UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
fiscal year ended December 31, 2007
Commission
File Number 0-15572
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FIRST
BANCORP
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(Exact
Name of Registrant as Specified in its Charter)
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North
Carolina
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56-1421916
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(State
of Incorporation)
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(I.R.S.
Employer Identification Number)
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341
North Main Street, Troy, North Carolina
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27371-0508
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
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(910) 576-6171
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Securities
Registered Pursuant to Section 12(b) of the Act:
COMMON
STOCK, NO PAR VALUE
(Title
of
each class)
Securities
Registered Pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act of 1933. o
YES ý NO
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of
1934. o
YES ý NO
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Exchange Act 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. ý
YES o NO
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to
the
Form 10-K. ý
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one)
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o
Large Accelerated
Filer
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ý Accelerated
Filer
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o
Non-Accelerated
Filer
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o
Smaller Reporting
Company
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(Do
not check if a smaller
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|||
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reporting
company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o
YES ý NO
The
aggregate market value of the Common Stock, no par value, held by non-affiliates
of the registrant, based on the closing price of the Common Stock as of June
30,
2007 as reported by The NASDAQ Global Select Market, was approximately
$225,809,891.
The
number of shares of the registrant’s Common Stock outstanding on February 29,
2008 was 14,377,980.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s Proxy Statement to be filed pursuant to Regulation 14A are
incorporated herein by reference into Part III.
CROSS
REFERENCE INDEX
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Begins
on
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Page
(s)
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Business
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4
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Risk
Factors
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13
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Unresolved
Staff Comments
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15
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Properties
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15
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Legal
Proceedings
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15
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Submission
of Matters to a Vote of Shareholders
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15
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Market
for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer
Purchases of Equity Securities
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16
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Selected
Consolidated Financial Data
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18,
50
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Management’s
Discussion and Analysis of Financial Condition
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and
Results of Operations
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18
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Critical
Accounting Policies
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18
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Merger
and Acquisition Activity
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20
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Overview
Comparison of 2007 to 2006
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21
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Overview
Comparison of 2006 to 2005
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23
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Statistical
Information
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Net
Interest Income
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25,
51
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Provision
for Loan Losses
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28,
57
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Noninterest
Income
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28,
52
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Noninterest
Expenses
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30,
52
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Income
Taxes
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30,
53
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Stock-Based
Compensation
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31
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Distribution
of Assets and Liabilities
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34,
53
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Securities
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35,
53
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Loans
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36,
55
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Nonperforming
Assets
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37,
56
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Allowance
for Loan Losses and Loan Loss Experience
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39,
56
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Deposits
and Securities Sold Under Agreements to Repurchase
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40,
57
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Borrowings
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41
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Liquidity,
Commitments, and Contingencies
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43,
59
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Off-Balance
Sheet Arrangements and Derivative Financial Instruments
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44
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Interest
Rate Risk (Including Quantitative and Qualitative Disclosures About
Market
Risk)
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44,
58
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Return
on Assets and Equity
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47,
60
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Capital
Resources and Shareholders’ Equity
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47,
61
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Inflation
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49
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Current
Accounting and Regulatory Matters
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49
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Quantitative
and Qualitative Disclosures About Market Risk
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49
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Forward-Looking
Statements
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49
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Financial
Statements and Supplementary Data:
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Consolidated
Balance Sheets as of December 31, 2007 and 2006
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63
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Consolidated
Statements of Income for each of the years in the three-year period
ended
December 31, 2007
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64
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2
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Begins
on
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Page
(s)
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Consolidated
Statements of Comprehensive Income for each of the years in the three-year
period ended December 31, 2007
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65
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Consolidated
Statements of Shareholders’ Equity for each of the years in the three-year
period ended December 31, 2007
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66
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Consolidated
Statements of Cash Flows for each of the years in the three-year
period
ended December 31, 2007
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67
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Notes
to Consolidated Financial Statements
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68
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Reports
of Independent Registered Public Accounting Firm
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102
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Selected
Consolidated Financial Data
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50
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Quarterly
Financial Summary
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62
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
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104
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Controls
and Procedures
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104
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Other
Information
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105
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Directors,
Executive Officers and Corporate Governance
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106*
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Executive
Compensation
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106*
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Security
Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
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106*
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Certain
Relationships and Related Transactions, and Director
Independence
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106*
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Principal
Accountant Fees and Services
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106*
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Exhibits
and Financial Statement Schedules
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106
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109
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*
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Information
called for by Part III (Items 10 through 14) is incorporated herein
by
reference to the Registrant’s definitive Proxy Statement for the 2008
Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission on or before April 29,
2008.
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PART
I
Item
1. Business
General
Description
The
Company
First
Bancorp (the “Company”) is a bank holding company. The principal
activity of the Company is the ownership and operation of First Bank (the
“Bank”), a state-chartered bank with its main office in Troy, North
Carolina. The Company also owns and operates a nonbank subsidiary,
Montgomery Data Services, Inc. (“Montgomery Data”), a data processing
company. This subsidiary is fully consolidated for financial
reporting purposes. The Company is also the parent to a series of
statutory business trusts organized under the laws of the State of Delaware
that
were created for the purpose of issuing trust preferred debt
securities. The Company’s outstanding debt associated with these
trusts was $46.4 million and $67.0 million at December 31, 2007 and 2006,
respectively.
The
Company was incorporated in North Carolina on December 8, 1983, as Montgomery
Bancorp, for the purpose of acquiring 100% of the outstanding common stock
of
the Bank through a stock-for-stock exchange. On December 31, 1986,
the Company changed its name to First Bancorp to conform its name to the name
of
the Bank, which had changed its name from Bank of Montgomery to First Bank
in
1985.
The
Bank
was organized in 1934 and began banking operations in 1935 as the Bank of
Montgomery, named for the county in which it operated. As of
December 31, 2007, the Bank operated in a 26-county area centered in Troy,
North
Carolina. Troy, population 3,500, is located in the center of
Montgomery County, approximately 60 miles east of Charlotte, 50 miles south
of
Greensboro, and 80 miles southwest of Raleigh. The Bank conducts
business from 70 branches located within a 120-mile radius of Troy, covering
principally a geographical area from Latta, South Carolina to the southeast,
to
Wilmington, North Carolina to the east, to Radford, Virginia to the north,
to
Wytheville, Virginia to the northwest, and to Harmony, North Carolina to the
west. The Bank also has a loan production office in Blacksburg, which
is located in southwestern Virginia and represents the Bank’s furthest location
to the north of Troy. Of the Bank’s 70 branches, 63 are in North
Carolina, with three branches in South Carolina and four braches in Virginia
(where the Bank operates under the name “First Bank of
Virginia”). Ranked by assets, the Bank was the 7th
largest
bank headquartered in North Carolina as of December 31, 2007.
As
of
December 31, 2007, the Bank had one wholly owned subsidiary, First Bank
Insurance Services, Inc. (“First Bank Insurance”). First Bank
Insurance was acquired as an active insurance agency in 1994 in connection
with
the Company’s acquisition of a bank that had an insurance
subsidiary. On December 29, 1995, the insurance agency operations of
First Bank Insurance were divested. From December 1995 until October
1999, First Bank Insurance was inactive. In October 1999, First Bank
Insurance began operations again as a provider of non-FDIC insured investments
and insurance products. Currently, First Bank Insurance’s primary
business activity is the placement of property and casualty insurance
coverage.
The
Company’s principal executive offices are located at 341 North Main Street,
Troy, North Carolina 27371-0508, and its telephone number is (910)
576-6171. Unless the context requires otherwise, references to the
“Company” in this annual report on Form 10-K shall mean collectively First
Bancorp and its consolidated subsidiaries.
General
Business
The
Bank
engages in a full range of banking activities, with the acceptance of deposits
and the making of loans being its most basic activities. The Bank
offers deposit products such as checking, savings, NOW and money market
accounts, as well as time deposits, including various types of certificates
of
deposits (CDs) and individual retirement accounts
(IRAs).
The
Bank
provides loans for a wide range of consumer and commercial purposes, including
loans for business, agriculture, real estate, personal uses, home improvement
and automobiles. The Bank also offers credit cards, debit cards,
letters of credit, safe deposit box rentals, bank money orders and electronic
funds transfer services, including wire transfers. In addition, the
Bank offers internet banking, cash management and bank-by-phone capabilities
to
its customers, and is affiliated with ATM networks that give Bank customers
access to 50,000 ATMs, with no surcharge fee. In 2005, the Bank began
offering repurchase agreements (also called securities sold under agreement
to
repurchase), which are similar to interest-bearing deposits and allow the Bank
to pay interest to business customers without statutory limitations on the
number of withdrawals that these customers can make. In 2007, the
Bank introduced remote capture, which allows business customers with a method
to
electronically transmit checks received from customers into their bank account
without having to visit a branch. Also in 2007, the Bank began an
initiative to grow its Hispanic customer base by opening two uniquely Hispanic
branches under the trade name “Primer Banco,” which means First Bank in
Spanish. The Hispanic population is the fastest growing segment in
the Bank’s market area.
Because
the majority of the Bank’s customers are individuals and small to medium-sized
businesses located in the counties it serves, management does not believe that
the loss of a single customer or group of customers would have a material
adverse impact on the Bank. There are no seasonal factors that tend
to have any material effect on the Bank’s business, and the Bank does not rely
on foreign sources of funds or income. Because the Bank operates
primarily within the central Piedmont region of North Carolina, the economic
conditions within that area could have a material impact on the
Company. See additional discussion below in the section entitled
“Territory Served and Competition.”
Beginning
in 1999, First Bank Insurance began offering non-FDIC insured investment and
insurance products, including mutual funds, annuities, long-term care insurance,
life insurance, and company retirement plans, as well as financial planning
services (the “investments division”). In May 2001, First Bank
Insurance added to its product line when it acquired two insurance agencies
that
specialized in the placement of property and casualty insurance. In
October 2003, the “investments division” of First Bank Insurance became a part
of the Bank. The primary activity of First Bank Insurance is now the
placement of property and casualty insurance products.
Montgomery
Data’s primary business is to provide electronic data processing services for
the Bank. Ownership and operation of Montgomery Data allows the
Company to do all of its electronic data processing without paying fees for
such
services to an independent provider. Maintaining its own data
processing system also allows the Company to adapt the system to its individual
needs and to the services and products it offers. Although not a significant
source of income, Montgomery Data has historically made its excess data
processing capabilities available to area financial institutions for a
fee. For the years ended December 31, 2007, 2006 and 2005, external
customers provided gross revenues of $204,000, $162,000 and $279,000,
respectively. During 2005, two of the five customers terminated their
services with Montgomery Data and switched to another
provider. During 2006, one other customer terminated its service,
which left Montgomery Data with two outside customers as of December 31, 2006
and 2007. Montgomery Data intends to continue to market its services
to area banks, but does not currently have any near-term prospects for
additional business.
Until
December 31, 2007, the Company had another subsidiary, First Bancorp Financial
Services. First Bancorp Financial was originally organized under the
name of First Recovery in September of 1988 for the purpose of providing a
back-up data processing site for Montgomery Data and other financial and
non-financial clients. First Recovery’s back-up data processing
operations were divested in 1994. Since that time, First Bancorp
Financial had been occasionally used to purchase and dispose of parcels of
real
estate that had been acquired by the Bank through foreclosure or from branch
closings. First Bancorp Financial Services had been substantially
inactive for most of the last decade, and the Company elected to dissolve this
subsidiary effective December 31, 2007.
First
Bancorp Capital Trust I was organized in October 2002 for the purpose of issuing
$20.6 million in debt securities. These debt securities were called
by the Company at par on November 7, 2007 and First Bancorp Capital Trust I
was
dissolved.
First
Bancorp Capital Trust II and First Bancorp Capital Trust III were organized
in
December 2003 for the purpose of issuing $20.6 million in debt securities ($10.3
million were issued from each trust). These borrowings are due on
December 19, 2033 and are also structured as trust preferred capital securities
in order to qualify as regulatory capital. These debt securities are
callable by the Company at par on any quarterly interest payment date beginning
on January 23, 2009. The interest rate on these debt securities
adjusts on a quarterly basis at a weighted average rate of three-month LIBOR
plus 2.70%.
First
Bancorp Capital Trust IV was organized in April 2006 for the purpose of issuing
$25.8 million in debt securities. These borrowings are due on June
15, 2036 and are structured as trust preferred capital securities, which qualify
as capital for regulatory capital adequacy requirements. These debt
securities are callable by the Company at par on any quarterly interest payment
date beginning on June 15, 2011. The interest rate on these debt
securities adjusts on a quarterly basis at a rate of three-month LIBOR plus
1.39%.
Territory
Served and Competition
The
Company’s headquarters are located in Troy, Montgomery County, North
Carolina. The Company serves primarily the south central area of the
Piedmont region of North Carolina. The following table presents, for
each county where the Company operates, the number of bank branches operated
by
the Company within the county at December 31, 2007, the approximate amount
of
deposits with the Company in the county as of December 31, 2007, the Company’s
approximate market share at June 30, 2007, and the number of bank competitors
located in the county at June 30, 2007.
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County
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No.
of
Branches
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Deposits
(in
millions)
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Market
Share
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Number
of
Competitors
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Anson,
NC
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1 | $ | 11 | 4.1 | % | 5 | ||||||||||
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Brunswick,
NC
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3 | 22 | 1.2 | % | 12 | |||||||||||
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Cabarrus,
NC
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2 | 36 | 2.0 | % | 11 | |||||||||||
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Chatham,
NC
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2 | 45 | 8.6 | % | 10 | |||||||||||
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Davidson,
NC
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3 | 117 | 5.7 | % | 10 | |||||||||||
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Dillon,
SC
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3 | 70 | 26.0 | % | 2 | |||||||||||
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Duplin,
NC
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3 | 67 | 13.8 | % | 7 | |||||||||||
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Guilford,
NC
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1 | 32 | 0.4 | % | 25 | |||||||||||
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Harnett,
NC
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3 | 117 | 12.5 | % | 8 | |||||||||||
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Iredell,
NC
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2 | 30 | 1.4 | % | 17 | |||||||||||
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Lee,
NC
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4 | 189 | 23.0 | % | 8 | |||||||||||
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Montgomery,
NC
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5 | 92 | 36.0 | % | 4 | |||||||||||
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Montgomery,
VA
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1 | 20 | 1.3 | % | 10 | |||||||||||
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Moore,
NC
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11 | 394 | 26.8 | % | 10 | |||||||||||
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New
Hanover, NC
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2 | 18 | 0.3 | % | 16 | |||||||||||
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Pulaski,
VA
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1 | 21 | 5.6 | % | 8 | |||||||||||
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Randolph,
NC
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5 | 62 | 3.8 | % | 15 | |||||||||||
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Richmond,
NC
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1 | 33 | 5.9 | % | 6 | |||||||||||
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Robeson,
NC
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5 | 159 | 16.2 | % | 10 | |||||||||||
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Rockingham,
NC
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1 | 25 | 2.17 | % | 10 | |||||||||||
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Rowan,
NC
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2 | 44 | 3.1 | % | 12 | |||||||||||
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Scotland,
NC
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2 | 51 | 15.3 | % | 6 | |||||||||||
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Stanly,
NC
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4 | 96 | 10.9 | % | 6 | |||||||||||
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Wake,
NC
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1 | 18 | 0.1 | % | 28 | |||||||||||
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Washington,
VA
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1 | 21 | 2.2 | % | 15 | |||||||||||
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Wythe,
VA
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1 | 48 | 10.4 | % | 10 | |||||||||||
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Total
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70 | $ | 1,838 | |||||||||||||
The
Company’s 70 branches and facilities are primarily located in small communities
whose economies are based primarily on services, manufacturing and light
industry. Although the Company’s market is predominantly small
communities and rural areas, the market area is not dependent on
agriculture. Textiles, furniture, mobile homes, electronics, plastic
and metal fabrication, forest products, food products, chicken hatcheries,
and
cigarettes are among the leading manufacturing industries in the trade
area. Leading producers of lumber and rugs are located in Montgomery
County. The Pinehurst area within Moore County is a widely known golf
resort and retirement area. The High Point area is widely known for
its furniture market. New Hanover and Brunswick Counties are in the
southeastern coastal region of North Carolina, which are popular with tourists
and have significant retirement populations. Additionally, several of
the communities served by the Company are “bedroom” communities of large cities
like Charlotte, Raleigh and Greensboro, while several branches are located
in
medium-sized cities such as Albemarle, Asheboro, High Point, Southern Pines
and
Sanford. The Company also has branches in small communities such as
Bennett, Polkton, Vass, and Harmony.
Approximately
21% of the Company’s deposit base is in Moore County, and approximately 10% is
in Lee County. Accordingly, material changes in competition, the
economy or population of Moore or Lee counties could materially impact the
Company. No other county comprises more than 10% of the Company’s
deposit base.
The
Company competes in its various market areas with, among others, several large
interstate bank holding companies that are headquartered in North
Carolina. These large competitors have substantially greater
resources than the Company, including broader geographic markets, higher lending
limits and the ability to make greater use of large-scale advertising and
promotions. A significant number of interstate banking acquisitions
have taken place in the past decade, thus further increasing the size and
financial resources of some of the Company’s competitors, three of which are
among the largest bank holding companies in the nation. In many of
the Company’s markets, the Company also competes against banks that have been
organized within the past ten years. These new banks often focus on
loan and deposit balance sheet growth, and not necessarily on earnings
profitability. This strategy often allows them to offer more
attractive terms on loans and deposits than the Company is able to offer because
the Company must achieve an acceptable level of profitability. Moore
County, which as noted above comprises a disproportionate share of the Company’s
deposits, is a particularly competitive market, with at least ten other
financial institutions having a physical presence. See “Supervision
and Regulation” below for a further discussion of regulations in the Company’s
industry that affect competition.
The
Company competes not only against banking organizations, but also against a
wide
range of financial service providers, including federally and state-chartered
savings and loan institutions, credit unions, investment and brokerage firms
and
small-loan or consumer finance companies. One of the credit unions in
the Company’s market area is among the largest in the
nation. Competition among financial institutions of all types is
virtually unlimited with respect to legal ability and authority to provide
most
financial services. The Company also experiences competition from
internet banks, particularly in the area of time deposits.
However,
the Company believes it has certain advantages over its competition in the
areas
it serves. The Company seeks to maintain a distinct local identity in each
of the communities it serves and actively sponsors and participates in local
civic affairs. Most lending and other customer-related business decisions
can be made without delays often associated with larger
systems. Additionally, employment of local managers and personnel in
various offices and low turnover of personnel enable the Company to establish
and maintain long-term relationships with individual and corporate
customers.
Lending
Policy and Procedures
Conservative
lending policies and procedures and appropriate underwriting standards are
high
priorities of the Bank. Loans are approved under the Bank’s written
loan policy, which provides that lending officers, principally branch managers,
have authority to approve loans of various amounts up to
$350,000. Each of the Bank’s regional senior lending officers has
discretion to approve secured loans of various principal amounts up to $500,000
and together can approve loans up to $3,000,000. Lending limits may
vary depending upon whether the loan is secured or unsecured.
The
Bank’s board of directors reviews and approves loans that exceed management’s
lending authority, loans to executive officers, directors, and their affiliates
and, in certain instances, other types of loans. New credit
extensions are reviewed daily by the Bank’s senior management and at least
monthly by its board of directors.
The
Bank
continually monitors its loan portfolio to identify areas of concern and to
enable management to take corrective action. Lending officers and the
board of directors meet periodically to review past due loans and portfolio
quality, while assuring that the Bank is appropriately meeting the credit needs
of the communities it serves. Individual lending officers are
responsible for pursuing collection of past-due amounts and monitoring any
changes in the financial status of borrowers.
The
Bank
also contracts with an independent consulting firm to review new loan
originations meeting certain criteria, as well as to assign risk grades to
existing credits meeting certain thresholds. The consulting firm’s
observations, comments, and risk grades, including variances with the Bank’s
risk grades, are shared with the audit committee of the Company’s board of
directors, and are considered by management in setting Bank policy, as well
as
in evaluating the adequacy of the allowance for loan losses. The
consulting firm also provides training on a periodic basis to the Company’s loan
officers to keep them updated on current developments in the
marketplace. For additional information, see “Allowance for Loan
Losses and Loan Loss Experience” under Item 7 below.
Investment
Policy and Procedures
The
Company has adopted an investment policy designed to maximize the Company’s
income from funds not needed to meet loan demand, in a manner consistent with
appropriate liquidity and risk objectives. Pursuant to this policy,
the Company may invest in federal, state and municipal obligations, federal
agency obligations, public housing authority bonds, industrial development
revenue bonds, the Federal Home Loan Bank, Fannie Mae, Government National
Mortgage Association, Freddie Mac, Student Loan Marketing Association
securities, and, to a limited extent, corporate bonds. Except for
corporate bonds, the Company’s investments must be rated at least Baa by Moody’s
or BBB by Standard and Poor’s. Securities rated below A are
periodically reviewed for creditworthiness. The Company may purchase
non-rated municipal bonds only if such bonds are in the Company’s general market
area and determined by the Company to have a credit risk no greater than the
minimum ratings referred to above. Industrial development authority
bonds, which normally are not rated, are purchased only if they are judged
to
possess a high degree of credit soundness to assure reasonably prompt sale
at a
fair value. The Company is also authorized by its board of directors
to invest a portion of its security portfolio in high quality corporate bonds,
with the amount of bonds related to any one issuer not to exceed the Company’s
legal lending limit. Prior to purchasing a corporate bond, the
Company’s management performs due diligence on the issuer of the bond, and the
purchase is not made unless the Company believes that the purchase of the bond
bears no more risk to the Company than would an unsecured loan to the same
company.
The
Company’s investment officer implements the investment policy, monitors the
investment portfolio, recommends portfolio strategies and reports to the
Company’s investment committee. Reports of all purchases, sales,
issuer calls, net profits or losses and market appreciation or depreciation
of
the bond portfolio are reviewed by the Company’s board of directors each
month. Once a quarter, the Company’s interest rate risk exposure is
evaluated by its board of directors. Once a year, the written
investment policy is reviewed by the board of directors, and the Company’s
portfolio is compared with the portfolios of other companies of comparable
size.
Mergers
and Acquisitions
As
part
of its operations, the Company has pursued an acquisition strategy over the
years to augment its internal growth. The Company regularly evaluates
the potential acquisition of, or merger with, various financial
institutions.
The
Company’s acquisitions to date have generally fallen into one of three
categories - 1) an acquisition of a financial institution or branch thereof
within a market in which the Company operates, 2) an acquisition of a financial
institution or branch thereof in a market contiguous or nearly contiguous to
a
market in which the Company operates, or 3) an acquisition of a company that
has
products or services that the Company does not currently offer.
The
Company believes that it can enhance its earnings by pursuing these types of
acquisition opportunities through any combination or all of the
following: 1) achieving cost efficiencies, 2) enhancing the
acquiree’s earnings or gaining new customers by introducing a more successful
banking model with more products and services to the acquiree’s market base, 3)
increasing customer satisfaction or gaining new customers by providing more
locations for the convenience of customers, and 4) leveraging the Company’s
customer base by offering new products and services.
Since
2000, the Company has completed acquisitions in all three categories described
above. During that time, the Company has 1) completed three
whole-bank acquisitions, with one being in the existing market area and the
other two being in contiguous markets, with assets totaling approximately $500
million, 2) purchased ten bank branches from other banks (both in the existing
market area and in contiguous/nearly contiguous markets) with total assets
of
approximately $250 million, and 3) acquired two insurance agencies, which
provided the Company with the ability to offer property and casualty insurance
coverage. The Company also currently has a pending acquisition of a
savings bank with approximately $220 million in assets that operates in markets
contiguous to ones in which the Company already operates. The Company
anticipates that the completion of this acquisition will occur in April
2008.
There
are
many factors that the Company considers when evaluating how much to offer for
potential acquisition candidates - in the form of a purchase price comprised
of
cash and/or stock for a whole company purchase or a deposit premium in a branch
purchase. Most significantly, the Company compares expectations of
future earnings per share on a stand-alone basis with projected future earnings
per share assuming completion of the acquisition under various pricing
scenarios. Significant assumptions that affect this analysis include
the estimated future earnings stream of the acquisition candidate, the amount
of
cost efficiencies that can be realized, and the interest rate earned/lost on
the
cash received/paid. In addition to the earnings per share comparison,
the Company also considers other factors including (but not limited to):
marketplace acquisition statistics, location of the candidate in relation to
the
Company’s expansion strategy, market growth potential, management of the
candidate, potential integration issues (including corporate culture), and
the
size of the acquisition candidate.
The
Company plans to continue to evaluate acquisition opportunities that could
potentially benefit the Company and its shareholders. These
opportunities may include acquisitions that do not fit the categories discussed
above.
For
a
further discussion of recent acquisition activity, see “Merger and Acquisition
Activity” under Item 7 below.
Employees
As
of
December 31, 2007, the Company had 574 full-time and 81 part-time
employees. The Company is not a party to any collective bargaining
agreements and considers its employee relations to be good.
Supervision
and Regulation
As
a bank
holding company, the Company is subject to supervision, examination and
regulation by the Board of Governors of the Federal Reserve System (the “Federal
Reserve Board”) and the North Carolina Office of the Commissioner of Banks (the
“Commissioner”). The Bank is subject to supervision and examination
by the Federal Deposit Insurance Corporation (the “FDIC”) and the
Commissioner. For additional information, see also Note 15 to the
consolidated financial statements.
Supervision
and Regulation of the Company
The
Company is a bank holding company within the meaning of the Bank Holding Company
Act of 1956, as amended. The Company is also regulated by the
Commissioner under the North Carolina Bank Holding Company Act of
1984.
A
bank
holding company is required to file quarterly reports and other information
regarding its business operations and those of its subsidiaries with the Federal
Reserve Board. It is also subject to examination by the Federal
Reserve Board and is required to obtain Federal Reserve Board approval prior
to
making certain acquisitions of other institutions or voting
securities. The Commissioner is empowered to regulate certain
acquisitions of North Carolina banks and bank holding companies, issue cease
and
desist orders for violations of North Carolina banking laws, and promulgate
rules necessary to effectuate the purposes of the North Carolina Bank Holding
Company Act of 1984.
Regulatory
authorities have cease and desist powers over bank holding companies and their
nonbank subsidiaries where their actions would constitute a serious threat
to
the safety, soundness or stability of a subsidiary bank. Those
authorities may compel holding companies to invest additional capital into
banking subsidiaries upon acquisitions or in the event of significant loan
losses or rapid growth of loans or deposits.
The
United States Congress and the North Carolina General Assembly have periodically
considered and adopted legislation that has resulted in, and could result in
further, deregulation of both banks and other financial
institutions. Such legislation could modify or eliminate geographic
restrictions on banks and bank holding companies and current restrictions on
the
ability of banks to engage in certain nonbanking activities. For
example, in 1999, the U.S. enacted legislation that allowed bank holding
companies to engage in a wider range of non-banking activities, including
greater authority to engage in securities and insurance
activities. Under the Gramm-Leach-Bliley Act (the “Act”), a bank
holding company that elects to become a financial holding company may engage
in
any activity that the Federal Reserve Board, in consultation with the Secretary
of the Treasury, determines by regulation or order is (i) financial in nature,
(ii) incidental to any such financial activity, or (iii) complementary to any
such financial activity and does not pose a substantial risk to the safety
or
soundness of depository institutions or the financial system
generally. The Act made significant changes in U.S. banking law,
principally by repealing certain restrictive provisions of the 1933
Glass-Steagall Act. The Act lists certain activities that are deemed
to be financial in nature, including lending, exchanging, transferring,
investing for others, or safeguarding money or securities; underwriting and
selling insurance; providing financial, investment, or economic advisory
services; underwriting, dealing in or making a market in, securities; and any
activity currently permitted for bank holding companies by the Federal Reserve
Board under Section 4(c)(8) of the Bank Holding Company Act. The Act
does not authorize banks or their affiliates to engage in commercial activities
that are not financial in nature. A bank holding company may elect to
be treated as a financial holding company only if all depository institution
subsidiaries of the holding company are well-capitalized, well-managed and
have
at least a satisfactory rating under the Community Reinvestment
Act. At the present time, the Company does not anticipate applying
for status as a financial holding company under the Act. This and
other legislative and regulatory changes have increased the ability of financial
institutions to expand the scope of their operations, both in terms of services
offered and geographic coverage. Such legislative changes have placed
the Company in more direct competition with other financial institutions,
including mutual funds, securities brokerage firms, insurance companies,
investment banking firms, and internet banks. The Company cannot
predict what other legislation might be enacted or what other regulations might
be adopted or, if enacted or adopted, the effect thereof on the Company’s
business.
After
the
September 11, 2001 terrorist attacks in New York and Washington, D.C., the
United States government acted in several ways to tighten control on activities
perceived to be connected to money laundering and terrorist
funding. A series of orders were issued that identify terrorists and
terrorist organizations and require the blocking of property and assets of,
as
well as prohibiting all transactions or dealings with, such terrorists,
terrorist organizations and those that assist or sponsor
them.
The
USA
Patriot Act substantially broadened existing anti-money laundering legislation
and the extraterritorial jurisdiction of the United States, imposed new
compliance and due diligence obligations, created new crimes and penalties,
compelled the production of documents located both inside and outside the United
States, including those of foreign institutions that have a correspondent
relationship in the United States, and clarified the safe harbor from civil
liability to customers. In addition, the United States Treasury
Department issued regulations in cooperation with the federal banking agencies,
the Securities and Exchange Commission, the Commodity Futures Trading Commission
and the Department of Justice to require customer identification and
verification, expand the money-laundering program requirement to the major
financial services sectors, including insurance and unregistered investment
companies, such as hedge funds, and facilitate and permit the sharing of
information between law enforcement and financial institutions, as well as
among
financial institutions themselves. The United States Treasury
Department also has created the Treasury USA Patriot Act Task Force to work
with
other financial regulators, the regulated community, law enforcement and
consumers to continually improve the regulations. The Company has
established policies and procedures to ensure compliance with the USA Patriot
Act.
In
2002,
the Sarbanes-Oxley Act was signed into law. The Sarbanes-Oxley Act
represents a comprehensive revision of laws affecting corporate governance,
accounting obligations and corporate reporting. The Sarbanes-Oxley
Act is applicable to all companies with equity or debt securities registered
under the Securities Exchange Act of 1934, as amended. In particular, the
Sarbanes-Oxley Act established: (i) new requirements for audit committees,
including independence, expertise, and responsibilities; (ii) additional
responsibilities regarding financial statements for the Chief Executive Officer
and Chief Financial Officer of the reporting company; (iii) new standards for
auditors and regulation of audits; (iv) increased disclosure and reporting
obligations for the reporting company and its directors and executive officers;
and (v) new and increased civil and criminal penalties for violation of the
securities laws. The most significant expense associated with
compliance with the Sarbanes-Oxley Act has been the internal control
documentation and attestation requirements of Section 404 of the
Act. The Company’s incremental external costs associated with
complying with Section 404 of the Sarbanes-Oxley Act amounted to approximately
$832,000 in 2005, the initial year of required compliance, with the external
cost declining to approximately $200,000-$300,000 in each subsequent year as
the
Company gained efficiencies. The incremental costs relate to higher
external audit fees and outside consultant fees. These amounts do not
include the value of the significant internal resources devoted to
compliance.
Supervision
and Regulation of the Bank
Federal
banking regulations applicable to all depository financial institutions, among
other things: (i) provide federal bank regulatory agencies with powers to
prevent unsafe and unsound banking practices; (ii) restrict preferential loans
by banks to “insiders” of banks; (iii) require banks to keep information on
loans to major shareholders and executive officers and (iv) bar certain director
and officer interlocks between financial institutions.
As
a
state-chartered bank, the Bank is subject to the provisions of the North
Carolina banking statutes and to regulation by the Commissioner. The
Commissioner has a wide range of regulatory authority over the activities and
operations of the Bank, and the Commissioner’s staff conducts periodic
examinations of the Bank and its affiliates to ensure compliance with state
banking regulations. Among other things, the Commissioner regulates
the merger and consolidation of state-chartered banks, the payment of dividends,
loans to officers and directors, recordkeeping, types and amounts of loans
and
investments, and the establishment of branches. The Commissioner also
has cease and desist powers over state-chartered banks for violations of state
banking laws or regulations and for unsafe or unsound conduct that is likely
to
jeopardize the interest of depositors.
The
dividends that may be paid by the Bank to the Company are subject to legal
limitations under North Carolina law. In addition, regulatory
authorities may restrict dividends that may be paid by the Bank or the Company’s
other subsidiaries. The ability of the Company to pay dividends to
its shareholders is largely dependent on the dividends paid to the Company
by
the Bank.
The
Bank is a member of
the FDIC, which currently insures the deposits of member banks. For this
protection, each member bank pays a quarterly statutory assessment, based on
its
level of deposits, and is subject to the rules and regulations of the
FDIC. For 2005 and 2006, due to the funded status of the insurance
fund, the FDIC did not assess the Bank any insurance
premiums. However, in late 2006 the FDIC adopted new regulations
that resulted in all financial institutions, including the Bank, being assessed
deposit insurance premiums ranging from 5 cents to 43 cents per $100 of
assessable deposits beginning in 2007. The amount of the assessment within
that range is based on risk factors that have been established by the
FDIC. Based on the specified risk factors, for 2007, the Bank was
assigned an assessment rate of 5.1 cents per $100 of assessable deposits, which
resulted in annual insurance premium expense to the Bank of approximately
$932,000. However, as part of the 2006 legislation that created the
new assessment schedule, the rules provide credits to certain institutions
that
paid deposit insurance premiums in years prior to 1996. As a result,
the Bank received a one-time credit of $832,000 that was used to offset FDIC
insurance premiums in 2007, which left the Bank with an actual expense of
$100,000 in 2007. The Company will have no remaining credit in 2008,
and therefore, the Company expects that its deposit insurance premium expense
will be approximately $1 million in 2008.
In
addition to deposit insurance assessments, the FDIC is authorized to collect
assessments against insured deposits to be paid to the Finance Corporation
(FICO) to service FICO debt incurred in connection with the resolution of the
thrift industry crisis the 1980s. The FICO assessment rate is
adjusted quarterly. The average annual assessment rate in 2007 was
1.16 cents per $100 for insured deposits, which resulted in approximately
$205,000 in expense for the Bank for 2007. For the first quarter of
2008, the FICO assessment rate for such deposits will decrease to 1.14 cents
per
$100 of assessable deposits.
The
FDIC
also is authorized to approve conversions, mergers, consolidations and
assumptions of deposit liability transactions between insured banks and
uninsured banks or institutions, and to prevent capital or surplus diminution
in
such transactions where the resulting, continuing, or assumed bank is an insured
nonmember bank. In addition, the FDIC monitors the Bank’s compliance
with several banking statutes, such as the Depository Institution Management
Interlocks Act and the Community Reinvestment Act of 1977. The FDIC
also conducts periodic examinations of the Bank to assess its compliance with
banking laws and regulations, and it has the power to implement changes in
or
restrictions on a bank’s operations if it finds that a violation is occurring or
is threatened.
Neither
the Company nor the Bank can predict what other legislation might be enacted
or
what other regulations might be adopted, or if enacted or adopted, the effect
thereof on the Bank’s operations.
See
“Capital Resources and Shareholders’ Equity” under Item 7 below for a discussion
of regulatory capital requirements.
Available
Information
The
Company maintains a corporate Internet site at www.FirstBancorp.com, which
contains a link within the “Investor Relations” section of the site to each of
its filings with the Securities and Exchange Commission, including its annual
reports on Form 10-K, its quarterly reports on Form 10-Q, its current reports
on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934. These filings
are available, free of charge, as soon as reasonably practicable after the
Company electronically files such material with, or furnishes it to, the
Securities and Exchange Commission. These filings can also be
accessed at the Securities and Exchange Commission’s website located at
www.sec.gov. Information included on the Company’s Internet site is
not incorporated by reference into this annual report.
Item
1A. Risk Factors
We
are subject to interest rate risk, which could negatively impact
earnings.
Net
interest income is the most significant component of our
earnings. Our net interest income results from the difference between
the yields we earn on our interest-earning assets, primarily loans and
investments, and the rates that we pay on our interest-bearing liabilities,
primarily deposits and borrowings. When interest rates change, the
yields we earn on our interest-earning assets and the rates we pay on our
interest-bearing liabilities do not necessarily move in tandem with each other
because of the difference between their maturities and repricing
characteristics. This mismatch can negatively impact net interest
income if the margin between yields earned and rates paid narrows, as described
below. Interest rate environment changes can occur at any time and
are affected by many factors that are outside our control, including inflation,
recession, unemployment trends, the Federal Reserve’s monetary policy, domestic
and international disorder and instability in domestic and foreign financial
markets.
From
mid-2004 through mid-2007, interest rates were generally increasing, although
short-term interest rates rose faster than long-term interest
rates. In 2006, this resulted in short-term interest rates reaching
the same level as long-term interest rates, which is referred to as a “flat
yield curve.” A flat yield curve is unfavorable for us and many other
financial institutions because our funding costs are generally tied to
short-term interest rates, while our investment rates, in the form of securities
and loans, are more closely correlated to long-term interest
rates. Largely as a result of the flat yield curve, our net interest
margin declined throughout 2006. The flat yield curve prevailed for
most of 2007, which resulted in our net interest margin remaining at levels
lower than our historical average. However, the strong growth
that we achieved in loans and deposits in 2006 and 2007 more than offset the
negative impact of the flat yield curve, resulting in an increase in net
interest income in 2006 and 2007 in comparison to the immediately preceding
year.
Beginning
in late 2007 and continuing into early 2008, the Federal Reserve began reducing
interest rates in response to unfavorable economic conditions in the United
States economy. From September 2007 through February 2008, the
Federal Reserve reduced interest rates by 225 basis points. When
interest rates decline, most of our adjustable rate loans, which comprise
approximately 46% of all of our loans, reprice downwards immediately by the
full
amount of the rate cut. However, most of our interest expense relates
to customer certificates of deposit, which cannot be repriced at lower interest
rates until they mature. As a result, interest rate cuts negatively
impact our profitability, particularly in the
short-term. Additionally, given the sharp decline in interest rates,
the interest rates we pay on our deposit accounts either cannot be repriced
downwards by the full amount of the rate cut due to competitive pressures or
because the rate is so close to zero already.
For
the
reasons noted above and based on prevailing economic forecasts that the Federal
Reserve will reduce interest rates further, we expect our profitability to
be
negatively impacted during 2008 as a result of the declines in interest
rates.
We
face strong competition, which could hurt our business.
Our
business operations are centered primarily in North Carolina, southwestern
Virginia and northeastern South Carolina. Increased competition
within this region may result in reduced loan originations and
deposits. Ultimately, we may not be able to compete successfully
against current and future competitors. Many competitors offer the
types of loans and banking services that we offer. These competitors
include savings associations, national banks, regional banks and other community
banks. We also face competition from many other types of financial institutions,
including finance companies, internet banks, brokerage firms, insurance
companies, credit unions, mortgage banks and other financial
intermediaries.
We
compete in our market areas with several large interstate bank holding
companies, including three of the largest in the nation, which are headquartered
in North Carolina. These large competitors have substantially greater
resources than we have, including broader geographic markets, more banking
locations, higher lending limits and the ability to make greater use of
large-scale advertising and promotions. Also, these institutions,
particularly to the extent they are more diversified than we are, may be able
to
offer the same products and services that we offer at more competitive rates
and
prices.
We
also
compete in some of our market areas with many banks that have been organized
within the past ten years. These new banks often focus on loan and
deposit balance sheet growth, and not necessarily on earnings
profitability. This strategy often allows them to offer more
attractive terms on loans and deposits than we are able to offer because we
must
achieve an acceptable level of profitability.
Moore
County, which comprises a disproportionate share of our deposits, is a
particularly competitive market, with at least ten other financial institutions
having a physical presence, including both large interstate bank holding
companies and recently organized banks.
Our
allowance for loan losses may not be adequate to cover actual
losses.
Like
all
financial institutions, we maintain an allowance for loan losses to provide
for
probable losses caused by customer loan defaults. The allowance for
loan losses may not be adequate to cover actual loan losses, and in this case
additional and larger provisions for loan losses would be required to replenish
the allowance. Provisions for loan losses are a direct charge against
income.
We
establish the amount of the allowance for loan losses based on historical loss
rates, as well as estimates and assumptions about future
events. Because of the extensive use of estimates and assumptions,
our actual loan losses could differ, possibly significantly, from our
estimate. We believe that our allowance for loan losses is adequate
to provide for probable losses, but it is possible that the allowance for loan
losses will need to be increased for credit reasons or that regulators will
require us to increase this allowance. Either of these occurrences
could materially and adversely affect our earnings and
profitability.
We
are vulnerable to the economic conditions within the fairly small geographic
region in which we operate.
Like
many
businesses, our overall success is partially dependent on the economic
conditions in the marketplace where we operate. Our marketplace is
predominately concentrated in the central Piedmont region of North
Carolina. An economic downturn in this fairly small geographic region
that negatively impacted our customers would likely also have an adverse impact
on us. For example, an economic downturn could result in higher loan
default rates and reduce the value of real estate securing those loans, which
would likely increase our loan losses. At December 31, 2007,
approximately 86% of our loans were secured by real estate collateral, and
thus
a decrease in real estate values could have an adverse impact on our
operations.
We
are subject to extensive regulation, which could have an adverse effect on
our
operations.
We
are
subject to extensive regulation and supervision from the North Carolina
Commissioner of Banks, the FDIC, and the Federal Reserve Board. This
regulation and supervision is intended primarily for the protection of the
FDIC
insurance fund and our depositors and borrowers, rather than for holders of
our
common stock. Regulatory authorities have extensive discretion in
their supervisory and enforcement activities, including the imposition of
restrictions on operations, the classification of our assets and determination
of the level of the allowance for loan losses. Changes in the
regulations that apply to us, or changes in our compliance with regulations,
could have a material impact on our operations.
In
the normal course of business, we
process large volumes of transactions involving millions of
dollars. If internal controls fail to work as expected, if systems
are used in an unauthorized manner, or if employees subvert our internal
controls, we could experience significant losses.
We
process large volumes of transactions on a daily basis and are exposed to
numerous types of operational risk. Operational risk includes the
risk of fraud by persons inside or outside the company, the execution of
unauthorized transactions by employees, errors relating to transaction
processing and systems and breaches of the internal control system and
compliance requirements. This risk of loss also includes potential legal actions
that could arise as a result of an operational deficiency or as a result of
noncompliance with applicable regulatory standards.
