UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 Commission File Number 0-15572 FIRST BANCORP (Exact Name of Registrant as Specified in its Charter) North Carolina 56-1421916 - ------------------------------ ---------------------- State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 341 North Main Street, Troy, North Carolina 27371-0508 - ------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (Registrant's telephone number, including area code) (910) 576-6171 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO As of April 30, 2002, 9,167,697 shares of the registrant's Common Stock, no par value, were outstanding. The registrant had no other classes of securities outstanding. - --------------------------------------------------------------------------------
INDEX FIRST BANCORP AND SUBSIDIARIES Page Part I. Financial Information Item 1 - Financial Statements Consolidated Balance Sheets - March 31, 2002 and 2001 (With Comparative Amounts at December 31, 2001) 3 Consolidated Statements Of Income - For the Periods Ended March 31, 2002 and 2001 4 Consolidated Statements Of Comprehensive Income - For the Periods Ended March 31, 2002 and 2001 5 Consolidated Statements Of Shareholders' Equity - For the Periods Ended March 31, 2002 and 2001 6 Consolidated Statements Of Cash Flows - For the Periods Ended March 31, 2002 and 2001 7 Notes To Consolidated Financial Statements 8 Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition 12 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20 Part II. Other Information Item 5 - Other Information 23 Item 6 - Exhibits and Reports on Form 8-K 23 Signatures 25 2
Part I. Financial Information Item 1 - Financial Statements <TABLE> <CAPTION> First Bancorp and Subsidiaries Consolidated Balance Sheets March 31, December 31, March 31, ($ in thousands-unaudited) 2002 2001 2001 - -------------------------- ---- ---- ---- <S> <C> <C> <C> ASSETS Cash & due from banks, noninterest-bearing $ 22,688 $ 34,019 24,944 Due from banks, interest-bearing 25,468 41,552 69,464 Federal funds sold 20,439 11,244 17,674 ----------- --------- --------- Total cash and cash equivalents 68,595 86,815 112,082 ----------- --------- --------- Securities available for sale (costs of $90,494, $95,445, and $93,031) 90,528 96,469 94,168 Securities held to maturity (fair values of $16,644, $16,746, and $16,768) 16,324 16,338 16,273 Presold mortgages in process of settlement 4,102 10,713 3,738 Loans 924,107 890,310 770,749 Less: Allowance for loan losses (9,729) (9,388) (8,386) ----------- --------- --------- Net loans 914,378 880,922 762,363 ----------- --------- --------- Premises and equipment 19,932 18,518 16,106 Accrued interest receivable 5,920 5,880 6,232 Intangible assets 24,104 24,488 18,910 Other 5,663 4,548 3,206 ----------- --------- --------- Total assets $ 1,149,546 1,144,691 1,033,078 =========== ========= ========= LIABILITIES Deposits: Demand - nonintere $ 101,331 96,065 89,538 Savings, NOW, and money market 362,777 353,439 295,800 Time deposits of $100,000 or more 183,939 189,948 160,677 Other time deposits 355,352 360,829 341,798 ----------- --------- --------- Total deposits 1,003,399 1,000,281 887,813 Borrowings 15,000 15,000 26,200 Accrued interest payable 2,703 3,480 4,322 Other liabilities 10,407 9,204 3,941 ----------- --------- --------- Total liabilities 1,031,509 1,027,965 922,276 ----------- --------- --------- SHAREHOLDERS' EQUITY Common stock, No par value per share Issued and outstanding: 9,167,697, 9,112,542, and 8,755,161 shares 50,459 50,134 48,476 Retained earnings 67,658 65,915 61,578 Accumulated other comprehensive income (loss) (80) 677 748 ----------- --------- --------- Total shareholders' equity 118,037 116,726 110,802 ----------- --------- --------- Total liabilities and shareholders' equity $ 1,149,546 1,144,691 1,033,078 =========== ========= ========= </TABLE> See notes to consolidated financial statements. 3
<TABLE> <CAPTION> First Bancorp and Subsidiaries Consolidated Statements of Income Three Months Ended March 31, ------------------------- ($ in thousands, except share data-unaudited) 2002 2001 - --------------------------------------------- ---- ---- <S> <C> <C> INTEREST INCOME Interest and fees on loans $ 16,204 16,422 Interest on investment securities: Taxable interest income 1,405 1,599 Tax-exempt interest income 197 206 Other, principally overnight investments 288 197 ----------- ------ Total interest income 18,094 18,424 ----------- ------ INTEREST EXPENSE Savings, NOW and money market 921 1,555 Time deposits of $100,000 or more 1,916 2,370 Other time deposits 3,714 4,656 Borrowings 250 524 ----------- ------ Total interest expense 6,801 9,105 ----------- ------ Net interest income 11,293 9,319 Provision for loan losses 440 220 ----------- ------ Net interest income after provision for loan losses 10,853 9,099 ----------- ------ NONINTEREST INCOME Service charges on deposit accounts 1,595 908 Other service charges, commissions and fees 636 526 Fees from presold mortgages 446 138 Commissions from sales of insurance and financial products 265 206 Data processing fees 56 47 Securities gains 20 -- Other gains (losses) (21) 37 ----------- ------ Total noninterest income 2,997 1,862 ----------- ------ NONINTEREST EXPENSES Salaries 3,693 2,791 Employee benefits 920 614 ----------- ------ Total personnel expense 4,613 3,405 Net occupancy expense 505 402 Equipment related expenses 483 373 Intangibles amortization 364 182 Other operating expenses 2,133 1,703 ----------- ------ Total noninterest expenses 8,098 6,065 ----------- ------ Income before income taxes 5,752 4,896 Income taxes 1,992 1,672 ----------- ------ NET INCOME $ 3,760 3,224 =========== ===== Earnings per share: Basic $ 0.41 0.37 Diluted 0.40 0.36 Weighted average common shares outstanding: Basic 9,149,693 8,774,877 Diluted 9,338,366 8,987,252 </TABLE> See notes to consolidated financial statements. 4
First Bancorp and Subsidiaries Consolidated Statements of Comprehensive Income Three Months Ended March 31, ------------------- ($ in thousands-unaudited) 2002 2001 - -------------------------- ---- ---- Net income $ 3,760 3,224 ------- ----- Other comprehensive income (loss): Unrealized gains (losses) on securities available for sale: Unrealized holding gains (losses) arising during the period, pretax (1,055) 754 Tax benefit (expense) 411 (262) Reclassification to realized gains (20) -- Tax expense 8 -- Adjustment to minimum pension liability: Additional pension charge related to unfunded pension liability (165) -- Tax benefit 64 -- ------- ----- Other comprehensive income (loss) (757) 492 ------- ----- Comprehensive income $ 3,003 3,716 ======= ===== See notes to consolidated financial statements. 5
<TABLE> <CAPTION> First Bancorp and Subsidiaries Consolidated Statements of Shareholders' Equity Accumulated Common Stock Other Share- ------------------ Retained Comprehensive holders' (In thousands, except per share - unaudited) Shares Amount Earnings Income (Loss) Equity - -------------------------------------------- ------ ------ -------- ------------- ------ <S> <C> <C> <C> <C> <C> Balances, January 1, 2001 8,827 $ 50,148 60,280 256 110,684 Net income 3,224 3,224 Cash dividends declared ($0.22 per share) (1,926) (1,926) Common stock issued under stock option plan 23 68 68 Purchases and retirement of common stock (95) (1,740) (1,740) Other comprehensive income 492 492 ----- -------- ------ --- ------- Balances, March 31, 2001 8,755 $ 48,476 61,578 748 110,802 ===== ======== ====== === ======= Balances, January 1, 2002 9,113 $ 50,134 65,915 677 116,726 Net income 3,760 3,760 Cash dividends declared ($0.22 per share) (2,017) (2,017) Common stock issued under stock option plan 84 551 551 Common stock issued into dividend reinvestment plan 13 289 289 Purchases and retirement of common stock (42) (897) (897) Tax benefit realized from exercise of nonqualified stock options 382 382 Other comprehensive loss (757) (757) ----- -------- ------ --- ------- Balances, March 31, 2002 9,168 $ 50,459 67,658 (80) 118,037 ===== ======== ====== === ======= </TABLE> See notes to consolidated financial statements. 6
