CommunityOne Bancorp 10-K 2005 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2005

Commission File Number 0-13823

FNB CORP.

(Exact name of Registrant as specified in its charter)

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

101 Sunset Avenue, Asheboro, North Carolina 27203

(Address of principal executive offices)

(336) 626-8300

(Registrant’s telephone number, including area code)

Securities pursuant to Section 12(g) of the Act:

Common Stock, par value $2.50 per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes¨    Nox

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes¨    Nox

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.    Yesx    No¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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

Large accelerated filer  ¨                    Accelerated filer  x                    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes¨    Nox

The aggregate market value of common stock held by nonaffiliates of the Registrant, assuming, without admission, that all directors and officers of the Registrant may be deemed affiliates, was $101,524,000 as of June 30, 2005, the last business day of the Registrant’s most recently completed second fiscal quarter.

As of March 1, 2006, the Registrant had 6,381,086 shares of $2.50 par value common stock outstanding.

Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on May 9, 2006 are incorporated by reference in Part III of this report.

CROSS REFERENCE INDEX

			Page
Part I	Item 1	Business	1-8
	Item 1A	Risk Factors	8
	Item 1B	Unresolved Staff Comments
		Not applicable
	Item 2	Properties	8
	Item 3	Legal Proceedings
		Not applicable.
	Item 4	Submission of Matters to a Vote of Security Holders
		Not applicable.
Part II	Item 5	Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	35-36
	Item 6	Selected Financial Data	9
	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10-36
	Item 7A	Quantitative and Qualitative Disclosures about Market Risk	22-23
	Item 8	Financial Statements and Supplementary Data
		Report of Independent Registered Public Accounting Firm	37-38
		Consolidated Balance Sheets at December 31, 2005 and 2004	39
		Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2005	40
		Consolidated Statements of Shareholders’ Equity and Comprehensive Income for each of the years in the three-year period ended December 31, 2005	41
		Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2005	42
		Notes to Consolidated Financial Statements	43-76
		Quarterly Financial Data for 2005 and 2004	35
	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
		Not applicable.
	Item 9A	Controls and Procedures	77-80
		Management’s Annual Report on Internal Control Over Financial Reporting	78
		Report of Independent Registered Public Accounting Firm	79-80
	Item 9B	Other Information
		Not applicable
Part III	Item 10	Directors and Executive Officers of the Registrant	*
	Item 11	Executive Compensation	*
	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	*
	Item 13	Certain Relationships and Related Transactions	*
	Item 14	Principal Accountant Fees and Services	*
Part IV	Item 15	Exhibits and Financial Statement Schedules
		(a)(1) Financial Statements (See Item 8 for reference).
		(2) Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable.
		(3) Exhibits have been filed separately with the Commission and are available upon written request.

* Information called for by Part III is incorporated herein by reference to portions of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholders, as follows:

Item 10—See information that appears under the headings “Election of Directors”, “Executive Officers” and “Report of the Audit Committee”.

Item 11—See information that appears under the heading “Executive Compensation”.

Item 12—See information that appears under the headings “Voting Securities Outstanding and Principal Shareholders” and “Security Ownership of Management”.

Item 13—See information that appears under the heading “Indebtedness of Officers and Directors”.

Item 14—See information that appears under the heading “Independent Auditors”.

BUSINESS

General

FNB Corp. is a bank holding company incorporated under the laws of the State of North Carolina in 1984. On July 2, 1985, through an exchange of stock, FNB Corp. acquired a wholly owned bank subsidiary, First National Bank and Trust Company (“First National Bank”), a national banking association founded in 1907. First National Bank has an operating subsidiary, First National Investor Services, Inc. On November 4, 2005, FNB Corp. acquired, through its merger with United Financial, Inc. (“United Financial”), another wholly owned bank subsidiary, Alamance Bank (“Alamance Bank”), a North Carolina-chartered bank organized in 1998 as a national bank. Alamance Bank was merged into First National Bank effective February 1, 2006. Alamance Bank owned Premier Investment Services, Inc., which offers insurance and investment products and is now a subsidiary of First National Bank. FNB Corp. also owns a mortgage banking subsidiary, Dover Mortgage Company (“Dover”), and is parent to FNB United Statutory Trust I. FNB Corp. and its subsidiaries are collectively referred to as the “Corporation”.

First National Bank, which is a full-service bank, currently conducts all of its operations in Alamance, Chatham, Guilford, Montgomery, Moore, Orange, Randolph, Richmond, Rowan and Scotland counties in central North Carolina. First National Bank has three offices, including the headquarters office, in Asheboro and additional community offices in Archdale (two offices), Biscoe, Burlington, China Grove, Ellerbe, Graham, Greensboro (two offices), Hillsborough, Kannapolis, Laurinburg, Pinehurst, Ramseur, Randleman, Rockingham (two offices), Salisbury, Seagrove, Siler City, Southern Pines and Trinity. Some of the major banking services offered include regular checking accounts, interest checking accounts (including package account versions that offer a variety of products and services), money market accounts, savings accounts, certificates of deposit, individual retirement accounts, debit cards, credit cards and loans, both secured and unsecured, for business, agricultural and personal use. Other services offered include internet banking, cash management, investment management and trust services. First National Bank also has automated teller machines and is a member of Plus, a national automated teller machine network, and Star, a regional network.

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

Acquired by FNB Corp. on April 1, 2003 and operating as a separate subsidiary, Dover Mortgage Company originates, underwrites and closes mortgage loans for sale into the secondary market. Dover has its main office in Charlotte, North Carolina and additional loan production offices in Carolina Beach, Goldsboro, Greenville, Lake Norman, Leland, Raleigh and Wilmington, North Carolina.Mortgage production is sold on a service-released basis to a number of national lenders who in turn service the loans. Subject to a maximum total payment, Dover shareholders will be entitled to additional cash consideration over the four-year period following closing, based on a percentage of Dover’s pretax net income during that four-year period. Any additional cash consideration paid to Dover shareholders will be recorded as an adjustment to goodwill. The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Dover were recorded based on a preliminary estimate of fair values as of April 1, 2003, subject to possible adjustment during the one-year period from that date. There were no adjustments to the estimate of fair values during that one-year period. The consolidated financial statements include the results of operations of Dover since April 1, 2003.

As noted above, on November 4, 2005, the Corporation completed a merger for the acquisition of United Financial, Inc., holding company for Alamance Bank, headquartered in Graham, North Carolina. The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Alamance Bank were recorded based on estimated fair values as of November 4, 2005, with the estimate of goodwill subject to possible adjustment during the one-year period from that date. The consolidated financial statements include the results of operations of Alamance Bank since November 4, 2005.

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

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

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

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

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

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

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

FNB Corp. makes its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports available on its website at www.MyYesBank.com without charge as soon as reasonably practicable after filing or furnishing them to the Securities and Exchange Commission. In addition, FNB Corp. will provide without charge a copy of its annual report on Form 10-K to any shareholder by mail. Requests should be sent to FNB Corp., Attention: Secretary, 101 Sunset Avenue, Asheboro, North Carolina 27203.

Competition

The banking industry within First National Bank’s marketing area is extremely competitive. First National Bank faces direct competition in Alamance, Chatham, Guilford, Montgomery, Moore, Orange, Randolph,

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Richmond, Rowan and Scotland counties from approximately 90 different financial institutions, including commercial banks, savings institutions and credit unions. Although no one of these entities is dominant, First National Bank considers itself to be one of the significant financial institutions in the area in terms of total assets and deposits. Further competition is provided by banks located in adjoining counties, as well as other types of financial institutions such as insurance companies, finance companies, pension funds and brokerage houses and other money funds. The principal methods of competing in the commercial banking industry are improving customer service through the quality and range of services provided, improving cost efficiencies and pricing services competitively.

Dover faces competition within its market area from other mortgage banking companies and from all types of financial institutions engaged in the mortgage loan business. The principal methods of competing in the mortgage banking business are offering competitively priced mortgage loan products and providing prompt and efficient customer service.

Regulation and Supervision

The following discussion sets forth material elements of the regulatory framework applicable to bank holding companies and their subsidiaries. It also provides certain specific information relevant to FNB Corp. This regulatory framework is intended primarily for the protection of customers and depositors and the deposit insurance funds that insure deposits of banks and savings institutions, and not for the protection of security holders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions. A change in the statutes, regulations or regulatory policies applicable to FNB Corp. or its subsidiaries may have a material effect on the business of the Corporation. Additional information related to regulatory matters is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

General

As a bank holding company, FNB Corp. is subject to regulation under the Bank Holding Company Act of 1956, as amended, and to inspection, examination and supervision by the Federal Reserve Board. Under the Bank Holding Company Act, bank holding companies, such as FNB Corp., that have not elected to become financial holding companies under the Gramm-Leach-Bliley Act generally may not acquire ownership or control of more than 5% of the voting shares or substantially all the assets of any company, including a bank, without the Federal Reserve Board’s prior approval. With limited exceptions, bank holding companies may engage only in the business of banking or managing or controlling banks or furnishing services to or performing services for their subsidiary banks. A significant exception is that a bank holding company may own shares in a company whose activities the Federal Reserve Board has determined to be closely related to banking or managing or controlling banks.

As a national banking association, First National Bank is subject to regulation and examination primarily by the Office of the Comptroller of the Currency (OCC). It is also regulated by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board. First National Bank’s deposits are insured by the FDIC through the Bank Insurance Fund and the Savings Association Insurance Fund. The OCC and the FDIC impose various requirements and restrictions on First National Bank, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged on loans, limitations on the types of investments that may be made and the types of services that may be offered, and requirements governing capital adequacy, liquidity, earnings, dividends, management practices and branching. As a member of the Federal Reserve System, First National Bank is subject to the applicable provisions of the Federal Reserve Act, which imposes restrictions on loans by subsidiary banks to a holding company and its other subsidiaries and on the use of stock or securities as collateral security for loans.

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

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

Various consumer laws and regulations also affect the operations of the Corporation. In addition to the impact of regulation, financial institutions may be significantly affected by legislation, which can change the statutes affecting them in substantial and unpredictable ways, and by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability to influence the economy. The instruments of monetary policy used by the Federal Reserve Board include its open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements on member bank deposits. The actions of the Federal Reserve Board influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans or paid on deposits.

In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Corporation.

Liability for Bank Subsidiaries

Under current Federal Reserve Board policy, a bank holding company is expected to act as a source of financial and managerial strength to its subsidiary banks and to maintain resources adequate to support each subsidiary bank. This support may be required at times when the bank holding company may not have the resources to provide it. Similarly, the cross-guaranty provisions of the Federal Deposit Insurance Act provide that if the FDIC suffers or anticipates a loss as a result of a default by a banking subsidiary or by providing assistance to a subsidiary in danger of default, then any other bank subsidiaries may be assessed for the FDIC’s loss. Federal law authorizes the OCC to order an assessment of FNB Corp. if the capital of First National Bank were to become impaired. If the assessment were not paid within three months, the OCC could order the sale of FNB Corp.’s stock in First National Bank to cover the deficiency.

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

Transactions with Affiliates

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

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Unsafe and Unsound Practices

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

Capital Requirements

FNB Corp. and First National Bank are required to comply with federal regulations on capital adequacy. There are two measures of capital adequacy: a risk-based measure and a leverage measure. All capital standards must be satisfied for an institution to be considered in compliance. The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. For additional information, see “Capital Adequacy” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

Dividend Restrictions

FNB Corp. is a legal entity separate and distinct from its bank and other subsidiaries. Because the principal source of FNB Corp.’s revenues is dividends from the subsidiary bank, the ability of FNB Corp. to pay dividends to its shareholders and to pay service on its own debt depends largely upon the amount of dividends its subsidiaries may pay to FNB Corp. There are statutory and regulatory limitations on the payment of dividends by First National Bank to FNB Corp., as well as by FNB Corp. to its shareholders.

