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 June 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 ofAugust 12,2003
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) atJune 30, 2003

3
   
Consolidated Statements of Earnings (unaudited) for the Three
  
    Months and the Six Months Ended June 30, 2003 and 2002

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

5
   
Consolidated Statements of Cash Flows (unaudited) for the 
  
    Six Months Ended June 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**
Consolidated Balance Sheet
June 30, 2003(Unaudited)
Assets

Cash and due from banks

$

17,876,588

Federal funds sold
 
13,038,593

Cash and cash equivalents

 
30,915,181

Investment securities available for sale

 
40,537,313

Other investments
 
1,255,000

Mortgage loans held for sale
 
2,468,250

Loans

 
227,535,191

Less: Unearned income
 
189,291

Allowance for loan losses
 
3,367,455

Loans, net

 
223,978,445

Premises and equipment, net

 
7,511,522

Goodwill
 
4,401,920

Other assets
 
2,025,368

 
$

313,092,999

Liabilities and Stockholders’ Equity
   
Liabilities:
  
Deposits:
 
 

Noninterest-bearing

$

  40,804,083

Interest-bearing
 
203,538,739

Total deposits

 
244,342,822

  
 
 

Securities sold under retail repurchase agreements
 
16,222,242

FHLB advances
 
13,187,500

Notes payable
 
7,060,400

Other liabilities
 
2,391,487

Total liabilities

 
283,204,451

Stockholders’ equity:  Common stock, $1 par value; authorized   5,000,000 shares; 730,906 shares issued and outstanding
 
 730,906

Retained earnings
 
27,465,488

Accumulated other comprehensive income, net of tax
 
1,692,154

Total stockholders’ equity

 
29,888,548

 
$

313,092,999

See accompanying notes to unaudited consolidated financial statements.

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

Consolidated Statements ofEarnings

For the Three Months and the Six Months Ended June 30, 2003 and2002(Unaudited)
  
Three MonthsEnded Six MonthsEnded  
2003
 
2002
 
2003
 
2002

Interest income:
        
Loans

$

4,265,022

 

3,899,580

 

8,536,663

 

7,521,684

Investment securities:
         
Tax exempt
 
126,350
 
131,122
 
249,708
 
262,282

Taxable
 
366,853
 
419,906
 
730,367
 
847,068

Federal funds sold
 
36,961
 
34,554
 
 46,097
 
     74,261

Total interest income

 
4,795,186

 
4,485,162

 
9,562,835

 
8,705,295
          
Interest expense:
        
Deposits and retail purchase agreements
 
903,077
 
1,187,375
 
1,755,826
 
2,476,740

Federal funds purchased and FHLB advances
 
71,513
 
-
 
134,363
 
-

Notes payable
 
90,274
 
11,500
 
   168,024
 
     23,446

Total interest expense

 
1,064,864

 
1,198,875

 
2,058,213

 
2,500,186

Net interest income

 
3,730,322

 
3,286,287

 
7,504,622

 
6,205,109

Provision for loan losses

 
155,936

 
566,083

 
   303,301

 
   766,887

Net interest income after provision for loan losses

 
3,574,386

 
2,720,204

 
7,201,321

 
5,438,222

Other operating income:

 
 
 
 
 
 
 
 
Service charges on deposit accounts
 
528,510
 
497,780
 
1,023,324
 
953,868

Fees for trust services
 
42,000
 
40,000
 
72,000
 
70,000

Securities gains (losses)
 
-
 
847,760
 
2,155
 
847,760

Other operating income
 
   268,652
 
100,480
 
486,283
 
259,936

Total other operating income

 
839,162

 
1,486,020

 
1,583,762

 
2,131,564

Other operating expense:

 
 
 
 
 
 
 
 
