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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934



For
the fiscal year ended December 31, 2004



Commission File
Number 0-13823



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FNB CORP.

(Exact name of Registrant as
specified in its charter)



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



101 Sunset Avenue,
Asheboro, North Carolina 27203

(Address of principal executive offices)



(336) 626-8300

(Registrants telephone number, including area code)



Securities pursuant to Section 12(g) of the Act:



Common Stock, par value $2.50 per share

(Title of Class)



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



Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. ̈



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



The aggregate market value of common stock held by nonaffiliates of the Registrant, assuming, without admission, that all
directors and officers of the Registrant may be deemed affiliates, was $99,239,000 as of June 30, 2004, the last business day of the Registrants most recently completed second fiscal quarter.



As of March 1, 2005, the Registrant had 5,609,252 shares of $2.50 par value
common stock outstanding.



Portions of the Proxy Statement of
the Registrant for the Annual Meeting of Shareholders to be held on May 10, 2005 are incorporated by reference in Part III of this report.



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CROSS REFERENCE INDEX



|         |  |         |  |                                                                                                                                                 |  |      
|-------- |  | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------- |  | -----
|         |  |         |  |                                                                                                                                                 |  | Page 
|Part I   |  | Item 1  |  | Business                                                                                                                                        |  | 1-6  
|         |  | Item 2  |  | Properties                                                                                                                                      |  | 6    
|         |  | Item 3  |  | Legal Proceedings                                                                                                                               |  |      
|         |  |         |  | Not applicable.                                                                                                                                 |  |      
|         |  | Item 4  |  | Submission of Matters to a Vote of Security Holders                                                                                             |  |      
|         |  |         |  | Not applicable.                                                                                                                                 |  |      
|Part II  |  | Item 5  |  | Market for the Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities                             |  | 31-32
|         |  | Item 6  |  | Selected Financial Data                                                                                                                         |  | 7    
|         |  | Item 7  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                           |  | 8-32 
|         |  | Item 7a |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                      |  | 19-20
|         |  | Item 8  |  | Financial Statements and Supplementary Data                                                                                                     |  |      
|         |  |         |  | Report of Independent Registered Public Accounting Firm                                                                                         |  | 33-34
|         |  |         |  | Consolidated Balance Sheets at December 31, 2004 and 2003                                                                                       |  | 35   
|         |  |         |  | Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2004                                        |  | 36   
|         |  |         |  | Consolidated Statements of Shareholders Equity and Comprehensive Income for each of the years in the three-year period ended December 31, 2004 |  | 37   
|         |  |         |  | Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2004                                    |  | 38   
|         |  |         |  | Notes to Consolidated Financial Statements                                                                                                      |  | 39-72
|         |  |         |  | Quarterly Financial Data for 2004 and 2003                                                                                                      |  | 31   
|         |  | Item 9  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                                            |  |      
|         |  |         |  | Not applicable.                                                                                                                                 |  |      
|         |  | Item 9a |  | Controls and procedures                                                                                                                         |  | 73   
|         |  | Item 9b |  | Other Information                                                                                                                               |  |      
|         |  |         |  | Not applicable.                                                                                                                                 |  |      
|Part III |  | Item 10 |  | Directors and Executive Officers of the Registrant                                                                                              |  | *    
|         |  | Item 11 |  | Executive Compensation                                                                                                                          |  | *    
|         |  | Item 12 |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                                                  |  | *    
|         |  | Item 13 |  | Certain Relationships and Related Transactions                                                                                                  |  | *    
|         |  | Item 14 |  | Principal Accountant Fees and Services                                                                                                          |  | *    
|Part IV  |  | Item 15 |  | Exhibits and Financial Statement Schedules                                                                                                      |  |      
|         |  |         |  | (a)(1) Financial Statements (See Item 8 for reference).                                                                                         |  |      
|         |  |         |  | (2) Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable.                                     |  |      
|         |  |         |  | (3) Exhibits have been filed separately with the Commission and are available upon written request.                                             |  | 75-76

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|* |  | Information called for by Part III is incorporated herein by reference to portions of the Registrants Proxy Statement for the 2005 Annual Meeting of Shareholders, as follows:
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 10See information that appears under
the headings Election of Directors, Executive Officers and Report of the Audit Committee.

Item
11See information that appears under the heading Executive Compensation.

Item 12See information that appears under
the headings Voting Securities Outstanding and Principal Shareholders and Security Ownership of Management.

Item
13See information that appears under the heading Indebtedness of Officers and Directors.

Item 14See information
that appears under the heading Independent Auditors.



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BUSINESS



General



FNB Corp. is a bank holding company incorporated under the laws of the State
of North Carolina in 1984. On July 2, 1985, through an exchange of stock, FNB Corp. acquired a wholly owned bank subsidiary, First National Bank and Trust Company (First National Bank), a national banking association founded in 1907.
First National Bank has a financial subsidiary, First National Investor Services, Inc. On August 1, 2002, FNB Corp. acquired another wholly owned bank subsidiary, Rowan Savings Bank SSB, Inc. (Rowan Bank), a North Carolina-chartered
savings bank founded in 1905. Rowan Bank remained a separate subsidiary of FNB Corp. until it was merged into First National Bank effective November 30, 2004. On April 1, 2003, FNB Corp. acquired, as discussed below, a mortgage banking subsidiary,
Dover Mortgage Company (Dover). FNB Corp. and its subsidiaries are collectively referred to as the Corporation.



First National Bank, which is a full-service bank, currently conducts all of its operations in Chatham, Guilford, Montgomery, Moore, Randolph, Richmond,
Rowan and Scotland counties in central North Carolina. First National Bank has three offices, including the headquarters office, in Asheboro and additional community offices in Archdale (two offices), Biscoe, China Grove, Ellerbe, Kannapolis,
Laurinburg, Pinehurst, Ramseur, Randleman, Rockingham (two offices), Salisbury, Seagrove, Siler City, Southern Pines and Trinity. A loan production office is located in Greensboro. Some of the major banking services offered include regular checking
accounts, interest checking accounts (including package account versions that offer a variety of products and services), money market accounts, savings accounts, certificates of deposit, individual retirement accounts, debit cards, credit cards and
loans, both secured and unsecured, for business, agricultural and personal use. Other services offered include internet banking, cash management, investment management and trust services. First National Bank also has automated teller machines and is
a member of Plus, a national teller machine network, and Star, a regional network.



Dover Mortgage Company, which conducts substantially all of its operations in North Carolina, originates, underwrites and closes mortgage loans for sale into the secondary market. Dover has its main office in
Charlotte and additional loan production offices in Carolina Beach, Goldsboro, Greenville, Lake Norman, Leland, Raleigh and Wilmington, North Carolina. Through representatives, Dover also conducts operations in Asheville, North Carolina and Kiawah
Island, South Carolina.



On August 1, 2002, the Corporation
completed a merger for the acquisition of Rowan Bancorp, Inc. (Rowan Bancorp), holding company for Rowan Savings Bank SSB, Inc. (Rowan Bank), headquartered in China Grove, North Carolina. The merger transaction has been
accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Rowan Bank were recorded based on a preliminary estimate of fair values as of August 1, 2002, subject to possible
adjustment during the one-year period from that date. The only adjustments recorded during that one-year period related to accrued acquisition costs and resulted in an $18,000 reduction of the amount initially recorded for goodwill. The consolidated
financial statements include the results of operations of Rowan Bank since August 1, 2002.



Per the terms of the merger agreement, Rowan Bank was to be operated as a separate subsidiary of FNB Corp. for a period of not less than 24 months; provided, however, that the Board of Directors of Rowan Bank could
elect to cause Rowan Bank to merge with First National Bank or another subsidiary of FNB Corp. prior to the termination of the 24-month period. Effective November 30, 2004, with the unanimous approval of the Rowan Board of Directors, Rowan Bank was
merged into First National Bank.



On April 1, 2003, the
Corporation completed a merger for the acquisition of Dover Mortgage Company, headquartered in Charlotte, North Carolina. Operating as a separate subsidiary of FNB Corp., Dover originates, underwrites and closes mortgage loans for sale into the
secondary market. Mortgage production is sold on a service-released basis to a number of national lenders who in turn service the loans. Subject to a maximum total payment, Dover shareholders will be entitled to additional cash consideration over
the four-year period following



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closing, based on a percentage of Dovers pretax net income during that four-year period. Any additional cash consideration paid to Dover shareholders
will be recorded as an adjustment to goodwill. The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Dover were recorded based on a preliminary
estimate of fair values as of April 1, 2003, subject to possible adjustment during the one-year period from that date. There were no adjustments to the estimate of fair values during that one-year period. The consolidated financial statements
include the results of operations of Dover since April 1, 2003.



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



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



In November 2004, First National Bank received
regulatory approval for the establishment of a second branch office in Greensboro, North Carolina. Construction of this full-service banking office is expected to be completed in 2005.



In 2004, Dover Mortgage Company opened new mortgage production offices in North Carolina at Carolina Beach in April and at
Leland in November. Through representatives, Dover has commenced operations in Kiawah Island, South Carolina in January 2005 and in Asheville, North Carolina in March 2005.



FNB Corp. makes its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and
amendments to those reports available on its website at www.MyYesBank.com without charge as soon as reasonably practicable after filing or furnishing them to the Securities and Exchange Commission. In addition, FNB Corp. will provide without charge
a copy of its annual report on Form 10-K to any shareholder by mail. Requests should be sent to FNB Corp., Attention: Secretary, 101 Sunset Avenue, Asheboro, North Carolina 27203.



Competition



The banking industry within First National Banks marketing area is extremely competitive. First National Bank faces direct competition in Chatham,
Guilford, Montgomery, Moore, Randolph, Richmond, Rowan and Scotland counties from approximately 70 different financial institutions, including commercial banks, savings institutions and credit unions. Although no one of these entities is dominant,
First National Bank considers itself to be one of the significant financial institutions in the area in terms of total assets and deposits. Further competition is provided by banks located in adjoining counties, as well as other types of financial
institutions such as insurance companies, finance companies, pension funds and brokerage houses and other money funds. The principal methods of competing in the commercial banking industry are improving customer service through the quality and range
of services provided, improving cost efficiencies and pricing services competitively.



Dover faces competition within its market area from other mortgage banking companies and from all types of financial institutions engaged in the mortgage loan business. The principal methods of competing in the
mortgage banking business are offering competitively priced mortgage loan products and providing prompt and efficient customer service.



Regulation and Supervision



The following discussion sets forth material elements of the regulatory framework applicable to bank holding companies and their subsidiaries. It also
provides certain specific information relevant to FNB Corp.



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This regulatory framework is intended primarily for the protection of customers and depositors and the deposit insurance funds that insure deposits of banks
and savings institutions, and not for the protection of security holders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions. A change in the
statutes, regulations or regulatory policies applicable to FNB Corp. or its subsidiaries may have a material effect on the business of the Corporation. Additional information related to regulatory matters is contained in Managements
Discussion and Analysis of Financial Condition and Results of Operations below.



General



As a bank
holding company, FNB Corp. is subject to regulation under the Bank Holding Company Act of 1956, as amended, and to inspection, examination and supervision by the Federal Reserve Board. Under the Bank Holding Company Act, bank holding companies, such
as FNB Corp., that have not elected to become financial holding companies under the Gramm-Leach-Bliley Financial Modernization Act of 1999 generally may not acquire ownership or control of more than 5% of the voting shares or substantially all the
assets of any company, including a bank, without the Federal Reserve Boards prior approval.



As a national banking association, First National Bank is subject to regulation and examination primarily by the Office of the Comptroller of the Currency
(OCC). It is also regulated by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board. First National Banks deposits are insured by the FDIC through the Bank Insurance Fund and the Savings Association Insurance Fund.
The OCC and the FDIC impose various requirements and restrictions on First National Bank, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be
charged on loans, limitations on the types of investments that may be made and the types of services that may be offered, and requirements governing capital adequacy, liquidity, earnings, dividends, management practices and branching. As a member of
the Federal Reserve System, First National Bank is subject to the applicable provisions of the Federal Reserve Act, which imposes restrictions on loans by subsidiary banks to a holding company and its other subsidiaries and on the use of stock or
securities as collateral security for loans.



Various consumer
laws and regulations also affect the operations of the Corporation. In addition to the impact of regulation, financial institutions may be significantly affected by legislation, which can change the statutes affecting them in substantial and
unpredictable ways, and by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability to influence the economy. The instruments of monetary policy used by the Federal Reserve Board include its open
market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements on member bank deposits. The actions of the Federal Reserve Board influence the growth of bank loans,
investments and deposits and also affect interest rates charged on loans or paid on deposits.



In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates,
deposit levels, loan demand or the business and earnings of the Corporation.



Liability for Bank Subsidiaries



Under current Federal Reserve Board policy, a bank holding company is expected to act as a source of financial and managerial strength to its subsidiary banks and to maintain resources adequate to support each subsidiary bank. This support
may be required at times when the bank holding company may not have the resources to provide it. Similarly, the cross-guaranty provisions of the Federal Deposit Insurance Act provide that if the FDIC suffers or anticipates a loss as a result of a
default by a banking subsidiary or by providing assistance to a subsidiary in danger of default, then any other bank subsidiaries may be assessed for the FDICs loss. Federal law authorizes the OCC to order an assessment of FNB Corp. if the
capital of First National Bank were to become impaired. If the assessment were not paid within three months, the OCC could order the sale of FNB Corp.s stock in First National Bank to cover the deficiency.



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Capital Requirements



FNB Corp. and First National Bank are required to comply with federal regulations on capital adequacy. There are two
measures of capital adequacy: a risk-based measure and a leverage measure. All capital standards must be satisfied for an institution to be considered in compliance. For additional information, see Capital Adequacy in
Managements Discussion and Analysis of Financial Condition and Results of Operations below.



Dividend Restrictions



FNB Corp. is a legal entity separate and distinct from its bank and other subsidiaries. Because the principal source of FNB Corp. revenues is dividends
from the subsidiary bank, the ability of FNB Corp. to pay dividends to its shareholders and to pay service on its own debt depends largely upon the amount of dividends its subsidiaries may pay to FNB Corp. There are statutory and regulatory
limitations on the payment of dividends by First National Bank to FNB Corp., as well as by FNB Corp. to its shareholders.



First National Bank must obtain the prior approval of the OCC to pay dividends if the total of all dividends declared by the bank in any calendar year
will exceed the sum of its net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits First National Bank from paying dividends that in the
aggregate would be greater than its undivided profits after deducting statutory bad debts in excess of its loan loss allowance.



FNB Corp. and First National Bank are also subject to various general regulatory policies and requirements relating to the payment of dividends, including
requirements to maintain adequate capital above regulatory minimums.



Community Reinvestment Act



First National
Bank is subject to the provisions of the Community Reinvestment Act of 1977, as amended (CRA). Under the CRA, all financial institutions have a continuing and affirmative obligation consistent with their safe and sound operation to help meet the
credit needs for their entire communities, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institutions discretion to
develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA.



The CRA requires the appropriate federal bank regulatory agency, in connection with its examination of the bank, to assess the banks record in
meeting the credit needs of the community served by the bank, including low- and moderate-income neighborhoods. The regulatory agencys assessment of the banks record is made available to the public.



Interstate Banking and Branching



The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(Interstate Banking Act) permits interstate acquisitions of banks by bank holding companies. FNB Corp. and any other bank holding company located in North Carolina may acquire a bank located in any other state, and any bank holding
company located outside North Carolina may lawfully acquire any North Carolina-based bank, regardless of state law to the contrary, in either case subject to certain deposit-percentage limitations, aging requirements and other restrictions. The
Interstate Banking Act also generally provides that national and state-chartered banks may branch interstate through acquisitions of banks in other states. It allowed, however, any state to elect prior to June 1, 1997 either to opt in
and accelerate the date after which interstate branching was permissible or to opt out and prohibit interstate branching altogether. North Carolina enacted opt in legislation permitting interstate branching. The Interstate
Banking Act may have the effect of increasing competition within the markets in which FNB Corp. operates.



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Gramm-Leach-Bliley Act



The Gramm-Leach-Bliley Financial Modernization Act of 1999 allows bank holding companies to engage in a wider range of
nonbanking activities, including greater authority to engage in the securities and insurance businesses. Under the Gramm-Leach-Bliley Act, a bank holding company that elects to become a financial holding company may engage in any activity that is
financial in nature, is incidental to financial activity or complements financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Activities cited by the law as
being financial in nature include securities underwriting, dealing in securities and market making, insurance underwriting and agency, providing financial, investment or economic advisory services, and activities that the Federal Reserve
Board has determined to be closely related to banking. FNB Corp. has not elected to become a financial holding company.



Subject to certain limitations on investment, a national bank or its financial subsidiary may also engage in activities that are financial in nature,
other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, so long as the bank is well-capitalized, well-managed and has at least a satisfactory Community Reinvestment Act rating.
Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well-capitalized and well-managed to continue to engage in activities that are financial in nature. In addition, a financial holding
company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has at least a satisfactory Community Reinvestment Act rating.



Privacy



The Gramm-Leach-Bliley Act also modified other financial laws, including
laws related to financial privacy. Under the act, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules
require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The Fair Credit Reporting Act restricts information sharing among
affiliates and was amended in December 2003 to restrict further affiliate sharing of information for marketing purposes.



International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001



The President signed the USA Patriot Act of 2001 into law in October 2001. This act contains the International Money
Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the IMLAFA). The IMLAFA substantially broadens existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposes new compliance
and due diligence obligations, creates new crimes and penalties, compels the production of documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United
States, and clarifies the safe harbor from civil liability to customers. The U.S. Treasury Department has issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements to financial institutions such as our
bank subsidiary. The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their
customers.



Pursuant to the IMLAFA, the Corporation established
anti-money laundering compliance and due diligence programs.



Sarbanes-Oxley Act of 2002



The President
signed into law the Sarbanes-Oxley Act of 2002, that addresses, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. The act is intended to allow
shareholders to monitor more easily and efficiently the performance of public companies and their directors.



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Future Legislation



Changes to the laws and regulations in the United States and North Carolina can affect the Corporations operating
environment in substantial and unpredictable ways. FNB Corp. cannot predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon the financial condition or results of
operations of the Corporation.



Employees



As of December 31, 2004, FNB Corp. had four officers, all of whom were also
officers of First National Bank. On that same date, First National Bank had 254 full-time employees and 31 part-time employees, and Dover had 43 full-time employees and 3 part-time employees. Each subsidiary considers its relationship with its
employees to be excellent. The Corporation provides employee benefit programs, including a noncontributory defined benefit pension plan, matching retirement/savings (401(k)) plan, group life, health and dental insurance, paid vacations, sick leave,
and health care and life insurance benefits for retired employees.



Properties



The main offices of
First National Bank and the principal executive offices of FNB Corp. are located in an office building at 101 Sunset Avenue, Asheboro, North Carolina. The premises contain approximately 36,500 square feet of office space. First National Bank also
has other community offices in Asheboro (two offices), Archdale (two offices), Biscoe, China Grove, Ellerbe, Kannapolis, Laurinburg, Pinehurst, Ramseur, Randleman, Rockingham (two offices), Salisbury, Seagrove, Siler City, Southern Pines and
Trinity, North Carolina. A loan production office is located in Greensboro, North Carolina. The Bush Hill office in Archdale and the Greensboro and Pinehurst offices are leased facilities. The land on which the Seagrove office is situated is also
under a lease.



The main offices of Dover are located in
Charlotte, North Carolina. Dover also has loan production offices in Carolina Beach, Goldsboro, Greenville, Lake Norman, Leland, Raleigh and Wilmington, North Carolina. All of the Dover facilities are leased.



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FNB CORP. AND SUBSIDIARIES



FIVE YEAR FINANCIAL HISTORY



|                                                      |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|----------------------------------------------------- |  | --------------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                      |  | 2004                                          |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                                      |  | (dollars in thousands, except per share data) |        
|Summary of Operations                                 |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest income                                       |  | $                                             | 40,436  |   |      | $ | 40,158  |      |  | $ | 39,452  |   |  | $    | 41,260  |   |  | $ | 41,936  |  
|Interest expense                                      |  |                                               | 12,402  |   |      |   | 13,144  |      |  |   | 14,114  |   |  |      | 20,492  |   |  |   | 20,908  |  
|                                                      |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income                                   |  |                                               | 28,034  |   |      |   | 27,014  |      |  |   | 25,338  |   |  |      | 20,768  |   |  |   | 21,028  |  
|Provision for loan losses                             |  |                                               | 4,030   |   |      |   | 1,860   |      |  |   | 1,780   |   |  |      | 1,200   |   |  |   | 1,802   |  
|                                                      |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income after provision for loan losses   |  |                                               | 24,004  |   |      |   | 25,154  |      |  |   | 23,558  |   |  |      | 19,568  |   |  |   | 19,226  |  
|Noninterest income                                    |  |                                               | 13,673  |   |      |   | 13,600  |      |  |   | 8,268   |   |  |      | 5,900   |   |  |   | 4,501   |  
|Noninterest expense                                   |  |                                               | 28,755  |   |      |   | 27,159  |      |  |   | 20,140  |   |  |      | 16,077  |   |  |   | 18,497  |  
|                                                      |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income before income taxes                            |  |                                               | 8,922   |   |      |   | 11,595  |      |  |   | 11,686  |   |  |      | 9,391   |   |  |   | 5,230   |  
|Income taxes                                          |  |                                               | 2,324   |   |      |   | 3,195   |      |  |   | 3,486   |   |  |      | 2,663   |   |  |   | 1,714   |  
|                                                      |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income                                            |  | $                                             | 6,598   |   |      | $ | 8,400   |      |  | $ | 8,200   |   |  | $    | 6,728   |   |  | $ | 3,516   |  
|                                                      |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                      |  |                                               |         |   |     
|Per Share Data                                        |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income:                                           |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic                                                 |  | $                                             | 1.17    |   |      | $ | 1.50    |      |  | $ | 1.63    |   |  | $    | 1.35    |   |  | $ | .70     |  
|Diluted                                               |  |                                               | 1.13    |   |      |   | 1.43    |      |  |   | 1.58    |   |  |      | 1.32    |   |  |   | .69     |  
|Cash dividends declared                               |  |                                               | .60     |   |      |   | .59     |      |  |   | .58     |   |  |      | .53     |   |  |   | .51     |  
|Book value                                            |  |                                               | 14.66   |   |      |   | 14.32   |      |  |   | 13.49   |   |  |      | 11.74   |   |  |   | 10.89   |  
|                                                      |  |                                               |         |   |     
|Balance Sheet Information                             |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total assets                                          |  | $                                             | 862,891 |   |      | $ | 773,245 |      |  | $ | 754,370 |   |  | $    | 593,742 |   |  | $ | 565,639 |  
|Investment securities                                 |  |                                               | 125,143 |   |      |   | 144,259 |      |  |   | 153,857 |   |  |      | 163,150 |   |  |   | 132,384 |  
|Loans                                                 |  |                                               | 664,754 |   |      |   | 551,913 |      |  |   | 502,342 |   |  |      | 391,632 |   |  |   | 395,737 |  
|Goodwill                                              |  |                                               | 16,335  |   |      |   | 16,325  |      |  |   | 12,601  |   |  |      |        |   |  |   |        |  
|Deposits                                              |  |                                               | 659,544 |   |      |   | 597,925 |      |  |   | 592,354 |   |  |      | 480,230 |   |  |   | 472,448 |  
|Borrowed funds                                        |  |                                               | 113,647 |   |      |   | 86,721  |      |  |   | 81,815  |   |  |      | 50,812  |   |  |   | 30,951  |  
|Shareholders equity                                  |  |                                               | 82,147  |   |      |   | 81,458  |      |  |   | 73,090  |   |  |      | 55,907  |   |  |   | 55,122  |  
|                                                      |  |                                               |         |   |     
|Ratios (Averages)                                     |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on assets                                      |  |                                               | .80     | % |      |   | 1.07    | %    |  |   | 1.25    | % |  |      | 1.15    | % |  |   | .65     | %
|Return on shareholders equity                        |  |                                               | 8.00    |   |      |   | 10.66   |      |  |   | 12.82   |   |  |      | 11.63   |   |  |   | 6.59    |  
|Shareholders equity to assets                        |  |                                               | 9.99    |   |      |   | 10.00   |      |  |   | 9.75    |   |  |      | 9.93    |   |  |   | 9.86    |  
|Dividend payout ratio                                 |  |                                               | 51.36   |   |      |   | 39.54   |      |  |   | 36.05   |   |  |      | 38.91   |   |  |   | 76.05   |  
|Loans to deposits                                     |  |                                               | 98.03   |   |      |   | 92.36   |      |  |   | 82.00   |   |  |      | 81.71   |   |  |   | 84.79   |  
|Net yield on earning assets, taxable equivalent basis |  |                                               | 3.89    |   |      |   | 3.94    |      |  |   | 4.40    |   |  |      | 4.03    |   |  |   | 4.28    |  



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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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



Rowan Savings Bank SSB, Inc. (Rowan Bank) was a wholly owned
subsidiary of FNB Corp. from August 1, 2002 until November 30, 2004, when it was merged into First National Bank. See below in the Overview Merger Acquisition of Rowan Bank in 2002 for additional information.



Overview



Description of Operations



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



Additionally, FNB
Corp. has a mortgage banking subsidiary, Dover Mortgage Company, that originates, underwrites and closes loans for sale into the secondary market. Dover operates eight mortgage production offices in North Carolina at Charlotte, Carolina Beach,
Goldsboro, Greenville, Lake Norman, Leland, Raleigh and Wilmington. Through representatives, Dover also conducts operations in Asheville, North Carolina and Kiawah Island, South Carolina.



For business segment information related to the financial performance of First National Bank and Dover Mortgage Company, see
Note 19 to the Consolidated Financial Statements.



Merger
Acquisition of Rowan Bank in 2002



On August 1, 2002, the
Corporation completed a merger for the acquisition of Rowan Bancorp, Inc. (Rowan Bancorp), holding company for Rowan Savings Bank SSB, Inc. (Rowan Bank), headquartered in China Grove, North Carolina. At the date of merger,
Rowan Bank operated three offices and, based on estimated fair values, had $134,208,000 in total assets, $95,738,000 in loans and $101,205,000 in deposits. Pursuant to the terms of the merger, each share of Rowan Bancorp common stock was converted
into either 2.3715 shares of FNB Corp. common stock or $36.00 in cash or a combination of stock and cash, the overall conversion to stock being limited to 45% of Rowan Bancorp shares. The aggregate purchase price was $21,830,000, consisting of
$11,205,000 of cash payments, 603,859 shares of FNB Corp. common stock valued at $9,094,000 and outstanding Rowan Bancorp stock options valued at $1,531,000. The merger transaction has been accounted for using the purchase method of accounting for
business combinations, and accordingly, the assets and liabilities of Rowan Bank were recorded based on a preliminary estimate of fair values as of August 1, 2002, subject to possible adjustment during the one-year period from that date. The only
adjustments recorded during that one-year period related to accrued acquisition costs and resulted in an $18,000 reduction of the amount initially recorded for goodwill. The consolidated financial statements include the results of operations of
Rowan Bank since August 1, 2002.



Per the terms of the merger
agreement, Rowan Bank was to be operated as a separate subsidiary of FNB Corp. for a period of not less than 24 months; provided, however, that the Board of Directors of Rowan Bank



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could elect to cause Rowan Bank to merge with First National Bank or another subsidiary of FNB Corp. prior to the termination of the 24-month period.
Effective November 30, 2004, with the unanimous approval of the Rowan Board of Directors, Rowan Bank was merged into First National Bank.



Merger Acquisition of Dover Mortgage Company in 2003



On April 1, 2003, the Corporation completed a merger for the acquisition of Dover Mortgage Company (Dover), headquartered in Charlotte, North
Carolina. Operating as a separate subsidiary of FNB Corp., Dover originates, underwrites and closes mortgage loans for sale into the secondary market. Mortgage production is sold on a service-released basis to a number of national lenders who in
turn service the loans. At the date of the merger, Dover operated six offices and, based on estimated fair values, had $47,001,000 in total assets and $5,823,000 in shareholders equity. Pursuant to the terms of the merger, 50% of the
outstanding shares of Dover common stock were converted into FNB Corp. common stock and the remaining 50% were converted into cash. The aggregate purchase price was $5,567,000, consisting of $2,908,000 of cash payments and 126,140 shares of FNB
Corp. common stock valued at $2,659,000. Subject to a maximum total payment, Dover shareholders will be entitled to additional cash consideration over the four-year period following closing, based on a percentage of Dovers pretax net income
during that four-year period. Any additional cash consideration paid to Dover shareholders will be recorded as a purchase adjustment which will increase goodwill. The merger transaction has been accounted for using the purchase method of accounting
for business combinations, and accordingly, the assets and liabilities of Dover were recorded based on a preliminary estimate of fair values as of April 1, 2003, subject to possible adjustment during the one-year period from that date. There were no
adjustments to the estimate of fair values during that one-year period. The consolidated financial statements include the results of operations of Dover since April 1, 2003.



Primary Financial Data for 2004



The Corporation earned $6,598,000 in 2004, a 21.5% decrease in net income from 2003. Basic earnings per share decreased from
$1.50 in 2003 to $1.17 in 2004 and diluted earnings per share decreased from $1.43 to $1.13, for percentage decreases of 22.0% and 21.0%, respectively. As noted above, Dover Mortgage Company was acquired as a subsidiary through merger effective
April 1, 2003, respectively, impacting both net income and the calculation of earnings per share since the acquisition date and also the comparability of operating results on a year-to-date basis between 2004 and 2003 (see Note 19 to the
Consolidated Financial Statements for business segment information and also below in Significant Factors Affecting Earnings in 2004). Total assets were $862,891,000 at December 31, 2004, up 11.6% from year-end 2003. Loans amounted to
$664,754,000 at December 31, 2004, increasing 20.4% from the prior year. Total deposits grew 10.3% to $659,544,000 in 2004.



Significant Factors Affecting Earnings in 2004



Because Dover Mortgage Company was acquired on April 1, 2003, there are no income statement amounts recorded for Dover in the consolidated financial
statements for the first quarter of 2003, which affects the comparisons of 2004 and 2003 on a year-to-date basis. Before the elimination of intersegment transactions, interest income, interest expense, noninterest income and noninterest expense for
Dover in the first quarter of 2004 amounted to $127,000, $54,000, $905,000 and $861,000, respectively. Income from mortgage loan sales specifically attributable to Dover in the 2004 first quarter amounted to $904,000.



Earnings were negatively impacted in 2004 by a $2,170,000 increase in the
provision for loan losses, largely as a result of the $2,780,000 provision recorded in the 2004 second quarter which exceeded the 2003 second quarter provision by $1,950,000. Actual loan charge-offs in the 2004 second quarter amounted to $2,574,000.
The determination of the second quarter provision for loan losses took into account the actual charge-offs, the significant growth in loans held for investment during the second quarter, and the level of nonperforming loans, which increased to
$7,026,000 at June 30, 2004 compared to $5,725,000 at March 31, 2004. Nonperforming loans amounted to $5,227,000 at December 31, 2004.



