================================================================================ 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, 2001 ------------------ Commission File Number 0-15572 FIRST BANCORP ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) North Carolina 56-1421916 - ------------------------------- ----------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 341 North Main Street, Troy, North Carolina 27371-0508 - ------------------------------------------- ----------------------------- (Address of Principal Executive Offices) (Zip Code) (Registrant's telephone number, including area code) (910) 576-6171 ------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] YES [ ] NO As of July 31, 2001, 9,239,230 shares of the registrant's Common Stock, no par value, were outstanding. The registrant had no other classes of securities outstanding. ================================================================================
INDEX FIRST BANCORP AND SUBSIDIARIES Page Part I. Financial Information Item 1 - Financial Statements CONSOLIDATED BALANCE SHEETS - June 30, 2001 and 2000 (With Comparative Amounts at December 31, 2000) 3 CONSOLIDATED STATEMENTS OF INCOME - For the Periods Ended June 30, 2001 and 2000 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - For the Periods Ended June 30, 2001 and 2000 5 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - For the Periods Ended June 30, 2001 and 2000 6 CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Periods Ended June 30, 2001 and 2000 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition 12 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 21 Part II. Other Information Item 4 - Submission of Matters to a Vote of Shareholders 24 Item 5 - Other Information 25 Item 6 - Exhibits and Reports on Form 8-K 25 Signatures 29 Page 2
Part I. Financial Information Item 1 - Financial Statements First Bancorp and Subsidiaries Consolidated Balance Sheets <TABLE> <CAPTION> June 30, December 31, June 30, ($ in thousands-unaudited) 2001 2000 2000 - ------------------------------------------------------------- ------------- ------------- ------------ ASSETS <S> <C> <C> <C> Cash & due from banks, noninterest-bearing $ 25,702 20,940 25,718 Due from banks, interest-bearing 8,190 1,769 31,561 Federal funds sold 14,834 7,730 11,829 ------------- ------------- ------------ Total cash and cash equivalents 48,726 30,439 69,108 ------------- ------------- ------------ Securities available for sale (costs of $111,932, $69,214, and $111,302) 112,667 69,597 107,670 Securities held to maturity (fair values of $16,899, $47,661, and $48,903) 16,356 47,924 50,022 Presold mortgages in process of settlement 4,410 1,036 496 Loans 869,713 746,089 704,714 Less: Allowance for loan losses (9,118) (7,893) (7,143) ------------- ------------- ------------ Net loans 860,595 738,196 697,571 ------------- ------------- ------------ Premises and equipment 17,291 14,116 13,720 Accrued interest receivable 6,764 6,342 5,713 Intangible assets 22,069 4,630 4,946 Other 4,966 2,887 5,641 ------------- ------------- ------------ Total assets $ 1,093,844 915,167 954,887 ============= =========== ============ LIABILITIES Deposits: Demand - noninterest-bearing $ 92,431 70,634 73,271 Savings, NOW, and money market 314,961 253,687 247,516 Time deposits of $100,000 or more 178,470 140,992 129,609 Other time deposits 364,312 305,066 302,391 ------------- ------------- ------------ Total deposits 950,174 770,379 752,787 Borrowings 15,000 26,200 84,000 Accrued interest payable 4,032 4,254 3,458 Other liabilities 7,649 3,650 3,942 ------------- ------------- ------------ Total liabilities 976,855 804,483 844,187 ------------- ------------- ------------ SHAREHOLDERS' EQUITY Common stock, No par value per share Issued and outstanding: 9,221,639, 8,827,341, and 8,905,382 shares 53,688 50,148 51,728 Retained earnings 62,815 60,280 61,367 Accumulated other comprehensive income (loss) 486 256 (2,395) ------------- ------------- ------------ Total shareholders' equity 116,989 110,684 110,700 ------------- ------------- ------------ Total liabilities and shareholders' equity $ 1,093,844 915,167 954,887 ============= ============= ============ </TABLE> See notes to consolidated financial statements. Page 3
First Bancorp and Subsidiaries Consolidated Statements of Income <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ---------------------------------- ------------------------------- ($ in thousands, except share data-unaudited) 2001 2000 2001 2000 - ----------------------------------------------------- --------------- --------------- --------------- ------------- INTEREST INCOME <S> <C> <C> <C> <C> Interest and fees on loans $ 17,079 15,246 33,501 29,417 Interest on investment securities: Taxable interest income 1,689 2,259 3,288 4,561 Tax-exempt interest income 201 220 407 450 Other, principally overnight investments 732 236 929 470 --------------- --------------- --------------- ------------- Total interest income 19,701 17,961 38,125 34,898 --------------- --------------- --------------- ------------- INTEREST EXPENSE Savings, NOW and money market 1,424 1,548 2,979 3,050 Time deposits of $100,000 or more 2,624 1,790 4,994 3,517 Other time deposits 5,169 3,922 9,825 7,526 Borrowings 331 960 855 1,670 --------------- --------------- --------------- ------------- Total interest expense 9,548 8,220 18,653 15,763 --------------- --------------- --------------- ------------- Net interest income 10,153 9,741 19,472 19,135 Provision for loan losses 308 350 528 660 --------------- --------------- --------------- ------------- Net interest income after provision for loan losses 9,845 9,391 18,944 18,475 --------------- --------------- --------------- ------------- NONINTEREST INCOME Service charges on deposit accounts 1,292 760 2,200 1,506 Other service charges, commissions and fees 514 428 1,040 920 Fees from presold mortgages 286 109 424 198 Commissions from sales of insurance/investments 140 100 346 260 Data processing fees 49 22 96 42 Securities gains -- 89 -- 89 Loan sale gains 9 -- 9 -- Other gains (losses) (7) (1) 30 (11) --------------- --------------- --------------- ------------- Total noninterest income 2,283 1,507 4,145 3,004 --------------- --------------- --------------- ------------- NONINTEREST EXPENSES Salaries 3,080 2,434 5,871 4,959 Employee benefits 685 646 1,299 1,310 --------------- --------------- --------------- ------------- Total personnel expense 3,765 3,080 7,170 6,269 Net occupancy expense 437 362 839 740 Equipment related expenses 388 365 761 665 Intangibles amortization 425 157 607 315 Other operating expenses 2,068 1,899 3,771 3,520 --------------- --------------- --------------- ------------- Total noninterest expenses 7,083 5,863 13,148 11,509 --------------- --------------- --------------- ------------- Income before income taxes 5,045 5,035 9,941 9,970 Income taxes 1,778 1,751 3,450 3,448 --------------- --------------- --------------- ------------- NET INCOME $ 3,267 3,284 6,491 6,522 =============== =============== =============== ============= Earnings per share: Basic $ 0.36 0.37 0.73 0.73 Diluted 0.35 0.36 0.71 0.72 Weighted average common shares outstanding: Basic 9,022,343 8,907,229 8,898,610 8,886,585 Diluted 9,281,715 9,104,892 9,136,406 9,118,325 </TABLE> See notes to consolidated financial statements. Page 4
First Bancorp and Subsidiaries Consolidated Statements of Comprehensive Income <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ($ in thousands-unaudited) 2001 2000 2001 2000 - ------------------------------------------------------ ---------- ---------- ----------- ----------- <S> <C> <C> <C> <C> Net income $ 3,267 3,284 6,491 6,522 ---------- ---------- ----------- ----------- Other comprehensive income (loss): Unrealized gains (losses) on securities available for sale: Unrealized holding gains (losses) arising during the period, pretax (402) 313 352 85 Tax benefit (expense) 140 (201) (122) (124) Reclassification to realized gains - (89) - (89) Tax expense - 30 - 30 ---------- ---------- ----------- ----------- Other comprehensive income (loss) (262) 53 230 (98) ---------- ---------- ----------- ----------- Comprehensive income $ 3,005 3,337 6,721 6,424 ========== ========== =========== =========== </TABLE> See notes to consolidated financial statements. Page 5
First Bancorp and Subsidiaries Consolidated Statements of Shareholders' Equity <TABLE> <CAPTION> Accumulated Common Stock Other Share- ------------------------------- Retained Comprehensive holders' (In thousands, except per share - unaudited) Shares Amount Earnings Income (Loss) Equity - --------------------------------------------- ------------- ----------------- --------------- ---------------- --------------- <S> <C> <C> <C> <C> <C> Balances, January 1, 2000 8,849 $ 51,490 57,787 (2,297) 106,980 Net income 6,522 6,522 Cash dividends declared ($0.34 per share) (2,942) (2,942) Common stock issued under stock option plan 112 334 334 Tax benefit realized from exercise of nonqualified stock options 790 790 Common stock issued into dividend reinvestment plan 2 33 33 Purchases and retirement of common stock (58) (919) (919) Other comprehensive loss (98) (98) ------------- ----------------- --------------- ---------------- --------------- Balances, June 30, 2000 8,905 $ 51,728 61,367 (2,395) 110,700 ============= ================= =============== ================ =============== Balances, January 1, 2001 8,827 $ 50,148 60,280 256 110,684 Net income 6,491 6,491 Cash dividends declared ($0.44 per share) (3,956) (3,956) Common stock issued under stock option plan 54 264 264 Common stock issued into dividend reinvestment plan 1 22 22 Common stock issued in acquisitions 602 9,159 9,159 Purchases and retirement of common stock (262) (5,905) (5,905) Other comprehensive income 230 230 ------------- ----------------- --------------- ---------------- --------------- Balances, June 30, 2001 9,222 $ 53,688 62,815 486 116,989 ============= ================= =============== ================ =============== </TABLE> See notes to consolidated financial statements. Page 6
