- --------- ------- --------- ---------
Basic EPS
Net income $9,504 9,375,439 $1.01 $8,152 9,151,095 $0.89
===== =====
Effect of Dilutive Securities -- 176,946 -- 188,954
------ --------- ------ ---------
Diluted EPS $9,504 9,552,385 $0.99 $8,152 9,340,049 $0.87
====== ========= ===== ====== ========= =====
For the three months ended June 30, 2003, there were options of 21,000
that were antidilutive since the exercise price exceeded the average market
price for the period. For the three months ended June 30, 2002, there were no
antidilutive options, as exercise prices for all options were equal to or less
than the average market price for the period. For the six months ended June 30,
2003 and 2002, there were options of 21,000 and 24,000, respectively, that were
antidilutive since the exercise price exceeded the average market price for the
period. Antidilutive options
Page 10
have been omitted from the calculation of diluted earnings per share for the
respective periods.
Note 6 - Asset Quality Information
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or
more days and still accruing interest, restructured loans and other real estate.
Nonperforming assets are summarized as follows:
June 30, December 31, June 30,
($ in thousands) 2003 2002 2002
==========================================================================================
Nonperforming loans:
Nonaccrual loans $3,741 2,976 2,755
Restructured loans 22 41 77
Accruing loans > 90 days past due -- -- --
------ ----- -----
Total nonperforming loans 3,763 3,017 2,832
Other real estate 1,174 1,384 1,264
------ ----- -----
Total nonperforming assets $4,937 4,401 4,096
====== ===== =====
Nonperforming loans to total loans 0.34% 0.30% 0.29%
Nonperforming assets as a percentage of loans and
other real estate 0.45% 0.44% 0.42%
Nonperforming assets to total assets 0.37% 0.36% 0.34%
Allowance for loan losses to total loans 1.10% 1.09% 1.05%
================================================================================
Note 7 - Deferred Loan Fees
Loans are shown on the Consolidated Balance Sheets net of net deferred
loan fees of approximately $712,000, $702,000, and $756,000 at June 30, 2003,
December 31, 2002, and June 30, 2002, respectively.
Note 8 - Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated
amortization of amortized intangible assets as of June 30, 2003, December 31,
2002, and June 30, 2002 and the carrying amount of unamortized intangible assets
as of those same dates. The amounts shown for June 30, 2002 include the effects
of the restatement of the interim financial statements in 2002 that is discussed
in Note 2 above.
June 30, 2003 December 31, 2002 June 30, 2002
---------------------------- ----------------------------- -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated Gross Carrying Accumulated
($ in thousands) Amount Amortization Amount Amortization Amount Amortization
- ------------------------------ -------------- ------------ -------------- ------------ -------------- ------------
Amortized intangible assets:
Customer lists $ 394 39 243 23 243 16
Noncompete agreements 50 12 -- -- -- --
Core deposit premiums 1,106 324 335 261 335 254
------- --- ------ --- ------ ---
Total $ 1,550 375 578 284 578 270
======= === ====== === ====== ===
Unamortized intangible assets:
Goodwill $35,399 24,658 23,926
======= ====== ======
Pension $ 93 217 217
======= ====== ======
Amortization expense totaled $46,000 and $8,000 for the three months ended
June 30, 2003 and 2002, respectively. Amortization expense totaled $91,000 and
$16,000 for the six months ended June 30, 2003 and 2002, respectively.
The following table presents the estimated amortization expense for each
of the five calendar years ending December 31, 2007 and the estimated amount
amortizable thereafter and includes the amortization expense associated with
the 2003 acquisitions discussed in Note 10 below. These estimates are subject to
change in
Page 11
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
---------------------- ----------------------
2003 $ 183
2004 165
2005 122
2006 107
2007 106
Thereafter 583
------
Total $1,266
======
Note 9. Accumulated Other Comprehensive Income
Shareholders' equity includes a line item entitled "Accumulated Other
Comprehensive Income," which is comprised of the following components:
June 30, December 31, June 30,
2003 2002 2002
------- ------------ -------
Unrealized gain on securities available for sale $ 2,025 1,399 $ 1,249
Deferred tax liability (790) (546) (490)
------- ------- -------
Net unrealized gain on securities available for sale 1,235 853 759
------- ------- -------
Additional minimum pension liability (292) (165) (165)
Deferred tax asset 114 64 64
------- ------- -------
Net additional minimum pension liability (178) (101) (101)
------- ------- -------
Total accumulated other comprehensive income $ 1,057 752 658
======= ======= =======
Note 10 - Completed Acquisitions
The Company completed the following acquisitions during 2003. The results
of each acquired company are included in First Bancorp's results for the period
ended June 30, 2003 beginning on their respective acquisition dates.
(a) Uwharrie Insurance Group - On January 2, 2003, the Company completed
the acquisition of Uwharrie Insurance Group, a Montgomery County based property
and casualty insurance agency. With eight employees, Uwharrie Insurance Group,
Inc. serves approximately 5,000 customers, primarily from its Troy-based
headquarters, and has annual commissions of approximately $500,000. The primary
reason for the acquisition was to gain efficiencies of scale with the Company's
existing property and casualty insurance business. In accordance with the terms
of the merger agreement, the Company paid cash in the amount of $546,000 to
complete the acquisition. In addition, the Company incurred $18,000 in other
direct costs to complete the acquisition. As of the date of the acquisition, the
value of the assets of Uwharrie Insurance Group amounted to $20,000 (consisting
primarily of premises and equipment), which resulted in the Company recording an
intangible asset of approximately $544,000. Based on an independent appraisal,
the allocation among types of intangible assets and related amortization periods
are:
Page 12
Type of Intangible Asset Allocated Amount Amortization Period
- ----------------------------- ---------------- -------------------------
Value of Noncompete Agreement $ 50,000 Two years - straight-line
Value of Customer List 151,000 Ten years - straight-line
Goodwill 343,000 Not applicable
--------
Total Intangible Assets $544,000
========
For tax purposes, each of the intangible assets recorded will result in
tax-deductible amortization expense. No pro forma earnings information has been
presented due to the immateriality of the acquisition.
