Management's Discussion and Analysis is intended to assist readers in understanding our results of operations and changes in financial position for the past three years. This review should be read in conjunction with the consolidated financial statements and accompanying notes beginning on page 71 of this report and the supplemental financial data contained in Tables 1 through 22 included with this discussion and analysis.

Overview - 2008 Compared to 2007

Net income was approximately 1% higher in 2008 than in 2007, while earnings per
share were down 9% due to a higher number of shares of stock outstanding as a
result of shares issued in connection with our acquisition of Great Pee Dee
Bancorp, Inc. Overall our profitability measures were down in 2008 primarily as
a result of a lower net interest margin, higher provision for loan losses, and
higher expenses that were associated with our growth.

    Financial Highlights
    ($ in thousands except per share data)        2008            2007         Change

    Earnings
    Net interest income                        $    86,559          79,284         9.2 %
    Provision for loan losses                        9,880           5,217        89.4 %
    Noninterest income                              21,107          18,473        14.3 %
    Noninterest expenses                            62,661          57,580         8.8 %
    Income before income taxes                      35,125          34,960         0.5 %
    Income tax expense                              13,120          13,150        -0.2 %
    Net income                                 $    22,005          21,810         0.9 %

    Net income per share
    Basic                                      $      1.38            1.52        -9.2 %
    Diluted                                           1.37            1.51        -9.3 %

    At Year End
    Assets                                     $ 2,750,567       2,317,249        18.7 %
    Loans                                        2,211,315       1,894,295        16.7 %
    Deposits                                     2,074,791       1,838,277        12.9 %

    Ratios
    Return on average assets                          0.89 %          1.02 %
    Return on average equity                         10.44 %         12.77 %
    Net interest margin (taxable-equivalent)          3.74 %          4.00 %

The following is a more detailed discussion of our results for 2008 compared to 2007:

Net income for the year ended December 31, 2008 was $22,005,000, or $1.37 per diluted share, compared to net income of $21,810,000, or $1.51 per diluted share, reported for 2007, a decrease of 9.3% in earnings per share. The 2008 earnings reflect the impact of the acquisition of Great Pee Dee Bancorp, Inc. (Great Pee Dee), which had $211 million in total assets as of the acquisition date of April 1, 2008, and resulted in the issuance of 2,059,091 shares of First Bancorp common stock.

We experienced strong balance sheet growth in 2008. Total assets at December 31, 2008 amounted to $2.8 billion, 18.7% higher than a year earlier. Total loans at December 31, 2008 amounted to $2.2 billion, a 16.7% increase from a year earlier, and total deposits amounted to $2.1 billion at December 31, 2008, a 12.9% increase from a year earlier. Total shareholders' equity amounted to $219.9 million at December 31, 2008, a 26.3% increase from a year earlier. The high growth rates were impacted by the acquisition of Great Pee Dee on April 1, 2008, which had $184 million in loans, $148 million in deposits, and $211 million in assets on that date.

Net interest income for the year ended December 31, 2008 amounted to $86.6 million, a 9.2% increase from 2007. The increases in net interest income during 2008 were primarily due to growth in loans and deposits. Also, subsequent to the Great Pee Dee acquisition in April 2008, we recorded non-cash net interest income purchase accounting adjustments totaling $1,098,000 for 2008, which increased net interest income. The largest of the adjustments relates to recording the Great Pee Dee time deposit portfolio at fair market value. This

adjustment was $1.1 million and is being amortized to reduce interest expense over a total of eleven months, or $100,000 per month, until March 2009.

The impact of the growth in loans and deposits on net interest income was partially offset by a decline in our net interest margin (tax-equivalent net interest income divided by average earning assets). Our net interest margin for 2008 was 3.74% compared to 4.00% for 2007. Our net interest margin has been negatively impacted by the Federal Reserve lowering interest rates by a total of 500 basis points from September 2007 to December 2008. When interest rates are lowered, our net interest margin declines, at least temporarily, as most of our adjustable rate loans reprice downward immediately, while rates on our customer time deposits are fixed, and thus do not adjust downward until they mature.

Our provision for loan losses for the year ended December 31, 2008 was $9,880,000 compared to $5,217,000 recorded in 2007. The higher provision in 2008 is primarily related to negative trends in asset quality.