First Bancorp and Subsidiaries Consolidated Statements of Cash Flows <TABLE> <CAPTION> Six Months Ended June 30, ($ in thousands-unaudited) 2001 2000 - ------------------------------------------------------------------------------ --------------- --------------- Cash Flows From Operating Activities <S> <C> <C> Net income $ 6,491 6,522 Reconciliation of net income to net cash provided by operating activities: Provision for loan losses 528 660 Net security premium amortization (discount accretion) (33) 166 Gains on sales of securities available for sale - (89) Gain on disposal of other real estate (30) - Loan fees and costs deferred, net of amortization (44) 46 Gain on sale of loans (9) - Depreciation of premises and equipment 674 592 Amortization of intangible assets 607 315 Deferred income tax benefit (133) (196) Decrease (increase) in accrued interest receivable 56 (427) Increase in other assets (3,262) (496) Decrease in accrued interest payable (980) (160) Increase in other liabilities 2,113 901 --------------- --------------- Net cash provided by operating activities 5,978 7,834 --------------- --------------- Cash Flows From Investing Activities Purchases of securities available for sale (25,776) (4,886) Purchases of securities held to maturity (1) (168) Proceeds from sales of securities available for sale - 90 Proceeds from maturities/issuer calls of securities available for sale 20,815 10,061 Proceeds from maturities/issuer calls of securities held to maturity 2,883 2,772 Net increase in loans (17,256) (61,727) Purchases of premises and equipment (1,770) (1,953) Net cash received in acquisition of insurance agencies 40 - Net cash paid in acquisition of Century Bancorp (8,112) - Net cash received in purchase of branches 70,201 - --------------- --------------- Net cash provided (used) by investing activities 41,024 (55,811) --------------- --------------- Cash Flows From Financing Activities Net increase in deposits 5,477 40,648 Net proceeds (repayments) of borrowings (24,700) 21,500 Cash dividends paid (3,873) (2,852) Proceeds from issuance of common stock 286 367 Purchases and retirement of common stock (5,905) (919) --------------- --------------- Net cash provided (used) by financing activities (28,715) 58,744 --------------- --------------- Increase In Cash And Cash Equivalents 18,287 10,767 Cash And Cash Equivalents, Beginning Of Period 30,439 58,341 --------------- --------------- Cash And Cash Equivalents, End Of Period $ 48,726 69,108 =============== =============== Supplemental Disclosures Of Cash Flow Information: Cash paid during the period for: Interest $ 19,388 15,923 Income taxes 718 3,588 Non-cash transactions: Transfer of securities from held to maturity to available for sale 31,220 - Unrealized gain (loss) on securities available for sale 352 (4) Foreclosed loans transferred to other real estate 319 - Premises and equipment transferred to other real estate 425 - </TABLE> See notes to consolidated financial statements. Page 7
First Bancorp And Subsidiaries Notes To Consolidated Financial Statements (unaudited) For the Periods Ended June 30, 2001 and 2000 - -------------------------------------------------------------------------------- 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, 2001 and 2000 and the consolidated results of operations and consolidated cash flows for the periods ended June 30, 2001 and 2000. Reference is made to the 2000 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. As discussed in Note 6 below, all prior period financial information has been restated to include historical information for a Company acquired in a transaction accounted for as a pooling-of-interests. The results of operations for the periods ended June 30, 2001 and 2000 are not necessarily indicative of the results to be expected for the full year. NOTE 2 - Reclassifications Certain amounts reported in the period ended June 30, 2000 have been reclassified to conform with the presentation for June 30, 2001. 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 3 - Earnings Per Share Basic earnings per share were computed by dividing net income by the weighted average common shares outstanding. Diluted earnings per share include 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: <TABLE> <CAPTION> For the Three Months Ended June 30, ------------------------------------------------------------------------------ 2001 2000 -------------------------------------- ------------------------------------- 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 <S> <C> <C> <C> <C> <C> <C> Net income $ 3,267 9,022,343 $ 0.36 $ 3,284 8,907,229 $ 0.37 ======== ======== Effect of Dilutive Securities - 259,372 - 197,663 --------- --------- -------- --------- Diluted EPS $ 3,267 9,281,715 $ 0.35 $ 3,284 9,104,892 $ 0.36 ========= ========= ========- ======== ========= ======== <CAPTION> For the Six Months Ended June 30, ------------------------------------------------------------------------------ 2001 2000 -------------------------------------- ------------------------------------- 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 <S> <C> <C> <C> <C> <C> <C> Net income $ 6,491 8,898,610 $ 0.73 $ 6,522 8,886,585 $ 0.73 ======== ======== Effect of Dilutive Securities - 237,796 - 231,740 --------- --------- -------- --------- Diluted EPS $ 6,491 9,136,406 $ 0.71 $ 6,522 9,118,325 $ 0.72 ========= ========= ========- ======== ========= ======== </TABLE> Page 8
NOTE 4 - Asset Quality Information Nonperforming assets are defined as nonaccrual loans, loans past due 90 or more days and still accruing interest, restructured loans and other real estate. For each of the periods presented, the Company had no loans past due 90 or more days and still accruing interest. Nonperforming assets are summarized as follows: <TABLE> <CAPTION> June 30, December 31, June 30, ($ in thousands) 2001 2000 2000 -------------------------------------------- ---------------- ---------------- ----------------- Nonperforming loans: <S> <C> <C> <C> Nonaccrual loans $ 5,104 626 738 Restructured loans 226 237 249 ---------- --------- --------- Total nonperforming loans 5,330 863 987 Other real estate 1,497 893 767 ---------- --------- --------- Total nonperforming assets $ 6,827 1,756 1,754 ========== ========= ========= Nonperforming loans to total loans 0.61% 0.12% 0.14% Nonperforming assets as a percentage of loans and other real estate 0.24% 0.25% 0.78% Nonperforming assets to total assets 0.62% 0.19% 0.18% Allowance for loan losses to total loans 1.05% 1.06% 1.01% </TABLE> ================================================================================ NOTE 5 - Deferred Loan Fees Loans are shown on the Consolidated Balance Sheets net of net deferred loan fees of approximately $689,000, $711,000, and $750,000 at June 30, 2001, December 31, 2000, and June 30, 2000, respectively. NOTE 6 - Merger and Acquisition Activity On September 14, 2000, the Company completed the merger with First Savings Bancorp, Inc. ("First Savings"), the holding Company for First Savings Bank of Moore County, Inc., SSB ("First Savings Bank"). At June 30, 2000, First Savings, headquartered in Southern Pines, North Carolina, had total assets of $331 million, with loans of $232 million and deposits of $224 million with six branch locations in Moore County, NC. In accordance with the terms of the merger agreement, each share of First Savings stock was exchanged for 1.2468 shares of First Bancorp stock. These terms resulted in First Bancorp issuing approximately 4,407,000 shares of stock to complete the transaction. The merger was accounted for as a pooling-of-interests and accordingly, all financial results for prior periods have been restated to include the combined results of First Bancorp and First Savings. To gain Federal Reserve approval for the merger with First Savings, the Company was required to divest the First Savings bank branch located in Carthage, NC. This branch was sold to another North Carolina community bank in a transaction that was completed in November 2000. At the time of the divestiture, the Carthage branch had approximately $15.1 million in total deposits and $2.3 million in total loans. The sale of the branch resulted in a net gain of $808,000. On March 26, 2001, the Company completed the purchase of four branches from First Union National Bank with aggregate deposits of approximately $103 million and aggregate loans of approximately $17 million. The four branches acquired were in Lumberton, Pembroke, St. Pauls (all located in Robeson County, NC), and Laurinburg (Scotland County, NC). Total intangible assets of $14.6 million were recorded in connection with the purchase. The following table presents a summary of the assets acquired and liabilities assumed in the purchase: Page 9
