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                                  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, 2005

                         Commission File Number 0-15572

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


                                                    
           North Carolina                                              56-1421916
----------------------------------------               -------------------------------------------
       (State of Incorporation)                        (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
                                                       -------------------------------------------


        Securities Registered Pursuant to Section 12(b) of the Act: None
           Securities Registered Pursuant to Section 12(g) of the Act:

                           COMMON STOCK, NO PAR VALUE
                              (Title of each class)

     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  twelve  months (or for such shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. [ X ] YES [ ] NO

     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. [ X ]

     Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated  filer. [ ] Large Accelerated Filer [
X ] Accelerated Filer [ ] Non-Accelerated Filer

     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,  2005 as  reported  on the NASDAQ  National  Market  System,  was
approximately $252,329,000.

     The  number of shares  of the  registrant's  Common  Stock  outstanding  on
February 27, 2006 was 14,255,043.

                       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.
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                                             CROSS REFERENCE INDEX

                                                                                                      Begins on
                                                                                                      Page (s)
                                                                                                      --------
                                                                                                    
PART I
     Item 1       Business                                                                                4
     Item 1A      Risk Factors                                                                           12
     Item 1B      Unresolved Staff Comments                                                              14
     Item 2       Properties                                                                             14
     Item 3       Legal Proceedings                                                                      14
     Item 4       Submission of Matters to a Vote of Shareholders                                        14

PART II
     Item 5       Market for the Registrant's Common Stock, Related Shareholder
                      Matters, and Issuer Purchases of Equity Securities                                 14
     Item 6       Selected Consolidated Financial Data                                                 15, 47
     Item 7       Management's Discussion and Analysis of Financial Condition
                      and Results of Operations                                                          16
                    Critical Accounting Policies                                                         16
                    Merger and Acquisition Activity                                                      18
                    Statistical Information
                        Net Interest Income                                                            22, 48
                        Provision for Loan Losses                                                      24, 54
                        Noninterest Income                                                             24, 49
                        Noninterest Expenses                                                           27, 49
                        Income Taxes                                                                   27, 50
                        Stock-Based Compensation                                                         28
                        Distribution of Assets and Liabilities                                         30, 50
                        Securities                                                                     31, 50
                        Loans                                                                          32, 52
                        Nonperforming Assets                                                           33, 53
                        Allowance for Loan Losses and Loan Loss Experience                             34, 53
                        Deposits and Securities Sold Under Agreements to Repurchase                    36, 55
                        Borrowings                                                                       37
                        Liquidity, Commitments, and Contingencies                                      38, 56
                        Off-Balance Sheet Arrangements and Derivative Financial Instruments              40
                        Interest Rate Risk (Including Quantitative
                                 and Qualitative Disclosures About Market Risk)                        40, 57
                        Return on Assets and Equity                                                    41, 57
                        Capital Resources and Shareholders' Equity                                     42, 58
                        Inflation                                                                        43
                        Current Accounting and Regulatory Matters                                        44
     Item 7A      Quantitative and Qualitative Disclosures About Market Risk                             46
     Forward-Looking Statements                                                                          46
     Item 8       Financial Statements and Supplementary Data:
                  Consolidated Balance Sheets as of December 31, 2005 and 2004                           60
                  Consolidated Statements of Income for each of the years in the
                      three-year period ended December 31, 2005                                          61
                  Consolidated Statements of Comprehensive Income for each of the
                      years in the three-year period ended December 31, 2005                             62


                                                       2




                                                                                                      Begins on
                                                                                                      Page (s)
                                                                                                      --------
                                                                                                   
                  Consolidated Statements of Shareholders' Equity for each of the years
                      in the three-year period ended December 31, 2005                                   63
                  Consolidated Statements of Cash Flows for each of the years
                      in the three-year period ended December 31, 2005                                   64
                  Notes to Consolidated Financial Statements                                             65
                  Report of Independent Registered Public Accounting Firm (Current Firm)                 98
                  Report of Independent Registered Public Accounting Firm (Predecessor Firm)             100
                  Selected Consolidated Financial Data                                                   47
                  Quarterly Financial Summary                                                            59

     Item 9       Changes in and Disagreements with Accountants on Accounting
                       and Financial Disclosures                                                         101
     Item 9A      Controls and Procedures                                                                101
     Item 9B      Other Information                                                                      102

PART III
     Item 10      Directors and Executive Officers of the Registrant                                     103*
     Item 11      Executive Compensation                                                                 103*
     Item 12      Security Ownership of Certain Beneficial Owners and Management
                     and Related Shareholder Matters                                                     103*
     Item 13      Certain Relationships and Related Transactions                                         104*
     Item 14      Principal Accountant Fees and Services                                                 104*

PART IV
     Item 15      Exhibits and Financial Statement Schedules                                             104

SIGNATURES                                                                                               107



*    Information  called for by Part III (Items 10 through  14) is  incorporated
     herein by reference to the Registrant's  definitive Proxy Statement for the
     2006 Annual  Meeting of  Shareholders  to be filed with the  Securities and
     Exchange Commission.

                                       3


PART I

Item 1.  Business

General Description

The Company

     First  Bancorp (the  "Company")  is a bank holding  company.  The principal
activity  of the  Company  is the  ownership  and  operation  of First Bank (the
"Bank"),  a state  chartered bank with its main office in Troy,  North Carolina.
The Company  also owns and operates two nonbank  subsidiaries:  Montgomery  Data
Services, Inc. ("Montgomery Data"), a data processing company, and First Bancorp
Financial Services,  Inc. ("First Bancorp  Financial"),  which owns and operates
various  real  estate.  Each of these  subsidiaries  is fully  consolidated  for
financial reporting purposes.  The Company is also the parent to three statutory
business  trusts  created  under the laws of the State of  Delaware,  which have
issued a total of  $41.2  million  in trust  preferred  debt  securities.  Under
current accounting  requirements,  these three statutory business trusts are not
consolidated  for  financial  reporting  purposes - see  discussion of FIN 46 in
"Current Accounting and Regulatory Matters" under Item 7 below.

     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  stock-for-stock  exchanges. On December 31, 1986, the
Company changed its name to First Bancorp to conform its name to the name of the
Bank, which had changed its name from Bank of Montgomery to First Bank in 1985.

     The Bank was organized in 1934 and began banking  operations in 1935 as the
Bank of  Montgomery,  named for the county in which it operated.  As of December
31,  2005,  the Bank  operated  in a  24-county  area  centered  in Troy,  North
Carolina. Troy, population 3,500, is located in the center of Montgomery County,
approximately 60 miles east of Charlotte,  50 miles south of Greensboro,  and 80
miles southwest of Raleigh.  The Bank conducts business from 61 branches located
within a 120-mile radius of Troy, covering  principally a geographical area from
Latta, South Carolina to the southeast,  to Wallace, North Carolina to the east,
to Radford, Virginia to the north, to Wytheville, Virginia to the northwest, and
to  Harmony,  North  Carolina to the west.  The Bank also has a loan  production
office in Wilmington, which is on the coast of North Carolina and represents the
Bank's  furthest  location  to the east of Troy.  Of the Bank's 61  full-service
branches,  55 are in North Carolina,  with three branches each in South Carolina
and Virginia  (where the Bank operates under the name "First Bank of Virginia").
Ranked by assets,  the Bank was the 7th  largest  bank in North  Carolina  as of
December 31, 2005.

     The Bank has two wholly owned subsidiaries,  First Bank Insurance Services,
Inc.  ("First  Bank  Insurance")  and  First   Montgomery   Financial   Services
Corporation ("First Montgomery"). 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
Montgomery,  a Virginia corporation incorporated on November 2, 2001, was formed
to acquire  real estate in Virginia  and lease the  property to the Bank.  First
Troy Realty Corporation ("First Troy") was incorporated on May 12, 1999 and is a
subsidiary  of First  Montgomery.  First  Troy was  formed  for the  purpose  of
allowing the Bank to centrally  manage a portion of its  residential,  mortgage,
and commercial  real estate loan portfolio.  The assets of First  Montgomery and
First Troy were liquidated during 2005, and these entities are no longer active.

     The  Company's  principal  executive  offices are located at 341 North Main
Street,  Troy,  North  Carolina  27371-0508,  and its telephone  number is (910)
576-6171. Unless the context requires otherwise,  references to the "Company" in
this annual  report on Form 10-K shall mean  collectively  First Bancorp and its
consolidated

                                       4


subsidiaries.

General Business

     The Bank  engages  in a full range of banking  activities,  providing  such
services as  checking,  savings,  NOW and money  market  accounts and other time
deposits  of  various  types  including   certificates  of  deposits  (CDs)  and
individual  retirement accounts (IRAs);  loans for business,  agriculture,  real
estate,  personal uses, home  improvement and automobiles;  credit cards;  debit
cards;  letters of credit;  safe deposit box  rentals;  bank money  orders;  and
electronic funds transfer services,  including wire transfers,  automated teller
machines, and bank-by-phone capabilities.  In December 2004, the Bank also began
offering its internet banking product, with on-line bill-pay and cash management
features. Because the majority of the Bank's customers are individuals and small
to medium-sized  businesses  located in the counties it serves,  management does
not believe that the loss of a single  customer or group of customers would have
a material  adverse impact on the Bank.  There are no seasonal factors that tend
to have any material effect on the Bank's  business,  and the Bank does not rely
on foreign  sources  of funds or income.  Because  the Bank  operates  primarily
within the central  Piedmont region of North Carolina,  the economic  conditions
within that area could have a material  impact on the  Company.  See  additional
discussion below in the section entitled "Territory Served and Competition."

     Beginning in 1999,  First Bank Insurance  began offering  non-FDIC  insured
investment and insurance products, including mutual funds, annuities,  long-term
care  insurance,  life  insurance,  and  company  retirement  plans,  as well as
financial  planning  services (the "investments  division").  In May 2001, First
Bank Insurance added to its product line when it acquired two insurance agencies
that specialized in the placement of property and casualty insurance. In October
2003, the "investment  division" of First Bank Insurance became a part the Bank.
The primary  activity of First Bank  Insurance is now the  placement of property
and casualty insurance products.

     Montgomery Data's primary business is to provide electronic data processing
services for the Bank.  Ownership and  operation of  Montgomery  Data allows the
Company to do all of its electronic data processing without paying fees for such
services to an independent provider.  Maintaining its own data processing system
also allows the Company to adapt the system to its  individual  needs and to the
services and products it offers.  Although not a  significant  source of income,
Montgomery Data has  historically  made its excess data processing  capabilities
available to area financial institutions for a fee. For the years ended December
31, 2005, 2004 and 2003, external customers provided gross revenues of $279,000,
$416,000 and $333,000,  respectively.  During 2005,  three of the five customers
terminated their services with Montgomery Data and switched to another provider,
which left Montgomery  Data with two outside  customers as of December 31, 2005.
Montgomery  Data intends to continue to market this  service to area banks,  but
does not currently have any near-term prospects for additional business.

     First Bancorp  Financial was organized  under the name of First Recovery in
September of 1988 for the purpose of providing a back-up  data  processing  site
for  Montgomery  Data and  other  financial  and  non-financial  clients.  First
Recovery's  back-up data  processing  operations  were  divested in 1994.  First
Bancorp  Financial now  periodically  purchases  parcels of real estate from the
Bank that were  acquired  through  foreclosure  or from branch  closings.  First
Bancorp Financial actively pursues the sale of these properties.

     First Bancorp Capital Trust I was organized in October 2002 for the purpose
of  issuing  $20.6  million  in debt  securities.  These  borrowings  are due on
November 7, 2032 and were  structured  as trust  preferred  capital  securities,
which qualify as capital for regulatory  capital  adequacy  requirements.  These
debt  securities  are callable by the Company at par on any  quarterly  interest
payment  date  beginning on November 7, 2007.  The  interest  rate on these debt
securities  adjusts on a  quarterly  basis at a rate of  three-month  LIBOR plus
3.45%. This rate may not exceed 12.50% through November 2007.

     First Bancorp  Capital  Trust II and First  Bancorp  Capital Trust III were
organized  in  December  2003 for

                                       5


the purpose of issuing  $20.6  million in debt  securities  ($10.3  million were
issued from each trust).  These borrowings are due on December 19, 2033 and were
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 Montgomery was incorporated on November 2, 2001. First Montgomery was
formed for the purpose of selecting and acquiring real estate in Virginia, which
would  then be  leased  to the Bank  for use as bank  branches.  First  Troy was
incorporated  on May 12, 1999 as a subsidiary of the Bank. Upon the formation of
First  Montgomery as a subsidiary of the Bank, the Bank contributed its interest
in First Troy to First Montgomery, resulting in First Troy becoming a subsidiary
of First Montgomery.  First Troy was formed for the purpose of allowing the Bank
to centrally manage a portion of its residential,  mortgage, and commercial real
estate loan  portfolio.  For tax years  through  December 31,  2004,  First Troy
elected to be treated as a real estate investment trust for tax purposes. During
2005, in response to evolving taxing authority  developments  (discussed in more
detail in "Liquidity,  Commitments,  and Contingencies" under Item 7 below), the
Company  liquidated  First  Montgomery and First Troy by transferring the assets
and  liabilities of each of these  subsidiaries to the Bank. It is the Company's
intent to dissolve First Montgomery and First Troy in 2006.

Territory Served and Competition

     The Company's  headquarters are located in Troy,  Montgomery County,  North
Carolina.  The Company  serves  primarily the south central area of the Piedmont
region of North Carolina.  The following  table presents,  for each county where
the Company operates, the number of bank branches operated by the Company within
the county, the approximate amount of deposits with the Company in the county as
of December 31, 2005, the Company's  approximate market share, and the number of
bank competitors located in the county.

                      No. of          Deposits          Market          Number
   County            Branches      (in millions)        Share        Competitors
----------------     --------      ------------       ----------     -----------
Anson, NC                1          $      11             4.9%            4
Cabarrus, NC             2                 28             1.3%            9
Chatham, NC              2                 52             9.6%            9
Davidson, NC             3                114             6.3%            9
Dillon, SC               3                 62            24.7%            2
Duplin, NC               3                 47            10.7%            7
Guilford, NC             1                 30             0.6%           24
Harnett, NC              3                 93            10.0%            7
Iredell, NC              1                 21             1.2%           15
Lee, NC                  4                136            19.2%            7
Montgomery, NC           5                 87            39.2%            4
Montgomery, VA           1                 11             0.1%            9
Moore, NC               10                337            25.0%           10
Randolph, NC             4                 53             3.7%           14
Richmond, NC             1                 30             6.1%            5
Robeson, NC              5                126            15.4%            9
Rockingham, NC           1                 14             1.2%            9
Rowan, NC                2                 42             3.5%           11
Scotland, NC             2                 46            14.7%            5
Stanly, NC               4                 82            10.1%            5
Wake, NC                 1                 15             0.1%           21
Washington, VA           1                 25             2.6%           12
Wythe, VA                1                 33             7.3%            9
                     ---------      ---------
    Total               61          $   1,495
                     =========      =========

================================================================================

     The Company's 61 branches and  facilities  are  primarily  located in small
communities  whose economies are based primarily on services,  manufacturing and
light industry. Although the Company's market is predominantly small communities
and rural areas, the area is not dependent on agriculture.  Textiles, furniture,
mobile homes,

                                       6


electronics,  plastic and metal fabrication,  forest products, food products and
cigarettes  are among the leading  manufacturing  industries  in the trade area.
Leading  producers  of  lumber,  socks,  hosiery  and area rugs are  located  in
Montgomery County. The Pinehurst area within Moore County is a widely known golf
resort  and  retirement  area.  The High  Point  area is  widely  known  for its
furniture market. Additionally, several of the communities served by the Company
are  "bedroom"  communities  serving  large cities like  Charlotte,  Raleigh and
Greensboro,  while several branches serve medium-sized cities such as Albemarle,
Asheboro,  High Point, Southern Pines and Sanford. The Company also has branches
in small communities such as Bennett, Polkton, Vass, and Harmony.

     Approximately  23% of the Company's  deposit base is in Moore County,  and,
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 the Company's deposit base.

     The Company  competes  in its various  market  areas  with,  among  others,
several large interstate bank holding  companies that are headquartered in North
Carolina.  These large competitors have substantially greater resources than the
Company,  including broader  geographic  markets,  higher lending limits and the
ability  to make  greater  use of  large-scale  advertising  and  promotions.  A
significant  number of interstate  banking  acquisitions have taken place in the
past decade, thus further increasing the size and financial resources of some of
the  Company's  competitors,  three of which are among the largest  bank holding
companies  in the nation.  In many of the  Company's  markets,  the Company also
competes against banks that have been organized within the past ten years. These
new  banks  often  focus on loan  and  deposit  balance  sheet  growth,  and not
necessarily on earnings profitability.  This strategy often allows them to offer
more  attractive  terms on loans and deposits  than the Company is able to offer
because the Company must achieve an  acceptable  level of  profitability.  Moore
County, which as noted above comprises a disproportionate share of the Company's
deposits,  is a  particularly  competitive  market,  with  at  least  ten  other
financial   institutions  having  a  physical  presence.  See  "Supervision  and
Regulation"  below for a further  discussion  of  regulations  in the  Company's
industry that affect competition.

     The Company  competes  not only  against  banking  organizations,  but also
against a wide range of financial  service  providers,  including  federally and
state chartered  savings and loan  institutions,  credit unions,  investment and
brokerage firms and small-loan or consumer finance companies.  Competition among
financial institutions of all types is virtually unlimited with respect to legal
ability and  authority  to provide  most  financial  services.  The Company also
experiences  competition  from internet banks,  particularly in the area of time
deposits.

     However,   the  Company  believes  it  has  certain   advantages  over  its
competition  in the areas it serves.  The  Company  seeks to maintain a distinct
local identity in each of the  communities  it serves and actively  sponsors and
participates  in local civic  affairs.  Most lending and other  customer-related
business  decisions  can be made  without  delays often  associated  with larger
systems.  Additionally,  employment  of local  managers and personnel in various
offices  and low  turnover of  personnel  enable the  Company to  establish  and
maintain long-term relationships with individual and corporate customers.

Lending Policy and Procedures

     Conservative  lending policies and procedures and appropriate  underwriting
standards are high  priorities of the Bank.  Loans are approved under the Bank's
written loan policy,  which provides that lending officers,  principally  branch
managers,  have  authority to approve  loans of various  amounts up to $100,000.
Each of the Bank's  regional  senior lending  officers has discretion to approve
secured loans in principal amounts up to $350,000 and together can approve loans
up to  $3,000,000.  Lending  limits may vary  depending upon whether the loan is
secured or unsecured.

     The Bank's  board of  directors  reviews  and  approves  loans that  exceed
management's  lending authority,  loans to executive  officers,  directors,  and
their  affiliates and, in certain  instances,  other types of loans.  New credit
extensions  are  reviewed  daily by the Bank's  senior  management  and at least
monthly by its board of directors.

                                       7


     The Bank  continually  monitors  its loan  portfolio  to identify  areas of
concern and to enable management to take corrective action. Lending officers and
the board of directors meet  periodically to review past due loans and portfolio
quality,  while assuring that the Bank is appropriately meeting the credit needs
of the communities it serves.  Individual  lending  officers are responsible for
pursuing  collection  of  past-due  amounts  and  monitoring  any changes in the
financial status of borrowers.

     The Bank also contracts with an independent  consulting  firm to review new
loan originations meeting certain criteria,  as well as to assign risk grades to
existing credits meeting certain thresholds. The consulting firm's observations,
comments, and risk grades,  including variances with the Bank's risk grades, are
shared with the audit  committee of the Company's  board of  directors,  and are
considered by management  in setting Bank policy,  as well as in evaluating  the
adequacy of the allowance  for loan losses.  The  consulting  firm also provides
on-going  training on a periodic  basis to the  Company's  loan officers to keep
them  updated  on  current  developments  in  the  marketplace.  For  additional
information, see "Allowance for Loan Losses and Loan Loss Experience" under Item
7 below.

Investment Policy and Procedures

     The Company  has  adopted an  investment  policy  designed to optimize  the
Company's  income  from  funds  not  needed  to meet  loan  demand  in a  manner
consistent  with  appropriate  liquidity and risk  objectives.  Pursuant to this
policy,  the  Company may invest in federal,  state and  municipal  obligations,
federal  agency   obligations,   public  housing  authority  bonds,   industrial
development revenue bonds, Fannie Mae, Government National Mortgage Association,
Freddie  Mac,  and Student  Loan  Marketing  Association  securities,  and, to a
limited  extent,  corporate  bonds.  Except for corporate  bonds,  the Company's
investments must be rated at least Baa by Moody's or BBB by Standard and Poor's.
Securities rated below A are  periodically  reviewed for  creditworthiness.  The
Company may  purchase  non-rated  municipal  bonds only if such bonds are in the
Company's  general  market area and  determined  by the Company to have a credit
risk  no  greater  than  the  minimum  ratings  referred  to  above.  Industrial
development authority bonds, which normally are not rated, are purchased only if
they are  judged  to  possess  a high  degree  of  credit  soundness  to  assure
reasonably  prompt sale at a fair value.  The Company is also  authorized by its
board of directors to invest a portion of its security portfolio in high quality
corporate  bonds,  with the  amount of bonds  related  to any one  issuer not to
exceed the Company's legal lending limit.  Prior to purchasing a corporate bond,
the Company's  management  performs due diligence on the issuer of the bond, and
the  purchase is not made unless the Company  believes  that the purchase of the
bond bears no more risk to the Company than would an unsecured  loan to the same
company.

     The Company's investment officer implements the investment policy, monitors
the investment  portfolio,  recommends  portfolio  strategies and reports to the
Company's investment committee.  Reports of all purchases,  sales, issuer calls,
net  profits or losses  and  market  appreciation  or  depreciation  of the bond
portfolio are reviewed by the Company's  board of directors  each month.  Once a
quarter,  the Company's interest rate risk exposure is evaluated by its board of
directors.  Once a year, the written  investment policy is reviewed by the board
of  directors,  and the Company's  portfolio is compared with the  portfolios of
other companies of comparable size.

Mergers and Acquisitions

     As part of its operations,  the Company has pursued an acquisition strategy
over the years to augment its internal growth.  The Company regularly  evaluates
the potential acquisition of or merger with various financial institutions.  The
Company's  acquisitions  to  date  have  generally  fallen  into  one  of  three
categories - 1) an  acquisition  of a financial  institution  or branch  thereof
within a market in which the Company operates,  2) an acquisition of a financial
institution  or branch  thereof in a market  contiguous to a market in which the
Company  operates,  or 3) an  acquisition  of a  company  that has  products  or
services that the Company does not currently offer.

     The Company  believes  that it can enhance its  earnings by pursuing  these
types  of  acquisition  opportunities

                                       8


through any combination or all of the following: 1) achieving cost efficiencies,
2) enhancing the  acquiree's  earnings or gaining new customers by introducing a
more successful  banking model with more products and services to the acquiree's
market base, 3)  increasing  customer  satisfaction  or gaining new customers by
providing more locations for the convenience of customers, and 4) leveraging the
Company's customer base by offering new products and services.

     In the last five  years,  the Company  has made  acquisitions  in all three
categories described above. In 2001, acquisitions resulted in the Company adding
$116.2  million in loans and $204.6  million in  deposits,  expanding  into four
contiguous markets (Lumberton, Pembroke, St. Pauls, and Thomasville),  providing
another branch for customers in one of the Company's newer markets  (Salisbury),
and giving the Company  the ability to offer  property  and  casualty  insurance
coverage.  In 2002, the Company completed the acquisition of a branch within its
market area (Broadway, located in Lee County) with approximately $8.4 million in
deposits and $3.1 million in loans. In 2003, the Company completed  acquisitions
that added  approximately  $72.5 million in loans and $160.8 million in deposits
that were in the nearby  markets of Dillon County SC, Duplin County NC,  Harmony
NC, and Fairmont NC. In 2003,  the Company also purchased  another  property and
casualty insurance agency that provided efficiencies of scale when combined with
the agency  purchased in 2001.  The Company did not  complete  any  acquisitions
during  2004 or 2005,  but in 2006 has  agreed to  purchase  a branch in Dublin,
Virginia (a contiguous market) with $20 million in deposits.

     The Company plans to continue to evaluate  acquisition  opportunities  that
could potentially benefit the Company and its shareholders.  These opportunities
may include  acquisitions that do not fit the categories  discussed above. For a
further discussion of recent acquisition  activity,  see "Merger and Acquisition
Activity" under Item 7 below.

Employees

     As of December 31,  2005,  the Company had 540  full-time  and 76 part-time
employees.  The Company is not a party to any collective  bargaining  agreements
and considers its employee relations to be good.

Supervision and Regulation

     As  a  bank  holding  company,  the  Company  is  subject  to  supervision,
examination  and  regulation  by the Board of Governors  of the Federal  Reserve
System  (the  "Federal  Reserve  Board")  and the North  Carolina  Office of the
Commissioner of Banks (the  "Commissioner").  The Bank is subject to supervision
and examination by the Federal Deposit  Insurance  Corporation  (the "FDIC") and
the  Commissioner.   For  additional  information,  see  also  Note  15  to  the
consolidated financial statements.

Supervision and Regulation of the Company

     The  Company  is a bank  holding  company  within  the  meaning of the Bank
Holding  Company Act of 1956,  as  amended,  and is required to register as such
with  the  Federal  Reserve  Board.   The  Company  is  also  regulated  by  the
Commissioner under the Bank Holding Company Act of 1984.

     A bank  holding  company is  required to file  quarterly  reports and other
information regarding its business operations and those of its subsidiaries with
the Federal  Reserve  Board.  It is also subject to  examination  by the Federal
Reserve Board and is required to obtain Federal  Reserve Board approval prior to
making certain  acquisitions  of other  institutions or voting  securities.  The
Commissioner  is empowered to regulate  certain  acquisitions  of North Carolina
banks and bank holding  companies,  issue cease and desist orders for violations
of North Carolina banking laws, and promulgate rules necessary to effectuate the
purposes of the Bank Holding Company Act of 1984.

     Regulatory  authorities  have cease and  desist  powers  over bank  holding
companies and their nonbank

                                       9


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.

     In 1999, the U.S. enacted  legislation that allowed bank holding  companies
to  engage  in a  wider  range  of  non-banking  activities,  including  greater
authority  to  engage  in  securities  and  insurance   activities.   Under  the
Gramm-Leach-Bliley Act (the "Act"), a bank holding company that elects to become
a financial  holding company may engage in any activity that the Federal Reserve
Board,  in  consultation  with the  Secretary  of the  Treasury,  determines  by
regulation  or order is (i)  financial in nature,  (ii)  incidental  to any such
financial  activity,  or (iii)  complementary to any such financial activity and
does not pose a  substantial  risk to the  safety  or  soundness  of  depository
institutions or the financial system generally. The Act made significant changes
in U.S. banking law, principally by repealing certain restrictive  provisions of
the 1933 Glass-Steagall Act. The Act lists certain activities that are deemed to
be financial in nature, including lending, exchanging,  transferring,  investing
for  others,  or  safeguarding  money or  securities;  underwriting  and selling
insurance;  providing  financial,  investment,  or economic  advisory  services;
underwriting,  dealing in or making a market in,  securities;  and any  activity
currently  permitted  for bank holding  companies by the Federal  Reserve  Board
under  Section  4(c)(8)  of the  Bank  Holding  Company  Act.  The Act  does not
authorize banks or their affiliates to engage in commercial  activities that are
not  financial in nature.  A bank  holding  company may elect to be treated as a
financial holding company only if all depository institution subsidiaries of the
holding  company  are  well-capitalized,   well-managed  and  have  at  least  a
satisfactory  rating under the Community  Reinvestment Act. At the present time,
the Company  does not  anticipate  applying  for status as a  financial  holding
company under the Act.

     National and state banks are also authorized by the Act to engage,  through
"financial  subsidiaries,"  in any activity that is permissible  for a financial
holding company (as described  above) and any activity that the Secretary of the
Treasury,  in  consultation  with  the  Federal  Reserve  Board,  determines  is
financial in nature or incidental  to any such  financial  activity,  except (i)
insurance  underwriting,  (ii) real estate development or real estate investment
activities  (unless  otherwise   permitted  by  law),  (iii)  insurance  company
portfolio  investments and (iv) merchant banking. The authority of a national or
state  bank to  invest  in a  financial  subsidiary  is  subject  to a number of
conditions,  including,  among  other  things,  requirements  that  the  bank be
well-managed  and  well-capitalized  (after  deducting  from the bank's  capital
outstanding investments in financial subsidiaries).

     The United States  Congress and the North  Carolina  General  Assembly have
periodically  considered and adopted legislation that has resulted in, and could
result in further,  deregulation of both banks and other financial institutions.
Such legislation could modify or eliminate geographic  restrictions on banks and
bank  holding  companies  and  current  restrictions  on the ability of banks to
engage in certain nonbanking activities. For example, the Riegle-Neal Interstate
Banking Act, which was enacted several years ago, allows expansion of interstate
acquisitions by bank holding companies and banks. This and other legislative and
regulatory  changes  have  increased  the ability of financial  institutions  to
expand the scope of their  operations,  both in terms of  services  offered  and
geographic  coverage.  Such legislative  changes have placed the Company in more
direct  competition with other financial  institutions,  including mutual funds,
securities brokerage firms,  insurance companies,  investment banking firms, and
internet  banks.  The Company  cannot  predict what other  legislation  might be
enacted or what other  regulations  might be adopted  or, if enacted or adopted,
the effect thereof on the Company's business.

     After the September 11, 2001 terrorist  attacks in New York and Washington,
D.C., the United States  government  acted in several ways to tighten control on
activities  perceived to be connected to money laundering and terrorist funding.
A  series  of  orders  were  issued  that  identify   terrorists  and  terrorist
organizations  and  require the  blocking of property  and assets of, as well as
prohibiting  all  transactions  or dealings  with,  such  terrorists,  terrorist
organizations  and those  that  assist or  sponsor  them.  The USA  Patriot  Act
substantially  broadened  existing  anti-money  laundering  legislation  and the
extraterritorial  jurisdiction of the United States,  imposed new compliance and
due  diligence  obligations,  created new crimes and  penalties,  compelled  the
production  of  documents  located  both inside and  outside the United  States,
including those of foreign  institutions that have a

                                       10


correspondent  relationship in the United States,  and clarified the safe harbor
from civil  liability to  customers.  In addition,  the United  States  Treasury
Department issued  regulations in cooperation with the federal banking agencies,
the Securities and Exchange Commission, the Commodity Futures Trading Commission
and  the  Department  of  Justice  to  require   customer   identification   and
verification,  expand  the  money-laundering  program  requirement  to the major
financial  services  sectors,  including  insurance and unregistered  investment
companies,  such as hedge  funds,  and  facilitate  and  permit  the  sharing of
information between law enforcement and financial institutions, as well as among
financial  institutions  themselves.  The United States Treasury Department also
has created the Treasury USA Patriot Act Task Force to work with other financial
regulators,   the  regulated   community,   law  enforcement  and  consumers  to
continually  improve the regulations.  The Company has established  policies and
procedures to ensure compliance with the USA Patriot Act.

     In 2002, the Sarbanes-Oxley Act was signed into law. The Sarbanes-Oxley Act
represents a  comprehensive  revision of laws  affecting  corporate  governance,
accounting  obligations  and  corporate  reporting.  The  Sarbanes-Oxley  Act is
applicable to all companies with equity or debt securities  registered under the
Securities Exchange Act of 1934, as amended.  In particular,  the Sarbanes-Oxley
Act  established:   (i)  new  requirements  for  audit   committees,   including
independence, expertise, and responsibilities;  (ii) additional responsibilities
regarding  financial  statements  for the  Chief  Executive  Officer  and  Chief
Financial Officer of the reporting company; (iii) new standards for auditors and
regulation of audits;  (iv) increased  disclosure and reporting  obligations for
the reporting  company and their directors and executive  officers;  and (v) new
and increased civil and criminal penalties for violation of the securities laws.
The most significant  expense associated with compliance with the Sarbanes-Oxley
Act has been the internal control documentation and attestation  requirements of
Section 404 of the Act. In 2004 and 2005,  the  Company's  incremental  external
costs  associated  with  complying  with Section 404 of the  Sarbanes-Oxley  Act
amounted to approximately $193,000 and $832,000,  respectively.  The incremental
costs relate to higher external audit fees and outside  consultant  fees.  These
amounts do not include the value of the significant  internal  resources devoted
to compliance.

Supervision and Regulation of the Bank

     Federal  banking  regulations   applicable  to  all  depository   financial
institutions,  among other things: (i) provide federal bank regulatory  agencies
with  powers to prevent  unsafe and unsound  banking  practices;  (ii)  restrict
preferential  loans by banks to "insiders" of banks; (iii) require banks to keep
information on loans to major shareholders and executive officers;  and (iv) bar
certain director and officer interlocks between financial institutions.

     As a state  chartered  bank,  the Bank is subject to the  provisions of the
North  Carolina  banking  statutes and to  regulation by the  Commissioner.  The
Commissioner  has a wide range of regulatory  authority  over the activities and
operations  of  the  Bank,  and  the  Commissioner's   staff  conducts  periodic
examinations  of the Bank and its  affiliates  to ensure  compliance  with state
banking regulations.  Among other things, the Commissioner  regulates the merger
and consolidation of state-chartered  banks, the payment of dividends,  loans to
officers  and  directors,   recordkeeping,   types  and  amounts  of  loans  and
investments,  and the establishment of branches. The Commissioner also has cease
and desist  powers over  state-chartered  banks for  violations of state banking
laws or  regulations  and for  unsafe  or  unsound  conduct  that is  likely  to
jeopardize the interest of depositors.

     The  dividends  that may be paid by the Bank to the  Company are subject to
legal limitations under North Carolina law. In addition,  regulatory authorities
may  restrict  dividends  that  may be paid by the Bank or the  Company's  other
subsidiaries. The ability of the Company to pay dividends to its shareholders is
largely dependent on the dividends paid to the Company by its subsidiaries.

     The Bank is a member of the FDIC,  which currently  insures the deposits of
member  banks.  For  this  protection,  each  bank  pays a  quarterly  statutory
assessment,  based on its level of  deposits,  and is  subject  to the rules and
regulations  of the FDIC.  The FDIC also is authorized  to approve  conversions,
mergers,  consolidations  and  assumptions  of  deposit  liability  transactions
between  insured  banks and  uninsured  banks or  institutions,  and

                                       11


to  prevent  capital  or  surplus  diminution  in such  transactions  where  the
resulting,  continuing,  or  assumed  bank  is an  insured  nonmember  bank.  In
addition, the FDIC monitors the Bank's compliance with several banking statutes,
such as the Depository  Institution  Management Interlocks Act and the Community
Reinvestment  Act of 1977. The FDIC also conducts  periodic  examinations of the
Bank to assess its compliance with banking laws and regulations,  and it has the
power to implement changes in or restrictions on a bank's operations if it finds
that a violation is occurring or is threatened.

     Neither the Company nor the Bank can predict what other  legislation  might
be enacted or what other regulations might be adopted, or if enacted or adopted,
the effect thereof on the Bank's operations.

     See "Capital  Resources and Shareholders'  Equity" under Item 7 below for a
discussion of regulatory capital requirements.

Available Information

     The Company  maintains a corporate  Internet site at  www.firstbancorp.com,
which  contains a link within the  "Investor  Relations"  section of the site to
each of its filings with the Securities and Exchange  Commission,  including its
annual  reports on Form 10-K,  its quarterly  reports on Form 10-Q,  its current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities  Exchange Act of 1934. These filings
are  available,  free of charge,  as soon as  reasonably  practicable  after the
Company  electronically  files  such  material  with,  or  furnishes  it to, the
Securities  and Exchange  Commission.  These filings can also be accessed at the
Securities and Exchange Commission's website located at www.sec.gov. Information
included on the Company's  Internet site is not  incorporated  by reference into
this annual report.

Item 1A.   Risk Factors

I.   The Company is subject to interest rate risk, which could negatively impact
     earnings.

     Net  interest  income  is  the  Company's  most  significant  component  of
earnings.  The Company's net interest income results from the difference between
the yields the Company earns on its interest-earning assets, primarily loans and
investments,  and the  rates  that  the  Company  pays  on its  interest-bearing
liabilities,  primarily deposits and borrowings. When interest rates change, the
yields  the  Company  earns on its  interest-earning  assets  and the  rates the
Company pays on its  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  the  control  of  the  Company,  including  inflation,  recession,
unemployment  trends,  the  Federal  Reserve's  monetary  policy,  domestic  and
international  disorder  and  instability  in  domestic  and  foreign  financial
markets.

     As of December  31,  2005,  interest  rates in general  have been  steadily
increasing  for  the  past  18  months.   During  that  period,   the  Company's
interest-earning asset yields have increased by approximately the same amount as
the Company's interest-bearing liability rates. However, our net interest income
has  benefited  from  the  fact  that  the  Company's  interest-earnings  assets
generally  reprice  sooner upon a change in interest rates than do the Company's
interest-bearing  liabilities.  Therefore,  if  interest  rates do not change in
2006,  the  Company  will  likely have more  interest-bearing  liabilities  than
interest-earning  assets  that will  reprice at higher  rates.  This will likely
negatively  impact the Company's net interest income.  If interest rates were to
decrease in 2006, the negative impact to the Company's net interest margin would
be exacerbated as a result of the Company's  interest-earning  assets  repricing
downwards  faster and by a greater  amount than the Company's  interest  bearing
liabilities.  Growth that the Company  expects to generate in loans and deposits
would be expected to increase  net  interest  income,  and thus would lessen the
negative  impact of compressing  spreads in a "no change" or declining  interest
rate environment.

                                       12


II.  The  Company  faces  strong  competition,  which  could hurt the  Company's
     business.

     The Company's business operations are centered primarily in North Carolina,
southwestern  Virginia and northeastern  South Carolina.  Increased  competition
within  this  region may  result in  reduced  loan  originations  and  deposits.
Ultimately,  the Company may not be able to compete successfully against current
and future  competitors.  Many competitors  offer the types of loans and banking
services  that  the  Company   offers.   These   competitors   include   savings
associations,  national  banks,  regional banks and other community  banks.  The
Company also faces competition from many other types of financial  institutions,
including  finance  companies,   internet  banks,   brokerage  firms,  insurance
companies, credit unions, mortgage banks and other financial intermediaries.

     The Company competes in its market areas with several large interstate bank
holding  companies,  including  three  of the  largest  in the  nation  that are
headquartered  in North Carolina.  These large  competitors  have  substantially
greater resources than the Company,  including broader geographic markets,  more
banking locations,  higher lending limits and the ability to make greater use of
large-scale advertising and promotions.  Also, these institutions,  particularly
to the extent they are more diversified  than the Company,  may be able to offer
the same products and services that the Company offers at more competitive rates
and prices.

     The Company also  competes in some of its market areas with many banks that
have been  organized  within the past ten years.  These new banks often focus on
loan  and  deposit  balance  sheet  growth,  and  not  necessarily  on  earnings
profitability. This strategy often allows them to offer more attractive terms on
loans and  deposits  than the Company is able to offer  because the Company must
achieve an acceptable level of profitability.

     Moore County,  which  comprises a  disproportionate  share of the Company's
deposits,  is a  particularly  competitive  market,  with  at  least  ten  other
financial  institutions  having a physical presence,  including large interstate
bank holding companies and recently organized banks.

III. The Company's allowance for loan losses may not be adequate to cover actual
     losses.

     Like all  financial  institutions,  the Company  maintains 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.

     The level of the  allowance for loan losses set by the Company is dependent
on the use of historical  loss rates,  as well as estimates and  assumptions  of
future events. Because of the extensive use of estimates and assumptions,  there
is the possibility  that they could be wrong and that the Company's  actual loan
losses could differ (and possibly  significantly)  from the Company's  estimate.
The Company  believes  that its 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 the
Company to increase this allowance. Either of these occurrences could materially
and adversely affect the Company's earnings and profitability.

IV.  The Company is  vulnerable  to the  economic  conditions  within the fairly
     small geographic region in which it operates.

     Like most businesses,  the Company's overall success is partially dependent
on the economic  conditions in the marketplace where it operates.  The Company's
marketplace is concentrated in the central Piedmont region of North Carolina and
is therefore not particularly  diversified.  An economic downturn in this fairly
small geographic region that negatively  impacted the Company's  customers would
likely also have an adverse  impact on the  Company.  For  example,  an economic
downturn  may result in higher loan  default  rates and reduce the value of real
estate  securing  those loans,  which would likely  increase the Company's  loan
losses.  At December 31, 2005,  approximately  86% of the  Company's  loans were
secured by real  estate  collateral,  and thus the

                                       13


Company could be adversely impacted if real estate values decreased.

V.   The Company is subject to extensive regulation, which could have an adverse
     effect.

     The Company is 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 the Company's  depositors  and  borrowers,  and not for
holders of the Company's  common stock.  Regulatory  authorities  have extensive
discretion  in their  supervisory  and  enforcement  activities,  including  the
imposition of restrictions on operations,  the  classification  of the Company's
assets and determination of the level of the allowance for loan losses.  Changes
in the  regulations  that apply to the  Company,  or  changes  in the  Company's
compliance with regulations, could have a material impact on our operations.

