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 September 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 October 31, 2001, 9,105,974 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 - September 30, 2001 and 2000 (With Comparative Amounts at December 31, 2000) 3 CONSOLIDATED STATEMENTS OF INCOME - For the Periods Ended September 30, 2001 and 2000 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - For the Periods Ended September 30, 2001 and 2000 5 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - For the Periods Ended September 30, 2001 and 2000 6 CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Periods Ended September 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 24 Part II. Other Information Item 5 - Other Information 27 Item 6 - Exhibits and Reports on Form 8-K 27 Signatures 31
Part I. Financial Information Item 1 - Financial Statements First Bancorp and Subsidiaries Consolidated Balance Sheets <TABLE> <CAPTION> September 30, December 31, September 30, ($ in thousands-unaudited) 2001 2000 2000 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> ASSETS Cash & due from banks, noninterest-bearing $ 33,567 20,940 24,189 Due from banks, interest-bearing 16,955 1,769 10,848 Federal funds sold 11,754 7,730 33,050 ------------ ------ ------ Total cash and cash equivalents 62,276 30,439 68,087 ------------ ------ ------ Securities available for sale (costs of $96,755, $69,214, and $58,826) 98,500 69,597 58,216 Securities held to maturity (fair values of $16,980, $47,661, and $48,079) 16,347 47,924 49,083 Presold mortgages in process of settlement 5,020 1,036 1,178 Loans 878,234 746,089 730,134 Less: Allowance for loan losses (9,187) (7,893) (7,773) ------------ ------- ------- Net loans 869,047 738,196 722,361 ------------ ------- ------- Premises and equipment 17,934 14,116 14,154 Accrued interest receivable 6,434 6,342 5,833 Intangible assets 21,632 4,630 4,788 Other 3,465 2,887 5,120 ------------ ------- ------- Total assets $ 1,100,655 915,167 928,820 ============ ======= ======= LIABILITIES Deposits: Demand - noninterest-bearing $ 92,824 70,634 71,392 Savings, NOW, and money market 318,799 253,687 248,573 Time deposits of $100,000 or more 188,392 140,992 135,882 Other time deposits 357,302 305,066 313,161 ------------ ------- ------- Total deposits 957,317 770,379 769,008 Borrowings 15,000 26,200 41,200 Accrued interest payable 3,772 4,254 3,727 Other liabilities 8,744 3,650 4,924 ------------ ------- ------- Total liabilities 984,833 804,483 818,859 ------------ ------- ------- SHAREHOLDERS' EQUITY Common stock, No par value per share Issued and outstanding: 9,099,571, 8,827,341, and 8,928,729 shares 50,147 50,148 51,881 Retained earnings 64,550 60,280 58,480 Accumulated other comprehensive income (loss) 1,125 256 (400) ------------ ------- ------- Total shareholders' equity 115,822 110,684 109,961 ------------ ------- ------- Total liabilities and shareholders' equity $ 1,100,655 915,167 928,820 ============ ======= ======= </TABLE> See notes to consolidated financial statements. 3
First Bancorp and Subsidiaries Consolidated Statements of Income <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------- ($ in thousands, except share data-unaudited) 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans $ 17,762 16,241 51,263 45,658 Interest on investment securities: Taxable interest income 1,605 2,255 4,893 6,816 Tax-exempt interest income 204 211 611 661 Other, principally overnight investments 258 285 1,187 755 ---------- ------ ------ ------ Total interest income 19,829 18,992 57,954 53,890 ---------- ------ ------ ------ INTEREST EXPENSE Savings, NOW and money market 1,332 1,679 4,311 4,729 Time deposits of $100,000 or more 2,657 2,162 7,651 5,679 Other time deposits 4,754 4,542 14,579 12,068 Borrowings 258 914 1,113 2,584 ---------- ------ ------ ------ Total interest expense 9,001 9,297 27,654 25,060 ---------- ------ ------ ------ Net interest income 10,828 9,695 30,300 28,830 Provision for loan losses 238 705 766 1,365 ---------- ------ ------ ------ Net interest income after provision for loan losses 10,590 8,990 29,534 27,465 ---------- ------ ------ ------ NONINTEREST INCOME Service charges on deposit accounts 1,436 796 3,636 2,302 Other service charges, commissions and fees 489 418 1,529 1,338 Fees from presold mortgages 338 116 762 314 Commissions from sales of insurance/investments 184 87 530 347 Data processing fees 55 34 151 76 Securities gains (losses) 61 (2,006) 61 (1,917) Loan sale gains -- -- 9 -- Other gains (losses) 57 -- 87 (11) ---------- ------ ------ ------ Total noninterest income 2,620 (555) 6,765 2,449 ---------- ------ ------ ------ NONINTEREST EXPENSES Salaries 3,212 2,608 9,083 7,567 Employee benefits 783 646 2,082 1,956 ---------- ------ ------ ------ Total personnel expense 3,995 3,254 11,165 9,523 Net occupancy expense 443 399 1,282 1,139 Equipment related expenses 428 348 1,189 1,013 Intangibles amortization 458 157 1,065 473 Merger expenses -- 3,188 -- 3,188 Other operating expenses 2,116 1,757 5,887 5,276 ---------- ------ ------ ------ Total noninterest expenses 7,440 9,103 20,588 20,612 ---------- ------ ------ ------ Income (loss) before income taxes 5,770 (668) 15,711 9,302 Income taxes 2,006 255 5,456 3,703 ---------- ------ ------ ------ NET INCOME (LOSS) $ 3,764 (923) 10,255 5,599 ========== ==== ====== ===== Earnings (loss) per share: Basic $ 0.41 (0.10) 1.14 0.63 Diluted 0.40 (0.10) 1.11 0.61 Weighted average common shares outstanding: Basic 9,223,600 8,915,635 9,006,940 8,896,268 Diluted 9,481,217 9,103,653 9,253,431 9,111,044 </TABLE> See notes to consolidated financial statements. 4
