FNB Corp

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 September 30, 2002

Commission File Number 0-13823

FNB CORP.

(Exact name of Registrant as specified in its charter)

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

101 Sunset Avenue, Asheboro, North Carolina 27203

(Address of principal executive offices)

(336) 626-8300

(Registrant’s telephone number, including area code)

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 ¨

The registrant had 5,412,431 shares of $2.50 par value common stock outstanding at November 8, 2002.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FNB Corp. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

	September 30, (unaudited)						December 31,
	2002			2001			2001
	(in thousands, except share data)
ASSETS
Cash and due from banks	$	20,387		$	14,092		$	13,490
Interest-bearing bank accounts		14,165			—			—
Federal funds sold		118			5,852			127
Investment securities—Available for sale (amortized cost of $164,228, $141,679 and $161,685)		170,905			145,093			163,150
Loans:
Loans held for sale		2,189			2,905			12,836
Loans held for investment		493,909			392,730			378,796
Less allowance for loan losses		(5,824	)		(4,422	)		(4,417	)

Net loans		490,274			391,213			387,215

Premises and equipment, net		13,454			9,974			10,268
Goodwill		12,601			—			—
Other assets		20,686			18,675			19,492

Total Assets	$	742,590		$	584,899		$	593,742

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits	$	58,523		$	45,543		$	49,089
Interest-bearing deposits:
Demand, savings and money market deposits		182,618			137,205			140,496
Time deposits of $100,000 or more		115,941			106,382			109,187
Other time deposits		223,168			190,486			181,458

Total deposits		580,250			479,616			480,230
Retail repurchase agreements		15,813			13,879			14,812
Federal Home Loan Bank advances		53,409			25,000			30,000
Federal funds purchased		600			—			6,000
Other borrowed funds		11,000			—			—
Other liabilities		8,089			7,815			6,793

Total Liabilities		669,161			526,310			537,835

Shareholders' equity:
Preferred stock—$10.00 par value; authorized 200,000 shares, none issued		—			—			—
Common stock—$2.50 par value; authorized 10,000,000 shares, issued shares—5,412,226, 4,912,212 and 4,763,261		13,531			12,281			11,908
Surplus		8,760			854			—
Retained earnings		46,733			43,200			43,032
Accumulated other comprehensive income		4,405			2,254			967

Total Shareholders' Equity		73,429			58,589			55,907

Total Liabilities and Shareholders' Equity	$	742,590		$	584,899		$	593,742

See accompanying notes to consolidated financial statements.

FNB Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended September 30, (unaudited)					Nine Months Ended September 30, (unaudited)
	2002			2001		2002		2001
	(in thousands, except per share data)
Interest Income
Interest and fees on loans	$	7,885		$	7,807	$	21,331	$	24,411
Interest and dividends on investment securities:
Taxable income		2,005			2,202		6,513		6,171
Non-taxable income		305			235		888		716
Other interest income		74			25		120		167

Total interest income		10,269			10,269		28,852		31,465

Interest Expense
Deposits		3,004			4,580		8,932		15,032
Retail repurchase agreements		66			103		190		346
Federal Home Loan Bank advances		469			325		1,195		926
Federal funds purchased		2			7		10		45
Other borrowed funds		52			—		52		—

Total interest expense		3,593			5,015		10,379		16,349

Net Interest Income		6,676			5,254		18,473		15,116
Provision for loan losses		285			205		1,325		490

Net Interest Income After Provision for Loan Losses		6,391			5,049		17,148		14,626

Noninterest Income
Service charges on deposit accounts		1,163			644		2,524		1,873
Annuity and brokerage commissions		131			61		271		175
Cardholder and merchant services income		183			146		537		441
Other service charges, commissions and fees		247			172		633		537
Bank owned life insurance		155			161		459		477
Net gain on sales of loans		351			235		1,021		664
Other income (charge)		(44	)		34		114		200

Total noninterest income		2,186			1,453		5,559		4,367

Noninterest Expense
Personnel expense		3,053			2,294		8,288		6,783
Net occupancy expense		257			217		750		621
Furniture and equipment expense		429			365		1,173		1,066
Data processing services		273			188		686		529
Other expense		1,265			1,033		3,355		3,008

Total noninterest expense		5,277			4,097		14,252		12,007

Income Before Income Taxes		3,300			2,405		8,455		6,986
Income taxes		1,007			685		2,483		1,986

Net Income	$	2,293		$	1,720	$	5,972	$	5,000

Net income per common share:
Basic	$	.45		$	.34	$	1.22	$	.99
Diluted		.43			.34		1.18		.97

Weighted average number of shares outstanding:
Basic		5,151,852			5,009,017		4,890,662		5,044,566
Diluted		5,372,825			5,117,112		5,049,612		5,130,706

Cash dividends declared per common share	$	.14		$	.12	$	.42	$	.36

See accompanying notes to consolidated financial statements.

FNB Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Nine Months Ended September 30, 2002 and September 30, 2001 (unaudited)

	Common Stock						Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Shares			Amount			Surplus			Retained Earnings						Total
	(in thousands, except share data)
Balance, December 31, 2000	$	5,059,641		$	12,649		$	2,836		$	40,000		$	(363	)	$	55,122
Comprehensive income:
Net income		—			—			—			5,000			—			5,000
Other comprehensive income:
Unrealized securities gains, net of income taxes of $1,346		—			—			—			—			2,617			2,617

Total comprehensive income		—			—			—			—			—			7,617

Cash dividends declared		—			—			—			(1,800	)		—			(1,800	)
Common stock issued through:
Stock option plan		24,461			61			174			—			—			235
Common stock repurchased		(171,890	)		(429	)		(2,156	)		—			—			(2,585	)

Balance, September 30, 2001		4,912,212		$	12,281		$	854		$	43,200		$	2,254		$	58,589


Balance, December 31, 2001		4,763,261		$	11,908		$	—		$	43,032		$	967		$	55,907
Comprehensive income:
Net income		—			—			—			5,972			—			5,972
Other comprehensive income:
Unrealized securities gains, net of income taxes of $1,774		—			—			—			—			3,438			3,438

Total comprehensive income		—			—			—			—			—			9,410

Cash dividends declared		—			—			—			(2,090	)		—			(2,090	)
Common stock issued through:
Stock option plan		104,249			261			303			—			—			564
Merger acquisition of subsidiary bank		603,859			1,510			7,584			—			—			9,094
Other merger consideration for fair value of stock options assumed		—			—			1,531			—			—			1.531
Common stock repurchased		(59,143	)		(148	)		(658	)		(181	)		—			(987	)


Balance, September 30, 2002		5,412,226		$	13,531		$	8,760		$	46,733		$	4,405		$	73,429

See accompanying notes to consolidated financial statements.