Item 1B.  Unresolved Staff Comments

     None

Item 2.   Properties

     The main offices of the Company,  the Bank and First Bancorp  Financial are
owned by the Bank and are  located  in a  three-story  building  in the  central
business  district of Troy, North Carolina.  The building houses  administrative
and bank teller facilities.  The Bank's Operations Division,  including customer
accounting functions, offices and operations of Montgomery Data, and offices for
loan operations, are housed in two one-story steel frame buildings approximately
one-half mile west of the main office.  Both of these buildings are owned by the
Bank.  The Company  operates  61 bank  branches.  The Company  owns all its bank
branch  premises except nine branch offices for which the land and buildings are
leased and four branch  offices for which the land is leased but the building is
owned. In addition,  the Company leases three loan production offices. There are
no other  options  to  purchase  or lease  additional  properties.  The  Company
considers its facilities  adequate to meet current needs and believes that lease
renewals or  replacement  properties can be acquired as necessary to meet future
needs.

Item 3.   Legal Proceedings

     Various legal  proceedings may arise in the ordinary course of business and
may be  pending or  threatened  against  the  Company  and/or its  subsidiaries.
However,  neither  the Company  nor any of its  subsidiaries  is involved in any
pending legal proceedings that management  believes could have a material effect
on the consolidated financial position of the Company.

     There  were no tax  shelter  penalties  assessed  by the  Internal  Revenue
Service against the Company during the year ended December 31, 2005.

Item 4.   Submission of Matters to a Vote of Shareholders

     No  matters  were  submitted  to a vote of  shareholders  during the fourth
quarter of 2005.

PART II

Item 5.   Market for the Registrant's Common Stock, Related Shareholder Matters,
and Issuer Purchases of Equity Securities

     The Company's  common stock trades on the NASDAQ  National Market System of
the  NASDAQ  Stock  Market  under  the  symbol  FBNC.   Table  22,  included  in
"Management's  Discussion and Analysis" below, set

                                       14


forth the high and low market prices of the Company's  common stock as traded by
the brokerage firms that maintain a market in the Company's common stock and the
dividends  declared for the periods  indicated.  See "Business - Supervision and
Regulation"  above and Note 15 to the  consolidated  financial  statements for a
discussion  of  regulatory  restrictions  on the  payment  of  dividends.  As of
December 31, 2005,  there were  approximately  2,700  shareholders of record and
another 3,250  shareholders  whose stock is held in "street name." There were no
sales of unregistered  securities during the year ended December 31, 2005. It is
the Company's  current intention to continue to pay cash dividends in the future
comparable to those in the recent past.

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 of director  authorization
was announced on July 30, 2004 and  authorized  the repurchase of 375,000 shares
of the Company's  stock.  During 2005, the Company did not repurchase any shares
of its own stock. The following table sets forth information about the Company's
stock repurchase plan for the three months ended December 31, 2005.



                                           Issuer Purchases of Equity Securities
-----------------------------------------------------------------------------------------------------------------------------
                                                                              Total Number of Shares      Maximum Number of
                                                                               Purchased as Part of     Shares that May Yet Be
                                 Total Number of     Average Price Paid per     Publicly Announced       Purchased Under the
           Period              Shares Purchased (2)           Share            Plans or Programs (1)    Plans or Programs (1)
----------------------------   --------------------  ----------------------   -----------------------   ---------------------
                                                                                             
Month #1 (October 1, 2005 to
    October 31, 2005)                 --                        --                      --                    315,015
Month #2 (November 1, 2005
    to November 30, 2005)             --                        --                      --                    315,015
Month #3 (December 1, 2005
    to December 31, 2005)             --                        --                      --                    315,015
                               --------------------  ----------------------   -----------------------   ---------------------

Total                                 --                        --                      --                    315,015
                               ====================  ======================   =======================   =====================


Footnotes to the Above Table

(1)  Any shares  repurchased  would be  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 issuer has determined
     to terminate prior to expiration, or under which the issuer does not intend
     to make further purchases.

(2)  The above  table  above does not  include  shares  that were used by option
     holders to satisfy the exercise  price of the Company's call options issued
     by the Company to its  employees  and  directors  pursuant to the Company's
     stock option plans.  In November 2005,  522 shares of the Company's  common
     stock  with a weighted  average  price of $22.00  were used to satisfy  the
     exercise price of employee option exercises. In December 2005, 1,383 shares
     of the Company's  common  stock,  with a weighted  average  market price of
     $22.07 were used to satisfy such exercises.

Item 6.    Selected Consolidated Financial Data

     Table 1 sets forth selected consolidated financial data for the Company.

                                       15


Item 7.   Management's  Discussion  and  Analysis  of  Financial  Condition  and
Results of Operations

     Management's  Discussion  and  Analysis is  intended  to assist  readers in
understanding  the  Company's  results of  operations  and changes in  financial
position for the past three  years.  This review  should be read in  conjunction
with the consolidated  financial  statements and accompanying notes beginning on
page 60 of this report and the supplemental financial data contained in Tables 1
through  22  included  with this  discussion  and  analysis.  All share data for
periods  prior  to  November  15,  2004 has been  adjusted  from its  originally
reported amounts to reflect the 3-for-2 stock split paid on November 15, 2004.

CRITICAL ACCOUNTING POLICIES

     The  accounting  principles  followed  by the  Company  and the  methods of
applying these principles conform with accounting  principles generally accepted
in the United  States of America  and with  general  practices  followed  by the
banking industry.  Certain of these principles  involve a significant  amount of
judgment and/or use of estimates based on the Company's best  assumptions at the
time of the estimation.  The Company has identified three policies as being more
sensitive in terms of judgments and estimates, taking into account their overall
potential  impact to the Company's  consolidated  financial  statements - 1) the
allowance for loan losses, 2) tax uncertainties, and 3) intangible assets.

Allowance for Loan Losses

     Due to the estimation process and the potential  materiality of the amounts
involved,  the Company has  identified the accounting for the allowance for loan
losses  and the  related  provision  for loan  losses  as an  accounting  policy
critical to the Company's consolidated  financial statements.  The provision for
loan losses charged to operations is an amount sufficient to bring the allowance
for loan losses to an estimated  balance  considered  adequate to absorb  losses
inherent in the portfolio.

     Management's  determination  of the  adequacy  of the  allowance  is  based
primarily on a mathematical  model that estimates the appropriate  allowance for
loan losses.  This model has two components.  The first  component  involves the
estimation of losses on loans defined as "impaired  loans." A loan is considered
to be impaired when, based on current information and events, it is probable the
Company will be unable to collect all amounts due  according to the  contractual
terms  of  the  loan  agreement.   The  estimated  valuation  allowance  is  the
difference,  if any,  between the loan balance  outstanding and the value of the
impaired  loan as determined by either 1) an estimate of the cash flows that the
Company expects to receive from the borrower  discounted at the loan's effective
rate, or 2) in the case of a  collateral-dependent  loan,  the fair value of the
collateral.

     The second  component of the allowance  model is to estimate losses for all
loans not  considered  to be impaired  loans.  First,  loans that have been risk
graded by the Company as having more than "standard" risk but are not considered
to be impaired are assigned estimated loss percentages generally accepted in the
banking  industry.  Loans that are  classified  by the Company as having  normal
credit risk are  segregated by loan type,  and estimated  loss  percentages  are
assigned to each loan type,  based on the historical  losses,  current  economic
conditions, and operational conditions specific to each loan type.

     The  reserve  estimated  for  impaired  loans is then added to the  reserve
estimated for all other loans. This becomes the Company's "allocated allowance."
In addition to the allocated  allowance derived from the model,  management also
evaluates other data such as the ratio of the allowance for loan losses to total
loans,  net loan growth  information,  nonperforming  asset levels and trends in
such data. Based on this additional analysis,  the Company may determine that an
additional  amount of  allowance  for loan  losses is  necessary  to reserve for
probable losses.  This additional amount, if any, is the Company's  "unallocated
allowance." The sum of the allocated allowance and the unallocated  allowance is
compared to the actual  allowance  for loan losses  recorded on the books of the
Company and any  adjustment  necessary  for the recorded  allowance to equal the
computed allowance is recorded as a provision for loan losses. The provision for
loan losses is a direct charge to earnings

                                       16


in the period recorded.

     Although   management   uses  the  best   information   available  to  make
evaluations,  future adjustments may be necessary if economic,  operational,  or
other  conditions  change.  In  addition,  various  regulatory  agencies,  as an
integral part of their examination  process,  periodically  review the Company's
allowance  for loan losses.  Such  agencies may require the Company to recognize
additions to the allowance  based on the examiners'  judgment about  information
available to them at the time of their examinations.

     For further  discussion  including a review of the range of provisions  for
loan  losses  and  its  impact  on  reported  results  in  recent  periods,  see
"Nonperforming  Assets" and "Allowance for Loan Losses and Loan Loss Experience"
under "Analysis of Financial Condition and Changes in Financial Condition."

Tax Uncertainties

     The Company reserves for tax uncertainties in instances when it has taken a
position  on a tax return  that may differ  from the  opinion of the  applicable
taxing authority. In accounting for tax contingencies,  the Company assesses the
relative  merits and risks of certain  tax  transactions,  taking  into  account
statutory,  judicial and regulatory guidance in the context of the Company's tax
position.  For those  matters where it is probable that the Company will have to
pay additional taxes, interest or penalties and a loss or range of losses can be
reasonably estimated, the Company records reserves in the consolidated financial
statements.  For those matters where it is reasonably  possible but not probable
that the Company will have to pay  additional  taxes,  interest or penalties and
the loss or range of losses can be reasonably estimated,  the Company only makes
disclosures  in the  notes  and does not  record  reserves  in the  consolidated
financial  statements.  The  process  of  concluding  that a loss is  reasonably
possible or probable  and  estimating  the amount of loss or range of losses and
related tax reserves is inherently subjective, and future changes to the reserve
may be necessary  based on changes in  management's  intent,  tax law or related
interpretations, or other functions.

     The sections below entitled "Income Taxes" and "Liquidity, Commitments, and
Contingencies"  and  Notes 12 and 18 to the  consolidated  financial  statements
include  information related to a tax loss contingency accrual that was recorded
in 2005.  For 2004, the Company had  determined  that this same tax  uncertainty
required disclosure, but not loss accrual.

Intangible Assets

     Due to the estimation process and the potential  materiality of the amounts
involved,  the Company has also identified the accounting for intangible  assets
as an  accounting  policy  critical  to  the  Company's  consolidated  financial
statements.

     When the Company  completes an acquisition  transaction,  the excess of the
purchase price over the amount by which the fair market value of assets acquired
exceeds the fair market value of  liabilities  assumed  represents an intangible
asset.  The  Company  must  then  determine  the  identifiable  portions  of the
intangible asset, with any remaining amount classified as goodwill. Identifiable
intangible  assets  associated with these  acquisitions are generally  amortized
over the  estimated  life of the  related  asset,  whereas  goodwill  is  tested
annually for impairment, but not systematically amortized.  Assuming no goodwill
impairment,  it is beneficial to the Company's  future  earnings to have a lower
amount  assigned  to  identifiable  intangible  assets  and a higher  amount  to
goodwill  as opposed to having a higher  amount  considered  to be  identifiable
intangible assets and a lower amount classified as goodwill.

     For the  Company,  the  primary  identifiable  intangible  asset  typically
recorded in connection with a whole bank or bank branch acquisition is the value
of the core deposit  intangible,  whereas when the Company acquires an insurance
agency, the primary  identifiable  intangible asset is the value of the acquired
customer list.  Determining  the amount of  identifiable  intangible  assets and
their average lives involves multiple assumptions

                                       17


and estimates and is typically  determined by performing a discounted  cash flow
analysis,  which  involves  a  combination  of  any  or  all  of  the  following
assumptions:  customer  attrition/runoff,  alternative  funding  costs,  deposit
servicing costs, and discount rates. The Company typically engages a third party
consultant  to  assist in each  analysis.  For the  whole  bank and bank  branch
transactions recorded to date, the core deposit intangible in each case has been
estimated to have a ten year life, with an accelerated rate of amortization. For
the 2003 insurance agency acquisition, the identifiable intangible asset related
to the customer list was determined to have a ten year life,  with  amortization
occurring on a straight-line basis.

     Subsequent to the initial  recording of the identifiable  intangible assets
and goodwill,  the Company  amortizes the  identifiable  intangible  assets over
their estimated  average lives, as discussed above. In addition,  on at least an
annual basis,  goodwill is evaluated for  impairment by comparing the fair value
of the Company's  reporting  units to their related  carrying  value,  including
goodwill  (the  Company's  community  banking  operation  is its  only  material
reporting  unit).  At its  last  evaluation,  the fair  value  of the  Company's
community banking operation exceeded its carrying value,  including goodwill. If
the carrying value of a reporting  unit were ever to exceed its fair value,  the
Company would determine whether the implied fair value of the goodwill,  using a
discounted cash flow analysis,  exceeded the carrying value of the goodwill.  If
the  carrying  value of the  goodwill  exceeded  the  implied  fair value of the
goodwill,  an  impairment  loss  would be  recorded  in an amount  equal to that
excess.  Performing  such a  discounted  cash flow  analysis  would  involve the
significant use of estimates and assumptions.

     The Company reviews identifiable  intangible assets for impairment whenever
events or changes in  circumstances  indicate that the carrying value may not be
recoverable.  The  Company's  policy is that an impairment  loss is  recognized,
equal to the difference  between the asset's carrying amount and its fair value,
if the sum of the  expected  undiscounted  future  cash  flows is less  than the
carrying amount of the asset.  Estimating  future cash flows involves the use of
multiple estimates and assumptions, such as those listed above.

     The  foregoing  accounting  policy was adopted by the Company  effective on
January  1, 2002 in  accordance  with  newly  issued  accounting  standards  for
goodwill  and other  intangible  assets.  For  acquisitions  occurring  prior to
January  1,  2002,  the  Company  generally  did  not  separately  identify  its
identifiable  intangible assets from its goodwill, as all intangible assets were
amortized under accounting standards then in effect. According to the transition
provisions of the  accounting  standards  that changed the Company's  accounting
policy to that described above,  the entire amount of those combined  intangible
assets was accounted for entirely as non-amortizable goodwill.

MERGER AND ACQUISITION ACTIVITY

     Over the past  three  fiscal  years,  the  Company  has  completed  several
acquisitions,  which have resulted in significant  amounts of intangible  assets
being recorded by the Company, as detailed below. As noted above, the accounting
for  intangible  assets  changed  significantly  in 2002 with the Company  being
required under new accounting  standards to cease the  amortization of goodwill.
See Note 2 and Note 6 to the  consolidated  financial  statements for additional
information regarding intangible assets.

     The Company did not announce or complete any  acquisitions in 2004 or 2005.
In January 2006, the Company announced an agreement to purchase a bank branch in
Dublin,  Virginia  with  approximately  $20  million in  deposits  from  another
financial  institution.  The Company completed the following acquisitions during
2003:

     (a) On January 2, 2003, the Company  completed the  acquisition of Uwharrie
Insurance  Group,  Inc.  ("Uwharrie"),  a Montgomery  County based  property and
casualty  insurance  agency.  Uwharrie was  subsequently  merged into First Bank
Insurance. With eight employees,  Uwharrie served approximately 5,000 customers,
primarily  from its  Troy-based  headquarters,  and had  annual  commissions  of
approximately  $500,000.  The  primary  reason for the  acquisition  was to gain
efficiencies  of  scale  with  the  Company's  existing  property  and  casualty
insurance  business.  The  acquisition  resulted  in the  Company  recording  an
intangible asset of approximately  $544,000.  Based on an independent appraisal,
$50,000 of the intangible  asset recorded was

                                       18


determined to be attributable to the value of the noncompete agreement signed as
part of the transaction and is being amortized over its two year life,  $151,000
was determined to be attributable to the value of the customer list and is being
amortized on a straight-line  basis over ten years,  and the remaining  $343,000
was  determined to be goodwill and thus is not being  systematically  amortized,
but rather is subject to an annual impairment test.

     (b) On January 15, 2003, the Company  completed the acquisition of Carolina
Community  Bancshares,  Inc. ("CCB"),  the parent company of Carolina  Community
Bank, a South  Carolina  community  bank with three  branches in Dillon  County,
South Carolina.  This represented the Company's first entry into South Carolina.
Dillon County, South Carolina is contiguous to Robeson County, North Carolina, a
county where the Company already operated four branches.  The Company's  primary
reason  for  the  acquisition  was to  expand  into  a  contiguous  market  with
facilities,  operations and experienced staff in place. In this transaction, the
shareholders  of CCB  received 1.2 shares of the  Company's  stock and $20.00 in
cash for each  share  of CCB  stock  they  owned  at the  time of  closing.  The
transaction  was completed on January 15, 2003,  with the Company paying cash of
$8.3  million,  issuing  499,332  shares of  common  stock  that were  valued at
approximately  $8.4  million,  and  assuming  employee  stock  options  with  an
intrinsic  value  of  approximately  $0.9  million.   As  of  the  date  of  the
acquisition, CCB had approximately $48 million in loans, $59 million in deposits
and $70 million in total assets.  In connection with the acquisition of CCB, the
Company recorded total intangible assets of $10.2 million, of which $771,000 was
determined to be the value of the core deposit base and is being amortized on an
accelerated basis over ten years, and $9.4 million was determined to be goodwill
and thus is not being  systematically  amortized,  but  rather is  subject to an
annual impairment test.

     (c) On October 24, 2003,  the Company  completed  the  acquisition  of four
branches of RBC Centura  Bank  located in Fairmont,  Harmony,  Kenansville,  and
Wallace, all in North Carolina. As of the date of the acquisition,  the branches
had a total of approximately  $102 million in deposits and $25 million in loans.
The  primary  reason for the  acquisition  was to expand  into new  markets  and
increase  the  Company's  customer  base.  Subject to certain  limitations,  the
Company paid a deposit premium of 14.1% for the branches,  which resulted in the
Company recording  intangible assets relating to this purchase of $14.2 million.
The  identifiable  intangible  asset  associated with the fair value of the core
deposit base, as determined by an  independent  consulting  firm,  was valued at
approximately  $1.3 million and is being  amortized as expense on an accelerated
basis over a ten year period.  The remaining  intangible  asset of $12.9 million
has been classified as goodwill, and thus is not being systematically amortized,
but rather is subject to an annual impairment test.

     The following  table contains a condensed  balance sheet that indicates the
amount  assigned  to  each  major  asset  and  liability  as of  the  respective
acquisition dates for the 2003 acquisitions described above.

                                 Uwharrie   Carolina        RBC
                                Insurance   Community     Centura
Assets acquired                   Group       Bank        Branches      Total
-----------------------------   ---------   ---------    ---------    ---------
                                                (in millions)
Cash                            $      --         7.0         62.4         69.4
Securities                             --        13.1           --         13.1
Loans, gross                           --        47.7         24.8         72.5
Allowance for loan losses              --        (0.8)        (0.3)        (1.1)
Premises and equipment                 --         0.8          1.0          1.8
Other                                  --         2.5          0.2          2.7
                                ---------   ---------    ---------    ---------
    Total assets acquired              --        70.3         88.1        158.4
                                ---------   ---------    ---------    ---------

Liabilities assumed
-----------------------------
Deposits                               --        58.9        102.0        160.9
Borrowings                             --         2.1           --          2.1
Other                                  --         0.6          0.3          0.9
                                ---------   ---------    ---------    ---------
   Total liabilities assumed           --        61.6        102.3        163.9
                                ---------   ---------    ---------    ---------
Value of cash paid and/or
    stock issued to
    stock-holders of acquiree         0.5        18.9          n/a         19.4
                                ---------   ---------    ---------    ---------
Intangible assets recorded      $     0.5        10.2         14.2         24.9
                                =========   =========    =========    =========

                                       19


     There are many factors that the Company  considers when evaluating how much
to offer for potential acquisition  candidates - in the form of a purchase price
comprised of cash and/or stock for a whole company purchase or a deposit premium
in a branch purchase.  Most significantly,  the Company compares expectations of
future earnings per share on a stand-alone  basis with projected future earnings
per  share  assuming   completion  of  the  acquisition  under  various  pricing
scenarios.  Significant  assumptions  that  affect  this  analysis  include  the
estimated  future earnings stream of the  acquisition  candidate,  the amount of
cost efficiencies that can be realized, and the interest rate earned/lost on the
cash  received/paid.  In  addition to the  earnings  per share  comparison,  the
Company also considers other factors including (but not limited to): marketplace
acquisition  statistics,  location of the candidate in relation to the Company's
expansion  strategy,  market  growth  potential,  management  of the  candidate,
potential integration issues (including corporate culture),  and the size of the
acquisition candidate.

ANALYSIS OF RESULTS OF OPERATIONS

     Net interest  income,  the "spread"  between  earnings on  interest-earning
assets and the interest paid on  interest-bearing  liabilities,  constitutes the
largest  source of the  Company's  earnings.  Other  factors that  significantly
affect operating results are the provision for loan losses,  noninterest  income
such as  service  fees and  noninterest  expenses  such as  salaries,  occupancy
expense,  equipment  expense and other overhead costs, as well as the effects of
income taxes.

Overview - 2005 Compared to 2004

     Net income for the year ended December 31, 2005 amounted to $16,090,000, or
$1.12 per diluted share, a 20.0% decrease from the net income of $20,114,000, or
$1.40 per diluted share,  reported for 2004.  The annual  earnings for 2005 were
significantly  impacted  by a  contingency  loss  accrual  related to income tax
exposure  amounting to $4,338,000  (after-tax),  or $0.30 per diluted share. The
Company originally accrued  $6,320,000,  or $0.44 per diluted share,  related to
this loss exposure in the third quarter of 2005. In March 2006,  prior to filing
its financial statements,  the Company reversed $1,982,000, or $0.14 per diluted
share, of this accrual, effective for the fourth quarter of 2005, as a result of
a change in the loss estimate. See additional discussion in the section entitled
"Income Taxes" below.

     Total assets at December 31, 2005  amounted to $1.80  billion,  9.9% higher
than a year earlier. Total loans at December 31, 2005 amounted to $1.48 billion,
an  increase of $116  million,  or 8.5%,  from a year  earlier.  Total  deposits
amounted to $1.49 billion at December 31, 2005, an increase of $106 million,  or
7.6%, from a year earlier. Deposit growth would have been higher had the Company
not paid off,  without  renewing,  $50  million in brokered  deposits  that were
outstanding  at December 31, 2004 and matured  during  2005.  The Company had no
brokered deposits outstanding at December 31, 2005.

     The growth in loans and deposits was the primary reason for the increase in
the  Company's net interest  income when  comparing  2004 to 2005.  Net interest
income for the year ended December 31, 2005 amounted to $68.6 million,  an 11.9%
increase  over the $61.3  million  recorded in 2004.  The Company's net interest
margin  (tax-equivalent  net interest  income divided by average earning assets)
realized for 2005 was 4.33% compared to 4.31% for 2004. The rising interest rate
environment had a positive effect on the Company's net interest margin,  but the
positive effects were largely offset by the mix of the Company's  deposit growth
being more  concentrated  in the  categories  of time deposits and time deposits
greater than $100,000. Time deposits are generally a high cost category of funds
for the Company.  However,  their increased usage has been necessary in order to
fund loan growth.

     The Company's  provision for loan losses did not vary significantly in 2005
compared to 2004,  amounting to  $3,040,000  in 2005  compared to  $2,905,000 in
2004. The ratio of net-charge offs to average loans for 2005 was 0.14%, which is
the same as it was for 2004. At December 31, 2005,  the Company's  nonperforming
assets to total assets ratio was 0.17%  compared to 0.32% at the prior year end,
and was the lowest it has been at any year

                                       20


end since the Company became publicly held in 1985.

     Noninterest  income for 2005 amounted to $15.0 million,  a decrease of 5.4%
from the $15.9 million recorded in 2004. The decrease in 2005 is partly a result
of lower  service  charges  on  deposit  accounts.  Service  charges  on deposit
accounts have decreased primarily as a result of the negative impact that higher
short term  interest  rates have on the service  charges that the Company  earns
from its commercial  depositors - in the Company's  commercial  account  service
charge  rate  structure,  commercial  depositors  are given  "earnings  credits"
(negatively  impacting  service  charges) on their average deposit balances that
are tied to short  term  interest  rates.  Also,  in 2005 the  Company  recorded
significantly  lower  "securities  gains" and "other gains" compared to 2004. In
2005,  the Company  recorded a combined  net loss of $258,000 for these two line
items compared to a net gain of $648,000 in 2004, a negative change of $906,000.

     Noninterest  expenses in 2005  amounted to $47.6  million,  a 9.0% increase
from the $43.7 million recorded in 2004. The increase in noninterest expenses is
primarily  attributable to costs associated with the Company's overall growth in
loans,  deposits  and  branch  network.   Also,  the  Company's   Sarbanes-Oxley
compliance costs amounted to $832,000 in 2005 compared to $193,000 in 2004.

     The  Company's  income  tax  expense for 2005 of $16.8 million includes the
previously  discussed  contingency  tax  loss  accrual  of  $4.3 million. During
periods  that  did not include this accrual, the Company's effective tax rate in
2005  was  approximately  38%-39% compared to approximately 34%-35% in 2004. The
higher  effective tax rate in 2005 compared to 2004 is the result of the Company
discontinuing,  effective  January  1, 2005, the operating structure involving a
real  estate  investment trust (REIT) that gave rise to the 2005 contingency tax
loss  accrual.  The  Company expects its effective tax rate to continue to be in
the  38%-39%  range for the foreseeable future. See additional discussion in the
section entitled "Income Taxes" below.

Overview - 2004 Compared to 2003

     Net income for the year ended December 31, 2004 amounted to $20,114,000, or
$1.40 per diluted  share,  a 3.6%  increase in net income and a 3.7% increase in
diluted  earnings  per share  over the net income of  $19,417,000,  or $1.35 per
diluted share,  reported for 2003. All per share amounts originally reported for
periods  prior to November  15,  2004 have been  adjusted to reflect the 3-for-2
stock split paid on November 15, 2004.

     Total assets at December 31, 2004 amounted to $1.64  billion,  11.1% higher
than a year earlier. Total loans at December 31, 2004 amounted to $1.37 billion,
a 12.2%  increase  from a year  earlier,  and total  deposits  amounted to $1.39
billion  at  December  31,  2004,  an  11.2%   increase  from  a  year  earlier.
Approximately  $50 million of the total 2004  deposit  increase of $139  million
related to wholesale  brokered  deposits  that the Company  gathered in order to
help fund the high loan growth experienced during 2004.

     The increase in loans and deposits  during 2004  resulted in an increase in
the Company's net interest income from 2003 to 2004. Net interest income for the
year ended December 31, 2004 amounted to $61.3 million, a 9.9% increase over the
$55.8 million  recorded in 2003. The positive impact on net interest income from
the increases in loans and deposits more than offset a lower net interest margin
realized  in  2004  compared  to  2003.   The  Company's  net  interest   margin
(tax-equivalent  net interest income divided by average earning assets) for 2004
was 4.31% compared to the 4.52% in 2003.  The Company's net interest  margin was
negatively  impacted by the thirteen interest rate cuts initiated by the Federal
Reserve  from  2001 to 2003 and the  Company's  shift  toward  originating  more
adjustable  rate loans  compared to fixed rate loans to protect the Company from
anticipated  increases in interest rates. The Federal Reserve increased interest
rates by 125 basis points in the second half of 2004 which was  responsible  for
the  Company's  net  interest  margin  increasing  during  the third and  fourth
quarters of 2004 after  having  decreased  for the  immediately  preceding  five
consecutive quarters.

     The Company's  provision for loan losses did not vary significantly in 2004
compared to 2003,  amounting to  $2,905,000  in 2004  compared to  $2,680,000 in
2003.  The  Company's  asset  quality  ratios  remained  sound in

                                       21


2004, with a net-charge off ratio (net charge-offs  divided by average loans) of
0.14% in 2004 compared to 0.10% in 2003,  and a December 31, 2004  nonperforming
asset to total asset ratio of 0.32%, compared to 0.39% at the prior year end.

     For the year ended 2004,  noninterest  income amounted to $15.9 million,  a
6.3%  increase  from  $14.9  million  in  2003.  Except  for fees  from  presold
mortgages,  most components of noninterest  income  increased for the year ended
2004 compared to 2003 as a result of the Company's overall growth,  particularly
the Company's  October 2003  acquisition of four bank branches with $102 million
in deposits,  which  impacted the  Company's  noninterest  income for all twelve
months  of 2004  compared  to only  three  months  in 2003.  Fees  from  presold
mortgages  decreased  significantly in 2004 as a result of a decline in mortgage
refinancing activity caused by higher mortgage interest rates. Fees from presold
mortgages  decreased  from $2.3  million in 2003 to $1.0  million  in 2004.  The
Company  realized  securities gains and other gains of $648,000 in 2004 compared
to $306,000 in 2003.

     Noninterest  expenses for 2004 amounted to $43.7 million,  a 15.2% increase
from the $38.0 million  recorded in 2003. The increase in  noninterest  expenses
was primarily  attributable  to growth in the Company's  branch  network,  which
increased by eight branches from October 2003 through the end of 2004.

     The Company's  effective tax rates were slightly lower for 2004 compared to
2003, amounting to 34.1% in 2004 compared to 35.3% for 2003. The lower effective
tax rate in 2004 was caused by several factors including higher amounts of state
tax exempt income,  higher amounts of low income housing investment tax credits,
and the reversal of an $89,000 tax  liability  that was  recorded in  connection
with a previous corporate acquisition.

Net Interest Income

     Net interest  income on a reported  basis  amounted to $68,591,000 in 2005,
$61,290,000 in 2004, and  $55,760,000 in 2003. For internal  purposes and in the
discussion  that follows,  the Company  evaluates  its net interest  income on a
tax-equivalent  basis  by  adding  the  tax  benefit  realized  from  tax-exempt
securities to reported interest income.  Net interest income on a tax-equivalent
basis amounted to $69,039,000 in 2005,  $61,765,000 in 2004, and  $56,278,000 in
2003.   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.

     Table 2  analyzes  net  interest  income  on a  tax-equivalent  basis.  The
Company's net interest income on a  taxable-equivalent  basis increased by 11.8%
in 2005 and 9.7% in 2004.  There are two primary  factors that cause  changes in
the amount of net interest  income  recorded by the Company - 1) growth in loans
and  deposits,  and 2) the  Company's net interest  margin  (tax-equivalent  net
interest income divided by average interest-earning assets).

     As illustrated  in Table 3, in both 2005 and 2004, net interest  income was
positively  impacted  by both  higher  amounts  of  average  loans and  deposits
outstanding.  In 2005, the average amount of loans  outstanding  increased 9.8%,
and the average amount of deposits  outstanding  increased  11.8%.  In 2004, the
average amount of loans  outstanding  increased 16.4%, and the average amount of
deposits  outstanding  increased  13.3%.  The  growth in the volume of loans and
deposits  increased net interest income by $5.8 million in 2005 and $7.8 million
in 2004.  The higher  amounts of average loans and deposits  outstanding in 2005
were entirely a result of internal  growth,  as the Company did not complete any
acquisitions  in 2004 or 2005.  The higher amounts of average loans and deposits
outstanding  in 2004 were a result of both  internal  growth,  as well as growth
achieved in  corporate  acquisitions.  Although the Company did not complete any
acquisitions  in 2004,  the increases in the Company's  average loan and deposit
amounts in 2004  compared to 2003 were  impacted by  acquisitions  completed  in
2003,  as  the  loans  and  deposits  assumed  in  the  2003  acquisitions  were
outstanding  for the full year in 2004  compared to only a partial  year in 2003
(from the date of the  respective  acquisitions).  For  analysis  regarding  the
nature of the  Company's  loan and deposit  growth,  see  "Analysis of Financial
Condition and Changes in Financial Condition" below.

                                       22


     Table 3 also  illustrates  the  impact  that  changes in the rates that the
Company  earned/paid  had on the Company's net interest income in 2004 and 2005.
In 2005, the Federal Reserve  increased  interest rates eight times totaling 200
basis points,  which followed five rate increases totaling 125 basis points that
occurred  in the second  half of 2004.  This rising  interest  rate  environment
resulted in higher amounts of interest  income earned and interest  expense paid
in 2005,  with the net effect  being a $1.5  million  increase  in net  interest
income.  In 2004,  although the average  prime rate was slightly  higher than in
2003, the average  yields  realized on earning assets and the average rates paid
on  interest-bearing  liabilities for the year were both lower than in 2003. The
average yield on earning  assets was lower in 2004 than in 2003 due to a growing
percentage of adjustable rate loans,  which carry lower initial rates than fixed
rate loans (see below for additional discussion), and lower renewal/reinvestment
rates earned on fixed rate earning assets that matured during 2004 that had been
originated  during periods of higher  interest  rates.  The average rate paid on
interest-bearing  liabilities was lower in 2004 than in 2003 due to the interest
rates on deposits  that are set by  management  not being  increased at the same
time,  or by the full amount,  as  increases in the prime rate of interest  that
occurred in 2004. Also, interest expense on time deposits was otherwise lower as
a result  of time  deposits  that  were  originated  prior to the  increases  in
interest rates, with maturities subsequent to the dates of the rate changes. The
reduction in interest  income for 2004 was $2.4 million more than the  reduction
in interest expense,  and thus changes in interest rates negatively impacted the
Company's net interest income for 2004.

     The Company measures the spread between the yield on its earning assets and
the cost of its funding  primarily in terms of the ratio  entitled "net interest
margin"  which is defined  as  tax-equivalent  net  interest  income  divided by
average earning assets.  The Company's net interest margin increased slightly in
2005 after  decreasing in 2004,  amounting to 4.33% in 2005,  4.31% in 2004, and
4.52% in 2003.

     In 2005, the Company's net interest  margin was positively  impacted by the
rising interest rate  environment,  but the positive effects were largely offset
by the mix of the  Company's  deposit  growth  being  more  concentrated  in the
categories of time deposits and time deposits greater than $100,000.  As derived
from Table 2, in 2005, the yield earned on loans, the Company's  primary earning
asset, increased by 75 basis points, from 5.87% to 6.62%, while the average rate
paid on savings,  NOW and money market accounts,  the Company's  largest deposit
category,  increased  by only  32  basis  points  (from  0.54%  to  0.86%).  The
difference  in these  increases  positively  impacted the Company's net interest
margin.  However,  82% of the  Company's  average  deposit  growth  in 2005  was
comprised  of time  deposits,  which are a high cost  category  of funds for the
Company and incrementally  result in lower net interest margins for the Company.
In  addition  to being a high cost of funds for the  Company,  this  category of
deposits is typically  more  price-sensitive  than the  Company's  other deposit
categories,  repricing  upward by a greater amount in a rising rate  environment
than the  Company's  other  deposits.  In 2005,  the  average  rate paid on time
deposits greater than $100,000  increased by 92 basis points in 2005, from 2.34%
to 3.26%,  while the average rate paid for all other time deposits  increased by
82 basis  points,  from 2.04% to 2.86%.  The higher  growth in time deposits was
necessary in order to fund the Company's loan growth.  The positive and negative
factors discussed above mostly offset each other, resulting in a two basis point
increase in net interest margin for 2005 - from 4.31% in 2004 to 4.33% in 2005.

     In 2004, the Company's net interest  margin was negatively  impacted by the
interest rate  environment and a shift towards  originating more adjustable rate
loans  compared to fixed rate loans to protect the Company from an expected rise
in interest rates. The mostly declining interest rate environment in effect from
2001  until  June 30,  2004,  and the  level to which  interest  rates  dropped,
resulted in the Company  being unable to reset  deposit  rates by an amount that
would offset the negative  impact of the lower  yields  earned on the  Company's
interest  earning  assets.  In the  declining  rate  environment,  the Company's
interest-sensitive  assets  repriced  sooner  (most  on the  day  following  the
interest rate cut) and by a larger  percentage  (generally by the same number of
basis points that the Federal Reserve  discount rate was decreased) than did the
Company's  interest-sensitive   liabilities  that  were  subject  to  repricing.
Additionally,  as fixed rate earning assets  originated during periods of higher
interest rates matured, they were generally replaced with lower yielding earning
assets.  The Company was unable to reset deposit rates by the full amount of the
interest  rate cuts  because of their  already  near-zero  rates and  because of

                                       23


competitive  pricing pressures.  Also,  interest rates paid on time deposits are
generally fixed and are not subject to automatic adjustment.  When time deposits
mature, the Company has the opportunity,  at the customers' discretion, to renew
the time deposit at a rate set by the Company.  Because time  deposits  that are
interest-sensitive  in a twelve month horizon mature throughout the twelve month
period,  any change in the renewal rate will affect only a portion of the twelve
month period.  In addition,  although changes in interest rates on renewing time
deposits  generally  track rate changes in the interest  rate  environment,  the
Company  found it  especially  difficult  to  decrease  rates on  renewing  time
deposits by the  corresponding  decreases in the Federal  Reserve  discount rate
because of competitive pressures in the Company's market areas. Finally, in 2004
the Company  increased its reliance on time  deposits  greater than $100,000 and
borrowings in order to fund high loan growth that  exceeded core retail  deposit
growth.  The ratio of the average amount of time deposits  greater than $100,000
and borrowings to total funding (total deposits plus borrowings)  increased from
22.7% in 2003 to 25.6%  in  2004.  The  impact  of the  factors  just  discussed
resulted in a 21 basis point  decrease  in net  interest  margin for 2004 - from
4.52% in 2003 to 4.31% in 2004.

     As discussed  above,  from 2002 to 2004, the Company  gradually  positioned
itself to be protected in a rising interest rate environment by originating more
variable rate loans than fixed rate loans - a rising  interest rate  environment
was  forecasted by most  economists  after the steeply  declining  interest rate
environment  that began in 2001 and concluded with interest rates being at their
lowest levels in 40 years during 2004. This initiative resulted in the Company's
loan mix changing from 57% fixed rate and 43% variable rate at December 31, 2001
to 60%  variable  rate and 40% fixed rate at December 31,  2004.  In 2005,  most
economists  began  to  forecast  that  the  steadily  increasing  interest  rate
environment in effect since mid-2004 would end in 2006. As a result, in 2005 the
Company began  originating a more even mix of fixed rate loans and variable rate
loans,  which resulted in the Company's  fixed/variable mix shifting slightly to
58% variable rate and 42% fixed rate at December 31, 2005.

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

Provision for Loan Losses

     The provision for loan losses charged to operations is an amount sufficient
to bring the  allowance  for loan  losses  to an  estimated  balance  considered
appropriate to absorb probable  losses  inherent in the portfolio.  Management's
determination  of the  adequacy of the  allowance  is based on the level of loan
growth, an evaluation of the portfolio, current economic conditions,  historical
loan loss experience and other risk factors.

     The  provision  for  loan  losses  recorded  by the  Company  did not  vary
significantly  over the past  three  years,  amounting  to  $3,040,000  in 2005,
compared to $2,905,000 in 2004 and  $2,680,000 in 2003. Net internal loan growth
was strong for each of those  years,  amounting to $116 million in 2005 and $148
million in both 2004 and 2003.  There was no  external/acquired  loan  growth in
2004 or 2005. In 2003,  there was acquired growth of $72.5 million,  for which a
preexisting  allocation  for loan  losses was  already in place.  Asset  quality
ratios were stable  during each of the three years in the period ended  December
31, 2005.

     See  the  section  entitled  "Allowance  for  Loan  Losses  and  Loan  Loss
Experience"  below for a more  detailed  discussion  of the  allowance  for loan
losses.  The allowance is monitored and analyzed  regularly in conjunction  with
the Company's loan analysis and grading  program,  and  adjustments  are made to
maintain an adequate allowance for loan losses.

Noninterest Income

     Noninterest income recorded by the Company amounted to $15,004,000 in 2005,
$15,864,000 in 2004, and $14,918,000 in 2003.

     As shown in Table 4, core  noninterest  income,  which  excludes  gains and
losses  from  sales  of  securities,   loans,  and  other  assets,  amounted  to
$15,262,000  in 2005, a 0.3% increase from  $15,216,000  in 2004.  The 2004

                                       24


core  noninterest  income of  $15,216,000  was 4.1% higher than the  $14,612,000
recorded in 2003.

     See  Table 4 and  the  following  discussion  for an  understanding  of the
components of noninterest income.

     Service charges on deposit accounts in 2005 amounted to $8,537,000,  a 5.8%
decrease  compared to $9,064,000  recorded in 2004.  Service  charges on deposit
accounts have decreased primarily as a result of the negative impact that higher
short term  interest  rates have on the service  charges that the Company  earns
from its commercial  depositors - in the Company's  commercial  account  service
charge  rate  structure,  commercial  depositors  are given  "earnings  credits"
(negatively  impacting  service  charges) on their average deposit balances that
are tied to short term interest  rates.  Beginning in February 2006, the Company
changed the index that the earnings  "credit  rate" is tied to. The new index is
based on a money market rate that is currently  lower than the previous rate and
is less susceptible to volatile  changes,  while still being  competitive in the
marketplace.  The  Company  expects  the new index to result in an  increase  in
income  earned from service  charges on deposit  accounts in 2006 as compared to
the service charge income that would have been received using the old index. The
2004  amount of  $9,064,000  in service  charges on deposit  accounts  was 14.2%
higher than the 2003 amount of  $7,938,000.  This  increase can be attributed to
the following  primary factors:  1) periodic rate increases,  2) service charges
earned from internally  generated deposit growth,  and 3) service charges earned
from acquired  deposits.  Deposit  service charge rates are generally  increased
2%-4% per year,  while internal  growth among deposit  transaction  accounts was
4%-5% in both 2004 and 2003. The deposits assumed in the acquisition of four RBC
Centura branches on October 24, 2003 generated approximately $720,000 in service
charges  for the full year of 2004  compared  to  $125,000  realized  during the
partial period in 2003 subsequent to the acquisition. This incremental income of
$595,000  accounted  for  approximately  half of the 14.2%  increase  in service
charges on deposit  accounts.  The  Company's  income  from  service  charges on
deposit  accounts  in the  fourth  quarter  of 2004 was  essentially  flat  when
compared to the fourth quarter of 2003,  which was a result of a higher customer
deposit base, the positive  effects of which were offset by the negative  impact
that higher short term interest  rates in the second half of 2004 had on service
charges from commercial depositors - see discussion above.

