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First Bancorp Annual Report
continuing
our journey.
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( Selected Financial Data )
We’re proud to report our 25th consecutive year of
profitability since our initial public offering:
Change 2010
Years Ended December 31, 2011 2010 to 2011
($ in thousands except share data)
SELECTED INCOME STATEMENT DATA
Net interest income $ 132,203 127,354 3.8%
Provision for loan losses 41,301 54,562 -24.3%
Noninterest income 26,216 29,106 -9.9%
Noninterest expenses 96,106 86,956 10.5%
Income taxes 7,370 4,960 48.6%
Net income 13,642 9,982 36.7%
Preferred stock dividends 6,166 4,107 50.1%
Net income - common shareholders 7,476 5,875 27.3%
PER SHARE DATA
Earnings per common share - basic $ 0.44 0.35 25.7%
Earnings per common share - diluted 0.44 0.35 25.7%
Cash dividends declared - common 0.32 0.32 0.0%
Market Price:
High 16.89 16.90 0.0%
Low 8.05 12.00 -32.9%
Close 11.15 15.31 -27.2%
Book value - common 16.66 16.64 0.1%
Tangible book value - common 12.53 12.45 0.6%
SELECTED BALANCE SHEET DATA
(at year end)
Assets $ 3,290,474 3,278,932 0.4%
Loans 2,430,386 2,454,132 -1.0%
Deposits 2,755,037 2,652,513 3.9%
Shareholders’ Equity 345,150 344,603 0.2%
PERFORMANCE RATIOS
Return on average assets 0.23% 0.18% 5 bps
Return on average common equity 2.59% 2.05% 54 bps
NONFINANCIAL DATA
Common shares outstanding 16,909,820 16,801,426
Number of branches 97 92
Number of employees - full/part time 812/36 753/41
93314_txt_p01-p05x_Layout 1 3/16/12 3:16 PM Page 1
( President’s Letter )
Jerry Ocheltree, President
Staying
the course.
Dear Shareholders, Customers and Friends,
I am pleased to be able to report to you the 25th
consecutive year of profitability for First Bancorp since
our initial public offering in 1987. If you follow the
performance of other community banks in our market
area, you know that profitability has not been a given
over the past several years. Our largest market area is
in North Carolina, which does not seem to be showing
the same signs of economic recovery as much of the rest
of the nation. We continue to see high unemployment
rates, real estate value declines and difficulties in
transitioning from a manufacturing economy. But we
are confident that First Bank is uniquely positioned
with the right combination of size and dedication to
community banking to prosper when conditions improve.
Financial Roadmap.
For 2011, we earned $7.5 million, or $0.44 per share,
for holders of our common stock. This represents a 26%
increase from the $5.9 million, or $0.35 per share,
earned in 2010. The results for both 2010 and 2011
were significantly impacted by what we consider to be
non-core components of earnings, which include a
bargain purchase gain in 2011, losses and related
indemnification asset income in both 2010 and 2011
related to problem loans and foreclosed properties
primarily associated with properties assumed in prior
FDIC failed-bank acquisitions, and accelerated accretion
of discount on preferred stock in 2011. These items are
discussed in detail in the accompanying Form 10-K.
Overall, our bank has a profitable core earnings
stream. However, the earnings stream has not been as
high as it could be due to losses on our non-covered
93314_txt_p01-p05x_Layout 1 3/16/12 2:46 PM Page 2
( President’s Letter )
loans and foreclosed properties (“non-covered”
refers to assets not covered under loss-share
agreements with the FDIC). In 2011, our provision
for loan losses on non-covered loans was $28.5
million, which was a 15% decline from 2010, but
was still significantly higher than we would like.
Losses on non-covered foreclosed properties
increased from $1.0 million in 2010 to $3.4 million
in 2011. Because these types of losses are closely
correlated with our level of problem assets, we are
eager for our problem asset levels to decline.
As I mentioned earlier, there have been signs of
economic recovery on a national level. But thus far,
it does not seem that our market has participated
much in the recovery, and our level of problem
assets has remained essentially flat.
On the positive side, our net interest margin for
2011 of 4.72% was the highest it has been in many
years, exceeding the already strong 4.39% margin
realized in 2010. With new regulations pressuring
certain sources of noninterest income and increasing
our overhead expenses, we know that having a
strong net interest margin is very important to the
sustained profitability of our company.
Driving Growth.
While unfavorable economic conditions in our
market area have limited the opportunities for
organic growth, our company’s financial strength
has allowed us the opportunity to seek external
acquisition growth.
On January 21, 2011, we acquired the Bank of
Asheville in an FDIC-assisted transaction, with
five branches and $190 million in assets. Like the
coast, the mountain region of North Carolina also
experienced a real estate bubble and a subsequent
bust that led to losses at many banks in that region.
But like the coast, this is a very attractive market
that we think will recover and experience good
growth again. With five branches throughout the city
of Asheville, we have the critical mass necessary to
support the growth when it eventually returns.
( Board of Directors )
Daniel T.
Blue Jr.
Virginia C.
Thomasson
R. Walton
Brown
James G.
Hudson Jr.
Thomas F.
Phillips
R. Winston
Dozier Jr.
David L.
Burns
Jack D.
Briggs
Dennis A.
Wicker
93314_txt_p01-p05x_Layout 1 3/16/12 2:46 PM Page 3
( President’s Letter )
Also, we were able to leverage the knowledge and
experience we gained from a 2009 failed-bank
acquisition to make this integration faster and smoother.
In October 2011, we announced that we had
reached an agreement with Waccamaw Bank,
Whiteville, North Carolina, to acquire 11 of their
coastal branches with total deposits of $180
million. Many of the branches are in towns where
we already have a presence and thus we believe
there are significant economies of scale that we
can leverage. We are awaiting regulatory approval
for this transaction.
Overall, the growth provided by the Bank of
Asheville acquisition essentially offset general
declines in loans and deposits caused by normal
loan paydowns and a decreased need to rely on
higher cost time deposits. At December 31, 2011,
we had 97 branches and our total assets amounted
to $3.3 billion, making us the fourth largest bank
holding company headquartered in North Carolina.
Gaining Speed on the Internet.
We have fully embraced the ongoing technology
revolution. In addition to free debit cards, we offer
state-of-the art internet banking, along with online
bill pay, cash rewards, mobile banking, e-statements,
remote deposit capture, and a comprehensive
product called Finance 360, which is a powerful
budgeting and financial analysis tool that assists
customers in seeing their complete financial picture,
including the ability to aggregate accounts held at
other firms. For smart phones, we offer our own
iPhone® app and our Android™ app is due to be
released soon.
In 2011, we completed a major upgrade to our
website. It is now simpler and faster than ever to
use. Please visit us at www.firstbancorp.com.
Navigating the Road Ahead.
During 2011, we made significant investments in
our infrastructure, including personnel, that provide
John F.
Burns
James
Crawford III
Mary Clara
Capel
Jerry L.
Ocheltree
Richard H.
Moore
John C.
Willis
George R.
Perkins Jr.
Frederick L.
Taylor, II
Not Pictured: Goldie H. Wallace
93314_txt_p01-p05x_Layout 1 3/16/12 3:19 PM Page 4
( President’s Letter )
Accompanying the mailing of this letter is our
proxy statement and the notice of our Annual
Shareholders Meeting, which is being held at the
James H. Garner Conference Center at 3:00 PM
on May 10, 2012. There is important information
regarding your company contained within the
proxy statement, and I encourage you to read it
closely. On the back of the proxy statement is
a location map for your convenience. I invite you
to attend this meeting, which will give you an
opportunity to meet the management and board
of directors of your company.
Your support is appreciated, and I welcome your
comments and suggestions.
Jerry L. Ocheltree
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FIRST BANCORP AND FIRST BANK
MARCH 20, 2012
us with the platform to seek growth. We believe it
is more important than ever to have enough size to
be able to better absorb the higher level of expenses
that are needed to comply with new regulations
applicable to banks. We believe many smaller
banks will come to this same conclusion and will
decide they need to partner with a larger bank.
With the investments we have made and our track
record of being a friendly acquirer, we believe that
we can be a good partner.
We are also working to grow internally. During
2011, we hired a chief retail banking officer who is
working to bring growth to our company with a
renewed focus on customer service. Also, we were
recently joined by a seasoned executive that will
be building out and growing our wealth management
capabilities. In addition to our existing banking
and property/casualty insurance expertise, we ask
that you also consider First Bank for your investment
advisory needs.
An aspect of internal growth we are working
hard to achieve is an increase in our small business
lending. During 2011, we were one of a minority of
banks that were approved by the US Treasury to
participate in the Small Business Lending Fund
(SBLF), which involved the issuance of preferred
stock to the Treasury that has a dividend rate that
can be as low as 1% during the first five years based
on increases in our lending to small businesses.
Simultaneous with our participation in the SBLF,
we were able to redeem all of the preferred stock
that we had issued as part of the Capital Purchase
Program (also known as “TARP”).
Road Well Traveled.
In summary, despite the near term challenges,
we believe we are well-positioned for a future that
is as bright as most of our previous 76 years of
service. Our financial position is strong, and we
believe we will be the beneficiary of the fallout and
consolidation that is expected to continue in the
banking industry.
93314_txt_p01-p05x_Layout 1 3/16/12 3:20 PM Page 5
Form 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
Commission File Number 0-15572
FIRST BANCORP
(Exact Name of Registrant as Specified in its Charter)
North Carolina
(State of Incorporation)
56-1421916
(I.R.S. Employer Identification Number)
341 North Main Street, Troy, North Carolina
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code:
27371-0508
(Zip Code)
(910) 576-6171
Title of each class
Common Stock, No Par Value
Name of each exchange on which registered
The Nasdaq Global Select Market
Securities Registered Pursuant to Section 12(b) of the Act:
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
of 1933. [ ] YES [X] NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934. [ ] YES [X] NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO
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).
[X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. [ ]
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)
[ ] Large Accelerated Filer [X] Accelerated Filer [ ] Non-Accelerated Filer [ ] Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] YES [X] NO
The aggregate market value of the Common Stock, no par value, held by non-affiliates of the registrant, based on the
closing price of the Common Stock as of June 30, 2011 as reported by The NASDAQ Global Select Market, was
approximately $154,892,268.
The number of shares of the registrant’s Common Stock outstanding on February 29, 2012 was 16,935,043.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement to be filed pursuant to Regulation 14A are incorporated herein by
reference into Part III.
TABLE OF CONTENTS
Forward-Looking Statements
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Item 5
Market for Registrant’s Common Stock, Related Shareholder Matters, and Issuer
Item 6
Item 7
Purchases of Equity Securities
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview – 2011 Compared to 2010
Overview – 2010 Compared to 2009
Outlook for 2012
Critical Accounting Policies
Merger and Acquisition Activity
FDIC Indemnification Asset
Statistical Information
Net Interest Income
Provision for Loan Losses
Noninterest Income
Noninterest Expenses
Income Taxes
Stock-Based Compensation
Distribution of Assets and Liabilities
Securities
Loans
Nonperforming Assets
Allowance for Loan Losses and Loan Loss Experience
Deposits and Securities Sold Under Agreements to Repurchase
Borrowings
Liquidity, Commitments, and Contingencies
Capital Resources and Shareholders’ Equity
Off-Balance Sheet Arrangements and Derivative Financial Instruments
Return on Assets and Equity
Interest Rate Risk (Including Quantitative and Qualitative Disclosures about
Market Risk)
Inflation
Current Accounting Matters
Item 7A
Item 8
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data:
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2011
Consolidated Statements of Comprehensive Income for each of the years in the
three-year period ended December 31, 2011
Consolidated Statements of Shareholders’ Equity for each of the years in the
three-year period ended December 31, 2011
3
Begins on
Page(s)
5
5
19
24
24
25
25
25, 65
28, 65
29
32
34
35
37
38
40, 66
42, 76
44, 67
45, 68
46, 68
46
49, 69
49, 69
51, 71
52, 73
55, 75
57, 78
58
59, 80
60, 82
62
62, 81
62, 79
64
64
64
84
85
86
87
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2011
Notes to the Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Selected Consolidated Financial Data
Quarterly Financial Summary
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9
Disclosures
Item 9A
Item 9B
Controls and Procedures
Other Information
PART III
Item 10
Item 11
Item 12
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
Item 13
Item 14
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15
Exhibits and Financial Statement Schedules
PART IV
SIGNATURES
Begins on
Page(s)
88
89
148
65
83
150
150
151
151
151
151
151
151
152
156
*
Information called for by Part III (Items 10 through 14) is incorporated herein by reference to the Registrant’s definitive
Proxy Statement for the 2012 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 29, 2012.
4
FORWARD-LOOKING STATEMENTS
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. Further,
forward-looking statements are intended to speak only as of the date made. 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 in Item 1A of this report.
PART I
Item 1. Business
General Description
First Bancorp (the “Company”) is a bank holding company. Our principal activity is the ownership and operation
of First Bank (the “Bank”), a state-chartered bank with its main office in Troy, North Carolina. The Company is
also the parent to a series of statutory business trusts organized under the laws of the State of Delaware that
were created for the purpose of issuing trust preferred debt securities. Our outstanding debt associated with
these trusts was $46.4 million at December 31, 2011 and 2010.
The Company was incorporated in North Carolina on December 8, 1983, as Montgomery Bancorp, for the
purpose of acquiring 100% of the outstanding common stock of the Bank through a stock-for-stock exchange.
On December 31, 1986, the Company changed its name to First Bancorp to conform its name to the name of the
Bank, which had changed its name from Bank of Montgomery to First Bank in 1985.
The Bank was organized in 1934 and began banking operations in 1935 as the Bank of Montgomery, named for
the county in which it operated. The Bank’s main office is in Troy, population 3,500, located in the center of
Montgomery County, approximately 60 miles east of Charlotte, 50 miles south of Greensboro, and 80 miles
southwest of Raleigh. As of December 31, 2011, we conducted business from 97 branches covering a
geographical area from Little River, South Carolina to the southeast, to Wilmington, North Carolina to the east,
to Kill Devil Hills, North Carolina to the northeast, to Radford, Virginia to the north, to Wytheville, Virginia to the
northwest, and to Asheville, North Carolina to the west. We also have a loan production office in Blacksburg,
which is located in southwestern Virginia and represents our furthest location to the north of Troy. Of the
Bank’s 97 branches, 82 branches are in North Carolina, nine branches are in South Carolina and six branches are
in Virginia (where we operate under the name “First Bank of Virginia”). Ranked by assets, the Bank was the
fourth largest bank headquartered in North Carolina as of December 31, 2011.
On June 19, 2009, we acquired substantially all of the assets and liabilities of Cooperative Bank, which had been
closed earlier that day by regulatory authorities. Cooperative Bank operated through twenty-four branches
located primarily in the coastal region of North Carolina. In connection with the acquisition, we assumed assets
with a book value of $959 million, including $829 million in loans and $706 million in deposits. The loans and
5
foreclosed real estate purchased in the acquisition are covered by loss share agreements between the Federal
Deposit Insurance Corporation (FDIC) and First Bank which affords the Bank significant loss protection. We
recorded a gain of $67.9 million as a result of this acquisition. Additional information regarding this transaction
is contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note
2 to the consolidated financial statements.
On January 21, 2011, we acquired substantially all of the assets and liabilities of The Bank of Asheville, which had
been closed earlier that day by regulatory authorities. The Bank of Asheville operated through five branches
located in or near Asheville, North Carolina. In connection with the acquisition, we assumed assets with a book
value of $190 million, including $154 million in loans and $192 million in deposits. Substantially all of the
acquired loans and foreclosed real-estate are covered by loss share agreements with the FDIC, which affords the
Bank significant loss protection. We recorded a gain of $10.2 million as a result of this acquisition. Additional
information regarding this transaction is also contained in Management’s Discussion and Analysis of Financial
Condition and Results of Operations and Note 2 to the consolidated financial statements.
As of December 31, 2011, the Bank had two wholly owned subsidiaries, First Bank Insurance Services, Inc. (“First
Bank Insurance”) and First Troy SPE, LLC. First Bank Insurance was acquired as an active insurance agency in
1994 in connection with the Company’s acquisition of a bank that had an insurance subsidiary. On December
29, 1995, the insurance agency operations of First Bank Insurance were divested. From December 1995 until
October 1999, First Bank Insurance was inactive. In October 1999, First Bank Insurance began operations again
as a provider of non-FDIC insured investments and insurance products. Currently, First Bank Insurance’s primary
business activity is the placement of property and casualty insurance coverage. First Troy SPE, LLC, which was
organized in December 2009, is a holding entity for certain foreclosed properties.
Our principal executive offices are located at 341 North Main Street, Troy, North Carolina 27371-0508, and our
telephone number is (910) 576-6171. Unless the context requires otherwise, references to the “Company,”
“we,” “our,” or “us” in this annual report on Form 10-K shall mean collectively First Bancorp and its consolidated
subsidiaries.
General Business
We engage in a full range of banking activities, with the acceptance of deposits and the making of loans being
our most basic activities. We offer deposit products such as checking, savings, NOW and money market
accounts, as well as time deposits, including various types of certificates of deposits (CDs) and individual
retirement accounts (IRAs). We provide loans for a wide range of consumer and commercial purposes, including
loans for business, agriculture, real estate, personal uses, home improvement and automobiles. We also offer
credit cards, debit cards, letters of credit, safe deposit box rentals and electronic funds transfer services,
including wire transfers. In addition, we offer internet banking, mobile banking, cash management and bank-by-
phone capabilities to our customers, and are affiliated with ATM networks that give our customers access to
67,000 ATMs, with no surcharge fee. In 2007, we introduced remote deposit capture, which provides business
customers with a method to electronically transmit checks received from customers into their bank account
without having to visit a branch. In 2008, we joined the Certificate of Deposit Account Registry Service (CDARS),
which gives our customers the ability to obtain FDIC insurance on deposits of up to $50 million, while continuing
to work directly with their local First Bank branch.
Because the majority of our customers are individuals and small to medium-sized businesses located in the
counties we serve, management does not believe that the loss of a single customer or group of customers would
have a material adverse impact on the Bank. There are no seasonal factors that tend to have any material effect
on the Bank’s business, and we do not rely on foreign sources of funds or income. Because we operate primarily
within North Carolina, southwestern Virginia and northeastern South Carolina, the economic conditions of these
6
areas could have a material impact on the Company. See additional discussion below in the section entitled
“Territory Served and Competition.”
Beginning in 1999, First Bank Insurance began offering non-FDIC insured investment and insurance products,
including mutual funds, annuities, long-term care insurance, life insurance, and company retirement plans, as
well as financial planning services (the “investments division”). In May 2001, First Bank Insurance added to its
product line when it acquired two insurance agencies that specialized in the placement of property and casualty
insurance. In October 2003, the “investments division” of First Bank Insurance became a part of the Bank. The
primary activity of First Bank Insurance is now the placement of property and casualty insurance products. In
February 2010, First Bank Insurance acquired The Insurance Center, Inc., a Troy-based property and casualty
insurance agency with approximately 500 customers.
First Bancorp Capital Trust I was organized in October 2002 for the purpose of issuing $20.6 million in debt
securities. These debt securities were called by the Company at par on November 7, 2007 and First Bancorp
Capital Trust I was dissolved.
First Bancorp Capital Trust II and First Bancorp Capital Trust III were organized in December 2003 for the
purpose of issuing $20.6 million in debt securities ($10.3 million was issued from each trust). These borrowings
are due on January 23, 2034 and are also structured as trust preferred capital securities in order to qualify as
regulatory capital. These debt securities are callable by the Company at par on any quarterly interest payment
date beginning on January 23, 2009. The interest rate on these debt securities adjusts on a quarterly basis at a
weighted average rate of three-month LIBOR plus 2.70%.
First Bancorp Capital Trust IV was organized in April 2006 for the purpose of issuing $25.8 million in debt
securities. These borrowings are due on June 15, 2036 and are also structured as trust preferred capital
securities that qualify as regulatory capital. These debt securities are callable by the Company at par on any
quarterly interest payment date beginning on June 15, 2011. The interest rate on these debt securities adjusts
on a quarterly basis at a rate of three-month LIBOR plus 1.39%.
7
Territory Served and Competition
Our headquarters are located in Troy, Montgomery County, North Carolina. At the end of 2011, we served
primarily the south central region (sometimes called the Piedmont region), the central mountain region and the
eastern coastal region of North Carolina, with additional operations in northeastern South Carolina and
southwestern Virginia. The following table presents, for each county where we operated as of December 31,
2011, the number of bank branches operated by the Company within the county, the approximate amount of
deposits with the Company in the county as of December 31, 2011, our approximate deposit market share at
June 30, 2011, and the number of bank competitors located in the county at June 30, 2011.
County
Anson, NC
Beaufort, NC
Bladen, NC
Brunswick, NC
Buncombe, NC
Cabarrus, NC
Carteret, NC
Chatham, NC
Chesterfield, SC
Columbus, NC
Dare, NC
Davidson, NC
Dillon, SC
Duplin, NC
Florence, SC
Guilford, NC
Harnett, NC
Horry, SC
Iredell, NC
Lee, NC
Montgomery, NC
Montgomery, VA
Moore, NC
New Hanover, NC
Onslow, NC
Pulaski, VA
Randolph, NC
Richmond, NC
Robeson, NC
Rockingham, NC
Rowan, NC
Scotland, NC
Stanly, NC
Wake, NC
Washington, VA
Wythe, VA
Brokered & Internet Deposits
Total
Number of
Branches
1
3
1
4
5
2
2
2
3
2
1
3
3
3
2
1
3
1
2
4
5
2
11
5
2
1
4
1
5
1
2
2
4
1
1
2
-
97
Deposits
(in millions)
$ 12
31
22
76
103
36
20
62
57
29
15
94
67
126
26
55
114
3
32
181
106
58
404
137
43
25
69
16
190
30
50
61
94
17
32
79
183
$ 2,755
Market
Share
4.2%
2.8%
9.3%
4.7%
2.9%
2.0%
2.6%
8.7%
16.1%
4.0%
1.2%
3.8%
23.8%
24.9%
1.2%
0.4%
13.0%
0.1%
1.5%
21.5%
39.1%
3.2%
25.7%
3.5%
4.1%
6.9%
3.7%
4.1%
19.7%
2.8%
3.3%
17.5%
9.7%
0.1%
3.0%
13.9%
Number of
Competitors
5
7
5
11
18
11
8
10
7
6
11
10
3
7
13
21
9
24
23
10
4
13
11
20
9
8
15
6
9
11
13
6
6
31
16
11
Our branches and facilities are primarily located in small communities whose economies are based primarily on
services, manufacturing and light industry. Although our market is predominantly small communities and rural
areas, the market area is not dependent on agriculture. Textiles, furniture, mobile homes, electronics, plastic
and metal fabrication, forest products, food products, chicken hatcheries, and cigarettes are among the leading
manufacturing industries in the trade area. Leading producers of lumber and rugs are located in Montgomery
8
County, North Carolina. The Pinehurst area within Moore County, North Carolina, is a widely known golf resort
and retirement area. The High Point, North Carolina, area is widely known for its furniture market. New
Hanover and Brunswick Counties, located in the southeastern coastal region of North Carolina, are popular with
tourists and have significant retirement populations. Buncombe County, located in the western region of North
Carolina, is a highly diverse area with industries in manufacturing, service, and tourism. Additionally, several of
the communities served by the Company are “bedroom” communities of large cities like Charlotte, Raleigh and
Greensboro, while several branches are located in medium-sized cities such as Albemarle, Asheboro, High Point,
Southern Pines and Sanford. We also have branches in small communities such as Bennett, Polkton, Vass, and
Harmony.
Approximately 15% of our deposit base is in Moore County. Accordingly, material changes in competition, the
economy or population of Moore County could materially impact the Company. No other county comprises
more than 10% of our deposit base.
We compete in our various market areas with, among others, several large interstate bank holding companies.
These large competitors have substantially greater resources than us, including broader geographic markets,
higher lending limits and the ability to make greater use of large-scale advertising and promotions. A significant
number of interstate banking acquisitions have taken place in the past decade, thus further increasing the size
and financial resources of some of our competitors, three of which are among the largest bank holding
companies in the nation. In many of our markets, we also compete against banks that have been organized
within the past ten to fifteen years. Until recently, these new banks often focused on loan and deposit balance
sheet growth, and not necessarily on earnings profitability, which often resulted in them offering more
attractive terms on loans and deposits than we were willing to offer in light of our profitability goals. Due to
capital considerations, most of these banks are no longer seeking balance sheet growth. This has increased our
ability to compete for loans, but the same banks continue to offer premium rates on deposits, presumably in an
effort to maintain maximum liquidity during these challenging economic times. Moore County, which as noted
above comprises a disproportionate share of our deposits, is a particularly competitive market, with at least
eleven other financial institutions having a physical presence.
We compete not only against banking organizations, but also against a wide range of financial service providers,
including federally and state-chartered savings and loan institutions, credit unions, investment and brokerage
firms and small-loan or consumer finance companies. One of the credit unions in our market area is among the
largest in the nation. Competition among financial institutions of all types is virtually unlimited with respect to
legal ability and authority to provide most financial services. We also experience competition from internet
banks, particularly in the area of time deposits.
Despite the competitive market, we believe we have certain advantages over our competition in the areas we
serve. We seek to maintain a distinct local identity in each of the communities we serve and we actively sponsor
and participate in local civic affairs. Most lending and other customer-related business decisions can be made
without the delays often associated with larger institutions. Additionally, employment of local managers and
personnel in various offices and low turnover of personnel enable us to establish and maintain long-term
relationships with individual and corporate customers.
Lending Policy and Procedures
Conservative lending policies and procedures and appropriate underwriting standards are high priorities of the
Bank. Loans are approved under our written loan policy, which provides that lending officers, principally branch
managers, have authority to approve loans of various amounts up to $350,000, with lending limits varying
depending upon the experience of the lending officer and whether the loan is secured or unsecured. Each of
our regional senior lending officers has discretion to approve secured loans of various principal amounts up to
9
$500,000 and together can approve loans up to $4,000,000. Loans above $4,000,000 must be approved by the
Executive Committee of the Company’s board of directors.
Our board of directors reviews and approves loans that exceed management’s lending authority, loans to
executive officers, directors, and their affiliates and, in certain instances, other types of loans. New credit
extensions are reviewed daily by our senior management and at least monthly by our board of directors.
We continually monitor our loan portfolio to identify areas of concern and to enable us to take corrective action.
Lending officers and the board of directors meet periodically to review past due loans and portfolio quality,
while assuring that the Bank is appropriately meeting the credit needs of the communities it serves. Individual
lending officers are responsible for pursuing collection of past-due amounts and monitoring any changes in the
financial status of borrowers.
We also contract with an independent consulting firm to review new loan originations meeting certain criteria,
as well as to assign risk grades to existing credits meeting certain thresholds. The consulting firm’s observations,
comments, and risk grades, including variances with the Bank’s risk grades, are shared with the audit committee
of the Company’s board of directors and are considered by management in setting Bank policy, as well as in
evaluating the adequacy of our allowance for loan losses. The consulting firm also provides training on a
periodic basis to our lending officers to keep them updated on current developments in the marketplace. For
additional information, see “Allowance for Loan Losses and Loan Loss Experience” under Item 7 below.
Investment Policy and Procedures
We have adopted an investment policy designed to maximize our income from funds not needed to meet loan
demand, in a manner consistent with appropriate liquidity and risk objectives. Pursuant to this policy, we may
invest in federal, state and municipal obligations, federal agency obligations, public housing authority bonds,
industrial development revenue bonds, Federal Home Loan Bank bonds, Fannie Mae bonds, Government
National Mortgage Association bonds, Freddie Mac bonds, Small Business Administration bonds, and, to a
limited extent, corporate bonds. Except for corporate bonds, our investments must be rated at least Baa by
Moody’s or BBB by Standard and Poor’s. Securities rated below A are periodically reviewed for
creditworthiness. We may purchase non-rated municipal bonds only if such bonds are in our general market
area and we determine these bonds have a credit risk no greater than the minimum ratings referred to above.
Industrial development authority bonds, which normally are not rated, are purchased only if they are judged to
possess a high degree of credit soundness to assure reasonably prompt sale at a fair value. We are also
authorized by our board of directors to invest a portion of our securities portfolio in high quality corporate
bonds, with the amount of such bonds not to exceed 15% of the entire securities portfolio. Prior to purchasing a
corporate bond, the Company’s management performs due diligence on the issuer of the bond, and the
purchase is not made unless we believe that the purchase of the bond bears no more risk to the Company than
would an unsecured loan to the same company.
Our investment officer implements the investment policy, monitors the investment portfolio, recommends
portfolio strategies and reports to the Company’s Investment Committee. The Investment Committee generally
meets on a quarterly basis to review investment activity and to assess the overall position of the securities
portfolio. The Investment Committee compares our securities portfolio with portfolios of other companies of
comparable size. In addition, reports of all purchases, sales, issuer calls, net profits or losses and market
appreciation or depreciation of the securities portfolio are reviewed by our board of directors each month.
Once a quarter, our interest rate risk exposure is evaluated by our board of directors. Each year, the written
investment policy is approved by the board of directors.
10
Mergers and Acquisitions
As part of our operations, we have pursued an acquisition strategy over the years to augment our internal
growth. We regularly evaluate the potential acquisition of, or merger with, various financial institutions. Our
acquisitions have generally fallen into one of three categories - 1) an acquisition of a financial institution or
branch thereof within a market in which we operate, 2) an acquisition of a financial institution or branch thereof
in a market contiguous or nearly contiguous to a market in which we operate, or 3) an acquisition of a company
that has products or services that we do not currently offer. Historically, we have paid for our acquisitions with
cash and/or common stock and any operating income or loss has been fully borne by the Company beginning on
the closing date of the acquisition.
In 2009, FDIC-assisted acquisitions began to occur frequently as banking regulators closed problem banks. In
FDIC-assisted transactions, the acquiring bank often does not pay any consideration for the failed bank, and in
some cases receives cash from the FDIC as part of the transaction. In addition, the acquiring bank usually enters
into one or more loss share agreements with the FDIC, which affords the acquiring bank significant loss
protection. As discussed below, we completed FDIC-assisted transactions in 2009 and 2011.
We believe that we can enhance our earnings by pursuing these types of acquisition opportunities through any
combination or all of the following: 1) achieving cost efficiencies, 2) enhancing the acquiree’s earnings or
gaining new customers by introducing a more successful banking model with more products and services to the
acquiree’s market base, 3) increasing customer satisfaction or gaining new customers by providing more
locations for the convenience of customers, and 4) leveraging the customer base by offering new products and
services. There is also the possibility, especially in a FDIC-assisted transaction, to record a gain on the acquisition
date arising from the difference between the purchase price and the acquisition date fair value of the acquired
assets and liabilities.
Since 2000, we have completed acquisitions in each of the three categories described above. We have
completed several whole-bank traditional acquisitions in our existing and contiguous markets; we have
purchased numerous bank branches from other banks (both in existing market area and in contiguous/nearly
contiguous markets) and we have acquired several insurance agencies, which provided us with the ability to
offer property and casualty insurance coverage.
In addition to the traditional acquisitions discussed above, in both 2009 and 2011 we acquired the operations of
failed banks in FDIC-assisted transactions. On June 19, 2009, we acquired substantially all of the assets and
liabilities of Cooperative Bank in a FDIC-assisted transaction. Cooperative Bank operated through twenty-one
branches in North Carolina and three branches in South Carolina in the same markets in which the Bank was
already operating, as well as in several new, mostly contiguous markets. In connection with the acquisition, the
Bank assumed assets with a book value of $959 million, including $829 million in loans and $706 million in
deposits. See Note 2 to the consolidated financial statements for more information on this acquisition.
On January 21, 2011, we acquired substantially all of the assets and liabilities of The Bank of Asheville in a FDIC-
assisted transaction. The Bank of Asheville operated through five branches in or near Asheville, North Carolina.
This market was a new market for the Bank. In connection with the acquisition, the Bank assumed assets with a
book value of $190 million, including $154 million in loans and $192 million in deposits. See Note 2 to the
consolidated financial statements for more information on this acquisition.
On October 21, 2011, we entered into a Branch Purchase and Assumption Agreement with Waccamaw Bank, in
Whiteville, North Carolina, which provides for the Bank to acquire eleven branches from Waccamaw Bank.
Deposits for these branches total approximately $180 million and loans total approximately $98 million. See
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Note 2 to the consolidated financial statements for more information on this pending acquisition, which is
currently awaiting regulatory approval.
There are many factors that we consider when evaluating how much to offer for potential acquisition candidates
(including FDIC-assisted transactions) with a few of the more significant factors being projected impact on
earnings per share, projected impact on capital, and projected impact on book value and tangible book value.
Significant assumptions that affect this analysis include the estimated future earnings stream of the acquisition
candidate, estimated credit and other losses to be incurred, the amount of cost efficiencies that can be realized,
and the interest rate earned/lost on the cash received/paid. In addition to these primary factors, we also
consider other factors including (but not limited to) marketplace acquisition statistics, location of the candidate
in relation to our expansion strategy, market growth potential, management of the candidate, potential
integration issues (including corporate culture), and the size of the acquisition candidate.
We plan to continue to evaluate acquisition opportunities that could potentially benefit the Company and its
shareholders. These opportunities may include acquisitions that do not fit the categories discussed above.
For a further discussion of recent acquisition activity, see “Merger and Acquisition Activity” under Item 7 below.
Employees
As of December 31, 2011, we had 811 full-time and 38 part-time employees. We are not a party to any
collective bargaining agreements, and we consider our employee relations to be good.
Supervision and Regulation
As a bank holding company, we are subject to supervision, examination and regulation by the Board of
Governors of the Federal Reserve System (the “Federal Reserve Board”) and the North Carolina Office of the
Commissioner of Banks (the “Commissioner”). The Bank is subject to supervision and examination by the FDIC
and the Commissioner. For additional information, see Note 16 to the consolidated financial statements.
Supervision and Regulation of the Company
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as
amended. The Company is also regulated by the Commissioner under the North Carolina Bank Holding
Company Act of 1984.
A bank holding company is required to file quarterly reports and other information regarding its business
operations and those of its subsidiaries with the Federal Reserve Board. It is also subject to examination by the
Federal Reserve Board and is required to obtain Federal Reserve Board approval prior to making certain
acquisitions of other institutions or voting securities. The Federal Reserve Board requires the Company to
maintain certain levels of capital - see “Capital Resources and Shareholders’ Equity.” The Federal Reserve Board
also has the authority to take enforcement action against any bank holding company that commits any unsafe or
unsound practice, or violates certain laws, regulations or conditions imposed in writing by the Federal Reserve
Board. The Federal Reserve Board generally prohibits a bank holding company from declaring or paying a cash
dividend that would impose undue pressure on the capital of subsidiary banks or would be funded only through
borrowing or other arrangements which might adversely affect a bank holding company’s financial position.
Under the Federal Reserve Board policy, a bank holding company is not permitted to continue its existing rate of
cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall
financial condition.
12
The Commissioner is empowered to regulate certain acquisitions of North Carolina banks and bank holding
companies, issue cease and desist orders for violations of North Carolina banking laws, and promulgate rules
necessary to effectuate the purposes of the North Carolina Bank Holding Company Act of 1984.
Regulatory authorities have cease and desist powers over bank holding companies and their nonbank
subsidiaries where their actions would constitute a serious threat to the safety, soundness or stability of a
subsidiary bank. Those authorities may compel holding companies to invest additional capital into banking
subsidiaries upon acquisitions or in the event of significant loan losses or rapid growth of loans or deposits.
The United States Congress and the North Carolina General Assembly have periodically considered and adopted
legislation that has impacted the Company.
Supervision and Regulation of the Bank
Federal banking regulations applicable to all depository financial institutions, among other things: (i) provide
federal bank regulatory agencies with powers to prevent unsafe and unsound banking practices; (ii) restrict
preferential loans by banks to “insiders” of banks; (iii) require banks to keep information on loans to major
shareholders and executive officers and (iv) bar certain director and officer interlocks between financial
institutions.
As a state-chartered bank, the Bank is subject to the provisions of the North Carolina banking statutes and to
regulation by the Commissioner. The Commissioner has a wide range of regulatory authority over the activities
and operations of the Bank, and the Commissioner’s staff conducts periodic examinations of the Bank and its
affiliates to ensure compliance with state banking regulations and to assess the safety and soundness of the
Bank. Among other things, the Commissioner regulates the merger and consolidation of state-chartered banks,
the payment of dividends, loans to officers and directors, recordkeeping, types and amounts of loans and
investments, and the establishment of branches. The Commissioner also has cease and desist powers over
state-chartered banks for violations of state banking laws or regulations and for unsafe or unsound conduct that
is likely to jeopardize the interest of depositors.
The dividends that may be paid by the Bank to the Company are subject to legal limitations under North Carolina
law. In addition, regulatory authorities may restrict dividends that may be paid by the Bank or the Company’s
other subsidiaries. The ability of the Company to pay dividends to its shareholders is largely dependent on the
dividends paid to the Company by the Bank.
The FDIC is authorized to approve conversions, mergers, consolidations and assumptions of deposit liability
transactions between insured banks and uninsured banks or institutions, and to prevent capital or surplus
diminution in such transactions if the resulting, continuing, or assumed bank is an insured nonmember bank. In
addition, the FDIC monitors the Bank’s compliance with several banking statutes, such as the Depository
Institution Management Interlocks Act and the Community Reinvestment Act of 1977. The FDIC also conducts
periodic examinations of the Bank to assess its safety and soundness and its compliance with banking laws and
regulations, and it has the power to implement changes to, or restrictions on, the Bank’s operations if it finds
that a violation is occurring or is threatened.
U.S. Treasury Capital Purchase Program (TARP)
On October 3, 2008, in response to the financial crises affecting the banking system and financial markets and
going concern threats to investment banks and other financial institutions, the Emergency Economic
Stabilization Act of 2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S. Treasury was given the
13
authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and
certain other financial instruments from financial institutions for the purpose of stabilizing and providing
liquidity to the U.S. financial markets.
On October 14, 2008, the Secretary of the U.S. Department of the Treasury announced that the Treasury would
purchase equity stakes in a wide variety of banks and thrifts. Under the program, known as the Capital Purchase
Program (also known as “TARP”), the Treasury made $250 billion of capital available from EESA to U.S. financial
institutions in the form of purchases of preferred stock. In addition to the preferred stock, the Treasury
received, from participating financial institutions, warrants to purchase common stock with an aggregate market
price equal to 15% of the preferred investment. Participating financial institutions were required to adopt the
Treasury’s standards for executive compensation and corporate governance for the period during which the
Treasury holds equity issued under the Capital Purchase Program.
Although we believed that our capital position was sound, we concluded that the Capital Purchase Program
would allow us to raise additional capital on favorable terms in comparison with other available alternatives.
Accordingly, we applied to participate in the Capital Purchase Program. The Treasury approved our application
in December 2008, and we received $65 million in proceeds from the sale of 65,000 shares of Series A
cumulative perpetual preferred stock with a liquidation value of $1,000 per share to the Treasury on January 9,
2009. The terms of the preferred stock issued to the Treasury require a dividend of 5% for the first five years
and 9% thereafter. As part of the transaction, we also granted the Treasury a ten-year warrant to purchase up
to 616,308 shares of our common stock at an exercise price of $15.82 per share.
On September 1, 2011, we redeemed the 65,000 shares of outstanding Series A preferred stock from the
Treasury for a redemption price of $65 million, plus unpaid dividends. We funded the majority of this
transaction by simultaneously issuing Series B preferred stock to the Treasury in connection with our
participation in the Small Business Lending Fund (see below). In November 2011, we repurchased the
outstanding common stock warrant from the Treasury at a price of $1.50 per common share for a total of
$924,000. See Note 19 to the consolidated financial statements for more information on these transactions.
Small Business Lending Fund
In December 2010, the U.S. Treasury announced the creation of the Small Business Lending Fund (SBLF)
program, which was established under the Small Business Jobs Act of 2010. The SBLF was created to encourage
lending to small businesses by providing capital to qualified community banks at favorable rates.
Interested financial institutions were required to submit an application and a small business lending plan. Less
than half of the financial institutions that applied for the SBLF were approved. We were one of the institutions
approved, and on September 1, 2011, we completed the sale of $63.5 million of Series B preferred stock to the
Treasury under the SBLF. Under the terms of the stock purchase agreement, the Treasury received 63,500
shares of Series B non-cumulative perpetual preferred stock with a liquidation value of $1,000 per share, in
exchange for $63.5 million. As noted above, we used the $63.5 million received from this issuance along with
$1.5 million of existing Company funds to redeem the $65 million of preferred stock issued to the Treasury as
part of the Capital Purchase Program. The initial dividend rate on SBLF preferred stock was 5%. Depending on
our success in meeting certain loan growth targets to small businesses, the dividend rate could decrease to as
low as 1% for a period of time. See Note 19 to the consolidated financial statements for more information.
14
FDIC Insurance
As a member of the FDIC, the Bank’s deposits are insured by the FDIC. For this protection, each member bank
pays a quarterly statutory assessment (which was previously based on deposits, but is now based on average
total assets less average tangible equity) and is subject to the rules and regulations of the FDIC. In 2009, the
FDIC assessed minimum rates ranging from twelve cents to sixteen cents per $100 in deposits. During 2009, we
recorded approximately $3.9 million in annual FDIC insurance premium expense (excluding the special
assessment discussed below).
The FDIC announced on February 27, 2009 an interim rule that imposed a one-time special assessment of seven
cents per $100 in insured deposits to be collected on September 30, 2009, which resulted in a $1.6 million
expense for the Bank that was recorded in the second quarter of 2009 and paid on September 30, 2009. The
interim rule also permits the FDIC to impose emergency special assessments from time to time after June 30,
2009 if the FDIC board believes the deposit insurance fund will fall to a level that would adversely affect public
confidence in federal deposit insurance. To date, the FDIC has not imposed additional special assessments, but
in December 2009, the FDIC did require banks to prepay their estimated insurance premiums for 2010 through
2012, which resulted in the Bank prepaying approximately $16.9 million in premiums. This prepaid amount is
being recorded as expense on our books as it is incurred. We recognized approximately $4.4 million in FDIC
insurance expense in 2010.
In February 2011, the FDIC announced changes to the deposit insurance program whereby FDIC deposit
insurance assessments are based on average total assets less average tangible equity instead of the previous
methodology that was based on deposits. Also, new assessment rates were adopted. The new assessment
methodology and assessment rates became effective April 1, 2011. These changes were favorable to our
insurance rates, and we recognized approximately $3.0 million in FDIC insurance expense in 2011 compared to
the previously noted insurance expense of $4.4 million and $3.9 million (excluding the special assessment) in
2010 and 2009, respectively.
Legislative and Regulatory Developments
Given the ongoing financial crisis and the current presidential administration, legislation that would affect
regulation in the banking industry is introduced in most legislative sessions. The most significant recent
legislative and regulatory developments impacting the Company were 1) the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010, and 2) Automated Overdraft Payment Regulation, each of which is discussed
below.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
On July 21, 2010, the Dodd-Frank Act became law. The Dodd-Frank Act has had and will continue to have a
broad impact on the financial services industry, including significant regulatory and compliance changes
including, among other things,
(cid:120) enhanced authority over troubled and failing banks and their holding companies;
(cid:120) increased capital and liquidity requirements;
(cid:120) increased regulatory examination fees;
(cid:120) specific provisions designed to improve supervision and safety and soundness by imposing
restrictions and limitations on the scope and type of banking and financial activities.
In addition, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial
system that will be enforced by new and existing federal regulatory agencies, including the Financial Stability
15
Oversight Council (FSOC), the Federal Reserve Bank (FRB), the Office of Comptroller of the Currency, the FDIC,
and the Consumer Financial Protection Bureau (CFPB). The following description briefly summarizes aspects of
the Dodd-Frank Act that could impact the Company, both currently and prospectively.
Deposit Insurance. The Dodd-Frank Act made permanent the $250,000 deposit insurance limit for insured
deposits, which was an increase from the previous limit of $100,000. The Act also provides for unlimited deposit
insurance coverage on non-interest bearing transaction accounts at all insured depository institutions effective
December 31, 2010 through December 31, 2012. Amendments to the Federal Deposit Insurance Act also
revised the assessment base against which an insured depository institution’s deposit insurance premiums paid
to the FDIC’s Deposit Insurance Fund (DIF) will be calculated. Under the amendments, which became effective
on April 1, 2011, the FDIC assessment base is no longer the institution’s deposit base, but rather its average
consolidated total assets less its average tangible equity. The Dodd-Frank Act also changed the minimum
designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of
total insured deposits, and eliminating the requirement that the FDIC pay dividends to depository institutions
when the reserve ratio exceeds certain thresholds by September 30, 2020.
Interest on Demand Deposits. The Dodd-Frank Act provided that beginning July 21, 2011 depository institutions
were permitted to pay interest on business demand deposits with no limit on the number of monthly
withdrawals. Prior to July 21, 2011, we entered into securities repurchase agreements with business customers
in order to allow them to earn interest on their excess funds. With the prohibition of paying interest now
removed, we have been able to pay interest on our customers’ deposits without the need to enter into a
securities repurchase agreement. During 2011, approximately $38 million in liabilities previously classified as
“securities sold under agreements to repurchase” were moved to the “NOW” deposit account category. At this
time, we do not expect a material increase in total interest expense, only an insignificant amount of
reclassification among interest expense categories, as a result of these changes.
