10-Q

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 March 31, 2004

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 ¨

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

The registrant had 5,718,632 shares of $2.50 par value common stock outstanding at April 30, 2004.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FNB Corp. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (unaudited)

	March 31,						December 31,
	2004			2003			2003
	(in thousands, except share data)
ASSETS
Cash and due from banks	$	18,912		$	22,727		$	17,164
Interest-bearing bank balances		20,094			33,742			8,641
Federal funds sold		9,142			12,576			1,319
Investment securities:
Available for sale, at estimated fair value (amortized cost of $73,565, $105,454 and $77,971)		76,493			108,903			80,558
Held to maturity (estimated fair value of $59,024, $40,639 and $63,000)		58,836			40,703			63,701
Loans:
Loans held for sale		14,636			2,239			8,567
Loans held for investment		565,523			507,219			543,346
Less allowance for loan losses		(6,330	)		(6,169	)		(6,172	)
Net loans		573,829			503,289			545,741
Premises and equipment, net		15,264			14,240			15,009
Goodwill		16,335			12,601			16,325
Other assets		25,416			20,885			24,787
Total Assets	$	814,321		$	769,666		$	773,245
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand deposits	$	72,649		$	61,438		$	70,671
Interest-bearing deposits:
Demand, savings and money market deposits		222,271			215,583			215,846
Time deposits of $100,000 or more		131,540			115,843			118,199
Other time deposits		190,446			211,532			193,209
Total deposits		616,906			604,396			597,925
Retail repurchase agreements		15,249			19,328			14,816
Federal Home Loan Bank advances		70,859			53,366			53,303
Federal funds purchased		—			—			625
Other borrowed funds		21,308			11,000			17,977
Other liabilities		6,889			6,977			7,141
Total Liabilities		731,211			695,067			691,787
Shareholders’ equity:
Preferred stock - $10.00 par value; authorized 200,000 shares, none issued		—			—			—
Common stock - $2.50 par value; authorized 10,000,000 shares, issued shares - 5,718,332, 5,486,219 and 5,686,899		14,296			13,716			14,217
Surplus		12,747			9,019			12,478
Retained earnings		54,268			49,589			53,174
Accumulated other comprehensive income		1,799			2,275			1,589
Total Shareholders’ Equity		83,110			74,599			81,458
Total Liabilities and Shareholders’ Equity	$	814,321		$	769,666		$	773,245

See accompanying notes to consolidated financial statements.

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FNB Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended March 31, (unaudited)
	2004		2003
	(in thousands, except per share data)
Interest Income
Interest and fees on loans	$	7,973	$	8,161
Interest and dividends on investment securities:
Taxable income		936		1,583
Non-taxable income		439		330
Other interest income		29		99
Total interest income		9,377		10,173
Interest Expense
Deposits		2,082		2,693
Retail repurchase agreements		26		54
Federal Home Loan Bank advances		587		576
Federal funds purchased		12		—
Other borrowed funds		143		98
Total interest expense		2,850		3,421
Net Interest Income		6,527		6,752
Provision for loan losses		270		250
Net Interest Income After Provision for Loan Losses		6,257		6,502
Noninterest Income
Mortgage loan sales		1,308		678
Service charges on deposit accounts		1,236		1,186
Trust and investment services		479		193
Cardholder and merchant services income		235		190
Other service charges, commissions and fees		186		303
Bank owned life insurance		156		148
Other income		—		65
Total noninterest income		3,600		2,763
Noninterest Expense
Personnel expense		4,176		3,354
Net occupancy expense		393		334
Furniture and equipment expense		477		500
Data processing services		283		490
Other expense		1,768		1,335
Total noninterest expense		7,097		6,013
Income Before Income Taxes		2,760		3,252
Income taxes		808		990
Net Income	$	1,952	$	2,262
Net income per common share:
Basic	$	.34	$	.42
Diluted		.33		.40
Weighted average number of shares outstanding:
Basic		5,705,602		5,446,462
Diluted		5,903,899		5,708,381

See accompanying notes to consolidated financial statements.

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FNB Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Three Months Ended March 31, 2004 and March 31, 2003 (unaudited)

	Common Stock					Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Shares		Amount
	(in thousands, except share data)
Balance, December 31, 2002	5,416,731		$	13,542		$	8,823		$	48,095		$	2,630		$	73,090
Comprehensive income:
Net income	—			—			—			2,262			—			2,262
Other comprehensive income:
Unrealized securities losses, net of income tax benefit of $181	—			—			—			—			(355	)		(355	)
Total comprehensive income	—			—			—			—			—			1,907
Cash dividends declared, $.14 per share	—			—			—			(768	)		—			(768	)
Common stock issued through:
Stock option plan	78,980			198			368			—			—			566
Common stock reacquired through:
Exchange related to issuance of option stock	(9,492	)		(24	)		(172	)		—			—			(196	)
Balance, March 31, 2003	5,486,219		$	13,716		$	9,019		$	49,589		$	2,275		$	74,599
Balance, December 31, 2003	5,686,899		$	14,217		$	12,478		$	53,174		$	1,589		$	81,458
Comprehensive income:
Net income	—			—			—			1,952			—			1,952
Other comprehensive income:
Unrealized securities gains, net of income taxes of $131	—			—			—			—			210			210
Total comprehensive income	—			—			—			—			—			2,162
Cash dividends declared, $.15 per share	—			—			—			(858	)		—			(858	)
Common stock issued through:
Stock option plan	31,433			79			269			—			—			348
Balance, March 31, 2004	5,718,332		$	14,296		$	12,747		$	54,268		$	1,799		$	83,110

See accompanying notes to consolidated financial statements.

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FNB Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31, (unaudited)
	2004			2003
	(in thousands)
Operating Activities:
Net income	$	1,952		$	2,262
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		405			427
Provision for loan losses		270			250
Deferred income taxes (benefit)		37			(55	)
Deferred loan fees and costs, net		14			45
Premium amortization and discount accretion of investment securities, net		166			115
Amortization of intangibles		15			19
Net decrease in loans held for sale		6,466			548
Decrease (increase) in other assets		216			(182	)
Decrease in other liabilities		(163	)		(128	)
Net Cash Provided by Operating Activities		9,378			3,301
Investing Activities:
Available-for-sale securities:
Proceeds from maturities and calls		11,570			19,588
Purchases		(7,217	)		(500	)
Held-to - maturity securities:
Proceeds from maturities and calls		4,752			12,000
Purchases		—			(28,006	)
Net increase in loans held for investment		(35,630	)		(8,177	)
Purchases of premises and equipment		(661	)		(615	)
Other, net		(169	)		298
Net Cash Used in Investing Activities		(27,355	)		(5,412	)
Financing Activities:
Net increase in deposits		18,981			12,170
Increase in retail repurchase agreements		433			1,901
Increase in Federal Home Loan Bank advances		17,500			—
Decrease in federal funds purchased		(625	)		—
Increase in other borrowed funds		3,331			—
Common stock issued		348			370
Cash dividends paid		(967	)		(867	)
Net Cash Provided by Financing Activities		39,001			13,574
Net Increase in Cash and Cash Equivalents		21,024			11,463
Cash and cash equivalents at beginning of period		27,124			57,582
Cash and Cash Equivalents at End of Period	$	48,148		$	69,045
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	2,808		$	3,434
Income taxes		—			161
Noncash transactions:
Loans held for investment transferred to loans held for sale		12,535			—
Foreclosed loans transferred to other real estate		603			135
Cashless exercise of stock options		—			196
Unrealized securities gains (losses), net of income taxes		210			(355	)

See accompanying notes to consolidated financial statements.

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FNB Corp. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

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

The accompanying consolidated financial statements, prepared without audit, include the accounts of FNB Corp. and its subsidiaries (collectively the “Corporation”). All significant intercompany balances and transactions have been eliminated.

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

2. Cash and Cash equivalents

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

3. Merger Information

On April 1, 2003, the Corporation completed a merger for the acquisition of Dover Mortgage Company (“Dover”), headquartered in Charlotte, North Carolina. Operating as a separate subsidiary of FNB Corp., Dover originates, underwrites and closes mortgage loans for sale into the secondary market. Mortgage production is sold on a service-released basis to a number of national lenders who in turn service the loans. At the date of the merger, Dover operated six offices and, based on estimated fair values, had $47,001,000 in total assets and $5,823,000 in shareholders’ equity.

Pursuant to the terms of the merger, 50% of the outstanding shares of Dover common stock were converted into FNB Corp. common stock and the remaining 50% were converted into cash. The aggregate purchase price was $5,567,000, consisting of $2,908,000 of cash payments and 126,140 shares of FNB Corp. common stock valued at $2,659,000. Subject to a maximum total payment,

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Dover shareholders will be entitled to additional cash consideration over the four-year period following closing, based on a percentage of Dover’s pretax net income during that four-year period. Any additional cash consideration paid to Dover shareholders will be recorded as an adjustment to goodwill. During the three-month period ended March 31, 2004, additional cash consideration of $10,000 was paid to Dover shareholders and recorded as an adjustment of goodwill.

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

4. Earnings Per Share (EPS)

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

	Three Months Ended March 31,
	2004	2003
Basic EPS denominator - Weighted average number of common shares outstanding	5,705,602	5,446,462
Dilutive share effect arising from assumed exercise of stock options	198,297	261,919
Diluted EPS denominator	5,903,899	5,708,381

For the three months ended March 31, 2004 and 2003, there were 171,824 and 2,500 stock options, respectively, that were antidilutive since the exercise price exceeded the average market price. These common stock equivalents were omitted from the calculations of diluted EPS for their respective periods.

5. Stock Options

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

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“Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123”, is disclosed as follows, for stock option grants in 1995 and subsequent years.

	Three Months Ended March 31,
	2004		2003
	(in thousands, except per share data)
Net income, as reported	$	1,952	$	2,262
Less: Stock-based compensation cost determined under fair value method, net of related tax effects		88		85
Net income, pro forma	$	1,864	$	2,177
Net income per share:
Basic:
As reported	$	.34	$	.42
Pro forma		.33		.40
Diluted:
As reported		.33		.40
Pro forma		.32		.38

6. Loans

Loans as presented are reduced by net deferred loan fees of $775,000, $826,000 and $761,000 at March 31, 2004, March 31, 2003 and December 31, 2003, respectively.

7. Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:

	Three Months Ended March 31,
	2004			2003
	(in thousands)
Balance at beginning of period	$	6,172		$	6,109
Charge-offs		230			214
Recoveries		163			24
Net loan charge-offs		67			190
Provision for loan losses		270			250
Allowance adjustment for loans sold		(45	)		—
Balance at end of period	$	6,330		$	6,169

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Based on information that has become available subsequent to March 31, 2004, management has identified certain loans that are expected to be either wholly or partially charged off in the second quarter of 2004, resulting in charge-offs estimated to be in a range of $1,800,000 to $2,500,000. Although a portion of these loans had specific reserves included in the allowance for loan losses at March 31, 2004, it is expected that the provision for loan losses charged against income in the second quarter of 2004 will be higher than in the 2004 first quarter. Due to the utilization of specific reserves in recording these charge-offs, however, the allowance for loan losses, as a percentage of loans held for investment, may be at a lower level at June 30, 2004 than at March 31, 2004.

8. Supplementary Income Statement Information

Significant components of other expense were as follows:

	Three Months Ended March 31,
	2004		2003
	(in thousands)
Stationery, printing and supplies	$	180	$	154
Advertising and marketing		186		118

9. Intangible Assets

Business Combinations

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

	March 31,				December 31,
	2004		2003		2003
	(in thousands)
Amortized intangible assets:
Core deposit premium related to whole bank acquisition:
Carrying amount	$	256	$	256	$	256
Accumulated amortization		114		49		99
Net core deposit premium	$	142	$	207	$	157
Unamortized intangible assets:
Goodwill – Carrying amount	$	16,335	$	12,601	$	16,325

Amortization of intangibles totaled $69,000 for core deposit premiums in 2003 and $15,000 and $19,000, respectively, for the three months ended March 31, 2004 and 2003. The estimated amortization expense for core deposit premiums for the years ending after December 31, 2003 is as follows: $55,000 in 2004, $44,000 in 2005, $32,000 in 2006, $19,000 in 2007 and $7,000 in 2008.

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The changes in the carrying amount of goodwill for the period ended March 31, 2004 were as follows:

Balance as of January 1, 2004	$	16,325
Payment of additional cash consideration to Dover shareholders		10
Balance as of March 31, 2004	$	16,335

Mortgage Servicing Rights

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

	Three Months Ended March 31,
	2004		2003
	(in thousands)
Balance at beginning of period	$	1,628	$	1,052
Servicing rights capitalized		274		223
Amortization expense		57		67
Balance at end of period	$	1,845	$	1,208

No valuation allowance for mortgage servicing rights was required at March 31, 2004 and 2003. The estimated amortization expense for mortgage servicing rights for the years ending after December 31, 2003 is as follows: $324,000 in 2004, $324,000 in 2005, $324,000 in 2006, $324,000 in 2007, $324,000 in 2008 and $225,000 in 2009. The estimated amortization expense is based on current information at December 31, 2003 regarding loan payments and prepayments. Amortization expense could change in future periods based on changes in the volume of prepayments and economic factors.

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10. Postretirement Employee Benefit Plans

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

	Three Months Ended March 31, 2004
	Pension Plan			Supplemental Executive Retirement Plan		Other Postretirement Defined Benefit Plans
	(in thousands)
Service cost	$	144		$	15	$	15
Interest cost		145			17		19
Expected return on plan assets		(156	)		—		—
Amortization of prior service cost		27			12		2
Amortization of transition obligation		—			—		5
Recognized net actuarial loss		40			4		2
Net periodic postretirement benefit cost	$	200		$	48	$	43

As previously disclosed in its consolidated financial statements for the year ended December 31, 2003, the Corporation expects to contribute $600,000 to its pension plan in 2004. As of March 31, 2004, no contribution has been made. The other postretirement benefit plans are unfunded plans, and there are no cash contribution requirements except for the direct payment of benefits.

11. Derivatives and Financial Instruments

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

In connection with its asset/liability management objectives, the Corporation entered into an interest rate swap on a $7,000,000 Federal Home Loan Bank (FHLB) advance during the three months ended March 31, 2004 that converts the fixed rate cash flow exposure on the FHLB advance to a variable rate cash flow. As structured, the pay-variable, receive-fixed swap is evaluated as being a fair value hedge with no ineffectiveness; and, consequently, the difference in cash flows in each period between the variable rate interest payments that the Corporation makes and the fixed rate interest payments received is currently reported in earnings.

During the three months ended March 31, 2004, the interest rate swap resulted in a net reduction of $11,000 in the interest expense that would otherwise have been reported for the FHLB advance. The

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fair value of the swap at March 31, 2004 was recorded on the consolidated balance sheet as an asset in the amount of $77,000, offset by a valuation adjustment in the same amount to the FHLB advance.

The Corporation has also identified the following derivative instruments which were recorded on the consolidated balance sheet at March 30, 2004: commitments to originate fixed rate residential mortgage loans and forward sales commitments.

Dover Mortgage Company originates certain fixed rate residential mortgage loans with the intention of selling these loans. Between the time that Dover enters into an interest rate lock or a commitment to originate a fixed rate residential mortgage loan with a potential borrower and the time the closed loan is sold, the Corporation is subject to variability in market prices related to these commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to deliver loans into a mortgage-backed security. The commitments to originate fixed rate residential mortgage loans and the forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their fair value adjustments are recorded through the income statement in income from mortgage loan sales. The commitments to originate fixed rate residential mortgage loans totaled $25,913,000 at March 31, 2004. The related forward sales commitments totaled $25,913,000 at March 31, 2004. The fair value of these commitments was recorded as a net asset of $303,000 at March 31, 2004. Loans held for sale by Dover Mortgage Company totaled $11,550,000 at March 31, 2004. The related forward sales commitments totaled $11,550,000 at March 31, 2004. The fair value of these commitments was recorded as a net asset of $29,000 at March 31, 2004.

The subsidiary banks had loans held for sale of $3,086,000 at March 31, 2004. Binding commitments of the subsidiary banks for the origination of mortgage loans intended to be held for sale at March 31, 2004 were not material.

12. Business Segment Information

Prior to the acquisition of Dover Mortgage Company on April 1, 2003, the chief operating decision maker had reviewed the results of operations of the Corporation and its subsidiaries as a single enterprise. There are now considered to be two principal business segments: the full-service subsidiary banks, First National Bank and Rowan Bank, and the mortgage banking subsidiary, Dover Mortgage Company. Dover originates, underwrites and closes loans for sale into the secondary market. Financial performance for each segment for the three months ended March 31, 2004 is detailed in the following table. Since Dover Mortgage Company was acquired subsequent to March 31, 2003 using the purchase method of accounting for business combinations and since the results of operations of the Corporation and its subsidiaries prior to March 31, 2003 had been reviewed by the chief operating decision maker as a single enterprise, segment information for the three months ended March 31, 2003 is not provided. Included in the “Other” column are amounts for other corporate activities and eliminations of intersegment transactions.

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	Three Months Ended March 31, 2004
	Full-Service Subsidiary Banks		Dover Mortgage Company		Other			Total
	(in thousands)
Interest income	$	9,250	$	127	$	—		$	9,377
Interest expense		2,707		54		89			2,850
Net interest income		6,543		73		(89	)		6,527
Provision for loan losses		270		—		—			270
Net interest income after provision for loan losses		6,273		73		(89	)		6,257
Noninterest income		2,750		905		(55	)		3,600
Noninterest expense		6,249		861		(13	)		7,097
Income before income taxes		2,774		117		(131	)		2,760
Income taxes		805		47		(44	)		808
Net income	$	1,969	$	70	$	(87	)	$	1,952
Total assets	$	796,036	$	18,124	$	161		$	814,321
Net loans		562,279		11,550		—			573,829
Goodwill		12,583		3,752		—			16,335

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

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

Overview

Description of Operations

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

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

For business segment information related to the financial performance of the full-service subsidiary banks and Dover Mortgage Company, see Note 12 to the Consolidated Financial Statements.

Merger Acquisition of Dover Mortgage Company in 2003

On April 1, 2003, the Corporation completed a merger for the acquisition of Dover Mortgage Company (“Dover”), headquartered in Charlotte, North Carolina. Operating as a separate subsidiary of FNB Corp., Dover originates, underwrites and closes mortgage loans for sale into the secondary market. Mortgage production is sold on a service-released basis to a number of national lenders who in turn service the loans. At the date of the merger, Dover operated six offices and, based on estimated fair values, had $47,001,000 in total assets and $5,823,000 in shareholders’ equity. Pursuant to the terms of the merger, 50% of the outstanding shares of Dover common stock were converted into FNB Corp. common stock and the remaining 50% were converted into cash. The aggregate purchase price was $5,567,000, consisting of $2,908,000 of cash payments and 126,140 shares of FNB Corp. common stock valued at $2,659,000. Subject to a maximum total payment, Dover shareholders will be entitled to additional cash consideration over the four-year period following closing, based on a percentage of Dover’s pretax net income during that four-year period. Any additional cash consideration paid to Dover shareholders will be recorded as an adjustment to goodwill. During the three-month period ended March 31, 2004, additional cash consideration of $10,000 was paid to Dover shareholders and recorded as an adjustment of goodwill. The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Dover were recorded based on a preliminary estimate of fair values as of April 1, 2003, subject to possible adjustment during the one-year period from that date. There were no adjustments to the estimate of

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fair values during that one-year period. The consolidated financial statements include the results of operations of Dover since April 1, 2003.

Primary Financial Data for 2004

The Corporation earned $1,952,000 in the first quarter of 2004, a 13.7% decrease from earnings of $2,262,000 in the same period of 2003. Basic earnings per share decreased from $.42 to $.34 and diluted earnings per share decreased from $.40 to $.33 for percentage decreases of 19.0% and 17.5%, respectively. As noted above, Dover Mortgage Company was acquired as a subsidiary through merger effective April 1, 2003, impacting both net income and the calculation of earnings per share since the acquisition date. Total assets were $814,321,000 at March 31, 2004, up 5.8% from March 31, 2003, due partially to the Dover acquisition (see Note 12 to the Consolidated Financial Statements), and up 5.3% from December 31, 2003. Loans amounted to $580,159,000 at March 31, 2004, increasing 13.9% from March 31, 2003 and 5.1% from December 31, 2003. Total deposits were up 2.1% from March 31, 2003 and 3.2% from December 31, 2003, amounting to $616,906,000 at March 31, 2004. A significant portion of the asset growth in the first quarter of 2004 was funded by advances totaling $17,500,000 from the Federal Home Loan Bank that were obtained primarily to help fund future loan growth. Loans were impacted during that period by the sale of $12,535,000 of 1-4 family residential mortgage loans previously classified as held for investment as discussed in “Significant Factors Affecting Earnings in 2004”.

