Edgar Filing: FIRST BANCORP /NC/

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

Commission File Number 0-15572

FIRST BANCORP

(Exact Name of Registrant as Specified in its Charter)

North Carolina		56-1421916
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)

341 North Main Street, Troy, North Carolina		27371-0508
(Address of Principal Executive Offices)		(Zip Code)

(Registrant's telephone number, including area code)		(910) 576-6171

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý YES o NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý YES o NO

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)

o Large Accelerated Filer	ý Accelerated Filer	o Non-Accelerated Filer	o Smaller Reporting Company
		(Do not check if a smaller
		reporting company)

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 number of shares of the registrant's Common Stock outstanding on July 31, 2012 was 16,975,481.

INDEX

FIRST BANCORP AND SUBSIDIARIES

	Page

Part I. Financial Information

Item 1 - Financial Statements

Consolidated Balance Sheets - June 30, 2012 and June 30, 2011 (With Comparative Amounts at December 31, 2011)	4

Consolidated Statements of Income - For the Periods Ended June 30, 2012 and 2011	5

Consolidated Statements of Comprehensive Income -For the Periods Ended June 30, 2012 and 2011	6

Consolidated Statements of Shareholders’ Equity - For the Periods Ended June 30, 2012 and 2011	7

Consolidated Statements of Cash Flows - For the Periods Ended June 30, 2012 and 2011	8

Notes to Consolidated Financial Statements	9

Item 2 – Management’s Discussion and Analysis of Consolidated Results of Operations and Financial Condition	41

Item 3 – Quantitative and Qualitative Disclosures About Market Risk	65

Item 4 – Controls and Procedures	67

Part II. Other Information

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	68

Item 6 – Exhibits	68

Signatures	70

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Index

FORWARD-LOOKING STATEMENTS

Part I of this report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, 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 our opinions or judgment about future events. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, our level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions. For additional information about factors that could affect the matters discussed in this paragraph, see the “Risk Factors” section of our 2011 Annual Report on Form 10-K.

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Index

Part I. Financial Information

Item 1 - Financial Statements

First Bancorp and Subsidiaries

Consolidated Balance Sheets

($ in thousands-unaudited)	June 30, 2012			December 31, 2011(audited)			June 30, 2011
ASSETS
Cash and due from banks, noninterest-bearing	$	58,872			80,341			73,676
Due from banks, interest-bearing		203,313			135,218			163,414
Federal funds sold		—			608			1,157
Total cash and cash equivalents		262,185			216,167			238,247

Securities available for sale		171,907			182,626			171,844
Securities held to maturity (fair values of $61,676, $62,754, and $59,860)		56,182			57,988			57,593

Presold mortgages in process of settlement		4,053			6,090			2,466

Loans – non-covered		2,114,906			2,069,152			2,040,714
Loans – covered by FDIC loss share agreement		322,895			361,234			401,726
Total loans		2,437,801			2,430,386			2,442,440
Allowance for loan losses – non-covered		(47,523	)		(35,610	)		(34,465	)
Allowance for loan losses – covered		(5,931	)		(5,808	)		(5,540	)
Total allowance for loan losses		(53,454	)		(41,418	)		(40,005	)
Net loans		2,384,347			2,388,968			2,402,435

Premises and equipment		73,642			69,975			68,898
Accrued interest receivable		10,932			11,779			12,000
FDIC indemnification asset		116,902			121,677			142,894
Goodwill		65,835			65,835			65,835
Other intangible assets		3,452			3,897			4,349
Other real estate owned – non-covered		37,895			37,023			31,849
Other real estate owned – covered		70,850			85,272			102,883
Bank-owned life insurance		27,380			2,207			2,160
Other assets		43,193			40,970			30,296
Total assets	$	3,328,755			3,290,474			3,333,749

LIABILITIES
Deposits: Noninterest bearing checking accounts	$	381,353			335,833			323,223
Interest bearing checking accounts		472,342			423,452			371,693
Money market accounts		545,356			513,832			499,286
Savings accounts		160,137			146,481			145,576
Time deposits of $100,000 or more		725,699			753,233			765,787
Other time deposits		553,411			582,206			641,853
Total deposits		2,838,298			2,755,037			2,747,418
Securities sold under agreements to repurchase		—			17,105			68,608
Borrowings		111,394			133,925			138,796
Accrued interest payable		1,549			1,872			2,208
Other liabilities		37,440			37,385			24,421
Total liabilities		2,988,681			2,945,324			2,981,451

Commitments and contingencies

SHAREHOLDERS’ EQUITY
Preferred stock, no par value per share. Authorized: 5,000,000 shares
Issued and outstanding: 63,500, 63,500, and 65,000 shares		63,500			63,500			65,000
Discount on preferred stock		—			—			(2,474	)
Common stock, no par value per share. Authorized: 40,000,000 shares
Issued and outstanding: 16,973,008, 16,909,820 and 16,862,536 shares		105,437			104,841			105,141
Retained earnings		179,298			185,491			188,737
Accumulated other comprehensive income (loss)		(8,161	)		(8,682	)		(4,106	)
Total shareholders’ equity		340,074			345,150			352,298
Total liabilities and shareholders’ equity	$	3,328,755			3,290,474			3,333,749

See notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Income

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands, except share data-unaudited)	2012			2011			2012			2011
INTEREST INCOME
Interest and fees on loans	$	35,636			38,464			70,678			75,271
Interest on investment securities:
Taxable interest income		1,149			1,463			2,407			2,895
Tax-exempt interest income		491			499			984			999
Other, principally overnight investments		178			103			317			193
Total interest income		37,454			40,529			74,386			79,358

INTEREST EXPENSE
Savings, checking and money market		759			1,103			1,608			2,333
Time deposits of $100,000 or more		2,085			2,661			4,260			5,265
Other time deposits		1,169			1,767			2,438			3,936
Securities sold under agreements to repurchase		—			48			4			98
Borrowings		490			470			1,034			932
Total interest expense		4,503			6,049			9,344			12,564

Net interest income		32,951			34,480			65,042			66,794
Provision for loan losses – non-covered		5,194			7,607			23,751			15,177
Provision for loan losses – covered		1,273			3,327			4,271			7,100
Total provision for loan losses		6,467			10,934			28,022			22,277
Net interest income after provision for loan losses		26,484			23,546			37,020			44,517

NONINTEREST INCOME
Service charges on deposit accounts		2,967			3,294			5,814			5,939
Other service charges, commissions and fees		2,340			2,070			4,532			3,985
Fees from presold mortgage loans		489			346			900			641
Commissions from sales of insurance and financial products		432			409			815			764
Gain from acquisition		─			─			—			10,196
Foreclosed property losses and write-downs – non-covered		(1,318	)		(271	)		(2,006	)		(1,624	)
Foreclosed property losses and write-downs – covered		(6,554	)		(2,583	)		(11,101	)		(7,517	)
FDIC indemnification asset income, net		3,558			1,826			7,663			6,866
Securities gains (losses)		(3	)		60			449			74
Other gains (losses)		(141	)		(37	)		53			(17	)
Total noninterest income		1,770			5,114			7,119			19,307

NONINTEREST EXPENSES
Salaries		10,173			9,694			20,347			19,405
Employee benefits		2,777			2,954			6,691			6,156
Total personnel expense		12,950			12,648			27,038			25,561
Net occupancy expense		1,615			1,598			3,296			3,270
Equipment related expenses		1,164			1,110			2,334			2,172
Intangibles amortization		223			226			446			450
Acquisition expenses		—			243			—			594
Other operating expenses		7,496			7,088			14,709			15,909
Total noninterest expenses		23,448			22,913			47,823			47,956

Income (loss) before income taxes		4,806			5,747			(3,684	)		15,868
Income taxes (benefit)		1,516			2,021			(1,792	)		5,767

Net income (loss)		3,290			3,726			(1,892	)		10,101

Preferred stock dividends		(829	)		(812	)		(1,589	)		(1,625	)
Accretion of preferred stock discount		—			(229	)		—			(458	)

Net income (loss) available to common shareholders	$	2,461			2,685			(3,481	)		8,018

Earnings (loss) per common share:
Basic	$	0.15			0.16			(0.21	)		0.48
Diluted		0.15			0.16			(0.21	)		0.48

Dividends declared per common share	$	0.08			0.08			0.16			0.16

Weighted average common shares outstanding:
Basic		16,952,624			16,841,289			16,938,620			16,827,615
Diluted		16,952,624			16,868,571			16,938,620			16,855,027

See notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands-unaudited)	2012			2011			2012			2011

Net income (loss)	$	3,290			3,726			(1,892	)		10,101
Other comprehensive income (loss):
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period, pretax		186			1,198			901			1,387
Tax benefit		(72	)		(467	)		(350	)		(541	)
Reclassification to realized losses (gains)		3			(60	)		(449	)		(74	)
Tax expense (benefit)		(1	)		23			175			29
Postretirement Plans:
Amortization of unrecognized net actuarial loss		82			140			383			280
Tax expense		(32	)		(56	)		(149	)		(112	)
Amortization of prior service cost and transition obligation		8			9			17			18
Tax expense		(3	)		(4	)		(7	)		(8	)
Other comprehensive income		171			783			521			979
Comprehensive income (loss)	$	3,461			4,509			(1,371	)		11,080

See notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(In thousands, except per share - unaudited)	Preferred		Preferred Stock			Common Stock					Retained			Accumulated Other Comprehensive			Total Share- holders’
	Stock		Discount			Shares		Amount			Earnings			Income (Loss)			Equity

Balances, January 1, 2011	$	65,000		(2,932	)		16,801	$	104,207			183,413			(5,085	)		344,603

Net income												10,101						10,101
Common stock issued under stock option plans							2		30									30
Common stock issued into dividend reinvestment plan							30		421									421
Cash dividends declared ($0.16 per common share)												(2,694	)					(2,694	)
Preferred dividends												(1,625	)					(1,625	)
Accretion of preferred stock discount				458								(458	)					—
Stock-based compensation							29		483									483
Other comprehensive income															979			979

Balances, June 30, 2011	$	65,000		(2,474	)		16,862	$	105,141			188,737			(4,106	)		352,298


Balances, January 1, 2012	$	63,500		—			16,910	$	104,841			185,491			(8,682	)		345,150

Net income (loss)												(1,892	)					(1,892	)
Common stock issued into dividend reinvestment plan							31		335									335
Repurchases of common stock							—		(2	)								(2	)
Cash dividends declared ($0.16 per common share)												(2,712	)					(2,712	)
Preferred dividends												(1,589	)					(1,589	)
Stock-based compensation							32		263									263
Other comprehensive income															521			521

Balances, June 30, 2012	$	63,500		—			16,973	$	105,437			179,298			(8,161	)		340,074

See notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

	Six Months Ended June 30,
($ in thousands-unaudited)	2012			2011
Cash Flows From Operating Activities
Net income (loss)	$	(1,892	)		10,101
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses		28,022			22,277
Net security premium amortization		907			748
Purchase accounting accretion and amortization, net		(5,721	)		(6,565	)
Gain from acquisition		—			(10,196	)
Foreclosed property losses and write-downs		13,107			9,141
Gain on securities available for sale		(449	)		(74	)
Other losses (gains)		(53	)		17
Increase in net deferred loan costs		(96	)		(323	)
Depreciation of premises and equipment		2,278			2,182
Stock-based compensation expense		263			483
Amortization of intangible assets		446			450
Origination of presold mortgages in process of settlement		(41,858	)		(35,532	)
Proceeds from sales of presold mortgages in process of settlement		43,895			37,028
Decrease in accrued interest receivable		847			1,579
Increase in other assets		(13,188	)		(6,866	)
Increase (decrease) in accrued interest payable		(323	)		126
Increase (decrease) in other liabilities		415			(5,238	)
Net cash provided by operating activities		26,600			19,338

Cash Flows From Investing Activities
Purchases of securities available for sale		(47,395	)		(23,721	)
Purchases of securities held to maturity		—			(3,816	)
Proceeds from sales of securities available for sale		9,641			2,518
Proceeds from maturities/issuer calls of securities available for sale		48,590			34,829
Proceeds from maturities/issuer calls of securities held to maturity		1,685			1,053
Purchase of bank-owned life insurance		(25,000	)		—
Net decrease (increase) in loans		(42,993	)		45,905
Proceeds from FDIC loss share agreements		15,286			32,468
Proceeds from sales of foreclosed real estate		25,767			16,425
Purchases of premises and equipment		(5,945	)		(3,323	)
Net cash received in acquisition		—			54,037
Net cash provided (used) by investing activities		(20,364	)		156,375

Cash Flows From Financing Activities
Net increase (decrease) in deposits and repurchase agreements		66,211			(83,523	)
Repayments of borrowings, net		(22,500	)		(62,081	)
Cash dividends paid – common stock		(2,708	)		(2,690	)
Cash dividends paid – preferred stock		(1,554	)		(1,625	)
Proceeds from issuance of common stock		335			451
Repurchase of common stock		(2	)		—
Net cash provided (used) by financing activities		39,782			(149,468	)

Increase in cash and cash equivalents		46,018			26,245
Cash and cash equivalents, beginning of period		216,167			212,002

Cash and cash equivalents, end of period	$	262,185			238,247

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	9,667			12,438
Income taxes		5,275			11,710
Non-cash transactions:
Unrealized gain on securities available for sale, net of taxes		277			801
Foreclosed loans transferred to other real estate		25,324			42,984

See notes to consolidated financial statements.

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First Bancorp and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

For the Periods Ended June 30, 2012 and 2011

Note 1 - Basis of Presentation

In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company as of June 30, 2012 and 2011 and the consolidated results of operations and consolidated cash flows for the periods ended June 30, 2012 and 2011. All such adjustments were of a normal, recurring nature. Reference is made to the 2011 Annual Report on Form 10-K filed with the SEC for a discussion of accounting policies and other relevant information with respect to the financial statements. The results of operations for the periods ended June 30, 2012 and 2011 are not necessarily indicative of the results to be expected for the full year. The Company has evaluated all subsequent events through the date the financial statements were issued.

Note 2 – Accounting Policies

Note 1 to the 2011 Annual Report on Form 10-K filed with the SEC contains a description of the accounting policies followed by the Company and discussion of recent accounting pronouncements. During the first six months of 2012, there were no new standards or guidance issued by the regulatory authorities relevant to the Company.

Note 3 – Reclassifications

Certain amounts reported in the period ended June 30, 2011 have been reclassified to conform to the presentation for June 30, 2012. These reclassifications had no effect on net income or shareholders’ equity for the periods presented, nor did they materially impact trends in financial information.

Note 4 – Equity-Based Compensation Plans

At June 30, 2012, the Company had the following equity-based compensation plans: the First Bancorp 2007 Equity Plan, the First Bancorp 2004 Stock Option Plan, the First Bancorp 1994 Stock Option Plan, and one plan that was assumed from an acquired entity. The Company’s shareholders approved all equity-based compensation plans, except for those assumed from acquired companies. The First Bancorp 2007 Equity Plan became effective upon the approval of shareholders on May 2, 2007. As of June 30, 2012, the First Bancorp 2007 Equity Plan was the only plan that had shares available for future grants.

The First Bancorp 2007 Equity Plan is intended to serve as a means to attract, retain and motivate key employees and directors and to associate the interests of the plans’ participants with those of the Company and its shareholders. The First Bancorp 2007 Equity Plan allows for both grants of stock options and other types of equity-based compensation, including stock appreciation rights, restricted stock, restricted performance stock, unrestricted stock, and performance units.

Recent equity grants to employees have either had performance vesting conditions, service vesting conditions, or both. Compensation expense for these grants is recorded over the various service periods based on the estimated number of equity grants that are probable to vest. No compensation cost is recognized for grants that do not vest and any previously recognized compensation cost will be reversed. As it relates to director equity grants, the Company grants common shares, valued at approximately $226,000 in the aggregate on the date of the grant, to non-employee directors in June of each year. Compensation expense associated with these director grants is recognized on the date of grant since there are no vesting conditions.

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The Company granted long-term restricted shares of common stock to certain senior executives on February 24, 2011 and February 23, 2012 with a two year minimum vesting period. The total compensation expense associated with the February 24, 2011 grant was $105,500 and the grant will fully vest on February 24, 2013. The Company recorded $22,000 in stock option expense in the first six months of 2012 and will record $9,700 in each subsequent quarter of 2012 related to this grant. The total compensation expense associated with the February 23, 2012 grant was $89,700 and the grant will fully vest on February 23, 2014. The Company recorded $14,900 in the first six months of 2012 and will record $11,200 in each subsequent quarter of 2012 related to this grant.

Under the terms of the predecessor plans and the First Bancorp 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. The Company’s options provide for immediate vesting if there is a change in control (as defined in the plans).

At June 30, 2012, there were 476,624 options outstanding related to the three First Bancorp plans, with exercise prices ranging from $14.35 to $22.12. At June 30, 2012, there were 871,257 shares remaining available for grant under the First Bancorp 2007 Equity Plan. The Company also has a stock option plan as a result of a corporate acquisition. At June 30, 2012, there were 4,788 stock options outstanding in connection with the acquired plan, with option prices ranging from $10.66 to $15.22.