Trust Preferred Securities. The Dodd-Frank Act prohibits bank holding companies from including in their
regulatory Tier 1 capital hybrid debt and equity securities issued on or after May 19, 2010. Among the hybrid
debt and equity securities included in this prohibition are trust preferred securities, which we have issued in the
past in order to raise additional Tier 1 capital and otherwise improve our regulatory capital ratios. Although we
may continue to include our existing trust preferred securities as Tier 1 capital, the prohibition on the use of
these securities as Tier 1 capital may limit our ability to raise capital in the future.
The Consumer Financial Protection Bureau. The Dodd-Frank Act creates a new, independent Consumer Financial
Protection Bureau (CFPB) within the FRB. The CFPB’s responsibility is to establish, implement and enforce rules
and regulations under certain federal consumer protection laws with respect to the conduct of providers of
certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes
that govern products and services banks offer to consumers. In addition, the Dodd-Frank Act permits states to
adopt consumer protection laws and regulations that are more stringent than those regulations the CFPB will
promulgate and state attorney generals will have the authority to enforce consumer protection rules the CFPB
adopts against state-chartered institutions and national banks. Compliance with any such new regulations
established by the CFPB and/or states could reduce our revenue, increase our cost of operations, and limit our
ability to expand into certain products and services.
Debit Card Interchange Fees. The Dodd-Frank Act gives the FRB the authority to establish rules regarding
interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion
and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of
a transaction to the issuer. While we are not directly subject to these rules for so long as our assets do not
exceed $10 billion, our activities as a debit card issuer may nevertheless be indirectly impacted by the change in
the applicable debit card market caused by these regulations, which may require us to match any new lower fee
16
structure implemented by larger financial institutions in order to remain competitive in the future. The new
caps on interchange fees for banks with assets greater than $10 billion became effective October 1, 2011. To
date, the Company has not noted any significant indirect negative effects of the interchange fee caps that are
applicable to the larger financial institutions.
Increased Capital Standards and Enhanced Supervision. The Dodd-Frank Act requires the federal banking
agencies to establish minimum leverage and risk-based capital requirements for banks and bank holding
companies. These new standards will be no less strict than existing regulatory capital and leverage standards
applicable to insured depository institutions and may, in fact, become higher once the agencies promulgate the
new standards. Compliance with heightened capital standards may reduce our ability to generate or originate
revenue-producing assets and thereby restrict revenue generation from banking and non-banking operations.
Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain transactions with
affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of
“covered transactions,” and an increase in the amount of time for which collateral requirements regarding
covered transactions must be maintained.
Transactions with Insiders. The Dodd-Frank Act expands insider transaction limitations through the
strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the
various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and
securities lending and borrowing transactions. The Dodd-Frank Act also places restrictions on certain asset sales
to and from an insider of an institution, including requirements that such sales be on market terms and, in
certain circumstances, receive the approval of the institution’s board of directors.
Enhanced Lending Limits. The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit
exposure to one borrower. Federal banking law currently limits a national bank’s ability to extend credit to one
person or group of related persons to an amount that does not exceed certain thresholds. The Dodd-Frank Act
expands the scope of these restrictions to include credit exposure arising from derivative transactions,
repurchase agreements and securities lending and borrowing transactions. It also will eventually prohibit state-
chartered banks from engaging in derivative transactions unless the state lending limit laws take into account
credit exposure to such transactions.
Corporate Governance. The Dodd-Frank Act addresses many corporate governance and executive compensation
matters that will affect most U.S. publicly traded companies, including the Company. The Dodd-Frank Act:
(cid:120) grants shareholders of U.S. publicly traded companies an advisory vote on executive compensation;
(cid:120) enhances independence requirements for compensation committee members;
(cid:120)
requires companies listed on national securities exchanges to adopt clawback policies for incentive-
based compensation plans applicable to executive officers; and
(cid:120) provides the SEC with authority to adopt proxy access rules that would allow shareholders of publicly
traded companies to nominate candidates for election as directors and require such companies to
include such nominees in its proxy materials.
Many of the requirements of the Dodd-Frank Act will be subject to implementation over the course of several
years. While we do not currently expect the final requirements of the Dodd-Frank Act to have a material
adverse impact on the Company, we do expect them to negatively impact our profitability, require changes to
certain of our business practices, including limitations on fee income opportunities, and impose more stringent
capital, liquidity and leverage requirements upon the Company. These changes may also require us to invest
significant management attention and resources to evaluate and make any changes necessary to comply with
the new statutory and regulatory requirements.
17
Automated Overdraft Payment Regulation
In recent years, the Federal Reserve and FDIC have enacted consumer protection regulations related to
automated overdraft payment programs offered by financial institutions. In November 2009, the Federal
Reserve amended its Regulation E to prohibit financial institutions, including the Company, from charging
consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless
a consumer consents, or opts in, to the overdraft service for those types of transactions. The Regulation E
amendments also require financial institutions to provide consumers with a notice that explains the financial
institution’s overdraft services, including the fees associated with the service and the consumer’s choices. We
have completed implementation of the changes as required by the Regulation E amendments, which resulted in
reductions to overdraft fees that we were able to collect beginning in the second half of 2010.
In November 2010, the FDIC supplemented the Regulation E amendments by requiring FDIC-supervised
institutions, including the Bank, to implement additional changes relating to automated overdraft payment
programs by July 1, 2011. The most significant of these changes require financial institutions to monitor
overdraft payment programs for “excessive or chronic” customer use and undertake “meaningful and effective”
follow-up action with customers that overdraw their accounts more than six times during a rolling 12-month
period. The additional guidance also imposes daily limits on overdraft charges, requires institutions to review
and modify check-clearing procedures, prominently distinguish account balances from available overdraft
coverage amounts and requires increased board and management oversight regarding overdraft payment
programs. We have now implemented the supplemental requirements of the Regulation E amendments, which
resulted in further reductions to the amount of overdraft fees we were able to collect beginning in July 2011.
Neither the Company nor the Bank can predict what other legislation might be enacted or what other
regulations or assessments might be adopted.
See “Capital Resources and Shareholders’ Equity” under Item 7 below for a discussion of regulatory capital
requirements.
Available Information
We maintain a corporate Internet site at www.FirstBancorp.com, which contains a link within the “Investor
Relations” section of the site to each of our filings with the Securities and Exchange Commission, including our
annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934. These filings are available, free of charge, as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the Securities and Exchange Commission. These filings can also be accessed
at the Securities and Exchange Commission’s website located at www.sec.gov. Information included on our
Internet site is not incorporated by reference into this annual report.
18
Item 1A. Risk Factors
An investment in our common stock involves certain risks. Before you invest in our common stock, you should
be aware that there are various risks, including those described below, which could affect the value of your
investment in the future. The trading price of our common stock could decline due to any of these risks, and
you may lose all or part of your investment. The risk factors described in this section, as well as any cautionary
language in this report, provide examples of risks, uncertainties and events that could have a material adverse
effect on our business, including our operating results and financial condition. In addition to the risks and
uncertainties described below, other risks and uncertainties not currently known to us, or that we currently
deem to be immaterial, also may materially or adversely affect our business, financial condition, and results of
operations. The value or market price of our common stock could decline due to any of these identified or other
unidentified risks.
Difficult market conditions and economic trends have adversely affected our industry and our business.
A general economic downturn began in the latter half of 2007. Dramatic declines in the housing market, with
decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit
performance of mortgage loans, especially land development loans, and resulted in significant write-downs of
assets by many financial institutions. In addition, the value of real estate collateral supporting many loans has
declined and may continue to decline. General downward economic trends, reduced availability of commercial
credit and high unemployment rates have negatively impacted the credit performance of commercial and
consumer credit, resulting in additional write-downs. While there have been recent signs of recovery in the
national economy, the economic conditions in our market area do not seem to have improved. We believe that
the economic downtrends are largely responsible for the deterioration in loan quality that we experienced over
the past three years, including higher levels of loan charge-offs, higher levels of nonperforming assets, and
higher provisions for loan losses. Concerns over the stability of the financial markets and the economy have
resulted in decreased lending by financial institutions to their customers and to each other. This market turmoil
and tightening of credit has led to increased commercial and consumer delinquencies, lack of confidence,
increased market volatility and widespread reduction in general business activity. Financial institutions,
including us, have experienced a decrease in access to borrowings. The resulting economic pressure on
consumers and businesses and the lack of confidence in the financial markets have adversely affected, and may
continue to adversely affect, our business, financial condition, results of operations and stock price.
As a result of the foregoing factors, there is a potential for new federal or state laws and regulations regarding
lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be very
aggressive in responding to concerns and trends identified in examinations. This increased governmental action
may increase our costs and limit our ability to pursue certain business opportunities.
Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our credit
exposure is made more complex by these difficult market and economic conditions. A worsening of these
conditions would likely exacerbate the adverse effects of these difficult market and economic conditions on us,
our customers and the other financial institutions in our market. As a result, we may experience additional
increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds.
We are vulnerable to the economic conditions within the fairly small geographic region in which we operate.
Like many businesses, our overall success is partially dependent on the economic conditions in the marketplace
where we operate. Our marketplace is predominately concentrated in the central Piedmont and coastal regions
of North Carolina. These regions continue to experience recessionary economic conditions, which we believe is
a factor in our increases in borrower delinquencies, nonperforming assets, and loan losses during 2009, 2010,
19
and 2011 compared to recent prior years. If economic conditions in our marketplace worsen, it would likely
have an adverse impact on us. In particular, if economic conditions related to real estate values in our
marketplace were to worsen, our loan losses would likely increase. At December 31, 2011, approximately 90%
of our loans were secured by real estate collateral, which means that additional decreases in real estate values
would have an adverse impact on our operations.
If our goodwill becomes impaired, we may be required to record a significant charge to earnings.
We have goodwill recorded on our balance sheet as an asset with a carrying value as of December 31, 2011 of
$65.8 million. Under generally accepted accounting principles, goodwill is required to be tested for impairment
at least annually and between annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount. The test for goodwill impairment
involves comparing the fair value of a company’s reporting units to their respective carrying values. For our
company, our community banking operation is our only material reporting unit. The price of our common stock
is one of several measures available for estimating the fair value of our community banking operations. For
much of 2009, 2010 and 2011, the stock market value of our common stock traded below the book value of our
company. Subject to the results of other valuation techniques, if this situation persists or worsens, this could
indicate that our next test of goodwill will result in a determination that there is impairment. We may be
required to record a significant charge to earnings in our financial statements during the period in which any
impairment of our goodwill is determined, which could have a negative impact on our results of operations.
We may be subject to more stringent capital requirements.
We are subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts
and types of capital which we must maintain. From time to time, the regulators implement changes to these
regulatory capital adequacy guidelines. If we fail to meet these minimum capital guidelines and other regulatory
requirements, our financial condition would be materially and adversely affected. In light of proposed changes
to regulatory capital requirements contained in the Dodd-Frank Act and the regulatory accords on international
banking institutions formulated by the Basel Committee and implemented by the Federal Reserve, we likely will
be required to satisfy additional, more stringent, capital adequacy standards. The ultimate impact of the new
capital standards on us cannot be determined at this time and will depend on a number of factors, including the
treatment and implementation by U.S. banking regulators. These requirements, however, and any other new
regulations, could adversely affect our ability to pay dividends, or could require us to reduce business levels or
raise capital, including in ways that may adversely affect our financial condition or results of operations.
We might be required to raise additional capital in the future, but that capital may not be available or may
not be available on terms acceptable to us when it is needed.
We are required to maintain adequate capital levels to support our operations. In the future, we might need to
raise additional capital to support growth, absorb loan losses, or meet more stringent capital requirements. Our
access to capital markets has remained limited for most of the past three years (excluding the Treasury’s Capital
Purchase Program and the Small Business Lending Fund). Our ability to raise additional capital will depend on
conditions in the capital markets at that time, which are outside our control, and on our financial performance.
Accordingly, we cannot be certain of our ability to raise additional capital in the future if needed or on terms
acceptable to us. If we cannot raise additional capital when needed, our ability to conduct our business could be
materially impaired.
The soundness of other financial institutions could adversely affect us.
Since the middle of 2007, the financial services industry as a whole, as well as the securities markets generally,
20
have been materially adversely affected by substantial declines in the values of nearly all asset classes and by a
significant lack of liquidity. Financial institutions, especially in North Carolina and the rest of the Southeast, have
been subject to increased volatility and an overall loss in investor confidence. Our ability to engage in routine
funding transactions could be adversely affected by the actions and commercial soundness of other financial
institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty or other
relationships. We have exposure to many different industries and counterparties, and we routinely execute
transactions with counterparties in the financial services industry, including brokers and dealers, commercial
banks, and investment banks. Defaults by, or even rumors or questions about, one or more financial services
companies, or the financial services industry generally, have led to market-wide liquidity problems and could
lead to losses or defaults by us or by other institutions. We can make no assurance that any such losses would
not materially and adversely affect our business, financial condition or results of operations.
We are subject to extensive regulation, which could have an adverse effect on our operations.
We are subject to extensive regulation and supervision from the North Carolina Commissioner of Banks, the
FDIC, and the Federal Reserve Board. This regulation and supervision is intended primarily for the protection of
the FDIC insurance fund and our depositors and borrowers, rather than for holders of our equity securities. In
the past, our business has been materially affected by these regulations. This trend is likely to continue in the
future.
Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the
imposition of restrictions on operations, the classification of our assets and the determination of the level of
allowance for loan losses. Changes in the regulations that apply to us, or changes in our compliance with
regulations, could have a material impact on our operations.
Financial reform legislation enacted by the U.S. Congress, and further changes in regulation to which we are
exposed, will result in additional new laws and regulations that are expected to increase our costs of
operations.
The Dodd-Frank Act has and will continue to significantly change bank regulatory structure and affect lending,
deposit, investment, and operating activities of financial institutions and their holding companies. The Dodd-
Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare
numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting and
implementing the rules and regulations, and consequently, many of the details and much of the impact of the
Dodd-Frank Act may not be known for many months or years. See “Legislative and Regulatory Developments –
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010” above for additional information
regarding the Dodd-Frank Act.
The Dodd-Frank Act also created the Consumer Financial Protection Bureau and gave it broad rule-making
authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including
the authority to prohibit “unfair, deceptive or abusive” acts and practices. Additionally, the Consumer Financial
Protection Bureau has examination and enforcement authority over all banks and savings institutions with more
than $10 billion in assets.
Proposals for further regulation of the financial services industry are continually being introduced in the
Congress of the United States of America. The agencies regulating the financial services industry also
periodically adopt changes to their regulations. It is possible that additional legislative proposals may be
adopted or regulatory changes may be made that would have an adverse effect on our business. In addition, it
is expected that such regulatory changes will increase our operating and compliance cost. We can provide no
assurance regarding the manner in which new laws and regulations will affect us.
21
We are subject to interest rate risk, which could negatively impact earnings.
Net interest income is the most significant component of our earnings. Our net interest income results from the
difference between the yields we earn on our interest-earning assets, primarily loans and investments, and the
rates that we pay on our interest-bearing liabilities, primarily deposits and borrowings. When interest rates
change, the yields we earn on our interest-earning assets and the rates we pay on our interest-bearing liabilities
do not necessarily move in tandem with each other because of the difference between their maturities and
repricing characteristics. This mismatch can negatively impact net interest income if the margin between yields
earned and rates paid narrows. Interest rate environment changes can occur at any time and are affected by
many factors that are outside our control, including inflation, recession, unemployment trends, the Federal
Reserve’s monetary policy, domestic and international disorder and instability in domestic and foreign financial
markets.
Our allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loan losses to provide for probable losses caused by
customer loan defaults. The allowance for loan losses may not be adequate to cover actual loan losses, and in
this case additional and larger provisions for loan losses would be required to replenish the allowance.
Provisions for loan losses are a direct charge against income.
We establish the amount of the allowance for loan losses based on historical loss rates, as well as estimates and
assumptions about future events. Because of the extensive use of estimates and assumptions, our actual loan
losses could differ, possibly significantly, from our estimate. We believe that our allowance for loan losses is
adequate to provide for probable losses, but it is possible that the allowance for loan losses will need to be
increased for credit reasons or that regulators will require us to increase this allowance. Either of these
occurrences could materially and adversely affect our earnings and profitability.
In the normal course of business, we process large volumes of transactions involving millions of dollars. If our
internal controls fail to work as expected, if our systems are used in an unauthorized manner, or if our
employees subvert our internal controls, we could experience significant losses.
We process large volumes of transactions on a daily basis and are exposed to numerous types of operational
risk. Operational risk includes the risk of fraud by persons inside or outside the Company, the execution of
unauthorized transactions by employees, errors relating to transaction processing and systems and breaches of
the internal control system and compliance requirements. This risk also includes potential legal actions that
could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory
standards.
We establish and maintain systems of internal operational controls that provide us with timely and accurate
information about our level of operational risk. Although not foolproof, these systems have been designed to
manage operational risk at appropriate, cost-effective levels. Procedures exist that are designed to ensure that
policies relating to conduct, ethics, and business practices are followed. From time to time, losses from
operational risk may occur, including the effects of operational errors. In 2011, we experienced a fraud loss of
$1 million involving the circumvention of internal controls by an employee. We continually monitor and
improve our internal controls, data processing systems, and corporate-wide processes and procedures, but
there can be no assurance that future losses will not occur.
22
Negative public opinion regarding our company and the financial services industry in general, could damage
our reputation and adversely impact our earnings.
Reputation risk, or the risk to our business, earnings and capital from negative public opinion regarding our
company and the financial services industry in general, is inherent in our business. Negative public opinion can
result from actual or alleged conduct in any number of activities, including lending practices, corporate
governance and acquisitions, and from actions taken by government regulators and community organizations in
response to those activities. Negative public opinion can adversely affect our ability to keep and attract clients
and employees and can expose us to litigation and regulatory action. Although we have taken steps to minimize
reputation risk in dealing with our clients and communities, this risk will always be present given the nature of
our business.
Our reported financial results are impacted by management’s selection of accounting methods and certain
assumptions and estimates.
Our accounting policies and methods are fundamental to the way we record and report our financial condition
and results of operations. Our management must exercise judgment in selecting and applying many of these
accounting policies and methods so they comply with generally accepted accounting principles and reflect
management’s judgment of the most appropriate manner to report our financial condition and results. In some
cases, management must select the accounting policy or method to apply from two or more alternatives, any of
which may be reasonable under the circumstances, yet may result in reporting materially different results than
would have been reported under a different alternative.
Certain accounting policies are critical to presenting our financial condition and results. They require
management to make difficult, subjective or complex judgments about matters that are uncertain. Materially
different amounts could be reported under different conditions or using different assumptions or estimates.
These critical accounting policies include: the allowance for loan losses; the valuation of goodwill and other
intangible assets; and the accounting for FDIC loss share transactions.
There can be no assurance that we will continue to pay cash dividends.
Although we have historically paid cash dividends, there is no assurance that we will continue to pay cash
dividends. Future payment of cash dividends, if any, will be at the discretion of our board of directors and will
be dependent upon our financial condition, results of operations, capital requirements, economic conditions,
and such other factors as the board may deem relevant.
Our business continuity plans or data security systems could prove to be inadequate, resulting in a material
interruption in, or disruption to, our business and a negative impact on our results of operations.
We rely heavily on communications and information systems to conduct our business. Our daily operations
depend on the operational effectiveness of our technology. We rely on our systems to accurately track and
record our assets and liabilities. Any failure, interruption or breach in security of our computer systems or
outside technology, due to severe weather, natural disasters, acts of war or terrorism, criminal activity or other
factors, could result in failures or disruptions in general ledger, deposit, loan, customer relationship
management, and other systems leading to inaccurate financial records. This could materially affect our
business operations and financial condition. While we have disaster recovery and other policies and procedures
designed to prevent or limit the effect of any failure, interruption or security breach of our information systems,
there can be no assurance that any such failures, interruptions, or security breaches will not occur or, if they do
occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches
of our information systems could damage our reputation, result in a loss of customer business, subject us to
23
additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could
have a material adverse effect on our results of operations.
In addition, the Bank provides its customers the ability to bank online. The secure transmission of confidential
information over the Internet is a critical element of online banking. While we use qualified third party vendors
to test and audit our network, our network could become vulnerable to unauthorized access, computer viruses,
phishing schemes and other security issues. The Bank may be required to spend significant capital and other
resources to alleviate problems caused by security breaches or computer viruses. To the extent that the Bank
activities or the activities of its customers involve the storage and transmission of confidential information,
security breaches and viruses could expose the Bank to claims, litigation, and other potential liabilities. Any
inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence
in the Bank’s systems and could adversely affect its reputation and its ability to generate deposits.
Our potential inability to integrate companies we may acquire in the future could expose us to financial,
execution, and operational risks that could negatively affect our financial condition and results of operations.
Acquisitions may be dilutive to common shareholders and FDIC-assisted transactions have additional
compliance risk that other acquisitions do not have.
On occasion, we may engage in a strategic acquisition when we believe there is an opportunity to strengthen
and expand our business. In addition, such acquisitions may involve the issuance of stock, which may have a
dilutive effect on earnings per share. To fully benefit from such acquisition, however, we must integrate the
administrative, financial, sales, lending, collections, and marketing functions of the acquired company. If we are
unable to successfully integrate an acquired company, we may not realize the benefits of the acquisition, and
our financial results may be negatively affected. A completed acquisition may adversely affect our financial
condition and results of operations, including our capital requirements and the accounting treatment of the
acquisition. Completed acquisitions may also lead to exposure from potential asset quality issues, losses of key
employees or customers, difficulty and expense of integrating operations and systems, and significant
unexpected liabilities after the consummation of these acquisitions. In addition, if we were to conclude that the
value of an acquired business had decreased and that the related goodwill had been impaired, that conclusion
would result in a goodwill impairment charge, which would adversely affect our results of operations.
We may have opportunities to acquire the assets and liabilities of failed banks in FDIC-assisted transactions.
Although these transactions typically provide for FDIC assistance to an acquirer to mitigate certain risks, such as
sharing exposure to loan losses and providing indemnification against certain liabilities of the failed institution,
we are (and would be in future transactions) subject to many of the same risks we would face in acquiring
another bank in a negotiated transaction, including risks associated with maintaining customer relationships and
failure to realize the anticipated acquisition benefits in the amounts and within the time frames we expect. In
addition, ongoing compliance risk under the loss-share agreement with the FDIC is considerable and the event of
noncompliance could result in coverage under the loss-share being disallowed, thus increasing the actual losses
to the Bank. Our inability to overcome these risks could have a material adverse effect on our business, financial
condition and results of operations.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The main offices of the Company and the Bank are owned by the Bank and are located in a three-story building
in the central business district of Troy, North Carolina. The building houses administrative and bank teller
24
facilities. The Bank’s Operations Division, including customer accounting functions, offices for information
technology operations, and offices for loan operations, are housed in two one-story steel frame buildings
approximately one-half mile west of the main office. Both of these buildings are owned by the Bank. The
Company operates 97 bank branches. The Company owns all of its bank branch premises except eight branch
offices for which the land and buildings are leased and ten branch offices for which the land is leased but the
building is owned. The Company also leases one loan production office. There are no options to purchase or
lease additional properties. The Company considers its facilities adequate to meet current needs and believes
that lease renewals or replacement properties can be acquired as necessary to meet future needs.
Item 3. Legal Proceedings
Various legal proceedings may arise in the ordinary course of business and may be pending or threatened
against the Company and its subsidiaries. However, neither the Company nor any of its subsidiaries is involved
in any pending legal proceedings that management believes could have a material effect on the consolidated
financial position of the Company. If an exposure were to be identified, it is the Company’s policy to establish
and accrue appropriate reserves during the accounting period in which a loss is deemed to be probable and the
amount is determinable.
There were no tax shelter penalties assessed by the Internal Revenue Service against the Company during the
year ended December 31, 2011.
Item 4. Mine Safety Disclosure
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of
Equity Securities
Our common stock trades on The NASDAQ Global Select Market under the symbol FBNC. Table 22, included in
“Management’s Discussion and Analysis” below, sets forth the high and low market prices of our common stock
as traded by the brokerage firms that maintain a market in our common stock and the dividends declared for
the periods indicated. We paid a cash dividend of $0.08 per share for each quarter of 2011. For the foreseeable
future, it is our current intention to continue to pay cash dividends of $0.08 per share on a quarterly basis. See
“Business - Supervision and Regulation” above and Note 16 to the consolidated financial statements for a
discussion of other regulatory restrictions on the Company’s payment of dividends. As of December 31, 2011,
there were approximately 2,600 shareholders of record and another 3,500 shareholders whose stock is held in
“street name.” There were no sales of unregistered securities during the year ended December 31, 2011.
25
Additional Information Regarding the Registrant’s Equity Compensation Plans
At December 31, 2011, the Company had four equity-based compensation plans, one of which was assumed in a
corporate acquisition. The Company’s 2007 Equity Plan is the only one of the four plans under which new grants
of equity-based awards are possible.
The following table presents information as of December 31, 2011 regarding shares of the Company’s stock that
may be issued pursuant to the Company’s equity based compensation plans. The table does not include
information with respect to shares subject to outstanding options granted under a stock incentive plan assumed
by the Company in connection with the acquisition of the company that originally granted those options.
Footnote (2) to the table indicates the total number of shares of common stock issuable upon the exercise of
options under the assumed plan as of December 31, 2011, and the weighted average exercise price of those
options. No additional options may be granted under the assumed plan. At December 31, 2011, the Company
had no warrants or stock appreciation rights outstanding under any compensation plans.
(a)
(b)
(c)
As of December 31, 2011
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities available for
future issuance under equity
compensation plans (excluding
securities reflected in column (a))
489,078
$ 18.98
(cid:326)
489,078
(cid:326)
$ 18.98
906,268
(cid:326)
906,268
Plan category
Equity compensation
plans approved by
security holders (1)
Equity compensation
plans not approved
by security holders
Total (2)
(1) Consists of (A) the Company’s 2007 Equity Plan, which is currently in effect; (B) the Company’s 2004 Stock
Option Plan; and (C) the Company’s 1994 Stock Option Plan, each of which was approved by our shareholders.
(2) The table does not include information for stock incentive plans that the Company assumed in connection
with mergers and acquisitions of the companies that originally established those plans. As of December 31,
2011, a total of 4,788 shares of common stock were issuable upon exercise under an assumed plan. The
weighted average exercise price of those outstanding options is $12.90 per share. No additional options may be
granted under the assumed plan.
26
Performance Graph
The performance graph shown below compares the Company’s cumulative total return to shareholders for the
five-year period commencing December 31, 2006 and ending December 31, 2011, with the cumulative total
return of the Russell 2000 Index (reflecting overall stock market performance of small-capitalization companies),
and an index of banks with between $1 billion and $5 billion in assets, as constructed by SNL Securities, LP
(reflecting changes in banking industry stocks). The graph and table assume that $100 was invested on
December 31, 2006 in each of the Company’s common stock, the Russell 2000 Index, and the SNL Bank Index,
and that all dividends were reinvested.
First Bancorp
Comparison of Five-Year Total Return Performances (1)
Five Years Ending December 31, 2011
First Bancorp
Russell 2000
SNL Index-Banks between $1
billion and $5 billion
2006
$ 100.00
100.00
100.00
Notes:
Total Return Index Values (1)
December 31,
2007
2008
2009
89.78
98.43
72.84
91.21
65.18
60.42
70.97
82.89
43.31
2010
79.54
105.14
2011
59.64
100.75
49.09
44.77
(1) Total return indices were provided from an independent source, SNL Securities LP, Charlottesville, Virginia, and assume
initial investment of $100 on December 31, 2006, reinvestment of dividends, and changes in market values. Total
return index numerical values used in this example are for illustrative purposes only.
27
Issuer Purchases of Equity Securities
Pursuant to authorizations by the Company’s board of directors, the Company has from time to time
repurchased shares of common stock in private transactions and in open-market purchases. The most recent
board authorization was announced on July 30, 2004 and authorized the repurchase of 375,000 shares of the
Company’s stock. The Company repurchased approximately 20,000 shares of its common stock during the
quarter ended December 31, 2011.
Issuer Purchases of Equity Securities
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)
(cid:326)
(cid:326)
$ (cid:326)
(cid:326)
20,278
20,278
11.24
$ 11.24
(cid:326)
(cid:326)
(cid:326)
(cid:326)
234,667
234,667
214,389
214,389
Period
Month #1 (October 1,
2011 to October 31,
2011)
Month #2 (November 1,
2011 to November
30, 2011)
Month #3 (December 1,
2011 to December
31, 2011) (3)
Total
Footnotes to the Above Table
(1) All shares available for repurchase are pursuant to publicly announced share repurchase authorizations.
On July 30, 2004, the Company announced that its board of directors had approved the repurchase of
375,000 shares of the Company’s common stock. The repurchase authorization does not have an
expiration date. There are no plans or programs the Company has determined to terminate prior to
expiration, or under which the Company does not intend to make further purchases.
(2) The table above does not include shares that were used by option holders to satisfy the exercise price of
the call options issued by the Company to its employees and directors pursuant to the Company’s stock
option plans. There were no such exercises during the three months ended December 31, 2011.
(3) The repurchases during December 2011 relate to shares of stock that employees of the Company sold
back to the Company in order to fund the taxes due on shares of restricted stock that became fully
vested during December 2011.
Item 6. Selected Consolidated Financial Data
Table 1 on page 65 of this report sets forth the selected consolidated financial data for the Company.
28
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis is intended to assist readers in understanding our results of operations
and changes in financial position for the past three years. This review should be read in conjunction with the
consolidated financial statements and accompanying notes beginning on page 83 of this report and the
supplemental financial data contained in Tables 1 through 22 included with this discussion and analysis.
Overview - 2011 Compared to 2010
Net income for 2011 increased by 27.3% over 2010. Earnings for 2011 were impacted by a bargain purchase
gain and accelerated accretion on our preferred stock discount (see discussion below).
Financial Highlights
($ in thousands except per share data)
2011
2010
Change
Earnings
Net interest income
Provision for loan losses – non-covered
Provision for loan losses - covered
Noninterest income
Noninterest expenses
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Accretion of preferred stock discount
Net income available to common shareholders
Net income per common share
Basic
Diluted
At Year End
Assets
Loans
Deposits
$ 132,203
28,525
12,776
26,216
96,106
21,012
7,370
13,642
(3,234)
(2,932)
$ 7,476
127,354
33,646
20,916
29,106
86,956
14,942
4,960
9,982
(3,250)
(857)
5,875
3.8%
-15.2%
-38.9%
-9.9%
10.5%
40.6%
48.6%
36.7%
27.3%
$ 0.44
0.44
0.35
0.35
25.7%
25.7%
$ 3,290,474
2,430,386
2,755,037
3,278,932
2,454,132
2,652,513
0.4%
-1.0%
3.9%
Ratios
Return on average assets
Return on average common equity
Net interest margin (taxable-equivalent)
0.23%
2.59%
4.72%
0.18%
2.05%
4.39%
The following is a more detailed discussion of our results for 2011 compared to 2010:
For the year ended December 31, 2011, we reported net income available to common shareholders of $7.5
million compared to $5.9 million reported for 2010. Earnings per diluted common share were $0.44 for the year
ended December 31, 2011 compared to $0.35 for 2010. In the first quarter of 2011, we realized a $10.2 million
bargain purchase gain related to the acquisition of a failed bank, which is recorded in noninterest income. The
after-tax impact of this gain on net income was $6.2 million, or $0.37 per diluted common share.
In the third quarter of 2011, we recorded $2.3 million of accelerated accretion of the discount remaining on the
preferred stock that was redeemed during the quarter. This stock was originally issued to the U.S. Treasury in
January 2009 as part of the program known as TARP. When this preferred stock was redeemed, the remaining
discount that was recorded upon the issuance of the stock, which had been on a five year accretion schedule,
29
was immediately accreted as a reduction to net income available to common shareholders. Total discount
accretion of the preferred stock for 2011 was $2.9 million, or $0.17 per diluted common share.
In both 2011 and 2010, we experienced significant write-downs and losses associated with loans and foreclosed
properties that were assumed in two failed bank acquisitions. The amounts of the write-downs and losses were
less in 2011 than in 2010, but continued to significantly impact our earnings.
We note that our results of operation are significantly affected by the on-going accounting for the two FDIC-
assisted failed bank acquisitions that we have completed. 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.
For covered loans that deteriorate in terms of repayment expectations, we record immediate allowances
through the provision of 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
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% due to the corresponding adjustments made to the indemnification
asset.
Total assets at December 31, 2011 amounted to $3.3 billion, a 0.4% increase from a year earlier. Total loans at
December 31, 2011 amounted to $2.4 billion, a 1.0% decrease from a year earlier, and total deposits amounted
to $2.8 billion at December 31, 2011, a 3.9% increase from a year earlier.
Since the onset of the recession, we have generally experienced declines in loans and deposits. Normal loan
paydowns, loan charge-offs, and loan foreclosures have exceeded new loan growth, which has provided the
liquidity to lessen our reliance on high cost deposits. However, for the last half of 2011, we experienced modest
growth in our non-covered loan portfolio, which increased $28 million from June 30, 2011 through year end. We
are actively pursuing lending opportunities in order to improve our asset yields, as well as to potentially
decrease the dividend rate on our preferred stock, as discussed in Note 19 to the consolidated financial
statements. Brokered deposits remained at a low level at December 31, 2011, comprising just 5.7% of total
deposits, with internet deposits comprising an additional 1.1%.
Net interest income for the year ended December 31, 2011 amounted to $132.2 million, an increase of $4.8
million, or 3.8%, from 2010. The higher net interest income was primarily caused by an increase in 2011 in the
amount of discount accretion on loans purchased in failed bank acquisitions. Loan discount accretion amounted
to $11.6 million for 2011 compared to $7.6 million in 2010, an increase of $4 million. As previously discussed,
the impact of changes in discount accretion on pretax income is only 20% of the gross amount of the change.
See “Net Interest Income” below for additional information.
30
Our net interest margin (tax-equivalent net interest income divided by average earnings assets) for 2011 was
4.72% compared to 4.39% for 2010. The higher margin was primarily due to the aforementioned increase in
loan discount accretion, as well as a decline in funding costs.
Our provisions for loan losses remain elevated compared to historical levels, primarily due to continued high
unemployment rates and ongoing declines in property values in our market area that negatively impact
collateral dependent real estate loans. Our provision for loan losses for non-covered loans amounted to $28.5
million for 2011 compared to $33.6 million recorded in 2010. The lower provision in 2011 was primarily due to
stabilization in overall loan quality and lower levels of non-covered nonperforming loans.
We recorded $12.8 million in provision for loan losses on covered loans during 2011 compared to $20.9 million
recorded in 2010. The lower provision in 2011 was due to declines in covered nonperforming loans resulting
from the resolution of a significant amount of these loans through a combination of charge-offs and
foreclosures.
Our non-covered nonperforming assets at December 31, 2011 amounted to $122 million compared to $117
million at December 31, 2010. At December 31, 2011, the ratio of non-covered nonperforming assets to total
non-covered assets was 4.30% compared to 4.16% at December 31, 2010.
Our covered nonperforming assets at December 31, 2011 amounted to $141 million compared to $168 million
at December 31, 2010.
Noninterest income for the year ended December 31, 2011 amounted to $26.2 million compared to $29.1
million for 2010. The decline in noninterest income in 2011 is primarily due to lower amounts of indemnification
asset income recorded. As previously discussed, when we anticipate receiving additional amounts from the FDIC
because of new losses identified in our covered loan and foreclosed property portfolios, we record
indemnification asset income for 80% of the expected loss. In 2011, fewer new losses were identified compared
to 2010, and thus less indemnification asset income was recorded.
Noninterest expenses for the year ended December 31, 2011 amounted to $96.1 million, a 10.5% increase from
the $87.0 million recorded in 2010. The majority of the increase relates to personnel expense, which increased
partially due to employees joining the Company in the 2011 Bank of Asheville acquisition. We also experienced
higher employee medical expense due to higher claims in 2011 compared to 2010. We have also progressively
built our infrastructure to manage increased compliance burdens, collection activities and the overall growth of
the Company, and to prepare for future growth, which has generally resulted in higher expenses across all
categories.
Our effective tax rates were 35.1% and 33.2% for the years ended December 31, 2011 and 2010, respectively.
31
Overview – 2010 Compared to 2009
Net income was significantly lower in 2010 than in 2009 primarily due to a gain that resulted from the
Cooperative Bank acquisition in June 2009. Most items of income and expense were higher in 2010 than in 2009
as a result of the Cooperative acquisition, which impacted the Company for twelve months in 2010 compared to
six months in 2009 beginning with the June acquisition date. In 2010, our provision for loan losses increased
significantly due to deterioration of asset quality, which we believe was primarily caused by the recessionary
economic environment, including its unfavorable effect on real estate values.
Financial Highlights
($ in thousands except per share data)
2010
2009
Change
Earnings
Net interest income
Provision for loan losses – non-covered
Provision for loan losses - covered
Noninterest income
Noninterest expenses
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Accretion of preferred stock discount
Net income available to common shareholders
Net income per common share
Basic
Diluted
At Year End
Assets
Loans
Deposits
$ 127,354
33,646
20,916
29,106
86,956
14,942
4,960
9,982
(3,250)
(857)
$ 5,875
107,096
20,186
(cid:888)
89,518
78,551
97,877
37,618
60,259
(3,169)
(803)
56,287
18.9%
66.7%
n/m
-67.5%
10.7%
-84.7%
-86.8%
-83.4%
-89.6%
$ 0.35
0.35
3.38
3.37
-89.6%
-89.6%
$ 3,278,932
2,454,132
2,652,513
3,545,356
2,652,865
2,933,108
-7.5%
-7.5%
-9.6%
Ratios
Return on average assets
Return on average common equity
Net interest margin (taxable-equivalent)
0.18%
2.05%
4.39%
1.82%
22.55%
3.81%
The following is a more detailed discussion of our results for 2010 compared to 2009:
For the year ended December 31, 2010, we reported net income available to common shareholders of $5.9
million compared to $56.3 million reported for 2009. Earnings per diluted common share were $0.35 for the
year ended December 31, 2010 compared to $3.37 for 2009. In the second quarter of 2009, we realized a $67.9
million gain related to the acquisition of a failed bank. The after-tax impact of this gain was $41.1 million, or
$2.46 per diluted common share.
Earnings reported for 2010 were impacted by write-downs of foreclosed properties that were assumed in our
2009 failed bank acquisition and also by higher provisions for loan losses related both to loans acquired in the
failed bank acquisition and to our legacy loans (loans not obtained in the failed bank acquisition).
Total assets at December 31, 2010 amounted to $3.3 billion, a 7.5% decrease from a year earlier. Total loans at
December 31, 2010 amounted to $2.5 billion, a 7.5% decrease from a year earlier, and total deposits amounted
to $2.7 billion at December 31, 2010, a 9.6% decrease from a year earlier. The contraction of our balance sheet
was primarily a result of weak loan demand during 2010, which allowed us to lessen our reliance on higher cost
32
sources of funding.
We began experiencing a general decline in loans beginning in 2009 as the full effect of the recession took hold.
Loans declined approximately $199 million, or 7.5%, in 2010.
Our deposits declined $281 million, or 9.6%, in 2010. The decrease was primarily associated with time deposits,
which are generally our highest cost source of funds. We also experienced a $70 million decrease in our NOW
accounts during 2010, primarily as a result of the expiration of certain provisions of the FDIC transaction account
guarantee program.
Net interest income for the year ended December 31, 2010 amounted to $127.4 million, an 18.9% increase from
2009. The increase in net interest income was primarily due to 1) a higher net interest margin, and 2) the higher
average balances of loans and deposits realized from the June 2009 Cooperative Bank acquisition.
Our net interest margin (tax-equivalent net interest income divided by average earnings assets) for 2010 was
4.39% compared to 3.81% for 2009. During 2010, there were no changes in the interest rates set by the Federal
Reserve, and we were able to continue to lower rates on our deposits, especially on maturing time deposits that
were originated in periods of higher interest rates. Also positively impacting net interest income were purchase
accounting adjustments, primarily related to our failed bank acquisition in 2009, including adjustments to loan
interest income previously discussed. See “Net Interest Income” below for additional discussion.
The economic environment, including its unfavorable effect on real estate values, resulted in an increase in our
loan losses and nonperforming assets, which led to significantly higher provisions for loan losses in 2010. Our
provision for loan losses amounted to $54.6 million for 2010 compared to $20.2 million recorded in 2009. In
2010, our provision for loan losses was comprised of $33.6 million in provisions related to non-covered loans
and $20.9 million related to covered loans, whereas in prior years the provision only related to non-covered
loans.
We recorded $33.6 million and $20.2 million in provision for loan losses during 2010 and 2009, respectively, for
non-covered loans. The higher provisions for loan losses were necessary primarily as a result of higher levels of
classified and nonperforming assets and the impact of declining real estate values on our collateral dependent
real estate loans.
We recorded $20.9 million in provision for loan losses during 2010 related to covered loans that experienced
credit quality deterioration. The credit quality deterioration primarily related to collateral dependent loans for
which we received updated appraisals during 2010 that reflected lower valuations.
Net loan charge-offs for 2010 were $42.5 million compared to $12.1 million in 2009. Net charge-offs increased
primarily as a result of declines in real estate values. In 2010, net charge-offs were also impacted by charge-offs
of covered loans and the recording of partial charge-offs of non-covered loans, neither of which occurred during
2009. We recorded approximately $9.8 million in charge-offs of covered loans in 2010 compared to none in
2009. Also, we recorded partial charge-offs of non-covered loans amounting to $8.6 million during the fourth
quarter of 2010. Previously, we recorded specific reserves on collateral-deficient nonaccrual loans within the
allowance for loan losses, but did not record the charge-offs until the loans were foreclosed upon.
Our non-covered nonperforming assets at December 31, 2010 amounted to $117 million compared to $92
million at December 31, 2009. At December 31, 2010, the ratio of non-covered nonperforming assets to total
non-covered assets was 4.16% compared to 3.10% at December 31, 2009.
Our covered nonperforming assets at December 31, 2010 amounted to $168 million compared to $165 million
33
at December 31, 2009.
Noninterest income for the year ended December 31, 2010 amounted to $29.1 million compared to $89.5
million for 2009. In 2009, we recorded a $67.9 million bargain purchase gain in connection with the acquisition
of a failed bank. In 2010, we recorded $35.5 million in write-downs and losses on foreclosed property, the
majority of which related to the market deterioration of foreclosed properties associated with the failed bank
acquisition. We recorded $41.8 million in indemnification asset income related to higher than anticipated claims
that we will be able to make with the FDIC under the loss share agreements, primarily relating to loan losses and
foreclosed property losses and write-downs.
Noninterest expenses for the year ended December 31, 2010 amounted to $87.0 million, a 10.7% increase from
the $78.6 million recorded in 2009. Incremental operating expenses associated with the failed bank acquisition
were the primary reason for the increases in 2010. Included in other operating expenses for 2010 were
approximately $2.6 million in costs (net of FDIC reimbursements) associated with collection activities on loans
and foreclosed properties covered by FDIC loss share agreements, compared to $0.8 million in 2009.
Our effective tax rates were 33.2% and 38.4% for the years ended December 31, 2010 and 2009, respectively.
The lower effective tax rate in 2010 was primarily due to increased investment holdings of tax-exempt municipal
securities.
Outlook for 2012
We expect the banking industry, particularly in our region, to continue to face significant challenges in 2012.
While there has been some favorable national economic data reported in recent months, we have seen little, if
any, improvement in the unfavorable economic statistics affecting our region. These include unemployment
rates, housing starts, home prices, and the number of personal and business bankruptcies. We believe that the
Carolinas and Virginia may have been relatively late to experience the downturn in the national economy and
that this region is lagging the rest of the country in recovery. Thus, we believe that our loan losses will continue
to remain at elevated levels compared to historical norms. We also expect that the weak economy will continue
to result in low loan demand.
We believe that regulatory reform will negatively impact our earnings. The regulatory climate is not favorable
for banks. We expect additional overhead costs will be necessary to comply with all of the new regulations
expected to arise directly or indirectly from the Dodd-Frank Act.
In 2009 and 2011 we acquired failed banks with approximately $959 and $193 million in assets, respectively.
These acquisitions resulted in significant volatility to our earnings in 2009, 2010, and 2011, primarily as a result
of the bargain purchase gains recorded on the acquisition dates that increased earnings and write-downs of
foreclosed properties in 2010 and 2011 that negatively impacted earnings. While we expect the acquisitions to
eventually be accretive to earnings on a consistent basis, we believe that they may continue to add volatility to
our reported earnings in 2012. The volatility may be positive to earnings, which would most likely occur if the
credit quality of the acquired loans improves, or negative to earnings, which would most likely occur if the credit
quality of the acquired loans deteriorates or if the properties we have foreclosed on continue to decline in value.