<TABLE> <CAPTION> First Bancorp and Subsidiaries Consolidated Statements of Cash Flows Three Months Ended March 31, --------------------- ($ in thousands-unaudited) 2002 2001 - -------------------------- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES <S> <C> <C> Net income $ 3,760 3,224 Reconciliation of net income to net cash provided by operating activities: Provision for loan losses 440 220 Net security premium amortization 73 22 Loss (gain) on disposal of other real estate 21 (37) Gain on sale of securities available for sale (20) -- Loan fees and costs deferred, net of amortization 59 (41) Depreciation of premises and equipment 420 321 Tax benefit realized from exercise of nonqualified stock options 382 -- Amortization of intangible assets 364 182 Deferred income tax benefit (444) (82) Decrease (increase) in accrued interest receivable (40) 110 Decrease (increase) in other assets 6,547 (2,701) Decrease in accrued interest payable (777) (176) Increase in other liabilities 1,394 297 -------- ------- Net cash provided by operating activities 12,179 1,339 -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities available for sale (4,901) -- Purchases of securities held to maturity (1) (1) Proceeds from maturities/issuer calls of securities available for sale 9,764 6,667 Proceeds from maturities/issuer calls of securities held to maturity 16 1,148 Proceeds from sales of securities available for sale 34 -- Net increase in loans (34,304) (8,072) Purchases of premises and equipment (2,062) (870) Net cash received in purchase of branches -- 70,201 -------- ------- Net cash provided (used) by investing activities (31,454) 69,073 -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 3,118 14,847 Cash dividends paid (2,006) (1,944) Proceeds from issuance of common stock 840 68 Purchases and retirement of common stock (897) (1,740) -------- ------- Net cash provided by financing activities 1,055 11,231 -------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,220) 81,643 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 86,815 30,439 -------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 68,595 112,082 ======== ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 7,578 9,037 Income taxes 41 703 Non-cash transactions: Transfer of securities from held to maturity to available for sale - fair value -- 31,220 Unrealized gain (loss) on securities available for sale, net of taxes (644) 492 Foreclosed loans transferred to other real estate 349 121 Premises and equipment transferred to other real estate 228 425 </TABLE> See notes to consolidated financial statements. 7
First Bancorp And Subsidiaries Notes To Consolidated Financial Statements (unaudited) For the Periods Ended March 31, 2002 and 2001 - -------------------------------------------------------------------------------- Note 1 - Basis of Presentation In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial position of the Company as of March 31, 2002 and 2001 and the consolidated results of operations and consolidated cash flows for the periods ended March 31, 2002 and 2001. Reference is made to the 2001 Annual Report on Form 10-K filed with the SEC for a discussion of accounting policies and other relevant information with respect to the financial statements. The results of operations for the periods ended March 31, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year. Note 2 - Newly Adopted Accounting Policies In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. The Company adopted this statement July 1, 2001. Statement 142 requires that all goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that identifiable intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Certain provisions of Statement 142 relating to business combinations consummated after June 30, 2001 were adopted by the Company on July 1, 2001. The remaining provisions were adopted on January 1, 2002. In connection with Statement 142's transitional goodwill impairment evaluation, the Statement required the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. The Company completed this assessment during the first quarter of 2002 and determined that there was no goodwill impairment. See Note 7 for additional disclosures related to Statement No. 142. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This standard provides guidance of differentiating between long-lived assets to be held and used, long-lived assets to be disposed of other than by sale and long-lived assets to be disposed of by sale. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144 also supersedes Accounting Principals Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This statement was adopted by the Company on January 1, 2002 and did not have a material impact on the Company's financial statements. Note 3 - Reclassifications Certain amounts reported in the period ended March 31, 2001 have been reclassified to conform with the presentation for March 31, 2002. These reclassifications had no effect on net income or shareholders' equity for the periods presented, nor did they materially impact trends in financial information. 8
Note 4 - Earnings Per Share Basic earnings per share were computed by dividing net income by the weighted average common shares outstanding. Diluted earnings per share includes the potentially dilutive effects of the Company's stock option plan. The following is a reconciliation of the numerators and denominators used in computing basic and diluted earnings per share: <TABLE> <CAPTION> For the Three Months Ended March 31, ------------------------------------------------------------------------------ 2002 2001 ------------------------------------ ------------------------------------- Income Shares Income Shares ($ in thousands except per (Numer- (Denom- Per Share (Numer- (Denom- Per Share share amounts) ator) inator) Amount ator) inator) Amount -------------- ------- ------- --------- ------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Basic EPS Net income $ 3,760 9,149,693 $ 0.41 $ 3,224 8,774,877 $ 0.37 ======== ======== Effect of Dilutive Securities -- 188,673 -- 212,375 --------- --------- --------- --------- Diluted EPS $ 3,760 9,338,366 $ 0.40 $ 3,224 8,987,252 $ 0.36 ========= ========= ======== ========= ========= ======== </TABLE> Note 5 - Asset Quality Information Nonperforming assets are defined as nonaccrual loans, loans past due 90 or more days and still accruing interest, restructured loans and other real estate. For each of the periods presented, the Company had no loans past due 90 or more days and still accruing interest. Nonperforming assets are summarized as follows: <TABLE> <CAPTION> March 31, December 31, March 31, ($ in thousands) 2002 2001 2001 ---------------- ---- ---- ---- <S> <C> <C> <C> Nonperforming loans: Nonaccrual loans $ 3,343 3,808 3,598 Restructured loans 79 83 231 ---------- ----- ----- Total nonperforming loans 3,422 3,891 3,829 Other real estate 1,800 1,253 1,324 ---------- ----- ----- Total nonperforming assets $ 5,222 5,144 5,153 ========== ===== ===== Nonperforming loans to total loans 0.37% 0.44% 0.50% Nonperforming assets as a percentage of loans and other real estate 0.56% 0.58% 0.67% Nonperforming assets to total assets 0.45% 0.45% 0.50% Allowance for loan losses to total loans 1.05% 1.05% 1.09% </TABLE> - -------------------------------------------------------------------------------- Note 6 - Deferred Loan Fees Loans are shown on the Consolidated Balance Sheets net of net deferred loan fees of approximately $717,000, $658,000, and $670,000 at March 31, 2002, December 31, 2001, and March 31, 2001, respectively. 9
