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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
_________________

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010
_________________

Commission File Number  0-15572

FIRST BANCORP
(Exact Name of Registrant as Specified in its Charter)

North Carolina
 
56-1421916
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification Number)
     
341 North Main Street, Troy, North Carolina
 
27371-0508
(Address of Principal Executive Offices)
 
(Zip Code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one)

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o YES    T NO

The number of shares of the registrant's Common Stock outstanding on July 31, 2010 was 16,780,703.
 


 
 

 

FIRST BANCORP AND SUBSIDIARIES


   
Page
     
Part I.
Financial Information
 
     
Item 1 -
Financial Statements
 
     
4
     
5
     
6
     
7
     
8
     
     
9
     
Item 2 –  
 
 
28
     
Item 3 –
47
     
Item 4 –
48
     
Part II.
Other Information
 
     
Item 2 –
49
     
Item 6 –
49
     
51

 
Page 2


FORWARD-LOOKING STATEMENTS

Part I of this report contains statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties.  Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact.  Such statements are often characterized by the use of qualifying words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning our opinions or judgment about future events.  Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of 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 that could affect the matters discussed in this paragraph, see the “Risk Factors” section of our 2009 Annual Report on Form 10-K.

 
Page 3


Part I.  Financial Information
Item 1 - Financial Statements

First Bancorp and Subsidiaries
Consolidated Balance Sheets

($ in thousands-unaudited)
 
June 30,
2010
   
December 31,
2009 (audited)
   
June 30,
2009
 
                   
ASSETS
                 
Cash and due from banks, noninterest-bearing
  $ 59,944       60,071       47,761  
Due from banks, interest-bearing
    148,539       283,175       151,520  
Federal funds sold
    5,091       7,626       25,710  
Total cash and cash equivalents
    213,574       350,872       224,991  
                         
Securities available for sale
    163,317       179,755       189,590  
                         
Securities held to maturity (fair values of $47,786, $34,947, and $24,374)
    47,312       34,413       24,408  
                         
Presold mortgages in process of settlement
    3,123       3,967       8,993  
                         
Loans – non-covered
    2,099,099       2,132,843       2,174,422  
Loans – covered by FDIC loss share agreement
    455,477       520,022       597,682  
Total loans
    2,554,576       2,652,865       2,772,104  
Less:  Allowance for loan losses
    (42,215 )     (37,343 )     (33,185 )
Net loans
    2,512,361       2,615,522       2,738,919  
                         
Premises and equipment
    54,026       54,159       52,362  
Accrued interest receivable
    12,975       14,783       15,154  
FDIC loss share receivable
    118,072       143,221       185,112  
Goodwill
    65,835       65,835       65,835  
Other intangible assets
    4,962       5,113       5,547  
Other
    122,785       77,716       20,864  
Total assets
  $ 3,318,342       3,545,356       3,531,775  
                         
LIABILITIES
                       
Deposits:   Demand - noninterest-bearing
  $ 293,555       272,422       271,669  
NOW accounts
    356,626       362,366       271,991  
Money market accounts
    494,979       496,940       449,007  
Savings accounts
    157,343       149,338       145,194  
Time deposits of $100,000 or more
    782,663       816,540       844,626  
Other time deposits
    709,722       835,502       892,679  
Total deposits
    2,794,888       2,933,108       2,875,166  
Securities sold under agreements to repurchase
    61,766       64,058       62,309  
Borrowings
    76,579       176,811       230,099  
Accrued interest payable
    2,665       3,054       4,001  
Other liabilities
    33,706       25,942       30,058  
Total liabilities
    2,969,604       3,202,973       3,201,633  
                         
Commitments and contingencies
 
   
   
 
                         
SHAREHOLDERS’ EQUITY
                       
Preferred stock, no par value per share.  Authorized: 5,000,000 shares
                       
Issued and outstanding:  65,000 shares
    65,000       65,000       65,000  
Discount on preferred stock
    (3,361 )     (3,789 )     (4,190 )
Common stock, no par value per share.  Authorized: 40,000,000 shares
                       
