Note 3 – Acquisition of Bank of Granite Corporation

On October 21, 2011, as part of the recapitalization of FNB, FNB acquired Granite Corp., through the Merger of a wholly owned subsidiary of FNB merging into Granite Corp. The Merger was part of the Company's recapitalization strategy, a condition to the closing of the Investment Agreements, and was a 100% stock exchange transaction. The Merger allows us to improve efficiencies and opens new markets for us. Upon consummation of the Merger, each outstanding share of Granite Corp.'s common stock, par value $1.00 per share, other than shares held by FNB, Granite Corp.'s and shares owned in a fiduciary capacity or as a result of debts previously contracted, was converted into the right to receive 3.375 shares of FNB common stock, resulting in FNB issuing approximately 521,595 shares (adjusted for the Reverse Stock Split) of FNB common stock to Granite Corp.'s stockholders.

Granite Corp. is a Delaware corporation organized on June 1, 1987, which is registered as a bank holding company due to its ownership of Granite, a North Carolina state chartered bank which has been in existence and continuously operating since August 2, 1906. Granite conducts banking business operations from 18 full-service branches located in Burke, Caldwell, Catawba, Forsyth, Iredell, Mecklenburg, Watauga, and Wilkes counties in North Carolina. As of December 31, 2011, Granite had total assets of approximately $752.1 million and 164 employees.

Granite Corp. also owns Granite Mortgage, Inc. ("Granite Mortgage"), a North Carolina corporation which ceased mortgage operations in July 2009 and which filed for Chapter 11 bankruptcy on February 15, 2012.

The acquisition of Granite Corp. by FNB was accounted for under the acquisition method of accounting in accordance with relevant accounting guidance. The purchased assets and assumed liabilities were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value. Fair value adjustments are preliminary and are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available.

None of the goodwill recognized is expected to be deductible for income tax purposes.

The following table summarizes the amounts of assets and liabilities of Granite Corp. assumed by FNB on October 21, 2011, as well as the fair value at the acquisition date:


(dollars in thousands)	October 21, 2011 (as initially recorded by Bank of Granite Corporation)		Preliminary Measurement Period Fair Value Adjustments				October 21, 2011 (as recorded by the Company)
Assets acquired:
Cash and cash equivalents	$	99,126	$	—			$	99,126
Investment securities		186,746		(385	)	^A		186,361
Loans, net		410,123		(16,470	)	^B		393,653
Premises and equipment, net		9,135		643		^C		9,778
Other real estate owned		21,674		(3,238	)	^D		18,436
Bank-owned life insurance		4,432		—				4,432
Core deposit intangible		—		4,900		^E		4,900
Other assets		8,052		(286	)	^F		7,766

Total assets acquired	$	739,288	$	(14,836	)		$	724,452

Liabilities assumed:
Deposits	$	716,863	$	2,580		^G	$	719,443
Other		3,668		322		^H		3,990

Total liabilities assumed	$	720,531	$	2,902			$	723,433

Equity:
Total shareholders' equity	$	18,757	$	(18,757	)	^I	$	—

Total liabilities assumed and shareholders' equity	$	739,288	$	(15,855	)	^J	$	723,433


Contributed capital							$	4,924	^K


Total liabilities assumed and contributed capital							$	728,357


Goodwill (excess of liabilities assumed and contributed capital over assets acquired)							$	3,905

Explanation of Fair Value Adjustments:

A.	Eliminates the remaining unamortized premium paid when the securities were initially purchased.

B.	Adjusts Granite's book value of loans to the estimated fair value, net of ALL, as a result of future expected losses and the impact of market discount rates. The adjustment is principally the result of expected losses inherent in the acquired portfolio.

C.	Adjusts Granite's book value of premises and equipment to the estimated fair value as of the acquisition date based in part on appraisals from an independent appraiser and unsolicited offers to purchase certain Granite facilities from independent third parties.

D.	Adjusts Granite's book value of foreclosed real estate properties to their estimated fair value as of the acquisition date.

E.	Recognizes the value of Granite's core deposit base. This amount was recorded by FNB as an identifiable intangible asset and will be amortized as an expense on a straight-line basis over the average life of the core deposit base, which is estimated to be eight years.

Adjusts Other Assets to expense remaining unamortized non-refundable prepaid insurance premium associated with directors and officers insurance. As of the acquisition, Granite Corp. and its subsidiaries were covered under FNB's directors and officers insurance policy. Also adjusts the deferred tax asset relating to investment securities available-for-sale as of the acquisition date.

Adjusts the deposit balances to reflect the excess of the weighted average interest rate of Granite's fixed rate time deposits over the cost of similar funding at the time of the acquisition. This amount will be amortized to reduce interest expense on a level yield basis over the life of the portfolio of approximately 24 months.

H.	Adjusts Other Liabilities to reflect the fair market value of operating leases on Granite's leased facilities.

Eliminates the carrying amount of shareholders' equity prior to the consummation of the Merger. Carrying equity balances attributable to existing Granite Corp. shareholders is eliminated and the conversion of Granite Corp. shares to FNB shares is reflected in the contributed capital amount in item K below.

The total fair value adjustments generated a gross deferred tax asset of $17.2 million and a gross deferred tax liability of $9.4 million. The deferred tax asset and liabilities generated from these fair value adjustments was offset 100% with a corresponding deferred tax valuation adjustment of $7.8 million. The net effect of the generated deferred tax assets and liabilities was zero.

K.	Granite Corp. shareholders received a total of 521,595 shares (adjusted for the Reverse Stock Split) of FNB common stock with a fair value price at $9.44 per share for an aggregate purchase price of $4.924 million.

The following table presents our unaudited pro forma results of operations for the periods presented as if the Merger had been completed on January 1, 2010. The unaudited pro forma results of operations include the historical accounts of FNB and Granite Corp. and pro forma adjustments as may be required, including the amortization of intangibles with definite lives and the amortization or accretion of any premiums or discounts arising from fair value adjustments for assets acquired and liabilities assumed. The unaudited pro forma information is intended for informational purposes only and is not necessarily indicative of our future operating results or operating results that would have occurred had the Merger been completed on January 1, 2010. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions.


(dollars in thousands, except per share data)	Revenue		Earnings (Loss)
Actual results for BOGC from 10/21/11 - 12/31/11	$	7,868	$	2,988

Supplemental pro forma from 1/1/11 - 12/31/11		133,312		(123,343	)

Supplemental pro forma from 1/1/10 - 12/31/10		180,090		(135,605	)

The proforma results are not necessarily indicative of actual results had the acquisition been completed as of the beginning of each fiscal period presented, nor are they necessarily indicative of future consolidated results.