We
establish and maintain systems of internal operational controls that provide
us
with timely and accurate information about our level of operational
risk. Although not foolproof, these systems have been designed to
manage operational risk at appropriate, cost-effective
levels. Procedures exist that are designed to ensure that policies
relating to conduct, ethics, and business practices are
followed. From time to time, losses from operational risk may occur,
including the effects of operational errors. We continually monitor
and improve our internal controls, data processing systems, and corporate-wide
processes and procedures, but there can be no assurance that future losses
will
not occur.
Item
1B. Unresolved Staff Comments
None
Item
2. Properties
The
main
offices of the Company and the Bank are owned by the Bank and are located in
a
three-story building in the central business district of Troy, North
Carolina. The building houses administrative and bank teller
facilities. The Bank’s Operations Division, including customer
accounting functions, offices and operations of Montgomery Data, and offices
for
loan operations, are housed in two one-story steel frame buildings approximately
one-half mile west of the main office. Both of these buildings are
owned by the Bank. The Company operates 70 bank
branches. The Company owns all its bank branch premises except 10
branch offices for which the land and buildings are leased and two branch
offices for which the land is leased but the building is owned. In
addition, the Company leases one loan production office. There are no
options to purchase or lease additional properties. The Company
considers its facilities adequate to meet current needs and believes that lease
renewals or replacement properties can be acquired as necessary to meet future
needs.
Item
3. Legal Proceedings
Various
legal proceedings may arise in the ordinary course of business and may be
pending or threatened against the Company and/or its
subsidiaries. However, neither the Company nor any of its
subsidiaries is involved in any pending legal proceedings that management
believes could have a material effect on the consolidated financial position
of
the Company.
There
were no tax shelter penalties assessed by the Internal Revenue Service against
the Company during the year ended December 31, 2007.
Item
4. Submission of Matters to a Vote of
Shareholders
No
matters were submitted to a vote of shareholders during the fourth quarter
of
2007.
PART
II
Item
5. Market for the Registrant’s Common
Stock, Related Shareholder Matters, and Issuer Purchases of Equity
Securities
The
Company’s common stock trades on The NASDAQ Global Select Market under the
symbol FBNC. Table 22, included in “Management’s Discussion and
Analysis” below, set forth the high and low market prices of the Company’s
common stock as traded by the brokerage firms that maintain a market in the
Company’s common stock and the dividends declared for the periods
indicated. It is the Company’s current intention to continue to pay
cash dividends in the future comparable to those in the recent
past. See “Business - Supervision and Regulation” above and Note 15
to the consolidated financial statements for a discussion of regulatory
restrictions on the Company’s payment of dividends. As of December
31, 2007, there were approximately 2,605 shareholders of record and another
3,600 shareholders whose stock is held in “street name.” There were
no sales of unregistered securities during the year ended December 31,
2007.
Additional
Information Regarding the Registrant’s Equity Compensation Plans
At
December 31, 2007, the Company had seven equity compensation
plans. Each of these plans is a stock option plan. Four of
the seven plans were assumed in corporate acquisitions. The Company’s
2007 Equity Plan is the only one of the seven plans for which new grants of
stock options are possible.
The
following table presents information as of December 31, 2007 regarding shares
of
the Company’s stock that may be issued pursuant to the Company’s stock options
plans. The table does not include information with respect to shares
subject to outstanding options granted under stock incentive plans assumed
by
the Company in connection with mergers and acquisitions of companies that
originally granted those options. Footnote (2) to the table indicates
the total number of shares of common stock issuable upon the exercise of options
under the assumed plans as of December 31, 2007, and the weighted average
exercise price of those options. No additional options may be granted
under those assumed plans. The Company has no warrants or stock
appreciation rights outstanding.
|
As
of December 31, 2007
|
||||||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Plan
category
|
Number
of securities to
be
issued upon exercise
of
outstanding options
|
Weighted-average
exercise
price of
outstanding
options
|
Number
of securities available for
future
issuance under equity
compensation
plans (excluding
securities
reflected in column (a))
|
|||||||||
|
Equity
compensation
plans
approved by
security
holders (1)
|
576,061 | $ | 17.74 | 1,155,500 | ||||||||
|
Equity
compensation
plans
not approved by
security
holders
|
─
|
─
|
─
|
|||||||||
|
Total
|
576,061 | $ | 17.74 | 1,155,500 | ||||||||
(1) Consists
of (A) the Company’s 2007 Equity Plan, which is currently in effect; (B) the
Company’s 2004 Stock Option Plan; and (C) the Company’s 1994 Stock Option Plan,
each of which was approved by shareholders.
The
table
does not include information for stock incentive plans that the Company assumed
in connection with mergers and acquisitions of the companies that originally
established those plans. As of December 31, 2007, a total of 31,921
shares of common stock were issuable upon exercise under those assumed
plans. The weighted average exercise price of those outstanding
options is $10.91 per share. No additional options may be granted
under those assumed plans.
Performance
Graph
The
performance graph shown below compares the Company’s cumulative total return to
shareholders for the five-year period commencing December 31, 2002 and ending
December 31, 2007, with the cumulative total return of the Russell 2000 Index
(reflecting overall stock market performance of small-capitalization companies),
and an index of banks with between $1 billion and $5 billion in assets, as
constructed by SNL Securities, LP (reflecting changes in banking industry
stocks). The graph and table assume that $100 was invested on
December 31, 2002 in each of the Company’s common stock, the Russell 2000 Index,
and the SNL Bank Index, and that all dividends were reinvested.
First
Bancorp
Comparison
of Five-Year Total Return Performances (1)
Five
Years Ending December 31, 2007
|
Total
Return Index Values (1)
December
31,
|
||||||||||||||||||||||||
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|||||||||||||||||||
|
First
Bancorp
|
$ | 100.00 | 137.25 | 184.43 | 141.42 | 158.53 | 142.33 | |||||||||||||||||
|
Russell
2000
|
100.00 | 147.25 | 174.24 | 182.18 | 215.64 | 212.26 | ||||||||||||||||||
|
SNL
Index-Banks between $1 billion and $5 billion
|
100.00 | 135.99 | 167.83 | 164.97 | 190.90 | 139.06 | ||||||||||||||||||
Notes:
|
(1)
|
Total
return indices were provided from an independent source, SNL Securities
LP, Charlottesville, Virginia, and assume initial investment of $100
on
December 31, 2002, reinvestment of dividends, and changes in market
values. Total return index numerical values used in this
example are for illustrative purposes
only.
|
Issuer
Purchases of Equity Securities
Pursuant
to authorizations by the Company’s board of directors, the Company has from time
to time repurchased shares of common stock in private transactions and in
open-market purchases. The most recent board authorization was
announced on July 30, 2004 and authorized the repurchase of 375,000 shares
of
the Company’s stock. During 2007, the Company repurchased a total of
27,348 shares of its own stock at an average price of $19.41 per
share. As shown below, the Company did not repurchase any shares of
its common stock during the three months ended December 31, 2007.
|
Issuer
Purchases of Equity Securities
|
||||||||||
|
Period
|
Total
Number of Shares
Purchased
(2)
|
Average
Price
Paid
per Share
|
Total
Number of Shares
Purchased
as Part of
Publicly
Announced
Plans
or Programs (1)
|
Maximum
Number of
Shares
that May Yet Be
Purchased
Under the Plans
or
Programs (1)
|
||||||
|
Month
#1 (October 1, 2007
to October 31, 2007)
|
─
|
─
|
─
|
234,667 | ||||||
|
Month
#2 (November 1, 2007
to November 30,
2007)
|
─
|
─
|
─
|
234,667 | ||||||
|
Month
#3 (December 1, 2007
to December 31,
2007)
|
─
|
─
|
─
|
234,667 | ||||||
|
Total
|
─
|
─
|
─
|
234,667 | ||||||
Footnotes
to the Above Table
|
(1)
|
All
shares available for repurchase are pursuant to publicly announced
share
repurchase authorizations. On July 30, 2004, the Company
announced that its Board of Directors had approved the repurchase
of
375,000 shares of the Company’s common stock. The repurchase
authorization does not have an expiration date. There are no
plans or programs the Company has determined to terminate prior to
expiration, or under which the Company does not intend to make further
purchases.
|
|
(2)
|
The
above table above does not include shares that were used by option
holders
to satisfy the exercise price of the call options issued by the Company
to
its employees and directors pursuant to the Company’s stock option plans.
There were no such exercises during the three months ended December
31,
2007.
|
Item
6. Selected Consolidated Financial
Data
Table
1
sets forth selected consolidated financial data for the Company.
Item
7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Management’s
Discussion and Analysis is intended to assist readers in understanding the
Company’s results of operations and changes in financial position for the past
three years. This review should be read in conjunction with the
consolidated financial statements and accompanying notes beginning on page
63 of
this report and the supplemental financial data contained in Tables 1 through
22
included with this discussion and analysis. All share data for
periods prior to November 15, 2004 has been adjusted from originally reported
amounts to reflect the 3-for-2 stock split paid on November 15,
2004.
CRITICAL
ACCOUNTING POLICIES
The
accounting principles followed by the Company and the methods of applying these
principles conform with accounting principles generally accepted in the United
States of America and with general practices followed by the banking
industry.
Certain
of these principles involve a significant amount of judgment and/or use of
estimates based on the Company’s best assumptions at the time of the
estimation. The Company has identified two policies as being more
sensitive in terms of judgments and estimates, taking into account their overall
potential impact to the Company’s consolidated financial statements – 1) the
allowance for loan losses and 2) intangible assets.
Allowance
for Loan Losses
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 consolidated 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 the estimation of losses for all
loans not considered to be impaired loans. First, loans that have
been risk graded by the Company as having more than “standard” risk but are not
considered to be impaired are assigned estimated loss percentages generally
accepted in the banking industry. Loans that are classified by the
Company as having normal credit risk are segregated by loan type, and estimated
loss percentages are assigned to each loan type, based on the historical losses,
current economic conditions, and operational conditions specific to each loan
type.
The
reserve estimated for impaired loans is then added to the reserve estimated
for
all other loans. This becomes the Company’s “allocated
allowance.” In addition to the allocated allowance derived from the
model, management also evaluates other data such as the ratio of the allowance
for loan losses to total loans, net loan growth information, nonperforming
asset
levels and trends in such data. Based on this additional analysis,
the Company may determine that an additional amount of allowance for loan losses
is necessary to reserve for probable losses. This additional amount,
if any, is the Company’s “unallocated allowance.” The sum of the
allocated allowance and the unallocated allowance is compared to the actual
allowance for loan losses recorded on the books of the Company, and any
adjustment necessary for the recorded allowance to equal the computed allowance
is recorded as a provision for loan losses. The provision for loan
losses is a direct charge to earnings in the period recorded.
Although
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 “Nonperforming Assets” and “Allowance for Loan Losses
and Loan Loss Experience” below.
Intangible
Assets
Due
to
the estimation process and the potential materiality of the amounts involved,
the Company has also identified the accounting for intangible assets as an
accounting policy critical to the Company’s consolidated financial
statements.
When
the
Company completes an acquisition transaction, the excess of the purchase price
over the amount by which the fair market value of assets acquired exceeds the
fair market value of liabilities assumed represents an intangible
asset. The Company must then determine the identifiable portions of
the intangible asset, with any remaining amount classified as
goodwill. Identifiable intangible assets associated with these
acquisitions are generally amortized over the estimated life of the related
asset, whereas goodwill is tested annually for impairment, but not
systematically amortized. Assuming no goodwill impairment, it is
beneficial to the Company’s future earnings to have a lower amount assigned to
identifiable intangible assets and higher amount of goodwill as opposed to
having a higher amount considered to be identifiable intangible assets and
a
lower amount classified as goodwill.
For
the
Company, the primary identifiable intangible asset typically recorded in
connection with a whole bank or bank branch acquisition is the value of the
core
deposit intangible, whereas when the Company acquires an insurance agency,
the
primary identifiable intangible asset is the value of the acquired customer
list. Determining the amount of identifiable intangible assets and
their average lives involves multiple assumptions and estimates and is typically
determined by performing a discounted cash flow analysis, which involves a
combination of any or all of the following assumptions: customer
attrition/runoff, alternative funding costs, deposit servicing costs, and
discount rates. The Company typically engages a third party
consultant to assist in each analysis. For the whole bank and bank
branch transactions recorded to date, the core deposit intangibles have
generally been estimated to have a life ranging from seven to ten years, with
an
accelerated rate of amortization. For insurance agency acquisitions,
the identifiable intangible assets related to the customer lists were determined
to have a life of ten to fifteen years, with amortization occurring on a
straight-line basis.
Subsequent
to the initial recording of the identifiable intangible assets and goodwill,
the
Company amortizes the identifiable intangible assets over their estimated
average lives, as discussed above. In addition, on at least an annual
basis, goodwill is evaluated for impairment by comparing the fair value of
the
Company’s reporting units to their related carrying value, including goodwill
(the Company’s community banking operation is its only material reporting
unit). At its last evaluation, the fair value of the Company’s
community banking operation exceeded its carrying value, including
goodwill. If the carrying value of a reporting unit were ever to
exceed its fair value, the Company would determine whether the implied fair
value of the goodwill, using a discounted cash flow analysis, exceeded the
carrying value of the goodwill. If the carrying value of the goodwill
exceeded the implied fair value of the goodwill, an impairment loss would be
recorded in an amount equal to that excess. Performing such a
discounted cash flow analysis would involve the significant use of estimates
and
assumptions.
The
Company reviews identifiable intangible assets for impairment whenever events
or
changes in circumstances indicate that the carrying value may not be
recoverable. The Company’s policy is that an impairment loss is
recognized, equal to the difference between the asset’s carrying amount and its
fair value, if the sum of the expected undiscounted future cash flows is less
than the carrying amount of the asset. Estimating future cash flows
involves the use of multiple estimates and assumptions, such as those listed
above.
MERGER
AND ACQUISITION ACTIVITY
The
Company did not complete any acquisitions in 2005 or 2007. The
Company completed two branch purchases in 2006, as follows:
(a) On
July 7, 2006, the Company completed the purchase of a branch of First Citizens
Bank located in Dublin, Virginia. The Company assumed the branch’s
$21 million in deposits and did not purchase any loans in this
transaction. The primary reason for this acquisition was to increase
the Company’s presence in southwestern Virginia, a market in which the Company
already had three branches with a large customer base. The Company
paid a deposit premium for the branch of approximately $994,000, all of which
is
deductible for tax purposes.
The
identifiable intangible asset associated with the fair value of the core deposit
base, as determined by an independent consulting firm, was determined to be
$269,000 and is being amortized as expense on an accelerated basis over an
eight
year period based on an amortization schedule provided by the consulting
firm. The weighted average amortization period is approximately 2.2
years. The remaining intangible asset of $725,000 has been classified
as goodwill, and thus is not being systematically amortized, but rather is
subject to an annual impairment test. The primary factor that
contributed to a purchase price that resulted in recognition of goodwill was
the
Company’s desire to expand its presence in southwestern Virginia with
facilities, operations and experienced staff in place. This branch’s
operations are included in the accompanying Consolidated Statements of Income
beginning on the acquisition date of July 7, 2006. Historical pro
forma information is not presented due to the immateriality of this transaction
to the overall consolidated financial statements of the Company.
(b) On
September 1, 2006, the Company completed the purchase of a branch of Bank of
the
Carolinas in Carthage, North Carolina. The Company assumed the
branch’s $24 million in deposits and $6 million in loans. The primary
reason for this acquisition was to increase the Company’s presence in Moore
County, a market in which the Company already had ten branches with a large
customer base. The Company paid a deposit premium for the branch of
approximately $1,768,000, all of which is deductible for tax
purposes. The identifiable intangible asset associated with the fair
value of the core deposit base, as determined by an independent consulting
firm,
was determined to be approximately $235,000 and is being amortized as expense
on
an accelerated basis over a thirteen year period based on an amortization
schedule provided by the consulting firm. The weighted-average
amortization period is approximately 3.2 years. The remaining
intangible asset of $1,533,000 has been classified as goodwill, and thus is
not
being systematically amortized, but rather is subject to an annual impairment
test. The primary factor that contributed to a purchase price that
resulted in recognition of goodwill was the Company’s desire to expand in an
existing high-growth market with facilities, operations and experienced staff
in
place. This branch’s operations are included in the accompanying
Consolidated Statements of Income beginning on the acquisition date of September
1, 2006. Historical pro forma information is not presented due to the
immateriality of this transaction to the overall consolidated financial
statements of the Company.
At
December 31, 2007, the Company had one pending acquisition. On July
12, 2007, the Company announced that it had reached an agreement to acquire
Great Pee Dee Bancorp, Inc. (“Great Pee Dee”), the holding company for a
community bank headquartered in Cheraw, South Carolina with three branches
and
total assets of $222 million. Under the terms of the agreement and
subject to possible adjustment, each share of Great Pee Dee common stock issued
and outstanding on the merger date will be converted into and exchanged for
the
right to receive 1.15 shares of the Company’s common
stock. Additional information is available in the registration
statement, which includes a proxy statement/prospectus, concerning the proposed
merger that was filed with the SEC on February 5, 2008. The Company
anticipates the completion of this merger to occur in April 2008.
See
Note
2 and Note 6 to the consolidated financial statements for additional information
regarding intangible assets.
ANALYSIS
OF RESULTS OF OPERATIONS
Net
interest income, the “spread” between earnings on interest-earning assets and
the interest paid on interest-bearing liabilities, constitutes the largest
source of the Company’s earnings. Other factors that significantly
affect operating results are the provision for loan losses, noninterest income
such as service fees and noninterest expenses such as salaries, occupancy
expense, equipment expense and other overhead costs, as well as the effects
of
income taxes.
2007
Compared to 2006
Overview
- Net income was 13% higher in 2007 than in 2006. In 2006, a merchant
credit card loss totaling $1.9 million, or $0.08 per diluted share (after-tax)
negatively impacted earnings.
The
positive impact on earnings due to high growth in loans and deposits during
2007
was partially offset by a lower net interest margin and higher expenses that
were associated with the Company’s growth.
|
Financial
Highlights
|
||||||||||||
|
($
in thousands except per share data)
|
2007
|
2006
|
Change
|
|||||||||
|
Earnings
|
||||||||||||
|
Net
interest income
|
$ | 79,284 | 74,536 | 6.4 | % | |||||||
|
Provision
for loan losses
|
5,217 | 4,923 | 6.0 | % | ||||||||
|
Noninterest
income
|
18,473 | 14,310 | 29.1 | % | ||||||||
|
Noninterest
expenses
|
57,580 | 53,198 | 8.2 | % | ||||||||
|
Income
before income taxes
|
34,960 | 30,725 | 13.8 | % | ||||||||
|
Income
tax expense
|
13,150 | 11,423 | 15.1 | % | ||||||||
|
Net
income
|
$ | 21,810 | 19,302 | 13.0 | % | |||||||
|
Net
income per share
|
||||||||||||
|
Basic
|
$ | 1.52 | 1.35 | 12.6 | % | |||||||
|
Diluted
|
1.51 | 1.34 | 12.7 | % | ||||||||
|
At
Year End
|
||||||||||||
|
Assets
|
$ | 2,317,249 | 2,136,624 | 8.5 | % | |||||||
|
Loans
|
1,894,295 | 1,740,396 | 8.8 | % | ||||||||
|
Deposits
|
1,838,277 | 1,695,679 | 8.4 | % | ||||||||
|
Ratios
|
||||||||||||
|
Return
on average assets
|
1.02 | % | 1.00 | % | ||||||||
|
Return
on average equity
|
12.77 | % | 11.83 | % | ||||||||
|
Net
interest margin (taxable-equivalent)
|
4.00 | % | 4.18 | % | ||||||||
The
following is a more detailed discussion of the Company’s results for 2007
compared to 2006:
Net
income for the year ended December 31, 2007 amounted to $21,810,000, or $1.51
per diluted share, compared to net income of $19,302,000, or $1.34 per diluted
share, reported for 2006. Results for 2006 include the write-off loss
during the second and third quarters of a merchant credit card receivable
amounting to $1,900,000, which had an after-tax impact of $1,149,000, or $0.08
per diluted share, on the Company’s earnings for 2006.
The
Company experienced strong balance sheet growth in 2007. Total assets
at December 31, 2007 amounted to $2.32 billion, 8.5% higher than a year
earlier. Total loans at December 31, 2007 amounted to $1.89 billion,
an increase of $154 million, or 8.8%, from a year earlier. Total
deposits amounted to $1.84 billion at December 31, 2007, an increase of $143
million, or 8.4%. All of the loan and deposit growth was
internally-generated, as there were no acquisitions that were completed during
the year. Total shareholders’ equity amounted to $174.1 million at
December 31, 2007, a 7.0% increase from a year earlier.
The
growth in loans and deposits was the primary reason for the increase in the
Company’s net interest income when comparing 2007 to 2006. Net
interest income for the year ended December 31, 2007 amounted to $79.3 million,
a 6.4% increase over the $74.5 million recorded in 2006.
The
impact of the growth in loans and deposits on the Company’s net interest income
was partially offset by a decline in the Company’s net interest margin
(tax-equivalent net interest income divided by average earning
assets). The Company’s net interest margin for the year ended
December 31, 2007 was 4.00% compared to 4.18% for 2006.
For
the
first three quarters of 2007, the lower net interest margins realized in 2007
compared to 2006 were caused primarily by deposit rates paid by the Company
rising by more than loan and investment yields, which
was
associated with the flat interest rate yield curve that was prevailing in the
marketplace. The Company was also negatively impacted during that
period by customers shifting their funds from low cost deposits to higher cost
deposits as rates rose. In the fourth quarter of 2007, the Company’s
net interest margin was negatively impacted by the Federal Reserve lowering
interest rates by a total of 100 basis points during the last four months of
the
year. When interest rates are lowered, the Company’s net interest
margin declines, at
least temporarily, as most of the Company’s adjustable rate loans reprice
downward immediately, while rates on the Company’s customer time deposits are
fixed, and thus do not adjust downward until they mature.
The
Company’s provision for loan losses did not vary significantly when comparing
2007 to 2006. The provision for loan losses for the year ended
December 31, 2007 was $5,217,000 compared to $4,923,000 for
2006. Asset quality changes and loan growth are the most significant
factors that impact the Company’s provision for loan
losses. Generally in 2007, the impact of unfavorable asset quality
trends on the Company’s provision for loan losses was largely offset by lower
loan growth experienced during the year compared to 2006. The
Company’s net charge-offs to average loans ratio was 0.16% for the year ended
December 31, 2007 compared to 0.11% in 2006, while the ratio of nonperforming
assets to total assets was 0.47% at December 31, 2007 compared to 0.39% a year
earlier. Net internal loan growth for 2007 was $154 million compared
to
$252 million for 2006.
Noninterest
income for the year ended December 31, 2007 amounted to $18,473,000, an increase
of 29.1% from the $14,310,000 recorded in 2006. The positive variance
in noninterest income for 2007 compared to 2006 was significantly impacted
by a
$1.9 million merchant credit card loss that the Company reserved for in the
second and third quarters of 2006. Another reason for the increase in
2007 compared to 2006 was the Company’s expansion of its overdraft protection
program in the fourth quarter of 2007 to include overdraft protection for debit
card purchases and ATM withdrawals. Previously the overdraft
protection program, in which the Company charges a fee for honoring payments
on
overdrawn accounts, only applied to written checks. This change
resulted in an increase in service charges on deposit accounts.
Noninterest
expenses for 2007 amounted to $57.6 million, an 8.2% increase from the $53.2
million recorded in 2006. The increase in noninterest expenses is
primarily attributable to costs associated with the Company’s overall growth in
loans, deposits and branch network. Since October 1, 2006, the
Company has opened six full service bank branches. Although
noninterest expenses rose in 2007, the lower rate of increase compared to 2006
was partially due to the implementation of cost control recommendations that
arose from a performance improvement consulting project that was completed
in
the first quarter of 2007. In addition, since the completion of the
consulting project, the Company has taken further measures to contain costs
and
improve efficiency. As a result, the Company’s number of full-time
equivalent employees decreased by six during 2007. For the first
time in many years, the Company began to again record FDIC insurance expense
in
the fourth quarter of 2007. This was as a result of the FDIC recently
beginning to charge for FDIC insurance again in order to replenish its
reserves. The Company recorded $100,000 in FDIC insurance expense in
the fourth quarter of 2007.
The
Company’s efficiency ratio (noninterest expense divided by the sum of
tax-equivalent net interest income plus noninterest income – for this measure, a
lower ratio is more favorable) was 58.57% for the year ended December 31, 2007
compared to 59.54% for 2006.
During
both 2006 and 2007, the Company’s effective tax rate was approximately
37%.
2006
Compared to 2005
Overview
- Net income was 20.0% higher in 2006 than in 2005. Both years had
unusual items of expense that negatively impacted earnings. In 2006,
a merchant credit card loss totaling $1.9 million, or $0.08 per diluted share
(after-tax) negatively impacted earnings, while in 2005, the Company recorded
a
tax loss related to an unfavorable state tax audit amounting to $4.3 million,
or
$0.30 per diluted share. Excluding those items, net income would have
been essentially unchanged in 2006 compared to 2005. The positive
impact on earnings of high growth in loans and deposits during 2006 was offset
by a lower net interest margin and higher expenses that were associated with
the
Company’s growth.
|
Financial
Highlights
|
||||||||||||
|
($
in thousands except per share data)
|
2006
|
2005
|
Change
|
|||||||||
|
Earnings
|
||||||||||||
|
Net
interest income
|
$ | 74,536 | 68,591 | 8.7 | % | |||||||
|
Provision
for loan losses
|
4,923 | 3,040 | 61.9 | % | ||||||||
|
Noninterest
income
|
14,310 | 15,004 | – 4.6 | % | ||||||||
|
Noninterest
expenses
|
53,198 | 47,636 | 11.7 | % | ||||||||
|
Income
before income taxes
|
30,725 | 32,919 | – 6.7 | % | ||||||||
|
Income
tax expense
|
11,423 | 16,829 | – 32.1 | % | ||||||||
|
Net
income
|
$ | 19,302 | 16,090 | 20.0 | % | |||||||
|
Net
income per share
|
||||||||||||
|
Basic
|
$ | 1.35 | 1.14 | 18.4 | % | |||||||
|
Diluted
|
1.34 | 1.12 | 19.6 | % | ||||||||
|
At
Year End
|
||||||||||||
|
Assets
|
$ | 2,136,624 | 1,801,050 | 18.6 | % | |||||||
|
Loans
|
1,740,396 | 1,482,611 | 17.4 | % | ||||||||
|
Deposits
|
1,695,679 | 1,494,577 | 13.5 | % | ||||||||
|
Ratios
|
||||||||||||
|
Return
on average assets
|
1.00 | % | 0.94 | % | ||||||||
|
Return
on average equity
|
11.83 | % | 10.39 | % | ||||||||
|
Net
interest margin (taxable-equivalent)
|
4.18 | % | 4.33 | % | ||||||||
The
following is a more detailed discussion of the Company’s results for 2006
compared to 2005:
Net
income for the year ended December 31, 2006 amounted to $19,302,000, or $1.34
per diluted share, compared to net income of $16,090,000, or $1.12 per diluted
share, reported for 2005. Results for 2006 include the write-off loss
during the second and third quarters of a merchant credit card receivable
amounting to $1,900,000, which had an after-tax impact of $1,149,000, or $0.08
per diluted share, on the Company’s earnings for 2006. Results for
2005 include a loss accrual related to income tax exposure amounting to
$4,338,000, or $0.30 per diluted share. See additional discussion in
the section entitled “Income Taxes” below.
The
Company experienced strong balance sheet growth in 2006. Total assets
at December 31, 2006 amounted to $2.14 billion, 18.6% higher than a year
earlier. Total loans at December 31, 2006 amounted to $1.74 billion,
an increase of $258 million, or 17.4%, from a year earlier. Total
deposits amounted to $1.70 billion at December 31, 2006, an increase of $201
million, or 13.5%, from a year earlier. Virtually all of the loan
growth was internally-generated, whereas approximately $44 million of the
deposit growth was the result of two branch acquisitions that were completed
in
the third quarter of 2006. Total shareholders’ equity amounted to
$162.7 million at December 31, 2006, a 4.5% increase from a year
earlier. Shareholders’ equity was negatively impacted at December 31,
2006 by the Company’s adoption of new pension plan accounting rules (FASB
Statement 158) that resulted in an increase in pension liabilities of $6.0
million, an increase in assets (primarily deferred tax assets) in the amount
of
$2.2 million, and a reduction to shareholders’ equity of $3.8
million.
The
growth in loans and
deposits was the primary reason for increases in the Company’s net interest
income when comparing 2006 to 2005. Net interest income for the
year
ended December 31, 2006
amounted to $74.5 million, an 8.7% increase over the $68.6 million recorded
in
2005. The
impact of
the growth in loans and deposits on the Company’s net interest income was
partially offset by declines in the Company’s net interest margin
(tax-equivalent net interest income divided by average earning
assets). The Company’s net interest margin for the year ended
December 31, 2006 was 4.18% compared to 4.33% for
2005.
The
compressing margin
was primarily due to 1) deposit rates paid by the Company rising by
more
than loan and investment yields, which was largely associated with the flat
interest rate yield curve prevailing in the marketplace, and 2) the negative
impact of the Company having more of its overall funding occurring in its
highest cost funding sources, which is a result of a need to fund high loan
growth, as well as customers shifting their funds from low cost deposits to
higher cost deposits as interest rates have risen.
The
Company’s provision for loan losses for 2006 was $4,923,000, an increase of
61.9% over the $3,040,000 recorded in 2005. The higher loss
provision was primarily the result of higher loan growth realized in 2006
compared to 2005, and to a lesser extent an increase in the level of the
Company’s nonperforming assets. Net internal loan growth was $252
million for 2006 compared to $116 million for 2005.
The
Company’s ratio of net
charge-offs to average loans was 11 basis points in 2006 compared to 14 basis
points in 2005. The Company’s level of nonperforming assets amounted
to $8.4 million at December 31, 2006 compared to $3.1
million at December 31,
2005. This increase was primarily the result of the December 31, 2005
level of nonperforming assets being unusually low. The low level of
nonperforming assets was the result of several of the Company's largest
nonaccrual loan relationships being reduced to zero in the fourth quarter of
2005, either as a result of cash received or the loan being
charged-off. This resulted in the amount of the Company's
nonperforming loans at December 31, 2005 reaching its lowest level in over
five
years. In 2006, the Company experienced more typical activity within
its nonaccrual loan category, and the amount of nonaccrual loans increased
to a
more normal level. The Company’s nonperforming assets to total assets
ratio was 0.39% at December 31, 2006 compared to 0.17% at December 31,
2005. This ratio averaged 0.34% for each of the five year ends from
2000-2004.
Noninterest
income for 2006 amounted to $14.3 million, a decrease of 4.6% from the $15.0
million recorded in 2005. The decrease in the 2006 amount was caused
by a $1.9 million write-off loss of a merchant credit card
receivable. See the section entitled “Noninterest Income” below for a
discussion of this matter.
Noninterest
expenses for 2006 amounted to $53.2 million, an 11.7% increase from the $47.6
million recorded in 2005. The increase in noninterest expenses is
primarily attributable to costs associated with the Company’s overall growth in
loans, deposits and branch network. From January 1, 2005 to December
31, 2006, the Company’s loans and deposits increased by 27% and 22%,
respectively, and the Company’s branch network increased from 59 branches to 68
branches. Additionally, in accordance with the new accounting
requirements regarding stock-based compensation (FASB Statement 123(R)) that
were effective on January 1, 2006, the Company recorded stock option expense
of
$325,000 ($246,000 after-tax effect) for the year ended December 31,
2006. As permitted by previous accounting standards, no stock option
expense was recorded by the Company in 2005, or any prior periods.
The
Company’s effective tax rate was 37% for the year ended December 31,
2006. As noted above, the Company’s income tax expense in 2005 was
significantly impacted by a tax loss accrual recorded in the third quarter
of
2005 and a partial reversal of this accrual recorded in the fourth quarter
of
2005. See additional discussion in the section entitled “Income
Taxes” below.
Net
Interest Income
Net
interest income on a reported basis amounted to $79,284,000 in 2007, $74,536,000
in 2006, and $68,591,000 in 2005. For internal purposes and in the
discussion that follows, the Company evaluates its net interest income on a
tax-equivalent basis by adding the tax benefit realized from tax-exempt
securities to reported interest income. Net interest income on a
tax-equivalent basis amounted to $79,838,000 in 2007, $75,037,000 in 2006,
and
$69,039,000 in 2005. Management believes that analysis of net
interest income on a tax-equivalent basis is useful and appropriate because
it
allows a comparison of net interest amounts in different periods without taking
into account the different mix of taxable versus non-taxable investments that
may have existed during those periods. The following is a
reconciliation of reported net interest income to tax-equivalent net interest
income.
|
Year
ended December 31,
|
||||||||||||
|
($
in thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Net
interest income, as reported
|
$ | 79,284 | 74,536 | 68,591 | ||||||||
|
Tax-equivalent
adjustment
|
554 | 501 | 448 | |||||||||
|
Net
interest income, tax-equivalent
|
$ | 79,838 | 75,037 | 69,039 | ||||||||
Table
2
analyzes net interest income on a tax-equivalent basis. The Company’s
net interest income on a taxable-equivalent basis increased by 6.4% in 2007
and
8.7% in 2006. 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 (tax-equivalent net interest
income divided by average interest-earning assets). In 2006 and 2007,
growth in loans and deposits increased net interest income, the positive effects
of which were partially offset by lower net interest margins realized in each
year.
The
Company’s loans outstanding grew by 8.8% and 17.4% in 2007 and 2006,
respectively, while deposits increased 8.4% in 2007 and 13.5% in
2006. As illustrated in Table 3, in both 2007 and 2006, this growth
positively impacted net interest income. In both years, the positive
impact on net interest income of growth in interest-earning assets, primarily
loans, more than offset the higher interest expense associated with funding
the
asset growth. In 2007, growth in interest-earning asset volumes
resulted in an increase in interest income of $15.1 million, while growth in
interest-bearing liabilities only resulted in $8.0 million in higher interest
expense. In 2006, growth in interest-earning asset volumes resulted
in an increase in interest income of $14.1 million, while growth in
interest-bearing liabilities only resulted in $7.2 million in higher interest
expense. As a result, balance sheet growth resulted in an increase in
tax-equivalent net interest income of $7.0 million in 2007 and $6.9 million
in
2006. For analysis regarding the nature of the Company’s loan and
deposit growth, see “Analysis of Financial Condition and Changes in Financial
Condition” below.
Table
3
also illustrates the impact that changes in the rates that the Company
earned/paid had on the Company’s net interest income in 2006 and
2007. During each of 2006 and 2007, the prevailing interest rate
environment was, on average, generally higher than that of the immediately
preceding year. In 2006, the higher interest rates resulted in
an increase in interest expense of $14.6 million compared to an increase in
interest income of only $13.7 million, which resulted in a reduction in net
interest income of $0.9 million. In 2007, the higher interest rates
resulted in an increase in interest expense of $6.9 million compared to an
increase in interest income of only $4.7 million, which resulted in a reduction
in net interest income of $2.2 million.
The
Company measures the spread between the yield on its earning assets and the
cost
of its funding primarily in terms of the ratio entitled “net interest margin”
which is defined as tax-equivalent net interest income divided by average
earning assets. The Company’s net interest margin decreased in both
2007 and 2006, amounting to 4.00% in 2007, 4.18% in 2006, and 4.33% in
2005.
For
2006
and most of 2007, the Company’s net interest margin was negatively impacted by
the effects of short-term interest rates prevailing in the market place rising
by more than long-term interest rates following the series of Federal Reserve
interest rate increases that occurred throughout 2005 and the first half of
2006
- with short-term interest rates being approximately the same as long-term
interest rates for much of 2006 and 2007 (commonly referred to as a “flat yield
curve”). A flat yield curve is unfavorable for the Company because
the Company’s funding costs are generally tied to short-term interest rates,
while its investment rates, in the form of securities and loans, are more
closely correlated to longer-term interest rates. When short-term and
long-term interest rates converge, the interest rate spread the Company is
able
to earn is reduced and the Company’s net interest margin and profitability are
unfavorably impacted. Due largely to the progressive flattening of
the yield curve that occurred throughout 2006, the Company’s net interest margin
decreased throughout 2006 before stabilizing at the lower levels in 2007 as
a
result of the relatively stable interest rate environment in effect for most
of
2007.
In
addition to the effects of the flat yield curve, the Company’s net interest
margin has been negatively impacted by its deposit growth being concentrated
in
deposit account types that carry high interest rates. Specifically,
the Company has experienced disproportionately high growth rates in its premium
money market account and its time deposits greater than $100,000, two of the
Company’s highest rate funding sources. The disproportionate growth
in these accounts has been due to the Company offering high promotional rates
in
order to help fund loan growth, as well as customers shifting funds from low
rate deposit accounts to higher rate deposit accounts as interest rates
generally rose in 2006 and during most of 2007.
The
Company’s net interest margin has also been negatively impacted by the intense
competition in the markets in which it operates. Competition for
deposits, in particular, is particularly fierce, and requires the Company to
pay
relatively higher interest rates on deposit accounts than it historically
has.
For
these
reasons, the yields the Company realized on its interest-earning assets
increased by a smaller amount than did the rates the Company paid on its
interest-bearing liabilities during both 2006 and 2007. As derived
from Table 2, in comparing 2007 to 2006, the yield realized on average earning
assets increased by only 25 basis points (from 7.23% to 7.48%) while the average
rate paid on interest-bearing liabilities, increased by 48 basis points (from
3.56% to 4.04%). In 2006, the yield realized on average earning
assets, increased by only 84 basis points (from 6.39% to 7.23%) while the
average rate paid on interest-bearing liabilities, increased by 114 basis points
(from 2.42% to 3.56%). The differences in these increases in each
year negatively impacted the Company’s net interest margin.
Also,
as
can be derived from Table 2, during 2007, the Company’s highest cost funding
sources (time deposits, borrowings and securities sold under agreements to
repurchase) comprised 60.9% of its total funding (total interest-bearing
liabilities plus non-interest bearing deposits), a slight increase from 60.5%
in
2006, which in turn was an increase from 57.6% in 2005. As noted
above, this shift to higher cost funding sources has been partially a result
of
the need to fund high loan growth, as well as the fact that some customers
have
shifted their funds from low cost deposits to higher cost deposits as interest
rates have risen. In addition to the increases in balances
experienced in high cost funding sources, the largest category of “low-cost”
interest-bearing deposits – Money Market deposits – has recently experienced
more growth and rate sensitivity than it has historically. The
average balance of Money Market deposits grew 20% in 2006 and 30% in 2007,
while
the increase in the average interest rate paid on this category of deposits
rose
more than any other funding source during both years - 60 basis points in 2007
(from 2.71% to 3.31%) and 131 basis points in 2006 (from 1.40% to
2.71%). These increases are almost entirely due to the Company’s
introduction in late 2005 of a high interest rate money market account (4.25%
for most of 2006 and 2007) that was created to compete with area
competitors. Average balances in the other lower cost deposit
categories experienced decreases of $1 million in 2007 and $17 million in
2006. The Company believes that a large portion of the decreases in
the lower cost accounts in 2006 and 2007 was the result of shifts to higher
rate
accounts.
From
2002
to 2004, the Company gradually positioned itself to be protected in a rising
interest rate environment by originating more variable rate loans than fixed
rate loans – a rising interest rate environment was forecasted by most
economists after the steeply declining interest rate environment that began
in
2001 and concluded with interest rates being at their lowest levels in 40 years
during 2004. This initiative resulted in the Company’s loan mix
changing from 57% fixed rate and 43% variable rate at December 31, 2001 to
60%
variable rate and 40% fixed rate at December 31, 2004. When
considered with the rest of the Company’s assets and liabilities however, this
60% variable / 40% fixed mix of loans contributed to heightened interest rate
risk exposure in the event of a declining interest rate
environment. Accordingly, beginning in 2005 the Company began
originating more fixed rate loans than variable rate loans to lessen this risk,
which resulted in the Company’s fixed/variable mix shifting to 51% variable rate
and 49% fixed rate at December 31, 2006 and 46% variable rate and 54% fixed
rate
at December 31, 2007.
See
additional information regarding net interest income in the section entitled
“Interest Rate Risk.”
Provision
for Loan Losses
The
provision for loan losses charged to operations is an amount sufficient to
bring
the allowance for loan losses to an estimated balance considered appropriate
to
absorb probable losses inherent in the loan portfolio. Management’s
determination of the adequacy of the allowance is based on the level of loan
growth, an evaluation of the portfolio, current economic conditions, historical
loan loss experience and other risk factors.
The
provision for loan
losses recorded by the Company amounted to $5,217,000 in 2007, compared to
$4,923,000 in 2006 and $3,040,000 in 2005. Asset quality
changes and loan growth are the most significant factors that impact the
Company’s provision for loan losses. Generally in 2007, the impact of
unfavorable asset quality trends on the Company’s provision for loan losses was
largely offset by lower loan growth experienced during the year compared to
2006. The Company’s net charge-offs to average loans ratio was 0.16%
for the year ended December 31, 2007 compared to 0.11% in 2006, while the ratio
of nonperforming assets to total assets was 0.47% at December 31, 2007 compared
to 0.39% a year earlier. Net internal loan growth was lower in 2007
than it was 2006, amounting to $154 million in
2007
compared to $252 million in 2006. The increase
in the
provision for loan losses in 2006 from 2005 was primarily the result of
higher loan growth realized in 2006 compared to 2005, and to a lesser extent
an
increase in the level of the Company’s nonperforming assets. The
Company’s net internal loan growth was $252 million in 2006 compared to $116
million in 2005, while total nonperforming assets amounted to $8.4 million
at
December 31, 2006, compared to $3.1 million at December 31, 2005.
See
the
section entitled “Allowance for Loan Losses and Loan Loss Experience” below for
a more detailed discussion of the allowance for loan losses. The
allowance is monitored and analyzed regularly in conjunction with the Company’s
loan analysis and grading program, and adjustments are made to maintain an
adequate allowance for loan losses.
Noninterest
Income
Noninterest
income recorded by the Company amounted to $18,473,000 in 2007, $14,310,000
in
2006, and $15,004,000 in 2005.
As
shown
in Table 4, core noninterest income, which excludes gains and losses from sales
of securities, loans, and other assets, amounted to $17,996,000 in 2007, an
11.1% increase from $16,204,000 in 2006. The 2006 core noninterest
income of $16,204,000 was 6.2% higher than the $15,262,000 recorded in
2005.
See
Table
4 and the following discussion for an understanding of the components of
noninterest income.