Note 7 - Goodwill and Other Intangible Assets The following is a summary of the gross carrying amount and accumulated amortization of amortized intangible assets as of March 31, 2002 and December 31, 2001 and the carrying amount of unamortized intangible assets as of March 31, 2002, and December 31, 2001: <TABLE> <CAPTION> March 31, 2002 December 31, 2001 -------------- ----------------- Gross Carrying Accumulated Gross Carrying Accumulated (Dollars in thousands) Amount Amortization Amount Amortization - ---------------------- ------ ------------ ------ ------------ <S> <C> <C> <C> <C> Amortized intangible assets: Customer lists $ 243 11 243 7 Core deposit premium related to whole-bank acquisition 335 250 335 246 Branch acquisitions 20,196 2,235 20,180 1,879 ------- ----- ------ ----- Total $20,774 2,496 20,758 2,132 ======= ===== ====== ===== Unamortized intangible assets: Goodwill $ 5,609 5,609 ======= ====== Pension $ 217 253 ======= ====== </TABLE> Amortization expense totaled $364,000 and $182,000 for the three months ended March 31, 2002 and 2001, respectively. The following table presents the estimated amortization expense for each of the five fiscal years ending December 31, 2006 and the estimated amount amortizable thereafter. These estimates are subject to change in future periods to the extent management determines it is necessary to make adjustments to the carrying value or estimated useful lives of amortized intangible assets. Estimated Amortization (Dollars in thousands) Expense ---------------------- ---------------------- 2002 $ 1,456 2003 1,454 2004 1,453 2005 1,448 2006 1,371 Thereafter 11,460 ------------ Total $ 18,642 ============ 10
The following tables present the adjusted effect on net income and on basic and diluted earnings per share excluding the amortization of goodwill for the three months ended March 31, 2002 and 2001 and for the years ended December 31, 2001, 2000 and 1999: <TABLE> <CAPTION> For the Three Months Ended March 31, ------------------------------------ (Dollars in thousands, except earnings per share amounts) 2002 2001 - --------------------------- ---- ---- <S> <C> <C> Reported net income $ 3,760 3,224 Add back: Goodwill amortization -- 93 ------- ----- Adjusted net income $ 3,760 3,317 ======= ===== Basic earnings per share: As reported $ 0.41 0.37 Goodwill amortization -- 0.01 ------- ----- Adjusted basic earnings per share $ 0.41 0.38 ======= ==== Diluted earnings per share: As reported $ 0.40 0.36 Goodwill amortization -- 0.01 ------- ----- Adjusted diluted earnings per share $ 0.40 0.37 ======= ===== <CAPTION> For the Years Ended December 31, -------------------------------- (Dollars in thousands, except earnings per share amounts) 2001 2000 1999 - --------------------------- ---- ---- ---- <S> <C> <C> <C> Reported net income $ 13,616 9,342 11,854 Add back: Goodwill amortization 511 373 373 --------- ----- ------ Adjusted net income $ 14,127 9,715 12,227 ========= ==== ==== Basic earnings per share: As reported $ 1.51 1.05 1.32 Goodwill amortization 0.05 0.04 0.04 --------- ----- ------ Adjusted basic earnings per share $ 1.56 1.09 1.36 ========= ==== ==== Diluted earnings per share: As reported $ 1.47 1.03 1.27 Goodwill amortization 0.05 0.04 0.04 --------- ----- ------ Adjusted diluted earnings per share $ 1.52 1.07 1.31 ========= ==== ==== </TABLE> 11
Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition RESULTS OF OPERATIONS OVERVIEW Net income for the three months ended March 31, 2002 was $3,760,000, a 16.6% increase from the $3,224,000 recorded in the first quarter of 2001. The net income recorded in the first quarter of 2002 amounted to diluted earnings of $0.40 per share, compared to $0.36 per share for the first quarter of 2001, an increase of 11.1%. Nonrecurring income/expense was insignificant for each of the three month periods. Effective January 1, 2002, in accordance with new accounting pronouncements, the Company discontinued the amortization of certain of its intangible assets, which effectively increased earnings by $147,000, or 1.6 cents per share, over what would have otherwise been recorded under previous accounting standards. The increase in earnings for 2002 from 2001 was primarily a result of higher net interest income and noninterest income, the effects of which were partially offset by an increase in the provision for loan losses and higher noninterest expenses. A significant increase in average loans and deposits resulting primarily from acquisition activity was the primary factor in the increase in net interest income, noninterest income and noninterest expenses. A higher level of internally generated loan growth in 2002 resulted in a higher provision for loan losses than in 2001. The Company's annualized return on average assets for the first quarter of 2002 was 1.34% compared to 1.41% for the first quarter of 2001. The Company's return on average equity for the first quarter of 2002 was 12.83% compared to 11.73% for the first quarter of 2001. COMPONENTS OF EARNINGS Net interest income is the largest component of earnings, representing the difference between interest and fees generated from earning assets and the interest costs of deposits and other funds needed to support those assets. Net interest income for the three month period ended March 31, 2002 amounted to $11,293,000, an increase of $1,974,000, or 21.2%, from the $9,319,000 recorded in the first quarter of 2001. There are two primary factors that cause changes in the amount of net interest income recorded by the Company - 1) growth in loans and deposits, and 2) the Company's net interest margin. For the three months ended March 31, 2002, growth in loans and deposits was the primary reason for the increase in net interest income, as the Company's net interest margin was nearly the same for the first quarter of 2002 as it was for the first quarter of 2001. The following tables present average balances and average rates earned/paid by the Company for the first quarter of 2002 compared to the first quarter of 2001. 12
<TABLE> <CAPTION> For the Three Months Ended March 31, ------------------------------------ 2002 2001 ---- ---- Interest Interest Average Average Earned Average Average Earned ($ in thousands) Volume Rate or Paid Volume Rate or Paid - ---------------- ------ ---- ------- ------ ---- ------- <S> <C> <C> <C> <C> <C> <C> Assets Loans (1) $ 903,283 7.28% $ 16,204 $ 752,557 8.85% $ 16,422 Taxable securities 93,239 6.11% 1,405 96,843 6.70% 1,599 Non-taxable securities (2) 16,130 8.50% 338 16,547 8.55% 349 Short-term investments, principally federal funds 50,053 2.33% 288 16,008 4.99% 197 ---------- ---------- ---------- ---------- Total interest-earning assets 1,062,705 6.96% 18,235 881,955 8.54% 18,567 ---------- ---------- Liabilities Savings, NOW and money market deposits $ 354,349 1.05% 921 $ 248,688 2.54% 1,555 Time deposits >$100,000 186,657 4.16% 1,916 146,233 6.57% 2,370 Other time deposits 357,328 4.22% 3,714 309,970 6.09% 4,656 ---------- ---------- ---------- ---------- Total interest-bearing deposits 898,334 2.96% 6,551 704,891 4.94% 8,581 Borrowings 15,000 6.76% 250 32,933 6.45% 524 ---------- ---------- ---------- ---------- Total interest-bearing liabilities 913,334 3.02% 6,801 737,824 5.00% 9,105 ---------- ---------- Non-interest-bearing deposits 96,902 68,571 Net yield on interest-earning assets and net interest income 4.36% $ 11,434 4.35% $ 9,462 ========== ========== Interest rate spread 3.94% 3.54% Average prime rate 4.75% 8.64% </TABLE> - -------------------------------------------------------------------------------- (1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. (2) Includes