First Bancorp and Subsidiaries Consolidated Statements of Comprehensive Income <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ----------------------- ($ in thousands-unaudited) 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net income (loss) $ 3,764 (923) 10,255 5,599 ------- ---- ------ ----- Other comprehensive income: Unrealized gains on securities available for sale: Unrealized holding gains arising during the period, pretax 1,045 1,016 1,397 1,101 Tax expense (367) (345) (489) (417) Reclassification to realized (gains) losses (61) 2,006 (61) 1,917 Tax expense (benefit) 22 (682) 22 (704) ------- ---- ------ ----- Other comprehensive income 639 1,995 869 1,897 ------- ---- ------ ----- Comprehensive income $ 4,403 1,072 11,124 7,496 ======= ===== ====== ===== </TABLE> See notes to consolidated financial statements. 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 5,599 5,599 Cash dividends declared ($0.56 per share) (4,906) (4,906) Common stock issued under stock option plan 128 375 375 Tax benefit realized from exercise of nonqualified stock options 790 790 Common stock issued into dividend reinvestment plan 10 151 151 Purchases and retirement of common stock (58) (925) (925) Other comprehensive income 1,897 1,897 ----- ----------- ------ ----- ------- Balances, September 30, 2000 8,929 $ 51,881 58,480 (400) 109,961 ===== =========== ====== ===== ======= Balances, January 1, 2001 8,827 $ 50,148 60,280 256 110,684 Net income 10,255 10,255 Cash dividends declared ($0.66 per share) (5,985) (5,985) Common stock issued under stock option plan 94 567 567 Common stock issued into dividend reinvestment plan 13 291 291 Common stock issued in acquisitions 602 9,159 9,159 Purchases and retirement of common stock (436) (10,018) (10,018) Other comprehensive income 869 869 ----- ----------- ------ ----- ------- Balances, September 30, 2001 9,100 $ 50,147 64,550 1,125 115,822 ===== =========== ====== ===== ======= </TABLE> See notes to consolidated financial statements. 6
First Bancorp and Subsidiaries Consolidated Statements of Cash Flows <TABLE> <CAPTION> Nine Months Ended September 30, ($ in thousands-unaudited) 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows From Operating Activities Net income $ 10,255 5,599 Reconciliation of net income to net cash provided by operating activities: Provision for loan losses 766 1,365 Net security premium amortization (discount accretion) (30) 43 Losses (gains) on sales of securities available for sale (61) 1,917 Losses (gains) on disposal of other real estate (30) 98 Loan fees and costs deferred, net of amortization 26 49 Gain on sale of loans (9) - Depreciation of premises and equipment 1,038 908 Amortization of intangible assets 1,065 474 Deferred income tax expense (benefit) 477 (289) Decrease (increase) in accrued interest receivable 386 (547) Increase in other assets (3,043) (525) Increase (decrease) in accrued interest payable (1,240) 92 Increase in other liabilities 3,522 379 ---------- --------- Net cash provided by operating activities 13,122 9,563 ---------- --------- Cash Flows From Investing Activities Purchases of securities available for sale (28,001) (10,977) Purchases of securities held to maturity (1) (169) Proceeds from sales of securities available for sale 2,348 54,490 Proceeds from maturities/issuer calls of securities available for sale 35,924 12,319 Proceeds from maturities/issuer calls of securities held to maturity 2,894 3,738 Net increase in loans (26,654) (87,231) Purchases of premises and equipment (2,781) (2,801) 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 45,858 (30,631) ---------- --------- Cash Flows From Financing Activities Net increase in deposits 12,620 56,869 Net repayments of borrowings (24,700) (21,300) Cash dividends paid (5,903) (4,356) Proceeds from issuance of common stock 858 526 Purchases and retirement of common stock (10,018) (925) ---------- --------- Net cash provided (used) by financing activities (27,143) 30,814 ---------- --------- Increase In Cash And Cash Equivalents 31,837 9,746 Cash And Cash Equivalents, Beginning Of Period 30,439 58,341 ---------- --------- Cash And Cash Equivalents, End Of Period $ 62,276 68,087 ========== ========= Supplemental Disclosures Of Cash Flow Information: Cash paid during the period for: Interest $ 28,649 24,968 Income taxes 735 4,910 Non-cash transactions: Transfer of securities from held to maturity to available for sale 31,220 - Unrealized gain on securities available for sale, net of taxes 869 1,897 Foreclosed loans transferred to other real estate 517 - Premises and equipment transferred to other real estate 425 - </TABLE> See notes to consolidated financial statements. 7
First Bancorp And Subsidiaries Notes To Consolidated Financial Statements - -------------------------------------------------------------------------------- (unaudited) For the Periods Ended September 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 September 30, 2001 and 2000 and the consolidated results of operations and consolidated cash flows for the periods ended September 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 September 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 September 30, 2000 have been reclassified to conform with the presentation for September 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 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: <TABLE> <CAPTION> For the Three Months Ended September 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 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Basic EPS Net income (loss) $ 3,764 9,223,600 $ 0.41 $ (923) 8,915,635 $ (0.10) =========== ========== Effect of Dilutive Securities -- 257,617 -- 188,018 --------- --------- ---------- --------- Diluted EPS $ 3,764 9,481,217 $ 0.40 $ (923) 9,103,653 $ (0.10) ========= ========= =========== ========== ========= ========== </TABLE> <TABLE> <CAPTION> For the Nine Months Ended September 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 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Basic EPS Net income $ 10,255 9,006,940 $ 1.14 $ 5,599 8,896,268 $ 0.63 =========== ========== Effect of Dilutive Securities -- 246,491 -- 214,776 --------- --------- ---------- --------- Diluted EPS $ 10,255 9,253,431 $ 1.11 $ 5,599 9,111,044 $ 0.61 ========= ========= =========== ========== ========= ========== </TABLE> 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> September 30, December 31, September 30, ($ in thousands) 2001 2000 2000 --------------------------------------------------- ---------------- --------------- --------------- <S> <C> <C> <C> Nonperforming loans: Nonaccrual loans $ 4,540 626 992 Restructured loans 166 237 243 ---------- ---------- ---------- Total nonperforming loans 4,706 863 1,235 Other real estate 1,146 893 738 ---------- ---------- ---------- Total nonperforming assets $ 5,852 1,756 1,973 ========== ========== ========== Nonperforming loans to total loans 0.54% 0.12% 0.17% Nonperforming assets as a percentage of loans and other real estate 0.67% 0.24% 0.27% Nonperforming assets to total assets 0.53% 0.19% 0.21% Allowance for loan losses to total loans 1.05% 1.06% 1.06% - ----------------------------------------------------------------------------------------------------------------- </TABLE> NOTE 5 - Deferred Loan Fees Loans are shown on the Consolidated Balance Sheets net of net deferred loan fees of approximately $719,000, $689,000, and $753,000 at September 30, 2001, December 31, 2000, and September 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 $102 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: 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 8, 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. 10
