MERGER AGREEMENT

Agreement and Plan of Merger

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1ST STATE BANCORP INC | CAPITAL BANK CORPORATION

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Title: MERGER AGREEMENT
Governing Law: North Carolina Date: 6/29/2005
Industry: Regional Banks Law Firm: Muldoon Murphy & Aguggia LLP; Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.; Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. Sector: Financial

Exhibit 2.1

MERGER AGREEMENT

DATED AS OF JUNE 29, 2005

BY AND BETWEEN

CAPITAL BANK CORPORATION

AND

1ST STATE BANCORP, INC.

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TABLE OF CONTENTS

PAGE

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ARTICLE I -- DEFINED TERMS .................................................. 1

1.1. DEFINITIONS ....................................................... 1

ARTICLE II -- THE MERGER; CONVERSION AND EXCHANGE OF COMPANY SHARES ......... 10

2.1. THE MERGER ........................................................ 10

2.2 COMPANY SHARES .................................................... 11

2.3 MERGER CONSIDERATION .............................................. 11

2.4 ELECTION AND ALLOCATION PROCEDURES ................................ 13

2.5 EXCHANGE PROCEDURES ............................................... 15

2.6 AVERAGE CLOSING PRICE ADJUSTMENT .................................. 15

2.7 COMPANY STOCK OPTIONS ............................................. 16

2.8 LIQUIDATION ACCOUNT ............................................... 16

ARTICLE III -- THE CLOSING .................................................. 16

3.1 CLOSING ........................................................... 16

3.2 DELIVERIES BY THE COMPANY ......................................... 17

3.3 DELIVERIES BY THE BUYER ........................................... 17

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY .................... 17

4.1 ORGANIZATION, STANDING AND POWER .................................. 17

4.2 AUTHORITY; NO CONFLICTS ........................................... 18

4.3 CAPITAL STOCK; SUBSIDIARIES ....................................... 18

4.4 SEC FILINGS; COMPANY FINANCIAL STATEMENTS ......................... 19

4.5 ABSENCE OF UNDISCLOSED LIABILITIES ................................ 21

4.6 ABSENCE OF CERTAIN CHANGES OR EVENTS .............................. 21

4.7 TAX MATTERS ....................................................... 22

4.8 ASSETS ............................................................ 23

4.9 SECURITIES PORTFOLIO AND INVESTMENTS .............................. 23

4.10 ENVIRONMENTAL MATTERS ............................................. 23

4.11 COMPLIANCE WITH LAWS .............................................. 24

4.12 LABOR RELATIONS ................................................... 25

4.13 EMPLOYEE BENEFIT PLANS ............................................ 25

4.14 MATERIAL CONTRACTS ................................................ 27

4.15 LEGAL PROCEEDINGS ................................................. 27

4.16 REPORTS ........................................................... 27

4.17 REGISTRATION STATEMENT; JOINT PROXY STATEMENT ..................... 28

4.18 ACCOUNTING, TAX, AND REGULATORY MATTERS ........................... 28

4.19 STATE TAKEOVER LAWS ............................................... 28

4.20 CHARTER PROVISIONS ................................................ 28

4.21 RECORDS ........................................................... 29

4.22 DERIVATIVES ....................................................... 29

4.23 CERTAIN REGULATED BUSINESSES ...................................... 29

4.24 LOANS; ALLOWANCE FOR LOAN LOSSES .................................. 29

4.25 REPURCHASE AGREEMENTS; DERIVATIVES ................................ 30

4.26 DEPOSIT ACCOUNTS .................................................. 30

4.27 PERMISSIBLE ACTIVITIES ............................................ 30

4.28 RELATED PARTY TRANSACTIONS ........................................ 30

4.29 COMMISSIONS ....................................................... 30

4.30 VOTING AGREEMENTS ................................................. 31

4.31 OPINION OF FINANCIAL ADVISOR ...................................... 31

ARTICLE V -- REPRESENTATIONS AND WARRANTIES OF THE BUYER .................... 31

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5.1 ORGANIZATION, STANDING AND POWER .................................. 31

5.2 AUTHORITY; NO CONFLICTS ........................................... 32

5.3 BUYER'S STOCK; SUBSIDIARIES ....................................... 32

5.4 SEC FILINGS; BUYER FINANCIAL STATEMENTS ........................... 33

5.5 ABSENCE OF UNDISCLOSED LIABILITIES ................................ 34

5.6 ABSENCE OF CERTAIN CHANGES OR EVENTS .............................. 34

5.7 COMPLIANCE WITH LAWS .............................................. 34

5.8 LEGAL PROCEEDINGS ................................................. 35

5.9 REGISTRATION STATEMENT; JOINT PROXY STATEMENT ..................... 35

5.10 ACCOUNTING, TAX, AND REGULATORY MATTERS ........................... 36

5.11 COMMISSIONS ....................................................... 36

5.12 TAX MATTERS ....................................................... 36

5.13 RECORDS ........................................................... 37

5.14 OPINION OF FINANCIAL ADVISOR ...................................... 37

ARTICLE VI -- COVENANTS ..................................................... 37

6.1 COVENANTS OF THE COMPANY .......................................... 37

6.2 COVENANTS OF THE BUYER ............................................ 43

6.3 COVENANTS OF BOTH PARTIES TO THE AGREEMENT ........................ 46

ARTICLE VII -- DISCLOSURE OF ADDITIONAL INFORMATION ......................... 49

7.1 ACCESS TO INFORMATION ............................................. 49

7.2 ACCESS TO PREMISES ................................................ 49

7.3 ENVIRONMENTAL SURVEY .............................................. 49

7.4 CONFIDENTIALITY ................................................... 49

7.5 PUBLICITY ......................................................... 50

ARTICLE VIII -- CONDITIONS CLOSING ......................................... 50

8.1 MUTUAL CONDITIONS ................................................. 50

8.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY ...................... 51

8.3 CONDITIONS TO THE OBLIGATIONS OF THE BUYER ........................ 53

ARTICLE IX -- TERMINATION ................................................... 55

9.1 TERMINATION ....................................................... 55

9.2 PROCEDURE AND EFFECT OF TERMINATION ............................... 56

9.3 TERMINATION EXPENSES AND FEES...................................... 56

ARTICLE X -- MISCELLANEOUS PROVISIONS ....................................... 57

10.1 EXPENSES .......................................................... 57

10.2 SURVIVAL OF REPRESENTATIONS ....................................... 57

10.3 AMENDMENT AND MODIFICATION ........................................ 57

10.4 WAIVER OF COMPLIANCE; CONSENTS .................................... 57

10.5 NOTICES ........................................................... 57

10.6 ASSIGNMENT ........................................................ 58

10.7 SEPARABLE PROVISIONS .............................................. 58

10.8 GOVERNING LAW ..................................................... 59

10.9 COUNTERPARTS ...................................................... 59

10.10 INTERPRETATION .................................................... 59

10.11 ENTIRE AGREEMENT .................................................. 59

EXHIBIT A FORM OF PLAN OF MERGER

EXHIBIT B BAKER EMPLOYMENT AGREEMENT

EXHIBIT C REYNOLDS EMPLOYMENT AGREEMENT

EXHIBIT D McGILL CONSULTING AGREEMENT

EXHIBIT E FORM OF VOTING AGREEMENT

EXHIBIT F FORM OF AFFILIATE LETTER

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MERGER AGREEMENT

THIS MERGER AGREEMENT (this "Agreement"), dated as of the 29th day of

June, 2005, is by and among:

CAPITAL BANK CORPORATION, a North Carolina corporation and a financial

holding company registered with the Board of Governors of the Federal Reserve

System under the Bank Holding Company Act of 1956, as amended, and a North

Carolina bank holding company (the "Buyer"); and

1st STATE BANCORP, INC., a Virginia corporation and a holding company

registered with the Board of Governors of the Federal Reserve System under the

Bank Holding Company Act of 1956, as amended, and a North Carolina bank holding

company (the "Company").

BACKGROUND STATEMENT

The Buyer and the Company desire to effect a merger pursuant to which the

Company will merge into the Buyer, with the Buyer being the surviving

corporation (the "Merger"). In consideration of the Merger, the shareholders of

the Company will receive shares of common stock of the Buyer and/or cash. It is

intended that the Merger qualify as a tax-free reorganization under Section 368

of the Internal Revenue Code of 1986, as amended.

STATEMENT OF AGREEMENT

In consideration of the premises and the mutual representations,

warranties, covenants, agreements and conditions contained herein, the parties

hereto agree as follows:

ARTICLE I

DEFINED TERMS

1.1. DEFINITIONS. As used in this Agreement, the following terms have the

following meanings:

"401(k) Plan" has the meaning given to it in Section 6.1(e).

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"Actual Average Closing Price" means, with respect to the Buyer's Stock,

the average of the daily closing sales price thereof on the Nasdaq National

Market System during the twenty (20) trading day period ending three (3)

Business Days prior to the Closing Date, as reported in The Wall Street Journal.

"Acquisition Proposal" has the meaning given to it in Section 6.1(c).

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"Affiliate" means, with respect to any Person, each of the Persons that

directly or indirectly, through one or more intermediaries, owns or controls, or

is controlled by or under common control with, such Person. For the purpose of

this Agreement, "Control" means the possession, directly or indirectly, of the

power to direct or cause the direction of management and policies, whether

through the ownership of voting securities, by contract or otherwise.

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Without limiting the foregoing, as used with respect to the Company, the term

"Affiliates" includes Company Bank, the LLC, and any other of the Company's

Subsidiaries.

"Agreement" means this Merger Agreement.

"Assets" means all of the assets, properties, businesses and rights of a

Person of every kind, nature, character and description, whether real, personal

or mixed, tangible or intangible, accrued or contingent, whether or not carried

on any books and records of such Person, whether or not owned in such Person's

name and wherever located.

"Average Closing Price" means the Actual Average Closing Price; provided,

in the event that the Actual Average Closing Price is greater than $18.00, the

Average Closing Price shall be $18.00; provided, further, in the event that the

Actual Average Closing Price is less than $15.00, the Buyer may set the Average

Closing Price at $15.00 pursuant to Section 2.6.

"Baker Employment Agreement" means the employment agreement to be entered

into at or prior to Closing between the Buyer and A. Christine Baker for a term

of one (1) year commencing on the Closing Date and automatically renewing on

each subsequent anniversary of the Closing Date for an additional one (1) year

renewal term unless either party delivers to the other party written notice of

the party's intent to terminate the employment agreement as of the end of such

initial term or applicable one (1) year renewal term. The employment agreement

shall contain customary terms and conditions (including non-competition and

non-solicitation provisions) applicable to executive employment agreements of

its nature and be substantially in the form attached hereto as EXHIBIT B.

"Benefit Plans" means all pension, retirement, profit-sharing, deferred

compensation, stock option, employee stock ownership, restricted stock,

severance pay, vacation, bonus, or other incentive plan, all other written

employee programs or agreements, all medical, vision, dental, or other health

plans, welfare plans, all life insurance plans, and all other employee benefit

plans, arrangements, fringe benefit plans or perquisites, whether written or

unwritten, including without limitation "employee benefit plans" as that term is

defined in Section 3(3) of ERISA maintained by, sponsored in whole or in part

by, or contributed to by, a Person or any of its subsidiaries for the benefit of

employees, retirees, dependents, spouses, directors, independent contractors, or

any other beneficiaries and under which employees, retirees, dependents,

spouses, directors, independent contractors, or any other beneficiaries are

eligible to participate.

"Business Day" means any day excluding (i) Saturday, (ii) Sunday and (iii)

any day that is a legal holiday in the State of North Carolina.

"Buyer" has the meaning given to it in the introductory paragraph hereof.

"Buyer Bank" means Capital Bank, a North Carolina bank and a wholly owned

subsidiary of the Buyer.

