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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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Quarterly Report Pursuant to Section
13 or 15(d)

of the Securities Exchange Act of 1934



For the quarterly period ended September 30, 2004



Commission File Number 0-13823



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FNB CORP.

(Exact name of Registrant as specified in its charter)



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|                         |  |                                     
|------------------------ |  | ------------------------------------
|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)



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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 whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No ̈



The registrant had 5,621,952 shares of $2.50 par value common stock outstanding at October 29, 2004.



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PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



FNB Corp. and Subsidiaries



CONSOLIDATED BALANCE SHEETS (unaudited)



|                                                                                                                 |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ------- | - | ----------------- | - | ------- | - |  | - | ------- | -
|                                                                                                                 |  | September 30,                                   |         |   | December 31, 2003 |  
|                                                                                                                 |  | 2004                                            |         |   | 2003              |   |        
|                                                                                                                 |  | (in thousands, except share and per share data) |        
|ASSETS                                                                                                           |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Cash and due from banks                                                                                          |  | $                                               | 18,421  |   |                   | $ | 23,694  |   |  | $ | 17,164  |  
|Interest-bearing bank balances                                                                                   |  |                                                 | 8,656   |   |                   |   | 7,511   |   |  |   | 8,641   |  
|Federal funds sold                                                                                               |  |                                                 | 95      |   |                   |   | 29      |   |  |   | 1,319   |  
|Investment securities:                                                                                           |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Available for sale, at estimated fair value (amortized cost of $68,385, $81,089 and $77,971)                     |  |                                                 | 70,642  |   |                   |   | 83,847  |   |  |   | 80,558  |  
|Held to maturity (estimated fair value of $52,825, $63,043 and $63,000)                                          |  |                                                 | 53,259  |   |                   |   | 63,744  |   |  |   | 63,701  |  
|Loans:                                                                                                           |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Loans held for sale                                                                                              |  |                                                 | 11,415  |   |                   |   | 31,912  |   |  |   | 8,567   |  
|Loans held for investment                                                                                        |  |                                                 | 629,693 |   |                   |   | 535,949 |   |  |   | 543,346 |  
|Less allowance for loan losses                                                                                   |  |                                                 | (6,936  | ) |                   |   | (6,098  | ) |  |   | (6,172  | )
|                                                                                                                 |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Net loans                                                                                                        |  |                                                 | 634,172 |   |                   |   | 561,763 |   |  |   | 545,741 |  
|                                                                                                                 |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Premises and equipment, net                                                                                      |  |                                                 | 17,242  |   |                   |   | 14,637  |   |  |   | 15,009  |  
|Goodwill                                                                                                         |  |                                                 | 16,335  |   |                   |   | 16,325  |   |  |   | 16,325  |  
|Other assets                                                                                                     |  |                                                 | 26,735  |   |                   |   | 23,725  |   |  |   | 24,787  |  
|                                                                                                                 |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Total Assets                                                                                                     |  | $                                               | 845,557 |   |                   | $ | 795,275 |   |  | $ | 773,245 |  
|                                                                                                                 |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                             |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Deposits:                                                                                                        |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Noninterest-bearing demand deposits                                                                              |  | $                                               | 75,856  |   |                   | $ | 64,161  |   |  | $ | 70,671  |  
|Interest-bearing deposits:                                                                                       |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Demand, savings and money market deposits                                                                        |  |                                                 | 224,233 |   |                   |   | 218,618 |   |  |   | 215,846 |  
|Time deposits of $100,000 or more                                                                                |  |                                                 | 147,361 |   |                   |   | 117,394 |   |  |   | 118,199 |  
|Other time deposits                                                                                              |  |                                                 | 194,253 |   |                   |   | 199,210 |   |  |   | 193,209 |  
|                                                                                                                 |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Total deposits                                                                                                   |  |                                                 | 641,703 |   |                   |   | 599,383 |   |  |   | 597,925 |  
|Retail repurchase agreements                                                                                     |  |                                                 | 14,654  |   |                   |   | 15,893  |   |  |   | 14,816  |  
|Federal Home Loan Bank advances                                                                                  |  |                                                 | 73,159  |   |                   |   | 52,824  |   |  |   | 53,303  |  
|Federal funds purchased                                                                                          |  |                                                 | 8,000   |   |                   |   | 5,300   |   |  |   | 625     |  
|Other borrowed funds                                                                                             |  |                                                 | 19,538  |   |                   |   | 34,699  |   |  |   | 17,977  |  
|Other liabilities                                                                                                |  |                                                 | 7,050   |   |                   |   | 7,237   |   |  |   | 7,141   |  
|                                                                                                                 |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Total Liabilities                                                                                                |  |                                                 | 764,104 |   |                   |   | 715,336 |   |  |   | 691,787 |  
|                                                                                                                 |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Shareholders equity:                                                                                            |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Preferred stock - $10.00 par value; authorized 200,000 shares, none issued                                       |  |                                                 |        |   |                   |   |        |   |  |   |        |  
|Common stock - $2.50 par value; authorized 10,000,000 shares, issued shares - 5,624,652, 5,677,843 and 5,686,899 |  |                                                 | 14,062  |   |                   |   | 14,195  |   |  |   | 14,217  |  
|Surplus                                                                                                          |  |                                                 | 11,026  |   |                   |   | 11,834  |   |  |   | 12,478  |  
|Retained earnings                                                                                                |  |                                                 | 54,978  |   |                   |   | 52,215  |   |  |   | 53,174  |  
|Accumulated other comprehensive income                                                                           |  |                                                 | 1,387   |   |                   |   | 1,695   |   |  |   | 1,589   |  
|                                                                                                                 |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Total Shareholders Equity                                                                                       |  |                                                 | 81,453  |   |                   |   | 79,939  |   |  |   | 81,458  |  
|                                                                                                                 |  |                                                 |         |   |                   |   |         |   |  |   |         |  
|Total Liabilities and Shareholders Equity                                                                       |  | $                                               | 845,557 |   |                   | $ | 795,275 |   |  | $ | 773,245 |  
|                                                                                                                 |  |                                                 |         |   |                   |   |         |   |  |   |         |  



See accompanying notes
to consolidated financial statements.



2



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FNB Corp. and Subsidiaries



CONSOLIDATED STATEMENTS OF INCOME



|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|--------------------------------------------------- |  | ----------------------------------------------- | --------- | ------------------------------------------ | - | --------- |  | ---- | --------- |  | - | ---------
|                                                    |  | Three Months Ended September 30, (unaudited)    |           | Nine Months EndedSeptember 30, (unaudited)
|                                                    |  | 2004                                            |           | 2003                                       |   | 2004      |  | 2003
|                                                    |  | (in thousands, except share and per share data)
|Interest Income                                     |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Interest and fees on loans                          |  | $                                               | 9,042     |                                            | $ | 8,494     |  | $    | 25,353    |  | $ | 25,131   
|Interest and dividends on investment securities:    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Taxable income                                      |  |                                                 | 795       |                                            |   | 1,135     |  |      | 2,591     |  |   | 4,076    
|Non-taxable income                                  |  |                                                 | 429       |                                            |   | 452       |  |      | 1,303     |  |   | 1,184    
|Other interest income                               |  |                                                 | 41        |                                            |   | 47        |  |      | 116       |  |   | 232      
|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Total interest income                               |  |                                                 | 10,307    |                                            |   | 10,128    |  |      | 29,363    |  |   | 30,623   
|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Interest Expense                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Deposits                                            |  |                                                 | 2,221     |                                            |   | 2,202     |  |      | 6,425     |  |   | 7,418    
|Retail repurchase agreements                        |  |                                                 | 39        |                                            |   | 32        |  |      | 98        |  |   | 134      
|Federal Home Loan Bank advances                     |  |                                                 | 655       |                                            |   | 583       |  |      | 1,880     |  |   | 1,741    
|Federal funds purchased                             |  |                                                 | 30        |                                            |   | 3         |  |      | 51        |  |   | 4        
|Other borrowed funds                                |  |                                                 | 153       |                                            |   | 401       |  |      | 462       |  |   | 887      
|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Total interest expense                              |  |                                                 | 3,098     |                                            |   | 3,221     |  |      | 8,916     |  |   | 10,184   
|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Net Interest Income                                 |  |                                                 | 7,209     |                                            |   | 6,907     |  |      | 20,447    |  |   | 20,439   
|Provision for loan losses                           |  |                                                 | 460       |                                            |   | 455       |  |      | 3,510     |  |   | 1,535    
|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Net Interest Income After Provision for Loan Losses |  |                                                 | 6,749     |                                            |   | 6,452     |  |      | 16,937    |  |   | 18,904   
|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Noninterest Income                                  |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Mortgage loan sales                                 |  |                                                 | 1,188     |                                            |   | 1         |  |      | 3,076     |  |   | 3,876    
|Service charges on deposit accounts                 |  |                                                 | 1,429     |                                            |   | 1,271     |  |      | 4,021     |  |   | 3,696    
|Trust and investment services                       |  |                                                 | 319       |                                            |   | 318       |  |      | 1,139     |  |   | 1,027    
|Cardholder and merchant services income             |  |                                                 | 270       |                                            |   | 223       |  |      | 778       |  |   | 639      
|Other service charges, commissions and fees         |  |                                                 | 200       |                                            |   | 85        |  |      | 582       |  |   | 511      
|Bank owned life insurance                           |  |                                                 | 153       |                                            |   | 169       |  |      | 462       |  |   | 465      
|Other income                                        |  |                                                 | 93        |                                            |   | 69        |  |      | 128       |  |   | 137      
|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Total noninterest income                            |  |                                                 | 3,652     |                                            |   | 2,136     |  |      | 10,186    |  |   | 10,351   
|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Noninterest Expense                                 |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Personnel expense                                   |  |                                                 | 4,210     |                                            |   | 3,992     |  |      | 12,335    |  |   | 11,810   
|Net occupancy expense                               |  |                                                 | 385       |                                            |   | 367       |  |      | 1,172     |  |   | 1,066    
|Furniture and equipment expense                     |  |                                                 | 507       |                                            |   | 556       |  |      | 1,455     |  |   | 1,607    
|Data processing services                            |  |                                                 | 321       |                                            |   | 243       |  |      | 916       |  |   | 1,002    
|Other expense                                       |  |                                                 | 1,661     |                                            |   | 1,737     |  |      | 5,357     |  |   | 4,864    
|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Total noninterest expense                           |  |                                                 | 7,084     |                                            |   | 6,895     |  |      | 21,235    |  |   | 20,349   
|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Income Before Income Taxes                          |  |                                                 | 3,317     |                                            |   | 1,693     |  |      | 5,888     |  |   | 8,906    
|Income taxes                                        |  |                                                 | 1,033     |                                            |   | 160       |  |      | 1,536     |  |   | 2,431    
|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Net Income                                          |  | $                                               | 2,284     |                                            | $ | 1,533     |  | $    | 4,352     |  | $ | 6,475    
|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Net income per common share:                        |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Basic                                               |  | $                                               | .41       |                                            | $ | .27       |  | $    | .77       |  | $ | 1.16     
|Diluted                                             |  |                                                 | .40       |                                            |   | .26       |  |      | .74       |  |   | 1.10     
|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Weighted average number of shares outstanding:      |  |                                                 |           |                                            |   |           |  |      |           |  |   |          
|Basic                                               |  |                                                 | 5,631,938 |                                            |   | 5,669,435 |  |      | 5,680,428 |  |   | 5,581,606
|Diluted                                             |  |                                                 | 5,760,985 |                                            |   | 5,957,798 |  |      | 5,843,693 |  |   | 5,866,122
|                                                    |  |                                                 |           |                                            |   |           |  |      |           |  |   |          



See accompanying notes
to consolidated financial statements.