The Company issues new shares of common stock when options are exercised.

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 future 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 Company’s equity grants for the six months ended June 30, 2012 were the issuance of 1) 9,559 shares of long-term restricted stock to certain senior executives on February 23, 2012, at a fair market value of $10.96 per share, which was the closing price of the Company’s common stock on that date, and 2) 25,452 shares of common stock to non-employee directors on June 1, 2012 (1,818 shares per director), at a fair market value of $8.86 per share, which was the closing price of the Company’s common stock on that date.

The Company’s equity grants for the six months ended June 30, 2011 were the issuance of 1) 7,259 shares of long-term restricted stock to certain senior executives on February 24, 2011, at a fair market value of $14.54 per share, which was the closing price of the Company’s common stock on that date, and 2) 21,210 shares of common stock to non-employee directors on June 1, 2011 (1,414 shares per director), at a fair market value of $11.39 per share, which was the closing price of the Company’s common stock on that date.

The Company recorded total stock-based compensation expense of $263,000 and $483,000 for the six month periods ended June 30, 2012 and 2011, respectively, which relates to the employee grants discussed above and is recorded as “salaries expense.” Stock based compensation is reflected as an adjustment to cash flows from operating activities on the Company’s Consolidated Statement of Cash Flows. The Company recognized $103,000 and $188,000 of income tax benefits related to stock based compensation expense in the income statement for the six months ended June 30, 2012 and 2011, respectively.

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. 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. Compensation expense is based on the estimated number of stock options and awards that will ultimately vest. Over the past five years, there have only been minimal amounts of forfeitures, and therefore the Company assumes that all options granted without performance conditions will become vested.

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The following table presents information regarding the activity for the first six months of 2012 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, 2011		493,850		$	18.92

Granted		—			—
Exercised		—			—
Forfeited		—			—
Expired		(12,438	)		18.71

Outstanding at June 30, 2012		481,412		$	18.92		3.2	$	—

Exercisable at June 30, 2012		480,412		$	18.92		3.2	$	—

The Company did not have any stock option exercises during the six months ended June 30, 2012 and received $30,000 as a result of stock option exercises during the six months ended June 30, 2011. The Company recorded no tax benefits from the exercise of nonqualified stock options during the six months ended June 30, 2012 or 2011.

As discussed above, the Company granted 7,259 and 9,559 long-term restricted shares of common stock to certain senior executives on February 24, 2011 and February 23, 2012, respectively.

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The following table presents information regarding the activity during 2012 related to the Company’s outstanding restricted stock:

	Long-Term Restricted Stock
	Number of Units			Weighted- Average Grant-Date Fair Value

Nonvested at December 31, 2011		7,259		$	14.54

Granted during the period		9,559		$	10.96
Vested during the period		—			—
Forfeited or expired during the period		(2,474	)		12.55

Nonvested at June 30, 2012		14,344		$	12.50

Note 5 – Earnings Per Common Share

Basic earnings per common share were computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period. Currently, the Company’s potentially dilutive common stock issuances relate to grants under the Company’s equity-based compensation plans, including stock options and restricted stock. The following is a reconciliation of the numerators and denominators used in computing basic and diluted earnings per common share:

	For the Three Months Ended June 30,
	2012						2011
($ in thousands except per share amounts)	Income (Numer- ator)		Shares (Denom- inator)		Per Share Amount		Income (Numer- ator)		Shares (Denom- inator)		Per Share Amount

Basic EPS
Net income available to common shareholders	$	2,461		16,952,624	$	0.15	$	2,685		16,841,289	$	0.16

Effect of Dilutive Securities		—		—				—		27,282

Diluted EPS per common share	$	2,461		16,952,624	$	0.15	$	2,685		16,868,571	$	0.16

	For the Six Months Ended June 30,
	2012								2011
($ in thousands except per share amounts)	Income (Numer- ator)			Shares (Denom- inator)		Per Share Amount			Income (Numer- ator)		Shares (Denom- inator)		Per Share Amount

Basic EPS
Net income (loss) available to common shareholders	$	(3,481	)		16,938,620	$	(0.21	)	$	8,018		16,827,615	$	0.48

Effect of Dilutive Securities		—			—					—		27,412

Diluted EPS per common share	$	(3,481	)		16,938,620	$	(0.21	)	$	8,018		16,855,027	$	0.48

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Index

For both the three and six months ended June 30, 2012, there were 386,662 options, respectively, that were antidilutive because the exercise price exceeded the average market price for the period. For both the three and six month periods ended June 30, 2011, there were 542,916 options that were antidilutive because the exercise price exceeded the average market price for the period. Antidilutive options have been omitted from the calculation of diluted earnings per share for the respective periods.

Note 6 – Securities

The book values and approximate fair values of investment securities at June 30, 2012 and December 31, 2011 are summarized as follows:

	June 30, 2012									December 31, 2011
	Amortized		Fair		Unrealized					Amortized		Fair		Unrealized
($ in thousands)	Cost		Value		Gains		(Losses)			Cost		Value		Gains		(Losses)

Securities available for sale:
Government-sponsored enterprise securities	$	29,504		29,626		122		—			34,511		34,665		170		(16	)
Mortgage-backed securities		115,674		119,536		3,862		—			120,032		124,105		4,164		(91	)
Corporate bonds		13,186		13,139		253		(300	)		13,189		12,488		279		(980	)
Equity securities		9,195		9,606		438		(27	)		10,998		11,368		409		(39	)
Total available for sale	$	167,559		171,907		4,675		(327	)		178,730		182,626		5,022		(1,126	)

Securities held to maturity:
State and local governments	$	56,182		61,676		5,494		—			57,988		62,754		4,766		—
Total held to maturity	$	56,182		61,676		5,494		—			57,988		62,754		4,766		—

Included in mortgage-backed securities at June 30, 2012 were collateralized mortgage obligations with an amortized cost of $663,000 and a fair value of $684,000. Included in mortgage-backed securities at December 31, 2011 were collateralized mortgage obligations with an amortized cost of $1,462,000 and a fair value of $1,515,000. All of the Company’s mortgage-backed securities, including collateralized mortgage obligations, were issued by government-sponsored corporations.

The Company owned Federal Home Loan Bank (FHLB) stock with a cost and fair value of $9,102,000 at June 30, 2012 and $10,904,000 at December 31, 2011, which is included in equity securities above and serves as part of the collateral for the Company’s line of credit with the FHLB. The investment in this stock is a requirement for membership in the FHLB system.

The following table presents information regarding securities with unrealized losses at June 30, 2012:

($ 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	$	—		—		—		—		—		—
Mortgage-backed securities		—		—		—		—		—		—
Corporate bonds		—		—		5,029		300		5,029		300
Equity securities		—		—		31		27		31		27
State and local governments		—		—		—		—		—		—
Total temporarily impaired securities	$	—		—		5,060		327		5,060		327

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Index

The following table presents information regarding securities with unrealized losses at December 31, 2011:

($ 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	$	8,984		16		—		—		8,984		16
Mortgage-backed securities		14,902		61		9,302		30		24,204		91
Corporate bonds		4,588		458		2,773		522		7,361		980
Equity securities		4		2		22		37		26		39
State and local governments		—		—		—		—		—		—
Total temporarily impaired securities	$	28,478		537		12,097		589		40,575		1,126

In the above tables, all of the non-equity securities that were in an unrealized loss position at June 30, 2012 and December 31, 2011 are bonds that the Company has determined are in a loss position due to interest rate factors, the overall economic downturn in the financial sector, and the broader economy in general. The Company has evaluated the collectability of each of these bonds and has concluded that there is no other-than-temporary impairment. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost. The Company has also concluded that each of the equity securities in an unrealized loss position at June 30, 2012 and December 31, 2011 was in such a position due to 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 $9,102,000 at June 30, 2012 and $10,904,000 at December 31, 2011, respectively, which was the FHLB stock discussed above. The Company determined that none of its cost-method investments were impaired at either period end.

The book values and approximate fair values of investment securities at June 30, 2012, 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	$	3,004		3,040		350		358
Due after one year but within five years		26,497		26,679		2,958		3,210
Due after five years but within ten years		3,000		3,000		29,731		32,673
Due after ten years		10,189		10,046		23,143		25,435
Mortgage-backed securities		115,674		119,536		—		—
Total debt securities		158,364		162,301		56,182		61,676

Equity securities		9,195		9,606		—		—
Total securities	$	167,559		171,907		56,182		61,676

At June 30, 2012 investment securities with a book value of $86,865,000 were pledged as collateral for public deposits. At December 31, 2011, investment securities with a book value of $47,418,000 were pledged as collateral for public and private deposits and securities sold under agreements to repurchase.

There were $9,641,000 in sales of securities during the six months ended June 30, 2012, which resulted in a net gain of $439,000. There were $2,518,000 in sales during the six months ended June 30, 2011, which resulted in a net gain of $8,000. During the six months ended June 30, 2012 and 2011, the Company recorded a net gain of $11,000 and $71,000, respectively, related to the call of several municipal and bond securities. Also, during the six months ended June 30, 2012 and 2011, the Company recorded a net loss of $1,000 and $5,000, respectively, related to write-downs of the Company’s equity portfolio.

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Index

Note 7 – Loans and Asset Quality Information

The loans and foreclosed real estate that were acquired in FDIC-assisted transactions are covered by loss share agreements between the FDIC and the Company’s banking subsidiary, First Bank, which afford First Bank significant loss protection. (See the Company’s 2011 Annual Report on Form 10-K for more information regarding these transactions.) Because of the loss protection provided by the FDIC, the risk of the Cooperative Bank and The Bank of Asheville loans and foreclosed real estate are significantly different from those assets not covered under the loss share agreements. Accordingly, the Company presents separately loans subject to the loss share agreements as “covered loans” in the information below and loans that are not subject to the loss share agreements as “non-covered loans.”

The following is a summary of the major categories of total loans outstanding:

($ in thousands)	June 30, 2012				December 31, 2011				June 30, 2011
	Amount		Percentage		Amount		Percentage		Amount		Percentage
All loans (non-covered and covered):

Commercial, financial, and agricultural	$	163,761		7%		162,099		7%		158,303		6%
Real estate – construction, land development & other land loans		343,620		14%		363,079		15%		386,354		16%
Real estate – mortgage – residential (1-4 family) first mortgages		815,605		34%		805,542		33%		803,209		33%
Real estate – mortgage – home equity loans / lines of credit		250,627		10%		256,509		11%		266,995		11%
Real estate – mortgage – commercial and other		789,290		32%		762,895		31%		745,858		31%
Installment loans to individuals		73,522		3%		78,982		3%		80,423		3%
Subtotal		2,436,425		100%		2,429,106		100%		2,441,142		100%
Unamortized net deferred loan costs		1,376				1,280				1,298
Total loans	$	2,437,801				2,430,386				2,442,440

As of June 30, 2012, December 31, 2011 and June 30, 2011, net loans include unamortized premiums of $717,000, $949,000, and $1,182,000, respectively, related to acquired loans.

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Index

The following is a summary of the major categories of non-covered loans outstanding:

($ in thousands)	June 30, 2012				December 31, 2011				June 30, 2011
	Amount		Percentage		Amount		Percentage		Amount		Percentage
Non-covered loans:

Commercial, financial, and agricultural	$	155,879		7%		152,627		8%		145,811		7%
Real estate – construction, land development & other land loans		283,818		13%		290,983		14%		306,140		15%
Real estate – mortgage – residential (1-4 family) first mortgages		669,088		32%		646,616		31%		631,640		31%
Real estate – mortgage – home equity loans / lines of credit		229,415		11%		233,171		11%		241,973		12%
Real estate – mortgage – commercial and other		702,717		33%		666,882		32%		635,103		31%
Installment loans to individuals		72,613		4%		77,593		4%		78,749		4%
Subtotal		2,113,530		100%		2,067,872		100%		2,039,416		100%
Unamortized net deferred loan costs		1,376				1,280				1,298
Total non-covered loans	$	2,114,906				2,069,152				2,040,714

The carrying amount of the covered loans at June 30, 2012 consisted of impaired and nonimpaired purchased loans, as follows:

($ in thousands)	Impaired Purchased Loans – Carrying Value		Impaired Purchased Loans – Unpaid Principal Balance		Nonimpaired Purchased Loans – Carrying Value		Nonimpaired Purchased Loans - Unpaid Principal Balance		Total Covered Loans – Carrying Value		Total Covered Loans – Unpaid Principal Balance
Covered loans:
Commercial, financial, and agricultural	$	68		146		7,814		9,885		7,882		10,031
Real estate – construction, land development & other land loans		1,577		2,606		58,225		99,332		59,802		101,938
Real estate – mortgage – residential (1-4 family) first mortgages		827		1,915		145,690		173,707		146,517		175,622
Real estate – mortgage – home equity loans / lines of credit		12		309		21,200		26,400		21,212		26,709
Real estate – mortgage – commercial and other		2,332		4,153		84,241		113,936		86,573		118,089
Installment loans to individuals		3		4		906		990		909		994
Total	$	4,819		9,133		318,076		424,250		322,895		433,383

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Index

The carrying amount of the covered loans at December 31, 2011 consisted of impaired and nonimpaired purchased loans, as follows:

($ in thousands)	Impaired Purchased Loans – Carrying Value		Impaired Purchased Loans – Unpaid Principal Balance		Nonimpaired Purchased Loans – Carrying Value		Nonimpaired Purchased Loans - Unpaid Principal Balance		Total Covered Loans – Carrying Value		Total Covered Loans – Unpaid Principal Balance
Covered loans:
Commercial, financial, and agricultural	$	69		319		9,403		11,736		9,472		12,055
Real estate – construction, land development & other land loans		3,865		8,505		68,231		115,489		72,096		123,994
Real estate – mortgage – residential (1-4 family) first mortgages		1,214		2,639		157,712		189,436		158,926		192,075
Real estate – mortgage – home equity loans / lines of credit		127		577		23,211		29,249		23,338		29,826
Real estate – mortgage – commercial and other		2,585		4,986		93,428		125,450		96,013		130,436
Installment loans to individuals		4		6		1,385		1,583		1,389		1,589
Total	$	7,864		17,032		353,370		472,943		361,234		489,975

The following table presents information regarding covered purchased nonimpaired loans since December 31, 2010. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond.

($ in thousands)
Carrying amount of nonimpaired covered loans at December 31, 2010	$	366,521
Additions due to acquisition of The Bank of Asheville (at fair value)		84,623
Principal repayments		(40,576	)
Transfers to foreclosed real estate		(53,999	)
Loan charge-offs		(14,797	)
Accretion of loan discount		11,598
Carrying amount of nonimpaired covered loans at December 31, 2011	$	353,370
Principal repayments		(25,012	)
Transfers to foreclosed real estate		(11,974	)
Loan charge-offs		(4,176	)
Accretion of loan discount		5,868
Carrying amount of nonimpaired covered loans at June 30, 2012	$	318,076

As reflected in the table above, the Company accreted $5,868,000 of the loan discount on purchased nonimpaired loans into interest income during the first six months of 2012. As of June 30, 2012, there was remaining loan discount of $73,519,000 related to purchased nonimpaired loans. If these loans continue to be repaid by the borrowers, the Company will accrete the remaining loan discount into interest income over the lives of the respective loans. In such circumstances, a corresponding entry to reduce the indemnification asset will be recorded amounting to 80% of the loan discount accretion, which reduces noninterest income.

The following table presents information regarding all purchased impaired loans since December 31, 2010, substantially all of which are covered loans. The Company has applied the cost recovery method to all purchased impaired loans at their respective acquisition dates due to the uncertainty as to the timing of expected cash flows, as reflected in the following table.

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Index

($ in thousands) Purchased Impaired Loans	Contractual Principal Receivable			Fair Market Value Adjustment – Write Down (Nonaccretable Difference)			Carrying Amount
Balance at December 31, 2010	$	8,080			2,329			5,751
Additions due to acquisition of The Bank of Asheville		38,452			20,807			17,645
Change due to payments received		(1,620	)		(327	)		(1,293	)
Transfer to foreclosed real estate		(19,881	)		(9,308	)		(10,573	)
Change due to loan charge-off		(7,522	)		(4,193	)		(3,329	)
Other		807			224			583
Balance at December 31, 2011	$	18,316			9,532			8,784
Change due to payments received		(287	)		(54	)		(233	)
Transfer to foreclosed real estate		(7,636	)		(3,487	)		(4,149	)
Change due to loan charge-off		(109	)		(109	)		—
Other		(1,151	)		(1,568	)		417
Balance at June 30, 2012	$	9,133			4,314			4,819

Each of the purchased impaired loans is on nonaccrual status and considered to be impaired. Because of the uncertainty of the expected cash flows, the Company is accounting for each purchased impaired loan under the cost recovery method, in which all cash payments are applied to principal. Thus, there is no accretable yield associated with the above loans. During the first six months of 2012 and 2011, the Company received no payments that exceeded the initial carrying amount of the purchased impaired loans.