FNB Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30, (unaudited)
	2002			2001
	(in thousands)
Operating Activities:
Net income	$	5,972		$	5,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		955			856
Provision for loan losses		1,325			490
Deferred income taxes (benefit)		(209	)		31
Deferred loan fees and costs, net		45			65
Premium amortization and discount accretion of investment securities, net		24			(6	)
Amortization of intangibles		13			7
Net decrease in loans held for sale		10,647			6,965
Increase in other assets		(318	)		(1,221	)
Increase (decrease) in other liabilities		(1,955	)		142

Net Cash Provided by Operating Activities		16,499			12,329

Investing Activities:
Available-for-sale securities:
Proceeds from maturities and calls		57,485			96,723
Purchases		(55,143	)		(105,452	)
Net increase in loans held for investment		(21,036	)		(7,949	)
Purchases of premises and equipment		(1,043	)		(1,234	)
Net cash received in merger acquisition of subsidiary bank		6,885			—
Other, net		4			552

Net Cash Used in Investing Activities		(12,848	)		(17,360	)

Financing Activities:
Net increase (decrease) in deposits		(1,100	)		7,168
Increase in retail repurchase agreements		467			2,678
Increase in Federal Home Loan Bank advances		15,000			10,000
Decrease in federal funds purchased		(5,400	)		(4,750	)
Increase in other borrowed funds		11,000			—
Common stock issued		564			235
Common stock repurchased		(987	)		(2,585	)
Cash dividends paid		(2,142	)		(1,973	)

Net Cash Provided by Financing Activities		17,402			10,773

Net Increase in Cash and Cash Equivalents		21,053			5,742
Cash and cash equivalents at beginning of period		13,617			14,202

Cash and Cash Equivalents at End of Period	$	34,670		$	19,944

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	11,580		$	16,609
Income taxes		2,385			2,195
Noncash transactions:
Transfer of held-to-maturity securities to available-for-sale securities		—			59,361
Foreclosed loans transferred to other real estate		327			626
Unrealized securities gains, net of income taxes		3,438			2,617
Merger acquisition of subsidiary bank:
Fair value of assets acquired		134,208			—
Fair value of common stock issued and stock options assumed		10,625			—
Cash paid		11,205			—

Liabilities assumed		112,378			—

See accompanying notes to consolidated financial statements.

FNB Corp. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

FNB Corp. is a multi-bank holding company whose wholly-owned subsidiaries are the First National Bank and Trust Company (“First National Bank”) and Rowan Savings Bank SSB, Inc. (“Rowan Bank”). First National Bank has one wholly-owned subsidiary, First National Investor Services, Inc. Through its subsidiaries, FNB Corp. offers a complete line of consumer, mortgage and business banking services, including loans, deposits, cash management, investment management and trust services, to individual and business customers primarily in the region of North Carolina that includes Chatham, Montgomery, Moore, Randolph, Richmond, Rowan and Scotland counties.

The accompanying consolidated financial statements, prepared without audit, include the accounts of FNB Corp. and its subsidiaries (collectively the “Corporation”). All significant intercompany balances and transactions have been eliminated. The chief operating decision maker reviews the results of operations of the Corporation and its subsidiaries as a single enterprise.

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

Cash and Cash equivalents

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

Merger Information

On August 1, 2002, the Corporation completed a merger for the acquisition of Rowan Bancorp, Inc. (“Rowan Bancorp”), holding company for Rowan Savings Bank SSB, Inc. (“Rowan Bank”), headquartered in China Grove, North Carolina. Per the terms of the merger agreement, Rowan Bank will be operated as a separate subsidiary of FNB Corp. for a period of not less than 24 months; provided, however, that the Board of Directors of Rowan Bank may elect to cause Rowan Bank to merge with First National Bank or another subsidiary of FNB Corp. prior to the termination of the 24-month period. At the date of merger, Rowan Bank operated three offices and, based on estimated fair values, had $134,208,000 in total assets, $95,738,000 in loans and $101,205,000 in deposits.

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

The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Rowan Bank were recorded based on a preliminary estimate of fair values as of August 1, 2002, subject to possible adjustment during the one-year period from that date. The consolidated financial statements include the results of operations of Rowan Bank since August 1, 2002.

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

	August 1, 2002
Assets
Cash and due from banks	$	5,270
Interest-bearing bank balances		12,820
Investment securities		4,926
Loans:
Loans held for sale		—
Loans held for investment		95,738
Less allowance for loan losses		(1,039)
Net loans		94,699
Premises and equipment, net		3,124
Intangible assets		12,857
Other assets acquired		512
Total assets acquired		134,208

Liabilities
Deposits		101,205
Retail repurchase agreements		534
Federal Home Loan Bank advances		8,423
Other liabilities		2,216
Total liabilities assumed		112,378

Net Assets Acquired and Purchase Price	$	21,830

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

	August 1, 2002
Purchase price	$	21,830
Tangible shareholders’ equity of Rowan Bank		10,145

Excess of purchase price over carrying value of net tangible assets acquired		11,685
Fair value adjustments		(570	)
Direct acquisition costs		1,611
Deferred and recoverable income taxes		131

Total intangible assets		12,857
Core deposit intangible		256

Goodwill	$	12,601

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

The following unaudited pro forma financial information presents the combined results of operations of FNB Corp. and Rowan Bancorp as if the merger had occurred as of the beginning of the period for each period presented, after giving effect to certain adjustments, including amortization of the core deposit intangible and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had FNB Corp. and Rowan Bancorp constituted a single entity during such periods.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2002		2001		2002		2001
	(in thousands, except per share data)
Net interest income	$	7,080	$	6,234	$	21,135	$	17,932
Noninterest income		2,263		1,627		6,095		4,900
Net income		2,386		1,938		6,448		5,620
Net income per common share:
Basic		.45		.35		1.20		.99
Diluted		.43		.33		1.15		.96

Direct acquisition costs of $1,611,000 associated with the merger are included in goodwill and are summarized as follows:

	September 30, 2002
	Total Costs		Amounts Paid		Remaining Accrual
	(in thousands)
Investment banking and professional fees	$	1,067	$	963	$	104
Contract termination costs		460		368		92
Other		84		55		29

Total	$	1,611	$	1,386	$	225

The contract termination costs include a payment required to be made to an executive pursuant to an employment contract and estimated payments to be incurred in connection with the termination of certain data processing contracts.