3



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FNB Corp. and Subsidiaries



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME



Nine Months Ended September 30, 2004 and September 30, 2003 (unaudited)



|                                                                |  |                                                 |   |  |         |        |   |                   |   |        |                                             |  |   |        |   |  |   |       |   |  |   |        |  
|--------------------------------------------------------------- |  | ----------------------------------------------- | - |  | ------- | ------ | - | ----------------- | - | ------ | ------------------------------------------- |  | - | ------ | - |  | - | ----- | - |  | - | ------ | -
|                                                                |  | Common Stock                                    |   |  | Surplus |        |   | Retained Earnings |   |        | AccumulatedOtherComprehensive Income (Loss) |  |   | 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                                                      |  |                                                |   |  |         |       |   |                   |   |       |                                             |  |   | 6,475  |   |  |   |      |   |  |   | 6,475  |  
|Other comprehensive income:                                     |  |                                                 |   |  |         |        |   |                   |   |        |                                             |  |   |        |   |  |   |       |   |  |   |        |  
|Unrealized securities losses, net of income tax benefit of $292 |  |                                                |   |  |         |       |   |                   |   |       |                                             |  |   |       |   |  |   | (935  | ) |  |   | (935   | )
|                                                                |  |                                                 |   |  |         |        |   |                   |   |        |                                             |  |   |        |   |  |   |       |   |  |   |        |  
|Total comprehensive income                                      |  |                                                |   |  |         |       |   |                   |   |       |                                             |  |   |       |   |  |   |      |   |  |   | 5,540  |  
|                                                                |  |                                                 |   |  |         |        |   |                   |   |        |                                             |  |   |        |   |  |   |       |   |  |   |        |  
|Cash dividends declared, $.42 per share                         |  |                                                |   |  |         |       |   |                   |   |       |                                             |  |   | (2,355 | ) |  |   |      |   |  |   | (2,355 | )
|Common stock issued through:                                    |  |                                                 |   |  |         |        |   |                   |   |        |                                             |  |   |        |   |  |   |       |   |  |   |        |  
|Stock option plan                                               |  | 144,527                                         |   |  |         | 362    |   |                   |   | 841    |                                             |  |   |       |   |  |   |      |   |  |   | 1,203  |  
|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, September 30, 2003                                     |  | 5,677,843                                       |   |  | $       | 14,195 |   |                   | $ | 11,834 |                                             |  | $ | 52,215 |   |  | $ | 1,695 |   |  | $ | 79,939 |  
|                                                                |  |                                                 |   |  |         |        |   |                   |   |        |                                             |  |   |        |   |  |   |       |   |  |   |        |  
|Balance, December 31, 2003                                      |  | 5,686,899                                       |   |  | $       | 14,217 |   |                   | $ | 12,478 |                                             |  | $ | 53,174 |   |  | $ | 1,589 |   |  | $ | 81,458 |  
|Comprehensive income:                                           |  |                                                 |   |  |         |        |   |                   |   |        |                                             |  |   |        |   |  |   |       |   |  |   |        |  
|Net income                                                      |  |                                                |   |  |         |       |   |                   |   |       |                                             |  |   | 4,352  |   |  |   |      |   |  |   | 4,352  |  
|Other comprehensive income:                                     |  |                                                 |   |  |         |        |   |                   |   |        |                                             |  |   |        |   |  |   |       |   |  |   |        |  
|Unrealized securities losses, net of income tax benefit of $128 |  |                                                |   |  |         |       |   |                   |   |       |                                             |  |   |       |   |  |   | (202  | ) |  |   | (202   | )
|                                                                |  |                                                 |   |  |         |        |   |                   |   |        |                                             |  |   |        |   |  |   |       |   |  |   |        |  
|Total comprehensive income                                      |  |                                                |   |  |         |       |   |                   |   |       |                                             |  |   |       |   |  |   |      |   |  |   | 4,150  |  
|                                                                |  |                                                 |   |  |         |        |   |                   |   |        |                                             |  |   |        |   |  |   |       |   |  |   |        |  
|Cash dividends declared, $.45 per share                         |  |                                                |   |  |         |       |   |                   |   |       |                                             |  |   | (2,548 | ) |  |   |      |   |  |   | (2,548 | )
|Common stock issued through:                                    |  |                                                 |   |  |         |        |   |                   |   |        |                                             |  |   |        |   |  |   |       |   |  |   |        |  
|Stock option plan                                               |  | 53,853                                          |   |  |         | 135    |   |                   |   | 452    |                                             |  |   |       |   |  |   |      |   |  |   | 587    |  
|Common stock repurchased                                        |  | (116,100                                        | ) |  |         | (290   | ) |                   |   | (1,904 | )                                           |  |   |       |   |  |   |      |   |  |   | (2,194 | )
|                                                                |  |                                                 |   |  |         |        |   |                   |   |        |                                             |  |   |        |   |  |   |       |   |  |   |        |  
|Balance, September 30, 2004                                     |  | 5,624,652                                       |   |  | $       | 14,062 |   |                   | $ | 11,026 |                                             |  | $ | 54,978 |   |  | $ | 1,387 |   |  | $ | 81,453 |  
|                                                                |  |                                                 |   |  |         |        |   |                   |   |        |                                             |  |   |        |   |  |   |       |   |  |   |        |  



See accompanying notes
to consolidated financial statements.



4



---

FNB Corp. and Subsidiaries



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                                            |          |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------------------ | -------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine Months EndedSeptember 30, (unaudited) |         
|                                                                                  |  | 2004                                       |          |   | 2003 |  
|                                                                                  |  | (in thousands)                             |         
|Operating Activities:                                                             |  |                                            |          |   |      |   |         |  
|Net income                                                                        |  | $                                          | 4,352    |   |      | $ | 6,475   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                            |          |   |      |   |         |  
|Depreciation and amortization of premises and equipment                           |  |                                            | 1,228    |   |      |   | 1,344   |  
|Provision for loan losses                                                         |  |                                            | 3,510    |   |      |   | 1,535   |  
|Deferred income taxes (benefit)                                                   |  |                                            | 388      |   |      |   | (444    | )
|Deferred loan fees and costs, net                                                 |  |                                            | 230      |   |      |   | 154     |  
|Premium amortization and discount accretion of investment securities, net         |  |                                            | 449      |   |      |   | 417     |  
|Amortization of intangibles                                                       |  |                                            | 43       |   |      |   | 53      |  
|Net decrease in loans held for sale                                               |  |                                            | 9,687    |   |      |   | 10,468  |  
|Decrease in other assets                                                          |  |                                            | 562      |   |      |   | 741     |  
|Decrease in other liabilities                                                     |  |                                            | (148     | ) |      |   | (1,862  | )
|                                                                                  |  |                                            |          |   |      |   |         |  
|Net Cash Provided by Operating Activities                                         |  |                                            | 20,301   |   |      |   | 18,881  |  
|                                                                                  |  |                                            |          |   |      |   |         |  
|Investing Activities:                                                             |  |                                            |          |   |      |   |         |  
|Available-for-sale securities:                                                    |  |                                            |          |   |      |   |         |  
|Proceeds from maturities and calls                                                |  |                                            | 26,773   |   |      |   | 50,962  |  
|Purchases                                                                         |  |                                            | (17,351  | ) |      |   | (7,606  | )
|Held-to-maturity securities:                                                      |  |                                            |          |   |      |   |         |  
|Proceeds from maturities and calls                                                |  |                                            | 10,719   |   |      |   | 16,002  |  
|Purchases                                                                         |  |                                            | (577     | ) |      |   | (55,253 | )
|Net increase in loans held for investment                                         |  |                                            | (104,473 | ) |      |   | (39,306 | )
|Purchases of premises and equipment                                               |  |                                            | (3,442   | ) |      |   | (1,821  | )
|Net cash paid in merger acquisition of subsidiary mortgage company                |  |                                            |         |   |      |   | (436    | )
|Other, net                                                                        |  |                                            | (176     | ) |      |   | (1,779  | )
|                                                                                  |  |                                            |          |   |      |   |         |  
|Net Cash Used in Investing Activities                                             |  |                                            | (88,527  | ) |      |   | (39,237 | )
|                                                                                  |  |                                            |          |   |      |   |         |  
|Financing Activities:                                                             |  |                                            |          |   |      |   |         |  
|Net increase in deposits                                                          |  |                                            | 43,778   |   |      |   | 7,412   |  
|Increase in retail repurchase agreements                                          |  |                                            | (162     | ) |      |   | (1,534  | )
|Increase (decrease) in Federal Home Loan Bank advances                            |  |                                            | 20,000   |   |      |   | (500    | )
|Increase in federal funds purchased                                               |  |                                            | 7,375    |   |      |   | 5,300   |  
|Increase (decrease) in other borrowed funds                                       |  |                                            | 1,561    |   |      |   | (15,248 | )
|Common stock issued                                                               |  |                                            | 587      |   |      |   | 1,007   |  
|Common stock repurchased                                                          |  |                                            | (2,194   | ) |      |   | (2      | )
|Cash dividends paid                                                               |  |                                            | (2,671   | ) |      |   | (2,427  | )
|                                                                                  |  |                                            |          |   |      |   |         |  
|Net Cash Provided by (Used in) Financing Activities                               |  |                                            | 68,274   |   |      |   | (5,992  | )
|                                                                                  |  |                                            |          |   |      |   |         |  
|Net Increase (Decrease) in Cash and Cash Equivalents                              |  |                                            | 48       |   |      |   | (26,348 | )
|Cash and cash equivalents at beginning of period                                  |  |                                            | 27,124   |   |      |   | 57,582  |  
|                                                                                  |  |                                            |          |   |      |   |         |  
|Cash and Cash Equivalents at End of Period                                        |  | $                                          | 27,172   |   |      | $ | 31,234  |  
|                                                                                  |  |                                            |          |   |      |   |         |  
|Supplemental disclosure of cash flow information:                                 |  |                                            |          |   |      |   |         |  
|Cash paid during the period for:                                                  |  |                                            |          |   |      |   |         |  
|Interest                                                                          |  | $                                          | 9,006    |   |      | $ | 10,649  |  
|Income taxes                                                                      |  |                                            | 687      |   |      |   | 3,060   |  
|Noncash transactions:                                                             |  |                                            |          |   |      |   |         |  
|Loans held for investment transferred to loans held for sale                      |  |                                            | 12,535   |   |      |   |        |  
|Foreclosed loans transferred to other real estate                                 |  |                                            | 1,550    |   |      |   | 667     |  
|Cashless exercise of stock options                                                |  |                                            |         |   |      |   | 196     |  
|Unrealized securities gains (losses), net of income taxes                         |  |                                            | (202     | ) |      |   | (935    | )
|Merger acquisition of subsidiary mortgage company:                                |  |                                            |          |   |      |   |         |  
|Fair value of assets acquired                                                     |  |                                            |         |   |      |   | 47,001  |  
|Fair value of common stock issued                                                 |  |                                            |         |   |      |   | 2,659   |  
|Cash paid                                                                         |  |                                            |         |   |      |   | 2,908   |  
|                                                                                  |  |                                            |          |   |      |   |         |  
|Liabilities assumed                                                               |  |                                            |         |   |      |   | 41,434  |  



See accompanying notes
to consolidated financial statements.



5



---

FNB Corp. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | Basis of Presentation
|-- | ---------------------



FNB Corp. is a multi-bank holding company whose wholly owned subsidiaries are the First National Bank and Trust Company (First National Bank),
Rowan Savings Bank SSB, Inc. (Rowan Bank) and Dover Mortgage Company (Dover). First National Bank and Rowan Bank are collectively referred to as the subsidiary banks. First National Bank has one wholly owned
subsidiary, First National Investor Services, Inc. Through its subsidiaries, FNB Corp. offers a complete line of consumer, mortgage and business banking services, including loan, deposit, cash management, investment management and trust services, to
individual and business customers. The subsidiary banks have offices in Cabarrus, Chatham, Guilford, Montgomery, Moore, Randolph, Richmond, Rowan and Scotland counties in North Carolina. Dover Mortgage Company operates seven mortgage production
offices in North Carolina at Charlotte, Carolina Beach, Goldsboro, Greenville, Lake Norman, Raleigh and Wilmington.