Nonperforming assets are defined as nonaccrual loans, restructured loans, loans past due 90 or more days and still accruing interest, and other real estate. Nonperforming assets are summarized as follows:

ASSET QUALITY DATA ($ in thousands)	June 30, 2012		December 31, 2011		June 30, 2011

Non-covered nonperforming assets
Nonaccrual loans	$	73,918		73,566		71,570
Restructured loans - accruing		20,684		11,720		16,893
Accruing loans > 90 days past due		—		—		—
Total non-covered nonperforming loans		94,602		85,286		88,463
Other real estate		37,895		37,023		31,849
Total non-covered nonperforming assets	$	132,497		122,309		120,312

Covered nonperforming assets
Nonaccrual loans (1)	$	39,075		41,472		37,057
Restructured loans - accruing		19,054		14,218		24,325
Accruing loans > 90 days past due		—		—		—
Total covered nonperforming loans		58,129		55,690		61,382
Other real estate		70,850		85,272		102,883
Total covered nonperforming assets	$	128,979		140,962		164,265

Total nonperforming assets	$	261,476		263,271		284,577

(1) At June 30, 2012, December 31, 2011, and June 30, 2011, the contractual balance of the nonaccrual loans covered by FDIC loss share agreements was $60.4 million, $69.0 million, and $69.4 million, respectively.

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Index

The following table presents information related to the Company’s impaired loans.

($ in thousands)	As of /for the six months ended June 30, 2012		As of /for the year ended December 31, 2011		As of /for the six months ended June 30, 2011
Impaired loans at period end
Non-covered	$	94,602		85,286		88,463
Covered		58,129		55,690		61,382
Total impaired loans at period end	$	152,731		140,976		149,845

Average amount of impaired loans for period
Non-covered	$	86,723		89,023		91,187
Covered		56,449		63,289		69,102
Average amount of impaired loans for period – total	$	143,172		152,312		160,289

Allowance for loan losses related to impaired loans at period end
Non-covered	$	11,051		5,804		6,019
Covered		5,158		5,106		4,727
Allowance for loan losses related to impaired loans - total	$	16,209		10,910		10,746

Amount of impaired loans with no related allowance at period end
Non-covered	$	22,235		35,721		31,514
Covered		40,613		43,702		49,755
Total impaired loans with no related allowance at period end	$	62,848		79,423		81,269

All of the impaired loans noted in the table above were on nonaccrual status at each respective period end except for those classified as restructured loans (see table on previous page for balances).

The remaining tables in this note present information derived from the Company’s allowance for loan loss model. Relevant accounting guidance requires certain disclosures to be disaggregated based on how the Company develops its allowance for loan losses and manages its credit exposure. This model combines loan types in a different manner than the tables previously presented.

The following table presents the Company’s nonaccrual loans as of June 30, 2012.

($ in thousands)	Non-covered		Covered		Total
Commercial, financial, and agricultural:
Commercial – unsecured	$	211		188		399
Commercial – secured		2,227		—		2,227
Secured by inventory and accounts receivable		637		—		637

Real estate – construction, land development & other land loans		19,781		16,963		36,744

Real estate – residential, farmland and multi-family		24,146		10,084		34,230

Real estate – home equity lines of credit		3,878		758		4,636

Real estate – commercial		20,277		11,009		31,286

Consumer		2,761		73		2,834
Total	$	73,918		39,075		112,993

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Index

The following table presents the Company’s nonaccrual loans as of December 31, 2011.

($ in thousands)	Non-covered		Covered		Total
Commercial, financial, and agricultural:
Commercial - unsecured	$	452		—		452
Commercial - secured		2,190		358		2,548
Secured by inventory and accounts receivable		588		102		690

Real estate – construction, land development & other land loans		22,772		21,204		43,976

Real estate – residential, farmland and multi-family		25,430		11,050		36,480

Real estate – home equity lines of credit		3,161		1,068		4,229

Real estate - commercial		16,203		7,459		23,662

Consumer		2,770		231		3,001
Total	$	73,566		41,472		115,038

The following table presents an analysis of the payment status of the Company’s loans as of June 30, 2012.

($ in thousands)	30-59 Days Past Due		60-89 Days Past Due		Nonaccrual Loans		Current		Total Loans Receivable
Non-covered loans
Commercial, financial, and agricultural:
Commercial - unsecured	$	83		58		211		37,991		38,343
Commercial - secured		446		443		2,227		110,248		113,364
Secured by inventory and accounts receivable		55		—		637		21,277		21,969

Real estate – construction, land development & other land loans		1,544		425		19,781		222,973		244,723

Real estate – residential, farmland, and multi-family		6,648		2,109		24,146		777,203		810,106

Real estate – home equity lines of credit		1,759		460		3,878		201,589		207,686

Real estate - commercial		4,715		381		20,277		597,135		622,508

Consumer		690		181		2,761		51,199		54,831
Total non-covered	$	15,940		4,057		73,918		2,019,615		2,113,530
Unamortized net deferred loan costs										1,376
Total non-covered loans									$	2,114,906

Covered loans	$	5,253		2,147		39,075		276,420		322,895

Total loans	$	21,193		6,204		112,993		2,296,035		2,437,801

The Company had no non-covered or covered loans that were past due greater than 90 days and accruing interest at June 30, 2012.

Page 20

Index

The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2011.

($ in thousands)	30-59 Days Past Due		60-89 Days Past Due		Nonaccrual Loans		Current		Total Loans Receivable
Non-covered loans
Commercial, financial, and agricultural:
Commercial - unsecured	$	67		591		452		37,668		38,778
Commercial - secured		672		207		2,190		108,682		111,751
Secured by inventory and accounts receivable		247		—		588		20,993		21,828

Real estate – construction, land development & other land loans		1,250		1,411		22,772		221,372		246,805

Real estate – residential, farmland, and multi-family		9,751		4,259		25,430		756,215		795,655

Real estate – home equity lines of credit		1,126		237		3,161		202,912		207,436

Real estate - commercial		2,620		1,006		16,203		567,354		587,183

Consumer		657		286		2,770		54,723		58,436
Total non-covered	$	16,390		7,997		73,566		1,969,919		2,067,872
Unamortized net deferred loan costs										1,280
Total non-covered loans									$	2,069,152

Covered loans	$	6,511		3,388		41,472		309,863		361,234

Total loans	$	22,901		11,385		115,038		2,279,782		2,430,386

The Company had no non-covered or covered loans that were past due greater than 90 days and accruing interest at December 31, 2011.

Page 21

Index

The following table presents the activity in the allowance for loan losses for non-covered loans for the three and six months ended June 30, 2012.

($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development, & Other Land Loans			Real Estate – Residential, Farmland, and Multi- family			Real Estate – Home Equity Lines of Credit			Real Estate – Commercial and Other			Consumer			Unallo- cated		Total

As of and for the three months ended June 30, 2012

Beginning balance	$	4,954			16,419			15,369			2,132			5,737			1,826			18		46,455
Charge-offs		(744	)		(174	)		(2,145	)		(281	)		(805	)		(334	)		—		(4,483	)
Recoveries		18			126			60			85			6			62			—		357
Provisions		833			1,448			1,675			210			781			237			10		5,194
Ending balance	$	5,061			17,819			14,959			2,146			5,719			1,791			28		47,523

As of and for the six months ended June 30, 2012

Beginning balance	$	3,780			11,306			13,532			1,690			3,414			1,872			16		35,610
Charge-offs		(2,062	)		(2,852	)		(4,236	)		(732	)		(2,170	)		(686	)		—		(12,738	)
Recoveries		34			314			254			119			47			132			—		900
Provisions		3,309			9,051			5,409			1,069			4,428			473			12		23,751
Ending balance	$	5,061			17,819			14,959			2,146			5,719			1,791			28		47,523

Ending balances as of June 30, 2012: Allowance for loan losses

Individually evaluated for impairment	$	869			4,819			635			439			1,480			—			—		8,242

Collectively evaluated for impairment	$	4,192			13,000			14,324			1,707			4,239			1,791			28		39,281

Loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—		—

Loans receivable as of June 30, 2012:

Ending balance – total	$	173,676			244,723			810,106			207,686			622,508			54,831			—		2,113,530

Ending balances as of June 30, 2012: Loans

Individually evaluated for impairment	$	1,009			23,860			9,508			1,331			21,918			—			—		57,626

Collectively evaluated for impairment	$	172,667			220,863			800,598			206,355			600,590			54,831			—		2,055,904

Loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—		—

Page 22

Index

The following table presents the activity in the allowance for loan losses for non-covered loans for the year ended December 31, 2011.

($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development, & Other Land Loans			Real Estate – Residential, Farmland, and Multi-family			Real Estate – Home Equity Lines of Credit			Real Estate – Commercial and Other			Consumer			Unallo- cated			Total


Beginning balance	$	4,731			12,520			11,283			3,634			3,972			1,961			174			38,275
Charge-offs		(2,703	)		(16,240	)		(9,045	)		(1,147	)		(3,355	)		(845	)		(524	)		(33,859	)
Recoveries		389			1,142			719			107			37			182			93			2,669
Provisions		1,363			13,884			10,575			(904	)		2,760			574			273			28,525
Ending balance	$	3,780			11,306			13,532			1,690			3,414			1,872			16			35,610

Ending balances: Allowance for loan losses

Individually evaluated for impairment	$	60			607			150			—			200			—			—			1,017

Collectively evaluated for impairment	$	3,720			10,699			13,382			1,690			3,214			1,872			16			34,593

Loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—			—

Loans receivable:

Ending balance – total	$	172,357			246,805			795,655			207,436			587,183			58,436			—			2,067,872

Ending balances: Loans

Individually evaluated for impairment	$	2,526			34,750			11,880			527			30,846			12			—			80,541

Collectively evaluated for impairment	$	169,831			212,055			783,775			206,909			556,337			58,424			—			1,987,331

Loans acquired with deteriorated credit quality	$	—			920			—			—			—			—			—			920

Page 23

Index

The following table presents the activity in the allowance for loan losses for non-covered loans for the three and six months ended June 30, 2011.

($ in thousands)	Commercial, Financial, and Agricultural			Real Estate – Construction, Land Development, & Other Land Loans			Real Estate – Residential, Farmland, and Multi- family			Real Estate – Home Equity Lines of Credit			Real Estate – Commercial and Other			Consumer			Unallo- cated			Total

As of and for the three months ended June 30, 2011

Beginning balance	$	4,142			10,203			12,463			3,359			3,359			2,223			24			35,773
Charge-offs		(740	)		(5,589	)		(2,248	)		(141	)		(313	)		(157	)		(121	)		(9,309	)
Recoveries		28			219			61			37			—			20			29			394
Provisions		475			6,957			1,808			(1,406	)		(187	)		(126	)		86			7,607
Ending balance	$	3,905			11,790			12,084			1,849			2,859			1,960			18			34,465

As of and for the six months ended June 30, 2011

Beginning balance	$	4,731			12,520			11,283			3,634			3,972			1,961			174			38,275
Charge-offs		(1,896	)		(9,582	)		(5,596	)		(764	)		(1,380	)		(360	)		(236	)		(19,814	)
Recoveries		36			251			293			43			28			103			73			827
Provisions		1,034			8,601			6,104			(1,064	)		239			256			7			15,177
Ending balance	$	3,905			11,790			12,084			1,849			2,859			1,960			18			34,465

Ending balances as of June 30, 2011: Allowance for loan losses

Individually evaluated for impairment	$	50			1,221			235			—			340			—			—			1,846

Collectively evaluated for impairment	$	3,855			10,569			11,849			1,849			2,519			1,960			18			32,619

Loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—			—

Loans receivable as of June 30, 2011:

Ending balance – total	$	165,091			267,346			774,448			213,920			558,879			59,732			—			2,039,416

Ending balances as of June 30, 2011: Loans

Individually evaluated for impairment	$	2,049			47,181			7,656			531			34,198			20			—			91,635

Collectively evaluated for impairment	$	163,042			220,165			766,792			213,389			524,681			59,712			—			1,947,781

Loans acquired with deteriorated credit quality	$	—			1,234			—			—			—			—			—			1,234

Page 24

Index

The following table presents the activity in the allowance for loan losses for covered loans for the three and six months ended June 30, 2012.

($ in thousands)	Covered Loans

As of and for the three months ended June 30, 2012

Beginning balance	$	6,372
Charge-offs		(1,714	)
Recoveries		—
Provisions		1,273
Ending balance	$	5,931

As of and for the six months ended June 30, 2012

Beginning balance	$	5,808
Charge-offs		(4,148	)
Recoveries		—
Provisions		4,271
Ending balance	$	5,931

Ending balances as of June 30, 2012: Allowance for loan losses

Individually evaluated for impairment	$	5,914
Collectively evaluated for impairment		—
Loans acquired with deteriorated credit quality		17

Loans receivable as of June 30, 2012:

Ending balance – total	$	322,895

Ending balances as of June 30, 2012: Loans

Individually evaluated for impairment	$	42,598
Collectively evaluated for impairment		280,297
Loans acquired with deteriorated credit quality		4,819

Page 25

Index

The following table presents the activity in the allowance for loan losses for covered loans for the year ended December 31, 2011.

($ in thousands)	Covered Loans

As of and for the year ended December 31, 2011
Beginning balance	$	11,155
Charge-offs		(18,123	)
Recoveries		—
Provisions		12,776
Ending balance	$	5,808

Ending balances as of December 31, 2011: Allowance for loan losses

Individually evaluated for impairment	$	5,481
Collectively evaluated for impairment		—
Loans acquired with deteriorated credit quality		327

Loans receivable as of December 31, 2011:

Ending balance – total	$	361,234

Ending balances as of December 31, 2011: Loans

Individually evaluated for impairment	$	44,723
Collectively evaluated for impairment		316,511
Loans acquired with deteriorated credit quality		7,864

Page 26

Index

The following table presents the activity in the allowance for loan losses for covered loans for the three and six months ended June 30, 2011.

($ in thousands)	Covered Loans

As of and for the three months ended June 30, 2011

Beginning balance	$	7,002
Charge-offs		(4,789	)
Recoveries		—
Provisions		3,327
Ending balance	$	5,540

As of and for the six months ended June 30, 2011

Beginning balance	$	11,155
Charge-offs		(12,715	)
Recoveries		—
Provisions		7,100
Ending balance	$	5,540

Ending balances as of June 30, 2011: Allowance for loan losses

Individually evaluated for impairment	$	5,540
Collectively evaluated for impairment		—
Loans acquired with deteriorated credit quality		—

Loans receivable as of June 30, 2011:

Ending balance – total	$	401,726

Ending balances as of June 30, 2011: Loans

Individually evaluated for impairment	$	37,149
Collectively evaluated for impairment		364,577
Loans acquired with deteriorated credit quality		13,538

Page 27

Index

The following table presents the Company’s impaired loans as of June 30, 2012.

($ in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Non-covered loans with no related allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	—		—		—		—
Commercial - secured		69		225		—		144
Secured by inventory and accounts receivable		—		—		—		9

Real estate – construction, land development & other land loans		6,950		11,676		—		8,992

Real estate – residential, farmland, and multi-family		4,242		6,010		—		3,172

Real estate – home equity lines of credit		—		—		—		15

Real estate – commercial		10,974		12,683		—		12,554

Consumer		—		—		—		4
Total non-covered impaired loans with no allowance	$	22,235		30,594		—		24,890

Total covered impaired loans with no allowance	$	40,613		75,350		—		40,357

Total impaired loans with no allowance recorded	$	62,848		105,944		—		65,247

Non-covered loans with an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	211		612		40		231
Commercial - secured		2,158		2,436		315		1,912
Secured by inventory and accounts receivable		637		1,112		143		673

Real estate – construction, land development & other land loans		18,156		22,302		6,093		15,360

Real estate – residential, farmland, and multi-family		23,476		26,658		2,361		24,792

Real estate – home equity lines of credit		3,877		4,493		453		3,300

Real estate – commercial		21,089		24,102		1,309		12,776

Consumer		2,763		2,801		337		2,789
Total non-covered impaired loans with allowance	$	72,367		84,516		11,051		61,833

Total covered impaired loans with allowance	$	17,516		19,421		5,158		16,092

Total impaired loans with an allowance recorded	$	89,883		103,937		16,209		77,925

Interest income recorded on non-covered and covered impaired loans during the six months ended June 30, 2012 is considered insignificant.

The related allowance listed above includes both reserves on loans specifically reviewed for impairment and general reserves on impaired loans that were not specifically reviewed for impairment.

Page 28

Index

The following table presents the Company’s impaired loans as of December 31, 2011.

($ in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Non-covered loans with no related allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	—		—		—		—
Commercial - secured		295		478		—		504
Secured by inventory and accounts receivable		27		493		—		124

Real estate – construction, land development & other land loans		15,105		20,941		—		17,876

Real estate – residential, farmland, and multi-family		3,442		4,741		—		5,278

Real estate – home equity lines of credit		46		300		—		79

Real estate – commercial		16,794		18,817		—		13,359

Consumer		12		39		—		15
Total non-covered impaired loans with no allowance	$	35,721		45,809		—		37,235

Total covered impaired loans with no allowance	$	43,702		78,578		—		49,030

Total impaired loans with no allowance recorded	$	79,423		124,387		—		86,265

Non-covered loans with an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured	$	452		454		59		226
Commercial - secured		1,895		1,899		295		1,427
Secured by inventory and accounts receivable		561		571		156		391

Real estate – construction, land development & other land loans		10,360		12,606		2,244		15,782

Real estate – residential, farmland, and multi-family		24,460		26,153		2,169		22,487

Real estate – home equity lines of credit		3,115		3,141		117		2,544

Real estate – commercial		5,965		6,421		283		6,602

Consumer		2,757		2,759		481		2,329
Total non-covered impaired loans with allowance	$	49,565		54,004		5,804		51,788

Total covered impaired loans with allowance	$	11,988		15,670		5,106		14,259

Total impaired loans with an allowance recorded	$	61,553		69,674		10,910		66,047

Interest income recorded on non-covered and covered impaired loans during the year ended December 31, 2011 is considered insignificant.

