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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, 2002

Commission File Number 0-13823

FNB CORP.

(Exact name of Registrant as specified in its charter)

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 whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No ¨

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

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 $74,512,000 as of June 28, 2002, the last business day of the Registrant’s most recently completed second fiscal quarter.

As of March 14, 2003, the Registrant had 5,465,819 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 13, 2003 are incorporated by reference in Part III of this report.

CROSS REFERENCE INDEX

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

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”.

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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. On August 1, 2002, FNB Corp. acquired through merger, as discussed below, another wholly owned bank subsidiary, Rowan Savings Bank SSB, Inc. (“Rowan Bank”), a North Carolina-chartered savings bank founded in 1905. First National Bank and Rowan Bank are collectively referred to as the “subsidiary banks”. FNB Corp. and the subsidiary banks are collectively referred to as the “Corporation”.

The subsidiary banks, which are full-service banks, currently conduct all of their operations in Chatham, Montgomery, Moore, Randolph, Richmond, Rowan and Scotland counties in central North Carolina. First National Bank has three offices, including the main office, in Asheboro and additional community offices in Archdale (two offices), Biscoe, Ellerbe, Laurinburg, Pinehurst, Ramseur, Randleman, Rockingham (two offices), Seagrove, Siler City, Southern Pines and Trinity. Rowan Bank has its main office in China Grove and additional community offices in Kannapolis and Salisbury. 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. The subsidiary banks also have automated teller machines and are members of Plus, a national teller machine network, and Star, a regional network.

On April 10, 2000, the Corporation completed a merger for the acquisition of Carolina Fincorp, Inc. (“Carolina Fincorp”), holding company for Richmond Savings Bank, Inc., SSB (“Richmond Savings”), headquartered in Rockingham, North Carolina, in a transaction accounted for as a pooling of interests. Accordingly, all prior period financial information included in the consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp. Pursuant to the terms of the merger, each share of Carolina Fincorp common stock was converted into .79 of a share of FNB Corp. common stock, for a total issuance of 1,478,398 FNB Corp. shares. On June 26, 2000, Richmond Savings was merged into First National Bank and Trust Company. At March 31, 2000, Carolina Fincorp operated five offices through Richmond Savings and had approximately $125,943,000 in total assets, $108,848,000 in deposits and $16,332,000 in shareholders’ equity. Merger-related expenses of $2,796,000 were recorded in the second quarter of 2000. Upon the change in control, the Carolina Fincorp ESOP plan terminated according to its terms and unvested MRP shares became fully vested. Included in merger-related expenses were $385,000 of expense related to the termination of these plans. Additionally, approximately $450,000 of the total provision for loan losses of $835,000 in the second quarter of 2000 was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp.

In connection with the merger of First National Bank with Richmond Savings, First National Bank acquired a financial subsidiary, Richmond Investment Services, Inc., which changed its name after the acquisition to First National Investor Services, Inc.

On August 1, 2002, the Corporation completed a merger for the acquisition of Rowan Bancorp, Inc. (“Rowan Bancorp”), holding company for Rowan Savings Bank SSB, Inc. (“Rowan Bank”), headquartered in China Grove, North Carolina. Per the terms of the merger agreement, Rowan Bank will be operated as a separate subsidiary of FNB Corp. for a period of not less than 24 months; provided, however, that the Board of Directors of Rowan Bank may elect to cause Rowan Bank to merge with First National Bank or another subsidiary of FNB Corp. prior to the termination of the 24-month period. At the date of merger, Rowan Bank operated three offices and, based on estimated fair values, had $134,208,000 in total assets, $95,738,000 in loans and $101,205,000 in deposits. Pursuant to the terms of the merger, each share of Rowan Bancorp common stock was converted into either 2.3715 shares of FNB Corp. common stock or $36.00 in cash or a combination of stock and cash, the overall conversion to stock being limited to 45% of Rowan Bancorp shares. The aggregate purchase price was $21,830,000, consisting of $11,205,000 of cash payments, 603,859 shares of FNB Corp. common stock valued at $9,094,000 and outstanding Rowan Bancorp stock options valued at $1,531,000. The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Rowan Bank were recorded based on a preliminary estimate of fair values as of August 1, 2002, subject to possible adjustment during the one-year period from that date. The consolidated financial statements include the results of operations of Rowan Bank since August 1, 2002.