(b) On January 15, 2003, the Company completed the acquisition of Carolina
Community Bancshares, Inc. (CCB), the parent company of Carolina Community Bank,
a South Carolina community bank with three branches in Dillon County, South
Carolina. This represented the Company's first entry into South Carolina. Dillon
County, South Carolina is contiguous to Robeson County, North Carolina, a county
where the Company operates four branches. The Company's primary reason for the
acquisition was to expand into a contiguous market with facilities, operations
and experienced staff in place. The terms of the agreement called for
shareholders of Carolina Community to receive 0.8 shares of First Bancorp stock
and $20.00 in cash for each share of Carolina Community stock they own. The
transaction was completed on January 15, 2003 with the Company paying cash of
$8.3 million, issuing 332,888 shares of common stock that were valued at
approximately $8.4 million, and assuming employee stock options with an
intrinsic value of approximately $0.9 million. The value of the stock issued was
determined using a Company stock price of $25.22, which was the average price of
Company stock during the five day period beginning two days before the
acquisition announcement and ending two days after the acquisition announcement.
The value of the employee stock options assumed was determined using the
Black-Scholes option-pricing model.
This acquisition has been accounted for using the purchase method of
accounting for business combinations, and accordingly, the assets and
liabilities of CCB were recorded based on estimates of fair values as of January
15, 2003, subject to possible adjustment during the one-year period from that
date. The following is a condensed balance sheet disclosing the amount assigned
to each major asset and liability caption of CCB as of January 15, 2003, and the
related fair value adjustments recorded by the Company to reflect the
acquisition. It is not expected that any portion of the intangible assets
recorded will be deductible for income tax purposes.
Page 13
As Fair As
($ in thousands) Recorded by Value Recorded by
CCB Adjustments First Bancorp
----------- ----------- -------------
Assets
Cash and cash equivalents $ 7,048 -- 7,048
Securities 12,995 99 (a) 13,094
Loans, gross 47,716 -- 47,716
Allowance for loan losses (751) -- (751)
Premises and equipment 799 (45)(b) 754
Other - Identifiable intangible asset -- 771 (c) 771
Other 1,697 (243)(d) 1,454
-------- ------- --------
Total 69,504 582 70,086
-------- ------- --------
Liabilities
Deposits $ 58,861 -- 58,861
Borrowings 2,000 115 (e) 2,115
Other 722 (88)(f) 634
-------- ------- --------
Total 61,583 27 61,610
-------- ------- --------
Net identifiable assets acquired 8,476
Total cost of acquisition
Cash $ 8,322
Value of stock issued 8,395
Value of assumed options 889
Direct costs of acquisition 1,268
-------
Total cost of acquisition 18,874
--------
Goodwill recorded through June 30, 2003 $ 10,398
========
Explanation of Fair Value Adjustments
(a) This fair value adjustment represents the net unrealized gain of CCB's
held-to-maturity securities portfolio. This fair value adjustment was
recorded by the Company as a premium on securities and will be amortized
as a reduction of investment interest income over the life of the related
securities, which have an average life of approximately four years.
(b) This fair value adjustment represents the book value of certain equipment
owned by CCB that became obsolete upon the acquisition.
(c) This fair value adjustment represents the value of the core deposit base
assumed in the acquisition based on a study performed by an independent
consulting firm. This amount was recorded by the Company as an
identifiable intangible asset and will be amortized as expense on an
accelerated basis over a ten year period based on an amortization schedule
provided by the consulting firm.
(d) This fair value adjustment represents the net deferred tax liability
recorded related to the other fair value adjustments.
(e) This fair value adjustment was recorded because the interest rates of
CCB's borrowings exceeded current interest rates on similar borrowings.
This amount will be amortized to reduce interest expense over the
remaining lives of the related borrowings, which have a weighted average
life of approximately 3.7 years.
(f) This fair value adjustment represents the carrying value of a retirement
plan liability that was terminated in accordance with the terms of the
merger agreement.
Page 14
The following unaudited pro forma financial information presents the
combined results of the Company and CCB as if the acquisition had occurred as of
January 1, 2002, after giving effect to certain adjustments, including
amortization of the core deposit intangible, an assumed cost of funds related to
the cash paid of 6%, and related income tax effects. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the Company and CCB constituted a single entity during such
period. Because the acquisition occurred just 15 days into the six month period
ended June 30, 2003, the actual results of operation for the three and six
months ended June 30, 2003 do not differ materially from pro forma results, and
thus pro forma results have not been presented.
Three Months Ended Six Months Ended
($ in thousands, except share data) June 30, 2002 June 30, 2002
------------------ ----------------
Net interest income $13,040 24,997
Noninterest income 3,082 6,259
Net income 4,375 8,575
Earnings per share
Basic 0.46 0.90
Diluted 0.45 0.88
Page 15
Item 2 - Management's Discussion and Analysis of Consolidated Results of
Operations and Financial Condition
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 losses for all
loans not considered to be impaired loans. First, loans that have been risk
graded by the Company as having more than "standard" risk but are not considered
to be impaired are assigned estimated loss percentages generally accepted in the
banking industry. Loans that are classified by the Company as having normal
credit risk are segregated by loan type, and estimated loss percentages are
assigned to each loan type, based on the historical losses, current economic
conditions, and operational conditions specific to each loan type.
The reserve estimated for impaired loans is then added to the reserve
estimated for all other loans. This becomes the Company's "allocated allowance."
In addition to the allocated allowance derived from the model, management also
evaluates other data such as the ratio of the allowance for loan losses to total
loans, net loan growth information, nonperforming asset levels and trends in
such data. Based on this additional analysis, the Company may determine that an
additional amount of allowance for loan losses is necessary to reserve for
probable losses. This additional amount, if any, is the Company's "unallocated
allowance." The sum of the allocated allowance and the unallocated allowance is
compared to the actual allowance for loan losses recorded on the books of the
Company and any adjustment necessary for the recorded allowance to equal the
computed allowance is recorded as a provision for loan losses. The provision for
loan losses is a direct charge to earnings in the period recorded.
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" below.
CURRENT ACCOUNTING MATTERS
See Note 2 to the Consolidated Financial Statements above.
