Form 10-Q

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T2QhuK7aMUIUKbAWXd2fV3x/2kzZJn1nNfjaelF7DzI4uZvN1VK8IYw80gTgwzo/ 8PhcBsp1rAXkF5sdSNPz/g== 0001193125-05-221350.txt : 20051109 0001193125-05-221350.hdr.sgml : 20051109 20051109144148 ACCESSION NUMBER: 0001193125-05-221350 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051109 DATE AS OF CHANGE: 20051109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FNB CORP/NC CENTRAL INDEX KEY: 0000764811 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 561456589 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13823 FILM NUMBER: 051189411 BUSINESS ADDRESS: STREET 1: 101 SUNSET AVE STREET 2: P O BOX 1328 CITY: ASHEBORO STATE: NC ZIP: 27203 BUSINESS PHONE: 3366268300 MAIL ADDRESS: STREET 1: P.O. BOX 1328 CITY: ASHEBORO STATE: NC ZIP: 27204 10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2005

Commission file number 0-13823

FNB CORP.

(Exact name of registrant as specified in its charter)


North Carolina		56-1456589
(State of incorporation)		(I.R.S. Employer Identification No.)

101 Sunset Avenue, Asheboro, North Carolina 27203

(Address of principal executive offices)

(336) 626-8300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The registrant had 5,625,561 shares of $2.50 par value common stock outstanding at November 1, 2005.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FNB Corp. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (unaudited)


	September 30,						December 31, 2004
	2005			2004			December 31, 2004
	(in thousands, except share and per share data)
ASSETS
Cash and due from banks	$	24,540		$	18,421		$	19,109
Interest-bearing bank balances		896			8,656			1,309
Federal funds sold		14,332			95			91
Investment securities:
Available for sale, at estimated fair value (amortized cost of $76,117, $68,385 and $71,959)		76,868			70,642			73,763
Held to maturity (estimated fair value of $47,682, $52,825 and $50,676)		48,792			53,259			51,380
Loans:
Loans held for sale		19,239			11,415			11,648
Loans held for investment		689,323			629,693			653,106
Less allowance for loan losses		(8,026	)		(6,936	)		(7,293	)

Net loans		700,536			634,172			657,461

Premises and equipment, net		19,809			17,242			17,114
Goodwill		16,359			16,335			16,335
Other assets		29,111			26,735			26,329

Total Assets	$	931,243		$	845,557		$	862,891

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand deposits	$	86,753		$	75,856		$	75,410
Interest-bearing deposits:
Demand, savings and money market deposits		223,282			224,233			219,968
Time deposits of $100,000 or more		182,767			147,361			155,278
Other time deposits		228,971			194,253			208,888

Total deposits		721,773			641,703			659,544
Retail repurchase agreements		18,594			14,654			13,818
Federal Home Loan Bank advances		67,389			73,159			69,088
Federal funds purchased		—			8,000			8,175
Other borrowed funds		28,152			19,538			22,566
Other liabilities		9,214			7,050			7,553

Total Liabilities		845,122			764,104			780,744

Shareholders’ equity:
Preferred stock - $10.00 par value; authorized 200,000 shares, none issued		—			—			—
Common stock - $2.50 par value; authorized 10,000,000 shares, issued shares - 5,622,060, 5,624,652 and 5,605,102		14,055			14,062			14,013
Surplus		10,611			11,026			10,643
Retained earnings		60,993			54,978			56,383
Accumulated other comprehensive income		462			1,387			1,108

Total Shareholders’ Equity		86,121			81,453			82,147

Total Liabilities and Shareholders’ Equity	$	931,243		$	845,557		$	862,891

See accompanying notes to consolidated financial statements.

FNB Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2004		2005			2004
	(in thousands, except share and per share data)
Interest Income
Interest and fees on loans	$	12,375		$	9,042	$	34,251		$	25,353
Interest and dividends on investment securities:
Taxable income		873			795		2,539			2,591
Non-taxable income		406			429		1,243			1,303
Other interest income		59			41		176			116

Total interest income		13,713			10,307		38,209			29,363

Interest Expense
Deposits		3,899			2,221		10,312			6,425
Retail repurchase agreements		135			39		322			98
Federal Home Loan Bank advances		660			655		1,955			1,880
Federal funds purchased		4			30		9			51
Other borrowed funds		395			153		987			462

Total interest expense		5,093			3,098		13,585			8,916

Net Interest Income		8,620			7,209		24,624			20,447
Provision for loan losses		446			460		1,680			3,510

Net Interest Income After Provision for Loan Losses		8,174			6,749		22,944			16,937

Noninterest Income
Mortgage loan sales		1,412			1,188		3,671			3,076
Service charges on deposit accounts		1,595			1,429		4,429			4,021
Trust and investment services		295			319		968			1,139
Cardholder and merchant services income		355			270		976			778
Other service charges, commissions and fees		207			200		663			582
Bank owned life insurance		148			153		438			462
Other income (charge)		(46	)		93		(57	)		128

Total noninterest income		3,966			3,652		11,088			10,186

Noninterest Expense
Personnel expense		5,103			4,210		14,345			12,335
Net occupancy expense		474			385		1,341			1,172
Furniture and equipment expense		573			507		1,619			1,455
Data processing services		387			321		1,057			916
Other expense		1,782			1,661		5,116			5,357

Total noninterest expense		8,319			7,084		23,478			21,235

Income Before Income Taxes		3,821			3,317		10,554			5,888
Income taxes		1,262			1,033		3,417			1,536

Net Income	$	2,559		$	2,284	$	7,137		$	4,352

Net income per common share:
Basic	$	.46		$	.41	$	1.27		$	.77
Diluted		.44			.40		1.24			.74

Weighted average number of common shares outstanding:
Basic		5,620,339			5,631,938		5,611,814			5,680,428
Diluted		5,768,654			5,760,985		5,757,626			5,843,693

See accompanying notes to consolidated financial statements.

FNB Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Nine Months Ended September 30, 2005 and September 30, 2004 (unaudited)


	Common Stock					Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Shares		Amount			Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	(in thousands, except share and per share data)
Balance, December 31, 2003	5,686,899		$	14,217		$	12,478		$	53,174		$	1,589		$	81,458
Comprehensive income:
Net income	—			—			—			4,352			—			4,352
Other comprehensive income:
Unrealized securities losses, net of income tax benefit of $128	—			—			—			—			(202	)		(202	)

Total comprehensive income	—			—			—			—			—			4,150

Cash dividends declared, $.45 per share	—			—			—			(2,548	)		—			(2,548	)
Common stock issued through:
Stock option plan	53,853			135			452			—			—			587
Common stock repurchased	(116,100	)		(290	)		(1,904	)		—			—			(2,194	)

Balance, September 30, 2004	5,624,652		$	14,062		$	11,026		$	54,978		$	1,387		$	81,453

Balance, December 31, 2004	5,605,102		$	14,013		$	10,643		$	56,383		$	1,108		$	82,147
Comprehensive income:
Net income	—			—			—			7,137			—			7,137
Other comprehensive income:
Unrealized securities losses, net of income tax benefit of $407	—			—			—			—			(646	)		(646	)

Total comprehensive income	—			—			—			—			—			6,491

Cash dividends declared, $.45 per share	—			—			—			(2,527	)		—			(2,527	)
Common stock issued through:
Stock option plan	41,758			104			405			—			—			509
Common stock repurchased	(24,800	)		(62	)		(437	)		—			—			(499	)

Balance, September 30, 2005	5,622,060		$	14,055		$	10,611		$	60,993		$	462		$	86,121

See accompanying notes to consolidated financial statements.

FNB Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Nine Months Ended September 30,
	2005			2004
	(in thousands)
Operating Activities:
Net income	$	7,137		$	4,352
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		1,259			1,228
Provision for loan losses		1,680			3,510
Deferred income tax benefit		(490	)		388
Deferred loan fees and costs, net		(73	)		230
Premium amortization and discount accretion of investment securities, net		270			449
Amortization of intangibles		35			43
Net decrease (increase) in loans held for sale		(7,591	)		9,687
Decrease (increase) in other assets		(537	)		562
Increase (decrease) in other liabilities		1,460			(148	)

Net Cash Provided by Operating Activities		3,150			20,301

Investing Activities:
Available-for-sale securities:
Proceeds from maturities and calls		5,261			26,773
Purchases		(9,478	)		(17,351	)
Held-to-maturity securities:
Proceeds from maturities and calls		4,156			10,719
Purchases		(1,779	)		(577	)
Net increase in loans held for investment		(38,451	)		(104,473	)
Purchases of premises and equipment		(4,052	)		(3,442	)
Other, net		51			(176	)

Net Cash Used in Investing Activities		(44,292	)		(88,527	)

Financing Activities:
Net increase in deposits		62,229			43,778
Increase (decrease) in retail repurchase agreements		4,776			(162	)
Increase (decrease) in Federal Home Loan Bank advances		(1,500	)		20,000
Increase (decrease) in federal funds purchased		(8,175	)		7,375
Increase in other borrowed funds		5,586			1,561
Common stock issued		509			587
Common stock repurchased		(499	)		(2,194	)
Cash dividends paid		(2,525	)		(2,671	)

Net Cash Provided by Financing Activities		60,401			68,274

Net Increase in Cash and Cash Equivalents		19,259			48
Cash and cash equivalents at beginning of period		20,509			27,124

Cash and Cash Equivalents at End of Period	$	39,768		$	27,172

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	13,018		$	9,006
Income taxes		3,970			687
Noncash transactions:
Foreclosed loans transferred to other real estate		885			1,550
Unrealized securities gains (losses), net of income taxes		(646	)		(202	)

See accompanying notes to consolidated financial statements.

FNB Corp. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.	Basis of Presentation

FNB Corp. is a bank holding company whose wholly owned subsidiaries are the First National Bank and Trust Company (“First National Bank”) and Dover Mortgage Company (“Dover”). First National Bank has one wholly owned subsidiary, First National Investor Services, Inc. Through its subsidiaries, FNB Corp. offers a complete line of consumer, mortgage and business banking services, including loan, deposit, cash management, investment management and trust services, to individual and business customers. First National Bank has offices in Chatham, Guilford, Montgomery, Moore, Randolph, Richmond, Rowan and Scotland counties in North Carolina. Dover Mortgage Company operates mortgage production offices in North Carolina at Carolina Beach, Charlotte, Goldsboro, Greenville, Kernersville, Lake Norman, Leland, Raleigh and Wilmington.

The accompanying consolidated financial statements, prepared without audit, include the accounts of FNB Corp. and its subsidiaries (collectively the “Corporation”). All significant intercompany balances and transactions have been eliminated.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Operating results for the three and nine month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2005.

The organization and business of FNB Corp., accounting policies followed by the Corporation and other relevant information are contained in the notes to the consolidated financial statements filed as part of the Corporation’s 2004 annual report on Form 10-K. This quarterly report should be read in conjunction with such annual report.

2.	Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.

3.	Merger Information

United Financial, Inc.

share of United common stock, at the election of the shareholder, into either: (1) $14.25 in cash, (2) 0.6828 shares of FNB Corp. common stock, or (3) $4.99 in cash and 0.4438 shares of FNB Corp. common stock, the overall conversion of stock being limited to 65% of United shares. The merger will be accounted for using the purchase method of accounting for business combinations. Alamance Bank is expected to be merged with and into First National Bank in the first quarter of 2006. At September 30, 2005, United operated three offices through Alamance Bank and had approximately $144,000,000 in total assets, $107,000,000 in deposits and $10,000,000 in shareholders’ equity.

Integrity Financial Corporation

On September 18, 2005, the Corporation entered into a definitive merger agreement to acquire Integrity Financial Corporation (“Integrity”), headquartered in Hickory, North Carolina and the holding company for Catawba Valley Bank and First Gaston Bank. Under the terms of the agreement, Integrity will be merged with and into FNB Corp. Prior to the closing of the merger of Integrity into FNB Corp., Integrity’s two banks, Catawba Valley Bank and First Gaston Bank, will be merged together. The surviving bank in that merger is expected to merge into First National Bank as soon as practicable following the merger of the holding companies. The merger of the holding companies will be accounted for using the purchase method of accounting for business combinations and is subject to several conditions, including approval by the shareholders of Integrity and FNB Corp. and approval by applicable regulatory authorities. Upon satisfaction of these conditions, the merger of the holding companies is anticipated to close early in the second quarter of 2006. Integrity shareholders will receive 0.8743 shares of FNB Corp. common stock and $5.20 in cash for each share of Integrity common stock. At September 30, 2005, Integrity operated twelve offices through Catawba Valley Bank and five offices through First Gaston Bank and had approximately $666,000,000 in total assets, $546,000,000 in deposits and $67,000,000 in shareholders’ equity.

4.	Earnings Per Share (EPS)

Basic net income per share, or basic EPS, is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if the Corporation’s dilutive stock options were exercised. The numerator of the basic EPS computation is the same as the numerator of the diluted EPS computation for all periods presented. A reconciliation of the denominators of the basic and diluted EPS computations is as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2005	2004	2005	2004
Basic EPS denominator - Weighted average number of common shares outstanding	5,620,339	5,631,938	5,611,814	5,680,428
Dilutive share effect arising from assumed exercise of stock options	148,315	129,047	145,812	163,265

Diluted EPS denominator	5,768,654	5,760,985	5,757,626	5,843,693

For the three months ended September 30, 2005 and 2004, there were 158,122 and 168,293 stock options, respectively, that were antidilutive since the exercise price exceeded the average market price, and for the nine months ended September 30, 2005 and 2004, there were 211,719 and 169,930 stock options, respectively, that were antidilutive. These common stock equivalents were omitted from the calculations of diluted EPS for their respective periods.

5.	Stock Options

The Corporation accounts for awards under employee stock-based compensation plans using the intrinsic value method in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” and, accordingly, no compensation cost has been recognized for such awards in the consolidated financial statements. The pro forma effect on net income and earnings per share as if the compensation cost that would have been determined under the fair value method had been recorded in the consolidated financial statements, pursuant to the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123”, is disclosed as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
	(in thousands, except per share data)
Net income, as reported	$	2,559	$	2,284	$	7,137	$	4,352
Less: Stock-based compensation cost determined under fair value method, net of related tax effects		98		83		293		254

Net income, pro forma	$	2,461	$	2,201	$	6,844	$	4,098

Net income per share:
Basic:
As reported	$	.46	$	.41	$	1.27	$	.77
Pro forma		.44		.39		1.22		.72

Diluted:
As reported		.44		.40		1.24		.74
Pro forma		.43		.38		1.19		.70

Loans

Loans as presented are reduced by net deferred loan fees of $950,000, $991,000 and $990,000 at September 30, 2005, September 30, 2004 and December 31, 2004, respectively.

7.	Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
	(in thousands)
Balance at beginning of period	$	7,732	$	6,579	$	7,293	$	6,172
Charge-offs		450		202		1,594		3,006
Recoveries		298		99		647		305

Net loan charge-offs		152		103		947		2,701
Provision for loan losses		446		460		1,680		3,510
Allowance adjustment for loans sold		—		—		—		(45	)

Balance at end of period	$	8,026	$	6,936	$	8,026	$	6,936

8.	Supplementary Income Statement Information

Significant components of other expense were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
	(in thousands)
Advertising and marketing	$	236	$	212	$	710	$	584
Stationery, printing and supplies		201		157		616		508
Communications		140		133		424		422
Professional fees		207		160		462		499

9.	Postretirement Employee Benefit Plans

Information concerning the net periodic cost of the Corporation’s postretirement benefit plans is as follows:


	Three Months Ended September 30, 2005
	Pension Plan			Supplemental Executive Retirement Plan		Other Postretirement Defined Benefit Plans
	(in thousands)
Service cost	$	159		$	17	$	17
Interest cost		156			19		21
Expected return on plan assets		(207	)		—		—
Amortization of prior service cost		7			12		2
Amortization of transition obligation		—			—		5
Recognized net actuarial loss		38			5		3

Net periodic postretirement benefit cost	$	153		$	53	$	48


	Three Months Ended September 30, 2004
	Pension Plan			Supplemental Executive Retirement Plan		Other Postretirement Defined Benefit Plans
	(in thousands)
Service cost	$	137		$	18	$	14
Interest cost		146			17		19
Expected return on plan assets		(181	)		—		—
Amortization of prior service cost		28			12		3
Amortization of transition obligation		—			—		5
Recognized net actuarial loss		39			7		2

Net periodic postretirement benefit cost	$	169		$	54	$	43


	Nine Months Ended September 30, 2005
	Pension Plan			Supplemental Executive Retirement Plan		Other Postretirement Defined Benefit Plans
	(in thousands)
Service cost	$	477		$	51	$	51
Interest cost		468			57		63
Expected return on plan assets		(621	)		—		—
Amortization of prior service cost		21			36		6
Amortization of transition obligation		—			—		15
Recognized net actuarial loss		114			15		9

Net periodic postretirement benefit cost	$	459		$	159	$	144


	Nine Months Ended September 30, 2004
	Pension Plan			Supplemental Executive Retirement Plan		Other Postretirement Defined Benefit Plans
	(in thousands)
Service cost	$	425		$	48	$	44
Interest cost		436			50		57
Expected return on plan assets		(493	)		—		—
Amortization of prior service cost		82			35		7
Amortization of transition obligation		—			—		15
Recognized net actuarial loss		119			16		5

Net periodic postretirement benefit cost	$	569		$	149	$	128

Due to the significant $2,175,000 contribution made in 2004, the Corporation does not expect to contribute any funds to its pension plan in 2005. The other postretirement benefit plans are unfunded plans; and consequently, there are no plan assets or cash contribution requirements other than for the direct payment of benefits.

10.	Derivatives and Financial Instruments

Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), as amended by SFAS Nos. 137, 138 and 149, establishes accounting and reporting standards for derivative and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. Changes in the fair value of those derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the derivative is held and whether the derivative qualifies for hedge accounting.

In connection with its asset/liability management objectives, the Corporation in 2004 entered into an interest rate swap on a $7,000,000 Federal Home Loan Bank (FHLB) advance that converts the fixed rate cash flow exposure on the FHLB advance to a variable rate cash flow. As structured, the pay-variable, receive-fixed swap is evaluated as being a fair value hedge with no ineffectiveness; and, consequently, the difference in cash flows in each period between the variable rate interest payments that the Corporation makes and the fixed rate interest payments received is currently reported in earnings.

For the three months ended September 30, 2005 and 2004, the interest rate swap resulted in a net increase of $4,000 and a net reduction of $32,000, respectively, in the interest expense that would otherwise have been reported for the FHLB advance, and for the nine months ended September 30, 2005 and 2004, the interest rate swap resulted in net reductions of $14,000 and $81,000, respectively, in interest expense. The fair value of the swap at September 30, 2005 was recorded on the consolidated balance sheet as a liability in the amount of $266,000, offset by a valuation adjustment in the same amount to the FHLB advance.

The Corporation has also identified the following derivative instruments which were recorded on the consolidated balance sheet at September 30, 2005: commitments to originate fixed rate residential mortgage loans and forward sales commitments.

Dover Mortgage Company originates certain fixed rate residential mortgage loans with the intention of selling these loans. Between the time that Dover enters into an interest rate lock or a commitment to originate a fixed rate residential mortgage loan with a potential borrower and the time the closed loan is sold, the Corporation is subject to variability in market prices related to these commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to deliver loans into a mortgage-backed security. The commitments to originate fixed rate residential mortgage loans and the forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their fair value adjustments are recorded through the income statement in income from mortgage loan sales. The commitments to originate fixed rate residential mortgage loans totaled $24,939,000 at September 30, 2005, and the related forward sales commitments totaled 24,939,000. Loans held for sale by Dover Mortgage Company totaled $17,651,000 at September 30, 2005, and the related forward sales commitments totaled $17,651,000.

First National Bank had loans held for sale of $1,588,000 at September 30, 2005. Binding commitments of First National Bank for the origination of mortgage loans intended to be held for sale at September 30, 2005 were not material.

11.	Recently Adopted Accounting Pronouncements

In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 03-3, “Accounting for Loans or Certain Debt Securities Acquired in a Transfer” (“SOP 03-3”). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences relate to a deterioration of credit quality. SOP 03-3 also prohibits companies from “carrying over” or creating a valuation allowance in the initial accounting for loans acquired that meet the scope criteria of SOP 03-3. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. The Corporation adopted the provisions of SOP 03-3 on January 1, 2005 with no effect on its consolidated financial statements.

On March 9, 2004, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (“SAB No. 105”). SAB No. 105 provides recognition guidance for entities that issue loan commitments that are required to be accounted for as derivative instruments. SAB No. 105 indicates that the expected future cash flows related to the associated servicing of the loan and any other internally developed intangible assets should not be considered when recognizing a loan commitment at inception or through its life. SAB No. 105 also discusses disclosure requirements for loan commitments and is effective for loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004. The Corporation adopted the provisions of SAB No. 105 effective April 1, 2004, resulting in a change in its accounting for loan commitments issued by Dover Mortgage Company. The application of SAB No. 105 creates a timing difference in the recognition of certain income recorded as income from mortgage loan sales, deferring the recognition from the current accounting period to a subsequent period. The estimated effect of adoption of SAB No. 105 on the results of operations for the three months ended June 30, 2004 and for the year ended December 31, 2004 was a $356,000 reduction in Dover’s income from mortgage loan sales.

12.	Business Segment Information

The Corporation is considered to have two principal business segments: the full-service subsidiary bank, First National Bank, and the mortgage banking subsidiary, Dover Mortgage Company. Dover originates, underwrites and closes loans for sale into the secondary market. Financial performance for each segment is detailed in the following tables. Included in the “Other” column are amounts for other corporate activities and eliminations of intersegment transactions.


	Three Months Ended September 30, 2005
	First National Bank		Dover Mortgage Company		Other			Total
	(in thousands)
Interest income	$	13,412	$	301	$	—		$	13,713
Interest expense		4,697		255		141			5,093

Net interest income		8,715		46		(141	)		8,620
Provision for loan losses		446		—		—			446

Net interest income after provision for loan losses		8,269		46		(141	)		8,174
Noninterest income		2,796		1,163		7			3,966
Noninterest expense		7,283		1,020		16			8,319

Income before income taxes		3,782		189		(150	)		3,821
Income taxes		1,237		76		(51	)		1,262

Net income	$	2,545	$	113	$	(99	)	$	2,559

Total assets	$	906,509	$	24,442	$	292		$	931,243
Net loans		682,885		17,651		—			700,536
Goodwill		12,583		3,776		—			16,359


	Three Months Ended September 30, 2004
	First National Bank		Dover Mortgage Company		Other			Total
	(in thousands)
Interest income	$	10,150	$	157	$	—		$	10,307
Interest expense		2,945		77		76			3,098

Net interest income		7,205		80		(76	)		7,209
Provision for loan losses		460		—		—			460

Net interest income after provision for loan losses		6,745		80		(76	)		6,749
Noninterest income		2,758		933		(39	)		3,652
Noninterest expense		6,226		873		(15	)		7,084

Income (loss) before income taxes		3,277		140		(100	)		3,317
Income taxes (benefit)		1,012		56		(35	)		1,033

Net income (loss)	$	2,265	$	84	$	(65	)	$	2,284

Total assets	$	829,134	$	16,441	$	(18	)	$	845,557
Net loans		624,184		9,988		—			634,172
Goodwill		12,583		3,752		—			16,335

	Nine Months Ended September 30, 2005
	First National Bank		Dover Mortgage Company		Other			Total
	(in thousands)
Interest income	$	37,456	$	753	$	—		$	38,209
Interest expense		12,598		598		389			13,585

Net interest income		24,858		155		(389	)		24,624
Provision for loan losses		1,680		—		—			1,680

Net interest income after provision for loan losses		23,178		155		(389	)		22,944
Noninterest income		8,151		2,996		(59	)		11,088
Noninterest expense		20,367		3,096		15			23,478

Income (loss) before income taxes		10,962		55		(463	)		10,554
Income taxes (benefit)		3,545		29		(157	)		3,417

Net income (loss)	$	7,417	$	26	$	(306	)	$	7,137

Total assets	$	906,509	$	24,442	$	292		$	931,243
Net loans		682,885		17,651		—			700,536
Goodwill		12,583		3,776		—			16,359


	Nine Months Ended September 30, 2004
	First National Bank		Dover Mortgage Company			Other			Total
	(in thousands)
Interest income	$	28,915	$	448		$	—		$	29,363
Interest expense		8,454		209			253			8,916

Net interest income		20,461		239			(253	)		20,447
Provision for loan losses		3,510		—			—			3,510

Net interest income after provision for loan losses		16,951		239			(253	)		16,937
Noninterest income		8,040		2,292			(146	)		10,186
Noninterest expense		18,658		2,620			(43	)		21,235

Income (loss) before income taxes		6,333		(89	)		(356	)		5,888
Income taxes (benefit)		1,684		(27	)		(121	)		1,536

Net income (loss)	$	4,649	$	(62	)	$	(235	)	$	4,352

Total assets	$	829,134	$	16,441		$	(18	)	$	845,557
Net loans		624,184		9,988			—			634,172
Goodwill		12,583		3,752			—			16,335

13.	Comprehensive Income

For the three months ended September 30, 2005 and 2004, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was $1,965,000 and $2,965,000, respectively.

For the nine months ended September 30, 2005 and 2004, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was $6,491,000 and $4,150,000, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion and analysis is to assist in the understanding and evaluation of the financial condition, changes in financial condition and results of operations of FNB Corp. (the “Parent Company”) and its wholly owned subsidiaries, First National Bank and Trust Company (“First National Bank”) and Dover Mortgage Company (“Dover”), collectively referred to as the “Corporation”. This discussion should be read in conjunction with the financial information appearing elsewhere in this report.

Overview

Description of Operations

FNB Corp. is a bank holding company with a full-service subsidiary bank, First National Bank, that offers a complete line of consumer, mortgage and business banking services, including loan, deposit, cash management, investment management and trust services, to individual and business customers. First National Bank has offices in Chatham, Guilford, Montgomery, Moore, Randolph, Richmond, Rowan and Scotland counties in North Carolina.

Additionally, FNB Corp. has a mortgage banking subsidiary, Dover Mortgage Company, that originates, underwrites and closes loans for sale into the secondary market. Dover operates mortgage production offices in North Carolina at Carolina Beach, Charlotte, Goldsboro, Greenville, Kernersville, Lake Norman, Leland, Raleigh and Wilmington.

For business segment information related to the financial performance of First National Bank and Dover Mortgage Company, see Note 12 to the Consolidated Financial Statements.

Merger Acquisition of United Financial, Inc. in 2005

On May 9, 2005, the Corporation entered into a definitive merger agreement to acquire United Financial, Inc. (“United”), holding company for Alamance Bank, headquartered in Graham, North Carolina. On September 27, 2005, the shareholders of United voted to approve the merger. The merger of the holding companies was effected on November 4, 2005 through the conversion of each share of United common stock, at the election of the shareholder, into either: (1) $14.25 in cash, (2) 0.6828 shares of FNB Corp. common stock, or (3) $4.99 in cash and 0.4438 shares of FNB Corp. common stock, the overall conversion of stock being limited to 65% of United shares. The merger will be accounted for using the purchase method of accounting for business combinations. Alamance Bank is expected to be merged with and into First National Bank in the first quarter of 2006. At September 30, 2005, United operated three offices through Alamance Bank and had approximately $144,000,000 in total assets, $107,000,000 in deposits and $10,000,000 in shareholders’ equity.

Pending Merger for Acquisition of Integrity Financial Corporation

merger is expected to merge into First National Bank as soon as practicable following the merger of the holding companies. The merger of the holding companies will be accounted for using the purchase method of accounting for business combinations and is subject to several conditions, including approval by the shareholders of Integrity and FNB Corp. and approval by applicable regulatory authorities. Upon satisfaction of these conditions, the merger of the holding companies is anticipated to close early in the second quarter of 2006. Integrity shareholders will receive 0.8743 shares of FNB Corp. common stock and $5.20 in cash for each share of Integrity common stock. At September 30, 2005, Integrity operated twelve offices through Catawba Valley Bank and five offices through First Gaston Bank and had approximately $666,000,000 in total assets, $546,000,000 in deposits and $67,000,000 in shareholders’ equity.

Primary Financial Data for 2005

The Corporation’s earnings were higher in the three and nine months ended September 30, 2005 compared to the same periods of 2004, and sharply higher in comparing nine-month periods due largely to the effect on 2004 results of certain significant factors discussed below. Earnings were $2,559,000 in the third quarter of 2005, a 12.0% increase from earnings of $2,284,000 in the 2004 third quarter. Basic earnings per share increased from $.41 to $.46 and diluted earnings per share increased from $.40 to $.44. For the first nine months of 2005, earnings amounted to $7,137,000, which represents a 64.0% increase from earnings of $4,352,000 in the same period of 2004. Basic earnings per share in comparing nine-month periods increased from $.77 to $1.27 and diluted earnings per share increased from $.74 to $1.24. Total assets were $931,243,000 at September 30, 2005, up 10.1% from September 30, 2004 and 7.9% from December 31, 2004. Loans amounted to $708,562,000 at September 30, 2005, increasing 10.5% from September 30, 2004 and 6.6% from December 31, 2004. Total deposits were up 12.5% from September 30, 2004 and 9.4% from December 31, 2004, amounting to $721,773,000 at September 30, 2005. The comparison of loans outstanding was affected by fluctuations in the balance of loans held for sale which was higher at September 30, 2005 compared to September 30, 2004 and December 31, 2004 by $7,824,000 and $7,591,000, respectively.

Significant Factors Affecting Earnings in 2005 and 2004

Earnings were negatively impacted in the first nine months of 2004 by a $1,975,000 increase in the provision for loan losses, the third quarter increase being $5,000, as compared to the same period in 2003. The increase in the provision for the first nine months of 2004 resulted largely from the $2,780,000 provision recorded in the 2004 second quarter which exceeded the 2003 second quarter provision by $1,950,000. Actual loan charge-offs in the 2004 second quarter amounted to $2,574,000. The determination of the second quarter provision for loan losses took into account the actual charge-offs, the significant growth in loans held for investment during the second quarter, and the level of nonperforming loans, which increased to $7,026,000 at June 30, 2004 compared to $5,725,000 at March 31, 2004. Nonperforming loans amounted to $6,062,000 at September 30, 2004.