Adoption of SFAS No. 133

On January 1, 2001, the Corporation adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as further amended by Statement of Financial Accounting Standards No. 138, “Accounting for Certain Derivative Financial Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 138” (collectively referred to as “SFAS No. 133”). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. As permitted by SFAS No. 133, on January 1, 2001, the Corporation transferred all of its securities from the held-to-maturity portfolio to the available-for-sale portfolio as follows:

	Securities Transferred
	Amortized Cost		Estimated Fair Value		Unrealized Gain (Loss)
	(in thousands)
U.S. Government agencies and corporations	$	36,089	$	35,759	$	(330	)
Mortgage-backed securities		483		488		5
State, county and municipal		19,735		20,352		617
Other debt securities		3,054		3,128		74

Total	$	59,361	$	59,727	$	366

As of January 1, 2001, the transfer of the securities had a net of tax effect of $242,000 on other comprehensive income.

On January 1, 2001, the Corporation had no embedded derivative instruments requiring separate accounting treatment. The Corporation does not engage in hedging activities and has identified fixed rate conforming loan commitments as its only freestanding derivative instruments. The fair value of these commitments was not material and therefore the adoption of SFAS No. 133 on January 1, 2001, did not have a material impact on the Corporation’s consolidated financial statements. The fair value of these commitments at September 30, 2002 and 2001 was not material to the Corporation’s consolidated financial statements. The Corporation had no other derivative instruments requiring separate accounting treatment at September 30, 2002 and 2001.

Earnings Per Share (EPS)

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

	Three Months Ended September 30,		Nine Months Ended September 30,
	2002	2001	2002	2001
Basic EPS denominator—Weighted average number of common shares outstanding	5,151,852	5,009,017	4,890,662	5,044,566
Dilutive share effect arising from assumed exercise of stock options	220,973	108,095	158,950	86,140

Diluted EPS denominator	5,372,825	5,117,112	5,049,612	5,130,706

Loans

Loans as presented are reduced by net deferred loan fees of $814,000, $470,000 and $514,000 at September 30, 2002, September 30, 2001 and December 31, 2001, respectively.

Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2002		2001		2002		2001
	(in thousands)
Balance at beginning of period	$	4,672	$	4,353	$	4,417	$	4,352
Charge-offs		277		166		1,135		481
Recoveries		105		30		178		104

Net loan charge-offs		172		136		957		377
Provision for loan losses		285		205		1,325		490
Allowance adjustment for loans assumed in merger		1,039		—		1,039		—
Allowance adjustment for loans sold		—		—		—		(43	)

Balance at end of period	$	4,422	$	5,824	$	5,824	$	4,422

Supplementary Income Statement Information

Significant components of other expense were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2002		2001		2002		2001
	(in thousands)
Stationery, printing and supplies	$	141	$	126	$	372	$	385
Advertising and marketing		119		84		318		254

Adoption of New Accounting Pronouncement

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”), and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria which must be met for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. Also, SFAS No. 142 requires that identifiable intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and be reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. The adoption of SFAS No. 141 and SFAS No. 142 impacted the Corporation’s consolidated financial statements

by requiring enhanced disclosures for mortgage servicing rights and other intangible assets. As of January 1, 2002, the Corporation had no goodwill and had an intangible asset related to mortgage servicing rights of $482,000.

Mortgage Servicing Rights

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

MSRs totaled $890,000 and $482,000 at September 30, 2002 and December 31, 2001, respectively. Amortization expense totaled $100,000 and $28,000 for the nine months ended September 30, 2002 and 2001, respectively, and $42,000 and $12,000 for the third quarter periods of 2002 and 2001.

The estimated amortization expense for MSRs in future periods based on the unamortized balance at December 31, 2001 is as follows: $66,000 in 2002, $44,000 in 2003, $41,000 in 2004, $39,000 in 2005, $35,000 in 2006 and $257,000 in 2007 and later years. The estimated amortization expense is based on current information regarding loan payments. The actual amortization expense in future periods is subject to change based on the volume of prepayments.

Other Intangible Assets

As discussed in Note 3, the Corporation completed a merger for the acquisition of Rowan Bancorp, holding company for Rowan Bank, on August 1, 2002. The Corporation, which reports as one reporting unit, recorded intangible assets in conjunction with the merger as follows (in thousands):

	September 30, 2002
Goodwill	$	12,601
Core deposit intangible		256
Less accumulated amortization		(12	)

Total	$	12,845

The estimated amortization expense for the core deposit intangible in future periods based on the initial amount of $256,000 as determined at August 1, 2002 is as follows: $30,000 in 2002, $68,000 in 2003, $56,000 in 2004, $44,000 in 2005, $32,000 in 2006, $19,000 in 2007 and $7,000 in 2008.

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

The purpose of this discussion and analysis is to assist in the understanding and evaluation of the financial condition, changes in financial condition and results of operations of FNB Corp. (the “Parent Company”) and its wholly-owned subsidiaries, First National Bank and Trust Company (“First National Bank”) and Rowan Savings Bank SSB, Inc. (“Rowan Bank”), collectively referred to as the “Corporation”. This discussion should be read in conjunction with the financial information appearing elsewhere in this report.

Overview

In the 2000 fourth quarter, management adopted a balance sheet restructuring project to reduce the level of lower yielding, 1–4 family residential mortgage loans by selling those loans and redeploying the funds in other types of assets, including specific purchases of bank owned life insurance and a more general redeployment to other loan programs and investment securities. 1–4 family residential mortgage loans totaling $20,938,000 were transferred to loans held for sale, and of that amount, $12,199,000 were sold in 2000 and the remainder were sold in the first quarter of 2001. In December 2000, single premium purchases of life insurance amounting to $10,000,000 were recorded as bank owned life insurance in other assets on the consolidated balance sheet. Income relating to the bank owned life insurance is being recorded as noninterest income, while the loans sold had generated interest income. The effective reduction of interest income will tend to lower the net yield on earning assets and net interest spread in future periods. Management believes that the income resulting from the bank owned life insurance, which is not subject to income tax, will produce a greater contribution to net income than did the income from the loans sold.