tax-equivalent adjustments of $141,000 and $143,000 in 2002 and 2001 respectively, to reflect the federal and state benefit of the tax-exempt securities, reduced by the related nondeductible portion of interest expense. Average loans outstanding for the first quarter of 2002 were $903.3 million, which was 20.0% higher than the average loans outstanding for the first quarter of 2001 ($752.6 million). Average deposits outstanding for the first quarter of 2002 were $995.2 million, which was 28.7% higher than the average amount of deposits outstanding in the first quarter of 2001 ($773.5 million). See additional discussion regarding the nature of the growth in loans and deposits in the section entitled "Financial Condition" below. The effect of these higher amounts of average loans and deposits was to increase net interest income in 2002. The net interest margin (tax equivalent net interest income divided by average earning assets) for the first quarter of 2002 was 4.36%, a 1 basis point increase from the 4.35% net interest margin realized in the first quarter of 2001, and a 24 basis point increase from the 4.12% net interest margin realized in the fourth quarter of 2001. The increase in the 2002 net interest margin compared to the fourth quarter of 2001 represented the first quarter-to-quarter increase in the net interest margin since the fourth quarter of 2000. In 2001, as the Federal Reserve decreased key interest rates, the Company's assets that were subject to repricing, mostly loans, repriced downward faster and by a greater amount than the Company's liabilities that were subject to repricing - mostly deposits. This resulted in a narrowing of the Company's net interest margin. The increase in the Company's net interest margin in 2002 was due primarily to a stable interest rate environment in which, for the first time in five quarters, there were no decreases in interest rates initiated by the Federal Reserve. This allowed a significant portion of the Company's time deposits that were originated during periods of higher interest rates and matured during the quarter to reprice at lower levels. A majority of the Company's rate sensitive, interest-earning assets repriced lower immediately upon the rate cuts by the Federal Reserve in 2001, and thus did not experience further rate reductions in 2002. 13
The Company recorded a $440,000 provision for loan losses during the first quarter of 2002, double that of the $220,000 recorded in the first quarter of 2001. The primary factor resulting in the increase in the provision was higher internal loan growth experienced in the first quarter of 2002 compared to the first quarter of 2001 - $33.8 million in net growth in 2002 compared to $7.9 million in 2001 (excluding loans assumed in acquisitions for which an allowance had already been established). The level of nonperforming assets and other asset quality indicators for the first quarter of 2002 were consistent with those of the first quarter of 2001. Noninterest income for the first quarter of 2002 amounted to $2,997,000, a 61.0% increase over the $1,862,000 recorded in the first quarter of 2001. Within noninterest income, services charges on deposit accounts experienced the largest increase in the first quarter of 2002 compared to 2001, amounting to $1,595,000, a 75.7% increase over the $908,000 recorded in the same quarter of 2001. This significant increase is primarily attributable to two factors - 1) the Company's acquisition of four branches on March 26, 2001 and one branch in December 2001 - the branches purchased had a high level of transaction accounts (non-time deposits), $83.4 million in total, which afforded the Company the opportunity to earn deposit service charges, and 2) the introduction of a product in August 2001 that charges a fee for allowing customers to overdraw their deposit account. Also contributing to the increase in noninterest income was "other service charges, commissions, and fees," which experienced a 20.9% increase, rising from $526,000 in the first quarter of 2001 to $636,000 in the first quarter of 2002. This category of noninterest income includes items such as safety deposit box rentals, check cashing fees, credit card and merchant income, and ATM surcharges. This category of income grew primarily because of increases in these activity-related fee services as a result of overall growth in the Company's total customer base, including growth achieved from acquisitions. Fees from presold mortgages increased 223%, from $138,000 in the first quarter of 2001 to $446,000 in the first quarter of 2002. This increase was primarily attributable to two factors - 1) a higher level of mortgage loan refinancings caused by the lower interest rate environment, and 2) the decision by the Company to sell a higher percentage of single family home loan originations into the secondary market as opposed to holding them in the Company's loan portfolio. This strategy was implemented in an effort to shift the Company's loan portfolio to having a higher percentage of commercial loans, which are generally shorter term in nature and have higher interest rates. Commissions from sales of insurance and financial products amounted to $265,000 in 2001, a 28.6% increase from the $206,000 recorded in the first quarter of 2001. This line item includes commissions the Company receives from three sources - 1) sales of credit insurance associated with new loans ($167,000 in 2002 compared to $152,000 in 2001), 2) commissions from the sales of investment, annuity, and long-term care insurance products ($58,000 in 2002 compared to $54,000 in 2001), and 3) commissions from the sale of property and casualty insurance ($40,000 in 2002 compared to $0 in 2001). Commissions from the sale of property and casualty insurance began to be realized upon the May 2001 completion of the purchase of two insurance companies that specialized in such insurance. Noninterest expenses for the three months ended March 31, 2002 increased 33.5% to $8,098,000 from $6,065,000 in the first quarter of 2001. The increase in noninterest expenses occurred in all categories and is associated with the overall growth of the Company in terms of branch network, employees and customer base. The Company operated 46 branches for most of the first quarter of 2002 with average assets of $1.14 billion compared to 39 branches for the majority of the first quarter of 2001 with average assets of $925 million. In addition to the typical cash expenses associated with the growth, the Company also recorded a total of $364,000 in non-cash amortization expense in the first quarter of 2002, double that of the $182,000 recorded in the first quarter of 2001. This increase was as a result of the $21.2 million in acquisition-related intangible assets recorded in 2001. See Notes 2 and 7 to the financial statements above for additional discussion regarding the accounting for intangible assets. 14