Salaries and other personnel expense
 
1,704,229
 
1,596,566
 
3,370,966
 
3,034,879

Net occupancy and equipment expense
 
511,327
 
484,661
 
1,020,781
 
927,847

Other operating expense
 
742,640
 
604,954
 
1,488,089
 
1,196,229

Total other operating expense

 
2,958,196

 
2,686,181

 
5,879,836

 
5,158,955

Earnings before income taxes

 
1,455,352

 
1,520,043

 
2,905,247

 
2,410,831

Income taxes

 
491,462

 
527,810

 
980,885

 
807,037

Net earnings

$

963,890

 
   992,233

 
1,924,362

 
1,603,794

Earnings per common share based on average outstanding     shares of 730,772, 732,075, 730,742and 737,548,     respectively:
        
Net earnings per share

$

1.32

 
1.36

 
2.63

 
2.17

Dividends declared per common share

$

.75

 
.70

 
.75

 
.70

 See accompanying notes to unaudited consolidated financial statements.

-4-
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**FNB BANKING COMPANY AND SUBSIDIARY**

Consolidated Statements ofComprehensive Income

For the Three Months and the SixMonths Ended June 30, 2003 and 2002(Unaudited) 
  Three MonthsEnded Six MonthsEnded
 

 

2003

 

2002

 

2003

 

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

 $
963,890 

 
992,233 

 
1,924,362

  
1,603,794 

Unrealized holding gains (losses) on investment securities   available for sale arisingduring the period
 
633,172 
 
808,573 
 
656,995 
 
1,142,057 

Unrealized holding gains (losses) on derivative financial   instruments classified as cashflow hedges, arising during   the period
 
(113,847)
 
- 
 
(239,440)
 
-

Reclassification adjustment for (gains) losses on   investment securities available forsale
 
 - 
 
(847,760)
 
    (2,155)
 
(847,760)

Total other comprehensive income (loss), before tax

 
  519,325 

 
(39,187)

 
  415,400 

 
   294,297 

Income taxes related to other comprehensive income:

 
 
 
 
 
 
 
 
 Unrealized holding gains (losses) on investment securities   available for sale arisingduring the period
 
(240,605)
 
(307,258)
 
(249,658)
 
(433,982)

Unrealized holding gains (losses) on derivative financial   instruments classified as cashflow hedges, arising   during the period
 
43,262 
 
- 
 
90,987 
 
               - 

Reclassification adjustment for losses on investment   securities available forsale
 
 - 
 
322,149 
 
819 
 
322,149 

Total income taxes related to other comprehensive   income (loss)

 
(197,343)

 
  14,891 

 
  (157,852)

 
 (111,833)

Total other comprehensive income, net of tax

 
321,982 

 
(24,296)

 
   257,548 

 
182,464 

Total comprehensive income

$

1,285,872 

 

967,937

 

2,181,910  

 

1,786,258 

See accompanying notes to unaudited consolidated financial statements.

-5-
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**FNB BANKING COMPANY AND SUBSIDIARY**

Consolidated Statements ofCash Flows

       For the Six Months Ended June 30, 2003and 2002(Unaudited)
  Six Months EndedJune 30,  
2003
 
2002

Cash flows from operating activities:
    
Net earnings

$

1,924,362 
 
1,603,794 

Adjustments to reconcile net earnings to net cash provided by operatingactivities:
    
Provision for loan losses
 
303,301 
 
766,887 

Gain on sale of investment securities
 
(2,155)
 
(847,760)

Depreciation, amortization and accretion
 
82,641 
 
345,377 

Change in assets and liabilities, net of effects from purchase acquisition in2002:
    
Other, net
 
175,320 
 
307,608 

Mortgage loans held for sale
 
 (136,400)
 
2,565,305 

Net cash provided by operating activities
 
2,347,069 
 
  4,741,211 

Cash flows from investing activities, net of effects from purchase acquisition in2002:
    
Payment for purchase of subsidiary, net of cash acquired of $5,993,138 in 2002
 
(110,729)
 
561,735 

Proceeds from sale of other investments
 
20,100 
 
- 

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

Proceeds from sales of investment securities
 
- 
 
4,584,598 

Proceeds from maturities, calls and paydowns of investment securities available forsale
 