34
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 the
estimation of losses on non-single family home loans or relationships greater than $500,000 that are defined as
“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 impaired single family home loans,
impaired loans or relationships less than $500,000, and all loans not considered to be impaired loans. Impaired
single family home loans, impaired loans or relationships less than $500,000, and loans that we have classified
as having normal credit risk are segregated by loan type, and estimated loss percentages are assigned to each
loan type, based on the historical losses, current economic conditions, and operational conditions specific to
each loan type. Loans that we have risk graded as having more than “standard” risk but not considered to be
impaired are segregated between those relationships with outstanding balances exceeding $500,000 and those
that are less than that amount. For those loan relationships with outstanding balances exceeding $500,000, we
review the attributes of each individual loan and assign any necessary loss reserve based on various factors
including payment history, borrower strength, collateral value, and guarantor strength. For loan relationships
less than $500,000 with more than standard risk but not considered to be impaired, 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 all other 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
35
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.
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
36
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.
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.
Merger and Acquisition Activity
In both 2009 and 2011 we completed a FDIC-assisted transaction of a failed bank. There were no significant
acquisitions in 2010. The results of each acquired company/branch are included in our financial statements
beginning on their respective acquisition dates. See Note 2 to the consolidated financial statements for
additional information regarding these acquisitions.
In October 2011, we announced that we had entered into a Branch Purchase and Assumption Agreement with
Waccamaw Bank, headquartered in Whiteville, North Carolina. The agreement provides for First Bank to
acquire eleven branches from Waccamaw Bank, which includes assuming all deposits, selected performing
loans, and all premises and equipment. Deposits total approximately $180 million and loans total approximately
$98 million. This transaction is subject to regulatory approval and other customary conditions. See Note 2 to the
consolidated financial statements for additional information.
37
FDIC Indemnification Asset
As previously discussed, on June 19, 2009 and January 21, 2011, we acquired substantially all of the assets and
liabilities of Cooperative Bank and The Bank of Asheville, respectively, in FDIC-assisted transactions. For each
transaction, the loans and foreclosed real estate purchased are covered by two loss share agreements with the
FDIC, which afford First Bank significant loss protection. Under the Cooperative Bank loss share agreements, the
FDIC will cover 80% of covered loan and foreclosed real estate losses up to $303 million, and 95% of losses in
excess of that amount. Under The Bank of Asheville loss share agreements, the FDIC will cover 80% of all
covered loan and foreclosed real estate losses. For both transactions, the loss share reimbursements are
applicable for ten years for single family home loans and five years for all other loans.
We have recorded a FDIC indemnification asset related to the two transactions to account for payments that we
expect to receive from the FDIC related to the loss share agreements. The carrying value of this receivable at
each period end is the sum of: 1) actual claims that have been submitted to the FDIC for reimbursement that
have not yet been received and 2) our estimated amount of loan and other real estate losses covered by the
agreements multiplied by the FDIC reimbursement percentage.
At December 31, 2011 and 2010, the FDIC indemnification asset was comprised of the following components:
($ in thousands)
Receivable related to claims submitted, not yet received
Receivable related to estimated future claims on loans
Receivable related to estimated future claims on other real estate owned
FDIC indemnification asset
2011
$ 13,377
90,275
18,025
$ 121,677
2010
30,201
86,966
6,552
123,719
As of each acquisition date, based on the losses inherent in the covered assets and what we estimated we would
receive as payments from the FDIC, we recorded a “FDIC Indemnification Asset.” Since that time, we have
recorded adjustments to the indemnification asset as discussed below.
The FDIC indemnification asset has been adjusted upwards in the following circumstances:
1) Deterioration of credit quality of covered loans – As of the acquisition dates, we recorded the loans
acquired from Cooperative Bank and The Bank of Asheville on our books at a fair value that was $227.9 million
and $51.7 million, respectively, less than the contractual amounts due from the borrowers, which was our
estimate of the loan losses inherent in the portfolio. As the credit quality of these portfolios change and better
information is obtained about likely losses, some loans have better repayment expectations than we originally
projected and some loans have worse repayment expectations than originally projected. For loans with worse
repayment expectations, we record provisions for loan losses with corresponding increases to the FDIC
indemnification asset by recording noninterest income in proportion to the reimbursement percentage. In 2011
and 2010, we recorded provisions for loan losses on covered loans amounting to $12.8 million and $20.9 million,
respectively, which resulted in an adjustment to the FDIC indemnification asset of $10.2 million and $16.7
million, respectively. There were no such adjustments in 2009.
2) Write-downs and losses on foreclosed properties – When we foreclose on delinquent borrowers, we
initially record the foreclosed property at the lower of book or fair value (based on current appraisals), with any
deficiency recorded as a charge-off. Subsequent to the foreclosure, we periodically order updated appraisals
and if the appraisal indicates a fair value lower than our carrying value, we must write the property down. Also,
periodically we sell foreclosed properties that result in losses. Each of these situations results in the Company
recording losses on other real estate owned with a corresponding increase to the FDIC indemnification asset by
recording noninterest income in proportion to the reimbursement percentage. In 2011 and 2010, we recorded
losses and write downs on covered foreclosed properties amounting to $24.5 million and $34.5 million,
38
respectively, which resulted in upward adjustments to the FDIC indemnification asset of $19.6 million and $27.6
million, respectively. There were no such adjustments in 2009.
3) Expenses incurred related to collection activities on covered assets – As a result of our collection efforts,
we incur expenses such as legal fees, property taxes and appraisal costs. Many of these expenses are
reimbursable by the FDIC. These expenses are recorded as “other” noninterest expenses and a corresponding
increase is made to increase the FDIC indemnification asset by reducing the gross collection expenses by the
amount expected to be reimbursed by the FDIC for eligible expenses. In 2011, 2010 and 2009, we incurred $8.5
million, $5.5 million, and $2.1 million in gross collection expenses related to covered assets, respectively, and
reduced that amount by $5.7 million, $2.9 million and $1.3 million in FDIC reimbursements, respectively.
The FDIC indemnification asset has been adjusted downwards in the following circumstances:
1) Receipt of cash from the FDIC related to claims submitted – On at least a quarterly basis, we submit
eligible loss share claims to the FDIC. After reviewing and approving the claims, the FDIC wires us cash, which
reduces the amount of the FDIC indemnification asset. In 2011, 2010 and 2009, we received $69.3 million,
$46.7 million and $40.5 million in FDIC reimbursements, respectively.
2) Accretion of discount on acquired loans – As noted above, we recorded the acquired loans of the two
transactions on our books at a fair value that was $280 million (in total) less than the contractual amounts due
from the borrowers (the “discount”), which was our estimate of the loan losses inherent in the portfolio. As the
credit quality of this portfolio changes and better information is obtained about likely losses, some loans have
better repayment expectations than we originally projected and some loans have worse repayment
expectations than originally projected (discussed above). For loans with improved repayment expectations, we
are systematically reducing the discount over the life of the loan as it repays. For some loans, we have received
complete payoffs at the contractual balance and the discount must be reduced to zero. When we
reduce/accrete the discount, we do so by recognizing interest income in that same amount. When the expected
losses on loans with improved repayment expectations becomes less than the original estimate, our expected
reimbursement from the FDIC declines as well. Accordingly, we reduce the FDIC indemnification asset by the
corresponding reimbursement percentage. In 2011, 2010 and 2009, we recorded discount accretion of $11.6
million, $7.6 million, and $1.5 million, respectively, which resulted in a reduction of FDIC indemnification asset
of $9.3 million, $6.1 million, and $1.2 million, respectively.
In summary, circumstances that result in adjustments to the FDIC indemnification asset are recorded within the
income statement line items noted without consideration of the FDIC loss share agreements. Because favorable
changes in covered assets result in lower expected FDIC claims, and unfavorable changes in covered assets result
in higher expected FDIC claims, the FDIC indemnification asset is adjusted to reflect those expectations. The net
increase or decrease in the indemnification asset is reflected within noninterest income.
The adjustments can result in volatility within individual income statement line items. Because of the FDIC loss
share agreements and the associated indemnification asset, pretax income resulting from amounts recorded as
provisions for loan losses, interest income, and losses from foreclosed properties is generally only impacted by
20% due to the corresponding adjustments made to the indemnification asset.
39
The following presents a rollforward of the FDIC indemnification asset since the date of the Cooperative Bank
acquisition on June 19, 2009.
($ in thousands)
Balance at June 19, 2009
Decrease related to favorable change in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Balance at December 31, 2009
Increase related to unfavorable change in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Balance at December 31, 2010
Increase related to acquisition of The Bank of Asheville
Increase related to unfavorable change in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Other
Balance at December 31, 2011
$ 185,112
(1,516)
1,300
(40,500)
(1,175)
143,221
30,419
2,900
(46,721)
(6,100)
123,719
42,218
29,814
5,725
(69,339)
(9,278)
(1,182)
$ 121,677
ANALYSIS OF RESULTS OF OPERATIONS
Net interest income, the “spread” between earnings on interest-earning assets and the interest paid on interest-
bearing liabilities, constitutes the largest source of our earnings. Other factors that significantly affect operating
results are the provision for loan losses, noninterest income such as service fees and noninterest expenses such
as salaries, occupancy expense, equipment expense and other overhead costs, as well as the effects of income
taxes.
Net Interest Income
Net interest income on a reported basis amounted to $132.2 million in 2011, $127.4 million in 2010, and $107.1
million in 2009. For internal purposes and in the discussion that follows, we evaluate our net interest income on
a tax-equivalent basis by adding the tax benefit realized from tax-exempt securities to reported interest income.
Net interest income on a tax-equivalent basis amounted to $133.8 million in 2011, $128.7 million in 2010, and
$107.9 million in 2009. Management believes that analysis of net interest income on a tax-equivalent basis is
useful and appropriate because it allows a comparison of net interest amounts in different periods without
taking into account the different mix of taxable versus non-taxable investments that may have existed during
those periods. The following is a reconciliation of reported net interest income to tax-equivalent net interest
income.
($ in thousands)
Net interest income, as reported
Tax-equivalent adjustment
Net interest income, tax-equivalent
2011
$ 132,203
1,556
$ 133,759
Year ended December 31,
2010
127,354
1,316
128,670
2009
107,096
818
107,914
Table 2 analyzes net interest income on a tax-equivalent basis. Our net interest income on a tax-equivalent
basis increased by 4.0% in 2011 and 19.2% in 2010. 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).
40
For 2011, the increase in net interest income over the comparable period in 2010 was due to a higher net
interest margin, which was partially offset by a lower level of earning assets due to a contraction of our balance
sheet during 2011. In 2010, higher average loan and deposit balances increased net interest income. Also, the
positive effects of the increased balances in 2010 were enhanced by a higher net interest margin.
Although our acquisition of The Bank of Asheville in early 2011 resulted in the addition of $102 million in loans,
our average loan balances declined by $92 million during the year - from $2.55 billion in 2010 to $2.46 billion in
2011. We believe the decline in loans is primarily a direct and indirect result of the weak economy in our market
area. During 2011, we charged-off $52 million in loans and foreclosed on another $76 million that reduced our
loan balances, with a portion of the charge-off and foreclosure activity relating to our two FDIC failed bank
acquisitions. Also, loan demand in most of our market areas remained weak, with the pace of loan principal
repayments substantially offsetting new loan originations. With the decline in loans, we were able to lessen our
reliance on higher cost sources of funding, including internet deposits and large denomination time deposits,
which resulted in lower deposit balances (and, as discussed below, a lower average cost of funds).
Although loans and deposits outstanding decreased during calendar year 2010, the average balances of loans
and deposits were both higher in 2010 than they were in 2009 as a result of the Cooperative Bank acquisition
that occurred in mid-2009. The loans and deposits acquired in this acquisition impacted loan and deposit
balances outstanding for all twelve months of 2010 and for the six month period subsequent to the June 2009
acquisition.
As illustrated in Table 3, the lower average loan and deposit balances negatively impacted net interest income in
2011, while higher balances positively impacted net interest income in 2010. In 2011, declines in interest-
earning assets, primarily loans, resulted in a decrease in interest income of $4.4 million, while lower amounts of
interest-bearing liabilities resulted in only $0.4 million of lower interest expense. As a result, the net impact of
lower loans and deposits was a decrease in tax-equivalent net interest income of $4.0 million in 2011. In 2010,
growth in interest-earning assets resulted in an increase in interest income of $6.1 million, while higher amounts
of interest-bearing liabilities only resulted in $0.5 million in increased interest expense. As a result, the higher
average balances of loans and deposits resulted in an increase in tax-equivalent net interest income of $5.6
million in 2010.
Table 3 also illustrates the impact that changes in the interest rates that we earned/paid had on our net interest
income in 2010 and 2011. In both years, lower interest rates on deposits was the primary factor affecting net
interest income. Although the prime rate of interest has not changed since 2008, interest rates on U.S. Treasury
bonds and other interest-sensitive financial instruments have steadily declined since then, resulting in a
generally lower interest rate environment. In both years, the progressively lower interest rate environment
gave us the opportunity to reduce rates on matured time deposits, and we were also able to gradually reduce
interest rates on demand deposits. In 2010, the lower interest rates reduced interest expense by $17.5 million
and in 2011 the lower interest rates reduced interest expense by $7.9 million. The lower interest rate
environment had much less impact on our interest income, with the impact of changes in interest rates lowering
interest income by $2.3 million in 2010 and increasing it by $1.2 million in 2011. The lesser impact was due to
continued use of interest rate floors on loans, as well as the effect of higher levels of loan discount accretion in
both 2010 and 2011 (discussed below). Overall, changes in interest rates increased net interest income by $15.2
million in 2010 and $9.1 million in 2011.
We measure the spread between the yield on our earning assets and the cost of our funding primarily in terms
of the ratio entitled “net interest margin” which is defined as tax-equivalent net interest income divided by
average earning assets. Our net interest margin increased 33 basis points in 2011 to 4.72% from 4.39% in 2010.
Our net interest margin was 3.81% in 2009.
41
The primary reason for the increases in our net interest margin has been that the yields on interest-earning
assets have remained fairly stable over the past three years, ranging from 5.48% to 5.55%, while the cost of
interest-bearing liabilities has steadily declined from 1.96% in 2009 to 1.20% in 2010 to 0.90% in 2011. As noted
above, our interest-earning asset yields have remained stable because of the continued use of interest rate
floors on loans, as well as higher levels of loan discount accretion. Also as noted above, we have been able to
lower rates on maturing time deposits that were originated in periods of higher rates throughout 2009, 2010,
and 2011. And to a lesser degree, we have been able to progressively lower interest rates on various types of
savings, NOW and money market accounts. We have also experienced declines in our levels of higher cost
deposit balances, including internet deposits and large denomination time deposits.
During each of the past three years, our net interest margin also benefitted from the net accretion of purchase
accounting premiums/discounts associated with the Cooperative Bank 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
2011, 2010 and 2009, we recorded $11.6 million, $10.0 million and $5.6 million, respectively, in net accretion of
purchase accounting premiums/discounts that increased net interest income. The following table provides
detail of the purchase accounting adjustments that impacted net interest income:
($ in thousands)
Year Ended
December 31,
2011
Year Ended
December 31,
2010
Year Ended
December 31,
2009
Interest income – reduced by premium amortization on loans
Interest income – increased by accretion of loan discount
Interest expense – reduced by premium amortization of deposits
Interest expense – reduced by premium amortization of borrowings
Impact on net interest income
$ (453)
11,598
337
146
$ 11,628
(196)
7,607
2,211
341
9,963
(196)
1,469
3,911
464
5,648
The following table presents the purchase accounting entries that we expect to record in 2012.
($ in thousands)
Interest income – reduced by premium amortization on loans
Interest income – increased by accretion of loan discount
Interest expense – reduced by premium amortization of deposits
Interest expense – reduced by premium amortization of borrowings
Impact on net interest income
Expected - 2012
$ (465)
See note below
85
30
See note below
Note - We cannot determine the amount of interest income, if any, to be recognized from the accretion of the
loan discount on Cooperative loans or The Bank of Asheville loans because it is reliant on our ongoing
assessment during the year of the repayment period of the loans, which is impacted by any changes in expected
credit losses related to the loans.
See additional information regarding net interest income in the section entitled “Interest Rate Risk.”
Provision for Loan Losses
The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses
to an estimated balance considered appropriate to absorb probable losses inherent in our loan portfolio.
Management’s determination of the adequacy of the allowance is based on the level of loan growth, an
evaluation of the portfolio, current economic conditions, historical loan loss experience and other risk factors.
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
42
impact collateral dependent real estate loans. For 2011, 2010, and 2009 our total provisions for loan losses
were $41.3 million, $54.6 million, and $20.2 million, respectively. 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, as
discussed in the following paragraphs.
We recorded $28.5 million, $33.6 million, and $20.2 million in provisions for loan losses related to non-covered
loans for the years-ended December 31, 2011, 2010, and 2009, respectively. The lower provision for loan losses
for non-covered loans in 2011 compared to 2010 was primarily due to stabilization in overall loan quality and
lower levels of non-covered nonperforming loans. The higher provision for non-covered loans in 2010 was
necessary primarily as a result of higher levels of classified and nonperforming assets and the impact of declining
real estate values on our collateral dependent real estate loans.
In 2011 and 2010, we recorded $12.8 million and $20.9 million in provisions for loan losses for covered loans,
respectively, that experienced credit quality deterioration. The credit quality deterioration primarily related to
collateral dependent nonaccrual loans for which we received updated appraisals in 2011 and 2010 that reflected
lower valuations. The lower provision for loan losses for covered loans in 2011 compared to 2010 was primarily
due to lower levels of 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 $10.2
million and $16.7 million in 2011 and 2010, respectively, or 80% of the amount of the provisions (see discussion
above).
Total net charge-offs for the years ended December 31, 2011, 2010, and 2009, were $49.3 million, $42.5 million,
and $12.1 million, respectively. As discussed further below, the higher net charge-offs in 2010 and 2011
compared to 2009 were primarily a result of worsening economic conditions, especially related to real estate,
that resulted in higher levels of borrowers not repaying their loans.
Net-charge offs for non-covered loans were $31.2 million, $32.7 million and $12.1 million for 2011, 2010 and
2009 respectively. Net charge-offs of non-covered loans were impacted by $9.0 million and $8.6 million in
partial charge-offs of non-covered loans for 2011 and 2010, respectively. Prior to 2010 we recorded specific
reserves on collateral-deficient nonaccrual loans within the allowance for loan losses, but did not record charge-
offs until the loans had been foreclosed upon.
Net charge-offs for covered loans were $18.1 million, $9.8 million, and $0 in for 2011, 2010, and 2009,
respectively. The charge-offs of covered loans were primarily a result of declining collateral values on collateral
dependent nonaccrual loans.
In 2011 and 2010, our provisions for loan losses and net charge-offs were concentrated in loans classified as
“real estate – construction, land development & other land loans.” This category of loans is primarily comprised
of land acquisition and development loans and other types of lot loans. These types of loans have been
particularly hard hit by the decline in real estate development and property values. As can be seen in Table 10,
although we have reduced our exposure to this category of loans, we continue to have exposure to this sector
and future significant losses could result.
Non-covered nonperforming assets at December 31, 2011 amounted to $122 million compared to $117 million
and $92 million at December 31, 2010 and 2009, respectively. At December 31, 2011, the ratio of non-covered
nonperforming assets to total non-covered assets was 4.30% compared to 4.16% and 3.10% at December 31,
2010 and 2009, respectively. Also see “Nonperforming Assets” below for additional discussion.
See the section entitled “Allowance for Loan Losses and Loan Loss Experience” below for a more detailed
discussion of the allowance for loan losses. The allowance is monitored and analyzed regularly in conjunction
with our loan analysis and grading program, and adjustments are made to maintain an adequate allowance for
43
loan losses.
Noninterest Income
Our noninterest income amounted to $26.2 million in 2011, $29.1 million in 2010, and $89.5 million in 2009.
As shown in Table 4, core noninterest income excludes gains from acquisitions, foreclosed property write-downs
and losses, indemnification asset income, securities gains or losses, and other miscellaneous gains and losses.
Core noninterest income amounted to $23.2 million in 2011, a 4.7% increase from $22.1 million in 2010. The
2010 core noninterest income of $22.1 million was 1.2% higher than the $21.9 million recorded in 2009.
See Table 4 and the following discussion for an understanding of the components of noninterest income.
Service charges on deposit accounts in 2011 amounted to $12.0 million, a 2.9% decrease compared to $12.3
million recorded in 2010. The $12.3 million recorded in 2010 was 5.9% less than the 2009 amount of $13.1
million. Legislation that became effective on July 1, 2010 reduced our fees earned on overdrafts in 2010 and
2011, which was the primary reason for the declines in this component of noninterest income. Specifically, the
legislation now prohibits us from charging an overdraft fee for paying ATM and one-time debit card transactions
that overdraw a consumer’s account, unless the consumer affirmatively consents, or opts in, to our payment of
overdrafts for these transactions. Additional regulations on overdraft fees became effective July 1, 2011 that
further reduced our overdraft fees, although to a lesser extent than the 2010 changes. In April 2011, we
implemented new fees on deposit accounts, such as fees for customers that elect to receive paper statements,
that have helped to replace a large portion of the revenue that was lost as a result of the overdraft legislation.
Other service charges, commissions and fees amounted to $8.1 million in 2011, a 24.0% increase from the $6.5
million earned in 2010. The 2010 amount of $6.5 million was a 13.6% increase from the $5.7 million earned in
2009. This category of noninterest income includes items such as electronic payment processing revenue (which
includes fees related to credit card transactions by merchants and customers and fees earned from debit card
transactions), ATM charges, safety deposit box rentals, fees from sales of personalized checks, and check cashing
fees. The growth in this category for both years was primarily attributable to increased debit card usage by our
customers, as we earn a small fee each time our customers make a debit card transaction. Also, part of the
increase in this category is due to the overall growth in our total customer base, including growth achieved from
corporate acquisitions.
Fees from presold mortgages amounted to $1.6 million in 2011, $1.8 million in 2010, and $1.5 million in 2009.
We continue to experience higher mortgage refinance activity due to lower interest rates.
Commissions from sales of insurance and financial products amounted to $1.5 million in each of 2011, 2010, and
2009. This line item includes commissions we receive from three sources - 1) sales of credit life insurance
associated with new loans, 2) commissions from the sales of investment, annuity, and long-term care insurance
products, and 3) commissions from the sale of property and casualty insurance. The following table presents
the contribution of each of the three sources to the total amount recognized in this line item:
44
($ in thousands)
Commissions earned from:
Sales of credit life insurance
Sales of investments, annuities, and long term care insurance
Sales of property and casualty insurance
Total
2011
2010
2009
$ 70
760
682
$ 1,512
107
531
838
1,476
281
503
740
1,524
Noninterest income not considered to be “core” resulted in a net contribution to total noninterest income of
$3.0 million in 2011, $7.0 million in 2010, and $67.6 million in 2009. The components of non-core noninterest
income are shown in Table 4 and the significant components thereof are discussed below.
In 2011 and 2010, we recorded $27.8 million and $35.5 million in write-downs and losses on foreclosed
properties, respectively, of which $24.5 million and $34.5 million related to write-downs on covered properties,
respectively. Consistent with the other failed bank accounting adjustments discussed earlier, the bottom line
impact to pretax income of these write-downs on covered properties was 20% of the gross write-downs.
Indemnification asset income for 2011 and 2010 amounted to $20.5 million and $41.8 million, respectively (with
no corresponding amount in 2009). This income primarily relates to upward adjustments to the amount
expected to be received from the FDIC under loss share agreements as a result of higher than anticipated loan
losses and foreclosed property losses and write-downs, as follows:
($ in millions)
Higher expected FDIC claims for covered loans experiencing a deterioration in quality
Lower expected FDIC claims for covered loans related to loan discount accretion and
principal paydowns/payoffs
Foreclosed property losses and write-downs - covered
Total adjustment to expected FDIC loss-share claims
Expected reimbursement rate
Indemnification asset income
2011
$ 12.7
(11.6)
24.5
25.6
80%
$ 20.5
2010
$ 20.9
(3.2)
34.5
52.2
80%
$ 41.8
In 2011 and 2009, as previously discussed, we realized gains from the FDIC-assisted acquisitions of failed banks
amounting to $10.2 million and $67.9 million, respectively, which were the amounts by which the fair value of
the assets purchased exceeded the fair value of liabilities assumed in each transaction.
The line item “Other gains (losses)” was positively impacted in 2010 by the sale of our merchant credit card
processing portfolio, which resulted in a gain of $850,000.
Noninterest Expenses
Noninterest expenses for 2011 were $96.1 million, compared to $87.0 million in 2010 and $78.6 million in 2009.
Table 5 presents the components of our noninterest expense during the past three years.
As reflected in the amounts noted above, noninterest expenses increased 10.5% in 2011 and 10.7% in 2010. The
increases in noninterest expenses over the past three years have occurred in almost every line item of expense
and have been primarily a result of our significant growth. Due to acquisition and internal growth, over the past
three years our number of bank branches has increased from 74 to 97, and the number of full time equivalent
employees has increased from 650 at December 31, 2008 to 830 at December 31, 2011. Additionally, from
December 31, 2008 to December 31, 2011, the amount of loans outstanding increased 9.9% and deposits
increased 32.8%.
Total personnel expense increased by approximately $6.1 million, or 13.6%, in 2011. Salaries expense
45
comprised $4.7 million of this increase, which was primarily a result of an initiative to progressively build our
infrastructure to manage increased compliance burdens, collection activities, and overall growth of the
Company, as well as to prepare for future growth. Another factor in the increase in salaries expense in 2011 was
the acquisition of The Bank of Asheville in January 2011, which added approximately 35 employees. Higher
employee health insurance costs also played a role in the increase in personnel expense in 2011. Employee
health insurance expense amounted to $4.4 million in 2011, an increase of $1.3 million over the $3.1 million
incurred in 2010. We self-insure our employees’ health care expense; therefore, incurred health care costs
directly impact the expense we record.
In 2010, salaries expense increased $4.3 million, primarily due to a full year of salaries related to employees
assumed in the June 2009 Cooperative acquisition. The increase in salary expense was partially offset by lower
health care expenses of $0.4 million and lower pension expense in 2010 of $0.6 million. Pension expense
decreased during 2010 primarily due to investment gains experienced by the pension plan’s assets in 2009.
In 2011 and 2009, we incurred acquisition expenses of approximately $0.6 million in connection with The Bank
of Asheville acquisition and $1.3 million in connection with the Cooperative Bank acquisition, respectively.
Acquisition expenses for both periods consisted primarily of professional fees.
FDIC deposit insurance expense declined in each of the past two years. In 2009, 2010, and 2011, we incurred
approximately $5.5 million, $4.4 million, and $3.0 million, respectively, in FDIC deposit insurance premium
expense. The $5.5 million in FDIC insurance expense for 2009 included a special assessment, which applied to all
banks, of $1.6 million. As previously discussed, the FDIC changed its premium assessment methodology in April
2011, which was favorable for our company and reduced our expense in 2011.
Due to higher levels of delinquencies and foreclosure activity, including those associated with our covered
assets, we recorded $5.5 million in repossession and collection expenses, net of FDIC reimbursements, in 2011,
compared to $4.8 million in 2010 and $1.7 million in 2009.
Within the “non-credit losses” presented in Table 5, we recorded $1 million in 2011 in connection with a fraud
loss.
Income Taxes
The provision for income taxes was $7.4 million in 2011, $5.0 million in 2010, and $37.6 million in 2009.
Table 6 presents the components of tax expense and the related effective tax rates. The effective tax rate for
2011 was 35.1% compared to 33.2% in 2010 and 38.4% in 2009. The variances in effective tax rates are
primarily due to changes in the proportion of tax-exempt interest income to pretax income. We expect our
effective tax rate to be approximately 35% in 2012.
Stock-Based Compensation
We recorded stock-based compensation expense of $0.9 million, $0.6 million, and $0.4 million for the years
ended December 31, 2011, 2010, and 2009, respectively. See Note 15 to the consolidated financial statements
for more information regarding stock-based compensation.
46
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Overview
Over the past two years, our total assets have decreased from $3.5 billion at December 31, 2009 to $3.3 billion
at December 31, 2011, which was primarily due to declines in our outstanding loans and deposits. Changes in
our loans and deposit balances occur as a result of organic growth or decline, as well as acquisitions. During the
first quarter of 2011, we acquired The Bank of Asheville in a FDIC-assisted failed bank transaction. The following
table presents detailed information regarding the nature of changes in our loans and deposits in 2010 and 2011:
($ in thousands)
2011
Loans – Non-covered
Loans – Covered
Total loans
Deposits – Noninterest bearing
Deposits – NOW
Deposits – Money market
Deposits – Savings
Deposits – Brokered time
Deposits – Internet time
Deposits – Time >$100,000 - retail
Deposits – Time <$100,000 - retail
Total deposits
2010
Loans – Non-covered
Loans – Covered
Total loans
Deposits – Noninterest bearing
Deposits – NOW
Deposits – Money market
Deposits – Savings
Deposits – Brokered time
Deposits – Internet time
Deposits – Time >$100,000 - retail
Deposits – Time <$100,000 - retail
Total deposits
Balance at
beginning of
period
Internal
growth (1)
Growth from
Acquisitions
Balance at
end of
period
Total
percentage
growth
Internal
percentage
growth (1)
$ 2,083,004
371,128
$ 2,454,132
(13,852)
(112,162)
(126,014)
$ 292,759
292,623
498,312
153,325
143,554
46,801
602,371
622,768
$ 2,652,513
24,276
99,471
(7,661)
(10,056)
(1,048)
(59,819)
(40,478)
(94,905)
(90,220)
(cid:1086)
102,268
102,268
18,798
31,358
19,150
3,212
14,902
42,920
13,515
48,889
192,744
$ 2,132,843
520,022
$ 2,652,865
(49,839)
(148,894)
(198,733)
$ 272,422
362,366
496,940
149,338
76,332
128,024
704,128
743,558
$ 2,933,108
20,337
(69,743)
1,372
3,987
67,222
(81,223)
(101,757)
(120,790)
(280,595)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
2,069,152
361,234
2,430,386
335,833
423,452
509,801
146,481
157,408
29,902
575,408
576,752
2,755,037
2,083,004
371,128
2,454,132
292,759
292,623
498,312
153,325
143,554
46,801
602,371
622,768
2,652,513
-0.7%
-2.7%
-1.0%
14.7%
44.7%
2.3%
-4.5%
9.7%
-36.1%
-4.5%
-7.4%
3.9%
-2.3%
-28.6%
-7.5%
7.5%
-19.2%
0.3%
2.7%
88.1%
-63.4%
-14.5%
-16.2%
-9.6%
-0.7%
-30.2%
-5.1%
8.3%
34.0%
-1.5%
-6.6%
-0.7%
-127.8%
-6.7%
-15.2%
-3.4%
-2.3%
-28.6%
-7.5%
7.5%
-19.2%
0.3%
2.7%
88.1%
-63.4%
-14.5%
-16.2%
-9.6%
(1) Excludes the impact of acquisitions in the year of the acquisition, but includes growth or declines in acquired operations after the
date of acquisition.
In 2011, as derived from the table above, our total loans declined $24 million, or 1.0%. Positively impacting
loans outstanding was our acquisition of The Bank of Asheville on January 21, 2011, which added $102 million in
loans. However, this increase was more than offset by loan payoffs, foreclosures and loan charge-offs. During
2011, we charged-off $52 million in loans and foreclosed on another $76 million that reduced our loan balances,
with a portion of the charge-off and foreclosure activity relating to our two FDIC failed bank acquisitions. Also,
loan demand in most of our market areas has remained weak, with the pace of loan principal repayments
substantially offsetting new loan originations. In addition, we have de-emphasized certain types of lending,
most notably acquisition and development land loans and non-owner occupied commercial real estate.
However, for the first time since our loans outstanding began trending downward in 2008, we experienced
sequential quarterly growth in our non-covered loan portfolio during each of the last two quarters of 2011, with
47
non-covered loans increasing by $28 million during the last half of 2011. We are actively pursuing lending
opportunities in order to improve asset yields, as well as to potentially decrease the dividend rate on our SBLF
preferred stock (see Note 19 to the consolidated financial statements for more information).
To start 2011, our total deposits increased by $193 million as a result of the January acquisition of The Bank of
Asheville. For the remainder of the year, as our loans declined, we were able to lessen our reliance on higher
cost sources of funding, including internet deposits and time deposits, which resulted in generally declining
deposit balances. Our lowest cost deposits, noninterest bearing demand accounts and NOW accounts,
experienced positive internal growth of $24 million and $99 million, respectively. In addition to our bank-wide
emphasis to grow these types of low-rate accounts, the increase in NOW accounts was impacted by $38 million
in customer funds that were shifted from repurchase agreements (securities sold under agreements to
repurchase) to NOW accounts during late 2011. In July 2011, the Dodd-Frank Act repealed certain sections of
the Federal Reserve Act that prohibited payment of interest on commercial demand deposits. With this
prohibition removed, we began to pay interest on certain types of commercial demand accounts, and we
encouraged our customers with repurchase agreements to switch to commercial NOW accounts, which
eliminated the need to sell/pledge our investment securities.
For the same reasons as discussed above for 2011, we experienced a decline in loans of 7.5% in 2010. In 2010,
we also experienced a decline in deposits of 9.6%, with most of the decline occurring in retail time deposits.
Retail time deposits are generally a high cost source of funds for us, and during 2010 we decided not to match
promotional time deposit interest rates being offered by several of our local competitors, which we felt were
too high compared to alternative funding sources, and consequently we experienced a loss of time deposits.
Also declining significantly in 2010 was our level of internet time deposits. Our level of time deposits gathered
from internet posting services declined from $128 million at December 31, 2009 to $47 million at December 31,
2010. Substantially all of our internet deposits during 2010 were assumed in the Cooperative acquisition in
2009. Prior to its closing, Cooperative was prohibited from originating or renewing brokered deposits and
accordingly, they enhanced liquidity by offering relatively high interest rates on internet posting services. As
these time deposits have matured, the internet depositors, mostly credit unions, have elected not to renew the
time deposits at the interest rates we have proposed. In 2010, we replaced most of the lost internet deposits
with brokered deposits, which had more favorable interest rates. As a result, our brokered deposits increased
from $76 million at December 31, 2009 to $144 million at December 31, 2010.
We also experienced a $70 million decrease in our NOW accounts during 2010, primarily as a result of two
depositors who withdrew their funds in the last week of the year in anticipation of the expiration of certain
provisions of the FDIC transaction account guarantee program. This program previously provided unlimited FDIC
insurance for interest bearing transaction accounts earning interest rates up to 0.25%. Subsequent to this
change, the only accounts with unlimited FDIC insurance are non-interest bearing transaction accounts.
Our overall liquidity increased slightly during 2011 compared to 2010. We experienced a $103 million increase
in deposits, while loans decreased $24 million. With the excess deposits, we were able to reduce our
borrowings by approximately $63 million during 2011. Our liquid assets (cash and securities) as a percentage of
our total deposits and borrowings increased from 15.4% at December 31, 2010 to 15.7% at December 31, 2011.
Our capital ratios improved in 2011. All of our capital ratios have continually exceeded the regulatory thresholds
for “well-capitalized” status for all periods covered by this report.
Due to the continued economic slowdown, our asset quality ratios remain at unfavorable levels compared to
most of our company’s history. Our non-covered nonperforming assets to total non-covered assets ratio was
4.30% at December 31, 2011 compared to 4.16% at December 31, 2010, and 3.10% at December 31, 2009. For
48
the year ended December 31, 2011, our ratio of net non-covered charge-offs to average non-covered loans was
1.52% compared to 1.55% for 2010, and 0.56% for 2009.
Distribution of Assets and Liabilities
Table 7 sets forth the percentage relationships of significant components of our balance sheet at December 31,
2011, 2010, and 2009.
Our balance sheet distribution has remained relatively stable over the past three years. The increase in NOW
deposits discussed earlier resulted in an increase in this category from 9% of total liabilities and shareholders’
equity at December 31, 2010 to 13% in 2011. Also, over the past two years we have experienced a decline in
retail time deposits less than $100,000 (“other time deposits”) that has resulted in other time deposits declining
from 23% of total liabilities and shareholders’ equity in 2009 to 18% in 2011.
Securities
Information regarding our securities portfolio as of December 31, 2011, 2010, and 2009 is presented in Tables 8
and 9.
The composition of the investment securities portfolio reflects our investment strategy of maintaining an
appropriate level of liquidity while providing a relatively stable source of income. The investment portfolio also
provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a
vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required
collateral for certain deposits. We obtain fair values for the vast majority of our investment securities from a
third-party investment recordkeeper, who specializes in securities purchases and sales, recordkeeping, and
valuation. This recordkeeper provides us with a third-party report that contains an evaluation of internal
controls that includes testwork of securities valuation. We further test the values we receive by comparing the
values for a significant sample of securities to another third-party valuation service on a quarterly basis.
Total securities amounted to $240.6 million, $235.2 million, and $214.2 million, at December 31, 2011, 2010,
and 2009, respectively.
The majority of our “government-sponsored enterprise” securities are issued by the Federal Home Loan Bank
and carry one maturity date, often with an issuer call feature. At December 31, 2011, of the $35 million
(carrying value) in government-sponsored enterprise securities, $21 million were issued by the Federal Home
Loan Bank system and the remaining $14 million were issued by the Federal Farm Credit Bank system.
Our $124 million of mortgage-backed securities have all been issued by either Freddie Mac, Fannie Mae, Ginnie
Mae, or the Small Business Administration, each of which are government-sponsored corporations. We have no
“private label” mortgage-backed securities. Mortgage-backed securities vary in their repayment in correlation
with the underlying pools of mortgage loans.
Included in mortgage-backed securities at December 31, 2011 were collateralized mortgage obligations
(“CMOs”) with an amortized cost of $1.5 million and a fair value of $1.5 million. The CMOs that we have
invested in are substantially all “early tranche” portions of the CMOs, which minimizes our long-term interest
rate risk.
49
At December 31, 2011, our $12.5 million investment in corporate bonds was comprised of the following:
Issuer
($ in thousands)
First Citizens Bancorp (South Carolina) Bond
Bank of America Trust Preferred Security
Bank of America Trust Preferred Security
First Citizens Bancorp (North Carolina) Trust Preferred Security
First Citizens Bancorp (South Carolina) Trust Preferred Security
Total investment in corporate bonds
S&P Issuer
Ratings (1)
Not Rated
BB
BB
BB
Not Rated
Maturity
Date
4/1/15
12/11/26
4/15/27
3/1/28
6/15/34
Amortized
Cost
$ 2,996
2,039
5,046
2,108
1,000
$ 13,189
Market
Value
3,102
1,780
4,588
2,278
740
12,488
(1) The ratings are as of January 26, 2012.
Substantially all of our investment in equity securities at each year end was comprised of capital stock in the
Federal Home Loan Bank of Atlanta (FHLB). The FHLB requires us to purchase their stock in order to borrow
from them. The amount they require us to invest is based on our level of borrowings from them. At December
31, 2011, our investment in capital stock of the FHLB amounted to $10.9 million of our total investment in
equity securities of $11.4 million. Until February 27, 2009, the FHLB redeemed their stock at par as borrowings
were repaid. On February 27, 2009, the FHLB announced that they would no longer automatically redeem their
stock when loans are repaid. Instead, they stated that they would evaluate whether they would repurchase
stock on a quarterly basis. During 2010 and 2011, the FHLB repurchased $1.8 million and $3.9 million,
respectively, of their stock from the Company.
The fair value of securities held to maturity, which we carry at amortized cost, was $4,766,000 more than the
carrying value at December 31, 2011 and $706,000 less than the carrying value at December 31, 2010. Our
$58.0 million in securities held to maturity are comprised almost entirely of municipal bonds issued by state and
local governments throughout our market area. We have only two municipal bonds with a denomination
greater than $2,000,000 and we have no significant concentration of bond holdings from one government
entity, with the single largest exposure to any one entity being $3,700,000. Management evaluated any
unrealized losses on individual securities at each year end and determined them to be of a temporary nature
and caused by fluctuations in market interest rates, not by concerns about the ability of the issuers to meet their
obligations.
At December 31, 2011, 2010, and 2009, a net unrealized gain of $3,896,000, $2,478,000, and $1,832,000,
respectively, was included in the carrying value of securities classified as available for sale. During the past three
years, interest rates have generally declined, which typically increases the value of our investment securities.
Management evaluated any unrealized losses on individual securities at each year end and determined them to
be of a temporary nature and caused by fluctuations in market interest rates and the overall economic
environment, not by concerns about the ability of the issuers to meet their obligations. Net unrealized gains,
net of applicable deferred income taxes, of $2,376,000, $1,512,000, and $1,117,000 have been reported as part
of a separate component of shareholders’ equity (accumulated other comprehensive income) as of December
31, 2011, 2010, and 2009, respectively.
The weighted average taxable-equivalent yield for the securities available for sale portfolio was 3.01% at
December 31, 2011. The expected weighted average life of the available for sale portfolio using the call date for
above-market callable bonds, the maturity date for all other non-mortgage-backed securities, and the expected
life for mortgage-backed securities, was 5.2 years.
The weighted average taxable-equivalent yield for the securities held to maturity portfolio was 5.78% at
December 31, 2011. The expected weighted average life of the held to maturity portfolio using the call date for
above-market callable bonds and the maturity date for all other securities, was 6.6 years.
50
The following table provides the names of issuers for which the Company has investment securities totaling in
excess of 10% of shareholders’ equity and the fair value and amortized cost of these investments as of
December 31, 2011. All of these securities are issued by government sponsored corporations.
($ in thousands)
Issuer
Ginnie Mae
Small Business Administration
Total
Amortized Cost
$ 66,888
39,034
$ 105,922
Fair Value
70,016
39,055
109,071
% of
Shareholders’
Equity
20.3%
11.3%
Loans
Table 10 provides a summary of the loan portfolio composition of our total loans at each of the past five year
ends.
As previously discussed, in our acquisitions of Cooperative Bank and The Bank of Asheville, we entered into loss
share agreements with the FDIC, which afford us significant protection from losses on all loans and other real
estate acquired in those acquisitions. Because of the loss protection provided by the FDIC, the financial risk of
the Cooperative Bank and The Bank of Asheville loans is significantly different from assets not covered under the
loss share agreements. Accordingly, we present separately loans subject to the FDIC loss share agreements as
“covered loans” and loans that are not subject to the loss share agreements as “non-covered loans.” Table 10a
presents a breakout of covered and non-covered loans as of December 31, 2011.
The loan portfolio is the largest category of our earning assets and is comprised of commercial loans, real estate
mortgage loans, real estate construction loans, and consumer loans. We restrict virtually all of our lending to
our 36 county market area, which is located in western, central and eastern North Carolina, four counties in
southern Virginia and five counties in northeastern South Carolina. The diversity of the region’s economic base
has historically provided a stable lending environment.
In 2011, loans outstanding decreased $23.7 million, or 1.0% to $2.43 billion. In 2010, loans outstanding
decreased $198.7 million, or 7.5% to $2.45 billion. As previously discussed, the declines for both years were
mainly due to loan payoffs and loan foreclosures exceeding new loan growth as loan demand in most of our
market areas remained weak.
The majority of our loan portfolio over the years has been real estate mortgage loans, with loans secured by real
estate consistently comprising 86% to 90% of our outstanding loan balances. Except for real estate construction,
land development and other land loans, the majority of our “real estate” loans are personal and commercial
loans where cash flow from the borrower’s occupation or business is the primary repayment source, with the
real estate pledged providing a secondary repayment source.
Table 10 indicates that the two types of loans that have had the largest variances in the amount outstanding as a
percent of total loans have been construction/land development loans and residential mortgage loans. In 2005
we expanded our branch network to what was then the fast-growing southeast coast of North Carolina, which
had a high demand for construction and land development loans. In 2008, due to recessionary conditions,
particularly in the new housing market, loan demand for these types of loans weakened and we tightened our
loan underwriting criteria for these types of loans, which reduced growth. Due to economic conditions, for the
past three years we have made very few new acquisition and land development loans, and we expect this trend
to continue.
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Our concentration of residential mortgage loans increased in 2009 as a result of the Cooperative acquisition,
because Cooperative’s loan portfolio was heavily concentrated in residential mortgages.
In 2011, due to The Bank of Asheville acquisition, our percentage of commercial real estate loans increased
slightly as that bank’s primary business had been commercial lending.
Table 11 provides a summary of scheduled loan maturities over certain time periods, with fixed rate loans and
adjustable rate loans shown separately. Approximately 23% of our accruing loans outstanding at December 31,
2011 mature within one year and 67% of total loans mature within five years. As of December 31, 2011, the
percentages of variable rate loans and fixed rate loans as compared to total performing loans were 47% and
53%, respectively. We intentionally make a blend of fixed and variable rate loans so as to reduce interest rate
risk.
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 a matter of policy we place all loans that are past due 90 or
more days on nonaccrual basis, and thus there were no loans at any of the past five year ends that were 90 days
past due and still accruing interest.
Nonaccrual loans are loans on which interest income is no longer being recognized or accrued because
management has determined that the collection of interest is doubtful. Placing loans on nonaccrual status
negatively impacts earnings because (i) interest accrued but unpaid as of the date a loan is placed on nonaccrual
status is reversed and deducted from interest income, (ii) future accruals of interest income are not recognized
until it becomes probable that both principal and interest will be paid and (iii) principal charged-off, if
appropriate, may necessitate additional provisions for loan losses that are charged against earnings. In some
cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms
significantly different from the originally contracted terms.
Table 12 summarizes our nonperforming assets at the dates indicated. Because of the loss protection provided
by the FDIC, we present separately nonperforming assets subject to the loss share agreements as “covered” and
nonperforming assets that are not subject to the loss share agreements as “non-covered.”