Page 16
RESULTS OF OPERATIONS
OVERVIEW
In the discussion below and the financial statements above, amounts as of
and for the three and six month periods ended June 30, 2002 have been restated
from their originally reported amounts in accordance with the adoption of a new
accounting standard - see Note 2 to the consolidated financial statements above.
Net income for the three months ended June 30, 2003 was $4,811,000, or
$0.50 per diluted share, an 11.1% increase in diluted earnings per share over
the net income of $4,161,000, or $0.45 per diluted share, recorded in the second
quarter of 2002. Net income for the six months ended June 30, 2003 amounted to
$9,504,000, or $0.99 per diluted share, a 13.8% increase in diluted earnings per
share over the net income of $8,152,000, or $0.87 per diluted share, reported
for the six months ended June 30, 2002.
The increase in the Company's earnings in 2003 compared to 2002 was
primarily due to the Company's overall growth, which resulted in increases in
net interest income and noninterest income, the positive benefits of which were
partially offset by higher operating expenses. The Company's net interest margin
did not vary significantly for the three or six month periods ended June 30,
2003 compared to the same periods in 2002, while the provisions for loan losses
recorded by the Company for the three and six months ended June 30, 2003 were
slightly less than the comparable periods in 2002, due primarily to lower loan
growth experienced.
The Company's asset quality ratios have remained sound in 2003. For the
three and six months ended June 30, 2003, annualized net charge-offs as a
percentage of average loans amounted to 7 basis points and 9 basis points,
respectively, compared to 14 basis points and 9 basis points for the comparable
periods in 2002. The Company's nonperforming assets to total assets ratio of
0.37% at June 30, 2003 is slightly higher than the same ratio of 0.34% a year
earlier, but remains significantly lower than a March 31, 2003 North Carolina
state bank average of 0.71%.
The Company's annualized return on average assets for the second quarter
of 2003 was 1.47% compared to 1.45% for the second quarter of 2002. The
Company's annualized return on average assets for the six months ended June 30,
2003 was 1.48% compared to 1.43% for the first half of 2002.
The Company's annualized return on average equity for the second quarter
of 2003 was 14.15% compared to 13.89% for the second quarter of 2002. The
Company's annualized return on average equity for the six months ended June 30,
2003 was 14.20% compared to 13.76% for the first half of 2002.
As discussed in the next two paragraphs, the Company has completed two
acquisitions in 2003. The results of each acquired company are included in First
Bancorp's 2003 results beginning on their respective acquisition dates.
On January 2, 2003, the Company completed the acquisition of Uwharrie
Insurance Group (Uwharrie Insurance), a property and casualty insurance agency
located in Troy, with eight employees and approximately 5,000 customers in
Montgomery and neighboring counties. Uwharrie Insurance was merged with the
Company's existing insurance subsidiary, First Bank Insurance Services, Inc.
On January 15, 2003, the Company completed the acquisition of Carolina
Community Bancshares, Inc. (CCB), the parent company of Carolina Community Bank,
a South Carolina community bank with three branches in Dillon County, South
Carolina. This represented the Company's first entry into South Carolina. Dillon
County, South Carolina is contiguous to Robeson County, North Carolina, a county
where the Company operates four branches. As of the acquisition date, CCB had
total assets of $70.2 million, with loans of $47.7 million, deposits of $58.9
million, and shareholders' equity of $8.8 million.
Page 17
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 and six month periods ended June 30, 2003 amounted
to $13,674,000 and $27,016,000, respectively, increases of $1,344,000 and
$3,393,000, or 10.9% and 14.4%, over the amounts of $12,330,000 and $23,623,000
recorded in the same three and six month periods in 2002, respectively.
There are two primary factors that cause changes in the amount of net
interest income recorded by the Company - 1) growth in loans and deposits, and
2) the Company's net interest margin. For the three and six months ended June
30, 2003, growth in loans and deposits was the primary factor that increased net
interest income, as the Company's net interest margin did not vary significantly
for the three or six month periods ended June 30, 2003 compared to the same
periods in 2002.
For the Three Months Ended June 30,
--------------------------------------------------------------------------
2003 2002
----------------------------------- ----------------------------------
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
---------- ------- --------- ---------- ------- --------
Assets
Loans (1) $1,087,932 6.36% $17,249 $ 946,279 7.06% $16,666
Taxable securities 74,961 4.87% 911 88,245 6.07% 1,336
Non-taxable securities (2) 15,085 8.19% 308 15,294 8.44% 322
Short-term investments,
principally federal funds 44,470 2.00% 222 30,259 2.49% 188
---------- ------- ---------- -------
Total interest-earning assets 1,222,448 6.13% 18,690 1,080,077 6.87% 18,512
------- -------
Liabilities
Savings, NOW and money
market deposits $ 403,078 0.58% $ 584 $ 370,585 1.05% $ 971
Time deposits >$100,000 234,219 2.68% 1,565 180,237 3.81% 1,714
Other time deposits 377,595 2.46% 2,318 351,022 3.60% 3,151
---------- ------- ---------- -------
Total interest-bearing deposits 1,014,892 1.77% 4,467 901,844 2.60% 5,836
Borrowings 32,874 5.08% 416 14,944 5.64% 210
---------- ------- ---------- -------
Total interest-bearing liabilities 1,047,766 1.87% 4,883 916,788 2.65% 6,046
------- -------
Non-interest-bearing deposits 125,418 103,042
Net yield on interest-earning
assets and net interest income 4.53% $13,807 4.63% $12,466
======= =======
Interest rate spread 4.26% 4.22%
Average prime rate 4.23% 4.75%
- --------------------------------------------------------------------------------------------------------------------
(1) Average loans include nonaccruing loans, the effect of which is to lower
the average rate shown.
(2) Includes tax-equivalent adjustments of $133,000 and $136,000 in 2003 and
2002, respectively, to reflect the tax benefit that the Company receives
related to its tax-exempt securities, which carry interest rates lower
than similar taxable investments due to their tax exempt status. This
amount has been computed assuming a 35% tax rate and is reduced by the
related nondeductible portion of interest expense.