First National Bank must obtain the prior approval of the OCC to pay dividends if the total of all dividends declared by the bank in any calendar year will exceed the sum of its net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits First National Bank from paying dividends that in the aggregate would be greater than its undivided profits after deducting statutory bad debts in excess of its loan loss allowance.

FNB Corp. and First National Bank are also subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. If, in the opinion of the appropriate federal regulatory authority, a bank under its jurisdiction is engaged in or is about to be engaged in an unsafe or unsound practice, the authority may require that the bank cease and desist from such practice. The Federal Reserve Board, the OCC and the FDIC have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the FDICIA, an insured bank may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Further, the Federal Reserve Board, OCC and FDIC have each indicated that banking institutions should generally pay dividends only out of current operating earnings.

FDIC Insurance Assessments

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

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

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

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

Community Reinvestment Act

First National Bank is subject to the provisions of the Community Reinvestment Act of 1977, as amended (CRA). Under the CRA, all financial institutions have a continuing and affirmative obligation consistent with their safe and sound operation to help meet the credit needs for their entire communities, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA.

The CRA requires the appropriate federal bank regulatory agency, in connection with its examination of the bank, to assess the bank’s record in meeting the credit needs of the community served by the bank, including low- and moderate-income neighborhoods. The regulatory agency’s assessment of the bank’s record is made available to the public. Should the Corporation fail to serve the community adequately, potential penalties are regulatory denials to expand branches, relocate, add subsidiaries and affiliates, expand into new financial activities and merge with or purchase other financial institutions.

Interstate Banking and Branching

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Banking Act”) permits interstate acquisitions of banks by bank holding companies. FNB Corp. and any other bank holding company located in North Carolina may acquire a bank located in any other state, and any bank holding company located outside North Carolina may lawfully acquire any North Carolina-based bank, regardless of state law to the contrary, in either case subject to certain deposit-percentage limitations, aging requirements and other restrictions. The Interstate Banking Act also generally provides that national and state-chartered banks may branch interstate through acquisitions of banks in other states. It allowed, however, any state to elect prior to June 1, 1997 either to “opt in” and accelerate the date after which interstate branching was permissible or to “opt out” and prohibit interstate branching altogether. North Carolina enacted “opt in” legislation permitting interstate branching. The Interstate Banking Act may have the effect of increasing competition within the markets in which FNB Corp. operates.

Depositor Preference Statute

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

Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act allows bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in the securities and insurance businesses. Under the Gramm-Leach-Bliley Act, a bank holding company that elects to become a financial holding company may engage in any activity that is financial in nature, is incidental to financial activity or complements financial activity and does

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not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Activities cited by the law as being “financial in nature” include securities underwriting, dealing in securities and market making, insurance underwriting and agency, providing financial, investment or economic advisory services, and activities that the Federal Reserve Board has determined to be closely related to banking. FNB Corp. has not elected to become a financial holding company.

Subject to certain limitations on investment, a national bank or its financial subsidiary may also engage in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, so long as the bank is well-capitalized, well-managed and has at least a satisfactory Community Reinvestment Act rating. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well-capitalized and well-managed to continue to engage in activities that are financial in nature. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has at least a satisfactory Community Reinvestment Act rating.

Privacy

The Gramm-Leach-Bliley Act also modified other financial laws, including laws related to financial privacy. Under the act, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The Fair Credit Reporting Act restricts information sharing among affiliates and was amended in December 2003 to restrict further affiliate sharing of information for marketing purposes.

International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001

The President signed the USA Patriot Act of 2001 into law in October 2001. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA substantially broadens existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposes new compliance and due diligence obligations, creates new crimes and penalties, compels the production of documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States, and clarifies the safe harbor from civil liability to customers. The U.S. Treasury Department has issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements to financial institutions such as our bank subsidiary. The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers.

Pursuant to the IMLAFA, the Corporation established anti-money laundering compliance and due diligence programs.

Sarbanes-Oxley Act of 2002

The President signed into law the Sarbanes-Oxley Act of 2002, which addresses, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. The act is intended to allow shareholders to monitor more easily and efficiently the performance of public companies and their directors.

Future Legislation

Changes to the laws and regulations in the United States and North Carolina can affect the Corporation’s operating environment in substantial and unpredictable ways. FNB Corp. cannot predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon the financial condition or results of operations of the Corporation.

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Employees

As of December 31, 2005, FNB Corp. had four officers, all of whom were also officers of First National Bank. On that same date, First National Bank had 261 full-time employees and 30 part-time employees, Alamance Bank had 37 full-time employees and 4 part-time employees, and Dover had 48 full-time employees and 3 part-time employees. Each subsidiary considers its relationship with its employees to be excellent. The Corporation provides employee benefit programs, including a noncontributory defined benefit pension plan, matching retirement/savings (401(k)) plan, group life, health and dental insurance, paid vacations, sick leave, and health care and life insurance benefits for retired employees.

Properties

The main offices of First National Bank and the principal executive offices of FNB Corp. are located in an office building at 101 Sunset Avenue, Asheboro, North Carolina. The premises contain approximately 36,500 square feet of office space. First National Bank also has other community offices in Asheboro (two offices), Archdale (two offices), Biscoe, Burlington, China Grove, Ellerbe, Graham, Greensboro (two offices), Hillsborough, Kannapolis, Laurinburg, Pinehurst, Ramseur, Randleman, Rockingham (two offices), Salisbury, Seagrove, Siler City, Southern Pines and Trinity, North Carolina. The Bush Hill office in Archdale, the Friendly Center office in Greensboro and the Pinehurst office are leased facilities. The land on which the New Garden office in Greensboro and the Seagrove office are situated is also under a lease.

The main offices of Dover are located in Charlotte, North Carolina. Dover also has loan production offices in Carolina Beach, Goldsboro, Greenville, Lake Norman, Leland, Raleigh and Wilmington, North Carolina. All of the Dover facilities are leased.

Risk Factors

There is a Limited Market for FNB Common Stock

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

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

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

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

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

• require the affirmative vote of the holders of at least 75% of FNB Corp.’s voting shares to approve major corporate transactions unless the transaction is approved by three-fourths of FNB Corp.’s “disinterested” directors.

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

8

FNB CORP. AND SUBSIDIARIES

FIVE YEAR FINANCIAL HISTORY

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

9

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Overview

Description of Operations

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

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

For business segment information related to the financial performance of First National Bank and Dover Mortgage Company, see Note 19 to the Consolidated Financial Statements.

Merger Acquisition of Dover Mortgage Company in 2003

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

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Merger Acquisition of Alamance Bank in 2005

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

Pending Merger for Acquisition of Integrity Financial Corporation

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

Primary Financial Data for 2005

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

Significant Factors Affecting Earnings in 2005

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

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As a point of reference in reviewing the 2005 results, earnings were negatively impacted in 2004 by a $2,170,000 increase in the provision for loan losses, largely as a result of the $2,780,000 provision recorded in the 2004 second quarter which exceeded the 2003 second quarter provision by $1,950,000. Actual loan charge-offs in the 2004 second quarter amounted to $2,574,000. The determination of the second quarter provision for loan losses took into account the actual charge-offs, the significant growth in loans held for investment during the second quarter, and the level of nonperforming loans, which increased to $7,026,000 at June 30, 2004 compared to $5,725,000 at March 31, 2004. Nonperforming loans amounted to $5,227,000 at December 31, 2004 and $6,046,000 at December 31, 2005.

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

On March 9, 2004, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (“SAB No. 105”). SAB No. 105 provides recognition guidance for entities that issue loan commitments that are required to be accounted for as derivative instruments. SAB No. 105 indicates that the expected future cash flows related to the associated servicing of the loan and any other internally developed intangible assets should not be considered when recognizing a loan commitment at inception or through its life. SAB No. 105 also discusses disclosure requirements for loan commitments and is effective for loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004. The Corporation adopted the provisions of SAB No. 105 effective April 1, 2004, resulting in a change in its accounting for loan commitments issued by Dover Mortgage Company. The application of SAB No. 105 creates a timing difference in the recognition of certain income recorded as income from mortgage loan sales, deferring recognition from the current accounting period to a subsequent period. The estimated effect of adoption of SAB No. 105 on the results of operations for the three months ended June 30, 2004 and for the year ended December 31, 2004 was a $356,000 reduction in Dover’s income from mortgage loan sales.

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

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

• The adoption of SAB No. 105 in the second quarter of 2004 reduced Dover’s income from mortgage loan sales as discussed above.

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

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

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

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

Critical Accounting Policies

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

Earnings Review

The Corporation’s net income increased $3,339,000 in 2005, up 50.6% over 2004, largely reflecting the significant increase in net interest income. Earnings were positively impacted in 2005 by increases of $6,331,000 or 22.6% in net interest income and $1,253,000 in noninterest income and by a $1,188,000 reduction in the provision for loan losses, which gains were partially offset by a $2,923,000 increase in noninterest expense. Certain factors specifically affecting the elements of income and expense and the comparability of operating results on a year-to-date basis between 2005 and 2004 are discussed in the “Overview—Significant Factors Affecting Earnings in 2005”.

The Corporation’s net income decreased $1,802,000 in 2004, down 21.5% from 2003, largely reflecting the $2,170,000 increase in the provision for loan losses. Earnings were positively impacted in 2004 by increases of $1,020,000 or 3.8% in net interest income and $73,000 in noninterest income, which gains were more than offset by a $1,596,000 increase in noninterest expense. Certain factors specifically affecting the elements of income and expense and the comparability of operating results on a year-to-date basis between 2004 and 2003 are discussed in the “Overview—Significant Factors Affecting Earnings in 2005”. In addition to the factors discussed in the “Overview” affecting income from mortgage loan sales, it should be noted that such income declined $858,000 in 2004 compared to 2003, reflecting in part the negative impact in 2004 from the increase in conforming mortgage rates from the historical lows that prevailed through most of 2003 and especially by the resulting slowdown in mortgage refinancing activity. The effect of the decline in income from mortgage loan sales was somewhat offset, however, by the reduction in compensation and other expenses related to the mortgage operations.

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

13

Net Interest Income

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

Net interest income was $34,365,000 in 2005 compared to $28,034,000 in 2004. The increase of $6,331,000 or 22.6% resulted primarily from a 13.2% increase in the level of average earning assets coupled with an improvement in the net yield on earning assets, or net interest margin, from 3.89% in 2004 to 4.16% in 2005. In 2004, the increase of $1,020,000 or 3.8% resulted primarily from a 4.5% increase in the level of average earning assets, the effect of which was partially offset by a decline in the net yield on earning assets, or net interest margin, from 3.94% in 2003 to 3.89% in 2004. On a taxable equivalent basis, the increases in net interest income in 2005 and 2004 were $6,220,000 and $907,000, respectively, reflecting changes in the relative mix of taxable and non-taxable earning assets in each year.