In 2005, the provision for loan losses was below the level of 2004 by $1,830,000 in comparing nine-month periods, by $1,916,000 in comparing second quarter periods and by $14,000 in comparing third quarter periods. The provision for loan losses was affected in the second quarter of 2005 by the adoption of new regulatory guidance on the accounting for courtesy overdraft programs which resulted in a $324,000 provision increase. As a result of this same regulatory guidance, however, the effect of the provision increase was partially offset by a $156,000 increase in income from service charges on deposit accounts. In periods subsequent to the second quarter of 2005, the regulatory guidance on accounting for courtesy overdraft programs will have a continuing effect on the results of operations by increasing the level of both the provision for loan losses and income from service charges on deposit accounts, although these effects should tend to be offsetting with only a minor impact on net income.

Prior to mid-2004, earnings had been affected for an extended period by historically low interest rates produced by the Federal Reserve’s stimulative monetary policy. Commencing June 29, 2004, however, the Federal Reserve implemented a tightening policy that has resulted in eleven one-quarter percent increases in the prime rate, bringing it to a level of 6.75% at September 30, 2005. These increases are working to improve the yield on earning assets, although the cost of funds is being impacted by the general increase in interest rates. Net interest income increased $4,177,000 or 20.4% in the first nine months of 2005 compared to the same period in 2004, reflecting the effect of a 10.2% increase in the level of average earning assets coupled with an increase in the net interest margin, stated on a taxable equivalent basis, from 3.83% in 2004 to 4.15% in 2005. In comparing third quarter periods, net interest income increased $1,411,000 or 19.5%, reflecting a 9.7% increase in average earning assets and an increase in the net interest margin from 3.94% to 4.24%.

The comparison of noninterest income between 2005 and 2004, which increased $314,000 or 8.6% in comparing second quarter periods and $902,000 or 8.9% in comparing nine-month periods, was specifically affected by the following factors:

•

The adoption of SAB No. 105 in the second quarter of 2004 reduced Dover’s income from mortgage loan sales as discussed above.

•

Income from mortgage loan sales benefited in the first quarter of 2004 as a result of the $233,000 in income from the sale by First National Bank of 1-4 family residential mortgage loans totaling $12,535,000 that were previously classified as loans held for investment at December 31, 2003 but transferred to loans held for sale in the 2004 first quarter.

•

There has been a general increase in income from mortgage loan sales in 2005 compared to 2004, exclusive of the effect of adoption of SAB No. 105 in the second quarter of 2004.

•

The adoption in the second quarter of 2005 of new regulatory guidance on the accounting for courtesy overdraft programs is resulting in an increase in income from service charges on deposit accounts as discussed above.

Noninterest expense increased $1,235,000 or 17.4% in the third quarter of 2005 compared to the same period of 2004 and increased $2,243,000 or 10.6% in comparing nine-month periods. This increase primarily resulted from a higher level of compensation expense, due in part to increased incentive compensation and the higher level of mortgage loan sales activity.

Critical Accounting Policies

The Corporation’s significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2004. Of these significant accounting policies, the Corporation considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires management’s most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Corporation has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporation’s assessments may be impacted in future periods by changes in economic conditions, the results of regulatory examinations, and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Corporation’s allowance for loan losses and related matters, see “Asset Quality”

Earnings Review

The Corporation’s net income increased $275,000 or 12.0% in the third quarter of 2005 compared to the same period of 2004 and increased $2,785,000 or 64.0% in comparing nine-month periods. In general, earnings were impacted most significantly in the third quarter of 2005 by increases of $1,411,000 or 19.6% in net interest income and $314,000 in noninterest income, which gains were significantly offset by a $1,235,000 increase in noninterest expense. Earnings for first nine months of 2005 were impacted by a $1,830,000 decrease in the provision for loan losses and by increases of $4,177,000 or 20.4% in net interest income and $902,000 in noninterest income, which gains were offset to an extent by a $2,243,000 increase in noninterest expense. Certain factors specifically affecting the elements of income and expense and the comparability of operating results for the first nine months and third quarter periods of 2005 and 2004 were discussed in the “Overview – Significant Factors Affecting Earnings in 2005 and 2004”.

On an annualized basis, return on average assets increased from 0.71% in the first nine months of 2004 to 1.06% in the first nine months of 2005. Return on average shareholders’ equity increased from 7.04% to 11.17% in comparing the same periods. In comparing third quarter periods, return on average assets improved from 1.10% to 1.12% and return on average shareholders’ equity improved from 11.25% to 11.79%. Return on tangible assets and equity (calculated by deducting average goodwill from average assets and from average equity) for the first nine months of 2005 amounted to 1.08% and 13.82%, respectively, and for the 2005 third quarter amounted to 1.14% and 14.53%.

Net Interest Income

Net interest income is the difference between interest income, principally from loans and investments, and interest expense, principally on customer deposits. Changes in net interest income result from changes in interest rates and in the volume, or average dollar level, and mix of earning assets and interest-bearing liabilities.

Net interest income was $24,624,000 in the first nine months of 2005 compared to $20,447,000 in the same period of 2004. This increase of $4,177,000 or 20.4% resulted primarily from a 10.2% increase in the level of average earning assets coupled with an improvement in the net yield on earning assets, or net interest margin, from 3.83% in the first nine months of 2004 to 4.15% in the same period of 2005. In comparing third quarter periods, net interest income increased $1,411,000 or 19.5% reflecting a 9.7% increase in average

earning assets and an increase in the net interest margin from 3.94% to 4.24%. On a taxable equivalent basis, the increase in net interest income in the first nine months and third quarter of 2005 were $4,075,000 and $1,378,000, respectively, reflecting changes in the relative mix of taxable and non-taxable earning assets in each period.

Table 1 on page 32 and Table 2 on page 33 set forth for the periods indicated information with respect to the Corporation’s average balances of assets and liabilities, as well as the total dollar amounts of interest income (taxable equivalent basis) from earning assets and interest expense on interest-bearing liabilities, resultant rates earned or paid, net interest income, net interest spread and net yield on earning assets. Net interest spread refers to the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. Net yield on earning assets, or net interest margin, refers to net interest income divided by average earning assets and is influenced by the level and relative mix of earning assets and interest-bearing liabilities. Changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are also analyzed in Tables 1 and 2. Volume refers to the average dollar level of earning assets and interest-bearing liabilities.

Changes in the net interest margin and net interest spread tend to correlate with movements in the prime rate of interest. There are variations, however, in the degree and timing of rate changes, compared to prime, for the different types of earning assets and interest-bearing liabilities.

Following the significant declines in 2001, interest rates tended to stabilize, until mid-2004, in a generally low-rate environment for rates both earned and paid by the Corporation. After reductions in the prime rate totaling 4.75% in 2001, there were additional rate cuts of .50% in November 2002 and .25% in June 2003, resulting in the prime rate of 4.00% that was effective through June 30, 2004. Due to concern about increasing inflationary pressures, the Federal Reserve took action to raise the level of interest rates at the end of June 2004, causing the prime rate to increase to 4.25% in July 2004. Four additional rate increases of 25 basis points each during the second six months of 2004 and six more such rate increases in 2005 have raised the prime rate to the 6.75% level at September 30, 2005. The prime rate averaged 6.99% in 2001, falling to 4.67% in 2002 and 4.12% in 2003 and rising to 4.33% in 2004.

The Corporation’s net interest margin and net interest spread were negatively impacted in 2003 due in part to the prime rate reductions in November 2002 and June 2003 but also because of the cumulative effect of the reductions in yields on fixed rate earning assets over an extended period. While there was some continuing erosion of the margin and spread in the first six months of 2004, the subsequent prime rate increases have had a positive effect on the margin and spread.

The prime rate averaged 6.43% in the first nine months of 2005 compared to 4.38% in the first nine months of 2004. The prime rate averaged 5.88% in the second quarter of 2005 compared to 4.00% in the second quarter of 2004. The net interest spread, in comparing nine-month periods, increased by 23 basis points from 3.61% in 2004 to 3.84% in 2005, reflecting the effect of an increase in the average total yield on earning assets that more than offset the increase in the average rate paid on interest-bearing liabilities, or cost of funds. The yield on earning assets increased by 93 basis points from 5.43% in 2004 to 6.36% in 2005, while the cost of funds increased by 70 basis points from 1.82% to 2.52%. In comparing third quarter periods, the net interest spread increased by 20 basis points from 3.71% to 3.91%, as the yield on earning assets increased by 111 basis points while the cost of funds increased by 91 basis points.

Provision for Loan Losses

This provision is the charge against earnings to provide an allowance or reserve for probable losses inherent in the loan portfolio. The amount of each period’s charge is affected by several considerations including management’s evaluation of various risk factors in determining the adequacy of the allowance (see “Asset Quality”), actual loan loss experience and loan portfolio growth. Earnings were positively impacted in the first nine months, second quarter and third quarter of 2005 by reductions in the provision for loan losses of $1,830,000, 1,916,000 and $14,000, respectively. The provision for loan losses was affected in the second quarter of 2005 by the adoption of new regulatory guidance on the accounting for courtesy overdraft programs which resulted in a $324,000 provision increase. Further effects from adoption of the new regulatory guidance are discussed in the “Overview – Significant Factors Affecting Earnings in 2005 and 2004”.

As a prior year comparison, earnings were negatively impacted in the first nine months of 2004 by a $1,975,000 increase in the provision for loan losses, the third quarter increase being $5,000, as compared to the same period in 2003. The increase in the provision for the first nine months of 2004 resulted largely from the $2,780,000 provision recorded in the 2004 second quarter which exceeded the 2003 second quarter provision by $1,950,000. Actual loan charge-offs in the 2004 second quarter amounted to $2,574,000. The determination of the second quarter provision for loan losses took into account the actual charge-offs, the significant growth in loans held for investment during the second quarter, and the level of nonperforming loans, which increased to $7,026,000 at June 30, 2004 compared to $5,725,000 at March 31, 2004. Nonperforming loans amounted to $6,062,000 at September 30, 2004.

The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.16% at September 30, 2005, 1.10% at September 30, 2004 and 1.12% at December 31, 2004. The allowance percentage has increased based on the results from application of the allowance model that assigns reserves to various components of the loan portfolio in order to provide for probable inherent losses.

Noninterest Income

Noninterest income for the first nine months and third quarter of 2005 increased $902,000 or 8.9% and $314,000 or 8.6%, respectively, compared to the same periods in 2004, due largely to increases of $595,000 and $224,000, respectively, in income from mortgage loan sales as discussed in the “Overview – Significant Factors Affecting Earnings in 2005 and 2004”. By similar comparison, there were significant increases of $408,000 and $166,000, respectively, in service charges on deposit accounts that were due mainly to the adoption in the second quarter of 2005 of new regulatory guidance on the accounting for courtesy overdraft programs as discussed in the “Overview – Significant Factors Affecting Earnings in 2005 and 2004”. The decrease in income from trust and investment services was largely related to the general decrease in the volume of sales of annuity products.

Noninterest Expense

Noninterest expense was $2,243,000 or 10.6% higher in the first nine months of 2005 compared to the same period in 2004 and for the third quarter was $1,235,000 or 17.4% higher, due primarily to increased compensation expense related in part to increased incentive compensation and the higher level of mortgage loan sales activity. Additionally, personnel expense was generally impacted in 2005 by increased staffing requirements, normal salary adjustments and higher costs of fringe benefits. The level of other expense has been favorably impacted in 2005 by reduced expenses related to credit administration and foreclosed properties.

Income Taxes

The effective income tax rate increased from 26.1% in the first nine months of 2004 to 32.4% in the same period of 2005 due principally to the significant increase in the ratio of taxable to non-taxable income.

Liquidity

Liquidity for First National Bank refers to its continuing ability to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds to the Parent Company for payment of dividends, debt service and other operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks, (b) the outstanding balance of federal funds sold, (c) lines for the purchase of federal funds from other banks, (d) the line of credit established at the Federal Home Loan Bank, less charges against that line for existing advances and letters of credit used to secure public funds on deposit, and (e) the investment securities portfolio. All debt securities are of investment grade quality and, if the need arises, can be promptly liquidated on the open market or pledged as collateral for short-term borrowing.

Consistent with the general approach to liquidity, loans and other assets of First National Bank are based primarily on a core of local deposits and First National Bank’s capital position. To date, the steady increase in deposits, retail repurchase agreements and capital, supplemented by Federal Home Loan Bank advances and a modest amount of brokered deposits, has been adequate to fund loan demand in First National Bank’s market area, while maintaining the desired level of immediate liquidity and a substantial investment securities portfolio available for both immediate and secondary liquidity purposes. It is anticipated that funding sources in the future will include an increased use of brokered deposits and, additionally, institutional deposits obtained from secure websites on the internet.

Liquidity for Dover Mortgage Company refers to its continuing ability to fund mortgage loan commitments, pay operating expenses and provide funds to the Parent Company for payment of dividends, debt service and other operational requirements. Liquidity is principally available from a line of credit with another financial institution.

Commitments, Contingencies and Off-Balance Sheet Risk

In the normal course of business, various commitments are outstanding that are not reflected in the consolidated financial statements. Significant commitments at September 30, 2005 are discussed below.

Commitments by First National Bank to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. At September 30, 2005, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $207,659,000. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower.

fixed swap is evaluated as being a fair value hedge with no ineffectiveness; and, consequently, the difference in cash flows in each period between the variable rate interest payments that the Corporation makes and the fixed rate interest payments received is currently reported in earnings.

First National Bank issues standby letters of credit whereby it guarantees the performance of a customer to a third party if a specified triggering event or condition occurs. The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee. All standby letters of credit provide for recourse against the customer on whose behalf the letter of credit was issued, and this recourse may be further secured by a pledge of assets. The maximum potential amount of undiscounted future payments related to standby letters of credit was $6,225,000 at September 30, 2005 and $6,410,000 at September 30, 2004. Due to insignificance, the Corporation has recorded no liability at September 30, 2005 for the current carrying amount of the obligation to perform as a guarantor.

Dover Mortgage Company originates certain fixed rate residential mortgage loans with the intention of selling these loans. Between the time that Dover enters into an interest rate lock or a commitment to originate a fixed rate residential mortgage loan with a potential borrower and the time the closed loan is sold, the Corporation is subject to variability in market prices related to these commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to deliver loans into a mortgage-backed security. The commitments to originate fixed rate residential mortgage loans and the forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their fair value adjustments are recorded through the income statement in income from mortgage loan sales. The commitments to originate fixed rate residential mortgage loans totaled $24,939,000 at September 30, 2005, and the related forward sales commitments totaled $24,939,000. Loans held for sale by Dover Mortgage Company totaled $17,651,000 at September 30, 2005, and the related forward sales commitments totaled $17,651,000.

As of September 30, 2005, the Corporation did not have any special purpose entities or other similar forms of off-balance sheet financing. See “Business Development Matters” concerning the issuance of trust preferred securities on November 4, 2005.

Asset/Liability Management and Interest Rate Sensitivity

One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps; however, this method addresses only the magnitude of timing differences and does not address earnings or

market value. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios in order to more accurately measure interest rate risk.

The Corporation’s balance sheet was asset-sensitive at September 30, 2005. An asset-sensitive position means that, for cumulative gap measurement periods of one year or less, there are more assets than liabilities subject to immediate repricing as market rates change. Because immediately rate sensitive assets exceed rate sensitive interest-bearing liabilities, the earnings position could improve in a rising rate environment and could deteriorate in a declining rate environment, depending on the correlation of rate changes in these two categories. Included in interest-bearing liabilities subject to rate changes within 90 days is a portion of the interest-bearing demand, savings and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators.

Capital Adequacy

Under guidelines established by the Board of Governors of the Federal Reserve System, capital adequacy is currently measured for regulatory purposes by certain risk-based capital ratios, supplemented by a leverage capital ratio. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier 1, Tier 2 and Tier 3, as a percentage of risk-weighted assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various off-balance sheet exposures. Tier 1 capital consists primarily of common shareholders’ equity and qualifying amounts of perpetual preferred stock and trust preferred securities, net of goodwill and other disallowed intangible assets. Tier 2 capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible debt, preferred stock, trust preferred securities and the allowance for loan losses. Tier 3 capital, applicable only to financial institutions subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institution’s ongoing trading activities. At September 30, 2005, FNB Corp. and First National Bank were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital. Under current requirements, the minimum total capital ratio is 8.00% and the minimum Tier 1 capital ratio is 4.00%. At September 30, 2005, FNB Corp. and First National Bank had total capital ratios of 10.17% and 11.37%, respectively, and Tier 1 capital ratios of 9.11% and 10.30%.

The leverage capital ratio, which serves as a minimum capital standard, considers Tier 1 capital only and is expressed as a percentage of average total assets for the most recent quarter, after reduction of those assets for goodwill and other disallowed intangible assets at the measurement date. As currently required, the minimum leverage capital ratio is 4.00%. At September 30, 2005, FNB Corp. and First National Bank had leverage capital ratios of 7.72% and 8.85%, respectively.

First National Bank is also required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. To be categorized as well-capitalized, a bank must have a minimum ratio for total capital of 10.00%, for Tier 1 capital of 6.00% and for leverage capital of 5.00%. As noted above, First National Bank met all of those ratio requirements at September 30, 2005 and, accordingly, is well-capitalized under the regulatory framework for prompt corrective action.

Balance Sheet Review

Total assets at September 30, 2005 were $85,686,000 or 10.1% higher than at September 30, 2004 and were $68,352,000 or 7.9% higher than at December 31, 2004. By similar comparison, deposits were

ahead by $80,070,000 or 12.5% and $62,229,000 or 9.4%. The level of total assets is directly affected by the level of loans held for sale which are largely supported by borrowings obtained strictly for this purpose. At September 30, 2005, loans held for sale amounted to $19,239,000 compared to $11,415,000 at September 30, 2004 and $11,648,000 at December 31, 2004. Consequently, the growth in assets exclusive of the change in loans held for sale was below the amounts indicated above by $7,824,000 and $7,591,000, respectively. Average assets increased 9.8% in the first nine months of 2005 compared to the same period of 2004, while average deposits increased 11.6%, the third quarter increases being 9.5% and 11.3%, respectively.

Investment Securities

Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. In general, because of loan funding needs in 2004, proceeds from investment maturities and calls were largely diverted to this purpose through approximately the first nine months of that year. Subsequent to that time, however, the level of investment securities has remained approximately the same. The level of investment securities was increased $1,759,000 or 1.4% during the twelve-month period ended September 30, 2005. The net increase in investment securities during the first nine months of 2005 was $517,000 or 0.4%. Investable funds not otherwise utilized are temporarily invested as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs.

Loans

The Corporation’s primary source of revenue and largest component of earning assets is the loan portfolio. Loans increased $67,454,000 or 10.5% during the twelve-month period ended September 30, 2005. The net loan increase during the first nine months of 2005 was $43,808,000 or 6.6%. Due to the relatively higher level of loans held for sale at September 30, 2005 compared to September 30, 2004 and December 31, 2004, as noted above in the “Balance Sheet Review”, the growth in loans identified as held for investment was somewhat lower than the increases reported for total loans, amounting to $59,630,000 for the twelve months ended September 30, 2005 and $36,217,000 for the first nine months of 2005. Average loans were $90,530,000 or 15.1% higher in the first nine months of 2005 than in the same period of 2004 and were $79,866,000 or 12.8% higher in the third quarter comparison. The ratio of average loans to average deposits, in comparing nine-month periods, increased from 97.2% in 2004 to 100.3% in 2005. The ratio of loans to deposits at September 30, 2005 was 98.2%.

Loan growth during the twelve-month period ended September 30, 2005 and also in the first nine months of 2005 was primarily due to increases in the portfolios related to construction loans and commercial and other real estate loans. The current composition of the loan portfolio has been affected by the circumstances noted in the following discussion. In both 2004 and 2003, loans grew significantly, following an extended period in which the level of the entire loan portfolio had been adversely impacted by the general slowdown of the economy. In particular, the portfolios related to construction loans and commercial and other real estate loans experienced significant gains in each year. Following a gain in 2003, the commercial and agricultural loan portfolio declined in 2004 and has continued to decline in 2005. The balance of the 1-4 family residential mortgage loan portfolio has been affected by the high level of refinancing activity that commenced in 2001 and extended through approximately the end of 2003, especially since many refinanced loans that were previously included in the “held for investment” category were sold as part of the refinancing process, and was also affected, as discussed in the “Overview – Significant Items Affecting Earnings in 2004”, by the direct sale in the 2004 first quarter of certain loans previously classified as held for investment. The level of the 1-4 family residential mortgage portfolio has been bolstered by steady growth, especially in

2004 and 2003, in loan balances resulting from home equity lines of credit, although the growth in equity line balances has now slowed significantly as interest rates have increased and such balances have even declined in 2005.

Asset Quality

Management considers the asset quality of First National Bank to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. As part of the loan review function, a third party assessment group is employed to review the underwriting documentation and risk grading analysis.

In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to a review of individual loans, historical loan loss experience, the value and adequacy of collateral, and economic conditions in First National Bank’s market area. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review First National Bank’s allowance for loan losses. Such agencies may require First National Bank to recognize changes to the allowance based on their judgments about information available to them at the time of their examinations. Loans are charged off when in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance, and subsequent recoveries are added to the allowance.

At September 30, 2005, the Corporation had impaired loans which totaled $215,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $210,000. At September 30, 2004, the Corporation had impaired loans which totaled $321,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $134,000. At December 31, 2004 the Corporation had no loans that were considered to be impaired.

At September 30, 2005, nonperforming loans were $5,132,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $4,508,000 and $624,000, respectively. At September 30, 2004, nonperforming loans were $6,062,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $4,121,000 and $1,941,000, respectively. At December 31, 2004, nonperforming loans were $5,227,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $3,952,000 and $1,275,000, respectively.

The adequacy of the allowance for loan losses is measured on a quarterly basis against an allocation model that assigns reserves to various components of the loan portfolio in order to provide for probable inherent losses. Homogeneous pools of loans are segregated, and classifications of individual loans within certain of these pools are identified using risk grades derived from regulatory risk guidelines and additional internal parameters. Utilizing the trailing two-year historical loss experience of First National Bank and the assessment of portfolio quality and diversification trends and economic factors, a range of appropriate reserves is calculated for each classification and pool of loans. Allocated to each pool is a reserve amount within the calculated range, as supported by the historical loss ratios. Additional reserves are estimated and assigned to the most adversely classified loans based upon an individual analysis of present-value repayment and/or liquidation projections of each loan. A portion of the total reserve may be unallocated to any specific

segment of the loan portfolio, but will not exceed the upper limit of the total calculated reserve range when aggregated with allocated portions. The determination within the allowance model of allocated and unallocated components is not necessarily indicative of future losses or allocations. The entire balance of the allowance for loan losses is available to absorb losses in any segment of the loan portfolio.

Management believes the allowance for loan losses of $8,026,000 at September 30, 2005 is adequate to cover probable losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment.

Management’s judgments are based on numerous assumptions about current events which it believes to be reasonable, but which may or may not be valid. Thus there can be no assurance that loan losses in future periods will not exceed the current allowance or that future increases in the allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting the operating results of the Corporation.

The following table presents an analysis of the changes in the allowance for loan losses.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
	(in thousands)
Balance at beginning of period	$	7,732	$	6,579	$	7,293	$	6,172
Charge-offs		450		202		1,594		3,006
Recoveries		298		99		647		305

Net loan charge-offs		152		103		947		2,701
Provision for loan losses		446		460		1,680		3,510
Allowance adjustment for loans sold		—		—		—		(45	)

Balance at end of period	$	8,026	$	6,936	$	8,026	$	6,936

Deposits

The level and mix of deposits is affected by various factors, including general economic conditions, the particular circumstances of local markets and the specific deposit strategies employed. In general, broad interest rate declines tend to encourage customers to consider alternative investments such as mutual funds and tax-deferred annuity products, while interest rate increases tend to have the opposite effect.

The level and mix of deposits has been specifically affected by the following factors. Following an extended period in which balances had decreased due to interest rate declines, time deposits increased $70,124,000 during the twelve-month period ended September 30, 2005 and $47,572,000 during the first nine months of 2005 due in part to higher rates but also reflecting the acquisition of brokered time deposits and the increase in time deposits obtained from governmental units, these latter deposits amounting to $72,961,000, $64,383,000 and $67,260,000 at September 30, 2005, September 30, 2004 and December 31, 2004, respectively. Reflecting new deposit products and extensive promotional efforts, noninterest-bearing demand deposits had significant growth during the twelve-month period ended September 30, 2005, increasing $10,897,000 during that period and $11,343,000 during the first nine months of 2005. Interest-bearing transactional deposits, including demand, savings and money market deposits, registered a net decline of $951,000 during the twelve-month period ended September 30, 2005 and gained $3,314,000 during the first nine months of 2005. Separately considered, interest-bearing demand deposits grew $10,068,000 during the twelve-month period ended September 30, 2005 and $6,380,000 during the first nine months of 2005.

Business Development Matters

As discussed in the “Overview” and in Note 3 to the Consolidated Financial Statements, the Corporation completed a merger on November 4, 2005 for the acquisition of United Financial, Inc., holding company for Alamance Bank, headquartered in Graham, North Carolina, in a transaction that will be accounted for using the purchase method of accounting for business combinations.

In conjunction with the completion of the United merger, FNB Corp.’s wholly owned and newly formed subsidiary, FNB United Statutory Trust I, issued $20,000,000 of trust preferred securities on November 4, 2005. The proceeds of the trust preferred securities, along with the proceeds of $619,000 received by the trust from the issuance of its common securities to FNB Corp., were used to purchase

$20,619,000 of FNB Corp.’s junior subordinated debt securities. The proceeds of FNB Corp.’s junior subordinated debt securities are primarily being used to fund the $8,196,000 cash portion of the consideration due the former United shareholders and also to repay $10,528,000 of long-term indebtedness of FNB Corp. For risk-based capital purposes, the entire $20,000,000 issuance of trust preferred securities should qualify for inclusion as Tier 1 capital. The trust preferred securities bear interest at a variable rate based on the three-month LIBOR rate plus 1.37% and mature on December 15, 2035, but may be redeemed at the option of FNB Corp. beginning on December 15, 2010.

As discussed in the “Overview” and in Note 3 to the Consolidated Financial Statements, on September 18, 2005, the Corporation entered into a definitive merger agreement to acquire Integrity Financial Corporation (“Integrity”), headquartered in Hickory, North Carolina and the holding company for Catawba Valley Bank and First Gaston Bank. Under the terms of the agreement, Integrity will be merged with and into FNB Corp. Prior to the closing of the merger of Integrity into FNB Corp., Integrity’s two banks, Catawba Valley Bank and First Gaston Bank, will be merged together. The surviving bank in that merger is expected to merge into First National Bank as soon as practicable following the merger of the holding companies. The merger of the holding companies is anticipated to close early in the second quarter of 2006.

In August 2003, First National Bank received regulatory approval for relocation of its existing branch offices in Laurinburg and Randleman, North Carolina. The new Laurinburg office opened for business in July 2004, and the new Randleman office opened in August 2005. The Laurinburg office replaced a leased facility, while the Randleman office represents a move from an owned facility that is expected to be disposed of.

In January 2004, First National Bank received regulatory approval for establishment of its first branch office in Greensboro, North Carolina, resulting in the opening of a loan production office in February 2004. A full-service banking office in a leased facility replaced the loan production office in May 2005.

In November 2004, First National Bank received regulatory approval for the establishment of a second branch office in Greensboro, North Carolina. Construction of this full-service banking office is expected to be completed in early 2006.

In June 2005, First National Bank received regulatory approval for the establishment of a second branch office in Salisbury, North Carolina. Construction of this full-service banking office, which will be a leased facility, is expected to be completed in 2006.

In 2004, Dover Mortgage Company opened new mortgage production offices in North Carolina at Carolina Beach in April and at Leland in November. In 2005, Dover opened a new office in North Carolina at Kernersville in May.

Accounting Pronouncement Matters

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), “Accounting for Stock-Based Compensation” (“SFAS No. 123(R)”). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this Statement

are effective for the first annual reporting period that begins after June 15, 2005. Accordingly, the Corporation will adopt SFAS No. 123(R) commencing with the fiscal year ending December 31, 2006. If an adjustment to income had been made for the pro forma cost of employee stock option compensation as disclosed in Note 1 to the Consolidated Financial Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2004, net income for the fiscal years ended December 31, 2004, 2003 and 2002 would have decreased by approximately $340,000, $340,000, and $362,000, respectively. Accordingly, the adoption of SFAS No. 123(R) is expected to have a material effect on the Corporation’s consolidated financial statements.

Non-GAAP Measures

This Quarterly Report on Form 10-Q contains financial information determined by methods other than in accordance with generally accepted accounting principles (“GAAP”). The Corporation’s management uses these non-GAAP measures in their analysis of the Corporation’s performance. These non-GAAP measures exclude average goodwill from the calculations of return on average assets and return on average equity. Management believes presentations of financial measures excluding the impact of goodwill provide useful supplemental information that is essential to a proper understanding of the operating results of the Corporation’s core businesses. In addition, certain designated net interest income amounts are presented on a taxable equivalent basis. Management believes that the presentation of net interest income on a taxable equivalent basis aids in the comparability of net interest income arising from taxable and tax-exempt sources. These disclosures should not be viewed as a substitute for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Cautionary Statement for Purpose of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as “believes”, “expects”, “plans”, “projects”, “goals”, “estimates”, “may”, “could”, “should”, or “anticipates” or the negative thereof or other variations thereon of comparable terminology, or by discussions of strategy that involve risks and uncertainties. In addition, from time to time, the Corporation or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, various filings made by the Corporation with the Securities and Exchange Commission, or press releases or oral statements made by or with the approval of an authorized executive officer of the Corporation. Forward-looking statements are based on management’s current views and assumptions and involve risks and uncertainties that could significantly affect expected results. The Corporation wishes to caution the reader that factors, such as those listed below, in some cases have affected and could affect the Corporation’s actual results, causing actual results to differ materially from those in any forward-looking statement. These factors include: (i) expected cost savings from the mergers described in the Overview may not materialize within the expected time frame, (ii) revenues following the mergers may not meet expectations, (iii) costs or difficulties related to the integration of the businesses of FNB Corp., United and Integrity may be greater than anticipated, (iv) competitive pressure in the banking industry or in the corporation’s markets may increase significantly, (v) changes in the interest rate environment may reduce margins, (vi) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration, (vii) changes may occur in banking

legislation and regulation, (viii) changes may occur in general business conditions and (ix) changes may occur in the securities markets. Readers should also consider information on risks and uncertainties contained in the discussions of competition, supervision and regulation, and effect of governmental policies contained in the Corporation’s most recent Annual Report on Form 10-K.