The accompanying consolidated financial statements, prepared without audit, 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 assets and 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. Operating results for the three, six and nine month periods ended March 31, June 30 and September 30, 2004 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 2004.



The organization and business of FNB Corp., accounting policies followed by the Corporation and other relevant information are contained in the notes to the consolidated financial statements filed as part of the
Corporations 2003 annual report on Form 10-K. This quarterly report should be read in conjunction with such annual report.



For comparative purposes, certain income statement amounts for 2003 have been restated to conform with the presentation in 2004.



|2. | 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.



6



---

|3. | Merger Information
|-- | ------------------



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 an adjustment to goodwill. During the nine-month period ended September 30, 2004, additional cash consideration of $10,000 was paid to Dover shareholders and recorded
as an adjustment of 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.



|4. | 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:



|                                                                             |  |                                 |  |                                |  |           |  |          
|---------------------------------------------------------------------------- |  | ------------------------------- |  | ------------------------------ |  | --------- |  | ---------
|                                                                             |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                                                                             |  | 2004                            |  | 2003                           |  | 2004      |  | 2003     
|Basic EPS denominator - Weighted average number of common shares outstanding |  | 5,631,938                       |  | 5,669,435                      |  | 5,680,428 |  | 5,581,606
|Dilutive share effect arising from assumed exercise of stock options         |  | 129,047                         |  | 288,363                        |  | 163,265   |  | 284,516  
|                                                                             |  |                                 |  |                                |  |           |  |          
|Diluted EPS denominator                                                      |  | 5,760,985                       |  | 5,957,798                      |  | 5,843,693 |  | 5,866,122
|                                                                             |  |                                 |  |                                |  |           |  |          



7



---

For the three months ended September 30, 2004 and 2003, there were 168,293 and 0 stock options,
respectively, that were antidilutive since the exercise price exceeded the average market price, and for the nine months ended September 30, 2004 and 2003, there were 169,930 and 1,658 stock options, respectively, that were antidilutive. These
common stock equivalents were omitted from the calculations of diluted EPS for their respective periods.



|5. | Stock Options
|-- | -------------



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



|                                                                                                   |  |                                       |       |                                |   |       |  |      |       |  |   |      
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                                                                                   |  | Three Months EndedSeptember 30,       |       | Nine Months EndedSeptember 30,
|                                                                                                   |  | 2004                                  |       | 2003                           |   | 2004  |  | 2003
|                                                                                                   |  | (in thousands, except per share data)
|Net income, as reported                                                                            |  | $                                     | 2,284 |                                | $ | 1,533 |  | $    | 4,352 |  | $ | 6,475
|Less: Stock-based compensation cost determined under fair value method, net of related tax effects |  |                                       | 83    |                                |   | 85    |  |      | 254   |  |   | 254  
|                                                                                                   |  |                                       |       |                                |   |       |  |      |       |  |   |      
|Net income, pro forma                                                                              |  | $                                     | 2,201 |                                | $ | 1,448 |  | $    | 4,098 |  | $ | 6,221
|                                                                                                   |  |                                       |       |                                |   |       |  |      |       |  |   |      
|Net income per share:                                                                              |  |                                       |       |                                |   |       |  |      |       |  |   |      
|Basic:                                                                                             |  |                                       |       |                                |   |       |  |      |       |  |   |      
|As reported                                                                                        |  | $                                     | .41   |                                | $ | .27   |  | $    | .77   |  | $ | 1.16 
|Pro forma                                                                                          |  |                                       | .39   |                                |   | .26   |  |      | .72   |  |   | 1.11 
|                                                                                                   |  |                                       |       |                               
|Diluted:                                                                                           |  |                                       |       |                                |   |       |  |      |       |  |   |      
|As reported                                                                                        |  |                                       | .40   |                                |   | .26   |  |      | .74   |  |   | 1.10 
|Pro forma                                                                                          |  |                                       | .38   |                                |   | .24   |  |      | .70   |  |   | 1.06 



|6. | Loans
|-- | -----



Loans as presented are reduced by net deferred loan fees of $991,000, $935,000 and $761,000 at September 30, 2004, September 30, 2003 and December 31,
2003, respectively.



8



---

|7. | Allowance for Loan Losses
|-- | -------------------------



Changes in the allowance for loan losses were as follows:



|                                    |  |                                 |       |                                |   |       |  |   |       |   |  |   |      
|----------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | - | ----- | - |  | - | -----
|                                    |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                                    |  | 2004                            |       | 2003                           |   | 2004  |  |   | 2003 
|                                    |  | (in thousands)                 
|Balance at beginning of period      |  | $                               | 6,579 |                                | $ | 6,038 |  | $ | 6,172 |   |  | $ | 6,109
|Charge-offs                         |  |                                 | 202   |                                |   | 411   |  |   | 3,006 |   |  |   | 1,621
|Recoveries                          |  |                                 | 99    |                                |   | 16    |  |   | 305   |   |  |   | 75   
|                                    |  |                                 |       |                                |   |       |  |   |       |   |  |   |      
|Net loan charge-offs                |  |                                 | 103   |                                |   | 395   |  |   | 2,701 |   |  |   | 1,546
|Provision for loan losses           |  |                                 | 460   |                                |   | 455   |  |   | 3,510 |   |  |   | 1,535
|Allowance adjustment for loans sold |  |                                 |      |                                |   |      |  |   | (45   | ) |  |   |     
|                                    |  |                                 |       |                                |   |       |  |   |       |   |  |   |      
|Balance at end of period            |  | $                               | 6,936 |                                | $ | 6,098 |  | $ | 6,936 |   |  | $ | 6,098
|                                    |  |                                 |       |                                |   |       |  |   |       |   |  |   |      



|8. | Supplementary Income Statement Information
|-- | ------------------------------------------



Significant components of other expense were as follows:



|                                  |  |                                 |     |                                |   |      |  |      |     |  |   |    
|--------------------------------- |  | ------------------------------- | --- | ------------------------------ | - | ---- |  | ---- | --- |  | - | ---
|                                  |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30,
|                                  |  | 2004                            |     | 2003                           |   | 2004 |  | 2003
|                                  |  | (in thousands)                 
|Advertising and marketing         |  | $                               | 212 |                                | $ | 185  |  | $    | 584 |  | $ | 442
|Stationery, printing and supplies |  |                                 | 157 |                                |   | 168  |  |      | 508 |  |   | 535
|Communications                    |  |                                 | 133 |                                |   | 117  |  |      | 422 |  |   | 327



9



---

|9. | Postretirement Employee Benefit Plans
|-- | -------------------------------------



Information concerning the net periodic cost of the Corporations postretirement benefit plans is as follows:



|                                         |  |                                       |      |   |                                     |   |                                         |  |   |   
|---------------------------------------- |  | ------------------------------------- | ---- | - | ----------------------------------- | - | --------------------------------------- |  | - | --
|                                         |  | Three Months Ended September 30, 2004
|                                         |  | PensionPlan                           |      |   | SupplementalExecutiveRetirementPlan |   | OtherPostretirementDefinedBenefit Plans
|                                         |  | (in thousands)                       
|Service cost                             |  | $                                     | 137  |   |                                     | $ | 18                                      |  | $ | 14
|Interest cost                            |  |                                       | 146  |   |                                     |   | 17                                      |  |   | 19
|Expected return on plan assets           |  |                                       | (181 | ) |                                     |   |                                        |  |   |  
|Amortization of prior service cost       |  |                                       | 28   |   |                                     |   | 12                                      |  |   | 3 
|Amortization of transition obligation    |  |                                       |     |   |                                     |   |                                        |  |   | 5 
|Recognized net actuarial loss            |  |                                       | 39   |   |                                     |   | 7                                       |  |   | 2 
|                                         |  |                                       |      |   |                                     |   |                                         |  |   |   
|Net periodic postretirement benefit cost |  | $                                     | 169  |   |                                     | $ | 54                                      |  | $ | 43
|                                         |  |                                       |      |   |                                     |   |                                         |  |   |   



|                                         |  |                                      |      |   |                                     |   |                                         |  |   |    
|---------------------------------------- |  | ------------------------------------ | ---- | - | ----------------------------------- | - | --------------------------------------- |  | - | ---
|                                         |  | Nine Months Ended September 30, 2004
|                                         |  | PensionPlan                          |      |   | SupplementalExecutiveRetirementPlan |   | OtherPostretirementDefinedBenefit Plans
|                                         |  | (in thousands)                      
|Service cost                             |  | $                                    | 425  |   |                                     | $ | 48                                      |  | $ | 44 
|Interest cost                            |  |                                      | 436  |   |                                     |   | 50                                      |  |   | 57 
|Expected return on plan assets           |  |                                      | (493 | ) |                                     |   |                                        |  |   |   
|Amortization of prior service cost       |  |                                      | 82   |   |                                     |   | 35                                      |  |   | 7  
|Amortization of transition obligation    |  |                                      |     |   |                                     |   |                                        |  |   | 15 
|Recognized net actuarial loss            |  |                                      | 119  |   |                                     |   | 16                                      |  |   | 5  
|                                         |  |                                      |      |   |                                     |   |                                         |  |   |    
|Net periodic postretirement benefit cost |  | $                                    | 569  |   |                                     | $ | 149                                     |  | $ | 128
|                                         |  |                                      |      |   |                                     |   |                                         |  |   |    



The Corporation has
made a cash contribution of $2,175,000 to its pension plan during the nine months ended September 30, 2004, which represents the entire contribution expected to be made in 2004. The other postretirement benefit plans are unfunded plans, and there
are no cash contribution requirements except for the direct payment of benefits.



|10. | 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



10



---

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 entered into an interest rate swap on a $7,000,000 Federal Home Loan Bank
(FHLB) advance during the nine months ended September 30, 2004 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 three and nine months ended September 30, 2004, the
interest rate swap resulted in net reductions of $32,000 and $81,000, respectively, in the interest expense that would otherwise have been reported for the FHLB advance. The fair value of the swap at September 30, 2004 was recorded on the
consolidated balance sheet as a liability in the amount of $80,000, 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 September 30, 2004:
commitments to originate fixed rate residential mortgage loans and forward sales commitments.



Dover Mortgage Company originates certain fixed rate 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
fixed rate 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 fixed rate 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 fixed rate residential mortgage loans totaled $21,649,000 at September 30, 2004. The related forward sales commitments totaled $21,649,000 at September 30, 2004. The fair value of these commitments was recorded as a net asset of $18,000
at September 30, 2004. Loans held for sale by Dover Mortgage Company totaled $9,988,000 at September 30, 2004. The related forward sales commitments totaled $9,988,000 at September 30, 2004. The fair value of these commitments was recorded as a net
asset of $18,000 at September 30, 2004.



The subsidiary banks
had loans held for sale of $1,427,000 at September 30, 2004. Binding commitments of the subsidiary banks for the origination of mortgage loans intended to be held for sale at September 30, 2004 were not material.



|11. | Recently Adopted Accounting Pronouncement
|--- | -----------------------------------------



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.