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On February 20, 2003, the Corporation entered into a definitive merger agreement to acquire Dover Mortgage Company (“Dover”), headquartered in Charlotte, North Carolina. 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. Under the terms of the agreement, Dover will be merged with a wholly owned subsidiary of FNB Corp. formed for the purposes of effecting the merger. Dover will then become a separate subsidiary of FNB Corp. The merger will be accounted for using the purchase method of accounting for business combinations and is subject to several conditions, including approval by applicable regulatory authorities. Upon satisfaction of these conditions, the merger is anticipated to close early in the second quarter of 2003. Dover shareholders will receive a combination of common stock and cash. The merger agreement provides that generally 50% of the outstanding shares of Dover common stock will be converted into FNB Corp. common stock and the remaining 50% will be converted into cash. 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. At December 31, 2002, Dover operated six mortgage loan production offices and had approximately $44,961,000 in total assets and $2,204,000 in shareholders’ equity.

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

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

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

Competition

The banking industry within the marketing area of the subsidiary banks is extremely competitive. The subsidiary banks face direct competition in Chatham, Montgomery, Moore, Randolph, Richmond, Rowan and Scotland counties from approximately 29 different financial institutions, including commercial banks, savings institutions and credit unions. Although none of these entities is dominant, the subsidiary banks consider themselves on a combined basis to be one of the major 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.

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 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 the subsidiary banks may have a material effect on the business

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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 Financial Modernization Act of 1999 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.

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.

As a North Carolina-chartered savings bank, Rowan Bank is subject to regulation and examination by the FDIC and the North Carolina Commissioner of Banks and to regulations governing such matters as capital standards, mergers, establishment of branch offices, subsidiary investments and activities, and general investment authority. Rowan Bank is a member of the Federal Home Loan Bank System and its deposits are insured by the FDIC through the Savings Association Insurance Fund. Generally, North Carolina-chartered savings banks whose deposits are insured by the Savings Association Insurance Fund are subject to restrictions with respect to activities and investments, transactions with affiliates and loans to one borrower.

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.

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Capital Requirements

FNB Corp. and the subsidiary banks 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. 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 subsidiaries. Because the principal source of FNB Corp. revenues is dividends from the subsidiary banks, the ability of FNB Corp. to pay dividends to its shareholders depends largely upon the amount of dividends the subsidiary banks may pay to FNB Corp. There are statutory and regulatory limitations on the payment of dividends by the subsidiary banks 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.

Rowan Bank is not permitted to declare or pay a cash dividend if the effect of the dividend would be to cause the net worth of Rowan bank to be reduced below the minimum regulatory capital required by the North Carolina Commissioner of Banks or the FDIC or the liquidation account established in connection with its conversion from mutual to stock form.

FNB Corp. and subsidiary banks 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.

Community Reinvestment Act

The subsidiary banks are 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.

Interstate Banking and Branching

The 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. The extent and timing of any such increase cannot be predicted.

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Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Financial Modernization Act of 1999 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 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.

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.