The Corporation earned $5,972,000 in the first nine months of 2002, a 19.4% increase over the same period in 2001. Reflecting the effect of a stock buyback programs implemented in May 2001 and August

2002, earnings per share amounts increased by a higher percentage than did net income in comparing these nine-month periods. Basic earnings per share increased from $.99 to $1.22 and diluted earnings per share increased from $.97 to $1.18 for percentage increases of 23.2% and 21.6%, respectively. As noted above, Rowan Bank was acquired as a subsidiary through a merger effective August 1, 2002, impacting both net income and the calculation of earnings per share since that time. For the 2002 third quarter, earnings amounted to $2,293,000, which represents a 33.3% increase from the 2001 third quarter. Basic earnings per share in comparing third quarter periods increased from $.34 to $.45 and diluted earnings per share increased from $.34 to $.43 for percentage increases of 32.4% and 26.5%, respectively. Under the May 2001 buyback program, which expired in May 2002, the Corporation repurchased 320,841 shares of common stock in 2001 and 17,243 shares in the first quarter of 2002. Under the new buyback program for the repurchase of up to 300,000 shares of common stock during the period commencing August 1, 2002 and ending July 31, 2003, the Corporation repurchased 41,900 shares through September 30, 2002.

Largely reflecting the acquisition of Rowan Bank on August 1, 2002 as discussed above, total assets were $742,590,000 at September 30, 2002, up 27.0% from September 30, 2001 and 25.1% from December 31, 2001. Loans amounted to $496,098,000 at September 30, 2002, increasing 25.4% from September 30, 2001 and 26.7% from December 31, 2001. Total deposits were up 21.0% from September 30, 2001 and 20.8% from December 31, 2001, amounting to $580,250,000 at September 30, 2002. Investment securities of $170,905,000 at September 30, 2002 were 17.8% higher compared to September 30, 2001 and 4.8% higher compared to December 31, 2001.

Critical Accounting Policies

The Corporation’s significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2001. Of these significant accounting policies, the Corporation considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires management’s most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Corporation has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporation’s assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Corporation’s allowance for loan losses and related matters, see “Asset Quality”.

Earnings Review

The Corporation’s net income increased $972,000 or 19.4% in the first nine months of 2002 compared to the same period of 2001 and increased $573,000 or 33.3% in comparing third quarter periods, reflecting in part the acquisition of Rowan Bank on August 1, 2002 as discussed above. Earnings were positively impacted in the first nine months and third quarter of 2002 by increases in net interest income of $3,357,000 or 22.2% and $1,422,000 or 27.1%, respectively, and by increases of $1,192,000 and $733,000 in noninterest income. These gains were significantly offset, however, by increases in noninterest expense of $2,245,000 in the first nine months of 2002 and $1,180,000 in the 2002 third quarter and by increases in the provision for loan losses of $835,000 and $80,000. Noninterest income has been favorably impacted by the increase in service charges on deposit accounts resulting from the implementation of an overdraft protection

program in July 2002 and by the increase in the net gain on sales of loans as long-term conforming mortgage rates have remained at historical lows.

On an annualized basis, return on average assets increased from 1.15% in the first nine months of 2001 to 1.27% in the first nine months of 2002. Return on average shareholders’ equity increased from 11.52% to 13.11% in comparing the same periods. In comparing third quarter periods, return on average assets increased from 1.17% to 1.34% and return on average shareholders’ equity increased from 11.70% to 13.46%. Return on tangible equity, excluding goodwill, amounted to 13.75% for the first nine months of 2002 and 15.35% for the 2002 third quarter.

Net Interest Income

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

Net interest income was $18,473,000 in the first nine months of 2002 compared to $15,116,000 in the same period of 2001. This increase of $3,357,000 or 22.2% resulted partially from the acquisition of Rowan Bank on August 1, 2002 as discussed above, but was primarily due to an improvement in the net yield on earning assets, or net interest margin, from 3.93% in the first nine months of 2001 to 4.49% in the same period of 2002 coupled with a 6.9% increase in the level of average earning assets. In comparing third quarter periods, net interest income increased $1,422,000 or 27.1% reflecting an increase in the net interest margin from 4.05% to 4.44% and a 14.9% increase in average earning assets. On a taxable equivalent basis, the increase in net interest income in the first nine months and third quarter of 2002 were $3,549,000 and $1,454,000, respectively, reflecting changes in the relative mix of taxable and non-taxable earning assets in each period.

Table 1 on page 25 and Table 2 on page 26 set forth for the periods indicated information with respect to the Corporation’s average balances of assets and liabilities, as well as the total dollar amounts of interest income (taxable equivalent basis) from earning assets and interest expense on interest-bearing liabilities, resultant rates earned or paid, net interest income, net interest spread and net yield on earning assets. Net interest spread refers to the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. Net yield on earning assets, or net interest margin, refers to net interest income divided by average earning assets and is influenced by the level and relative mix of earning assets and interest-bearing liabilities. Changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are also analyzed in Tables 1 and 2. Volume refers to the average dollar level of earning assets and interest-bearing liabilities.

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

Until the significant interest rate declines in 2001, there had been a much greater degree of stability for several years in the interest rates both earned and paid by the Bank. After rate cuts totaling 4.75%, the prime rate averaged 6.99% in 2001 compared to the average prime rates of 9.21%, 7.99% and 8.37% in 2000, 1999 and 1998, respectively. Due to a general slowdown in the economy that began to be perceived in the

2000 fourth quarter, the Federal Reserve acted to provide a stimulus through a series of interest rate reductions commencing in the 2001 first quarter, resulting in eight 50 basis point reductions and three 25 basis point reductions in the prime rate that lowered it to the 4.75% level at December 31, 2001. The reductions in the prime rate tended to negatively impact the net interest margin and net interest spread until the 2001 third quarter when these measures began to improve.

Following the rate cuts in 2001, the prime rate averaged 4.75% in the first nine months of 2002 compared to 7.61% in the first nine months of 2001. The prime rate averaged 4.75% in the third quarter of 2002 compared to 6.64% in the 2001 third quarter. The net interest spread, in comparing nine-month periods, increased by 83 basis points from 3.29% in 2001 to 4.12% in 2002, reflecting the effect of a decrease in the average rate paid on interest-bearing liabilities, or cost of funds, that more than offset the decrease in the average total yield on earning assets. The yield on earning assets decreased by 107 basis points from 7.94% in 2001 to 6.87% in 2002, while the cost of funds decreased by 190 basis points from 4.65% to 2.75%. In comparing third quarter periods, the net interest spread increased by 63 basis points from 3.49% to 4.12%, as the yield on earning assets decreased by 98 basis points while the cost of funds decreased by 161 basis points.

