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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, 2005



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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes ̈No x



Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.    Yes ̈No x



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.    x



Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated
filer ̈Accelerated filer  x                    Non-accelerated filer ̈



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



The 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 $101,524,000 as of
June 30, 2005, the last business day of the Registrants most recently completed second fiscal quarter.



As of March 1, 2006, the Registrant had 6,381,086 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 9, 2006 are incorporated by reference in Part III of this report.



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CROSS REFERENCE INDEX



|         |  |         |  |                                                                                                                                                 |  |      
|-------- |  | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------- |  | -----
|         |  |         |  |                                                                                                                                                 |  | Page 
|Part I   |  | Item 1  |  | Business                                                                                                                                        |  | 1-8  
|         |  | Item 1A |  | Risk Factors                                                                                                                                    |  | 8    
|         |  | Item 1B |  | Unresolved Staff Comments                                                                                                                       |  |      
|         |  |         |  | Not applicable                                                                                                                                  |  |      
|         |  | Item 2  |  | Properties                                                                                                                                      |  | 8    
|         |  | 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                             |  | 35-36
|         |  | Item 6  |  | Selected Financial Data                                                                                                                         |  | 9    
|         |  | Item 7  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                           |  | 10-36
|         |  | Item 7A |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                      |  | 22-23
|         |  | Item 8  |  | Financial Statements and Supplementary Data                                                                                                     |  |      
|         |  |         |  | Report of Independent Registered Public Accounting Firm                                                                                         |  | 37-38
|         |  |         |  | Consolidated Balance Sheets at December 31, 2005 and 2004                                                                                       |  | 39   
|         |  |         |  | Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2005                                        |  | 40   
|         |  |         |  | Consolidated Statements of Shareholders Equity and Comprehensive Income for each of the years in the three-year period ended December 31, 2005 |  | 41   
|         |  |         |  | Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2005                                    |  | 42   
|         |  |         |  | Notes to Consolidated Financial Statements                                                                                                      |  | 43-76
|         |  |         |  | Quarterly Financial Data for 2005 and 2004                                                                                                      |  | 35   
|         |  | Item 9  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                                            |  |      
|         |  |         |  | Not applicable.                                                                                                                                 |  |      
|         |  | Item 9A |  | Controls and Procedures                                                                                                                         |  | 77-80
|         |  |         |  | Managements Annual Report on Internal Control Over Financial Reporting                                                                         |  | 78   
|         |  |         |  | Report of Independent Registered Public Accounting Firm                                                                                         |  | 79-80
|         |  | 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.                                             |  |      

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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 2006 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 an operating subsidiary, First National
Investor Services, Inc. On November 4, 2005, FNB Corp. acquired, through its merger with United Financial, Inc. (United Financial), another wholly owned bank subsidiary, Alamance Bank (Alamance Bank), a North
Carolina-chartered bank organized in 1998 as a national bank. Alamance Bank was merged into First National Bank effective February 1, 2006. Alamance Bank owned Premier Investment Services, Inc., which offers insurance and investment products
and is now a subsidiary of First National Bank. FNB Corp. also owns a mortgage banking subsidiary, Dover Mortgage Company (Dover), and is parent to FNB United Statutory Trust I. 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 Alamance, Chatham, Guilford, Montgomery, Moore, Orange, 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, Burlington, China Grove, Ellerbe, Graham, Greensboro (two offices), Hillsborough, Kannapolis, Laurinburg, Pinehurst, Ramseur, Randleman, Rockingham
(two offices), Salisbury, Seagrove, Siler City, Southern Pines and Trinity. 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 automated teller machine network, and Star, a regional network.



First National Investor Services, Inc., which does business as
Marketplace Finance, is engaged in servicing loans purchased by First National Bank from automobile dealers.



Acquired by FNB Corp. on April 1, 2003 and operating as a separate subsidiary, Dover Mortgage Company originates, underwrites and closes mortgage
loans for sale into the secondary market. Dover has its main office in Charlotte, North Carolina and additional loan production offices in Carolina Beach, Goldsboro, Greenville, Lake Norman, Leland, Raleigh and Wilmington, North Carolina.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 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.



As noted above, on November 4, 2005, the Corporation
completed a merger for the acquisition of United Financial, Inc., holding company for Alamance Bank, headquartered in Graham, 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 Alamance Bank were recorded based on estimated fair values as of November 4, 2005, with the estimate of goodwill subject to possible adjustment during the one-year period from that
date. The consolidated financial statements include the results of operations of Alamance Bank since November 4, 2005.



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On September 18, 2005, FNB Corp. entered into a definitive merger agreement to acquire Integrity
Financial Corporation (Integrity), headquartered in Hickory, North Carolina and the holding company for First Gaston Bank of North Carolina. Integritys second subsidiary bank, Catawba Valley Bank, was merged into First Gaston Bank
effective January 5, 2006. First Gaston Bank is expected to merge into First National Bank as soon as practicable following the merger of Integrity into FNB Corp. The merger of Integrity into FNB Corp. will be accounted for using the purchase
method of accounting for business combinations and is subject to several conditions, including approval by the shareholders of Integrity and FNB Corp. and approval by applicable regulatory authorities. The transaction is also conditioned upon the
FNB Corp. shareholders approving an amendment to FNB Corp.s articles of incorporation to increase the amount of authorized shares of FNB Corp. common stock. Special shareholders meetings to approve the merger and, in the case of
FNB Corp., to approve an increase in the amount of authorized shares of FNB Corp. common stock, have been called to be held on March 15, 2006. Upon satisfaction of these conditions, the merger of the holding companies is anticipated to close
early in the second quarter of 2006. Integrity shareholders will receive 0.8743 shares of FNB Corp. common stock and $5.20 in cash for each share of Integrity common stock. At September 30, 2005, Integrity operated 12 offices through Catawba
Valley Bank and five offices through First Gaston Bank and had approximately $666 million in total assets, $546 million in deposits and $67 million in shareholders equity. In connection with the merger, it is expected that the Integrity
shareholders will receive approximately 4,591,918 shares of FNB Corp. common stock with an estimated fair value of $92 million and cash consideration amounting to approximately $27 million. The resulting goodwill is estimated to be approximately $76
million.



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



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



In November 2004, First National Bank received regulatory approval for the establishment of a second branch office in Greensboro, North Carolina. The new
office opened for business in January 2006.



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



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



In November 2005, FNB Corp. formed FNB United Statutory Trust I to facilitate the issuance of trust preferred securities. The trust is a statutory business trust formed under the laws of the State of Connecticut. All
common securities of the trust are owned by FNB Corp.



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 Alamance, Chatham, Guilford, Montgomery, Moore, Orange, Randolph,



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Richmond, Rowan and Scotland counties from approximately 90 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. 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 Act 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. With limited exceptions, bank holding companies may engage only in the
business of banking or managing or controlling banks or furnishing services to or performing services for their subsidiary banks. A significant exception is that a bank holding company may own shares in a company whose activities the Federal Reserve
Board has determined to be closely related to banking or managing or controlling banks.



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.



FNB Corp. acquired Alamance Bank, a North Carolina-chartered
bank, on November 4, 2005 through its merger with United Financial, Inc. Alamance Bank merged with and into First National Bank on February 1, 2006. Prior to the bank merger, Alamance Bank was regulated by the North Carolina Commissioner
of Banks.



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FNB Corp.s subsidiary, Dover Mortgage Company, is regulated by the North Carolina Commissioner of
Banks. Because Dover is a nonbank subsidiary of a bank holding company, it is also regulated by the Federal Reserve Board. Also, because Dover underwrites mortgages guaranteed by the government, it is subject to other audits and examinations as
required by the government agencies or the investors who purchase the mortgages.



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.



Any
capital loans by a bank holding company to any of its bank subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of such bank subsidiaries. In the event of a bank holding companys bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.



Transactions with Affiliates



There are certain restrictions on the ability of FNB Corp. and certain of
its nonbank affiliates to borrow from, and engage in other transactions with, its bank subsidiary and on the ability of its bank subsidiary to pay dividends to FNB Corp. In general, these restrictions require that any extensions of credit must be
secured by designated amounts of specified collateral and are limited, as to any one of FNB Corp. or a nonbank affiliate, to 10% of the lending banks capital stock and surplus, and, as to FNB Corp. and all such nonbank affiliates in the
aggregate, to 20% of such lending banks capital stock and surplus. These restrictions, other than the 10% of capital limit on covered transactions with any one affiliate, are also applied to transactions between national banks and their
financial subsidiaries. In addition, certain transactions with affiliates must be on terms and conditions, including credit standards, that are substantially the same, or at least as favorable to the institution, as those prevailing at the time for
comparable transactions involving other nonaffiliated companies or, in the absence of comparable transactions, on terms and conditions, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies.



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Unsafe and Unsound Practices



The OCC has authority under the Financial Institutions Advisory Act to prohibit national banks from engaging in any activity
that, in the OCCs opinion, constitutes an unsafe or unsound practice in conducting their businesses. The Federal Reserve Board has similar authority with respect to FNB Corp. and its nonbank subsidiaries.



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. The risk-based capital standards are
designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. 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.s 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. If, in the opinion of the appropriate federal regulatory authority, a bank under its jurisdiction is engaged in or is about to be engaged in an unsafe or unsound practice, the
authority may require that the bank cease and desist from such practice. The Federal Reserve Board, the OCC and the FDIC have indicated that paying dividends that deplete a banks capital base to an inadequate level would be an unsafe and
unsound banking practice. Under the FDICIA, an insured bank may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Further, the Federal Reserve Board, OCC and FDIC have each indicated that
banking institutions should generally pay dividends only out of current operating earnings.



FDIC Insurance Assessments



The deposits of First National Bank are insured up to regulatory limits by the FDIC. Accordingly, First National Bank is subject to deposit insurance assessments to maintain the Bank Insurance Fund, or BIF, or the Savings Association
Insurance Fund, or SAIF, administered by the FDIC. The FDIC has adopted regulations establishing a permanent risk-related deposit insurance assessment system. Under this system, the FDIC places each insured bank in one of nine risk categories based
on (1) the banks capitalization and (2) supervisory evaluations provided to the FDIC by the institutions primary supervisory authority. Each insured banks insurance assessment rate is then determined by the risk category
in which it is classified by the FDIC.



The annual insurance
premiums on bank deposits insured by the BIF and the SAIF vary between $0.00 per $100 of deposits for banks classified in the highest capital and supervisory evaluation categories to $0.27 per $100 of deposits for banks classified in the lowest
capital and supervisory categories.



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The Deposit Insurance Funds Act provides for additional assessments to be imposed on insured depository
institutions with respect to deposits insured by the BIF and the SAIF to pay for the cost of Financing Corporation funding. The FDIC established these assessment rates effective January 1, 2006 at $0.0132 per $100 annually for BIF-assessable
deposits and SAIF-assessable deposits. The assessments do not vary depending upon a depository institutions capitalization or supervisory evaluations.



Under the Federal Deposit Insurance Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and
unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a banks federal regulatory agency.



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. Should the Corporation fail to serve the community adequately, potential penalties are regulatory
denials to expand branches, relocate, add subsidiaries and affiliates, expand into new financial activities and merge with or purchase other financial institutions.



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.



Depositor Preference Statute



Under federal
law, depositors and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution, including federal funds
and letters of credit, in the liquidation or other resolution of such an institution by any receiver.



Gramm-Leach-Bliley Act



The Gramm-Leach-Bliley Act 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



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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, which 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.



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.



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##### Table of Contents

Employees



As of December 31, 2005, FNB Corp. had four officers, all of whom were also officers of First National Bank. On that same date, First National Bank
had 261 full-time employees and 30 part-time employees, Alamance Bank had 37 full-time employees and 4 part-time employees, and Dover had 48 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, Burlington, China Grove, Ellerbe, Graham, Greensboro (two offices), Hillsborough, Kannapolis, Laurinburg, Pinehurst, Ramseur, Randleman, Rockingham (two offices), Salisbury, Seagrove, Siler City,
Southern Pines and Trinity, North Carolina. The Bush Hill office in Archdale, the Friendly Center office in Greensboro and the Pinehurst office are leased facilities. The land on which the New Garden office in Greensboro and the Seagrove office are
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.



Risk Factors



There is a Limited Market for FNB Common Stock



Although FNB Corp. common stock is traded on the Nasdaq National Market, the volume of trading has historically been low,
averaging only a few thousand shares per week. Therefore, there can be no assurance that a holder of FNB Corp. common stock who wishes to sell his or her shares would be able to do so immediately or at an acceptable price.



Certain Provisions of FNB Corp.s Articles of Incorporation and
Bylaws May Discourage Takeovers



FNB Corp.s articles
of incorporation and bylaws contain certain anti-takeover provisions that may discourage or may make more difficult or expensive a tender offer, change in control or takeover attempt that is opposed by FNB Corp.s board of directors. In
particular, FNB Corp.s articles of incorporation and bylaws:



| |  |  | classify its board of directors into three classes, so that shareholders elect only one-third of its board of directors each year.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | permits FNB Corp.s board of directors to issue, without shareholder approval unless otherwise required by law, nonvoting preferred stock with such terms as the board may
determine, and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require the affirmative vote of the holders of at least 75% of FNB Corp.s voting shares to approve major corporate transactions unless the transaction is approved by
three-fourths of FNB Corp.s disinterested directors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These provisions of FNB Corp.s articles of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control, even though a majority of FNB Corp.s
shareholders may consider such proposal desirable. Such provisions could also make it more difficult for third parties to remove and replace the members of FNB Corp.s board of directors. They may also inhibit increases in the trading price of
FNB Corp.s common stock that could result from takeover attempts.



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



FIVE YEAR FINANCIAL HISTORY



|                                                      |  |                                               |           |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|----------------------------------------------------- |  | --------------------------------------------- | --------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                      |  | 2005                                          |           |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|                                                      |  | (dollars in thousands, except per share data) |          
|Summary of Operations                                 |  |                                               |           |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest income                                       |  | $                                             | 54,415    |   |      | $ | 40,436  |      |  | $ | 40,158  |   |  | $    | 39,452  |   |  | $ | 41,260  |  
|Interest expense                                      |  |                                               | 20,050    |   |      |   | 12,402  |      |  |   | 13,144  |   |  |      | 14,114  |   |  |   | 20,492  |  
|                                                      |  |                                               |           |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income                                   |  |                                               | 34,365    |   |      |   | 28,034  |      |  |   | 27,014  |   |  |      | 25,338  |   |  |   | 20,768  |  
|Provision for loan losses                             |  |                                               | 2,842     |   |      |   | 4,030   |      |  |   | 1,860   |   |  |      | 1,780   |   |  |   | 1,200   |  
|                                                      |  |                                               |           |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income after provision for loan losses   |  |                                               | 31,523    |   |      |   | 24,004  |      |  |   | 25,154  |   |  |      | 23,558  |   |  |   | 19,568  |  
|Noninterest income                                    |  |                                               | 14,926    |   |      |   | 13,673  |      |  |   | 13,600  |   |  |      | 8,268   |   |  |   | 5,900   |  
|Noninterest expense                                   |  |                                               | 31,678    |   |      |   | 28,755  |      |  |   | 27,159  |   |  |      | 20,140  |   |  |   | 16,077  |  
|                                                      |  |                                               |           |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income before income taxes                            |  |                                               | 14,771    |   |      |   | 8,922   |      |  |   | 11,595  |   |  |      | 11,686  |   |  |   | 9,391   |  
|Income taxes                                          |  |                                               | 4,834     |   |      |   | 2,324   |      |  |   | 3,195   |   |  |      | 3,486   |   |  |   | 2,663   |  
|                                                      |  |                                               |           |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income                                            |  | $                                             | 9,937     |   |      | $ | 6,598   |      |  | $ | 8,400   |   |  | $    | 8,200   |   |  | $ | 6,728   |  
|                                                      |  |                                               |           |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                      |  |                                               |           |   |     
|Per Share Data                                        |  |                                               |           |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income:                                           |  |                                               |           |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic                                                 |  | $                                             | 1.73      |   |      | $ | 1.17    |      |  | $ | 1.50    |   |  | $    | 1.63    |   |  | $ | 1.35    |  
|Diluted                                               |  |                                               | 1.69      |   |      |   | 1.13    |      |  |   | 1.43    |   |  |      | 1.58    |   |  |   | 1.32    |  
|Cash dividends declared                               |  |                                               | .62       |   |      |   | .60     |      |  |   | .59     |   |  |      | .58     |   |  |   | .53     |  
|Book value                                            |  |                                               | 16.06     |   |      |   | 14.66   |      |  |   | 14.32   |   |  |      | 13.49   |   |  |   | 11.74   |  
|                                                      |  |                                               |           |   |     
|Balance Sheet Information                             |  |                                               |           |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total assets                                          |  | $                                             | 1,102,085 |   |      | $ | 862,891 |      |  | $ | 773,245 |   |  | $    | 754,370 |   |  | $ | 593,742 |  
|Investment securities                                 |  |                                               | 159,806   |   |      |   | 125,143 |      |  |   | 144,259 |   |  |      | 153,857 |   |  |   | 163,150 |  
|Loans                                                 |  |                                               | 812,666   |   |      |   | 664,754 |      |  |   | 551,913 |   |  |      | 502,342 |   |  |   | 391,632 |  
|Goodwill                                              |  |                                               | 31,381    |   |      |   | 16,335  |      |  |   | 16,325  |   |  |      | 12,601  |   |  |   |        |  
|Deposits                                              |  |                                               | 841,609   |   |      |   | 659,544 |      |  |   | 597,925 |   |  |      | 592,354 |   |  |   | 480,230 |  
|Borrowed funds                                        |  |                                               | 146,567   |   |      |   | 113,647 |      |  |   | 86,721  |   |  |      | 81,815  |   |  |   | 50,812  |  
|Shareholders equity                                  |  |                                               | 102,315   |   |      |   | 82,147  |      |  |   | 81,458  |   |  |      | 73,090  |   |  |   | 55,907  |  
|                                                      |  |                                               |           |   |     
|Ratios (Averages)                                     |  |                                               |           |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on assets                                      |  |                                               | 1.06      | % |      |   | .80     | %    |  |   | 1.07    | % |  |      | 1.25    | % |  |   | 1.15    | %
|Return on shareholders equity                        |  |                                               | 11.25     |   |      |   | 8.00    |      |  |   | 10.66   |   |  |      | 12.82   |   |  |   | 11.63   |  
|Shareholders equity to assets                        |  |                                               | 9.46      |   |      |   | 9.99    |      |  |   | 10.00   |   |  |      | 9.75    |   |  |   | 9.93    |  
|Dividend payout ratio                                 |  |                                               | 36.32     |   |      |   | 51.36   |      |  |   | 39.54   |   |  |      | 36.05   |   |  |   | 38.91   |  
|Loans to deposits                                     |  |                                               | 99.26     |   |      |   | 98.03   |      |  |   | 92.36   |   |  |      | 82.00   |   |  |   | 81.71   |  
|Net yield on earning assets, taxable equivalent basis |  |                                               | 4.16      |   |      |   | 3.89    |      |  |   | 3.94    |   |  |      | 4.40    |   |  |   | 4.03    |  



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##### Table of Contents

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.



Alamance Bank, acquired through merger with United Financial, Inc. as
discussed below in the OverviewMerger Acquisition of Alamance Bank in 2005, was merged into First National Bank on February 1, 2006 and, for purposes of this discussion and analysis, is considered a part of First National Bank
in 2005.



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 Alamance, Chatham, Guilford, Montgomery, Moore, Orange, 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.



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 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.



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##### Table of Contents

Merger Acquisition of Alamance Bank in 2005



On November 4, 2005, the Corporation completed a merger for the
acquisition of United Financial, Inc. (United), holding company for Alamance Bank, headquartered in Graham, North Carolina. At the date of merger, Alamance Bank operated three offices and, based on estimated fair values, had $163,858,000
in total assets, $96,624,000 in loans and $112,961,000 in deposits. On February 1, 2006, Alamance Bank was merged into First National Bank. Pursuant to the terms of the merger, each share of United common stock was converted, at the election of
the shareholder, into either: (1) $14.25 in cash, (2) 0.6828 shares of FNB Corp. common stock, or (3) $4.99 in cash and 0.4438 shares of FNB Corp. common stock, the overall conversion of stock being limited to 65% of United shares.
The aggregate purchase price was $22,708,000, consisting of $8,201,000 of cash payments and 728,625 shares of FNB Corp. common stock valued at $14,507,000. The merger transaction has been accounted for using the purchase method of accounting for
business combinations, and accordingly, the assets and liabilities of Alamance Bank were recorded based on estimated fair values as of November 4, 2005, with the estimate of goodwill being subject to possible adjustment during the one-year
period from that date. The consolidated financial statements include the results of operations of Alamance Bank since November 4, 2005.



Pending Merger for Acquisition of Integrity Financial Corporation



On September 18, 2005, the Corporation entered into a definitive merger agreement to acquire Integrity Financial
Corporation (Integrity), headquartered in Hickory, North Carolina and the holding company for First Gaston Bank of North Carolina. Integritys second subsidiary bank, Catawba Valley Bank was merged into First Gaston Bank effective
January 5, 2006. As soon as practicable following the merger of the holding companies, First Gaston Bank will be merged with and into First National Bank. The merger of the holding companies will be accounted for using the purchase method of
accounting for business combinations and is subject to several conditions, including approval by the shareholders of Integrity and FNB Corp., which vote is scheduled to occur on March 15, 2006, and approval by applicable regulatory authorities.
Upon satisfaction of these conditions, the merger of the holding companies is anticipated to close early in the second quarter of 2006. Integrity shareholders will receive 0.8743 shares of FNB Corp. common stock and $5.20 in cash for each share of
Integrity common stock. At September 30, 2005, Integrity operated twelve offices through Catawba Valley Bank and five offices through First Gaston Bank and had approximately $666,000,000 in total assets, $546,000,000 in deposits and $67,000,000
in shareholders equity. In connection with the merger, it is expected that the Integrity shareholders will receive approximately 4,592,000 shares of FNB Corp. common stock with an estimated fair value of $92,000,000 and cash consideration
amounting to approximately $27,000,000. The resulting goodwill is estimated to be approximately $76,000,000.



Primary Financial Data for 2005



The Corporation earned $9,937,000 in 2005, a 50.6% increase in net income from 2004. Basic earnings per share increased from $1.17 in 2004 to $1.73 in
2005 and diluted earnings per share increased from $1.13 to $1.69, for percentage increases of 47.9% and 49.6%, respectively. As noted above, Alamance Bank was acquired through merger effective November 4, 2005, 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 2005 and 2004 (see Note 19 to the Consolidated Financial Statements for business segment information and
also below in Significant Factors Affecting Earnings in 2005). Largely reflecting the Alamance Bank acquisition, which added $163,168,000 or approximately 17.5% to total assets at the time of acquisition, total assets were $1,102,085,000
at December 31, 2005, up 27.7% from year-end 2004. Loans amounted to $812,666,000 at December 31, 2005, increasing 22.3% from the prior year. Total deposits grew 27.6% to $841,609,000 in 2005.



Significant Factors Affecting Earnings in 2005



Because Alamance Bank was acquired late in the year on November 4, 2005
and on a comparative basis was not significant in size relative to the existing operation at the time of acquisition, there was no substantial effect from this acquisition on either net income or on the income statement amounts recorded in the
consolidated financial statements for 2005.