Employees

As of December 31, 2002, FNB Corp. had four officers, all of whom were also officers of First National Bank. On that same date, First National Bank had 202 full-time employees and 21 part-time employees, and Rowan Bank had 30 full-time employees and 7 part-time employees. Each subsidiary bank 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, Ellerbe, Laurinburg, Pinehurst, Ramseur, Randleman, Rockingham (two offices), Seagrove, Siler City, Southern Pines and Trinity, North Carolina. The main offices of Rowan Bank are located in China Grove, North Carolina. Rowan Bank also has other community offices in Kannapolis and Salisbury, North Carolina. Except as noted below, all premises are owned by the subsidiary banks in fee. The Bush Hill office in Archdale is under a lease expiring January 31, 2004, with lease renewal options for up to an additional 18-year term. The Laurinburg office is under a lease expiring August 31, 2003. The Pinehurst office is under a lease expiring February 28, 2005 with lease renewal options for up to an additional four-year term. The land on which the Seagrove office is situated is under a lease expiring June 30, 2016. At that time, the land is subject to a purchase option at a fixed price or lease renewal options for up to an additional 30-year term.

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FNB CORP. AND SUBSIDIARIES

FIVE YEAR FINANCIAL HISTORY ⁽¹⁾

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

On April 10, 2000, the Corporation completed a merger for the acquisition of Carolina Fincorp, Inc. (“Carolina Fincorp”), holding company for Richmond Savings Bank, Inc., SSB (“Richmond Savings”), headquartered in Rockingham, North Carolina, in a transaction accounted for as a pooling of interests. Accordingly, all prior period financial information included in the consolidated financial statements has been restated to include the account balances and results of operations of Carolina Fincorp. Pursuant to the terms of the merger, each share of Carolina Fincorp common stock was converted into .79 of a share of FNB Corp. common stock, for a total issuance of 1,478,398 FNB Corp. shares. On June 26, 2000, Richmond Savings was merged into First National Bank and Trust Company. At March 31, 2000, Carolina Fincorp operated five offices through Richmond Savings and had approximately $125,943,000 in total assets, $108,848,000 in deposits and $16,332,000 in shareholders’ equity. Merger-related expenses of $2,796,000 were recorded in the second quarter of 2000. Upon the change in control, the Carolina Fincorp ESOP plan terminated according to its terms and unvested MRP shares became fully vested. Included in merger-related expenses were $385,000 of expense related to the termination of these plans. Additionally, approximately $450,000 of the total provision for loan losses of $835,000 in the second quarter of 2000 was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp.

On August 1, 2002, the Corporation completed a merger for the acquisition of Rowan Bancorp, Inc. (“Rowan Bancorp”), holding company for Rowan Savings Bank SSB, Inc. (“Rowan Bank”), headquartered in China Grove, North Carolina. Per the terms of the merger agreement, Rowan Bank will be operated as a separate subsidiary of FNB Corp. for a period of not less than 24 months; provided, however, that the Board of Directors of Rowan Bank may elect to cause Rowan Bank to merge with First National Bank or another subsidiary of FNB Corp. prior to the termination of the 24-month period. At the date of merger, Rowan Bank operated three offices and, based on estimated fair values, had $134,208,000 in total assets, $95,738,000 in loans and $101,205,000 in deposits. Pursuant to the terms of the merger, each share of Rowan Bancorp common stock was converted into either 2.3715 shares of FNB Corp. common stock or $36.00 in cash or a combination of stock and cash, the overall conversion to stock being limited to 45% of Rowan Bancorp shares. The aggregate purchase price was $21,830,000, consisting of $11,205,000 of cash payments, 603,859 shares of FNB Corp. common stock valued at $9,094,000 and outstanding Rowan Bancorp stock options valued at $1,531,000. The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Rowan Bank were recorded based on a preliminary estimate of fair values as of August 1, 2002, subject to possible adjustment during the one-year period from that date. The consolidated financial statements include the results of operations of Rowan Bank since August 1, 2002.