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

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Table 1

Average Balances and Net Interest Income Analysis

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

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

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

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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 tended to stabilize, until mid-2004, in a generally low-rate environment for rates both earned and paid by the Corporation. After reductions in the prime rate totaling 4.75% in 2001, there were additional rate cuts of .50% in November 2002 and .25% in June 2003, resulting in the prime rate of 4.00% that was effective through June 30, 2004. Due to concern about increasing inflationary pressures, the Federal Reserve took action to raise the level of interest rates at the end of June 2004, causing the prime rate to increase to 4.25% in July 2004. Four additional rate increases of 25 basis points each during the second six months of 2004 and eight more such rate increases in 2005 have raised the prime rate to the 7.25% level at December 31, 2005. The prime rate averaged 6.99% in 2001, falling to 4.67% in 2002 and 4.12% in 2003 and rising to 4.33% in 2004 and 6.15% in 2005.

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

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

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The 2005 and 2004 changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are analyzed in Table 2. Volume refers to the average dollar level of earning assets and interest-bearing liabilities.

Table 2

Volume and Rate Variance Analysis

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

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

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

Provision for Loan Losses

This provision is the charge against earnings to provide an allowance or reserve for probable losses inherent in the loan portfolio. The amount of each year’s charge is affected by several considerations including management’s evaluation of various risk factors in determining the adequacy of the allowance (see “Asset Quality”), actual loan loss experience and loan portfolio growth. Earnings were positively impacted in 2005 by a $1,188,000 reduction in the provision for loan losses and were negatively impacted in 2004 by a $2,170,000 increase in the provision. As discussed in the “Overview—Significant Factors Affecting Earnings in 2005”, the provision for loan losses was affected in 2005 by the adoption of new regulatory guidance on the accounting for courtesy overdraft programs which resulted in a $712,000 provision increase. Further effects from the adoption of the new regulatory guidance are discussed in the “Overview”.

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

17

loan charge-offs in the 2004 second quarter amounted to $2,574,000. The determination of the second quarter provision for loan losses took into account the actual charge-offs, the significant growth in loans held for investment during the second quarter, and the level of nonperforming loans, which increased to $7,026,000 at June 30, 2004 compared to $5,725,000 at March 31, 2004. Nonperforming loans amounted to $5,227,000 at December 31, 2004 and $6,046,000 at December 31, 2005.

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

Noninterest Income

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

Noninterest income increased only $73,000 or 0.5% in 2004, due primarily to a decline of $858,000 in income from mortgage loan sales that substantially offset gains in other areas of noninterest income. The increase in service charges on deposit accounts was largely due to selected increases in service charge rates that became effective in 2004. Certain factors specifically affecting income from mortgage loan sales in 2004 are discussed in the “Overview—Significant Factors Affecting Earnings in 2005”. In addition to the factors discussed in the “Overview”, it should be noted that the decline in such income from 2003 to 2004 reflected in part the negative impact in 2004 from the increase in conforming mortgage rates from the historical lows that prevailed through most of 2003 and especially by the resulting slowdown in mortgage refinancing activity. The effect of the decline in income from mortgage loan sales was somewhat offset, however, by the reduction in compensation and other expenses related to the mortgage operations.

Noninterest Expense

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

Noninterest expense was $1,596,000 or 5.9% higher in 2004, due primarily to the effect of the acquisition of Dover Mortgage Company on April 1, 2003 on this comparison. While the 2003 first quarter did not contain any noninterest expense attributable to Dover, such expense in the 2004 first quarter amounted to $861,000. While the level of mortgage loan sales activity tends to have an impact on compensation and other expenses related to the mortgage operations, the general level of personnel expense, despite the reduction in mortgage loan sales activity as discussed in “Noninterest Income”, has been affected in 2004 by increased staffing requirements, by normal salary adjustments and by higher costs of fringe benefits. The decrease in furniture and equipment expense was due mainly to the reduction in depreciation expense related to furniture and equipment that became fully depreciated in 2003. Other expense has been affected in 2004 by higher levels of advertising and marketing expenditures and by increased expenses related to credit administration and foreclosed properties.

Income Taxes

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

18

management’s judgment that these assets would be realized in future periods, the effective income tax rate decreased from 29.0% in 2003 to 26.0% in 2004 due principally to a decrease in the ratio of taxable to tax-exempt income.

Liquidity

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

Consistent with the general approach to liquidity, loans and other assets of First National Bank are based primarily on a core of local deposits and First National Bank’s capital position. To date, the steady increase in deposits, retail repurchase agreements and capital, supplemented by Federal Home Loan Bank advances and a modest amount of brokered deposits, has been adequate to fund loan demand in First National Bank’s market area, while maintaining the desired level of immediate liquidity and a substantial investment securities portfolio available for both immediate and secondary liquidity purposes.

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

Contractual Obligations

Under existing contractual obligations, the Corporation will be required to make payments in future periods. Table 3 presents aggregated information about the payments due under such contractual obligations at December 31, 2005. Transaction deposit accounts with indeterminate maturities have been classified as having payments due in one year or less. Benefit plan payments cover estimated amounts due through 2015.

Table 3

Contractual Obligations

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

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Commitments, Contingencies and Off-Balance Sheet Risk

In the normal course of business, various commitments are outstanding that are not reflected in the consolidated financial statements. Significant commitments at December 31, 2005 are discussed below.

Commitments by First National Bank to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. At December 31, 2005, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $195,712,000. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower.

First National Bank issues standby letters of credit whereby it guarantees the performance of a customer to a third party if a specified triggering event or condition occurs. The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee. All standby letters of credit provide for recourse against the customer on whose behalf the letter of credit was issued, and this recourse may be further secured by a pledge of assets. The maximum potential amount of undiscounted future payments related to standby letters of credit was $7,767,000 at December 31, 2005 and $6,445,000 at December 31, 2004. Due to insignificance, the Corporation has recorded no liability at December 31, 2005 for the current carrying amount of the obligation to perform as a guarantor.

Dover Mortgage Company originates certain residential mortgage loans with the intention of selling these loans. Between the time that Dover enters into an interest rate lock or a commitment to originate a residential mortgage loan with a potential borrower and the time the closed loan is sold, the Corporation is subject to variability in market prices related to these commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to deliver loans into a mortgage-backed security. The commitments to originate residential mortgage loans and the forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their fair value adjustments are recorded through the income statement in income from mortgage loan sales. The commitments to originate residential mortgage loans totaled $34,648,000 at December 31, 2005, and the related forward sales commitments totaled $34,648,000. Loans held for sale by Dover Mortgage Company totaled $16,282,000 at December 31, 2005, and the related forward sales commitments totaled $16,282,000.

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

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

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Asset/Liability Management and Interest Rate Sensitivity

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

The Corporation’s balance sheet was asset-sensitive at December 31, 2005. An asset-sensitive position means that, for cumulative gap measurement periods of one year or less, there are more assets than liabilities subject to immediate repricing as market rates change. Because immediately rate sensitive assets exceed rate sensitive interest-bearing liabilities, the earnings position could improve in a rising rate environment and could deteriorate in a declining rate environment, depending on the correlation of rate changes in these two categories. Included in interest-bearing liabilities subject to rate changes within 90 days is a portion of the interest-bearing demand, savings and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators.

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Table 4 presents information about the periods in which the interest-sensitive assets and liabilities at December 31, 2005 will either mature or be subject to repricing in accordance with market rates, and the resulting interest-sensitivity gaps. This table shows the sensitivity of the balance sheet at one point in time and is not necessarily indicative of what the sensitivity will be on other dates. As a simplifying assumption concerning repricing behavior, 50% of the interest-bearing demand, savings and money market deposits are assumed to reprice immediately and 50% are assumed to reprice beyond one year.

Table 4

Interest Rate Sensitivity Analysis

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

Market Risk

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

The Corporation’s market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of the Corporation’s loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. The Corporation does not maintain a trading account nor is the Corporation subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Corporation’s asset/liability management function, which is discussed in “Asset/Liability Management and Interest Rate Sensitivity” above. The use of an interest rate swap in conjunction with asset/liability management objectives is discussed in “Commitments, Contingencies and Off-Balance Sheet Risk” above.

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Table 5 presents information about the contractual maturities, average interest rates and estimated fair values of financial instruments considered market risk sensitive at December 31, 2005.

Table 5

Market Risk Analysis of Financial Instruments

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

(1) The average interest rate related to debt securities is stated on a fully taxable equivalent basis, assuming a 35% federal income tax rate and applicable state income tax rate, reduced by the nondeductible portion of interest expense.

(2) Debt securities are reported on the basis of amortized cost. Mortgage-backed securities which have monthly curtailments of principal are categorized by final maturity.

(3) Nonaccrual loans are included in the balance of loans. The allowance for loan losses is excluded.

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Capital Adequacy

Under guidelines established by the Board of Governors of the Federal Reserve System, capital adequacy is currently measured for regulatory purposes by certain risk-based capital ratios, supplemented by a leverage capital ratio. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier 1, Tier 2 and Tier 3, as a percentage of risk-weighted assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various off-balance sheet exposures. Tier 1 capital consists primarily of common shareholders’ equity and qualifying perpetual preferred stock, net of goodwill and other disallowed intangible assets. Tier 2 capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible debt, preferred stock and the allowance for loan losses. Tier 3 capital, applicable only to financial institutions subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institution’s ongoing trading activities. At December 31, 2005, FNB Corp. and First National Bank were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital. Under current requirements, the minimum total capital ratio is 8.00% and the minimum Tier 1 capital ratio is 4.00%. At December 31, 2005, FNB Corp. and First National Bank had total capital ratios of 11.46% and 11.20%, respectively, and Tier 1 capital ratios of 10.21% and 9.96%.

The leverage capital ratio, which serves as a minimum capital standard, considers Tier 1 capital only and is expressed as a percentage of average total assets for the most recent quarter, after reduction of those assets for goodwill and other disallowed intangible assets at the measurement date. As currently required, the minimum leverage capital ratio is 4.00%. At December 31, 2005, FNB Corp. and First National Bank had leverage capital ratios of 8.81% and 8.26%, respectively.

First National Bank is also required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. To be categorized as well-capitalized, a bank must have a minimum ratio for total capital of 10.00%, for Tier 1 capital of 6.00% and for leverage capital of 5.00%. As noted above, First National Bank met all of those ratio requirements at December 31, 2005 and, accordingly, is well-capitalized under the regulatory framework for prompt corrective action.

Balance Sheet Review

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

Investment Securities

Investments are carried on the consolidated balance sheet at estimated fair value for available-for-sale securities and at amortized cost for held-to-maturity securities. Table 6 presents information, on the basis of selected maturities, about the composition of the investment securities portfolio for each of the last three years.

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Table 6

Investment Securities Portfolio Analysis

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

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

25

Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. In 2005, there was a net increase of $34,663,000, or 27.7% in the level of investment securities, due largely to the addition of $34,712,000 in investment securities from the Alamance Bank acquisition on November 4, 2005, as discussed in the “Balance Sheet Review”. In 2004, when the growth in loans significantly exceeded that for total assets, there was a net decrease of $19,116,000 or 13.3% in the level of investment securities. Investable funds not otherwise utilized are temporarily invested on an overnight basis as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs.

Loans

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

Table 7 sets forth the major categories of loans for each of the last five years. The maturity distribution and interest rate sensitivity of selected loan categories at December 31, 2005 are presented in Table 8.

Table 7

Loan Portfolio Composition

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

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Table 8

Selected Loan Maturities

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

In 2005, loan growth through internal generation continued to be significant as in 2004 and 2003, following an extended period in which the level of the entire loan portfolio had been adversely impacted by the general slowdown of the economy. In particular, considering only growth through internal generation in both 2005 and 2004, the portfolios related to construction loans and commercial and other real estate loans experienced significant gains in each year, while the commercial and agricultural loan portfolio declined. The balance of the 1-4 family residential mortgage loan portfolio considered “held for investment” also experienced growth in both 2005 and 2004, due primarily to home equity lines of credit in 2004. In 2005, there was a modest decline in the balance of home equity lines of credit.