The provision for income taxes was $1,992,000 in the first quarter of 2002 compared to $1,672,000 in the first quarter of 2001. The effective tax rates for each period were virtually the same - 34.6% for the first quarter of 2002 compared to 34.2% for the first quarter of 2001. FINANCIAL CONDITION The Company's financial condition was materially impacted by several acquisitions completed during 2001. The Company acquired four branches from First Union National Bank on March 26, 2001 with $103 million in deposits and $17 million in loans, the effects of which are reflected on the balance sheet as of March 31, 2001, but impacted income and expense for only five days during the first quarter of 2001. In May 2001, the Company acquired Century Bancorp, a one branch savings institution with $72 million in deposits and $90 million in loans. In December, the Company acquired another branch from First Union with $30 million in deposits and $9 million in loans. The May and December acquisitions significantly increased the amounts of loans and deposits of the Company when comparing March 31, 2002, to March 31, 2001. The following table presents information regarding the nature of the Company's growth since March 31, 2001 <TABLE> <CAPTION> Balance at Balance at Total Percentage growth, beginning Internal Growth from end of percentage excluding of period Growth Acquisitions period growth acquisitions --------- ------ ------------ ------ ------ ------------ (in thousands) April 1, 2001 to March 31, 2002 - ------------------------------ <S> <C> <C> <C> <C> <C> <C> Loans $ 770,749 53,925 99,433 924,107 19.9% 7.0% ========== ====== ====== ======= ==== === Deposits - Noninterest bearing $ 89,538 6,656 5,137 101,331 13.2% 7.4% Deposits - Savings, NOW, and Money Market 295,800 28,811 38,166 362,777 22.6% 9.7% Deposits - Time>$100,000 160,677 3,429 19,833 183,939 14.5% 2.1% Deposits - Time<$100,000 341,798 (25,359) 38,913 355,352 4.0% (7.4%) ---------- ------ ------- --------- ---- --- Total deposits $ 887,813 13,537 102,049 1,003,399 13.0% 1.5% ========== ====== ======= ========= ==== === <CAPTION> January 1, 2002 to March 31, 2002 - ------------------------------ <S> <C> <C> <C> <C> <C> <C> Loans $ 890,310 33,797 -- 924,107 3.8% 3.8% ========== ===== ======= ========= === === Deposits - Noninterest bearing $ 96,065 5,266 -- 101,331 5.5% 5.5% Deposits - Savings, NOW, and Money Market 353,439 9,338 -- 362,777 2.6% 2.6% Deposits - Time>$100,000 189,948 (6,009) -- 183,939 (3.2%) (3.2%) Deposits - Time<$100,000 360,829 (5,477) -- 355,352 (1.5%) (1.5%) ---------- ------ ------- --------- ---- --- Total deposits $1,000,281 3,118 -- 1,003,399 0.3% 0.3% ========== ====== ======= ========= === === </TABLE> As can be seen in the first table, most of the Company's growth in loans and deposits over the past 12 months has been a result of acquisitions with internal loan growth comprising 7.0% of the total increase of 19.9% and internal deposit growth making up 1.5% of the total growth of 13.0%. As can be seen in the second table, the Company experienced strong internal loan growth (15.2% annualized) in the first quarter of 2002, while deposit growth was virtually flat. Although total deposit growth was only 0.3% for the quarter, the Company's noninterest bearing deposits experienced growth of 5.5% and savings, NOW, and money market accounts experienced growth of 2.6%, the effects of which were mostly offset by decreases in time deposits. 15
The Company's total assets were $1.15 billion at March 31, 2002, an increase of $116.4 million, or 11.3%, from the $1.03 billion at March 31, 2001. The primary reason for the increase in total assets were the May 2001 acquisition of Century and the December branch purchase, which added approximately $124 million in total assets. NONPERFORMING ASSETS Nonperforming assets are defined as nonaccrual loans, loans past due 90 or more days and still accruing interest, restructured loans and other real estate. For each of the periods presented, the Company had no loans past due 90 or more days and still accruing interest. Nonperforming assets are summarized as follows: <TABLE> <CAPTION> March 31, December 31, March 31, ($ in thousands) 2002 2001 2001 ---------------- ---- ---- ---- <S> <C> <C> <C> Nonperforming loans: Nonaccrual loans $ 3,343 3,808 3,598 Restructured loans 79 83 231 ---------- ----- ----- Total nonperforming loans 3,422 3,891 3,829 Other real estate 1,800 1,253 1,324 ---------- ----- ----- Total nonperforming assets $ 5,222 5,144 5,153 ========== ===== ===== Nonperforming loans to total loans 0.37% 0.44% 0.50% Nonperforming assets as a percentage of loans and other real estate 0.56% 0.58% 0.67% Nonperforming assets to total assets 0.45% 0.45% 0.50% Allowance for loan losses to total loans 1.05% 1.05% 1.09% </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. The level of nonaccrual loans has not varied materially among the periods presented, amounting to $3.3 million at March 31, 2002, compared to $3.8 million at December 31, 2001 and $3.6 million at March 31, 2001. The Company continues to have one large credit that was on nonaccrual basis as of each of the three dates presented. The nonaccrual balance of this credit amounted to $1.8 million, $1.9 million, and $2.4 million as of March 31, 2002, December 31, 2001, and March 31, 2001, respectively. The borrower of this credit has liquidity problems. The loans related to this borrower are collateralized by real estate, the value of which the Company believes exceeds the outstanding loan balance. The borrower has been actively selling the real estate to pay down the loan balance. The level of restructured loans did not vary materially among the periods presented. At March 31, 2002, December 31, 2001, and March 31, 2001, the recorded investment in loans considered to be impaired was $2,077,000, $2,482,000, and $2,907,000, respectively, all of which were on nonaccrual status. The majority of the impaired loans for each of the three periods presented is the same credit noted above that is on nonaccrual status. At March 31, 2002, December 31, 2001, and March 31, 2001, the related allowance for loan losses for these impaired loans was $25,000 (related to one loan with a balance of $171,000, with the remainder of impaired loans having no valuation allowance), $100,000 (related to two loans with a total balance of $271,000, with the remainder of the impaired loans have no valuation allowance), and $436,000 (all impaired loans at March 31, 2001 had a valuation allowance), respectively. The average recorded investments in impaired loans during the three month period ended March 31, 2002, the year ended December 31, 2001, and the three months ended March 31, 2001 were approximately $2,280,000, $2,450,000, and $1,600,000, respectively. For the same periods, the Company recognized no interest income on those impaired loans during the period that they were considered to be impaired. 16
As of March 31, 2002, December 31, 2001 and March 31, 2001, the Company's other real estate owned amounted to $1,800,000, $1,253,000, and $1,324,000, respectively, which consisted principally of several parcels of real estate. The increase in the level of other real estate owned at March 31, 2002 is attributable to two foreclosures of real estate totaling $336,000 and the transfer of property with a value of $180,000 from premises and equipment to other real estate due to a decision to delay the construction of a bank branch at the location indefinitely. The Company's management has reviewed recent appraisals of its other real estate and believes that their fair values, less estimated costs to sell, equal or exceed their respective carrying values at the dates presented. SUMMARY OF LOAN LOSS EXPERIENCE The allowance for loan losses is created by direct charges to operations. Losses on loans are charged against the allowance in the period in which such loans, in management's opinion, become uncollectible. The recoveries realized during the period are credited to this allowance. The Company has identified the accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy critical to the Company's financial statements. See "CRITICAL ACCOUNTING POLICIES" below for additional discussion. The Company has no foreign loans, few agricultural loans and does not engage in significant lease financing or highly leveraged transactions. Commercial loans are diversified among a variety of industries. The majority of the Company's real estate loans are primarily various personal and commercial loans where real estate provides additional