The related allowance listed above includes both reserves on loans specifically reviewed for impairment and general reserves on impaired loans that were not specifically reviewed for impairment.

Page 29

Index

The Company tracks credit quality based on its internal risk ratings. Upon origination a loan is assigned an initial risk grade, which is generally based on several factors such as the borrower’s credit score, the loan-to-value ratio, the debt-to-income ratio, etc. Loans that are risk-graded as substandard during the origination process are declined. After loans are initially graded, they are monitored monthly for credit quality based on many factors, such as payment history, the borrower’s financial status, and changes in collateral value. Loans can be downgraded or upgraded depending on management’s evaluation of these factors. Internal risk-grading policies are consistent throughout each loan type.

The following describes the Company’s internal risk grades in ascending order of likelihood of loss:

	Numerical Risk Grade	Description
Pass:
	1	Cash secured loans.
	2	Non-cash secured loans that have no minor or major exceptions to the lending guidelines.
	3	Non-cash secured loans that have no major exceptions to the lending guidelines.
Weak Pass:
	4	Non-cash secured loans that have minor or major exceptions to the lending guidelines, but the exceptions are properly mitigated.
Watch or Standard:
	9	Loans that meet the guidelines for a Risk Graded 5 loan, except the collateral coverage is sufficient to satisfy the debt with no risk of loss under reasonable circumstances. This category also includes all loans to insiders and any other loan that management elects to monitor on the watch list.
Special Mention:
	5	Existing loans with major exceptions that cannot be mitigated.
Classified:
	6	Loans that have a well-defined weakness that may jeopardize the liquidation of the debt if deficiencies are not corrected.
	7	Loans that have a well-defined weakness that make the collection or liquidation improbable.
	8	Loans that are considered uncollectible and are in the process of being charged-off.

Page 30

Index

The following table presents the Company’s recorded investment in loans by credit quality indicators as of June 30, 2012.

($ in thousands)	Credit Quality Indicator (Grouped by Internally Assigned Grade)
	Pass (Grades 1, 2, & 3)		Weak Pass (Grade 4)		Watch or Standard Loans (Grade 9)		Special Mention Loans (Grade 5)		Classified Loans (Grades 6, 7, & 8)		Nonaccrual Loans		Total
Non-covered loans:
Commercial, financial, and agricultural:
Commercial - unsecured	$	11,933		25,351		12		323		513		211		38,343
Commercial - secured		34,861		69,630		1,705		2,481		2,460		2,227		113,364
Secured by inventory and accounts receivable		3,688		16,539		265		695		145		637		21,969

Real estate – construction, land development & other land loans		32,230		161,242		5,304		11,971		14,195		19,781		244,723

Real estate – residential, farmland, and multi-family		250,715		476,852		9,105		17,883		31,405		24,146		810,106

Real estate – home equity lines of credit		131,210		66,044		2,521		2,338		1,695		3,878		207,686

Real estate - commercial		135,080		417,454		27,537		13,025		9,135		20,277		622,508

Consumer		28,153		22,676		86		514		641		2,761		54,831
Total	$	627,870		1,255,788		46,535		49,230		60,189		73,918		2,113,530
Unamortized net deferred loan costs														1,376
Total non-covered loans													$	2,114,906

Total covered loans	$	51,912		137,930		—		8,459		85,519		39,075		322,895

Total loans	$	679,782		1,393,718		46,535		57,689		145,708		112,993		2,437,801

At June 30, 2012, there was an insignificant amount of non-covered loans that were graded “8” with an accruing status. At June 30, 2012, there were no covered loans that were graded “8” with an accruing status.

Page 31

Index

The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2011.

($ in thousands)	Credit Quality Indicator (Grouped by Internally Assigned Grade)
	Pass (Grades 1, 2, & 3)		Weak Pass (Grade 4)		Watch or Standard Loans (Grade 9)		Special Mention Loans (Grade 5)		Classified Loans (Grades 6, 7, & 8)		Nonaccrual Loans		Total
Non-covered loans:
Commercial, financial, and agricultural:
Commercial - unsecured	$	13,516		23,735		13		217		845		452		38,778
Commercial - secured		36,587		66,105		1,912		2,196		2,761		2,190		111,751
Secured by inventory and accounts receivable		3,756		16,197		282		756		249		588		21,828

Real estate – construction, land development & other land loans		37,596		156,651		6,490		9,903		13,393		22,772		246,805

Real estate – residential, farmland, and multi-family		257,163		456,188		10,248		17,687		28,939		25,430		795,655

Real estate – home equity lines of credit		130,913		67,606		2,422		1,868		1,466		3,161		207,436

Real estate - commercial		140,577		372,614		30,722		11,502		15,565		16,203		587,183

Consumer		30,693		23,550		67		368		988		2,770		58,436
Total	$	650,801		1,182,646		52,156		44,497		64,206		73,566		2,067,872
Unamortized net deferred loan costs														1,280
Total non-covered loans													$	2,069,152

Total covered loans	$	62,052		161,508		—		8,033		88,169		41,472		361,234

Total loans	$	712,853		1,344,154		52,156		52,530		152,375		115,038		2,430,386

At December 31, 2011, there was an insignificant amount of non-covered loans that were graded “8” with an accruing status. At December 31, 2011, there were no covered loans that were graded “8” with an accruing status.

Troubled Debt Restructurings

The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

The vast majority of the Company’s troubled debt restructurings modified during the period ended June 30, 2012 related to interest rate reductions combined with restructured amortization schedules. The Company does not grant principal forgiveness.

All loans classified as troubled debt restructurings are considered to be impaired and are evaluated as such for determination of the allowance for loan losses. The Company’s troubled debt restructurings can be classified as either nonaccrual or accruing based on the loan’s payment status. The troubled debt restructurings that are nonaccrual are reported within the nonaccrual loan totals presented previously.

Page 32

Index

The following table presents information related to loans modified in a troubled debt restructuring during the three and six months ended June 30, 2012.

($ in thousands)	For the three months ended June 30, 2012				For the six months ended June 30, 2012
	Number of Contracts		Restructured Balances		Number of Contracts		Restructured Balances
Non-covered TDRs – Accruing
Real estate – construction, land development & other land loans		1	$	300		1	$	300
Real estate – residential, farmland, and multi-family		1		303		1		303

Non-covered TDRs - Nonaccrual
Real estate – construction, land development & other land loans		1		238		1		238

Total non-covered TDRs arising during period		3	$	841		3	$	841

Total covered TDRs arising during period– Accruing		3	$	5,428		6	$	7,342
Total covered TDRs arising during period – Nonaccrual		—		—		—		—

Total TDRs arising during period		6	$	6,269		9	$	8,183

Accruing restructured loans that defaulted during the three and six months ended June 30, 2012 are presented in the table below. The Company considers a loan to have defaulted when it becomes 90 or more days delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to other real estate owned.

($ in thousands)	For the three months ended June 30, 2012				For the six months ended June 30, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Non-covered accruing TDRs that subsequently defaulted
Real estate – construction, land development & other land loans		—	$	—		2	$	664
Real estate – residential, farmland, and multi-family		1		341		1		341
Real estate - commercial		1		180		1		180

Total non-covered TDRs that subsequently defaulted		2	$	521		4	$	1,185

Total accruing covered TDRs that subsequently defaulted		3	$	716		14	$	3,427

Total accruing TDRs that subsequently defaulted		5	$	1,237		18	$	4,612

Note 8 – Deferred Loan Costs

The amount of loans shown on the Consolidated Balance Sheets includes net deferred loan costs of approximately $1,376,000, $1,280,000, and $1,298,000 at June 30, 2012, December 31, 2011, and June 30, 2011, respectively.

Page 33

Index

Note 9 – FDIC Indemnification Asset

The FDIC indemnification asset is the estimated amount that the Company will receive from the FDIC under loss share agreements associated with two FDIC-assisted failed bank acquisitions. See page 38 of the Company’s 2011 Annual Report on Form 10-K for a detailed explanation of this asset.

The FDIC indemnification asset was comprised of the following components as of the dates shown:

($ in thousands)	June 30, 2012		December 31, 2011		June 30, 2011
Receivable related to claims submitted, not yet received	$	18,574		13,377		27,668
Receivable related to estimated future claims on loans		79,308		90,275		100,953
Receivable related to estimated future claims on other real estate owned		19,020		18,025		14,273
FDIC indemnification asset	$	116,902		121,677		142,894

The following presents a rollforward of the FDIC indemnification asset since December 31, 2011.

($ in thousands)
Balance at December 31, 2011	$	121,677
Increase related to unfavorable changes in loss estimates		12,298
Increase related to reimbursable expenses		3,183
Cash received		(15,286	)
Accretion of loan discount		(4,694	)
Other		(276	)
Balance at June 30, 2012	$	116,902

Note 10 – Goodwill and Other Intangible Assets

The following is a summary of the gross carrying amount and accumulated amortization of amortizable intangible assets as of June 30, 2012, December 31, 2011, and June 30, 2011 and the carrying amount of unamortized intangible assets as of those same dates.

	June 30, 2012				December 31, 2011				June 30, 2011
($ in thousands)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortizable intangible assets:
Customer lists	$	678		387		678		357		678		328
Core deposit premiums		7,867		4,707		7,867		4,291		7,867		3,868
Total	$	8,545		5,094		8,545		4,648		8,545		4,196

Unamortizable intangible assets:
Goodwill	$	65,835				65,835				65,835

Amortization expense totaled $223,000 and $226,000 for the three months ended June 30, 2012 and 2011, respectively. Amortization expense totaled $446,000 and $450,000 for the six months ended June 30, 2012 and 2011, respectively

Page 34

Index

The following table presents the estimated amortization expense for the last three quarters of calendar year 2012 and for each of the four calendar years ending December 31, 2016 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
July 1 to December 31, 2012	$	446
2013		781
2014		678
2015		622
2016		555
Thereafter		369
Total	$	3,451

Note 11 – Pension Plans

The Company sponsors two defined benefit pension plans – a qualified retirement plan (the “Pension Plan”) which is generally available to all employees, and a Supplemental Executive Retirement Plan (the “SERP”), which is for the benefit of certain senior management executives of the Company.

The Company recorded pension expense totaling $619,000 and $832,000 for the three months ended June 30, 2012 and 2011, respectively, related to the Pension Plan and the SERP. The following table contains the components of the pension expense.

	For the Three Months Ended June 30,
	2012			2011			2012		2011		2012 Total			2011 Total
($ in thousands)	Pension Plan			Pension Plan			SERP		SERP		Both Plans			Both Plans
Service cost – benefits earned during the period	$	457			478			76		115		533			593
Interest cost		363			432			70		102		433			534
Expected return on plan assets		(492	)		(444	)		─		─		(492	)		(444	)
Amortization of transition obligation		1			1			─		─		1			1
Amortization of net (gain)/loss		136			114			─		26		136			140
Amortization of prior service cost		3			3			5		5		8			8
Net periodic pension cost	$	468			584			151		248		619			832

The Company recorded pension expense totaling $1,658,000 and $1,664,000 for the six months ended June 30, 2012 and 2011, respectively, related to the Pension Plan and the SERP. The following table contains the components of the pension expense.

	For the Six Months Ended June 30,
	2012			2011			2012		2011		2012 Total			2011 Total
($ in thousands)	Pension Plan			Pension Plan			SERP		SERP		Both Plans			Both Plans
Service cost – benefits earned during the period	$	1,061			956			170		230		1,231			1,186
Interest cost		799			864			157		204		956			1,068
Expected return on plan assets		(984	)		(888	)		─		─		(984	)		(888	)
Amortization of transition obligation		2			2			─		─		2			2
Amortization of net (gain)/loss		403			228			34		52		437			280
Amortization of prior service cost		6			6			10		10		16			16
Net periodic pension cost	$	1,287			1,168			371		496		1,658			1,664

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 contribute $2,500,000 to the Pension Plan in 2012.

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The Company’s funding policy with respect to the SERP is to fund the related benefits from the operating cash flow of the Company.

Note 12 – 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 (loss) for the Company are as follows:

($ in thousands)	June 30, 2012			December 31, 2011			June 30, 2011
Unrealized gain (loss) on securities available for sale	$	4,348			3,896			3,790
Deferred tax asset (liability)		(1,694	)		(1,520	)		(1,478	)
Net unrealized gain (loss) on securities available for sale		2,654			2,376			2,312

Additional pension liability		(17,879	)		(18,278	)		(10,608	)
Deferred tax asset		7,064			7,220			4,190
Net additional pension liability		(10,815	)		(11,058	)		(6,418	)

Total accumulated other comprehensive income (loss)	$	(8,161	)		(8,682	)		(4,106	)

Note 13 – Fair Value

Relevant accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at June 30, 2012.

($ in thousands)
Description of Financial Instruments	Fair Value at June 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring
Securities available for sale:
Government-sponsored enterprise securities	$	29,626		—		29,626		—
Mortgage-backed securities		119,536		—		119,536		—
Corporate bonds		13,139		—		13,139		—
Equity securities		9,606		423		9,183		—
Total available for sale securities	$	171,907		423		171,484		—

Nonrecurring
Impaired loans – covered	$	58,129		—		—		58,129
Impaired loans – non-covered		94,602		—		—		94,602
Other real estate – covered		70,850		—		70,850		—
Other real estate – non-covered		37,895		—		37,895		—

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2011.

($ in thousands)
Description of Financial Instruments	Fair Value at December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring
Securities available for sale:
Government-sponsored enterprise securities	$	34,665		—		34,665		—
Mortgage-backed securities		124,105		—		124,105		—
Corporate bonds		12,488		—		12,488		—
Equity securities		11,368		398		10,969		—
Total available for sale securities	$	182,626		398		182,227		—

Nonrecurring
Impaired loans – covered	$	55,690		—		55,690		—
Impaired loans – non-covered		85,286		—		85,286		—
Other real estate – covered		85,272		—		85,272		—
Other real estate – non-covered		37,023		—		37,023		—

The following is a description of the valuation methodologies used for instruments measured at fair value.

Securities — When quoted market prices are available in an active market, the securities are classified as Level 1 in the valuation hierarchy. Level 1 securities for the Company include certain equity securities. If quoted market prices are not available, but fair values can be estimated by observing quoted prices of securities with similar characteristics, the securities are classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s Level 2 securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. For the Company, Level 2 securities include mortgage-backed securities, collateralized mortgage obligations, government-sponsored entity securities, and corporate bonds. In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

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Impaired loans —Fair values for impaired loans in the above table are collateral dependent and are estimated based on underlying collateral values, as determined by third-party appraisers, which are then adjusted for the cost related to liquidation of the collateral.

Other real estate – Other real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses.

Transfers of assets or liabilities between levels within the fair value hierarchy are recognized when an event or change in circumstances occurs. There were no transfers between Level 1 and Level 2 for assets or liabilities measured on a recurring basis during the three months ended June 30, 2012 or 2011.

For the six months ended June 30, 2012 and 2011, the increase in the fair value of securities available for sale was $452,000 and $1,313,000, respectively, which is included in other comprehensive income (tax expense of $175,000 and $512,000, respectively). Fair value measurement methods at June 30, 2012 and 2011 are consistent with those used in prior reporting periods.

The carrying amounts and estimated fair values of financial instruments at June 30, 2012 and December 31, 2011 are as follows:

		June 30, 2012					December 31, 2011
($ in thousands)	Level in Fair Value Hierarchy		Carrying Amount		Estimated Fair Value			Carrying Amount		Estimated Fair Value

Cash and due from banks, noninterest-bearing	Level 1		$	58,872		58,872			80,341		80,341
Due from banks, interest-bearing	Level 1			203,313		203,313			135,218		135,218
Federal funds sold	Level 1			—		—			608		608
Securities available for sale	Level 2			171,907		171,907			182,626		182,626
Securities held to maturity	Level 2			56,182		61,676			57,988		62,754
Presold mortgages in process of settlement	Level 1			4,053		4,053			6,090		6,090
Loans – non-covered, net of allowance	Level 3			2,067,383		2,006,670			2,033,542		1,987,979
Loans – covered, net of allowance	Level 3			316,964		316,964			355,426		355,426
FDIC indemnification asset	Level 3			116,902		116,501			121,677		121,004
Accrued interest receivable	Level 1			10,932		10,932			11,779		11,779

Deposits	Level 2			2,838,298		2,841,563			2,755,037		2,759,504
Securities sold under agreements to repurchase	Level 2			—		—			17,105		17,105
Borrowings	Level 2			111,394		86,451			133,925		106,333
Accrued interest payable	Level 2			1,549		1,549			1,872		1,872

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. (Level 1)

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 or matrix pricing. (Level 2)

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Loans – For non-impaired 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. The fair value for each category is determined by discounting scheduled future cash flows using current interest rates offered on loans with similar risk characteristics. (Level 3)

As discussed above, fair values for impaired loans are estimated based on estimated proceeds expected upon liquidation of the collateral. (Level 3)

FDIC Indemnification Asset – Fair value is equal to the FDIC reimbursement rate of the expected losses to be incurred and reimbursed by the FDIC and then discounted over the estimated period of receipt. (Level 3)

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, checking, 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. (Level 2)

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. (Level 2)

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 – Participation in the Small Business Lending Fund

On September 1, 2011, the Company completed the sale of $63.5 million of Series B preferred stock to the Secretary of the Treasury under the Small Business Lending Fund (SBLF). The fund was established under the Small Business Jobs Act of 2010 that was created to encourage lending to small businesses by providing capital to qualified community banks with assets less than $10 billion.