"Buyer Financial Statements" means, with respect to the Buyer and its

Subsidiaries, the consolidated audited statements of income and stockholder's

equity and cash flows for the years ended December 31, 2004, 2003 and 2002 and

consolidated audited balance sheets as of December 31, 2004 and 2003, as well as

the interim unaudited consolidated statements of

<PAGE>

income and stockholders' equity and cash flows for each of the completed fiscal

quarters since December 31, 2004 and the consolidated interim balance sheet as

of each such quarter as filed with the SEC.

"Buyer SEC Reports" has the meaning given to it in Section 5.4(a).

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"Buyer's Disclosure Schedule" has the meaning given to it in the preamble

to ARTICLE V.

"Buyer's Stock" means the common stock of Capital Bank Corporation, no par

value, as traded on the Nasdaq National Market System.

"Cash Election Amount" has the meaning given to it in Section 2.4(a).

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"Cash Election Shares" has the meaning given to it in Section 2.4(a).

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"Cause" means: (i) any act of an employee in connection with his or her

employment and relating to the Buyer's or its Subsidiaries' business including,

but not limited to, negligence, which is materially detrimental to the Buyer's

or its Subsidiaries' interests; (ii) any act of misconduct, unlawfulness or

dishonesty by an employee in connection with his or her employment which is

detrimental to the Buyer's or its Subsidiaries' interests; (iii) an employee's

unsatisfactory job performance or failure to comply with the Buyer's or its

Subsidiaries' board of directors' reasonable directions; or (iv) an employee's

material breach of any agreement between such employee and the Buyer or its

Subsidiaries.

"Closing" means the closing of the Merger, as identified more specifically

in ARTICLE III.

"Closing Date" has the meaning given to it in Section 3.1.

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"Code" means the Internal Revenue Code of 1986, as amended, and any

successor statute of similar import, together with the regulations thereunder,

in each case as in effect from time to time. References to sections of the Code

shall be construed also to refer to any successor sections.

"Company" has the meaning given to it in the introductory paragraph

hereof.

"Company Bank" means 1st State Bank, a North Carolina bank.

"Company Contracts" has the meaning given to it in Section 4.14.

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

"Company Financial Statements" means, with respect to the Company and its

Subsidiaries, the consolidated audited statements of income and stockholder's

equity and cash flows for the years ended September 30, 2004, 2003 and 2002 and

consolidated audited balance sheets as of September 30, 2004 and 2003, as well

as the interim unaudited consolidated statements of income and stockholders'

equity and cash flows for each of the completed fiscal quarters since September

30, 2004 and the consolidated interim balance sheet as of each such quarter as

filed with the SEC.

<PAGE>

"Company Option" and "Company Options" have the respective meanings given

to them in Section 2.7(a).

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

"Company Rule 145 Affiliates" has the meaning given to it in

Section 6.1(h).

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"Company SEC Reports" has the meaning given to it in Section 4.4(a).

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

"Company Shares" has the meaning given to it in Section 2.2(a).

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

"Company's Disclosure Schedule" has the meaning given to it in the

preamble to ARTICLE IV.

"Consent" means any consent, approval, authorization, clearance,

exemption, waiver, or similar affirmation by any Person given or granted with

respect to any Contract, Law, Order, or Permit.

"Contract" means any agreement, warranty, indenture, mortgage, guaranty,

lease, license or other contract, agreement, arrangement, commitment or

understanding, written or oral, to which a Person is a party.

"DCP" has the meaning given to it in Section 6.1(e).

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"Default" means (i) any breach or violation of or default under any

Contract, Order or Permit (including any noncompliance with restrictions on

assignment, where assignment is defined to include a change of control of the

parties to this Agreement or any of their Affiliates or the merger or

consolidation of any of them with another Person), (ii) any occurrence of any

event that with the passage of time or the giving of notice or both would

constitute such a breach or violation of or default under any Contract, Order or

Permit, or (iii) any occurrence of any event that with or without the passage of

time or the giving of notice would give rise to a right to terminate or revoke,

change the current terms of, or renegotiate, or to accelerate, increase, or

impose any Liability under, any Contract, Order or Permit.

"EDGAR" has the meaning given to it in Section 4.4(a).

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

"Effective Time" has the meaning given to it in Section 2.1(e).

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

"Election Deadline" has the meaning given to it in Section 2.4(a).

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"Election Form" has the meaning given to it in Section 2.4(a).

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"Environmental Laws" means any federal, state or local law, statute,

ordinance, rule, regulation, permit, directive, license, approval, guidance,

interpretation, order or other legal requirement relating to the protection of

human health or the environment, including but not limited to any requirement

pertaining to the manufacture, processing, distribution, use, treatment,

storage, disposal, transportation, handling, reporting, licensing, permitting,

investigation or remediation of materials that are or may constitute a threat to

human health or the environment. Without limiting the foregoing, each of the

following is an Environmental Law: the Comprehensive Environmental Response,

Compensation, and Liability Act (42 U.S.C. Section. 9601

<PAGE>

et seq.) ("CERCLA"), the Hazardous Material Transportation Act (49 U.S.C.

Section. 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C.

Section. 6901 et seq.) ("RCRA"), the Federal Water Pollution Control Act (33

U.S.C. Section. 1251 et seq.), the Clean Air Act (42 U.S.C. Section. 7401 et

seq.), the Toxic Substances Control Act (15 U.S.C. Section. 2601 et seq.), the

Safe Drinking Water Act (42 U.S.C. Section. 300 et seq.) and the Occupational

Safety and Health Act (29 U.S.C. Section. 651 et seq.) ("OSHA"), as such laws

and regulations have been or are in the future amended or supplemented, and each

similar federal, state or local statute, and each rule and regulation

promulgated under such federal, state and local laws.

"Environmental Survey" has the meaning given to it in Section 7.3.

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"ERISA" means the Employee Retirement Income Security Act of 1974, as

amended, and any successor statute of similar import, together with the

regulations thereunder, in each case as in effect from time to time. References

to sections of ERISA shall be construed also to refer to any successor sections.

"ERISA Plan" means any Benefit Plan that is an "employee welfare benefit

plan," as that term is defined in Section 3(l) of ERISA, or an "employee pension

benefit plan," as that term is defined in Section 3(2) of ERISA.

"ESOP" has the meaning given it in Section 6.1(e).

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"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Exchange Agent" has the meaning given to it in Section 2.5(a).

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"Exchange Ratio" means an amount equal to $37.15 divided by the Average

Closing Price.

"Federal Reserve Bank" means the Federal Reserve Bank of Richmond.

"FDIC" means the Federal Deposit Insurance Corporation.

"Foundation" means 1st State Bank Foundation, Inc.

"Foundation Agreement" has the meaning given to it in Section 6.2(e).

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"FTN" means FTN Midwest Securities Corp.

"Generally Accepted Accounting Principles" or "GAAP" means accounting

principles generally accepted in the United States of America as recognized by

the Public Company Accounting Oversight Board (PCAOB), as in effect from time to

time, consistently applied and maintained on a consistent basis for a Person

throughout the period indicated and consistent with such Person's prior

financial practice.

"Governmental Authority" means any nation, province or state, or any

political subdivision thereof, and any agency, department, natural person or

other entity exercising

<PAGE>

executive, legislative, regulatory or administrative functions of or pertaining

to government, including Regulatory Authorities.

"Hazardous Material" means any substance or material that either is or

contains a substance designated as a hazardous waste, hazardous substance,

hazardous material, pollutant, contaminant or toxic substance under any

Environmental Law or is otherwise regulated under any Environmental Law, or the

presence of which in some quantity requires investigation, notification or

remediation under any Environmental Law.

"IRS" means the Internal Revenue Service.

"Joint Proxy Statement" has the meaning given to it in Section 4.17.

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"Knowledge of the Buyer" means the knowledge of any of the directors and

executive officers of the Buyer or the Buyer Bank or any of their respective

Subsidiaries.

"Knowledge of the Company" means the knowledge of any of the directors and

executive officers of the Company or the Company Bank or any of their respective

Subsidiaries.

"Law" means any code, law, ordinance, rule, regulation, reporting or

licensing requirement, or statute applicable to a Person or its Assets,

Liabilities, business or operations promulgated, interpreted or enforced by any

Governmental Authority.

"Liability" means any direct or indirect, primary or secondary, liability,

indebtedness, obligation, penalty, cost or expense (including costs of

investigation, collection and defense), claim, deficiency, guaranty or

endorsement of or by any Person (other than endorsements of notes, bills,

checks, and drafts presented for collection or deposit in the ordinary course of

business) of any type, whether accrued, absolute or contingent, liquidated or

unliquidated, matured or unmatured or otherwise.

"Lien" means, whether contractual or statutory, any conditional sale

agreement, participation or repurchase agreement, assignment, default of title,

easement, encroachment, encumbrance, hypothecation, infringement, lien,

mortgage, pledge, reservation, restriction, security interest, title retention

or other security arrangement, or any adverse right or interest, charge or claim

of any nature whatsoever of, on, or with respect to any property or property

interest, other than (i) Liens for current property Taxes not yet due and

payable, (ii) easements, restrictions of record and title exceptions that could

not reasonably be expected to have a Material Adverse Effect, and (iii) pledges

to secure deposits, Liens to secure advances from the Federal Home Loan Bank of

Atlanta and other Liens incurred in the ordinary course of the banking business.

"Litigation" means any action, arbitration, cause of action, complaint,

criminal prosecution, governmental investigation, hearing, or administrative or

other proceeding, but shall not include regular, periodic examinations of

depository institutions and their Affiliates by Regulatory Authorities.

"LLC" has the meaning given to it in Section 4.1(a).

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<PAGE>

"Loan Collateral" means all of the assets, properties, businesses and

rights of every kind, nature, character and description, whether real, personal,

or mixed, tangible or intangible, accrued or contingent, owned by whomever and

wherever located, in which any Person has taken a security interest with respect

to, on which any Person has placed a Lien with respect to, or which is otherwise

used to secure, any loan made by the Person or any note, account, or other

receivable payable to the Person.

"Mailing Date" has the meaning given to it in Section 2.4(a).

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"Material" for purposes of this Agreement shall be determined in light of

the facts and circumstances of the matter in question; provided that any

specific monetary amount stated in this Agreement shall determine materiality in

that instance.

"Material Adverse Effect" on a Person shall mean an event, change, or

occurrence that, individually or together with any other event, change, or

occurrence, has a Material adverse impact on (i) the financial condition,

results of operations, or business of such Person and its subsidiaries, taken as

a whole, or (ii) the ability of such Person to perform its obligations under

this Agreement or to consummate the Merger or the other transactions

contemplated by this Agreement, provided that "Material Adverse Effect" shall

not be deemed to include the impact of (a) changes in banking and similar Laws

of general applicability or interpretations thereof by courts or governmental

authorities, (b) changes in market interest rates, real estate markets,

securities markets or other market conditions applicable to banks or thrift

institutions generally, (c) changes in GAAP or regulatory accounting principles

generally applicable to banks and their holding companies, (d) actions and

omissions of a Person (or any of its Affiliates) taken with the prior informed

consent of the other Person in contemplation of the transactions contemplated

hereby, and (e) the Merger (and the reasonable expenses incurred in connection

therewith) and compliance with the provisions of this Agreement on the operating

performance of the Persons.

"McGill Consulting Agreement" means the consulting agreement to be entered

into at or prior to Closing between the Buyer and James C. McGill for a term of

four (4) years commencing on the Closing Date. The consulting agreement shall

contain customary terms and conditions (including non-competition and

non-solicitation provisions) applicable to agreements of its nature and be

substantially in the form attached hereto as EXHIBIT D.

"Merger" has the meaning given to it in the Background Statement hereof.

"Merger Consideration" has the meaning given to it in Section 2.3(a).

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"Mixed Cash Consideration Election Amount" has the meaning given to it in

Section 2.4(a).

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"Mixed Election Shares" has the meaning given to it in Section 2.4(a).

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"Mixed Stock Consideration Election Amount" has the meaning given to it in

Section 2.4(a).

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"MRP" has the meaning given to it in Section 6.1(e).

<PAGE>

"Order" means any administrative decision or award, decree, injunction,

judgment, order, quasi-judicial decision or award, ruling, or writ of any

federal, state, local, foreign or other court, arbitrator, mediator, tribunal,

administrative agency or Governmental Authority.