Asset Quality

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

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

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

The adequacy of the allowance for loan losses is measured on a quarterly basis against an allocation model that assigns reserves to various components of the loan portfolio in order to provide for probable inherent losses. Homogeneous pools of loans are segregated, and classifications of individual loans within certain of these pools are identified using risk grades derived from regulatory risk guidelines and additional internal parameters.

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Utilizing the trailing two-year historical loss experience of First National Bank and the assessment of portfolio quality and diversification trends and economic factors, a range of appropriate reserves is calculated for each classification and pool of loans. Allocated to each pool is a reserve amount within the calculated range, as supported by the historical loss ratios. Additional reserves are estimated and assigned to the most adversely classified loans based upon an individual analysis of present-value repayment and/or liquidation projections of each loan. A portion of the total reserve may be unallocated to any specific segment of the loan portfolio, but will not exceed the upper limit of the total calculated reserve range when aggregated with allocated portions. The determination within the allowance model of allocated and unallocated components is not necessarily indicative of future losses or allocations. The entire balance of the allowance for loan losses is available to absorb losses in any segment of the loan portfolio.

Earnings were negatively impacted in 2004 by a $2,170,000 increase in the provision for loan losses, largely as a result of the $2,780,000 provision recorded in the 2004 second quarter which exceeded the 2003 second quarter provision by $1,950,000. Actual loan charge-offs in the 2004 second quarter amounted to $2,574,000. The determination of the second quarter provision for loan losses took into account the actual charge-offs, the significant growth in loans held for investment during the second quarter, and the level of nonperforming loans, which increased to $7,026,000 at June 30, 2004 compared to $5,725,000 at March 31, 2004. Nonperforming loans amounted to $5,227,000 at December 31, 2004 and $6,046,000 at December 31, 2005.

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

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

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

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

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Table 9 presents an analysis of the changes in the allowance for loan losses and of the level of nonperforming assets for each of the last five years. Information about management’s allocation of the allowance for loan losses by loan category is presented in Table 10.

Table 9

Allowance for Loan Losses and Nonperforming Assets

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

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

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Table 10

Allocation of Allowance For Loan Losses

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

Deposits

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

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

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

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

Table 11

Analysis of Deposits

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

Business Development Matters

As discussed in the “Overview” and in Note 2 to the Consolidated Financial Statements, the Corporation completed a merger on April 1, 2003 for the acquisition of Dover Mortgage Company, headquartered in Charlotte, North Carolina, in a transaction accounted for using the purchase method of accounting for business combinations.

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

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

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

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

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

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

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

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

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

Accounting Pronouncement Matters

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

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

32

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

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

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

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

Effects of Inflation

The operations of First National Bank and Dover Mortgage Company and, therefore, of the Corporation are subject to the effects of inflation through interest rate fluctuations and changes in the general price level of noninterest operating expenses. Such costs as salaries, fringe benefits and utilities have tended to increase at a rate comparable to or even greater than the general rate of inflation. Broadly speaking, all operating expenses have risen to higher levels as inflationary pressures have increased. Management has responded to this situation by evaluating and adjusting fees charged for specific services and by emphasizing operating efficiencies.

The level of interest rates is also considered to be influenced by inflation, rising whenever inflationary expectations and the actual level of inflation increase and declining whenever the inflationary outlook appears to be improving. Management constantly monitors this situation, attempting to adjust both rates received on earning assets and rates paid on interest-bearing liabilities in order to maintain the desired net yield on earning assets.

Additionally, the level of activity in the origination of 1-4 family residential mortgage loans which directly affects the amount of income from mortgage loan sales, the principal source of revenue for Dover and an important source for First National Bank, is significantly affected by the level of interest rates, increasing as rates decline and decreasing as rates rise. In periods of rising rates, which do not generally benefit from the activity that results from the refinancing of residential mortgage loans, management attempts to increase the volume of originations resulting from traditional purchase mortgage transactions.

Non-GAAP Measures

This Annual Report on Form 10-K contains financial information determined by methods other than in accordance with generally accepted accounting principles (“GAAP”). The Corporation’s management uses these

33

non-GAAP measures in their analysis of the Corporation’s performance. These non-GAAP measures exclude average goodwill and core deposit premiums from the calculations of return on average assets and return on average equity. Management believes presentations of financial measures excluding the impact of goodwill and core deposit premiums provide useful supplemental information that is essential to a proper understanding of the operating results of the Corporation’s core businesses. These disclosures should not be viewed as a substitute for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

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

The statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as “believes”, “expects”, “plans”, “projects”, “goals”, “estimates”, “may”, “could”, “should”, or “anticipates” or the negative thereof or other variations thereon of comparable terminology, or by discussions of strategy that involve risks and uncertainties. In addition, from time to time, the Corporation or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, various filings made by the Corporation with the Securities and Exchange Commission, or press releases or oral statements made by or with the approval of an authorized executive officer of the Corporation. Forward-looking statements are based on management’s current views and assumptions and involve risks and uncertainties that could significantly affect expected results. The Corporation wishes to caution the reader that factors, such as those listed below, in some cases have affected and could affect the Corporation’s actual results, causing actual results to differ materially from those in any forward-looking statement. These factors include, without limitation: (i) expected cost savings from the mergers described in the Overview may not materialize or may not fully materialize within the expected time frame, (ii) revenues following the mergers may not meet expectations, (iii) costs or difficulties related to the integration of the businesses of the Corporation and the companies acquired may be greater than anticipated, (iv) competitive pressure in the banking industry or in the Corporation’s markets may increase significantly, (v) changes in the interest rate environment may reduce margins, (vi) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration, (vii) changes may occur in banking legislation and regulation, (viii) changes may occur in general business conditions, (ix) changes may occur in the securities markets and (x) any new capital accords adopted by the Basel Committee on Banking Supervision and implemented by U.S. federal bank regulatory agencies will affect the Corporation’s future capital requirements. All forward-looking statements speak only as of the date on which such statements are made, and the Corporation undertakes no obligation to update any statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

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Table 12

Quarterly Financial Data (Unaudited)

	First		Second			Third		Fourth
	(in thousands, except per share data)
2005
Interest income	$	11,814	$	12,682		$	13,713	$	16,206
Interest expense		3,995		4,497			5,093		6,465
Net interest income		7,819		8,185			8,620		9,741
Provision for loan losses		370		864			446		1,162
Net interest income after provision for loan losses		7,449		7,321			8,174		8,579
Noninterest income		3,162		3,960			3,966		3,838
Noninterest expense		7,222		7,937			8,319		8,200
Income before income taxes		3,389		3,344			3,821		4,217
Income taxes		1,083		1,072			1,262		1,417
Net income	$	2,306	$	2,272		$	2,559	$	2,800
Per share data:
Net income:
Basic	$	.41	$	.41		$	.46	$	.46
Diluted		.40		.40			.44		.45
Cash dividends declared		.15		.15			.15		.17
Common stock price (1):
High		21.39		21.85			21.50		19.32
Low		17.80		18.20			18.50		17.35
2004
Interest income	$	9,377	$	9,679		$	10,307	$	11,073
Interest expense		2,850		2,968			3,098		3,486
Net interest income		6,527		6,711			7,209		7,587
Provision for loan losses		270		2,780			460		520
Net interest income after provision for loan losses		6,257		3,931			6,749		7,067
Noninterest income		3,600		2,934			3,652		3,487
Noninterest expense		7,097		7,054			7,084		7,520
Income (loss) before income taxes		2,760		(189	)		3,317		3,034
Income taxes (benefit)		808		(305	)		1,033		788
Net income	$	1,952	$	116		$	2,284	$	2,246
Per share data:
Net income:
Basic	$	.34	$	.02		$	.41	$	.40
Diluted		.33		.02			.40		.39
Cash dividends declared		.15		.15			.15		.15
Common stock price (1):
High		22.90		22.50			19.60		21.19
Low		20.00		16.60			16.30		17.23

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

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Table 13

Issuer Purchase of Equity Securities

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

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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors

FNB Corp and Subsidiaries

Asheboro, North Carolina

We have audited the accompanying consolidated balance sheets of FNB Corp. and subsidiaries (the “Corporation”) as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and comprehensive income and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FNB Corp and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

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

Raleigh, North Carolina

March 14, 2006

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

FNB Corp.

We have audited the accompanying consolidated balance sheets of FNB Corp. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FNB Corp. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

Greenville, South Carolina

March 12, 2004

38

FNB CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

Commitments (Note 17)

See accompanying notes to consolidated financial statements.

39

FNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

See accompanying notes to consolidated financial statements.

40

FNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

	Common Stock					Surplus			Retained Earnings			Accumulated Other Comprehensive Income			Total
	Shares		Amount
	(in thousands, except share and per share data)
Balance, December 31, 2002	5,416,731		$	13,542		$	8,823		$	48,095		$	2,630		$	73,090
Comprehensive income:
Net income	—			—			—			8,400			—			8,400
Other comprehensive income:
Unrealized securities losses, net of income tax benefit of $357	—			—			—			—			(1,041	)		(1,041	)
Total comprehensive income																7,359
Cash dividends declared, $.59 per share	—			—			—			(3,321	)		—			(3,321	)
Common stock issued through:
Stock option plan	153,583			384			1,485			—			—			1,869
Merger acquisition of subsidiary company	126,140			315			2,344			—			—			2,659
Common stock reacquired through:
Exchange related to issuance of option stock	(9,492	)		(24	)		(172	)		—			—			(196	)
Other	(63	)		—			(2	)		—			—			(2	)
Balance, December 31, 2003	5,686,899			14,217			12,478			53,174			1,589			81,458
Comprehensive income:
Net income	—			—			—			6,598			—			6,598
Other comprehensive income:
Unrealized securities losses, net of income tax benefit of $302	—			—			—			—			(481	)		(481	)
Total comprehensive income																6,117
Cash dividends declared, $.60 per share	—			—			—			(3,389	)		—			(3,389	)
Common stock issued through stock option plan	66,303			166			625			—			—			791
Common stock repurchased	(148,100	)		(370	)		(2,460	)		—			—			(2,830	)
Balance, December 31, 2004	5,605,102			14,013			10,643			56,383			1,108			82,147
Comprehensive income:
Net income	—			—			—			9,937			—			9,937
Other comprehensive income:
Unrealized securities losses, net of income tax benefit of $607	—			—			—			—			(972	)		(972	)
Total comprehensive income																8,965
Cash dividends declared, $.62 per share	—			—			—			(3,609	)		—			(3,609	)
Common stock issued through stock option plan	61,559			153			651			—			—			804
Merger acquisition of subsidiary company	728,625			1,822			12,685			—			—			14,507
Common stock repurchased	(24,800	)		(62	)		(437	)		—			—			(499	)
Balance, December 31, 2005	6,370,486		$	15,926		$	23,542		$	62,711		$	136		$	102,315

See accompanying notes to consolidated financial statements.

41

FNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

See accompanying notes to consolidated financial statements.