Issued and outstanding:  16,770,119, 16,722,423, and 16,655,577 shares
    98,973       98,099       97,409  
Common stock warrants
    4,592       4,592       4,592  
Retained earnings
    186,552       182,908       175,933  
Accumulated other comprehensive income (loss)
    (3,018 )     (4,427 )     (8,602 )
Total shareholders’ equity
    348,738       342,383       330,142  
Total liabilities and shareholders’ equity
  $ 3,318,342       3,545,356       3,531,775  

See notes to consolidated financial statements

 
Page 4


First Bancorp and Subsidiaries
Consolidated Statements of Income

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
($ in thousands, except share data-unaudited)
 
2010
   
2009
   
2010
   
2009
 
                         
INTEREST INCOME
                       
Interest and fees on loans
  $ 37,609       33,640       75,827       66,192  
Interest on investment securities:
                               
Taxable interest income
    1,579       1,682       3,109       3,462  
Tax-exempt interest income
    409       192       763       344  
Other, principally overnight investments
    121       66       328       105  
Total interest income
    39,718       35,580       80,027       70,103  
                                 
INTEREST EXPENSE
                               
Savings, NOW and money market
    1,664       1,986       3,528       4,121  
Time deposits of $100,000 or more
    3,182       4,769       6,654       9,565  
Other time deposits
    2,825       4,469       6,049       8,963  
Securities sold under agreements to repurchase
    70       205       184       401  
Borrowings
    441       708       899       1,500  
Total interest expense
    8,182       12,137       17,314       24,550  
                                 
Net interest income
    31,536       23,443       62,713       45,553  
Provision for loan losses
    8,003       3,926       15,626       8,411  
                                 
Net interest income after provision  for loan losses
    23,533       19,517       47,087       37,142  
                                 
NONINTEREST INCOME
                               
Service charges on deposit accounts
    3,593       3,250       7,058       6,224  
Other service charges, commissions and fees
    1,378       1,205       2,723       2,326  
Fees from presold mortgages
    440       293       812       452  
Commissions from sales of insurance and financial products
    340       337       762       831  
Data processing fees
          36       32       65  
Gain from acquisition
          67,894             67,894  
Securities gains (losses)
    15       (56 )     24       (119 )
Other gains (losses)
    (1,229 )     (183 )     (1,180 )     (151 )
Total noninterest income
    4,537       72,776       10,231       77,522  
                                 
NONINTEREST EXPENSES
                               
Salaries
    8,735       6,646       17,351       13,113  
Employee benefits
    2,589       2,906       5,073       5,265  
Total personnel expense
    11,324       9,552       22,424       18,378  
Net occupancy expense
    1,752       1,125       3,640       2,213  
Equipment related expenses
    1,063       985       2,202       1,966  
Intangibles amortization
    220       98       435       196  
Acquisition expenses
          792             792  
Other operating expenses
    7,598       6,651       15,536       11,595  
Total noninterest expenses
    21,957       19,203       44,237       35,140  
                                 
Income before income taxes
    6,113       73,090       13,081       79,524  
Income taxes
    2,172       28,562       4,702       30,915  
                                 
Net income
    3,941       44,528       8,379       48,609  
                                 
Preferred stock dividends and accretion
    1,026       1,022       2,053       1,963  
                                 
Net income available to common shareholders
  $ 2,915       43,506       6,326       46,646  
                                 
Earnings per common share:
                               
Basic
  $ 0.17       2.62       0.38       2.81  
Diluted
    0.17       2.61       0.38       2.80  
                                 
Dividends declared per common share
  $ 0.08       0.08       0.16       0.16  
                                 
Weighted average common shares outstanding:
                               
Basic
    16,751,962       16,636,769       16,742,240       16,622,697  
Diluted
    16,784,126       16,672,989       16,772,969       16,658,917  

See notes to consolidated financial statements.

 
Page 5


First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
($ in thousands-unaudited)
 
2010
   
2009
   
2010
   
2009
 
                         
Net income
  $ 3,941       44,528       8,379       48,609  
Other comprehensive income (loss):
                               
Unrealized gains (losses) on securities available for sale:
                               
Unrealized holding gains (losses) arising during the period, pretax
    1,190       2,335       2,085       (1,304 )
Tax benefit (expense)
    (464 )     (911 )     (813 )     509  
Reclassification to realized (gains) losses
    (15 )     56       (24 )     119  
Tax expense (benefit)
    5       (22 )     9       (46 )
Postretirement Plans:
                               
Amortization of unrecognized net actuarial loss
    117       205       234       410  
Tax expense
    (46 )     (65 )     (92 )     (145 )
Amortization of prior service cost and transition obligation
    9       9       18       18  
Tax expense
    (4 )     (3 )     (8 )     (7 )
Other comprehensive income (loss)
    792       1,604       1,409       (446 )
                                 
Comprehensive income
  $ 4,733       46,132       9,788       48,163  

See notes to consolidated financial statements.

