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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 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)

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.    ¨

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

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 $99,239,000 as of June 30, 2004, the last business day of the Registrant’s most recently completed second fiscal quarter.

As of March 1, 2005, the Registrant had 5,609,252 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 10, 2005 are incorporated by reference in Part III of this report.

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CROSS REFERENCE INDEX

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

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

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

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

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

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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. First National Bank has a financial subsidiary, First National Investor Services, Inc. On August 1, 2002, FNB Corp. acquired another wholly owned bank subsidiary, Rowan Savings Bank SSB, Inc. (“Rowan Bank”), a North Carolina-chartered savings bank founded in 1905. Rowan Bank remained a separate subsidiary of FNB Corp. until it was merged into First National Bank effective November 30, 2004. On April 1, 2003, FNB Corp. acquired, as discussed below, a mortgage banking subsidiary, Dover Mortgage Company (“Dover”). FNB Corp. and its subsidiaries are collectively referred to as the “Corporation”.

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

Dover Mortgage Company, which conducts substantially all of its operations in North Carolina, originates, underwrites and closes mortgage loans for sale into the secondary market. Dover has its main office in Charlotte and additional loan production offices in Carolina Beach, Goldsboro, Greenville, Lake Norman, Leland, Raleigh and Wilmington, North Carolina. Through representatives, Dover also conducts operations in Asheville, North Carolina and Kiawah Island, South Carolina.

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. 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 only adjustments recorded during that one-year period related to accrued acquisition costs and resulted in an $18,000 reduction of the amount initially recorded for goodwill. The consolidated financial statements include the results of operations of Rowan Bank since August 1, 2002.

Per the terms of the merger agreement, Rowan Bank was to 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 could 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. Effective November 30, 2004, with the unanimous approval of the Rowan Board of Directors, Rowan Bank was merged into First National Bank.

On April 1, 2003, the Corporation completed a merger for the acquisition of Dover Mortgage Company, 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. Subject to a maximum total payment, Dover shareholders will be entitled to additional cash consideration over the four-year period following

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closing, based on a percentage of Dover’s pretax net income during that four-year period. Any additional cash consideration paid to Dover shareholders will be recorded as an adjustment to goodwill. The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Dover were recorded based on a preliminary estimate of fair values as of April 1, 2003, subject to possible adjustment during the one-year period from that date. There were no adjustments to the estimate of fair values during that one-year period. The consolidated financial statements include the results of operations of Dover since April 1, 2003.

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

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

In November 2004, First National Bank received regulatory approval for the establishment of a second branch office in Greensboro, North Carolina. Construction of this full-service banking office is expected to be completed in 2005.

In 2004, Dover Mortgage Company opened new mortgage production offices in North Carolina at Carolina Beach in April and at Leland in November. Through representatives, Dover has commenced operations in Kiawah Island, South Carolina in January 2005 and in Asheville, North Carolina in March 2005.

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

Competition

The banking industry within First National Bank’s marketing area is extremely competitive. First National Bank faces direct competition in Chatham, Guilford, Montgomery, Moore, Randolph, Richmond, Rowan and Scotland counties from approximately 70 different financial institutions, including commercial banks, savings institutions and credit unions. Although no one of these entities is dominant, First National Bank considers itself to be one of the significant financial institutions in the area in terms of total assets and deposits. Further competition is provided by banks located in adjoining counties, as well as other types of financial institutions such as insurance companies, finance companies, pension funds and brokerage houses and other money funds. The principal methods of competing in the commercial banking industry are improving customer service through the quality and range of services provided, improving cost efficiencies and pricing services competitively.

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

Regulation and Supervision

The following discussion sets forth material elements of the regulatory framework applicable to bank holding companies and their subsidiaries. It also provides certain specific information relevant to FNB Corp.

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

General

As a bank holding company, FNB Corp. is subject to regulation under the Bank Holding Company Act of 1956, as amended, and to inspection, examination and supervision by the Federal Reserve Board. Under the Bank Holding Company Act, bank holding companies, such as FNB Corp., that have not elected to become financial holding companies under the Gramm-Leach-Bliley 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.