"Orr Group" means The Orr Group, LLC.

"Pension Plan" means any ERISA Plan that also is a "defined benefit plan"

(as defined in Section 414(j) of the Code or Section 3(35) of ERISA).

"Permit" means any approval, authorization, certificate, easement, filing,

franchise, license, notice, permit, or right given by a Governmental Authority

to which any Person is a party or that is or may be binding upon or inure to the

benefit of any Person or its securities, Assets or business.

"Person" means a corporation, a company, an association, a joint venture,

a partnership, an organization, a business, an individual, a trust, a

Governmental Authority or any other legal entity.

"Per Share Cash Consideration" has the meaning given to it in

Section 2.3(a).

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"Per Share Mixed Consideration" has the meaning given to it in

Section 2.3(a).

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"Per Share Stock Consideration" has the meaning given to in

Section 2.3(a).

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"Real Property" means all of the land, buildings, premises, or other real

property in which a Person has ownership or possessory rights, whether by title,

lease or otherwise (including banking facilities and any foreclosed properties).

Notwithstanding the foregoing, "Real Property", as used with respect to any

Person, does not include any Loan Collateral not yet foreclosed and conveyed to

the Person as of the date with respect to which the term "Real Property" is

being used.

"Registration Statement" has the meaning given to it in Section 4.17.

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"Regulatory Authorities" means, collectively, the Federal Trade

Commission, the United States Department of Justice, the Federal Reserve Board,

the FDIC, the North Carolina Banking Commission, the North Carolina Commissioner

of Banks, the National Association of Securities Dealers and the SEC, and all

other regulatory agencies having jurisdiction over the parties hereto and their

respective Affiliates.

"Retiree Benefits" has the meaning given to it in Section 6.1(e).

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"Reynolds Employment Agreement" means the employment agreement to be

entered into at or prior to Closing between the Buyer and Fairfax C. Reynolds

for a term of one (1) year commencing on the Closing Date and automatically

renewing on each subsequent anniversary of the Closing Date for an additional

one (1) year renewal term unless either party delivers to the other party

written notice of the party's intent to terminate the employment agreement as of

the end of such initial term or applicable one (1) year renewal term. The

employment agreement shall contain customary terms and conditions (including

non-competition and non-solicitation

<PAGE>

provisions) applicable to executive employment agreements of its nature and be

substantially in the form attached hereto as EXHIBIT C.

"Rights" shall mean all arrangements, calls, commitments, Contracts,

options, rights to subscribe to, scrip, understandings, warrants, or other

binding obligations of any character whatsoever relating to, or securities or

rights convertible into or exchangeable for, shares of the capital stock of a

Person or by which a Person is or may be bound to issue additional shares of its

capital stock or other Rights.

"Sarbanes-Oxley" has the meaning given it in Section 4.4(a).

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"SEC" means the Securities and Exchange Commission.

"Securities Act" means the Securities Act of 1933, as amended.

"Securities Laws" means the Securities Act of 1933, the Securities

Exchange Act of 1934, the Investment Company Act of 1940, the Investment

Advisors Act of 1940, the Trust Indenture Act of 1939, each as amended, and the

rules and regulations of any Governmental Authority promulgated under each.

"Shareholder Meeting" and "Shareholder Meetings" have the respective

meanings given to them in Section 4.17.

"Stock Adjustment" has the meaning given to it in Section 2.3(d).

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"Stock Election Amount" has the meaning given to it in Section 2.4(a).

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"Stock Election Shares" has the meaning given to it in Section 2.4(a).

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"Subsidiary" means, with respect to any Person, each of the Persons that

directly or indirectly, through one or more intermediaries, is controlled by

such Person.

"Superior Proposal" means a bona fide, written and unsolicited proposal or

offer (including a new or solicited proposal received by the Company after

execution of this Agreement from a person whose initial contact with the Company

may have been solicited by the Company or its representatives prior to the

execution of this Agreement) made by any person or group (other than the Buyer

or any of its Subsidiaries) with respect to an Acquisition Proposal on terms

which the board of directors of the Company determines in good faith, and in the

exercise of reasonable judgment (based on the advice of independent financial

advisors and outside legal counsel), to be reasonably capable of being

consummated and to be superior from a financial point of view to the holders of

Company Shares than the transactions contemplated hereby, taking into

consideration all elements of the transactions contemplated hereby including,

without limitation, the non-taxable element of such transactions.

"Surviving Holding Company" has the meaning given to it in Section 2.1(a).

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

"Tax" or "Taxes" means any and all taxes, charges, fees, levies or other

assessments (whether federal, state, local or foreign), including without

limitation income, gross receipts,

<PAGE>

excise, property, estate, sales, use, value added, transfer, license, payroll,

franchise, ad valorem, withholding, Social Security and unemployment taxes, as

well as any interest, penalties and other additions to such taxes, charges,

fees, levies or other assessments.

"Tax Return" means any report, return or other information required to be

supplied to a taxing authority in connection with Taxes.

"Taxable Period" shall mean any period prescribed by any Governmental

Authority, including the United States or any state, local, or foreign

government or subdivision or agency thereof for which a Tax Return is required

to be filed or Tax is required to be paid.

"Total Cash Merger Consideration" has the meaning given to it in

Section 2.3(b).

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

"Total Stock Merger Consideration" has the meaning given to it in

Section 2.3(b).

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

"Voting Agreement" means that certain voting agreement to be entered into

between the Buyer and each officer and director of the Company concurrently with

the execution and delivery of this Agreement as a condition to inducement to the

Buyer entering into this Agreement and incurring the obligations set forth

herein substantially in the form of EXHIBIT E.

ARTICLE II

THE MERGER; CONVERSION AND EXCHANGE OF COMPANY SHARES

2.1. THE MERGER.

(a) The Merger. On the terms and subject to the conditions of this

Agreement, the Plan of Merger in respect of the Merger, which shall be

substantially in the form attached hereto as EXHIBIT A, and North Carolina Law

and Virginia Law, the Company shall merge into the Buyer, the separate existence

of the Company shall cease, and the Buyer shall be the surviving corporation

(the "Surviving Holding Company") and shall continue its corporate existence

under the laws of the State of North Carolina .

(b) Governing Documents. The articles of incorporation of the Buyer in

effect at the Effective Time (as defined below) of the Merger shall be the

articles of incorporation of the Surviving Holding Company until further amended

in accordance with applicable Law. The bylaws of the Buyer in effect at such

Effective Time shall be the bylaws of the Surviving Holding Company until

further amended in accordance with applicable Law.

Employment Agreement and the Reynolds Employment Agreement, from and after the

Effective Time of the Merger, until successors or additional directors are duly

elected or appointed in accordance with applicable law, (i) the directors of the

Buyer at the Effective Time shall be the directors of the Surviving Holding

Company, and (ii) the officers of the Buyer at the Effective Time shall be the

officers of the Surviving Holding Company.

(d) Approval. The parties hereto shall take and cause to be taken all

action necessary to approve and authorize (i) this Agreement and the other

documents contemplated hereby

<PAGE>

(including without limitation the above-described Plan of Merger) and (ii) the

Merger and the other transactions contemplated hereby.

(e) Effective Time. The Merger shall become effective on the date and at

the time of filing of the related Articles of Merger, in the form required by

and executed in accordance with North Carolina Law and Virginia Law, or at such

other time specified therein. The date and time when the Merger shall become

effective is herein referred to as the "Effective Time."

(f) Filing of Articles of Merger. At the Closing, the Buyer and the

Company shall cause the Articles of Merger (containing the above-referenced Plan

of Merger) in respect of the Merger to be executed and filed with the Secretary

of State of North Carolina and the Virginia State Corporation Commission, as

required by North Carolina Law and Virginia Law, respectively, and shall take

any and all other actions and do any and all other things to cause the Merger to

become effective as contemplated hereby.

2.2 COMPANY SHARES.

(a) Each share of the Company's capital stock (the "Company Shares"), par

value $0.01 per share, issued and outstanding immediately prior to the Effective

Time (other than Company Shares to be canceled pursuant to this Section 2.2)

shall, by virtue of the Merger and without any action on the part of the holders

thereof, be canceled and converted at the Effective Time into the right to

receive the Merger Consideration (as defined below) in accordance with this

ARTICLE II.

(b) Each Company Share, by virtue of the Merger and without any action on

the part of the holder thereof, shall at the Effective Time no longer be

outstanding, shall be canceled and retired and shall cease to exist, and each

holder of certificates representing any such Company Shares shall thereafter

cease to have any rights with respect to such shares, except for the right to

receive the Merger Consideration.

contrary, any Company Shares held in the treasury of the Company immediately

prior to the Effective Time shall be canceled without any conversion thereof,

and no payment shall be made with respect thereto.

(d) From and after the Effective Time of the Merger, there shall be no

transfers on the stock transfer books of the Surviving Holding Company of

Company Shares that were outstanding immediately prior to the Effective Time.

If, after the Effective Time, certificates representing Company Shares are

presented to the Surviving Holding Company, they shall be canceled, and

exchanged for the Merger Consideration as provided for herein.

2.3 MERGER CONSIDERATION.

(a) Subject to Sections 2.2, 2.4, 2.5, 2.6 and 2.8, at the Effective

Time, the holders of Company Shares outstanding at the Effective Time, other

than the Buyer and its Affiliates, shall be entitled to receive, and the Buyer

shall pay or issue and deliver, for each Company Share held by such Person: (i)

0.691829 shares of the Buyer's Stock multiplied by the Exchange Ratio plus an

amount equal to $11.4486 in cash (the "Per Share Mixed Consideration"), (ii) 1.0

share of

<PAGE>

the Buyer's Stock multiplied by the Exchange Ratio (the "Per Share Stock

Consideration"), or (iii) an amount equal to $37.15 in cash (the "Per Share Cash

Consideration"). The foregoing consideration, collectively and in the aggregate,

shall be referred to herein as the "Merger Consideration."

(b) Subject to the allocation provisions of Section 2.4, each holder of a

Company Share may elect, for all Company Shares beneficially owned by such

holder, to receive the Per Share Mixed Consideration, the Per Share Stock

Consideration or the Per Share Cash Consideration; provided, (i) that the

aggregate number of shares of Buyer's Stock with respect to which the Per Share

Mixed Consideration and the Per Share Stock Consideration (excluding fractions

of Company Shares issued or not issued pursuant to Section 2.3(c) as a result of

rounding) shall be paid as Merger Consideration shall be such number of shares

equal to $74,499,168.79 divided by the Average Closing Price (subject to

equitable adjustment for any stock dividend, stock split or other stock payment

by the Company after the date hereof but prior to the Effective Time) (the

"Total Stock Merger Consideration"), subject to adjustment so that the Total

Stock Merger Consideration shall not be less than the amount necessary to

qualify the Merger as a tax-free reorganization under Section 368 of the Code,

as determined by the Buyer at or immediately after the Effective Time upon

consultation with its independent accountants and counsel; and (ii) that the

aggregate amount of cash with respect to which the Per Share Mixed Consideration

and the Per Share Cash Consideration shall be paid as Merger Consideration shall

be $33,185,195.76 (the "Total Cash Merger Consideration"); provided however,

that, if the Total Stock Merger Consideration is adjusted as provided in Section

2.3(b)(i) above to qualify the Merger as a tax-free reorganization under Section

368 of the Code, the Total Cash Merger Consideration shall be adjusted so that

the aggregate value of the Merger Consideration paid after the adjustment to the

Total Stock Merger Consideration is equal to the aggregate value of the Merger

Consideration which would have been paid in the absence of such adjustment.

delivered in connection with the Merger. Instead, the number of shares of the

Buyer's Stock to which a holder of the Company Shares is entitled to receive

pursuant to this Article II shall be rounded to the nearest whole share (with

0.5 share rounded up to the nearest whole share).

