News Column

FIRST BANCORP /NC/ - 10-Q - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition

August 11, 2014

Critical Accounting Policies

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

Due to the estimation process and the potential materiality of the amounts involved, we have identified the accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy critical to our consolidated financial statements. The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb losses inherent in the portfolio. Our determination of the adequacy of the allowance is based primarily on a mathematical model that estimates the appropriate allowance for loan losses. This model has three components. The first component involves the estimation of losses on individually significant "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. A loan is specifically evaluated for an appropriate valuation allowance if the loan balance is above a prescribed evaluation threshold (which varies based on credit quality, accruing status, and type of collateral) and the loan is determined to be impaired. 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 the estimation of losses for impaired loans that have common risk characteristics and are aggregated to measure impairment. These impaired loans generally have loan balances below the thresholds that result in an individual review discussed above. For these impaired loans, we aggregate loans among similar loan types and apply loss rates that are derived from historical statistics. The third component of the allowance model is the estimation of losses for loans that are not considered to be impaired loans. Loans not considered to be impaired are segregated by loan type, and estimated loss percentages are assigned to each loan type, based on historical losses, current economic conditions, and operational conditions specific to each loan type. For loans with more than standard risk, loss percentages are based on a multiple of the estimated loss rate for loans of a similar loan type with normal risk. The multiples assigned vary by type of loan, depending on risk, and we have consulted with an external credit review firm in assigning those multiples. The reserves estimated for impaired loans (specifically reviewed and aggregate) are 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. Loans covered under loss share agreements (referred to as "covered loans") are recorded at fair value at acquisition date. Therefore, amounts deemed uncollectible at acquisition date become a part of the fair value calculation and are excluded from the allowance for loan losses. Subsequent decreases in the amount expected to be collected result in a provision for loan losses with a corresponding increase in the allowance for loan losses. Subsequent increases in the amount expected to be collected are accreted into income over the life of the loan. Proportional adjustments are also recorded to the FDIC indemnification asset. Page 42 Index

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

their examinations.



For further discussion, see "Nonperforming Assets" and "Summary of Loan Loss Experience" below.

Intangible Assets



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

When we complete an acquisition transaction, the excess of the purchase price over the amount by which the fair market value of assets acquired exceeds the fair market value of liabilities assumed represents an intangible asset. We must then determine the identifiable portions of the intangible asset, with any remaining amount classified as goodwill. Identifiable intangible assets associated with these acquisitions are generally amortized over the estimated life of the related asset, whereas goodwill is tested annually for impairment, but not systematically amortized. Assuming no goodwill impairment, it is beneficial to our future earnings to have a lower amount assigned to identifiable intangible assets and higher amount of goodwill as opposed to having a higher amount considered to be identifiable intangible assets and a lower amount classified as goodwill. The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangible, whereas when we acquire an insurance agency, the primary identifiable intangible asset is the value of the acquired customer list. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. We typically engage a third party consultant to assist in each analysis. For the whole bank and bank branch transactions recorded to date, the core deposit intangibles have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization. For insurance agency acquisitions, the identifiable intangible assets related to the customer lists were determined to have a life of ten to fifteen years, with amortization occurring on a straight-line basis. Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the identifiable intangible assets over their estimated average lives, as discussed above. In addition, on at least an annual basis, goodwill is evaluated for impairment by comparing the fair value of our reporting units to their related carrying value, including goodwill (our community banking operation is our only material reporting unit). If the carrying value of a reporting unit were ever to exceed its fair value, we would determine whether the implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the carrying value of the goodwill. If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow analysis would involve the significant use of estimates and assumptions. In our 2013 goodwill impairment evaluation, we engaged a consulting firm that used various valuation techniques to assist us in concluding that our goodwill was not impaired.

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. Page 43 Index



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

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

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



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

Page 44 Index



FDIC Indemnification Asset

The FDIC indemnification asset is the estimated amount that the Company will receive from the FDIC under loss share agreements associated with two FDIC-assisted failed bank acquisitions. See page 41 of the Company's 2013 Annual Report on Form 10-K for a detailed explanation of this asset. The following table presents additional information regarding our covered loans, loan discounts, allowances for loan losses and the corresponding FDIC indemnification asset: ($ in thousands) Cooperative Cooperative Bank of Single Family Non-Single Asheville Single Bank of Asheville Loss Share Family Loss Family Loss Non-Single Family At June 30, 2014 Loans Share Loans Share Loans Loss Share Loans Total Expiration of loss share agreement 6/30/2019 6/30/2014 3/31/2021 3/31/2016 Nonaccrual covered loans Unpaid principal balance $ 8,280 17,842 513 7,698 34,333 Carrying value prior to loan discount* 8,093 9,705 392 6,056 24,246 Loan discount 1,046 - 246 2,016 3,308 Net carrying value 7,047 9,705 146 4,040 20,938 Allowance for loan losses 762 402 24 475 1,663 Indemnification asset recorded 1,411 - 201 1,669 3,281 All other covered loans Unpaid principal balance 106,999 30,432 10,518 31,087 179,036 Carrying value prior to loan discount* 106,901 29,968 10,427 31,073 178,369 Loan discount 14,630 - 2,576 5,246 22,452 Net carrying value 92,271 29,968 7,851 25,827 155,917 Allowance for loan losses 389 1,329 48 401 2,167 Indemnification asset recorded 11,044 - 2,010 3,965 17,019 All covered loans Unpaid principal balance 115,279 48,274 11,031 38,785 213,369 Carrying value prior to loan discount* 114,994 39,673 10,819 37,129 202,615 Loan discount 15,676 - 2,822 7,262 25,760 Net carrying value 99,318 39,673 7,997 29,867 176,855 Allowance for loan losses 1,151 1,731 72 876 3,830 Indemnification asset recorded 12,455 - 2,211 5,634 20,300 **



Foreclosed Properties

Net carrying value 2,822 3,004 142 3,966 9,934 Indemnification asset recorded 1,314 - 83 777 2,174 For the Six Months Ended June 30, 2014 Loan discount accretion recognized 1,695 4,297 946



4,321 11,259 Indemnification asset expense associated with the loan discount accretion recognized

2,057 3,463 822 4,038 10,380 * Reflects partial charge-offs ** A present value adjustment of $104 reduces the carrying value of this asset to $20,196. As noted in the table above, our loss share agreement related to Cooperative Bank's non-single family assets expired on June 30, 2014. On July 1, 2014, the remaining balances associated with the Cooperative non-single family loans and foreclosed properties were transferred from the covered portfolio to the non-covered portfolio. Therefore, after June 30, 2014, we will bear all future losses on that portfolio of loans and foreclosed properties. At June 30, 2014, these loans and foreclosed properties were classified as covered. At June 30, 2014, the portfolio of loans had a carrying value of $39.7 million and the portfolio of foreclosed properties had a carrying value of $3.0 million. Of the $39.7 million in loans that are losing loss share protection, approximately $9.7 million of these loans were on nonaccrual status and $2.1 million of these loans were classified as accruing troubled debt restructurings as of June 30, 2014. Additionally, approximately $1.7 million in allowance for loan losses that related to this portfolio of loans were transferred to the allowance for loan losses for non-covered loans on July 1, 2014. Page 45 Index



As noted in the table above, there is no remaining loan discount or indemnification asset related to the Cooperative non-single family loss share loans or foreclosed properties. Loan discount accretion and indemnification asset expense will continue to be recorded on the other three portfolios.

Current Accounting Matters



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

RESULTS OF OPERATIONS

Net income available to common shareholders for the second quarter of 2014 amounted to $6.4 million, or $0.32 per diluted common share, an increase of 19.7% compared to the $5.4 million, or $0.27 per diluted common share, recorded in the second quarter of 2013. For the six months ended June 30, 2014, we recorded net income available to common shareholders of $11.9 million, or $0.59 per diluted common share, an increase of 44.5% compared to the $8.2 million, or $0.41 per diluted common share, for the six months ended June 30, 2013. The higher earnings were primarily the result of lower provisions for loan losses.