Although we have no exposure to the subprime mortgage market, the current economic environment has resulted in an increase in our delinquencies and classified assets. At December 31, 2008, our nonperforming assets were $35.4 million compared to $10.9 million at December 31, 2007. Our nonperforming assets to total assets ratio was 1.29% at December 31, 2008 compared to 0.47% at December 31, 2007. For the year ended December 31, 2008, our ratio of net charge-offs to average loans was 0.24% compared to 0.16% for 2007.

Although our asset quality ratios discussed above reflect unfavorable trends, they compare favorably to those typical of our peers based on public information available. The table below shows how our ratios compare to data reported by the Federal Reserve for all bank holding companies with between $1 billion and $3 billion in assets at December 31, 2008:

                                                                First Bancorp       Peer Average
Nonaccrual loans and loans past due 90 days and still
accruing as percent of total loans                                        1.20 %             2.40 %
Net charge-offs to average loans                                          0.24 %             0.66 %

Noninterest income for the year ended December 31, 2008 amounted to $21.1 million, a 14.3% increase over 2007. The positive variance in noninterest income for the twelve months ended December 31, 2008 primarily relates to increases in service charges on deposit accounts. These higher service charges were primarily associated with expanding the availability of our customer overdraft protection program in the fourth quarter of 2007 to include debit card purchases and ATM withdrawals. Previously the overdraft protection program, in which we charge a fee for honoring payments on overdrawn accounts, only applied to written checks.

Noninterest expenses for the year ended December 31, 2008 amounted to $62.7 million, an 8.8% increase from 2007. This increase is primarily attributable to our growth, including the April 1, 2008 acquisition of Great Pee Dee. Additionally, we recorded FDIC insurance expense of $1,157,000 for year ended December 31, 2008, compared to $100,000 for 2007, as a result of the FDIC recently beginning to charge for FDIC insurance again in order to replenish its reserves. We expect our FDIC insurance expense to be significantly higher in 2009 than 2008, and we also expect our pension plan expense to be significantly higher in 2009 - see "Outlook for 2009" below for discussion of the causes of these increases.

Our efficiency ratio (noninterest expense divided by the sum of tax-equivalent net interest income plus noninterest income - for this measure, a lower ratio is more favorable) was 57.85% for the year ended December 31, 2008 compared to 58.57% for 2007.

Our effective tax rate was 37%-38% for each of years ended December 31, 2008 and 2007.

Overview - 2007 Compared to 2006

Net income was 13% higher in 2007 than in 2006. In 2006, a merchant credit card
loss totaling $1.9 million or $0.08 per diluted share (after-tax), negatively
impacted earnings. The positive impact on earnings from growth in loans and
deposits during 2007 was partially offset by a lower net interest margin and
higher expenses that were associated with our growth.

    Financial Highlights
    ($ in thousands except per share data)        2007            2006         Change

    Earnings
    Net interest income                        $    79,284          74,536         6.4 %
    Provision for loan losses                        5,217           4,923         6.0 %
    Noninterest income                              18,473          14,310        29.1 %
    Noninterest expenses                            57,580          53,198         8.2 %
    Income before income taxes                      34,960          30,725        13.8 %
    Income tax expense                              13,150          11,423        15.1 %
    Net income                                 $    21,810          19,302        13.0 %

    Net income per share
    Basic                                      $      1.52            1.35        12.6 %
    Diluted                                           1.51            1.34        12.7 %

    At Year End
    Assets                                     $ 2,317,249       2,136,624         8.5 %
    Loans                                        1,894,295       1,740,396         8.8 %
    Deposits                                     1,838,277       1,695,679         8.4 %

    Ratios
    Return on average assets                          1.02 %          1.00 %
    Return on average equity                         12.77 %         11.83 %
    Net interest margin (taxable-equivalent)          4.00 %          4.18 %

The following is a more detailed discussion of our results for 2007 compared to 2006:

Net income for the year ended December 31, 2007 amounted to $21,810,000, or $1.51 per diluted share, compared to net income of $19,302,000, or $1.34 per diluted share, reported for 2006. Results for 2006 include the write-off loss of a merchant credit card receivable amounting to $1,900,000, which had an after-tax impact of $1,149,000, or $0.08 per diluted share, on our earnings for 2006.