42

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations/Consolidation

FNB Corp. is a bank holding company whose wholly owned subsidiaries are the First National Bank and Trust Company (“First National Bank”) and Dover Mortgage Company (“Dover”). First National Bank has one wholly owned subsidiary, First National Investor Services, Inc. A second bank subsidiary, Alamance Bank, acquired through merger with United Financial, Inc. effective November 4, 2005 as discussed in Note 2 below, was merged into First National Bank on February 1, 2006 and, for the purposes of these consolidated financial statements, is considered a part of First National Bank in 2005. Through its subsidiaries, FNB Corp. offers a complete line of consumer, mortgage and business banking services, including loan, deposit, cash management, investment management and trust services, to individual and business customers. First National Bank has offices in Alamance, Chatham, Guilford, Montgomery, Moore, Orange, Randolph, Richmond, Rowan and Scotland counties in North Carolina. Dover Mortgage Company operates eight mortgage production offices in North Carolina at Charlotte, Carolina Beach, Goldsboro, Greenville, Lake Norman, Leland, Raleigh and Wilmington.

The consolidated financial statements include the accounts of FNB Corp. and its subsidiaries (collectively the “Corporation”). All significant intercompany balances and transactions have been eliminated.

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

Business Segments

The Corporation reports business segments in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). Business segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. SFAS No. 131 requires that a public enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the way that the business segments were determined and other items. The Corporation has two reportable business segments, the full-service subsidiary bank, First National Bank, and the mortgage banking subsidiary, Dover Mortgage Company. Business segment information is disclosed in Note 19.

Recently Adopted Accounting Pronouncements

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

43

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 1—SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES—(Continued)

Business Combinations

For all business combination transactions initiated after June 30, 2001, the purchase method of accounting has been used, and accordingly, the assets and liabilities of the acquired company have been recorded at their estimated fair values as of the merger date. The fair values are subject to adjustment as information relative to the fair values as of the acquisition date becomes available. The Corporation uses an allocation period, not to exceed one year, to identify and quantify the fair value of the assets acquired and liabilities assumed in business combinations accounted for as purchases. The consolidated financial statements include the results of operations of any acquired company since the acquisition date.

Cash and Cash Equivalents

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

Investment Securities

Investment securities are categorized and accounted for as follows:

• Held-to-maturity securities—Debt securities that the Corporation has the positive intent and ability to hold to maturity are reported at amortized cost.

• Trading securities—Debt and equity securities bought and held principally for the purpose of being sold in the near future are reported at fair value, with unrealized gains and losses included in earnings.

• Available-for-sale securities—Debt and equity securities not classified as either held-to-maturity securities or trading securities are reported at fair value, with unrealized gains and losses, net of related tax effect, included as an item of accumulated other comprehensive income and reported as a separate component of shareholders’ equity.

The Corporation intends to hold its securities classified as available-for-sale securities for an indefinite period of time but may sell them prior to maturity. All other securities, which the Corporation has the positive intent and ability to hold to maturity, are classified as held-to-maturity securities.

A decline, which is deemed to be other than temporary, in the market value of any available-for-sale or held-to-maturity security to a level below cost results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established.

Interest income on debt securities is adjusted using the level yield method for the amortization of premiums and accretion of discounts. The adjusted cost of the specific security is used to compute gains or losses on the disposition of securities.

Loans

Interest income on loans is generally calculated by using the constant yield method based on the daily outstanding balance. The recognition of interest income is discontinued when, in management’s opinion, the collection of all or a portion of interest becomes doubtful. Loans are returned to accrual status when the factors indicating doubtful collectibility cease to exist and the loan has performed in accordance with its terms for a demonstrated period of time. The past due status of loans is based on the contractual payment terms.

44

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 1—SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES—(Continued)

A loan is considered impaired when, based on current information or events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. When the ultimate collectibility of the impaired loan’s principal is doubtful, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are first recorded as recoveries of any amounts previously charged-off and are then applied to interest income, to the extent that any interest has been foregone.

Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income. The premium or discount on purchased loans is amortized over the expected life of the loans and is included in interest and fees on loans.

Residential mortgage loans held for sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements, calculated on the aggregate loan basis.

Allowance for Loan Losses

The allowance for loan losses represents an amount considered adequate to absorb probable loan losses inherent in the portfolio. Management’s evaluation of the adequacy of the allowance is based on a review of individual loans, historical loan loss experience, the value and adequacy of collateral, and economic conditions in First National Bank’s market area. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Losses are charged and recoveries are credited to the allowance for loan losses. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review First National Bank’s allowance for loan losses. Such agencies may require First National Bank to recognize changes to the allowance based on their judgments about information available to them at the time of their examinations.

Other Real Estate

Other real estate, which is included in other assets on the consolidated balance sheet, represents properties acquired through foreclosure or deed in lieu thereof. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the property is classified as held for sale when the sale is probable and expected to occur within one year. The property is initially carried at the lower of cost or fair value based on recent appraisals, less estimated costs to sell. Declines in the fair value of properties included in other real estate below carrying value are recognized by a charge to income.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows: buildings and improvements, 10 to 50 years and furniture and equipment, 3 to 10 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated life of the improvement or the term of the lease.

45

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 1—SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES—(Continued)

Intangible Assets

Intangible assets include goodwill and other identifiable assets, such as core deposit premiums, resulting from acquisitions. Core deposit premiums are amortized primarily on a straight-line basis over a ten-year life based upon historical studies of core deposits. Goodwill is not amortized but is tested annually for impairment or at any time an event occurs or circumstances change that may trigger a decline in the value of the reporting unit. Examples of such events or circumstances include adverse changes in legal factors, business climate, unanticipated competition, change in regulatory environment or loss of key personnel.

The Corporation tests for impairment in accordance with SFAS No. 142. Potential impairment of goodwill exists when the carrying amount of a reporting unit exceeds its fair value. The fair value of a reporting unit is computed using one or a combination of the following three methods: income, market value or cost method. The income method uses a discounted cash flow analysis to determine fair value by considering a reporting unit’s capital structure and applying a risk-adjusted discount rate to forecast earnings based on a capital asset pricing model. The market value method uses recent transaction analysis or publicly traded comparable analysis for similar assets and liabilities to determine fair value. The cost method assumes the net assets of a recent business combination accounted for under the purchase method of accounting will be recorded at fair value if no event or circumstance has occurred triggering a decline in the value. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired, and a second step of impairment test will be performed. In the second step, the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities as if the reporting unit had been acquired in a business combination at the date of the impairment test. If the implied fair value of reporting unit goodwill is lower than its carrying amount, goodwill is impaired and is written down to its implied fair value. The loss recognized is limited to the carrying amount of goodwill. Once an impairment loss is recognized, future increases in fair value will not result in the reversal of previously recognized losses.

Mortgage Servicing Rights (MSRs)

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

Income Taxes

Income tax expense includes both a current provision based on the amounts computed for income tax return purposes and a deferred provision that results from application of the asset and liability method of accounting for deferred taxes. Under the asset and liability method, deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Corporation’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Earnings Per Share (EPS)

As required for entities with complex capital structures, a dual presentation of basic and diluted EPS is included on the face of the income statement, and a reconciliation is provided in a footnote of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation.

46

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 1—SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES—(Continued)

Comprehensive Income

Comprehensive income is defined as the change in equity of an enterprise during a period from transactions and other events and circumstances from nonowner sources and, accordingly, includes both net income and amounts referred to as other comprehensive income. The items of other comprehensive income are included in the consolidated statement of shareholders’ equity and comprehensive income. The accumulated balance of other comprehensive income is included in the shareholders’ equity section of the consolidated balance sheet. The Corporation’s sole component of accumulated other comprehensive income is unrealized gains (losses) on investment securities classified as available-for-sale.

Employee Benefit Plans

The Corporation has a defined benefit pension plan covering substantially all full-time employees. Pension costs, which are actuarially determined using the projected unit credit method, are charged to current operations. Annual funding contributions are made up to the maximum amounts allowable for Federal income tax purposes.

The Corporation has a noncontributory, nonqualified supplemental executive retirement plan (the “SERP”) covering certain executive employees. Annual benefits payable under the SERP are based on factors similar to those for the pension plan, with offsets related to amounts payable under the pension plan and social security benefits. SERP costs, which are actuarially determined using the projected unit credit method and recorded on an unfunded basis, are charged to current operations and credited to a liability account on the consolidated balance sheet.

Medical and life insurance benefits are provided by the Corporation on a postretirement basis under defined benefit plans covering substantially all full-time employees. Postretirement benefit costs, which are actuarially determined using the attribution method and recorded on an unfunded basis, are charged to current operations and credited to a liability account on the consolidated balance sheet.

Stock Options

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

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

47

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 1—SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES—(Continued)

Derivatives and Financial Instruments

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

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

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

The Corporation has also identified the following derivative instruments which were recorded on the consolidated balance sheet at December 31, 2005: commitments to originate residential mortgage loans and forward sales commitments.

Dover Mortgage Company originates certain residential mortgage loans with the intention of selling these loans. Between the time that Dover enters into an interest rate lock or a commitment to originate a residential mortgage loan with a potential borrower and the time the closed loan is sold, the Corporation is subject to variability in market prices related to these commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to deliver loans into a mortgage-backed security. The commitments to originate residential mortgage loans and the forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their fair value adjustments are recorded through the income statement in income from mortgage loan sales.

See Note 17 for additional information related to derivatives and financial instruments.

NOTE 2—MERGER INFORMATION

Dover Mortgage Company

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

48

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 2—MERGER INFORMATION—(Continued)

Pursuant to the terms of the merger, 50% of the outstanding shares of Dover common stock were converted into FNB Corp. common stock and the remaining 50% were converted into cash. The aggregate purchase price was $5,567,000, consisting of $2,908,000 of cash payments and 126,140 shares of FNB Corp. common stock valued at $2,659,000. Subject to a maximum total payment, Dover shareholders will be entitled to additional cash consideration over the four-year period following closing, based on a percentage of Dover’s pretax net income during that four-year period. Any additional cash consideration paid to Dover shareholders will be recorded as a purchase price adjustment which will increase goodwill.

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

The portion of the purchase price allocated to goodwill at the date of the merger on April 1, 2003, there being no subsequent adjustments to the estimate of fair values during the one-year period from that date, is presented below (in thousands):

Purchase price	$	5,567
Tangible shareholders’ equity of Dover		2,719
Excess of purchase price over carrying value of net tangible assets acquired		2,848
Direct acquisition costs		568
Deferred income taxes		326
Goodwill	$	3,742

Direct acquisition costs of $568,000 associated with the merger, related to investment banking and professional fees and all recorded in 2003, are included in goodwill.

United Financial, Inc.

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

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

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

49

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 2—MERGER INFORMATION—(Continued)

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

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

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

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

The core deposit intangible will be amortized on the straight-line basis over a ten-year life. The amortization method and valuation of the core deposit intangible are based upon a historical study of the deposits acquired. Goodwill will not be amortized but will be tested for impairment in accordance with SFAS No. 142. None of the goodwill is expected to be deductible for income tax purposes. Premiums and discounts that resulted from recording the United assets and liabilities at their respective fair values are being amortized using methods that approximate an effective yield over the life of the assets and liabilities. The net amortization increased net income before income taxes by $88,000 in 2005.

50

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 2—MERGER INFORMATION—(Continued)

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

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

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

	December 31, 2005
	Total Costs		Amounts Paid		Remaining Accrual
	(in thousands)
Cash out of stock options	$	1,262	$	1,262	$	—
Contract termination costs		978		335		643
Investment banking and professional fees		812		793		19
Other		148		96		52
Total	$	3,200	$	2,486	$	714

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

Integrity Financial Corporation

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

51

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 3—INTANGIBLE ASSETS

Business Combinations

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

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

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

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

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

Mortgage Servicing Rights

Mortgage loans serviced for others are not included in the consolidated balance sheet. The unpaid principal balance of mortgage loans serviced for others amounted to $202,332,000, $180,176,000 and $160,966,000 at December 31, 2005, 2004 and 2003, respectively.