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##### Table of Contents

As a point of reference in reviewing the 2005 results, 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 and $6,046,000 at December 31, 2005.



In 2005, the provision for loan losses was below the level of 2004 by
$1,188,000. There was a negative effect on the provision for loan losses in 2005, however, due to the adoption in the second quarter of 2005 of new regulatory guidance on the accounting for courtesy overdraft programs which resulted in a $324,000
provision increase in that quarter. As a result of this same regulatory guidance, however, the effect of this initial provision increase was partially offset by a $156,000 increase in income from service charges on deposit accounts. In periods
subsequent to the second quarter of 2005, the regulatory guidance on accounting for courtesy overdraft programs will have a continuing effect on the results of operations by increasing the level of both the provision for loan losses and income from
service charges on deposit accounts, although these effects should tend to be offsetting with only a minor impact on net income. The total increase in the provision for loan losses in 2005 due to the new regulatory guidance was $712,000.



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.



Prior to mid-2004, earnings had been affected for an extended period by historically low interest rates produced by the
Federal Reserves stimulative monetary policy. Commencing June 29, 2004, however, the Federal Reserve implemented a tightening policy that has resulted in thirteen one-quarter percent increases in the prime rate, bringing it to a level of
7.25% at December 31, 2005. These increases are working to improve the yield on earning assets, although the cost of funds is being impacted by the general increase in interest rates. Net interest income increased $6,331,000 or 22.6% in 2005
compared to 2004, reflecting the effect of a 13.2% increase in the level of average earning assets coupled with an increase in the net interest margin, stated on a taxable equivalent basis, from 3.89% in 2004 to 4.16% in 2005.



The comparison of noninterest income between 2005 and 2004, which increased
$1,253,000 or 9.2%, was specifically affected by the following factors:



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



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



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##### Table of Contents

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



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



Noninterest
expense increased $2,923,000 or 10.2% in 2005 compared to 2004. This increase resulted primarily from a higher level of compensation expense, due in part to increased incentive compensation, the higher level of mortgage loan sales activity and the
acquisition of Alamance Bank on November 4, 2005 as discussed above.



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.



Earnings Review



The Corporations net income increased $3,339,000 in 2005, up 50.6% over 2004, largely reflecting the significant
increase in net interest income. Earnings were positively impacted in 2005 by increases of $6,331,000 or 22.6% in net interest income and $1,253,000 in noninterest income and by a $1,188,000 reduction in the provision for loan losses, which gains
were partially offset by a $2,923,000 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 2005 and 2004 are discussed
in the OverviewSignificant Factors Affecting Earnings in 2005.



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. 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 are discussed in the OverviewSignificant Factors Affecting Earnings in 2005. In addition to the factors discussed in the Overview
affecting income from mortgage loan sales, it should be noted that such income declined $858,000 in 2004 compared to 2003, reflecting in part the negative impact in 2004 from the increase in 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 decline in income from mortgage loan sales was somewhat offset, however, by the reduction in compensation and other expenses
related to the mortgage operations.



Return on average assets
decreased from 1.07% in 2003 to 0.80% in 2004 and increased to 1.06% in 2005. Return on average shareholders equity decreased from 10.66% in 2003 to 8.00% in 2004 and increased to 11.25% in 2005. In 2005, return on tangible assets and equity
(calculated by deducting average goodwill and core deposit premiums from average assets and from average equity) amounted to 1.09% and 14.36%, respectively.



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##### Table of Contents

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 $34,365,000 in 2005 compared to $28,034,000 in 2004. The increase of $6,331,000 or 22.6% resulted
primarily from a 13.2% increase in the level of average earning assets coupled with an improvement in the net yield on earning assets, or net interest margin, from 3.89% in 2004 to 4.16% in 2005. In 2004, 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. On a taxable equivalent
basis, the increases in net interest income in 2005 and 2004 were $6,220,000 and $907,000, 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.



14



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##### Table of Contents

Table 1

Average
Balances and Net Interest Income Analysis



|                                           |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  
|------------------------------------------ |  | ------------------------------------------------ | ------- | ---------------------- | ---- | -------------------------- |  | ---- | -------------- |  | ---------------------- | ------- | ------------------------ | - | ------ | -------------- | ---- | ---------------------- |  | ------------------------ | ------- |  | - | ------ |  | ---- | -
|                                           |  | 2005                                             |         |                        | 2004 |                            |  | 2003 |               
|                                           |  | AverageBalance                                   |         | InterestIncome/Expense |      | Average Rates Earned/ Paid |  |      | AverageBalance |  | InterestIncome/Expense |         | AverageRatesEarned/ Paid |   |        | AverageBalance |      | InterestIncome/Expense |  | AverageRatesEarned/ Paid |        
|                                           |  | (taxable equivalent basis, dollars in thousands) |        
|EARNING ASSETS                             |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  
|Loans (1) (2)                              |  | $                                                | 711,431 |                        | $    | 48,718                     |  | 6.85 | %              |  | $                      | 612,217 |                          | $ | 35,308 |                | 5.77 | %                      |  | $                        | 549,234 |  | $ | 33,351 |  | 6.07 | %
|Investment securities (1):                 |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  
|Taxable income                             |  |                                                  | 85,082  |                        |      | 3,860                      |  | 4.54 |                |  |                        | 81,253  |                          |   | 3,556  |                | 4.38 |                        |  |                          | 105,617 |  |   | 5,397  |  | 5.11 |  
|Non-taxable income                         |  |                                                  | 44,731  |                        |      | 2,595                      |  | 5.80 |                |  |                        | 47,630  |                          |   | 2,725  |                | 5.72 |                        |  |                          | 41,452  |  |   | 2,555  |  | 6.16 |  
|Other earning assets                       |  |                                                  | 13,129  |                        |      | 445                        |  | 3.39 |                |  |                        | 13,602  |                          |   | 161    |                | 1.19 |                        |  |                          | 25,610  |  |   | 282    |  | 1.10 |  
|                                           |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  
|Total earning assets                       |  |                                                  | 854,373 |                        |      | 55,618                     |  | 6.51 |                |  |                        | 754,702 |                          |   | 41,750 |                | 5.53 |                        |  |                          | 721,913 |  |   | 41,585 |  | 5.76 |  
|                                           |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  
|Cash and due from banks                    |  |                                                  | 18,642  |                        |      |                            |  |      |                |  |                        | 16,945  |                          |   |        |                |      |                        |  |                          | 17,337  |  |   |        |  |      |  
|Goodwill                                   |  |                                                  | 18,857  |                        |      |                            |  |      |                |  |                        | 16,332  |                          |   |        |                |      |                        |  |                          | 15,403  |  |   |        |  |      |  
|Other assets, net                          |  |                                                  | 42,035  |                        |      |                            |  |      |                |  |                        | 37,211  |                          |   |        |                |      |                        |  |                          | 33,698  |  |   |        |  |      |  
|                                           |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  
|TOTAL ASSETS                               |  | $                                                | 933,907 |                        |      |                            |  |      |                |  | $                      | 825,190 |                          |   |        |                |      |                        |  | $                        | 788,351 |  |   |        |  |      |  
|                                           |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  
|INTEREST-BEARING LIABILITIES               |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  
|Interest-bearing deposits:                 |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  
|Demand deposits                            |  | $                                                | 97,623  |                        |      | 733                        |  | .75  |                |  | $                      | 89,827  |                          |   | 362    |                | .40  |                        |  | $                        | 85,039  |  |   | 421    |  | .50  |  
|Savings deposits                           |  |                                                  | 51,483  |                        |      | 165                        |  | .32  |                |  |                        | 54,298  |                          |   | 168    |                | .31  |                        |  |                          | 51,586  |  |   | 279    |  | .54  |  
|Money market deposits                      |  |                                                  | 75,948  |                        |      | 1,504                      |  | 1.98 |                |  |                        | 75,824  |                          |   | 798    |                | 1.05 |                        |  |                          | 74,881  |  |   | 838    |  | 1.12 |  
|Certificates and other time deposits       |  |                                                  | 407,303 |                        |      | 12,917                     |  | 3.17 |                |  |                        | 329,812 |                          |   | 7,646  |                | 2.32 |                        |  |                          | 319,581 |  |   | 8,062  |  | 2.52 |  
|Retail repurchase agreements               |  |                                                  | 17,770  |                        |      | 503                        |  | 2.83 |                |  |                        | 15,890  |                          |   | 158    |                | .99  |                        |  |                          | 18,786  |  |   | 160    |  | .85  |  
|Federal Home Loan Bank advances            |  |                                                  | 71,152  |                        |      | 2,766                      |  | 3.89 |                |  |                        | 69,490  |                          |   | 2,546  |                | 3.66 |                        |  |                          | 53,240  |  |   | 2,321  |  | 4.36 |  
|Federal funds purchased                    |  |                                                  | 342     |                        |      | 9                          |  | 2.53 |                |  |                        | 4,181   |                          |   | 71     |                | 1.70 |                        |  |                          | 515     |  |   | 7      |  | 1.39 |  
|Other borrowed funds                       |  |                                                  | 31,044  |                        |      | 1,453                      |  | 4.68 |                |  |                        | 22,306  |                          |   | 653    |                | 2.93 |                        |  |                          | 35,044  |  |   | 1,056  |  | 3.01 |  
|                                           |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  
|Total interest-bearing liabilities         |  |                                                  | 752,665 |                        |      | 20,050                     |  | 2.66 |                |  |                        | 661,628 |                          |   | 12,402 |                | 1.87 |                        |  |                          | 638,672 |  |   | 13,144 |  | 2.06 |  
|                                           |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  
|Noninterest-bearing demand deposits        |  |                                                  | 84,393  |                        |      |                            |  |      |                |  |                        | 74,741  |                          |   |        |                |      |                        |  |                          | 63,608  |  |   |        |  |      |  
|Other liabilities                          |  |                                                  | 8,481   |                        |      |                            |  |      |                |  |                        | 6,389   |                          |   |        |                |      |                        |  |                          | 7,254   |  |   |        |  |      |  
|Shareholders equity                       |  |                                                  | 88,368  |                        |      |                            |  |      |                |  |                        | 82,432  |                          |   |        |                |      |                        |  |                          | 78,817  |  |   |        |  |      |  
|                                           |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |  | $                                                | 933,907 |                        |      |                            |  |      |                |  | $                      | 825,190 |                          |   |        |                |      |                        |  | $                        | 788,351 |  |   |        |  |      |  
|                                           |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  
|NET INTEREST INCOME AND SPREAD             |  |                                                  |         |                        | $    | 35,568                     |  | 3.84 | %              |  |                        |         |                          | $ | 29,348 |                | 3.66 | %                      |  |                          |         |  | $ | 28,441 |  | 3.70 | %
|                                           |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  
|NET YIELD ON EARNING ASSETS                |  |                                                  |         |                        |      |                            |  | 4.16 | %              |  |                        |         |                          |   |        |                | 3.89 | %                      |  |                          |         |  |   |        |  | 3.94 | %
|                                           |  |                                                  |         |                        |      |                            |  |      |                |  |                        |         |                          |   |        |                |      |                        |  |                          |         |  |   |        |  |      |  

---

|(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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15



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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 and eight more such rate increases in 2005 have raised the prime rate to the 7.25% level at December 31, 2005. The prime rate averaged 6.99% in 2001,
falling to 4.67% in 2002 and 4.12% in 2003 and rising to 4.33% in 2004 and 6.15% in 2005.



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



In 2005, the net interest spread increased
by 18 basis points from 3.66% in 2004 to 3.84% in 2005, reflecting the effect of an increase in the average total yield on earning assets that more than offset the increase in the average rate paid on interest-bearing liabilities, or cost of funds.
The yield on earning assets increased by 98 basis points from 5.53% in 2004 to 6.51% in 2005, while the cost of funds increased by 79 basis points from 1.87% to 2.66%. In 2004, the 4 basis points decrease in net interest spread resulted from a 23
basis points decrease in the yield on earning assets as partially offset by a 19 basis points decrease in the cost of funds.



16



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##### Table of Contents

The 2005 and 2004 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



|                                     |  |                                          |       |   |                     |   |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|------------------------------------ |  | ---------------------------------------- | ----- | - | ------------------- | - | ---------- |  | - | ------ | - |  | ---- | ------ | - | ---------- | - | ------ | - |  | - | ------ | -
|                                     |  | 2005 Versus 2004                         |       |   | 2004 Versus 2003    |  
|                                     |  | 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)                            |  | $                                        | 6,223 |   |                     | $ | 7,187      |  | $ | 13,410 |   |  | $    | 3,677  |   |            | $ | (1,720 | ) |  | $ | 1,957  |  
|Investment securities (2):           |  |                                          |       |   |                     |   |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Taxable income                       |  |                                          | 171   |   |                     |   | 133        |  |   | 304    |   |  |      | (1,137 | ) |            |   | (704   | ) |  |   | (1,841 | )
|Non-taxable income                   |  |                                          | (168  | ) |                     |   | 38         |  |   | (130   | ) |  |      | 362    |   |            |   | (192   | ) |  |   | 170    |  
|Other earning assets                 |  |                                          | (6    | ) |                     |   | 290        |  |   | 284    |   |  |      | (142   | ) |            |   | 21     |   |  |   | (121   | )
|                                     |  |                                          |       |   |                     |   |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Total interest income                |  |                                          | 6,220 |   |                     |   | 7,648      |  |   | 13,868 |   |  |      | 2,760  |   |            |   | (2,595 | ) |  |   | 165    |  
|                                     |  |                                          |       |   |                     |   |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Interest Expense                     |  |                                          |       |   |                     |   |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Interest-bearing deposits:           |  |                                          |       |   |                     |   |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Demand deposits                      |  |                                          | 33    |   |                     |   | 338        |  |   | 371    |   |  |      | 25     |   |            |   | (84    | ) |  |   | (59    | )
|Savings deposits                     |  |                                          | (9    | ) |                     |   | 6          |  |   | (3     | ) |  |      | 14     |   |            |   | (125   | ) |  |   | (111   | )
|Money market deposits                |  |                                          | 1     |   |                     |   | 705        |  |   | 706    |   |  |      | 11     |   |            |   | (51    | ) |  |   | (40    | )
|Certificates and other time deposits |  |                                          | 2,060 |   |                     |   | 3,211      |  |   | 5,271  |   |  |      | 249    |   |            |   | (665   | ) |  |   | (416   | )
|Retail repurchase agreements         |  |                                          | 21    |   |                     |   | 324        |  |   | 345    |   |  |      | (26    | ) |            |   | 24     |   |  |   | (2     | )
|Federal Home Loan Bank advances      |  |                                          | 61    |   |                     |   | 159        |  |   | 220    |   |  |      | 636    |   |            |   | (411   | ) |  |   | 225    |  
|Federal funds purchased              |  |                                          | (86   | ) |                     |   | 24         |  |   | (62    | ) |  |      | 62     |   |            |   | 2      |   |  |   | 64     |  
|Other borrowed funds                 |  |                                          | 317   |   |                     |   | 483        |  |   | 800    |   |  |      | (376   | ) |            |   | (27    | ) |  |   | (403   | )
|                                     |  |                                          |       |   |                     |   |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Total interest expense               |  |                                          | 2,398 |   |                     |   | 5,250      |  |   | 7,648  |   |  |      | 595    |   |            |   | (1,337 | ) |  |   | (742   | )
|                                     |  |                                          |       |   |                     |   |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  
|Net Interest Income                  |  | $                                        | 3,822 |   |                     | $ | 2,398      |  | $ | 6,220  |   |  | $    | 2,165  |   |            | $ | (1,258 | ) |  | $ | 907    |  
|                                     |  |                                          |       |   |                     |   |            |  |   |        |   |  |      |        |   |            |   |        |   |  |   |        |  

---

|(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 positively impacted in 2005 by a $1,188,000 reduction in the provision for loan losses and were negatively impacted in 2004 by a $2,170,000 increase in the provision. As discussed in the OverviewSignificant Factors
Affecting Earnings in 2005, the provision for loan losses was affected in 2005 by the adoption of new regulatory guidance on the accounting for courtesy overdraft programs which resulted in a $712,000 provision increase. Further effects from
the adoption of the new regulatory guidance are discussed in the Overview.



The increase in the provision for loan losses in 2004 largely resulted from the $2,780,000 provision recorded in the 2004 second quarter which exceeded the 2003 second quarter provision by $1,950,000. Actual



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##### Table of Contents

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 and $6,046,000 at December 31, 2005.



The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.25% at December 31, 2005, 1.12% at December 31, 2004
and 1.14% at December 31, 2003. The allowance percentage has increased based on the results from application of the allowance model that assigns reserves to various components of the loan portfolio in order to provide for probable inherent
losses and also from the effect of the relative allowance level assigned to the loans of Alamance Bank, which was acquired on November 4, 2005 as discussed in the Overview.



Noninterest Income



Noninterest income increased $1,253,000 or 9.2% in 2005, due primarily to increases of $610,000 in income from mortgage loan
sales and $638,000 in service charges on deposit accounts. Certain factors specifically related to these increases are discussed in the OverviewSignificant Factors Affecting Earnings in 2005.



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 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. Certain factors specifically affecting income from mortgage loan sales in 2004 are discussed in the OverviewSignificant Factors Affecting Earnings in 2005. In addition to the factors discussed in the
Overview, it should be noted that the decline in such income from 2003 to 2004 reflected in part the negative impact in 2004 from the increase in 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 decline in income from mortgage loan sales was somewhat offset, however, by the reduction in compensation and other expenses related to the mortgage operations.



Noninterest Expense



Noninterest expense was $2,923,000 or 10.2% higher in 2005. This increase
resulted primarily from a higher level of compensation expense, due in part to increased incentive compensation, the higher level of mortgage loan sales activity and the acquisition of Alamance Bank on November 4, 2005 as discussed in the
Overview.



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 Noninterest Income, 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.



Income Taxes



The effective income tax rate
increased from 26.0% in 2004 to 32.7% in 2005 due principally to the significant increase in the ratio of taxable to tax-exempt income. Exclusive of the $173,000 reduction in income tax expense in 2003 for the change in the valuation allowance for
state deferred income tax assets as a result of



18



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##### Table of Contents

managements judgment that these assets would be realized in future periods, the 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.



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.



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, 2005. Transaction deposit accounts with indeterminate maturities have been classified as having
payments due in one year or less. Benefit plan payments cover estimated amounts due through 2015.



Table 3

Contractual Obligations



|                                           |  |                                             |         |                  |   |                   |  |               |        |       |   |        |  |   |          
|------------------------------------------ |  | ------------------------------------------- | ------- | ---------------- | - | ----------------- |  | ------------- | ------ | ----- | - | ------ |  | - | ---------
|                                           |  | Payments Due by Period at December 31, 2005
|                                           |  | OneYear orLess                              |         | One toThreeYears |   | Three toFiveYears |  | OverFiveYears |        | Total
|                                           |  | (dollars in thousands)                     
|Deposits                                   |  | $                                           | 726,570 |                  | $ | 103,723           |  | $             | 10,717 |       | $ | 599    |  | $ | 841,609  
|Retail repurchase agreements               |  |                                             | 21,338  |                  |   |                  |  |               |       |       |   |       |  |   | 21,338   
|Federal Home Loan Bank advances            |  |                                             | 5,964   |                  |   | 5,183             |  |               | 21,143 |       |   | 53,935 |  |   | 86,225   
|Other borrowed funds                       |  |                                             | 15,885  |                  |   | 2,500             |  |               |       |       |   | 20,619 |  |   | 39,004   
|Lease obligations                          |  |                                             | 365     |                  |   | 507               |  |               | 413    |       |   | 3,544  |  |   | 4,829    
|Estimated benefit plan payments:           |  |                                             |         |                  |   |                   |  |               |        |       |   |        |  |   |          
|Pension                                    |  |                                             | 396     |                  |   | 832               |  |               | 1,047  |       |   | 3,233  |  |   | 5,508    
|Other                                      |  |                                             | 85      |                  |   | 207               |  |               | 321    |       |   | 874    |  |   | 1,487    
|Pension plan contribution expected in 2006 |  |                                             |        |                  |   |                  |  |               |       |       |   |       |  |   |         
|                                           |  |                                             |         |                  |   |                   |  |               |        |       |   |        |  |   |          
|Total contractual cash obligations         |  | $                                           | 770,603 |                  | $ | 112,952           |  | $             | 33,641 |       | $ | 82,804 |  | $ | 1,000,000
|                                           |  |                                             |         |                  |   |                   |  |               |        |       |   |        |  |   |          



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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, 2005 are discussed below.



Commitments by First National Bank to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. At December 31, 2005, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $195,712,000. 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.



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 $7,767,000 at December 31, 2005 and $6,445,000 at December 31, 2004. Due to insignificance, the Corporation has recorded no liability at December 31, 2005 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 $34,648,000 at December 31, 2005, and the related
forward sales commitments totaled $34,648,000. Loans held for sale by Dover Mortgage Company totaled $16,282,000 at December 31, 2005, and the related forward sales commitments totaled $16,282,000.



First National Bank had loans held for sale of $1,333,000 at
December 31, 2005. Binding commitments of First National Bank for the origination of mortgage loans intended to be held for sale at December 31, 2005 were not material.



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



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##### Table of Contents

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



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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, 2005 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, 2005      |        
|                                                                     |  | Rate Maturity in Days  |         |   | Beyond One Year |   |         | Total   | 
|                                                                     |  | 1-90                   |         |   | 91-180          |   |         | 181-365 |  |   |         
|                                                                     |  | (dollars in thousands) |        
|Earning Assets                                                       |  |                        |         |   |                 |   |         |         |  |   |          |   |  |   |         |   |  |   |         |  
|Loans                                                                |  | $                      | 506,933 |   |                 | $ | 17,195  |         |  | $ | 31,112   |   |  | $ | 257,426 |   |  | $ | 812,666 |  
|Investment securities                                                |  |                        | 13,421  |   |                 |   | 2,693   |         |  |   | 3,423    |   |  |   | 140,269 |   |  |   | 159,806 |  
|Interest-bearing bank balances                                       |  |                        | 2,310   |   |                 |   |        |         |  |   |         |   |  |   |        |   |  |   | 2,310   |  
|Federal funds sold                                                   |  |                        | 20,180  |   |                 |   |        |         |  |   |         |   |  |   |        |   |  |   | 20,180  |  
|                                                                     |  |                        |         |   |                 |   |         |         |  |   |          |   |  |   |         |   |  |   |         |  
|Total earning assets                                                 |  |                        | 542,844 |   |                 |   | 19,888  |         |  |   | 34,535   |   |  |   | 397,695 |   |  |   | 994,962 |  
|                                                                     |  |                        |         |   |                 |   |         |         |  |   |          |   |  |   |         |   |  |   |         |  
|Interest-Bearing Liabilities                                         |  |                        |         |   |                 |   |         |         |  |   |          |   |  |   |         |   |  |   |         |  
|Interest-bearing deposits:                                           |  |                        |         |   |                 |   |         |         |  |   |          |   |  |   |         |   |  |   |         |  
|Demand deposits                                                      |  |                        | 58,280  |   |                 |   |        |         |  |   |         |   |  |   | 58,279  |   |  |   | 116,559 |  
|Savings deposits                                                     |  |                        | 25,382  |   |                 |   |        |         |  |   |         |   |  |   | 25,381  |   |  |   | 50,763  |  
|Money market deposits                                                |  |                        | 42,767  |   |                 |   |        |         |  |   |         |   |  |   | 42,766  |   |  |   | 85,533  |  
|Time deposits of $100,000 or more                                    |  |                        | 75,974  |   |                 |   | 44,369  |         |  |   | 60,092   |   |  |   | 49,475  |   |  |   | 229,910 |  
|Other time deposits                                                  |  |                        | 63,168  |   |                 |   | 46,134  |         |  |   | 82,456   |   |  |   | 66,621  |   |  |   | 258,379 |  
|Retail repurchase agreements                                         |  |                        | 21,338  |   |                 |   |        |         |  |   |         |   |  |   |        |   |  |   | 21,338  |  
|Federal Home Loan Bank advances                                      |  |                        | 1,519   |   |                 |   | 3,462   |         |  |   | 983      |   |  |   | 80,261  |   |  |   | 86,225  |  
|Other borrowed funds                                                 |  |                        |        |   |                 |   | 15,885  |         |  |   |         |   |  |   | 23,119  |   |  |   | 39,004  |  
|                                                                     |  |                        |         |   |                 |   |         |         |  |   |          |   |  |   |         |   |  |   |         |  
|Total interest-bearing liabilities                                   |  |                        | 288,428 |   |                 |   | 109,850 |         |  |   | 143,531  |   |  |   | 345,902 |   |  |   | 887,711 |  
|                                                                     |  |                        |         |   |                 |   |         |         |  |   |          |   |  |   |         |   |  |   |         |  
|Interest Sensitivity Gap                                             |  | $                      | 254,416 |   |                 | $ | (89,962 | )       |  | $ | (108,996 | ) |  | $ | 51,793  |   |  | $ | 107,251 |  
|                                                                     |  |                        |         |   |                 |   |         |         |  |   |          |   |  |   |         |   |  |   |         |  
|Cumulative gap                                                       |  | $                      | 254,416 |   |                 | $ | 164,454 |         |  | $ | 55,458   |   |  | $ | 107,251 |   |  | $ | 107,251 |  
|Ratio of interest-sensitive assets to interest-sensitive liabilities |  |                        | 188     | % |                 |   | 18      | %       |  |   | 24       | % |  |   | 115     | % |  |   | 112     | %



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.