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

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

Liability for Bank Subsidiaries

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

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Capital Requirements

FNB Corp. and First National Bank are required to comply with federal regulations on capital adequacy. There are two measures of capital adequacy: a risk-based measure and a leverage measure. All capital standards must be satisfied for an institution to be considered in compliance. For additional information, see “Capital Adequacy” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

Dividend Restrictions

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

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

FNB Corp. and First National Bank are also subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums.

Community Reinvestment Act

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

The CRA requires the appropriate federal bank regulatory agency, in connection with its examination of the bank, to assess the bank’s record in meeting the credit needs of the community served by the bank, including low- and moderate-income neighborhoods. The regulatory agency’s assessment of the bank’s record is made available to the public.

Interstate Banking and Branching

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

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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.

Privacy

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

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

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

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

Sarbanes-Oxley Act of 2002

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

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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, 2004, FNB Corp. had four officers, all of whom were also officers of First National Bank. On that same date, First National Bank had 254 full-time employees and 31 part-time employees, and Dover had 43 full-time employees and 3 part-time employees. Each subsidiary considers its relationship with its employees to be excellent. The Corporation provides employee benefit programs, including a noncontributory defined benefit pension plan, matching retirement/savings (401(k)) plan, group life, health and dental insurance, paid vacations, sick leave, and health care and life insurance benefits for retired employees.

Properties

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

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

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FNB CORP. AND SUBSIDIARIES

FIVE YEAR FINANCIAL HISTORY

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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 Dover Mortgage Company (“Dover”), collectively referred to as the “Corporation”. This discussion should be read in conjunction with the consolidated financial statements and supplemental financial information appearing elsewhere in this report.

Rowan Savings Bank SSB, Inc. (“Rowan Bank”) was a wholly owned subsidiary of FNB Corp. from August 1, 2002 until November 30, 2004, when it was merged into First National Bank. See below in the “Overview— Merger Acquisition of Rowan Bank in 2002” for additional information.

Overview

Description of Operations

FNB Corp. is a bank holding company with a full-service subsidiary bank, First National Bank, that offers a complete line of consumer, mortgage and business banking services, including loan, deposit, cash management, investment management and trust services, to individual and business customers. First National Bank has offices in 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 eight mortgage production offices in North Carolina at Charlotte, Carolina Beach, Goldsboro, Greenville, Lake Norman, Leland, Raleigh and Wilmington. Through representatives, Dover also conducts operations in Asheville, North Carolina and Kiawah Island, South Carolina.

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

Merger Acquisition of Rowan Bank in 2002

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. 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 only adjustments recorded during that one-year period related to accrued acquisition costs and resulted in an $18,000 reduction of the amount initially recorded for goodwill. The consolidated financial statements include the results of operations of Rowan Bank since August 1, 2002.

Per the terms of the merger agreement, Rowan Bank was to 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

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could 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. Effective November 30, 2004, with the unanimous approval of the Rowan Board of Directors, Rowan Bank was merged into First National Bank.

Merger Acquisition of Dover Mortgage Company in 2003

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

Primary Financial Data for 2004

The Corporation earned $6,598,000 in 2004, a 21.5% decrease in net income from 2003. Basic earnings per share decreased from $1.50 in 2003 to $1.17 in 2004 and diluted earnings per share decreased from $1.43 to $1.13, for percentage decreases of 22.0% and 21.0%, respectively. As noted above, Dover Mortgage Company was acquired as a subsidiary through merger effective April 1, 2003, respectively, impacting both net income and the calculation of earnings per share since the acquisition date and also the comparability of operating results on a year-to-date basis between 2004 and 2003 (see Note 19 to the Consolidated Financial Statements for business segment information and also below in “Significant Factors Affecting Earnings in 2004”). Total assets were $862,891,000 at December 31, 2004, up 11.6% from year-end 2003. Loans amounted to $664,754,000 at December 31, 2004, increasing 20.4% from the prior year. Total deposits grew 10.3% to $659,544,000 in 2004.