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##### Table of Contents

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



The comparison of income from mortgage loan sales on a year-to-date basis in 2004 to 2003 has been affected by the acquisition of Dover Mortgage Company on April 1, 2003 as noted above. In addition, income from
mortgage loan sales has been negatively impacted in general in 2004 by the increase in long-term conforming mortgage rates from the historical lows that prevailed through most of 2003 and especially by the resulting slowdown in mortgage refinancing
activity. The effect of the resulting decline in income from mortgage loan sales has been somewhat offset, however, by the reduction in compensation and other expenses related to the mortgage operations. Compared to 2003, income from mortgage loan
sales declined $858,000 in 2004. Apart from the general factors noted above, there were certain specific factors that impacted the comparison of income from mortgage loan sales between 2004 and 2003 as follows:



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



| |  |  | Results for the third and fourth quarters of 2003 were negatively affected by reductions of approximately $1,250,000 and $80,000, respectively, in income from mortgage loan sales of
Dover as a result of the failure to properly obtain forward sales commitments when certain interest rate locks or commitments to lend were entered into with potential borrowers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Income tax expense was reduced $173,000 in 2003 for the change in the
valuation allowance for state deferred income tax assets as a result of managements judgment that these assets would be realized in future periods.



Critical Accounting Policies



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



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Earnings Review



The Corporations net income decreased $1,802,000 in 2004, down 21.5% from 2003, largely reflecting the $2,170,000 increase in the provision for loan
losses as discussed above. Earnings were positively impacted in 2004 by increases of $1,020,000 or 3.8% in net interest income and $73,000 in noninterest income, which gains were more than offset by a $1,596,000 increase in noninterest expense.
Certain factors specifically affecting the elements of income and expense and the comparability of operating results on a year-to-date basis between 2004 and 2003 were discussed in the OverviewSignificant Factors Affecting Earnings in
2004.



The Corporations net income increased
$200,000 in 2003, up 2.4% over 2002, reflecting in part the acquisitions of Rowan Bank and Dover Mortgage Company on August 1, 2002 and April 1, 2003, respectively, as discussed above. Earnings were positively impacted in 2003 by increases of
$1,676,000 or 6.6% in net interest income and $5,332,000 or 64.5% in noninterest income. The net $7,008,000 gain in revenue from operations was significantly offset, however, by increases of $7,019,000 or 34.9% in noninterest expense and $80,000 in
the provision for loan losses. Noninterest income was significantly augmented by the increase in income from mortgage loan sales following the Dover acquisition, except for the reductions in Dover income from mortgage loan sales in 2003 as noted in
the OverviewSignificant Factors Affecting Earnings in 2004. Additionally, noninterest income was further augmented by the first full-year increase in service charges on deposit accounts resulting from the implementation of an
overdraft protection program in July 2002 and by the increased level of income from mortgage loan sales by First National Bank as long-term conforming mortgage rates remained at historical lows through most of 2003. Noninterest expense was impacted
significantly by the Dover acquisition and also by the Rowan Bank acquisition.



Return on average assets decreased from 1.25% in 2002 to 1.07% in 2003 to 0.80% in 2004. Return on average shareholders equity decreased from 12.82% in 2002 to 10.66% in 2003 to 8.00% in 2004. In 2004, return on
tangible assets and equity (calculated by deducting average goodwill from average assets and from average equity) amounted to 0.82% and 9.98%, respectively.



Net Interest Income



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



Net interest income was $28,034,000 in 2004 compared to $27,014,000 in 2003. The increase of $1,020,000 or 3.8% resulted
primarily from a 4.5% increase in the level of average earning assets, the effect of which was partially offset by a decline in the net yield on earning assets, or net interest margin, from 3.94% in 2003 to 3.89% in 2004. In 2003, the increase of
$1,676,000 or 6.6% resulted largely from the acquisitions of Rowan Bank and Dover Mortgage Company on August 1, 2002 and April 1, 2003, respectively, as discussed above, which was the primary factor resulting in an 18.7% increase in the level of
average earning assets, the effect of which was partially offset by a decline in the net yield on earning assets, or net interest margin, from 4.40% to 3.94%. On a taxable equivalent basis, the increases in net interest income in 2004 and 2003 were
$907,000 and $1,665,000, respectively, reflecting changes in the relative mix of taxable and non-taxable earning assets in each year.



Table 1 sets forth for the periods indicated information with respect to the Corporations average balances of assets and liabilities, as well as the
total dollar amounts of interest income (taxable equivalent basis) from earning assets and interest expense on interest-bearing liabilities, resultant rates earned or paid, net interest income, net interest spread and net yield on earning assets.
Net interest spread refers to the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. Net yield on earning assets, or net interest margin, refers to net interest income divided by average
earning assets and is influenced by the level and relative mix of earning assets and interest-bearing liabilities.



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Table 1

Average
Balances and Net Interest Income Analysis



|                                           |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  
|------------------------------------------ |  | ------------------------------------------------ | ------- | ---------------------- | ---- | ----------------------- |  | ---- | -------------- |  | ---------------------- | ------- | ----------------------- | - | ------ | -------------- | ---- | ---------------------- |  | ----------------------- | ------- |  | - | ------ |  | ---- | -
|                                           |  | 2004                                             |         |                        | 2003 |                         |  | 2002 |               
|                                           |  | AverageBalance                                   |         | InterestIncome/Expense |      | AverageRatesEarned/Paid |  |      | AverageBalance |  | InterestIncome/Expense |         | AverageRatesEarned/Paid |   |        | AverageBalance |      | InterestIncome/Expense |  | AverageRatesEarned/Paid |        
|                                           |  | (taxable equivalent basis, dollars in thousands) |        
|EARNING ASSETS                             |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  
|Loans (1) (2)                              |  | $                                                | 612,217 |                        | $    | 35,308                  |  | 5.77 | %              |  | $                      | 549,234 |                         | $ | 33,351 |                | 6.07 | %                      |  | $                       | 432,053 |  | $ | 29,825 |  | 6.90 | %
|Investment securities (1):                 |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  
|Taxable income                             |  |                                                  | 81,253  |                        |      | 3,556                   |  | 4.38 |                |  |                        | 105,617 |                         |   | 5,397  |                | 5.11 |                        |  |                         | 134,807 |  |   | 8,952  |  | 6.64 |  
|Non-taxable income                         |  |                                                  | 47,630  |                        |      | 2,725                   |  | 5.72 |                |  |                        | 41,452  |                         |   | 2,555  |                | 6.16 |                        |  |                         | 25,063  |  |   | 1,870  |  | 7.46 |  
|Other earning assets                       |  |                                                  | 13,602  |                        |      | 161                     |  | 1.19 |                |  |                        | 25,610  |                         |   | 282    |                | 1.10 |                        |  |                         | 16,409  |  |   | 243    |  | 1.48 |  
|                                           |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  
|Total earning assets                       |  |                                                  | 754,702 |                        |      | 41,750                  |  | 5.53 |                |  |                        | 721,913 |                         |   | 41,585 |                | 5.76 |                        |  |                         | 608,332 |  |   | 40,890 |  | 6.72 |  
|                                           |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  
|Cash and due from banks                    |  |                                                  | 16,945  |                        |      |                         |  |      |                |  |                        | 17,337  |                         |   |        |                |      |                        |  |                         | 13,179  |  |   |        |  |      |  
|Goodwill                                   |  |                                                  | 16,332  |                        |      |                         |  |      |                |  |                        | 15,403  |                         |   |        |                |      |                        |  |                         | 5,316   |  |   |        |  |      |  
|Other assets, net                          |  |                                                  | 37,211  |                        |      |                         |  |      |                |  |                        | 33,698  |                         |   |        |                |      |                        |  |                         | 29,001  |  |   |        |  |      |  
|                                           |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  
|TOTAL ASSETS                               |  | $                                                | 825,190 |                        |      |                         |  |      |                |  | $                      | 788,351 |                         |   |        |                |      |                        |  | $                       | 655,828 |  |   |        |  |      |  
|                                           |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  
|INTEREST-BEARING LIABILITIES               |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  
|Interest-bearing deposits:                 |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  
|Demand deposits                            |  | $                                                | 89,827  |                        |      | 362                     |  | .40  |                |  | $                      | 85,039  |                         |   | 421    |                | .50  |                        |  | $                       | 67,809  |  |   | 502    |  | .74  |  
|Savings deposits                           |  |                                                  | 54,298  |                        |      | 168                     |  | .31  |                |  |                        | 51,586  |                         |   | 279    |                | .54  |                        |  |                         | 41,216  |  |   | 401    |  | .97  |  
|Money market deposits                      |  |                                                  | 75,824  |                        |      | 798                     |  | 1.05 |                |  |                        | 74,881  |                         |   | 838    |                | 1.12 |                        |  |                         | 59,223  |  |   | 1,065  |  | 1.80 |  
|Certificates and other time deposits       |  |                                                  | 329,812 |                        |      | 7,646                   |  | 2.32 |                |  |                        | 319,581 |                         |   | 8,062  |                | 2.52 |                        |  |                         | 304,147 |  |   | 9,941  |  | 3.27 |  
|Retail repurchase agreements               |  |                                                  | 15,890  |                        |      | 158                     |  | .99  |                |  |                        | 18,786  |                         |   | 160    |                | .85  |                        |  |                         | 15,057  |  |   | 259    |  | 1.72 |  
|Federal Home Loan Bank advances            |  |                                                  | 69,490  |                        |      | 2,546                   |  | 3.66 |                |  |                        | 53,240  |                         |   | 2,321  |                | 4.36 |                        |  |                         | 38,416  |  |   | 1,784  |  | 4.64 |  
|Federal funds purchased                    |  |                                                  | 4,181   |                        |      | 71                      |  | 1.70 |                |  |                        | 515     |                         |   | 7      |                | 1.39 |                        |  |                         | 472     |  |   | 10     |  | 2.06 |  
|Other borrowed funds                       |  |                                                  | 22,306  |                        |      | 653                     |  | 2.93 |                |  |                        | 35,044  |                         |   | 1,056  |                | 3.01 |                        |  |                         | 4,222   |  |   | 152    |  | 3.61 |  
|                                           |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  
|Total interest-bearing liabilities         |  |                                                  | 661,628 |                        |      | 12,402                  |  | 1.87 |                |  |                        | 638,672 |                         |   | 13,144 |                | 2.06 |                        |  |                         | 530,562 |  |   | 14,114 |  | 2.66 |  
|                                           |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  
|Noninterest-bearing demand deposits        |  |                                                  | 74,741  |                        |      |                         |  |      |                |  |                        | 63,608  |                         |   |        |                |      |                        |  |                         | 54,471  |  |   |        |  |      |  
|Other liabilities                          |  |                                                  | 6,389   |                        |      |                         |  |      |                |  |                        | 7,254   |                         |   |        |                |      |                        |  |                         | 6,854   |  |   |        |  |      |  
|Shareholders equity                       |  |                                                  | 82,432  |                        |      |                         |  |      |                |  |                        | 78,817  |                         |   |        |                |      |                        |  |                         | 63,941  |  |   |        |  |      |  
|                                           |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |  | $                                                | 825,190 |                        |      |                         |  |      |                |  | $                      | 788,351 |                         |   |        |                |      |                        |  | $                       | 655,828 |  |   |        |  |      |  
|                                           |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  
|NET INTEREST INCOME AND SPREAD             |  |                                                  |         |                        | $    | 29,348                  |  | 3.66 | %              |  |                        |         |                         | $ | 28,441 |                | 3.70 | %                      |  |                         |         |  | $ | 26,776 |  | 4.06 | %
|                                           |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  
|NET YIELD ON EARNING ASSETS                |  |                                                  |         |                        |      |                         |  | 3.89 | %              |  |                        |         |                         |   |        |                | 3.94 | %                      |  |                         |         |  |   |        |  | 4.40 | %
|                                           |  |                                                  |         |                        |      |                         |  |      |                |  |                        |         |                         |   |        |                |      |                        |  |                         |         |  |   |        |  |      |  

---

|(1) |  | Interest income and yields related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone are stated on a fully
taxable equivalent basis, assuming a 34% federal tax rate and applicable state tax rate, reduced by the nondeductible portion of interest expense.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Nonaccrual loans are included in the average loan balance. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the
life of the loan as an adjustment of interest income.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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



Following the significant declines in 2001, interest rates tended to stabilize, until mid-2004, in a generally low-rate
environment for rates both earned and paid by the Corporation. After reductions in the prime rate totaling 4.75% in 2001, there were additional rate cuts of .50% in November 2002 and .25% in June 2003, resulting in the prime rate of 4.00% that was
effective through June 30, 2004. Due to concern about increasing inflationary pressures, the Federal Reserve took action to raise the level of interest rates at the end of June 2004, causing the prime rate to increase to 4.25% in July 2004. Four
additional rate increases of 25 basis points each during the second six months of 2004 have raised the prime rate to the 5.25% level at December 31, 2004. The prime rate averaged 6.99% in 2001, falling to 4.67% in 2002 and 4.12% in 2003 and rising
to 4.33% in 2004.



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



In 2004, the net interest spread declined by 4 basis points from 3.70% in
2003 to 3.66% in 2004, reflecting the effect of a decrease in the average total yield on earning assets that more than offset the decrease in the average rate paid on interest-bearing liabilities, or cost of funds. The yield on earning assets
decreased by 23 basis points from 5.76% in 2003 to 5.53% in 2004, while the cost of funds decreased by 19 basis points from 2.06% to 1.87%. In 2003, the 36 basis points decrease in net interest spread resulted from a 96 basis points decrease in the
yield on earning assets as partially offset by a 60 basis points decrease in the cost of funds.



13



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##### Table of Contents

The 2004 and 2003 changes in net interest income on a taxable equivalent basis, as measured by volume and
rate variances, are analyzed in Table 2. Volume refers to the average dollar level of earning assets and interest-bearing liabilities.



Table 2

Volume and Rate Variance Analysis

|                                     |  |                                          |        |   |                    |   |        |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|------------------------------------ |  | ---------------------------------------- | ------ | - | ------------------ | - | ------ | ---------- |  | - | ------ | - |  | ---- | ------ | - | ---------- | - | ------ | - |  | - | ------ | -
|                                     |  | 2004 Versus 2003                         |        |   | 2003 Versus 2002   |  
|                                     |  | Variance due to(1)                       |        |   | Variance due to(1) |  
|                                     |  | Volume                                   |        |   | Rate               |   |        | Net Change |  |   | Volume |   |  | Rate |        |   | Net Change |  
|                                     |  | (taxable equivalent basis, in thousands) |       
|Interest Income                      |  |                                          |        |   |                    |   |        |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Loans (2)                            |  | $                                        | 3,677  |   |                    | $ | (1,720 | )          |  | $ | 1,957  |   |  | $    | 7,411  |   |            | $ | (3,885 | ) |  | $ | 3,526  |  
|Investment securities (2):           |  |                                          |        |   |                    |   |        |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Taxable income                       |  |                                          | (1,137 | ) |                    |   | (704   | )          |  |   | (1,841 | ) |  |      | (1,722 | ) |            |   | (1,833 | ) |  |   | (3,555 | )
|Non-taxable income                   |  |                                          | 362    |   |                    |   | (192   | )          |  |   | 170    |   |  |      | 1,055  |   |            |   | (370   | ) |  |   | 685    |  
|Other earning assets                 |  |                                          | (142   | ) |                    |   | 21     |            |  |   | (121   | ) |  |      | 112    |   |            |   | (73    | ) |  |   | 39     |  
|                                     |  |                                          |        |   |                    |   |        |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Total interest income                |  |                                          | 2,760  |   |                    |   | (2,595 | )          |  |   | 165    |   |  |      | 6,856  |   |            |   | (6,161 | ) |  |   | 695    |  
|                                     |  |                                          |        |   |                    |   |        |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Interest Expense                     |  |                                          |        |   |                    |   |        |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Interest-bearing deposits:           |  |                                          |        |   |                    |   |        |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Demand deposits                      |  |                                          | 25     |   |                    |   | (84    | )          |  |   | (59    | ) |  |      | 107    |   |            |   | (188   | ) |  |   | (81    | )
|Savings deposits                     |  |                                          | 14     |   |                    |   | (125   | )          |  |   | (111   | ) |  |      | 84     |   |            |   | (206   | ) |  |   | (122   | )
|Money market deposits                |  |                                          | 11     |   |                    |   | (51    | )          |  |   | (40    | ) |  |      | 238    |   |            |   | (465   | ) |  |   | (227   | )
|Certificates and other time deposits |  |                                          | 249    |   |                    |   | (665   | )          |  |   | (416   | ) |  |      | 487    |   |            |   | (2,366 | ) |  |   | (1,879 | )
|Retail repurchase agreements         |  |                                          | (26    | ) |                    |   | 24     |            |  |   | (2     | ) |  |      | 54     |   |            |   | (153   | ) |  |   | (99    | )
|Federal Home Loan Bank advances      |  |                                          | 636    |   |                    |   | (411   | )          |  |   | 225    |   |  |      | 650    |   |            |   | (113   | ) |  |   | 537    |  
|Federal funds purchased              |  |                                          | 62     |   |                    |   | 2      |            |  |   | 64     |   |  |      | 1      |   |            |   | (4     | ) |  |   | (3     | )
|Other borrowed funds                 |  |                                          | (376   | ) |                    |   | (27    | )          |  |   | (403   | ) |  |      | 933    |   |            |   | (29    | ) |  |   | 904    |  
|                                     |  |                                          |        |   |                    |   |        |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Total interest expense               |  |                                          | 595    |   |                    |   | (1,337 | )          |  |   | (742   | ) |  |      | 2,554  |   |            |   | (3,524 | ) |  |   | (970   | )
|                                     |  |                                          |        |   |                    |   |        |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Net Interest Income                  |  | $                                        | 2,165  |   |                    | $ | (1,258 | )          |  | $ | 907    |   |  | $    | 4,302  |   |            | $ | (2,637 | ) |  | $ | 1,665  |  
|                                     |  |                                          |        |   |                    |   |        |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  

---

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



|(2) |  | Interest income related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone is stated on a fully taxable
equivalent basis, assuming a 34% federal tax rate and applicable state tax rate, reduced by the nondeductible portion of interest expense.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Provision for Loan Losses



This provision is the charge against earnings to provide an allowance or reserve for probable losses inherent in the loan portfolio. The amount of each
years charge is affected by several considerations including managements evaluation of various risk factors in determining the adequacy of the allowance (see Asset Quality), actual loan loss experience and loan portfolio
growth. Earnings were negatively impacted in 2004 by a $2,170,000 increase in the provision for loan losses, largely as a result of the $2,780,000 provision recorded in the 2004 second quarter which exceeded the 2003 second quarter provision by
$1,950,000. Actual loan charge-offs in the 2004 second quarter amounted to $2,574,000. The determination of the second quarter provision for loan losses took into account the actual charge-offs, the significant growth in loans held for investment
during the second quarter, and the level of nonperforming loans, which increased to $7,026,000 at June 30, 2004 compared to $5,725,000 at March 31, 2004. Nonperforming loans amounted to $5,227,000 at December 31, 2004.



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##### Table of Contents

The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.12% at
December 31, 2004, 1.14% at December 31, 2003 and 1.22% at December 31, 2002. The allowance percentage has decreased due to charge-offs of impaired loans which were specifically reserved and a general improvement in economic conditions.



Noninterest Income



Noninterest income increased only $73,000 or 0.5% in 2004, due primarily to a decline of $858,000 in income from mortgage
loan sales, as discussed in the OverviewSignificant Factors Affecting Earnings in 2004, that substantially offset gains in other areas of noninterest income. The increase in service charges on deposit accounts was largely due to
selected increases in service charge rates that became effective in 2004.



Noninterest income increased $5,332,000 or 64.5% in 2003, reflecting in large part the acquisition of Dover Mortgage Company on April 1, 2003 as discussed above, to a lesser extent the acquisition of Rowan Bank on
August 1, 2002 as discussed above, and further to the general increase in the volume of business. The increase was primarily due to a $3,259,000 increase in income from mortgage loan sales and a $1,209,000 increase in service charges on deposit
accounts. The increase in income from mortgage loan sales was largely due to the Dover acquisition but there was also an increase in the level of income from mortgage loan sales by First National Bank as long-term conforming mortgage rates remained
at historical lows through most of 2003. The increase in service charges on deposit accounts was primarily due to the first full-year results of an overdraft protection program implemented in July 2002. The increase in trust and investment services
was largely related to the general increase in the volume of sales of annuity products.



Noninterest Expense



Noninterest expense was
$1,596,000 or 5.9% higher in 2004, due primarily to the effect of the acquisition of Dover Mortgage Company on April 1, 2003 on this comparison. While the 2003 first quarter did not contain any noninterest expense attributable to Dover, such expense
in the 2004 first quarter amounted to $861,000. While the level of mortgage loan sales activity tends to have an impact on compensation and other expenses related to the mortgage operations, the general level of personnel expense, despite the
reduction in mortgage loan sales activity as discussed in the OverviewSignificant Factors Affecting Earnings in 2004, has been affected in 2004 by increased staffing requirements, by normal salary adjustments and by higher costs of
fringe benefits. The decrease in furniture and equipment expense was due mainly to the reduction in depreciation expense related to furniture and equipment that became fully depreciated in 2003. Other expense has been affected in 2004 by higher
levels of advertising and marketing expenditures and by increased expenses related to credit administration and foreclosed properties.



Noninterest expense was $7,019,000 or 34.9% higher in 2003, due primarily to the acquisitions of Rowan Bank and Dover Mortgage Company on August 1, 2002
and April 1, 2003, respectively, as discussed above, with the Dover acquisition being the most significant factor with regard to the higher level of noninterest expense after the 2003 first quarter. The largest factor resulting in higher noninterest
expense was the generally increased level of personnel expense, which was impacted by increased staffing requirements in addition to what was attributable to the acquisitions of Rowan Bank and Dover, by normal salary adjustments and by higher costs
of fringe benefits. Other expense has been affected commencing in the third quarter of 2002 by expenses related to the new overdraft protection program (see Noninterest Income), such expenses amounting to $312,000 in 2003 and $174,000 in
2002.



Income Taxes



As noted in the OverviewSignificant Factors Affecting Earnings
in 2004, the 2003 results were positively affected by a $173,000 reduction in income tax expense for the change in the valuation allowance for state deferred income tax assets as a result of managements judgment that these assets would
be realized in future periods. Exclusive of the change in the valuation allowance for state deferred income tax assets, the



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##### Table of Contents

effective income tax rate decreased from 29.0% in 2003 to 26.0% in 2004 due principally to a decrease in the ratio of taxable to tax-exempt income. The
effective income tax rate decreased from 29.8% in 2002 to 29.0% in 2003 due principally to a decrease in the ratio of taxable to tax-exempt income.



Liquidity



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



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



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



Contractual Obligations



Under existing contractual obligations, the Corporation will be required to make payments in future periods. Table 3 presents aggregated information about the payments due under such contractual obligations at December 31, 2004. Transaction
deposit accounts with indeterminate maturities have been classified as having payments due in one year or less.



Table 3

Contractual Obligations



|                                           |  |                                             |         |                  |   |                   |  |               |        |       |   |        |  |   |        
|------------------------------------------ |  | ------------------------------------------- | ------- | ---------------- | - | ----------------- |  | ------------- | ------ | ----- | - | ------ |  | - | -------
|                                           |  | Payments Due by Period at December 31, 2004
|                                           |  | OneYear orLess                              |         | One toThreeYears |   | Three toFiveYears |  | OverFiveYears |        | Total
|                                           |  | (dollars in thousands)                     
|Deposits                                   |  | $                                           | 556,889 |                  | $ | 90,972            |  | $             | 11,608 |       | $ | 75     |  | $ | 659,544
|Retail repurchase agreements               |  |                                             | 13,818  |                  |   |                  |  |               |       |       |   |       |  |   | 13,818 
|Federal Home Loan Bank advances            |  |                                             | 3,072   |                  |   | 2,048             |  |               | 8,918  |       |   | 55,050 |  |   | 69,088 
|Federal funds purchased                    |  |                                             | 8,175   |                  |   |                  |  |               |       |       |   |       |  |   | 8,175  
|Other borrowed funds                       |  |                                             | 12,496  |                  |   | 3,662             |  |               | 3,662  |       |   | 2,746  |  |   | 22,566 
|Lease obligations                          |  |                                             | 223     |                  |   | 217               |  |               | 162    |       |   | 1,170  |  |   | 1,772  
|Pension plan contribution expected in 2005 |  |                                             |        |                  |   |                  |  |               |       |       |   |       |  |   |       
|                                           |  |                                             |         |                  |   |                   |  |               |        |       |   |        |  |   |        
|Total contractual cash obligations         |  | $                                           | 594,673 |                  | $ | 96,899            |  | $             | 24,350 |       | $ | 59,041 |  | $ | 774,963
|                                           |  |                                             |         |                  |   |                   |  |               |        |       |   |        |  |   |        



16



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##### Table of Contents

Commitments, Contingencies and Off-Balance Sheet Risk



In the normal course of business, various commitments are outstanding that
are not reflected in the consolidated financial statements. Significant commitments at December 31, 2004 are discussed below.



Commitments by First National Bank to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. At December 31, 2004, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $167,502,000. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Since many commitments expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each
customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower.



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



For the twelve months ended
December 31, 2004, the interest rate swap resulted in a net reduction of $85,000 in the interest expense that would otherwise have been reported for the FHLB advance. The fair value of the swap at December 31, 2004 was recorded on the consolidated
balance sheet as a liability in the amount of $131,000, offset by a valuation adjustment in the same amount to the FHLB advance.



First National Bank issues standby letters of credit whereby it guarantees the performance of a customer to a third party if a specified triggering event
or condition occurs. The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee. All standby letters of credit provide for recourse against the customer on whose behalf the letter of
credit was issued, and this recourse may be further secured by a pledge of assets. The maximum potential amount of undiscounted future payments related to standby letters of credit was $6,445,000 at December 31, 2004 and $6,221,000 at December 31,
2003. Due to insignificance, the Corporation has recorded no liability at December 31, 2004 for the current carrying amount of the obligation to perform as a guarantor.



Dover Mortgage Company originates certain residential mortgage loans with the intention of selling these loans. Between the
time that Dover enters into an interest rate lock or a commitment to originate a residential mortgage loan with a potential borrower and the time the closed loan is sold, the Corporation is subject to variability in market prices related to these
commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to deliver loans into a mortgage-backed security.
The commitments to originate residential mortgage loans and the forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their fair value adjustments are recorded through the income
statement in income from mortgage loan sales. The commitments to originate residential mortgage loans totaled $16,382,000 at December 31, 2004. The related forward sales commitments totaled $16,382,000 at December 31, 2004. The fair value of these
commitments was recorded as a net asset of $19,000 at December 31, 2004. Loans held for sale by Dover Mortgage Company totaled $10,919,000 at December 31, 2004. The related forward sales commitments totaled $10,919,000 at December 31, 2004. The fair
value of these commitments was recorded as a net liability of $32,000 at December 31, 2004.



First National Bank had loans held for sale of $729,000 at December 31, 2004. Binding commitments of First National Bank for the origination of mortgage loans intended to be held for sale at December 31, 2004 were not
material.



17



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##### Table of Contents

The Corporation does not have any special purpose entities or other similar forms of off-balance sheet
financing.



Asset/Liability Management and Interest Rate Sensitivity



One of the primary objectives of asset/liability
management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate
sensitivity positions, or gaps; however, this method addresses only the magnitude of timing differences and does not address earnings or market value. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings
projections based on a range of interest rate scenarios in order to more accurately measure interest rate risk.



The Corporations balance sheet was asset-sensitive at December 31, 2004. An asset-sensitive position means that, for cumulative gap measurement
periods of one year or less, there are more assets than liabilities subject to immediate repricing as market rates change. Because immediately rate sensitive assets exceed rate sensitive interest-bearing liabilities, the earnings position could
improve in a rising rate environment and could deteriorate in a declining rate environment, depending on the correlation of rate changes in these two categories. Included in interest-bearing liabilities subject to rate changes within 90 days is a
portion of the interest-bearing demand, savings and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators.



18



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##### Table of Contents

Table 4 presents information about the periods in which the interest-sensitive assets and liabilities at
December 31, 2004 will either mature or be subject to repricing in accordance with market rates, and the resulting interest-sensitivity gaps. This table shows the sensitivity of the balance sheet at one point in time and is not necessarily
indicative of what the sensitivity will be on other dates. As a simplifying assumption concerning repricing behavior, 50% of the interest-bearing demand, savings and money market deposits are assumed to reprice immediately and 50% are assumed to
reprice beyond one year.