Average Balances and Net Interest Income Analysis


	2005						2004						2005 Versus 2004
NINE MONTHS ENDED SEPTEMBER 30	Average Balance		Interest Income/ Expense		Average Rates Earned/ Paid		Average Balance		Interest Income/ Expense		Average Rates Earned/ Paid		Interest Variance due to (1)					Net Change
NINE MONTHS ENDED SEPTEMBER 30	Average Balance		Interest Income/ Expense		Average Rates Earned/ Paid		Average Balance		Interest Income/ Expense		Average Rates Earned/ Paid		Volume			Rate		Net Change
	(Taxable Equivalent Basis, Dollars in Thousands)
Earning Assets
Loans (2) (3)	$	689,704	$	34,338	6.65	%	$	599,174	$	25,447	5.66	%	$	4,121		$	4,770	$	8,891
Investment securities (2):
Taxable income		79,706		2,663	4.45			83,286		2,741	4.39			(116	)		38		(78	)
Non-taxable income		44,066		1,931	5.84			48,015		2,057	5.71			(172	)		46		(126	)
Other earning assets		8,365		176	2.81			15,198		119	1.05			(73	)		130		57

Total earning assets		821,841		39,108	6.36			745,673		30,364	5.43			3,760			4,984		8,744

Cash and due from banks		18,263						16,958
Goodwill		16,351						16,332
Other assets, net		39,735						36,869

Total Assets	$	896,190					$	815,832

Interest-Bearing Liabilities
Interest-bearing deposits:
Demand deposits	$	93,623		441	0.63		$	89,354		256	0.38			13			172		185
Savings deposits		51,775		121	0.31			54,404		128	0.31			(7	)		—		(7	)
Money market deposits		73,962		1,053	1.90			75,516		534	0.94			(11	)		530		519
Certificates and other time deposits		387,102		8,697	3.00			323,760		5,507	2.27			1,207			1,983		3,190
Retail repurchase agreements		16,842		322	2.55			15,914		98	0.82			6			218		224
Federal Home Loan Bank advances		68,086		1,955	3.84			68,307		1,880	3.67			(6	)		81		75
Federal funds purchased		457		9	2.53			4,422		51	1.52			(62	)		20		(42	)
Other borrowed funds		29,931		987	4.41			22,108		462	2.78			198			327		525

Total interest-bearing liabilities		721,778		13,585	2.52			653,785		8,916	1.82			1,338			3,331		4,669

Noninterest-bearing demand deposits		81,454						73,306
Other liabilities		7,763						6,357
Shareholders’ equity		85,195						82,384

Total Liabilities and Shareholders’ Equity	$	896,190					$	815,832

Net Interest Income and Spread			$	25,523	3.84	%			$	21,448	3.61	%	$	2,422		$	1,653	$	4,075

Net Yield on Earning Assets					4.15	%					3.83	%

(1)	The mix variance, not separately stated, has been proportionally allocated to the rate and volume variances based on their absolute dollar amount.

(2)

Interest income and yields related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone are stated on a fully taxable equivalent basis, assuming a 34% federal tax rate and applicable state tax rate, reduced by the nondeductible portion of interest expense.

(3)	Nonaccrual loans are included in the average loan balance. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income.

Average Balances and Net Interest Income Analysis


	2005						2004						2005 Versus 2004
THREE MONTHS ENDED SEPTEMBER 30	Average Balance		Interest Income/ Expense		Average Rates Earned/ Paid		Average Balance		Interest Income/ Expense		Average Rates Earned/ Paid		Interest Variance due to (1)					Net Change
THREE MONTHS ENDED SEPTEMBER 30	Average Balance		Interest Income/ Expense		Average Rates Earned/ Paid		Average Balance		Interest Income/ Expense		Average Rates Earned/ Paid		Volume			Rate		Net Change
	(Taxable Equivalent Basis, Dollars in Thousands)
Earning Assets
Loans (2) (3)	$	704,245	$	12,403	6.99	%	$	624,379	$	9,072	5.78	%	$	1,263		$	2,068	$	3,331
Investment securities (2):
Taxable income		81,886		917	4.48			77,877		840	4.31			44			33		77
Non-taxable income		42,226		625	5.92			46,664		677	5.80			(66	)		14		(52	)
Other earning assets		7,000		59	3.31			12,769		42	1.32			(26	)		43		17

Total earning assets		835,357		14,004	6.66			761,689		10,631	5.55			1,215			2,158		3,373

Cash and due from banks		19,357						16,964
Goodwill		16,357						16,335
Other assets, net		41,228						37,851

Total Assets	$	912,299					$	832,839

Interest-Bearing Liabilities
Interest-bearing deposits:
Demand deposits	$	93,551		165	0.70		$	89,235		92	0.41			5			68		73
Savings deposits		50,425		39	0.31			54,885		44	0.31			(5	)		—		(5	)
Money market deposits		75,168		395	2.08			79,235		199	1.00			(11	)		207		196
Certificates and other time deposits		397,440		3,300	3.30			329,007		1,886	2.27			444			970		1,414
Retail repurchase agreements		17,686		135	3.02			15,552		39	1.00			6			90		96
Federal Home Loan Bank advances		67,578		660	3.87			73,158		655	3.55			(52	)		57		5
Federal funds purchased		398		4	3.60			6,703		30	1.72			(41	)		15		(26	)
Other borrowed funds		31,601		395	4.96			20,972		153	2.89			100			142		242

Total interest-bearing liabilities		733,847		5,093	2.75			668,747		3,098	1.84			446			1,549		1,995

Noninterest-bearing demand deposits		83,597						76,471
Other liabilities		8,051						6,418
Shareholders’ equity		86,804						81,203

Total Liabilities and Shareholders’ Equity	$	912,299					$	832,839

Net Interest Income and Spread			$	8,911	3.91	%			$	7,533	3.71	%	$	769		$	609	$	1,378

Net Yield on Earning Assets					4.24	%					3.94	%

(1)	The mix variance, not separately stated, has been proportionally allocated to the rate and volume variances based on their absolute dollar amount.

(2)

(3)	Nonaccrual loans are included in the average loan balance. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods.

The Corporation’s market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of the Corporation’s loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. The Corporation does not maintain a trading account nor is the Corporation subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Corporation’s asset/liability management function, which is discussed above in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Asset/Liability Management and Interest Rate Sensitivity”.

Management does not believe there has been any significant change in the overall analysis of financial instruments considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and estimated fair values, since the analysis prepared and presented in conjunction with the Form 10-K Annual Report for the fiscal year ended December 31, 2004.

Item 4. Controls and Procedures

As of September 30, 2005, the end of the period covered by this report, FNB Corp. carried out an evaluation under the supervision and with the participation of the company’s management, including FNB Corp.’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of FNB Corp.’s disclosure controls and procedures. In designing and evaluating the company’s disclosure controls and procedures, FNB Corp. and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and FNB Corp.’s management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by FNB Corp. in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. No significant change in the company’s internal control over financial reporting occurred during the quarterly period ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, FNB Corp.’s internal control over financial reporting. FNB Corp. reviews its disclosure controls and procedures, which may include its internal controls over financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness.

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


	Issuer Purchases of Equity Securities
Three Months Ended September 30, 2005	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
July 1 to July 31	800	$	20.49	800	300,000
August 1 to August 31	1,200		21.05	1,200	298,800
September 1 to September 30	—		—	—	298,800

Total	2,000		20.83	2,000	298,800

On July 28, 2004, the Corporation announced that the Board of Directors had authorized a program for the repurchase of up to 300,000 shares of common stock during the period commencing August 1, 2004 and ending July 31, 2005.

On July 21, 2005, the Corporation announced that the Board of Directors had authorized a program for the repurchase of up to 300,000 shares of common stock during the period commencing August 1, 2005 and ending July 31, 2006.

Item 6. Exhibits

Exhibits to this report are listed in the index to exhibits on pages 37, 38 and 39 of this report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	FNB Corp.
	(Registrant)

Date: November 8, 2005	By:	/s/ Jerry A. Little
		Jerry A. Little
		Treasurer and Secretary
		(Principal Financial and
		Accounting Officer)

INDEX TO EXHIBITS


Exhibit No.		Description of Exhibit
2.10		Agreement and Plan of Merger dated as of May 9, 2005 by and between the Registrant and United Financial, Inc., incorporated herein by reference to Exhibit 2.10 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 2005.

2.11		Agreement and Plan of Merger dated as of September 18, 2005 by and between the Registrant and Integrity Financial Corporation.

3.10		Articles of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form S-14 Registration Statement (No. 2-96498) filed March 16, 1985.

3.11		Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 10, 1988, incorporated herein by reference to Exhibit 19.10 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 1988.

3.12		Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 12, 1998, incorporated herein by reference to Exhibit 3.12 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 1998.

3.13		Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 23, 2003, incorporated herein by reference to Exhibit 3.13 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 2003.

3.20		Amended and Restated Bylaws of the Registrant, adopted July 21, 2005, incorporated herein by reference to Exhibit 3.20 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 2005.

4		Specimen of Registrant’s Common Stock Certificate, incorporated herein by reference to Exhibit 4 to Amendment No. 1 to the Registrant’s Form S-14 Registration Statement (No. 2-96498) filed April 19, 1985.

4.10		Indenture dated as of November 4, 2005, between FNB Corp. and U.S. Bank, National Association, as trustee, incorporated herein by reference to Exhibit 4.1 to the Registrant’s Form 8-K Current Report dated November 4, 2005.

4.20		Amended and Restated Declaration of Trust of FNB United Statutory Trust I dated as of November 4, 2005, among FNB Corp., as sponsor, U.S. Bank, National Association, as institutional trustee, and Michael C. Miller and Jerry A. Little, as administrators, incorporated herein by reference to Exhibit 4.2 to the Registrant’s Form 8-K Current Report dated November 4, 2005.


Exhibit No.		Description of Exhibit
10.10*		Form of Split Dollar Insurance Agreement dated as of November 1, 1987 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 19.20 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 1988.

10.11*		Form of Amendment to Split Dollar Insurance Agreement dated as of November 1, 1994 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 10.11 to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.

10.20*		Stock Compensation Plan as amended effective May 12, 1998, incorporated herein by reference to Exhibit 10.30 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 1998.

10.21*		Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrant’s Stock Compensation Plan, incorporated herein by reference to Exhibit 10.31 to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.

10.22*		Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrant’s Stock Compensation Plan, incorporated herein by reference to Exhibit 10.32 to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.

10.23*		FNB Corp. 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-105442).

10.24*		Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrant’s 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.24 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended September 30, 2003.

10.25*		Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrant’s 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.25 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2003.


Exhibit No.		Description of Exhibit
10.30*		Employment Agreement dated as of December 27, 1995 between First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10.50 to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended December 31, 1995.

10.31*		Carolina Fincorp, Inc. Stock Option Plan (assumed by the Registrant on April10, 2000), incorporated herein by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-54702).

10.32*		Employment Agreement dated as of April 10, 2000 between First National Bank and Trust Company and R. Larry Campbell, incorporated herein by reference to Exhibit 10.32 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2000.

10.33*		Nonqualified Supplemental Retirement Plan with R. Larry Campbell, incorporated herein by reference to Exhibit 10(c) to the Annual Report on Form 10-KSB of Carolina Fincorp, Inc. for the fiscal year ended June 30, 1997.

10.34*		Form of Change of Control Agreement between FNB Corp. and certain of its key employees and officers, incorporated herein by reference to Exhibit 10.35 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2003.

10.40		Guarantee Agreement dated as of November 4, 2005, by FNB Corp. for the benefit of the holders of trust preferred securities, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K Current Report dated November 4, 2005.

31.10		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.11		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Management contract, or compensatory plan or arrangement.

EX-2.11 2 dex211.htm AGREEMENT AND PLAN OF MERGER Agreement and Plan of Merger

Exhibit 2.11

AGREEMENT AND PLAN OF MERGER

by and between

FNB CORP.

and

INTEGRITY FINANCIAL CORPORATION

THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”) is entered into as of the 18^th day of September, 2005, by and between INTEGRITY FINANCIAL CORPORATION, a North Carolina corporation and registered bank holding company (“Integrity”), and FNB CORP., a North Carolina corporation and registered bank holding company (“FNB”);

W I T N E S S E T H:

WHEREAS, the parties hereto have agreed that it is in their mutual best interests and in the best interests of their respective shareholders for Integrity to be merged with and into FNB pursuant to a plan of merger (the “Plan of Merger”) in the form attached hereto as Schedule A, and the parties desire to provide for certain undertakings, conditions, representations, warranties and covenants in connection with the Merger (as defined in Section 1.1) and transactions contemplated hereby.

NOW, THEREFORE, in consideration of the premises, the mutual benefits to be derived from this Agreement, and of the representations, warranties, conditions, covenants and promises herein contained, and subject to the terms and conditions hereof, the parties hereto mutually agree as follows:

ARTICLE I. THE MERGER

1.1 Merger. Subject to the provisions of this Agreement and the Plan of Merger, as of the Effective Time (as defined in Section 1.10 hereof), Integrity shall be merged with and into FNB (the “Merger”), the separate corporate existence of Integrity shall cease, the corporate existence of FNB, as the surviving corporation in the Merger, shall continue under the laws of the State of North Carolina and, if FNB determines in its reasonable discretion that such name is available for its use, FNB shall change its name to “FNB United Corp.” FNB, as the surviving corporation in the Merger, is hereinafter sometimes referred to as the “Surviving Corporation.”

1.2 Effect of the Merger. At the Effective Time and by reason of the Merger, and in accordance with applicable law, all of the property, assets and rights of every kind and character of FNB and of Integrity including, without limitation, its stock in its wholly owned bank subsidiaries, Catawba Valley Bank (“CVB”) and First Gaston Bank of North Carolina (“FGB”), and all real, personal or mixed property, all debts due on whatever account, all other choses in

action and every other interest of or belonging to or due to Integrity, whether tangible or intangible, shall vest in the Surviving Corporation, and the Surviving Corporation shall succeed to all the rights, privileges, immunities, powers, purposes and franchises of a public or private nature of Integrity and FNB, all without any conveyance, assignment or further act or deed; and the Surviving Corporation shall become responsible for all of the liabilities, duties and obligations of every kind, nature and description of Integrity and FNB as of the Effective Time.

1.3 Articles of Incorporation, Bylaws and Management. The Articles of Incorporation and bylaws of FNB in effect at the Effective Time shall be the Articles of Incorporation and bylaws of the Surviving Corporation until thereafter amended in accordance with applicable laws. The officers and directors of FNB at the Effective Time shall continue to hold such offices and positions of the Surviving Corporation until removed as provided by law or until the election or appointment of their respective successors.

1.4 Conversion of Shares.

(a) Integrity Stock. Except as otherwise provided herein, at the Effective Time, all rights of Integrity’s shareholders with respect to all then outstanding shares of the common stock of Integrity, $1.00 par value per share (“Integrity Stock”), shall cease to exist, and the holders of shares of Integrity Stock shall cease to be, and shall have no further rights as, shareholders of Integrity. At the Effective Time, each such outstanding share of Integrity Stock (except for shares held, other than in a fiduciary capacity or as a result of debts previously contracted, by Integrity, FNB or any of their subsidiaries, which shall be canceled in the Merger) shall be converted, without any action on the part of the holder of such shares, into the right to receive the Merger Consideration (as defined in Section 1.5) in accordance with this Article I. Following the Effective Time, certificates representing shares of Integrity Stock outstanding at the Effective Time shall evidence only the right of the registered holder thereof to receive, and may be exchanged for, the Merger Consideration.

(b) Outstanding FNB Stock. Each share of common stock of FNB, par value $2.50 per share (“FNB Stock”), issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding and shall not be affected by the Merger.

1.5 Merger Consideration.

(a) Per Share Consideration. Subject to the provisions of this Article I, at the Effective Time each outstanding share of Integrity Stock (except for shares held, other than in a fiduciary capacity or as a result of debts previously contracted, by Integrity, FNB or any of their subsidiaries) shall cease to represent any interest (equity, shareholder or otherwise) in Integrity and shall automatically be converted exclusively into the right to receive $5.20 in cash, without interest, and a number of shares of FNB Stock equal to the product of 1.1209 (the “Exchange Ratio”) and 0.78. The amount of cash into which shares of Integrity Stock shall be converted pursuant to this Agreement is sometimes hereinafter referred to as “Cash Consideration,” and the number of shares of FNB Stock into which shares of Integrity Stock shall be converted pursuant to this Agreement is sometimes hereinafter referred to as “Stock Consideration.” The Cash Consideration and Stock Consideration are sometimes referred to herein collectively as the “Merger Consideration.” No share of Integrity Stock shall be deemed

to be outstanding or have any rights other than those set forth in this Section 1.5(a) after the Effective Time. The Exchange Ratio is subject to possible adjustment in accordance with Section 1.5(c) and/or Section 8.2(c) below.

(b) Fractional Shares. Notwithstanding any other provision of this Agreement, each holder of shares of Integrity Stock exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of FNB Stock (after taking into account all certificates delivered by such holder under Section 1.7(a) below, shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of a share of FNB Stock multiplied by the market value of one share of FNB Stock at the Effective Time. The market value of one share of FNB Stock at the Effective Time shall be the last sale price of FNB Stock on Nasdaq Stock Market, Inc. National Market System (“NASDAQ”) as reported by The Wall Street Journal or, if not reported thereby, any other authoritative source selected by FNB, on the last trading day preceding the Effective Time. No such holder will be entitled to dividends, voting rights, or any other rights as a shareholder in respect of any fractional shares.

(c) Anti-Dilution Provisions. In the event FNB changes the number of shares of FNB Stock issued and outstanding prior to the Effective Time as a result of a stock split, stock dividend, recapitalization, reclassification, combination, exchange of shares, or similar transaction with respect to such stock and the record date therefor (in the case of a stock dividend) or the effective date thereof (in the case of a stock split, recapitalization, reclassification, combination, exchange of shares, or similar transaction for which a record date is not established) shall be prior to the Effective Time, the Exchange Ratio shall be appropriately adjusted to reflect such change.

1.6 Closing Payment. As of the Effective Time, FNB shall deposit, or shall cause to be deposited, with Registrar and Transfer Company, in its capacity as the transfer agent of FNB Stock (the “Exchange Agent”), for the benefit of each holder of Integrity Stock for exchange in accordance with this Article I, (i) certificates representing the aggregate number of whole shares of FNB Stock to be issued as Stock Consideration, and (ii) the aggregate amount of cash to be delivered to holders of Integrity Stock as Cash Consideration and in lieu of any fractional shares, to be issued and paid pursuant to this Article I for outstanding shares of Integrity Stock (such certificates for shares of FNB Stock and such cash are referred to as the “Exchange Fund”). The Exchange Agent shall, pursuant to irrevocable instructions in accordance with this Article I, deliver the FNB Stock and cash contemplated to be issued with respect to Integrity Stock out of the Exchange Fund. The Exchange Fund shall not be used for any other purpose. The Exchange Agent shall invest any cash included in the Exchange Fund, as directed by FNB, on a daily basis. Any interest and other income resulting from such investments shall be paid to FNB.

1.7 Exchange of Shares.

(a) Exchange Procedures. After the Effective Time, FNB shall cause the Exchange Agent to mail to the shareholders of Integrity of record at the Effective Time transmittal materials and other appropriate written instructions (collectively, a “Transmittal Letter”) (which shall specify that delivery shall be effected, and risk of loss and title to the certificate representing shares of Integrity Stock prior to such Effective Time shall pass, only upon proper delivery of such certificates to the Exchange Agent and which shall be in such form

and have such other provisions as FNB may reasonably specify). After the Effective Time and upon the proper surrender of certificate(s) representing shares of Integrity Stock to the Exchange Agent, together with a properly completed and duly executed Transmittal Letter, the holder of such certificate(s) shall be entitled to receive in exchange therefor the number of shares of FNB Stock and the cash to which such holder is entitled hereunder (including any cash payments to which such holder is entitled hereunder in respect of rights to receive fractional shares and any dividends or other distributions to which such holder is entitled pursuant to Section 1.7(c)), subject to any required withholding of applicable taxes. Neither FNB nor the Exchange Agent shall be obligated to deliver any of such payments in cash or stock until such holder surrenders the certificate(s) representing such holder’s shares. The certificate(s) so surrendered shall be duly endorsed as the Exchange Agent may require. If there is a transfer of ownership of any shares of Integrity Stock not registered in the transfer records of Integrity, the Merger Consideration shall be issued to the transferee thereof if the certificates representing such Integrity Stock are presented to the Exchange Agent, accompanied by all documents required, in the reasonable judgment of FNB and the Exchange Agent, to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. Any portion of the Exchange Fund that remains undistributed to the holders of certificates representing Integrity Stock for six months after the Effective Time shall be delivered to FNB, upon demand, and any shareholders of Integrity who have not previously complied with the provisions of this Article I shall thereafter look only to FNB for payment of their claim for FNB Stock and cash and any dividends or distributions with respect to FNB Stock. Any portion of the Exchange Fund remaining unclaimed by holders of Integrity Stock five years after the Effective Time (or such earlier date immediately prior to such time as such portion would otherwise escheat to or become property of any government entity) shall, to the extent permitted by applicable law, become the property of FNB free and clear of any claims or interest of any person previously entitled therein. Any other provision of this Agreement notwithstanding, neither FNB nor the Exchange Agent shall be liable to any holder of shares of Integrity Stock for any amounts paid or properly delivered in good faith to a public official pursuant to any applicable abandoned property law.

(b) Lost Certificates. Any shareholder of Integrity whose certificate representing shares of Integrity Stock has been lost, destroyed, stolen or otherwise is missing shall be entitled to receive a certificate representing the shares of FNB Stock and/or any cash, including cash in lieu of fractional shares, to which he or she is entitled in accordance with and upon compliance with conditions reasonably imposed by the Exchange Agent or FNB (including, without limitation, a requirement that the shareholder provide a lost instruments indemnity bond in form, substance and amount reasonably satisfactory to the Exchange Agent and FNB).

(c) Rights of Former Integrity Shareholders. At the Effective Time, the stock transfer books of Integrity shall be closed as to holders of Integrity Stock immediately prior to the Effective Time and no transfer of Integrity Stock by any such holder shall thereafter be made or recognized. Until surrendered for exchange in accordance with the provisions of Section 1.7(a) of this Agreement, each certificate theretofore representing shares of Integrity Stock (other than shares to be canceled pursuant to Section 1.4(a) of this Agreement) shall from and after the Effective Time represent for all purposes only the right to receive the Merger Consideration. If, after the Effective Time, certificates representing Integrity Stock are presented to FNB or the Exchange Agent for any reason, they shall be cancelled and exchanged as

provided in this Article I. To the extent permitted by North Carolina law, former shareholders of record of Integrity shall be entitled to vote after the Effective Time at any meeting of shareholders of FNB the number of whole shares of FNB Stock into which their respective shares of Integrity Stock are converted, regardless of whether such holders have exchanged their certificates representing Integrity Stock for certificates representing FNB Stock in accordance with the provisions of this Agreement. Whenever a dividend or other distribution is declared by FNB on the FNB Stock, the record date for which is at or after the Effective Time, the declaration shall include dividends or other distributions on all shares of FNB Stock to be issued pursuant to the Merger, but beginning at the Effective Time no dividend or other distribution payable to the holders of record of FNB Stock as of any time subsequent to the Effective Time shall be delivered to the holder of any certificate representing shares of Integrity Stock issued and outstanding at the Effective Time until such holder surrenders such certificate for exchange as provided in Section 1.7(a) of this Agreement; provided, however, that upon surrender of such Integrity Stock certificate (or compliance with Section 1.7(b) of this Agreement), the FNB Stock certificate, together with all undelivered dividends or other distributions (without interest) and any cash payments to be paid for fractional share interests (without interest), shall be delivered and paid with respect to each share represented by such Integrity Stock certificate.

1.8 Treatment of Integrity Stock Options. (a) At the Effective Time, FNB shall assume each option to purchase Integrity Stock granted and outstanding under the Integrity Financial Corporation 1996 Incentive Stock Option Plan, as amended, the Integrity Financial Corporation 1997 Nonqualified Stock Option Plan, the FGB 1999 Incentive Stock Option Plan, the FGB 1999 Nonstatutory Stock Option Plan, the FGB Stock Option Plan or the Integrity Financial Corporation 1993 Stock Option Plan (collectively, the “Integrity Option Plan”), whether or not then exercisable, in accordance with the terms of the Integrity Option Plan and stock option agreement by which it is evidenced, except that from and after the Effective Time with respect to each such plan or agreement: (i) FNB shall be substituted for Integrity; (ii) the compensation committee of the FNB Board of Directors shall be substituted for the compensation committee of the Integrity Board of Directors administering the Integrity Option Plan; (iii) each stock option granted and outstanding under the Integrity Option Plan may be exercised solely for shares of FNB Stock; (iv) the number of shares of FNB Stock subject to each such stock option shall be the number of whole shares of FNB Stock (omitting any fractional share) determined by multiplying the number of shares of Integrity Stock subject to such stock option immediately prior to the Effective Time by the Exchange Ratio; and (v) the per share exercise price under each such stock option shall be adjusted by dividing the per share exercise price under each such stock option by the Exchange Ratio and rounding up to the nearest cent. In addition, each stock option which is an “incentive stock option” under the Integrity Option Plan shall be adjusted as required by Section 424 of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations promulgated thereunder so as to continue as an incentive stock option under Section 424(a) of the Code, and so as not to constitute a modification, extension, or renewal of the option, within the meaning of Section 424(h) of the Code. FNB and Integrity shall take all necessary steps to effectuate the foregoing provisions of this Section 1.8, including appropriate amendments to the Integrity Option Plan if necessary.

(b) As soon as practicable after the Effective Time, FNB shall deliver to each of the participants in the Integrity Option Plan an appropriate notice setting forth such participant’s rights pursuant thereto, and the grants pursuant to the Integrity Option Plan shall continue in

effect on the same terms and conditions (subject to the adjustments required by Section 1.8(a) after giving effect to the Merger). At or prior to the Effective Time, FNB shall take all corporate action necessary to reserve for issuance sufficient shares of FNB Stock for delivery upon exercise of the stock options assumed by it in accordance with this Section 1.8. Integrity hereby represents that the Integrity Option Plan in its current form complies with Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the “1934 Act”), as in effect as of the date hereof.

(c) As soon as practicable after the Effective Time, FNB will use its best efforts to cause the shares subject to options granted under the Integrity Option Plan prior to the Effective Time (or any substitute options) to be registered under the Securities Act of 1933, as amended (the “1933 Act”), on a Form S-8 (or equivalent successor form) registration statement.

1.9 Closing. The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of Schell Bray Aycock Abel & Livingston P.L.L.C. in Greensboro, North Carolina, or at such other place as FNB shall designate, on a date mutually agreeable to Integrity and FNB (the “Closing Date”) after the expiration of any and all required waiting periods following the effective date of all required approvals of the Merger by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the North Carolina Commissioner of Banks (the “Commissioner”) and any other governmental or regulatory authorities (as soon as practicable, but in no event to be more than 60 days following the expiration of all such required waiting periods). At the Closing, FNB and Integrity shall take such actions (including, without limitation, the delivery of certain closing documents and the execution of Articles of Merger under North Carolina law) as are required herein and as otherwise shall be required by law to consummate the Merger and cause it to become effective.

1.10 Effective Time. Subject to satisfaction or waiver of all conditions precedent set forth in this Agreement, the Merger shall become effective (the “Effective Time”) on the date and at the time on which Articles of Merger containing the Plan of Merger and the other provisions required by, and executed in accordance with applicable North Carolina and applicable federal law shall have been accepted for filing by the Secretary of State of the State of North Carolina (or such later time as may be specified in the Articles of Merger); provided, however, that unless otherwise mutually agreed upon by the parties hereto, the Effective Time shall in no event be more than ten days following the Closing Date.

1.11 Further Assurances. If at any time after the Effective Time FNB shall consider or be advised that any further deeds, assignments or assurances in law or any other actions are necessary, desirable or proper to vest, perfect or confirm of record or otherwise, in the Surviving Corporation, the title to any property or rights of Integrity acquired or to be acquired by reason of, or as a result of, the Merger, Integrity, its subsidiaries and their officers and directors shall execute and deliver all such proper deeds, assignments and assurances in law and do all things necessary, desirable or proper to vest, perfect or confirm title to such property or rights in FNB and otherwise to carry out the purpose of this Agreement, and the officers and directors of FNB are fully authorized and directed in the name of Integrity or otherwise to take any and all such actions.

ARTICLE II. REPRESENTATIONS AND WARRANTIES OF INTEGRITY

Except as otherwise specifically provided herein or as “Previously Disclosed” to FNB, Integrity hereby makes the following representations and warranties to FNB. (“Previously Disclosed” shall mean, as to Integrity, the disclosure of information in a letter delivered by Integrity to FNB specifically referring to this Agreement and arranged in sections corresponding to the sections, subsections and items of this Agreement applicable thereto, and which letter has been delivered prior to the execution of this Agreement. Information shall be deemed Previously Disclosed for the purpose of a given section, subsection or item of this Agreement only to the extent that a specific reference thereto is made in connection with disclosure of such information at the time of such delivery.)

2.1 Corporate Organization, Capacity and Authority.

(a) Organization. Integrity is a corporation duly organized and validly existing under the laws of the State of North Carolina and is registered with the Commissioner as a bank holding company and with the Federal Reserve Board as a bank holding company under the Bank Holding Company Act of 1956, as amended.

(b) Subsidiaries. Integrity has six wholly owned subsidiaries, as Previously Disclosed to FNB, which are sometimes referred to in this Agreement as the subsidiaries of Integrity. Other than the subsidiaries of Integrity Previously Disclosed to FNB, Integrity has no subsidiaries, direct or indirect, and does not own, directly or indirectly, any stock or other equity interest in any other corporation, service corporation, joint venture, partnership or other entity, except for equity issues reflected in Integrity’s investment portfolio and securities held in a fiduciary capacity.

