**AGREEMENT** **AND
      PLAN OF BANK MERGER**


**OF**


**FNB
      SOUTHEAST**


**INTO**


**LEXINGTON
      STATE BANK**







This
      AGREEMENT AND PLAN OF BANK MERGER (the “Bank Agreement”) is made and entered
      into as of this 26 th day of
      February, 2007 to effect the merger (the “Bank Merger”) of FNB SOUTHEAST with
      and into LEXINGTON STATE BANK. The
      terms
      and conditions of the Bank Merger shall be as follows:





**ARTICLE
      I**





**CORPORATE
      PARTICIPANTS IN THE BANK MERGER**





1.1  In
      General . The
      name
      of the entity planning to merge is FNB Southeast (“FNB Bank”), a North Carolina
      chartered commercial
      bank having its principal place of business at 1501
      Highwoods Blvd., Suite 400, Greensboro NC 27410 .
      The
      name of the entity into which FNB Bank plans to merge is Lexington State Bank
      (“LSB Bank” or the “Surviving Bank”), a North Carolina chartered commercial bank
      having its principal
      place of business at One
      LSB Plaza, Lexington, North Carolina 27292.





**ARTICLE
      II**





**TERMS
      AND CONDITIONS OF THE BANK MERGER**





2.1  In
      General .
      Subject
      to the terms and conditions of this Bank Agreement, at the Effective Time
      (as ** defined herein),
      FNB Bank shall be merged with and into LSB Bank (together, the “Merging
      Institutions”) pursuant to the provisions
      of, and with the effect provided under, Sections 53-12 and 53-13 of the North
      Carolina General Statutes.





2.2  Effect
      of Bank Merger .
      At the
      Effective Time, the separate existence of FNB Bank shall cease and LSB Bank,
      as the
      surviving entity, shall continue unaffected and unimpaired by the Bank Merger,
      except as otherwise provided in this Bank Agreement.





2.3  Headquarters
      of the Surviving Bank .
      From
      and after the Effective Time until otherwise determined by the Board of
      Directors of the Surviving Bank, the headquarters and principal executive
      offices of the Surviving Bank shall be located in Greensboro, North
      Carolina.


2.4  Name
      and Business of the Surviving Bank .
      The
      business of the Surviving Bank shall be that of a North Carolina
      chartered commercial bank and shall be conducted at the headquarters of the
      Surviving Bank and at its legally established branches, including those branches
      of FNB Bank acquired as a result of the Bank Merger. Articles
      of Amendment shall be filed
      with the North Carolina Secretary of State changing
      the name of the Surviving Bank to a name to be mutually agreed by the parties
      (the “New Name”). F ollowing
      the Effective Time, the
      Surviving Bank shall operate all
      of
      the branch offices of FNB Bank and LSB Bank as branch offices under the New
      Name.








**ARTICLE
      III**





**EFFECTIVE
      TIME**





3.1  Effective
      Time of Bank Merger .
      The
      Bank Merger shall become effective on the date and at the time specified in
      the
      Articles of Merger, which shall contain this Bank Agreement, together with
      a
      certified copy of the approval of the Bank
      Merger by the North Carolina Commissioner of Banks, filed with the North
      Carolina Secretary of State as
      required under Section 53-13 of the North Carolina General Statutes (the
“Effective Time”).





3.2  As of
      the
      Effective Time . As of
      the
      Effective Time:





(a)  The
      corporate existence of each of the Merging Institutions shall be merged into
      and
      continue in the Surviving
      Bank.





(b)  All
      assets, rights, franchises and interests of the Merging Institutions in and
      to
      every type of property (real,
      personal and mixed) and **** choses
      in
      action shall be transferred to and vested in the Surviving Bank by virtue of
      the
      Bank Merger without any deed or other transfer. The Surviving Bank, upon the
      Bank Merger and without any order or
      other
      action on the part of any court or otherwise, shall hold and enjoy all rights
      of
      property, franchises and interest,
      including appointments, designations and nominations, and all other rights
      and
      interests as trustee, executor, administrator, registrar of stocks and bonds,
      guardian of estates, assignee and receiver, and in every other fiduciary capacity,
      in the same manner and to the same extent as such rights, franchises and
      interests were held or enjoyed by each
      of
      the Merging Institutions at the time of the Bank Merger.





(c)  The
      Surviving Bank shall be liable for all liabilities of every kind and description
      of the Merging Institutions,
      including liabilities arising out of the operation of the trust department
      of
      each of the Merging Institutions,
      existing immediately prior to the Effective Time, to the extent provided by
      law.