     Other service charges, commissions and fees amounted to $3,963,000 in 2005,
a 17.9%  increase  from the  $3,361,000  earned  in 2004.  The  2004  amount  of
$3,361,000 was 24.0% higher than the $2,710,000  recorded in 2003. This category
of  noninterest  income  includes items such as credit card  interchange  income
related to merchants and customers,  debit card interchange income, ATM charges,
safety deposit box rentals,  fees from sales of personalized  checks,  and check
cashing  fees.  This category of income grew  primarily  because of increases in
these  activity-related fee services as a result of the increased acceptance and
popularity  of debit  cards,  special  credit  and debit  card  promotions  that
increased  their use, and the overall  growth in the  Company's  total  customer
base, including growth achieved from corporate acquisitions.

     Fees  from  presold  mortgages  amounted  to  $1,176,000  in 2005,  a 21.4%
increase from the 2004 amount of $969,000.  The 2004 amount was a 58.4% decrease
from the $2,327,000 recorded in 2003. Fees from presold mortgages peaked in 2003
as a result of a high  level of  mortgage  loan  refinancings  brought on by low
mortgage  interest  rates.  Since that time,  the absence of the initial wave of
refinancing  activity and higher adjustable rate mortgage rates have resulted in
the Company's  fees from presold  mortgages  decreasing  from the 2003 level and
averaging approximately $200,000-$300,000 per quarter.

     Commissions  from sales of insurance  and  financial  products  amounted to
$1,307,000 in 2005,  $1,406,000 in 2004, and $1,304,000 in 2003.  This line item
includes  commissions  the  Company  receives  from three  sources - 1) sales of
credit  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:

                                       25


                 ($ in thousands)             2005     2004     2003
                                             ------   ------   ------
          Commissions earned from:
          ------------------------
          Sales of credit insurance          $  308      291      300
          Sales of investments, annuities,
              and long term care insurance      193      291      299
          Sales of property and casualty
              insurance                         806      824      705
                                             ------   ------   ------

                    Total                    $1,307    1,406    1,304
                                             ======   ======   ======

     As shown in the table above,  lower "sales of investments,  annuities,  and
long-term  care  insurance"  is the primary  cause for the  decrease in recorded
insurance and financial  product  commissions from 2004 to 2005. The decrease in
this component is primarily due to two employees in this area being  transferred
to another division of the Company and not yet being replaced.

     Data  processing  fees amounted to $279,000 in 2005,  $416,000 in 2004, and
$333,000  in 2003.  As noted  earlier,  Montgomery  Data makes its  excess  data
processing  capabilities available to area financial institutions for a fee. The
decrease  in data  processing  fees in 2005 is a  result  of  three  of the five
customers of Montgomery Data terminating  their service and switching to another
provider.  Montgomery  Data  intends to continue to market this  service to area
banks,  but does not  currently  have any  near-term  prospects  for  additional
business.

     Noninterest  income not  considered to be "core"  amounted to a net loss of
$258,000 in 2005, a net gain of $648,000 in 2004,  and a net gain of $306,000 in
2003.  The 2005 net loss of $258,000  included  $189,000 in losses due to normal
write-downs of tax credit investments, and $83,000 in losses related to a change
in the Company's  methodology for reserving for overdrafts and overdraft  loans.
The 2004 net gain of $648,000 included securities gains of $299,000,  which were
effected primarily in order to realize current income. Also in 2004, the Company
sold a former  bank branch  building  that  resulted in a gain of  approximately
$350,000. The 2003 net gain of $306,000 primarily related to securities gains of
$218,000 effected primarily to realize current income and an $82,000 gain from a
sale of vacant land located beside one of the Company's existing  branches.  The
Company  projects  $196,000 of tax credit  investment  write-downs  in 2006. Tax
credit  write-downs  experienced  in 2005 and projected for 2006 have  increased
from the $70,000  amounts  recorded  in 2004 and 2003 as a result of  additional
investments made in tax credit partnerships during 2005. To date, all tax credit
write-downs have been exceeded, and are projected to continue to be exceeded, by
the amount of tax credits  realized  and  recorded as a reduction  of income tax
expense.

                                       26


Noninterest Expenses

     Noninterest expenses for 2005 were $47,636,000,  compared to $43,717,000 in
2004 and  $37,964,000 in 2003.  Table 5 presents the components of the Company's
noninterest expense during the past three years.

     Based on the recorded amounts noted above,  noninterest  expenses increased
9.0% in 2005 and 15.2% in 2004. The increases in  noninterest  expenses over the
past three  years have  occurred  in nearly  every line item of expense and have
been primarily as a result of the significant growth experienced by the Company,
both internally and by acquisition. Over the past three years, the number of the
Company's  branches  has  increased  from 48 to 61,  and the number of full time
equivalent  employees  has  increased  from 447 at  December  31, 2002 to 578 at
December 31, 2005.  Additionally,  from  December 31, 2002 to December 31, 2005,
the amount of loans  outstanding  increased 48.5% and deposits  increased 41.5%.
The incremental  expense associated with the acquisition of the four RBC Centura
branches in October 2003 was approximately $380,000 in 2003 and $1,900,000 on an
annual basis thereafter.  The Company's  noninterest expenses were also impacted
by external costs  associated with complying  Section 404 of the  Sarbanes-Oxley
Act. These expenses amounted to approximately  $193,000 in 2004 and increased to
$832,000 in 2005.  These  amounts do not  include  the value of the  significant
internal resources devoted to compliance. The Company expects its Sarbanes-Oxley
compliance costs to decline modestly in 2006 from the expense recorded in 2005.

Income Taxes

     The  provision for income taxes was  $16,829,000  in 2005,  $10,418,000  in
2004, and $10,617,000 in 2003.

     The  Company's  income tax  expense  for 2005 of $16.8  million  includes a
contingency accrual of $4.3 million. In 1999, in consultation with the Company's
tax advisors,  the Company  established an operating  structure involving a real
estate  investment  trust ("REIT") that resulted in a reduction in the Company's
state tax  liability  to the state of North  Carolina.  In late 2004,  the North
Carolina  Department  of Revenue  indicated  that it would  challenge  taxpayers
engaged in activities  deemed to be  "income-shifting,"  and they indicated that
they   believed   certain   REIT   operating   structures   were   a   type   of
"income-shifting."  During 2005, the North Carolina  Department of Revenue began
an audit of the Company's tax returns for 2001-2004, which represented all years
eligible for audit. In the third quarter of 2005,  based on  consultations  with
the Company's external auditor and legal counsel, the Company determined that it
should record a $6.3 million loss accrual to reserve for this issue. In February
2006,  the  North  Carolina   Department  of  Revenue  announced  a  "Settlement
Initiative" that offered  companies with certain  transactions,  including those
with a REIT operating  structure,  the  opportunity to resolve such matters with
reduced penalties by agreeing to participate in the initiative by June 15, 2006.
Although the Company continues to believe that its tax returns complied with the
relevant statutes, the board of directors of the Company has tentatively decided
that it is in the best  interests  of the  Company  to  settle  this  matter  by
participating  in the  initiative.  Based on the  terms of the  initiative,  the
Company  estimates  that its  total  liability  to  settle  the  matter  will be
approximately $4.3 million, net of the federal tax benefit, or $2.0 million less
than the amount that was originally accrued.  Accordingly,  in March 2006, prior
to the filing of its financial statements, the Company retroactively recorded an
adjustment to its fourth quarter of 2005 earnings to reverse $2.0 million of tax
expense, as required by relevant accounting  standards.  The aspects of the REIT
structure that gave rise to this issue were  discontinued  effective  January 1,
2005,  and thus the  Company  does not  believe it has any  additional  exposure
related  to this item  beyond  the  amount of the  accrual  other  than  ongoing
interest on the unpaid taxes amounting to $65,000 per quarter (after-tax).

     Table 6 presents the  components  of tax expense and the related  effective
tax rates. The high effective tax rate of 55.1% in 2005 is primarily a result of
the contingency loss accrual  discussed  above.  During periods in 2005 that did
not include  contingency loss accrual matters,  the Company's effective tax rate
was  approximately  38%-39% compared to approximately  34%-35% in 2004 and 2003.
The  higher  effective  tax rate in 2005  compared  to 2004 is the result of the
Company  discontinuing,  effective  January 1,  2005,  the  operating  structure
involving  a  real  estate  investment  trust  (REIT)  that  gave  rise  to  the
contingency tax accrual.  The Company

                                       27


expects its  effective  tax rate to continue to be in the 38%-39%  range for the
foreseeable  future.  In 2004,  the  Company's  effective  tax rate of 34.1% was
slightly  lower than the 2003 effective tax rate of 35.3%.  The lower  effective
tax rate in 2004 was caused by several factors including higher amounts of state
tax exempt income,  higher amounts of low income housing investment tax credits,
and the reversal of an $89,000 tax  liability  that was  recorded in  connection
with a previous corporate acquisition.

Stock-Based Compensation

     For the three years ended  December 31, 2005,  the Company was not required
to record any expense for the value of stock options  granted to  employees.  As
discussed  in more  detail  below in the next to last  paragraph  of the section
entitled "Current Accounting and Regulatory  Matters," a new accounting standard
("Statement  123(R)",  as defined  below) will require the Company to record the
value of stock options as an expense in the income statement  beginning  January
1, 2006. Note 1(k) to the consolidated  financial  statements contains pro forma
net income and earnings per share information as if the Company applied the fair
value recognition  provisions required by the new standard.  Note 1(k) indicates
that the Company's  stock-based  employee  compensation  expense would have been
$335,000,  $1,291,000 and $319,000, for the three years ended December 31, 2005,
2004,  and 2003,  respectively.  The  significant  increase  in  expense in 2004
compared  to 2003 and 2005 is  primarily  due to the  Company  granting  128,000
employee  options in April 2004 with immediate  vesting (under the new standard,
expense  related to the fair  market  value of options  is  recognized  when the
options vest). Prior to that grant, all previous employee option grants had five
year vesting  periods  (20%  vesting each year),  and thus the amount of expense
related to options was generally  spread over the five year vesting period.  The
Compensation  Committee  of the Board of  Directors  of the Company  granted the
April 2004  options  without any vesting  requirements  for two reasons - 1) the
options were granted  primarily as a reward for past  performance  and therefore
had already been "earned" in the view of the  Committee,  and 2) to  potentially
minimize the impact that any change in  accounting  standards  for stock options
could have on future years'  reported net income.  Employee  stock option grants
since the April 2004 grant have reverted to having five year vesting periods.

     As noted above,  beginning on January 1, 2006, the Company will be required
to expense,  within its income statement,  the value of stock option grants that
vest from that date forward.  In 2006, 2007, and 2008 the Company's  stock-based
compensation   expense  related  to  options   currently   outstanding  will  be
approximately  $126,000,  $47,000,  and $3,000  respectively.  New stock  option
grants that are granted and vest after  January 1, 2006 will increase the amount
of stock-based  compensation expense recorded by the Company.  Except for grants
to directors (see below), the Company cannot estimate the amount of future stock
option grants at this time. In the past,  stock option grants to employees  have
been  irregular,  generally  falling  into three  categories - 1) to attract and
retain new employees,  2) to recognize changes in  responsibilities  of existing
employees,  and 3) to periodically  reward  exemplary  performance.  The Company
expects to  continue  to grant  2,250  stock  options  to each of the  Company's
non-employee  directors  in June of each year until the 2014  expiration  of the
current stock option plan. In 2005,  the amount of pro forma expense  associated
with the June director grants was $127,000.

                                       28


ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION

Overview

     Over the past two years,  the Company has achieved steady  increases in its
levels of loans and deposits.  All of this growth has been internally generated,
as the Company did not complete any  acquisitions in 2004 or 2005. The following
table presents detailed information regarding the nature of the Company's growth
in 2004 and 2005:



                                                                                                   Internal growth,
                                 Balance at                 Change in     Balance at     Total     excluding changes
       (in thousands)            beginning     Internal      brokered       end of     percentage     in brokered
                                 of period      growth       deposits       period       growth        deposits
                                 ----------   ----------    ----------    ----------   ----------     ----------
                                                                                          
           2005
-----------------------------
Loans                            $1,367,053      115,558            --     1,482,611          8.5%           8.5%
                                 ==========   ==========    ==========    ==========   ==========     ==========

Deposits - Noninterest bearing      165,778       28,273            --       194,051         17.1%          17.1%
Deposits - Savings, NOW, and
     Money Market                   472,811      (14,590)           --       458,221         (3.1%)         (3.1%)
Deposits - Time>$100,000            334,756       71,398       (49,873)      356,281          6.4%          21.3%
Deposits - Time<$100,000            415,423       70,601            --       486,024         17.0%          17.0%
                                 ----------   ----------    ----------    ----------   ----------     ----------
   Total deposits                $1,388,768      155,682       (49,873)    1,494,577          7.6%          11.2%
                                 ==========   ==========    ==========    ==========   ==========     ==========

           2004
-----------------------------
Loans                            $1,218,895      148,158            --     1,367,053         12.2%          12.2%
                                 ==========   ==========    ==========    ==========   ==========     ==========

Deposits - Noninterest bearing      146,499       19,279            --       165,778         13.2%          13.2%
Deposits - Savings, NOW, and
     Money Market                   462,876        9,935            --       472,811          2.1%           2.1%
Deposits - Time>$100,000            238,535       46,348        49,873       334,756         40.3%          19.4%
Deposits - Time<$100,000            401,454       13,969            --       415,423          3.5%           3.5%
                                 ----------   ----------    ----------    ----------   ----------     ----------
   Total deposits                $1,249,364       89,531        49,873     1,388,768         11.2%           7.2%
                                 ==========   ==========    ==========    ==========   ==========     ==========


     As shown in the table above,  the Company  experienced high internal growth
in loans in 2004 and 2005 with internal growth of 12.2% and 8.5%, respectively.

     Deposits  increased  11.2% in 2004 and  7.6% in 2005.  In 2004,  of the $96
million  in growth in the  category  "Deposits  -  Time>$100,000,"  $50  million
related to brokered  deposits  that the Company  attracted  in order to fund the
strong loan growth experienced.  Excluding the brokered deposits,  the Company's
deposit growth in 2004 was 7.2%. In 2005,  the $50 million in brokered  deposits
gathered in 2004  matured and were paid off,  without  renewing.  The  Company's
deposit growth rate in 2005,  excluding the reduction in brokered deposits,  was
11.2%. The Company had no brokered deposits outstanding at December 31, 2005. In
both 2004 and 2005,  the Company  achieved its highest  growth in time deposits,
particularly  time  deposits  in  denominations  greater  than  $100,000.   Time
deposits,  especially  time deposits  greater than  $100,000,  are generally the
easiest  type of  deposit to achieve  growth in through  the use of  promotional
interest rates. The Company offered promotional  interest rates in 2004 and 2005
in order to help fund the strong loan growth experienced both years.

     Over the past few years, including 2004 and 2005, the Company's loan growth
has  exceeded  its deposit  growth and to a greater  extent  exceeded its retail
deposit  growth  (excludes  time deposits  greater than  $100,000).  The Company
believes the higher  internal growth rates for loans compared to retail deposits
over the past two years is largely  attributable  to the type of  customers  the
Company has been able to  attract.  Most of the  Company's  loan growth has come
from small-business customers that need loans in order to expand their business,
and have few  deposits.  Additionally,  the  Company has found it  difficult  to
compete for retail  deposits in recent years.  The Company  frequently  competes
against  banks in the  marketplace  that  either 1) are so large

                                       29


that they enjoy  better  economies  of scale over the Company and can thus offer
higher  rates,  or 2) are  recently  started  banks that are focused on building
market share, and not necessarily on positive earnings, by offering high deposit
rates. The Company enjoys  advantages in the loan marketplace by having seasoned
lenders in place that have the experience necessary to oversee the completion of
a loan and the autonomy to be able to make timely decisions.

     The Company's liquidity did not change  significantly  during 2004 or 2005.
The Company's loan to deposit ratio  increased has ranged from 97.6% to 99.2% at
each of the past three  year  ends.  The level of the  Company's  liquid  assets
(consisting of cash, due from banks,  federal funds sold,  presold  mortgages in
process of settlement and securities) as a percentage of deposits and borrowings
has also  remained  consistent,  ranging from 13.1% to 14.4% at each of the past
three year ends. As discussed  above,  over the past two years,  the Company has
had to rely  more on time  deposits  in order  to  maintain  targeted  liquidity
levels.

     In 2004 and  2005,  regulatory  capital  ratios  declined  as asset  growth
exceeded  capital growth.  Additionally,  the $4.3 million  contingency tax loss
accrual negatively impacted the Company's capital ratios in 2005.  However,  all
of  the  Company's  capital  ratios  have  significantly  exceeded  the  minimum
regulatory thresholds for all periods covered by this report.

     Although the Company's  primary market area, the central Piedmont region of
North Carolina,  has experienced  recessionary  times in the past few years as a
result of  manufacturing  job losses,  the Company's  asset quality  ratios have
remained fairly stable over the past three years with net charge-offs to average
loans ranging from 10 basis points to 14 basis points and  nonperforming  assets
to total assets ranging from 17 basis points to 39 basis points.

Distribution of Assets and Liabilities

     Table 7 sets forth the percentage  relationships of significant  components
of the Company's balance sheets at December 31, 2005, 2004, and 2003.

     The relative  size of the  components  of the balance  sheet has not varied
significantly  over the past two years  with loans  comprising  81%-82% of total
assets and deposits comprising 83%-85%. The most significant variance in Table 7
is the 2004  increase in the  percentage  of time  deposits of $100,000 or more,
which  increased  from 16% at December 31, 2003 to 21% at December 31, 2004. The
Company aggressively  attracted large time deposits in 2004, including gathering
the $50  million in  brokered  deposits,  in order to help fund the strong  loan
growth  experienced  that was not  able to be  fully  funded  with  core  retail
deposits. In 2005, these brokered deposits were paid off and were not renewed.

     Also  shown in Table 7 is a  decrease  in the  relative  percentage  of the
Company's balance sheet comprised of Savings, NOW and Money Market accounts. The
decrease in the  percentage  from 29% to 25% during 2005 is due partially to the
high  growth  experienced  in the other  categories  of  deposits,  and was also
impacted by the introduction of a new product - Securities Sold Under Agreements
to Repurchase ("repurchase agreements") - that resulted in a shift of customers'
money  from  savings  and  money  market  accounts  to  repurchase   agreements.
Repurchase  agreements  are similar to  interest-bearing  deposits and allow the
Company to pay interest to business  customers without statutory  limitations on
the number of withdraws that these customers can make. Upon the  introduction of
this product in the second half of 2005, the growth in repurchase  agreements to
the year end balance of $33.5 million was comprised  almost entirely of customer
funds that had  previously  been held by the Company as savings or money  market
deposits.

                                       30


Securities

     Information regarding the Company's securities portfolio as of December 31,
2005, 2004, and 2003 is presented in Tables 8 and 9.

     The  composition  of  the  investment  securities  portfolio  reflects  the
Company's  investment  strategy of maintaining an appropriate level of liquidity
while providing a relatively stable source of income.  The investment  portfolio
also  provides  a  balance  to  interest  rate  risk  and  credit  risk in other
categories of the balance sheet while  providing a vehicle for the investment of
available funds,  furnishing  liquidity,  and supplying  securities to pledge as
required collateral for certain deposits.

     Total securities available for sale and held to maturity amounted to $127.8
million,  $102.6  million,  and $117.7  million at December 31, 2005,  2004, and
2003,  respectively.  The  increase  in  securities  from  December  31, 2004 to
December 31, 2005 was  primarily  due to security  purchases,  a decrease in the
amount  of  called   bonds  and  lower  levels  of   principal   repayments   on
mortgage-backed securities. The decrease in securities from December 31, 2003 to
December 31, 2004 was primarily  attributable  to called and maturing  bonds, as
well as a high level of principal  repayments on mortgage-backed  securities due
to  the  low   interest   rate   environment.   Instead   of   reinvesting   the
maturities/paydowns  back into  securities,  the proceeds were used to fund loan
growth.  The security mix within the available for sale  classification  and the
held to maturity  classification  remained  relatively  unchanged  over the past
three years.

     The majority of the Company's U.S.  Government  agency debt  securities are
issued by the Federal Home Loan Bank and carry one maturity date,  often with an
issuer call feature,  while the  mortgage-backed  securities have been primarily
issued by Freddie Mac and Fannie Mae and vary in their  repayment in correlation
with the underlying  pools of home mortgage loans.  The Company's  investment in
corporate bonds is primarily  comprised of trust preferred  securities issued by
other North Carolina bank holding companies.

     Included  in   mortgage-backed   securities   at  December  31,  2005  were
collateralized   mortgage   obligations  ("CMOs")  with  an  amortized  cost  of
$15,810,000  and a  fair  value  of  $15,399,000.  Included  in  mortgage-backed
securities at December 31, 2004 were CMOs with an amortized  cost of $15,928,000
and a fair value of  $15,831,000.  Included  in  mortgage-backed  securities  at
December 31, 2003 were CMOs with an  amortized  cost of  $21,649,000  and a fair
value  of   $21,458,000.   The  CMOs  that  the  Company  has  invested  in  are
substantially  all  "early  tranche"  portions  of  the  CMOs,  which  minimizes
long-term interest rate risk to the Company.

     At December 31, 2005, a net  unrealized  loss of $1,049,000 was included in
the carrying value of securities classified as available for sale, compared to a
net unrealized gain of $1,186,000 at December 31, 2004 and a net unrealized gain
of  $1,868,000  at  December  31,  2003.  The  declining  fair  market  value of
securities  available  over the past two years was caused by a  steadily  rising
interest rate environment.  Higher interest rates negatively impact the value of
fixed income securities. Another factor was the Company's 2004 sale of a portion
of its bond portfolio that had unrealized gains at December 31, 2003. Management
evaluated any  unrealized  losses on individual  securities at each year end and
determined them to be of a temporary nature and caused by fluctuations in market
interest  rates,  not by concerns about the ability of the issuers to meet their
obligations.  Net unrealized gains (losses),  net of applicable  deferred income
taxes, of ($639,000),  $723,000,  and $1,140,000 have been reported as part of a
separate  component of shareholders'  equity  (accumulated  other  comprehensive
income) as of December 31, 2005, 2004, and 2003, respectively.

     The fair value of securities held to maturity, which the Company carries at
amortized  cost,  was more than the carrying value at December 31, 2005 and 2004
by $149,000 and $426,000,  respectively.  Management  evaluated  any  unrealized
losses on individual  securities at each year end and determined them to be of a
temporary  nature and caused by fluctuations  in market  interest rates,  not by
concerns about the ability of the issuers to meet their obligations.

                                       31


     Table 9 provides  detail as to scheduled  contractual  maturities  and book
yields on  securities  available  for sale and  securities  held to  maturity at
December 31, 2005.  Mortgage-backed  and other  amortizing  securities are shown
maturing in the time  periods  consistent  with their  estimated  lives based on
expected prepayment speeds.

     The weighted average  taxable-equivalent yield for the securities available
for sale portfolio was 4.64% at December 31, 2005. 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 4.0 years.

     The weighted  average  taxable-equivalent  yield for the securities held to
maturity portfolio was 5.76% at December 31, 2005. 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 1.9 years.

     As of December 31, 2005 and 2004, the Company held no investment securities
of any one issuer, other than U.S. Government agencies or corporations, in which
aggregate book values and market values exceeded 10% of shareholders' equity.

Loans

     Table 10 provides a summary of the loan  portfolio  composition  at each of
the past five year ends.

     The loan portfolio is the largest category of the Company's  earning assets
and is comprised of commercial  loans,  real estate mortgage loans,  real estate
construction  loans, and consumer loans. The Company restricts  virtually all of
its  lending to its 24 county  market  area,  which is  located  in the  central
Piedmont region of North Carolina,  three counties in Virginia and one county in
South  Carolina.  The diversity of the region's  economic base has  historically
provided a stable lending environment.

     In 2005,  loans  outstanding  increased  $115.6 million,  or 8.5%, to $1.48
billion. In 2004, loans outstanding increased $148.2 million, or 12.2%, to $1.37
billion.  All of the loan growth in 2005 and 2004 was internally  generated,  as
the Company did not complete any acquisitions during those years. In 2003, loans
outstanding increased $220.3 million, or 22.1%, to $1.22 billion.  Approximately
$148  million of the 2003 growth was from net internal  loan  growth,  while $73
million  was  assumed in  acquisitions.  The  majority of the 2005 and 2004 loan
growth  occurred  in loans  secured by real  estate,  with  approximately  $94.4
million,  or 81.7%,  in 2005, and $143.1  million,  or 96.6%, in 2004 of the net
loan growth occurring in real estate mortgage or real estate construction loans.

     Over the years, the Company's loan mix has remained fairly consistent, with
real estate loans (mortgage and  construction)  comprising  approximately 86% of
the loan portfolio, commercial, financial, and agricultural loans not secured by
real  estate   comprising  9%,  and  consumer   installment   loans   comprising
approximately  5% of the portfolio.  The majority of the Company's "real estate"
loans are  primarily  various  personal and  commercial  loans where real estate
provides additional security for the loan.

     At December 31, 2005,  $1.275  billion,  or 86.0%,  of the  Company's  loan
portfolio  was  secured by liens on real  property.  Included  in this total are
$707.9 million, or 47.7% of total loans, in loans secured by liens on 1-4 family
residential  properties and $567.1  million,  or 38.3% of total loans,  in loans
secured by liens on other types of real estate.  At December  31,  2004,  $1.181
billion,  or 86.4%, of the Company's loan portfolio was secured by liens on real
property. Included in this total are $630.5 million, or 46.1% of total loans, in
loans secured by liens on 1-4 family residential  properties and $550.4 million,
or 40.3% of  total  loans,  in  loans  secured  by liens on other  types of real
estate.  The Company's  $1.275 billion in real estate mortgage loans at December
31, 2005 can be further  classified as follows - for  comparison  purposes,  the
classification  of the Company's  $1.181  billion real estate loan  portfolio at
December 31, 2004 is shown in parenthesis:

                                       32


     o    $443.4 million,  or 29.9% of total loans (vs. $411.7 million, or 30.1%
          of total loans), are traditional  residential  mortgage loans in which
          the borrower's personal income is the primary repayment source.
     o    $410.1 million,  or 27.7% of total loans (vs. $389.0 million, or 28.5%
          of  total  loans),  are  primarily  dependent  on  cash  flow  from  a
          commercial business for repayment.
     o    $146.1 million, or 9.9% of total loans (vs. $120.6 million, or 8.8% of
          total loans), are home equity loans.
     o    $125.2 million, or 8.4% of total loans (vs. $117.2 million, or 8.6% of
          total loans), are real estate construction loans.
     o    $118.4 million, or 8.0% of total loans (vs. $110.6 million, or 8.1% of
          total loans),  are personal  consumer  installment  loans in which the
          borrower has provided residential real estate as collateral.
     o    $31.9 million,  or 2.2% of total loans (vs. $31.8 million,  or 2.3% of
          total loans),  are primarily  dependent on cash flow from agricultural
          crop sales.

     Table 11 provides a summary of scheduled loan  maturities over certain time
periods,  with fixed  rate loans and  adjustable  rate loans  shown  separately.
Approximately 23% of the Company's loans outstanding at December 31, 2005 mature
within one year and 75% of total loans mature within five years. The percentages
of  variable  rate loans and fixed rate loans as  compared  to total  performing
loans were 57.5% and 42.5%,  respectively,  as of December 31, 2005. The Company
intentionally  makes a blend of fixed and  variable  rate  loans so as to reduce
interest rate risk. See discussion regarding fluctuations in the Company's ratio
of fixed rate loans to variable  rate loans in the section  above  entitled "Net
Interest Income."

Nonperforming Assets

     Nonperforming  assets include  nonaccrual loans,  loans past due 90 or more
days and still accruing interest, restructured loans and other real estate. As a
matter of policy the Company  places all loans that are past due 90 or more days
on nonaccrual  basis,  and thus there were no loans at any of the past five year
ends that were 90 days past due and still accruing interest. Table 12 summarizes
the Company's nonperforming assets at the dates indicated.

     Nonaccrual  loans are  loans on which  interest  income is no longer  being
recognized or accrued  because  management has determined that the collection of
interest is doubtful.  Placing loans on  nonaccrual  status  negatively  impacts
earnings because (i) interest accrued but unpaid as of the date a loan is placed
on nonaccrual  status is either deducted from interest income or is charged-off,
(ii)  future  accruals of interest  income are not  recognized  until it becomes
probable  that both  principal  and  interest  will be paid and (iii)  principal
charged-off,  if  appropriate,  may necessitate  additional  provisions for loan
losses that are charged  against  earnings.  In some cases,  where borrowers are
experiencing financial difficulties,  loans may be restructured to provide terms
significantly different from the originally contracted terms.

     Nonperforming  loans  (which  includes  nonaccrual  loans and  restructured
loans) as of December 31, 2005, 2004, and 2003 totaled  $1,653,000,  $3,724,000,
and $4,295,000, respectively. Nonperforming loans as a percentage of total loans
amounted to 0.11%,  0.27%,  and 0.35%,  at December  31, 2005,  2004,  and 2003,
respectively.  The variances in nonperforming loans over the past two years have
been primarily due to changes in nonaccrual  loans, as  restructured  loans have
not changed  significantly.  Nonaccrual  loans have declined at each of the past
two year ends.  The decrease in nonaccrual  loans from 2003 to 2004 was impacted
by the resolution of the Company's largest  nonaccrual loan relationship  during
2004. This nonaccrual relationship amounted to $663,000 at December 31, 2003. In
2004, the loan was reduced to zero through a combination  of payments  received,
property foreclosures,  and charge-offs. In total, the Company received payments
of $65,000, foreclosed on property with a value of $100,000, and charged-off the
remaining  balance of $498,000.  The decrease in  nonaccrual  loans from 2004 to
2005 was primarily  because  during the fourth  quarter of 2005,  the collection
process for several of the  Company's  large  nonperforming  loan  relationships
reached a conclusion.  As a result, the Company's net charge-offs for the fourth
quarter of 2005 were $1.1 million, or 0.29% of average loans (annualized), which
is a higher ratio than the Company has historically  experienced.  The Company's
largest

                                       33


nonaccrual  relationships at December 31, 2005 and 2004 amounted to $337,000 and
$404,000, respectively.

     If the  nonaccrual  loans and  restructured  loans as of December 31, 2005,
2004 and 2003 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  $123,000,
$247,000  and $319,000 for  nonaccrual  loans and $2,000,  $2,000 and $2,000 for
restructured   loans  would  have  been  recorded  for  2005,   2004  and  2003,
respectively.  Interest  income on such loans that was  actually  collected  and
included in net income in 2005, 2004 and 2003 amounted to approximately $67,000,
$120,000  and  $102,000  for  nonaccrual  loans  (prior to their being placed on
nonaccrual  status)  and  $2,000,  $2,000  and $2,000  for  restructured  loans,
respectively.  At December 31, 2005 and 2004,  the Company had no commitments to
lend additional funds to debtors whose loans were nonperforming.

     Management  routinely  monitors the status of certain  large loans that, in
management's  opinion,  have credit  weaknesses  that could cause them to become
nonperforming  loans. In addition to the  nonperforming  loan amounts  discussed
above,  management  believes that an estimated  $5.5-$6.0  million of loans that
were performing in accordance with their  contractual terms at December 31, 2005
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, 2005 (see  discussion
below).

     Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been disclosed in the problem loan amounts and the
potential  problem loan amounts  discussed above do not represent or result from
trends or  uncertainties  that  management  reasonably  expects will  materially
impact future operating results,  liquidity,  or capital resources, or represent
material  credits about which management is aware of any information that causes
management to have serious  doubts as to the ability of such borrowers to comply
with the loan repayment terms.

     Other real estate includes foreclosed,  repossessed,  and idled properties.
Other real estate has not varied  materially at any of the past three year ends,
amounting to $1,421,000  at December 31, 2005,  $1,470,000 at December 31, 2004,
and $1,398,000 at December 31, 2003. Other real estate represented approximately
0.10%  of total  assets  at the end of  2005,  2004,  and  2003.  The  Company's
management believes that the fair values of the items of other real estate, less
estimated costs to sell, equal or exceed their respective carrying values at the
dates presented.

Allowance for Loan Losses and Loan Loss Experience

     The  allowance  for loan losses is created by direct  charges to operations
(known as a  "provision  for loan  losses" for the period in which the charge is
taken). Losses on loans are charged against the allowance in the period in which
such loans,  in  management's  opinion,  become  uncollectible.  The  recoveries
realized during the period are credited to this allowance. The Company considers
its procedures for recording the amount of the allowance for loan losses and the
related provision for loan losses to be a critical  accounting  policy.  See the
heading "Critical Accounting Policies" above for further discussion.

     The factors that influence  management's judgment in determining the amount
charged to operating  expense include past loan loss experience,  composition of
the loan portfolio,  evaluation of probable inherent losses and current economic
conditions.

     The Company uses a loan  analysis  and grading  program to  facilitate  its
evaluation  of probable  inherent  loan losses and the adequacy of its allowance
for loan losses.  In this program,  risk grades are assigned by  management  and
tested by an  independent  third party  consulting  firm.  The  testing  program
includes  an  evaluation  of a  sample  of  new  loans,  loans  that  management
identifies  as having  potential  credit  weaknesses,  loans past due 90 days or
more,  loans  originated by new loan  officers,  nonaccrual  loans and any other
loans

                                       34


identified during previous regulatory and other examinations.

     The Company  strives to maintain its loan portfolio in accordance with what
management  believes are conservative loan underwriting  policies that result in
loans  specifically  tailored to the needs of the Company's market areas.  Every
effort is made to identify and minimize  the credit risks  associated  with such
lending strategies. The Company has no foreign loans, few agricultural loans and
does not engage in significant lease financing or highly leveraged transactions.
Commercial loans are diversified among a variety of industries.  The majority of
loans  captioned  in the  tables  discussed  below as "real  estate"  loans  are
primarily  various  personal  and  commercial  loans where real estate  provides
additional security for the loan. Collateral for virtually all of these loans is
located within the Company's principal market area.

    The allowance for loan losses  amounted to  $15,716,000 at December 31, 2005
compared to  $14,717,000  at December 31, 2004 and  $13,569,000  at December 31,
2003. This  represented  1.06%,  1.08%,  and 1.11%,  of loans  outstanding as of
December  31,  2005,  2004,  and 2003,  respectively.  As noted in Table 12, the
Company's  allowance  for loan losses as a  percentage  of  nonperforming  loans
("coverage  ratio")  amounted to 951% at December  31, 2005  compared to 395% at
December 31, 2004 and 316% at December 31,  2003.  Due to the secured  nature of
virtually all of the Company's loans that are on nonaccrual status, the variance
in the coverage ratio is not necessarily  indicative of the relative adequacy of
the allowance for loan losses.

     Table 13 sets forth the  allocation of the allowance for loan losses at the
dates  indicated.  The portion of these  reserves that was allocated to specific
loan types in the loan  portfolio  increased to $15,692,000 at December 31, 2005
from  $14,643,000 at December 31, 2004 and $13,416,000 at December 31, 2003. The
7.2% increase in the amount of the allocated allowance during 2005 is consistent
with the 8.5% increase in total loans  outstanding  during the year.  Similarly,
the 9.1%  increase  in the  amount of the  allocated  allowance  during  2004 is
consistent with the 12.2% increase in total loans  outstanding  during the year.
In addition to the  allocated  portion of the  allowance  for loan  losses,  the
Company  maintains an  unallocated  portion that is not assigned to any specific
category of loans,  but rather is intended to reserve for the  inherent  risk in
the  overall  portfolio  and the  intrinsic  inaccuracies  associated  with  the
estimation of the allowance for loan losses and its  allocation to specific loan
categories.  The amount of the  unallocated  portion of the  allowance  for loan
losses did not vary materially at any of the past three year ends.

     Management  considers  the  allowance  for loan  losses  adequate  to cover
probable loan losses on the loans outstanding as of each reporting date. It must
be  emphasized,  however,  that the  determination  of the  allowance  using the
Company's  procedures and methods rests upon various  judgments and  assumptions
about economic conditions and other factors affecting loans. No assurance can be
given that the Company  will not in any  particular  period  sustain loan losses
that  are  sizable  in  relation  to the  amount  reserved  or  that  subsequent
evaluations  of the loan  portfolio,  in light of  conditions  and factors  then
prevailing,  will not  require  significant  changes in the  allowance  for loan
losses or future charges to earnings.

     In addition,  various  regulatory  agencies,  as an integral  part of their
examination  process,  periodically  review the  allowances  for loan losses and
losses on  foreclosed  real  estate.  Such  agencies  may require the Company to
recognize  additions to the allowances  based on the examiners'  judgments about
information available to them at the time of their examinations.

    For the years indicated, Table 14 summarizes the Company's balances of loans
outstanding,  average  loans  outstanding,  and a  detailed  rollforward  of the
allowance  for loan losses.  In addition to the  increases to the  allowance for
loan losses related to normal provisions, the increases in the dollar amounts of
the allowance  for loan losses in 2003 was also affected by amounts  recorded to
provide for loans assumed in corporate acquisitions.  In 2003, the Company added
$1,083,000  to the  allowance  for loan losses  related to loans  assumed in two
corporate  acquisitions.  Approximately  $333,000 of the  $1,083,000  related to
$24.8  million  in  loans  assumed  in  the  October  2003  RBC  Centura  branch
acquisition,  while  $750,000  related  to the  CCB  acquisition.  The  $750,000
addition  related to CCB  represented the book value of CCB's allowance for loan
losses on the date of

                                       35


the acquisition.

    The  Company's  net  loan  charge  offs  amounted  to  $2,041,000  in  2005,
$1,757,000 in 2004, and $1,101,000 in 2003. This represents  0.14%,  0.14%,  and
0.10% of average loans during 2005, 2004, and 2003 respectively. The increase in
charge offs from 2003 to 2004 is largely attributable to the $498,000 charge off
recorded in 2004 related to the disposition of a large  nonaccrual  relationship
that is  discussed  above in the  section  entitled  "Nonperforming  Assets." As
discussed  in that  same  section,  during  the  fourth  quarter  of  2005,  the
collection  process  for  several  of the  Company's  large  nonperforming  loan
relationships reached a conclusion, which impacted the net charge off percentage
in 2005.

Deposits and Securities Sold Under Agreements to Repurchase

     At December 31, 2005, deposits  outstanding  amounted to $1.495 billion, an
increase of $106 million,  or 7.6%,  from  December 31, 2004. In 2004,  deposits
grew from $1.249  billion to $1.389  billion,  an increase of $139  million,  or
11.2% from December 31, 2003. All deposit growth in 2004 and 2005 was internally
generated  (the Company did not complete any  acquisitions  during those years).
Approximately $50 million of the increase in 2004 related to wholesale  brokered
deposits  that the  Company  gathered in order to help fund the high loan growth
experienced  during  2004,  while  the  Company's  deposit  growth  in 2005  was
negatively  impacted by paying back the $50  million in brokered  deposits  upon
their maturity in 2005.  Prior to 2004, the Company had never utilized  brokered
deposits.  In 2003,  $161 million of the $193  million  increase in deposits was
related to acquisitions - the Company's January 2003 acquisition of CCB with $59
million  in  deposits  and the  October  2003  acquisition  of four RBC  Centura
branches with $102 million in deposits.

     The nature of the Company's  deposit  growth is illustrated in the table on
page 29. The following table reflects the mix of the Company's  deposits at each
of the past three year ends:

                                                    2005      2004      2003
                                                   ------    ------    ------
  Noninterest-bearing deposits                         13%       12%       12%
  Savings, NOW and Money Market deposits               31%       34%       37%
  Time deposits > $100,000                             24%       24%       19%
  Time deposits < $100,000                             32%       30%       32%
                                                   ------    ------    ------
      Total deposits                                  100%      100%      100%
                                                   ======    ======    ======
  Securities sold under agreements to repurchase
       as a percent of total deposits                   2%       --        --
                                                   ======    ======    ======

     In  2004,  there  was a  significant  increase  in the  percentage  of time
deposits  greater  than  $100,000,  which was  largely  a result of the  Company
offering  competitive  interest  rates on this  product  and the $50  million in
wholesale brokered deposits gathered by the Company. Both of the factors driving
the increase in time deposits  greater than $100,000  were  necessitated  by the
combination  of strong  loan  growth  and  modest  core  retail  deposit  growth
experienced by the Company in 2004. As noted earlier,  competition  for deposits
in the  Company's  market area is strong.  The deposit mix  remained  relatively
consistent  from 2004 to 2005,  despite  the $50  million  decrease  in brokered
deposits that were repaid in 2005, which impacted the time deposits greater than
$100,000  category.  In 2005, the $50 million repayment of brokered deposits was
offset by growth  in this  category  resulting  from the  Company  competitively
pricing this product in order to generate funds with which to repay the brokered
deposit maturities, as well as to help fund loan growth.