(c) Organization of Subsidiaries. Each of the subsidiaries of Integrity is duly organized and validly existing under the laws of the state of its organization as Previously Disclosed to FNB, and all of the outstanding capital stock of each subsidiary is owned of record and beneficially, free and clear of all security interests and claims, by Integrity. All of the outstanding shares of capital stock of each of Integrity’s subsidiaries are duly authorized, validly issued, fully paid and nonassessable except, as to CVB and FGB, to the extent of assessability as set forth in N.C. Gen. Stat. § 53-42. Neither CVB nor FGB has received any notice of impairment from the Commissioner pursuant to N.C. Gen. Stat. § 53-42.

(d) Power and Authority. Each of Integrity and its subsidiaries has all requisite power and authority (corporate and other) to own, lease and operate its properties and to carry on its business as it is now being conducted, is duly qualified to do business and is in good standing in each other jurisdiction in which the character of the properties owned, leased or operated by it therein or in which the transaction of its business makes such qualification necessary, except where failure so to qualify would not have a Material Adverse Effect (as defined herein) on Integrity and its subsidiaries, and, is not transacting business or operating any properties owned or leased by it in violation of any provision of federal, state or local law or any rule or regulation promulgated thereunder, which violation would have a Material Adverse Effect on Integrity and its subsidiaries. For purposes of this Article II, “Material Adverse Effect” shall mean: (a) with respect to references to Integrity, any change in the business of Integrity that

is or could be materially adverse to the financial condition, results of operations, prospects, business, assets, investments, properties or operations of Integrity, or (b) with respect to references to Integrity and its subsidiaries, any change in the business of Integrity or its subsidiaries that is or could be materially adverse to the financial condition, results of operations, prospects, business, assets, loan portfolio, investments, properties or operations of Integrity and its subsidiaries considered as one enterprise.

(e) Constituent Documents. Integrity has previously delivered to FNB true, accurate and complete copies of the currently effective charter and bylaws or equivalent organizational documents of each of Integrity and its subsidiaries, including all amendments and proposed amendments thereto.

2.2 Capital Stock. The authorized capital stock of Integrity consists of 9,000,000 shares of common stock, $1.00 par value per share, of which 5,237,316 shares are issued and outstanding as of September 16, 2005, and 1,000,000 shares of preferred stock, no par value, of which no shares are issued and outstanding. Other than the Integrity Stock, Integrity has no outstanding class of capital stock. Each outstanding share of Integrity Stock has been duly authorized and validly issued, is fully paid and nonassessable, has been issued in compliance with applicable federal and state securities laws and has not been issued in violation of the preemptive rights of any shareholder. Except as Previously Disclosed to FNB, since December 31, 2004, (i) no cash, stock or other dividend or any other distribution with respect to the capital stock of Integrity or any of its subsidiaries has been declared, set aside or paid, and (ii) no shares of capital stock of Integrity have been purchased, redeemed or otherwise acquired, directly or indirectly, by Integrity and no agreements have been made to make any such purchase, redemption or acquisition.

2.3 Principal Shareholders. Except as Previously Disclosed, there are no persons or entities known to Integrity that own beneficially, directly or indirectly, more than 5% of the outstanding shares of Integrity Stock.

2.4 Convertible Securities, Options, Etc. Except for the Integrity Option Plan and the stock options granted thereunder, Integrity does not have any outstanding (i) securities or other obligations (including debentures or other debt instruments) which are convertible into shares of Integrity Stock or any other securities of Integrity, (ii) options, warrants, rights, calls or other commitments of any nature which entitle any person to receive or acquire any shares of Integrity Stock or any other securities of Integrity, or (iii) plan, agreement or other arrangement pursuant to which shares of Integrity Stock or any other securities of Integrity or options, warrants, rights, calls or other commitments of any nature pertaining thereto, have been or may be issued.

2.5 Authorization and Validity of Agreement. This Agreement has been duly and validly approved by Integrity’s Board of Directors. Subject only to approval of the Plan of Merger by the shareholders of Integrity, (i) Integrity has the corporate power and authority to execute and deliver this Agreement and to perform its obligations and agreements and carry out the transactions described herein, (ii) all corporate proceedings and approvals required to be taken to authorize Integrity to enter into this Agreement and to perform its obligations and agreements and to carry out the transactions described herein have been duly and properly taken,

and (iii) this Agreement constitutes the valid and binding agreement of Integrity enforceable in accordance with its terms (except to the extent enforceability may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect which affect creditors’ rights generally, (B) legal and equitable limitations on the availability of injunctive relief, specific performance and other equitable remedies, and (C) general principles of equity and applicable laws or court decisions limiting the enforceability of indemnification provisions).

2.6 Validity of Transactions; Absence of Required Consents or Waivers. Provided the required approvals of Integrity’s shareholders and of governmental or regulatory authorities are obtained, neither the execution and delivery of this Agreement, nor the consummation of the transactions described herein, nor compliance by Integrity with any of its obligations or agreements contained herein, will: (i) conflict with or result in a breach of the terms and conditions of, or constitute a default or violation under any provision of, the Articles of Incorporation or bylaws or the equivalent organizational documents of Integrity or any subsidiary, or any material contract, agreement, lease, mortgage, note, bond, indenture, license, or obligation or understanding (oral or written) to which Integrity or any subsidiary is bound or by which it or its business, capital stock or any of its properties or assets may be affected; (ii) result in the creation or imposition of any lien, claim, interest, charge, restriction or encumbrance upon any of the properties or assets of Integrity or any subsidiary; (iii) violate any applicable federal or state statute, law, rule or regulation, or any judgment, order, writ, injunction or decree of any court, administrative or regulatory agency or governmental body; (iv) result in the acceleration of any obligation or indebtedness of Integrity or any subsidiary; or (v) interfere with or otherwise adversely affect the ability of Integrity to carry on its business as presently conducted, or interfere with or otherwise adversely affect the ability of FNB to carry on such business after the Effective Time. No consents, approvals or waivers are required to be obtained from any person or entity in connection with Integrity’s execution and delivery of this Agreement, or the performance of its obligations or agreements or the consummation of the transactions described herein, except for required approvals of Integrity’s shareholders as described in Section 7.1(a) below and of governmental or regulatory authorities as described in Section 7.1(d) below and approvals previously obtained.

2.7 Books and Records. The books of account of each of Integrity and its subsidiaries have been fully, properly and accurately maintained in material compliance with all applicable legal and accounting requirements and in accordance with good business practices, and such books of account are complete and reflect accurately in all material respects Integrity’s and its subsidiaries’, respectively, items of income and expense and all of its assets, liabilities and shareholders’ equity and reflect in all material respects all dealings and transactions in respect of the business, assets, liabilities and affairs of Integrity and its subsidiaries. The minute books of each of Integrity and its subsidiaries accurately reflect in all material respects the corporate actions which its respective shareholders and board of directors, and all committees thereof, have taken during the time periods covered by such minute books. All such minute books have been or will be made available to FNB and its representatives.

2.8 Regulatory Reports. Since January 1, 2001, Integrity and each of its subsidiaries has filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that were required to be filed with (i) the Federal Reserve Board,

(ii) the FDIC, (iii) the Commissioner and (iv) any other governmental or regulatory authorities having jurisdiction over Integrity or its subsidiaries except to the extent that failure to file such reports, registrations and statements would not have a Material Adverse Effect on Integrity and its subsidiaries. All such reports, registrations and statements filed by Integrity or a subsidiary with the Federal Reserve Board, FDIC, the Commissioner or other such regulatory authority are collectively referred to herein as the “Integrity Reports.” As of their respective dates, the Integrity Reports complied in all material respects with all the statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and neither Integrity nor its subsidiaries has been notified that any such Integrity Reports were deficient as to form or content. Following the date of this Agreement, Integrity shall deliver to FNB, simultaneous with the filing thereof, a copy of each report, registration, statement or other regulatory filing made thereafter by Integrity or its subsidiaries, with the FDIC, the Commissioner or any other such regulatory authority.

2.9 SEC Filings; Financial Statements.

(a) SEC Filings. Integrity has filed and made available to FNB all forms, reports and documents required to be filed by Integrity with the Securities and Exchange Commission (the “SEC”) since December 31, 2001 (collectively, the “Integrity SEC Reports”). The Integrity SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the 1933 Act and the 1934 Act, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Integrity SEC Reports or necessary in order to make the statements in such Integrity SEC Reports, in light of the circumstances under which they were made, not misleading.

(b) Financial Statements. Integrity has filed with the SEC and made available to FNB the following financial statements (collectively, the “Integrity Financial Statements”): (i) its consolidated balance sheets as of December 31, 2004 and 2003 and its consolidated statements of operations, changes in shareholders’ equity and cash flows for the years ended December 31, 2004, 2003 and 2002, together with notes thereto, all as audited by Dixon Hughes PLLC, independent registered public accountants; and (ii) its balance sheets as of June 30, 2005 and 2004, and the related statements of income for the six-month periods then ended. Following the date of this Agreement, Integrity promptly will deliver to FNB all other annual or interim financial statements prepared by or for Integrity. The Integrity Financial Statements (including any related notes and schedules thereto) (x) are in accordance with Integrity’s books and records, and (y) except as stated therein, were prepared in accordance with generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods indicated and present fairly Integrity’s consolidated financial condition, assets and liabilities, results of operations, changes in shareholders’ equity and changes in cash flows as of the dates indicated and for the periods specified therein subject, in the case of unaudited interim financial statements, to normal year-end adjustments and any other adjustments described therein, which adjustments will not be material in amount or effect.

2.10 Tax Returns and Other Tax Matters. (i) Integrity and each of its subsidiaries has timely filed or caused to be filed, or obtained proper extensions of time for filing, all federal, state and local income tax returns and reports which are required by law to have been filed, and all such returns and reports were true, correct and complete in all material respects and contained all material information required to be contained therein; (ii) all federal, state and local income, profits, franchise, sales, use, occupation, property, excise, withholding, employment and other taxes (including interest and penalties), charges and assessments which have become due from or been assessed or levied against Integrity, any subsidiary or their respective properties have been fully paid or, if not yet due, a reserve or accrual which is reasonably believed by the management of Integrity to be adequate in all material respects for the payment of all such taxes to be paid and the obligation for such unpaid taxes is reflected on the Integrity Financial Statements; (iii) tax returns and reports of Integrity and its subsidiaries have not been subject to audit by the Internal Revenue Service (the “IRS”) or the North Carolina Department of Revenue in the last seven years and neither Integrity nor any subsidiary has received any indication of the pendency of any audit or examination in connection with any such tax return or report or has any knowledge that any such return or report is subject to adjustment; (iv) neither Integrity nor any subsidiary has executed any waiver or extended the statute of limitations (or been asked to execute a waiver or extend a statute of limitations) with respect to any tax; (v) no closing agreements, private letter rulings, technical advice memoranda or similar agreements or rulings have been entered into or issued by any governmental authority with respect to Integrity and its subsidiaries; (vi) neither Integrity nor any of its subsidiaries maintains any compensation plans, programs or arrangements the payments under which would not reasonably be expected to be deductible as a result of the limitations under Section 162(m) of the Code and the regulations issued thereunder; (vii) neither Integrity nor any of its subsidiaries (A) has agreed, or is required, to make any adjustment under Section 481(a) of the Code or any comparable provision of state, local or foreign law or has any knowledge that a governmental authority has proposed any such adjustment or change in accounting method with respect to Integrity or its subsidiaries or (B) has any application pending with any governmental authority requesting permission for any change in accounting method; and (viii) neither Integrity nor any of its subsidiaries is required to include any item of income in, or exclude any item of deduction or loss from, taxable income for any taxable period or portion thereof beginning on or after the Closing Date as a result of (A) a change in method of accounting for a taxable period beginning prior to the Closing Date, (B) any “closing agreement,” as described in Section 71 of the Code, or any corresponding provision of state, local or foreign law, executed on or before the Closing Date, (C) any sale reported on the installment method where such sale occurred on or prior to the Closing Date, (D) any prepaid amount received by Integrity or any of its subsidiaries on or prior to the Closing Date of (E) any intercompany transactions or excess loss account described in Treasury Regulations under Section 1502 of the Code or any corresponding provision of state, local or foreign law.

2.11 Absence of Material Adverse Changes or Certain Other Events.

(a) Since December 31, 2004, Integrity and each of its subsidiaries has conducted its respective business only in the ordinary course, and there has been no Material Adverse Effect, and there has occurred no event or development and there currently exists no condition or circumstance which, with the lapse of time or otherwise, may or could cause, create or result in a Material Adverse Effect, on Integrity and its subsidiaries.

(b) Since December 31, 2004, and other than in the ordinary course of its business, neither Integrity nor any subsidiary has incurred any material liability or engaged in any material transaction or entered into any material agreement, increased the salaries, compensation or general benefits payable to its employees, suffered any loss, destruction or damage to any of its respective properties or assets, or made a material acquisition or disposition of any assets or entered into any material contract or lease. For purposes of this Section 2.11(b), “material” means material to Integrity and its subsidiaries considered as one enterprise.

2.12 Absence of Undisclosed Liabilities. Neither Integrity nor any subsidiary has any liabilities or obligations, whether known or unknown, matured or unmatured, accrued, absolute, contingent or otherwise, whether due or to become due (including, without limitation, tax liabilities or unfunded liabilities under employee benefit plans or arrangements), other than (i) those reflected in the Integrity Financial Statements, or (ii) obligations or liabilities incurred in the ordinary course of its business since December 31, 2004 and which are not, individually or in the aggregate, material to Integrity and its subsidiaries considered as one enterprise. No facts or circumstances exist that could reasonably be expected to serve as the basis for any other liabilities of Integrity or any subsidiary. Without limiting the generality of the foregoing, no agreement pursuant to which any loans or other assets have been or shall be sold by Integrity or any of its subsidiaries entitled the buyer of such loans or other assets, unless there is material breach of a representation or covenant by Integrity or its subsidiaries, to cause Integrity or its subsidiaries to repurchase such loan or other asset or the buyer to pursue any other form of recourse against Integrity or its subsidiaries. To the best knowledge and belief of management of Integrity, there has been no material breach of a representation or covenant by Integrity or its subsidiaries in any such agreement.

2.13 Litigation and Compliance with Law.

(a) There are no actions, suits, arbitrations, controversies or other proceedings or investigations (or, to the best knowledge and belief of management of Integrity, any facts or circumstances which reasonably could result in such), including, without limitation, any such action by any governmental or regulatory authority, which currently exist or are ongoing, pending or, to the best knowledge and belief of management of Integrity, threatened, contemplated or probable of assertion, against, relating to or otherwise affecting Integrity, any subsidiary or any of their respective properties, assets or employees which, if determined adversely, could result in liability on the part of Integrity or any subsidiary for, or subject Integrity or any subsidiary to, material monetary damages, fines or penalties or an injunction, or which could have a Material Adverse Effect on Integrity and its subsidiaries or on Integrity’s ability to consummate the Merger.

(b) Except for such licenses, permits, orders, authorizations or approvals (“Permits”) the absence of which would not have a Material Adverse Effect on Integrity or its subsidiaries, each of Integrity and its subsidiaries has all Permits of any federal, state, local or foreign governmental or regulatory body that are material to or necessary for the conduct of its respective business or to own, lease and operate its respective properties. Except as would not have a Material Adverse Effect on Integrity and its subsidiaries, all such Permits are in full force and effect and no violations are or have been recorded in respect of any such Permits. No proceeding is pending or, to the best knowledge and belief of management of Integrity, threatened or probable of assertion to suspend, cancel, revoke or limit any Permit.

(c) Except as Previously Disclosed to FNB, neither Integrity nor any subsidiary is subject to any supervisory agreement, enforcement order, writ, injunction, capital directive, supervisory directive, memorandum of understanding or other similar agreement, order, directive, memorandum or consent of, with or issued by any regulatory or other governmental authority (including, without limitation, the Federal Reserve Board, the FDIC or the Commissioner) relating to its financial condition, directors or officers, employees, operations, capital, regulatory compliance or otherwise; there are no judgments, orders, stipulations, injunctions, decrees or awards against Integrity or any subsidiary that in any manner limit, restrict, regulate, enjoin or prohibit any present or past business or practice of Integrity or any subsidiary; and neither Integrity nor any subsidiary has been advised or has any reason to believe that any regulatory or other governmental authority or any court is contemplating, threatening or requesting the issuance of any such agreement, order, injunction, directive, memorandum, judgment, stipulation, decree or award.

(d) Neither Integrity nor any subsidiary is in violation or default under, and each has complied with, all laws, statutes, ordinances, rules, regulations, orders, writs, injunctions or decrees of any court or federal, state, municipal or other governmental or regulatory authority having jurisdiction or authority over it or its business operations, properties or assets (including, without limitation, all provisions of North Carolina law relating to usury, the Consumer Credit Protection Act, and all other laws and regulations applicable to extensions of credit) except for any such violation, default or noncompliance as does not or would not have a Material Adverse Effect on Integrity and its subsidiaries, and, to the best knowledge and belief of management of Integrity, there is no basis for any claim by any person or authority for compensation, reimbursement or damages or otherwise for any violation of any of the foregoing.

2.14 Real Properties. Integrity has Previously Disclosed to FNB a listing of all real property owned or leased by Integrity or any subsidiary (the “Real Property”) and all leases pertaining to any such Real Property to which Integrity or any subsidiary is a party (the “Real Property Leases”). With respect to all Real Property, Integrity or any subsidiary has good and marketable fee simple title to, or a valid and subsisting leasehold interest in, such Real Property and owns the same free and clear of all mortgages, liens, leases, encumbrances, title defects and exceptions to title other than (i) the lien of current taxes not yet due and payable, and (ii) such imperfections of title and restrictions, covenants and easements (including utility easements) which do not materially affect the value of the Real Property and which do not and will not materially detract from, interfere with or restrict the present or future use of the properties subject thereto or affected thereby. With respect to each Real Property Lease (i) such lease is valid and enforceable in accordance with its terms, (ii) there currently exists no circumstance or condition which constitutes an event of default by Integrity or any subsidiary (as lessor or lessee) or its respective lessor or which, with the passage of time or the giving of required notices will or could constitute such an event of default, and (iii) subject to any required consent of Integrity’s lessor, each such Real Property Lease may be assigned to FNB and the execution and delivery of this Agreement does not constitute an event of default thereunder. The Real Property complies with all applicable federal, state and local laws, regulations, ordinances or orders of any governmental authority, including those relating to zoning, building and use permits, except for

such noncompliance as does not or would not have a Material Adverse Effect on Integrity and its subsidiaries, and the Real Property may be used under applicable zoning ordinances for commercial banking facilities as a matter of right rather than as a conditional or nonconforming use. All improvements and fixtures included in or on the Real Property are in good condition and repair, ordinary wear and tear excepted, and there does not exist any condition which materially adversely affects the economic value thereof or materially adversely interferes (or will interfere after the Merger) with the contemplated use thereof.

2.15 Loans, Accounts, Notes and Other Receivables.

(a) All loans, accounts, notes and other receivables reflected as assets on the books and records of Integrity and its subsidiaries (i) have resulted from bona fide business transactions in the ordinary course of operations of Integrity and its subsidiaries, (ii) were made in accordance with the standard loan policies and procedures of Integrity and its subsidiaries, and (iii) are owned by Integrity or a subsidiary free and clear of all liens, encumbrances, assignments, participation or repurchase agreements or other exceptions to title or to the ownership or collection rights of any other person or entity.

(b) All of the records of Integrity and its subsidiaries regarding all outstanding loans, accounts, notes and other receivables, and all other real estate owned, are accurate in all material respects, and, with respect to such loans the loan documentation of which indicate are secured by any real or personal property or property rights (“Loan Collateral”), such loans are in all material respects secured by valid, perfected and enforceable liens on all such Loan Collateral having the priority described in the records of such loan. Neither Integrity nor any subsidiary has engaged in any form of indirect lending and no such indirect loans are outstanding.

(c) To the best knowledge and belief of management of Integrity, each loan reflected as an asset on the books of Integrity and its subsidiaries and each guaranty therefor, is the legal, valid and binding obligation of the obligor or guarantor thereon, and no defense, offset or counterclaim has been asserted with respect to any such loan or guaranty.

(d) Integrity has Previously Disclosed to FNB (i) a written listing of each loan, extension of credit or other asset of Integrity or any subsidiary which, as of December 31, 2004, is classified by the FDIC or the Commissioner as “Loss,” “Doubtful,” “Substandard” or “Special Mention” (or otherwise by words of similar import), or which it has designated as a special asset or for special handling or placed on any “watch list” because of concerns regarding the ultimate collectibility or deteriorating condition of such asset or any obligor or Loan Collateral therefor, and (ii) a written listing of each loan or extension of credit that, as of December 31, 2004, was past due as to the payment of principal or interest or both, or as to which any obligor thereon (including the borrower or any guarantor) otherwise was in default, is the subject of a proceeding in bankruptcy or otherwise has indicated any inability or intention not to repay such loan or extension of credit. Each such listing is accurate and complete in all material respects as of the date indicated.

(e) As of December 31, 2004, Integrity’s, or any subsidiary’s, reserve for possible loan losses (the “Loan Loss Reserve”) has been established in conformity with GAAP, sound banking practices and all applicable requirements, rules and policies of the FDIC and the

Commissioner and, in the best judgment of management of Integrity, (i) is reasonable in view of the size and character of its loan portfolio, current economic conditions and other relevant factors, and (ii) is adequate to provide for losses relating to or the risk of loss inherent in its loan portfolio. At December 31, 2004, Integrity’s Loan Loss Reserve was $10,416,195 and at June 30, 2005, Integrity’s Loan Loss Reserve was $8,099,563.

2.16 Securities Portfolio and Investments; Risk Management Instruments. Except as Previously Disclosed, all securities owned by Integrity or any subsidiary (whether owned of record or beneficially) are held free and clear of all mortgages, liens, pledges, encumbrances or any other restriction or rights of any other person or entity, whether contractual or statutory, which would materially impair the ability of Integrity or any subsidiary to dispose freely of any such security or otherwise to realize the benefits of ownership thereof at any time. There are no voting trusts or other agreements or undertakings to which Integrity or any subsidiary is a party with respect to the voting of any such securities. With respect to all “repurchase agreements” to which Integrity or any subsidiary has “purchased” securities under agreement to resell, Integrity or such subsidiary has a valid, perfected first lien or security interest in the government securities or other collateral securing the repurchase agreement, and the value of the collateral securing each such repurchase agreement equals or exceeds the amount of the debt owed that is secured by such collateral. Except for fluctuations in the market values of its investment securities, since December 31, 2004, there has been no significant deterioration or material adverse change in the quality, or any material decrease in the value, of Integrity’s securities portfolio as a whole. Neither Integrity nor any of its subsidiaries is a party or has agreed to enter into an exchange trade or over-the-counter equity, interest rate, foreign exchange or other swap, forward, future, option, cap, floor or collar or any other contract that is not included on Integrity’s consolidated statement of financial condition and is a derivatives contract (including various combinations thereof) nor does Integrity or any of its subsidiaries own securities that (i) are referred to generically as “structured notes,” “high risk mortgage derivatives,” “capped floating rate notes” or “capped floating rate mortgage derivatives” or (ii) are likely to have changes in value as a result of interest or exchange rate changes that significantly exceed normal changes in value attributable to interest or exchange rate changes.

2.17 Personal Property and Other Assets. All tangible personal property of Integrity or any subsidiary material to the business operations of Integrity and such subsidiary (including, without limitation, all banking equipment, data processing equipment, vehicles, and all other tangible personal property located in any office of or used by Integrity or such subsidiary in the operation of its business) is owned or leased by Integrity or such subsidiary free and clear of all liens, encumbrances, leases, title defects or exceptions to title other than such as are not material in character, amount or extent, and which do not materially detract from the value of, or interfere with the present or future use or ability to convey, the property subject thereto or affected thereby. All of Integrity or any subsidiary’s tangible personal property material to its business is in good operating condition and repair, ordinary wear and tear excepted.

2.18 Patents and Trademarks. Integrity and its subsidiaries own, possess or have the right to use any and all patents, licenses, trademarks, trade names, copyrights, trade secrets and proprietary and other confidential information necessary to conduct their business as now conducted; and neither Integrity nor any subsidiary has violated, and currently is not in conflict with, any patent, license, trademark, trade name, copyright or proprietary right of any other person or entity.

2.19 Environmental Matters.

(a) Integrity has Previously Disclosed to FNB copies of all written reports, correspondence, notices or other materials, if any, in its or any subsidiary’s possession pertaining to environmental surveys or assessments of the Real Property or any of its Loan Collateral and any improvements thereon, or to any violation of “Environmental Laws” (as defined below) on, affecting or otherwise involving the Real Property or any Loan Collateral.

(b) There has been no presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control, removal, clean-up or remediation of any “Hazardous Substances” (as defined below) by any person prior to the date hereof on, from or relating to the Real Property or, to the best knowledge and belief of management of Integrity, the Loan Collateral, which constitutes a violation of any Environmental Laws.

(c) Neither Integrity nor any subsidiary has violated any federal, state or local law, rule, regulation, order, permit or other requirement relating to health, safety or the environment or imposing liability, responsibility or standards of conduct applicable to environmental conditions, and there has been no violation of any Environmental Laws (as defined in Section 2.19(f) below) (including, to the best knowledge and belief of management of Integrity, any violation with respect to or relating to any Loan Collateral) by any other person or entity for whose liability or obligation with respect to any particular matter or violation Integrity or any subsidiary is or may be responsible or liable, except to the extent any violations of which, when taken as a whole, would not have a Material Adverse Effect on Integrity or its subsidiaries.

(d) Neither Integrity nor any subsidiary is subject to any claims, demands, causes of action, suits, proceedings, losses, damages, penalties, liabilities, obligations, costs or expenses of any kind and nature which arise out of, under or in connection with, or which result from or are based upon the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control, removal, clean-up or remediation of any Hazardous Substances on, from or relating to the Real Property or, to the best knowledge and belief of management of Integrity, any Loan Collateral by any person or entity.

(e) No facts, events or conditions relating to the Real Property or, to the best knowledge and belief of management of Integrity, any Loan Collateral, or the operations of Integrity or any subsidiary, will prevent, hinder or limit continued compliance with Environmental Laws, or give rise to any investigatory, emergency removal, remedial or corrective actions, obligations or liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to Environmental Laws.

(f) For purposes of this Agreement, “Environmental Laws” shall include:

(i) all federal, state and local statutes, regulations, ordinances, orders, decrees, and similar provisions having the force or effect of law,

(ii) all contractual agreements, and

(iii) all common law

concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all standards of conduct and bases of obligations relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, discharge, release, threatened release, control, emergency removal, clean-up or remediation of any Hazardous Substances (including without limitation the Comprehensive Environmental Response, Compensation and Liability Act, the Superfund Amendment and Reauthorization Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Clean Air Act, the Toxic Substances Control Act, any “Superfund” or “Superlien” law, the Americans with Disabilities Act, and the Occupational Safety and Health Act), as such may now or at any time hereafter be defined or in effect.

(g) For purposes of this Agreement, “Hazardous Substances” shall include hazardous, toxic or otherwise regulated materials, substances or wastes; chemical substances or mixtures; pesticides; pollutants; contaminants; toxic chemicals; oil or other petroleum products, byproducts, or constituents (including but not limited to crude oil, diesel oil, fuel oil, gasoline, lubrication oil, oil refuse, oil mixed with other waste, oil sludge, and all other liquid hydrocarbons regardless of specific gravity); asbestos or asbestos containing material; flammable explosives; polychlorinated biphenyls (“PCBs”) or any material containing PCBs; radioactive materials; biological micro organisms, viruses, fungi, spores; environmental tobacco smoke; radon or radon gas; formaldehyde or any material containing formaldehyde; fumigants; any material or substance comprising or contributing to conditions known as “sick building syndrome,” “building-related illness” or similar conditions or exposures; and/or any hazardous, toxic, regulated or dangerous waste, substance or material defined as such by the United States Environmental Protection Agency or any other federal, state or local governmental agency or political subdivision thereof, or for the purpose of or by any Environmental Laws, as now or at any time hereafter may be in effect.

2.20 Brokerage or Finders’ Commissions. All negotiations relative to this Agreement and the transactions described herein have been carried on by Integrity or its representatives, including McColl Partners, LLC (“McColl Partners”), directly with FNB or its representatives. No person or firm other than McColl Partners has been retained by or has acted on behalf of, pursuant to any agreement, arrangement or understanding with, or under the authority of, Integrity or its Board of Directors, as a broker, finder or agent or has performed similar functions or otherwise is or may be entitled to receive or claim a brokerage fee or other commission in connection with or as a result of the transactions described herein.

2.21 Material Contracts.

(a) Except as Previously Disclosed, neither Integrity nor any subsidiary is a party to or bound by any agreement, other than loans made in the ordinary course of business, (i)involving money or other property in an amount or with a value in excess of $50,000, (ii) which

calls for the provision of goods or services to Integrity or any subsidiary and cannot be terminated without material penalty upon written notice to the other party thereto, (iii) which is material to Integrity or any subsidiary and was not entered into in the ordinary course of business, (iv) which involves hedging, options or any similar trading activity, or interest rate exchanges or swaps, (v) which commits Integrity or any subsidiary to extend any loan or credit (with the exception of letters of credit, lines of credit and loan commitments extended in the ordinary course of a subsidiary’s business), (vi) which involves the purchase or sale of any assets of Integrity or any subsidiary, or the purchase, sale, issuance, redemption or transfer of any capital stock or other securities of Integrity or any subsidiary, or (vii) with any director, officer or principal shareholder of Integrity or any subsidiary (including, without limitation, any consulting agreement, but not including any agreement relating to loans or other banking services which were made in the ordinary course of its business and on substantially the same terms and conditions as were prevailing at that time for similar agreements with unrelated persons).

(b) Neither Integrity nor any subsidiary is in default, and there has not occurred any event which with the lapse of time or giving of notice or both would constitute such a default, under any contract, lease, insurance policy, commitment or arrangement to which it is a party or by which it or its property is or may be bound or affected or under which it or its property receives benefits.