11



---

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 the recognition from the current accounting period to a subsequent period. The effect of adoption of SAB No. 105 on the results of operations for the three months ended June 30, 2004 and
for the nine months ended September 30, 2004 was a $356,000 reduction in Dovers income from mortgage loan sales.



|12. | Business Segment Information
|--- | ----------------------------



Prior to the acquisition of Dover Mortgage Company on April 1, 2003, the chief operating decision maker had reviewed the results of operations of the
Corporation and its subsidiaries as a single enterprise. There are now considered to be two principal business segments: the full-service subsidiary banks, First National Bank and Rowan 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.



|                                                    |  |                                       |         |                      |   |        |  |   |       |   |  |   |        
|--------------------------------------------------- |  | ------------------------------------- | ------- | -------------------- | - | ------ |  | - | ----- | - |  | - | -------
|                                                    |  | Three Months Ended September 30, 2004
|                                                    |  | Full-ServiceSubsidiaryBanks           |         | DoverMortgageCompany |   | Other  |  |   | Total
|                                                    |  | (in thousands)                       
|Interest income                                     |  | $                                     | 10,150  |                      | $ | 157    |  | $ |      |   |  | $ | 10,307 
|Interest expense                                    |  |                                       | 2,945   |                      |   | 77     |  |   | 76    |   |  |   | 3,098  
|                                                    |  |                                       |         |                      |   |        |  |   |       |   |  |   |        
|Net interest income                                 |  |                                       | 7,205   |                      |   | 80     |  |   | (76   | ) |  |   | 7,209  
|Provision for loan losses                           |  |                                       | 460     |                      |   |       |  |   |      |   |  |   | 460    
|                                                    |  |                                       |         |                      |   |        |  |   |       |   |  |   |        
|Net interest income after provision for loan losses |  |                                       | 6,745   |                      |   | 80     |  |   | (76   | ) |  |   | 6,749  
|Noninterest income                                  |  |                                       | 2,758   |                      |   | 933    |  |   | (39   | ) |  |   | 3,652  
|Noninterest expense                                 |  |                                       | 6,226   |                      |   | 873    |  |   | (15   | ) |  |   | 7,084  
|                                                    |  |                                       |         |                      |   |        |  |   |       |   |  |   |        
|Income (loss) before income taxes                   |  |                                       | 3,277   |                      |   | 140    |  |   | (100  | ) |  |   | 3,317  
|Income taxes (benefit)                              |  |                                       | 1,012   |                      |   | 56     |  |   | (35   | ) |  |   | 1,033  
|                                                    |  |                                       |         |                      |   |        |  |   |       |   |  |   |        
|Net income (loss)                                   |  | $                                     | 2,265   |                      | $ | 84     |  | $ | (65   | ) |  | $ | 2,284  
|                                                    |  |                                       |         |                      |   |        |  |   |       |   |  |   |        
|Total assets                                        |  | $                                     | 829,134 |                      | $ | 16,441 |  | $ | (18   | ) |  | $ | 845,557
|Net loans                                           |  |                                       | 624,184 |                      |   | 9,988  |  |   |      |   |  |   | 634,172
|Goodwill                                            |  |                                       | 12,583  |                      |   | 3,752  |  |   |      |   |  |   | 16,335 



12



---

|                                                    |  |                                       |         |                      |   |        |       |  |   |       |   |  |   |        
|--------------------------------------------------- |  | ------------------------------------- | ------- | -------------------- | - | ------ | ----- |  | - | ----- | - |  | - | -------
|                                                    |  | Three Months Ended September 30, 2003
|                                                    |  | Full-ServiceSubsidiaryBanks           |         | DoverMortgageCompany |   |        | Other |  |   | Total
|                                                    |  | (in thousands)                       
|Interest income                                     |  | $                                     | 9,518   |                      | $ | 610    |       |  | $ |      |   |  | $ | 10,128 
|Interest expense                                    |  |                                       | 2,821   |                      |   | 308    |       |  |   | 92    |   |  |   | 3,221  
|                                                    |  |                                       |         |                      |   |        |       |  |   |       |   |  |   |        
|Net interest income                                 |  |                                       | 6,697   |                      |   | 302    |       |  |   | (92   | ) |  |   | 6,907  
|Provision for loan losses                           |  |                                       | 455     |                      |   |       |       |  |   |      |   |  |   | 455    
|                                                    |  |                                       |         |                      |   |        |       |  |   |       |   |  |   |        
|Net interest income after provision for loan losses |  |                                       | 6,242   |                      |   | 302    |       |  |   | (92   | ) |  |   | 6,452  
|Noninterest income                                  |  |                                       | 2,656   |                      |   | (392   | )     |  |   | (128  | ) |  |   | 2,136  
|Noninterest expense                                 |  |                                       | 6,178   |                      |   | 820    |       |  |   | (103  | ) |  |   | 6,895  
|                                                    |  |                                       |         |                      |   |        |       |  |   |       |   |  |   |        
|Income (loss) before income taxes                   |  |                                       | 2,720   |                      |   | (910   | )     |  |   | (117  | ) |  |   | 1,693  
|Income taxes (benefit)                              |  |                                       | 550     |                      |   | (350   | )     |  |   | (40   | ) |  |   | 160    
|                                                    |  |                                       |         |                      |   |        |       |  |   |       |   |  |   |        
|Net income (loss)                                   |  | $                                     | 2,170   |                      | $ | (560   | )     |  | $ | (77   | ) |  | $ | 1,533  
|                                                    |  |                                       |         |                      |   |        |       |  |   |       |   |  |   |        
|Total assets                                        |  | $                                     | 763,291 |                      | $ | 32,019 |       |  | $ | (35   | ) |  | $ | 795,275
|Net loans                                           |  |                                       | 536,884 |                      |   | 24,879 |       |  |   |      |   |  |   | 561,763
|Goodwill                                            |  |                                       | 12,583  |                      |   | 3,742  |       |  |   |      |   |  |   | 16,325 



|                                                    |  |                                      |         |                      |   |        |       |  |   |       |   |  |   |        
|--------------------------------------------------- |  | ------------------------------------ | ------- | -------------------- | - | ------ | ----- |  | - | ----- | - |  | - | -------
|                                                    |  | Nine Months Ended September 30, 2004
|                                                    |  | Full-ServiceSubsidiaryBanks          |         | DoverMortgageCompany |   |        | Other |  |   | Total
|                                                    |  | (in thousands)                      
|Interest income                                     |  | $                                    | 28,915  |                      | $ | 448    |       |  | $ |      |   |  | $ | 29,363 
|Interest expense                                    |  |                                      | 8,454   |                      |   | 209    |       |  |   | 253   |   |  |   | 8,916  
|                                                    |  |                                      |         |                      |   |        |       |  |   |       |   |  |   |        
|Net interest income                                 |  |                                      | 20,461  |                      |   | 239    |       |  |   | (253  | ) |  |   | 20,447 
|Provision for loan losses                           |  |                                      | 3,510   |                      |   |       |       |  |   |      |   |  |   | 3,510  
|                                                    |  |                                      |         |                      |   |        |       |  |   |       |   |  |   |        
|Net interest income after provision for loan losses |  |                                      | 16,951  |                      |   | 239    |       |  |   | (253  | ) |  |   | 16,937 
|Noninterest income                                  |  |                                      | 8,040   |                      |   | 2,292  |       |  |   | (146  | ) |  |   | 10,186 
|Noninterest expense                                 |  |                                      | 18,658  |                      |   | 2,620  |       |  |   | (43   | ) |  |   | 21,235 
|                                                    |  |                                      |         |                      |   |        |       |  |   |       |   |  |   |        
|Income (loss) before income taxes                   |  |                                      | 6,333   |                      |   | (89    | )     |  |   | (356  | ) |  |   | 5,888  
|Income taxes (benefit)                              |  |                                      | 1,684   |                      |   | (27    | )     |  |   | (121  | ) |  |   | 1,536  
|                                                    |  |                                      |         |                      |   |        |       |  |   |       |   |  |   |        
|Net income (loss)                                   |  | $                                    | 4,649   |                      | $ | (62    | )     |  | $ | (235  | ) |  | $ | 4,352  
|                                                    |  |                                      |         |                      |   |        |       |  |   |       |   |  |   |        
|Total assets                                        |  | $                                    | 829,134 |                      | $ | 16,441 |       |  | $ | (18   | ) |  | $ | 845,557
|Net loans                                           |  |                                      | 624,184 |                      |   | 9,988  |       |  |   |      |   |  |   | 634,172
|Goodwill                                            |  |                                      | 12,583  |                      |   | 3,752  |       |  |   |      |   |  |   | 16,335 



13



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|                                                    |  |                                      |         |                      |   |        |  |   |       |   |  |   |        
|--------------------------------------------------- |  | ------------------------------------ | ------- | -------------------- | - | ------ |  | - | ----- | - |  | - | -------
|                                                    |  | Nine Months Ended September 30, 2003
|                                                    |  | Full-ServiceSubsidiaryBanks          |         | DoverMortgageCompany |   | Other  |  |   | Total
|                                                    |  | (in thousands)                      
|Interest income                                     |  | $                                    | 29,520  |                      | $ | 1,121  |  | $ | (18   | ) |  | $ | 30,623 
|Interest expense                                    |  |                                      | 9,300   |                      |   | 597    |  |   | 287   |   |  |   | 10,184 
|                                                    |  |                                      |         |                      |   |        |  |   |       |   |  |   |        
|Net interest income                                 |  |                                      | 20,220  |                      |   | 524    |  |   | (305  | ) |  |   | 20,439 
|Provision for loan losses                           |  |                                      | 1,535   |                      |   |       |  |   |      |   |  |   | 1,535  
|                                                    |  |                                      |         |                      |   |        |  |   |       |   |  |   |        
|Net interest income after provision for loan losses |  |                                      | 18,685  |                      |   | 524    |  |   | (305  | ) |  |   | 18,904 
|Noninterest income                                  |  |                                      | 8,576   |                      |   | 2,046  |  |   | (271  | ) |  |   | 10,351 
|Noninterest expense                                 |  |                                      | 18,091  |                      |   | 2,436  |  |   | (178  | ) |  |   | 20,349 
|                                                    |  |                                      |         |                      |   |        |  |   |       |   |  |   |        
|Income (loss) before income taxes                   |  |                                      | 9,170   |                      |   | 134    |  |   | (398  | ) |  |   | 8,906  
|Income taxes (benefit)                              |  |                                      | 2,513   |                      |   | 53     |  |   | (135  | ) |  |   | 2,431  
|                                                    |  |                                      |         |                      |   |        |  |   |       |   |  |   |        
|Net income (loss)                                   |  | $                                    | 6,657   |                      | $ | 81     |  | $ | (263  | ) |  | $ | 6,475  
|                                                    |  |                                      |         |                      |   |        |  |   |       |   |  |   |        
|Total assets                                        |  | $                                    | 763,291 |                      | $ | 32,019 |  | $ | (35   | ) |  | $ | 795,275
|Net loans                                           |  |                                      | 536,884 |                      |   | 24,879 |  |   |      |   |  |   | 561,763
|Goodwill                                            |  |                                      | 12,583  |                      |   | 3,742  |  |   |      |   |  |   | 16,325 



|13. | Comprehensive Income
|--- | --------------------



For the three months ended September 30, 2004 and 2003, total comprehensive income, consisting of net income and unrealized securities gains and losses,
net of taxes, was $2,965,000 and $654,000, respectively.



For
the nine months ended September 30, 2004 and 2003, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was $4,150,000 and $5,540,000, respectively.



14



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Item 2. 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), Rowan Savings Bank SSB, Inc. (Rowan Bank) and Dover Mortgage Company (Dover), collectively referred to as the Corporation. First National Bank and Rowan Bank are collectively referred to as
the subsidiary banks. This discussion should be read in conjunction with the financial information appearing elsewhere in this report.



Overview



Description of Operations



FNB Corp. is a multi-bank holding company with two full-service subsidiary banks, First National Bank and Rowan Bank, that offer 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. The subsidiary banks have offices in Cabarrus, Chatham, Guilford, Montgomery, Moore, Randolph, Richmond, Rowan and Scotland counties in North Carolina.



Additionally, FNB Corp. has a mortgage banking subsidiary, Dover Mortgage
Company, that originates, underwrites and closes loans for sale into the secondary market. Dover operates seven mortgage production offices in North Carolina at Charlotte, Carolina Beach, Goldsboro, Greenville, Lake Norman, Raleigh and Wilmington.