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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, 2005.



Table 5

Market Risk Analysis of Financial Instruments



|                                 |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|-------------------------------- |  | ------------------------------------------- | ------- | ---- | - | ------- |  | ---- | ------ | ---- | - | ---------------- |  | ----- | ------- | ----------------------- | - | ------- | ------------------- | - | ------- |  | ---- | - |  | - | -------
|                                 |  | Contractual Maturities at December 31, 2005 |         |      |   |         | 
|                                 |  | 2006                                        |         | 2007 |   | 2008    |  | 2009 |        | 2010 |   | BeyondFive Years |  | Total |         | AverageInterestRate (1) |   |         | EstimatedFair Value
|                                 |  | (dollars in thousands)                     
|Financial Assets                 |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Debt Securities (2):             |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Fixed rate                       |  | $                                           | 11,678  |      | $ | 7,654   |  | $    | 14,894 |      | $ | 10,144           |  | $     | 15,003  |                         | $ | 91,356  |                     | $ | 150,729 |  | 4.94 | % |  | $ | 149,558
|Variable rate                    |  |                                             |        |      |   |        |  |      | 1,000  |      |   |                 |  |       |        |                         |   | 912     |                     |   | 1,912   |  | 4.45 | % |  |   | 1,915  
|Loans (3):                       |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Fixed rate                       |  |                                             | 76,542  |      |   | 36,160  |  |      | 49,744 |      |   | 41,024           |  |       | 34,358  |                         |   | 44,446  |                     |   | 282,274 |  | 7.31 |   |  |   | 277,411
|Variable rate                    |  |                                             | 202,387 |      |   | 60,066  |  |      | 96,905 |      |   | 47,960           |  |       | 47,315  |                         |   | 75,759  |                     |   | 530,392 |  | 7.34 |   |  |   | 528,736
|Interest-bearing bank balances   |  |                                             |        |      |   |        |  |      |       |      |   |                 |  |       |        |                         |   |        |                     |   | 2,310   |  | 4.09 |   |  |   | 2,310  
|Federal funds sold               |  |                                             |        |      |   |        |  |      |       |      |   |                 |  |       |        |                         |   |        |                     |   | 20,180  |  | 4.23 |   |  |   | 20,180 
|                                 |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Total                            |  | $                                           | 223,417 |      | $ | 107,647 |  | $    | 92,099 |      | $ | 91,191           |  | $     | 112,613 |                         | $ | 155,486 |                     | $ | 783,853 |  | 6.89 |   |  | $ | 786,037
|                                 |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Financial Liabilities            |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Interest-bearing demand deposits |  | $                                           |        |      | $ |        |  | $    |       |      | $ |                 |  | $     |        |                         | $ |        |                     | $ | 116,559 |  | 1.16 |   |  | $ | 116,559
|Savings deposits                 |  |                                             |        |      |   |        |  |      |       |      |   |                 |  |       |        |                         |   |        |                     |   | 50,763  |  | .31  |   |  |   | 50,763 
|Money market deposits            |  |                                             |        |      |   |        |  |      |       |      |   |                 |  |       |        |                         |   |        |                     |   | 85,533  |  | 2.19 |   |  |   | 85,533 
|Time deposits:                   |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Fixed rate                       |  |                                             | 371,204 |      |   | 87,382  |  |      | 14,974 |      |   | 3,292            |  |       | 7,329   |                         |   | 599     |                     |   | 484,780 |  | 3.70 |   |  |   | 487,116
|Variable rate                    |  |                                             | 2,046   |      |   | 902     |  |      | 465    |      |   | 96               |  |       |        |                         |   |        |                     |   | 3,509   |  | 4.02 |   |  |   | 3,509  
|Retail repurchase agreements     |  |                                             |        |      |   |        |  |      |       |      |   |                 |  |       |        |                         |   |        |                     |   | 21,338  |  | 3.68 |   |  |   | 21,338 
|Federal Home Loan Bank advances: |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Fixed Rate                       |  |                                             | 5,964   |      |   | 3,708   |  |      | 1,475  |      |   | 6,434            |  |       | 8,000   |                         |   | 53,935  |                     |   | 79,516  |  | 3.81 |   |  |   | 77,803 
|Variable Rate                    |  |                                             |        |      |   |        |  |      |       |      |   | 6,709            |  |       |        |                         |   |        |                     |   | 6,709   |  | 5.83 |   |  |   | 6,709  
|Other borrowed funds             |  |                                             | 15,885  |      |   | 2,500   |  |      |       |      |   |                 |  |       |        |                         |   | 20,619  |                     |   | 39,004  |  | 6.00 |   |  |   | 39,004 
|                                 |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        
|Total                            |  | $                                           | 395,099 |      | $ | 93,680  |  | $    | 16,914 |      | $ | 16,531           |  | $     | 15,329  |                         | $ | 75,153  |                     | $ | 887,711 |  | 6.16 |   |  | $ | 888,334
|                                 |  |                                             |         |      |   |         |  |      |        |      |   |                  |  |       |         |                         |   |         |                     |   |         |  |      |   |  |   |        

---

|(1) |  | The average interest rate related to debt securities is stated on a fully taxable equivalent basis, assuming a 35% 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.
|--- |  | -------------------------------------------------------------------------------------------------



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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, 2005, FNB Corp. and First National Bank were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier
1, Tier 2 and Tier 3 capital. Under current requirements, the minimum total capital ratio is 8.00% and the minimum Tier 1 capital ratio is 4.00%. At December 31, 2005, FNB Corp. and First National Bank had total capital ratios of 11.46% and
11.20%, respectively, and Tier 1 capital ratios of 10.21% and 9.96%.



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, 2005, FNB Corp. and First National Bank had leverage capital ratios of 8.81% and 8.26%,
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, 2005 and, accordingly, is well-capitalized under the regulatory framework for prompt corrective action.



Balance Sheet Review



The growth in total assets in 2005 largely reflected the acquisition of Alamance Bank on November 4, 2005, as discussed
in the Overview. Significant estimated fair values initially recorded for Alamance Bank included total assets of $163,668,000, investment securities of $34,712,000, loans of $96,624,000, deposits of $112,961,000 and Federal Home Loan
Bank advances of $21,866,000. Total assets increased $239,194,000 or 27.7% in 2005 and $89,646,000 or 11.6% in 2004. The average asset growth rates were 13.2% in 2005 and 4.7% in 2004. The corresponding average deposit growth rates were 14.8% and
5.0%.



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.



24



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##### Table of Contents

Table 6

Investment Securities Portfolio Analysis



|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|------------------------------------------ |  | ---------------------- | ------- | -------------------- | ---- | ---------------------------- | ---- | ---- | -------------- |  | -------------- | ------ |  | - | ------
|                                           |  | December 31           
|                                           |  | 2005                   |         |                      | 2004 |                              | 2003
|                                           |  | Amortized Cost         |         | Estimated Fair Value |      | Taxable Equivalent Yield (1) |      |      | Carrying Value |  | Carrying Value
|                                           |  | (dollars in thousands)
|Available for Sale                         |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|U.S. Government agencies and corporations: |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Within one year                            |  | $                      | 3,478   |                      | $    | 3,430                        |      | 2.78 | %              |  | $              | 1,262  |  | $ | 1,029 
|One to five years                          |  |                        | 17,217  |                      |      | 16,895                       |      | 4.07 |                |  |                | 13,078 |  |   | 5,340 
|Five to ten years                          |  |                        | 22,645  |                      |      | 22,421                       |      | 5.48 |                |  |                | 15,583 |  |   | 28,207
|Over ten years                             |  |                        |        |                      |      |                             |      |     |                |  |                | 2,002  |  |   | 8,105 
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Total                                      |  |                        | 43,340  |                      |      | 42,746                       |      | 4.70 |                |  |                | 31,925 |  |   | 42,681
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Mortgage-backed securities                 |  |                        | 28,903  |                      |      | 28,628                       |      | 4.45 |                |  |                | 8,392  |  |   | 5,545 
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|State, county and municipal:               |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Within one year                            |  |                        | 631     |                      |      | 636                          |      | 7.67 |                |  |                | 866    |  |   | 533   
|One to five years                          |  |                        | 4,032   |                      |      | 4,114                        |      | 7.61 |                |  |                | 4,038  |  |   | 4,219 
|Five to ten years                          |  |                        | 10,662  |                      |      | 10,978                       |      | 7.24 |                |  |                | 10,292 |  |   | 9,737 
|Over ten years                             |  |                        | 11,059  |                      |      | 11,159                       |      | 6.19 |                |  |                | 6,793  |  |   | 8,842 
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Total                                      |  |                        | 26,384  |                      |      | 26,887                       |      | 6.89 |                |  |                | 21,989 |  |   | 23,331
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Other debt securities:                     |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|One to five years                          |  |                        | 2,497   |                      |      | 2,489                        |      | 4.60 |                |  |                | 3,138  |  |   | 3,148 
|Over ten years                             |  |                        | 2,629   |                      |      | 3,215                        |      | 9.19 |                |  |                | 2,657  |  |   | 2,562 
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Total                                      |  |                        | 5,126   |                      |      | 5,704                        |      | 6.95 |                |  |                | 5,795  |  |   | 5,710 
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Total debt securities                      |  |                        | 103,753 |                      |      | 103,965                      |      | 5.30 |                |  |                | 68,101 |  |   | 77,267
|Equity securities                          |  |                        | 6,940   |                      |      | 6,953                        |      |      |                |  |                | 5,662  |  |   | 3,291 
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Total available-for-sale securities        |  | $                      | 110,693 |                      | $    | 110,918                      |      |      |                |  | $              | 73,763 |  | $ | 80,558
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Held to Maturity                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|U.S. Government agencies and corporations: |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Within one year                            |  | $                      | 4,011   |                      | $    | 3,998                        |      | 2.33 |                |  | $              | 2,001  |  | $ | 4,055 
|One to five years                          |  |                        | 16,726  |                      |      | 16,121                       |      | 3.71 |                |  |                | 13,912 |  |   | 14,558
|Five to ten years                          |  |                        |        |                      |      |                             |      |     |                |  |                | 7,000  |  |   | 15,063
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Total                                      |  |                        | 20,737  |                      |      | 20,119                       |      | 3.44 |                |  |                | 22,913 |  |   | 33,676
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Mortgage-backed securities                 |  |                        | 3,190   |                      |      | 3,116                        |      | 5.10 |                |  |                | 1,270  |  |   | 501   
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|State, county and municipal:               |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Within one year                            |  |                        | 2,059   |                      |      | 2,045                        |      | 2.19 |                |  |                | 2,151  |  |   | 2,197 
|One to five years                          |  |                        | 7,504   |                      |      | 7,262                        |      | 3.50 |                |  |                | 8,078  |  |   | 8,574 
|Five to ten years                          |  |                        | 7,244   |                      |      | 7,024                        |      | 5.34 |                |  |                | 7,307  |  |   | 6,927 
|Over ten years                             |  |                        | 6,154   |                      |      | 5,971                        |      | 6.20 |                |  |                | 7,661  |  |   | 9,826 
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Total                                      |  |                        | 22,961  |                      |      | 22,302                       |      | 4.70 |                |  |                | 25,197 |  |   | 27,524
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Other debt securities:                     |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Within one year                            |  |                        | 1,000   |                      |      | 995                          |      | 2.30 |                |  |                |       |  |   |      
|One to five years                          |  |                        |        |                      |      |                             |      |     |                |  |                | 1,000  |  |   | 1,000 
|Five to ten years                          |  |                        | 1,000   |                      |      | 976                          |      | 4.70 |                |  |                | 1,000  |  |   | 1,000 
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Total                                      |  |                        | 2,000   |                      |      | 1,971                        |      | 3.50 |                |  |                | 2,000  |  |   | 2,000 
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       
|Total held-to-maturity securities          |  | $                      | 48,888  |                      | $    | 47,508                       |      | 4.14 |                |  | $              | 51,380 |  | $ | 63,701
|                                           |  |                        |         |                      |      |                              |      |      |                |  |                |        |  |   |       

---

|(1) |  | Yields are stated on a fully taxable equivalent basis, assuming a 35% federal income tax rate, which is expected to be the effective rate in 2006, and applicable state income tax
rate, reduced by the nondeductible portion of interest expense.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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 2005, there was a net increase of $34,663,000, or 27.7% in the level of investment securities, due largely to the addition of $34,712,000 in investment securities from the
Alamance Bank acquisition on November 4, 2005, as discussed in the Balance Sheet Review. In 2004, when the growth in loans significantly exceeded that for total assets, there was a net decrease of $19,116,000 or 13.3% in the level
of investment securities. 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.



Loans



The Corporations primary source of revenue and largest component of
earning assets is the loan portfolio. In 2005, loans increased $147,912,000 or 22.3%, due largely to the addition of $96,624,000 in loans from the Alamance Bank acquisition on November 4, 2005, as discussed in the Balance Sheet
Review. Excluding the amount of Alamance Bank loans initially added on November 4, 2005, loans increased $51,288,000 or 7.7% in 2005. In 2004, loans increased $112,841,000 or 20.4% due entirely to internal loan generation. Average loans
increased $99,214,000 or 11.8% in 2005 and $62,983,000 or 11.5% in 2004. The ratio of average loans to average deposits increased from 98.0% in 2004 to 99.3% in 2005. The ratio of loans to deposits at December 31, 2005 was 96.6%.



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, 2005 are presented in Table 8.



Table 7

Loan Portfolio Composition



|                            |  |                        |         |      |       |        |   |         |  |        |  |   |         |        |       |   |   |         |  |       |  |   |         |  |      
|--------------------------- |  | ---------------------- | ------- | ---- | ----- | ------ | - | ------- |  | ------ |  | - | ------- | ------ | ----- | - | - | ------- |  | ----- |  | - | ------- |  | -----
|                            |  | December 31           
|                            |  | 2005                   |         | 2004 |       | 2003   |   | 2002    |  | 2001  
|                            |  | Amount                 |         | %    |       | Amount |   | %       |  | Amount |  | % |         | Amount |       | % |   | Amount  |  | %    
|                            |  | (dollars in thousands)
|Commercial and agricultural |  | $                      | 176,286 |      | 22.2  |        | $ | 196,846 |  | 30.1   |  | $ | 215,036 |        | 39.6  |   | $ | 198,085 |  | 39.6  |  | $ | 177,577 |  | 46.9 
|Real estateconstruction    |  |                        | 142,096 |      | 17.9  |        |   | 83,433  |  | 12.8   |  |   | 36,357  |        | 6.7   |   |   | 29,553  |  | 5.9   |  |   | 11,249  |  | 3.0  
|Real estatemortgage:       |  |                        |         |      |       |        |   |         |  |        |  |   |         |        |       |   |   |         |  |       |  |   |         |  |      
|1-4 family residential      |  |                        | 231,071 |      | 29.1  |        |   | 197,855 |  | 30.3   |  |   | 184,881 |        | 34.0  |   |   | 188,764 |  | 37.8  |  |   | 146,347 |  | 38.6 
|Commercial and other        |  |                        | 221,457 |      | 27.8  |        |   | 154,024 |  | 23.6   |  |   | 86,734  |        | 15.9  |   |   | 59,760  |  | 12.0  |  |   | 15,269  |  | 4.0  
|Consumer                    |  |                        | 24,141  |      | 3.0   |        |   | 20,899  |  | 3.2    |  |   | 19,973  |        | 3.7   |   |   | 21,550  |  | 4.3   |  |   | 20,978  |  | 5.5  
|Leases                      |  |                        |        |      |      |        |   | 49      |  |       |  |   | 365     |        | .1    |   |   | 1,843   |  | .4    |  |   | 7,376   |  | 2.0  
|                            |  |                        |         |      |       |        |   |         |  |        |  |   |         |        |       |   |   |         |  |       |  |   |         |  |      
|Loans held for investment   |  |                        | 795,051 |      | 100.0 |        |   | 653,106 |  | 100.0  |  |   | 543,346 |        | 100.0 |   |   | 499,555 |  | 100.0 |  |   | 378,796 |  | 100.0
|                            |  |                        |         |      |       |        |   |         |  |        |  |   |         |        |       |   |   |         |  |       |  |   |         |  |      
|Loans held for sale         |  |                        | 17,615  |      |       |        |   | 11,648  |  |        |  |   | 8,567   |        |       |   |   | 2,787   |  |       |  |   | 12,836  |  |      
|                            |  |                        |         |      |       |        |   |         |  |        |  |   |         |        |       |   |   |         |  |       |  |   |         |  |      
|Gross loans                 |  | $                      | 812,666 |      |       |        | $ | 664,754 |  |        |  | $ | 551,913 |        |       |   | $ | 502,342 |  |       |  | $ | 391,632 |  |      
|                            |  |                        |         |      |       |        |   |         |  |        |  |   |         |        |       |   |   |         |  |       |  |   |         |  |      



26



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##### Table of Contents

Table 8

Selected
Loan Maturities



|                             |  |                   |         |                  |   |                |  |       |        |  |   |        
|---------------------------- |  | ----------------- | ------- | ---------------- | - | -------------- |  | ----- | ------ |  | - | -------
|                             |  | December 31, 2005
|                             |  | One Yearor Less   |         | One toFive Years |   | Over FiveYears |  | Total
|                             |  | (in thousands)   
|Commercial and agricultural  |  | $                 | 61,338  |                  | $ | 96,967         |  | $     | 17,981 |  | $ | 176,286
|Real estateconstruction     |  |                   | 81,666  |                  |   | 43,951         |  |       | 16,479 |  |   | 142,096
|                             |  |                   |         |                  |   |                |  |       |        |  |   |        
|Total selected loans         |  | $                 | 143,004 |                  | $ | 140,918        |  | $     | 34,460 |  | $ | 318,382
|                             |  |                   |         |                  |   |                |  |       |        |  |   |        
|Sensitivity to rate changes: |  |                   |         |                  |   |                |  |       |        |  |   |        
|Fixed interest rates         |  | $                 | 23,097  |                  | $ | 48,095         |  | $     | 8,820  |  | $ | 80,012 
|Variable interest rates      |  |                   | 119,907 |                  |   | 92,823         |  |       | 25,640 |  |   | 238,370
|                             |  |                   |         |                  |   |                |  |       |        |  |   |        
|Total                        |  | $                 | 143,004 |                  | $ | 140,918        |  | $     | 34,460 |  | $ | 318,382
|                             |  |                   |         |                  |   |                |  |       |        |  |   |        



In 2005, loan growth
through internal generation continued to be significant as in 2004 and 2003, 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, considering
only growth through internal generation in both 2005 and 2004, the portfolios related to construction loans and commercial and other real estate loans experienced significant gains in each year, while the commercial and agricultural loan portfolio
declined. The balance of the 1-4 family residential mortgage loan portfolio considered held for investment also experienced growth in both 2005 and 2004, due primarily to home equity lines of credit in 2004. In 2005, there was a modest
decline in the balance of 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.



At December 31, 2005 and December 31, 2004, the Corporation did not have any loans considered impaired.



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.



27



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##### Table of Contents

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 and $6,046,000 at December 31, 2005.



Earnings were positively impacted in 2005 by a $1,188,000 reduction in the provision for loan losses. As discussed in the OverviewSignificant
Factors Affecting Earnings in 2005, the provision for loan losses was affected in 2005 by the adoption of new regulatory guidance on the accounting for courtesy overdraft programs which resulted in a $712,000 provision increase. Further
effects from the adoption of the new regulatory guidance are discussed in the Overview.



The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.25% at December 31, 2005, 1.12% at December 31, 2004
and 1.14% at December 31, 2003. The allowance percentage has increased based on the results from application of the allowance model that assigns reserves to various components of the loan portfolio in order to provide for probable inherent
losses and also from the effect of the relative allowance level assigned to the loans of Alamance Bank, which was acquired on November 4, 2005 as discussed in the Overview.



Management believes the allowance for loan losses of $9,945,000 at
December 31, 2005 is adequate to cover probable losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment.