     The percentage of savings,  NOW and money market accounts to total deposits
at  December  31,  2005 was  impacted  by the  introduction  of a new  product -
securities sold under agreements to repurchase ("repurchase  agreements") - that
resulted in a shift of customer's  money from savings and money market  accounts
to repurchase agreements.  Repurchase agreements are similar to interest-bearing
deposits  and allow the Company to pay  interest to business  customers  without
statutory  limitations on the number of withdraws that these customers can make.
Upon the  introduction of this product in the second half of 2005, the growth in
repurchase  agreements,  which  amounted  to  $33.5  million  at year  end,  was
comprised almost entirely of customer funds that

                                       36


had previously been held by the Company as savings or money market deposits.

     Table 15 presents  the  average  amounts of deposits of the Company and the
average  yield paid for those  deposits  for the years ended  December 31, 2005,
2004, and 2003.

     As of December 31, 2005, the Company held  approximately  $356.3 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,  2005.  This table shows that
82.0% of the  Company's  time deposits  greater than $100,000  mature within one
year.

     At each of the past three year ends,  the Company  had no  deposits  issued
through foreign  offices,  nor did the Company believe that it held any deposits
by foreign depositors.

Borrowings

     The Company had  borrowings  outstanding  of $100.2 million at December 31,
2005  compared to $92.2  million at December  31, 2004.  The slight  increase in
borrowings  was due to normal  fluctuations  in cash needs and not to an overall
increased dependence on borrowings.  As shown in Table 2, average borrowings has
fluctuated over the past two years,  amounting to $42.1 million in 2003,  rising
to $84.9 million in 2004, and then declining  slightly in 2005 to $77.1 million.
The increase in average  borrowing  from 2003 to 2004 was  necessary in order to
fund loan  growth  that  exceeded  deposit  growth.  In 2005,  growth in average
deposits  exceeded  growth  in  average  loans,   which  reduced  the  Company's
dependency on borrowings.

     At December 31, 2005,  the Company had three  sources of readily  available
borrowing  capacity - 1) an  approximately  $360 million line of credit with the
Federal Home Loan Bank of Atlanta ("FHLB"), of which $59 million was outstanding
at December 31, 2005 and $51 million was  outstanding at December 31, 2004, 2) a
$50 million  overnight  federal funds line of credit with a correspondent  bank,
none  of  which  was  outstanding  at  December  31,  2005  or  2004,  and 3) an
approximately  $62 million  line of credit  through the Federal  Reserve Bank of
Richmond's (FRB) discount window,  none of which was outstanding at December 31,
2005 or 2004.

     The  Company's  line of credit  with the FHLB can be  structured  as either
short-term  or  long-term  borrowings,  depending on the  particular  funding or
liquidity need, and is secured by the Company's FHLB stock and a blanket lien on
most  of its  real  estate  loan  portfolio.  In  addition  to  the  outstanding
borrowings  from the FHLB that reduce the  available  borrowing  capacity of the
line of credit,  the  borrowing  capacity was further  reduced by $40 million at
December 31, 2005 and 2004 as a result of the Company pledging letters of credit
for public deposits at each of those dates.

     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, 2005 or 2004. This line of credit was not drawn upon during
any of the past three years.

     The Company  also has a line of credit with the FRB discount  window.  This
line is secured by a blanket lien on a portion of the Company's  commercial  and
consumer loan portfolio  (excluding real estate loans).  Based on the collateral
owned by the Company as of December 31, 2005,  the  available  line of credit is
approximately  $62  million.  This line of credit was  established  primarily in
connection  with the Company's Y2K liquidity  contingency  plan and has not been
drawn on since  inception.  The FRB has indicated that it would not expect lines
of credit  that have been  granted  to  financial  institutions  to be a primary
borrowing source. The Company plans to maintain this line of credit, although it
is not expected that it will be drawn upon except in unusual circumstances.

     In addition to the lines of credit  described  above,  in which the Company
had $59 million  outstanding  as of December  31,  2005,  the Company also had a
total of $41.2 million in trust preferred  security debt outstanding at

                                       37


December 31, 2005.  The Company issued $20.6 million of this debt on October 29,
2002 and an additional $20.6 million on December 19, 2003. These borrowings each
have 30 year final  maturities and were  structured as trust  preferred  capital
securities  that  qualify  as Tier I capital  for  regulatory  capital  adequacy
requirements.  These debt  securities  are callable by the Company at par on any
quarterly  interest payment date five years after their issue date. The interest
rate  on  these  debt  securities  adjusts  on a  quarterly  basis  at a rate of
three-month  LIBOR plus 3.45% for the securities  issued in 2002 and three-month
LIBOR  plus  2.70% for the  securities  issued  in 2003.  The  Company  incurred
approximately  $1,195,000 in debt issuance  costs related to the issuances  that
were  recorded as prepaid  expenses and are included in the "Other  Assets" line
item of the  consolidated  balance sheet.  During the first quarter of 2006, the
Company plans to issue an additional $25 million in trust  preferred  securities
in order to improve  regulatory  capital ratios. The terms will be substantially
the same as previous  issuances  except that the interest rate is expected to be
based on three-month LIBOR plus 1.39%, and no debt issuance costs are expected.

     Average  short-term  borrowings  for each of the past five  years were less
than 30% of total shareholders' equity at all times during each period.

Liquidity, Commitments, and Contingencies

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

     As noted above, in addition to internally  generated liquidity sources, the
Company has the ability to obtain  borrowings from the following three sources -
1) an approximately  $360 million line of credit with the FHLB, 2) a $50 million
overnight  federal  funds line of credit with a  correspondent  bank,  and 3) an
approximately $62 million line of credit through the FRB's discount window.

     The Company's liquidity did not change  significantly  during 2004 or 2005.
The  Company's  loan to deposit  ratio has ranged from 97.6% to 99.2% at each of
the past three year ends. The level of the Company's  liquid assets  (consisting
of cash,  due from banks,  federal funds sold,  presold  mortgages in process of
settlement  and  securities) as a percentage of deposits and borrowings has also
remained consistent,  ranging from 13.1% to 14.4% at each of the past three year
ends. As discussed  above,  over the past two years, the Company has had to rely
more on time deposits in order to maintain targeted liquidity levels.

     The Company's  management believes its liquidity sources,  including unused
lines of credit,  are at an  acceptable  level and remain  adequate  to meet its
operating needs in the foreseeable  future. The Company will continue to monitor
its liquidity  position  carefully and will explore and implement  strategies to
increase liquidity if deemed appropriate

     In the normal course of business there are various outstanding  contractual
obligations of the Company that will require future cash outflows.  In addition,
there are commitments and contingent liabilities,  such as commitments to extend
credit, that may or may not require future cash outflows.

     Table  18  reflects  the  contractual   obligations  and  other  commercial
commitments  of the Company  outstanding  as of December  31,  2005.  Any of the
Company's $59 million in outstanding borrowings with the FHLB may be accelerated
immediately by the FHLB in certain  circumstances,  including  material  adverse
changes  in  the  condition  of  the  Company  or if  the  Company's  qualifying
collateral  is less than the amount  required  under the terms of the  borrowing
agreement.

                                       38


     In the normal course of business there are various outstanding  commitments
and contingent  liabilities such as commitments to extend credit,  which are not
reflected in the financial statements.  As of December 31, 2005, the Company had
outstanding  loan  commitments of $277,044,000,  of which  $236,047,000  were at
variable rates and $40,997,000 were at fixed rates. Included in outstanding loan
commitments were unfunded commitments of $157,257,000 on revolving credit plans,
of which  $132,796,000  were at  variable  rates and  $24,461,000  were at fixed
rates.

     At December 31, 2005 and 2004, the Company had  $4,283,000 and  $3,762,000,
respectively,  in standby  letters of credit  outstanding.  The  Company  had no
carrying  amount for these  standby  letters of credit at either of those dates.
The nature of the standby letters of credit is a guarantee made on behalf of the
Company's  customers to suppliers of the customers to guarantee payments owed to
the supplier by the  customer.  The standby  letters of credit are generally for
terms for one year,  at which time they may be renewed for another  year if both
parties agree.  The payment of the guarantees  would generally be triggered by a
continued nonpayment of an obligation owed by the customer to the supplier.  The
maximum potential amount of future payments  (undiscounted) the Company could be
required  to make under the  guarantees  in the event of  nonperformance  by the
parties to whom credit or financial guarantees have been extended is represented
by the contractual amount of the financial  instruments  discussed above. In the
event that the Company is required to honor a standby letter of credit,  a note,
already executed with the customer,  is triggered which provides repayment terms
and any  collateral.  Over the past ten years,  the Company has had to honor one
standby letter of credit,  which was repaid by the borrower  without any loss to
the  Company.  Management  expects any draws under  existing  commitments  to be
funded through normal operations.

     It has been the  experience  of the Company  that deposit  withdrawals  are
generally  replaced with new deposits,  thus not requiring any net cash outflow.
Based on that assumption,  management  believes that it can meet its contractual
cash obligations and existing commitments from normal operations.

     The Company is not involved in any legal  proceedings that, in management's
opinion,  could have a material effect on the consolidated financial position of
the Company;  however,  the following  paragraph  describes a probable  exposure
related to taxes.

     In 1999, in  consultation  with the  Company's  tax  advisors,  the Company
established  an operating  structure  involving a real estate  investment  trust
("REIT") that  resulted in a reduction in the  Company's  state tax liability to
the state of North  Carolina.  In late 2004,  the North  Carolina  Department of
Revenue indicated that it would challenge taxpayers engaged in activities deemed
to be  "income-shifting,"  and they  indicated  that they believed  certain REIT
operating  structures were a type of  "income-shifting."  During 2005, the North
Carolina  Department  of Revenue began an audit of the Company's tax returns for
2001-2004,  which represented all years eligible for audit. In the third quarter
of 2005,  based on consultations  with the Company's  external auditor and legal
counsel,  the  Company  determined  that it should  record a $6.3  million  loss
accrual  to  reserve  for this  issue.  In  February  2006,  the North  Carolina
Department of Revenue announced a "Settlement Initiative" that offered companies
with certain transactions,  including those with a REIT operating structure, the
opportunity  to resolve  such  matters  with  reduced  penalties  by agreeing to
participate in the initiative by June 15, 2006.  Although the Company  continues
to believe that its tax returns complied with the relevant  statutes,  the board
of  directors  of the Company  has  tentatively  decided  that it is in the best
interests  of  the  Company  to  settle  this  matter  by  participating  in the
initiative. Based on the terms of the initiative, the Company estimates that its
total liability to settle the matter will be approximately $4.3 million,  net of
the  federal  tax  benefit,  or $2.0  million  less  than  the  amount  that was
originally  accrued.  Accordingly,  in March 2006,  prior to the issuance of its
financial statements,  the Company  retroactively  recorded an adjustment to its
fourth  quarter of 2005  earnings to reverse  $2.0  million of tax  expense,  as
required by relevant  accounting  standards.  The aspects of the REIT  structure
that gave rise to this issue were  discontinued  effective  January 1, 2005, and
thus the Company does not believe it has any additional exposure related to this
item beyond the amount of the accrual other than ongoing  interest on the unpaid
taxes amounting to $65,000 per quarter (after-tax).


                                       39


Off-Balance Sheet Arrangements and Derivative Financial Instruments

     Off-balance sheet arrangements include transactions,  agreements,  or other
contractual  arrangements  in which the  Company  has  obligations  or  provides
guarantees on behalf of an unconsolidated entity. The Company has no off-balance
sheet arrangements of this kind other than repayment guarantees  associated with
its trust preferred securities.

     Derivative financial instruments include futures,  forwards,  interest rate
swaps,  options  contracts,   and  other  financial   instruments  with  similar
characteristics.  The Company has not engaged in derivatives  activities through
December 31, 2005 and has no current plans to do so.

Interest Rate Risk (Including  Quantitative  and Qualitative  Disclosures  About
Market Risk - Item 7A.)

     Net  interest  income  is  the  Company's  most  significant  component  of
earnings.  Notwithstanding  changes  in  volumes  of  loans  and  deposits,  the
Company's  level of net interest income is continually at risk due to the effect
that  changes in general  market  interest  rate trends have on interest  yields
earned and paid with  respect to the various  categories  of earning  assets and
interest-bearing  liabilities. It is the Company's policy to maintain portfolios
of earning assets and interest-bearing liabilities with maturities and repricing
opportunities that will afford protection, to the extent practical, against wide
interest  rate  fluctuations.  The  Company's  exposure to interest rate risk is
analyzed on a regular basis by management  using standard GAP reports,  maturity
reports,  and an asset/liability  software model that simulates future levels of
interest  income and expense based on current  interest  rates,  expected future
interest rates, and various intervals of "shock" interest rates. Over the years,
the  Company  has been able to  maintain  a fairly  consistent  yield on average
earning assets (net interest  margin).  Over the past five calendar  years,  the
Company's net interest  margin has ranged from a low of 4.23% (realized in 2001)
to a high of 4.58% (realized in 2002).  During that five year period,  the prime
rate of interest has ranged from a low of 4.00% to a high of 9.00%.

     Table 17 sets forth the Company's interest rate sensitivity  analysis as of
December  31,  2005,  using  stated   maturities  for  all  instruments   except
mortgage-backed securities (which are allocated in the periods of their expected
payback) and securities  and borrowings  with call features that are expected to
be called (which are shown in the period of their expected call). As illustrated
by this table,  at December  31,  2005,  the Company had $282.4  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, 2005 are deposits  totaling  $458 million  comprised of
NOW, savings, and certain types of money market deposits with interest rates set
by management. These types of deposits historically have not repriced with or in
the same proportion as general market indicators.

    Thus,  the  Company  believes  that in the near term  (twelve  months),  net
interest income will not likely  experience  significant  downward pressure from
rising  interest  rates.  Similarly,  management  would not expect a significant
increase  in  near  term  net  interest  income  from  falling  interest  rates.
Conversely,  it was the  Company's  experience  that each interest rate cut that
occurred in the  2001-2003  period of declining  rates  negatively  impacted (at
least  temporarily)  the  Company's  net interest  margin and that interest rate
increases  occurring  since  July 1, 2004  have  positively  impacted  (at least
temporarily)  the Company's net interest margin.  Generally,  when rates change,
the Company's  interest-sensitive  assets that are subject to adjustment reprice
immediately   at  the  full   amount  of  the   change,   while  the   Company's
interest-sensitive  liabilities that are subject to adjustment  reprice at a

                                       40


lag  to the rate change and typically not to the full extent of the rate change.
The  net effect is that in the twelve month horizon, as rates change, the impact
of  having  a  higher  level  of interest-sensitive liabilities is substantially
negated  by the later and typically lower proportionate change these liabilities
experience  compared  to  interest  sensitive  assets.  However,  the  rate cuts
totaling  75  basis  points  that  occurred in late 2002 and mid-2003 had a more
pronounced  and  a  longer lasting negative impact on the Company's net interest
margin  than previous rate cuts because of the inability of the Company to reset
deposit rates by an amount (because of their already near-zero rates) that would
offset the negative impact of the rate cut on the yields earned on the Company's
interest earning assets. Also, as previously discussed, over the past few years,
the  Company  has  originated  more adjustable rate loans than fixed rate loans.
Adjustable  rate  loans  generally carry lower initial interest rates than fixed
rate  loans.  For  these  reasons,  the  second quarter of 2004 marked the fifth
consecutive  quarter  of declining net interest margins. Since July 1, 2004, the
Federal  Reserve  has increased interest rates thirteen times totaling 325 basis
points,  which  was  largely  responsible  for the Company's net interest margin
reversing  its  downward  trend  beginning  in  the  third  quarter  of 2004 and
increasing slightly for five out of the six consecutive quarters ending December
31, 2005. The net interest margin of 4.37% in the fourth quarter of 2005 was the
highest  since  the  first quarter of 2004. The immediate positive impact of the
rising  interest  rate environment on the Company's net interest margin has been
largely  offset  by  the  mix   of  the  Company's  deposit  growth  being  more
concentrated  in  the categories of time deposits and time deposits greater than
$100,000, the Company's highest cost categories of deposits.

    Assuming no changes in interest rates in 2006, the Company would expect,  as
discussed  above in the section  titled "Net Interest  Income," its net interest
margin to be  negatively  impacted  as a result of time  deposits  maturing  and
repricing  in 2006 that were  originated  in  periods  when  rates  were  lower.
However, interest rates were increased 25 basis points by the Federal Reserve in
February 2006, and most  economists  believe that the Federal Reserve will raise
rates by at least 25 more basis  points  before  the end of 2006.  In a scenario
that reflects the 25 basis point increase that has already  occurred in 2006 and
one more rate  increase  occurring  in the second  quarter  of 2006,  along with
expected  balance  sheet  growth  rates,  the Company  anticipates  that its net
interest margin for the 2006 will continue to be in the recently  realized range
of  4.30%-4.40%.  However in  determining  this  range,  the Company had to make
certain  assumptions  about its  ability  to  manage  changes  in rates  paid on
deposits,   which  will  depend  largely  on  actions  taken  by  the  Company's
competitors and could be significantly different from the assumptions made.

     The  Company  has no market  risk  sensitive  instruments  held for trading
purposes, nor does it maintain any foreign currency positions. Table 19 presents
the  expected  maturities  of the  Company's  other  than  trading  market  risk
sensitive  financial  instruments.  Table 19 also  presents the  estimated  fair
values of market risk  sensitive  instruments  as estimated in  accordance  with
Statement of Financial  Accounting  Standards No. 107,  "Disclosures  About Fair
Value of Financial  Instruments." The Company's assets and liabilities each have
estimated fair values that are slightly less than their carrying  values because
of the rising interest rate environment.

     See  additional  discussion  regarding  net  interest  income,  as  well as
discussion  of the  changes  in the annual net  interest  margin in the  section
entitled "Net Interest Income" above.

Return on Assets and Equity

     Table 20 shows  return on assets  (net  income  divided  by  average  total
assets),  return on equity (net income divided by average shareholders' equity),
dividend payout ratio  (dividends per share divided by net income per share) and
shareholders'  equity to assets ratio (average  shareholders'  equity divided by
average  total  assets)  for each of the years in the  three-year  period  ended
December 31, 2005.  The  significant  decrease in return on assets and return on
equity and the  increase  in the  dividend  payout  ratio from 2004 to 2005 were
caused primarily by the large  contingency tax loss accrual that is discussed in
the  sections   entitled  "Income  Taxes"  and  "Liquidity,   Commitments,   and
Contingencies" above.

                                       41


Capital Resources and Shareholders' Equity

     Shareholders'  equity at  December  31,  2005  amounted  to $155.7  million
compared to $148.5 million at December 31, 2004. The two basic  components  that
typically have the largest impact on the Company's  shareholders' equity are net
income,  which increases  shareholders'  equity, and dividends  declared,  which
decreases shareholders' equity.

     In 2005,  net  income of  $16,090,000  increased  equity,  while  dividends
declared of $9,930,000  reduced  equity.  The Company made no stock  repurchases
during 2005.  At December 31,  2005,  the Company had a remaining  authorization
from its board of directors to repurchase 315,015 shares of stock.

     Other  items  affecting  shareholders'  equity in 2005 were 1)  proceeds of
$785,000  received  from  common  stock  issued  as a  result  of  stock  option
exercises,  2) proceeds of  $1,604,000  received from the issuance of stock into
the  Company's  dividend  reinvestment  plan,  3) a $118,000  increase to equity
related  to a tax  benefit  that  the  Company  realized  due  to  exercises  of
nonqualified stock options, and 4) other comprehensive loss of $1,417,000, which
was comprised of the  $1,362,000  decrease in the net  unrealized  gain,  net of
taxes,  of the Company's  available for sale securities and an adjustment to the
Company's pension liability of $55,000, net of taxes.

     In 2004,  net  income of  $20,114,000  increased  equity,  while  dividends
declared of $9,269,000  reduced equity.  Also, the Company continued to actively
manage  its  capital  and  number of common  shares  outstanding  through  stock
repurchases.  In 2004, the Company  repurchased a total of 300,816 shares of its
common stock at an average price of $21.65,  which reduced  shareholders' equity
by $6.5 million.

     Other  items  affecting  shareholders'  equity in 2004 were 1)  proceeds of
$1,081,000  received  from  common  stock  issued  as a result  of stock  option
exercises,  2) proceeds of  $1,466,000  received from the issuance of stock into
the  Company's  dividend  reinvestment  plan,  3) a $203,000  increase to equity
related  to the tax  benefit  that the  Company  realized  due to  exercises  of
nonqualified stock options,  and 4) other comprehensive loss of $445,000,  which
was comprised of the $417,000 decrease in the net unrealized gain, net of taxes,
of  the  Company's  available  for  sale  securities  and an  adjustment  to the
Company's pension liability of $28,000, net of taxes.

     In 2003,  net  income of  $19,417,000  increased  equity,  while  dividends
declared of $8,835,000  reduced equity. Two other items  significantly  impacted
shareholders'  equity in 2003. In connection  with the Company's  acquisition of
CCB in January  2003,  the Company  issued 1.2 shares of stock for each share of
CCB stock outstanding,  which resulted in the Company issuing a total of 500,000
shares of stock valued at $9.3 million,  which  increased  shareholders  equity.
Also in 2003,  the Company  repurchased a total of 315,000  shares of its common
stock at an average price of $16.49, which reduced  shareholders' equity by $5.2
million.

     Other  items  affecting  shareholders'  equity in 2003 were 1)  proceeds of
$1,167,000  received  from  common  stock  issued  as a result  of stock  option
exercises,  2) proceeds of  $1,277,000  received from the issuance of stock into
the  Company's  dividend  reinvestment  plan,  3) a $546,000  increase to equity
related  to the tax  benefit  that the  Company  realized  due to  exercises  of
nonqualified stock options, and 4) other comprehensive income of $210,000, which
was comprised of the $287,000 increase in the net unrealized gain, net of taxes,
of the Company's available for sale securities that was reduced by an adjustment
to the Company's pension liability of $77,000, net of taxes.

     The Company is not aware of any  recommendations of regulatory  authorities
or otherwise which, if they were to be implemented, would have a material effect
on its liquidity, capital resources, or operations.

     The Company and the Bank must comply with regulatory  capital  requirements
established  by  the  FRB  and  the  FDIC.   Failure  to  meet  minimum  capital
requirements   can  initiate   certain   mandatory,   and  possibly   additional
discretionary,  actions by regulators  that, if undertaken,  could have a direct
material effect on the Company's

                                       42


financial  statements.  Under capital  adequacy  guidelines  and the  regulatory
framework  for prompt  corrective  action,  the  Company  and the Bank must meet
specific capital guidelines that involve quantitative  measures of the Company's
assets,  liabilities,  and certain  off-balance  sheet items as calculated under
regulatory  accounting  practices.  The Company's and Bank's capital amounts and
classifications  are also subject to  qualitative  judgments  by the  regulators
about components,  risk weightings,  and other factors.  These capital standards
require the Company and the Bank to maintain  minimum ratios of "Tier 1" capital
to total  risk-weighted  assets  ("Tier I Capital  Ratio") and total  capital to
risk-weighted  assets ("Total Capital Ratio") of 4.00% and 8.00%,  respectively.
Tier 1 capital is comprised of total shareholders' equity,  excluding unrealized
gains or losses from the securities  available for sale, less intangible assets,
and total capital is comprised of Tier 1 capital plus certain  adjustments,  the
largest of which for the Company and the Bank is the  allowance for loan losses.
Risk-weighted  assets refer to the on- and  off-balance  sheet  exposures of the
Company and the Bank,  adjusted for their related risk levels using formulas set
forth in FRB and FDIC regulations.

     In addition to the risk-based  capital  requirements  described  above, the
Company and the Bank are subject to a leverage capital requirement,  which calls
for a minimum  ratio of Tier 1 capital (as defined  above) to quarterly  average
total  assets  ("Leverage   Ratio)  of  3.00%  to  5.00%,   depending  upon  the
institution's composite ratings as determined by its regulators. The FRB has not
advised the Company of any requirement specifically applicable to it.

     Table 21 presents the Company's  regulatory  capital  ratios as of December
31, 2005, 2004, and 2003. In 2004 and 2005,  regulatory  capital ratios declined
as  asset  growth  exceeded  capital  growth.  Additionally,  the  $4.3  million
contingency tax loss accrual negatively impacted the Company's capital ratios in
2005. However,  all of the Company's 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%.  The
Bank's regulatory ratios exceeded the threshold for "well-capitalized" status at
December 31, 2005, 2004 and 2003.

     The  Company's  goal is to maintain  its  "well-capitalized"  status at all
times.  At December 31, 2005, the Company's total  risk-based  capital ratio was
11.51% compared to the 10.00% "well-capitalized"  threshold. In order to improve
this ratio, the Company plans to issue $25 million in additional trust preferred
securities  during the first quarter of 2006.  The Company also believes that it
has the ability to raise capital in a secondary  stock offering  should the need
arise.

     See "Supervision and Regulation"  under "Business" above and Note 15 to the
consolidated  financial  statements  for  discussion  of other  matters that may
affect the Company's capital resources.

Inflation

     Because  the assets and  liabilities  of a bank are  primarily  monetary in
nature  (payable in fixed  determinable  amounts),  the performance of a bank is
affected  more by changes in interest  rates than by inflation.  Interest  rates
generally increase as the rate of inflation increases,  but the magnitude of the
change  in rates  may not be the  same.  The  effect  of  inflation  on banks is
normally not as significant as its influence on those businesses that have large
investments in plant and  inventories.  During periods of high inflation,  there
are  normally  corresponding  increases  in the money  supply,  and  banks  will
normally  experience above average growth in assets,  loans and deposits.  Also,
general  increases in the price of goods and  services  will result in increased
operating expenses.

                                       43


Current Accounting and Regulatory Matters

     The Company  prepares its  consolidated  financial  statements  and related
disclosures  in conformity  with  standards  established  by, among others,  the
Financial  Accounting  Standards  Board (the  "FASB").  Because the  information
needed by users of financial reports is dynamic,  the FASB frequently issues new
rules  and  proposes  new  rules  for  companies  to  apply in  reporting  their
activities.  The following  paragraphs  contain  information  regarding recently
adopted  accounting  standards  that affected the Company and new standards that
have not yet been adopted that have the potential to affect the Company.

     In January 2003, the Financial  Accounting  Standards Board ("FASB") issued
Financial  Interpretation  No. 46 (FIN 46),  "Consolidation of Variable Interest
Entities," which was subsequently revised in December 2003. FIN 46 addresses the
consolidation by business enterprises of certain variable interest entities. The
provisions of this  interpretation  became  effective for the Company on January
31, 2003 as it relates to variable  interest entities created or purchased after
that date.  In  December  2003,  the FASB issued a revision to FIN 46 (FIN 46R),
which  clarified and  interpreted  certain of the  provisions of FIN 46, without
changing the basic  accounting  model in FIN 46. The  provisions of FIN 46R were
effective no later than March 31,  2004.  The adoption of FIN 46 did not have an
impact on the  Company's  financial  position or results of  operations,  as the
Company  had  no  investments  in  variable   interest  entities  that  required
consolidation  under FIN 46. The  application of FIN 46R during 2004 resulted in
the  de-consolidation  of three trusts that the Company  established in order to
issue $40 million in trust preferred capital securities. The de-consolidation of
the  trusts  resulted  in  the  Company  recording  the  amount  of  the  junior
subordinated  debentures  between the Company  and the trust  subsidiary  in the
amount of  $1,239,000.  Previously,  the  junior  subordinated  debentures  were
eliminated  in  consolidation.  The impact of this change was to  increase  both
securities (held-to-maturity) and borrowings by $1,239,000 each.

     From November 2003 through  November  2005, the FASB issued several sets of
guidance  relating to the concept of  "other-than-temporary  impairment" and its
applicability  to investments.  The final guidance,  as stated in Staff Position
FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application  to Certain  Investments,"  requires the  disclosure of  information
about  unrealized  losses  associated  with debt and  equity  securities,  while
affirming  the existing  requirements  for  determining  whether  impairment  is
other-than-temporary.  The required  disclosures  are presented in Note 3 in the
accompanying audited consolidated financial statements.

     In  December  2003,  the FASB  issued  Statement  of  Financial  Accounting
Standards No. 132 (revised 2003)  (Statement  132(R)),  "Employers'  Disclosures
about  Pensions and Other  Postretirement  Benefits."  Statement  132(R) revises
employers'  disclosures about pension plans and other postretirement  plans, but
does not change the  measurement or  recognition  of those plans.  Statement No.
132(R)  requires  additional  disclosures  about the assets,  obligations,  cash
flows,  and net periodic pension cost of defined benefit plans and other defined
benefit  postretirement plans. Most of the provisions of Statement 132(R) became
effective for financial  statements  with fiscal years after  December 15, 2003,
with certain  provisions  becoming  effective for fiscal years ending after June
15, 2004.  The additional  disclosures  required for the Company are included in
Note 11 in the accompanying audited consolidated financial statements.

    In December 2003,  the American  Institute of Certified  Public  Accountants
issued  Statement of Position 03-3 (SOP 03-3),  "Accounting for Certain Loans or
Debt  Securities  Acquired in a  Transfer."  SOP 03-3  provides  guidance on the
accounting for differences  between contractual and expected cash flows from the
purchaser's  initial  investment  in  loans  or debt  securities  acquired  in a
transfer,  if those  differences are  attributable,  at least in part, to credit
quality.  The scope of SOP 03-3  includes  loans  that have  shown  evidence  of
deterioration of credit quality since  origination,  and includes loans acquired
individually, in pools or as part of a business combination. Among other things,
SOP 03-3: (1) prohibits the recognition of the excess of contractual  cash flows
over expected  cash flows as an  adjustment of yield,  loss accrual or valuation
allowance at the time of purchase;  (2) requires  that  subsequent  increases in
expected cash flows be recognized  prospectively through an adjustment of

                                       44


yield;  and (3) requires  that  subsequent  decreases in expected  cash flows be
recognized  as  impairment.  In  addition,  SOP 03-3  prohibits  the creation or
carrying  over of a valuation  allowance in the initial  accounting of all loans
within the scope that are acquired in a transfer. Under SOP 03-3, the difference
between  expected cash flows and the purchase price is accreted as an adjustment
to  yield  over  the  life  of the  loans.  For  loans  acquired  in a  business
combination that have shown  deterioration of credit quality since  origination,
SOP 03-3 represents a significant  change from the previous purchase  accounting
practice whereby the acquiree's  allowance for loan losses is typically added to
the acquirer's allowance for loan losses. SOP 03-3 became effective for loans or
debt  securities  acquired  by the  Company  beginning  on January 1, 2005.  The
adoption of this  statement in the first  quarter of 2005 did not have an impact
on the Company's financial statements;  however it will change, on a prospective
basis,  the way that the Company  accounts for loans and debt securities that it
acquires in the future.

    In March 2004,  the Securities  and Exchange  Commission  (the "SEC") issued
Staff  Accounting  Bulletin  Number 105 (SAB 105),  "Application  of  Accounting
Principles to Loan  Commitments."  SAB 105 summarizes the views of the SEC staff
regarding the application of generally  accepted  accounting  principles to loan
commitments  accounted for as derivatives,  and its provisions were required for
such loan commitments entered into subsequent to March 31, 2004. The adoption of
SAB 105 did not have a material impact on the Company's  consolidated  financial
statements.

     In  December  2004,  the FASB  issued  Statement  of  Financial  Accounting
Standards No. 123 (revised  2004)  (Statement  123(R)),  "Share-Based  Payment."
Statement  123(R) replaces FASB Statement No. 123 (Statement  123),  "Accounting
for Stock-Based  Compensation,"  and supersedes APB Opinion No. 25 (Opinion 25),
"Accounting for Stock Issued to Employees."  Statement 123, as originally issued
in 1995,  established as preferable a fair-value-based  method of accounting for
share-based  payment  transactions  with  employees.   However,   Statement  123
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Statement 123(R)
requires that the compensation cost relating to share-based payment transactions
be recognized in financial  statements.  That cost will be measured based on the
fair value of the  equity or  liability  instruments  issued.  Statement  123(R)
covers a wide range of share-based  compensation  arrangements  including  share
options,  restricted share plans,  performance-based  awards, share appreciation
rights,  and employee  share purchase  plans.  Currently,  the only  share-based
compensation  arrangement  utilized by the Company is stock  options.  Under the
original  provisions of Statement  123(R), it was to have become effective as of
the first  interim or annual  reporting  period that began after June 15,  2005.
However in April  2005,  the  Securities  and  Exchange  Commission  effectively
delayed the adoption of Statement  123(R) for the Company until January 1, 2006.
See  "Stock-Based  Compensation"  above for further  discussion,  including  the
potential quantitative impact of adopting this statement.

     In March  2005,  the FRB  issued a final  rule  concerning  the  regulatory
capital  treatment  of  Trust  Preferred  Securities  ("TPS")  by  bank  holding
companies.  After a five-year  transition  period  ending  March 31,  2009,  the
aggregate  amount of TPS and certain other  capital  elements will be limited to
25% of Tier I capital elements - net of goodwill,  less any associated  deferred
tax liability.  Amounts of restricted  core capital  elements in excess of these
limits generally may be included in Tier 2 capital.  The Company does not expect
this rule to materially impact the Company's capital ratios.

     In May 2005, the FASB issued  Statement of Financial  Accounting  Standards
No.  154  (Statement  154),   "Accounting  Changes  and  Error  Corrections,   a
replacement  of APB  Opinion No. 20 and FASB  Statement  No. 3."  Statement  154
applies to all voluntary  changes in accounting  principle as well as to changes
required  by  an  accounting   pronouncement  that  does  not  include  specific
transition  provisions.  Statement 154 eliminates the previous  requirement that
the  cumulative  effect of changes in  accounting  principle be reflected in the
income statement in the period of change.  Instead, to enhance the comparability
of prior period  financial  statements,  Statement  154 requires that changes in
accounting   principle   be   retrospectively   applied.   Under   retrospective
application,  the new accounting principle is applied as of the beginning of the
first period presented, as if that principle had always been used. Statement 154
carries  forward the  requirement  that an error be reported by restating  prior
period  financial  statement as of the beginning of the first period.  Statement
154 is effective for

                                       45


accounting  changes and  corrections  of errors made in fiscal  years  beginning
after  December  15, 2005.  The Company does not expect the initial  adoption of
Statement 154 to materially impact the Company's financial  statements;  however
the adoption of this statement  could result in a material change to the way the
Company  reflects  future  changes in  accounting  principles,  depending on the
nature  of  future  changes  in  accounting   principles  and  whether  specific
transition provisions are included.


Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

     The  information  responsive  to this  Item is  found  in Item 7 under  the
caption "Interest Rate Risk."

FORWARD-LOOKING STATEMENTS

     The  discussion  in Part I and Part II of this report  contains  statements
that could be deemed  forward-looking  statements  within the meaning of Section
21E of the Securities Exchange Act of 1934 and the Private Securities Litigation
Reform Act, which statements are inherently  subject to risks and uncertainties.
Forward-looking statements are statements that include projections, predictions,
expectations  or beliefs  about future  events or results or  otherwise  are not
statements of historical  fact. Such statements are often  characterized  by the
use of qualifying  words (and their  derivatives)  such as "expect,"  "believe,"
"estimate,"  "plan,"  "project,"  or other  statements  concerning  opinions  or
judgment of the Company and its  management  about future  events.  Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the  financial  success or changing  strategies of the Company's
customers, the Company's level of success in integrating  acquisitions,  actions
of  government  regulators,  the level of market  interest  rates,  and  general
economic conditions, and also include the matters discussed under "Risk Factors"
in Item 1A of this report.

                                       46




--------------------------------------------------------------------------------------------------------------------
Table 1    Selected Consolidated Financial Data
--------------------------------------------------------------------------------------------------------------------



                                                                        Year Ended December 31,
    ($ in thousands, except per share             ------------------------------------------------------------------
          and nonfinancial data)                    2005 (1)       2004          2003          2002          2001
                                                  ----------    ----------    ----------    ----------    ----------
                                                                                               
Income Statement Data
Interest income                                   $  101,429        81,593        74,667        73,261        76,773
Interest expense                                      32,838        20,303        18,907        23,871        35,720
Net interest income                                   68,591        61,290        55,760        49,390        41,053
Provision for loan losses                              3,040         2,905         2,680         2,545         1,151
Net interest income after provision                   65,551        58,385        53,080        46,845        39,902
Noninterest income                                    15,004        15,864        14,918        11,968         9,655
Noninterest expense                                   47,636        43,717        37,964        32,301        28,634
Income before income taxes                            32,919        30,532        30,034        26,512        20,923
Income taxes                                          16,829        10,418        10,617         9,282         7,307
Net income                                            16,090        20,114        19,417        17,230        13,616

Earnings per share - basic                              1.14          1.42          1.38          1.26          1.00
Earnings per share - diluted                            1.12          1.40          1.35          1.23          0.98

--------------------------------------------------------------------------------------------------------------------
Per Share Data (2)
Cash dividends declared                           $     0.70          0.66          0.63          0.60          0.59
Market Price
     High                                              27.88         29.73         21.49         18.35         18.72
     Low                                               19.32         18.47         15.30         13.47         10.33
     Close                                             20.16         27.17         20.80         15.67         15.03
Book value - stated                                    10.94         10.54         10.02          9.06          8.54
Tangible book value                                     7.48          7.04          6.44          7.22          6.75
--------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data (at year end)
Total assets                                      $1,801,050     1,638,913     1,475,769     1,218,146     1,144,691
Loans                                              1,482,611     1,367,053     1,218,895       998,547       890,310
Allowance for loan losses                             15,716        14,717        13,569        10,907         9,388
Intangible assets                                     49,227        49,330        50,701        25,169        24,488
Deposits                                           1,494,577     1,388,768     1,249,364     1,055,957     1,000,281
Borrowings                                           100,239        92,239        76,000        30,000        15,000
Total shareholders' equity                           155,728       148,478       141,856       123,985       116,726
--------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Assets                                            $1,709,380     1,545,332     1,339,823     1,162,708     1,046,030
Loans                                              1,422,419     1,295,682     1,113,426       954,885       831,817
Earning assets                                     1,593,554     1,434,425     1,245,679     1,090,666       983,628
Deposits                                           1,460,620     1,306,404     1,153,385     1,010,693       899,989
Interest-bearing liabilities                       1,359,744     1,232,130     1,065,950       928,686       837,563
Shareholders' equity                                 154,871       146,683       137,293       120,943       115,620
--------------------------------------------------------------------------------------------------------------------
Ratios
Return on average assets                                0.94%         1.30%         1.45%         1.48%         1.30%
Return on average equity                               10.39%        13.71%        14.14%        14.25%        11.78%
Net interest margin (taxable-equivalent  basis)         4.33%         4.31%         4.52%         4.58%         4.23%
Shareholders' equity to assets at year end              8.65%         9.06%         9.61%        10.18%        10.20%
Loans to deposits at year end                          99.20%        98.44%        97.56%        94.56%        89.01%
Allowance for loan losses to total loans                1.06%         1.08%         1.11%         1.09%         1.05%
Nonperforming  assets to total assets at year end       0.17%         0.32%         0.39%         0.36%         0.45%
Net charge-offs to average loans                        0.14%         0.14%         0.10%         0.11%         0.09%
Efficiency ratio                                       56.68%        56.32%        53.32%        52.19%        55.82%
--------------------------------------------------------------------------------------------------------------------
Nonfinancial Data
Number of branches                                        61            59            57            48            45
Number of employees - Full time equivalents              578           563           550           447           393

--------------------------------------------------------------------------------------------------------------------

(1)  Financial results for 2005 were significantly impacted by a contingency tax
     loss  accrual  amounting  to $4.3  million,  or $0.30  per  diluted  share,
     included above in the line item "Income Taxes."
(2)  Per share  amounts for 2001,  2002,  and 2003 have been restated from their
     originally  reported  amounts to reflect  the  3-for-2  stock split paid on
     November 15, 2004.