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies the criteria that 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 (including such assets acquired prior to January 1, 2002) 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. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" - see below. 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. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This standard provides guidance of differentiating between long-lived assets to be held and used, long-lived assets to be disposed of other than by sale and long-lived assets to be disposed of by sale. SFAS No. 144 supersedes FASB Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144 also supersedes Accounting Principals Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". This statement is effective for fiscal years beginning after December 15, 2001. At this time, the Company is assessing the impact of SFAS No. 144 on its financial condition and results of operations. 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 September 30, 2001 amounted to $3,764,000, or $0.40 per diluted share, compared to a net loss of $923,000, or $0.10 per diluted share, recorded in the third quarter of 2000. The third quarter of 2000 was significantly affected by merger-related charges associated with the Company's merger-acquisition of First Savings Bancorp, Inc. (First Savings) that occurred on September 14, 2000. Excluding the effects of nonrecurring items of income and expense recorded in each period (including the merger-related charges recorded in 2000), the Company's net income for the third quarter of 2001 amounted to $3,687,000, a 17.3% increase over the $3,142,000 recorded for the third quarter of 2000. Excluding nonrecurring income/expense, diluted earnings per share for the third quarter of 2001 amounted to $0.39 per share, compared to $0.35 for the third quarter of 2000, an 11.4% increase. Net income for the nine months ended September 30, 2001 was $10,255,000, or $1.11 per diluted share, compared to net income of $5,599,000, or $0.61 per diluted share, recorded in the first nine months of 2000. As noted above, charges associated with the merger acquisition of First Savings significantly impacted results for 2000. Excluding the effects of nonrecurring items of income and expense recorded for each nine month period (including the merger-related charges recorded in 2000), the Company's net income for the nine months ended September 30, 2001 amounted to $10,153,000, a 5.6% increase over the $9,616,000 recorded for the same nine months of 2000. Excluding nonrecurring income/expense, diluted earnings per share for the nine months ended September 30, 2001 amounted to $1.10 per share, compared to $1.06 for the same nine months in 2000, a 3.8% increase. Excluding items of nonrecurring income and expense, the Company's annualized return on average assets (ROA) was 1.34% for the third quarter of 2001 compared to 1.35% for the third quarter of 2000, and 1.32% for the nine months ended September 30, 2001 compared to 1.41% for the first nine months of 2000. Excluding items of nonrecurring income and expense, the Company's annualized return on average equity (ROE) was 12.37% for the third quarter of 2001 compared to 11.28% for the third quarter of 2000, and 11.79% for the nine months ended September 30, 2001 compared to 11.69% for the first nine months of 2000. The increase in recurring earnings when comparing the three and nine month periods of 2001 to the same periods of 2000 are the result of higher net interest income and noninterest income that was largely 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. All major categories of noninterest income have experienced increases in 2001 as a result of fees and charges earned from customers and accounts assumed in corporate acquisitions, the low interest rate environment which has increased mortgage loan refinancings, and the introduction of a product that charges a fee for allowing customers to overdraw their deposit account. Noninterest expenses increased in 2001 primarily as a result of the Company's recent acquisitions. NONRECURRING ITEMS OF INCOME AND EXPENSE As noted above, the third quarter of 2000 was significantly impacted by the Company's merger-acquisition of First Savings. The material nonrecurring items of income and expense related to the merger were as follows: 12
o $3,188,000 in expenses ($2,593,000 after-tax) that were incurred in completing the merger. These expenses consisted primarily of investment banker fees, attorney fees, employment contract payments, accountant fees, and early termination fees associated with vendor contracts. o $2,006,000 in losses ($1,218,000 after-tax) from sales of securities. The merger with First Savings increased the company's liability sensitive position. To reduce the Company's interest rate risk exposure, approximately $54.5 million in securities were sold at a total loss of $2,006,000. The proceeds from the sale were first used to repay short-term debt, with the remaining proceeds invested in investments with a shorter average life and a higher yield than the securities sold. o $420,000 was recorded ($254,000 after-tax) as a one time adjustment to the allowance for loan losses during the third quarter of 2000. This provision for loan losses was recorded in order to align the credit risk methodologies of the Company and First Savings. While less significant in amount, the three and nine months ended September 30, 2001 and 2000 also contained other items of a nonrecurring nature. Nonrecurring