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

	Years Ended December 31
	2005			2004			2003
	(in thousands)
Balance at beginning of year	$	2,006		$	1,628		$	1,052
Servicing rights capitalized		754			681			1,026
Amortization expense		(351	)		(303	)		(450	)
Change in valuation allowance		—			—			—
Balance at end of year	$	2,409		$	2,006		$	1,628

52

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 3—INTANGIBLE ASSETS—(Continued)

The estimated amortization expense for mortgage servicing rights for the years ending December 31 is as follows: $346,000 in 2006, $346,000 in 2007, $346,000 in 2008, $346,000 in 2009, $346,000 in 2010, $346,000 in 2011 and $333,000 in 2012. The estimated amortization expense is based on current information regarding loan payments and prepayments. Amortization expense could change in future periods based on changes in the volume of prepayments and economic factors.

NOTE 4—INVESTMENT SECURITIES

Summaries of the amortized cost and estimated fair value of investment securities and the related gross unrealized gains and losses are presented below:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)
Available For Sale
December 31, 2005
U.S. Government agencies and corporations	$	43,340	$	33	$	627	$	42,746
Mortgage-backed securities		28,903		38		313		28,628
State, county and municipal		26,384		550		47		26,887
Other debt securities		5,126		606		28		5,704
Equity securities		6,940		13		—		6,953
Total	$	110,693	$	1,240	$	1,015	$	110,918
December 31, 2004
U.S. Government agencies and corporations	$	31,791	$	270	$	136	$	31,925
Mortgage-backed securities		8,364		56		28		8,392
State, county and municipal		21,044		945		—		21,989
Other debt securities		5,120		675		—		5,795
Equity securities		5,640		22		—		5,662
Total	$	71,959	$	1,968	$	164	$	73,763
Held To Maturity
December 31, 2005
U.S. Government agencies and corporations	$	20,737	$	—	$	618	$	20,119
Mortgage-backed securities		3,190		—		74		3,116
State, county and municipal		22,961		32		691		22,302
Other debt securities		2,000		—		29		1,971
Total	$	48,888	$	32	$	1,412	$	47,508
December 31, 2004
U.S. Government agencies and corporations	$	22,913	$	—	$	356	$	22,557
Mortgage-backed securities		1,270		6		8		1,268
State, county and municipal		25,197		109		436		24,870
Other debt securities		2,000		—		19		1,981
Total	$	51,380	$	115	$	819	$	50,676

53

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 4—INVESTMENT SECURITIES—(Continued)

The amortized cost and estimated fair value of investment securities at December 31, 2005, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to prepay obligations with or without prepayment penalties.

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

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

There were no sales of investment securities in 2005, 2004 and 2003.

First National Bank, as a member of the Federal Home Loan Bank (the “FHLB”) of Atlanta, is required to own capital stock in the FHLB of Atlanta based generally upon the balances of total assets and FHLB advances. FHLB capital stock is pledged to secure FHLB advances. This investment is carried at cost since no ready market exists for FHLB stock and there is no quoted market value. However, redemption of this stock has historically been at par value. At December 31, 2005 and 2004, First National Bank owned a total of $5,968,000 and $4,668,000, respectively, of FHLB stock. Due to the redemption provisions of FHLB stock, the Corporation estimated that fair value was equal to cost and that this investment was not impaired at December 31, 2005.

First National Bank, as a member bank of the Federal Reserve Bank (the “FRB”) of Richmond, is required to own capital stock of the FRB of Richmond based upon a percentage of First National Bank’s common stock and surplus. This investment is carried at cost since no ready market exists for FRB stock and there is no quoted market value. At December 31, 2005 and 2004, First National Bank owned a total of $954,000 of FRB stock. Due to the nature of this investment in an entity of the U. S. Government, the Corporation estimated that fair value was equal to cost and that this investment was not impaired at December 31, 2005.

54

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 4—INVESTMENT SECURITIES—(Continued)

Gross unrealized losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
	(in thousands)
December 31, 2005
Available for Sale
U.S. Government agencies and corporations	$	16,237	$	226	$	17,820	$	412	$	34,057	$	638
Mortgage-backed securities		20,841		260		1,225		42		22,066		302
State, county and municipal		5,419		47		—		—		5,419		47
Other debt securities		—		—		972		28		972		28
Total	$	42,497	$	533	$	20,017	$	482	$	62,514	$	1,015
Held to Maturity
U.S. Government agencies and corporations	$	459	$	8	$	19,660	$	610	$	20,119	$	618
Mortgage-backed securities		2,686		57		430		17		3,116		74
State, county and municipal		6,349		81		12,706		610		19,055		691
Other debt securities		976		24		995		5		1,971		29
Total	$	10,470	$	170	$	33,791	$	1,242	$	44,261	$	1,412
December 31, 2004
Available for Sale
U.S. Government agencies and corporations	$	17,114	$	126	$	490	$	10	$	17,604	$	136
Mortgage-backed securities		851		11		837		17		1,688		28
Total	$	17,965	$	137	$	1,327	$	27	$	19,292	$	164
Held to Maturity
U.S. Government agencies and corporations	$	16,271	$	175	$	5,819	$	181	$	22,090	$	356
Mortgage-backed securities		293		2		324		6		617		8
State, county and municipal		9,730		50		7,591		386		17,321		436
Other debt securities		1,981		19		—		—		1,981		19
Total	$	28,275	$	246	$	13,734	$	573	$	42,009	$	819

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

Debt securities other than mortgage-backed securities.    126 debt securities other than mortgage-backed securities had unrealized losses with aggregate depreciation of 2.5% from the amortized cost basis. The unrealized losses were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment, adjusted for call premiums if appropriate. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Corporation has the ability and intent to hold these investments until maturity or a market price recovery, these investments are not considered other-than-temporarily impaired.

55

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 4—INVESTMENT SECURITIES—(Continued)

Mortgage-backed securities.47 mortgage-backed securities had unrealized losses with aggregate depreciation of 1.5% from the amortized cost basis. The unrealized losses were caused by interest rate increases. These securities were issued by reputable organizations and, for certain of these securities, the contractual cash flows are guaranteed by U.S Government agencies and corporations. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Corporation has the ability and intent to hold these investments until maturity or a market price recovery, these investments are not considered other-than-temporarily impaired.

NOTE 5—LOANS

Major classifications of loans are as follows:

	December 31
	2005		2004
	(in thousands)
Commercial and agricultural	$	176,286	$	196,846
Real estate—construction		142,096		83,433
Real estate—mortgage:
1-4 family residential		231,071		197,855
Commercial and other		221,457		154,024
Consumer		24,141		20,899
Leases		—		49
Loans held for investment		795,051		653,106
Loans held for sale		17,615		11,648
Gross loans	$	812,666	$	664,754

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

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

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

Loans held for investment are primarily made in the region of North Carolina that includes Alamance, Cabarrus, Chatham, Guilford, Iredell, Montgomery, Moore, Randolph, Richmond, Rowan and Scotland counties. The real estate loan portfolio can be affected by the condition of the local real estate markets.

56

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 5—LOANS—(Continued)

Loans have been made by First National Bank to directors and executive officers of the Corporation and to the associates of such persons, as defined by the Securities and Exchange Commission. Such loans were made in the ordinary course of business on substantially the same terms, including rate and collateral, as those prevailing at the time in comparable transactions with other borrowers and do not involve more than normal risk of collectibility. A summary of the activity with respect to related party loans, based upon the related parties as determined in each year, is as follows:

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

NOTE 6—ALLOWANCEFOR LOAN LOSSES

Changes in the allowance for loan losses were as follows:

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

NOTE 7—PREMISESAND EQUIPMENT

Premises and equipment are summarized as follows:

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

57

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 8—INCOME TAXES

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

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

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

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

58

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 8—INCOME TAXES—(Continued)

The components of deferred tax assets and liabilities and the tax effect of each are as follows:

	December 31
	2005		2004
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	3,712	$	2,811
Compensation and benefit plans		2,114		1,412
Fair value basis of loans		517		—
Other		88		235
Gross deferred tax assets		6,431		4,458
Less valuation allowance		—		—
Net deferred tax assets		6,431		4,458
Deferred tax liabilities:
Mortgage servicing rights		951		773
Prepaid pension cost		925		902
Depreciable basis of premises and equipment		724		662
Net deferred loan fees and costs		231		262
Net unrealized securities gains		89		696
Fair value basis of loans		—		212
Other		303		388
Gross deferred tax liabilities		3,223		3,895
Net deferred tax asset	$	3,208	$	563

Changes in net deferred tax asset were as follows:

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

Under accounting principles generally accepted in the United States of America, the Corporation is not required to provide a deferred tax liability for the tax effect of additions to the tax bad debt reserve through 1987, the base year. Retained earnings at December 31, 2005 includes approximately $2,686,000 for which no provision for federal income tax has been made. These amounts represent allocations of income to bad debt deductions for tax purposes only. Reductions of such amounts for purposes other than bad debt losses could create income for tax purposes in certain remote instances, which would then be subject to the then current corporate income tax rate.

59

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 9—TIME DEPOSITS

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

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

NOTE 10—BORROWED FUNDS

Retail Repurchase Agreements and Federal Funds Purchased

Funds are borrowed on an overnight basis through retail repurchase agreements with bank customers and federal funds purchased from other financial institutions. Retail repurchase agreement borrowings are collateralized by securities of the U.S. Treasury and U.S. Government agencies and corporations.

Information concerning retail repurchase agreements and federal funds purchased is as follows:

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

Federal Home Loan Bank (FHLB) Advances

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

60

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 10—BORROWED FUNDS—(Continued)

At December 31, 2005, the scheduled maturities of FHLB advances, certain of which are callable at the option of the FHLB before scheduled maturity, are as follows (in thousands):

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

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

Junior Subordinated Deferrable Interest Debentures

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

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

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

Other Borrowed Funds

Dover mortgage Company has a line of credit totaling $30,000,000 with an external financial institution, secured by a blanket collateral agreement on the mortgage loans and certain other assets of Dover and separately guaranteed by FNB Corp. Interest is payable on a variable rate basis and the line of credit is subject to annual renewal. At December 31, 2005, the balance outstanding on the line of credit was $15,885,000 at a current interest rate of 6.15%. At December 31, 2004, the balance outstanding on the line of credit was $10,873,000 at a current interest rate of 4.19%.

61

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 10—BORROWED FUNDS—(Continued)

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

NOTE 11—EMPLOYEE BENEFIT PLANS

Pension Plan

The Corporation has a noncontributory defined benefit pension plan covering substantially all full-time employees who qualify as to age and length of service. Benefits are based on the employee’s compensation, years of service and age at retirement. The Corporation’s funding policy is to contribute annually to the plan an amount which is not less than the minimum amount required by the Employee Retirement Income Security Act of 1974 and not more than the maximum amount deductible for income tax purposes.

Information concerning the status of the plan is as follows:

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

62

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 11—EMPLOYEE BENEFIT PLANS—(Continued)

The expected long-term rate of return on plan assets considers the portfolio as a whole and not on the sum of the returns on individual asset categories. The return is based exclusively on historical returns, without adjustments.