7,305,000 
 
5,557,879 

Purchases of investment securities available for sale
 
(7,108,039)
 
(6,123,796)

Net change in loans
 
5,636,784 
 
(3,959,759)

Purchases of premises and equipment
 
(202,490)
 
 (574,769)

Net cash provided (used) by investing activities
 
  5,934,626 
 
45,888 

Cash flows from financing activities, net of effects from purchase acquisition:
    
Net change in federal funds purchased
 
- 
 
2,500,000 

Net change in deposits
 
11,302,081 
 
(7,059,493)

Net change in securities sold under retail repurchase agreements
 
176,791 
 
(5,159,116)

Repayments of note payable, net of advances of $3,874
 
(181,926)
 
- 

Advances under notes payable
 
- 
 
2,700,000 

Repayments of FHLB advances
 
(7,812,500)
 
(62,500)

Proceeds from FHLB advances
 
6,500,000 
 
- 

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

Proceeds from sale of common stock
 
9,252 
 
- 

Dividends paid
 
 (548,204)
 
 (540,403)

Net cash provided (used) by financing activities
 
  9,432,244 
 
 (9,750,387)

Net change in cash and cash equivalents
 
17,713,939 
 
(4,963,288)

Cash and cash equivalents at beginning of period
 
13,201,242 
 
20,214,880 

Cash and cash equivalents at end of period

$

30,915,181 

 

15,251,592 

Supplemental cash flow information:
    
Cash paid for income taxes

$

1,107,000 
 
381,000 

Cash paid for interest

$

2,132,891 
 
2,598,934 

Noncash investing and financing activities:
    
Change in components of comprehensive income

$

257,548 
 
182,464 

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 June 30, 2002,$4,630,251 was payable upon the tendering of all remaining shares.  In conjunction with the acquisition, assets were acquiredand liabilities were 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 June 30, 2002
 
  4,630,251

Cash paid through June 30, 2002

$

5,431,403

See accompanying notes to unaudited consolidated financial statements.

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

Notes to Consolidated Financial Statements(Unaudited)

(1)         Basis of Presentation

The accompanying unauditedconsolidated financial statements have been prepared in accordance with generally accepted accounting principles for interimfinancial information and with the instructions for Form 10-QSB. Accordingly, they do not include all the information and footnotesrequired by generally accepted accounting principles for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operatingresults for the three-month and the six-month period ended June 30, 2003, are not necessarily indicative of the results that may beexpected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements andfootnotes included 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 Companyconsummated an agreement to acquire all of the outstanding shares of American Community Bank (“ACB”) for approximately$9.9 million in cash ($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 indeposits.  The primary reason for the acquisition was to expand the Company’s banking franchise into the high growtharea of eastern Henry County, Georgia.  The Company accounted for this transaction using the purchase method and accordingly,the original purchase price was allocated to assets and liabilities acquired based upon their fair values at the date of theacquisition. The excess of the purchase price over the fair value of the net assets acquired (goodwill) was approximately $4.4million.  ACB was merged into First National Bank of Griffin and is operated as a branch.

The cashproceeds to consummate the purchase were obtained through a combination ofborrowings under a line of credit with a correspondent bank and cash dividendspaid to the Company by its bank subsidiary, First National Bank of Griffin.

The results of ACB have beenincluded in the accompanying consolidated statements of earnings since May 31, 2002, the date of the acquisition.  Thefollowing summarized proforma unaudited financial information is presented as if the purchase had occurred at the beginning of theperiod, and therefore includes adjustments for additional interest expense and amortization of intangibles and other purchaseaccounting adjustments.  The unaudited proforma financial information is not necessarily indicative either of the results ofoperations that would have occurred had the two companies actually been combined during the period presented or of future resultsof operations of the combined companies.
  
