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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

                               ------------------

                Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                         For the quarterly period ended:

                                  June 30, 2005

                        Commission File Number: 000-13086

                       FNB FINANCIAL SERVICES CORPORATION
             (Exact name of Registrant as specified in its Charter)

             North Carolina                             56-1382275
        (State of Incorporation)           (I.R.S. Employer Identification No.)

   1501 Highwoods Boulevard, Suite 400
       Greensboro, North Carolina                          27410
(Address of principal executive offices)                (Zip Code)

                                 (336) 369-0900
              (Registrant's telephone number, including area code)

                               ------------------

      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 Act).

                                 Yes |X| No |_|

   At July 26, 2005, 6,998,529 shares of the registrant's common stock, $1.00
                        stated value, were outstanding.

        This Form 10-Q has 26 pages. The Exhibit Index begins on page 20.

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<PAGE>

                       FNB FINANCIAL SERVICES CORPORATION

                                    FORM 10-Q

                                      INDEX

                                                                            Page
                                                                            ----

PART   I   INANCIAL INFORMATION

Item   1   Financial Statements

           Consolidated Balance Sheets
           June 30, 2005 and December 31, 2004                                 3

           Consolidated Statements of Income and Comprehensive Income
           Three Months and Six Months Ended June 30, 2005 and 2004            4

           Consolidated Statements of Cash Flows for the
           Six Months ended June 30, 2005 and 2004                             5

           Notes to Consolidated Financial Statements                          6

Item   2   Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                          10

Item   3   Quantitative and Qualitative Disclosures About Market Risk         18

Item   4   Controls and Procedures                                            18

PART   II  OTHER INFORMATION

Item   1   Legal Proceedings                                                  19

Item   2   Unregistered Sales of Equity Securities and Use of Proceeds        19

Item   3   Defaults Upon Senior Securities                                    19

Item   4   Submission of Matters to a Vote of Security Holders                19

Item   5   Other Information                                                  20

Item   6   Exhibits                                                           20


                                       2
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

FNB Financial Services Corporation and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                             June 30,
                                                                               2005           December 31,
                                                                            (Unaudited)           2004 *
                                                                            -----------       ------------
<S>                                                                         <C>               <C>
ASSETS

Cash and due from banks                                                     $    27,742       $    24,246
Investment securities:
     Securities available for sale                                              150,054           137,161
     Federal Home Loan Bank and Federal Reserve Bank Stock, at cost               5,514             4,442
Loans, net of allowance for credit losses of $8,380 at
      June 30, 2005 and $7,353 at December 31, 2004                             754,875           656,073
Premises and equipment, net                                                      13,094            13,144
Other assets                                                                     28,167            30,269
                                                                            -----------       -----------

               Total assets                                                 $   979,446       $   865,335
                                                                            ===========       ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits:
     Noninterest bearing                                                    $    95,335       $    78,810
     Interest bearing                                                           716,031           645,475
                                                                            -----------       -----------
               Total deposits                                                   811,366           724,285

Short-term borrowings                                                            24,153            21,534
Long-term debt                                                                   65,000            45,000
Other liabilities                                                                 5,567             4,086
                                                                            -----------       -----------

               Total liabilities                                                906,086           794,905
                                                                            -----------       -----------

Shareholders' Equity:
Preferred stock no par value; authorized 10,000,000 shares;
               none issued                                                           --                --
Common stock, $1.00 stated value; authorized 75,000,000 shares;
               outstanding 6,995,029 at June 30, 2005 and 5,550,326 at
               December 31, 2004                                                  6,995             5,550
Paid-in capital                                                                  21,722            21,367
Retained earnings                                                                45,486            43,986
Accumulated other comprehensive loss                                               (843)             (473)
                                                                            -----------       -----------

               Total shareholders' equity                                        73,360            70,430
                                                                            -----------       -----------

               Total liabilities and shareholders' equity                   $   979,446       $   865,335
                                                                            ===========       ===========
</TABLE>

* Derived from audited consolidated financial statements.

See notes to unaudited consolidated financial statements.


                                       3
<PAGE>

FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Income and Comprehensive Income
(Unaudited; dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                Three Months Ended                   Six Months Ended
                                                                     June 30,                            June 30,
                                                           -----------------------------       -----------------------------
                                                               2005              2004              2005              2004
                                                           -----------       -----------       -----------       -----------
<S>                                                        <C>               <C>               <C>               <C>
Interest income
   Loans                                                   $    13,629       $     9,311       $    25,732       $    18,498
   Federal funds sold and overnight deposits                        61                29               127                46
   Investment securities
        Taxable                                                    976               711             1,799             1,568
        Tax exempt                                                 318               342               637               671
        Other                                                       77                48               143                96
                                                           -----------       -----------       -----------       -----------

        Total interest income                                   15,061            10,441            28,438            20,879
                                                           -----------       -----------       -----------       -----------

Interest expense
   Deposits                                                      5,253             2,967             9,536             6,135
   Short-term borrowings                                           141                51               241               104
   Long-term debt                                                  581               378             1,062               746
                                                           -----------       -----------       -----------       -----------

        Total interest expense                                   5,975             3,396            10,839             6,985
                                                           -----------       -----------       -----------       -----------

Net interest income                                              9,086             7,045            17,599            13,894
Provision for credit losses                                        638               272             1,318               660
                                                           -----------       -----------       -----------       -----------

Net interest income after provision for credit losses            8,448             6,773            16,281            13,234

Noninterest income
   Service charges on deposit accounts                             964               960             1,788             1,972
   Net gain (loss) on sale of securities                            (3)               --                (5)              111
   Income from investment services                                  95               180               233               313
   Mortgage banking fees                                           618               553             1,622               887
   Net gain on disposition of branch                                --               825                --               825
   Other noninterest income                                        141                86               315               337
                                                           -----------       -----------       -----------       -----------

        Total noninterest income                                 1,815             2,604             3,953             4,445

Noninterest expense
   Salaries and employee benefits                                3,428             2,984             6,895             5,782
   Occupancy expense                                               394               311               796               636
   Furniture and equipment expense                                 789               701             1,547             1,370
   Telecommunications expense                                      152               129               311               286
   Marketing expense                                               220               215               482               367
   Printing and supply expense                                     174               134               347               265
   Other noninterest expense                                     1,888             1,116             3,559             2,330
                                                           -----------       -----------       -----------       -----------

        Total noninterest expense                                7,045             5,590            13,937            11,036

Income before provision for income taxes                         3,218             3,787             6,297             6,643
Provision for income taxes                                       1,083             1,274             2,119             2,235
                                                           -----------       -----------       -----------       -----------

Net income                                                       2,135             2,513             4,178             4,408
Other comprehensive income (loss)                                  604            (3,070)             (369)           (1,984)
                                                           -----------       -----------       -----------       -----------
Comprehensive income (loss)                                $     2,739       $      (557)      $     3,809       $     2,424
                                                           ===========       ===========       ===========       ===========
Per share data
   Net income, basic                                       $      0.30       $      0.36       $      0.60       $      0.64
   Net income, diluted                                     $      0.29       $      0.35       $      0.58       $      0.62
   Cash dividends                                          $      0.11       $      0.10       $      0.22       $      0.20
Weighted average shares outstanding, basic                   6,991,912         6,868,133         6,936,055         6,862,659
Weighted average shares outstanding, diluted                 7,229,261         7,153,771         7,177,459         7,177,491
</TABLE>

            See notes to unaudited consolidated financial statements.