Service
charges on deposit accounts in 2007 amounted to $9,988,000, an 11.4% increase
compared to $8,968,000 recorded in 2006. The $8,968,000 recorded in
2006 was 5.0% more than the 2005 amount of $8,537,000. The primary
reason for the increase in 2007 compared to 2006 was the Company’s expansion of
its overdraft protection program in the fourth quarter of 2007 to include
overdraft protection for debit card purchases and ATM
withdrawals. Previously the overdraft protection program, in which
the Company charges a fee for honoring payments on overdrawn accounts, only
applied to written checks. The 5.0% increase in service charges on
deposit accounts in 2006 was primarily associated with the Company’s overall
growth.
Other
service charges, commissions and fees amounted to $5,158,000 in 2007, a 12.7%
increase from the $4,578,000 earned in 2006. The 2006 amount of
$4,578,000 was 15.5% higher than the $3,963,000 recorded in
2005. This category of noninterest income includes items such as
electronic payment processing revenue (which includes fees related to credit
card transactions by merchants and customers and fees earned from debit card
transactions), ATM charges, safety deposit box rentals, fees from sales of
personalized checks, and check cashing fees. This category of income
grew in 2006 and 2007 primarily because of increases in these activity-related
fee
services
resulting from the increased acceptance and popularity of debit cards, special
credit and debit card promotions that increased their use, and the overall
growth in the Company’s total customer base, including growth achieved from
corporate acquisitions. The gross fees that the Company earned from
electronic payment processing revenue amounted to $3,514,000 in 2007, a
$544,000, or 18.3%, increase from the $2,970,000 earned in 2006. The
2006 amount was $745,000, or 33.5%, higher than the $2,225,000 earned in
2005.
Fees
from
presold mortgages amounted to $1,135,000 in 2007, $1,062,000 in 2006, and
$1,176,000 in 2005. Fees from presold mortgages peaked in 2003
($2,327,000 recorded in 2003) as a result of a high level of mortgage loan
refinancings brought on by low mortgage interest rates. Since that
time, the absence of the initial wave of refinancing activity and higher
adjustable rate mortgage rates have resulted in the Company’s fees from presold
mortgages decreasing from the 2003 level and averaging approximately
$200,000-$300,000 per quarter over each of the past three years.
Commissions
from sales of insurance and financial products have grown steadily over the
past
three years – amounting to $1,511,000 in 2007, $1,434,000 in 2006, and
$1,307,000 in 2005. This line item includes commissions the Company
receives from three sources - 1) sales of credit life insurance associated
with
new loans, 2) commissions from the sales of investment, annuity, and long-term
care insurance products, and 3) commissions from the sale of property and
casualty insurance. The following table presents the contribution of
each of the three sources to the total amount recognized in this line
item:
|
($
in thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Commissions
earned from:
|
||||||||||||
|
Sales
of credit life insurance
|
$ | 304 | 337 | 308 | ||||||||
|
Sales
of investments, annuities, and long term care insurance
|
387 | 266 | 193 | |||||||||
|
Sales
of property and casualty insurance
|
820 | 831 | 806 | |||||||||
|
Total
|
$ | 1,511 | 1,434 | 1,307 | ||||||||
Data
processing fees amounted to $204,000 in 2007, $162,000 in 2006, and $279,000
in
2005. As noted earlier, Montgomery Data makes its excess data
processing capabilities available to area financial institutions for a
fee. The decline in this revenue in 2006 was the result of the loss
of a customer, which left Montgomery Data with two outside customers as of
December 31, 2006 and 2007. Montgomery Data intends to continue to
market this service to area banks, but does not currently have any near-term
prospects for additional business.
Noninterest
income not considered to be “core” amounted to a net gain of $477,000 in 2007, a
net loss of $1,894,000 in 2006, and a net loss of $258,000 in
2005. In Table 4, the line item entitled “other gains (losses), net”
totaling $2,099,000 in 2006 includes a loss of $1,900,000 related to the
write-off loss of a merchant credit card receivable. During 2006, the
Company discovered that it had liability associated with a commercial merchant
client that sold furniture over the internet. The furniture store did
not deliver furniture that its customers had ordered and paid for, and was
unable to immediately refund their credit card purchases. As the
furniture store’s credit card processor, the Company became contractually liable
for the amounts that were required to be refunded. During the second
quarter of 2006, the
furniture store changed management, stated its intention to repay the Company
for all funds advanced, and began making repayments to the
Company. At June 30, 2006, the Company recorded a $230,000 loss to
reserve for this situation. During the third quarter of 2006, the
furniture store’s financial condition deteriorated
significantly. Accordingly, the Company determined that it should
fully reserve for the entire $1.9 million in estimated
exposure
associated with
this situation, which resulted in recording an additional
loss of
$1,670,000. During
the third quarter
of 2006, the Company completed a review of all merchant credit card customers
and concluded
that this situation appeared to be
an isolated event
that was
not likely to
recur. During
2007,
the Company determined that its ultimate exposure to this loss was approximately
$190,000 less than the original estimated total loss of $1.9 million that had
been reserved for in 2006. Accordingly, the Company reversed $190,000
of this loss during 2007, which is included in “other gains (losses),
net.”
Partially
as a result of the aforementioned loss, the Company terminated its contract
with
its previous credit card processor in 2007 and entered into a new contract
with
a different processor. The new contract shifts the risk of losses
similar to the one described above from the Company to the third-party
processor. The previous processor agreed to continue processing
payments for the Company’s merchant credit card clients until each of them can
be systematically converted to the new processor. At December 31,
2007, approximately 30% of the Company’s merchant credit card clients had been
converted from the old processor to the new processor and the remaining clients
are expected to be converted in the first quarter of 2008. Although
the Company retains the risk of loss related to each merchant until they are
converted, the Company does not expect any losses to occur prior to the rest
of
the conversions taking place.
Also
included in “other gains (losses), net” are normal write-downs of tax credit
partnership investments amounting to $308,000, $295,000 and $189,000 in 2007,
2006, and 2005, respectively. The Company projects $320,000 of tax
credit investment write-downs in 2008. The Company’s total investment
in tax credit partnerships amounted to $1.4 million, $1.6 million and $1.1
million at December 31, 2007, 2006, and 2005, respectively. To date,
all tax credit write-downs have been exceeded, and are projected to continue
to
be exceeded, by the amount of tax credits realized and recorded as a reduction
of income tax expense.
The
Company realized net securities gains of $487,000, $205,000, and $5,000 in
2007,
2006, and 2005, respectively. These sales were initiated primarily to
realize current income.
Noninterest
Expenses
Noninterest
expenses for 2007 were $57,580,000, compared to $53,198,000 in 2006 and
$47,636,000 in 2005. Table 5 presents the components of the Company’s
noninterest expense during the past three years.
Based
on the amounts noted above, noninterest expenses increased 8.2% in 2007 and
11.7% in 2006. The increases in noninterest expenses over the past
three years have occurred in nearly every line item of expense and have been
primarily a result of the significant growth experienced by the
Company. Over the past three years, the number of the Company’s
branches has increased from 59 to 70, and the number of full time equivalent
employees has increased from 563 at December 31, 2004 to 614 at December 31,
2007. Additionally, from December 31, 2004 to December 31, 2007, the
amount of loans outstanding increased 38.6% and deposits increased
32.4%. Although noninterest expenses rose in 2007, the lower rate of
increase compared to 2006 was partially due to the implementation of cost
control recommendations that arose from a performance improvement consulting
project that was completed in the first quarter of 2007. In addition,
since the completion of the consulting project, the Company has taken further
measures to contain costs and improve efficiency. Partially as a
result of this initiative, the Company’s number of full-time equivalent
employees decreased by six during 2007.
From
2004
through 2006, the Company was not required to pay any FDIC deposit insurance
premiums. As discussed above in “Supervision and Regulation of the
Bank,” in 2006 the FDIC modified its rules relating to the assessment of deposit
insurance premiums. In 2007, the Company incurred approximately
$100,000 in FDIC deposit insurance premium expense compared to none in
2006. In 2008, the Company estimates its FDIC insurance expense will
be approximately $1 million.
Income
Taxes
The
provision for income taxes was $13,150,000 in 2007, $11,423,000 in 2006, and
$16,829,000 in 2005.
Table
6
presents the components of tax expense and the related effective tax
rates. The effective tax rate for 2007 was 37.6% compared to 37.2% in
2006 and 51.1% in 2005. The high effective tax rate of 51.1% in 2005
is primarily a result of the contingency loss accrual discussed in the following
paragraph. During periods in 2005 that did not include contingency
loss accrual matters, the Company’s effective tax rate was approximately
38%-39%.
The
Company recorded nonrecurring adjustments in the third quarter of 2006 amounting
to $182,000 that reduced otherwise reported income tax expense. The
Company expects its effective tax rate to be in the 37%-38% range for the
foreseeable future.
In
1999,
in consultation with the Company’s tax advisors, the Company established an
operating structure involving a real estate investment trust (REIT) that
resulted in a reduction in the Company’s state tax liability to the state of
North Carolina. In late 2004, the North Carolina Department of
Revenue indicated that it would challenge taxpayers engaged in activities deemed
to be “income-shifting,” and they indicated that they believed certain REIT
operating structures were a type of “income-shifting.” During 2005,
the North Carolina Department of Revenue began an audit of the Company’s tax
returns for 2001-2004, which represented all years eligible for
audit. In the third quarter of 2005, based on consultations with the
Company’s external auditor and legal counsel, the Company determined that it
should record a $6.3 million loss accrual to reserve for this issue, which
was
comprised of $8.6 million in estimated liability related to taxes due, interest
and penalty, less $2.3 million in related federal tax benefit. In
February 2006, the North Carolina Department of Revenue announced a “Settlement
Initiative” that offered companies with certain transactions, including those
with a REIT operating structure, the opportunity to resolve such matters with
reduced penalties by agreeing to participate in the initiative by June 15,
2006. Although the Company believes that its tax returns complied
with the relevant statutes, the board of directors of the Company decided that
it was in the best interest of the Company to settle this matter by
participating in the initiative. Based on the terms of the
initiative, the Company estimated that its total liability to settle the matter
would be approximately $6.4 million, or $4.3 million net of the federal tax
benefit, which was $2.0 million less than the amount that was originally
accrued. Accordingly, in March 2006, the Company retroactively
recorded an adjustment to its fourth quarter of 2005 earnings to reverse $2.0
million of tax expense. The aspects of the REIT structure that gave
rise to this issue were discontinued effective January 1, 2005. In
March 2007, the Company completed its participation in the North Carolina
Department of Revenue’s Settlement Initiative by paying the state $6.9 million
to settle the matter, which represented the $6.4 million accrued as of December
31, 2005 plus interest of $0.5 million that accrued from December 31, 2005
until
the date of the payment.
Stock-Based
Compensation
Until
the
approval by shareholders of the First Bancorp 2007 Equity Plan (“2007 Equity
Plan”) on May 2, 2007, the Company’s stock-based compensation plans only
permitted the issuance of stock options, whereas the 2007 Equity Plan, in
addition to providing for grants of stock options, also allows for grants of
other types of equity-based compensation including stock appreciation rights,
restricted stock, restricted performance stock, unrestricted stock, and
performance units.
Although
the Company’s only grant under the 2007 Equity Plan thus far has been the grant
of 2,250 stock options to each non-employee director on June 1, 2007, in 2008
the Company expects to grant a combination of performance units and stock
options to approximately twenty employees. It is expected that these
grants will have both performance (earnings per share targets) and service
conditions that must be met in order for the grants to vest, whereas previously
stock option grants to employees only had service conditions (typically five
year vesting).
For
all
years prior to 2006, the Company was not required to record any expense for
the
value of stock options granted to employees or directors. As
discussed in more detail in Note 1(s) to the consolidated financial statements,
a new accounting standard (“Statement 123(R)”, as defined below) required the
Company to record the value of stock options as an expense in the income
statement beginning January 1, 2006. Based on the requirement of
Statement 123(R), the Company recorded compensation expense of $190,000, or
$134,000 net of taxes, in 2007 related to stock option grants. In
2006, the Company recorded compensation expense of $325,000, or $246,000 net
of
taxes, related to stock option grants. Note 14 to the consolidated
financial statements contains pro forma net income and earnings per share
information for 2005, as if the Company applied the fair value recognition
provisions required by the new standard. Note 14 indicates that the
Company’s stock-based employee compensation expense would have been $335,000,
net of taxes, for the year ended December 31, 2005.
In
2008,
2009, and 2010 the Company’s stock-based compensation expense related to options
currently outstanding will be approximately $3,300, $3,300, and $3,000
respectively. There is no tax benefit related to any of those
expenses. Any new stock-based awards that are granted and vest after
January 1, 2008 will increase the amount of stock-based compensation expense
recorded by the Company. In addition to the annual grant of 2,250
stock options to each of the Company’s non-employee directors which resulted in
the Company recording an expense of $144,000 ($88,000 after-tax) in 2007, as
noted above, the Company expects to grant a combination of performance units
and
stock options to certain employees in 2008. It is expected that these
grants will have both performance (earnings per share targets) and service
conditions in order to vest. The Company currently expects that the
incremental pre-tax expense associated with these grants will be in a range
of
zero to $250,000 for each of the next three years depending on the number of
stock options and performance units that vest.
ANALYSIS
OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Overview
Over
the
past two years, the Company has achieved steady increases in its levels of
loans
and deposits, which has resulted in an increase in assets from $1.8 billion
at
December 31, 2005 to $2.3 billion at December 31, 2007. This growth
has been both internally generated and acquired. During the third
quarter of 2006, the Company completed the acquisition of two branches, while
the Company did not complete any acquisitions in 2007. The following
table presents detailed information regarding the nature of the Company’s growth
in 2006 and 2007:
|
(in
thousands)
|
Balance
at
beginning
of
period
|
Internal
growth
|
Growth
from
Acquisitions
|
Balance
at
end
of
period
|
Total
percentage
growth
|
Internal
growth
(1)
|
||||||||||||||||||
|
2007
|
||||||||||||||||||||||||
|
Loans
|
$ | 1,740,396 | 153,899 |
─
|
1,894,295 | 8.8 | % | 8.8 | % | |||||||||||||||
|
Deposits
- Noninterest bearing
|
217,291 | 14,850 |
─
|
232,141 | 6.8 | % | 6.8 | % | ||||||||||||||||
|
Deposits
- NOW
|
193,435 | (650 | ) |
─
|
192,785 | -0.3 | % | -0.3 | % | |||||||||||||||
|
Deposits
- Money Market
|
205,994 | 58,659 |
─
|
264,653 | 28.5 | % | 28.5 | % | ||||||||||||||||
|
Deposits
- Savings
|
103,346 | (2,391 | ) |
─
|
100,955 | -2.3 | % | -2.3 | % | |||||||||||||||
|
Deposits
- Time>$100,000
|
422,772 | 56,404 |
─
|
479,176 | 13.3 | % | 13.3 | % | ||||||||||||||||
|
Deposits
- Time<$100,000
|
552,841 | 15,726 |
─
|
568,567 | 2.8 | % | 2.8 | % | ||||||||||||||||
|
Total
deposits
|
$ | 1,695,679 | 142,598 |
─
|
1,838,277 | 8.4 | % | 8.4 | % | |||||||||||||||
|
2006
|
||||||||||||||||||||||||
|
Loans
|
$ | 1,482,611 | 252,036 | 5,749 | 1,740,396 | 17.4 | % | 17.0 | % | |||||||||||||||
|
Deposits
- Noninterest bearing
|
194,051 | 18,266 | 4,974 | 217,291 | 12.0 | % | 9.4 | % | ||||||||||||||||
|
Deposits
- NOW
|
188,828 | (1,245 | ) | 5,852 | 193,435 | 2.4 | % | -0.7 | % | |||||||||||||||
|
Deposits
- Money Market
|
155,964 | 47,935 | 2,095 | 205,994 | 32.1 | % | 30.7 | % | ||||||||||||||||
|
Deposits
- Savings
|
113,429 | (14,027 | ) | 3,944 | 103,346 | -8.9 | % | -12.4 | % | |||||||||||||||
|
Deposits
- Time>$100,000
|
356,281 | 61,692 | 4,799 | 422,772 | 18.7 | % | 17.3 | % | ||||||||||||||||
|
Deposits
- Time<$100,000
|
486,024 | 44,504 | 22,313 | 552,841 | 13.7 | % | 9.2 | % | ||||||||||||||||
|
Total
deposits
|
$ | 1,494,577 | 157,125 | 43,977 | 1,695,679 | 13.5 | % | 10.5 | % | |||||||||||||||
(1) Excludes
the impact of acquisitions.
As
shown
in the table above, the Company experienced internal loan growth of 8.8% and
17.0%, in 2007 and 2006, respectively. The strong growth experienced
in 2006 and 2007 was partially due to the Company’s recent expansion into
Mooresville, North Carolina, a high growth market near Charlotte, and the
Company’s expansion into the coastal North Carolina counties of New Hanover
County and Brunswick County. Loan growth in these markets amounted to
$89 million in 2007 and $75 million in 2006.
Total
deposits increased 8.4% in 2007 and 13.5% in 2006. The Company had no
brokered deposits outstanding at December 31, 2006 or 2007. In both
2006 and 2007, the Company achieved its highest growth in time deposits,
particularly time deposits in denominations greater than
$100,000. Time deposits, especially time deposits greater than
$100,000, are generally the easiest type of deposit to achieve growth in through
the use of promotional interest rates. The Company offered
promotional interest rates in 2006 and 2007 in order to help fund the strong
loan growth experienced both years.
In
addition to the increases in time deposits, the Company experienced high growth
in its Money Market deposit accounts, which increased by approximately 30%
in
both 2006 and 2007. These increases are almost entirely due to the
Company’s introduction in late 2005 of a high interest rate money market account
(4.25% for most of 2006 and 2007) that was created to compete with area
competitors. The Company believes that a large portion of the
decreases in NOW and Savings accounts in 2006 and 2007 was the result of
customers shifting funds to the high rate money market account.
Over
the
past few years, including 2006 and 2007, the Company’s loan growth has exceeded
its deposit growth and to a greater extent exceeded its retail deposit growth
(which excludes time deposits greater than $100,000). The Company
believes the higher internal growth rates for loans compared to retail deposits
over the past two years is largely attributable to the type of customers the
Company has been able to attract. Most of the Company’s loan growth
has come from small-business customers that need loans in order to expand their
business, and have few deposits. Additionally, the Company has found
it difficult to compete for retail deposits in recent years. The
Company frequently competes against banks in the marketplace that either 1)
are
so large that they enjoy better economies of scale over the Company and can
thus
offer higher rates, or 2) are recently started banks that are focused on
building market share, and not necessarily on positive earnings, by offering
high deposit rates. The Company believes it enjoys advantages in the
loan marketplace because of its seasoned lenders who have the experience
necessary to oversee the completion of a loan and are afforded the autonomy
to
be able to make timely decisions.
The
Company’s liquidity did not change significantly during 2006 or
2007. Higher loan growth as compared to deposit growth in recent
years has resulted in the Company’s loan to deposit ratio increasing from 99% in
2005 to 103% in both 2006 and 2007. The negative impact on the
Company’s liquidity due to the imbalance in loan and deposit growth has been
offset by a higher level of securities sold under agreements to repurchase
and
borrowings. 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, securities sold under
agreements to repurchase and borrowings has remained stable, amounting to
approximately 15% at each of the past three year ends.
In
both
2006 and 2007, the Company’s balance sheet growth exceeded internal capital
growth resulting from earnings. In order to maintain its regulatory
capital ratios at internal targets in 2006, the Company issued an additional
$25.8 million in trust preferred debt securities, which are includable as
regulatory capital. The increases to the Company’s capital ratios
resulting from this issuance were mostly offset in 2007 by the redemption of
$20.6 million in trust preferred securities that had been originally issued
in
2002. All of the Company’s capital ratios have significantly exceeded
the minimum regulatory thresholds for all periods covered by this
report.
Although
the Company’s largest market area, the central Piedmont region of North
Carolina, has experienced economic difficulties in the past few years as a
result of manufacturing job losses, the Company’s asset quality ratios have
remained fairly stable over the past three years, with ratios of net charge-offs
to average loans ranging from 11 basis points to 16 basis points and
nonperforming assets to total assets ranging from 17 basis points to 47 basis
points. Consistent with current economic conditions, the Company has
noted modest increases in its trends in delinquencies and classified
assets. However, the Company does not believe these trends will
materially impact its financial condition in the foreseeable
future.
Distribution
of Assets and Liabilities
Table
7
sets forth the percentage relationships of significant components of the
Company’s balance sheet at December 31, 2007, 2006, and 2005.
The
relative size of the components of the balance sheet has not varied
significantly over the past two years, with loans comprising 80%-81% of total
assets and deposits comprising 79%-83%. The most significant variance
in Table 7 is the 2006 increase in the percentage of borrowings, which increased
from 5% at December 31, 2005, to 10% at December 31, 2006. The
Company has increasingly relied on borrowings in order to help fund the strong
loan growth that has exceeded deposit growth.
Securities
Information
regarding the Company’s securities portfolio as of December 31, 2007, 2006, and
2005 is presented in Tables 8 and 9.
The
composition of the investment securities portfolio reflects the Company’s
investment strategy of maintaining an appropriate level of liquidity while
providing a relatively stable source of income. The investment
portfolio also provides a balance to interest rate risk and credit risk in
other
categories of the balance sheet while providing a vehicle for the investment
of
available funds, furnishing liquidity, and supplying securities to pledge as
required collateral for certain deposits.
Total
securities amounted to $151.8 million, $143.1 million, and $125.1 million at
December 31, 2007, 2006, and 2005, respectively. The increase in
securities over the past two years was primarily due to securities purchases
that have been necessary to collateralize higher levels of repurchase agreements
and pledged deposits, as well as to help maintain the Company’s liquidity at
targeted levels. Over the past two years, the Company has elected to
primarily purchase securities issued by the Federal Home Loan Bank, a
government-sponsored enterprise, which, due to their non-amortizing nature,
are
easier to pledge than mortgage-backed securities and can be more easily
purchased in shorter maturity terms than mortgage-backed
securities. In general, the Company prefers to invest in short-term
investments in order to provide liquidity and manage interest rate
risk.
The
majority of the Company’s “government-sponsored enterprise” securities are
issued by the Federal Home Loan Bank and carry one maturity date, often with
an
issuer call feature. The Company’s mortgage-backed securities have
been primarily issued by Freddie Mac and Fannie Mae, which are
government-sponsored corporations, and vary in their repayment in correlation
with the underlying pools of home mortgage loans. The Company’s
investment in corporate bonds is primarily comprised of trust preferred
securities issued by other North Carolina bank holding companies.
Included
in mortgage-backed securities at December 31, 2007 were collateralized mortgage
obligations (“CMOs”) with an amortized cost of $9,551,000 and a fair value of
$9,373,000. Included in mortgage-backed securities at December 31,
2006 were CMOs with an amortized cost of $11,898,000 and a fair value of
$11,517,000. Included in mortgage-backed securities at December 31,
2005 were CMOs with an amortized cost of $15,810,000 and a fair value of
$15,399,000. The CMOs that the Company has invested in are
substantially all “early tranche” portions of the CMOs, which minimizes
long-term interest rate risk to the Company.
At
December 31, 2007, a net unrealized gain of $86,000 was included in the carrying
value of securities classified as available for sale, compared to net unrealized
losses of $860,000 and $1,049,000 at December 31, 2006 and 2005,
respectively. In 2006 and 2005, a steadily rising interest rate
environment caused a decline in fair market value of securities. In
2007, declines in interest rates late in the year resulted in a small unrealized
gain at December 31, 2007. Higher interest rates negatively impact
the value of fixed income securities and conversely, lower interest rates have
a
positive impact on the value of fixed income securities. Management
evaluated any unrealized losses on individual securities at each year end and
determined them to be of a temporary nature and caused by fluctuations in market
interest rates, not by concerns about the ability of the issuers to meet their
obligations. Net unrealized gains (losses), net of applicable
deferred income taxes, of $52,000, ($524,000), and ($639,000) have been reported
as part of a separate component of shareholders’ equity (accumulated other
comprehensive income (loss)) as of December 31, 2007, 2006, and 2005,
respectively.
The
fair
value of securities held to maturity, which the Company carries at amortized
cost, was more than the carrying value at December 31, 2007 and 2006 by $9,000
and $46,000, respectively. Management evaluated any unrealized losses
on individual securities at each year end and determined them to be of a
temporary nature and caused by fluctuations in market interest rates, not by
concerns about the ability of the issuers to meet their
obligations.
Table
9
provides detail as to scheduled contractual maturities and book yields on
securities available for sale and securities held to maturity at December 31,
2007. Mortgage-backed and other amortizing securities are shown
maturing in the time periods consistent with their estimated lives based on
expected prepayment speeds.
The
weighted average taxable-equivalent yield for the securities available for
sale
portfolio was 5.14% at December 31, 2007. The expected weighted
average life of the available for sale portfolio using the call date for
above-market callable bonds, the maturity date for all other non-mortgage-backed
securities, and the expected life for mortgage-backed securities, was 3.9
years.
The
weighted average taxable-equivalent yield for the securities held to maturity
portfolio was 6.61% at December 31, 2007. The expected weighted
average life of the held to maturity portfolio using the call date for
above-market callable bonds and the maturity date for all other securities,
was 6.0 years.
As
of
December 31, 2007 and 2006, the Company held no investment securities of any
one
issuer, other than government-sponsored enterprises or corporations, in which
aggregate book values and market values exceeded 10% of shareholders’
equity.
Loans
Table
10
provides a summary of the loan portfolio composition at each of the past five
year ends.
The
loan
portfolio is the largest category of the Company’s earning assets and is
comprised of commercial loans, real estate mortgage loans, real estate
construction loans, and consumer loans. The Company restricts
virtually all of its lending to its 26 county market area, which is located
in
central and southeastern North Carolina, three counties in southern Virginia
and
Dillon County, South Carolina. The diversity of the region’s economic
base has historically provided a stable lending environment.
In
2007,
loans outstanding increased $153.9 million, or 8.8%, to $1.89
billion. In 2006, loans outstanding increased $257.8 million, or
17.4%, to $1.74 billion. All of the loan growth in 2007 was
internally generated, as the Company did not complete any acquisitions during
that year. The majority of the loan growth in 2006 was internally
generated, as the Company only acquired a total of $6 million in loans from
the
acquisitions of two bank branches completed in 2006. The majority of
the 2007 and 2006 loan growth occurred in loans secured by real estate, with
approximately $136.8 million, or 88.9%, in 2007, and $224.8 million, or 87.2%,
in 2006, of the net loan growth occurring in real estate mortgage or real estate
construction loans.
Within
the growth in real estate loans in 2006 and 2007, the Company has experienced
the highest growth in the following two categories – i) construction and land
development loans – growth of $58 million in 2007 and $30 million in 2006, and
ii) unimproved land (primarily vacant residential lots) – growth of $55 million
in 2007 and $75 million in 2006. These two categories combined
totaled $384.0 million at December 31, 2007, or 20.2% of all loans, and totaled
$271.7 million at December 31, 2006, or 15.6% of all loans. The
Company has not noted any significant changes in credit quality trends among
these types of loans in the last twelve months.
Over
the
years, the Company’s loan mix has remained fairly consistent, with real estate
loans (mortgage and construction) comprising approximately 86% of the loan
portfolio, commercial, financial, and agricultural loans not secured by real
estate comprising 9-10%, and consumer installment loans comprising 4-5% of
the
portfolio. 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.
At
December 31, 2007, $1.637 billion, or 86.4%, of the Company’s loan portfolio was
secured by liens on real property. Included in this total are $724.2
million, or 38.2% of total loans, in loans secured by liens on 1-4 family
residential properties and $912.5 million, or 48.2% of total loans, in loans
secured by liens on other types of real estate. At December 31, 2006,
$1.500 billion, or 86.2%, of the Company’s loan portfolio was secured by liens
on real property. Included in this total are $718.4 million, or 41.3%
of total loans, in loans secured by liens on 1-4 family residential properties
and $781.6 million, or 44.9% of total loans, in loans secured by liens on other
types of real estate. The Company’s $1.637 billion in real estate
mortgage loans at December 31, 2007 can be further classified as follows – for
comparison purposes, the classification of the Company’s $1.500 billion real
estate loan portfolio at December 31, 2006 is shown in parenthesis:
|
|
·
|
$514.3
million, or 27.2% of total loans (vs. $513.1 million, or 29.5% of
total
loans), are secured by first liens on residential homes, in which
the
borrower’s personal income is generally the primary repayment
source.
|
|
|
·
|
$496.0
million, or 26.2% of total loans (vs. $474.6 million, or 27.3% of
total
loans), are primarily dependent on cash flow from a commercial business
for repayment.
|
|
|
·
|
$212.9
million, or 11.2% of total loans (vs. $155.4 million, or 8.9% of
total
loans), are real estate construction and land development
loans.
|
|
|
·
|
$209.9
million, or 11.1% of total loans (vs. $205.3 million, or 11.8% of
total
loans), are home equity loans (lines-of-credit and term loans) obtained
by
consumers for various purposes.
|
|
|
·
|
$171.1
million, or 9.0% of total loans (vs. $116.3 million, or 6.7% of total
loans), are tracts of unimproved
land.
|
|
|
·
|
$32.6
million, or 1.7% of total loans (vs. $35.3 million, or 2.0% of total
loans), are primarily dependent on cash flow from agricultural crop
sales.
|
Table
11
provides a summary of scheduled loan maturities over certain time periods,
with
fixed rate loans and adjustable rate loans shown
separately. Approximately 31% of the Company’s loans outstanding at
December 31, 2007 mature within one year and 81% of total loans mature within
five years. The percentages of variable rate loans and fixed rate
loans as compared to total performing loans were 46.3% and 53.7%, respectively,
as of December 31, 2007. The Company intentionally makes a blend of
fixed and variable rate loans so as to reduce interest rate risk. See
discussion regarding fluctuations in the Company’s ratio of fixed rate loans to
variable rate loans in the section above entitled “Net Interest
Income.”
Nonperforming
Assets
Nonperforming
assets include nonaccrual loans, loans past due 90 or more days and still
accruing interest, restructured loans and other real estate. As a
matter of policy the Company places all loans that are past due 90 or more
days
on nonaccrual basis, and thus there were no loans at any of the past five year
ends that were 90 days past due and still accruing interest. Table 12
summarizes the Company’s nonperforming assets at the dates
indicated.
Nonaccrual
loans are loans on which interest income is no longer being recognized or
accrued because management has determined that the collection of interest is
doubtful. Placing loans on nonaccrual status negatively impacts
earnings because (i) interest accrued but unpaid as of the date a loan is placed
on nonaccrual status is reversed and deducted from interest income, (ii) future
accruals of interest income are not recognized until it becomes probable that
both principal and interest will be paid and (iii) principal charged-off, if
appropriate, may necessitate additional provisions for loan losses that are
charged against earnings. In some cases, where borrowers are
experiencing financial difficulties, loans may be restructured to provide terms
significantly different from the originally contracted terms.
Nonperforming
loans (which includes nonaccrual loans and restructured loans) as of December
31, 2007, 2006, and 2005 totaled $7,813,000, $6,862,000, and $1,653,000,
respectively. Nonperforming loans as a percentage of total loans
amounted to 0.41%, 0.39%, and 0.11%, at December 31, 2007, 2006, and
2005, respectively.
The
variances in the dollar amount of nonperforming loans among the periods have
been primarily due to changes in nonaccrual loans, as restructured loans have
not changed significantly. In the fourth quarter of 2005, the
collection process for several of the Company's largest nonaccrual loan
relationships reached a conclusion and their principal balances were reduced
to
zero either as a result of cash received or the loan being
charged-off. This resulted in the amount of the Company's
nonperforming loans at December 31, 2005 reaching its lowest level in over
five
years. In 2006 and 2007, the Company experienced more typical
activity within its nonaccrual loan category, and the amount of nonaccrual
loans
increased to more normal levels as a percentage of the total loan
portfolio. The Company’s largest nonaccrual relationships at December 31,
2007 and 2006 amounted to $530,000 and $585,000, respectively.
If
the
nonaccrual loans and restructured loans as of December 31, 2007, 2006 and 2005
had been current in accordance with their original terms and had been
outstanding throughout the period (or since origination if held for part of
the
period), gross interest income in the amounts of approximately $610,000,
$510,000 and $123,000 for nonaccrual loans and $1,000, $1,000 and $2,000 for
restructured loans would have been recorded for 2007, 2006, and 2005,
respectively. Interest income on such loans that was actually
collected and included in net income in 2007, 2006, and 2005 amounted to
approximately $252,000, $179,000 and $67,000 for nonaccrual loans (prior to
their being placed on nonaccrual status) and $1,000, $1,000 and $2,000 for
restructured loans, respectively. At December 31, 2007 and 2006, the
Company had no commitments to lend additional funds to debtors whose loans
were
nonperforming.
Management
routinely monitors the status of certain large loans that, in management’s
opinion, have credit weaknesses that could cause them to become nonperforming
loans. In addition to the nonperforming loan amounts discussed above,
management believes that an estimated $5.5-$6.0 million of loans that were
performing in accordance with their contractual terms at December 31, 2007
have
the potential to develop problems depending upon the particular financial
situations of the borrowers and economic conditions in
general. Management has taken these potential problem loans into
consideration when evaluating the adequacy of the allowance for loan losses
at
December 31, 2007 (see discussion below).
Loans
classified for regulatory purposes as loss, doubtful, substandard, or special
mention that have not been disclosed in the problem loan amounts and the
potential problem loan amounts discussed above do not represent or result from
trends or uncertainties that 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 that causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
Other
real estate includes foreclosed, repossessed, and idled
properties. Other real estate has increased over the past three
years, amounting to $3,042,000 at December 31, 2007, $1,539,000 at December
31,
2006, and $1,421,000 at December 31, 2005. Other real estate
represented approximately 0.07%-0.13% of total assets at each of the past three
year ends. The increases in other real estate are due to increased
foreclosure activity. At December 31, 2007, the largest balance
related to any single piece of other real estate was $425,000. The
Company’s management believes that the fair values of the items of other real
estate, less estimated costs to sell, equal or exceed their respective carrying
values at the dates presented.
Allowance
for Loan Losses and Loan Loss Experience
The
allowance for loan losses is created by direct charges to operations (known
as a
“provision for loan losses” for the period in which the charge is
taken). 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 considers its procedures for recording
the amount of the allowance for loan losses and the related provision for loan
losses to be a critical accounting policy. See the heading “Critical
Accounting Policies” above for further discussion.
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, evaluation of probable inherent losses and current economic
conditions.
The
Company uses a loan analysis and grading program to facilitate its evaluation
of
probable inherent loan losses and the adequacy of its allowance for loan
losses. In this program, risk grades are assigned by management and
tested by an independent third party consulting firm. The testing
program includes an evaluation of a sample of new loans, loans that management
identifies as having potential credit weaknesses, loans past due 90 days or
more, loans originated by new loan officers, nonaccrual loans and any other
loans identified during previous regulatory and other examinations.
The
Company strives to maintain its loan portfolio in accordance with what
management believes are conservative loan underwriting policies that result
in
loans specifically tailored to the needs of the Company’s market
areas. Every effort is made to identify and minimize the credit risks
associated with such lending strategies. 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 loans captioned in the tables
discussed below as “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.
Although
the Company’s largest market area, the central Piedmont region of North
Carolina, has experienced economic difficulties in the past few years as a
result of manufacturing job losses, the Company’s asset quality ratios have
remained fairly stable over the past three years with net charge-offs to average
loans ranging from 11 basis points to 16 basis points and nonperforming assets
to total assets ranging from 17 basis points to 47 basis
points. Consistent with current economic conditions, the Company has
noted modest increases in its trends in delinquencies and classified
assets. However, the Company does not believe that these trends will
materially impact its financial condition in the foreseeable
future. The Company does not originate “subprime” loans.
The
allowance for loan losses amounted to $21,324,000 at December 31, 2007 compared
to $18,947,000 at December 31, 2006 and $15,716,000 at December 31,
2005. This represented 1.13%, 1.09%, and 1.06%, of loans outstanding
as of December 31, 2007, 2006, and 2005, respectively. The higher
percentages in 2006 and 2007 are primarily associated with slightly higher
levels of classified assets in each year. As noted in Table 12, the
Company’s allowance for loan losses as a percentage of nonperforming loans
(“coverage ratio”) amounted to 273% at December 31, 2007 compared to 276% at
December 31, 2006 and 951% at December 31, 2005. Due to the secured
nature of virtually all of the Company’s loans that are on nonaccrual status,
the variance in the coverage ratio is not necessarily indicative of the relative
adequacy of the allowance for loan losses. As noted above in
“Nonperforming Assets”, the level of nonaccrual loans at December 31, 2005 was
at an unusually low level, thus resulting in the higher coverage ratio for
the
2005 year end.
Table
13
sets forth the allocation of the allowance for loan losses at the dates
indicated. The portion of these reserves that was allocated to
specific loan types in the loan portfolio increased to $21,306,000 at December
31, 2007 from $18,942,000 at December 31, 2006 and $15,692,000 at December
31,
2005. The 12.5% increase in the amount of the allocated allowance
during 2007 is relatively consistent with the 8.8% increase in total loans
outstanding during the year.
Similarly,
the 20.7% increase in the amount of the allocated allowance during 2006 is
consistent with the 17.4% increase in total loans outstanding during the
year. In addition to the allocated portion of the allowance for loan
losses, the Company maintains an unallocated portion that is not assigned to
any
specific category of loans, but rather is intended to reserve for the inherent
risk in the overall portfolio and the intrinsic inaccuracies associated with
the
estimation of the allowance for loan losses and its allocation to specific
loan
categories. The amount of the unallocated portion of the allowance
for loan losses did not vary materially at any of the past three year
ends. The allowance for loan losses is available to absorb losses in
all categories.
Management
considers the allowance for loan losses 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 allowance 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 amount 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 allowances for loan losses and losses on
foreclosed real estate. Such agencies may require the Company to
recognize additions to the allowances based on the examiners’ judgments about
information available to them at the time of their examinations.
For
the
years indicated, Table 14 summarizes the Company’s balances of loans
outstanding, average loans outstanding, and a detailed rollforward of the
allowance for loan losses. In addition to the increases to the
allowance for loan losses related to normal provisions, the increases in the
dollar amounts of the allowance for loan losses in 2006 was also affected by
amounts recorded to provide for loans assumed in corporate
acquisitions. In 2006, the Company added $52,000 to the allowance for
loan losses related to approximately $6 million in loans assumed in a branch
acquisition.
Table
14
also provides a breakout of loans charged-off and recoveries of loans previously
charged-off based on the loan type. In years prior to 2006, the
Company’s policy was to record net charge-offs related to deposit overdrafts as
a reduction to service charges on deposits accounts. Based on
regulatory requirements, on July 1, 2006, the Company began recording
charge-offs and recoveries related to deposit overdrafts to the allowance for
loan losses. Total net charge-offs related to overdrafts that were
recorded as a reduction to service charges on deposit accounts instead of a
reduction to the allowance for loan losses amounted to $81,000 for the six
months ended June 30, 2006 and $248,000, $258,000, and $272,000, for the years
ended December 31, 2005, 2004, and 2003, respectively.
The
Company’s net loan charge-offs amounted to $2,840,000 in 2007, $1,744,000 in
2006, and $2,041,000 in 2005. This represents 0.16%, 0.11%, and 0.14%
of average loans during 2007, 2006, and 2005 respectively. In each of
the past five years, the Company’s net charge-off ratio has been in the range of
0.10%-0.16%.
Deposits
and Securities Sold Under Agreements to Repurchase
At
December 31, 2007, deposits outstanding amounted to $1.838 billion, an increase
of $142 million, or 8.4%, from December 31, 2006. There were no
deposits assumed in acquisitions in 2007. In 2006, deposits grew from
$1.495 billion to $1.696 billion, an increase of $201 million, or 13.5% from
December 31, 2005. Approximately $157 million, or 78%, of the deposit
growth in 2006 was internally generated, while the remaining $44 million, or
22%, resulted from the acquisitions of two bank branches completed in
2006.
The
nature of the Company’s deposit growth is illustrated in the table on page
33. The following table reflects the mix of the Company’s deposits at
each of the past three year ends:
|
2007
|
2006
|
2005
|
||||||||||
|
Noninterest-bearing
deposits
|
13 | % | 13 | % | 13 | % | ||||||
|
NOW
deposits
|
10 | % | 11 | % | 13 | % | ||||||
|
Money
market deposits
|
14 | % | 12 | % | 10 | % | ||||||
|
Savings
deposits
|
6 | % | 6 | % | 8 | % | ||||||
|
Time
deposits > $100,000
|
26 | % | 25 | % | 24 | % | ||||||
|
Time
deposits < $100,000
|
31 | % | 33 | % | 32 | % | ||||||
|
Total
deposits
|
100 | % | 100 | % | 100 | % | ||||||
|
Securities
sold under agreements to repurchase
as
a percent of total deposits
|
2 | % | 3 | % | 2 | % | ||||||
The
deposit mix remained relatively consistent from 2005 to 2007, with the largest
variances being a decrease in NOW and Savings deposits and an increase in Money
Market deposits. The Company believes this has been due to the
introduction of a high interest rate money market account that was created
to
compete with area competitors. The Company believes that a large
portion of the decreases in NOW deposit accounts and Savings deposit accounts
in
2006 and 2007 was the result of a shift to the high rate money market
account.
The
Company routinely engages in activities designed to grow and retain deposits,
such as (1) emphasizing relationship banking to new and existing customers,
where borrowers are encouraged and normally expected to maintain deposit
accounts with the Company, (2) pricing deposits at rate levels that will attract
and/or retain a level of deposits, and (3) continually working to identify
and
introduce new products that will attract customers or enhance the Company’s
appeal as a primary provider of financial services.
Table
15
presents the average amounts of deposits of the Company and the average yield
paid for those deposits for the years ended December 31, 2007, 2006, and
2005.
As
of
December 31, 2007, the Company held approximately $479.2 million in time
deposits of $100,000 or more. Table 16 is a maturity schedule of time
deposits of $100,000 or more as of December 31, 2007. This table
shows that 90% of the Company’s time deposits greater than $100,000 mature
within one year.
At
each
of the past three year ends, the Company had no deposits issued through foreign
offices, nor did the Company believe that it held any deposits by foreign
depositors.