Under the terms of the stock purchase agreement, the Treasury received 63,500 shares of non-cumulative perpetual preferred stock with a liquidation value of $1,000 per share, in exchange for $63.5 million.

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The Series B preferred stock qualifies as Tier 1 capital. The dividend rate, as a percentage of the liquidation amount, can fluctuate on a quarterly basis during the first 10 quarters during which the Series B preferred stock is outstanding, based upon changes in the level of “Qualified Small Business Lending” or “QBSL”. For the first nine quarters after issuance, the dividend rate can range from one percent (1%) to five percent (5%) per annum based upon the increase in QBSL as compared to the baseline. For quarters subsequent to the issuance in 2011, the Company has paid a dividend rate ranging from 4.8% to 5.0%. Based upon an increase in the level of QBSL over the baseline level calculated under the terms of the related purchase agreement, the dividend rate for the next dividend period (which will end on September 30, 2012) is expected to be 5.0%, subject to confirmation by Treasury. For the tenth calendar quarter through four and one half years after issuance, the dividend rate will be fixed at between one percent (1%) and seven percent (7%) based upon the level of QBSL compared to the baseline. After four and one half years from the issuance, the dividend rate will increase to nine percent (9%). Subject to regulatory approval, the Company is generally permitted to redeem the Series B preferred shares at par plus unpaid dividends.

There was no discount recorded related to the SBLF preferred stock (because no warrants were issued in connection with this preferred stock issuance), and therefore there will be no future amounts recorded for preferred stock discount accretion.

For the first six months of 2012, the Company accrued approximately $1,589,000 in preferred dividend payments. This amount is deducted from net income in computing “Net income available to common shareholders.”

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Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition

Critical Accounting Policies

The accounting principles we follow and our 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 may involve the use of estimates based on our best assumptions at the time of the estimation. The allowance for loan losses, intangible assets, and the fair value and discount accretion of loans acquired in FDIC-assisted transactions are three policies we have identified as being more sensitive in terms of judgments and estimates, taking into account their overall potential impact to our consolidated financial statements.

Allowance for Loan Losses

Due to the estimation process and the potential materiality of the amounts involved, we have identified the accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy critical to our 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.

Our 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 a review, and an estimation of losses, on loans or loan relationships that are significant in size and that are impaired (“impaired loans”). A loan is considered to be impaired when, based on current information and events, it is probable we 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 we expect 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 an estimate of losses for smaller balance impaired loans and all loans not considered to be impaired loans (“general reserve loans”). General reserve loans 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. For loans that we have risk graded as having more than “standard” risk, loss percentages are based on a multiple of the estimated loss rate for loans of a similar loan type with normal risk. The multiples assigned vary by type of loan, depending on risk, and we have consulted with an external credit review firm in assigning those multiples.

The reserve estimated for impaired loans is then added to the reserve estimated for general reserve loans. This becomes our “allocated allowance.” In addition to the allocated allowance derived from the model, we also evaluate 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, we may determine that an additional amount of allowance for loan losses is necessary to reserve for probable losses. This additional amount, if any, is our “unallocated allowance.” The sum of the allocated allowance and the unallocated allowance is compared to the actual allowance for loan losses recorded on our books 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.

Loans covered under loss share agreements are recorded at fair value at acquisition date. Therefore, amounts deemed uncollectible at acquisition date become a part of the fair value calculation and are excluded from the allowance for loan losses. Subsequent decreases in the amount expected to be collected result in a provision for loan losses with a corresponding increase in the allowance for loan losses. Subsequent increases in the amount expected to be collected are accreted into income over the life of the loan. Proportional adjustments are also recorded to the FDIC indemnification asset.

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Although we use the best information available to make evaluations, future material 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 our allowance for loan losses. Such agencies may require us 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 “Summary of Loan Loss Experience” below.

Intangible Assets

Due to the estimation process and the potential materiality of the amounts involved, we have also identified the accounting for intangible assets as an accounting policy critical to our consolidated financial statements.

When we complete 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. We 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 our 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.

The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangible, whereas when we acquire 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. We typically engage 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, we amortize 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 our reporting units to their related carrying value, including goodwill (our community banking operation is our only material reporting unit). If the carrying value of a reporting unit were ever to exceed its fair value, we 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.

At our last goodwill impairment evaluation as of September 30, 2011, we determined the fair value of our community banking operation was approximately $18.50 per common share, or 8% higher, than the $17.08 stated book value of our common stock at the date of valuation. To assist us in computing the fair value of our community banking operation, we engaged a consulting firm who used various valuation techniques as part of their analysis, which resulted in the conclusion of the $18.50 value.

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We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our 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.

Fair Value and Discount Accretion of Loans Acquired in FDIC-Assisted Transactions

We consider the determination of the initial fair value of loans acquired in FDIC-assisted transactions, the initial fair value of the related FDIC indemnification asset, and the subsequent discount accretion of the purchased loans to involve a high degree of judgment and complexity. We determine fair value accounting estimates of newly assumed assets and liabilities in accordance with relevant accounting guidance. However, the amount that we realize on these assets could differ materially from the carrying value reflected in our financial statements, based upon the timing of collections on the acquired loans in future periods. To the extent the actual values realized for the acquired loans are different from the estimates, the FDIC indemnification asset will generally be impacted in an offsetting manner due to the loss-sharing support from the FDIC.

Because of the inherent credit losses associated with the acquired loans in a failed bank acquisition, the amount that we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans. We have applied the cost recovery method of accounting to all purchased impaired loans due to the uncertainty as to the timing of expected cash flows. This will result in the recognition of interest income on these impaired loans only when the cash payments received from the borrower exceed the recorded net book value of the related loans.

For nonimpaired purchased loans, we accrete the discount over the lives of the loans in a manner consistent with the guidance for accounting for loan origination fees and costs.

Current Accounting Matters

See Note 2 to the Consolidated Financial Statements above for information about accounting standards that we have recently adopted.

RESULTS OF OPERATIONS

Overview

Net income available to common shareholders for the second quarter of 2012 amounted to $2.5 million, or $0.15 per diluted common share, compared to $2.7 million, or $0.16 per diluted common share, recorded in the second quarter of 2011. For the six months ended June 30, 2012, we reported a net loss available to common shareholders of $3.5 million, or ($0.21) per diluted common share, compared to net income of $8.0 million, or $0.48 per diluted common share, for the six months ended June 30, 2011. The net loss reported for the first six months of 2012 was caused primarily by a higher provision for loan losses in the first quarter of 2012 related to non-covered loans.

Also impacting comparability from 2011 to 2012 was a significant gain we recorded in 2011. In the first quarter of 2011, we realized a $10.2 million bargain purchase gain related to the acquisition of The Bank of Asheville in Asheville, North Carolina. The after-tax impact of this gain was $6.2 million, or $0.37 per diluted common share.

Note Regarding Components of Earnings

Our results of operation are significantly affected by the on-going accounting for two FDIC-assisted failed bank acquisitions. In the discussion below, the term “covered” is used to describe assets included as part of FDIC loss share agreements, which generally result in the FDIC reimbursing the Company for 80% of losses incurred on those assets. The term “non-covered” refers to the Company’s legacy assets, which are not included in any type of loss share arrangement.

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For covered loans that deteriorate in terms of repayment expectations, we record immediate allowances through the provision for loan losses. For covered loans that experience favorable changes in credit quality compared to what was expected at the acquisition date, including loans that payoff, we record positive adjustments to interest income over the life of the respective loan – also referred to as loan discount accretion. For foreclosed properties that are sold at gains or losses or that are written down to lower values, we record the gains/losses within noninterest income.

The adjustments discussed above are recorded within the income statement line items noted without consideration of the FDIC loss share agreements. Because favorable changes in covered assets result in lower expected FDIC claims, and unfavorable changes in covered assets result in higher expected FDIC claims, the FDIC indemnification asset is adjusted to reflect those expectations. The net increase or decrease in the indemnification asset is reflected within noninterest income.

The adjustments noted above can result in volatility within individual income statement line items. Because of the FDIC loss share agreements and the associated indemnification asset, pretax income resulting from amounts recorded as provisions for loan losses on covered loans, discount accretion, and losses from covered foreclosed properties is generally only impacted by 20% of these amounts due to the corresponding adjustments made to the indemnification asset.

Net Interest Income and Net Interest Margin

Net interest income for the second quarter of 2012 amounted to $33.0 million, a 4.4% decrease from the $34.5 million recorded in the second quarter of 2011. Net interest income for the six months ended June 30, 2012 amounted to $65.0 million, a 2.6% decrease from the $66.8 million recorded in the comparable period of 2011.

The Company’s net interest margin (tax-equivalent net interest income divided by average earning assets) in the second quarter of 2012 was 4.68%, a 24 basis point decrease compared to the 4.92% margin realized in the second quarter of 2011. For the six month period ended June 30, 2012, the Company’s net interest margin was 4.64% compared to 4.77% for the same period in 2011. The lower margins were primarily due to lower loan yields, as well as the mix of the Company’s earning assets being more concentrated in lower yielding short-term investments in 2012 compared to a larger concentration of higher yielding loans and securities in 2011.

The 4.68% net interest margin realized in the second quarter of 2012 was a nine basis point increase from the 4.59% margin realized in the first quarter of 2012. The increase was primarily a result of higher amounts of discount accretion on loans purchased in failed bank acquisitions recognized during the respective periods. As previously discussed, the impact of the changes in discount accretion on pretax income is only 20% of the gross amount of the change.

Provision for Loan Losses and Asset Quality

We recorded total provisions for loan losses of $6.5 million in the second quarter of 2012 compared to $10.9 million for the second quarter of 2011. For the six months ended June 30, 2012, we recorded total provisions for loan losses of $28.0 million compared to $22.3 million for the comparable period of 2011.

The provision for loan losses on non-covered loans amounted to $5.2 million in the second quarter of 2012 compared to $7.6 million in the second quarter of 2011. This decline in provision was primarily due to stabilization in our assessment of the losses associated with our nonperforming non-covered loans. For the first six months of 2012 the provision for loan losses on non-covered loans amounted to $23.8 million compared to $15.2 million for the same period of 2011. The higher provision for loan losses was primarily a result of an internal review of non-covered loans that occurred in the first quarter of 2012 that applied more conservative assumptions to estimate the probable losses associated with some of our nonperforming loan relationships, which we believe may lead to a more timely resolution of the related credits.

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Our provisions for loan losses for covered loans amounted to $1.3 million and $3.3 million for the three months ended June 30, 2012 and 2011, respectively, and $4.3 million and $7.1 million for the six months ended June 30, 2012 and 2011, respectively. The lower provisions in 2012 were due to stabilization in our assessment of the losses associated with our nonperforming covered loans. The majority of the provisions for loan losses on covered loans in 2011 and 2012 relate to loans assumed in the Company’s June 2009 acquisition of Cooperative Bank. As previously discussed, the provision for loan losses related to covered loans is offset by an 80% increase to the FDIC indemnification asset, which increases noninterest income.

Total non-covered nonperforming assets have remained fairly stable over the past five quarter ends, ranging from $117 million to $132 million, or approximately 4.5% of total non-covered assets at June 30, 2012. During the three months ended June 30, 2012, as a part of a routine regulatory exam, we reclassified approximately $12 million of performing loans to “restructured loans – accruing” that had been renewed or modified in prior periods. Other than reclassifying these loans to a nonperforming asset category for disclosure purposes, this reclassification did not impact our financial statements.

Covered nonperforming assets have generally declined over the past 12 months, amounting to $129 million at June 30, 2012 compared to $164 million at June 30, 2011.

Noninterest Income

Total noninterest income for the three months ended June 30, 2012 and 2011 was $1.8 million and $5.1 million, respectively, a decrease of $3.3 million, or 65.4%, which was primarily attributable to losses and write-downs on foreclosed properties (see discussion in section entitled “Components of Earnings”). For the six months ended June 30, 2012 and 2011, we recorded noninterest income of $7.1 million and $19.3 million, respectively. The significant decrease in noninterest income for the six month period comparison is primarily the result of the previously discussed $10.2 million bargain purchase gain recorded in the acquisition of The Bank of Asheville during the first quarter of 2011.

Noninterest Expenses

Noninterest expenses amounted to $23.4 million in the second quarter of 2012, a 2.3% increase from the $22.9 million recorded in the same period of 2011. Noninterest expenses for the six months ended June 30, 2012 amounted to $47.8 million, a 0.3% decrease from the $48.0 million recorded in the first six months of 2011. (See further discussion in section entitled “Components of Earnings”.)

Balance Sheet and Capital

Total assets at June 30, 2012 amounted to $3.3 billion, a 0.1% decrease from a year earlier. Total loans at June 30, 2012 amounted to $2.4 billion, a 0.2% decrease from a year earlier, and total deposits amounted to $2.8 billion at June 30, 2012, a 3.3% increase from a year earlier.

For the fourth consecutive quarter, we experienced growth in our non-covered loan portfolio, with non-covered loans increasing by $20 million during the three months ended June 30, 2012. At June 30, 2012, non-covered loans amounted to $2.1 billion, an increase of $74 million, or 3.6%, from a year earlier. We are actively pursuing lending opportunities.

Our level of non-interest bearing checking accounts amounted to $381.4 million at June 30, 2012, an 18.0% increase from a year earlier, while interest-bearing checking accounts amounted to $472.3 million, an increase of 27.1% from a year earlier. Contributing to the increase in interest-bearing checking accounts was a shift into this category from customer repurchase agreements as a result of the repeal on the prohibition of banks paying interest on commercial deposit accounts. The overall growth in checking and other transaction accounts has allowed us to reduce our reliance on higher cost time deposits.

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In September 2011, we issued $63.5 million in preferred stock to the U.S. Treasury as part of the Company’s participation in the Small Business Lending Fund (“SBLF”). The goal of the SBLF is to incentivize healthy banks to make loans to small businesses. Depending on the Bank’s success in making small business loans, the dividend rate on the preferred stock could range from 5% to as low as 1% for several years. For the third quarter of 2012, we expect to pay a dividend rate of 4.3%.

We remain well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio at June 30, 2012 of 16.23% compared to the 10.00% minimum to be considered well-capitalized. Our tangible common equity to tangible assets ratio was 6.36% at June 30, 2012, a decrease of 29 basis points from a year earlier.

Components of Earnings

Net interest income is the largest component of earnings, representing the difference between interest and fees generated from earning assets and the interest costs of deposits and other funds needed to support those assets. Net interest income for the three month period ended June 30, 2012 amounted to $33.0 million, a decrease of $1.5 million, or 4.4%, from the $34.5 million recorded in the second quarter of 2011. Net interest income on a tax-equivalent basis for the three month period ended June 30, 2012 amounted to $33.3 million, a decrease of $1.5 million, or 4.4%, from the $34.9 million recorded in the second quarter of 2011. We believe that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income amounts in different periods without taking into account the different mix of taxable versus non-taxable investments that may have existed during those periods.

	Three Months Ended June 30,
($ in thousands)	2012		2011
Net interest income, as reported	$	32,951		34,480
Tax-equivalent adjustment		387		388
Net interest income, tax-equivalent	$	33,338		34,868

Net interest income for the six month period ended June 30, 2012 amounted to $65.0 million, a decrease of $1.8 million, or 2.6%, from the $66.8 million recorded in the second quarter of 2011. Net interest income on a tax-equivalent basis for the six month period ended June 30, 2012 amounted to $65.8 million, a decrease of $1.8 million, or 2.6%, from the $67.6 million recorded in the second quarter of 2011.

	Six Months Ended June 30,
($ in thousands)	2012		2011
Net interest income, as reported	$	65,042		66,794
Tax-equivalent adjustment		774		773
Net interest income, tax-equivalent	$	65,816		67,567

There are two primary factors that cause changes in the amount of net interest income we record - 1) changes in our loans and deposits balances, and 2) our net interest margin (tax-equivalent net interest income divided by average interest-earning assets).

For the three and six months ended June 30, 2012, the lower net interest income compared to the same periods of 2011 was primarily due to a lower net interest margin, which is discussed in more detail below.

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The following table presents net interest income analysis on a tax-equivalent basis.