                                       4
<PAGE>

FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; dollars in thousands)

<TABLE>
<CAPTION>
                                                                                            Six Months Ended
                                                                                                 June 30,
                                                                                      -----------------------------
                                                                                          2005              2004
                                                                                      -----------       -----------
<S>                                                                                   <C>               <C>
Cash flows from operating activities:
   Net income                                                                         $     4,178       $     4,408
   Adjustments to reconcile net income to net cash provided by
      operating activities:
          Depreciation, accretion, and amortization                                           634             1,215
          Provision for credit losses                                                       1,318               660
          (Gain) loss on sale of securities available for sale                                  5              (111)
          (Gain) loss on disposal of premises and equipment                                     3              (108)
          Net change in loans held for sale                                                 3,229            (1,982)
          Changes in assets and liabilities:
               Increase in other assets                                                    (4,391)           (1,599)
               Increase in other liabilities                                                1,934               986
                                                                                      -----------       -----------
               Net cash provided by operating activities                                    6,910             3,467
                                                                                      -----------       -----------

Cash flows from investing activities:
      Proceeds from sales, maturities, or calls of securities available for sale           10,956            18,362
      Purchase of securities available for sale                                           (26,366)           (9,564)
      Purchase of premises and equipment                                                   (1,089)           (1,688)
      Proceeds from disposal of premises and equipment                                        111               229
      (Increase) decrease in other real estate owned                                        3,005               (40)
      Net increase in loans                                                               (98,398)          (19,642)
                                                                                      -----------       -----------

               Net cash used in investing activities                                     (111,781)          (12,343)
                                                                                      -----------       -----------

Cash flows from financing activities:
      Net increase (decrease) in deposits                                                  87,080            (3,271)
      Net decrease in other borrowings                                                     20,000             2,000
      Net decrease in federal funds purchased and repurchase agreements                     2,618             4,939
      Repurchase of common stock                                                             (627)           (1,135)
      Proceeds from issuance of common stock                                                  853               831
      Cash dividends paid                                                                  (1,557)           (1,316)
                                                                                      -----------       -----------

               Net cash provided by financing activities                                  108,367             2,048
                                                                                      -----------       -----------

Net decrease in cash and cash equivalents                                                   3,496            (6,828)
Cash and cash equivalents, January 1                                                       24,246            29,319
                                                                                      -----------       -----------

Cash and cash equivalents, June 30                                                    $    27,742       $    22,491
                                                                                      ===========       ===========
</TABLE>

            See notes to unaudited consolidated financial statements.


                                       5
<PAGE>

FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)

1.    Basis of presentation

            The accompanying  unaudited  consolidated  financial statements have
      been prepared in accordance with accounting  principles generally accepted
      in the United States of America and with the instructions to Form 10-Q and
      Rule 10-01 of Regulation S-X. Accordingly, these statements do not include
      all of the  information  and footnotes  required by accounting  principles
      generally  accepted in the United States of America for complete financial
      statements.  In the opinion of management,  all adjustments (consisting of
      normal recurring  accruals)  considered  necessary for a fair presentation
      have been included.  Operating results for the six-month period ended June
      30,  2005  are not  necessarily  indicative  of the  results  that  may be
      expected for the year ending  December 31, 2005.  For further  information
      refer to the  consolidated  financial  statements  and  footnotes  thereto
      included in FNB  Financial  Services  Corporation's  2004 Annual Report on
      Form 10-K.  Certain  reclassifications  have been made to the prior period
      consolidated financial statements to place them on a comparable basis with
      the   current   period   consolidated    financial    statements.    These
      reclassifications  have no effect on net income or shareholders' equity as
      previously reported.

2.    Per share data

            Basic and diluted net income per share  amounts  have been  computed
      based upon net  income as  presented  in the  accompanying  statements  of
      income divided by the weighted average number of common shares outstanding
      or assumed to be outstanding as summarized.

<TABLE>
<CAPTION>
                                                            Three Months Ended            Six Months Ended
                                                                 June 30,                      June 30,
                                                        ------------------------      ------------------------
                                                           2005           2004           2005           2004
                                                        ---------      ---------      ---------      ---------
<S>                                                     <C>            <C>            <C>            <C>
      Weighted average number of shares
              used in basic EPS                         6,991,912      6,868,133      6,936,055      6,862,659
      Effect of dilutive stock options                    237,349        285,639        241,404        314,833
                                                        ---------      ---------      ---------      ---------

      Weighted average number of common
              shares and dilutive potential common
              shares used in dilutive EPS               7,229,261      7,153,771      7,177,459      7,177,491
                                                        =========      =========      =========      =========
</TABLE>

            For the  three  months  ended  June 30,  2005 and 2004,  there  were
      131,875 and 272,375 options,  respectively,  that were antidilutive  since
      the exercise  price  exceeded the average  market price for the period and
      were omitted from the calculation of diluted  earnings per share for their
      respective periods. For the six months ended June 30, 2005 and 2004, there
      were 131,875 and 269,875  options,  respectively,  that were  antidilutive
      since the exercise  price exceeded the average market price for the period
      and were omitted from the  calculation  of diluted  earnings per share for
      their respective periods.

            On April 21, 2005, the Board of Directors  approved a  five-for-four
      (5:4)  stock  split of its common  stock,  to be  effected  as a 25% stock
      dividend.  Shareholders of record at the close of business on May 12, 2005
      received one additional  share of the Company's common stock for each four
      shares owned.  Certificates  for the new shares and any cash to be paid to
      shareholders in lieu of fractional  shares were issued on or about May 31,
      2005.  All relevant per share data has been restated to reflect this stock
      split.

            At  the  Annual  Meeting  of  Shareholders  held  on May  19,  2005,
      proposals to increase the number of authorized shares of common stock from
      40,000,000 to 75,000,000  with no par value were approved.  For accounting
      purposes, the common stock will have a stated value of $1.00 per share.


                                       6
<PAGE>

3.    Stock based compensation

            The  Company  follows  SFAS No.  123,  "Accounting  for  Stock-Based
      Compensation."  Under SFAS No.  123,  the  Company has elected to continue
      using the measurement  prescribed in Accounting  Principles  Board ("APB")
      Opinion  No.  25,  and  accordingly,  SFAS No.  123 had no  effect  on the
      Company's  financial  position or results of  operations.  The Company has
      issued stock under both  incentive and  non-qualified  stock option plans.
      The proforma  impact on net income and net income per share as if the fair
      value of stock-based  compensation  plans had been recorded as a component
      of compensation expense in the consolidated financial statements as of the
      date of grant of awards related to such plans,  pursuant to the provisions
      of SFAS No. 148, "Accounting for Stock-Based  Compensation-Transition  and
      Disclosure,"  which  amends  SFAS No.  123,  "Accounting  for Stock  Based
      Compensation," is disclosed in the accompanying table.

            These plans  provide  that shares  granted  come from the  Company's
      authorized but unissued or reacquired  common stock. The exercise price of
      the  options  granted  pursuant  to these  plans will not be less than 100
      percent of the fair market  value of the shares on the date of grant.  The
      options  granted in 1996 and  thereafter  vest  ratably  over a  four-year
      period.  No option  will be  exercisable  after  ten  years  from the date
      granted.

<TABLE>
<CAPTION>
                                                    For the three months ended      For the six months ended
                                                    --------------------------      ------------------------
                                                             June 30,                        June 30,
                                                             --------                        --------
(Dollars in thousands, except per share data)          2005            2004           2005             2004
---------------------------------------------          ----            ----           ----             ----
<S>                                                 <C>             <C>             <C>             <C>
Net income, as reported                             $   2,135       $   2,513       $   4,178       $   4,408
Less: Stock based compensation as
calculated per fair value method, net of
tax effect                                                (92)            (91)           (183)           (182)
                                                    ---------       ---------       ---------       ---------

Proforma net income                                 $   2,043       $   2,422       $   3,995       $   4,226
                                                    =========       =========       =========       =========

Basic earnings per share:
  As reported                                       $    0.30       $    0.36       $    0.60       $    0.64
  Proforma                                          $    0.29       $    0.36       $    0.58       $    0.59

Diluted earnings per share:
  As reported                                       $    0.29       $    0.35       $    0.58       $    0.62
  Proforma                                          $    0.28       $    0.35       $    0.56       $    0.56
</TABLE>

            In December 2004,  the FASB issued SFAS No.  123(R),  Accounting for
      Stock-Based  Compensation.  This Statement focuses primarily on accounting
      for  transactions  in  which  an  entity  obtains  employee   services  in
      share-based payment  transactions.  SFAS No. 123(R) requires that the fair
      value of such  equity  instruments  be  recognized  as an  expense  in the
      financial  statements as services are  performed.  The  provisions of this
      Statement are effective for the first interim reporting period that begins
      after  December  31,  2005.  Accordingly,  the Company will adopt SFAS No.
      123(R) commencing with the quarter ending March 31, 2006.