items are items that are not a part of the Company's day-to-day operations and include items such as merger-related expenses, gains and losses from securities sales, loan sales, fixed assets, other real estate, and other items of a similar nature. The following table presents a summary of items that are nonrecurring in nature that impact comparisons of the three and nine month periods in 2001 compared to the same periods in 2000. The "Impact on Net Income" and "Impact on Diluted Earnings Per Share (EPS)" columns reflect the after-tax amount of the nonrecurring item at the blended federal and state tax rate. <TABLE> <CAPTION> Three Months Ended Sept. 30, 2001 Three Months Ended Sept. 30, 2000 ------------------------------------- --------------------------------------- Gross Amount Impact on Gross Amount Impact on Income/ Impact on Diluted Income/ Impact on Diluted (Expense) Net Income EPS (Expense) Net Income EPS --------- ---------- --------- --------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> Merger-related addition to provision for loan losses $ -- -- -- (420) (254) (0.03) ------ ------ ------ ------ ------ ------ Items affecting noninterest income - ------------------------------ Securities losses - merger- related -- -- -- (2,006) (1,218) (0.14) Other securities gains, net 61 40 0.01 -- -- -- Other 57 37 -- -- -- -- ------ ------ ------ ------ ------ ------ Total impact on noninterest income 118 77 0.01 (2,006) (1,218) (0.14) ------ ------ ------ ------ ------ ------ Items affecting noninterest expense - ------------------------------ Merger-related expenses -- -- -- (3,188) (2,593) (0.28) ------ ------ ------ ------ ------ ------ Total impact $ 118 77 0.01 (5,614) (4,065) (0.45) ====== ====== ====== ====== ====== ====== </TABLE> 13
<TABLE> <CAPTION> Nine Months Ended Sept. 30, 2001 Nine Months Ended Sept. 30, 2000 ------------------------------------- --------------------------------------- Gross Amount Impact on Gross Amount Impact on Income/ Impact on Diluted Income/ Impact on Diluted (Expense) Net Income EPS (Expense) Net Income EPS --------- ---------- --------- --------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> Merger-related addition to provision for loan losses $ -- -- -- (420) (254) (0.03) ------ ------ ------ ------ ------ ------ Items affecting noninterest income - ------------------------------ Securities losses - merger- related -- -- -- (2,006) (1,218) (0.14) Other securities gains, net 61 40 0.00 89 55 0.00 Other 96 62 0.01 (11) (7) 0.00 ------ ------ ------ ------ ------ ------ Total impact on noninterest income 157 102 0.01 (1,928) (1,170) (0.14) ------ ------ ------ ------ ------ ------ Items affecting noninterest expense - ------------------------------ Merger-related expenses -- -- -- (3,188) (2,593) (0.28) ------ ------ ------ ------ ------ ------ Total impact $ 157 102 0.01 (5,536) (4,017) (0.45) ====== ====== ====== ====== ====== ====== </TABLE> 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 nine month periods ended September 30, 2001 amounted to $10,828,000 and $30,300,000, respectively, increases of 11.7% and 5.1%, over the amounts recorded in the same three and nine month periods in 2000, respectively. There are two primary factors that cause changes in the amount of net interest income recorded by the Company - 1) growth in loans and deposits, and 2) the Company's net interest margin (net yield on interest-earning assets). For the three and nine months ended September 30, 2001, growth in loans and deposits, which was achieved largely from corporate acquisitions, had a positive impact on net interest income, while a declining net interest margin had a negative impact on net interest income, when compared to the same periods in 2000. 14
The following tables present average balances and average rates earned/paid by the Company for the periods indicated. <TABLE> <CAPTION> For the Three Months Ended September 30, -------------------------------------------------------------------------- 2001 2000 ---------------------------------- ----------------------------------- Interest Interest Average Average Earned Average Average Earned Volume Rate or Paid Volume Rate or Paid ($ in thousands) --------- --------- --------- ----------- --------- ---------- <S> <C> <C> <C> <C> <C> <C> Assets Loans (1) $ 873,958 8.06% $ 17,762 $ 718,301 8.97% $ 16,241 Taxable securities 103,206 6.17% 1,605 132,323 6.76% 2,255 Non-taxable securities (2) 16,182 8.43% 344 17,149 8.26% 357 Short-term investments, principally federal funds 26,100 3.92% 258 18,072 6.26% 285 --------- ---------- ---------- ---------- Total interest-earning assets 1,019,446 7.77% 19,969 885,845 8.57% 19,138 ---------- ---------- Liabilities Savings, NOW and money market deposits 319,457 1.65% 1,332 $ 249,569 2.67% 1,679 Time deposits >$100,000 179,023 5.89% 2,657 133,896 6.41% 2,162 Other time deposits 360,358 5.23% 4,754 310,886 5.80% 4,542 --------- ---------- ---------- ---------- Total interest-bearing deposits 858,838 4.04% 8,743 694,351 4.79% 8,383 Borrowings 16,207 6.32% 258 50,605 7.17% 914 --------- ---------- ---------- ---------- Total interest-bearing liabilities 875,045 4.08% 9,001 744,956 4.95% 9,297 ---------- ---------- Non-interest-bearing deposits 87,314 66,443 Net yield on interest-earning assets and net interest income 4.27% $ 10,968 4.41% $ 9,841 ========== ========== Interest rate spread 3.69% 3.62% Average prime rate 6.58% 9.50% - -------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. (2) Includes tax-equivalent adjustments of $140,000 and $146,000 in 2001 and 2000 respectively, to reflect the federal and state benefit of the tax-exempt securities, reduced by the related nondeductible portion of interest expense. - ---------------- 15