Net Interest Income and Net Interest Margin

Net interest income for the second quarter of 2014 amounted to $33.8 million, a 5.0% decrease from the $35.6 million recorded in the second quarter of 2013. Net interest income for the six months ended June 30, 2014 amounted to $69.3 million, a 2.7% increase from the $67.5 million recorded in the comparable period of 2013. Our net interest margin (tax-equivalent net interest income divided by average earning assets) in the second quarter of 2014 was 4.65% compared to 5.10% for the second quarter of 2013. For the six month period ended June 30, 2014, our net interest margin was 4.89% compared to 4.90% for the same period in 2013. The lower margin realized in the second quarter of 2014 compared to the second quarter of 2013 was primarily due to a lower amount of discount accretion on loans purchased in failed-bank acquisitions and lower average asset yields. Loan discount accretion amounted to $4.9 million in the second quarter of 2014 and $6.6 million in the second quarter of 2013. For the first six months of 2014, loan discount accretion amounted to $11.3 million compared to $10.3 million for the first six months of 2013. Our cost of funds has steadily declined from 0.41% in the second quarter of 2013 to 0.30% in the second quarter of 2014, which has had a positive impact on

our net interest margin.



Provision for Loan Losses and Asset Quality

We recorded total provisions for loan losses of $3.7 million in the second quarter of 2014 compared to $5.6 million for the second quarter of 2013. For the six months ended June 30, 2014, we recorded total provisions for loan losses of $7.2 million compared to $16.7 million for the same period of 2013 - see explanation of the terms "non-covered" and "covered" in the section below entitled "Note Regarding Components of Earnings." Total non-covered nonperforming assets have remained relatively unchanged over the past year, amounting to $84.1 million at June 30, 2014 (2.73% of total non-covered assets), $82.0 million at December 31, 2013 and $79.1 million at June 30, 2013 (2.66% of total non-covered assets).



Total covered nonperforming assets have steadily declined in the past year, amounting to $39.1 million at June 30, 2014 compared to $70.6 million at December 31, 2013 and $89.1 million at June 30, 2013. Over the past twelve months, we have resolved a significant amount of covered loans and have experienced strong property sales along the North Carolina coast, which is where most of our covered assets are located.

Noninterest Income

Total noninterest income for the three months ended June 30, 2014 was $5.0 million compared to $4.5 million for the comparable period of 2013. For the six months ended June 30, 2014, noninterest income amounted to $5.3 million compared to $11.6 million for the six months ended June 30, 2013. Page 46 Index

Core noninterest income for the second quarter of 2014 was $7.8 million, an increase of 8.6% over the $7.2 million reported for the second quarter of 2013. For the first six months of 2014, core noninterest income amounted to $15.3 million, an 11.9% increase from the $13.7 million recorded in the comparable period of 2013. Core noninterest income includes i) service charges on deposit accounts, ii) other service charges, commissions, and fees, iii) fees from presold mortgages, iv) commissions from financial product sales, and v) bank-owned life insurance income. The primary factors that resulted in the increases in core noninterest income in 2014 were higher service charges on deposit accounts and higher debit and credit card interchange fees. Service charges on deposit accounts have increased primarily as a result of the December 2013 introduction of a new deposit product line-up that simplified the Company's product offering and also altered the fee structure of many accounts. The increase in debit and credit card interchange fees is due to growth in the number and usage of debit and credit cards. Noncore components of noninterest income resulted in net losses of $2.9 million in the second quarter of 2014 compared to net losses of $2.7 million in the second quarter of 2013. For the six months ended June 30, 2014 and 2013, the Company recorded net losses of $10.0 million and $2.1 million, respectively, related to the noncore components of noninterest income. The largest variances related to foreclosed property gains/losses and indemnification asset income (expense) - see discussion in the section entitled "Components of Earnings".



During the second quarter of 2014, we realized $0.8 million in securities gains.

Noninterest Expenses Noninterest expenses amounted to $24.8 million in the second quarter of 2014 compared to $25.8 million recorded in the second quarter of 2013. Noninterest expenses for the six months ended June 30, 2014 amounted to $48.3 million compared to $49.0 million recorded in the first half of 2013. The decreases in 2014 were due primarily to the Company accruing $1.6 million in severance expenses in the second quarter of 2013 (included in "other operating expenses" in the accompanying financial statements and tables). Balance Sheet and Capital Total assets at June 30, 2014 amounted to $3.3 billion, a 0.6% increase from a year earlier. Total loans at June 30, 2014 amounted to $2.4 billion, a 0.1% increase from a year earlier, and total deposits amounted to $2.8 billion at June 30, 2014, a 2.3% decrease from a year earlier. Non-covered loans increased 3.1% from June 30, 2013 to June 30, 2014. Since January 1, 2014, growth in non-covered loans has slowed, with the progressive decline in covered loans outpacing non-covered loan growth. Strong competition in the marketplace for high quality loans has contributed to the low growth. The lower amount of deposits at June 30, 2014 compared to June 30, 2013 was primarily due to declines in retail time deposits (called "other time deposits" and "other time deposits > $100,000" in the accompanying financial statements and tables), with increases in checking accounts offsetting a large portion of the decline. Retail time deposits are generally one of our most expensive funding sources, and thus the shift from this category benefited our overall cost of funds. We obtained new borrowings in the first quarter of 2014 from a low cost funding source in order to offset declines in time deposit balances, and in anticipation of future loan growth. At June 30, 2014, these low-cost borrowings totaled $70 million, compared to none a year earlier. We remain well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio at June 30, 2014 of 17.14% compared to the 10.00% minimum to be considered well-capitalized. Our tangible common equity to tangible assets ratio was 7.57% at June 30, 2014, an increase of 64 basis points from a year earlier.



Note Regarding Components of Earnings

Our results of operation are significantly affected by the on-going accounting for two FDIC-assisted failed bank acquisitions. In the discussion above and elsewhere in this document, the term "covered" is used to describe assets included as part of FDIC loss share agreements, which generally result in the FDIC reimbursing the Company for 80% of losses incurred on those assets. The term "non-covered" refers to the Company's legacy assets, which are not included in any type of loss share arrangement. For covered loans that deteriorate in terms of repayment expectations, we record immediate allowances through the provision for loan losses. For covered loans that experience favorable changes in credit quality compared to what was expected at the acquisition date, including loans that payoff, we record positive adjustments to interest income over the life of the respective loan - also referred to as loan discount accretion. For covered foreclosed properties that are sold at gains or losses or that are written down to lower values, we record the gains/losses within noninterest income. Page 47 Index The adjustments discussed above are recorded within the income statement line items noted without consideration of the FDIC loss share agreements. Because favorable changes in covered assets result in lower expected FDIC claims, and unfavorable changes in covered assets result in higher expected FDIC claims, the FDIC indemnification asset is adjusted to reflect those expectations. The net increase or decrease in the indemnification asset is reflected within noninterest income. The adjustments noted above can result in volatility within individual income statement line items. Because of the FDIC loss share agreements and the associated indemnification asset, pretax income resulting from amounts recorded as provisions for loan losses on covered loans, discount accretion, and losses from covered foreclosed properties is generally only impacted by 20% of these amounts due to the corresponding adjustments made to the indemnification asset. Page 48 Index Components of Earnings

Net interest income is the largest component of earnings, representing the difference between interest and fees generated from earning assets and the interest costs of deposits and other funds needed to support those assets. Net interest income for the three month period ended June 30, 2014 amounted to $33.8 million, a decrease of $1.8 million, or 5.0%, from the $35.6 million recorded in the second quarter of 2013. Net interest income on a tax-equivalent basis for the three month period ended June 30, 2014 amounted to $34.2 million, a decrease of $1.8 million, or 5.0%, from the $36.0 million recorded in the second quarter of 2013. We believe that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income amounts in different periods without taking into account the different mix of taxable versus non-taxable investments that may have existed during

those periods. Three Months Ended June 30, ($ in thousands) 2014 2013 Net interest income, as reported $ 33,808 35,602 Tax-equivalent adjustment 375 373 Net interest income, tax-equivalent $ 34,183 35,975 Net interest income for the six month period ended June 30, 2014 amounted to $69.3 million, an increase of $1.8 million, or 2.7%, from the $67.5 million recorded in the first half of 2013. Net interest income on a tax-equivalent basis for the six month period ended June 30, 2014 amounted to $70.1 million, an increase of $1.8 million, or 2.7%, from the $68.3 million recorded in the comparable period of 2013. Six Months Ended June 30, ($ in thousands) 2014 2013 Net interest income, as reported $ 69,343 67,523 Tax-equivalent adjustment 749 745 Net interest income, tax-equivalent $ 70,092 68,268 There are two primary factors that cause changes in the amount of net interest income we record - 1) changes in our loans and deposits balances, and 2) our net interest margin (tax-equivalent net interest income divided by average interest-earning assets).



For the three months ended June 30, 2014, the lower net interest income compared to the same period of 2013 was due to lower net interest margins, which was partially offset by increases in interest-earning assets (see discussion below).