(d) In the event the Buyer changes the number of shares of the Buyer's

Stock issued and outstanding prior to the Effective Time as a result of a stock

split, stock dividend or other distribution payable in Buyer's Stock or

securities convertible into Buyer's Stock or similar recapitalization with

respect to such stock or effects a reclassification, combination or other change

with respect to Buyer's Stock (each a "Stock Adjustment") and the record date

therefor (in the case of a stock dividend) or the effective date thereof (in the

case of a stock split or similar recapitalization, reclassification or

combination for which a record date is not established) shall be prior to the

Effective Time, the Per Share Mixed Consideration and the Per Share Stock

Consideration shall each be equitably adjusted to reflect such change.

<PAGE>

2.4 ELECTION AND ALLOCATION PROCEDURES.

(a) Election.

(i) An election form ("Election Form"), together with the other

transmittal materials described in Section 2.5, shall be mailed as soon as

reasonably practicable but no later than five (5) Business Days after the

Effective Time to each holder of Company Shares of record at the Effective

Time. Such date of mailing shall be referred to hereinafter as the

"Mailing Date." Each Election Form shall provide that a holder (or the

beneficial owner through appropriate and customary documentation and

instruction) of Company Shares will receive the Per Share Mixed

Consideration with respect to all of such holder's Company Shares, unless

such holder (or the beneficial owner through appropriate and customary

documentation and instruction) elects to receive the Per Share Cash

Consideration or the Per Share Stock Consideration with respect to all of

such holder's Company Shares. Company Shares as to which no election of

Per Share Stock Consideration or Per Share Cash Consideration is made

shall be herein referred to as the "Mixed Election Shares"; Company Shares

as to which the Per Share Cash Consideration election is made shall be

referred to as the "Cash Election Shares"; and Company Shares as to which

the Per Share Stock Consideration election is made shall be referred to as

the "Stock Election Shares". The "Cash Election Amount" shall be equal to

the Per Share Cash Consideration multiplied by the total number of Cash

Election Shares plus the amount of the Per Share Mixed Consideration

consisting of cash multiplied by the total number of Mixed Election Shares

(the "Mixed Cash Consideration Election Amount"). The "Stock Election

Amount" shall be equal to the Per Share Stock Consideration multiplied by

the total number of Stock Election Shares plus the amount of the Per Share

Mixed Consideration consisting of the Buyer's Stock multiplied by the

total number of Mixed Election Shares (the "Mixed Stock Consideration

Election Amount").

(ii) Any Company Share with respect to which the holder (or the

beneficial owner, as the case may be) shall not have submitted to the

Exchange Agent an effective, properly completed Election Form on or before

a date after the Effective Date to be agreed upon by the parties hereto

(which date shall be set forth on the Election Form), but in any event not

earlier than the twentieth (20th) Business Day after the Mailing Date

(such deadline, the "Election Deadline"), shall be converted into the Per

Share Mixed Consideration as set forth in Section 2.4(b) and shall be

deemed to be a Mixed Election Share.

(iii)The Buyer shall make available one or more Election Forms as may

be reasonably requested by all Persons who become holders (or beneficial

owners) of Company Shares between the Mailing Date and the close of

business on the business day prior to the Election Deadline, and the Buyer

shall provide to the Exchange Agent all information reasonably necessary

for it to perform as specified herein.

(iv) Any election shall have been properly made only if the Exchange

Agent shall have actually received a properly completed Election Form by

the Election Deadline. An Election Form shall be deemed properly completed

only if accompanied by

<PAGE>

one or more certificates (or customary affidavits and indemnification

regarding the loss or destruction of such certificates or the guaranteed

delivery of such certificates) representing all Company Shares covered by

such Election Form, together with duly executed transmittal materials

included with the Election Form. Any Election Form may be revoked or

changed by the person submitting such Election Form (or the beneficial

owner of the shares covered by such Election Form through appropriate and

customary documentation and instruction) at or prior to the Election

Deadline. In the event an Election Form is revoked prior to the Election

Deadline and no other valid election is made by the Election Deadline, the

Company Shares represented by such Election Form shall be Mixed Election

Shares. Subject to the terms of this Agreement and of the Election Form,

the Exchange Agent shall have reasonable discretion to determine whether

any election, revocation or change has been properly or timely made and to

disregard immaterial defects in the Election Forms, and any good faith

decisions of the Exchange Agent regarding such matters shall be binding

and conclusive. Neither the Buyer nor the Exchange Agent shall be under

any obligation to notify any person of any defect in an Election Form.

(b) Allocation. As soon as reasonably practicable after the Effective

Time, the Buyer shall cause the Exchange Agent to allocate the Merger

Consideration among the holders of Company Shares, which shall be effected by

the Exchange Agent as follows:

(i) Each Mixed Election Share shall be converted into the right to

receive an amount of cash and a number of shares of the Buyer's Stock equal to

the Per Share Mixed Consideration.

(ii) If the Total Cash Merger Consideration is greater than the

aggregate Cash Election Amount, then:

(A) each Cash Election Share shall be converted into the right

to receive an amount of cash equal to the Per Share Cash

Consideration; and

(B) each Stock Election Share shall be converted into the

right to receive (1) an amount in cash equal to the Total Cash Merger

Consideration less the aggregate Cash Election Amount divided by the

total number of Stock Election Shares, and (2) a number of shares of

the Buyer's Stock equal to the Total Stock Merger Consideration less

the aggregate Mixed Stock Consideration Election Amount divided by

the total number of Stock Election Shares.

(iii) If the Total Cash Merger Consideration is less than the Cash

Election Amount then:

(A) each Stock Election Share shall be converted into the

right to receive the Per Share Stock Consideration; and

(B) each Cash Election Share shall be converted into the right

to receive (1) an amount in cash equal to the Total Cash Merger

Consideration less the aggregate Mixed Cash Consideration Election

Amount divided by the total number of Cash Election Shares, and (2) a

number of shares of the Buyer's Stock

<PAGE>

equal to the Total Stock Merger Consideration less the aggregate

Stock Election Amount divided by the total number of Cash Election

Shares.

2.5 EXCHANGE PROCEDURES.

(a) After the Effective Time, the Buyer shall cause an exchange agent

selected by the Buyer and reasonably acceptable to the Company (the "Exchange

Agent") to mail to the shareholders of the Company of record at the Effective

Time the Election Form, as required under Section 2.4, and other appropriate

transmittal materials (which shall specify that delivery shall be effected, and

risk of loss and title to the certificates representing Company Shares prior to

such Effective Time shall pass, only upon proper delivery of such certificates

to the Exchange Agent). After the Effective Time, each holder of Company Shares

issued and outstanding at the Effective Time (other than any of such shares held

by the Buyer or any Affiliate thereof or canceled pursuant to Section 2.2(c) or

(d)) shall surrender the certificate or certificates representing such shares to

the Exchange Agent and upon surrender thereof and completion of all required

allocation procedures contained in this ARTICLE II receive in exchange therefor

the number of shares of the Buyer's Stock and the cash to which such holder is

entitled hereunder. The Buyer, or the Exchange Agent, as applicable, shall not

be obligated to deliver any of such payments in cash or stock until such holder

surrenders the certificate(s) representing such holder's Company Shares. The

certificate(s) so surrendered shall be duly endorsed as the Exchange Agent may

require. Any other provision of this Agreement notwithstanding, neither the

Buyer nor the Exchange Agent shall be liable to any holder of Company Shares for

any amounts paid or properly delivered in good faith to a public official

pursuant to any applicable abandoned property Law.

(b) To the extent permitted by applicable Law, former shareholders of

record of the Company shall be entitled to vote after the Total Stock Merger

Consideration has been allocated pursuant to the provisions of this ARTICLE II

at any meeting of the Buyer's shareholders the number of whole shares of the

Buyer's Stock into which their respective Company Shares are converted pursuant

to the Merger, regardless of whether such holders have exchanged their

certificates representing such Company Shares for certificates representing the

Buyer's Stock in accordance with the provisions of this Agreement. Whenever a

dividend or other distribution is declared by the Buyer on the Buyer's 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 the Buyer's

Stock issuable pursuant to this Agreement, but beginning at the Effective Time

no dividend or other distribution payable to the holders of record of the

Buyer's Stock as of any time subsequent to the Effective Time shall be delivered

to the holder of any certificate representing any of the Company Shares issued

and outstanding at such Effective Time until such holder surrenders such

certificate for exchange as provided in this Section 2.5. However, upon

surrender of such certificate(s), both the certificate(s) representing the

shares of the Buyer's Stock to which such holder is entitled and any such

undelivered dividends (without any interest) shall be delivered and paid with

respect to each share represented by such certificates.

2.6 AVERAGE CLOSING PRICE ADJUSTMENT. In the event that the Actual

Average Closing Price is less than $15.00, the Buyer shall deliver written

notice to the Company no later than the second (2nd) Business Day preceding the

Closing Date pursuant to which the Buyer shall elect, in its sole discretion,

to: (a) maintain the Average Closing Price at a price

<PAGE>

equal to the Actual Average Closing Price; (b) set the Average Closing Price at

$15.00 and pay the holders of Company Shares receiving shares of Buyer's Stock

as Merger Consideration (after giving effect to the allocation procedures set

forth in Section 2.4) an amount in cash equal to $15.00 minus the Actual Average

Closing Price per share of Buyer's Stock to be received by such holders of

Company Shares; or (c) set the Average Closing Price at $15.00 and pay no

additional consideration to the holders of Company Shares receiving shares of

Buyer's Stock as Merger Consideration (after giving effect to the allocation

procedures set forth in Section 2.4). In the event that the Buyer elects option

Buyer written notice of termination no later than one (1) Business Day prior to

the Closing Date.

2.7 COMPANY STOCK OPTIONS.

(a) Each option or other right to purchase Company Shares (each, a

"Company Option" and collectively, the "Company Options") granted by the Company

under its Benefit Plans that are outstanding at the Effective Time shall, by

virtue of the Merger and without any action on the part of the holders thereof,

be canceled and converted at such Effective Time into the right to receive, and

the Buyer shall pay, an amount equal to $37.15 minus the exercise price

applicable to each such Company Option, in cash, per Company Share covered by

each such Company Option.

(b) Each Company Option, by virtue of the Merger and without any action

on the part of the holder thereof, shall at the Effective Time no longer be

outstanding, shall be canceled and retired and shall cease to exist, and each

holder of Company Options shall thereafter cease to have any rights with respect

to such Company Options, except for the right to receive the cash consideration

provided in Section 2.7(a) above.

2.8 LIQUIDATION ACCOUNT. The liquidation account established by Company

Bank pursuant to the plan of conversion adopted in connection with the Company

Bank's conversion from mutual to stock form shall, to the extent required by

Law, continue to be maintained by Buyer Bank after the Effective Time for the

benefit of those persons and entities who were savings account holders of

Company Bank on the eligibility record date and supplemental eligibility record

date for such conversion and who continue from time to time to have rights

therein.

ARTICLE III

THE CLOSING

3.1 CLOSING. The Closing of the Merger shall take place at the offices of

Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. in Raleigh, North

Carolina as soon as reasonably practical after all conditions to Closing have

been met, or on such other date or at such other location as the Buyer and the

Company may mutually agree (such date, the "Closing Date"), provided, that the

Closing shall not occur before January 1, 2006. At the Closing, the parties will

execute, deliver and file all documents necessary to effect the transactions

contemplated with respect to the Merger, including the Articles of Merger in

respect of the Merger.

<PAGE>

3.2 DELIVERIES BY THE COMPANY. At or by the Closing, the Company shall

have caused the following documents to be executed and delivered:

(a) the agreements, opinions, certificates, instruments and other

documents contemplated in Section 8.3; and

-----------

(b) all other documents, certificates and instruments required hereunder

to be delivered to the Buyer, or as may reasonably be requested by the Buyer at

or prior to the Closing.