Table 4

Interest Rate Sensitivity Analysis



|                                                                     |  |                        |         |   |                |   |         |         |  |   |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------- |  | ---------------------- | ------- | - | -------------- | - | ------- | ------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                     |  | December 31, 2004      |        
|                                                                     |  | Rate Maturity in Days  |         |   | BeyondOne Year |   |         | Total   | 
|                                                                     |  | 1-90                   |         |   | 91-180         |   |         | 181-365 |  |   |        
|                                                                     |  | (dollars in thousands) |        
|Earning Assets                                                       |  |                        |         |   |                |   |         |         |  |   |         |   |  |   |         |   |  |   |         |  
|Loans                                                                |  | $                      | 446,031 |   |                | $ | 19,334  |         |  | $ | 22,450  |   |  | $ | 176,939 |   |  | $ | 664,754 |  
|Investment securities                                                |  |                        | 8,676   |   |                |   | 3,445   |         |  |   |        |   |  |   | 113,022 |   |  |   | 125,143 |  
|Interest-bearing bank balances                                       |  |                        | 1,309   |   |                |   |        |         |  |   |        |   |  |   |        |   |  |   | 1,309   |  
|Federal funds sold                                                   |  |                        | 91      |   |                |   |        |         |  |   |        |   |  |   |        |   |  |   | 91      |  
|                                                                     |  |                        |         |   |                |   |         |         |  |   |         |   |  |   |         |   |  |   |         |  
|Total earning assets                                                 |  |                        | 456,107 |   |                |   | 22,779  |         |  |   | 22,450  |   |  |   | 289,961 |   |  |   | 791,297 |  
|                                                                     |  |                        |         |   |                |   |         |         |  |   |         |   |  |   |         |   |  |   |         |  
|Interest-Bearing Liabilities                                         |  |                        |         |   |                |   |         |         |  |   |         |   |  |   |         |   |  |   |         |  
|Interest-bearing deposits:                                           |  |                        |         |   |                |   |         |         |  |   |         |   |  |   |         |   |  |   |         |  
|Demand deposits                                                      |  |                        | 46,690  |   |                |   |        |         |  |   |        |   |  |   | 46,689  |   |  |   | 93,379  |  
|Savings deposits                                                     |  |                        | 26,583  |   |                |   |        |         |  |   |        |   |  |   | 26,583  |   |  |   | 53,166  |  
|Money market deposits                                                |  |                        | 36,712  |   |                |   |        |         |  |   |        |   |  |   | 36,711  |   |  |   | 73,423  |  
|Time deposits of $100,000 or more                                    |  |                        | 59,845  |   |                |   | 38,473  |         |  |   | 27,537  |   |  |   | 29,423  |   |  |   | 155,278 |  
|Other time deposits                                                  |  |                        | 44,662  |   |                |   | 38,585  |         |  |   | 58,452  |   |  |   | 67,189  |   |  |   | 208,888 |  
|Retail repurchase agreements                                         |  |                        | 13,818  |   |                |   |        |         |  |   |        |   |  |   |        |   |  |   | 13,818  |  
|Federal Home Loan Bank advances                                      |  |                        | 7,381   |   |                |   | 512     |         |  |   | 2,048   |   |  |   | 59,147  |   |  |   | 69,088  |  
|Federal funds purchased                                              |  |                        | 8,175   |   |                |   |        |         |  |   |        |   |  |   |        |   |  |   | 8,175   |  
|Other borrowed funds                                                 |  |                        | 354     |   |                |   | 11,227  |         |  |   | 915     |   |  |   | 10,070  |   |  |   | 22,566  |  
|                                                                     |  |                        |         |   |                |   |         |         |  |   |         |   |  |   |         |   |  |   |         |  
|Total interest-bearing liabilities                                   |  |                        | 244,220 |   |                |   | 88,797  |         |  |   | 88,952  |   |  |   | 275,812 |   |  |   | 697,781 |  
|                                                                     |  |                        |         |   |                |   |         |         |  |   |         |   |  |   |         |   |  |   |         |  
|Interest Sensitivity Gap                                             |  | $                      | 211,887 |   |                | $ | (66,018 | )       |  | $ | (66,502 | ) |  | $ | 14,149  |   |  | $ | 93,516  |  
|                                                                     |  |                        |         |   |                |   |         |         |  |   |         |   |  |   |         |   |  |   |         |  
|Cumulative gap                                                       |  | $                      | 211,887 |   |                | $ | 145,869 |         |  | $ | 79,367  |   |  | $ | 93,516  |   |  | $ | 93,516  |  
|Ratio of interest-sensitive assets to interest-sensitive liabilities |  |                        | 187     | % |                |   | 26      | %       |  |   | 25      | % |  |   | 105     | % |  |   | 113     | %



Market Risk



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



The Corporations market risk arises primarily from interest rate
risk inherent in its lending and deposit-taking activities. The structure of the Corporations loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. The
Corporation does not maintain a trading account nor is the Corporation subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Corporations asset/liability management function, which is
discussed in Asset/Liability Management and Interest Rate Sensitivity above. The use of an interest rate swap in conjunction with asset/liability management objectives is discussed in Commitments, Contingencies and Off-Balance
Sheet Risk above.



19



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##### Table of Contents

Table 5 presents information about the contractual maturities, average interest rates and estimated fair
values of financial instruments considered market risk sensitive at December 31, 2004.



Table 5

Market Risk Analysis of Financial Instruments



|                                 |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|-------------------------------- |  | ------------------------------------------- | ------- | ---- | - | ------- |  | ---- | ------ | ---- | - | ---------------- |  | ----- | ------- | ----------------------- | - | ------- | ------------------- | - | ------- |  | ---- | - |  | - | -------
|                                 |  | Contractual Maturities at December 31, 2004 |         |      |   |         | 
|                                 |  | 2005                                        |         | 2006 |   | 2007    |  | 2008 |        | 2009 |   | BeyondFive Years |  | Total |         | AverageInterestRate (1) |   |         | EstimatedFair Value
|                                 |  | (dollars in thousands)                     
|Financial Assets                 |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Debt Securities (2):             |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Fixed rate                       |  | $                                           | 6,261   |      | $ | 12,038  |  | $    | 7,815  |      | $ | 13,355           |  | $     | 9,011   |                         | $ | 68,087  |                     | $ | 116,567 |  | 4.90 | % |  | $ | 117,643
|Variable rate                    |  |                                             |        |      |   |        |  |      |       |      |   | 1,000            |  |       |        |                         |   | 132     |                     |   | 1,132   |  | 1.86 | % |  |   | 1,134  
|Loans (3):                       |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Fixed rate                       |  |                                             | 53,640  |      |   | 29,548  |  |      | 27,624 |      |   | 25,882           |  |       | 32,206  |                         |   | 33,125  |                     |   | 202,025 |  | 6.96 |   |  |   | 202,887
|Variable rate                    |  |                                             | 163,516 |      |   | 66,061  |  |      | 56,660 |      |   | 50,954           |  |       | 71,396  |                         |   | 54,142  |                     |   | 462,729 |  | 5.76 |   |  |   | 462,973
|Interest-bearing bank balances   |  |                                             |        |      |   |        |  |      |       |      |   |                 |  |       |        |                         |   |        |                     |   | 1,309   |  | 2.10 |   |  |   | 1,309  
|Federal funds sold               |  |                                             |        |      |   |        |  |      |       |      |   |                 |  |       |        |                         |   |        |                     |   | 91      |  | 2.24 |   |  |   | 91     
|                                 |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Total                            |  | $                                           | 223,417 |      | $ | 107,647 |  | $    | 92,099 |      | $ | 91,191           |  | $     | 112,613 |                         | $ | 155,486 |                     | $ | 783,853 |  | 5.93 |   |  | $ | 786,037
|                                 |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Financial Liabilities            |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Interest-bearing demand deposits |  | $                                           |        |      | $ |        |  | $    |       |      | $ |                 |  | $     |        |                         | $ |        |                     | $ | 93,379  |  | .49  |   |  | $ | 93,379 
|Savings deposits                 |  |                                             |        |      |   |        |  |      |       |      |   |                 |  |       |        |                         |   |        |                     |   | 53,166  |  | .25  |   |  |   | 53,166 
|Money market deposits            |  |                                             |        |      |   |        |  |      |       |      |   |                 |  |       |        |                         |   |        |                     |   | 73,423  |  | 1.60 |   |  |   | 73,423 
|Time deposits:                   |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Fixed rate                       |  |                                             | 260,266 |      |   | 62,549  |  |      | 26,196 |      |   | 6,116            |  |       | 5,276   |                         |   | 75      |                     |   | 360,478 |  | 2.68 |   |  |   | 365,878
|Variable rate                    |  |                                             | 1,245   |      |   | 1,808   |  |      | 419    |      |   | 216              |  |       |        |                         |   |        |                     |   | 3,688   |  | 2.98 |   |  |   | 3,688  
|Retail repurchase agreements     |  |                                             |        |      |   |        |  |      |       |      |   |                 |  |       |        |                         |   |        |                     |   | 13,818  |  | 1.90 |   |  |   | 13,818 
|Federal Home Loan Bank advances: |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Fixed Rate                       |  |                                             | 3,072   |      |   | 1,536   |  |      | 512    |      |   |                 |  |       | 2,049   |                         |   | 55,050  |                     |   | 62,219  |  | 3.87 |   |  |   | 64,314 
|Variable Rate                    |  |                                             |        |      |   |        |  |      |       |      |   |                 |  |       | 6,869   |                         |   |        |                     |   | 6,869   |  | 3.73 |   |  |   | 6,869  
|Federal funds purchased          |  |                                             |        |      |   |        |  |      |       |      |   |                 |  |       |        |                         |   |        |                     |   | 8,175   |  | 2.57 |   |  |   | 8,175  
|Other borrowed funds             |  |                                             | 12,496  |      |   | 1,831   |  |      | 1,831  |      |   | 1,831            |  |       | 1,831   |                         |   | 2,746   |                     |   | 22,566  |  | 4.05 |   |  |   | 22,566 
|                                 |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Total                            |  | $                                           | 277,079 |      | $ | 67,724  |  | $    | 28,958 |      | $ | 8,163            |  | $     | 16,025  |                         | $ | 57,871  |                     | $ | 697,781 |  | 2.23 |   |  | $ | 705,276
|                                 |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        

---

|(1) |  | The average interest rate related to debt securities is stated on a fully taxable equivalent basis, assuming a 34% federal income tax rate and applicable state income tax rate,
reduced by the nondeductible portion of interest expense.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Debt securities are reported on the basis of amortized cost. Mortgage-backed securities which have monthly curtailments of principal are categorized by final maturity.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Nonaccrual loans are included in the balance of loans. The allowance for loan losses is excluded.
|--- |  | -------------------------------------------------------------------------------------------------



20



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##### Table of Contents

Capital Adequacy



Under guidelines established by the Board of Governors of the Federal Reserve System, capital adequacy is currently measured for regulatory purposes by
certain risk-based capital ratios, supplemented by a leverage capital ratio. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier 1, Tier 2 and Tier 3, as a percentage of risk-weighted
assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various off-balance sheet exposures. Tier 1 capital consists primarily of common shareholders equity and qualifying
perpetual preferred stock, net of goodwill and other disallowed intangible assets. Tier 2 capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible debt, preferred stock and the
allowance for loan losses. Tier 3 capital, applicable only to financial institutions subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institutions ongoing trading
activities. At December 31, 2004, FNB Corp. and First National Bank were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1,
Tier 2 and Tier 3 capital. Under current requirements, the minimum total capital ratio is 8.00% and the minimum Tier 1 capital ratio is 4.00%. At December 31, 2004, FNB Corp. and First National Bank had total capital ratios of 10.08% and 11.24%,
respectively, and Tier 1 capital ratios of 9.05% and 10.21%.



The leverage capital ratio, which serves as a minimum capital standard, considers Tier 1 capital only and is expressed as a percentage of average total assets for the most recent quarter, after reduction of those assets for goodwill and
other disallowed intangible assets at the measurement date. As currently required, the minimum leverage capital ratio is 4.00%. At December 31, 2004, FNB Corp. and First National Bank had leverage capital ratios of 7.73% and 8.80%, respectively.



First National Bank is also required to comply with prompt
corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. To be categorized as well-capitalized, a bank must have a minimum ratio for total capital of 10.00%, for Tier 1 capital of 6.00% and for leverage
capital of 5.00%. As noted above, First National Bank met all of those ratio requirements at December 31, 2004 and, accordingly, is well-capitalized under the regulatory framework for prompt corrective action.



Balance Sheet Review



Asset growth in 2004 related to internal factors, unlike both 2003 and 2002 when growth largely reflected an acquisition
through merger in each year. As discussed in the Overview, Dover Mortgage Company was acquired on April 1, 2003 and Rowan Bank on August 1, 2002. Total assets increased $89,646,000 or 11.6% in 2004, $18,875,000 or 2.5% in 2003 and
$160,628,000 or 27.1% in 2002. Deposits grew $61,619,000 or 10.3%, $5,571,000 or 0.9% and $112,124,000 or 23.3%, respectively, in the same periods. The level of total assets was also affected in 2004 by net additional advances of $15,785,000 from
the Federal Home Loan Bank that were obtained primarily to help fund loan growth. The average asset growth rates were 4.7% in 2004 and 20.2% in 2003. The corresponding average deposit growth rates were 5.0% and 12.9%.



Investment Securities



Investments are carried on the consolidated balance sheet at estimated fair value for available-for-sale securities and at
amortized cost for held-to-maturity securities. Table 6 presents information, on the basis of selected maturities, about the composition of the investment securities portfolio for each of the last three years.



21



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##### Table of Contents

Table 6

Investment Securities Portfolio Analysis



|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|------------------------------------------ |  | ---------------------- | ------ | ------------------- | ---- | --------------------------- | ---- | ---- | ------------- |  | ------------- | ------ |  | - | -------
|                                           |  | December 31           
|                                           |  | 2004                   |        |                     | 2003 |                             | 2002
|                                           |  | AmortizedCost          |        | EstimatedFair Value |      | TaxableEquivalent Yield (1) |      |      | CarryingValue |  | CarryingValue
|                                           |  | (dollars in thousands)
|Available for Sale                         |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|U.S. Government agencies and corporations: |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Within one year                            |  | $                      | 1,250  |                     | $    | 1,262                       |      | 6.73 | %             |  | $             | 1,029  |  | $ | 518    
|One to five years                          |  |                        | 13,175 |                     |      | 13,078                      |      | 3.34 |               |  |               | 5,340  |  |   | 6,466  
|Five to ten years                          |  |                        | 15,368 |                     |      | 15,583                      |      | 5.04 |               |  |               | 28,207 |  |   | 59,225 
|Over ten years                             |  |                        | 1,998  |                     |      | 2,002                       |      | 5.92 |               |  |               | 8,105  |  |   | 27,555 
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Total                                      |  |                        | 31,791 |                     |      | 31,925                      |      | 4.45 |               |  |               | 42,681 |  |   | 93,764 
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Mortgage-backed securities                 |  |                        | 8,364  |                     |      | 8,392                       |      | 4.80 |               |  |               | 5,545  |  |   | 1,039  
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|State, county and municipal:               |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Within one year                            |  |                        | 859    |                     |      | 866                         |      | 7.81 |               |  |               | 533    |  |   | 1,312  
|One to five years                          |  |                        | 3,896  |                     |      | 4,038                       |      | 7.92 |               |  |               | 4,219  |  |   | 4,563  
|Five to ten years                          |  |                        | 9,841  |                     |      | 10,292                      |      | 7.55 |               |  |               | 9,737  |  |   | 10,912 
|Over ten years                             |  |                        | 6,448  |                     |      | 6,793                       |      | 7.12 |               |  |               | 8,842  |  |   | 9,417  
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Total                                      |  |                        | 21,044 |                     |      | 21,989                      |      | 7.51 |               |  |               | 23,331 |  |   | 26,204 
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Other debt securities:                     |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Within one year                            |  |                        |       |                     |      |                            |      |     |               |  |               |       |  |   | 507    
|One to five years                          |  |                        | 3,041  |                     |      | 3,138                       |      | 4.01 |               |  |               | 3,148  |  |   |       
|Five to ten years                          |  |                        |       |                     |      |                            |      |     |               |  |               |       |  |   | 1,150  
|Over ten years                             |  |                        | 2,079  |                     |      | 2,657                       |      | 9.88 |               |  |               | 2,562  |  |   | 2,304  
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Total                                      |  |                        | 5,120  |                     |      | 5,795                       |      | 6.39 |               |  |               | 5,710  |  |   | 3,961  
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Total debt securities                      |  |                        | 66,319 |                     |      | 68,101                      |      | 5.62 |               |  |               | 77,267 |  |   | 124,968
|Equity securities                          |  |                        | 5,640  |                     |      | 5,662                       |      |      |               |  |               | 3,291  |  |   | 4,168  
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Total available-for-sale securities        |  | $                      | 71,959 |                     | $    | 73,763                      |      |      |               |  | $             | 80,558 |  | $ | 129,136
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Held to Maturity                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|U.S. Government agencies and corporations: |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Within one year                            |  | $                      | 2,001  |                     | $    | 1,999                       |      | 1.85 |               |  | $             | 4,055  |  | $ |       
|One to five years                          |  |                        | 13,912 |                     |      | 13,733                      |      | 3.06 |               |  |               | 14,558 |  |   | 7,000  
|Five to ten years                          |  |                        | 7,000  |                     |      | 6,825                       |      | 4.17 |               |  |               | 15,063 |  |   | 13,996 
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Total                                      |  |                        | 22,913 |                     |      | 22,557                      |      | 3.30 |               |  |               | 33,676 |  |   | 20,996 
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Mortgage-backed securities                 |  |                        | 1,270  |                     |      | 1,268                       |      | 4.49 |               |  |               | 501    |  |   |       
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|State, county and municipal:               |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Within one year                            |  |                        | 2,151  |                     |      | 2,144                       |      | 1.74 |               |  |               | 2,197  |  |   |       
|One to five years                          |  |                        | 8,078  |                     |      | 7,987                       |      | 3.00 |               |  |               | 8,574  |  |   |       
|Five to ten years                          |  |                        | 7,307  |                     |      | 7,201                       |      | 4.99 |               |  |               | 6,927  |  |   | 483    
|Over ten years                             |  |                        | 7,661  |                     |      | 7,538                       |      | 6.12 |               |  |               | 9,826  |  |   | 3,242  
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Total                                      |  |                        | 25,197 |                     |      | 24,870                      |      | 4.43 |               |  |               | 27,524 |  |   | 3,725  
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Other debt securities:                     |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Within one year                            |  |                        |       |                     |      |                            |      |     |               |  |               |       |  |   |       
|One to five years                          |  |                        | 1,000  |                     |      | 990                         |      | 2.30 |               |  |               | 1,000  |  |   |       
|Five to ten years                          |  |                        | 1,000  |                     |      | 991                         |      | 4.70 |               |  |               | 1,000  |  |   |       
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Total                                      |  |                        | 2,000  |                     |      | 1,981                       |      | 3.50 |               |  |               | 2,000  |  |   |       
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        
|Total held-to-maturity securities          |  | $                      | 51,380 |                     | $    | 50,676                      |      | 3.89 |               |  | $             | 63,701 |  | $ | 24,721 
|                                           |  |                        |        |                     |      |                             |      |      |               |  |               |        |  |   |        

---

|(1) |  | Yields are stated on a fully taxable equivalent basis, assuming a 34% federal income tax rate and applicable state income tax rate, reduced by the nondeductible portion of interest
expense.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Additions to the investment securities portfolio depend to a large extent on the availability of
investable funds that are not otherwise needed to satisfy loan demand. In both 2004 and 2003, when the growth in loans significantly exceeded that for total assets, there was a net decrease in the level of investment securities, amounting to
$19,116,000 or 13.3% and $9,598,000 or 6.2%, respectively. Investable funds not otherwise utilized are temporarily invested on an overnight basis as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by
such considerations as near-term loan demand and liquidity needs. In 2003, the level of funds temporarily invested as federal funds sold or as interest-bearing balances at other banks, which was higher than normal at December 31, 2002 due to
proceeds from investment maturities and calls being held in a liquid status, was significantly reduced to supply part of the funding for loan growth. In 2004, there was a further reduction of interest-bearing bank balances for loan growth purposes.



Loans



The Corporations primary source of revenue and largest component of earning assets is the loan portfolio. In 2004,
loans increased $112,841,000 or 20.4% due entirely to internal loan generation. In 2003, loans increased $49,571,000 or 9.9% due largely to internal loan generation, although augmented by the acquisition of Dover Mortgage Company on April 1, 2003 as
discussed in the Overview. Average loans increased $62,983,000 or 11.5% in 2004 and $117,181,000 or 27.1% in 2003. The ratio of average loans to average deposits increased from 92.4% in 2003 to 98.0% in 2004. The ratio of loans to
deposits at December 31, 2004 was 100.8%.



Table 7 sets forth
the major categories of loans for each of the last five years. The maturity distribution and interest rate sensitivity of selected loan categories at December 31, 2004 are presented in Table 8.



Table 7

Loan Portfolio Composition



|                            |  |                        |         |      |       |        |   |         |  |        |  |   |         |        |       |   |   |         |  |       |  |   |         |  |      
|--------------------------- |  | ---------------------- | ------- | ---- | ----- | ------ | - | ------- |  | ------ |  | - | ------- | ------ | ----- | - | - | ------- |  | ----- |  | - | ------- |  | -----
|                            |  | December 31           
|                            |  | 2004                   |         | 2003 |       | 2002   |   | 2001    |  | 2000  
|                            |  | Amount                 |         | %    |       | Amount |   | %       |  | Amount |  | % |         | Amount |       | % |   | Amount  |  | %    
|                            |  | (dollars in thousands)
|Commercial and agricultural |  | $                      | 196,846 |      | 30.1  |        | $ | 215,036 |  | 39.6   |  | $ | 198,085 |        | 39.6  |   | $ | 177,577 |  | 46.9  |  | $ | 160,057 |  | 41.5 
|Real estateconstruction    |  |                        | 83,433  |      | 12.8  |        |   | 36,357  |  | 6.7    |  |   | 29,553  |        | 5.9   |   |   | 11,249  |  | 3.0   |  |   | 5,734   |  | 1.5  
|Real estatemortgage:       |  |                        |         |      |       |        |   |         |  |        |  |   |         |        |       |   |   |         |  |       |  |   |         |  |      
|1-4 family residential      |  |                        | 197,855 |      | 30.3  |        |   | 184,881 |  | 34.0   |  |   | 188,764 |        | 37.8  |   |   | 146,347 |  | 38.6  |  |   | 165,057 |  | 42.8 
|Commercial and other        |  |                        | 154,024 |      | 23.6  |        |   | 86,734  |  | 15.9   |  |   | 59,760  |        | 12.0  |   |   | 15,269  |  | 4.0   |  |   | 16,050  |  | 4.2  
|Consumer                    |  |                        | 20,899  |      | 3.2   |        |   | 19,973  |  | 3.7    |  |   | 21,550  |        | 4.3   |   |   | 20,978  |  | 5.5   |  |   | 25,290  |  | 6.5  
|Leases                      |  |                        | 49      |      |      |        |   | 365     |  | .1     |  |   | 1,843   |        | .4    |   |   | 7,376   |  | 2.0   |  |   | 13,679  |  | 3.5  
|                            |  |                        |         |      |       |        |   |         |  |        |  |   |         |        |       |   |   |         |  |       |  |   |         |  |      
|Loans held for investment   |  |                        | 653,106 |      | 100.0 |        |   | 543,346 |  | 100.0  |  |   | 499,555 |        | 100.0 |   |   | 378,796 |  | 100.0 |  |   | 385,867 |  | 100.0
|                            |  |                        |         |      |       |        |   |         |  |        |  |   |         |        |       |   |   |         |  |       |  |   |         |  |      
|Loans held for sale         |  |                        | 11,648  |      |       |        |   | 8,567   |  |        |  |   | 2,787   |        |       |   |   | 12,836  |  |       |  |   | 9,870   |  |      
|                            |  |                        |         |      |       |        |   |         |  |        |  |   |         |        |       |   |   |         |  |       |  |   |         |  |      
|Gross loans                 |  | $                      | 664,754 |      |       |        | $ | 551,913 |  |        |  | $ | 502,342 |        |       |   | $ | 391,632 |  |       |  | $ | 395,737 |  |      
|                            |  |                        |         |      |       |        |   |         |  |        |  |   |         |        |       |   |   |         |  |       |  |   |         |  |      



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##### Table of Contents

Table 8

Selected
Loan Maturities



|                             |  |                   |         |                  |   |                |  |       |        |  |   |        
|---------------------------- |  | ----------------- | ------- | ---------------- | - | -------------- |  | ----- | ------ |  | - | -------
|                             |  | December 31, 2004
|                             |  | One Yearor Less   |         | One toFive Years |   | Over FiveYears |  | Total
|                             |  | (in thousands)   
|Commercial and agricultural  |  | $                 | 65,703  |                  | $ | 120,624        |  | $     | 10,519 |  | $ | 196,846
|Real estateconstruction     |  |                   | 47,547  |                  |   | 25,424         |  |       | 10,462 |  |   | 83,433 
|                             |  |                   |         |                  |   |                |  |       |        |  |   |        
|Total selected loans         |  | $                 | 113,250 |                  | $ | 146,048        |  | $     | 20,981 |  | $ | 280,279
|                             |  |                   |         |                  |   |                |  |       |        |  |   |        
|Sensitivity to rate changes: |  |                   |         |                  |   |                |  |       |        |  |   |        
|Fixed interest rates         |  | $                 | 17,001  |                  | $ | 34,352         |  | $     | 4,159  |  | $ | 55,512 
|Variable interest rates      |  |                   | 96,249  |                  |   | 111,696        |  |       | 16,822 |  |   | 224,767
|                             |  |                   |         |                  |   |                |  |       |        |  |   |        
|Total                        |  | $                 | 113,250 |                  | $ | 146,048        |  | $     | 20,981 |  | $ | 280,279
|                             |  |                   |         |                  |   |                |  |       |        |  |   |        



In both 2004 and 2003,
loans grew significantly, following an extended period in which the level of the entire loan portfolio had been adversely impacted by the general slowdown of the economy. In particular, the portfolios related to construction loans and commercial and
other real estate loans experienced significant gains in each year. Following a gain in 2003, the commercial and agricultural loan portfolio declined in 2004. Exclusive of the initial impact of the acquisition of Dover Mortgage Company on April 1,
2003 and Rowan Bank on August 1, 2002, as discussed in the Overview, the balance of the 1-4 family residential mortgage loan portfolio has been affected by the high level of refinancing activity that commenced in 2001 and extended
through approximately the end of 2003, especially since many refinanced loans that were previously included in the held for investment category were sold as part of the refinancing process, and was also affected, as discussed in the
OverviewSignificant Items Affecting Earnings in 2004, by the direct sale in the 2004 first quarter of certain loans previously classified as held for investment. The level of the 1-4 family residential mortgage portfolio has been
bolstered by steady growth, especially in 2004 and 2003, in loan balances resulting from home equity lines of credit.



Asset Quality



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



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



24



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##### Table of Contents

At December 31, 2004, the Corporation did not have any loans considered impaired. At December 31, 2003,
the Corporation had impaired loans which totaled $1,963,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $1,133,000.



The adequacy of the allowance for loan losses is measured on a quarterly basis against an allocation model that assigns
reserves to various components of the loan portfolio in order to provide for probable inherent losses. Homogeneous pools of loans are segregated, and classifications of individual loans within certain of these pools are identified using risk grades
derived from regulatory risk guidelines and additional internal parameters. Utilizing the trailing two-year historical loss experience of First National Bank and the assessment of portfolio quality and diversification trends and economic factors, a
range of appropriate reserves is calculated for each classification and pool of loans. Allocated to each pool is a reserve amount within the calculated range, as supported by the historical loss ratios. Additional reserves are estimated and assigned
to the most adversely classified loans based upon an individual analysis of present-value repayment and/or liquidation projections of each loan. A portion of the total reserve may be unallocated to any specific segment of the loan portfolio, but
will not exceed the upper limit of the total calculated reserve range when aggregated with allocated portions. The determination within the allowance model of allocated and unallocated components is not necessarily indicative of future losses or
allocations. The entire balance of the allowance for loan losses is available to absorb losses in any segment of the loan portfolio.



Earnings were negatively impacted in 2004 by a $2,170,000 increase in the provision for loan losses, largely as a result of the $2,780,000 provision
recorded in the 2004 second quarter which exceeded the 2003 second quarter provision by $1,950,000. Actual loan charge-offs in the 2004 second quarter amounted to $2,574,000. The determination of the second quarter provision for loan losses took
into account the actual charge-offs, the significant growth in loans held for investment during the second quarter, and the level of nonperforming loans, which increased to $7,026,000 at June 30, 2004 compared to $5,725,000 at March 31, 2004.
Nonperforming loans amounted to $5,227,000 at December 31, 2004.



The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.12% at December 31, 2004, 1.14% at December 31, 2003 and 1.22% at December 31, 2002. The allowance percentage has decreased due to charge-offs of
impaired loans which were specifically reserved and a general improvement in economic conditions.



Management believes the allowance for loan losses of $7,293,000 at December 31, 2004 is adequate to cover probable losses in the loan portfolio; however,
assessing the adequacy of the allowance is a process that requires considerable judgment.



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



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##### Table of Contents

Table 9 presents an analysis of the changes in the allowance for loan losses and of the level of
nonperforming assets for each of the last five years. Information about managements allocation of the allowance for loan losses by loan category is presented in Table 10.



