Table of Contents
**UNITED STATES****SECURITIES AND EXCHANGECOMMISSION**
**Washington, D.C. 20549**
**FORM 10-QSB**
**[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)****OF THESECURITIES EXCHANGE ACT OF 1934**
For the Quarterly Period Ended September 30, 2003
**OR**
**[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)****OF THESECURITIES EXCHANGE ACT OF 1934**
For the Transition Period from ____________ to ______________
Commission file number 2-94292
**FNB Banking Company**

(Exact name of registrant as specified in its charter)

Georgia
 
58-1479370

(State of Incorporation) 
(I.R.S. Employer Identification No.)

318 South Hill Street
Griffin, Georgia  30224

(Address of principal executive offices)

770-227-2251

(Issuer’s Telephone Number, Including Area Code)
State the number of shares outstanding of each of theissuer’sclasses of common equity, as of the latest practicabledate:
Common stock, par value $1 per share: 730,906 sharesoutstanding as ofNovember 13,2003
Table of Contents
**FNB BANKING COMPANY AND SUBSIDIARY**
**INDEX**
   
Page No.
   PART I
FINANCIAL INFORMATION

3 - 8
  
Item 1.

Financial Statements
   
Consolidated Balance Sheet (unaudited) atSeptember 30, 2003

3
   
Consolidated Statements of Earnings(unaudited) for the Three
  
    Months and the Nine Months EndedSeptember 30, 2003 and 2002

4
    
Consolidated Statements of Comprehensive Income (unaudited)
  
    for the Three Months and the Nine Months EndedSeptember 30, 2003 and 2002

5
   
Consolidated Statements of Cash Flows (unaudited) for the 
  
    Nine Months Ended September 30, 2003 and 2002

6

   
Notes to Consolidated Financial Statements (unaudited)

7 - 8
  
Item 2.

Management’s Discussion and Analysis of Financial Condition and
  
    Results of Operations

9 - 12
     
Item 3.

Controls and Procedures

12
 
PART II.

OTHER INFORMATION
  
Item 1.

Legal Proceedings

13
  
Item 2.

Changes in Securities and Use of Proceeds

13
  
Item 3.

Defaults Upon Senior Securities

13
  
Item 4.

Submission of Matters to a Vote of Security Holders

13
   
Item 5.

Other Information

13
  
Item 6.

Exhibits and Reports on Form 8-K

13
 
SIGNATURES

14

-2-
Table of Contents
**PART I.    FINANCIAL INFORMATION**
Item 1.   Financial Statements
**FNB BANKING COMPANY AND SUBSIDIARY**

ConsolidatedBalance SheetSeptember 30, 2003(Unaudited)

Assets

Cash and due from banks

$

14,725,840

Federal funds sold
 
   2,013,112
   
          Cash and cash equivalents
 
16,738,952
   
Investment securities available for sale
 
40,537,457

Other investments
 
1,255,000

Mortgage loans held for sale
 
1,779,230
   
Loans
 
231,817,813

Less:  Unearned income
 
207,528

           Allowance for loan losses
 
    3,397,241
   
          Loans, net
 
228,213,044
   
Premises and equipment, net
 
7,426,975

Goodwill
 
4,401,920

Other assets
 
    2,757,530
    
$

303,110,108

Liabilities and Stockholders’ Equity
   
Liabilities:
  
   Deposits:
 
 

     Noninterest-bearing

$

39,893,106

     Interest-bearing
 
202,344,308
  
          Total deposits
 
242,237,414

 
  
Securities sold under retail repurchase agreements
 
14,438,788

FHLB advances
 
7,656,250

Notes payable
 
6,874,600

Other liabilities
 
1,507,159
   
          Total liabilities
 
272,714,211
   
Stockholders’ equity:  Common stock, $1 par value; authorized   5,000,000 shares; 730,906 shares issued and outstanding
 
730,906

Retained earnings
 
28,420,247

Accumulated other comprehensive income, net of tax
 
1,244,744
   
          Total stockholders’ equity
 
  30,395,897
    
$

303,110,108

See accompanying notes to unaudited consolidated financial statements.