For the six months ended June 30, 2014, the higher net interest income compared to the same period of 2013 was due to increases in interest-earning assets (primarily average loan balances) and decreases in interest-bearing liabilities (see discussion below). Page 49 Index



The following tables present net interest income analysis on a tax-equivalent basis for the periods indicated.

For the Three Months Ended June 30,

2014 2013 Interest Interest Average Average Earned Average Average Earned ($ in thousands) Volume Rate or Paid Volume Rate or Paid Assets Loans (1) $ 2,438,364



5.65% $ 34,376$ 2,409,037 6.17% $ 37,030 Taxable securities

176,382 1.99% 876 178,566 1.85% 824 Non-taxable securities (2) 53,917 6.29% 846 54,950 6.20% 850



Short-term investments, principally federal funds 277,923 0.33%

232 184,618 0.38% 173 Total interest-earning assets 2,946,586



4.95% 36,330 2,827,171 5.52% 38,877

Cash and due from banks 81,327 80,751 Premises and equipment 76,958 78,039 Other assets 154,679 258,814 Total assets $ 3,259,550$ 3,244,775 Liabilities Interest bearing checking $ 535,304 0.06% $ 80$ 524,930 0.10% $ 131 Money market deposits 556,264 0.11% 156 566,147 0.16% 220 Savings deposits 175,504 0.05% 23 167,181 0.07% 30 Time deposits >$100,000 574,037 0.82% 1,172 632,488 0.98% 1,546 Other time deposits 396,885 0.42% 419 486,157 0.59% 719 Total interest-bearing deposits 2,237,994



0.33% 1,850 2,376,903 0.45% 2,646 Borrowings

116,774 1.02% 297 46,394 2.21% 256 Total interest-bearing liabilities 2,354,768



0.37% 2,147 2,423,297 0.48% 2,902

Noninterest bearing checking 513,472

441,344 Other liabilities 10,768 18,910 Shareholders' equity 380,542 361,224 Total liabilities and shareholders' equity $ 3,259,550$ 3,244,775 Net yield on interest-earning assets and net interest income 4.65% $ 34,183 5.10% $ 35,975 Interest rate spread 4.58% 5.04% Average prime rate 3.25% 3.25%



(1) Average loans include nonaccruing loans, the effect of which is to lower the

average rate shown.

(2) Includes tax-equivalent adjustments of $375,000 and $373,000 in 2014 and

2013, respectively, to reflect the tax benefit that we receive related to

tax-exempt securities, which carry interest rates lower than similar taxable

investments due to their tax exempt status. This amount has been computed

assuming a 39% tax rate and is reduced by the related nondeductible portion of interest expense. Page 50 Index For the Six Months Ended June 30, 2014 2013 Interest Interest ($ in thousands) Average Average Earned Average Average Earned Volume Rate or Paid Volume Rate or Paid Assets Loans (1) $ 2,448,866 5.80% $ 70,462$ 2,395,949 5.94% $ 70,581 Taxable securities 178,305 2.12% 1,877 171,425 2.03% 1,729 Non-taxable securities (2) 53,946 6.32% 1,690 55,449 6.19% 1,701 Short-term investments, principally federal funds 210,579 0.34% 351 186,135 0.35% 327 Total interest-earning assets 2,891,696 5.19% 74,380 2,808,958 5.34% 74,338 Cash and due from banks 82,285 80,916 Premises and equipment 77,199 76,647 Other assets 168,019 270,098 Total assets $ 3,219,199$ 3,236,619 Liabilities Interest bearing checking $ 532,207 0.06% $ 160$ 522,933 0.11% $ 293 Money market deposits 555,028 0.11% 307 563,175 0.19% 526 Savings deposits 174,366 0.05% 44 164,792 0.09% 72 Time deposits >$100,000 574,832 0.83% 2,355 643,209 0.99% 3,159 Other time deposits 405,936 0.43% 875 491,093 0.62% 1,508 Total interest-bearing deposits 2,242,369 0.34% 3,741 2,385,202 0.47% 5,558 Borrowings 82,084 1.34% 547 46,394 2.23% 512 Total interest-bearing liabilities 2,324,453 0.37% 4,288 2,431,596 0.50% 6,070 Noninterest bearing checking 502,961 425,544 Other liabilities 13,305 19,186 Shareholders' equity 378,480 360,293 Total liabilities and shareholders' equity $ 3,219,199$ 3,236,619 Net yield on interest-earning assets and net interest income 4.89% $ 70,092 4.90% $ 68,268 Interest rate spread 4.82% 4.84% Average prime rate 3.25% 3.25%



(1) Average loans include nonaccruing loans, the effect of which is to lower the

average rate shown.

(2) Includes tax-equivalent adjustments of $749,000 and $745,000 in 2014 and

2013, respectively, to reflect the tax benefit that we receive related to

tax-exempt securities, which carry interest rates lower than similar taxable

investments due to their tax exempt status. This amount has been computed

assuming a 39% tax rate and is reduced by the related nondeductible portion

of interest expense. Average loans outstanding for the second quarter of 2014 were $2.438 billion, which was 1.2% more than the average loans outstanding for the second quarter of 2013 ($2.409 billion). Average loans outstanding for the six months ended June 30, 2014 were $2.449 billion, which was 2.2% more than the average loans outstanding for the six months ended June 30, 2013 ($2.396 billion). The higher amount of average loans outstanding in 2014 is due to internal loan growth. Partially offsetting the internal loan growth was the resolution of covered loans within our "covered loan" portfolio through foreclosure, charge-off,

or repayment. The mix of our loan portfolio remained substantially the same at June 30, 2014 compared to December 31, 2013, with approximately 90% of our loans being real estate loans, 7% being commercial, financial, and agricultural loans, and the remaining 3% being consumer installment loans. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan. Average total deposits outstanding for the second quarter of 2014 were $2.751 billion, which was 2.4% less than the average deposits outstanding for the second quarter of 2013 ($2.818 billion). Average deposits outstanding for the six months ended June 30, 2014 were $2.745 billion, which was 2.3% less than the average deposits outstanding for the six months ended June 30, 2013 ($2.811 billion). Average transaction deposit accounts (noninterest bearing checking, interest bearing checking, money market and savings accounts) increased from $1.676 billion during the first six months of 2013 to $1.765 billion for the first six months of 2014, representing growth of $88 million, or 5.3%. With the growth of our transaction deposit accounts, we were able to reduce our reliance on higher cost sources of funding, specifically time deposits. Average time deposits declined from $1.13 billion for the first six months of 2013 to $981 million for the first six months of 2014, a decrease of $154 million, or 13.5%. Average borrowings increased from $46 million for the first six months of 2013 to $82 million for the first six months of 2014. This favorable change in funding mix was largely responsible for our average cost of interest bearing liabilities decreasing from 0.50% for the first six months of 2013 to 0.37% for the first six months of 2014. Our total cost of funds, which includes noninterest bearing checking accounts at a zero percent cost, was 0.43% for the first six months of 2013 compared to 0.31% for the first six months of 2014. Page 51 Index



See additional information regarding changes in the Company's loans and deposits in the section below entitled "Financial Condition."

Our net interest margin (tax-equivalent net interest income divided by average earning assets) for the second quarter of 2014 was 4.65% compared to 5.10% for the second quarter of 2013. The lower quarterly margin was primarily a result of a lower amount of discount accretion on loans purchased in failed bank acquisitions (see discussion below), and lower average asset yields that are primarily a result of the prolonged low interest rate environment. During this long period of low interest rates, loans and securities originated/purchased during times of higher interest rates are experiencing payoffs and redemptions, the proceeds of which are being reinvested into the currently lower interest rate environment. Because of the short-term nature of most of our interest-bearing liabilities, they are already reflective of the current interest rate environment. For the six month period ended June 30, 2014, our net interest margin remained relatively stable - 4.89% compared to 4.90% for the same period in 2013. The virtually flat net interest margin is a result of asset yields and interest costs declining by approximately the same amounts. Our net interest margin benefitted from net accretion of purchase accounting premiums/discounts associated with the Cooperative acquisition in June 2009 and, to a lesser degree, the acquisition of The Bank of Asheville in January 2011. For the three months ended June 30, 2014 and 2013, we recorded $4,806,000 and $6,504,000, respectively, in net accretion of purchase accounting premiums/discounts, which increased net interest income. For the six months ended June 30, 2014 and 2013, we recorded $11,168,000 and $10,055,000, respectively, in net accretion of purchase accounting premiums/discounts. The following table presents the detail of the purchase accounting adjustments

that impacted net interest income. For the Three Months Ended For the Six Months Ended $ in thousands June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013