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



28



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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



|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|------------------------------------------------------ |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                       |  | 2005                   |       |   | 2004 |   |       | 2003 |  |   | 2002  |   |  | 2001 |      
|                                                       |  | (dollars in thousands) |      
|Allowance for Loan Losses                              |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Balance at beginning of year                           |  | $                      | 7,293 |   |      | $ | 6,172 |      |  | $ | 6,109 |   |  | $    | 4,417 |   |  | $ | 4,352 |  
|Charge-offs:                                           |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial and agricultural                            |  |                        | 747   |   |      |   | 2,007 |      |  |   | 1,165 |   |  |      | 502   |   |  |   | 152   |  
|Real estateconstruction                               |  |                        |      |   |      |   |      |      |  |   | 133   |   |  |      |      |   |  |   |      |  
|Real estatemortgage                                   |  |                        | 449   |   |      |   | 943   |      |  |   | 244   |   |  |      | 101   |   |  |   | 10    |  
|Consumer (1)                                           |  |                        | 1,420 |   |      |   | 211   |      |  |   | 332   |   |  |      | 538   |   |  |   | 395   |  
|Leases                                                 |  |                        |      |   |      |   | 106   |      |  |   | 26    |   |  |      | 243   |   |  |   | 702   |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total charge-offs                                      |  |                        | 2,616 |   |      |   | 3,267 |      |  |   | 1,900 |   |  |      | 1,384 |   |  |   | 1,259 |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Recoveries:                                            |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial and agricultural                            |  |                        | 427   |   |      |   | 158   |      |  |   | 14    |   |  |      | 116   |   |  |   | 63    |  
|Real estateconstruction                               |  |                        |      |   |      |   | 1     |      |  |   |      |   |  |      |      |   |  |   |      |  
|Real estatemortgage                                   |  |                        | 7     |   |      |   | 36    |      |  |   |      |   |  |      | 1     |   |  |   | 8     |  
|Consumer (1)                                           |  |                        | 522   |   |      |   | 94    |      |  |   | 85    |   |  |      | 76    |   |  |   | 96    |  
|Leases                                                 |  |                        | 65    |   |      |   | 114   |      |  |   | 4     |   |  |      | 64    |   |  |   |      |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total recoveries                                       |  |                        | 1,021 |   |      |   | 403   |      |  |   | 103   |   |  |      | 257   |   |  |   | 167   |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Net loan charge-offs                                   |  |                        | 1,595 |   |      |   | 2,864 |      |  |   | 1,797 |   |  |      | 1,127 |   |  |   | 1,092 |  
|Provision for loan losses (1)                          |  |                        | 2,842 |   |      |   | 4,030 |      |  |   | 1,860 |   |  |      | 1,780 |   |  |   | 1,200 |  
|Purchase accounting acquisition                        |  |                        | 1,405 |   |      |   |      |      |  |   |      |   |  |      | 1,039 |   |  |   |      |  
|Allowance adjustment for loans sold                    |  |                        |      |   |      |   | (45   | )    |  |   |      |   |  |      |      |   |  |   | (43   | )
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Balance at end of year                                 |  | $                      | 9,945 |   |      | $ | 7,293 |      |  | $ | 6,172 |   |  | $    | 6,109 |   |  | $ | 4,417 |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonperforming Assets, at end of year                   |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonaccrual loans                                       |  | $                      | 5,398 |   |      | $ | 3,952 |      |  | $ | 5,235 |   |  | $    | 4,944 |   |  | $ | 4,144 |  
|Accruing loans past due 90 days or more                |  |                        | 648   |   |      |   | 1,275 |      |  |   | 758   |   |  |      | 1,268 |   |  |   | 609   |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total nonperforming loans                              |  |                        | 6,046 |   |      |   | 5,227 |      |  |   | 5,993 |   |  |      | 6,212 |   |  |   | 4,753 |  
|Foreclosed assets                                      |  |                        | 108   |   |      |   | 77    |      |  |   | 65    |   |  |      | 61    |   |  |   | 123   |  
|Other real estate owned                                |  |                        | 929   |   |      |   | 543   |      |  |   | 1,008 |   |  |      | 414   |   |  |   | 758   |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total nonperforming assets                             |  | $                      | 7,083 |   |      | $ | 5,847 |      |  | $ | 7,066 |   |  | $    | 6,687 |   |  | $ | 5,634 |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Ratios                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Net loan charge-offs to average loans                  |  |                        | .22   | % |      |   | .47   | %    |  |   | .33   | % |  |      | .26   | % |  |   | .28   | %
|Net loan charge-offs to allowance for loan losses      |  |                        | 16.03 |   |      |   | 39.27 |      |  |   | 29.12 |   |  |      | 18.45 |   |  |   | 24.72 |  
|Allowance for loan losses to loans held for investment |  |                        | 1.25  |   |      |   | 1.12  |      |  |   | 1.14  |   |  |      | 1.22  |   |  |   | 1.17  |  
|Total nonperforming loans to loans held for investment |  |                        | .76   |   |      |   | .80   |      |  |   | 1.10  |   |  |      | 1.24  |   |  |   | 1.25  |  

---

|(1) |  | Includes activity related to an overdraft protection program commencing in mid-2005.
|--- |  | ------------------------------------------------------------------------------------



29



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##### Table of Contents

Table 10

Allocation of Allowance For Loan Losses



|                                |  |                |       |      |   |       |  |      |       |      |   |       |  |   |      
|------------------------------- |  | -------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                |  | December 31   
|                                |  | 2005           |       | 2004 |   | 2003  |  | 2002 |       | 2001
|                                |  | (in thousands)
|Commercial and agricultural     |  | $              | 3,165 |      | $ | 2,953 |  | $    | 3,440 |      | $ | 2,939 |  | $ | 1,590
|Real estateconstruction        |  |                | 1,939 |      |   | 1,015 |  |      | 118   |      |   | 128   |  |   | 15   
|Real estatemortgage            |  |                | 3,892 |      |   | 2,401 |  |      | 1,395 |      |   | 1,539 |  |   | 776  
|Consumer                        |  |                | 707   |      |   | 592   |  |      | 756   |      |   | 911   |  |   | 934  
|Leases                          |  |                |      |      |   |      |  |      | 21    |      |   | 194   |  |   | 734  
|Unallocated                     |  |                | 242   |      |   | 332   |  |      | 442   |      |   | 398   |  |   | 368  
|                                |  |                |       |      |   |       |  |      |       |      |   |       |  |   |      
|Total allowance for loan losses |  | $              | 9,945 |      | $ | 7,293 |  | $    | 6,172 |      | $ | 6,109 |  | $ | 4,417
|                                |  |                |       |      |   |       |  |      |       |      |   |       |  |   |      



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.



In 2005, deposits increased $182,065,000 or 27.6%, due largely to the addition of $112,961,000 in deposits from the Alamance Bank acquisition on
November 4, 2005, as discussed in the Balance Sheet Review.



The level and mix of deposits has been specifically affected by the following factors, excluding the amount of Alamance Bank deposits initially added on November 4, 2005. Following an extended period in which
balances had decreased due to interest rate declines, time deposits increased for the second consecutive year, adding $44,421,000 in 2005 due primarily to higher rates but also reflecting a modest increase in time deposits obtained from governmental
units, these latter deposits amounting to $72,710,000, $67,260,000 and $49,605,000 at December 31, 2005, 2004 and 2003, respectively. Noninterest-bearing demand deposits and interest-bearing transactional deposits, including demand, savings and
money market deposits, also grew in 2005, increasing $13,148,000 and $11,535,000, respectively. In 2004, deposits grew similarly with time deposits increasing $52,758,000 due in part to higher rates but also reflecting the acquisition of brokered
time deposits and a greater increase in time deposits obtained from governmental units. Noninterest-bearing demand deposits and interest-bearing transactional deposits, including demand, savings and money market deposits, increased $4,739,000 and
$4,122,000, respectively.



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Table 11 shows the year-end and average deposit balances for the years 2005, 2004 and 2003 and the
changes in 2005 and 2004.



Table 11

Analysis of Deposits



|                                     |  |                        |         |                        |      |         |         |      |                        |        |  |         |         |  |   |        |   |  |      |   |  |   |        
|------------------------------------ |  | ---------------------- | ------- | ---------------------- | ---- | ------- | ------- | ---- | ---------------------- | ------ |  | ------- | ------- |  | - | ------ | - |  | ---- | - |  | - | -------
|                                     |  | 2005                   |         |                        | 2004 |         |         | 2003
|                                     |  | Balance                |         | Change from Prior Year |      |         | Balance |      | Change from Prior Year |        |  | Balance
|                                     |  |                        | Amount  |                        |      | %       |         |      |                        | Amount |  |         | %       |  |  
|                                     |  | (dollars in thousands)
|Year-End Balances                    |  |                        |         |                        |      |         |         |      |                        |        |  |         |         |  |   |        |   |  |      |   |  |   |        
|Interest-bearing deposits:           |  |                        |         |                        |      |         |         |      |                        |        |  |         |         |  |   |        |   |  |      |   |  |   |        
|Demand deposits                      |  | $                      | 116,559 |                        | $    | 23,180  |         |      | 24.8                   |        |  | $       | 93,379  |  | $ | 4,089  |   |  | 4.6  |   |  | $ | 89,290 
|Savings deposits                     |  |                        | 50,763  |                        |      | (2,403  | )       |      | (4.5                   | )      |  |         | 53,166  |  |   | 732    |   |  | 1.4  |   |  |   | 52,434 
|Money market deposits                |  |                        | 85,533  |                        |      | 12,110  |         |      | 16.5                   |        |  |         | 73,423  |  |   | (699   | ) |  | (.9  | ) |  |   | 74,122 
|                                     |  |                        |         |                        |      |         |         |      |                        |        |  |         |         |  |   |        |   |  |      |   |  |   |        
|Total                                |  |                        | 252,855 |                        |      | 32,887  |         |      | 15.0                   |        |  |         | 219,968 |  |   | 4,122  |   |  | 1.9  |   |  |   | 215,846
|Certificates and other time deposits |  |                        | 488,289 |                        |      | 124,123 |         |      | 34.1                   |        |  |         | 364,166 |  |   | 52,758 |   |  | 16.9 |   |  |   | 311,408
|                                     |  |                        |         |                        |      |         |         |      |                        |        |  |         |         |  |   |        |   |  |      |   |  |   |        
|Total interest-bearing deposits      |  |                        | 741,144 |                        |      | 157,010 |         |      | 26.9                   |        |  |         | 584,134 |  |   | 56,880 |   |  | 10.8 |   |  |   | 527,254
|Noninterest-bearing demand deposits  |  |                        | 100,465 |                        |      | 25,055  |         |      | 33.2                   |        |  |         | 75,410  |  |   | 4,739  |   |  | 6.7  |   |  |   | 70,671 
|                                     |  |                        |         |                        |      |         |         |      |                        |        |  |         |         |  |   |        |   |  |      |   |  |   |        
|Total deposits                       |  | $                      | 841,609 |                        | $    | 182,065 |         |      | 27.6                   |        |  | $       | 659,544 |  | $ | 61,619 |   |  | 10.3 |   |  | $ | 597,925
|                                     |  |                        |         |                        |      |         |         |      |                        |        |  |         |         |  |   |        |   |  |      |   |  |   |        
|Average Balances                     |  |                        |         |                        |      |         |         |      |                        |        |  |         |         |  |   |        |   |  |      |   |  |   |        
|Interest-bearing deposits:           |  |                        |         |                        |      |         |         |      |                        |        |  |         |         |  |   |        |   |  |      |   |  |   |        
|Demand deposits                      |  | $                      | 97,623  |                        | $    | 7,796   |         |      | 8.7                    |        |  | $       | 89,827  |  | $ | 4,788  |   |  | 5.6  |   |  | $ | 85,039 
|Savings deposits                     |  |                        | 51,483  |                        |      | (2,815  | )       |      | (5.2                   | )      |  |         | 54,298  |  |   | 2,712  |   |  | 5.3  |   |  |   | 51,586 
|Money market deposits                |  |                        | 75,948  |                        |      | 124     |         |      | .2                     |        |  |         | 75,824  |  |   | 943    |   |  | 1.3  |   |  |   | 74,881 
|                                     |  |                        |         |                        |      |         |         |      |                        |        |  |         |         |  |   |        |   |  |      |   |  |   |        
|Total                                |  |                        | 225,054 |                        |      | 5,105   |         |      | 2.3                    |        |  |         | 219,949 |  |   | 8,443  |   |  | 4.0  |   |  |   | 211,506
|Certificates and other time deposits |  |                        | 407,303 |                        |      | 77,491  |         |      | 23.5                   |        |  |         | 329,812 |  |   | 10,231 |   |  | 3.2  |   |  |   | 319,581
|                                     |  |                        |         |                        |      |         |         |      |                        |        |  |         |         |  |   |        |   |  |      |   |  |   |        
|Total interest-bearing deposits      |  |                        | 632,357 |                        |      | 82,596  |         |      | 15.0                   |        |  |         | 549,761 |  |   | 18,674 |   |  | 3.5  |   |  |   | 531,087
|Noninterest-bearing demand deposits  |  |                        | 84,393  |                        |      | 9,652   |         |      | 12.9                   |        |  |         | 74,741  |  |   | 11,133 |   |  | 17.5 |   |  |   | 63,608 
|                                     |  |                        |         |                        |      |         |         |      |                        |        |  |         |         |  |   |        |   |  |      |   |  |   |        
|Total deposits                       |  | $                      | 716,750 |                        | $    | 92,248  |         |      | 14.8                   |        |  | $       | 624,502 |  | $ | 29,807 |   |  | 5.0  |   |  | $ | 594,695
|                                     |  |                        |         |                        |      |         |         |      |                        |        |  |         |         |  |   |        |   |  |      |   |  |   |        



Business Development Matters



As 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.



As also discussed in the
Overview and in Note 2 to the Consolidated Financial Statements, the Corporation completed a merger on November 4, 2005 for the acquisition of United Financial, Inc., holding company for Alamance Bank, headquartered in Graham, North
Carolina, in a transaction accounted for using the purchase method of accounting for business combinations. On February 1, 2006, Alamance Bank was merged into First National Bank.



As discussed in the Overview and in Note 2 to the Consolidated Financial Statements, on September 18, 2005,
the Corporation entered into a definitive merger agreement to acquire Integrity Financial Corporation (Integrity), headquartered in Hickory, North Carolina and the holding company at that time for two separate banks, Catawba Valley Bank
and First Gaston Bank. Effective January 5, 2006, Integrity merged Catawba Valley



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Bank into First Gaston Bank. As soon as practicable following the merger of the holding companies, First Gaston Bank will be merged with and into First
National Bank. The merger of the holding companies is anticipated to close early in the second quarter of 2006.



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



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



In November 2004, First
National Bank received regulatory approval for the establishment of a second branch office in Greensboro, North Carolina. The new office opened for business in January 2006.



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



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



In November 2005, FNB Corp. formed FNB United Statutory Trust I to
facilitate the issuance of trust preferred securities. The trust is a statutory business trust formed under the laws of the State of Connecticut. All common securities of the trust are owned by FNB Corp.



Accounting Pronouncement Matters



In November 2003, the Emerging Issues Task Force (EITF) issued
EITF Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-01). EITF 03-01 provided guidance for evaluating whether an investment is other-than-temporarily impaired
and requires certain disclosures with respect to these investments. In September 2004, the Financial Accounting Standards Board (FASB) issued a FASB Staff Position (FSP EITF 03-1-b) to delay the requirement to record
impairment losses under EITF 03-1. The guidance also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requirements for disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, which addresses the determination as to when an investment is considered impaired. This FSP nullifies certain requirements of EITF 03-01 and supersedes
EITF Topic No. D-44, Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. This FSP is to be applied to reporting periods beginning after December 15. 2005. The Corporation
is in process of evaluating the impact of this FSP.



In
December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(r) (SFAS No. 123(r)), Share-Based Payment, which is a revision of FASB Statement No. 123 Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees. SFAS No. 123(r) requires companies to recognize in the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees over the period during which an employee is required to provide service in exchange for the award, which will often be the shorter of the vesting period or the period the employee will be retirement
eligible. SFAS No. 123(r) sets accounting requirements for share-based compensation to employees, including employee-stock purchase plans (ESPPs). Awards to most nonemployee directors will be accounted for as employee
awards. This Statement was to be effective for public companies that



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do not file as small business issuers as of the beginning of interim or annual reporting periods beginning after June 15, 2005. In April 2005, the
Securities and Exchange Commission (SEC) issued Release No. 2005-57, which defers the effective date of SFAS No. 123(r) for many registrants. Registrants that do not file as small business users must adopt SFAS No. 123(r)
as of the beginning of their first annual period beginning after June 15, 2005. Accordingly, the Corporation will adopt SFAS No. 123(r) on January 1, 2006, and is currently evaluating the effect on its consolidated financial
statements.



In March 2005, the SEC issued Staff Accounting
Bulletin No. 107 (SAB 107), which contains guidance on applying the requirements in SFAS No. 123(r). SAB 107 provides guidance on valuation techniques, development of assumptions used in valuing employee share options and
related MD&A disclosures. SAB 107 is effective for the period in which SFAS No. 123(r) is adopted. The Corporation will adopt SAB 107 on January 1, 2006, and is currently evaluating the effect on its consolidated financial statements.



In May 2005, the FASB issued Statement of Financial Accounting
Standards No. 154 (SFAS No. 154), Accounting Changes and Error Corrections, which replaces APB Opinion No. 20 Accounting Changes and FASB Statement No. 3 Reporting Accounting Changes in
Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in an accounting principle. SFAS No. 154 requires retrospective application for voluntary changes in an accounting
principle unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Corporation will adopt SFAS No. 154 on January 1, 2006 with no expected
material effect on its consolidated financial statements.



From
time to time, the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of
financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Corporation and monitors the status of changes to and proposed effective dates of exposure drafts.



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.



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



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non-GAAP measures in their analysis of the Corporations performance. These non-GAAP measures exclude average goodwill and core deposit premiums from
the calculations of return on average assets and return on average equity. Management believes presentations of financial measures excluding the impact of goodwill and core deposit premiums 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, without limitation: (i) expected cost savings from the mergers described in the Overview may
not materialize or may not fully materialize within the expected time frame, (ii) revenues following the mergers may not meet expectations, (iii) costs or difficulties related to the integration of the businesses of the Corporation and 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, (ix) changes may occur in the securities markets and (x) any new capital accords adopted by the Basel Committee on Banking Supervision and implemented by U.S. federal bank
regulatory agencies will affect the Corporations future capital requirements. All forward-looking statements speak only as of the date on which such statements are made, and the Corporation undertakes no obligation to update any statement to
reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.



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Table 12

Quarterly Financial Data (Unaudited)



|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|--------------------------------------------------- |  | ------------------------------------- | ------ | ------ | - | ------ | ----- |  | ------ | ------ |  | - | ------
|                                                    |  | First                                 |        | Second |   |        | Third |  | Fourth
|                                                    |  | (in thousands, except per share data)
|2005                                                |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Interest income                                     |  | $                                     | 11,814 |        | $ | 12,682 |       |  | $      | 13,713 |  | $ | 16,206
|Interest expense                                    |  |                                       | 3,995  |        |   | 4,497  |       |  |        | 5,093  |  |   | 6,465 
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Net interest income                                 |  |                                       | 7,819  |        |   | 8,185  |       |  |        | 8,620  |  |   | 9,741 
|Provision for loan losses                           |  |                                       | 370    |        |   | 864    |       |  |        | 446    |  |   | 1,162 
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Net interest income after provision for loan losses |  |                                       | 7,449  |        |   | 7,321  |       |  |        | 8,174  |  |   | 8,579 
|Noninterest income                                  |  |                                       | 3,162  |        |   | 3,960  |       |  |        | 3,966  |  |   | 3,838 
|Noninterest expense                                 |  |                                       | 7,222  |        |   | 7,937  |       |  |        | 8,319  |  |   | 8,200 
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Income before income taxes                          |  |                                       | 3,389  |        |   | 3,344  |       |  |        | 3,821  |  |   | 4,217 
|Income taxes                                        |  |                                       | 1,083  |        |   | 1,072  |       |  |        | 1,262  |  |   | 1,417 
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Net income                                          |  | $                                     | 2,306  |        | $ | 2,272  |       |  | $      | 2,559  |  | $ | 2,800 
|                                                    |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Per share data:                                     |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Net income:                                         |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|Basic                                               |  | $                                     | .41    |        | $ | .41    |       |  | $      | .46    |  | $ | .46   
|Diluted                                             |  |                                       | .40    |        |   | .40    |       |  |        | .44    |  |   | .45   
|Cash dividends declared                             |  |                                       | .15    |        |   | .15    |       |  |        | .15    |  |   | .17   
|Common stock price (1):                             |  |                                       |        |        |   |        |       |  |        |        |  |   |       
|High                                                |  |                                       | 21.39  |        |   | 21.85  |       |  |        | 21.50  |  |   | 19.32 
|Low                                                 |  |                                       | 17.80  |        |   | 18.20  |       |  |        | 18.50  |  |   | 17.35 
|                                                    |  |                                       |        |       
|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 

---

|(1) |  | FNB Corp. common stock is traded on the Nasdaq National Market under the symbol FNBN. At December 31, 2005, there were 2,457 shareholders of record.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



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Table 13

Issuer
Purchase of Equity Securities



|                                     |  |                                  |  |                             |   |                                                                                 |   |                                                                                |        
|------------------------------------ |  | -------------------------------- |  | --------------------------- | - | ------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------ | -------
|                                     |  | Total Number of Shares Purchased |  | Average PricePaid per Share |   | Total Numberof Shares Purchased as Part of Publicly Announced Plans or Programs |   | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
|Three Months Ended December 31, 2005 |  |                                  |  |                             |   |                                                                                 |   |                                                                                |        
|October 1 to October 31              |  |                                 |  | $                           |  |                                                                                 |  |                                                                                | 298,800
|November 1 to November 30            |  |                                 |  |                             |  |                                                                                 |  |                                                                                | 298,800
|December 1 to December 31            |  |                                 |  |                             |  |                                                                                 |  |                                                                                | 298,800
|                                     |  |                                  |  |                             |   |                                                                                 |   |                                                                                |        
|Total                                |  |                                 |  |                             |  |                                                                                 |  |                                                                                | 298,800
|                                     |  |                                  |  |                             |   |                                                                                 |   |                                                                                |        



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



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LOGO



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM



To the Stockholders and the Board of
Directors

FNB Corp and Subsidiaries

Asheboro, North Carolina



We have audited the accompanying consolidated balance sheets
of FNB Corp. and subsidiaries (the Corporation) as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders equity and comprehensive income and cash flows for the years 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 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 at December 31, 2005 and 2004, and the results of
their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of FNB
Corps internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated March 14, 2006 expressed unqualified opinions on both managements assessment of the Corporations internal control over financial reporting and the effectiveness of the Corporations internal control over financial
reporting.