Page 18
For the Six Months Ended June 30,
--------------------------------------------------------------------------
2003 2002
----------------------------------- ----------------------------------
Interest Interest
Average Average Earned Average Average Earned
($ in thousands) Volume Rate or Paid Volume Rate or Paid
---------- ------- --------- ---------- ------- --------
Assets
Loans (1) $1,068,857 6.46% $34,258 $ 924,781 7.17% $32,870
Taxable securities 74,434 5.01% 1,851 90,742 6.09% 2,741
Non-taxable securities (2) 15,412 8.61% 658 15,712 8.47% 660
Short-term investments,
principally federal funds 48,740 2.18% 528 40,156 2.39% 476
---------- ------- ---------- -------
Total interest-earning assets 1,207,443 6.23% 37,295 1,071,391 6.92% 36,747
------- -------
Liabilities
Savings, NOW and money
market deposits $ 399,625 0.61% $ 1,202 $ 362,467 1.05% $ 1,892
Time deposits >$100,000 226,198 2.79% 3,125 183,447 3.99% 3,630
Other time deposits 376,310 2.56% 4,785 354,175 3.91% 6,865
---------- ------- ---------- -------
Total interest-bearing deposits 1,002,133 1.83% 9,112 900,089 2.78% 12,387
Borrowings 32,692 5.51% 893 14,972 6.20% 460
---------- ------- ---------- -------
Total interest-bearing liabilities 1,034,825 1.95% 10,005 915,061 2.83% 12,847
------- -------
Non-interest-bearing deposits 120,688 99,972
Net yield on interest-earning
assets and net interest income 4.56% $27,290 4.50% $23,900
======= =======
Interest rate spread 4.28% 4.09%
Average prime rate 4.25% 4.75%
- --------------------------------------------------------------------------------------------------------------------
(1) Average loans include nonaccruing loans, the effect of which is to lower
the average rate shown.
(2) Includes tax-equivalent adjustments of $274,000 and $277,000 in 2003 and
2002, respectively, to reflect the tax benefit that the Company receives
related to its tax-exempt securities, which carry interest rates lower
than similar taxable investments due to their tax exempt status. This
amount has been computed assuming a 35% tax rate and is reduced by the
related nondeductible portion of interest expense.
Average loans outstanding for the second quarter of 2003 were $1.088
billion, which was 15.0% higher than the average loans outstanding for the
second quarter of 2002 ($946 million). Average loans outstanding for the six
months ended June 30, 2003 were $1.069 billion, which was 15.6% higher than the
average loans outstanding for the six months ended June 30, 2002 ($925 million).
Average deposits outstanding for the second quarter of 2003 were $1.140
billion, which was 13.5% higher than the average deposits outstanding for the
second quarter of 2002 ($1.005 billion). Average deposits outstanding for the
six months ended June 30, 2003 were $1.123 billion, which was 12.3% higher than
the average deposits outstanding for the six months ended June 30, 2002 ($1.000
billion).
See additional discussion regarding the nature of the growth in loans and
deposits in the section entitled "Financial Condition" below. The effect of the
higher amounts of average loans and deposits was to increase net interest income
in 2003.
The net interest margin (tax equivalent net interest income divided by
average earning assets) did not vary significantly when comparing the three and
six months ended June 30, 2003 to the comparable periods in 2002. The net
interest margin for the second quarter of 2003 was 4.53% compared to 4.63% in
the second quarter of 2002, while the net interest margin for the six months
ended June 30, 2003 was 4.56% compared to 4.50% for the six months ended June
30, 2002. See additional discussion regarding the Company's net interest margin
in Item 3 below entitled - INTEREST RATE RISK (INCLUDING QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK).
Page 19
The provision for loan losses for the second quarter of 2003 was $540,000,
$235,000 less than the $775,000 recorded in the second quarter of 2002. For the
six months ended June 30, 2003, the provision for loan losses was $1,060,000
compared to $1,215,000 for the six months ended June 30, 2002. The decreases in
the provision for loan losses in 2003 have primarily been a result of lower loan
growth. Net internal loan growth ("internal loan growth" excludes loans assumed
in acquisitions for which preestablished reserves have been recorded) for the
second quarter of 2003 amounted to $36.6 million compared to $45.3 million in
the second quarter of 2002. Net internal loan growth for first six months of
2003 amounted to $61.7 million compared to $79.1 million in the first half of
2002. Asset quality ratios have remained fairly stable in 2003 compared to 2002.
Noninterest income for the three and six month periods ended June 30, 2003
amounted to $3,602,000 and $7,335,000, respectively, increases of 24.2% and
24.4% over the amounts recorded in the same three and six month periods in 2002.
The primary factors affecting the increase in noninterest income were -1)
internal growth in the Company's business - for the twelve months ended June 30,
2003, excluding the Company's CCB acquisition, loans increased 9% and deposits
increased 8%, which have provided the Company with fee income opportunities, 2)
the CCB acquisition - CCB has contributed approximately $180,000 in each of the
first two quarters of 2003 in noninterest income (primarily service charges on
deposit accounts), and 3) as a result of the high refinancing activity driven by
the very low interest rate environment, fees that the Company earns from
mortgage loans presold into the secondary market increased by $317,000 and
$573,000, or 95% and 74%, for the three and six months ended June 30, 2003,
respectively, versus the comparable periods in 2002. The Company believes that
the rise in mortgage loan interest rates since June 30, 2003 will likely have a
negative impact on the amount of fees from presold mortgages received by the
Company.
Also contributing to the increases in noninterest income in 2003 were
higher amounts of commissions from sales of insurance and financial products.
This line item includes commissions the Company receives from three sources - 1)
sales of credit insurance associated with new loans, 2) commissions from the
sales of investment, annuity, and long-term care insurance products, and 3)
commissions from the sale of property and casualty insurance. The following
table presents these components for the three month and six month periods ended
June 30, 2003 compared to the same periods in 2002:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
($ in thousands) $ % $ %
2003 2002 Change Change 2003 2002 Change Change
---- ---- ------ ------ ---- ---- ------ ------
Commissions earned from:
Sales of credit insurance $ 70 72 (2) (2.8)% $148 239 (91) (38.1)%
Sales of investments,
annuities, and long term
care insurance 100 54 46 85.2% 122 112 10 8.9%
Sales of property and
casualty insurance 165 52 113 217.3% 325 92 233 253.3%
---- --- ---- ----- ---- --- ---- -----
Total $335 178 157 88.2% $595 443 152 34.3%
==== === ==== ===== ==== === ==== =====
The decrease in commissions earned from sales from credit insurance for
the six months ended June 30, 2003 is primarily related to an approximately
$70,000 decrease in the "experience bonus" that is received annually in the
first quarter of each year from the insurance companies that the Company acts as
an agent for. The experience bonus can fluctuate depending on the actual loss
experience that the insurance companies experience related to the Company's
customers. The increase in commissions from sales of investments, annuities, and
long term care insurance for both the three and six month periods in 2003
compared to 2002 is primarily due to the hiring of an additional staff person in
this area. The increase in commissions earned from sales of property and
casualty insurance is primarily due to the acquisition of Uwharrie Insurance,
which was effective on January 2, 2003 - see Note 10 to the consolidated
financial statements above.