<TABLE> <CAPTION> For the Nine Months Ended September 30, ------------------------------------------------------------------------------------ 2001 2000 ----------------------------------------- ---------------------------------------- Interest Interest Average Average Earned Average Average Earned Volume Rate or Paid Volume Rate or Paid ------ ---- ------- ------ ---- ------- <S> <C> <C> <C> <C> <C> <C> ($ in thousands) Assets Loans (1) $ 814,105 8.42% $ 51,263 $ 688,947 8.83% $ 45,658 Taxable securities 99,362 6.58% 4,893 142,303 6.38% 6,816 Non-taxable securities (2) 16,329 8.71% 1,064 17,829 8.26% 1,106 Short-term investments, principally federal funds 34,868 4.55% 1,187 15,880 6.33% 755 ----------- -------- ----------- -------- Total interest-earning assets 964,664 8.10% 58,407 864,959 8.37% 54,335 -------- -------- Liabilities Savings, NOW and money market deposits 290,513 1.98% 4,311 $ 251,005 2.51% 4,729 Time deposits >$100,000 164,866 6.20% 7,651 126,042 6.00% 5,679 Other time deposits 341,612 5.71% 14,579 292,224 5.50% 12,068 ----------- -------- ----------- -------- Total interest-bearing deposits 796,991 4.45% 26,541 669,271 4.47% 22,476 Borrowings 23,065 6.45% 1,113 54,097 6.36% 2,584 ----------- -------- ----------- -------- Total interest-bearing liabilities 820,056 4.51% 27,654 723,368 4.61% 25,060 -------- -------- Non-interest-bearing deposits 81,135 66,907 Net yield on interest-earning assets and net interest income 4.26% $ 30,753 4.51% $ 29,275 ======== ======== Interest rate spread 3.59% 3.76% Average prime rate 7.50% 9.15% - --------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. (2) Includes tax-equivalent adjustments of $453,000 and $445,000 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 21.7% higher in the third quarter of 2001 and 18.2% higher in the first nine months of 2001 compared to the same three and nine month periods of 2000. Average deposits for the three and nine month periods ended September 30, 2001 were 24.4% and 19.3% 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 eight successive interest rate cuts totaling 350 basis points by the Federal Reserve Board during the first nine months of 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 16
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 further 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, the Company has not been able to decrease rates on renewing time deposits in the first nine months of 2001 by the corresponding decreases in the Federal Reserve discount rate because of competitive pressures in the Company's market. 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 asset 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 margin earned on these acquired loans and deposits has been lower than the Company's historic margins. The provision for loan losses for the third quarter of 2001 was $238,000, $47,000 lower than the recurring (i.e. not merger-related) provision of $285,000 recorded in the third quarter of 2000 - as discussed above, a merger-related provision for $420,000 was also recorded in the third quarter of 2000. For the nine months ended September 30, 2001, the provision for loan losses was $766,000 compared to the recurring provision of $945,000 for the nine months ended September 30, 2000 (excluding the $420,000 merger-related provision). The decreases in the provision for loan losses in 2001 compared to 2000 have been a result of significantly lower loan growth experienced during 2001. Net internal loan growth (excluding loans assumed in acquisitions) for the third quarter of 2001 amounted to $9.0 million compared to $25.4 million in the third quarter of 2000. Net internal loan growth for first nine months of 2001 amounted to $25.3 million compared to $86.9 million in the first nine months of 2000. An increase in nonperforming assets (see discussion below) during 2001 increased what otherwise would have been an even lower level of provision for loan losses in 2001. Excluding nonrecurring items of noninterest income (security sales, loan sales, etc. - see discussion above), noninterest income for the three and nine month periods ended September 30, 2001 amounted to $2,502,000 and $6,608,000 respectively, increases of 72.4% and 51.0% over the like amounts recorded in the same three and nine month periods in 2000. Within noninterest income, service charges on deposit accounts experienced the largest increase in 2001 compared to 2000, amounting to $1,436,000 in the third quarter of 2001, an 80.4% increase over the $796,000 recorded in the same quarter of 2000, and $3,636,000 for the first nine months of 2001, a 57.9% increase over the $2,302,000 recorded in the first nine months of 2000. The increase in service charges on deposit accounts is primarily related to three events - 1) an increase in the Company's service fee rate structure implemented in November 2000, 2) the Company's acquisition of four branches on March 26, 2001 - the branches purchased had a high level of transaction accounts (non-time deposits), $60.2 million in total, which afforded the Company the opportunity to earn deposit service charge income, and 3) the introduction of a product in August 2001 that charges a fee for allowing customers to overdraw their deposit account. Also contributing to the increase in noninterest income was "Other service charges, commissions, and fees," which increased from $418,000 in the third quarter of 2000 to $489,000 in the third quarter of 2001, a 17.0% increase. For the nine months ended September 30, 2001, this category of noninterest income amounted to $1,529,000, a 14.3% increase compared to the $1,338,000 recorded in the first nine 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 17
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 nine month periods ended September 30, 2001 amounted to $338,000 and $762,000, respectively, increases of 191% and 143% over the amounts recorded in the comparable periods in 2000 of $116,000 and $314,000, 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 $184,000 and $530,000 for the three and nine months in 2001, respectively, a 111% and 53% increase from the $87,000 and $347,000 amounts recorded for the three and nine months ended September 30, 2000, respectively. The Company expects that this line item will continue to increase as a result of hiring additional personnel and the May 30, 2001 acquisition of two insurance agencies that specialize in property and casualty insurance, as discussed above. Data processing fees for the three and nine month periods ended September 30, 2001 amounted to $55,000 and $151,000, respectively, increases of 62% and 99% over the amounts recorded in the comparable periods in 2000 of $34,000 and $76,000, 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 nine months ended September 30, 2001 amounted to $7,440,000 and $20,588,000, respectively, increases of 25.8% and 18.2%, from the amounts of $5,915,000 and $17,424,000 (excluding $3,188,000 in merger expenses discussed above) recorded in the three and nine month periods ended September 30, 2000, respectively. The increases in noninterest expenses occurred in all categories and are 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 nine months of 2001. Amortization of intangible assets increased from $157,000 in the third quarter of 2000 to $458,000 in the third quarter of 2001, and from $473,000 for the nine months ended September 30, 2000 to $1,065,000 for the first nine months of 2001. These increases are primarily 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 intangible assets related to the branch purchase of approximately $14.6 million and intangible assets related to the Century acquisition of $3.2 million. 