LOGO



Raleigh, North Carolina

March 14, 2006



37



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##### Table of Contents

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



38



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



|                                                                                                                          |  |                                                |           |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------- | --------- | - | ---- | - | ------- | -
|                                                                                                                          |  | December 31                                    |          
|                                                                                                                          |  | 2005                                           |           |   | 2004 |  
|                                                                                                                          |  | (in thousands, except shareand per share data) |          
|Assets                                                                                                                    |  |                                                |           |   |      |   |         |  
|Cash and due from banks                                                                                                   |  | $                                              | 22,389    |   |      | $ | 19,109  |  
|Interest-bearing bank balances                                                                                            |  |                                                | 2,310     |   |      |   | 1,309   |  
|Federal funds sold                                                                                                        |  |                                                | 20,180    |   |      |   | 91      |  
|Investment securities:                                                                                                    |  |                                                |           |   |      |   |         |  
|Available for sale, at estimated fair value (amortized cost of $110,693 in 2005 and $71,959 in 2004)                      |  |                                                | 110,918   |   |      |   | 73,763  |  
|Held to maturity (estimated fair value of $47,508 in 2005 and $50,676 in 2004)                                            |  |                                                | 48,888    |   |      |   | 51,380  |  
|Loans:                                                                                                                    |  |                                                |           |   |      |   |         |  
|Loans held for sale                                                                                                       |  |                                                | 17,615    |   |      |   | 11,648  |  
|Loans held for investment                                                                                                 |  |                                                | 795,051   |   |      |   | 653,106 |  
|Less allowance for loan losses                                                                                            |  |                                                | (9,945    | ) |      |   | (7,293  | )
|                                                                                                                          |  |                                                |           |   |      |   |         |  
|Net loans                                                                                                                 |  |                                                | 802,721   |   |      |   | 657,461 |  
|                                                                                                                          |  |                                                |           |   |      |   |         |  
|Premises and equipment, net                                                                                               |  |                                                | 24,670    |   |      |   | 17,114  |  
|Goodwill                                                                                                                  |  |                                                | 31,381    |   |      |   | 16,335  |  
|Other assets                                                                                                              |  |                                                | 38,628    |   |      |   | 26,329  |  
|                                                                                                                          |  |                                                |           |   |      |   |         |  
|Total Assets                                                                                                              |  | $                                              | 1,102,085 |   |      | $ | 862,891 |  
|                                                                                                                          |  |                                                |           |   |      |   |         |  
|Liabilities and Shareholders Equity                                                                                      |  |                                                |           |   |      |   |         |  
|Deposits:                                                                                                                 |  |                                                |           |   |      |   |         |  
|Noninterest-bearing demand deposits                                                                                       |  | $                                              | 100,465   |   |      | $ | 75,410  |  
|Interest-bearing deposits:                                                                                                |  |                                                |           |   |      |   |         |  
|Demand, savings and money market deposits                                                                                 |  |                                                | 252,855   |   |      |   | 219,968 |  
|Time deposits of $100,000 or more                                                                                         |  |                                                | 229,910   |   |      |   | 155,278 |  
|Other time deposits                                                                                                       |  |                                                | 258,379   |   |      |   | 208,888 |  
|                                                                                                                          |  |                                                |           |   |      |   |         |  
|Total deposits                                                                                                            |  |                                                | 841,609   |   |      |   | 659,544 |  
|Retail repurchase agreements                                                                                              |  |                                                | 21,338    |   |      |   | 13,818  |  
|Federal Home Loan Bank advances                                                                                           |  |                                                | 86,225    |   |      |   | 69,088  |  
|Federal funds purchased                                                                                                   |  |                                                |          |   |      |   | 8,175   |  
|Other borrowed funds                                                                                                      |  |                                                | 39,004    |   |      |   | 22,566  |  
|Other liabilities                                                                                                         |  |                                                | 11,594    |   |      |   | 7,553   |  
|                                                                                                                          |  |                                                |           |   |      |   |         |  
|Total Liabilities                                                                                                         |  |                                                | 999,770   |   |      |   | 780,744 |  
|                                                                                                                          |  |                                                |           |   |      |   |         |  
|Shareholders equity:                                                                                                     |  |                                                |           |   |      |   |         |  
|Preferred stock, $10.00 par value; authorized 200,000 shares, none issued                                                 |  |                                                |          |   |      |   |        |  
|Common stock, $2.50 par value; authorized 10,000,000 shares, issued 6,370,486 shares in 2005 and 5,605,102 shares in 2004 |  |                                                | 15,926    |   |      |   | 14,013  |  
|Surplus                                                                                                                   |  |                                                | 23,542    |   |      |   | 10,643  |  
|Retained earnings                                                                                                         |  |                                                | 62,711    |   |      |   | 56,383  |  
|Accumulated other comprehensive income                                                                                    |  |                                                | 136       |   |      |   | 1,108   |  
|                                                                                                                          |  |                                                |           |   |      |   |         |  
|Total Shareholders Equity                                                                                                |  |                                                | 102,315   |   |      |   | 82,147  |  
|                                                                                                                          |  |                                                |           |   |      |   |         |  
|Total Liabilities and Shareholders Equity                                                                                |  | $                                              | 1,102,085 |   |      | $ | 862,891 |  
|                                                                                                                          |  |                                                |           |   |      |   |         |  



Commitments (Note 17)



See accompanying notes to
consolidated financial statements.



39



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME



|                                                    |  |                                                |           |      |   |           |  |   |          
|--------------------------------------------------- |  | ---------------------------------------------- | --------- | ---- | - | --------- |  | - | ---------
|                                                    |  | Years Ended December 31                       
|                                                    |  | 2005                                           |           | 2004 |   | 2003     
|                                                    |  | (in thousands, except shareand per share data)
|Interest Income                                     |  |                                                |           |      |   |           |  |   |          
|Interest and fees on loans                          |  | $                                              | 48,604    |      | $ | 35,184    |  | $ | 33,194   
|Interest and dividends on investment securities:    |  |                                                |           |      |   |           |  |   |          
|Taxable income                                      |  |                                                | 3,689     |      |   | 3,369     |  |   | 5,061    
|Non-taxable income                                  |  |                                                | 1,677     |      |   | 1,727     |  |   | 1,629    
|Other interest income                               |  |                                                | 445       |      |   | 156       |  |   | 274      
|                                                    |  |                                                |           |      |   |           |  |   |          
|Total interest income                               |  |                                                | 54,415    |      |   | 40,436    |  |   | 40,158   
|                                                    |  |                                                |           |      |   |           |  |   |          
|Interest Expense                                    |  |                                                |           |      |   |           |  |   |          
|Deposits                                            |  |                                                | 15,319    |      |   | 8,974     |  |   | 9,600    
|Retail repurchase agreements                        |  |                                                | 503       |      |   | 158       |  |   | 160      
|Federal Home Loan Bank advances                     |  |                                                | 2,766     |      |   | 2,546     |  |   | 2,321    
|Federal funds purchased                             |  |                                                | 9         |      |   | 71        |  |   | 7        
|Other borrowed funds                                |  |                                                | 1,453     |      |   | 653       |  |   | 1,056    
|                                                    |  |                                                |           |      |   |           |  |   |          
|Total interest expense                              |  |                                                | 20,050    |      |   | 12,402    |  |   | 13,144   
|                                                    |  |                                                |           |      |   |           |  |   |          
|Net Interest Income                                 |  |                                                | 34,365    |      |   | 28,034    |  |   | 27,014   
|Provision for loan losses                           |  |                                                | 2,842     |      |   | 4,030     |  |   | 1,860    
|                                                    |  |                                                |           |      |   |           |  |   |          
|Net Interest Income After Provision for Loan Losses |  |                                                | 31,523    |      |   | 24,004    |  |   | 25,154   
|                                                    |  |                                                |           |      |   |           |  |   |          
|Noninterest Income                                  |  |                                                |           |      |   |           |  |   |          
|Mortgage loan sales                                 |  |                                                | 4,642     |      |   | 4,032     |  |   | 4,890    
|Service charges on deposit accounts                 |  |                                                | 6,057     |      |   | 5,419     |  |   | 4,949    
|Trust and investment services                       |  |                                                | 1,293     |      |   | 1,535     |  |   | 1,415    
|Cardholder and merchant services income             |  |                                                | 1,347     |      |   | 1,078     |  |   | 870      
|Other service charges, commissions and fees         |  |                                                | 882       |      |   | 843       |  |   | 644      
|Bank owned life insurance                           |  |                                                | 597       |      |   | 617       |  |   | 638      
|Other income                                        |  |                                                | 108       |      |   | 149       |  |   | 194      
|                                                    |  |                                                |           |      |   |           |  |   |          
|Total noninterest income                            |  |                                                | 14,926    |      |   | 13,673    |  |   | 13,600   
|                                                    |  |                                                |           |      |   |           |  |   |          
|Noninterest Expense                                 |  |                                                |           |      |   |           |  |   |          
|Personnel expense                                   |  |                                                | 18,934    |      |   | 16,755    |  |   | 15,804   
|Occupancy expense                                   |  |                                                | 1,888     |      |   | 1,566     |  |   | 1,415    
|Furniture and equipment expense                     |  |                                                | 2,241     |      |   | 1,943     |  |   | 2,122    
|Data processing services                            |  |                                                | 1,473     |      |   | 1,331     |  |   | 1,267    
|Other expense                                       |  |                                                | 7,142     |      |   | 7,160     |  |   | 6,551    
|                                                    |  |                                                |           |      |   |           |  |   |          
|Total noninterest expense                           |  |                                                | 31,678    |      |   | 28,755    |  |   | 27,159   
|                                                    |  |                                                |           |      |   |           |  |   |          
|Income Before Income Taxes                          |  |                                                | 14,771    |      |   | 8,922     |  |   | 11,595   
|Income taxes                                        |  |                                                | 4,834     |      |   | 2,324     |  |   | 3,195    
|                                                    |  |                                                |           |      |   |           |  |   |          
|Net Income                                          |  | $                                              | 9,937     |      | $ | 6,598     |  | $ | 8,400    
|                                                    |  |                                                |           |      |   |           |  |   |          
|Net income per common share:                        |  |                                                |           |      |   |           |  |   |          
|Basic                                               |  | $                                              | 1.73      |      | $ | 1.17      |  | $ | 1.50     
|Diluted                                             |  | $                                              | 1.69      |      | $ | 1.13      |  | $ | 1.43     
|Weighted average number of shares outstanding:      |  |                                                |           |      |   |           |  |   |          
|Basic                                               |  |                                                | 5,731,966 |      |   | 5,663,173 |  |   | 5,607,681
|Diluted                                             |  |                                                | 5,869,023 |      |   | 5,822,047 |  |   | 5,880,026



See accompanying notes
to consolidated financial statements.



40



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME



|                                                                |  |                                                 |   |  |         |        |   |                  |   |        |                                     |  |   |        |   |  |   |        |   |  |   |         |  
|--------------------------------------------------------------- |  | ----------------------------------------------- | - |  | ------- | ------ | - | ---------------- | - | ------ | ----------------------------------- |  | - | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                                |  | Common Stock                                    |   |  | Surplus |        |   | RetainedEarnings |   |        | AccumulatedOtherComprehensiveIncome |  |   | Total  |  
|                                                                |  | Shares                                          |   |  | Amount  |        |   |                  |   |       
|                                                                |  | (in thousands, except share and per share data) |  
|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  |  
|Comprehensive income:                                           |  |                                                 |   |  |         |        |   |                  |   |        |                                     |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                      |  |                                                |   |  |         |       |   |                  |   |       |                                     |  |   | 9,937  |   |  |   |       |   |  |   | 9,937   |  
|Other comprehensive income:                                     |  |                                                 |   |  |         |        |   |                  |   |        |                                     |  |   |        |   |  |   |        |   |  |   |         |  
|Unrealized securities losses, net of income tax benefit of $607 |  |                                                |   |  |         |       |   |                  |   |       |                                     |  |   |       |   |  |   | (972   | ) |  |   | (972    | )
|                                                                |  |                                                 |   |  |         |        |   |                  |   |        |                                     |  |   |        |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                      |  |                                                 |   |  |         |        |   |                  |   |        |                                     |  |   |        |   |  |   |        |   |  |   | 8,965   |  
|                                                                |  |                                                 |   |  |         |        |   |                  |   |        |                                     |  |   |        |   |  |   |        |   |  |   |         |  
|Cash dividends declared, $.62 per share                         |  |                                                |   |  |         |       |   |                  |   |       |                                     |  |   | (3,609 | ) |  |   |       |   |  |   | (3,609  | )
|Common stock issued through stock option plan                   |  | 61,559                                          |   |  |         | 153    |   |                  |   | 651    |                                     |  |   |       |   |  |   |       |   |  |   | 804     |  
|Merger acquisition of subsidiary company                        |  | 728,625                                         |   |  |         | 1,822  |   |                  |   | 12,685 |                                     |  |   |       |   |  |   |       |   |  |   | 14,507  |  
|Common stock repurchased                                        |  | (24,800                                         | ) |  |         | (62    | ) |                  |   | (437   | )                                   |  |   |       |   |  |   |       |   |  |   | (499    | )
|                                                                |  |                                                 |   |  |         |        |   |                  |   |        |                                     |  |   |        |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2005                                      |  | 6,370,486                                       |   |  | $       | 15,926 |   |                  | $ | 23,542 |                                     |  | $ | 62,711 |   |  | $ | 136    |   |  | $ | 102,315 |  
|                                                                |  |                                                 |   |  |         |        |   |                  |   |        |                                     |  |   |        |   |  |   |        |   |  |   |         |  



See accompanying notes
to consolidated financial statements.



41



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                         |         |   |      |   |          |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                  |  | Years Ended December 31 |        
|                                                                                  |  | 2005                    |         |   | 2004 |   |          | 2003 | 
|                                                                                  |  | (in thousands)          |        
|Operating Activities                                                              |  |                         |         |   |      |   |          |      |  |   |         |  
|Net income                                                                        |  | $                       | 9,937   |   |      | $ | 6,598    |      |  | $ | 8,400   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |         |   |      |   |          |      |  |   |         |  
|Depreciation and amortization of premises and equipment                           |  |                         | 1,755   |   |      |   | 1,619    |      |  |   | 1,793   |  
|Provision for loan losses                                                         |  |                         | 2,842   |   |      |   | 4,030    |      |  |   | 1,860   |  
|Deferred income taxes                                                             |  |                         | (502    | ) |      |   | (12      | )    |  |   | (338    | )
|Deferred loan fees and costs, net                                                 |  |                         | (119    | ) |      |   | 229      |      |  |   | (20     | )
|Premium amortization and discount accretion of investment securities, net         |  |                         | 453     |   |      |   | 591      |      |  |   | 597     |  
|Amortization of intangibles                                                       |  |                         | 66      |   |      |   | 55       |      |  |   | 69      |  
|Income from bank owned life insurance                                             |  |                         | (597    | ) |      |   | (617     | )    |  |   | (638    | )
|Net decrease (increase) in loans held for sale                                    |  |                         | (5,967  | ) |      |   | 9,453    |      |  |   | 33,813  |  
|Decrease (increase) in other assets                                               |  |                         | (1,328  | ) |      |   | 2,768    |      |  |   | 1,314   |  
|Increase (decrease) in other liabilities                                          |  |                         | (27     | ) |      |   | 324      |      |  |   | (2,315  | )
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |         |  
|Net Cash Provided by Operating Activities                                         |  |                         | 6,513   |   |      |   | 25,038   |      |  |   | 44,535  |  
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |         |  
|Investing Activities                                                              |  |                         |         |   |      |   |          |      |  |   |         |  
|Available-for-sale securities:                                                    |  |                         |         |   |      |   |          |      |  |   |         |  
|Proceeds from maturities and calls                                                |  |                         | 6,266   |   |      |   | 35,659   |      |  |   | 62,774  |  
|Purchases                                                                         |  |                         | (10,464 | ) |      |   | (29,858  | )    |  |   | (16,366 | )
|Held-to-maturity securities:                                                      |  |                         |         |   |      |   |          |      |  |   |         |  
|Proceeds from maturities and calls                                                |  |                         | 4,407   |   |      |   | 12,812   |      |  |   | 16,003  |  
|Purchases                                                                         |  |                         | (2,192  | ) |      |   | (871     | )    |  |   | (55,326 | )
|Net increase in loans held for investment                                         |  |                         | (48,411 | ) |      |   | (128,634 | )    |  |   | (47,658 | )
|Purchases of premises and equipment                                               |  |                         | (5,614  | ) |      |   | (3,799   | )    |  |   | (2,671  | )
|Net cash paid in merger acquisition of subsidiary company                         |  |                         | (447    | ) |      |   |         |      |  |   | (436    | )
|Purchases of life insurance contracts                                             |  |                         |        |   |      |   |         |      |  |   | (2,000  | )
|Other, net                                                                        |  |                         | 149     |   |      |   | (168     | )    |  |   | 239     |  
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |         |  
|Net Cash Used in Investing Activities                                             |  |                         | (56,306 | ) |      |   | (114,859 | )    |  |   | (45,441 | )
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |         |  
|Financing Activities                                                              |  |                         |         |   |      |   |          |      |  |   |         |  
|Net increase in deposits                                                          |  |                         | 69,118  |   |      |   | 61,619   |      |  |   | 5,954   |  
|Increase (decrease) in retail repurchase agreements                               |  |                         | 7,466   |   |      |   | (998     | )    |  |   | (2,611  | )
|Increase (decrease) in Federal Home Loan Bank advances                            |  |                         | (4,500  | ) |      |   | 16,000   |      |  |   |        |  
|Increase (decrease) in federal funds purchased                                    |  |                         | (8,175  | ) |      |   | 7,550    |      |  |   | 625     |  
|Increase (decrease) in other borrowed funds                                       |  |                         | 13,319  |   |      |   | 4,589    |      |  |   | (31,970 | )
|Common stock issued                                                               |  |                         | 804     |   |      |   | 791      |      |  |   | 1,673   |  
|Common stock repurchased                                                          |  |                         | (499    | ) |      |   | (2,830   | )    |  |   | (2      | )
|Cash dividends paid                                                               |  |                         | (3,370  | ) |      |   | (3,515   | )    |  |   | (3,221  | )
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |         |  
|Net Cash Provided by (Used in) Financing Activities                               |  |                         | 74,163  |   |      |   | 83,206   |      |  |   | (29,552 | )
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |         |  
|Net Increase (Decrease) in Cash and Cash Equivalents                              |  |                         | 24,370  |   |      |   | (6,615   | )    |  |   | (30,458 | )
|Cash and Cash Equivalents at Beginning of Year                                    |  |                         | 20,509  |   |      |   | 27,124   |      |  |   | 57,582  |  
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |         |  
|Cash and Cash Equivalents at End of Year                                          |  | $                       | 44,879  |   |      | $ | 20,509   |      |  | $ | 27,124  |  
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |         |  
|Supplemental disclosure of cash flow information:                                 |  |                         |         |   |      |   |          |      |  |   |         |  
|Cash paid during the year for:                                                    |  |                         |         |   |      |   |          |      |  |   |         |  
|Interest                                                                          |  | $                       | 18,871  |   |      | $ | 12,344   |      |  | $ | 13,628  |  
|Income taxes                                                                      |  |                         | 5,334   |   |      |   | 1,172    |      |  |   | 3,680   |  
|Noncash transactions:                                                             |  |                         |         |   |      |   |          |      |  |   |         |  
|Foreclosed loans transferred to other real estate                                 |  |                         | 1,004   |   |      |   | 1,872    |      |  |   | 1,354   |  
|Cashless exercise of stock options                                                |  |                         |        |   |      |   |         |      |  |   | 196     |  
|Unrealized securities losses, net of income tax benefit                           |  |                         | (972    | ) |      |   | (481     | )    |  |   | (1,041  | )
|Merger acquisition of subsidiary company:                                         |  |                         |         |   |      |   |          |      |  |   |         |  
|Fair value of assets acquired                                                     |  |                         | 163,668 |   |      |   |         |      |  |   | 47,001  |  
|Fair value of common stock issued                                                 |  |                         | 14,507  |   |      |   |         |      |  |   | 2,659   |  
|Cash paid                                                                         |  |                         | 8,201   |   |      |   |         |      |  |   | 2,908   |  
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |         |  
|Liabilities assumed                                                               |  |                         | 140,960 |   |      |   |         |      |  |   | 41,434  |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

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. A second bank subsidiary, Alamance Bank, acquired through merger with United Financial, Inc. effective November 4, 2005 as discussed in Note 2 below, was merged into First National Bank on February 1, 2006 and, for the
purposes of these consolidated financial statements, is considered a part of First National Bank in 2005. 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 Alamance, Chatham, Guilford, Montgomery, Moore, Orange, 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.



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.



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



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



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)



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 accumulated other comprehensive income and reported as a separate component of shareholders equity.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



44



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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)



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.



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.



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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)



Intangible Assets



Intangible assets include goodwill and other identifiable assets, such as core deposit premiums, resulting from acquisitions. Core deposit premiums are amortized primarily on a straight-line basis over a ten-year life 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.



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 using the interest method 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.



46



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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)



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 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 grants in 1995 and
subsequent years.



|                                                                                                   |  |                                       |       |      |   |       |  |   |      
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ----- | ---- | - | ----- |  | - | -----
|                                                                                                   |  | 2005                                  |       | 2004 |   | 2003 
|                                                                                                   |  | (in thousands, except per share data)
|Net income, as reported                                                                            |  | $                                     | 9,937 |      | $ | 6,598 |  | $ | 8,400
|Less: Stock-based compensation cost determined under fair value method, net of related tax effects |  |                                       | 387   |      |   | 340   |  |   | 340  
|                                                                                                   |  |                                       |       |      |   |       |  |   |      
|Net income, pro forma                                                                              |  | $                                     | 9,550 |      | $ | 6,258 |  | $ | 8,060
|                                                                                                   |  |                                       |       |      |   |       |  |   |      
|Net income per share:                                                                              |  |                                       |       |      |   |       |  |   |      
|Basic:                                                                                             |  |                                       |       |      |   |       |  |   |      
|As reported                                                                                        |  | $                                     | 1.73  |      | $ | 1.17  |  | $ | 1.50 
|Pro forma                                                                                          |  |                                       | 1.67  |      |   | 1.11  |  |   | 1.44 
|Diluted:                                                                                           |  |                                       |       |      |   |       |  |   |      
|As reported                                                                                        |  |                                       | 1.69  |      |   | 1.13  |  |   | 1.43 
|Pro forma                                                                                          |  |                                       | 1.63  |      |   | 1.07  |  |   | 1.37 



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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)



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, 2005 and 2004, the interest rate swap resulted in net reductions of $1,000 and $104,000, respectively, in the interest expense that would otherwise have been reported for the FHLB advance. The fair value of the swap at
December 31, 2005 was recorded on the consolidated balance sheet as a liability in the amount of $291,000, 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, 2005: 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



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 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.



48



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 2MERGER
INFORMATION(Continued)



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.



United Financial, Inc.



On November 4, 2005, the Corporation completed a merger for the acquisition of United Financial, Inc. (United), holding company for
Alamance Bank, headquartered in Graham, North Carolina. At the date of merger, Alamance Bank operated three offices and, based on estimated fair values, had $163,858,000 in total assets, $96,624,000 in loans and $112,961,000 in deposits. On
February 1, 2006, Alamance Bank was merged into First National Bank.



Pursuant to the terms of the merger, each share of United common stock was converted, at the election of the shareholder, into either: (1) $14.25 in cash, (2) 0.6828 shares of FNB Corp. common stock, or
(3) $4.99 in cash and 0.4438 shares of FNB Corp. common stock, the overall conversion of stock being limited to 65% of United shares. The aggregate purchase price was $22,708,000, consisting of $8,201,000 of cash payments and 728,625 shares of
FNB Corp. common stock valued at $14,507,000.



The merger
transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Alamance Bank were recorded based on estimated fair values as of November 4, 2005, with the
estimate of goodwill being subject to possible adjustment during the one-year period from that date. The consolidated financial statements include the results of operations of Alamance Bank since November 4, 2005.