Due largely to the economic downturn that began in late 2007 and continued to worsen over the past few years,
we have experienced increases in our non-covered nonperforming assets. Our total nonperforming assets were
also significantly impacted by the Cooperative acquisition in 2009.
Table 12a presents our nonperforming assets at December 31, 2011 by general geographic region and further
segregated into “covered” nonperforming assets and “non-covered” nonperforming assets. The majority of our
nonperforming assets are located in the Eastern North Carolina region, which has experienced the most
negative effects of the recession of any of our regions.
Non-covered nonperforming loans totaled $85.2 million, $96.0 million, and $83.5 million, as of December 31,
2011, 2010, and 2009, respectively. Total non-covered nonperforming loans as a percentage of total non-
covered loans amounted to 4.12%, 4.61%, and 3.91%, at December 31, 2011, 2010, and 2009, respectively.
At December 31, 2011, 2010, and 2009, non-covered troubled debt restructurings amounted to $11.7 million,
$33.7 million, and $21.3 million, respectively. The decline in 2011 is primarily a result of troubled debt
restructurings that re-defaulted and were placed on nonaccrual status. The increase in 2010 was the result of
52
our initiative to work with borrowers experiencing financial difficulties by modifying certain loan terms.
We also had $14.2 million and $14.4 million of covered troubled debt restructurings at December 31, 2011 and
2010, respectively, compared to none in 2009.
The following is the composition, by loan type, of all of our nonaccrual loans at each period end, as classified for
regulatory purposes:
($ in thousands)
Commercial, financial, and agricultural
Real estate – construction, land development, and other land loans
Real estate – mortgage – residential (1-4 family) first mortgages
Real estate – mortgage – home equity loans/lines of credit
Real estate – mortgage – commercial and other
Installment loans to individuals
Total nonaccrual loans
(1)
Includes both covered and non-covered loans.
At December 31,
2011 (1)
$ 3,300
48,467
24,133
7,255
28,491
3,392
$ 115,038
At December 31,
2010 (1)
2,595
54,781
36,715
8,584
17,578
539
120,792
The following segregates our nonaccrual loans at December 31, 2011 into covered and non-covered loans, as
classified for regulatory purposes:
($ in thousands)
Commercial, financial, and agricultural
Real estate – construction, land development, and other land loans
Real estate – mortgage – residential (1-4 family) first mortgages
Real estate – mortgage – home equity loans/lines of credit
Real estate – mortgage – commercial and other
Installment loans to individuals
Total nonaccrual loans
Covered
Nonaccrual
Loans
$ 469
21,203
10,134
1,231
8,212
223
$ 41,472
Non-covered
Nonaccrual
Loans
2,831
27,264
13,999
6,024
20,279
3,169
73,566
Total
Nonaccrual
Loans
3,300
48,467
24,133
7,255
28,491
3,392
115,038
The following segregates our nonaccrual loans at December 31, 2010 into covered and non-covered loans, as
classified for regulatory purposes:
($ in thousands)
Commercial, financial, and agricultural
Real estate – construction, land development, and other land loans
Real estate – mortgage – residential (1-4 family) first mortgages
Real estate – mortgage – home equity loans/lines of credit
Real estate – mortgage – commercial and other
Installment loans to individuals
Total nonaccrual loans
Covered
Nonaccrual
Loans
$ 163
30,846
16,343
4,059
7,039
16
$ 58,466
Non-covered
Nonaccrual
Loans
2,432
23,935
20,372
4,525
10,539
523
62,326
Total
Nonaccrual
Loans
2,595
54,781
36,715
8,584
17,578
539
120,792
The tables above indicate that covered nonaccrual loans declined from $58.5 million at December 31, 2010 to
$41.5 million at December 31, 2011. This decrease was primarily a result of many of the nonaccrual loans at
December 31, 2010 being either charged-off or being foreclosed upon in 2011 and their balances being
transferred to other real estate during the year.
Non-covered nonaccrual loans increased from $62.3 million at December 31, 2010 to $73.6 million at December
31, 2011, which was the result of continued economic hardship in our market areas, particularly for the
commercial real estate business.
If the nonaccrual and restructured loans as of December 31, 2011, 2010 and 2009 had been current in
53
accordance with their original terms and had been outstanding throughout the period (or since origination if
held for part of the period), gross interest income in the amounts of approximately $8,724,000, $8,136,000 and
$9,800,000 for nonaccrual loans and $1,873,000, $1,943,000 and $1,200,000 for restructured loans would have
been recorded for 2011, 2010, and 2009, respectively. Interest income on such loans that was actually collected
and included in net income in 2011, 2010 and 2009 amounted to approximately $2,578,000, $3,195,000 and
$2,147,000 for nonaccrual loans (prior to their being placed on nonaccrual status), and $1,351,000, $1,342,000,
and $866,000 for restructured loans, respectively. At December 31, 2011 and 2010, we had no commitments to
lend additional funds to debtors whose loans were nonperforming.
Management routinely monitors the status of certain large loans that, in management’s opinion, have credit
weaknesses that could cause them to become nonperforming loans. In addition to the nonperforming loan
amounts discussed above, management believes that an estimated $5 million of non-covered loans and $16
million of covered loans that were performing in accordance with their contractual terms at December 31, 2011
have the potential to develop problems depending upon the particular financial situations of the borrowers and
economic conditions in general. Management has taken these potential problem loans into consideration when
evaluating the adequacy of the allowance for loan losses at December 31, 2011 (see discussion below).
Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been
disclosed in the problem loan amounts and the potential problem loan amounts discussed above do not
represent or result from trends or uncertainties that management reasonably expects will materially impact
future operating results, liquidity, or capital resources, or represent material credits about which management is
aware of any information that causes management to have serious doubts as to the ability of such borrowers to
comply with the loan repayment terms.
Other real estate includes foreclosed, repossessed, and idled properties. Non-covered other real estate has
increased over the past three years, amounting to $37.0 million at December 31, 2011, $21.1 million at
December 31, 2010, and $8.8 million at December 31, 2009. At December 31, 2011, 2010 and 2009, we also
held $85.3 million, $94.9 million and $47.4 million, respectively, in other real estate that is subject to loss share
agreements with the FDIC. 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.
The following table presents the detail of our other real estate at each of the past two year ends:
Vacant land
1-4 family residential properties
Commercial real estate
Other
Total other real estate
(1)
Includes both covered and non-covered real estate.
At December 31,
2011 (1)
$ 76,341
33,724
12,230
–
$ 122,295
At December 31,
2010 (1)
81,185
28,146
6,641
–
115,972
54
The following segregates our other real estate at December 31, 2011 into covered and non-covered:
Vacant land
1-4 family residential properties
Commercial real estate
Other
Total other real estate
Covered Other
Real Estate
$ 59,994
17,362
7,916
–
$ 85,272
Non-covered Other
Real Estate
16,347
16,362
4,314
–
Total Other Real
Estate
76,341
33,724
12,230
–
37,023
122,295
The following segregates our other real estate at December 31, 2010 into covered and non-covered:
Vacant land
1-4 family residential properties
Commercial real estate
Other
Total other real estate
Allowance for Loan Losses and Loan Loss Experience
Covered Other
Real Estate
$ 72,878
18,691
3,322
–
$ 94,891
Non-covered Other
Real Estate
8,307
9,455
3,319
–
Total Other Real
Estate
81,185
28,146
6,641
–
21,081
115,972
The allowance for loan losses is created by direct charges to operations (known as a “provision for loan losses”
for the period in which the charge is taken). Losses on loans are charged against the allowance in the period in
which such loans, in management’s opinion, become uncollectible. The recoveries realized during the period
are credited to this allowance. We consider our procedures for recording the amount of the allowance for loan
losses and the related provision for loan losses to be a critical accounting policy. See the heading “Critical
Accounting Policies” above for further discussion.
The factors that influence management’s judgment in determining the amount charged to operating expense
include past loan loss experience, composition of the loan portfolio, evaluation of probable inherent losses and
current economic conditions.
We use a loan analysis and grading program to facilitate our evaluation of probable inherent loan losses and the
adequacy of our allowance for loan losses. In this program, credit risk grades are assigned by management and
tested by an independent third party consulting firm. The testing program includes an evaluation of a sample of
new loans, loans we identify as having potential credit weaknesses, loans past due 90 days or more, loans
originated by new loan officers, nonaccrual loans and any other loans identified during previous regulatory and
other examinations.
We strive to maintain our loan portfolio in accordance with what management believes are conservative loan
underwriting policies that result in loans specifically tailored to the needs of our market areas. Every effort is
made to identify and minimize the credit risks associated with such lending strategies. 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 loans captioned in the tables
discussed below as “real estate” loans are 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 allowance for loan losses amounted to $41.4 million at December 31, 2011 compared to $49.4 million at
December 31, 2010 and $37.3 million at December 31, 2009. At December 31, 2011 and 2010, $5.8 million and
$11.2 million, respectively, of the allowance for loan losses is attributable to covered loans that have exhibited
credit quality deterioration due to lower collateral valuations, while the allowance for loan losses for non-
covered loans amounted to $35.6 million and $38.3 million at those dates. For all prior periods, the entire
55
allowance for loan losses is attributable to non-covered loans.
The ratio of the allowance for non-covered loan losses to non-covered loans was 1.72%, 1.84%, and 1.75%, as of
December 31, 2011, 2010, and 2009, respectively. The decrease in the percentage for 2011 is primarily
attributable to lower specific reserves at December 31, 2011. The increased allowance percentage in 2010 was
necessary due to the higher level of delinquencies and classified and nonperforming loans.
Table 13 sets forth the allocation of the allowance for loan losses at the dates indicated. The amount of the
unallocated portion of the allowance for loan losses did not vary materially at any of the past three year ends.
The allowance for loan losses is available to absorb losses in all categories. Table 13a segregates the allocation
of the allowance for loan losses as of December 31, 2011 and 2010 into covered and non-covered categories. As
indicated in Tables 13 and 13a, the amount of the allowance allocated to “Real Estate – Construction and Land
Development” declined by $5-$6 million from December 31, 2010 to December 31, 2011. This decline was due
to charge-offs and the foreclosure and transfer to “other real estate” of a significant amount of covered land
development loans.
Management considers the allowance for loan losses adequate to cover probable loan losses on the loans
outstanding as of each reporting date. It must be emphasized, however, that the determination of the
allowance using 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 amount reserved or that subsequent evaluations of the loan
portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance
for loan losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the
allowance for loan losses and losses on foreclosed real estate. Such agencies may require us to recognize
additions to the allowance based on the examiners’ judgments about information available to them at the time
of their examinations.
For the years indicated, Table 14 summarizes our balances of loans outstanding, average loans outstanding, and
a detailed rollforward of the allowance for loan losses.
Table 14a presents a detailed rollforward of the 2011 and 2010 activity for the allowance for loan losses
segregated into covered and non-covered activity.
Net loan charge-offs of non-covered loans amounted to $31.2 million in 2011, $32.7 million in 2010, and $12.1
million in 2009. The elevated amounts in 2010 and 2011 reflect the impact of deteriorating loan quality that has
been impacted by the economic downturn. Also in 2010 and 2011, we recorded $8.6 million and $9.0 million,
respectively, in partial charge-offs of non-covered loans. Previously, we recorded specific reserves on collateral-
deficient nonaccrual loans within the allowance for loans losses, but did not record charge-offs until the loans
had been foreclosed upon. Net non-covered charge-offs as a percentage of average non-covered loans
represented 1.52%, 1.55%, and 0.56%, during 2011, 2010, and 2009, respectively.
We recorded $18.1 million and $9.8 million in charge-offs of covered loans during 2011 and 2010, respectively,
primarily related to collateral dependent nonaccrual loans for which we received updated appraisals that
reflected lower valuations.
56
Deposits and Securities Sold Under Agreements to Repurchase
At December 31, 2011, deposits outstanding amounted to $2.755 billion, an increase of $103 million from
December 31, 2010. To begin 2011, deposits initially grew by $193 million as a result of the acquisition of The
Bank of Asheville in January 2011. For the remainder of the year, our deposit base declined by $90 million as a
lack of loan growth allowed us to reduce our reliance on higher cost deposits. Our NOW deposits increased
approximately $131 million during 2011, with $31 million being assumed in The Bank of Asheville acquisition and
another $38 million of the growth resulting from customers shifting their funds from securities sold under
agreements to repurchase to a commercial interest bearing NOW account (discussed earlier). In 2011, despite
the addition of $62 million in time deposits and $43 million in internet deposits from The Bank of Asheville
acquisition, we experienced overall net declines in these categories of $73 million and $17 million, respectively,
due to our ability to lessen our reliance on these higher cost deposits as a result of weak loan demand and
growth in our other lower-cost deposit categories.
In 2010, deposits declined from $2.933 billion to $2.653 billion, a decrease of $281 million, or 9.6%, from
December 31, 2009. Approximately $237 million, or 84%, of the decline in deposits was attributable to
decreases in time deposits. We also experienced a $70 million decrease in our NOW accounts during 2010,
primarily as a result of two depositors who withdrew their funds during the last week of the year in anticipation
of the expiration of certain provisions of the FDIC transaction account guarantee program.
The nature of our deposit growth is illustrated in the table on page 46. The following table reflects the mix of
our deposits at each of the past three year ends:
Noninterest-bearing deposits
NOW deposits
Money market deposits
Savings deposits
Brokered deposits
Internet deposits
Time deposits > $100,000 - retail
Time deposits < $100,000 - retail
Total deposits
Securities sold under agreements to repurchase
2011
12%
15%
19%
5%
6%
1%
21%
21%
100%
2010
11%
11%
19%
6%
5%
2%
23%
23%
100%
2009
9%
12%
17%
5%
3%
4%
24%
26%
100%
as a percent of total deposits
1%
2%
2%
The deposit mix remained relatively consistent from 2009 to 2011. Our mix has gradually shifted over the past
few years to a heavier concentration in transaction accounts and less concentration in our time deposits. The
percentages for retail time deposits have declined because we have chosen not to match certain promotional
time deposit interest rates being offered by several of our local competitors, which we felt were too high
compared to alternative funding sources. Our growth in other categories of deposits and our weak loan demand
eliminated the need to match the higher competitor rates.
We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship
banking to new and existing customers, where borrowers are encouraged and normally expected to maintain
deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3)
continually working to identify and introduce new products that will attract customers or enhance our appeal as
a primary provider of financial services.
Table 15 presents the average amounts of our deposits and the average yield paid for those deposits for the
years ended December 31, 2011, 2010, and 2009.
57
As of December 31, 2011, we held approximately $753.2 million in time deposits of $100,000 or more. Table 16
is a maturity schedule of time deposits of $100,000 or more as of December 31, 2011. This table shows that
66% of our time deposits greater than $100,000 mature within one year.
At each of the past three year ends, we have no deposits issued through foreign offices, nor do we believe that
we held any deposits by foreign depositors.
Borrowings
We had borrowings outstanding of $133.9 million at December 31, 2011 compared to $196.9 million at
December 31, 2010 and $176.8 million at December 31, 2009. Borrowings decreased from 2010 to 2011
primarily as a result of a decline in loans and growth in deposits that provided funds to pay down our
borrowings. During most of 2010, we held a lower level of borrowings until late in the year when we obtained
borrowings to offset a portion of the liquidity decline we experienced as a result of the loss of deposits that was
previously discussed. Table 2 shows that average borrowings were $122.7 million in 2011 compared to $79.8
million in 2010 and $151.2 million in 2009.
At December 31, 2011, the Company had four sources of readily available borrowing capacity – 1) an
approximately $389 million line of credit with the FHLB, of which $88 million was outstanding at December 31,
2011 and $62 million was outstanding at December 31, 2010, 2) a $50 million overnight federal funds line of
credit with a correspondent bank, of which none was outstanding at December 31, 2011 and $33 million was
outstanding at December 31, 2010, 3) an approximately $79 million line of credit through the Federal Reserve
Bank of Richmond’s (FRB) discount window, of which none was outstanding at December 31, 2011 and $55
million was outstanding at December 31, 2010, and 4) a $10 million holding company line of credit with a
commercial bank (none of which was outstanding at December 31, 2011 or 2010).
Our line of credit with the FHLB can be structured as either short-term or long-term borrowings, depending on
the particular funding or liquidity need, and is secured by our FHLB stock and a blanket lien on most of our real
estate loan portfolio. As of December 31, 2011, none of the $88 million outstanding with the FHLB were
overnight borrowings. All the FHLB borrowings were at fixed rates with a weighted average interest rate of
1.36% and maturity dates ranging from April 2012 to June 2014. For the year ended December 31, 2011, the
average amount of FHLB borrowings outstanding was approximately $76 million with a weighted average
interest rate for the year of 1.49%. The maximum amount of short-term FHLB borrowings outstanding at any
month-end during 2011 was $92 million.
In addition to the outstanding borrowings from the FHLB that reduce the available borrowing capacity of the line
of credit, our borrowing capacity was further reduced by $203 million at December 31, 2011 and 2010 as a
result of our pledging letters of credit backed by the FHLB for public deposits at each of those dates.
Our correspondent bank relationship allows us to purchase up to $50 million in federal funds on an overnight,
unsecured basis (federal funds purchased). We had no borrowings under this line at December 31, 2011. We
had $33 million outstanding under this line at December 31, 2010 with a weighted average interest rate of
0.65%. There were no federal funds purchased outstanding at any month-end during 2011.
We also have a line of credit with the FRB discount window. This line is secured by a blanket lien on a portion of
our commercial and consumer loan portfolio (excluding real estate loans). Based on the collateral that we
owned as of December 31, 2011, the available line of credit was approximately $79 million. At December 31,
2011, we had no borrowings outstanding under this line. At December 31, 2010, we had $55 million in
borrowings outstanding under this line. There were no FRB borrowings outstanding at any month-end during
2011.
58
At December 31, 2011 and 2010, we had a $10 million holding company line of credit with a correspondent bank
that was secured by 100% of the common stock of our bank subsidiary. This line of credit expires and is subject
to renewal in March of each year. The line of credit had no outstanding balance at December 31, 2011 or 2010,
and was not drawn upon during 2011 or 2010.
In addition to the lines of credit described above, in which we had $88 million and $150 million outstanding as of
December 31, 2011, and 2010, respectively, we also had a total of $46.4 million in trust preferred security debt
outstanding at December 31, 2011 and 2010. We have initiated three trust preferred security issuances since
2002 totaling $67.0 million, with one of those issuances for $20.6 million being redeemed in 2007. These
borrowings each have 30 year final maturities and were structured in a manner that allows them to qualify as
capital for regulatory capital adequacy requirements. We may call these debt securities at par on any quarterly
interest payment date five years after their issue date. We issued $20.6 million of this debt on October 29, 2002
(which we called in 2007), an additional $20.6 million on December 19, 2003, and $25.8 million on April 13,
2006. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus
2.70% for the securities issued in 2003, and three-month LIBOR plus 1.39% for the securities issued in 2006.
Liquidity, Commitments, and Contingencies
We have a pending agreement to purchase eleven branches of another bank with approximately $180 million in
total deposits and $98 million in total loans. See Note 2 to the consolidated financial statements for additional
information.
Our liquidity is determined by our ability to convert assets to cash or to acquire alternative sources of funds to
meet the needs of our customers who are withdrawing or borrowing funds, and our ability 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.
As noted above, in addition to internally generated liquidity sources, we currently (March 2012) have the ability
to obtain borrowings from the following four sources – 1) an approximately $389 million line of credit with the
FHLB, 2) a $50 million overnight federal funds line of credit with a correspondent bank, 3) an approximately $79
million line of credit through the FRB’s discount window and 4) a holding company line of credit with a limit of
$10 million.
Our overall liquidity increased slightly during 2011 compared to 2010. Our loans decreased by $24 million, while
our deposits increased by $103 million. As a result, our liquid assets (cash and securities) as a percentage of our
total deposits and borrowings increased from 15.4% at December 31, 2010 to 15.7% at December 31, 2011.
We continue to 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.
In the normal course of business we have various outstanding contractual obligations that will require future
cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend
credit, that may or may not require future cash outflows.
Table 18 reflects our contractual obligations and other commercial commitments outstanding as of December
31, 2011. Any of our $88 million in outstanding borrowings with the FHLB may be accelerated immediately by
59
the FHLB in certain circumstances, including material adverse changes in our condition or if our qualifying
collateral is less than the amount required under the terms of the borrowing agreement.
In the normal course of business there are various outstanding commitments and contingent liabilities such as
commitments to extend credit, which are not reflected in the financial statements. The following table presents
a summary of our outstanding loan commitments as of December 31, 2011:
($ in millions)
Type of Commitment
Outstanding closed-end loan commitments
Unfunded commitments on revolving lines of
credit, credit cards and home equity loans
Total
Fixed Rate
$ 39
32
$ 71
Variable Rate
278
185
463
Total
317
217
534
At December 31, 2011 and 2010, we also had $7.1 million and $7.5 million, respectively, in standby letters of
credit outstanding. We had no carrying amount for these standby letters of credit at either of those dates. The
nature of the standby letters of credit is that of a guarantee made on behalf of our customers to suppliers of the
customers to guarantee payments owed to the supplier by the customer. The standby letters of credit are
generally for terms of one year, at which time they may be renewed for another year if both parties agree. The
payment of the guarantees would generally be triggered by a continued nonpayment of an obligation owed by
the customer to the supplier. The maximum potential amount of future payments (undiscounted) we could be
required to make under the guarantees in the event of nonperformance by the parties to whom credit or
financial guarantees have been extended is represented by the contractual amount of the financial instruments
discussed above. In the event that we are required to honor a standby letter of credit, a note, already executed
by the customer, becomes effective providing repayment terms and any collateral. Over the past two years, we
have had to honor only a few standby letters of credit, which involved insignificant amounts of funds and have
been or are being repaid by the borrower without any loss to us. We expect any draws under existing
commitments to be funded through normal operations.
It has been our experience that deposit withdrawals are generally replaced with new deposits, thus not
requiring any net cash outflow. Based on that assumption, management believes that it can meet its
contractual cash obligations and existing commitments from normal operations.
We are not involved in any legal proceedings that, in management’s opinion, could have a material effect on the
consolidated financial position of the Company.
Capital Resources and Shareholders’ Equity
Shareholders’ equity at December 31, 2011 amounted to $345.2 million compared to $344.6 million at
December 31, 2010. The two basic components that typically have the largest impact on our shareholders’
equity are net income, which increases shareholders’ equity, and dividends declared, which decreases
shareholders’ equity. Additionally, any stock issuances can significantly increase shareholders’ equity.
In 2011, the most significant factors that impacted our equity were the redemption of $65.0 million of our Series
A Preferred Stock issued under the U.S. Treasury’s Capital Purchase Program (also known as TARP) and the
simultaneous issuance of $63.5 million of Series B Preferred Stock under the Treasury’s Small Business Lending
Fund (SBLF). Net income of $13.6 million for 2011 increased equity, while common stock dividends declared of
$5.4 million and preferred stock dividends declared of $3.2 million reduced equity. We also recorded accretion
of the discount on preferred stock of $2.9 million due to the redemption of the Series A Preferred Stock. (See
Note 19 to the consolidated financial statements for further information on these transactions.) Another
significant factor negatively impacting equity in 2011 was a $4.5 million increase in accumulated other
60
comprehensive loss that was caused by an increase in our pension liability. The increase in the pension liability
was primarily due to the impact of lower interest rates on the actuarial calculations involved in determining the
liability. Our policy is to use the Citigroup Pension Index yield curve in the computation of the pension liability.
At December 31, 2011, that index had a weighted average rate of 4.39%, which was a decline from the rate of
5.59% at December 31, 2010. See the Consolidated Statements of Shareholders’ Equity within the consolidated
financial statements for disclosure of other less significant items affecting shareholders’ equity.
In 2010, the most significant factors that impacted our equity were net income of $10.0 million, which increased
equity, and common stock dividends declared of $5.4 million and preferred stock dividends declared of $3.3
million, which reduced equity. See the Consolidated Statements of Shareholders’ Equity within the consolidated
financial statements for disclosure of other less significant items affecting shareholders’ equity.
In 2009, the most significant item that impacted our equity was our issuance of $65 million in preferred stock to
the U.S. Treasury in connection with our participation in the Treasury’s Capital Purchase Program (see Note 19
to the consolidated financial statements). In addition, other significant factors were net income of $60.3 million,
which increased equity, and common stock dividends declared of $5.3 million and preferred stock dividends
declared of $3.2 million, which reduced equity. See the consolidated financial statements for other less
significant factors that impacted equity in 2009.
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.
The Company and the Bank must comply with regulatory capital requirements established by the FRB and the
FDIC. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s
financial statements. These capital standards require the Company and the Bank to maintain minimum ratios of
“Tier 1” capital to total risk-weighted assets (“Tier I Capital Ratio”) and total capital to risk-weighted assets
(“Total Capital Ratio”) of 4.00% and 8.00%, respectively. Tier 1 capital is comprised of total shareholders’ equity,
excluding unrealized gains or losses from the securities available for sale, less intangible assets, and total capital
is comprised of Tier 1 capital plus certain adjustments, the largest of which for the Company and the Bank is the
allowance for loan losses. Risk-weighted assets refer to the on- and off-balance sheet exposures of the
Company and the Bank, adjusted for their related risk levels using formulas set forth in FRB and FDIC
regulations.
In addition to the risk-based capital requirements described above, the Company and the Bank are subject to a
leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly
average total assets (“Leverage Ratio) of 3.00% to 5.00%, depending upon the institution’s composite ratings as
determined by its regulators. The FRB has not advised us of any requirement specifically applicable to the
Company.
Table 21 presents our regulatory capital ratios as of December 31, 2011, 2010, and 2009. All of our capital ratios
have significantly exceeded the minimum regulatory thresholds for all periods covered by this report.
In addition to the minimum capital requirements described above, the regulatory framework for prompt
corrective action also contains specific capital guidelines for a bank’s classification as “well capitalized.” The
specific guidelines are as follows – Tier I Capital Ratio of at least 6.00%, Total Capital Ratio of at least 10.00%,
and a Leverage Ratio of at least 5.00%. If a bank falls below “well capitalized” status in any of these three ratios,
it must ask for FDIC permission to originate or renew brokered deposits. The Bank’s regulatory ratios exceeded
the threshold for “well-capitalized” status at December 31, 2011, 2010, and 2009 – see Note 16 to the
consolidated financial statements for a table that presents the Bank’s regulatory ratios.
61
In addition to shareholders’ equity, we have supplemented our capital in past years with trust preferred security
debt issuances, which because of their structure qualify as regulatory capital. This was necessary in past years
because our balance sheet growth outpaced the growth rate of our capital. Additionally, we have frequently
purchased bank branches over the years that resulted in our recording intangible assets, which negatively
impacted regulatory capital ratios. As discussed in “Borrowings” above, we have issued a total of $67.0 million
in trust preferred securities since 2002, with the most recent issuance being a $25.8 million issuance that
occurred in April 2006. We currently have $46.4 million in trust preferred securities outstanding.
In this economic environment, our goal is to maintain our capital ratios at levels at least 200 basis points higher
than the “well-capitalized” thresholds set for banks. At December 31, 2011, our total risk-based capital ratio
was 16.72% compared to the 10.00% “well-capitalized” threshold.
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 6.58% at December 31, 2011 compared to 6.52% at December 31, 2010.
See “Supervision and Regulation” under “Business” above and Note 16 to the consolidated financial statements
for discussion of other matters that may affect our capital resources.
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 derivatives activities through
December 31, 2011 and have no current plans to do so.
Return on Assets and Equity
Table 20 shows return on assets (net income available to common shareholders divided by average total assets),
return on common equity (net income available to common shareholders divided by average common
shareholders’ equity), dividend payout ratio (dividends per share divided by net income per common share) and
shareholders’ equity to assets ratio (average total shareholders’ equity divided by average total assets) for each
of the years in the three-year period ended December 31, 2011.
Interest Rate Risk (Including Quantitative and Qualitative Disclosures About Market Risk – Item 7A.)
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
62
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
December 31, 2011) to a high of 8.25%. The consistency of the net interest margin is aided by the relatively low
level of long-term interest rate exposure that we maintain. At December 31, 2011, approximately 82% 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.
Table 17 sets forth our interest rate sensitivity analysis as of December 31, 2011, 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). As illustrated by this table, at December 31, 2011, we had $682 million more in
interest-bearing liabilities that are subject to interest rate changes within one year than earning assets. This
generally would indicate that net interest income would experience downward pressure in a rising interest rate
environment and would benefit from a declining interest rate environment. However, this method of analyzing
interest sensitivity only measures the magnitude of the timing differences and does not address earnings,
market value, or management actions. Also, interest rates on certain types of assets and liabilities may fluctuate
in advance of changes in market interest rates, while interest rates on other types may lag behind changes in
market rates. In addition to the effects of “when” various rate-sensitive products reprice, market rate changes
may not result in uniform changes in rates among all products. For example, included in interest-bearing
liabilities subject to interest rate changes within one year at December 31, 2011 are deposits totaling $1.084
billion comprised of NOW, savings, and certain types of money market deposits with interest rates set by
management. These types of deposits historically have not repriced with, or in the same proportion, as general
market indicators.
Overall 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. Our net interest margin increased throughout 2010 and 2011. Our net interest margin was 4.72%
for 2011, a 33 basis point increase from the 4.39% margin realized in 2010.
As previously discussed in the section “Net Interest Income,” 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 $11.6
million and $7.6 million for 2011 and 2010, respectively, is less predictable and could be materially different
63
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.
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 2012 will remain relatively
consistent with the net interest margins recently realized. With interest rates having been stable for a relatively
long period of time, most of our interest-sensitive assets and interest-sensitive liabilities have been repriced at
rates near today’s interest rates.
We have no market risk sensitive instruments held for trading purposes, nor do we maintain any foreign
currency positions. Table 19 presents the expected maturities of our other than trading market risk sensitive
financial instruments. Table 19 also presents the estimated fair values of market risk sensitive instruments as
estimated in accordance with relevant accounting guidance. Our assets and liabilities have estimated fair values
that do not materially differ from their carrying amounts.
See additional discussion regarding net interest income, as well as discussion of the changes in the annual net
interest margin, in the section entitled “Net Interest Income” above.
Inflation
Because the assets and liabilities of a bank are primarily monetary in nature (payable in fixed determinable
amounts), the performance of a bank is affected more by changes in interest rates than by inflation. Interest
rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be
the same. The effect of inflation on banks is normally not as significant as its influence on those businesses that
have large investments in plant and inventories. During periods of high inflation, there are normally
corresponding increases in the money supply, and banks will normally experience above average growth in
assets, loans and deposits. Also, general increases in the price of goods and services will result in increased
operating expenses.
Current Accounting Matters
We prepare our consolidated financial statements and related disclosures in conformity with standards
established by, among others, the Financial Accounting Standards Board (the “FASB”). Because the information
needed by users of financial reports is dynamic, the FASB frequently issues new rules and proposes new rules for
companies to apply in reporting their activities. See Note 1(t) to our consolidated financial statements for a
discussion of recent rule proposals and changes.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information responsive to this Item is found in Item 7 under the caption “Interest Rate Risk.”
64
Table 1 Selected Consolidated Financial Data
($ in thousands, except per share
and nonfinancial data)
Income Statement Data
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
Preferred stock dividends
Accretion of preferred stock discount
Net income available to common shareholders
Earnings per common share – basic
Earnings per common share – diluted
Per Share Data (Common)
Cash dividends declared - common
Market Price
High
Low
Close
Stated book value – common
Tangible book value – common
Selected Balance Sheet Data (at year end)
Total assets
Loans – non-covered
Loans – covered
Total loans
Allowance for loan losses
Intangible assets
Deposits
Borrowings
Total shareholders’ equity
Selected Average Balances
Assets
Loans – non-covered
Loans – covered
Total loans
Earning assets
Deposits
Interest-bearing liabilities
Shareholders’ equity
Ratios
Return on average assets
Return on average common equity
Net interest margin (taxable-equivalent basis)
Tangible common equity to tangible assets
Loans to deposits at year end
Allowance for loan losses to total loans
Allowance for loan losses to total loans - non-covered
Nonperforming assets to total assets at year end
Nonperforming assets to total assets - non-covered
Net charge-offs to average total loans
Net charge-offs to average total loans - non-covered
Nonfinancial Data – number of branches
Nonfinancial Data – number of employees (FTEs)
2011
2010
2009
2008
2007
Year Ended December 31,
$ 155,768
23,565
132,203
41,301
90,902
26,216
96,106
21,012
7,370
13,642
(3,234)
(2,932)
7,476
0.44
0.44
159,261
31,907
127,354
54,562
72,792
29,106
86,956
14,942
4,960
9,982
(3,250)
(857)
5,875
155,991
48,895
107,096
20,186
86,910
89,518
78,551
97,877
37,618
60,259
(3,169)
(803)
56,287
147,862
61,303
86,559
9,880
76,679
20,657
62,211
35,125
13,120
22,005
—
—
22,005
148,942
69,658
79,284
5,217
74,067
17,217
56,324
34,960
13,150
21,810
—
—
21,810
0.35
0.35
3.38
3.37
1.38
1.37
1.52
1.51
$ 0.32
0.32
0.32
0.76
0.76
16.89
8.05
11.15
16.66
12.53
$ 3,290,474
2,069,152
361,234
2,430,386
41,418
69,732
2,755,037
133,925
345,150
$ 3,315,045
2,051,677
410,318
2,461,995
2,834,938
2,758,022
2,606,450
353,588
0.23%
2.59%
4.72%
6.58%
89.27%
1.70%
1.72%
8.00%
4.30%
2.00%
1.52%
97
830
65
16.90
12.00
15.31
16.64
12.45
19.00
6.87
13.97
16.59
12.35
20.86
11.25
18.35
13.27
9.18
26.72
16.40
18.89
12.11
8.56
3,278,932
2,083,004
371,128
2,454,132
49,430
70,358
2,652,513
196,870
344,603
3,326,977
2,104,677
449,724
2,554,401
2,927,815
2,807,161
2,655,195
350,908
3,545,356
2,132,843
520,022
2,652,865
37,343
70,948
2,933,108
176,811
342,383
3,097,137
2,176,153
298,892
2,475,045
2,833,167
2,549,709
2,497,304
313,173
2,750,567
2,211,315
(cid:1086)
2,211,315
29,256
67,780
2,074,791
367,275
219,868
2,317,249
1,894,295
(cid:1086)
1,894,295
21,324
51,020
1,838,277
242,394
174,070
2,484,296
2,117,028
—
2,117,028
2,329,025
1,985,332
2,019,256
210,810
2,139,576
1,808,219
—
1,808,219
1,998,428
1,780,265
1,726,002
170,857
0.18%
2.05%
4.39%
6.52%
92.52%
2.01%
1.84%
8.69%
4.16%
1.66%
1.55%
92
774
1.82%
22.55%
3.81%
5.94%
90.45%
1.41%
1.75%
7.27%
3.10%
0.49%
0.56%
91
764
0.89%
10.44%
3.74%
5.67%
106.58%
1.32%
1.32%
1.29%
1.29%
0.24%
0.24%
74
650
1.02%
12.77%
4.00%
5.43%
103.05%
1.13%
1.13%
0.47%
0.47%
0.16%
0.16%
70
614
Table 2 Average Balances and Net Interest Income Analysis
2011
Avg.
Rate
Interest
Earned
or Paid
Average
Volume
Year Ended December 31,
2010
2009
Average
Volume
Avg.
Rate
Interest
Earned
or Paid
Average
Volume
Avg.
Rate
Interest
Earned
or Paid
$2,461,995
175,666
57,478
6.00%
3.23%
6.18%
$147,652
5,680
3,556
$2,554,401
160,711
46,807
5.92% $151,292
5,750
3.58%
2,949
6.30%
$2,475,045
167,041
23,018
5.98% $148,007
6,580
3.94%
1,677
7.29%
139,799
0.31%
436
165,896
0.35%
586
168,063
0.32%
545
2,834,938
72,628
68,930
338,549
$3,315,045
5.55%
157,324
2,927,815
59,236
56,534
283,392
$3,326,977
5.48%
160,577
2,833,167
42,350
52,789
168,831
$3,097,137
5.53%
156,809
$ 355,979
508,209
152,256
771,165
641,078
0.22%
0.53%
0.48%
1.31%
1.10%
$ 776
2,705
731
10,103
7,036
$ 349,501
508,250
156,483
786,257
717,416
0.24%
0.84%
0.81%
1.57%
1.56%
$ 834
4,267
1,262
12,374
11,193
$ 244,863 0.29%
1.52%
1.08%
2.54%
2.43%
429,068
137,142
745,159
736,358
$ 720
6,537
1,487
18,908
17,866
2,428,687
0.88%
21,351
2,517,907
1.19%
29,930
2,292,590
1.99%
45,518
55,020
0.33%
122,743
1.65%
184
2,030
57,443
0.52%
298
53,537
1.37%
736
79,845
2.10%
1,679
151,177
1.75%
2,641
2,606,450
0.90%
23,565
2,655,195
1.20%
31,907
2,497,304
1.96%
48,895
329,335
25,672
353,588
289,254
31,620
350,908
257,119
29,541
313,173
$3,315,045
$3,326,977
$3,097,137
$133,759
4.72%
4.65%
3.25%
$128,670
4.39%
4.28%
3.25%
$107,914
3.81%
3.57%
3.25%
($ in thousands)
Assets
Loans (1) (2)
Taxable securities
Non-taxable securities (3)
Short-term investments,
primarily overnight funds
Total interest-
earning assets
Cash and due from banks
Bank premises and
equipment, net
Other assets
Total assets
Liabilities and Equity
NOW accounts
Money market accounts
Savings accounts
Time deposits >$100,000
Other time deposits
Total interest-bearing
deposits
Securities sold under
agreements to
repurchase
Borrowings
Total interest-
bearing liabilities
Non-interest-
bearing deposits
Other liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
Net yield on interest-
earning assets and
net interest income
Interest rate spread
Average prime rate
(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. Interest earned includes recognized net loan
(2)
(3)
fees (costs) in the amounts of ($101,500), $35,000, and $144,000 for 2011, 2010, and 2009, respectively.
Includes accretion of discount on covered loans of $11,598,000, $7,607,000, and $1,469,000 in 2011, 2010, and 2009, respectively.
Includes tax-equivalent adjustments of $1,556,000, $1,316,000, and $818,000 in 2011, 2010, and 2009, respectively, to reflect the federal and state
tax benefit of the tax-exempt securities (using a 39% combined tax rate), reduced by the related nondeductible portion of interest expense.
66
Table 3 Volume and Rate Variance Analysis
($ in thousands)
Interest income (tax-equivalent):
Loans
Taxable securities
Non-taxable securities
Short-term investments, primarily
overnight funds
Total interest income
Interest expense:
NOW accounts
Money Market accounts
Savings accounts
Time deposits >$100,000
Other time deposits
Total interest-bearing deposits
Securities sold under agreements to
repurchase
Borrowings
Total interest expense
Year Ended December 31, 2011
Year Ended December 31, 2010
Change Attributable to
Change Attributable to
Changes in
Volumes
Changes
in Rates
Total
Increase
(Decrease)
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
$ (5,507)
509
666
(87)
(4,419)
15
(cid:1086)
(27)
(218)
(1,014)
(1,244)
(10)
806
(448)
1,867
(579)
(59)
(63)
1,166
(73)
(1,562)
(504)
(2,053)
(3,143)
(7,335)
(104)
(455)
(7,894)
(3,640)
(70)
607
4,723
(238)
1,616
(150)
(3,253)
(58)
(1,562)
(531)
(2,271)
(4,157)
(8,579)
(114)
351
(8,342)
(7)
6,094
279
936
183
845
(378)
1,865
37
(1,373)
529
(1,438)
(592)
(344)
48
(2,326)
(165)
(3,206)
(408)
(7,379)
(6,295)
(17,453)
(475)
411
(17,517)
3,285
(830)
1,272
41
3,768
114
(2,270)
(225)
(6,534)
(6,673)
(15,588)
(438)
(962)
(16,988)
Net interest income (tax-equivalent)
$ (3,971)
9,060
5,089
5,565
15,191
20,756
Changes attributable to both volume and rate are allocated equally between rate and volume variances.
Table 4 Noninterest Income
($ in thousands)
Service charges on deposit accounts
Other service charges, commissions, and fees
Fees from presold mortgages
Commissions from sales of insurance and financial products
Total core noninterest income
Gain from acquisition
Foreclosed property losses and write-downs – covered
Foreclosed property losses and write-downs – non-covered
FDIC Indemnification asset income, net
Securities gains (losses), net
Other gains (losses), net
Total
2011
$ 11,981
8,067
1,609
1,512
23,169
10,196
(24,492)
(3,355)
20,481
74
143
$ 26,216
Year Ended December 31,
2010
12,335
6,507
1,813
1,476
22,131
—
(34,527)
(984)
41,808
26
652
29,106
2009
13,112
5,729
1,505
1,524
21,870
67,894
—
—
—
(104)
(142)
89,518
67
Table 5 Noninterest Expenses
($ in thousands)
Salaries
Employee benefits
Total personnel expense
Occupancy expense
Equipment related expenses
Amortization of intangible assets
Acquisition expenses
FDIC insurance expense
Stationery and supplies
Telephone
Repossession and collection expenses – non-covered
Repossession and collection expenses – covered, net
of FDIC reimbursement and rental income
Non-credit losses
Other operating expenses
Total
Table 6 Income Taxes
($ in thousands)
Current - Federal
- State
Deferred - Federal
- State
Total
Effective tax rate
2011
$ 39,822
11,616
51,438
6,574
4,326
902
636
3,008
2,867
2,127
3,492
1,968
1,276
17,492
$ 96,106
2011
$ 9,204
2,094
(3,234)
(694)
$ 7,370
Year Ended December 31,
2010
35,076
10,214
45,290
6,799
4,327
874
—
4,387
2,563
2,053
2,138
2,617
489
15,419
86,956
2010
25,353
3,807
(21,092)
(3,108)
4,960
2009
30,745
10,843
41,588
6,071
4,334
630
1,343
5,500
2,181
1,847
871
795
254
13,137
78,551
2009
11,190
1,830
20,545
4,053
37,618
35.1%
33.2%
38.4%
68
Table 7 Distribution of Assets and Liabilities
2011
2010
2009
As of December 31,
Assets
Interest-earning assets
Net loans
Securities available for sale
Securities held to maturity
Short term investments
Total interest-earning assets
Noninterest-earning assets
Cash and due from banks
Premises and equipment
FDIC indemnification asset
Other real estate owned
Other assets
Total assets
Liabilities and shareholders’ equity
Demand deposits – noninterest bearing
NOW deposits
Money market deposits
Savings deposits
Time deposits of $100,000 or more
Other time deposits
Total deposits
Securities sold under agreements to repurchase
Borrowings
Accrued expenses and other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Table 8 Securities Portfolio Composition
($ in thousands)
Securities available for sale:
Government-sponsored enterprise securities
Mortgage-backed securities
Corporate bonds
Equity securities
Total securities available for sale
Securities held to maturity:
State and local governments
Other
Total securities held to maturity
73%
6
2
4
85
2
2
4
4
3
100%
10%
13
16
4
23
18
84
1
4
1
90
10
100%
73%
6
2
5
86
2
2
4
4
2
100%
9%
9
15
5
23
20
81
2
6
1
90
10
100%
74%
5
1
8
88
2
2
4
2
2
100%
8%
10
14
4
23
23
82
2
5
1
90
10
100%
2011
$ 34,665
124,105
12,488
11,368
182,626
57,988
(cid:1086)
57,988
As of December 31,
2010
43,273
107,460
15,330
15,119
181,182
54,011
7
54,018
2009
36,518
111,797
14,436
17,004
179,755
34,394
19
34,413
Total securities
$ 240,614
235,200
214,168
Average total securities during year
$ 233,144
207,518
190,059
69
Table 9 Securities Portfolio Maturity Schedule
($ in thousands)
Securities available for sale:
Government-sponsored enterprise securities
Due within one year
Due after one but within five years
Due after five but within ten years
Total
Mortgage-backed securities (2)
Due within one year
Due after one but within five years
Due after five but within ten years
Due after ten years
Total
Corporate debt securities
Due after one but within five years
Due after ten years
Total
Equity securities
Total securities available for sale
Due within one year
Due after one but within five years
Due after five but within ten years
Due after ten years
Equity securities
Total
Securities held to maturity:
State and local governments
Due within one year
Due after one but within five years
Due after five but within ten years
Due after ten years
Total
Total securities held to maturity
Due within one year
Due after one but within five years
Due after five but within ten years
Due after ten years
Total
As of December 31,
2011
Book
Value
Fair
Value
Book
Yield (1)
$ 3,011
28,500
3,000
34,511
1,053
62,754
48,192
8,033
120,032
2,997
10,192
13,189
10,998
4,064
94,251
51,192
18,225
10,998
$ 178,730
$ 626
1,743
23,188
32,431
57,988
626
1,743
23,188
32,431
$ 57,988
3,106
28,558
3,001
34,665
1,074
65,780
48,606
8,645
124,105
3,102
9,386
12,488
11,368
4,180
97,440
51,607
18,031
11,368
182,626
629
1,843
25,201
35,081
62,754
629
1,843
25,201
35,081
62,754
4.15%
1.62%
1.60%
1.84%
4.44%
3.58%
2.08%
4.91%
3.07%
6.83%
7.50%
7.35%
0.79%
4.22%
3.09%
2.05%
6.36%
0.79%
3.01%
5.52%
5.86%
5.85%
5.73%
5.78%
5.52%
5.86%
5.85%
5.73%
5.78%
(1) Yields on tax-exempt investments have been adjusted to a taxable equivalent basis using a 39% tax rate.