                                       47




---------------------------------------------------------------------------------------------------------------------------------
Table 2    Average Balances and Net Interest Income Analysis
---------------------------------------------------------------------------------------------------------------------------------
                                                                   Year Ended December 31,
                             ----------------------------------------------------------------------------------------------------
                                           2005                              2004                             2003
                             --------------------------------   -------------------------------   -------------------------------
                                                    Interest                          Interest                          Interest
                               Average     Avg.     Earned        Average    Avg.     Earned       Average     Avg.     Earned
($ in thousands)               Volume      Rate     or Paid       Volume     Rate     or Paid       Volume     Rate     or Paid
                             ----------   ------   ----------   ----------  ------   ----------   ----------  ------   ----------
                                                                                           
Assets
Loans (1)                    $1,422,419    6.62%   $   94,097   $1,295,682   5.87%   $   76,093   $1,113,426   6.23%   $   69,318
Taxable securities              114,223    4.54%        5,184       98,016   4.52%        4,428       81,211   4.80%        3,902
Non-taxable securities (2)       10,782    8.57%          924       12,082   8.30%        1,003       14,238   8.33%        1,186
Short-term investments,
  primarily federal funds        46,130    3.62%        1,672       28,645   1.90%          544       36,804   2.12%          779
                             ----------            ----------   ----------           ----------   ----------           ----------
Total interest-
    earning assets            1,593,554    6.39%      101,877    1,434,425   5.72%       82,068    1,245,679   6.04%       75,185
                                                   ----------   ----------           ----------   ----------           ----------
Cash and due from banks          34,574                             32,594                            31,189
Bank premises and
    equipment, net               32,179                             25,915                            23,371
Other assets                     49,073                             52,398                            39,584
                             ----------                         ----------                        ----------
Total assets                 $1,709,380                         $1,545,332                        $1,339,823
                             ==========                         ==========                        ==========

Liabilities and Equity
Savings, NOW and  money
  market deposits            $  470,648    0.86%        4,048   $  468,177   0.54%        2,530   $  414,525   0.53%        2,215
Time deposits >$100,000         350,240    3.26%       11,425      271,448   2.34%        6,362      229,758   2.56%        5,892
Other time deposits             455,557    2.86%       13,043      407,602   2.04%        8,334      379,603   2.37%        9,001
                             ----------            ----------   ----------           ----------   ----------           ----------
     Total
      interest-bearing
      deposits                1,276,445    2.23%       28,516    1,147,227   1.50%       17,226    1,023,886   1.67%       17,108
Securities sold under
  agreements to repurchase        6,219    2.88%          179           --     --            --           --     --            --
Borrowings                       77,080    5.37%        4,143       84,903   3.62%        3,077       42,064   4.28%        1,799
                             ----------            ----------   ----------           ----------   ----------           ----------
Total interest-
    bearing liabilities       1,359,744    2.42%       32,838    1,232,130   1.65%       20,303    1,065,950   1.77%       18,907
                                                   ----------                        ----------                        ----------
Non-interest-
    bearing deposits            184,175                            159,177                           129,499
Other liabilities                10,590                              7,342                             7,081
Shareholders' equity            154,871                            146,683                           137,293
                             ----------                         ----------                        ----------
Total liabilities and
    shareholders' equity     $1,709,380                         $1,545,332                        $1,339,823
                             ==========                         ==========                        ==========
Net yield on interest-
    earning assets and
    net interest income                    4.33%   $   69,039                4.31%   $   61,765                4.52%   $   56,278
                                                   ==========                        ==========                        ==========
Interest rate spread                       3.97%                             4.07%                             4.26%

Average prime rate                         6.19%                             4.34%                             4.12%
---------------------------------------------------------------------------------------------------------------------------------


     (1) Average  loans  include  nonaccruing  loans,  the effect of which is to
         lower the average rate shown.  Interest earned includes recognized loan
         fees in the amounts of $1,037,000, $1,244,000, and $1,235,000 for 2005,
         2004, and 2003, respectively.
     (2) Includes tax-equivalent adjustments of $448,000, $475,000, and $518,000
         in 2005, 2004, and 2003, respectively, to reflect the federal and state
         benefit of the tax-exempt  securities  (using a 39% combined tax rate),
         reduced by the related nondeductible portion of interest expense.
================================================================================

                                       48



------------------------------------------------------------------------------------------------------------------------------------
Table 3  Volume and Rate Variance Analysis
------------------------------------------------------------------------------------------------------------------------------------
                                                         Year Ended December 31, 2005            Year Ended December 31, 2004
                                                    -------------------------------------    ---------------------------------------
                                                     Change Attributable to                   Change Attributable to
                                                    ------------------------                 ------------------------
                                                                                 Total                                     Total
                                                     Changes       Changes      Increase      Changes       Changes       Increase
(In thousands)                                      in Volumes     in Rates    (Decrease)    in Volumes     in Rates     (Decrease)
                                                    ----------    ----------   ----------    ----------    ----------    ----------
                                                                                                            
Interest income (tax-equivalent):
     Loans                                          $    7,914        10,090       18,004        11,025        (4,250)        6,775
     Taxable securities                                    734            22          756           783          (257)          526
     Non-taxable securities                               (110)           31          (79)         (179)           (4)         (183)
     Short-term investments, principally
          federal funds sold                               483           645        1,128          (164)          (71)         (235)
                                                    ----------    ----------   ----------    ----------    ----------    ----------
               Total interest income                     9,021        10,788       19,809        11,465        (4,582)        6,883
                                                    ----------    ----------   ----------    ----------    ----------    ----------

Interest expense:
     Savings, NOW and money
          market deposits                                   17         1,501        1,518           288            27           315
     Time deposits>$100,000                              2,208         2,855        5,063         1,023          (553)          470
     Other time deposits                                 1,177         3,532        4,709           618        (1,285)         (667)
                                                    ----------    ----------   ----------    ----------    ----------    ----------
          Total interest-bearing deposits                3,402         7,888       11,290         1,929        (1,811)          118
     Securities sold under agreements to
      repurchase                                           179            --          179            --            --            --
     Borrowings                                           (352)        1,418        1,066         1,692          (414)        1,278
                                                    ----------    ----------   ----------    ----------    ----------    ----------
              Total interest expense                     3,229         9,306       12,535         3,621        (2,225)        1,396
                                                    ----------    ----------   ----------    ----------    ----------    ----------

                    Net interest income             $    5,792         1,482        7,274         7,844        (2,357)        5,487
                                                    ==========    ==========   ==========    ==========    ==========    ==========

     Changes attributable to both volume and rate are allocated equally between rate and volume variances.



------------------------------------------------------------------------------------------------------------------------------------
Table 4  Noninterest Income
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Year Ended December 31,
                                                                                   -------------------------------------------------
(In thousands)                                                                       2005                 2004                 2003
                                                                                   --------             --------            --------
                                                                                                                      
Service charges on deposit accounts                                                $  8,537                9,064               7,938
Other service charges, commissions, and fees                                          3,963                3,361               2,710
Fees from presold mortgages                                                           1,176                  969               2,327
Commissions from sales of insurance and
       financial products                                                             1,307                1,406               1,304
Data processing fees                                                                    279                  416                 333
                                                                                   --------             --------            --------
     Total core noninterest income                                                   15,262               15,216              14,612
Loan sale gains                                                                           9                    2                   2
Securities gains, net                                                                     5                  299                 218
Other gains (losses), net                                                              (272)                 347                  86
                                                                                   --------             --------            --------
          Total                                                                    $ 15,004               15,864              14,918
                                                                                   ========             ========            ========



------------------------------------------------------------------------------------------------------------------------------------
Table 5  Noninterest Expenses
------------------------------------------------------------------------------------------------------------------------------------

                                                                                                    Year Ended December 31,
                                                                                          ------------------------------------------
(In thousands)                                                                              2005             2004              2003
                                                                                          --------         --------         --------
                                                                                                                     
Salaries                                                                                  $ 21,921           20,116           17,756
Employee benefits                                                                            6,054            5,488            4,381
                                                                                          --------         --------         --------
     Total personnel expense                                                                27,975           25,604           22,137
Occupancy expense                                                                            3,037            2,754            2,366
Equipment related expenses                                                                   2,965            2,956            2,555
Amortization of intangible assets                                                              290              378              224
Stationery and supplies                                                                      1,590            1,523            1,498
Telephone                                                                                    1,260            1,345            1,229
Non-credit losses                                                                              110              187              198
Other operating expenses                                                                    10,409            8,970            7,757
                                                                                          --------         --------         --------
          Total                                                                           $ 47,636           43,717           37,964
                                                                                          ========         ========         ========
------------------------------------------------------------------------------------------------------------------------------------

                                                               49



------------------------------------------------------------------------------------------------------------------------------------
Table 6  Income Taxes
------------------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                                    2005                 2004                 2003
                                                                               ----------           ----------           ----------
                                                                                                                     
Current  - Federal                                                             $    8,285               10,407                9,578
         - State                                                                    8,700                  228                  614
Deferred - Federal                                                                   (124)                (192)                 425
         - State                                                                      (32)                 (25)                  --
                                                                               ----------           ----------           ----------
     Total                                                                     $   16,829               10,418               10,617
                                                                               ==========           ==========           ==========

Effective tax rate                                                                   51.1%                34.1%                35.3%
                                                                               ==========           ==========           ==========



------------------------------------------------------------------------------------------------------------------------------------
Table 7  Distribution of Assets and Liabilities
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                       As of December 31,
                                                                                            ----------------------------------------
                                                                                                2005          2004          2003
                                                                                             ----------    ----------    ----------
                                                                                                                        
Assets
     Interest-earning assets
        Net loans                                                                                    81%           82%           82%
        Securities available for sale                                                                 6             5             7
        Securities held to maturity                                                                   1             1             1
        Short term investments                                                                        4             4             2
                                                                                             ----------    ----------    ----------
             Total interest-earning assets                                                           92            92            92

     Noninterest-earning assets
        Cash and due from banks                                                                       2             2             2
        Premises and equipment                                                                        2             2             2
        Other assets                                                                                  4             4             4
                                                                                             ----------    ----------    ----------
               Total assets                                                                         100%          100%          100%
                                                                                             ==========    ==========    ==========

Liabilities and shareholders' equity
     Demand deposits - noninterest bearing                                                           11%           10%           10%
     Savings, NOW, and money market deposits                                                         25            29            31
     Time deposits of $100,000 or more                                                               20            21            16
     Other time deposits                                                                             27            25            27
                                                                                             ----------    ----------    ----------
           Total deposits                                                                            83            85            84
     Securities sold under agreements to repurchase                                                   2            --            --
     Borrowings                                                                                       5             5             5
     Accrued expenses and other liabilities                                                           1             1             1
                                                                                             ----------    ----------    ----------
             Total liabilities                                                                       91            91            90

Shareholders' equity                                                                                  9             9            10
                                                                                             ----------    ----------    ----------
                 Total liabilities and shareholders' equity                                         100%          100%          100%
                                                                                             ==========    ==========    ==========



------------------------------------------------------------------------------------------------------------------------------------
Table 8  Securities Portfolio Composition
------------------------------------------------------------------------------------------------------------------------------------

                                                                                                       As of December 31,
                                                                                            ----------------------------------------
(In thousands)                                                                                  2005          2004            2003
                                                                                            ----------     ----------     ----------
                                                                                                                     
Securities available for sale:
     U.S. Government agencies                                                               $   44,481         29,810         35,808
     Mortgage-backed securities                                                                 47,928         41,062         48,473
     Corporate bonds                                                                            14,912         12,084         13,415
     Equity securities                                                                           6,292          5,598          5,759
                                                                                            ----------     ----------     ----------
             Total securities available for sale                                               113,613         88,554        103,455
                                                                                            ----------     ----------     ----------

Securities held to maturity:
     State and local governments                                                                11,382         11,605         12,947
     Other                                                                                       2,790          2,420          1,259
                                                                                            ----------     ----------     ----------
             Total securities held to maturity                                                  14,172         14,025         14,206
                                                                                            ----------     ----------     ----------

                       Total securities                                                     $  127,785        102,579        117,661
                                                                                            ==========     ==========     ==========

                       Average total securities during year                                 $  125,005        110,098         95,449
                                                                                            ==========     ==========     ==========
------------------------------------------------------------------------------------------------------------------------------------


                                                                50


--------------------------------------------------------------------------------
Table 9  Securities Portfolio Maturity Schedule
--------------------------------------------------------------------------------
                                                     As of December 31,
                                              ------------------------------
                                                           2005
                                              ------------------------------
                                                Book       Fair       Book
                                                Value     Value     Yield (1)
                                              --------   --------   --------
Securities available for sale:

   U.S. Government agencies
        Due within one year                   $  2,300      2,268       3.10%
        Due after one but within five years     37,285     36,579       3.95%
        Due after five but within ten years      5,673      5,634       5.02%
                                              --------   --------   --------
              Total                             45,258     44,481       4.05%
                                              --------   --------   --------

   Mortgage-backed securities
        Due within one year                      1,498      1,468       4.21%
        Due after one but within five years     36,549     35,651       4.25%
        Due after five but within ten years     10,290      9,946       4.72%
        Due after ten years                        898        863       5.07%
                                              --------   --------   --------
              Total                             49,235     47,928       4.36%
                                              --------   --------   --------

   Corporate debt securities
        Due after five but within ten years      2,990      3,011       6.85%
        Due after ten years                     10,939     11,901       7.74%
                                              --------   --------   --------
              Total                             13,929     14,912       7.55%
                                              --------   --------   --------

    Equity securities                            6,240      6,292       4.60%
                                              --------   --------   --------

Total securities available for sale
        Due within one year                      3,798      3,736       3.54%
        Due after one but within five years     73,834     72,230       4.10%
        Due after five but within ten years     18,953     18,591       5.15%
        Due after ten years                     11,837     12,764       7.54%
        Equity securities                        6,240      6,292       4.60%
                                              --------   --------   --------
              Total                           $114,662    113,613       4.64%
                                              ========   ========   ========

Securities held to maturity:

   State and local governments
        Due within one year                   $  1,323      1,325       5.99%
        Due after one but within five years      6,712      6,799       7.30%
        Due after five but within ten years      3,061      3,121       7.34%
        Due after ten years                        286        286       6.01%
                                              --------   --------   --------
              Total                             11,382     11,531       7.14%
                                              --------   --------   --------

    Other
        Due after one but within five years      2,790      2,790       0.13%
                                              --------   --------   --------
              Total                              2,790      2,790       0.13%
                                              --------   --------   --------

Total securities held to maturity
        Due within one year                      1,323      1,325       5.99%
        Due after one but within five years      9,502      9,589       5.20%
        Due after five but within ten years      3,061      3,121       7.34%
        Due after ten years                        286        286       6.01%
                                              --------   --------   --------
              Total                           $ 14,172     14,321       5.76%
                                              ========   ========   ========

(1) Yields on tax-exempt  investments have been adjusted to a taxable equivalent
basis using a 39% tax rate.
--------------------------------------------------------------------------------

                                       51



--------------------------------------------------------------------------------------------------------------------------------
Table 10  Loan Portfolio Composition
--------------------------------------------------------------------------------------------------------------------------------
                                                               As of December 31,
                          2005                  2004                  2003                  2002                  2001
                 -------------------   --------------------   --------------------   --------------------   --------------------
                              % of                   % of                   % of                   % of                   % of
($ in                         Total                  Total                  Total                  Total                  Total
thousands)         Amount     Loans      Amount      Loans      Amount      Loans      Amount      Loans      Amount      Loans
                 -----------  ------   -----------   ------   -----------   ------   -----------   ------   -----------   ------
                                                                                              
Commercial,
  financial, &
  agricultural   $   135,942    9.17%  $   122,501     8.96%  $   117,287     9.62%  $    88,291     8.84%  $    79,695     8.94%
Real estate -
  construction       125,158    8.44%      117,158     8.57%       98,189     8.05%       68,162     6.82%       66,304     7.44%
Real estate -
  mortgage(1)      1,150,068   77.58%    1,063,694    77.80%      939,578    77.05%      795,148    79.57%      697,498    78.29%
Installment
  loans to
  individuals         71,259    4.81%       63,913     4.67%       64,444     5.28%       47,648     4.77%       47,471     5.33%
                 -----------  ------   -----------   ------   -----------   ------   -----------   ------   -----------   ------
   Loans, gross    1,482,427  100.00%    1,367,266   100.00%    1,219,498   100.00%      999,249   100.00%      890,968   100.00%
                              ======                 ======                 ======                 ======                 ======
Unamortized net
  deferred loan
  costs/ (fees)          184                  (213)                  (603)                  (702)                  (658)
                 -----------           -----------            -----------            -----------            -----------
Total loans,
  net            $ 1,482,611           $ 1,367,053            $ 1,218,895            $   998,547            $   890,310
                 ===========           ===========            ===========            ===========            ===========


(1)   The majority of these loans are various personal and commercial loans
      where real estate provides additional security for the loan.


--------------------------------------------------------------------------------------------------------------------------------
Table 11  Loan Maturities
--------------------------------------------------------------------------------------------------------------------------------
                                                                As of December 31, 2005
                                   ---------------------------------------------------------------------------------
                                       Due within     Due after one year but   Due after five
                                        one year        within five years            years               Total
                                   ------------------   ------------------   ------------------   ------------------
($ in thousands)                     Amount    Yield      Amount    Yield      Amount    Yield      Amount    Yield
                                   ----------  ------   ----------  ------   ----------  ------   ----------  ------
                                                                                        
Variable Rate Loans:
   Commercial, financial, and
       agricultural                $   39,685    7.50%  $   27,391    7.40%  $    2,501    7.48%  $   69,577    7.46%
   Real estate - construction          96,892    7.78%      10,651    7.38%       2,554    7.29%     110,097    7.73%
   Real estate - mortgage              87,471    7.64%     269,297    7.25%     298,987    6.66%     655,755    7.03%
   Installment loans
       to individuals                   6,789    7.46%       8,364    8.22%       1,579    8.00%      16,732    7.89%
                                   ----------           ----------           ----------           ----------
          Total at variable rates     230,837    7.67%     315,703    7.29%     305,621    6.68%     852,161    7.17%
                                   ----------           ----------           ----------           ----------

Fixed Rate Loans:
   Commercial, financial, and          13,493    6.85%      41,240    6.45%       5,062    5.50%      59,795    6.46%
       agricultural
   Real estate - construction          16,348    6.32%       1,086    6.32%          --      --       17,434    6.32%
   Real estate - mortgage              67,663    6.71%     362,265    6.43%      53,642    6.86%     483,570    6.52%
   Installment loans
       to individuals                  14,086    7.62%      51,975    8.49%       1,950    7.09%      68,011    8.27%
                                   ----------           ----------           ----------           ----------
          Total at fixed rates        111,590    6.78%     456,566    6.67%      60,654    6.75%     628,810    6.70%
                                   ----------           ----------           ----------           ----------

              Subtotal                342,427    7.38%     772,269    6.92%     366,275    6.69%   1,480,971    6.97%
Nonaccrual loans                        1,640                   --                   --                1,640
                                   ----------           ----------           ----------           ----------
                  Total Loans      $  344,067           $  772,269           $  366,275           $1,482,611
                                   ==========           ==========           ==========           ==========

The above table is based on contractual scheduled maturities. Early repayment of
loans or renewals at maturity are not considered in this table.
--------------------------------------------------------------------------------------------------------------------------------


                                                            52



------------------------------------------------------------------------------------------------------------------------------------
Table 12  Nonperforming Assets
------------------------------------------------------------------------------------------------------------------------------------
                                                                                           As of December 31,
                                                                     --------------------------------------------------------------
($ in thousands)                                                        2005         2004         2003         2002         2001
                                                                     ----------   ----------   ----------   ----------   ----------

                                                                                                          
Nonaccrual loans                                                     $    1,640        3,707        4,274        2,976        3,808
Restructured loans                                                           13           17           21           41           83
Accruing loans >90 days past due                                             --           --           --           --           --
                                                                     ----------   ----------   ----------   ----------   ----------
     Total nonperforming loans                                            1,653        3,724        4,295        3,017        3,891
Other real estate (included in other assets)                              1,421        1,470        1,398        1,384        1,253
                                                                     ----------   ----------   ----------   ----------   ----------
     Total nonperforming assets                                      $    3,074        5,194        5,693        4,401        5,144
                                                                     ==========   ==========   ==========   ==========   ==========

Nonperforming loans as a percentage
   of total loans                                                          0.11%        0.27%        0.35%        0.30%        0.44%
Nonperforming assets as a percentage of
   loans and other real estate                                             0.21%        0.38%        0.47%        0.44%        0.58%
Nonperforming assets as a percentage of
   total assets                                                            0.17%        0.32%        0.39%        0.36%        0.45%
Allowance for loan losses as a percentage
   of nonperforming loans                                                950.76%      395.19%      315.93%      361.52%      241.27%



------------------------------------------------------------------------------------------------------------------------------------
Table 13  Allocation of the Allowance for Loan Losses
------------------------------------------------------------------------------------------------------------------------------------
                                                                                           As of December 31,
                                                                      --------------------------------------------------------------
($ in thousands)                                                         2005         2004         2003         2002         2001
                                                                      ----------   ----------   ----------   ----------   ----------
                                                                                                                
Commercial, financial, and agricultural                               $    2,686        2,453        2,420        1,890        1,643
Real estate - construction                                                   798          757          641          483          449
Real estate - mortgage                                                    10,445        9,965        8,920        7,416        6,230
Installment loans to individuals                                           1,763        1,468        1,435        1,094        1,021
                                                                      ----------   ----------   ----------   ----------   ----------
Total allocated                                                           15,692       14,643       13,416       10,883        9,343
Unallocated                                                                   24           74          153           24           45
                                                                      ----------   ----------   ----------   ----------   ----------
Total                                                                 $   15,716       14,717       13,569       10,907        9,388
                                                                      ==========   ==========   ==========   ==========   ==========

------------------------------------------------------------------------------------------------------------------------------------


                                                               53



------------------------------------------------------------------------------------------------------------------------------
Table 14  Loan Loss and Recovery Experience
------------------------------------------------------------------------------------------------------------------------------
                                                                               As of December 31,
                                                   ---------------------------------------------------------------------------
($ in thousands)                                       2005            2004           2003            2002           2001
                                                   -----------     -----------     -----------     -----------     -----------
                                                                                                        
Loans outstanding at end of year                   $ 1,482,611       1,367,053       1,218,895         998,547         890,310
                                                   ===========     ===========     ===========     ===========     ===========
Average amount of loans outstanding                $ 1,422,419       1,295,682       1,113,426         954,885         831,817
                                                   ===========     ===========     ===========     ===========     ===========

Allowance for loan losses, at
   beginning of year                               $    14,717          13,569          10,907           9,388           7,893
Provision for loan losses                                3,040           2,905           2,680           2,545           1,151
Additions related to loans assumed in
      corporate acquisitions                                --              --           1,083              50           1,125
                                                   -----------     -----------     -----------     -----------     -----------
                                                        17,757          16,474          14,670          11,983          10,169
                                                   -----------     -----------     -----------     -----------     -----------
Loans charged off:
   Commercial, financial and agricultural                 (756)           (247)           (205)           (598)            (89)
   Real estate - mortgage                               (1,120)         (1,143)           (705)           (230)           (181)
   Installment loans to individuals                       (487)           (548)           (431)           (383)           (642)
                                                   -----------     -----------     -----------     -----------     -----------
       Total charge-offs                                (2,363)         (1,938)         (1,341)         (1,211)           (912)
                                                   -----------     -----------     -----------     -----------     -----------
Recoveries of loans previously charged-off:
   Commercial, financial and agricultural                   99              45              73              33              27
   Real estate - mortgage                                  115              63              30              15              48
   Installment loans to individuals                        108              73             137              87              56
                                                   -----------     -----------     -----------     -----------     -----------
       Total recoveries                                    322             181             240             135             131
                                                   -----------     -----------     -----------     -----------     -----------
            Net charge-offs                             (2,041)         (1,757)         (1,101)         (1,076)           (781)
                                                   -----------     -----------     -----------     -----------     -----------
Allowance for loan losses, at end of year          $    15,716          14,717          13,569          10,907           9,388
                                                   ===========     ===========     ===========     ===========     ===========

Ratios:
   Net charge-offs as a percent of average loans          0.14%           0.14%           0.10%           0.11%           0.09%
   Allowance for loan losses as a
         percent of  loans at end of year                 1.06%           1.08%           1.11%           1.09%           1.05%
   Allowance for loan losses as a multiple
        of net charge-offs                               7.70x           8.38x          12.32x          10.14x          12.02x
   Provision for loan losses as a percent of net
        charge-offs                                     148.95%         165.33%         243.42%         236.52%         147.38%
   Recoveries of loans previously charged-off
        as a percent of loans charged-off                13.63%           9.34%          17.90%          11.15%          14.36%

------------------------------------------------------------------------------------------------------------------------------


                                                               54



------------------------------------------------------------------------------------------------------------------------------------
Table 15  Average Deposits
------------------------------------------------------------------------------------------------------------------------------------

                                                                                 Year Ended December 31,
                                                      ------------------------------------------------------------------------------
                                                                2005                       2004                      2003
                                                      ------------------------   ------------------------   ------------------------
                                                       Average       Average       Average       Average     Average       Average
                                                        Amount         Rate        Amount         Rate        Amount         Rate
                                                      ----------    ----------   ----------    ----------   ----------    ----------
                                                                                                             
Interest-bearing demand deposits                      $  341,370         0.81%      338,831         0.47%      308,750         0.47%
Savings deposits                                         129,278         1.00%      129,346         0.73%      105,775         0.72%
Time deposits                                            455,557         2.86%      407,602         2.04%      379,603         2.37%
Time deposits > $100,000                                 350,240         3.26%      271,448         2.34%      229,758         2.56%
                                                      ----------                 ----------                 ----------
     Total interest-bearing deposits                   1,276,445         2.23%    1,147,227         1.50%    1,023,886         1.67%
Noninterest-bearing deposits                             184,175           --       159,177           --       129,499           --
                                                      ----------                 ----------                 ----------
     Total deposits                                   $1,460,620         1.95%    1,306,404         1.32%    1,153,385         1.48%
                                                      ==========                 ==========                 ==========



------------------------------------------------------------------------------------------------------------------------------------
Table 16  Maturities of Time Deposits of $100,000 or More
------------------------------------------------------------------------------------------------------------------------------------

                                                                                          As of December 31, 2005
                                                                  ------------------------------------------------------------------
                                                                   3 Months    Over 3 to 6   Over 6 to 12    Over 12
(In thousands)                                                      or Less       Months         Months       Months         Total
                                                                  ----------    ----------    ----------    ----------    ----------
                                                                                                           
Time deposits of $100,000 or more                                 $  106,804        78,207       107,061        64,209       356,281
                                                                  ==========    ==========    ==========    ==========    ==========



------------------------------------------------------------------------------------------------------------------------------------
Table 17   Interest Rate Sensitivity Analysis
------------------------------------------------------------------------------------------------------------------------------------
                                                                Repricing schedule for interest-earning assets and interest-bearing
                                                                             liabilities held as of December 31, 2005
                                                               --------------------------------------------------------------------
                                                                3 Months    Over 3 to 12   Total Within     Over 12
($ in thousands)                                                 or Less       Months       12 Months        Months        Total
                                                               ----------    ----------     ----------     ----------    ----------
                                                                                                           
Earning assets:
     Loans, net of deferred fees                               $  772,795       116,541        889,336        593,275     1,482,611
     Securities available for sale                                  4,947        16,994         21,941         91,672       113,613
     Securities held to maturity                                    1,803         3,362          5,165          9,007        14,172
     Short-term investments                                        73,885            --         73,885             --        73,885
                                                               ----------    ----------     ----------     ----------    ----------
          Total earning assets                                 $  853,430       136,897        990,327        693,954     1,684,281
                                                               ==========    ==========     ==========     ==========    ==========

     Percent of total earning assets                                50.67%         8.13%         58.80%         41.20%       100.00%
     Cumulative  percent of total earning assets                    50.67%        58.80%         58.80%        100.00%       100.00%


Interest-bearing liabilities:
     Savings, NOW and money market deposits                    $  458,221            --        458,221             --       458,221
     Time deposits of $100,000 or more                            106,804       185,268        292,072         64,209       356,281
     Other time deposits                                          122,159       274,473        396,632         89,392       486,024
     Securities sold under agreements
      to repurchase                                                33,530            --         33,530             --        33,530
     Borrowings                                                    79,739        12,500         92,239          8,000       100,239
                                                               ----------    ----------     ----------     ----------    ----------
          Total interest-bearing liabilities                   $  800,453       472,241      1,272,694        161,601     1,434,295
                                                               ==========    ==========     ==========     ==========    ==========

     Percent of total interest-bearing liabilities                  55.81%        32.92%         88.73%         11.27%       100.00%
     Cumulative percent of total interest-
          bearing liabilities                                       55.81%        88.73%         88.73%        100.00%       100.00%

Interest sensitivity gap                                       $   52,977      (335,344)      (282,367)       532,353       249,986
Cumulative interest sensitivity gap                                52,977      (282,367)      (282,367)       249,986       249,986
Cumulative interest sensitivity gap
     as a percent of total earning assets                            3.15%      -16.76%        -16.76%          14.84%        14.84%
Cumulative ratio of interest-sensitive
     assets to interest-sensitive liabilities                      106.62%        77.81%         77.81%        117.43%       117.43%
------------------------------------------------------------------------------------------------------------------------------------


                                                                 55



------------------------------------------------------------------------------------------------------------------------------------
Table 18  Contractual Obligations and Other Commercial Commitments
------------------------------------------------------------------------------------------------------------------------------------
                                                                             Payments Due by Period (in thousands)
                 Contractual                              --------------------------------------------------------------------------
                 Obligations                                             On Demand or
-------------------------------------------------------                      Less                                           After
           As of December 31, 2005                           Total        than 1 Year     1-3 Years        4-5 Years       5 Years
-------------------------------------------------------   ----------      ----------      ----------      ----------      ----------
                                                                                                               
Securities sold under agreements
    to repurchase                                         $   33,530          33,530              --              --              --
Borrowings                                                   100,239          51,000           3,000           5,000          41,239
Operating leases                                               2,572             435             581             450           1,106
                                                          ----------      ----------      ----------      ----------      ----------
   Total contractual cash obligations,
    excluding deposits                                       136,341          84,965           3,581           5,450          42,345


Deposits                                                   1,494,577       1,340,976         113,407          38,033           2,161
                                                          ----------      ----------      ----------      ----------      ----------
   Total contractual cash obligations,
    including deposits                                    $1,630,918       1,425,941         116,988          43,483          44,506
                                                          ==========      ==========      ==========      ==========      ==========




                                                                       Amount of Commitment Expiration Per Period (in thousands)
              Other Commercial                                    ------------------------------------------------------------------
                 Commitments                                        Total
--------------------------------------------------------------     Amounts         Less                                     After
           As of December 31, 2005                                Committed     than 1 Year    1-3 Years     4-5 Years     5 Years
--------------------------------------------------------------    ----------    ----------    ----------    ----------    ----------
                                                                                                              
Credit cards                                                      $   18,494         9,247         9,247            --            --
Lines of credit and loan commitments                                 258,550       118,948        11,920         3,719       123,963
Standby letters of credit                                              4,283         4,139            93            51            --
                                                                  ----------    ----------    ----------    ----------    ----------
   Total commercial commitments                                   $  281,327       132,334        21,260         3,770       123,963
                                                                  ==========    ==========    ==========    ==========    ==========

------------------------------------------------------------------------------------------------------------------------------------


                                                                  56



------------------------------------------------------------------------------------------------------------------------------------
Table 19  Market Risk Sensitive Instruments
------------------------------------------------------------------------------------------------------------------------------------

                                     Expected Maturities of Market Sensitive Instruments Held
                                         at December 31, 2005 Occurring in Indicated Year
                            ----------------------------------------------------------------------------------
                                                                                                               Average   Estimated
                                                                                                               Interest      Fair
($ in thousands)               2006        2007        2008        2009        2010       Beyond       Total     Rate       Value
                            ----------  ----------  ----------  ----------  ----------  ----------  ----------   ----    ----------
                                                                                              
Due from banks,
    interest-bearing        $   41,655          --          --          --          --          --      41,655   4.15%   $   41,655
Federal funds sold              28,883          --          --          --          --          --      28,883   4.15%       28,883
Presold mortgages in
  process of settlement          3,347          --          --          --          --          --       3,347   5.75%        3,347
Debt Securities- at
  amortized cost (1) (2)        20,730      29,275      37,535       9,291      11,349      14,414     122,594   4.73%      121,642
Loans - fixed (3) (4)          123,119      91,386     147,682     113,292     105,077      48,255     628,811   6.70%      622,129
Loans - adjustable (3) (4)     272,320      91,761     125,766     121,387      99,529     141,397     852,160   7.17%      852,066
                            ----------  ----------  ----------  ----------  ----------  ----------  ----------   ----    ----------
  Total                     $  490,054     212,422     310,983     243,970     215,955     204,066   1,677,450   6.69%   $1,669,722
                            ==========  ==========  ==========  ==========  ==========  ==========  ==========   ====    ==========

Savings, NOW, and money
   market deposits          $  458,221          --          --          --          --          --     458,221   1.02%   $  458,221
Time deposits                  688,704      77,846      35,561      16,210      21,823       2,161     842,305   2.36%      841,771
Securities sold under
  agreements to repurchase      33,530          --          --          --          --          --      33,530   3.08%       33,530
Borrowings - fixed (2)          21,000       2,000       1,000       5,000          --          --      29,000   3.77%       28,900
Borrowings - adjustable         30,000          --          --          --          --      41,239      71,239   6.16%       72,771
                            ----------  ----------  ----------  ----------  ----------  ----------  ----------   ----    ----------
  Total                     $1,231,455      79,846      36,561      21,210      21,823      43,400   1,434,295   2.92%   $1,435,193
                            ==========  ==========  ==========  ==========  ==========  ==========  ==========   ====    ==========


(1)  Tax-exempt  securities  are reflected at a tax-equivalent basis using a 35%
     tax rate.
(2)  Securities and borrowings  with call dates within 12 months of December 31,
     2005 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)  Single-family  mortgage  loans are assumed to mature in the period of their
     expected  repayment based on estimated  prepayment  speeds. All other loans
     are shown in the period of their contractual maturity.


------------------------------------------------------------------------------------------------------------------------------------
Table 20  Return on Assets and Equity
------------------------------------------------------------------------------------------------------------------------------------
                                                                                               For the Year Ended December 31,
                                                                                         ------------------------------------------
                                                                                            2005            2004            2003
                                                                                         ----------      ----------      ----------
                                                                                                                      
Return on assets                                                                               0.94%           1.30%           1.45%
Return on equity                                                                              10.39%          13.71%          14.14%
Dividend payout ratio                                                                         61.40%          46.48%          45.41%
Average shareholders' equity to average assets                                                 9.06%           9.49%          10.25%

------------------------------------------------------------------------------------------------------------------------------------


                                                                 57



----------------------------------------------------------------------------------------------
Table 21  Risk-Based and Leverage Capital Ratios
----------------------------------------------------------------------------------------------
                                                               As of December 31,
                                                   -------------------------------------------
($ in thousands)                                      2005             2004            2003
                                                   -----------     -----------     -----------
                                                                              
Risk-Based and Leverage Capital
Tier I capital:
     Common shareholders' equity                   $   155,728         148,478         141,856
     Trust preferred securities                         40,000          40,000          40,000
     Intangible assets                                 (49,227)        (49,330)        (50,701)
     Accumulated other
          comprehensive income                             900            (517)           (962)
                                                   -----------     -----------     -----------
               Total Tier I leverage capital           147,401         138,631         130,193
                                                   -----------     -----------     -----------

Tier II capital:
     Allowable allowance for loan losses                15,716          14,717          13,569
                                                   -----------     -----------     -----------
               Tier II capital additions                15,716          14,717          13,569
                                                   -----------     -----------     -----------
Total risk-based capital                           $   163,117         153,348         143,762
                                                   ===========     ===========     ===========

Risk adjusted assets                               $ 1,449,842       1,315,755       1,182,966
Tier I risk-adjusted assets
   (includes Tier I capital adjustments)             1,401,515       1,265,908       1,131,303
Tier II risk-adjusted assets
   (includes Tiers I and II capital adjustments)     1,417,231       1,280,625       1,144,872
Fourth quarter average assets                        1,759,279       1,608,146       1,431,031
Adjusted fourth quarter average assets
   (includes Tier I capital adjustments)             1,710,952       1,558,299       1,379,368

Risk-based capital ratios:
   Tier I capital to Tier I risk adjusted assets         10.52%          10.95%          11.51%
   Minimum required Tier I capital                        4.00%           4.00%           4.00%

   Total risk-based capital to
         Tier II risk-adjusted assets                    11.51%          11.97%          12.56%
   Minimum required total risk-based capital              8.00%           8.00%           8.00%

Leverage capital ratios:
   Tier I leverage capital to
       adjusted fourth quarter average assets             8.62%           8.90%           9.44%
   Minimum required Tier I leverage capital               4.00%           4.00%           4.00%

----------------------------------------------------------------------------------------------


                                       58



------------------------------------------------------------------------------------------------------------------------------------
Table 22  Quarterly Financial Summary
------------------------------------------------------------------------------------------------------------------------------------
                                                    2005                                               2004
                             --------------------------------------------------   --------------------------------------------------
($ in thousands except         Fourth       Third        Second        First       Fourth        Third       Second       First
per share data)                Qtr (2)     Qtr (2)       Quarter      Quarter      Quarter      Quarter      Quarter      Quarter
                             ----------   ----------    ----------   ----------   ----------   ----------   ----------   ----------
                                                                                                     
Income Statement Data
Interest income, taxable
   equivalent                $   27,853       26,178        24,818       23,028       22,026       20,852       19,684       19,507
Interest expense                  9,793        8,715         7,700        6,630        5,793        5,193        4,706        4,611
Net interest income,
   taxable equivalent            18,060       17,463        17,118       16,398       16,233       15,659       14,978       14,896
Taxable equivalent,
   adjustment                       113          111           111          113          116          118          119          123
Net interest income              17,947       17,352        17,007       16,285       16,117       15,541       14,859       14,773
Provision for loan losses           925          690           845          580          825          770          740          570
Net interest income after
   provision for losses          17,022       16,662        16,162       15,705       15,292       14,771       14,119       14,203
Noninterest income                3,803        3,779         3,712        3,710        3,844        4,296        3,912        3,812
Noninterest expense              12,175       11,486        12,260       11,715       11,271       11,092       10,622       10,732
Income before income taxes        8,650        8,955         7,614        7,700        7,865        7,975        7,409        7,283
Income taxes                      1,237        9,646         2,962        2,984        2,554        2,778        2,523        2,563
Net income                        7,413         (691)        4,652        4,716        5,311        5,197        4,886        4,720
------------------------------------------------------------------------------------------------------------------------------------
Per Share Data (1)
Earnings per share - basic   $     0.52        (0.05)         0.33         0.33         0.37         0.34         0.33         0.38
Earnings per share - diluted       0.52        (0.05)         0.32         0.33         0.37         0.36         0.34         0.33
Cash dividends declared            0.18         0.18          0.17         0.17         0.17         0.17         0.16         0.16
Market Price
     High                    $    22.89        22.54         23.16        27.88        22.65        22.77        23.26        29.73
     Low                          19.32        19.66         19.62        21.43        22.33        19.01        18.47        20.33
     Close                        20.16        20.04         22.13        22.64        27.17        22.48        22.29        20.99
Book value                        10.94        10.63         10.88        10.66        10.54        10.36        10.13        10.15
Tangible book value                7.48         7.16          7.40         7.17         7.04         6.79         6.56         6.58
------------------------------------------------------------------------------------------------------------------------------------
Selected Average Balances
Assets                       $1,759,279    1,720,505     1,707,112    1,650,624    1,608,146    1,563,548    1,524,169    1,482,987
Loans                         1,463,468    1,433,874     1,409,118    1,383,216    1,352,589    1,320,391    1,273,672    1,236,076
Earning assets                1,639,823    1,604,383     1,592,845    1,537,165    1,495,139    1,453,879    1,414,095    1,372,109
Deposits                      1,493,683    1,467,183     1,466,893    1,414,721    1,363,557    1,301,703    1,300,263    1,260,093
Interest-bearing liabilities  1,392,921    1,365,959     1,361,365    1,318,731    1,282,404    1,249,440    1,211,314    1,182,884
Shareholders' equity            154,562      158,220       154,540      152,162      150,163      145,757      145,776      145,036
------------------------------------------------------------------------------------------------------------------------------------
Ratios
Return on average assets           1.67%       (0.16%)        1.09%        1.16%        1.31%        1.32%        1.29%        1.28%
Return on average equity          19.03%       (1.73%)       12.07%       12.57%       14.07%       14.18%       13.48%       13.09%
Equity to assets at
  end of period                    8.65%        8.59%         8.87%        8.94%        9.06%        9.04%        9.19%        9.63%
Tangible equity to
  tangible assets at end of period 6.08%        5.95%         6.21%        6.19%        6.24%        6.11%        6.15%        6.46%
Average loans to
  average deposits                97.98%       97.73%        96.06%       97.77%       99.20%      101.44%       97.95%       98.09%
Average earning assets to
  interest-bearing liabilities   117.73%      117.45%       117.00%      116.56%      116.59%      116.36%      116.74%      116.00%
Net interest margin                4.37%        4.32%         4.31%        4.33%        4.32%        4.28%        4.26%        4.37%
Allowance for loan losses
   to gross loans                  1.06%        1.10%         1.10%        1.08%        1.08%        1.07%        1.10%        1.11%
Nonperforming loans as a
   percent of total loans          0.11%        0.23%         0.27%        0.31%        0.27%        0.27%        0.26%        0.27%
Nonperforming assets as a
   percent of total assets         0.17%        0.31%         0.36%        0.40%        0.32%        0.34%        0.33%        0.33%
Net charge-offs as a percent
   of average loans                0.29%        0.12%         0.08%        0.07%        0.14%        0.22%        0.11%        0.07%
------------------------------------------------------------------------------------------------------------------------------------


(1)  Per share amounts for periods prior to the fourth quarter of 2004 have been
     restated  from their  originally  reported  amounts to reflect  the 3-for-2
     stock split paid on November 15, 2004.
(2)  The  third-quarter  of 2005  includes  a  contingency  tax loss  accrual of
     $6,320,000, or $0.44 per diluted share. The fourth quarter of 2005 includes
     a reversal of $1,982,000,  or $0.14 per diluted share, related to this same
     accrual (which  increased net income) that was recorded because the Company
     lowered its original estimate of this loss.