Borrowings
The
Company had borrowings outstanding of $242.4 million at December 31, 2007
compared to $210.0 million at December 31, 2006. As shown in Table 2,
average borrowings have steadily increased over the past three years, amounting
to $77.1 million in 2005, increasing by $36 million in 2006 to $113.4 million,
and increasing by $17 million to $130.4 million in 2007. The increase
in borrowings in 2006 and 2007 has been primarily a result of needing to fund
the loan growth that has exceeded deposit growth. In 2006, average
loans outstanding were $201 million higher than in 2005, whereas average
deposits increased by only $139 million. In 2007, average loans
increased by $185 million compared to average deposit growth of $181
million.
At
December 31, 2007, the Company had three sources of readily available borrowing
capacity - 1) an approximately $321 million line of credit with the Federal
Home
Loan Bank of Atlanta (FHLB), of which $176 million was outstanding at December
31, 2007 and $143 million was outstanding at December 31, 2006, 2) a $70 million
overnight federal funds line of credit with a correspondent bank, none of which
was outstanding at December 31, 2007 or 2006, and 3) an approximately $81
million line of credit through the Federal Reserve Bank of Richmond’s (FRB)
discount window, none of which was outstanding at December 31, 2007 or
2006.
The
Company’s line of credit with the FHLB can be structured as either short-term or
long-term borrowings, depending on the particular funding or liquidity need,
and
is secured by the Company’s FHLB stock and a blanket lien on most of its real
estate loan portfolio. As
of
December 31, 2007, $171 million of the $176 million outstanding with the FHLB
was structured as short-term borrowings and had a weighted-average interest
rate of 4.41%, with the remaining $5 million outstanding having an interest
rate
of 5.26% and a maturity date in April 2009. For the year ended December
31, 2007, the average amount of short-term FHLB borrowings outstanding was
approximately $58 million and had a weighted average interest rate for the
year
of 5.26%. The maximum amount of short-term FHLB borrowings outstanding at
any month-end during 2007 was the year end amount of $171
million.
In
addition to the outstanding borrowings from the FHLB that reduce the available
borrowing capacity of the line of credit, the borrowing capacity was further
reduced by $40 million at December 31, 2007 and 2006 as a result of the Company
pledging letters of credit backed by the FHLB for public deposits at each of
those dates.
The
Company’s correspondent bank relationship allows the Company to purchase up to
$70 million in federal funds on an overnight, unsecured basis (federal funds
purchased). The Company had no borrowings outstanding under this line
at December 31, 2007 or 2006. This line of credit was not drawn
upon during any of the past three years.
The
Company also has a line of credit with the FRB discount window. This
line is secured by a blanket lien on a portion of the Company’s commercial and
consumer loan portfolio (excluding real estate loans). Based on the
collateral owned by the Company as of December 31, 2007, the available line
of
credit is approximately $81 million. This line of credit was
established primarily in connection with the Company’s Y2K liquidity contingency
plan and has not been drawn on since inception. The FRB has indicated
that it would not expect lines of credit that have been granted to financial
institutions to be a primary borrowing source. The Company plans to
maintain this line of credit, although it is not expected that it will be drawn
upon except in unusual circumstances.
In
addition to the lines of credit described above, in which the Company had $176
million and $143 million outstanding as of December 31, 2007, and 2006,
respectively, the Company also had a total of $46.4 million in trust preferred
security debt outstanding at December 31, 2007 and $67.0 million outstanding
as
of December 31, 2006. The Company has initiated three trust preferred
security issuances since 2002 totaling $67.0 million, with one of those
issuances for $20.6 million being redeemed in 2007. These borrowings
each have 30 year final maturities and were structured in a manner that allow
them to qualify as capital for regulatory capital adequacy
requirements. These debt securities are callable by the Company at
par on any quarterly interest payment date five years after their issue
date. The Company issued $20.6 million of this debt on October 29,
2002, an additional $20.6 million on December 19, 2003, and $25.8 million on
April 13, 2006. The interest rate on these debt securities adjusts on
a quarterly basis at a rate of three-month LIBOR plus 3.45% for the securities
issued in 2002, three-month LIBOR plus 2.70% for the securities issued in 2003,
and three-month LIBOR plus 1.39% for the securities issued in 2006.
The
$20.6
million in trust preferred securities that were issued in 2002 at a rate of
LIBOR plus 3.45% were called and redeemed by the Company at par in November
2007. The Company’s original intent was to replace the called
securities with a new issuance at a lower interest rate that would also qualify
as regulatory capital. However, the Company’s ability to issue new
trust preferred securities into the marketplace was negatively impacted by
the
liquidity and credit concerns experienced in the United States economy beginning
in the fall of 2007. The Company observed that very few trust
preferred securities were being issued in the marketplace in the fall of 2007,
and those that were issued carried a significantly higher interest rate than
those issued in recent years. It was the Company’s general belief
that this period of low demand and high interest rates in the marketplace was
a
temporary phenomenon and that the opportunity to issue new trust preferred
securities at more favorable rates would return in the near
future. Accordingly, the Company elected to fund the redemption of
the trust preferred securities issued in 2002 with a $20 million line of credit
that the Company obtained from a third-party commercial bank. This
line of credit has a maturity date of October 30, 2009 and carries an interest
rate of either i) prime minus 1.00% or ii) LIBOR plus 1.50%, at the
discretion of the Company. Although this line of credit does not
qualify as regulatory capital, the Company’s capital ratios continued to
significantly exceed minimum regulatory thresholds following the
redemption. It is the Company’s continued intent to replace the line
of credit in the near future with debt that qualifies as regulatory
capital.
The
Company incurred approximately $1,195,000 in debt issuance costs related to
the
2002 and 2003 trust preferred security issuances that were recorded as prepaid
expenses that are being amortized to the earliest call dates and are included
in
the “Other Assets” line item of the consolidated balance sheet. No
debt issuance costs were incurred with the 2006 issuance.
Liquidity,
Commitments, and Contingencies
The
Company’s liquidity is determined by its ability to convert assets to cash or to
acquire alternative sources of funds to meet the needs of its customers who
are
withdrawing or borrowing funds, and its ability 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.
As
noted
above, in addition to internally generated liquidity sources, the Company has
the ability to obtain borrowings from the following three sources – 1) an
approximately $321 million line of credit with the FHLB, 2) a $70 million
overnight federal funds line of credit with a correspondent bank, and 3) an
approximately $81 million line of credit through the FRB’s discount
window.
The
Company’s liquidity did not change significantly during 2006 or
2007. Higher loan growth as compared to deposit growth in recent
years has resulted in the Company’s loan to deposit ratio increasing from 99% in
2005 to 103% in both 2006 and 2007. The negative impact on the
Company’s liquidity due to the imbalance in loan and deposit growth has been
offset by a higher level of securities sold under agreements to repurchase
and
borrowings. 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, securities sold under
agreements to repurchase and borrowings has grown slightly over the past two
years, with this ratio increasing from 14.2% in 2005 to 15.1% in both 2006
and
2007.
The
Company’s management believes its liquidity sources, including unused lines of
credit, are at an acceptable level and remain adequate to meet its operating
needs in the foreseeable future. The Company will continue to monitor
its liquidity position carefully and will explore and implement strategies
to
increase liquidity if deemed appropriate.
In
the
normal course of business there are various outstanding contractual obligations
of the Company that will require future cash outflows. In addition,
there are commitments and contingent liabilities, such as commitments to extend
credit, that may or may not require future cash outflows.
Table
18
reflects the contractual obligations and other commercial commitments of the
Company outstanding as of December 31, 2007. Any of the Company’s
$176 million in outstanding borrowings with the FHLB may be accelerated
immediately by the FHLB in certain circumstances, including material adverse
changes in the condition of the Company or if the Company’s qualifying
collateral is less than the amount required under the terms of the borrowing
agreement.
In
the
normal course of business there are various outstanding commitments and
contingent liabilities such as commitments to extend credit, which are not
reflected in the financial statements. As of December 31, 2007, the
Company had outstanding unfunded loan and credit card commitments of
$340,160,000, of which $281,999,000 were at variable rates and $58,161,000
were
at fixed rates. Included in outstanding loan commitments were
unfunded commitments of $197,777,000 on revolving credit plans, of which
$171,871,000 were at variable rates and $25,906,000 were at fixed
rates.
At
December 31, 2007 and 2006, the Company had $6,176,000 and $4,459,000,
respectively, in standby letters of credit outstanding. The Company
had no carrying amount for these standby letters of credit at either of those
dates. The nature of the standby letters of credit is that of a
guarantee made on behalf of the Company’s customers to suppliers of the
customers to guarantee payments owed to the supplier by the
customer.
The
standby letters of credit are generally for terms of one year, at which time
they may be renewed for another year if both parties agree. The
payment of the guarantees would generally be triggered by a continued nonpayment
of an obligation owed by the customer to the supplier. The maximum
potential amount of future payments (undiscounted) the Company could be required
to make under the guarantees in the event of nonperformance by the parties
to
whom credit or financial guarantees have been extended is represented by the
contractual amount of the financial instruments discussed above. In
the event that the Company is required to honor a standby letter of credit,
a
note, already executed by the customer, becomes effective providing repayment
terms and any collateral. Over the past ten years, the Company has
had to honor one standby letter of credit, which was repaid by the borrower
without any loss to the Company. Management expects any draws under
existing commitments to be funded through normal operations.
It
has
been the experience of the Company that deposit withdrawals are generally
replaced with new deposits, thus not requiring any net cash
outflow. Based on that assumption, management believes that it can
meet its contractual cash obligations and existing commitments from normal
operations.
The
Company is not involved in any legal proceedings that, in management’s opinion,
could have a material effect on the consolidated financial position of the
Company; however, see “Income Taxes” above for discussion of a tax loss
contingency.
Off-Balance
Sheet Arrangements and Derivative Financial Instruments
Off-balance
sheet arrangements include transactions, agreements, or other contractual
arrangements pursuant to which the Company has obligations or provides
guarantees on behalf of an unconsolidated entity. The Company has no
off-balance sheet arrangements of this kind other than repayment guarantees
associated with its trust preferred securities.
Derivative
financial instruments include futures, forwards, interest rate swaps, options
contracts, and other financial instruments with similar
characteristics. The Company has not engaged in derivatives
activities through December 31, 2007 and has no current plans to do
so.
Interest
Rate Risk (Including Quantitative and Qualitative Disclosures About Market
Risk
– Item 7A.)
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 4.00% (realized in 2007) to a high
of
4.52% (realized in 2003). During that five year period, the prime
rate of interest has ranged from a low of 4.00% to a high of
8.25%. The consistency of the net interest margin is aided by the
relatively low level of long-term interest rate exposure that the Company
maintains. At December 31, 2007, approximately 95% of the Company’s
interest-earning assets are subject to repricing within five years (because
they
are either adjustable rate assets or they are fixed rate assets that mature)
and
substantially all of its interest-bearing liabilities reprice with five
years.
Table
17
sets forth the Company’s interest rate sensitivity analysis as of December 31,
2007, 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). As
illustrated by this table, at December 31, 2007, the Company had $503 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 subject to interest rate changes within one year
at
December 31, 2007 are deposits totaling $558 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
with or in the same proportion as general market indicators.
Overall,
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. 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. In the short-term (less than six months),
this results in the Company being asset-sensitive, meaning that the Company’s
net interest income benefits from an increase in interest rates and is
negatively impacted by a decrease in interest rates. However, in the
twelve-month horizon, the impact of having a higher level of interest-sensitive
liabilities lessens the short-term effects of changes in interest rates just
discussed. The general discussion in this paragraph applies most
directly in a “normal” interest rate environment in which longer term maturity
instruments carry higher interest rates than short term maturity instruments,
and is less applicable in periods in which there is a “flat” interest rate
curve, as discussed in the following paragraph.
Prior
to
the interest rate decrease that occurred in September 2007, the Federal Reserve
had increased the discount rate 17 times totaling 425 basis points beginning
on
July 1, 2004 and regularly thereafter until June 29, 2006. However,
the impact of these rate increases did not have an equal effect on short-term
interest rates and long-term interest rates in the marketplace. In
the marketplace, short-term rates rose by a significantly higher amount than
have longer-term interest rates. For example, from June 30, 2004 to
December 31, 2006, the interest rate on three-month treasury bills rose by
369
basis points, whereas the interest rate for seven-year treasury notes increased
by only 46 basis points. This resulted in what economists refer to as
a “flat yield curve”, which means that short-term interest rates were
substantially the same as long-term interest rates. This is an
unfavorable interest rate environment for many banks, including the Company,
as
short-term interest rates generally drive the Company’s deposit pricing and
longer-term interest rates generally drive loan pricing. When these
rates converge, which they did, the profit spread the Company realizes between
loan yields and deposit rates narrows, which reduces the Company’s net interest
margin. Due largely to the progressive flattening of the yield curve
that occurred throughout 2006, the Company’s net interest margin decreased
throughout 2006 before stabilizing at the lower levels in 2007 as a result
of
the relatively stable interest rate environment in effect for most of 2007.
The
Company’s net interest margin was 4.37% in the fourth quarter of 2005 and
steadily declined to 4.05% by the fourth quarter of 2006. The
Company’s net interest margin was 4.18% for the full year 2006, compared to
4.33% in 2005. In 2007, the Company’s net interest margin for each
quarter of the year was within 3 basis points of its average for the year of
4.00%.
In
addition to the impact of the interest rate environment discussed above, the
Company’s net interest margin was also negatively impacted by the Company having
more of its overall funding occurring in its highest cost funding
sources. This trend was caused by aggressive pricing to attract funds
to fund high loan growth, and by customers shifting their funds from low cost
deposits to higher cost deposits.
Interest
rates were reduced by the Federal Reserve by a total of 100 basis points in
late
2007. However, because these reductions occurred late in the year,
with 50 basis points of cuts occurring in the last 61 days of the year, the
Company’s net interest margin was only marginally impacted by these cuts in
2007. As noted above, the Company’s net interest margin is negatively
impacted, at least in the short-term, by reductions in interest
rates. Accordingly, in 2008 the Company expects its net interest
margin to be negatively impacted by the interest rate cuts that occurred in
late
2007 and even more significantly by the additional rate cuts that have already
occurred in 2008. In January 2008, the Federal Reserve responded to
continued weakness in the US economy by reducing interest rates by another
125
basis points, and many economists are forecasting an additional 75-100 basis
points in rate cuts by June 2008. In addition to the initial normal
decline in net interest margin that the Company experiences when interest rates
are reduced (as discussed above), the cumulative impact of the magnitude of
the
approximately 300 basis points in interest rate cuts (those already made plus
those forecasted) is expected to amplify and lengthen the negative impact on
the
Company’s net interest margin in 2008 and possibly beyond. This is
primarily due to the Company’s inability to cut a significant portion of its
interest-bearing deposits by any significant amount due to their already
near-zero interest rate. Based on its most recent interest rate
modeling, which assumes an additional 75 basis points in interest rate cuts
(federal funds rate = 2.25%, prime = 5.25%), the Company projects its net
interest margin will be approximately 3.70% for the full year of
2008. In addition to the assumption regarding interest rates, the
aforementioned modeling is dependent on many other assumptions that could vary
significantly from expectations, including, but not limited
to: prepayment assumptions on fixed rate loans, loan growth, mix of
loan growth, deposit growth, mix of deposit growth, and the ability of the
Company to manage changes in rates earned on loans and paid on deposits, which
will depend largely on actions taken by the Company’s competitors.
The
Company has no market risk sensitive instruments held for trading purposes,
nor
does it maintain any foreign currency positions. Table 19 presents
the expected maturities of the Company’s other than trading market risk
sensitive financial instruments. Table 19 also presents the estimated
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.” The Company’s assets and liabilities have
estimated fair values that are do not materially differ from their carrying
amounts.
See
additional discussion regarding net interest income, as well as discussion
of
the changes in the annual net interest margin, in the section entitled “Net
Interest Income” above.
Return
on Assets and Equity
Table
20
shows return on assets (net income divided by average total assets), return
on
equity (net income divided by average shareholders’ equity), dividend payout
ratio (dividends per share divided by net income per share) and shareholders’
equity to assets ratio (average shareholders’ equity divided by average total
assets) for each of the years in the three-year period ended December 31,
2007.
Capital
Resources and Shareholders’ Equity
Shareholders’
equity at December 31, 2007 amounted to $174.1 million compared to $162.7
million at December 31, 2006. The two basic components that typically
have the largest impact on the Company’s shareholders’ equity are net income,
which increases shareholders’ equity, and dividends declared, which decreases
shareholders’ equity.
In
2007,
net income of $21,810,000 increased equity, while dividends declared of
$10,928,000 reduced equity. Other significant items affecting
shareholders’ equity in 2007 were 1) proceeds of $568,000 received from common
stock issued as a result of stock option exercises, 2) repurchases of 27,000
shares of the Company’s common stock at an average price of $19.41, which
reduced shareholders’ equity by $532,000, and 3) other comprehensive gain of
$216,000, which was primarily comprised of a $576,000 increase in the net
unrealized gain, net of taxes, of the Company’s available for sale securities
and a $360,000 negative adjustment to equity related to the funded status of
the
Company’s two defined benefit plans in accordance with Statement of Financial
Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans” (Statement 158). See
Notes 1(s) and 11 to the Company’s consolidated financial statements for
additional discussion of Statement 158.
In
2006,
net income of $19,302,000 increased equity, while dividends declared of
$10,589,000 reduced equity. Other significant items affecting
shareholders’ equity in 2006 were 1) proceeds of $1,027,000 received from common
stock issued as a result of stock option exercises, 2) proceeds of $1,557,000
received from the issuance of stock into the Company’s dividend reinvestment
plan, 3) repurchases of 53,000 shares of the Company’s common stock at an
average price of $20.97, which reduced shareholders’ equity by $1,112,000, and
4) a $3,775,000 negative adjustment to equity related to the Company’s December
31, 2006 adoption of Statement 158.
In
2005,
net income of $16,090,000 increased equity, while dividends declared of
$9,930,000 reduced equity. Other significant items affecting
shareholders’ equity in 2005 were 1) proceeds of $785,000 received from common
stock issued as a result of stock option exercises, 2) proceeds of $1,604,000
received from the issuance of stock into the Company’s dividend reinvestment
plan, and 3) other comprehensive loss of $1,417,000, which was primarily
comprised of a $1,362,000 decrease in the net unrealized gain, net of taxes,
of
the Company’s available for sale securities.
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 and the Bank must comply with regulatory capital requirements
established by the FRB and the 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 and the Bank 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 and Bank’s capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. These capital
standards require the Company and the Bank to maintain minimum ratios of “Tier
1” capital to total risk-weighted assets (“Tier I Capital Ratio”) and total
capital to risk-weighted assets (“Total Capital Ratio”) of 4.00% and 8.00%,
respectively.
Tier
1
capital is comprised of total shareholders’ equity, excluding unrealized gains
or losses from the securities available for sale, less intangible assets, and
total capital is comprised of Tier 1 capital plus certain adjustments, the
largest of which for the Company and the Bank is the allowance for loan
losses. Risk-weighted assets refer to the on- and off-balance sheet
exposures of the Company and the Bank, adjusted for their related risk levels
using formulas set forth in FRB and FDIC regulations.
In
addition to the risk-based capital requirements described above, the Company
and
the Bank are subject to a leverage capital requirement, which calls for a
minimum ratio of Tier 1 capital (as defined above) to quarterly average total
assets (“Leverage Ratio) of 3.00% to 5.00%, depending upon the institution’s
composite ratings as determined by its regulators. The FRB has not
advised the Company of any requirement specifically applicable to
it.
Table
21
presents the Company’s regulatory capital ratios as of December 31, 2007, 2006,
and 2005. All of the Company’s capital ratios have significantly
exceeded the minimum regulatory thresholds for all periods covered by this
report.
In
addition to shareholders’ equity, the Company has supplemented its capital in
recent years with trust preferred security debt issuances, which because of
their structure qualify as regulatory capital. This has generally
been necessary because the Company’s balance sheet growth has outpaced the
growth rate of its capital. Additionally, the Company has purchased
several bank branches over the years that resulted in the Company recording
intangible assets, which negatively impacted regulatory capital ratios. As
discussed in “Borrowings” above, the Company has issued a total of $67.0 million
in trust preferred securities since 2002, with the most recent issuance being
a
$25.8 million issuance that occurred in April 2006. Also as discussed
above, in November 2007 the Company elected to redeem $20.6 million of these
trust preferred securities due to their high interest rate. Due to
unfavorable market conditions, the Company elected to fund the redemption not
with new trust preferred securities, which was the Company’s intent, but rather
with a third-party line of credit, which does not quality as regulatory
capital. This redemption reduced the Company’s regulatory capital by
$20 million and reduced each of its regulatory capital ratios by approximately
100 basis points. It is the Company’s intent to replace the line of
credit with an instrument that qualifies as regulatory capital in the near
future.
In
addition to the minimum capital requirements described above, the regulatory
framework for prompt corrective action also contains specific capital guidelines
for a bank’s classification as “well capitalized.” The specific guidelines are
as follows – Tier I Capital Ratio of at least 6.00%, Total Capital Ratio of at
least 10.00%, and a Leverage Ratio of at least 5.00%. The Bank’s
regulatory ratios exceeded the threshold for “well-capitalized” status at
December 31, 2007, 2006, and 2005.
The
Company’s goal is to maintain its capital ratios at levels no less than the
“well-capitalized” thresholds set for banks. At December 31, 2007,
the Company’s total risk-based capital ratio was 10.30% compared to the 10.00%
“well-capitalized” threshold. The Company believes it has readily
accessible options to increase capital should the need arise, including
perpetual preferred stock, a secondary common stock offering, or the issuance
of
additional trust preferred securities.
See
“Supervision and Regulation” under “Business” above and Note 15 to the
consolidated financial statements for discussion of other matters that may
affect the Company’s capital resources.
Inflation
Because
the assets and liabilities of a bank are primarily monetary in nature (payable
in fixed determinable amounts), the performance of a bank is affected more
by
changes in interest rates than by inflation. Interest rates generally
increase as the rate of inflation increases, but the magnitude of the change
in
rates may not be the same. The effect of inflation on banks is normally not
as
significant as its influence on those businesses that have large investments
in
plant and inventories. During periods of high inflation, there are
normally corresponding increases in the money supply, and banks will normally
experience above average growth in assets, loans and deposits. Also,
general increases in the price of goods and services will result in increased
operating expenses.
Current
Accounting and Regulatory Matters
The
Company prepares its consolidated financial statements and related disclosures
in conformity with standards established by, among others, the Financial
Accounting Standards Board (the “FASB”). Because the information
needed by users of financial reports is dynamic, the FASB frequently issues
new
rules and proposes new rules for companies to apply in reporting their
activities. See Note 1(s) to the Company’s consolidated financial
statements for a discussion of recent rule proposals and changes.
Item
7A. Quantitative and Qualitative Disclosures About
Market Risk.
The
information responsive to this Item is found in Item 7 under the caption
“Interest Rate Risk.”
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. For
additional information that could affect the matters discussed in this
paragraph, see the “Risk Factors” section in Item 1A of this
report.
|
Table
1 Selected Consolidated Financial
Data
|
|||||||
|
($
in thousands, except per share
|
Year
Ended December 31,
|
|||||||||||||||||||
|
and
nonfinancial data)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Income
Statement Data
|
||||||||||||||||||||
|
Interest
income
|
$ | 148,942 | 129,207 | 101,429 | 81,593 | 74,667 | ||||||||||||||
|
Interest
expense
|
69,658 | 54,671 | 32,838 | 20,303 | 18,907 | |||||||||||||||
|
Net
interest income
|
79,284 | 74,536 | 68,591 | 61,290 | 55,760 | |||||||||||||||
|
Provision
for loan losses
|
5,217 | 4,923 | 3,040 | 2,905 | 2,680 | |||||||||||||||
|
Net
interest income after provision
|
74,067 | 69,613 | 65,551 | 58,385 | 53,080 | |||||||||||||||
|
Noninterest
income
|
18,473 | 14,310 | 15,004 | 15,864 | 14,918 | |||||||||||||||
|
Noninterest
expense
|
57,580 | 53,198 | 47,636 | 43,717 | 37,964 | |||||||||||||||
|
Income
before income taxes
|
34,960 | 30,725 | 32,919 | 30,532 | 30,034 | |||||||||||||||
|
Income
taxes
|
13,150 | 11,423 | 16,829 | 10,418 | 10,617 | |||||||||||||||
|
Net
income
|
21,810 | 19,302 | 16,090 | 20,114 | 19,417 | |||||||||||||||
|
Earnings
per share – basic
|
1.52 | 1.35 | 1.14 | 1.42 | 1.38 | |||||||||||||||
|
Earnings
per share – diluted
|
1.51 | 1.34 | 1.12 | 1.40 | 1.35 | |||||||||||||||
|
Per
Share Data
|
||||||||||||||||||||
|
Cash
dividends declared
|
$ | 0.76 | 0.74 | 0.70 | 0.66 | 0.63 | ||||||||||||||
|
Market
Price
|
||||||||||||||||||||
|
High
|
26.72 | 23.90 | 27.88 | 29.73 | 21.49 | |||||||||||||||
|
Low
|
16.40 | 19.47 | 19.32 | 18.47 | 15.30 | |||||||||||||||
|
Close
|
18.89 | 21.84 | 20.16 | 27.17 | 20.80 | |||||||||||||||
|
Book
value - stated
|
12.11 | 11.34 | 10.94 | 10.54 | 10.02 | |||||||||||||||
|
Tangible
book value
|
8.56 | 7.76 | 7.48 | 7.04 | 6.44 | |||||||||||||||
|
Selected
Balance Sheet Data (at year end)
|
||||||||||||||||||||
|
Total
assets
|
$ | 2,317,249 | 2,136,624 | 1,801,050 | 1,638,913 | 1,475,769 | ||||||||||||||
|
Loans
|
1,894,295 | 1,740,396 | 1,482,611 | 1,367,053 | 1,218,895 | |||||||||||||||
|
Allowance
for loan losses
|
21,324 | 18,947 | 15,716 | 14,717 | 13,569 | |||||||||||||||
|
Intangible
assets
|
51,020 | 51,394 | 49,227 | 49,330 | 50,701 | |||||||||||||||
|
Deposits
|
1,838,277 | 1,695,679 | 1,494,577 | 1,388,768 | 1,249,364 | |||||||||||||||
|
Borrowings
|
242,394 | 210,013 | 100,239 | 92,239 | 76,000 | |||||||||||||||
|
Total
shareholders’ equity
|
174,070 | 162,705 | 155,728 | 148,478 | 141,856 | |||||||||||||||
|
Selected
Average Balances
|
||||||||||||||||||||
|
Assets
|
$ | 2,139,576 | 1,922,510 | 1,709,380 | 1,545,332 | 1,339,823 | ||||||||||||||
|
Loans
|
1,808,219 | 1,623,188 | 1,422,419 | 1,295,682 | 1,113,426 | |||||||||||||||
|
Earning
assets
|
1,998,428 | 1,793,811 | 1,593,554 | 1,434,425 | 1,245,679 | |||||||||||||||
|
Deposits
|
1,780,265 | 1,599,575 | 1,460,620 | 1,306,404 | 1,153,385 | |||||||||||||||
|
Interest-bearing
liabilities
|
1,726,002 | 1,537,385 | 1,359,744 | 1,232,130 | 1,065,950 | |||||||||||||||
|
Shareholders’
equity
|
170,857 | 163,193 | 154,871 | 146,683 | 137,293 | |||||||||||||||
|
Ratios
|
||||||||||||||||||||
|
Return
on average assets
|
1.02 | % | 1.00 | % | 0.94 | % | 1.30 | % | 1.45 | % | ||||||||||
|
Return
on average equity
|
12.77 | % | 11.83 | % | 10.39 | % | 13.71 | % | 14.14 | % | ||||||||||
|
Net
interest margin (taxable-equivalent basis)
|
4.00 | % | 4.18 | % | 4.33 | % | 4.31 | % | 4.52 | % | ||||||||||
|
Shareholders’
equity to assets at year end
|
7.51 | % | 7.62 | % | 8.65 | % | 9.06 | % | 9.61 | % | ||||||||||
|
Loans
to deposits at year end
|
103.05 | % | 102.64 | % | 99.20 | % | 98.44 | % | 97.56 | % | ||||||||||
|
Allowance
for loan losses to total loans
|
1.13 | % | 1.09 | % | 1.06 | % | 1.08 | % | 1.11 | % | ||||||||||
|
Nonperforming
assets to total assets at year end
|
0.47 | % | 0.39 | % | 0.17 | % | 0.32 | % | 0.39 | % | ||||||||||
|
Net
charge-offs to average loans
|
0.16 | % | 0.11 | % | 0.14 | % | 0.14 | % | 0.10 | % | ||||||||||
|
Efficiency
ratio
|
58.57 | % | 59.54 | % | 56.68 | % | 56.32 | % | 53.32 | % | ||||||||||
|
Nonfinancial
Data
|
||||||||||||||||||||
|
Number
of branches
|
70 | 68 | 61 | 59 | 57 | |||||||||||||||
|
Number
of employees – Full time equivalents
|
614 | 620 | 578 | 563 | 550 | |||||||||||||||
Per
share
amounts for 2003 have been restated from their originally reported amounts
to
reflect the 3-for-2 stock split paid on November 15, 2004.
|
Table
2 Average Balances and Net Interest Income
Analysis
|
||||||||||||||||||||||||||||||||||||
|
Year
Ended December 31,
|
||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
($
in thousands)
|
Average
Volume
|
Avg.
Rate
|
Interest
Earned
or
Paid
|
Average
Volume
|
Avg.
Rate
|
Interest
Earned
or
Paid
|
Average
Volume
|
Avg.
Rate
|
Interest
Earned
or
Paid
|
|||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Loans
(1)
|
$ | 1,808,219 | 7.70 | % | $ | 139,323 | $ | 1,623,188 | 7.44 | % | $ | 120,694 | $ | 1,422,419 | 6.62 | % | $ | 94,097 | ||||||||||||||||||
|
Taxable
securities
|
131,035 | 4.92 | % | 6,453 | 118,032 | 4.84 | % | 5,718 | 114,223 | 4.54 | % | 5,184 | ||||||||||||||||||||||||
|
Non-taxable
securities (2)
|
13,786 | 8.09 | % | 1,115 | 11,466 | 8.84 | % | 1,014 | 10,782 | 8.57 | % | 924 | ||||||||||||||||||||||||
|
Short-term
investments,
primarily
federal funds
|
45,388 | 5.74 | % | 2,605 | 41,125 | 5.55 | % | 2,282 | 46,130 | 3.62 | % | 1,672 | ||||||||||||||||||||||||
|
Total
interest-earning
assets
|
1,998,428 | 7.48 | % | 149,496 | 1,793,811 | 7.23 | % | 129,708 | 1,593,554 | 6.39 | % | 101,877 | ||||||||||||||||||||||||
|
Cash
and due from banks
|
38,906 | 37,872 | 34,574 | |||||||||||||||||||||||||||||||||
|
Bank
premises and equipment,
net
|
45,398 | 38,592 | 32,179 | |||||||||||||||||||||||||||||||||
|
Other
assets
|
56,844 | 52,235 | 49,073 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 2,139,576 | $ | 1,922,510 | $ | 1,709,380 | ||||||||||||||||||||||||||||||
|
Liabilities
and Equity
|
||||||||||||||||||||||||||||||||||||
|
NOW
accounts
|
$ | 192,407 | 0.37 | % | $ | 712 | $ | 187,888 | 0.36 | % | $ | 679 | $ | 187,721 | 0.32 | % | $ | 602 | ||||||||||||||||||
|
Money
market accounts
|
239,258 | 3.31 | % | 7,929 | 183,751 | 2.71 | % | 4,972 | 153,649 | 1.40 | % | 2,148 | ||||||||||||||||||||||||
|
Savings
accounts
|
106,357 | 1.62 | % | 1,727 | 111,909 | 1.29 | % | 1,443 | 129,278 | 1.00 | % | 1,298 | ||||||||||||||||||||||||
|
Time
deposits >$100,000
|
450,801 | 5.03 | % | 22,687 | 390,246 | 4.53 | % | 17,662 | 350,240 | 3.26 | % | 11,425 | ||||||||||||||||||||||||
|
Other
time deposits
|
567,572 | 4.67 | % | 26,498 | 520,140 | 4.09 | % | 21,276 | 455,557 | 2.86 | % | 13,043 | ||||||||||||||||||||||||
|
Total
interest-bearing deposits
|
1,556,395 | 3.83 | % | 59,553 | 1,393,934 | 3.30 | % | 46,032 | 1,276,445 | 2.23 | % | 28,516 | ||||||||||||||||||||||||
|
Securities
sold under agreements to repurchase
|
39,220 | 3.76 | % | 1,476 | 30,036 | 3.72 | % | 1,116 | 6,219 | 2.88 | % | 179 | ||||||||||||||||||||||||
|
Borrowings
|
130,387 | 6.62 | % | 8,629 | 113,415 | 6.63 | % | 7,523 | 77,080 | 5.37 | % | 4,143 | ||||||||||||||||||||||||
|
Total
interest-bearing
liabilities
|
1,726,002 | 4.04 | % | 69,658 | 1,537,385 | 3.56 | % | 54,671 | 1,359,744 | 2.42 | % | 32,838 | ||||||||||||||||||||||||
|
Non-interest-bearing
deposits
|
223,870 | 205,641 | 184,175 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
18,847 | 16,291 | 10,590 | |||||||||||||||||||||||||||||||||
|
Shareholders’
equity
|
170,857 | 163,193 | 154,871 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and
shareholders’
equity
|
$ | 2,139,576 | $ | 1,922,510 | $ | 1,709,380 | ||||||||||||||||||||||||||||||
|
Net
yield on interest-
earning
assets
and
net interest income |
4.00 | % | $ | 79,838 | 4.18 | % | $ | 75,037 | 4.33 | % | $ | 69,039 | ||||||||||||||||||||||||
|
Interest
rate spread
|
3.44 | % | 3.67 | % | 3.97 | % | ||||||||||||||||||||||||||||||
|
Average
prime rate
|
8.05 | % | 7.96 | % | 6.19 | % | ||||||||||||||||||||||||||||||
|
|
(1)
|
Average
loans include nonaccruing loans, the effect of which is to lower
the
average rate shown. Interest earned includes recognized loan
fees in the amounts of $836,000, $696,000, and $1,037,000 for 2007,
2006,
and 2005, respectively.
|
|
|
(2)
|
Includes
tax-equivalent adjustments of $554,000, $501,000, and $448,000 in
2007,
2006, and 2005, respectively, to reflect the federal and state benefit
of
the tax-exempt securities (using a 39% combined tax rate), reduced
by the
related nondeductible portion of interest
expense.
|
|
Table
3 Volume and Rate Variance Analysis
|
||||||||||||||||||||||||
|
Year
Ended December 31, 2007
|
Year
Ended December 31, 2006
|
|||||||||||||||||||||||
|
Change
Attributable to
|
Change
Attributable to
|
|||||||||||||||||||||||
|
(In
thousands)
|
Changes
in
Volumes |
Changes
in
Rates
|
Total
Increase
(Decrease)
|
Changes
in
Volumes
|
Changes
in
Rates
|
Total
Increase
(Decrease)
|
||||||||||||||||||
|
Interest
income (tax-equivalent):
|
||||||||||||||||||||||||
|
Loans
|
$ | 14,007 | 4,622 | 18,629 | 14,105 | 12,492 | 26,597 | |||||||||||||||||
|
Taxable
securities
|
635 | 100 | 735 | 179 | 355 | 534 | ||||||||||||||||||
|
Non-taxable
securities
|
196 | (95 | ) | 101 | 60 | 30 | 90 | |||||||||||||||||
|
Short-term
investments, principally federal
funds sold
|
241 | 82 | 323 | (230 | ) | 840 | 610 | |||||||||||||||||
|
Total
interest income
|
15,079 | 4,709 | 19,788 | 14,114 | 13,717 | 27,831 | ||||||||||||||||||
|
Interest
expense:
|
||||||||||||||||||||||||
|
NOW
accounts
|
17 | 16 | 33 | 1 | 76 | 77 | ||||||||||||||||||
|
Money
Market accounts
|
1,671 | 1,286 | 2,957 | 618 | 2,206 | 2,824 | ||||||||||||||||||
|
Savings
accounts
|
(81 | ) | 365 | 284 | (199 | ) | 344 | 145 | ||||||||||||||||
|
Time
deposits>$100,000
|
2,894 | 2,131 | 5,025 | 1,558 | 4,679 | 6,237 | ||||||||||||||||||
|
Other
time deposits
|
2,077 | 3,145 | 5,222 | 2,245 | 5,988 | 8,233 | ||||||||||||||||||
|
Total
interest-bearing deposits
|
6,578 | 6,943 | 13,521 | 4,223 | 13,293 | 17,516 | ||||||||||||||||||
|
Securities
sold under agreements to repurchase
|
343 | 17 | 360 | 785 | 152 | 937 | ||||||||||||||||||
|
Borrowings
|
1,124 | (18 | ) | 1,106 | 2,182 | 1,198 | 3,380 | |||||||||||||||||
|
Total
interest expense
|
8,045 | 6,942 | 14,987 | 7,190 | 14,643 | 21,833 | ||||||||||||||||||
|
Net
interest income (tax-equivalent)
|
$ | 7,034 | (2,233 | ) | 4,801 | 6,924 | (926 | ) | 5,998 | |||||||||||||||
Changes
attributable to both volume and rate are allocated equally between rate and
volume variances.
|
Table
4 Noninterest Income
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Service
charges on deposit accounts
|
$ | 9,988 | 8,968 | 8,537 | ||||||||
|
Other
service charges, commissions, and fees
|
5,158 | 4,578 | 3,963 | |||||||||
|
Fees
from presold mortgages
|
1,135 | 1,062 | 1,176 | |||||||||
|
Commissions
from sales of insurance and financial
products
|
1,511 | 1,434 | 1,307 | |||||||||
|
Data
processing fees
|
204 | 162 | 279 | |||||||||
|
Total
core noninterest income
|
17,996 | 16,204 | 15,262 | |||||||||
|
Loan
sale gains
|
- | - | 9 | |||||||||
|
Securities
gains, net
|
487 | 205 | 5 | |||||||||
|
Other
gains (losses), net
|
(10 | ) | (2,099 | ) | (272 | ) | ||||||
|
Total
|
$ | 18,473 | 14,310 | 15,004 | ||||||||
|
Table
5 Noninterest Expenses
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Salaries
|
$ | 26,227 | 23,867 | 21,921 | ||||||||
|
Employee
benefits
|
7,443 | 6,811 | 6,054 | |||||||||
|
Total
personnel expense
|
33,670 | 30,678 | 27,975 | |||||||||
|
Occupancy
expense
|
3,795 | 3,447 | 3,037 | |||||||||
|
Equipment
related expenses
|
3,809 | 3,419 | 2,965 | |||||||||
|
Amortization
of intangible assets
|
374 | 322 | 290 | |||||||||
|
Stationery
and supplies
|
1,593 | 1,675 | 1,590 | |||||||||
|
Telephone
|
1,246 | 1,273 | 1,260 | |||||||||
|
Non-credit
losses
|
204 | 165 | 110 | |||||||||
|
Other
operating expenses
|
12,889 | 12,219 | 10,409 | |||||||||
|
Total
|
$ | 57,580 | 53,198 | 47,636 | ||||||||
|
Table
6 Income Taxes
|
||||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Current -
Federal
|
$ | 11,625 | 10,809 | 8,285 | ||||||||
|
- State
|
1,938 | 1,927 | 8,700 | |||||||||
|
Deferred -
Federal
|
(348 | ) | (1,112 | ) | (124 | ) | ||||||
|
-
State
|
(65 | ) | (201 | ) | (32 | ) | ||||||
|
Total
|
$ | 13,150 | 11,423 | 16,829 | ||||||||
|
Effective
tax rate
|
37.6 | % | 37.2 | % | 51.1 | % | ||||||
|
Table
7 Distribution of Assets and Liabilities
|
||||||||||||
|
As
of December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Assets
|
||||||||||||
|
Interest-earning
assets
|
||||||||||||
|
Net
loans
|
81 | % | 80 | % | 81 | % | ||||||
|
Securities
available for sale
|
6 | 6 | 6 | |||||||||
|
Securities
held to maturity
|
1 | 1 | 1 | |||||||||
|
Short
term investments
|
6 | 5 | 4 | |||||||||
|
Total
interest-earning assets
|
94 | 92 | 92 | |||||||||
|
Noninterest-earning
assets
|
||||||||||||
|
Cash
and due from banks
|
1 | 2 | 2 | |||||||||
|
Premises
and equipment
|
2 | 2 | 2 | |||||||||
|
Other
assets
|
3 | 4 | 4 | |||||||||
|
Total
assets
|
100 | % | 100 | % | 100 | % | ||||||
|
Liabilities
and shareholders’ equity
|
||||||||||||
|
Demand
deposits – noninterest bearing
|
10 | % | 10 | % | 11 | % | ||||||
|
NOW
deposits
|
8 | 9 | 10 | |||||||||
|
Money
market deposits
|
11 | 9 | 9 | |||||||||
|
Savings
deposits
|
4 | 5 | 6 | |||||||||
|
Time
deposits of $100,000 or more
|
21 | 20 | 20 | |||||||||
|
Other
time deposits
|
25 | 26 | 27 | |||||||||
|
Total
deposits
|
79 | 79 | 83 | |||||||||
|
Securities
sold under agreements to repurchase
|
2 | 2 | 2 | |||||||||
|
Borrowings
|
10 | 10 | 5 | |||||||||
|
Accrued
expenses and other liabilities
|
1 | 1 | 1 | |||||||||
|
Total
liabilities
|
92 | 92 | 91 | |||||||||
|
Shareholders’
equity
|
8 | 8 | 9 | |||||||||
|
Total
liabilities and shareholders’ equity
|
100 | % | 100 | % | 100 | % | ||||||
|
Table
8 Securities Portfolio Composition
|
||||||||||||
|
As
of December 31,
|
||||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Securities
available for sale:
|
||||||||||||
|
Government-sponsored
enterprise securities
|
$ | 69,893 | 62,456 | 44,481 | ||||||||
|
Mortgage-backed
securities
|
39,296 | 43,442 | 47,928 | |||||||||
|
Corporate
bonds
|
13,855 | 13,580 | 14,912 | |||||||||
|
Equity
securities
|
12,070 | 10,486 | 6,292 | |||||||||
|
Total
securities available for sale
|
135,114 | 129,964 | 113,613 | |||||||||
|
Securities
held to maturity:
|
||||||||||||
|
State
and local governments
|
16,611 | 13,089 | 11,382 | |||||||||
|
Other
|
29 | 33 | 66 | |||||||||
|
Total
securities held to maturity
|
16,640 | 13,122 | 11,448 | |||||||||
|
Total
securities
|
$ | 151,754 | 143,086 | 125,061 | ||||||||
|
Average
total securities during year
|
$ | 144,821 | 129,498 | 125,005 | ||||||||
|
Table
9 Securities Portfolio Maturity Schedule
|
||||||||||||
|
As
of December 31,
|
||||||||||||
|
2007
|
||||||||||||
|
($
in thousands)
|
Book
Value
|
Fair
Value
|
Book
Yield
(1)
|
|||||||||
|
Securities
available for sale:
|
||||||||||||
|
Government-sponsored
enterprise securities
|
||||||||||||
|
Due
within one year
|
$ | 17,707 | 17,697 | 3.92 | % | |||||||
|
Due
after one but within five years
|
51,756 | 52,196 | 5.18 | % | ||||||||
|
Total
|
69,463 | 69,893 | 4.86 | % | ||||||||
|
Mortgage-backed
securities (2)
|
||||||||||||
|
Due
within one year
|
170 | 167 | 4.21 | % | ||||||||
|
Due
after one but within five years
|
22,169 | 21,930 | 4.52 | % | ||||||||
|
Due
after five but within ten years
|
9,191 | 9,028 | 4.71 | % | ||||||||
|
Due
after ten years
|
8,176 | 8,171 | 5.45 | % | ||||||||
|
Total
|
39,706 | 39,296 | 4.75 | % | ||||||||
|
Corporate
debt securities
|
||||||||||||
|
Due
after five but within ten years
|
6,092 | 5,885 | 5.91 | % | ||||||||
|
Due
after ten years
|
7,727 | 7,970 | 7.92 | % | ||||||||
|
Total
|
13,819 | 13,855 | 7.03 | % | ||||||||
|
Equity
securities
|
12,040 | 12,070 | 5.91 | % | ||||||||
|
Total
securities available for sale
|
||||||||||||
|
Due
within one year
|
17,877 | 17,864 | 3.92 | % | ||||||||
|
Due
after one but within five years
|
73,925 | 74,126 | 4.98 | % | ||||||||
|
Due
after five but within ten years
|
15,283 | 14,913 | 5.19 | % | ||||||||
|
Due
after ten years
|
15,903 | 16,141 | 6.65 | % | ||||||||
|
Equity
securities
|
12,040 | 12,070 | 5.91 | % | ||||||||
|
Total
|
$ | 135,028 | 135,114 | 5.14 | % | |||||||
|
Securities
held to maturity:
|
||||||||||||
|
State
and local governments
|
||||||||||||
|
Due
within one year
|
$ | 2,264 | 2,275 | 7.46 | % | |||||||
|
Due
after one but within five years
|
3,466 | 3,496 | 6.95 | % | ||||||||
|
Due
after five but within ten years
|
4,608 | 4,649 | 6.33 | % | ||||||||
|
Due
after ten years
|
6,273 | 6,200 | 6.31 | % | ||||||||
|
Total
|
16,611 | 16,620 | 6.61 | % | ||||||||
|
Other
|
||||||||||||
|
Due
after one but within five years
|
29 | 29 | 6.57 | % | ||||||||
|
Total
|
29 | 29 | 6.57 | % | ||||||||
|
Total
securities held to maturity
|
||||||||||||
|
Due
within one year
|
2,264 | 2,275 | 7.46 | % | ||||||||
|
Due
after one but within five years
|
3,495 | 3,525 | 6.95 | % | ||||||||
|
Due
after five but within ten years
|
4,608 | 4,649 | 6.33 | % | ||||||||
|
Due
after ten years
|
6,273 | 6,200 | 6.31 | % | ||||||||
|
Total
|
$ | 16,640 | 16,649 | 6.61 | % | |||||||
(1)
Yields
on
tax-exempt investments have been adjusted to a taxable equivalent basis using
a
39% tax rate.