3.3 DELIVERIES BY THE BUYER. At or by the Closing, the Buyer shall have

caused the following documents to be executed and delivered:

(a) the agreements, opinions, certificates, instruments and other

documents contemplated in Section 8.2; and

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

(b) all other documents, certificates and instruments required hereunder

to be delivered to the Company, or as may reasonably be requested by the Company

at or prior to the Closing.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Except as set forth on the Company's Disclosure Schedule (the "Company's

Disclosure Schedule"), the Company represents and warrants to the Buyer that the

statements contained in this ARTICLE IV are correct and complete as of the date

of this Agreement and will be correct and complete as of the Closing Date.

4.1 ORGANIZATION, STANDING AND POWER.

(a) The Company is a bank holding company registered with the Board of

Governors of the Federal Reserve System under the Bank Holding Company Act of

1956, as amended, and the Company Bank is a bank under North Carolina Law. The

Company Bank is an "insured institution" as defined in the Federal Deposit

Insurance Act and applicable regulations thereunder, and subject to dollar

limits under such Act, all deposits in the Company Bank are fully insured by the

FDIC to the extent permitted by Law. Company Bank's Subsidiary, First Capital

Services Company, LLC, is a North Carolina limited liability company (the

"LLC").

(b) The Company is a corporation, duly organized, validly existing and in

good standing under the Laws of the Commonwealth of Virginia. The Company Bank

is a bank, duly organized, validly existing and in good standing under the Laws

of the State of North Carolina. The LLC is a limited liability company, duly

organized, validly existing and in good standing under the Laws of the State of

North Carolina. Each of the Company and its Subsidiaries has the corporate or

other applicable power and authority to carry on, in all Material respects, its

businesses as now conducted and to own, lease and operate its Assets. Each of

the Company and its Subsidiaries is duly qualified or licensed to transact

business as a foreign corporation in good standing in the States of the United

States and foreign jurisdictions where the character of its Assets or the nature

or conduct of its business requires it to be so qualified or licensed, except

for

<PAGE>

such jurisdictions in which the failure to be so qualified or licensed could not

reasonably be expected to have a Material Adverse Effect on the Company.

of all meetings and other corporate actions held or taken of their respective

shareholders and board of directors (including the committees of such boards)

since October 1, 2001, which records are complete and accurate in all material

respects and have been made available to the Buyer.

4.2 AUTHORITY; NO CONFLICTS.

(a) Subject to required regulatory and shareholder approvals, the Company

has the corporate power and authority necessary to execute, deliver and perform

its obligations under this Agreement and to consummate the transactions

contemplated hereby. Subject to required shareholder approval, the execution,

delivery and performance of the Company's obligations under this Agreement and

the other documents contemplated hereby and the consummation of the transactions

contemplated herein, including the Merger, have been duly and validly authorized

by all necessary corporate action in respect thereof on the part of the Company.

This Agreement represents a legal, valid and binding obligation of the Company,

enforceable against the Company in accordance with its terms (except in all

cases as such enforceability may be limited by applicable bankruptcy,

insolvency, reorganization, moratorium or similar Laws affecting the enforcement

of creditors' rights generally and except that the availability of specific

performance, injunctive relief and other equitable remedies is subject to the

discretion of the court before which any proceeding may be brought). To the

Knowledge of the Company, there is no fact or condition relating to the Company

that would prevent all regulatory approvals required for the consummation of the

transactions contemplated hereby from being obtained.

(b) Neither the execution and delivery of this Agreement by the Company,

nor the consummation by the Company of the transactions contemplated hereby, nor

compliance by the Company with any of the provisions hereof, will (i) conflict

with or result in a breach of any provision of the Company's articles of

incorporation, charter, bylaws or any other similar governing document, (ii)

constitute or result in a Default under, or require any Consent pursuant to, or

result in the creation of any Lien on any Asset of the Company or any of its

Subsidiaries under, any Contract or Permit of the Company or any of its

Subsidiaries, except as could not reasonably be expected to have a Material

Adverse Effect on the Company, or (iii) subject to obtaining the requisite

Consents referred to in Section 8.1 of this Agreement, violate any Law or Order

applicable to the Company or any of its Subsidiaries or any of their respective

Assets.

Securities Laws and banking Regulatory Authorities, no notice to, filing with,

or Consent of, any Governmental Authority is necessary for the consummation by

the Company of the Merger and the other transactions contemplated in this

Agreement.

4.3 CAPITAL STOCK; SUBSIDIARIES.

(a) The authorized capital stock of the Company consists of 7,000,000

shares of common stock, $0.01 par value per share, of which 2,898,637 shares are

issued and outstanding as of the date of this Agreement, and 1,000,000 shares of

preferred stock, $0.01 par value per

<PAGE>

share, of which there are no shares issued and outstanding as of the date of

this Agreement. Except for the 2,898,637 shares of common stock referenced in

the preceding sentence, there are no shares of capital stock or other equity

securities of the Company outstanding. There are options to purchase 308,812

shares of common stock of the Company outstanding as of the date of this

Agreement, and except for such options, there are no options, Rights or

Contracts requiring the Company to issue additional shares of its capital stock.

There are 308,812 shares of capital stock reserved with respect to such options.

The authorized capital stock of the Company Bank consists of 10,000,000 shares

of common stock, par value $10.00 per share, of which 600,000 shares are issued

and outstanding as of the date of this Agreement and are owned and held by the

Company, and except for such 600,000 shares of common stock, there are no shares

of capital stock or other equity securities of the Company Bank outstanding. All

outstanding interests in the LLC are owned and held by the Company Bank, and

except for such interests, there are no other ownership interests or other

securities of the LLC outstanding. The Company has no other direct or indirect

Subsidiaries other than the Company Bank as of the date of this Agreement. The

Company Bank has no other direct or indirect Subsidiaries other than the LLC as

of the date of this Agreement.

(b) All of the issued and outstanding shares of capital stock of the

Company and its Subsidiaries are duly and validly issued and outstanding and are

fully paid and nonassessable. None of the outstanding shares of capital stock of

the Company or any of its Subsidiaries has been issued in violation of any

preemptive rights of the current or past shareholders of such Persons. Except as

set forth in Section 4.3(a) above, (i) no equity securities of any Subsidiaries

of the Company are or may become required to be issued (other than to the

Company or any of its Subsidiaries) by reason of any Rights, and (ii) there are

no Contracts by which the Company or any Subsidiary of the Company is bound to

issue (other than to the Company or any of its Subsidiaries) additional shares

of its capital stock or Rights or by which the Company or any of its

Subsidiaries is or may be bound to transfer any shares of the capital stock of

any Subsidiary of the Company (other than to the Company or any of its

Subsidiaries). There are no equity securities reserved for any of the foregoing

purposes (except as set forth in Section 4.3(a) above), and there are no

Contracts relating to the rights of the Company or any of its Subsidiaries to

vote or to dispose of any shares of the capital stock of any Subsidiary of the

Company.

4.4 SEC FILINGS; COMPANY FINANCIAL STATEMENTS.

(a) The Company has on a timely basis filed all forms, reports and

documents required to be filed by it with the SEC since September 30, 1999.

Except to the extent available in full without redaction on the SEC's website

through the Electronic Data Gathering, Analysis and Retrieval System ("EDGAR")

two (2) days prior to the date of this Agreement, the Company has delivered to

Buyer copies in the form filed with the SEC of (i) the Company's Annual Reports

on Form 10-K for each fiscal year of the Company beginning since September 30,

1999, (ii) its Quarterly Reports on Form 10-Q for each of the first three fiscal

quarters in each of the fiscal years of the Company referred to in clause (i)

above, (iii) all proxy statements relating to meetings of the Company's

shareholders (whether annual or special) held, and all information statements

relating to stockholder consents since the beginning of the first fiscal year

referred to in clause (i) above, (iv) all certifications and statements required

by (x) the SEC's Order dated June 27, 2002 pursuant to Section 21(a)(1) of the

Exchange Act (File No. 4-460), (y) Rule 13a-14 or 15d-14 under the Exchange Act

or (z) 18 U.S.C. Section. 1350 (Section 906 of the Sarbanes-

<PAGE>

Oxley Act of 2002, as amended ("Sarbanes-Oxley")) with respect to any report

referred to in clause (i) or (iii) above, (v) all other forms, reports,

registration statements and other documents (other than preliminary materials if

the corresponding definitive materials have been provided to Buyer pursuant to

this Section 4.4) filed by the Company with the SEC since the beginning of the

first fiscal year referred to in clause (i) above (the forms, reports,

registration statements and other documents referred to in clauses (i), (ii),

(iv) and (v) above are, collectively, the "Company SEC Reports"), and (vi) all

comment letters received by the Company from the Staff of the SEC since

September 30, 1999 and all responses to such comment letters by or on behalf of

the Company. The Company SEC Reports (i) at the time filed with the SEC,

complied in all Material respects with the applicable requirements of the

Securities Laws, as the case may be, and (ii) did not at the time filed with the

SEC (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 therein or

necessary in order to make the statements made therein, in the light of the

circumstances under which they were made, not misleading. No Subsidiary of the

Company is or has been required to file any form, report, registration

statement, or other document with the SEC. The Company maintains disclosure

controls and procedures required by Rule 13a-15 or 15d-15 under the Exchange

Act; such controls and procedures are effective to ensure that all material

information concerning the Company and its Subsidiaries is made known on a

timely basis to the individuals responsible for the preparation of the Company's

filings with the SEC and other public disclosure documents. The Company has

delivered to Buyer copies of, all written descriptions of, and all policies,

manuals and other documents promulgating, such disclosure controls and

procedures. To the Knowledge of the Company, except as disclosed in the Company

SEC Reports, each director and executive officer of the Company has filed with

the SEC on a timely basis all statements required by Section 16(a) of the

Exchange Act and the rules and regulations thereunder since September 30, 1999.

As used in this Section 4.4, the term "file" shall be broadly construed to

include any manner in which a document or information is furnished, supplied

otherwise made available to the SEC.

(b) Each of the Company Financial Statements (including, in each case,

any related notes) contained in the Company SEC Reports, including any Company

SEC Reports filed after the date of this Agreement until the Effective Time,

complied or will comply as to form in all Material respects with the applicable

published rules and regulations of the SEC with respect thereto, was prepared or

will be prepared in accordance with GAAP applied on a consistent basis

throughout the periods involved (except as may be indicated in the notes to such

financial statements, or, in the case of unaudited statements, as permitted by

the rules and regulations governing Quarterly Reports on Form 10-Q), and fairly

presented or will fairly present the consolidated financial position of the

Company and its Subsidiaries as at the respective dates and the consolidated

results of its operations and cash flows for the periods indicated, except that

the unaudited interim financial statements were or are subject to normal and

recurring year-end adjustments that were not or are not expected to be Material

in amount or effect (except as may be indicated in such financial statements or

notes thereto).

sufficient to provide reasonable assurance that (i) transactions are executed in

accordance with management's general or specific authorization, (ii)

transactions are recorded as necessary to permit preparation of the consolidated

financial statements of the Company in accordance with GAAP and to

<PAGE>

maintain asset accountability, (iii) access to the Company's assets is permitted

only in accordance with management's general or specific authorization, and (iv)

assets are reconciled at reasonable intervals and appropriate action is taken

with respect to any Material differences.

(d) The Chief Executive Officer and the Chief Financial Officer of the

Company have signed, and the Company has furnished to the SEC, all

certifications required by Section 906 of Sarbanes-Oxley; such certifications

contain no qualifications or exceptions to the matters certified therein and

have not been modified or withdrawn; and neither the Company nor any of its

officers has received notice from any Governmental Authority questioning or

challenging the accuracy, completeness, form or manner of filing or submission

of such certifications.

(e) The Company has delivered to the Buyer complete and accurate copies

of notices received from its independent auditor prior to the date hereof of any

significant deficiencies or material weaknesses in the Company's internal

control over financial reporting since October 1, 2003 and any other management

letter or similar correspondence from any independent auditor of the Company or

any of its Subsidiaries received since October 1, 2003 and prior to the date

hereof. As of the date hereof, the Company is implementing such programs and is

taking such steps as it believes are necessary to effect compliance (not later

than the relevant statutory and regulatory deadline therefor) with all

provisions of Section 404 of Sarbanes-Oxley that will become applicable to the

Company and has not received, orally or in writing, any notification that its

independent auditor (i) believes that the Company will not be able to complete

its assessment before the reporting deadline, or, if completed, that it will not

be completed in sufficient time for the independent auditor to complete its

assessment or (ii) will not be able to issue unqualified attestation reports

with respect thereto.