Significant Factors Affecting Earnings in 2004

Because Dover Mortgage Company was acquired on April 1, 2003, there are no income statement amounts recorded for Dover in the consolidated financial statements for the first quarter of 2003, which affects the comparisons of 2004 and 2003 on a year-to-date basis. Before the elimination of intersegment transactions, interest income, interest expense, noninterest income and noninterest expense for Dover in the first quarter of 2004 amounted to $127,000, $54,000, $905,000 and $861,000, respectively. Income from mortgage loan sales specifically attributable to Dover in the 2004 first quarter amounted to $904,000.

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

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

The comparison of income from mortgage loan sales on a year-to-date basis in 2004 to 2003 has been affected by the acquisition of Dover Mortgage Company on April 1, 2003 as noted above. In addition, income from mortgage loan sales has been negatively impacted in general in 2004 by the increase in long-term conforming mortgage rates from the historical lows that prevailed through most of 2003 and especially by the resulting slowdown in mortgage refinancing activity. The effect of the resulting decline in income from mortgage loan sales has been somewhat offset, however, by the reduction in compensation and other expenses related to the mortgage operations. Compared to 2003, income from mortgage loan sales declined $858,000 in 2004. Apart from the general factors noted above, there were certain specific factors that impacted the comparison of income from mortgage loan sales between 2004 and 2003 as follows:

Income tax expense was reduced $173,000 in 2003 for the change in the valuation allowance for state deferred income tax assets as a result of management’s judgment that these assets would be realized in future periods.

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”.

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Earnings Review

The Corporation’s net income decreased $1,802,000 in 2004, down 21.5% from 2003, largely reflecting the $2,170,000 increase in the provision for loan losses as discussed above. Earnings were positively impacted in 2004 by increases of $1,020,000 or 3.8% in net interest income and $73,000 in noninterest income, which gains were more than offset by a $1,596,000 increase in noninterest expense. Certain factors specifically affecting the elements of income and expense and the comparability of operating results on a year-to-date basis between 2004 and 2003 were discussed in the “Overview—Significant Factors Affecting Earnings in 2004”.

The Corporation’s net income increased $200,000 in 2003, up 2.4% over 2002, reflecting in part the acquisitions of Rowan Bank and Dover Mortgage Company on August 1, 2002 and April 1, 2003, respectively, as discussed above. Earnings were positively impacted in 2003 by increases of $1,676,000 or 6.6% in net interest income and $5,332,000 or 64.5% in noninterest income. The net $7,008,000 gain in revenue from operations was significantly offset, however, by increases of $7,019,000 or 34.9% in noninterest expense and $80,000 in the provision for loan losses. Noninterest income was significantly augmented by the increase in income from mortgage loan sales following the Dover acquisition, except for the reductions in Dover income from mortgage loan sales in 2003 as noted in the “Overview—Significant Factors Affecting Earnings in 2004”. Additionally, noninterest income was further augmented by the first full-year increase in service charges on deposit accounts resulting from the implementation of an overdraft protection program in July 2002 and by the increased level of income from mortgage loan sales by First National Bank as long-term conforming mortgage rates remained at historical lows through most of 2003. Noninterest expense was impacted significantly by the Dover acquisition and also by the Rowan Bank acquisition.

Return on average assets decreased from 1.25% in 2002 to 1.07% in 2003 to 0.80% in 2004. Return on average shareholders’ equity decreased from 12.82% in 2002 to 10.66% in 2003 to 8.00% in 2004. In 2004, return on tangible assets and equity (calculated by deducting average goodwill from average assets and from average equity) amounted to 0.82% and 9.98%, 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 $28,034,000 in 2004 compared to $27,014,000 in 2003. The increase of $1,020,000 or 3.8% resulted primarily from a 4.5% increase in the level of average earning assets, the effect of which was partially offset by a decline in the net yield on earning assets, or net interest margin, from 3.94% in 2003 to 3.89% in 2004. In 2003, the increase of $1,676,000 or 6.6% resulted largely from the acquisitions of Rowan Bank and Dover Mortgage Company on August 1, 2002 and April 1, 2003, respectively, as discussed above, which was the primary factor resulting in an 18.7% increase in the level of average earning assets, the effect of which was partially offset by a decline in the net yield on earning assets, or net interest margin, from 4.40% to 3.94%. On a taxable equivalent basis, the increases in net interest income in 2004 and 2003 were $907,000 and $1,665,000, respectively, reflecting changes in the relative mix of taxable and non-taxable earning assets in each year.