We experienced strong balance sheet growth in 2007. Total assets at December 31, 2007 amounted to $2.32 billion, 8.5% higher than a year earlier. Total loans at December 31, 2007 amounted to $1.89 billion, an increase of $154 million, or 8.8%, from a year earlier. Total deposits amounted to $1.84 billion at December 31, 2007, an increase of $143 million, or 8.4%. All of the loan and deposit growth was internally-generated, as there were no acquisitions that were completed during 2007. Total shareholders' equity amounted to $174.1 million at December 31, 2007, a 7.0% increase from a year earlier.

The growth in loans and deposits was the primary reason for the increase in our net interest income when comparing 2007 to 2006. Net interest income for the year ended December 31, 2007 amounted to $79.3 million, a 6.4% increase over the $74.5 million recorded in 2006.

The impact of the growth in loans and deposits on our net interest income was partially offset by a decline in our net interest margin (tax-equivalent net interest income divided by average earning assets), as discussed below. Our net interest margin for the year ended December 31, 2007 was 4.00% compared to 4.18% for 2006.

For the first three quarters of 2007, the lower net interest margins realized in 2007 compared to 2006 were caused primarily by the deposit rates we paid rising by more than loan and investment yields, which was associated with the flat interest rate yield curve that was prevailing in the marketplace. We were also negatively impacted during the first three quarters of 2007 by customers shifting their funds from low cost deposits to higher cost deposits as rates rose. In the fourth quarter of 2007, our net interest margin was negatively impacted by the Federal Reserve lowering interest rates by a total of 100 basis points during the last four months of the year.

Our provision for loan losses did not vary significantly when comparing 2007 to 2006. The provision for loan losses for the year ended December 31, 2007 was $5,217,000 compared to $4,923,000 for 2006. Asset quality changes and loan growth are the most significant factors that impact our provision for loan losses. Generally in 2007, the impact of unfavorable asset quality trends on our provision for loan losses was largely offset by lower loan growth experienced during the year compared to 2006. Our net charge-offs to average loans ratio was 0.16% for the year ended December 31, 2007 compared to 0.11% in 2006, while the ratio of nonperforming assets to total assets was 0.47% at December 31, 2007 compared to 0.39% a year earlier. Net internal loan growth for 2007 was $154 million compared to $252 million for 2006.

Noninterest income for the year ended December 31, 2007 amounted to $18,473,000, an increase of 29.1% from the $14,310,000 recorded in 2006. The positive variance in noninterest income for 2007 compared to 2006 was significantly impacted by a $1.9 million merchant credit card loss that we reserved for in the second and third quarters of 2006. Another reason for the increase in 2007 compared to 2006 was the expansion of our overdraft protection program in the fourth quarter of 2007 to include overdraft protection for debit card purchases and ATM withdrawals. Previously the overdraft protection program, in which we charge a fee for honoring payments on overdrawn accounts, only applied to written checks. This change resulted in an increase in service charges on deposit accounts.

Noninterest expenses for 2007 amounted to $57.6 million, an 8.2% increase from the $53.2 million recorded in 2006. The increase in noninterest expenses is primarily attributable to costs associated with our overall growth in loans, deposits and branch network. From October 1, 2006 to December 31, 2007, we opened six full service bank branches. Although noninterest expenses rose in 2007, the lower rate of increase compared to 2006 was partially due to the implementation of cost control recommendations that arose from a performance improvement consulting project that we completed in the first quarter of 2007. In addition, subsequent to the completion of the consulting project, we took further measures to contain costs and improve efficiency. As a result, our number of full-time equivalent employees decreased by six during 2007.

Our efficiency ratio (noninterest expense divided by the sum of tax-equivalent net interest income plus noninterest income - for this measure, a lower ratio is more favorable) was 58.57% for the year ended December 31, 2007 compared to 59.54% for 2006.

During both 2006 and 2007, our effective tax rate was approximately 37%.