2.22 Employment Matters; Employee Relations.

(a) Each of Integrity and its subsidiaries (i) has paid in full to or accrued on behalf of all its respective directors, officers and employees all wages, salaries, commissions, bonuses, fees and other direct compensation for all labor or services rendered, including all wages, salaries, commissions, bonuses, fees and other direct compensation for all labor or services performed by them to the date of this Agreement and all vacation pay, sick pay, severance pay and other amounts promised to the extent required by law or its existing policies or practices, and (ii) is in compliance in all material respects with all applicable federal, state and local laws, statutes, rules and regulations with regard to employment and employment practices, terms and conditions, and wages and hours and other compensation matters; and no person has, to the best knowledge and belief of management of Integrity, asserted that Integrity or any subsidiary is liable in any amount for any arrearages in wages or employment taxes or for any penalties for failure to comply with any of the foregoing.

(b) There is no action, suit or proceeding by any person pending or, to the best knowledge and belief of management of Integrity, threatened against Integrity or any subsidiary (or their employees), involving employment discrimination, harassment, wrongful discharge or similar claims. Neither Integrity nor any subsidiary is a party to or bound by any collective bargaining agreement with any of its employees, any labor union or any other collective bargaining unit or organization. There is no pending or threatened labor dispute, work stoppage or strike involving Integrity, any subsidiary, or any of their employees, or any pending or threatened proceeding in which it is asserted that Integrity or any subsidiary has committed an unfair labor practice; and, neither Integrity nor any subsidiary is aware of any activity involving it or any of its employees seeking to certify a collective bargaining unit or engaging in any other labor organization activity.

2.23 Employment Agreements; Employee Benefit Plans.

(a) Integrity has Previously Disclosed to FNB a true and complete list of all bonus, deferred compensation, pension, retirement, profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted stock and stock option plans; all employment and severance contracts; all medical, dental, health, and life insurance plans; all vacation, sickness and other leave plans, disability and death benefit plans; and all other employee benefit plans, contracts, or arrangements maintained or contributed to by Integrity or any subsidiary for the benefit of any employees, former employees, directors, former directors or any of their beneficiaries (collectively, the “Plans”). True and complete copies of all Plans, including, but not limited to, any trust instruments or insurance contracts, if any, forming a part thereof, and all amendments thereto, previously have been supplied to FNB. Neither Integrity nor any subsidiary maintains, sponsors, contributes to or otherwise participates in any “Employee Benefit Plan” within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), any “Multiemployer Plan” within the meaning of Section 3(37) of ERISA, or any “Multiple Employer Welfare Arrangement” within the meaning of Section 3(40) of ERISA. Each Plan that is an “employee pension benefit plan” within the meaning of Section 3(2) of ERISA and which is intended to be qualified under Section 401(a) of the Code, has received or applied for a favorable determination letter from the IRS and Integrity is not aware of any circumstances reasonably likely to result in the revocation or denial of any such favorable determination letter. All reports and returns with respect to the Plans (and any Plans previously maintained by Integrity or any subsidiary) required to be filed with any governmental department, agency, service or other authority, including, without limitation, Internal Revenue Service Form 5500 (Annual Report), have been properly and timely filed.

(b) All “Employee Benefit Plans” maintained by or otherwise covering employees or former employees of Integrity or any subsidiary currently are, and at all times have been, in compliance with all provisions and requirements of ERISA except those the noncompliance of which, when taken as a whole, would not have a Material Adverse Effect on Integrity or its subsidiaries. There is no pending or threatened litigation relating to any Plan or any such Plan previously maintained by Integrity or any subsidiary. Neither Integrity nor any subsidiary has engaged in a transaction with respect to any Plan that has subjected it, or absent the exemption under which the transaction was effected, would subject it to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA.

(c) Integrity has delivered to FNB a true, correct and complete copy (including copies of all amendments thereto) of each of its retirement plans that is intended to be qualified under Section 401(a) of the Code (collectively, the “Retirement Plans”), together with true, correct and complete copies of the summary plan descriptions relating to the Retirement Plans, the most recent determination letters received from the IRS regarding the Retirement Plans, and the most recent Annual Reports (Form 5500 series) and related schedules, if any, for the Retirement Plans. The Retirement Plans are qualified under the provisions of Section 401(a) of the Code, the trusts under the Retirement Plans are exempt trusts under Section 501(a) of the Code, and determination letters have been issued or applied for with respect to the Retirement Plans to said effect, including determination letters covering the current terms and provisions of the Retirement Plans. There are no issues relating to said qualification or exemption of the Retirement Plans currently pending before the IRS, the United States Department of Labor, the

Pension Benefit Guaranty Corporation or any court. The Retirement Plans and the administration thereof meet (and have met since the establishment of the Retirement Plans) the requirements of ERISA, the Code and all other laws, rules and regulations applicable to the Retirement Plans and do not violate (and since the establishment of the Retirement Plans have not violated) any of the provisions of ERISA, the Code and such other laws, rules and regulations, except to the extent such violation, when taken as a whole, would not have a Material Adverse Effect on Integrity or its subsidiaries. Without limiting the generality of the foregoing, all reports and returns with respect to the Retirement Plans required to be filed with any governmental department, agency, service or other authority have been properly and timely filed. There are no disputes or unresolved disagreements with respect to the Retirement Plans or the administration thereof currently existing between Integrity, any subsidiary or any trustee or other fiduciary thereunder, and any governmental agency, any current or former employee of Integrity, any subsidiary or beneficiary of any such employee or any other person or entity. No “reportable event” within the meaning of Section 4043(b) of ERISA has occurred at any time with respect to the Retirement Plans, other than those, when taken as a whole, that would not have a Material Adverse Effect on Integrity or its subsidiaries.

(d) No liability under subtitle C or D of Title IV of ERISA has been or is expected to be incurred by Integrity or any subsidiary with respect to the Retirement Plans or with respect to any other ongoing, frozen or terminated defined benefit pension plan currently or formerly maintained by Integrity or any subsidiary. Neither Integrity nor any subsidiary has ever contributed to a “Multiemployer Plan.” All contributions required to be made pursuant to the terms of each of the Plans (including without limitation the Retirement Plans and any other “pension plan” (as defined in Section 3(2) of ERISA, provided such plan is intended to qualify under the provisions of Section 401(a) of the Code) maintained by Integrity or any subsidiary has been timely made. Neither the Retirement Plans nor any other “pension plan” maintained by Integrity or any subsidiary has an “accumulated funding deficiency” (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA. Neither Integrity nor any subsidiary has provided, and is not required to provide, security to any “pension plan” or to any “Single Employer Plan” pursuant to Section 401(a)(29) of the Code. Under the Retirement Plans and any other “pension plan” maintained by Integrity or any subsidiary as of the last day of the most recent plan year ended prior to the date hereof, the actuarially determined present value of all “benefit liabilities,” within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions contained in the plan’s most recent actuarial valuation) did not exceed the then current value of the assets of such plan, and there has been no material change in the financial condition of any such plan since the last day of the most recent plan year.

(e) None of the execution of this Agreement, shareholder approval of this Agreement or consummation of the transactions contemplated hereby, except as Previously Disclosed to FNB, (i) entitle any employees of Integrity or any of its subsidiaries to severance pay or any increase in severance pay upon any termination of employment after the date hereof, (ii) accelerate the time of payment or vesting or trigger any payment or funding, through a grantor trust or otherwise, of compensation or benefits under, increase the amount payable or trigger any other material obligation pursuant to, any plan or agreement, (iii) result in any breach or violation of, or a default under, any plan or agreement; (iv) result in any payment that would be a “parachute payment” to a “disqualified individual” as those terms are defined in Section 280G of the Code, without regard to whether such payment is reasonable compensation for

personal services performed or to be performed in the future, (v) result in any payment to any person (including, without limitation, any severance compensation or payment, unemployment compensation, “golden parachute” or “change in control” payment, or otherwise) becoming due under any plan or agreement to any director, officer, employee or consultant, (vi) increase any benefits otherwise payable under any plan or agreement, or (vii) result in any acceleration of the time of payment or vesting of any such benefit.

2.24 Insurance. Integrity has in effect a “financial institutions bond” and such other policies of general liability, casualty, directors and officers liability, employee fidelity, errors and omissions and other property and liability insurance as have been Previously Disclosed to FNB (the “Policies”). The Policies provide coverage in such amounts and against such liabilities, casualties, losses or risks as is required by applicable law or regulation; and, in the judgment of management of Integrity, the insurance coverage provided under the Policies is reasonable and adequate in all respects for Integrity and its subsidiaries. Each of the Policies is in full force and effect and is valid and enforceable in accordance with its terms, and is underwritten by an insurer of recognized financial responsibility that is qualified to transact business in North Carolina; and Integrity and its subsidiaries have taken all requisite actions (including the giving of required notices) under each such Policy to preserve all rights thereunder with respect to all matters. Neither Integrity nor any subsidiary is in default under the provisions of, has received notice of cancellation or nonrenewal of or any premium increase on, or has any knowledge of any failure to pay any premium on or any inaccuracy in any application for any Policy. There are no pending claims under any Policy, and Integrity has no knowledge of any facts or of the occurrence of any event that is reasonably likely to result in any such claim.

2.25 Insurance of Deposits. CVB and FGB are “insured institutions” as defined in the Federal Deposit Insurance Act and applicable regulations thereunder. The deposits of each depositor in CVB or FGB are insured by the FDIC to the maximum amount provided by law, all deposit insurance premiums due from CVB or FGB to the FDIC have been paid in full in a timely fashion, and, to the best knowledge and belief of management of Integrity, no proceedings have been commenced or are contemplated by the FDIC or otherwise to terminate such insurance.

2.26 Compensation; Stock Ownership. Integrity has Previously Disclosed (i) the name and current salary or wage rate for each present employee of Integrity or its subsidiaries, (ii) the name of and number of shares of Integrity Stock beneficially owned by each of the directors and officers of Integrity and by any person or entity known to Integrity to own beneficially 5% or more of Integrity Stock, and (iii) the name, number and vesting schedule of outstanding options and restricted stock awards held by each person to whom a stock option or restricted stock award has been granted and currently is outstanding under any stock option or other plan of Integrity, including, without limitation, the Integrity Option Plan.

2.27 Affiliates. Integrity will deliver to FNB within 15 days of the date hereof a listing of those persons deemed by Integrity and its counsel as of the date of this Agreement to be “Affiliates” of Integrity as that term is defined in Rule 405 promulgated under the 1933 Act, including persons, trusts, estates or other entities related to persons deemed to be Affiliates of Integrity.

2.28 State Takeover Laws. Integrity has taken all necessary action to exempt the transactions contemplated by this Agreement from any applicable “moratorium,” “control share,” “fair price,” “business combination,” or other anti-takeover laws and regulations of the State of North Carolina (collectively, “Takeover Laws”).

2.29 Obstacles to Regulatory Approval or Tax Treatment. To the best knowledge and belief of management of Integrity, there exists no fact or condition relating to Integrity or any subsidiary that may reasonably be expected to (i) prevent, impede or delay FNB or Integrity from obtaining the regulatory approvals required to consummate transactions described herein, or (ii) prevent the Merger from qualifying to be a tax-free reorganization under Section 368(a)(1)(A) of the Code; and, if any such fact or condition becomes known to Integrity, Integrity shall promptly (and in any event within three days after obtaining such knowledge) communicate such fact or condition to the President of FNB.

2.30 Disclosure. To the best knowledge and belief of management of Integrity, no written statement, certificate, schedule, list or other written information furnished by or on behalf of Integrity at any time to FNB in connection with this Agreement (including without limitation the statements contained herein), when considered as a whole, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. Each document delivered or to be delivered by Integrity to FNB is or will be a true and complete copy of such document, unmodified except by another document delivered by Integrity.

ARTICLE III. REPRESENTATIONS AND WARRANTIES OF FNB

Except as otherwise specifically described herein or as “Previously Disclosed” to Integrity, FNB hereby makes the following representations and warranties to Integrity. (“Previously Disclosed” shall mean, as to FNB, the disclosure of information in a letter delivered by FNB to Integrity specifically referring to this Agreement and arranged in sections corresponding to the sections, subsections and items of this Agreement applicable thereto, and which letter has been delivered prior to the execution of this Agreement. Information shall be deemed Previously Disclosed for the purpose of a given section, subsection or item of this Agreement only to the extent a specific reference thereto is made in connection with disclosure of such information at the time of such delivery.)

3.1 Corporate Organization, Capacity and Authority.

(a) Organization. FNB is a corporation duly organized and validly existing under the laws of the State of North Carolina and is registered with the Federal Reserve Board as a bank holding company under the Bank Holding Company Act of 1956, as amended.

(b) Subsidiaries. FNB has two wholly owned subsidiaries, First National Bank and Trust Company, a national banking corporation (“First National”), and Dover Mortgage Company, a North Carolina corporation (“Dover”). First National has one wholly owned subsidiary, First National Investor Services, Inc., a North Carolina corporation (“FNIS”).

First National, Dover and FNIS are sometimes referred to as the subsidiaries of FNB. Other than First National, Dover and FNIS, FNB has no subsidiaries, direct or indirect, and does not own, directly or indirectly, any stock or other equity interest in any other corporation, service corporation, joint venture, partnership or other entity, except for equity issues reflected in First National’s investment portfolio and securities held in a fiduciary capacity.

(c) Organization of Subsidiaries. First National is duly organized and validly existing under the laws of the United States. Each of Dover and FNIS is duly organized and validly existing under the laws of the State of North Carolina. Except as Previously Disclosed, all of the outstanding capital stock of each such subsidiary is owned of record and beneficially, free and clear of all security interests and claims, by FNB or First National. All of the outstanding shares of capital stock of each of FNB’s subsidiaries are duly authorized, validly issued, fully paid and nonassessable.

(d) Power and Authority. Each of FNB and its subsidiaries has all requisite power and authority (corporate and other) to own, lease and operate its properties and conduct its business as now being conducted, is duly qualified to do business and is in good standing in each other jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary, except where failure so to qualify would not have a Material Adverse Effect (as defined herein) on FNB and its subsidiaries, and is not transacting business, or operating any properties owned or leased by it, in violation of any provision of federal or state law or any rule or regulation promulgated thereunder, which violation would have a Material Adverse Effect on FNB and its subsidiaries. For purposes of this Article III, “Material Adverse Effect” shall mean: (a) with respect to references to FNB, any change in the business of FNB that is or could be materially adverse to the financial condition, results of operations, prospects, business, assets, investments, properties or operations of FNB, or (b) with respect to references to FNB and its subsidiaries, any change in the business of FNB or its subsidiaries that is or could be materially adverse to the financial condition, results of operations, prospects, business, assets, loan portfolio, investments, properties or operations of FNB and its subsidiaries considered as one enterprise.

(e) Constituent Documents. FNB has previously delivered to Integrity true, accurate and complete copies of the currently effective charter and bylaws or equivalent organizational documents of each of FNB and its subsidiaries, including all amendments and proposed amendments thereto.

3.2 Capital Stock. The authorized capital stock of FNB consists of 10,000,000 shares of FNB Stock, of which 5,622,060 shares are issued and outstanding as of September 16, 2005, and 200,000 shares of preferred stock, par value $10.00 per share, of which no shares are issued and outstanding. Each outstanding share of FNB Stock has been duly authorized and validly issued, is fully paid and nonassessable, has been issued in compliance with applicable federal and state securities laws and has not been issued in violation of the preemptive rights of any shareholder. Subject to required shareholder approval and the filing of Articles of Amendment with the Secretary of State of North Carolina to increase the amount of authorized FNB Stock, the shares of FNB Stock issued to Integrity’s shareholders pursuant to this Agreement, when issued as described herein, will be duly authorized, validly issued, fully paid and nonassessable, and will be issued in compliance with applicable federal and state securities laws.

3.3 Convertible Securities, Options, Etc. Except as Previously Disclosed, FNB does not have any outstanding (i) securities or other obligations (including debentures or other debt instruments) which are convertible into shares of FNB Stock or any other securities of FNB, (ii) options, warrants, rights, calls or other commitments of any nature which entitle any person to receive or acquire any shares of FNB Stock or any other securities of FNB, or (iii) plan, agreement or other arrangement pursuant to which shares of FNB Stock or any other securities of FNB, or options, warrants, rights, calls or other commitments of any nature pertaining thereto, have been or may be issued.

3.4 Authorization and Validity of Agreement. This Agreement has been duly and validly approved by FNB’s Board of Directors. Subject to required shareholder approval and the filing of Articles of Amendment with the Secretary of State of North Carolina to increase the amount of authorized FNB Stock, (i) FNB has the corporate power and authority to execute and deliver this Agreement and to perform its obligations and agreements and carry out the transactions described herein, (ii) all corporate proceedings and approvals required to be taken to authorize FNB to enter into this Agreement and to perform its respective obligations and agreements and to carry out the transactions described herein have been duly and properly taken, and (iii) this Agreement constitutes the valid and binding agreement of FNB enforceable in accordance with its terms (except to the extent enforceability may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect which affect creditors’ rights generally, (B) legal and equitable limitations on the availability of injunctive relief, specific performance and other equitable remedies, and (C) general principles of equity and applicable laws or court decisions limiting the enforceability of indemnification provisions).

3.5 Validity of Transactions; Absence of Required Consents or Waivers. Provided the required approvals of governmental or regulatory authorities and shareholders are obtained and the filing of Articles of Amendment with the Secretary of State of North Carolina to increase the amount of authorized FNB Stock is completed, neither the execution and delivery of this Agreement, nor the consummation of the transactions described herein, nor compliance by FNB with any of its obligations or agreements contained herein, will: (i) conflict with or result in a breach of the terms and conditions of, or constitute a default or violation under any provision of, the Articles of Incorporation or bylaws or the equivalent organizational documents of FNB or any subsidiary, or any material contract, agreement, lease, mortgage, note, bond, indenture, license, or obligation or understanding (oral or written) to which FNB or any subsidiary, is bound or by which it, its business, capital stock or any of its properties or assets may be affected; (ii) result in the creation or imposition of any lien, claim, interest, charge, restriction or encumbrance upon any of the properties or assets of FNB or any subsidiary; (iii) violate any applicable federal or state statute, law, rule or regulation, or any order, writ, injunction or decree of any court, administrative or regulatory agency or governmental body; (iv) result in the acceleration of any obligation or indebtedness of FNB or any subsidiary; or (v) interfere with or otherwise adversely affect FNB’s ability to carry on its business as presently conducted. No consents, approvals or waivers are required to be obtained from any governmental or regulatory authority in connection with FNB’s execution and delivery of this

Agreement, or the performance of its obligations or agreements or the consummation of the transactions described herein, except for required approvals of governmental or regulatory authorities described in Section 7.1(d) below and approvals previously obtained.

3.6 Books and Records. The books of account of FNB and its subsidiaries have been maintained in material compliance with all applicable legal and accounting requirements and in accordance with good business practices, and such books of account are complete and reflect accurately in all material respects FNB’s and its subsidiaries’, respectively, items of income and expense and all of its assets, liabilities and shareholders’ equity. The minute books of each of FNB and its subsidiaries accurately reflect in all material respects the corporate actions which its respective shareholders and board of directors, and all committees thereof, have taken during the time periods covered by such minute books. All such minute books have been or will be made available to Integrity and its representatives.

3.7 Regulatory Reports. Since January 1, 2001, FNB and its subsidiaries have filed all reports, registrations and statements, together with any amendments that were required to be made with respect thereto, that were required to be filed with the Federal Reserve Board, the FDIC, the Office of the Comptroller of the Currency (“OCC”) and any other governmental or regulatory authorities having jurisdiction over FNB or its subsidiaries except to the extent that failure to file such reports, registrations and statements would not have a Material Adverse Effect on FNB and its subsidiaries. All such reports and statements filed with the Federal Reserve Board, the FDIC, the OCC or other such regulatory authority are collectively referred to herein as the “FNB Reports.” As of their respective dates, the FNB Reports complied in all material respects with all the statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and, FNB has not been notified that any such FNB Reports were deficient in any material respect as to form or content. Following the date of this Agreement, FNB shall deliver to Integrity upon its request a copy of any report, registration, statement or other regulatory filing made by FNB or its subsidiaries with the Federal Reserve Board, the FDIC, the OCC or any other such regulatory authority.

3.8 SEC Filings; Financial Statements.

(a) SEC Filings. FNB has filed and made available to Integrity all forms, reports, and documents required to be filed by FNB with the SEC since December 31, 2001 (collectively, the “FNB SEC Reports”). The FNB SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the 1933 Act and the 1934 Act and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such FNB SEC Reports or necessary in order to make the statements in such FNB SEC Reports, in light of the circumstances under which they were made, not misleading.

(b) Financial Statements. FNB has filed with the SEC and made available to Integrity the following financial statements (collectively, the “FNB Financial Statements”): (i)

its consolidated balance sheets as of December 31, 2004 and 2003 and its consolidated statements of operations, changes in shareholders’ equity and cash flows for the years ended December 31, 2004, 2003 and 2002, together with notes thereto; and (ii) its balance sheets as of June 30, 2005 and 2004, and the related statements of income for the six-month periods then ended. Following the date of this Agreement, FNB promptly will deliver to Integrity all other annual or interim financial statements prepared by or for FNB. The FNB Financial Statements (including any related notes and schedules thereto) (i) are in accordance with FNB’s books and records, and (ii) were prepared in accordance with GAAP applied on a consistent basis throughout the periods indicated and present fairly FNB’s consolidated financial condition, assets and liabilities, results of operations, changes in shareholders’ equity and changes in cash flows as of the dates indicated and for the periods specified therein subject, in the case of unaudited interim financial statements, to normal year-end adjustments and any other adjustments described therein, which adjustments will not be material in amount or effect. FNB’s consolidated balance sheet as of December 31, 2004 and its consolidated statements of operations, changes in shareholders’ equity and cash flows for the year ended December 31, 2004 have been audited by Dixon Hughes PLLC, independent registered public accountants. Its consolidated balance sheet as of December 31, 2003 and its consolidated statements of operations, changes in shareholders’ equity and cash flows for the years ended December 31, 2003 and 2002 have been audited by KPMG LLP, independent registered public accountants.

3.9 Tax Returns and Other Tax Matters. (i) Each of FNB and its subsidiaries has timely filed or caused to be filed, or obtained proper extensions of time for filing, all federal, state and local income tax returns and reports which are required by law to have been filed, and all such returns and reports were true, correct and complete in all material respects and contained all material information required to be contained therein; (ii) all federal, state and local income, profits, franchise, sales, use, occupation, property, excise, withholding, employment and other taxes (including interest and penalties), charges and assessments which have become due from or been assessed or levied against FNB, its subsidiaries or their respective properties have been fully paid or, if not yet due, a reserve or accrual which is reasonably believed by the management of FNB to be adequate in all material respects for the payment of all such taxes to be paid and the obligation for such unpaid taxes is reflected on the FNB Financial Statements; (iii) tax returns and reports of FNB and its subsidiaries have not been subject to audit by the IRS or the North Carolina Department of Revenue in the last seven years and neither FNB nor any of its subsidiaries has received any indication of the pendency of any audit or examination in connection with any such tax return or report or has any knowledge that any such return or report is subject to adjustment; and (iv) neither FNB nor any of its subsidiaries has executed any waiver or extended the statute of limitations (or been asked to execute a waiver or extend a statute of limitations) with respect to any tax.

3.10 Absence of Material Adverse Changes. Since December 31, 2004, there has been no material adverse change, and there has occurred no event or development and there currently exists no condition or circumstance which, with the lapse of time or otherwise, may or could cause, create or result in a Material Adverse Effect on FNB and its subsidiaries.

3.11 Absence of Undisclosed Liabilities. Neither FNB nor its subsidiaries have any liabilities or obligations, whether known or unknown, matured or unmatured, accrued, absolute, contingent or otherwise, whether due or to become due (including without limitation tax

liabilities or unfunded liabilities under employee benefit plans or arrangements), other than (i) those reflected in the FNB Financial Statements, or (ii) obligations or liabilities incurred in the ordinary course of its business since December 31, 2004 and which are not, individually or in the aggregate, material to FNB and its subsidiaries considered as one enterprise.

3.12 Litigation and Compliance with Law.

(a) There are no actions, suits, arbitrations, controversies or other proceedings or investigations (or, to the best knowledge and belief of management of FNB, any facts or circumstances which reasonably could result in such), including, without limitation, any such action by any governmental or regulatory authority, which currently exist or are ongoing, pending or, to the best knowledge and belief of management of FNB, threatened, contemplated or probable of assertion, against, relating to or otherwise affecting FNB, its subsidiaries or any of their respective properties, assets or employees which, if determined adversely, could result in liability on the part of FNB or its subsidiaries for, or subject FNB or its subsidiary to, material monetary damages, fines or penalties or an injunction, or which could have a Material Adverse Effect on FNB and its subsidiaries or on FNB’s ability to consummate the Merger.

(b) Except for such licenses, permits, orders, authorizations or approvals (“Permits”) the absence of which would not have a Material Adverse Effect on FNB or its subsidiaries, each of FNB and its subsidiaries has all Permits of any federal, state, local or foreign governmental or regulatory body that are material to or necessary for the conduct of its respective business or to own, lease and operate its respective properties. Except as would not have a Material Adverse Effect on FNB and its subsidiaries, all such Permits are in full force and effect and no violations are or have been recorded in respect of any such Permits. No proceeding is pending or, to the best knowledge and belief of management of FNB, threatened or probable of assertion to suspend, cancel, revoke or limit any Permit.

(c) Neither FNB nor any of its subsidiaries is subject to any supervisory agreement, enforcement order, writ, injunction, capital directive, supervisory directive, memorandum of understanding or other similar agreement, order, directive, memorandum or consent of, with or issued by any regulatory or other governmental authority (including, without limitation, the Federal Reserve Board, the FDIC or the OCC) relating to its financial condition, directors or officers, employees, operations, capital, regulatory compliance or otherwise; there are no judgments, orders, stipulations, injunctions, decrees or awards against FNB or its subsidiaries which in any manner limits, restricts, regulates, enjoins or prohibits any present or past business or practice of FNB or its subsidiaries; and neither FNB nor any of its subsidiaries has been advised or has any reason to believe that any regulatory or other governmental authority or any court is contemplating, threatening or requesting the issuance of any such agreement, order, injunction, directive, memorandum, judgment, stipulation, decree or award.

(d) Neither FNB nor any of its subsidiaries is in violation or default under, and each has complied with, all laws, statutes, ordinances, rules, regulations, orders, writs, injunctions or decrees of any court or federal, state, municipal or other governmental or regulatory authority having jurisdiction or authority over it or its business operations, properties or assets (including without limitation all provisions of North Carolina law relating to usury, the Consumer Credit Protection Act, and all other laws and regulations applicable to extensions of

credit) except for any such violation, default or noncompliance as does not or would not have a Material Adverse Effect on FNB and its subsidiaries, and, to the best knowledge and belief of management of FNB, there is no basis for any claim by any person or authority for compensation, reimbursement or damages or otherwise for any violation of any of the foregoing.

3.13 Absence of Brokerage or Finders’ Commissions. All negotiations relative to this Agreement and the transactions described herein have been carried on by FNB or its representatives, including Legg Mason Wood Walker, Incorporated (“Legg Mason”), directly with Integrity or its representatives. No person or firm other than Legg Mason has been retained by or has acted on behalf of, pursuant to any agreement, arrangement or understanding with, or under the authority of, FNB or its Board of Directors, as a broker, finder or agent or has performed similar functions or otherwise is or may be entitled to receive or claim a brokerage fee or other commission in connection with or as a result of the transactions described herein.

3.14 Obstacles to Regulatory Approval or Tax Treatment. To the best of the knowledge and belief of the management of FNB, no fact or condition relating to FNB exists that may reasonably be expected to (i) prevent, impede or delay FNB or Integrity from obtaining the regulatory approvals required in order to consummate transactions described herein, or (ii) prevent the Merger from qualifying to be a tax-free reorganization under Section 368(a)(1)(A) of the Code; and, if any such fact or condition becomes known to the executive officers of FNB, FNB promptly (and in any event within three days after obtaining such knowledge) shall communicate such fact or condition to the President of Integrity.

3.15 Loans, Accounts, Notes and Other Receivables.

(a) All loans, accounts, notes and other receivables reflected as assets on the books and records of FNB and its subsidiaries (i) have resulted from bona fide business transactions in the ordinary course of operations of FNB and its subsidiaries, (ii) were made in accordance with the standard loan policies and procedures of FNB and its subsidiaries, and (iii) except as Previously Disclosed, are owned by FNB or a subsidiary free and clear of all liens, encumbrances, assignments, participation or repurchase agreements or other exceptions to title or to the ownership or collection rights of any other person or entity.

(b) All of the records of FNB and its subsidiaries regarding all outstanding loans, accounts, notes and other receivables, and all other real estate owned, are accurate in all material respects, and, with respect to such loans the loan documentation of which indicate are secured by any Loan Collateral, such loans are in all material respects secured by valid, perfected and enforceable liens on all such Loan Collateral having the priority described in the records of such loan.

(c) To the best knowledge and belief of management of FNB, each loan reflected as an asset on the books of FNB and its subsidiaries and each guaranty therefor, is the legal, valid and binding obligation of the obligor or guarantor thereon, and no defense, offset or counterclaim has been asserted with respect to any such loan or guaranty.

3.16 Securities Portfolio and Investments. Except as Previously Disclosed, all securities owned by FNB or any subsidiary (whether owned of record or beneficially) are held

free and clear of all mortgages, liens, pledges, encumbrances or any other restriction or rights of any other person or entity, whether contractual or statutory, which would materially impair the ability of FNB or any subsidiary to dispose freely of any such security or otherwise to realize the benefits of ownership thereof at any time. There are no voting trusts or other agreements or undertakings to which FNB or any subsidiary is a party with respect to the voting of any such securities. With respect to all “repurchase agreements” to which FNB or any subsidiary has “purchased” securities under agreement to resell, FNB or any subsidiary has a valid, perfected first lien or security interest in the government securities or other collateral securing the repurchase agreement, and the value of the collateral securing each such repurchase agreement equals or exceeds the amount of the debt owed that is secured by such collateral. Except for fluctuations in the market values of its investment securities, since December 31, 2004, there has been no significant deterioration or material adverse change in the quality, or any material decrease in the value, of FNB’s securities portfolio as a whole.