security for the loan. Collateral for virtually all of these loans is located within the Company's principal market area. The Company recorded a $440,000 provision for loan losses during the first quarter of 2002, double that of the $220,000 recorded in the first quarter of 2001. The primary factor resulting in the increase in the provision was higher internal loan growth experienced in the first quarter of 2002 compared to the first quarter of 2001 - $33.8 million in net growth in 2002 compared to $7.9 million in 2001 (excluding loans assumed in acquisitions for which an allowance had already been established). The level of nonperforming assets and other asset quality indicators for the first quarter of 2002 were consistent with those of the first quarter of 2001. At March 31, 2002, the allowance for loan losses amounted to $9,729,000, compared to $9,388,000 at December 31, 2001 and $8,386,000 at March 31, 2001. The allowance for loan losses was 1.05%, 1.05% and 1.09% of total loans as of March 31, 2002, December 31, 2001, and March 31, 2001, respectively. The slight decrease in the allowance percentage since March 31, 2001 is primarily related to the effects of the May 2001 Century acquisition, the recorded allowance of which amounted to 0.67% of total loans, as a result of Century's relatively low risk loan portfolio comprised almost exclusively of loans secured by single family residences. Management believes the Company's reserve levels are adequate to cover probable loan losses on the loans outstanding as of each reporting date. It must be emphasized, however, that the determination of the reserve using the Company's procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that the Company will not in any 17
particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and value of other real estate. Such agencies may require the Company to recognize adjustments to the allowance or the carrying value of other real estate based on their judgments about information available at the time of their examinations. For the periods indicated, the following table summarizes the Company's balances of loans outstanding, average loans outstanding, changes in the allowance for loan losses arising from charge-offs and recoveries, and additions to the allowance for loan losses that have been charged to expense and additions that were recorded related to acquisitions. <TABLE> <CAPTION> Three Months Year Three Months Ended Ended Ended March 31, December 31, March 31, ($ in thousands) 2002 2001 2001 ---------------- ---- ---- ---- <S> <C> <C> <C> Loans outstanding at end of period $ 924,107 890,310 $ 770,749 ========= ======= ========= Average amount of loans outstanding $ 903,283 831,817 $ 752,557 ========= ======= ========= Allowance for loan losses, at beginning of period $ 9,388 7,893 $ 7,893 Total charge-offs (128) (912) (98) Total recoveries 29 131 36 --------- ----- --------- Net charge-offs (99) (781) (62) --------- ----- --------- Additions to the allowance charged to expense 440 1,151 220 --------- ----- --------- Addition related to loans assumed in acquisitions -- 1,125 335 --------- ----- --------- Allowance for loan losses, at end of period $ 9,729 9,388 $ 8,386 ========= ===== ========= Ratios: Net charge-offs (annualized) as a percent of average loans 0.04% 0.09% 0.03% Allowance for loan losses as a percent of loans at end of period 1.05% 1.05% 1.09% </TABLE> Based on the results of the aforementioned loan analysis and grading program and management's evaluation of the allowance for loan losses at March 31, 2002, there have been no material changes to the allocation of the allowance for loan losses among the various categories of loans since December 31, 2001. LIQUIDITY The Company's liquidity is determined by its ability to convert assets to cash or acquire alternative sources of funds to meet the needs of its customers who are withdrawing or borrowing funds, and to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. The Company's primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments. The Company's securities portfolio is comprised almost entirely of readily marketable securities, which could also be sold to provide cash. In addition to internally generated liquidity sources, the Company has the ability to obtain borrowings from the following three sources - 1) an approximately $171 million line of credit with the Federal Home Loan Bank 18
(of which $15 million has been drawn), 2) a $35 million overnight federal funds line of credit with a correspondent bank, and 3) an approximately $38 million line of credit through the Federal Reserve Bank of Richmond's discount window. The Company's liquidity declined slightly during the first quarter of 2002 as a result of loan growth of $33.8 million outpacing deposit growth of $3.1 million. This resulted in the Company's loan to deposit ratio increasing from 89.0% at December 31, 2001 to 92.1% at March 31, 2002, and the level of the Company's liquid assets (consisting of cash, due from banks, federal funds sold, presold mortgages in process of settlement and securities) as a percentage of deposits and borrowings decreasing from 20.7% at December 31, 2001 to 17.6% at March 31, 2002. The amount and timing of the Company's contractual obligations and commercial commitments has not changed materially since December 31, 2001, detail of which is presented on pages 34 and 35 of the Company's 2001 Form 10-K. The Company's management believes its liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet its operating needs in the foreseeable future. CAPITAL RESOURCES The Company is regulated by the Board of Governors of the Federal Reserve Board (FED) and is subject to securities registration and public reporting regulations of the Securities and Exchange Commission. The Company's banking subsidiaries are regulated by the Federal Deposit Insurance Corporation (FDIC) and the respective state of North Carolina bank and savings regulators. The Company is not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on its liquidity, capital resources, or operations. The Company must comply with regulatory capital requirements established by the FED and FDIC. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. These capital standards require the Company to maintain minimum ratios of "Tier 1" capital to total risk-weighted assets and total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1 capital is comprised of total shareholders' equity calculated in accordance with generally accepted accounting principles, excluding accumulated other comprehensive income (loss), less intangible assets, and total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which for the Company is the allowance for loan losses. Risk-weighted assets refer to the on- and off-balance sheet exposures of the Company, adjusted for their related risk levels using formulas set forth in FED and FDIC regulations. In addition to the risk-based capital requirements described above, the Company is subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution's composite ratings as determined by its regulators. The FED has not advised the Company of any requirement specifically applicable to it. At March 31, 2002, the Company's capital ratios exceeded the regulatory minimum ratios discussed above with a Tier 1 capital ratio to Tier 1 risk adjusted ratio of 10.99%, a total capital to total risk adjusted asset ratio of 19