Assets acquired (in millions) - ------------------------------------------------------- ------------- Cash $ 70.2 Loans, gross, primarily consumer installment 16.7 Allowance for loan losses (0.3) Property, plant and equipment 1.9 --------- 88.5 --------- Liabilities assumed - ------------------------------------------------------- Deposits 102.6 Accrued interest on deposits 0.2 Other 0.3 --------- 103.1 --------- Excess of liabilities assumed over assets acquired - recorded as an intangible asset $ 14.6 ========= On May 17, 2001, the Company completed the purchase of Century Bancorp, Inc. ("Century"). Century was the holding Company for Home Savings, Inc., SSB, a one branch savings institution located in Thomasville, NC. As of March 31, 2001, Century had total assets of $107 million, total loans of $90 million, and total deposits of $74 million. In accordance with the terms of the merger agreement, the Company issued approximately 586,000 shares of common stock and paid cash of approximately $13.2 million to Century shareholders in exchange for all shares of Century outstanding. An intangible asset of $3.2 million was recorded in connection with this acquisition. On May 30, 2001, the Company completed the purchase of two insurance agencies - Aberdeen Insurance & Realty Company and Hobbs Insurance and Realty Company. Both agencies were located in Moore County and specialized in placing property and casualty insurance coverage for individuals and businesses in the Moore County area. In completing the acquisition, the agencies were merged into First Bank Insurance Services, Inc. Approximately 16,000 shares of Company stock were issued in connection with the acquisition of the two agencies. An intangible asset of $243,000 was recorded in connection with the acquisition. On August 13, 2001 the Company entered into a definitive agreement to acquire the Salisbury, North Carolina branch of First Union National Bank located at 215 West Innes Street. The branch currently has approximately $37 million in deposits and $10 million in loans. The closing of the transaction and the data conversion are expected to occur in the fourth quarter of 2001. According to the terms of the agreement, the Company will pay a deposit premium of 9.1% based on the average daily balance of the branch's deposits in the calendar month prior to the closing date. Note 7 - New Accounting Standards On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (`SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. On January 1, 2001, the Company transferred, as permitted by the standard upon its adoption, held-to-maturity securities with an amortized cost of approximately $31.7 million to the available-for-sale category at fair value. The unrealized loss at the time of the transfer was approximately $513,000, and is included as a component of other comprehensive income, net of tax. The Company does not engage in any hedging activities and other than the aforementioned transfer of securities, the adoption of the statement had no impact on the Company. Page 10
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies criteria for intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement 142 is effective for the Company beginning on January 1, 2002 and will require that all goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In connection with Statement 142's transitional goodwill impairment evaluation, the Statement will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of earnings. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether it will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle. Page 11
Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition RESULTS OF OPERATIONS OVERVIEW Net income for the three months ended June 30, 2001 was $3,267,000, a 0.5% decrease from the $3,284,000 reported in the second quarter of 2000. The net income recorded in the second quarter of 2001 amounted to diluted earnings per share of $0.35, a one cent decrease from the $0.36 diluted earnings per share recorded in the second quarter of 2000. Net income for the six months ended June 30, 2001 was $6,491,000, a 0.5% decrease from the $6,522,000 reported in the first half of 2000. The net income recorded in the first six months of 2001 amounted to diluted earnings per share of $0.71, a one cent decrease from the $0.72 diluted earnings per share recorded in the first half of 2000. Excluding the effects of a one time gain from a sale of equity securities that was realized in the second quarter of 2000, the Company's diluted earnings per share for the second quarter of 2001 and 2000 each amounted to $0.35, while the Company's diluted earnings per share for the first half of 2001 and 2000 each amounted to $0.71. The essentially flat earnings when comparing the three and six month periods of 2001 to the same periods of 2000 are the result of higher net interest income and noninterest income offset by higher noninterest expenses. The higher net interest income was a result of a greater amount of interest-earning assets, achieved primarily as a result of corporate acquisitions, the effects of which were partially negated by a lower net interest margin. The increases in noninterest income and noninterest expenses were primarily attributable to the Company's recent acquisitions. 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, 2001 amounted to $10,153,000 and $19,472,000, respectively, increases of $412,000 and $337,000, or 4.2% and 1.8%, over the amounts recorded in the same three and six month periods in 2000. There are two primary factors that cause changes in the amount of net interest income recorded by the Company - 1) growth in loans and deposits, and 2) the Company's net interest margin. For the three and six months ended June 30, 2001, growth in loans and deposits, which was achieved largely from corporate acquisitions, had a positive impact on net interest income, while a declining net interest margin had a negative impact on net interest income, when compared to the same periods in 2000. The following tables present average balances and average rates earned/paid by the Company for the periods indicated. Page 12
<TABLE> <CAPTION> For the Three Months Ended June 30, ----------------------------------------------------------------------------------- 2001 2000 -------------------------------------- ---------------------------------------- Interest Interest Average Average Earned Average Average Earned ($ in thousands) Volume Rate or Paid Volume Rate or Paid ----------- --------- --------- ----------- --------- ---------- Assets <S> <C> <C> <C> <C> <C> <C> Loans (1) $ 815,799 8.40% $ 17,079 $ 690,810 8.85% $ 15,246 Taxable securities 98,037 6.91% 1,689 146,273 6.19% 2,259 Non-taxable securities (2) 16,257 9.15% 371 17,651 8.36% 368 Short-term investments, principally federal funds 62,496 4.70% 732 14,286 6.63% 236 ----------- --------- ----------- ---------- Total interest-earning assets 992,589 8.03% 19,871 869,020 8.36% 18,109 --------- ---------- Liabilities Savings, NOW and money market deposits 303,394 1.88% 1,424 250,504 2.48% 1,548 Time deposits >$100,000 169,343 6.22% 2,624 123,765 5.80% 1,790 Other time deposits 354,508 5.85% 5,169 286,540 5.49% 3,922 ----------- --------- ----------- ---------- Total interest-bearing deposits 827,245 4.47% 9,217 660,809 4.41% 7,260 Borrowings 20,055 6.62% 331 61,054 6.31% 960 ----------- --------- ----------- ---------- Total interest-bearing liabilities 847,300 4.52% 9,548 721,863 4.57% 8,220 ---------- Non-interest-bearing deposits 87,519 70,247 Net yield on interest-earning assets and net interest income 4.17% $ 10,323 4.56% $ 9,889 ========= ========== Interest rate spread 3.51% 3.79% Average prime rate 7.36% 9.25% </TABLE> - -------------------------------------------------------------------------------- (1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. (2) Includes tax-equivalent adjustments of $170,000 and $148,000 in 2001 and 2000 respectively, to reflect the federal and state benefit of the tax-exempt securities, reduced by the related nondeductible portion of interest expense. <TABLE> <CAPTION> For the Six Months Ended June 30, ----------------------------------------------------------------------------------- 2001 2000 -------------------------------------- ---------------------------------------- Interest Interest Average Average Earned Average Average Earned ($ in thousands) Volume Rate or Paid Volume Rate or Paid ----------- --------- --------- ----------- --------- ---------- Assets <S> <C> <C> <C> <C> <C> <C> Loans (1) $ 784,178 8.62% $ 33,501 $ 674,270 8.80% $ 29,417 Taxable securities 97,440 6.80% 3,288 147,293 6.24% 4,561 Non-taxable securities (2) 16,402 8.85% 720 18,169 8.31% 749 Short-term investments, principally federal funds 39,252 4.77% 929 14,784 6.41% 470 ----------- --------- ----------- ---------- Total interest-earning assets 937,272 8.27% 38,438 854,516 8.31% 35,197 --------- ---------- Liabilities Savings, NOW and money market deposits 276,041 2.18% 2,979 251,723 2.44% 3,050 Time deposits >$100,000 157,788 6.38% 4,994 122,115 5.81% 3,517 Other time deposits 332,239 5.96% 9,825 282,893 5.36% 7,526 ----------- --------- ----------- ---------- Total interest-bearing deposits 766,068 4.69% 17,798 656,731 4.33% 14,093 Borrowings 26,494 6.51% 855 55,843 6.03% 1,670 ----------- --------- ----------- ---------- Total interest-bearing liabilities 792,562 4.75% 18,653 712,574 4.46% 15,763 ---------- Non-interest-bearing deposits 78,045 67,139 Net yield on interest-earning assets and net interest income 4.26% $ 19,785 4.56% $ 19,434 ========= ========== Interest rate spread 3.52% 3.85% Average prime rate 7.98% 8.97% </TABLE> Page 13