3.17 Disclosure. To the best of the knowledge and belief of FNB, no written statement, certificate, schedule, list or written information furnished by or on behalf of FNB at any time to Integrity in connection with this Agreement (including, without limitation, the statements contained herein), when considered as a whole, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. Each document delivered or to be delivered by FNB to Integrity is or will be a true and complete copy of such document, unmodified except by another document delivered by FNB.

ARTICLE IV. COVENANTS OF INTEGRITY

4.1 Affirmative Covenants of Integrity. Integrity hereby covenants and agrees as follows with FNB:

(a) “Affiliates” of Integrity. Integrity will use its best efforts to cause each Affiliate disclosed to FNB (in addition to each additional person who shall become an Affiliate of Integrity after the date of this Agreement or who shall be deemed by FNB or its counsel, in their sole discretion, to be an Affiliate of Integrity, and including persons, trusts, estates, corporations or other entities related to persons deemed to be Affiliates of Integrity) to execute and deliver to FNB prior to the Closing a written agreement (the “Affiliates’ Agreement”) relating to restrictions on shares of FNB Stock to be received by such Affiliates pursuant to this Agreement, which Affiliates’ Agreement shall be in form and content reasonably satisfactory to FNB. Certificates for the shares of FNB Stock issued to Affiliates of Integrity shall bear a restrictive legend (substantially in the form as shall be set forth in the Affiliates’ Agreement) with respect to the restrictions applicable to such shares.

(b) Conduct of Business Prior to Effective Time. Between the date of this Agreement and the Effective Time, except as otherwise agreed by FNB in writing, Integrity will, and will cause each of its subsidiaries to, carry on its business in and only in the regular and usual course in substantially the same manner as such business heretofore was conducted, and will, and where applicable will cause each of its subsidiaries to:

(i) make all reasonable efforts to preserve intact its present business organization, keep available their present officers and employees, and preserve its relationships with customers, depositors, creditors, correspondents, suppliers, and others having business relationships with them;

(ii) maintain all of its properties and equipment used in its business in customary repair, order and condition, ordinary wear and tear excepted;

(iii) maintain its books of account and records in the usual, regular and ordinary manner in accordance with sound business practices applied on a consistent basis except to the extent otherwise reasonably required by applicable laws or regulations or GAAP;

(iv) comply in all material respects with all laws, rules and regulations applicable to it, its properties, assets or employees and to the conduct of its business;

(v) by January 31, 2006, charge down all outstanding loans identified as being impaired by its internal or external auditors, loan review consultants, or regulatory authorities, in amounts not less than the impairments or loss amounts as so identified;

(vi) achieve a Loan Loss Reserve of not less than 1.25% of loans held for investment, net of impaired loans and their related impairment (notwithstanding any other provision of this Agreement, actions taken by Integrity to fulfill the requirements of this Section 4.1(b)(vi) shall not come within the definition of Material Adverse Effect);

(vii) not change its existing loan underwriting guidelines, policies or procedures except as may be required by law;

(viii) continue to maintain in force insurance such as is described in Section 2.24 above; not modify any bonds or policies of insurance in effect as of the date hereof unless the same, as modified, provides substantially equivalent coverage; and, not cancel, allow to be terminated or, to the extent available, fail to renew, any such bond or policy of insurance unless the same is replaced with a bond or policy providing substantially equivalent coverage; and

(ix) promptly provide to FNB such information about its financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations as FNB reasonably shall request.

(c) Loans. Integrity will request in writing and obtain FNB’s prior approval for each new extension of credit (including the issuance of unfunded commitments) or modification of existing credit that it or a subsidiary proposes to make within the following categories: (i) loan participations, (ii) loans for real estate acquisition and development purposes, (iii) construction loans exceeding $1,000,000 in principal amount, (iv) loans to borrowers domiciled, or loans secured by real estate located, outside of Alexander, Ashe, Burke, Caldwell,

Catawba, Iredell, Watauga, Wilkes and Gaston Counties, North Carolina (the “Integrity Market Counties”) or any counties contiguous to the Integrity Market Counties, (v) lines of credit limited by asset-based eligibility formulae, (vi) loans to not-for-profit enterprises, (vii) loans to operators of recreational facilities, (viii) loans secured by mobile home rental or resale properties (regardless of how dwelling title is documented), (ix) loans to Insiders, as defined in Regulation O of the Federal Reserve Board and (x) standby letters of credit exceeding $100,000 in amount; provided, however, that if FNB does not object to a written request for approval within two business days after receipt, the request shall be deemed approved. Neither Integrity nor any subsidiary will enter into any form of indirect lending. Additionally, Integrity will make available and provide to FNB the following information with respect to each of its, CVB’s and FGB’s loans and other extensions of credit (such assets herein referred to as “Loans”) as of June 30, 2005 and as of the end of each month thereafter (unless otherwise specified) until the Effective Time, such information for each month to be in form and substance as is usual and customary in the conduct of its business and to be furnished within 25 days of the end of each month ending after the date hereof, except as otherwise provided:

(i) a list of Loans past due for 30 days or more as to principal or interest;

(ii) a quarterly analysis of the Loan Loss Reserve and management’s assessment of the adequacy of the Loan Loss Reserve;

(iii) a list of all classified or “watch list” Loans, along with the outstanding balance and amount specifically allocated to the Loan Loss Reserve for each such classified or “watch list” Loan;

(iv) a list of Loans in nonaccrual status;

(v) a list of all Loans over $100,000 without principal reduction for a period of longer than one year;

(vi) a list of all foreclosed real property or other real estate owned and all repossessed personal property;

(vii) a list of reworked or restructured Loans over $100,000 and still outstanding, including original terms, restructured terms and status;

(viii) a list of all Loans with interest capitalized; and

(ix) a list of any actual or threatened litigation by or against Integrity or a subsidiary pertaining to any Loans or credits, together with the pleadings and other filed documents related thereto.

Further, Integrity will review with representatives of FNB the circumstances and terms of problem or work-out Loans before establishing a work-out plan or otherwise taking any action with respect to any such Loans and shall provide notice to FNB of, and permit representatives of FNB at FNB’s discretion to attend, meetings of Integrity’s or a subsidiary’s loan committee.

(d) Notice of Certain Changes or Events. Following the execution of this Agreement and up to the Effective Time, Integrity promptly will notify FNB in writing of and provide to it such information as it shall request regarding (i) any material adverse change in its consolidated financial condition, consolidated results of operations, prospects, business, assets, loan portfolio, investments, properties or operations, or of the actual or prospective occurrence of any condition or event which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change, or of (ii) the actual or prospective existence or occurrence of any condition or event which, with the lapse of time or otherwise, has caused or may or could cause any statement, representation or warranty of Integrity herein to be or become inaccurate, misleading or incomplete, or which has resulted or may or could cause, create or result in the breach or violation of any of Integrity’s covenants or agreements contained herein or in the failure of any of the conditions described in Sections 7.1 or 7.3 below.

(e) Consents to Assignment of Contracts and Leases. Integrity will use its best efforts to obtain all required consents to the assignment to FNB of Integrity’s or its subsidiaries’ rights and obligations under any contracts or personal or real property leases, each of which consents shall be in such form as shall be specified by FNB.

(f) Qualified Plans. Integrity shall take all appropriate action as shall be necessary to maintain the Integrity Financial Corporation Employee Savings and Profit Sharing Plan and Trust (the “Integrity 401(k) Plan”) as a qualified plan for purposes of ERISA. Integrity acknowledges that FNB intends that the Integrity 40l(k) Plan will be merged into FNB’s Section 401(k) Savings Plan (the “FNB 401(k) Plan”) as soon as practicable after the Effective Time. Integrity shall take all such actions with respect to such plan as shall be necessary to accomplish such intent and, until the Effective Time, will not take any other extraordinary actions with respect to such plan without the written consent of FNB.

(g) Merger of CVB into FGB. Integrity shall take all appropriate action as shall be necessary to have caused the merger of CVB with and into FGB to have been consummated on or prior to the earlier of January 31, 2006 or the Closing Date. Prior to such merger, Integrity shall use its best efforts to cause each person who is a party to an employment, change of control or similar agreement with CVB or FGB that provides for payments to be made to such person following a “change of control,” whether or not such payments are contingent upon the occurrence of any additional events, to agree in writing that the merger of CVB with and into FGB is not a “change of control” for purposes of such agreement.

(h) Memorandum of Understanding. Integrity shall use its best efforts to cause the Memorandum of Understanding issued by the FDIC and the Commissioner to CVB dated July 28, 2005 (the “MOU”) to be resolved and released.

(i) Further Action; Instruments of Transfer. Integrity shall (i) use its best efforts in good faith to take or cause to be taken all action required of it hereunder as promptly as practicable so as to permit the expeditious consummation of the transactions described herein, (ii) perform all acts and execute and deliver to FNB all documents or instruments required herein or as otherwise shall be reasonably necessary or useful to or requested of Integrity in consummating such transactions and (iii) cooperate with FNB fully in carrying out, and will pursue diligently the expeditious completion of, such transactions.

4.2 Negative Covenants of Integrity. Between the date hereof and the Effective Time, neither Integrity nor, if applicable, any of its subsidiaries, will do any of the following things or take any of the following actions without the prior written consent and authorization of the President of FNB:

(a) Amendments to Articles of Incorporation or Bylaws. Amend its Articles of Incorporation or bylaws.

(b) Change in Capital Stock. Make any change in its authorized capital stock, or create any other or additional authorized capital stock or other securities, or issue (except pursuant to the exercise of options heretofore granted and outstanding under the Integrity Option Plan), sell, purchase, redeem, retire, reclassify, combine or split any shares of its capital stock or other securities (including securities convertible into capital stock), or enter into any agreement or understanding with respect to any such action.

(c) Options, Warrants and Rights. Grant or issue any options, warrants, calls, puts or other rights of any kind relating to the purchase, redemption or conversion of shares of its capital stock or any other securities (including securities convertible into capital stock) or enter into any agreement or understanding with respect to any such action.

(d) Dividends. Declare or pay any dividends on the outstanding shares of capital stock or make any other distributions on or in respect of any shares of its capital stock or otherwise to its shareholders, other than its regularly scheduled semi-annual dividend in the amount of $0.08 per share of Integrity Stock.

(e) Employment, Benefit or Retirement Agreements or Plans. Except as required by law, contemplated by this Agreement or Previously Disclosed, (i) enter into, become bound by, renew or extend any oral or written contract, agreement or commitment for the employment or compensation of any director, officer, employee or consultant which is not immediately terminable by Integrity or any subsidiary without cost or other liability on no more than 30 days’ notice; (ii) amend any existing, or adopt, enter into or become bound by any new or additional, profit-sharing, bonus, incentive, change in control or “golden parachute,” stock option, stock purchase, pension, retirement, insurance (hospitalization, life or other), paid leave (sick leave, vacation leave or other) or similar contract, agreement, commitment, understanding, plan or arrangement (whether formal or informal) with respect to or which provides for benefits for any of its current or former directors, officers, employees or consultants; (iii) grant or amend any existing options under the Integrity Option Plan; (iv) make contributions to the Integrity 401(k) Plan other than basic and matching contributions in accordance with the terms of the Integrity 401(k) Plan as Previously Disclosed; or (v) enter into or become bound by any contract with or commitment to any labor or trade union or association or any collective bargaining group. With respect to any Integrity Benefit Plan that provides for vesting, there shall be no discretionary vesting without FNB’s prior written consent whether or not such discretionary vesting is provided for under the Integrity Benefit Plan, and Integrity shall not take any action to accelerate the vesting or exercisability of stock options, restricted stock or other compensation or benefits payable thereunder.

(f) Increase in Compensation. With the exception of the anticipated increases in annual salary and annual officer and employee bonuses Previously Disclosed to FNB, increase the compensation or benefits of, or pay any bonus or other special or additional compensation to, any of its directors, officers, employees or consultants.

(g) Accounting Practices. Make any changes in its accounting methods, practices or procedures or in depreciation or amortization policies, schedules or rates heretofore applied (except as required by GAAP or governmental regulations).

(h) Acquisitions; Additional Branch Offices. Directly or indirectly (i)acquire or merge with, or acquire any branch or all or any significant part of the assets of, any other person or entity, (ii) open any new branch office, or (iii) enter into or become bound by any contract, agreement, commitment or letter of intent relating to, or otherwise take or agree to take any action in furtherance of, any such transaction or the opening of a new branch office.

(i) Changes in Business Practices. Except as may be required by the FDIC, the Commissioner or any other governmental or other regulatory agency or as shall be required by applicable law, regulation or this Agreement, (i) conduct its business other than in the ordinary and usual course consistent with past practice or fail to use reasonable best efforts to preserve intact its business organization and advantageous business relationships, (ii) fail to use commercially reasonable best efforts to keep available the present services of its employees and preserve for itself and FNB the goodwill of the customers of Integrity and its subsidiaries and others with whom business relations exist, (iii) take any action that would adversely affect or materially delay the ability of either Integrity or FNB to obtain any necessary approvals of any regulatory agency required for the transactions contemplated hereby or to perform its covenants and agreements under this Agreement or to consummate the transactions contemplated hereby, (iv) discontinue any material portion or line of its business, or (v) change in any material respect its lending, investment, asset-liability management or other material banking or business policies (except to the extent required by Section 4.1(b) above and Section 6.9 below).

(j) Investment Securities. (i) Acquire, other than by way of foreclosure or acquisition in a bona fide fiduciary capacity or in satisfaction of debts previously contracted in good faith, in each case in the ordinary course of business consistent with past practice any debt security or Equity Investment (as hereinafter defined) other than federal funds or United States Government securities or United States Government agency securities, in each case with a term of one year or less, (ii) restructure or materially change its investment securities portfolio or its gap position, or (iii) enter into any Derivatives Contract (as hereinafter defined); provided, however, that, if FNB does not object to a written request for approval within two business days after receipt, the request shall be deemed approved. “Equity Investment” means (i) any stock (other than adjustable-rate preferred stock, money market (auction rate) preferred stock or other instrument determined by the OCC to have the character of debt securities), certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, or voting-trust certificate; any security convertible into such a security; any security carrying any warrant or right to subscribe to or purchase any such security and any certificate of interest or participation in, temporary or interim certificate for or receipt for any of the foregoing, (ii) any ownership interest in any company or other entity, any membership interest that includes a voting right in any company or

other entity or any interest in real estate or (iii) any investment or transaction which in substance falls into any of these categories even though it may be structured as some other form of investment or transaction. “Derivatives Contract” means any exchange traded or over-the-counter equity, interest rate, foreign exchange or other swap, forward, future, option, cap, floor or collar or any other contract that is a derivatives contract, including any combination of the foregoing.

(k) Acquisition or Disposition of Assets.

(i) Except in the ordinary course of business consistent with its past practices, sell or lease (as lessor), or enter into or become bound by any contract, agreement, option or commitment relating to the sale, lease (as lessor) or other disposition of any real estate; or sell or lease (as lessor), or enter into or become bound by any contract, agreement, option or commitment relating to the sale, lease (as lessor) or other disposition of any equipment or any other fixed or capital asset (other than real estate) having a book value or a fair market value, whichever is greater, of more than $25,000 for any individual item or asset, or more than $50,000 in the aggregate for all such items or assets;

(ii) Except in the ordinary course of business consistent with past practices, purchase or lease (as lessee), or enter into or become bound by any contract, agreement, option or commitment relating to the purchase, lease (as lessee) or other acquisition of any real property; or purchase or lease (as lessee), or enter into or become bound by any contract, agreement, option or commitment relating to the purchase, lease (as lessee) or other acquisition of any equipment or any other fixed assets (other than real estate) having a purchase price, or involving aggregate lease payments, in excess of $25,000 for any individual item or asset, or more than $50,000 in the aggregate for all such items or assets;

(iii) Enter into any purchase commitment for supplies or services which calls for prices of goods or fees for services materially higher than current market prices or fees or which obligates Integrity or any subsidiary for a period longer than six months;

(iv) Except in the ordinary course of its business consistent with its past practices, sell, purchase or repurchase, or enter into or become bound by any contract, agreement, option or commitment to sell, purchase or repurchase, any loan or other receivable or any participation in any loan or other receivable; or

(v) Sell or dispose of, or enter into or become bound by any contract, agreement, option or commitment relating to the sale or other disposition of, any other asset (whether tangible or intangible, and including without limitation any trade name, trademark, copyright, service mark or intellectual property right or license) other than assets that are obsolete or no longer used in Integrity’s business; or assign its right to or otherwise give any other person its permission or consent to use or do business under the corporate name of Integrity or any subsidiary or any name similar thereto; or release, transfer or waive any license or right granted to it by any other person to use any trademark, trade name, copyright, service mark or intellectual property right.

(l) Debt; Liabilities. Except in the ordinary course of its business consistent with its past practices, (i) incur any indebtedness for borrowed money, other than deposits, federal funds purchased, cash management accounts, Federal Home Loan Bank borrowings that mature within one year and securities sold under agreements to repurchase that mature within 90 days, in each case in the ordinary course of business consistent with past practice, or assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other person or entity, other than in the ordinary course of business consistent with past practice, (ii) prepay any indebtedness, or (iii) incur any other liability or obligation (absolute or contingent).

(m) Liens; Encumbrances. Mortgage, pledge or subject any of its assets to, or permit any of its assets to become or (with the exception of those liens and encumbrances Previously Disclosed to FNB with specificity) remain subject to, any lien or any other encumbrance (other than in the ordinary course of business consistent with its past practices in connection with borrowings from the Federal Home Loan Bank of Atlanta, securing of public funds deposits, repurchase agreements or other similar operating matters).

(n) Waiver of Rights. Waive, release or compromise any material rights in its favor (except in the ordinary course of business) except in good faith for fair value in money or money’s worth, nor waive, release or compromise any rights against or with respect to any of its officers, directors or shareholders or members of families of officers, directors or shareholders.

(o) Other Contracts. Except as Previously Disclosed, enter into or become bound by any contracts, agreements, commitments or understandings (other than those described elsewhere in this Section 4.2) (i) for or with respect to any charitable contributions in excess of $15,000; (ii) with any governmental or regulatory agency or authority; (iii) pursuant to which Integrity or any subsidiary would assume, guarantee, endorse or otherwise become liable for the debt, liability or obligation of any other person or entity; (iv) which is entered into other than in the ordinary course of its business; or (v) which, in the case of any one contract, agreement, commitment or understanding and whether or not in the ordinary course of its business, would obligate or commit Integrity or any subsidiary to make expenditures of more than $25,000 (other than contracts, agreements, commitments or understandings entered into in the ordinary course of Integrity’s or any subsidiary’s lending operations).

(p) Deposit Liabilities. Make any change in its current deposit policies, including pricing and acceptance, and shall not take any actions designed to materially decrease the aggregate level of deposits as of the date of this Agreement.

4.3 Shareholder Approval.

(a) Meeting of Shareholders. Integrity shall cause a meeting of its shareholders to be duly called and held as soon as practicable for the purpose of voting on the approval and adoption of the Plan of Merger. In connection with the call and conduct of and all

other matters relating to its shareholders’ meeting (including the solicitation of proxies), Integrity shall fully comply with all provisions of applicable federal and state law and regulations and with its Articles of Incorporation and bylaws.

(b) Recommendation of Board of Directors. Subject to the right of Integrity and its Board of Directors to take any action permitted by Section 4.4(b) with respect to a Superior Proposal (as defined in Section 4.4(b)), Integrity, through its Board of Directors, shall recommend to the shareholders of Integrity that they vote their shares at the shareholders’ meeting contemplated by Section 4.3(a) above to approve the Plan of Merger (the “Approval Recommendation”) and the Joint Proxy Statement/Prospectus (as defined in Section 6.1(b)) will so indicate and state that Integrity’s Board of Directors considers the Merger to be advisable and in the best interests of Integrity and its shareholders.

4.4 Certain Actions.

(a) From the date of this Agreement through the Effective Time, except as otherwise permitted by this Section 4.4, Integrity shall not, and shall not authorize or permit any of its directors, officers, agents, employees, investment bankers, attorneys, accountants, advisors, agents, affiliates or representatives (collectively, “Representatives”) to, directly or indirectly, (i) initiate, solicit, encourage or take any action to facilitate, including by way of furnishing information, any Acquisition Proposal (as defined below) or any inquiries with respect to the making of any Acquisition Proposal, (ii) enter into, continue or otherwise participate in any discussions or negotiations with, furnish any information relating to Integrity or any of its subsidiaries or afford access to the business, properties, assets, books or records of Integrity or any of its subsidiaries to, otherwise cooperate in any way with, or knowingly assist, participate in, facilitate or encourage any effort by any third party that is seeking to make, or has made, an Acquisition Proposal or (iii) except in accordance with Section 8.2(b)(vi), approve, endorse or recommend or enter into any letter of intent or similar document or any contract, agreement or commitment contemplating or otherwise relating to an Acquisition Proposal.

The term “Acquisition Proposal” means any inquiry, proposal or offer, filing of any regulatory application or notice, whether in draft or final form, or disclosure of an intention to do any of the foregoing from any person relating to any (w) direct or indirect acquisition or purchase of a business that constitutes a substantial portion of the net revenues, net income or net assets of Integrity or any of its subsidiaries, (x) the direct or indirect acquisition or purchase of any class of equity securities representing 10% or more of the voting power of Integrity’s common stock, (y) tender offer or exchange offer that if consummated would result in any person beneficially owning 10% or more of any class of equity securities of Integrity, or (z) merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving Integrity other than the transactions contemplated by this Agreement.

(b) Notwithstanding anything herein to the contrary, Integrity and its Board of Directors shall be permitted (i) to comply with Rule 14d-9 and Rule 14e-2 promulgated under the 1934 Act with regard to an Acquisition Proposal, provided that the Board of Directors of Integrity shall not withdraw or modify in a manner adverse to FNB its Approval Recommendation except as set forth in clause (iii) below; (ii) to engage in any discussions or negotiations with, or provide any information to, any person in response to a Superior Proposal

(as defined below) by any such person, if and only to the extent that (x) Integrity’s Board of Directors concludes in good faith, after consultation with outside counsel, that failure to do so would breach its fiduciary duties to Integrity’s shareholders under applicable law, (y) prior to providing any information or data to any person in connection with a Superior Proposal by any such person, Integrity’s Board of Directors receives from such person an executed confidentiality agreement, a copy of which executed confidentiality agreement shall have been provided to FNB for informational purposes, and (z) at least 72 hours prior to providing any information or data to any person or entering into discussions or negotiations with any person, Integrity promptly notifies FNB in writing of the name of such person and the material terms and conditions of any such Superior Proposal, and (iii) to withdraw, modify, qualify in a manner adverse to FNB, condition or refuse to make its Approval Recommendation (the “Change in Recommendation”) if Integrity’s Board of Directors concludes in good faith, after consultation with outside counsel and financial advisors, that failure to do so would breach its fiduciary duties to Integrity’s shareholders under applicable law.

The term “Superior Proposal” means any bona fide, unsolicited written Acquisition Proposal made by a third party to acquire more than 50% of the combined voting power of the shares of Integrity Stock then outstanding or all or substantially all of Integrity’s consolidated assets for consideration consisting of cash or securities or both that is on terms that the Board of Directors of Integrity in good faith concludes, after consultation with its financial advisors and outside counsel, taking into account, among other things, all legal, financial, regulatory and other aspects of the proposal and the person making the proposal, including any break-up fees, expense reimbursement provisions and conditions to consummation, (A) is on terms that the Board of Directors of Integrity in its good faith judgment believes to be more favorable from a financial point of view to its shareholders than the Merger; (B) for which financing, to the extent required, is then fully committed or reasonably determined to be available by the Board of Directors of Integrity, and (C) is reasonably capable of being completed.

(c) Integrity will promptly, and in any event within 24 hours, notify FNB in writing of the receipt of any Acquisition Proposal or any information related thereto, which notification shall describe the Acquisition Proposal and identify the third party making such proposal.

(d) Integrity shall, and shall cause its Representatives to, immediately cease and cause to be terminated any activities, discussions or negotiations existing as of the date of this Agreement with any parties conducted heretofore with respect to any Acquisition Proposal.

(e) If a Payment Event (as hereinafter defined) occurs, Integrity shall pay to FNB by wire transfer of immediately available funds, within two business days following such Payment Event, a fee of $4,000,000 (the “Break-up Fee”). The term “Payment Event” means any of the following:

(i) the termination of this Agreement by FNB pursuant to Section 8.2(a)(vi);

(ii) the termination of this Agreement by Integrity pursuant to Section 8.2(b)(vi);

(iii) a tender offer or exchange offer for 25% or more of the outstanding common stock of Integrity is commenced and Integrity shall not have sent to its shareholders, within 10 business days after the commencement of such tender offer or exchange offer, a statement that the Board of Directors of Integrity recommends rejection of such tender offer or exchange offer; or

(iv) the occurrence of any of the following events within eighteen months of the termination of this Agreement pursuant to Section 8.2(a)(iv) or 8.2(b)(iv), provided that an Acquisition Proposal shall have been made by a Third Party after the date hereof and prior to such termination that shall not have been withdrawn in good faith prior to such termination: (A) Integrity enters into an agreement to merge with or into, or be acquired, directly or indirectly, by merger or otherwise by, such Third Party; (B) such Third Party, directly or indirectly, acquires substantially all of the total assets of Integrity and its subsidiaries, taken as a whole; (C) such Third Party, directly or indirectly, acquires more than 50% of the outstanding Integrity Stock or (D) Integrity adopts or implements a plan of liquidation, recapitalization or share repurchase relating to more than 50% of the outstanding Integrity Stock or an extraordinary dividend relating to substantially all of the outstanding Integrity Stock or substantially all of the assets of Integrity and its subsidiaries, taken as a whole. As used herein, “Third Party” means any person as defined in Section 13(d) of the 1934 Act other than FNB or its affiliates.

Integrity acknowledges that the agreements contained in this Section 4.4 are an integral part of the transactions contemplated in this Agreement and that without these agreements FNB would not enter into this Agreement. Accordingly, in the event Integrity fails to pay to FNB the Break-up Fee, promptly when due, Integrity shall, in addition thereto, pay to FNB all costs and expenses, including attorneys’ fees and disbursements, incurred in collecting such Break-up Fee together with interest on the amount of the Break-up Fee or any unpaid portion thereof, from the date such payment was due until the date such payment is received by FNB, accrued at the fluctuating prime rate as quoted in The Wall Street Journal as in effect from time to time during the period.

ARTICLE V. COVENANTS OF FNB

FNB hereby covenants and agrees as follows with Integrity:

5.1 NASDAQ Notification. Prior to the Effective Time, FNB shall file with the National Association of Securities Dealers such notifications and other materials (and shall pay such fees) as shall be required for the listing on NASDAQ of the shares of FNB Stock to be issued to Integrity’s shareholders pursuant to the Merger.

5.2 Employment. After the Effective Time, FNB may, but shall be under no obligation to, retain the employees of Integrity and its subsidiaries other than those employees who are employed by Integrity or any subsidiary pursuant to a written employment agreement that is Previously Disclosed to FNB. Any such person retained shall be an employee of FNB on an “at-will” basis, and nothing in this Agreement shall be deemed to constitute an employment

agreement with any such person or to obligate FNB to employ any such person for any specific period of time or in any specific position or location or to restrict FNB’s right to change the rate of compensation or terminate the employment of any such person at any time and for any reason.

5.3 Employee Benefits.

(a) Generally. Except as otherwise provided herein and to the extent permitted by contribution and deduction limitations of ERISA and the Code with respect to FNB’s qualified plans, any employee of Integrity or its subsidiaries who continues employment with FNB, Integrity or its subsidiaries at the Effective Time (a “New Employee”) shall become entitled to receive all employee benefits and to participate in all benefit plans provided by FNB or First National on the same basis and subject to the same eligibility and vesting requirements, and to the same conditions, restrictions and limitations, as generally are in effect and applicable to other newly hired employees of FNB or First National. However, each New Employee shall be given credit for his or her full years of service with Integrity or its subsidiaries for purposes of (i) entitlement to vacation and sick leave and for participation in all FNB or First National welfare, insurance and other fringe benefit plans, and (ii) eligibility for participation and vesting in the FNB 401(k) Plan and in FNB’s defined benefit pension plan (the “FNB Pension Plan”). Notwithstanding any provision herein to the contrary, FNB will not be required to take any action that could adversely affect the continuing qualification of the FNB 40l(k) Plan or the FNB Pension Plan. FNB will grant to each New Employee a pro rata amount of sick leave and vacation leave, in accordance with FNB standard leave policies, for the period between the Effective Time and the end of the calendar year during which the Effective Time occurs. Each New Employee will be permitted to carry over accrued and unused sick leave and vacation leave earned at Integrity or a subsidiary but shall thereafter be subject to FNB’s leave policies.

(b) Health Insurance. Upon the merger of Integrity’s bank subsidiaries with and into First National, each New Employee shall be entitled to participate in First National’s group health insurance plan at a cost equal to the cost for any First National employee and such participation shall be without regard to pre-existing condition requirements under First National’s group health insurance plan, to the extent any such condition at the Effective Time would have been covered under the health insurance plans of Integrity.

5.4 Integrity Directors.

(a) Representation on FNB Board. FNB shall appoint four persons nominated by Integrity and then serving as independent directors on the Integrity, CVB or FGB Board of Directors and approved by FNB at the Effective Time to serve as directors of FNB until the next annual meeting of shareholders at which directors of FNB are elected and shall take such actions as shall be required to increase the number of members of its Board of Directors as may be necessary to permit such nominees to serve as directors. FNB’s Board shall nominate such persons for election at annual meetings of FNB shareholders such that those four nominees of Integrity, if elected by FNB’s shareholders, would be able to serve as directors of FNB for terms of no less than one year after the Effective Time.

(b) Advisory Board. Each of the members of the Integrity, CVB and FGB Boards of Directors (other than those appointed as members of the FNB Board of Directors

pursuant to Section 5.4(a) above) at the Effective Time shall be appointed to serve as a member of FNB’s local advisory board in the Integrity Market Counties, after the Effective Time notwithstanding any mandatory retirement policy of FNB for its directors generally. Each person so appointed shall diligently discharge his or her duties as an advisory board member and promote in good faith FNB’s best interests. Each such person’s service as an advisory director will be at FNB’s pleasure and will be subject to FNB’s normal policies and procedures regarding the appointment and service of directors to the boards of its subsidiaries.