Three MonthsEndedJune 30, 2002
 
Six MonthsEndedJune 30, 2002

Interest income

$

5,076,685 
  
10,179,332 

Interest expense

(1,353,595)
 
(3,004,056)

       Net interest income

3,723,090 

 
7,175,276 

Provision for loan losses

  (582,083)
 
   (790,887)

       Net interest income after provision for loan losses

3,141,007 

 
6,384,389 

Other income

1,537,721 

 
2,188,756 

Other expense

(3,123,936)
 
(5,972,721)

       Earnings before income taxes

1,554,792 

 
2,600,424 

Income taxes

  (544,709)

 
  (877,511)

       Net earnings

$

1,010,083 
 
1,722,913 

Net earnings per common share

$

1.38 
 
2.34 

Weighted average common shares outstanding

732,075 

 
 737,548 

-7-
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 accountingadjustments will be amortized over a period of one year and will not be recurring.  Net earnings were increased in the aboveproforma presentations for the amortization of this purchase accounting adjustment as follows:
  
Three MonthsEndedJune 30, 2002
 
Six MonthsEndedJune 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 orliabilities. The accounting for the changes in the fair value of a derivative depends on the intended use of the derivativeinstrument at inception. The change in fair value of instruments used as fair value hedges is accounted for in the income of theperiod simultaneous with accounting for the fair value change of the item being hedged. The change in fair value of the effectiveportion of cash flow hedges is accounted for in comprehensive income rather than income. The change in fair value of derivativeinstruments that do not qualify as a hedge is accounted for in the income of the period of the change.

The Company maintains an overall interest rate risk-management strategy that incorporatesthe use of derivative instruments to minimize fluctuations in earnings that are caused by interest rate volatility. The goal is tomanage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets andliabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. As aresult of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in fair value. The effect of thisunrealized appreciation or depreciation will generally be offset by earnings or loss on the derivative instruments that are linkedto the hedged assets and liabilities. The Company views this strategy as a prudent management of interest rate sensitivity, suchthat earnings are not exposed to undue risk presented by changes in interest rates.

Derivative instruments that are used as part of the Company’s interest raterisk-management strategy include interest rate swap contracts. Interest rate swaps generally involve the exchange of fixed- andvariable-rate interest payments 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 thecounterparty fails to perform, credit risk is equal to the extent of the fair-value gain in a derivative. When the fair value of aderivative contract is positive, this generally indicates that the counterparty owes the Company, and, therefore, creates arepayment risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and,therefore, it has no repayment risk. The Company minimizes the credit risk in derivative instruments by entering into transactionswith high-quality counterparties that are reviewed periodically.

The Company’s derivative activities are monitored by its asset/liability managementfunction as part of that group’s oversight of asset/liability and treasury functions. This group is responsible forimplementing various hedging strategies that are developed through its analysis of data from financial simulation models and otherinternal and industry sources. The resulting hedging strategies are then incorporated into the overall interest-rate riskmanagement.

                       -8-

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 agreementto partially offset the interest rate risk associated with the loan used to finance the purchase of American Community Bank. Theloan amount was $7,432,000 at a floating rate of 110 basis points below prime amortizing over a term of 10 years. The notionalamount of the swap is $5,000,000, with an interest rate of 5.75%, also with a term of ten years. The notional amount of the swap,however, is structured to amortize at a slower rate than the loan for the first five years, at which point the loan balance and theswap balance will be equal, and will amortize at the same rate for the remaining five years.

At June 30,2003, the swap is being accounted for as a cash flow hedge and its fair value isincluded in other comprehensive income, net of taxes.  At June 30, 2003,the Company recorded a liability for $239,440 to reflect the fair value of theswap.  No hedge ineffectiveness from this cash flow hedge was recognized inthe consolidated statement of earnings.
 
 

 

 

-9-
Table of Contents
Item 2.

**MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OFOPERATION**

For the Six Months inthe Periods EndedJune 30, 2003 and 2002

**Forward-Looking Statements**

This discussion may contain forward-looking statements under the Private SecuritiesLitigation Reform Act of 1995 that involve risks and uncertainties.  Although the Company believes the assumptions underlyingthe forward-looking statements contained in the discussion are reasonable, any of the assumptions could be inaccurate, andtherefore, no assurance can be made that any of the forward-looking statements included in this discussion will be accurate.Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limitedto:  economic conditions (both generally and in the markets where the Company operates); competition from other providers offinancial services offered by the Company; government regulation and legislation; changes in interest rates; and materialunforeseen changes in the financial stability and liquidity of the Company’s credit customers;  all of which aredifficult to predict and which may be beyond the control of the Company. The Company undertakes no obligation to reviseforward-looking statements to reflect events or changes after the date of this discussion or to reflect the occurrence ofunanticipated events.

**Financial Condition**

Total assets at June 30, 2003, were $313.1 million representing a $11.6 million (3.85%)increase from December 31, 2002. Deposits, including retail repurchase agreements, increased $11.1 million (4.47%) from December31, 2002. Gross loans decreased $5.9 million (2.53%). The allowance for loan losses at June 30, 2003, totaled $3.37 million,representing 1.48% of total loans compared to the December 31, 2002, total of $3.2 million representing 1.40% of total loans. Cashand cash equivalents increased $17.7 million from December 31, 2002.

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

Other real estate and repossessions

$

-

 

78,800

 

-

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

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

$

3,014,900

 

3,906,100

 

3,567,800

Non-accrual loans decreased $934,400 million (24%) from March 31, 2003 to June 30,2003.  The decrease is the net result of several transactions outlined as follows:

Balance at March 31, 2003

$

3,827,300 

Loans reclassified as non-accrual
 
81,500 

Loans with improved performance and placed back on accrual status
 
- 

Payments on non-accrual loans
 
(954,900)

Non-accrual loans that were charged off
 
   (61,000)

 
$

2,892,900 

A total of $1,001,325 of valuation allocation was maintained in the allowance for loanlosses at June 30, 2003, for non-performing loans.

-10-
Table of Contents
**MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION,continued**

For the SixMonths in the Periods EndedJune 30, 2003 and 2002

The Company’s subsidiary bank was most recently examined by its primary regulatoryauthority in June 2002.  All recommendations by the regulatory authority that, in management’s opinion would have amaterial effect on the Company’s liquidity, capital resources or operations have been implemented.

**Results of Operations**

For the six months ended June 30, 2003,the Company reported net earnings of $1.9 million or $2.63 per share, comparedto $1.6 million, or $2.17 per share, for the same period in 2002.  Netearnings for the three months ended June 30, 2003, decreased $28,300 or 2.9%,compared to the same period in 2002.

Net interest income increased $1.3 million (20.94%) in the first six months of 2003compared to the same period for 2002. Interest income for the first six months of 2003 was $9.6 million, representing an increaseof $857,500 (9.85%) over the same period in 2002. Interest expense for the first six months of 2003 decreased $442,000 (17.68%)compared to the same period in 2002.  The primary reason for the increase in net interest income for the six-month periodended June 30, 2003, versus the same period of 2002 was a 30% increase in the net interest bearing assets from 2002 to 2003 dueto  the acquisition of American Community Bank.  At June 30, 2003, the net interest margin was 5.41% versus 5.51% at June30, 2002.  Since December 31, 2002, the net interest margin has decreased 19 basis points as deposits were repriced at lowerrates in connection with the overall general interest rate decreases.

The provision for loan losses for the six months of 2003 decreased $464,000 compared tothe same period for 2002.  The decrease in the provision for loan losses was attributable to a decrease in the level ofnon-performing loans and an overall decrease in outstanding loan balances.  Net loan charge-offs for the six months ended June30, 2003, were $211,000, compared to $186,000, for the same period in 2002.  It is management’s belief that theallowance for loan losses is adequate to absorb probable losses in the portfolio, but there is no assurance that this will be thecase.