Significant Factors Affecting Earnings in 2004

Income from mortgage loan sales increased $630,000 in the first quarter of 2004 partially as a result of the $233,000 in income from the sale of 1-4 family residential mortgage loans totaling $12,535,000 that were previously classified as loans held for investment at December 31, 2003 but transferred to loans held for sale in the 2004 first quarter. See below in this section for other information regarding income from mortgage loan sales.

Net interest income in the first quarter of 2004 compared to the same period of 2003 did not increase in proportion to the increase in earning assets, reflecting the continuing decline in interest rates. The net interest margin, as a percentage of earning assets, decreased 27 basis points to 3.84% in 2004 from 4.11% in 2003.

The levels of noninterest income and noninterest expense in the first quarter of 2004 compared to the same period of 2003 were significantly affected by the acquisition of Dover Mortgage Company subsequent to the 2003 first quarter. As reported in Note 12 to the Consolidated Financial Statements, noninterest income and noninterest expense attributable to Dover in the 2004 first quarter, before the elimination of intersegment transactions, amounted to $905,000 and $861,000, respectively. Income from mortgage loan sales specifically attributable to Dover amounted to $904,000.

Critical Accounting Policies

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

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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 decreased $310,000 or 13.7% in the first quarter of 2004 compared to the same period of 2003. Earnings were positively impacted in the first quarter of 2004 by an $837,000 or 30.3% increase in noninterest income although the net gain in revenue from operations was negatively impacted by a $225,000 or 3.3% decrease in net interest income. The net $612,000 gain in revenue was more than offset by increases of $1,084,000 or 18.0% in noninterest expense and $20,000 in the provision for loan losses. Certain factors specifically affecting the elements of income and expense were discussed above in “Significant Factors Affecting Earnings in 2004”.

On an annualized basis, return on average assets decreased from 1.20% in the first quarter of 2003 to .99% in the first quarter of 2004. Return on average shareholders’ equity decreased from 12.23% to 9.41% in comparing the same periods. In the first quarter of 2004, return on tangible assets and equity (calculated by deducting average goodwill from average assets and from average equity) amounted to 1.01% and 11.72%, respectively.

Net Interest Income

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

Net interest income was $6,527,000 in the first quarter of 2004 compared to $6,752,000 in the same period of 2003. This decrease of $225,000 or 3.3% resulted primarily from a decline in the net yield on earning assets, or net interest margin, from 4.11% in the first quarter of 2003 to 3.84% in the same period of 2004, the effect of which was partially offset by a 3.6% increase in the level of average earning assets. A significant portion of the increase in average earnings assets resulted from the acquisition of Dover Mortgage Company on April 1, 2003. On a taxable equivalent basis, the decrease in net interest income in the first quarter of 2003 was $231,000, reflecting changes in the relative mix of taxable and non-taxable earning assets in each period.

Table 1 on page 27 sets forth for the periods indicated information with respect to the Corporation’s average balances of assets and liabilities, as well as the total dollar amounts of interest income (taxable equivalent basis) from earning assets and interest expense on interest-bearing liabilities, resultant rates earned or paid, net interest income, net interest spread and net yield on earning assets. Net interest spread refers to the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. Net yield on earning assets, or net interest margin, refers to net interest income divided by average earning assets and is influenced by the level and relative mix of earning assets and interest-bearing liabilities. Changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are also analyzed in Table 1. Volume refers to the average dollar level of earning assets and interest-bearing liabilities.

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

Following the significant declines in 2001, interest rates have tended to stabilize in a generally low-rate environment for rates both earned and paid by the Corporation. After reductions in the prime rate totaling 4.75% in 2001, there were additional rate cuts of .50% in November 2002 and .25% in June 2003, resulting in the current prime rate of 4.00%. The prime rate averaged 6.99% in 2001, falling to 4.67% in 2002 and 4.12% in 2003.

The Corporation’s net interest margin and net interest spread were negatively impacted in 2003 due in part to the prime rate reductions in November 2002 and June 2003 but also because of the cumulative effect of the reductions in yields on fixed rate earning assets over an extended period. Although the margin and spread were lower for the first three months of 2004 compared to the same period of 2003, there has tended to be a stabilization of these measures starting in the latter part of 2003.

The prime rate averaged 4.00% in the first quarter of 2004 compared to 4.25% in the first quarter of 2003. The net interest spread, in comparing first quarter periods, declined by 24 basis points from 3.85% in 2003 to 3.61% in 2004, reflecting the effect of a decrease in the average total yield on earning assets that more than offset the decrease in the average rate paid on interest-bearing liabilities, or cost of funds. The yield on earning assets decreased by 66 basis points from 6.10% in 2003 to 5.44% in 2004, while the cost of funds decreased by 42 basis points from 2.25% to 1.83%.

Provision for Loan Losses

This provision is the charge against earnings to provide an allowance or reserve for probable losses inherent in the loan portfolio. The amount of each period’s charge is affected by several considerations including management’s evaluation of various risk factors in determining the adequacy of the allowance (see “Asset Quality”), actual loan loss experience and loan portfolio growth. Earnings were negatively impacted in the first quarter of 2004 by a $20,000 increase in the provision.

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

Noninterest Income

Noninterest income increased $837,000 or 30.3% in the first quarter of 2004 compared to the same period of 2003, reflecting in large part the acquisition of Dover Mortgage Company on April 1, 2003, as discussed above, and further to the general increase in the volume of business. The increase was primarily due to a $630,000 increase in income from mortgage loan sales and a $286,000 increase in income from trust and investment services. Although income from mortgage loan sales has been negatively impacted in 2004 by the increase in long-term conforming mortgage rates from the historical lows that prevailed through most of 2003, the total income level was favorably affected by two factors discussed above in “Significant Factors Affecting Earnings in 2004”: $233,000 of income from the sale of loans previously classified as held for investment and $904,000 of income from mortgage loan sales by Dover which was acquired subsequent to the 2003 first quarter. The increase in income from trust and investment services was largely related to the general increase in the volume of sales of annuity products.

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Noninterest Expense

Noninterest expense was $1,084,000 or 18.0% higher in the first quarter of 2004 compared to the same period of 2003, due primarily to the acquisition of Dover Mortgage Company on April 1, 2003. As discussed above in “Significant Factors Affecting Earnings in 2004”, noninterest expense attributable to Dover in the 2004 first quarter amounted to $861,000. Regarding specific expense categories, the largest factor resulting in higher noninterest expense was the generally increased level of personnel expense, which was impacted by increased staffing requirements in addition to what was attributable to the Dover acquisition, by normal salary adjustments and by higher costs of fringe benefits. The cost of data processing services was higher in the 2003 first quarter because of the outside data processing services employed by Rowan Bank until the conversion to an in-house system in March 2003, with the conversion project separately resulting in $140,000 in expenses. Other expense has been affected in 2004 by higher levels of advertising and marketing expenditures and by increased expenses related to credit administration and foreclosed properties.

Income Taxes

The effective income tax rate decreased from 30.4% in the first quarter of 2003 to 29.3% in the same period of 2004 due principally to a decrease in the ratio of taxable to non-taxable income.

Liquidity

Liquidity for the subsidiary banks refers to their continuing ability to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds to the Parent Company for payment of dividends, debt service and other operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks, (b) the outstanding balance of federal funds sold, (c) lines for the purchase of federal funds from other banks, (d) the lines of credit established at the Federal Home Loan Bank totaling $159,200,000, 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, loans and other assets of the subsidiary banks are based primarily on a core of local deposits and the subsidiary 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 each subsidiary bank’s market area, while maintaining the desired level of immediate liquidity and a substantial investment securities portfolio available for both immediate and secondary liquidity purposes.

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

Commitments, Contingencies and Off-Balance Sheet Risk

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

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Commitments of the subsidiary banks to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. At March 31, 2004, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $168,961,000. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower.

The subsidiary banks issue standby letters of credit whereby the Corporation guarantees the performance of a customer to a third party if a specified triggering event or condition occurs. The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee. All standby letters of credit provide for recourse against the customer on whose behalf the letter of credit was issued, and this recourse may be further secured by a pledge of assets. The maximum potential amount of undiscounted future payments related to standby letters of credit was $6,221,000 at March 31, 2004 and $106,000 at March 31, 2003. Due to insignificance, the Corporation has recorded no liability at March 31, 2004 for the current carrying amount of the obligation to perform as a guarantor.

In connection with its asset/liability management objectives, the Corporation entered into an interest rate swap on a $7,000,000 Federal Home Loan Bank (FHLB) advance during the three months ended March 31, 2004 that converts the fixed rate cash flow exposure on the FHLB advance to a variable rate cash flow. As structured, the pay-variable, receive-fixed swap is evaluated as being a fair value hedge with no ineffectiveness; and, consequently, the difference in cash flows in each period between the variable rate interest payments that the Corporation makes and the fixed rate interest payments received is currently reported in earnings.

During the three months ended March 31, 2004, the interest rate swap resulted in a net reduction of $11,000 in the interest expense that would otherwise have been reported for the FHLB advance. The fair value of the swap at March 31, 2004 was recorded on the consolidated balance sheet as an asset in the amount of $77,000, offset by a valuation adjustment in the same amount to the FHLB advance.

Dover Mortgage Company originates certain fixed rate residential mortgage loans with the intention of selling these loans. Between the time that Dover enters into an interest rate lock or a commitment to originate a fixed rate residential mortgage loan with a potential borrower and the time the closed loan is sold, the Corporation is subject to variability in market prices related to these commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to deliver loans into a mortgage-backed security. The commitments to originate fixed rate residential mortgage loans and the forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their fair value adjustments are recorded through the income statement in income from mortgage loan sales. The commitments to originate fixed rate residential mortgage loans totaled $25,913,000 at March 31, 2004. The related forward sales commitments totaled $25,913,000 at March 31, 2004. The fair value of these commitments was recorded as a net asset of $303,000 at March 31, 2004. Loans held for sale by Dover Mortgage Company totaled $11,550,000 at March 31, 2004. The related forward sales commitments totaled $11,550,000 at March 31, 2004. The fair value of these commitments was recorded as a net asset of $29,000 at March 31, 2004.