                                       7
<PAGE>

4.    Loans

Loan Category:

<TABLE>
<CAPTION>
                                                                                  June 30,        December 31,
       (Dollars in thousands)                                                       2005              2004
                                                                                ------------      ------------
<S>                                                                             <C>               <C>
Real estate - commercial                                                        $    167,827      $    166,491
Real estate - residential                                                            149,989           124,436
Real estate - construction                                                           213,165           162,143
Commercial, financial and agricultural                                                91,098            83,332
Consumer                                                                             148,256           137,332
                                                                                ------------      ------------

       Subtotal loans                                                                770,335           673,734

   Less: Loans held for sale                                                           7,080            10,308
                                                                                ------------      ------------

       Gross loans                                                              $    763,255      $    663,426
                                                                                ============      ============
</TABLE>

Allowance for credit losses:

<TABLE>
<CAPTION>
                                                       June 30, 2005                   December 31, 2004
                                             ------------------------------     ------------------------------
                                                               % of Loans                         % of Loans
                                                               in Each                            in Each
                                                               Category  to                       Category to
(Dollars in thousands)                         Allowance       Total Loans       Allowance        Total  Loans
                                             ------------      ------------     ------------      ------------
<S>                                          <C>                        <C>     <C>                        <C>
Balance at end of period applicable to:

     Real estate - construction                         2                28     $          1                24
     Real estate - mortgage                            68                41               43                42
     Commercial                                     5,635                12            5,166                13
     Consumer                                       2,675                19            2,143                21
                                             ------------      ------------     ------------      ------------

          Total                              $      8,380               100%    $      7,353               100%
                                             ============      ============     ============      ============
</TABLE>

Rollforward - allowance for credit losses:

<TABLE>
<CAPTION>
                                                                                        Six Months Ended
                                                                                            June 30,
                                                                                ------------------------------
(Dollars in thousands)                                                              2005              2004
                                                                                ------------      ------------
<S>                                                                             <C>               <C>
Balance, beginning of period                                                    $      7,353      $      7,124
Charge-offs                                                                              503               634
Recoveries                                                                              (212)              (33)
                                                                                ------------      ------------
Net charge-offs                                                                          291               601
                                                                                ------------      ------------
Provision for credit losses                                                            1,318               660
                                                                                ------------      ------------
Balance, end of period                                                          $      8,380      $      7,183
                                                                                ============      ============

Annualized net charge-offs during the period to
          average loans outstanding during the period                                   0.08%             0.20%
                                                                                ============      ============
Ratio of allowance for credit losses to
          period end loans                                                              1.10%             1.20%
                                                                                ============      ============
</TABLE>


                                       8
<PAGE>

4. Loans (continued)

Nonperforming assets:

<TABLE>
<CAPTION>
                                                            June 30,        December 31,
(Dollars in thousands)                                        2005             2004
                                                          ------------      ------------
<S>                                                       <C>               <C>
Nonaccrual                                                $      3,974      $      3,450
Past due 90 days or more and still accruing interest                28                65
Other real estate                                                2,544             5,559
Renegotiated troubled debt                                          --                --
</TABLE>

5.    Employee benefit plans

            The accompanying table details the components of pension expense
      recognized in the Company's Consolidated Statements of Income and
      Comprehensive Income:

<TABLE>
<CAPTION>
                                              For the three months                 For the six months
                                              --------------------                 ------------------
                                                 ended June 30,                      ended June 30,
                                                 --------------                      --------------
(Dollars in thousands)                       2005              2004               2005               2004
----------------------                       ----              ----               ----               ----
<S>                                     <C>                <C>                <C>                <C>
Service cost                            $        174       $        127       $        348       $        254
Interest cost                                    109                 90                217                180
Expected return on plan assets                  (131)              (121)              (262)              (242)
Amortization of prior service cost                 5                  5                 10                 10
                                        ------------       ------------       ------------       ------------
Net periodic pension cost               $        157       $        101       $        313       $        202
                                        ============       ============       ============       ============
</TABLE>

            For the 2005 Plan Year, no tax-deductible contributions are required
      or allowed.


                                       9
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Information  set forth  below may  contain  various  forward-looking  statements
within the meaning of Section 27A of the  Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, which statements represent the Company's
judgment  concerning the future and are subject to risks and uncertainties  that
could cause the Company's actual operating  results to differ  materially.  Such
forward-looking  statements  can be  identified  by the  use of  forward-looking
terminology,  such  as  "may",  "will",  "expect",   "anticipate",   "estimate",
"believe", or "continue", or the negative thereof or other variations thereof or
comparable   terminology.   The  Company  cautions  that  such   forward-looking
statements  are further  qualified  by  important  factors  that could cause the
Company's  actual  operating  results  to differ  materially  from  those in the
forward-looking statements.

Application of Critical Accounting Policies

      The  Company's   accounting  policies  are  fundamental  to  understanding
management's  discussion  and analysis of results of  operations  and  financial
condition. The Company's significant accounting policies are discussed in detail
in Note 1 of the  consolidated  financial  statements  included in the Company's
2004 Annual Report on Form 10-K. The following is a summary of the allowance for
credit losses, one of the most complex and judgmental accounting policies of the
Company.

      The allowance for credit losses, which is utilized to absorb actual losses
in the loan portfolio,  is maintained at a level  consistent  with  management's
best estimate of probable  credit losses  incurred as of the balance sheet date.
The  Company's  allowance  for  credit  losses  is also  analyzed  quarterly  by
management.  This analysis  includes a methodology that separates the total loan
portfolio into homogeneous loan classifications for purposes of evaluating risk,
as well as analysis  of certain  individually  identified  loans.  The  required
allowance is calculated by applying a risk adjusted  reserve  requirement to the
dollar volume of loans within a homogenous group. Major loan portfolio subgroups
include: risk graded commercial loans, mortgage loans, home equity loans, retail
loans and retail credit lines. Management also analyzes the loan portfolio on an
ongoing  basis to evaluate  current  risk  levels,  and risk grades are adjusted
accordingly.  While  management  believes  that it  uses  the  best  information
available to make evaluations,  future adjustments may be necessary, if economic
or other conditions differ substantially from the assumptions used.

Executive Summary

      FNB Financial  Services  Corporation  (the  "Company" or "FNB") is a North
Carolina financial holding company.  The Company's wholly owned subsidiary,  FNB
Southeast (the "Bank"),  is a North Carolina  chartered  commercial  bank. As of
June 30, 2005, the Bank operated  thirteen banking offices in North Carolina and
four banking  offices in Virginia.  The Bank has two wholly owned  subsidiaries:
FNB Southeast Investment  Services,  Inc., which operated three offices, and FNB
Southeast  Mortgage  Corporation,  which  operated  seven  offices.  The Company
relocated its headquarters from Reidsville,  North Carolina to Greensboro, North
Carolina in April 2004.

      Assets  at June 30,  2005  were  $979.4  million,  an  increase  of $114.1
million,  or 13.2%,  since  December 31, 2004. A $98.8  million  increase in net
loans, combined with a $14.0 million increase in investment securities, were the
principal factors impacting this overall increase during the first six months of
2005. Over the past six months,  noninterest  bearing  deposits  increased $16.5
million and interest bearing  deposits rose $70.6 million,  resulting in a 12.0%
increase in total deposits for the period.

     The Company's  second quarter earnings were $2.14 million in 2005 and $2.51
million in 2004.  Earnings per diluted share were $0.29 for the second  quarters
of 2005, compared to $0.35 for the same period in 2004. For the first six months
of 2005,  earnings were $4.18 million,  or $0.58 per diluted share,  compared to
$4.41 million, or $0.62 per diluted share, for the first half of 2004. Excluding
after-tax  gains of $548,000 from the sale of a banking  operation in the second
quarter  of 2004,  year to date  earnings  for 2005  increased  8.2% and  second
quarter earnings rose 8.7%.