(2) Mortgage-backed securities are shown maturing in the periods consistent with their estimated lives based on expected prepayment
speeds.
70
Table 10 Loan Portfolio Composition
As of December 31,
2011
2010
2009
2008
2007
% of
Total
Loans
Amount
% of
Total
Loans
Amount
Amount
% of
Total
Loans
Amount
% of
Total
Loans
Amount
% of
Total
Loans
$ 162,099
7%
$ 155,016
6%
$ 173,611
7%
$ 190,428
9%
$ 166,925
9%
363,079
15%
437,700
18%
551,714
21%
481,849
22%
446,437
23%
805,542
33%
802,658
33%
849,875
32%
576,884
26%
456,102
24%
256,509
11%
263,529
11%
270,054
10%
249,764
11%
209,852
11%
762,895
31%
710,337
29%
718,723
27%
620,444
28%
523,008
28%
78,982
2,429,106
3%
100%
83,919
2,453,159
3%
100%
88,514
2,652,491
3%
100%
91,711
2,211,080
4%
100%
91,825
1,894,149
5%
100%
1,280
$2,430,386
973
$2,454,132
374
$2,652,865
235
$2,211,315
146
$1,894,295
($ in thousands)
Commercial, financial,
and agricultural
Real estate –
construction, land
development & other
land loans
Real estate – mortgage –
residential (1-4
family) first
mortgages
Real estate – mortgage –
home equity loans /
lines of credit
Real estate – mortgage –
commercial and other
Installment loans to
individuals
Loans, gross
Unamortized net
deferred loan costs
Total loans
Table 10a Loan Portfolio Composition – Covered versus Non-covered
As of December 31, 2011
Covered Loans
(Carrying Value)
% of
Covered
Loans
Amount
Non-covered Loans
% of
Non-
covered
Loans
Amount
Total Loans
% of
Total
Loans
Amount
Unpaid
Principal
Balance of
Covered Loans
Carrying Value of
Covered Loans as
a Percent of the
Unpaid Balance
Amount
Percentage
$ 9,472
3%
$ 152,627
8%
$ 162,099
7%
$ 12,055
79%
72,096
20%
290,983
14%
363,079
15%
123,994
58%
158,926
44%
646,616
31%
805,542
33%
192,075
83%
23,338
6%
233,171
11%
256,509
11%
29,826
96,013
27%
666,882
32%
762,895
31%
130,436
1,389
361,234
–
$ 361,234
0%
100%
77,593
2,067,872
4%
100%
78,982
2,429,106
3%
100%
1,589
$ 489,975
1,280
$ 2,069,152
1,280
$2,430,386
78%
74%
87%
74%
($ in thousands)
Commercial, financial, and
agricultural
Real estate – construction,
land development &
other land loans
Real estate – mortgage –
residential (1-4 family)
first mortgages
Real estate – mortgage –
home equity loans / lines
of credit
Real estate – mortgage –
commercial and other
Installment loans to
individuals
Loans, gross
Unamortized net deferred
loan costs
Total loans
See Note 4 to the Consolidated Financial Statements for tables showing breakout of covered loans versus non-covered loans at December 31, 2010.
71
Table 11 Loan Maturities
($ in thousands)
Variable Rate Loans:
Commercial, financial, and
agricultural
Real estate – construction only
Real estate – all other mortgage
Installment loans
to individuals
Total at variable rates
Fixed Rate Loans:
Commercial, financial, and
agricultural
Real estate – construction only
Real estate – all other mortgage
Installment loans
to individuals
Total at fixed rates
Subtotal
Nonaccrual loans
Total loans
As of December 31, 2011
Due within
one year
Due after one year but
within five years
Due after five
years
Total
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
$ 56,973
49,298
150,100
358
256,729
23,830
3,728
233,842
9,184
270,584
527,313
115,038
$ 642,351
5.28%
5.40%
5.29%
5.55%
5.31%
5.85%
5.56%
6.48%
6.92%
6.43%
5.88%
$ 28,408
1,698
340,476
9,862
380,444
44,577
2,358
565,095
32,432
644,462
1,024,906
(cid:326)
$1,024,906
5.41%
5.10%
5.23%
8.93%
5.34%
6.50%
5.59%
6.12%
9.25%
6.30%
5.94%
$ 924
2,449
427,964
5.28%
4.74%
4.50%
$ 86,305
53,445
918,540
14,690
446,027
4.88%
4.52%
24,910
1,083,200
9,666
835
303,900
2,701
317,102
763,129
(cid:326)
$ 763,129
4.63%
5.72%
5.38%
5.79%
5.36%
4.87%
78,073
6,921
1,102,837
44,317
1,232,148
2,315,348
115,038
$2,430,386
5.32%
5.36%
4.90%
6.49%
4.99%
6.07%
5.59%
6.00%
8.55%
6.09%
5.58%
The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in
this table.
72
Table 12 Nonperforming Assets
($ in thousands)
Non-covered nonperforming assets
Nonaccrual loans
Restructured loans - accruing
Accruing loans >90 days past due
Total non-covered nonperforming loans
Other real estate
Total non-covered nonperforming assets
Covered nonperforming assets (1)
Nonaccrual loans (2)
Restructured loans - accruing
Accruing loans >90 days past due
Total covered nonperforming loans
Other real estate
Total covered nonperforming assets
2011
2010
As of December 31,
2009
2008
2007
$ 73,566
11,720
(cid:16)
85,286
37,023
$ 122,309
62,326
33,677
(cid:16)
96,003
21,081
117,084
62,206
21,283
(cid:16)
83,489
8,793
92,282
26,600
3,995
(cid:16)
30,595
4,832
35,427
7,807
6
(cid:16)
7,813
3,042
10,855
$ 41,472
14,218
(cid:16)
55,690
85,272
$ 140,962
58,466
14,359
(cid:16)
72,825
94,891
167,716
117,916
(cid:16)
(cid:16)
117,916
47,430
165,346
(cid:16)
(cid:16)
(cid:16)
(cid:1086)
(cid:16)
(cid:1086)
(cid:16)
(cid:16)
(cid:16)
(cid:1086)
(cid:16)
(cid:1086)
Total nonperforming assets
$ 263,271
284,800
257,628
35,427
10,855
Asset Quality Ratios – All Assets
Nonperforming loans to total loans
Nonperforming assets to total loans and other real estate
Nonperforming assets to total assets
Asset Quality Ratios – Based on Non-covered Assets only
Non-covered nonperforming loans to non-covered
loans
Non-covered nonperforming assets to non-covered loans
5.80%
10.31%
8.00%
6.88%
11.08%
8.69%
7.59%
9.51%
7.27%
1.38%
1.60%
1.29%
0.41%
0.57%
0.47%
4.12%
4.61%
3.91%
1.38%
0.41%
and non-covered other real estate
5.81%
5.56%
4.31%
1.60%
0.57%
Non-covered nonperforming assets to total non-covered
assets
4.30%
4.16%
3.10%
1.29%
0.47%
(1) Covered nonperforming assets consist of assets that are included in loss-share agreements with the FDIC.
(2) At December 31, 2011, 2010 and 2009, the contractual balance of the nonaccrual loans covered by the FDIC loss share agreement was $69.0 million,
$86.2 million and $192.1 million, respectively.
73
Table 12a Nonperforming Assets by Geographical Region
($ in thousands)
Nonaccrual loans and
Troubled Debt Restructurings (1)
Eastern Region (NC)
Triangle Region (NC)
Triad Region (NC)
Charlotte Region (NC)
Southern Piedmont Region (NC)
Western Region (NC)
South Carolina Region
Virginia Region
Other
Total nonaccrual loans and
troubled debt restructurings
Other Real Estate (1)
Eastern Region (NC)
Triangle Region (NC)
Triad Region (NC)
Charlotte Region (NC)
Southern Piedmont Region (NC)
Western Region (NC)
South Carolina Region
Virginia Region
Other
Total other real estate
As of December 31, 2011
Covered
Non-covered
Total
Total Loans
Nonperforming
Loans to Total
Loans
$ 46,179
–
–
–
180
9,188
143
–
–
20,111
23,546
16,854
1,795
3,436
1
13,164
4,950
1,429
66,290
23,546
16,854
1,795
3,616
9,189
13,307
4,950
1,429
$ 535,000
764,000
381,000
97,000
220,000
73,000
148,000
201,000
11,000
$ 55,690
85,286
140,976
$ 2,430,000
12.4%
3.1%
4.4%
1.9%
1.6%
12.6%
9.0%
2.5%
13.0%
5.8%
$ 73,110
–
–
–
–
11,810
352
–
–
$ 85,272
12,102
9,286
7,580
4,585
1,130
–
2,110
230
–
37,023
85,212
9,286
7,580
4,585
1,130
11,810
2,462
230
–
122,295
(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
Charlotte North Carolina Region - Iredell, Cabarrus, Rowan
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
74
Table 13 Allocation of the Allowance for Loan Losses
($ in thousands)
Commercial, financial, and agricultural
Real estate – construction, land development
Real estate – residential, commercial,
home equity, multifamily
Installment loans to individuals
Total allocated
Unallocated
Total
2011
2010
As of December 31,
2009
2008
2007
$ 4,443
14,268
5,154
20,065
4,995
9,286
4,913
1,977
3,516
1,827
20,818
1,873
41,402
16
$ 41,418
22,077
1,960
49,256
174
49,430
20,845
1,606
36,732
611
37,343
19,543
2,815
29,248
8
29,256
13,477
2,486
21,306
18
21,324
Table 13a Allocation of the Allowance for Loan Losses – Covered versus Non-covered
($ in thousands)
Commercial, financial, and agricultural
Real estate – construction, land
development
Real estate – residential, commercial,
home equity, multifamily
Installment loans to individuals
Total allocated
Unallocated
Total
As of December 31, 2011
Non-covered
Total
Covered
As of December 31, 2010
Covered
Non-covered
Total
$ 663
3,780
4,443
423
4,731
5,154
2,962
11,306
14,268
7,545
12,520
20,065
2,182
1
5,808
(cid:1086)
$ 5,808
18,636
1,872
35,594
16
35,610
20,818
1,873
41,402
16
41,418
3,187
(cid:1086)
11,155
(cid:1086)
11,155
18,890
1,960
38,101
174
38,275
22,077
1,960
49,256
174
49,430
75
Table 14 Loan Loss and Recovery Experience
($ in thousands)
2011
2010
As of December 31,
2009
2008
2007
Loans outstanding at end of year
$ 2,430,386
2,454,132
2,652,865
2,211,315
1,894,295
Average amount of loans outstanding
$ 2,461,995
2,554,401
2,475,045
2,117,028
1,808,219
Allowance for loan losses, at
beginning of year
Provision for loan losses
Additions related to loans assumed in
corporate acquisitions
Loans charged off:
Commercial, financial, and agricultural
Real estate – construction, land development &
other land loans
Real estate – mortgage – residential (1-4 family)
first mortgages
Real estate – mortgage – home equity loans / lines
of credit
Real estate – mortgage – commercial and other
Installment loans to individuals
Total charge-offs
Recoveries of loans previously charged-off:
Commercial, financial, and agricultural
Real estate – construction, land development &
other land loans
Real estate – mortgage – residential (1-4 family)
first mortgages
Real estate – mortgage – home equity loans / lines
of credit
Real estate – mortgage – commercial and other
Installment loans to individuals
Total recoveries
Net charge-offs
Allowance for loan losses, at end of year
Ratios:
Net charge-offs as a percent of average loans
Allowance for loan losses as a percent of loans at
end of year
Allowance for loan losses as a multiple of net
charge-offs
Provision for loan losses as a percent of net
charge-offs
Recoveries of loans previously charged-off as a
$ 49,430
41,301
37,343
54,562
29,256
20,186
21,324
9,880
18,947
5,217
—
90,731
—
91,905
(2,358)
(4,481)
(25,604)
(22,665)
(12,045)
(6,032)
(3,195)
(7,180)
(1,600)
(51,982)
(4,973)
(2,916)
(2,499)
(43,566)
314
919
492
61
113
357
—
49,442
(2,143)
(1,716)
(4,617)
(1,824)
(516)
(1,973)
(12,789)
18
9
184
3,158
34,362
(992)
(309)
(1,333)
(613)
(677)
(1,714)
(5,638)
31
–
86
—
24,164
(982)
(180)
(305)
–
(497)
(1,213)
(3,177)
49
–
–
375
119
450
2,669
(49,313)
$ 41,418
131
33
396
1,091
(42,475)
49,430
66
129
284
690
(12,099)
37,343
42
136
237
532
(5,106)
29,256
43
23
222
337
(2,840)
21,324
2.00%
1.70%
0.84x
1.66%
2.01%
1.16x
0.49%
1.41%
3.09x
0.24%
1.32%
5.73x
0.16%
1.13%
7.51x
83.75%
128.46%
166.84%
193.50%
183.70%
percent of loans charged-off
5.13%
2.50%
5.40%
9.44%
10.61%
76
Table 14a - Loan Loss and Recovery Experience – Covered versus Non-covered
($ in thousands)
As of December 31, 2011
Non-covered
Covered
Total
As of December 31, 2010
Non-covered
Covered
Total
Loans outstanding at end of year
$ 361,234
2,069,152
2,430,386
371,128
2,083,004
2,454,132
Average amount of loans outstanding
$ 410,318
2,051,677
2,461,995
449,724
2,104,677
2,554,401
Allowance for loan losses, at beginning
of year
Provision for loan losses
Loans charged off:
Commercial, financial, and agricultural
Real estate – construction, land
development & other land loans
Real estate – mortgage – residential
(1-4 family) first mortgages
Real estate – mortgage – home equity
loans / lines of credit
Real estate – mortgage – commercial
and other
Installment loans to individuals
Total charge-offs
Recoveries of loans previously
charged-off:
Commercial, financial, and agricultural
Real estate – construction, land
development & other land loans
Real estate – mortgage – residential
(1-4 family) first mortgages
Real estate – mortgage – home equity
loans / lines of credit
Real estate – mortgage – commercial
and other
Installment loans to individuals
Total recoveries
Net charge-offs
Allowance for loan losses, at end of
year
Ratios:
Net charge-offs as a percent of
average loans
Allowance for loan losses as a
percent of loans at end of year
Allowance for loan losses as a
multiple of net charge-offs
Provision for loan losses as a percent
of net charge-offs
Recoveries of loans previously
charged-off as a percent of loans
charged-off
$ 11,155
38,275
49,430
(cid:1086)
37,343
37,343
12,776
23,931
28,525
66,800
41,301
90,731
20,916
20,916
33,646
70,989
54,562
91,905
(293)
(2,065)
(2,358)
(cid:1086)
(4,481)
(4,481)
(10,127)
(15,477)
(25,604)
(7,208)
(15,457)
(22,665)
(4,744)
(7,301)
(12,045)
(1,482)
(4,550)
(6,032)
(925)
(2,270)
(3,195)
(332)
(4,641)
(4,973)
(1,908)
(126)
(18,123)
(5,272)
(1,474)
(33,859)
(7,180)
(1,600)
(51,982)
(739)
(cid:1086)
(9,761)
(2,177)
(2,499)
(33,805)
(2,916)
(2,499)
(43,566)
(cid:237)
(cid:237)
(cid:237)
(cid:237)
(cid:237)
(cid:1086)
(cid:1086)
(18,123)
$ 5,808
314
919
492
375
314
919
492
375
119
450
2,669
(31,190)
35,610
119
450
2,669
(49,313)
41,418
(cid:237)
(cid:237)
(cid:237)
(cid:237)
(cid:237)
(cid:1086)
(cid:1086)
(9,761)
11,155
61
113
357
131
61
113
357
131
33
396
1,091
(32,714)
38,275
33
396
1,091
(42,475)
49,430
4.42%
1.61%
0.32x
1.52%
2.00%
1.72%
1.70%
1.14x
0.84x
2.17%
3.01%
1.14x
1.55%
1.66%
1.84%
2.01%
1.17x
1.16x
70.50%
91.46%
83.75%
214.28%
102.85%
128.46%
0%
7.88%
5.13%
0%
3.23%
2.50%
Note: There were no covered loan charge-offs or recoveries prior to 2010.
77
Table 15 Average Deposits
($ in thousands)
NOW accounts
Money market accounts
Savings accounts
Time deposits >$100,000
Other time deposits
Total interest-bearing deposits
Noninterest-bearing deposits
Total deposits
2011
Year Ended December 31,
2010
2009
Average
Amount
Average
Rate
Average
Amount
Average
Rate
Average
Amount
Average
Rate
$ 355,979
508,209
152,256
771,165
641,078
2,428,687
329,335
$2,758,022
0.22%
0.53%
0.48%
1.31%
1.10%
0.88%
(cid:16)
0.77%
$ 349,501
508,250
156,483
786,257
717,416
2,517,907
289,254
$2,807,161
0.24%
0.84%
0.81%
1.57%
1.56%
1.19%
(cid:16)
1.07%
$ 244,863
429,068
137,142
745,159
736,358
2,292,590
257,119
$2,549,709
0.29%
1.52%
1.08%
2.54%
2.43%
1.99%
(cid:16)
1.79%
Table 16 Maturities of Time Deposits of $100,000 or More
($ in thousands)
3 Months
or Less
Over 3 to 6
Months
As of December 31, 2011
Over 6 to 12
Months
Over 12
Months
Total
Time deposits of $100,000 or more
$ 160,668
120,391
214,133
258,041
753,233
78
Table 17 Interest Rate Sensitivity Analysis
($ in thousands)
Earning assets:
Loans (1)
Securities available for sale
Securities held to maturity
Short-term investments
Total earning assets
Interest-bearing liabilities:
NOW deposits
Money market deposits
Savings deposits
Time deposits of $100,000 or more
Other time deposits
Securities sold under agreements
to repurchase
Borrowings
Total interest-bearing liabilities
Repricing schedule for interest-earning assets and interest-bearing
liabilities held as of December 31, 2011
Total Within
12 Months
Over 3 to 12
Months
Over 12
Months
3 Months
or Less
Total
$ 1,020,605
54,458
733
141,916
$ 1,217,712
$ 423,452
513,832
146,481
160,668
159,572
255,581
27,845
752
(cid:326)
284,178
10.10%
53.39%
(cid:326)
(cid:326)
(cid:326)
334,524
351,679
1,276,186
82,303
1,485
141,916
1,501,890
1,154,200
100,323
56,503
(cid:326)
1,311,026
2,430,386
182,626
57,988
141,916
2,812,916
53.39%
53.39%
46.61%
100.00%
100.00%
100.00%
423,452
513,832
146,481
495,192
511,251
(cid:326)
(cid:326)
(cid:326)
258,041
70,955
423,452
513,832
146,481
753,233
582,206
17,105
133,925
2,570,234
17,105
46,394
$ 1,467,504
(cid:326)
30,031
716,234
17,105
76,425
2,183,738
(cid:326)
57,500
386,496
Percent of total earning assets
Cumulative percent of total earning assets
43.29%
43.29%
Percent of total interest-bearing liabilities
Cumulative percent of total interest-
bearing liabilities
Interest sensitivity gap
Cumulative interest sensitivity gap
Cumulative interest sensitivity gap
as a percent of total earning assets
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities
57.10%
27.87%
84.96%
15.04%
100.00%
57.10%
84.96%
84.96%
100.00%
100.00%
$ (249,792)
(249,792)
(432,056)
(681,848)
(681,848)
(681,848)
924,530
242,682
242,682
242,682
(8.88%)
(24.24%)
(24.24%)
8.63%
8.63%
82.98%
68.78%
68.78%
109.44%
109.44%
(1) The three months or less category for loans includes $813,955 in adjustable rate loans that have reached their contractual rate floors.
79
Table 18 Contractual Obligations and Other Commercial Commitments
Contractual
Obligations
As of December 31, 2011
Securities sold under agreements
to repurchase
Borrowings
Operating leases
Total contractual cash obligations,
excluding deposits
Deposits
Total contractual cash obligations,
Payments Due by Period ($ in thousands)
On Demand or
Less
than 1 Year
1-3 Years
4-5 Years
After 5
Years
17,105
30,031
805
(cid:326)
57,500
1,452
(cid:326)
(cid:326)
1,125
(cid:326)
46,394
2,143
Total
$ 17,105
133,925
5,525
156,555
47,941
58,952
1,125
48,537
2,755,037
2,423,164
227,905
102,465
1,503
including deposits
$ 2,911,592
2,471,105
286,857
103,590
50,040
Amount of Commitment Expiration Per Period ($ in thousands)
Other Commercial
Commitments
As of December 31, 2011
Credit cards
Lines of credit and loan commitments
Standby letters of credit
Total commercial commitments
Total
Amounts
Committed
$ 27,809
289,788
7,088
$ 324,685
Less
than 1 Year
13,904
106,813
6,359
127,076
1-3 Years
4-5 Years
13,905
11,926
729
26,560
(cid:326)
11,491
(cid:326)
11,491
After 5
Years
(cid:326)
159,558
(cid:326)
159,558
80
Table 19 Market Risk Sensitive Instruments
Expected Maturities of Market Sensitive Instruments Held
at December 31, 2011 Occurring in Indicated Year
($ in thousands)
2012
2013
2014
2015
2016
Beyond
Total
Average
Interest
Rate
Estimated
Fair
Value
Due from banks,
interest-bearing
Federal funds sold
Presold mortgages in
process of settlement
Debt Securities - at
amortized cost (1) (2)
Loans – fixed (3) (4)
Loans – adjustable (3) (4)
Total
NOW deposits
Money market deposits
Savings deposits
Time deposits
Securities sold under
agreements to
repurchase
Borrowings – fixed (2)
Borrowings – adjustable
Total
$ 135,218
608
6,090
(cid:16)
(cid:16)
(cid:16)
(cid:16)
(cid:16)
(cid:16)
(cid:16)
(cid:16)
(cid:16)
(cid:16)
(cid:16)
(cid:16)
(cid:16)
(cid:16)
(cid:16)
135,218
608
0.22%
0.22%
$ 135,218
608
6,090
4.00%
6,090
50,438
22,188
24,236
271,241 250,627 165,442
263,637 111,407
92,113
67,607
37,121
24,130
90,459 137,311 317,066
82,687 105,008 428,350
$ 727,232 386,270 279,743 197,276 279,440 813,023
225,720
1,232,146
1,083,202
2,682,984
$ 423,452
513,832
146,481
(cid:16)
(cid:16)
(cid:16)
1,003,566 162,617
(cid:16)
(cid:16)
(cid:16)
65,288
(cid:16)
(cid:16)
(cid:16)
64,592
(cid:16)
(cid:16)
(cid:16)
37,873
(cid:16)
(cid:16)
(cid:16)
1,503
423,452
513,832
146,481
1,335,439
3.83%
6.09%
4.99%
5.15%
0.19%
0.42%
0.35%
1.06%
234,012
1,227,825
1,041,960
$2,645,713
$ 423,452
513,832
146,481
1,339,906
17,105
30,031
(cid:16)
35,000
–
$2,134,467 185,117 100,288
(cid:16)
22,500
–
(cid:1086)
(cid:16)
(cid:16)
–
64,592
(cid:16)
(cid:16)
–
37,873
(cid:16)
(cid:16)
46,394
47,897
17,105
87,531
46,394
2,570,234
0.32%
1.36%
2.47%
0.70%
17,105
88,048
18,285
$2,547,109
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 39% tax rate.
(2) Securities and borrowings with call dates within 12 months of December 31, 2011 that have above market interest rates are
assumed to mature at their call date for purposes of this table. Mortgage securities are assumed to mature in the period of their
expected repayment based on estimated prepayment speeds.
(3) Excludes nonaccrual loans.
(4) Loans are shown in the period of their contractual maturity, except for home equity lines of credit loans which are assumed to repay
on a straight-line basis over five years.
Table 20 Return on Assets and Common Equity
2011
For the Year Ended December 31,
2010
2009
Return on assets
Return on common equity
Dividend payout ratio
Average shareholders’ equity to average assets
0.23%
2.59%
72.73%
10.67%
0.18%
2.05%
91.43%
10.55%
1.82%
22.55%
9.47%
10.11%
81
Table 21 Risk-Based and Leverage Capital Ratios
($ in thousands)
Risk-Based and Leverage Capital
Tier I capital:
Shareholders’ equity
Trust preferred securities eligible for Tier I
capital treatment
Intangible assets
Accumulated other
comprehensive income adjustments
Total Tier I leverage capital
Tier II capital:
Allowable allowance for loan losses
Tier II capital additions
Total risk-based capital
2011
As of December 31,
2010
2009
$ 345,150
344,603
342,383
45,000
(69,732)
8,682
329,100
45,000
(70,358)
5,085
324,330
45,000
(70,948)
4,427
320,862
26,797
26,797
$ 355,897
26,767
26,767
351,097
28,996
28,996
349,858
Total risk weighted assets
$ 2,129,116
2,118,661
2,314,393
Adjusted fourth quarter average assets
3,222,762
3,155,297
3,449,684
Risk-based capital ratios:
Tier I capital to Tier I risk adjusted assets
Minimum required Tier I capital
Total risk-based capital to
Tier II risk-adjusted assets
Minimum required total risk-based capital
Leverage capital ratios:
Tier I leverage capital to
adjusted fourth quarter average assets
Minimum required Tier I leverage capital
15.46%
4.00%
16.72%
8.00%
10.21%
4.00%
15.31%
4.00%
16.57%
8.00%
10.28%
4.00%
13.86%
4.00%
15.12%
8.00%
9.30%
4.00%
82
Table 22 Quarterly Financial Summary (Unaudited)
2011
2010
($ in thousands except
per share data)
Income Statement Data
Interest income, taxable equivalent
Interest expense
Net interest income, taxable
equivalent
Taxable equivalent, adjustment
Net interest income
Provision for loan losses
Net interest income after provision
for losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
Income taxes (benefit)
Net income (loss)
Preferred stock dividends and
accretion
Net income (loss) available to
common shareholders
Per Common Share Data
Earnings (loss) per common share -
basic
Earnings (loss) per common share -
diluted
Cash dividends declared
Market Price
High
Low
Close
Stated book value - common
Tangible book value - common
Selected Average Balances
Assets
Loans
Earning assets
Deposits
Interest-bearing liabilities
Shareholders’ equity
Ratios (annualized where applicable)
Return on average assets
Return on average common equity
Equity to assets at end of period
Tangible equity to tangible assets at
end of period
Tangible common equity to tangible
assets at end of period
Average loans to average deposits
Average earning assets to interest-
bearing liabilities
Net interest margin
Allowance for loan losses to gross loans
Nonperforming loans as a percent of
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$ 37,576
5,262
32,314
394
31,920
9,878
22,042
3,423
24,192
1,273
289
984
39,617
5,739
33,878
389
33,489
9,146
24,343
3,486
23,958
3,871
1,314
2,557
40,917
6,049
34,868
388
34,480
10,934
23,546
5,114
22,913
5,747
2,021
3,726
39,214
6,515
40,785
6,854
32,699
385
32,314
11,343
20,971
14,193
25,043
10,121
3,746
6,375
33,931
361
33,570
30,545
3,025
14,918
22,008
(4,065)
(1,820)
(2,245)
39,140
7,739
31,401
330
31,071
8,391
22,680
3,957
20,711
5,926
2,078
3,848
40,049
8,182
31,867
331
31,536
8,003
23,533
4,537
21,957
6,113
2,172
3,941
40,604
9,132
31,472
295
31,177
7,623
23,554
5,694
22,280
6,968
2,530
4,438
(794)
(3,289)
(1,041)
(1,042)
(1,027)
(1,027)
(1,026)
(1,027)
190
(732)
2,685
5,333
(3,272)
2,821
2,915
3,411
$ 0.01
(0.04)
0.01
0.08
13.78
9.36
11.15
16.66
12.53
(0.04)
0.08
11.87
8.05
10.04
17.08
12.93
0.16
0.16
0.08
14.08
9.82
10.24
17.04
12.88
0.32
(0.19)
0.32
0.08
16.89
12.36
13.26
16.90
12.72
(0.19)
0.08
15.83
12.73
15.31
16.64
12.45
0.17
0.17
0.08
16.90
12.00
13.62
17.04
12.83
0.17
0.17
0.08
16.80
13.27
14.49
16.92
12.70
0.20
0.20
0.08
16.00
12.97
13.52
16.76
12.52
$3,292,494
2,432,568
2,816,689
2,730,422
2,577,329
354,206
3,293,758
2,441,486
2,808,205
2,724,418
2,592,873
355,575
3,327,238
2,471,915
2,842,817
2,785,998
2,617,122
352,619
3,346,690
2,502,011
2,872,041
2,791,250
2,638,476
351,952
3,225,655
2,484,684
2,811,988
2,722,162
2,543,070
354,715
3,272,161 3,316,971
2,529,356 2,575,926
2,894,660 2,939,478
2,777,358 2,818,581
2,613,762 2,664,399
349,330
353,061
3,440,537
2,627,638
3,065,134
2,910,543
2,799,549
346,526
0.02%
0.26%
10.49%
(0.09%)
(1.00%)
10.65%
0.32%
3.74%
10.57%
0.65%
7.54%
10.27%
(0.40%)
(4.48%)
10.51%
0.34%
3.89%
10.44%
0.35%
4.11%
10.51%
0.40%
4.91%
10.19%
8.55%
8.72%
8.64%
8.37%
8.54%
8.52%
8.56%
8.27%
6.58%
89.09%
6.75%
89.61%
6.65%
88.73%
6.42%
89.64%
6.52%
91.28%
6.55%
91.07%
6.56%
91.39%
6.31%
90.28%
109.29%
4.55%
1.70%
108.30%
4.79%
1.55%
108.62%
4.92%
1.64%
108.85%
4.62%
1.72%
110.57%
4.79%
2.01%
110.75%
4.30%
1.79%
110.32%
4.35%
1.65%
109.49%
4.16%
1.52%
total loans
5.80%
5.74%
6.14%
6.52%
6.88%
7.17%
7.86%
7.94%
Nonperforming loans as a percent of
total loans – non-covered
Nonperforming assets as a percent of
total assets
Nonperforming assets as a percent of
total assets – non-covered
Net charge-offs as a percent of average
total loans
Net charge-offs as a percent of average
total loans – non-covered
4.12%
4.19%
4.33%
4.35%
4.61%
4.81%
4.46%
4.28%
8.00%
8.39%
8.54%
8.38%
8.69%
8.90%
8.90%
8.43%
4.30%
4.21%
4.25%
4.05%
4.16%
4.16%
3.89%
3.58%
1.00%
1.87%
2.22%
2.92%
4.17%
0.88%
0.85%
0.81%
1.09%
1.26%
1.74%
1.97%
3.10%
1.06%
1.04%
1.01%
83
Item 8. Financial Statements and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 2011 and 2010
($ in thousands)
Assets
Cash and due from banks, noninterest-bearing
Due from banks, interest-bearing
Federal funds sold
Total cash and cash equivalents
Securities available for sale
Securities held to maturity (fair values of $62,754 in 2011 and $53,312 in 2010)
Presold mortgages in process of settlement
Loans – non-covered
Loans – covered by FDIC loss share agreement
Total loans
Allowance for loan losses – non-covered
Allowance for loan losses – covered
Total allowance for loan losses
Net loans
Premises and equipment
Accrued interest receivable
FDIC indemnification asset
Goodwill
Other intangible assets
Other real estate owned – non-covered
Other real estate owned – covered
Other assets
Total assets
Liabilities
Deposits: Demand – noninterest-bearing
NOW accounts
Money market accounts
Savings accounts
Time deposits of $100,000 or more
Other time deposits
Total deposits
Securities sold under agreements to repurchase
Borrowings
Accrued interest payable
Other liabilities
Total liabilities
Commitments and contingencies (see Note 13)
2011
2010
$ 80,341
135,218
608
216,167
56,821
154,320
861
212,002
182,626
57,988
6,090
2,069,152
361,234
2,430,386
(35,610)
(5,808)
(41,418)
2,388,968
69,975
11,779
121,677
65,835
3,897
37,023
85,272
43,177
$ 3,290,474
$ 335,833
423,452
513,832
146,481
753,233
582,206
2,755,037
17,105
133,925
1,872
37,385
2,945,324
181,182
54,018
3,962
2,083,004
371,128
2,454,132
(38,275)
(11,155)
(49,430)
2,404,702
67,741
13,579
123,719
65,835
4,523
21,081
94,891
31,697
3,278,932
292,759
292,623
500,360
153,325
762,990
650,456
2,652,513
54,460
196,870
2,082
28,404
2,934,329
Shareholders’ Equity
Preferred stock, no par value per share. Authorized: 5,000,000 shares
Issued & outstanding: 63,500 in 2011 and 65,000 in 2010
Discount on preferred stock
Common stock, no par value per share. Authorized: 40,000,000 shares
Issued & outstanding: 16,909,820 shares in 2011 and 16,801,426 shares in 2010
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
63,500
(cid:1086)
104,841
185,491
(8,682)
345,150
$ 3,290,474
65,000
(2,932)
104,207
183,413
(5,085)
344,603
3,278,932
84
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2011, 2010 and 2009
($ in thousands, except per share data)
Interest Income
Interest and fees on loans
Interest on investment securities:
Taxable interest income
Tax-exempt interest income
Other, principally overnight investments
Total interest income
Interest Expense
Savings, NOW and money market
Time deposits of $100,000 or more
Other time deposits
Securities sold under agreements to repurchase
Borrowings
Total interest expense
Net interest income
Provision for loan losses – non-covered
Provision for loan losses – covered
Total provision for loan losses
Net interest income after provision for loan losses
Noninterest Income
Service charges on deposit accounts
Other service charges, commissions and fees
Fees from presold mortgage loans
Commissions from sales of insurance and financial products
Gain from acquisition
Foreclosed property losses and write-downs – covered
Foreclosed property losses and write-downs – non-covered
FDIC indemnification asset income, net
Securities gains (losses)
Other gains (losses)
Total noninterest income
Noninterest Expenses
Salaries
Employee benefits
Total personnel expense
Occupancy expense
Equipment related expenses
Intangibles amortization
Acquisition expenses
Other operating expenses
Total noninterest expenses
Income before income taxes
Income taxes
Net income
Preferred stock dividends
Accretion of preferred stock discount
Net income available to common shareholders
Earnings per common share:
Basic
Diluted
Dividends declared per common share
Weighted average common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
85
2011
2010
2009
$ 147,652
151,292
148,007
5,680
2,000
436
155,768
4,212
10,103
7,036
184
2,030
23,565
132,203
28,525
12,776
41,301
90,902
11,981
8,067
1,609
1,512
10,196
(24,492)
(3,355)
20,481
74
143
26,216
39,822
11,616
51,438
6,574
4,326
902
636
32,230
96,106
21,012
7,370
5,750
1,633
586
159,261
6,363
12,374
11,193
298
1,679
31,907
127,354
33,646
20,916
54,562
72,792
12,335
6,507
1,813
1,476
(cid:326)
(34,527)
(984)
41,808
26
652
29,106
35,076
10,214
45,290
6,799
4,327
874
(cid:326)
29,666
86,956
14,942
4,960
6,580
859
545
155,991
8,744
18,908
17,866
736
2,641
48,895
107,096
20,186
(cid:326)
20,186
86,910
13,112
5,729
1,505
1,524
67,894
(cid:326)
(cid:326)
(cid:326)
(104)
(142)
89,518
30,745
10,843
41,588
6,071
4,334
630
1,343
24,585
78,551
97,877
37,618
13,642
9,982
60,259
(3,234)
(2,932)
(3,250)
(857)
(3,169)
(803)
$ 7,476
5,875
56,287
$ 0.44
0.44
$ 0.32
0.35
0.35
0.32
3.38
3.37
0.32
16,856,072
16,883,244
16,764,879
16,793,650
16,648,822
16,686,880
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2011, 2010 and 2009
($ in thousands)
2011
2010
2009
Net income
Other comprehensive income (loss):
Unrealized gains/losses on securities available for sale:
Unrealized holding gains arising during the period, pretax
Tax expense
Reclassification to realized (gains) losses
Tax expense (benefit)
Postretirement Plans:
Net gain (loss) arising during period
Tax (expense) benefit
Amortization of unrecognized net actuarial loss
Tax expense
Amortization of prior service cost and transition obligation
Tax expense
Other comprehensive income (loss)
$ 13,642
9,982
60,259
1,492
(583)
(74)
29
(7,798)
3,080
393
(155)
32
(13)
(3,597)
672
(261)
(26)
10
(2,307)
911
531
(210)
35
(13)
(658)
1,455
(567)
104
(41)
3,623
(1,397)
869
(339)
36
(14)
3,729
Comprehensive income
$ 10,045
9,324
63,988
See accompanying notes to consolidated financial statements.
86
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2011, 2010 and 2009
(In thousands)
Preferred
Stock
Preferred
Stock
Discount
Common Stock
Shares
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Share-
holders’
Equity
Balances, January 1, 2009
$ —
—
16,574 $ 96,072
131,952
(8,156)
219,868
Net income
Preferred stock issued
Common stock warrants issued
Common stock issued under
stock option plans
Common stock issued into
dividend reinvestment plan
Cash dividends declared ($0.32 per
share)
Preferred dividends accrued
Accretion of preferred stock
discount
Tax benefit realized from exercise of
nonqualified stock options
Stock-based compensation
Other comprehensive income
65,000
(4,592)
4,592
393
1,112
42
77
803
—
29
73
449
60,259
(5,331)
(3,169)
(803)
3,729
60,259
60,408
4,592
393
1,112
(5,331)
(3,169)
––
73
449
3,729
Balances, December 31, 2009
65,000
(3,789)
16,722
102,691
182,908
(4,427)
342,383
Net income
Common stock issued under
stock option plans
Common stock issued into
dividend reinvestment plan
Cash dividends declared ($0.32 per
share)
Preferred dividends accrued
Accretion of preferred stock
discount
Tax benefit realized from exercise of
nonqualified stock options
Stock-based compensation
Other comprehensive (loss)
9,982
(5,370)
(3,250)
(857)
17
46
171
669
857
—
16
36
640
9,982
171
669
(5,370)
(3,250)
––
36
640
(658)
(658)
Balances, December 31, 2010
65,000
(2,932)
16,801
104,207
183,413
(5,085)
344,603
(65,000)
63,500
Net income
Preferred stock redeemed
Preferred stock issued
Common stock issued under
stock option plans
Common stock issued into
dividend reinvestment plan
Repurchases of common stock
Repurchase of outstanding
common stock warrants
Cash dividends declared ($0.32 per
share)
Preferred dividends
Accretion of preferred stock
discount
Stock-based compensation
Other comprehensive (loss)
13,642
(5,398)
(3,234)
(2,932)
2
71
(20)
30
851
(228)
(924)
2,932
56
905
(3,597)
13,642
(65,000)
63,500
30
851
(228)
(924)
(5,398)
(3,234)
––
905
(3,597)
Balances, December 31, 2011
$ 63,500
(cid:1086)
16,910 $ 104,841
185,491
(8,682)
345,150
See accompanying notes to consolidated financial statements.
87
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2011, 2010 and 2009
($ in thousands)
Cash Flows From Operating Activities
Net income
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses
Net security premium amortization
Purchase accounting accretion and amortization, net
Gain from acquisition
Foreclosed property losses and write-downs
Loss (gain) on securities available for sale
Other losses (gains)
Increase in net deferred loan costs
Depreciation of premises and equipment
Stock-based compensation expense
Amortization of intangible assets
Originations of presold mortgages in process of settlement
Proceeds from sales of presold mortgages in process of settlement
Decrease in accrued interest receivable
Decrease (increase) in other assets
Decrease in accrued interest payable
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash Flows From Investing Activities
Purchases of securities available for sale
Purchases of securities held to maturity
Proceeds from sales of securities available for sale
Proceeds from maturities/issuer calls of securities available for sale
Proceeds from maturities/issuer calls of securities held to maturity
Net decrease in loans
Proceeds from FDIC loss share agreements
Proceeds from sales of foreclosed real estate
Purchases of premises and equipment
Net cash received (paid) in acquisition
Net cash provided by investing activities
Cash Flows From Financing Activities
Net increase (decrease) in deposits and repurchase agreements
Proceeds from (repayments of) borrowings, net
Cash dividends paid – common stock
Cash dividends paid – preferred stock
Proceeds from issuance of preferred stock
Proceeds from issuance of common stock
Redemption of preferred stock
Repurchase of common stock
Repurchase of common stock warrants
Tax benefit from exercise of nonqualified stock options
Net cash used by financing activities
Increase (decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Year
2011
2010
2009
$ 13,642
9,982
60,259
41,301
1,373
(11,628)
(10,196)
27,847
(74)
(143)
(307)
4,388
905
902
(76,095)
73,967
1,800
(30,096)
(210)
(330)
37,046
(75,689)
(4,332)
2,518
75,615
1,053
11,912
69,339
43,414
(6,606)
54,037
171,261
(127,253)
(66,881)
(5,390)
(2,847)
63,500
881
(65,000)
(228)
(924)
—
(204,142)
4,165
212,002
54,562
1,491
(9,963)
—
35,511
(26)
(652)
(599)
3,993
640
874
(88,665)
88,670
1,204
(32,538)
(972)
597
64,109
(99,310)
(22,431)
—
97,202
2,687
40,306
46,721
24,875
(17,543)
(171)
72,336
(287,982)
20,400
(5,359)
(3,250)
—
840
—
—
—
36
(275,315)
(138,870)
350,872
20,186
1,279
(5,648)
(67,894)
—
104
142
(139)
3,624
449
630
(93,893)
93,598
1,096
2,306
(3,706)
2,640
15,033
(102,899)
(20,300)
44
134,736
1,799
105,007
41,891
4,094
(5,299)
91,696
250,769
153,085
(349,465)
(7,145)
(2,763)
65,000
1,505
—
—
—
73
(139,710)
126,092
224,780
Cash and Cash Equivalents, End of Year
$ 216,167
212,002
350,872
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest
Income taxes
Non-cash investing and financing transactions:
Foreclosed loans transferred to other real estate
Unrealized gain on securities available for sale, net of taxes
See accompanying notes to consolidated financial statements.
88
$ 23,775
14,893
32,879
16,309
52,601
16,474
76,242
864
123,962
395
43,860
951
First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
Note 1. Summary of Significant Accounting Policies
(a) Basis of Presentation (cid:16) The consolidated financial statements include the accounts of First Bancorp (the
Company) and its wholly owned subsidiary - First Bank (the Bank). The Bank has two wholly owned subsidiaries
that are fully consolidated - First Bank Insurance Services, Inc. (First Bank Insurance) and First Troy SPE, LLC. All
significant intercompany accounts and transactions have been eliminated. Subsequent events have been
evaluated through the date of filing this Form 10-K.
The Company is a bank holding company. The principal activity of the Company is the ownership and operation
of the Bank, a state chartered bank with its main office in Troy, North Carolina. The Company is also the parent
company for a series of statutory trusts that were formed at various times since 2002 for the purpose of issuing
trust preferred debt securities. The trusts are not consolidated for financial reporting purposes; however, notes
issued by the Company to the trusts in return for the proceeds from the issuance of the trust preferred
securities are included in the consolidated financial statements and have terms that are substantially the same
as the corresponding trust preferred securities. The trust preferred securities qualify as capital for regulatory
capital adequacy requirements. First Bank Insurance is an agent for property and casualty insurance policies.
First Troy SPE, LLC was formed in order to hold and dispose of certain real estate foreclosed upon by the Bank.
The preparation of financial statements in conformity with generally accepted accounting principles in the
United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. The most significant estimates made by the Company in the preparation of its
consolidated financial statements are the determination of the allowance for loan losses, the valuation of other
real estate, the accounting and impairment testing related to intangible assets, and the fair value and discount
accretion of loans acquired in FDIC-assisted transactions.
(b) Cash and Cash Equivalents (cid:16) The Company considers all highly liquid assets such as cash on hand,
noninterest-bearing and interest-bearing amounts due from banks and federal funds sold to be “cash
equivalents.”
(c) Securities (cid:16) Debt securities that the Company has the positive intent and ability to hold to maturity are
classified as “held to maturity” and carried at amortized cost. Securities not classified as held to maturity are
classified as “available for sale” and carried at fair value, with unrealized gains and losses being reported as
other comprehensive income and reported as a separate component of shareholders’ equity.
A decline in the market value of any available for sale or held to maturity security below cost that is deemed to
be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. Any equity security that is in an unrealized loss
position for twelve consecutive months is presumed to be other than temporarily impaired and an impairment
charge is recorded unless the amount of the charge is insignificant.
Gains and losses on sales of securities are recognized at the time of sale based upon the specific identification
method. Premiums and discounts are amortized into income on a level yield basis, with premiums being
amortized to the earliest call date and discounts being accreted to the stated maturity date.
89
(d) Premises and Equipment (cid:16) Premises and equipment are stated at cost less accumulated depreciation.
Depreciation, computed by the straight-line method, is charged to operations over the estimated useful lives of
the properties, which range from 2 to 40 years or, in the case of leasehold improvements, over the term of the
lease, if shorter. Maintenance and repairs are charged to operations in the year incurred. Gains and losses on
dispositions are included in current operations.