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The subsidiary banks had loans held for sale of $3,086,000 at March 31, 2004. Binding commitments of the subsidiary banks for the origination of mortgage loans intended to be held for sale at March 31, 2004 were not material.

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

Asset/Liability Management and Interest Rate Sensitivity

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

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

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 March 31, 2004, FNB Corp. and each of the subsidiary banks were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital. Under current requirements, the minimum total capital ratio is 8.00% and the minimum Tier 1 capital ratio is 4.00%. At March 31, 2004, FNB Corp. had a total capital ratio of 11.29% and a Tier 1 capital ratio of 10.29%. First National Bank and Rowan Bank had total capital ratios of 12.36% and 11.98%, respectively, and Tier 1 capital ratios of 11.36% and 10.88%, 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

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assets for goodwill and other disallowed intangible assets at the measurement date. As currently required, the minimum leverage capital ratio is 4.00%. At March 31, 2004, FNB Corp. had a leverage capital ratio of 8.41%. First National Bank and Rowan Bank had leverage capital ratios of 9.48% and 8.37%, 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 March 31, 2004 and, accordingly, are well-capitalized under the regulatory framework for prompt corrective action.

Balance Sheet Review

Total assets at March 31, 2004 were $44,655,000 or 5.8% higher than at March 31, 2003, partially reflecting the acquisition of Dover Mortgage Company on April 1, 2003 as discussed in the “Overview”, and were $41,076,000 or 5.3% higher than at December 31, 2003. Similarly, deposits were ahead by $12,510,000 or 2.1% and $18,981,000 or 3.2%. The level of total assets was also affected at March 31, 2004 compared to both March 31, 2003 and December 31, 2003 by additional advances totaling $17,500,000 from the Federal Home Loan Bank that were obtained primarily to help fund future loan growth. Average assets increased 4.7% in the first quarter of 2004 compared to the same period in 2003, while average deposits increased 1.6%.

Investment Securities

Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. In general, because of loan funding needs, proceeds from investment maturities and calls were diverted to this purpose, leading to a $14,277,000 or 9.5% reduction in the level of investment securities compared to March 31, 2003. Investable funds not otherwise utilized are temporarily invested as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs.

Loans

The Corporation’s primary source of revenue and largest component of earning assets is the loan portfolio. Due largely to internal loan growth, although augmented by the acquisition of Dover Mortgage Company on April 1, 2003 as discussed in the “Overview”, loans increased $70,701,000 or 13.9% during the twelve-month period ended March 31, 2004. The loan increase during the first quarter of 2004, which was affected by the sale of loans totaling $12,535,000 previously classified as held for investment as discussed above in “Significant Factors Affecting Earnings in 2004”, was $28,246,000 or 5.1%. Affected by both the Dover acquisition and the sale of loans previously held for investment, average loans were $61,853,000 or 12.2% higher in the first quarter of 2004 than in the same period of 2003. The ratio of average loans to average deposits, in comparing first quarter periods, increased from 85.9% in 2003 to 94.8% in 2004. The ratio of loans to deposits at March 31, 2004 was 94.0%.

While the level of the entire loan portfolio has been adversely affected for an extended period by the general slowdown in the economy, the portfolios related to construction loans and commercial and other real estate loans experienced significant gains during both the twelve-month period ended March 31, 2004 and the first quarter of 2004. The balance of the 1-4 family residential mortgage loan portfolio, exclusive of the initial impact of the Dover Mortgage Company acquisition, has been affected by the high level of refinancing

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activity since many refinanced loans that were previously included in the “held for investment” category were sold as part of the refinancing process and has also been affected, as discussed above, by the direct sale in the 2004 first quarter of certain loans previously classified as held for investment.

Asset Quality

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

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

At March 31, 2004, the Corporation had impaired loans which totaled $1,905,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $1,166,000. At March 31, 2003, the Corporation had impaired loans which totaled $3,242,000, of which, loans totaling $3,180,000 were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $1,374,000. At December 31, 2003, the Corporation had impaired loans which totaled $1,963,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $1,133,000.

At March 31, 2004, nonperforming loans were $5,725,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $4,668,000 and $1,057,000, respectively. At March 31, 2003, nonperforming loans were $7,098,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $4,525,000 and $2,573,000, respectively. At December 31, 2003, nonperforming loans were $5,993,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $5,235,000 and $758,000, respectively.

Based on information that has become available subsequent to March 31, 2004, management has identified certain loans that are expected to be either wholly or partially charged off in the second quarter of 2004, resulting in charge-offs estimated to be in a range of $1,800,000 to $2,500,000. Although a portion of these loans had specific reserves included in the allowance for loan losses at March 31, 2004, it is expected that the provision for loan losses charged against income in the second quarter of 2004 will be higher than in the 2004 first quarter. Due to the utilization of specific reserves in recording these charge-offs, however, the allowance for loan losses, as a percentage of loans held for investment, may be at a lower level at June 30, 2004 than at March 31, 2004.

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

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

Management believes the allowance for loan losses of $6,330,000 at March 31, 2004 is adequate to cover probable losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment. Management’s judgments are based on numerous assumptions about current events which it believes to be reasonable, but which may or may not be valid. Thus there can be no assurance that loan losses in future periods will not exceed the current allowance or that future increases in the allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting the operating results of the Corporation.

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

	Three Months Ended March 31,
	2004			2003
	(in thousands)
Balance at beginning of period	$	6,172		$	6,109
Charge-offs		230			214
Recoveries		163			24
Net loan charge-offs		67			190
Provision for loan losses		270			250
Allowance adjustment for loans sold		(45	)		—
Balance at end of period	$	6,330		$	6,169

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.

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The level and mix of deposits has been specifically affected by the following factors. Reflecting new deposit products and extensive promotion efforts, noninterest-bearing demand deposits had the most significant growth of any component of deposits during the twelve-month period ended March 31, 2004, increasing $11,211,000 during that period and $1,978,000 during the first quarter of 2004. Interest-bearing demand deposits have had similarly strong growth, increasing $9,369,000 during the twelve-month period ended March 31, 2004 and $4,263,000 during the first quarter of 2004, although approximately $3,000,000 of these increases apparently resulted from a temporary balance fluctuation at March 31, 2004. Money market deposits and time deposits decreased $5,027,000 and $5,389,000, respectively, during the twelve-month period ended March 31, 2004, reflecting the effect of interest rate declines. Time deposits did increase $10,578,000 during the first quarter of 2004 due largely to the increase in time deposits obtained from governmental units, such deposits amounting to $58,879,000, $43,688,000 and $49,605,000 at March 31, 2004, March 31, 2003 and December 31, 2003, respectively.

Business Development Matters

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

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

In January 2004, First National Bank received regulatory approval for establishment of a new branch office in Greensboro, North Carolina. A loan production office was initially opened in February 2004 with a full-service banking office to follow.

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

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

Accounting Pronouncement Matters

In December 2003, the FASB issued revised Statement of Financial Accounting Standards No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“SFAS No. 132”), which, similar to original SFAS No. 132, revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions”, SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. Revised SFAS No. 132 retains the disclosure requirements contained in original SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, which it replaces. Revised SFAS No. 132 requires additional disclosures to those in original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The provisions of original SFAS

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No. 132 remain in place until the provisions of revised SFAS No. 132 are adopted. Certain provisions of revised SFAS No. 132 are effective for fiscal years ending after December 15, 2003 while others are effective for fiscal years ending after June 15, 2004. Additionally, certain provisions are effective for interim periods beginning after December 15, 2003. The Corporation has adopted the disclosure provisions specifically effective for fiscal years ending after December 15, 2003 and for interim periods beginning after December 15, 2003 and will adopt the remaining disclosure provisions as they become effective.

On March 9, 2004, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (“SAB No. 105”). SAB No. 105 provides recognition guidance for entities that issue loan commitments that are required to be accounted for as derivative instruments. SAB No. 105 indicates that the expected future cash flows related to the associated servicing of the loan and any other internally-developed intangible assets should not be considered when recognizing a loan commitment at inception or through its life. SAB No. 105 also discusses disclosure requirements for loan commitments and is effective for loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004. The Corporation currently includes the associated servicing of the loan when recognizing loan commitments at inception and throughout its life and is currently evaluating the impact of applying the requirements of SAB No. 105. At this time, it is anticipated that the effect may be material to future financial statements.

Non-GAAP Measures

This Quarterly Report on Form 10-Q contains financial information determined by methods other than in accordance with generally accepted accounting principles (“GAAP”). The Corporation’s management uses these non-GAAP measures in their analysis of the Corporation’s performance. These non-GAAP measures exclude average goodwill from the calculations of return on average assets and return on average equity. Management believes presentations of financial measures excluding the impact of goodwill provide useful supplemental information that is essential to a proper understanding of the operating results of the Corporation’s core businesses. In addition, certain designated net interest income amounts are presented on a taxable equivalent basis. Management believes that the presentation of net interest income on a taxable equivalent basis aids in the comparability of net interest income arising from taxable and tax-exempt sources. These disclosures should not be viewed as a substitute for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

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

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as “believes”, “expects”, “plans”, “projects”, “goals”, “estimates”, “may”, “could”, “should”, or “anticipates” or the negative thereof or other variations thereon of comparable terminology, or by discussions of strategy that involve risks and uncertainties. In addition, from time to time, the Corporation or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, various filings made by the Corporation with the Securities and Exchange Commission, or press releases or oral statements made by or with the approval of an authorized executive officer of the Corporation. Forward-looking statements are based on management’s current views and assumptions and involve risks and

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uncertainties that could significantly affect expected results. The Corporation wishes to caution the reader that factors, such as those listed below, in some cases have affected and could affect the Corporation’s actual results, causing actual results to differ materially from those in any forward-looking statement. These factors include: (i) expected cost savings from the Corporation’s acquisition described in the Overview may not materialize within the expected time frame, (ii) revenues following the acquisition may not meet expectations, (iii) costs or difficulties related to the integration of the business of the company acquired may be greater than anticipated, (iv) competitive pressure in the banking industry or in the Corporation’s markets may increase significantly, (v) changes in the interest rate environment may reduce margins, (vi) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration, (vii) changes may occur in banking legislation and regulation, (viii) changes may occur in general business conditions and (ix) changes may occur in the securities markets. Readers should also consider information on risks and uncertainties contained in the discussions of competition, supervision and regulation, and effect of governmental policies contained in the Corporation’s most recent Annual Report on Form 10-K.