                                       10
<PAGE>

      Subsequent to June 30, 2005, two loan production  offices of FNB Southeast
Mortgage Corporation,  located in Charlotte,  NC and Cornelius,  NC were closed.
Management  determined  that these  locations have been unable to produce market
share  significant  enough to warrant FNB's continued  commitment to that market
and the  decision  was  made to  redirect  the  resources  required  to fund the
operations at these offices into other areas of the Company.

Financial Condition

      Since  December 31,  2004,  the  Company's  assets have  increased  $114.1
million,  rising from $865.3  million at yearend 2004 to $979.4  million at June
30, 2005. The principal factors impacting this overall increase during the first
six months of 2005 were a $98.8 million  increase in net loans,  combined with a
$14.0 million increase in investment securities.  Loans at June 30, 2005 totaled
$763.3  million,  compared  to $663.4  million at yearend  2004,  an increase of
15.0%.  Investment  securities  of $155.6  million  at June 30,  2005 were $14.0
million higher than the $141.6 million balance at December 31, 2004.

      Deposits  totaled  $811.4  million at June 30,  2005,  compared  to $724.3
million at December 31, 2004. At the end of the second quarter 2005, noninterest
bearing  deposits were $95.3 million,  or 11.8%, of total deposits.  At June 30,
2005,  borrowings at the Federal Home Loan Bank of Atlanta  (FHLB) totaled $65.0
million,  an increase of 44.4%,  compared to $45.0 million at December 31, 2004.
The proceeds form this increase were utilized as a funding source for the growth
in the loan portfolio.  Federal funds purchased and retail repurchase agreements
totaled  $24.2  million at June 30,  2005,  an  increase  of $2.6  million  from
December 31, 2004.

      Shareholders'  equity remains strong,  with all of our regulatory  capital
ratios at levels  that enable the Company to be  considered  "well  capitalized"
under bank regulatory  capital  guidelines.  Shareholders'  equity  increased to
$73.4 million at the end of the second  quarter 2005,  compared to $70.4 million
at December 31, 2004.  The Company paid cash dividends of $0.11 per share during
the  quarter  ended June 30,  2005,  a 10.0%  increase  over the $0.10 per share
dividend  rate for the second  quarter of 2004. As discussed in the Notes to the
Consolidated  Financial  Statements,  a  five-for-four  (5:4)  stock  split  was
effected on or about May 31, 2005 with the  issuance of shares and cash  payment
for fractional shares to shareholders of record on May 12, 2005.

      The Company  recorded a fraud loss of $250,000 for the quarter  ended June
30, 2005, which  represents the deductible  amount under the Bank's blanket bond
policy.  The loss reported is a result of some improper  loans made in violation
of certain  policies and  procedures of the Bank.  Management of the Company and
the Bank is in the process of conducting an investigation of this matter as well
as an internal audit of the relevant loan portfolio.  In addition,  the Bank has
engaged an outside  consultant to conduct a  comprehensive,  independent  credit
review of that loan portfolio.

      In July 2004, the Company's Board of Directors  approved the  continuation
of its stock repurchase program by authorizing the repurchase of up to 5% of the
Company's  outstanding  common stock.  This program  succeeds a stock repurchase
program  authorized  in  November  2002 and became  effective  immediately  upon
completion of the 2002 program.  The new authorization  allows the repurchase of
up to 343,905  additional  shares of common  stock.  This program is intended to
help  the  Company  achieve  its  goal  of  building   shareholder  value  while
maintaining  appropriate capital levels. During the quarter ended June 30, 2005,
a total of 6,375 shares were purchased at an average price of $18.09 through the
stock repurchase  program authorized by the Company's Board of Directors in July
2004. In accordance with state law,  repurchased shares are cancelled and are no
longer considered issued.

Asset Quality

      The  Company's  allowance  for  credit  losses is  analyzed  quarterly  by
management.  This  analysis  includes  a  methodology  that  segments  the  loan
portfolio into homogeneous loan classifications and considers the current status
of  the  portfolio,   historical  charge-off   experience,   current  levels  of
delinquent,  impaired and  non-performing  loans,  as well as economic and other
risk factors.  It is also subject to regulatory  examinations and determinations
as to adequacy,  which may take into  account  such  factors as


                                       11
<PAGE>

the methodology  employed and other analytical measures in comparison to a group
of peer banks. Management believes the allowance for credit losses is sufficient
to absorb known risk in the  portfolio.  No assurances  can be given that future
economic  conditions will not adversely affect borrowers and result in increased
losses.

      The credit loss allowance,  as a percentage of period end loans, was 1.10%
at June 30, 2005,  1.11% at December 31, 2004,  and 1.20% at June 30, 2004.  For
the second quarter of 2005, provision charges against earnings totaled $638,000,
compared to  $272,000 in the second  quarter of 2004.  Net  charge-offs  for the
second quarter of 2005 totaled $102,000,  or a 0.06% annualized loss ratio based
on average loans  outstanding.  This is a decrease from the net  charge-offs for
the second quarter of 2004 totaling  $292,000,  or 0.20%  annualized loss ratio.
Annualized net  charge-offs for the first six months of 2005 and 2004 were 0.08%
and 0.20%, respectively, based on average loans outstanding.

      Nonperforming  loans  totaled $4.0  million at June 30, 2005,  compared to
$3.5  million at yearend  2004 and $2.7  million  at June 30,  2004.  Other real
estate  owned  ("OREO")  was $2.6  million  at June 30,  2005,  $5.6  million at
December 31, 2004, and $5.2 million at June 30, 2004. Approximately $321,000 has
been  transferred  from loans into OREO and  approximately  $3.0 million of such
assets  were  disposed  of during  the first six  months of 2005.  A net loss of
$535,000 has been  recorded on  disposition  or writedown of OREO in the current
year.

      Total  nonperforming  assets  (comprised of nonperforming  loans and OREO)
decreased to $6.6 million,  or 0.67% of total assets at June 30, 2005, from $9.1
million,  or 1.05% of total assets at December 31, 2004,  and $8.0  million,  or
1.01% of total assets a year ago.

Results of Operations for the Three Months Ended June 30, 2005 and 2004

Interest Income and Interest Expense
------------------------------------

      Total  interest  income was $15.1 million for the second  quarter of 2005,
compared to $10.4 million for the same period a year ago. Average earning assets
for the  current  quarter  were  $899.5  million,  an increase of 21.6% over the
second quarter average of $739.6 million a year ago.  Interest income from loans
was $13.6 million, up 46.4% from $9.3 million in the second quarter of 2004. The
average rate on loans  increased  to 7.41% in 2005,  a 117 basis point  increase
over 2004. The increase in interest  income was driven  primarily by an increase
in average loans  outstanding  combined with increases in the prime lending rate
during the past year. Average loans of $737.7 million were 23.3% higher than the
$598.3 million last year.  Interest  income on investments  totaled $1.4 million
for the three  months  ended June 30,  2005,  compared  to $1.1  million for the
second  quarter of 2004.  The average  balance of the  investment  portfolio was
$153.4  million for the quarter  ended June 30, 2005, a 14.6%  increase from the
average balance of $133.9 million for the prior year second quarter.

      Second quarter total interest  expense was $6.0 million,  compared to $3.4
million from the second quarter of last year, a 76.0% increase. Average interest
bearing deposits increased 24.7%, to $694.5 million,  from $556.9 for the second
quarter  of  2004.  Interest  expense  on  federal  funds  purchased  and  other
borrowings  was $722,000  and $429,000 for the quarters  ended June 30, 2005 and
2004,  respectively.  The average  balance of federal funds  purchased and other
borrowings  was $87.2  million in 2005 and $79.7  million in 2004.  The  Company
utilized  the growth in  deposits  and the  increased  levels of  borrowings  as
funding sources to support the growth in earning assets.