On February 20, 2003, the Corporation entered into a definitive merger agreement to acquire Dover Mortgage Company (“Dover”), headquartered in Charlotte, North Carolina. 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. Under the terms of the agreement, Dover will be merged with a wholly owned subsidiary of FNB Corp. formed for the purposes of effecting the merger. Dover will then become a separate subsidiary of FNB Corp. The merger will be accounted for using the purchase method of accounting for business combinations and is subject to several conditions, including approval by applicable regulatory authorities. Upon satisfaction of these conditions, the merger is anticipated to close early in the second quarter of 2003. Dover shareholders will receive a combination of common stock and cash. The merger agreement provides that generally 50% of the outstanding shares of Dover common stock will be converted into FNB Corp. common stock and the remaining 50% will be converted into cash. 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. At December 31, 2002, Dover operated six mortgage loan production offices and had approximately $44,961,000 in total assets and $2,204,000 in shareholders’ equity.

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

The Corporation earned $8,200,000 in 2002, a 21.9% increase in net income from 2001. Basic earnings per share increased from $1.35 in 2001 to $1.63 in 2002 and diluted earnings per share increased from $1.32 to $1.58. Largely reflecting the acquisition of Rowan Bank on August 1, 2002 as discussed above, total assets were $754,370,000 at December 31, 2002, up 27.1% from year-end 2001. Loans amounted to $502,342,000 at December 31, 2002, increasing 28.3% from the prior year. Total deposits grew 23.3% to $592,354,000 in 2002.

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 $1,472,000 in 2002, up 21.9% over 2001, reflecting in part the acquisition of Rowan Bank on August 1, 2002 as discussed above. Earnings were positively impacted in 2002 by increases of $4,570,000 or 22.0% in net interest income and $2,368,000 in noninterest income. These gains were significantly offset, however, by increases $4,063,000 in noninterest expense and $580,000 in the provision for loan losses. Noninterest income has been favorably impacted by the increase in service charges on deposit accounts resulting from the implementation of an overdraft protection program in July 2002 and by the increase in the net gain on sales of loans as long-term conforming mortgage rates have remained at historical lows.

After exclusion of after-tax, merger-related charges of $2,338,000 recorded in the second quarter of 2000 and associated with the merger with Carolina Fincorp as discussed in the “Overview”, the Corporation’s net income increased $874,000 in 2001, up 14.9% over 2000. Earnings were positively impacted in 2001 by a $1,399,000 increase in noninterest income and by a $152,000 decrease in the provision for loan losses, excluding merger-related charges. These gains were partially offset, however, by a $376,000 increase in noninterest expense, excluding merger-related charges, and by a $260,000 or 1.2% decrease in net interest income, which reflected the effects of interest rate declines in 2001 and the balance sheet restructuring project discussed in the “Overview”. The interest rate declines, resulting from actions taken by the Federal Reserve, caused a greater reduction in the average yield on earning assets than in the average rate paid on interest-bearing liabilities. As noted in the discussion of the restructuring project, non-taxable income related to bank owned life insurance, which replaced a portion of certain loans sold, is recorded as noninterest income, while income on loans sold was recorded as interest income. Income on bank owned life insurance amounted to $638,000 in 2001 compared to $12,000 in 2000. The net gain on loans sold, which amounted to $831,000 in 2001 compared to $153,000 in 2000, included a net gain of $151,000 in the 2001 first quarter and $50,000 in the 2000 fourth quarter related to loans sold in connection with the restructuring project.

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Excluding the merger-related charges in 2000, return on average assets improved from 1.08% in 2000 to 1.15% in 2001 to 1.25% in 2002. Return on average shareholders’ equity improved from 10.97% in 2000 to 11.63% in 2001 to 12.82% in 2002. In 2002, return on tangible assets and equity (calculated by deducting average goodwill from average assets and from average equity) amounted to 1.26% and 13.99%, respectively. In 2000, return on average assets and equity, including the effect of the merger-related charges, was .65% and 6.59%, respectively.