5.5 Indemnification of Directors and Officers.

(a) After the Effective Time, without releasing any insurance carrier and after exhaustion of all applicable director and liability insurance coverage for Integrity and its directors and officers, FNB shall indemnify, hold harmless and defend the directors and officers of Integrity in office on the date hereof or the Effective Time, to the same extent as it indemnifies its own directors and officers, from and against any and all claims, disputes, demands, causes of action, suits, proceedings, losses, damages, liabilities, obligations, costs and expenses of every kind and nature including, without limitation, reasonable attorneys’ fees and legal costs and expenses therewith whether known or unknown and whether now existing or hereafter arising which may be threatened against, incurred, undertaken, received or paid by such persons in connection with or which arise out of or result from or are based upon any action or failure to act by such person in the ordinary scope of his duties as a director or officer of Integrity (including service as a director or officer of any Integrity subsidiary or fiduciary of any of the Integrity Plans (as defined in Section 2.23(a)) through the Effective Time; provided, however, that FNB shall not be obligated to indemnify such person for (i) any act not available for statutory or permissible indemnification under North Carolina law, (ii) any penalty, decree, order, finding or other action imposed or taken by any regulatory authority, (iii) any violation or alleged violation of federal or state securities laws to the extent that indemnification is prohibited by law, or (iv) any claim of sexual or other unlawful harassment, or any form of employment discrimination prohibited by federal or state law; further, provided, however, that (A) FNB shall have the right to assume the defense thereof and upon such assumption FNB shall not be liable to any director or officer of Integrity for any legal expenses of other counsel or any other expenses subsequently incurred by such director or officer in connection with the defense thereof, except that if FNB elects not to assume such defense or counsel for such director or officer reasonably advises such director or officer that there are issues which raise conflicts of interest between FNB and such director or officer, such director or officer may retain counsel reasonably satisfactory to him, and FNB shall pay the reasonable fees and expenses of such counsel, (B) FNB shall not be liable for any settlement effected without its prior written consent, and (C) FNB shall have no obligation hereunder to any director or officer of Integrity when and if a court of competent jurisdiction shall determine that indemnification of such director or officer in the manner contemplated hereby is prohibited by applicable law. The indemnification provided herein shall be in addition to any indemnification rights an indemnitee may have by law, pursuant to the charter or bylaws of Integrity or any of its subsidiaries or pursuant to any Plan for which the indemnity serves as a fiduciary.

(b) From and after the Effective Time, FNB will directly or indirectly cause the persons who served as directors or officers of Integrity at the Effective Time to be covered by Integrity’s existing directors’ and officers’ liability insurance policy (provided that FNB may

substitute therefor policies of at least the same coverage in amounts contained and terms and conditions which are not less advantageous than such policy). Such insurance coverage shall commence at the Effective Time and will be provided for a period of no less than three years after the Effective Time.

(c) The indemnification provided by this Section 5.5 is the sole indemnification provided by FNB to the directors and officers of Integrity for service in such positions up to and through the Effective Time. This Section 5.5 is intended to create personal rights in the directors and officers of Integrity, who shall be deemed to be third-party beneficiaries hereof. Notwithstanding any other provision of this Agreement, at the Effective Time, the indemnification rights provided herein shall not be extinguished but shall instead survive for a period of three years after the Effective Time.

5.6 Notice of Certain Changes or Events. Following the execution of this Agreement and up to the Effective Time, FNB promptly will notify Integrity in writing of and provide to it such information as it shall request regarding (i) any material adverse change in its consolidated financial condition, consolidated results of operations, prospects, business, assets, loan portfolio, investments, properties or operations, or of the actual or prospective occurrence of any condition or event which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change, or (ii) the actual or prospective existence or occurrence of any condition or event which, with the lapse of time or otherwise, has caused or may or could cause any statement, representation or warranty of FNB herein to be or become inaccurate, misleading or incomplete, or which has resulted or may or could cause, create or result in the breach or violation of any of FNB’s covenants or agreements contained herein or in the failure of any of the conditions described in Sections 7.1 or 7.2 below.

5.7 Further Action; Instruments of Transfer. FNB shall (i) use its best efforts in good faith to take or cause to be taken all action required of it hereunder as promptly as practicable so as to permit the expeditious consummation of the transactions described herein, (ii) perform all acts and execute and deliver to Integrity all documents or instruments required herein or as otherwise shall be reasonably necessary or useful to or requested of FNB in consummating such transactions and (iii) cooperate with Integrity fully in carrying out, and will pursue diligently the expeditious completion of, such transactions.

5.8 Shareholder Approval.

(a) Meeting of Shareholders. FNB shall cause a meeting of its shareholders to be duly called and held as soon as practicable for the purpose of voting on the approval and adoption of the Plan of Merger, the approval of an amendment to the Articles of Incorporation of FNB to increase the number of authorized shares, and the approval of the issuance of shares of FNB Stock in the Merger. In connection with the call and conduct of and all other matters relating to its shareholders’ meeting (including the solicitation of proxies), FNB shall fully comply with all provisions of applicable federal and state law and regulations and with its Articles of Incorporation and bylaws.

(b) Recommendation of Board of Directors. Subject to its fiduciary obligations, the Board of Directors of FNB, shall recommend to the shareholders of FNB that

they vote their shares at the shareholders’ meeting contemplated by Section 5.8(a) above to approve the issuance of shares of FNB Stock in the Merger, the amendment of the Articles of Incorporation and the Plan of Merger and the Joint Proxy Statement/Prospectus (as defined in Section 6.1(b)) will so indicate and state that FNB’s Board of Directors considers the Merger to be advisable and in the best interests of FNB and its shareholders.

ARTICLE VI. MUTUAL AGREEMENTS

6.1 Registration Statement; Joint Proxy Statement/Prospectus.

(a) Registration Statement and “Blue Sky” Approvals. As soon as practicable following the execution of this Agreement and after the furnishing by Integrity of all information required to be contained therein, FNB shall prepare and file with the SEC under the 1933 Act a registration statement on Form S-4 (or on such other form as FNB shall determine to be appropriate) (the “Registration Statement”) covering the FNB Stock to be issued to shareholders of Integrity pursuant to this Agreement. Additionally, FNB shall take all such other actions, if any, as shall be required by applicable state securities or “blue sky” laws (i) to cause the FNB Stock to be issued upon consummation of the Merger, and at the time of the issuance thereof, to be duly qualified or registered (unless exempt) under such laws, (ii) to cause all conditions to any exemptions from qualification or registration under such laws to have been satisfied, and (iii) to obtain any and all required approvals or consents to the issuance of such stock. FNB shall deliver to Integrity and its counsel a preliminary draft of the Registration Statement and the Joint Proxy Statement/Prospectus as soon as practicable after the date of this Agreement.

(b) Preparation and Distribution of Joint Proxy Statement/Prospectus. FNB and Integrity jointly shall prepare a “Joint Proxy Statement/Prospectus” for distribution to their shareholders as the proxy statement relating to solicitation of proxies for use at the shareholders’ meetings contemplated in Sections 4.3(a) and 5.8(a) above and as FNB’s prospectus relating to the offer and distribution of FNB Stock as described herein. The Joint Proxy Statement/Prospectus shall be in such form and shall contain or be accompanied by such information regarding the shareholders’ meeting, this Agreement, the parties hereto, the Merger and other transactions described herein as is required by applicable law and regulations and otherwise as shall be agreed upon by FNB and Integrity. FNB shall include the Joint Proxy Statement/Prospectus as the prospectus in its “Registration Statement” described above; and FNB and Integrity shall cooperate with each other in good faith and shall use their best efforts to cause the Joint Proxy Statement/Prospectus to comply with any comments of the SEC. Each of FNB and Integrity shall mail the Joint Proxy Statement/Prospectus to its shareholders prior to the scheduled date of its shareholders’ meeting; provided, however, that no such materials shall be mailed to Integrity’s shareholders unless and until FNB shall have determined to its own satisfaction that the conditions specified in Sections 7.1(b) and (c) below have been satisfied and shall have approved such mailing.

(c) Information for Joint Proxy Statement/Prospectus and Registration Statement. Each of FNB and Integrity shall promptly respond, and use its best efforts to cause its directors, officers, accountants and affiliates to promptly respond, to requests by the other party and its counsel for information for inclusion in the various applications for regulatory

approvals and in the Joint Proxy Statement/Prospectus. Each of FNB and Integrity hereby covenants with the other that none of the information provided by it for inclusion in the Joint Proxy Statement/Prospectus will, at the time of its mailing, contain any untrue statement of a material fact or omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading; and, at all times following such mailing up to and including the Effective Time, none of such information contained in the Joint Proxy Statement/Prospectus, as it may be amended or supplemented, will contain any untrue statement of a material fact or omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading.

6.2 Regulatory Approvals. Within 75 days after the date of this Agreement, each of FNB and Integrity shall prepare and file, or cause to be prepared and filed, all applications for regulatory approvals and actions as may be required of it, by applicable law and regulations with respect to the transactions described herein (including applications to the Federal Reserve Board, the Commissioner and to any other applicable federal or state banking, securities or other regulatory authority). Each party shall use its best efforts in good faith to obtain all necessary regulatory approvals required for consummation of the transactions described herein. Each party shall cooperate with the other party in the preparation of all applications to regulatory authorities and, upon request, promptly shall furnish all documents, information, financial statements or other material that may be required by any other party to complete any such application; and, before the filing thereof, each party to this Agreement shall have the right to review and comment on the form and content of any such application to be filed by any other party. Should the appearance of any of the officers, directors, employees or counsel of any of the parties hereto be requested by any other party or by any governmental agency at any hearing in connection with any such application, such party shall promptly use its best efforts to arrange for such appearance.

6.3 Access. Following the date of this Agreement and to and including the Effective Time, Integrity and FNB shall each provide the other party and such other party’s employees, accountants, counsel or other representatives, access to all its books, records, files and other information (whether maintained electronically or otherwise), to all its properties and facilities, and to all its employees, accountants, counsel and consultants as Integrity and FNB, as the case may be, shall, in its sole discretion, consider to be necessary or appropriate; provided, however, that any investigation or reviews conducted by FNB or Integrity shall be performed in such a manner as will not interfere unreasonably with the other party’s normal operations or with relationships with its customers or employees, and shall be conducted in accordance with procedures established by the parties having due regard for the foregoing.

6.4 Costs. Subject to the provisions of Section 8.3(c) below, and whether or not this Agreement shall be terminated or the Merger shall be consummated, each of FNB and Integrity shall pay its own legal, accounting and financial advisory fees and all its other costs and expenses incurred or to be incurred in connection with the execution and performance of its obligations under this Agreement or otherwise in connection with this Agreement and the transactions described herein (including, without limitation, all accounting fees, legal fees, filing fees, printing costs, mailing costs, travel expenses, and investment banking fees). However, subject to the provisions of Section 8.3(c) below, all costs incurred in connection with the printing and mailing of the Joint Proxy Statement/Prospectus shall be deemed to be incurred and shall be paid fifty percent (50%) by Integrity and fifty percent (50%) by FNB.

6.5 Announcements. No person other than the parties to this Agreement is authorized to make any public announcements or statements about this Agreement or any of the transactions described herein, and, without the prior review and consent of the others (which consent shall not unreasonably be denied or delayed), no party hereto may make any public announcement, statement or disclosure as to the terms and conditions of this Agreement or the transactions described herein, except for such disclosures as may be required incidental to obtaining the prior approval of any regulatory agency or official to the consummation of the transactions described herein. However, notwithstanding anything contained herein to the contrary, prior review and consent shall not be required if in the good faith opinion of counsel to FNB or Integrity any such disclosure by FNB or Integrity, as the case may be, is required by law or otherwise is prudent.

6.6 Confidentiality. FNB and Integrity each shall treat as confidential and not disclose to any unauthorized person any documents or other information obtained from or learned about the other during the course of the negotiation of this Agreement and the carrying out of the events and transactions described herein (including any information obtained during the course of any due diligence investigation or review provided for herein or otherwise) and which documents or other information relates in any way to the business, operations, personnel, customers or financial condition of such other party; and that it will not use any such documents or other information for any purpose except for the purposes for which such documents and information were provided to it and in furtherance of the transactions described herein. However, the above obligations of confidentiality shall not prohibit the disclosure of any such document or information by any party to this Agreement to the extent (i) such document or information is then available generally to the public or is already known to the person or entity to whom disclosure is proposed to be made (other than through the previous actions of such party in violation of this Section 6.6), (ii) such document or information was available to the disclosing party on a nonconfidential basis prior to the same being obtained pursuant to this Agreement, (iii) disclosure is required by subpoena or order of a court or regulatory authority of competent jurisdiction, or by the SEC or other regulatory authorities in connection with the transactions described herein, or (iv) to the extent that, in the reasonable opinion of legal counsel to such party, disclosure otherwise is required by law. In the event this Agreement is terminated for any reason, then each of the parties hereto immediately shall return to the other party all copies of any and all documents or other written materials or information (including computer generated and stored data) of or relating to such other party which were obtained from them during the course of the negotiation of this Agreement and the carrying out of the events and transactions described herein (whether during the course of any due diligence investigation or review provided for herein or otherwise) and which documents or other information relates in any way to the business, operations, personnel, customers or financial condition of such other party. The parties’ obligations of confidentiality under this Section 6.6 shall survive and remain in effect following any termination of this Agreement.

6.7 Environmental Studies. At its option, FNB may cause to be conducted Phase I environmental assessments of the Real Property, the real estate subject to any Real Property Lease, or the Loan Collateral, or any portion thereof, together with such other studies, testing and

intrusive sampling and analyses as FNB shall deem necessary or desirable (collectively, the “Environmental Survey”); provided, however, that the Environmental Survey, as much as possible, shall be performed in such a manner as will not interfere unreasonably with Integrity’s normal operations, and provided further, however, that Integrity shall use its best efforts to obtain any required consents of third parties to permit any Environmental Survey of any Loan Collateral. FNB shall attempt in good faith to complete all such Phase I environmental assessments within 60 days following the date of this Agreement and thereafter to conduct and complete any such additional studies, testing, sampling and analyses as promptly as practicable. Subject to the provisions of Section 8.3(c) below, the costs of the Environmental Survey shall be paid by FNB. If (i) the final results of any Environmental Survey (or any related analytical data) reflect that there likely has been any discharge, disposal, release or emission by any person of any Hazardous Substance on, from or relating to any of the Real Property, real estate subject to a Real Property Lease or Loan Collateral at any time prior to the Effective Time, or that any action has been taken or not taken, or a condition or event likely has occurred or exists, with respect to any of the Real Property, real estate subject to a Real Property Lease or Loan Collateral which constitutes or would constitute a violation of any Environmental Laws, and if, (ii) based on the advice of its legal counsel or other consultants, FNB believes that Integrity or, following the Merger, FNB, could become responsible for the remediation of such discharge, disposal, release or emission or for other corrective action with respect to any such violation, or that Integrity or, following the Merger, FNB, could become liable for monetary damages (including without limitation any civil or criminal penalties or assessments) resulting therefrom (or that, in the case of any of the Loan Collateral, Integrity or, following the Merger, FNB, could incur any such liability if it acquired title to such Loan Collateral), and if, (iii) based on the advice of their legal counsel or other consultants, FNB reasonably believes the amount of expenses or liability which either of them could incur or for which either of them could become responsible or liable on account of any and all such remediation, corrective action or monetary damages at any time or over any period of time could equal or exceed an aggregate of $250,000 over any period of time, then FNB shall give Integrity prompt written notice thereof (together with all information in its possession relating thereto) and, at FNB’s sole option and discretion, at any time thereafter and up to the Effective Time, it may terminate this Agreement without further obligation or liability to Integrity or its shareholders.

6.8 Tax-Free Reorganization. FNB and Integrity shall each use its best efforts to cause the Merger to qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(A) of the Code and shall not intentionally take any action that would cause the Merger to fail to so qualify.

6.9 Certain Modifications. FNB and Integrity shall consult with each other with respect to their loan, litigation and real estate valuation policies and practices (including loan classifications and levels of reserves) and Integrity shall make such modifications or changes to its policies and practices, if any, prior to the Effective Time, as may be mutually agreed upon. FNB and Integrity also shall consult with each other with respect to the character, amount and timing of restructuring and Merger-related expense charges to be taken by each of them in connection with the transactions contemplated by this Agreement and shall take such charges in accordance with GAAP as may be mutually agreed upon by them. The representations, warranties and covenants of each of FNB and Integrity contained in this Agreement shall not be deemed to be inaccurate or breached in any respect as a consequence of any modifications or charges undertaken by reason of this Section 6.9.

6.10 Transition Team. FNB and Integrity shall create a transition team comprised of staff and representatives of Integrity and staff and representatives of FNB (the “Transition Team”). The purpose of the Transition Team shall be to provide detailed guidance to FNB in fulfilling and consummating the Merger, to maintain open lines of communication between Integrity and FNB, and to handle customer inquiries regarding the Merger. The Transition Team shall meet as necessary until the Effective Time. Members of the Transition Team shall receive no separate compensation for such service.

ARTICLE VII. CONDITIONS PRECEDENT TO MERGER

7.1 Conditions to all Parties’ Obligations. Notwithstanding any other provision of this Agreement to the contrary, the obligations of each of the parties to this Agreement to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date:

(a) Corporate Action. All corporate action necessary to authorize the execution, delivery and performance of this Agreement and the Plan of Merger in consummation of the transactions contemplated hereby and thereby shall have been duly and validly taken, including, without limitation, the approval of the shareholders of Integrity and of FNB of this Agreement and Plan of Merger and of the shareholders of FNB of the approval of an amendment to the Articles of Incorporation of FNB to increase the number of authorized shares of FNB and the issuance of shares of FNB Stock in the Merger.

(b) Registration Statement Effective. The Registration Statement (including any post-effective amendments thereto) shall be effective under the 1933 Act, and no stop orders or proceedings shall be pending or, to the knowledge of FNB, threatened by the SEC to suspend the effectiveness of such Registration Statement.

(c) “Blue Sky” Approvals. FNB shall have received all state securities or “Blue Sky” permits or other authorizations, or confirmations as to the availability of exemptions from Blue Sky registration requirements as may be necessary, and no stop orders or proceedings shall be pending or, to the knowledge of FNB, threatened by any state Blue Sky administration to suspend the effectiveness of any registration statement filed therewith with respect to the issuance of FNB Stock in the Merger.

(d) Regulatory Approvals. (i) The Merger and other transactions described herein shall have been approved, to the extent required by law, by the Federal Reserve Board, the Commissioner, and by all other governmental or regulatory agencies or authorities having jurisdiction over such transactions, (ii) no governmental or regulatory agency or authority shall have withdrawn its approval of such transactions or imposed any condition on such transactions or conditioned its approval thereof, which condition is reasonably deemed by FNB or Integrity to be materially disadvantageous or burdensome or to so adversely affect the economic or business benefits of this Agreement to FNB or Integrity’s shareholders as to render it inadvisable for it to

consummate the Merger; (iii) all applicable waiting periods following regulatory approvals shall have expired without objection to the Merger by the Federal Reserve Board or other applicable regulatory authorities; and (iv) all other consents, approvals and permissions, and the satisfaction of all of the requirements prescribed by law or regulation, necessary to the carrying out of the transactions contemplated herein shall have been procured.

(e) Adverse Proceedings, Injunction, Etc. There shall not be (i) any order, decree or injunction of any court or agency of competent jurisdiction which enjoins or prohibits the Merger or any of the other transactions described herein or any of the parties hereto from consummating any such transaction, (ii) any pending or threatened investigation of the Merger or any of such other transactions by the Federal Reserve Board, or any actual or threatened litigation under federal antitrust laws relating to the Merger or any other such transaction, (iii)any suit, action or proceeding by any person (including any governmental, administrative or regulatory agency), pending or threatened before any court or governmental agency in which it is sought to restrain or prohibit Integrity or FNB from consummating the Merger or carrying out any of the terms or provisions of this Agreement, or (iv) any other suit, claim, action or proceeding pending or threatened against Integrity or FNB or any of their respective officers or directors which shall reasonably be considered by Integrity or FNB to be materially burdensome in relation to the proposed Merger or materially adverse in relation to the financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of either such corporation, and which has not been dismissed, terminated or resolved to the satisfaction of all parties hereto within 90 days of the institution or threat thereof.

(f) Tax Opinion. The parties shall have received an opinion of Schell Bray Aycock Abel & Livingston P.L.L.C. or another tax advisor in form and substance satisfactory to FNB and Integrity, substantially to the effect that, for federal income tax purposes: (i) consummation of the Merger will constitute a “reorganization” as defined in Section 368(a) of the Code; (ii) no gain or loss will be recognized by FNB or Integrity by reason of the Merger, (iii) the exchange or cancellation of shares of Integrity Stock in the Merger will not give rise to recognition of gain or loss for federal income tax purposes to the shareholders of Integrity to the extent such shareholders receive FNB Stock in exchange for their shares of Integrity Stock (except with respect to cash in lieu of fractional shares); (iv) the basis of the FNB Stock to be received by a shareholder of Integrity will be the same as the basis of the Integrity Stock surrendered in exchange therefor, decreased by the amount of cash received, if any, and increased by the amount of dividend income or gain recognized, if any, as a result of the Merger; and (v) if Integrity Stock is a capital asset in the hands of the shareholder at the Effective Time, the holding period of the FNB Stock received by the shareholder in the Merger will include the holding period of Integrity Stock surrendered in exchange therefor. In rendering its opinion, Schell Bray Aycock Abel & Livingston P.L.L.C. or such other tax advisor will require and rely on representations by officers of FNB and Integrity, and will be entitled to make reasonable assumptions.

(g) NASDAQ Listing. FNB shall have satisfied all requirements for the shares of FNB Stock to be issued to the shareholders of Integrity and holders of options issued under the Integrity Option Plan in connection with the Merger to be listed on NASDAQ as of the Effective Time.

7.2 Additional Conditions to Integrity’s Obligations. Notwithstanding any other provision of this Agreement to the contrary, Integrity’s separate obligation to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date:

(a) Material Adverse Change. There shall not have been any material adverse change in the consolidated financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of FNB and its consolidated subsidiaries considered as one enterprise and there shall not have occurred any event or development and there shall not exist any condition or circumstance which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change.

(b) Compliance with Laws. FNB shall have complied in all material respects with all federal and state laws and regulations applicable to the transactions described herein and where the violation of or failure to comply with any such law or regulation could or may have a material adverse effect on the consolidated financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of FNB and its consolidated subsidiaries considered as one enterprise.

(c) FNB’s Representations and Warranties and Performance of Agreements; Officers’ Certificate. Unless waived in writing by Integrity as provided in Section 10.2 below, (i) each of the representations and warranties of FNB contained in this Agreement shall have been true and correct as of the date hereof and shall be true and correct on and as of the Effective Time with the same force and effect as though made on and as of such date, except (A) for changes which are not, in the aggregate, material and adverse to the consolidated financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of FNB and its consolidated subsidiaries considered as one enterprise, and (B) for the effect of any activities or transactions that may have taken place after the date of this Agreement and are expressly contemplated by this Agreement; and (ii) FNB shall have performed in all material respects all of its obligations, covenants and agreements hereunder to be performed by it on or before the Closing Date. Integrity shall have received a certificate dated as of the Closing Date and executed by the chief executive officer and chief financial officer of FNB to the foregoing effect and as to such other matters as may be reasonably requested by Integrity.

(d) Legal Opinion of FNB’s Counsel. Integrity shall have received from Schell Bray Aycock Abel & Livingston P.L.L.C., counsel for FNB, a written opinion dated as of the Closing Date in form and substance customary for transactions of this nature and otherwise reasonably satisfactory to Integrity and its counsel.

(e) Fairness Opinion. The Board of Directors of Integrity shall have received from Integrity’s financial advisor, McColl Partners, an opinion dated as of the date of this Agreement to the effect that the consideration to be received by Integrity’s shareholders in the Merger is fair, from a financial point of view, to the shareholders of Integrity.

(f) Other Documents and Information from FNB. FNB shall have provided to Integrity correct and complete copies of its Articles of Incorporation, bylaws and Board of Directors resolutions approving this Agreement and the Merger (all certified by its Secretary), together with certificates of the incumbency of its officers and such other closing documents and information as may be reasonably requested by Integrity or its counsel.

7.3 Additional Conditions to FNB’s Obligations. Notwithstanding any other provision of this Agreement to the contrary, FNB’s obligations to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date:

(a) Material Adverse Change. There shall not have occurred any material adverse change in the consolidated financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of Integrity and its subsidiaries considered as one enterprise and there shall not have occurred any event or development and there shall not exist any condition or circumstance which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change.

(b) Compliance with Laws. Integrity shall have complied in all material respects with all federal and state laws and regulations applicable to the transactions described herein and where the violation of or failure to comply with any such law or regulation could or may have a material adverse effect on the consolidated financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of FNB or Integrity.

(c) Integrity’s Representations and Warranties and Performance of Agreements; Officers’ Certificate. Unless waived in writing by FNB as provided in Section 10.2 below, (i) each of the representations and warranties of Integrity contained in this Agreement shall have been true and correct as of the date hereof and shall be true and correct at and as of the Effective Time with the same force and effect as though made on and as of such date, except (A) for changes which are not, in the aggregate, material and adverse to the consolidated financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of Integrity and its subsidiaries considered as one enterprise, and (B) for the effect of any activities or transactions that may have taken place after the date of this Agreement and are expressly contemplated by this Agreement, and (ii) Integrity shall have performed in all material respects all its obligations, covenants and agreements hereunder to be performed by it on or before the Closing Date. FNB shall have received a certificate dated as of the Closing Date and executed by the chief executive officer and chief financial officer of Integrity to the foregoing effect and as to such other matters as may be reasonably requested by FNB.

(d) Legal Opinion of Integrity’s Counsel. FNB shall have received from Gaeta & Eveson, P.A., counsel to Integrity, a written opinion, dated as of the Closing Date in form and substance customary for transactions of this nature and otherwise reasonably satisfactory to FNB and its counsel.

(e) Other Documents and Information from Integrity. Integrity shall have provided to FNB correct and complete copies of Integrity’s Articles of Incorporation, bylaws and Board and shareholder resolutions (all certified by Integrity’s Secretary), together with certificates of the incumbency of Integrity’s officers and such other closing documents and information as may be reasonably requested by FNB or its counsel.

(f) Amendments to Benefit Plans. The Board of Directors of Integrity shall have adopted and implemented, effective as of the Effective Time, such amendments to the Integrity Option Plan as may be necessary in accordance with the provisions of this Agreement and otherwise satisfactory to FNB.

(g) Consents to Assignment of Property Leases. Integrity shall have obtained all required consents to the assignment to FNB of its rights and obligations under any personal property lease and any Real Property Lease material to the business of Integrity and its subsidiaries considered as one enterprise, and such consents shall be in such form and substance as shall be reasonably satisfactory to FNB; and each of the lessors of Integrity shall have confirmed in writing that Integrity is not in default under the terms and conditions of any personal property lease or any Real Property Lease.

(h) Bank Merger Complete. The merger of CVB with and into FGB contemplated by Section 4.1(g) shall have been consummated.

(i) Fairness Opinion. The Board of Directors of FNB shall have received from FNB’s financial advisor, Legg Mason, an opinion dated as of this Agreement to the effect that the consideration to be paid in the Merger is fair, from a financial point of view, to the shareholders of FNB.

ARTICLE VIII. TERMINATION; BREACH; REMEDIES

8.1 Mutual Termination. At any time prior to the Effective Time (and whether before or after approval hereof by the shareholders of Integrity and FNB), this Agreement may be terminated by the mutual agreement of FNB and Integrity. Upon any such mutual termination, all obligations of Integrity and FNB hereunder shall terminate and each party shall pay costs and expenses as provided in Section 6.4 above.

8.2 Unilateral Termination. This Agreement may be terminated by either FNB or Integrity (whether before or after approval hereof by Integrity’s or FNB’s shareholders) upon written notice to the other party and under the circumstances described below.

(a) Termination by FNB. This Agreement may be terminated by FNB by action of its Board of Directors:

(i) if any of the conditions to the obligations of FNB (as set forth in Section 7.1 and 7.3 above) shall not have been satisfied or effectively waived in writing by FNB by May 31, 2006 (except to the extent that the failure of such condition to be satisfied has been caused by the failure of FNB to satisfy any of its obligations, covenants or agreements contained herein);

(ii) if Integrity shall have violated or failed to fully perform any of its obligations, covenants or agreements contained in Article IV or Article VI herein in any material respect;

(iii) if FNB determines at any time that any of Integrity’s representations or warranties contained in Article II above or in any other certificate or writing delivered pursuant to this Agreement shall have been false or misleading in any material respect when made, or that there has occurred any event or development or that there exists any condition or circumstance which has caused or, with the lapse of time or otherwise, may or could cause any such representations or warranties to become false or misleading in any material respect;

(iv) if, notwithstanding FNB’s satisfaction of its obligations under Sections 5.8 and 6.1 above, Integrity’s or FNB’s shareholders do not approve this Agreement and Plan of Merger at its shareholders’ meeting held for such purpose;

(v) if the Merger shall not have become effective on or before May 31, 2006 unless such date is extended as evidenced by the written mutual agreement of the parties hereto; provided, however, that in the event there is a delay of not more than 30 days caused by circumstances beyond the control of the parties hereto, the dates set forth in this Section 8.2(a) shall be extended by mutual agreement for up to an additional 60 days;

(vi) if (A) Integrity shall have breached Section 4.4 in any respect materially adverse to FNB, (B) Integrity shall have breached its obligations set forth in Section 4.3(b) to make its Approval Recommendation or shall have effected a Change in Recommendation, (C) the Integrity Board of Directors shall have recommended approval of an Acquisition Proposal, or (D) Integrity shall have breached its obligations set forth in Section 4.3(a) to hold the meeting of shareholders to approve and adopt the Plan of Merger; or

(vii) under the circumstances described in Section 6.7 above.

However, before FNB may terminate this Agreement for any of the reasons specified above in (i), (ii) or (iii) of this Section 8.2(a), it shall give written notice to Integrity as provided herein stating its intent to terminate and a description of the specific breach, default, violation or other condition giving rise to its right to so terminate, and, such termination by FNB shall not become effective if, within 30 days following the giving of such notice, Integrity shall cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of FNB. In the event Integrity cannot or does not cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of FNB within such 30-day period, FNB shall have 30 days to notify Integrity of its intention to terminate this Agreement. A failure to so notify Integrity will be deemed to be a waiver by FNB of the breach, default or violation pursuant to Section 10.2 below.