(2) Mortgage-backed
securities are shown maturing in the periods consistent with their estimated
lives based on expected prepayment speeds.
|
Table
10 Loan Portfolio Composition
|
||||||||||||||||||||||||||||||||||||||||
|
As
of December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||||||||||||||
|
($
in thousands)
|
Amount
|
%
of
Total
Loans
|
Amount
|
%
of
Total
Loans
|
Amount
|
%
of
Total
Loans
|
Amount
|
%
of
Total
Loans
|
Amount
|
%
of
Total
Loans
|
||||||||||||||||||||||||||||||
|
Commercial,
financial,
& agricultural
|
$ | 172,530 | 9.11 | % | $ | 165,214 | 9.49 | % | $ | 135,942 | 9.17 | % | $ | 122,501 | 8.96 | % | $ | 117,287 | 9.62 | % | ||||||||||||||||||||
|
Real
estate -construction
|
212,902 | 11.24 | % | 155,440 | 8.93 | % | 125,158 | 8.44 | % | 117,158 | 8.57 | % | 98,189 | 8.05 | % | |||||||||||||||||||||||||
|
Real
estate -mortgage(1)
|
1,423,842 | 75.17 | % | 1,344,553 | 77.26 | % | 1,150,068 | 77.58 | % | 1,063,694 | 77.80 | % | 939,578 | 77.05 | % | |||||||||||||||||||||||||
|
Installment
loans
to individuals
|
84,875 | 4.48 | % | 75,162 | 4.32 | % | 71,259 | 4.81 | % | 63,913 | 4.67 | % | 64,444 | 5.28 | % | |||||||||||||||||||||||||
|
Loans,
gross
|
1,894,149 | 100.0 | % | 1,740,369 | 100.0 | % | 1,482,427 | 100.0 | % | 1,367,266 | 100.0 | % | 1,219,498 | 100.0 | % | |||||||||||||||||||||||||
|
Unamortized
net
deferred loan
costs/ (fees)
|
146 | 27 | 184 | (213 | ) | (603 | ) | |||||||||||||||||||||||||||||||||
|
Total
loans, net
|
$ | 1,894,295 | $ | 1,740,396 | $ | 1,482,611 | $ | 1,367,053 | $ | 1,218,895 | ||||||||||||||||||||||||||||||
(1) The
majority of these loans are various personal and commercial loans where real
estate provides additional security for the loan.
|
Table
11 Loan Maturities
|
||||||||||||||||||||||||||||||||
|
As
of December 31, 2007
|
||||||||||||||||||||||||||||||||
|
Due
within
one
year
|
Due
after one year but
within
five years
|
Due
after five
years
|
Total
|
|||||||||||||||||||||||||||||
|
($
in thousands)
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
||||||||||||||||||||||||
|
Variable
Rate Loans:
|
||||||||||||||||||||||||||||||||
|
Commercial,
financial, and
agricultural
|
$ | 49,225 | 7.41 | % | $ | 15,876 | 7.40 | % | $ | 2,688 | 7.36 | % | $ | 67,789 | 7.41 | % | ||||||||||||||||
|
Real
estate - construction
|
138,975 | 7.60 | % | 24,096 | 7.06 | % |
─
|
─
|
163,071 | 7.52 | % | |||||||||||||||||||||
|
Real
estate - mortgage
|
155,654 | 7.40 | % | 185,608 | 7.27 | % | 280,644 | 7.35 | % | 621,906 | 7.34 | % | ||||||||||||||||||||
|
Installment
loans to
individuals
|
1,450 | 7.66 | % | 7,960 | 9.37 | % | 12,032 | 7.66 | % | 21,442 | 8.29 | % | ||||||||||||||||||||
|
Total
at variable rates
|
345,304 | 7.48 | % | 233,540 | 7.33 | % | 295,364 | 7.36 | % | 874,208 | 7.40 | % | ||||||||||||||||||||
|
Fixed
Rate Loans:
|
||||||||||||||||||||||||||||||||
|
Commercial,
financial, and
agricultural
|
33,837 | 7.47 | % | 61,530 | 7.57 | % | 8,324 | 6.08 | % | 103,691 | 7.42 | % | ||||||||||||||||||||
|
Real
estate - construction
|
34,222 | 7.90 | % | 14,142 | 7.59 | % | 33 | 8.76 | % | 48,397 | 7.81 | % | ||||||||||||||||||||
|
Real
estate - mortgage
|
154,745 | 6.92 | % | 587,990 | 7.37 | % | 53,262 | 7.03 | % | 795,997 | 7.26 | % | ||||||||||||||||||||
|
Installment
loans to
individuals
|
15,128 | 7.95 | % | 47,588 | 9.65 | % | 1,479 | 8.11 | % | 64,195 | 9.21 | % | ||||||||||||||||||||
|
Total
at fixed rates
|
237,932 | 7.20 | % | 711,250 | 7.54 | % | 63,098 | 6.93 | % | 1,012,280 | 7.43 | % | ||||||||||||||||||||
|
Subtotal
|
583,236 | 7.37 | % | 944,790 | 7.49 | % | 358,462 | 7.28 | % | 1,886,488 | 7.42 | % | ||||||||||||||||||||
|
Nonaccrual
loans
|
7,807 |
─
|
─
|
7,807 | ||||||||||||||||||||||||||||
|
Total
loans
|
$ | 591,043 | $ | 944,790 | $ | 358,462 | $ | 1,894,295 | ||||||||||||||||||||||||
The
above
table is based on contractual scheduled maturities. Early repayment
of loans or renewals at maturity are not considered in this table.
|
Table
12 Nonperforming Assets
|
||||||||||||||||||||
|
As
of December 31,
|
||||||||||||||||||||
|
($
in thousands)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Nonaccrual
loans
|
$ | 7,807 | 6,852 | 1,640 | 3,707 | 4,274 | ||||||||||||||
|
Restructured
loans
|
6 | 10 | 13 | 17 | 21 | |||||||||||||||
|
Accruing
loans >90 days past due
|
- | - | - | - | - | |||||||||||||||
|
Total
nonperforming loans
|
7,813 | 6,862 | 1,653 | 3,724 | 4,295 | |||||||||||||||
|
Other
real estate (included in other assets)
|
3,042 | 1,539 | 1,421 | 1,470 | 1,398 | |||||||||||||||
|
Total
nonperforming assets
|
$ | 10,855 | 8,401 | 3,074 | 5,194 | 5,693 | ||||||||||||||
|
Nonperforming
loans as a percentage of
total loans
|
0.41 | % | 0.39 | % | 0.11 | % | 0.27 | % | 0.35 | % | ||||||||||
|
Nonperforming
assets as a percentage of loans
and other real estate
|
0.57 | % | 0.48 | % | 0.21 | % | 0.38 | % | 0.47 | % | ||||||||||
|
Nonperforming
assets as a percentage of total
assets
|
0.47 | % | 0.39 | % | 0.17 | % | 0.32 | % | 0.39 | % | ||||||||||
|
Allowance
for loan losses as a percentage of
nonperforming loans
|
272.93 | % | 276.11 | % | 950.76 | % | 395.19 | % | 315.93 | % | ||||||||||
|
Table
13 Allocation of the Allowance for Loan Losses
|
||||||||||||||||||||
|
As
of December 31,
|
||||||||||||||||||||
|
($
in thousands)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Commercial,
financial, and agricultural
|
$ | 3,516 | 3,548 | 2,686 | 2,453 | 2,420 | ||||||||||||||
|
Real
estate - construction
|
1,827 | 1,182 | 798 | 757 | 641 | |||||||||||||||
|
Real
estate - mortgage
|
13,477 | 12,186 | 10,445 | 9,965 | 8,920 | |||||||||||||||
|
Installment
loans to individuals
|
2,486 | 2,026 | 1,763 | 1,468 | 1,435 | |||||||||||||||
|
Total
allocated
|
21,306 | 18,942 | 15,692 | 14,643 | 13,416 | |||||||||||||||
|
Unallocated
|
18 | 5 | 24 | 74 | 153 | |||||||||||||||
|
Total
|
$ | 21,324 | 18,947 | 15,716 | 14,717 | 13,569 | ||||||||||||||
|
Table
14 Loan Loss and Recovery Experience
|
||||||||||||||||||||
|
As
of December 31,
|
||||||||||||||||||||
|
($
in thousands)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Loans
outstanding at end of year
|
$ | 1,894,295 | 1,740,396 | 1,482,611 | 1,367,053 | 1,218,895 | ||||||||||||||
|
Average
amount of loans outstanding
|
$ | 1,808,219 | 1,623,188 | 1,422,419 | 1,295,682 | 1,113,426 | ||||||||||||||
|
Allowance
for loan losses, at beginning
of year
|
$ | 18,947 | 15,716 | 14,717 | 13,569 | 10,907 | ||||||||||||||
|
Provision
for loan losses
|
5,217 | 4,923 | 3,040 | 2,905 | 2,680 | |||||||||||||||
|
Additions
related to loans assumed in corporate
acquisitions
|
─
|
52 |
─
|
─
|
1,083 | |||||||||||||||
| 24,164 | 20,691 | 17,757 | 16,474 | 14,670 | ||||||||||||||||
|
Loans
charged off:
|
||||||||||||||||||||
|
Commercial,
financial and agricultural
|
(982 | ) | (486 | ) | (756 | ) | (247 | ) | (205 | ) | ||||||||||
|
Real
estate - mortgage
|
(982 | ) | (510 | ) | (1,120 | ) | (1,143 | ) | (705 | ) | ||||||||||
|
Installment
loans to individuals
|
(894 | ) | (838 | ) | (487 | ) | (548 | ) | (431 | ) | ||||||||||
|
Overdraft
losses (1)
|
(319 | ) | (183 | ) |
─
|
─
|
─
|
|||||||||||||
|
Total
charge-offs
|
(3,177 | ) | (2,017 | ) | (2,363 | ) | (1,938 | ) | (1,341 | ) | ||||||||||
|
Recoveries
of loans previously charged-off:
|
||||||||||||||||||||
|
Commercial,
financial and agricultural
|
49 | 57 | 99 | 45 | 73 | |||||||||||||||
|
Real
estate - mortgage
|
66 | 61 | 115 | 63 | 30 | |||||||||||||||
|
Installment
loans to individuals
|
148 | 112 | 108 | 73 | 137 | |||||||||||||||
|
Overdraft
recoveries (1)
|
74 | 43 |
─
|
─
|
─
|
|||||||||||||||
|
Total
recoveries
|
337 | 273 | 322 | 181 | 240 | |||||||||||||||
|
Net
charge-offs
|
(2,840 | ) | (1,744 | ) | (2,041 | ) | (1,757 | ) | (1,101 | ) | ||||||||||
|
Allowance
for loan losses, at end of year
|
$ | 21,324 | 18,947 | 15,716 | 14,717 | 13,569 | ||||||||||||||
|
Ratios:
|
||||||||||||||||||||
|
Net
charge-offs as a percent of average loans
|
0.16 | % | 0.11 | % | 0.14 | % | 0.14 | % | 0.10 | % | ||||||||||
|
Allowance
for loan losses as a percent
of loans at end of year
|
1.13 | % | 1.09 | % | 1.06 | % | 1.08 | % | 1.11 | % | ||||||||||
|
Allowance
for loan losses as a multiple of
net charge-offs
|
7.51 | x | 10.86 | x | 7.70 | x | 8.38 | x | 12.32 | x | ||||||||||
|
Provision
for loan losses as a percent of net charge-offs
|
183.70 | % | 282.28 | % | 148.95 | % | 165.33 | % | 243.42 | % | ||||||||||
|
Recoveries
of loans previously charged-off as
a percent of loans charged-off
|
10.61 | % | 13.53 | % | 13.63 | % | 9.34 | % | 17.90 | % | ||||||||||
|
(1) Until
July 1, 2006, the Company recorded net overdraft charge-offs as a
reduction to service charge income.
|
||||||||||||||||||||
|
Table
15 Average Deposits
|
||||||||||||||||||||||||
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
($
in thousands)
|
Average
Amount
|
Average
Rate
|
Average
Amount
|
Average
Rate
|
Average
Amount
|
Average
Rate
|
||||||||||||||||||
|
NOW
accounts
|
$ | 192,407 | 0.37 | % | 187,888 | 0.36 | % | 187,721 | 0.32 | % | ||||||||||||||
|
Money
market accounts
|
239,258 | 3.31 | % | 183,751 | 2.71 | % | 153,649 | 1.40 | % | |||||||||||||||
|
Savings
accounts
|
106,357 | 1.62 | % | 111,909 | 1.29 | % | 129,278 | 1.00 | % | |||||||||||||||
|
Time
deposits >$100,000
|
450,801 | 5.03 | % | 390,246 | 4.53 | % | 350,240 | 3.26 | % | |||||||||||||||
|
Other
time deposits
|
567,572 | 4.67 | % | 520,140 | 4.09 | % | 455,557 | 2.86 | % | |||||||||||||||
|
Total
interest-bearing deposits
|
1,556,395 | 3.83 | % | 1,393,934 | 3.30 | % | 1,276,445 | 2.23 | % | |||||||||||||||
|
Noninterest-bearing
deposits
|
223,870 | - | 205,641 | - | 184,175 | - | ||||||||||||||||||
|
Total
deposits
|
$ | 1,780,265 | 3.35 | % | 1,599,575 | 2.88 | % | 1,460,620 | 1.95 | % | ||||||||||||||
|
Table
16 Maturities of Time Deposits of $100,000 or
More
|
||||||||||||||||||||
|
As
of December 31, 2007
|
||||||||||||||||||||
|
(In
thousands)
|
3
Months
or
Less
|
Over
3 to 6
Months
|
Over
6 to 12
Months
|
Over
12
Months
|
Total
|
|||||||||||||||
|
Time
deposits of $100,000 or more
|
$ | 160,084 | 139,314 | 131,329 | 48,449 | 479,176 | ||||||||||||||
|
Table
17 Interest Rate Sensitivity Analysis
|
||||||||||||||||||||
|
Repricing
schedule for interest-earning assets and interest-bearing
liabilities
held as of December 31, 2007
|
||||||||||||||||||||
|
($
in thousands)
|
3
Months
or
Less
|
Over
3 to 12
Months
|
Total
Within
12
Months
|
Over
12
Months
|
Total
|
|||||||||||||||
|
Earning
assets:
|
||||||||||||||||||||
|
Loans,
net of deferred fees (1)
|
$ | 871,075 | 194,232 | 1,065,307 | 828,988 | 1,894,295 | ||||||||||||||
|
Securities
available for sale
|
25,583 | 41,287 | 66,870 | 68,244 | 135,114 | |||||||||||||||
|
Securities
held to maturity
|
1,171 | 2,634 | 3,805 | 12,835 | 16,640 | |||||||||||||||
|
Short-term
investments
|
136,813 |
─
|
136,813 |
─
|
136,813 | |||||||||||||||
|
Total
earning assets
|
$ | 1,034,642 | 238,153 | 1,272,795 | 910,067 | 2,182,862 | ||||||||||||||
|
Percent
of total earning assets
|
47.40 | % | 10.91 | % | 58.31 | % | 41.69 | % | 100.00 | % | ||||||||||
|
Cumulative
percent of total earning assets
|
47.40 | % | 58.31 | % | 58.31 | % | 100.00 | % | 100.00 | % | ||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||
|
NOW
deposits
|
$ | 192,785 |
─
|
192,785 |
─
|
192,785 | ||||||||||||||
|
Money
market deposits
|
264,653 |
─
|
264,653 |
─
|
264,653 | |||||||||||||||
|
Savings
deposits
|
100,955 |
─
|
100,955 |
─
|
100,955 | |||||||||||||||
|
Time
deposits of $100,000 or more
|
160,084 | 270,643 | 430,727 | 48,449 | 479,176 | |||||||||||||||
|
Other
time deposits
|
174,461 | 335,403 | 509,864 | 58,703 | 568,567 | |||||||||||||||
|
Securities
sold under agreements to
repurchase
|
39,695 |
─
|
39,695 |
─
|
39,695 | |||||||||||||||
|
Borrowings
|
236,394 | 1,000 | 237,394 | 5,000 | 242,394 | |||||||||||||||
|
Total
interest-bearing liabilities
|
$ | 1,169,027 | 607,046 | 1,776,073 | 112,152 | 1,888,225 | ||||||||||||||
|
Percent
of total interest-bearing liabilities
|
61.91 | % | 32.15 | % | 94.06 | % | 5.94 | % | 100.00 | % | ||||||||||
|
Cumulative
percent of total interest-bearing
liabilities
|
61.91 | % | 94.06 | % | 94.06 | % | 100.00 | % | 100.00 | % | ||||||||||
|
Interest
sensitivity gap
|
$ | (134,385 | ) | (368,893 | ) | (503,278 | ) | 797,915 | 294,637 | |||||||||||
|
Cumulative
interest sensitivity gap
|
(134,385 | ) | (503,278 | ) | (503,278 | ) | 294,637 | 294,637 | ||||||||||||
|
Cumulative
interest sensitivity gap as
a percent of total earning assets
|
(6.16 | %) | (23.06 | %) | (23.06 | %) | 13.50 | % | 13.50 | % | ||||||||||
|
Cumulative
ratio of interest-sensitive assets
to interest-sensitive liabilities
|
88.50 | % | 71.66 | % | 71.66 | % | 115.60 | % | 115.60 | % | ||||||||||
|
(1) The
three months or less category for loans includes $63,367 in adjustable
rate loans that have reached their contractual rate caps.
|
||||||||||||||||||||
|
Table
18 Contractual Obligations and Other Commercial
Commitments
|
||||||||||||||||||||
|
Payments
Due by Period (in thousands)
|
||||||||||||||||||||
|
Contractual
Obligations
As
of December 31, 2007
|
Total
|
On
Demand or
Less
than
1 Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
|||||||||||||||
|
Securities
sold under agreements to
repurchase
|
$ | 39,695 | 39,695 |
─
|
─
|
─
|
||||||||||||||
|
Borrowings
|
242,394 | 171,000 | 25,000 |
─
|
46,394 | |||||||||||||||
|
Operating
leases
|
2,484 | 485 | 708 | 475 | 816 | |||||||||||||||
|
Total
contractual cash obligations, excluding
deposits
|
284,573 | 211,180 | 25,708 | 475 | 47,210 | |||||||||||||||
|
Deposits
|
1,838,277 | 1,730,179 | 78,420 | 29,183 | 495 | |||||||||||||||
|
Total
contractual cash obligations, including
deposits
|
$ | 2,122,850 | 1,941,359 | 104,128 | 29,658 | 47,705 | ||||||||||||||
|
Amount
of Commitment Expiration Per Period (in thousands)
|
||||||||||||||||||||
|
Other
Commercial
Commitments
As
of December 31, 2007
|
Total
Amounts
Committed
|
Less
than
1 Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
|||||||||||||||
|
Credit
cards
|
$ | 23,629 | 11,815 | 11,814 |
─
|
─
|
||||||||||||||
|
Lines
of credit and loan commitments
|
316,531 | 147,420 | 22,105 | 9,168 | 137,838 | |||||||||||||||
|
Standby
letters of credit
|
6,176 | 5,826 | 308 | 42 |
─
|
|||||||||||||||
|
Total
commercial commitments
|
$ | 346,336 | 165,061 | 34,227 | 9,210 | 137,838 | ||||||||||||||
|
Table
19 Market Risk Sensitive Instruments
|
||||||||||||||||||||||||||||||||||||
|
Expected
Maturities of Market Sensitive Instruments Held
at
December 31, 2007 Occurring in Indicated Year
|
||||||||||||||||||||||||||||||||||||
|
($
in thousands)
|
2008
|
2009
|
2010
|
2011
|
2012
|
Beyond
|
Total
|
Average
Interest
Rate
|
Estimated
Fair
Value
|
|||||||||||||||||||||||||||
|
Due
from banks, interest-bearing
|
$ | 111,591 | - | - | - | - | - | 111,591 | 4.05 | % | $ | 111,591 | ||||||||||||||||||||||||
|
Federal
funds sold
|
23,554 | - | - | - | - | - | 23,554 | 4.05 | % | 23,554 | ||||||||||||||||||||||||||
|
Presold
mortgages in process
of settlement
|
1,668 | - | - | - | - | - | 1,668 | 5.50 | % | 1,668 | ||||||||||||||||||||||||||
|
Debt
Securities- at amortized
cost (1) (2)
|
70,441 | 12,013 | 6,879 | 6,095 | 12,825 | 31,375 | 139,628 | 5.19 | % | 139,693 | ||||||||||||||||||||||||||
|
Loans
- fixed (3) (4)
|
242,029 | 180,507 | 205,158 | 148,911 | 172,579 | 63,096 | 1,012,280 | 7.40 | % | 1,008,223 | ||||||||||||||||||||||||||
|
Loans
- adjustable (3) (4)
|
388,240 | 137,145 | 105,244 | 65,953 | 66,876 | 110,750 | 874,208 | 7.43 | % | 873,393 | ||||||||||||||||||||||||||
|
Total
|
$ | 837,523 | 329,665 | 317,281 | 220,959 | 252,280 | 205,221 | 2,162,929 | 7.06 | % | $ | 2,158,122 | ||||||||||||||||||||||||
|
NOW
deposits
|
$ | 192,785 | - | - | - | - | - | 192,785 | 0.24 | % | $ | 192,785 | ||||||||||||||||||||||||
|
Money
market deposits
|
264,653 | - | - | - | - | - | 264,653 | 3.15 | % | 264,653 | ||||||||||||||||||||||||||
|
Savings
deposits
|
100,955 | - | - | - | - | - | 100,955 | 1.59 | % | 100,955 | ||||||||||||||||||||||||||
|
Time
deposits
|
939,645 | 48,748 | 29,672 | 14,432 | 14,751 | 495 | 1,047,743 | 4.68 | % | 1,049,026 | ||||||||||||||||||||||||||
|
Securities
sold under agreements
to repurchase
|
39,695 | - | - | - | - | - | 39,695 | 3.22 | % | 39,695 | ||||||||||||||||||||||||||
|
Borrowings
– fixed (2)
|
1,000 | 5,000 | - | - | - | - | 6,000 | 5.30 | % | 6,073 | ||||||||||||||||||||||||||
|
Borrowings
– adjustable
|
170,000 | 20,000 | – | – | – | 46,394 | 236,394 | 5.07 | % | 235,071 | ||||||||||||||||||||||||||
|
Total
|
$ | 1,708,733 | 73,748 | 29,672 | 14,432 | 14,751 | 46,889 | 1,888,225 | 4.42 | % | $ | 1,888,258 | ||||||||||||||||||||||||
|
(1) Tax-exempt
securities are reflected at a tax-equivalent basis using a 39% tax
rate.
|
||||||||||||||||||||||||||||||||||||
|
(2) Securities
and borrowings with call dates within 12 months of December 31, 2007
that
have above market interest rates 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.
|
||||||||||||||||||||||||||||||||||||
|
(4) Loans
are shown in the period of their contractual maturity, except for
home
equity lines of credit loans which are assumed to repay on a straight-line
basis over five years.
|
||||||||||||||||||||||||||||||||||||
|
Table
20 Return on Assets and Equity
|
||||||||||||
|
For
the Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Return
on assets
|
1.02 | % | 1.00 | % | 0.94 | % | ||||||
|
Return
on equity
|
12.77 | % | 11.83 | % | 10.39 | % | ||||||
|
Dividend
payout ratio
|
50.00 | % | 54.81 | % | 61.40 | % | ||||||
|
Average
shareholders’ equity to average assets
|
7.99 | % | 8.49 | % | 9.06 | % | ||||||
|
Table
21 Risk-Based and Leverage Capital Ratios
|
||||||||||||
|
As
of December 31,
|
||||||||||||
|
($
in thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Risk-Based
and Leverage Capital
|
||||||||||||
|
Tier
I capital:
|
||||||||||||
|
Common
shareholders’ equity
|
$ | 174,070 | 162,705 | 155,728 | ||||||||
|
Trust
preferred securities eligible for Tier I capital treatment
|
45,000 | 54,235 | 40,000 | |||||||||
|
Intangible
assets
|
(51,020 | ) | (51,394 | ) | (49,227 | ) | ||||||
|
Accumulated
other comprehensive income adjustments
|
4,334 | 4,550 | 639 | |||||||||
|
Total
Tier I leverage capital
|
172,384 | 170,096 | 147,140 | |||||||||
|
Tier
II capital:
|
||||||||||||
|
Remaining
trust preferred securities
|
– | 10,765 | – | |||||||||
|
Allowable
allowance for loan losses
|
21,324 | 18,947 | 15,716 | |||||||||
|
Tier
II capital additions
|
21,324 | 29,712 | 15,716 | |||||||||
|
Total
risk-based capital
|
$ | 193,708 | 199,808 | 162,856 | ||||||||
|
Total
risk weighted assets
|
$ | 1,880,480 | 1,691,666 | 1,402,555 | ||||||||
|
Adjusted
fourth quarter average assets
|
2,154,407 | 1,979,333 | 1,711,029 | |||||||||
|
Risk-based
capital ratios:
|
||||||||||||
|
Tier
I capital to Tier I risk adjusted assets
|
9.17 | % | 10.05 | % | 10.49 | % | ||||||
|
Minimum
required Tier I capital
|
4.00 | % | 4.00 | % | 4.00 | % | ||||||
|
Total
risk-based capital to Tier
II risk-adjusted assets
|
10.30 | % | 11.81 | % | 11.61 | % | ||||||
|
Minimum
required total risk-based capital
|
8.00 | % | 8.00 | % | 8.00 | % | ||||||
|
Leverage
capital ratios:
|
||||||||||||
|
Tier
I leverage capital to adjusted
fourth quarter average assets
|
8.00 | % | 8.59 | % | 8.60 | % | ||||||
|
Minimum
required Tier I leverage capital
|
4.00 | % | 4.00 | % | 4.00 | % | ||||||
|
Table
22 Quarterly Financial Summary
|
||||||||||||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||||||||||
|
($
in thousands except
per
share data)
|
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First
Quarter
|
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First
Quarter
|
||||||||||||||||||||||||
|
Income
Statement Data
|
||||||||||||||||||||||||||||||||
|
Interest
income, taxable equivalent
|
$ | 38,469 | 38,311 | 37,057 | 35,660 | 35,387 | 34,040 | 31,440 | 28,841 | |||||||||||||||||||||||
|
Interest
expense
|
17,751 | 17,998 | 17,239 | 16,670 | 16,072 | 14,866 | 12,871 | 10,862 | ||||||||||||||||||||||||
|
Net
interest income, taxable
equivalent
|
20,718 | 20,313 | 19,818 | 18,990 | 19,315 | 19,174 | 18,569 | 17,979 | ||||||||||||||||||||||||
|
Taxable
equivalent, adjustment
|
155 | 136 | 140 | 124 | 117 | 133 | 125 | 126 | ||||||||||||||||||||||||
|
Net
interest income
|
20,563 | 20,177 | 19,678 | 18,866 | 19,198 | 19,041 | 18,444 | 17,853 | ||||||||||||||||||||||||
|
Provision
for loan losses
|
1,475 | 1,299 | 1,322 | 1,121 | 1,293 | 1,215 | 1,400 | 1,015 | ||||||||||||||||||||||||
|
Net
interest income after provision for losses
|
19,088 | 18,878 | 18,356 | 17,745 | 17,905 | 17,826 | 17,044 | 16,838 | ||||||||||||||||||||||||
|
Noninterest
income
|
5,103 | 4,277 | 4,857 | 4,236 | 4,058 | 2,454 | 3,844 | 3,954 | ||||||||||||||||||||||||
|
Noninterest
expense
|
14,999 | 13,941 | 14,510 | 14,130 | 13,870 | 13,535 | 13,064 | 12,729 | ||||||||||||||||||||||||
|
Income
before income taxes
|
9,192 | 9,214 | 8,703 | 7,851 | 8,093 | 6,745 | 7,824 | 8,063 | ||||||||||||||||||||||||
|
Income
taxes
|
3,430 | 3,471 | 3,284 | 2,965 | 2,949 | 2,373 | 3,029 | 3,072 | ||||||||||||||||||||||||
|
Net
income
|
5,762 | 5,743 | 5,419 | 4,886 | 5,144 | 4,372 | 4,795 | 4,991 | ||||||||||||||||||||||||
|
Per
Share Data
|
||||||||||||||||||||||||||||||||
|
Earnings
per share - basic
|
$ | 0.40 | 0.40 | 0.38 | 0.34 | 0.36 | 0.31 | 0.34 | 0.35 | |||||||||||||||||||||||
|
Earnings
per share - diluted
|
0.40 | 0.40 | 0.37 | 0.34 | 0.36 | 0.30 | 0.33 | 0.35 | ||||||||||||||||||||||||
|
Cash
dividends declared
|
0.19 | 0.19 | 0.19 | 0.19 | 0.19 | 0.19 | 0.18 | 0.18 | ||||||||||||||||||||||||
|
Market
Price
|
||||||||||||||||||||||||||||||||
|
High
|
$ | 21.34 | 21.38 | 21.67 | 26.72 | 23.43 | 21.84 | 22.85 | 23.90 | |||||||||||||||||||||||
|
Low
|
16.79 | 16.40 | 18.56 | 20.96 | 20.30 | 19.47 | 19.59 | 20.00 | ||||||||||||||||||||||||
|
Close
|
18.89 | 20.38 | 18.73 | 21.38 | 21.84 | 20.38 | 21.00 | 22.38 | ||||||||||||||||||||||||
|
Book
value
|
12.11 | 11.88 | 11.63 | 11.49 | 11.34 | 11.40 | 11.20 | 11.12 | ||||||||||||||||||||||||
|
Tangible
book value
|
8.56 | 8.32 | 8.08 | 7.92 | 7.76 | 7.78 | 7.76 | 7.69 | ||||||||||||||||||||||||
|
Selected
Average Balances
|
||||||||||||||||||||||||||||||||
|
Assets
|
$ | 2,204,247 | 2,157,155 | 2,116,527 | 2,080,375 | 2,030,366 | 1,970,128 | 1,886,234 | 1,803,312 | |||||||||||||||||||||||
|
Loans
|
1,872,983 | 1,819,253 | 1,783,794 | 1,756,846 | 1,713,803 | 1,669,423 | 1,593,070 | 1,516,456 | ||||||||||||||||||||||||
|
Earning
assets
|
2,063,972 | 2,016,480 | 1,973,548 | 1,939,712 | 1,893,969 | 1,844,560 | 1,764,227 | 1,682,535 | ||||||||||||||||||||||||
|
Deposits
|
1,836,644 | 1,808,468 | 1,763,210 | 1,712,738 | 1,679,747 | 1,623,605 | 1,569,781 | 1,525,167 | ||||||||||||||||||||||||
|
Interest-bearing
liabilities
|
1,776,489 | 1,741,495 | 1,704,799 | 1,681,225 | 1,632,107 | 1,583,827 | 1,501,670 | 1,431,936 | ||||||||||||||||||||||||
|
Shareholders’
equity
|
175,675 | 171,947 | 169,169 | 166,637 | 167,276 | 164,590 | 162,526 | 158,380 | ||||||||||||||||||||||||
|
Ratios
(1)
|
||||||||||||||||||||||||||||||||
|
Return
on average assets
|
1.04 | % | 1.06 | % | 1.03 | % | 0.95 | % | 1.01 | % | 0.88 | % | 1.02 | % | 1.12 | % | ||||||||||||||||
|
Return
on average equity
|
13.01 | % | 13.25 | % | 12.85 | % | 11.89 | % | 12.20 | % | 10.54 | % | 11.83 | % | 12.78 | % | ||||||||||||||||
|
Equity
to assets at end
of period
|
7.51 | % | 7.48 | % | 7.59 | % | 7.58 | % | 7.62 | % | 7.85 | % | 8.03 | % | 8.33 | % | ||||||||||||||||
|
Tangible
equity to tangible assets
at end of period
|
5.43 | % | 5.36 | % | 5.40 | % | 5.35 | % | 5.34 | % | 5.50 | % | 5.70 | % | 5.91 | % | ||||||||||||||||
|
Average
loans to average deposits
|
101.98 | % | 100.60 | % | 101.17 | % | 102.58 | % | 102.03 | % | 102.82 | % | 101.48 | % | 99.43 | % | ||||||||||||||||
|
Average
earning assets to interest-bearing
liabilities
|
116.18 | % | 115.79 | % | 115.76 | % | 115.37 | % | 116.04 | % | 116.46 | % | 117.48 | % | 117.50 | % | ||||||||||||||||
|
Net
interest margin
|
3.98 | % | 4.00 | % | 4.03 | % | 3.97 | % | 4.05 | % | 4.12 | % | 4.22 | % | 4.33 | % | ||||||||||||||||
|
Allowance
for loan losses to
gross loans
|
1.13 | % | 1.12 | % | 1.12 | % | 1.10 | % | 1.09 | % | 1.09 | % | 1.08 | % | 1.07 | % | ||||||||||||||||
|
Nonperforming
loans as a percent
of total loans
|
0.41 | % | 0.38 | % | 0.36 | % | 0.33 | % | 0.39 | % | 0.31 | % | 0.24 | % | 0.21 | % | ||||||||||||||||
|
Nonperforming
assets as a percent
of total assets
|
0.47 | % | 0.39 | % | 0.38 | % | 0.38 | % | 0.39 | % | 0.34 | % | 0.30 | % | 0.25 | % | ||||||||||||||||
|
Net
charge-offs as a percent of
average loans
|
0.17 | % | 0.17 | % | 0.16 | % | 0.14 | % | 0.19 | % | 0.11 | % | 0.09 | % | 0.03 | % | ||||||||||||||||
|
(1)
|
Annualized
where applicable.
|
Item
8. Financial Statements
and
Supplementary Data
First
Bancorp and Subsidiaries
Consolidated
Balance Sheets
December
31, 2007 and 2006
|
($
in thousands)
|
2007
|
2006
|
||||||
|
ASSETS
|
||||||||
|
Cash
and due from banks, noninterest-bearing
|
$ | 31,455 | 43,248 | |||||
|
Due
from banks, interest-bearing
|
111,591 | 83,877 | ||||||
|
Federal
funds sold
|
23,554 | 19,543 | ||||||
|
Total
cash and cash equivalents
|
166,600 | 146,668 | ||||||
|
Securities
available for sale (costs of
|
||||||||
|
$135,028
in 2007 and $130,824 in 2006)
|
135,114 | 129,964 | ||||||
|
Securities
held to maturity (fair values of
|
||||||||
|
$16,649
in 2007 and $13,168 in 2006)
|
16,640 | 13,122 | ||||||
|
Presold
mortgages in process of settlement
|
1,668 | 4,766 | ||||||
|
Loans
|
1,894,295 | 1,740,396 | ||||||
|
Less: Allowance
for loan losses
|
(21,324 | ) | (18,947 | ) | ||||
|
Net
loans
|
1,872,971 | 1,721,449 | ||||||
|
Premises
and equipment
|
46,050 | 43,540 | ||||||
|
Accrued
interest receivable
|
12,961 | 12,158 | ||||||
|
Goodwill
|
49,505 | 49,505 | ||||||
|
Other
intangible assets
|
1,515 | 1,889 | ||||||
|
Other
assets
|
14,225 | 13,563 | ||||||
|
Total
assets
|
$ | 2,317,249 | 2,136,624 | |||||
|
LIABILITIES
|
||||||||
|
Deposits: Demand
– noninterest-bearing
|
$ | 232,141 | 217,291 | |||||
|
NOW
accounts
|
192,785 | 193,435 | ||||||
|
Money
market accounts
|
264,653 | 205,994 | ||||||
|
Savings
accounts
|
100,955 | 103,346 | ||||||
|
Time
deposits of $100,000 or more
|
479,176 | 422,772 | ||||||
|
Other
time deposits
|
568,567 | 552,841 | ||||||
|
Total
deposits
|
1,838,277 | 1,695,679 | ||||||
|
Securities
sold under agreements to repurchase
|
39,695 | 43,276 | ||||||
|
Borrowings
|
242,394 | 210,013 | ||||||
|
Accrued
interest payable
|
6,010 | 5,649 | ||||||
|
Other
liabilities
|
16,803 | 19,302 | ||||||
|
Total
liabilities
|
2,143,179 | 1,973,919 | ||||||
|
Commitments
and contingencies (see Note 12)
|
— | — | ||||||
|
SHAREHOLDERS’
EQUITY
|
||||||||
|
Common
stock, No par value per share
|
||||||||
|
Authorized:
20,000,000 shares
|
||||||||
|
Issued
and outstanding: 14,377,981 shares in 2007 and
14,352,884
shares in 2006
|
56,302 | 56,035 | ||||||
|
Retained
earnings
|
122,102 | 111,220 | ||||||
|
Accumulated
other comprehensive income (loss)
|
(4,334 | ) | (4,550 | ) | ||||
|
Total
shareholders’ equity
|
174,070 | 162,705 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 2,317,249 | 2,136,624 | |||||
See
accompanying notes to consolidated financial statements.