Interest income - reduced by premium amortization on loans $ (49 )

(116 ) (98 ) (232 ) Interest income - increased by accretion of loan discount 4,851 6,612 11,259 10,270 Interest expense - reduced by premium amortization of deposits 4 8 7 17 Impact on net interest income $

4,806 6,504 11,168 10,055



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

We recorded total provisions for loan losses of $3.7 million in the second quarter of 2014 compared to $5.6 million in the second quarter of 2013. For the six months ended June 30, 2014, we recorded total provisions for loans losses of $7.2 million compared to $16.7 million in the same period of 2013. The provision for loan losses on non-covered loans amounted to $1.2 million in the second quarter of 2014 compared to $4.0 million in the second quarter of 2013. For the first six months of 2014, the provision for loan losses on non-covered loans amounted to $4.5 million compared to $9.8 million for the same period of 2013. The decreases in 2014 were primarily the result of lower loan growth during the respective periods and stable asset quality trends. See additional discussion below in the section entitled "Allowance for Loan Losses and Summary of Loan Loss Experience." The provision for loan losses on covered loans amounted to $2.5 million in the second quarter of 2014 compared to $1.5 million in the second quarter of 2013. The higher provision in 2014 is primarily the result of losses associated with several large loans that were experienced during the quarter. For the six months ended June 30, 2014, the provision for loan losses on covered loans amounted to $2.7 million compared to $6.9 million for the same period of 2013. The decrease was primarily due to lower levels of covered nonperforming loans during the period, stabilization in the underlying collateral values of nonperforming loans, and a $1.9 million recovery recorded in the first quarter of 2014. Page 52 Index Total noninterest income was $5.0 million in the second quarter of 2014 compared to $4.5 million for the second quarter of 2013. Total noninterest income was $5.3 million for the first six months of 2014 compared to $11.6 million for

the same period in 2013. As presented in the table below, core noninterest income for the second quarter of 2014 was $7.8 million, an increase of 8.6% over the $7.2 million reported for the second quarter of 2013. Core noninterest income for the six months ended June 30, 2014 was $15.3 million, an increase of 11.9% over the $13.7 million reported for the comparable period in 2013. Core noninterest income includes i) service charges on deposit accounts, ii) other service charges, commissions, and fees, iii) fees from presold mortgages, iv) commissions from sales of insurance and financial products, and v) bank-owned life insurance income.



The following table presents our core noninterest income for the three and six month periods ending June 30, 2014 and 2013, respectively.

For the Three Months Ended For the Six Months Ended $ in thousands June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013

Service charges on deposit accounts $ 3,446 3,254 7,019 6,189 Other service charges, commissions, and fees 2,562 2,340 4,929 4,515 Fees from presold mortgages 790 820 1,397 1,567 Commissions from sales of insurance and financial products 706 579 1,300 978 Bank-owned life insurance income 318

212 645 420 Core noninterest income $ 7,822 7,205 15,290 13,669



Most categories of core noninterest income increased during 2014 compared to the same periods in 2013.

As shown in the table above, service charges on deposit accounts increased in 2014 compared to 2013 primarily due to a new deposit product line-up that we introduced in December 2013. The new line-up simplified our product offering and also altered the fee structure of many accounts. Some customer charges were lowered or eliminated, while other fees were increased, with the most significant change being the elimination of free checking for most customers maintaining low account balances, which is the primary cause of the higher service charges in 2014. Other service charges, commissions, and fees increased in 2014 compared to 2013 primarily as a result of higher debit card and credit card interchange fees. We earn a small fee each time a customer uses a debit card to make a purchase. Due to the growth in checking accounts and increased customer usage of debit cards, we have experienced increases in this line item. Interchange income from credit cards has also increased due to growth in the number and usage of credit cards, which we believe is a result of increased promotion of this product.



Fees from presold mortgages decreased slightly for both the three and six month periods ended June 30, 2014 compared to the comparable periods of 2013, due primarily to lower refinancing activity.

Commissions from sales of insurance and financial products have increased in 2014 compared to 2013 as a result of increased sales volume generated by additional personnel hired in our wealth management division over the past

three years.



Bank-owned life insurance income increased in 2014 compared 2013 as a result of $15 million in additional bank-owned life insurance purchased in June 2013.

Within the noncore components of noninterest income, we recorded net losses on non-covered foreclosed properties of $0.6 million and $0.7 million for the three and six months ended June 30, 2014, respectively, compared to net gains of $0.8 million and $1.5 million for the same periods of 2013. In the second quarter of 2014, we had a significant write-down associated with one property and incurred losses on the sale of several of our least desirable properties. In 2013, we experienced several large gains related to the sale of properties along the North Carolina coast that had recovered in value. Losses on covered foreclosed properties amounted to $1.2 million and $3.3 million during the three and six month periods ended June 30, 2014, respectively, compared to $0.5 million and $5.1 million in the comparable periods of 2013. Losses on covered foreclosed properties have generally declined over the past several years as a result of stabilization in property values and declining numbers of properties that we hold. In the second quarter of 2014, we sold many of our least desirable covered foreclosed properties at amounts that resulted in losses. Page 53 Index Indemnification asset income (expense) is recorded to reflect additional (decreased) amounts expected to be received from the FDIC during the period related to covered assets. The three primary items that result in recording indemnification asset income (expense) are 1) income from loan discount accretion, which results in indemnification expense, 2) provisions for loan losses on covered loans, which result in indemnification income and 3) foreclosed property losses on covered assets, which also result in indemnification income. In the second quarter of 2014, the Company recorded $1.6 million in indemnification asset expense compared to $3.4 million in indemnification asset expense in the second quarter of 2013. The variance was because in the second quarter of 2014, higher amounts of loan and foreclosed property losses resulted in more indemnification income compared to the second quarter of 2013, which reduced the indemnification expense associated with loan discount accretion income to a greater degree. For the six months ended June 30, 2014, indemnification asset expense amounted to $6.5 million compared to indemnification asset income of $1.5 million for the same period of 2013. The variance was primarily caused by higher amounts of covered losses experienced in 2013 that resulted in the recording of indemnification income, as shown in

the following table: ($ in millions) For the Three Months For the Six Months Ended Ended June 30, 2014 June 30, 2013 June 30, 2014



June 30, 2013

Indemnification asset expense associated with loan discount accretion income $ (4.4 )

(5.3 ) (10.4 ) (8.2 )



Indemnification asset income (expense) associated with loan losses (recoveries),net

1.9 1.5 1.6 5.4 Indemnification asset income associated with foreclosed property losses 0.9 0.4 2.6



4.1

Other sources of indemnification asset income (expense) - - (0.3 )



0.2

Total indemnification asset income (expense)

$ (1.6 ) (3.4 ) (6.5 ) 1.5



For the three and six month periods ended June 30, 2014, we recorded $0.8 million in gains on sales of approximately $46.7 million in available for sale securities. We recorded negligible gains on securities during the first six months of 2013.

Noninterest expenses amounted to $24.8 million in the second quarter of 2014 compared to $25.8 million recorded in the same period of 2013. Noninterest expenses for the six months ended June 30, 2014 amounted to $48.3 million compared to $49.0 million recorded in the first half of 2013.

Salaries expense was $11.4 million for the second quarter of 2014 compared to $11.0 million in the second quarter of 2013. Salaries expense amounted to $23.0 million for the first half of 2014 compared to $21.7 million for the comparable period of 2013. The increase in salaries expense has been primarily associated with the hiring of additional employees in our credit administration and mortgage banking divisions. Employee benefits expense was $2.3 million in the second quarter of 2014 compared to $2.5 million in the second quarter of 2013. For the first six months of 2013, employee benefits expense was $4.6 million compared to $5.2 million for the same period in 2013. The decrease primarily relates to a $0.2 million and $0.5 million decline in health care expense resulting from lower incurred medical claims for the three and six month periods ended June 30, 2014, respectively. Occupancy and equipment expense did not vary materially when comparing the three and six month periods ending June 30, 2014 to the same periods of 2013. Total occupancy and equipment expense was approximately $2.8 million for the second quarters of 2014 and 2013 and $5.6 million for the first six months of 2014

and 2013.