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 $2,006,000 in the third quarter of 2001, amounting to an effective tax rate of 34.8%, compared to $255,000 in the third quarter of 2000, which exceeded the amount of net income for that quarter. The provision for income taxes for the nine months ended September 30, 2001 amounted to $5,456,000, amounting to an effective tax rate of 34.7%, compared to $3,703,000 for the first nine months of 2000, which amounted to an effective tax rate of 39.8%. The higher recorded income tax expense for both periods in 2001 is attributable to the higher level of pretax earnings, while the higher effective tax rates for 2000 are due to certain nondeductible merger expenses recorded in 2000. 18
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 these purchases on selected balance sheet levels and growth rates during the time periods indicated. <TABLE> <CAPTION> Balance at Balance at Total Percentage growth, (in millions) beginning Internal Growth from end of percentage excluding of period growth acquisitions period growth acquisitions --------- ------ ------------ ------ ------ ------------ October 1, 2000 to September 30, 2001 ------------------ <S> <C> <C> <C> <C> <C> <C> Loans $730,134 41,208 106,892 878,234 20.3% 5.6% ======== ======== ======== ======== ======== ======== Deposits - Noninterest bearing $ 71,392 3,765 17,667 92,824 30.0% 5.3% Deposits - Savings, NOW, and Money Market 248,573 7,541 62,685 318,799 28.3% 3.0% Deposits - Time 449,043 2,685 93,966 545,694 21.5% 0.6% -------- -------- -------- -------- -------- -------- Total deposits $769,008 13,991 174,318 957,317 24.5% 1.8% ======== ======== ======== ======== ======== ======== January 1, 2001 to September 30, 2001 ------------------ Loans $746,089 25,253 106,892 878,234 17.7% 3.4% ======== ======== ======== ======== ======== ======== Deposits - Noninterest bearing $ 70,634 4,523 17,667 92,824 31.4% 6.4% Deposits - Savings, NOW, and Money Market 253,687 2,427 62,685 318,799 25.7% 1.0% Deposits - Time 446,058 5,670 93,966 545,694 22.3% 1.3% -------- -------- -------- -------- -------- -------- Total deposits $770,379 12,620 174,318 957,317 24.3% 1.6% ======== ======== ======== ======== ======== ======== </TABLE> 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 served to leverage the Company's capital. The Company's tangible equity to total assets ratio decreased from 11.6% at December 31, 2000 to 8.6% at September 30, 2001. The Company's total assets were $1.1 billion at September 30, 2001, an increase of $171 million, or 18.4%, from the $929 million at September 30, 2000. The primary reason for the increase in total assets was the acquisitions discussed above, which added approximately $196.0 million in total assets. Paydowns of outstanding debt totaling $26 million and repurchases of the Company's stock of approximately $12 million have reduced the Company's assets since September 30, 2000. 19
NONPERFORMING ASSETS Nonperforming assets are defined as nonaccrual loans, loans past due 90 or more days and still accruing interest, restructured loans and other real estate. For each of the periods presented, the Company had no loans past due 90 or more days and still accruing interest. Nonperforming assets are summarized as follows: <TABLE> <CAPTION> September 30, December 31, September 30, ($ in thousands) 2001 2000 2000 - --------------------------------------------- ------------- ------------ ------------- <S> <C> <C> <C> Nonperforming loans: Nonaccrual loans $4,540 626 992 Restructured loans 166 237 243 ------ ----- ----- Total nonperforming loans 4,706 863 1,235 Other real estate 1,146 893 738 ------ ----- ----- Total nonperforming assets $5,852 1,756 1,973 ====== ===== ===== Nonperforming loans to total loans 0.54% 0.12% 0.17% Nonperforming assets as a percentage of loans and other real estate 0.67% 0.24% 0.27% Nonperforming assets to total assets 0.53% 0.19% 0.21% Allowance for loan losses to total loans 1.05% 1.06% 1.06% </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 $4,540,000 at September 30, 2001. The increase is primarily attributable to four loans to the same borrower totaling $2.7 million that were placed on nonaccrual status during the first half of 2001. The Company has a total of approximately $3.2 million in loans ($0.5 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 same borrower were placed on nonaccrual status. The level of restructured loans did not vary materially among the periods presented. At September 30, 2001, December 31, 2000, and September 30, 2000, the recorded investment in loans considered to be impaired was $3,140,000, $293,000, and $60,000, respectively, all of which were on nonaccrual status. The increase in impaired loans is primarily due to the same loans noted above that were placed on nonaccrual status. The related allowance for loan losses for these impaired loans was $75,000, $44,000, and $9,000, respectively. The average recorded investments in impaired loans during the nine month period ended September 30, 2001, the year ended December 31, 2000, and the nine months ended September 30, 2000 were approximately $2,442,000, $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 20