Other operating income decreased for the six months ended June 30, 2003, by $547,800 or25.7%, compared to the same period in 2002, primarily due to a decrease of $845,600 in security gains which was offset by increasesof $69,500 in service charges on deposit accounts due an increase in the number of deposit accounts, a $177,000 increase inmortgage origination income, and a $26,000 increase in ATM and debit card income.  All of these increasesexcept increases in mortgage origination income are primarily due tothe inclusion of the American Community Bank operations in 2003 totals.

Other operating expenses for the six months of 2003 increased $721,000 (13.98%) comparedto the first six months in 2002.  Included in the increase for the six months ended June 30, 2003, compared to the same periodof 2002 was an increase of $336,100 in salaries and benefits for personnel, a $93,000 increase in occupancy expense, increases ofdeposit account fraud and other losses of $90,000, postage expenses increases of $48,000 and various other expenses. Except for the deposit account fraud, theseexpenses increased principally due to the inclusion of American Community Bank in the 2003 operating results.  Totals foroperating results for 2002 included American Community Bank for only one month as the acquisition date was May 30, 2002.

Income tax expense expressed as a percentage of pretax earnings remained constant at34%.

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

For the SixMonths in the Periods EndedJune 30, 2003 and 2002

****

**Capital**

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

Risk-Based Capital Ratios

Consolidated

Bank Only

Tier 1 TangibleCapital, Actual

9.79%

12.70%

Tier 1 Tangible Capital minimumrequirement

  4.00%

  4.00%

          Excess

5.79%

  8.70%
   
Total Capital, Actual

11.04%

13.95%

Total Capital minimum requirement

  8.00%

  8.00%

          Excess

  3.04%

  5.95%
   
Leverage Ratio
  
Tier 1 Tangible Capital to adjustedtotal assets (“Leverage Ratio”)

7.75%

10.08%

Minimum leverage requirement

  3.00%

  3.00%

          Excess

4.75%

    7.08%
   ===      ===     
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)as of June 30, 2003.  Based on, and as of the date of,  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.
 
-12-
Table of Contents
**PART II.  OTHER INFORMATION**

**          FNB BANKINGCOMPANY AND SUBSIDIARY**

Item 1.

Legal Proceedings
  
None
 
Item 2.

Changes in Securities and Use of Proceeds
  
None
 
Item 3.

Defaults Upon Senior Securities
  
None
 
Item 4.

Submission of Matters to a Vote of Security Holders
  
(a)
FNB Banking Company's annual meeting of stockholders was held onApril 3, 2003   (b) The following is a summary of matters submitted to a voteof security holders:   1.  The election* of the following directors to servethe current year term:
               C.A. Knowles               James A. Mankin               John T. Newton,Jr.               David G.Newton               J. HenryCheatham, III               J. GilliamCheatham               J. CharlesCopeland    A tabulation of votes concerning the above issues is asfollows:   DirectorElection   Shares voted by proxy in favor
467,758   Shares voted in person in favor134,985   Shares voted in person against-   Shares withheld from voting432     
   Total shares represented
603,175        Total Shares outstanding
730,674        * - Directors were elected by slate, not individually.  Votetabulation is therefore by slate.  
Item 5.

Other Information
  
None
 
Item 6.

Exhibits and Reports on Form 8-K
   
a)

Exhibit - The following exhibits are filed with this report.
  
 31.1   Certification ofChief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  
 31.2   Certification ofChief 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 Section 906 ofthe           Sarbanes-Oxley Act of 2002    
b)

Reports on  Form 8-K - none

-13-
Table of Contents
**FNB BANKING COMPANY AND SUBSIDIARY**
**SIGNATURES**
Pursuant to the requirements of the Securities Exchange Act of1934, the Registrant has duly caused this Report to be signed on its behalf bythe undersigned thereunto duly authorized.
 
FNB BANKING COMPANY
       
By:  /s/ J. Charles Copeland                            
 
       J. Charles Copeland, President
 
       (Chief Executive Officer)
   
Date: August 14, 2003
       
By:_/s/ Mark Flowers                                      
 
       Mark Flowers, Assistant Treasurer
 
       (Chief Accounting Officer)
   
Date: August 14, 2003
****