      During the three months ended June 30, 2005, net interest income increased
$2.0  million,  or 29.0%,  over the same period a year ago. Net interest  income
benefited  from strong growth in average  earning  assets which rose from $739.6
million for the second  quarter of 2004 to $899.5 million for the second quarter
of 2005, a 21.6% increase.  The average yields on total interest  earning assets
for the same periods  increased 103 basis points,  from 5.76% to 6.79%.  Average
interest bearing  liabilities for the second quarter of 2005 increased 22.8%, to
$781.7  million from $636.6  million for the second quarter of 2004. The average
cost of interest  bearing  liabilities  for the same periods  increased 93 basis
points from


                                       12
<PAGE>

2.14% to 3.07%.  The net result was an  improvement  in the interest rate spread
from 3.62% for the three months ended June 30, 2004 to 3.72% for the same period
in 2005.

Average Balance Sheet and Net Interest Income Analysis
Fully Taxable Equivalent Basis
(Dollars in thousands)

<TABLE>
<CAPTION>
For the quarter ended:                                      June 30, 2005                              June 30, 2004
                                                               Interest      Average                      Interest     Average
                                                Average         Income /     Yield /      Average         Income /     Yield /
                                               Balance(3)       Expense       Rate       Balance(3)       Expense       Rate
<S>                                            <C>             <C>            <C>        <C>             <C>            <C>
Interest earning assets:
Loans (2)                                      $ 737,735       $  13,629      7.41%      $ 598,329       $   9,311      6.24%
Taxable investment securities                    114,686             976      3.41%         96,432             711      2.95%
Tax-exempt investment securities (1)              32,134             482      6.01%         33,942             521      6.16%
Other securities                                   6,591              77      4.69%          3,501              46      6.87%
Federal funds sold and overnight deposits          8,376              61      2.87%          7,426              29      0.92%
                                               ---------       ---------                 ---------       ---------
   Total earning assets                          899,522          15,225      6.79%        739,630          10,618      5.76%
                                                               ---------                                 ---------

Non-earning assets:
Cash and due from banks                           32,115                                    23,938
Premises and equipment                            12,898                                    13,788
Other assets                                      18,330                                    20,861
Less: Allowance for credit losses                 (8,079)                                   (7,152)
                                               ---------                                 ---------
   Total assets                                $ 954,786                                 $ 791,065
                                               =========                                 =========

Interest bearing liabilities:
Savings and NOW                                $  52,850       $      31      0.24%      $  52,337       $      17      0.13%
MMI                                              127,786             823      2.58%         63,947             216      1.35%
Time deposits                                    513,857           4,399      3.43%        440,614           2,734      2.49%
Short-term borrowings                             23,335             141      2.42%         22,231              51      0.92%
Long-term debt                                    63,835             581      3.65%         57,500             378      2.64%
                                               ---------       ---------                 ---------       ---------
   Total interest bearing liabilities            781,663           5,975      3.07%        636,629           3,396      2.14%
                                                               ---------                                 ---------

Other liabilities and shareholders'
equity:
Demand deposits                                   88,550                                    80,590
Other liabilities                                 12,419                                     6,577
Shareholders' equity                              72,154                                    67,269
                                               ---------                                 ---------
  Total liabilities and equity                 $ 954,786                                 $ 791,065
                                               =========                                 =========

Net interest income and net yield on
earning assets (3) (4)                                         $   9,250      4.12%                      $   7,222      3.91%
                                                               =========      ====                       =========      ====

Interest rate spread (5)                                                      3.72%                                     3.62%
                                                                              ====                                      ====
</TABLE>

(1)   The fully tax  equivalent  basis is  computed  using a federal tax rate of
      34%. The adjustments  made to convert to a fully taxable  equivalent basis
      were $164,000 for 2005 and $179,000 for 2004.

(2)   The average loan balances include nonaccruing loans.

(3)   The average  balances for all years  include  market  adjustments  to fair
      value for securities and loans available/held for sale.

(4)   Net yield on earning assets is computed by dividing net interest income by
      average earning assets.

(5)   Earning asset yield minus interest bearing liabilities rate.

--------------------------------------------------------------------------------


                                       13
<PAGE>

Provision for Credit Losses
---------------------------

      A  provision  for credit  losses is charged  against  earnings in order to
maintain the allowance  for credit losses at a level that is deemed  appropriate
by management. The amount of the provision is based on continuing assessments of
factors that include  growth,  composition and industry  diversification  of the
portfolio,  historical loan loss experience, current delinquency levels, adverse
situations that may affect a borrower's ability to repay, estimated value of any
underlying  collateral,   prevailing  economic  conditions  and  other  relevant
factors.  The  provision  for credit  losses in the  second  quarter of 2005 was
$638,000,  compared to $272,000 in 2004.  The  allowance  for credit losses as a
percentage  of gross  loans  outstanding  was 1.10% at June 30,  2005,  1.11% at
December 31, 2004, and 1.20% at June 30, 2004.  Annualized net credit losses, as
a percent of average loans,  was 0.06% and 0.20% for the quarters ended June 30,
2005 and 2004, respectively.

Noninterest Income and Expense
------------------------------

      Noninterest  income  in the  second  quarter  of 2005  was  $1.8  million,
compared to $2.6 million in the same period last year.  Deposit  service charges
were $964,000 for the second quarter of 2005, compared to $960,000 in the second
quarter  of 2004.  Sales of  securities  available  for sale  during  the second
quarter of 2005 resulted in a $3,000 net loss; however,  there were no net gains
or losses on the sales of securities during the same period in 2004. Noninterest
income in the second quarter of 2005 included  $618,000 in mortgage banking fees
and $95,000 in  investment  service  fees  compared to revenues of $553,000  and
$180,000,  respectively,  for  the  previous  year.  Additionally,  the  Company
realized a net gain of $825,000 on the disposition of a branch banking operation
in the second quarter of 2004.

      Noninterest  expense for the second  quarter of 2005 was $7.0  million,  a
26.0%  increase  over the $5.6  million  expense in the second  quarter of 2004.
Salaries and employee benefits  increased $444,000 because of increased staffing
associated  with  the  expansion  of the  mortgage  banking  operations  and the
corporate headquarters relocation, combined with higher insurance and retirement
costs. Other items impacted were occupancy expense, which increased $83,000, and
furniture and equipment expense, which rose $88,000,  compared to second quarter
2004. Marketing expense increased $5,000 in the second quarter of 2004, compared
to the same  period a year  ago,  primarily  because  of costs  associated  with
campaigns  designed  to increase  deposits.  Other  noninterest  expense for the
second  quarters  of 2005 and  2004  totaled  $1.9  million  and  $1.1  million,
respectively.

      The Company  recorded a fraud loss of $250,000 for the quarter  ended June
30, 2005, which  represents the deductible  amount under the Bank's blanket bond
policy.  The loss reported is a result of some improper  loans made in violation
of certain  policies and  procedures of the Bank.  Management of the Company and
the Bank is in the process of conducting an investigation of this matter as well
as an internal audit of the relevant loan portfolio.  In addition,  the Bank has
engaged an outside  consultant to conduct a  comprehensive,  independent  credit
review of that loan portfolio.

Provision for Income Taxes
--------------------------

      The  Company's  provision  for income  taxes  totaled $1.1 million for the
second  quarter  of 2005  and $1.3  million  for the same  period  in 2004.  The
Company's  effective tax rates for the  three-month  periods ended June 30, 2005
and 2004  were  33.6%  for  each  period.  Overall,  the  effective  tax rate is
attributable  to the current expense  required to provide an adequate  provision
for income taxes for the quarters ended June 30, 2005 and 2004.

Results of Operations for the Six Months Ended June 30, 2005 and 2004

Interest Income and Interest Expense
------------------------------------

      Total interest  income was $28.4 million for the first six months of 2005,
compared to $20.9 million for the same period in 2004.  Average  earning  assets
for the six months ended June 30, 2005 were $871.0 million, an increase of 17.6%
over the average of $740.9  million a year ago.  Interest  income from


                                       14
<PAGE>

loans was $25.7  million,  up 39.1% from $18.5 million in 2004.  The increase in
interest income was driven  primarily by a continuing  increase in average loans
outstanding.  Average loans of $714.6  million were 20.3% higher than the $594.2
million last year.  The average  rate on loans  increased to 7.26% in 2005, a 98
basis point  increase over 2004.  The increase in average loan rate is driven by
increases  in the prime  lending  rate over the past  year.  Interest  income on
investments  for the  six-month  period  totaled  $2.6  million in 2005 and $2.3
million in 2004.