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 September 30, 2001, December 31, 2000 and September 30, 2000, the amount of the Company's other real estate owned did not vary materially, amounting to $1,146,000, $893,000, and $738,000, 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 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. The provision for loan losses for the third quarter of 2001 was $238,000, $47,000 lower than the recurring (i.e not merger-related) provision of $285,000 recorded in the third quarter of 2000 - as discussed above, a merger-related provision for $420,000 was also recorded in the third quarter of 2000. For the nine months ended September 30, 2001, the provision for loan losses was $766,000 compared to the recurring provision of $945,000 for the nine months ended September 30, 2000 (excluding the $420,000 merger-related provision). The decreases in the provision for loan losses in 2001 compared to 2000 have been a result of significantly lower loan growth experienced during 2001. Net internal loan growth (excluding loans assumed in acquisitions) for the third quarter of 2001 amounted to $9.0 million compared to $25.4 million in the third quarter of 2000. Net internal loan growth for first nine months of 2001 amounted to $25.3 million compared to $86.9 million in the first nine months of 2000. An increase in nonperforming assets (see discussion above) during 2001 increased what otherwise would have been an even lower level of provisions for loan losses in 2001. At September 30, 2001, the allowance for loan losses amounted to $9,187,000, compared to $7,893,000 at December 31, 2000 and $7,773,000 at September 30, 2000. The allowance for loan losses was 1.05%, 1.06% and 1.06% of total loans as of September 30, 2001, December 31, 2000, and September 30, 2000, respectively. In addition to the increases to the allowance for loan losses related to normal quarterly provisions, the increase in the dollar amount of the allowance for loan losses since December 31, 2001 was also affected by 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 $601,000 addition related to Century represented the book value of Century's 21
allowance for loan losses on the date of the acquisition. Management believes the Company's reserve levels are adequate to cover probable loan losses on the loans outstanding as of each reporting date. It must be emphasized, however, that the determination of the reserve using the Company's procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that the Company will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and value of other real estate. Such agencies may require the Company to recognize adjustments to the allowance or the carrying value of other real estate based on their judgments about information available at the time of their examinations. For the periods indicated, the following table summarizes the Company's balances of loans outstanding, average loans outstanding, changes in the allowance for loan losses arising from charge-offs and recoveries, additions to the allowance for loan losses that have been charged to expense and additions that were recorded related to the acquisitions. <TABLE> <CAPTION> Nine Months Year Nine Months Ended Ended Ended September 30, December 31, September 30, ($ in thousands) 2001 2000 2000 ------------- ------------ ------------- <S> <C> <C> <C> Loans outstanding at end of period $ 878,234 746,089 730,134 ============= ============ ============= Average amount of loans outstanding $ 814,105 701,317 688,947 ============= ============ ============= Allowance for loan losses, at beginning of year $ 7,893 6,674 $ 6,674 Total charge-offs (527) (475) (333) Total recoveries 119 89 67 ------------- ------------ ------------- Net charge-offs (408) (386) (266) ------------- ------------ ------------- Additions to the allowance charged to expense 766 1,605 1,365 Addition related to loans of purchased branches 335 -- -- Addition related to acquisition of Century 601 -- -- ------------- ------------ ------------- Allowance for loan losses, at end of period $ 9,187 7,893 7,773 ============= ============ ============= Ratios: Net charge-offs (annualized) as a percent of average loans 0.07% 0.06% 0.05% Allowance for loan losses as a percent of loans at end of period 1.05% 1.06% 1.06% </TABLE> Based on the results of the aforementioned loan analysis and grading program and management's evaluation of the allowance for loan losses at September 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 22
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%. Although the acquisitions that have occurred in 2001 have served to reduce the Company's loan to deposit ratio to 91.7%, the positive effects on liquidity indicated by this lower ratio have been offset by the cash used to pay former Century shareholders the 40% cash portion of their merger consideration and to repurchase shares of the Company's common stock. As a result, the Company's liquid assets to deposits and borrowings ratio remains unchanged at 18.7%. 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 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. 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. 23
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 September 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 11.29%, a total capital to total risk adjusted asset ratio of 12.27%, and a leverage ratio of 8.71%. The Company's two risk based ratios each reflect decreases of approximately 410 basis points from December 31, 2000, and the leverage ratio is approximately 290 basis points lower than at December 31, 2000. Each of the decreases is primarily related to two factors - 1) the Company's acquisitions during 2001, which reduced tangible capital by a net of $8.6 million, while adding approximately $196 million in assets, and 2) the Company's share repurchase program in place in 2001 that resulted in approximately $10 million in share repurchases during the first nine months of the year. 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 562,000 shares at an average price of $21.32 per share. For the nine months ended September 30, 2001, the Company repurchased 437,000 shares at an average price of $22.93. During the third quarter of 2001, the Company repurchased 174,900 shares at an average price of $23.52. On October 23, 2001, the Company reported that it's board of directors had approved the repurchase of an additional 150,000 shares of the company's stock upon completion of the existing share repurchase program noted above. These repurchases may take place in the open market or privately negotiated transactions on a time-to-time and ongoing basis, depending upon market conditions and subject to compliance with all applicable securities laws and 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 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 complete 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 (under "Components of Earnings"), the Company has recently experienced downward pressure in 2001 on its net interest margin as a result of the significant decreases in the interest rate environment. 24