	For the Three Months Ended June 30,
	2012						2011
($ in thousands)	Average Volume		Average Rate		Interest Earned or Paid		Average Volume		Average Rate		Interest Earned or Paid
Assets
Loans (1)	$	2,438,471		5.88%	$	35,636	$	2,471,915		6.24%	$	38,464
Taxable securities		164,053		2.82%		1,149		184,125		3.19%		1,463
Non-taxable securities (2)		56,650		6.23%		878		57,720		6.16%		887
Short-term investments, principally federal funds		204,692		0.35%		178		129,057		0.32%		103
Total interest-earning assets		2,863,866		5.31%		37,841		2,842,817		5.77%		40,917

Cash and due from banks		56,310						74,610
Premises and equipment		73,096						68,336
Other assets		320,492						341,475
Total assets	$	3,313,764					$	3,327,238

Liabilities
Interest bearing checking	$	454,923		0.17%	$	190	$	350,094		0.21%	$	184
Money market deposits		536,288		0.37%		491		507,381		0.57%		723
Savings deposits		159,850		0.20%		78		154,624		0.51%		196
Time deposits >$100,000		733,630		1.14%		2,085		778,235		1.37%		2,661
Other time deposits		559,810		0.84%		1,169		660,551		1.07%		1,767
Total interest-bearing deposits		2,444,501		0.66%		4,013		2,450,885		0.91%		5,531
Securities sold under agreements to repurchase		—		—		—		56,756		0.34%		48
Borrowings		127,878		1.54%		490		109,481		1.72%		470
Total interest-bearing liabilities		2,572,379		0.70%		4,503		2,617,122		0.93%		6,049

Non-interest-bearing deposits		367,172						335,113
Other liabilities		31,861						22,384
Shareholders’ equity		342,352						352,619
Total liabilities and shareholders’ equity	$	3,313,764					$	3,327,238

Net yield on interest-earning assets and net interest income				4.68%	$	33,338				4.92%	$	34,868
Interest rate spread				4.61%						4.84%

Average prime rate				3.25%						3.25%

(1)	Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.

(2)

Includes tax-equivalent adjustments of $387,000 and $388,000 in 2012 and 2011, respectively, to reflect the tax benefit that we receive related to tax-exempt securities, which carry interest rates lower than similar taxable investments due to their tax exempt status. This amount has been computed assuming a 39% tax rate and is reduced by the related nondeductible portion of interest expense.

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The following table presents net interest income analysis on a tax-equivalent basis.

	For the Six Months Ended June 30,
	2012						2011
($ in thousands)	Average Volume		Average Rate		Interest Earned or Paid		Average Volume		Average Rate		Interest Earned or Paid
Assets
Loans (1)	$	2,434,682		5.84%	$	70,678	$	2,486,963		6.10%	$	75,271
Taxable securities		165,190		2.93%		2,407		184,914		3.16%		2,895
Non-taxable securities (2)		57,123		6.19%		1,758		57,265		6.24%		1,772
Short-term investments, principally federal funds		198,424		0.32%		317		128,287		0.30%		193
Total interest-earning assets		2,855,419		5.29%		75,160		2,857,429		5.66%		80,131

Cash and due from banks		57,532						70,747
Premises and equipment		72,397						68,144
Other assets		322,570						340,644
Total assets	$	3,307,918					$	3,336,964

Liabilities
Interest bearing checking	$	446,668		0.18%	$	396	$	337,401		0.25%	$	411
Money market deposits		528,648		0.39%		1,019		509,141		0.58%		1,465
Savings deposits		156,359		0.25%		193		156,677		0.59%		457
Time deposits >$100,000		739,245		1.16%		4,260		787,888		1.35%		5,265
Other time deposits		567,346		0.86%		2,438		669,975		1.18%		3,936
Total interest-bearing deposits		2,438,266		0.69%		8,306		2,461,082		0.95%		11,534
Securities sold under agreements to repurchase		3,353		0.24%		4		57,570		0.34%		98
Borrowings		129,206		1.61%		1,034		109,147		1.72%		932
Total interest-bearing liabilities		2,570,825		0.73%		9,344		2,627,799		0.96%		12,564

Non-interest-bearing deposits		357,326						327,542
Other liabilities		34,494						29,338
Shareholders’ equity		345,273						352,285
Total liabilities and shareholders’ equity	$	3,307,918					$	3,336,964

Net yield on interest-earning assets and net interest income				4.64%	$	65,816				4.77%	$	67,567
Interest rate spread				4.56%						4.70%

Average prime rate				3.25%						3.25%

(1)	Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.

(2)

Includes tax-equivalent adjustments of $774,000 and $773,000 in 2012 and 2011, respectively, to reflect the tax benefit that we receive related to tax-exempt securities, which carry interest rates lower than similar taxable investments due to their tax exempt status. This amount has been computed assuming a 39% tax rate and is reduced by the related nondeductible portion of interest expense.

Average loans outstanding for the second quarter of 2012 were $2.438 billion, which was 1.4% less than the average loans outstanding for the second quarter of 2011 ($2.472 billion). Average loans outstanding for the six months ended June 30, 2012 were $2.435 billion, which was 2.1% less than the average loans outstanding for the six months ended June 30, 2011 ($2.487 billion). The mix of our loan portfolio remained substantially the same at June 30, 2012 compared to December 31, 2011, with approximately 90% of our loans being real estate loans, 7% being commercial, financial, and agricultural loans, and the remaining 3% being consumer installment loans. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan.

The slightly lower amount of average loans outstanding in 2012 is primarily due to the resolution of loans within our “covered loan” portfolio that we assumed in two failed bank acquisitions. The resolution of $79 million of these covered loans through foreclosure, charge-off, or repayment since June 30, 2011 offset $74 million in non-covered loan growth that occurred during that same period.

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Average total deposits outstanding for the second quarter of 2012 were $2.812 billion, which was 0.9% greater than the average deposits outstanding for the second quarter of 2011 ($2.786 billion). Average deposits outstanding for the six months ended June 30, 2012 were $2.796 billion, which was 0.2% greater than the average deposits outstanding for the six months ended June 30, 2011 ($2.789 billion). Generally, we can reinvest funds from deposits at higher yields than the interest rate being paid on those deposits, and therefore increases in deposits typically result in higher amounts of net interest income.

Our net interest margin (tax-equivalent net interest income divided by average earning assets) for the second quarter of 2012 was 4.68% compared to 4.92% for the second quarter of 2011. For the six month period ended June 30, 2012, our net interest margin was 4.64% compared to 4.77% for the same period in 2011. The lower margins were primarily due to lower loan yields, as well as the mix of the Company’s earning assets being more concentrated in lower yielding short-term investments in 2012 compared to a larger concentration of higher yielding loans and securities in 2011. As can be seen in the above table, average short-term investments amounted to $205 million for the second quarter of 2012, a 59% increase from the second quarter of 2011 average of $129 million, while average loan and securities balances declined during that same period. Our higher level of short-term investments was due to declining loan balances and our decision not to deploy our excess cash into higher yielding, but longer-term, securities due to the historically low interest rate environment that has been in effect.

Our net interest margin benefitted from the net accretion of purchase accounting premiums/discounts associated with the Cooperative acquisition in June 2009 and, to a lesser degree, the acquisition of Great Pee Dee Bancorp in April 2008 and the Bank of Asheville in January 2011. For the three and six months ended June 30, 2012, we recorded $3,196,000 and $5,721,000, respectively, in net accretion of purchase accounting premiums/discounts that increased net interest income. For the comparable periods of 2011, we recorded $4,065,000 and $6,565,000, respectively, in net accretion of purchase accounting premiums/discounts. The following table presents the detail of the purchase accounting adjustments that impacted net interest income.

	For the Three Months Ended						For the Six Months Ended
$ in thousands	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011

Interest income – reduced by premium amortization on loans	$	(116	)		(116	)		(232	)		(221	)
Interest income – increased by accretion of loan discount		3,290			4,014			5,868			6,529
Interest expense – reduced by premium amortization of deposits		22			130			55			183
Interest expense – reduced by premium amortization of borrowings		—			37			30			74
Impact on net interest income	$	3,196			4,065			5,721			6,565

See additional information regarding net interest income in the section entitled “Interest Rate Risk.”

Our provisions for loan losses and nonperforming assets remain at what we believe to be elevated levels, primarily due to high unemployment rates and declining property values in our market area that negatively impact collateral dependent real estate loans.

Our total provision for loan losses was $6.5 million for the second quarter of 2012 compared to $10.9 million in the second quarter of 2011. Our total provision for loan losses was $28.0 million for the first six months of 2012 compared to $22.3 million for the first six months of 2011. The total provision for loan losses is comprised of provision for loan losses for non-covered loans and provision for loan losses for covered loans. (See section entitled “Summary of Loan Loss Experience” below for further discussion.)

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Our non-covered nonperforming assets amounted to $132 million at June 30, 2012, compared to $122 million at December 31, 2011 and $120 million at June 30, 2011. At June 30, 2012, the ratio of non-covered nonperforming assets to total non-covered assets was 4.51%, compared to 4.30% at December 31, 2011, and 4.25% at June 30, 2011. Our outlook for nonperforming non-covered assets is consistent with the recent trend, which is that we do not expect material improvement, nor deterioration, in the near future.

Our ratio of annualized net charge-offs to average non-covered loans was 0.79% for the second quarter of 2012 compared to 1.75% in the second quarter of 2011. Our ratio of annualized net charge-offs for the six months ended June 30, 2012 was 1.14% compared to 1.87% for the first six months of 2011.

Our nonperforming assets that are covered by FDIC loss share agreements have generally declined over the past twelve months, amounting to $164 million at June 30, 2011 compared to $141 million at December 31, 2011 and $129 million at June 30, 2012. We expect covered nonperforming assets to continue to decline as we resolve covered nonperforming loans and dispose of covered other real estate owned.

Total noninterest income was $1.8 million in the second quarter of 2012 compared to $5.1 million for the second quarter of 2011, a decrease of $3.3 million that was primarily attributable to losses and write-downs on foreclosed properties (see discussion below). For the six months ended June 30, 2012 and 2011, we recorded noninterest income of $7.1 million and $19.3 million, respectively. The decrease for the six month period comparison is primarily the result of a $10.2 million bargain purchase gain recorded in the first quarter of 2011 related to our acquisition of The Bank of Asheville.

Service charges on deposit accounts amounted to $3.0 million in the second quarter of 2012 compared to $3.3 million in the second quarter of 2011. Service charges on deposit accounts amounted to $5.8 million for the first six months of 2012 compared to $5.9 million for the first six months of 2011. The decline in this category is primarily due to lower overdraft fees. The lower level of overdraft fees is primarily attributable to new regulations that took effect on July 1, 2011 that limit our ability to charge overdraft fees.

Other service charges, commissions and fees amounted to $2.3 million in the second quarter of 2012 compared to $2.1 million in the second quarter of 2011. Other service charges, commissions and fees amounted to $4.5 million for the first six months of 2012 compared to $4.0 million for the first six months of 2011. The increases in 2012 are primarily attributable to increased debit card usage by our customers. We earn a small fee each time our customers make a debit card transaction.

Fees from presold mortgages amounted to $0.5 million in the second quarter of 2012 compared to $0.3 million in the second quarter of 2011. Fees from presold mortgages amounted to $0.9 million for the first six months of 2012 compared to $0.6 million for the first six months of 2011. The increase in these fees is primarily attributable to the low interest rate environment for home loans, which has increased refinance activity.

We continue to experience losses and write-downs on our foreclosed properties due to declining property values in our market area. For the second quarter of 2012, these losses amounted to $6.6 million for covered properties compared to $2.6 million in the second quarter of 2011. For the first six months of 2012, losses on covered properties amounted to $11.1 million compared to $7.5 million for the same period in 2011.

Losses on non-covered foreclosed properties amounted to $1.3 million for the second quarter of 2012 compared to $0.3 million in 2011. For the six months ended June 30, 2012, losses on non-covered foreclosed properties amounted to $2.0 million compared to $1.6 million for the same period of 2011.

As previously discussed, indemnification asset income is recorded to reflect additional amounts expected to be received from the FDIC due to covered loan and foreclosed property losses arising during the period. For the second quarter of 2012, indemnification asset income totaled $3.6 million compared to $1.8 million in the second quarter of 2011. For the six months ended June 30, 2012, indemnification asset income amounted to $7.7 million compared to $6.9 million for the same period of 2011.

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We recorded $0.4 million in gains on sales of securities during the first six months of 2012 compared to $0.1 million in the comparable period of 2011.

Salaries expense amounted to $10.2 million in the second quarter of 2012 compared to $9.7 million for the second quarter of 2011. Salaries expense amounted to $20.3 million for the first half of 2012 compared to $19.4 million for comparable period of 2011. The increase in salary expense in 2012 is primarily associated with the hiring of additional employees in order to build our infrastructure and an initiative to expand our wealth management capabilities.

Employee benefit expense amounted to $2.8 million in the second quarter of 2012 compared to $3.0 million for the second quarter of 2011. This decrease is primarily due lower pension expense, which amounted to $0.6 million in the second quarter of 2012 compared to $0.8 million in the second quarter of 2011. The $0.6 million in pension expense we recorded in the second quarter of 2012 was a decline from the $1.0 million in pension expense in the first quarter of 2012. During the second quarter of 2012, we reviewed and adjusted certain assumptions used to calculate pension expense. These included a change in expected salary increases, which was changed from 5% to 3.5%, and a change in the assumption that all employees retire at age 65, which was changed to assume retirements occur on a graded basis from age 58 to age 70 based on a study of actual historical retirements. Employee benefit expense amounted to $6.7 million for the first half of 2012 compared to $6.2 million for comparable period of 2011. The increase was primarily due to higher health care costs in 2012.

Other operating expenses amounted to $7.5 million and $7.1 million for the second quarters of 2012 and 2011, respectively, and $14.7 million and $15.9 million for six month periods ended June 30, 2012 and 2011, respectively. The increase in the second quarter of 2012 compared to the second quarter of 2011 was due to generally higher expenses, with other operating expenses for the second quarter of 2011 being somewhat lower than most recent quarters. The decline in other operating expenses when comparing the first half of 2012 to the first half of 2011 was primarily due to lower FDIC insurance premiums as a result of a change in the FDIC’s assessment methodology that was effective April 1, 2011.

One of the largest categories of other operating expenses is collection expenses. Collection expenses on non-covered assets remained relatively stable for the periods presented amounting to approximately $0.8 million for both the second quarter of 2012 and 2011, and $1.45 million for the first half of both 2012 and 2011. Collection expenses on covered assets (net of FDIC reimbursement) decreased in both periods and amounted to $0.3 and $0.8 million for the three and six months ended June 30, 2012, respectively, compared to $0.6 million and $1.4 million for the three and six months ended June 30, 2011, respectively.

Merger expenses associated with The Bank of Asheville acquisition in January 2011 amounted to $243,000 and $594,000 for the three and six months ended June 30, 2011. There were no comparable merger expenses in 2012.

For the second quarter of 2012, the provision for income taxes was $1.5 million, an effective tax rate of 31.5%, compared to $2.0 million, an effective tax rate of 35.2%, for the same period of 2011. We recorded an income tax benefit of $1.8 million for the first six months of 2012 due to the net loss reported in the first quarter of 2012. For the first six months of 2011, the provision for income taxes was $5.8 million, an effective tax rate of 36.3%.

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The Consolidated Statements of Comprehensive Income reflect other comprehensive income of $171,000 and $783,000 during the second quarters of 2012 and 2011, respectively, and other comprehensive income of $521,000 and $979,000 for the six months ended June 30, 2012 and 2011, respectively. The primary component of other comprehensive income for the periods presented was changes in unrealized holding gains of our available for sale securities. Our available for sale securities portfolio is predominantly comprised of fixed rate bonds that generally increase in value when market yields for fixed rate bonds decrease and decline in value when market yields for fixed rate bonds increase. Management has evaluated any unrealized losses on individual securities at each period end and determined that there is no other-than-temporary impairment.

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FINANCIAL CONDITION

Total assets at June 30, 2012 amounted to $3.33 billion, 0.1% lower than a year earlier. Total loans at June 30, 2012 amounted to $2.44 billion, a 0.2% decrease from a year earlier, and total deposits amounted to $2.84 billion, a 3.3% increase from a year earlier.

The following table presents information regarding the nature of our growth for the twelve months ended June 30, 2012 and for the first six months of 2012.