- 3 -
Table of Contents
**FNB BANKING COMPANY AND SUBSIDIARY**

ConsolidatedStatements of Earnings

For the Three Months and the Nine Months Ended September 30, 2003 and2002

(Unaudited)
  
Three MonthsEndedSeptember 30, Nine MonthsEndedSeptember 30,  
2003
 
2002
 
2003
 
2002

Interest income:
        
Loans

$

4,210,772
 

4,501,811
 

12,747,435
 

12,023,495
Investment securities:
         
Tax exempt
 
133,562 
130,594 
383,270 
392,876
Taxable
 
338,512 
446,540 
1,068,879
 
1,293,608
Federal funds sold
 
18,894 
8,329 
 64,991
 
82,590
Total interest income

 
4,701,740
 
5,087,274
 
14,264,575

 
13,792,569          
Interest expense:
        
Deposits and retail purchase agreements
 
993,765 
1,063,672 
2,749,591
 
3,540,412
Federal funds purchased and FHLB advances
 
73,100 
51,111
 
207,463
 
74,557

Notes payable
 
87,761 
57,616
 
   255,785
 
    57,616

Total interest expense

 
1,154,626
 
1,172,399

 
3,212,839

 
3,672,585

Net interest income

 
3,547,114
 
3,914,875

 
11,051,736

 
10,119,984

Provision for loan losses

 
159,822

 
93,160

 
  463,123

 
  860,047

Net interest income after provision for loan losses

 
3,387,292

 
3,821,715

 
10,588,613

 
9,259,937

Other operating income:

 
 
 
 
 
 
 
 
Service charges on deposit accounts
 
570,774
 
515,059
 
1,594,098
 
1,468,927

Fees for trust services
 
66,000
 
60,000
 
138,000
 
130,000

Securities gains (losses)
 
4,484
 
-
 
6,639
 
847,760

Other operating income
 
   284,157
 
263,511
 
770,440
 
566,368

Total other operating income

 
925,415

 
838,570

 
2,509,177

 
3,013,055

Other operating expense:

 
 
 
 
 
 
 
 
Salaries and other personnel expense
 
1,681,963
 
1,669,342
 
5,052,929
 
4,704,221

Net occupancy and equipment expense
 
497,819
 
558,734
 
1,518,600
 
1,486,581

Other operating expense
 
708,711
 
632,495
 
2,196,800
 
1,871,645

Total other operating expense

 
2,888,493

 
2,860,571

 
8,768,329

 
8,062,447

Earnings before income taxes

 
1,424,214

 
1,799,714

 
4,329,461

 
4,210,545

Income taxes

 
471,803

 
629,094

 
1,452,688

 
1,436,131

Net earnings

$

952,411

 
  1,170,620

 
2,876,773

 
2,774,414

Earnings per common share based on average outstanding     shares of 730,772, 731,045, 730,798and 735,408,     respectively:
        
Net earnings per share

$

1.30

 
1.60

 
3.94

 
3.77

Dividends declared per common share

$

-

 
-

 
.75

 
.70

See accompanying notes to unaudited consolidated financial statements.

- 4 -
Table of Contents
**FNB BANKING COMPANY AND SUBSIDIARY**

Consolidated Statements ofComprehensive Income

       For the Three Months and the NineMonths Ended September 30, 2003 and 2002       (Unaudited) 
  Three MonthsEndedSeptember 30, Nine MonthsEndedSeptember 30,
 

 

2003

 

2002

 

2003

 

2002
Net earnings        
Other comprehensive income (loss), net of tax:

 $
952,411 
 
1,170,620
 
2,876,773 
  
2,774,414          
Unrealized holding gains (losses) on investment securities   available for sale arisingduring the period
 
(837,939)
 
807,694
 
(180,944)
 
1,949,750 

Unrealized holding gains (losses) on derivative financial   instruments classified as cashflow hedges, arising during   the period
 
120,794  
- 
 
(118,646) 
-

Reclassification adjustment for (gains) losses on   investment securities available forsale
 
(4,484)
 
- 
 
(6,639)
 
(847,760)

Total other comprehensive income (loss), before tax

 
(721,629)
 