First
Bancorp and Subsidiaries
Consolidated
Statements of Income
Years
Ended December 31, 2007, 2006 and 2005
|
($
in thousands, except per share data)
|
2007
|
2006
|
2005
|
|||||||||
|
INTEREST
INCOME
|
||||||||||||
|
Interest
and fees on loans
|
$ | 139,323 | 120,694 | 94,097 | ||||||||
|
Interest
on investment securities:
|
||||||||||||
|
Taxable
interest income
|
6,453 | 5,718 | 5,184 | |||||||||
|
Tax-exempt
interest income
|
561 | 513 | 476 | |||||||||
|
Other,
principally overnight investments
|
2,605 | 2,282 | 1,672 | |||||||||
|
Total
interest income
|
148,942 | 129,207 | 101,429 | |||||||||
|
INTEREST
EXPENSE
|
||||||||||||
|
Savings,
NOW and money market
|
10,368 | 7,094 | 4,048 | |||||||||
|
Time
deposits of $100,000 or more
|
22,687 | 17,662 | 11,425 | |||||||||
|
Other
time deposits
|
26,498 | 21,276 | 13,043 | |||||||||
|
Securities
sold under agreements to repurchase
|
1,476 | 1,116 | 179 | |||||||||
|
Borrowings
|
8,629 | 7,523 | 4,143 | |||||||||
|
Total
interest expense
|
69,658 | 54,671 | 32,838 | |||||||||
|
Net
interest income
|
79,284 | 74,536 | 68,591 | |||||||||
|
Provision
for loan losses
|
5,217 | 4,923 | 3,040 | |||||||||
|
Net
interest income after provision for loan losses
|
74,067 | 69,613 | 65,551 | |||||||||
|
NONINTEREST
INCOME
|
||||||||||||
|
Service
charges on deposit accounts
|
9,988 | 8,968 | 8,537 | |||||||||
|
Other
service charges, commissions and fees
|
5,158 | 4,578 | 3,963 | |||||||||
|
Fees
from presold mortgage loans
|
1,135 | 1,062 | 1,176 | |||||||||
|
Commissions
from sales of insurance and financial products
|
1,511 | 1,434 | 1,307 | |||||||||
|
Data
processing fees
|
204 | 162 | 279 | |||||||||
|
Securities
gains
|
487 | 205 | 5 | |||||||||
|
Merchant
credit card loss
|
─
|
(1,900 | ) |
─
|
||||||||
|
Other
gains (losses)
|
(10 | ) | (199 | ) | (263 | ) | ||||||
|
Total
noninterest income
|
18,473 | 14,310 | 15,004 | |||||||||
|
NONINTEREST
EXPENSES
|
||||||||||||
|
Salaries
|
26,227 | 23,867 | 21,921 | |||||||||
|
Employee
benefits
|
7,443 | 6,811 | 6,054 | |||||||||
|
Total
personnel expense
|
33,670 | 30,678 | 27,975 | |||||||||
|
Occupancy
expense
|
3,795 | 3,447 | 3,037 | |||||||||
|
Equipment
related expenses
|
3,809 | 3,419 | 2,965 | |||||||||
|
Intangibles
amortization
|
374 | 322 | 290 | |||||||||
|
Other
operating expenses
|
15,932 | 15,332 | 13,369 | |||||||||
|
Total
noninterest expenses
|
57,580 | 53,198 | 47,636 | |||||||||
|
Income
before income taxes
|
34,960 | 30,725 | 32,919 | |||||||||
|
Income
taxes
|
13,150 | 11,423 | 16,829 | |||||||||
|
NET
INCOME
|
$ | 21,810 | 19,302 | 16,090 | ||||||||
|
Earnings
per share:
|
||||||||||||
|
Basic
|
$ | 1.52 | 1.35 | 1.14 | ||||||||
|
Diluted
|
1.51 | 1.34 | 1.12 | |||||||||
|
Dividends
declared per share
|
$ | 0.76 | 0.74 | 0.70 | ||||||||
|
Weighted
average common shares outstanding:
|
||||||||||||
|
Basic
|
14,378,279 | 14,294,753 | 14,165,992 | |||||||||
|
Diluted
|
14,468,974 | 14,435,252 | 14,360,032 | |||||||||
See
accompanying notes to consolidated financial statements.
First
Bancorp and Subsidiaries
Consolidated
Statements of Comprehensive Income
Years
Ended December 31, 2007, 2006 and 2005
|
($
in
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Net
income
|
$ | 21,810 | 19,302 | 16,090 | ||||||||
|
Other
comprehensive income (loss):
|
||||||||||||
|
Unrealized
gains/losses on securities available
for sale:
|
||||||||||||
|
Unrealized
holding gains (losses) arising during
the period, pretax
|
1,432 | 394 | (2,229 | ) | ||||||||
|
Tax
benefit (expense)
|
(559 | ) | (154 | ) | 870 | |||||||
|
Reclassification
to realized gains
|
(487 | ) | (205 | ) | (5 | ) | ||||||
|
Tax
expense
|
190 | 80 | 2 | |||||||||
|
Postretirement
Plans:
|
||||||||||||
|
Pension
benefit (charge) related to unfunded pension liability
|
- | 16 | (90 | ) | ||||||||
|
Tax
benefit (expense)
|
- | (6 | ) | 35 | ||||||||
|
Net
loss arising during period
|
(1,098 | ) | - | - | ||||||||
|
Tax
benefit
|
428 | - | - | |||||||||
|
Amortization
of unrecognized net actuarial loss
|
467 | - | - | |||||||||
|
Tax
expense
|
(182 | ) | - | - | ||||||||
|
Amortization
of prior service cost and transition obligation
|
40 | - | - | |||||||||
|
Tax
expense
|
(15 | ) | - | - | ||||||||
|
Other
comprehensive income (loss)
|
216 | 125 | (1,417 | ) | ||||||||
|
Comprehensive
income
|
$ | 22,026 | 19,427 | 14,673 | ||||||||
Seeaccompanying
notes to consolidated
financial statements.
First
Bancorp and Subsidiaries
Consolidated
Statements of Shareholders’ Equity
Years
Ended December 31, 2007, 2006 and 2005
|
Common
Stock
|
Retained
|
Accumulated
Other
Comprehensive
|
Total
Share-
holders’
|
|||||||||||||||||
|
(In
thousands, except share
data)
|
Shares
|
Amount
|
Earnings
|
Income
(Loss)
|
Equity
|
|||||||||||||||
|
Balances,
January 1, 2005
|
14,084 | $ | 51,614 | 96,347 | 517 | 148,478 | ||||||||||||||
|
Net
income
|
16,090 | 16,090 | ||||||||||||||||||
|
Cash
dividends declared ($0.70 per share)
|
(9,930 | ) | (9,930 | ) | ||||||||||||||||
|
Common
stock issued under stock
option plans
|
71 | 785 | 785 | |||||||||||||||||
|
Common
stock issued into dividend
reinvestment plan
|
74 | 1,604 | 1,604 | |||||||||||||||||
|
Tax
benefit realized from exercise of nonqualified
stock options
|
─
|
118 | 118 | |||||||||||||||||
|
Other
comprehensive loss
|
(1,417 | ) | (1,417 | ) | ||||||||||||||||
|
Balances,
December 31, 2005
|
14,229 | 54,121 | 102,507 | (900 | ) | 155,728 | ||||||||||||||
|
Net
income
|
19,302 | 19,302 | ||||||||||||||||||
|
Cash
dividends declared ($0.74 per share)
|
(10,589 | ) | (10,589 | ) | ||||||||||||||||
|
Common
stock issued under stock
option plans
|
105 | 1,027 | 1,027 | |||||||||||||||||
|
Common
stock issued into dividend
reinvestment plan
|
72 | 1,557 | 1,557 | |||||||||||||||||
|
Purchases
and retirement of common stock
|
(53 | ) | (1,112 | ) | (1,112 | ) | ||||||||||||||
|
Tax
benefit realized from exercise of nonqualified
stock options
|
─
|
117 | 117 | |||||||||||||||||
|
Stock-based
compensation
|
─
|
325 | 325 | |||||||||||||||||
|
Other
comprehensive income
|
125 | 125 | ||||||||||||||||||
|
Adoption
of SFAS No. 158
|
(3,775 | ) | (3,775 | ) | ||||||||||||||||
|
Balances,
December 31, 2006
|
14,353 | 56,035 | 111,220 | (4,550 | ) | 162,705 | ||||||||||||||
|
Net
income
|
21,810 | 21,810 | ||||||||||||||||||
|
Cash
dividends declared ($0.76 per share)
|
(10,928 | ) | (10,928 | ) | ||||||||||||||||
|
Common
stock issued under stock
option plans
|
52 | 568 | 568 | |||||||||||||||||
|
Purchases
and retirement of common stock
|
(27 | ) | (532 | ) | (532 | ) | ||||||||||||||
|
Tax
benefit realized from exercise of nonqualified
stock options
|
─
|
41 | 41 | |||||||||||||||||
|
Stock-based
compensation
|
─
|
190 | 190 | |||||||||||||||||
|
Other
comprehensive income
|
216 | 216 | ||||||||||||||||||
|
Balances,
December 31, 2007
|
14,378 | $ | 56,302 | 122,102 | (4,334 | ) | 174,070 | |||||||||||||
See
accompanying notes to consolidated financial statements.
First
Bancorp and Subsidiaries
Consolidated
Statements of Cash Flows
Years
Ended December 31, 2007, 2006 and 2005
|
($
in thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
Flows From Operating Activities
|
||||||||||||
|
Net
income
|
$ | 21,810 | 19,302 | 16,090 | ||||||||
|
Reconciliation
of net income to net cash provided by operating
activities:
|
||||||||||||
|
Provision
for loan losses
|
5,217 | 4,923 | 3,040 | |||||||||
|
Net
security premium amortization
|
67 | 86 | 120 | |||||||||
|
Gains
on sales of securities available for sale
|
(487 | ) | (205 | ) | (5 | ) | ||||||
|
Other
losses
|
10 | 281 | 263 | |||||||||
|
Loan
fees and costs deferred, net of amortization
|
(118 | ) | 157 | (397 | ) | |||||||
|
Depreciation
of premises and equipment
|
3,286 | 2,873 | 2,675 | |||||||||
|
Tax
benefit realized from exercise of nonqualified stock
options
|
─
|
─
|
118 | |||||||||
|
Stock-based
compensation expense
|
190 | 325 |
─
|
|||||||||
|
Amortization
of intangible assets
|
374 | 322 | 290 | |||||||||
|
Deferred
income tax benefit
|
(422 | ) | (1,341 | ) | (156 | ) | ||||||
|
Originations
of presold mortgages in process of settlement
|
(68,325 | ) | (66,157 | ) | (74,569 | ) | ||||||
|
Proceeds
from sales of presold mortgages in process of settlement
|
71,423 | 64,738 | 72,993 | |||||||||
|
Increase
in accrued interest receivable
|
(803 | ) | (3,176 | ) | (2,115 | ) | ||||||
|
Decrease
(increase) in other assets
|
1,075 | (467 | ) | 840 | ||||||||
|
Increase
in accrued interest payable
|
361 | 1,736 | 1,158 | |||||||||
|
Increase
(decrease) in other liabilities
|
(3,095 | ) | (226 | ) | 5,945 | |||||||
|
Net
cash provided by operating activities
|
30,563 | 23,171 | 26,290 | |||||||||
|
Cash
Flows From Investing Activities
|
||||||||||||
|
Proceeds
from sales of loans
|
─
|
─
|
276 | |||||||||
|
Purchases
of securities available for sale
|
(90,046 | ) | (62,067 | ) | (54,130 | ) | ||||||
|
Purchases
of securities held to maturity
|
(5,117 | ) | (5,052 | ) | (1,514 | ) | ||||||
|
Proceeds
from sales of securities available for sale
|
4,185 | 1,575 | 17 | |||||||||
|
Proceeds
from maturities/issuer calls of securities available for
sale
|
82,013 | 44,471 | 26,710 | |||||||||
|
Proceeds
from maturities/issuer calls of securities held to
maturity
|
1,577 | 3,355 | 1,176 | |||||||||
|
Net
increase in loans
|
(159,531 | ) | (255,958 | ) | (120,065 | ) | ||||||
|
Proceeds
from sales of foreclosed real estate
|
1,522 | 1,887 | 2,607 | |||||||||
|
Purchases
of premises and equipment
|
(5,786 | ) | (10,867 | ) | (7,212 | ) | ||||||
|
Net
cash received in purchase of branches
|
─
|
34,819 |
─
|
|||||||||
|
Net
cash used by investing activities
|
(171,183 | ) | (247,837 | ) | (152,135 | ) | ||||||
|
Cash
Flows From Financing Activities
|
||||||||||||
|
Net
increase in deposits and repurchase agreements
|
139,017 | 166,871 | 139,339 | |||||||||
|
Proceeds
from borrowings, net
|
32,381 | 109,774 | 8,000 | |||||||||
|
Cash
dividends paid
|
(10,923 | ) | (10,423 | ) | (9,761 | ) | ||||||
|
Proceeds
from issuance of common stock
|
568 | 2,584 | 2,389 | |||||||||
|
Purchases
and retirement of common stock
|
(532 | ) | (1,112 | ) |
─
|
|||||||
|
Tax
benefit from exercise of nonqualified stock options
|
41 | 117 |
─
|
|||||||||
|
Net
cash provided by financing activities
|
160,552 | 267,811 | 139,967 | |||||||||
|
Increase
in Cash and Cash Equivalents
|
19,932 | 43,145 | 14,122 | |||||||||
|
Cash
and Cash Equivalents, Beginning of Year
|
146,668 | 103,523 | 89,401 | |||||||||
|
Cash
and Cash Equivalents, End of Year
|
$ | 166,600 | 146,668 | 103,523 | ||||||||
|
Supplemental
Disclosures of Cash Flow Information:
|
||||||||||||
|
Cash
paid during the period for:
|
||||||||||||
|
Interest
|
$ | 69,297 | 52,857 | 31,680 | ||||||||
|
Income
taxes
|
17,077 | 13,993 | 11,925 | |||||||||
|
Non-cash
investing and financing transactions:
|
||||||||||||
|
Foreclosed
loans transferred to other real estate
|
2,915 | 2,021 | 2,596 | |||||||||
|
Unrealized
gain (loss) on securities available for sale, net of taxes
|
577 | 115 | (1,362 | ) | ||||||||
See
accompanying notes to consolidated financial statements.
First
Bancorp and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
Note
1. Summary of Significant Accounting Policies
(a)
Basis
of Presentation- The consolidated
financial
statements include the accounts of First Bancorp (the Company) and its wholly
owned subsidiaries - First Bank (the Bank) and Montgomery Data Services, Inc.
(Montgomery Data). The Bank has one wholly owned subsidiary - First
Bank Insurance Services, Inc. (First Bank Insurance). All significant
intercompany accounts and transactions have been eliminated.
The
Company is a bank holding company. The principal activity of the
Company is the ownership and operation of First Bank, a state chartered bank
with its main office in Troy, North Carolina. Montgomery Data,
another subsidiary, is a data processing company headquartered in Troy, whose
primary client is First Bank. The Company is also the parent company
for a series of statutory trusts that were formed at various times since 2002
for the purpose of issuing trust preferred debt securities. The trusts are
not consolidated for financial reporting purposes, however notes issued by
the
Company to the trusts in return for the proceeds from the issuance of the trust
preferred securities are included in the consolidated financial statements
and
have terms that are substantially the same as the corresponding trust preferred
securities. These securities qualify as capital for regulatory capital
adequacy requirements. First Bank Insurance is a provider of non-FDIC
insured investment and insurance products.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. The most significant estimates made by the Company in the
preparation of its consolidated financial statements are the determination
of
the allowance for loan losses, the valuation of other real estate, and fair
value estimates for financial instruments.
(b)
Cash and Cash
Equivalents-
The Company considers all highly liquid assets such as cash on hand,
noninterest-bearing and interest-bearing amounts due from banks and federal
funds sold to be “cash equivalents.”
(c)
Securities - Debt securities
that the
Company has the positive intent and ability to hold to maturity are classified
as “held to maturity” and carried at amortized cost. Securities not
classified as held to maturity are classified as “available for sale” and
carried at fair value, with unrealized gains and losses being reported as other
comprehensive income and reported as a separate component of shareholders’
equity.
A
decline
in the market value of any available for sale or held to maturity security
below
cost that is deemed to be other than temporary results in a reduction in
carrying amount to fair value. The impairment is charged to earnings
and a new cost basis for the security is established. Any equity
security that is in an unrealized loss position for twelve consecutive months
is
presumed to be permanently impaired and an impairment charge is recorded unless
the amount of the charge is insignificant.
Gains
and
losses on sales of securities are recognized at the time of sale based upon
the
specific identification method. Premiums and discounts are amortized
into income on a level yield basis, with premiums being amortized to the
earliest call date and discounts being accreted to the stated maturity
date.
(d)
Premises and
Equipment-
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation, computed by the straight-line method, is charged to operations
over the estimated useful lives of the properties, which range from 2 to 40
years or, in the case of leasehold improvements, over the term of the lease,
if
shorter. Maintenance and repairs are charged to operations in the
year incurred. Gains and losses on dispositions are included in
current operations.
(e)
Loans – Loans are stated
at the principal amount outstanding, less unearned income and deferred
nonrefundable loan fees, net of certain origination costs. Interest
on loans is accrued on the unpaid principal balance outstanding. Net
deferred loan origination costs/fees are capitalized and recognized as a yield
adjustment over the life of the related loan. Unearned income for
each of the reporting periods was immaterial.
A
loan is
placed on nonaccrual status when, in management’s judgment, the collection of
interest appears doubtful. The accrual of interest is discontinued on
all loans that become 90 days or more past due with respect to principal or
interest. The past due status of loans is based on the contractual
payment terms. While a loan is on nonaccrual status, the Company’s
policy is that all cash receipts are applied to principal. Once the
recorded principal balance has been reduced to zero, future cash receipts are
applied to recoveries of any amounts previously charged off. Further
cash receipts are recorded as interest income to the extent that any interest
has been foregone. Loans are removed from nonaccrual status when they
become current as to both principal and interest and when concern no longer
exists as to the collectibility of principal or interest. In some
cases, where borrowers are experiencing financial difficulties, loans may be
restructured to provide terms significantly different from the originally
contracted terms.
Commercial
loans greater than $100,000 that are on nonaccrual status are evaluated
regularly for impairment. 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. Impaired loans are measured using 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. While a loan is considered to be
impaired, the Company’s policy is that interest accrual is discontinued and all
cash receipts are applied to principal. Once the recorded principal
balance has been reduced to zero, future cash receipts are applied to recoveries
of any amounts previously charged off. Further cash receipts are
recorded as interest income to the extent that any interest has been
foregone.
(f)
Presold Mortgages in Process of
Settlement and Loans Held for Sale -
As a
part of normal business operations, the Company originates residential mortgage
loans that have been pre-approved by secondary investors. The terms
of the loans are set by the secondary investors, and the purchase price that
the
investor will pay for the loan is agreed to prior to the funding of the loan
by
the Company. Generally within three weeks after funding, the loans
are transferred to the investor in accordance with the agreed-upon
terms. The Company records gains from the sale of these loans on the
settlement date of the sale equal to the difference between the proceeds
received and the carrying amount of the loan. The gain generally
represents the portion of the proceeds attributed to service release premiums
received from the investors and the realization of origination fees received
from borrowers which were deferred as part of the carrying amount of the
loan. Between the initial funding of the loans by the Company and the
subsequent reimbursement by the investors, the Company carries the loans on
its
balance sheet at the lower of cost or market.
Periodically,
the Company originates commercial loans that are intended for
resale. The Company carries these loans at the lower of cost or fair
value at each reporting date. There were no such loans held for sale
as of December 31, 2007 or 2006.
(g)
Allowance for Loan
Losses- The
allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged-off against the allowance for
loan losses when management believes that the collectibility of the principal
is
unlikely. 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 on an evaluation of the portfolio, current economic
conditions, historical loan loss experience and other risk
factors. While management uses the best information available to make
evaluations, future adjustments may be necessary if economic and other
conditions differ substantially from the assumptions used.
In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank’s allowance for loan
losses. Such agencies may require the Bank to recognize additions to
the allowance based on the examiners’ judgment about information available to
them at the time of their examinations.
(h)
Other Real Estate- Other real
estate owned
consists primarily of real estate acquired by the Company through legal
foreclosure or deed in lieu of foreclosure. The property is initially
carried at the lower of cost (generally the loan balance plus additional costs
incurred for improvements to the property) or the estimated fair value of the
property less estimated selling costs. If there are subsequent
declines in fair value, the property is written down to its fair value through
a
charge to expense. Capital expenditures made to improve the property
are capitalized. Costs of holding real estate, such as property
taxes, insurance and maintenance, less related revenues during the holding
period, are charged to operations.
(i)
Income Taxes -
Income
taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced, if necessary, by the
amount of such benefits that are not expected to be realized based upon
available evidence. The Company’s investment tax credits, which for
the Company are low income housing tax credits and state historic tax credits,
are recorded in the period that they are affirmed by the tax credit
fund.
(j)
Intangible Assets- Business
combinations are
accounted for using the purchase method of accounting. Identifiable
intangible assets are recognized separately and are amortized over their
estimated useful lives, which for the Company has generally been seven to ten
years and at an accelerated rate. Goodwill is recognized in business
combinations to the extent that the price paid exceeds the fair value of the
net
assets acquired, including any identifiable intangible
assets. Goodwill is not amortized, but as discussed in Note 1(o), is
subject to fair value impairment tests on at least an annual basis.
(k)Other
Investments– The Company
accounts for investments in limited partnerships, limited liability companies
(“LLCs”), and other privately held companies using either the cost or the equity
method of accounting. The accounting treatment depends upon the
Company’s percentage ownership and degree of management influence.
Under
the cost method of accounting, the Company records an investment in stock at
cost and generally recognizes cash dividends received as income. If
cash dividends received exceed the investee’s earnings since the investment
date, these payments are considered a return of investment and reduce the cost
of the investment.
Under
the equity method of accounting, the Company records its initial investment
at
cost. Subsequently, the carrying amount of the investment is
increased or decreased to reflect the Company’s share of income or loss of the
investee. The Company’s recognition of earnings or losses from an
equity method investment is based on the Company’s ownership percentage in the
limited partnerships or LLCs and the investee’s earnings on a quarterly
basis. The limited partnerships and LLCs generally provide their
financial information during the quarter following the end of a given period.
The Company’s policy is to record its share of earnings or losses on equity
method investments in the quarter the financial information is
received.
All
of the Company’s investments in limited partnerships and LLCs are privately
held, and their market values are not readily available. The Company’s
management evaluates its investments in limited partnerships and LLCs for
impairment based on the investee’s ability to generate cash through its
operations or obtain alternative financing, and other subjective
factors. There are inherent risks associated with the Company’s
investments in limited partnerships and LLCs, which may result in income
statement volatility in future periods.
At
December 31, 2007 and 2006, the Company’s investments in limited
partnerships, LLCs and other privately held companies totaled $2.1 million
and
$2.2 million respectively, and were included in other assets.
(l)
Stock Option Plan -
At
December 31, 2007, the Company had seven stock-based employee compensation
plans, which are described more fully in Note 14. The Company
accounts for those plans under the recognition and measurement principles of
Statement of Financial Accounting Standards No. 123 (revised 2004)
(Statement 123(R)), “Share-Based Payment.” Statement 123(R) replaces
FASB Statement No. 123 (Statement 123), “Accounting for Stock-Based
Compensation,” and supersedes Accounting Principles Board Opinion No. 25
(Opinion 25), “Accounting for Stock Issued to Employees.” Prior to
January 1, 2006, the Company accounted for the stock option plans under Opinion
25, and thus, no stock-based employee compensation expense was reflected in
net
income prior to January 1, 2006. However, Statement 123(R) requires
that the compensation cost relating to share-based payment transactions be
recognized in the financial statements, and thus stock-based compensation
expense has been recognized in the financial statements during 2006 and
2007.
(m)
Per Share Amounts- Basic Earnings
Per Share
is calculated by dividing net income by the weighted average number of common
shares outstanding during the period. Diluted Earnings Per Share is
computed by assuming the issuance of common shares for all dilutive potential
common shares outstanding during the reporting period. Currently, the
Company’s only potential dilutive common stock issuances relate to options that
have been issued under the Company’s stock option plans. In computing
Diluted Earnings Per Share, it is assumed that all such dilutive stock options
are exercised during the reporting period at their respective exercise prices,
with the proceeds from the exercises used by the Company to buy back stock
in
the open market at the average market price in effect during the reporting
period. The difference between the number of shares assumed to be
exercised and the number of shares bought back is added to the number of
weighted average common shares outstanding during the period. The sum
is used as the denominator to calculate Diluted Earnings Per Share for the
Company.
The
following is a reconciliation of the numerators and denominators used in
computing Basic and Diluted Earnings Per Share:
|
For
the Years Ended December 31,
|
||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
($
in thousands,
except
per share
amounts)
|
Income
(Numer-
ator)
|
Shares
(Denom-
inator)
|
Per
Share
Amount
|
Income
(Numer-
ator)
|
Shares
(Denom-
inator)
|
Per
Share
Amount
|
Income
(Numer-
ator)
|
Shares
(Denom-
inator)
|
Per
Share
Amount
|
|||||||||||||||||||||||||||
|
Basic
EPS
|
$ | 21,810 | 14,378,279 | $ | 1.52 | $ | 19,302 | 14,294,753 | $ | 1.35 | $ | 16,090 | 14,165,992 | $ | 1.14 | |||||||||||||||||||||
|
Effect
of dilutive
securities
|
- | 90,695 | - | 140,499 | - | 194,040 | ||||||||||||||||||||||||||||||
|
Diluted
EPS
|
$ | 21,810 | 14,468,974 | $ | 1.51 | $ | 19,302 | 14,435,252 | $ | 1.34 | $ | 16,090 | 14,360,032 | $ | 1.12 | |||||||||||||||||||||
For
both
the years ended December 31, 2007 and 2006, there were 214,980 options that
were
anti-dilutive because the exercise price exceeded the average market price
for
the period. For the year ended December 31, 2005, there were 34,000
options that were anti-dilutive because the exercise price exceeded the average
market price for the year.
(n)
Fair Value of Financial
Instruments-
Statement of Financial Accounting Standards (“SFAS”) No. 107, “Disclosures About
Fair Value of Financial Instruments,” requires that the Company disclose
estimated fair values for its financial instruments. Fair value
methods and assumptions are set forth below for the Company’s financial
instruments.
Cash
and
Due from Banks, Federal Funds Sold, Presold Mortgages in Process of Settlement,
Accrued Interest Receivable, and Accrued Interest Payable - The carrying amounts
approximate their fair value because of the short maturity of these financial
instruments.
Available
for Sale and Held to Maturity Securities - Fair values are
based on
quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments.
Loans
- Fair values are
estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial,
financial and agricultural, real estate construction, real estate mortgages
and
installment loans to individuals. Each loan category is further
segmented into fixed and variable interest rate terms. For variable
rate loans, the carrying value is a reasonable estimate of the fair
value. For fixed rate loans, fair value is determined by discounting
scheduled future cash flows using current interest rates offered on loans with
similar risk characteristics. Fair values for impaired loans are
estimated based on discounted cash flows or underlying collateral values, where
applicable.
Deposits
and Securities Sold Under Agreements to Repurchase - The fair value
of
securities sold under agreements to repurchase and deposits with no stated
maturity, such as non-interest-bearing demand deposits, savings, NOW, and money
market accounts, is equal to the amount payable on demand as of the valuation
date. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities.
Borrowings
- The fair value
of
borrowings is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently
offered by the Company’s lenders for debt of similar remaining
maturities.
Commitments
to Extend Credit and Standby Letters of Credit - At December 31,
2007 and
2006, the Company’s off-balance sheet financial instruments had no carrying
value. The large majority of commitments to extend credit and standby
letters of credit are at variable rates and/or have relatively short terms
to
maturity. Therefore, the fair value for these financial instruments
is considered to be immaterial.
(o)
Impairment - Goodwill
is evaluated for
impairment on at least an annual basis by comparing the fair value of its
reporting units to their related carrying value. If the carrying
value of a reporting unit exceeds its fair value, the Company determines whether
the implied fair value of the goodwill, using a discounted cash flow analysis,
exceeds the carrying value of the goodwill. If the carrying value of
the goodwill exceeds the implied fair value of the goodwill, an impairment
loss
is recorded in an amount equal to that excess.
The
Company reviews all other long-lived assets, including identifiable intangible
assets, for impairment whenever events or changes in circumstances indicate
that
the carrying value may not be recoverable. The Company’s policy is
that an impairment loss is recognized if the sum of the undiscounted future
cash
flows is less than the carrying amount of the asset. Any long-lived
assets to be disposed of are reported at the lower of the carrying amount or
fair value, less costs to sell.
To
date,
the Company has not recorded any impairment write-downs of its long-lived assets
or goodwill.
(p)
Comprehensive Income - Comprehensive
income is
defined as the change in equity during a period for non-owner transactions
and
is divided into net income and other comprehensive income. Other
comprehensive income includes revenues, expenses, gains, and losses that are
excluded from earnings under current accounting standards. The
components of accumulated other comprehensive income for the Company are as
follows:
|
December
31,
2007
|
December
31,
2006
|
December
31,
2005
|
||||||||||
|
Unrealized
gain (loss) on securities
available
for sale
|
$ | 86 | (860 | ) | (1,049 | ) | ||||||
|
Deferred
tax asset (liability)
|
(34 | ) | 336 | 410 | ||||||||
|
Net
unrealized gain (loss) on
securities
available for sale
|
52 | (524 | ) | (639 | ) | |||||||
|
Additional
pension liability
|
(7,240 | ) | (6,649 | ) | (428 | ) | ||||||
|
Deferred
tax asset
|
2,854 | 2,623 | 167 | |||||||||
|
Net
additional pension liability
|
(4,386 | ) | (4,026 | ) | (261 | ) | ||||||
|
Total
accumulated other
comprehensive
income (loss)
|
$ | (4,334 | ) | (4,550 | ) | (900 | ) | |||||
(q)
Segment Reporting -
Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about
Segments of an Enterprise and Related Information” requires management to report
selected financial and descriptive information about reportable operating
segments. It also establishes standards for related disclosures about
products and services, geographic areas, and major
customers. Generally, disclosures are required for segments
internally identified to evaluate performance and resource
allocation. The Company’s operations are primarily within the banking
segment, and the financial statements presented herein reflect the results
of
that segment. Also, the Company has no foreign operations or
customers.
(r)
Reclassifications- Certain
amounts for prior
years have been reclassified to conform to the 2007 presentation. The
reclassifications had no effect on net income or shareholders’ equity as
previously presented, nor did they materially impact trends in financial
information.
(s)
Recent Accounting
Pronouncements-
On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (Statement
123(R)), “Share-Based Payment,” which was issued in December
2004. Statement 123(R) replaces FASB Statement No. 123 (Statement
123), “Accounting for Stock-Based Compensation,” and supersedes Accounting
Principles Board Opinion No. 25 (Opinion 25), “Accounting for Stock Issued to
Employees.” Statement 123(R) requires that the compensation cost
relating to share-based payment transactions be recognized in the financial
statements. Statement 123(R) permitted public companies to adopt its
requirements using one of two methods. The “modified prospective”
method recognizes compensation for all stock options granted after the date
of
adoption and for all previously granted stock options that become vested after
the date of adoption. The “modified retrospective” method includes
the requirements of the “modified prospective” method described above, but also
permits entities to restate prior period results based on the amounts previously
presented under Statement 123 for purposes of pro-forma
disclosures. The Company elected to adopt Statement 123(R) under the
“modified prospective” method and accordingly did not restate prior period
results. See Note 14 for a more detailed description of the Company’s
adoption of Statement 123(R).
In
May
2005, the FASB issued SFAS No. 154 (Statement 154), "Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No.
3." Statement 154 applies to all voluntary changes in accounting principle
as
well as to changes required by an accounting pronouncement that does not include
specific transition provisions. Statement 154 eliminates the previous
requirement that the cumulative effect of changes in accounting principle be
reflected in the income statement in the period of change. Instead,
to enhance the comparability of prior period financial statements, Statement
154
requires that changes in accounting principle be retrospectively
applied. Under retrospective application, the new accounting
principle is applied as of the beginning of the first period presented, as
if
that principle had always been used. Statement 154 carries forward the
requirement that an error be reported by restating prior period financial
statement as of the beginning of the first period. Statement 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.
The
initial adoption of Statement 154 did not have a material impact on the
Company's financial statements; however the adoption of this statement could
result in a material change to the way the Company reflects future changes
in
accounting principles, depending on the nature of future changes in accounting
principles and whether specific transition provisions are included.
In
December 2005, the FASB issued Staff Position SOP 94-6-1, “Terms of Loan
Products that May Give Rise to a Concentration of Credit Risk” (FSP SOP
94-6-1). FSP SOP 94-6-1 addresses 1) the circumstances under which
the terms of loan products give rise to a concentration of credit risk, and
2)
the disclosures or other accounting considerations that apply for entities
that
originate, hold guarantee, service, or invest in loan products with terms that
may give rise to a concentration of credit risk. The disclosures
required by FSP SOP 94-6-1 are required for interim and annual periods ending
after December 19, 2005. See Note 12 for the Company’s disclosures
required by FSP SOP 94-6-1.
In
July
2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48).
FIN 48 clarifies the accounting and reporting for uncertainties in income tax
law. FIN 48 prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. The cumulative
effect of applying the provisions of this interpretation is required to be
reported separately as an adjustment to the opening balance of retained earnings
in the year of adoption. The Company’s adoption of FIN 48 in the
first quarter of 2007 did not impact the Company’s consolidated financial
statements. See additional disclosures related to FIN 48 in Note
7.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB
108). SAB 108 provides guidance on the consideration of the effects
of prior year misstatements in quantifying current year misstatements for the
purpose of a materiality assessment. The bulletin is effective for
the first fiscal year ending after November 15, 2006. The adoption of
SAB 108
did not materially impact the Company’s consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(Statement 157). Statement 157 provides enhanced guidance for using
fair value to measure assets and liabilities. The standard also
requires expanded disclosures about the extent to which companies measure assets
and liabilities at fair value, the information used to measure fair value,
and
the effect of fair value measurements on earnings. Statement 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years (the original
effective date was modified by the release of FASB Staff Position FAS 157-2
in
February 2008). The Company does not expect the adoption of Statement
157 to materially impact the Company’s consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans” (Statement
158). Statement 158 requires an employer to: (a) recognize
in its statement of financial position an asset for a plan’s overfunded status
or a liability for a plan’s underfunded status (b) measure a plan’s assets
and its obligations that determine its funded status as of the end of the
employer’s fiscal year (with limited exceptions) and (c) recognize changes in
the funded status of a defined benefit postretirement plan in the year in which
the changes occur. Those changes will be reported in comprehensive
income. The requirement to recognize the funded status of a benefit
plan and the disclosure requirements are effective as of the end of the fiscal
year ending after December 15, 2006, whereas the measurement date provisions
are
effective for fiscal years ending after December 15, 2008. The
Company currently measures its plan assets and obligations at the end of its
fiscal year, and thus the measurement date requirements will not impact the
Company. The Company adopted the funded status and disclosure
requirements of Statement 158 as of December 31, 2006. The effect of
the adoption was to recognize $3.8 million, after-tax, of net actuarial losses,
prior service cost and transition obligation as a reduction to accumulated
other
comprehensive income. See Note 11 for additional disclosures required
by Statement 158.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115” (Statement 159). This statement permits, but does
not require, entities to measure many financial instruments at fair
value. The objective is to provide entities with an opportunity to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. Entities electing this option will apply it when the
entity first recognizes an eligible instrument and will report unrealized gains
and losses on such instruments in current earnings. This statement 1)
applies to all entities, 2) specifies certain election dates, 3) can be applied
on an instrument-by-instrument basis with some exceptions, 4) is irrevocable
and
5) applies only to entire instruments. One exception is demand
deposit liabilities, which are explicitly excluded as qualifying for fair
value. With respect to FASB Statement No. 115, available for sale and
held to maturity securities at the effective date of Statement 159 are eligible
for the fair value option at that date. If the fair value option is
elected for those securities at the effective date, cumulative unrealized gains
and losses at that date shall be included in the cumulative-effect adjustment
and thereafter, such securities will be accounted for as trading
securities. Statement 159 is effective for the Company on January 1,
2008. Earlier adoption was permitted in 2007 if the Company also
elected to apply the provisions of Statement 157. The Company did not
elect early adoption of Statement 159 and believes that it is unlikely that
it
will expand its use of fair value accounting upon the January 1, 2008 effective
date.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”
(Statement 141(R)) which replaces Statement 141, “Business
Combinations.” Statement 141(R) retains the fundamental requirements
in Statement No. 141 that the acquisition method of accounting (formerly
referred to as purchase method) be used for all business combinations and that
an acquirer be identified for each business combination. Statement
141(R) defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date
as
of the date that the acquirer achieves control. Statement 141(R)
requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree at the acquisition date,
measured at their fair values. This Statement requires the acquirer
to recognize acquisition-related costs and restructuring costs separately from
the business combination as period expense. This Statement is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The adoption on this statement will impact
the accounting and reporting of acquisitions after January 1,
2009.
Note
2. Acquisitions – Completed and Pending
The
Company did not complete any acquisitions during 2007 or 2005. The
Company completed two branch purchases during 2006. The results of
each acquired branch are included in the Company’s results beginning on their
respective acquisition dates.
(a) On
July 7, 2006, the Company completed the purchase of a branch of First Citizens
Bank located in Dublin, Virginia. The Company assumed the branch’s
$21 million in deposits. No loans were acquired in this
transaction. The primary reason for this acquisition was to increase
the Company’s presence in southwestern Virginia, a market in which the Company
already had three branches with a large customer base. The Company
paid a deposit premium for the branch of approximately $994,000, all of which
is
deductible for tax purposes. The identifiable intangible asset
associated with the fair value of the core deposit base, as determined by an
independent consulting firm, was determined to be $269,000 and is being
amortized as expense on an accelerated basis over an eight year period based
on
an amortization schedule provided by the consulting firm. The
weighted-average amortization period is approximately 2.2 years. The
remaining intangible asset of $725,000 has been classified as goodwill, and
thus
is not being systematically amortized, but rather is subject to an annual
impairment test. The primary factors that contributed to a purchase
price that resulted in recognition of goodwill were the Company’s desire to
expand its presence in southwestern Virginia with facilities, operations and
experienced staff in place. This branch’s operations are included in
the accompanying Consolidated Statements of Income beginning on the acquisition
date of July 7, 2006. Historical pro forma information is not
presented due to the immateriality of this transaction to the overall
consolidated financial statements of the Company.
(b) On
September 1, 2006, the Company completed the purchase of a branch of Bank of
the
Carolinas in Carthage, North Carolina. The Company assumed the
branch’s $24 million in deposits and $6 million in loans. The primary
reason for this acquisition was to increase the Company’s presence in Moore
County, a market in which the Company already had ten branches with a large
customer base. The Company paid a deposit premium for the branch of
approximately $1,768,000, all of which is deductible for tax
purposes. The identifiable intangible asset associated with the fair
value of the core deposit base, as determined by an independent consulting
firm,
was determined to be approximately $235,000 and is being amortized as expense
on
an accelerated basis over a thirteen year period based on an amortization
schedule provided by the consulting firm. The weighed-average
amortization period is approximately 3.2 years. The remaining
intangible asset of $1,533,000 has been classified as goodwill, and thus is
not
being systematically amortized, but rather is subject to an annual impairment
test. The primary factors that contributed to a purchase price that
resulted in recognition of goodwill were the Company’s desire to expand in an
existing high-growth market with facilities, operations and experienced staff
in
place. This branch’s operations are included in the accompanying
Consolidated Statements of Income beginning on the acquisition date of September
1, 2006. Historical pro forma information is not presented due to the
immateriality of this transaction to the overall consolidated financial
statements of the Company.
At
December 31, 2007, the Company has one pending acquisition. On July
12, 2007, the Company announced that it had reached an agreement to acquire
Great Pee Dee Bancorp, Inc. (“Great Pee Dee”), the holding company for a
community bank headquartered in Cheraw, South Carolina with three branches
and
total assets of $222 million. Under the terms of the agreement and
subject to possible adjustment, each share of Great Pee Dee common stock issued
and outstanding on the merger date will be converted into and exchanged for
the
right to receive 1.15 shares of the Company’s common
stock. Additional information is available in the registration
statement, which includes a proxy statement/prospectus, concerning the proposed
merger that was filed with the SEC on February 5, 2008. The Company
anticipates the completion of this merger to occur in April 2008.
Note
3. Securities
The
book
values and approximate fair values of investment securities at December 31,
2007
and 2006 are summarized as follows:
|
2007
|
2006
|
|||||||||||||||||||||||||||||||
|
Amortized
|
Fair
|
Unrealized
|
Amortized
|
Fair
|
Unrealized
|
|||||||||||||||||||||||||||
|
(In
thousands)
|
Cost
|
Value
|
Gains
|
(Losses)
|
Cost
|
Value
|
Gains
|
(Losses)
|
||||||||||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||||||||||||||||||
|
Government-sponsored
enterprise
securities
|
$ | 69,463 | 69,893 | 443 | (13 | ) | 63,004 | 62,456 | 16 | (564 | ) | |||||||||||||||||||||
|
Mortgage-backed
securities
|
39,706 | 39,296 | 65 | (475 | ) | 44,572 | 43,442 | 4 | (1,134 | ) | ||||||||||||||||||||||
|
Corporate
bonds
|
13,819 | 13,855 | 271 | (235 | ) | 12,853 | 13,580 | 810 | (83 | ) | ||||||||||||||||||||||
|
Equity
securities
|
12,040 | 12,070 | 55 | (26 | ) | 10,395 | 10,486 | 97 | (6 | ) | ||||||||||||||||||||||
|
Total
available for sale
|
$ | 135,028 | 135,114 | 834 | (749 | ) | 130,824 | 129,964 | 927 | (1,787 | ) | |||||||||||||||||||||
|
Securities
held to maturity:
|
||||||||||||||||||||||||||||||||
|
State
and local governments
|
$ | 16,611 | 16,620 | 102 | (93 | ) | 13,089 | 13,135 | 98 | (52 | ) | |||||||||||||||||||||
|
Other
|
29 | 29 |
─
|
─
|
33 | 33 |
─
|
─
|
||||||||||||||||||||||||
|
Total
held to maturity
|
$ | 16,640 | 16,649 | 102 | (93 | ) | 13,122 | 13,168 | 98 | (52 | ) | |||||||||||||||||||||
Included
in mortgage-backed securities at December 31, 2007 were collateralized mortgage
obligations with an amortized cost of $9,551,000 and a fair value of
$9,373,000. Included in mortgage-backed securities at December 31,
2006 were collateralized mortgage obligations with an amortized cost of
$11,898,000 and a fair value of $11,517,000.
The
Company owned Federal Home Loan Bank stock with a cost and fair value of
$11,766,000 at December 31, 2007 and $10,036,000 at December 31, 2006, which
is
included in equity securities above and serves as part of the collateral for
the
Company’s line of credit with the Federal Home Loan Bank (see Note 9 for
additional discussion). The investment in this stock is a requirement
for membership in the Federal Home Loan Bank system.