Table 9

Allowance for Loan Losses
and Nonperforming Assets



|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|------------------------------------------------------ |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                       |  | 2004                   |       |   | 2003 |   |       | 2002 |  |   | 2001  |   |  | 2000 |      
|                                                       |  | (dollars in thousands) |      
|Allowance for Loan Losses                              |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Balance at beginning of year                           |  | $                      | 6,172 |   |      | $ | 6,109 |      |  | $ | 4,417 |   |  | $    | 4,352 |   |  | $ | 3,289 |  
|Charge-offs:                                           |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial and agricultural                            |  |                        | 2,007 |   |      |   | 1,165 |      |  |   | 502   |   |  |      | 152   |   |  |   | 603   |  
|Real estateconstruction                               |  |                        |      |   |      |   | 133   |      |  |   |      |   |  |      |      |   |  |   |      |  
|Real estatemortgage                                   |  |                        | 943   |   |      |   | 244   |      |  |   | 101   |   |  |      | 10    |   |  |   | 21    |  
|Consumer                                               |  |                        | 211   |   |      |   | 332   |      |  |   | 538   |   |  |      | 395   |   |  |   | 277   |  
|Leases                                                 |  |                        | 106   |   |      |   | 26    |      |  |   | 243   |   |  |      | 702   |   |  |   | 12    |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total charge-offs                                      |  |                        | 3,267 |   |      |   | 1,900 |      |  |   | 1,384 |   |  |      | 1,259 |   |  |   | 913   |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Recoveries:                                            |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial and agricultural                            |  |                        | 158   |   |      |   | 14    |      |  |   | 116   |   |  |      | 63    |   |  |   | 117   |  
|Real estateconstruction                               |  |                        | 1     |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Real estatemortgage                                   |  |                        | 36    |   |      |   |      |      |  |   | 1     |   |  |      | 8     |   |  |   | 6     |  
|Consumer                                               |  |                        | 94    |   |      |   | 85    |      |  |   | 76    |   |  |      | 96    |   |  |   | 130   |  
|Leases                                                 |  |                        | 114   |   |      |   | 4     |      |  |   | 64    |   |  |      |      |   |  |   |      |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total recoveries                                       |  |                        | 403   |   |      |   | 103   |      |  |   | 257   |   |  |      | 167   |   |  |   | 253   |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Net loan charge-offs                                   |  |                        | 2,864 |   |      |   | 1,797 |      |  |   | 1,127 |   |  |      | 1,092 |   |  |   | 660   |  
|Provision for loan losses (1)                          |  |                        | 4,030 |   |      |   | 1,860 |      |  |   | 1,780 |   |  |      | 1,200 |   |  |   | 1,802 |  
|Purchase accounting acquisition                        |  |                        |      |   |      |   |      |      |  |   | 1,039 |   |  |      |      |   |  |   |      |  
|Allowance adjustment for loans sold                    |  |                        | (45   | ) |      |   |      |      |  |   |      |   |  |      | (43   | ) |  |   | (79   | )
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Balance at end of year                                 |  | $                      | 7,293 |   |      | $ | 6,172 |      |  | $ | 6,109 |   |  | $    | 4,417 |   |  | $ | 4,352 |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonperforming Assets, at end of year                   |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonaccrual loans                                       |  | $                      | 3,952 |   |      | $ | 5,235 |      |  | $ | 4,944 |   |  | $    | 4,144 |   |  | $ | 1,478 |  
|Accruing loans past due 90 days or more                |  |                        | 1,275 |   |      |   | 758   |      |  |   | 1,268 |   |  |      | 609   |   |  |   | 367   |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total nonperforming loans                              |  |                        | 5,227 |   |      |   | 5,993 |      |  |   | 6,212 |   |  |      | 4,753 |   |  |   | 1,845 |  
|Foreclosed assets                                      |  |                        | 77    |   |      |   | 65    |      |  |   | 61    |   |  |      | 123   |   |  |   | 33    |  
|Other real estate owned                                |  |                        | 543   |   |      |   | 1,008 |      |  |   | 414   |   |  |      | 758   |   |  |   | 163   |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total nonperforming assets                             |  | $                      | 5,847 |   |      | $ | 7,066 |      |  | $ | 6,687 |   |  | $    | 5,634 |   |  | $ | 2,041 |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Ratios                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Net loan charge-offs to average loans                  |  |                        | .47   | % |      |   | .33   | %    |  |   | .26   | % |  |      | .28   | % |  |   | .17   | %
|Net loan charge-offs to allowance for loan losses      |  |                        | 39.27 |   |      |   | 29.12 |      |  |   | 18.45 |   |  |      | 24.72 |   |  |   | 15.17 |  
|Allowance for loan losses to loans held for investment |  |                        | 1.12  |   |      |   | 1.14  |      |  |   | 1.22  |   |  |      | 1.17  |   |  |   | 1.13  |  
|Total nonperforming loans to loans held for investment |  |                        | .80   |   |      |   | 1.10  |      |  |   | 1.24  |   |  |      | 1.25  |   |  |   | .48   |  

---

|(1) |  | Approximately $450,000 of the total provision for loan losses in 2000 was merger related.
|--- |  | -----------------------------------------------------------------------------------------



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Table 10

Allocation of Allowance For Loan Losses



|                                |  |                |       |      |   |       |  |      |       |      |   |       |  |   |      
|------------------------------- |  | -------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                |  | December 31   
|                                |  | 2004           |       | 2003 |   | 2002  |  | 2001 |       | 2000
|                                |  | (in thousands)
|Commercial and agricultural     |  | $              | 2,953 |      | $ | 3,440 |  | $    | 2,939 |      | $ | 1,590 |  | $ | 1,714
|Real estateconstruction        |  |                | 1,015 |      |   | 118   |  |      | 128   |      |   | 15    |  |   | 21   
|Real estatemortgage            |  |                | 2,401 |      |   | 1,395 |  |      | 1,539 |      |   | 776   |  |   | 982  
|Consumer                        |  |                | 592   |      |   | 756   |  |      | 911   |      |   | 934   |  |   | 1,076
|Leases                          |  |                |      |      |   | 21    |  |      | 194   |      |   | 734   |  |   | 201  
|Unallocated                     |  |                | 332   |      |   | 442   |  |      | 398   |      |   | 368   |  |   | 358  
|                                |  |                |       |      |   |       |  |      |       |      |   |       |  |   |      
|Total allowance for loan losses |  | $              | 7,293 |      | $ | 6,172 |  | $    | 6,109 |      | $ | 4,417 |  | $ | 4,352
|                                |  |                |       |      |   |       |  |      |       |      |   |       |  |   |      



Deposits



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



The level and mix of deposits has been specifically affected by the following factors. Following an extended period in which balances had decreased due to
interest rate declines, time deposits increased $52,758,000 in 2004 due in part to higher rates but also reflecting the acquisition of brokered time deposits and the increase in time deposits obtained from governmental units, these latter deposits
amounting to $67,260,000, $49,605,000 and $42,323,000 at December 31, 2004, 2003 and 2002, respectively. Noninterest-bearing demand deposits and interest-bearing transactional deposits, including demand, savings and money market deposits, also grew
in 2004, increasing $4,739,000 and $4,122,000, respectively. In 2003, reflecting new deposit products and extensive promotion efforts, noninterest-bearing demand deposits grew the most of any component of deposits, increasing $12,365,000.
Interest-bearing transactional deposits also increased significantly in 2003, up $8,575,000. Time deposits decreased $15,369,000 in 2003 due to the continuing effect of interest rate declines.



27



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##### Table of Contents

Table 11 shows the year-end and average deposit balances for the years 2004, 2003 and 2002 and the
changes in 2004 and 2003.



Table 11

Analysis of Deposits



|                                     |  |                        |         |                       |      |        |         |      |                       |        |  |         |         |  |   |         |   |  |      |   |  |   |        
|------------------------------------ |  | ---------------------- | ------- | --------------------- | ---- | ------ | ------- | ---- | --------------------- | ------ |  | ------- | ------- |  | - | ------- | - |  | ---- | - |  | - | -------
|                                     |  | 2004                   |         |                       | 2003 |        |         | 2002
|                                     |  | Balance                |         | Change fromPrior Year |      |        | Balance |      | Change fromPrior Year |        |  | Balance
|                                     |  |                        | Amount  |                       |      | %      |         |      |                       | Amount |  |         | %       |  |  
|                                     |  | (dollars in thousands)
|Year-End Balances                    |  |                        |         |                       |      |        |         |      |                       |        |  |         |         |  |   |         |   |  |      |   |  |   |        
|Interest-bearing deposits:           |  |                        |         |                       |      |        |         |      |                       |        |  |         |         |  |   |         |   |  |      |   |  |   |        
|Demand deposits                      |  | $                      | 93,379  |                       | $    | 4,089  |         |      | 4.6                   |        |  | $       | 89,290  |  | $ | 3,814   |   |  | 4.5  |   |  | $ | 85,476 
|Savings deposits                     |  |                        | 53,166  |                       |      | 732    |         |      | 1.4                   |        |  |         | 52,434  |  |   | 2,778   |   |  | 5.6  |   |  |   | 49,656 
|Money market deposits                |  |                        | 73,423  |                       |      | (699   | )       |      | (.9                   | )      |  |         | 74,122  |  |   | 1,983   |   |  | 2.7  |   |  |   | 72,139 
|                                     |  |                        |         |                       |      |        |         |      |                       |        |  |         |         |  |   |         |   |  |      |   |  |   |        
|Total                                |  |                        | 219,968 |                       |      | 4,122  |         |      | 1.9                   |        |  |         | 215,846 |  |   | 8,575   |   |  | 4.1  |   |  |   | 207,271
|Certificates and other time deposits |  |                        | 364,166 |                       |      | 52,758 |         |      | 16.9                  |        |  |         | 311,408 |  |   | (15,369 | ) |  | (4.7 | ) |  |   | 326,777
|                                     |  |                        |         |                       |      |        |         |      |                       |        |  |         |         |  |   |         |   |  |      |   |  |   |        
|Total interest-bearing deposits      |  |                        | 584,134 |                       |      | 56,880 |         |      | 10.8                  |        |  |         | 527,254 |  |   | (6,794  | ) |  | (1.3 | ) |  |   | 534,048
|Noninterest-bearing demand deposits  |  |                        | 75,410  |                       |      | 4,739  |         |      | 6.7                   |        |  |         | 70,671  |  |   | 12,365  |   |  | 21.2 |   |  |   | 58,306 
|                                     |  |                        |         |                       |      |        |         |      |                       |        |  |         |         |  |   |         |   |  |      |   |  |   |        
|Total deposits                       |  | $                      | 659,544 |                       | $    | 61,619 |         |      | 10.3                  |        |  | $       | 597,925 |  | $ | 5,571   |   |  | .9   |   |  | $ | 592,354
|                                     |  |                        |         |                       |      |        |         |      |                       |        |  |         |         |  |   |         |   |  |      |   |  |   |        
|Average Balances                     |  |                        |         |                       |      |        |         |      |                       |        |  |         |         |  |   |         |   |  |      |   |  |   |        
|Interest-bearing deposits:           |  |                        |         |                       |      |        |         |      |                       |        |  |         |         |  |   |         |   |  |      |   |  |   |        
|Demand deposits                      |  | $                      | 89,827  |                       | $    | 4,788  |         |      | 5.6                   |        |  | $       | 85,039  |  | $ | 17,230  |   |  | 25.4 |   |  | $ | 67,809 
|Savings deposits                     |  |                        | 54,298  |                       |      | 2,712  |         |      | 5.3                   |        |  |         | 51,586  |  |   | 10,370  |   |  | 25.2 |   |  |   | 41,216 
|Money market deposits                |  |                        | 75,824  |                       |      | 943    |         |      | 1.3                   |        |  |         | 74,881  |  |   | 15,658  |   |  | 26.4 |   |  |   | 59,223 
|                                     |  |                        |         |                       |      |        |         |      |                       |        |  |         |         |  |   |         |   |  |      |   |  |   |        
|Total                                |  |                        | 219,949 |                       |      | 8,443  |         |      | 4.0                   |        |  |         | 211,506 |  |   | 43,258  |   |  | 25.7 |   |  |   | 168,248
|Certificates and other time deposits |  |                        | 329,812 |                       |      | 10,231 |         |      | 3.2                   |        |  |         | 319,581 |  |   | 15,434  |   |  | 5.1  |   |  |   | 304,147
|                                     |  |                        |         |                       |      |        |         |      |                       |        |  |         |         |  |   |         |   |  |      |   |  |   |        
|Total interest-bearing deposits      |  |                        | 549,761 |                       |      | 18,674 |         |      | 3.5                   |        |  |         | 531,087 |  |   | 58,692  |   |  | 12.4 |   |  |   | 472,395
|Noninterest-bearing demand deposits  |  |                        | 74,741  |                       |      | 11,133 |         |      | 17.5                  |        |  |         | 63,608  |  |   | 9,137   |   |  | 16.8 |   |  |   | 54,471 
|                                     |  |                        |         |                       |      |        |         |      |                       |        |  |         |         |  |   |         |   |  |      |   |  |   |        
|Total deposits                       |  | $                      | 624,502 |                       | $    | 29,807 |         |      | 5.0                   |        |  | $       | 594,695 |  | $ | 67,829  |   |  | 12.9 |   |  | $ | 526,866
|                                     |  |                        |         |                       |      |        |         |      |                       |        |  |         |         |  |   |         |   |  |      |   |  |   |        



Business Development Matters



As discussed in the Overview and in Note 2 to
the Consolidated Financial Statements, the Corporation completed a merger on August 1, 2002 for the acquisition of Rowan Bancorp, Inc., holding company for Rowan Savings Bank SSB, Inc. (Rowan Bank), headquartered in China Grove, North
Carolina, in a transaction accounted for using the purchase method of accounting for business combinations. Effective November 30, 2004, Rowan Bank was merged into First National Bank.



As also discussed in the Overview and in Note 2 to the Consolidated Financial Statements, the Corporation
completed a merger on April 1, 2003 for the acquisition of Dover Mortgage Company, headquartered in Charlotte, North Carolina, in a transaction accounted for using the purchase method of accounting for business combinations.



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



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



In November 2004, First National Bank received regulatory approval for the
establishment of a second branch office in Greensboro, North Carolina. Construction of this full-service banking office is expected to be completed in 2005.



In 2004, Dover Mortgage Company opened new mortgage production offices in North Carolina at Carolina Beach in April and at Leland in November. Through
representatives, Dover has commenced operations in Kiawah Island, South Carolina in January 2005 and in Asheville, North Carolina in March 2005.



Accounting Pronouncement Matters



In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 03-3, Accounting for Loans or
Certain Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investors initial investment in loans or
debt securities acquired in a transfer if those differences relate to a deterioration of credit quality. SOP 03-3 also prohibits companies from carrying over or creating a valuation allowance in the initial accounting for loans acquired
that meet the scope criteria of SOP 03-3. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 is not expected to have a material impact on the Corporations financial position or
results of operations.



In December 2004, the FASB issued
Statement of Financial Accounting Standards No. 123 (R), Accounting for Stock-Based Compensation (SFAS No. 123 (R)). SFAS No. 123 (R) establishes standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123 (R) requires that the fair value of such equity
instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123 (R), only certain pro forma disclosures of fair value were required. The provisions of this Statement are effective
for the first interim reporting period that begins after June 15, 2005. Accordingly, the Corporation will adopt SFAS No. 123 (R) commencing with the quarter ending September 30, 2005. If the pro forma cost of employee stock option compensation as
disclosed in Note 1 below had been included in the Corporations current consolidated financial statements, net income for the fiscal years ended December 31, 2004, 2003 and 2002 would have decreased by approximately $340,000, $340,000, and
$362,000, respectively. Accordingly, the adoption of SFAS No. 123 (R) is expected to have a material effect on the Corporations consolidated financial statements.



Effects of Inflation



The operations of First National Bank and Dover Mortgage Company and, therefore, of the Corporation are subject to the effects of inflation through
interest rate fluctuations and changes in the general price level of noninterest operating expenses. Such costs as salaries, fringe benefits and utilities have tended to increase at a rate comparable to or even greater than the general rate of
inflation. Broadly speaking, all operating expenses have risen to higher levels as inflationary pressures have increased. Management has responded to this situation by evaluating and adjusting fees charged for specific services and by emphasizing
operating efficiencies.



The level of interest rates is also
considered to be influenced by inflation, rising whenever inflationary expectations and the actual level of inflation increase and declining whenever the inflationary outlook appears to be improving. Management constantly monitors this situation,
attempting to adjust both rates received on earning assets and rates paid on interest-bearing liabilities in order to maintain the desired net yield on earning assets.



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Additionally, the level of activity in the origination of 1-4 family residential mortgage loans which
directly affects the amount of income from mortgage loan sales, the principal source of revenue for Dover and an important source for First National Bank, is significantly affected by the level of interest rates, increasing as rates decline and
decreasing as rates rise. In periods of rising rates, which do not generally benefit from the activity that results from the refinancing of residential mortgage loans, management attempts to increase the volume of originations resulting from
traditional purchase mortgage transactions.



Non-GAAP Measures



This Annual Report on Form 10-K contains financial
information determined by methods other than in accordance with generally accepted accounting principles (GAAP). The Corporations management uses these non-GAAP measures in their analysis of the Corporations performance.
These non-GAAP measures exclude average goodwill from the calculations of return on average assets and return on average equity. Management believes presentations of financial measures excluding the impact of goodwill provide useful supplemental
information that is essential to a proper understanding of the operating results of the Corporations core businesses. These disclosures should not be viewed as a substitute for results determined in accordance with GAAP, nor are they
necessarily comparable to non-GAAP performance measures that may be presented by other companies.



Cautionary Statement for Purpose of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995



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



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Table 12

Quarterly Financial Data (Unaudited)



|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|--------------------------------------------------- |  | ------------------------------------- | ------ | ------ | - | ------ | ----- |  | ------ | ------ |  | - | ------
|                                                    |  | First                                 |        | Second |   |        | Third |  | Fourth
|                                                    |  | (in thousands, except per share data)
|2004                                                |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Interest income                                     |  | $                                     | 9,377  |        | $ | 9,679  |       |  | $      | 10,307 |  | $ | 11,073
|Interest expense                                    |  |                                       | 2,850  |        |   | 2,968  |       |  |        | 3,098  |  |   | 3,486 
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Net interest income                                 |  |                                       | 6,527  |        |   | 6,711  |       |  |        | 7,209  |  |   | 7,587 
|Provision for loan losses                           |  |                                       | 270    |        |   | 2,780  |       |  |        | 460    |  |   | 520   
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Net interest income after provision for loan losses |  |                                       | 6,257  |        |   | 3,931  |       |  |        | 6,749  |  |   | 7,067 
|Noninterest income                                  |  |                                       | 3,600  |        |   | 2,934  |       |  |        | 3,652  |  |   | 3,487 
|Noninterest expense                                 |  |                                       | 7,097  |        |   | 7,054  |       |  |        | 7,084  |  |   | 7,520 
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Income (loss) before income taxes                   |  |                                       | 2,760  |        |   | (189   | )     |  |        | 3,317  |  |   | 3,034 
|Income taxes (benefit)                              |  |                                       | 808    |        |   | (305   | )     |  |        | 1,033  |  |   | 788   
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Net income                                          |  | $                                     | 1,952  |        | $ | 116    |       |  | $      | 2,284  |  | $ | 2,246 
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Per share data:                                     |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Net income:                                         |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Basic                                               |  | $                                     | .34    |        | $ | .02    |       |  | $      | .41    |  | $ | .40   
|Diluted                                             |  |                                       | .33    |        |   | .02    |       |  |        | .40    |  |   | .39   
|Cash dividends declared                             |  |                                       | .15    |        |   | .15    |       |  |        | .15    |  |   | .15   
|Common stock price (1):                             |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|High                                                |  |                                       | 22.90  |        |   | 22.50  |       |  |        | 19.60  |  |   | 21.19 
|Low                                                 |  |                                       | 20.00  |        |   | 16.60  |       |  |        | 16.30  |  |   | 17.23 
|                                                    |  |                                       |        |       
|2003                                                |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Interest income                                     |  | $                                     | 10,173 |        | $ | 10,016 |       |  | $      | 9,707  |  | $ | 9,526 
|Interest expense                                    |  |                                       | 3,421  |        |   | 3,542  |       |  |        | 3,221  |  |   | 2,960 
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Net interest income                                 |  |                                       | 6,752  |        |   | 6,474  |       |  |        | 6,486  |  |   | 6,566 
|Provision for loan losses                           |  |                                       | 250    |        |   | 830    |       |  |        | 455    |  |   | 325   
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Net interest income after provision for loan losses |  |                                       | 6,502  |        |   | 5,644  |       |  |        | 6,031  |  |   | 6,241 
|Noninterest income                                  |  |                                       | 2,763  |        |   | 5,758  |       |  |        | 2,557  |  |   | 3,258 
|Noninterest expense                                 |  |                                       | 6,013  |        |   | 7,441  |       |  |        | 6,895  |  |   | 6,810 
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Income before income taxes                          |  |                                       | 3,252  |        |   | 3,961  |       |  |        | 1,693  |  |   | 2,689 
|Income taxes                                        |  |                                       | 990    |        |   | 1,281  |       |  |        | 160    |  |   | 764   
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Net income                                          |  | $                                     | 2,262  |        | $ | 2,680  |       |  | $      | 1,533  |  | $ | 1,925 
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Per share data:                                     |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Net income:                                         |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Basic                                               |  | $                                     | .42    |        | $ | .48    |       |  | $      | .27    |  | $ | .34   
|Diluted                                             |  |                                       | .40    |        |   | .45    |       |  |        | .26    |  |   | .33   
|Cash dividends declared                             |  |                                       | .14    |        |   | .14    |       |  |        | .14    |  |   | .17   
|Common stock price (1):                             |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|High                                                |  |                                       | 26.20  |        |   | 32.05  |       |  |        | 29.50  |  |   | 26.25 
|Low                                                 |  |                                       | 19.10  |        |   | 22.41  |       |  |        | 24.03  |  |   | 21.18 

---

|(1) |  | FNB Corp. common stock is traded on the Nasdaq National Market under the symbol FNBN. At December 31, 2004, there were 1,807 shareholders of record.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



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Table 13

Issuer
Purchase of Equity Securities



|                                     |  |                                |  |                             |       |                                                                             |        |                                                                           |        
|------------------------------------ |  | ------------------------------ |  | --------------------------- | ----- | --------------------------------------------------------------------------- | ------ | ------------------------------------------------------------------------- | -------
|                                     |  | Total Numberof SharesPurchased |  | Average PricePaid per Share |       | Total Numberof SharesPurchased asPart of PubliclyAnnounced Plansor Programs |        | Maximum Numberof Shares ThatMay Yet BePurchased Underthe Plans orPrograms
|Three Months Ended December 31, 2004 |  |                                |  |                             |       |                                                                             |        |                                                                           |        
|October 1 to October 31              |  | 2,700                          |  | $                           | 18.55 |                                                                             | 2,700  |                                                                           | 275,900
|November 1 to November 30            |  | 23,300                         |  |                             | 20.04 |                                                                             | 23,300 |                                                                           | 252,600
|December 1 to December 31            |  | 6,000                          |  |                             | 19.94 |                                                                             | 6,000  |                                                                           | 246,600
|                                     |  |                                |  |                             |       |                                                                             |        |                                                                           |        
|Total                                |  | 32,000                         |  |                             | 19.89 |                                                                             | 32,000 |                                                                           | 246,600
|                                     |  |                                |  |                             |       |                                                                             |        |                                                                           |        



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



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LOGO



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM



TO THE
BOARD OF DIRECTORS AND SHAREHOLDERS

FNB CORP.

Asheboro, North Carolina



We have audited the accompanying consolidated balance sheet of FNB Corp. and subsidiaries (the Corporation) as of December 31, 2004 and the
related consolidated statements of income, shareholders equity and comprehensive income and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Corporations management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for
our opinion.



In our opinion, the 2004 consolidated financial
statements referred to above present fairly, in all material respects, the financial position of FNB Corp. and subsidiaries as of December 31, 2004, and the results of their operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.



LOGO



Sanford, North
Carolina

February 25, 2005



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors

FNB Corp.



We have audited the accompanying consolidated balance sheets of FNB Corp. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of income, shareholders equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Corporations
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of FNB Corp. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.



LOGO



Greenville, South Carolina

March 12, 2004



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FNB CORP. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



|                                                                                                                          |  |                                               |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                          |  | December 31                                   |        
|                                                                                                                          |  | 2004                                          |         |   | 2003 |  
|                                                                                                                          |  | (in thousands, except shareand per share data |        
|Assets                                                                                                                    |  |                                               |         |   |      |   |         |  
|Cash and due from banks                                                                                                   |  | $                                             | 19,109  |   |      | $ | 17,164  |  
|Interest-bearing bank balances                                                                                            |  |                                               | 1,309   |   |      |   | 8,641   |  
|Federal funds sold                                                                                                        |  |                                               | 91      |   |      |   | 1,319   |  
|Investment securities:                                                                                                    |  |                                               |         |   |      |   |         |  
|Available for sale, at estimated fair value (amortized cost of $71,959 in 2004 and $77,971 in 2003)                       |  |                                               | 73,763  |   |      |   | 80,558  |  
|Held to maturity (estimated fair value of $50,676 in 2004 and $63,000 in 2003)                                            |  |                                               | 51,380  |   |      |   | 63,701  |  
|Loans:                                                                                                                    |  |                                               |         |   |      |   |         |  
|Loans held for sale                                                                                                       |  |                                               | 11,648  |   |      |   | 8,567   |  
|Loans held for investment                                                                                                 |  |                                               | 653,106 |   |      |   | 543,346 |  
|Less allowance for loan losses                                                                                            |  |                                               | (7,293  | ) |      |   | (6,172  | )
|                                                                                                                          |  |                                               |         |   |      |   |         |  
|Net loans                                                                                                                 |  |                                               | 657,461 |   |      |   | 545,741 |  
|                                                                                                                          |  |                                               |         |   |      |   |         |  
|Premises and equipment, net                                                                                               |  |                                               | 17,114  |   |      |   | 15,009  |  
|Goodwill                                                                                                                  |  |                                               | 16,335  |   |      |   | 16,325  |  
|Other assets                                                                                                              |  |                                               | 26,329  |   |      |   | 24,787  |  
|                                                                                                                          |  |                                               |         |   |      |   |         |  
|Total Assets                                                                                                              |  | $                                             | 862,891 |   |      | $ | 773,245 |  
|                                                                                                                          |  |                                               |         |   |      |   |         |  
|Liabilities and Shareholders Equity                                                                                      |  |                                               |         |   |      |   |         |  
|Deposits:                                                                                                                 |  |                                               |         |   |      |   |         |  
|Noninterest-bearing demand deposits                                                                                       |  | $                                             | 75,410  |   |      | $ | 70,671  |  
|Interest-bearing deposits:                                                                                                |  |                                               |         |   |      |   |         |  
|Demand, savings and money market deposits                                                                                 |  |                                               | 219,968 |   |      |   | 215,846 |  
|Time deposits of $100,000 or more                                                                                         |  |                                               | 155,278 |   |      |   | 118,199 |  
|Other time deposits                                                                                                       |  |                                               | 208,888 |   |      |   | 193,209 |  
|                                                                                                                          |  |                                               |         |   |      |   |         |  
|Total deposits                                                                                                            |  |                                               | 659,544 |   |      |   | 597,925 |  
|Retail repurchase agreements                                                                                              |  |                                               | 13,818  |   |      |   | 14,816  |  
|Federal Home Loan Bank advances                                                                                           |  |                                               | 69,088  |   |      |   | 53,303  |  
|Federal funds purchased                                                                                                   |  |                                               | 8,175   |   |      |   | 625     |  
|Other borrowed funds                                                                                                      |  |                                               | 22,566  |   |      |   | 17,977  |  
|Other liabilities                                                                                                         |  |                                               | 7,553   |   |      |   | 7,141   |  
|                                                                                                                          |  |                                               |         |   |      |   |         |  
|Total Liabilities                                                                                                         |  |                                               | 780,744 |   |      |   | 691,787 |  
|                                                                                                                          |  |                                               |         |   |      |   |         |  
|Shareholders equity:                                                                                                     |  |                                               |         |   |      |   |         |  
|Preferred stock, $10.00 par value; authorized 200,000 shares, none issued                                                 |  |                                               |        |   |      |   |        |  
|Common stock, $2.50 par value; authorized 10,000,000 shares, issued 5,605,102 shares in 2004 and 5,686,899 shares in 2003 |  |                                               | 14,013  |   |      |   | 14,217  |  
|Surplus                                                                                                                   |  |                                               | 10,643  |   |      |   | 12,478  |  
|Retained earnings                                                                                                         |  |                                               | 56,383  |   |      |   | 53,174  |  
|Accumulated other comprehensive income                                                                                    |  |                                               | 1,108   |   |      |   | 1,589   |  
|                                                                                                                          |  |                                               |         |   |      |   |         |  
|Total Shareholders Equity                                                                                                |  |                                               | 82,147  |   |      |   | 81,458  |  
|                                                                                                                          |  |                                               |         |   |      |   |         |  
|Total Liabilities and Shareholders Equity                                                                                |  | $                                             | 862,891 |   |      | $ | 773,245 |  
|                                                                                                                          |  |                                               |         |   |      |   |         |  



Commitments (Note 17)



See accompanying notes to consolidated financial statements.



35



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FNB CORP. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME



|                                                    |  |                                                |           |      |   |           |  |   |           |  
|--------------------------------------------------- |  | ---------------------------------------------- | --------- | ---- | - | --------- |  | - | --------- | -
|                                                    |  | Years Ended December 31                        |          
|                                                    |  | 2004                                           |           | 2003 |   | 2002      | 
|                                                    |  | (in thousands, except shareand per share data) |          
|Interest Income                                     |  |                                                |           |      |   |           |  |   |           |  
|Interest and fees on loans                          |  | $                                              | 35,184    |      | $ | 33,194    |  | $ | 29,658    |  
|Interest and dividends on investment securities:    |  |                                                |           |      |   |           |  |   |           |  
|Taxable income                                      |  |                                                | 3,369     |      |   | 5,061     |  |   | 8,368     |  
|Non-taxable income                                  |  |                                                | 1,727     |      |   | 1,629     |  |   | 1,189     |  
|Other interest income                               |  |                                                | 156       |      |   | 274       |  |   | 237       |  
|                                                    |  |                                                |           |      |   |           |  |   |           |  
|Total interest income                               |  |                                                | 40,436    |      |   | 40,158    |  |   | 39,452    |  
|                                                    |  |                                                |           |      |   |           |  |   |           |  
|Interest Expense                                    |  |                                                |           |      |   |           |  |   |           |  
|Deposits                                            |  |                                                | 8,974     |      |   | 9,600     |  |   | 11,909    |  
|Retail repurchase agreements                        |  |                                                | 158       |      |   | 160       |  |   | 259       |  
|Federal Home Loan Bank advances                     |  |                                                | 2,546     |      |   | 2,321     |  |   | 1,784     |  
|Federal funds purchased                             |  |                                                | 71        |      |   | 7         |  |   | 10        |  
|Other borrowed funds                                |  |                                                | 653       |      |   | 1,056     |  |   | 152       |  
|                                                    |  |                                                |           |      |   |           |  |   |           |  
|Total interest expense                              |  |                                                | 12,402    |      |   | 13,144    |  |   | 14,114    |  
|                                                    |  |                                                |           |      |   |           |  |   |           |  
|Net Interest Income                                 |  |                                                | 28,034    |      |   | 27,014    |  |   | 25,338    |  
|Provision for loan losses                           |  |                                                | 4,030     |      |   | 1,860     |  |   | 1,780     |  
|                                                    |  |                                                |           |      |   |           |  |   |           |  
|Net Interest Income After Provision for Loan Losses |  |                                                | 24,004    |      |   | 25,154    |  |   | 23,558    |  
|                                                    |  |                                                |           |      |   |           |  |   |           |  
|Noninterest Income                                  |  |                                                |           |      |   |           |  |   |           |  
|Mortgage loan sales                                 |  |                                                | 4,032     |      |   | 4,890     |  |   | 1,631     |  
|Service charges on deposit accounts                 |  |                                                | 5,419     |      |   | 4,949     |  |   | 3,740     |  
|Trust and investment services                       |  |                                                | 1,535     |      |   | 1,415     |  |   | 725       |  
|Cardholder and merchant services income             |  |                                                | 1,078     |      |   | 870       |  |   | 740       |  
|Other service charges, commissions and fees         |  |                                                | 843       |      |   | 644       |  |   | 914       |  
|Bank owned life insurance                           |  |                                                | 617       |      |   | 638       |  |   | 617       |  
|Other income (charge)                               |  |                                                | 149       |      |   | 194       |  |   | (99       | )
|                                                    |  |                                                |           |      |   |           |  |   |           |  
|Total noninterest income                            |  |                                                | 13,673    |      |   | 13,600    |  |   | 8,268     |  
|                                                    |  |                                                |           |      |   |           |  |   |           |  
|Noninterest Expense                                 |  |                                                |           |      |   |           |  |   |           |  
|Personnel expense                                   |  |                                                | 16,755    |      |   | 15,804    |  |   | 11,488    |  
|Occupancy expense                                   |  |                                                | 1,566     |      |   | 1,415     |  |   | 1,050     |  
|Furniture and equipment expense                     |  |                                                | 1,943     |      |   | 2,122     |  |   | 1,660     |  
|Data processing services                            |  |                                                | 1,331     |      |   | 1,267     |  |   | 1,003     |  
|Other expense                                       |  |                                                | 7,160     |      |   | 6,551     |  |   | 4,939     |  
|                                                    |  |                                                |           |      |   |           |  |   |           |  
|Total noninterest expense                           |  |                                                | 28,755    |      |   | 27,159    |  |   | 20,140    |  
|                                                    |  |                                                |           |      |   |           |  |   |           |  
|Income Before Income Taxes                          |  |                                                | 8,922     |      |   | 11,595    |  |   | 11,686    |  
|Income taxes                                        |  |                                                | 2,324     |      |   | 3,195     |  |   | 3,486     |  
|                                                    |  |                                                |           |      |   |           |  |   |           |  
|Net Income                                          |  | $                                              | 6,598     |      | $ | 8,400     |  | $ | 8,200     |  
|                                                    |  |                                                |           |      |   |           |  |   |           |  
|Net income per common share:                        |  |                                                |           |      |   |           |  |   |           |  
|Basic                                               |  | $                                              | 1.17      |      | $ | 1.50      |  | $ | 1.63      |  
|Diluted                                             |  | $                                              | 1.13      |      | $ | 1.43      |  | $ | 1.58      |  
|Weighted average number of shares outstanding:      |  |                                                |           |      |   |           |  |   |           |  
|Basic                                               |  |                                                | 5,663,173 |      |   | 5,607,681 |  |   | 5,022,397 |  
|Diluted                                             |  |                                                | 5,822,047 |      |   | 5,880,026 |  |   | 5,195,872 |  



See accompanying notes
to consolidated financial statements.