4.5 ABSENCE OF UNDISCLOSED LIABILITIES. Neither the Company nor any of

its Subsidiaries has any Liabilities that could reasonably be expected to have a

Material Adverse Effect on the Company, except Liabilities that are accrued or

reserved against in the consolidated balance sheets of the Company as of March

31, 2005, included in the Company Financial Statements or reflected in the notes

thereto and except for Liabilities incurred in the ordinary course of business

subsequent to March 31, 2005. Neither the Company nor any of its Subsidiaries

has incurred or paid any Liability since March 31, 2005, except for (a) such

Liabilities incurred or paid in the ordinary course of business consistent with

past business practice and (b) Liabilities that could not reasonably be expected

to have a Material Adverse Effect on the Company. To the Knowledge of the

Company, no facts or circumstances exist that could reasonably be expected to

serve as the basis for any other Liabilities of the Company or any of its

Subsidiaries, except as could not reasonably be expected to have a Material

Adverse Effect on the Company.

4.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since March 31, 2005, (a) there

have been no events, changes, or occurrences that have had, or could reasonably

be expected to have, a Material Adverse Effect on the Company, and (b) each of

the Company and its Subsidiaries has conducted in all Material respects its

respective businesses in the ordinary and usual course (excluding the incurrence

of expenses in connection with this Agreement and the transactions contemplated

hereby).

<PAGE>

4.7 TAX MATTERS.

(a) All Tax Returns required to be filed by or on behalf of any of

Company and its Subsidiaries have been timely filed, or requests for extensions

have been timely filed, granted, and have not expired for periods ended on or

before September 30, 2004, and all Tax Returns filed are complete and accurate

in all Material respects. All Tax Returns for periods ending on or before the

date of the most recent fiscal year end immediately preceding the Effective Time

will be timely filed or requests for extensions will be timely filed. All Taxes

shown on filed Tax Returns have been paid. There is no audit examination,

deficiency, or refund Litigation with respect to any Taxes that could have a

Material Adverse Effect on the Company, except to the extent reserved against in

the Company Financial Statements dated prior to the date of this Agreement. All

Taxes and other Liabilities due with respect to completed and settled

examinations or concluded Litigation have been paid.

(b) None of the Company or its Affiliates has executed an extension or

waiver of any statute of limitations on the assessment or collection of any Tax

due (excluding such statutes that relate to years currently under examination by

the Internal Revenue Service or other applicable taxing authorities) that is

currently in effect.

the Company or any of its Subsidiaries for the period or periods through and

including the date of the respective Company Financial Statements has been made

and is reflected on such Company Financial Statements.

(d) Each of the Company and its Subsidiaries is in compliance with, and

its records contain all information and documents (including properly completed

IRS Forms W-9) necessary to comply with, all applicable information reporting

and Tax withholding requirements under federal, state, and local Tax Laws, and

such records identify with specificity all accounts subject to backup

withholding under Section 3406 of the Code.

(e) None of the Company and its Subsidiaries has made any payments, is

obligated to make any payments, or is a party to any contract, agreement, or

other arrangement that could obligate it to make any payments that would be

disallowed as a deduction under Section 280G or 162(m) of the Code.

(f) There are no Material Liens with respect to Taxes upon any of the

Assets of the Company and its Subsidiaries.

(g) There has not been an ownership change, as defined in Code Section

382(g), of the Company and its Subsidiaries that occurred during any Taxable

Period in which any of the Company and its Subsidiaries has incurred a net

operating loss that carries over to another Taxable Period ending after

September 30, 2004.

(h) After the date of this Agreement, no Material election with respect

to Taxes will be made without the prior consent of the Buyer.

<PAGE>

(i) Neither the Company nor any of its Subsidiaries has or has had a

permanent establishment in any foreign country, as defined in any applicable tax

treaty or convention between the United States and such foreign country.

4.8 ASSETS. Each of the Company and its Subsidiaries has good and

marketable title, free and clear of all Liens, to all of its Assets, except for

Liens to secure public deposits, accounts at the Federal Reserve Bank, or

Federal Home Loan Bank of Atlanta advances, each in the ordinary course of

business consistent with past practice. All tangible properties used in the

businesses of the Company and its Subsidiaries are in good condition, reasonable

wear and tear excepted, and are usable in the ordinary course of business

consistent with past practice. All Material Assets held under leases or

subleases by any of the Company and its Subsidiaries are held under valid

Contracts enforceable in accordance with their respective terms, and each such

Contract is in full force and effect. Each of the Company and its Subsidiaries

currently maintain insurance in amounts, scope, and coverage necessary for its

operations. None of the Company or its Subsidiaries has received notice from any

insurance carrier that (a) such insurance will be canceled or that coverage

thereunder will be reduced or eliminated, or (b) premium costs with respect to

such policies of insurance will be increased. The Assets of the Company and its

Subsidiaries include all Assets required to operate their businesses taken as a

whole as presently conducted.

4.9 SECURITIES PORTFOLIO AND INVESTMENTS. All securities owned by the

Company or any of its Subsidiaries (whether owned of record or beneficially) are

held free and clear of all Liens that would impair the ability of the owner

thereof to dispose freely of any such security and/or otherwise to realize the

benefits of ownership thereof at any time except for securities pledged to

secure public deposits, securities pledged to the Federal Reserve Bank, or

securities pledged to secure Federal Home Loan Bank of Atlanta advances, each in

the ordinary course of business consistent with past practices. There are no

voting trusts or other agreements or undertakings to which the Company or any of

its Subsidiaries is a party with respect to the voting of any such securities.

Except for fluctuations in the market values of United States Treasury and

agency or municipal securities, since September 30, 2004, there has been no

significant deterioration or adverse change in the quality, or any decrease in

the value, of the securities portfolio of the Company and its Subsidiaries,

taken as a whole.

4.10 ENVIRONMENTAL MATTERS.

(a) Each of the Company and its Subsidiaries, their respective facilities

and properties, and their respective Loan Collateral are, and have been, in

compliance with all Environmental Laws.

(b) To the Knowledge of the Company, there is no Litigation pending or

threatened before any court, governmental agency, or authority, or other forum

in which any of the Company or its Subsidiaries or any of their respective

facilities or properties has been or, with respect to threatened Litigation, may

be expected to be, named as a defendant (i) for alleged noncompliance (including

by any predecessor) with any Environmental Law or (ii) relating to the release

into the environment of any Hazardous Material, whether or not occurring at, on,

under, or involving a site owned, leased, or operated by the Company or any of

its Subsidiaries or any of their facilities or properties.

<PAGE>

threatened before any court, governmental agency or authority or other forum in

which any of its Loan Collateral (or the Company or any of its Subsidiaries in

respect of such Loan Collateral) has been or, with respect to threatened

Litigation, may be expected to be named as a defendant or potentially

responsible party (i) for alleged noncompliance (including by any predecessor)

with any Environmental Law or (ii) relating to the release into the environment

of any Hazardous Material, whether or not occurring at, on, under, or involving

Loan Collateral.

(d) To the Knowledge of the Company, no facts exist that provide a

reasonable basis for any Litigation of a type described in subsections (b) or

(c).

(e) To the Knowledge of the Company, during and prior to the period of

(i) any of the Company's or its Subsidiaries' ownership or operation of any of

their respective current properties, (ii) any of the Company's or its

Subsidiaries' participation in the management of any facility or property, or

(iii) any of the Company's or its Subsidiaries' holding of a security interest

in Loan Collateral, there have been no releases of Hazardous Material in, on,

under, or affecting (or potentially affecting) such properties.

(f) To the Knowledge of the Company, there is no asbestos or

asbestos-containing material at its or its Subsidiaries' facilities or

properties that is friable, capable of becoming airborne, or in any state or

condition which would render the site or building in noncompliance with

applicable Laws.

(g) To the Knowledge of the Company, there are no above- or underground

storage tanks or related equipment (including without limitation pipes and

lines) at, on or under any of its or its Subsidiaries' facilities or properties,

and that all such tanks and equipment, if any, previously located thereat,

thereon or thereunder have been removed or closed in place in accordance with

all applicable Laws, including without limitation the preparation and filing of

any required closure certification with the North Carolina Department of

Environment and Natural Resources.

4.11 COMPLIANCE WITH LAWS.

(a) Each of the Company and its Subsidiaries has in effect all Permits

necessary for it to own, lease, or operate its Material Assets and to carry on

its business as now conducted, except for those Permits the absence of which

could not reasonably be expected to have a Material Adverse Effect on the

Company, and there has occurred no Default under any such Permit, other than

Defaults that could not reasonably be expected to have a Material Adverse Effect

on the Company. None of the Company or any of its Subsidiaries: (i) is in

violation of any Laws, Orders, or Permits applicable to its business or

employees conducting its business, except for violations that could not

reasonably be expected to have a Material Adverse Effect on the Company

(provided that this clause (i) shall not apply to Environmental Laws, which are

covered in Section 4.10 above); or (ii) has received any notification or

communication from any agency or department of federal, state, or local

Government or any Regulatory Authority or the staff thereof (A) asserting that

any of the Company or its Subsidiaries is not in compliance with any of the Laws

or Orders that such Governmental Authority or Regulatory Authority enforces,

except where such noncompliance could not reasonably be expected to have a

Material Adverse

<PAGE>

Effect on the Company, (B) threatening to revoke any Permits, except where the

revocation of which could not reasonably be expected to have a Material Adverse

Effect on the Company, or (C) requiring the Company or any of its Subsidiaries

(1) to enter into or consent to the issuance of a cease and desist order, formal

agreement, directive, commitment, or memorandum of understanding, or (2) to

adopt any board or directors resolution or similar undertaking that restricts

the conduct of its business, or in any manner relates to its capital adequacy,

its credit or reserve policies, its management, or the payment of dividends.

(b) There are no pending or, to the Knowledge of the Company, threatened

actions against any director or officer of the Company pursuant to Section 8A or

20(b) of the Securities Act, 15 U.S.C. Sections. 77h-1 or 77t(b), or Section

21(d) or 21C of the Exchange Act, 15 U.S.C. Sections. 78u(d) or 78u-3. The

Company has delivered to Buyer copies of all reports made by any attorney to the

Company's chief legal officer, chief executive officer, board of directors (or

committee thereof) or other representative pursuant to 17 C.F.R. Part 205, and

all responses thereto.

continue to remain in compliance in all Material respects after the date hereof,

up to and including the Effective Time, with all current listing and corporate

governance requirements of the Nasdaq National Market System, and is in

compliance in all Material respects, and will continue to remain in compliance

in all Material respects after the date hereof, up to and including the

Effective Time, with all rules, regulations, and requirements of Sarbanes-Oxley

and the SEC.

4.12 LABOR RELATIONS. Neither the Company nor any of its Subsidiaries is

the subject of any Litigation asserting that it has committed an unfair labor

practice (within the meaning of the National Labor Relations Act or comparable

state Law) or seeking to compel it to bargain with any labor organization as to

wages or conditions of employment, nor is any of them a party to or bound by any

collective bargaining agreement, Contract, or other agreement or understanding

with a labor union or labor organization, nor is there any strike or other labor

dispute involving any of them, pending or, to the Knowledge of the Company,

threatened. To the Knowledge of the Company, there is not currently any activity

involving any of the Company's or its Subsidiaries' employees seeking to certify

a collective bargaining unit or engaging in any other organization activity.

4.13 EMPLOYEE BENEFIT PLANS.

(a) The Company has made available to the Buyer prior to the execution of

this Agreement correct and complete copies in each case of all Company Benefits

Plans.