The
following table presents information regarding securities with unrealized losses
at December 31, 2007:
|
Securities
in an Unrealized
Loss
Position for
Less
than 12 Months
|
Securities
in an Unrealized
Loss
Position for
More
than 12 Months
|
Total
|
||||||||||||||||||||||
|
(in
thousands)
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||||
|
Government-sponsored
enterprise securities
|
$ | – | – | 9,484 | 13 | 9,484 | 13 | |||||||||||||||||
|
Mortgage-backed
securities
|
– | – | 28,509 | 475 | 28,509 | 475 | ||||||||||||||||||
|
Corporate
bonds
|
3,935 | 57 | 2,922 | 178 | 6,857 | 235 | ||||||||||||||||||
|
Equity
securities
|
63 | 9 | 32 | 17 | 95 | 26 | ||||||||||||||||||
|
State
and local governments
|
3,269 | 46 | 3,944 | 47 | 7,213 | 93 | ||||||||||||||||||
|
Total
temporarily impaired securities
|
$ | 7,267 | 112 | 44,891 | 730 | 52,158 | 842 | |||||||||||||||||
The
following table presents information regarding securities with unrealized losses
at December 31, 2006:
|
(in
thousands)
|
Securities
in an Unrealized
Loss
Position for
Less
than 12 Months
|
Securities
in an Unrealized
Loss
Position for
More
than 12 Months
|
Total
|
|||||||||||||||||||||
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||||||||||||||||||
|
Government-sponsored
enterprise securities
|
$ | 7,985 | 15 | 39,465 | 549 | 47,450 | 564 | |||||||||||||||||
|
Mortgage-backed
securities
|
799 | 1 | 38,985 | 1,133 | 39,784 | 1,134 | ||||||||||||||||||
|
Corporate
bonds
|
3,249 | 5 | 3,022 | 78 | 6,271 | 83 | ||||||||||||||||||
|
Equity
securities
|
27 | 5 | 15 | 1 | 42 | 6 | ||||||||||||||||||
|
State
and local governments
|
2,537 | 26 | 1,050 | 26 | 3,587 | 52 | ||||||||||||||||||
|
Total
temporarily impaired securities
|
$ | 14,597 | 52 | 82,537 | 1,787 | 97,134 | 1,839 | |||||||||||||||||
In
the
above tables, all of the non-equity securities that were in an unrealized loss
position at December 31, 2007 and 2006 are bonds that the Company has determined
are in a loss position due to interest rate factors, and not because of credit
quality concerns. The Company has the ability and intent to hold
these investments until maturity with no accounting loss. The Company
has concluded that each of the equity securities in an unrealized loss position
at December 31, 2007 and 2006 was in such a position due to minor temporary
fluctuations in the market prices of the securities. The Company’s
policy is to record an impairment charge for any of these equity securities
that
remains in an unrealized loss position for twelve consecutive months unless
the
amount is insignificant.
The
aggregate carrying amount of cost-method investments was $11,844,000 and
$10,204,000 at December 31, 2007 and 2006, respectively, which included the
Federal Home Loan Bank stock discussed above. The Company determined
that none of its cost-method investments were impaired at either year
end.
The
book
values and approximate fair values of investment securities at December 31,
2007, by contractual maturity, are summarized in the table
below. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
|
Securities
Available for Sale
|
Securities
Held to Maturity
|
|||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||
|
(In
thousands)
|
Cost
|
Value
|
Cost
|
Value
|
||||||||||||
|
Debt
securities
|
||||||||||||||||
|
Due
within one year
|
$ | 17,707 | 17,697 | $ | 2,264 | 2,275 | ||||||||||
|
Due
after one year but within five years
|
51,756 | 52,196 | 3,496 | 3,525 | ||||||||||||
|
Due
after five years but within ten years
|
6,092 | 5,885 | 4,608 | 4,649 | ||||||||||||
|
Due
after ten years
|
7,727 | 7,970 | 6,272 | 6,200 | ||||||||||||
|
Mortgage-backed
securities
|
39,706 | 39,296 |
─
|
─
|
||||||||||||
|
Total
debt securities
|
122,988 | 123,044 | 16,640 | 16,649 | ||||||||||||
|
Equity
securities
|
12,040 | 12,070 |
─
|
─
|
||||||||||||
|
Total
securities
|
$ | 135,028 | 135,114 | $ | 16,640 | 16,649 | ||||||||||
At
December 31, 2007 and 2006, investment securities with book values of
$111,892,000 and $92,161,000, respectively, were pledged as collateral for
public and private deposits and securities sold under agreements to
repurchase.
Sales
of
securities available for sale with aggregate proceeds of $4,185,000 in 2007,
$1,575,000 in 2006, and $17,000 in 2005 resulted in gross gains of $487,000
and
no gross losses in 2007, resulted in gross gains of $205,000 and no gross losses
in 2006, and resulted in gross gains of $5,000 and no gross losses in
2005.
Note
4. Loans and Allowance for Loan Losses
Loans
at
December 31, 2007 and 2006 are summarized as follows:
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Commercial,
financial, and agricultural
|
$ | 172,530 | 165,214 | |||||
|
Real
estate – construction, land development, and other land
loans
|
383,973 | 271,710 | ||||||
|
Real
estate – mortgage – residential (1-4 family) first
mortgages
|
514,329 | 513,066 | ||||||
|
Real
estate – mortgage – home equity loans/lines of credit
|
209,852 | 205,284 | ||||||
|
Real
estate – mortgage – commercial and other
|
528,590 | 509,933 | ||||||
|
Installment
loans to individuals
|
84,875 | 75,162 | ||||||
|
Subtotal
|
1,894,149 | 1,740,369 | ||||||
|
Unamortized
net deferred loan costs
|
146 | 27 | ||||||
|
Loans,
including net deferred loan costs
|
$ | 1,894,295 | 1,740,396 | |||||
Loans
in
the amounts of $1,241,958,000 and $1,262,729,000 as of December 31, 2007 and
2006, respectively, are pledged as collateral for certain borrowings (see Note
9). The loans above also include loans to executive officers and
directors serving the Company at December 31, 2007 and to their associates
totaling approximately $6,636,000 and $8,135,000 at December 31, 2007 and 2006,
respectively. During 2007, additions to such loans were approximately
$772,000 and repayments totaled approximately $2,271,000. These loans
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other non-related borrowers. Management does not believe these loans
involve more than the normal risk of collectibility or present other unfavorable
features.
Nonperforming
assets at December 31, 2007 and 2006 were as follows:
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Loans: Nonaccrual
loans
|
$ | 7,807 | 6,852 | |||||
|
Restructured
loans
|
6 | 10 | ||||||
|
Accruing
loans greater than 90 days past due
|
– | – | ||||||
|
Total
nonperforming loans
|
7,813 | 6,862 | ||||||
|
Other
real estate (included in other assets)
|
3,042 | 1,539 | ||||||
|
Total
nonperforming assets
|
$ | 10,855 | 8,401 | |||||
If
the
nonaccrual loans and restructured loans as of December 31, 2007, 2006 and 2005
had been current in accordance with their original terms and had been
outstanding throughout the period (or since origination if held for part of
the
period), gross interest income in the amounts of approximately $610,000,
$510,000 and $123,000 for nonaccrual loans and $1,000, $1,000 and $2,000 for
restructured loans would have been recorded for 2007, 2006, and 2005,
respectively. Interest income on such loans that was actually
collected and included in net income in 2007, 2006 and 2005 amounted to
approximately $252,000, $179,000 and $67,000 for nonaccrual loans (prior to
their being placed on nonaccrual status) and $1,000, $1,000 and $2,000 for
restructured loans, respectively. At December 31, 2007 and 2006, the
Company had no commitments to lend additional funds to debtors whose loans
were
nonperforming.
Activity
in the allowance for loan losses for the years ended December 31, 2007, 2006,
and 2005 was as follows:
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Balance,
beginning of year
|
$ | 18,947 | 15,716 | 14,717 | ||||||||
|
Provision
for loan losses
|
5,217 | 4,923 | 3,040 | |||||||||
|
Recoveries
of loans charged-off
|
337 | 273 | 322 | |||||||||
|
Loans
charged-off
|
(3,177 | ) | (2,017 | ) | (2,363 | ) | ||||||
|
Allowance
recorded related to loans assumed
in corporate acquisitions
|
─
|
52 |
─
|
|||||||||
|
Balance,
end of year
|
$ | 21,324 | 18,947 | 15,716 | ||||||||
In
accordance with the Company’s policy for reviewing nonaccrual loans for
impairment, as described in note 1(e), at December 31, 2007 and 2006, the
recorded investment in loans considered to be impaired was $3,883,000 and
$2,864,000, respectively, of which all were on a nonaccrual basis at each year
end. The related allowance for loan losses for the impaired loans at
December 31, 2007 and 2006 was $751,000 and $511,000,
respectively. At December 31, 2007, and 2006, there was $1,982,000
and $842,000, respectively, in impaired loans that did not have a related
allowance. The average recorded investments in impaired loans during
the years ended December 31, 2007, 2006, and 2005 was approximately $3,161,000,
$1,445,000, and $1,474,000, respectively. For the years ended
December 31, 2007, 2006, and 2005, the Company recognized no interest income
on
these loans during the period that they were considered to be
impaired.
Note
5. Premises and Equipment
Premises
and equipment at December 31, 2007 and 2006 consisted of the
following:
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Land
|
$ | 13,277 | 12,547 | |||||
|
Buildings
|
33,527 | 30,735 | ||||||
|
Furniture
and equipment
|
23,881 | 21,674 | ||||||
|
Leasehold
improvements
|
1,332 | 1,305 | ||||||
|
Total
cost
|
72,017 | 66,261 | ||||||
|
Less
accumulated depreciation and amortization
|
(25,967 | ) | (22,721 | ) | ||||
|
Net
book value of premises and equipment
|
$ | 46,050 | 43,540 | |||||
Note
6. Goodwill and Other Intangible Assets
The
following is a summary of the gross carrying amount and accumulated amortization
of amortized intangible assets as of December 31, 2007 and December 31, 2006
and
the carrying amount of unamortized intangible assets as of December 31, 2007
and
December 31, 2006.
|
December
31, 2007
|
December
31, 2006
|
|||||||||||||||
|
(In
thousands)
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
||||||||||||
|
Amortized
intangible assets:
|
||||||||||||||||
|
Customer
lists
|
$ | 394 | 179 | 394 | 148 | |||||||||||
|
Core
deposit premiums
|
2,945 | 1,645 | 2,945 | 1,302 | ||||||||||||
|
Total
|
$ | 3,339 | 1,824 | 3,339 | 1,450 | |||||||||||
|
Unamortized
intangible assets:
|
||||||||||||||||
|
Goodwill
|
$ | 49,505 | 49,505 | |||||||||||||
The
following table presents the estimated amortization expense for intangible
assets for each of the five calendar years ending December 31, 2012 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.
|
(In
thousands)
|
Estimated
Amortization
Expense
|
|||
|
2008
|
$ | 316 | ||
|
2009
|
279 | |||
|
2010
|
262 | |||
|
2011
|
247 | |||
|
2012
|
235 | |||
|
Thereafter
|
176 | |||
|
Total
|
$ | 1,515 | ||
Note
7. Income Taxes
Total
income taxes for the years ended December 31, 2007, 2006 and 2005 were allocated
as follows:
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Allocated
to net income
|
$ | 13,150 | 11,423 | 16,829 | ||||||||
|
Allocated
to stockholders’ equity, for unrealized holding gain/loss on
debt
and equity securities for financial reporting purposes
|
369 | 74 | (872 | ) | ||||||||
|
Allocated
to stockholders’ equity, for tax benefit of pension
liabilities
|
(231 | ) | (2,456 | ) | (35 | ) | ||||||
|
Total
income taxes
|
$ | 13,288 | 9,041 | 15,922 | ||||||||
The
components of income tax expense (benefit) for the years ended December 31,
2007, 2006 and 2005 are as follows:
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Current -
Federal
|
$ | 11,625 | 10,809 | 8,285 | ||||||||
|
- State
|
1,938 | 1,927 | 8,700 | |||||||||
|
Deferred -
Federal
|
(348 | ) | (1,112 | ) | (124 | ) | ||||||
|
-
State
|
(65 | ) | (201 | ) | (32 | ) | ||||||
|
Total
|
$ | 13,150 | 11,423 | 16,829 | ||||||||
The
sources and tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) at December 31, 2007 and
2006
are presented below:
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Deferred
tax assets:
|
||||||||
|
Allowance
for loan losses
|
$ | 8,364 | 7,436 | |||||
|
Excess
book over tax SERP retirement plan cost
|
1,257 | 989 | ||||||
|
Basis
of investment in subsidiary
|
69 | 69 | ||||||
|
Reserve
for employee medical expense for financial reporting
purposes
|
20 | 20 | ||||||
|
Deferred
compensation
|
177 | 183 | ||||||
|
State
net operating loss carryforwards
|
226 | 230 | ||||||
|
Trust
preferred security issuance costs
|
154 | 284 | ||||||
|
Accruals,
book versus tax
|
252 | 171 | ||||||
|
Pension
liability adjustments
|
2,854 | 2,623 | ||||||
|
Unrealized
loss on securities available for sale
|
─
|
335 | ||||||
|
Net
loan fees recognized for tax reporting purposes
|
24 |
─
|
||||||
|
All
other
|
416 | 378 | ||||||
|
Gross
deferred tax assets
|
13,813 | 12,718 | ||||||
|
Less:
Valuation allowance
|
(224 | ) | (239 | ) | ||||
|
Net
deferred tax assets
|
13,589 | 12,479 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Loan
fees
|
(1,272 | ) | (1,227 | ) | ||||
|
Excess
tax over book pension cost
|
(547 | ) | (545 | ) | ||||
|
Depreciable
basis of fixed assets
|
(1,525 | ) | (1,610 | ) | ||||
|
Amortizable
basis of intangible assets
|
(4,836 | ) | (3,991 | ) | ||||
|
Net
loan fees recognized for tax reporting purposes
|
─
|
(7 | ) | |||||
|
Unrealized
gain on securities available for sale
|
(33 | ) |
─
|
|||||
|
FHLB
stock dividends
|
(436 | ) | (436 | ) | ||||
|
Book
versus tax basis difference – securities
|
─
|
─
|
||||||
|
Gross
deferred tax liabilities
|
(8,649 | ) | (7,816 | ) | ||||
|
Net
deferred tax asset - included in other assets
|
$ | 4,940 | 4,663 | |||||
A
portion
of the annual change in the net deferred tax liability relates to unrealized
gains and losses on securities available for sale. The related 2007
and 2006 deferred tax expense (benefit) of approximately $369,000 and $74,000
respectively, has been recorded directly to shareholders’
equity. Additionally, a portion of the annual change in the net
deferred tax liability relates to pension adjustments.
The
related 2007 and 2006 deferred benefit of $231,000 and $2,456,000, respectively,
has been recorded directly to shareholders’ equity. The balance of
the 2007 and 2006 increase in the net deferred tax asset of $413,000 and
$1,313,000, respectively, is reflected as a deferred income tax benefit in
the
consolidated statement of income.
The
valuation allowances for 2007 and 2006 relate primarily to state net operating
loss carryforwards. It is management’s belief that the realization of
the remaining net deferred tax assets is more likely than not.
In
1999,
in consultation with the Company’s tax advisors, the Company established an
operating structure involving a real estate investment trust (REIT) that
resulted in a reduction in the Company’s state tax liability to the state of
North Carolina. In late 2004, the North Carolina Department of
Revenue indicated that it would challenge taxpayers engaged in activities deemed
to be “income-shifting,” and they indicated that they believed certain REIT
operating structures were a type of “income-shifting.” During 2005,
the North Carolina Department of Revenue began an audit of the Company’s tax
returns for 2001-2004, which represented all years eligible for
audit. In the third quarter of 2005, based on consultations with the
Company’s external auditor and legal counsel, the Company determined that it
should record a $6.3 million loss accrual to reserve for this issue, which
was
comprised of $8.6 million in estimated liability related to taxes due, interest
and penalty, less $2.3 million in related federal tax benefit. In
February 2006, the North Carolina Department of Revenue announced a “Settlement
Initiative” that offered companies with certain transactions, including those
with a REIT operating structure, the opportunity to resolve such matters with
reduced penalties by agreeing to participate in the initiative by June 15,
2006. Although the Company believed that its tax returns complied
with the relevant statutes, the board of directors of the Company decided that
it was in the best interest of the Company to settle this matter by
participating in the initiative. Based on the terms of the
initiative, the Company estimated that its total liability to settle the matter
would be approximately $6.4 million, or $4.3 million net of the federal tax
benefit, which was $2.0 million less than the amount that was originally
accrued. Accordingly, in March 2006, the Company retroactively
recorded an adjustment to its fourth quarter of 2005 earnings to reverse $2.0
million of tax expense. The aspects of the REIT structure that gave
rise to this issue were discontinued effective January 1, 2005. In
March 2007, the Company completed its participation in the North Carolina
Department of Revenue’s Settlement Initiative by paying the state $6.9 million
to settle the matter, which represented the $6.4 million accrued as of December
31, 2005 plus interest of $0.5 million that accrued from December 31, 2005
until
the actual payment.
As
discussed in Note 1(s), the Company adopted FIN 48 in 2007. In
connection with the adoption, the Company assessed whether it had any
significant uncertain tax positions and determined that there were
none. Accordingly, no reserve for uncertain tax positions was
recorded. Additionally, the Company determined that it had no
material unrecognized tax benefits that if recognized would affect the effective
tax rate. The Company’s general policy is to record tax penalties and
interest as a component of “other operating expenses.” As it relates
to the state tax liability discussed above however, the Company classified
the
entire 2005 state tax accrual of $6.4 million as “income tax expense,” which
included $5.6 million in state taxes, $0.6 in accrued interest through December
31, 2005, and $0.2 million in penalties. Until the payment was made
to settle this liability in early 2007, interest continued to accrue on the
amount of state taxes due. Accordingly, the Company recorded
approximately $100,000 in interest per quarter for each of the four quarters
in
2006 and the first quarter of 2007. The Company recorded this
additional expense within the line item “other operating expenses” on its income
statement.
The
Company’s tax returns are subject to income tax audit by federal or state
agencies beginning with the year 2004.
Retained
earnings at December 31, 2007 and 2006 includes approximately $6,869,000
representing pre-1988 tax bad debt reserve base year amounts for which no
deferred income tax liability has been provided since these reserves are not
expected to reverse or may never reverse. Circumstances that would
require an accrual of a portion or all of this unrecorded tax liability are
a
reduction in qualifying loan levels relative to the end of 1987, failure to
meet
the definition of a bank, dividend payments in excess of accumulated tax
earnings and profits, or other distributions in dissolution, liquidation or
redemption of the Bank’s stock.
The
following is a reconcilement of federal income tax expense at the statutory
rate
of 35% to the income tax provision reported in the financial
statements.
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Tax
provision at statutory rate
|
$ | 12,235 | 10,754 | 11,522 | ||||||||
|
Increase
(decrease) in income taxes resulting from:
|
||||||||||||
|
Tax-exempt
interest income
|
(321 | ) | (287 | ) | (251 | ) | ||||||
|
Low
income housing tax credits
|
(114 | ) | (114 | ) | (109 | ) | ||||||
|
Non-deductible
interest expense
|
45 | 34 | 20 | |||||||||
|
State
income taxes, net of federal benefit
|
1,218 | 1,122 | 5,634 | |||||||||
|
Change
in valuation allowance
|
(15 | ) | (36 | ) | (92 | ) | ||||||
|
Non-deductible
penalty
|
─
|
─
|
50 | |||||||||
|
Other,
net
|
102 | (50 | ) | 55 | ||||||||
|
Total
|
$ | 13,150 | 11,423 | 16,829 | ||||||||
Note
8. Time Deposits, Securities Sold Under Agreements to Repurchase, and
Related Party Deposits
At
December 31, 2007, the scheduled maturities of time deposits were as
follows:
|
(In
thousands)
|
||||
|
2008
|
$ | 939,645 | ||
|
2009
|
48,748 | |||
|
2010
|
29,672 | |||
|
2011
|
14,432 | |||
|
2012
|
14,751 | |||
|
Thereafter
|
495 | |||
| $ | 1,047,743 | |||
Securities
sold under agreement to repurchase represent short term borrowings by the
Company with maturities less than one year and are collateralized by a portion
of the Company’s securities portfolio, which have been delivered to a third
party custodian for safekeeping. At December 31, 2007, securities
with an amortized cost of $51,233,000 and a market value of $50,903,000 were
pledged to secure securities sold under agreements to
repurchase.
The
following table presents certain information for securities sold under
agreements to repurchase:
|
($
in thousands)
|
2007
|
2006
|
||||||
|
Balance
at December 31
|
$ | 39,695 | 43,276 | |||||
|
Weighted
average interest rate at December 31
|
3.40 | % | 3.78 | % | ||||
|
Maximum
amount outstanding at any month-end during the year
|
$ | 50,610 | 43,276 | |||||
|
Average
daily balance outstanding during the year
|
$ | 39,220 | 30,036 | |||||
|
Average
annual interest rate paid during the year
|
3.76 | % | 3.72 | % | ||||
Deposits
received from executive officers and directors and their associates totaled
approximately $8,444,000 at December 31, 2007. These deposit accounts
have substantially the same terms, including interest rates, as those prevailing
at the time for comparable transactions with other non-related
depositors.
Note
9. Borrowings and Borrowings Availability
The
following table presents information regarding the Company’s outstanding
borrowings at December 31, 2007 and 2006:
|
Description
- 2007
|
Due
date
|
Call
Feature
|
2007
Amount
|
Interest Rate
|
|||||
|
FHLB
Overnight
Borrowings
|
January
1, 2008, renewable
daily
|
None
|
$ | 170,000,000 |
4.40%
subject to
change
daily
|
||||
|
FHLB
Term Note
|
Due
June 23, 2008
|
None
|
1,000,000 |
5.51%
fixed
|
|||||
|
FHLB
Term Note
|
Due
on April 21, 2009
|
Expired
(One time call
option
in 2004 not
exercised
by FHLB)
|
5,000,000 |
5.26%
fixed
|
|||||
|
Line
of Credit with
Commercial
Bank
|
Due
October 30, 2009
|
None
|
20,000,000 |
6.38%
at Dec. 31, 2007
adjustable
rate
3
month LIBOR + 1.50%
|
|||||
|
Trust
Preferred
Securities
|
Due
on January 23, 2034
|
By
Company on a
quarterly
basis beginning
on
January 23, 2009
|
20,620,000 |
7.68%
at Dec. 31, 2007
adjustable
rate
3
month LIBOR + 2.70%
|
|||||
|
Trust
Preferred
Securities
|
Due
on June 15, 2036
|
By
Company on a
quarterly
basis beginning
on
June 15, 2011
|
25,774,000 |
6.38%
at Dec. 31, 2007
adjustable
rate
3
month LIBOR + 1.39%
|
|||||
|
Total
borrowings/
weighted
average
rate
|
$ | 242,394,000 |
5.08%
(6.66% excluding
overnight
borrowings)
|
||||||
|
Description
- 2006
|
Due
date
|
Call
Feature
|
2006
Amount
|
Interest Rate
|
|||||
|
FHLB
Overnight
Borrowings
|
January
1, 2007, renewable
daily |
None
|
$ | 135,000,000 |
5.50%
subject to
change
daily
|
||||
|
FHLB
Term Note
|
Due
March 13, 2007
|
None
|
2,000,000 |
2.91%
fixed
|
|||||
|
FHLB
Term Note
|
Due
June 23, 2008
|
None
|
1,000,000 |
5.51%
fixed
|
|||||
|
FHLB
Term Note
|
Due
on April 21, 2009
|
Expired
(One time call
option
in 2004 not
exercised
by FHLB)
|
5,000,000 |
5.26%
fixed
|
|||||
|
Trust
Preferred
Securities
|
Due
on November 7, 2032
|
By
Company on a
quarterly
basis beginning
on
November 7, 2007
|
20,619,000 |
8.81%
at Dec. 31, 2006
adjustable
rate
3
month LIBOR + 3.45%
|
|||||
|
Trust
Preferred
Securities
|
Due
on January 23, 2034
|
By
Company on a
quarterly
basis beginning
on
January 23, 2009
|
20,620,000 |
8.06%
at Dec. 31, 2006
adjustable
rate
3
month LIBOR + 2.70%
|
|||||
|
Trust
Preferred
Securities
|
Due
on June 15, 2036
|
By
Company on a
quarterly
basis beginning
on
June 15, 2011
|
25,774,000 |
6.75%
at Dec. 31, 2006
adjustable
rate
3
month LIBOR + 1.39%
|
|||||
|
Total
borrowings/
weighted
average
rate
|
$ | 210,013,000 |
6.20%
(7.46% excluding
overnight
borrowings)
|
||||||
All
outstanding FHLB borrowings may be accelerated immediately by the FHLB in
certain circumstances including material adverse changes in the condition of
the
Company or if the Company’s qualifying collateral amounts to less than that
required under the terms of the borrowing agreement.
In
the
above table, the $20.6 million in borrowings due on January 23, 2034 relate
to
borrowings structured as trust preferred capital securities that were issued
by
First Bancorp Capital Trusts II and III ($10.3 million by each trust),
unconsolidated subsidiaries of the Company, on December 19, 2003 and qualify
as
capital for regulatory capital adequacy requirements. These unsecured
debt securities are callable by the Company at par on any quarterly interest
payment date beginning on January 23, 2009. The interest rate on
these debt securities adjusts on a quarterly basis at a rate of three-month
LIBOR plus 2.70%. The Company incurred approximately $580,000 of debt
issuance costs related to the issuance that were recorded as prepaid expenses
and are included in the “Other Assets” line item of the consolidated balance
sheet. These debt issuance costs are being amortized as interest
expense until the earliest possible call date of January 23, 2009.
In
the
above table, the $25.8 million in borrowings due on June 15, 2036 relate to
borrowings structured as trust preferred capital securities that were issued
by
First Bancorp Capital Trust IV, an unconsolidated subsidiary of the Company,
on
April 13, 2006 and qualify as capital for regulatory capital adequacy
requirements. These unsecured debt securities are callable by the
Company at par on any quarterly interest payment date beginning on June 15,
2011. The interest rate on these debt securities adjusts on a
quarterly basis at a rate of three-month LIBOR plus 1.39%. The
Company incurred no debt issuance costs related to the issuance.
In
the
2006 table above, the $20.6 million in borrowings due on November 7, 2032
related to borrowings structured as trust preferred capital securities that
were
issued by First Bancorp Capital Trust I, an unconsolidated subsidiary of the
Company, on October 29, 2002.
These
unsecured debt securities were called by the Company at par on November 7,
2007
and fully redeemed. The funding of the repayment was provided by a
$20 million line of credit that the Company obtained from a third-party
commercial bank. This line of credit has a maturity date of October
30, 2009 and carries an interest rate of either i) prime minus 1.00% or
ii) LIBOR plus 1.50%, at the discretion of the Company.
At
December 31, 2007, the Company had three sources of readily available borrowing
capacity – 1) an approximately $321 million line of credit with the FHLB, of
which $176 million was outstanding at December 31, 2007 and $143 million was
outstanding at December 31, 2006, 2) a $70 million overnight federal funds
line
of credit with a correspondent bank, none of which was outstanding at December
31, 2007 or 2006, and 3) an approximately $81 million line of credit through
the
Federal Reserve Bank of Richmond’s (FRB) discount window, none of which was
outstanding at December 31, 2007 or 2006.
The
Company’s line of credit with the FHLB totaling approximately $321 million can
be structured as either short-term or long-term borrowings, depending on the
particular funding or liquidity need and is secured by the Company’s FHLB stock
and a blanket lien on most of its real estate loan portfolio. In
addition to the outstanding borrowings from the FHLB that reduce the available
borrowing capacity of the line of credit, the borrowing capacity was further
reduced by $40 million at December 31, 2007 and 2006 as a result of the Company
pledging letters of credit for public deposits at each of those
dates. Accordingly, the Company’s unused FHLB line of credit was $105
million at December 31, 2007.
The
Company’s correspondent bank relationship allows the Company to purchase up to
$70 million in federal funds on an overnight, unsecured basis (federal funds
purchased). The Company had no borrowings outstanding under this line
at December 31, 2007 or 2006. This line of credit was not drawn
upon during any of the past three years.
The
Company also has a line of credit with the FRB discount window. This
line is secured by a blanket lien on a portion of the Company’s commercial and
consumer loan portfolio (excluding real estate). Based on the
collateral owned by the Company as of December 31, 2007, the available line
of
credit is approximately $81 million. This line of credit was
established primarily in connection with the Company’s Y2K liquidity contingency
plan and has not been drawn on since inception. The FRB has indicated
that it would not expect lines of credit that have been granted to financial
institutions to be a primary borrowing source. The Company plans to
maintain this line of credit, although it is not expected that it will be drawn
upon except in unusual circumstances.
Note
10. Leases
Certain
bank premises are leased under operating lease agreements. Generally,
operating leases contain renewal options on substantially the same basis as
current rental terms. Rent expense charged to operations under all
operating lease agreements was $541,000 in 2007, $560,000 in 2006, and $510,000
in 2005.
Future
obligations for minimum rentals under noncancelable operating leases at December
31, 2007 are as follows:
|
(In
thousands)
|
||||
|
Year
ending December 31:
|
||||
|
2008
|
$ | 485 | ||
|
2009
|
393 | |||
|
2010
|
315 | |||
|
2011
|
271 | |||
|
2012
|
203 | |||
|
Later
years
|
817 | |||
|
Total
|
$ | 2,484 | ||
Note
11. Employee Benefit Plans
401(k)
Plan. The Company sponsors a retirement savings plan pursuant
to Section 401(k) of the Internal Revenue Code. Employees who have
completed one year of service are eligible to participate in the
plan. New employees hired after January 1, 2008, and who have met the
service requirement, will be automatically enrolled in the plan at a 2% deferral
rate, which can be modified by the employee at any time. An eligible
employee may contribute up to 15% of annual salary to the plan. The
Company contributes an amount equal to 75% of the first 6% of the employee’s
salary contributed. Participants vest in Company contributions at the
rate of 20% after one year of service, and 20% for each additional year of
service, with 100% vesting after five years of service. The Company’s
matching contribution expense was $777,000, $710,000, and $700,000, for the
years ended December 31, 2007, 2006, and 2005,
respectively. Additionally, the Company made additional discretionary
matching contributions to the plan of $231,000 in 2007, $122,500 in 2006, and
$225,000 in 2005. The Company’s matching and discretionary
contributions are made in the form of Company stock, which can be transferred
by
the employee into other investment options offered by the plan at any
time. Employees are not permitted to invest their own contributions
in Company stock.
Pension
Plan. The Company sponsors a noncontributory defined benefit
retirement plan (the “Pension Plan”), which is intended to qualify under Section
401(a) of the Internal Revenue Code. Employees who have attained age
21 and completed one year of service are eligible to participate in the Pension
Plan. The Pension Plan provides for a monthly payment, at normal
retirement age of 65, equal to one-twelfth of the sum of (i) 0.75% of Final
Average Annual Compensation (5 highest consecutive calendar years’ earnings out
of the last 10 years of employment) multiplied by the employee’s years of
service not in excess of 40 years, and (ii) 0.65% of Final Average Annual
Compensation in excess of “covered compensation” multiplied by years of service
not in excess of 35 years. “Covered compensation” means the average
of the social security taxable wage base during the 35 year period ending with
the year the employee attains social security retirement age. Early
retirement, with reduced monthly benefits, is available at age 55 after 15
years
of service. The Pension Plan provides for 100% vesting after 5 years
of service, and provides for a death benefit to a vested participant’s surviving
spouse. The costs of benefits under the Pension Plan, which are borne
by the Company, are computed actuarially and defrayed by earnings from the
Pension Plan’s investments. The compensation covered by the Pension
Plan includes total earnings before reduction for contributions to a cash or
deferred profit-sharing plan (such as the 401(k) plan described above) and
amounts used to pay group health insurance premiums and includes bonuses (such
as amounts paid under the incentive compensation plan). Compensation
for the purposes of the Pension Plan may not exceed statutory limits; such
limits were $225,000 in 2007, $220,000 in 2006 and $210,000 in
2005.
The
Company’s contributions to the Pension Plan are based on computations by
independent actuarial consultants and are intended to provide the Company with
the maximum deduction for income tax purposes. The contributions are
invested to provide for benefits under the Pension Plan. The Company
expects that it will not make a contribution to the Pension Plan in
2008.
Funds
in
the Pension Plan are invested in a mix of investment types in accordance with
the Pension Plan’s investment policy, which is intended to provide a reasonable
return while maintaining proper diversification. Except for Company
stock, all of the Pension Plan’s assets are invested in an unaffiliated bank
money market account or mutual funds. The investment policy of the
Pension Plan does not permit the use of derivatives, except to the extent that
derivatives are used by any of the mutual funds invested in by the Pension
Plan. The following table presents information regarding the mix of
investments of the Pension Plan’s assets at December 31, 2007 and its targeted
mix, as set out by the Plan’s investment policy:
|
Investment
type
|
Balance
at
December
31, 2007
|
%
of Total Assets at
December
31, 2007
|
Targeted
%
of
Total Assets
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Fixed
income
investments
|
||||||||||||
|
Cash/money
market account
|
$ | 385 | 2 | % | 1%-5 | % | ||||||
|
US
government bond fund
|
1,725 | 10 | % | 10%-20 | % | |||||||
|
US
corporate bond fund
|
1,727 | 10 | % | 5%-15 | % | |||||||
|
US
corporate high yield bond fund
|
845 | 5 | % | 0%-10 | % | |||||||
|
Equity
investments
|
||||||||||||
|
Large
cap value fund
|
3,280 | 20 | % | 20%-30 | % | |||||||
|
Large
cap growth fund
|
3,358 | 21 | % | 20%-30 | % | |||||||
|
Mid-small
cap growth fund
|
3,001 | 18 | % | 15%-25 | % | |||||||
|
Foreign
equity fund
|
1,683 | 10 | % | 5%-15 | % | |||||||
|
Company
stock
|
693 | 4 | % | 0%-10 | % | |||||||
|
Total
|
$ | 16,697 | 100 | % | ||||||||
For
the
years ended December 31, 2007, 2006, and 2005, the Company used an expected
long-term rate-of-return-on-assets assumption of 8.75%, 8.75%, and 9.00%,
respectively. The Company arrived at this rate based primarily on a
third-party investment consulting firm’s historical analysis of investment
returns, which indicated that the mix of the Pension Plan’s assets (generally
75% equities and 25% fixed income) can be expected to return approximately
8.75%
on a long term basis.
The
following table reconciles the beginning and ending balances of the Pension
Plan’s benefit obligation, as computed by the Company’s independent actuarial
consultants, and its plan assets, with the difference between the two amounts
representing the funded status of the Pension Plan as of the end of the
respective year.
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Change
in benefit
obligation
|
||||||||||||
|
Projected
benefit obligation at beginning of year
|
$ | 17,774 | 16,093 | 12,445 | ||||||||
|
Service
cost
|
1,490 | 1,387 | 1,137 | |||||||||
|
Interest
cost
|
1,117 | 902 | 766 | |||||||||
|
Actuarial
(gain) loss
|
855 | (418 | ) | 1,829 | ||||||||
|
Benefits
paid
|
(283 | ) | (190 | ) | (84 | ) | ||||||
|
Projected
benefit obligation at end of year
|
20,953 | 17,774 | 16,093 | |||||||||
|
Change
in plan
assets
|
||||||||||||
|
Plan
assets at beginning of year
|
14,209 | 11,603 | 9,907 | |||||||||
|
Actual
return on plan assets
|
1,070 | 1,296 | 361 | |||||||||
|
Employer
contributions
|
1,700 | 1,500 | 1,419 | |||||||||
|
Benefits
paid
|
(283 | ) | (190 | ) | (84 | ) | ||||||
|
Other
|
1 | – | – | |||||||||
|
Plan
assets at end of year
|
16,697 | 14,209 | 11,603 | |||||||||
|
Funded
status at end of year
|
$ | (4,256 | ) | (3,565 | ) | (4,490 | ) | |||||
The
accumulated benefit obligation related to the Pension Plan was $14,220,000,
$11,698,000, and $10,284,000 at December 31, 2007, 2006, and 2005,
respectively.
The
following table presents information regarding the amounts recognized in the
consolidated balance sheets as it relates to the Pension Plan, excluding the
related deferred tax assets.
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Other
assets – prepaid pension asset
|
$ | 1,502 | 1,497 | |||||
|
Other
liabilities
|
(5,758 | ) | (5,062 | ) | ||||
| $ | (4,256 | ) | (3,565 | ) | ||||
The
following table presents information regarding the amounts recognized in
accumulated other comprehensive income (AOCI) at December 31, 2007 and 2006,
as
it relates to the Pension Plan.
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Net
(gain)/loss
|
$ | 5,622 | 4,910 | |||||
|
Net
transition obligation
|
40 | 43 | ||||||
|
Prior
service cost
|
96 | 109 | ||||||
|
Amount
recognized in AOCI before tax effect
|
5,758 | 5,062 | ||||||
|
Tax
benefit
|
(2,269 | ) | (1,997 | ) | ||||
|
Net
amount recognized as reduction to AOCI
|
$ | 3,489 | 3,065 | |||||
The
following table reconciles the beginning and ending balances of the prepaid
pension cost related to the Pension Plan:
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Prepaid
pension cost as of beginning of fiscal year
|
$ | 1,497 | 1,642 | |||||
|
Net
periodic pension cost for fiscal year
|
(1,695 | ) | (1,645 | ) | ||||
|
Actual
employer contributions
|
1,700 | 1,500 | ||||||
|
Prepaid
pension asset as of end of fiscal year
|
$ | 1,502 | 1,497 | |||||
Net
pension cost for the Pension Plan included the following components for the
years ended December 31, 2007, 2006, and 2005:
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Service
cost – benefits earned during the period
|
$ | 1,490 | 1,387 | 1,137 | ||||||||
|
Interest
cost on projected benefit obligation
|
1,117 | 902 | 766 | |||||||||
|
Expected
return on plan assets
|
(1,304 | ) | (1,037 | ) | (947 | ) | ||||||
|
Net
amortization and deferral
|
392 | 393 | 344 | |||||||||
|
Net
periodic pension cost
|
$ | 1,695 | 1,645 | 1,300 | ||||||||
The
estimated net loss, transition obligation, and prior service cost that will
be
amortized from accumulated other comprehensive income into net periodic pension
cost over the next fiscal year are $304,000, $2,000, and $13,000,
respectively.
The
following table is an estimate of the benefits that will be paid in accordance
with the Pension Plan during the indicated time periods:
|
(In
thousands)
|
Estimated
benefit
payments
|
|||
|
Year
ending December 31, 2008
|
$ | 330 | ||
|
Year
ending December 31, 2009
|
345 | |||
|
Year
ending December 31, 2010
|
381 | |||
|
Year
ending December 31, 2011
|
454 | |||
|
Year
ending December 31, 2012
|
561 | |||
|
Years
ending December 31, 2013-2017
|
5,033 | |||
Supplemental
Executive
Retirement Plan. The Company sponsors a Supplemental Executive
Retirement Plan (the “SERP”) for the benefit of certain senior management
executives of the Company. The purpose of the SERP is to provide
additional monthly pension benefits to ensure that each such senior management
executive would receive lifetime monthly pension benefits equal to 3% of his
or
her final average compensation multiplied by his or her years of service
(maximum of 20 years) to the Company or its subsidiaries, subject to a maximum
of 60% of his or her final average compensation. The amount of a
participant’s monthly SERP benefit is reduced by (i) the amount payable under
the Company’s qualified Pension Plan (described above), and (ii) fifty percent
(50%) of the participant’s primary social security benefit. Final
average compensation means the average of the 5 highest consecutive calendar
years of earnings during the last 10 years of service prior to termination
of
employment. The SERP is an unfunded plan. Payments are
made from the general assets of the Company.
The
following table reconciles the beginning and ending balances of the SERP’s
benefit obligation, as computed by the Company’s independent actuarial
consultants:
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Change
in benefit
obligation
|
||||||||||||
|
Projected
benefit obligation at beginning of year
|
$ | 4,133 | 3,223 | 2,553 | ||||||||
|
Service
cost
|
431 | 330 | 247 | |||||||||
|
Interest
cost
|
242 | 202 | 154 | |||||||||
|
Actuarial
loss
|
10 | 403 | 269 | |||||||||
|
Benefits
paid
|
(105 | ) | (25 | ) |
─
|
|||||||
|
Projected
benefit obligation at end of year
|
4,711 | 4,133 | 3,223 | |||||||||
|
Plan
assets
|
─
|
─
|
─
|
|||||||||
|
Funded
status at end of year
|
$ | (4,711 | ) | (4,133 | ) | (3,223 | ) | |||||
The
accumulated benefit obligation related to the SERP was $3,482,000, $3,279,000,
and $2,556,000 at December 31, 2007, 2006, and 2005, respectively.
The
following table presents information regarding the amounts recognized in the
consolidated balance sheets at December 31, 2007 and 2006 as it relates to
the
SERP, excluding the related deferred tax assets.
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Other
assets – prepaid pension asset (liability)
|
$ | (3,229 | ) | (2,546 | ) | |||
|
Other
liabilities
|
(1,482 | ) | (1,587 | ) | ||||
| $ | (4,711 | ) | (4,133 | ) | ||||
The
following table presents information regarding the amounts recognized in
accumulated other comprehensive income (AOCI) at December 31, 2007 and
2006.
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Net
(gain)/loss
|
$ | 1,305 | 1,386 | |||||
|
Prior
service cost
|
177 | 201 | ||||||
|
Amount
recognized in AOCI before tax effect
|
1,482 | 1,587 | ||||||
|
Tax
benefit
|
(585 | ) | (626 | ) | ||||
|
Net
amount recognized as reduction to AOCI
|
$ | 897 | 961 | |||||
The
following table reconciles the beginning and ending balances of the prepaid
pension cost related to the SERP:
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Prepaid
pension cost as of beginning of fiscal year
|
$ | (2,546 | ) | (1,907 | ) | |||
|
Net
periodic pension cost for fiscal year
|
(788 | ) | (664 | ) | ||||
|
Benefits
paid
|
105 | 25 | ||||||
|
Prepaid
pension cost as of end of fiscal year
|
$ | (3,229 | ) | (2,546 | ) | |||
Net
pension cost for the SERP included the following components for the years ended
December 31, 2007, 2006, and 2005:
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Service
cost – benefits earned during the period
|
$ | 431 | 329 | 247 | ||||||||
|
Interest
cost on projected benefit obligation
|
242 | 202 | 154 | |||||||||
|
Net
amortization and deferral
|
115 | 133 | 88 | |||||||||
|
Net
periodic pension cost
|
$ | 788 | 664 | 489 | ||||||||
The
estimated net loss and prior service cost that will be amortized from
accumulated other comprehensive income into net periodic pension cost over
the
next fiscal year are $69,000 and $19,000, respectively.