Noninterest expenses for the three and six months ended June 30, 2003
amounted to $9,352,000 and $18,600,000, respectively, increases of 16.0% and
17.7% from the amounts recorded in the same three and six
Page 20
month periods in 2002. 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 acquisitions of Uwharrie
Insurance and CCB have resulted in incremental noninterest expense of
approximately $600,000 per quarter. In addition to the overall growth
experienced, the Company made significant technology investments in mid-2002,
including check imaging technology (which was introduced in July 2002) and a
company-wide computer network that increased equipment depreciation expense.
The provision for income taxes was $2,573,000 in the second quarter of
2003 compared to $2,232,000 in the second quarter of 2002, an increase of 15.3%.
The provision for income taxes for the six months ended June 30, 2003 amounted
to $5,187,000 compared to $4,349,000 for the first half of 2002. The effective
tax rates did not vary significantly among the periods presented, amounting to
approximately 35% in each period. In the normal course of business, the Company
carries out various tax planning initiatives in order to control its effective
tax rate.
FINANCIAL CONDITION
Total assets at June 30, 2003 amounted to $1.33 billion, 10.2% higher than
a year earlier. Total loans at June 30, 2003 amounted to $1.11 billion, a 14.3%
increase from a year earlier, and total deposits amounted to $1.15 billion at
June 30, 2003, a 15.0% increase from a year earlier. A significant portion of
the Company's growth from a year ago is due to the Company's January 2003
acquisition of CCB, and to a lesser degree the Company's purchase of a bank
branch in Broadway, North Carolina in October 2002. As of their respective
acquisition dates, CCB had total assets of $70.2 million, with loans of $47.7
million and deposits of $58.9 million, while the Broadway branch had $3.1
million in loans and $8.4 million in deposits.
The following tables present information regarding the nature of the
Company's growth since June 30, 2002.
Balance at Balance at Total Percentage growth,
July 1, 2002 to beginning Internal Growth from end of percentage excluding
June 30, 2003 of period Growth Acquisitions period growth acquisitions
- ------------------------------ ---------- -------- ------------ ---------- ---------- ------------------
($ in thousands)
Loans $ 969,409 87,789 50,799 1,107,997 14.3% 9.1%
========== ======= ====== ========= ==== ====
Deposits - Noninterest bearing $ 103,436 21,425 10,427 135,288 30.8% 20.7%
Deposits - Savings, NOW, and
Money Market 367,336 18,886 18,257 404,479 10.1% 5.1%
Deposits - Time>$100,000 181,811 42,203 12,566 236,580 30.1% 23.2%
Deposits - Time<$100,000 349,560 10 26,052 375,622 7.5% 0.0%
---------- ------- ------ --------- ---- ----
Total deposits $1,002,143 82,524 67,302 1,151,969 15.0% 8.2%
========== ======= ====== ========= ==== ====
January 1, 2003 to
June 30, 2003
- ------------------------------
Loans $ 998,547 61,734 47,716 1,107,997 11.0% 6.2%
========== ======= ====== ========= ==== ====
Deposits - Noninterest bearing $ 112,380 14,131 8,777 135,288 20.4% 12.6%
Deposits - Savings, NOW, and
Money Market 387,691 1,853 14,935 404,479 4.3% 0.5%
Deposits - Time>$100,000 199,794 24,220 12,566 236,580 18.4% 12.1%
Deposits - Time<$100,000 356,092 (3,053) 22,583 375,622 5.5% (0.9%)
---------- ------- ------ --------- ---- ----
Total deposits $1,055,957 37,151 58,861 1,151,969 9.1% 3.5%
========== ======= ====== ========= ==== ====
As can be seen in the first table, over the past twelve months the
Company's internal growth rates for loans and deposits were 9.1% and 8.2%
respectively, with the growth assumed in acquisitions increasing the overall
growth in loans to 14.3% and deposits to 15.0%. As can be seen in the second
table, the Company experienced steady internal growth of 6.2% in loans (12.4%
annualized) and 3.5% in deposits (7.0% annualized) during the first half
Page 21
of 2003. The CCB acquisition increased overall loan and deposit growth by 5%-6%.
The deposit categories of noninterest-bearing demand deposits and time deposits
greater than $100,000 have experienced the highest percentage increases in
internal growth during the periods shown.
NONPERFORMING ASSETS
Nonperforming assets are defined as nonaccrual loans, loans past due 90 or
more days and still accruing interest, restructured loans and other real estate.
Nonperforming assets are summarized as follows:
June 30, December 31, June 30,
($ in thousands) 2003 2002 2002
=========================================================================================
Nonperforming loans:
Nonaccrual loans $3,741 2,976 2,755
Restructured loans 22 41 77
Accruing loans > 90 days past due -- -- --
------ ----- -----
Total nonperforming loans 3,763 3,017 2,832
Other real estate 1,174 1,384 1,264
------ ----- -----
Total nonperforming assets $4,937 4,401 4,096
====== ===== =====
Nonperforming loans to total loans 0.34% 0.30% 0.29%
Nonperforming assets as a percentage of loans
and other real estate 0.45% 0.44% 0.42%
Nonperforming assets to total assets 0.37% 0.36% 0.34%
Allowance for loan losses to total loans 1.10% 1.09% 1.05%
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 increased in 2003, amounting to $3.7
million at June 30, 2003, compared to $3.0 million at December 31, 2002 and $2.8
million at June 30, 2002. The primary reason for the increase is due to the
Company placing four loans on nonaccrual status during the second quarter of
2003, each with an outstanding balance of between $110,000 and $340,000. Each
loan is secured by a single family residence, and the Company does not
anticipate significant losses on any of the loans.