36



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME



|                                                                   |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------------ |  | ----------------------------------------------- | - |  | ------- | ------ | - | ---------------- | - | ------ | ------------------------------------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                   |  | Common Stock                                    |   |  | Surplus |        |   | RetainedEarnings |   |        | Accumulated Other ComprehensiveIncome |  |   | Total  |  
|                                                                   |  | Shares                                          |   |  | Amount  |        |   |                  |   |       
|                                                                   |  | (in thousands, except share and per share data) |  
|Balance, December 31, 2001                                         |  | 4,763,261                                       |   |  | $       | 11,908 |   |                  | $ |       |                                       |  | $ | 43,032 |   |  | $ | 967    |   |  | $ | 55,907 |  
|Comprehensive income:                                              |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Net income                                                         |  |                                                |   |  |         |       |   |                  |   |       |                                       |  |   | 8,200  |   |  |   |       |   |  |   | 8,200  |  
|Other comprehensive income:                                        |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Unrealized securities gains, net of income taxes of $857           |  |                                                |   |  |         |       |   |                  |   |       |                                       |  |   |       |   |  |   | 1,663  |   |  |   | 1,663  |  
|                                                                   |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Total comprehensive income                                         |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   | 9,863  |  
|                                                                   |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Cash dividends declared, $.58 per share                            |  |                                                |   |  |         |       |   |                  |   |       |                                       |  |   | (2,956 | ) |  |   |       |   |  |   | (2,956 | )
|Common stock issued through:                                       |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Stock option plan                                                  |  | 108,754                                         |   |  |         | 272    |   |                  |   | 365    |                                       |  |   |       |   |  |   |       |   |  |   | 637    |  
|Merger acquisition of subsidiary company                           |  | 603,859                                         |   |  |         | 1,510  |   |                  |   | 7,584  |                                       |  |   |       |   |  |   |       |   |  |   | 9,094  |  
|Other merger consideration for fair value of stock options assumed |  |                                                |   |  |         |       |   |                  |   | 1,531  |                                       |  |   |       |   |  |   |       |   |  |   | 1,531  |  
|Common stock repurchased                                           |  | (59,143                                         | ) |  |         | (148   | ) |                  |   | (657   | )                                     |  |   | (181   | ) |  |   |       |   |  |   | (986   | )
|                                                                   |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Balance, December 31, 2002                                         |  | 5,416,731                                       |   |  |         | 13,542 |   |                  |   | 8,823  |                                       |  |   | 48,095 |   |  |   | 2,630  |   |  |   | 73,090 |  
|Comprehensive income:                                              |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Net income                                                         |  |                                                |   |  |         |       |   |                  |   |       |                                       |  |   | 8,400  |   |  |   |       |   |  |   | 8,400  |  
|Other comprehensive income:                                        |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Unrealized securities losses, net of income tax benefit of $357    |  |                                                |   |  |         |       |   |                  |   |       |                                       |  |   |       |   |  |   | (1,041 | ) |  |   | (1,041 | )
|                                                                   |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Total comprehensive income                                         |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   | 7,359  |  
|                                                                   |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Cash dividends declared, $.59 per share                            |  |                                                |   |  |         |       |   |                  |   |       |                                       |  |   | (3,321 | ) |  |   |       |   |  |   | (3,321 | )
|Common stock issued through:                                       |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Stock option plan                                                  |  | 153,583                                         |   |  |         | 384    |   |                  |   | 1,485  |                                       |  |   |       |   |  |   |       |   |  |   | 1,869  |  
|Merger acquisition of subsidiary company                           |  | 126,140                                         |   |  |         | 315    |   |                  |   | 2,344  |                                       |  |   |       |   |  |   |       |   |  |   | 2,659  |  
|Common stock reacquired through:                                   |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Exchange related to issuance of option stock                       |  | (9,492                                          | ) |  |         | (24    | ) |                  |   | (172   | )                                     |  |   |       |   |  |   |       |   |  |   | (196   | )
|Other                                                              |  | (63                                             | ) |  |         |       |   |                  |   | (2     | )                                     |  |   |       |   |  |   |       |   |  |   | (2     | )
|                                                                   |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Balance, December 31, 2003                                         |  | 5,686,899                                       |   |  |         | 14,217 |   |                  |   | 12,478 |                                       |  |   | 53,174 |   |  |   | 1,589  |   |  |   | 81,458 |  
|Comprehensive income:                                              |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Net income                                                         |  |                                                |   |  |         |       |   |                  |   |       |                                       |  |   | 6,598  |   |  |   |       |   |  |   | 6,598  |  
|Other comprehensive income:                                        |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Unrealized securities losses, net of income tax benefit of $302    |  |                                                |   |  |         |       |   |                  |   |       |                                       |  |   |       |   |  |   | (481   | ) |  |   | (481   | )
|                                                                   |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Total comprehensive income                                         |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   | 6,117  |  
|                                                                   |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Cash dividends declared, $.60 per share                            |  |                                                |   |  |         |       |   |                  |   |       |                                       |  |   | (3,389 | ) |  |   |       |   |  |   | (3,389 | )
|Common stock issued through                                        |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|stock option plan                                                  |  | 66,303                                          |   |  |         | 166    |   |                  |   | 625    |                                       |  |   |       |   |  |   |       |   |  |   | 791    |  
|Common stock repurchased                                           |  | (148,100                                        | ) |  |         | (370   | ) |                  |   | (2,460 | )                                     |  |   |       |   |  |   |       |   |  |   | (2,830 | )
|                                                                   |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  
|Balance, December 31, 2004                                         |  | 5,605,102                                       |   |  | $       | 14,013 |   |                  | $ | 10,643 |                                       |  | $ | 56,383 |   |  | $ | 1,108  |   |  | $ | 82,147 |  
|                                                                   |  |                                                 |   |  |         |        |   |                  |   |        |                                       |  |   |        |   |  |   |        |   |  |   |        |  



See accompanying notes
to consolidated financial statements.



37



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                         |          |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                  |  | Years Ended December 31 |         
|                                                                                  |  | 2004                    |          |   | 2003 |   |         | 2002 | 
|                                                                                  |  | (in thousands)          |         
|Operating Activities                                                              |  |                         |          |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $                       | 6,598    |   |      | $ | 8,400   |      |  | $ | 8,200   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |          |   |      |   |         |      |  |   |         |  
|Depreciation and amortization of premises and equipment                           |  |                         | 1,619    |   |      |   | 1,793   |      |  |   | 1,382   |  
|Provision for loan losses                                                         |  |                         | 4,030    |   |      |   | 1,860   |      |  |   | 1,780   |  
|Deferred income taxes                                                             |  |                         | (12      | ) |      |   | (338    | )    |  |   | (192    | )
|Deferred loan fees and costs, net                                                 |  |                         | 229      |   |      |   | (20     | )    |  |   | 12      |  
|Premium amortization and discount accretion of investment securities, net         |  |                         | 591      |   |      |   | 597     |      |  |   | 70      |  
|Amortization of intangibles                                                       |  |                         | 55       |   |      |   | 69      |      |  |   | 30      |  
|Net decrease in loans held for sale                                               |  |                         | 9,453    |   |      |   | 33,813  |      |  |   | 10,049  |  
|Decrease in other assets                                                          |  |                         | 2,151    |   |      |   | 676     |      |  |   | 877     |  
|Increase (decrease) in other liabilities                                          |  |                         | 324      |   |      |   | (2,315  | )    |  |   | (2,302  | )
|                                                                                  |  |                         |          |   |      |   |         |      |  |   |         |  
|Net Cash Provided by Operating Activities                                         |  |                         | 25,038   |   |      |   | 44,535  |      |  |   | 19,906  |  
|                                                                                  |  |                         |          |   |      |   |         |      |  |   |         |  
|Investing Activities                                                              |  |                         |          |   |      |   |         |      |  |   |         |  
|Available-for-sale securities:                                                    |  |                         |          |   |      |   |         |      |  |   |         |  
|Proceeds from sales                                                               |  |                         |         |   |      |   |        |      |  |   | 2,060   |  
|Proceeds from maturities and calls                                                |  |                         | 35,659   |   |      |   | 62 774  |      |  |   | 105,020 |  
|Purchases                                                                         |  |                         | (29,858  | ) |      |   | (16,366 | )    |  |   | (65,682 | )
|Held-to-maturity securities:                                                      |  |                         |          |   |      |   |         |      |  |   |         |  
|Proceeds from maturities and calls                                                |  |                         | 12,812   |   |      |   | 16,003  |      |  |   |        |  
|Purchases                                                                         |  |                         | (871     | ) |      |   | (55,326 | )    |  |   | (24,721 | )
|Net increase in loans held for investment                                         |  |                         | (128,634 | ) |      |   | (47,658 | )    |  |   | (27,341 | )
|Purchases of premises and equipment                                               |  |                         | (3,799   | ) |      |   | (2,671  | )    |  |   | (2,092  | )
|Net cash received (paid) in merger acquisition of subsidiary company              |  |                         |         |   |      |   | (436    | )    |  |   | 6,885   |  
|Purchases of life insurance contracts                                             |  |                         |         |   |      |   | (2,000  | )    |  |   |        |  
|Other, net                                                                        |  |                         | (168     | ) |      |   | 239     |      |  |   | (34     | )
|                                                                                  |  |                         |          |   |      |   |         |      |  |   |         |  
|Net Cash Used in Investing Activities                                             |  |                         | (114,859 | ) |      |   | (45,441 | )    |  |   | (5,905  | )
|                                                                                  |  |                         |          |   |      |   |         |      |  |   |         |  
|Financing Activities                                                              |  |                         |          |   |      |   |         |      |  |   |         |  
|Net increase in deposits                                                          |  |                         | 61,619   |   |      |   | 5,954   |      |  |   | 11,132  |  
|Increase (decrease) in retail repurchase agreements                               |  |                         | (998     | ) |      |   | (2,611  | )    |  |   | 2,081   |  
|Increase in Federal Home Loan Bank advances                                       |  |                         | 16,000   |   |      |   |        |      |  |   | 15,000  |  
|Increase (decrease) in federal funds purchased                                    |  |                         | 7,550    |   |      |   | 625     |      |  |   | (6,000  | )
|Increase (decrease) in other borrowed funds                                       |  |                         | 4,589    |   |      |   | (31,970 | )    |  |   | 11,000  |  
|Common stock issued                                                               |  |                         | 791      |   |      |   | 1,673   |      |  |   | 637     |  
|Common stock repurchased                                                          |  |                         | (2,830   | ) |      |   | (2      | )    |  |   | (986    | )
|Cash dividends paid                                                               |  |                         | (3,515   | ) |      |   | (3,221  | )    |  |   | (2,900  | )
|                                                                                  |  |                         |          |   |      |   |         |      |  |   |         |  
|Net Cash Provided by (Used in) Financing Activities                               |  |                         | 83,206   |   |      |   | (29,552 | )    |  |   | 29,964  |  
|                                                                                  |  |                         |          |   |      |   |         |      |  |   |         |  
|Net Increase (Decrease) in Cash and Cash Equivalents                              |  |                         | (6,615   | ) |      |   | (30,458 | )    |  |   | 43,965  |  
|Cash and Cash Equivalents at Beginning of Year                                    |  |                         | 27,124   |   |      |   | 57,582  |      |  |   | 13,617  |  
|                                                                                  |  |                         |          |   |      |   |         |      |  |   |         |  
|Cash and Cash Equivalents at End of Year                                          |  | $                       | 20,509   |   |      | $ | 27,124  |      |  | $ | 57,582  |  
|                                                                                  |  |                         |          |   |      |   |         |      |  |   |         |  
|Supplemental disclosure of cash flow information:                                 |  |                         |          |   |      |   |         |      |  |   |         |  
|Cash paid during the year for:                                                    |  |                         |          |   |      |   |         |      |  |   |         |  
|Interest                                                                          |  | $                       | 12,344   |   |      | $ | 13,628  |      |  | $ | 15,197  |  
|Income taxes                                                                      |  |                         | 1,172    |   |      |   | 3,680   |      |  |   | 3,733   |  
|Noncash transactions:                                                             |  |                         |          |   |      |   |         |      |  |   |         |  
|Foreclosed loans transferred to other real estate                                 |  |                         | 1,872    |   |      |   | 1,354   |      |  |   | 539     |  
|Cashless exercise of stock options                                                |  |                         |         |   |      |   | 196     |      |  |   |        |  
|Unrealized securities gains (losses), net of income taxes                         |  |                         | (481     | ) |      |   | (1,041  | )    |  |   | 1,663   |  
|Merger acquisition of subsidiary company:                                         |  |                         |          |   |      |   |         |      |  |   |         |  
|Fair value of assets acquired                                                     |  |                         |         |   |      |   | 47,001  |      |  |   | 134,208 |  
|Fair value of common stock issued and stock options assumed                       |  |                         |         |   |      |   | 2,659   |      |  |   | 10,625  |  
|Cash paid                                                                         |  |                         |         |   |      |   | 2,908   |      |  |   | 11,205  |  
|                                                                                  |  |                         |          |   |      |   |         |      |  |   |         |  
|Liabilities assumed                                                               |  |                         |         |   |      |   | 41,434  |      |  |   | 112,378 |  



See accompanying notes
to consolidated financial statements.



38



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Nature of Operations/Consolidation



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



The consolidated financial statements include the accounts of FNB Corp. and its subsidiaries (collectively the Corporation). All significant
intercompany balances and transactions have been eliminated.



The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.



Rowan Savings Bank SSB, Inc. (Rowan Bank) was a
wholly owned subsidiary of FNB Corp. from August 1, 2002 until November 30, 2004, when it was merged into First National Bank. See Note 2 below for additional information concerning the acquisition of Rowan Bank and its former holding Company, Rowan
Bancorp, Inc.



For comparative purposes, certain amounts for
2003 and 2002 have been reclassified to conform with the presentation in 2004. The reclassification had no effect on the Corporations previously reported consolidated financial position or results of operations.



Business Segments



The Corporation reports business segments in accordance with Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131). Business segments are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. SFAS No. 131 requires that a public enterprise report a measure of segment profit or loss, certain specific
revenue and expense items, segment assets, information about the way that the business segments were determined and other items. The Corporation has two reportable business segments, the full-service subsidiary bank, First National Bank, and the
mortgage banking subsidiary, Dover Mortgage Company. Business segment information is disclosed in Note 19.



Recently Adopted Accounting Pronouncements



On March 9, 2004, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to
Loan Commitments (SAB No. 105). SAB No. 105 provides recognition guidance for entities that issue loan commitments that are required to be accounted for as derivative instruments. SAB No. 105 indicates that the expected future cash
flows related to the associated servicing of the



39



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 1SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)



loan and any other internally developed intangible assets should not be considered when recognizing a loan commitment at inception or through its life. SAB No. 105 also discusses disclosure requirements for loan
commitments and is effective for loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004. The Corporation adopted the provisions of SAB No. 105 effective April 1, 2004, resulting in a change in its accounting for
loan commitments issued by Dover Mortgage Company. The application of SAB No. 105 creates a timing difference in the recognition of certain income recorded as income from mortgage loan sales, deferring the recognition from the current accounting
period to a subsequent period. The estimated effect of adoption of SAB No. 105 on the results of operations for the three months ended June 30, 2004 and for the year ended December 31, 2004 was a $356,000 reduction in Dovers income from
mortgage loan sales.



In March 2004, the Emerging Issues Task
Force (EITF) released EITF Issue 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF Issue 03-01). EITF Issue 03-01 provides guidance for determining whether an investment is
other-than-temporarily impaired and requires certain disclosures with respect to these investments. The recognition and measurement guidance for other-than-temporary impairment has been delayed by the issuance of FASB Staff Position EITF 03-1-1 on
September 30, 2004. The Corporation has adopted the disclosure provisions of EITF Issue 03-01. Additionally, although the FASB has delayed the effective date for the recognition and measurement guidance provisions of EITF Issue 03-01, the
Corporation does not believe there was any other-than-temporary impairment of its investments at December 31, 2004 that would have required a charge against income.



Business Combinations



For all business combination transactions initiated after June 30, 2001, the purchase method of accounting has been used, and accordingly, the assets and
liabilities of the acquired company have been recorded at their estimated fair values as of the merger date. The fair values are subject to adjustment as information relative to the fair values as of the acquisition date becomes available. The
Corporation uses an allocation period, not to exceed one year, to identify and quantify the fair value of the assets acquired and liabilities assumed in business combinations accounted for as purchases. The consolidated financial statements include
the results of operations of any acquired company since the acquisition date.



Cash and Cash Equivalents



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



Investment Securities



Investment securities are categorized and accounted for as follows:



| |  |  | Held-to-maturity securitiesDebt securities that the Corporation has the positive intent and ability to hold to maturity are reported at amortized cost.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Trading securitiesDebt and equity securities bought and held principally for the purpose of being sold in the near future are reported at fair value, with unrealized gains and
losses included in earnings.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Available-for-sale securitiesDebt and equity securities not classified as either held-to-maturity securities or trading securities are reported at fair value, with unrealized
gains and losses, net of related tax effect, included as an item of other comprehensive income and reported as a separate component of shareholders equity.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 1SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)



The Corporation intends to hold its securities classified as available-for-sale securities for an indefinite period of time but may sell them prior to maturity. All other securities, which the Corporation has the
positive intent and ability to hold to maturity, are classified as held-to-maturity securities.



A decline, which is deemed to be other than temporary, in the market value of any availableforsale or heldtomaturity security to a
level below cost results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established.



Interest income on debt securities is adjusted using the level yield method for the amortization of premiums and accretion
of discounts. The adjusted cost of the specific security is used to compute gains or losses on the disposition of securities.



Loans



Interest income on loans is generally calculated by using the constant yield method based on the daily outstanding balance. The recognition of interest
income is discontinued when, in management's opinion, the collection of all or a portion of interest becomes doubtful. Loans are returned to accrual status when the factors indicating doubtful collectibility cease to exist and the loan has performed
in accordance with its terms for a demonstrated period of time. The past due status of loans is based on the contractual payment terms.



A loan is considered impaired when, based on current information or events, it is probable that a borrower will be unable to pay all amounts due according
to the contractual terms of the loan agreement. For loans determined to be impaired, the allowance is based on discounted cash flows using the loans initial effective interest rate or the fair value of the collateral for certain collateral
dependent loans. When the ultimate collectibility of the impaired loans principal is doubtful, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are first recorded as
recoveries of any amounts previously charged-off and are then applied to interest income, to the extent that any interest has been foregone.



Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an
adjustment of interest income. The premium or discount on purchased loans is amortized over the expected life of the loans and is included in interest and fees on loans.



Residential mortgage loans held for sale are valued at the lower of cost or market as determined by outstanding commitments
from investors or current investor yield requirements, calculated on the aggregate loan basis.



Allowance for Loan Losses



The allowance for loan losses represents an amount considered adequate to absorb probable loan losses inherent in the portfolio. Management's evaluation of the adequacy of the allowance is based on a review of individual loans, historical
loan loss experience, the value and adequacy of collateral, and economic conditions in First National Banks market area. For loans determined to be impaired, the allowance is based on discounted cash flows using the loans initial
effective interest rate or the fair value of the collateral for certain collateral dependent loans. Losses are charged and recoveries are credited to the allowance for loan losses. This evaluation is inherently subjective as it requires material
estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 1SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)



In addition, various regulatory agencies, as an integral part of their examination process, periodically review First National Banks allowance for loan losses. Such agencies may require First National Bank to
recognize changes to the allowance based on their judgments about information available to them at the time of their examinations.



Other Real Estate



Other real estate, which is included in other assets on the consolidated balance sheet, represents properties acquired through foreclosure or deed in lieu
thereof. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the property is classified as held for sale when the sale is probable and expected to occur
within one year. The property is initially carried at the lower of cost or fair value based on recent appraisals, less estimated costs to sell. Declines in the fair value of properties included in other real estate below carrying value are
recognized by a charge to income.



Premises and Equipment



Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows: buildings and improvements, 10 to 50 years and furniture and equipment, 3 to 10 years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the estimated life of the improvement or the term of the lease.



Intangible Assets



Intangible assets include goodwill and other identifiable assets, such as core deposit premiums, resulting from acquisitions. Core deposit premiums are
amortized over a six-year life using the sum-of-the-years-digits method based upon historical studies of core deposits. Goodwill is not amortized but is tested annually for impairment or at any time an event occurs or circumstances change that may
trigger a decline in the value of the reporting unit. Examples of such events or circumstances include adverse changes in legal factors, business climate, unanticipated competition, change in regulatory environment or loss of key personnel.



The Corporation tests for impairment in accordance with SFAS
No. 142. Potential impairment of goodwill exists when the carrying amount of a reporting unit exceeds its fair value. The fair value of a reporting unit is computed using one or a combination of the following three methods: income, market value or
cost method. The income method uses a discounted cash flow analysis to determine fair value by considering a reporting units capital structure and applying a risk-adjusted discount rate to forecast earnings based on a capital asset pricing
model. The market value method uses recent transaction analysis or publicly traded comparable analysis for similar assets and liabilities to determine fair value. The cost method assumes the net assets of a recent business combination accounted for
under the purchase method of accounting will be recorded at fair value if no event or circumstance has occurred triggering a decline in the value. To the extent a reporting units carrying amount exceeds its fair value, an indication exists
that the reporting units goodwill may be impaired, and a second step of impairment test will be performed. In the second step, the implied fair value of the reporting units goodwill, determined by allocating the reporting units
fair value to all of its assets (recognized and unrecognized) and liabilities as if the reporting unit had been acquired in a business combination at the date of the impairment test. If the implied fair value of reporting unit goodwill is lower than
its carrying amount, goodwill is impaired and is written down to its implied fair value. The loss recognized is limited to the carrying amount of goodwill. Once an impairment loss is recognized, future increases in fair value will not result in the
reversal of previously recognized losses.



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 1SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)



Mortgage Servicing Rights (MSRs)



The rights to service mortgage loans for others are included in other assets on the consolidated balance sheet. MSRs are capitalized based on the allocated cost which is determined when the underlying loans are sold.
MSRs are amortized over the life of the underlying loan as an adjustment of servicing income. Impairment reviews of MSRs are performed on a quarterly basis.



Income Taxes



Income tax expense includes both a current provision based on the amounts computed for income tax return purposes and a deferred provision that results
from application of the asset and liability method of accounting for deferred taxes. Under the asset and liability method, deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and
the tax basis of the Corporation's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.



Earnings Per
Share (EPS)



As required for entities with complex capital
structures, a dual presentation of basic and diluted EPS is included on the face of the income statement, and a reconciliation is provided in a footnote of the numerator and denominator of the basic EPS computation to the numerator and denominator
of the diluted EPS computation.



Comprehensive Income



Comprehensive income is defined as the change in equity
of an enterprise during a period from transactions and other events and circumstances from nonowner sources and, accordingly, includes both net income and amounts referred to as other comprehensive income. The items of other comprehensive income are
included in the consolidated statement of shareholders equity and comprehensive income. The accumulated balance of other comprehensive income is included in the shareholders equity section of the consolidated balance sheet. The
Corporations sole component of accumulated other comprehensive income is unrealized gains (losses) on investment securities classified as available-for-sale.



Employee Benefit Plans



The Corporation has a defined benefit pension plan covering substantially all full-time employees. Pension costs, which are actuarially determined using
the projected unit credit method, are charged to current operations. Annual funding contributions are made up to the maximum amounts allowable for Federal income tax purposes.



The Corporation has a noncontributory, nonqualified supplemental executive retirement plan (the SERP) covering
certain executive employees. Annual benefits payable under the SERP are based on factors similar to those for the pension plan, with offsets related to amounts payable under the pension plan and social security benefits. SERP costs, which are
actuarially determined using the projected unit credit method and recorded on an unfunded basis, are charged to current operations and credited to a liability account on the consolidated balance sheet.



Medical and life insurance benefits are provided by the Corporation on a
postretirement basis under defined benefit plans covering substantially all full-time employees. Postretirement benefit costs, which are actuarially



43



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 1SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)



determined using the attribution method and recorded on an unfunded basis, are charged to current operations and credited to a liability account on the consolidated balance sheet.



Stock Options



The Corporation accounts for awards under employee stock-based compensation
plans using the intrinsic value method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees and, accordingly, no compensation cost has been recognized for such awards in the consolidated financial statements.
The pro forma effect on net income and earnings per share as if the compensation cost that would have been determined under the fair value method had been recorded in the consolidated financial statements, pursuant to the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation and Statement No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of FASB Statement No. 123, is
disclosed as follows, for stock option grants in 1995 and subsequent years.



|                                                                                                   |  |                                       |       |      |   |       |  |   |      
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ----- | ---- | - | ----- |  | - | -----
|                                                                                                   |  | 2004                                  |       | 2003 |   | 2002 
|                                                                                                   |  | (in thousands, except per share data)
|Net income, as reported                                                                            |  | $                                     | 6,598 |      | $ | 8,400 |  | $ | 8,200
|Less: Stock-based compensation cost determined under fair value method, net of related tax effects |  |                                       | 340   |      |   | 340   |  |   | 362  
|                                                                                                   |  |                                       |       |      |   |       |  |   |      
|Net income, pro forma                                                                              |  | $                                     | 6,258 |      | $ | 8,060 |  | $ | 7,838
|                                                                                                   |  |                                       |       |      |   |       |  |   |      
|Net income per share:                                                                              |  |                                       |       |      |   |       |  |   |      
|Basic:                                                                                             |  |                                       |       |      |   |       |  |   |      
|As reported                                                                                        |  | $                                     | 1.17  |      | $ | 1.50  |  | $ | 1.63 
|Pro forma                                                                                          |  |                                       | 1.11  |      |   | 1.44  |  |   | 1.56 
|Diluted:                                                                                           |  |                                       |       |      |   |       |  |   |      
|As reported                                                                                        |  |                                       | 1.13  |      |   | 1.43  |  |   | 1.58 
|Pro forma                                                                                          |  |                                       | 1.07  |      |   | 1.37  |  |   | 1.51 



Derivatives and
Financial Instruments



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



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



For the twelve months ended December 31, 2004, the interest rate swap
resulted in a net reduction of $85,000 in the interest expense that would otherwise have been reported for the FHLB advance. The fair value of



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 1SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)



the swap at December 31, 2004 was recorded on the consolidated balance sheet as a liability in the amount of $131,000, offset by a valuation adjustment in the same amount to the FHLB advance.



The Corporation has also identified the following derivative instruments
which were recorded on the consolidated balance sheet at December 31, 2004: commitments to originate residential mortgage loans and forward sales commitments.



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



See Note 17 for additional information
related to derivatives and financial instruments.



NOTE 2MERGER INFORMATION



Rowan Bancorp, Inc.



On
August 1, 2002, the Corporation completed a merger for the acquisition of Rowan Bancorp, Inc. (Rowan Bancorp), holding company for Rowan Savings Bank SSB, Inc. (Rowan Bank), headquartered in China Grove, North Carolina. At
the date of merger, Rowan Bank operated three offices and, based on estimated fair values, had $134,208,000 in total assets, $95,738,000 in loans and $101,205,000 in deposits.



Pursuant to the terms of the merger, each share of Rowan Bancorp common stock was converted into either 2.3715 shares of FNB
Corp. common stock or $36.00 in cash or a combination of stock and cash, the overall conversion to stock being limited to 45% of Rowan Bancorp shares. The aggregate purchase price was $21,830,000, consisting of $11,205,000 of cash payments, 603,859
shares of FNB Corp. common stock valued at $9,094,000 and outstanding Rowan Bancorp stock options valued at $1,531,000.



The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and
liabilities of Rowan Bank were recorded based on a preliminary estimate of fair values as of August 1, 2002, subject to possible adjustment during the one-year period from that date. The only adjustments recorded during that one-year period related
to accrued acquisition costs and resulted in an $18,000 reduction of the amount initially recorded for goodwill. The consolidated financial statements include the results of operations of Rowan Bank since August 1, 2002.



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 2MERGER
INFORMATION(Continued)



The portion of the
purchase price allocated to goodwill and other intangible assets at the date of merger on August 1, 2002, and the subsequent adjustments during the one-year period from that date, are presented below:



|                                                                             |  |                   |        |   |                       |   |     |                 |  |   |        |  
|---------------------------------------------------------------------------- |  | ----------------- | ------ | - | --------------------- | - | --- | --------------- |  | - | ------ | -
|                                                                             |  | Intangible Assets |       
|                                                                             |  | InitialAmounts    |        |   | SubsequentAdjustments |   |     | AdjustedAmounts | 
|                                                                             |  | (in thousands)    |       
|Purchase price                                                               |  | $                 | 21,830 |   |                       | $ |    |                 |  | $ | 21,830 |  
|Tangible shareholders equity of Rowan Bank                                  |  |                   | 10,145 |   |                       |   |    |                 |  |   | 10,145 |  
|                                                                             |  |                   |        |   |                       |   |     |                 |  |   |        |  
|Excess of purchase price over carrying value of net tangible assets acquired |  |                   | 11,685 |   |                       |   |    |                 |  |   | 11,685 |  
|Fair value adjustments                                                       |  |                   | (570   | ) |                       |   |    |                 |  |   | (570   | )
|Direct acquisition costs                                                     |  |                   | 1,611  |   |                       |   | (28 | )               |  |   | 1,583  |  
|Deferred and recoverable income taxes                                        |  |                   | 131    |   |                       |   | 10  |                 |  |   | 141    |  
|                                                                             |  |                   |        |   |                       |   |     |                 |  |   |        |  
|Total intangible assets                                                      |  |                   | 12,857 |   |                       |   | (18 | )               |  |   | 12,839 |  
|Core deposit intangible                                                      |  |                   | 256    |   |                       |   |    |                 |  |   | 256    |  
|                                                                             |  |                   |        |   |                       |   |     |                 |  |   |        |  
|Goodwill                                                                     |  | $                 | 12,601 |   |                       | $ | (18 | )               |  | $ | 12,583 |  
|                                                                             |  |                   |        |   |                       |   |     |                 |  |   |        |  



The core deposit
intangible will be amortized on the sum-of-the-years-digits basis over a six-year life. The amortization method and valuation of the core deposit intangible are based upon a historical study of the deposits acquired. Goodwill will not be amortized
but will be tested at least annually for impairment in accordance with SFAS No. 142. None of the goodwill is expected to be deductible for income tax purposes.