807,694 
 
(306,229)
 
1,101,990 
Income taxes related to other comprehensive income:

 
 
 
 
 
 
 
 
 Unrealized holding gains (losses) on investment securities   available for sale arisingduring the period
 
318,417 
 
(306,924)
 
68,760 
 
(740,905)

Unrealized holding gains (losses) on derivative financial   instruments classified as cashflow hedges, arising   during the period
 
(45,902) 
- 
 
45,085  
               - 

Reclassification adjustment for losses on investment   securities available forsale
 
1,704 
 
- 
 
2,522 
 
322,149 

Total income taxes related to other comprehensive   income (loss)

 
274,219 

 
(306,924)

 
116,367 

 
(418,756)

Total other comprehensive income, net of tax

 
(447,410)
 
500,770 
 
(189,862)
 
683,234
Total comprehensive income

$

505,001
 

1,671,390 
 

2,686,911 
 

3,457,648 
See accompanying notes to unaudited consolidated financial statements.

- 5 -
Table of Contents
**FNB BANKING COMPANY AND SUBSIDIARY**

Consolidated Statements of Cash Flows

       For the Nine Months Ended September 30, 2003 and2002(Unaudited)
  
Nine Months EndedSeptember 30,  
2003
  
2002

Cash flows from operating activities:
    
   Net earnings

$

2,876,773 
 
2,774,414 

   Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 
  
       Provision for loan losses

 

463,123 
 
860,047 

       Depreciation, amortization and accretion
 
282,168 
 
557,130 

       Gain on sale of investment securities
 
(6,639)
 
(847,760)

       Gain on sale of premises
 
- 
 
(99,143)

   Change in assets and liabilities, net of effects from purchase acquisition in 2002:

 

 
  
       Other, net
 
(467,115)
 
1,300,697 

       Mortgage loans held for sale
 
     552,620 
 
1,661,480 

                    Net cash provided by operating activities

 
  3,700,930 

 
6,206,865 

Cash flows from investing activities, net of effects from purchase acquisition in 2002:

   
 

   Payment for purchase of subsidiary, net of cash acquired of $5,993,138 in 2002
 
(125,458)
 
(3,697,869)

   Proceeds from sale of other investments
 
20,100 
 
- 

   Change in interest bearing deposits with other banks
 
394,000 
 
300,000 

   Proceeds from sales of investment securities
 
216,011 
 
4,584,598 

   Proceeds from maturities, calls and paydowns of investment securities available for sale
 
9,701,097 
 
7,513,609 

   Purchases of investment securities available for sale
 
(10,604,771)
 
(6,123,796)

   Net change in loans
 
1,242,363 
 
(6,771,103)

   Purchases of premises and equipment
 
(284,714)
 
(711,815)

   Proceeds from sale of premises
 
                - 
 
    121,884 

                    Net cash provided (used) by investing activities

 
     558,628 

 
(4,784,492)

Cash flows from financing activities, net of effects from purchase acquisition in 2002:
   
 

   Net change in deposits
 
9,196,673 
 
(11,801,387)

   Net change in securities sold under retail repurchase agreements
 
(1,606,663)
 
(626,976)

   Repayments of note payable, net of advances of $3,874
 
(367,726)
 
- 

   Advances under notes payable
 
- 
 
7,083,500 

   Proceeds from FHLB advances
 
6,500,000 
 
7,500,000 

   Repayments of FHLB advances
 
(13,343,750)
 
(2,593,750)

   Purchase and retirement of common stock
 
(13,250)
 
(2,128,875)

   Proceeds from sale of common stock
 
9,252 
 
-  

   Dividends paid
 
  (1,096,384)
 
  (1,052,135)

                    Net cash provided (used) by financing activities

 
    (721,848)

 
  (3,619,623)

Net change in cash and cash equivalents

 
3,537,710 

 
(2,197,250)

Cash and cash equivalents at beginning of period

 
13,201,242 

 
20,214,880 

                    Cash and cash equivalents at end of period

$ 

16,738,952 
 
18,017,630 

Supplemental cash flow information:

 
 
 
 