(b) Termination by Integrity. This Agreement may be terminated by Integrity by action of its Board of Directors:

(i) if any of the conditions of the obligations of Integrity (as set forth in Section 7.1 and 7.2 above) shall not have been satisfied or effectively waived in writing by Integrity by May 31, 2006 (except to the extent that the failure of such condition to be satisfied has been caused by the failure of Integrity to satisfy any of its obligations, covenants or agreements contained herein);

(ii) if FNB shall have violated or failed to fully perform any of its obligations, covenants or agreements contained in Article V or Article VI herein in any material respect;

(iii) if Integrity determines that any of FNB’s representations and warranties contained in Article III herein or in any other certificate or writing delivered pursuant to this Agreement shall have been false or misleading in any material respect when made, or that there has occurred any event or development or that there exists any condition or circumstance which has caused or, with the lapse of time or otherwise, may or could cause any such representations or warranties to become false or misleading in any material respect;

(iv) if, notwithstanding Integrity’s satisfaction of its obligations contained in Sections 4.3 and 6.1 above, FNB’s or Integrity’s shareholders do not approve this Agreement and Plan of Merger at its shareholders’ meeting called for such purpose;

(v) if the Merger shall not have become effective on or before May 31, 2006, unless such date is extended as evidenced by the written mutual agreement of the parties hereto; provided, however, that in the event there is a delay of not more than 30 days caused by circumstances beyond the control of the parties hereto, the dates set forth in this Section 8.2(b) shall be extended by mutual agreement for up to an additional 60 days; or

(vi) At any time prior to the date of mailing of the Joint Proxy Statement/Prospectus, by Integrity in order to enter concurrently into an Acquisition Proposal that has been received by Integrity and the Integrity Board of Directors in compliance with Sections 4.4(a) and (b) and that Integrity’s Board of Directors concludes in good faith, in consultation with its financial and legal advisors, is a Superior Proposal; provided, however, that this Agreement may be terminated by Integrity pursuant to this Section 8.2(b)(vi) only after the fifth Business Day following Integrity’s provision of written notice to FNB advising FNB that the Integrity Board of Directors is prepared to accept a Superior Proposal and only if (x) during such five-Business Day period, Integrity has caused its financial and legal advisors to negotiate with FNB in good faith to make such adjustments in the terms and conditions of this Agreement such that such Acquisition Proposal would no longer constitute a Superior Proposal, (y) Integrity’s Board of Directors has considered such adjustments in the terms and conditions of this Agreement resulting from such negotiations and has concluded in good faith, based upon consultation with its financial and legal advisers, that such Acquisition Proposal remains a Superior Proposal even after giving effect to the adjustments proposed by FNB and further provided that such termination shall not be effective until Integrity has paid the Break-up Fee to FNB.

However, before Integrity may terminate this Agreement for any of the reasons specified above in clause (i), (ii) or (iii) of this Section 8.2(b), it shall give written notice to FNB as provided herein stating its intent to terminate and a description of the specific breach, default, violation or other condition giving rise to its right to so terminate, and, such termination by Integrity shall not become effective if, within 30 days following the giving of such notice, FNB shall cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of Integrity. In the event FNB cannot or does not cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of Integrity within such 30-day period, Integrity shall have 30 days to notify FNB of its intention to terminate this Agreement. A failure to so notify FNB will be deemed to be a waiver by Integrity of the breach, default or violation pursuant to Section 10.2 below.

(c) Termination by Integrity or Increase in Exchange Ratio. This Agreement may be terminated by action of the Board of Directors of Integrity if it determines by a vote of a majority of the members of its entire Board, at any time during the ten-day period commencing two days after the Determination Date (as defined below), that both of the following conditions are satisfied:

(i) the Average Closing Price (as defined below) shall be less than the product of 0.80 and the Starting Price (as defined below); and

(ii) the quotient obtained by dividing the Average Closing Price by the Starting Price (such number being referred to herein as the “FNB Ratio”) shall be less than the “Index Ratio” (which shall mean the quotient obtained by dividing the Index Price on the Determination Date by the Index Price (as defined below) on the Starting Date (as defined below) and subtracting 0.20 from the quotient in this parenthetical); subject, however, to the following three sentences. If Integrity desires to terminate the Merger pursuant to this Section 8.2(c), it shall give prompt written notice thereof to FNB; provided that such notice of election to terminate may be withdrawn at any time within the aforementioned ten-day period. During the five-day period commencing with its receipt of such notice, FNB shall have the option to elect to increase the Exchange Ratio to equal the lesser of (x) the quotient (rounded to the nearest one-ten-thousandth) obtained by dividing (A) the product of 0.80, the Starting Price, and Exchange Ratio (as then in effect) by (B) the Average Closing Price, and (y) the quotient (rounded to the nearest one-ten-thousandth) obtained by dividing (A) the product of the Index Ratio and the Exchange Ratio (as then in effect) by (B) the FNB Ratio. If FNB makes an election contemplated by the preceding sentence, within such five-day period, it shall give prompt written notice to Integrity of such election and the revised Exchange Ratio, whereupon no termination shall have occurred pursuant to this Section 8.2(c) and this Agreement shall remain in effect in accordance with its terms (except as the Exchange Ratio shall have been so modified), and any references in this Agreement to “Exchange Ratio” shall thereafter be deemed to refer to the Exchange Ratio as adjusted pursuant to this Section 8.2(c).

For purposes of this Section 8.2(c), the following terms shall have the meanings indicated:

“Average Closing Price” shall mean the average of the daily last sales prices of FNB Stock as reported on NASDAQ (as reported by The Wall Street Journal or, if not reported thereby, another authoritative source as chosen by FNB) for the twenty consecutive full trading days in which such shares are traded on NASDAQ ending at the close of trading on the Determination Date.

“Determination Date” shall mean the later of the date on which both (i) the approval of the Federal Reserve Board of the Merger (without regard to any requisite waiting period thereof) shall have been received and (ii) the shareholders of both Integrity and FNB shall have approved the Merger at their respective shareholders’ meetings.

“Index Price” on a given date shall mean the closing quoted index value of the companies comprising the NASDAQ Bank Index [IXBK].

“Starting Date” shall mean September 16, 2005.

“Starting Price” shall mean the last sale price per share of FNB Stock as reported on NASDAQ (as reported by The Wall Street Journal or, if not reported thereby, another authoritative source as chosen by FNB) on the Starting Date.

8.3 Breach; Remedies.

(a) Except as otherwise provided below or in Section 4.4, in the event of a breach by Integrity of any of its representations or warranties contained in this Agreement or in any other certificate or writing delivered pursuant to this Agreement, or in the event of its failure to perform or violation of any of its obligations, agreements or covenants contained in this Agreement, then FNB’s sole right and remedy shall be to terminate this Agreement prior to the Effective Time as provided in Section 8.2 above, or, in the case of a failure to perform or violation of any obligations, agreements or covenants, to seek specific performance thereof.

(b) Likewise, and except as otherwise provided below, in the event of a breach by FNB of any of its representations or warranties contained in this Agreement, or in the event of its failure to perform or violation of any of its obligations, agreements or covenants contained in this Agreement, then Integrity’s sole right and remedy shall be to terminate this Agreement prior to the Effective Time as provided in Section 8.2 above, or, in the case of a failure to perform or violation of any obligations, agreements or covenants, to seek specific performance thereof.

(c) Notwithstanding anything contained herein to the contrary, if either party to this Agreement breaches this Agreement by willfully or intentionally failing to perform or violating any of its obligations, agreements or covenants contained in this Agreement, such party shall be obligated to pay all expenses of the other party described in Section 6.4, together with other damages recoverable at law or in equity.

ARTICLE IX. INDEMNIFICATION

9.1 Agreement to Indemnify. In the event this Agreement is terminated for any reason and the Merger is not consummated, then Integrity and FNB will indemnify each other as provided below.

(a) By Integrity. Integrity shall indemnify, hold harmless and defend FNB from and against any and all claims, disputes, demands, causes of action, suits, proceedings, losses, damages, liabilities, obligations, costs and expenses of every kind and nature that arise from or are related to claims by third parties, including without limitation reasonable attorneys’ fees and legal costs and expenses in connection therewith, whether known or unknown, and whether now existing or hereafter arising, which may be threatened against, incurred, undertaken, received or paid by FNB:

(i) in connection with or which arise out of or result from or are based upon (A) Integrity’s operations or business transactions or its relationship with any of its employees, or (B) Integrity’s failure to comply with any statute or regulation of any federal, state or local government or agency (or any political subdivision thereof) in connection with the transactions described in this Agreement;

(ii) in connection with or which arise out of or result from or are based upon any fact, condition or circumstance that constitutes a breach by Integrity of, or any inaccuracy, incompleteness or inadequacy in, any of its representations or warranties under or in connection with this Agreement, or any failure of Integrity to perform any of its covenants, agreements or obligations under or in connection with this Agreement;

(iii) in connection with or which arise out of or result from or are based upon any information provided by Integrity which is included in the Proxy Statement/Prospectus and which information causes the Proxy Statement/Prospectus at the time of its mailing to Integrity’s and FNB’s shareholders to contain any untrue statement of a material fact or to omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading; and

(iv) in connection with or which arise out of or result from or are based upon the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control, removal, clean-up or remediation on, from or relating to the Real Property by Integrity or any other person of any Hazardous Substances, or any action taken or any event or condition occurring or existing with respect to the Real Property which constitutes a violation of any Environmental Laws by Integrity or any other person.

(b) By FNB. FNB shall indemnify, hold harmless and defend Integrity from and against any and all claims, disputes, demands, causes of action, suits, proceedings, losses, damages, liabilities, obligations, costs and expenses of every kind and nature that arise from or are related to claims by third parties, including without limitation reasonable attorneys’ fees and legal costs and expenses in connection therewith, whether known or unknown, and whether now existing or hereafter arising, which may be threatened against, incurred, undertaken, received or paid by Integrity:

(i) in connection with or which arise out of or result from or are based upon (A) FNB’s operations or business transactions or its relationship with any of its employees, or (B) FNB’s failure to comply with any statute or regulation of any federal, state or local government or agency (or any political subdivision thereof) in connection with the transactions described in this Agreement;

(ii) in connection with or which arise out of or result from or are based upon any fact, condition or circumstance that constitutes a breach by FNB of, or any inaccuracy, incompleteness or inadequacy in, any of its representations or warranties under or in connection with this Agreement, or any failure of FNB to perform any of its covenants, agreements or obligations under or in connection with this Agreement; and,

(iii) in connection with or which arise out of or result from or are based upon any information provided by FNB which is included in the Proxy Statement/Prospectus and which information causes the Proxy Statement/Prospectus at the time of its mailing to FNB’s and Integrity’s shareholders to contain any untrue statement of a material fact or to omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading.

9.2 Procedure for Claiming Indemnification.

(a) By FNB. If any matter subject to indemnification hereunder arises in the form of a claim against FNB or its successors and assigns (herein referred to as a “Third Party Claim”), FNB promptly shall give notice and details thereof, including copies of all pleadings and pertinent documents, to Integrity. Within 15 days of such notice, Integrity either (i) shall pay the Third Party Claim either in full or upon agreed compromise or (ii) shall notify FNB that Integrity disputes the Third Party Claim and intends to defend against it, and thereafter shall so defend and pay any adverse final judgment or award in regard thereto. Such defense shall be controlled by Integrity and the cost of such defense shall be borne by Integrity except that FNB shall have the right to participate in such defense at its own expense and provided that Integrity shall have no right in connection with any such defense or the resolution of any such Third Party Claim to impose any cost, restriction, limitation or condition of any kind upon FNB or its successors or assigns. FNB agrees that it shall cooperate in all reasonable respects in the defense of any such Third Party Claim, including making personnel, books and records relevant to the Third Party Claim available to Integrity without charge therefor except for out-of-pocket expenses. If Integrity fails to take action within 15 days as hereinabove provided or, having

taken such action, thereafter fails diligently to defend and resolve the Third Party Claim, FNB shall have the right to pay, compromise or defend the Third Party Claim and to assert the indemnification provisions hereof. FNB also shall have the right, exercisable in good faith, to take such action as may be necessary to avoid a default prior to the assumption of the defense of the Third Party Claim by Integrity.

(b) By Integrity. If any matter subject to indemnification hereunder arises in the form of a claim against Integrity or its successors and assigns (herein referred to as a “Third Party Claim”), Integrity promptly shall give notice and details thereof, including copies of all pleadings and pertinent documents, to FNB. Within 15 days of such notice, FNB either (i) shall pay the Third Party Claim either in full or upon agreed compromise or (ii) shall notify Integrity that FNB disputes the Third Party Claim and intends to defend against it, and thereafter shall so defend and pay any adverse final judgment or award in regard thereto. Such defense shall be controlled by FNB and the cost of such defense shall be borne by FNB except that Integrity shall have the right to participate in such defense at its own expense and provided that FNB shall have no right in connection with any such defense or the resolution of any such Third Party Claim to impose any cost, restriction, limitation or condition of any kind upon Integrity or its successors and assigns. Integrity agrees that it shall cooperate in all reasonable respects in the defense of any such Third Party Claim, including making personnel, books and records relevant to the Third Party Claim available to FNB without charge therefor except for out-of-pocket expenses. If FNB fails to take action within 15 days as hereinabove provided or, having taken such action, thereafter fails diligently to defend and resolve the Third Party Claim, Integrity shall have the right to pay, compromise or defend the Third Party Claim and to assert the indemnification provisions hereof. Integrity also shall have the right, exercisable in good faith, to take such action as may be necessary to avoid a default prior to the assumption of the defense of the Third Party Claim by FNB.

ARTICLE X. MISCELLANEOUS PROVISIONS

10.1 Reservation of Right to Revise Structure. Notwithstanding any provision herein to the contrary, FNB shall have the unilateral right to revise the structure of the Merger to achieve the tax consequences described in Section 6.8 or for any other reason FNB may deem advisable; provided, however, that no such change will (i) alter or change the amount or kind of consideration to be received by the shareholders of Integrity in the Merger or (ii) adversely affect the tax treatment to the shareholders of Integrity as a result of receiving such consideration. In the event of such election by FNB, the parties hereto shall execute an appropriate amendment to this Agreement.

10.2 Survival of Representations, Warranties, Indemnification and Other Agreements.

(a) Representations, Warranties and Other Agreements. None of the representations, warranties or agreements herein shall survive the effectiveness of the Merger, and no party shall have any right after the Effective Time to recover damages or any other relief from any other party to this Agreement by reason of any breach of representation or warranty, any nonfulfillment or nonperformance of any agreement contained herein, or otherwise;

provided, however, that the parties’ agreements contained in Section 6.6 above and FNB’s covenants contained in Sections 5.1 through 5.5 above shall survive the effectiveness of the Merger.

(b) Indemnification. The parties’ indemnification agreements and obligations pursuant to Section 9.1 above shall become effective only in the event this Agreement is terminated, and neither of the parties shall have any obligations under Section 9.1 in the event of or following consummation of the Merger.

10.3 Waiver. Any term or condition of this Agreement may be waived (except as to matters of regulatory approvals and approvals required by law), either in whole or in part, at any time by the party which is, and whose shareholders are, entitled to the benefits thereof, provided, however, that any such waiver shall be effective only upon a determination by the waiving party (through action of its Board of Directors) that such waiver would not adversely affect the interests of the waiving party or its shareholders; and, provided further, that no waiver of any term or condition of this Agreement by any party shall be effective unless such waiver is in writing and signed by the waiving party or as provided in Sections 8.2(a) and 8.2(b) above, or be construed to be a waiver of any succeeding breach of the same term or condition. No failure or delay of any party to exercise any power, or to insist upon a strict compliance by any other party of any obligation, and no custom or practice at variance with any terms hereof, shall constitute a waiver of the right of any party to demand full and complete compliance with such terms.

10.4 Amendment. This Agreement may be amended, modified or supplemented at any time or from time to time prior to the Effective Time, and either before or after its approval by the shareholders of Integrity and FNB, by an agreement in writing approved by a majority of the Boards of Directors of FNB and Integrity executed in the same manner as this Agreement; provided however, that the provisions of this Agreement relating to the manner or basis in which shares of Integrity Stock are converted into FNB Stock shall not be amended after the approval of this Agreement and Plan of Merger by the shareholders of Integrity without the requisite approval of such shareholders of such amendment.

10.5 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or by courier, or mailed by certified mail, return receipt requested, postage prepaid, and addressed as follows:

(a) If to Integrity, to:

Integrity Financial Corporation

Attention: Mr. W. Alex Hall, Jr., President

39 Second Street, N.W.

Hickory, North Carolina 28601

With copy to:

Gaeta & Eveson, P.A.

Attention: Anthony Gaeta, Jr.

8305 Falls of Neuse Road, Suite 203

Raleigh, North Carolina 27615

(b) If to FNB, to:

FNB Corp.

Attention: Mr. Michael C. Miller, President

Post Office Box 1328 (27204)

101 Sunset Avenue

Asheboro, North Carolina 27203

With copy to:

Schell Bray Aycock Abel & Livingston P.L.L.C.

Attention: Melanie S. Tuttle

1500 Renaissance Plaza

230 North Elm Street

Greensboro, North Carolina 27420

10.6 Further Assurance. Integrity and FNB shall each furnish to the other such further assurances with respect to the matters contemplated herein and their respective agreements, covenants, representations and warranties contained herein, including the opinion of legal counsel, as such other party may reasonably request.

10.7 Headings and Captions. Headings and captions of the sections and Sections of this Agreement have been inserted for convenience of reference only and do not constitute a part hereof.

10.8 Entire Agreement. This Agreement (including all schedules and exhibits attached hereto and all documents incorporated herein by reference) contains the entire agreement of the parties with respect to the transactions described herein and supersedes any and all other oral or written agreement(s) heretofore made, and there are no representations or inducements by or to, or any agreements between, any of the parties hereto other than those contained herein in writing.

10.9 Severability of Provisions. The invalidity or unenforceability of any term, phrase, clause, Section, restriction, covenant, agreement or other provision hereof shall in no way affect the validity or enforceability of any other provision or part hereof.

10.10 Assignment. This Agreement may not be assigned by either party hereto except with the prior written consent of the other party hereto.

10.11 Counterparts. Any number of counterparts of this Agreement may be signed and delivered, each of which shall be considered an original and all of which together shall constitute one agreement.

10.12 Governing Law. This Agreement is made in and shall be construed and enforced in accordance with the laws of North Carolina.

10.13 Inspection. Any right of FNB or Integrity hereunder to investigate or inspect the assets, books, records, files and other information of the other in no way shall establish any presumption that FNB or Integrity should have conducted any investigation or that such right has been exercised by FNB or Integrity or their agents, representatives or others. Any investigations or inspections that have been made by FNB or Integrity or their agents, representatives or others prior to the Closing Date shall not be deemed in any way in derogation or limitation of the covenants, representations and warranties made by or on behalf of Integrity or FNB in this Agreement.

[Signatures on Following Page]

IN WITNESS WHEREOF, Integrity and FNB each has caused this Agreement to be executed in its name by its duly authorized officers and its corporate seal to be affixed hereto as of the date first above written.


INTEGRITY FINANCIAL CORPORATION

By		/s/ W. Alex Hall, Jr.
		President and Chief Executive Officer

FNB CORP.

By		/s/ Michael C. Miller
		President and Chief Executive Officer

SCHEDULES TO

AGREEMENT AND PLAN OF MERGER


SCHEDULE		DESCRIPTION

A		Plan of Merger

SCHEDULE A

to Agreement and Plan of Merger

dated as of September 18, 2005

PLAN OF MERGER

INTEGRITY FINANCIAL CORPORATION

WITH AND INTO

FNB CORP.

A. Parties to Merger. The parties to the proposed merger are Integrity Financial Corporation, a North Carolina corporation (“Integrity”), and FNB Corp., a North Carolina corporation (“FNB”).

B. Nature of Transaction. Subject to the provisions of this Plan of Merger, Integrity shall be merged with and into FNB (the “Merger”) with the effect provided in the North Carolina Business Corporation Act.

C. Surviving Corporation. FNB shall be the surviving corporation in the Merger. At the Effective Time (as hereinafter defined) of the Merger, the name of the surviving corporation shall be changed to FNB United Corp.

D. Effective Time. The Merger shall be effective on the date and at the time on which Articles of Merger containing this Plan of Merger and the other provisions required by, and executed in accordance with, applicable North Carolina and applicable federal law shall have been accepted for filing by the Secretary of State of the State of North Carolina (or such later time as may be specified in the Articles of Merger) (the “Effective Time”). At the Effective Time, the separate corporate existence of Integrity shall cease and the corporate existence of FNB shall continue with all of its purposes, objects, rights, privileges, powers and franchises, all of which shall be unaffected and unimpaired by the Merger.

E. Conversion and Exchange of Shares.

1. At the Effective Time, all rights of Integrity’s shareholders with respect to all then outstanding shares of the common stock of Integrity, $1.00 par value per share (“Integrity Stock”) shall cease to exist, and the holders of Integrity Stock shall cease to be, and shall have no further rights as, shareholders of Integrity. At the Effective Time, each such outstanding share of Integrity Stock (except for shares held, other than in a fiduciary capacity or as a result of debts previously contracted, by Integrity, FNB or any of their subsidiaries, which shall be canceled in the Merger) shall be converted exclusively into the right to receive $5.20 in cash, without interest, and a number of shares of the common stock of FNB, par value $2.50 per share (the “FNB Stock”), equal to the product of 1.1209 (the “Exchange Ratio”) and 0.78. The amount of cash into which shares of Integrity Stock shall be converted pursuant to this Plan of Merger is sometimes hereinafter referred to as “Cash Consideration,” and the number of shares of

FNB Stock into which shares of Integrity Stock shall be converted pursuant to this Plan of Merger is sometimes hereinafter referred to as “Stock Consideration.” The Cash Consideration and Stock Consideration are sometimes referred to herein collectively as the “Merger Consideration.” No share of Integrity Stock shall be deemed to be outstanding or have any rights other than those set forth in this Section E.1 after the Effective Time. [The Exchange Ratio is subject to possible adjustment in accordance with Sections 1.5(c) and 8.2(c) of the Agreement and Plan of Merger, dated as of September 18, 2005, by and between FNB and Integrity. If so adjusted, the adjusted Exchange Ratio shall be reflected in this Plan of Merger prior to filing with the Secretary of State of North Carolina.]

2. Each share of the FNB Stock issued and outstanding immediately prior to the Effective Time of the Merger shall continue to be issued and outstanding and shall not be affected by the Merger.

3. Notwithstanding any other provision of this Plan of Merger, each holder of shares of Integrity Stock exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of FNB Stock (after taking into account all certificates delivered by such holder) shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of a share of FNB Stock multiplied by the market value of one share of FNB Stock upon the Effective Time. The market value of one share of FNB Stock at the Effective Time shall be the last sale price of FNB Stock on Nasdaq Stock Market, Inc. National Market System as reported by The Wall Street Journal or, if not reported thereby, any other authoritative source selected by FNB, on the last trading day preceding the Effective Time. No such holder will be entitled to dividends, voting rights, or any other rights as a shareholder in respect of any fractional shares.

4. As of the Effective Time, FNB shall deposit, or shall cause to be deposited, with Registrar and Transfer Company, in its capacity as the transfer agent of FNB Stock (the “Exchange Agent”), for the benefit of each holder of Integrity Stock for exchange in accordance with this Plan of Merger, (i) certificates representing the aggregate number of whole shares of FNB Stock to be issued as Stock Consideration, and (ii) the aggregate amount of cash to be delivered to holders of Integrity Stock as Cash Consideration and in lieu of any fractional shares, to be issued and paid pursuant to this Plan of Merger for outstanding shares of Integrity Stock (such certificates for shares of FNB Stock and such cash are referred to as the “Exchange Fund”). The Exchange Agent shall, pursuant to irrevocable instructions in accordance with this Plan of Merger, deliver the FNB Stock and cash contemplated to be issued with respect to Integrity Stock out of the Exchange Fund. The Exchange Fund shall not be used for any other purpose. The Exchange Agent shall invest any cash included in the Exchange Fund, as directed by FNB, on a daily basis. Any interest and other income resulting from such investments shall be paid to FNB.

5. After the Effective Time, FNB shall cause the Exchange Agent to mail to the shareholders of Integrity of record at the Effective Time transmittal materials and other appropriate written instructions (collectively, a “Transmittal Letter”) (which shall

specify that delivery shall be effected, and risk of loss and title to the certificate representing shares of Integrity Stock prior to such Effective Time shall pass, only upon proper delivery of such certificates to the Exchange Agent and which shall be in such form and have such other provisions as FNB may reasonably specify). After the Effective Time and upon the proper surrender of certificate(s) representing shares of Integrity Stock to the Exchange Agent, together with a properly completed and duly executed Transmittal Letter, the holder of such certificate(s) shall be entitled to receive in exchange therefor the number of shares of FNB Stock and the cash to which such holder is entitled hereunder (including any cash payments to which such holder is entitled hereunder in respect of rights to receive fractional shares and any dividends or other distributions to which such holder is entitled pursuant to Section E.6 below), subject to any required withholding of applicable taxes. Neither FNB nor the Exchange Agent shall be obligated to deliver any of such payments in cash or stock until such holder surrenders the certificate(s) representing such holder’s shares. The certificate(s) so surrendered shall be duly endorsed as the Exchange Agent may require. If there is a transfer of ownership of any shares of Integrity Stock not registered in the transfer records of Integrity, the Merger Consideration shall be issued to the transferee thereof if the certificates representing such Integrity Stock are presented to the Exchange Agent, accompanied by all documents required, in the reasonable judgment of FNB and the Exchange Agent, to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. Any portion of the Exchange Fund that remains undistributed to the holders of certificates representing Integrity Stock for six months after the Effective Time shall be delivered to FNB, upon demand, and any shareholders of Integrity who have not previously complied with the provisions of this Plan of Merger shall thereafter look only to FNB for payment of their claim for FNB Stock and cash and any dividends or distributions with respect to FNB Stock. Any portion of the Exchange Fund remaining unclaimed by holders of Integrity Stock five years after the Effective Time (or such earlier date immediately prior to such time as such portion would otherwise escheat to or become property of any government entity) shall, to the extent permitted by applicable law, become the property of FNB free and clear of any claims or interest of any person previously entitled therein. Any other provision of this Agreement notwithstanding, neither FNB nor the Exchange Agent shall be liable to any holder of shares of Integrity Stock for any amounts paid or properly delivered in good faith to a public official pursuant to any applicable abandoned property law.

6. At the Effective Time, the stock transfer books of Integrity shall be closed as to holders of Integrity Stock immediately prior to the Effective Time and no transfer of Integrity Stock by any such holder shall thereafter be made or recognized. Until surrendered for exchange in accordance with the provisions of Section E.5 above, each certificate theretofore representing shares of Integrity Stock (other than shares to be canceled pursuant to Section E.1 above) shall from and after the Effective Time represent for all purposes only the right to receive the Merger Consideration. If, after the Effective Time, certificates representing Integrity Stock are presented to FNB or the Exchange Agent for any reason, they shall be cancelled and exchanged as provided in this Plan of Merger. To the extent permitted by North Carolina law, former shareholders of record of Integrity shall be entitled to vote after the Effective Time at any meeting of shareholders

of FNB the number of whole shares of FNB Stock into which their respective shares of Integrity Stock are converted, regardless of whether such holders have exchanged their certificates representing Integrity Stock for certificates representing FNB Stock in accordance with the provisions of this Agreement. Whenever a dividend or other distribution is declared by FNB on the FNB Stock, the record date for which is at or after the Effective Time, the declaration shall include dividends or other distributions on all shares of FNB Stock to be issued pursuant to the Merger, but beginning at the Effective Time no dividend or other distribution payable to the holders of record of FNB Stock as of any time subsequent to the Effective Time shall be delivered to the holder of any certificate representing shares of Integrity Stock issued and outstanding at the Effective Time until such holder surrenders such certificate for exchange as provided in Section E.5 above; provided, however, that upon surrender of such Integrity Stock certificate (or compliance with Section E.7 below), the FNB Stock certificate, together with all undelivered dividends or other distributions (without interest) and any cash payments to be paid for fractional share interests (without interest), shall be delivered and paid with respect to each share represented by such Integrity Stock certificate.

7. Any shareholder of Integrity whose certificate representing shares of Integrity Stock has been lost, destroyed, stolen or otherwise is missing shall be entitled to receive a certificate representing the shares of FNB Stock and/or any cash, including cash in lieu of fractional shares, to which he or she is entitled in accordance with and upon compliance with conditions reasonably imposed by the exchange agent or FNB (including, without limitation, a requirement that the shareholder provide a lost instruments indemnity bond in form, substance and amount reasonably satisfactory to the exchange agent and FNB).

F. Abandonment. This Plan of Merger may be terminated and the Merger may be abandoned at any time prior to the Effective Time upon termination of the Merger Agreement.

EX-31.10 3 dex3110.htm SECTION 302 CEO CERTIFICATION Section 302 CEO Certification

Exhibit 31.10

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Michael C. Miller, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of FNB Corp.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 8, 2005		/s/ Michael C. Miller
		Michael C. Miller
		Chief Executive Officer

EX-31.11 4 dex3111.htm SECTION 302 CFO CERTIFICATION Section 302 CFO Certification

Exhibit 31.11

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jerry A. Little, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of FNB Corp.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 8, 2005		/s/ Jerry A. Little
		Jerry A. Little
		Chief Financial Officer

EX-32 5 dex32.htm SECTION 906 CEO & CFO CERTIFICATION Section 906 CEO & CFO Certification

Exhibit 32

Certification

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of FNB Corp., a North Carolina corporation (the “Corporation”), does hereby certify that:

The Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (the “Form 10-Q”) of the Corporation fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all materials respects, the financial condition and results of operations of the Corporation.


Date: November 8, 2005		/s/ Michael C. Miller
		Michael C. Miller
		Chief Executive Officer

Date: November 8, 2005		/s/ Jerry A. Little
		Jerry A. Little
		Chief Financial Officer

The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.

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