Direct acquisition costs associated with the merger and included in goodwill at the date of the merger on August 1, 2002, and subsequent adjustments
during the one-year period from that date, are summarized as follows:



|                                         |  |                          |       |                       |   |     |           |  |   |      
|---------------------------------------- |  | ------------------------ | ----- | --------------------- | - | --- | --------- |  | - | -----
|                                         |  | Direct Acquisition Costs
|                                         |  | InitialEstimate          |       | SubsequentAdjustments |   |     | TotalPaid
|                                         |  | (in thousands)          
|Investment banking and professional fees |  | $                        | 1,067 |                       | $ |    |           |  | $ | 1,067
|Contract termination costs               |  |                          | 460   |                       |   |    |           |  |   | 460  
|Other                                    |  |                          | 84    |                       |   | (28 | )         |  |   | 56   
|                                         |  |                          |       |                       |   |     |           |  |   |      
|Total                                    |  | $                        | 1,611 |                       | $ | (28 | )         |  | $ | 1,583
|                                         |  |                          |       |                       |   |     |           |  |   |      



Per the terms of the
merger agreement, Rowan Bank was to be operated as a separate subsidiary of FNB Corp. for a period of not less than 24 months; provided, however, that the Board of Directors of Rowan Bank could elect to cause Rowan Bank to merge with First National
Bank or another subsidiary of FNB Corp. prior to the termination of the 24-month period. Effective November 30, 2004, with the unanimous approval of the Rowan Board of Directors, Rowan Bank was merged into First National Bank.



Dover Mortgage Company



On April 1, 2003, the Corporation completed a merger for the acquisition of
Dover Mortgage Company (Dover), headquartered in Charlotte, North Carolina. Operating as a separate subsidiary of FNB Corp., Dover



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 2MERGER
INFORMATION(Continued)



originates, underwrites and closes
mortgage loans for sale into the secondary market. Mortgage production is sold on a service-released basis to a number of national lenders who in turn service the loans. At the date of the merger, Dover operated six offices and, based on estimated
fair values, had $47,001,000 in total assets and $5,823,000 in shareholders equity.



Pursuant to the terms of the merger, 50% of the outstanding shares of Dover common stock were converted into FNB Corp. common stock and the remaining 50% were converted into cash. The aggregate purchase price was
$5,567,000, consisting of $2,908,000 of cash payments and 126,140 shares of FNB Corp. common stock valued at $2,659,000. Subject to a maximum total payment, Dover shareholders will be entitled to additional cash consideration over the four-year
period following closing, based on a percentage of Dovers pretax net income during that four-year period. Any additional cash consideration paid to Dover shareholders will be recorded as a purchase price adjustment which will increase
goodwill.



The merger transaction has been accounted for using
the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Dover were recorded based on a preliminary estimate of fair values as of April 1, 2003, subject to possible adjustment during the one-year
period from that date. There were no adjustments to the estimate of fair values during that one-year period. The consolidated financial statements include the results of operations of Dover since April 1, 2003.



The portion of the purchase price allocated to goodwill at the date of the
merger on April 1, 2003, there being no subsequent adjustments to the estimate of fair values during the one-year period from that date, is presented below (in thousands):



|                                                                             |  |   |      
|---------------------------------------------------------------------------- |  | - | -----
|Purchase price                                                               |  | $ | 5,567
|Tangible shareholders equity of Dover                                       |  |   | 2,719
|                                                                             |  |   |      
|Excess of purchase price over carrying value of net tangible assets acquired |  |   | 2,848
|Direct acquisition costs                                                     |  |   | 568  
|Deferred income taxes                                                        |  |   | 326  
|                                                                             |  |   |      
|Goodwill                                                                     |  | $ | 3,742
|                                                                             |  |   |      



Direct acquisition
costs of $568,000 associated with the merger, related to investment banking and professional fees and all recorded in 2003, are included in goodwill.



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 3INTANGIBLE ASSETS



Business Combinations



For intangible assets related to business combinations, the following is a summary of the gross carrying amount and accumulated amortization of amortized intangible assets and the carrying amount of unamortized intangible assets:



|                                                        |  |                |        |      |   |       
|------------------------------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                                        |  | December 31,  
|                                                        |  | 2004           |        | 2003
|                                                        |  | (in thousands)
|Amortized intangible assets:                            |  |                |        |      |   |       
|Core deposit premium related to whole bank acquisition: |  |                |        |      |   |       
|Carrying amount                                         |  | $              | 256    |      | $ | 256   
|Accumulated amortization                                |  |                | 154    |      |   | 99    
|                                                        |  |                |        |      |   |       
|Net core deposit premium                                |  | $              | 102    |      | $ | 157   
|                                                        |  |                |        |      |   |       
|Unamortized intangible assets:                          |  |                |        |      |   |       
|Goodwill                                                |  | $              | 16,335 |      | $ | 16,325
|                                                        |  |                |        |      |   |       



Amortization of
intangibles totaled $55,000 for core deposit premiums in 2004, $69,000 in 2003 and $30,000 in 2002. The estimated amortization expense for core deposit premiums for the years ending December 31 is as follows: $44,000 in 2005, $32,000 in 2006,
$19,000 in 2007 and $7,000 in 2008.



The changes in the
carrying amount of goodwill in 2004 were as follows:



|                                                                                                           |  |   |       
|---------------------------------------------------------------------------------------------------------- |  | - | ------
|Balance, December 31, 2003                                                                                 |  | $ | 16,325
|Payment of additional cash consideration to shareholders of acquired company per terms of merger agreement |  |   | 10    
|                                                                                                           |  |   |       
|Balance December 31, 2004                                                                                  |  | $ | 16,335
|                                                                                                           |  |   |       



Mortgage Servicing
Rights



Mortgage loans serviced for others are not
included in the consolidated balance sheet. The unpaid principal balance of mortgage loans serviced for others amounted to $180,176,000 and $160,966,000 at December 31, 2004 and 2003, respectively.



The following is an analysis of mortgage servicing rights included in other
assets on the consolidated balance sheet:



|                              |  |                         |       |   |      |   |       |      |  |   |       |  
|----------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                              |  | Years Ended December 31 |      
|                              |  | 2004                    |       |   | 2003 |   |       | 2002 | 
|                              |  | (in thousands)          |      
|Balance at beginning of year  |  | $                       | 1,628 |   |      | $ | 1,052 |      |  | $ | 482   |  
|Servicing rights capitalized  |  |                         | 681   |   |      |   | 1,026 |      |  |   | 735   |  
|Amortization expense          |  |                         | (303  | ) |      |   | (450  | )    |  |   | (165  | )
|Change in valuation allowance |  |                         |      |   |      |   |      |      |  |   |      |  
|                              |  |                         |       |   |      |   |       |      |  |   |       |  
|Balance at end of year        |  | $                       | 2,006 |   |      | $ | 1,628 |      |  | $ | 1,052 |  
|                              |  |                         |       |   |      |   |       |      |  |   |       |  



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 3INTANGIBLE
ASSETS(Continued)



The estimated
amortization expense for mortgage servicing rights for the years ending December 31 is as follows: $308,000 in 2005, $308,000 in 2006, $308,000 in 2007, $308,000 in 2008, $308,000 in 2009, $308,000 in 2010 and $158,000 in 2011. The estimated
amortization expense is based on current information regarding loan payments and prepayments. Amortization expense could change in future periods based on changes in the volume of prepayments and economic factors.



NOTE 4INVESTMENT
SECURITIES



Summaries of the amortized cost and
estimated fair value of investment securities and the related gross unrealized gains and losses are presented below:



|                                          |  |                |        |                      |   |                       |  |                    |     |  |   |       
|----------------------------------------- |  | -------------- | ------ | -------------------- | - | --------------------- |  | ------------------ | --- |  | - | ------
|                                          |  | AmortizedCost  |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedFairValue
|                                          |  | (in thousands)
|Available For Sale                        |  |                |        |                      |   |                       |  |                    |     |  |   |       
|December 31, 2004                         |  |                |        |                      |   |                       |  |                    |     |  |   |       
|U.S. Government agencies and corporations |  | $              | 31,791 |                      | $ | 270                   |  | $                  | 136 |  | $ | 31,925
|Mortgage-backed securities                |  |                | 8,364  |                      |   | 56                    |  |                    | 28  |  |   | 8,392 
|State, county and municipal               |  |                | 21,044 |                      |   | 945                   |  |                    |    |  |   | 21,989
|Other debt securities                     |  |                | 5,120  |                      |   | 675                   |  |                    |    |  |   | 5,795 
|Equity securities                         |  |                | 5,640  |                      |   | 22                    |  |                    |    |  |   | 5,662 
|                                          |  |                |        |                      |   |                       |  |                    |     |  |   |       
|Total                                     |  | $              | 71,959 |                      | $ | 1,968                 |  | $                  | 164 |  | $ | 73,763
|                                          |  |                |        |                      |   |                       |  |                    |     |  |   |       
|December 31, 2003                         |  |                |        |                      |   |                       |  |                    |     |  |   |       
|U.S. Government agencies and corporations |  | $              | 42,044 |                      | $ | 646                   |  | $                  | 9   |  | $ | 42,681
|Mortgage-backed securities                |  |                | 5,531  |                      |   | 50                    |  |                    | 36  |  |   | 5,545 
|State, county and municipal               |  |                | 22,016 |                      |   | 1,315                 |  |                    |    |  |   | 23,331
|Other debt securities                     |  |                | 5,113  |                      |   | 597                   |  |                    |    |  |   | 5,710 
|Equity securities                         |  |                | 3,267  |                      |   | 24                    |  |                    |    |  |   | 3,291 
|                                          |  |                |        |                      |   |                       |  |                    |     |  |   |       
|Total                                     |  | $              | 77,971 |                      | $ | 2,632                 |  | $                  | 45  |  | $ | 80,558
|                                          |  |                |        |                      |   |                       |  |                    |     |  |   |       
|Held To Maturity                          |  |                |        |                      |   |                       |  |                    |     |  |   |       
|December 31, 2004                         |  |                |        |                      |   |                       |  |                    |     |  |   |       
|U.S. Government agencies and corporations |  | $              | 22,913 |                      | $ |                      |  | $                  | 356 |  | $ | 22,557
|Mortgage-backed securities                |  |                | 1,270  |                      |   | 6                     |  |                    | 8   |  |   | 1,268 
|State, county and municipal               |  |                | 25,197 |                      |   | 109                   |  |                    | 436 |  |   | 24,870
|Other debt securities                     |  |                | 2,000  |                      |   |                      |  |                    | 19  |  |   | 1,981 
|                                          |  |                |        |                      |   |                       |  |                    |     |  |   |       
|Total                                     |  | $              | 51,380 |                      | $ | 115                   |  | $                  | 819 |  | $ | 50,676
|                                          |  |                |        |                      |   |                       |  |                    |     |  |   |       
|December 31, 2003                         |  |                |        |                      |   |                       |  |                    |     |  |   |       
|U.S. Government agencies and corporations |  | $              | 33,676 |                      | $ | 33                    |  | $                  | 403 |  | $ | 33,306
|Mortgage-backed securities                |  |                | 501    |                      |   |                      |  |                    | 10  |  |   | 491   
|State, county and municipal               |  |                | 27,524 |                      |   | 114                   |  |                    | 412 |  |   | 27,226
|Other debt securities                     |  |                | 2,000  |                      |   |                      |  |                    | 23  |  |   | 1,977 
|                                          |  |                |        |                      |   |                       |  |                    |     |  |   |       
|Total                                     |  | $              | 63,701 |                      | $ | 147                   |  | $                  | 848 |  | $ | 63,000
|                                          |  |                |        |                      |   |                       |  |                    |     |  |   |       



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 4INVESTMENT
SECURITIES(Continued)



The amortized cost
and estimated fair value of investment securities at December 31, 2004, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to prepay obligations with or without
prepayment penalties.



|                                       |  |                    |        |                    |   |               |  |                    |        |  |   |       
|-------------------------------------- |  | ------------------ | ------ | ------------------ | - | ------------- |  | ------------------ | ------ |  | - | ------
|                                       |  | Available For Sale |        | Held To Maturity  
|                                       |  | AmortizedCost      |        | EstimatedFairValue |   | AmortizedCost |  | EstimatedFairValue
|                                       |  | (in thousands)    
|Due in one year or less                |  | $                  | 2,109  |                    | $ | 2,128         |  | $                  | 4,152  |  | $ | 4,143 
|Due after one year through five years  |  |                    | 20,112 |                    |   | 20,254        |  |                    | 22,990 |  |   | 22,710
|Due after five years through ten years |  |                    | 25,209 |                    |   | 25,875        |  |                    | 15,307 |  |   | 15,017
|Due after ten years                    |  |                    | 10,525 |                    |   | 11,452        |  |                    | 7,661  |  |   | 7,538 
|                                       |  |                    |        |                    |   |               |  |                    |        |  |   |       
|Total                                  |  |                    | 57,955 |                    |   | 59,709        |  |                    | 50,110 |  |   | 49,408
|Mortgage-backed securities             |  |                    | 8,364  |                    |   | 8,392         |  |                    | 1,270  |  |   | 1,268 
|Equity securities                      |  |                    | 5,640  |                    |   | 5,662         |  |                    |       |  |   |      
|                                       |  |                    |        |                    |   |               |  |                    |        |  |   |       
|Total investment securities            |  | $                  | 71,959 |                    | $ | 73,763        |  | $                  | 51,380 |  | $ | 50,676
|                                       |  |                    |        |                    |   |               |  |                    |        |  |   |       

Debt securities with an estimated fair value of $79,647,000 at December 31, 2004 and $91,110,000 at
December 31, 2003 were pledged to secure public funds and trust funds on deposit. Debt securities with an estimated fair value of $20,963,000 at December 31, 2004 and $24,878,000 at December 31, 2003 were pledged to secure retail repurchase
agreements. Debt securities with an estimated fair value of $3,873,000 at December 31, 2004 and $3,402,000 at December 31, 2003 were pledged for other purposes.



Proceeds from the sales of investment securities classified as available-for-sale amounted to $2,060,000 in 2002. Gross gains realized on the sales
were $16,000 in 2002. There were no securities sales in 2004 and 2003.



First National Bank, as a member of the Federal Home Loan Bank (the FHLB) of Atlanta, is required to own capital stock in the FHLB of Atlanta based generally upon the balances of total assets and FHLB advances. FHLB capital
stock is pledged to secure FHLB advances. This investment is carried at cost since no ready market exists for FHLB stock and there is no quoted market value. However, redemption of this stock has historically been at par value. At December 31, 2004
and 2003, First National Bank owned a total of $4,668,000 and $2,864,000, respectively, of FHLB stock. Due to the redemption provisions of FHLB stock, the Corporation estimated that fair value was equal to cost and that this investment was not
impaired at December 31, 2004.



First National Bank, as a
member bank of the Federal Reserve Bank (the FRB) of Richmond, is required to own capital stock of the FRB of Richmond based upon a percentage of First National Banks common stock and surplus. This investment is carried at cost
since no ready market exists for FRB stock and there is no quoted market value. At December 31, 2004 and 2003, First National Bank owned a total of $954,000 and $386,000, respectively, of FRB stock. Due to the nature of this investment in an entity
of the U. S. Government, the Corporation estimated that fair value was equal to cost and that this investment was not impaired at December 31, 2004.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 4INVESTMENT
SECURITIES(Continued)



Gross unrealized
losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:



|                                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    
|----------------------------------------- |  | ------------------- | ------ | --------------------- | - | ------------------ |  | --------------------- | ------ | ------------------ | - | --------------------- |  | - | ------ |  | - | ---
|                                          |  | Less than 12 Months |        | 12 Months or More     |   | Total             
|                                          |  | EstimatedFairValue  |        | GrossUnrealizedLosses |   | EstimatedFairValue |  | GrossUnrealizedLosses |        | EstimatedFairValue |   | GrossUnrealizedLosses
|                                          |  | (in thousands)     
|December 31, 2004                         |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    
|Available for Sale                        |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    
|U.S. Government agencies and corporations |  | $                   | 17,114 |                       | $ | 126                |  | $                     | 490    |                    | $ | 10                    |  | $ | 17,604 |  | $ | 136
|Mortgage-backed securities                |  |                     | 851    |                       |   | 11                 |  |                       | 837    |                    |   | 17                    |  |   | 1,688  |  |   | 28 
|                                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    
|Total                                     |  | $                   | 17,965 |                       | $ | 137                |  | $                     | 1,327  |                    | $ | 27                    |  | $ | 19,292 |  | $ | 164
|                                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    
|Held to Maturity                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    
|U.S. Government agencies and corporations |  | $                   | 16,271 |                       | $ | 175                |  | $                     | 5,819  |                    | $ | 181                   |  | $ | 22,090 |  | $ | 356
|Mortgage-backed securities                |  |                     | 293    |                       |   | 2                  |  |                       | 324    |                    |   | 6                     |  |   | 617    |  |   | 8  
|State, county and municipal               |  |                     | 9,730  |                       |   | 50                 |  |                       | 7,591  |                    |   | 386                   |  |   | 17,321 |  |   | 436
|Other debt securities                     |  |                     | 1,981  |                       |   | 19                 |  |                       |       |                    |   |                      |  |   | 1,981  |  |   | 19 
|                                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    
|Total                                     |  | $                   | 28,275 |                       | $ | 246                |  | $                     | 13,734 |                    | $ | 573                   |  | $ | 42,009 |  | $ | 819
|                                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    
|                                          |  |                     |        |                       |   |                   
|December 31, 2003                         |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    
|Available for Sale                        |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    
|U.S. Government agencies and corporations |  | $                   | 1,491  |                       | $ | 9                  |  | $                     |       |                    | $ |                      |  | $ | 1,491  |  | $ | 9  
|Mortgage-backed securities                |  |                     | 2,066  |                       |   | 35                 |  |                       | 76     |                    |   | 1                     |  |   | 2,142  |  |   | 36 
|                                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    
|Total                                     |  | $                   | 3,557  |                       | $ | 44                 |  | $                     | 76     |                    | $ | 1                     |  | $ | 3,633  |  | $ | 45 
|                                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    
|Held to Maturity                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    
|U.S. Government agencies and corporations |  | $                   | 18,101 |                       | $ | 403                |  | $                     |       |                    | $ |                      |  | $ | 18,101 |  | $ | 403
|Mortgage-backed securities                |  |                     | 491    |                       |   | 10                 |  |                       |       |                    |   |                      |  |   | 491    |  |   | 10 
|State, county and municipal               |  |                     | 18,167 |                       |   | 412                |  |                       |       |                    |   |                      |  |   | 18,167 |  |   | 412
|Other debt securities                     |  |                     | 1,977  |                       |   | 23                 |  |                       |       |                    |   |                      |  |   | 1,977  |  |   | 23 
|                                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    
|Total                                     |  | $                   | 38,736 |                       | $ | 848                |  | $                     |       |                    | $ |                      |  | $ | 38,736 |  | $ | 848
|                                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |    



Information concerning
the status of investment securities with unrealized losses at December 31, 2004 is as follows:



Debt securities other than mortgage-backed securities.    Eighty-nine debt securities other than mortgage-backed securities had
unrealized losses with aggregate depreciation of 1.6% from the amortized cost basis. The unrealized losses were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a
price less than the par value of the investment, adjusted for call premiums if appropriate. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 4INVESTMENT
SECURITIES(Continued)



because the Corporation has the
ability and intent to hold these investments until maturity or a market price recovery, these investments are not considered other-than-temporarily impaired.



Mortgage-backed securities.    Ten mortgage-backed securities had unrealized losses with aggregate depreciation of 1.5% from
the amortized cost basis. The unrealized losses were caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S Government agencies and corporations. It is expected that the securities would not be
settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Corporation has the ability and intent to hold these
investments until maturity or a market price recovery, these investments are not considered other-than-temporarily impaired.



NOTE 5LOANS



Major classifications of loans are as follows:



|                            |  |                |         |      |   |        
|--------------------------- |  | -------------- | ------- | ---- | - | -------
|                            |  | December 31   
|                            |  | 2004           |         | 2003
|                            |  | (in thousands)
|Commercial and agricultural |  | $              | 196,846 |      | $ | 215,036
|Real estateconstruction    |  |                | 83,433  |      |   | 36,357 
|Real estatemortgage:       |  |                |         |      |   |        
|1-4 family residential      |  |                | 197,855 |      |   | 184,881
|Commercial and other        |  |                | 154,024 |      |   | 86,734 
|Consumer                    |  |                | 20,899  |      |   | 19,973 
|Leases                      |  |                | 49      |      |   | 365    
|                            |  |                |         |      |   |        
|Loans held for investment   |  |                | 653,106 |      |   | 543,346
|Loans held for sale         |  |                | 11,648  |      |   | 8,567  
|                            |  |                |         |      |   |        
|Gross loans                 |  | $              | 664,754 |      | $ | 551,913
|                            |  |                |         |      |   |        



Loans as presented are
reduced by net deferred loan fees of $990,000 and $761,000 at December 31, 2004 and 2003, respectively. Accruing loans past due 90 days or more amounted to $1,275,000 at December 31, 2004 and $758,000 at December 31, 2003. Nonaccrual loans amounted
to $3,952,000 at December 31, 2004 and $5,235,000 at December 31, 2003. Interest income that would have been recorded on nonaccrual loans for the years ended December 31, 2004, 2003 and 2002, had they performed in accordance with their original
terms, amounted to approximately $355,000, $317,000 and $471,000, respectively. Interest income on all such loans included in the results of operations amounted to approximately $216,000 in 2004, $67,000 in 2003 and $231,000 in 2002.



At December 31, 2004, the Corporation did not have any loans that were
considered to be impaired. At December 31, 2003, the Corporation had impaired loans which totaled $1,963,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $1,133,000. The average carrying value
of impaired loans was $2,074,000 in 2003 and $3,260,000 in 2002. Interest income recognized on impaired loans amounted to approximately $5,000 in 2003 and $91,000 in 2002.



Loans with outstanding balances of $1,857,000 in 2004 and $1,354,000 in 2003 were transferred from loans to other real
estate acquired through foreclosure. Other real estate acquired through loan foreclosures amounted



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 5LOANS(Continued)



to $543,000 at December 31, 2004 and $1,008,000 at December 31, 2003 and is included in other
assets on the consolidated balance sheet.



Loans held for
investment are primarily made in the region of North Carolina that includes Cabarrus, Chatham, Guilford, Iredell, Montgomery, Moore, Randolph, Richmond, Rowan and Scotland counties. The real estate loan portfolio can be affected by the condition of
the local real estate markets.



Loans have been made by First
National Bank to directors and executive officers of the Corporation and to the associates of such persons, as defined by the Securities and Exchange Commission. Such loans were made in the ordinary course of business on substantially the same
terms, including rate and collateral, as those prevailing at the time in comparable transactions with other borrowers and do not involve more than normal risk of collectibility. A summary of the activity with respect to related party loans, based
upon the related parties as determined in each year, is as follows:



|                             |  |                |         |   |      |   |         |  
|---------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                             |  | 2004           |         |   | 2003 |  
|                             |  | (in thousands) |        
|Balance at beginning of year |  | $              | 2,613   |   |      | $ | 2,988   |  
|New loans                    |  |                | 18,764  |   |      |   | 18,557  |  
|Repayments                   |  |                | (19,240 | ) |      |   | (18,483 | )
|                             |  |                |         |   |      |   |         |  
|Balance at end of year       |  | $              | 2,137   |   |      | $ | 3,062   |  
|                             |  |                |         |   |      |   |         |  



NOTE 6ALLOWANCE FOR LOAN LOSSES



Changes in the allowance for loan losses were as follows:



|                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                           |  | Years Ended December 31 |       
|                                           |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|                                           |  | (in thousands)          |       
|Balance at beginning of year               |  | $                       | 6,172  |   |      | $ | 6,109  |      |  | $ | 4,417  |  
|Provision for losses charged to operations |  |                         | 4,030  |   |      |   | 1,860  |      |  |   | 1,780  |  
|Loans charged off                          |  |                         | (3,267 | ) |      |   | (1,900 | )    |  |   | (1,384 | )
|Recoveries on loans previously charged off |  |                         | 403    |   |      |   | 103    |      |  |   | 257    |  
|Purchase accounting acquisition            |  |                         |       |   |      |   |       |      |  |   | 1,039  |  
|Allowance adjustment for loans sold        |  |                         | (45    | ) |      |   |       |      |  |   |       |  
|                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Balance at end of year                     |  | $                       | 7,293  |   |      | $ | 6,172  |      |  | $ | 6,109  |  
|                                           |  |                         |        |   |      |   |        |      |  |   |        |  



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 7PREMISES AND
EQUIPMENT



Premises and equipment are summarized
as follows:



|                                               |  |                |        |      |   |       
|---------------------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                               |  | December 31   
|                                               |  | 2004           |        | 2003
|                                               |  | (in thousands)
|Land                                           |  | $              | 4,891  |      | $ | 4,391 
|Buildings and improvements                     |  |                | 12,389 |      |   | 10,613
|Furniture and equipment                        |  |                | 12,698 |      |   | 11,616
|Leasehold improvements                         |  |                | 693    |      |   | 689   
|                                               |  |                |        |      |   |       
|Total                                          |  |                | 30,671 |      |   | 27,309
|Less accumulated depreciation and amortization |  |                | 13,557 |      |   | 12,300
|                                               |  |                |        |      |   |       
|Premises and equipment, net                    |  | $              | 17,114 |      | $ | 15,009
|                                               |  |                |        |      |   |       



NOTE 8INCOME TAXES



Income taxes as reported in the consolidated income statement included the following expense (benefit) components:



|                   |  |                |       |   |      |   |       |      |  |   |       |  
|------------------ |  | -------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                   |  | 2004           |       |   | 2003 |   |       | 2002 | 
|                   |  | (in thousands) |      
|Current:           |  |                |       |   |      |   |       |      |  |   |       |  
|Federal            |  | $              | 2,046 |   |      | $ | 3,112 |      |  | $ | 3,517 |  
|State              |  |                | 290   |   |      |   | 421   |      |  |   | 161   |  
|                   |  |                |       |   |      |   |       |      |  |   |       |  
|Total              |  |                | 2,336 |   |      |   | 3,533 |      |  |   | 3,678 |  
|                   |  |                |       |   |      |   |       |      |  |   |       |  
|Deferred:          |  |                |       |   |      |   |       |      |  |   |       |  
|Federal            |  |                | 2     |   |      |   | 10    |      |  |   | (197  | )
|State              |  |                | (14   | ) |      |   | (348  | )    |  |   | 5     |  
|                   |  |                |       |   |      |   |       |      |  |   |       |  
|Total              |  |                | (12   | ) |      |   | (338  | )    |  |   | (192  | )
|                   |  |                |       |   |      |   |       |      |  |   |       |  
|Total income taxes |  | $              | 2,324 |   |      | $ | 3,195 |      |  | $ | 3,486 |  
|                   |  |                |       |   |      |   |       |      |  |   |       |  



A reconciliation of
income tax expense computed at the statutory Federal income tax rate to actual income tax expense is presented below:



|                                                               |  |                |       |   |      |   |       |      |  |   |       |  
|-------------------------------------------------------------- |  | -------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                               |  | 2004           |       |   | 2003 |   |       | 2002 | 
|                                                               |  | (in thousands) |      
|Amount of tax computed using Federal statutory tax rate of 34% |  | $              | 3,033 |   |      | $ | 3,942 |      |  | $ | 3,973 |  
|Increases (decreases) resulting from effects of:               |  |                |       |   |      |   |       |      |  |   |       |  
|Non-taxable income                                             |  |                | (811  | ) |      |   | (796  | )    |  |   | (662  | )
|State income taxes, net of federal benefit                     |  |                | 183   |   |      |   | 48    |      |  |   | 110   |  
|Other                                                          |  |                | (81   | ) |      |   | 1     |      |  |   | 65    |  
|                                                               |  |                |       |   |      |   |       |      |  |   |       |  
|Total                                                          |  | $              | 2,324 |   |      | $ | 3,195 |      |  | $ | 3,486 |  
|                                                               |  |                |       |   |      |   |       |      |  |   |       |  



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 8INCOME
TAXES(Continued)



The components of
deferred tax assets and liabilities and the tax effect of each are as follows:



|                                            |  |                |       |      |   |      
|------------------------------------------- |  | -------------- | ----- | ---- | - | -----
|                                            |  | December 31   
|                                            |  | 2004           |       | 2003
|                                            |  | (in thousands)
|Deferred tax assets:                        |  |                |       |      |   |      
|Allowance for loan losses                   |  | $              | 2,811 |      | $ | 2,379
|Compensation and benefit plans              |  |                | 1,412 |      |   | 1,292
|Other                                       |  |                | 235   |      |   | 294  
|                                            |  |                |       |      |   |      
|Gross deferred tax assets                   |  |                | 4,458 |      |   | 3,965
|Less valuation allowance                    |  |                |      |      |   |     
|                                            |  |                |       |      |   |      
|Net deferred tax assets                     |  |                | 4,458 |      |   | 3,965
|                                            |  |                |       |      |   |      
|Deferred tax liabilities:                   |  |                |       |      |   |      
|Prepaid pension cost                        |  |                | 902   |      |   | 354  
|Mortgage servicing rights                   |  |                | 773   |      |   | 627  
|Net unrealized securities gains             |  |                | 696   |      |   | 998  
|Depreciable basis of premises and equipment |  |                | 662   |      |   | 694  
|Net deferred loan fees and costs            |  |                | 262   |      |   | 263  
|Fair value basis of loans                   |  |                | 212   |      |   | 294  
|Other                                       |  |                | 388   |      |   | 486  
|                                            |  |                |       |      |   |      
|Gross deferred tax liabilities              |  |                | 3,895 |      |   | 3,716
|                                            |  |                |       |      |   |      
|Net deferred tax asset                      |  | $              | 563   |      | $ | 249  
|                                            |  |                |       |      |   |      



Changes in net
deferred tax asset were as follows:



|                                                                                            |  |                |     |      |   |      |  
|------------------------------------------------------------------------------------------- |  | -------------- | --- | ---- | - | ---- | -
|                                                                                            |  | 2004           |     | 2003 |  
|                                                                                            |  | (in thousands) |    
|Balance at beginning of year                                                                |  | $              | 249 |      | $ | (110 | )
|Purchase accounting acquisitions:                                                           |  |                |     |      |   |      |  
|Dover Mortgage Company                                                                      |  |                |    |      |   | (326 | )
|Rowan Bank                                                                                  |  |                |    |      |   | (10  | )
|Income tax effect from change in unrealized losses (gains) on available-for-sale securities |  |                | 302 |      |   | 357  |  
|Deferred income tax benefit on continuing operations                                        |  |                | 12  |      |   | 338  |  
|                                                                                            |  |                |     |      |   |      |  
|Balance at end of year                                                                      |  | $              | 563 |      | $ | 249  |  
|                                                                                            |  |                |     |      |   |      |  



The balance of
$173,000 at December 31, 2002 of the valuation allowance for deferred tax assets, which had primarily served as an offset to certain deferred tax benefits recognized for state income tax purposes, was reversed in 2003 as a result of
managements assessment that these deferred tax assets will now be realized in future periods. Based upon taxable income available in the carryback period, the reversal of taxable temporary differences and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Corporation will realize the benefits of the deductible differences existing as of December 31, 2004.