The
following table is an estimate of the benefits that will be paid in accordance
with the SERP during the indicated time periods:
|
(In
thousands)
|
Estimated
benefit
payments
|
|||
|
Year
ending December 31, 2008
|
$ | 104 | ||
|
Year
ending December 31, 2009
|
104 | |||
|
Year
ending December 31, 2010
|
124 | |||
|
Year
ending December 31, 2011
|
163 | |||
|
Year
ending December 31, 2012
|
189 | |||
|
Years
ending December 31, 2013-2017
|
1,349 | |||
The
following assumptions were used in determining the actuarial information for
the
Pension Plan and the SERP for the years ended December 31, 2007, 2006, and
2005:
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Pension
Plan
|
SERP
|
Pension
Plan
|
SERP
|
Pension
Plan
|
SERP
|
|||||||||||||||||||
|
Discount
rate used to determine net periodic pension
cost
|
5.75 | % | 5.75 | % | 5.50 | % | 5.50 | % | 6.00 | % | 6.00 | % | ||||||||||||
|
Discount
rate used to calculate end of year liability
disclosures
|
6.00 | % | 6.00 | % | 5.75 | % | 5.75 | % | 5.50 | % | 5.50 | % | ||||||||||||
|
Expected
long-term rate of return on assets
|
8.75 | % | n/a | 8.75 | % | n/a | 9.00 | % | n/a | |||||||||||||||
|
Rate
of compensation increase
|
5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | ||||||||||||
In
2005,
the Company adopted a policy that the year end discount rate would be a rate
no
greater than the Moody’s Aa corporate bond rate as of December 31 of each year,
rounded up to the nearest quarter point. The Company believes that
this policy is appropriate given the Company’s desire that the discount rate be
based on the rate of return of a high-quality fixed-income security and the
expected cash flows of its retirement obligation.
Note
12. Commitments, Contingencies, and Concentrations of Credit
Risk
See
Note
7 for discussion regarding a state issue that resulted in the Company
recognizing a significant contingent tax liability in 2005 that was paid in
2007.
See
Note
10 with respect to future obligations under noncancelable operating
leases.
In
the
normal course of business there are various outstanding commitments and
contingent liabilities such as commitments to extend credit, which are not
reflected in the financial statements. As of December 31, 2007, the
Company had outstanding loan commitments of $340,160,000, of which $281,999,000
were at variable rates and $58,161,000 were at fixed rates. Included
in outstanding loan commitments were unfunded commitments of $197,777,000 on
revolving credit plans, of which $171,871,000 were at variable rates and
$25,906,000 were at fixed rates.
At
December 31, 2007 and 2006, the Company had $6,176,000 and $4,459,000,
respectively in standby letters of credit outstanding. The Company
has no carrying amount for these standby letters of credit at either of those
dates. The nature of the standby letters of credit is a guarantee
made on behalf of the Company’s customers to suppliers of the customers to
guarantee payments owed to the supplier by the customer. The standby
letters of credit are generally for terms for one year, at which time they
may
be renewed for another year if both parties agree. The payment of the
guarantees would generally be triggered by a continued nonpayment of an
obligation owed by the customer to the supplier. The maximum
potential amount of future payments (undiscounted) the Company could be required
to make under the guarantees in the event of nonperformance by the parties
to
whom credit or financial guarantees have been extended is represented by the
contractual amount of the financial instruments discussed above. In
the event that the Company is required to honor a standby letter of credit,
a
note, already executed with the customer, is triggered which provides repayment
terms and any collateral. Over the past ten years, the Company has
had to honor one standby letter of credit, which was repaid by the borrower
without any loss to the Company. Management expects any draws under
existing commitments to be funded through normal operations.
The
Company has historically had a portfolio of commercial merchant clients for
which it processed credit card transactions. As these clients
presented credit card transactions authorized by their customers to the Company,
the Company deposited funds in their checking accounts and collected the
corresponding amounts due from the credit card issuer. In the event
that the customer disputed the charge, the Company was contractually liable
for
any amounts legally due to the customer in the event the Company’s merchant
clients did not make payment. This represented a contingent liability
that led to a loss in 2006, as discussed in the following
paragraph.
During
2006, the Company discovered that it had liability associated with a commercial
merchant client that sold furniture over the internet. The furniture
store did not deliver furniture that its customers had ordered and paid for,
and
was unable to immediately refund their credit card purchases. As the
furniture store’s credit card processor, the Company became contractually liable
for the amounts that were required to be refunded. During the second
quarter of 2006, the
furniture store changed management, stated its intention to repay the Company
for all funds advanced, and began making repayments to the
Company. At June 30, 2006, the Company recorded a $230,000 loss to
reserve for this situation. During the third quarter of 2006, the
furniture store’s financial condition deteriorated
significantly. Accordingly, the Company determined that it should
fully reserve for the entire $1.9 million in estimated
exposure
associated with
this situation, which resulted in recording an additional
loss of
$1,670,000. During
the third quarter
of 2006, the Company completed a review of all merchant credit card customers
and concluded
that this situation appeared to be
an isolated event
that was
not likely to
recur. During
2007,
the Company determined that its ultimate exposure to this loss was approximately
$190,000 less than the original estimated total loss of $1.9 million that had
been reserved for in 2006. Accordingly, the Company reversed $190,000
of this loss during 2007 by recording “other gains” to reduce this
liability.
Partially
as a result of the aforementioned loss, the Company terminated its contract
with
its previous credit card processor in 2007 and entered into a new contract
with
a different processor. The new contract shifts the risk of losses
similar to the one described above from the Company to the third-party
processor. The previous processor agreed to continue processing
payments for the Company’s merchant credit card clients until each of them can
be systematically converted to the new processor. At December 31,
2007, approximately 30% of the Company’s merchant credit card clients had been
converted from the old processor to the new processor. The remaining
clients are expected to be converted in the first quarter of
2008. Although the Company retains the risk of loss related to each
merchant until they are converted, the Company does not expect any losses to
occur prior to the rest of the conversions taking place.
The
Company is not involved in any legal proceedings which, in management’s opinion,
could have a material effect on the consolidated financial position of the
Company.
The
Bank
grants primarily commercial and installment loans to customers throughout its
market area, which consists of Anson, Brunswick, Cabarrus, Chatham, Davidson,
Duplin, Guilford, Harnett, Iredell, Lee, Montgomery, Moore, New Hanover,
Randolph, Richmond, Robeson, Rockingham, Rowan, Scotland, Stanly and Wake
Counties in North Carolina, Dillon County in South Carolina, and Montgomery,
Pulaski, Washington and Wythe Counties in Virginia. The real estate
loan portfolio can be affected by the condition of the local real estate
market. The commercial and installment loan portfolios can be
affected by local economic conditions.
The
Company’s loan portfolio is not concentrated in loans to any single borrower or
to a relatively small number of borrowers. Additionally, management
is not aware of any concentrations of loans to classes of borrowers or
industries that would be similarly affected by economic conditions.
In
addition to monitoring potential concentrations of loans to particular borrowers
or groups of borrowers, industries and geographic regions, the Company monitors
exposure to credit risk that could arise from potential concentrations of
lending products and practices such as loans that subject borrowers to
substantial payment increases (e.g. principal deferral periods, loans with
initial interest-only periods, etc), and loans with high loan-to-value
ratios. Additionally, there are industry practices that could subject
the Company to increased credit risk should economic conditions change over
the
course of a loan’s life. For example, the Company makes variable rate
loans and fixed rate principal-amortizing loans with maturities prior to the
loan being fully paid (i.e. balloon payment loans). These loans are
underwritten and monitored to manage the associated risks. The
Company has determined that there is no concentration of credit risk associated
with its lending policies or practices.
The
Company’s investment portfolio consists principally of obligations of the United
States, its agencies or its corporations and general obligation municipal
securities. In the opinion of the Company, there is no concentration
of credit risk in its investment portfolio. The Company places its
deposits and correspondent accounts with and sells its federal funds to high
quality institutions. The Company believes credit risk associated
with correspondent accounts is not significant.
Note
13. Fair Value of Financial Instruments
Fair
value estimates as of December 31, 2007 and 2006 and limitations thereon are
set
forth below for the Company’s financial instruments. Please see Note
1(n) for a discussion of fair value methods and assumptions, as well as fair
value information for off-balance sheet financial instruments.
|
December
31, 2007
|
December
31, 2006
|
|||||||||||||||
|
(In
thousands)
|
Carrying
Amount
|
Estimated
Fair
Value
|
Carrying
Amount
|
Estimated
Fair
Value
|
||||||||||||
|
Cash
and due from banks, noninterest-bearing
|
$ | 31,455 | 31,455 | 43,248 | 43,248 | |||||||||||
|
Due
from banks, interest-bearing
|
111,591 | 111,591 | 83,877 | 83,877 | ||||||||||||
|
Federal
funds sold
|
23,554 | 23,554 | 19,543 | 19,543 | ||||||||||||
|
Securities
available for sale
|
135,114 | 135,114 | 129,964 | 129,964 | ||||||||||||
|
Securities
held to maturity
|
16,640 | 16,649 | 13,122 | 13,168 | ||||||||||||
|
Presold
mortgages in process of
settlement
|
1,668 | 1,668 | 4,766 | 4,766 | ||||||||||||
|
Loans,
net of allowance
|
1,872,971 | 1,868,099 | 1,721,449 | 1,706,818 | ||||||||||||
|
Accrued
interest receivable
|
12,961 | 12,961 | 12,158 | 12,158 | ||||||||||||
|
Deposits
|
1,838,277 | 1,839,560 | 1,695,679 | 1,695,370 | ||||||||||||
|
Securities
sold under agreements
to repurchase
|
39,695 | 39,695 | 43,276 | 43,276 | ||||||||||||
|
Borrowings
|
242,394 | 241,144 | 210,013 | 210,426 | ||||||||||||
|
Accrued
interest payable
|
6,010 | 6,010 | 5,649 | 5,649 | ||||||||||||
Limitations
Of Fair Value
Estimates. Fair value estimates are made at a specific point
in time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the Company’s
entire holdings of a particular financial instrument. Because no
highly liquid market exists for a significant portion of the Company’s financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics
of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair
value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are
not considered financial assets or liabilities include net premises and
equipment, intangible and other assets such as foreclosed properties, deferred
income taxes, prepaid expense accounts, income taxes currently payable and
other
various accrued expenses. In addition, the income tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in
any
of the estimates.
Note
14. Equity-Based Compensation Plans
At
December 31, 2007, the Company had the following equity-based compensation
plans, all of which are stock option plans: the First Bancorp 2007
Equity Plan (“2007 Equity Plan”), the First Bancorp 2004 Stock Option Plan, the
First Bancorp 1994 Stock Option Plan, and four plans that were assumed from
acquired entities, which are all described below. The Company’s
shareholders approved all equity-based compensation plans, except for those
assumed from acquired companies. As of December 31, 2007, the 2007
Equity Plan was the only plan that had shares available for future
grants.
The
2007
Equity Plan and its predecessor plans, the First Bancorp 2004 Stock Option
Plan
and the First Bancorp 1994 Stock Option Plan (“Predecessor Plans”), are intended
to serve as a means of attracting, retaining and motivating key employees and
directors and to associate the interests of the plans’ participants with those
of the Company and its shareholders. The Predecessor Plans only
provided for the ability to grant stock options, whereas the 2007 Equity Plan,
in addition to providing for grants of stock options, also allows for grants
of
other types of equity-based compensation including stock appreciation rights,
restricted stock, restricted performance stock, unrestricted stock, and
performance units. Since it became effective on May 2, 2007, the only
grant of stock-based compensation under the 2007 Equity Plan has been the grant
of 2,250 stock options to each of the Company’s non-employee directors on June
1, 2007. However, in 2008 the Company expects to grant a combination
of performance units and stock options to approximately twenty
employees. It is expected that these grants will have both
performance (earnings per share targets) and service conditions in order to
vest.
The
Company’s practice has been that stock option grants to non-employee directors
have had no vesting requirements, whereas, except as discussed below,
historically stock option grants to employees have generally had five-year
vesting schedules (20% vesting each year). In April 2004, the
Company’s Compensation Committee granted 128,000 options to employees with no
vesting requirements. These options were granted without any vesting
requirements for two reasons - 1) the options were granted primarily as a reward
for past performance and therefore had already been “earned” in the view of the
Committee, and 2) to potentially minimize the impact that any change in
accounting standards for stock options could have on future years’ reported net
income. Employee stock option grants since the April 2004 grant have
reverted to having five year vesting periods. The Company’s options
provide for immediate vesting if there is a change in control (as defined in
the
plans). Under the terms of the Predecessor Plans and the 2007 Equity
Plan, options can have a term of no longer than ten years, and all options
granted thus far under these plans have had a term of ten years. In
the past, stock option grants to employees have been irregular, generally
falling into three categories - 1) to attract and retain new employees, 2)
to
recognize changes in responsibilities of existing employees, and 3) to
periodically reward exemplary performance. As noted above, the
Company expects in 2008 to grant stock options and performance units with
specific incentive-based features to certain employees. As it relates
to directors, the Company has historically granted 2,250 stock options to each
of the Company’s non-employee directors in June of each year, and expects to
continue doing so for the foreseeable future.
At
December 31, 2007, there were 576,061 options outstanding related to the
Predecessor Plans and the 2007 Equity Plan, with exercise prices ranging from
$9.75 to $22.12. At December 31, 2007, there were 1,155,500 shares
remaining available for grant under the 2007 Equity Plan.
The
Company also has four stock option plans as a result of assuming plans of
acquired companies. At December 31, 2007, there were 31,921 stock
options outstanding in connection with these plans, with option prices ranging
from $10.22 to $11.49.
The
Company issues new shares when options are exercised.
Prior
to
January 1, 2006, the Company accounted for all of these plans using the
intrinsic value method prescribed by APB Opinion No. 25, “Accounting for Stock
Issued to Employees” (Opinion 25), and related
interpretations. Because all of the Company’s stock options had an
exercise price equal to the market value of the underlying common stock on
the
date of grant, no compensation cost had ever been recognized. On
January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment”
(Statement 123(R)). Statement 123(R) supersedes Opinion 25 (and
related interpretations) and requires that the compensation cost relating to
share-based payment transactions be recognized in the financial
statements. Statement 123(R) permitted public companies to adopt its
requirements using one of two methods. The “modified prospective”
method recognizes compensation for all stock options granted after the date
of
adoption and for all previously granted stock options that become vested after
the date of adoption. The “modified retrospective” method includes
the requirements of the “modified prospective” method described above, but also
permits entities to restate prior period results based on the amounts previously
presented under FASB Statement No. 123 for purposes of pro-forma
disclosures. The Company elected to adopt Statement 123(R) under the
“modified prospective” method and accordingly did not restate prior period
results.
The
Company measures the fair value of each option award on the date of grant using
the Black-Scholes option-pricing model. The Company determines the
assumptions used in the Black-Scholes option pricing model as
follows: the risk-free interest rate is based on the U.S. Treasury
yield curve in effect at the time of the grant; the dividend yield is based
on
the Company’s dividend yield at the time of the grant (subject to adjustment if
the dividend yield on the grant date is not expected to approximate the dividend
yield over the expected life of the option); the volatility factor is based
on
the historical volatility of the Company’s stock (subject to adjustment if
historical volatility is reasonably expected to differ from the past); and
the
weighted-average expected life is based on the historical behavior of employees
related to exercises, forfeitures and cancellations.
The
per
share weighted-average fair value of options granted during 2007, 2006, and
2005
was $5.80, $6.79, and $6.68, respectively, on the date of the grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
|
2007
|
2006
|
2005
|
||||||||||
|
Expected
dividend yield
|
3.88 | % | 3.30 | % | 3.08 | % | ||||||
|
Risk-free
interest rate
|
4.92 | % | 5.05 | % | 3.88 | % | ||||||
|
Expected
life
|
7
years
|
7
years
|
7
years
|
|||||||||
|
Expected
volatility
|
32.91 | % | 32.56 | % | 32.97 | % | ||||||
As
noted
above, prior to the adoption of Statement 123(R), the Company applied Opinion
25
to account for its stock options. The following table illustrates the
effect on net income and earnings per share had the Company accounted for
share-based compensation in accordance with Statement 123(R) for the periods
indicated:
|
Year
Ended
December
31,
|
Year
Ended
December
31,
|
Year
Ended
December
31,
|
|||||||||||
|
(In
thousands except per share data)
|
2007
|
2006
|
2005
|
||||||||||
|
Net
income, as reported
|
$ | 21,810 | 19,302 | 16,090 | |||||||||
|
Add: Stock-based
employee compensation expense included
in reported net income, net of related tax effects
|
134 | 246 | — | ||||||||||
|
Deduct: Total
stock-based employee compensation expense
determined under fair value based method for
all awards, net of related tax effects
|
(134 | ) | (246 | ) | (335 | ) | |||||||
|
Pro
forma net income
|
$ | 21,810 | 19,302 | 15,755 | |||||||||
|
Earnings
per share:
|
Basic
- As reported
|
$ | 1.52 | 1.35 | 1.14 | ||||||||
|
Basic
- Pro forma
|
1.52 | 1.35 | 1.11 | ||||||||||
|
Diluted
- As reported
|
1.51 | 1.34 | 1.12 | ||||||||||
|
Diluted
- Pro forma
|
1.51 | 1.34 | 1.10 | ||||||||||
For
the
years ended December 31, 2007 and 2006, the Company recorded stock-based
compensation expense of $190,000 and $325,000, respectively, which was
classified as “salaries expense” on the Consolidated Statements of
Income. The Company recognized $56,000 and $79,000 of income tax
benefits in the income statement during 2007 and 2006,
respectively. The 2006 and 2007 stock-based compensation expense
related to the vesting of several stock option grants made prior to January
1,
2006, as well as grants of 2,250 options to each non-employee director of the
Company on June 1, 2006 and June 1, 2007 with no vesting
requirements. This compensation expense was reflected as an
adjustment to cash flows from operating activities on the Company’s Consolidated
Statement of Cash Flows. At December 31, 2007, the Company had $9,800 of
unrecognized compensation costs related to unvested stock
options. The cost is expected to be amortized over a
weighted-average
life of 3 years, with approximately $3,300 being expensed in 2008, 2009, and
2010, equally distributed among each of the four quarters of each
year. In addition, as discussed above, the Company granted 2,250
options, without vesting requirements, to each of its non-employee directors
on
June 1, 2007 and expects to continue this grant on June 1 of each
year. Also as discussed above, in 2008, the Company expects to grant
stock options and performance units to certain employees that will have service
and performance conditions. The Company currently expects that the
incremental pre-tax expense associated with these grants will be in a range
of
zero to $250,000 for each of the next three years.
As
noted
above, certain of the Company’s stock option grants contain terms that provide
for a graded vesting schedule whereby portions of the award vest in increments
over the requisite service period. As provided for under Statement
123(R), the Company has elected to recognize compensation expense for awards
with graded vesting schedules on a straight-line basis over the requisite
service period for the entire award. Statement 123(R) requires
companies to recognize compensation expense based on the estimated number of
stock options and awards that will ultimately vest. Over the past
five years, there have only been ten forfeitures or expirations, totaling 22,500
options, and therefore the Company assumes that all options granted will become
vested.
The
following table presents information regarding the activity since December
31,
2004 related to all of the Company’s stock options outstanding:
|
Options
Outstanding
|
|||||||||||||
|
Number
of
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Contractual
Term
(years)
|
Aggregate
Intrinsic
Value
|
||||||||||
|
Balance
at December 31, 2004
|
778,726 | $ | 15.01 | ||||||||||
|
Granted
|
34,000 | 22.11 | |||||||||||
|
Exercised
|
(65,844 | ) | 11.41 | $ | 804,000 | ||||||||
|
Forfeited
|
(600 | ) | 15.33 | ||||||||||
|
Expired
|
(3,000 | ) | 21.70 | ||||||||||
|
Balance
at December 31, 2005
|
743,282 | 15.73 | |||||||||||
|
Granted
|
29,250 | 21.83 | |||||||||||
|
Exercised
|
(108,628 | ) | 10.27 | $ | 1,205,000 | ||||||||
|
Forfeited
|
(300 | ) | 15.33 | ||||||||||
|
Expired
|
(7,500 | ) | 12.61 | ||||||||||
|
Balance
at December 31, 2006
|
656,104 | 16.94 | |||||||||||
|
Granted
|
24,750 | 19.61 | |||||||||||
|
Exercised
|
(62,372 | ) | 12.95 | $ | 535,000 | ||||||||
|
Forfeited
|
(10,500 | ) | 21.70 | ||||||||||
|
Expired
|
– | – | |||||||||||
|
Outstanding
at December 31, 2007
|
607,982 | $ | 17.38 |
4.9
|
$ | 998,000 | |||||||
|
Exercisable
at December 31, 2007
|
597,482 | $ | 17.39 |
4.8
|
$ | 973,000 | |||||||
The
Company received $568,000, $1,027,000, and $785,000 as a result of stock option
exercises during the years ended December 31, 2007, 2006, and 2005
respectively. The Company recorded $41,000, $117,000, and $118,000 in
associated tax benefits from the exercise of nonqualified stock options during
the years ended December 31, 2007, 2006, and 2005, respectively. In
accordance with Statement 123(R), this benefit is included as a financing
activity in the accompanying Statements of Cash Flows for periods subsequent
to
the adoption of Statement 123(R), but continues to be reported as an operating
activity in periods prior to its adoption.
The
following table summarizes information about the stock options outstanding
at
December 31, 2007:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
|
Range
of
Exercise
Prices
|
Number
Outstanding
at
12/31/07
|
Weighted-
Average
Remaining
Contractual
Life
|
Weighted-
Average
Exercise
Price
|
Number
Exercisable
at
12/31/07
|
Weighted-
Average
Exercise
Price
|
|||||||||||||||||
|
$
|
8.85 to $11.06 | 42,761 |
2.0
|
$
|
10.51
|
42,761 |
$
|
10.51
|
||||||||||||||
|
$
|
11.06 to $13.27 | 50,744 |
1.3
|
11.43
|
50,744 |
11.43
|
||||||||||||||||
|
$
|
13.27 to $15.48 | 161,947 |
3.4
|
15.28
|
161,947 |
15.28
|
||||||||||||||||
|
$
|
15.48 to $17.70 | 91,800 |
4.6
|
16.35
|
82,800 |
16.42
|
||||||||||||||||
|
$
|
17.70 to $19.91 | 56,250 |
7.7
|
19.65
|
56,250 |
19.65
|
||||||||||||||||
|
$
|
19.91 to $22.12 | 204,480 |
6.8
|
21.79
|
202,980 |
21.79
|
||||||||||||||||
| 607,982 |
4.9
|
$
|
17.38
|
597,482 |
$
|
17.39
|
||||||||||||||||
Note
15. Regulatory Restrictions
The
Company is regulated by the Board of Governors of the Federal Reserve System
(“FED”) and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Bank is
regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the North
Carolina Office of the Commissioner of Banks.
The
primary source of funds for the payment of dividends by the Company is dividends
received from its subsidiary, the Bank. The Bank, as a North Carolina
banking corporation, may pay dividends only out of undivided profits as
determined pursuant to North Carolina General Statutes Section
53-87. As of December 31, 2007, the Bank had undivided profits of
approximately $140,962,000 which were available for the payment of dividends
(subject to remaining in compliance with regulatory capital
requirements). As of December 31, 2007, approximately $99,737,000 of
the Company’s investment in the Bank is restricted as to transfer to the Company
without obtaining prior regulatory approval.
The
average reserve balance maintained by the Bank under the requirements of the
Federal Reserve was approximately $274,700 for the year ended December 31,
2007.
The
Company and the Bank 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 and the Bank 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 and Bank’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 and the Bank to maintain minimum ratios of “Tier
1” capital to total risk-weighted assets (“Tier I Capital Ratio”) and total
capital to risk-weighted assets of 4.00% and 8.00% (“Total Capital Ratio”),
respectively. Tier 1 capital is comprised of total shareholders’
equity, excluding unrealized gains or losses from the securities available
for
sale, less intangible assets, and total capital is comprised of Tier 1 capital
plus certain adjustments, the largest of which for the Company and the Bank
is
the allowance for loan losses. Risk-weighted assets refer to the on-
and off-balance sheet exposures of the Company and the Bank, 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
and
the Bank are subject to a leverage capital requirement, which calls for a
minimum ratio of Tier 1 capital (as defined above) to quarterly average total
assets (“Leverage Ratio) 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.
In
addition to the minimum capital requirements described above, the regulatory
framework for prompt corrective action also contains specific capital guidelines
applicable to banks for classification as “well capitalized,” which are
presented with the minimum ratios, the Company’s ratios and the Bank’s ratios as
of December 31, 2007 and 2006 in the following table. Based on the
most recent notification from its regulators, the Bank is well capitalized
under
the framework. There are no conditions or events since that
notification that management believes have changed the Company’s
classification.
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
Be Well Capitalized
Under
Prompt Corrective
Action
Provisions
|
||||||||||||||||||||||
|
($
in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
|
(must
equal or exceed)
|
(must
equal or exceed)
|
|||||||||||||||||||||||
|
As
of December 31, 2007
|
||||||||||||||||||||||||
|
Total
Capital Ratio
|
||||||||||||||||||||||||
|
Company
|
$ | 193,708 | 10.30 | % | $ | 150,438 | 8.00 | % | $ | N/A | N/A | |||||||||||||
|
Bank
|
211,002 | 11.23 | % | 150,269 | 8.00 | % | 187,836 | 10.00 | % | |||||||||||||||
|
Tier
I Capital Ratio
|
||||||||||||||||||||||||
|
Company
|
172,384 | 9.17 | % | 75,219 | 4.00 | % | N/A | N/A | ||||||||||||||||
|
Bank
|
189,678 | 10.10 | % | 75,134 | 4.00 | % | 112,701 | 6.00 | % | |||||||||||||||
|
Leverage
Ratio
|
||||||||||||||||||||||||
|
Company
|
172,384 | 8.00 | % | 86,176 | 4.00 | % | N/A | N/A | ||||||||||||||||
|
Bank
|
189,678 | 8.82 | % | 86,048 | 4.00 | % | 107,560 | 5.00 | % | |||||||||||||||
|
As
of December 31, 2006
|
||||||||||||||||||||||||
|
Total
Capital Ratio
|
||||||||||||||||||||||||
|
Company
|
$ | 199,808 | 11.81 | % | $ | 135,333 | 8.00 | % | $ | N/A | N/A | |||||||||||||
|
Bank
|
199,767 | 11.83 | % | 135,081 | 8.00 | % | 168,852 | 10.00 | % | |||||||||||||||
|
Tier
I Capital Ratio
|
||||||||||||||||||||||||
|
Company
|
170,096 | 10.05 | % | 67,667 | 4.00 | % | N/A | N/A | ||||||||||||||||
|
Bank
|
180,820 | 10.71 | % | 67,541 | 4.00 | % | 101,311 | 6.00 | % | |||||||||||||||
|
Leverage
Ratio
|
||||||||||||||||||||||||
|
Company
|
170,096 | 8.59 | % | 79,173 | 4.00 | % | N/A | N/A | ||||||||||||||||
|
Bank
|
180,820 | 9.15 | % | 79,014 | 4.00 | % | 98,768 | 5.00 | % | |||||||||||||||
Note
16. Supplementary Income Statement Information
Components
of other noninterest income/expense exceeding 1% of total income for any of
the
years ended December 31, 2007, 2006, and 2005 are as follows:
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Other
service charges, commissions, and fees – electronic
payment
processing revenue
|
$ | 3,514 | 2,970 | 2,225 | ||||||||
|
Other
gains (losses) – merchant credit card (loss) recovery – see Note
12
|
190 | (1,900 | ) | — | ||||||||
|
Other
operating expenses - electronic payment processing expense
|
1,963 | 1,683 | 1,455 | |||||||||
|
Other
operating expenses - stationery and supplies
|
1,593 | 1,675 | 1,590 | |||||||||
|
Other
operating expenses - telephone
|
1,246 | 1,273 | 1,260 | |||||||||
|
Other
operating expenses - professional fees
|
839 | 756 | 1,090 | |||||||||
Note
17. Condensed Parent Company Information
Condensed
financial data for First Bancorp (parent company only) follows:
|
CONDENSED
BALANCE SHEETS
|
As
of December 31,
|
|||||||
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Assets
|
||||||||
|
Cash
on deposit with bank subsidiary
|
$ | 5,211 | 1,878 | |||||
|
Investment
in wholly-owned subsidiaries, at equity
|
236,729 | 228,845 | ||||||
|
Premises
and Equipment
|
205 | 7 | ||||||
|
Other
assets
|
1,878 | 2,598 | ||||||
|
Total
assets
|
$ | 244,023 | 233,328 | |||||
|
Liabilities
and
shareholders’ equity
|
||||||||
|
Borrowings
|
$ | 66,394 | 67,013 | |||||
|
Other
liabilities
|
3,559 | 3,610 | ||||||
|
Total
liabilities
|
69,953 | 70,623 | ||||||
|
Shareholders’
equity
|
174,070 | 162,705 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 244,023 | 233,328 | |||||
|
CONDENSED
STATEMENTS OF INCOME
|
Year
Ended December 31,
|
|||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Dividends
from wholly-owned subsidiaries
|
$ | 18,200 | 9,500 | 6,050 | ||||||||
|
Undistributed
earnings of wholly-owned subsidiaries
|
7,959 | 13,882 | 13,155 | |||||||||
|
Interest
expense
|
(5,293 | ) | (4,767 | ) | (2,846 | ) | ||||||
|
All
other income and expenses, net
|
944 | 687 | (269 | ) | ||||||||
|
Net
income
|
$ | 21,810 | 19,302 | 16,090 | ||||||||
|
CONDENSED
STATEMENTS OF CASH FLOWS
|
Year
Ended December 31,
|
|||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Operating
Activities:
|
||||||||||||
|
Net
income
|
$ | 21,810 | 19,302 | 16,090 | ||||||||
|
Equity
in undistributed earnings of subsidiaries
|
(7,959 | ) | (13,882 | ) | (13,155 | ) | ||||||
|
Decrease
(increase) in other assets
|
953 | (605 | ) | 177 | ||||||||
|
Increase
(decrease) in other liabilities
|
(76 | ) | 240 | 325 | ||||||||
|
Total
- operating activities
|
14,728 | 5,055 | 3,437 | |||||||||
|
Investing
Activities:
|
||||||||||||
|
Downstream
cash investment in subsidiary
|
–
|
(22,000 | ) |
─
|
||||||||
|
Cash
proceeds from dissolution of subsidiary
|
111 |
─
|
─
|
|||||||||
|
Total
– investing activities
|
111 | (22,000 | ) |
─
|
||||||||
|
Financing
Activities:
|
||||||||||||
|
Proceeds
from (repayments of) borrowings, net
|
(619 | ) | 25,774 |
─
|
||||||||
|
Payment
of cash dividends
|
(10,923 | ) | (10,423 | ) | (9,761 | ) | ||||||
|
Proceeds
from issuance of common stock
|
568 | 2,584 | 2,389 | |||||||||
|
Purchases
and retirement of common stock
|
(532 | ) | (1,112 | ) |
─
|
|||||||
|
Total
- financing activities
|
(11,506 | ) | 16,823 | (7,372 | ) | |||||||
|
Net
decrease in cash and cash equivalents
|
3,333 | (122 | ) | (3,935 | ) | |||||||
|
Cash
and cash equivalents, beginning of year
|
1,878 | 2,000 | 5,935 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 5,211 | 1,878 | 2,000 | ||||||||
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders
First
Bancorp
Troy,
North Carolina
We
have
audited the accompanying consolidated balance sheets of First Bancorp and
subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the years in the three-year period ended December
31,
2007. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of First Bancorp and subsidiaries
as
of December 31, 2007 and 2006, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2007 in conformity with accounting principles generally accepted in the United
States of America.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 5, 2008 expressed an unqualified
opinion thereon.
Greenville,
South Carolina
March
5,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders
First
Bancorp
Troy,
North Carolina
We
have
audited the internal control over financial reporting of First Bancorp and
subsidiaries (the “Company”) as of December 31, 2007, based on criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO criteria”). The Company’s
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(1)
pertain to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In
our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the COSO
criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2007 and 2006 and the related consolidated statements of
income, comprehensive income, shareholders’ equity, and cash flows for each of
the years in the three-year period ended December 31, 2007 and our report dated
March 5, 2008 expressed an unqualified opinion thereon.
Greenville,
South Carolina
March
5,
2008
Item
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
None.
Item
9A. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As
of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our chief executive officer and
chief financial officer, of the effectiveness of the design and operation of
our
disclosure controls and procedures, which are our controls and other procedures
that are designed to ensure that information required to be disclosed in our
periodic reports with the SEC is recorded, processed, summarized and reported
within the required time periods. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed is communicated to our management to allow
timely decisions regarding required disclosure. Based on the evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective in allowing timely decisions
regarding disclosure to be made about material information required to be
included in our periodic reports with the SEC.
Management’s
Report On Internal Control Over Financial Reporting
Management
of First Bancorp and its subsidiaries (the “Company”) is responsible for
establishing and maintaining effective internal control over financial
reporting. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in
accordance with U.S. generally accepted accounting principles.
Under
the
supervision and with the participation of management, including the principal
executive officer and principal financial officer, the Company conducted an
evaluation of the effectiveness of internal control over financial reporting
based on the framework in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation under the framework in Internal
Control – Integrated Framework, management of the Company has concluded the
Company maintained effective internal control over financial reporting, as
such
term is defined in Securities Exchange Act of 1934 Rules 13a-15(f), as of
December 31, 2007.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal control over
financial reporting can also be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. However, these inherent limitations
are known features of the financial reporting process. Therefore, it
is possible to design into the process safeguards to reduce, though not
eliminate, this risk.
Management
is also responsible for the preparation and fair presentation of the
consolidated financial statements and other financial information contained
in
this report. The accompanying consolidated financial statements were
prepared in conformity with U.S. generally accepted accounting principles and
include, as necessary, best estimates and judgments by management.
Elliott
Davis, PLLC, an independent, registered public accounting firm, has audited
the
Company’s consolidated financial statements as of and for the year ended
December 31, 2007, and audited the Company’s effectiveness of internal
control over financial reporting as of December 31, 2007, as stated in
their report, which is included in Item 8 hereof.
Changes
in Internal Controls
There
were no changes in our internal control over financial reporting that occurred
during, or subsequent to, the fourth quarter of 2007 that were reasonably likely
to materially affect our internal control over financial reporting.
Item
9B. Other Information
Not
applicable.
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance
Incorporated
herein by reference is the information under the captions “Directors, Nominees
and Executive Officers,” “Section 16(a) Beneficial Ownership Reporting
Compliance,” “Corporate Governance Policies and Practices” and “Board
Committees, Attendance and Compensation” from the Company’s definitive proxy
statement to be filed pursuant to Regulation 14A.
Item
11. Executive Compensation
Incorporated
herein by reference is the information under the captions “Executive
Compensation” and “Board Committees, Attendance and Compensation” from the
Company’s definitive proxy statement to be filed pursuant to Regulation
14A.
Item
12. Security Ownership of Certain Beneficial Owners
and Management and Related Shareholder Matters
Incorporated
herein by reference is the information under the captions “Principal Holders of
First Bancorp Voting Securities” and “Directors, Nominees and Executive
Officers” from the Company’s definitive proxy statement to be filed pursuant to
Regulation 14A.
Item
13. Certain Relationships and Related Transactions,
and Director Independence
Incorporated
herein by reference is the information under the caption “Certain Transactions”
and “Corporate Governance Policies and Practices” from the Company’s definitive
proxy statement to be filed pursuant to Regulation 14A.
Item
14. Principal Accountant Fees and
Services
Incorporated
herein by reference is the information under the caption “Audit Committee
Report” from the Company’s definitive proxy statement to be filed pursuant to
Regulation 14A.
PART
IV
Item
15. Exhibits and Financial Statement
Schedules
| (a) |
1.
|
Financial
Statements - See Item 8 and the Cross Reference Index on page 2
for
information concerning the Company’s consolidated financial statements and
report of independent
auditors.
|
|
2.
|
Financial
Statement Schedules - not
applicable
|
|
3.
|
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
|
Copy
of Articles of Incorporation of the Company and amendments thereto
were
filed as Exhibits 3.a.i through 3.a.v to the Company’s Quarterly Report on
Form 10-Q for the period ended June 30, 2002, and are incorporated
herein
by reference.
|
|
3.b
|
Copy
of the Amended and Restated Bylaws of the Company was filed as Exhibit
3.b
to the Company’s Annual Report on Form 10-K for the year ended December
31, 2003, 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
Bancorp Annual Incentive Plan was filed as Exhibit 10(a) to the Form
8-K
filed on February 2, 2007 and is incorporated herein by reference.
(*)
|
|
10.c
|
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.d
|
First
Bancorp Senior Management Supplemental Executive Retirement Plan
was filed
as Exhibit 10.1 to the Company's Form 8-K filed on December 22, 2006,
and
is incorporated herein by reference.
(*)
|
|
10.e
|
First
Bancorp 1994 Stock Option Plan was filed as Exhibit 10(f) to the
Company's
Annual Report on Form 10-K for the year ended December 31, 2001,
and is
incorporated herein by reference.
(*)
|
|
10.f
|
First
Bancorp 2004 Stock Option Plan was filed as Exhibit B to the Registrant's
Form Def 14A filed on March 30, 2004 and is incorporated herein by
reference. (*)
|
|
10.g
|
First
Bancorp 2007 Equity Plan was filed as Appendix B to the Registrant's
Form
Def 14A filed on March 27, 2007 and is incorporated herein by reference.
(*)
|
|
10.h
|
Employment
Agreement between the Company and Anna G. Hollers dated August
17, 1998
was filed as Exhibit 10(m) to the Company'sQuarterly
Report on Form 10-Q for the quarter ended September 30, 1998,
and is incorporated by reference (Commission File Number 000-15572).
(*)
|
|
10.i
|
Employment
Agreement between the Company and Teresa C. Nixon dated August 17,
1998
was filed as Exhibit 10(n) to the Company's Quarterly Report on Form
10-Q
for the quarter ended September 30, 1998, and is incorporated by
reference
(Commission File Number 000-15572).
(*)
|
|
10.j
|
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
(Commission File Number
333-71431).(*)
|
|
10.k
|
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.l
|
Employment
Agreement between the Company and James G. Hudson, Jr. dated May
17, 2001
was filed as Exhibit 10(p) to the Company's Annual Report on Form
10-K for
the year ended December 31, 2001, and is incorporated herein by reference.
(*)
|
|
10.m
|
Amendment
to the employment agreement between the Company and James G. Hudson,
Jr.
dated April 26, 2005 was filed as Exhibit 10.a to the Form 8-K filed
on
April 29, 2005 and is incorporated herein by reference.
(*)
|
|
10.n
|
Employment
Agreement between the Company and R. Walton Brown dated January 15,
2003
was filed as Exhibit 10(b) to the Company's Quarterly Report on Form
10-Q
for the quarter ended June 30, 2003 and is incorporated herein by
reference. (*)
|
|
10.o
|
Amendment
to the employment agreement between the Company and R. Walton Brown
dated
March 8, 2005 was filed as Exhibit 10.n to the Company's Annual Report
on
Form 10-K for the year ended December 31, 2004 and is incorporated
herein
by reference. (*)
|
|
10.p
|
Employment
Agreement between the Company and Jerry L. Ocheltree was filed as
Exhibit
10.1 to the Form 8-K filed on January 25, 2006, and is incorporated
herein
by reference. (*)
|
|
10.q
|
First
Bancorp Long Term Care Insurance Plan was filed as Exhibit 10(o)
to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 2004, and is incorporated by reference.
(*)
|
|
10.r
|
Advances
and Security Agreement with the Federal Home Loan Bank of Atlanta
dated
February 15, 2005 was attached as Exhibit 99(a) to the Form 8-K
filed on February 22, 2005, and is incorporated herein by
reference
|
|
10.s
|
Merger
Agreement between First Bancorp and Great Pee Dee Bancorp dated July
12,
2007 was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on July 13, 2007, and is incorporated herein by
reference.
|
|
Description
of Director
Compensation pursuant to Item 601(b)(10)(iii)(A) of Regulation
S-K.
|
|
List
of Subsidiaries of Registrant.
|
|
Consent
of Independent Registered Public Accounting Firm, Elliott Davis,
PLLC
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
302(a)
of the Sarbanes-Oxley Act of 2002.
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
302(a)
of the Sarbanes-Oxley Act of 2002.
|
|
Chief
Executive Officer Certification Pursuant to 18 U.S.C. Section 1350,
as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
Chief
Financial Officer Certification Pursuant to 18 U.S.C. Section 1350,
as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
(b)
|
Exhibits
- see (a)(3) above
|
|
(c)
|
No
financial statement schedules are filed
herewith.
|
Copies
of exhibits are available upon written request to: First Bancorp,
Anna G. Hollers, Executive Vice President, P.O. Box 508, Troy,
NC 27371
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, FIRST BANCORP has duly caused this Annual Report on Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Troy, and State of North Carolina, on the 14th
day of
March 2008.
First
Bancorp
By: /s/ Jerry
L. Ocheltree
Jerry
L. Ocheltree
President,
Chief Executive Officer and Treasurer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed on behalf of the Company by the following persons and in the capacities
and on the dates indicated.
Executive
Officers
/s/ Jerry
L.
Ocheltree
Jerry
L. Ocheltree
President,
Chief Executive Officer and Treasurer
|
/s/
Anna G.
Hollers
Anna
G. Hollers
Executive
Vice President
Chief
Operating Officer / Secretary
March
14, 2008
|
/s/
Eric P.
Credle
Eric
P. Credle
Executive
Vice President
Chief
Financial Officer
(Principal
Accounting Officer)
March
14, 2008
|
|
Board
of
Directors
|
|
|
/s/
David L.
Burns
David
L. Burns
Chairman
of the Board
Director
March
14, 2008
|
/s/
Thomas F.
Phillips
Thomas
F. Phillips
Director
March
14, 2008
|
|
/s/
Jack D.
Briggs
Jack
D. Briggs
Director
March
14, 2008
|
/s/
Frederick L.
Taylor II
Frederick
L. Taylor II
Director
March
14, 2008
|
|
/s/
R. Walton
Brown
R.
Walton Brown
Director
March
14, 2008
|
/s/
Virginia C.
Thomasson
Virginia
C. Thomasson
Director
March
14, 2008
|
|
/s/
John F.
Burns
John
F. Burns
Director
March
14, 2008
|
Goldie
H. Wallace
Director
March
14, 2008
|
|
/s/
Mary Clara
Capel
Mary
Clara Capel
Director
March
14, 2008
|
/s/
A. Jordan
Washburn
A.
Jordan Washburn
Director
March
14, 2008
|
|
/s/
James G. Hudson,
Jr.
James
G. Hudson, Jr.
Director
March
14, 2008
|
/s/
Dennis A.
Wicker
Dennis
A. Wicker
Director
March
14, 2008
|
|
/s/
Jerry L.
Ocheltree
Jerry
L. Ocheltree
Director
March
14, 2008
|
/s/
John C.
Willis
John
C. Willis
Director
March
14, 2008
|
|
/s/
George R. Perkins,
Jr.
George
R. Perkins, Jr.
Director
March
14, 2008
|
110