 
Page 6


First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity

(In thousands, except per share –
unaudited)
 
Preferred
Stock
   
Preferred
Stock
Discount
   
Common Stock
   
Common
Stock
Warrants
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Share-
holders’
Equity
 
         
Shares
   
Amount
                 
                                                 
                                                 
Balances, January 1, 2009
  $             16,574     $ 96,072             131,952       (8,156 )     219,868  
                                                                 
Net income
                                            48,609               48,609  
Preferred stock issued
    65,000       (4,592 )                                             60,408  
Common stock warrants issued
                                    4,592                       4,592  
Common stock issued under
                                                               
stock option plans
                    33       303                               303  
Common stock issued into
                                                               
dividend reinvestment plan
                    49       650                               650  
Cash dividends declared ($0.16
                                                               
per common share)
                                            (2,665 )             (2,665 )
Preferred dividends accrued
                                            (1,561 )             (1,561 )
Accretion of preferred stock discount
            402                               (402 )              
Tax benefit realized from
                                                               
exercise of nonqualified stock
                                                               
options
                            73                               73  
Stock-based compensation
                            311                               311  
Other comprehensive income
                                                    (446 )     (446 )
                                                                 
Balances, June 30, 2009
  $ 65,000       (4,190 )     16,656     $ 97,409       4,592       175,933       (8,602 )     330,142  
                                                                 
                                                                 
Balances, January 1, 2010
  $ 65,000       (3,789 )     16,722     $ 98,099       4,592       182,908       (4,427 )     342,383  
                                                                 
Net income
                                            8,379               8,379  
Common stock issued under
                                                               
stock option plans
                    17       171                               171  
Common stock issued into
                                                               
dividend reinvestment plan
                    15       226                               226  
Cash dividends declared ($0.16
                                                               
per common share)
                                            (2,682 )             (2,682 )
Preferred dividends accrued
                                            (1,625 )             (1,625 )
Accretion of preferred stock discount
            428                               (428 )              
Tax benefit realized from
                                                               
exercise of nonqualified
                                                               
stock options
                            36                               36  
Stock-based compensation
                    16       441                               441  
Other comprehensive income
                                                    1,409       1,409  
                                                                 
Balances, June 30, 2010
  $ 65,000       (3,361 )     16,770     $ 98,973       4,592       186,552       (3,018 )     348,738  

See notes to consolidated financial statements.

 
Page 7


First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows

   
Six Months Ended
June 30,
 
($ in thousands-unaudited)
 
2010
   
2009
 
Cash Flows From Operating Activities
           
Net income
  $ 8,379       48,609  
Reconciliation of net income to net cash provided by operating activities:
               
Provision for loan losses
    15,626       8,411  
Net security premium amortization
    765       408  
Net purchase accounting adjustments
    (5,192 )     (334 )
Loss (gain) on securities
    (24 )     119  
Other gains (losses)
    1,180       (67,743 )
Increase in net deferred loan costs
    (317 )     (121 )
Depreciation of premises and equipment
    1,974       1,753  
Stock-based compensation expense
    441       311  
Amortization of intangible assets
    435       196  
Origination of presold mortgages in process of settlement
    (38,379 )     (36,040 )
Proceeds from sales of presold mortgages in process of settlement
    39,223       30,719  
Decrease in accrued interest receivable
    1,808       725  
Decrease (increase) in other assets
    (6,440 )     17,265  
Decrease in accrued interest payable
    (389 )     (2,759 )
Increase in other liabilities
    9,270       8,781  
Net cash provided by operating activities
    28,360       10,300  
                 