                                       59


Item 8.   Financial Statements
          and Supplementary Data

                         First Bancorp and Subsidiaries
                           Consolidated Balance Sheets
                           December 31, 2005 and 2004



($ in thousands)                                                  2005           2004
----------------------------------------------------------------------------------------
                                                                            
ASSETS
Cash and due from banks, noninterest-bearing                  $    32,985         28,486
Due from banks, interest-bearing                                   41,655         45,135
Federal funds sold                                                 28,883         15,780
                                                              -----------    -----------
     Total cash and cash equivalents                              103,523         89,401
                                                              -----------    -----------

Securities available for sale (costs of
     $114,662 in 2005 and $87,368 in 2004)                        113,613         88,554

Securities held to maturity (fair values of
     $14,321 in 2005 and $14,451 in 2004)                          14,172         14,025

Presold mortgages in process of settlement                          3,347          1,771

Loans                                                           1,482,611      1,367,053
   Less:  Allowance for loan losses                               (15,716)       (14,717)
                                                              -----------    -----------
   Net loans                                                    1,466,895      1,352,336
                                                              -----------    -----------

Premises and equipment                                             34,840         30,318
Accrued interest receivable                                         8,947          6,832
Intangible assets                                                  49,227         49,330
Other assets                                                        6,486          6,346
                                                              -----------    -----------
          Total assets                                        $ 1,801,050      1,638,913
                                                              ===========    ===========

LIABILITIES
Deposits:   Demand - noninterest-bearing                      $   194,051        165,778
            Savings, NOW, and money market                        458,221        472,811
            Time deposits of $100,000 or more                     356,281        334,756
            Other time deposits                                   486,024        415,423
                                                              -----------    -----------
               Total deposits                                   1,494,577      1,388,768
Securities sold under agreements to repurchase                     33,530             --
Borrowings                                                        100,239         92,239
Accrued interest payable                                            3,835          2,677
Other liabilities                                                  13,141          6,751
                                                              -----------    -----------
     Total liabilities                                          1,645,322      1,490,435
                                                              -----------    -----------

SHAREHOLDERS' EQUITY
Common stock, No par value per share
     Authorized: 20,000,000 shares
     Issued and outstanding:  14,229,148 shares in 2005 and
          14,083,856 shares in 2004                                54,121         51,614
Retained earnings                                                 102,507         96,347
Accumulated other comprehensive income (loss)                        (900)           517
                                                              -----------    -----------
     Total shareholders' equity                                   155,728        148,478
                                                              -----------    -----------
          Total liabilities and shareholders' equity          $ 1,801,050      1,638,913
                                                              ===========    ===========


See accompanying notes to consolidated financial statements.

                                       60



                                      First Bancorp and Subsidiaries
                                    Consolidated Statements of Income
                               Years Ended December 31, 2005, 2004 and 2003


($ in thousands, except per share data)                          2005            2004            2003
--------------------------------------------------------------------------------------------------------
                                                                                         
INTEREST INCOME
Interest and fees on loans                                   $     94,097          76,093         69,318
Interest on investment securities:
     Taxable interest income                                        5,184           4,428          3,902
     Tax-exempt interest income                                       476             528            668
Other, principally overnight investments                            1,672             544            779
                                                             ------------    ------------   ------------
     Total interest income                                        101,429          81,593         74,667
                                                             ------------    ------------   ------------
INTEREST EXPENSE
Savings, NOW and money market                                       4,048           2,530          2,215
Time deposits of $100,000 or more                                  11,425           6,362          5,892
Other time deposits                                                13,043           8,334          9,001
Securities sold under agreements to repurchase                        179              --             --
Borrowings                                                          4,143           3,077          1,799
                                                             ------------    ------------   ------------
     Total interest expense                                        32,838          20,303         18,907
                                                             ------------    ------------   ------------

Net interest income                                                68,591          61,290         55,760
Provision for loan losses                                           3,040           2,905          2,680
                                                             ------------    ------------   ------------
Net interest income after provision for loan losses                65,551          58,385         53,080
                                                             ------------    ------------   ------------

NONINTEREST INCOME
Service charges on deposit accounts                                 8,537           9,064          7,938
Other service charges, commissions and fees                         3,963           3,361          2,710
Fees from presold mortgage loans                                    1,176             969          2,327
Commissions from sales of insurance and financial products          1,307           1,406          1,304
Data processing fees                                                  279             416            333
Securities gains                                                        5             299            218
Other gains (losses)                                                 (263)            349             88
                                                             ------------    ------------   ------------
     Total noninterest income                                      15,004          15,864         14,918
                                                             ------------    ------------   ------------

NONINTEREST EXPENSES
Salaries                                                           21,921          20,116         17,756
Employee benefits                                                   6,054           5,488          4,381
   Total personnel expense                                         27,975          25,604         22,137
Occupancy expense                                                   3,037           2,754          2,366
Equipment related expenses                                          2,965           2,956          2,555
Intangibles amortization                                              290             378            224
Other operating expenses                                           13,369          12,025         10,682
                                                             ------------    ------------   ------------
     Total noninterest expenses                                    47,636          43,717         37,964
                                                             ------------    ------------   ------------

Income before income taxes                                         32,919          30,532         30,034
Income taxes                                                       16,829          10,418         10,617
                                                             ------------    ------------   ------------

NET INCOME                                                   $     16,090          20,114         19,417
                                                             ============    ============   ============
Earnings per share:
     Basic                                                   $       1.14            1.42           1.38
     Diluted                                                         1.12            1.40           1.35

Weighted average common shares outstanding:
     Basic                                                     14,165,992      14,138,513     14,076,471
     Diluted                                                   14,360,032      14,395,152     14,351,106


See accompanying notes to consolidated financial statements.

                                                   61



                            First Bancorp and Subsidiaries
                    Consolidated Statements of Comprehensive Income
                     Years Ended December 31, 2005, 2004 and 2003

($ in thousands)                                       2005        2004        2003
-------------------------------------------------------------------------------------
                                                                      
Net income                                           $ 16,090      20,114      19,417
                                                     --------    --------    --------
Other comprehensive income (loss):
   Unrealized gains on securities
     available for sale:
     Unrealized holding gains (losses) arising
        during the period, pretax                      (2,229)       (383)        688
          Tax benefit (expense)                           870         148        (268)
     Reclassification to realized gains                    (5)       (299)       (218)
          Tax expense                                       2         117          85
   Adjustment to minimum pension liability:
     Additional pension charge related to unfunded
       pension liability                                  (90)        (46)       (127)
     Tax benefit                                           35          18          50
                                                     --------    --------    --------
Other comprehensive income (loss)                      (1,417)       (445)        210
                                                     --------    --------    --------

Comprehensive income                                 $ 14,673      19,669      19,627
                                                     ========    ========    ========


See accompanying notes to consolidated financial statements.

                                          62



                                   First Bancorp and Subsidiaries
                           Consolidated Statements of Shareholders' Equity
                            Years Ended December 31, 2005, 2004 and 2003

                                                                              Accumulated    Total
                                                Common Stock                     Other       Share-
                                            --------------------   Retained  Comprehensive  holders'
(In thousands, except per share)             Shares      Amount    Earnings  Income (Loss)   Equity
---------------------------------------------------------------------------------------------------
                                                                            
Balances, January 1, 2003                     13,683    $ 48,313      74,920        752     123,985
                                            --------    --------    --------   --------    --------

Net income                                                            19,417                 19,417
Cash dividends declared ($0.63 per share)                             (8,835)                (8,835)
Common stock issued in acquisition               500       9,284                              9,284
Common stock issued under
     stock option plans                          211       1,167                              1,167
Common stock issued into
     dividend reinvestment plan                   74       1,277                              1,277
Tax benefit realized from exercise of
     nonqualified stock options                              546                                546
Purchases and retirement of common stock        (315)     (5,195)                            (5,195)
Other comprehensive income                                                          210         210
                                            --------    --------    --------   --------    --------

Balances, December 31, 2003                   14,153      55,392      85,502        962     141,856
                                            --------    --------    --------   --------    --------

Net income                                                            20,114                 20,114
Cash dividends declared ($0.66 per share)                             (9,269)                (9,269)
Common stock issued under
     stock option plans                          165       1,081                              1,081
Common stock issued into
     dividend reinvestment plan                   67       1,466                              1,466
Tax benefit realized from exercise of
     nonqualified stock options                              203                                203
Purchases and retirement of common stock        (301)     (6,528)                            (6,528)
Other comprehensive loss                                                           (445)       (445)
                                            --------    --------    --------   --------    --------

Balances, December 31, 2004                   14,084      51,614      96,347        517     148,478
                                            --------    --------    --------   --------    --------

Net income                                                            16,090                 16,090
Cash dividends declared ($0.70 per share)                             (9,930)                (9,930)
Common stock issued under
     stock option plans                           71         785                                785
Common stock issued into
     dividend reinvestment plan                   74       1,604                              1,604
Tax benefit realized from exercise of
     nonqualified stock options                              118                                118
Other comprehensive loss                                                         (1,417)     (1,417)
                                            --------    --------    --------   --------    --------

Balances, December 31, 2005                   14,229    $ 54,121     102,507       (900)    155,728
                                            ========    ========    ========   ========    ========


See accompanying notes to consolidated financial statements.


                                                 63



                                          First Bancorp and Subsidiaries
                                      Consolidated Statements of Cash Flows
                                   Years Ended December 31, 2005, 2004 and 2003


($ in thousands)                                                                2005           2004        2003
-----------------------------------------------------------------------------------------------------------------
                                                                                                  
Cash Flows From Operating Activities
Net income                                                                    $  16,090       20,114       19,417
Reconciliation of net income to net cash provided by operating activities:
     Provision for loan losses                                                    3,040        2,905        2,680
     Net security premium amortization                                              120          152          362
     Gains on sales of loans                                                         (9)          (2)          (2)
     Gains on sales of securities available for sale                                 (5)        (299)        (218)
     Loss (gain) on sales of other real estate                                       82         (427)          --
     Other nonoperating losses (gains)                                              190           80          (86)
     Loan fees and costs deferred, net of amortization                             (397)        (390)         (99)
     Depreciation of premises and equipment                                       2,675        2,553        2,236
     Tax benefit realized from exercise of nonqualified stock options               118          203          546
     Amortization of intangible assets                                              290          378          224
     Deferred income tax expense (benefit)                                         (156)        (217)         425
     Decrease (increase) in presold mortgages in process of settlement           (1,576)        (464)      17,961
     Decrease (increase) in accrued interest receivable                          (2,115)        (745)          29
     Decrease (increase) in other assets                                          3,447        2,331       (1,338)
     Increase (decrease) in accrued interest payable                              1,158          539         (601)
     Increase (decrease) in other liabilities                                     5,945        1,175          (67)
                                                                              ---------    ---------    ---------
          Net cash provided by operating activities                              28,897       27,886       41,469
                                                                              ---------    ---------    ---------

Cash Flows From Investing Activities
     Proceeds from sales of loans                                                   276           49           41
     Purchases of securities available for sale                                 (54,130)     (30,354)     (73,663)
     Purchases of securities held to maturity                                    (1,514)        (707)        (317)
     Proceeds from sales of securities available for sale                            17       12,060        7,750
     Proceeds from  maturities/issuer  calls of securities available for sale    26,710       32,673       38,908
     Proceeds from maturities/issuer calls of securities held to maturity         1,176        2,033        3,850
     Net increase in loans                                                     (120,065)    (151,103)    (149,877)
     Purchases of premises and equipment                                         (7,212)      (7,335)      (3,666)
     Net cash received in purchase of branches                                       --           --       62,427
     Net cash paid in insurance agency acquisitions                                  --           --         (564)
     Net cash paid in bank acquisitions                                              --           --       (2,256)
                                                                              ---------    ---------    ---------
          Net cash used by investing activities                                (154,742)    (142,684)    (117,367)
                                                                              ---------    ---------    ---------

Cash Flows From Financing Activities
     Net increase in deposits and repurchase agreements                         139,339      139,404       32,580
     Proceeds from borrowings, net                                                8,000       15,000       44,000
     Cash dividends paid                                                         (9,761)      (9,138)      (8,670)
     Proceeds from issuance of common stock                                       2,389        2,547        2,444
     Purchases and retirement of common stock                                        --       (6,528)      (5,195)
                                                                              ---------    ---------    ---------
          Net cash provided by financing activities                             139,967      141,285       65,159
                                                                              ---------    ---------    ---------

Increase (Decrease) in Cash and Cash Equivalents                                 14,122       26,487      (10,739)
Cash and Cash Equivalents, Beginning of Year                                     89,401       62,914       73,653
                                                                              ---------    ---------    ---------

Cash and Cash Equivalents, End of Year                                        $ 103,523       89,401       62,914
                                                                              =========    =========    =========

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
     Interest                                                                 $  31,680       19,764       19,508
     Income taxes                                                                11,925        9,738        9,858
Non-cash transactions:
     Foreclosed loans transferred to other real estate                            2,596        1,531          537
     Additions to held to maturity securities and borrowings related to
       deconsolidation of subsidiary trusts                                          --        1,239           --
     Unrealized  gain (loss) on securities available for sale, net of taxes      (1,362)        (417)         287
     Other real estate transferred to premises and equipment                         --          180           --


See accompanying notes to consolidated financial statements.

                                                       64


                         First Bancorp and Subsidiaries
                   Notes to Consolidated Financial Statements
                                December 31, 2005


Note 1.   Summary of Significant Accounting Policies

     (a) Basis of Presentation - The consolidated  financial  statements include
the accounts of First Bancorp (the  Company) and its wholly owned  subsidiaries:
First Bank (the Bank);  Montgomery Data Services,  Inc.  (Montgomery  Data); and
First Bancorp Financial Services,  Inc. (First Bancorp Financial).  The Bank has
two wholly owned subsidiaries:  First Bank Insurance Services,  Inc. (First Bank
Insurance),   and  First  Montgomery   Financial  Services   Corporation  (First
Montgomery).  First  Montgomery  has one wholly  owned  subsidiary  - First Troy
Realty  Corporation  (First Troy).  All  significant  intercompany  accounts and
transactions have been eliminated.

     The  Company is a bank  holding  company.  The  principal  activity  of the
Company is the  ownership and  operation of First Bank, a state  chartered  bank
with its main  office  in  Troy,  North  Carolina.  Other  subsidiaries  include
Montgomery  Data, a data processing  company whose primary client is First Bank,
and First Bancorp Financial, a real estate investment subsidiary,  both of which
are  headquartered  in Troy.  The  Company is also the parent  company for three
statutory  trusts that were formed in 2002 and 2003 for the purpose of issuing a
total of $40  million in debt  securities.  These  securities  qualify as Tier I
capital for regulatory capital adequacy requirements.  First Bank Insurance is a
provider of non-FDIC insured investment and insurance products. First Montgomery
is a Virginia  incorporated  company that  acquires  real estate in Virginia and
leases the  property to the Bank.  First Troy was formed in 1999 for the purpose
of  allowing  the Bank to  centrally  manage a portion of its real  estate  loan
portfolio.  First Montgomery and First Troy were liquidated  during 2005 and are
no longer active.

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities  and disclosure of contingent  liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting  period.  Actual results could differ from those estimates.
The most  significant  estimates  made by the Company in the  preparation of its
consolidated  financial  statements are the  determination  of the allowance for
loan losses,  the valuation of other real estate,  and fair value  estimates for
financial instruments.

     (b) Cash and Cash  Equivalents  - The Company  considers  all highly liquid
assets such as cash on hand,  noninterest-bearing  and interest-bearing  amounts
due from banks and federal funds sold to be "cash equivalents."

     (c) Securities - Debt  securities  that the Company has the positive intent
and ability to hold to maturity are classified as "held-to-maturity" and carried
at amortized cost.  Securities not classified as held-to-maturity are classified
as  "available-for-sale"  and carried at fair value,  with unrealized  gains and
losses being reported as other  comprehensive  income and reported as a separate
component of shareholders' equity.

     A decline in the market value of any available-for-sale or held-to-maturity
security  below  cost that is deemed to be other  than  temporary  results  in a
reduction  in  carrying  amount to fair  value.  The  impairment  is  charged to
earnings  and a new cost  basis for the  security  is  established.  Any  equity
security that is in an unrealized loss position for twelve consecutive months is
presumed to be permanently impaired and an impairment charge is recorded.

     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

                                       65


being  amortized to the earliest call date and discounts  being  accreted to the
stated maturity date.

     (d) Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Depreciation, computed by the straight-line method, is
charged to operations over the estimated  useful lives of the properties,  which
range  from 5 to 40 years or, in the case of  leasehold  improvements,  over the
term of the lease, if shorter. Maintenance and repairs are charged to operations
in the year incurred.  Gains and losses on dispositions  are included in current
operations.

     (e) Loans - Loans are  stated at the  principal  amount  outstanding,  less
unearned income and deferred nonrefundable loan fees, net of certain origination
costs. Interest on loans is accrued on the unpaid principal balance outstanding.
Net deferred loan  origination  costs/fees are  capitalized  and recognized as a
yield adjustment over the life of the related loan.  Unearned income for each of
the reporting periods was immaterial.

     A loan is placed on nonaccrual status when, in management's  judgment,  the
collection of interest appears doubtful. The accrual of interest is discontinued
on all loans that become 90 days or more past due with  respect to  principal or
interest.  The past due  status  of  loans is based on the  contractual  payment
terms.  While a loan is on nonaccrual  status,  the Company's policy is that all
cash receipts are applied to principal.  Once the recorded principal balance has
been  reduced to zero,  future cash  receipts are applied to  recoveries  of any
amounts  previously  charged off. Further cash receipts are recorded as interest
income to the extent that any interest has been foregone. Loans are removed from
nonaccrual status when they become current as to both principal and interest and
when concern no longer exists as to the collectibility of principal or interest.
In some cases, where borrowers are experiencing  financial  difficulties,  loans
may be restructured to provide terms significantly different from the originally
contracted terms.

     Commercial  loans greater than  $100,000 that are on nonaccrual  status are
evaluated  regularly for  impairment.  A loan is considered to be impaired when,
based on current  information  and events,  it is probable  the Company  will be
unable to collect all amounts due according to the contractual terms of the loan
agreement.  Impaired  loans are measured using either 1) an estimate of the cash
flows that the Company  expects to receive from the borrower  discounted  at the
loan's  effective  rate, or 2) in the case of a  collateral-dependent  loan, the
fair  value  of the  collateral  is  used to  value  the  loan.  While a loan is
considered  to be impaired,  the Company's  policy is that  interest  accrual is
discontinued  and all cash receipts are applied to principal.  Once the recorded
principal  balance has been reduced to zero, future cash receipts are applied to
recoveries  of any amounts  previously  charged off.  Further cash  receipts are
recorded as interest income to the extent that any interest has been foregone.

     (f) Presold Mortgages in Process of Settlement and Loans Held for Sale - As
a part  of  normal  business  operations,  the  Company  originates  residential
mortgage loans that have been pre-approved by secondary investors.  The terms of
the loans are set by the secondary  investors,  and the purchase  price that the
investor  will pay for the loan is agreed to prior to the funding of the loan by
the  Company.  Generally  within  three  weeks  after  funding,  the  loans  are
transferred  to the  investor in  accordance  with the  agreed-upon  terms.  The
Company records gains from the sale of these loans on the settlement date of the
sale equal to the  difference  between the  proceeds  received  and the carrying
amount of the loan.  The gain  generally  represents the portion of the proceeds
attributed  to service  release  premiums  received  from the  investors and the
realization of origination  fees received from borrowers  which were deferred as
part of the  carrying  amount of the loan.  Between the  initial  funding of the
loans by the Company and the  subsequent  reimbursement  by the  investors,  the
Company  carries the loans on its balance  sheet at the lower of cost or market.
During 2005, the Company originated $74,569,000 and received proceeds from sales
amounting to $72,993,000 related to these types of loans.

     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,
2005 or 2004.

     (g)  Allowance  for  Loan  Losses  -  The  allowance  for  loan  losses  is
established  through a provision for loan

                                       66


losses charged to expense.  Loans are charged-off against the allowance for loan
losses when  management  believes  that the  collectibility  of the principal is
unlikely.  The  provision  for loan losses  charged to  operations  is an amount
sufficient  to bring  the  allowance  for loan  losses to an  estimated  balance
considered  adequate to absorb losses  inherent in the  portfolio.  Management's
determination  of the adequacy of the allowance is based on an evaluation of the
portfolio,  current  economic  conditions,  historical  loan loss experience and
other risk factors. While management uses the best information available to make
evaluations,   future  adjustments  may  be  necessary  if  economic  and  other
conditions differ substantially from the assumptions used.

     In addition,  various  regulatory  agencies,  as an integral  part of their
examination  process,  periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on the examiners'  judgment about  information  available to them at the time of
their examinations.

     (h) Other Real Estate - Other real estate owned consists  primarily of real
estate  acquired by the Company  through  legal  foreclosure  or deed in lieu of
foreclosure.  The property is initially  carried at the lower of cost (generally
the  loan  balance  plus  additional  costs  incurred  for  improvements  to the
property) or estimated fair value of the property less estimated  selling costs.
If there are subsequent  declines in fair value, the property is written down to
its fair value through a charge to expense. Capital expenditures made to improve
the property  are  capitalized.  Costs of holding real estate,  such as property
taxes,  insurance  and  maintenance,  less related  revenues  during the holding
period, are charged to operations.

     (i)  Income  Taxes - Income  taxes  are  accounted  for under the asset and
liability  method.  Deferred tax assets and  liabilities  are recognized for the
future tax  consequences  attributable  to  differences  between  the  financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective tax bases and operating loss and tax credit  carryforwards.  Deferred
tax assets and  liabilities  are measured  using  enacted tax rates  expected to
apply to taxable income in the years in which those  temporary  differences  are
expected  to be  recovered  or settled.  The effect on  deferred  tax assets and
liabilities  of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are reduced,  if necessary,  by
the amount of such  benefits  that are not  expected to be  realized  based upon
available evidence.  The Company's investment tax credits, which for the Company
are low income housing tax credits and state historic tax credits,  are recorded
in the period that they are affirmed by the tax credit fund.

     (j) Intangible  Assets - Business  combinations are accounted for using the
purchase  method of accounting.  Identifiable  intangible  assets are recognized
separately and are amortized over their  estimated  useful lives,  which for the
Company has generally  been 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. As discussed in Note 1(n), goodwill is not amortized,  but is subject to
fair value impairment tests on at least an annual basis.

     In accordance with applicable accounting standards,  the Company records an
intangible  asset in  connection  with a defined  benefit  pension plan to fully
accrue  for its  liability.  This  intangible  asset  is  adjusted  annually  in
accordance with actuarially  determined  amounts.  The amount of this intangible
asset was $273,000 and $84,000 at December 31, 2005 and 2004, respectively.

     (k)  Stock  Option  Plan - At  December  31,  2005,  the  Company  had  six
stock-based employee  compensation plans, which are described more fully in Note
14. The Company  accounts for those plans under the  recognition and measurement
principles of Accounting  Principles  Board Opinion No. 25 (APB Opinion No. 25),
"Accounting  for Stock Issued to  Employees,"  and related  interpretations.  No
stock-based  employee  compensation  cost is  reflected  in net  income,  as all
options  granted  under those  plans had an  exercise  price equal to the market
value of the underlying common stock on the date of grant.

    The following  table  illustrates  the effect on net income and earnings per
share if the  Company  had  applied  the

                                       67


fair value recognition provisions of Statement of Financial Accounting Standards
No.  123,  "Accounting  for  Stock-Based  Compensation," to stock-based employee
compensation.  For options with vesting requirements, the amount of compensation
expense  recognized  in each period is on a straight-line basis over the vesting
period.



                                                             Year Ended December 31,
                                                      --------------------------------------
(In thousands except per share data)                     2005          2004          2003
                                                      ----------    ----------    ----------
                                                                             
Net income, as reported                               $   16,090        20,114        19,417
Deduct:  Total stock-based employee compensation
   expense determined under fair value based method
   for all awards, net of related tax effects               (335)       (1,291)         (319)
                                                      ----------    ----------    ----------
Pro forma net income                                  $   15,755        18,823        19,098
                                                      ==========    ==========    ==========


Earnings per share:      Basic - As reported          $     1.14          1.42          1.38
                         Basic - Pro forma                  1.11          1.33          1.36

                         Diluted - As reported              1.12          1.40          1.35
                         Diluted - Pro forma                1.10          1.31          1.33


     (l) Per Share Amounts - Basic  Earnings Per Share is calculated by dividing
net income by the weighted  average number of common shares  outstanding  during
the period.  Diluted  Earnings Per Share is computed by assuming the issuance of
common shares for all dilutive  potential common shares  outstanding  during the
reporting period.  Currently, the Company's only potential dilutive common stock
issuances  relate to options  that have been issued  under the  Company's  stock
option plans.  In computing  Diluted  Earnings Per Share, it is assumed that all
such dilutive stock options are exercised  during the reporting  period at their
respective  exercise  prices,  with the proceeds from the exercises  used by the
Company  to buy back stock in the open  market at the  average  market  price in
effect during the reporting period.  The difference between the number of shares
assumed to be  exercised  and the number of shares  bought  back is added to the
number of weighted average common shares  outstanding during the period. The sum
is used as the  denominator  to  calculate  Diluted  Earnings  Per Share for the
Company.

     The following is a reconciliation  of the numerators and denominators  used
in computing Basic and Diluted Earnings Per Share:



                                                          For the Years Ended December 31,
                    ----------------------------------------------------------------------------------------------------------------
                                    2005                                  2004                                 2003
                    ------------------------------------  ------------------------------------   -----------------------------------
($ in thousands,      Income       Shares        Per        Income       Shares        Per        Income       Shares        Per
except per share     (Numer-      (Denom-       Share      (Numer-      (Denom-       Share       (Numer-      (Denom-      Share
amounts)               ator        inator)      Amount       ator)       inator)      Amount        ator        inator)     Amount
                    ----------  -----------   ----------  ----------   ----------   ----------   ----------   ----------  ----------
                                                                                               
Basic EPS           $   16,090   14,165,992   $     1.14  $   20,114   14,138,513   $     1.42   $   19,417   14,076,471  $     1.38
                                              ==========                            ==========                            ==========

Effect of dilutive
  securities                --      194,040                       --      256,639                       --      274,635
                    ----------   ----------               ----------   ----------                ----------   ----------

Diluted EPS         $   16,090   14,360,032   $     1.12  $   20,114   14,395,152   $     1.40   $   19,417   14,351,106  $     1.35
                    ==========   ==========   ==========  ==========   ==========   ==========   ==========   ==========  ==========


     For the year ended  December 31, 2005,  there were 34,000 options that were
anti-dilutive  because the exercise  price exceeded the average market price for
the  period.  For the years  ended  December  31,  2004 and 2003,  there were no
anti-dilutive  options since the exercise price for each option  outstanding was
less that the average market price for the year.

     (m) Fair Value of Financial Instruments - Statement of Financial Accounting
Standards  No. 107,  "Disclosures  About Fair Value of  Financial  Instruments,"
requires  that the Company  disclose  estimated  fair  values for its  financial
instruments.  Fair value  methods  and  assumptions  are set forth below for the
Company's

                                       68


financial instruments.

     Cash and Due from Banks,  Federal Funds Sold,  Presold Mortgages in Process
of Settlement,  Accrued Interest Receivable,  and Accrued Interest Payable - The
carrying amounts  approximate  their fair value because of the short maturity of
these financial instruments.

     Available for Sale and Held to Maturity  Securities - Fair values are based
on quoted  market  prices,  where  available.  If quoted  market  prices are not
available,  fair  values  are  based  on  quoted  market  prices  of  comparable
instruments.

     Loans - Fair values are  estimated  for  portfolios  of loans with  similar
financial  characteristics.  Loans are  segregated  by type such as  commercial,
financial and agricultural,  real estate construction, real estate mortgages and
installment  loans to individuals.  Each loan category is further segmented into
fixed and variable  interest rate terms.  For variable rate loans,  the carrying
value is a  reasonable  estimate of the fair value.  For fixed rate loans,  fair
value is determined  by  discounting  scheduled  future cash flows using current
interest rates offered on loans with similar risk  characteristics.  Fair values
for impaired  loans are estimated  based on discounted  cash flows or underlying
collateral values, where applicable.

     Deposits  and  Securities  Sold  Under  Agreements to Repurchase - The fair
value  of  securities  sold  under agreements to repurchase and deposits with no
stated maturity, such as non-interest-bearing demand deposits, savings, NOW, and
money  market  accounts,  is  equal  to  the  amount payable on demand as of the
valuation  date.  The  fair  value  of  certificates  of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities.

     Borrowings - The fair value of borrowings is based on the discounted  value
of  contractual  cash flows.  The  discount  rate is  estimated  using the rates
currently  offered  by the  Company's  lenders  for  debt of  similar  remaining
maturities.

     Commitments  to Extend  Credit and Standby  Letters of Credit - At December
31, 2005 and 2004, 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.

     (n) Impairment - Goodwill is evaluated for impairment on at least an annual
basis by  comparing  the  fair  value of its  reporting  units to their  related
carrying  value.  If the  carrying  value of a reporting  unit  exceeds its fair
value,  the Company  determines  whether the implied fair value of the goodwill,
using a  discounted  cash  flow  analysis,  exceeds  the  carrying  value of the
goodwill.  If the carrying value of the goodwill  exceeds the implied fair value
of the  goodwill,  an  impairment  loss is recorded  in an amount  equal to that
excess.

     For all other long-lived assets,  including identifiable intangible assets,
the  Company  reviews  them  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 of  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 had to record any  impairment  write-downs of
its long-lived assets or goodwill.

     (o) Comprehensive Income - Comprehensive income is defined as the change in
equity during a period for non-owner transactions and is divided into net income
and other comprehensive  income.  Other comprehensive  income includes revenues,
expenses,  gains,  and losses that are  excluded  from  earnings  under  current
accounting  standards.  The components of accumulated other comprehensive income
for the Company are as follows:

                                       69



                                        December 31,  December 31,  December 31,
                                           2005          2004          2003
                                        ----------    ----------    ----------
 Unrealized gain (loss) on
      securities available for sale     $   (1,049)        1,186         1,868
      Deferred tax asset (liability)           410          (463)         (728)
                                        ----------    ----------    ----------
 Net unrealized gain (loss) on
      securities available for sale           (639)          723         1,140
                                        ----------    ----------    ----------

 Additional minimum pension liability         (428)         (338)         (292)
      Deferred tax asset                       167           132           114
                                        ----------    ----------    ----------
 Net additional minimum pension
      liability                               (261)         (206)         (178)
                                        ----------    ----------    ----------

 Total accumulated other
      comprehensive income (loss)       $     (900)          517           962
                                        ==========    ==========    ==========

     (p) Segment  Reporting - SFAS No. 131,  "Disclosures  about  Segments of an
Enterprise  and Related  Information"  requires  management  to report  selected
financial and descriptive  information about reportable  operating segments.  It
also establishes  standards for related disclosures about products and services,
geographic areas, and major customers.  Generally,  disclosures are required for
segments internally  identified to evaluate performance and resource allocation.
The Company's  operations  are  primarily  within the banking  segment,  and the
financial statements presented herein reflect the results of that segment. Also,
the Company has no foreign operations or customers.

     (q)   Reclassifications  -  Certain  amounts  for  prior  years  have  been
reclassified to conform to the 2005 presentation.  The  reclassifications had no
effect on net income or shareholders'  equity as previously  presented,  nor did
they materially impact trends in financial information.

     (r) Stock Split - The Company  paid a 3-for-2  stock split on November  15,
2004.  All  previously  reported  share  totals and per share  amounts have been
adjusted to retroactively reflect the effect of the split.

     (s) Recent  Accounting  Pronouncements  - In January  2003,  the  Financial
Accounting Standards Board ("FASB") issued Financial  Interpretation No. 46 (FIN
46),  "Consolidation  of Variable  Interest  Entities,"  which was  subsequently
revised in  December  2003.  FIN 46  addresses  the  consolidation  by  business
enterprises  of certain  variable  interest  entities.  The  provisions  of this
interpretation  became  effective  for the  Company  on January  31,  2003 as it
relates to variable  interest  entities created or purchased after that date. In
December 2003, the FASB issued a revision to FIN 46 (FIN 46R),  which  clarified
and interpreted  certain of the provisions of FIN 46, without changing the basic
accounting  model in FIN 46. The  provisions of FIN 46R were  effective no later
than  March  31,  2004.  The  adoption  of FIN 46 did not have an  impact on the
Company's  financial  position or results of  operations,  as the Company had no
investments in variable interest entities that required  consolidation under FIN
46. The application of FIN 46R during 2004 resulted in the  de-consolidation  of
three trusts that the Company established in order to issue $40 million in trust
preferred capital securities. The de-consolidation of the trusts resulted in the
Company recording the amount of the junior  subordinated  debentures between the
Company and the trust  subsidiary in the amount of $1,239,000.  Previously,  the
junior subordinated  debentures were eliminated in consolidation.  The impact of
this change was to increase both securities (held-to-maturity) and borrowings by
$1,239,000 each. Additional  information regarding the Company's trust preferred
securities is included in Note 9.

    From November 2003 through  November  2005,  the FASB issued several sets of
guidance  relating to the concept of  "other-than-temporary  impairment" and its
applicability  to investments.  The final guidance,  as stated in Staff Position
FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application  to Certain  Investments,"  requires the  disclosure of  information
about  unrealized  losses  associated  with debt and  equity  securities,  while
affirming  the existing  requirements  for  determining  whether  impairment  is

                                       70


other-than-temporary. The required disclosures are presented in Note 3.

     In  December  2003,  the FASB  issued  Statement  of  Financial  Accounting
Standards No. 132 (revised 2003)  (Statement  132(R)),  "Employers'  Disclosures
about  Pensions and Other  Postretirement  Benefits."  Statement  132(R) revises
employers'  disclosures about pension plans and other postretirement  plans, but
does not change the  measurement or  recognition  of those plans.  Statement No.
132(R)  requires  additional  disclosures  about the assets,  obligations,  cash
flows,  and net periodic pension cost of defined benefit plans and other defined
benefit  postretirement plans. Most of the provisions of Statement 132(R) became
effective for financial  statements  with fiscal years after  December 15, 2003,
with certain  provisions  becoming  effective for fiscal years ending after June
15, 2004.  The additional  disclosures  required for the Company are included in
Note 11.

     In December 2003, the American  Institute of Certified  Public  Accountants
issued  Statement of Position 03-3 (SOP 03-3),  "Accounting for Certain Loans or
Debt  Securities  Acquired in a  Transfer."  SOP 03-3  provides  guidance on the
accounting for differences  between contractual and expected cash flows from the
purchaser's  initial  investment  in  loans  or debt  securities  acquired  in a
transfer,  if those  differences are  attributable,  at least in part, to credit
quality.  The scope of SOP 03-3  includes  loans  that have  shown  evidence  of
deterioration of credit quality since  origination,  and includes loans acquired
individually, in pools or as part of a business combination. Among other things,
SOP 03-3: (1) prohibits the recognition of the excess of contractual  cash flows
over expected  cash flows as an  adjustment of yield,  loss accrual or valuation
allowance at the time of purchase;  (2) requires  that  subsequent  increases in
expected cash flows be recognized  prospectively through an adjustment of yield;
and (3) requires that subsequent  decreases in expected cash flows be recognized
as impairment.  In addition, SOP 03-3 prohibits the creation or carrying over of
a valuation  allowance in the initial  accounting  of all loans within the scope
that are acquired in a transfer. Under SOP 03-3, the difference between expected
cash flows and the purchase price is accreted as an adjustment to yield over the
life of the loans. For loans acquired in a business  combination that have shown
deterioration  of  credit  quality  since  origination,  SOP 03-3  represents  a
significant  change from the previous purchase  accounting  practice whereby the
acquiree's  allowance  for loan  losses  is  typically  added to the  acquirer's
allowance  for  loan  losses.  SOP  03-3  became  effective  for  loans  or debt
securities acquired by the Company beginning on January 1, 2005. The adoption of
this  statement  in the  first  quarter  of 2005 did not have an  impact  on the
Company's financial statements;  however it will change, on a prospective basis,
the way that the Company accounts for loans and debt securities that it acquires
in the future.

     In March 2004, the Securities  and Exchange  Commission  (the "SEC") issued
Staff  Accounting  Bulletin  Number 105 (SAB 105),  "Application  of  Accounting
Principles to Loan  Commitments."  SAB 105 summarizes the views of the SEC staff
regarding the application of generally  accepted  accounting  principles to loan
commitments  accounted for as derivatives,  and its provisions were required for
such loan commitments entered into subsequent to March 31, 2004. The adoption of
SAB 105 did not have a material impact on the Company's  consolidated  financial
statements.

     In  December  2004,  the FASB  issued  Statement  of  Financial  Accounting
Standards No. 123 (revised  2004)  (Statement  123(R)),  "Share-Based  Payment."
Statement  123(R) replaces FASB Statement No. 123 (Statement  123),  "Accounting
for Stock-Based  Compensation,"  and supersedes APB Opinion No. 25 (Opinion 25),
"Accounting for Stock Issued to Employees."  Statement 123, as originally issued
in 1995,  established as preferable a fair-value-based  method of accounting for
share-based  payment  transactions  with  employees.   However,   Statement  123
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Statement 123(R)
requires that the compensation cost relating to share-based payment transactions
be recognized in financial  statements.  That cost will be measured based on the
fair value of the  equity or  liability  instruments  issued.  Statement  123(R)
covers a wide range of share-based  compensation  arrangements  including  share
options,  restricted share plans,  performance-based  awards, share appreciation
rights,  and employee  share purchase  plans.  Currently,  the only  share-based
compensation  arrangement  utilized by the Company is stock  options.  Under the
original  provisions of Statement  123(R), it was to have become effective as of
the first  interim or annual  reporting  period that began after June 15,  2005.
However in April  2005,

                                       71


the  Securities  and  Exchange  Commission  effectively  delayed the adoption of
Statement  123(R) for the Company until January 1, 2006. In 2006, 2007, and 2008
the Company's  stock-based  compensation  expense  related to options  currently
outstanding will be approximately $126,000, $47,000, and $3,000 respectively. In
addition,  the Company  expects to continue to grant 2,250 stock options to each
of the  Company's  non-employee  directors  in June of each year  until the 2014
expiration of the current  stock option plan.  In 2005,  the amount of pro forma
expense associated with the June director grants was $127,000.

     In December 2005, the FASB issued Staff Position SOP 94-6-1, "Terms of Loan
Products  that May Give  Rise to a  Concentration  of  Credit  Risk"  ("FSP  SOP
94-6-1"). FSP SOP 94-6-1 addresses 1) the circumstances under which the terms of
loan  products  give  rise  to a  concentration  of  credit  risk,  and  2)  the
disclosures  or other  accounting  considerations  that apply for entities  that
originate,  hold guarantee,  service, or invest in loan products with terms that
may give rise to a concentration of credit risk. The disclosures required by FSB
SOP 94-6-1 are required for interim and annual periods ending after December 19,
2005. See Note 12 for this discussion as it relates to the Company.

Note 2.   Completed Acquisitions

     There were no acquisitions  during 2004 or 2005. The Company  completed the
following  acquisitions  during 2003.  The results of each acquired  company are
included in First  Bancorp's  results  for the period  ended  December  31, 2003
beginning on their respective acquisition dates.

     (a) On January 2, 2003, the Company  completed the  acquisition of Uwharrie
Insurance  Group,  a  Montgomery  County based  property and casualty  insurance
agency.   With  eight  employees,   Uwharrie   Insurance   Group,   Inc.  serves
approximately 5,000 customers,  primarily from its Troy-based headquarters,  and
has annual  commissions of  approximately  $500,000.  The primary reason for the
acquisition  was to gain  efficiencies  of  scale  with the  Company's  existing
property and casualty  insurance  business.  In accordance with the terms of the
merger  agreement,  the Company  paid cash in the amount of $546,000 to complete
the acquisition. In addition, the Company incurred $18,000 in other direct costs
to complete the acquisition. As of the date of the acquisition, the value of the
assets of Uwharrie Insurance Group amounted to $20,000 (consisting  primarily of
premises and equipment),  which resulted in the Company  recording an intangible
asset  of  approximately  $544,000.  Based  on  an  independent  appraisal,  the
allocation  among types of intangible  assets and related  amortization  periods
are:

   Type of Intangible Asset      Allocated Amount         Amortization Period
-----------------------------    ----------------     --------------------------
Value of Noncompete Agreement    $         50,000     Two years - straight-line
Value of Customer List                    151,000     Ten years - straight-line
Goodwill                                  343,000     Not applicable
                                 ----------------
Total Intangible Assets          $        544,000
                                 ================

     For tax purposes,  each of the  intangible  assets  recorded will result in
tax-deductible  amortization expense. No pro forma earnings information has been
presented due to the immateriality of the acquisition.

     (b) On January 15, 2003, the Company  completed the acquisition of Carolina
Community Bancshares, Inc. (CCB), the parent company of Carolina Community Bank,
a South Carolina  community  bank with three  branches in Dillon  County,  South
Carolina. This represented the Company's first entry into South Carolina. Dillon
County, South Carolina is contiguous to Robeson County, North Carolina, a county
where the Company operates four branches.  The Company's  primary reason for the
acquisition was to expand into a contiguous  market with facilities,  operations
and  experienced  staff  in  place.  The  terms  of  the  agreement  called  for
shareholders of Carolina  Community to receive 1.2 shares of First Bancorp stock
and  $20.00 in cash for each share of  Carolina  Community  stock they own.  The
transaction  was  completed on January 15, 2003 with the Company  paying cash of
$8.3  million,  issuing  499,332  shares of  common  stock  that were  valued at
approximately  $8.4  million,  and  assuming  employee  stock  options  with  an
intrinsic value of approximately $0.9 million. The value of the stock issued was
determined using a Company stock price of $16.81, which was the average price of
Company  stock

                                       72


during  the  five  day  period   beginning  two  days  before  the   acquisition
announcement and ending two days after the acquisition announcement (as adjusted
for the November 15, 2004 3-for-2 stock split).  The value of the employee stock
options assumed was determined using the Black-Scholes option-pricing model.