11.99%, and a leverage ratio of 8.42%. All of the Company's regulatory risk based ratios are within two basis points of what they were at December 31, 2001. The Company's bank subsidiary is also subject to similar capital requirements as those discussed above. At March 31, 2002, the Company's bank subsidiary exceeded the minimum ratios established by the FED and FDIC. SHARE REPURCHASES The Company's share repurchase program announced on October 20, 2000 in connection with the execution of the merger agreement to purchase Century Bancorp, Inc. was completed during the first quarter of 2002 with the repurchase of 5,000 shares at a weighted average cost of $21.05. In connection with this program, a total of 586,000 shares of stock were repurchased at an average cost of $21.37. As previously disclosed, the Company's board of directors has authorized the repurchase of an additional 150,000 shares. The Company repurchased 37,000 shares under this authorization during the first quarter of 2002 at an average cost of $21.65. In total during the first quarter of 2002, approximately 42,000 shares of stock were repurchased at an average cost of $21.58. Item 3. Quantitative and Qualitative Disclosures About Market Risk INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK) Net interest income is the Company's most significant component of earnings. Notwithstanding changes in volumes of loans and deposits, the Company's level of net interest income is continually at risk due to the effect that changes in general market interest rate trends have on interest yields earned and paid with respect to the various categories of earning assets and interest-bearing liabilities. It is the Company's policy to maintain portfolios of earning assets and interest-bearing liabilities with maturities and repricing opportunities that will afford protection, to the extent practical, against wide interest rate fluctuations. The Company's exposure to interest rate risk is analyzed on a regular basis by management using standard GAP reports, maturity reports, and an asset/liability software model that simulates future levels of interest income and expense based on current interest rates, expected future interest rates, and various intervals of "shock" interest rates. Over the years, the Company has been able to maintain a fairly consistent yield on average earning assets (net interest margin). Over the past five calendar years the Company's net interest margin has ranged from a low of 4.23% (realized in 2001) to a high of 4.88% (realized in 1997). During that five year period the prime rate of interest has ranged from a low of 4.75% to a high of 9.50%. As discussed above under the heading "Components of Earnings," the Company experienced downward pressure in 2001 on its net interest margin, primarily as a result of the significant decreases in the interest rate environment. In the first quarter of 2002, the Company's net interest margin increased to its highest level since the fourth quarter of 2000, primarily as a result of the stable interest rate environment, when for the first time in five quarters, there were no decreases in rates initiated by the Federal Reserve. This allowed a significant portion of the Company's time deposits that were originated during periods of higher interest rates and matured during the quarter to reprice at lower levels. A majority of the Company's rate sensitive interest-earning assets repriced lower immediately upon the rate cuts by the Federal Reserve in 2001, and thus did not experience further rate reductions in 2002. Using stated maturities for all instruments except mortgage-backed securities (which are allocated in the periods of their expected payback) and securities and borrowings with call features that are expected to be called (which are included in the period of their expected call), at March 31, 2002 the Company had $373.2 million more in interest-bearing liabilities that are subject to interest rate changes within one year than earning assets. This generally would indicate that net interest income would experience downward pressure in a rising interest rate environment and would benefit from a declining interest rate environment. However, this method of analyzing interest sensitivity only measures the magnitude of the timing differences and does not address 20
earnings, market value, or management actions. Also, interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. In addition to the effects of "when" various rate-sensitive products reprice, market rate changes may not result in uniform changes in rates among all products. For example, included in interest-bearing liabilities at March 31, 2002 subject to interest rate changes within one year are deposits totaling $362.8 million comprised of NOW, savings, and certain types of money market deposits with interest rates set by management. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators. Thus, the Company believes that in the near term (twelve months), net interest income would not likely experience significant downward pressure from rising interest rates. Similarly, management would not expect a significant increase in near term net interest income from falling interest rates (In fact, as discussed above under the heading "Components of Earnings," a declining interest rate environment during 2001 negatively impacted (at least temporarily) the Company's net interest margin). Generally, when rates change, the Company's interest-sensitive assets that are subject to adjustment reprice immediately at the full amount of the change, while the Company's interest-sensitive liabilities that are subject to adjustment reprice at a lag to the rate change and typically not to the full extent of the rate change. The net effect is that in the twelve month horizon, as rates change, the impact of having a higher level of interest-sensitive liabilities is substantially negated by the later and typically lower proportionate change these liabilities experience compared to interest sensitive assets. The Company has no market risk sensitive instruments held for trading purposes, nor does it maintain any foreign currency positions. The following table presents the expected maturities of the Company's other than trading market risk sensitive financial instruments. The following table also presents the fair values of market risk sensitive instruments as estimated in accordance with Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments." <TABLE> <CAPTION> Expected Maturities of Market Sensitive Instruments Held at March 31, 2002 --------------------------------------- Average Estimated Interest Fair ($ in thousands) 1 Year 2 Years 3 Years 4 Years 5 Years Beyond Total Rate (1) Value - ---------------- ------ ------- ------- ------- ------- ------ ----- -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Due from banks, interest bearing $ 25,468 -- -- -- -- -- 25,468 1.65% $ 25,468 Federal funds sold 20,439 -- -- -- -- -- 20,439 1.65% 20,439 Debt securities- at amortized cost (1) (2) 33,534 17,535 19,080 6,925 5,550 17,219 99,843 6.37% 100,433 Loans - fixed (3) (4) 91,472 87,847 109,423 48,309 116,337 60,563 513,951 7.84% 519,944 Loans - adjustable (3) (4) 148,327 56,227 57,101 53,715 44,538 46,905 406,813 6.01% 406,813 --------- ------- ------- ------- ------- ------- --------- ---- ---------- Total $ 319,240 161,609 185,604 108,949 166,425 124,687 1,066,514 6.74% $1,073,097 ========= ======= ======= ======= ======= ======= ========= ==== ========== Savings, NOW, and money market deposits $ 362,777 -- -- -- -- -- 362,777 1.03% $ 362,777 Time deposits 480,403 37,830 9,715 6,030 5,167 146 539,291 3.84% 542,975 Borrowings (2) 5,000 5,000 5,000 -- -- -- 15,000 6.73% 15,414 --------- ------- ------- ------- ------- ------- --------- ---- --------- Total $ 848,180 42,830 14,715 6,030 5,167 146 917,068 2.78% $ 921,166 ========= ====== ====== ===== ===== ======= ======= ==== ========= </TABLE> (1) Tax-exempt securities are reflected at a tax-equivalent basis using a 35% tax rate. (2) Callable securities and borrowings with above market interest rates at March 31, 2002 are assumed to mature at their call date for purposes of this table. Mortgage-backed securities are assumed to mature in the period of their expected repayment based on estimated prepayment speeds. (3) Excludes nonaccrual loans and allowance for loan losses. (4) Single-family mortgage loans are assumed to mature in the period of their expected repayment based on estimated prepayment speeds. All other loans are shown in the period of their contractual maturity. 21