Cash Flows From Investing Activities
               
Purchases of securities available for sale
    (33,282 )     (63,514 )
Purchases of securities held to maturity
    (15,173 )     (9,720 )
Proceeds from maturities/issuer calls of securities available for sale
    51,079       83,471  
Proceeds from maturities/issuer calls of securities held to maturity
    2,235       1,270  
Net decrease in loans
    42,703       32,663  
Proceeds from FDIC loss share agreements
    21,192        
Proceeds from sales of foreclosed real estate
    10,030       1,992  
Purchases of premises and equipment
    (1,809 )     (1,631 )
Net cash paid for acquisition
    (170 )      
Net cash received in acquisition
          91,696  
Net cash provided by investing activities
    76,805       136,227  
                 
Cash Flows From Financing Activities
               
Net increase (decrease) in deposits and repurchase agreements
    (138,597 )     89,683  
Repayments of borrowings, net
    (100,000 )     (296,409 )
Cash dividends paid – common stock
    (2,674 )     (4,055 )
Cash dividends paid – preferred stock
    (1,625 )     (1,561 )
Proceeds from issuance of preferred stock and common stock warrants
          65,000  
Proceeds from issuance of common stock
    397       953  
Tax benefit from exercise of nonqualified stock options
    36       73  
Net cash used by financing activities
    (242,463 )     (146,316 )
                 
Increase (decrease) in cash and cash equivalents
    (137,298 )     211  
Cash and cash equivalents, beginning of period
    350,872       224,780  
                 
Cash and cash equivalents, end of period
  $ 213,574       224,991  
                 
Supplemental Disclosures of Cash Flow Information:
               
Cash paid during the period for:
               
Interest
  $ 17,703       27,309  
Income taxes
    7,569       6,136  
Non-cash transactions:
               
Unrealized gain (loss) on securities available for sale, net of taxes
    1,257       (723 )
Foreclosed loans transferred to other real estate
    52,151       3,193  

See notes to consolidated financial statements.

 
Page 8


First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements


(unaudited)
For the Periods Ended June 30, 2010 and 2009
 

Note 1 - Basis of Presentation

In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company as of June 30, 2010 and 2009 and the consolidated results of operations and consolidated cash flows for the periods ended June 30, 2010 and 2009.  All such adjustments were of a normal, recurring nature.  Reference is made to the 2009 Annual Report on Form 10-K filed with the SEC for a discussion of accounting policies and other relevant information with respect to the financial statements.  The results of operations for the periods ended June 30, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year.  The Company has evaluated all subsequent events through the date the financial statements were issued.

Note 2 – Accounting Policies

Note 1 to the 2009 Annual Report on Form 10-K filed with the SEC contains a description of the accounting policies followed by the Company and discussion of recent accounting pronouncements.  The following paragraphs update that information as necessary.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance that removed the concept of a special purpose entity (SPE) from previous accounting guidance.  The amended guidance limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement.  The guidance requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale.  The concept of a qualifying SPE is no longer applicable.  The guidance was effective for all interim and annual periods beginning after November 15, 2009.  The adoption of this guidance on January 1, 2010 did not have a material impact on the Company’s consolidated statements.

In January 2010, new guidance was issued by the FASB requiring improved disclosures about fair value measurements.  The guidance requires entities to disclose significant transfers in and out of fair value hierarchy levels, and the reasons for the transfers, and to present information about purchases, sales, issuances and settlements separately in the reconciliation of fair value measurements using significant unobservable inputs (Level 3).  Additionally, the guidance clarifies that a reporting entity should provide fair value measurements for each class of assets and liabilities and disclose the inputs and valuation techniques used for fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3).  The Company has applied the new disclosure requirements as of January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the Level 3 reconciliation, which will be effective for interim and annual periods beginning after December 15, 2010.  The adoption of this guidance has not had and is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued new guidance related to subsequent events.  The amendment removed the requirement to disclose the date through which subsequent events have been evaluated, and became effective immediately upon issuance and is to be applied prospectively.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2010, the FASB issued new guidance related to accounting for acquired troubled loans that are subsequently modified.  The guidance provides that if these loans meet the criteria to be accounted for within a

 
Page 9


pool, modifications to one or more of these loans does not result in the removal of the modified loan from the pool even if the modification would otherwise be considered a troubled debt restructuring. The pool of assets in which the loan is included will continue to be considered for impairment.  The amendments do not apply to loans not meeting the criteria to be accounted for within a pool. These amendments are effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. The Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued guidance that will require an entity to provide more information about the credit quality of its financing receivables, such as aging information and credit quality indicators, in the disclosures to its financial statements.  Both new and existing 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.  The required disclosures are effective for periods ending on or after December 15, 2010.  The Company will provide all required disclosures beginning with the Annual Report on Form 10-K for the year ended December 31, 2010.