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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 8INCOME
TAXES(Continued)



Under accounting
principles generally accepted in the United States of America, the Corporation is not required to provide a deferred tax liability for the tax effect of additions to the tax bad debt reserve through 1987, the base year. Retained earnings at December
31, 2004 includes approximately $2,686,000 for which no provision for federal income tax has been made. These amounts represent allocations of income to bad debt deductions for tax purposes only. Reductions of such amounts for purposes other than
bad debt losses could create income for tax purposes in certain remote instances, which would then be subject to the then current corporate income tax rate.



NOTE 9TIME DEPOSITS



The scheduled maturities of time deposits at December 31, 2004 are as follows (in thousands):



|                         |  |   |        
|------------------------ |  | - | -------
|Years ending December 31 |  |  
|2005                     |  | $ | 261,511
|2006                     |  |   | 64,357 
|2007                     |  |   | 26,615 
|2008                     |  |   | 6,332  
|2009                     |  |   | 5,276  
|2010 and later years     |  |   | 75     
|                         |  |   |        
|Total time deposits      |  | $ | 364,166
|                         |  |   |        



NOTE 10BORROWED FUNDS



Retail Repurchase Agreements and Federal Funds Purchased



Funds are borrowed on an overnight basis through retail repurchase agreements with bank customers and federal funds purchased from other financial
institutions. Retail repurchase agreement borrowings are collateralized by securities of the U.S. Treasury and U.S. Government agencies and corporations.



Information concerning retail repurchase agreements and federal funds purchased is as follows:



|                                |  |                            |        |   |                       |   |        |                            |  |   |                       |   |  |   |       |  
|------------------------------- |  | -------------------------- | ------ | - | --------------------- | - | ------ | -------------------------- |  | - | --------------------- | - |  | - | ----- | -
|                                |  | 2004                       |        |   | 2003                  |  
|                                |  | RetailRepurchaseAgreements |        |   | FederalFundsPurchased |   |        | RetailRepurchaseAgreements |  |   | FederalFundsPurchased |  
|                                |  | (dollars in thousands)     |       
|Balance at December 31          |  | $                          | 13,818 |   |                       | $ | 8,175  |                            |  | $ | 14,816                |   |  | $ | 625   |  
|Average balance during the year |  |                            | 15,890 |   |                       |   | 4,181  |                            |  |   | 18,786                |   |  |   | 515   |  
|Maximum month-end balance       |  |                            | 15,913 |   |                       |   | 11,425 |                            |  |   | 20,906                |   |  |   | 5,300 |  
|Weighted average interest rate: |  |                            |        |   |                       |   |        |                            |  |   |                       |   |  |   |       |  
|At December 31                  |  |                            | 1.90   | % |                       |   | 2.57   | %                          |  |   | 1.09                  | % |  |   | 1.27  | %
|During the year                 |  |                            | .99    |   |                       |   | 1.70   |                            |  |   | .85                   |   |  |   | 1.39  |  



Federal Home Loan
Bank (FHLB) Advances



First National Bank had a
$130,169,000 line of credit with the FHLB at December 31, 2004, secured by blanket collateral agreements on qualifying mortgage loans and, as required, by other qualifying collateral. At December 31, 2004, FHLB advances under these lines amounted to
$69,088,000 and were at interest rates



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 10BORROWED
FUNDS(Continued)



ranging from 2.07% to 6.77%. At December
31, 2003, FHLB advances amounted to $53,303,000 and were at interest rates ranging from 2.58% to 6.77%.



At December 31, 2004, the scheduled maturities of FHLB advances, certain of which are callable at the option of the FHLB before scheduled maturity, are as
follows (in thousands):



|                         |  |   |       
|------------------------ |  | - | ------
|Years ending December 31 |  |  
|2005                     |  | $ | 3,072 
|2006                     |  |   | 1,536 
|2007                     |  |   | 512   
|2009                     |  |   | 8,918 
|2010                     |  |   | 8,000 
|2011                     |  |   | 12,050
|2012                     |  |   | 15,000
|2014                     |  |   | 20,000
|                         |  |   |       
|Total FHLB Advances      |  | $ | 69,088
|                         |  |   |       



First National Bank
has obtained irrevocable letters of credit from the FHLB amounting to $26,000,000 at December 31, 2004. These letters of credit, which expire in 2014, were issued in favor of the State of North Carolina to secure public funds on deposit.



Other Borrowed Funds



Under an agreement with an external financial institution, funds in the
amount of $9,900,000 were borrowed by FNB Corp. on a long-term basis in 2004, replacing a similar borrowing from another financial institution. The borrowing is to be repaid in twenty-eight equal quarterly installments of approximately $354,000 each
until the final maturity in 2011. Additionally, a separate line of credit was obtained from this same financial institution, permitting advances of up to a total of $4,500,000 until June 30, 2005, after which the balance outstanding will be repaid
in twenty-four equal quarterly installments until the final maturity in 2011. Based on total advances of $2,500,000 drawn against this line of credit at December 31, 2004, the quarterly installments would amount to approximately $104,000 each.
Interest on these notes is payable on a variable rate basis. Borrowings under the two notes are secured by a pledge of 50% of the outstanding shares of the capital stock of First National Bank. At December 31, 2004, the balance outstanding under the
two notes was $11,693,000 at a current interest rate of 3.92%. At December 31, 2003, the note balance outstanding under the prior agreement was $9,900,000 at a current interest rate of 3.56%.



Dover mortgage Company has a line of credit totaling $20,000,000 with an
external financial institution, secured by a blanket collateral agreement on the mortgage loans and certain other assets of Dover and separately guaranteed by FNB Corp. Interest is payable on a variable rate basis and the line of credit is subject
to annual renewal. At December 31, 2004, the balance outstanding on the line of credit was $10,873,000 at a current interest rate of 4.19%. At December 31, 2003, the balance outstanding on the line of credit was $8,077,000 at a current interest rate
of 2.79%.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 11EMPLOYEE BENEFIT
PLANS



Pension Plan



The Corporation has a noncontributory defined benefit pension plan covering
substantially all full-time employees who qualify as to age and length of service. Benefits are based on the employee's compensation, years of service and age at retirement. The Corporation's funding policy is to contribute annually to the plan an
amount which is not less than the minimum amount required by the Employee Retirement Income Security Act of 1974 and not more than the maximum amount deductible for income tax purposes.



Information concerning the status of the plan is as follows:



|                                                           |  |                        |        |   |      |   |        |  
|---------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                           |  | 2004                   |        |   | 2003 |  
|                                                           |  | (dollars in thousands) |       
|Change in Benefit Obligation:                              |  |                        |        |   |      |   |        |  
|Benefit obligation at beginning of year                    |  | $                      | 9,096  |   |      | $ | 7,081  |  
|Service cost                                               |  |                        | 567    |   |      |   | 478    |  
|Interest cost                                              |  |                        | 576    |   |      |   | 533    |  
|Net actuarial loss                                         |  |                        | 339    |   |      |   | 1,398  |  
|Benefits paid                                              |  |                        | (376   | ) |      |   | (394   | )
|                                                           |  |                        |        |   |      |   |        |  
|Benefit obligation at end of year                          |  | $                      | 10,202 |   |      | $ | 9,096  |  
|                                                           |  |                        |        |   |      |   |        |  
|Accumulated Benefit Obligation at End of Year              |  | $                      | 7,387  |   |      | $ | 6,659  |  
|                                                           |  |                        |        |   |      |   |        |  
|Prepaid Pension Cost Components:                           |  |                        |        |   |      |   |        |  
|Funded status (liability) of plan                          |  | $                      | (818   | ) |      | $ | (2,348 | )
|Unrecognized net actuarial loss                            |  |                        | 3,000  |   |      |   | 2,998  |  
|Unrecognized prior service cost                            |  |                        | 158    |   |      |   | 268    |  
|                                                           |  |                        |        |   |      |   |        |  
|Prepaid pension cost at end of year                        |  | $                      | 2,340  |   |      | $ | 918    |  
|                                                           |  |                        |        |   |      |   |        |  
|Change in Plan Assets:                                     |  |                        |        |   |      |   |        |  
|Fair value of plan assets at beginning of year             |  | $                      | 6,748  |   |      | $ | 5,683  |  
|Actual loss on plan assets                                 |  |                        | 807    |   |      |   | 673    |  
|Employer contributions                                     |  |                        | 2,175  |   |      |   | 786    |  
|Benefits paid                                              |  |                        | (376   | ) |      |   | (394   | )
|Other                                                      |  |                        | 30     |   |      |   |       |  
|                                                           |  |                        |        |   |      |   |        |  
|Fair value of plan assets at end of year                   |  | $                      | 9,384  |   |      | $ | 6,748  |  
|                                                           |  |                        |        |   |      |   |        |  
|Weighted-Average Allocation of Plan Assets at End of Year: |  |                        |        |   |      |   |        |  
|Equity securities                                          |  |                        | 66     | % |      |   | 62     | %
|Debt securities                                            |  |                        | 34     |   |      |   | 36     |  
|Cash and cash equivalents                                  |  |                        |       |   |      |   | 2      |  
|                                                           |  |                        |        |   |      |   |        |  
|Total                                                      |  |                        | 100    | % |      |   | 100    | %
|                                                           |  |                        |        |   |      |   |        |  
|Weighted-Average Plan Assumptions at End of Year:          |  |                        |        |   |      |   |        |  
|Discount rate                                              |  |                        | 6.25   | % |      |   | 6.50   | %
|Expected long-term rate of return on plan assets           |  |                        | 9.00   |   |      |   | 9.00   |  
|Rate of increase in compensation levels                    |  |                        | 6.00   |   |      |   | 6.00   |  



The expected long-term
rate of return on plan assets considers the portfolio as a whole and not on the sum of the returns on individual asset categories. The return is based exclusively on historical returns, without adjustments.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 11EMPLOYEE BENEFIT
PLANS(Continued)



Net periodic pension
cost included the following components:



|                                   |  |                |      |   |      |   |      |      |  |   |      |  
|---------------------------------- |  | -------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                   |  | 2004           |      |   | 2003 |   |      | 2002 | 
|                                   |  | (in thousands) |     
|Service cost                       |  | $              | 567  |   |      | $ | 478  |      |  | $ | 293  |  
|Interest cost                      |  |                | 576  |   |      |   | 533  |      |  |   | 461  |  
|Expected return on plan assets     |  |                | (658 | ) |      |   | (524 | )    |  |   | (577 | )
|Amortization of prior service cost |  |                | 110  |   |      |   | 110  |      |  |   | 109  |  
|Recognized net actuarial loss      |  |                | 158  |   |      |   | 141  |      |  |   |     |  
|                                   |  |                |      |   |      |   |      |      |  |   |      |  
|Net periodic pension cost          |  | $              | 753  |   |      | $ | 738  |      |  | $ | 286  |  
|                                   |  |                |      |   |      |   |      |      |  |   |      |  



The Corporations
investment policies and strategies for the pension plan use a target allocation of 50% to 70% for equity securities and 30% to 50% for debt securities. The investment goals attempt to maximize returns while remaining within specific risk management
policies. While the risk management policies permit investment in specific debt and equity securities, a significant percentage of total plan assets is maintained in mutual funds, approximately 83% at December 31, 2004, to assist in investment
diversification. Generally the investments are readily marketable and can be sold to fund benefit payment obligations as they become payable.



Due to the significant $2,175,000 contribution made in 2004, the Corporation does not expect to contribute any funds to its pension plan in 2005.



The estimated benefit payments for each year ending December
31 from 2005 through 2009 are as follows: $386,000 in 2005, $388,000 in 2006, $383,000 in 2007, $440,000 in 2008 and $511,000 in 2009. The estimated benefit payments to be paid in the aggregate for the five year period from 2010 through 2014 are
$3,040,000. The estimated benefit payments are based on the same assumptions used to measure the benefit obligation at December 31, 2004 and include estimated future employee service.



Supplemental Executive Retirement Plan



The Corporation has a noncontributory, nonqualified supplemental executive retirement plan (the SERP) covering
certain executive employees. Annual benefits payable under the SERP are based on factors similar to those for the pension plan, with offsets related to amounts payable under the pension plan and social security benefits.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 11EMPLOYEE BENEFIT
PLANS(Continued)



Information concerning
the status of the plan is as follows:



|                                                 |  |                        |        |   |      |   |        |  
|------------------------------------------------ |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                 |  | 2004                   |        |   | 2003 |  
|                                                 |  | (dollars in thousands) |       
|Change in Benefit Obligation:                    |  |                        |        |   |      |   |        |  
|Benefit obligation at beginning of year          |  | $                      | 1,011  |   |      | $ | 743    |  
|Service cost                                     |  |                        | 63     |   |      |   | 45     |  
|Interest cost                                    |  |                        | 68     |   |      |   | 55     |  
|Net actuarial loss                               |  |                        | 77     |   |      |   | 190    |  
|Benefits paid                                    |  |                        | (22    | ) |      |   | (22    | )
|                                                 |  |                        |        |   |      |   |        |  
|Benefit obligation at end of year                |  | $                      | 1,197  |   |      | $ | 1,011  |  
|                                                 |  |                        |        |   |      |   |        |  
|Accumulated Benefit Obligation at End of Year    |  | $                      | 783    |   |      | $ | 620    |  
|                                                 |  |                        |        |   |      |   |        |  
|Change in Plan Assets:                           |  |                        |        |   |      |   |        |  
|Fair value of plan assets at beginning of year   |  | $                      |       |   |      | $ |       |  
|Actual return on plan assets                     |  |                        |       |   |      |   |       |  
|Employer contributions                           |  |                        | 22     |   |      |   | 22     |  
|Benefits paid                                    |  |                        | (22    | ) |      |   | (22    | )
|                                                 |  |                        |        |   |      |   |        |  
|Fair value of plan assets at end of year         |  | $                      |       |   |      | $ |       |  
|                                                 |  |                        |        |   |      |   |        |  
|Accrued SERP Cost Components:                    |  |                        |        |   |      |   |        |  
|Funded status (liability) of plan                |  | $                      | (1,197 | ) |      | $ | (1,011 | )
|Unrecognized net actuarial loss                  |  |                        | 355    |   |      |   | 300    |  
|Unrecognized prior service cost                  |  |                        | 235    |   |      |   | 281    |  
|Unrecognized transition obligation               |  |                        |       |   |      |   |       |  
|                                                 |  |                        |        |   |      |   |        |  
|Accrued SERP cost at end of year                 |  | $                      | (607   | ) |      | $ | (430   | )
|                                                 |  |                        |        |   |      |   |        |  
|Weighted-Average Plan Assumption at End of Year: |  |                        |        |   |      |   |        |  
|Discount rate                                    |  |                        | 6.25   | % |      |   | 6.50   | %



Net periodic SERP cost
included the following components:



|                                      |  |                |     |      |   |      |  |   |    
|------------------------------------- |  | -------------- | --- | ---- | - | ---- |  | - | ---
|                                      |  | 2004           |     | 2003 |   | 2002
|                                      |  | (in thousands)
|Service cost                          |  | $              | 63  |      | $ | 45   |  | $ | 34 
|Interest cost                         |  |                | 68  |      |   | 55   |  |   | 47 
|Expected return on plan assets        |  |                |    |      |   |     |  |   |   
|Amortization of prior service cost    |  |                | 46  |      |   | 46   |  |   | 46 
|Amortization of transition obligation |  |                |    |      |   |     |  |   |   
|Recognized net actuarial loss         |  |                | 22  |      |   | 8    |  |   | 3  
|                                      |  |                |     |      |   |      |  |   |    
|Net periodic SERP cost                |  | $              | 199 |      | $ | 154  |  | $ | 130
|                                      |  |                |     |      |   |      |  |   |    



The SERP is an
unfunded plan. Consequently, there are no plan assets or cash contribution requirements other than for the direct payment of benefits.



The estimated benefit payments for each year ending December 31 from 2005 through 2009 are as follows: $22,000 in 2005, $22,000 in 2006, $22,000 in 2007,
$44,000 in 2008 and $78,000 in 2009. The estimated benefit



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 11EMPLOYEE BENEFIT
PLANS(Continued)



payments to be paid in the aggregate for
the five year period from 2010 through 2014 are $374,000. The estimated benefit payments are based on the same assumptions used to measure the benefit obligation at December 31, 2004 and include estimated future employee service.



Other Postretirement Defined Benefit Plans



The Corporation has postretirement medical and life insurance plans covering
substantially all full-time employees who qualify as to age and length of service. The medical plan is contributory, with retiree contributions adjusted whenever medical insurance rates change. The life insurance plan is noncontributory.



Information concerning the plans, which are unfunded, is as follows:



|                                                         |  |                        |        |   |      |   |        |  
|-------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                         |  | 2004                   |        |   | 2003 |  
|                                                         |  | (dollars in thousands) |       
|Change in Benefit Obligation:                            |  |                        |        |   |      |   |        |  
|Benefit obligation at beginning of year                  |  | $                      | 1,192  |   |      | $ | 1,373  |  
|Service cost                                             |  |                        | 60     |   |      |   | 49     |  
|Interest cost                                            |  |                        | 78     |   |      |   | 71     |  
|Net actuarial loss (gain)                                |  |                        | 82     |   |      |   | (258   | )
|Benefits paid                                            |  |                        | (37    | ) |      |   | (43    | )
|                                                         |  |                        |        |   |      |   |        |  
|Benefit obligation at end of year                        |  | $                      | 1,375  |   |      | $ | 1,192  |  
|                                                         |  |                        |        |   |      |   |        |  
|Accumulated Benefit Obligation at End of Year            |  | $                      | 1,271  |   |      | $ | 1,110  |  
|                                                         |  |                        |        |   |      |   |        |  
|Accrued Postretirement Benefit Cost Components:          |  |                        |        |   |      |   |        |  
|Funded status (liability) of plan                        |  | $                      | (1,375 | ) |      | $ | (1,192 | )
|Unrecognized net actuarial loss                          |  |                        | 288    |   |      |   | 215    |  
|Unrecognized prior service cost                          |  |                        | 10     |   |      |   | 19     |  
|Unrecognized transition obligation                       |  |                        | 162    |   |      |   | 182    |  
|                                                         |  |                        |        |   |      |   |        |  
|Accrued postretirement benefit cost at end of year       |  | $                      | (915   | ) |      | $ | (776   | )
|                                                         |  |                        |        |   |      |   |        |  
|Weighted-Average Plan Assumptions at End of Year:        |  |                        |        |   |      |   |        |  
|Discount rate                                            |  |                        | 6.25   | % |      |   | 6.50   | %
|Annual rate of increase in the cost of medical benefits: |  |                        |        |   |      |   |        |  
|Current year                                             |  |                        | 11.00  |   |      |   | 12.00  |  
|Final constant amount                                    |  |                        | 5.00   |   |      |   | 5.00   |  
|Annual decrease                                          |  |                        | 1.00   |   |      |   | 1.00   |  



Increasing or
decreasing the assumed medical cost trend rate by one percentage point would not have a significant effect on either the postretirement benefit obligation at December 31, 2004 or the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year ended December 31, 2004.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 11EMPLOYEE BENEFIT
PLANS(Continued)



Net periodic
postretirement benefit cost included the following components:



|                                         |  |                |     |      |   |      |  |   |    
|---------------------------------------- |  | -------------- | --- | ---- | - | ---- |  | - | ---
|                                         |  | 2004           |     | 2003 |   | 2002
|                                         |  | (in thousands)
|Service cost                             |  | $              | 60  |      | $ | 49   |  | $ | 57 
|Interest Cost                            |  |                | 78  |      |   | 71   |  |   | 88 
|Amortization of prior service cost       |  |                | 10  |      |   | 10   |  |   | 10 
|Amortization of transition obligation    |  |                | 20  |      |   | 20   |  |   | 21 
|Recognized net actuarial loss            |  |                | 8   |      |   | 2    |  |   | 22 
|                                         |  |                |     |      |   |      |  |   |    
|Net periodic postretirement benefit cost |  | $              | 176 |      | $ | 152  |  | $ | 198
|                                         |  |                |     |      |   |      |  |   |    



The postretirement
medical and life insurance plans are unfunded plans. Consequently, there are no plan assets or cash contribution requirements other than for the direct payment of benefits.



The estimated benefit payments for each year ending December 31 from 2005 through 2009 are as follows: $58,000 in 2005,
$60,000 in 2006, $65,000 in 2007, $68,000 in 2008 and $75,000 in 2009. The estimated benefit payments to be paid in the aggregate for the five year period from 2010 through 2014 are $451,000. The estimated benefit payments are based on the same
assumptions used to measure the benefit obligation at December 31, 2004 and include estimated future employee service.

Matching
Retirement/Savings Plan

The Corporation has a matching retirement/savings plan which permits eligible employees to make contributions
to the plan up to a specified percentage of compensation as defined by the plan. A portion of the employee contributions are matched by the Corporation based on the plan formula. The matching contributions amounted to $322,000 in 2004, $320,000 in
2003 and $238,000 in 2002.



NOTE 12LEASES



Future obligations at December 31, 2004 for minimum rentals under noncancellable operating lease commitments, primarily relating to premises, are as follows (in thousands):



|                             |  |   |      
|---------------------------- |  | - | -----
|Years ending December 31     |  |  
|2005                         |  | $ | 223  
|2006                         |  |   | 126  
|2007                         |  |   | 91   
|2008                         |  |   | 81   
|2009                         |  |   | 81   
|2010 and later years         |  |   | 1,170
|                             |  |   |      
|Total minimum lease payments |  | $ | 1,772
|                             |  |   |      



Net rental expense for
all operating leases amounted to $359,000 in 2004, $271,000 in 2003 and $85,000 in 2002.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 13SUPPLEMENTARY INCOME
STATEMENT INFORMATION



Significant components of other expense were as follows:



|                                  |  |                |     |      |   |      |  |   |    
|--------------------------------- |  | -------------- | --- | ---- | - | ---- |  | - | ---
|                                  |  | 2004           |     | 2003 |   | 2002
|                                  |  | (in thousands)
|Advertising and marketing         |  | $              | 809 |      | $ | 660  |  | $ | 515
|Stationery, printing and supplies |  |                | 711 |      |   | 699  |  |   | 536
|Professional fees                 |  |                | 681 |      |   | 649  |  |   | 535



NOTE 14FNB CORP. (PARENT COMPANY) FINANCIAL DATA



The Parent Companys principal asset is its investment in the subsidiary companies, and its principal source of income is dividends from those
subsidiaries.



The Parent Companys condensed balance
sheets as of December 31, 2004 and 2003, and the related condensed statements of income and cash flows for each of the years in the three-year period ended December 31, 2004 are as follows:



Condensed Balance Sheets



|                                           |  |                |        |      |   |       
|------------------------------------------ |  | -------------- | ------ | ---- | - | ------
|                                           |  | December 31   
|                                           |  | 2004           |        | 2003
|                                           |  | (in thousands)
|Assets:                                    |  |                |        |      |   |       
|Cash                                       |  | $              | 1,915  |      | $ | 1,316 
|Investment in subsidiaries                 |  |                | 91,806 |      |   | 89,504
|Other assets                               |  |                | 961    |      |   | 1,565 
|                                           |  |                |        |      |   |       
|Total assets                               |  | $              | 94,682 |      | $ | 92,385
|                                           |  |                |        |      |   |       
|Liabilities and Shareholders Equity:      |  |                |        |      |   |       
|Accrued liabilities                        |  | $              | 842    |      | $ | 1,027 
|Borrowed funds                             |  |                | 11,693 |      |   | 9,900 
|Shareholders equity                       |  |                | 82,147 |      |   | 81,458
|                                           |  |                |        |      |   |       
|Total liabilities and shareholders equity |  | $              | 94,682 |      | $ | 92,385
|                                           |  |                |        |      |   |       



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 14FNB CORP. (PARENT
COMPANY) FINANCIAL DATA(Continued)



Condensed Statements of Income



|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                                  |  | Years Ended December 31 |      
|                                                                                  |  | 2004                    |       |   | 2003 |   |       | 2002 | 
|                                                                                  |  | (in thousands)          |      
|Income:                                                                           |  |                         |       |   |      |   |       |      |  |   |       |  
|Dividends from subsidiaries                                                       |  | $                       | 4,140 |   |      | $ | 5,318 |      |  | $ | 4,017 |  
|Other income (charge)                                                             |  |                         |      |   |      |   | (17   | )    |  |   | (5    | )
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  
|Total income                                                                      |  |                         | 4,140 |   |      |   | 5,301 |      |  |   | 4,012 |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  
|Expenses:                                                                         |  |                         |       |   |      |   |       |      |  |   |       |  
|Interest                                                                          |  |                         | 352   |   |      |   | 381   |      |  |   | 152   |  
|Operating                                                                         |  |                         | 125   |   |      |   | 119   |      |  |   | 87    |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  
|Total expenses                                                                    |  |                         | 477   |   |      |   | 500   |      |  |   | 239   |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  
|Income before income taxes and equity in undistributed net income of subsidiaries |  |                         | 3,663 |   |      |   | 4,801 |      |  |   | 3,773 |  
|Income tax benefit                                                                |  |                         | (162  | ) |      |   | (176  | )    |  |   | (87   | )
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  
|Income before equity in undistributed net income of subsidiaries                  |  |                         | 3,825 |   |      |   | 4,977 |      |  |   | 3,860 |  
|Equity in undistributed net income of subsidiaries                                |  |                         | 2,773 |   |      |   | 3,423 |      |  |   | 4,340 |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  
|Net income                                                                        |  | $                       | 6,598 |   |      | $ | 8,400 |      |  | $ | 8,200 |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  



Condensed Statements of Cash Flows



|                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                  |  | Years Ended December 31 |       
|                                                                                  |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|                                                                                  |  | (in thousands)          |       
|Operating activities:                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Net income                                                                        |  | $                       | 6,598  |   |      | $ | 8,400  |      |  | $ | 8,200   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |        |   |      |   |        |      |  |   |         |  
|Equity in undistributed net income of subsidiaries                                |  |                         | (2,773 | ) |      |   | (3,423 | )    |  |   | (4,340  | )
|Other, net                                                                        |  |                         | 59     |   |      |   | (29    | )    |  |   | (55     | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Net cash provided by operating activities                                         |  |                         | 3,884  |   |      |   | 4,948  |      |  |   | 3,805   |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Investing activities:                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Net cash paid in merger acquisition of subsidiary company                         |  |                         |       |   |      |   | (3,164 | )    |  |   | (11,768 | )
|Other, net                                                                        |  |                         | 476    |   |      |   | (551   | )    |  |   | (16     | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Net cash provided by (used in) investing activities                               |  |                         | 476    |   |      |   | (3,715 | )    |  |   | (11,784 | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Financing activities:                                                             |  |                         |        |   |      |   |        |      |  |   |         |  
|Increase (decrease) in borrowed funds                                             |  |                         | 1,793  |   |      |   | (1,100 | )    |  |   | 11,000  |  
|Common stock issued                                                               |  |                         | 791    |   |      |   | 1,673  |      |  |   | 637     |  
|Common stock repurchased                                                          |  |                         | (2,830 | ) |      |   | (2     | )    |  |   | (986    | )
|Cash dividends paid                                                               |  |                         | (3,515 | ) |      |   | (3,221 | )    |  |   | (2,900  | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Net cash provided by (used in) financing activities                               |  |                         | (3,761 | ) |      |   | (2,650 | )    |  |   | 7,751   |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Net increase (decrease) in cash                                                   |  |                         | 599    |   |      |   | (1,417 | )    |  |   | (228    | )
|Cash at beginning of year                                                         |  |                         | 1,316  |   |      |   | 2,733  |      |  |   | 2,961   |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  
|Cash at end of year                                                               |  | $                       | 1,915  |   |      | $ | 1,316  |      |  | $ | 2,733   |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |         |  



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 15CAPITAL ADEQUACY
REQUIREMENTS



Certain regulatory requirements
restrict the lending of funds by First National Bank to FNB Corp. and the amount of dividends which can be paid to FNB Corp. In 2005, the maximum amount of dividends First National Bank can pay to FNB Corp., without the approval of the Comptroller
of the Currency, is $5,614,000 plus an additional amount equal to the retained net income in 2005 up to the date of any dividend declaration.



First National Bank is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits. For the reserve
maintenance period in effect at December 31, 2004, the average daily reserve requirement was $5,431,000.



FNB Corp. and First National Bank are required to comply with capital adequacy standards established by the Board of Governors of the Federal Reserve
System. In addition, First National Bank is required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, there are minimum ratios of capital to risk-weighted assets. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure
to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a material effect on the consolidated financial statements.



Regulatory capital amounts and ratios are set forth in the table below. The
risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier 1, Tier 2 and Tier 3, as a percentage of risk-weighted assets, which are computed by measuring the relative credit risk of both the asset
categories on the balance sheet and various off-balance sheet exposures. Tier 1 capital consists primarily of common shareholders equity and qualifying perpetual preferred stock, net of goodwill and other disallowed intangible assets. Tier 2
capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible debt, preferred stock and the allowance for loan losses. Tier 3 capital, applicable only to financial institutions
subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institutions ongoing trading activities. At December 31, 2004, FNB Corp. and First National Bank were not subject to the
market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital.