(b) Each Company ERISA Plan is in compliance with and has been

administered in all respects consistent with, its terms, ERISA, the Code and

other applicable Laws. To the Knowledge of the Company, no Company ERISA Plan

has encountered any operational failure.

contribute" (as defined in ERISA Section 4212) to a "multiemployer plan" (as

defined in ERISA Sections 4001(a)(3) and 3(37)(A)). Each "employee pension

benefit plan," as defined in Section 3(2) of ERISA, ever maintained by the

Company or its Subsidiaries that was intended to qualify under

<PAGE>

Section 401(a) of the Code and with respect to which the Company or any of its

Subsidiaries has any Liability, is disclosed as such in Section 4.13 of the

Company's Disclosure Schedule.

(d) The Company has made available to the Buyer prior to the execution of

this Agreement correct and complete copies of the following documents: (i) all

trust agreements or other funding arrangements for such Company Benefit Plans

(including insurance contracts), and all amendments thereto; (ii) with respect

to any such Company Benefit Plans or amendments, all determination letters,

rulings, opinion letters, information letters, or advisory opinions issued by

the Internal Revenue Service, the United States Department of Labor, or the

Pension Benefit Guaranty Corporation after December 31, 1994; (iii) annual

reports or returns, audited or unaudited financial statements, actuarial

valuations and reports, and summary annual reports prepared for any Company

Benefit Plan with respect to the three (3) most recent plan years; and (iv) the

most recent summary plan descriptions and any modifications thereto.

(e) Each Company ERISA Plan that is intended to be qualified under

Section 401(a) of the Code has received a favorable determination letter from

the Internal Revenue Service, and, to the Knowledge of the Company, there is no

circumstance that will or could reasonably be expected to result in revocation

of any such favorable determination letter or in such Plan's failure to be so

qualified. Each trust created under any Company ERISA Plan has been determined

to be exempt from Tax under Section 501(a) of the Code and the Company is not

aware of any circumstance that will or could be expected to result in revocation

of such exemption. With respect to each such Company Benefit Plan, to the

Knowledge of the Company, no event has occurred that will or could be expected

to give rise to a loss of any intended Tax consequences under the Code or to any

Tax under Section 511 of the Code. There is no Litigation pending or, to the

Knowledge of the Company, threatened relating to any Company Benefit Plan.

(f) Neither the Company nor any of its Affiliates has engaged in a

transaction with respect to any Company Benefit Plan that, assuming the Taxable

Period of such transaction expired as of the date of this Agreement, would

subject the Company or any of its Affiliates to a Material tax or penalty

imposed by either Section 4975 of the Code or Section 502(i) of ERISA. Neither

the Company nor any of its Affiliates nor any administrator or fiduciary of any

Company Benefit Plan (or any agent of any of the foregoing) has engaged in any

transaction, or acted or failed to act in any manner, that could subject the

Company or any of its Affiliates to any direct or indirect Liability (by

indemnity or otherwise) for breach of any fiduciary, co-fiduciary, or other duty

under ERISA. No oral or written representation or communication with respect to

any aspect of the Company Benefit Plans has been made to employees of the

Company or any of its Affiliates that is not in accordance with the written or

otherwise preexisting terms and provisions of such plans.

(g) Neither the Company nor any of its Affiliates maintains or has ever

maintained or otherwise had any obligation to contribute to a Company Pension

Plan or other plan subject to Title IV of ERISA, a "Multiemployer Plan" as

defined in Section 3(37) of ERISA, or a multiple employer welfare arrangement

(MEWA) as defined in Section 3(40) of ERISA.

<PAGE>

(h) Neither the Company nor any of its Affiliates has any obligation for

retiree health and retiree life benefits under any of the Company Benefit Plans

other than with respect to benefit coverage mandated by applicable Law.

(i) Neither the execution and delivery of this Agreement nor the

consummation of the transactions contemplated hereby will, by themselves, (i)

result in any payment (including without limitation severance, unemployment

compensation, golden parachute, or otherwise) becoming due to any director or

any employee of the Company or its Affiliates from the Company or any of its

Affiliates under any Company Benefit Plan or otherwise, (ii) increase any

benefit otherwise payable under any Company Benefit Plan, or (iii) result in any

acceleration of the time of any payment or vesting of any benefit.

4.14 MATERIAL CONTRACTS. None of the Company or its Subsidiaries, nor any

of their respective Assets, businesses, or operations, is a party to, or is

bound or affected by, or receives benefits under, (a) any employment, severance,

termination, consulting, or retirement Contract, (b) any Contract relating to

the borrowing of money by the Company or its Subsidiaries or the guarantee by

the Company or its Subsidiaries of any such obligation (other than Contracts

evidencing deposit liabilities, purchases of federal funds, fully-secured

repurchase agreements, and Federal Reserve or Federal Home Loan Bank of Atlanta

advances of depository institution Subsidiaries, trade payables, and Contracts

relating to borrowings or guarantees made in the ordinary course of business),

and (c) any other Contract or amendment thereto that would be required to be

filed as an exhibit to an Annual Report on Form 10-K filed by the Company with

the SEC as of the date of this Agreement that has not been filed or incorporated

by reference as an exhibit to the Company's Annual Report on Form 10-K filed for

the fiscal year ended September 30, 2004, or in another document filed by the

Company with the SEC and identified to the Buyer (together with all Contracts

referred to in Sections 4.8 and 4.13(a) of this Agreement, the "Company

Contracts"). With respect to each Company Contract: (i) the Contract is in full

force and effect; (ii) none of the Company or its Subsidiaries is in Default

thereunder; (iii) neither the Company nor any of its Subsidiaries has repudiated

or waived any Material provision of any such Contract; and (iv) no other party

to any such Contract is, to the Knowledge of the Company, in Default in any

respect, or has repudiated or waived any provision thereunder. Except for

Federal Reserve and Federal Home Loan Bank of Atlanta advances, all of the

indebtedness of the Company and its Subsidiaries for money borrowed (not

including deposit Liabilities) is prepayable at any time without penalty or

premium.

4.15 LEGAL PROCEEDINGS. There is no Litigation instituted or pending, or,

to the Knowledge of the Company, threatened against the Company or any of its

Subsidiaries, or against any Asset, employee benefit plan, interest, or right of

any of them, except as could not reasonably be expected to have a Material

Adverse Effect on the Company, nor are there any Orders of any Regulatory

Authorities, other Governmental Authorities, or arbitrators outstanding against

any the Company or its Subsidiaries, except as could not reasonably be expected

to have a Material Adverse Effect on the Company. There is no Litigation to

which the Company or any of its subsidiaries is a party that names the Company

or any of its Subsidiaries as a defendant or cross-defendant.

4.16 REPORTS. Since October 1, 2001, each of the Company and its

Subsidiaries has timely filed all reports and statements, together with any

amendments required to be made

<PAGE>

with respect thereto, that it was required to file with any Regulatory

Authorities. As of their respective dates, each of such reports and documents,

including the financial statements, exhibits, and schedules thereto, complied in

all Material respects with all applicable Laws.

4.17 REGISTRATION STATEMENT; JOINT PROXY STATEMENT. Subject to the

accuracy of the representations contained in Section 5.9, the information

supplied by the Company or its Subsidiaries for inclusion in the registration

statement (the "Registration Statement") covering the shares of the Buyer's

Stock to be issued pursuant to this Agreement shall not, at the time the

Registration Statement (including any amendments or supplements thereto) is

declared effective by the SEC, contain any untrue statement of a Material fact

or omit to state any Material fact required to be stated therein or necessary to

make the statements therein not misleading. The information supplied by or on

behalf of the Company and its Subsidiaries for inclusion in the joint proxy

statement/prospectus to be sent to the shareholders of each of the Company and

the Buyer to consider, at special meetings (each a "Shareholder Meeting" and

collectively, the "Shareholder Meetings"), the Merger (such proxy

statement/prospectus as amended or supplemented is referred to herein as the

"Joint Proxy Statement") will not, on the date the Joint Proxy Statement is

first mailed to shareholders, at the time of each of the Shareholder Meetings

and at the Effective Time, contain any untrue statement of a Material fact or

omit to state any Material fact necessary to make the statements therein, in

light of the circumstances under which they were made, not misleading. If at any

time prior to the Effective Time any event relating to the Company or its

Subsidiaries or any of their Affiliates, officers or directors should be

discovered by the Company or its Subsidiaries that should be set forth in an

amendment to the Registration Statement or a supplement to the Joint Proxy

Statement, the Company will promptly inform the Buyer. The Joint Proxy Statement

shall comply in all Material respects with the requirements of the Securities

Laws and the rules and regulations thereunder applicable to the Company.

Notwithstanding the foregoing, the Company makes no representation or warranty

with respect to any information supplied by the Buyer and its Subsidiaries that

is contained or incorporated by reference in, or furnished in connection with

the preparation of, the Registration Statement or the Joint Proxy Statement.

4.18 ACCOUNTING, TAX, AND REGULATORY MATTERS. To the Knowledge of the

Company, none of the Company or any of its Subsidiaries has taken or agreed to

take any action, that could reasonably be expected to (a) prevent the

transactions contemplated hereby, including the Merger, from qualifying as a

reorganization within the meaning of Section 368(a) of the Code, or (b)

Materially impede or delay receipt of any Consents of Regulatory Authorities

referred to in Section 8.1(c) of this Agreement.

4.19 STATE TAKEOVER LAWS. Each of the Company and its Subsidiaries 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 Virginia.

4.20 CHARTER PROVISIONS.

(a) Each of the Company and its Subsidiaries has taken all action so that

the entering into of this Agreement and the consummation of the Merger and the

other transactions contemplated by this Agreement do not and will not result in

the grant of any rights to any

<PAGE>

Person under the articles of incorporation, bylaws, or other governing

instruments of any of them or restrict or impair the ability of the Buyer or any

of its Subsidiaries to vote, or otherwise to exercise the rights of a

shareholder with respect to, the capital stock of the Company or any of its

Subsidiaries that may be directly or indirectly acquired or controlled by it.

(b) The transactions contemplated by this Agreement do not implicate

Article XIII, Approval of Certain Business Combinations, of the Company's

articles of incorporation and the Company has taken all necessary action to

exempt the transactions contemplated by this Agreement from such provision of

the Company's articles of incorporation.

4.21 RECORDS. Complete and accurate copies of the articles of

incorporation or charter and bylaws of each of the Company and its Subsidiaries

have been made available to the Buyer. The stock books of the Company and its

Subsidiaries contain complete and accurate records of the record share ownership

of the issued and outstanding shares of stock thereof.

4.22 DERIVATIVES. All interest rate swaps, caps, floors, option

agreements, futures and forward contracts, and other similar risk management

arrangements, whether entered into for the account of the Company or it

Affiliates or their customers were entered into (a) in accordance with prudent

business practices and all applicable Laws, and (b) with counterparties believed

to be financially responsible.

4.23 CERTAIN REGULATED BUSINESSES. Neither the Company nor any of its

Subsidiaries is an "investment company" as defined in the Investment Company Act

of 1940, as amended, nor is it a "public utility holding company" as defined in

the Public Utility Holding Company Act of 1935, as amended.

4.24 LOANS; ALLOWANCE FOR LOAN LOSSES

(a) All of the loans, leases, installment sales contracts and other

credit transactions on the books of the Company Bank are valid and properly

documented and were made in the ordinary course of business, and the security

therefor, if any, is valid and properly perfected. Neither the terms of such

loans, leases, installment sales contracts and other credit transactions, nor

any of the documentation evidencing such transactions, nor the manner in which

such loans, leases, installment sales contracts and other credit transactions

have been administered and serviced, nor the Company Bank's procedures and

practices of approving or rejecting applications for such transactions, violates

any federal, state or local law, rule, regulation or ordinance applicable

thereto, including without limitation the TILA, Regulations O and Z of the

Federal Reserve Board, the CRA, the Equal Credit Opportunity Act, as amended,

and state laws, rules and regulations relating to consumer protection,

installment sales and usury.

(b) The allowances for losses respecting loans, leases, installment sales

contracts and other credit transactions reflected on the consolidated balance

sheets included in the Company Financial Statements are adequate as of their

respective dates under the requirements of GAAP and applicable regulatory

requirements and guidelines.