**ARTICLE
      IV**





**CONVERSION
      OF SHARES**





4.1  Capital
      Stock of FNB Bank .  As
      of the
      date hereof, the authorized capital stock of FNB Bank consists
      of SEVEN HUNDRED FORTY TWO THOUSAND FIVE HUNDRED ( 742,500) shares
      of co mmon
      stock, par value ONE DOLLAR ($1.00) per share. All of the issued and outstanding
      capital stock of FNB Bank is owned by FNB Financial Services Corporation, a
      North Carolina corporation, also having its principal place of business at 1501
      Highwoods Blvd., Suite 400, Greensboro NC 27410 (“FNB”).
      As of the Effective Time, each outstanding share of the capital stock of FNB
      Bank shall be cancelled and retired with no consideration to
      be
      issued or paid in exchange therefor.





4.2  Capital
      Stock of LSB Bank .  As
      of the
      date hereof, the authorized capital stock of LSB Bank consists of FIVE MILLION
      (5,000,000) shares of common stock,
      par value FIVE DOLLARS ($5.00) per share. All of the issued and outstanding
      capital stock of LSB Bank is


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owned
      by
      LSB Bancshares, Inc., a North Carolina corporation, also having its principal
      place of business at One LSB Plaza, Lexington, North Carolina 27292
      (“LSB”) .
      As of
      the Effective Time, each outstanding share of the capital stock of LSB Bank
      shall remain
      outstanding as a share of common stock of the Surviving Bank.





**ARTICLE
      V**





**OFFICERS
      AND DIRECTORS OF THE SURVIVING BANK**





5.1  Management.  At
      the
      Effective Time, Robert F. Lowe shall be Chairman of the Board of Directors
      and
      Chairman of the Executive Committee of the Board of Directors of the Surviving
      Bank. Barry Z. Dodson shall be Vice Chairman of the Board of Directors of the
      Surviving Bank, and Vice Chairman of the Executive Committee of the Board.
      Presley A. Ridgill shall be President and Chief Executive Officer of the
      Surviving Bank and a member of the Executive Committee of the Board of Directors
      of the Surviving Bank. Michael W. Shelton shall be an Executive Vice President
      and Chief Financial Officer of the Surviving Bank.





5.2  Board
      of Directors .




(a)  From
      and
      after the Effective Time, until duly changed in compliance with applicable
      law,
      the Articles of Incorporation and Bylaws of the Surviving Bank, the Board of
      Directors of the Surviving Bank shall consist of up to twenty (20) directors,
      and shall initially include Mr. Lowe, Mr. Dodson and Mr. Ridgill and an equal
      number, inclusive of Mr. Lowe, Mr. Dodson and Mr. Ridgill, of FNB Bank Directors
      and LSB Bank Directors (each as defined below). The initial FNB Bank Directors
      shall be selected by FNB’s Board of Directors and the initial LSB Bank Directors
      shall be selected by LSB’s Board of Directors. Subject to Section 5.2, from and
      after the Effective Time and until the second annual meeting of the Surviving
      Bank following the 2007 annual meeting, all vacancies on the Board of Directors
      of the Surviving Bank created by (i) the cessation of service of a FNB Bank
      Director shall be filled by a nominee selected by the continuing FNB Bank
      Directors and (ii) the cessation of service of a LSB Bank Director shall be
      filled by a nominee selected by the continuing LSB Bank Directors.




(b)  Subject
      to Section 5.2, from and after the Effective Time until the second annual
      meeting of the Surviving Bank following the 2007 annual meeting, each of the
      committees of the Board of Directors of the Surviving Bank shall be comprised
      of
      an equal number of FNB Bank Directors and LSB Bank Directors, the identity
      of
      the members of such committees to be otherwise mutually determined by Mr. Lowe
      and Mr. Dodson; provided, however, that Mr. Lowe, Mr. Dodson and Mr. Ridgill
      shall serve on the Executive Committees of the Board of Directors of the
      Surviving Bank during such period, Mr. Lowe shall serve as the Chairman of
      the
      Executive Committee, and Mr. Dodson shall serve as Vice Chair of the Executive
      Committee. In the event Mr. Lowe, Mr. Dodson or Mr. Ridgill shall cease to
      be a
      director of the Surviving Bank during such two year period or unable to assume
      or continue in the designated positions during such periods, as applicable,
      (i)
      an LSB Bank Director selected by the LSB Bank Directors shall succeed Mr. Lowe
      for the remainder of such period as Chairman of the Board of Directors and
      Chair
      of the Executive Committee of the Surviving Bank, and (ii) an FNB Bank Director
      selected by the FNB Bank Directors shall succeed Mr. Dodson for the remainder
      of
      such period as Vice Chair of the Board of Directors and the Executive Committee
      of the Surviving Bank or Mr. Ridgill for the remainder of such period as a
      member of the Executive Committee of the Board of Directors of the Surviving
      Bank.