Other operating expenses amounted to $8.1 million and $9.1 million for the second quarters of 2014 and 2013, respectively, and $14.7 million and $16.1 million for the six month periods ended June 30, 2014 and 2013, respectively. The primary reason for the decreases in both periods relates to higher severance expenses recorded in 2013. In the second quarter of 2013, we accrued approximately $1.6 million in severance expenses due to separation of service of several employees during the quarter, including the Company's former chief executive officer. For the second quarter of 2014, the provision for income taxes was $3.7 million, an effective tax rate of 35.7%, compared to $3.2 million for the same period of 2013, which was an effective tax rate of 36.1%. For the first six months of 2014, the provision for income taxes was $6.7 million, an effective tax rate of 35.3%, compared to $4.7 million for the same period of 2014, which was an effective tax rate of 35.2%. Page 54 Index We accrued total preferred stock dividends of $0.2 million in each of the three months ended June 30, 2014 and 2013. For the first six months of 2014 and 2013, we accrued preferred stock dividends of $0.4 million and $0.5 million, respectively. These amounts are deducted from net income in computing "net income available to common shareholders." Preferred dividends related to our Series B Preferred Stock and our Series C Preferred Stock. Our Series B Preferred Stock relates to $63.5 million in preferred stock that was issued to the U.S. Treasury in September 2011 in connection with our participation in the Small Business Lending Fund. From the September 2011 issuance date until December 31, 2013, the dividend rate on this stock was subject to fluctuation between 1% and 5% per anum based upon changes in the level of our "Qualified Small Business Lending" ("QSBL"). We were able to continually increase our levels of QSBL such that our dividend rate decreased to approximately 1.0% by the first quarter of 2013 and remained at that level through December 31, 2013, at which point the dividend rate became fixed at 1.0%. The dividend rate will remain at 1.0% until March 2016, at which point the dividend rate automatically increases to 9%. Our Series C Preferred Stock relates to the December 2012 issuance of 728,706 shares of preferred stock that pay dividends at the same rate as we pay to holders of our common stock. The Consolidated Statements of Comprehensive Income reflect other comprehensive loss of $46,000 during the second quarter of 2014 compared to other comprehensive loss of $1,125,000 during the second quarter of 2013. During the six months ended June 30, 2014 and 2013, we recorded other comprehensive income of $118,000 and other comprehensive loss of $1,311,000, respectively. The primary component of other comprehensive income (loss) for the periods presented was changes in unrealized holding gains (losses) of our available for sale securities. Our available for sale securities portfolio is predominantly comprised of fixed rate bonds that generally increase in value when market yields for fixed rate bonds decrease and decline in value when market yields for fixed rate bonds increase. Management has evaluated any unrealized losses on individual securities at each period end and determined that there is no other-than-temporary impairment. Page 55 Index FINANCIAL CONDITION Total assets at June 30, 2014 amounted to $3.27 billion, a 0.6% increase from a year earlier. Total loans at June 30, 2014 amounted to $2.43 billion, a 0.1% increase from a year earlier, and total deposits amounted to $2.75 billion, a 2.3% decrease from a year earlier.



The following table presents information regarding the nature of our growth for the twelve months ended June 30, 2014 and for the first six months of 2014.

Balance at Internal Balance at Total Internal July 1, 2013 to beginning of Growth, Growth from end of percentage percentage June 30, 2014 period net (1) Acquisitions period growth growth (1) Loans - Non-covered $ 2,190,583 66,947 - 2,257,530 3.1% 3.1% Loans - Covered 240,279 (63,424 ) - 176,855 -26.4% -26.4% Total loans 2,430,862 3,523 - 2,434,385 0.1% 0.1% Deposits - Noninterest bearing checking 454,785 70,547 - 525,332 15.5% 15.5% Deposits - Interest bearing checking 546,203 5,374 - 551,577 1.0% 1.0% Deposits - Money market 560,612 (5,881 )

- 554,731 -1.0% -1.0% Deposits - Savings 166,497 8,587 - 175,084 5.2% 5.2% Deposits - Brokered 109,510 25,790 - 135,300 23.6% 23.6%

Deposits - Internet time 6,847 (4,631 ) - 2,216 -67.6% -67.6% Deposits - Time>$100,000 501,811 (80,556 ) - 421,255 -16.1% -16.1% Deposits - Time$100,000 472,088 (83,004 )

- 389,084 -17.6% -17.6% Total deposits $ 2,818,353 (63,774 ) - 2,754,579 -2.3% -2.3% January 1, 2014 to June 30, 2014 Loans - Non-covered $ 2,252,885 4,645 - 2,257,530 0.2% 0.2% Loans - Covered 210,309 (33,454 ) - 176,855 -15.9% -15.9% Total loans $ 2,463,194 (28,809 ) - 2,434,385 -1.2% -1.2%



Deposits - Noninterest bearing checking $ 482,650 42,682 -

525,332 8.8% 8.8% Deposits - Interest bearing checking 557,413 (5,836 ) -

551,577 -1.0% -1.0% Deposits - Money market 547,556 7,175 - 554,731 1.3% 1.3% Deposits - Savings 169,023 6,061 - 175,084 3.6% 3.6% Deposits - Brokered 116,087 19,213 - 135,300 16.6% 16.6% Deposits - Internet time 1,319 897 - 2,216 68.0% 68.0% Deposits - Time>$100,000 451,741 (30,486 ) - 421,255 -6.7% -6.7% Deposits - Time$100,000 425,230 (36,146 ) - 389,084 -8.5% -8.5% Total deposits $ 2,751,019 3,560 - 2,754,579 0.1% 0.1%



(1) Excludes the impact of acquisitions in the year of acquisition, but includes

growth or declines in acquired operations after the date of acquisition.

As derived from the table above, for the twelve months preceding June 30, 2014, our total loans increased $4 million, or 0.1%. Over that period, we experienced internal growth in our non-covered loan portfolio of $67 million, or 3.1%. Partially offsetting the growth in non-covered loans were normal pay-downs, foreclosures, and charge-offs of our covered loans, which declined by $63 million at June 30, 2014 compared to a year earlier. We continue to pursue lending opportunities in order to improve our asset yields. For the first six months of 2014, we experienced internal growth in our non-covered loan portfolio of $5 million, or 0.2%. This increase was more than offset by a decline in our covered loans of $33 million. While we expect higher loan growth in our non-covered loans portfolio for the remainder of 2014, the strong competition in the marketplace for high quality loans is expected to remain a challenge and constrain our net loan growth. We expect our current portfolio of covered loans to continue to steadily decline. As discussed previously, on June 30, 2014, one of our loss share agreements expired and we transferred that portfolio of loans from the "covered" category to the "non-covered" category on July 1, 2014. The mix of our loan portfolio remains substantially the same at June 30, 2014 compared to December 31, 2013. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan. Page 56 Index Note 7 to the consolidated financial statements presents additional detailed information regarding our mix of loans, including a break-out between loans covered by FDIC loss share agreements and non-covered loans. Additionally, the section above titled "FDIC Indemnification Asset" contains detail of our covered loans and foreclosed properties segregated by each of the four loss-share agreements. For the twelve month period ended June 30, 2014, we experienced a net decline in total deposits of $64 million, which was a result of growth in our transaction account deposits (checking, money market, and savings) and declines in our time deposit accounts. Over this period, growth of $79 million in our transaction account categories was more than offset by a $142 million decline in time deposits, including brokered deposits and internet time deposits. For the first six months of 2014, we experienced a net increase in total deposits of $4 million. Transaction account deposits increased $50 million, while the net decline in time deposits was $47 million. Within time deposits, we obtained $34 million in brokered deposits in the first quarter of 2014 to help offset declines in the retail time deposit categories ("Time>$100,000" and "Time$100,000" categories). As shown above, the retail time deposit categories experienced significant declines over the time periods shown. Due to the low interest rates we are currently offering as a result of the overall low interest rate environment in the marketplace, our analysis indicates that some customers are shifting their funds related to matured time deposits to their transaction accounts at our company, while other customers are withdrawing their funds from our company in search of higher yields from other companies. We expect this trend to continue. We obtained new borrowings of $90 million in the first quarter of 2014 from a low cost funding source in order to enhance our cash position and in anticipation of future loan growth. During the second quarter of 2014, we repaid $20 million of these borrowings, which resulted in our total borrowings at June 30, 2014 amounting to $116.4 million compared to $46.4 million a year earlier. Nonperforming Assets Nonperforming assets include nonaccrual loans, troubled debt restructurings, loans past due 90 or more days and still accruing interest, nonperforming loans held for sale, and foreclosed real estate. As previously discussed, as a result of two FDIC-assisted transactions, we entered into loss share agreements that afford us significant protection from losses from all loans and foreclosed real estate acquired in those acquisitions. Because of the loss protection provided by the FDIC, the financial risk of the acquired loans and foreclosed real estate is significantly different from the risk associated with assets not covered under the loss share agreements. Accordingly, we present separately nonperforming assets subject to the loss share agreements as "covered" nonperforming assets, and nonperforming assets that are not subject to the loss share agreements as "non-covered." Page 57 Index