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.

Note 3 – Reclassifications

Certain amounts reported in the period ended June 30, 2009 have been reclassified to conform to the presentation for June 30, 2010.  These reclassifications had no effect on net income or shareholders’ equity for the periods presented, nor did they materially impact trends in financial information.

Note 4 – Equity-Based Compensation Plans

At June 30, 2010, the Company had the following equity-based compensation plans:  the First Bancorp 2007 Equity Plan, the First Bancorp 2004 Stock Option Plan, the First Bancorp 1994 Stock Option Plan, and one plan that was assumed from an acquired entity.  The Company’s shareholders approved all equity-based compensation plans, except for those assumed from acquired companies.  The First Bancorp 2007 Equity Plan became effective upon the approval of shareholders on May 2, 2007.  As of June 30, 2010, the First Bancorp 2007 Equity Plan was the only plan that had shares available for future grants.

The First Bancorp 2007 Equity Plan and its predecessor plans, the First Bancorp 2004 Stock Option Plan and the First Bancorp 1994 Stock Option Plan (“Predecessor Plans”), are intended to serve as a means 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 Predecessor Plans only provided for the ability to grant stock options, whereas the First Bancorp 2007 Equity Plan, in addition to providing for grants of stock options, also allows for grants of other types of equity-based compensation, including stock appreciation rights, restricted stock, restricted performance stock, unrestricted stock, and performance units.  Since the First Bancorp 2007 Equity Plan became effective on May 2, 2007, the Company has granted the following stock-based compensation:  1) the grant of 2,250 stock options to each of the Company’s non-employee directors on June 1, 2007, 2008, and 2009, 2) the grant of 5,000 incentive stock options to an executive officer on April 1, 2008 in connection with a corporate acquisition, 3) the grant of 262,599 stock options and 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), 4) the grant of 29,267 long-term restricted shares of common stock to certain senior executive officers on December 11, 2009, and 5) the grant of 1,039 shares of common stock to each of the Company’s non-employee directors on June 1, 2010.

Prior to the June 17, 2008 grant, 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

 
Page 10


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 2010, the Company granted 1,039 common shares 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 (EPS) targets) and service conditions that must be met in order to vest.  The 262,599 stock options and 81,337 performance units represent the maximum number of options and performance units that could have vested if the Company were to achieve specified maximum goals for EPS during the three annual performance periods ending on December 31, 2008, 2009, and 2010.  Up to one-third of the total number of options and performance units granted are subject to vesting annually as of December 31 of each year beginning in 2010, if (1) the Company achieves specific EPS goals during the corresponding performance period and (2) the executive or key employee continues employment for a period of two years beyond the corresponding performance period.  Compensation expense for this grant is recorded over the various service periods based on the estimated number of options and performance units that are probable to vest.  If the awards do not vest, no compensation cost is recognized and any previously recognized compensation cost will be reversed.  The Company did not achieve the minimum EPS performance goal for 2008, and thus one-third of the above grant was permanently forfeited.  As a result of a significant acquisition gain realized in June 2009 related to a failed bank acquisition, the Company achieved the EPS goal for 2009 and recorded compensation expense of $300,000 in 2009 and $150,000 for the first six months of 2010.  Assuming no forfeitures, the Company will record compensation expense of aprproximately $150,000 in the second half of 2010 and approximately $300,000 in 2011 as a result of the vesting of the 2009 performance period awards.  The Company does not believe that the EPS goals for 2010 will be met, and thus no compensation expense has been recorded related to that performance period.