Net periodic pension cost included the following components:

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

The Corporation’s investment policies and strategies for the pension plan use a target allocation of 50% to 70% for equity securities and 30% to 50% for debt securities. The investment goals attempt to maximize returns while remaining within specific risk management policies. While the risk management policies permit investment in specific debt and equity securities, a significant percentage of total plan assets is maintained in mutual funds, approximately 84% at December 31, 2005, to assist in investment diversification. Generally the investments are readily marketable and can be sold to fund benefit payment obligations as they become payable.

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

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

Supplemental Executive Retirement Plan

The Corporation has a noncontributory, nonqualified supplemental executive retirement plan (the “SERP”) covering certain executive employees. Annual benefits payable under the SERP are based on factors similar to those for the pension plan, with offsets related to amounts payable under the pension plan and social security benefits.

63

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 11—EMPLOYEE BENEFIT PLANS—(Continued)

Information concerning the status of the plan is as follows:

	2005			2004
	(dollars in thousands)
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	1,197		$	1,011
Service cost		86			63
Interest cost		83			68
Net actuarial loss		250			77
Benefits paid		(22	)		(22	)
Benefit obligation at end of year	$	1,594		$	1,197
Accumulated Benefit Obligation at End of Year	$	1,004		$	783
Change in Plan Assets:
Fair value of plan assets at beginning of year	$	—		$	—
Actual return on plan assets		—			—
Employer contributions		22			22
Benefits paid		(22	)		(22	)
Fair value of plan assets at end of year	$	—		$	—
Accrued SERP Cost Components:
Funded status (liability) of plan	$	(1,594	)	$	(1,197	)
Unrecognized net actuarial loss		539			355
Unrecognized prior service cost		222			235
Unrecognized transition obligation		—			—
Accrued SERP cost at end of year	$	(833	)	$	(607	)
Weighted-Average Plan Assumption at End of Year:
Discount rate		5.75	%		6.25	%

Net periodic SERP cost included the following components:

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

The SERP is an unfunded plan. Consequently, there are no plan assets or cash contribution requirements other than for the direct payment of benefits.

The estimated benefit payments for each year ending December 31 from 2006 through 2010 are as follows: $22,000 in 2006, $22,000 in 2007, $46,000 in 2008, $82,000 in 2009 and $81,000 in 2010. The estimated benefit

64

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 11—EMPLOYEE BENEFIT PLANS—(Continued)

payments to be paid in the aggregate for the five year period from 2011 through 2015 are $393,000. The estimated benefit payments are based on the same assumptions used to measure the benefit obligation at December 31, 2005 and include estimated future employee service.

Other Postretirement Defined Benefit Plans

The Corporation has postretirement medical and life insurance plans covering substantially all full-time employees who qualify as to age and length of service. The medical plan is contributory, with retiree contributions adjusted whenever medical insurance rates change. The life insurance plan is noncontributory.

Information concerning the plans, which are unfunded, is as follows:

	2005			2004
	(dollars in thousands)
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	1,375		$	1,192
Service cost		66			60
Interest cost		80			78
Net actuarial loss (gain)		43			82
Benefits paid		(33	)		(37	)
Benefit obligation at end of year	$	1,531		$	1,375
Accumulated Benefit Obligation at End of Year	$	1,411		$	1,271
Accrued Postretirement Benefit Cost Components:
Funded status (liability) of plan	$	(1,531	)	$	(1,375	)
Unrecognized net actuarial loss		325			288
Unrecognized prior service cost		—			10
Unrecognized transition obligation		142			162
Accrued postretirement benefit cost at end of year	$	(1,064	)	$	(915	)
Weighted-Average Plan Assumptions at End of Year:
Discount rate		5.75	%		6.25	%
Annual rate of increase in the cost of medical benefits:
Current year		10.00			11.00
Final constant amount		5.00			5.00
Annual decrease		1.00			1.00

Increasing or decreasing the assumed medical cost trend rate by one percentage point would not have a significant effect on either the postretirement benefit obligation at December 31, 2005 or the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2005.

65

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 11—EMPLOYEE BENEFIT PLANS—(Continued)

Net periodic postretirement benefit cost included the following components:

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

The postretirement medical and life insurance plans are unfunded plans. Consequently, there are no plan assets or cash contribution requirements other than for the direct payment of benefits.

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

Matching Retirement/Savings Plan

The Corporation has a matching retirement/savings plan which permits eligible employees to make contributions to the plan up to a specified percentage of compensation as defined by the plan. A portion of the employee contributions are matched by the Corporation based on the plan formula. The matching contributions amounted to $379,000 in 2005, $322,000 in 2004 and $320,000 in 2003.

NOTE 12—LEASES

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

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

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

66

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 13—SUPPLEMENTARY INCOME STATEMENT INFORMATION

Significant components of other expense were as follows:

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

NOTE 14—FNB CORP. (PARENT COMPANY) FINANCIAL DATA

The Parent Company’s principal asset is its investment in the subsidiary companies, and its principal source of income is dividends from those subsidiaries.

The Parent Company’s condensed balance sheets as of December 31, 2005 and 2004, and the related condensed statements of income and cash flows for each of the years in the three-year period ended December 31, 2005 are as follows:

Condensed Balance Sheets

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

67

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 14—FNB CORP. (PARENT COMPANY) FINANCIAL DATA—(Continued)

Condensed Statements of Income

	Years Ended December 31
	2005			2004			2003
	(in thousands)
Income:
Dividends from subsidiaries	$	3,606		$	4,140		$	5,318
Other income (charge)		6			—			(17	)
Total income		3,612			4,140			5,301
Expenses:
Interest		632			352			381
Operating		99			125			119
Total expenses		731			477			500
Income before income taxes and equity in undistributed net income of subsidiaries		2,881			3,663			4,801
Income tax benefit		(254	)		(162	)		(176	)
Income before equity in undistributed net income of subsidiaries		3,135			3,825			4,977
Equity in undistributed net income of subsidiaries		6,802			2,773			3,423
Net income	$	9,937		$	6,598		$	8,400

Condensed Statements of Cash Flows

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

68

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 15—CAPITAL ADEQUACY REQUIREMENTS

Certain regulatory requirements restrict the lending of funds by First National Bank to FNB Corp. and the amount of dividends which can be paid to FNB Corp. In 2006, the maximum amount of dividends First National Bank can pay to FNB Corp., without the approval of the Comptroller of the Currency, is $9,580,000 plus an additional amount equal to the retained net income in 2006 up to the date of any dividend declaration.

First National Bank is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits. For the reserve maintenance period in effect at December 31, 2005, the average daily reserve requirement was $4,538,000.

FNB Corp. and First National Bank are required to comply with capital adequacy standards established by the Board of Governors of the Federal Reserve System. In addition, First National Bank is required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, there are minimum ratios of capital to risk-weighted assets. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a material effect on the consolidated financial statements.

Regulatory capital amounts and ratios are set forth in the table below. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier 1, Tier 2 and Tier 3, as a percentage of risk-weighted assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various off-balance sheet exposures. Tier 1 capital consists primarily of common shareholders’ equity and qualifying perpetual preferred stock, net of goodwill and other disallowed intangible assets. Tier 2 capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible debt, preferred stock and the allowance for loan losses. Tier 3 capital, applicable only to financial institutions subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institution’s ongoing trading activities. At December 31, 2005, FNB Corp. and First National Bank were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital.

First National Bank is well-capitalized under the regulatory framework for prompt corrective action based on the most recent notification from the various regulatory agencies as of December 31, 2005. To be categorized as well-capitalized, First National Bank must meet minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no events or conditions since the notification that management believes have changed the category for First National Bank.

69

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 15—Capital Adequacy Requirements—(Continued)

									Minimum Ratios
	Capital Amount				Ratio				For Capital Adequacy Purposes		To Be Well Capitalized Under Prompt Corrective Action Provisions
	2005		2004		2005		2004
	(dollars in thousands)
As of December 31
Total capital (to risk-weighted assets):
FNB Corp.	$	100,182	$	71,805	11.46	%	10.08	%	8.00	%	N/A
First National Bank		96,773		79,409	11.20		11.24		8.00		10.00	%
Tier 1 capital (to risk-weighted assets):
FNB Corp.		89,231		64,503	10.21		9.05		4.00		N/A
First National Bank		86,070		72,107	9.96		10.21		4.00		6.00	%
Tier 1 capital (to average assets):
FNB Corp.		89,231		64,503	8.81		7.73		4.00		N/A
First National Bank		86,070		72,107	8.26		8.80		4.00		5.00	%

NOTE 16—SHAREHOLDERS’ EQUITY

Stock Buyback Program

Under stock buyback programs authorized by the Board of Directors for the repurchase of shares of common stock, the Corporation repurchased 24,800 shares in 2005, 66,303 shares in 2004 and 63 shares in 2003. Under the stock buyback program in effect at December 31, 2005, a maximum of 300,000 shares could be repurchased, of which 1,200 shares were repurchased in 2005, resulting in a remaining authorization of 298,800 shares available for future repurchases.

Earnings Per Share (EPS)

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

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

For the years 2005, 2004 and 2003, there were 236,730, 175,400 and 2,697 stock options, respectively, that were antidilutive since the exercise price exceeded the average market price. These common stock equivalents were omitted from the calculations of diluted EPS for their respective years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 16—SHAREHOLDERS’ EQUITY—(Continued)

Stock Options

The Corporation adopted stock compensation plans in 1993 and 2003 that allow for the granting of incentive and nonqualified stock options to key employees and directors. Under terms of both the 1993 and 2003 plans, options are granted at prices equal to the fair market value of the common stock on the date of grant. Options become exercisable after one year in equal, cumulative installments over a five-year period. No option shall expire later than ten years from the date of grant. No further grants can be made under the 1993 stock compensation plan after March 10, 2003. Based on the stock options outstanding at December 31, 2005, a maximum of 411,855 shares of common stock has been reserved for issuance under the 1993 stock compensation plan. A maximum of 420,000 shares of common stock has been reserved for issuance under the 2003 stock compensation plan. At December 31, 2005, there were 103,900 shares available under the 2003 plan for the granting of additional options.

The Corporation assumed a stock compensation plan in its merger acquisition of Carolina Fincorp in 2000. One grant of qualified and nonqualified stock options was made under the plan in 1999 to key employees and directors at a price equal to fair market value on the date of grant. No additional grants will be made under the plan. Based on the stock options outstanding at December 31, 2005, a maximum of 41,008 shares of common stock has been reserved for issuance under the stock compensation plan.

The Corporation assumed another stock compensation plan in its merger acquisition of Rowan Bancorp in 2002. One grant of incentive and nonqualified stock options was made under the plan in 1993 to key employees and directors at a price equal to fair market value on the date of grant. No additional grants were to be made under the plan, and no options remained outstanding after the final activity in 2003. Consequently, the stock compensation plan is effectively considered terminated, and no shares of common stock are reserved for issuance.

The Corporation accounts for awards under employee stock-based compensation plans using the intrinsic value method in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” and, accordingly, no compensation cost has been recognized for such awards in the consolidated financial statements. The pro forma effect on net income and earnings per share as if the compensation cost that would have been determined under the fair value method had been recorded in the consolidated financial statements, pursuant to the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123”, is disclosed in Note 1.

The weighted-average fair value per share of options granted in 2005, 2004 and 2003 amounted to $5.04, $5.64 and $6.58, respectively. Fair values were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2005		2004		2003
Risk-free interest rate	4.40	%	3.80	%	3.51	%
Dividend yield	2.75		2.75		2.75
Volatility	31.00		33.05		35.78
Expected life	6 years		6 years		6 years

71

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 16—SHAREHOLDERS’ EQUITY—(Continued)

The following is a summary of stock option activity.