For business segment information related to the financial
performance of the full-service subsidiary banks and Dover Mortgage Company, see Note 12 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 an adjustment to goodwill. During the nine-month period ended September 30, 2004, additional cash consideration of $10,000 was paid to
Dover shareholders and recorded as an adjustment of 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.



15



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Primary Financial Data for 2004



The Corporations earnings declined for the nine months ended September 30, 2004 while showing an increase for the 2004
third quarter, affected by the significant factors discussed below. Earnings were $4,352,000 in the first nine months of 2004, a 32.8% decrease from earnings of $6,475,000 in the same period in 2003. Basic earnings per share decreased from $1.16 to
$.77 and diluted earnings per share decreased from $1.10 to $.74 for percentage decreases of 33.6% and 32.7%, respectively. For the 2004 third quarter, earnings amounted to $2,284,000, which represents a 49.0% increase from earnings of $1,533,000 in
the 2003 third quarter. Basic earnings per share in comparing third quarter periods increased from $.27 to $.41 and diluted earnings per share increased from $.26 to $.40 for percentage increases of 51.9% and 53.8%, respectively. As noted above,
Dover Mortgage Company was acquired as a subsidiary through merger effective April 1, 2003, impacting income and the calculation of earnings per share since the acquisition date and also the comparability of operating results on a year-to-date basis
between 2004 and 2003 (see Note 12 to the Consolidated Financial Statements). Total assets were $845,557,000 at September 30, 2004, up 6.3% from September 30, 2003 and 9.4% from December 31, 2003. Loans amounted to $641,108,000 at September 30,
2004, increasing 12.9% from September 30, 2003 and 16.2% from December 31, 2003. Total deposits were up 7.1% from September 30, 2003 and 7.3% from December 31, 2003, amounting to $641,703,000 at September 30, 2004. A significant portion of the asset
growth in the first nine months of 2004 was funded by advances totaling $20,000,000 from the Federal Home Loan Bank that were obtained primarily to help fund loan growth. Loans were impacted during that period by the sale of $12,535,000 of 1-4
family residential mortgage loans previously classified as held for investment as discussed in Significant Factors Affecting Earnings in 2004.



Significant Factors Affecting Earnings in 2004



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



Earnings were negatively impacted in the first nine months of 2004 by a
$1,975,000 increase in the provision for loan losses, the third quarter increase being $5,000, as compared to the same period in 2003. The increase in the provision for the first nine months of 2004 resulted largely from 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 $6,062,000 at September 30, 2004.



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



16



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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 effect of adoption of SAB No. 105 on the results of operations
for the three months ended June 30, 2004 and for the nine months ended September 30, 2004 was a $356,000 reduction in Dovers income from mortgage loan sales.



The comparison of income from mortgage loan sales on a year-to-date basis in 2004 to 2003 has been affected by the
acquisition of Dover Mortgage Company on April 1, 2003 as noted above. In addition, income from mortgage loan sales has been negatively impacted in general in 2004 by the increase in long-term conforming mortgage rates from the historical lows that
prevailed through most of 2003 and especially by the resulting slowdown in mortgage refinancing activity. The effect of the resulting decline in income from mortgage loan sales has been somewhat offset, however, by the reduction in compensation and
other expenses related to the mortgage operations. Compared to 2003, income from mortgage loan sales declined $800,000 in the first nine months of 2004 and increased $1,187,000 in the 2004 third quarter. Apart from the general factors noted above,
there were certain specific factors that impacted the comparison of income from mortgage loan sales between 2004 and 2003 as follows:



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



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



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



Income tax expense was reduced $213,000 in the three and nine months ended September 30, 2003 for the change in the
valuation allowance for state deferred income tax assets as a result of managements judgment that these assets would be realized in future periods.



Prior to the three prime rate increases that became effective in the 2004 third quarter, net interest income did not tend to increase in proportion to the
increase in earning assets in 2004 compared to 2003, reflecting the continuing effect of the historically low level of interest rates. The net interest margin, as a percentage of earning assets, decreased 13 basis points from 3.96% in the first nine
months of 2003 to 3.83% in the same period of 2004. For the 2004 third quarter, however, which benefited from three 25 basis point increases in the prime rate with the first such increase occurring on July 1, 2004, the net interest margin increased
2 basis points from 3.92% to 3.94% in comparing third quarter periods.



Critical Accounting Policies



The
Corporations significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2003. Of these significant accounting policies, the
Corporation considers its policy regarding the allowance for loan losses to



17



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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 results of regulatory examinations, and the discovery of information with respect to borrowers that 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 decreased $2,123,000 or 32.8% in the first nine months of 2004 compared to the same period of 2003 and increased
$751,000 or 49.0% in comparing third quarter periods. In general, earnings were impacted most significantly in the first nine months of 2004 by a $1,975,000 increase in the provision for loan losses and by an $886,000 increase in noninterest
expense. Earnings for the third quarter of 2004 were impacted by a $302,000 increase in net interest income and by a $1,516,000 increase in noninterest income. Certain factors specifically affecting the elements of income and expense were discussed
above in Significant Factors Affecting Earnings in 2004.



On an annualized basis, return on average assets decreased from 1.09% in the first nine months of 2003 to 0.71% in the first nine months of 2004. Return on average shareholders equity decreased from 11.07% to
7.04% in comparing the same periods. In comparing third quarter periods, return on average assets improved from 0.76% to 1.10% and return on average shareholders equity improved from 7.59% to 11.25%. Return on tangible assets and equity
(calculated by deducting average goodwill from average assets and from average equity) for the first nine months of 2004 amounted to 0.73% and 8.78%, respectively, and for the 2004 third quarter amounted to 1.12% and 14.08%.



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 $20,447,000 in the first nine months of 2004 compared
to $20,439,000 in the same period of 2003. This minor increase of $8,000 or 0.04% resulted from the approximately offsetting effects of a 2.9% increase in the level of average earning assets and a decline in the net yield on earning assets, or net
interest margin, from 3.96% in the first nine months of 2003 to 3.83% in the same period of 2004. In comparing third quarter periods, net interest income increased $302,000 or 4.4% reflecting an improvement in the net interest margin from 3.92% to
3.94% coupled with a 2.9% increase in average earning assets. On a taxable equivalent basis, net interest income decreased $67,000 in the first nine months of 2004 and increased $256,000 in the 2004 third quarter, reflecting changes in the relative
mix of taxable and non-taxable earning assets in each period.



Table 1 on page 30 and Table 2 on Page 31 set 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,



18



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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. Changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are also analyzed in Tables 1 and 2.
Volume refers to the average dollar level of earning assets and interest-bearing liabilities.



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. Two additional rate increases of 25 basis points each during the third quarter of 2004 have raised
the prime rate to the 4.75% level at September 30, 2004. The prime rate averaged 6.99% in 2001, falling to 4.67% in 2002 and 4.12% in 2003.



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



The prime rate averaged 4.13% in the first nine months of 2004 compared to 4.16% in the first nine months of 2003. The prime rate averaged 4.38% in the
third quarter of 2004 compared to 4.00% in the third quarter of 2003. The net interest spread, in comparing nine-month periods, declined by 11 basis points from 3.72% in 2003 to 3.61% in 2004, reflecting the effect of a decrease in the average total
yield on earning assets that more than offset the decrease in the average rate paid on interest-bearing liabilities, or cost of funds. The yield on earning assets decreased by 41 basis points from 5.84% in 2003 to 5.43% in 2004, while the cost of
funds decreased by 30 basis points from 2.12% to 1.82%. In comparing third quarter periods, the net interest spread increased by 1 basis point from 3.70% to 3.71%, as the yield on earning assets decreased by 10 basis points while the cost of funds
decreased by 11 basis points.



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 periods charge is affected by several considerations including managements evaluation of various risk factors in determining the adequacy of the allowance
(see Asset Quality), actual loan loss experience and loan portfolio growth. Earnings were negatively impacted in the first nine months of 2004 by a $1,975,000 increase in the provision for loan losses, the third quarter increase being
$5,000, as compared to the same period in 2003. The increase in the provision for the first nine months of 2004 resulted largely from 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



19



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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 $6,062,000 at September 30, 2004.



The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.10% at September 30, 2004, 1.14%
at September 30, 2003 and 1.14% at December 31, 2003. The allowance percentage has decreased due to charge-offs of impaired loans which were specifically reserved.



Noninterest Income



Noninterest income decreased $165,000 or 1.6% for the first nine months of 2004 compared to the same period in 2003 and increased $1,516,000 or 71.0% in
comparing third quarter periods, due primarily to a decline of $800,000 and an increase of $1,187,000, respectively, in income from mortgage loan sales as discussed above in Significant Factors Affecting Earnings in 2004. The
increase in service charges on deposit accounts was largely due to selected increases in service charge rates that became effective in 2004.



Noninterest Expense



Noninterest expense was $886,000 or 4.4% higher in the first nine months of 2004 compared to the same period of 2003, 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. In comparing third
quarter periods, which were comparable with respect to the inclusion of Dover operations, noninterest expense was higher by $189,000 or 2.7%, due primarily to an increase in personnel expense. 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 above in Significant Factors Affecting Earnings
in 2004, has been affected in 2004 by increased staffing requirements, by normal salary adjustments and by higher costs of fringe benefits. The decrease in furniture and equipment expense was due mainly to the reduction in depreciation
expense related to furniture and equipment that became fully depreciated in 2003. The cost of data processing services was higher in the first nine months of 2003 because of the outside data processing services employed by Rowan Bank until the
conversion to an in-house system in March 2003, with the conversion project separately resulting in $140,000 in expenses. Other expense has been affected in 2004, especially in the comparison of the first nine months of 2004 to the same period in
2003, by higher levels of advertising and marketing expenditures, by higher communications expenses and by increased expenses related to credit administration and foreclosed properties.



Income Taxes



As noted above in Significant Factors Affecting Earnings in 2004, the results for the three and nine months ended September 30, 2003
were positively affected by a $213,000 reduction in income tax expense for the change in the valuation allowance for state deferred income tax assets as a result of managements judgment that these assets would be realized in future periods.
Exclusive of the change in the valuation allowance for state deferred income tax assets, the effective income tax rate decreased from 29.7% in the first nine months of 2003 to 26.1% in the same period of 2004 due principally to the decrease in the
ratio of taxable to non-taxable income. Because of the very significant increase in the ratio of taxable to non-taxable income in the third quarter of 2004 compared to the same period of 2003 as a result of the substantially higher level of pre-tax
income in 2004, the effective quarterly income tax rate, exclusive of the change in the valuation allowance, increased from 22.0% in 2003 to 31.1% in 2004.



20



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Liquidity



Liquidity for the subsidiary banks refers to their 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 lines of credit established at the Federal Home Loan Bank, less existing advances and letters of credit
used to secure public deposits charged against those lines, 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 the subsidiary banks are based primarily on a core of local deposits, retail repurchase agreements and the subsidiary banks capital position. To date, these core funds, supplemented by
Federal Home Loan Bank advances and a modest amount of brokered deposits, have been adequate to fund loan demand in each subsidiary banks market area, while maintaining the desired level of immediate liquidity and an investment securities
portfolio available for both immediate and secondary liquidity purposes. It is anticipated that funding sources in the future will include an increased use of brokered deposits and, additionally, institutional deposits obtained from secured websites
on the internet.



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



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 June 30, 2004 are discussed below.



Commitments of the subsidiary banks 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 September 30, 2004, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $166,298,000. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being 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.