The December 11, 2009 grant of 29,267 long-term restricted shares of common stock to senior executives vests 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.  For each 25% of total financial assistance repaid, 25% of the total long-term restricted stock may become transferrable.  The total compensation expense associated with this grant was $398,000 and is being initially amortized over a four year period, with approximately $25,000 being expensed in each quarter of 2010-2013.  See Note 13 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 June 30, 2010, there were 728,645 options outstanding related to the three First Bancorp plans, with exercise prices ranging from $14.35 to $22.12.  At June 30, 2010, there were 849,356 shares remaining available for grant under the First Bancorp 2007 Equity Plan.  The Company also has a stock option plan as a result of a corporate acquisition.  At June 30, 2010, there were 5,788 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

 
Page 11


historical volatility is reasonably expected to differ from the past); and the weighted-average expected life is based on the historical behavior of employees related to exercises, forfeitures and cancellations.

The Company’s only equity grants for the six months ended June 30, 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 Company’s only equity grants for the six months ended June 30, 2009 were grants of 27,000 options to non-employee directors on June 1, 2009 (2,250 options per director).  The per share weighted-average fair value of these options was $6.06 on the date of the grant using the following assumptions:

   
Six months ended
June 30, 2009
Expected dividend yield
  2.23%
Risk-free interest rate
  3.28%
Expected life
 
7 years
Expected volatility
  46.32%

The Company recorded stock-based compensation expense of $342,000 and $311,000 for the three-month periods ended June 30, 2010 and June 30, 2009, respectively.  For the six-month periods ended June 30, 2010 and June 30, 2009, the Company recorded stock-based compensation expense of $441,000 and $311,000, respectively. Approximately $242,000 of the expense for the three and six months ended June 30, 2010 relates to the June 1, 2010 director grants and is classified as “other operating expenses.”  The remaining 2010 expense is classified as “personnel expense” on the Consolidated Statements of Income with approximately $149,000 ($74,500 each quarter) relating to the June 17, 2008 grants to 19 senior officers and $50,000 ($25,000 each quarter) relating to the vesting of the restricted stock awards granted in December 2009.  Of the $311,000 in expense that was recorded in the three and six month periods ended June 30, 2009, approximately $149,000 relates to the June 17, 2008 officer grants and is classified as “personnel expense” on the Consolidated Statements of Income, while $162,000 relates to the June 1, 2009 director grants and is classified as “other operating expenses.”  Stock-based compensation expense is reflected as an adjustment to cash flows from operating activities on the Company’s Consolidated Statement of Cash Flows.  The Company recognized $133,000 and $172,000 in income tax benefits in the income statement related to stock-based compensation for the three and six month periods ended June 30, 2010, respectively, and $121,000 in both of the comparable periods of 2009.

At June 30, 2010, the Company had $31,000 of unrecognized compensation costs related to unvested stock options that have vesting requirements based solely on service conditions.  The cost is expected to be amortized over a weighted-average life of 2.3 years, with $18,000 being expensed in 2010, $6,000 being expensed in each of 2011 and 2012, and $1,000 being expensed in 2013.  At June 30, 2010, the Company had $1.3 million in unrecognized compensation expense associated with the June 17, 2008 award grant that has both performance conditions and service conditions.  Based on the performance conditions, the Company believes that only the 2009 performance awards will ultimately vest, and therefore, the Company expects to record $75,000 in each quarter of 2010 and 2011.

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 or expirations, and therefore the Company assumes that all options granted without performance conditions will become vested.

 
Page 12


The following table presents information regarding the activity for the first six months of 2010 related to all of the Company’s stock options outstanding:

   
Options Outstanding
 
   
Number of
Shares
   
Weighted-
Average
Exercise
Price
   
Weighted-
Average
Contractual
Term (years)
   
Aggregate
Intrinsic
Value
 
                         
                         
Balance at December 31, 2009
    753,116     $ 17.73              
                             
Granted
                       
Exercised
    (18,667 )     10.46           $ 97,940  
Forfeited
                         
Expired
                         
                               
Outstanding at June 30, 2010
    734,449     $ 17.91       4.7     $ 22,550  
                                 
Exercisable at June 30, 2010
    572,467     $ 18.27       3.8     $ 22,550  

The Company received $171,000 and $303,000 as a result of stock option exercises during the six months ended June 30, 2010 and 2009, respectively.  The Company recorded $36,000 in associated tax benefits from the exercise of nonqualified stock options during the six months ended June 30, 2010 compared to $73,000 in the comparable period of 2009.

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 because the Company failed to meet the minimum performance goal required for vesting.  Also, as discussed above, the Company granted 29,267 long-term restricted shares of common stock to certain senior executives on December 11, 2009.

