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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2004

Commission File Number 0-13823

FNB CORP.

(Exact name of Registrant as specified in its charter)

101 Sunset Avenue, Asheboro, North Carolina 27203

(Address of principal executive offices)

(336) 626-8300

(Registrant’s telephone number, including area code)

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

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

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

PART I. FINANCIAL INFORMATION

FNB Corp. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (unaudited)

See accompanying notes to consolidated financial statements.

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FNB Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to consolidated financial statements.

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FNB Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

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

See accompanying notes to consolidated financial statements.

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FNB Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

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FNB Corp. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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.

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

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

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

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

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:

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

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

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

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

Changes in the allowance for loan losses were as follows:

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

Significant components of other expense were as follows:

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:

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

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

Mortgage Servicing Rights

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

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

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

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

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

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

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

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

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

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

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

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

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

Overview

Description of Operations

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

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

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

Merger Acquisition of Dover Mortgage Company in 2003

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

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

Primary Financial Data for 2004

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

Significant Factors Affecting Earnings in 2004

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

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

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

Critical Accounting Policies

The Corporation’s significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2003. Of these significant accounting policies, the Corporation considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires management’s most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Corporation has

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developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporation’s assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Corporation’s allowance for loan losses and related matters, see “Asset Quality”.

Earnings Review

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

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

Net Interest Income

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

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

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

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

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

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

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

Provision for Loan Losses

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

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

Noninterest Income

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

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Noninterest Expense

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

Income Taxes

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

Liquidity

Liquidity for the subsidiary banks refers to their continuing ability to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds to the Parent Company for payment of dividends, debt service and other operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks, (b) the outstanding balance of federal funds sold, (c) lines for the purchase of federal funds from other banks, (d) the lines of credit established at the Federal Home Loan Bank totaling $159,200,000, less existing advances against those lines, and (e) the investment securities portfolio. All debt securities are of investment grade quality and, if the need arises, can be promptly liquidated on the open market or pledged as collateral for short-term borrowing.

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

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

Commitments, Contingencies and Off-Balance Sheet Risk

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

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

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

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

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

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

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

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

Asset/Liability Management and Interest Rate Sensitivity

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

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

Capital Adequacy

Under guidelines established by the Board of Governors of the Federal Reserve System, capital adequacy is currently measured for regulatory purposes by certain risk-based capital ratios, supplemented by a leverage capital ratio. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier 1, Tier 2 and Tier 3, as a percentage of risk-weighted assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various off-balance sheet exposures. Tier 1 capital consists primarily of common shareholders’ equity and qualifying perpetual preferred stock, net of goodwill and other disallowed intangible assets. Tier 2 capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible debt, preferred stock and the allowance for loan losses. Tier 3 capital, applicable only to financial institutions subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institution’s ongoing trading activities. At March 31, 2004, FNB Corp. and each of the subsidiary banks were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital. Under current requirements, the minimum total capital ratio is 8.00% and the minimum Tier 1 capital ratio is 4.00%. At March 31, 2004, FNB Corp. had a total capital ratio of 11.29% and a Tier 1 capital ratio of 10.29%. First National Bank and Rowan Bank had total capital ratios of 12.36% and 11.98%, respectively, and Tier 1 capital ratios of 11.36% and 10.88%, respectively.

The leverage capital ratio, which serves as a minimum capital standard, considers Tier 1 capital only and is expressed as a percentage of average total assets for the most recent quarter, after reduction of those

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assets for goodwill and other disallowed intangible assets at the measurement date. As currently required, the minimum leverage capital ratio is 4.00%. At March 31, 2004, FNB Corp. had a leverage capital ratio of 8.41%. First National Bank and Rowan Bank had leverage capital ratios of 9.48% and 8.37%, respectively.

First National Bank and Rowan Bank are also required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. To be categorized as well-capitalized, a bank must have a minimum ratio for total capital of 10.00%, for Tier 1 capital of 6.00% and for leverage capital of 5.00%. As noted above, both First National Bank and Rowan Bank met all of those ratio requirements at March 31, 2004 and, accordingly, are well-capitalized under the regulatory framework for prompt corrective action.

Balance Sheet Review

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

Investment Securities

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

Loans

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

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

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

Asset Quality

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

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

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

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

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

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

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

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

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