(e) Loans – Loans are stated at the principal amount outstanding less any partial charge-offs plus deferred
origination costs, net of nonrefundable loan fees. Interest on loans is accrued on the unpaid principal balance
outstanding. Net deferred loan origination costs/fees are capitalized and recognized as a yield adjustment over
the life of the related loan.
The Company does not hold any interest-only strips, loans, other receivables, or retained interests in
securitizations that can be contractually prepaid or otherwise settled in a way that it would not recover
substantially all of its recorded investment.
Purchased loans acquired in a business combination, which include loans that were purchased in the 2009
Cooperative Bank acquisition and the 2011 Bank of Asheville acquisition, are recorded at estimated fair value on
their purchase date. The purchaser cannot carry over any related allowance for loan losses.
The Company follows specific accounting guidance related to purchased impaired loans when purchased loans
have evidence of credit deterioration since origination and it is probable at the date of acquisition that the
Company will not collect all contractually required principal and interest payments. Evidence of credit quality
deterioration as of the purchase date may include statistics such as past due and nonaccrual status. The
accounting guidance permits the use of the cost recovery method of income recognition for those purchased
impaired loans for which the timing and amount of cash flows expected to be collected cannot be reasonably
estimated. Under the cost recovery method of income recognition, all cash receipts are initially applied to
principal, with interest income being recorded only after the carrying value of the loan has been reduced to
zero. Substantially all of the Company’s purchased impaired loans to date have had uncertain cash flows and
thus are accounted for under the cost recovery method of income recognition.
For nonimpaired purchased loans, the Company accretes any fair value discount over the life of the loan in a
manner consistent with the guidance for accounting for loan origination fees and costs.
A loan is placed on nonaccrual status when, in management’s judgment, the collection of interest appears
doubtful. The accrual of interest is discontinued on all loans that become 90 days or more past due with respect
to principal or interest. The past due status of loans is based on the contractual payment terms. While a loan is
on nonaccrual status, the Company’s policy is that all cash receipts are applied to principal. Once the recorded
principal balance has been reduced to zero, future cash receipts are applied to recoveries of any amounts
previously charged off. Further cash receipts are recorded as interest income to the extent that any interest has
been foregone. Loans are removed from nonaccrual status when they become current as to both principal and
interest and when concern no longer exists as to the collectability of principal or interest. In some cases, where
borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly
different from the originally contracted terms. The nonaccrual policy discussed above applies to all loan
classifications.
A loan is considered to be impaired when, based on current information and events, it is probable the Company
will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired
loans are measured using either 1) an estimate of the cash flows that the Company expects to receive from the
borrower discounted at the loan’s effective rate, or 2) in the case of a collateral-dependent loan, the fair value
of the collateral. Unless restructured, while a loan is considered to be impaired, the Company’s policy is that
90
interest accrual is discontinued and all cash receipts are applied to principal. Once the recorded principal
balance has been reduced to zero, future cash receipts are applied to recoveries of any amounts previously
charged off. Further cash receipts are recorded as interest income to the extent that any interest has been
foregone. Impaired loans that are restructured are returned to accruing status in accordance with the
restructured terms if the Company believes that the borrower will be able to meet the obligations of the
restructured loan terms. The impairment policy discussed above applies to all loan classifications.
(f) Presold Mortgages in Process of Settlement and Loans Held for Sale (cid:16) As a part of normal business
operations, the Company originates residential mortgage loans that have been pre-approved by secondary
investors to be sold on a best efforts basis. The terms of the loans are set by the secondary investors, and the
purchase price that the investor will pay for the loan is agreed to prior to the funding of the loan by the
Company. Generally within three weeks after funding, the loans are transferred to the investor in accordance
with the agreed-upon terms. The Company records gains from the sale of these loans on the settlement date of
the sale equal to the difference between the proceeds received and the carrying amount of the loan. The gain
generally represents the portion of the proceeds attributed to service release premiums received from the
investors and the realization of origination fees received from borrowers that were deferred as part of the
carrying amount of the loan. Between the initial funding of the loans by the Company and the subsequent
reimbursement by the investors, the Company carries the loans on its balance sheet at the lower of cost or
market.
Periodically, the Company originates commercial loans that are intended for resale. The Company carries these
loans at the lower of cost or fair value at each reporting date. There were no such loans held for sale as of
December 31, 2011 or 2010.
(g) Allowance for Loan Losses (cid:16) The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged-off against the allowance for loan losses when management believes
that the collectability of the principal is unlikely. The provision for loan losses charged to operations is an
amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb
losses inherent in the portfolio. Management’s determination of the adequacy of the allowance is based on
several factors, including:
1. Risk grades assigned to the loans in the portfolio,
2. Specific reserves for larger loans with concerns regarding repayment ability,
3. Current economic conditions, including the local, state, and national economic outlook; interest rate
risk; trends in loan volume, mix and size of loans; seasoning of the loan portfolio; levels and trends of
delinquencies,
4. Historical loan loss experience with the more recent periods carrying a higher weight, and
5. An assessment of the risk characteristics of the Company’s loan portfolio, including industry
concentrations, payment structures, and credit administration practices.
While management uses the best information available to make evaluations, future adjustments may be
necessary if economic and other conditions differ substantially from the assumptions used.
For loans covered under loss share agreements, subsequent decreases to the expected cash flows will generally
result in additional provisions for loan losses. Subsequent increases in expected cash flows will result in a
reversal of the allowance for loan losses to the extent of prior allowance recognition.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the
Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance
based on the examiners’ judgment about information available to them at the time of their examinations.
91
(h) Other Real Estate (cid:16) Other real estate owned consists primarily of real estate acquired by the Company
through legal foreclosure or deed in lieu of foreclosure. The property is initially carried at the lower of cost
(generally the loan balance plus additional costs incurred for improvements to the property) or the estimated
fair value of the property less estimated selling costs. If there are subsequent declines in fair value, which is
reviewed routinely by management, the property is written down to its fair value through a charge to expense.
Capital expenditures made to improve the property are capitalized. Costs of holding real estate, such as
property taxes, insurance and maintenance, less related revenues during the holding period, are recorded as
expense.
(i) FDIC Indemnification Asset – The FDIC indemnification asset relates to loss share agreements with the FDIC,
whereby the FDIC has agreed to reimburse to the Company a percentage of the losses related to loans and other
real estate that the Company assumed in the acquisition of two failed banks. This indemnification asset is
measured separately from the loan portfolio and other real estate because it is not contractually embedded in
the loans and is not transferable with the loans should the Company choose to dispose of them. The carrying
value of this receivable at each period end is the sum of: 1) actual claims that have been submitted to the FDIC
for reimbursement that have not yet been received and 2) the Company’s estimated amount of loan and other
real estate losses covered by the agreements multiplied by the FDIC reimbursement percentage. At December
31, 2011 and 2010, the amount of actual claims that had been submitted to the FDIC for reimbursement but had
not yet been received was $13.4 million and $30.2 million, respectively.
(j) Income Taxes (cid:16) Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are reduced, if necessary, by the amount of such
benefits that are not expected to be realized based upon available evidence. The Company’s investment tax
credits, which are low income housing tax credits and state historic tax credits, are recorded in the period that
they are reflected in the Company’s tax returns.
(k) Intangible Assets (cid:16) Business combinations are accounted for using the purchase method of accounting.
Identifiable intangible assets are recognized separately and are amortized over their estimated useful lives,
which for the Company has generally been seven to ten years and at an accelerated rate. Goodwill is recognized
in business combinations to the extent that the price paid exceeds the fair value of the net assets acquired,
including any identifiable intangible assets. Goodwill is not amortized, but as discussed in Note 1(p), is subject
to fair value impairment tests on at least an annual basis.
(l) Other Investments – The Company accounts for investments in limited partnerships, limited liability
companies (“LLCs”), and other privately held companies using either the cost or the equity method of
accounting. The accounting treatment depends upon the Company’s percentage ownership and degree of
management influence.
Under the cost method of accounting, the Company records an investment in stock at cost and generally
recognizes cash dividends received as income. If cash dividends received exceed the investee’s earnings since
the investment date, these payments are considered a return of investment and reduce the cost of the
investment.
Under the equity method of accounting, the Company records its initial investment at cost. Subsequently, the
carrying amount of the investment is increased or decreased to reflect the Company’s share of income or loss of
the investee. The Company’s recognition of earnings or losses from an equity method investment is based on
92
the Company’s ownership percentage in the investee and the investee’s earnings on a quarterly basis. The
investees generally provide their financial information during the quarter following the end of a given period.
The Company’s policy is to record its share of earnings or losses on equity method investments in the quarter
the financial information is received.
All of the Company’s investments in limited partnerships, LLCs, and other companies are privately held, and
their market values are not readily available. The Company’s management evaluates its investments in
investees for impairment based on the investee’s ability to generate cash through its operations or obtain
alternative financing, and other subjective factors. There are inherent risks associated with the Company’s
investments in such companies, which may result in income statement volatility in future periods.
At December 31, 2011 and 2010, the Company’s investments in limited partnerships, LLCs and other privately
held companies totaled $2.6 million and $2.3 million, respectively, and were included in other assets.
(m) Stock Option Plan (cid:16) At December 31, 2011, the Company had four equity-based employee compensation
plans, which are described more fully in Note 15. The Company accounts for these plans under the recognition
and measurement principles of relevant accounting guidance.
(n) Per Share Amounts (cid:16) Basic Earnings Per Common Share is calculated by dividing net income 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 plans, including 1) stock options, 2)
performance units, and 3) restricted stock grants. In computing Diluted Earnings Per Common Share, it is
assumed that all dilutive stock options are exercised during the reporting period at their respective exercise
prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the
average market price in effect during the reporting period. The difference between the number of shares
assumed to be exercised and the number of shares bought back is included in the calculation of dilutive
securities. Performance units vest if certain financial goals and service conditions are met. Once vested, one
performance unit is equal to one share of common stock. Performance units are included in the calculation of
dilutive securities if the financial goals for a measurement period have been met, even if service requirements
have not been met. Restricted stock grants issued by the Company vest solely on service conditions, and thus
these shares are included in the calculation of dilutive securities.
The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted
Earnings Per Common Share:
($ in thousands,
except per share
amounts)
Income
(Numer-
ator)
2011
Shares
(Denom-
inator)
Per
Share
Amount
For the Years Ended December 31,
2010
Shares
(Denom-
inator)
Per
Share
Amount
Income
(Numer-
ator)
Income
(Numer-
ator)
2009
Shares
(Denom-
inator)
Per
Share
Amount
Basic EPS
Net income available to
common shareholders
Effect of dilutive
securities
Diluted EPS per
common share
$ 7,476
16,856,072
$ 0.44
$ 5,875
16,764,879
$ 0.35
$ 56,287
16,648,822
$ 3.38
(cid:16)
27,172
(cid:16)
28,771
(cid:16)
38,058
$ 7,476
16,883,244
$ 0.44
$ 5,875
16,793,650
$ 0.35
$ 56,287
16,686,880
$ 3.37
For the years ended December 31, 2011, 2010, and 2009, there were 396,669 options, 604,752 options and
93
704,018 options, respectively, that were anti-dilutive because the exercise price exceeded the average market
price for the year, and thus are not included in the calculation to determine the effect of dilutive securities. In
addition, the warrant for 616,308 shares issued to the Treasury in 2009 and repurchased by the Company in
2011 was anti-dilutive for the year ended December 31, 2010 and 2009 – see Note 19 for additional information.
(o) Fair Value of Financial Instruments (cid:16) Relevant accounting guidance requires that the Company disclose
estimated fair values for its financial instruments. Fair value methods and assumptions are set forth below for
the Company’s financial instruments.
Cash and Amounts Due from Banks, Federal Funds Sold, Presold Mortgages in Process of Settlement, Accrued
Interest Receivable, and Accrued Interest Payable (cid:16) The carrying amounts approximate their fair value because
of the short maturity of these financial instruments.
Available for Sale and Held to Maturity Securities (cid:16) Fair values are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on quoted market prices of
comparable instruments.
Loans (cid:16) 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. Fair values for impaired loans are
estimated based on discounted cash flows or underlying collateral values, where applicable.
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.
Deposits and Securities Sold Under Agreements to Repurchase (cid:16) The fair value of securities sold under
agreements to repurchase and deposits with no stated maturity, such as non-interest-bearing demand deposits,
savings, NOW, and money market accounts, is equal to the amount payable on demand as of the valuation date.
The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount
rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Borrowings (cid:16) The fair value of borrowings is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered by the Company’s lenders for debt of similar
remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit (cid:16) At December 31, 2011 and 2010, the Company’s
off-balance sheet financial instruments had no carrying value. The large majority of commitments to extend
credit and standby letters of credit are at variable rates and/or have relatively short terms to maturity.
Therefore, the fair value for these financial instruments is considered to be immaterial.
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.
94
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.
(p) Impairment (cid:16) Goodwill is evaluated for impairment on at least an annual basis by comparing the fair value of
the reporting units to their related carrying value. If the carrying value of a reporting unit exceeds its fair value,
the Company determines whether the implied fair value of the goodwill, using various valuation techniques,
exceeds the carrying value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value of
the goodwill, an impairment loss is recorded in an amount equal to that excess.
The Company reviews all other long-lived assets, including identifiable intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The
Company’s policy is that an impairment loss is recognized if the sum of the undiscounted future cash flows is
less than the carrying amount of the asset. Any long-lived assets to be disposed of are reported at the lower of
the carrying amount or fair value, less costs to sell.
To date, the Company has not recorded any impairment write-downs of its long-lived assets or goodwill.
(q) Comprehensive Income (cid:16) 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)
Unrealized gain on securities available for sale
Deferred tax liability
Net unrealized gain on securities available for sale
Additional pension liability
Deferred tax asset
Net additional pension liability
December 31,
2011
$ 3,896
(1,520)
2,376
December 31,
2010
2,478
(966)
1,512
December 31,
2009
1,832
(715)
1,117
(18,278)
7,220
(11,058)
(10,905)
4,308
(6,597)
(9,164)
3,620
(5,544)
Total accumulated other comprehensive income (loss)
$ (8,682)
(5,085)
(4,427)
(r) Segment Reporting (cid:16) Accounting standards require management to report selected financial and descriptive
information about reportable operating segments. The standards also require related disclosures about
products and services, geographic areas, and major customers. Generally, disclosures are required for segments
internally identified to evaluate performance and resource allocation. The Company’s operations are primarily
within the banking segment, and the financial statements presented herein reflect the results of that segment.
The Company has no foreign operations or customers.
(s) Reclassifications (cid:16) Certain amounts for prior years have been reclassified to conform to the 2011
presentation. The reclassifications had no effect on net income or shareholders’ equity as previously presented,
nor did they materially impact trends in financial information.
(t) Recent Accounting Pronouncements (cid:16) In July 2010, the Financial Accounting Standards Board (FASB) issued
guidance that requires an entity to provide more information about the credit quality of its financing
95
receivables, such as aging information, credit quality indicators and troubled debt restructurings, in the
disclosures to its financial statements. The disclosures must be disaggregated by portfolio segment or class. The
disaggregation of information is based on how the entity develops its allowance for credit losses and how it
manages its credit exposure. Except for disclosures related to troubled debt restructurings (discussed in next
paragraph), the required disclosures became effective for periods ending on or after December 15, 2010. The
Company is required to include these disclosures in its interim and annual financial statements. See Note 4 for
required disclosures.
In April 2011, the FASB issued guidance to assist creditors with their determination of when a restructuring is a
troubled debt restructuring. The determination is based on whether the restructuring constitutes a concession
and whether the debtor is experiencing financial difficulties, as both events must be present. This guidance and
the new disclosures related to troubled debt restructurings became effective for reporting periods beginning
after June 15, 2011. See Note 4 for required disclosures.
In December 2010, the FASB issued amended guidance to modify Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to
perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists.
Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained
earnings upon adoption. Impairments occurring subsequent to adoption should be included in earnings. The
amendment was effective for the Company beginning January 1, 2011 and did not impact the Company.
In September 2011, the FASB issued additional amended guidance related to goodwill impairment testing.
Guidance now permits an entity to consider qualitative factors to determine whether it is more likely than not
that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is
necessary to perform the two-step goodwill impairment test. This amendment will be effective for the
Company on January 1, 2012 and is not expected to impact the Company.
Also in December 2010, the FASB issued amended guidance specifying that if a public entity presents
comparative financial statements, the entity should disclose revenue and earnings of the combined entity as
though the business combination that occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. The amendment also requires that the supplemental pro forma
disclosures include a description of the nature and amount of any material, nonrecurring pro forma adjustments
directly attributable to the business combination included in the reported pro forma revenue and earnings. This
amendment is effective for the Company for business combinations for which the acquisition date is on or after
January 1, 2011. The Company does not expect this guidance to have a material impact on its financial
statements.
In June 2011, the FASB amended the comprehensive income guidance by eliminating the option to present
other comprehensive income as a part of the statement of changes in stockholders’ equity. The amendment
requires consecutive presentation of the statement of net income and other comprehensive income and
requires an entity to present reclassification adjustments from other comprehensive income to net income on
the face of the financial statements. In December 2011, the FASB deferred the effective date of presenting
reclassification adjustments from other comprehensive income to net income on the face of the financial
statements. The remaining amendments of the guidance will be applicable to the Company on January 1, 2012
and will be applied retrospectively. The Company has consistently followed the new requirements in prior
filings, and thus this guidance will not change the way the Company has presented its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies
are not expected to have a material impact on the Company’s financial position, results of operations or cash
flows.
96
Note 2. Acquisitions – Completed and Pending
The Company did not complete any significant acquisitions during 2010. The Company completed the
acquisitions described below during 2009 and 2011. The results of each acquired company/branch are included
in the Company’s results beginning on its respective acquisition date.
(1) On June 19, 2009, the Bank entered into a purchase and assumption agreement with the Federal Deposit
Insurance Corporation (FDIC), as receiver for Cooperative Bank, in Wilmington, North Carolina. Earlier that day,
the North Carolina Commissioner of Banks issued an order requiring the closure of Cooperative Bank and
appointing the FDIC as receiver. According to the terms of the agreement, the Bank acquired all deposits
(except certain brokered deposits) and borrowings, and substantially all of the assets of Cooperative Bank and
its subsidiary, Lumina Mortgage. All deposits were assumed by the Bank with no losses to any depositor.
Cooperative Bank operated through twenty-one branches in North Carolina and three branches in South
Carolina, with assets totaling approximately $959 million and approximately 200 employees.
The loans and foreclosed real estate purchased are covered by two loss share agreements between the FDIC and
the Bank, which affords the Bank significant loss protection. Under the loss share agreements, the FDIC will
cover 80% of covered loan and foreclosed real estate losses up to $303 million and 95% of losses in excess of
that amount. The term for loss sharing on residential real estate loans is ten years, while the term for loss
sharing on non-residential real estate loans is five years in respect to losses and eight years in respect to loss
recoveries. The reimbursable losses from the FDIC are based on the book value of the relevant loan as
determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the
loss share agreements.
The Bank received a $123 million discount on the assets acquired and paid no deposit premium. The acquisition
was accounted for under the purchase method of accounting in accordance with relevant accounting guidance.
The purchased assets and assumed liabilities were recorded at their respective acquisition date fair values, and
identifiable intangible assets were recorded at fair value. Fair values were subject to refinement for up to one
year after the closing date of the acquisition as information relative to closing date fair values became available.
The Company recorded an estimated receivable from the FDIC in the amount of $185.1 million as of June 30,
2009, which represented the FDIC’s portion of the losses that were expected to be incurred and reimbursed to
the Company.
An acquisition gain totaling $67.9 million resulted from the acquisition and is included as a component of
noninterest income in the Company’s statement of income. In the Company’s filings for the second quarter
2009, this gain was reported as being $53.8 million. During the third and fourth quarters of 2009, the Company
obtained third-party appraisals for the majority of Cooperative Bank’s collateral dependent problem loans.
Overall, the appraised values were higher than the Company’s original estimates made as of the acquisition
date. In addition, during the third and fourth quarters of 2009, the Company received payoffs related to certain
loans for which losses had been anticipated. Accordingly, as required by accounting guidance, the Company
retrospectively adjusted the fair value of the loans acquired for these factors, which resulted in a higher gain
being reflected in the second quarter of 2009.
The statement of net assets acquired as of June 19, 2009 and the resulting gain (as adjusted) are presented in
the following table.
97
($ in thousands)
Assets
Cash and cash equivalents
Securities
Presold mortgages
Loans
Core deposit intangible
FDIC indemnification asset
Foreclosed properties
Other assets
Total
Liabilities
Deposits
Borrowings
Other
Total
Excess of assets received over liabilities
Less: Asset discount
Cash received from FDIC at closing
Total gain recorded
Explanation of Fair Value Adjustments
As
Recorded by
Cooperative Bank
Fair
Value
Adjustments
As
Recorded by
the Company
$ 66,096
40,189
3,249
828,958
(cid:1086)(cid:3)
(cid:1086)(cid:3)
15,993
4,178
958,663
$ 706,139
153,056
2,227
861,422
$ 97,241
(123,000)
25,759
–
–
–
(227,854) (a)
3,798 (b)
185,112 (c)
(3,534) (d)
(137) (e)
(42,615)
5,922 (f)
6,409 (g)
160 (e)
12,491
(55,106)
66,096
40,189
3,249
601,104
3,798
185,112
12,459
4,041
916,048
712,061
159,465
2,387
873,913
42,135
25,759
$ 67,894
(a) This estimated fair value adjustment was necessary as of the acquisition date to write down Cooperative
Bank’s book value of loans to the estimated fair value as a result of future expected loan losses.
(b) This estimated fair value adjustment represents the value of the core deposit base assumed in the
acquisition based on a study performed by an independent consulting firm. This amount was recorded
by the Company as an identifiable intangible asset and will be amortized as an expense on a straight-line
basis over the average life of the core deposit base, which is estimated to be 8 years.
(c) This estimated fair value adjustment represents the amount that the Company will receive from the
FDIC under its loss share agreements as a result of future loan losses.
(d) This estimated fair value adjustment was necessary to write down Cooperative Bank’s book value of
foreclosed real estate properties to their estimated fair value as of the acquisition date.
(e) These estimated fair value adjustments are other immaterial adjustments made to acquired assets and
assumed liabilities to reflect fair value.
(f) This estimated fair value adjustment was recorded because the weighted average interest rate of
Cooperative Bank’s time deposits exceeded the cost of similar wholesale funding at the time of the
acquisition. This amount was amortized to reduce interest expense on a declining basis over the
average life of the portfolio of approximately 15 months.
(g) This estimated fair value adjustment was recorded because the interest rates of Cooperative Bank’s
fixed rate borrowings exceeded current interest rates on similar borrowings. This amount was realized
shortly after the acquisition by prepaying the borrowings at a premium, and thus there will be no future
amortization related to this adjustment.
98
The operating results of the Company for the year ended December 31, 2009 include the operating results of the
acquired assets and assumed liabilities since the acquisition date of June 19, 2009.
(2) On January 21, 2011, the Bank entered into a loss share purchase and assumption agreement with the
FDIC, as receiver for The Bank of Asheville, Asheville, North Carolina. Earlier that day, the North Carolina
Commissioner of Banks issued an order for the closure of The Bank of Asheville and appointed the FDIC as
receiver. According to the terms of the agreement, First Bank acquired substantially all of the assets and
liabilities of The Bank of Asheville. All deposits were assumed by First Bank with no losses to any depositor.
The Bank of Asheville operated through five branches in Asheville, North Carolina with total assets of
approximately $198 million and 50 employees.
Substantially all of the loans and foreclosed real estate purchased are covered by loss share agreements
between the FDIC and First Bank, which afford First Bank significant loss protection. Under the loss share
agreements, the FDIC will cover 80% of covered loan and foreclosed real estate losses. The term for loss sharing
on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is
five years in respect to losses and eight years in respect to loss recoveries. The reimbursable losses from the
FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction.
New loans made after that date are not covered by the loss share agreements.
First Bank received a $23.9 million discount on the assets acquired and paid no deposit premium. The
acquisition was accounted for under the purchase method of accounting in accordance with relevant accounting
guidance. The statement of net assets acquired as of January 21, 2011 and the resulting gain are presented in
the following table. The purchased assets and assumed liabilities were recorded at their respective acquisition
date fair values, and identifiable intangible assets were recorded at fair value. The Company recorded an
estimated receivable from the FDIC in the amount of $42.2 million, which represents the fair value of the FDIC’s
portion of the losses that are expected to be incurred and reimbursed to the Company.
An acquisition gain totaling $10.2 million resulted from the acquisition and is included as a component of
noninterest income in the statement of income. The amount of the gain is equal to the amount by which the
fair value of assets purchased exceeded the fair value of liabilities assumed.
The statement of net assets acquired as of January 21, 2011 and the resulting gain that was recorded are
presented in the following table.
99
($ in thousands)
Assets
Cash and cash equivalents
Securities
Loans
Core deposit intangible
FDIC indemnification asset
Foreclosed properties
Other assets
Total
Liabilities
Deposits
Borrowings
Other
Total
Excess of liabilities received over assets
Less: Asset discount
Cash received/receivable from FDIC at closing
Total gain recorded
As
Recorded by
The Bank of
Asheville
$ 27,297
4,461
153,994
(cid:1086)(cid:3)
(cid:1086)(cid:3)
3,501
1,146
190,399
$ 192,284
4,004
111
196,399
$ (6,000)
(23,940)
29,940
Fair
Value
Adjustments
As
Recorded by
the Company
–
–
(51,726) (a)
277 (b)
42,218 (c)
(2,159) (d)
(370) (e)
(11,760)
460 (f)
77 (g)
1,447 (h)
1,984
27,297
4,461
102,268
277
42,218
1,342
776
178,639
192,744
4,081
1,558
198,383
(13,744)
(19,744)
29,940
$ 10,196
Explanation of Fair Value Adjustments
(a) This estimated adjustment is necessary as of the acquisition date to write down The Bank of Asheville’s
book value of loans to the estimated fair value as a result of future expected loan losses.
(b) This fair value adjustment represents the value of the core deposit base assumed in the acquisition
based on a study performed by an independent consulting firm. This amount was recorded by the
Company as an identifiable intangible asset and will be amortized as an expense on a straight-line basis
over the average life of the core deposit base, which is estimated to be seven years.
(c) This adjustment is the estimated fair value of the amount that the Company expects to receive from the
FDIC under its loss share agreements as a result of future loan losses.
(d) This is the estimated adjustment necessary to write down The Bank of Asheville’s book value of
foreclosed real estate properties to their estimated fair value as of the acquisition date.
(e) This is an immaterial adjustment made to reflect fair value.
(f) This fair value adjustment was recorded because the weighted average interest rate of The Bank of
Asheville’s time deposits exceeded the cost of similar wholesale funding at the time of the acquisition.
This amount will be amortized to reduce interest expense on a declining basis over the life of the
portfolio of approximately 48 months.
(g) This fair value adjustment was recorded because the interest rates of The Bank of Asheville’s fixed rate
borrowings exceeded current interest rates on similar borrowings. This amount was realized shortly
after the acquisition by prepaying the borrowings at a premium and thus there will be no future
amortization related to this adjustment.
(h) This adjustment relates primarily to the estimate of what the Company will owe to the FDIC at the
conclusion of the loss share agreements based on a pre-established formula set forth in those
agreements that is based on total expected losses in relation to the amount of the discount bid.
100
The operating results of the Company for the year ended December 31, 2011 include the operating results of the
acquired assets and assumed liabilities for the period subsequent to the acquisition date of January 21, 2011.
Due primarily to the significant amount of fair value adjustments and the FDIC loss share agreements now in
place, historical results of The Bank of Asheville are not believed to be relevant to the Company’s results, and
thus no pro forma information is presented.
(3) At December 31, 2011, the Company had one pending acquisition. On October 21, 2011, the Company
entered into a Branch Purchase and Assumption Agreement (“The Agreement”) with Waccamaw Bankshares,
Inc., and its subsidiary, Waccamaw Bank. The Agreement provides for First Bank to acquire eleven branches
from Waccamaw Bank, which includes assuming all deposits, selected performing loans, and all premises and
equipment. Deposits total approximately $180 million (unaudited) and loans total approximately $98 million
(unaudited).
The Agreement provides for the deposits to be purchased at a premium that varies by account type. The
estimated blended premium is approximately 1.5% of total deposits (unaudited).
The Agreement provides for loans to be purchased at par (the amount of principal outstanding and interest
receivable) and for premises and equipment to be purchased at net book value. Approximately $31 million of
the $98 million (unaudited) in loans being acquired are subject to a provision in the Agreement allowing First
Bank to put the loans back to Waccamaw Bank at par value for any reason within 20 months following the
closing date of the transaction. The Agreement is subject to regulatory approval and other customary
conditions. No assurance can be provided that this Agreement will be approved.
Note 3. Securities
The book values and approximate fair values of investment securities at December 31, 2011 and 2010 are
summarized as follows:
($ in thousands)
Securities available for sale:
Government-sponsored
enterprise securities
Mortgage-backed securities
Corporate bonds
Equity securities
Total available for sale
Securities held to maturity:
State and local governments
Other
Total held to maturity
2011
2010
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
$ 34,511
120,032
13,189
10,998
$ 178,730
34,665
124,105
12,488
11,368
182,626
170
4,164
279
409
5,022
(16)
(91)
(980)
(39)
(1,126)
43,432
104,660
15,754
14,858
178,704
43,273
107,460
15,330
15,119
181,182
214
3,270
35
301
3,820
(373)
(470)
(459)
(40)
(1,342)
$ 57,988
(cid:326)
$ 57,988
62,754
(cid:326)
62,754
4,766
(cid:326)
4,766
(cid:326)
(cid:326)
(cid:326)
54,011
7
54,018
53,305
7
53,312
517
(cid:326)
517
(1,223)
(cid:326)
(1,223)
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. Included in mortgage-backed securities at
December 31, 2010 were collateralized mortgage obligations with an amortized cost of $2,644,000 and a fair
value of $2,740,000. All of the Company’s mortgage-backed securities, including the 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 $10,904,000 at
December 31, 2011 and $14,759,000 at December 31, 2010, which is included in equity securities above and
serves as part of the collateral for the Company’s line of credit with the FHLB (see Note 10 for additional
101
discussion). The investment in this stock is a requirement for membership in the FHLB system.
The following table presents information regarding securities with unrealized losses at December 31, 2011:
($ 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
Government-sponsored enterprise
securities
Mortgage-backed securities
Corporate bonds
Equity securities
State and local governments
Total temporarily impaired securities
Fair Value
$ 8,984
14,902
4,588
4
(cid:1086)
$ 28,478
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
16
61
458
2
(cid:1086)
537
–
9,302
2,773
22
–
12,097
–
30
522
37
–
589
8,984
24,204
7,361
26
(cid:1086)
40,575
16
91
980
39
(cid:1086)
1,126
The following table presents information regarding securities with unrealized losses at December 31, 2010:
($ 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
Government-sponsored enterprise
securities
Mortgage-backed securities
Corporate bonds
Equity securities
State and local governments
Total temporarily impaired securities
Fair Value
$ 18,607
21,741
7,548
3
35,289
$ 83,188
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
373
470
55
1
1,223
2,122
–
–
2,900
29
–
2,929
–
–
404
39
–
443
18,607
21,741
10,448
32
35,289
86,117
373
470
459
40
1,223
2,565
In the above tables, all of the non-equity securities that were in an unrealized loss position at December 31,
2011 and 2010 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.
At December 31, 2011, the Company’s $12.5 million investment in corporate bonds was comprised of the
following:
($ in thousands)
Issuer
First Citizens Bancorp (South Carolina) Bond
Bank of America Trust Preferred Security
Bank of America Trust Preferred Security
First Citizens Bancorp (North Carolina) Trust Preferred Security
First Citizens Bancorp (South Carolina) Trust Preferred Security
Total investment in corporate bonds
(1) The ratings are as of January 26, 2012.
S&P Issuer
Ratings (1)
Not Rated
BB+
BB+
BB+
Not Rated
Maturity
Date
4/1/15
12/11/26
4/15/27
3/1/28
6/15/34
Amortized
Cost
$ 2,996
2,039
5,046
2,108
1,000
$ 13,189
Market Value
3,102
1,780
4,588
2,278
740
12,488
102
The Company has concluded that each of the equity securities in an unrealized loss position at December 31,
2011 and 2010 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 $11,368,000 and $14,766,000 at December 31,
2011 and 2010, respectively, which included the Federal Home Loan Bank stock discussed above. The Company
determined that none of its cost-method investments were impaired at either year end.
The book values and approximate fair values of investment securities at December 31, 2011, by contractual
maturity, are summarized in the table below. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
($ in thousands)
Debt securities
Due within one year
Due after one year but within five years
Due after five years but within ten years
Due after ten years
Mortgage-backed securities
Total debt securities
Equity securities
Total securities
Securities Available for Sale
Amortized
Cost
Fair
Value
Securities Held to Maturity
Amortized
Cost
Fair
Value
$ 3,011
31,497
3,000
10,192
120,032
167,732
10,998
$ 178,730
3,106
31,660
3,001
9,386
124,105
171,258
11,368
182,626
$ 626
1,743
23,188
32,431
(cid:326)
57,988
(cid:326)
$ 57,988
629
1,843
25,201
35,081
(cid:326)
62,754
(cid:326)
62,754
At December 31, 2011 and 2010, investment securities with book values of $47,418,000 and $75,654,000,
respectively, were pledged as collateral for public and private deposits and securities sold under agreements to
repurchase.
There were $2,510,000 in sales of securities in 2011, which resulted in a net gain of $8,000. There were no sales
of securities in 2010. There were $44,000 in sales in 2009, which resulted in a net gain of $9,000. In 2011, the
Company recorded a net loss of $5,000 related to write-downs of the Company’s equity portfolio and recorded a
net gain of $71,000 related to the call of several securities. In 2010, the Company recorded a gain of $26,000
related to the call of several municipal securities. The Company recorded losses of $113,000 related to write-
downs of the Company’s equity portfolio in 2009.
Note 4. Loans and Asset Quality Information
The loans and foreclosed real estate that were acquired in FDIC-assisted transactions are covered by loss share
agreements between the FDIC and the Company’s banking subsidiary, First Bank, which afford First Bank
significant loss protection. (See Note 2 above for more information regarding these transactions.) Because of
the loss protection provided by the FDIC, the risk of the Cooperative Bank and The Bank of Asheville loans and
foreclosed real estate are significantly different from those assets not covered under the loss share agreements.
Accordingly, the Company presents separately loans subject to the loss share agreements as “covered loans” in
the information below and loans that are not subject to the loss share agreements as “non-covered loans.”
103
The following is a summary of the major categories of total loans outstanding:
($ in thousands)
All loans (non-covered and covered):
Commercial, financial, and agricultural
Real estate – construction, land
development & other land loans
Real estate – mortgage – residential (1-4
December 31, 2011
December 31, 2010
Amount
Percentage
Amount
Percentage
$ 162,099
7%
$ 155,016
363,079
15%
437,700
family) first mortgages
805,542
33%
802,658
Real estate – mortgage – home equity
loans / lines of credit
256,509
11%
263,529
Real estate – mortgage – commercial and
other
Installment loans to individuals
Subtotal
Unamortized net deferred loan costs
Total loans
762,895
78,982
2,429,106
1,280
$ 2,430,386
31%
3%
100%
710,337
83,919
2,453,159
973
$ 2,454,132
6%
18%
33%
11%
29%
3%
100%
As of December 31, 2011 and 2010, net loans include an unamortized premium of $949,000 and $687,000,
respectively, related to acquired loans.
Loans in the amounts of $2,074,148,000 and $1,708,642,000 as of December 31, 2011 and 2010, respectively,
are pledged as collateral for certain borrowings (see Note 10).
The loans above also include loans to executive officers and directors serving the Company at December 31,
2011 and to their associates, totaling approximately $6,004,000 and $5,097,000 at December 31, 2011 and
2010, respectively. During 2011, additions to such loans were approximately $1,253,000 and repayments
totaled approximately $346,000. These loans were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable transactions with other non-related
borrowers. Management does not believe these loans involve more than the normal risk of collectability or
present other unfavorable features.
104
The following is a summary of the major categories of non-covered loans outstanding:
($ in thousands)
Non-covered loans:
December 31, 2011
December 31, 2010
Amount
Percentage
Amount
Percentage
Commercial, financial, and agricultural
Real estate – construction, land
development & other land loans
Real estate – mortgage – residential (1-4
$ 152,627
8%
$ 150,545
290,983
14%
344,939
family) first mortgages
646,616
31%
622,353
Real estate – mortgage – home equity
loans / lines of credit
233,171
11%
246,418
Real estate – mortgage – commercial and
other
Installment loans to individuals
Subtotal
Unamortized net deferred loan costs
Total non-covered loans
666,882
77,593
2,067,872
1,280
$ 2,069,152
32%
4%
100%
636,197
81,579
2,082,031
973
$ 2,083,004
7%
17%
30%
12%
30%
4%
100%
The carrying amount of the covered loans at December 31, 2011 consisted of impaired and nonimpaired
purchased loans, as follows:
($ in thousands)
Covered loans:
Commercial, financial, and agricultural
Real estate – construction, land
development & other land loans
Real estate – mortgage – residential (1-4
family) first mortgages
Real estate – mortgage – home equity loans
/ lines of credit
Real estate – mortgage – commercial and
other
Installment loans to individuals
Total
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
$ 69
319
9,403
11,736
9,472
12,055
3,865
8,505
68,231
115,489
72,096
123,994
1,214
2,639
157,712
189,436
158,926
192,075
127
577
23,211
29,249
23,338
29,826
2,585
4
$ 7,864
4,986
6
17,032
93,428
1,385
353,370
125,450
1,583
472,943
96,013
1,389
361,234
130,436
1,589
489,975
The carrying amount of the covered loans at December 31, 2010 consisted of impaired and nonimpaired
purchased loans, as follows:
($ in thousands)
Covered loans:
Commercial, financial, and agricultural
Real estate – construction, land
development & other land loans
Real estate – mortgage – residential (1-4
family) first mortgages
Real estate – mortgage – home equity loans
/ lines of credit
Real estate – mortgage – commercial and
other
Installment loans to individuals
Total
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
$ (cid:1086)
(cid:1086)
4,471
5,272
4,471
5,272
1,898
3,328
90,863
147,615
92,761
150,943
(cid:1086)
(cid:1086)
2,709
(cid:1086)(cid:3)
$ 4,607
(cid:1086)
(cid:1086)
3,594
(cid:1086)
6,922
105
180,305
212,826
180,305
212,826
17,111
20,332
17,111
20,332
71,431
2,340
366,521
93,490
2,595
482,130
74,140
2,340
371,128
97,084
2,595
489,052
The following table presents information regarding covered purchased nonimpaired loans since December 31,
2009. 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 Cooperative Bank loans at December 31, 2009
Principal repayments
Transfers to foreclosed real estate
Loan charge-offs
Accretion of loan discount
Carrying amount of nonimpaired Cooperative Bank loans at December 31, 2010
Additions due to acquisition of The Bank of Asheville (at fair value)
Principal repayments
Transfers to foreclosed real estate
Loan charge-offs
Accretion of loan discount
Carrying amount of nonimpaired covered loans at December 31, 2011
$ 485,572
(43,801)
(75,121)
(7,736)
7,607
366,521
84,623
(40,576)
(53,999)
(14,797)
11,598
$ 353,370
As reflected in the table above, the Company accreted $11,598,000 and $7,607,000 of the loan discount on
purchased nonimpaired loans into interest income during 2011 and 2010, respectively. As of December 31,
2011, there was remaining loan discount of $89,837,000 related to purchased nonimpaired loans. If these loans
continue to be repaid by the borrowers, the Company will accrete the remaining loan discount into interest
income over the lives of the respective loans. In such circumstances, a corresponding entry to reduce the
indemnification asset will be recorded amounting to 80% of the loan discount accretion, which reduces
noninterest income.
The following table presents information regarding all purchased impaired loans since December 31, 2009,
substantially all of which are covered loans. The Company has applied the cost recovery method to all
purchased impaired loans at their respective acquisition dates due to the uncertainty as to the timing of
expected cash flows, as reflected in the following table.
($ in thousands)
Purchased Impaired Loans
Balance at December 31, 2009
Change due to payments received
Transfer to foreclosed real estate
Change due to loan charge-off
Other
Balance at December 31, 2010
Additions due to acquisition of The Bank of Asheville
Change due to payments received
Transfer to foreclosed real estate
Change due to loan charge-off
Other
Balance at December 31, 2011
Fair Market
Value
Adjustment –
Write Down
(Nonaccretable
Difference)
3,242
2
(225)
(625)
(65)
2,329
20,807
(327)
(9,308)
(4,193)
224
9,532
Contractual
Principal
Receivable
$ 39,293
(685)
(27,569)
(3,149)
190
8,080
38,452
(1,620)
(19,881)
(7,522)
807
$ 18,316
Carrying
Amount
36,051
(687)
(27,344)
(2,524)
255
5,751
17,645
(1,293)
(10,573)
(3,329)
583
8,784
Each of the purchased impaired loans are 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 2011 and 2010, the Company received $0 and $67,000, respectively, in
payments that exceeded the initial carrying amount of the purchased impaired loans, which is included in the
106
loan discount accretion amount discussed previously.
Nonperforming assets are defined as nonaccrual loans, restructured loans, loans past due 90 or more days and
still accruing interest, and other real estate. Nonperforming assets are summarized as follows:
ASSET QUALITY DATA ($ in thousands)
Non-covered nonperforming assets
Nonaccrual loans
Restructured loans – accruing
Accruing loans > 90 days past due
Total non-covered nonperforming loans
Other real estate
Total non-covered nonperforming assets
Covered nonperforming assets
Nonaccrual loans (1)
Restructured loans – accruing
Accruing loans > 90 days past due
Total covered nonperforming loans
Other real estate
Total covered nonperforming assets
December 31,
2011
December 31,
2010
$ 73,566
11,720
(cid:16)
85,286
37,023
$ 122,309
$ 41,472
14,218
(cid:16)
55,690
85,272
$ 140,962
62,326
33,677
(cid:16)
96,003
21,081
117,084
58,466
14,359
(cid:16)
72,825
94,891
167,716
Total nonperforming assets
$ 263,271
284,800
_________________________________________________________________________________________________________
(1) At December 31, 2011 and December 31, 2010, the contractual balance of the nonaccrual loans covered by FDIC loss share agreements was $69.0
million and $86.2 million, respectively.
If the nonaccrual and restructured loans as of December 31, 2011, 2010, and 2009 had been current in
accordance with their original terms and had been outstanding throughout the period (or since origination if
held for part of the period), gross interest income in the amounts of approximately $8,724,000, $8,136,000 and
$9,800,000 for nonaccrual loans and $1,873,000, $1,943,000 and $1,200,000 for restructured loans would have
been recorded for 2011, 2010, and 2009, respectively. Interest income on such loans that was actually collected
and included in net income in 2011, 2010, and 2009 amounted to approximately $2,578,000, $3,195,000 and
$2,147,000 for nonaccrual loans (prior to their being placed on nonaccrual status), and $1,351,000, $1,342,000,
and $866,000 for restructured loans, respectively. At December 31, 2011 and 2010, the Company had no
commitments to lend additional funds to debtors whose loans were nonperforming.
107
The following table presents information related to the Company’s impaired loans.
($ in thousands)
Impaired loans at period end
Non-covered
Covered
Total impaired loans at period end
Average amount of impaired loans for period
Non-covered
Covered
Average amount of impaired loans for period – total
Allowance for loan losses related to impaired loans at period end
Non-covered
Covered
Allowance for loan losses related to impaired loans - total
Amount of impaired loans with no related allowance at period end
Non-covered
Covered
Total impaired loans with no related allowance at period end
As of /for the
year ended
December 31,
2011
As of /for the
year ended
December 31,
2010
As of /for the
year ended
December 31,
2009
$ 85,286
55,690
$ 140,976
96,003
72,825
168,828
55,574
94,746
150,320
$ 89,023
63,289
$ 152,312
89,751
95,373
185,124
36,171
34,161
70,332
$ 5,804
5,106
$ 10,910
7,613
11,155
18,768
9,717
(cid:1086)
9,717
$ 35,721
43,702
$ 79,423
42,874
49,991
92,865
30,236
94,746
124,982
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 December 31, 2011.
($ in thousands)
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
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
Consumer
Total
Non-covered
Covered
Total
$ 452
2,190
588
22,772
25,430
3,161
16,203
2,770
$ 73,566
(cid:1086)
358
102
21,204
11,050
1,068
7,459
231
41,472
452
2,548
690
43,976
36,480
4,229
23,662
3,001
115,038
108
The following table presents the Company’s nonaccrual loans as of December 31, 2010.
($ in thousands)
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
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
Consumer
Total
Non-covered
Covered
Total
$ 64
1,566
802
22,654
27,055
2,201
7,461
523
$ 62,326
160
3
(cid:1086)
30,847
19,716
685
7,039
16
58,466
224
1,569
802
53,501
46,771
2,886
14,500
539
120,792
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2011.