Average Balance Sheet and Net Interest Income Analysis
Fully Taxable Equivalent Basis
(Dollars in thousands)

<TABLE>
<CAPTION>
For the six months ended:                                June 30, 2005                                  June 30, 2004
                                           -----------------------------------------    ------------------------------------------
                                                           Interest          Average                      Interest        Average
                                            Average         Income /         Yield /      Average         Income /        Yield /
                                           Balance(3)       Expense           Rate      Balance(3)        Expense           Rate
                                           -----------------------------------------    ------------------------------------------
<S>                                        <C>             <C>                <C>        <C>             <C>                <C>
Interest earning assets:
Loans (2)                                  $ 714,586       $  25,732          7.26%      $ 594,206       $  18,498          6.28%
Taxable investment securities                109,169           1,799          3.32%        101,347           1,568          3.11%
Tax-exempt investment securities (1)          32,231             965          6.04%         33,389           1,017          6.17%
Other securities                               6,318             143          4.56%          4,716              96          4.10%
Overnight deposits                             8,686             127          2.95%          7,249              46          1.25%
                                           ---------       ---------                     ---------       ---------
   Total earning assets                      870,990          28,766          6.66%        740,907          21,225          5.78%
                                                           ---------                                     ---------

Non-earning assets:
Cash and due from banks                       31,901                                        25,653
Premises and equipment                        12,991                                        13,242
Other assets                                  19,026                                        17,020
Less: Allowance for credit losses             (7,819)                                       (7,156)
                                           ---------                                     ---------
   Total assets                            $ 927,089                                     $ 789,666
                                           =========                                     =========

Interest bearing liabilities:
Savings and NOW                            $  52,795       $      51          0.19%      $  52,211       $      33          0.13%
MMI                                          124,499           1,488          2.41%         64,928             441          1.37%
Time deposits                                499,966           7,997          3.23%        444,715           5,661          2.57%
Short-term borrowings                         21,784             241          2.23%         22,161             104          0.95%
Long-term debt                                59,939           1,062          3.57%         55,895             746          2.69%
                                           ---------       ---------                     ---------       ---------
   Total interest bearing liabilities        758,983          10,839          2.88%        639,910           6,985          2.20%
                                                           ---------                                     ---------
Other liabilities and shareholders'
equity:
Demand deposits                               85,498                                        76,482
Other liabilities                             11,118                                         6,255
Shareholders' equity                          71,490                                        67,019
                                           ---------                                     ---------
  Total liabilities and equity             $ 927,089                                     $ 789,666
                                           =========                                     =========

Net interest income and net yield on
earning assets (3) (4)                                     $  17,927          4.15%                      $  14,240          3.92%
                                                           =========          ====                       =========          ====

Interest rate spread (5)                                                      3.78%                                         3.58%
                                                                              ====                                          ====
</TABLE>

(1)   The fully tax  equivalent  basis is  computed  using a federal tax rate of
      34%. The adjustments  made to convert to a fully taxable  equivalent basis
      were $328,000 for 2005 and $346,000 for 2004.

(2)   The average loan balances include nonaccruing loans.

(3)   The average  balances for all years  include  market  adjustments  to fair
      value for securities and loans available/held for sale.

(4)   Net yield on earning assets is computed by dividing net interest income by
      average earning assets.

(5)   Earning asset yield minus interest bearing liabilities rate.


                                       15
<PAGE>

      Total interest expense for the first six months of 2005 was $10.8 million,
a 55.2% increase from the $7.0 million expense for the first six months of 2004.
Interest  expense on deposits for the six-month  period increased 55.4%, to $9.5
million for 2005 from $6.1 million in 2004.  The average rate for the six months
on interest  bearing  deposits  increased to 2.84% in 2005,  from 2.20% one year
earlier while average  interest  bearing  deposits  increased  20.5%,  to $677.3
million,  from  $561.9  for the first six  months of 2004.  Interest  expense on
federal funds purchased and other borrowings was $1.3 million for the six months
ended June 30, 2005 and $850,000 in 2004.  The average  balance of federal funds
purchased  and other  borrowings  increased  from $78.1 million in 2004 to $81.7
million in 2005. The average rate paid on purchased  funds  increased from 2.20%
for the first  six  months  of 2004 to 3.22%  for the same  period in 2005.  The
Company  utilized the growth in deposits and the increased  levels of borrowings
as funding sources to support balance sheet growth.

      During the six months ended June 30, 2005, net interest  income  increased
$3.7  million,  or 26.7%,  over the same period a year ago. Net interest  income
benefited  from strong growth in average  earning  assets which rose from $740.9
million  for the six  months of 2004 to $871.0  million  for the same  period in
2005, a 17.6% increase.  The average yields on total interest earning assets for
the same periods increased 88 basis points from 5.78% to 6.66%. Average interest
bearing  liabilities for the first six months of 2005 increased 18.6%, to $759.0
million from $639.9  million for the first six months of 2004.  The average cost
of interest bearing  liabilities for the same periods  increased 68 basis points
from 2.20% to 2.88%.  The net result was an  improvement  in the  interest  rate
spread  from 3.58% for the six months  ended June 30, 2004 to 3.78% for the same
period in 2005.

Provision for Credit Losses
---------------------------

      A  provision  for credit  losses is charged  against  earnings in order to
maintain the allowance  for credit losses at a level that is deemed  appropriate
by management. The amount of the provision is based on continuing assessments of
factors that include  growth,  composition and industry  diversification  of the
portfolio,  historical loan loss experience, current delinquency levels, adverse
situations that may affect a borrower's ability to repay, estimated value of any
underlying  collateral,   prevailing  economic  conditions  and  other  relevant
factors.  The  provision  for credit losses for the first six months of 2005 was
$1.3 million, compared to $660,000 in 2004. The allowance for credit losses as a
percentage  of gross  loans  outstanding  was 1.10% at June 30,  2005,  1.11% at
December  31,  2004,  and 1.20% at June 30, 2004.  Year to date  annualized  net
credit losses declined to 0.08% of average loans in 2005,  compared to 0.20% for
the same period in 2004.

Noninterest Income and Expense
------------------------------

      Noninterest  income for the first six months of this year decreased  11.1%
to $4.0  million  from $4.4  million in the same period  last year.  For the six
months,  $5,000 of net losses from sales of investment securities was recognized
in 2005, compared to $111,000 of net gains in the same period last year. Deposit
service  charges of $1.8 million for the first six months of 2005 decreased 9.3%
from the $2.0 million in 2004.  Mortgage  banking fees increased to $1.6 million
for the first six months of 2005,  compared  to  $887,000  for the same period a
year  ago.  The  increase  in  mortgage  banking  fees for  2005  was  primarily
attributable  to  the  increased   volume   generated  by  the  Bank's  mortgage
subsidiary.  Investment service fees decreased 25.6% for the first six months of
2005,  from  $313,000 in the first six months of 2004 to  $233,000  for the same
period in 2005.

      Noninterest  expense for the first six months of 2005 was $13.9 million, a
26.3%  increase  over the $11.0 million  expense in 2004.  Salaries and employee
benefits   increased  $1.1  million  primarily  because  of  increased  staffing
associated   with  the  expansion  of  banking   operations  and  the  corporate
headquarters  relocation,  combined with higher insurance and retirement  costs.
Other items impacted were  occupancy  expense,  which  increased  $160,000,  and
furniture and equipment expense, which rose $177,000,  compared to the first six
months of 2004.  Marketing expense increased $115,000 in the first six months of
2005,  compared to the same  period a year ago.  Other  noninterest  expense was
impacted  by the  expansion  of  banking  operations  that  included  a $336,000
increase in mortgage banking fees during the first six months


                                       16
<PAGE>

of 2005,  compared to the same period in 2004.  Other  expense for the first six
months of 2005 and 2004 totaled $3.4 million and $2.3 million, respectively.