Provision for Loan Losses

This provision is the charge against earnings to provide an allowance or reserve for probable losses inherent in the loan portfolio. The amount of each period’s charge is affected by several considerations including management’s evaluation of various risk factors in determining the adequacy of the allowance (see “Asset Quality”), actual loan loss experience and loan portfolio growth. Earnings were negatively impacted in 2002 by provisions of $1,325,000 for the first nine months and $285,000 for the third quarter compared to 2001 provisions of $490,000 and $205,000, respectively.

The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.18% at September 30, 2002, 1.13% at September 30, 2001 and 1.17% at December 31, 2001. The increase in the allowance percentage from September 30, 2001 to September 30, 2002 related primarily to asset quality considerations, increases in historical charge-off trends and general economic conditions.

Noninterest Income

Noninterest income for the first nine months and third quarter of 2002 increased $1,192,000 or 27.3% and $733,000 or 50.4%, respectively, compared to the same periods in 2001, reflecting in part the acquisition of Rowan Bank on August 1, 2002 as discussed above and also the general increase in the volume of business. The increase, in comparing nine-month periods, was primarily due to a $651,000 increase in service charges on deposit accounts and to a $357,000 increase in the net gain on sales of loans. Similarly, in comparing third quarter periods, there was a $519,000 increase in service charges on deposit accounts and a $116,000 increase in the net gain on sales of loans. The increase in service charges on deposit accounts was primarily due to the implementation of an overdraft protection program in July 2002. Other factors favorably affecting the level of service charges on deposit accounts in 2002 were the selected increases in service charge rates that became effective in the 2002 first and third quarters and the increase in the level of deposit accounts subject to service charges. The net gain on sales of loans was affected in 2002 by long-term conforming mortgage rates that have remained at historical lows.

Noninterest Expense

Noninterest expense was $2,245,000 or 18.7% higher in the first nine months of 2002 compared to the same period in 2001 and for the third quarter was $1,180,000 or 28.8% higher, due in part to the acquisition of Rowan Bank on August 1, 2002 as discussed above. The largest factor resulting in higher noninterest income was the generally increased level of personnel expense, which was impacted by increased staffing requirements in addition to the acquisition of Rowan Bank, by normal salary adjustments and by higher costs of fringe benefits. Other expense was affected in 2002 by increases in advertising and marketing expense, by expenses related to nonperforming assets, by losses recorded on disposal of fixed asset and by expenses related to the new overdraft protection program (see “Noninterest Income”).

Income Taxes

The effective income tax rate increased from 28.4% in the first nine months of 2001 to 29.4% in the same period of 2002 due principally to an increase in the ratio of taxable to non-taxable income.

Liquidity

Liquidity refers to the continuing ability of First National Bank and Rowan Bank to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds to the Parent Company for payment of dividends, debt service and other operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks, (b) the outstanding balance of federal funds sold, (c) lines for the purchase of federal funds from other banks, (d) the lines of credit established at the Federal Home Loan Bank ($71,200,000 for First National Bank and $23,700,000 for Rowan Bank), less existing advances against those lines, and (e) the investment securities portfolio. All debt securities are of investment grade quality and, if the need arises, can be promptly liquidated on the open market or pledged as collateral for short-term borrowing.

Consistent with the general approach to liquidity, First National Bank and Rowan Bank as a matter of policy do not solicit or accept brokered deposits for funding asset growth. Instead, loans and other assets are based primarily on a core of local deposits and the bank’s capital position. To date, the steady increase in deposits, retail repurchase agreements and capital, supplemented by Federal Home Loan Bank advances, has been adequate to fund loan demand in the each bank’s market area, while maintaining the desired level of immediate liquidity and an investment securities portfolio available for both immediate and secondary liquidity purposes.

Commitments, Contingencies and Off-Balance Sheet Risk

In the normal course of business, various commitments are outstanding that are not reflected in the consolidated financial statements. At September 30, 2002, a summary of significant commitments is as follows:

Commitments to extend credit		$	135,210,000
Standby letters of credit			466,000

In management’s opinion, these commitments will be funded from normal operations with not more than the normal risk of loss.

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

Standby letters of credit are commitments issued by the Corporation to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that in extending loans to customers.

There were no binding commitments for the origination of mortgage loans intended to be held for sale at September 30, 2002.

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

Asset/Liability Management and Interest Rate Sensitivity

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

The Corporation’s balance sheet was liability-sensitive at September 30, 2002. A liability-sensitive position means that in gap measurement periods of one year or less there are more liabilities than assets subject to immediate repricing as market rates change. Because immediately rate sensitive interest-bearing liabilities exceed rate sensitive assets, the earnings position could improve in a declining rate environment and could deteriorate in a rising rate environment, depending on the correlation of rate changes in these two categories. Included in interest-bearing liabilities subject to rate changes within 90 days is a portion of the interest-bearing demand, savings and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators.

Capital Adequacy

Under guidelines established by the Board of Governors of the Federal Reserve System, capital adequacy is currently measured for regulatory purposes by certain risk-based capital ratios, supplemented by a leverage capital ratio. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier 1, Tier 2 and Tier 3, as a percentage of risk-weighted assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various off-balance sheet exposures. Tier 1 capital consists primarily of common shareholders’ equity and qualifying perpetual preferred stock, net of goodwill and other disallowed intangible assets. Tier 2 capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible debt,

preferred stock and the allowance for loan losses. Tier 3 capital, applicable only to financial institutions subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institution’s ongoing trading activities. At September 30, 2002, FNB Corp. and each of the subsidiary banks were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital. Under current requirements, the minimum total capital ratio is 8.00% and the minimum Tier 1 capital ratio is 4.00%. At September 30, 2002, FNB Corp. had a total capital ratio of 12.00% and a Tier 1 capital ratio of 10.87%. First National Bank and Rowan Bank had total capital ratios of 13.54% and 13.74%, respectively, and Tier 1 capital ratios of 12.44% and 12.48%, respectively.

The leverage capital ratio, which serves as a minimum capital standard, considers Tier 1 capital only and is expressed as a percentage of average total assets for the most recent quarter, after reduction of those assets for goodwill and other disallowed intangible assets at the measurement date. As currently required, the minimum leverage capital ratio is 4.00%. At September 30, 2002, FNB Corp. had a leverage capital ratio of 8.42%. First National Bank and Rowan Bank had leverage capital ratios of 9.25% and 8.22%, respectively.