Outlook for 2009

The banking industry is facing significant challenges in 2009. The nation is in the midst of a recession with the economic data getting seemingly worse with each passing day. What began with heavy losses in the sub-prime mortgage market (which we had no exposure to) expanded to become a decline in the overall housing market, which is having a pervasive effect on most aspects of our economy. This is resulting in higher loan losses for banks, and bank failures are occurring on a regular basis. The bank failures are depleting the FDIC insurance fund, which is requiring the FDIC to raise insurance premiums. Additionally, on February 27, 2009 the FDIC issued an interim rule requiring a special one-time assessment that, if approved in its current form, will have a significant impact on most banks, including our company.

Although we have consistently operated our company in what we believe is a conservative manner and have

asset quality ratios that compare favorably to peer ratios, we are not immune to the challenges facing the industry. For 2009, based on the unfavorable economic conditions that we expect to prevail throughout 2009 and our expectation that loan growth will be in a range of 0%-2%, we currently project that it will be necessary to record provisions for loan losses at approximately the rate recorded in the second half of 2008. In the second half of 2008, we recorded provisions for loan losses of $6.3 million. If our 2009 provision for loan losses were to total $12 million, which would represent a $2.1 million, or 21%, increase from 2008, this would negatively impact our after-tax earnings per share by $0.08 compared to 2008 (assuming a constant number of shares outstanding during the year).

We also expect significant unfavorable variances in two of our categories of noninterest expenses - FDIC insurance expense and pension expense.

As noted above, the FDIC has announced increases in its annual insurance premium rates. Based on the FDIC's guidance, excluding the special assessment discussed below, we expect our annual FDIC insurance premium expense will be approximately $3.0 million in 2009, a $1.8 million increase from 2008, which is expected to negatively impact our after-tax earnings per share by $0.07 compared to 2008.

Additionally, the FDIC announced on February 27, 2009 an interim rule that would impose a one-time special assessment of 20 cents per $100 in insured deposits, to be collected in the third quarter of 2009. If approved as proposed, we estimate that our special assessment will total approximately $4 million, or $0.15 per share on an after-tax basis.

We also expect our pension expense will be significantly higher in 2009 compared to 2008. This is primarily due to investment losses experienced in our pension plan trust account as a result of the decline in the stock market. Based on a preliminary report from our third-party actuary, we expect our pension expense to increase from $2.3 million in 2008 to $3.6 million in 2009, an increase of $1.3 million, or $0.05 per share on an after-tax basis.

Finally, as discussed above under "U.S. Treasury Capital Purchase Program," we sold $65 million in preferred stock and warrants to the U.S. Treasury on January 9, 2009. The preferred stock carries a dividend rate of 5% for the first five years, which is not tax deductible. With the low loan demand we are currently experiencing and the low investment rates available in the marketplace for safe securities, we expect to earn substantially less on the $65 million than we will be paying in dividends. Based on our projected use of these proceeds in light of the current conditions, we expect that we will earn $3.3 million less on an after-tax basis, or $0.20 per share of common stock, than the cost of the preferred stock.

The sum of the expected earnings per share impact on our common shareholders related to the factors discussed above is a decrease of $0.55. All per share calculations in this section assume that the number of shares outstanding remains constant throughout the year.

Critical Accounting Policies

The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry. Certain of these principles involve a significant amount of judgment and may involve the use of estimates based on our best assumptions at the time of the estimation. The allowance for loan losses and intangible assets are two policies we have identified as being more sensitive in terms of judgments and estimates, taking into account their overall potential impact to our consolidated financial statements.

Allowance for Loan Losses

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

critical to our consolidated financial statements. The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb losses inherent in the portfolio.

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

The second component of the allowance model is an estimate of losses for all loans not considered to be impaired loans. First, loans that we have risk graded 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 we have classified as having normal credit risk are segregated by loan type, and estimated loss percentages are assigned to each loan type based on the historical losses, current economic conditions, and operational conditions specific to each loan type.

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

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

For further discussion, see "Nonperforming Assets" and "Allowance for Loan Losses and Loan Loss Experience" below.

Intangible Assets

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

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

The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangible, whereas when we acquire an insurance agency, the primary identifiable intangible asset is the value of the acquired customer list. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. We typically engage a third party consultant to assist in each analysis. For the whole bank and bank branch transactions recorded to date, the core deposit intangibles have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization. For insurance agency acquisitions, the identifiable intangible assets related to the customer lists were determined to have a life of ten to fifteen years, with amortization occurring on a straight-line basis.

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

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

Merger and Acquisition Activity

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