Net Interest Income

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

Net interest income was $25,338,000 in 2002 compared to $20,768,000 in 2001. The increase of $4,570,000 or 22.0% resulted partially from the acquisition of Rowan Bank on August 1, 2002 as discussed above, but was primarily due to an improvement in the net yield on earning assets, or net interest margin, from 4.03% to 4.40% coupled with an 11.6% increase in the level of average earning assets. In 2001, there was a $260,000 or 1.2% decrease in net interest income that resulted primarily from the effect of the balance sheet restructuring project as discussed in the “Overview” and from a decline in the net yield on earning assets, or net interest margin, from 4.28% in 2000 to 4.03% in 2001, the effect of which more than offset the benefit of a 5.9% increase in average earning assets. On a taxable equivalent basis, the increase in net interest income in 2002 was $4,798,000 and the decrease in 2001 was $73,000, 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

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

Until the significant interest rate declines in 2001, there had been a much greater degree of stability for several years in the interest rates both earned and paid by the Corporation. After rate cuts totaling 4.75% in 2001 and an additional rate cut of .50% in 2002, the prime rate averaged 6.99% in 2001 and 4.67% in 2002 compared to the average prime rates of 9.21%, 7.99% and 8.37% in 2000, 1999 and 1998, respectively. Due to a general slowdown in the economy that began to be perceived in the 2000 fourth quarter, the Federal Reserve acted to provide a stimulus through a series of interest rate reductions commencing in the 2001 first quarter, resulting in eight 50 basis point reductions and three 25 basis point reductions in the prime rate that lowered it to the 4.75% level at December 31, 2001. The reductions in the prime rate tended

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to negatively impact the net interest margin and net interest spread until the 2001 third quarter when these measures began to improve. An additional rate cut of 50 basis points in November 2002 further lowered the prime rate to the 4.25% level at December 31, 2002.

In 2002, the net interest spread increased by 62 basis points from 3.44% in 2001 to 4.06% in 2002, reflecting the effect of a decrease in the average rate paid on interest-bearing liabilities, or cost of funds, that more than offset the decrease in the average total yield on earning assets. The yield on earning assets decreased by 107 basis points from 7.79% in 2001 to 6.72% in 2002, while the cost of funds decreased by 169 basis points from 4.35% to 2.66%. In 2001, the 10 basis points decrease in net interest spread resulted from a 54 basis points decrease in the yield on earning assets as partially offset by a 44 basis points decrease in the cost of funds.

The 2002 and 2001 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

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 negatively impacted in 2002 by a $1,780,000 provision for loan losses compared to a provision of $1,200,000 in 2001. In 2001, there was a positive impact from a $602,000 provision decrease. Of the total 2000

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provision of $1,802,000, the second quarter provision was $835,000, which amount included approximately $450,000 that was merger related as discussed in the overview, while the remainder resulted from increases in historical charge-off trends.

The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.22% at December 31, 2002, 1.17% at December 31, 2001 and 1.13% at December 31, 2000. The increase in the allowance percentage from December 31, 2000 to December 31, 2001 related primarily to asset quality considerations and increases in historical charge-off trends, while the increase from December 31, 2001 to December 31, 2002 related to the same factors and additionally to general economic conditions.

Noninterest Income

Noninterest income increased $2,368,000 or 40.1% in 2002, reflecting in part the acquisition of Rowan Bank on August 1, 2002 as discussed above and also the general increase in the volume of business. The increase was primarily due to a $1,203,000 increase in service charges on deposit accounts and to an $800,000 increase in the net gain on sales of loans. The increase in service charges on deposit accounts primarily related to the implementation of an overdraft protection program in July 2002. Other factors favorably affecting the level of service charges on deposit accounts in 2002 were the selected increases in service charge rates that became effective in the 2002 first and third quarters and the increase in the level of deposit accounts subject to service charges. The net gain on sales of loans was affected in 2002 by long-term conforming mortgage rates that have remained at historical lows.