     This  acquisition  has been  accounted  for  using the  purchase  method of
accounting  for  business   combinations,   and  accordingly,   the  assets  and
liabilities of CCB were recorded based on estimates of fair values as of January
15, 2003.  Except as noted beginning in the next sentence,  the table below is a
condensed  balance sheet  disclosing the amount assigned to each major asset and
liability  caption  of CCB on  January  15,  2003,  and the  related  fair value
adjustments  recorded  by the Company to reflect  the  acquisition.  The "Other"
category in the table below amounting to $755,000 consists solely of the net tax
asset recorded in connection with the acquisition and was originally a liability
of $243,000.  In 2004, the Company  recorded  three  adjustments to the purchase
price allocation totaling $998,000, each of which related to taxes, as explained
in the  following  sentences.  It was  determined  in 2004 that  $895,000 of the
amount  originally  recorded as goodwill at the acquisition  date was deductible
for tax purposes, with all other goodwill associated with this transaction being
nondeductible. The tax impact of these deductions was approximately $353,000. It
was also  determined  in 2004 that a deferred tax valuation  allowance  that had
been  recorded  by  CCB in the  amount  of  $224,000  was no  longer  necessary.
Additionally  the Company has realized  $421,000 in tax benefits  related to the
exercise  of  nonqualified  stock  options  that  were  assumed  in the  merger.
Accordingly,  in 2004, the Company reduced its tax liability by $998,000, with a
corresponding  decrease to goodwill.  The table below includes the impact of the
2004 adjustments.



                                                     As         Fair            As
                  ($ in thousands)               Recorded by    Value       Recorded by
                                                    CCB      Adjustments   First Bancorp
                                                  --------    --------       --------
                                                                       
Assets
------------------------------------------
Cash and cash equivalents                         $  7,048          --          7,048
Securities                                          12,995          99 (a)     13,094
Loans, gross                                        47,716          --         47,716
Allowance for loan losses                             (751)         --           (751)
Premises and equipment                                 799         (45)(b)        754
Other - Identifiable intangible asset                   --         771 (c)        771
Other                                                1,697         755 (d)      2,452
                                                  --------    --------       --------
   Total                                            69,504       1,580         71,084
                                                  --------    --------       --------

Liabilities
------------------------------------------
Deposits                                          $ 58,861          --         58,861
Borrowings                                           2,000         115 (e)      2,115
Other                                                  722         (88)(f)        634
                                                  --------    --------       --------
   Total                                            61,583          27         61,610
                                                  --------    --------       --------

Net identifiable assets acquired                                                9,474

Total cost of acquisition
   Cash                                                       $  8,322
   Value of stock issued                                         8,395
   Value of assumed options                                        889
   Direct costs of acquisition                                   1,270
                                                              --------
       Total cost of acquisition                                               18,876
                                                                             --------

Goodwill recorded related to acquisition of CCB                              $  9,402
                                                                             ========


                                       73


Explanation of Fair Value Adjustments
-------------------------------------
     (a) This fair value adjustment  represents the net unrealized gain of CCB's
         held-to-maturity  securities portfolio.  This fair value adjustment was
         recorded  by the  Company  as a  premium  on  securities  and  will  be
         amortized as a reduction of investment interest income over the life of
         the related  securities,  which have an average  life of  approximately
         four years.

     (b) This  fair  value  adjustment  represents  the book  value  of  certain
         equipment owned by CCB that became obsolete upon the acquisition.

     (c) 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 expense on an
         accelerated  basis  over a ten year  period  based  on an  amortization
         schedule provided by the consulting firm.

     (d) This  fair  value  adjustment  represents  the net tax  asset  recorded
         related to the accounting for the acquisition.

     (e) This fair value  adjustment was recorded  because the interest rates of
         CCB's borrowings exceeded current interest rates on similar borrowings.
         This amount  will be  amortized  to reduce  interest  expense  over the
         remaining  lives  of the  related  borrowings,  which  have a  weighted
         average life of approximately 3.7 years.

     (f) This  fair  value  adjustment   represents  the  carrying  value  of  a
         retirement  plan liability  that was terminated in accordance  with the
         terms of the merger agreement.

     The  following  unaudited  pro forma  financial  information  presents  the
combined results of the Company and CCB as if the acquisition had occurred as of
January  1,  2002,  after  giving  effect  to  certain  adjustments,   including
amortization of the core deposit intangible, an assumed cost of funds related to
the cash paid of 6%, and related  income tax  effects.  The pro forma  financial
information  does not  necessarily  reflect the results of operations that would
have  occurred had the Company and CCB  constituted  a single entity during such
period.  Because  the  acquisition  took place on January  15,  2003,  pro forma
results for 2003 are not provided.

       ($ in thousands, except share data)          Year Ended
                                                 December 31, 2002
                                                 -----------------
       Net interest income                           $ 52,200
       Noninterest income                              12,717
       Net income                                      17,748
       Earnings per share
            Basic                                        1.25
            Diluted                                      1.22

     The above pro forma results include  charges  recorded by CCB in the fourth
quarter of 2002 related to the impending merger with the Company. These expenses
amounted to $255,375 on a pretax basis and $198,432 on an after-tax basis.

     (c) On October 24, 2003,  the Company  completed  the  acquisition  of four
branches of RBC Centura  Bank  located in Fairmont,  Harmony,  Kenansville,  and
Wallace, all in North Carolina. As of the date of the acquisition,  the branches
had a total of approximately  $102 million in deposits and $25 million in loans.
The  primary  reason for the  acquisition  was to expand  into new  markets  and
increase  the  Company's  customer  base.  Subject to certain  limitations,  the
Company paid a deposit premium of 14.1% for the branches,  which resulted in the
Company recording  intangible assets relating to this purchase of $14.2 million,
all of which is deductible for tax purposes.  The identifiable  intangible asset
associated  with the fair value of the core deposit  base,  as  determined

                                       74


by an  independent  consulting  firm, was  determined to be  approximately  $1.3
million and is being  amortized  as expense on an  accelerated  basis over a ten
year period based on an amortization  schedule  provided by the consulting firm.
The remaining intangible asset of $12.9 million has been classified as goodwill,
and thus is not being  systematically  amortized,  but  rather is  subject to an
annual impairment test. The primary factors that contributed to a purchase price
that resulted in recognition of goodwill were the Company's  desire to expand in
four new markets with  facilities,  operations and  experienced  staff in place.
These four branches'  operations are included in the  accompanying  Consolidated
Statements  of Income  beginning  on the  acquisition  date of October 24, 2003.
Historical financial information related to the four branches while owned by RBC
Centura Bank is not available, and thus pro forma results of operations have not
been presented.

     The following  table contains a condensed  balance sheet that indicates the
amount  assigned  to  each  major  asset  and  liability  as of  the  respective
acquisition dates for the 2003 acquisitions described above.

                                  Uwharrie    Carolina      RBC
                                  Insurance  Community    Centura
   Assets acquired                  Group       Bank      Branches     Total
   -----------------------------   --------   --------    --------    --------
                                                 (in millions)
   Cash                            $     --        7.0        62.4        69.4
   Securities                            --       13.1          --        13.1
   Loans, gross                          --       47.7        24.8        72.5
   Allowance for loan losses             --       (0.8)       (0.3)       (1.1)
   Premises and equipment                --        0.8         1.0         1.8
   Other                                 --        2.5         0.2         2.7
                                   --------   --------    --------    --------
       Total assets acquired             --       70.3        88.1       158.4
                                   --------   --------    --------    --------

   Liabilities assumed
   -----------------------------
   Deposits                              --       58.9       102.0       160.9
   Borrowings                            --        2.1          --         2.1
   Other                                 --        0.6         0.3         0.9
                                   --------   --------    --------    --------
      Total liabilities assumed          --       61.6       102.3       163.9
                                   --------   --------    --------    --------
   Value of cash paid and/or
       stock issued to
       stock-holders of acquiree        0.5       18.9         n/a        19.4
                                   --------   --------    --------    --------
   Intangible assets recorded      $    0.5       10.2        14.2        24.9
                                   ========   ========    ========    ========

                                       75


Note 3.   Securities

     The book values and  approximate  fair values of  investment  securities at
December 31, 2005 and 2004 are summarized as follows:




                                                       2005                                            2004
                                 ---------------------------------------------    ----------------------------------------------
                                 Amortized     Fair           Unrealized          Amortized     Fair           Unrealized
                                    Cost       Value       Gains     (Losses)        Cost       Value       Gains      (Losses)
                                 ---------   ---------   ---------   ---------    ---------   ---------   ---------    ---------
                                                                                                     
(In thousands)

Securities available for sale:
  U.S. Government agencies       $  45,258      44,481          --        (777)      29,778      29,810         169         (137)
  Mortgage-backed securities        49,235      47,928          13      (1,320)      41,116      41,062         240         (294)
  Corporate bonds                   13,929      14,912       1,067         (84)      10,909      12,084       1,194          (19)
  Equity securities                  6,240       6,292          56          (4)       5,565       5,598          39           (6)
                                 ---------   ---------   ---------   ---------    ---------   ---------   ---------    ---------
Total available for sale         $ 114,662     113,613       1,136      (2,185)      87,368      88,554       1,642         (456)
                                 =========   =========   =========   =========    =========   =========   =========    =========

Securities held to maturity:
  State and local governments    $  11,382      11,531         181         (32)      11,605      12,031         435           (9)
  Other                              2,790       2,790          --          --        2,420       2,420          --           --
                                 ---------   ---------   ---------   ---------    ---------   ---------   ---------    ---------
Total held to maturity           $  14,172      14,321         181         (32)      14,025      14,451         435           (9)
                                 =========   =========   =========   =========    =========   =========   =========    =========


     Included  in   mortgage-backed   securities   at  December  31,  2005  were
collateralized  mortgage obligations with an amortized cost of $15,810,000 and a
fair value of $15,399,000.  Included in  mortgage-backed  securities at December
31, 2004 were  collateralized  mortgage  obligations  with an amortized  cost of
$15,928,000 and a fair value of $15,831,000.

     The Company  owned  Federal Home Loan Bank stock with a cost and fair value
of $5,930,000 at December 31, 2005 and $5,247,000 at December 31, 2004, which is
included in equity securities above and serves as part of the collateral for the
Company's  line of  credit  with the  Federal  Home  Loan  Bank  (see Note 9 for
additional  discussion).  The  investment  in this  stock is a  requirement  for
membership in the Federal Home Loan Bank system.

     The  following  table  presents   information   regarding  securities  with
unrealized losses at December 31, 2005:



                                           Securities in an Unrealized  Securities in an Unrealized
                                                Loss Position for           Loss Position for
                                               Less than 12 Months          More than 12 Months                Total
                                             -----------------------      -----------------------      -----------------------
                                                          Unrealized                   Unrealized                   Unrealized
                                             Fair Value     Losses        Fair Value     Losses        Fair Value     Losses
                                             ----------   ----------      ----------   ----------      ----------   ----------
                                                                                                         
U.S. Government agencies                     $   25,004          380          16,477          397          41,481          777
Mortgage-backed securities                       30,729          667          15,955          653          46,684        1,320
Corporate bonds                                      --           --           3,016           84           3,016           84
Equity securities                                    38            4              --           --              38            4
State and local governments                       1,921           15             417           17           2,338           32
                                             ----------   ----------      ----------   ----------      ----------   ----------
     Total temporarily impaired securities   $   57,692        1,066          35,865        1,151          93,557        2,217
                                             ==========   ==========      ==========   ==========      ==========   ==========


                                       76


     The  following  table  presents   information   regarding  securities  with
unrealized losses at December 31, 2004:



                                           Securities in an Unrealized  Securities in an Unrealized
                                                Loss Position for           Loss Position for
                                               Less than 12 Months         More than 12 Months                Total
                                             -----------------------     -----------------------      -----------------------
                                                          Unrealized                  Unrealized                   Unrealized
                                             Fair Value     Losses       Fair Value     Losses        Fair Value     Losses
                                             ----------   ----------     ----------   ----------      ----------   ----------
                                                                                                  
U.S. Government agencies                     $   16,731          137             --           --          16,731          137
Mortgage-backed securities                        4,533           30         16,361          264          20,894          294
Corporate bonds                                   3,081           19             --           --           3,081           19
Equity securities                                    53            6             --           --              53            6
State and local governments                         925            9             --           --             925            9
                                             ----------   ----------     ----------   ----------      ----------   ----------
     Total temporarily impaired securities   $   25,323          201         16,361          264          41,684          465
                                             ==========   ==========     ==========   ==========      ==========   ==========



     In the  above  tables,  all of the  non-equity  securities  that  are in an
unrealized  loss  position  at  December  31,  2005 and 2004 are bonds  that the
company has determined are in a loss position due to interest rate factors,  and
not  because of credit  quality  concerns.  Therefore,  the  Company  expects to
collect the full par value of each bond upon maturity  with no accounting  loss.
The Company has  concluded  that each of the equity  securities in an unrealized
loss  position  at  December  31,  2005  and  2004  is  due to  minor  temporary
fluctuations in the market prices of the securities.  The Company's policy is to
record an impairment  charge for any of these equity  securities that remains in
an unrealized loss position for twelve consecutive months.

     The aggregate carrying amount of cost-method investments was $8,803,000 and
$6,508,000  at December  31, 2005 and 2004,  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, 2005, by contractual  maturity,  are summarized in the table below.
Expected  maturities may differ from contractual  maturities because issuers may
have the right to call or prepay  obligations with or without call or prepayment
penalties.



                                                Securities Available for Sale         Securities Held to Maturity
                                                -----------------------------         ----------------------------
                                                Amortized            Fair             Amortized            Fair
(In thousands)                                     Cost              Value               Cost              Value
                                                ----------         ----------         ----------        ----------
                                                                                                 

Debt securities
    Due within one year                         $    2,300              2,268         $    1,323             1,325
    Due after one year but within five years        37,285             36,579              9,502             9,589
    Due after five years but within ten years        8,663              8,645              3,061             3,121
    Due after ten years                             10,939             11,901                286               286
    Mortgage-backed securities                      49,235             47,928                 --                --
                                                ----------         ----------         ----------        ----------
       Total debt securities                       108,422            107,321             14,172            14,321

Equity securities                                    6,240              6,292                 --                --
                                                ----------         ----------         ----------        ----------
       Total securities                         $  114,662            113,613         $   14,172            14,321
                                                ==========         ==========         ==========        ==========


     At December 31, 2005 and 2004,  investment  securities  with book values of
$88,581,000 and $43,315,000, respectively, were pledged as collateral for public
and private deposits and securities sold under agreements to repurchase.

     Sales of securities  available for sale with aggregate  proceeds of $17,000
in 2005,  $12,060,000 in 2004, and $7,750,000 in 2003 resulted in gross gains of
$5,000 and no gross  losses in 2005,  resulted in gross gains of $299,000 and no
gross losses in 2004, and gross gains of $218,000 and no gross losses in 2003.


                                       77


Note 4.   Loans and Allowance for Loan Losses

     Loans at December 31, 2005 and 2004 are summarized as follows:

(In thousands)                                           2005            2004
                                                      ----------     ----------

Commercial, financial, and agricultural               $  135,942        122,501
Real estate - construction                               125,158        117,158
Real estate - mortgage                                 1,150,068      1,063,694
Installment loans to individuals                          71,259         63,913
                                                      ----------     ----------
    Subtotal                                           1,482,427      1,367,266
Unamortized net deferred loan costs (fees)                   184           (213)
                                                      ----------     ----------
    Loans, net of deferred fees                       $1,482,611      1,367,053
                                                      ==========     ==========

     Loans  described  above as "Real estate - mortgage"  included  loans in the
amounts of  $1,050,191,000  and  $999,384,000  as of December 31, 2005 and 2004,
respectively,  which are being pledged as collateral for certain borrowings (see
Note 9). The loans above also include loans to executive  officers and directors
and to their associates  totaling  approximately  $12,857,000 and $13,764,000 at
December 31, 2005 and 2004,  respectively.  During 2005, additions to such loans
were  approximately  $930,000 and repayments totaled  approximately  $1,837,000.
These loans were made on substantially the same terms,  including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other  non-related  borrowers.  Management  does not believe these loans involve
more  than the  normal  risk of  collectibility  or  present  other  unfavorable
features.

     Nonperforming assets at December 31, 2005 and 2004 are as follows:


(In thousands)                                              2005         2004
                                                         ----------   ----------

Loans: Nonaccrual loans                                  $    1,640        3,707
       Restructured loans                                        13           17
       Accruing loans greater than 90 days past due              --           --
                                                         ----------   ----------
                   Total nonperforming loans                  1,653        3,724
Other real estate (included in other assets)                  1,421        1,470
                                                         ----------   ----------
     Total nonperforming assets                          $    3,074        5,194
                                                         ==========   ==========

     If the  nonaccrual  loans and  restructured  loans as of December 31, 2005,
2004 and 2003 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  $123,000,
$247,000  and $319,000 for  nonaccrual  loans and $2,000,  $2,000 and $2,000 for
restructured   loans  would  have  been  recorded  for  2005,   2004  and  2003,
respectively.  Interest  income on such loans that was  actually  collected  and
included in net income in 2005, 2004 and 2003 amounted to approximately $67,000,
$120,000  and  $102,000  for  nonaccrual  loans  (prior to their being placed on
nonaccrual  status)  and  $2,000,  $2,000  and $2,000  for  restructured  loans,
respectively.  At December 31, 2005 and 2004,  the Company had no commitments to
lend additional funds to debtors whose loans were nonperforming.

                                       78


     Activity in the allowance for loan losses for the years ended  December 31,
2005, 2004 and 2003 is as follows:

(In thousands)                                   2005        2004        2003
                                               --------    --------    --------

Balance, beginning of year                     $ 14,717      13,569      10,907
Provision for loan losses                         3,040       2,905       2,680
Recoveries of loans charged-off                     322         181         240
Loans charged-off                                (2,363)     (1,938)     (1,341)
Allowance recorded related to loans
    assumed in corporate acquisitions                --          --       1,083
                                               --------    --------    --------
Balance, end of year                           $ 15,716      14,717      13,569
                                               ========      ======      ======


     At December 31, 2005 and 2004, the recorded  investment in loans considered
to be impaired was $338,000 and $1,578,000, respectively, of which all were on a
nonaccrual basis at each year end. The related allowance for loan losses for the
impaired  loans  at  December  31,  2005 and 2004  was  $100,000  and  $370,000,
respectively.  At December 31, 2005,  there were no impaired  loans that did not
have a related  allowance.  At December 31, 2004, there was $532,000 in impaired
loans for which there was no related allowance. The average recorded investments
in impaired loans during the years ended December 31, 2005,  2004, and 2003 were
approximately  $1,474,000,  $1,317,000,  and $1,590,000,  respectively.  For the
years ended  December  31,  2005,  2004,  and 2003,  the Company  recognized  no
interest  income  on those  impaired  loans  during  the  period  that they were
considered to be impaired.

Note 5.   Premises and Equipment

     Premises  and  equipment  at  December  31,  2005 and 2004  consist  of the
following:


(In thousands)                                             2005          2004
                                                         --------      --------

Land                                                     $  7,819         7,812
Buildings                                                  27,097        21,725
Furniture and equipment                                    19,118        17,388
Leasehold improvements                                      1,204         1,236
                                                         --------      --------
    Total cost                                             55,238        48,161
Less accumulated depreciation and amortization            (20,398)      (17,843)
                                                         --------      --------
    Net book value of premises and equipment             $ 34,840        30,318
                                                         ========      ========

                                       79



Note 6.   Goodwill and Other Intangible Assets

     The  following is a summary of the gross  carrying  amount and  accumulated
amortization of amortized intangible assets as of December 31, 2005 and December
31, 2004 and the carrying amount of unamortized intangible assets as of December
31, 2005 and December 31, 2004.



                                       December 31, 2005            December 31, 2004
                                ----------------------------  ----------------------------
                                Gross Carrying   Accumulated  Gross Carrying   Accumulated
                                    Amount      Amortization      Amount      Amortization
------------------------------- -------------   ------------  -------------   ------------
                                                                            
(In thousands)
Amortized intangible assets:
   Customer lists                $        394            115            394             85
   Noncompete agreements                   50             50             50             50
   Core deposit premiums                2,441          1,011          2,441            751
                                 ------------   ------------   ------------   ------------
        Total                    $      2,885          1,176          2,885            886
                                 ============   ============   ============   ============
Unamortized intangible assets:
   Goodwill                      $     47,247                        47,247
                                 ============                  ============
   Pension                       $        273                            84
                                 ============                  ============


     The  following  table  presents  the  estimated  amortization  expense  for
intangible  assets for each of the five calendar years ending  December 31, 2010
and the estimated amount amortizable thereafter.  These estimates are subject to
change in future periods to the extent management  determines it is necessary to
make  adjustments to the carrying  value or estimated  useful lives of amortized
intangible assets.


                                                   Estimated
                                              Amortization Expense
                 --------------------        --------------------
                                                 (In thousands)
                          2006                     $         242
                          2007                               220
                          2008                               219
                          2009                               218
                          2010                               218
                       Thereafter                            592
                                                   -------------
                              Total                        1,709
                                                   =============

                                       80


Note 7.   Income Taxes

     Total  income taxes for the years ended  December  31, 2005,  2004 and 2003
were allocated as follows:



(In thousands)                                                                 2005        2004         2003
                                                                             --------    --------    --------
                                                                                              
Allocated to net income                                                      $ 16,829      10,418      10,617
Allocated to stockholders' equity, for unrealized holding gain/loss on
   debt and equity securities for financial reporting purposes                   (872)       (265)        183
Allocated to stockholders'  equity,  for tax benefit of additional
   pension charge                                                                 (35)        (18)        (50)
                                                                             --------    --------    --------
    Total income taxes                                                       $ 15,922      10,135      10,750
                                                                             ========    ========    ========


     The components of income tax expense (benefit) for the years ended December
31, 2005, 2004 and 2003 are as follows:

(In thousands)                                 2005        2004         2003
                                             --------    --------    --------

Current - Federal                            $  8,285      10,407       9,578
         - State                                8,700         228         614
Deferred - Federal                               (124)       (192)        425
         - State                                  (32)        (25)         --
                                             --------    --------    --------
     Total                                   $ 16,829      10,418      10,617
                                             ========    ========    ========

     The  sources  and tax effects of  temporary  differences  that give rise to
significant  portions of the deferred tax assets  (liabilities)  at December 31,
2005 and 2004 are presented below:



(In thousands)                                                                  2005       2004
                                                                              -------    -------
                                                                                       
Deferred tax assets:
     Allowance for loan losses                                                $ 6,075      5,456
     Excess book over tax SERP retirement plan cost                               739        550
     Basis of investment in subsidiary                                             69         69
     Net loan fees recognized for tax reporting purposes                           --         55
     Reserve for employee medical expense for financial reporting purposes         20         20
     Deferred compensation                                                        180        156
     State net operating loss carryforwards                                       282        352
     Trust preferred security issuance costs                                      206        128
     Accruals, book versus tax                                                    154        160
     Minimum pension liability adjustment                                         167        132
     Unrealized loss on securities available for sale                             409         --
     All other                                                                     27         35
                                                                              -------    -------
        Gross deferred tax assets                                               8,328      7,113
         Less: Valuation allowance                                               (275)      (367)
                                                                              -------    -------
              Net deferred tax assets                                           8,053      6,746
                                                                              -------    -------
Deferred tax liabilities:
     Loan fees                                                                 (1,115)    (1,050)
     Excess tax over book pension cost                                           (603)      (559)
     Depreciable basis of fixed assets                                         (1,689)    (1,906)
     Amortizable basis of intangible assets                                    (3,166)    (2,378)
     Unrealized gain on securities available for sale                              --       (464)
     Net loan fees recognized for tax reporting purposes                          (69)        --
     FHLB stock dividends                                                        (436)      (439)
     Book versus tax basis difference - securities                                 (7)       (46)
                                                                              -------    -------
          Gross deferred tax liabilities                                       (7,085)    (6,842)
                                                                              -------    -------
              Net deferred tax asset (liability) - included in other assets   $   968        (96)
                                                                              =======    =======


     A portion of the annual change in the net deferred tax liability relates to
unrealized  gains and losses on securities  available for sale. The related 2005
and 2004  deferred tax (benefit) of  approximately  ($872,000)  and

                                       81


($265,000),  respectively,  has been recorded directly to shareholders'  equity.
Additionally,  a portion of the annual  change in the net deferred tax liability
relates to an additional  pension charge. The related 2005 and 2004 deferred tax
(benefit) of ($35,000) and ($18,000),  respectively,  has been recorded directly
to shareholders' equity. The balance of the 2005 and 2004 increase (decrease) in
the  net  deferred  tax  asset   (liability)  of  ($156,000)   and   ($217,000),
respectively,  is  reflected as a deferred  income tax expense  (benefit) in the
consolidated statement of income.

     The valuation  allowances  for 2005 and 2004 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.

     See Note 12 for discussion regarding state taxing authority exposure.

     Retained  earnings at December  31,  2005 and 2004  includes  approximately
$6,869,000  representing  pre-1988  tax bad debt  reserve  base year amounts for
which no deferred  income tax liability has been provided  since these  reserves
are not  expected  to reverse  or may never  reverse.  Circumstances  that would
require an accrual of a portion or all of this  unrecorded  tax  liability are a
reduction in qualifying loan levels relative to the end of 1987, failure to meet
the  definition  of a bank,  dividend  payments  in  excess of  accumulated  tax
earnings and profits,  or other  distributions  in  dissolution,  liquidation or
redemption of the Bank's stock.

     The  following  is a  reconcilement  of federal  income tax  expense at the
statutory  rate of 35% to the income tax  provision  reported  in the  financial
statements.



(In thousands)                                          2005        2004        2003
                                                      --------    --------    --------
                                                                       
Tax provision at statutory rate                       $ 11,522      10,686      10,512
Increase (decrease) in income taxes resulting from:
   Tax-exempt interest income                             (251)       (263)       (286)
   Low income housing tax credits                         (109)        (98)        (20)
   Non-deductible interest expense                          20          14          16
   State income taxes, net of federal benefit            5,634         132         361
   Change in valuation allowance                           (92)        153          78
   Non-deductible penalty                                   50          --          --
   Other, net                                               55        (206)        (44)
                                                      --------    --------    --------
     Total                                            $ 16,829      10,418      10,617
                                                      ========    ========    ========


Note 8.   Time Deposits and Securities Sold Under Agreements to Repurchase

     At December 31, 2005,  the  scheduled  maturities  of time  deposits are as
follows:

                                             (In thousands)
                          2006                $    688,704
                          2007                      77,846
                          2008                      35,561
                          2009                      16,210
                          2010                      21,823
                       Thereafter                    2,161
                                              ------------
                                              $    842,305
                                              ============

     Securities  sold  under  agreement  to  repurchase   represent  short  term
borrowings  by  the  Company  with   maturities  less  than  one  year  and  are
collateralized  by a portion of the Company's  United States  government  agency
obligations,   which  have  been  delivered  to  a  third  party  custodian  for
safekeeping.  At  December  31,  2005,  securities  with  an  amortized  cost of
$48,830,000 and a market value of $47,835,000 were pledged to secure  securities
sold under agreements to repurchase.

                                       82


     The following table presents certain  information for securities sold under
agreements to repurchase:

                                                               2005      2004
                                                             -------    -------
Balance at December 31                                       $33,530         --
Weighted average interest rate at December 31                   3.08%        --
Maximum amount outstanding at an month-end during the year   $33,530         --
Average daily balance outstanding during the year            $ 6,219         --
Average annual interest rate paid during the year               2.88%        --

Note 9.   Borrowings and Borrowings Availability

     The  following   table   presents   information   regarding  the  Company's
outstanding borrowings at December 31, 2005 and 2004:




    Description                  Due date                   Call Feature                Amount              Interest Rate
--------------------     --------------------------    ------------------------     -------------     ------------------------
     2005
--------------------
                                                                                               
FHLB Overnight           January 1, 2006, renewable              None                 $30,000,000          4.49% subject to
                                                                                                             change daily
FHLB Term Note           Due February 15, 2006                   None                   6,500,000            3.47% fixed
FHLB Term Note           Due March 13, 2006                      None                   2,000,000            2.44% fixed
FHLB Term Note           Due May 15, 2006                        None                   7,500,000            3.51% fixed
FHLB Term Note           Due August 10, 2006                     None                   5,000,000            3.60% fixed
FHLB Term Note           Due March 13, 2007                      None                   2,000,000            2.91% fixed
FHLB Term Note           Due June 23, 2008                       None                   1,000,000            5.51% fixed
FHLB Term Note           Due on April 21, 2009          Expired (One time call          5,000,000            5.26% fixed
                                                          option in 2004 not
                                                          exercised by FHLB)
Trust Preferred          Due on November 7, 2032      By Company on a quarterly        20,619,000      7.79% at Dec. 31, 2005
     Securities                                           basis beginning on                               adjustable rate
                                                           November 7, 2007                            3 month LIBOR + 3.45%
Trust Preferred          Due on January 23, 2034           By Company on a             20,620,000      6.94% at Dec. 31, 2005
     Securities                                       quarterly basis beginning                             adjustable rate
                                                         on January 23, 2009                           3 month LIBOR + 2.70%
                                                                                     ------------    -------------------------
Total
    borrowings/                                                                                        5.47% (5.88% excluding
    weighted average                                                                 $100,239,000       overnight borrowings)
    rate                                                                             ============    =========================


                                       83




  Description                   Due date                   Call Feature                Amount              Interest Rate
--------------------     --------------------------    ------------------------     -------------     ------------------------
     2004
--------------------
                                                                                               
FHLB Overnight           January 1, 2005, renewable              None                $40,000,000             2.55% subject to
    Borrowings             daily                                                                              change daily
FHLB Term Note           Due January 16, 2005                    None                  1,000,000               4.01% fixed
FHLB Term Note           Due March 13, 2006                      None                  2,000,000               2.44% fixed
FHLB Term Note           Due March 13, 2007                      None                  2,000,000               2.91% fixed
FHLB Term Note           Due June 23, 2008                       None                  1,000,000               5.51% fixed
FHLB Term Note           Due on April 21, 2009          Expired (One time call         5,000,000               5.26% fixed
                                                          option in 2004 not
                                                          exercised by FHLB)
Trust Preferred          Due on November 7, 2032      By Company on a quarterly       20,619,000          5.73% at Dec. 31, 2004
     Securities                                           basis beginning on                                  adjustable rate
                                                           November 7, 2007                               3 month LIBOR + 3.45%
Trust Preferred          Due on January 23, 2034           By Company on a            20,620,000         4.86% at Dec. 31, 2004
     Securities                                       quarterly basis beginning                               adjustable rate
                                                         on January 23, 2009                             3 month LIBOR + 2.70%
                                                                                     -----------       ------------------------
Total borrowings/
    weighted                                                                                              3.98% (5.07% excluding
    average rate                                                                     $92,239,000          overnight borrowings)
                                                                                     ===========       =========================


     In the tables above,  only the $5 million due to the FHLB on April 21, 2009
had a lender call  provision,  which allowed the FHLB, at their option,  to call
the bond on April 21, 2004. The call provision provided interest rate protection
to the FHLB in the event that prevailing  market interest rates were higher than
the note rate on the date of the call. This call option was not exercised by the
FHLB at the April 21,  2004 call  date.  In  addition  to the call  option,  all
outstanding  FHLB  borrowings  may be  accelerated  immediately  by the  FHLB in
certain circumstances including material adverse changes in the condition of the
Company  or if the  Company's  qualifying  collateral  amounts to less than that
required under the terms of the borrowing agreement.

     In the above table, the $20.6 million in borrowings due on November 7, 2032
relate to borrowings  structured as trust preferred capital securities that were
issued by First  Bancorp  Capital Trust I, an  unconsolidated  subsidiary of the
Company,  on  October  29,  2002 and  qualify as Tier I capital  for  regulatory
capital adequacy requirements. These debt securities are callable by the Company
at par on any quarterly interest payment date beginning on November 7, 2007. The
interest rate on these debt securities adjusts on a quarterly basis at a rate of
three-month  LIBOR plus 3.45%.  This rate may not exceed 12.50% through November
2007. The Company incurred approximately $615,000 in debt issuance costs related
to the issuance that were  recorded as prepaid  expenses and are included in the
"Other Assets" line item of the consolidated  balance sheet. These debt issuance
costs are being amortized as interest  expense until the earliest  possible call
date of November 7, 2007.

     In the above table, the $20.6 million in borrowings due on January 23, 2034
relate to borrowings  structured as trust preferred capital securities that were
issued by First Bancorp Capital Trusts II and III ($10.3 million by each trust),
unconsolidated  subsidiaries of the Company, on December 19, 2003 and qualify as
Tier  I  capital  for  regulatory  capital  adequacy  requirements.  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 rate of  three-month  LIBOR plus  2.70%.  The
Company  incurred  approximately  $580,000 of debt issuance costs related to the
issuance that were  recorded as prepaid  expenses and are included in the "Other
Assets" line item of the consolidated  balance sheet.  These debt issuance costs
are being amortized as interest expense until the earliest possible call date of
January 23, 2009.

     At December 31, 2005,  the Company has three  sources of readily  available
borrowing  capacity - 1) an  approximately  $360 million line of credit with the
FHLB, of which $59 million was  outstanding at December 31,

                                       84


2005 and $51 million was  outstanding  at December  31,  2004,  2) a $50 million
overnight federal funds line of credit with a correspondent  bank, none of which
was  outstanding  at December  31,  2005 or 2004,  and 3) an  approximately  $62
million  line of credit  through the Federal  Reserve Bank of  Richmond's  (FRB)
discount window, none of which was outstanding at December 31, 2005 or 2004.

     The  Company's  line of credit with the FHLB  totaling  approximately  $360
million  can  be  structured  as  either  short-term  or  long-term  borrowings,
depending  on the  particular  funding or  liquidity  need and is secured by the
Company's  FHLB  stock  and a  blanket  lien  on most of its  real  estate  loan
portfolio.  In addition to the outstanding  borrowings from the FHLB that reduce
the available  borrowing  capacity of the line of credit, the borrowing capacity
was further  reduced by $40 million at December 31, 2005 and 2004 as a result of
the  Company  pledging  letters of credit for public  deposits  at each of those
dates.

     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, 2005 or 2004. This line of credit was not drawn upon during
any of the past three years.

     The Company  also has a line of credit with the FRB discount  window.  This
line is secured by a blanket lien on a portion of the Company's  commercial  and
consumer loan portfolio  (excluding real estate).  Based on the collateral owned
by the  Company  as of  December  31,  2005,  the  available  line of  credit is
approximately  $62  million.  This line of credit was  established  primarily in
connection  with the Company's Y2K liquidity  contingency  plan and has not been
drawn on since  inception.  The FRB has indicated that it would not expect lines
of credit  that have been  granted  to  financial  institutions  to be a primary
borrowing source. The Company plans to maintain this line of credit, although it
is not expected that it will be drawn upon except in unusual circumstances.

Note 10.  Leases

     Certain  bank  premises  are  leased  under  operating  lease   agreements.
Generally,  operating leases contain renewal options on  substantially  the same
basis as current  rental terms.  Rent expense  charged to  operations  under all
operating lease agreements was $510,000 in 2005,  $452,000 in 2004, and $324,000
in 2003.

     Future obligations for minimum rentals under noncancelable operating leases
at December 31, 2005 are as follows:

                                                      (In thousands)
        Year ending December 31:
          2006                                                $  435
          2007                                                   314
          2008                                                   267
          2009                                                   237
          2010                                                   213
          Later years                                          1,106
                                                              ------
               Total                                          $2,572
                                                              ======

Note 11.  Employee Benefit Plans

     401(k) Plan.  The Company  sponsors a retirement  savings plan  pursuant to
     -----------
Section  401(k) of the Internal  Revenue Code.  Employees who have completed one
year of service are eligible to  participate  in the plan. 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 $700,000,
$607,000,  and $528,000,  for the years ended December 31, 2005,  2004 and 2003,
respectively.  Additionally,  the Company made additional

                                       85


discretionary  matching  contributions to the plan of $225,000 in 2005, $175,000
in 2004,  and  $175,000  in  2003.  The  Company's  matching  and  discretionary
contributions are made in the form of Company stock. 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 First Bancorp  and/or its  subsidiaries,  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 $210,000 in 2005, $205,000 in 2004 and
$200,000 in 2003.

     The Company's  contributions  to the Pension Plan are based on computations
by  independent  actuarial  consultants  and are intended to provide the Company
with the  maximum  deduction  for income tax  purposes.  The  contributions  are
invested to provide for benefits under the Pension Plan.  The Company  estimates
that its contribution to the Pension Plan will be $945,000 in 2006.

     Funds in the  Pension  Plan are  invested in a mix of  investment  types in
accordance  with the  Pension  Plan's  investment  policy,  which is intended to
provide a reasonable return while maintaining proper diversification. Except for
Company stock,  all of the Pension Plan's assets are invested in an unaffiliated
bank money market account or mutual funds. The investment  policy of the Pension
Plan  does  not  permit  the  use of  derivatives,  except  to the  extent  that
derivatives are used by any of the mutual funds invested in by the Pension Plan.
The following table presents information regarding the mix of investments of the
Pension  Plan's  assets at December 31, 2005 and its targeted mix, as set out by
the Plan's investment policy:



                                     Balance at    % of Total Assets at      Targeted %
Investment type                  December 31, 2005   December 31, 2005    of Total Assets
-----------------------------    -----------------   -----------------   -----------------
                                                                        
                                (Dollars in thousands)
Fixed income investments
   Money market account              $        301                2%              1%-5%
   US government bond fund                  1,669               14%            10%-20%
   US corporate bond fund                   1,111               10%             5%-15%
Equity investments
   Large cap value fund                     2,572               22%            20%-30%
   Large cap growth fund                    3,086               27%            20%-30%
   Mid-small cap growth fund                2,302               20%            15%-25%
   Company stock                              527                5%             0%-10%
                                     ------------      ------------
        Total                        $     11,568              100%
                                     ============      ============


     For the three years ended  December 31, 2005,  the Company used an expected
long-term  rate-of-return-on-assets  assumption of 9.00%. 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

                                       86


assets  (generally  75% equities and 25% fixed income) can be expected to return
approximately 9% on a long term basis.

     The following  table  reconciles  the beginning and ending  balances of the
Pension  Plan's  projected  benefit  obligation,  as computed  by the  Company's
independent  actuarial  consultants.  The  Pension  Plan's  accumulated  benefit
obligation is also presented:



(In thousands)                                        2005        2004        2003
                                                    --------    --------    --------
                                                                      
Projected benefit obligation at beginning of year   $ 12,445       9,892       7,475
Service cost                                           1,137         955         690
Interest cost                                            766         642         527
Actuarial loss                                         1,829       1,013       1,175
Effect of amendments                                      --          --          85
Benefits paid                                            (84)        (57)        (60)
                                                    --------    --------    --------
Projected benefit obligation at end of year         $ 16,093      12,445       9,892
                                                    ========    ========    ========

Accumulated benefit obligation at end of year       $ 10,284       7,817       6,164
                                                    ========    ========    ========


     The following  table  reconciles  the beginning and ending  balances of the
Pension Plan's assets:

(In thousands)                               2005          2004          2003
                                           --------      --------      --------

Plan assets at beginning of year           $  9,907         8,498         5,126
Actual return on plan assets                    361           816         1,387
Employer contributions                        1,419           650         2,045
Benefits paid                                   (84)          (57)          (60)
                                           --------      --------      --------
Plan assets at end of year                 $ 11,603         9,907         8,498
                                           ========      ========      ========

     The following table presents information regarding the funded status of the
Pension Plan, the amounts not recognized in the consolidated balance sheets, and
the amounts recognized in the consolidated balance sheets:

(In thousands)                                           2005             2004
                                                        -------         -------

Funded status                                           $(4,490)         (2,538)
Unrecognized net actuarial loss                           5,955           3,764
Unrecognized prior service cost                             132             249
Unrecognized transition obligation                           45              47
                                                        -------         -------
Prepaid pension cost                                    $ 1,642           1,522
                                                        =======         =======

     Net pension cost for the Pension Plan included the following components for
the years ended December 31, 2005, 2004 and 2003:

(In thousands)                                     2005       2004        2003
                                                  -------    -------    -------

Service cost - benefits earned during the period  $ 1,137        955        690
Interest cost on projected benefit obligation         766        642        527
Expected return on plan assets                       (947)      (759)      (507)
Net amortization and deferral                         344        307        301
                                                  -------    -------    -------
     Net periodic pension cost                    $ 1,300      1,145      1,011
                                                  =======    =======    =======

                                       87


     The  following  table is an estimate of the  benefits  that will be paid in
accordance with the Pension Plan during the indicated time periods:


                                                          Estimated
         (In thousands)                                    benefit
                                                           payments
                                                          ----------
          Year ending December 31, 2006                     $  200
          Year ending December 31, 2007                        214
          Year ending December 31, 2008                        257
          Year ending December 31, 2009                        278
          Year ending December 31, 2010                        323
          Years ending December 31, 2011-2015                3,659

     Supplemental Executive Retirement Plan. The Company sponsors a Supplemental
     --------------------------------------
Executive  Retirement  Plan (the "SERP Plan") for the benefit of certain  senior
management executives of the Company. The purpose of the SERP Plan is to provide
additional  monthly pension benefits to ensure that each such senior  management
executive would receive  lifetime monthly pension benefits equal to 3% of his or
her  final  average  compensation  multiplied  by his or her  years  of  service
(maximum of 20 years) to the Company or its  subsidiaries,  subject to a maximum
of 60% of his or her final average  compensation.  The amount of a participant's
monthly SERP benefit is reduced by (i) the amount  payable  under the  Company's
qualified  Pension Plan (described  above),  and (ii) fifty percent (50%) of the
participant's primary social security benefit.  Final average compensation means
the average of the 5 highest  consecutive  calendar years of earnings during the
last 10 years of service prior to termination of employment.