The subsidiary banks issue standby letters of credit whereby the subsidiary
bank guarantees the performance of a customer to a third party if a specified triggering event or condition occurs. The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee. All standby
letters of credit provide for recourse against the customer on whose behalf the letter of credit was issued, and this recourse may be further secured by a pledge of assets. The maximum potential amount of undiscounted future payments related to
standby letters of credit was $6,410,000 at September 30, 2004 and $6,221,000 at September 30, 2003. Due to insignificance, the Corporation has recorded no liability at September 30, 2004 for the current carrying amount of the obligation to perform
as a guarantor.



21



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In connection with its asset/liability management objectives, the Corporation entered into an interest
rate swap on a $7,000,000 Federal Home Loan Bank (FHLB) advance during the nine months ended September 30, 2004 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
three and nine months ended September 30, 2004, the interest rate swap resulted in net reductions of $32,000 and $81,000, respectively, in the interest expense that would otherwise have been reported for the FHLB advance. The fair value of the swap
at September 30, 2004 was recorded on the consolidated balance sheet as a liability in the amount of $80,000, offset by a valuation adjustment in the same amount to the FHLB advance.



Dover Mortgage Company originates certain fixed rate 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 fixed rate 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 fixed rate 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 fixed rate residential mortgage loans totaled $21,649,000 at September 30, 2004. The related forward sales commitments totaled
$21,649,000 at September 30, 2004. The fair value of these commitments was recorded as a net asset of $18,000 at September 30, 2004. Loans held for sale by Dover Mortgage Company totaled $9,988,000 at September 30, 2004. The related forward sales
commitments totaled $9,988,000 at September 30, 2004. The fair value of these commitments was recorded as a net asset of $18,000 at September 30, 2004.



The subsidiary banks had loans held for sale of $1,427,000 at September 30, 2004. Binding commitments of the subsidiary banks for the origination of
mortgage loans intended to be held for sale at September 30, 2004 were not material.



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



Asset/Liability Management and Interest Rate Sensitivity



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



22



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The Corporations balance sheet was asset-sensitive at September 30, 2004. An asset-sensitive
position means that, for cumulative gap measurement periods of one year or less, there are more assets than liabilities subject to immediate repricing as market rates change. Because immediately rate sensitive assets exceed rate sensitive
interest-bearing liabilities, the earnings position could improve in a rising rate environment and could deteriorate in a declining rate environment, depending on the correlation of rate changes in these two categories. Included in interest-bearing
liabilities subject to rate changes within 90 days is a portion of the interest-bearing demand, savings and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market
indicators.



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 September 30, 2004, FNB Corp. and each of the subsidiary banks 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 September 30, 2004,
FNB Corp. had a total capital ratio of 10.34% and a Tier 1 capital ratio of 9.32%. First National Bank and Rowan Bank had total capital ratios of 11.59% and 10.82%, respectively, and Tier 1 capital ratios of 10.58% and 9.70%, respectively.



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 September 30, 2004, FNB Corp. had a leverage capital ratio of 7.80%. First National Bank and Rowan Bank had leverage capital ratios of 9.16% and 7.30%, respectively.



First National Bank and Rowan Bank are also subject to the 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, both First National Bank and Rowan Bank met all of those ratio requirements at September 30, 2004 and, accordingly, are well-capitalized under the regulatory framework for prompt corrective action.



Balance Sheet Review



Total assets at September 30, 2004 were $50,282,000 or 6.3% higher than at September 30, 2003 and were $72,312,000 or 9.4%
higher than at December 31, 2003. By similar comparison, deposits were ahead by $42,320,000 or 7.1% and $43,778,000 or 7.3%. The level of total assets is directly affected by the level of loans held for sale which are largely supported by borrowings
obtained strictly for this purpose. At



23



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September 30, 2003, loans held for sale amounted to $31,912,000 compared to $8,567,000 at December 31, 2003 and
$11,415,000 at September 30, 2004. Consequently, the growth in assets exclusive of loans held for sale was significantly higher at September 30, 2004 compared to September 30, 2003 than the amount indicated by the comparison of total assets noted
above. The level of total assets was also affected at September 30, 2004 compared to both September 30, 2003 and December 31, 2003 by additional advances totaling $20,000,000 from the Federal Home Loan Bank that were obtained primarily to help fund
loan growth. Affected by the acquisition of Dover Mortgage Company on April 1, 2003 as discussed in the Overview, average assets increased 3.2% in the first nine months of 2004 compared to the same period in 2003, while average deposits
increased 3.9%, the third quarter increases being 2.9% and 5.9%, respectively.



Investment Securities



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 general, because of loan funding needs, proceeds from investment maturities and calls were
diverted to this purpose, leading to a reduction in the level of investment securities at September 30, 2004 of $23,690,000 or 16.1% compared to September 30, 2003 and $20,358,000 or 14.1% compared to December 31, 2003. Investable funds not
otherwise utilized are temporarily invested 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 total,
loans increased $73,247,000 or 12.9% during the twelve-month period ended September 30, 2004. As noted above in the Balance Sheet Review, the level of loans held for sale can significantly impact the comparison of total assets from
period to period and hence the comparison of total loans. As further noted, there was a relatively high level of loans held for sale at September 30, 2003 compared to subsequent periods. Consequently, loans held for investment, excluding loans held
for sale, grew by the much greater amount of $93,744,000 or 17.5% during the twelve-month period ended September 30, 2004. The increase in total loans during the first nine months of 2004, which was affected by the sale in the first quarter of 2004
of loans totaling $12,535,000 previously classified as held for investment as discussed above in Significant Factors Affecting Earnings in 2004, was $89,195,000 or 16.2%. Affected by the acquisition of Dover Mortgage Company on
April 1, 2003 as discussed in the Overview, average loans were $51,681,000 or 9.4% higher in the first nine months of 2004 than in the same period of 2003 and were $50,273,000 or 8.8% higher in the third quarter comparison. The ratio of
average loans to average deposits, in comparing nine-month periods, increased from 92.3% in 2003 to 97.2% in 2004. The ratio of loans to deposits at September 30, 2004 was 99.9%.



While the level of the entire loan portfolio has been adversely affected for an extended period by the general slowdown in
the economy, the portfolios related to construction loans and commercial and other real estate loans experienced significant gains during both the twelve-month period ended September 30, 2004 and the first nine months of 2004. The balance of the 1-4
family residential mortgage loan portfolio, exclusive of the initial impact of the Dover Mortgage Company acquisition, continued to be affected during the twelve-month period ended September 30, 2004 by the high level of refinancing activity that
commenced in 2001 and extended through approximately the end of 2003, since many refinanced loans that were previously included in the held for investment category were sold as part of the refinancing process, and was also affected, as
discussed above, by the direct sale in the 2004 first quarter of certain loans previously classified as held for investment.



24



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Asset Quality



Management considers the asset quality of the subsidiary banks 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 the market areas of the subsidiary banks. 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 the allowance for loan losses of each of the subsidiary banks. Such agencies may require the subsidiary banks 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 September 30, 2004, the Corporation had impaired loans which totaled $321,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $134,000. At September 30, 2003, the Corporation had
impaired loans which totaled $904,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $538,000. At December 31, 2003, the Corporation had impaired loans which totaled $1,963,000 and were also on
nonaccrual status. The related allowance for loan losses on these loans amounted to $1,133,000.



At September 30, 2004, nonperforming loans were $6,062,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $4,121,000
and $1,941,000, respectively. At September 30, 2003, nonperforming loans were $6,410,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $5,370,000 and $1,040,000, respectively. At December 31, 2003, nonperforming
loans were $5,993,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $5,235,000 and $758,000, respectively. At June 30, 2004, nonperforming loans were $7,026,000 in total, nonaccrual loans and accruing loans past
due 90 days or more amounting to $5,867,000 and $1,159,000, respectively.



A model that considers both allocated and unallocated components of the allowance for loan losses is used on a quarterly basis to analyze the adequacy of the allowance to absorb probable losses inherent in the loan
portfolio. Homogeneous pools of loans are segregated, and classifications of individual loans within certain of these pools are identified using risk grades derived from regulatory guidelines. Allocations of estimated reserves are assigned to the
most adversely classified loans based upon an individual analysis of present-value repayment and/or liquidation projections of each loan. The reserve is allocated to each pool, and remaining classifications within pools, based upon a two-year
historical loss ratio of First National Bank, concentrations within industries, economic and industry-specific trends, portfolio trends, and other subjective factors. An additional portion of the reserve is unallocated to any specific portion of the
loan portfolio, and is based upon the mix and weight of the several homogeneous pools. 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 the loan portfolio.



25



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Earnings were negatively impacted in the first nine months of 2004 by a $1,975,000 increase in the
provision for loan losses, the third quarter increase being $5,000, as compared to the same period in 2003. The increase in the provision for the first nine months of 2004 resulted largely from 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 $6,062,000 at September 30, 2004.



The allowance for loan
losses, as a percentage of loans held for investment, amounted to 1.10% at September 30, 2004, 1.14% at September 30, 2003 and 1.14% at December 31, 2003. The allowance percentage has decreased due to charge-offs of impaired loans which were
specifically reserved.



Management believes the allowance for
loan losses of $6,936,000 at September 30, 2004 is adequate to cover probable losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment. Managements judgments are based on
numerous assumptions about current events which it believes to be reasonable, but which may or may not be valid. Thus there can be no assurance that loan losses in future periods will not exceed the current allowance or that future increases in the
allowance will not be required. No assurance can be given that managements ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the
allowance, thus adversely affecting the operating results of the Corporation.



The following table presents an analysis of the changes in the allowance for loan losses.



|                                    |  |                                 |       |                                |   |       |  |   |       |   |  |   |      
|----------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | - | ----- | - |  | - | -----
|                                    |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                                    |  | 2004                            |       | 2003                           |   | 2004  |  |   | 2003 
|                                    |  | (in thousands)                 
|Balance at beginning of period      |  | $                               | 6,579 |                                | $ | 6,038 |  | $ | 6,172 |   |  | $ | 6,109
|Charge-offs                         |  |                                 | 202   |                                |   | 411   |  |   | 3,006 |   |  |   | 1,621
|Recoveries                          |  |                                 | 99    |                                |   | 16    |  |   | 305   |   |  |   | 75   
|                                    |  |                                 |       |                                |   |       |  |   |       |   |  |   |      
|Net loan charge-offs                |  |                                 | 103   |                                |   | 395   |  |   | 2,701 |   |  |   | 1,546
|Provision for loan losses           |  |                                 | 460   |                                |   | 455   |  |   | 3,510 |   |  |   | 1,535
|Allowance adjustment for loans sold |  |                                 |      |                                |   |      |  |   | (45   | ) |  |   |     
|                                    |  |                                 |       |                                |   |       |  |   |       |   |  |   |      
|Balance at end of period            |  | $                               | 6,936 |                                | $ | 6,098 |  | $ | 6,936 |   |  | $ | 6,098
|                                    |  |                                 |       |                                |   |       |  |   |       |   |  |   |      



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.



26



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The level and mix of deposits has been specifically affected by the following factors. Reflecting new
deposit products and extensive promotion efforts, noninterest-bearing demand deposits had significant growth during the twelve-month period ended September 30, 2004, increasing $11,695,000 during that period and $5,185,000 during the first nine
months of 2004. Interest-bearing transactional deposits, including demand, savings and money market deposits, have also grown, increasing $5,615,000 during the twelve-month period ended September 30, 2004 and $8,387,000 during the first nine months
of 2004. The level of time deposits has been negatively affected in recent years by the continuing effect of interest rate declines. Time deposits did increase $25,010,000 during the twelve-month period ended September 30, 2004 and $30,206,000
during the first nine months of 2004 due primarily to brokered time deposits of $8,088,000 that were largely obtained during the first nine months of 2004 and to the increase in time deposits obtained from governmental units, such deposits amounting
to $64,383,000, $48,401,000 and $49,605,000 at September 30, 2004, September 30, 2003 and December 31, 2003, respectively.