49



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 2MERGER
INFORMATION(Continued)



The estimated fair
values of the assets acquired and liabilities assumed at the date of merger based on the information currently available is as follows (in thousands):



|                                       |  |                  |         |  
|-------------------------------------- |  | ---------------- | ------- | -
|                                       |  | November 4, 2005 |        
|Assets                                 |  |                  |         |  
|Cash and due from banks                |  | $                | 2,108   |  
|Interest-bearing bank balances         |  |                  | 1,095   |  
|Federal funds sold                     |  |                  | 4,551   |  
|Investment securities                  |  |                  | 34,712  |  
|Loans:                                 |  |                  |         |  
|Loans held for sale                    |  |                  |        |  
|Loans held for investment              |  |                  | 96,624  |  
|Less allowance for loan losses         |  |                  | (1,405  | )
|                                       |  |                  |         |  
|Net loans                              |  |                  | 95,219  |  
|Premises and equipment, net            |  |                  | 4,139   |  
|Intangible assets                      |  |                  | 16,312  |  
|Other assets acquired                  |  |                  | 5,532   |  
|                                       |  |                  |         |  
|Total assets acquired                  |  |                  | 163,668 |  
|                                       |  |                  |         |  
|Liabilities                            |  |                  |         |  
|Deposits                               |  |                  | 112,961 |  
|Retail repurchase agreements           |  |                  | 54      |  
|Federal Home Loan Bank advances        |  |                  | 21,866  |  
|Other borrowed funds                   |  |                  | 2,500   |  
|Other liabilities                      |  |                  | 3,579   |  
|                                       |  |                  |         |  
|Total liabilities assumed              |  |                  | 140,960 |  
|                                       |  |                  |         |  
|Net Assets Acquired and Purchase Price |  | $                | 22,708  |  
|                                       |  |                  |         |  



The portion of the
purchase price allocated to goodwill and other intangible assets is presented below (in thousands):



|                                                                             |  |                  |        |  
|---------------------------------------------------------------------------- |  | ---------------- | ------ | -
|                                                                             |  | November 4, 2005 |       
|Purchase price                                                               |  | $                | 22,708 |  
|Tangible shareholders equity of Alamance Bank                               |  |                  | 11,081 |  
|                                                                             |  |                  |        |  
|Excess of purchase price over carrying value of net tangible assets acquired |  |                  | 11,627 |  
|Fair value adjustments                                                       |  |                  | 3,114  |  
|Direct acquisition costs                                                     |  |                  | 3,200  |  
|Deferred and recoverable income taxes                                        |  |                  | (1,629 | )
|                                                                             |  |                  |        |  
|Total intangible assets                                                      |  |                  | 16,312 |  
|Core deposit intangible                                                      |  |                  | 1,290  |  
|                                                                             |  |                  |        |  
|Goodwill                                                                     |  | $                | 15,022 |  
|                                                                             |  |                  |        |  



The core deposit
intangible will be amortized on the straight-line basis over a ten-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 for impairment in accordance with SFAS No. 142. None of the goodwill is expected to be deductible for income tax purposes. Premiums and discounts that resulted from recording the United assets and liabilities at their respective fair
values are being amortized using methods that approximate an effective yield over the life of the assets and liabilities. The net amortization increased net income before income taxes by $88,000 in 2005.



50



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##### Table of Contents

FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 2MERGER
INFORMATION(Continued)



The following
unaudited pro forma financial information presents the combined results of operations of FNB Corp. and United as if the merger had occurred as of the beginning of the year for the years ended December 31, 2005 and 2004, after giving effect to
certain adjustments, including amortization of the core deposit intangible and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had FNB Corp. and United
constituted a single entity during these years.



|                             |  |                                       |        |      |   |       
|---------------------------- |  | ------------------------------------- | ------ | ---- | - | ------
|                             |  | 2005                                  |        | 2004
|                             |  | (in thousands, except per share data)
|Net interest income          |  | $                                     | 38,694 |      | $ | 32,876
|Noninterest income           |  |                                       | 15,800 |      |   | 14,764
|Net income                   |  |                                       | 10,206 |      |   | 7,066 
|                             |  |                                      
|Net income per common share: |  |                                       |        |      |   |       
|Basic                        |  |                                       | 1.61   |      |   | 1.11  
|Diluted                      |  |                                       | 1.57   |      |   | 1.08  



Direct acquisition
costs of $3,200,000 associated with the merger are included in goodwill and are summarized as follows:



|                                         |  |                   |       |             |   |                  |  |   |    
|---------------------------------------- |  | ----------------- | ----- | ----------- | - | ---------------- |  | - | ---
|                                         |  | December 31, 2005
|                                         |  | TotalCosts        |       | AmountsPaid |   | RemainingAccrual
|                                         |  | (in thousands)   
|Cash out of stock options                |  | $                 | 1,262 |             | $ | 1,262            |  | $ |   
|Contract termination costs               |  |                   | 978   |             |   | 335              |  |   | 643
|Investment banking and professional fees |  |                   | 812   |             |   | 793              |  |   | 19 
|Other                                    |  |                   | 148   |             |   | 96               |  |   | 52 
|                                         |  |                   |       |             |   |                  |  |   |    
|Total                                    |  | $                 | 3,200 |             | $ | 2,486            |  | $ | 714
|                                         |  |                   |       |             |   |                  |  |   |    



The contract
termination costs include amounts due to certain executives related to the settlement of compensation contracts and estimated payments to be incurred in connection with the termination of certain data processing contracts.



Integrity Financial Corporation



On September 18, 2005, the Corporation entered into a definitive merger
agreement to acquire Integrity Financial Corporation (Integrity), headquartered in Hickory, North Carolina and the holding company for First Gaston Bank of North Carolina. Integritys second subsidiary bank, Catawba Valley Bank was
merged into First Gaston Bank effective January 5, 2006. As soon as practicable following the merger of the holding companies, First Gaston Bank will be merged with and into First National Bank. The merger of the holding companies will be
accounted for using the purchase method of accounting for business combinations and is subject to several conditions, including approval by the shareholders of Integrity and FNB Corp., which vote is scheduled to occur on March 15, 2006, and
approval by applicable regulatory authorities. Upon satisfaction of these conditions, the merger of the holding companies is anticipated to close early in the second quarter of 2006. Integrity shareholders will receive 0.8743 shares of FNB Corp.
common stock and $5.20 in cash for each share of Integrity common stock. At September 30, 2005, Integrity operated twelve offices through Catawba Valley Bank and five offices through First Gaston Bank and had approximately $666,000,000 in total
assets, $546,000,000 in deposits and $67,000,000 in shareholders equity. In connection with the merger, it is expected that the Integrity shareholders will receive approximately 4,592,000 shares of FNB Corp. common stock with an estimated fair
value of $92,000,000 and cash consideration amounting to approximately $27,000,000. The resulting goodwill is estimated to be approximately $76,000,000.



51



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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,  
|                                                                        |  | 2005           |        | 2004
|                                                                        |  | (in thousands)
|Amortized intangible assets:                                            |  |                |        |      |   |       
|Core deposit premium related to whole bank acquisitions:Carrying amount |  | $              | 1,546  |      | $ | 256   
|Accumulated amortization                                                |  |                | 220    |      |   | 154   
|                                                                        |  |                |        |      |   |       
|Net core deposit premium                                                |  | $              | 1,326  |      | $ | 102   
|                                                                        |  |                |        |      |   |       
|Unamortized intangible assets:                                          |  |                |        |      |   |       
|Goodwill                                                                |  | $              | 31,381 |      | $ | 16,335
|                                                                        |  |                |        |      |   |       



Amortization of
intangibles totaled $66,000 for core deposit premiums in 2005, $55,000 in 2004 and $69,000 in 2003. The estimated amortization expense for core deposit premiums for each year ending December 31 from 2006 through 2010 is as follows: $160,000 in
2006, $149,000 in 2007, $136,000 in 2008, $129,000 in 2009 and $129,000 in 2010.



The changes in the carrying amount of goodwill in 2005 were as follows:



|                                                                                                           |  |   |       
|---------------------------------------------------------------------------------------------------------- |  | - | ------
|Balance, December 31, 2004                                                                                 |  | $ | 16,335
|Goodwill acquired during the period                                                                        |  |   | 15,022
|Payment of additional cash consideration to shareholders of acquired company per terms of merger agreement |  |   | 24    
|                                                                                                           |  |   |       
|Balance December 31, 2005                                                                                  |  | $ | 31,381
|                                                                                                           |  |   |       



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 $202,332,000, $180,176,000 and $160,966,000 at December 31, 2005, 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 |      
|                              |  | 2005                    |       |   | 2004 |   |       | 2003 | 
|                              |  | (in thousands)          |      
|Balance at beginning of year  |  | $                       | 2,006 |   |      | $ | 1,628 |      |  | $ | 1,052 |  
|Servicing rights capitalized  |  |                         | 754   |   |      |   | 681   |      |  |   | 1,026 |  
|Amortization expense          |  |                         | (351  | ) |      |   | (303  | )    |  |   | (450  | )
|Change in valuation allowance |  |                         |      |   |      |   |      |      |  |   |      |  
|                              |  |                         |       |   |      |   |       |      |  |   |       |  
|Balance at end of year        |  | $                       | 2,409 |   |      | $ | 2,006 |      |  | $ | 1,628 |  
|                              |  |                         |       |   |      |   |       |      |  |   |       |  



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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: $346,000 in 2006, $346,000 in 2007, $346,000 in 2008, $346,000 in 2009, $346,000 in 2010, $346,000 in 2011 and $333,000 in 2012. 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 |  | EstimatedFair Value
|                                          |  | (in thousands)
|Available For Sale                        |  |                |         |                      |   |                       |  |                     |       |  |   |        
|December 31, 2005                         |  |                |         |                      |   |                       |  |                     |       |  |   |        
|U.S. Government agencies and corporations |  | $              | 43,340  |                      | $ | 33                    |  | $                   | 627   |  | $ | 42,746 
|Mortgage-backed securities                |  |                | 28,903  |                      |   | 38                    |  |                     | 313   |  |   | 28,628 
|State, county and municipal               |  |                | 26,384  |                      |   | 550                   |  |                     | 47    |  |   | 26,887 
|Other debt securities                     |  |                | 5,126   |                      |   | 606                   |  |                     | 28    |  |   | 5,704  
|Equity securities                         |  |                | 6,940   |                      |   | 13                    |  |                     |      |  |   | 6,953  
|                                          |  |                |         |                      |   |                       |  |                     |       |  |   |        
|Total                                     |  | $              | 110,693 |                      | $ | 1,240                 |  | $                   | 1,015 |  | $ | 110,918
|                                          |  |                |         |                      |   |                       |  |                     |       |  |   |        
|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 
|                                          |  |                |         |                      |   |                       |  |                     |       |  |   |        
|Held To Maturity                          |  |                |         |                      |   |                       |  |                     |       |  |   |        
|December 31, 2005                         |  |                |         |                      |   |                       |  |                     |       |  |   |        
|U.S. Government agencies and corporations |  | $              | 20,737  |                      | $ |                      |  | $                   | 618   |  | $ | 20,119 
|Mortgage-backed securities                |  |                | 3,190   |                      |   |                      |  |                     | 74    |  |   | 3,116  
|State, county and municipal               |  |                | 22,961  |                      |   | 32                    |  |                     | 691   |  |   | 22,302 
|Other debt securities                     |  |                | 2,000   |                      |   |                      |  |                     | 29    |  |   | 1,971  
|                                          |  |                |         |                      |   |                       |  |                     |       |  |   |        
|Total                                     |  | $              | 48,888  |                      | $ | 32                    |  | $                   | 1,412 |  | $ | 47,508 
|                                          |  |                |         |                      |   |                       |  |                     |       |  |   |        
|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 
|                                          |  |                |         |                      |   |                       |  |                     |       |  |   |        



53



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##### Table of Contents

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, 2005, 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      |         | EstimatedFair Value |   | AmortizedCost |  | EstimatedFairValue
|                                       |  | (in thousands)    
|Due in one year or less                |  | $                  | 4,109   |                     | $ | 4,066         |  | $                  | 7,070  |  | $ | 7,038 
|Due after one year through five years  |  |                    | 23,746  |                     |   | 23,498        |  |                    | 24,230 |  |   | 23,383
|Due after five years through ten years |  |                    | 33,307  |                     |   | 33,399        |  |                    | 8,244  |  |   | 8,000 
|Due after ten years                    |  |                    | 13,688  |                     |   | 14,374        |  |                    | 6,154  |  |   | 5,971 
|                                       |  |                    |         |                     |   |               |  |                    |        |  |   |       
|Total                                  |  |                    | 74,850  |                     |   | 75,337        |  |                    | 45,698 |  |   | 44,392
|Mortgage-backed securities             |  |                    | 28,903  |                     |   | 28,628        |  |                    | 3,190  |  |   | 3,116 
|Equity securities                      |  |                    | 6,940   |                     |   | 6,953         |  |                    |       |  |   |      
|                                       |  |                    |         |                     |   |               |  |                    |        |  |   |       
|Total investment securities            |  | $                  | 110,693 |                     | $ | 110,918       |  | $                  | 48,888 |  | $ | 47,508
|                                       |  |                    |         |                     |   |               |  |                    |        |  |   |       



Debt securities with
an estimated fair value of $67,189,000 at December 31, 2005 and $79,647,000 at December 31, 2004 were pledged to secure public funds and trust funds on deposit. Debt securities with an estimated fair value of $29,072,000 at
December 31, 2005 and $20,963,000 at December 31, 2004 were pledged to secure retail repurchase agreements. Debt securities with an estimated fair value of $24,621,000 at December 31, 2005 were pledged to secure advances from the
Federal Home Loan Bank, with none being so pledged at December 31, 2004. Debt securities with an estimated fair value of $8,119,000 at December 31, 2005 and $3,873,000 at December 31, 2004 were pledged for other purposes.



There were no sales of investment securities in 2005, 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, 2005 and 2004, First National Bank owned a total of $5,968,000 and
$4,668,000, 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, 2005.



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, 2005 and 2004, First National Bank owned a total of $954,000 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, 2005.



54



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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, 2005                         |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |      
|Available for Sale                        |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |      
|U.S. Government agencies and corporations |  | $                   | 16,237 |                       | $ | 226                |  | $                     | 17,820 |                    | $ | 412                   |  | $ | 34,057 |  | $ | 638  
|Mortgage-backed securities                |  |                     | 20,841 |                       |   | 260                |  |                       | 1,225  |                    |   | 42                    |  |   | 22,066 |  |   | 302  
|State, county and municipal               |  |                     | 5,419  |                       |   | 47                 |  |                       |       |                    |   |                      |  |   | 5,419  |  |   | 47   
|Other debt securities                     |  |                     |       |                       |   |                   |  |                       | 972    |                    |   | 28                    |  |   | 972    |  |   | 28   
|                                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |      
|Total                                     |  | $                   | 42,497 |                       | $ | 533                |  | $                     | 20,017 |                    | $ | 482                   |  | $ | 62,514 |  | $ | 1,015
|                                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |      
|Held to Maturity                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |      
|U.S. Government agencies and corporations |  | $                   | 459    |                       | $ | 8                  |  | $                     | 19,660 |                    | $ | 610                   |  | $ | 20,119 |  | $ | 618  
|Mortgage-backed securities                |  |                     | 2,686  |                       |   | 57                 |  |                       | 430    |                    |   | 17                    |  |   | 3,116  |  |   | 74   
|State, county and municipal               |  |                     | 6,349  |                       |   | 81                 |  |                       | 12,706 |                    |   | 610                   |  |   | 19,055 |  |   | 691  
|Other debt securities                     |  |                     | 976    |                       |   | 24                 |  |                       | 995    |                    |   | 5                     |  |   | 1,971  |  |   | 29   
|                                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |      
|Total                                     |  | $                   | 10,470 |                       | $ | 170                |  | $                     | 33,791 |                    | $ | 1,242                 |  | $ | 44,261 |  | $ | 1,412
|                                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |      
|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  
|                                          |  |                     |        |                       |   |                    |  |                       |        |                    |   |                       |  |   |        |  |   |      



Information concerning
the status of investment securities with unrealized losses at December 31, 2005 is as follows:



Debt securities other than mortgage-backed securities.126 debt securities other than mortgage-backed securities had
unrealized losses with aggregate depreciation of 2.5% 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 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.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 4INVESTMENT
SECURITIES(Continued)



Mortgage-backed
securities.47 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. These securities were issued by reputable
organizations and, for certain of these securities, the contractual cash flows 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   
|                            |  | 2005           |         | 2004
|                            |  | (in thousands)
|Commercial and agricultural |  | $              | 176,286 |      | $ | 196,846
|Real estateconstruction    |  |                | 142,096 |      |   | 83,433 
|Real estatemortgage:       |  |                |         |      |   |        
|1-4 family residential      |  |                | 231,071 |      |   | 197,855
|Commercial and other        |  |                | 221,457 |      |   | 154,024
|Consumer                    |  |                | 24,141  |      |   | 20,899 
|Leases                      |  |                |        |      |   | 49     
|                            |  |                |         |      |   |        
|Loans held for investment   |  |                | 795,051 |      |   | 653,106
|Loans held for sale         |  |                | 17,615  |      |   | 11,648 
|                            |  |                |         |      |   |        
|Gross loans                 |  | $              | 812,666 |      | $ | 664,754
|                            |  |                |         |      |   |        



Loans as presented are
reduced by net deferred loan fees of $939,000 and $990,000 at December 31, 2005 and 2004, respectively. Accruing loans past due 90 days or more amounted to $648,000 at December 31, 2005 and $1,275,000 at December 31, 2004. Nonaccrual
loans amounted to $5,398,000 at December 31, 2005 and $3,952,000 at December 31, 2004. Interest income that would have been recorded on nonaccrual loans for the years ended December 31, 2005, 2004 and 2003, had they performed in
accordance with their original terms, amounted to approximately $588,000, $355,000 and $317,000, respectively. Interest income on all such loans included in the results of operations amounted to approximately $307,000 in 2005, $216,000 in 2004 and
$67,000 in 2003.



At December 31, 2005 and at
December 31, 2004, the Corporation did not have any loans that were considered to be impaired. The average carrying value of impaired loans was $2,074,000 in 2003. Interest income recognized on impaired loans amounted to approximately $5,000 in
2003.



Loans with outstanding balances of $1,004,000 in 2005
and $1,857,000 in 2004 were transferred from loans to other real estate acquired through foreclosure. Other real estate acquired through loan foreclosures amounted to $929,000 at December 31, 2005 and $543,000 at December 31, 2004 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 Alamance, 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.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 5LOANS(Continued)



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:



|                             |  |                |         |   |      |   |         |  
|---------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                             |  | 2005           |         |   | 2004 |  
|                             |  | (in thousands) |        
|Balance at beginning of year |  | $              | 2,137   |   |      | $ | 2,613   |  
|New loans                    |  |                | 29,231  |   |      |   | 18,764  |  
|Repayments                   |  |                | (22,435 | ) |      |   | (19,240 | )
|                             |  |                |         |   |      |   |         |  
|Balance at end of year       |  | $              | 8,933   |   |      | $ | 2,137   |  
|                             |  |                |         |   |      |   |         |  



NOTE 6ALLOWANCE FOR LOAN LOSSES



Changes in the allowance for loan losses were as follows:



|                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                           |  | Years Ended December 31 |       
|                                           |  | 2005                    |        |   | 2004 |   |        | 2003 | 
|                                           |  | (in thousands)          |       
|Balance at beginning of year               |  | $                       | 7,293  |   |      | $ | 6,172  |      |  | $ | 6,109  |  
|Provision for losses charged to operations |  |                         | 2,842  |   |      |   | 4,030  |      |  |   | 1,860  |  
|Loans charged off                          |  |                         | (2,616 | ) |      |   | (3,267 | )    |  |   | (1,900 | )
|Recoveries on loans previously charged off |  |                         | 1,021  |   |      |   | 403    |      |  |   | 103    |  
|Purchase accounting acquisition            |  |                         | 1,405  |   |      |   |       |      |  |   |       |  
|Allowance adjustment for loans sold        |  |                         |       |   |      |   | (45    | )    |  |   |       |  
|                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Balance at end of year                     |  | $                       | 9,945  |   |      | $ | 7,293  |      |  | $ | 6,172  |  
|                                           |  |                         |        |   |      |   |        |      |  |   |        |  



NOTE 7PREMISES AND EQUIPMENT



Premises and equipment are summarized as follows:



|                                               |  |                |        |      |   |       
|---------------------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                               |  | December 31   
|                                               |  | 2005           |        | 2004
|                                               |  | (in thousands)
|Land                                           |  | $              | 5,864  |      | $ | 4,891 
|Buildings and improvements                     |  |                | 17,822 |      |   | 12,389
|Furniture and equipment                        |  |                | 16,654 |      |   | 12,698
|Leasehold improvements                         |  |                | 969    |      |   | 693   
|                                               |  |                |        |      |   |       
|Total                                          |  |                | 41,309 |      |   | 30,671
|Less accumulated depreciation and amortization |  |                | 16,639 |      |   | 13,557
|                                               |  |                |        |      |   |       
|Premises and equipment, net                    |  | $              | 24,670 |      | $ | 17,114
|                                               |  |                |        |      |   |       



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 8INCOME TAXES



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



|                   |  |                |       |   |      |   |       |      |  |   |       |  
|------------------ |  | -------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                   |  | 2005           |       |   | 2004 |   |       | 2003 | 
|                   |  | (in thousands) |      
|Current:           |  |                |       |   |      |   |       |      |  |   |       |  
|Federal            |  | $              | 4,510 |   |      | $ | 2,046 |      |  | $ | 3,112 |  
|State              |  |                | 826   |   |      |   | 290   |      |  |   | 421   |  
|                   |  |                |       |   |      |   |       |      |  |   |       |  
|Total              |  |                | 5,336 |   |      |   | 2,336 |      |  |   | 3,533 |  
|                   |  |                |       |   |      |   |       |      |  |   |       |  
|Deferred:          |  |                |       |   |      |   |       |      |  |   |       |  
|Federal            |  |                | (429  | ) |      |   | 2     |      |  |   | 10    |  
|State              |  |                | (73   | ) |      |   | (14   | )    |  |   | (348  | )
|                   |  |                |       |   |      |   |       |      |  |   |       |  
|Total              |  |                | (502  | ) |      |   | (12   | )    |  |   | (338  | )
|                   |  |                |       |   |      |   |       |      |  |   |       |  
|Total income taxes |  | $              | 4,834 |   |      | $ | 2,324 |      |  | $ | 3,195 |  
|                   |  |                |       |   |      |   |       |      |  |   |       |  



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



|                                                                                                |  |                |       |   |      |   |       |      |  |   |       |  
|----------------------------------------------------------------------------------------------- |  | -------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                                                |  | 2005           |       |   | 2004 |   |       | 2003 | 
|                                                                                                |  | (in thousands) |      
|Amount of tax computed using Federal statutory tax rate of 35% in 2005 and 34% in 2004 and 2003 |  | $              | 5,170 |   |      | $ | 3,033 |      |  | $ | 3,942 |  
|Increases (decreases) resulting from effects of:                                                |  |                |       |   |      |   |       |      |  |   |       |  
|Non-taxable income                                                                              |  |                | (783  | ) |      |   | (811  | )    |  |   | (796  | )
|State income taxes, net of federal benefit                                                      |  |                | 489   |   |      |   | 183   |      |  |   | 48    |  
|Other                                                                                           |  |                | (42   | ) |      |   | (81   | )    |  |   | 1     |  
|                                                                                                |  |                |       |   |      |   |       |      |  |   |       |  
|Total                                                                                           |  | $              | 4,834 |   |      | $ | 2,324 |      |  | $ | 3,195 |  
|                                                                                                |  |                |       |   |      |   |       |      |  |   |       |  