First National Bank and Rowan Bank are also required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. To be categorized as well-capitalized, a bank must have a minimum ratio for total capital of 10.00%, for Tier 1 capital of 6.00% and for leverage capital of 5.00%. As noted above, both First National Bank and Rowan Bank met all of those ratio requirements at September 30, 2002 and, accordingly, are well-capitalized under the regulatory framework for prompt corrective action.

Balance Sheet Review

Largely reflecting the acquisition of Rowan Bank as discussed in the “Overview”, total assets at September 30, 2002 were higher than at September 30, 2001 and December 31, 2001 by $157,691,000 or 27.0% and $148,848,000 or 25.1%, respectively; deposits were ahead by $100,634,000 or 21.0% and $100,020,000 or 20.8%. The level of total assets was also affected by advances from the Federal Home Loan Bank to First National Bank, which at September 30, 2002 had increased by $20,000,000 compared to September 30, 2001 and $15,000,000 compared to December 31, 2001. Average assets increased 7.6% in the first nine months of 2002 compared to the same period in 2001, while average deposits increased 6.2%, the third quarter increases being 16.5% and 13.6%, respectively.

Investment Securities

Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. Reflecting in part the the acquisition of Rowan Bank on August 1, 2002 as discussed in the “Overview”, the level of investment securities was increased $25,812,000 during the twelve-month period ended September 30, 2002 and $7,755,000 during the first nine months of 2002. Investable funds not otherwise utilized are temporarily invested as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs.

Loans

The Corporation’s primary source of revenue and largest component of earning assets is the loan portfolio. Due primarily to the acquisition of Rowan Bank on August 1, 2002 as discussed in the “Overview”, loans increased $100,463,000 or 25.4% during the twelve-month period ended September 30, 2002. The loan increase during the first nine months of 2002 was $104,466,000 or 26.7%. Average loans were $18,766,000 or 4.8% higher in the first nine months of 2002 than in the same period of 2001. The ratio of average loans to average deposits, in comparing nine-month periods, decreased from 81.7% in 2001 to 80.6% in 2002. The ratio of loans to deposits at September 30, 2002 was 85.5%.

While the level of the entire loan portfolio has been adversely affected by the general slowdown in the economy, the portfolios related to commercial and agricultural loans, construction loans and commercial and other real estate loans experienced gains during both the twelve-month period ended September 30, 2002 and the first nine months of 2002. The balance of the 1-4 family residential mortgage loan portfolio has been negatively affected by the high level of refinancing activity, especially since certain loans previously included in the “held for investment” category were refinanced and subsequently sold.

Asset Quality

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

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

At September 30, 2002, the Corporation had impaired loans which totaled $1,560,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $610,000. At September 30, 2002, nonperforming loans were $5,150,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $4,552,000 and $598,000, respectively. At September 30, 2001, nonperforming loans were $5,814,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $3,705,000 and $2,109,000, respectively.

A model that considers both allocated and unallocated components of the allowance for loan losses is used on a quarterly basis to analyze the adequacy of the allowance to absorb probable losses inherent in the loan portfolio. Homogeneous pools of loans are segregated, and classifications of individual loans within certain of these pools are identified using risk grades derived from regulatory guidelines. Allocations of estimated reserves are assigned to the most adversely classified loans based upon an individual analysis of present-value repayment and/or liquidation projections of each loan. The reserve is allocated to each pool, and remaining classifications within pools, based upon a two-year historical loss ratio, concentrations within industries, economic and industry-specific trends, portfolio trends, and other subjective factors. An additional portion of the reserve is unallocated to any specific portion of the loan portfolio, and is based upon the mix and weight of the several homogeneous pools. The determination within the allowance model of allocated and unallocated components is not necessarily indicative of future losses or allocations. The entire balance of the allowance for loan losses is available to absorb losses in the loan portfolio.

Management believes the allowance for loan losses of $5,824,000 at September 30, 2002 is adequate to cover probable losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment. Management’s judgments are based on numerous assumptions about current events which it believes to be reasonable, but which may or may not be valid. Thus there can be no assurance that loan losses in future periods will not exceed the current allowance or that future increases in the allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting the operating results of the Corporation.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2002		2001		2002		2001
	(in thousands)
Balance at beginning of period	$	4,672	$	4,353	$	4,417	$	4,352
Charge-offs		277		166		1,135		481
Recoveries		105		30		178		104

Net loan charge-offs		172		136		957		377
Provision for loan losses		285		205		1,325		490
Allowance adjustment for loans assumed in merger		1,039		—		1,039		—
Allowance adjustment for loans sold		—		—		—		(43	)

Balance at end of period	$	5,824	$	4,422	$	5,824	$	4,422

Deposits

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

In addition to the acquisition of Rowan Bank on August 1, 2002 as discussed in the “Overview”, the level and mix of deposits has been specifically affected by the following factors. Money market deposits, excluding the amount of Rowan Bank deposits initially added on August 1, 2002, had the most significant growth of any component of deposits, increasing $17,986,000 during the twelve-month period ended September 30, 2002 and $16,638,000 during the first nine months of 2002. By similar comparison, time deposits, reflecting the effect of deposit maturities related to prior promotions for premium-rate certificates of deposit, decreased $36,622,000 during the twelve-month period ended September 30, 2002 and $30,399,000 during the first nine months of 2002. Further, the level of time deposits obtained from governmental units fluctuates, amounting to $47,002,000, $51,607,000 and $53,573,000 at September 30, 2002, September 30, 2001 and December 31, 2001, respectively.

Business Development Matters

As discussed in the “Overview” and in Note 3 to Consolidated Financial Statements, the Corporation completed a merger on August 1, 2002 for the acquisition of Rowan Bancorp, Inc. (“Rowan Bancorp”), holding company for Rowan Savings Bank SSB, Inc. (“Rowan Bank”), headquartered in China Grove, North Carolina, in a transaction accounted for using the purchase method of accounting for business combinations.

As discussed in the “Overview”, management adopted a balance sheet restructuring project in the 2000 fourth quarter that has affected loans and other balance sheet categories in both the 2000 fourth quarter and the 2001 first quarter.