      The Company  recorded a fraud loss of $250,000 for the quarter  ended June
30, 2005, which  represents the deductible  amount under the Bank's blanket bond
policy.  The loss reported is a result of some improper  loans made in violation
of certain  policies and  procedures of the Bank.  Management of the Company and
the Bank is in the process of conducting an investigation of this matter as well
as an internal audit of the relevant loan portfolio.  In addition,  the Bank has
engaged an outside  consultant to conduct a  comprehensive,  independent  credit
review of that loan portfolio.

Provision for Income Taxes
--------------------------

      The  Company's  provision  for income  taxes  totaled $2.1 million for the
first six months of 2005,  compared to $2.2 million for the same period of 2004.
The Company's  effective tax rates for the six-month periods ended June 30, 2005
and 2004 were 33.7% and 33.6%, respectively.  Overall, the effective tax rate is
attributable  to the current expense  required to provide an adequate  provision
for income taxes for the six months ended June 30, 2005 and 2004.

Capital Resources

      Banks and financial holding  companies,  as regulated  institutions,  must
meet  required  levels of capital.  The Office of the  Commissioner  of Banks in
North Carolina and the Board of Governors of the Federal Reserve,  which are the
primary  regulatory  agencies for FNB Southeast  and the Company,  respectively,
have  adopted  minimum   capital   regulations  or  guidelines  that  categorize
components  and the  level of risk  associated  with  various  types of  assets.
Financial  institutions are required to maintain a level of capital commensurate
with  the  risk  profile  assigned  to  their  assets  in  accordance  with  the
guidelines.

      As shown in the accompanying  table, the Company and the Bank have capital
levels exceeding the minimum levels for "well  capitalized"  banks and financial
holding companies as of June 30, 2005.

                                  Regulatory Guidelines
                                -------------------------
                                   Well        Adequately
     Ratio                      Capitalized   Capitalized    Company       Bank
     -----                      -----------   -----------    -------       ----

     Total Capital                  10.0%        8.0%          10.2%       10.1%
     Tier 1 Capital                  6.0         4.0            9.2         9.1
     Leverage Capital                5.0         4.0            7.7         7.6

Liquidity Management

      Liquidity  management  refers to the ability to meet  day-to-day cash flow
requirements  based  primarily  on activity in loan and deposit  accounts of the
Company's  customers.  Deposit  withdrawals,  loan funding and general corporate
activity create a need for liquidity for the Company.  Liquidity is derived from
sources  such as  deposit  growth;  maturity,  calls,  or  sales  of  investment
securities;  principal and interest payments on loans;  access to borrowed funds
or lines of credit; and profits.

      During the first six months of 2005 the Company  had net cash  provided by
operating activities of $6.9 million.  This was an increase of $3.4 million from
the $3.5 million of net cash  provided by operating  activities in the first six
months of 2004.  The  increase is  primarily  attributable  to the $5.2  million
change in loans held for sale and a $2.8  million  rise in other  assets for the
first six months of 2005, compared to the same period in 2004.

      Net cash used in  investing  activities  in the  first six  months of 2005
totaled $111.8 million.  Purchases of investment  securities in the current year
totaled  $26.4  million  and  proceeds  from  sales,  calls,  or  maturities  of
securities  were $11.0  million.  This  compares to the first six months of 2004
when


                                       17
<PAGE>

proceeds from sales,  calls,  or maturities of securities  totaled $18.4 million
and purchases of investment securities totaled $9.6 million, leading to net cash
used in investment activities of $12.3 million. An increase in loans outstanding
used $98.4  million in cash during the first six months of 2005,  compared to an
increase  in  outstanding   loans  in  2004  totaling  $19.6  million.   Capital
expenditures used $1.1 million in 2005, compared to $1.7 million in 2004.

      During the six months ended June 30, 2005,  financing  activities provided
$108.4 million compared to $2.0 million during the same six months in 2004. This
change in financing  activities  is based  primarily on an $87.1 million rise in
deposits and cash  inflows from other  borrowings  of $20.0  million  during the
first six months of 2005.

      Overall cash and cash  equivalents  totaled $27.7 million at June 30, 2005
compared  to $24.2  million at December  31, 2004 and $22.5  million at June 30,
2004.

      Liquidity  is further  enhanced by an  approximately  $145 million line of
credit  with the  FHLB  collateralized  by FHLB  stock,  investment  securities,
qualifying 1 to 4 family residential  mortgage loans, and qualifying  commercial
real estate loans. The Company provides various reports to the FHLB on a regular
basis  throughout the year to maintain the availability of the credit line. Each
borrowing request to the FHLB is initiated  through an advance  application that
is subject to approval by the FHLB before  funds are  advanced  under the credit
agreement.

      The Company also has unsecured  overnight borrowing lines of $51.0 million
available through six financial institutions. These lines are used to manage the
day-to-day,  short-term liquidity needs of the Company.  Each Federal funds line
has a  requirement  to repay  the line in full on a  frequent  basis,  typically
within five to ten business days. The Company has also established a $15 million
wholesale  repurchase  agreement with a regional brokerage firm. The Company can
access this  additional  source of liquidity by pledging  investment  securities
with the brokerage firm.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

      Market risk is the  possible  chance of loss from  unfavorable  changes in
market prices and rates.  These changes may result in a reduction of current and
future period net interest income, which is the favorable spread earned from the
excess of interest income on  interest-earning  assets, over interest expense on
interest-bearing liabilities.

      The Company considers interest rate risk to be its most significant market
risk, which could  potentially  have the greatest impact on operating  earnings.
The Company is asset  sensitive,  which means that falling  interest rates could
result in a reduced  amount of net interest  income.  The monitoring of interest
rate risk is part of the Company's overall  asset/liability  management process.
The primary  oversight of  asset/liability  management  rests with the Company's
Asset and Liability Committee.  The Committee meets on a regular basis to review
asset/liability activities and to monitor compliance with established policies.

      The Company has not experienced any substantive  changes in portfolio risk
during the six months ended June 30, 2005.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

      The Company's management, under the supervision and with the participation
of the Chief Executive  Officer and the Chief  Financial  Officer of the Company
(its principal executive officer and principal financial officer, respectively),
has concluded  based on its  evaluation  as of the end of the period  covered by
this Report, that the Company's disclosure controls and procedures are effective
to ensure  that  information  required  to be  disclosed  by the  Company in the
reports filed or submitted by it under the  Securities  Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the


                                       18
<PAGE>

time periods  specified in the applicable  rules and forms, and include controls
and procedures  designed to ensure that information  required to be disclosed by
the Company in such reports is  accumulated  and  communicated  to the Company's
management,  including  the Chief  Executive  Officer  and the  Chief  Financial
Officer of the  Company,  as  appropriate  to allow timely  decisions  regarding
required disclosure.

Changes in internal control over financial reporting

      There have been no significant  changes in internal control over financial
reporting  during  the  period  covered  by this  Report  that  have  materially
affected,  or are reasonably likely to materially affect, the Company's internal
control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

        None.

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

      The accompanying table details,  by month, the information  related to the
share  repurchase  program  approved by the Company's Board of Directors in July
2004  authorizing  the  repurchase  of up to  343,905  shares  of the  Company's
outstanding  common  stock.  The program was publicly  announced in the month of
approval.

<TABLE>
<CAPTION>
                                        Stock Repurchase Program - Approved July 2004
                                        ---------------------------------------------
                                        (a)               (b)                     (c)                     (d)
                                                                                                   Maximum Number
                                  Total Number of     Average Price      Cumulative Number of      of Shares that
Period                           Shares Purchased    Paid Per Share         Shares Purchased    May Yet Be Purchased
---------------------------      ----------------    --------------         ----------------    --------------------
<S>                                     <C>              <C>                    <C>                     <C>
April 1, 2005 to
April 30, 2005 ............                --                 --                     --                 219,843

May 1, 2005 to
May 31, 2005 ..............             6,375            $ 18.09                130,438                 213,468

June 1, 2005 to
June 30, 2005 .............                --                 --                     --                 213,468
     Total ................             6,375            $ 18.09
</TABLE>

Item 3. Defaults Upon Senior Securities

        Not Applicable.