Business Development Matters



As discussed in the Overview and in Note 3 to the Consolidated Financial Statements, the Corporation completed a merger on April 1, 2003 for
the acquisition of Dover Mortgage Company, headquartered in Charlotte, North Carolina, in a transaction accounted for using the purchase method of accounting for business combinations.



In August 2003, First National Bank received regulatory approval for relocation of its existing branch offices in Laurinburg
and Randleman, North Carolina. The new Laurinburg office opened for business in July 2004, while construction of the new Randleman office is expected to be complete in 2005. The Laurinburg office replaces 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 a new branch office in Greensboro, North Carolina, resulting in the opening of a loan production office in February 2004. In
September 2004, regulatory approval was requested for a second office in Greensboro that is expected to result in the opening of a full-service banking office in 2005.



In March 2004, Rowan Bank opened a new loan production office in Concord, North Carolina.



In April 2004, Dover Mortgage Company opened a new mortgage production office
in Carolina Beach, North Carolina.



On August 20, 2004, the
Corporation announced that William D. Wood, III, had been selected to serve as the President of Rowan Bank by its Board of Directors. This action was taken following the resignation of Bruce D. Jones, who had served as the President and CEO of Rowan
Bank and as a Vice President and member of the Board of Directors for FNB Corp. The Corporation has also filed for regulatory approval of the merger of its Rowan Bank subsidiary with and into First National Bank. The merger is expected to be
completed in early December with Mr. Wood retaining a regional officer position within First National Bank.



Accounting Pronouncement Matters



In December 2003, the FASB issued revised Statement of Financial Accounting Standards No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits (SFAS No. 132),
which,



27



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similar to original SFAS No. 132, revises employers disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, Employers Accounting for Pensions, SFAS No. 88, Employers Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. Revised SFAS No. 132 retains the disclosure requirements contained in original SFAS
No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits, which it replaces. Revised SFAS No. 132 requires additional disclosures to those in original SFAS No. 132 about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The provisions of original SFAS No. 132 remain in place until the provisions of revised SFAS No. 132 are adopted. Certain provisions of
revised SFAS No. 132 are effective for fiscal years ending after December 15, 2003 while others are effective for fiscal years ending after June 15, 2004. Additionally, certain provisions are effective for interim periods beginning after December
15, 2003. The Corporation has adopted the disclosure provisions specifically effective for fiscal years ending after December 15, 2003 and for interim periods beginning after December 15, 2003 and will adopt the remaining disclosure provisions as
they become effective.



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



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 the recognition from the
current accounting period to a subsequent period. The effect of adoption of SAB No. 105 on the results of operations for the three months ended June 30, 2004 and for the nine months ended September 30, 2004 was a $356,000 reduction in Dovers
income from mortgage loan sales.



In March 2004, the Emerging
Issues Task Force (EITF) released EITF Issue 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF Issue 03-01). EITF Issue 03-01 provides guidance for determining whether an
investment is other-than-temporarily impaired and requires certain disclosures with respect to these investments. The recognition and measurement guidance for other-than-temporary impairment has been delayed by the issuance of FASB Staff Position
EITF 03-1-1 on September 30, 2004.



28



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Non-GAAP Measures



This Quarterly Report on Form 10-Q contains financial information determined by methods other than in accordance with generally accepted accounting
principles (GAAP). The Corporations management uses these non-GAAP measures in their analysis of the Corporations performance. These non-GAAP measures exclude average goodwill from the calculations of return on average assets
and return on average equity. Management believes presentations of financial measures excluding the impact of goodwill provide useful supplemental information that is essential to a proper understanding of the operating results of the
Corporations core businesses. In addition, certain designated net interest income amounts are presented on a taxable equivalent basis. Management believes that the presentation of net interest income on a taxable equivalent basis aids in the
comparability of net interest income arising from taxable and tax-exempt sources. 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 Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can
be identified by the use of forward-looking terminology such as believes, expects, plans, projects, goals, estimates, may, could, should, or
anticipates or the negative thereof or other variations thereon of comparable terminology, or by discussions of strategy that involve risks and uncertainties. In addition, from time to time, the Corporation or its representatives have
made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, various filings made by the Corporation with the Securities and Exchange Commission, or press releases or
oral statements made by or with the approval of an authorized executive officer of the Corporation. Forward-looking statements are based on managements current views and assumptions and involve risks and uncertainties that could significantly
affect expected results. The Corporation wishes to caution the reader that factors, such as those listed below, in some cases have affected and could affect the Corporations actual results, causing actual results to differ materially from
those in any forward-looking statement. These factors include: (i) expected cost savings from the Corporations acquisition described in the Overview may not materialize within the expected time frame, (ii) revenues following the acquisition
may not meet expectations, (iii) costs or difficulties related to the integration of the business of the company acquired may be greater than anticipated, (iv) competitive pressure in the banking industry or in the Corporations markets may
increase significantly, (v) changes in the interest rate environment may reduce margins, (vi) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality
deterioration, (vii) changes may occur in banking legislation and regulation, (viii) changes may occur in general business conditions and (ix) changes may occur in the securities markets. Readers should also consider information on risks and
uncertainties contained in the discussions of competition, supervision and regulation, and effect of governmental policies contained in the Corporations most recent Annual Report on Form 10-K.



29



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Table 1



Average Balances and Net Interest Income Analysis



NINE MONTHS ENDED SEPTEMBER 30



|                                           |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|------------------------------------------ |  | ------------------------------------------------ | ------- | ----------------------- | ---- | ------------------------- |  | ---------------- | --------------- |  | ----------------------- | ------- | ------------------------- | - | ------ | --------------------------- | ---- | - | ---------- | - | ----- | - |  | - | ------ | - |  | - | ------ | -
|                                           |  | 2004                                             |         |                         | 2003 |                           |  | 2004 Versus 2003 |                
|                                           |  | Average Balance                                  |         | InterestIncome/ Expense |      | Average RatesEarned/ Paid |  |                  | Average Balance |  | InterestIncome/ Expense |         | Average RatesEarned/ Paid |   |        | Interest Variancedue to (1) |      |   | Net Change |  
|                                           |  |                                                  |         |                         |      |                           |  | Volume           |                 |  | Rate                    |         |                          
|                                           |  |                                                  |         |                         |      |                           |  |                  |                
|                                           |  | (Taxable Equivalent Basis, Dollars in Thousands) |        
|Earning Assets                             |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Loans (2) (3)                              |  | $                                                | 599,174 |                         | $    | 25,447                    |  | 5.66             | %               |  | $                       | 547,493 |                           | $ | 25,256 |                             | 6.16 | % |            | $ | 2,312 |   |  | $ | (2,121 | ) |  | $ | 191    |  
|Investment securities (2):                 |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Taxable income                             |  |                                                  | 83,286  |                         |      | 2,741                     |  | 4.39             |                 |  |                         | 110,444 |                           |   | 4,349  |                             | 5.25 |   |            |   | (965  | ) |  |   | (643   | ) |  |   | (1,608 | )
|Non-taxable income                         |  |                                                  | 48,015  |                         |      | 2,057                     |  | 5.71             |                 |  |                         | 38,697  |                           |   | 1,854  |                             | 6.39 |   |            |   | 415   |   |  |   | (212   | ) |  |   | 203    |  
|Other earning assets                       |  |                                                  | 15,198  |                         |      | 119                       |  | 1.05             |                 |  |                         | 28,084  |                           |   | 240    |                             | 1.14 |   |            |   | (103  | ) |  |   | (18    | ) |  |   | (121   | )
|                                           |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Total earning assets                       |  |                                                  | 745,673 |                         |      | 30,364                    |  | 5.43             |                 |  |                         | 724,718 |                           |   | 31,699 |                             | 5.84 |   |            |   | 1,659 |   |  |   | (2,994 | ) |  |   | (1,335 | )
|                                           |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Cash and due from banks                    |  |                                                  | 16,958  |                         |      |                           |  |                  |                 |  |                         | 17,176  |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Goodwill                                   |  |                                                  | 16,332  |                         |      |                           |  |                  |                 |  |                         | 15,095  |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Other assets, net                          |  |                                                  | 36,869  |                         |      |                           |  |                  |                 |  |                         | 33,438  |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|                                           |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Total Assets                               |  | $                                                | 815,832 |                         |      |                           |  |                  |                 |  | $                       | 790,427 |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|                                           |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Interest-Bearing Liabilities               |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Interest-bearing deposits:                 |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Demand deposits                            |  | $                                                | 89,354  |                         |      | 256                       |  | 0.38             |                 |  | $                       | 83,840  |                           |   | 333    |                             | 0.53 |   |            |   | 21    |   |  |   | (98    | ) |  |   | (77    | )
|Savings deposits                           |  |                                                  | 54,404  |                         |      | 128                       |  | 0.31             |                 |  |                         | 51,437  |                           |   | 225    |                             | 0.58 |   |            |   | 12    |   |  |   | (109   | ) |  |   | (97    | )
|Money market deposits                      |  |                                                  | 75,516  |                         |      | 534                       |  | 0.94             |                 |  |                         | 74,701  |                           |   | 666    |                             | 1.19 |   |            |   | 7     |   |  |   | (139   | ) |  |   | (132   | )
|Certificates and other time deposits       |  |                                                  | 323,760 |                         |      | 5,507                     |  | 2.27             |                 |  |                         | 321,184 |                           |   | 6,194  |                             | 2.58 |   |            |   | 51    |   |  |   | (738   | ) |  |   | (687   | )
|Retail repurchase agreements               |  |                                                  | 15,914  |                         |      | 98                        |  | 0.82             |                 |  |                         | 19,210  |                           |   | 134    |                             | 0.93 |   |            |   | (21   | ) |  |   | (15    | ) |  |   | (36    | )
|Federal Home Loan Bank advances            |  |                                                  | 68,307  |                         |      | 1,880                     |  | 3.67             |                 |  |                         | 53,227  |                           |   | 1,741  |                             | 4.37 |   |            |   | 445   |   |  |   | (306   | ) |  |   | 139    |  
|Federal funds purchased                    |  |                                                  | 4,422   |                         |      | 51                        |  | 1.52             |                 |  |                         | 396     |                           |   | 4      |                             | 1.45 |   |            |   | 47    |   |  |   |       |   |  |   | 47     |  
|Other borrowed funds                       |  |                                                  | 22,108  |                         |      | 462                       |  | 2.78             |                 |  |                         | 38,760  |                           |   | 887    |                             | 3.06 |   |            |   | (350  | ) |  |   | (75    | ) |  |   | (425   | )
|                                           |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Total interest-bearing liabilities         |  |                                                  | 653,785 |                         |      | 8,916                     |  | 1.82             |                 |  |                         | 642,755 |                           |   | 10,184 |                             | 2.12 |   |            |   | 212   |   |  |   | (1,480 | ) |  |   | (1,268 | )
|                                           |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Noninterest-bearing demand deposits        |  |                                                  | 73,306  |                         |      |                           |  |                  |                 |  |                         | 62,259  |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Other liabilities                          |  |                                                  | 6,357   |                         |      |                           |  |                  |                 |  |                         | 7,406   |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Shareholders equity                       |  |                                                  | 82,384  |                         |      |                           |  |                  |                 |  |                         | 78,007  |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|                                           |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Total Liabilities and Shareholders Equity |  | $                                                | 815,832 |                         |      |                           |  |                  |                 |  | $                       | 790,427 |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|                                           |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Net Interest Income and Spread             |  |                                                  |         |                         | $    | 21,448                    |  | 3.61             | %               |  |                         |         |                           | $ | 21,515 |                             | 3.72 | % |            | $ | 1,447 |   |  | $ | (1,514 | ) |  | $ | (67    | )
|                                           |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  
|Net Yield on Earning Assets                |  |                                                  |         |                         |      |                           |  | 3.83             | %               |  |                         |         |                           |   |        |                             | 3.96 | % |            |   |       |   |  |   |        |   |  |   |        |  
|                                           |  |                                                  |         |                         |      |                           |  |                  |                 |  |                         |         |                           |   |        |                             |      |   |            |   |       |   |  |   |        |   |  |   |        |  