July 1, 2011 to June 30, 2012	Balance at beginning of period		Internal Growth			Growth from Acquisitions		Balance at end of period		Total percentage growth		Percentage growth, excluding acquisitions
	($ in thousands)

Loans – Non-covered	$	2,040,714		74,192			—		2,114,906		3.6%		3.6%
Loans – Covered		401,726		(78,831	)		—		322,895		-19.6%		-19.6%
Total loans	$	2,442,440		(4,639	)		—		2,437,801		-0.2%		-0.2%

Deposits – Noninterest bearing checking	$	323,223		58,130			—		381,353		18.0%		18.0%
Deposits – Interest bearing checking		371,693		100,649			—		472,342		27.1%		27.1%
Deposits – Money market		497,112		44,207			—		541,319		8.9%		8.9%
Deposits – Savings		145,576		14,561			—		160,137		10.0%		10.0%
Deposits – Brokered		175,161		(23,074	)		—		152,087		-13.2%		-13.2%
Deposits – Internet time		40,677		(17,238	)		—		23,439		-42.4%		-42.4%
Deposits – Time>$100,000		567,722		(9,894	)		—		557,828		-1.7%		-1.7%
Deposits – Time<$100,000		626,254		(76,461	)		—		549,793		-12.2%		-12.2%
Total deposits	$	2,747,418		90,880			—		2,838,298		3.3%		3.3%

January 1, 2012 to June 30, 2012
Loans – Non-covered	$	2,069,152		45,754			—		2,114,906		2.2%		2.2%
Loans – Covered		361,234		(38,339	)		—		322,895		-10.6%		-10.6%
Total loans	$	2,430,386		7,415			—		2,437,801		0.3%		0.3%

Deposits – Noninterest bearing checking	$	335,833		45,520			—		381,353		13.6%		13.6%
Deposits – Interest bearing checking		423,452		48,890			—		472,342		11.5%		11.5%
Deposits – Money market		509,801		31,518			—		541,319		6.2%		6.2%
Deposits – Savings		146,481		13,656			—		160,137		9.3%		9.3%
Deposits – Brokered		157,408		(5,321	)		—		152,087		-3.4%		-3.4%
Deposits – Internet time		29,902		(6,463	)		—		23,439		-21.6%		-21.6%
Deposits – Time>$100,000		575,408		(17,580	)		—		557,828		-3.1%		-3.1%
Deposits – Time<$100,000		576,752		(26,959	)		—		549,793		-4.7%		-4.7%
Total deposits	$	2,755,037		83,261			—		2,838,298		3.0%		3.0%

As derived from the table above, for the twelve months preceding June 30, 2012, our non-covered loans increased by $74 million, or 3.6%, which was offset by declines in our covered loans of $79 million. Over that same period, total deposits increased $91 million, or 3.3%. For the first six months of 2012, non-covered loans increased $46 million, or 2.2%, which was partially offset by declines in our covered loans of $38 million. During the first six months of 2012, total deposits increased by $83 million, or 3.0%. We had no acquisitions during the periods presented. We have experienced growth in our non-covered loan portfolio during the periods presented, and we are actively pursuing lending opportunities in order to improve our asset yields, as well as to potentially decrease the dividend rate on our SBLF preferred stock (see Note 14 to the consolidated financial statements for more information).

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For the six and twelve months preceding June 30, 2012, internal growth in our lowest cost deposits outpaced the decline in our higher cost deposits, which resulted in a net increase in deposits. A portion of the $101 million increase in interest bearing checking accounts during the twelve months preceding June 30, 2012 was caused by the shifting of repurchase agreements (securities sold under agreements to repurchase) to interest bearing checking accounts during late 2011 and early 2012. In July 2011, the Dodd-Frank Act repealed certain sections of the Federal Reserve Act that prohibited payment of interest on commercial demand accounts. With this prohibition removed, we began to pay interest on certain types of commercial demand accounts, as we encouraged our customers with repurchase agreements to switch to commercial checking accounts, which eliminated the need to sell/pledge our investment securities. Securities sold under agreements to repurchase were $69 million at June 30, 2011, $17 million at December 31, 2011 and $0 at June 30, 2012.

The mix of our loan portfolio remains substantially the same at June 30, 2012 compared to December 31, 2011. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan.

Note 7 to the consolidated financial statements presents additional detailed information regarding our mix of loans, including a break-out between loans covered by FDIC loss share agreements and non-covered loans.

Nonperforming Assets

Nonperforming assets include nonaccrual loans, troubled debt restructurings, loans past due 90 or more days and still accruing interest, and other real estate. As previously discussed, as a result of two FDIC-assisted transactions, we entered into loss share agreements that afford us significant protection from losses from all loans and other real estate acquired in those acquisitions.

Because of the loss protection provided by the FDIC, the financial risk of the acquired loans and foreclosed real estate is significantly different from the risk associated with assets not covered under the loss share agreements. Accordingly, we present separately nonperforming assets subject to the loss share agreements as “covered” nonperforming assets, and nonperforming assets that are not subject to the loss share agreements as “non-covered.”

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Nonperforming assets are summarized as follows:

ASSET QUALITY DATA ($ in thousands)	June 30, 2012		December 31, 2011		June 30, 2011

Non-covered nonperforming assets
Nonaccrual loans	$	73,918		73,566		71,570
Restructured loans – accruing		20,684		11,720		16,893
Accruing loans >90 days past due		—		—		—
Total non-covered nonperforming loans		94,602		85,286		88,463
Other real estate		37,895		37,023		31,849
Total non-covered nonperforming assets	$	132,497		122,309		120,312

Covered nonperforming assets (1)
Nonaccrual loans (2)	$	39,075		41,472		37,057
Restructured loans – accruing		19,054		14,218		24,325
Accruing loans > 90 days past due		—		—		—
Total covered nonperforming loans		58,129		55,690		61,382
Other real estate		70,850		85,272		102,883
Total covered nonperforming assets	$	128,979		140,962		164,265

Total nonperforming assets	$	261,476		263,271		284,577

Asset Quality Ratios – All Assets
Net charge-offs to average loans – annualized		0.96% QTD, 1.32% YTD		1.00% YTD		2.22% QTD, 2.57% YTD
Nonperforming loans to total loans		6.27%		5.80%		6.14%
Nonperforming assets to total assets		7.86%		8.00%		8.54%
Allowance for loan losses to total loans		2.19%		1.70%		1.64%
Allowance for loan losses to nonperforming loans		35.00%		29.38%		27.31%

Asset Quality Ratios – Based on Non-covered Assets only
Net charge-offs to average non-covered loans - annualized		0.79% QTD, 1.14% YTD		1.09% YTD		1.74% QTD, 1.87% YTD
Non-covered nonperforming loans to non-covered loans		4.47%		4.12%		4.33%
Non-covered nonperforming assets to total non-covered assets		4.51%		4.30%		4.25%
Allowance for loan losses to non-covered loans		2.25%		1.72%		1.69%
Allowance for loan losses to non-covered nonperforming loans		50.23%		41.75%		38.96%

(1)

Covered nonperforming assets consist of assets that are included in loss share agreements with the FDIC.

(2)

At June 30, 2012, the contractual balance of the nonaccrual loans covered by FDIC loss share agreements was $60.4 million.

We have reviewed the collateral for our nonperforming assets, including nonaccrual loans, and have included this review among the factors considered in the evaluation of the allowance for loan losses discussed below.

Consistent with the weak economy in our market area, we have experienced high levels of loan losses, delinquencies and nonperforming assets compared to our historical averages.

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The following is the composition, by loan type, of all of our nonaccrual loans (covered and non-covered) at each period end, as classified for regulatory purposes:

($ in thousands)	At June 30, 2012		At December 31, 2011		At June 30, 2011
Commercial, financial, and agricultural	$	3,270		3,300		2,755
Real estate – construction, land development, and other land loans		40,051		48,467		45,694
Real estate – mortgage – residential (1-4 family) first mortgages		25,453		24,133		27,981
Real estate – mortgage – home equity loans/lines of credit		7,574		7,255		6,534
Real estate – mortgage – commercial and other		33,819		28,491		22,907
Installment loans to individuals		2,826		3,392		2,756
Total nonaccrual loans	$	112,993		115,038		108,627

The following segregates our nonaccrual loans at June 30, 2012 into covered and non-covered loans, as classified for regulatory purposes:

($ in thousands)	Covered Nonaccrual Loans		Non-covered Nonaccrual Loans		Total Nonaccrual Loans
Commercial, financial, and agricultural	$	195		3,075		3,270
Real estate – construction, land development, and other land loans		16,963		23,088		40,051
Real estate – mortgage – residential (1-4 family) first mortgages		9,184		16,269		25,453
Real estate – mortgage – home equity loans/lines of credit		910		6,664		7,574
Real estate – mortgage – commercial and other		11,759		22,060		33,819
Installment loans to individuals		64		2,762		2,826
Total nonaccrual loans	$	39,075		73,918		112,993

The following segregates our nonaccrual loans at December 31, 2011 into covered and non-covered loans, as classified for regulatory purposes:

($ in thousands)	Covered Nonaccrual Loans		Non-covered Nonaccrual Loans		Total Nonaccrual Loans
Commercial, financial, and agricultural	$	469		2,831		3,300
Real estate – construction, land development, and other land loans		21,203		27,264		48,467
Real estate – mortgage – residential (1-4 family) first mortgages		10,134		13,999		24,133
Real estate – mortgage – home equity loans/lines of credit		1,231		6,024		7,255
Real estate – mortgage – commercial and other		8,212		20,279		28,491
Installment loans to individuals		223		3,169		3,392
Total nonaccrual loans	$	41,472		73,566		115,038

At June 30, 2012, troubled debt restructurings (covered and non-covered) amounted to $39.7 million, compared to $25.9 million at December 31, 2011, and $41.2 million at June 30, 2011. During the three months ended June 30, 2012, as a part of a routine regulatory exam, we reclassified approximately $12 million of performing loans to “restructured loans – accruing” that had been renewed or modified in prior periods. The reclassification was for disclosure purposes only and did not impact our financial statements beyond the reclassification of these assets to a nonperforming asset category.

Other real estate includes foreclosed, repossessed, and idled properties. Non-covered other real estate has increased over the past year, amounting to $37.9 million at June 30, 2012, $37.0 million at December 31, 2011, and $31.8 million at June 30, 2011. At June 30, 2012, we also held $70.9 million in other real estate that is subject to the loss share agreements with the FDIC, which is a decline from $85.3 million at December 31, 2011 and $102.9 million at June 30, 2011. We believe 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.

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The following table presents the detail of all of our other real estate at each period end (covered and non-covered):

($ in thousands)	At June 30, 2012		At December 31, 2011		At June 30, 2011
Vacant land	$	67,128		76,341		88,239
1-4 family residential properties		28,475		33,724		37,349
Commercial real estate		13,142		12,230		9,144
Total other real estate	$	108,745		122,295		134,732

The following segregates our other real estate at June 30, 2012 into covered and non-covered:

($ in thousands)	Covered Other Real Estate		Non-covered Other Real Estate		Total Other Real Estate
Vacant land	$	50,572		16,556		67,128
1-4 family residential properties		12,870		15,605		28,475
Commercial real estate		7,408		5,734		13,142
Total other real estate	$	70,850		37,895		108,745

The following segregates our other real estate at December 31, 2011 into covered and non-covered:

($ in thousands)	Covered Other Real Estate		Non-covered Other Real Estate		Total Other Real Estate
Vacant land	$	59,994		16,347		76,341
1-4 family residential properties		17,362		16,362		33,724
Commercial real estate		7,916		4,314		12,230
Total other real estate	$	85,272		37,023		122,295

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The following table presents geographical information regarding our nonperforming assets at June 30, 2012.

	As of June 30, 2012
($ in thousands)	Covered		Non-covered		Total		Total Loans		Nonperforming Loans to Total Loans

Nonaccrual loans and Troubled Debt Restructurings (1)
Eastern Region (NC)	$	51,367		26,960		78,327	$	542,000		14.5	%
Triangle Region (NC)		—		29,953		29,953		780,000		3.8	%
Triad Region (NC)		—		14,722		14,722		383,000		3.8	%
Charlotte Region (NC)		—		3,546		3,546		97,000		3.7	%
Southern Piedmont Region (NC)		642		3,440		4,082		219,000		1.9	%
Western Region (NC)		6,072		5		6,077		62,000		9.8	%
South Carolina Region		48		9,397		9,445		135,000		7.0	%
Virginia Region		—		5,170		5,170		210,000		2.5	%
Other		—		1,409		1,409		10,000		14.1	%
Total nonaccrual loans and troubled debt restructurings	$	58,129		94,602		152,731	$	2,438,000		6.3	%

Other Real Estate (1)
Eastern Region (NC)	$	57,263		10,492		67,755
Triangle Region (NC)		—		8,426		8,426
Triad Region (NC)		—		8,481		8,481
Charlotte Region (NC)		—		3,638		3,638
Southern Piedmont Region (NC)		—		1,259		1,259
Western Region (NC)		13,499		—		13,499
South Carolina Region		88		4,890		4,978
Virginia Region		—		709		709
Other		—		—		—
Total other real estate		70,850		37,895		108,745

(1)

The counties comprising each region are as follows:

Eastern North Carolina Region - New Hanover, Brunswick, Duplin, Dare, Beaufort, Onslow, Carteret

Triangle North Carolina Region - Moore, Lee, Harnett, Chatham, Wake

Triad North Carolina Region - Montgomery, Randolph, Davidson, Rockingham, Guilford, Stanly

Southern Piedmont North Carolina Region - Anson, Richmond, Scotland, Robeson, Bladen, Columbus

Western North Carolina Region – Buncombe

South Carolina Region - Chesterfield, Dillon, Florence, Horry

Virginia Region - Wythe, Washington, Montgomery, Pulaski

Charlotte North Carolina Region - Iredell, Cabarrus, Rowan

Summary of Loan Loss Experience

The allowance for loan losses is created by direct charges to operations. Losses on loans are charged against the allowance in the period in which such loans, in management’s opinion, become uncollectible. The recoveries realized during the period are credited to this allowance.

We have no foreign loans, few agricultural loans and do not engage in significant lease financing or highly leveraged transactions. Commercial loans are diversified among a variety of industries. The majority of our real estate loans are primarily personal and commercial loans where real estate provides additional security for the loan. Collateral for virtually all of these loans is located within our principal market area.

The current economic environment has resulted in an increase in our classified and nonperforming assets, which has led to elevated provisions for loan losses. Our total provision for loan losses was $28.0 million for the first six months of 2012 compared to $22.3 million in the first six months of 2011. The total provision for loan losses is comprised of provisions for loan losses for non-covered loans and provisions for loan losses for covered loans, as discussed in the following paragraphs.

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The provision for loan losses on non-covered loans amounted to $5.2 million in the second quarter of 2012 compared to $7.6 million in the second quarter of 2011. The decline in provision was primarily due to stabilization in our assessment of the losses associated with our nonperforming non-covered loans. For the six months ended June 30, 2012 and 2011, our provision for loan losses on non-covered loans amounted to $23.8 million and $15.2 million, respectively. The increase resulted from refinements to our loan loss model and internal control changes that resulted in a realignment of departmental responsibilities for determining our allowance for loan losses. As a result of the changes, an internal review of selected nonperforming loan relationships was conducted, which applied more conservative assumptions to estimate the probable losses. We believe that the additional reserves established may lead to a more timely resolution of the related credits.

A part of the departmental realignment involved a reassignment of the responsibility for determining our allowance for loan loss amount at period end. Concurrent with this change, we performed a new review of the Company’s nonperforming loans and significant classified lending relationships. As a result of this review, approximately 30 loan relationships were identified in which additional provisions for loan losses were necessary when more conservative judgments were applied to the repayment assumptions associated with the borrowers. The total additional provisions for losses associated with these borrowers was approximately $11 million. The majority of the additional provision was concentrated in construction and land development real estate, commercial real estate, and residential real estate loan categories.

For the three months ended June 30, 2012 and 2011, we recorded $1.3 million and $3.3 million in provisions for loan losses for covered loans, respectively. We recorded $4.3 million and $7.1 million in provisions for loan losses for covered loans for the six months ended June 30, 2012 and 2011, respectively. The lower provisions in 2012 were due to stabilization in our assessment of the losses associated with our nonperforming covered loans. Because of the FDIC loss-share agreements in place for these loans, the FDIC indemnification asset was adjusted upwards by recording noninterest income of $1.0 million and $2.7 million in the second quarters of 2012 and 2011, respectively, and $3.4 million and $5.7 million for the first six months of 2012 and 2011, respectively, or 80% of the amount of the provisions.

For the first six months of 2012, we recorded $16.0 million in net charge-offs, compared to $31.7 million for the comparable period of 2011. The net charge-offs in 2012 included $4.1 million of covered loans and $11.8 million of non-covered loans, whereas in 2011 net charge-offs included $12.7 million of covered loans and $19.0 million of non-covered loans. During 2011, a large amount of loans that had specific reserves due to concerns about collectability were determined to be confirmed losses and partial charge-offs were recorded. The charge-offs in 2012 continue a trend that began in 2010, with charge-offs being concentrated in the construction and land development real estate categories. These types of loans have been impacted the most by the recession and decline in new housing.

The allowance for loan losses amounted to $53.5 million at June 30, 2012, compared to $41.4 million at December 31, 2011 and $40.0 million at June 30, 2011. At June 30, 2012, December 31, 2011, and June 30, 2011, the allowance for loan losses attributable to covered loans was $5.9 million, $5.8 million, and $5.5 million, respectively. The allowance for loan losses for non-covered loans amounted to $47.5 million, $35.6 million, and $34.5 million at June 30, 2012, December 31, 2011, and June 30, 2011, respectively. The increase in the allowance for losses at June 30, 2012 compared to prior periods is primarily due to the high provision for loan losses recorded in the first quarter of 2012 that was recorded as an addition to the allowance for loan losses without a corresponding increase in charge-offs.