Nonperforming assets are summarized as follows:

As of/for the As of/for the As of/for the ASSET QUALITY DATA ($ in thousands) quarter



ended quarter ended quarter ended

June 30,



2014 December 31, 2013June 30, 2013

Non-covered nonperforming assets

Nonaccrual loans $ 47,533 41,938 42,338 Restructured loans - accruing 27,250 27,776 21,333 Accruing loans >90 days past due - - - Total non-covered nonperforming loans 74,783 69,714 63,671 Foreclosed real estate 9,346 12,251 15,425 Total non-covered nonperforming assets $ 84,129 81,965 79,096



Covered nonperforming assets (1)

Nonaccrual loans (2) $ 20,938 37,217 50,346 Restructured loans - accruing 8,193 8,909 6,790 Accruing loans > 90 days past due - - - Total covered nonperforming loans 29,131 46,126 57,136 Foreclosed real estate 9,934 24,497 32,005 Total covered nonperforming assets $ 39,065 70,623 89,141 Total nonperforming assets $ 123,194 152,588 168,237 Asset Quality Ratios - All Assets Net charge-offs to average loans - annualized 0.99% 1.31% 0.75% Nonperforming loans to total loans 4.27% 4.70% 4.97% Nonperforming assets to total assets 3.77% 4.79% 5.18% Allowance for loan losses to total loans 1.88% 1.97% 2.09% Allowance for loan losses to nonperforming loans 44.07% 41.87% 42.09%



Asset Quality Ratios - Based on Non-covered Assets only Net charge-offs to average non-covered loans - annualized

0.69% 0.74% 0.74% Non-covered nonperforming loans to non-covered loans 3.31% 3.09% 2.91% Non-covered nonperforming assets to total non-covered assets 2.73% 2.78% 2.66% Allowance for loan losses to non-covered loans 1.86% 1.96% 2.05% Allowance for loan losses to non-covered nonperforming loans 56.12% 63.49% 70.39%



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

(2) At June 30, 2014, the contractual balance of the nonaccrual loans covered by FDIC loss share agreements was $34.3 million. As discussed elsewhere in this document, $9.7 million of covered nonaccrual loans were transferred to non-covered status on July 1, 2014 due to the expiration of one of our non-single family loss share agreements with the FDIC on June 30, 2014.



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

Consistent with the continuing weak economy experienced in much of our market area since the onset of the recession that began in 2008, we have experienced high levels of loan losses, delinquencies and nonperforming assets compared

to our historical averages. Page 58 Index



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

($ in thousands) At



June 30, 2014 At December 31, 2013 At June 30, 2013 Commercial, financial, and agricultural

$ 4,305 5,690 3,408 Real estate - construction, land development, and other land loans 15,466 22,688 25,405 Real estate - mortgage - residential (1-4 family) first mortgages 21,230 21,751 24,806 Real estate - mortgage - home equity loans/lines of credit 4,190 4,081 2,750 Real estate - mortgage - commercial and other 22,670 24,568 35,461 Installment loans to individuals

610 377 854 Total nonaccrual loans $ 68,471 79,155 92,684



The following segregates our nonaccrual loans at June 30, 2014 into covered and non-covered loans, as classified for regulatory purposes:

Covered Non-covered Total Nonaccrual Nonaccrual Nonaccrual ($ in thousands) Loans Loans Loans

Commercial, financial, and agricultural $ 282 4,023 4,305 Real estate - construction, land development, and other land loans 5,300 10,166 15,466 Real estate - mortgage - residential (1-4 family) first mortgages 5,576 15,654 21,230 Real estate - mortgage - home equity loans/lines of credit 327 3,863 4,190 Real estate - mortgage - commercial and other 9,451 13,219 22,670 Installment loans to individuals 2

608 610 Total nonaccrual loans $ 20,938 47,533 68,471



The following segregates our nonaccrual loans at December 31, 2013 into covered and non-covered loans, as classified for regulatory purposes:

Covered Non-covered Total Nonaccrual Nonaccrual Nonaccrual ($ in thousands) Loans Loans Loans

Commercial, financial, and agricultural $ 935 4,755 5,690



Real estate - construction, land development, and other land loans 13,274

9,414 22,688



Real estate - mortgage - residential (1-4 family) first mortgages 9,447

12,304 21,751 Real estate - mortgage - home equity loans/lines of credit 509 3,572 4,081 Real estate - mortgage - commercial and other 13,050 11,518 24,568 Installment loans to individuals

2 375 377 Total nonaccrual loans $ 37,217 41,938 79,155

Among non-covered loans, the tables above indicate small increases in most categories of non-covered nonaccrual loans. Residential first mortgage loans experienced the largest increase, which was caused by increased efforts to work with home borrowers on repayment plans, increased legal delays in the foreclosure process, and continued challenging economic conditions in some

of our more rural market areas. "Restructured loans - accruing", or troubled debt restructurings (TDRs), are accruing loans for which we have granted concessions to the borrower as a result of the borrower's financial difficulties. As seen in the previous table "Asset Quality Data", at June 30, 2014, total TDRs (covered and non-covered) amounted to $35.4 million, compared to $36.7 million at December 31, 2013, and $28.1 million at June 30, 2013. Foreclosed real estate includes primarily foreclosed properties. Non-covered foreclosed real estate has decreased over the past year, amounting to $9.3 million at June 30, 2014, $12.3 million at December 31, 2013, and $15.4 million at June 30, 2013. The decreases were the result of strong sales activity during the periods, which was consistent with our strategy implemented in 2012 to accelerate the disposition of foreclosed properties. At June 30, 2014, we also held $9.9 million in foreclosed real estate that is subject to the loss share agreements with the FDIC, which is a decline from $24.5 million at December 31, 2013 and $32.0 million at June 30, 2013. The decreases are due to increased property sales activity, particularly along the North Carolina coast, which is where most of our covered foreclosed properties are located As discussed elsewhere in this document, on July 1, 2014, we transferred $9.7 million of covered nonaccrual loans, $2.1 million of covered accruing troubled debt restructurings, and $3.0 million of covered foreclosed real estate to non-covered status due to the expiration of one of our non-single family loss share agreements with the FDIC on June 30, 2014. Page 59 Index We believe that the fair values of the items of foreclosed real estate, less estimated costs to sell, equal or exceed their respective carrying values at the dates presented.



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

($ in thousands) At June 30, 2014 At December 31, 2013 At June 30, 2013 Vacant land $ 6,838 19,295 29,089

1-4 family residential properties 5,536 7,982 10,087 Commercial real estate 6,906 9,471 8,254 Total foreclosed real estate $ 19,280

36,748 47,430 The following segregates our foreclosed real estate at June 30, 2014 into covered and non-covered: Covered Foreclosed Non-covered Foreclosed Total Foreclosed ($ in thousands) Real Estate Real Estate Real Estate Vacant land $ 3,268 3,570 6,838 1-4 family residential properties 3,590 1,946 5,536 Commercial real estate 3,076

3,830 6,906 Total foreclosed real estate $ 9,934 9,346 19,280 The following segregates our foreclosed real estate at December 31, 2013 into covered and non-covered: Covered Foreclosed Non-covered Foreclosed Total Foreclosed ($ in thousands) Real Estate Real Estate Real Estate Vacant land $ 14,043 5,252 19,295 1-4 family residential properties 5,102 2,880 7,982 Commercial real estate 5,352

4,119 9,471 Total foreclosed real estate $ 24,497 12,251 36,748 Page 60 Index



The following table presents geographical information regarding our nonperforming assets at June 30, 2014.