   Cash paid for income taxes

$ 

1,387,000 
 
771,000 

   Cash paid for interest

$ 

3,299,933 
 
3,824,182 

Noncash investing and financing activities:
   
 

   Change in components of comprehensive income

$ 

(189,862)
 
683,234 

 

- 6 -
Table of Contents
**FNB BANKING COMPANY AND SUBSIDIARY**

Consolidated Statements of Cash Flows, continued

       For the Nine Months Ended September 30, 2003 and2002(Unaudited)

On May 31, 2002, the Company purchased all of the capital stock of American Community Bank (Stockbridge, GA) for$10,061,654, including certain acquisition costs, of which $5,431,403 was paid in cash and at September 30, 2002, $370,647 waspayable upon the tendering of all remaining shares.  In conjunction with the acquisition, assets were acquired and liabilitieswere assumed as follows:

Fair value of assets acquired

$

60,680,351

Liabilities assumed
 
50,618,697

Cash consideration to be given

 
10,061,654

Less amount payable at September 30, 2002
 
     370,647

                    Cash paid through September 30, 2002

$

  9,691,007

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

 

- 7 -
Table of Contents
**FNB BANKING COMPANY AND SUBSIDIARY**

Notes to Consolidated Financial Statements(Unaudited)

(1)       Basis of Presentation

The accompanying unaudited consolidated financialstatements have been prepared in accordance with generally accepted accounting principles for interim financial information andwith the instructions for Form 10-QSB. Accordingly, they do not include all the information and footnotes required by generallyaccepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting ofnormal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for thethree-month and the nine-month period ended September 30, 2003, are not necessarily indicative of the results that may be expectedfor the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotesincluded in the Company’s annual report on Form 10-KSB for the year ended December 31, 2002.

(2)       Business Combination

On May 31, 2002, the Company consummated anagreement to acquire all of the outstanding shares of American Community Bank (“ACB”) for approximately $9.9 million incash ($13.35 per share) plus certain acquisition costs.  ACB was a banking corporation based in Stockbridge (Henry County)Georgia with approximately $55.3 million in total assets, $40.8 million in loans and $46.3 million in deposits.  The primaryreason for the acquisition was to expand the Company’s banking franchise into the high growth area of eastern Henry County,Georgia.  The Company accounted for this transaction using the purchase method and accordingly, the original purchase pricewas allocated to assets and liabilities acquired based upon their fair values at the date of the acquisition. The excess of thepurchase price over the fair value of the net assets acquired (goodwill) was approximately $4.4 million.  ACB was merged intoFirst National Bank of Griffin and is operated as a branch.

The cash proceeds to consummate thepurchase were obtained through a combination of borrowings under a line ofcredit with a correspondent bank and cash dividends paid to the Company by itsbank subsidiary, First National Bank of Griffin.

The results of ACB have been included in theaccompanying consolidated statements of earnings since May 31, 2002, the date of the acquisition.  The following summarizedproforma unaudited financial information is presented as if the purchase had occurred at the beginning of the period, and thereforeincludes adjustments for additional interest expense and amortization of intangibles and other purchase accountingadjustments.  The unaudited proforma financial information is not necessarily indicative either of the results of operationsthat would have occurred had the two companies actually been combined during the period presented or of future results ofoperations of the combined companies.
  
Three MonthsEndedSeptember 30, 2002
 
Nine MonthsEndedSeptember 30, 2002

Interest income

$

5,087,274 
  
15,266,606
Interest expense

(1,202,528)
 
(4,206,584)

       Net interest income

3,884,746 

 
11,060,022 

Provision for loan losses

  (93,160)
 
   (884,047)

       Net interest income after provision for loan losses

3,791,586 

 
10,175,975 

Other income

838,570 

 
3,027,326 

Other expense

(2,860,791)
 
(8,833,512)

       Earnings before income taxes

1,769,365 

 
4,369,789 

Income taxes

 (617,494)

 
 (1,495,005)

       Net earnings

$

1,151,871 
 
2,874,784 

Net earnings per common share

$

1.58 
 
3.91 

Weighted average common shares outstanding

731,045 

 
 735,408 

- 8 -
Table of Contents
**FNB BANKING COMPANY AND SUBSIDIARY**

Notes to Consolidated Financial Statements, continued(Unaudited)