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 $750,000, $1.0 million, and $1.4 million as of June 30, 2003,
December 31, 2002, and June 30, 2002, respectively. The borrower of this credit,
which is secured by real estate, has liquidity problems. During the last six
months of 2002, the borrower sold several pieces of the real estate collateral
that provided $400,000 in paydowns, resulting in the $1.0 million outstanding
balance at December 31, 2002. At December 31, 2002, the Company had accepted a
nonbinding proposal from a third party that would result in the receipt of
approximately $750,000 of the $1.0 million outstanding in 2003, with the
remaining $250,000 to be charged-off by the Company. At December 31, 2002, the
Company had a specific impaired loan valuation allowance of $250,000 assigned to
this relationship. During the first quarter of 2003, because of the increasing
likelihood that the terms of the nonbinding proposal would occur, the Company
charged-off the $250,000 specific reserve that had been established, resulting
in the $750,000 balance for this credit at June 30, 2003. The Company had
expected that the $750,000 payment would be received by June 30, 2003, but it
has not occurred due to the time it has taken the third party to legally
structure the transaction in accordance with their intent.
The recorded investment in loans considered to be impaired under FASB
Statement No. 114 did not vary significantly among the periods presented,
amounting to $1,718,000, $1,431,000, and $1,554,000 at June 30, 2003, December
31, 2002, and June 30, 2002, respectively, all of which were on nonaccrual
status. A significant portion of the impaired loans for each
Page 22
of the three periods presented is the same credit noted above that is on
nonaccrual status. At June 30, 2003, December 31, 2002, and June 30, 2002, the
related allowance for loan losses for all impaired loans was $289,000 (seven of
the nine impaired loans totaling $962,000 at June 30, 2003 had an assigned
valuation allowance), $290,000 (related to three of the four impaired loans with
a total balance of $1,269,000), and $50,000 (related to two loans with a balance
of $1,221,000, with the remainder of impaired loans having no valuation
allowance), respectively. As noted above, in the first quarter of 2003, the
Company charged-off $250,000 related to the nonaccrual/impaired loan discussed
above that had a specific reserve of $250,000 at December 31, 2002. Excluding
that loan, specific reserves related to impaired loans increased from $40,000 at
December 31, 2002 to $289,000 at June 30, 2003. The average recorded investments
in impaired loans during the six month period ended June 30, 2003, the year
ended December 31, 2002, and the six months ended June 30, 2002 were
approximately $1,643,000, $1,882,000, and $2,105,000, 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.
As of June 30, 2003, December 31, 2002 and June 30, 2002, the amount of
the Company's other real estate did not vary significantly, amounting to
$1,174,000, $1,384,000, and $1,264,000, respectively, which consisted
principally of several parcels of real estate. The Company's management has
reviewed recent appraisals of its other real estate and believes that their fair
values, less estimated costs to sell, equal or exceed their respective carrying
values at the dates presented.
SUMMARY OF LOAN LOSS EXPERIENCE
The allowance for loan losses is created by direct charges to operations.
Losses on loans are charged against the allowance in the period in which such
loans, in management's opinion, become uncollectible. The recoveries realized
during the period are credited to this allowance.
The Company has no foreign loans, few agricultural loans and does not
engage in significant lease financing or highly leveraged transactions.
Commercial loans are diversified among a variety of industries. The majority of
the Company's real estate loans are primarily various personal and commercial
loans where real estate provides additional security for the loan. Collateral
for virtually all of these loans is located within the Company's principal
market area.
The provision for loan losses for the second quarter of 2003 was $540,000,
$235,000 less than the $775,000 recorded in the second quarter of 2002. For the
six months ended June 30, 2003, the provision for loan losses was $1,060,000
compared to $1,215,000 for the six months ended June 30, 2002. The decreases in
the provision for loan losses in 2003 have primarily been a result of lower loan
growth. Net internal loan growth ("internal loan growth" excludes loans assumed
in acquisitions for which preestablished reserves have been recorded) for the
second quarter of 2003 amounted to $36.6 million compared to $45.3 million in
the second quarter of 2002. Net internal loan growth for first six months of
2003 amounted to $61.7 million compared to $79.1 million in the first half of
2002. Asset quality ratios have remained fairly stable in 2003 compared to 2002.
At June 30, 2003, the allowance for loan losses amounted to $12,243,000,
compared to $10,907,000 at December 31, 2002 and $10,179,000 at June 30, 2002.
The allowance for loan losses was 1.10%, 1.09% and 1.05% of total loans as of
June 30, 2003, December 31, 2002, and June 30, 2002, respectively. The slight
increase in the allowance for loan losses since December 31, 2002 is primarily
the result of the CCB acquisition (see Note 10 to the Consolidated Financial
Statements for a description of recently completed acquisitions). At the time of
the acquisition, CCB's allowance for loan losses amounted to 1.57% of gross
loans. The increase in the allowance percentage from June 30, 2002 was also
caused by a slight shift in the composition of the Company's loan portfolio from
residential mortgage loans to commercial loans - commercial loans carry a higher
reserve percentage in the Company's allowance for loan loss model than do
residential mortgage loans. The slight shift from residential mortgage loans to
commercial loans has been intentional. Two of the Company's recent bank
acquisitions (First Savings Bancorp in September 2000 and Century Bancorp in May
2001) had loan portfolios that were highly concentrated in residential mortgage
loans. As many of those loans have refinanced at lower rates over the past 12
months, the Company chose to sell the refinanced loans in the secondary market
instead of holding them in the Company's loan portfolio. This strategy was
implemented in an effort to shift the Company's loan portfolio to
Page 23
having a higher percentage of commercial loans, which are generally shorter term
in nature and have higher interest rates.