As of June 30, 2014 Nonperforming Loans to Total ($ in thousands) Covered Non-covered Total Total Loans Loans Nonaccrual loans and Troubled Debt Restructurings (1) Eastern Region (NC) $ 20,733 10,480 31,213 $ 568,000 5.5% Triangle Region (NC) - 24,903 24,903 752,000 3.3% Triad Region (NC) - 18,197 18,197 366,000 5.0% Charlotte Region (NC) - 2,779 2,779 96,000 2.9% Southern Piedmont Region (NC) 1,667 6,497 8,164 244,000 3.3% Western Region (NC) 6,606 13 6,619 58,000 11.4% South Carolina Region 125 3,915 4,040 105,000 3.8% Virginia Region - 7,999 7,999 230,000 3.5% Other - - - 15,000 0.0% Total nonaccrual loans and troubled debt restructurings $ 29,131 74,783 103,914 $ 2,434,000 4.3% Foreclosed Real Estate (1) Eastern Region (NC) $ 5,367 985 6,352 Triangle Region (NC) - 3,322 3,322 Triad Region (NC) - 2,300 2,300 Charlotte Region (NC) - 647 647 Southern Piedmont Region (NC) 411 622 1,033 Western Region (NC) 4,108 - 4,108 South Carolina Region 48 961 1,009 Virginia Region - 92 92 Other - 417 417 Total foreclosed real estate 9,934 9,346 19,280



(1) The counties comprising each region are as follows:

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

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

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

Charlotte North Carolina Region - Iredell, Cabarrus, Rowan

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

Western North Carolina Region - Buncombe

South Carolina Region - Chesterfield, Dillon, Florence, Horry

Virginia Region - Wythe, Washington, Montgomery, Pulaski, Roanoke

Summary of 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 in taken). Losses on loans are charged against the allowance in the period in which such loans, in management's opinion, become uncollectible. The recoveries realized during the period are credited to this allowance. We have no foreign loans, few agricultural loans and do not engage in significant lease financing or highly leveraged transactions. Commercial loans are diversified among a variety of industries. The majority of our real estate loans are primarily personal and commercial loans where real estate provides additional security for the loan. Collateral for virtually all of these loans is located within our principal market area. The weak economic environment since 2009 has resulted in elevated levels of classified and nonperforming assets, which has led to higher provisions for loan losses compared to historical averages. While we have begun to see signs of a recovering economy in most of our market areas, the recovery seems to be lagging and is less robust than that of the national economy. We continue to have an elevated level of past due and adversely classified assets compared to historic averages. In fact, over the past year we have experienced steady, but small, increases in our non-covered nonperforming and adversely classified assets - see Note 7 to the consolidated financial statements for detail. Despite the higher levels of these problem assets, based on our analysis, we believe the severity of the loss rate inherent in our classified loans is less than in recent years. In addition, we believe that our allowance for loan losses is sufficient to absorb the probable losses inherent in our portfolio at June 30, 2014. Page 61 Index

Our total provision for loan losses was $3.7 million for the second quarter of 2014 compared to $5.6 million in the second quarter of 2013. Our total provision for loan losses for the first six months of 2014 and 2013 was $7.2 million and $16.7 million, respectively. The total provision for loan losses is comprised of provision for loan losses for non-covered loans and provision for loan losses for covered loans, as discussed in the following paragraphs. The provision for loan losses on non-covered loans amounted to $1.2 million and $4.0 million in the second quarters of 2014 and 2013, respectively, and $4.5 million and $9.8 million for the first half of 2014 and 2013, respectively. The lower provisions in 2014 were primarily the result of lower loan growth during 2014 and stable asset quality trends, as discussed in the following paragraph. Non-covered loan growth for the first six months of 2014 was $5 million compared to $96 million for the first six months of 2013, which resulted in a smaller incremental provision for loan losses attributable to loan growth. As it relates to asset quality trends, as shown in a table within Note 7 to the consolidated financial statements, our total non-covered classified and nonaccrual loans remained almost unchanged at $121-$123 million when comparing June 30, 2014 to December 31, 2013. Comparatively, in the first six months of 2013, these same classifications of non-covered loans increased from $75 million to $103 million, which resulted in the need to record additional provisions for loan losses during that period. Additionally, our allowance for loan loss model utilizes the net charge-offs experienced in the most recent years as a significant component of estimating the current allowance for loan losses that is necessary. Thus, older years (and parts thereof) systematically age out and are excluded from the analysis as time goes on. Periods of high net charge-offs we experienced during the peak of the recession are now dropping out of the analysis and being replaced by the more modest levels of net charge-offs now being experienced. The second quarter of 2014 marked our sixth consecutive quarter of annualized net charge-offs related to non-covered loans being less than 1.00%, whereas at the peak of the recession, that ratio was frequently over 1.00%. In the near term, we expect that net charge-offs experienced in the next few quarters will continue to be less than those experienced in the recession periods that are dropping out of the analysis, and for that reason, we expect our resulting provisions for loan losses to be impacted. The provision for loan losses on covered loans amounted to $2.5 million in the second quarter of 2014 compared to $1.5 million in the second quarter of 2013. The higher provision in 2014 is primarily the result of losses associated with several large loans that were experienced during the quarter. For the six months ended June 30, 2014, the provision for loan losses on covered loans amounted to $2.7 million compared to $6.9 million for the same period of 2013. The decrease in the six month period was primarily due to lower levels of covered nonperforming loans during the period, stabilization in the underlying collateral values of nonperforming loans, and a $1.9 million recovery that we realized in the first quarter of 2014. For the first six months of 2014, we recorded $9.9 million in net charge-offs, compared to $12.3 million for the comparable period of 2013. Of these amounts, net charge-offs of non-covered loans amounted to $6.8 million in the first six months of 2014 compared to $6.6 million in the first six months of 2013. Net charge-offs of covered loans amounted to $3.1 million for the first six months of 2014 compared to $5.7 million for the first six months of 2013. The charge-offs in 2014 continue a trend that began in 2010, with the largest amount of charge-offs being in the construction and land development real estate categories. These types of loans were impacted the most by the recession and decline in new housing. The total allowance for loan losses amounted to $45.8 million at June 30, 2014, compared to $48.5 million at December 31, 2013 and $50.9 million at June 30, 2013. The allowance for loan losses for non-covered loans was $42.0 million, $44.3 million, and $44.8 million at June 30, 2014, December 31, 2013, and June 30, 2013, respectively. The ratio of our allowance for non-covered loans to total non-covered loans has declined from 2.05% at June 30, 2013 to 1.96% at December 31, 2013 to 1.86% at June 30, 2014 as a result of the factors discussed above that impacted our provision for loan losses on non-covered loans. At June 30, 2014, December 31, 2013, and June 30, 2013, the allowance for loan losses attributable to covered loans was $3.8 million, $4.2 million, and $6.0 million, respectively. The steady decline has been primarily due to the resolution of many of those loans via charge-off or foreclosure, and thus the declining amount of problem covered loans. Page 62 Index

We believe our reserve levels are adequate to cover probable loan losses on the loans outstanding as of each reporting date. It must be emphasized, however, that the determination of the reserve using our procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. See "Critical Accounting Policies - Allowance for Loan Losses" above. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses and value of other real estate. Such agencies may require us to recognize adjustments to the allowance or the carrying value of other real estate based on their judgments about information available at the time of their examinations. For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, changes in the allowance for loan losses arising from charge-offs and recoveries, and additions to the allowance for loan losses that have been charged to expense. Six Months Twelve Months Six Months ($ in thousands) Ended Ended Ended June 30, December 31, June 30, 2014 2013 2013 Loans outstanding at end of period $ 2,434,385 2,463,194 2,430,862 Average amount of loans outstanding $ 2,448,866 2,419,679 2,395,949 Allowance for loan losses, at beginning of year $ 48,505 46,402 46,402 Provision for loan losses 7,234 30,616 16,740 55,739 77,018 63,142 Loans charged off: Commercial, financial, and agricultural (3,566 ) (4,667 ) (1,583 )



Real estate - construction, land development & other land loans (4,791 )

(10,582 ) (4,091 )



Real estate - mortgage - residential (1-4 family) first mortgages (1,886 )

(4,764 ) (2,182 ) Real estate - mortgage - home equity loans / lines of credit (753 ) (3,143 ) (1,859 ) Real estate - mortgage - commercial and other (1,432 ) (7,027 ) (4,191 ) Installment loans to individuals (964 ) (2,253 ) (1,085 ) Total charge-offs (13,392 ) (32,436 ) (14,991 ) Recoveries of loans previously charged-off: Commercial, financial, and agricultural 50 198 132 Real estate - construction, land development & other land loans 2,535 777 634 Real estate - mortgage - residential (1-4 family) first mortgages 314 595 561 Real estate - mortgage - home equity loans / lines of credit 30 199 131 Real estate - mortgage - commercial and other 286 1,531 897 Installment loans to individuals 234 623 345 Total recoveries 3,449 3,923 2,700 Net charge-offs (9,943 ) (28,513 ) (12,291 ) Allowance for loan losses, at end of period $ 45,796 48,505 50,851



Ratios:

Net charge-offs as a percent of average loans (annualized) 0.82% 1.18% 1.03%



Allowance for loan losses as a percent of loans at end of period 1.88%

1.97% 2.09% Page 63 Index



The following table discloses the activity in the allowance for loan losses for the six months ended June 30, 2014, segregated into covered and non-covered.