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 September 30, 2001 the Company had $367.5 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 September 30, 2001 subject to interest rate changes within one year are deposits totaling $318.8 million comprised of NOW, savings, and certain types of money market deposits with interest rates set by management. These types of deposits historically have not repriced, and did not reprice during the first nine months 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 nine months of 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 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 September 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 $ 16,955 -- -- -- -- -- 16,955 2.95% $ 16,955 Federal funds sold 11,754 -- -- -- -- -- 11,754 2.95% 11,754 Debt securities- at amortized cost (2) 40,416 29,461 17,040 6,294 4,099 8,843 106,153 6.51% 107,912 Loans-fixed (3)(4) 114,964 106,411 98,568 62,502 78,158 52,613 513,216 8.25% 523,711 Loans-adjustable (3)(4) 137,441 48,586 52,024 47,814 49,997 24,616 360,478 7.11% 360,478 --------- --------- --------- --------- --------- --------- --------- ---- --------- Total $ 321,530 184,458 167,632 116,610 132,254 86,072 1,008,556 7.51% $1,020,810 ========= ========= ========= ========= ========= ========= ========= ==== ========= Savings, NOW, and money market deposits $ 318,799 -- -- -- -- -- 318,799 1.59% $ 318,799 Time deposits 465,267 61,223 8,717 6,886 2,050 1,551 545,694 5.19% 550,169 Borrowings (2) 5,000 5,000 -- -- -- 5,000 15,000 6.73% 15,508 --------- --------- --------- --------- --------- --------- --------- ---- --------- Total $ 789,066 66,223 8,717 6,886 2,050 6,551 879,493 3.91% $ 884,476 ========= ========= ========= ========= ========= ========= ========= ==== ========= </TABLE> 25
(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 September 30, 2001 are assumed to mature at their call date for purposes of this table. Mortgage securities are assumed to mature in the period of their expected repayment based on estimated prepayment speeds. (3) Excludes nonaccrual loans and allowance for loan losses. (4) Single-family mortgage loans are assumed to mature in the period of their expected repayment based on estimated prepayment speeds. All other loans are shown in the period of their contractual maturity. 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 September 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. 26
Part II. Other Information Item 5 - Other Information The bylaws of the Company establish an advance notice procedure for shareholder proposals to be brought before a meeting of shareholders of the Company. Subject to any other applicable requirements, only such business may be conducted at a meeting of the shareholders as has been brought before the meeting by, or at the direction of, the Board of Directors or by a shareholder who has given to the Secretary of the Company timely written notice, in proper form, of the shareholder's intention to bring that business before the meeting. The presiding officer at such meeting has the authority to make such determinations. To be timely, notice of other business to be brought before any meeting must generally be received by the Secretary of the Company within 60 to 90 days in advance of the shareholders' meeting. The notice of any shareholder proposal must set forth the various information required under the bylaws. The person submitting the notice must provide, among other things, the name and address under which such shareholder appears on the Company's books and the class and number of shares of the Company's capital stock that are beneficially owned by such shareholder. Any shareholder desiring a copy of the Company's bylaws will be furnished one without charge upon written request to the Secretary of the Company at the Company's headquarters. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed with this report or, as noted, are incorporated by reference. Management contracts, compensatory plans and arrangements are marked with an asterisk (*). 3.a.i Copy of Articles of Incorporation of the Registrant and amendments thereto, was filed as Exhibit 3(a) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. 3.a.ii Copy of the amendment to Articles of Incorporation - adding a new Article Nine, was filed as Exhibit 3(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, and is incorporated herein by reference. 3.a.iii Copy of the amendment to Articles of Incorporation - adding a new Article Ten, was filed as Exhibit 3.a.iii to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference. 3.a.iv Copy of the amendment to Article IV of the Articles of Incorporation was filed as Exhibit 3.a.iv to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference. 3.b.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. 27
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.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.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. (*) 28
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. (*) 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. (*) 29
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 September 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 30
SIGNATURES 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 November 13, 2001 BY: /s/ James H. Garner --------------------------------------- James H. Garner President (Principal Executive Officer), Treasurer and Director November 13, 2001 BY: /s/ Anna G. Hollers --------------------------------------- Anna G. Hollers Executive Vice President and Secretary November 13, 2001 BY: /s/ Eric P. Credle --------------------------------------- Eric P. Credle Senior Vice President and Chief Financial Officer 31