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

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Table 1

Average Balances and Net Interest Income Analysis

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

Following the significant declines in 2001, interest rates tended to stabilize, until mid-2004, in a generally low-rate environment for rates both earned and paid by the Corporation. After reductions in the prime rate totaling 4.75% in 2001, there were additional rate cuts of .50% in November 2002 and .25% in June 2003, resulting in the prime rate of 4.00% that was effective through June 30, 2004. Due to concern about increasing inflationary pressures, the Federal Reserve took action to raise the level of interest rates at the end of June 2004, causing the prime rate to increase to 4.25% in July 2004. Four additional rate increases of 25 basis points each during the second six months of 2004 have raised the prime rate to the 5.25% level at December 31, 2004. The prime rate averaged 6.99% in 2001, falling to 4.67% in 2002 and 4.12% in 2003 and rising to 4.33% in 2004.

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

In 2004, the net interest spread declined by 4 basis points from 3.70% in 2003 to 3.66% 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 23 basis points from 5.76% in 2003 to 5.53% in 2004, while the cost of funds decreased by 19 basis points from 2.06% to 1.87%. In 2003, the 36 basis points decrease in net interest spread resulted from a 96 basis points decrease in the yield on earning assets as partially offset by a 60 basis points decrease in the cost of funds.

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

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The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.12% at December 31, 2004, 1.14% at December 31, 2003 and 1.22% at December 31, 2002. The allowance percentage has decreased due to charge-offs of impaired loans which were specifically reserved and a general improvement in economic conditions.

Noninterest Income

Noninterest income increased only $73,000 or 0.5% in 2004, due primarily to a decline of $858,000 in income from mortgage loan sales, as discussed in the “Overview—Significant Factors Affecting Earnings in 2004”, that substantially offset gains in other areas of noninterest income. The increase in service charges on deposit accounts was largely due to selected increases in service charge rates that became effective in 2004.

Noninterest income increased $5,332,000 or 64.5% in 2003, reflecting in large part the acquisition of Dover Mortgage Company on April 1, 2003 as discussed above, to a lesser extent the acquisition of Rowan Bank on August 1, 2002 as discussed above, and further to the general increase in the volume of business. The increase was primarily due to a $3,259,000 increase in income from mortgage loan sales and a $1,209,000 increase in service charges on deposit accounts. The increase in income from mortgage loan sales was largely due to the Dover acquisition but there was also an increase in the level of income from mortgage loan sales by First National Bank as long-term conforming mortgage rates remained at historical lows through most of 2003. The increase in service charges on deposit accounts was primarily due to the first full-year results of an overdraft protection program implemented in July 2002. The increase in trust and investment services was largely related to the general increase in the volume of sales of annuity products.

Noninterest Expense

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

Noninterest expense was $7,019,000 or 34.9% higher in 2003, due primarily to the acquisitions of Rowan Bank and Dover Mortgage Company on August 1, 2002 and April 1, 2003, respectively, as discussed above, with the Dover acquisition being the most significant factor with regard to the higher level of noninterest expense after the 2003 first quarter. 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 acquisitions of Rowan Bank and Dover, by normal salary adjustments and by higher costs of fringe benefits. Other expense has been affected commencing in the third quarter of 2002 by expenses related to the new overdraft protection program (see “Noninterest Income”), such expenses amounting to $312,000 in 2003 and $174,000 in 2002.