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Table 1

Average Balances and Net Interest Income Analysis

THREE MONTHS ENDED MARCH 31

	2004						2003						2004 Versus 2003
	Average Balance		Interest Income/ Expense		Average Rates Earned/ Paid		Average Balance		Interest Income/ Expense		Average Rates Earned/ Paid		Interest Variance due to (1)						Net Change
													Volume			Rate
	(Taxable Equivalent Basis, Dollars in Thousands)
Earning Assets
Loans (2) (3)	$	570,123	$	8,005	5.67	%	$	508,270	$	8,202	6.52	%	$	945		$	(1,142	)	$	(197	)
Investment securities (2):
Taxable income		87,583		991	4.53			122,426		1,692	5.53			(429	)		(272	)		(701	)
Non-taxable income		49,351		694	5.62			28,662		522	7.29			312			(140	)		172
Other earning assets		12,664		29	0.95			35,158		105	1.21			(57	)		(19	)		(76	)
Total earning assets		719,721		9,719	5.44			694,516		10,521	6.10			771			(1,573	)		(802	)
Cash and due from banks		17,323						15,485
Goodwill		16,327						12,601
Other assets, net		36,454						31,817
Total Assets	$	789,825					$	754,419
Interest-Bearing Liabilities
Interest-bearing deposits:
Demand deposits	$	87,960		79	0.37		$	81,289		122	0.61			9			(52	)		(43	)
Savings deposits		53,584		42	0.32			50,365		85	0.68			5			(48	)		(43	)
Money market deposits		72,677		160	0.89			73,539		264	1.46			(3	)		(101	)		(104	)
Certificates and other time deposits		317,508		1,801	2.30			328,026		2,222	2.75			(69	)		(352	)		(421	)
Retail repurchase agreements		15,455		26	0.67			17,959		54	1.23			(7	)		(21	)		(28	)
Federal Home Loan Bank advances		59,273		587	4.02			53,380		576	4.37			60			(49	)		11
Federal funds purchased		3,697		12	1.32			53		—	1.61			12			—			12
Other borrowed funds		21,154		143	2.74			11,000		98	3.61			74			(29	)		45
Total interest-bearing liabilities		631,308		2,850	1.83			615,611		3,421	2.25			81			(652	)		(571	)
Noninterest-bearing demand deposits		69,392						58,621
Other liabilities		6,167						6,214
Shareholders' equity		82,958						73,973
Total Liabilities and Shareholders' Equity	$	789,825					$	754,419
Net Interest Income and Spread			$	6,869	3.61	%			$	7,100	3.85	%	$	690		$	(921	)	$	(231	)
Net Yield on Earning Assets					3.84	%					4.11	%

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

⁽²⁾ Interest income 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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

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

Item 4. Controls and Procedures

As of March 31, 2004, the end of the period covered by this report, FNB Corp. carried out an evaluation under the supervision and with the participation of the company’s management, including FNB Corp.’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of FNB Corp.’s disclosure controls and procedures. In designing and evaluating the company’s disclosure controls and procedures, FNB Corp. and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and FNB Corp.’s management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by FNB Corp. in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. No significant changes in the company’s internal control over financial reporting occurred during the period ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, FNB Corp.’s internal control over financial reporting. FNB Corp. reviews its disclosure controls and procedures, which may include its internal controls over financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness.

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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, 31 and 32 of this report.

(b) Reports on Form 8-K.

During the quarter ended March 31, 2004, the Corporation filed a Current Report on Form 8-K dated April 19, 2004, which furnished under Item 12 the Corporation’s earnings release for the quarter ended March 31, 2004. The information furnished in such report is not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, is not incorporated into this Report on Form 10-Q and the Corporation does not intend to incorporate such report by reference into any filing made by the Corporation under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof.

SIGNATURES

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

	FNB Corp. (Registrant)
Date: May 7, 2004	By:	/s/ Jerry A. Little
		Jerry A. Little       Treasurer and Secretary       (Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS

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

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Exhibit No.	Description of Exhibit
10.21*	Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrant’s Stock Compensation Plan, incorporated herein by reference to Exhibit 10.31 to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.
10.22*	Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrant’s Stock Compensation Plan, incorporated herein by reference to Exhibit 10.32 to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.
10.23*	FNB Corp. 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-105442).
10.24*	Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrant’s 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.24 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended September 30, 2003.
10.25*	Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrant’s 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.25 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2003.
10.30*	Employment Agreement dated as of December 27, 1995 between First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10.50 to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended December 31, 1995.
10.31*	Carolina Fincorp, Inc. Stock Option Plan (assumed by the Registrant on April10, 2000), incorporated herein by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-54702).
10.32*	Employment Agreement dated as of April 10, 2000 between First National Bank and Trust Company and R. Larry Campbell, incorporated herein by reference to Exhibit 10.32 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2000.
10.33*	Nonqualified Supplemental Retirement Plan with R. Larry Campbell, incorporated herein by reference to Exhibit 10(c) to the Annual Report on Form 10-KSB of Carolina Fincorp, Inc. for the fiscal year ended June 30, 1997.

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Exhibit No.	Description of Exhibit
10.34*	Employment Agreement dated as of August 1, 2002 between Rowan Savings Bank SSB, Inc. and Bruce D. Jones, incorporated herein by reference to Exhibit 10.34 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended September 30, 2002.
10.35*	Form of Change of Control Agreement between FNB Corp. and certain of its key employees and officers, incorporated herein by reference to Exhibit 10.35 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2003.
10.36*	Supplemental Income Agreement dated as of November 1, 1990 between Rowan Federal Savings and Loan Association and Bruce D. Jones.
31.10	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.11	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract, or compensatory plan or arrangement.

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EX-3.20

Exhibit 3.20

Composite Copy

March 18, 2004    

AMENDED AND RESTATED BYLAWS

OF

FNB CORP.

ARTICLE I

Offices

1. Principal Office. The principal office of the corporation shall be located at such place as the Board of Directors may determine.

2. Other Offices. The corporation may have offices at such other places, either within or without the State of North Carolina, as the Board of Directors may from time to time determine, or as the affairs of the corporation may require.

ARTICLE II

Shareholders’ Meetings

1. Place of Meetings. All meetings of the shareholders shall be held at the principal office of the corporation, or at such other place, either within or without the State of North Carolina, as shall be designated in the notice of the meeting or agreed upon by a majority of the shareholders entitled to vote thereat.

2. Annual Meetings. The annual meeting of shareholders shall be held on the second Tuesday in May, if not a legal holiday, but if a legal holiday, then on the next day following not a legal holiday, for the purpose of electing directors of the corporation and for the transaction of such other business as may be properly brought before the meeting.

3. Substitute Annual Meetings. If the annual meeting shall not be held on the day designated by these bylaws, a substitute annual meeting may be called in accordance with the provisions of Section 4 of this Article. A meeting so called shall be designated and treated for all purposes as the annual meeting.

4. Special Meetings. Special meetings of the shareholders may be called at any time by the President, Secretary or Board of Directors of the corporation.

5. Notice of Meetings. Written or printed notice stating the time and place of the meeting shall be delivered no fewer than 10 nor more than 60 days before the date thereof, either

personally or by mail, by or at the direction of the President, the Secretary, or other person calling the meeting, to each shareholder of record entitled to vote at such meeting and to each nonvoting shareholder entitled to notice of the meeting. If the corporation is required by law to give notice of proposed action to nonvoting shareholders and the action is to be taken without a meeting pursuant to Section 9 of this Article, written notice of such proposed action shall be delivered to such shareholders not less than 10 days before such action is taken.

If notice is mailed, such notice shall be effective when deposited in the United States mail with postage thereon prepaid and correctly addressed to the shareholder’s address shown in the corporation’s current record of shareholders.

In the case of an annual or substitute annual meeting, the notice of meeting need not specifically state the business to be transacted thereat unless it is a matter with respect to which specific notice to the shareholders is expressly required by the provisions of the North Carolina Business Corporation Act. In the case of a special meeting the notice of meeting shall specifically state the purpose or purposes for which the meeting is called.

When a meeting is adjourned for more than 120 days after the date fixed for the original meeting or if a new record date for the adjourned meeting is fixed, notice of the adjourned meeting shall be given as in the case of an original meeting. When a meeting is adjourned for 120 days or less and no new record date for the adjourned meeting is fixed, it is not necessary to give notice of the adjourned meeting other than by announcement at the meeting at which the adjournment is taken.

6. Waiver of Notice. A shareholder may waive any notice required by law, the Articles of Incorporation or these bylaws before or after the date and time stated in the notice. Such waiver must be in writing, be signed by the shareholder entitled to the notice, and be delivered to the corporation for inclusion in the minutes or filing with the corporate records. A shareholder’s attendance at a meeting waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. A shareholder’s attendance at a meeting also waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the notice of meeting, unless the shareholder objects to considering the matter before it is voted upon.

7. Quorum. Shares representing a majority of the outstanding votes entitled to vote upon a particular matter within each voting group represented in person or by proxy shall constitute a quorum at meetings of shareholders. If there is no quorum at the opening of a meeting of shareholders, such meeting may be adjourned from time to time by a vote of a majority of the votes cast on the motion to adjourn; at any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the original meeting unless a new record date is or must be set for the adjourned meeting.

Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is set for that adjourned meeting.

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8. Voting of Shares. Except as otherwise provided in the Articles of Incorporation, each outstanding share having voting rights shall be entitled to one vote on each matter submitted to a vote at a meeting of the shareholders. Except in the election of directors, a majority of the votes cast on any matter at a meeting of shareholders at which a quorum is present shall be the act of the shareholders on that matter, unless a greater vote is required by law, by the Articles of Incorporation or by a bylaw adopted by the shareholders of the corporation.

9. Informal Action by Shareholders. Any action which is required or permitted to be taken at a meeting of the shareholders may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed, either before or after the time the action which is the subject of the shareholder approval is taken, by all of the persons who would be entitled to vote upon such action at a meeting and delivered to the corporation for inclusion in the minutes or filing with the corporate records. Unless otherwise fixed by law or these bylaws, the record date for determining the shareholders entitled to take action without a meeting shall be the date the first shareholder signs the consent.