- -------------------------------------------------------------------------------- (1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. (2) Includes tax-equivalent adjustments of $313,000 and $299,000 in 2001 and 2000 respectively, to reflect the federal and state benefit of the tax-exempt securities, reduced by the related nondeductible portion of interest expense. As shown in the tables above, the Company's average loans were 18.1% higher in the second quarter of 2001 and 16.3% higher in the first six months of 2001 compared to the same three and six month periods of 2000. Average deposits for the three and six month periods ended June 30, 2001 were 25.1% and 16.6% higher, respectively, compared to the same periods of 2000. See additional discussion regarding the nature of the growth in loans and deposits in the section entitled "Financial Condition" below. The effect of these higher amounts of average loans and deposits was to increase net interest income in 2001. Also as shown in the tables above, the Company's net interest margins were lower in 2001 than in the comparable periods in 2000, which partially offset the above-mentioned positive effects of having higher amounts of average loans and deposits. In addition to the competitive banking environment which has required the Company to price its loans and deposits more competitively than in the past, there are two other significant reasons for the lower net interest margins, as discussed in the following paragraphs. One factor that has thus far negatively impacted the Company's net interest margin has been the six successive interest rate cuts totaling 275 basis points by the Federal Reserve Board since January 1, 2001. Although at January 1, 2001 the Company had more interest-sensitive liabilities than interest-sensitive assets subject to repricing within twelve months, to date, the Company's interest-sensitive assets have repriced sooner (generally the day following the interest rate cut) and by a larger percentage (generally by the same number of basis points that the Federal Reserve discount rate was decreased) than have the Company's interest-sensitive liabilities that were subject to repricing. The Company's primary interest-sensitive liabilities at January 1, 2001 in the twelve month horizon consisted of the following 1) savings, NOW, and money market deposits, and 2) time deposits. Interest rates paid on savings, NOW and money market deposits are set by management of the Company, and although the interest rates on these accounts were decreased by the Company within days of each of the Federal Reserve rate cuts, it was not possible to reduce the interest rates by the full amount of the Federal Reserve cuts due to the already relatively low rates paid on these types of accounts. Interest rates paid on time deposits are generally fixed and not subject to automatic adjustment. When time deposits mature, the Company has the opportunity, at the customers' discretion, to renew the time deposit at a rate set by the Company. Because time deposits that are interest-sensitive in a twelve month horizon mature throughout the twelve month period, any change in the renewal rate will only affect a portion of the twelve month period. Also, although changes in interest rates on renewing time deposits generally track rate changes in the interest rate environment, due to competitive pressures, the Company has not been able to decrease rates on renewing time deposits in the first half of 2001 by the corresponding decreases in the Federal Reserve discount rate. The second factor affecting the Company's net interest margin has been the impact of the Company's acquisitions. As shown in Note 6 to the financial statements above, the March 2001 acquisition of four branches of First Union resulted in the Company receiving approximately $70 million in cash. As anticipated, until this cash can be fully redeployed by the Company into a mix of higher yielding investments and loans consistent with the Company's historic mix, the Company's net interest margin has been and will continue to be negatively impacted. In addition, because of Century's higher mix of single family mortgage loans and time deposits (which are generally the lowest yielding type of loan and highest rate type of deposit), the net interest margins earned on these acquired loans and deposits has been lower than the Company's historic margins. The provision for loan losses for the second quarter of 2001 was $308,000, $42,000 lower than the $350,000 recorded in the second quarter of 2000. For the six months ended June 30, 2001, the provision for loan losses was $528,000 compared to $660,000 for the six months ended June 30, 2000. The decreases in the provision for Page 14
loan losses in 2001 compared to 2000 have been a result of significantly lower loan growth experienced. Net internal loan growth (excludes loans assumed in acquisitions) for the second quarter of 2001 amounted to $8.8 million compared to $31.6 million in the second quarter of 2000. Net internal loan growth for first six months of 2001 amounted to $16.8 million compared to $61.5 million in the first half of 2001. An increase in nonperforming assets (see discussion below) during 2001 increased what would have been an otherwise lower level of provision for loan losses in 2001. Noninterest income for the three and six month periods ended June 30, 2001 amounted to $2,283,000 and $4,145,000 respectively, increases of 51.5% and 38.0% over the amounts recorded in the same three and six month periods in 2000. Within noninterest income, services charges on deposit accounts experienced the largest increase in 2001 compared to 2000, amounting to $1,292,000 in the second quarter of 2001, a 70.0% increase over the $760,000 recorded in the same quarter of 2000, and $2,200,000 for the first six months of 2001, a 46.1% increase over the $1,506,000 recorded in the first six months of 2000. The increase in service charges on deposit accounts is primarily related to two events - 1) an increase in the Company's service fee rate structure implemented in November 2000, and 2) the Company's acquisition of four branches on March 26, 2001. The branches purchased had a high level of transaction accounts (non-time deposits), $60.2 million in total, which afforded the Company the opportunity to earn deposit service charge income. Also contributing to the increase in noninterest income was "other service charges, commissions, and fees," which increased from $428,000 in the second quarter of 2000 to $514,000 in the second quarter of 2001, a 20.1% increase. For the six months ended June 30, 2001, this category of noninterest income amounted to $1,040,000, a 13.0% increase compared to the $920,000 recorded in the first six months of 2000. This category of noninterest income includes items such as safety deposit box rentals, check cashing fees, credit card and merchant income, and ATM charges. This category of income grew primarily because of increases in these activity-related fee services as a result of overall growth in the Company's total customer base, including growth achieved from corporate acquisitions. Fees from presold mortgages for the three and six month periods ended June 30, 2001 amounted to $286,000 and $424,000, respectively, increases of 162% and 114% over the amounts recorded in the comparable periods in 2000 of $109,000 and $198,000, respectively. The increases in 2001 are primarily attributable to two factors - 1) a higher level of mortgage loan refinancings caused by the lower interest rate environment, and 2) the decision by the Company to sell a higher percentage of single family home loan originations into the secondary market as opposed to holding them in the Company's loan portfolio. This strategy was implemented in an effort to shift the Company's loan portfolio to having a higher percentage of commercial loans, which are generally shorter term in nature and have higher interest rates. The line item "Commissions from sales of insurance/investments" includes commissions the Company receives from sales of credit insurance associated with new loans, commission from the sales of investment and annuity products, and commissions from the sale of property and casualty insurance. This income amounted to $140,000 and $346,000 for the three and six months 2001, respectively, a 40.0% and 33.1% increase from the $100,000 and $260,000 amounts recorded for the three and six months ended June 30, 2000, respectively. The Company expects that this line item will continue to increase as a result of the hiring of additional personnel and the May 30, 2001 acquisition of two insurance agencies that specialized in property and casualty insurance, as discussed above. Data processing fees for the three and six month periods ended June 30, 2001 amounted to $49,000 and $96,000, respectively, increases of 123% and 129% over the amounts recorded in the comparable periods in 2000 of $22,000 and $42,000, respectively. These fees have increased as a result of an increase from two data processing clients to four clients over the past one and a half years. Noninterest expenses for the three month and six months ended June 30, 2001 amounted to $7,083,000 and $13,148,000, respectively, increases of 20.8% and 14.2%, from amounts recorded in the Page 15