     The Company's  funding  policy with respect to the SERP Plan is to fund the
related benefits through investments in life insurance  policies,  which are not
considered  plan assets for the purpose of  determining  the SERP Plan's  funded
status. The cash surrender values of the life insurance policies are included in
the line item "other assets."

    The following table reconciles the beginning and ending balances of the SERP
Plan's benefit obligation,  as computed by the Company's  independent  actuarial
consultants:

(In thousands)                                           2005     2004     2003
                                                        ------   ------   ------

Projected benefit obligation at beginning of year       $2,553    1,631    1,248
Service cost                                               247      242      105
Interest cost                                              154      128       88
Actuarial loss                                             269      329      179
Effect of amendments                                        --      223       11
Benefits paid                                               --       --       --
                                                        ------   ------   ------
Projected benefit obligation at end of year             $3,223    2,553    1,631
                                                        ======   ======   ======

Accumulated benefit obligation at end of year           $2,556    2,119    1,391
                                                        ======   ======   ======

                                       88


     The following table presents information regarding the funded status of the
SERP Plan, the amounts not recognized in the  consolidated  balance sheets,  and
the amounts recognized in the consolidated balance sheets:

(In thousands)                                           2005             2004
                                                       -------          -------

Funded status                                          $(3,223)          (2,553)
Unrecognized net actuarial loss                          1,079              862
Unrecognized prior service cost                            237              273
Additional minimum liability                              (701)            (422)
                                                       -------          -------
Accrued pension cost                                   $(2,608)          (1,840)
                                                       =======          =======

     Net pension cost for the SERP Plan  included the following  components  for
the years ended December 31, 2005, 2004 and 2003:

(In thousands)                                           2005     2004     2003
                                                        ------   ------   ------

Service cost - benefits earned during the period        $  247      242      105
Interest cost on projected benefit obligation              154      128       88
Net amortization and deferral                               88       80       45
                                                        ------   ------   ------
     Net periodic pension cost                          $  489      450      238
                                                        ======   ======   ======


     The  following  table is an estimate of the  benefits  that will be paid in
accordance with the SERP Plan during the indicated time periods:

          (In thousands)
                                                         Estimated
                                                          benefit
                                                          payments
                                                          --------
           Year ending December 31, 2006                  $   164
           Year ending December 31, 2007                      156
           Year ending December 31, 2008                      148
           Year ending December 31, 2009                      140
           Year ending December 31, 2010                      159
           Years ending December 31, 2011-2015              1,268

     The  following   assumptions   were  used  in  determining   the  actuarial
information  for the Pension Plan and the SERP Plan for the years ended December
31, 2005, 2004 and 2003:



                                                       2005                  2004                 2003
                                                ------------------    ------------------   -------------------
                                                Pension     SERP      Pension     SERP     Pension      SERP
                                                 Plan       Plan       Plan       Plan       Plan       Plan
                                                -------    -------    -------    -------   -------     -------
                                                                                      
Discount rate used to determine net
    periodic pension cost                        6.00%      6.00%      6.25%      6.25%      6.75%      6.75%
Discount rate used to  calculate end of
    year liability disclosures                   5.50%      5.50%      6.00%      6.00%      6.25%      6.25%
Expected long-term rate of return on assets      9.00%       n/a       9.00%       n/a       9.00%       n/a
Rate of compensation increase                    5.00%      5.00%      5.00%      5.00%      5.00%      5.00%


     For the years ended December 31, 2004 and 2003, the Company  determined the
year end  discount  rate based on  discussions  with the  Company's  third-party
actuarial  consultant,  giving weight to the year end Moody's  corporate Aa rate
and its change during the year, and the expected cash flows  associated with the
Company's  retirement  payment  obligations.  During 2005, the Company adopted a
policy  that the year end  discount  rate  would be a rate no  greater  than the
Moody's Aa corporate bond rate as of December 31 of each year, rounded up to the
nearest  quarter  point.  The Company  believes that this policy is  appropriate
given the Company's desire that the discount rate be based on the rate of return
of a  high-quality  fixed-income  security  and the  expected  cash flows of its
retirement obligation.

                                       89


     Included in intangible assets at December 31, 2005 and 2004 is $273,000 and
$84,000,  respectively,  that has been recognized in connection with the accrual
of the additional minimum liability for the SERP Plan.

Note 12.  Commitments, Contingencies, and Concentrations of Credit Risk

     See  Note  10  with  respect  to  future  obligations  under  noncancelable
operating leases.

     See Note 18 for a subsequent  event related to a branch purchase  agreement
executed in January 2006.

     In the normal course of business there are various outstanding  commitments
and contingent  liabilities such as commitments to extend credit,  which are not
reflected in the financial statements.  As of December 31, 2005, the Company had
outstanding  loan  commitments of $277,044,000,  of which  $236,047,000  were at
variable rates and $40,997,000 were at fixed rates. Included in outstanding loan
commitments were unfunded commitments of $157,257,000 on revolving credit plans,
of which  $132,796,000  were at  variable  rates and  $24,461,000  were at fixed
rates.

     At December 31, 2005 and 2004, the Company had  $4,283,000 and  $3,762,000,
respectively  in  standby  letters of credit  outstanding.  The  Company  has no
carrying  amount for these  standby  letters of credit at either of those dates.
The nature of the standby letters of credit is a guarantee made on behalf of the
Company's  customers to suppliers of the customers to guarantee payments owed to
the supplier by the  customer.  The standby  letters of credit are generally for
terms for one year,  at which time they may be renewed for another  year if both
parties agree.  The payment of the guarantees  would generally be triggered by a
continued nonpayment of an obligation owed by the customer to the supplier.  The
maximum potential amount of future payments  (undiscounted) the Company could be
required  to make under the  guarantees  in the event of  nonperformance  by the
parties to whom credit or financial guarantees have been extended is represented
by the contractual amount of the financial  instruments  discussed above. In the
event that the Company is required to honor a standby letter of credit,  a note,
already executed with the customer,  is triggered which provides repayment terms
and any  collateral.  Over the past ten years,  the Company has had to honor one
standby letter of credit,  which was repaid by the borrower  without any loss to
the  Company.  Management  expects any draws under  existing  commitments  to be
funded through normal operations.

     In 1999, in  consultation  with the  Company's  tax  advisors,  the Company
established  an operating  structure  involving a real estate  investment  trust
("REIT") that  resulted in a reduction in the  Company's  state tax liability to
the state of North  Carolina.  In late 2004,  the North  Carolina  Department of
Revenue indicated that it would challenge taxpayers engaged in activities deemed
to be  "income-shifting,"  and they  indicated  that they believed  certain REIT
operating  structures were a type of  "income-shifting."  During 2005, the North
Carolina  Department  of Revenue began an audit of the Company's tax returns for
2001-2004,  which represented all years eligible for audit. In the third quarter
of 2005,  based on consultations  with the Company's  external auditor and legal
counsel,  the  Company  determined  that it should  record a $6.3  million  loss
accrual  to  reserve  for this  issue.  In  February  2006,  the North  Carolina
Department of Revenue announced a "Settlement Initiative" that offered companies
with certain transactions,  including those with a REIT operating structure, the
opportunity  to resolve  such  matters  with  reduced  penalties  by agreeing to
participate in the initiative by June 15, 2006.  Although the Company  continues
to believe that its tax returns complied with the relevant  statutes,  the board
of  directors  of the Company  has  tentatively  decided  that it is in the best
interests  of  the  Company  to  settle  this  matter  by  participating  in the
initiative. Based on the terms of the initiative, the Company estimates that its
total liability to settle the matter will be approximately $4.3 million,  net of
the  federal  tax  benefit,  or $2.0  million  less  than  the  amount  that was
originally  accrued.  Accordingly,  in March  2006,  the  Company  retroactively
recorded an  adjustment  to its fourth  quarter of 2005 earnings to reverse $2.0
million of tax expense.  The financial  statements contained herein reflect this
revised estimate. The aspects of the REIT structure that gave rise to this issue
were  discontinued  effective  January 1, 2005,  and thus the  Company  does not
believe it has any additional exposure related to this item beyond the amount of
the accrual other than ongoing interest on the unpaid taxes amounting to $65,000
per quarter (after-tax).

                                       90


     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,  Cabarrus,  Chatham,
Davidson,  Duplin,  Guilford,  Harnett,  Iredell,  Lee,  Montgomery,  Moore, New
Hanover, Randolph,  Richmond, Robeson,  Rockingham,  Rowan, Scotland, Stanly and
Wake Counties in North  Carolina,  Dillon County in South  Carolina,  and Wythe,
Washington,  and Montgomery Counties in Virginia. The real estate loan portfolio
can be affected by the condition of the local real estate market. The commercial
and installment loan portfolios can be affected by local economic conditions.

     The Company's  loan  portfolio is not  concentrated  in loans to any single
borrower or to a relatively small number of borrowers. Additionally,  management
is not  aware  of any  concentrations  of  loans  to  classes  of  borrowers  or
industries that would be similarly affected by economic conditions.

     In addition to monitoring  potential  concentrations of loans to particular
borrowers or groups of borrowers, industries and geographic regions, the Company
monitors exposure to credit risk that could arise from potential  concentrations
of lending  products  and  practices  such as loans that  subject  borrowers  to
substantial  payment  increases (e.g.  principal  deferral  periods,  loans with
initial interest-only  periods,  etc), and loans with high loan-to-value ratios.
Additionally,  there are industry  practices  that could  subject the Company to
increased  credit risk should  economic  conditions  change over the course of a
loan's life.  For example,  the Company makes variable rate loans and fixed rate
principal-amortizing  loans with  maturities  prior to the loan being fully paid
(i.e.  balloon payment  loans).  These loans are  underwritten  and monitored to
manage  the  associated  risks.  The  Company  has  determined  that there is no
concentration of credit risk associated with its lending policies or practices.

     The Company's  investment  portfolio consists principally of obligations of
the United  States,  its  agencies or its  corporations  and general  obligation
municipal securities.  In the opinion of the Company,  there is no concentration
of credit risk in its investment portfolio.  The Company places its deposits and
correspondent  accounts  with  and  sells  its  federal  funds  to high  quality
institutions.  The Company  believes credit risk  associated with  correspondent
accounts is not significant.

Note 13.  Fair Value of Financial Instruments

     Fair value  estimates  as of  December  31,  2005 and 2004 and  limitations
thereon are set forth below for the Company's financial instruments.  Please see
Note 1 for a discussion of fair value methods and  assumptions,  as well as fair
value information for off-balance sheet financial instruments.



                                      December 31, 2005         December 31, 2004
                                   -----------------------   -----------------------
                                    Carrying    Estimated     Carrying     Estimated
(In thousands)                       Amount     Fair Value     Amount     Fair Value
                                   ----------   ----------   ----------   ----------
                                                                  
Cash and due from banks,
   noninterest-bearing             $   32,985       32,985   $   28,486       28,486
Due from banks, interest-bearing       41,655       41,655       45,135       45,135
Federal funds sold                     28,883       28,883       15,780       15,780
Securities available for sale         113,613      113,613       88,554       88,554
Securities held to maturity            14,172       14,321       14,025       14,451
Presold mortgages in process
   of settlement                        3,347        3,347        1,771        1,771
Loans, net of allowance             1,466,895    1,460,119    1,352,336    1,352,998
Accrued interest receivable             8,947        8,947        6,832        6,832

Deposits                            1,494,577    1,494,043    1,388,768    1,388,994
Securities sold under
   agreements to repurchase            33,530       33,530           --           --
Borrowings                            100,239      101,671       92,239       92,459
Accrued interest payable                3,835        3,835        2,677        2,677


                                       91


     Limitations  Of Fair Value  Estimates.  Fair value  estimates are made at a
     -------------------------------------
specific point in time,  based on relevant  market  information  and information
about the financial  instrument.  These  estimates do not reflect any premium or
discount  that could  result from  offering  for sale at one time the  Company's
entire holdings of a particular financial  instrument.  Because no highly liquid
market exists for a significant portion of the Company's financial  instruments,
fair value  estimates  are based on judgments  regarding  future  expected  loss
experience,   current  economic  conditions,  risk  characteristics  of  various
financial  instruments,  and other  factors.  These  estimates are subjective in
nature and  involve  uncertainties  and  matters  of  significant  judgment  and
therefore  cannot be determined  with  precision.  Changes in assumptions  could
significantly affect the estimates.

     Fair  value  estimates  are based on  existing  on- and  off-balance  sheet
financial  instruments  without  attempting to estimate the value of anticipated
future business and the value of assets and liabilities  that are not considered
financial   instruments.   Significant  assets  and  liabilities  that  are  not
considered  financial assets or liabilities  include net premises and equipment,
intangible  and other  assets such as  foreclosed  properties,  deferred  income
taxes,  prepaid  expense  accounts,  income  taxes  currently  payable and other
various accrued expenses.  In addition,  the income tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in any of the estimates.

Note 14.  Stock Option Plan

     Pursuant to provisions of the Company's 2004 Stock Option Plan (the "Option
Plan"), options to purchase up to 1,275,000 shares of First Bancorp's authorized
but unissued common stock may be granted to employees  ("Employee  Options") and
directors  ("Nonemployee Director Options") of the Company and its subsidiaries.
The purposes of the Option Plan are (i) to align the interests of  participating
employees  and directors  with the Company's  shareholders  by  reinforcing  the
relationship  between  shareholder  gains  and  participant  rewards,   (ii)  to
encourage equity ownership in the Company by participants,  and (iii) to provide
an incentive to employee  participants  to continue  their  employment  with the
Company.

     Since the inception of the Option Plan and its  predecessor  plan (the 1994
Stock Option Plan), each nonemployee director has been granted 2,250 Nonemployee
Director  Options  in  June of each  year.  Employee  Options  were  granted  to
substantially  all  officers at the  inception of the 1994 Stock Option Plan and
since  then  have been  granted  to new  officers,  officers  that have  assumed
increased  responsibilities,  and for performance rewards. For both Employee and
Nonemployee  Director Options,  the option price is the fair market value of the
stock at the date of grant.  Employee  Options  may  require  a vesting  period.
Director  Options are 100% vested on the date of grant.  All options  expire not
more than 10 years from the date of grant.  Forfeited  options become  available
for future grants.

     In addition to the Option Plan and its  predecessor  plan,  the Company has
four  stock  option  plans that were  assumed in  connection  with  mergers  and
acquisitions  of the companies that  originally  established  those plans. As of
December 31, 2005, a total of 76,995  shares of common stock were  issuable upon
exercise under those assumed plans. The weighted average exercise price of those
outstanding  options is $10.14 per share.  No additional  options may be granted
under those  assumed  plans.  The tables on the  following  page  include  these
options.

                                       92


     At December 31, 2005, there were 1,211,590  additional shares available for
grant  under the  Option  Plan.  The per share  weighted-average  fair  value of
options  granted  during  2005,  2004,  and 2003 was  $6.68,  $7.07,  and $5.03,
respectively  on the  date(s) of grant  using the  Black-Scholes  option-pricing
model with the following weighted-average assumptions:

                                             2005         2004       2003
                                           --------     --------   --------
Expected dividend yield                      3.08%        2.97%      3.73%
Risk-free interest rate                      3.88%        3.49%      3.30%
Expected life                               7 years      7 years    8 years
Expected volatility                         32.97%       36.67%     33.08%

     The Company  applies APB  Opinion  No. 25 in  accounting  for its Plan and,
accordingly,  no compensation  cost has been recognized for its stock options in
the  financial  statements.  Note 1(k)  reflects  the pro forma  effects had the
Company  determined  compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123.

    The  following  table sets forth a summary of the activity of the  Company's
outstanding options since December 31, 2002:

                                                           Options Exercisable
                                    Options Outstanding       at Year End
                                   --------------------   --------------------
                                               Weighted-              Weighted-
                                               Average                Average
                                   Number of   Exercise   Number of  Exercise
                                    Shares      Price      Shares      Price
                                   --------    --------   --------   --------


Balance at December 31, 2002        850,023    $  10.69    702,123   $   9.81

   Granted                           76,500       16.35
   Assumed in corporate
        acquisition                  78,000        4.17
   Exercised                       (226,764)       6.38
   Forfeited                             --          --
   Expired                               --          --

Balance at December 31, 2003        777,759       11.85    626,583      11.05

   Granted                          183,230       21.35
   Exercised                       (181,663)       7.83
   Forfeited                           (600)      15.32
   Expired                               --          --

Balance at December 31, 2004        778,726       15.01    668,260      14.88

   Granted                           34,000       22.11
   Exercised                        (65,844)      11.41
   Forfeited                             --          --
   Expired                               --          --

Balance at December 31, 2005        746,882       15.75    678,883      15.69

                                       93


The following table summarizes  information about the stock options  outstanding
at December 31, 2005:

                           Options Outstanding             Options Exercisable
                  ---------------------------------------  ---------------------
                                 Weighted-      Weighted-              Weighted-
                    Number        Average        Average     Number     Average
    Range of      Outstanding    Remaining      Exercise  Exercisable  Exercise
 Exercise Prices  at 12/31/05 Contractual Life    Price   at 12/31/05    Price
 --------------- ------------ ---------------- ---------- ------------ ---------

 $4.00 to $7.99       38,699         1.0          $ 6.94       38,699   $ 6.94
 $8.00 to $11.99     168,651         3.3           10.87      168,651    10.87
$12.00 to $15.99     251,052         5.4           15.08      192,927    14.95
$16.00 to $19.99      96,750         7.0           17.62       96,750    17.62
$20.00 to $22.00     191,730         8.4           21.77      181,856    21.77
                 -----------                              -----------
                     746,882         5.7          $15.75      678,883   $15.69
                 ===========                              ===========

Note 15.  Regulatory Restrictions

     The Company is regulated  by the Board of Governors of the Federal  Reserve
System ("FED") and is subject to securities  registration  and public  reporting
regulations of the Securities and Exchange Commission.  The Bank is regulated by
the Federal Deposit Insurance Corporation ("FDIC") and the North Carolina Office
of the Commissioner of Banks.

     The primary  source of funds for the payment of dividends by First  Bancorp
is dividends  received  from its  subsidiary,  First 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, 2005, the Bank had undivided profits of approximately  $117,241,000
which were  available  for the payment of  dividends.  As of December  31, 2005,
approximately  $77,063,000 of the Company's investment in the Bank is restricted
as to transfer to the Company without obtaining prior regulatory approval.

     The average reserve balance  maintained by the Bank under the  requirements
of the Federal  Reserve was  approximately  $498,000 for the year ended December
31, 2005.

     The Company and the Bank must comply with regulatory  capital  requirements
established by the FED and FDIC.  Failure to meet minimum  capital  requirements
can initiate certain mandatory, and possibly additional  discretionary,  actions
by regulators  that, if undertaken,  could have a direct  material effect on the
Company's  financial  statements.  Under  capital  adequacy  guidelines  and the
regulatory framework for prompt corrective action, the Company and the Bank must
meet  specific  capital  guidelines  that involve  quantitative  measures of the
Company's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices.  The Company's and Bank's capital amounts
and classification  are also subject to qualitative  judgments by the regulators
about components,  risk weightings,  and other factors.  These capital standards
require the Company and the Bank to maintain  minimum ratios of "Tier 1" capital
to total  risk-weighted  assets  ("Tier I Capital  Ratio") and total  capital to
risk-weighted  assets of 4.00% and 8.00% ("Total Capital Ratio"),  respectively.
Tier 1 capital is comprised of total shareholders' equity,  excluding unrealized
gains or losses from the securities  available for sale, less intangible assets,
and total capital is comprised of Tier 1 capital plus certain  adjustments,  the
largest of which for the Company and the Bank is the  allowance for loan losses.
Risk-weighted  assets refer to the on- and  off-balance  sheet  exposures of the
Company and the Bank,  adjusted for their related risk levels using formulas set
forth in FED and FDIC regulations.

     In addition to the risk-based  capital  requirements  described  above, the
Company and the Bank are subject to a leverage capital requirement,  which calls
for a minimum  ratio of Tier 1 capital (as defined  above) to quarterly  average
total  assets  ("Leverage   Ratio)  of  3.00%  to  5.00%,   depending  upon  the
institution's composite ratings as determined by its regulators. The FED has not
advised the Company of any requirement specifically applicable to it.

                                       94


     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, 2005 and 2004 in the  following  table.  Based on the
most recent notification from its regulators, the Bank is well capitalized under
the framework for prompt  corrective  action.  There are no conditions or events
since that  notification  that  management  believes  have changed the Company's
category.



                                                                         To Be Well Capitalized
                                                       For Capital      Under Prompt Corrective
                                   Actual           Adequacy Purposes      Action Provisions
                            --------------------   --------------------   --------------------
($ in thousands)             Amount       Ratio     Amount      Ratio      Amount      Ratio
                            --------    --------   --------    --------   --------    --------
                                                                       
                                                  (must equal or exceed) (must equal or exceed)
As of December 31, 2005
     Total Capital Ratio
         Company            $163,117      11.51%   $113,378       8.00%   $    N/A        N/A
         Bank                162,776      11.51%    113,178       8.00%    141,472      10.00%
     Tier I Capital Ratio
         Company             147,401      10.52%     56,061       4.00%        N/A        N/A
          Bank               147,060      10.51%     55,960       4.00%     83,940       6.00%
     Leverage Ratio
         Company             147,401       8.62%     68,438       4.00%        N/A        N/A
         Bank                147,060       8.61%     68,335       4.00%     85,419       5.00%

As of December 31, 2004
     Total Capital Ratio
         Company            $153,348      11.97%   $102,450       8.00%   $    N/A        N/A
         Bank                146,377      11.49%    102,252       8.00%    127,815      10.00%
     Tier I Capital Ratio
         Company             138,631      10.95%     50,636       4.00%        N/A        N/A
          Bank               131,660      10.46%     50,537       4.00%     75,806       6.00%
     Leverage Ratio
         Company             138,631       8.90%     62,332       4.00%        N/A        N/A
         Bank                131,660       8.50%     62,191       4.00%     77,739       5.00%


Note 16.  Supplementary Income Statement Information

     Components of other operating expenses exceeding 1% of total income for any
of the years ended December 31, 2005, 2004 and 2003 are as follows:

(In thousands)                                 2005          2004          2003
                                              ------        ------        ------

Stationery and supplies                       $1,590         1,523         1,498
Telephone                                      1,260         1,345         1,229
Professional fees                              1,090           989           650

                                       95


Note 17.  Condensed Parent Company Information

     Condensed financial data for First Bancorp (parent company only) follows:

CONDENSED BALANCE SHEETS                                      As of December 31,
                                                            --------------------
(In thousands)                                                2005        2004
                                                            --------    --------
Assets
------
Cash on deposit with bank subsidiary                        $  2,000       5,935
Investment in wholly-owned subsidiaries, at equity           196,170     184,316
Land                                                               7           7
Other assets                                                   1,993       2,170
                                                            --------    --------
         Total assets                                       $200,170     192,428
                                                            ========    ========

Liabilities and shareholders' equity
------------------------------------
Borrowings                                                  $ 41,239      41,239
Other liabilities                                              3,203       2,711
                                                            --------    --------
     Total liabilities                                        44,442      43,950

Shareholders' equity                                         155,728     148,478
                                                            --------    --------

         Total liabilities and shareholders' equity         $200,170     192,428
                                                            ========    ========



CONDENSED STATEMENTS OF INCOME                                Year Ended December 31,
                                                        --------------------------------
(In thousands)                                            2005        2004        2003
                                                        --------    --------    --------
                                                                           
Dividends from wholly-owned subsidiaries                $  6,050          --       3,400
Undistributed earnings of wholly-owned subsidiaries       13,155      22,332      17,453
Interest expense                                          (2,846)     (2,086)     (1,110)
All other income and expenses, net                          (269)       (132)       (326)
                                                        --------    --------    --------
          Net income                                    $ 16,090      20,114      19,417
                                                        ========    ========    ========





CONDENSED STATEMENTS OF CASH FLOWS                           Year Ended December 31,
                                                        --------------------------------
(In thousands)                                            2005        2004        2003
                                                        --------    --------    --------
                                                                           
Operating Activities:
     Net income                                         $ 16,090      20,114      19,417
    Equity in undistributed earnings of subsidiaries     (13,155)    (22,332)    (17,453)
     Amortization of securities and intangible assets         --          --          60
     Decrease (increase) in other assets                     177         122        (667)
     Increase in other liabilities                           325         356          90
                                                        --------    --------    --------
          Total - operating activities                     3,437      (1,740)      1,447
                                                        --------    --------    --------
Investing Activities:
     Net cash paid in acquisitions                            --          --      (9,050)
                                                        --------    --------    --------
          Total - investing activities                        --          --      (9,050)
                                                        --------    --------    --------
Financing Activities:
      Proceeds from borrowings                                --          --      20,000
      Payment of cash dividends                           (9,761)     (9,138)     (8,670)
      Proceeds from issuance of common stock               2,389       2,547       2,444
      Purchases and retirement of common stock                --      (6,528)     (5,195)
                                                        --------    --------    --------
          Total - financing activities                    (7,372)    (13,119)      8,579
                                                        --------    --------    --------
Net increase (decrease) in cash and cash equivalents      (3,935)    (14,859)        976
Cash and cash equivalents, beginning of year               5,935      20,794      19,818
                                                        --------    --------    --------
Cash and cash equivalents, end of year                  $  2,000       5,935      20,794
                                                        ========    ========    ========


                                       96


Note 18.  Subsequent Events

     In March 2006, the Company  adjusted its originally  reported  earnings for
the three and twelve  months ended  December 31, 2005 to reflect a change in the
Company's  estimate of a contingent  loss liability as of December 31, 2005 that
occurred as a result of an event  occurring  subsequent to December 31, 2005 and
prior to the issuance of the  Company's  financial  statements.  As discussed in
Note 12, the Company recorded a loss amount of $6.3 million in the third quarter
of 2005 to accrue for contingent tax loss exposure  involving the North Carolina
Department  of Revenue.  In February  2006,  the North  Carolina  Department  of
Revenue announced a "Settlement  Initiative" that offered companies with certain
transactions  that had been  challenged  by the  North  Carolina  Department  of
Revenue the  opportunity  to resolve  such  matters  with  reduced  penalties by
agreeing to participate in the initiative by June 15, 2006. Although the Company
continues to believe that its tax returns  complied with the relevant  statutes,
the board of directors of the Company has tentatively  decided that it is in the
best  interests  of the Company to settle this  matter by  participating  in the
initiative. Based on the terms of the initiative, the Company estimated that its
total liability to settle the matter will be approximately $4.3 million,  net of
the  federal  tax  benefit,  or $2.0  million  less  than  the  amount  that was
originally  accrued.  Accordingly,  in March  2006,  the  Company  adjusted  its
originally reported 2005 earnings to reflect the impact of this subsequent event
by reducing  originally  reported  tax  expense for the three and twelve  months
ended December 31, 2005 by $1,982,000. The financial statements contained herein
reflect this revised estimate.

     In January 2006, the Company reported that it had agreed to purchase a bank
branch in Dublin,  Virginia  with  approximately  $20 million in  deposits  from
another financial institution.


                                       97



             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 sheet of First Bancorp and
subsidiaries   (the  "Company")  as  of  December  31,  2005,  and  the  related
consolidated  statements of income,  comprehensive income,  shareholders' equity
and cash  flows  for the year then  ended.  We also  have  audited  management's
assessment, included in the accompanying Management's Report on Internal Control
Over Financial Reporting, that the Company maintained effective internal control
over financial reporting as of December 31, 2005, based on criteria  established
in Internal Control-- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission  ("COSO").  The Company's management is
responsible  for  these  consolidated  financial  statements,   for  maintaining
effective internal control over financial  reporting,  and for its assessment of
the   effectiveness   of  internal   control  over  financial   reporting.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements,  an  opinion  on  management's  assessment,  and 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 the financial
statements  are free of material  misstatement  and whether  effective  internal
control over financial  reporting was maintained in all material  respects.  Our
audit of financial  statements  included  examining,  on a test basis,  evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement  presentation.  Our audit of internal
control over financial reporting included obtaining an understanding of internal
control over financial reporting,  evaluating management's  assessment,  testing
and evaluating the design and operating  effectiveness of internal control,  and
performing   such  other   procedures   as  we   considered   necessary  in  the
circumstances.  We believe that our audits  provide a  reasonable  basis for our
opinions.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of First Bancorp and subsidiaries
as of December  31,  2005,  and the results of their  operations  and their cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United  States of  America.  Also in our  opinion,  management's
assessment that First Bancorp and  subsidiaries  maintained  effective

                                       98


internal  control over  financial  reporting as of December 31, 2005,  is fairly
stated,  in all material  respects,  based on criteria  established  in Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations of the Treadway Commission ("COSO").  Furthermore, in our opinion,
First Bancorp and subsidiaries maintained,  in all material respects,  effective
internal  control over  financial  reporting  as of December 31, 2005,  based on
criteria  established in Internal  Control--Integrated  Framework  issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO").

                                                           /s/ Elliot Davis PLLC

Greenville, South Carolina
March 7, 2006

                                       99


             Report of Independent Registered Public Accounting Firm
             -------------------------------------------------------


The Board of Directors and Shareholders
First Bancorp:


     We have  audited  the  accompanying  consolidated  balance  sheets of First
Bancorp  and  subsidiaries  as of December  31,  2004 and 2003,  and the related
consolidated  statements of income,  comprehensive income,  shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
2004. 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, 2004 and 2003,  and the results of
their  operations  and their cash flows for each of the years in the  three-year
period ended  December 31, 2004,  in  conformity  with U.S.  generally  accepted
accounting principles.


                                                                    /s/ KPMG LLP

Charlotte, North Carolina
March 6, 2005


                                      100


Item 9.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosures

     During the two years ended December 31, 2005,  and any  subsequent  interim
periods,  there were no disagreements on any matters of accounting principles or
practices or financial statement disclosures.

     For information on the Company's change in independent  accountants on July
26, 2005, from KPMG LLP to Elliott Davis,  PLLC, see the Form 8-K filed with the
SEC on August 1, 2005 and Form 8-K/A filed with the SEC on August 15, 2005.

Item 9A.  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.  Based on the
evaluation,  our chief executive  officer and chief financial  officer concluded
that our disclosure  controls and  procedures  are effective in timely  alerting
them to material  information  required to be included in our  periodic  reports
with the Securities and Exchange Commission.  It should be noted that the design
of any system of controls is based in part upon  certain  assumptions  about the
likelihood of future events,  and there can be no assurance that any design will
succeed in achieving  its stated goals under all  potential  future  conditions,
regardless of how remote.  In addition,  no change in our internal  control over
financial  reporting has occurred during the Company's  fourth fiscal quarter of
2005 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.

        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, 2005.

     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

                                      101


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, 2005, and the Company's  assertion as to the effectiveness of
internal control over financial  reporting as of December 31, 2005, as stated in
their report, which is included in Item 8 hereof.


        /s/ James H. Garner               /s/ Eric P. Credle
        James H. Garner                   Eric P. Credle
        President and                     Senior Vice President and
        Chief Executive Officer           Chief Financial Officer

        March 7, 2006


Item 9B.  Other Information

Not applicable.


                                      102


PART III

Item 10.  Directors and Executive Officers of the Registrant

     Incorporated  herein by  reference  is the  information  under the captions
"Directors,   Nominees  and  Executive   Officers,"  "Section  16(a)  Beneficial
Ownership Reporting  Compliance," and "Corporate  Governance" 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
"Compensation  of Executive  Officers" 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.

Additional Information Regarding the Registrant's Equity Compensation Plans

     At December 31, 2005, the Company had six equity  compensation  plans. Each
of these plans is a stock  option  plan.  Four of the six plans were  assumed in
corporate acquisitions.  The Company's 2004 Stock Option Plan is the only one of
the six plans for which new grants of stock options are possible.

     The following table presents  information as of December 31, 2005 regarding
shares of the Company's stock that may be issued pursuant to the Company's stock
options  plans.  The table does not include  information  with respect to shares
subject to outstanding  options  granted under stock  incentive plans assumed by
the Company in  connection  with  mergers and  acquisitions  of  companies  that
originally granted those options.  Footnote (2) to the table indicates the total
number of shares of common stock issuable upon the exercise of options under the
assumed plans as of December 31, 2005, and the weighted  average  exercise price
of those  options.  No  additional  options may be granted  under those  assumed
plans. The Company has no warrants or stock appreciation rights outstanding.



                                                   As of December 31, 2005
                        ----------------------------------------------------------------------------------
                                  (a)                     (b)                         (c)
                                                                        Number of securities available for
                        Number of securities to    Weighted-average        future issuance under equity
                        be issued upon exercise    exercise price of      compensation plans (excluding
    Plan category       of outstanding options    outstanding options   securities reflected in column (a))
---------------------   -----------------------   -------------------   ----------------------------------
                                                                       
Equity compensation
  plans approved by
  security holders (1)           669,887             $    16.40                  1,211,590
Equity compensation
  plans not approved by
  security holders                    --                     --                         --
                        -----------------------   -------------------   ----------------------------------
Total                            669,887                  16.40                  1,211,590
                        =======================   ===================   ==================================


(1) Consists of (A) the Company's 2004 Stock Option Plan,  which is currently in
effect and (B) the  Company's  1994 Option  Plan,  each of which was approved by
shareholders.

     The table does not include  information  for stock incentive plans that the
Company  assumed in connection

                                      103


with mergers and acquisitions of the companies that originally established those
plans.  As of December 31,  2005, a total of 76,995  shares of common stock were
issuable upon exercise under those assumed plans.  The weighted average exercise
price of those  outstanding  options is $10.14 per share. No additional  options
may be granted under those assumed plans.

Item 13.  Certain Relationships and Related Transactions

     Incorporated  herein by  reference  is the  information  under the  caption
"Certain Transactions" 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
"Principal  Accountant  Fees and Services" from the Company's  definitive  proxy
statement to be filed pursuant to Regulation 14A.

PART IV

Item 15.  Exhibits and Financial Statement Schedules

(a)    1.  Financial  Statements - See Item  8 and the Cross  Reference Index on
           page  2  for  information   concerning  the  Company's   consolidated
           financial statements and report of independent auditors.

       2.  Financial Statement Schedules - not applicable

       3.  Exhibits

           The following  exhibits are filed with this report or, as noted,  are
           incorporated by reference.  Management contracts,  compensatory plans
           and arrangements are marked with an asterisk (*).

3.a        Copy of Articles  of  Incorporation  of the  Company  and  amendments
           thereto were filed as Exhibits  3.a.i  through 3.a.v to the Company's
           Quarterly Report on Form 10-Q for the period ended June 30, 2002, and
           are incorporated herein by reference.

3.b        Copy of the Amended and  Restated  Bylaws of the Company was filed as
           Exhibit 3.b to the Company's  Annual Report on Form 10-K for the year
           ended December 31, 2003, and is incorporated herein by reference.

4          Form of  Common  Stock  Certificate  was  filed as  Exhibit  4 to the
           Company's  Quarterly  Report on Form 10-Q for the quarter  ended June
           30, 1999, and is incorporated herein by reference.

10         Material Contracts

10.a       Data  Processing  Agreement dated October 1, 1984 by and between Bank
           of Montgomery  (First Bank) and Montgomery  Data  Services,  Inc. was
           filed as Exhibit  10(k) to the  Registrant's  Registration  Statement
           Number 33-12692, and is incorporated herein by reference.

10.b       First Bancorp Annual Incentive Plan was filed as Exhibit 10(a) to the
           Form 8-K filed on  January  26,  2005 and is  incorporated  herein by
           reference. (*)

10.c       Indemnification  Agreement  between the Company and its Directors and
           Officers was filed as Exhibit 10(t) to the Registrant's  Registration
           Statement Number 33-12692, and is incorporated herein by reference.

                                      104


10.d       First Bancorp Senior  Management  Supplemental  Executive  Retirement
           Plan was filed as Exhibit  10(d) 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 1994 Stock  Option Plan was filed as Exhibit  10(f) to
           the Company's  Annual Report on Form 10-K for the year ended December
           31, 2001, and is incorporated herein by reference. (*)

10.f       First  Bancorp  2004 Stock  Option Plan was filed as Exhibit B to the
           Registrant's Form Def 14A filed on March 30, 2004 and is incorporated
           herein by reference. (*)

10.g        Employment  Agreement  between the Company and James H. Garner dated
            August  17,  1998  was  filed  as  Exhibit  10(l)  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        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.i        Employment  Agreement  between the Company and Teresa C. Nixon dated
            August  17,  1998  was  filed  as  Exhibit  10(n)  to the  Company's
            Quarterly  Report on Form 10-Q for the quarter  ended  September 30,
            1998,  and is  incorporated  by  reference  (Commission  File Number
            000-15572). (*)

10.j        Employment  Agreement  between the Company and Eric P. Credle  dated
            August 17, 1998 was filed as Exhibit 10(p) to the  Company's  Annual
            Report on Form 10-K for the year ended  December  31,  1998,  and is
            incorporated herein by reference (Commission File Number 333-71431).
            (*)

10.k        Employment  Agreement  between  the  Company and John F. Burns dated
            September  14,  2000 was  filed  as  Exhibit  10.w to the  Company's
            Quarterly  Report on Form 10-Q for the quarter  ended  September 30,
            2000 and is incorporated herein by reference. (*)

10.l       Employment  Agreement  between the Company and James G.  Hudson,  Jr.
           dated May 17, 2001 was filed as Exhibit 10(p) to the Company's Annual
           Report on Form 10-K for the year  ended  December  31,  2001,  and is
           incorporated herein by reference. (*)

10.n        Amendment to the employment  agreement between the Company and James
            G. Hudson, Jr. dated April 26, 2005 was filed as Exhibit 10.a to the
            Form 8-K  filed on April  29,  2005 and is  incorporated  herein  by
            reference. (*)

10.o        Employment  Agreement  between the Company and R. Walton Brown dated
            January  15,  2003 was  filed  as  Exhibit  10(b)  to the  Company's
            Quarterly  Report on Form 10-Q for the  quarter  ended June 30, 2003
            and is incorporated herein by reference. (*)

10.p        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.q       Copy of  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.r        Copy of 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.
            (*)

                                      105


10.s       Description    of    Director    Compensation    pursuant   to   Item
           601(b)(10)(iii)(A) of Regulation S-K.

21         List of  Subsidiaries  of  Registrant  was filed as Exhibit 21 to the
           Company's  Annual Report on Form 10-K for the year ended December 31,
           2003, and is incorporated herein by reference.

23.a       Consent of Independent  Registered  Public  Accounting Firm,  Elliott
           Davis, PLLC

23.b       Consent of Independent Registered Public Accounting Firm, KPMG LLP

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

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

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

(b)        Exhibits - see (a)(3) above

(c)        No financial statement schedules are filed herewith.

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


                                      106


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934,  FIRST  BANCORP has duly caused this Annual Report on Form
10-K to be signed on its behalf by the  undersigned,  thereunto duly authorized,
in the City of Troy, and State of North Carolina, on the 7th day of March 2006.

                                  First Bancorp

                             By: /s/ James H. Garner
                                 -------------------
                                   James H. Garner
                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/ James H. Garner
                               -------------------
                                 James H. Garner
                President, Chief Executive Officer and Treasurer

/s/ Anna G. Hollers                             /s/ Eric P. Credle
-------------------                             ------------------
Anna G. Hollers                                 Eric P. Credle
Executive Vice President                        Senior Vice President
Secretary                                       Chief Financial Officer
March 7, 2006                                   (Principal Accounting Officer)
                                                March 7, 2006

                               Board of Directors
                               ------------------

/s/ David L. Burns                              /s/ William E. Samuels
------------------                              ----------------------
David L. Burns                                  William E. Samuels
Chairman of the Board                           Vice-Chairman of the Board
Director                                        Director
March 7, 2006                                   March 7, 2006

/s/ Jack D. Briggs                              /s/ George R. Perkins, Jr.
------------------                              --------------------------
Jack D. Briggs                                  George R. Perkins, Jr.
Director                                        Director
March 7, 2006                                   March 7, 2006

/s/ R. Walton Brown                             /s/ Thomas F. Phillips
-------------------                             ----------------------
R. Walton Brown                                 Thomas F. Phillips
Director                                        Director
March 7, 2006                                   March 7, 2006

/s/ H. David Bruton                             /s/ Edward T. Taws, Jr.
-------------------                             -----------------------
H. David Bruton                                 Edward T. Taws, Jr.
Director                                        Director
March 7, 2006                                   March 7, 2006

/s/ John F. Burns                               /s/ Frederick L. Taylor II
-----------------                               --------------------------
John F. Burns                                   Frederick L. Taylor II
Director                                        Director
March 7, 2006                                   March 7, 2006


                                      107



/s/ Mary Clara Capel                            /s/ Virginia C. Thomasson
 -------------------                            -------------------------
Mary Clara Capel                                Virginia C. Thomasson
Director                                        Director
March 7, 2006                                   March 7, 2006

/s/ Goldie H. Wallace-Gainey                    /s/ A. Jordan Washburn
----------------------------                    ----------------------
Goldie H. Wallace-Gainey                        A. Jordan Washburn
Director                                        Director
March 7, 2006                                   March 7, 2006

/s/ James H. Garner                             /s/ Dennis A. Wicker
 ------------------                             --------------------
James H. Garner                                 Dennis A. Wicker
Director                                        Director
March 7, 2006                                   March 7, 2006

/s/ James G. Hudson, Jr.                        /s/ John C. Willis
------------------------                        ------------------
James G. Hudson, Jr.                            John C. Willis
Director                                        Director
March 7, 2006                                   March 7, 2006

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