Income Taxes

As noted in the “Overview—Significant Factors Affecting Earnings in 2004”, the 2003 results were positively affected by a $173,000 reduction in income tax expense for the change in the valuation allowance for state deferred income tax assets as a result of management’s judgment that these assets would be realized in future periods. Exclusive of the change in the valuation allowance for state deferred income tax assets, the

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effective income tax rate decreased from 29.0% in 2003 to 26.0% in 2004 due principally to a decrease in the ratio of taxable to tax-exempt income. The effective income tax rate decreased from 29.8% in 2002 to 29.0% in 2003 due principally to a decrease in the ratio of taxable to tax-exempt income.

Liquidity

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

Consistent with the general approach to liquidity, loans and other assets of First National Bank are based primarily on a core of local deposits and First National Bank’s capital position. To date, the steady increase in deposits, retail repurchase agreements and capital, supplemented by Federal Home Loan Bank advances and a modest amount of brokered deposits, has been adequate to fund loan demand in First National Bank’s market area, while maintaining the desired level of immediate liquidity and a substantial investment securities portfolio available for both immediate and secondary liquidity purposes. It is anticipated that funding sources in the future will include an increased use of brokered deposits and, additionally, institutional deposits obtained from secure websites on the internet.

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

Contractual Obligations

Under existing contractual obligations, the Corporation will be required to make payments in future periods. Table 3 presents aggregated information about the payments due under such contractual obligations at December 31, 2004. Transaction deposit accounts with indeterminate maturities have been classified as having payments due in one year or less.

Table 3

Contractual Obligations

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Commitments, Contingencies and Off-Balance Sheet Risk

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

Commitments by First National Bank to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. At December 31, 2004, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $167,502,000. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower.

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

For the twelve months ended December 31, 2004, the interest rate swap resulted in a net reduction of $85,000 in the interest expense that would otherwise have been reported for the FHLB advance. The fair value of the swap at December 31, 2004 was recorded on the consolidated balance sheet as a liability in the amount of $131,000, offset by a valuation adjustment in the same amount to the FHLB advance.

First National Bank issues standby letters of credit whereby it guarantees the performance of a customer to a third party if a specified triggering event or condition occurs. The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee. All standby letters of credit provide for recourse against the customer on whose behalf the letter of credit was issued, and this recourse may be further secured by a pledge of assets. The maximum potential amount of undiscounted future payments related to standby letters of credit was $6,445,000 at December 31, 2004 and $6,221,000 at December 31, 2003. Due to insignificance, the Corporation has recorded no liability at December 31, 2004 for the current carrying amount of the obligation to perform as a guarantor.

Dover Mortgage Company originates certain residential mortgage loans with the intention of selling these loans. Between the time that Dover enters into an interest rate lock or a commitment to originate a residential mortgage loan with a potential borrower and the time the closed loan is sold, the Corporation is subject to variability in market prices related to these commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to deliver loans into a mortgage-backed security. The commitments to originate residential mortgage loans and the forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their fair value adjustments are recorded through the income statement in income from mortgage loan sales. The commitments to originate residential mortgage loans totaled $16,382,000 at December 31, 2004. The related forward sales commitments totaled $16,382,000 at December 31, 2004. The fair value of these commitments was recorded as a net asset of $19,000 at December 31, 2004. Loans held for sale by Dover Mortgage Company totaled $10,919,000 at December 31, 2004. The related forward sales commitments totaled $10,919,000 at December 31, 2004. The fair value of these commitments was recorded as a net liability of $32,000 at December 31, 2004.

First National Bank had loans held for sale of $729,000 at December 31, 2004. Binding commitments of First National Bank for the origination of mortgage loans intended to be held for sale at December 31, 2004 were not material.

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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 December 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.

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Table 4 presents information about the periods in which the interest-sensitive assets and liabilities at December 31, 2004 will either mature or be subject to repricing in accordance with market rates, and the resulting interest-sensitivity gaps. This table shows the sensitivity of the balance sheet at one point in time and is not necessarily indicative of what the sensitivity will be on other dates. As a simplifying assumption concerning repricing behavior, 50% of the interest-bearing demand, savings and money market deposits are assumed to reprice immediately and 50% are assumed to reprice beyond one year.

Table 4

Interest Rate Sensitivity Analysis