The Company's fixed rate assets and liabilites each have estimated fair values that are slightly higher than their carrying value. This is due to the yields on these portfolios being higher than market yields at March 31, 2002 for instruments with maturities similar to the remaining term of the portfolios, due to the declining interest rate environment. See additional discussion of the Company's net interest margin in the "Components of Earnings" section above. CRITICAL ACCOUNTING POLICIES Due to the estimation process and the potential materiality of the amounts involved, the Company has identified the accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy critical to the Company's financial statements. The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb losses inherent in the portfolio. Management's determination of the adequacy of the allowance is based primarily on a mathematical model that estimates the appropriate allowance for loan losses. This model has two components. The first component involves the estimation of losses on loans defined as "impaired loans." A loan is considered to be impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The estimated valuation allowance is the difference, if any, between the loan balance outstanding and the value of the impaired loan as determined by either 1) an estimate of the cash flows that the Company expects to receive from the borrower discounted at the loan's effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral. The second component of the allowance model is to estimate inherent losses for all loans not considered to be impaired loans. First, loans that have been risk graded by the Company as having more than "standard" risk but are not considered to be impaired are assigned estimated loss percentages generally accepted in the banking industry. Loans that are classified by the Company as having normal credit risk are segregated by loan type, and estimated loss percentages are assigned to each loan type, based on the historical losses, current economic conditions, and operational conditions specific to each loan type. The reserve estimated for impaired loans is then added to the reserve estimated for all other loans. This becomes the Company's "allocated allowance." In addition to the allocated allowance derived from the model, management of the Company also evaluates other data such as the ratio of the allowance for loan losses to total loans, net loan growth information, nonperforming asset levels and trends in such data. Based on this additional analysis, the Company may determine that an additional amount of allowance for loan losses is necessary to reserve for probable losses. This additional amount, if any, is the Company's "unallocated allowance." The sum of the allocated allowance and the unallocated allowance is compared to the actual allowance for loan losses recorded on the books of the Company and any adjustment necessary for the recorded allowance to equal the computed allowance is recorded as a provision for loan losses. While management uses the best information available to make evaluations, future adjustments may be necessary if economic, operational, or other conditions change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on the examiners' judgment about information available to them at the time of their examinations. For further discussion, see "SUMMARY OF LOAN LOSS EXPERIENCE" above. CURRENT ACCOUNTING MATTERS See Notes 2 and 7 to the Consolidated Financial Statements above. FORWARD-LOOKING STATEMENTS Part I of this report contains statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," or other statements concerning opinions or judgment of the Company and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of the Company's customers, the Company's level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions. 22
Part II. Other Information Item 5 - Other Information The bylaws of the Company establish an advance notice procedure for shareholder proposals to be brought before a meeting of shareholders of the Company. Subject to any other applicable requirements, only such business may be conducted at a meeting of the shareholders as has been brought before the meeting by, or at the direction of, the Board of Directors or by a shareholder who has given to the Secretary of the Company timely written notice, in proper form, of the shareholder's intention to bring that business before the meeting. The presiding officer at such meeting has the authority to make such determinations. To be timely, notice of other business to be brought before any meeting must generally be received by the Secretary of the Company within 60 to 90 days in advance of the shareholders' meeting. The notice of any shareholder proposal must set forth the various information required under the bylaws. The person submitting the notice must provide, among other things, the name and address under which such shareholder appears on the Company's books and the class and number of shares of the Company's capital stock that are beneficially owned by such shareholder. Any shareholder desiring a copy of the Company's bylaws will be furnished one without charge upon written request to the Secretary of the Company at the Company's headquarters. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed with this report or, as noted, are incorporated by reference. Management contracts, compensatory plans and arrangements are marked with an asterisk (*). 3.a.i Copy of Articles of Incorporation of the Registrant and amendments thereto, was filed as Exhibit 3(a) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by reference. 3.a.ii Copy of the amendment to Articles of Incorporation - adding a new Article Nine, was filed as Exhibit 3(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, and is incorporated herein by reference. 3.a.iii Copy of the amendment to Articles of Incorporation - adding a new Article Ten, was filed as Exhibit 3.a.iii to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference. 3.a.iv Copy of the amendment to Article IV of the Articles of Incorporation was filed as Exhibit 3.a.iv to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference. 3.b. Copy of the Bylaws of the Registrant was filed as Exhibit 3.b to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, and is incorporated herein by reference. 4 Form of Common Stock Certificate was filed as Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference. 23
21 List of Subsidiaries of Registrant was filed as Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, and is incorporated herein by reference. (b) There were no reports filed on Form 8-K during the quarter ended March 31, 2002. Copies Of Exhibits Are Available Upon Written Request To: First Bancorp, Anna G. Hollers, Executive Vice President, P.O. Box 508, Troy, NC 27371 24
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST BANCORP May 13, 2002 BY: /s/ James H. Garner ---------------------------- James H. Garner President (Principal Executive Officer), Treasurer and Director May 13, 2002 BY: /s/ Anna G. Hollers ---------------------------- Anna G. Hollers Executive Vice President and Secretary May 13, 2002 BY: /s/ Eric P. Credle ---------------------------- Eric P. Credle Senior Vice President and Chief Financial Officer