<PAGE>

4.25 REPURCHASE AGREEMENTS; DERIVATIVES

(a) With respect to all agreements currently outstanding pursuant to

which the Company or the Subsidiaries has purchased securities subject to an

agreement to resell, the Company or the Subsidiaries have a valid, perfected

first lien or security interest in the securities or other collateral securing

such agreement, and the value of such collateral equals or exceeds the amount of

the debt secured thereby. With respect to all agreements currently outstanding

pursuant to which the Company or the Subsidiaries have sold securities subject

to an agreement to repurchase, neither the Company nor any of its Subsidiaries

has pledged collateral having a value at the time of entering into such pledge

that exceeds the amount of the debt secured thereby. Neither the Company nor any

of its Subsidiaries has pledged collateral having a value at the time of

entering into such pledge that exceeds the amount required under any interest

rate swap or other similar agreement currently outstanding.

(b) Neither the Company nor any of its Subsidiaries is a party to or has

agreed to enter into an exchange-traded or over-the-counter swap, forward,

future, option, cap, floor, or collar financial contract, or any other interest

rate or foreign currency protection contract not included on its balance sheets

in the Company Financial Statements, which is a financial derivative contract

(including various combinations thereof), except for options and forwards

entered into in the ordinary course of its mortgage lending business consistent

with past practice and current policy.

4.26 DEPOSIT ACCOUNTS. The deposit accounts of the Company Bank are

insured by the FDIC to the maximum extent permitted by federal law, and the

Company Bank has paid all premiums and assessments and filed all reports

required to have been paid or filed under all rules and regulations applicable

to the FDIC.

4.27 PERMISSIBLE ACTIVITIES. Each of the activities in which the LLC is

engaged is permitted of a subsidiary of a national bank by applicable banking

Laws, including, but not limited to, Section 24a of the National Bank Act.

4.28 RELATED PARTY TRANSACTIONS. The Company has disclosed all existing

transactions, investments and loans, including loan guarantees existing as of

the date hereof other than deposits with Company Bank, to which the Company or

any of its Subsidiaries is a party with any director, executive officer or five

percent (5%) shareholder of the Company or any person, corporation, or

enterprise controlling, controlled by or under common control with any of the

foregoing. All such transactions, investments and loans were negotiated at arm's

length and are on terms and conditions that are substantially the same as those

prevailing for comparable transactions with other persons and do not involve

more than the normal risk of repayment or present other unfavorable features.

4.29 COMMISSIONS. No broker, finder or other Person is entitled to any

brokerage fees, commissions or finder's fees in connection with the transactions

contemplated hereby by reason of any action taken by the Company, any of its

Subsidiaries or any of the Company's shareholders.

<PAGE>

4.30 VOTING AGREEMENTS. Concurrently with the execution and delivery of

this Agreement, each significant Company shareholder listed on Schedule 4.29,

Company officer and Company director has executed and delivered to the Buyer the

form of Voting Agreement substantially in the form of EXHIBIT E.

4.31 OPINION OF FINANCIAL ADVISOR. The Company has received the written

opinion of Orr Group to the effect that the Merger Consideration to be received

in the Merger by the holders of Company Shares is fair, from a financial point

of view, to such holders. A true, correct and complete copy of the written

opinion delivered by Orr Group, as well as a true and correct copy of the

Company's engagement of Orr Group, have been delivered to the Buyer by the

Company.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE BUYER

Except as set forth on the Buyer's Disclosure Schedule (the "Buyer's

Disclosure Schedule"), the Buyer represents and warrants to the Company that the

statements contained in this ARTICLE V are correct and complete as of the date

of this Agreement and will be correct and complete as of the Closing Date.

5.1 ORGANIZATION, STANDING AND POWER.

(a) The Buyer is a financial holding company registered with the Board of

Governors of the Federal Reserve System under the Bank Holding Company Act of

1956, as amended, and the Buyer Bank is a bank under North Carolina Law. The

Buyer Bank is an "insured institution" as defined in the Federal Deposit

Insurance Act and applicable regulations thereunder, and subject to dollar

limits under such Act, all deposits in the Buyer Bank are fully insured by the

FDIC to the extent permitted by Law.

(b) Each of the Buyer and its Subsidiaries is either a corporation or a

bank duly organized, validly existing and in good standing under the Laws of the

State of North Carolina, and has the corporate power and authority to carry on,

in all Material respects, its businesses as now conducted and to own, lease and

operate its Assets. Each of the Buyer and its Subsidiaries is duly qualified or

licensed to transact business as a foreign corporation in good standing in the

States of the United States and foreign jurisdictions where the character of its

Assets or the nature or conduct of its business requires it to be so qualified

or licensed except for such jurisdiction, in which the failure to be so

qualified or licensed could not reasonably be expected to have a Material

Adverse Effect on the Buyer.

all meetings and other corporate actions held or taken of their respective

shareholders and boards of directors (including the committees of such boards)

since January 1, 2002, which records are complete and accurate in all material

respects and have been made available to the Company.

<PAGE>

5.2 AUTHORITY; NO CONFLICTS.

(a) Subject to required regulatory and shareholder approvals, the Buyer

has the corporate power and authority necessary to execute, deliver and perform

its obligations under this Agreement and to consummate the transactions

contemplated hereby. Subject to required shareholder approval, the execution and

delivery of and performance of its obligations under this Agreement and the

other documents contemplated hereby, and the consummation of the transactions

contemplated herein, including the Merger, have been duly and validly authorized

by all necessary corporate action in respect thereof on the part of the Buyer.

This Agreement represents a legal, valid, and binding obligation of the Buyer,

enforceable against it in accordance with its terms (except in all cases as such

enforceability may be limited by applicable bankruptcy, insolvency,

reorganization, moratorium or similar Laws affecting the enforcement of

creditors' rights generally and except that the availability of specific

performance, injunctive relief and other equitable remedies is subject to the

discretion of the court before which any proceeding may be brought). To the

Knowledge of the Buyer, there is no fact or condition relating to the Buyer that

would prevent all regulatory approvals required for the consummation of the

transactions contemplated hereby from being obtained.

(b) Neither the execution and delivery of this Agreement by the Buyer,

nor the consummation by the Buyer of the transactions contemplated hereby, nor

compliance by the Buyer with any of the provisions hereof will (i) conflict with

or result in a breach of any provision of the Buyer's articles of incorporation

or bylaws, (ii) constitute or result in a Default under, or require any Consent

pursuant to, or result in the creation of any Lien on any Asset of the Buyer

under, any Contract or Permit of the Buyer, except as could not reasonably be

expected to have a Material Adverse Effect on the Buyer, or (iii) subject to

obtaining the requisite Consents referred to in Section 8.1 of this Agreement,

violate any Law or Order applicable to the Buyer or any of its respective

Assets.

Securities Laws and banking Regulatory Authorities, no notice to, filing with,

or Consent of, any Governmental Authority is necessary for the consummation by

the Buyer of the Merger and the other transactions contemplated in this

Agreement.

5.3 BUYER'S STOCK.

(a) The authorized capital stock of the Buyer consists of 20,000,000

shares of common stock, no par value per share, of which 6,625,870 shares are

issued and outstanding as of the date of this Agreement, and except for such

shares, there are no shares of capital stock of the Buyer outstanding. There are

options to purchase 647,383 shares of common stock of the Buyer outstanding as

of the date of this Agreement. There are 833,360 shares of capital stock

reserved with respect to such options. In addition, there are 200,000 shares of

capital stock reserved under the Capital Bank Corporation Deferred Compensation

Plan for Outside Directors and 16,827 shares of capital stock reserved under the

Capital Bank Corp. Deferred Compensation Plan for Advisory Board Members which

shares can be used in lieu of cash to pay the deferred compensation benefits

under those plans if the Buyer elects. Except for such options and the 216,827

shares reserved under the deferred compensation plans, there are no options,

Rights or Contracts requiring the Buyer to issue additional shares of its

capital stock.

<PAGE>

The authorized capital stock of the Buyer Bank consists of 20,000,000 shares of

common stock, par value $5.00 per share, of which 2,477,651 shares are issued

and outstanding as of the date of this Agreement and are owned and held by the

Buyer, and except for such 2,477,651 shares of common stock, there are no shares

of capital stock or other equity securities of the Buyer Bank outstanding.

(b) All of the issued and outstanding shares of capital stock of the

Buyer are duly and validly issued and outstanding and are fully paid and

nonassessable, except to the extent otherwise required by the North Carolina

General Statutes 53-42 or other applicable banking Law, and none are subject to

preemptive rights. Shares of the Buyer's Stock to be issued in connection with

the Merger have been duly authorized and, when so issued, will be fully paid and

nonassessable, and will not be subject to preemptive rights.

5.4 SEC FILINGS; BUYER FINANCIAL STATEMENTS.

(a) The Buyer has on a timely basis filed all forms, reports, and

documents required to be filed by the Buyer with the SEC since December 31, 1999

(collectively, the "Buyer SEC Reports"). The Buyer SEC Reports (i) at the time

filed with the SEC, complied in all Material respects with the applicable

requirements of the Securities Laws, as the case may be, and (ii) did not at the

time filed with the SEC (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 Buyer SEC Reports or necessary in order to make the statements in

such Buyer SEC Reports, in light of the circumstances under which they were

made, not misleading. None of the Buyer's Subsidiaries is required to file any

forms, reports, or other documents with the SEC. The Buyer maintains disclosure

controls and procedures required by Rule 13a-15 or 15d-15 under the Exchange

Act; such controls and procedures are effective to ensure that all material

information concerning the Buyer and its Subsidiaries is made known on a timely

basis to the individuals responsible for the preparation of the Buyer's filings

with the SEC and other public disclosure documents.

(b) Each of the Buyer Financial Statements (including, in each case, any

related notes) contained in the Buyer SEC Reports, including any Buyer SEC

Reports filed after the date of this Agreement until the Effective Time,

complied or will comply as to form in all Material respects with the applicable

published rules and regulations of the SEC with respect thereto, was prepared or

will be prepared in accordance with GAAP applied on a consistent basis

throughout the periods involved (except as may be indicated in the notes to such

financial statements, or, in the case of unaudited statements, as permitted by

the rules and regulations governing Quarterly Reports on Form 10-Q), and fairly

presented or will fairly present the consolidated financial position of the

Buyer and its Subsidiaries as at the respective dates and the consolidated

results of its operations and cash flows for the periods indicated, except that

the unaudited interim financial statements were or are subject to normal and

recurring year-end adjustments that were not or are not expected to be Material

in amount or effect (except as may be indicated in such financial statements or

notes thereto).

sufficient to provide reasonable assurance that (i) transactions are executed in

accordance with management's general or specific authorization, (ii)

transactions are recorded as necessary to permit preparation of the

<PAGE>

consolidated financial statements of the Buyer in accordance with GAAP and to

maintain asset accountability, (iii) access to the Buyer's assets is permitted

only in accordance with management's general or specific authorization, and (iv)

assets are reconciled at reasonable intervals and appropriate action is taken

with respect to any Material differences.

(d) The Chief Executive Officer and the Chief Financial Officer of the

Buyer have signed, and the Company has furnished to the SEC, all certifications

required by Section 906 of Sarbanes-Oxley; such certifications contain no

qualifications or exceptions to the matters certified therein and have not been

modified or withdrawn; and neither the Buyer nor any of its officers has

received notice from any Governmental Authority questioning or challenging the

accuracy, completeness, form or manner of filing or submission of such

certifications.

(e) The Buyer has delivered to the Company complete and accurate copies

of notices received from its independent auditor prior to the date hereof of any

significant deficiencies or material weaknesses in the Buyer's internal control

over financial reporting since January 1, 2004 and any other management letter

or similar correspondence from any independent auditor of the Company or any of

its Subsidiaries received since January 1, 2004 and prior to the date hereof.

5.5 ABSENCE OF UNDISCLOSED LIABILITIES. Neither the Buyer nor any of its

Subsidiaries has any Liabilities that could reasonably be expected to have a

Material Adverse Effect on

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