($ in thousands)
Non-covered loans
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
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
Consumer
Total non-covered
Unamortized net deferred loan costs
Total non-covered loans
30-59
Days Past
Due
$ 67
672
247
1,250
9,751
1,126
2,620
657
$ 16,390
60-89 Days
Past Due
Nonaccrual
Loans
Current
Total Loans
Receivable
591
207
(cid:1086)
452
2,190
588
37,668
108,682
20,993
38,778
111,751
21,828
1,411
4,259
237
1,006
286
7,997
22,772
221,372
246,805
25,430
756,215
795,655
3,161
202,912
207,436
16,203
567,354
587,183
2,770
73,566
54,723
1,969,919
58,436
2,067,872
1,280
$ 2,069,152
Covered loans
Total loans
$ 6,511
3,388
41,472
309,863
361,234
$ 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.
109
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2010.
($ 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
Commercial - secured
Secured by inventory and accounts receivable
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
Consumer
Total non-covered
Unamortized net deferred loan costs
Total non-covered loans
Total covered loans
Total loans
$ 225
1,165
100
2,951
10,290
496
2,581
595
$ 18,403
92
195
(cid:1086)
7,022
2,942
253
1,193
297
11,994
64
1,566
802
41,564
102,657
21,369
41,945
105,583
22,271
22,654
270,892
303,519
27,055
726,456
766,743
2,201
213,984
216,934
7,461
552,020
563,255
523
62,326
60,366
1,989,308
61,781
2,082,031
973
$ 2,083,004
$ 6,713
4,127
58,466
301,822
371,128
$ 25,116
16,121
120,792
2,291,130
2,454,132
The Company had no non-covered or covered loans that were past due greater than 90 days and accruing
interest at December 31, 2010.
110
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)
Real Estate –
Construction,
Land
Development, &
Other Land
Loans
Real Estate –
Residential,
Farmland,
and Multi-
family
Real
Estate –
Home
Equity
Lines of
Credit
Commercial,
Financial, and
Agricultural
As of and for the year ended December 31, 2011
Real Estate –
Commercial
and Other
Consumer
Unallo-
cated
Total
Beginning
balance
Charge-offs
Recoveries
Provisions
Ending balance
$ 4,731
(2,703)
389
1,363
$ 3,780
12,520
(16,240)
1,142
13,884
11,306
11,283
(9,045)
719
10,575
13,532
3,634
(1,147)
107
(904)
1,690
3,972
(3,355)
37
2,760
3,414
1,961
(845)
182
574
1,872
174
(524)
93
273
16
38,275
(33,859)
2,669
28,525
35,610
Ending balances as of December 31, 2011: Allowance for loan losses
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
$ 60
607
150
(cid:1086)
200
(cid:1086)
(cid:1086)
1,017
$ 3,720
10,699
13,382
1,690
3,214
1,872
16
34,593
(cid:936)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
Loans receivable as of December 31, 2011:
Ending balance –
total
$ 172,357
246,805
795,655
207,436
587,183
58,436
(cid:1086)
2,067,872
Ending balances as of December 31, 2011: Loans
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
$ 2,526
34,750
11,880
527
30,846
12
(cid:1086)
80,541
$ 169,831
212,055
783,775
206,909
556,337
58,424
(cid:1086)
1,987,331
(cid:936)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:1086)(cid:3)
920
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
920
111
The following table presents the activity in the allowance for loan losses for non-covered loans for the year
ended December 31, 2010.
($ in
thousands)
Real Estate –
Construction,
Land
Development, &
Other Land
Loans
Real Estate –
Residential,
Farmland,
and Multi-
family
Real
Estate –
Home
Equity
Lines of
Credit
Commercial,
Financial, and
Agricultural
As of and for the year ended December 31, 2010
Real Estate –
Commercial
and Other
Consumer
Unallo-
cated
Total
Beginning
balance
Charge-offs
Recoveries
Provisions
Ending balance
$ 4,992
(4,691)
145
4,285
$ 4,731
9,286
(15,721)
130
18,825
12,520
10,779
(6,962)
548
6,918
11,283
3,228
(2,490)
59
2,837
3,634
6,839
(2,354)
38
(551)
3,972
1,610
(1,587)
171
1,767
1,961
609
(cid:1086)
(cid:1086)
(435)
174
37,343
(33,805)
1,091
33,646
38,275
Ending balances as of December 31, 2010: Allowance for loan losses
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with
deteriorated
credit quality
$ 867
3,740
1,070
269
611
(cid:1086)
(cid:1086)
6,557
$ 3,864
8,780
10,213
3,365
3,361
1,961
174
31,718
(cid:936)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
Loans receivable as of December 31, 2010:
Ending balance
– total
$ 169,799
303,519
766,743
216,934
563,255
61,781
(cid:1086)
2,082,031
Ending balances as of December 31, 2010: Loans
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with
deteriorated
credit quality
$ 3,487
64,549
15,786
1,223
25,213
28
(cid:1086)
110,286
$ 166,312
238,970
750,957
215,711
538,042
61,753
(cid:1086)
1,971,745
(cid:936)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:1086)(cid:3)
1,144
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
1,144
112
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
Charge-offs
Recoveries
Provisions
Ending balance
$ 11,155
(18,123)
(cid:1086)
12,776
$ 5,808
Ending balances as of December 31, 2011: Allowance for loan losses
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$ 5,481
(cid:1086)
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
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$ 44,723
316,511
7,864
The following table presents the activity in the allowance for loan losses for covered loans for the year ended
December 31, 2010.
($ in thousands)
Covered Loans
As of and for the year ended December 31, 2010
Beginning balance
Charge-offs
Recoveries
Provisions
Ending balance
$ (cid:1086)
(9,761)
(cid:1086)
20,916
$ 11,155
Ending balances as of December 31, 2010: Allowance for loan losses
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$ 11,155
(cid:1086)
(cid:1086)
Loans receivable as of December 31, 2010:
Ending balance – total
$ 371,128
Ending balances as of December 31, 2010: Loans
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$ 72,690
298,438
4,607
113
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
Secured by inventory and accounts receivable
(cid:936)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:1086)
295
27
(cid:1086)
478
493
Real estate – construction, land development & other
land loans
15,105
20,941
Real estate – residential, farmland, and multi-family
3,442
4,741
Real estate – home equity lines of credit
46
300
Real estate – commercial
16,794
18,817
Consumer
Total non-covered impaired loans with no allowance
12
$ 35,721
39
45,809
Total covered impaired loans with no allowance
$ 43,702
78,578
Total impaired loans with no allowance recorded
$ 79,423
124,387
Non-covered loans with an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
$ 452
1,895
561
454
1,899
571
Real estate – construction, land development & other
land loans
10,360
12,606
Real estate – residential, farmland, and multi-family
24,460
26,153
Real estate – home equity lines of credit
Real estate – commercial
Consumer
Total non-covered impaired loans with allowance
3,115
5,965
2,757
$ 49,565
3,141
6,421
2,759
54,004
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
59
295
156
2,244
2,169
117
283
481
5,804
(cid:1086)
504
124
17,876
5,278
79
13,359
15
37,235
49,030
86,265
226
1,427
391
15,782
22,487
2,544
6,602
2,329
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.
114
The following table presents the Company’s impaired loans as of December 31, 2010.
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
($ in thousands)
Non-covered loans:
With no related allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
(cid:936)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:1086)
902
240
(cid:1086)
967
650
Real estate – construction, land development & other
land loans
22,026
26,012
Real estate – residential, farmland, and multi-family
8,269
9,447
Real estate – home equity lines of credit
302
502
Real estate – commercial
11,115
11,321
Consumer
Total non-covered impaired loans with no allowance
20
$ 42,874
40
48,939
Total covered impaired loans with no allowance
$ 49,991
77,321
Total impaired loans with no allowance recorded
$ 92,865
126,260
Non-covered loans:
With an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
$ 124
579
1,026
124
579
1,026
Real estate – construction, land development & other
land loans
17,540
19,926
Real estate – residential, farmland, and multi-family
23,012
23,012
Real estate – home equity lines of credit
Real estate – commercial
Consumer
Total non-covered impaired loans with allowance
2,148
8,013
687
$ 53,129
2,223
8,088
687
55,665
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
24
88
609
3,932
1,820
357
497
286
7,613
138
758
186
15,639
7,437
381
7,284
46
31,869
83,955
115,824
243
1,385
613
21,362
22,166
1,928
9,275
910
57,882
Total covered impaired loans with allowance
$ 22,834
27,105
11,155
11,418
Total impaired loans with an allowance recorded
$ 75,963
82,770
18,768
69,300
Interest income recorded on non-covered and covered impaired loans during the year ended December 31,
2010 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.
115
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:
Weak Pass:
Watch or Standard:
Special Mention:
Classified:
1
2
3
4
9
5
6
7
8
Cash secured loans.
Non-cash secured loans that have no minor or major exceptions to the lending
guidelines.
Non-cash secured loans that have no major exceptions to the lending guidelines.
Non-cash secured loans that have minor or major exceptions to the lending
guidelines, but the exceptions are properly mitigated.
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.
Existing loans with major exceptions that cannot be mitigated.
Loans that have a well-defined weakness that may jeopardize the liquidation of
the debt if deficiencies are not corrected.
Loans that have a well-defined weakness that make the collection or liquidation
improbable.
Loans that are considered uncollectible and are in the process of being charged-
off.
116
The following table presents the Company’s recorded investment in loans by credit quality indicators as of
December 31, 2011.
($ in thousands)
Non-covered loans:
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts
receivable
Real estate – construction, land
development & other land loans
Real estate – residential, farmland,
and multi-family
Real estate – home equity lines of
credit
Credit Quality Indicator (Grouped by Internally Assigned Grade)
Special
Mention
Loans
(Grade 5)
Classified
Loans
(Grades
6, 7, & 8)
Watch or
Standard
Loans
(Grade 9)
Weak Pass
(Grade 4)
Nonaccrual
Loans
Total
Pass (Grades
1, 2, & 3)
$ 13,516
36,587
23,735
66,105
13
1,912
3,756
16,197
282
217
2,196
756
845
2,761
249
452
2,190
38,778
111,751
588
21,828
37,596
156,651
6,490
9,903
13,393
22,772
246,805
257,163
456,188
10,248
17,687
28,939
25,430
795,655
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
Total
Unamortized net deferred loan costs
Total non-covered loans
30,693
$650,801
23,550
1,182,646
67
52,156
368
44,497
988
64,206
2,770
73,566
58,436
2,067,872
1,280
$2,069,152
Total covered loans
$ 62,052
161,508
(cid:1086)
8,033
88,169
41,472
361,234
Total loans
$712,853
1,344,154
52,156
52,530
152,375
115,038
2,430,386
At December 31, 2011, there was an insignificant amount of non-covered loans that were graded “8” with an
accruing status. At December 31, 2011, there were no covered loans that were graded “8” with an accruing
status.
117
The following table presents the Company’s recorded investment in loans by credit quality indicators as of
December 31, 2010.
($ in thousands)
Non-covered loans:
Commercial, financial, and agricultural:
Commercial – unsecured
Commercial – secured
Secured by inventory and accounts
receivable
Real estate – construction, land
development & other land loans
Real estate – residential, farmland,
and multi-family
Real estate – home equity lines of
credit
Credit Quality Indicator (Grouped by Internally Assigned Grade)
Special
Mention
Loans
(Grade 5)
Classified
Loans
(Grades
6, 7, & 8)
Watch or
Standard
Loans
(Grade 9)
Weak Pass
(Grade 4)
Nonaccrual
Loans
Total
Pass (Grades
1, 2, & 3)
$ 14,850
40,995
25,992
55,918
(cid:1086)
2,100
6,364
14,165
(cid:1086)
332
2,774
873
707
2,230
64
1,566
41,945
105,583
67
802
22,271
66,321
162,147
7,649
13,971
30,777
22,654
303,519
302,594
376,187
15,808
22,196
22,903
27,055
766,743
137,674
68,876
3,001
3,060
2,122
2,201
216,934
Real estate – commercial
190,284
301,828
33,706
11,915
18,061
7,461
563,255
Consumer
Total
Unamortized net deferred loan costs
Total non-covered loans
34,600
$793,682
24,783
1,029,896
140
62,404
408
55,529
1,327
78,194
523
62,326
61,781
2,082,031
973
$2,083,004
Total covered loans
$ 37,973
187,526
(cid:1086)
7,461
79,702
58,466
371,128
Total loans
$831,655
1,217,422
62,404
62,990
157,896
120,792
2,454,132
At December 31, 2010, there was an insignificant amount of non-covered and covered loans that were graded
“8” with an accruing status.
Troubled Debt Restructurings
The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing
financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate
reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other
actions intended to minimize potential losses.
The vast majority of the Company’s troubled debt restructurings modified during the year ended December 31,
2011 related to interest rate reductions combined with restructured amortization schedules. The Company
does not grant principal forgiveness.
All loans classified as troubled debt restructurings are considered to be impaired and are evaluated as such for
determination of the allowance for loan losses. The Company’s troubled debt restructurings can be classified as
either nonaccrual or accruing based on the loan’s payment status. The troubled debt restructurings that are
nonaccrual are reported within the nonaccrual loan totals presented previously.
118
The following table presents information related to loans modified in a troubled debt restructuring during the
year ended December 31, 2011.
($ in thousands)
Non-covered TDRs – Accruing
Real estate – construction, land development & other land
loans
Real estate – residential, farmland, and multi-family
Real estate - commercial
Non-covered TDRs - Nonaccrual
Real estate – construction, land development & other land
loans
Real estate – residential, farmland, and multi-family
Real estate - commercial
Total non-covered TDRs arising during period
Total covered TDRs arising during period– Accruing
Total covered TDRs arising during period – Nonaccrual
Total TDRs arising during period
For the year ended
December 31, 2011
Number of
Contracts
Restructured
Balances
2
5
4
1
3
4
19
37
8
64
$ 543
1,645
1,871
357
438
1,408
$ 6,262
$ 6,528
1,472
$ 14,262
Accruing restructured loans that defaulted during the year ended December 31, 2011 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)
Non-covered accruing TDRs that subsequently defaulted
Real estate – construction, land development & other land
loans
Real estate – residential, farmland, and multi-family
Real estate - commercial
Total non-covered TDRs that subsequently defaulted
Total accruing covered TDRs that subsequently defaulted
Total accruing TDRs that subsequently defaulted
For the year ended
December 31, 2011
Number of
Contracts
Recorded
Investment
8
5
10
23
40
63
$ 13,688
1,281
7,005
$ 21,974
$ 18,203
$ 40,177
119
Note 5. Premises and Equipment
Premises and equipment at December 31, 2011 and 2010 consisted of the following:
($ in thousands)
2011
2010
Land
Buildings
Furniture and equipment
Leasehold improvements
Total cost
Less accumulated depreciation and amortization
Net book value of premises and equipment
Note 6. FDIC Indemnification Asset
$ 22,700
53,818
31,618
2,003
110,139
(40,164)
$ 69,975
22,069
50,456
29,563
2,003
104,091
(36,350)
67,741
As discussed in Note 1(i), 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.
December 31, 2011 and 2010, the FDIC indemnification asset was comprised of the following components:
At
($ in thousands)
Receivable related to claims submitted, not yet received
Receivable related to estimated future claims on loans
Receivable related to estimated future claims on other real estate owned
FDIC indemnification asset
2011
$ 13,377
90,275
18,025
$ 121,677
2010
30,201
86,966
6,552
123,719
The following presents a rollforward of the FDIC indemnification asset since the date of the Cooperative Bank
acquisition on June 19, 2009.
($ in thousands)
Balance at June 19, 2009
Decrease related to favorable change in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Balance at December 31, 2009
Increase related to unfavorable change in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Balance at December 31, 2010
Increase related to acquisition of The Bank of Asheville
Increase related to unfavorable change in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Other
Balance at December 31, 2011
$ 185,112
(1,516)
1,300
(40,500)
(1,175)
143,221
30,419
2,900
(46,721)
(6,100)
$ 123,719
42,218
29,814
5,725
(69,339)
(9,278)
(1,182)
$ 121,677
Note 7. Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated amortization of amortized intangible
assets as of December 31, 2011 and December 31, 2010 and the carrying amount of unamortized intangible
assets as of those same dates. In 2011, the Company recorded a core deposit premium intangible of $277,000 in
connection with the acquisition of The Bank of Asheville, which is being amortized on a straight-line basis over
120
the estimated life of the related deposits of seven years.
($ in thousands)
Amortized intangible assets:
Customer lists
Core deposit premiums
Total
Unamortized intangible assets:
Goodwill
December 31, 2011
December 31, 2010
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$ 678
7,867
$ 8,545
357
4,291
4,648
678
7,590
8,268
298
3,447
3,745
$ 65,835
65,835
Amortization expense totaled $902,000, $874,000 and $630,000 for the years ended December 31, 2011, 2010
and 2009, respectively.
Goodwill is evaluated for impairment on at least an annual basis – see Note 1(p). For each of the years
presented, the Company’s evaluation indicated that there was no goodwill impairment.
The following table presents the estimated amortization expense for intangible assets for each of the five
calendar years ending December 31, 2016 and the estimated amount amortizable thereafter. These estimates
are subject to change in future periods to the extent management determines it is necessary to make
adjustments to the carrying value or estimated useful lives of amortized intangible assets.
($ in thousands)
Estimated
Amortization Expense
2012
2013
2014
2015
2016
Thereafter
Total
$ 892
781
678
622
555
369
$ 3,897
Note 8. Income Taxes
Total income taxes for the years ended December 31, 2011, 2010 and 2009 were allocated as follows:
($ in thousands)
2011
2010
2009
Allocated to net income
Allocated to stockholders’ equity, for unrealized holding gain/loss on
debt and equity securities for financial reporting purposes
Allocated to stockholders’ equity, for tax benefit of pension liabilities
Total income taxes
$ 7,370
4,960
37,618
554
(2,912)
$ 5,012
251
(688)
4,523
610
1,750
39,978
The components of income tax expense (benefit) for the years ended December 31, 2011, 2010 and 2009 are as
follows:
($ in thousands)
Current - Federal
- State
Deferred - Federal
- State
Total
2011
2010
2009
$ 9,204
2,094
(3,234)
(694)
$ 7,370
25,353
3,807
(21,092)
(3,108)
4,960
11,190
1,830
20,545
4,053
37,618
121
The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax
assets (liabilities) at December 31, 2011 and 2010 are presented below:
($ in thousands)
2011
2010
Deferred tax assets:
Allowance for loan losses
Excess book over tax SERP retirement plan cost
Deferred compensation
State net operating loss carryforwards
Accruals, book versus tax
Pension liability adjustments
Unrealized gain on securities available for sale
Basis differences in assets acquired in FDIC transactions
All other
Gross deferred tax assets
Less: Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Loan fees
Excess tax over book pension cost
Depreciable basis of fixed assets
Amortizable basis of intangible assets
Accruals, book versus tax
Unrealized gain on securities available for sale
FHLB stock dividends
Basis differences in assets acquired in FDIC transactions
All other
Gross deferred tax liabilities
Net deferred tax asset (liability) - included in other assets
$ 16,458
2,378
138
62
329
7,220
(cid:1086)
771
3,086
30,442
(81)
30,361
(1,217)
(219)
(2,372)
(8,334)
(cid:1086)
(1,520)
(437)
(cid:1086)
(198)
(14,297)
$ 16,064
$ 20,020
2,150
148
62
(cid:1086)
4,308
(cid:1086)
(cid:1086)
2,225
28,913
(86)
28,827
(1,003)
(61)
(1,300)
(7,423)
(66)
(966)
(436)
(7,520)
(274)
(19,049)
$ 9,778
A portion of the annual change in the net deferred tax asset relates to unrealized gains and losses on securities
available for sale. The related 2011 and 2010 deferred tax expense (benefit) of approximately $554,000 and
$251,000 respectively, has been recorded directly to shareholders’ equity. Additionally, a portion of the annual
change in the net deferred tax asset relates to pension adjustments. The related 2011 and 2010 deferred tax
expense (benefit) of ($2,912,000) and ($688,000), respectively, has been recorded directly to shareholders’
equity. Purchase acquisitions also increased the net deferred tax asset by approximately $4,005,000 in 2011.
The balance of the 2011 increase in the net deferred tax asset of $3,928,000 is reflected as a deferred income
tax benefit, and the balance of the 2010 increase in the net deferred tax asset of $24,200,000 is reflected as a
deferred income tax benefit in the consolidated statement of income.
The valuation allowances for 2011 and 2010 relate primarily to state net operating loss carryforwards. It is
management’s belief that the realization of the remaining net deferred tax assets is more likely than not.
The Company had no significant uncertain tax positions, and thus no reserve for uncertain tax positions has
been recorded. Additionally, the Company determined that it has no material unrecognized tax benefits that if
recognized would affect the effective tax rate. The Company’s general policy is to record tax penalties and
interest as a component of “other operating expenses”.
The Company’s tax returns are subject to income tax audit by federal and state agencies beginning with the year
2008.
Retained earnings at December 31, 2011 and 2010 includes approximately $6,869,000 representing pre-1988 tax
bad debt reserve base year amounts for which no deferred income tax liability has been provided since these
reserves are not expected to reverse or may never reverse. Circumstances that would require an accrual of a
portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987,
failure to meet the definition of a bank, dividend payments in excess of accumulated tax earnings and profits, or
122
other distributions in dissolution, liquidation or redemption of the Bank’s stock.
The following is a reconcilement of federal income tax expense at the statutory rate of 35% to the income tax
provision reported in the financial statements.
($ in thousands)
2011
2010
2009
Tax provision at statutory rate
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income
Low income housing tax credits
Non-deductible interest expense
State income taxes, net of federal benefit
Change in valuation allowance
Other, net
Total
$ 7,354
$ 5,230
$ 34,257
(852)
(163)
33
910
(5)
93
$ 7,370
(726)
(143)
37
454
(145)
253
$ 4,960
(459)
(114)
38
3,824
3
69
$ 37,618
Note 9. Time Deposits, Securities Sold Under Agreements to Repurchase, and Related Party Deposits
At December 31, 2011, the scheduled maturities of time deposits were as follows:
($ in thousands)
2012
2013
2014
2015
2016
Thereafter
$ 1,003,566
162,617
65,288
64,592
37,873
1,503
$ 1,335,439
For the years ended December 31, 2011, 2010, and 2009, the Company recorded amortization of deposit
premiums amounting to $337,000, $2,211,000 and $3,911,000, respectively, which reduced interest expense.
The deposit premiums related to the Company’s acquisitions are discussed in Note 2. The Company has
$123,000 remaining in unamortized deposit premiums at December 31, 2011.
Securities sold under agreements to repurchase represent short-term borrowings by the Company with
maturities less than one year and are collateralized by a portion of the Company’s securities portfolio, which
have been delivered to a third-party custodian for safekeeping. At December 31, 2011, securities with an
amortized cost of $17,184,000 and a market value of $17,155,000 were pledged to secure securities sold under
agreements to repurchase.
The following table presents certain information for securities sold under agreements to repurchase:
($ in thousands)
Balance at December 31
Weighted average interest rate at December 31
Maximum amount outstanding at any month-end during the year
Average daily balance outstanding during the year
Average annual interest rate paid during the year
2011
$ 17,105
0.32%
$ 72,926
$ 55,011
0.33%
2010
$ 54,460
0.36%
$ 68,157
$ 57,443
0.52%
Deposits received from executive officers and directors and their associates totaled approximately $30,764,000
and $27,607,000 at December 31, 2011 and 2010, respectively. These deposit accounts have substantially the
same terms, including interest rates, as those prevailing at the time for comparable transactions with other non-
related depositors.
123
Note 10. Borrowings and Borrowings Availability
The following tables present information regarding the Company’s outstanding borrowings at December 31,
2011 and 2010:
Description - 2011
Due date
Call Feature
2011
Amount
Interest Rate
4/20/12
Quarterly by FHLB, beginning 4/20/09
$ 7,500,000
4.51% fixed
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
Trust Preferred Securities
6/28/12
12/28/12
6/28/2013
12/30/13
1/13/14
6/30/14
1/23/34
Trust Preferred Securities
6/15/36
Total borrowings/
weighted average rate
None
None
None
None
None
None
Quarterly by Company
beginning 1/23/09
Quarterly by Company
beginning 6/15/11
15,000,000
0.69% fixed
7,500,000
0.91% fixed
15,000,000
0.72% fixed
7,500,000
1.50% fixed
20,000,000
1.38% fixed
15,000,000
1.21% fixed
20,620,000
25,774,000
3.13% at 12/31/11
adjustable rate
3 month LIBOR + 2.70%
1.94% at 12/31/11
adjustable rate
3 month LIBOR + 1.39%
133,894,000
1.74%
Unamortized fair market value adjustment recorded in acquisition
Total borrowings as of December 31, 2011
31,000
$ 133,925,000
124
Description - 2010
Due date
Call Feature
FHLB Overnight Borrowings
Federal Funds Purchased
Line of Credit with Federal
Reserve Bank
1/1/11,
renewable daily
1/1/11,
renewable daily
1/1/11,
renewable daily
FHLB Term Note
8/1/11
None
None
None
None
2010
Amount
$20,000,000
33,000,000
55,000,000
3,000,000
Interest Rate
0.47% subject to
change daily
0.65% subject to
change daily
0.75% subject to
change daily
0.29% at 12/31/10
Adjustable rate based on
3 month LIBOR
12/12/11
Quarterly by FHLB, beginning 6/12/08
1,800,000
4.21% fixed
4/20/12
Quarterly by FHLB, beginning 4/20/09
7,500,000
4.51% fixed
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
6/28/12
12/28/12
12/30/13
Trust Preferred Securities
1/23/34
Trust Preferred Securities
6/15/36
None
None
None
Quarterly by Company
beginning 1/23/09
Quarterly by Company
beginning 6/15/11
Total borrowings/
weighted average rate
Unamortized fair market value adjustment recorded in acquisition
Total borrowings as of December 31, 2010
15,000,000
0.69% fixed
7,500,000
0.91% fixed
7,500,000
1.50% fixed
2.99% at 12/31/10
adjustable rate
3 month LIBOR + 2.70%
1.69% at 12/31/10
adjustable rate
3 month LIBOR + 1.39%
1.26% (1.98% excluding
overnight borrowings)
20,620,000
25,774,000
196,694,000
176,000
$ 196,870,000
As noted in the table above, at December 31, 2011 and 2010, borrowings outstanding included $31,000 and
$176,000, respectively, in unamortized premium on borrowings acquired from a 2008 acquisition. The originally
recorded premium was $1,328,000, of which $145,000, $341,000, and $464,000 was amortized in 2011, 2010,
and 2009, respectively, as a reduction of interest expense.
All outstanding FHLB borrowings may be accelerated immediately by the FHLB in certain circumstances,
including material adverse changes in the condition of the Company or if the Company’s qualifying collateral
amounts to less than that required under the terms of the FHLB borrowing agreement.
In the above tables, the $20.6 million in borrowings due on January 23, 2034 relate to borrowings structured as
trust preferred capital securities that were issued by First Bancorp Capital Trusts II and III ($10.3 million by each
trust), which are unconsolidated subsidiaries of the Company, on December 19, 2003 and qualify as capital for
regulatory capital adequacy requirements. These unsecured debt securities are callable by the Company at par
on any quarterly interest payment date beginning on January 23, 2009. The interest rate on these debt
securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 2.70%. The Company incurred
approximately $580,000 of debt issuance costs related to the issuance that were recorded as prepaid expenses
and are included in the “Other Assets” line item of the consolidated balance sheet. These debt issuance costs
were amortized as interest expense until the earliest possible call date of January 23, 2009.
In the above tables, the $25.8 million in borrowings due on June 15, 2036 relate to borrowings structured as
trust preferred capital securities that were issued by First Bancorp Capital Trust IV, an unconsolidated subsidiary
125
of the Company, on April 13, 2006 and qualify as capital for regulatory capital adequacy requirements. These
unsecured debt securities are callable by the Company at par on any quarterly interest payment date beginning
on June 15, 2011. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month
LIBOR plus 1.39%. The Company incurred no debt issuance costs related to the issuance.
At December 31, 2011, the Company had four sources of readily available borrowing capacity – 1) an
approximately $389 million line of credit with the FHLB, of which $88 million was outstanding at December 31,
2011 and $62 million was outstanding at December 31, 2010, 2) a $50 million overnight federal funds line of
credit with a correspondent bank, of which none was outstanding at December 31, 2011 and $33 million was
outstanding at December 31, 2010, 3) an approximately $79 million line of credit through the Federal Reserve
Bank of Richmond’s (FRB) discount window, of which none was outstanding at December 31, 2011 and $55
million was outstanding at December 31, 2010, and 4) a $10 million holding company line of credit with a
commercial bank, of which none was outstanding at December 31, 2011 or 2010.
The Company’s line of credit with the FHLB totaling approximately $389 million can be structured as either
short-term or long-term borrowings, depending on the particular funding or liquidity needs and is secured by
the Company’s FHLB stock and a blanket lien on most of its real estate loan portfolio. In addition to the
outstanding borrowings from the FHLB that reduce the available borrowing capacity of the line of credit, the
borrowing capacity was further reduced by $203 million at December 31, 2011 and 2010, as a result of the
Company pledging letters of credit for public deposits at each of those dates. Accordingly, the Company’s
unused FHLB line of credit was $98 million at December 31, 2011.
The Company’s correspondent bank relationship allows the Company to purchase up to $50 million in federal
funds on an overnight, unsecured basis (federal funds purchased). The Company had no borrowings
outstanding under this line at December 31, 2011 and $33 million in borrowings outstanding at December 31,
2010.
The Company has a line of credit with the FRB discount window. This line is secured by a blanket lien on a
portion of the Company’s commercial and consumer loan portfolio (excluding real estate). Based on the
collateral owned by the Company as of December 31, 2011, the available line of credit was approximately $79
million. The Company had no borrowings outstanding under this line of credit at December 31, 2011 and $55
million in borrowings outstanding at December 31, 2010.
At December 31, 2011 and 2010, the Company had a $10 million line of credit with a correspondent bank that
was secured by 100% of the common stock of the Bank. This line of credit expires and is subject to renewal in
March of each year. The line of credit was not drawn at December 31, 2011 or 2010.
Note 11. Leases
Certain bank premises are leased under operating lease agreements. Generally, operating leases contain
renewal options on substantially the same basis as current rental terms. Rent expense charged to operations
under all operating lease agreements was $1,226,000 in 2011, $2,076,000 in 2010, and $1,978,000 in 2009.
126
Future obligations for minimum rentals under noncancelable operating leases at December 31, 2011 are as
follows:
($ in thousands)
Year ending December 31:
2012
2013
2014
2015
2016
Later years
Total
$ 805
751
701
612
513
2,143
$ 5,525
Note 12. Employee Benefit Plans
401(k) Plan. The Company sponsors a retirement savings plan pursuant to Section 401(k) of the Internal
Revenue Code. Employees who have completed one year of service are eligible to participate in the plan. New
employees, who have met the service requirement, are automatically enrolled in the plan at a 2% deferral rate,
which can be modified by the employee at any time. An eligible employee may contribute up to 15% of annual
salary to the plan. The Company contributes an amount equal to 75% of the first 6% of the employee’s salary
contributed. Participants vest in Company contributions at the rate of 20% after one year of service, and 20%
for each additional year of service, with 100% vesting after five years of service. The Company’s matching
contribution expense was $1,198,000, $1,107,000, and $933,000, for the years ended December 31, 2011, 2010,
and 2009, respectively. Additionally, the Company made additional discretionary matching contributions to the
plan of $200,000 in 2009. The Company did not make a discretionary contribution in 2011 or 2010. The
Company’s matching and discretionary contributions are made in the form of Company stock, which can be
transferred by the employee into other investment options offered by the plan at any time. Employees are not
permitted to invest their own contributions in Company stock.
Pension Plan. The Company sponsors a noncontributory defined benefit retirement plan (the “Pension Plan”),
which is intended to qualify under Section 401(a) of the Internal Revenue Code. Employees who have attained
age 21 and completed one year of service are eligible to participate in the Pension Plan. The Pension Plan
provides for a monthly payment, at normal retirement age of 65, equal to one-twelfth of the sum of (i) 0.75% of
Final Average Annual Compensation (5 highest consecutive calendar years’ earnings out of the last 10 years of
employment) multiplied by the employee’s years of service not in excess of 40 years, and (ii) 0.65% of Final
Average Annual Compensation in excess of “covered compensation” multiplied by years of service not in excess
of 35 years. “Covered compensation” means the average of the social security taxable wage base during the 35
year period ending with the year the employee attains social security retirement age. Early retirement, with
reduced monthly benefits, is available at age 55 after 15 years of service. The Pension Plan provides for 100%
vesting after 5 years of service, and provides for a death benefit to a vested participant’s surviving spouse. The
costs of benefits under the Pension Plan, which are borne by the Company, are computed actuarially and
defrayed by earnings from the Pension Plan’s investments. The compensation covered by the Pension Plan
includes total earnings before reduction for contributions to a cash or deferred profit-sharing plan (such as the
401(k) plan described above) and amounts used to pay group health insurance premiums and includes bonuses
(such as amounts paid under the incentive compensation plan). Compensation for the purposes of the Pension
Plan may not exceed statutory limits; such limits were $245,000 in 2011, $245,000 in 2010 and $235,000 in
2009.
During the second quarter of 2009, the Company amended the Pension Plan to prohibit new entrants into the
plan.
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.
127
The contributions are invested to provide for benefits under the Pension Plan. The Company expects that it will
contribute $2,500,000 to the Pension Plan in 2012.
The following table reconciles the beginning and ending balances of the Pension Plan’s benefit obligation, as
computed by the Company’s independent actuarial consultants, and its plan assets, with the difference between
the two amounts representing the funded status of the Pension Plan as of the end of the respective year.
($ in thousands)
Change in benefit obligation
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Projected benefit obligation at end of year
Change in plan assets
Plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Plan assets at end of year
2011
2010
2009
$ 31,140
1,782
1,638
6,004
(480)
40,084
22,431
15
2,500
(480)
24,466
25,395
1,754
1,555
2,830
(394)
31,140
17,793
2,532
2,500
(394)
22,431
24,039
1,687
1,360
(1,309)
(382)
25,395
13,065
3,610
1,500
(382)
17,793
Funded status at end of year
$ (15,618)
(8,709)
(7,602)
The accumulated benefit obligation related to the Pension Plan was $29,641,000, $22,124,000, and $18,413,000
at December 31, 2011, 2010, and 2009, respectively.
The following table presents information regarding the amounts recognized in the consolidated balance sheets
at December 31, 2011 and 2010 as it relates to the Pension Plan, excluding the related deferred tax assets.
($ in thousands)
2011
2010
Other assets – prepaid pension asset
Other liabilities
$ 671
(16,289)
$ (15,618)
270
(8,979)
(8,709)
The following table presents information regarding the amounts recognized in accumulated other
comprehensive income (AOCI) at December 31, 2011 and 2010, as it relates to the Pension Plan.
($ in thousands)
2011
2010
Net loss
Net transition obligation
Prior service cost
Amount recognized in AOCI before tax effect
Tax benefit
Net amount recognized as reduction to AOCI
$ 16,213
32
44
16,289
(6,434)
$ 9,855
8,889
34
56
8,979
(3,547)
5,432
128
The following table reconciles the beginning and ending balances of accumulated other comprehensive income
(AOCI) at December 31, 2011 and 2010, as it relates to the Pension Plan:
($ in thousands)
Accumulated other comprehensive loss at beginning of fiscal year
Net loss arising during period
Amortization of unrecognized actuarial loss
Amortization of prior service cost and transition obligation
Tax benefit of changes during the year, net
Accumulated other comprehensive loss at end of fiscal year
2011
2010
$ 5,432
7,707
(382)
(13)
(2,889)
$ 9,855
4,639
1,777
(450)
(15)
(519)
5,432
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the
Pension Plan:
($ in thousands)
2011
2010
Prepaid pension cost as of beginning of fiscal year
Net periodic pension cost for fiscal year
Actual employer contributions
Prepaid pension asset as of end of fiscal year
$ 270
(2,099)
2,500
$ 671
65
(2,295)
2,500
270
Net pension cost for the Pension Plan included the following components for the years ended December 31,
2011, 2010, and 2009:
($ in thousands)
2011
2010
2009
Service cost – benefits earned during the period
Interest cost on projected benefit obligation
Expected return on plan assets
Net amortization and deferral
Net periodic pension cost
$ 1,782
1,638
(1,716)
395
$ 2,099
1,754
1,555
(1,479)
465
2,295
1,687
1,360
(998)
780
2,829
The estimated net loss, transition obligation, and prior service cost that will be amortized from accumulated
other comprehensive income into net periodic pension cost over the next fiscal year are $1,070,000, $2,000, and
$12,000, respectively.
The following table is an estimate of the benefits that will be paid in accordance with the Pension Plan during
the indicated time periods:
($ in thousands)
Year ending December 31, 2012
Year ending December 31, 2013
Year ending December 31, 2014
Year ending December 31, 2015
Year ending December 31, 2016
Years ending December 31, 2017-2021
Estimated
benefit
payments
$ 661
827
1,017
1,065
1,384
8,945
For each of the years ended December 31, 2011, 2010, and 2009, the Company used an expected long-term
rate-of-return-on-assets assumption of 7.75%. The Company arrived at this rate based primarily on a third-party
investment consulting firm’s historical analysis of investment returns, which indicated that the mix of the
Pension Plan’s assets (generally 75% equities and 25% fixed income) can be expected to return approximately
7.75% on a long term basis.
129
Funds in the Pension Plan are invested in a mix of investment types in accordance with the Pension Plan’s
investment policy, which is intended to provide an average annual rate of return of 7% to 10%, while
maintaining proper diversification. Except for Company stock, all of the Pension Plan’s assets are invested in an
unaffiliated bank money market account or mutual funds. The investment policy of the Pension Plan does not
permit the use of derivatives, except to the extent that derivatives are used by any of the mutual funds invested
in by the Pension Plan. The following table presents the targeted mix of the Pension Plan’s assets as of
December 31, 2011, as set out by the Plan’s investment policy:
Investment type
Fixed income investments
Cash/money market account
US government bond fund
US corporate bond fund
US corporate high yield bond fund
Equity investments
Large cap value fund
Large cap growth fund
Mid cap equity fund
Small cap growth fund
Foreign equity fund
Company stock
Targeted %
of Total Assets
Acceptable Range % of
Total Assets
2%
10%
10%
5%
20%
20%
10%
8%
10%
5%
1%-5%
10%-20%
5%-15%
0%-10%
20%-30%
20%-30%
5%-15%
5%-15%
5%-15%
0%-10%
The Pension Plan’s investment strategy contains certain investment objectives and risks for each permitted
investment category. To ensure that risk and return characteristics are consistently followed, the Pension Plan’s
investments are reviewed at least semi-annually and rebalanced within the acceptable range. Performance
measurement of the investments employs the use of certain investment category and peer group benchmarks.
The investment category benchmarks as of December 31, 2011 are as follows:
Investment Category
Investment Category Benchmark
Range of Acceptable Deviation
from Investment Category
Benchmark
Fixed income investments
Cash/money market account
US government bond fund
US corporate bond fund
US corporate high yield bond fund
Equity investments
Large cap value fund
Large cap growth fund
Mid cap equity fund
Small cap growth fund
Foreign equity fund
Company stock
Citigroup Treasury Bill Index – 3 month
Barclays Intermediate Government Bond Index
Barclays Aggregate Index
Barclays High Yield Index
Russell 1000 Value Index
Russell 1000 Growth Index
Russell Mid Cap Index
Russell 2000 Growth Index
MSCI EAFE Index
Russell 2000 Index
0-50 basis points
0-200 basis points
0-200 basis points
0-200 basis points
0-300 basis points
0-300 basis points
0-300 basis points
0-300 basis points
0-300 basis points
0-300 basis points
Each of the investment fund’s average annualized return over a three-year period should be within the range of
acceptable deviation from the benchmarked index shown above. In addition to the investment category
benchmarks, the Pension Plan also utilizes certain Peer Group benchmarks, based on Morningstar percentile
rankings for each investment category. Funds are generally considered to be underperformers if their category
ranking is below the 75th percentile for the trailing one-year period; the 50th percentile for the trailing three-year
period; and the 25th percentile for the trailing five-year period.
The Pension Plan invests in various investment securities which are exposed to various risks such as interest rate,
market, and credit risks. All of these risks are monitored and managed by the Company. No significant
130
concentration of risk exists within the plan assets at December 31, 2011.
The fair values of the Company’s pension plan assets at December 31, 2011, by asset category, are as follows:
($ in thousands)
Total 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)
Fixed income investments
Money market funds
US government bond fund
US corporate bond fund
US corporate high yield bond fund
Equity investments
Large cap value fund
Large cap growth fund
Small cap growth fund
Mid cap growth fund
Foreign equity fund
Company stock
Total
$ 831
2,356
2,331
1,195
5,194
4,883
2,030
2,491
2,328
827
$ 24,466
(cid:1086)(cid:3)(cid:3)(cid:3)(cid:3)
2,356
2,331
1,195
5,194
4,883
2,030
2,491
2,328
827
23,635
831
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
831
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
The fair values of the Company’s pension plan assets at December 31, 2010, by asset category, are as follows:
($ in thousands)
Total Fair Value
at December
31, 2010
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fixed income investments
Money market funds
US government bond fund
US corporate bond fund
US corporate high yield bond fund
Equity investments
Large cap value fund
Large cap growth fund
Small cap growth fund
Mid cap growth fund
Foreign equity fund
Company stock
Total
$ 525
1,987
2,038
1,147
4,634
4,623
2,106
2,523
2,286
562
$ 22,431
(cid:1086)(cid:3)(cid:3)(cid:3)(cid:3)
1,987
2,038
1,147
4,634
4,623
2,106
2,523
2,286
562
21,906
525
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
525
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
(cid:1086)
The following is a description of the valuation methodologies used for assets measured at fair value. There have
been no changes in the methodologies used at December 31, 2011 and 2010.
- Money market fund: valued on the active market on which it is traded; at amortized cost, which
approximates fair value.
- Mutual funds, common stocks: valued at the closing price reported on the active market on which
the individual securities are traded.
Supplemental Executive Retirement Plan. The Company sponsors a Supplemental Executive Retirement Plan
(the “SERP”) for the benefit of certain senior management executives of the Company. The purpose of the SERP
is to provide additional monthly pension benefits to ensure that each such senior management executive would
receive lifetime monthly pension benefits equal to 3% of his or her final average compensation multiplied by his
or her years of service (maximum of 20 years) to the Company or its subsidiaries, subject to a maximum of 60%
131
of his or her final average compensation. The amount of a participant’s monthly SERP benefit is reduced by (i)
the amount payable under the Company’s qualified Pension Plan (described above), and (ii) 50% of the
participant’s primary social security benefit. Final average compensation means the average of the 5 highest
consecutive calendar years of earnings during the last 10 years of service prior to termination of employment.
The SERP is an unfunded plan. Payments are made from the general assets of the Company.
The following table reconciles the beginning and ending balances of the SERP’s benefit obligation, as computed
by the Company’s independent actuarial consultants:
($ in thousands)
Change in benefit obligation
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Projected benefit obligation at end of year
Plan assets
Funded status at end of year
2011
2010
2009
$ 7,433
292
351
93
(105)
8,064
(cid:326)
$ (8,064)
6,222
408
377
531
(105)
7,433
(cid:326)
(7,433)
5,239
464
328
296
(105)
6,222
(cid:326)
(6,222)
The accumulated benefit obligation related to the SERP was $7,199,000, $5,623,000, and $4,882,000 at
December 31, 2011, 2010, and 2009, respectively.
The following table presents information regarding the amounts recognized in the consolidated balance sheets
at December 31, 2011 and 2010 as it relates to the SERP, excluding the related deferred tax assets.
($ in thousands)
Other assets – prepaid pension asset (liability)
Other liabilities
2011
2010
$ (6,075)
(1,989)
$ (8,064)
(5,507)
(1,926)
(7,433)
The following table presents information regarding the amounts recognized in AOCI at December 31, 2011 and
2010.
($ in thousands)
Net (gain)/loss
Prior service cost
Amount recognized in AOCI before tax effect
Tax benefit
Net amount recognized as reduction to AOCI
2011
2010
$ 1,887
102
1,989
(786)
$ 1,203
1,805
121
1,926
(761)
1,165
The following table reconciles the beginning and ending balances of accumulated other comprehensive income
(AOCI) at December 31, 2011 and 2010, as it relates to the SERP:
($ in thousands)
Accumulated other comprehensive loss at beginning of fiscal year
Net loss arising during period
Amortization of unrecognized actuarial loss
Amortization of prior service cost and transition obligation
Tax benefit of changes during the year, net
Accumulated other comprehensive loss at end of fiscal year
2011
2010
$ 1,165
93
(12)
(19)
(24)
$ 1,203
906
530
(81)
(19)
(171)
1,165
132
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the
SERP:
($ in thousands)
Prepaid pension cost (liability) as of beginning of fiscal year
Net periodic pension cost for fiscal year
Benefits paid
Prepaid pension cost (liability) as of end of fiscal year
2011
2010
$ (5,507)
(673)
105
$ (6,075)
(4,727)
(885)
105
(5,507)
Net pension cost for the SERP included the following components for the years ended December 31, 2011, 2010,
and 2009:
($ in thousands)
2011
2010
2009
Service cost – benefits earned during the period
Interest cost on projected benefit obligation
Net amortization and deferral
Net periodic pension cost
$ 292
351
30
$ 673
408
377
100
885
464
328
125
917
The estimated net loss and prior service cost that will be amortized from accumulated other comprehensive
income into net periodic pension cost over the next fiscal year are $135,000 and $19,000, respectively.