three and six month periods ended June 30, 2000. 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, including the incremental expenses associated with the Company's acquisitions. Certain efficiencies realized as a result of the Company's acquisition of First Savings that occurred in the third quarter of 2000 partially offset the increases in noninterest expense in the first half of 2001. Amortization of intangible assets increased from $157,000 in the second quarter of 2000 to $425,000 in the second quarter of 2001, and from $315,000 for the six months ended June 30, 2000 to $607,000 for the first six months of 2001. These increases are associated with the Company's aforementioned March 26, 2001 purchase of four branch offices and the May 17, 2001 acquisition of Century. The Company recorded gross intangible assets related to the branch purchase of approximately $14,624,000 and gross intangible assets related to the Century acquisition of $3,161,000. These intangible assets are being amortized on a straight-line basis over fifteen years. As discussed in Note 7 to the financial statements above, recently issued accounting pronouncements will significantly affect the way the Company accounts for its intangible assets beginning in 2002. The provision for income taxes was $1,778,000 in the second quarter of 2001 compared to $1,751,000 in the second quarter of 2000. The provision for income taxes for the six months ended June 30, 2001 amounted to $3,450,00 compared to $3,448,000 for the first half of 2000. The effective tax rates did not vary significantly among the periods presented, amounting to approximately 35%. FINANCIAL CONDITION The Company's financial condition was materially impacted by the purchase of the four First Union branches that occurred during the first quarter of 2001 and the acquisition of Century that occurred in the second quarter of 2001. As a percentage of January 1, 2001 amounts, these acquisitions increased the Company's loans by 14.3%, intangible assets by 384%, and deposits by 22.6%. The following table presents the impact of the purchase on selected balance sheet levels and growth rates during the time periods indicated. <TABLE> <CAPTION> (in thousands) Balance at Balance at Total Percentage growth, beginning Internal Growth from end of percentage excluding of period growth acquisitions period growth acquisitions --------- ------ ------------ ------ ------ ------------ July 1, 2000 to June 30, 2001 - ------------------------------ <S> <C> <C> <C> <C> <C> <C> Loans $ 704,714 58,127 106,872 869,713 23.4% 8.2% ========= ====== ======= ======= ===== ==== Deposits - Noninterest bearing $ 73,271 1,493 17,667 92,431 26.1% 2.0% Deposits - Savings, NOW, and Money Market 247,516 4,760 62,685 314,961 27.2% 1.9% Deposits - Time 432,000 16,816 93,966 542,782 25.6% 3.9% --------- ------ ------- ------- ----- ---- Total deposits $ 752,787 23,069 174,318 950,174 26.2% 3.1% ========= ====== ======= ======= ===== ==== January 1, 2001 to June 30, 2001 - ------------------------------ Loans $ 746,089 16,752 106,872 869,713 16.6% 2.2% ========= ====== ======= ======= ===== ==== Deposits - Noninterest bearing $ 70,634 4,130 17,667 92,431 30.9% 5.8% Deposits - Savings, NOW, and Money Market 253,687 (1,411) 62,685 314,961 24.2% (0.6%) Deposits - Time 446,058 2,758 93,966 542,782 21.7% 0.6% --------- ------ ------- ------- ----- ---- Total deposits $ 770,379 5,477 174,318 950,174 23.3% 0.7% ========= ====== ======= ======= ===== ==== </TABLE> Page 16
As can be seen from the above table, most of the Company's loan and deposit growth over the periods presented was achieved through acquisitions. Intense competition and the slowdown in the economy have resulted in lower rates of internal loan and deposit growth than were experienced by the Company in recent years. The acquisitions have improved the Company's liquidity position, while reducing the Company's tangible capital level. At December 31, 2000, balance sheet assets that are generally regarded as being liquid (consisting of cash, due from banks, federal funds sold, presold mortgages in process of settlement and securities) amounted to 18.7% of total deposits and borrowings, while at June 30, 2001 the percentage was 25.4%. The Company's tangible equity to total assets ratio decreased from 11.6% at December 31, 2000 to 8.7% at June 30, 2001. The Company's total assets were $1.094 billion at June 30, 2001, an increase of $139.0 million, or 14.6%, from the $954.9 million at June 30, 2000. The primary reason for the increase in total assets was the acquisitions, which added approximately $196.0 million in total assets. Paydowns of outstanding debt totaling $69 million have reduced the Company's assets since June 30, 2000. NONPERFORMING ASSETS Nonperforming assets are defined as nonaccrual loans, loans past due 90 or more days and still accruing interest, restructured loans and other real estate. For each of the periods presented, the Company had no loans past due 90 or more days and still accruing interest. Nonperforming assets are summarized as follows: <TABLE> <CAPTION> June 30, December 31, June 30, ($ in thousands) 2001 2000 2000 ------------------------------------------ -------------- -------------- --------------- Nonperforming loans: <S> <C> <C> <C> Nonaccrual loans $ 5,104 626 738 Restructured loans 226 237 249 -------- -------- -------- Total nonperforming loans 5,330 863 987 Other real estate 1,497 893 767 -------- -------- -------- Total nonperforming assets $ 6,827 1,756 1,754 ======== ======== ======== Nonperforming loans to total loans 0.61% 0.12% 0.14% Nonperforming assets as a percentage of loans and other real estate 0.78% 0.24% 0.25% Nonperforming assets to total assets 0.62% 0.19% 0.18% Allowance for loan losses to total loans 1.05% 1.06% 1.01% </TABLE> 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. Nonaccrual loans increased from $626,000 at December 31, 2000 to $5,104,000 at June 30, 2001. The increase is primarily attributable to five loans to the same borrower totaling $2.9 million that were placed on nonaccrual status during the first half of 2001. The Company has a total of approximately $3.3 million in loans ($0.4 million of which do not meet the Company's criteria for nonaccrual status) to this borrower with liquidity problems. The loans related to this borrower are collateralized by real estate, the value of which the Company believes exceeds the outstanding loan balance. The borrower has been actively selling the real estate to pay down the loan balance. However, several real estate sales scheduled for 2001 did not occur due to the filing of a lawsuit against the borrower during the first quarter of 2001. As a result of this development, management determined that $2.4 million in loans related to this borrower should be placed on nonaccrual status, and they were classified as such in February 2001. In the second quarter of 2001, an additional $500,000 of loans to this Page 17