---

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

|(2) | 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30



---

Table 2



Average Balances and Net Interest Income Analysis



THREE MONTHS ENDED SEPTEMBER 30



|                                           |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|------------------------------------------ |  | ------------------------------------------------ | ------- | ---------------------- | ---- | ----------------------- | ------ | ---------------- | -------------- | ---- | ---------------------- | ------- | ----------------------- | - | ------ | --------------------------- | ---- | - | --------- | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                                           |  | 2004                                             |         |                        | 2003 |                         |        | 2004 Versus 2003 |               
|                                           |  | AverageBalance                                   |         | InterestIncome/Expense |      | AverageRatesEarned/Paid |        |                  | AverageBalance |      | InterestIncome/Expense |         | AverageRatesEarned/Paid |   |        | Interest Variancedue to (1) |      |   | NetChange |  
|                                           |  |                                                  |         |                        |      |                         | Volume |                  |                | Rate |                        |        
|                                           |  | (Taxable Equivalent Basis, Dollars in Thousands) |        
|Earning Assets                             |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Loans (2) (3)                              |  | $                                                | 624,379 |                        | $    | 9,072                   |        | 5.78             | %              |      | $                      | 574,106 |                         | $ | 8,535  |                             | 5.92 | % |           | $ | 742  |   |  | $ | (205 | ) |  | $ | 537  |  
|Investment securities (2):                 |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Taxable income                             |  |                                                  | 77,877  |                        |      | 840                     |        | 4.31             |                |      |                        | 96,981  |                         |   | 1,208  |                             | 4.98 |   |           |   | (219 | ) |  |   | (149 | ) |  |   | (368 | )
|Non-taxable income                         |  |                                                  | 46,664  |                        |      | 677                     |        | 5.80             |                |      |                        | 49,441  |                         |   | 707    |                             | 5.72 |   |           |   | (40  | ) |  |   | 10   |   |  |   | (30  | )
|Other earning assets                       |  |                                                  | 12,769  |                        |      | 42                      |        | 1.32             |                |      |                        | 19,516  |                         |   | 48     |                             | 0.97 |   |           |   | (20  | ) |  |   | 14   |   |  |   | (6   | )
|                                           |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Total earning assets                       |  |                                                  | 761,689 |                        |      | 10,631                  |        | 5.55             |                |      |                        | 740,044 |                         |   | 10,498 |                             | 5.65 |   |           |   | 463  |   |  |   | (330 | ) |  |   | 133  |  
|                                           |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Cash and due from banks                    |  |                                                  | 16,964  |                        |      |                         |        |                  |                |      |                        | 18,325  |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Goodwill                                   |  |                                                  | 16,335  |                        |      |                         |        |                  |                |      |                        | 16,321  |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Other assets, net                          |  |                                                  | 37,851  |                        |      |                         |        |                  |                |      |                        | 34,549  |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|                                           |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Total Assets                               |  | $                                                | 832,839 |                        |      |                         |        |                  |                |      | $                      | 809,239 |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|                                           |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Interest-Bearing Liabilities               |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Interest-bearing deposits:                 |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Demand deposits                            |  | $                                                | 89,235  |                        |      | 92                      |        | 0.41             |                |      | $                      | 87,192  |                         |   | 90     |                             | 0.41 |   |           |   | 2    |   |  |   |     |   |  |   | 2    |  
|Savings deposits                           |  |                                                  | 54,885  |                        |      | 44                      |        | 0.31             |                |      |                        | 51,958  |                         |   | 64     |                             | 0.49 |   |           |   | 4    |   |  |   | (24  | ) |  |   | (20  | )
|Money market deposits                      |  |                                                  | 79,235  |                        |      | 199                     |        | 1.00             |                |      |                        | 74,839  |                         |   | 171    |                             | 0.91 |   |           |   | 10   |   |  |   | 18   |   |  |   | 28   |  
|Certificates and other time deposits       |  |                                                  | 329,007 |                        |      | 1,886                   |        | 2.27             |                |      |                        | 314,257 |                         |   | 1,877  |                             | 2.37 |   |           |   | 88   |   |  |   | (79  | ) |  |   | 9    |  
|Retail repurchase agreements               |  |                                                  | 15,552  |                        |      | 39                      |        | 1.00             |                |      |                        | 19,558  |                         |   | 32     |                             | 0.65 |   |           |   | (8   | ) |  |   | 15   |   |  |   | 7    |  
|Federal Home Loan Bank advances            |  |                                                  | 73,158  |                        |      | 655                     |        | 3.55             |                |      |                        | 52,948  |                         |   | 583    |                             | 4.37 |   |           |   | 195  |   |  |   | (123 | ) |  |   | 72   |  
|Federal funds purchased                    |  |                                                  | 6,703   |                        |      | 30                      |        | 1.72             |                |      |                        | 878     |                         |   | 3      |                             | 1.42 |   |           |   | 26   |   |  |   | 1    |   |  |   | 27   |  
|Other borrowed funds                       |  |                                                  | 20,972  |                        |      | 153                     |        | 2.89             |                |      |                        | 53,921  |                         |   | 401    |                             | 2.95 |   |           |   | (240 | ) |  |   | (8   | ) |  |   | (248 | )
|                                           |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Total interest-bearing liabilities         |  |                                                  | 668,747 |                        |      | 3,098                   |        | 1.84             |                |      |                        | 655,551 |                         |   | 3,221  |                             | 1.95 |   |           |   | 77   |   |  |   | (200 | ) |  |   | (123 | )
|                                           |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Noninterest-bearing demand deposits        |  |                                                  | 76,471  |                        |      |                         |        |                  |                |      |                        | 65,474  |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Other liabilities                          |  |                                                  | 6,418   |                        |      |                         |        |                  |                |      |                        | 7,443   |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Shareholders equity                       |  |                                                  | 81,203  |                        |      |                         |        |                  |                |      |                        | 80,771  |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|                                           |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Total Liabilities and Shareholders Equity |  | $                                                | 832,839 |                        |      |                         |        |                  |                |      | $                      | 809,239 |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|                                           |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Net Interest Income and Spread             |  |                                                  |         |                        | $    | 7,533                   |        | 3.71             | %              |      |                        |         |                         | $ | 7,277  |                             | 3.70 | % |           | $ | 386  |   |  | $ | (130 | ) |  | $ | 256  |  
|                                           |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  
|Net Yield on Earning Assets                |  |                                                  |         |                        |      |                         |        | 3.94             | %              |      |                        |         |                         |   |        |                             | 3.92 | % |           |   |      |   |  |   |      |   |  |   |      |  
|                                           |  |                                                  |         |                        |      |                         |        |                  |                |      |                        |         |                         |   |        |                             |      |   |           |   |      |   |  |   |      |   |  |   |      |  

---

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



|(2) | 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



31



---

Item 3. Quantitative and Qualitative Disclosures about 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 above in Item 2 Managements
Discussion and Analysis of Financial Condition and Results of Operations under the heading Asset/Liability Management and Interest Rate Sensitivity.



Management does not believe there has been any significant change in the overall analysis of financial instruments
considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and estimated fair values, since the analysis prepared and presented in conjunction with the Form 10-K Annual Report for the fiscal year
ended December 31, 2003.



Item 4. Controls and Procedures



As of September 30, 2004, the end of the period covered by this report, FNB
Corp. carried out an evaluation under the supervision and with the participation of the companys management, including FNB Corp.s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
FNB Corp.s disclosure controls and procedures. In designing and evaluating the companys disclosure controls and procedures, FNB Corp. and its management recognize that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and FNB Corp.s management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon
the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the companys disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by FNB Corp. in the
reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. No significant changes in the companys
internal control over financial reporting occurred during the period ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, FNB Corp.s internal control over financial reporting. FNB Corp. reviews
its disclosure controls and procedures, which may include its internal controls over financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness. The internal controls at Dover Mortgage
Company, which FNB Corp. acquired on April 1, 2003 and was not previously a public reporting company, are an area of particular focus and FNB Corp. has engaged a third-party consultant to review those controls with the aim of identifying any
necessary or appropriate changes. Dover has begun the process of implementing the changes.



32



---

PART II. OTHER INFORMATION



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



Issuer Purchases of Equity Securities



|                                      |  |                                |  |                           |       |                                                                           |        |                                                                        |        
|------------------------------------- |  | ------------------------------ |  | ------------------------- | ----- | ------------------------------------------------------------------------- | ------ | ---------------------------------------------------------------------- | -------
|Three Months Ended September 30, 2004 |  | Total Numberof SharesPurchased |  | AveragePricePaid perShare |       | TotalNumber of SharesPurchasedas Part ofPubliclyAnnouncedPlans orPrograms |        | MaximumNumberof SharesThat MayYet BePurchasedUnder thePlans orPrograms
|July 1 to July 31                     |  |                               |  | $                         |      |                                                                           |       |                                                                        | 300,000
|August 1 to August 31                 |  | 15,800                         |  |                           | 17.88 |                                                                           | 15,800 |                                                                        | 284,200
|September 1 to September 30           |  | 5,600                          |  |                           | 17.48 |                                                                           | 5,600  |                                                                        | 278,600
|                                      |  |                                |  |                           |       |                                                                           |        |                                                                        |        
|Total                                 |  | 21,400                         |  |                           | 17.73 |                                                                           | 21,400 |                                                                        | 278,600
|                                      |  |                                |  |                           |       |                                                                           |        |                                                                        |        



On July 18, 2003, 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, 2003 and ending July 31, 2004. No additional shares were purchased under
this program after June 30, 2004.



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



Item 6. Exhibits



Exhibits to this report are listed in the index to exhibits on pages 35, 36 and 37 of this report.



33



---

SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



|                       |  |              |  |                                             
|---------------------- |  | ------------ |  | --------------------------------------------
|                       |  | FNB Corp.   
|                       |  | (Registrant)
|                       |  |             
|Date: November 5, 2004 |  | By:          |  | /s/ Jerry A. Little                         
|                       |  |              |  | Jerry A. Little                             
|                       |  |              |  | Treasurer and Secretary                     
|                       |  |              |  | (Principal Financial and Accounting Officer)



34



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INDEX TO EXHIBITS



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



35



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|            |  |                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                         
|10.21*      |  | Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrants Stock Compensation Plan, incorporated herein by reference to
Exhibit 10.31 to the Registrants Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.
|            | 
|10.22*      |  | Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrants Stock Compensation Plan, incorporated herein by reference to
Exhibit 10.32 to the Registrants Form 10-KSB Annual Report for the fiscal year ended December 31, 1994. 
|            | 
|10.23*      |  | FNB Corp. 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to the Registrants Registration Statement on Form S-8 (File No. 333-105442).                                                                                                                            
|            | 
|10.24*      |  | Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrants 2003 Stock Incentive Plan, incorporated herein by reference to
Exhibit 10.24 to the Registrants Form 10-Q Quarterly Report for the quarter ended September 30, 2003.
|            | 
|10.25*      |  | Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrants 2003 Stock Incentive Plan, incorporated herein by reference to
Exhibit 10.25 to the Registrants Form 10-K Annual Report for the fiscal year ended December 31, 2003. 
|            | 
|10.30*      |  | Employment Agreement dated as of December 27, 1995 between First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10.50 to the
Registrants Form 10-KSB Annual Report for the fiscal year ended December 31, 1995.                           
|            | 
|10.31*      |  | Carolina Fincorp, Inc. Stock Option Plan (assumed by the Registrant on April10, 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.                                                                     



36



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|            |  |                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                         
|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.
|            | 
|31.10       |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                            
|            | 
|31.11       |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                            
|            | 
|32          |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                       

---

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



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