The following table is an estimate of the benefits that will be paid in accordance with the SERP during the
indicated time periods:
($ in thousands)
Year ending December 31, 2012
Year ending December 31, 2013
Year ending December 31, 2014
Year ending December 31, 2015
Year ending December 31, 2016
Years ending December 31, 2017-2021
Estimated
benefit
payments
$ 230
326
321
315
436
2,494
The following assumptions were used in determining the actuarial information for the Pension Plan and the
SERP for the years ended December 31, 2011, 2010, and 2009:
2011
2010
2009
Pension
Plan
SERP
Pension
Plan
SERP
Pension
Plan
Discount rate used to determine net periodic
pension cost
5.59%
5.59%
6.00%
6.00%
5.75%
Discount rate used to calculate end of year
liability disclosures
Expected long-term rate of return on assets
Rate of compensation increase
4.39%
7.75%
5.00%
4.39%
n/a
5.00%
5.59%
7.75%
5.00%
5.59%
n/a
5.00%
6.00%
7.75%
5.00%
SERP
5.75%
6.00%
n/a
5.00%
The Company’s discount rate policy is based on a calculation of the Company’s expected pension payments, with
those payments discounted using the Citigroup Pension Index yield curve.
133
Note 13. Commitments, Contingencies, and Concentrations of Credit Risk
See Note 2 for discussion regarding a pending purchase of eleven bank branches from another bank.
See Note 11 with respect to future obligations under noncancelable operating leases.
In the normal course of the Company’s business, there are various outstanding commitments and contingent
liabilities such as commitments to extend credit that are not reflected in the financial statements. The following
table presents the Company’s outstanding loan commitments at December 31, 2011.
($ in millions)
Type of Commitment
Outstanding closed-end loan commitments
Unfunded commitments on revolving lines of
credit, credit cards and home equity loans
Total
Fixed Rate
$ 39
32
$ 71
Variable Rate
278
185
463
Total
317
217
534
At December 31, 2011 and 2010, the Company had $7.1 million and $7.5 million, respectively, in standby letters
of credit outstanding. The Company has no carrying amount for these standby letters of credit at either of those
dates. The nature of the standby letters of credit is a guarantee made on behalf of the Company’s customers to
suppliers of the customers to guarantee payments owed to the supplier by the customer. The standby letters of
credit are generally for terms for one year, at which time they may be renewed for another year if both parties
agree. The payment of the guarantees would generally be triggered by a continued nonpayment of an
obligation owed by the customer to the supplier. The maximum potential amount of future payments
(undiscounted) the Company could be required to make under the guarantees in the event of nonperformance
by the parties to whom credit or financial guarantees have been extended is represented by the contractual
amount of the standby letter of credit. In the event that the Company is required to honor a standby letter of
credit, a note, already executed with the customer, is triggered which provides repayment terms and any
collateral. Over the past two years, the Company has had to honor several insignificant standby letters of credit,
which have been or are being repaid by the borrower without any loss to the Company. Management expects
any draws under existing commitments to be funded through normal operations.
The Company is not involved in any legal proceedings which, in management’s opinion, could have a material
effect on the consolidated financial position of the Company.
The Bank grants primarily commercial and installment loans to customers throughout its market area, which
consists of Anson, Beaufort, Bladen, Brunswick, Buncombe, Cabarrus, Carteret, Chatham, Columbus, Dare,
Davidson, Duplin, Guilford, Harnett, Iredell, Lee, Montgomery, Moore, New Hanover, Onslow, Randolph,
Richmond, Robeson, Rockingham, Rowan, Scotland, Stanly and Wake Counties in North Carolina, Chesterfield,
Dillon, Florence and Horry Counties in South Carolina, and Montgomery, Pulaski, Washington and Wythe
Counties in Virginia. The real estate loan portfolio can be affected by the condition of the local real estate
market. The commercial and installment loan portfolios can be affected by local economic conditions.
The Company’s loan portfolio is not concentrated in loans to any single borrower or to a relatively small number
of borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or
industries that would be similarly affected by economic conditions.
In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers,
industries and geographic regions, the Company monitors exposure to credit risk that could arise from potential
concentrations of lending products and practices such as loans that subject borrowers to substantial payment
increases (e.g. principal deferral periods, loans with initial interest-only periods, etc), and loans with high loan-
134
to-value ratios. Additionally, there are industry practices that could subject the Company to increased credit risk
should economic conditions change over the course of a loan’s life. For example, the Company makes variable
rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon
payment loans). These loans are underwritten and monitored to manage the associated risks. The Company
has determined that there is no concentration of credit risk associated with its lending policies or practices.
The Company’s investment portfolio consists principally of obligations of government-sponsored enterprises,
mortgage-backed securities guaranteed by government-sponsored enterprises, corporate bonds, FHLB stock and
general obligation municipal securities. The following are the fair values at December 31, 2011 of available for
sale and held to maturity securities to any one issuer/guarantor that exceed $2.0 million, with such amounts
representing the maximum amount of credit risk that the Company would incur if the issuer did not repay the
obligation.
($ in thousands)
Issuer
Ginnie Mae - mortgage-backed securities
Small Business Administration - pooled bonds
Federal Home Loan Bank System - bonds
Federal Farm Credit bonds
Federal Home Loan Bank of Atlanta - common stock
Fannie Mae - mortgage-backed securities
Bank of America - trust preferred securities
Freddie Mac - mortgage-backed securities
Craven County, North Carolina municipal bond
First Citizens Bancorp (South Carolina) – bond / trust preferred securities
Spartanburg, South Carolina Sanitary Sewer District municipal bond
Richmond County, North Carolina municipal bond
South Carolina State municipal bond
Virginia State Housing Authority municipal bond
First Citizens Bancorp (North Carolina) - trust preferred security
Amortized Cost
$ 66,888
39,034
20,511
14,000
10,904
9,422
7,085
4,688
3,665
3,996
3,301
2,610
2,124
2,194
2,108
Fair Value
70,016
39,055
20,655
14,010
10,904
10,045
6,368
4,939
4,041
3,842
3,628
2,793
2,338
2,304
2,278
Until February 27, 2009, the FHLB redeemed their stock at par as borrowings were repaid. On February 27,
2009, the FHLB announced that they would no longer automatically redeem their stock when loans are repaid.
Instead, they stated that they would evaluate whether they would repurchase stock on a quarterly basis. During
the second half of 2010, the FHLB repurchased $1.8 million of stock from the Company. During 2011, the FHLB
repurchased $4.4 million of stock from the Company.
The Company places its deposits and correspondent accounts with the Federal Home Loan Bank of Atlanta, the
Federal Reserve Bank, and Bank of America and sells its federal funds to Bank of America. At December 31,
2011, the Company had deposits in the Federal Home Loan Bank of Atlanta totaling $17.6 million, deposits of
$117.6 million in the Federal Reserve Bank, and deposits of $54.9 million in Bank of America and federal funds
sold to Bank of America of $0.6 million. None of the deposits held at the Federal Home Loan Bank of Atlanta,
the Federal Reserve Bank, or the federal funds sold to Bank of America are FDIC-insured, however the Federal
Reserve Bank is a government entity and therefore risk of loss is minimal. The deposits held at Bank of America
are fully guaranteed by the FDIC under its Temporary Liquidity Guarantee Program which guarantees, until
December 31, 2013, an unlimited amount of non-interest bearing deposits.
135
Note 14. Fair Value of Financial Instruments
As discussed in Note 1(o), the Company is required to disclose estimated fair values for its financial instruments.
Fair value estimates as of December 31, 2011 and 2010 and limitations thereon are set forth below for the
Company’s financial instruments. See Note 1(o) for a discussion of fair value methods and assumptions, as well
as fair value information for off-balance sheet financial instruments.
($ in thousands)
Cash and due from banks,
noninterest-bearing
Due from banks, interest-bearing
Federal funds sold
Securities available for sale
Securities held to maturity
Presold mortgages in process
of settlement
Loans - non-covered, net of allowance
Loans - covered, net of allowance
FDIC indemnification asset
Accrued interest receivable
Deposits
Securities sold under
agreements to repurchase
Borrowings
Accrued interest payable
December 31, 2011
Carrying
Amount
Estimated
Fair Value
$ 80,341
135,218
608
182,626
57,988
6,090
2,033,542
355,426
121,677
11,779
80,341
135,218
608
182,626
62,754
6,090
1,987,979
355,426
121,004
11,779
December 31, 2010
Carrying
Amount
56,821
154,320
861
181,182
54,018
3,962
2,044,729
359,973
123,719
13,579
Estimated
Fair Value
56,821
154,320
861
181,182
53,312
3,962
2,020,109
359,973
122,351
13,579
2,755,037
2,759,504
2,652,613
2,657,214
17,105
133,925
1,872
17,105
106,333
1,872
54,460
196,870
2,082
54,460
168,508
2,082
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.
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: Quoted prices for similar instruments in active or non-active markets and model-derived
valuations in which all significant inputs are observable in active markets.
136
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.
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.
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)
($ in thousands)
Description of Financial
Instruments
Recurring
Securities available for sale:
Government-sponsored
enterprise securities
Mortgage-backed securities
Corporate bonds
Equity securities
Total available for sale
securities
$ 34,665
124,105
12,488
11,368
$ 182,626
Nonrecurring
Impaired loans – covered
Impaired loans – non-covered
Other real estate – covered
Other real estate – non-covered
$ 55,690
85,286
85,272
37,023
—
—
—
398
398
—
—
—
—
34,665
124,105
12,488
10,969
182,227
55,690
85,286
85,272
37,023
—
—
—
—
—
—
—
—
—
The following table summarizes the Company’s financial instruments that were measured at fair value on a
recurring and nonrecurring basis at December 31, 2010.
($ in thousands)
Description of Financial
Instruments
Recurring
Securities available for sale:
Government-sponsored
enterprise securities
Mortgage-backed securities
Corporate bonds
Equity securities
Total available for sale
securities
Nonrecurring
Impaired loans – covered
Impaired loans – non-covered
Other real estate – covered
Other real estate – non-covered
Fair Value
at
December
31, 2010
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 43,273
107,460
15,330
15,119
$ 181,182
$ 72,825
96,003
94,891
21,081
—
—
—
360
360
—
—
—
—
43,273
107,460
15,330
14,759
180,822
72,825
96,003
94,891
21,081
—
—
—
—
—
—
—
—
—
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. 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.
137
Impaired loans — Fair values for impaired loans in the above table are collateral dependent and are
estimated based on underlying collateral values, 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.
There were no transfers to or from Level 1 and 2 during the year ended December 31, 2011.
For the year ended December 31, 2011, the increase in the fair value of securities available for sale was
$1,418,000, which is included in other comprehensive income (net of taxes of $554,000). For the year ended
December 31, 2010, the increase in the fair value of securities available for sale was $646,000, which is included
in other comprehensive income (net of taxes of $251,000). Fair value measurement methods at December 31,
2011 and 2010 are consistent with those used in prior reporting periods.
Note 15. Equity-Based Compensation Plans
At December 31, 2011, 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 December 31, 2011, 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.
Prior to the June 17, 2008 grant (discussed below), stock option grants to employees generally had five-year
vesting schedules (20% vesting each year) and had been irregular, usually falling into three categories - 1) to
attract and retain new employees, 2) to recognize changes in responsibilities of existing employees, and 3) to
periodically reward exemplary performance. Compensation expense associated with these types of grants is
recorded pro-ratably over the vesting period. As it relates to directors, until 2010 the Company had historically
granted 2,250 vested stock options to each of the Company’s non-employee directors in June of each year. In
June 2011 and 2010, the Company granted 1,414 common shares and 1,039 common shares, respectively, to
each non-employee director, which had approximately the same value as 2,250 stock options. Compensation
expense associated with these director grants is recognized on the date of grant since there are no vesting
conditions.
The June 17, 2008 grant of a combination of performance units and stock options have both performance
conditions (earnings per share targets) and service conditions that must be met in order to vest. The 262,599
stock options and 81,337 performance units represented the maximum number of options and performance
units that could have vested if the Company were to achieve specified maximum goals for earnings per share
during the three annual performance periods ending on December 31, 2008, 2009, and 2010. Up to one-third of
138
the total number of options and performance units granted were subject to vesting annually as of December 31
of each year beginning in 2010, if (1) the Company achieved specific earnings per share (EPS) goals during the
corresponding performance period and (2) the executive or key employee continued employment for a period
of two years beyond the corresponding performance period. Compensation expense for this grant was recorded
over the various service periods based on the estimated number of options and performance units that were
probable to vest. No compensation cost is recognized for awards that do not vest and any previously recognized
compensation cost will be reversed. The Company did not achieve the minimum earnings per share
performance goal for 2008 or 2010, and thus two-thirds of the above grant was permanently forfeited. As a
result of the significant acquisition gain realized in June 2009 related to a failed bank acquisition, the Company
achieved the EPS goal for 2009 and the related awards fully vested on December 31, 2011 for each grantee that
remained employed through that date. The Company recorded compensation expense of $299,000 in each of
2009, 2010 and 2011 related to the vesting of these awards.
The Company granted long-term restricted shares of common stock to senior executives on December 11, 2009
and February 24, 2011, with vesting terms in accordance with the minimum rules for long-term equity grants for
companies participating in the U.S. Treasury’s Troubled Asset Relief Program (TARP). These rules require that
the vesting of the stock be tied to repayment of the financial assistance, with a two year minimum vesting
period. The Company originally projected the repayment to occur five years after the date of the TARP issuance,
and thus the amortization schedule for the expense was based on a repayment date of January 9, 2014.
However, the Company redeemed 100% of the TARP preferred stock on September 1, 2011. Therefore, the
Company recast the amortization schedule for both grants to be based on the vesting date two years after the
grant. The total compensation expense associated with the December 11, 2009 grant was $398,000 and was
being initially amortized over a four-year period at approximately $100,000 per year. Due to the TARP
repayment, the 2009 grant fully vested on December 11, 2011. Accordingly, the Company accelerated the
expense amortization and recorded a total of $298,000 for 2011. The total compensation expense associated
with the February 24, 2011 grant was $105,500 and was being initially amortized over a three-year period at
approximately $35,000 per year. Due to the TARP repayment, the 2011 grant will fully vest on February 24,
2013. Accordingly, the Company accelerated the expense amortization and recorded a total of $42,000 in 2011.
See Note 19 for further information related to the Company’s participation in the TARP.
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 December 31, 2011, there were 489,062 options outstanding related to the three First Bancorp plans, with
exercise prices ranging from $14.35 to $22.12. At December 31, 2011, there were 906,268 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 December 31, 2011, 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.
139
The Company’s equity grants for the year ended December 31, 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’s only equity grants for the year ended December 31, 2010 were the issuance of 15,585 shares of
common stock to non-employee directors on June 1, 2010 (1,039 shares per director). The fair market value of
the Company’s common stock on the grant date was $15.51 per share, which was the closing price of the
Company’s common stock on that date.
The per share weighted-average fair value of options granted during 2009 was $6.06 on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average assumptions:
Expected dividend yield
Risk-free interest rate
Expected life
Expected volatility
2009
2.23%
3.28%
7 years
46.32%
The Company recorded total stock-based compensation expense of $905,000, $640,000 and $449,000 for the
years ended December 31, 2011, 2010 and 2009, respectively. Of the $905,000 in expense that was recorded in
2011, approximately $242,000 related to the June 1, 2011 director grants, which is classified as “other operating
expenses” in the Consolidated Statements of Income. The remaining $663,000 in expense relates 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 $353,000, $250,000, and $180,000 of income tax benefits related to stock based
compensation expense in the income statement for the years ended December 31, 2011, 2010, and 2009,
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.
140
The following table presents information regarding the activity since December 31, 2008 related to all of the
Company’s stock options outstanding:
Options Outstanding
Weighted-
Average
Exercise
Price
Weighted-
Average
Contractual
Term (years)
Aggregate
Intrinsic
Value
Number of
Shares
Balance at December 31, 2008
828,876
$ 17.21
Granted
Exercised
Forfeited
Expired
27,000
(73,843)
(cid:1086)(cid:3)(cid:3)(cid:3)
(28,917)
14.35
13.14
(cid:1086)
11.52
Balance at December 31, 2009
753,116
$ 17.73
Granted
Exercised
Forfeited
Expired
(cid:1086)(cid:3)(cid:3)(cid:3)
(18,667)
(87,536)
(4,500)
(cid:1086)
10.46
16.53
15.69
Balance at December 31, 2010
642,413
$ 18.11
Granted
Exercised
Forfeited
Expired
(cid:1086)(cid:3)(cid:3)(cid:3)
(2,300)
(cid:1086)(cid:3)(cid:3)(cid:3)
(146,247)
(cid:1086)
13.30
(cid:1086)
15.47
$ 251,000
$ 97,940
$ 6,949
Outstanding at December 31, 2011
493,866
$ 18.92
3.7
$ 1,337
Exercisable at December 31, 2011
420,936
$ 19.31
3.3
$ 1,337
The Company received $30,000, $171,000, and $393,000 as a result of stock option exercises during the years
ended December 31, 2011, 2010, and 2009, respectively. The Company recorded $0, $36,000, and $73,000 in
associated tax benefits from the exercise of nonqualified stock options during the years ended December 31,
2011, 2010, and 2009, respectively.
The following table summarizes information about the stock options outstanding at December 31, 2011:
Range of
Exercise Prices
$8.85 to $11.06
$11.06 to $13.27
$13.27 to $15.48
$15.48 to $17.70
$17.70 to $19.91
$19.91 to $22.12
Options Outstanding
Weighted-
Average
Remaining
Contractual Life
Weighted-
Average
Exercise
Price
Number
Outstanding
at 12/31/11
Options Exercisable
Number
Exercisable
at 12/31/11
Weighted-
Average
Exercise
Price
2,447
(cid:1086)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
54,107
171,582
56,250
209,480
493,866
0.5
(cid:1086)
3.9
4.8
3.7
2.9
3.7
$ 10.66
(cid:1086)
14.85
16.61
19.65
21.76
$ 18.92
2,447
(cid:1086)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
54,107
100,652
56,250
207,480
420,936
$ 10.66
(cid:1086)
14.85
16.66
19.65
21.77
$ 19.31
As discussed above, the Company granted 81,337 performance units to 19 senior officers on June 17, 2008. Each
performance unit represents the right to acquire one share of the Company’s common stock upon satisfaction of
the vesting conditions (discussed above). The fair market value of the Company’s common stock on the grant
date was $16.53 per share. One-third of this grant was forfeited on December 31, 2008 and another one-third
141
was forfeited on December 31, 2010 because the Company failed to meet the minimum performance goal
required for vesting. Also, as discussed above, the Company granted 29,267 and 7,259 long-term restricted
shares of common stock to certain senior executives on December 11, 2009 and February 24, 2011, respectively.
The following table presents information regarding the activity during 2009, 2010, and 2011 related to the
Company’s outstanding performance units and restricted stock:
Nonvested Performance Units
Long-Term Restricted Stock
Weighted-
Average
Grant-Date
Fair Value
Weighted-
Average
Grant-Date
Fair Value
Number of
Units
Number of
Units
Nonvested at December 31, 2008
54,225
$ 16.53
–
$ –
Granted during the period
Vested during the period
Forfeited or expired during the period
–
–
–
–
–
–
29,267
–
–
$ 13.59
–
–
Nonvested at December 31, 2009
54,225
$ 16.53
29,267
$ 13.59
Granted during the period
Vested during the period
–
–
–
–
Forfeited or expired during the period
(27,112)
16.53
–
–
–
–
–
–
Nonvested at December 31, 2010
27,113
$ 16.53
29,267
$ 13.59
Granted during the period
Vested during the period
Forfeited or expired during the period
–
(27,022)
(91)
–
16.53
16.53
7,259
(29,267)
–
14.54
13.59
–
Nonvested at December 31, 2011
(cid:1086)
(cid:936)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:1086)
7,259
$ 14.54
Note 16. Regulatory Restrictions
The Company is regulated by the Federal Reserve Board and is subject to securities registration and public
reporting regulations of the Securities and Exchange Commission. The Bank is regulated by the FDIC and the
North Carolina Commissioner of Banks.
The primary source of funds for the payment of dividends by the Company is dividends received from its
subsidiary, the Bank. The Bank, as a North Carolina banking corporation, may pay dividends only out of
undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. As of December 31,
2011, the Bank had undivided profits of approximately $197,681,000 which were available for the payment of
dividends (subject to remaining in compliance with regulatory capital requirements). As of December 31, 2011,
approximately $199,512,000 of the Company’s investment in the Bank is restricted as to transfer to the
Company without obtaining prior regulatory approval.
The average reserve balance maintained by the Bank under the requirements of the Federal Reserve Board was
approximately $410,000 for the year ended December 31, 2011.
The Company and the Bank must comply with regulatory capital requirements established by the Federal
Reserve Board and FDIC. Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on
the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for
142
prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk weightings, and other factors. These
capital standards require the Company and the Bank to maintain minimum ratios of “Tier 1” capital to total risk-
weighted assets (“Tier I Capital Ratio”) and total capital to risk-weighted assets of 4.00% and 8.00% (“Total
Capital Ratio”), respectively. Tier 1 capital is comprised of total shareholders’ equity, excluding unrealized gains
or losses from the securities available for sale, less intangible assets, and total capital is comprised of Tier 1
capital plus certain adjustments, the largest of which for the Company and the Bank is the allowance for loan
losses. Risk-weighted assets refer to the on- and off-balance sheet exposures of the Company and the Bank,
adjusted for their related risk levels using formulas set forth in Federal Reserve Board and FDIC regulations.
In addition to the risk-based capital requirements described above, the Company and the Bank are subject to a
leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly
average total assets (“Leverage Ratio) of 3.00% to 5.00%, depending upon the institution’s composite ratings as
determined by its regulators. The Federal Reserve Board has not advised the Company of any requirement
specifically applicable to it.
In addition to the minimum capital requirements described above, the regulatory framework for prompt
corrective action also contains specific capital guidelines applicable to banks for classification as “well
capitalized,” which are presented with the minimum ratios, the Company’s ratios and the Bank’s ratios as of
December 31, 2011 and 2010 in the following table. Based on the most recent notification from its regulators,
the Bank is well capitalized under the framework. There are no conditions or events since that notification that
management believes have changed the Company’s classification.
Also see Note 19 for discussion of preferred stock transactions that have affected the Company’s capital ratios.
($ in thousands)
As of December 31, 2011
Total Capital Ratio
Company
Bank
Tier I Capital Ratio
Company
Bank
Leverage Ratio
Company
Bank
As of December 31, 2010
Total Capital Ratio
Company
Bank
Tier I Capital Ratio
Company
Bank
Leverage Ratio
Company
Bank
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
(must equal or exceed)
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
(must equal or exceed)
$ 355,897
354,235
16.72%
16.65%
$ 170,329
170,180
8.00%
8.00%
$ N/A
212,725
N/A
10.00%
329,100
327,461
329,100
327,461
15.46%
15.39%
10.21%
10.17%
85,165
85,090
128,910
128,831
$ 351,097
330,560
16.57%
15.62%
$ 169,493
169,340
324,330
303,817
324,330
303,817
15.31%
14.35%
10.28%
9.63%
84,746
84,670
126,212
126,228
4.00%
4.00%
4.00%
4.00%
8.00%
8.00%
4.00%
4.00%
4.00%
4.00%
N/A
127,635
N/A
161,039
$ N/A
211,675
N/A
127,005
N/A
157,785
N/A
6.00%
N/A
5.00%
N/A
10.00%
N/A
6.00%
N/A
5.00%
143
Note 17. Supplementary Income Statement Information
Components of other noninterest income/expense exceeding 1% of total income for any of the years ended
December 31, 2011, 2010, and 2009 are as follows:
($ in thousands)
2011
2010
2009
Other service charges, commissions, and fees – debit interchange income
Other service charges, commissions, and fees – other interchange income
$ 4,757
1,033
Other operating expenses – interchange expense
Other operating expenses – stationery and supplies
Other operating expenses – telephone expense
Other operating expenses – FDIC insurance expense
Other operating expenses – repossession and collection – non-covered
Other operating expenses – repossession and collection – covered, net of FDIC
reimbursement and rental income
Other operating expenses – outside consultants
2,042
2,867
2,127
3,008
3,492
1,968
1,842
3,608
912
1,736
2,563
2,053
4,387
2,138
2,617
1,185
2,823
980
1,561
2,181
1,847
5,500
871
795
808
Note 18. Condensed Parent Company Information
Condensed financial data for First Bancorp (parent company only) follows:
CONDENSED BALANCE SHEETS
($ in thousands)
Assets
Cash on deposit with bank subsidiary
Investment in wholly-owned subsidiaries, at equity
Premises and Equipment
Other assets
Total assets
Liabilities and shareholders’ equity
Trust preferred securities
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
As of December 31,
2011
2010
$ 3,324
388,528
161
1,633
$ 393,646
$ 46,394
2,102
48,496
345,150
$ 393,646
21,826
369,107
172
1,660
392,765
46,394
1,768
48,162
344,603
392,765
CONDENSED STATEMENTS OF INCOME
($ in thousands)
Year Ended December 31,
2011
2010
2009
Dividends from wholly-owned subsidiaries
Earnings of wholly-owned subsidiaries, net of dividends
Interest expense
All other income and expenses, net
Net income
Preferred stock dividends and accretion
$ 9,500
5,862
(1,041)
(679)
13,642
(6,166)
26,250
(14,536)
(1,054)
(678)
9,982
(4,107)
13,250
49,024
(1,356)
(659)
60,259
(3,972)
Net income available to common shareholders
$ 7,476
5,875
56,287
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CONDENSED STATEMENTS OF CASH FLOWS
($ in thousands)
Operating Activities:
Net income
Equity in undistributed earnings of subsidiaries
Dividend from subsidiaries in excess of earnings
Decrease in other assets
Increase (decrease) in other liabilities
Total – operating activities
Investing Activities:
Downstream cash investment in subsidiary
Cash proceeds from dissolution of subsidiary
Total – investing activities
Financing Activities:
Repayments of borrowings, net
Payment of preferred and common cash dividends
Proceeds from issuance of preferred stock
Redemption of preferred stock
Proceeds from issuance of common stock
Repurchases of common stock
Repurchase of common stock warrants
Total - financing activities
Net increase (decrease) in cash
Cash, beginning of year
Cash, end of year
2011
Year Ended December 31,
2010
2009
$ 13,642
(5,862)
(cid:326)
38
(62)
7,756
(16,250)
(cid:326)
(16,250)
(cid:326)
(8,237)
63,500
(65,000)
881
(228)
(924)
(10,008)
(18,502)
21,826
$ 3,324
9,982
(cid:1086)
14,536
32
17
24,567
(cid:326)
706
706
(cid:326)
(8,609)
(cid:326)
(cid:326)
840
(cid:326)
(cid:326)
(7,769)
17,504
4,322
21,826
60,259
(49,024)
(cid:1086)
72
(349)
10,958
(45,000)
(cid:326)
(45,000)
(20,000)
(9,908)
65,000
(cid:326)
1,505
(cid:326)
(cid:326)
36,597
2,555
1,767
4,322
Note 19. Participation in the U.S. Treasury Capital Purchase Program and Small Business Lending Fund
U.S. Treasury Capital Purchase Program
On January 9, 2009, the Company completed the sale of $65 million of Series A preferred stock to the United
States Treasury Department (Treasury) under the Treasury’s Capital Purchase Program. The program was
designed to attract broad participation by healthy banking institutions to help stabilize the financial system and
increase lending for the benefit of the U.S. economy.
Under the terms of the stock purchase agreement, the Treasury received (i) 65,000 shares of fixed rate
cumulative perpetual preferred stock with a liquidation value of $1,000 per share and (ii) a warrant to purchase
616,308 shares of the Company’s common stock, no par value, in exchange for $65 million. As discussed below,
the Company redeemed this preferred stock in the third quarter of 2011 and repurchased the common stock
warrant in the fourth quarter of 2011.
The Series A preferred stock qualified as Tier 1 capital and its terms required cumulative dividends at a rate of
5% for the first five years, and 9% thereafter.
The warrant had a 10-year term and became immediately exercisable upon its issuance, with an exercise price
equal to $15.82 per share.
145
The Company allocated the $65 million in proceeds to the preferred stock and the common stock warrant based
on their relative fair values. To determine the fair value of the preferred stock, the Company used a discounted
cash flow model that assumed redemption of the preferred stock at the end of year five. The discount rate
utilized was 13% and the estimated fair value was determined to be $36.2 million. The fair value of the common
stock warrant was estimated to be $2.8 million using the Black-Scholes option pricing model with the following
assumptions:
Expected dividend yield
Risk-free interest rate
Expected life
Expected volatility
Weighted average fair value
4.83%
2.48%
10 years
35.00%
$ 4.47
The aggregate fair value result for both the preferred stock and the common stock warrant was determined to
be $39.0 million, with 7% of this aggregate total attributable to the warrant and 93% attributable to the
preferred stock. Therefore, the $65 million issuance was allocated with $60.4 million being assigned to the
preferred stock and $4.6 million being assigned to the common stock warrant.
The $4.6 million difference between the $65 million face value of the preferred stock and the $60.4 million
allocated to it upon issuance was recorded as a discount on the preferred stock. Until the Company redeemed
the preferred stock in the third quarter of 2011 (discussed below), the $4.6 million discount was being accreted,
using the effective interest method, as a reduction in net income available to common shareholders over a five-
year period at approximately $0.8 million to $1.0 million per year.
On September 1, 2011, the Company redeemed the 65,000 shares of outstanding Series A preferred stock from
the U.S. Treasury for a redemption price of $65 million, plus unpaid dividends. The Company funded the
majority of this transaction by simultaneously issuing Series B preferred stock to the Treasury as part of the
Small Business Lending Fund (see below).
Due to the redemption of the preferred stock, the Company accreted the remaining discount of $2.3 million
during the third quarter of 2011, which resulted in total discount accretion for 2011 of $2.9 million, which
compared to $0.9 million recorded in 2010 and $0.8 million in 2009. Preferred stock discount accretion is
deducted from net income in computing “Net income available to common shareholders.”
In November 2011, the Company repurchased the outstanding common stock warrant from the Treasury for
$1.50 per common share, or a total of $924,000.
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.
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 the two quarters subsequent to the issuance
in 2011, the Company paid a dividend rate of 5%. Based upon an increase in the level of QBSL over the baseline
146
level calculated under the terms of the related purchase agreement, the dividend rate for the next dividend
period (which will end on March 31, 2012) is expected to be 4.8%, 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.
147
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
First Bancorp
Troy, North Carolina
We have audited the accompanying consolidated balance sheets of First Bancorp and subsidiaries (the
“Company”) as of December 31, 2011 and 2010, and the related consolidated statements of income,
comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended
December 31, 2011. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of First Bancorp and subsidiaries as of December 31, 2011 and 2010, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2011 in
conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2011, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated March 14, 2012 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
Greenville, South Carolina
March 14, 2012
/s/ Elliott Davis, PLLC
148
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
First Bancorp
Troy, North Carolina
We have audited the internal control over financial reporting of First Bancorp and subsidiaries (the “Company”) as of
December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). The Company’s management is responsible
for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2011, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of the Company as of December 31, 2011 and 2010 and the related consolidated
statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2011 and our report dated March 14, 2012 expressed an unqualified opinion thereon.
Greenville, South Carolina
March 14, 2012
/s/ Elliott Davis, PLLC
149
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with
the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, which are our controls and other procedures that are
designed to ensure that information required to be disclosed in our periodic reports with the SEC is recorded,
processed, summarized and reported within the required time periods. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be
disclosed is communicated to our management to allow timely decisions regarding required disclosure. Based
on the evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls
and procedures are effective in allowing timely decisions regarding disclosure to be made about material
information required to be included in our periodic reports with the SEC.
Management’s Report On Internal Control Over Financial Reporting
Management of First Bancorp and its subsidiaries (the “Company”) is responsible for establishing and
maintaining effective internal control over financial reporting. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting
principles.
Under the supervision and with the participation of management, including the principal executive officer and
principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over
financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in
Internal Control – Integrated Framework, management of the Company has concluded the Company maintained
effective internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934
Rules 13a-15(f), as of December 31, 2011.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting
objectives because of its inherent limitations. Internal control over financial reporting is a process that involves
human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human
failures. Internal control over financial reporting can also be circumvented by collusion or improper
management override. Because of such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial reporting. However, these inherent
limitations are known features of the financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.
Management is also responsible for the preparation and fair presentation of the consolidated financial
statements and other financial information contained in this report. The accompanying consolidated financial
statements were prepared in conformity with U.S. generally accepted accounting principles and include, as
necessary, best estimates and judgments by management.
Elliott Davis, PLLC, an independent, registered public accounting firm, has audited the Company’s consolidated
financial statements as of and for the year ended December 31, 2011, and audited the Company’s effectiveness
150
of internal control over financial reporting as of December 31, 2011, as stated in their report, which is included
in Item 8 hereof.
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during, or subsequent to,
the fourth quarter of 2011 that were reasonably likely to materially affect our internal control over financial
reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Incorporated herein by reference is the information under the captions “Directors, Nominees and Executive
Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance Policies and
Practices” and “Board Committees, Attendance and Compensation” from the Company’s definitive proxy
statement to be filed pursuant to Regulation 14A.
Item 11. Executive Compensation
Incorporated herein by reference is the information under the captions “Executive Compensation” and “Board
Committees, Attendance and Compensation” from the Company’s definitive proxy statement to be filed
pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Incorporated herein by reference is the information under the captions “Principal Holders of First Bancorp
Voting Securities” and “Directors, Nominees and Executive Officers” from the Company’s definitive proxy
statement to be filed pursuant to Regulation 14A.
See also “Additional Information Regarding the Registrant’s Equity Compensation Plans” in Item 5 of this report.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated herein by reference is the information under the caption “Certain Transactions” and “Corporate
Governance Policies and Practices” from the Company’s definitive proxy statement to be filed pursuant to
Regulation 14A.
Item 14. Principal Accountant Fees and Services
Incorporated herein by reference is the information under the caption “Audit Committee Report” from the
Company’s definitive proxy statement to be filed pursuant to Regulation 14A.
151
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1.
Financial Statements - See Item 8 and the Cross Reference Index on page 3 for information concerning
the Company’s consolidated financial statements and report of independent auditors.
2.
Financial Statement Schedules - not applicable
3.
Exhibits
The following exhibits are filed with this report or, as noted, are incorporated by reference.
Management contracts, compensatory plans and arrangements are marked with an asterisk (*).
3.a
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 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.
10
Material Contracts
10.a
First Bancorp Annual Incentive Plan was filed as Exhibit 10(a) to the Form 8-K filed on February 2, 2007
and is incorporated herein by reference. (*)
10.b
Indemnification Agreement between the Company and its Directors and Officers was filed as Exhibit
10(t) to the Registrant's Registration Statement Number 33-12692, and is incorporated herein by
reference.
10.c
First Bancorp Senior Management Supplemental Executive Retirement Plan was filed as Exhibit 10.1 to
the Company's Form 8-K filed on December 22, 2006, and is incorporated herein by reference. (*)
10.d
First Bancorp 1994 Stock Option Plan was filed as Exhibit 10(f) to the Company's Annual Report on Form
10-K for the year ended December 31, 2001, and is incorporated herein by reference. (*)
10.e
First Bancorp 2004 Stock Option Plan was filed as Exhibit B to the Registrant's Form Def 14A filed on
March 30, 2004 and is incorporated herein by reference. (*)
152
10.f
First Bancorp 2007 Equity Plan was filed as Appendix B to the Registrant's Form Def 14A filed on March
27, 2007 and is incorporated herein by reference. (*)
10.g
Employment Agreement between the Company and Anna G. Hollers dated August 17, 1998 was filed as
Exhibit 10(m) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, and is incorporated by reference (Commission File Number 000-15572). (*)
10.h
10.i
10.j
10.k
10.l
Employment Agreement between the Company and Teresa C. Nixon dated August 17, 1998 was filed as
Exhibit 10(n) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, and is incorporated by reference (Commission File Number 000-15572). (*)
Employment Agreement between the Company and Eric P. Credle dated August 17, 1998 was filed as
Exhibit 10(p) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and
is incorporated herein by reference (Commission File Number 333-71431).(*)
Employment Agreement between the Company and John F. Burns dated September 14, 2000 was filed
as Exhibit 10.w to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
2000 and is incorporated herein by reference. (*)
Employment Agreement between the Company and R. Walton Brown dated January 15, 2003 was filed
as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
and is incorporated herein by reference. (*)
Amendment to the employment agreement between the Company and R. Walton Brown dated March
8, 2005 was filed as Exhibit 10.n to the Company's Annual Report on Form 10-K for the year ended
December 31, 2004 and is incorporated herein by reference. (*)
10.m
Employment Agreement between the Company and Jerry L. Ocheltree was filed as Exhibit 10.1 to the
Form 8-K filed on January 25, 2006, and is incorporated herein by reference. (*)
10.n
First Bancorp Long Term Care Insurance Plan was filed as Exhibit 10(o) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004, and is incorporated by reference. (*)
10.o
Advances and Security Agreement with the Federal Home Loan Bank of Atlanta dated February 15, 2005
was attached as Exhibit 99(a) to the Form 8-K filed on February 22, 2005, and is incorporated herein by
reference.
10.p Form of Stock Option and Performance Unit Award Agreement was filed as Exhibit 10 to the Company’s
Form 8-K filed on June 23, 2008 and is incorporated herein by reference. (*)
10.q
Description of Director Compensation pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K .
10.r
Purchase and Assumption Agreement among Federal Deposit Insurance Corporation, Receiver of
Cooperative Bank, Federal Deposit Insurance Corporation and First Bank dated as of June 19, 2009 was
filed as Exhibit 10.1 to the Company’s Form 8-K filed on June 24, 2009, and is incorporated herein by
reference.
10.s
Form of Restricted Stock Award Agreement under the First Bancorp 2007 Equity Plan was filed as Exhibit
10.u to the Company's Annual Report on Form 10-K for the year ended December 31, 2009 and is
incorporated herein by reference. (*)
153
10.t
10.u
10.v
First Bancorp Employees’ Pension Plan, including amendments, was filed as Exhibit 10.v to the
Company's Annual Report on Form 10-K for the year ended December 31, 2009 and is incorporated
herein by reference. (*)
Purchase and Assumption Agreement among Federal Deposit Insurance Corporation, Receiver of The
Bank of Asheville, Federal Deposit Insurance Corporation and First Bank, dated as of January 21, 2011,
was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 26, 2011, and is
incorporated herein by reference.
Securities Purchase Agreement, dated September 1, 2011, between First Bancorp and the Secretary of
the Treasury, with respect to the issuance and sale of Series B Preferred Stock, was filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed on September 6, 2011, and is incorporated herein by
reference.
10.w Repurchase Letter Agreement, dated September 1, 2011, between First Bancorp and the United States
Department of the Treasury, with respect to the repurchase and redemption of the Series A Preferred
Stock, was filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 6, 2011
and is incorporated herein by reference.
10.x
12
21
Purchase and Assumption Agreement among Waccamaw Bank and Waccamaw Bankshares, Inc. and
First Bank, dated as of October 21, 2011, was filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on October 26, 2011, and is incorporated herein by reference.
Computation of Ratio of Earnings to Fixed Charges.
List of Subsidiaries of Registrant was filed as Exhibit 21 to the Company’s Annual Report on Form 10-K
for the year ended December 31, 2010 and is incorporated herein by reference. (*)
23
Consent of Independent Registered Public Accounting Firm, Elliott Davis, PLLC
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
101
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.
The following financial information from the Company’s Quarterly Report on Form 10-K for the year
ended December 31, 2011, 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)
______________
(b)
Exhibits - see (a)(3) above
(c)
No financial statement schedules are filed herewith.
154
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.
155
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, FIRST BANCORP has duly
caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Troy, and State of North Carolina, on the 15th day of March 2012.
SIGNATURES
First Bancorp
By: /s/ Jerry L. Ocheltree
Jerry L. Ocheltree
President, Chief Executive Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on behalf of the
Company by the following persons and in the capacities and on the dates indicated.
Executive Officers
/s/ Jerry L. Ocheltree
Jerry L. Ocheltree
President, Chief Executive Officer and Treasurer
/s/ Anna G. Hollers
Anna G. Hollers
Executive Vice President
Chief Operating Officer / Secretary
March 15, 2012
Board of Directors
/s/ Thomas F. Phillips
Thomas F. Phillips
Chairman of the Board
Director
March 15, 2012
/s/ Daniel T. Blue, Jr.
Daniel T. Blue, Jr.
Director
March 15, 2012
/s/ Jack D. Briggs
Jack D. Briggs
Director
March 15, 2012
/s/ R. Walton Brown
R. Walton Brown
Director
March 15, 2012
/s/ David L. Burns
David L. Burns
Director
March 15, 2012
156
/s/ Eric P. Credle
Eric P. Credle
Executive Vice President
Chief Financial Officer
(Principal Accounting Officer)
March 15, 2012
/s/ James G. Hudson, Jr.
James G. Hudson, Jr.
Director
March 15, 2012
/s/ Richard H. Moore
Richard H. Moore
Director
March 15, 2012
/s/ Jerry L. Ocheltree
Jerry L. Ocheltree
Director
March 15, 2012
/s/ George R. Perkins, Jr.
George R. Perkins, Jr.
Director
March 15, 2012
/s/ Frederick L. Taylor II
Frederick L. Taylor II
Director
March 15, 2012
/s/ John F. Burns
John F. Burns
Director
March 15, 2012
/s/ Mary Clara Capel
Mary Clara Capel
Director
March 15, 2012
/s/ James C. Crawford, III
James C. Crawford, III
Director
March 15, 2012
/s/ R. Winston Dozier, Jr.
R. Winston Dozier, Jr.
Director
March 15, 2012
/s/ Virginia C. Thomasson
Virginia C. Thomasson
Director
March 15, 2012
________________
Goldie H. Wallace
Director
March 15, 2012
/s/ Dennis A. Wicker
Dennis A. Wicker
Director
March 15, 2012
/s/ John C. Willis
John C. Willis
Director
March 15, 2012
157
AR_11_Covers_Layout 1 3/15/12 6:11 AM Page 2
( Shareholder Information )
Corporate Office
341 North Main Street
P.O. Box 508
Troy, NC 27371
910-576-6171
800-548-9377
Fax 910-576-0662
www.FirstBancorp.com
Independent Auditors
Elliott Davis, PLLC
Greenville, SC
Corporate Counsel
Robinson, Bradshaw & Hinson, PA
Charlotte, NC
Transfer Agent
Registrar & Transfer Co., Inc.
10 Commerce Drive
Cranford, NJ 07016-3572
800-368-5948
www.rtco.com
Shareholders’ Meeting
The Annual Meeting will be held on May 10, 2012
at 3:00 pm at the James H. Garner Conference
Center, 211 Burnette Street, Troy, North Carolina.
Common Stock Information
The Company’s common stock is traded on the
NASDAQ Global Select Market under the symbol
FBNC. There were 16,909,820 shares outstanding
as of December 31, 2011 with 2,574 shareholders
of record and approximately 3,500 additional
shareholders that held their shares in “street name.”
Direct Deposit
With Direct Deposit, shareholders may enjoy the
convenience of having dividends directly deposited
into their checking or savings account. There is no
cost for this service. Shareholders may obtain further
information about Direct Deposit by calling us toll-
free at 800-548-9377 and asking for Shareholder
Services.
Shareholder Services
First Bancorp now offers online access to your
First Bancorp Stock Account, including your
account balance, certificate history, dividend
reinvestment plan information and more. Choose
About Us at www.FirstBancorp.com and select
Shareholder Access.
First Bancorp now offers online access to all financial
publications, including annual reports and quarterly
reports filed with the Securities and Exchange
Commission, at www.FirstBancorp.com. Choose
About Us and select SEC Filings.
For more information or shareholder assistance,
call us toll-free at 800-548-9377 and ask for
Shareholder Services.
Copies of Form 10-K
Copies of the First Bancorp Annual Report on
Form 10-K filed with the Securities and Exchange
Commission may be obtained at no cost by
contacting:
Investor Relations
Anna Hollers
P.O. Box 508
Troy, NC 27371-0508
800-548-9377
or by visiting our corporate website at
www.FirstBancorp.com
Dividend Reinvestment
Registered holders of First Bancorp stock are
eligible to participate in the Company’s Dividend
Reinvestment Plan, a convenient and economical
way to purchase additional shares of First Bancorp
common stock without payment of brokerage
commissions. For an information folder and
authorization form, or to receive additional
information on this plan, contact:
Investor Relations
Anna Hollers
P.O. Box 508
Troy, NC 27371-0508
800-548-9377
or
Registrar & Transfer Co., Inc.
Dividend Reinvestment Section
10 Commerce Drive
Cranford, NJ 07016-3572
800-368-5948 or info@rtco.com
93314_BC-FC_Layout 1 3/19/12 12:04 PM Page 1
FIRST BANCORP
341 N. Main Street
P.O. Box 508
Troy, NC 27371- 0508
www.FirstBancorp.com