same borrower were placed on nonaccrual status. Another reason for the increase in nonaccrual loans in 2001 was due to approximately $449,000 in nonaccrual loans assumed in the Century acquisition. The level of restructured loans did not vary materially among the periods presented. At June 30, 2001, December 31, 2000, and June 30, 2000, the recorded investment in loans considered to be impaired was $3,427,000, $293,000, and $257,000, respectively, all of which were on nonaccrual status. The increase in impaired loans is due to the same loans noted above that were placed on nonaccrual status. The related allowance for loan losses for these impaired loans was $514,000, $44,000, and $39,000, respectively. There were no impaired loans for which there was no related allowance. The average recorded investments in impaired loans during the six month period ended June 30, 2001, the year ended December 31, 2000, and the six months ended June 30, 2000 were approximately $2,209,000, $218,000, and $246,000, 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. Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed in the problem loan amounts above do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. As of June 30, 2001, December 31, 2000 and June 30, 2000, the Company's other real estate owned amounted to $1,497,000, $893,000, and $767,000, respectively, which consisted principally of several parcels of real estate. The increase in the level of other real estate owned at June 30, 2001 is primarily attributable to the transfer from property, plant and equipment to other real estate of the Company's former Laurinburg branch as a result of the Company consolidating it with a newly purchased branch located in the same city. 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 factors that influence management's judgment in determining the amount charged to operating expense include past loan loss experience, composition of the loan portfolio, probable losses inherent in the portfolio and current economic conditions. The Company uses a loan analysis and grading program to facilitate its evaluation of probable loan losses and the adequacy of its allowance for loan losses. In this program, risk grades are assigned by management and tested by the Company's internal audit department and an independent third party consulting firm. The testing program includes an evaluation of a sample of new loans, loans that management identifies as having credit weaknesses, loans past due 90 days or more, nonaccrual loans and any other loans identified during previous regulatory and other examinations. 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. Page 18
The provision for loan losses for the second quarter of 2001 was $308,000, $42,000 lower than the $350,000 recorded in the second quarter of 2000. For the six months ended June 30, 2001, the provision for loan losses was $528,000 compared to $660,000 for the six months ended June 30, 2000. The decreases in the provision for loan losses in 2001 compared to 2000 have been a result of significantly lower loan growth experienced. Net internal loan growth (excludes loans assumed in acquisitions) for the second quarter of 2001 amounted to $8.8 million compared to $31.6 million in the second quarter of 2000. Net internal loan growth for first six months of 2001 amounted to $16.8 million compared to $61.5 million in the first half of 2001. An increase in nonperforming assets (see discussion above) during 2001 increased what would have been an otherwise lower level of provision for loan losses for the three and six month periods in 2001. At June 30, 2001, the allowance for loan losses amounted to $9,118,000, compared to $7,893,000 at December 31, 2000 and $7,143,000 at June 30, 2000. The allowance for loan losses was 1.05%, 1.06% and 1.01% of total loans as of June 30, 2001, December 31, 2000, and June 30, 2000, respectively. The increase in the dollar amount of the allowance for loan losses since December 31, 2001 is primarily due to a $335,000 addition recorded in connection with the Company's branch purchase and a $601,000 addition recorded related to the Century acquisition. The $601,000 addition related to Century represented the book value of Century's allowance for loan losses on the date of the acquisition. Management believes the Company's reserve levels are adequate to cover probable loan losses on the loans outstanding as of each reporting date. It must be emphasized, however, that the determination of the reserve using the Company's procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that the Company will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and value of other real estate. Such agencies may require the Company to recognize adjustments to the allowance or the carrying value of other real estate based on their judgments about information available at the time of their examinations. For the periods indicated, the following table summarizes the Company's balances of loans outstanding, average loans outstanding, changes in the allowance for loan losses arising from charge-offs and recoveries, additions to the allowance for loan losses that have been charged to expense, and additions that were recorded related to acquisitions. <TABLE> <CAPTION> Six Months Year Six Months Ended Ended Ended June 30, December 31, June 30, ($ in thousands) 2001 2000 2000 ------------- ------------ ---------- <S> <C> <C> <C> Loans outstanding at end of period $ 869,713 746,089 704,714 ============= ============ ========== Average amount of loans outstanding $ 784,178 701,317 674,270 ============= ============ ========== Allowance for loan losses, at beginning of year $ 7,893 6,674 6,674 Total charge-offs (313) (475) (230) Total recoveries 74 89 39 ------------- ------------ ---------- Net charge-offs (239) (386) (191) ------------- ------------ ---------- Additions to the allowance charged to expense 528 1,605 660 Addition related to loans of purchased branches 335 - - Addition related to acquisition of Century 601 - - ------------- ------------ ---------- Allowance for loan losses, at end of period $ 9,118 7,893 7,143 ============= ============ ========== Ratios: Net charge-offs (annualized) as a percent of average loans 0.06% 0.06% 0.06% Allowance for loan losses as a percent of loans at end of period 1.05% 1.06% 1.01% </TABLE> Page 19
Based on the results of the aforementioned loan analysis and grading program and management's evaluation of the allowance for loan losses at June 30, 2001, there have been no material changes to the allocation of the allowance for loan losses among the various categories of loans since December 31, 2000. LIQUIDITY The Company's liquidity is determined by its ability to convert assets to cash or acquire alternative sources of funds to meet the needs of its customers who are withdrawing or borrowing funds, and to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. The Company's primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments. The Company's securities portfolio is comprised almost entirely of readily marketable securities which could also be sold to provide cash. In addition to internally generated liquidity sources, the Company has the ability to obtain borrowings from the following three sources - 1) an approximately $125,000,000 line of credit with the Federal Home Loan Bank (FHLB), 2) a $35,000,000 overnight federal funds line of credit with a correspondent bank, and 3) an approximately $45,000,000 line of credit through the Federal Reserve Bank of Richmond's discount window. Although the Company has not historically had to rely on these sources of credit as a source of liquidity (but has chosen to do so at various times instead of selling securities), in recent years the Company has experienced an increase in its loan to deposit ratio which has reduced the Company's liquidity. From December 31, 1997 to December 31, 2000, the Company's loan to deposit ratio increased from 84.3% to 96.8% and 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 decreased during that same period from 34.2% to 18.7%. As noted above, the acquisitions completed in the first half of 2001 have increased the Company's liquidity. The Company's loans to deposits ratio at June 30, 2001 decreased to 91.5%, and the Company's liquid assets to deposits ratio increased to 25.4% Although liquidity has generally lessened in recent years, the Company's management believes its liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet its operating needs in the foreseeable future. CAPITAL RESOURCES The Company is regulated by the Board of Governors of the Federal Reserve Board (FED) and is subject to securities registration and public reporting regulations of the Securities and Exchange Commission. The Company's banking subsidiaries are regulated by the Federal Deposit Insurance Corporation (FDIC) and the respective state of North Carolina bank and savings regulators. The Company is not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on its liquidity, capital resources, or operations. The Company must comply with regulatory capital requirements established by the FED and FDIC. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, Page 20
actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. These capital standards require the Company to maintain minimum ratios of "Tier 1" capital to total risk-weighted assets and total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1 capital is comprised of total shareholders' equity calculated in accordance with generally accepted accounting principles, excluding accumulated other comprehensive income (loss), less intangible assets, and total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which for the Company is the allowance for loan losses. Risk-weighted assets refer to the on- and off-balance sheet exposures of the Company, adjusted for their related risk levels using formulas set forth in FED and FDIC regulations. In addition to the risk-based capital requirements described above, the Company is subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution's composite ratings as determined by its regulators. The FED has not advised the Company of any requirement specifically applicable to it. At June 30, 2001, the Company's capital ratios exceeded the regulatory minimum ratios discussed above with a Tier 1 capital ratio to Tier 1 risk adjusted ratio of 11.75%, a total capital to total risk adjusted asset ratio of 12.74%, and a leverage ratio of 9.07%. The Company's two risk based ratios each reflect decreases of approximately 360 basis points from December 31, 2000, and the leverage ratio is approximately 250 basis points lower than at December 31, 2000. Each of the decreases is primarily related to the Company's acquisitions during 2001, which reduced tangible capital by $8.6 million, while adding approximately $196 million in assets. SHARE REPURCHASES As noted earlier, on May 17, 2001, the Company acquired Century Bancorp, Inc. in a part cash-part stock transaction. In connection with this transaction, the Company announced its intent to repurchase up to the number of shares that were issued to complete the acquisition (approximately 585,000 shares). Since the announcement of the program on October 20, 2000, the Company has repurchased approximately 387,000 shares at an average price of $20.32 per share. For the six months ended June 30, 2001, the Company repurchased 262,000 shares at an average price of $22.54. During the second quarter of 2001, the Company repurchased 167,000 shares at an average price of $24.89. Item 3. Quantitative and Qualitative Disclosures About Market Risk INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK) Net interest income is the Company's most significant component of earnings. Notwithstanding changes in volumes of loans and deposits, the Company's level of net interest income is continually at risk due to the effect that changes in general market interest rate trends have on interest yields earned and paid with respect to the various categories of earning assets and interest-bearing liabilities. It is the Company's policy to maintain portfolios of earning assets and interest-bearing liabilities with maturities and repricing opportunities that will afford protection, to the extent practical, against wide interest rate fluctuations. The Company's exposure to interest rate risk is analyzed on a regular basis by management using standard GAP reports, maturity reports, and an asset/liability software model that simulates future levels of interest income and expense based on current interest rates, expected future interest rates, and various intervals of "shock" interest rates. Over the years, the Page 21
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 4.53% (realized in 2000) to a high of 4.88% (realized in 1997). During that five year period the prime rate of interest has ranged from a low of 7.75% to a high of 9.50%. As discussed above, the Company has recently experienced downward pressure on its net interest margin, particularly during the three months ended June 30, 2001 when the Company's net interest margin was 4.17%. Using stated maturities for all instruments except mortgage-backed securities (which are allocated in the periods of their expected payback) and securities and borrowings with call features that are expected to be called (which are shown in the period of their expected call), at June 30, 2001 the Company had $361.1 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, 2001 subject to interest rate changes within one year are deposits totaling $315.0 million comprised of NOW, savings, and certain types of money market deposits with interest rates set by management. These types of deposits historically have not repriced, and did not reprice during the first half of 2001, coincidentally with or in the same proportion as general market indicators. Thus, the Company believes that in the near term (twelve months), net interest income would not likely experience significant downward pressure from rising interest rates. Similarly, management would not expect a significant increase in near term net interest income from falling interest rates (In fact, as discussed above under the heading "Components of Earnings," a declining interest rate environment during the first six months of 2001 negatively impacted (at least temporarily) the Company's next interest margin and net interest income). 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 amount of the rate change. The net effect is that in the twelve month horizon, as rates change, the impact of having a higher level of interest-sensitive liabilities is substantially negated by the later and typically lower proportionate change these liabilities experience compared to interest sensitive assets. The Company has no market risk sensitive instruments held for trading purposes, nor does it maintain any foreign currency positions. The following table presents the expected maturities of the Company's other than trading market risk sensitive financial instruments. The following table also presents the fair values of market risk sensitive instruments as estimated in accordance with Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments." <TABLE> <CAPTION> Expected Maturities of Market Sensitive Instruments Held at June 30, 2001 ----------------------------------------------------------------------------- Average Estimated ($ in thousands) Interest Fair 1 Year 2 Years 3 Years 4 Years 5 Years Beyond Total Rate (1) Value --------- ---------- --------- ---------- --------- -------- ---------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Due from banks, interest bearing $8,190 - - - - - 8,190 3.75% $ 8,190 Federal funds sold 14,834 - - - - - 14,834 3.75% 14,834 Debt securities- at amortized cost (2) 38,060 29,469 15,589 20,150 6,179 11,836 121,283 6.63% 122,599 Loans - fixed (3) 70,359 56,205 87,349 78,760 78,368 135,486 506,527 8.38% 509,716 Loans - adjustable (3) 114,778 29,136 36,387 25,775 29,243 122,763 358,082 7.61% 358,082 --------- ---------- --------- ---------- --------- -------- ---------- -------- ---------- Total $246,221 114,810 139,325 124,685 113,790 270,085 1,008,916 7.79% $1,013,421 ========= ========== ========= ========== ========= ======== ========== ======== ========== Savings, NOW, and money market deposits $314,961 - - - - - 314,961 1.66% $ 314,961 Time deposits 429,713 88,904 12,929 7,520 2,265 1,451 542,782 5.68% 546,395 Borrowings (2) - 5,000 5,000 5,000 - - 15,000 6.73% 15,360 --------- ---------- --------- ---------- --------- -------- ---------- -------- ---------- Total $744,674 93,904 17,929 12,520 2,265 1,451 872,743 4.17% $ 876,716 ========= ========== ========= ========== ========= ======== ========== ======== ========== </TABLE> Page 22
(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, 2001 are assumed to mature at their call date for purposes of this table. (3) Excludes nonaccrual loans and allowance for loan losses. The Company's fixed rate assets and liabilities each have estimated fair values that are slightly higher than their carrying value. This is due to the yields on these portfolios being higher than market yields at June 30, 2001 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. MERGER AND ACQUISITION ACTIVITY See Note 6 to the consolidated financial statements above. CURRENT ACCOUNTING MATTERS See Note 7 to the consolidated financial statements above. FORWARD-LOOKING STATEMENTS Part I of this report contains statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," or other statements concerning opinions or judgment of the Company and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of the Company's customers, the Company's level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions. Page 23
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 May 1, 2001: Proposal 1 A proposal to elect 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 7,320,095 39,179 H. David Bruton, M.D. 7,299,896 59,378 David L. Burns 7,3145,39 44,735 John F. Burns 7,283,031 76,243 Felton J. Capel 7,309,066 50,208 Jesse S. Capel 7,314,307 44,966 James H. Garner 7,316,299 42,975 Frank G. Hardister 7,276,407 82,866 George R. Perkins, Jr. 7,301,966 57,308 Thomas F. Philips 7,314,031 45,243 William E. Samuels 7,286,320 72,954 Edward T. Taws 7,316,177 43,096 Frederick H. Taylor 7,318,006 41,268 Virginia C. Thomasson 7,300,910 58,364 Goldie H. Wallace 7,302,016 57,258 A. Jordan Washburn 7,318,006 41,268 Dennis A. Wicker 7,314,794 44,479 John C. Willis 7,318,006 41,268 Proposal 2 A proposal to amend the Company's bylaws to increase the maximum number of directors on the board to nineteen. This proposal was conditioned on the consummation of the Company's acquisition of Century Bancorp, Inc. For 5,120,781 Against 268,484 Abstain 76,547 Non-Vote 1,893,461 --------- ------- ------ --------- Proposal 3 A proposal to approve an amendment to the Company's Articles of Incorporation to increase the number of authorized shares of common stock to 20,000,000 shares. For 6,992,126 Against 256,449 Abstain 110,698 --------- ------- ------- Proposal 4 A proposal to ratify the appointment of KPMG LLP as the independent auditors of the Company for the current fiscal year. For 7,212,385 Against 96,935 Abstain 49,954 --------- ------ ------ Page 24