10. Voting Lists. After fixing a record date for a meeting, the corporation shall prepare an alphabetical list of the names of all the shareholders entitled to notice of such meeting, arranged by voting group and within each voting group by class or series of shares, with the address of and number of shares held by each shareholder. Such list shall be available for inspection by any shareholder, beginning two business days after notice is given of the meeting for which the list was prepared and continuing through the meeting, at the corporation’s principal office or at a place identified in the meeting notice in the city where the meeting will be held. A shareholder, or his agent or attorney, is entitled on written demand to inspect and, subject to the requirements of North Carolina law, to copy the list, during regular business hours and at his expense, during the period it is available for inspection. This list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder, or his agent or attorney, during the whole time of the meeting or any adjournment.

11. Proxies. Shares may be voted either in person or by one or more proxies authorized by an appointment of proxy given by the shareholder or by the shareholder’s duly authorized attorney-in-fact, in any manner provided by law, including electronic or telephonic transmission. An appointment of proxy is valid for 11 months from the date of its execution, unless a different period is expressly provided in the appointment form. An appointment is revocable by the shareholder unless the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest.

12. Shares Held by Nominees. The corporation may establish a procedure by which the beneficial owner of shares that are registered in the name of a nominee is recognized by the corporation as a shareholder. The extent of this recognition may be determined in the procedure.

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ARTICLE III

Directors

1. General Powers. Subject to the Articles of Incorporation, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation be managed under the direction of, its Board of Directors.

2. Number, Term and Qualifications. The number of directors of the corporation shall be not less than nine (9) nor more than twenty-five (25), the exact number of directors within such minimum and maximum limits to be fixed and determined from time to time by resolution by a majority of the full Board of Directors or by resolution of the shareholders at any annual or special meeting thereof.

The Board of Directors shall be divided into three classes, which shall be as nearly equal in number as possible. In the event of a change in the number of directors, the Board of Directors shall determine the class or classes to which the increased or decreased number of directors shall be apportioned; provided, however, that no decrease in the number of directors shall affect the term of any director then in office. The directors elected at the 1995 Annual Meeting of Shareholders shall be designated as Class I Directors, Class II Directors and Class III Directors at the time of their election and shall have terms of office as follows: the term of office of Class I Directors shall expire at the 1996 Annual Meeting of Shareholders, the term of office of Class II Directors shall expire at the 1997 Annual Meeting of Shareholders, and the term of office of Class III Directors shall expire at the 1998 Annual Meeting of Shareholders, with the members of each class of directors to hold office until their successors are elected and qualified. At each Annual Meeting of Shareholders subsequent to the 1995 Annual Meeting of Shareholders, directors elected to succeed those whose terms are expiring shall be elected for a term of office to expire at the third succeeding Annual Meeting of Shareholders and when their respective successors are elected and qualified.

Directors need not be residents of the State of North Carolina or shareholders of the corporation, except insofar as such requirements are imposed by national banking laws or by regulations of the Federal Reserve and/or the U.S. Comptroller of the Currency.

3. Election of Directors. Except as provided in Section 5 of this Article, the directors shall be elected at the annual meeting of shareholders by a plurality of the votes cast.

4. Removal. Directors may be removed from office with or without cause by the affirmative vote of a majority of the outstanding votes of the corporation entitled to be cast at an election of the directors. However, unless the entire Board of Directors is removed, an individual director may be removed only if the number of votes cast for the removal exceeds the number of votes cast against the removal. If any directors are so removed, new directors may be elected at the same meeting.

A director may not be removed by the shareholders at a meeting unless the notice of the meeting states that the purpose, or one of the purposes, of the meeting is removal of the director.

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5. Vacancies. Unless the Articles of Incorporation provide otherwise, if a vacancy occurs on the Board of Directors, including, without limitation, a vacancy resulting from an increase in the number of directors or from the failure by the shareholders to elect the full authorized number of directors, the vacancy may be filled by the shareholders or the Board of Directors. If the directors remaining in office constitute fewer than a quorum of the Board of Directors, vacancies may be filled by the affirmative vote of a majority of all the directors, or by the sole remaining director. A vacancy that will occur at a specific later date may be filled before the vacancy occurs but the new director may not take office until the vacancy occurs. A director elected to fill a vacancy shall serve for the unexpired term of his predecessor in office and until his successor is elected and qualified.

6. Chairman. There may be a Chairman of the Board of Directors elected by the directors from their number at any meeting of the Board. The Chairman shall preside at all meetings of the Board of Directors and perform such other duties as may be directed by the Board. The Chairman of the Board shall not be an officer of the corporation unless specifically so designated by the Board.

7. Compensation. The Board of Directors may compensate a director for his services as such and may provide for the payment of all expenses incurred by a director in attending regular and special meetings of the Board or in otherwise fulfilling his duties as a director.

8. Executive and Other Committees. Unless otherwise provided in the Articles of Incorporation or the bylaws, the Board of Directors, by resolution adopted by a majority of the number of directors then in office, may designate from among its members an executive committee and one or more other committees, each consisting of two or more directors. To the extent specified by the Board of Directors or in the Articles of Incorporation of the corporation, such committees shall have and may exercise all of the authority of the Board of Directors in the management of the business and affairs of the corporation, except that a committee may not authorize distributions; approve or propose to shareholders action that North Carolina law requires be approved by shareholders; fill vacancies on the Board of Directors or on any committee; amend the Articles of Incorporation; adopt, amend, or repeal bylaws; approve a plan of merger not requiring shareholder approval; authorize or approve reacquisition of shares of capital stock of the corporation, except according to a formula or method prescribed by the Board of Directors; or authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except that the Board of Directors may authorize a committee (or a senior executive officer of the corporation) to do so within limits specifically prescribed by the Board of Directors.

ARTICLE IV

Meetings of Directors

1. Regular Meetings. The Board of Directors may provide, by resolution, the time and place, either within or without the State of North Carolina, for the holding of regular meetings.

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2. Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, the President or any two directors. Such meetings may be held within or without the State of North Carolina.

3. Notice of Meetings. Regular meetings of the Board of Directors may be held without notice.

The person or persons calling a special meeting of the Board of Directors shall, at least two days before the meeting, give notice thereof by any usual means of communication. Such notice need not specify the purpose for which the meeting is called.

4. Waiver of Notice. Any director may waive any required notice before or after the date and time stated in the notice. Attendance at or participation by a director in a meeting shall constitute a waiver of notice of such meeting, unless the director at the beginning of the meeting (or promptly upon his arrival) objects to holding the meeting or transacting any business at the meeting and does not thereafter vote for or assent to action taken at the meeting.

5. Quorum. A majority of the number of directors prescribed, or, if no number is prescribed, the number in office immediately before the meeting begins, shall constitute a quorum for the transaction of business at any meeting of the Board of Directors.

6. Manner of Acting. Except as otherwise provided by law, the Articles of Incorporation or these bylaws, an act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.

The vote of a majority of the directors then holding office shall be required to adopt, amend or repeal a bylaw, if otherwise permissible. Approval of a transaction in which one or more directors have an adverse interest shall require a majority, not less than two, of the disinterested directors then in office, even though less than a quorum.

7. Presumption of Assent. A director of the corporation who is present at a meeting of the Board of Directors or a committee of the Board of Directors when corporate action is taken shall be deemed to have assented to the action taken unless his contrary vote is recorded; he objects at the beginning of the meeting (or promptly upon his arrival) to holding it or transacting business at the meeting; his dissent or abstention is entered in the minutes of the meeting; or he files written notice of dissent or abstention with the presiding officer of the meeting before its adjournment or with the corporation immediately after the adjournment of the meeting. The right of dissent or abstention is not available to a director who voted in favor of such action.

8. Informal Action by Directors and Attendance by Telephone. Action taken by a majority of the directors without a meeting is nevertheless Board action if written consent to the action in question, describing the action taken, is signed by all the directors and filed with the minutes of the proceedings of the Board or with the corporate records, whether done before or after the action so taken. Such action shall be effective when the last director signs the consent, unless the consent specifies a different effective date. The Board of Directors may permit any or

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all directors to participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting.

9. Loans to Directors. Except as otherwise provided by law, the corporation shall not directly or indirectly lend money to or guarantee the obligation of a director of the corporation unless the particular loan or guarantee is approved by a majority of the votes represented by the outstanding voting shares of all classes, voting as a single voting group, except the votes of shares owned by or voted under control of the benefited director, or unless the corporation’s Board of Directors determines that the loan or guarantee benefits the corporation and either approves the specific loan or guarantee or a general plan authorizing loans and guarantees. The fact that a loan or guarantee is made in violation of this Section does not affect the borrower’s liability on the loan.

ARTICLE V

Officers

1. Number. The officers of the corporation shall consist of a Chairman, a President, a Secretary, a Treasurer, and such Vice Presidents, Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers as may be elected from time to time. Any two or more offices may be held by the same person, except the offices of President and Secretary, but no officer may act in more than one capacity where action of two or more officers is required. It shall not be necessary for any officer to be a shareholder of the corporation.

2. Election and Term. Except as hereafter provided, the officers of the corporation shall be elected by the Board of Directors. Such election may be held at any regular or special meeting of the Board. Unless otherwise determined by the Board of Directors, the Chief Executive Officer may appoint assistant officers. Each officer shall hold office until his death, resignation, retirement, removal, disqualification or until his successor is elected and qualified.

3. Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board with or without cause. Officers appointed by the Chief Executive Officer may be removed by him. Any such removal shall be without prejudice to the contract rights, if any, of the person so removed.

4. Compensation. The compensation of all officers of the corporation other than assistant officers shall be fixed by the Board of Directors. No officer shall serve the corporation in any other capacity and receive compensation therefor unless such additional compensation be authorized by the Board of Directors. The compensation of all assistant officers shall be fixed by the Chief Executive Officer of the corporation or his designee.

5. President. The President shall, unless otherwise determined by the Board of Directors, be the Chief Executive Officer of the corporation and, subject to the control of the Board of Directors, shall supervise and control the management of the corporation according to these

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bylaws. He shall, in the absence of the Chairman, preside at all meetings of the shareholders. He shall sign, with any other proper officer, certificates for shares of the corporation, and any deeds, mortgages, bonds, contracts or other instruments that may lawfully be executed on behalf of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be delegated by the Board of Directors to some other officer or agent; and, in general, he shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time.