Management believes the Company's reserve levels are adequate to cover
probable loan losses on the loans outstanding as of each reporting date. It must
be emphasized, however, that the determination of the reserve using the
Company's procedures and methods rests upon various judgments and assumptions
about economic conditions and other factors affecting loans. No assurance can be
given that the Company will not in any particular period sustain loan losses
that are sizable in relation to the amounts reserved or that subsequent
evaluations of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan losses
and value of other real estate. Such agencies may require the Company to
recognize adjustments to the allowance or the carrying value of other real
estate based on their judgments about information available at the time of their
examinations.
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.
Six Months Year Six Months
Ended Ended Ended
June 30, December 31, June 30,
($ in thousands) 2003 2002 2002
----------- ------------ ----------
Loans outstanding at end of period $ 1,107,997 998,547 969,409
=========== ======== ========
Average amount of loans outstanding $ 1,068,857 954,885 924,781
=========== ======== ========
Allowance for loan losses, at
beginning of period $ 10,907 9,388 9,388
Total charge-offs (630) (1,211) (505)
Total recoveries 155 135 81
----------- -------- --------
Net charge-offs (475) (1,076) (424)
----------- -------- --------
Additions to the allowance charged to expense 1,060 2,545 1,215
----------- -------- --------
Addition related to loans assumed in corporate acquisitions 751 50 --
----------- -------- --------
Allowance for loan losses, at end of period $ 12,243 10,907 10,179
=========== ======== ========
Ratios:
Net charge-offs (annualized) as a percent of average loans 0.09% 0.11% 0.09%
Allowance for loan losses as a
percent of loans at end of period 1.10% 1.09% 1.05%
Based on the results of the Company's loan analysis and grading program
and management's evaluation of the allowance for loan losses at June 30, 2003,
there have been no material changes to the allocation of the allowance for loan
losses among the various categories of loans since December 31, 2002.
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
Page 24
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 $199 million line of credit with the Federal Home Loan Bank (of
which $11 million has been drawn), 2) a $50 million overnight federal funds line
of credit with a correspondent bank (none of which was outstanding at June 30,
2003), and 3) an approximately $39 million line of credit through the Federal
Reserve Bank of Richmond's discount window (none of which was outstanding at
June 30, 2003).
The Company's liquidity lessened slightly from December 31, 2002 to June
30, 2003, as loan growth exceeded deposit growth in the first half of 2003. The
Company's loan to deposit ratio was 96.2% at June 30, 2003 compared to 94.6% at
December 31, 2002. The level of the Company's liquid assets (consisting of cash,
due from banks, federal funds sold, presold mortgages in process of settlement
and securities) as a percentage of deposits and borrowings was 13.5% at June 30,
2003 compared to 16.0% at December 31, 2002.
The amount and timing of the Company's contractual obligations and
commercial commitments has not changed materially since December 31, 2002,
detail of which is presented in Table 18 on page 52 of the Company's 2002 Form
10-K.
The Company is not involved in any legal proceedings that, in management's
opinion, could have a material effect on the consolidated financial position of
the Company.
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.
The Company's management believes its liquidity sources, including unused
lines of credit, are at an acceptable level and remain adequate to meet its
operating needs in the foreseeable future. The Company will continue to monitor
its liquidity position carefully and will explore and implement strategies to
increase liquidity if deemed appropriate.
CAPITAL RESOURCES
The Company is regulated by the Board of Governors of the Federal Reserve
Board (FED) and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Company's banking
subsidiary is regulated by the Federal Deposit Insurance Corporation (FDIC) and
the North Carolina Office of the Commissioner of Banks. The Company is not aware
of any recommendations of regulatory authorities or otherwise which, if they
were to be implemented, would have a material effect on its liquidity, capital
resources, or operations.
The Company must comply with regulatory capital requirements established
by the FED and FDIC. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under 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-
Page 25
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 June 30, 2003, the Company's capital ratios exceeded the regulatory
minimum ratios discussed above. The following table presents the Company's
capital ratios and the regulatory minimums discussed above for the periods
indicated.
June 30, December 31, June 30,
2003 2002 2002
-------- ------------ --------
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets 11.47% 12.68% 10.54%
Minimum required Tier I capital 4.00% 4.00% 4.00%
Total risk-based capital to
Tier II risk-adjusted assets 12.51% 13.69% 11.54%
Minimum required total risk-based capital 8.00% 8.00% 8.00%
Leverage capital ratios:
Tier I leverage capital to
adjusted first quarter average assets 9.20% 10.09% 8.39%
Minimum required Tier I leverage capital 4.00% 4.00% 4.00%
After increasing in the second half of 2002 as a result of issuing $20
million in trust preferred securities in October 2002, the Company's capital
ratios declined in the first half of 2003 primarily as a result of the
acquisition of CCB.
The Company's bank subsidiary is also subject to similar capital
requirements as those discussed above. The bank subsidiary's capital ratios do
not vary materially from the Company's capital ratios presented above. At June
30, 2003, the Company's bank subsidiary exceeded the minimum ratios
established by the FED and FDIC.
SHARE REPURCHASES
During the second quarter of 2003, the Company repurchased 83,500 shares
of its own common stock at an average price of $25.90 per share. For the six
months ended June 30, 2003, the Company repurchased 200,700 shares of its own
common stock at an average price of $24.76 per share. At June 30, 2003, the
Company had approximately 169,000 shares available for repurchase under existing
authority from its board of directors. The Company plans to repurchase these
shares in open market and privately negotiated transactions, as market
conditions and the Company's liquidity warrant, subject to compliance with
applicable regulations.
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
Page 26
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 4.73% (realized in 1998). During that five year period the prime rate of
interest has ranged from a low of 4.25% to a high of 9.50%.
The net interest margin (tax equivalent net interest income divided by
average earning assets) did not vary significantly when comparing the three and
six months ended June 30, 2003 to the comparable periods in 2002. The net
interest margin for the second quarter of 2003 was 4.53% compared to 4.63% in
the second quarter of 2002, while the net interest margin for the six months
ended June 30, 2003 was 4.56% compared to 4.50% for the six months ended June
30, 2002. See "Components of Earnings" above for additional discussion regarding
variances in the Company's net interest margin.