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

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

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Shares	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$  9.82 – 11.75	205,638	4.59	$	11.36	205,638	$	11.36
14.00 – 14.13	96,325	2.10		14.07	96,325		14.07
15.00 – 19.82	312,900	7.80		18.01	118,300		17.11
20.00 – 27.00	154,100	7.87		22.03	63,500		22.15
	768,963	6.24		16.54	483,763		14.72

NOTE 17—COMMITMENTS

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

Commitments by First National Bank to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. At December 31, 2005, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $195,712,000. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower.

First National Bank issues standby letters of credit whereby it guarantees the performance of a customer to a third party if a specified triggering event or condition occurs. The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee. All standby letters of credit provide for recourse against the customer on whose behalf the letter of credit was issued, and this recourse may be further secured by a pledge of assets. The maximum potential amount of undiscounted future payments related to

72

FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 17—COMMITMENTS—(Continued)

standby letters of credit was $7,767,000 at December 31, 2005 and $6,445,000 at December 31, 2004. Due to insignificance, the Corporation has recorded no liability at December 31, 2005 for the current carrying amount of the obligation to perform as a guarantor.

Dover Mortgage Company originates certain residential mortgage loans with the intention of selling these loans. Between the time that Dover enters into an interest rate lock or a commitment to originate a residential mortgage loan with a potential borrower and the time the closed loan is sold, the Corporation is subject to variability in market prices related to these commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to deliver loans into a mortgage-backed security. The commitments to originate residential mortgage loans and the forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their fair value adjustments are recorded through the income statement in income from mortgage loan sales. The commitments to originate residential mortgage loans totaled $34,648,000 at December 31, 2005, and the related forward sales commitments totaled $34,648,000. Loans held for sale by Dover Mortgage Company totaled $16,282,000 at December 31, 2005, and the related forward sales commitments totaled $16,282,000.

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

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

NOTE 18—FAIR VALUEOF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value for each class of financial instruments.

Cash and Cash Equivalents.    For cash on hand, amounts due from banks, and federal funds sold, the carrying value is considered to be a reasonable estimate of fair value.

Investment Securities.     The fair value of investment securities is based on quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans.     The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

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

Deposits.     The fair value of demand, savings and money market deposits is the amount payable on demand at the reporting date. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.

Borrowed Funds.     The carrying value of retail repurchase agreements and federal funds purchased is considered to be a reasonable estimate of fair value. The fair value of Federal Home Loan Bank advances and other borrowed funds is estimated using the rates currently offered for advances of similar remaining maturities.

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FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 18—FAIR VALUEOF FINANCIAL INSTRUMENTS—(Continued)

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

Commitments.     The fair value of commitments to extend credit is considered to approximate carrying value, since the large majority of these commitments would result in loans that have variable rates and/or relatively short terms to maturity or sale. For other commitments, generally of a short-term nature, the carrying value is considered to be a reasonable estimate of fair value. The various commitment items are disclosed in Note 17.

The estimated fair values of financial instruments are as follows:

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

The fair value estimates are made at a specific point in time based on relevant market and other information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be considered in an actual sale considered. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and such other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

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FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 19—BUSINESS SEGMENT INFORMATION

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

	Year Ended December 31, 2005
	First National Bank		Dover Mortgage Company			Other			Total
	(in thousands)
Interest income	$	53,439	$	971		$	5		$	54,415
Interest expense		18,623		796			631			20,050
Net interest income		34,816		175			(626	)		34,365
Provision for loan losses		2,842		—			—			2,842
Net interest income after provision for loan losses		31,974		175			(626	)		31,523
Noninterest income		11,196		3,780			(50	)		14,926
Noninterest expense		27,740		3,911			27			31,678
Income (loss) before income taxes		15,430		44			(703	)		14,771
Income taxes (benefit)		5,057		22			(245	)		4,834
Net income (loss)	$	10,373	$	22		$	(458	)	$	9,937
Total assets	$	1,078,367	$	22,554		$	1,164		$	1,102,085
Net loans		786,439		16,282			—			802,721
Goodwill		27,605		3,776			—			31,381
	Year Ended December 31, 2004
	First National Bank		Dover Mortgage Company			Other			Total
	(in thousands)
Interest income	$	39,835	$	601		$	—		$	40,436
Interest expense		11,749		301			352			12,402
Net interest income		28,086		300			(352	)		28,034
Provision for loan losses		4,030		—			—			4,030
Net interest income after provision for loan losses		24,056		300			(352	)		24,004
Noninterest income		10,781		3,058			(166	)		13,673
Noninterest expense		25,209		3,587			(41	)		28,755
Income (loss) before income taxes		9,628		(229	)		(477	)		8,922
Income taxes (benefit)		2,562		(76	)		(162	)		2,324
Net income (loss)	$	7,066	$	(153	)	$	(315	)	$	6,598
Total assets	$	845,402	$	17,174		$	315		$	862,891
Net loans		646,542		10,919			—			657,461
Goodwill		12,583		3,752			—			16,335

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FNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 19—BUSINESS SEGMENT INFORMATION—(Continued)

	Year Ended December 31, 2003
	First National Bank		Dover Mortgage Company		Other			Total
	(in thousands)
Interest income	$	38,911	$	1,265	$	(18	)	$	40,158
Interest expense		12,091		675		378			13,144
Net interest income		26,820		590		(396	)		27,014
Provision for loan losses		1,860		—		—			1,860
Net interest income after provision for loan losses		24,960		590		(396	)		25,154
Noninterest income		11,273		2,628		(301	)		13,600
Noninterest expense		24,178		3,164		(183	)		27,159
Income before income taxes		12,055		54		(514	)		11,595
Income taxes		3,342		28		(175	)		3,195
Net income	$	8,713	$	26	$	(339	)	$	8,400
Total assets	$	758,628	$	14,609	$	8		$	773,245
Net loans		537,540		8,201		—			545,741
Goodwill		12,583		3,742		—			16,325

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CONTROLS AND PROCEDURES

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

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

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MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

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

FNB Corp.

March 14, 2006

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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

FNB Corp and Subsidiaries

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that FNB Corp and Subsidiaries (the “Corporation”) maintained effective internal control overfinancial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Corporation’s management is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internal control overfinancial reporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Corporation’s internal control overfinancial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

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

79

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

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

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

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

Raleigh, North Carolina

March 14, 2006

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of March 15, 2006.

FNB Corp.
(Registrant)
By:	/s/    MICHAEL C. MILLER
	Michael C. Miller Chairman and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, as of March 15, 2006.

Signature	Title
/s/                          MICHAEL C. MILLER Michael C. Miller	Chairman and President (Principal Executive Officer)
/s/                              JERRY A. LITTLE Jerry A. Little	Treasurer and Secretary (Principal Financial and Accounting Officer)
/s/                        JACOB F. ALEXANDER III Jacob F. Alexander III	Director
/s/                            LARRY E. BROOKS Larry E. Brooks	Director
/s/                      JAMES M. CAMPBELL, JR. James M. Campbell, Jr.	Director
/s/                          R. LARRY CAMPBELL R. Larry Campbell	Director
/s/                              DARRELL L. FRYE Darrell L. Frye	Director
/s/                          WILBERT L. HANCOCK Wilbert L. Hancock	Director
/s/                           THOMAS A. JORDAN Thomas A. Jordan	Director
/s/                              DALE E. KEIGER Dale E. Keiger	Director
/s/                              LYNN S. LLOYD Lynn S. Lloyd	Director

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Signature	Title
/s/                      EUGENE B. MCLAURIN, II Eugene B. McLaurin, II	Director
/s/                        R. REYNOLDS NEELY, JR. R. Reynolds Neely, Jr.	Director
/s/                             RICHARD K. PUGH Richard K. Pugh	Director
/s/                             J. M. RAMSAY III J. M. Ramsay III	Director

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INDEX TO EXHIBITS

Exhibit No.	Description of Exhibit
2.10	Agreement and Plan of Merger dated as of September 18, 2005 by and between the Registrant and Integrity Financial Corporation, incorporated herein by reference to Exhibit 2.11 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended September 30, 2005.
3.10	Articles of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form S-14 Registration Statement (No. 2-96498) filed March 16, 1985.
3.11	Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 10, 1988, incorporated herein by reference to Exhibit 19.10 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 1988.
3.12	Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 12, 1998, incorporated herein by reference to Exhibit 3.12 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 1998.
3.13	Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 23, 2003, incorporated herein by reference to Exhibit 3.13 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 2003.
3.20	Amended and Restated Bylaws of the Registrant, adopted July 21, 2005, incorporated herein by reference to Exhibit 3.20 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 2005.
4.1	Specimen of Registrant’s Common Stock Certificate, incorporated herein by reference to Exhibit 4 to Amendment No. 1 to the Registrant’s Form S-14 Registration Statement (No. 2-96498) filed April 19, 1985.
4.2	Indenture dated as of November 4, 2005, between FNB Corp. and U.S. Bank, National Association, as trustee, incorporated herein by reference to Exhibit 4.1 to the Registrant’s Form 8-K Current Report filed November 8, 2005.
4.3	Amended and Restated Declaration of Trust of FNB United Statutory Trust I dated as of November 4, 2005, among FNB Corp., as sponsor, U.S. Bank, National Association, as institutional trustee, and Michael C. Miller and Jerry A. Little, as administrators, incorporated herein by reference to Exhibit 4.2 to the Registrant’s Form 8-K Current Report filed November 8, 2005.
10.10*	Form of Split Dollar Insurance Agreement dated as of November 1, 1987 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 19.20 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 1988.
10.11*	Form of Amendment to Split Dollar Insurance Agreement dated as of November 1, 1994 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by reference to Exhibit 10.11 to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.
10.20*	Stock Compensation Plan as amended effective May 12, 1998, incorporated herein by reference to Exhibit 10.30 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 1998.
10.21*	Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrant’s Stock Compensation Plan, incorporated herein by reference to Exhibit 10.31 to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.
10.22*	Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrant’s Stock Compensation Plan, incorporated herein by reference to Exhibit 10.32 to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.
10.23*	FNB Corp. 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-105442).

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Exhibit No.	Description of Exhibit
10.24*	Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrant’s 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.24 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended September 30, 2003.
10.25*	Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrant’s 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.25 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2003.
10.30*	Employment Agreement dated as of January 1, 2006 among FNB Corp., First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10 to the Registrant’s Current Report on Form 8-K filed on January 6, 2006.
10.31*	Carolina Fincorp, Inc. Stock Option Plan (assumed by the Registrant on April 10, 2000), incorporated herein by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-54702).
10.32*	Employment Agreement dated as of April 10, 2000 between First National Bank and Trust Company and R. Larry Campbell, incorporated herein by reference to Exhibit 10.32 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2000.
10.33*	Nonqualified Supplemental Retirement Plan with R. Larry Campbell, incorporated herein by reference to Exhibit 10(c) to the Annual Report on Form 10-KSB of Carolina Fincorp, Inc. for the fiscal year ended June 30, 1997.
10.34*	Form of Change of Control Agreement between FNB Corp. and certain of its key employees and officers, incorporated herein by reference to Exhibit 10.35 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2003.
14	Code of Ethics for Senior Financial Officers, incorporated herein by reference to Exhibit 14 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2003.
21	Subsidiaries of the Registrant.
23.10	Consent of Independent Registered Public Accounting Firm—Dixon Hughes PLLC
23.11	Consent of Independent Registered Public Accounting Firm—KPMG LLP
31.10	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.11	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract, or compensatory plan or arrangement.

84