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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   
|                                            |  | 2005           |       | 2004
|                                            |  | (in thousands)
|Deferred tax assets:                        |  |                |       |      |   |      
|Allowance for loan losses                   |  | $              | 3,712 |      | $ | 2,811
|Compensation and benefit plans              |  |                | 2,114 |      |   | 1,412
|Fair value basis of loans                   |  |                | 517   |      |   |     
|Other                                       |  |                | 88    |      |   | 235  
|                                            |  |                |       |      |   |      
|Gross deferred tax assets                   |  |                | 6,431 |      |   | 4,458
|Less valuation allowance                    |  |                |      |      |   |     
|                                            |  |                |       |      |   |      
|Net deferred tax assets                     |  |                | 6,431 |      |   | 4,458
|                                            |  |                |       |      |   |      
|Deferred tax liabilities:                   |  |                |       |      |   |      
|Mortgage servicing rights                   |  |                | 951   |      |   | 773  
|Prepaid pension cost                        |  |                | 925   |      |   | 902  
|Depreciable basis of premises and equipment |  |                | 724   |      |   | 662  
|Net deferred loan fees and costs            |  |                | 231   |      |   | 262  
|Net unrealized securities gains             |  |                | 89    |      |   | 696  
|Fair value basis of loans                   |  |                |      |      |   | 212  
|Other                                       |  |                | 303   |      |   | 388  
|                                            |  |                |       |      |   |      
|Gross deferred tax liabilities              |  |                | 3,223 |      |   | 3,895
|                                            |  |                |       |      |   |      
|Net deferred tax asset                      |  | $              | 3,208 |      | $ | 563  
|                                            |  |                |       |      |   |      



Changes in net
deferred tax asset were as follows:



|                                                                                            |  |                |       |      |   |    
|------------------------------------------------------------------------------------------- |  | -------------- | ----- | ---- | - | ---
|                                                                                            |  | 2005           |       | 2004
|                                                                                            |  | (in thousands)
|Balance at beginning of year                                                                |  | $              | 563   |      | $ | 249
|Purchase accounting acquisition:                                                            |  |                |       |      |   |    
|Alamance Bank                                                                               |  |                | 1,536 |      |   |   
|Income tax effect from change in unrealized losses (gains) on available-for-sale securities |  |                | 607   |      |   | 302
|Deferred income tax benefit on continuing operations                                        |  |                | 502   |      |   | 12 
|                                                                                            |  |                |       |      |   |    
|Balance at end of year                                                                      |  | $              | 3,208 |      | $ | 563
|                                                                                            |  |                |       |      |   |    



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, 2005 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.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 9TIME DEPOSITS



The scheduled maturities of time deposits at December 31, 2005 are as
follows (in thousands):



|                         |  |   |        
|------------------------ |  | - | -------
|Years ending December 31 |  |  
|2006                     |  | $ | 373,250
|2007                     |  |   | 88,284 
|2008                     |  |   | 15,439 
|2009                     |  |   | 3,388  
|2010                     |  |   | 7,329  
|2011 and later years     |  |   | 599    
|                         |  |   |        
|Total time deposits      |  | $ | 488,289
|                         |  |   |        



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:



|                                |  |                            |        |   |                       |   |       |                            |  |   |                       |   |  |                            |        |   |                       |   |        |   |  |   |       |  
|------------------------------- |  | -------------------------- | ------ | - | --------------------- | - | ----- | -------------------------- |  | - | --------------------- | - |  | -------------------------- | ------ | - | --------------------- | - | ------ | - |  | - | ----- | -
|                                |  | 2005                       |        |   | 2004                  |   |       | 2003                       | 
|                                |  | RetailRepurchaseAgreements |        |   | FederalFundsPurchased |   |       | RetailRepurchaseAgreements |  |   | FederalFundsPurchased |   |  | RetailRepurchaseAgreements |        |   | FederalFundsPurchased |  
|                                |  | (dollars in thousands)     |       
|Balance at December 31          |  | $                          | 21,338 |   |                       | $ |      |                            |  | $ | 13,818                |   |  | $                          | 8,175  |   |                       | $ | 14,816 |   |  | $ | 625   |  
|Average balance during the year |  |                            | 17,770 |   |                       |   | 342   |                            |  |   | 15,890                |   |  |                            | 4,181  |   |                       |   | 18,786 |   |  |   | 515   |  
|Maximum month-end balance       |  |                            | 21,338 |   |                       |   | 2,625 |                            |  |   | 15,913                |   |  |                            | 11,425 |   |                       |   | 20,906 |   |  |   | 5,300 |  
|Weighted average interest rate: |  |                            |        |   |                       |   |       |                            |  |   |                       |   |  |                            |        |   |                       |   |        |   |  |   |       |  
|At December 31                  |  |                            | 3.68   | % |                       |   |      | %                          |  |   | 1.90                  | % |  |                            | 2.57   | % |                       |   | 1.09   | % |  |   | 1.27  | %
|During the year                 |  |                            | 2.83   |   |                       |   | 2.53  |                            |  |   | .99                   |   |  |                            | 1.70   |   |                       |   | .85    |   |  |   | 1.39  |  



Federal Home Loan
Bank (FHLB) Advances



First National Bank had a
$207,371,000 line of credit with the FHLB at December 31, 2005, secured by blanket collateral agreements on qualifying mortgage loans and, as required, by other qualifying collateral. At December 31, 2005, FHLB advances under these lines
amounted to $86,225,000 and were at interest rates ranging from 2.16% to 5.92%. At December 31, 2004, FHLB advances amounted to $69,088,000 and were at interest rates ranging from 2.07% to 6.77%.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 10BORROWED
FUNDS(Continued)



At December 31,
2005, 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 |  |  
|2006                     |  | $ | 5,964 
|2007                     |  |   | 3,708 
|2008                     |  |   | 1,475 
|2009                     |  |   | 13,143
|2010                     |  |   | 8,000 
|2011                     |  |   | 15,986
|2012                     |  |   | 15,000
|2014                     |  |   | 20,000
|2015                     |  |   | 2,949 
|                         |  |   |       
|Total FHLB Advances      |  | $ | 86,225
|                         |  |   |       



First National Bank
has obtained irrevocable letters of credit from the FHLB amounting to $46,000,000 at December 31, 2005. These letters of credit, which expire in 2014 and 2015, were issued in favor of the State of North Carolina to secure public funds on
deposit.



Junior Subordinated Deferrable Interest Debentures



FNB Corp. has Junior Subordinated Deferrable
Interest Debentures (Junior Subordinated Debentures) outstanding. The Junior Subordinated Debentures were issued from funds invested from the sale of trust preferred securities by FNB United Statutory Trust I (Trust I), which
is owned by FNB Corp.



On November 4, 2005, Trust I issued
$20,000,000 of preferred securities, which pay cumulative cash distributions quarterly at a variable rate equal to three-month LIBOR plus 1.37%. The dividends paid to holders of the preferred securities, which are recorded as interest expense, are
tax deductible for income tax purposes. The preferred securities are redeemable at the option of FNB Corp. beginning on December 15, 2010. Redemption is mandatory on December 15, 2035.



The proceeds of the preferred securities were invested by Trust I in Junior
Subordinated Debentures of FNB Corp. due December 15, 2035. FNB Corp. fully and unconditionally guarantees the preferred securities through the combined operation of the debentures and other related documents. Obligations under these guarantees
are unsecured and subordinate to senior and subordinated indebtedness of the Corporation. The preferred securities qualify as Tier 1 capital for regulatory capital purposes. The Junior Subordinated Debentures have a principal amount of $20,619,000,
a maturity date of December 15, 2035 and pay interest on a variable rate basis equal to three-month LIBOR plus 1.37%. At December 31, 2005, the current interest rate on the Junior Subordinated Debentures was 5.86%.



Other Borrowed Funds



Dover mortgage Company has a line of credit totaling $30,000,000 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, 2005, the balance outstanding on the line of credit was $15,885,000 at a current interest rate of 6.15%. At December 31, 2004, the balance outstanding on the line of credit was $10,873,000 at a
current interest rate of 4.19%.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 10BORROWED
FUNDS(Continued)



As a result of the
merger with United Financial, Inc., First National Bank has acquired certain subordinated debt payable to a commercial bank in the principal amount of $2,500,000 with a maturity in 2008. Interest is payable on a variable rate basis, and the current
interest rate was 6.25% at December 31, 2005.



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:



|                                                           |  |                        |        |   |      |   |        |  
|---------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                           |  | 2005                   |        |   | 2004 |  
|                                                           |  | (dollars in thousands) |       
|Change in Benefit Obligation:                              |  |                        |        |   |      |   |        |  
|Benefit obligation at beginning of year                    |  | $                      | 10,202 |   |      | $ | 9,096  |  
|Service cost                                               |  |                        | 614    |   |      |   | 567    |  
|Interest cost                                              |  |                        | 604    |   |      |   | 576    |  
|Net actuarial loss                                         |  |                        | 525    |   |      |   | 339    |  
|Benefits paid                                              |  |                        | (397   | ) |      |   | (376   | )
|                                                           |  |                        |        |   |      |   |        |  
|Benefit obligation at end of year                          |  | $                      | 11,548 |   |      | $ | 10,202 |  
|                                                           |  |                        |        |   |      |   |        |  
|Accumulated Benefit Obligation at End of Year              |  | $                      | 8,494  |   |      | $ | 7,387  |  
|                                                           |  |                        |        |   |      |   |        |  
|Prepaid Pension Cost Components:                           |  |                        |        |   |      |   |        |  
|Funded status (liability) of plan                          |  | $                      | (1,406 | ) |      | $ | (818   | )
|Unrecognized net actuarial loss                            |  |                        | 3,621  |   |      |   | 3,000  |  
|Unrecognized prior service cost                            |  |                        | 129    |   |      |   | 158    |  
|                                                           |  |                        |        |   |      |   |        |  
|Prepaid pension cost at end of year                        |  | $                      | 2,344  |   |      | $ | 2,340  |  
|                                                           |  |                        |        |   |      |   |        |  
|Change in Plan Assets:                                     |  |                        |        |   |      |   |        |  
|Fair value of plan assets at beginning of year             |  | $                      | 9,384  |   |      | $ | 6,748  |  
|Actual return on plan assets                               |  |                        | 625    |   |      |   | 807    |  
|Employer contributions                                     |  |                        | 530    |   |      |   | 2,175  |  
|Benefits paid                                              |  |                        | (397   | ) |      |   | (376   | )
|Other                                                      |  |                        |       |   |      |   | 30     |  
|                                                           |  |                        |        |   |      |   |        |  
|Fair value of plan assets at end of year                   |  | $                      | 10,142 |   |      | $ | 9,384  |  
|                                                           |  |                        |        |   |      |   |        |  
|Weighted-Average Allocation of Plan Assets at End of Year: |  |                        |        |   |      |   |        |  
|Equity securities                                          |  |                        | 66     | % |      |   | 66     | %
|Debt securities                                            |  |                        | 29     |   |      |   | 34     |  
|Cash and cash equivalents                                  |  |                        | 5      |   |      |   |       |  
|                                                           |  |                        |        |   |      |   |        |  
|Total                                                      |  |                        | 100    | % |      |   | 100    | %
|                                                           |  |                        |        |   |      |   |        |  
|Weighted-Average Plan Assumptions at End of Year:          |  |                        |        |   |      |   |        |  
|Discount rate                                              |  |                        | 5.75   | % |      |   | 6.25   | %
|Expected long-term rate of return on plan assets           |  |                        | 9.00   |   |      |   | 9.00   |  
|Rate of increase in compensation levels                    |  |                        | 6.00   |   |      |   | 6.00   |  



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 11EMPLOYEE BENEFIT
PLANS(Continued)



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.



Net periodic pension cost included the following components:



|                                   |  |                |      |   |      |   |      |      |  |   |      |  
|---------------------------------- |  | -------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                   |  | 2005           |      |   | 2004 |   |      | 2003 | 
|                                   |  | (in thousands) |     
|Service cost                       |  | $              | 614  |   |      | $ | 567  |      |  | $ | 478  |  
|Interest cost                      |  |                | 604  |   |      |   | 576  |      |  |   | 533  |  
|Expected return on plan assets     |  |                | (851 | ) |      |   | (658 | )    |  |   | (524 | )
|Amortization of prior service cost |  |                | 29   |   |      |   | 110  |      |  |   | 110  |  
|Recognized net actuarial loss      |  |                | 130  |   |      |   | 158  |      |  |   | 141  |  
|                                   |  |                |      |   |      |   |      |      |  |   |      |  
|Net periodic pension cost          |  | $              | 526  |   |      | $ | 753  |      |  | $ | 738  |  
|                                   |  |                |      |   |      |   |      |      |  |   |      |  



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 84% at December 31, 2005, 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 contributions of $530,000 and $2,175,000 made in 2005 and 2004, respectively, the Corporation does not expect to contribute any
funds to its pension plan in 2006.



The estimated benefit
payments for each year ending December 31 from 2006 through 2010 are as follows: $396,000 in 2006, $389,000 in 2007, $443,000 in 2008, $512,000 in 2009 and $535,000 in 2010. The estimated benefit payments to be paid in the aggregate for the
five year period from 2011 through 2015 are $3,233,000. The estimated benefit payments are based on the same assumptions used to measure the benefit obligation at December 31, 2005 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:



|                                                 |  |                        |        |   |      |   |        |  
|------------------------------------------------ |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                 |  | 2005                   |        |   | 2004 |  
|                                                 |  | (dollars in thousands) |       
|Change in Benefit Obligation:                    |  |                        |        |   |      |   |        |  
|Benefit obligation at beginning of year          |  | $                      | 1,197  |   |      | $ | 1,011  |  
|Service cost                                     |  |                        | 86     |   |      |   | 63     |  
|Interest cost                                    |  |                        | 83     |   |      |   | 68     |  
|Net actuarial loss                               |  |                        | 250    |   |      |   | 77     |  
|Benefits paid                                    |  |                        | (22    | ) |      |   | (22    | )
|                                                 |  |                        |        |   |      |   |        |  
|Benefit obligation at end of year                |  | $                      | 1,594  |   |      | $ | 1,197  |  
|                                                 |  |                        |        |   |      |   |        |  
|Accumulated Benefit Obligation at End of Year    |  | $                      | 1,004  |   |      | $ | 783    |  
|                                                 |  |                        |        |   |      |   |        |  
|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                |  | $                      | (1,594 | ) |      | $ | (1,197 | )
|Unrecognized net actuarial loss                  |  |                        | 539    |   |      |   | 355    |  
|Unrecognized prior service cost                  |  |                        | 222    |   |      |   | 235    |  
|Unrecognized transition obligation               |  |                        |       |   |      |   |       |  
|                                                 |  |                        |        |   |      |   |        |  
|Accrued SERP cost at end of year                 |  | $                      | (833   | ) |      | $ | (607   | )
|                                                 |  |                        |        |   |      |   |        |  
|Weighted-Average Plan Assumption at End of Year: |  |                        |        |   |      |   |        |  
|Discount rate                                    |  |                        | 5.75   | % |      |   | 6.25   | %



Net periodic SERP cost
included the following components:



|                                      |  |                |     |      |   |      |  |   |    
|------------------------------------- |  | -------------- | --- | ---- | - | ---- |  | - | ---
|                                      |  | 2005           |     | 2004 |   | 2003
|                                      |  | (in thousands)
|Service cost                          |  | $              | 86  |      | $ | 63   |  | $ | 45 
|Interest cost                         |  |                | 83  |      |   | 68   |  |   | 55 
|Expected return on plan assets        |  |                |    |      |   |     |  |   |   
|Amortization of prior service cost    |  |                | 50  |      |   | 46   |  |   | 46 
|Amortization of transition obligation |  |                |    |      |   |     |  |   |   
|Recognized net actuarial loss         |  |                | 29  |      |   | 22   |  |   | 8  
|                                      |  |                |     |      |   |      |  |   |    
|Net periodic SERP cost                |  | $              | 248 |      | $ | 199  |  | $ | 154
|                                      |  |                |     |      |   |      |  |   |    



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 2006 through 2010 are as follows: $22,000 in 2006, $22,000 in 2007, $46,000 in
2008, $82,000 in 2009 and $81,000 in 2010. 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 2011 through 2015 are $393,000. The estimated benefit payments are based on the same
assumptions used to measure the benefit obligation at December 31, 2005 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:



|                                                         |  |                        |        |   |      |   |        |  
|-------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                         |  | 2005                   |        |   | 2004 |  
|                                                         |  | (dollars in thousands) |       
|Change in Benefit Obligation:                            |  |                        |        |   |      |   |        |  
|Benefit obligation at beginning of year                  |  | $                      | 1,375  |   |      | $ | 1,192  |  
|Service cost                                             |  |                        | 66     |   |      |   | 60     |  
|Interest cost                                            |  |                        | 80     |   |      |   | 78     |  
|Net actuarial loss (gain)                                |  |                        | 43     |   |      |   | 82     |  
|Benefits paid                                            |  |                        | (33    | ) |      |   | (37    | )
|                                                         |  |                        |        |   |      |   |        |  
|Benefit obligation at end of year                        |  | $                      | 1,531  |   |      | $ | 1,375  |  
|                                                         |  |                        |        |   |      |   |        |  
|Accumulated Benefit Obligation at End of Year            |  | $                      | 1,411  |   |      | $ | 1,271  |  
|                                                         |  |                        |        |   |      |   |        |  
|Accrued Postretirement Benefit Cost Components:          |  |                        |        |   |      |   |        |  
|Funded status (liability) of plan                        |  | $                      | (1,531 | ) |      | $ | (1,375 | )
|Unrecognized net actuarial loss                          |  |                        | 325    |   |      |   | 288    |  
|Unrecognized prior service cost                          |  |                        |       |   |      |   | 10     |  
|Unrecognized transition obligation                       |  |                        | 142    |   |      |   | 162    |  
|                                                         |  |                        |        |   |      |   |        |  
|Accrued postretirement benefit cost at end of year       |  | $                      | (1,064 | ) |      | $ | (915   | )
|                                                         |  |                        |        |   |      |   |        |  
|Weighted-Average Plan Assumptions at End of Year:        |  |                        |        |   |      |   |        |  
|Discount rate                                            |  |                        | 5.75   | % |      |   | 6.25   | %
|Annual rate of increase in the cost of medical benefits: |  |                        |        |   |      |   |        |  
|Current year                                             |  |                        | 10.00  |   |      |   | 11.00  |  
|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, 2005 or the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year ended December 31, 2005.



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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:



|                                         |  |                |     |      |   |      |  |   |    
|---------------------------------------- |  | -------------- | --- | ---- | - | ---- |  | - | ---
|                                         |  | 2005           |     | 2004 |   | 2003
|                                         |  | (in thousands)
|Service cost                             |  | $              | 66  |      | $ | 60   |  | $ | 49 
|Interest Cost                            |  |                | 80  |      |   | 78   |  |   | 71 
|Amortization of prior service cost       |  |                | 10  |      |   | 10   |  |   | 10 
|Amortization of transition obligation    |  |                | 20  |      |   | 20   |  |   | 20 
|Recognized net actuarial loss            |  |                | 6   |      |   | 8    |  |   | 2  
|                                         |  |                |     |      |   |      |  |   |    
|Net periodic postretirement benefit cost |  | $              | 182 |      | $ | 176  |  | $ | 152
|                                         |  |                |     |      |   |      |  |   |    



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 2006 through 2010 are as follows: $63,000 in 2006,
$68,000 in 2007, $71,000 in 2008, $78,000 in 2009 and $80,000 in 2010. The estimated benefit payments to be paid in the aggregate for the five year period from 2011 through 2015 are $481,000. The estimated benefit payments are based on the same
assumptions used to measure the benefit obligation at December 31, 2005 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 $379,000 in 2005, $322,000 in 2004 and $320,000 in 2003.



NOTE 12LEASES



Future obligations at December 31, 2005 for minimum
rentals under noncancellable operating lease commitments, primarily relating to premises, are as follows (in thousands):



|                             |  |   |      
|---------------------------- |  | - | -----
|Years ending December 31     |  |  
|2006                         |  | $ | 365  
|2007                         |  |   | 273  
|2008                         |  |   | 234  
|2009                         |  |   | 208  
|2010                         |  |   | 205  
|2011 and later years         |  |   | 3,544
|                             |  |   |      
|Total minimum lease payments |  | $ | 4,829
|                             |  |   |      



Net rental expense for
all operating leases amounted to $472,000 in 2005, $359,000 in 2004 and $271,000 in 2003.



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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:



|                                  |  |                |     |      |   |      |  |   |    
|--------------------------------- |  | -------------- | --- | ---- | - | ---- |  | - | ---
|                                  |  | 2005           |     | 2004 |   | 2003
|                                  |  | (in thousands)
|Advertising and marketing         |  | $              | 903 |      | $ | 809  |  | $ | 660
|Stationery, printing and supplies |  |                | 814 |      |   | 711  |  |   | 699
|Professional fees                 |  |                | 742 |      |   | 681  |  |   | 649



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, 2005 and 2004, and the related condensed statements of income and cash flows for each of the years in the three-year period ended December 31, 2005 are as follows:



Condensed Balance Sheets



|                                           |  |                |         |      |   |       
|------------------------------------------ |  | -------------- | ------- | ---- | - | ------
|                                           |  | December 31   
|                                           |  | 2005           |         | 2004
|                                           |  | (in thousands)
|Assets:                                    |  |                |         |      |   |       
|Cash                                       |  | $              | 1,413   |      | $ | 1,915 
|Investment in subsidiaries                 |  |                | 121,130 |      |   | 91,806
|Other assets                               |  |                | 1,550   |      |   | 961   
|                                           |  |                |         |      |   |       
|Total assets                               |  | $              | 124,093 |      | $ | 94,682
|                                           |  |                |         |      |   |       
|Liabilities and Shareholders Equity:      |  |                |         |      |   |       
|Accrued liabilities                        |  | $              | 1,159   |      | $ | 842   
|Borrowed funds                             |  |                | 20,619  |      |   | 11,693
|Shareholders equity                       |  |                | 102,315 |      |   | 82,147
|                                           |  |                |         |      |   |       
|Total liabilities and shareholders equity |  | $              | 124,093 |      | $ | 94,682
|                                           |  |                |         |      |   |       



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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 |      
|                                                                                  |  | 2005                    |       |   | 2004 |   |       | 2003 | 
|                                                                                  |  | (in thousands)          |      
|Income:                                                                           |  |                         |       |   |      |   |       |      |  |   |       |  
|Dividends from subsidiaries                                                       |  | $                       | 3,606 |   |      | $ | 4,140 |      |  | $ | 5,318 |  
|Other income (charge)                                                             |  |                         | 6     |   |      |   |      |      |  |   | (17   | )
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  
|Total income                                                                      |  |                         | 3,612 |   |      |   | 4,140 |      |  |   | 5,301 |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  
|Expenses:                                                                         |  |                         |       |   |      |   |       |      |  |   |       |  
|Interest                                                                          |  |                         | 632   |   |      |   | 352   |      |  |   | 381   |  
|Operating                                                                         |  |                         | 99    |   |      |   | 125   |      |  |   | 119   |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  
|Total expenses                                                                    |  |                         | 731   |   |      |   | 477   |      |  |   | 500   |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  
|Income before income taxes and equity in undistributed net income of subsidiaries |  |                         | 2,881 |   |      |   | 3,663 |      |  |   | 4,801 |  
|Income tax benefit                                                                |  |                         | (254  | ) |      |   | (162  | )    |  |   | (176  | )
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  
|Income before equity in undistributed net income of subsidiaries                  |  |                         | 3,135 |   |      |   | 3,825 |      |  |   | 4,977 |  
|Equity in undistributed net income of subsidiaries                                |  |                         | 6,802 |   |      |   | 2,773 |      |  |   | 3,423 |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  
|Net income                                                                        |  | $                       | 9,937 |   |      | $ | 6,598 |      |  | $ | 8,400 |  
|                                                                                  |  |                         |       |   |      |   |       |      |  |   |       |  



Condensed Statements of Cash Flows



|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                  |  | Years Ended December 31 |       
|                                                                                  |  | 2005                    |        |   | 2004 |   |        | 2003 | 
|                                                                                  |  | (in thousands)          |       
|Operating activities:                                                             |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income                                                                        |  | $                       | 9,937  |   |      | $ | 6,598  |      |  | $ | 8,400  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |        |   |      |   |        |      |  |   |        |  
|Equity in undistributed net income of subsidiaries                                |  |                         | (6,802 | ) |      |   | (2,773 | )    |  |   | (3,423 | )
|Other, net                                                                        |  |                         | (211   | ) |      |   | 59     |      |  |   | (29    | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash provided by operating activities                                         |  |                         | 2,924  |   |      |   | 3,884  |      |  |   | 4,948  |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Investing activities:                                                             |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash paid in merger acquisition of subsidiary company                         |  |                         | (8,685 | ) |      |   |       |      |  |   | (3,164 | )
|Other, net                                                                        |  |                         | 17     |   |      |   | 476    |      |  |   | (551   | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash provided by (used in) investing activities                               |  |                         | (8,668 | ) |      |   | 476    |      |  |   | (3,715 | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Financing activities:                                                             |  |                         |        |   |      |   |        |      |  |   |        |  
|Increase (decrease) in borrowed funds                                             |  |                         | 8,307  |   |      |   | 1,793  |      |  |   | (1,100 | )
|Common stock issued                                                               |  |                         | 804    |   |      |   | 791    |      |  |   | 1,673  |  
|Common stock repurchased                                                          |  |                         | (499   | ) |      |   | (2,830 | )    |  |   | (2     | )
|Cash dividends paid                                                               |  |                         | (3,370 | ) |      |   | (3,515 | )    |  |   | (3,221 | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash provided by (used in) financing activities                               |  |                         | 5,242  |   |      |   | (3,761 | )    |  |   | (2,650 | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Net increase (decrease) in cash                                                   |  |                         | (502   | ) |      |   | 599    |      |  |   | (1,417 | )
|Cash at beginning of year                                                         |  |                         | 1,915  |   |      |   | 1,316  |      |  |   | 2,733  |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Cash at end of year                                                               |  | $                       | 1,413  |   |      | $ | 1,915  |      |  | $ | 1,316  |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  



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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 2006, the maximum amount of dividends First National Bank can pay to FNB Corp., without the approval of the Comptroller
of the Currency, is $9,580,000 plus an additional amount equal to the retained net income in 2006 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, 2005, the average daily reserve requirement was $4,538,000.