(2)     Business Combination, continued

Certain fair value adjustments for deposits which were recorded as purchase accounting adjustments will beamortized over a period of one year and will not be recurring.  Net earnings were increased in the above proformapresentations for the amortization of this purchase accounting adjustment as follows:
  
Three MonthsEndedSeptember 30, 2002
 
Nine MonthsEndedSeptember 30, 2002

Reduction in interest expense

$
 
187,500
 
  
375,000
 
Related income taxes
  
(71,250)
  
 
(142,500) 
          Net earnings effect

$
 
116,250
 
  
232,500 
 
(3)     Derivative Instruments and HedgingActivities

The fair value of derivatives is recognized in the financial statements as assets or liabilities. The accountingfor the changes in the fair value of a derivative depends on the intended use of the derivative instrument at inception. The changein fair value of instruments used as fair value hedges is accounted for in the income of the period simultaneous with accountingfor the fair value change of the item being hedged. The change in fair value of the effective portion of cash flow hedges isaccounted for in comprehensive income rather than income. The change in fair value of derivative instruments that do not qualify asa hedge is accounted for in the income of the period of the change.

The Company maintains an overall interest rate risk-management strategy that incorporates the use of derivativeinstruments to minimize fluctuations in earnings that are caused by interest rate volatility. The goal is to manage interest ratesensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the netinterest margin is not, on a material basis, adversely affected by movements in interest rates. As a result of interest ratefluctuations, hedged assets and liabilities will appreciate or depreciate in fair value. The effect of this unrealized appreciationor depreciation will generally be offset by earnings or loss on the derivative instruments that are linked to the hedged assets andliabilities. The Company views this strategy as a prudent management of interest rate sensitivity, such that earnings are notexposed to undue risk presented by changes in interest rates.

Derivative instruments that are used as part of the Company’s interest rate risk-management strategyinclude interest rate swap contracts. Interest rate swaps generally involve the exchange of fixed- and variable-rate interestpayments between two parties, based on a common notional principal amount and maturity date.

By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails toperform, credit risk is equal to the extent of the fair-value gain in a derivative. When the fair value of a derivative contract ispositive, this generally indicates that the counterparty owes the Company, and, therefore, creates a repayment risk for theCompany. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it has norepayment risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-qualitycounterparties that are reviewed periodically.

The Company’s derivative activities are monitored by its asset/liability management function as part ofthat group’s oversight of asset/liability and treasury functions. This group is responsible for implementing various hedgingstrategies that are developed through its analysis of data from financial simulation models and other internal and industrysources. The resulting hedging strategies are then incorporated into the overall interest-rate risk management.

                                                                                                                                                                                                                                                    

- 9 -
Table of Contents
**FNB BANKING COMPANY AND SUBSIDIARY**

Notes to Consolidated Financial Statements, continued(Unaudited)

(3)     Derivative Instruments and Hedging Activities,continued

During the first quarter of 2003, the Company entered into an interest rate swap agreement to partially offsetthe interest rate risk associated with the loan used to finance the purchase of American Community Bank. The loan amount was$7,432,000 at a floating rate of 110 basis points below prime amortizing over a term of 10 years. The notional amount of the swapis $5,000,000, with an interest rate of 5.75%, also with a term of ten years. The notional amount of the swap, however, isstructured to amortize at a slower rate than the loan for the first five years, at which point the loan balance and the swapbalance will be equal, and will amortize at the same rate for the remaining five years.

At September30, 2003, the swap is being accounted for as a cash flow hedge and its fairvalue is included in other comprehensive income, net of taxes.  AtSeptember 30, 2003, the Company recorded a liability for $118,646 to reflect thefair value of the swap.  No hedge ineffectiveness from this cash flow hedgewas recognized in the consolidated statement of earnings.

 

 

 

 

 

- 10 -
Table of Contents
Item 2.

**MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

           For the Nine Months in the PeriodsEnded           September 30, 2003 and2002

**Forward-Looking Statements**

This discussion may contain forward-looking statements under the Private Securities Litigation Reform Act of 1995that involve risks and uncertainties.  Although the Company believes the assumptions underlying the forward-looking statementscontained in the discussion are reasonable, any of the assumptions could be inaccurate, and therefore, no assurance can be madethat any of the forward-looking statements included in this discussion will be accurate. Factors that could cause actual results todiffer from results discussed in forward-looking statements include, but are not limited to:  economic conditions (bothgenerally and in the markets where the Company operates); competition from other providers of financial services offered by theCompany; government regulation and legislation; changes in interest rates; and material unforeseen changes in the financialstability and liquidity of the Company’s credit customers;  all of which are difficult to predict and which may bebeyond the control of the Company. The Company undertakes no obligation to revise forward-looking statements to reflect events orchanges after the date of this discussion or to reflect the occurrence of unanticipated events.

**Financial Condition**

Total assets at September 30, 2003, were $303.1 million representing a $1.6 million (.53%) increase from December31, 2002. Deposits, including retail repurchase agreements, increased $7.2 million (2.91%) from December 31, 2002. Gross loansdecreased $1.6 million (.70%). The allowance for loan losses at September 30, 2003, totaled $3.4 million, representing 1.47% oftotal loans compared to the December 31, 2002, total of $3.2 million representing 1.40% of total loans. Cash and cash equivalentsincreased $3.5 million from December 31, 2002.

The following summarizes non-performing assets:
 
September 30,2003
 
June 30,2003
 
March 31,2003
 
December 31,2002

Other real estate and repossessions

$

19,000
 

-

 

78,800

 

-

Accruing loans 90 days or more past due
 
36,000 
122,000
 
-
 
33,000

Non-accrual loans
 
2,677,900 
2,892,900
 
3,827,300
 
3,534,800

$

2,732,900
 

3,014,900

 

3,906,100

 

3,567,800

Non-accrual loans decreased $215,000 (7.4%) from June 30, 2003 to September 30, 2003.  The decrease is thenet result of several transactions outlined as follows:

Balance at June 30, 2003

$

2,892,900 

Loans reclassified as non-accrual
 
53,200 

Loans with improved performance and placed back on accrual status
 
- 

Payments on non-accrual loans
 
(113,500)

Non-accrual loans that were charged off
 
(154,700)

 
$

2,677,900 

A total of approximately $862,000 of valuation allocation was maintained in the allowance for loan losses atSeptember 30, 2003, for non-performing loans.

- 11 -
Table of Contents
**MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, continued**

           For the Nine Months in the PeriodsEndedSeptember 30, 2003 and 2002

The Company’s subsidiary bank was most recently examined by its primary regulatory authority in September2003.  There were no recommendations by the regulatory authority that, in management’s opinion would have a materialeffect on the Company’s liquidity, capital resources or operations have been implemented.

**Results of Operations**

For the nine months ended September 30, 2003, the Company reported net earnings of $2.9 million or $3.94 pershare, compared to $2.8 million, or $3.77 per share, for the same period in 2002.  Net earnings for the three months endedSeptember 30, 2003, decreased $218,209 or 19%, compared to the same period in 2002 primarily due to a drop in the interestmargin. 

Net interest income increased $931,752 million (9.2%) in the first nine months of 2003 compared to the sameperiod in 2002. Interest expense for the first nine months of 2003 decreased $459,746 (12.5%) compared to the same period in2002.  The primary reason for the increase in net interest income for the nine-month period ended September 30, 2003, versusthe same period of 2002 was an increase in the volume of net interest bearing assets due in large part to the acquisition ofAmerican Community Bank.  At September 30, 2003, the net interest margin was 5.35% versus 5.72% at September 30, 2002. Since December 31, 2002, the net interest margin has decreased 25 basis points as variable loan rates have fallen faster than thedeposit rates in an environment of declining interest rates.

The provision for loan losses for the nine months of 2003 decreased $396,924 compared to the same period for2002.  The decrease in the provision for loan losses was attributable to a decrease in the level of non-performing loans andan overall decrease in outstanding loan balances.  Net loan charge-offs for the nine months ended September 30, 2003, were$341,000, compared to $170,000, for the same period in 2002.  It is management’s belief that the allowance for loanlosses is adequate to absorb probable losses in the portfolio, but there is no assurance that this will be the case.