In 2001, noninterest income increased $1,399,000 or 31.1%, reflecting in part the general increase in the volume of business. The increase was primarily due to a $678,000 increase in the net gain on sales of loans and to a $626,000 increase in income on bank owned life insurance. As discussed in the “Overview”, a balance sheet restructuring project resulted in single premium purchases of life insurance amounting to $10,000,000 in December 2000. Income resulting from the bank owned life insurance is not subject to income tax. The net gain on loans sold included a net gain of $151,000 in the 2001 first quarter related to loans sold in connection with the restructuring project. The increase in service charges on deposit accounts was primarily due to the improved fee collection efforts that became effective during 2000. The decrease in annuity and brokerage commissions was largely related to a general decrease in the volume of sales of annuity products. Other income was positively impacted in 2000 by a $76,000 gain on the sale of an investment and by a net gain on sales of other real estate while a net loss was incurred on these sales in 2001.

Noninterest Expense

Noninterest expense was $4,063,000 or 25.3% higher in 2002 due in part to the acquisition of Rowan Bank on August 1, 2002 as discussed above. The largest factor resulting in higher noninterest expense was the generally increased level of personnel expense, which was impacted by increased staffing requirements in addition to the acquisition of Rowan Bank, by normal salary adjustments, by increased incentive compensation and by higher costs of fringe benefits. Other expense was affected in 2002 by increases in consulting fees and advertising and marketing expense, by losses recorded on disposal of fixed assets and by expenses related to the new overdraft protection program (see “Noninterest Income”).

Excluding merger-related expenses of $2,796,000 recorded in the second quarter of 2000, noninterest expense was $376,000 or 2.4% higher in 2001. The nominal increase in the level of noninterest expense in 2001 reflects in part the successful implementation of synergies following the merger with Carolina Fincorp on April 10, 2000 as discussed in the “Overview”. Personnel expense was impacted by increased staffing requirements and by normal salary adjustments. The decrease in furniture and equipment expense was due mainly to the reduction in depreciation expense related to computer networks that became fully depreciated in the third and fourth quarters of 2000. The cost of data processing services was higher in 2000 than in 2001 because of the outside data processing services employed by Richmond Savings until its merger into First National Bank on June 26, 2000. While benefiting from a reduction in advertising and marketing expense, other expense was negatively impacted in 2001 by increased expenses related to nonperforming assets.

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Merger-Related Expenses and Charges

In connection with the merger acquisition of Carolina Fincorp, merger-related expenses of $2,796,000 were recorded in the second quarter of 2000. Upon the change in control, the Carolina Fincorp ESOP plan terminated according to its terms and unvested restricted stock plan shares became fully vested, resulting in certain expenses considered merger-related. Other primary components of merger-related expenses were professional fees, investment banking fees, contract termination costs, data processing conversion fees and severance payments. Additionally, approximately $450,000 of the total provision for loan losses of $835,000 in the second quarter was related to aligning the credit risk methodologies of FNB Corp. and Carolina Fincorp. The primary components of merger-related expenses are summarized in Table 3.

Table 3

Merger-Related Expenses

Income Taxes

The effective income tax rate increased from 28.4% in 2001 to 29.8% in 2002 due principally to an increase in the ratio of taxable to tax-exempt income. The effective income tax rate declined from 32.8% in 2000 to 28.4% in 2001 due principally to the nondeductibility of certain merger-related expenses in 2000 and to a decrease in the ratio of taxable to tax-exempt income.

Liquidity

Liquidity refers to the continuing ability of the subsidiary banks to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds to the Parent Company for payment of dividends, debt service and other operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks, (b) the outstanding balance of federal funds sold, (c) lines for the purchase of federal funds from other banks, (d) the lines of credit established at the Federal Home Loan Bank totaling $101,200,000, less existing advances against those lines, and (e) the investment securities portfolio. All debt securities are of investment grade quality and, if the need arises, can be promptly liquidated on the open market or pledged as collateral for short-term borrowing.

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

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Contractual Obligations

Under existing contractual obligations, the Corporation will be required to make payments in future periods. Table 4 presents aggregated information about the payments due under such contractual obligations at December 31, 2002. Transaction deposit accounts with indeterminate maturities have been classified as having payments due in one year or less.

Table 4

Contractual Obligations