Six Months Ended June 30, 2014 ($ in thousands)



Covered Non-covered Total

Loans outstanding at end of period $ 176,855 2,257,530 2,434,385 Average amount of loans outstanding $



192,572 2,256,294 2,448,866

Allowance for loan losses, at beginning of year $ 4,242 44,263 48,505 Provision for loan losses 2,711 4,523 7,234 6,953 48,786 55,739 Loans charged off: Commercial, financial, and agricultural (1,086 ) (2,480 ) (3,566 ) Real estate - construction, land development & other land loans (3,520 ) (1,271 ) (4,791 ) Real estate - mortgage - residential (1-4 family) first mortgages (558 ) (1,328 ) (1,886 ) Real estate - mortgage - home equity loans / lines of credit (74 ) (679 ) (753 ) Real estate - mortgage - commercial and other (430 ) (1,002 ) (1,432 ) Installment loans to individuals (2 ) (962 ) (964 ) Total charge-offs



(5,670 ) (7,722 ) (13,392 )

Recoveries of loans previously charged-off: Commercial, financial, and agricultural 2 48 50



Real estate - construction, land development & other land loans 2,213

322 2,535



Real estate - mortgage - residential (1-4 family) first mortgages 184

130 314 Real estate - mortgage - home equity loans / lines of credit - 30 30 Real estate - mortgage - commercial and other 148 138 286 Installment loans to individuals

- 234 234 Total recoveries 2,547 902 3,449 Net charge-offs (3,123 ) (6,820 ) (9,943 ) Allowance for loan losses, at end of period $ 3,830 41,966 45,796



The following table discloses the activity in the allowance for loan losses for the six months ended June 30, 2013, segregated into covered and non-covered.

Six Months Ended June 30, 2013 ($ in thousands)



Covered Non-covered Total

Loans outstanding at end of period $ 240,279 2,190,583 2,430,862 Average amount of loans outstanding $



262,020 2,133,929 2,395,949

Allowance for loan losses, at beginning of year $ 4,759 41,643 46,402 Provision for loan losses 6,926 9,814 16,740 11,685 51,457 63,142 Loans charged off: Commercial, financial, and agricultural (194 ) (1,389 ) (1,583 ) Real estate - construction, land development & other land loans (1,915 ) (2,176 ) (4,091 ) Real estate - mortgage - residential (1-4 family) first mortgages (1,057 ) (1,125 ) (2,182 ) Real estate - mortgage - home equity loans / lines of credit (758 ) (1,101 ) (1,859 ) Real estate - mortgage - commercial and other (1,725 ) (2,466 ) (4,191 ) Installment loans to individuals



(1 ) (1,084 ) (1,085 )

Total charge-offs



(5,650 ) (9,341 ) (14,991 )

Recoveries of loans previously charged-off: Commercial, financial, and agricultural - 132 132 Real estate - construction, land development & other land loans - 634 634



Real estate - mortgage - residential (1-4 family) first mortgages -

561 561 Real estate - mortgage - home equity loans / lines of credit - 131 131 Real estate - mortgage - commercial and other - 897 897 Installment loans to individuals

- 345 345 Total recoveries - 2,700 2,700 Net charge-offs (5,650 ) (6,641 ) (12,291 ) Allowance for loan losses, at end of period $ 6,035 44,816 50,851 Page 64 Index Based on the results of our loan analysis and grading program and our evaluation of the allowance for loan losses at June 30, 2014, there have been no material changes to the allocation of the allowance for loan losses among the various categories of loans since December 31, 2013.



Liquidity, Commitments, and Contingencies

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

to provide cash.

In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following three sources - 1) an approximately $439 million line of credit with the Federal Home Loan Bank (of which $70 million was outstanding at June 30, 2014), 2) a $50 million overnight federal funds line of credit with a correspondent bank (none of which was outstanding at June 30, 2014), and 3) an approximately $90 million line of credit through the Federal Reserve Bank of Richmond's discount window (none of which was outstanding at June 30, 2014). In addition to the outstanding borrowings from the FHLB that reduce the available borrowing capacity of that line of credit, our borrowing capacity was reduced by $193 million and $143 million at June 30, 2014 and 2013, respectively, as a result of our pledging letters of credit for public deposits at each of those dates. Unused and available lines of credit amounted to $316 million at June 30, 2014 compared to $254 million at December 31, 2013. Our overall liquidity has increased since June 30, 2013, primarily as a result of our increased borrowings. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 16.7% at June 30, 2013 to 20.4% at June 30, 2014. We believe our liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet our operating needs in the foreseeable future. We will continue to monitor our liquidity position carefully and will explore and implement strategies to increase liquidity if deemed appropriate. The amount and timing of our contractual obligations and commercial commitments has not changed materially since December 31, 2013, detail of which is presented in Table 18 on page 87 of our 2013 Annual Report on Form 10-K.



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

Off-Balance Sheet Arrangements and Derivative Financial Instruments

Off-balance sheet arrangements include transactions, agreements, or other contractual arrangements pursuant to which we have obligations or provide guarantees on behalf of an unconsolidated entity. We have no off-balance sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities. Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through June 30, 2014, and have no current plans to do so. Capital Resources We are regulated by the Board of Governors of the Federal Reserve Board (FED) and are subject to the securities registration and public reporting regulations of the Securities and Exchange Commission. Our banking subsidiary is regulated by the Federal Deposit Insurance Corporation (FDIC) and the North Carolina Office of the Commissioner of Banks. We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on our liquidity, capital resources, or operations.

Page 65 Index

We must comply with regulatory capital requirements established by the FED and FDIC. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. These capital standards require us to maintain minimum ratios of "Tier 1" capital to total risk-weighted assets and total capital to risk-weighted assets of 4.00% and 8.00%, respectively. Tier 1 capital is comprised of total shareholders' equity calculated in accordance with generally accepted accounting principles, excluding accumulated other comprehensive income (loss), less intangible assets, and total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which is our allowance for loan losses. Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in FED and FDIC regulations. In addition to the risk-based capital requirements described above, we are subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution's composite ratings as determined by its regulators. The FED has not advised us of any requirement specifically applicable to us.



At June 30, 2014, our capital ratios exceeded the regulatory minimum ratios discussed above. The following table presents our capital ratios and the regulatory minimums discussed above for the periods indicated.

June 30, December 31, June 30, 2014 2013 2013 Risk-based capital ratios:

Tier I capital to Tier I risk adjusted assets 15.88% 15.53% 15.32% Minimum required Tier I capital 4.00% 4.00% 4.00% Total risk-based capital to Tier II risk-adjusted assets 17.14% 16.79% 16.58% Minimum required total risk-based capital 8.00% 8.00% 8.00%



Leverage capital ratios:

Tier I leverage capital to adjusted most recent quarter average assets 11.15% 11.18% 10.63% Minimum required Tier I leverage capital 4.00% 4.00% 4.00% Our bank subsidiary is also subject to capital requirements similar to those discussed above. The bank subsidiary's capital ratios do not vary materially from our capital ratios presented above. At June 30, 2014, our bank subsidiary exceeded the minimum ratios established by the FED and FDIC. In addition to regulatory capital ratios, we also closely monitor our ratio of tangible common equity to tangible assets ("TCE Ratio"). Our TCE Ratio was 7.57% at June 30, 2014 compared to 7.46% at December 31, 2013 and 6.93% at June 30, 2013. Page 66 Index BUSINESS DEVELOPMENT MATTERS



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

On June 16, 2014, the Company announced a quarterly cash dividend of $0.08

cents per share payable on July 25, 2014 to shareholders of record on June 30,

2014. This is the same dividend rate as the Company declared in the second

quarter of 2013.



On May 19, 2014, the Company opened a full-service branch in Fuquay-Varina,

North Carolina. The new branch is located at 125 North Main Street.



The Company is planning to construct a new branch facility at 4110 Bradham

Drive, Jacksonville, North Carolina. Upon completion, the First Bank branch

located on Western Boulevard will be closed and the accounts serviced at that

branch will be reassigned to the new and improved branch. This is expected to

occur in the first quarter of 2015 and is subject to regulatory approval.

SHARE REPURCHASES We did not repurchase any shares of our common stock during the first six months of 2014. At June 30, 2014, we had approximately 214,000 shares available for repurchase under existing authority from our board of directors. We may repurchase these shares in open market or privately negotiated transactions, as market conditions and our liquidity warrants, subject to compliance with applicable regulations. See also Part II, Item 2 "Unregistered Sales of Equity Securities and Use of Proceeds."


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