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(c)  The
      term
“FNB Bank Director” means (i) any person serving as a director of FNB Bank on
      the date of this Agreement who continues as a director of the Surviving Bank
      at
      the Effective Time and (ii) any person who becomes a director of the Surviving
      Bank and who is designated as such by the continuing FNB Bank Directors prior
      to
      his or her election; and the term “LSB Bank Director” means (i) any person
      serving as a director of LSB Bank on the date of this Agreement who becomes
      a
      director of the Surviving Bank at the Effective Time and (ii) any person who
      becomes a director of the Surviving Bank and who is designated as such by the
      continuing LSB Bank Directors prior to his or her election.




**ARTICLE
      VI**





**ARTICLES
      OF INCORPORATION AND**  **BYLAWS
      OF THE SURVIVING BANK**





6.1  Charter.  Subject
      to the terms and conditions of this Bank Agreement, at the Effective Time,
      the
      Articles of Incorporation, as amended, of LSB Bank, with such amendments as
      to
      which the parties may hereafter agree to submit to LSB Bank’s shareholder,
      including, without limitation, amendments to change the corporate name of LSB
      Bank and which may be properly approved by LSB Bank’s Board of Directors and by
      the sole shareholder (the “Charter”), shall be the Charter of the Surviving Bank
      until thereafter amended in accordance with applicable law.




6.2  By-Laws.  Subject
      to the terms and conditions of this Bank Agreement, at the Effective Time,
      the
      Bylaws of LSB Bank shall be the Bylaws of the Surviving Bank until thereafter
      amended in accordance with applicable law; provided, however, that the Bylaws
      shall be amended as of the Effective Time to reflect the amendments to the
      Charter described in Section 6.1 .




**ARTICLE
      VII**





**GENERAL
      PROVISIONS**





7.1  Entire
      Agreement .
      This
      Bank Agreement, along with the Agreement and Plan of Merger by and between
      FNB
      Financial Services Corporation and LSB Bancshares, Inc., also dated February
      26,
      2007, contains the entire agreement between the parties with respect to the
      transaction contemplated hereunder and supersedes any and all prior arrangements
      or understandings with respect thereto. This Bank Agreement shall inure to
      the
      benefit of and be binding upon the parties hereto and their respective successors
      and assigns.





7.2  Amendment .
      At any
      time before the Effective Time, the Merging Institutions, by mutual consent
      of
      their respective
      Boards of Directors, may amend this Bank Agreement.





7.3  Termination .
      At any
      time before the Effective Time, this Bank Agreement may be terminated by
      mutual
      consent of the Boards of Directors of the Merging Institutions, notwithstanding any
      prior
      shareholder vote for approval.


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7.4  Shareholder
      Vote .
      This
      Bank Agreement shall be subject to the approval, ratification and confirmation
      by the affirmative
      vote of the shareholder of each of the Merging Institutions.





7.5  Applicable
      Law .
      This
      Bank Agreement shall be governed by the laws of the State of North
      Carolina.





7.6  Headings .
      The
      headings contained in this Bank Agreement are for reference purposes only and
      are not part of
      this
      Bank Agreement.





7.7  Counterparts .
      This
      Bank Agreement may be executed in several counterparts, each of which shall
      be
      deemed an
      original, but all of which together shall constitute one and the same
      instrument.
















***Remainder
      of Page Intentionally Left Blank***


5


IN
      WITNESS WHEREOF, each of the parties has caused this Bank Agreement to be duly
      executed UNDER
      SEAL on its behalf all as of the day and year first above written.





FNB
                  FINANCIAL SERVICES CORPORATIONBy:Name:
              Pressley
                  A. RidgillTitle:
              President
                  and Chief Executive Officer





ATTEST:








_________________________________


_______________,
      Secretary











FNB
                  SOUTHEASTBy:Name:
              Pressley
                  A. RidgillTitle:
              President
                  and Chief Executive Officer








ATTEST:








_________________________________


_______________,
      Secretary








6


LSB
                  BANCSHARES, INCBy:Name:
              Robert
                  F. LoweTitle:
              Chairman,
                  Presidentand
                  Chief Executive Officer
 ATTEST:
 
 
 _________________________________
 _______________,
        Secretary
 
 
 LEXINGTON
                  STATE BANKBy:Name:
              Robert
                  F. LoweTitle:
              Chairman,
                  Presidentand
                  Chief Executive Officer
 
 ATTEST:
 
 
 _________________________________
 _______________,
        Secretary
 
   7