6. Vice Presidents. The Vice Presidents shall perform such duties and shall have such other powers as the Board of Directors or the President shall prescribe. The Board of Directors may designate one or more Vice Presidents as Executive or Senior Vice President, or any other title that the Board of Directors deems appropriate, and may rank the Vice Presidents in order of authority. The Vice President, or, if more than one, the highest ranking available Vice President, shall, in the absence or disability of the President, perform the duties and exercise the powers of that office.

7. Secretary. The Secretary shall keep accurate records of the acts and proceedings of all meetings of shareholders and directors. He shall give all notices required by law and by these bylaws. He shall have general charge of the corporate records and books and of the corporate seal, and he shall affix the corporate seal to any lawfully executed instruments requiring it. He shall have general charge of the stock transfer books of the Corporation and shall keep, at the registered or principal office of the Corporation, a record of shareholders showing the name and address of each shareholder and the number and class of the shares held by each. He shall sign such instruments as may require his signature, and in general, shall perform all duties incident to the office of Secretary and such other duties as may be assigned to him from time to time by the President or by the Board of Directors.

8. Treasurer. The Treasurer shall have custody of all funds and securities belonging to the Corporation and shall receive, deposit or disburse the same under the direction of the Board of Directors and the President. He shall keep full and accurate records of the finances of the Corporation in books especially provided for the purpose; and he shall cause a true statement of the assets and liabilities as of the close of each fiscal year and of the results of its operations and of changes in surplus for such fiscal year, all in reasonable detail, including particulars as to convertible securities then outstanding, to be made and filed at the registered or principal office of the Corporation within four months after the end of such fiscal year. The statement so filed shall be kept available for inspection by any shareholder for a period of ten years and the Treasurer shall mail or otherwise deliver a copy of the latest such statement to any shareholder upon his written request therefor. The Treasurer shall, in general, perform all duties incident to his office and such other duties as may be assigned to him from time to time by the President or by the Board of Directors.

9. Assistant Officers. The Assistant Vice Presidents, Secretaries and Treasurers shall, in the absence or disability of their superiors, perform the duties and exercise the powers of those offices and shall, in general, perform such other duties as shall be assigned to them by the President or by the respective officers to whom they report.

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10. Executive Officers. The Board of Directors may designate any officer as Chief Executive Officer, Chief Operating Officer, Chief Financial Officer or Chief Accounting Officer, which officer shall have such authority as the Board of Directors may designate.

11. Contract Rights. The appointment of an officer does not itself create contract rights in the officer.

12. Bonds. The Board of Directors may by resolution require any or all officers, agents and employees of the corporation to give bond to the corporation, with sufficient sureties, conditioned on the faithful performance of the duties of their respective offices or positions, and to comply with such other conditions as may from time to time be required by the Board of Directors.

ARTICLE VI

Contracts, Checks and Deposits

1. Contracts. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument on behalf of the corporation, and such authority may be general or confined to specific instances.

2. Checks and Drafts. All checks, drafts or orders for the payment of money issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors.

3. Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such depositories as the Board of Directors shall direct.

ARTICLE VII

Certificates for Shares and Transfer Thereof

1. Certificates for Shares. The Chairman or the President and the Secretary or the Treasurer or any other two officers designated by the Board of Directors shall sign (either manually or in facsimile) share certificates. Shares may but need not be represented by certificates. Unless otherwise provided by law, the rights and obligations of shareholders are identical whether or not their shares are represented by certificates. If shares are issued without certificates, the corporation shall, within a reasonable time after such issuance, send the shareholder a written statement of the information required on certificates by law. At a minimum each share certificate or information statement shall state on its face the following information: the name of the corporation and that it is organized under the law of North Carolina; the name of the person to whom issued; the number and class of shares and the designation of the series, if any, the certificate or information statement represents; if the

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corporation is authorized to issue different classes of shares or different series within a class, a summary of, or alternatively, a conspicuous statement on the back or front of the certificate or contained in the information statement that the corporation will furnish in writing and without charge, the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the Board of Directors to determine variations for future series); and, a conspicuous statement of any restrictions on the transfer or registration of transfer of the shares.

2. Transfer of Shares. Transfer of shares of the corporation evidenced by certificates shall be made only on the stock transfer books of the corporation by the holder of record thereof, or by his legal representative, who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or other officer or agent designated by the Board of Directors, and on surrender for cancellation of the certificate for such shares. Transfer of shares of the corporation not evidenced by certificates shall be made upon delivery to the corporation of such documentation as the corporation shall require.

3. Fixing Record Date. For the purpose of determining the shareholders entitled to notice of a meeting of shareholders, to vote, to take any other action, or to receive a dividend with respect to their shares, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders. Such record date fixed by the Board of Directors under this Section shall not be more than 70 days before the meeting or action requiring a determination of shareholders.

If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to a dividend, the close of the business day before the first notice is delivered to shareholders or the date on which the Board of Directors authorizes the dividend, as the case may be, shall be the record date for such determination of shareholders.

When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any adjournment thereof unless the Board of Directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting.

4. Lost Certificates. If a shareholder claims that a certificated security has been lost, apparently destroyed or wrongfully taken, the corporation shall issue a new certificated security or, at the option of the corporation, an equivalent noncertificated security in place of the original security, if the shareholder so requests before the corporation has notice that the security has been acquired by a bona fide purchaser, files with the corporation a sufficient indemnity bond if so required by the corporation, and satisfies any other reasonable requirements imposed by the corporation.

5. Holder of Record. The corporation may treat as absolute owner of shares the person in whose name the shares stand of record on its books just as if that person had full competency, capacity and authority to exercise all rights of ownership irrespective of any knowledge or notice

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to the contrary or any description indicating a representative, pledge or other fiduciary relation or any reference to any other instrument or to the rights of any other person appearing upon its record or upon the share certificates except that any person furnishing to the corporation proof of his appointment as a fiduciary shall be treated as if he were a holder of record of its share.

The corporation may reject a vote, consent, waiver, or proxy appointment if the Secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory’s authority to sign for the shareholder.

6. Reacquired Shares. The corporation may acquire its own shares and shares so acquired constitute authorized but unissued shares.

7. Rights, Options and Warrants. The corporation may issue rights, options or warrants for the purchase of shares of the corporation. The Board of Directors shall determine the terms upon which the rights, options or warrants are issued, their form and content, and the consideration for which the shares are to be issued. Without limitation, the Board of Directors may include on such rights, options and warrants restrictions or conditions that preclude or limit the exercise, transfer or receipt of such rights, options or warrants by the holder or holders, or beneficial owner or owners, of a specified number or percentage of the outstanding voting shares of the corporation or by any transferee of such holder or owner, or that invalidate or void such rights, options or warrants held by any such holder or owner or by such transferee. In addition, the Board of Directors may implement rights plans that create purchase or conversion rights that are not exercisable by a hostile bidder involved in a hostile takeover of the corporation.

ARTICLE VIII.

Indemnification

1. Extent. In addition to the indemnification otherwise provided by law, the corporation shall indemnify and hold harmless its directors and officers against liability and litigation expense, including reasonable attorneys’ fees, arising out of their status as directors or officers or their activities in any of such capacities or in any capacity in which any of them is or was serving, at the corporation’s request, in another corporation, partnership, joint venture, trust or other enterprise, and the corporation shall indemnify and hold harmless those directors, officers or employees of the corporation and who are deemed to be fiduciaries of the corporation’s employee pension and welfare benefit plans as defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA fiduciaries”) against all liability and litigation expense, including reasonable attorneys’ fees, arising out of their status or activities as ERISA fiduciaries; provided, however, that the corporation shall not indemnify a director or officer against liability or litigation expense that he may incur on account of his activities that at the time taken were known or reasonably should have been known by him to be clearly in conflict with the best interests of the corporation, and the corporation shall not indemnify an ERISA fiduciary against any liability or litigation expense that he may incur on account of his activities that at the time taken were known or reasonably should have been known by him to be clearly in conflict with the best interests of the employee benefit plan to which the activities relate. The

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corporation shall also indemnify the director, officer, and ERISA fiduciary for reasonable costs, expenses and attorneys’ fees in connection with the enforcement of rights to indemnification granted herein, if it is determined in accordance with Section 2 of this Article that the director, officer and ERISA fiduciary is entitled to indemnification hereunder.

2. Determination. Any indemnification under Section 1 of this Article shall be paid by the corporation in any specific case only after a determination that the director, officer or ERISA fiduciary did not act in a manner, at the time the activities were taken, that was known or reasonably should have been known by him to be clearly in conflict with the best interests of the corporation, or the employee benefit plan to which the activities relate, as the case may be. Such determination shall be made (a) by the affirmative vote of a majority (but not less than two) of directors who are or were not parties to such action, suit or proceeding or against whom any such claim is asserted (“disinterested directors”) even though less than a quorum, or (b) if a majority (but not less than two) of disinterested directors so direct, by independent legal counsel in a written opinion, or (c) by the vote of a majority of all of the voting shares other than those owned or controlled by directors, officers or ERISA fiduciaries who were parties to such action, suit or proceeding or against whom such claim is asserted, or by a unanimous vote of all of the voting shares, or (d) by a court of competent jurisdiction.

3. Advanced Expenses. Expenses incurred by a director, officer or ERISA fiduciary in defending a civil or criminal claim, action, suit or proceeding may, upon approval of a majority (but not less than two) of the disinterested directors, even though less than a quorum, or, if there are less than two disinterested directors, upon unanimous approval of the Board of Directors, be paid by the corporation in advance of the final disposition of such claim, action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer or ERISA fiduciary to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified against such expenses by the corporation.

4. Corporation. For purposes of this Article, references to directors, officers or ERISA fiduciaries of the “corporation” shall be deemed to include directors, officers and ERISA fiduciaries of FNB Corp., its subsidiaries, and all constituent corporations absorbed into FNB Corp. or any of its subsidiaries by a consolidation or merger.

5. Reliance and Consideration. Any director, officer or ERISA fiduciary who at any time after the adoption of this Bylaw serves or has served in any of the aforesaid capacities for or on behalf of the corporation shall be deemed to be doing or to have done so in reliance upon, and as consideration for, the right of indemnification provided herein. Such right shall inure to the benefit of the legal representatives of any such person and shall not be exclusive of any other rights to which such person may be entitled apart from the provision of this Bylaw. No amendment, modification or repeal of this Article VIII shall adversely affect the right of any director, officer or ERISA fiduciary to indemnification hereunder with respect to any activities occurring prior to the time of such amendment, modification or repeal.