Item 4. Submission of Matters to a Vote of Security Holders

        On May 19, 2005, at the Annual  Meeting of the  Company's  shareholders,
        the following proposals were voted on by shareholders:

        Proposal
        --------

        To elect six members of the Board of Directors as follows:

        Three Directors to serve for a term of three years ending in 2008. Votes
        for each nominee were as follows:

        Nominee                    For                 Withheld
        -------                    ---                 --------
        Gary G. Blosser            4,727,516           131,220
        Joseph H. Kinnarney        4,716,710           142,027
        Kenan C. Wright            4,726,407           132,330


                                       19
<PAGE>

        Three  Directors to serve for a term of two years ending in 2007.  Votes
        for each nominee were as follows:

         Nominee                   For                  Withheld
         -------                   ---                  --------
        Pressley A. Ridgill        4,727,214            131,523
        Robbie Perkins             4,683,080            175,657
        E. Reid Teague             4,717,918            140,818

        The following  directors remain in office:  Ernest J. Sewell,  C. Arnold
        Britt, and Barry Z. Dodson.

        Proposal
        --------

        To  ratify  the  appointment  of  Dixon  Hughes  PLLC  as the  Company's
        independent registered public accounting firm for fiscal year 2005:

        For                        Against              Abstain
        ---                        -------              -------
        4,720,672                  68,845               69,220

        Proposal
        --------

        To approve an amendment to Article 4 of the Articles of Incorporation of
        the  Corporation to increase the  authorized  number of shares of common
        stock from 40,000,000 to 75,000,000:

        For                        Against              Abstain
        ---                        -------              -------
        4,032,800                  751,669              74,268

        Proposal
        --------

        To approve an amendment  to Article 10 of the Articles of  Incorporation
        of  the  Corporation  related  to  possible   acquisitions  or  business
        combinations  in the form of  Article  VI of the  proposed  Amended  and
        Restated Articles of Incorporation:

        For                        Against              Abstain
        ---                        -------              -------
        2,947,001                  816,556              105,878

        Proposal
        --------

        To approve additional amendments to the Articles of Incorporation in the
        form of the proposed Amended and Restated Articles of Incorporation:

        For                        Against              Abstain
        ---                        -------              -------
        4,349,696                  382,226              126,813

Item 5. Other Information

        None.

Item 6. Exhibits

        Exhibit No.   Description
        -----------   -----------

        3.01(1)       Amended and Restated Articles of Incorporation.

        3.02(1)       Bylaws of Company, as amended.

        4.01(2)       Specimen Common Stock Certificate.

        10.01(4)      Stock Compensation Plan of the Registrant approved April
                      11, 1989, by the shareholders of the Registrant, with
                      forms of stock option and stock bonus agreements attached.

        10.02(5)      Omnibus Equity Compensation Plan of the Registrant.


                                       20
<PAGE>

        10.03(6)      Severance Policy for Senior Officers of the Registrant
                      (employed for five years or more).

        10.04(7)      Revised Severance Plan for Senior Officers of the
                      Registrant(employed for five years or more).

        10.05(8)      Severance Policy for Senior Officers of the Registrant
                      (employed for less than five years).

        10.06(9)      Benefit Equivalency Plan of the Registrant effective
                      January 1, 1994.

        10.07(13)     Annual Management Incentive Plan of the Registrant.

        10.08(9)      Long Term Incentive Plan of the Registrant.

        10.09(11)     Long Term Incentive Plan of the Registrant for certain
                      senior management employees.

        10.10(9)      Employment Agreement dated May 18, 1995, between the
                      Registrant, as employer, and Ernest J. Sewell, President
                      and Chief Executive Officer of the Registrant.

        10.11(10)     Split-Dollar Agreement dated January 27, 1995, between the
                      Registrant and Ernest J. Sewell.

        10.12(10)     Split-Dollar Agreement dated January 27, 1995, between the
                      Registrant and C. Melvin Gantt.

        10.13(10)     Split-Dollar Agreement dated December 8, 1995, between the
                      Registrant and Richard L. Powell.

        10.14(3)      Amendment to Benefit Equivalency Plan of the Registrant
                      effective January 1, 1998.

        10.15(10)     Split-Dollar Agreement dated March 20, 1998, between the
                      Registrant and Ernest J. Sewell.

        10.16(13)     Second Amendment, dated May 19, 2004, to the Employment
                      Agreement dated May 18, 1995, between the Registrant, as
                      employer, and Ernest J. Sewell, President and Chief
                      Executive Officer of the Registrant.

        10.17(12)     Employment and Change of Control Agreement dated July 1,
                      2004, between the Registrant, as employer, and Pressley A.
                      Ridgill, Executive Vice President and Chief Operating
                      Officer of the Registrant.

        10.18(13)     2005 Annual Incentive Bonus Plan

        10.19(13)     Third Amendment to Employment Agreement and First
                      Amendments to Split-Dollar Agreements and Collateral
                      Agreements with Ernest J. Sewell effective January 1, 2004

        31.01         Certification of Ernest J. Sewell.

        31.02         Certification of Michael W. Shelton.

        32.01         Certification of Periodic Financial Report Pursuant to 18
                      U.S.C Section 1350.

Exhibit references:

      (1)   Incorporated herein by reference to the Registrant's Current Report
            on Form 8-K, dated May 25, 2005, filed with the Securities and
            Exchange Commission.

      (2)   Incorporated herein by reference to the Registrant's Quarterly
            Report on Form 10-Q for the fiscal quarter ended March 31, 1998,
            filed with the Securities and Exchange Commission.

      (3)   Incorporated herein by reference to the Registrant's Annual Report
            on Form 10-K for the fiscal year ended December 31, 1998, filed with
            the Securities and Exchange Commission.

      (4)   Incorporated herein by reference to the Registrant's Statement on
            Form S-8 (No. 33-33186), filed with the Securities and Exchange
            Commission.


                                       21
<PAGE>

      (5)   Incorporated herein by reference to the Registrant's Annual Report
            on Form 10-KSB for the fiscal year ended December 31, 1996, filed
            with the Securities and Exchange Commission.

      (6)   Incorporated herein by reference to the Registrant's Annual Report
            on Form 10-K for the fiscal year ended December 31, 1989, filed with
            the Securities and Exchange Commission.

      (7)   Incorporated herein by reference to the Registrant's Annual Report
            on Form 10-KSB for the fiscal year ended December 31, 1994, filed
            with the Securities and Exchange Commission.

      (8)   Incorporated herein by reference to the Registrant's Quarterly
            Report, on Form 10-QSB for the fiscal quarter ended June 30, 1995,
            filed with the Securities and Exchange Commission.

      (9)   Incorporated herein by reference to the Registrant's Statement on
            Form S-2 (File No. 333-47203) filed with the Securities and Exchange
            Commission on March 3, 1998.

      (10)  Incorporated herein by reference to the Registrant's Annual Report
            on Form 10-KSB for the fiscal year ended December 31, 1997, filed
            with the Securities and Exchange Commission.

      (11)  Incorporated herein by reference to the Registrant's Annual Report
            on Form 10-K for the fiscal year ended December 31, 2002, filed with
            the Securities and Exchange Commission.

      (12)  Incorporated herein by reference to the Registrant's Quarterly
            Report on Form 10-Q for the quarter ended September 30, 2004, filed
            with the Securities and Exchange Commission.

      (13)  Incorporated herein by reference to the Registrant's Annual Report
            on Form 10-K for the fiscal year ended December 31, 2004, filed with
            the Securities and Exchange Commission.


                                       22
<PAGE>

                                   SIGNATURES

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

                                   FNB FINANCIAL SERVICES CORPORATION
                                   (Registrant)


August 9, 2005                          /s/ MICHAEL W. SHELTON
                                        -----------------------------
                                               Michael W. Shelton
                                   (Senior Vice President, Chief Financial
                                     Officer, Secretary, and Treasurer)


                                       23