In the 1998 fourth quarter, First National Bank received regulatory approval for establishment of a new branch office in Trinity, North Carolina. Construction of the permanent Trinity facility was completed in February 2002, resulting in a total capital outlay of approximately $1,400,000. Prior to completion of the permanent facility, a temporary mobile office, which opened in August 1999, was operated at this site.

In April 2002, First National Bank received regulatory approval for establishment of a new branch office in Pinehurst, North Carolina. The office, located in a leased facility which had previously been used as a banking office by another financial institution, was renovated and then opened for business in October 2002.

Accounting Pronouncement Matters

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. SFAS No. 143 requires the Corporation to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The

Corporation also is to record a corresponding increase to the carrying amount of the related long-lived asset and to depreciate that cost over the life of the asset. The liability is changed at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the initial fair value measurement. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. At this time, the Corporation is assessing the impact of SFAS No. 143 on its financial condition and results of operations.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This standard provides guidance on differentiating between long-lived assets to be held and used, long-lived assets to be disposed of other than by sale and long-lived assets to be disposed of by sale. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. SFAS No. 144 also supersedes APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Corporation adopted the provisions of SFAS No. 144 effective January 1, 2002 with no effect on its consolidated financial statements.

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”), which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS No. 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Those costs include, but are not limited to, the following: (a) termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract (hereinafter referred to as one-time termination benefits), (b) costs to terminate a contract that is not a capital lease and (c) costs to consolidate facilities or relocate employees. SFAS No. 146 does not apply to costs associated with the retirement of a long-lived asset covered by SFAS No. 143, “Accounting for Asset Retirement Obligations”. A liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period in which the liability is incurred. A liability for a cost associated with an exit or disposal activity is incurred when the definition of a liability is met. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The impact of adoption on the Corporation is not known at this time.

In October 2002, the FASB issued Statement of Financial Accounting Standards No. 147, “Acquisitions of Certain Financial Institutions” (“SFAS No. 147”), which brings all business combinations involving financial institutions, except mutuals, into the scope of SFAS No. 141, “Business Combinations”. SFAS No. 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with SFAS No. 141 and the related intangibles accounted for in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 147 removes such acquisitions from the scope of SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions”, which was adopted in February 1983 to address financial institutions acquisitions during a period when many of such

acquisitions involved “troubled” institutions. SFAS No. 147 also amends SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, to include in its scope long-term customer-relationship intangible assets of financial institutions. SFAS No. 147 is generally effective immediately and provides guidance with respect to amortization and impairment of intangibles recognized in connection with acquisitions previously within the scope of SFAS No. 72. The Corporation adopted the provisions of SFAS No. 147 with no effect on its consolidated financial statements.

Cautionary Statement for Purpose of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

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

Table 1

Average Balances and Net Interest Income Analysis

NINE MONTHS ENDED SEPTEMBER 30	2002						2001
	2002						2001						2002 Versus 2001
	Average		Interest Income/		Average Rates Earned/		Average		Interest Income/		Average Rates Earned/		Interest Variance due to (1)						Net Change
	Balance		Expense		Paid		Balance		Expense		Paid		Volume			Rate			Net Change
	(Taxable Equivalent Basis, Dollars in Thousands)
Earning Assets
Loans (2) (3)	$	409,072	$	21,456	7.01	%	$	390,306	$	24,496	8.38	%	$	1,127		$	(4,167	)	$	(3,040	)
Investment securities (2):
Taxable income		137,918		6,969	6.74			129,568		6,599	6.79			419			(49	)		370
Non-taxable income		24,864		1,395	7.48			19,237		1,102	7.64			317			(24	)		293
Other earning assets		9,873		123	1.66			4,865		167	4.58			104			(148	)		(44	)

Total earning assets		581,727		29,943	6.87			543,976		32,364	7.94			1,967			(4,388	)		(2,421	)

Cash and due from banks		12,423						12,238
Goodwill		2,816						—
Other assets, net		27,978						24,538

Total Assets	$	624,944					$	580,752

Interest-Bearing Liabilities
Interest-bearing deposits:
Demand deposits	$	62,343		319	0.69		$	54,849		357	0.87			43			(81	)		(38	)
Savings deposits		38,461		287	1.00			34,377		413	1.61			45			(171	)		(126	)
Money market deposits		55,875		827	1.98			41,416		1,092	3.53			308			(573	)		(265	)
Certificates and other time deposits		297,590		7,499	3.37			301,775		13,170	5.83			(181	)		(5,490	)		(5,671	)
Retail repurchase agreements		14,125		190	1.80			12,637		346	3.66			37			(193	)		(156	)
Federal Home Loan Bank advances		33,364		1,195	4.79			23,850		926	5.19			345			(76	)		269
Federal funds purchased		631		10	2.06			1,103		45	5.46			(14	)		(21	)		(35	)
Other borrowed funds		1,938		52	3.62			—		—	—			52			—			52

Total interest-bearing liabilities		504,327		10,379	2.75			470,007		16,349	4.65			635			(6,605	)		(5,970	)

Noninterest-bearing demand deposits		53,143						45,495
Other liabilities		6,733						7,363
Shareholders' equity		60,741						57,887

Total Liabilities and Shareholders’ Equity	$	624,944					$	580,752

Net Interest Income and Spread			$	19,564	4.12	%			$	16,015	3.29	%	$	1,332		$	2,217		$	3,549

Net Yield on Earning Assets					4.49	%					3.93	%

(1)

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

(2)

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

(3)

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

Table 2

Average Balances and Net Interest Income Analysis

THREE MONTHS ENDED SEPTEMBER 30	2002						2001
	2002						2001						2002 Versus 2001
	Average		Interest Income/		Average Rates Earned/		Average		Interest Income/		Average Rates Earned/		Interest Variance due to (1)						Net
	Balance		Expense		Paid		Balance		Expense		Paid		Volume			Rate			Change
	(Taxable Equivalent Basis, Dollars in Thousands)
Earning Assets
Loans (2) (3)	$	457,781	$	7,928	6.89	%	$	389,993	$	7,842	7.99	%	$	1,255		$	(1,169	)	$	86
Investment securities (2):
Taxable income		129,578		2,145	6.62			136,918		2,356	6.88			(124	)		(87	)		(211	)
Non-taxable income		25,289		468	7.41			18,977		363	7.66			117			(12	)		105
Other earning assets		18,189		77	1.66			3,029		25	3.23			69			(17	)		52

Total earning assets		630,837		10,618	6.70			548,917		10,586	7.68			1,317			(1,285	)		32