6. Insurance. The corporation may purchase and maintain insurance on behalf of its directors, officers, employees and agents and those persons who were serving at the request of the corporation as a director, officer, partner or trustee of, or in some other capacity in, another

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corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article or otherwise. Any full or partial payment made by an insurance company under any insurance policy covering any director, officer, employee or agent made to or on behalf of a person entitled to indemnification under this Article shall relieve the corporation of its liability for indemnification provided for in this Article or otherwise to the extent of such payment, and no insurer shall have a right of subrogation against the corporation with respect to such payment.

ARTICLE IX

General Provisions

1. Dividends. The Board of Directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares in such manner and upon such terms and conditions as are permitted by law and by its Articles of Incorporation.

2. Waiver of Notice. Whenever any notice is required to be given to any shareholder or director under the provisions of the North Carolina Business Corporation Act or under the provisions of the Articles of Incorporation or bylaws of the corporation, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to such notice.

3. Fiscal Year. Unless otherwise ordered by the Board of Directors, the fiscal year of the corporation shall be from January 1 to December 31.

4. Inspection of Records by Shareholders. The shareholders shall not be entitled to inspect or copy any accounting records of the corporation or any records of the corporation with respect to any matter which the corporation determines in good faith may, if disclosed, adversely affect the corporation in the conduct of its business or may constitute material nonpublic information at the time the shareholder’s notice of demand to inspect and copy is received by the corporation.

5. Amendments. Except as otherwise provided herein, these bylaws may be amended or repealed and new bylaws may be adopted by the affirmative vote of a majority of the directors then holding office at any regular or special meeting of the Board of Directors.

The Board of Directors shall have no power to adopt a bylaw: (1) requiring more than a majority of the voting shares for a quorum at a meeting of shareholders or more than a majority of the votes cast to constitute action by the shareholders, except where higher percentages are required by law; (2) providing for the management of the corporation otherwise than by the Board of Directors or its Executive or other committees; (3) increasing or decreasing the number of directors authorized by these bylaws; (4) classifying and staggering the election of directors.

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No bylaw adopted or amended by the shareholders shall be altered or repealed by the Board of Directors unless specifically authorized by the shareholders at the time of such adoption or amendment.

6. Inapplicability of Article 9. Article 9 of Chapter 55 of the General Statutes of North Carolina entitled, “The North Carolina Shareholder Protection Act,” shall not apply to this corporation.

7. Inapplicability of Article 9A. Article 9A of Chapter 55 of the General Statutes of North Carolina, entitled “Control Share Acquisition Act,” shall not apply to this corporation.

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EX-10.36

Exhibit 10.36

SUPPLEMENTAL INCOME AGREEMENT

AGREEMENT entered into as of the 1^st day of November, 1990 between Rowan Federal Savings and Loan Association, a domestic Corporation having its principal office in China Grove, North Carolina (hereinafter referred to as the Company) and Bruce D. Jones of Concord, North Carolina (hereinafter referred to as the Employee).

WITNESSETH :

WHEREAS, the Employee has been employed by the Company since December 11, 1987; and,

WHEREAS, the performance of the Employee is such that assurance of his continued services is essential to the future growth and profits of the Company; and,

WHEREAS, the Company desires to retain the services of the Employee, and realizes that if the Employee were to leave the Company it would suffer a substantial financial loss; and,

WHEREAS, the Employee is willing to continue in the employ of the Company is the Company will agree to pay to the Employee or designees certain benefits in accordance with the provisions and conditions hereinafter set forth;

NOW THEREFORE, in consideration of the premises contained herein, the parties hereto mutually agree as follows:

1. Remuneration: During the period of the Employee’s employment with the Company, the Company will pay the Employee for services to be rendered:

A. Cash amounts at rates and times mutually agreed upon; and,

B. Additional amounts, payments of which will be deferred pursuant to the terms hereinafter set forth.

2. Retirement Benefit: Upon attainment of the first day of month following the employee’s 65^th birthday, the Company will commence to pay him $6,000 annually for a continuous period of 10 years. In the event that the Employee should die after becoming entitled to receive said monthly installments but before any or all of said installments have been paid, the Association will pay or will continue to pay said installments to such beneficiary or beneficiaries as the Employee has directed by filling with the Association a notice in writing. In the event of the death of the last named beneficiary before all the unpaid payments have been made, the balance of any amount which remains unpaid at said death shall be commuted on the basis of 8 percent per annum compound interest and shall be commuted on the basis of 8 percent per annum compound interest and

shall be paid in a single sum to the executor or administrator of the Employee’s estate.

3. Death Benefit: Should the Employee die while in the employment of the Association and prior to the attainment of his 65^th birthday, the Association (beginning at a date to be determined by the Association but within six months from the date of such death) will commence to pay $6,000 annually for a continuous period of 10 years to such beneficiary or beneficiaries as the Employee has directed by filing with the Association a notice in writing. Irrespective of the above, however, if the Employee dies as a result of suicide within two years of the execution of this agreement, the death benefit shall not exceed an amount equal to his waived salary plus interest at the rate of 8 percent per annum compounded annually. In the event of the death of the last named beneficiary before all the unpaid payments have been made, the balance of any amount which remains unpaid at said death shall be commuted on the basis of 8 percent per annum compound interest and shall be paid in a single sum to the executor or administrator of the estate of the last named beneficiary to die. In the absence of any such beneficiary designation, any amount remaining unpaid at the Employee’s death shall be commuted on the basis of 8 percent per annum compound interest and shall be paid in a single sum to the executor or administrator of the Employee’s estate.

4. Termination of Employment: If the Employee terminates his employment, for reasons other than death or the attainment of his 65^th birthday, at the end of two or more years from the execution date of this Agreement, he or his beneficiary, as applicable, shall be entitled upon the attainment of his 65^th birthday, or his prior death, to a percentage of the retirement benefits stated in Section 1 of this Agreement as determined by the following table:

FULL NUMBER OF YEARS SERVED AS EMPLOYEE FROM DATE OF EXECUTION OF THIS AGREEMENT UNTIL TERMINATION OF EMPLOYMENT	PERCENTAGE OF RETIREMENT BENEFITS STATED IN SECTION 1 OF THIS AGREEMENT TO WHICH THE EMPLOYEE IS ENTITLED
Under 15	0%
15	50%
16	60%
17	70%
18	80%
19	90%
20	100%

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5. Forfeiture Provisions:

A. During the period the retirement benefit is payable to the Employee under Section 2 of this Agreement, the Employee shall not engage in business activities in Rowan County, North Carolina which are in competition with the Association with first obtaining the written consent of the Association.

B. During the period the retirement payment is payable to the Employee under Section 2 of this Agreement, the Employee shall be available to render consulting services to the Association upon request by an officer of the Association, but such requests shall not be made more frequently than once each month. The Employee shall not be considered to have breached this condition if he is unable to consult because of his mental or physical disability.

C. Payment of the retirement benefit under this Agreement may be terminated by the Association, if the Employee fails to comply with either of the conditions set forth in paragraph (A) and (B) of this Section 5.

6. General Provision:

A. Except as otherwise provided by this Agreement, it is agreed that neither the Employee, nor his beneficiary shall have any right to commute, sell, assign, transfer or otherwise convey the right to receive any payments hereunder, which payments and the right thereto are expressly declared to be nonassignable and nontransferable.

B. The benefits payable under this Agreement shall be independent of, and in addition to, any other employment agreements that may exist from time to time between the parties hereto, concerning any other compensation payable by the Association to the Employee whether as salary, bonus, or otherwise. This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Association to discharge the Employee or restrict the right of the Association to discharge the Employee or restrict the right of the Employee to terminate his employment.

C. The rights of the Employee under this Agreement and of any beneficiary of the Employee shall be solely those of an unsecured creditor of the Association. Any asset acquired by the Association in connection with the liabilities assumed by it hereunder, shall not be deemed to be held under any trust for the benefit of the Employee or his beneficiaries or to be considered security for the performance of the obligations of the Association but shall be, and remain, a general, unpledged, unrestricted asset of the Association.

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D. The Association hereby reserves the right to accelerate the payments specified in Section 2, 3 and 4 above without the consent of the Employee, his estate, beneficiaries, or any other person claiming through or under him.

E. The Association agrees that it will not merge or consolidate with any other Association or organization, or permit its business activities to be taken over by any other organization unless and until the succeeding or continuing Association or other organization shall expressly assume the rights and obligations of the Association herein set forth. The Association further agrees that it will not cease its business activities or terminate its existence, other than as heretoforth set forth in this Section, without having made adequate provision for the fulfilling of its obligations hereunder.

F. This Agreement may be revoked or amended in whole or in part by a writing signed by both of the parties hereto.

G. This Agreement shall be subject to and construed under the laws of the State of North Carolina.

IN WITNESS THEREOF, the said Association has caused this Agreement to signed in its Corporate name by its duly authorized officer, and impressed with its Corporate seal, attested by its Secretary, and the said Employee has hereunto set his hand and seal, all on the day and year first above written.

ATTEST:
/s/    Nancy C. Hildreth	/s/    Eric E. Rhodes	(Seal)
	Vice President

WITNESS: /s/ Nancy C. Hildreth	/s/    Bruce D. Jones	(Seal)
	(The Employee)

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EX-31.10

Exhibit 31.10

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Michael C. Miller, certify that:

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

2. Based on my knowledge, this 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 report;

3. 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 report;

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

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2004	/s/ Michael C. Miller
	Michael C. Miller      Chief Executive Officer

EX-31.20

Exhibit 31.11

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jerry A. Little, certify that:

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

2. Based on my knowledge, this 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 report;

3. 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 report;

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

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2004	/s/ Jerry A. Little
	Jerry A. Little      Chief Financial Officer

EX-32

Exhibit 32

Certification

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of FNB Corp., a North Carolina corporation (the “Corporation”), does hereby certify that:

The Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (the “Form 10-Q”) of the Corporation fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all materials respects, the financial condition and results of operations of the Corporation.

Date: May 7, 2004	/s/ Michael C. Miller
	Michael C. Miller      Chief Executive Officer

Date: May 7, 2004	/s/ Jerry A. Little
	Jerry A. Little      Chief Financial Officer

The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.