First National Bank is well-capitalized under the regulatory framework for prompt corrective action based on the most recent
notification from the various regulatory agencies as of December 31, 2004. To be categorized as well-capitalized, First National Bank must meet minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below.
There are no events or conditions since the notification that management believes have changed the category for First National Bank.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 15CAPITAL ADEQUACY
REQUIREMENTS(Continued)



|                                          |  |                        |        |       |   |        |                            |       |      |                                                               |       |                |  |      |   |  |       |  
|----------------------------------------- |  | ---------------------- | ------ | ----- | - | ------ | -------------------------- | ----- | ---- | ------------------------------------------------------------- | ----- | -------------- |  | ---- | - |  | ----- | -
|                                          |  |                        |        |       |   |        |                            |       |      |                                                               |       | Minimum Ratios | 
|                                          |  | Capital Amount         |        | Ratio |   |        | ForCapitalAdequacyPurposes |       |      | To Be WellCapitalizedUnder PromptCorrective Action Provisions |      
|                                          |  | 2004                   |        | 2003  |   | 2004   |                            |       | 2003 |                                                               |       |               
|                                          |  | (dollars in thousands) |       
|As of December 31                         |  |                        |        |       |   |        |                            |       |      |                                                               |       |                |  |      |   |  |       |  
|Total capital (to risk-weighted assets):  |  |                        |        |       |   |        |                            |       |      |                                                               |       |                |  |      |   |  |       |  
|FNB Corp.                                 |  | $                      | 71,805 |       | $ | 69,564 |                            | 10.08 | %    |                                                               | 11.69 | %              |  | 8.00 | % |  | N/A   |  
|First National Bank                       |  |                        | 79,409 |       |   | 75,345 |                            | 11.24 |      |                                                               | 12.77 |                |  | 8.00 |   |  | 10.00 | %
|Tier 1 capital (to risk-weighted assets): |  |                        |        |       |   |        |                            |       |      |                                                               |       |                |  |      |   |  |       |  
|FNB Corp.                                 |  |                        | 64,503 |       |   | 63,381 |                            | 9.05  |      |                                                               | 10.66 |                |  | 4.00 |   |  | N/A   |  
|First National Bank                       |  |                        | 72,107 |       |   | 69,162 |                            | 10.21 |      |                                                               | 11.72 |                |  | 4.00 |   |  | 6.00  | %
|Tier 1 capital (to average assets):       |  |                        |        |       |   |        |                            |       |      |                                                               |       |                |  |      |   |  |       |  
|FNB Corp.                                 |  |                        | 64,503 |       |   | 63,381 |                            | 7.73  |      |                                                               | 8.31  |                |  | 4.00 |   |  | N/A   |  
|First National Bank                       |  |                        | 72,107 |       |   | 69,162 |                            | 8.80  |      |                                                               | 9.28  |                |  | 4.00 |   |  | 5.00  | %



NOTE 16SHAREHOLDERS EQUITY





Stock Buyback Program



Under stock buyback programs authorized by the Board of Directors for the repurchase of shares of common stock, the Corporation repurchased 66,303 shares
in 2004, 63 shares in 2003 and 59,143 shares in 2002. Under the stock buyback program in effect at December 31, 2004, a maximum of 300,000 shares could be repurchased, of which 53,400 shares were repurchased in 2004, resulting in a remaining
authorization of 246,600 shares available for future repurchases.



Earnings Per Share (EPS)



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



|                                                                           |  |           |  |           |  |          
|-------------------------------------------------------------------------- |  | --------- |  | --------- |  | ---------
|                                                                           |  | 2004      |  | 2003      |  | 2002     
|Basic EPS denominatorWeighted average number of common shares outstanding |  | 5,663,173 |  | 5,607,681 |  | 5,022,397
|Dilutive share effect arising from assumed exercise of stock options       |  | 158,874   |  | 272,345   |  | 173,475  
|                                                                           |  |           |  |           |  |          
|Diluted EPS denominator                                                    |  | 5,822,047 |  | 5,880,026 |  | 5,195,872
|                                                                           |  |           |  |           |  |          



For the years 2004,
2003 and 2002, there were 175,400, 2,697 and 5,911 stock options, respectively, that were antidilutive since the exercise price exceeded the average market price. These common stock equivalents were omitted from the calculations of diluted EPS for
their respective years.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 16SHAREHOLDERS
EQUITY(Continued)



Stock Options



The Corporation adopted stock compensation plans in 1993
and 2003 that allow for the granting of incentive and nonqualified stock options to key employees and directors. Under terms of both the 1993 and 2003 plans, options are granted at prices equal to the fair market value of the common stock on the
date of grant. Options become exercisable after one year in equal, cumulative installments over a five-year period. No option shall expire later than ten years from the date of grant. No further grants can be made under the 1993 stock compensation
plan after March 10, 2003. Based on the stock options outstanding at December 31, 2004, a maximum of 473,015 shares of common stock has been reserved for issuance under the 1993 stock compensation plan. A maximum of 420,000 shares of common stock
has been reserved for issuance under the 2003 stock compensation plan. At December 31, 2004, there were 100,500 shares available under the 2003 plan for the granting of additional options.



The Corporation assumed a stock compensation plan in its merger acquisition
of Carolina Fincorp in 2000. One grant of qualified and nonqualified stock options was made under the plan in 1999 to key employees and directors at a price equal to fair market value on the date of grant. No additional grants will be made under the
plan. Based on the stock options outstanding at December 31, 2004, a maximum of 49,307 shares of common stock has been reserved for issuance under the stock compensation plan.



The Corporation assumed another stock compensation plan in its merger acquisition of Rowan Bancorp in 2002. Remaining under
the plan was one grant of incentive and nonqualified stock options made in 1993 to key employees and directors at a price equal to fair market value on the date of grant. No additional grants will be made under the plan. The total stock options
assumed on August 1, 2002, the date of completion of the merger, amounted to 141,223 shares after adjustment for the exchange ratio in converting from Rowan Bancorp shares to FNB Corp. shares. All options of Rowan Bancorp that were outstanding on
August 1, 2002 were fully vested under normal plan provisions prior to the assumption by FNB Corp. There were no options that remained outstanding under the stock compensation plan at December 31, 2004 and, consequently, no shares of common stock
are reserved for issuance.



The Corporation accounts for awards
under employee stock-based compensation plans using the intrinsic value method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees and, accordingly, no compensation cost has been recognized for such awards in
the consolidated financial statements. The pro forma effect on net income and earnings per share as if the compensation cost that would have been determined under the fair value method had been recorded in the consolidated financial statements,
pursuant to the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation and Statement No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, an
amendment of FASB Statement No. 123, is disclosed in Note 1.



The weighted-average fair value per share of options granted in 2004, 2003 and 2002 amounted to $5.64, $6.58 and $2.82, respectively. Fair values were estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:



|                        |  |         |   |  |         |   |  |         |  
|----------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                        |  | 2004    |   |  | 2003    |   |  | 2002    |  
|Risk-free interest rate |  | 3.80    | % |  | 3.51    | % |  | 4.00    | %
|Dividend yield          |  | 2.75    |   |  | 2.75    |   |  | 2.75    |  
|Volatility              |  | 33.05   |   |  | 35.78   |   |  | 18.00   |  
|Expected life           |  | 6 years |   |  | 6 years |   |  | 6 years |  





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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 16SHAREHOLDERS
EQUITY(Continued)



The following is a
summary of stock option activity. Under the purchase method used to account for the acquisition of Rowan Bancorp, the options assumed by the Corporation on August 1, 2002 are separately identified as an addition to option shares outstanding.



|                                   |  |                         |   |      |                              |       |        |          |   |                              |   |        |  |          |                              |  |   |      
|---------------------------------- |  | ----------------------- | - | ---- | ---------------------------- | ----- | ------ | -------- | - | ---------------------------- | - | ------ |  | -------- | ---------------------------- |  | - | -----
|                                   |  | Years Ended December 31
|                                   |  | 2004                    |   | 2003 |                              | 2002 
|                                   |  | Shares                  |   |      | WeightedAverageExercisePrice |       | Shares |          |   | WeightedAverageExercisePrice |   | Shares |  |          | WeightedAverageExercisePrice
|Outstanding at beginning of year   |  | 765,345                 |   |      | $                            | 15.11 |        | 763,428  |   |                              | $ | 12.21  |  | 563,509  |                              |  | $ | 11.37
|Granted                            |  | 161,000                 |   |      |                              | 19.79 |        | 171,000  |   |                              |   | 21.94  |  | 181,250  |                              |  |   | 16.16
|Assumed in merger acquisition      |  |                        |   |      |                              |      |        |         |   |                              |   |       |  | 141,223  |                              |  |   | 4.22 
|Exercised                          |  | (66,303                 | ) |      |                              | 10.47 |        | (153,583 | ) |                              |   | 8.38   |  | (108,754 | )                            |  |   | 5.58 
|Forfeited                          |  | (18,220                 | ) |      |                              | 19.61 |        | (15,500  | ) |                              |   | 14.34  |  | (13,800  | )                            |  |   | 14.03
|                                   |  |                         |   |      |                              |       |        |          |   |                              |   |        |  |          |                              |  |   |      
|Outstanding at end of year         |  | 841,822                 |   |      |                              | 16.27 |        | 765,345  |   |                              |   | 15.11  |  | 763,428  |                              |  |   | 12.21
|                                   |  |                         |   |      |                              |       |        |          |   |                              |   |        |  |          |                              |  |   |      
|Options exercisable at end of year |  | 418,852                 |   |      |                              | 13.65 |        | 369,660  |   |                              |   | 12.34  |  | 439,688  |                              |  |   | 10.64
|                                   |  |                         |   |      |                              |       |        |          |   |                              |   |        |  |          |                              |  |   |      



At December 31, 2004,
information concerning stock options outstanding and exercisable is as follows:



|                         |  |                     |  |                                                 |  |                              |       |                   |         |                              |   |      
|------------------------ |  | ------------------- |  | ----------------------------------------------- |  | ---------------------------- | ----- | ----------------- | ------- | ---------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                            
|Range of Exercise Prices |  | Shares              |  | WeightedAverageRemainingContractualLife (Years) |  | WeightedAverageExercisePrice |       | NumberExercisable |         | WeightedAverageExercisePrice
|$  9.82  11.75          |  | 224,247             |  | 5.55                                            |  | $                            | 11.32 |                   | 184,377 |                              | $ | 11.23
|12.00  14.13            |  | 138,175             |  | 2.86                                            |  |                              | 13.58 |                   | 138,175 |                              |   | 13.58
|15.00  19.82            |  | 317,400             |  | 8.72                                            |  |                              | 18.01 |                   | 61,900  |                              |   | 16.22
|20.00  27.00            |  | 162,000             |  | 8.87                                            |  |                              | 22.02 |                   | 34,400  |                              |   | 22.31
|                         |  |                     |  |                                                 |  |                              |       |                   |         |                              |   |      
|                         |  | 841,822             |  | 6.94                                            |  |                              | 16.27 |                   | 418,852 |                              |   | 13.65
|                         |  |                     |  |                                                 |  |                              |       |                   |         |                              |   |      



NOTE 17COMMITMENTS



In the normal course of business, various commitments are outstanding that are not reflected in the consolidated financial statements. Significant commitments at December 31, 2004 are discussed below.



Commitments by First National Bank to extend credit and undisbursed advances
on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. At December 31, 2004, total commitments to extend credit and undisbursed advances on customer lines of
credit amounted to $167,502,000. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being fully drawn, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit
evaluation of the borrower.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 17COMMITMENTS(Continued)



First National Bank issues standby letters of credit whereby it guarantees
the performance of a customer to a third party if a specified triggering event or condition occurs. The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee. All standby letters of
credit provide for recourse against the customer on whose behalf the letter of credit was issued, and this recourse may be further secured by a pledge of assets. The maximum potential amount of undiscounted future payments related to standby letters
of credit was $6,445,000 at December 31, 2004 and $6,221,000 at December 31, 2003. Due to insignificance, the Corporation has recorded no liability at December 31, 2004 for the current carrying amount of the obligation to perform as a guarantor.



Dover Mortgage Company originates certain residential mortgage
loans with the intention of selling these loans. Between the time that Dover enters into an interest rate lock or a commitment to originate a residential mortgage loan with a potential borrower and the time the closed loan is sold, the Corporation
is subject to variability in market prices related to these commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and
commitments to deliver loans into a mortgage-backed security. The commitments to originate residential mortgage loans and the forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so
their fair value adjustments are recorded through the income statement in income from mortgage loan sales. The commitments to originate residential mortgage loans totaled $16,382,000 at December 31, 2004. The related forward sales commitments
totaled $16,382,000 at December 31, 2004. The fair value of these commitments was recorded as a net asset of $19,000 at December 31, 2004. Loans held for sale by Dover Mortgage Company totaled $10,919,000 at December 31, 2004. The related forward
sales commitments totaled $10,919,000 at December 31, 2004. The fair value of these commitments was recorded as a net liability of $32,000 at December 31, 2004.



First National Bank had loans held for sale of $729,000 at December 31, 2004. Binding commitments of First National Bank for the origination of
mortgage loans intended to be held for sale at December 31, 2004 were not material.



The Corporation does not have any special purpose entities or other similar forms of off-balance sheet financing.



NOTE 18FAIR VALUE OF FINANCIAL
INSTRUMENTS



The following methods and
assumptions were used to estimate the fair value for each class of financial instruments.



Cash and Cash Equivalents.    For cash on hand, amounts due from banks, and federal funds sold, the carrying value is considered to be a reasonable estimate of fair value.



Investment Securities.    The fair value
of investment securities is based on quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.



Loans.    The fair value of loans is
estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.



Deposits.    The fair value of demand, savings and money market deposits is the amount
payable on demand at the reporting date. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 18FAIR VALUE
OF FINANCIAL INSTRUMENTS(Continued)



Borrowed Funds.    The carrying value of retail repurchase agreements and federal funds purchased is considered to be a reasonable estimate of fair value. The fair value of Federal
Home Loan Bank advances and other borrowed funds is estimated using the rates currently offered for advances of similar remaining maturities.



Commitments.    The fair value of commitments to extend credit is considered to approximate carrying value, since the
large majority of these commitments would result in loans that have variable rates and/or relatively short terms to maturity or sale. For other commitments, generally of a short-term nature, the carrying value is considered to be a reasonable
estimate of fair value. The various commitment items are disclosed in Note 17.



The estimated fair values of financial instruments are as follows:



|                                |  |                   |         |                     |   |               |  |                     |         |  |   |        
|------------------------------- |  | ----------------- | ------- | ------------------- | - | ------------- |  | ------------------- | ------- |  | - | -------
|                                |  | December 31, 2004 |         | December 31, 2003  
|                                |  | CarryingValue     |         | EstimatedFair Value |   | CarryingValue |  | EstimatedFair Value
|                                |  | (in thousands)   
|Financial Assets                |  |                   |         |                     |   |               |  |                     |         |  |   |        
|Cash and cash equivalents       |  | $                 | 20,509  |                     | $ | 20,509        |  | $                   | 27,124  |  | $ | 27,124 
|Investment securities:          |  |                   |         |                     |   |               |  |                     |         |  |   |        
|Available for sale              |  |                   | 73,763  |                     |   | 73,763        |  |                     | 80,558  |  |   | 80,558 
|Held to maturity                |  |                   | 51,380  |                     |   | 50,676        |  |                     | 63,701  |  |   | 63,000 
|Net loans                       |  |                   | 657,461 |                     |   | 658,567       |  |                     | 545,741 |  |   | 563,592
|Financial Liabilities           |  |                   |         |                     |   |               |  |                     |         |  |   |        
|Deposits                        |  |                   | 659,544 |                     |   | 664,944       |  |                     | 597,925 |  |   | 605,492
|Retail repurchase agreements    |  |                   | 13,818  |                     |   | 13,818        |  |                     | 14,816  |  |   | 14,816 
|Federal Home Loan Bank advances |  |                   | 69,088  |                     |   | 71,183        |  |                     | 53,303  |  |   | 60,027 
|Federal funds purchased         |  |                   | 8,175   |                     |   | 8,175         |  |                     | 625     |  |   | 625    
|Other borrowed funds            |  |                   | 22,566  |                     |   | 22,566        |  |                     | 17,977  |  |   | 18,198 



The fair value
estimates are made at a specific point in time based on relevant market and other information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the
Corporations entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be considered in an actual sale considered. Because no market exists for a significant portion of the Corporation's
financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and such other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the tax ramifications related to the realization
of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.



NOTE 19BUSINESS SEGMENT INFORMATION



Prior to the acquisition of Dover Mortgage Company on April 1, 2003, the
chief operating decision maker had reviewed the results of operations of the Corporation and its subsidiaries as a single enterprise. There are now considered to be two principal business segments: the full-service subsidiary bank, First National
Bank, and the mortgage banking subsidiary, Dover Mortgage Company. Dover originates, underwrites and closes loans for sale into the secondary market. Included in the Other column are amounts for other corporate activities and



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 19BUSINESS SEGMENT
INFORMATION(Continued)



eliminations of intersegment
transactions. Operating results for the year ended December 31, 2003 includes information for twelve months for First National Bank and nine months for Dover Mortgage Company which was acquired using the purchase method of accounting for business
combinations.



|                                                    |  |                              |         |                      |   |        |       |  |   |       |   |  |   |        
|--------------------------------------------------- |  | ---------------------------- | ------- | -------------------- | - | ------ | ----- |  | - | ----- | - |  | - | -------
|                                                    |  | Year Ended December 31, 2004
|                                                    |  | FirstNationalBank            |         | DoverMortgageCompany |   |        | Other |  |   | Total
|                                                    |  | (in thousands)              
|Interest income                                     |  | $                            | 39,835  |                      | $ | 601    |       |  | $ |      |   |  | $ | 40,436 
|Interest expense                                    |  |                              | 11,749  |                      |   | 301    |       |  |   | 352   |   |  |   | 12,402 
|                                                    |  |                              |         |                      |   |        |       |  |   |       |   |  |   |        
|Net interest income                                 |  |                              | 28,086  |                      |   | 300    |       |  |   | (352  | ) |  |   | 28,034 
|Provision for loan losses                           |  |                              | 4,030   |                      |   |       |       |  |   |      |   |  |   | 4,030  
|                                                    |  |                              |         |                      |   |        |       |  |   |       |   |  |   |        
|Net interest income after provision for loan losses |  |                              | 24,056  |                      |   | 300    |       |  |   | (352  | ) |  |   | 24,004 
|Noninterest income                                  |  |                              | 10,781  |                      |   | 3,058  |       |  |   | (166  | ) |  |   | 13,673 
|Noninterest expense                                 |  |                              | 25,209  |                      |   | 3,587  |       |  |   | (41   | ) |  |   | 28,755 
|                                                    |  |                              |         |                      |   |        |       |  |   |       |   |  |   |        
|Income (loss) before income taxes                   |  |                              | 9,628   |                      |   | (229   | )     |  |   | (477  | ) |  |   | 8,922  
|Income taxes (benefit)                              |  |                              | 2,562   |                      |   | (76    | )     |  |   | (162  | ) |  |   | 2,324  
|                                                    |  |                              |         |                      |   |        |       |  |   |       |   |  |   |        
|Net income (loss)                                   |  | $                            | 7,066   |                      | $ | (153   | )     |  | $ | (315  | ) |  | $ | 6,598  
|                                                    |  |                              |         |                      |   |        |       |  |   |       |   |  |   |        
|Total assets                                        |  | $                            | 845,402 |                      | $ | 17,174 |       |  | $ | 315   |   |  | $ | 862,891
|Net loans                                           |  |                              | 646,542 |                      |   | 10,919 |       |  |   |      |   |  |   | 657,461
|Goodwill                                            |  |                              | 12,583  |                      |   | 3,752  |       |  |   |      |   |  |   | 16,335 
|                                                    | 
|                                                    |  | Year Ended December 31, 2003
|                                                    |  | FirstNationalBank            |         | DoverMortgageCompany |   |        | Other |  |   | Total
|                                                    |  | (in thousands)              
|Interest income                                     |  | $                            | 38,911  |                      | $ | 1,265  |       |  | $ | (18   | ) |  | $ | 40,158 
|Interest expense                                    |  |                              | 12,091  |                      |   | 675    |       |  |   | 378   |   |  |   | 13,144 
|                                                    |  |                              |         |                      |   |        |       |  |   |       |   |  |   |        
|Net interest income                                 |  |                              | 26,820  |                      |   | 590    |       |  |   | (396  | ) |  |   | 27,014 
|Provision for loan losses                           |  |                              | 1,860   |                      |   |       |       |  |   |      |   |  |   | 1,860  
|                                                    |  |                              |         |                      |   |        |       |  |   |       |   |  |   |        
|Net interest income after provision for loan losses |  |                              | 24,960  |                      |   | 590    |       |  |   | (396  | ) |  |   | 25,154 
|Noninterest income                                  |  |                              | 11,273  |                      |   | 2,628  |       |  |   | (301  | ) |  |   | 13,600 
|Noninterest expense                                 |  |                              | 24,178  |                      |   | 3,164  |       |  |   | (183  | ) |  |   | 27,159 
|                                                    |  |                              |         |                      |   |        |       |  |   |       |   |  |   |        
|Income before income taxes                          |  |                              | 12,055  |                      |   | 54     |       |  |   | (514  | ) |  |   | 11,595 
|Income taxes                                        |  |                              | 3,342   |                      |   | 28     |       |  |   | (175  | ) |  |   | 3,195  
|                                                    |  |                              |         |                      |   |        |       |  |   |       |   |  |   |        
|Net income                                          |  | $                            | 8,713   |                      | $ | 26     |       |  | $ | (339  | ) |  | $ | 8,400  
|                                                    |  |                              |         |                      |   |        |       |  |   |       |   |  |   |        
|Total assets                                        |  | $                            | 758,628 |                      | $ | 14,609 |       |  | $ | 8     |   |  | $ | 773,245
|Net loans                                           |  |                              | 537,540 |                      |   | 8,201  |       |  |   |      |   |  |   | 545,741
|Goodwill                                            |  |                              | 12,583  |                      |   | 3,742  |       |  |   |      |   |  |   | 16,325 



In 2003, the financial
performance of Dover Mortgage Company was negatively impacted by reductions of approximately $1,250,000 in the third quarter and $80,000 in the fourth quarter in income from mortgage loan sales as a result of the failure to properly obtain forward
sales commitments when certain interest rate locks or



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 19BUSINESS SEGMENT
INFORMATION(Continued)



commitments to lend were entered
into with potential borrowers. Failure to adhere to policies in connection with forward sales commitments, along with steep increases for a period of time in conforming mortgage interest rates, created the reduction in income enumerated above. In
2004, Dover results were adversely affected by the accounting change required by the SECs issuance of Staff Accounting Bulletin No. 105, as discussed in Note 1 above, which resulted in a $356,000 reduction in Dovers income from mortgage
loan sales and also by the increase in long-term conforming mortgage rates from the historical lows that prevailed through most of 2003 and especially by the resulting slowdown in mortgage refinancing activity. Information concerning the acquisition
of Dover is provided in Note 2.



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CONTROLS AND PROCEDURES



As of
December 31, 2004, the end of the period covered by this report, FNB Corp. carried out an evaluation under the supervision and with the participation of the companys management, including FNB Corp.s Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of FNB Corp.s disclosure controls and procedures. In designing and evaluating the companys disclosure controls and procedures, FNB Corp. and its management recognize
that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and FNB Corp.s management necessarily was required to apply its judgment in
evaluating and implementing possible controls and procedures. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the companys disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed by FNB Corp. in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange
Commissions rules and forms. No significant changes in the companys internal control over financial reporting occurred during the period ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect,
FNB Corp.s internal control over financial reporting. FNB Corp. reviews its disclosure controls and procedures, which may include its internal controls over financial reporting, on an ongoing basis and may from time to time make changes aimed
at enhancing their effectiveness. The internal controls at Dover Mortgage Company, which FNB Corp. acquired on April 1, 2003 and was not previously a public reporting company, continue to be an area of particular focus and FNB Corp. engaged a
third-party consultant to review those controls with the aim of identifying any necessary or appropriate changes. Dover is in the process of implementing changes.



Managements report on internal control over financial reporting, required by Item 308(a) of Regulation S-K, and the
related attestation report of the registered public accounting firm, required by Item 308(b) of Regulation S-K, will be filed by amendment to this Annual Report on Form 10-K in accordance with Release No. 34-50754.



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of March 15, 2005.



FNB Corp. (Registrant)By:

/s/    MICHAEL C.
MILLERMichael C. Miller Chairman and President




Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, as of March 15, 2005.



|                                                                        |  |                                                                    
|----------------------------------------------------------------------- |  | -------------------------------------------------------------------
|Signature                                                               |  | Title                                                              
|                                                                        | 
|/s/                          MICHAEL C. MILLERMichael C. Miller         |  | Chairman and President(Principal Executive Officer)                
|                                                                        | 
|/s/                            JERRY A. LITTLEJerry A. Little           |  | Treasurer and Secretary(Principal Financial and Accounting Officer)
|                                                                        | 
|/s/                        JAMES M. CAMPBELL, JR.James M. Campbell, Jr. |  | Director                                                           
|                                                                        | 
|/s/                        R. LARRY CAMPBELLR. Larry Campbell           |  | Director                                                           
|                                                                        | 
|/s/                            DARRELL L. FRYEDarrell L. Frye           |  | Director                                                           
|                                                                        | 
|/s/                        WILBERT L. HANCOCKWilbert L. Hancock         |  | Director                                                           
|                                                                        | 
|/s/                            THOMAS A. JORDANThomas A. Jordan         |  | Director                                                           
|                                                                        | 
|/s/                              DALE E.
KEIGERDale E. Keiger           |  | Director                                                           
|                                                                        | 
|/s/                      EUGENE B. MCLAURIN, IIEugene B. McLaurin, II   |  | Director                                                           
|                                                                        | 
|/s/                        R. REYNOLDS NEELY, JR.R. Reynolds Neely, Jr. |  | Director                                                           
|                                                                        | 
|/s/                            RICHARD K. PUGHRichard K. Pugh           |  | Director                                                           
|                                                                        | 
|/s/                            J. M. RAMSAY IIIJ. M. Ramsay III         |  | Director                                                           



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INDEX TO EXHIBITS



|            |  |                                                                                                                                                                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                                       
|3.10        |  | Articles of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrants Form S-14 Registration Statement (No. 2-96498) filed March 16,
1985.                                                                                                                                        
|            | 
|3.11        |  | Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 10, 1988, incorporated herein by reference to Exhibit 19.10 to the Registrants Form 10-Q Quarterly
Report for the quarter ended June 30, 1988.                                                                                            
|            | 
|3.12        |  | Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 12, 1998, incorporated herein by reference to Exhibit 3.12 to the Registrants Form 10-Q Quarterly
Report for the quarter ended June 30, 1998.                                                                                             
|            | 
|3.13        |  | Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 23, 2003, incorporated herein by reference to Exhibit 3.13 to the Registrants Form 10-Q Quarterly
Report for the quarter ended June 30, 2003.                                                                                             
|            | 
|3.20        |  | Amended and Restated Bylaws of the Registrant, adopted March 18, 2004, incorporated herein by reference to Exhibit 3.20 to the Registrants Form 10-Q Quarterly Report for the quarter
ended March 31, 2004.                                                                                                                 
|            | 
|4           |  | Specimen of Registrants Common Stock Certificate, incorporated herein by reference to Exhibit 4 to Amendment No. 1 to the Registrants Form S-14 Registration Statement (No.
2-96498) filed April 19, 1985.                                                                                                                 
|            | 
|10.10*      |  | Form of Split Dollar Insurance Agreement dated as of November 1, 1987 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by
reference to Exhibit 19.20 to the Registrants Form 10-Q Quarterly Report for the quarter ended June 30, 1988.                    
|            | 
|10.11*      |  | Form of Amendment to Split Dollar Insurance Agreement dated as of November 1, 1994 between First National Bank and Trust Company and certain of its key employees and directors, incorporated
herein by reference to Exhibit 10.11 to the Registrants Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.
|            | 
|10.20*      |  | Stock Compensation Plan as amended effective May 12, 1998, incorporated herein by reference to Exhibit 10.30 to the Registrants Form 10-Q Quarterly Report for the quarter ended June 30,
1998.                                                                                                                             
|            | 
|10.21*      |  | Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrants Stock Compensation Plan, incorporated herein by reference to
Exhibit 10.31 to the Registrants Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.                              
|            | 
|10.22*      |  | Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrants Stock Compensation Plan, incorporated herein by reference to
Exhibit 10.32 to the Registrants Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.                               
|            | 
|10.23*      |  | FNB Corp. 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to the Registrants Registration Statement on Form S-8 (File No. 333-105442).                                                                                                                                                          
|            | 
|10.24*      |  | Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrants 2003 Stock Incentive Plan, incorporated herein by reference to
Exhibit 10.24 to the Registrants Form 10-Q Quarterly Report for the quarter ended September 30, 2003.                              
|            | 
|10.25*      |  | Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrants 2003 Stock Incentive Plan, incorporated herein by reference to
Exhibit 10.25 to the Registrants Form 10-K Annual Report for the fiscal year ended December 31, 2003.                               



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|            |  |                                                                                                                                                                                                                                                                     
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                              
|10.30*      |  | Employment Agreement dated as of December 27, 1995 between First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10.50 to the
Registrants Form 10-KSB Annual Report for the fiscal year ended December 31, 1995.
|            | 
|10.31*      |  | Carolina Fincorp, Inc. Stock Option Plan (assumed by the Registrant on April 10, 2000), incorporated herein by reference to Exhibit 99.1 to the Registrants Registration Statement on
Form S-8 (File No. 333-54702).                                               
|            | 
|10.32*      |  | Employment Agreement dated as of April 10, 2000 between First National Bank and Trust Company and R. Larry Campbell, incorporated herein by reference to Exhibit 10.32 to the Registrants
Form 10-K Annual Report for the fiscal year ended December 31, 2000.     
|            | 
|10.33*      |  | Nonqualified Supplemental Retirement Plan with R. Larry Campbell, incorporated herein by reference to Exhibit 10(c) to the Annual Report on Form 10-KSB of Carolina Fincorp, Inc. for the
fiscal year ended June 30, 1997.                                          
|            | 
|10.34*      |  | Form of Change of Control Agreement between FNB Corp. and certain of its key employees and officers, incorporated herein by reference to Exhibit 10.35 to the Registrants Form 10-K
Annual Report for the fiscal year ended December 31, 2003.                     
|            | 
|14          |  | Code of Ethics for Senior Financial Officers, incorporated herein by reference to Exhibit 14 to the Registrants Form 10-K Annual Report for the fiscal year ended December 31,
2003.                                                                               
|            | 
|21          |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                     
|            | 
|23.10       |  | Consent of Independent Registered Public Accounting FirmDixon Hughes PLLC                                                                                                                                                                                          
|            | 
|23.11       |  | Consent of Independent Registered Public Accounting FirmKPMG LLP                                                                                                                                                                                                   
|            | 
|31.10       |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                 
|            | 
|31.11       |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                 
|            | 
|32          |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                            

---

|* |  | Management contract, or compensatory plan or arrangement.
|- |  | ---------------------------------------------------------



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