Cash and due from banks		13,592						12,071
Goodwill		8,356						—
Other assets, net		30,764						25,900

Total Assets	$	683,549					$	586,888

Interest-Bearing Liabilities
Interest-bearing deposits:
Demand deposits	$	65,066		114	0.70		$	55,136		100	0.72			17			(3	)		14
Savings deposits		44,857		113	1.00			34,361		113	1.31			30			(30	)		—
Money market deposits		61,136		301	1.95			44,277		320	2.87			101			(120	)		(19	)
Certificates and other time deposits		320,604		2,476	3.06			301,799		4,047	5.32			239			(1,810	)		(1,571	)
Retail repurchase agreements		14,735		66	1.76			13,944		103	2.93			6			(43	)		(37	)
Federal Home Loan Bank advances		39,982		469	4.65			25,000		325	5.15			178			(34	)		144
Federal funds purchased		306		2	2.15			700		7	4.07			(3	)		(2	)		(5	)
Other borrowed funds		5,751		52	3.62			—		—	—			52			—			52

Total interest-bearing liabilities		552,437		3,593	2.58			475,217		5,015	4.19			620			(2,042	)		(1,422	)

Noninterest-bearing demand deposits		54,707						45,446
Other liabilities		8,280						7,417
Shareholders’ equity		68,125						58,808

Total Liabilities and Shareholders’ Equity	$	683,549					$	586,888

Net Interest Income and Spread			$	7,025	4.12	%			$	5,571	3.49	%	$	697		$	757		$	1,454

Net Yield on Earning Assets					4.44	%					4.05	%

(1)

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

(2)

(3)

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

The Corporation’s market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of the Bank’s loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. The Bank does not maintain a trading account nor is the Bank subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Bank’s asset/liability management function, which is discussed above in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Asset/Liability Management and Interest Rate Sensitivity”.

Management does not believe there has been any significant change in the overall analysis of financial instruments considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and estimated fair values, since the analysis prepared and presented in conjunction with the Form 10-K Annual Report for the fiscal year ended December 31, 2001.

Item 4. Controls and Procedures

Based on their evaluation of the Corporation’s disclosure controls and procedures, which was completed within 90 days prior to the filing of this report, the Chief Executive Officer and the Chief Financial Officer of the Corporation have concluded that the Corporations’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. In reaching this conclusion, the Corporation’s Chief Executive Officer and Chief Financial Officer determined that the Corporation’s disclosure controls and procedures are effective in ensuring that such information is accumulated and communicated to the Corporation’s management to allow timely decisions regarding required disclosure.

There were no significant changes in the Corporations’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

Exhibits to this report are listed in the index to exhibits on pages 30 and 31 of this report.

(b) Reports on Form 8-K.

During the quarter ended September 30, 2002, the Registrant filed a Current Report on Form 8-K dated August 1, 2002, which reported under “Item 2” that the Registrant had completed its acquisition of Rowan Bancorp, Inc.

SIGNATURES

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

FNB Corp.

(Registrant)

Date: November 14, 2002	By:	/s/ JERRY A. LITTLE
			Jerry A. Little Treasurer and Secretary (Principal Financial and Accounting Officer)

CERTIFICATIONS

I, Michael C. Miller, certify that:

I have reviewed this quarterly report on Form 10-Q of FNB Corp.;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date:	November 14, 2002	/s/ MICHAEL C. MILLER
		Michael C. Miller Chief Executive Officer

I, Jerry A. Little, certify that:

I have reviewed this quarterly report on Form 10-Q of FNB Corp.;

(a)

(b)

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(a)

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and



Date:	November 14, 2002	/s/ JERRY A. LITTLE
		Jerry A. Little Chief Financial Officer

INDEX TO EXHIBITS

Exhibit No.		Description of Exhibit

2.10		Agreement and Plan of Merger dated as of February 11, 2002 by and between the Registrant and Rowan Bancorp, Inc., incorporated herein by reference to Exhibit 2.10 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2001

3.10		Articles of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form S-14 Registration Statement (No. 2-96498) filed June 16, 1985.

3.11		Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 10, 1988, incorporated herein by reference to Exhibit 19.10 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 1988.

3.12		Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 12, 1998, incorporated herein by reference to Exhibit 3.12 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 1998.

3.20		Amended and Restated Bylaws of the Registrant, adopted May 21, 1998, incorporated herein by reference to Exhibit 3.20 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 1998.

4		Specimen of Registrant’s Common Stock Certificate, incorporated herein by reference to Exhibit 4 to Amendment No. 1 to the Registrant’s Form S-14 Registration Statement (No. 2-96498) filed April 19, 1985.

10.10	*	Form of Split Dollar Insurance Agreement dated as of November 1, 1987 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 19.20 to the Registrant’s Form 10-Q Quarterly Report for the Quarter ended June 30, 1988.

10.11	*	Form of Amendment to Split Dollar Insurance Agreement dated as of November 1, 1994 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 10.11 to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.

10.20	*	Stock Compensation Plan as amended effective May 12, 1998, incorporate herein by reference to Exhibit 10.30 the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 1998.

Exhibit No.		Description of Exhibit

10.21	*	Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrant’s Stock Compensation Plan, incorporated herein by reference to Exhibit 10.31 to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.

10.22	*	Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrant’s Stock Compensation Plan, incorporated herein by reference to Exhibit 10.32 to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.

10.30	*	Employment Agreement dated as of December 27, 1995 between First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10.50 to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended December 31, 1995.

10.31	*	Carolina Fincorp, Inc. Stock Option Plan (assumed by the Registrant on April 10, 2000), incorporated herein by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-54702).

10.32	*	Employment Agreement dated as of April 10, 2000 between First National Bank and Trust Company and R. Larry Campbell, incorporated herein by reference to Exhibit 10.32 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2000.

10.33	*	Nonqualified Supplemental Retirement Plan with R. Larry Campbell, incorporated herein by reference to Exhibit 10(c) to the Annual Report on Form 10-KSB of Carolina Fincorp, Inc. for the fiscal year ended June 30, 1997.

10.34	*	Employment Agreement dated as of August 1, 2002 between Rowan Savings Bank SSB, Inc. and Bruce D. Jones.

Management contract, or compensatory plan or arrangement.

ROWAN SAVINGS BANK SSB, INC.

By	/s/ Claude M. Colvard
Title:	Chairman

/s/ Bruce D. Jones		(SEAL)
Bruce D. Jones