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 June 30, 2003 the
Company had $293 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 June 30,
2003 subject to interest rate changes within one year are deposits totaling $405
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,
a rapidly 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 expects the June 25, 2003 Federal Reserve 25 basis point rate
cut to negatively impact, at least temporarily, the Company's net interest
margin for the reasons described above. The rate cut may have a more severe and
longer lasting negative impact on the Company's net interest margin than past
rate cuts because of the inability of the Company to reset deposit rates by an
amount (because of their already near-zero rates) that would offset the negative
impact of the rate cut on the yields earned on the Company's interest earning
assets.
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."
Page 27
Expected Maturities of Market Sensitive
Instruments Held at June 30, 2003
---------------------------------------------------------------------------
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 $ 20,011 -- -- -- -- -- 20,011 1.00% $ 20,011
Federal funds sold 18,710 -- -- -- -- -- 18,710 1.00% 18,710
Presold mortgages in 3,526 -- -- -- -- -- 3,526 5.25% 3,526
process of settlement
Debt securities- at
amortized cost (1) (2) 22,773 12,306 11,433 9,227 5,197 23,161 84,097 5.09% 87,075
Loans - fixed (3) (4) 92,283 76,446 75,654 98,769 103,855 67,121 514,128 7.32% 520,833
Loans - adjustable (3) (4) 203,048 69,497 63,482 58,987 92,318 102,796 590,128 4.99% 591,413
-------- ------- ------- ------- ------- ------- --------- ---- ----------
Total $360,351 158,249 150,569 166,693 201,370 193,078 1,230,600 5.85% $1,241,568
======== ======= ======= ======= ======= ======= ========= ==== ==========
Savings, NOW, and
money market
deposits $404,479 -- -- -- -- -- 404,479 0.57% $ 404,479
Time deposits 508,271 57,772 12,577 9,950 22,052 1,580 612,202 2.44% 614,641
Borrowings - fixed (2) -- 1,000 2,000 2,000 1,000 5,000 11,000 4.23% 11,716
Borrowings - adjustable -- -- -- -- -- 20,000 20,000 4.74% 20,000
-------- ------- ------- ------- ------- ------- --------- ---- ----------
Total $912,750 58,772 14,577 11,950 23,052 26,580 1,047,681 1.78% $1,050,836
======== ======= ======= ======= ======= ======= ========= ==== ==========
(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
June 30, 2003 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.
The Company's market-sensitive 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 June 30, 2003
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.
Item 4. Controls and Procedures
(a) The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
as of June 30, 2003, and they have concluded that these controls and procedures
are effective.
(b) There were no changes in the Company's internal control over financial
reporting that occurred during the quarter ended June 30, 2003 that have
materially affected, or are reasonably likely to materially affect the Company's
internal control over financial reporting.
Page 28
FORWARD-LOOKING STATEMENTS
Part I of this report contains statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgment of the Company and its management about future events. Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the financial success or changing strategies of the Company's
customers, the Company's level of success in integrating acquisitions, actions
of government regulators, the level of market interest rates, and general
economic conditions.
Page 29
Part II. Other Information
Item 4 - Submission of Matters to a Vote of Shareholders
The following proposals were considered and acted upon at the annual
meeting of shareholders of the Company held on April 24, 2003:
Proposal 1
A proposal to elect eighteen (18) directors to serve until the next
annual meeting of shareholders and until their successors are
elected and qualified.
Voted Withheld
Nominee For Authority
------- --------- ---------
Jack D. Briggs 7,452,895 390,336
H. David Bruton, M.D 7,448,573 394,658
R. Walton Brown 7,546,773 296,457
David L. Burns 7,457,994 385,236
John F. Burns 7,518,357 324,874
Jesse S. Capel 7,455,299 387,932
Goldie Wallace-Gainey 7,465,502 377,729
James H. Garner 7,544,094 299,136
James G. Hudson, Jr 7,544,306 298,925
George R. Perkins, Jr 7,529,763 313,468
Thomas F. Philips 7,513,050 330,180
William E. Samuels 7,513,819 329,412
Edward T. Taws 7,544,306 298,925
Frederick H. Taylor 7,542,659 300,572
Virginia C. Thomasson 7,448,282 394,948
A. Jordan Washburn 7,544,306 298,925
Dennis A. Wicker 7,539,780 303,451
John C. Willis 7,454,053 389,178
Proposal 2
A proposal to ratify the appointment of KPMG LLP as the independent
auditors of the Company for the current fiscal year.
For 7,608,733 Against 216,698 Abstain 18,720
--------- ------- ------
Proposal 3
A proposal to amend the Company's 1994 Stock Option Plan to increase
the number of shares available for issuance by 150,000 shares to
705,000 shares.
For 7,115,591 Against 663,086 Abstain 65,474
--------- ------- ------
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 (*).
Page 30
3.a Copy of Articles of Incorporation of the Company and amendments
thereto were filed as Exhibits 3.a.i through 3.a.v to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 2002,
and are incorporated herein by reference.
3.b Copy of the Bylaws of the Company was filed as Exhibit 3.b to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001, and is incorporated herein by reference.
10.a Definitive Merger Agreement with Carolina Community Bancshares, Inc.
dated July 16, 2002 was filed as Exhibit 99.2 to the Company's
current report on Form 8-K on July 17, 2002 and is incorporated
herein by reference.
10.b Employment Agreement between the Company and R. Walton Brown dated
January 15, 2003.
21 List of Subsidiaries of the Company was filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2002, and is incorporated herein by reference.
31.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002.
31.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002.
32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) There was one report on Form 8-K filed during the quarter ended June
30, 2003.
On April 23, 2003, the Company filed a report on Form 8-K regarding
its April 22, 2003 news release in which it announced its earnings
for the quarter ended March 31, 2003. The full text of the news
release dated April 22, 2003 was attached as Exhibit 99(a) to this
Form 8-K filing.
Copies of exhibits are available upon written request to: First Bancorp, Anna G.
Hollers, Executive Vice President, P.O. Box 508, Troy, NC 27371
Page 31
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
August 13, 2003 BY: James H. Garner
------------------------------
James H. Garner
President
(Principal Executive Officer),
Treasurer and Director
August 13, 2003 BY: Anna G. Hollers
------------------------------
Anna G. Hollers
Executive Vice President
and Secretary
August 13, 2003 BY: Eric P. Credle
------------------------------
Eric P. Credle
Senior Vice President
and Chief Financial Officer
Page 32