Item 5 - Other Information The bylaws of the Company establish an advance notice procedure for shareholder proposals to be brought before a meeting of shareholders of the Company. Subject to any other applicable requirements, only such business may be conducted at a meeting of the shareholders as has been brought before the meeting by, or at the direction of, the Board of Directors or by a shareholder who has given to the Secretary of the Company timely written notice, in proper form, of the shareholder's intention to bring that business before the meeting. The presiding officer at such meeting has the authority to make such determinations. To be timely, notice of other business to be brought before any meeting must generally be received by the Secretary of the Company within 60 to 90 days in advance of the shareholders' meeting. The notice of any shareholder proposal must set forth the various information required under the bylaws. The person submitting the notice must provide, among other things, the name and address under which such shareholder appears on the Company's books and the class and number of shares of the Company's capital stock that are beneficially owned by such shareholder. Any shareholder desiring a copy of the Company's bylaws will be furnished one without charge upon written request to the Secretary of the Company at the Company's headquarters. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed with this report or, as noted, are incorporated by reference. Management contracts, compensatory plans and arrangements are marked with an asterisk (*). 3.a.i Copy of Articles of Incorporation of the Registrant and amendments thereto, was filed as Exhibit 3(a) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. 3.a.ii Copy of the amendment to Articles of Incorporation - adding a new Article Nine, was filed as Exhibit 3(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, and is incorporated herein by reference. 3.a.iii Copy of the amendment to Articles of Incorporation - adding a new Article Ten, was filed as Exhibit 3.a.iii to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference. 3.a.iv Copy of the amendment to Article IV of the Articles of Incorporation was filed as Exhibit 3.a.iv to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference. 3.b.i Copy of the Bylaws of the Registrant and amendments thereto, was filed as Exhibit 3(b) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994, and is incorporated herein by reference. 3.b.ii Copy of the amendment to the Bylaws replacing Section 3.04 of Article Three was filed as Exhibit 3.b.ii to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference. 3.b.iii Copy of the amendment to the Bylaws amending Section 3.19 of Article Three was filed as Exhibit 3.b.iii to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference. Page 25
3.b.iv Copy of the amendment to the Bylaws replacing Section 3.02 was filed as Exhibit 3.b.iv to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and is incorporated herein by reference. 4 Form of Common Stock Certificate was filed as Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference. 10 Material Contracts 10.a Data processing Agreement dated October 1, 1984 by and between Bank of Montgomery (First Bank) and Montgomery Data Services, Inc. was filed as Exhibit 10(k) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. 10.b First Bank Salary and Incentive Plan, as amended, was filed as Exhibit 10(m) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. (*) 10.c First Bancorp Savings Plus and Profit Sharing Plan (401(k) savings incentive plan and trust), as amended January 25, 1994 and July 19, 1994, was filed as Exhibit 10(c) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994, and is incorporated herein by reference. (*) 10.d Directors and Officers Liability Insurance Policy of First Bancorp, dated July 16, 1991, was filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, and is incorporated herein by reference. 10.e Indemnification Agreement between the Company and its Directors and Officers was filed as Exhibit 10(t) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. 10.f First Bancorp Employees' Pension Plan, as amended on August 16, 1994, was filed as Exhibit 10(g) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994, and is incorporated herein by reference. (*) 10.g First Bancorp Senior Management Supplemental Executive Retirement Plan dated May 31, 1993, was filed as Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and is incorporated herein by reference. (*) 10.h First Bancorp Senior Management Split-Dollar Life Insurance Agreements between the Company and the Executive Officers, as amended on December 22, 1994, was filed as Exhibit 10(i) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994, and is incorporated herein by reference. (*) 10.i First Bancorp 1994 Stock Option Plan was filed as Exhibit 10(n) to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1994, and is incorporated herein by reference. (*) 10.j Amendment to the First Bancorp Savings Plus and Profit Sharing Plan (401(k) savings incentive plan and trust), dated December 17, 1996, was filed as Exhibit 10(m) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996, and is incorporated herein by reference. (*) Page 26
10.k Employment Agreement between the Company and James H. Garner dated August 17, 1998 was filed as Exhibit 10(l) to the Company's Annual Report on Form 10-Q for the quarter ended September 30, 1998, and is incorporated by reference. (*) 10.l Employment Agreement between the Company and Anna G. Hollers dated August 17, 1998 was filed as Exhibit 10(m) to the Company's Annual Report on Form 10-Q for the quarter ended September 30, 1998, and is incorporated by reference. (*) 10.m Employment Agreement between the Company and Teresa C. Nixon dated August 17, 1998 was filed as Exhibit 10(n) to the Company's Annual Report on Form 10-Q for the quarter ended September 30, 1998, and is incorporated by reference. (*) 10.n First Amendment to the First Bancorp Senior Management Executive Retirement Plan dated April 21, 1998 was filed as Exhibit 10(o) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and is incorporated herein by reference. (*) 10.o Employment Agreement between the Company and Eric P. Credle dated August 17, 1998 was filed as Exhibit 10(p) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and is incorporated herein by reference. (*) 10.p Amendments 1 and 2 to the Company's 1994 Stock Option Plan was filed as Exhibit 10.q to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference. (*) 10.q Employment Agreement between the Company and David G. Grigg dated August 17, 1998 was filed as Exhibit 10.r to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference. (*) 10.r Definitive Merger Agreement with First Savings Bancorp, Inc. dated December 16, 1999 was filed on Form 8-K on December 21, 1999 and is incorporated herein by reference. 10.s Amendment and Waiver to Merger Agreement with First Savings Bancorp, Inc. dated March 24, 2000 was filed as Exhibit 10.s to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and is incorporated herein by reference. (*). 10.t Second Amendment and Waiver to Merger Agreement dated as of May 15, 2000 was filed as Exhibit 2.3 to the Company's Amendment No. 1 to Registration Statement on Form S-4 (Registration No. 333-34216) dated May 16, 2000 and is incorporated herein by reference. 10.u Purchase and Assumption Agreement with Bank of Davie, dated August 22, 2000 was filed as Exhibit 10.u to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and is incorporated herein by reference. 10.v Purchase and Assumption Agreement with First Union National Bank, dated September 13, 2000 was filed as Exhibit 10.v to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and is incorporated herein by reference. 10.w Employment Agreement between the Company and John F. Burns dated September 14, 2000 was filed as Exhibit 10.w to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and is incorporated herein by reference. (*) Page 27
10.x Definitive Merger Agreement with Century Bancorp, Inc. dated October 19, 2000 was filed on Form 8-K on October 20, 2000 and is incorporated herein by reference. 10.y Employee Stock Option Plan of First Savings Bank of Moore County, Inc., SSB, was filed by First Savings Bancorp, Inc. as Exhibit (10)(ii)(a) to its Registration Statement on Form 8-A, Registration No. 0-27-098, dated October 26, 1995, and is incorporated herein by reference. (*) 10.z Director Stock Option Plan of First Savings Bank of Moore County, Inc., SSB, was filed by First Savings Bancorp, Inc. as Exhibit (10)(ii)(b) to its Registration Statement on Form 8-A, Registration No. 0-27-098, dated October 26, 1995, and is incorporated herein by reference. (*) 10.aa First Savings Bancorp, Inc. Second Nonqualified Stock Option Plan for Directors, dated June 30, 1999 was filed as Exhibit (10)(ii)(g) to its Form 10-K for the twelve months ended June 30, 1999, and is incorporated herein by reference. (*) 21 List of Subsidiaries of Registrant. (b) There were no reports filed on Form 8-K during the three months ended June 30, 2001. 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 28
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, 2001 BY: James H. Garner --------------------------- James H. Garner President (Principal Executive Officer), Treasurer and Director August 13, 2001 BY: Anna G. Hollers --------------------------- Anna G. Hollers Executive Vice President and Secretary August 13, 2001 BY: Eric P. Credle --------------------------- Eric P. Credle Senior Vice President and Chief Financial Officer Page 29