We believe our reserve levels are adequate to cover probable loan losses on the loans outstanding as of each reporting date. It must be emphasized, however, that the determination of the reserve using our procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. See “Critical Accounting Policies – Allowance for Loan Losses” above.

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In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses and value of other real estate. Such agencies may require us to recognize adjustments to the allowance or the carrying value of other real estate based on their judgments about information available at the time of their examinations.

For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, changes in the allowance for loan losses arising from charge-offs and recoveries, additions to the allowance for loan losses that have been charged to expense, and additions that were recorded related to acquisitions.

	Six Months Ended June 30,			Twelve Months Ended December 31,			Six Months Ended June 30,
($ in thousands)	2012			2011			2011
Loans outstanding at end of period	$	2,437,801			2,430,386			2,442,440
Average amount of loans outstanding	$	2,434,682			2,461,995			2,486,963

Allowance for loan losses, at beginning of year	$	41,418			49,430			49,430
Provision for loan losses		28,022			41,301			22,277
		69,440			90,731			71,707
Loans charged off:
Commercial, financial, and agricultural		(1,627	)		(2,358	)		(1,077	)
Real estate – construction, land development & other land loans		(6,773	)		(25,604	)		(17,528	)
Real estate – mortgage – residential (1-4 family) first mortgages		(3,007	)		(12,045	)		(7,966	)
Real estate – mortgage – home equity loans / lines of credit		(1,261	)		(3,195	)		(1,458	)
Real estate – mortgage – commercial and other		(2,939	)		(7,180	)		(3,434	)
Installment loans to individuals		(1,279	)		(1,600	)		(1,066	)
Total charge-offs		(16,886	)		(51,982	)		(32,529	)
Recoveries of loans previously charged-off:
Commercial, financial, and agricultural		31			314			27
Real estate – construction, land development & other land loans		490			919			255
Real estate – mortgage – residential (1-4 family) first mortgages		50			492			140
Real estate – mortgage – home equity loans / lines of credit		146			375			121
Real estate – mortgage – commercial and other		29			119			32
Installment loans to individuals		154			450			252
Total recoveries		900			2,669			827
Net charge-offs		(15,986	)		(49,313	)		(31,702	)
Allowance for loan losses, at end of period	$	53,454			41,418			40,005

Ratios:
Net charge-offs as a percent of average loans		1.32%			2.00%			2.57%
Allowance for loan losses as a percent of loans at end of period		2.19%			1.70%			1.64%

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The following table discloses the activity in the allowance for loan losses for the six months ended June 30, 2012, segregated into covered and non-covered.

	As of and for the six months ended June 30, 2012
($ in thousands)	Covered			Non-covered			Total

Loans outstanding at end of period	$	322,895			2,114,906			2,437,801
Average amount of loans outstanding	$	342,077			2,092,605			2,434,682

Allowance for loan losses, at beginning of year	$	5,808			35,610			41,418
Provision for loan losses		4,271			23,751			28,022
		10,079			59,361			69,440
Loans charged off:
Commercial, financial, and agricultural		—			(1,627	)		(1,627	)
Real estate – construction, land development & other land loans		(2,522	)		(4,251	)		(6,773	)
Real estate – mortgage – residential (1-4 family) first mortgages		(881	)		(2,126	)		(3,007	)
Real estate – mortgage – home equity loans / lines of credit		(153	)		(1,108	)		(1,261	)
Real estate – mortgage – commercial and other		(445	)		(2,494	)		(2,939	)
Installment loans to individuals		(147	)		(1,132	)		(1,279	)
Total charge-offs		(4,148	)		(12,738	)		(16,886	)

Recoveries of loans previously charged-off:
Commercial, financial, and agricultural		—			31			31
Real estate – construction, land development & other land loans		—			490			490
Real estate – mortgage – residential (1-4 family) first mortgages		—			50			50
Real estate – mortgage – home equity loans / lines of credit		—			146			146
Real estate – mortgage – commercial and other		—			29			29
Installment loans to individuals		—			154			154
Total recoveries		—			900			900
Net charge-offs		(4,148	)		(11,838	)		(15,986	)
Allowance for loan losses, at end of period	$	5,931			47,523			53,454

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The following table discloses the activity in the allowance for loan losses for the six months ended June 30, 2011, segregated into covered and non-covered.

	As of and for the six months ended June 30, 2011
($ in thousands)	Covered			Non-covered			Total

Loans outstanding at end of period	$	401,726			2,040,714			2,442,440
Average amount of loans outstanding	$	436,859			2,050,104			2,486,963

Allowance for loan losses, at beginning of year	$	11,155			38,275			49,430
Provision for loan losses		7,100			15,177			22,277
		18,255			53,452			71,707
Loans charged off:
Commercial, financial, and agricultural		(13	)		(1,064	)		(1,077	)
Real estate – construction, land development & other land loans		(7,954	)		(9,574	)		(17,528	)
Real estate – mortgage – residential (1-4 family) first mortgages		(3,393	)		(4,573	)		(7,966	)
Real estate – mortgage – home equity loans / lines of credit		(198	)		(1,260	)		(1,458	)
Real estate – mortgage – commercial and other		(1,052	)		(2,382	)		(3,434	)
Installment loans to individuals		(105	)		(961	)		(1,066	)
Total charge-offs		(12,715	)		(19,814	)		(32,529	)

Recoveries of loans previously charged-off:
Commercial, financial, and agricultural		—			27			27
Real estate – construction, land development & other land loans		—			255			255
Real estate – mortgage – residential (1-4 family) first mortgages		—			140			140
Real estate – mortgage – home equity loans / lines of credit		—			121			121
Real estate – mortgage – commercial and other		—			32			32
Installment loans to individuals		—			252			252
Total recoveries		—			827			827
Net charge-offs		(12,715	)		(18,987	)		(31,702	)
Allowance for loan losses, at end of period	$	5,540			34,465			40,005

Based on the results of our loan analysis and grading program and our evaluation of the allowance for loan losses at June 30, 2012, there have been no material changes to the allocation of the allowance for loan losses among the various categories of loans since December 31, 2011.

Liquidity, Commitments, and Contingencies

Our liquidity is determined by our ability to convert assets to cash or acquire alternative sources of funds to meet the needs of our customers who are withdrawing or borrowing funds, and to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. Our primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments. Our securities portfolio is comprised almost entirely of readily marketable securities, which could also be sold to provide cash.

In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following sources - 1) an approximately $393 million line of credit with the Federal Home Loan Bank (of which $65 million was outstanding at June 30, 2012), 2) a $50 million overnight federal funds line of credit with a correspondent bank (none of which was outstanding at June 30, 2012), and 3) an approximately $92 million line of credit through the Federal Reserve Bank of Richmond’s discount window (none of which was outstanding at June 30, 2012). In addition to the outstanding borrowings from the FHLB that reduce the available borrowing capacity of that line of credit, our borrowing capacity was further reduced by $143 million at June 30, 2012 and $203 million at December 31, 2011, as a result of our pledging letters of credit for public deposits at each of those dates. Unused and available lines of credit amounted to $327 million at June 30, 2012 compared to $227 million at December 31, 2011.

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Our overall liquidity has increased since June 30, 2011. Our loans have decreased $5 million, while our deposits have increased by $91 million. As a result, our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 15.8% at June 30, 2011 to 16.6% at June 30, 2012.

We believe our liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet our operating needs in the foreseeable future. We will continue to monitor our liquidity position carefully and will explore and implement strategies to increase liquidity if deemed appropriate.

The amount and timing of our contractual obligations and commercial commitments has not changed materially since December 31, 2011, detail of which is presented in Table 18 on page 80 of our 2011 Annual Report on Form 10-K.

We are not involved in any legal proceedings that, in our opinion, are likely to have a material effect on our consolidated financial position.

Off-Balance Sheet Arrangements and Derivative Financial Instruments

Off-balance sheet arrangements include transactions, agreements, or other contractual arrangements pursuant to which we have obligations or provide guarantees on behalf of an unconsolidated entity. We have no off-balance sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities.

Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in derivative activities through June 30, 2012, and have no current plans to do so.

Capital Resources

We are regulated by the Board of Governors of the Federal Reserve Board (FED) and are subject to the securities registration and public reporting regulations of the Securities and Exchange Commission. Our banking subsidiary is regulated by the Federal Deposit Insurance Corporation (FDIC) and the North Carolina Office of the Commissioner of Banks. We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on our liquidity, capital resources, or operations.

We 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 our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. These capital standards require us to maintain minimum ratios of “Tier 1” capital to total risk-weighted assets and total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1 capital is comprised of total shareholders’ equity calculated in accordance with generally accepted accounting principles, excluding accumulated other comprehensive income (loss), less intangible assets, and total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which is our allowance for loan losses. Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in FED and FDIC regulations.

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In addition to the risk-based capital requirements described above, we 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 of 3.00% to 5.00%, depending upon the institution’s composite ratings as determined by its regulators. The FED has not advised us of any requirement specifically applicable to us.

At June 30, 2012, our capital ratios exceeded the regulatory minimum ratios discussed above. The following table presents our capital ratios and the regulatory minimums discussed above for the periods indicated.

	June 30, 2012		March 31, 2012		December 31, 2011		June 30, 2011
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets		14.96%		15.07%		15.46%		15.74%
Minimum required Tier I capital		4.00%		4.00%		4.00%		4.00%

Total risk-based capital to Tier II risk-adjusted assets		16.23%		16.34%		16.72%		17.00%
Minimum required total risk-based capital		8.00%		8.00%		8.00%		8.00%

Leverage capital ratios:
Tier I leverage capital to adjusted most recent quarter average assets		9.98%		9.97%		10.21%		10.17%
Minimum required Tier I leverage capital		4.00%		4.00%		4.00%		4.00%

Our bank subsidiary is also subject to capital requirements similar to those discussed above. The bank subsidiary’s capital ratios do not vary materially from our capital ratios presented above. At June 30, 2012, our bank subsidiary exceeded the minimum ratios established by the FED and FDIC.

In addition to regulatory capital ratios, we also closely monitor our ratio of tangible common equity to tangible assets (“TCE Ratio”). Our TCE ratio was 6.36% at June 30, 2012 compared to 6.58% at December 31, 2011 and 6.65% at June 30, 2011.

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BUSINESS DEVELOPMENT MATTERS

The following is a list of business development and other miscellaneous matters affecting First Bancorp and First Bank, our bank subsidiary.

On April 30, 2012, First Bank entered into an agreement to assume all of the deposits and acquire certain loans of the Gateway Bank & Trust Co. branch located in Wilmington, North Carolina. The acquired accounts will be transferred to one of our existing branches that is located nearby. The transaction is subject to regulatory approval and is expected to occur in the third quarter of 2012.

On July 2, 2012, we opened our new branch in Salem, Virginia. This branch is our 7^th branch in southwestern Virginia.

On July 3, 2012, the Branch Purchase and Assumption Agreement between Waccamaw Bank and First Bank was terminated. Waccamaw Bank was closed by the North Carolina Commissioner of Banks, which named the Federal Deposit Insurance Corporation as receiver, during June 2012.

We are relocating our Biscoe, North Carolina branch and expect completion of the new building in the fourth quarter of 2012.

We expect to complete the relocation of our branch in Fort Chiswell, Virginia in the fourth quarter of 2012.

On June 18, 2012, the Company announced a quarterly cash dividend of $0.08 cents per share payable on July 25, 2012 to shareholders of record on June 30, 2012. This is the same dividend rate as the Company declared in the second quarter of 2011.

SHARE REPURCHASES

We repurchased 148 shares of our common stock during the first six months of 2012 in two private transactions. At June 30, 2012, we had approximately 214,000 shares available for repurchase under existing authority from our board of directors. We may repurchase these shares in open market and privately negotiated transactions, as market conditions and our liquidity warrants, subject to compliance with applicable regulations. See also Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK)

Net interest income is our most significant component of earnings. Notwithstanding changes in volumes of loans and deposits, our 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 our various categories of earning assets and interest-bearing liabilities. It is our 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. Our 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, we have been able to maintain a fairly consistent yield on average earning assets (net interest margin). Over the past five calendar years, our net interest margin has ranged from a low of 3.74% (realized in 2008) to a high of 4.72% (realized in 2011). During that five year period, the prime rate of interest has ranged from a low of 3.25% (which was the rate as of June 30, 2012) to a high of 8.25% (2007). The consistency of the net interest margin is aided by the relatively low level of long-term interest rate exposure that we maintain. At June 30, 2012, approximately 83% of our 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 our interest-bearing liabilities reprice within five years.

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Using stated maturities for all fixed rate instruments except mortgage-backed securities (which are allocated in the periods of their expected payback) and securities and borrowings with call features that are expected to be called (which are shown in the period of their expected call), at June 30, 2012, we had approximately $594 million more in interest-bearing liabilities that are subject to interest rate changes within one year than we had in 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 June 30, 2012 are deposits totaling $1.2 billion comprised of checking, 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 we believe that in the near term (twelve months), net interest income will not likely experience significant downward pressure from rising interest rates. Similarly, we would not expect a significant increase in near term net interest income from falling interest rates. Generally, when rates change, our interest-sensitive assets that are subject to adjustment reprice immediately at the full amount of the change, while our 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 us being asset-sensitive, meaning that our 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.

The Federal Reserve has made no changes to interest rates since 2008, and since that time the difference between market driven short-term interest rates and longer-term interest rates has generally widened, with short-term interest rates steadily declining and longer-term interest rates not declining by as much. The higher long term interest rate environment enhanced our ability to require higher interest rates on loans. As it relates to funding, we have been able to reprice many of our maturing time deposits at lower interest rates. We were also able to generally decrease the rates we paid on other categories of deposits as a result of declining short-term interest rates in the marketplace and an increase in liquidity that lessened our need to offer premium interest rates.

As previously discussed in the section entitled “Net Interest Income and Net Interest Margin,” our net interest income was impacted by certain purchase accounting adjustments related primarily to our acquisitions of Cooperative Bank and The Bank of Asheville. The purchase accounting adjustments related to the premium amortization on loans, deposits and borrowings are based on amortization schedules and are thus systematic and predictable. The accretion of the loan discount on loans acquired from Cooperative Bank and The Bank of Asheville, which amounted to $5.9 million and $6.5 million for the first six months of 2012 and 2011, respectively, is less predictable and could be materially different among periods. This is because of the magnitude of the discounts that were initially recorded ($280 million in total) and the fact that the accretion being recorded is dependent on both the credit quality of the acquired loans and the impact of any accelerated loan repayments, including payoffs. If the credit quality of the loans declines, some or all of the remaining discount will cease to be accreted into income. If the underlying loans experience accelerated paydowns or are paid off, the remaining discount will be accreted into income on an accelerated basis, which in the event of total payoff will result in the remaining discount being entirely accreted into income in the period of the payoff. Each of these factors is difficult to predict and susceptible to volatility.

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Based on our most recent interest rate modeling, which assumes no changes in interest rates for 2012 (federal funds rate = 0.25%, prime = 3.25%), we project that our net interest margin for the remainder of 2012 will remain relatively consistent with the net interest margins recently realized. We expect loan yields and deposit costs to continue to trend downwards.

We have no market risk sensitive instruments held for trading purposes, nor do we maintain any foreign currency positions.

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 and Net Interest Margin” above.

Item 4 – 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. In addition, no change in our internal control over financial reporting has occurred during, or subsequent to, the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

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)
April 1, 2012 to April 30, 2012	─	─	─	214,241
May 1, 2012 to May 31, 2012	─	─	─	214,241
June 1, 2012 to June 30, 2012	─	─	─	214,241
Total	─	─	─	214,241

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 we do not intend to make further purchases.

(2)

The 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 June 30, 2012.

There were no unregistered sales of our securities during the three months ended June 30, 2012.

Item 6 - 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

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. Articles of Amendment to the Articles of Incorporation were filed as Exhibits 3.1 and 3.2 to the Company’s Current Report on Form 8-K filed on January 13, 2009, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1.b to the Company’s Registration Statement on Form S-3D filed on June 29, 2010, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 6, 2011, and are incorporated herein by reference.

3.b

Amended and Restated Bylaws of the Company were filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed on November 23, 2009, and are incorporated herein by reference.

4.a

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.

4.b

Form of Certificate for Series A Preferred Stock was filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 13, 2009, and is incorporated herein by reference.

4.c

Warrant for Purchase of Shares of Common Stock was filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on January 13, 2009, and is incorporated herein by reference.

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4.d

Form of Certificate for Series B Preferred Stock was filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on September 6, 2011, and is incorporated herein by reference.

Computation of Ratio of Earnings to Fixed Charges.

31.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32.1	Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. (1)

Copies of exhibits are available upon written request to: First Bancorp, Anna G. Hollers, Executive Vice President, P.O. Box 508, Troy, NC 27371

(1)

As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		FIRST BANCORP


August 9, 2012		BY:/s/ Richard H. Moore
		Richard H. Moore
		President
		(Principal Executive Officer),
		Treasurer and Director


August 9, 2012		BY:/s/ Anna G. Hollers
		Anna G. Hollers
		Executive Vice President,
		Secretary
		and Chief Operating Officer


August 9, 2012		BY:/s/ Eric P. Credle
		Eric P. Credle
		Executive Vice President
		and Chief Financial Officer

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