Other operating income decreased for the nine months ended September 30, 2003, by $503,878 or 16.7%, compared tothe same period in 2002, primarily due to a decrease of $841,000 in gains on sales of investment securities offset by an increaseof $249,000 in mortgage origination income and a $49,000 increase in ATM and debit card income. 

Other operating expenses for the nine months of 2003 increased $705,882 (8.76%) compared to the first nine monthsin 2002.  Included in the increase for the nine months ended September 30, 2003, compared to the same period of 2002, was anincrease of $349,000 in salaries and employee benefits, a $32,000 increase in occupancy expense, an increase of deposit fraud andother losses of $90,000, postage expense increase of $56,000 and various other expense category increases.    Exceptfor the deposit account fraud, these expenses increased principally due to the inclusion of American Community Bank in the 2003operation results.  Totals for operating results for 2002 included American Community Bank for only four months as theacquisition was May 31, 2002.

Income tax expense expressed as a percentage of pretax earnings remained constant at 34%.

- 12 -
Table of Contents
**MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, continued**

           For the Nine Months in the PeriodsEndedSeptember 30, 2003 and 2002

**Capital**

The following tables present FNB Banking Company’s regulatory capital position at September 30,2003:

Risk-Based Capital Ratios

Consolidated
 
Bank Only

Tier 1 Tangible Capital, Actual

9.85%     
 
12.51%   

Tier 1 Tangible Capital minimum requirement

  4.00%    
 
  4.00%   

Excess

  5.85%    
 
  8.51%   
    
Total Capital, Actual

11.10%    
 
13.76%   

Total Capital minimum requirement

    8.00%    
 
  8.00%   

Excess

    3.10%    
 
  5.76%   
    
Leverage Ratio
   
Tier 1 Tangible Capital to adjusted total assets (“Leverage Ratio”)

8.16%    
 
10.38%   

Minimum leverage requirement

    3.00%    
 
  3.00%   

Excess

  5.16%     
 
  8.38%   
    ===        ===       
Item 3. 

**Controls and Procedures**

Our management, including the chief executive and chief financial officers, supervised andparticipated in an evaluation of our disclosure controls and procedures (as defined in federal securities rules) within the 90 daysbefore we filed this report. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and proceduresare effective in accumulating and communicating information to our management, including our President and CEO and CFO, asappropriate to allow timely decisions regarding required disclosures of that information under the Securities and ExchangeCommission’s rules and forms and that our disclosure controls and procedures are designed to ensure that the information weare required to disclose in reports that we file or submit under all applicable federal securities law is recorded, processed,summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules andforms.

There were no significant changes in our internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation.
 
 

 

 

- 13 -
Table of Contents
**PART II.  OTHER INFORMATION**

**          FNB BANKING COMPANY ANDSUBSIDIARY**

Item 1.         Legal Proceedings

                   None

Item 2.         Changes in Securities and Use ofProceeds

                   None

Item 3.         Defaults Upon Senior Securities

                   None

Item 4.         Submission of Matters to a Vote of SecurityHolders

                   None

Item 5.         Other Information

                   None

Item 6.         Exhibits and Reports on Form 8-K

                   a)    Exhibits – The following exhibits are filed with this report.                           31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                           31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                            32      Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section906 of the                                      Sarbanes-Oxley Act of 2002

                    b)   Reports on Form 8-K - none
 
 

 

 

 

 

- 14 -
Table of Contents
**FNB BANKING COMPANY AND SUBSIDIARY**

**SIGNATURES**

          Pursuant to the requirements of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto dulyauthorized.
 
FNB BANKING COMPANY
       
By:  /s/ J. Charles Copeland                            
 
       J. Charles Copeland, President
 
       (Principal Executive Officer)
   
Date: November 14, 2003
       
By:_/s/ Mark Flowers                                      
 
       Mark Flowers, Assistant Treasurer
 
       (Principal Accounting Officer)
   
Date: November 14, 2003
 
 

 

 

 

- 15 -