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, 2005, FNB Corp. and First National Bank were not subject to
the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital.



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, 2005. 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 PromptCorrectiveAction Provisions |      
|                                          |  | 2005                   |         | 2004  |   | 2005   |                            |       | 2004 |                                                              |       |               
|                                          |  | (dollars in thousands) |        
|As of December 31                         |  |                        |         |       |   |        |                            |       |      |                                                              |       |                |  |      |   |  |       |  
|Total capital (to risk-weighted assets):  |  |                        |         |       |   |        |                            |       |      |                                                              |       |                |  |      |   |  |       |  
|FNB Corp.                                 |  | $                      | 100,182 |       | $ | 71,805 |                            | 11.46 | %    |                                                              | 10.08 | %              |  | 8.00 | % |  | N/A   |  
|First National Bank                       |  |                        | 96,773  |       |   | 79,409 |                            | 11.20 |      |                                                              | 11.24 |                |  | 8.00 |   |  | 10.00 | %
|Tier 1 capital (to risk-weighted assets): |  |                        |         |       |   |        |                            |       |      |                                                              |       |                |  |      |   |  |       |  
|FNB Corp.                                 |  |                        | 89,231  |       |   | 64,503 |                            | 10.21 |      |                                                              | 9.05  |                |  | 4.00 |   |  | N/A   |  
|First National Bank                       |  |                        | 86,070  |       |   | 72,107 |                            | 9.96  |      |                                                              | 10.21 |                |  | 4.00 |   |  | 6.00  | %
|Tier 1 capital (to average assets):       |  |                        |         |       |   |        |                            |       |      |                                                              |       |                |  |      |   |  |       |  
|FNB Corp.                                 |  |                        | 89,231  |       |   | 64,503 |                            | 8.81  |      |                                                              | 7.73  |                |  | 4.00 |   |  | N/A   |  
|First National Bank                       |  |                        | 86,070  |       |   | 72,107 |                            | 8.26  |      |                                                              | 8.80  |                |  | 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 24,800 shares in 2005, 66,303 shares in 2004 and 63 shares in 2003. Under the stock buyback program
in effect at December 31, 2005, a maximum of 300,000 shares could be repurchased, of which 1,200 shares were repurchased in 2005, resulting in a remaining authorization of 298,800 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:



|                                                                           |  |           |  |           |  |          
|-------------------------------------------------------------------------- |  | --------- |  | --------- |  | ---------
|                                                                           |  | 2005      |  | 2004      |  | 2003     
|Basic EPS denominatorWeighted average number of common shares outstanding |  | 5,731,966 |  | 5,663,173 |  | 5,607,681
|Dilutive share effect arising from assumed exercise of stock options       |  | 137,057   |  | 158,874   |  | 272,345  
|                                                                           |  |           |  |           |  |          
|Diluted EPS denominator                                                    |  | 5,869,023 |  | 5,822,047 |  | 5,880,026
|                                                                           |  |           |  |           |  |          



For the years 2005,
2004 and 2003, there were 236,730, 175,400 and 2,697 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, 2005, a maximum of 411,855 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, 2005, there were 103,900 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, 2005, a maximum of 41,008 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. One grant of
incentive and nonqualified stock options was made under the plan in 1993 to key employees and directors at a price equal to fair market value on the date of grant. No additional grants were to be made under the plan, and no options remained
outstanding after the final activity in 2003. Consequently, the stock compensation plan is effectively considered terminated, and 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 2005, 2004 and 2003 amounted to $5.04, $5.64 and $6.58, respectively. Fair values were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



|                        |  |         |   |  |         |   |  |         |  
|----------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                        |  | 2005    |   |  | 2004    |   |  | 2003    |  
|Risk-free interest rate |  | 4.40    | % |  | 3.80    | % |  | 3.51    | %
|Dividend yield          |  | 2.75    |   |  | 2.75    |   |  | 2.75    |  
|Volatility              |  | 31.00   |   |  | 33.05   |   |  | 35.78   |  
|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.



|                                   |  |                         |   |      |                              |       |        |         |   |                              |   |        |  |          |                              |  |   |      
|---------------------------------- |  | ----------------------- | - | ---- | ---------------------------- | ----- | ------ | ------- | - | ---------------------------- | - | ------ |  | -------- | ---------------------------- |  | - | -----
|                                   |  | Years Ended December 31
|                                   |  | 2005                    |   | 2004 |                              | 2003 
|                                   |  | Shares                  |   |      | WeightedAverageExercisePrice |       | Shares |         |   | WeightedAverageExercisePrice |   | Shares |  |          | WeightedAverageExercisePrice
|Outstanding at beginning of year   |  | 841,822                 |   |      | $                            | 16.27 |        | 765,345 |   |                              | $ | 15.11  |  | 763,428  |                              |  | $ | 12.21
|Granted                            |  | 11,000                  |   |      |                              | 17.97 |        | 161,000 |   |                              |   | 19.79  |  | 171,000  |                              |  |   | 21.94
|Exercised                          |  | (61,559                 | ) |      |                              | 12.12 |        | (66,303 | ) |                              |   | 10.47  |  | (153,583 | )                            |  |   | 8.38 
|Forfeited                          |  | (22,300                 | ) |      |                              | 19.24 |        | (18,220 | ) |                              |   | 19.61  |  | (15,500  | )                            |  |   | 14.34
|                                   |  |                         |   |      |                              |       |        |         |   |                              |   |        |  |          |                              |  |   |      
|Outstanding at end of year         |  | 768,963                 |   |      |                              | 16.54 |        | 841,822 |   |                              |   | 16.27  |  | 765,345  |                              |  |   | 15.11
|                                   |  |                         |   |      |                              |       |        |         |   |                              |   |        |  |          |                              |  |   |      
|Options exercisable at end of year |  | 483,763                 |   |      |                              | 14.72 |        | 418,852 |   |                              |   | 13.65  |  | 369,660  |                              |  |   | 12.34
|                                   |  |                         |   |      |                              |       |        |         |   |                              |   |        |  |          |                              |  |   |      



At December 31,
2005, information concerning stock options outstanding and exercisable is as follows:



|                        |  |                     |  |                                                 |  |                              |       |                   |         |                              |   |      
|----------------------- |  | ------------------- |  | ----------------------------------------------- |  | ---------------------------- | ----- | ----------------- | ------- | ---------------------------- | - | -----
|                        |  | Options Outstanding |  | Options Exercisable                            
|Range ofExercise Prices |  | Shares              |  | WeightedAverageRemainingContractualLife (Years) |  | WeightedAverageExercisePrice |       | NumberExercisable |         | WeightedAverageExercisePrice
|$  9.82  11.75         |  | 205,638             |  | 4.59                                            |  | $                            | 11.36 |                   | 205,638 |                              | $ | 11.36
|14.00  14.13           |  | 96,325              |  | 2.10                                            |  |                              | 14.07 |                   | 96,325  |                              |   | 14.07
|15.00  19.82           |  | 312,900             |  | 7.80                                            |  |                              | 18.01 |                   | 118,300 |                              |   | 17.11
|20.00  27.00           |  | 154,100             |  | 7.87                                            |  |                              | 22.03 |                   | 63,500  |                              |   | 22.15
|                        |  |                     |  |                                                 |  |                              |       |                   |         |                              |   |      
|                        |  | 768,963             |  | 6.24                                            |  |                              | 16.54 |                   | 483,763 |                              |   | 14.72
|                        |  |                     |  |                                                 |  |                              |       |                   |         |                              |   |      



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, 2005, total commitments to extend credit and undisbursed advances on customer lines
of credit amounted to $195,712,000. 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.



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



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 17COMMITMENTS(Continued)



standby letters of credit was $7,767,000 at December 31, 2005 and $6,445,000 at December 31, 2004. Due to insignificance, the Corporation has
recorded no liability at December 31, 2005 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 $34,648,000 at December 31, 2005, and the related forward sales commitments totaled $34,648,000. Loans held for sale by Dover Mortgage Company totaled
$16,282,000 at December 31, 2005, and the related forward sales commitments totaled $16,282,000.



First National Bank had loans held for sale of $1,333,000 at December 31, 2005. Binding commitments of First National Bank for the origination of
mortgage loans intended to be held for sale at December 31, 2005 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.



Bank Owned Life Insurance.    The carrying value of life insurance is considered to approximate fair value because this
investment is carried at cash surrender value, as determined by the insurer.



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.



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.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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



Accrued Interest.    The carrying amount of accrued interest is considered to approximate fair value.



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, 2005 |         | December 31, 2004  
|                                |  | CarryingValue     |         | EstimatedFair Value |   | CarryingValue |  | EstimatedFair Value
|                                |  | (in thousands)   
|Financial Assets                |  |                   |         |                     |   |               |  |                     |         |  |   |        
|Cash and cash equivalents       |  | $                 | 44,879  |                     | $ | 44,879        |  | $                   | 20,509  |  | $ | 20,509 
|Investment securities:          |  |                   |         |                     |   |               |  |                     |         |  |   |        
|Available for sale              |  |                   | 110,693 |                     |   | 110,918       |  |                     | 73,763  |  |   | 73,763 
|Held to maturity                |  |                   | 48,888  |                     |   | 47,508        |  |                     | 51,380  |  |   | 50,676 
|Net loans                       |  |                   | 802,721 |                     |   | 796,202       |  |                     | 657,461 |  |   | 658,567
|Accrued interest receivable     |  |                   | 5,003   |                     |   | 5,003         |  |                     | 3,488   |  |   | 3,488  
|Bank owned life insurance       |  |                   | 17,334  |                     |   | 17,334        |  |                     | 15,193  |  |   | 15,193 
|Financial Liabilities           |  |                   |         |                     |   |               |  |                     |         |  |   |        
|Deposits                        |  |                   | 841,609 |                     |   | 843,945       |  |                     | 659,544 |  |   | 664,944
|Retail repurchase agreements    |  |                   | 21,338  |                     |   | 21,338        |  |                     | 13,818  |  |   | 13,818 
|Federal Home Loan Bank advances |  |                   | 86,225  |                     |   | 84,512        |  |                     | 69,088  |  |   | 71,183 
|Federal funds purchased         |  |                   |        |                     |   |              |  |                     | 8,175   |  |   | 8,175  
|Other borrowed funds            |  |                   | 39,004  |                     |   | 39,004        |  |                     | 22,566  |  |   | 22,566 
|Accrued interest payable        |  |                   | 2,280   |                     |   | 2,280         |  |                     | 1,101   |  |   | 1,101  



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.



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 19BUSINESS SEGMENT
INFORMATION



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



|                                                    |  |                              |           |                      |   |        |       |  |   |       |   |  |   |          
|--------------------------------------------------- |  | ---------------------------- | --------- | -------------------- | - | ------ | ----- |  | - | ----- | - |  | - | ---------
|                                                    |  | Year Ended December 31, 2005
|                                                    |  | FirstNationalBank            |           | DoverMortgageCompany |   |        | Other |  |   | Total
|                                                    |  | (in thousands)              
|Interest income                                     |  | $                            | 53,439    |                      | $ | 971    |       |  | $ | 5     |   |  | $ | 54,415   
|Interest expense                                    |  |                              | 18,623    |                      |   | 796    |       |  |   | 631   |   |  |   | 20,050   
|                                                    |  |                              |           |                      |   |        |       |  |   |       |   |  |   |          
|Net interest income                                 |  |                              | 34,816    |                      |   | 175    |       |  |   | (626  | ) |  |   | 34,365   
|Provision for loan losses                           |  |                              | 2,842     |                      |   |       |       |  |   |      |   |  |   | 2,842    
|                                                    |  |                              |           |                      |   |        |       |  |   |       |   |  |   |          
|Net interest income after provision for loan losses |  |                              | 31,974    |                      |   | 175    |       |  |   | (626  | ) |  |   | 31,523   
|Noninterest income                                  |  |                              | 11,196    |                      |   | 3,780  |       |  |   | (50   | ) |  |   | 14,926   
|Noninterest expense                                 |  |                              | 27,740    |                      |   | 3,911  |       |  |   | 27    |   |  |   | 31,678   
|                                                    |  |                              |           |                      |   |        |       |  |   |       |   |  |   |          
|Income (loss) before income taxes                   |  |                              | 15,430    |                      |   | 44     |       |  |   | (703  | ) |  |   | 14,771   
|Income taxes (benefit)                              |  |                              | 5,057     |                      |   | 22     |       |  |   | (245  | ) |  |   | 4,834    
|                                                    |  |                              |           |                      |   |        |       |  |   |       |   |  |   |          
|Net income (loss)                                   |  | $                            | 10,373    |                      | $ | 22     |       |  | $ | (458  | ) |  | $ | 9,937    
|                                                    |  |                              |           |                      |   |        |       |  |   |       |   |  |   |          
|Total assets                                        |  | $                            | 1,078,367 |                      | $ | 22,554 |       |  | $ | 1,164 |   |  | $ | 1,102,085
|Net loans                                           |  |                              | 786,439   |                      |   | 16,282 |       |  |   |      |   |  |   | 802,721  
|Goodwill                                            |  |                              | 27,605    |                      |   | 3,776  |       |  |   |      |   |  |   | 31,381   
|                                                    | 
|                                                    |  | 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   



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FNB CORP. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

NOTE 19BUSINESS SEGMENT
INFORMATION(Continued)



|                                                    |  |                              |         |                      |   |        |  |   |       |   |  |   |        
|--------------------------------------------------- |  | ---------------------------- | ------- | -------------------- | - | ------ |  | - | ----- | - |  | - | -------
|                                                    |  | 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 



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CONTROLS AND PROCEDURES



As of December 31, 2005, the end of the period covered by this report, FNB Corp. carried out an evaluation under the
supervision and with the participation of the companys management, including FNB Corp.s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of FNB Corp.s disclosure controls and
procedures. In designing and evaluating the companys disclosure controls and procedures, FNB Corp. and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and FNB Corp.s management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon the evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the companys disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by FNB Corp. in the reports it files or submits under the Exchange
Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. No significant change in the companys internal control over financial reporting occurred
during the quarterly period ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, FNB Corp.s internal control over financial reporting. FNB Corp. reviews its disclosure controls and
procedures, which may include its internal controls over financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness.



The annual report of management on the effectiveness of internal control over financial reporting and the attestation report
thereon issued by the Corporations independent registered public accounting firm are set forth below under Managements Report on Internal Control Over Financial Reporting and Report of Independent Registered Public
Accounting Firm.



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MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING



Management of FNB Corp and subsidiaries (the Corporation) is
responsible for preparing the Corporations annual consolidated financial statements and for establishing and maintaining adequate internal control over financial reporting for the Corporation. Management has evaluated the effectiveness of the
Corporations internal control over financial reporting, including controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C),as of December 31, 2005 based on criteria established in Internal Control -- Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that the
Corporation maintained effective internal control over financial reporting as of December 31, 2005. Management has excluded United Financial, Inc., which was acquired by the Corporation on November 4, 2005, from its assessment.



The Corporations registered public accounting firm that audited the
Corporations consolidated financial statements included in this annual report has issued an attestation report on managements assessment of internal control over financial reporting.



Management is also responsible for compliance with laws and regulations
relating to safety and soundness which are designated by the FDIC and the appropriate federal banking agencies. Management assessed its compliance with these designated laws and regulations relating to safety and soundness and believes that the
Corporation complied, in all significant respects, with such laws and regulations and during the year ended December 31, 2005.



FNB Corp.

March 14, 2006



|                         |  |  |  |                         |  | 
|------------------------ |  |  |  | ----------------------- |  | 
|/s/    MICHAEL C.
MILLER |  |  |  | /s/    JERRY A.
LITTLE  |  | 
|Michael C. Miller        |  |  |  | Jerry A. Little         |  | 
|Chief Executive Officer  |  |  |  | Chief Financial Officer |  | 



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LOGO



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders

FNB Corp and Subsidiaries



We have audited managements assessment, included in the accompanying Managements Annual Report on Internal Control Over Financial Reporting,
that FNB Corp and Subsidiaries (the Corporation) maintained effective internal control overfinancial reporting as of December 31, 2005, based on criteria established inInternal ControlIntegrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway Commission. The Corporations management is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internal
control overfinancial reporting. Our responsibility is to express an opinion on managementsassessment and an opinion on the effectiveness of the Corporations internal control overfinancial reporting 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 effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



Management has excluded United Financial, Inc., which was acquired by the Corporation on November 4, 2005, from its assessment. Accordingly, we have
excluded United Financial, Inc. from our audit of internal control over financial reporting.



A Corporations internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. Because managements assessment and our audit were conducted to also meet the reporting requirements of Section 112 of the Federal Deposit Insurance Company
Improvement Act (FDICIA), managements assessment and our audit of the Corporations internal control over financial reporting included controls over the preparation of financial statements in accordance with the instructions to the
Consolidated Financial Statements for Bank Holding Companies (form FR Y-9 C). A Corporations internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporations assets that could have a material effect on the financial statements.



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Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.



In our opinion, managements assessment that
FNB Corp and subsidiaries maintained effective internal control over financial reporting as of December 31 2005, is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, FNB Corp and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria
established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial
statements of FNB Corp and subsidiaries as of and for the year ended December 31, 2005, and our report dated March 14, 2006, expressed an unqualified opinion on those consolidated financial statements.



We do not express an opinion or any other form of assurance on
managements statement referring to compliance with designated laws and regulations related to safety and soundness.



LOGO



Raleigh, North Carolina

March 14, 2006







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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, 2006.



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, 2006.



|                                                                        |  |                                                                    
|----------------------------------------------------------------------- |  | -------------------------------------------------------------------
|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/                        JACOB F. ALEXANDER IIIJacob F. Alexander III |  | Director                                                           
|                                                                        | 
|/s/                            LARRY E. BROOKSLarry E. Brooks           |  | Director                                                           
|                                                                        | 
|/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/                              LYNN S. LLOYDLynn S. Lloyd             |  | Director                                                           



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|                                                                        |  |         
|----------------------------------------------------------------------- |  | --------
|Signature                                                               |  | Title   
|                                                                        | 
|/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                                                                                                                                                                                                                                                                                                                                                           
|2.10        |  | Agreement and Plan of Merger dated as of September 18, 2005 by and between the Registrant and Integrity Financial Corporation, incorporated herein by reference to Exhibit 2.11 to the
Registrants Form 10-Q Quarterly Report for the quarter ended September 30, 2005.                                                                                                         
|            | 
|3.10        |  | Articles of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrants Form S-14 Registration Statement (No. 2-96498) filed March 16,
1985.                                                                                                                                                                                            
|            | 
|3.11        |  | Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 10, 1988, incorporated herein by reference to Exhibit 19.10 to the Registrants Form 10-Q Quarterly
Report for the quarter ended June 30, 1988.                                                                                                                                                
|            | 
|3.12        |  | Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 12, 1998, incorporated herein by reference to Exhibit 3.12 to the Registrants Form 10-Q Quarterly
Report for the quarter ended June 30, 1998.                                                                                                                                                 
|            | 
|3.13        |  | Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 23, 2003, incorporated herein by reference to Exhibit 3.13 to the Registrants Form 10-Q Quarterly
Report for the quarter ended June 30, 2003.                                                                                                                                                 
|            | 
|3.20        |  | Amended and Restated Bylaws of the Registrant, adopted July 21, 2005, incorporated herein by reference to Exhibit 3.20 to the Registrants Form 10-Q Quarterly Report for the quarter
ended June 30, 2005.                                                                                                                                                                       
|            | 
|4.1         |  | Specimen of Registrants Common Stock Certificate, incorporated herein by reference to Exhibit 4 to Amendment No. 1 to the Registrants Form S-14 Registration Statement (No.
2-96498) filed April 19, 1985.                                                                                                                                                                     
|            | 
|4.2         |  | Indenture dated as of November 4, 2005, between FNB Corp. and U.S. Bank, National Association, as trustee, incorporated herein by reference to Exhibit 4.1 to the Registrants Form 8-K
Current Report filed November 8, 2005.                                                                                                                                                   
|            | 
|4.3         |  | Amended and Restated Declaration of Trust of FNB United Statutory Trust I dated as of November 4, 2005, among FNB Corp., as sponsor, U.S. Bank, National Association, as institutional trustee,
and Michael C. Miller and Jerry A. Little, as administrators, incorporated herein by reference to Exhibit 4.2 to the Registrants Form 8-K Current Report filed November 8, 2005.
|            | 
|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).                                                                                                                                                                                                              



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|            |  |                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                         
|            | 
|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. 
|            | 
|10.30*      |  | Employment Agreement dated as of January 1, 2006 among FNB Corp., First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10 to the
Registrants Current Report on Form 8-K filed on January 6, 2006.                                         
|            | 
|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.
|- |  | ---------------------------------------------------------



84