The following table presents information regarding the activity during 2010 related to the Company’s outstanding performance units and restricted stock:

   
Nonvested Performance Units
   
Long-Term Restricted Stock
 
                         
Six months ended June 30, 2010
 
Number of
Units
   
Weighted-
Average
Grant-Date
Fair Value
   
Number of
Units
   
Weighted-
Average
Grant-Date
Fair Value
 
Nonvested at the beginning of the period
    54,225     $ 16.53       29,267     $ 13.59  
Granted during the period
                       
Vested during the period
                       
Forfeited or expired during the period
                       
Nonvested at end of period
    54,225     $ 16.53       29,267     $ 13.59  

 
Page 13


Note 5 – Earnings Per Common Share

Basic earnings per common share were computed by dividing net income available to common shareholders by the weighted average common shares outstanding.  Diluted earnings per common share includes the potentially dilutive effects of the Company’s equity plan and the warrant issued to the U.S. Treasury in connection with the Company’s participation in the Treasury’s Capital Purchase Program – see Note 13 for additional information.  The following is a reconciliation of the numerators and denominators used in computing basic and diluted earnings per common share:

   
For the Three Months Ended June 30,
 
   
2010
   
2009
 
($ in thousands except per
share amounts)
 
Income
(Numer-
ator)
   
Shares
(Denom-
inator)
   
Per Share
Amount
   
Income
(Numer-
ator)
   
Shares
(Denom-
inator)
   
Per Share
Amount
 
                                     
Basic EPS
                                   
Net income available to common
                                   
shareholders
  $ 2,915       16,751,962     $ 0.17     $ 43,506       16,636,769     $ 2.62  
                                                 
Effect of Dilutive Securities
    -       32,164               -       36,220          
                                                 
Diluted EPS per common share
  $ 2,915       16,784,126     $ 0.17     $ 43,506       16,672,989     $ 2.61  


   
For the Six Months Ended June 30,
 
   
2010
   
2009
 
($ in thousands except per
share amounts)
 
Income
(Numer-
ator)
   
Shares
(Denom-
inator)
   
Per Share
Amount
   
Income
(Numer-
ator)
   
Shares
(Denom-
inator)
   
Per Share
Amount
 
                                     
Basic EPS
                                   
Net income available to common
                                   
shareholders
  $ 6,326       16,742,240     $ 0.38     $ 46,646       16,622,697     $ 2.81  
                                                 
Effect of Dilutive Securities
    -       30,729               -       36,220          
                                                 
Diluted EPS per common share
  $ 6,326       16,772,969     $ 0.38     $ 46,646       16,658,917     $ 2.80  

For the three and six months ended June 30, 2010, there were 464,848 and 609,252 options, respectively, that were antidilutive because the exercise price exceeded the average market price for the period.  For both the three and six month periods ended June 30, 2009, there were 731,018 options that were antidilutive because the exercise price exceeded the average market price for the period.  In addition, the warrant issued to the U.S. Treasury (see Note 13) was anti-dilutive for the three and six months ended June 30, 2010 and 2009.  Antidilutive options and warrants have been omitted from the calculation of diluted earnings per share for the respective period.

 
Page 14


Note 6 – Securities

The book values and approximate fair values of investment securities at June 30, 2010 and December 31, 2009 are summarized as follows:

   
June 30, 2010
   
December 31, 2009
 
   
Amortized
   
Fair
   
Unrealized
   
Amortized
   
Fair
   
Unrealized
 
($ in thousands)
 
Cost
   
Value
   
Gains
   
(Losses)
   
Cost
   
Value
   
Gains
   
(Losses)
 
                                                 
Securities available for sale:
                                               
Government-sponsored
                                               
enterprise securities
  $ 27,031       27,336       305             36,106       36,518       412    
 
Mortgage-backed securities
    100,010       103,972       3,962             109,430       111,797       2,423       (56 )
Corporate bonds
    15,763       15,099       80       (744 )     15,769       14,436    
      (1,333 )
Equity securities
    16,618       16,910       327       (35 )     16,618       17,004       417       (31 )
Total available for sale
  $ 159,422       163,317       4,674       (779 )     177,923       179,755       3,252       (1,420 )
                                                                 
Securities held to maturity: