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**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KSB**

S     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934.

For the fiscal year ended December 31, 2003

or

 ̈    Transition Report Pursuant to Section13 or15(d) of THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 2-94292

| FNB Banking Company                                              |
|------------------------------------------------------------------|
| (Exact name of Small Business Issuer as specified in itsCharter) |

                                   

| **Georgia**                                                    | **                     ** | ** 58-1479370**                    |
|----------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------|
| (State or Other Jurisdiction of Incorporation or Organization) |                                                                                                                               | (I.R.S. Employer Identification Number) |

                                   

| **         318 South Hill Street, Post OfficeDrawer F, Griffin, Georgia**** ****         ****30224**                                                                                                                                                                 |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         (Address of principal executiveoffices)                                           (Zip Code) |

Issuer’s telephone number:  (770) 227-2251

Securities registered pursuant to Section 12(b) of theAct:    None.Securities registered pursuant to Section 12(g) of the Act:    None.

Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   /**X**/  No  /   /

Check if there is no disclosure of delinquent filers in response to Item 405 of RegulationS-B not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.** ** Not Applicable. 

Registrant is not required to be registered under the Securities Exchange Act of1934.

State the issuer’s revenue for its most recent fiscal year: $22,353,127.

State the aggregate market value of the voting and non-voting Common Stock held bynon-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of suchcommon equity, as of a specified date within the past 60 days:  as of February 26, 2004, there were 714,878 shares of commonstock, $1.00 par value (the “Common Stock”), having an aggregate market value of $39,318,290 (based upon approximatemarket value of $55/share) (the last sales price known to the Registrant for the Common Stock, for which there is no establishedtrading market).

State the number of shares outstanding of each of the issuer’s classes of CommonStock as of the latest practicable date:  As of February 26, 2004, there were 714,878 shares outstanding of theRegistrant’s Common Stock.

Transitional Small Business Disclosure Format (check one):

Yes____                No  X  

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Table of Contents

**INDEX**

|          | PAGE                                                                                                            |
|---------------|-----------------------------------------------------------------------------------------------------------------|
| **PART I**    | 3                                                                                                               |
| Item 1.       | Description Of Business                                                                                         | 3 |
| Item 2.       | Description Of Property                                                                                         | 9 |
| Item 3.  | Legal Proceedings                                                                                               | 10 |
| Item 4.       | Submission of Matters to a Vote of Security Holders                                                             | 10 |
| **PART II**.  | 11                                                                                                              |
| Item 5.       | Market for Common Equity and Related Stockholder Matters                                                        | 11 |
| Item 6.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations               | 12 |
| Item 7.       | Financial Statements                                                                                            | 26 |
| Item 8.       | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                      | 26 |
| Item 8A.      | Controls and Procedures                                                                                         | 26 |
| **PART III**. | 27                                                                                                              |
| Item 9.       | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act | 27 |
| Item 10.      | Executive Compensation                                                                                          | 28 |
| Item 11.      | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.                 | 30 |
| Item 12.      | Certain Relationships and Related Transactions                                                                  | 33 |
| Item 13.      | Exhibits and Reports on Form 8-K                                                                                | 34 |
| Item 14.      | Principal Accountant Fees and Services                                                                          | 34 |

 

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Table of Contents

**PART I**

**Item 1. ****Description ofBusiness**

**General**

               FNB Banking Company, a Georgia corporation (the “Company” or “FNB”), was organized on July 13, 1982. On March 1, 1983, the Company acquired all of the 200,000 issued and outstanding shares of common stock of First National Bank ofGriffin (the “Bank”).  As a result of this transaction, the former shareholders of the Bank became theshareholders of the Company, and the Bank became the wholly-owned subsidiary of the Company.  On May 31, 2002, the Companycompleted the acquisition of American Community Bank of Georgia (“ACB”), and subsequently merged ACB into theBank.  ACB shareholders received $13.35 per share for each outstanding share of ACB.  In addition to the Bank, theCompany conducts business through its subsidiary Griffin Loans, Inc. (“Griffin Loans”), a consumer finance company,principally engaged in the business of making small loans to individuals. 

               At December 31, 2003, the Company’s total assets were $302,037,951, compared to $301,493,265 at year-end 2002.  Over thepast 5 years, total assets of the Company have grown by $99,256,036 representing an increase of 48.9%.

**Market and Services**

               The primary markets for the Bank are Spalding and Henry Counties, Georgia. 

               The Company operates a full-service commercial banking business based in Griffin, Georgia, providing such customary bankingservices as checking and savings accounts, various types of time deposits, safe deposit facilities, money transfers, and individualretirement accounts.  The Company also finances commercial transactions, makes secured and unsecured loans, and provides otherfinancial services, including corporate, pension, and personal trust services, to its customers through the Bank.  ThroughGriffin Loans, the Company engages in the business of making small loans to individuals under the trade name “FirstCredit”.  The Bank is community oriented, with an emphasis on retail banking, and offers such customary banking servicesas consumer and commercial checking accounts, NOW accounts, savings accounts, certificates of deposit, lines of credit, MasterCardand Visa accounts, and money transfers.  The Bank finances commercial and consumer transactions, makes secured and unsecuredloans, and provides a variety of other banking services.

**Deposits**

               The Bank offers a full range of depository accounts and services to both consumers and businesses.  At December 31, 2003, theBank’s deposit base, totaling approximately $238 million, consisted of $39 million in non-interest bearing demand deposits(16% of total deposits), $63 million in interest bearing demand deposits (including money market accounts) (27% of total deposits),$25 million in savings deposits (10% of total deposits), $80 million in time deposits in amounts less than $100,000 (34% of totaldeposits), and $31 million in time deposits of $100,000 or more (13% of total deposits).  Management of the Bank is of theopinion that its time deposits of $100,000 or more are customer relationship-oriented and represent a reasonably stable source offunds. 

**Loans**

                The Bank makes both secured and unsecured loans to individuals, firms, and corporations, and both its consumer and commerciallending operations include various types of credit for the Bank’s customers.  Secured loans include first and secondreal estate mortgage loans.  The Bank also makes direct installment loans to consumers on both a secured and unsecuredbasis.  At December 31, 2003, commercial, construction, commercial accounts receivable, consumer, and mortgage loansrepresented 62%, 11%, 2%, 22%, and 3%, respectively, of the Bank’s total loan portfolio.  Most loans made by GriffinLoans are for less than $1,000, but Griffin Loans also makes real estate loans for larger amounts depending on the collateralavailable.  Currently, the largest real estate loan is approximately $50,000.

**Lending Policy**

               The current lending strategy of the Bank is to make loans only to persons who reside, work, or own property in its primary tradearea consisting of Spalding and Henry Counties, Georgia.   Normally, unsecured loans are made only to persons whomaintain depository relationships with the Bank.  Secured loans are made to persons who are well-established and have networth, collateral, and cash flow to support the loan.  Real estate loans are normally made when such loans are secured by realproperty located in the Bank’s primary trade area.

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               The Bank provides each lending officer with written guidelines for lending activities.  Lending authority is delegated by theBoard of Directors of the Bank to loan officers, each of whom is limited in the amount of secured and unsecured loans which he orshe can make to a single borrower or related group of borrowers.  All unsecured loans in excess of $50,000 must have theapproval of the loan committee.

               Making loans to businesses to fund working capital is a traditional function of commercial banks.  Such loans are expected tobe repaid out of the cash flow of the commercial entity, and the ability of the borrower to service its debt is dependent upon thesuccess of the commercial enterprise.  It is the Bank’s policy to secure these loans with collateral.  Many of theBank’s commercial loans are secured by real estate collateral because such collateral is superior to other types ofcollateral available to small businesses.  Loans secured by commercial real estate, however, particularly if collateraldependent, are subject to certain inherent risks.  Commercial real estate may be substantially illiquid, and commercial realestate values are difficult to ascertain and subject to wide fluctuation depending upon economic conditions.

               Inter-agency guidelines adopted by federal bank regulators, including the Office of the Comptroller of the Currency (the“OCC”), mandate that  financial institutions establish real estate lending policies and establish certain minimumreal estate loan-to-value standards.  The Bank has adopted these federal standards as its minimum standards.  Thesestandards require maximum loan-to-value ratios for various types of real estate loans as set forth below.  The Bank may,however, make exceptions to the minimum standards, which exceptions must be accounted for and tracked.

 Loan category

Loan to Value Limit (percent)

                                                                                       

Raw Land Development

Construction:

     Commercial, multifamily (1) and othernonresidential

     1-to-4-family residential

      Improved Property

     Owner-occupied 1-to-4 family and homeequity(2) 

 

65%

 

 75%

80%

85%

85%

_______________________(1)  Multifamily construction includes condominiums and cooperatives.(2)  A loan-to-value limit has not been established for permanent mortgage or homeequity loans on owner-occupied,       1-to 4-family residential property.  For any such loan with a loan-to-value ratiothat equals or exceeds 90 percent at       origination, appropriate credit enhancement in the form of either mortgage insurance orreadily marketable collateral       is required. 

**Loan Review and Non-Performing Assets**

               The loan review officer of the Company reviews the Bank’s loan portfolio to determine deficiencies and corrective action tobe taken, if any.  The results of the reviews by the loan review officer are presented to the President and the ExecutiveCommittee of the Bank on a monthly basis.  On at least an annual basis, reviews are conducted for all loans over$50,000.  Past due loans are reviewed at least weekly by lending officers and by the chief credit officer, and a summaryreport is reviewed monthly by the Board of Directors.  The Board of Directors reviews all new loans over $25,000 whethercurrent or past due each month.  The Bank charges off loans with past-due amounts when they are believed to beuncollectible. 

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**Asset/Liability Management**

               A committee composed of the Bank’s officers is charged with managing the Bank’s assets and liabilities.  Thecommittee attempts to manage asset growth, liquidity, and capital to maximize income and reduce interest rate risk.  Thecommittee directs the Bank’s overall acquisition and allocation of funds.  At monthly meetings, the committee reviewsand discusses the monthly asset and liability funds budget in relation to the actual flow of funds, as well as peer groupcomparisons; the ratio of the amount of rate-sensitive assets to the amount of rate-sensitive liabilities; the ratio of theallowance for loan losses to outstanding and non-performing loans; and other variables, such as expected loan demand, investmentopportunities, core deposit growth within specified categories, regulatory changes, monetary policy adjustments, and the overallstate of the economy.  The Bank’s Investment Policy is set to maximize income with safety of principal an overridingconcern.  The investment portfolio is a source of liquidity and it is reviewed annually. 

**Competition**

               The banking business is highly competitive.  The Company’s primary market area consists of Spalding and Henry Counties,Georgia.  The Company competes in Spalding County with five other commercial banks and in Henry County with 15 commercialbanks. The Bank is the largest bank in Spalding County in terms of deposits located in this county, with deposits at December 31,2003 of approximately $238 million, and the fifth largest in Henry County in terms of deposits located in that county.

                In addition to the Company’s competitors in Spalding and Henry Counties, the Company competes with commercial banks, thrifts,and various other financial institutions and brokerage houses located outside the market area.  To a lesser extent, theCompany also competes for loans with insurance companies, regulated small loan companies, credit unions, and certain governmentalagencies.  In addition, the Company and any non-banking subsidiaries it may establish in the future compete and will competewith numerous other companies and financial institutions engaged in similar lines of business, such as other bank holdingcompanies, leasing companies, and insurance companies. 

               The business of the Bank is not materially seasonal.  Construction and development lending are strongest in the spring andsummer.  Building slows somewhat in the fall and winter, but not to the degree that there is an appreciable impact upon theBank’s balance sheet or statement of earnings. 

**Employees**

               As of December 31, 2003, the Company and the Bank had 109 full-time and 32 part-time employees.  The Company is not a party toany collective bargaining agreement.  Management believes that the Company has satisfactory relations with itsemployees.

**Forward Looking Statements**

               Certain statements included or incorporated by reference in this Form 10-KSB are forward-looking (as such term is defined in theSecurities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, each as amended).  Such statementsmay relate to the Company’s or the Bank’s operations, performance, and financial condition.  These statements arebased upon a number of assumptions and estimates that are inherently subject to significant uncertainties, many of which are beyondthe control of the Company and the Bank.  Actual results may differ materially from those expressed or implied by suchforward-looking statements.

               All percentages and dollar amounts contained in this Form 10-KSB are approximated and may have been rounded to the nearest wholenumber to provide a more easily understandable format.

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**Supervision and Regulation**

*General*

               The Company is a registered bank holding company subject to regulation by the Board of Governors of the Federal Reserve (the“Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “Act”).  The Company isrequired to file financial information with, and is subject to periodic examination by, the Federal Reserve.

               The Act requires every bank holding company to obtain the Federal Reserve’s prior approval before (1) it may acquire director indirect ownership or control of more than 5% of the voting shares of any bank that it does not already control; (2) it or anyof its non-bank subsidiaries may acquire all or substantially all of the assets of a bank; and (3) it may merge or consolidate withany other bank holding company.  In addition, a bank holding company is generally prohibited from engaging in, or acquiring,direct or indirect control of the voting shares of any company engaged in non-banking activities.   This prohibition does notapply to activities listed in the Act or found by the Federal Reserve, by order or regulation, to be closely related to banking ormanaging or controlling banks as to be a proper incident thereto.  Some of the activities that the Federal Reserve hasdetermined by regulation or order to be closely related to banking are:
- making or servicing loans and certain types of leases;
- performing certain data processing services;
- acting as fiduciary or investment or financial advisor;
- providing brokerage services;
- underwriting bank eligible securities;
- underwriting debt and equity securities on a limited basis through separately capitalized subsidiaries;and
- making investments in corporations or projects designed primarily to promote community welfare.

               Although the activities of bank holding companies have traditionally been limited to the business of banking and activities closelyrelated or incidental to banking, the Gramm-Leach-Bliley Act became effective in 2000 and relaxed the previous limitations,permitting bank holding companies to engage in a broader range of financial activities.  Specifically, bank holding companiesmay elect to become financial holding companies which may affiliate with securities firms and insurance companies and engage inother activities that are financial in nature.  Activities that are deemed “financial in nature”include:
- lending, exchanging, transferring, investing for others or safeguarding money or securities;
- insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providingand issuing annuities, and acting as principal, agent, or broker with respect thereto;
- providing financial, investment, or economic advisory services, including advising an investmentcompany;
- issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;and
- underwriting, dealing in or making a market in securities.

               A bank holding company may become a financial holding company under this statute only if each of its subsidiary banks is wellcapitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act.  A bank holdingcompany that falls out of compliance with such requirements may be required to cease engaging in certain activities.  Any bankholding company that does not elect to become a financial holding company remains subject to the current restrictions of theAct.

               Under the Gramm-Leach-Bliley Act, the Federal Reserve Board serves as the primary “umbrella” regulator of financialholding companies with supervisory authority over each parent company and limited authority over its subsidiaries.  Theprimary regulator of each subsidiary of a financial holding company will depend on the type of activity conducted by thesubsidiary.  For example, broker-dealer subsidiaries will be regulated largely by securities regulators and insurancesubsidiaries will be regulated largely by insurance authorities.

               On October 26, 2001, the United States Congress adopted the USA Patriot Act of 2001 (Patriot Act) to combat terrorism.  Underthe Patriot Act, FDIC insured banks and commercial banks are required to increase their due diligence efforts for correspondentaccounts and private banking customers.  The Patriot Act requires the Bank to engage in additional record keeping andreporting, to obtain identification of account owners or customers of foreign bank account holders, and to restrict or prohibitcertain correspondent accounts. 

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               The laws of Georgia require annual registration with the Department of Banking and Finance (the “DBF”) by all Georgiabank holding companies.  Such registration includes information with respect to the financial condition, operations,management, and intercompany relationships of a bank holding company and its subsidiaries and related matters.  The DBF mayalso require such other information as is necessary to keep itself informed as to whether the provisions of Georgia law and theregulations and orders issued thereunder by the DBF have been complied with. The DBF may make examinations of each bank holdingcompany and each bank subsidiary thereof, other than a national bank.

               The Bank is a national bank chartered under the National Bank Act and is subject to the supervision of, and is regularly examinedby, the OCC.  The OCC regulates or monitors all areas of the Bank’s operations and activities, including reserves,loans, mergers, issuance of securities, payments of dividends, interest rates, and establishment of branches.  Interest andcertain other charges collected or contracted for by the Bank are also subject to state usury laws or certain federal lawsconcerning interest rates.

               The Bank is insured by the Federal Deposit Insurance Corporation (the “FDIC”).  The major functions of the FDICwith respect to insured banks include paying depositors to the extent provided by law if an insured bank is closed without adequateprovisions having been made to pay claims of depositors, acting as a receiver of state banks placed in receivership when appointedreceiver by state authorities, and preventing the development or continuance of unsound and unsafe banking practices.

               The Company is an “affiliate” of the Bank under the Federal Reserve Act, which imposes certain restrictions on (i)loans by the Bank to the Company, (ii) investments in the stock or securities of the Company by the Bank, (iii) the Bank’staking the stock or securities of an “affiliate” as collateral for loans by the Bank to a borrower and (iv) thepurchase of assets from the Company by the Bank.  Further, a bank holding company and its subsidiaries are prohibited fromengaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing ofservices.

*Payment of Dividends*

               The Company is a legal entity separate and distinct from the Bank.  Most of the revenues of the Company result from dividendspaid to it by the Bank.  There are statutory and regulatory requirements applicable to the payment of dividends by the Bank,as well as by the Company to its shareholders.

               As a national bank, the Bank is required by federal law to obtain the prior approval of the OCC for payments of dividends if thetotal of all dividends declared by the Board of Directors in any year will exceed (i) the total of the Bank’s net profits (asdefined and interpreted by regulation) for that year, plus (ii) the Bank’s retained net profits (as defined and interpretedby regulation) of the preceding two years, less any required transfers to surplus.

               The payment of dividends by the Company and the Bank may also be affected or limited by other factors, such as the requirement tomaintain adequate capital above regulatory guidelines.  In addition, if in the opinion of the applicable regulatory authority,a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending upon thefinancial condition of a bank, could include the payment of dividends), such authority may require, after notice and hearing, thatsuch bank cease and desist from such practice.  The FDIC and the OCC have issued policy statements providing that insuredbanks should generally only pay dividends out of current operating earnings.  At December 31, 2003, the Bank’s retainedearnings from which dividends could be paid is limited to 2004 earnings of the Bank.  For 2003, the Company’s cashdividend payout to stockholders was 28 percent of net earnings.

**Monetary Policy**

               The results of operations of the Bank, and therefore the Company, are affected by credit policies of monetary authorities,particularly the Federal Reserve.  The instruments of monetary policy employed by the Federal Reserve include open marketoperations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirementsagainst bank deposits.  In view of changing conditions in the national economy and in the money markets, as well as the effectof actions by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible futurechanges in interest rates, deposit levels, loan demand, or the business and earnings of the Bank.

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**Capital Adequacy**

                The Federal Reserve and the OCC have implemented substantially identical risk-based rulesfor assessing bank and bank holding company capital adequacy.  These regulations establish minimum capital standards inrelation to assets and off-balance sheet exposures as adjusted for credit risk.  Banks and bank holding companies are requiredto have (1) a minimum level of total capital (as defined) to risk-weighted assets of eight percent; (2) a minimum Tier One Capital(as defined) to risk-weighted assets of four percent; and (3) a minimum stockholders equity to risk weighted assets of fourpercent.  In addition, the Federal Reserve and the OCC have established a minimum three percent leverage ratio of Tier OneCapital to total assets (four percent for all but the most highly-rated banks and bank holding companies).  “Tier OneCapital” generally consists of common equity not including unrecognized gains and losses on securities, minority interests inequity accounts of consolidated subsidiaries, and certain perpetual preferred stock less certain intangibles.  The FederalReserve and the OCC use the leverage ratio in tandem with the risk-based ratio to assess the  capital adequacy of banksand bank holding companies.  The capital adequacy standards also provide for the consideration of interest rate risk in theoverall determination of a bank’s capital ratio, requiring banks with greater interest rate risk to maintain adequate capitalfor the risk. 

               In addition, Section 38 of the Federal Deposit Insurance Corporation Act’s “prompt corrective action” provisions,designed to efficiently resolve failing financial institutions, set forth five regulatory zones in which all banks are placedlargely based on their capital positions.  Regulators are permitted to take increasingly harsh action as a bank’sfinancial condition declines.  Regulators are also empowered to place in receivership or require the sale of a bank to anotherdepository institution when a bank’s tangible equity to total assets ratio reaches two percent.  Better capitalizedinstitutions are generally subject to less onerous regulation and supervision than banks with lesser amounts ofcapital. 

               The OCC regulations concerning the “prompt corrective action” provisions place financial institutions in the followingfive categories based upon capitalization ratios: (1) a “well capitalized” institution has a total risk-based capitalratio of at least ten percent, a Tier One risk-based ratio of at least six percent and a leverage ratio of at least four percent;(2) an “adequately capitalized” institution has a total risk-based capital ratio of at least eight percent, a Tier Onerisk-based ratio of at least four percent and a leverage ratio of at least four percent; (3) an “undercapitalized”institution has a total risk-based capital ratio of under eight percent, a Tier One risk-based ratio of under four percent or aleverage ratio of under four percent; (4) a “significantly undercapitalized” institution has a total risk-based capitalratio of under six percent, a Tier One risk-based ratio of under three percent or a leverage ratio of under three percent; and (5)a “critically undercapitalized” institution has a leverage ratio of two percent or less.  Institutions in any ofthe three undercapitalized categories would be prohibited from declaring dividends or making capital distributions.  The OCCregulations also establish procedures for “downgrading” an institution to a lower capital category based on supervisoryfactors other than capital.  Under the OCC’s regulations, the Bank was a “well capitalized” institution atDecember 31, 2003.

               Below are pertinent capital ratios for the Company and the Bank as of December 31, 2003.

**                                                                                **

**Company**

**             **

**Bank**

** **

** **

** **

** **

Tier 1 Capital to Risk-based Assets

9.64% 

 

12.24%

Total Capital to Risk-based Assets

10.90% 

 

13.49%

Leverage Ratio (Tier 1 Capital to Average Assets)

8.08% 

 

10.29%

               Below are pertinent capital ratios for the Company and the Bank as of December 31, 2002.

**                                                                                **

**Company**

**             **

**Bank**

** **

** **

** **

** **

Tier 1 Capital to Risk-based Assets

9.29% 

 

12.44%

Total Capital to Risk-based Assets

10.54% 

 

13.69%

Leverage Ratio (Tier 1 Capital to Average Assets)

7.52% 

 

10.12%

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**Item 2. ****Description of Property**

               The Company’s main office is located at 318 South Hill Street, Griffin, Georgia, 30224, and its telephone number at thatoffice is (770) 227-2251.

               The Company distributes its services through four full-service banking offices and one limited-service banking office asfollows:

**                Main Office**

               318 South Hill Street                Griffin, Georgia 30224

               **Northside Bank Branch**

               1475 West McIntosh Road                Griffin, Georgia  30223

**                Southside BankBranch**

               1103 Zebulon Road                Griffin, Georgia  30224

**                Kroger GriffinBranch  (**Limited Service Office)

               100 Spalding Village                Griffin, Georgia  30223

**                HamptonBranch**

               996 Bear Creek Boulevard                 Hampton, Georgia 30228

**                Eagles LandingBranch**

               2750 Highway 42 North                McDonough, Georgia 30253

               The executive offices of the Company and the main office of the Bank are located in a 33,000 square-foot facility, 318 South HillStreet, Griffin, Georgia.  None of the owned properties of the Company is subject to encumbrances.  The Company owns abuilding adjacent to its main office in Griffin which is used for storage of bulk supplies and to house the offices of GriffinLoans, Inc.  The Company owns all of the properties, except the Kroger Griffin Branch Limited Office and the Eagles LandingOffice.  The Kroger Griffin Branch Limited Office is leased for a term of 15 years, which lease began on May 11, 1989. Such lease is expected to expire on July 31, 2004.  The Eagles Landing office, which was assumed in connection with theCompany’s acquisition of ACB, is leased for a term of 10 years, which began in April 1998.  All bank’s owned orleased property is in good condition.

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            Management of theCompany believes that all of its properties are adequately covered by insurance.

**Item 3. ****LegalProceedings**

               The Company is not aware of any material pending or contemplated legal proceedings to which the Company or the Bank is a party orto which any of their property is subject.

**Item 4.  Submission of Mattersto a Vote of Security Holders**

               No matters were submitted to a vote of security holders of the Company during the fourth quarter of the 2003 fiscalyear.
 
 

 

 

 

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**PART II**

**Item 5. ****Market for CommonEquity and Related Stockholder Matters**

**Stock**

               There is no established public trading market for the Common Stock.  At December 31, 2003, there were 385 shareholders ofrecord.  Management is aware of 8 sales of the Company’s stock in 2003, aggregating 17,771 shares in blocks ranging from21 shares to 8,727 shares at a price in the range of $50.00 to $63.02 per share.  Management is aware of 6 sales of theCompany’s stock in 2002, aggregating 4,376 shares in blocks ranging from 6 shares to 1,872 shares at a price of $45 pershare. 

**Dividends**

               In 2002 and 2003, the Company declared cash dividends of $1,059,936 ($1.45 per share) and $1,120,056 ($1.55 per share),respectively.  The Company intends to continue paying cash dividends on a semi-annual basis.  The amount and frequency ofdividends, however, will be determined by the Company’s Board of Directors in light of earnings, capital requirements and thefinancial condition of the Company, and no assurances can be given that dividends will be paid in the future.  Information onrestrictions on the amount of dividends payable by the Company appears in Note 12 to the Company’s consolidated financialstatements set forth in Item 7 hereof.

**Securities Authorized for Issuance Under Equity Compensation Plans.**

               The following table gives information about the Company’s equity compensation awards.  The Company does not have anyequity compensation plans.  This table reflects the Company’s sole equity compensation arrangement with its Presidentand CEO, J. Charles Copeland, providing for the award of options to purchase the Company’s Common Stock during calendar year2004.

** **PlanCategory

(a) Number of securities to be issued upon exercise of outstanding options,warrants and rights

(b) Weighted-average exercise price of outstanding options, warrants  and rights

(c)Number of securities remaining available for future issuance under equity compensation  plans (excluding securities   reflected in column (a))

  

 
  
Equity compensation plans approved by stockholders

-0-

-0-

-0-

Equity compensation plans not approved by stockholders

320

N/A

N/A

Total

320

N/A

N/A

____________________The table sets forth options granted to J. Charles Copeland by the Executive Committee of the Board of Directors.  Such grantswere specific to Mr. Copeland.  The exercise price for Mr. Copeland’s options is the book value per share of theCompany’s Common Stock as of the date Mr. Copeland exercises his options.

               In December of 2002, the Executive Committee of the Company’s Board of Directors, without shareholder approval, approved anincentive stock option arrangement with J. Charles Copeland, its Chief Executive Officer and President, whereby the Company wouldissue up to a maximum number of 1,000 shares of its Common Stock at book value (the exercise price) to Mr. Copeland based on theBank’s performance.  Under this agreement and based on the Bank’s 2002 performance, on December 23, 2002, theCompany granted Mr. Copeland options to purchase 232 shares of the Company’s Common Stock at an exercise price equal to thebook value per share as of the date of exercise.  On December 23, 2003, the Company granted Mr. Copeland options to purchase320 shares of the Company’s Common Stock at an exercise price equal to the book value per share as of the date of exercise.Mr. Copeland may exercise these options at any time in calendar year 2004.

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**Item 6.             **

**Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

**Forward-Looking Statements**This discussion contains forward-looking statements under the private SecuritiesLitigation Reform Act of 1995 that involve risks and uncertainties.  Although the Company believes that the assumptionsunderlying the forward-looking statements contained in the discussion are reasonable, any of the assumptions could be inaccurate,and therefore, 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; material unforeseenchanges in the financial stability and liquidity of the Company’s credit customers; all of which are difficult to predict andwhich may be beyond the control of the Company.  The Company undertakes no obligation to revise forward-looking statements toreflect events or changes after the date of this discussion or to reflect the occurrence of unanticipated events.

**Executive Summary2003**

Consolidated net earnings rose slightlyto $4.0 million in 2003, from $3.9 million in the prior year, an increase of1.9%.  Because 2002 results for the Company were favorably impacted by aone-time gain from the sale of a long-term equity investment held by theCompany, earnings for the core banking operation showed a more significantimprovement in 2003 over the prior year.  Core bank earnings, as adjustedfor the effects of this transaction in 2002,  totaled $4.1 million in 2003as compared to $3.5 million in 2002, an increase of approximately 17%.

2003 earnings produced a return on average assets of 1.30% and a return on average equityof 13.46%, representing slight decreases as compared to 1.41% and 14.46%, respectively, in 2002.

Moderate to weak loan demand, created by the still recovering economy, resulted in verylittle balance sheet growth in 2003.  Year ending assets at December 31, 2003 were just over $302 million, as compared to$301.5 million at the prior year end.

**2004**

Though the net interest margin held for most of 2003, pressure against this key componentto the Company’s earnings has increased.  Management’s challenge in 2004 will be to continue to manage the marginwhile at the same time grow the balance sheet with quality earning assets. To that end, management has initiated a strong businessdevelopment effort.

The Company has made important strides in controlling non-interest expense in 2003, butthose gains may be offset by some new challenges in 2004 and beyond. The Company will re-tool the drive-in facility at itsNorthside branch in the spring of 2004. The Company will face a full year of cost on its new imaging system as well. While thesechanges will position the company to better compete in its market, they will certainly add to non-interest expense.

Another significant cost for 2004 will be those associated with the Sarbanes-Oxley Act of2002 compliance implementation. The Sarbanes-Oxley Act of 2002 includes provisions addressing audits, financial reporting anddisclosure, conflicts of interest and corporate governance at public companies. Section 404 of this Act deals with managementsreport on internal controls, and will require much in the way of resources to plan, implement and document internal controls. Someof the resources will be in the form of internal people hours, but a significant cost will likely be in increased accounting andconsulting fees. The Company cannot quantify the costs with any accuracy, but based on recent industry surveys during the earlypart of 2004, even small companies are expecting costs in the tens of thousands of dollars.

 

 

12
Table of Contents

**General**The Company is a one-bank holding company registered under the Bank Holding Company Act of1956 and was incorporated under the laws of the State of Georgia in 1983. All of the Company’s activities are currentlyconducted by its wholly owned subsidiary, the Bank. The Bank owns a consumer finance company, First Credit, Inc., which engages inthe business of making small loans to individuals.

The Company’s subsidiary bank was most recently examined by its primary regulatoryauthority in September, 2003. There were no recommendations by the regulatory authority that, in management’s opinion, wouldhave had a material effect on the Company’s liquidity, capital resources or operations.

The following discussion is intended to provide insight into the financial condition andresults of operations of the Company and should be read in conjunction with the consolidated financial statements and accompanyingnotes.

**Critical Accounting Policies**The accounting and financial reporting policies of the Company conform to accountingprinciples generally accepted in the United States of America and to general practices within the banking industry.  Followingis a description of the accounting policies applied by the Company, which are deemed “critical”.  In determiningwhich accounting policies are “critical” in nature, the Company has identified the policies that require significantjudgment or involve complex estimates.  The application of these policies has a significant impact on the Company’sfinancial statements.  Financial results could differ significantly if different judgments or estimates areapplied. 

**Allowance for Loan Losses**The allowance for loan losses is an estimate of the losses that may be sustained in theloan portfolio.  The allowance is based on two basic principles of accounting: (1) Statement of Financial Accounting Standards(“SFAS”) No. 5 “Accounting for Contingencies,” which requires that losses be accrued when they are probableof occurring and estimable, and (2) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” which requiresthat losses be accrued based on the differences between the value of collateral, present value of future cash flows or values thatare observable in the secondary market and the loan balance.  The use of these values is inherently subjective and the actuallosses could be greater or less than the estimates.

The allowance for loan losses has two basic components: (1) specific loss estimates forindividually classified and impaired loans, and (2) general loss estimates on loans for which no impairment has been identified andfor large groups of smaller balance homogeneous loans.  Specific loss estimates on individual loans include subjectiveevaluations related to secondary sources of repayment for the loan, which are principally collateral liquidation.  The generalloss allocations uses historical loss ratio experience, which may not be indicative of the actual losses present in the loanportfolio at a given point in time.

The Company continuously re-evaluatesthe use of historical loss factors, national and local economic trends, creditconcentrations and other relevant factors in determining the adequacy of theallowance for loan loss.  The estimation process associated with theallowance for loan losses can have significant effects in the estimated loanloss expense of a given period.  Generally, the allowance for loan lossesincreases as the outstanding balance of loans increases or the level ofclassified or impaired loans increases.  Loans or portions of loans whendeemed uncollectible are charged against and reduce the allowance.

**Business Combination**On May 31, 2002, the Company consummated an agreement to acquire all of the outstandingshares of ACB for approximately $9.9 million in cash ($13.35 per share) plus certain acquisition costs.  ACB was a bankingcorporation based in Stockbridge (Henry County), Georgia with approximately $55.4 million in total assets, $40.8 million in loansand $46.3 million in deposits.  The primary reason for the acquisition was to expand the Company’s banking franchiseinto the high growth area of eastern Henry County, Georgia.  The Company accounted for this transaction using the purchasemethod and accordingly, the original purchase price was allocated to assets and liabilities acquired based upon their fair valuesat the date of the acquisition. The excess of the purchase price over the fair value of the net assets acquired (goodwill) wasapproximately $4.4 million.  ACB was merged into the Bank and is operated as a branch.

The cash proceeds to consummate the purchase were obtained through a combination ofborrowings under a line of credit with a correspondent bank and cash dividends paid to the Company by the Bank.

Additional information about the 2002 ACB business combination is included in Note 2 ofthe consolidated financial statements.

13
Table of Contents

**Statements of Earnings Review**Net earnings were $4.0 million in 2003, an increase of 1.9% from the $3.9 million earnedin 2002. Net earnings per share were $5.46 for 2003, compared with $5.32 reported in 2002, an increase of 2.6%. Return on averageassets and return on average stockholders’ equity for 2003 was 1.30% and 13.46%, respectively, compared with 1.41% and 14.5%,respectively, for 2002. Net earnings were $3.9 million in 2002, an increase of 39.6% from the $2.8 million earned in 2001. Netearnings per share were $5.32 for 2002, compared with $3.61 reported in 2001, an increase of 47.4%.

Net interest income increased by $398,000 or 2.84% in 2003, as a result of increasedinterest earning assets. Net interest income at December 31, 2003 was $14.4 million compared to $14.0 million in 2002. Low interestrates reduced the net yield (tax equivalent) on interest earning assets (5.23% in 2003 and 5.60% in 2002) by 37 basis points in2003 from 2002. Net interest income at December 31, 2002 was $14.0 million compared to $11.6 million in 2001, an increase of $2.4million or 20.6% in 2002. Net yield (tax equivalent) on interest earning assets (5.60% in 2002 and 5.34% in 2001) increased by 26basis points in 2002 from 2001, principally because of a reduction of rates paid on deposits. 

The Company’s operational results depend primarily on the earnings of the Bank. Itsearnings depend to a large degree on net interest income, which is the difference between the interest income received from itsinvestments (such as loans, investment securities, federal funds sold, etc.) and the interest expense, which is paid on depositsand other liabilities.

The banking industry uses two key ratios to measure relative profitability of net interestincome. The net interest rate spread measures the difference between the average yield on interest earning assets and the averagerate paid on interest bearing liabilities. The interest rate spread eliminates the impact of non-interest bearing deposits andgives a direct perspective on the effect of market interest rate movements. The net interest margin is defined as net interestincome as a percent of average total interest earning assets and takes into account the positive impact of investingnoninterest-bearing deposits.

The net interest spread (on a tax equivalent basis) was 4.92% in 2003, 5.18% in 2002 and4.60% in 2001, while the net interest margin (on a tax-equivalent basis) was 5.23%, in 2003, 5.60% in 2002 and 5.34% in2001.

The following table shows, for the past three years, the relationship between interestincome and interest expense and the average balances of interest earning assets and interest bearing liabilities on a taxequivalent basis.

14
Table of Contents

**Table 1Average Consolidated Balance Sheets and Net Interest Analysis on a Tax EquivalentBasis***(in thousands)*
  
2003

2002

2001
  
Balance

Interest

AverageYield/

Balance

Interest

AverageYield/

Balance

Interest

AverageYield/

Interest earnings assets:
          
   Loans (including loan fees)

$

231,978

16,684

7.19%

205,724

16,456

8.00%

165,492

16,015

9.68%

   Investment securities:

 
   
   

   

   

   

   

  

       Taxable

 

30,416

1,403

4.61%

32,946

1,713

5.20%

29,891

1,864

6.24%

       Tax exempt

 

11,724

782

6.67%

11,204

788

7.03%

10,246

760

7.42%

Federal funds sold

 

    6,502

       72

1.11%

   4,849

       84

1.73%

  16,548

     620

3.75%
     
Total interest earning assets

 

280,620

18,941

6.75%

254,723

19,041

7.48%

222,177

19,259

8.67%
        
Other non-interest earnings assets

 

  26,522
   
  22,791

 

 

18,268

 

 
        
               Total assets

$

307,142
  
277,514

 
 
240,445

  

 
        
Liabilities and stockholders’ equity:
        
Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

   Deposits:

 

 

 

 

 

 

 

 

 

 

       Interest-bearing demand and savings

$

89,255

550

.62%

79,721

755

.95%

66,251

1,212

1.83%

       Time

 

111,397

2,976

2.67%

104,109

3,554

3.41%

100,312

5,637

5.62%

FHLB advances

 

9,943

260

2.61%

5,195

130

2.50%

952

53

5.57%

Long-term debt

 

6,968

342

4.90%

4,256

119

2.80%

       42

3

7.14%

Federal funds purchased and   securities sold under   repurchase agreements
 
15,084

140

.93%

  14,236

    206

1.45%

  13,887

   482

3.47%
     
               Total interest-bearing liabilities

 

232,647

4,268

1.83%

207,517

4,764

2.30%

181,444

7,387

4.07%
        
Non-interest bearing deposits

 

42,672
  
38,561

 

 

30,784

 

 

Other liabilities

 

2,203
  
4,396

 

 

1,506

 

 

Stockholders’ equity

 

  29,620

 
 
 27,040

 

 

  26,711

 

 
        
Total liabilities and stockholders’ equity

 $
307,142

 
 
277,514

 

 

240,445

 

 
        
Excess of interest-earning assets over interest-bearing liabilities

$

    47,973
  
   47,206

 

 

   40,733

 

 
        
Ratio of interest-earning assets to interest-bearing liabilities
 
120.62%  
  
122.75%
  
122.45%
          
Net interest income

$
 
14,673
 
 

14,277

 

 

11,872

 
        
Net interest spread

 
  
4.92%

 

 

5.18%

 

 

4.60%
        
Net interest margin on interest earning assets
   
5.23%
  
5.60%
  
5.34%
        
                               

15
Table of Contents

Non-accrual loans and the interest income that was recorded on these loans, if any, areincluded in the yield calculation for loans in all periods reported.   Loan fees for 2003, 2002 and 2001 were $2.2million,  $2.5 million and $2.1 million, respectively.

Tax-exempt interest income is calculated on a tax equivalent basis.

The following table shows the relative impact on net interest income of changes in theaverage outstanding balances (volume) of interest earning assets and interest bearing liabilities and the rates earned and paid bythe Company on such assets and liabilities. Variances resulting from a combination of changes in rate and volume are allocated inproportion to the absolute dollar amounts of the change in each category.

**Table 2Changes in Interest Income and Expense on a Tax Equivalent Basis***(in thousands)*
  
Increase (decrease) due to changes in:  
2003 over 2002 
2002 over 2001
     
Volume
    
Rate
    
Total
    
Volume
    
Rate
    
Total

Interest income on:
            
Loans (including loan fees)

$

1,089 

 

(861)

 

228 

 

3,499 

 

(3,058)

 

441 

Investment securities:
            
Taxable
 
(126)
 
(184)
 
(310)
 
178 
 
(329)
 
(151)

Tax exempt
 
53 
 
(59)
 
(6)
 
69 
 
(41)
 
28 

Federal funds sold
 
  206 
 
  (218)
 
  (12)
 
  (304)
 
  (232)
 
(536)

Total interest earning assets

 
1,222 

 
(1,322)

 
  (100)

 
3,442

 
(3,660)

 
(218)

Interest expense on:
            
Deposits:
            
Interest‐bearing demand and savings
 
107 
 
(312)
 
(205)
 
211 
 
(668)
 
(457)

Time
 
274 
 
(852)
 
(578)
 
206 
 
(2,289)
 
(2,083)

FHLB advances
 
124 
 
6 
 
130 
 
120 
 
(43)
 
77 

Long‐term debt
 
102 
 
121 
 
223 
 
119 
 
(3)
 
116 

Federal funds purchased and securities sold   under repurchase agreements
 
    13 
 
   (79)
 
  (66)
 
    12 
 
  (288)
 
  (276)

Total interest‐bearing liabilities

 
  620 

 
(1,116)

 
  (496)

 
  668 

 
(3,291)

 
(2,623)

Increase (decrease) in net interest income

$

  602 

 

  (206)

 

396 

 

2,774 

 

  (369)

 

2,405 

Other operating income for 2003 decreased by $160,000 or (4.16%) to $3.7 million comparedto $3.8 million for 2002. The decrease in other operating income is primarily attributable to the decrease in net gains on sales ofsecurities in 2003 of $615,000 (72.51%), which is related to the decreased amount of investment securities that were sold in 2003compared to 2002. Excluding the securities gains for 2002 and 2003, other operating income increased by $455,000 (15.20%). Thisincrease is primarily attributable to the increase in the gain on mortgage loan sales, as well as an increase in service chargerevenue. The gain on mortgage sales amounted to $467,000, which is an increase of $180,000 (62.53%) over the $287,000 reported for2002. The gain is primarily related to increased volume of mortgage loans experienced in 2003 over 2002. Service charge revenue for2003 amounted to $2,186,000, which represents an increase of $131,000 (6.37%) over the $2,055,000 reported for 2002. This increasein service charge revenue is primarily due to a full year of processing the accounts added in the acquisition ofACB. 

16
Table of Contents

Total other operating expenses increased by $814,000 (7.51%) in 2003 over 2002. Theincrease is attributable to salaries and employee benefit costs and miscellaneous expenses. Salaries and employee benefit costsamounted to $6.6 million in 2003, a $231,000 (3.63%) increase over the $6.4 million reported in 2002. The increase in personnelcosts was held to a minimum despite the additional costs associated with the ACB acquisition. Miscellaneous expensesincreased to $3.0 million for 2003, a $600,000 (24.51%) increase over 2002. The increase includedcosts associated with two major projects, an imaging system conversion and an ATM and debit card conversion as well as costsrelated to a full year of processing at ACB. Some of the specific increases included $98,000 for ATM and debit card expenses, asingle deposit fraud incident of $80,000, postage increase of $61,000, data processing increase of $50,000 and advertising increaseof $35,000.

Income tax expense expressed as a percentage of 2003 pre-tax earnings was 31% versus 34%in 2002 primarily due to the receipt of state tax credits of approximately $130,000 for new technology training.

Other operating income in 2002 of $3.8 million increased from 2001 by $1.1 million or39.5% primarily due to net gains on sales of securities and an increase in service charges associated with a larger number ofdeposit accounts due in part to the acquisition of ACB.

Total other operating expenses increased by $1.2 million (12.9%) in 2002 over 2001. Salary and employee benefits increased $597,000 as a result of an increase in the number of employees due to the acquisition ofACB.  Occupancy expense increased $412,000 (25.5%) in 2002 from 2001 primarily due to the increase in lease expense of $77,000on the leased offices acquired in the ACB purchase as well as increased depreciation on furniture and equipment of $114,000. Miscellaneous operating expenses increased $229,300 in 2002 primarily due to the acquisition of ACB.

**Balance Sheet Review**During 2003, average total assets increased $29.6 million (10.7%) over 2002. Averagedeposits increased $20 million (9.4%) in 2003 over 2002. Average loans increased $26.2 million (12.8%) in 2003 over 2002. Theacquisition of ACB is the primary contributor to these increases.  During 2002, average total assets increased $37.1 million(15.4%) over 2001. Average deposits increased $25 million (12.7%) in 2002 over 2001. Average loans increased $40.2 million (24.3%)in 2002 over 2001.

Total assets at December 31, 2003, were $302 million, representing a $545,000 (0.2%)increase from December 31, 2002. Total deposits increased $4.8 million (2.1%) from 2002 to 2003 while total gross loans decreased$886,000 (0.4%) during 2003. Time deposits increased $280,000 from 2002 to 2003 while all other deposit accounts increased $4.6million in 2003.

Total assets at December 31, 2002, were $301.5 million, representing a $55 million (22.3%)increase from December 31, 2001. Total deposits increased $30.8 million (15.2%) from 2001 to 2002 while total gross loans increased$58.5 million (33.5%) during 2002. Time deposits increased $10.9 million from 2001 to 2002 while all other deposit accountsincreased $19.9 million in 2002. The acquisition of ACB was the primary reason for these increases.

**Investments**The investment portfolio consists of debt securities and to a lesser extent equitysecurities, and provides the Company with a source of liquidity and a long‐term, relatively stable source of income.Additionally, the investment portfolio provides a balance to interest rate and credit risk in other categories of the balance sheetwhile providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge asrequired collateral for certain deposits.

17
Table of Contents

**Table 3Investment Portfolio**(*in thousands*)

The following table shows the carryingvalue of the Company’s securities, by security type, as of December 31, 2003,2002 and 2001:   

 

 

 

       

 

        

 

**Available for Sale**

 

2003

 

2002

 

2001

United States treasuries and agencies

$

11,014
 
10,483

 

7,121

State, county and municipal

 

14,205
 
12,884

 

12,491

Mortgage-backed securities

 

9,453
 
10,699

 

13,990

Corporate securities
 
3,658
 
5,020
 
4,928

Equity securities

 

991
 
1,055
 
1,543

 

$

39,321
 
40,141
 
40,073

**Other Investments**

$

1,255
 
1,275

 

848

                                                                               

 

 

 

 

 

 

The following table presents the expected maturity of the total debt securities bymaturity date and average yields based on amortized cost (for all obligations on a fully taxable basis, assuming a 34% tax rate) atDecember 31, 2003. The composition and maturity/repricing distribution of the securities portfolio is subject to change dependingon rate sensitivity, capital and liquidity needs.

**Table 4Expected Maturity of Securities**(*in thousands*)

   

  

  

    

  

   

  
   
  

 

Maturities at December 31, 2003

 

United States Treasuries and Agencies

 

State, County and Municipal

   

Mortgage- Backed Securities
 
Corporate Securities

Weighted Average Yields

Within 1 year

$

-

 
760

 
47

 
-

6.08%

After 1 through 5 years

  

5,766
 
1,359
 
8,583
 
2,852

5.21%

After 5 through 10 years

  

4,977
 
9,379
 
705
 
483

5.55%

After 10 years

  

-
 
1,999
 
-
 
-

6.54%

Totals

$

10,743
 
13,497
 
9,335
 
3,335

         5.48%

 

 

 

 

 

 

 
 
 

 

Mortgage backed securities are included in the maturities categories in which they areanticipat­ed to be repaid based on scheduled maturities and yields on tax exempt securities are calculated on a tax equivalentbasis.

**Table 5Loan Portfolio**(*in thousands*)

The following table presents loans bytype at the end of each of the last five years. 
  
 December 31,
 
 

2003
    
2002

     

2001

     

2000

     

1999

Commercial

$

145,669 

 
139,442 

 

98,083 

 

88,997 

 

85,784 

Commercial construction

 

25,145 
 
25,960 

 

17,534 

 

12,396 

 

7,001 

Commercial accounts receivable

 

4,368 
 
8,584 

 

7,506 

 

11,337 

 

13,970 

Consumer, including equity lines ofcredit

 

51,195 
 
52,456 

 

44,331 

 

43,300 

 

40,542 

Mortgages

 

6,179 
 
   7,000 

 

   7,447 

 

   8,996 

 

   9,099 

 

 

232,556 
 
233,442 

 

174,901 

 

165,026 

 

156,396 

Less:    Allowance for loan losses

 

(3,500)
 
(3,275)

 

(1,879)

 

(2,137)

 

(2,589)

              Unearnedinterest and fees

 

(225)
 
(248)

 

(371)

 

(375)

 

  (320)

      Loans, net
$
228,831 
 
229,919 
 
172,651 
 
162,514 
 
153,487            
18
Table of Contents

The following table sets forth the maturity distribution and interest rate sensitivity forloans as of December 31, 2003.

**Table 6Loan Portfolio Maturity**(*in thousands*)  

                      

   

Commercial

     

Construction

     

Commercial A/R

     

Consumer

     

Mortgages, including equity lines  of credit

     

Total

Within 1 year

$

81,564   
 
24,144 
 
1,358
 
36,641
 
2,640
 
146,347

1 to 5 years

 

62,457   
 
1,001 
 
3,010
 
12,506
 
2,934
 
81,908

After 5 years

 

1,648   
 
- 
 
-
 
2,048
 
605
 
4,301
 
$

145,669
 
25,145 
 
4,368
 
51,195
  
6,179
 
232,556

 
 
     

Fixed Interest Rates

        

Variable Interest Rates

        

Total

Commercial:

 

 

 

 

 

 

   Within 1 year

 $

27,639
  
53,925
 
81,564

   1 to 5 years

 

60,879
  
1,578
 
62,457

   After 5 years

 

1,648
  
-
 
1,648

 

 

90,166
  
55,503
 
145,669

Construction:

 
      
   Within 1 year

 

20,150
  
3,994
 
24,144

   1 to 5 years

 

-
  
1,001
 
1,001

   After 5 years

 

-
 
-
 
-

 

 

20,150
  
4,995
 
25,145

Commercial A/R:

 
      
Within 1 year

 

1,358
  
-
 
1,358

1 to 5 years

 

3,010
  
-
 
3,010

After 5 years

 

-
  
-
 
-

 

 

4,368
  
-
 
4,368

Consumer:

 
      
Within 1 year

 

12,338
  
24,303
 
36,641

1 to 5 years

 

12,506
  
-
 
12,506

After 5 years

 

2,048
  
-
 
2,048

 

 

26,892
 
24,303
 
51,195

Mortgages:

 
     
Within 1 year

 

-
 
2,640
 
2,640

1 to 5 years

 

90
 
2,844
 
2,934

After 5 years

 

605
 
-
 
605

 

 

695
 
5,484
 
6,179

 

 $

142,271
 
90,285
 
232,556

The provision for loan losses in 2003 was $636,000 compared to $1,071,000 in 2002. The provision for loan losses continues to reflect management’s estimate of potential loan losses inherent in the portfolioand the creation of an allowance for loan losses adequate to absorb such losses. The allowance for loan losses representedapproximately 1.51% and 1.40% of total loans outstanding at December 31, 2003 and 2002, respectively. Net charge‐offs were$411,000 and $193,000 during 2003 and 2002, respectively. The charge-offs were larger in 2003 due to an increase in consumerbankruptcies throughout the year. Management believes that these levels of allowance are appropriate based upon the Company’sloan portfolio and the current economic conditions.

19
Table of Contents

The provision for loan losses in 2002 was $1,071,000 compared to $672,000 in 2001. The allowance for loan losses represented approximately 1.40% and 1.10% of total loans outstanding at December 31, 2002 and 2001,respectively. Net charge‐offs were $193,000 and $929,000 during 2002 and 2001, respectively. The spike in 2001 is primarilyattributable to the charge-off of one loan for $659,000.

The Company has a dedicated loan review function. All loans of $50,000 or more arereviewed annually and placed in various loan grading categories which assist in developing lists of potential problem loans. Theseloans are regularly monitored by the loan review function to ensure early identification of repayment problems so that adequateallowances can be made through the provision for loan losses. The formal allowance for loss adequacy test is performed at eachcalendar quarter end. Specific amounts of loss are estimated on problem loans and historical loss percentages are applied to thebalance of the portfolio using certain portfolio stratifications. Additionally, the evaluation takes into consideration suchfactors as changes in the nature and volume of the loan portfolio, current economic conditions, regulatory examination results, andthe existence of loan concentrations.

Management’s judgment in determining the adequacy of the allowance is based onevaluations of the collectibility of loans. These evaluations take into consideration such factors as changes in the nature andvolume of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay, overall portfolioquality, and review of specific problem loans.  In determining the adequacy of the allowance for loan losses, management usesa loan grading system that rates loans in six different categories.  Grades four though six are assigned allocations of lossbased on management’s estimate of potential loss which is generally based on discounted collateral deficiencies or losspercentages by grade used by federal bank regulators.  Loans graded one through three are stratified by type and allocatedloss ranges based on historical loss experience for the strata.  The combination of these results are compared quarterly tothe recorded allowance for loan losses and material differences are adjusted by increasing or decreasing the provision for loanlosses.  Management uses a devoted internal loan reviewer who is independent of the lending function to challenge andcorroborate the loan grading system and provide additional analysis in determining the adequacy of the allowance for loan lossesand the future provisions for estimated loan losses.

Management believes that the allowance for loan losses is adequate. While management usesavailable information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economicconditions. In addition, regulators, as an integral part of their examination process, periodically review the Company’sallowance for loan losses.  Such regulators may require the Company to recognize additions to the allowance based on theirjudgments of information available to them at the time of their examination. 

For year-end 2003 the allowance for loan losses was allocated as follows*(in thousands)*:
     
Allocation ofAllowance forLoan Losses
     
% ofAllowance forLoan Losses
     
% of Loans by Category toTotal Loans

Commercial

 
$

2,365

 
 
 

67.6
%
 
 
 

62.6
%
Commercial Construction
  
69
  
 
1.9
%  
 
10.8%
Commercial Accounts Receivable
   
104
  
 
3.0
%   
1.9
%
Consumer
  
351
  
 
10.0
%  
 
22.0%
Mortgages
  
37
  
 
1.1
%
   
2.7
%
Cross-allocated
  
  574
  
   
16.4
%  
       

-
 
Total

 
$

3,500

 
 
 

100.0
%
 
 
 

100.0
%
The Company did not allocate the allowance for loan losses to various loan categories in2002. The entire allowance was available to absorb losses from any and all loans. 

20
Table of Contents

The following table presents a summary of changes in the allowance for loan losses foreach of the past five years.

**Table 7Allowance for Loan Losses**(*in thousands*)  

 

 

  
 
 

 

December 31,

 

 

2003
 
2002

      

2001

    

2000

    

1999

Balance at beginning of year

$

3,275

 
1,880

  

2,137

 

2,589

 

1,708

Charge–offs:

 
  
 

  

 

 

 

 

 

   Commercial

 

158
 
129

  

829

 

1,083

 

270

   Real estate–mortgage

 

92
 
40

  

14

 

33

 

41

   Installment loans to individuals

 

510
 
308

  

413

 

320

 

528

 

 

760
 
477
 
1,256

 

1,436

 

839

Recoveries:

 
  
 

  

 

 

 

 

 

   Commercial

 

152
 
147

  

136

 

56

 

47

   Real estate–mortgage

 

-
 
15

  

15

 

13

 

5

   Installment loans to individuals

 

197
 
122

  

176

 

182

 

208

 

 

349
 
284

  

327

 

251

 

260

Net charge–offs

 

411
 
193

  

929

 

1,185

 

579

Additions charged to operations

 

636
 
1,071

  

672

 

733

 

1,460

Allowance acquired from purchase acquisition

 

-
 
517

  

-

 

  -

 

-

 

 

636
 
1,588

  

672

 

733

 

1,460

Balance at end of year

$

3,500
 
3,275

  

1,880

 

2,137

 

2,589

Ratio of net charge–offs during the period to average loans outstanding during the period

 
  
 

 

 

 

 

 

 

 

.17%
 
.09%

 

.56%

 

.72%

 

.38%

  

   
         
   

  

The following table summarizes past due and non‐accrual loans, other real estate andrepossessions, and income that would have been reported on non‐accrual loans for each of the past five years:

**Table 8Non-Performing Assets**(*in thousands*)

 

 

 

 

 

 December 31,

 

 

2003
 
2002

    

2001

    

2000

    

1999

Other real estate and repossessions

$

-

 
-

 

-

 

-

 

-

Accruing loans 90 days or more past due

$

-
 
33

 

186

 

142

 

281

Non–accrual loans

$

2,614
 
3,534

 

1,177

 

6,685

 

1,342

Interest on non–accrual loans whichwould have been reported

 $

923
 
842

 

375

 

319

 

20

21
Table of Contents

The total of non-accrual loans decreased 26% or $920,000 from $3.5 million at December 31,2002 to $2.6 million at December 31, 2003.  The decrease is the net result of the following changes:

Balance at December 31, 2002

$

3,534,800 

Loans reclassified to non-accrual in 2003
 
816,300 

Loans with improved performance and placed back on accrual     status during 2003
 
(152,200)

Payments received on non-accrual loans during 2003
 
(1,286,000)

Non-accrual loans that were charged-off during 2003
 
(298,400)

 
$

2,614,500

The balance of non-accrual loans at December 31, 2003 consists of thirteen (13) borrowingrelationships, two of which total $2,499,500.  One loan totaling $1.9 million to a health care company is collateralized bycommercial real estate.    The other loan relationship totaling approximately $600,000 to a construction enterpriseis collateralized by commercial real estate, accounts receivable and equipment used in the business.   A total of $895,000 ofvaluation allowances for non-accrual loans is included in the allowance for loan losses at December 31, 2003.  There were norelated party loans in the non-performing loan totals at December 31, 2003 or 2002.

While there may be additional loans in the portfolio that may become classified asconditions indicate, management is not aware of any potential problem or restructured loans that are not disclosed in the tableabove.       

A loan is placed on non‐accrual status when, in management’s judgment, thecollection of interest appears questionable. As a result of management’s ongoing review of the loan portfolio, loans areclassified as non‐accrual generally when they are past due in principal or interest payments for more than 90 days or it isotherwise not reasonable to expect collection of principal and interest under the original terms. Exceptions are allowed for 90 daypast due loans when such loans are well secured and in process of collection. Generally, payments received on non‐accrualloans are applied directly to principal.

**Deposits**Time deposits of $100,000 and greater totaled $31.2 million at December31, 2003, compared with $32.8 million at year-end 2002. The Bank had no brokered CD’s outstanding during 2003 or 2002. The following table sets forth the scheduled maturities of time deposits of $100 thousand and greater at December 31,2003.

**Table 9Deposits**(*in thousands*) 

Within 3 months

$

9,812

After 3 through 6 months
 
3,530

After 6 through 12 months
 
7,330

After 12 months
 
10,554

      Total

$

31,226

The Bank also utilizes retail repurchase agreements and Federal funds purchased forshort-term borrowings.  The retail repurchase agreements are agreements with Bank customers to sweep excess demand depositfunds to an overnight account that bears interest at the Bank’s 91-day time deposit rate.  The following table setsforth certain information regarding Federal funds purchased and securities sold under repurchase agreements for the periodsindicated. 

**Table 10Short-term Borrowings***(in thousands)*
  
December 31,
  
2003

2002

Average balance outstanding

$

15,084     

14,236    

Maximum amount outstanding at any month-end during the year

$

17,476     

17,193    

Balance outstanding at end of year

$

17,476     

16,045    

Weighted average interest rate during the year
 
.93%     

1.45%    

Weighted average interest rate at end of year
 
.93%     

1.00%    

**Liquidity**The Bank must maintain, on a daily basis, sufficient funds to cover the withdrawals fromdepositors’ accounts and to supply new borrowers with funds. To meet these obligations, the Bank keeps cash on hand,maintains account balances with its correspondent banks, and purchases and sells federal funds and other short-term investments.Asset and liability maturities are monitored on a regular basis in an attempt to match these to meet liquidity needs. It is thepolicy of the Bank to monitor its liquidity to meet regulatory requirements and their local funding requirements.

22
Table of Contents

The Bank maintains relationships with correspondent banks that can provide funds to it onshort notice, if needed. Presently, the Bank has arrangements with a commercial bank for short term unsecured Federal fundspurchased lines up to $10 million.  Under agreements with the Federal Home Loan Bank, the Bank could borrow an additional$12.4 million at December 31, 2003.  Cash and cash equivalents increased $3.6 million to a total $16.9 million at December 31,2003, as cash flows used by financing activities were out-paced by amounts provided by investing and operating activities. Cashinflows from operations totaled $6.7 million in 2003, while outflows from financing activities totaled $3.3 million. Included infinancing activities were net repayments on notes payable of $554,000 and net FHLB borrowing repayments of $6.9 million whichoffset the $4.8 million increase in deposits. Additionally, $1.1 million of dividends paid to stockholders and $1 million for therepurchase and retirement of common stock were used by financing activities. 

Investing activities provided $213,000 of cash and cash equivalents as proceeds fromdisposals of investments were offset by the repurchase of new investments.  Other investing activities such as additions topremises and equipment were offset by net repayments of loans and maturities of interest bearing deposits with otherbanks.

See the consolidated statements of cash flows in the consolidated financial statements fora more complete analysis of cash flows.

**Capital Resources**

The Company continues to maintain adequate capital ratios. The following tables presentthe Company’s regulatory capital position at December 31, 2003.

**Table 11Capital Ratios**
 
Actual as ofDecember 31, 2003

Tier 1 Capital

 
9.64

 %
Tier 1 Capital minimum requirement
 
  4.00
 %
Excess

 
  5.64

 %
Total Capital

 
10.90

 %
Total Capital minimum requirement
 
  8.00
 %
Excess

 
  2.90

 %

Tier 1 Capital to adjusted total assets
   
  (“Leverage Ratio”)
 
8.08
 %
Minimum leverage requirement
 
  4.00
 %
Excess

 
4.08

 %
For a more complete discussion of the actual and required capital ratios of the Companyand the Bank, see Note 17 to the consolidated financial statements.

During 2003, 2002, and 2001 the Company redeemed and retired 16,326, 41,065 and 7,150shares, respectively, of its $1 par value common stock, for a total purchase price of $1,025,414, $2,133,645 and $320,250,respectively. 

Average equity to average assets was 9.64% in 2003, 9.74% in 2002 and 11.11% in 2001. Theratio of dividends declared to net earnings was 28.1% in 2003 compared to 27.11% and 37.26% in 2002 and 2001,respectively.

**Asset/Liability Management**It is the Company’s objective to manage assets and liabilities to provide asatisfactory, consistent level of profitability within the framework of established cash, loan, investment, borrowing and capitalpolicies. Certain officers are charged with the responsibility for monitoring policies and procedures that are designed to ensureacceptable composition of the asset/liability mix. It is the overall philosophy of management to support asset growth primarilythrough growth of core deposits, which include deposits of all categories made by local individuals, partnerships and corporations.The objective of the policy is to control interest sensitive assets and liabilities so as to minimize the impact of substantialmovements in interest rates on earnings.

23
Table of Contents

The asset/liability mix is monitored on a regular basis. A report reflecting the interestsensitive assets and interest sensitive liabilities is prepared and presented to the Board of Directors on a monthly basis. One method to measure a bank’s interest rate exposure is through its repricing gap. The gap is calculated by taking allassets that reprice or mature within a given timeframe and subtracting all liabilities that reprice or mature within thattimeframe. The difference between these two amounts is called the “gap”, the amount of either liabilities or assetsthat will reprice without a corresponding asset or liability repricing.

A negative gap (more liabilities repricing than assets) generally indicates that thebank’s net interest income will decrease if interest rates rise and will increase if interest rates fall. A positive gapgenerally indicates that the bank’s net interest income will decrease if rates fall and will increase if ratesrise.

The following table summarizes the amounts of interest‐earning assets andinterest‐bearing liabilities outstanding at December 31, 2003, that are expected to mature, prepay or reprice in each of thefuture time periods shown. Except as stated below, the amount of assets or liabilities that mature or reprice during a particularperiod was determined in accordance with the contractual terms of the asset or liability.  Adjustable rate loans are includedin the period in which interest rates are next scheduled to adjust rather than in the period in which they are due, and fixed rateloans and mortgage‐backed securities are included in the periods in which they are anticipated to be repaid based onscheduled maturities. The Company’s savings accounts and interest‐bearing demand accounts (NOW and money market depositaccounts), which are generally subject to immediate withdrawal, are included in the “Three Months or Less” category,although historical experience has proven these deposits to be more stable over the course of a year.

**Table 12Interest Rate Gap Sensitivity**(*in thousands*)  
  
At December 31, 2003Maturing or Repricing in      
ThreeMonths orLess
     
FourMonths to12 Months
     
1 to 5Years
     
Over 5Years
     
Total
    
Interest‐earning assets:
           
   Federal funds sold

 $
99 
 
-
 
-
 
-
 
99

   Investment securities
 
250 
 
557
 
18,289
 
20,225
 
39,321

   Mortgage loans held for sale
 
843 
 
-
 
-
 
-
 
843

   Loans
 
108,367 
 
25,241
 
91,302
 
3,921
 
228,831

   Other investments
 
- 
 
  -
 
 -
 
  1,255
 
1,255

Total interest‐bearing assets

$

109,559 

 
25,798

 
109,591

 
25,401

 
270,349

Interest‐bearing liabilities:
          
   Deposits:
  
 
       
       Demand and savings

$

88,117 
 
-
 
-
 
-
 
88,117

       Time deposits
 
34,397 
 
45,026
 
32,027
 
-
 
111,450

       Securities sold under repurchase            agreements and Fed funds            purchased
 
17,476 
 
-
 
-
 
-
 
17,476

   FHLB Advances
 
1,031 
 
94
 
6,500
 
-
 
7,625

   Note payable
 
186 
 
557
 
  2,973
 
2,973
 
6,689

Total interest‐bearing liabilities

$

141,207 
 
45,677
 
41,500
 
  2,973
 
231,357

Interest sensitive difference per period

$

(31,648)

 
(19,879)

 
68,091

 
22,428

38,992

Cumulative interest sensitivity difference

$

(31,648)

 

(51,527)

 

16,564

 

38,992
 
Cumulative difference to total assets
 
(10.5%)

 

(17.1%)

 

5.5%

 

12.9%
 
At December 31, 2003, the difference between the Company’s liabilities and assetsrepricing or maturing within one year was $51.5 million. Due to an excess of liabilities repricing or maturing within one year, arise in interest rates would cause the Company’s net interest income to decline.

24
Table of Contents

The internal model used by management to monitor interest rate gap sensitivity makesassumptions based on managements’ experience about the composition of the banks deposit and loan portfolios as well ashistorical trends.  For example, fixed rate loans tend to payoff or reprice in a falling rate environment faster than thematurity schedule would suggest due to the ability of a customer to obtain favorable rates elsewhere. Additionally, a modest risein interest rates in one category of deposit accounts will not entice all account holders to move to a different account type orrequire management to raise rates in all other categories. Compared to Table 12, the internal model which is reviewed quarterly bymanagement, shows the bank more evenly balanced in the 12 month and five year time horizons and as asset sensitive in the underthree month time frame.  Under this scenario a rise in interest rates would cause net interest income to increase.

Certain shortcomings are inherent in the method of analysis presented in the foregoingtable. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react indifferent degrees or at different points in time to changes in market interest rates. Additionally, certain assets, such asadjustable‐rate mortgages, have features that restrict changes in interest rates, both on a short‐term basis and overthe life of the asset. Changes in interest rates, prepayment rates, early withdrawal levels and the ability of borrowers to servicetheir debt, among other factors, may change significantly from the assumptions made in the table.

**Off-Balance Sheet Arrangements**In the normal course of our business, we enter into certain off-balance sheet transactionsthat are connected with meeting the financing needs of our customers.  These off-balance sheet arrangements consist of lettersof credit and commitments to extend credit.  In notes 10 and 11 to our consolidated financial statements, we discuss in detailoff-balance sheet arrangements.

**Inflation**Inflation impacts the growth in total assets in the banking industry and causes a need toincrease equity capital at higher than normal rates to meet capital adequacy requirements. The Company copes with the effects ofinflation through the management of its interest rate sensitivity gap position by periodically reviewing and adjusting its pricingof services to consider current costs, and through managing its level of net income relative to its dividend payoutpolicy.

**Recent Accounting Pronouncements**In July 2001, the FASB issued Statements of Financial Accounting Standards No. 141, “Business Combinations” and No. 142, “Goodwill and Other Intangible Assets.” These standards change the accounting for business combinations by, among other things, prohibiting the prospective use of pooling-of-interests accounting and requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life created by business combinations accounted for using the purchase method of accounting. Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. The new standards generally were effective in the first quarter of 2002. The provisions of these statements were applied in the business combinations with ACB.

Accounting standards that have been issued or proposed by the Financial Accounting Standards Board (FASB) and other standard setting entities that do not require adoption until a future date are either not directly applicable at the present time or are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

25
Table of Contents

**Item 7.  FinancialStatements**

               The financial statements and the report of independent public accountants are included in this report beginning at pageF-1.

**Item 8.  Changes in andDisagreements with Accountants on Accounting and Financial Disclosure**

               For the years ended December 31, 2003 and December 31, 2002, the accounting firm of Porter Keadle Moore, LLP was the principalaccountant for the Company.  The Company had no disagreements with its accountants on any matters of accounting principle orpractices or financial statement disclosure.

**Item 8A.  Controls and Procedures**

               Our management, including the chief executive and chief financial officers, supervised and participated in an evaluation of ourdisclosure controls and procedures (as defined in federal securities rules) and pursuant to such evaluation, concluded that ourdisclosure controls and procedures are effective as of December 31, 2003.  Disclosure controls and procedures are thosecontrols and procedures which ensure that information required to be disclosed in this filing is accumulated and communicated tomanagement and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and ExchangeCommission rules and regulations.

               There were no significant changes in our internal controls or in other factors that could significantly affect these controlssubsequent to the date of their evaluation.
 
26
Table of Contents

**PART III**

**Item 9.**

**Directors, Executive Officers, Promoters and Control Persons; Compliance with Section16(a) of the Exchange Act; and Code of Ethics**

**The Board of Directors**

               The following table sets forth for each director of the Company as of February 26, 2004, (a) the person’s name, (b) his ageat December 31, 2003, (c) the year he was first elected as a director of the Company; and (d) his positions with the Company andthe Bank, other than as a director, his principal occupation and business experience for the past five years, and otherdirectorships.

**Name**

**Age**

**Year First Elected**

**Position with Company; Principal Occupation;Business Experience; Directorships**

J. Henry Cheatham, III

53

1994

Private Investor

J. Gilliam Cheatham

51

1995

President of the 1888 Mills, a textile company

David G. Newton

55

1985

Real Estate Developer

John T. Newton, Jr.

57

1993

Chairman of the Board of the Company, Chairman of the Board of the Bank,Attorney, Newton & Howell, P.C.

J. Charles Copeland

42

2002

President and Chief Executive Officer of the Company and Chief ExecutiveOfficer, President and Director of the Bank

C. A. Knowles

71

1982

Marketing Advisor of the Company, Retired President of the Company and theBank, Director of the 1888 Mills.

               Directors are elected at each annual meeting of shareholders and hold office until the next annual meeting and until theirsuccessors are elected and qualified.  John T. Newton, Jr. and David G. Newton are brothers and are first cousins of J. HenryCheatham, III and James G. Cheatham, who are also brothers.  Charles A. Knowles, Jr. vice president of the Bank, is C.A.Knowles’ son.  There are no other family relationships among the directors and executive officers of theCompany.

27
Table of Contents

**Executive Officers**

               The following table sets forth for each named executive officer of the Company (a) the person’s name, (b) his age at December31, 2003, (c) the year he was first elected as an executive officer of the Company, and (d) his positions with the Company and theBank.

**Name**

**Age**

**Year First Elected**

**Principal Occupation; Business Experience**

Mark A. Flowers

48

2001

Assistant Treasurer of the Company since 2001, Senior Vice President of theBank since 2001, Principal Accounting and Financial Officer of the Company since  December 2000.

J. Charles Copeland

42

2002

President, Chief Executive Officer and Treasurer of the Company and Presidentof the Bank as of July 1, 2002.  

**Audit Committee and Audit Committee Financial Expert**

               The Company has an audit committee comprised of the following two individuals: John T. Newton, Jr. and David G. Newton.  TheCompany’s audit committee does not have a financial expert as such term is defined in Item 401(e) of SEC Regulation S-Bbecause the individuals who meet this definition are not readily available in the community in which the Company operates. Furthermore, the Company does not know of anyone who can serve on the Board of Directors and Audit Committee who would meet thisdefinition.

**Compliance with Section 16(a)**

**           **Pursuant to Section 16(a) of the Securities Exchange Act of 1934, each executive officer, director and beneficial owner of10% or more of the Company’s Common Stock is required to file certain forms with the Securities and Exchange Commission(“SEC”).  A report of beneficial ownership of the Company’s Common Stock on Form 3 is due at the time suchperson becomes subject to the reporting requirement and a report on Form 4 or 5 must be filed to reflect changes in beneficialownership occurring thereafter.  Based solely on a review of filings with the Securities and Exchange Commission and writtenrepresentations by each executive officer and director that no other reports were required, we believe that all of our directorsand executive officers have complied with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934,during fiscal 2003.

**Code of Ethics**

               The Company has adopted a code of ethics that applies to all employees of the Company, including the Company’s principalexecutive officer, principal financial officer and principal accounting officer. A copy of our Code of Ethics is attached asExhibit 14 to this Form 10-KSB.

**Item 10.****  Executive Compensation**

               The following table sets forth the annual compensation paid by the Company and its subsidiaries to certain of the Company’sexecutive officers whose cash compensation, including salary and bonus, exceeded $100,000.

 

28
Table of Contents

**SUMMARY COMPENSATION TABLE**

** **

** **

**Annual Compensation**

**Long-TermCompensation**

**All Other Compensation**

Name and PrincipalPosition

    Year

 Salary(1)

 Bonus

All Other AnnualCompensation

Securities Underlying Options/ SAR

 401KContributions(2)

Other(3)

J. Charles Copeland President of the Bank, President, Chief Executive Officer, and Treasurer of the Company 

2003

$165,400

$23,744

*

$13,120(4)

$17,875

1,080

2002

$136,950

$15,370

*

$8,948(4)

$15,175

1,080

2001

$121,850

$  7,500

*

-0-

$12,961

1,080

Christopher L. Hill Executive Vice President of the Bank, Commercial Loans

2003

$133,158

$12,310

*

-0-

$13,750

  1,080

2002

$119,752

$11,722

*

-0-

$13,107

1,080

2001

$112,223

$12,028

*

-0-

$12,450

1,080

James H. Smallwood Senior Vice President of the Bank, Mortgage Loans

2003

$85,126

$120,058

*

-0-

$19,395

  1,080

2002

$  77,296

$57,103

*

-0-

$13,142

1,080

2001

$  77,337

$33,548

*

-0-

$11,111

1,080

Arthur HammondSenior Vice President of the Bank, HenryCounty Executive

2003

$70,112

-0-

*

-0-

$9,382

127,220(5)

2002

N/A

N/A

N/A

N/A

N/A

N/A

2001

N/A

N/A

N/A

N/A

N/A

N/A

*Does not meet the Securities and Exchange Commission’s threshold fordisclosure

_____________________(1)  Includes Director’s fees, if any.(2)  Represents Company matching of 401(k) contributions.(3)  Reflects life insurance premiums.  (4)  This reflects the aggregate value of Mr. Copeland’s stock options based on the book value per share ofthe Company’s      Common Stock as of year-end of the year indicated.(5)  In addition to $720 in life insurance premiumspaid by the Company, Mr. Hammond’s amount includes $126,500      in payments made in connection with the Company’sacquisition of ACB, Mr. Hammond’s previous employer.

 

29
Table of Contents

The following table sets forth the number and potential realizable value of stock options granted in2003.

Option Grants in Last Fiscal Year

Name

No. of Securities Underlying Option/SARs  Granted(1) 

% of Total Options/SAR Granted to Employees in  Fiscal Year  

 Exercise or  Base Price  

 Expiration    Date    

J. Charles Copeland

320

100%

N/A*

12/31/04

*The exercise price for Mr. Copeland’s options is the book value per share of theCompany’s Common Stock as of the date Mr. Copeland exercises his options.

Option Exercises in 2003 and Year-End Option Values

               The following table sets forth the number and value of options exercised during 2003 by the named executive officers and the numberof shares covered by both exercisable and unexercisable options, including the value of these options as of December 31,2003:

 
Executive Officers 
SharesAcquired OnExercise (#) 
ValueRealized ($) 
Number ofUnexercised Optionsat December 31, 2003
  
Value ofUnexercised Optionsat December 31, 2003
      Exercisable Unexercisable 
Exercisable  
Unexercisable
J. Charles Copeland
 
232
 
$ 2,348
 
320
 
--
  
$ 13,120
 
--
*This reflects the aggregate value of Mr. Copeland’s options based on the book valueper share of the Company’s Common Stock at year end.
**Director Compensation**

               Each director of the Company receives a $1,600 annual retainer plus $300 per meeting attended for his service as a director of theCompany.  Each director of the Bank receives an annual retainer of $3,000 plus $300 per meeting attended for his service as adirector of the Bank and $150 for each Board committee meeting he attends.

**Item 11.  Security Ownershipof Certain Beneficial Owners and Management and Related Stockholder Matters**

**Principal Holders of Stock**

               The following table provides for each person who, to the best information and knowledge of the Company, beneficially owned 5% ormore of the outstanding shares of Common Stock as of  February 26, 2004, the following information: (a) the owner’s nameand address, (b) the number of shares of Common Stock owned, and (c) the  percentage such number represents of the outstandingshares of Company Common Stock.  Unless otherwise indicated, the listed owners are the record owners of, and have sole votingand investment powers over, their shares.

30
Table of Contents
 
Name and Address

Number of SharesBeneficially Owned

Percentage of Total(1)

David G. Newton

102,672(2)

14.36%

John T. Newton, Jr.

97,776(3)

13.67%

Victoria Newton Mooney

59,614(4)

8.33%

Jan Newton Miller

42,921(5)

6.00%

James G. Cheatham

51,600(6)

7.21%

John Henry Cheatham, III

41,176(7)

5.75%
 
(1)

The percentages shown are based on 714,878 shares of Common Stock outstanding on February26, 2004.

(2)

Includes (i) 17,553 shares held by Mr. David G. Newton as trustee for the benefit of hisniece and nephew, (ii) 13,244 shares in the name of the John T. Newton, Sr. Estate, of which Mr. David G. Newton serves asco-executor, and (iii) 1,714 shares held by Mr. David G. Newton as co-trustee under will for the benefit of Betty Newton.  Mr.David G. Newton’s address is 651 Brook Circle, Griffin, Georgia  30224.

(3)

Includes (i) 15,742 shares held by Mr. John T. Newton, Jr. as trustee for the benefit ofhis niece and nephew, (ii) 13,244 shares in the name of the John T. Newton, Sr. Estate, of which Mr. David G. Newton serves asco-executor, (iii) 250 shares owned by Mr. John T. Newton Jr.’s wife, as to which Mr. John T. Newton disclaims beneficialownership, and (iv) 1,714 shares held by Mr. John T. Newton, Jr. as co-trustee under will for the benefit of Betty Newton. Mr. John T. Newton’s address is 16 Stillwater Trace, Griffin, Georgia  30223.

(4)

Includes 12,884 shares held by Mrs. Victoria Newton Mooney as trustee for the benefitof her two nephews. Mrs. Victoria Newton Mooney’s address is 140 Peachtree Way NE Atlanta, GA 30305.

(5)

Mrs. Jan Newton Miller’s address is 46 A Marlin Lane Key Largo, FL 33037.

(6)

Includes 16,016 shares owned by his three children.  Mr. James G. Cheatham’saddress is 2761 Highway 16 West, Griffin, Georgia 30223.

(7)

Includes 6,024 shares owned by his son.  Mr. John Henry Cheatham’s address is2773 Hwy 16 West, Griffin, Georgia 30223. 

 

 

31
Table of Contents

**Stock Owned By Management**

               The following table provides for each director of the Company, each named executive officer, and for all directors and officers ofthe Company as a group, as of February 26, 2004, the following information: (a) the name of the named executive officer, director,or the number of persons in the group; (b) the number of shares of Common Stock beneficially owned by the named executive officer,director, or the group; and (c) the percentage such number represents of the outstanding shares of Common Stock.  Unlessotherwise indicated, the listed person is the record owner of, and has sole voting and investment powers over hisshares.

Name and Address

Number of Shares Beneficially Owned

Percentage of Total(1)

 

 

 

James G. Cheatham

51,600(2)               

7.21%     

John Henry Cheatham, III

41,176(3)               

5.75%     

David G. Newton

102,672(4)               

14.36%     

John T. Newton, Jr.

97,776(5)               

13.67%     

J. Charles Copeland*

850(6)               

   .11%     

C. A. Knowles*

920(7)               

.12%     

All directors and executive officers as a group (7 persons)

295,174                   

41.00%     

________________________*          Indicates less than one percent.

(1)

The percentages shown are based on 714,878 shares of Common Stock outstanding on February26, 2004, which includes, as to each person and group listed, the number of shares of Common Stock deemed owned by such holderpursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, assuming the exercise of options held by such holderthat are exercisable within 60 days of March 3, 2003.

(2)

Includes 16,016 shares held by his children.  Mr. James G. Cheatham’s addressis 2761 Highway 16 West, Griffin, Georgia 30223.

(3)

Includes 6,024 shares held by Mr. John Henry Cheatham as custodian for the benefit of hisson.  Mr. John Henry Cheatham’s address is 2773 Hwy 16 West, Griffin, Georgia 30223. 

(4)

Includes (i) 17,553 shares held by Mr.David G. Newton as trustee for the benefit of his niece and nephew, (ii) 13,244shares in the name of the John T. Newton, Sr. Estate, of which Mr. David G.Newton serves as co-executor, and (iii) 1,714 shares held by Mr. David G. Newtonas co-trustee under will for the benefit of Betty Newton.  Mr. David G.Newton’s address is 651 Brook Circle, Griffin, Georgia  30224.

(5)

Includes (i) 15,742 shares held by Mr. John T. Newton, Jr. as trustee for the benefit ofhis niece and nephew, (ii) 13,244 shares in the name of the John T. Newton, Sr. Estate, of which Mr. David G. Newton serves asco-executor, (iii) 250 shares owned by Mr. John T. Newton Jr.’s wife, as to which Mr. John T. Newton disclaims beneficialownership, and  (iv) 1,714 shares held by Mr. John T. Newton, Jr. as co-trustee under will for the benefit of Betty Newton.Mr. John T. Newton’s address is 16 Stillwater Trace, Griffin, Georgia  30223.

(6)

Includes currently exercisable options for 320 shares of Common Stock.  Mr.Copeland’s address is 106 Four Oaks Drive, Griffin, Georgia 30224.

(7)

Does not include 100 shares owned by Mr. Knowles’ wife, as to which Mr. Knowlesdisclaims beneficial ownership.  Mr. Knowles address is 1119 Pine Valley Road, Griffin, Georgia  30224.

32
Table of Contents

            The following tablegives information about the Company’s equity compensation awards.  The Company does not have any equity compensationplans.  This table reflects the Company’s sole equity compensation arrangement with its President and CEO, J. CharlesCopeland, providing for the award of options to purchase the Company’s Common Stock during calendar year 2004.

Equity Compensation Plan Information

** **PlanCategory

(a) Number of securities to be issued upon exercise of outstanding options,warrants and rights

(b) Weighted-average exercise price of outstanding options, warrants  and rights

(c)Number of securities remaining available for future issuance under equity compensation  plans (excluding securities   reflected in column (a))

   

  
  
Equity compensation plans approved by stockholders

-0-

-0-

-0-

Equity compensation plans not approved by stockholders

320

N/A

N/A

Total

320

N/A

N/A

____________________The table sets forth options granted to J. Charles Copeland by the Executive Committee of the Board of Directors.  Such grantswere specific to Mr. Copeland.  The exercise price for Mr. Copeland’s options is the book value per share of theCompany’s Common Stock as of the date Mr. Copeland exercises his options.

**Non-Shareholder Approved Equity Arrangements**

               In December of 2002, the Executive Committee of the Company’s Board of Directors, without shareholder approval, approved anincentive stock option arrangement with J. Charles Copeland, its Chief Executive Officer and President, whereby the Company wouldissue up to a maximum number of 1,000 shares of its Common Stock at book value (the exercise price) to Mr. Copeland based on theBank’s performance.  Under this agreement and based on the Bank’s 2002 performance, on December 23, 2002, theCompany granted Mr. Copeland options to purchase 232 shares of the Company’s Common Stock at an exercise price equal to thebook value per share as of the date of exercise, which he exercised on December 31, 2003.  On December 23, 2003, the Companygranted Mr. Copeland options to purchase 320 shares of the Company’s Common Stock at an exercise price equal to the bookvalue per share as of the date of exercise. Mr. Copeland may exercise these options at any time in calendar year 2004.

**Item 12.****  CertainRelationships and Related Transactions**

               The Bank’s law firm, Newton & Howell, P.C., which John T. Newton, Jr. is President and a partner, handles a significantpercentage of the Bank’s mortgage claims and bankruptcies.  The Company’s directors and officers and certaincompanies and individuals associated with them have been customers of, and have had banking transactions with, the Bank and areexpected to continue such relationships in the future.  Pursuant to such transactions, the Company’s directors andofficers from time to time have borrowed funds from the Bank for various business and personal reasons.  In the opinion of themanagement of the Company, the extensions of credit made by the Bank to its directors and officers since January 1, 2003 (a) weremade in the ordinary course of business, (b) were made on substantially the same terms, including interest rates and collateral, asthose prevailing at the time for comparable transactions with other persons and (c) did not involve more than a normal risk ofcollectibility or present other unfavorable features.  See note 14 under notes to consolidated financial statements in Item 7hereof.
 
 

33
Table of Contents

**Item 13. ****Exhibits and Reportson Form 8-K**

(a)  Exhibits:

               The Company submits herewith as exhibits to this report on Form 10-KSB the exhibits required by Item 601 of Regulation S-B, subjectto Rule 12b-32 under the Securities Exchange Act of 1934.

Exhibit.     No.    

 Document

2.0

Agreement and Plan of Reorganization, dated as of September 20, 2002, by and betweenAmerican Community Bank of Georgia and FNB Banking Company, as amended. (Incorporated by reference from Exhibit 2.0 to theCompany’s annual report on Form 10-KSB for the year ended December 31, 2001.).

3.1

Amended and Restated Articles of Incorporation of FNB Banking Company, dated as of October12, 1982, as amended on April 16, 1987.  (Incorporated by reference from Exhibit 3.1 to the Company’s annual report onForm 10-KSB for the year ended December 31, 2001.).

3.2

Bylaws of FNB Banking Company, as amended. (Incorporated by reference from Exhibit 3.2 tothe Company’s annual report on Form 10-KSB for the year ended December 31, 2001.).

4.1

See Exhibits 3.1 and 3.2 for provisions of Articles of Incorporation and Bylaws, asamended, which define the rights of the holders of Common Stock of FNB Banking Company.

14

Code of Ethics.

21.0

Subsidiaries of FNB Banking Company. 

24.0

A Power of Attorney is set forth on the signature pages to this Form 10-KSB.

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

31.2

Certification of Principal Accounting and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

32.0

Joint Certification of the ChiefExecutive Officer and the Principal Accounting and Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

(b)  Reports on Form 8-K:

               None.

**Item 14. ****Principal AccountantFees and Services**

               Porter Keadle Moore, LLP was the principal independent public accountant for the Company during the year ended December 31,2003.  Representatives of Porter Keadle Moore, LLP  are expected to be present at the annual meeting and will have theopportunity to make a statement if they desire to do so and to respond to appropriate questions.  The Company anticipates thatPorter Keadle Moore, LLP  will be the Company’s accountants for the 2004 fiscal year.

               During 2003 and 2002, the Company was billed the following amounts for services rendered by Porter Keadle Moore:

               *Audit Fees*.  In connection with the audit of the Company’s annual consolidated financial statements and review ofits Form 10‐KSB and the review of the Company’s interim consolidated financial statements included within Forms10‐QSB, the Company was billed approximately $103,300 in 2003 and $97,000 in 2002 by Porter Keadle Moore, LLP.  Thisfigure includes fees for certain services that were billed to the Company in 2004 in connection with the 2003 annual audit,including out‐of‐pocket travel costs.

34
Table of Contents

*                Audit-Relatedfees*.  The Company was billed approximately $21,500 in 2003 and $32,750 in 2002 by Porter KeadleMoore, LLP for merger and acquisition assistance in 2002, the audit of the Company’s employee benefit plan, and certainagreed upon procedures in connection with federal home loan bank borrowing arrangements in both 2002 and 2003.

*                Tax Fees*. The Company was billed approximately $14,700 in 2003 and $13,300 in 2002 by Porter Keadle Moore, LLP  for tax advice andpreparation of tax returns and estimated payment calculations.

*                All Other Fees*. The Company was billed $2,100 in 2003 and $800 in 2002 Porter Keadle Moore, LLP for services that were not related tothe audit of the Company’s financial statements.  These services included information technology reviews.

               The audit committee of the Company has determined that the performance of these services and payment of these fees are compatiblewith maintaining the independence of Porter Keadle Moore, LLP.

               The audit committee pre-approves all audit and non-audit services performed by the Company’s independent auditor.  Theaudit committee specifically approves the annual audit services engagement and has generally approved the provision of certainaudit-related services and tax services by Porter Keadle Moore, LLP.  Certain non-audit services that are permitted under thefederal securities laws may be approved from time to time by the audit committee.

               During 2003 and 2002, 100% of the audit, audit-related, tax and other services described above werepre-approved by the audit committee.

 

 

 

 

 

35
Table of Contents

  

 

 

**FNB BANKING COMPANY AND SUBSIDIARY**

 

**Consolidated Financial Statements**

**December 31, 2003, 2002 and 2001**

**(with Independent Accountants’ Reportthereon)**

 

 

 

 

Table of Contents

 

****

**REPORT OF INDEPENDENT CERTIFIED PUBLICACCOUNTANTS**

 

To the Board of Directors and StockholdersFNB Banking Company and Subsidiary

 

We have audited the accompanying consolidated balance sheets of FNB BankingCompany and subsidiary as of December 31, 2003 and 2002, and the related statements of earnings, changes in stockholders’equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2003. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of FNB Banking Company and subsidiary as of December 31, 2003 and2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003,in conformity with accounting principles generally accepted in the United States of America.
 
Atlanta, GeorgiaFebruary 12, 2004

Certified Public Accountants
Suite 1800 •    235 Peachtree Street NE • Atlanta, Georgia  30303 • Phone 404-588-4200    • Fax 404-588-4222 • www.pkm.com
F-1
 

Table of Contents

**FNB BANKING COMPANY AND SUBSIDIARY**

**Consolidated Balance Sheets**

**December 31, 2003 and 2002**

Assets

                                                                                                                         

  

2003
  

2002
Cash and due from banks, including reserve requirements of

  

                 

 

                       

     $4,370,000 and $3,969,000

$    

16,751,644

 

10,022,829

Federal funds sold

 

99,348
 

3,178,413
          Cash and cashequivalents

 

16,850,992
 

13,201,242
Interest-bearing deposits with other banks

 

-

 

394,000

Investment securities available for sale

 

39,321,350

 

40,141,230

Other investments

 

1,255,000

 

1,275,100

Mortgage loans held for sale

 

843,010

 

2,331,850

Loans, net of allowances for loan losses of $3,500,162 and$3,275,061

 

228,830,899

 

229,918,530

Premises and equipment, net

 

7,724,583

 

7,688,918

Goodwill

 

4,401,920

 

4,401,920

Accrued interest receivable and other assets

 

2,810,197
 

2,140,475
 

$

302,037,951
 

301,493,265
 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Deposits:

 

 

 

 

   Demand

$

38,650,191

 

37,532,140

   Interest-bearing demand

 

63,403,263

 

61,059,740

  Savings

 

24,713,686

 

23,619,865

   Time

 

111,450,176
 

111,169,905
          Totaldeposits

 

238,217,316
 

233,381,650
 

 
 
 

 

Federal funds purchased

 

5,000,000

 

-

Securities sold under retail repurchase agreements

 

12,476,382

 

16,045,451

FHLB advances

 

7,625,000

 

14,500,000

Note payable

 

6,688,800

 

7,242,326

Accrued interest payable and accrued liabilities

 

2,108,263
 

2,065,022
          Totalliabilities

 

272,115,761
 

273,234,449
 

 

 

 

 

Commitments

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

   Common stock, $1 par value; 5,000,000 sharesauthorized;

 

 

 

 

        714,845 and 730,939 sharesissued and outstanding

 

714,845

 

730,939

   Retained earnings

 

27,961,279

 

26,093,271

   Accumulated other comprehensive income

 

1,246,066
 

1,434,606
          Totalstockholders’ equity

 

29,922,190
 

28,258,816
 

$

302,037,951
 

301,493,265
See accompanying notes to consolidated financial statements.

F-2
Table of Contents

**FNB BANKING COMPANY AND SUBSIDIARY**

**Consolidated Statements of Earnings**

**For the Years Ended December 31, 2003, 2002 and2001**

                                                                                                           

 

2003
    

2002
    

2001
Interest and dividend income:

 
 
 
 
 
 
  Interest on loans, including fees of $2,150,827, $2,536,193and        $2,052,348

 $    

 16,683,621

  

 16,455,822

  

 16,015,271

  Interest on federal funds sold

 

71,979

 

84,177

 

619,868

  Interest-bearing deposits in other banks

 

5,976

 

26,274

 

31,157

  Interest on investment securities:

 
 
 
 
 
 
       Tax-exempt

 

516,046

 

519,770

 

501,521

       Taxable

 

1,300,365

 

1,588,710

 

1,734,799

       Dividends on otherinvestments

 

96,300
 

97,888
 

98,351
          Total interestincome

 

18,674,287
 

18,772,641
 

19,000,967
Interest expense:

 

 
 

 
 

 
  Deposits

 

3,526,083

 

4,309,154

 

6,849,672

  Note payable

 

341,642

 

118,700

 

3,008

  Retail repurchase agreements and other

 

400,417
 

336,542
 

534,940
          Total interestexpense

 

4,268,142
 

4,764,396
 

7,387,620
          Net interestincome

 

14,406,145

 

14,008,245

 

11,613,347

Provision for loan losses

 

636,283
 

1,071,475
 

672,136
          Net interestincome after provision for loan losses

 

13,769,862
 

12,936,770
 

10,941,211
Other operating income:

 

 
 

 
 

 
  Service charges

 

2,186,395

 

2,055,474

 

1,872,156

  Fees for trust services

 

204,000

 

190,000

 

170,000

  Securities gains, net

 

233,024

 

847,760

 

54,228

  Gain on mortgage loan sales

 

467,118

 

287,399

 

271,795

  Other

 

588,303
 

458,181
 

382,853
          Total otheroperating income

 

3,678,840
 

3,838,814
 

2,751,032
Other operating expenses:

 

 
  

 
  

 
  Salaries and employee benefits

 

6,601,550

 

6,370,293

 

5,773,295

  Occupancy and equipment

 

2,015,494

 

2,028,771

 

1,616,880

  Miscellaneous

 

3,028,595
 

2,432,339
 

2,203,087
          Total otheroperating expenses

 

11,645,639
 

10,831,403
 

9,593,262
 

 

 
 

 
 

 
           Earningsbefore income taxes

 

5,803,063

 

5,944,181

 

4,098,981

 

 
 
 
 
 
 
Income taxes

 

1,817,280
 

2,034,613
 

1,300,108
          Netearnings

$

3,985,783
 

3,909,568
 

2,798,873
 

 

 

 

 

 

 

          Net earnings pershare

$

5.46
 

5.32
 

3.61
See accompanying notes to consolidated financial statements.

F-3
Table of Contents

**FNB BANKING COMPANY AND SUBSIDIARY**

**Consolidated Statements of Changes in Stockholders’Equity**

**For the Years Ended December 31, 2003, 2002 and2001**

                                                                          

  

Common Stock
     

Retained Earnings
     

Accumulated Other Comprehensive Income (Loss)
     

Total
 

 

 

 

 

 

 

 
 
Balance, December 31, 2000

$   

779,154 

 

23,893,439 

 

540,766 

 

25,213,359 

 

 

 

 

 

 

 

 

 

Net earnings

 

- 

 

2,798,873 

 

- 

 

2,798,873 

 

 

 

 

 

 

 

 

 

Cash dividends declared of $1.35 per share

 

- 

 

(1,042,993)

 

- 

 

(1,042,993)

 

 

 

 

 

 

 

 

 

Shares repurchased and retired

 

(7,150)

 

(313,100)

 

- 

 

(320,250)

 

 

 

 

 

 

 

 

 

Change in accumulated other comprehensive

 

 

 

 

 

 

 

 

   income (loss)

 

- 
 

- 
 

393,201 
 

393,201 
 

 
 
 

 

 

 

 

 

Balance, December 31, 2001

 

772,004 

 

25,336,219 

 

933,967 

 

27,042,190 

 

 

 

 

 

 

 

 

 

Net earnings

 

- 

 

3,909,568 

 

- 

 

3,909,568 

 

 

 

 

 

 

 

 

 

Cash dividends declared of $1.45 per share

 

- 

 

(1,059,936)

 

- 

 

(1,059,936)

 

 

 

 

 

 

  

 

 

Shares repurchased and retired

 

 (41,065)

 

(2,092,580)

 

- 

 

(2,133,645)

 

 

 

 

 

 

 

 

 

Change in accumulated other comprehensive

 

 

 

 

 

 

 

 

   income (loss)

 

- 
 

- 
 

500,639 
 

500,639 
 

 

 

 

 

 

 

 

 

Balance, December 31, 2002

 

730,939 

 

26,093,271 

 

1,434,606 

 

28,258,816 

 

 

 

 

 

 

 

 

 

Net earnings

 

- 

 

3,985,783 

 

- 

 

3,985,783 

 

 

 

 

 

 

 

 

 

Cash dividends declared of $1.55 per share

 

- 

 

(1,120,055)

 

- 

 

(1,120,055)

 

 

 

 

 

 

 

 

 

Common shares issued

 

232 

 

11,368 

 

- 

 

11,600 

 

 

 

 

 

 

 

 

 

Shares repurchased and retired

 

  (16,326)

 

(1,009,088)

 

- 

 

(1,025,414)

 

 

 

 

 

 

 

 

 

Change in accumulated other comprehensive

 

 

 

 

 

 

 

 

   income (loss)

 

- 
 

- 
 

  (188,540)
 

  (188,540)
 

 

 

 

 

 

 

 

 

Balance, December 31, 2003

$   

714,845 
 

27,961,279
 

1,246,066 
 

29,922,190 
See accompanying notes to consolidated financial statements.

F-4
Table of Contents

**FNB BANKING COMPANY AND SUBSIDIARY**

**Consolidated Statements of ComprehensiveIncome**

**For the Years Ended December 31, 2003, 2002 and2001**

                                                                                                                 

    

2003      
2002     
2001
Net earnings

$  

3,985,783 

 

3,909,568 

 

2,798,873 

Other comprehensive income (loss):

 

 

 

 

 

 

  Unrealized holding gains (losses) on investment securities      available for sale arising during period

 

(20,099)

 

1,655,242 

 

687,423

  Unrealized holding gains (losses) on derivative financial      instruments classified as cash flow hedges arising      during the period

 

(50,974)

 

- 

 

- 

  Reclassification adjustment for (gains) losses on investmentsecurities      available for sale

 

  (233,024)
 

  (847,760)
 

  (54,228)
          Total othercomprehensive income (loss) before tax

 

  (304,097)
 

807,482 
 

633,195 
Income taxes related to other comprehensive income:

 

 

 

 

 

 

  Unrealized holding gains (losses) on investment securitiesavailable      for sale arising during period

 

7,638 

 

  (628,992)

 

(260,601)

  Unrealized holding gains (losses) on derivative financialinstruments      classified as cash flow hedges arising during the period

 

19,370 

 

- 

 

- 

  Reclassification adjustment for (gains) losses oninvestment      securities available for sale

 

88,549 
 

322,149 
 

20,607 
          Total incometaxes related to other comprehensive income                (loss)

 

115,557 
 

  (306,843)
 

  (239,994)
          Total othercomprehensive income (loss), net of tax

 

  (188,540)
 

500,639
 

393,201 
          Totalcomprehensive income

$  

3,797,243 
 

4,410,207
 

3,192,074 
 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

F-5
Table of Contents

**FNB BANKING COMPANY AND SUBSIDIARY**

**Consolidated Statements of Cash Flows**

**For the Years Ended December 31, 2003, 2002 and2001**

                                                                                                             

      

2003      
2002      
2001
Cash flows from operating activities:

 

 

 

 

 

 

  Net earnings

$

3,985,783 

 

3,909,568 

 

2,798,873 

  Adjustments to reconcile net earnings to net cashprovided

 

 

 

 

 

 

     by operating activities:

 

 

 

 

 

 

          Depreciation,amortization and accretion

 

488,070 

 

336,474 

 

496,255 

          Provision forloan losses
 
636,283 
 
1,071,475 
 
672,136 

          Provision fordeferred income taxes

 

506,725 

 

(121,607)

 

165,116 

          (Gains) losseson sales of investment securities

 

(233,024)

 

(847,760)

 

(54,228)

          (Gains) losseson disposals of premises and equipment

 

- 

 

(21,185)

 

48,822 

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

 

 

 

 

 

 

                 Mortgage loans heldfor sale

 

1,488,840 

 

433,655 

 

(1,678,464)

                 Interestreceivable

 

69,643 

 

151,854 

 

275,647 

                 Interestpayable

 

(103,482) 

 

(176,182)

 

(181,429)

                Other, net

 

  (127,607) 
 

1,074,927 
 

  (26,512)
                Net cash provided byoperating activities

 

  6,711,231 
 

5,811,219 
 

  2,516,216  
 

 

 

 

 

 

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

 

 

 

 

 

 

  Payment for purchase of subsidiary, net of cash acquiredof      $5,993,138

 

(136,714)

 

(3,864,997)

 

- 

  Change in interest-bearing deposits with other banks

 

394,000 

 

400,000 

 

- 

  Proceeds from sales of investment securities available forsale

 

1,790,335 

 

4,459,008 

 

3,044,600 

  Proceeds from calls, maturities and paydowns of investment      securities available for sale

 

 10,990,554 

 

 11,215,427 

 

 18,511,592 

  Purchase of investment securities available for sale

 

(12,123,461)

 

(7,120,275)

 

(23,537,222)

  Proceeds from sales of other investments

 

20,100 

 

- 

 

- 

  Purchase of other investments and tax credits

 

(420,000)

 

(301,900)

 

- 

  Net change in loans

 

451,348 

 

(17,525,941)

 

(10,808,202)

  Proceeds from sale of trademark

 

- 

 

200,000 

 

- 

  Proceeds from disposals of premises and equipment

 

- 

 

251,075 

 

5,460 

  Additions to premises and equipment

 

  (753,169)
 

  (969,279)
 

  (363,366)
                 Net cash provided(used) by investing activities

$

212,993 
 

(13,256,882)
 

(13,147,138)
 

 

See accompanying notes to consolidated financial statements.

 

F-6
Table of Contents

**FNB BANKING COMPANY AND SUBSIDIARY**

**Consolidated Statements of Cash Flows,continued**

**For the Years Ended December 31, 2003, 2002 and2001**

                                                                                                         

 

2003 
2002 
2001
 

 

 

 

 

 

 

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

 

 

 

 

    

 

     Net change in deposits

$  

4,835,666 

     

(15,476,312) 

  

14,263,596 

     Net change in federal fundspurchased

 

5,000,000 

 

- 

 

- 

     Net change in securities sold under retailrepurchase agreements

 

(3,569,069)

 

726,791 

 

2,701,148 

     Proceeds from FHLB advances

 

10,000,000 

 

38,500,000 

 

- 

     Repayments of FHLB advances

 

(16,875,000)

 

(27,375,000)

 

(125,000)

     Borrowings on note payable

 

3,874 

 

7,242,326 

 

- 

     Repayments of note payable

 

(557,400)

 

- 

 

(111,113)

     Proceeds from sale of common stock

 

9,252 

 

- 

 

- 

     Payment of cash dividends

 

(1,096,383)

 

(1,052,135)

 

(1,051,323)

     Repurchase and retirement of commonstock

 

  (1,025,414)
 

(2,133,645)
 

  (320,250)
                               Net cash (used) provided by financingactivities

 

  (3,274,474)
 

432,025
 

15,357,058 
Net change in cash and cash equivalents

 

3,649,750 

 

(7,013,638)

 

4,726,136 

Cash and cash equivalents at beginning of year

 

13,201,242 
 

20,214,880 
 

15,488,744 
Cash and cash equivalents at end of year

$

16,850,992 
 

13,201,242 
 

20,214,880 
Supplemental disclosures of cash flow information:

 

 
 

 

 

 

Cash paid during the year for:

 

 
 

 

 

 

     Interest

$

4,371,624 

 

4,940,578 

 

7,569,049 

     Income taxes, net of refunds

$

1,589,000 

 

1,489,000 

 

1,143,100 

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

 

     Change in net unrealized gains/losses oninvestment securities          available for sale, net of tax

 $

 156,935 

  

  500,639

  

 393,201 

     Change in fair value of interest rate swap,net of tax

$

31,605 

 

- 

 

- 

     Change in dividends payable

$

23,672 

 

7,801 

 

(8,330)

     Compensation effect of optionsexercised

$

2,348 

 

- 

 

- 

 

In 2002, the Company purchased all of the capital stock of AmericanCommunity Bank (Stockbridge, Georgia) for $10,061,654, including certain acquisition costs, of which $9,858,135 was paid in cashand $203,519 was payable, at December 31, 2002, upon the tendering of all remaining shares.  In conjunction with theacquisition, assets were acquired and liabilities were assumed as follows:

Fair value of assets acquired

$     

60,680,351

Liabilities assumed

 

50,618,697
                                                                                                               

                       

10,061,654

Less amount payable at December 31, 2002

 

203,519
          Cash paid through December 31, 2002

$     

  9,858,135
 

 

See accompanying notes to consolidated financial statements.

F-7
Table of Contents

**FNB BANKING COMPANY AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**(1)     Summary of Significant AccountingPolicies**

The accounting and reporting policies of FNB Banking Company (the“Company”) and subsidiary, and the methods of applying those principles, conform with accounting principles generallyaccepted in the United States of America (“GAAP”) and with general practices within the banking industry promulgated byfederal bank regulators. The following is a summary of the significant policies and procedures.

Basis of PresentationThe consolidated financial statements include the accounts of the Company and its whollyowned subsidiary, First National Bank of Griffin (the “Bank”). All significant intercompany accounts and transactionshave been eliminated in consolidation.

The Bank commenced business in 1933 upon receipt of its charter from theGeorgia Department of Banking and Finance. This state charter was converted to a national charter in 1965. The Bank is primarilyregulated by the Office of the Comptroller of the Currency (“OCC”) and the Company is regulated by the Federal ReserveBank and both undergo periodic examinations by these regulatory authorities. The Bank provides a full range of customary bankingservices throughout Spalding, Henry and other surrounding counties in Georgia.

In preparing financial statements in conformity with GAAP, management isrequired to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results coulddiffer significantly from these estimates. Material estimates common to the banking industry that are particularly susceptible tosignificant change in the near term include, but are not limited to, the determination of the allowance for loan losses, thevaluation of real estate acquired in connection with or in lieu of foreclosure on loans, and valuation allowances associated withthe realization of deferred tax assets which are based on future taxable income.

ReclassificationsCertain 2002 amounts have been reclassified to conform to the presentation used in2003.

Cash and Cash EquivalentsCash equivalents include amounts due from banks, interest bearing deposits in banksmaturing within ninety days and federal funds sold.  Generally, federal funds are sold for one-day periods.

Investment SecuritiesThe Company classifies its securities in one of three categories: trading, available forsale, or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term.Held to maturity securities are those securities for which the Company has the ability and intent to hold the security untilmaturity. All other securities not included in trading or held to maturity are classified as available for sale. At December 31,2003 and 2002, the Company had no trading or held to maturity securities.

Available for sale securities are recorded at fair value. Held to maturitysecurities are recorded at cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains andlosses, net of the related tax effect, on securities available for sale are excluded from earnings and are reported as a separatecomponent of stockholders’ equity until realized. Transfers of securities between categories are recorded at fair value atthe date of transfer. Unrealized holding gains or losses associated with transfers of securities from held to maturity to availablefor sale are recorded as a separate component of stockholders’ equity. The unrealized holding gains or losses included in theseparate component of stockholders’ equity for securities transferred from available for sale to held to maturity aremaintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistentwith the amortization or accretion of premium or discount on the associated security. 

A decline in the market value of any available for sale or held to maturityinvestment below cost that is deemed other than temporary is charged to earnings and establishes a new cost basis for thesecurity.

Premiums and discounts are amortized or accreted over the life of therelated security as an adjustment to the yield. Realized gains and losses for securities classified as available for sale and heldto maturity are included in earnings and are derived using the specific identification method for determining the cost ofsecurities sold.

F-8
Table of Contents

**FNB BANKING COMPANY AND SUBSIDIARY**

**Notes to Consolidated Financial Statements,continued**

 

**(1)     Summary of Significant Accounting Policies,continued**

Other InvestmentsOther investments include equity securities of the Federal Reserve Bank and the FederalHome Loan Bank. These investment securities are carried at cost.

Mortgage Loans Held for SaleMortgage loans held for sale are carried at the lower of aggregate cost or market value.The amount by which cost exceeds market value is accounted for as a valuation allowance. Changes in the valuation allowance areincluded in the determination of net earnings of the period in which the change occurs.  At December 31, 2003 and 2002, therewas no valuation allowance associated with mortgage loans held for sale.

Loans, Loan Fees and Interest IncomeLoans are stated at principal amount outstanding, net of the allowance for loan losses.Interest on loans is calculated by using the simple interest method on daily balances of the principal amountoutstanding.

Accrual of interest is discontinued on a loan when management believes,after considering economic and business conditions and collection efforts, that the borrower’s financial condition is suchthat collection of interest is doubtful. When a loan is placed on nonaccrual status, previously accrued and uncollected interest ischarged to interest income on loans. Generally, payments on nonaccrual loans are applied to principal.

Loan fees, net of certain origination costs, have been deferred and arebeing amortized over the lives of the respective loans.

Allowance For Loan LossesThe allowance for loan losses is established through a provision for loan losses charged toexpense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principalis unlikely. The allowance represents an amount, which in management’s judgment, will be adequate to absorb probable losseson existing loans that may become uncollectible.

Management’s judgment in determining the adequacy of the allowance isbased on evaluations of the collectibility of loans. These evaluations take into consideration such factors as changes in thenature and volume of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay, overallportfolio quality, and review of specific problem loans.  In determining the adequacy of the allowance for loan losses,management uses a loan grading system that rates loans in six different categories.  Grades four through six are assignedallocations of loss based on management’s estimate of potential loss, which is generally based on discounted, collateraldeficiencies or loss percentages by grade used by the federal bank regulators.  Loans graded one through three are stratifiedby type and allocated loss ranges based on historical loss experience for the strata.  The combination of these results arecompared quarterly to the recorded allowance for loan losses and material differences are adjusted by increasing or decreasing theprovision for loan losses.  Management uses a devoted internal loan reviewer who is independent of the lending function tochallenge and corroborate the loan grading system and provide additional analysis in determining the adequacy of the allowance forloan losses and the future provisions for estimated loan losses.

Management believes the allowance for loan losses is adequate. Whilemanagement uses available information to recognize losses on loans, future additions to the allowance may be necessary based onchanges in economic conditions. In addition, bank regulators, as an integral part of their examination process, periodically reviewthe Bank’s allowance for loan losses. Such regulators may require the Bank to recognize additions to the allowance based ontheir judgments of information available to them at the time of their examination.

Impaired loans are measured based on the present value of expected futurecash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price, or at the fairvalue of the collateral of the loan if the loan is collateral dependent. A loan is impaired when, based on current information andevents, it is probable that all amounts due according to the contractual terms of the loan agreement will not becollected.

F-9
Table of Contents

**FNB BANKING COMPANY AND SUBSIDIARY**

**Notes to Consolidated Financial Statements,continued**

**(1)     Summary of Significant Accounting Policies,continued**

Premises and EquipmentPremises and equipment are stated atcost less accumulated depreciation. Depreciation is computed using thestraight-line method over the estimated useful lives of the assets. When assetsare retired or otherwise disposed, the cost and related accumulated depreciationare removed from the accounts, and any gain or loss is reflected in income forthe period. Costs incurred for maintenance and repairs are expensed currently.The range of estimated useful lives for premises and equipment are:

Buildings andimprovements                                                             

10 - 40 years

Furniture and equipment

3 - 10 years

GoodwillGoodwill represents the excess of thepurchase price for American Community Bank over the fair value of its net assetsacquired.  Goodwill is tested annually for impairment unless events orcircumstances arise that would indicate the need for more frequent testing. The impairment tests are performed at the reporting level which in the Company’scase is effectively the entire entity.  There were no goodwill impairmentlosses in the financial statements.

Securities Sold Under Retail Repurchase AgreementsSecurities sold under retail repurchaseagreements are secured borrowings from customers and are treated as financingactivities and are carried at the amounts at which the securities will besubsequently reacquired as specified in the respective agreements.

Income TaxesThe Company accounts for income taxesusing the liability method and recognizes deferred tax assets and liabilitiesfor the future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax basis. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich the assets and liabilities are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income tax expense in the period that includes the enactment date.

In the event the future tax consequences of differences between thefinancial reporting bases and the tax bases of the Company’s assets and liabilities results in deferred tax assets, anevaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuationallowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of thedeferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers thescheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.

Net Earnings Per Common ShareBasic net earnings per common share arebased on the weighted average number of common shares outstanding during theperiod while the effects of potential common shares outstanding during theperiod such as options, convertible securities and warrants are included indiluted earnings per share. The Company has no potential common shares andcorrespondingly, earnings per share amounts for 2003, 2002 and 2001,respectively, are based on 730,252, 734,285 and 774,757 shares, the weightedaverage number of common shares outstanding.

Comprehensive IncomeThe Company has elected to presentcomprehensive income in a separate consolidated statement of comprehensiveincome. Accumulated other comprehensive income includes the net of tax effect ofunrealized gains (losses) on securities available for sale and the net of taxeffect of changes in fair value of cash flow hedges.

OtherProperty (other than cash deposits) heldby the Bank in a fiduciary or agency capacity for customers is not included inthe balance sheets since such items are not assets of the Bank.

F-10
Table of Contents

**FNB BANKING COMPANY AND SUBSIDIARY**

**Notes to Consolidated Financial Statements,continued**

**(1)   ****Summary of Significant Accounting Policies, continued**

Recent Accounting PronouncementsAccounting standards that have been issued or proposed by the Financial Accounting Standards Board (FASB)and other standard setting entities that do not require adoption until a future date are either not directly applicable at thepresent time or are not expected to have a material impact on the Company’s consolidated financial statements uponadoption.

**(2)**    **Business Combination**

On May 31, 2002, the Company consummated an agreement to acquire all of theoutstanding shares of American Community Bank (“ACB”) for approximately $9.9 million in cash ($13.35 per share) pluscertain acquisition costs.  The cash proceeds to consummate the purchase were obtained through a combination of borrowingsunder a line of credit with a correspondent bank and cash dividends paid to the Company by its bank subsidiary, First National Bankof Griffin.  ACB was a banking corporation based in Stockbridge (Henry County), Georgia. The primary reason for theacquisition 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 price was allocated toassets and liabilities acquired based upon their fair values at the date of the acquisition. The excess of the purchase price overthe fair value of the net assets acquired (goodwill) was approximately $4.4 million, none of which will be deductible for incometax purposes.  ACB was merged into First National Bank of Griffin and is operated as a branch.

The following table summarizes the carrying amount, fair value adjustmentsand the resulting fair value of the assets acquired and liabilities assumed of ACB at May 31, 2002, the date of theacquisition:

*(amounts in thousands)*

 

Carrying Amount
   

Fair Value Adjustment
    

Resulting Fair Value Acquired* *      
Assets:

 
 
 
 
 

 

     Cash and cash equivalents

$  

5,993

   

- 

 

5,993

     Investment securities and otherinvestments

 

7,323

 

- 

 

7,323

     Loans, net

 

40,813

 

- 

 

40,813

     Premises and equipment

 

158

 

- 

 

158

     Intangible assets

  

-

  

450 

  

450

     Goodwill

 

-

 

4,402 

 

4,402

     Other assets

 

1,155
 

385 
 

1,540
                                                                            

$  

55,442
 

5,237 
 

60,679
Liabilities and Stockholders’ Equity:

 
 
 

 
 

 

     Deposits

$  

46,308

 

750 

 

47,058

     FHLB advances

 

2,500

 

- 

 

2,500

     Acquisition payable

 

-

 

10,061 

 

10,061

     Other liabilities

 

610

 

450 

 

1,060

     Stockholders’ equity

 

6,024
 

(6,024)
 

-
 

$  

55,442
 

5,237 
 

60,679
Intangible assets acquired totaled $450,000 and included $250,000 for thedeposit base intangible which is being amortized over seven years and $200,000 for a trademark.  Amortization expense ofapproximately $18,000 was recorded for the deposit intangible in 2002.  The trademark was sold in September 2002 with noresulting gain or loss.

F-11
Table of Contents

**FNB BANKING COMPANY AND SUBSIDIARY**

**Notes to Consolidated Financial Statements,continued**

 

**(2)**    **Business Combination, continued**

The results of ACB have been included in the accompanying consolidatedstatements of earnings only since May 31, 2002 (the date of the acquisition).  The following summarized proforma unauditedfinancial information is presented as if the purchase had occurred at the beginning of the period, and therefore includesadjustments for additional interest expense and amortization of intangibles and other purchase accounting adjustments.  Theunaudited proforma financial information is not necessarily indicative either of the results of operations that would have occurredhad the two companies actually been combined during the period presented or of future results of operations of the combinedcompanies.

                                                                                                                       
 
For the years ended December 31, (Unaudited)
                                                                                              

 

2002
     

2001
Interest income

$    

20,246,678 

 

23,191,290 

Interest expense

 

(5,015,866)
 

  (9,184,691)
          Net interestincome

 

15,230,812 

 

14,006,599 

Provision for loan losses

 

(1,095,475)
 

  (730,374)
          Net interestincome after provision for loan losses

 

14,135,337 

 

13,276,225 

Other income

 

3,967,420 

 

3,155,971 

Other expense

 

(11,694,583)
 

(11,527,856)
          Earnings beforeincome taxes

 

6,408,174 

 

4,904,340 

Income taxes

 

(2,209,487)
 

  (1,595,130)
          Netearnings

$    

  4,198,687 
 

3,309,210 
Net earnings per common share

$    

5.72 
 

4.27 
Weighted average common shares outstanding

 

734,285 
 

774,757 
 

Certain fair value adjustments for deposits which were recorded as purchaseaccounting adjustments were amortized over a period of one year.  Net earnings were increased in the above unaudited proformapresentations for the amortization of this purchase accounting adjustment as follows:

                                                                                       

           

For the years ended December 31,
 

 

2002           
2001
Reduction in interest expense

$     

750,000 

 

750,000 

Related income taxes

 

(285,000)
 

(285,000)
          Net earnings effect

$     

465,000 
 

465,000 
 

F-12
Table of Contents

**FNB BANKING COMPANY AND SUBSIDIARY**

**Notes to Consolidated Financial Statements,continued**

**(3)    Investment Securities**

Investment securities available for sale at December 31, 2003 and 2002 areas follows:

                                                      

 

**December 31, 2003**
 

      

 Amortized Cost
      

Gross Unrealized Gains
      

Gross Unrealized Losses
      

 Estimated Fair Value
U.S. Government agencies

$    

10,743,899

 

287,881

 

(17,063)

 

11,014,717

State, county and municipal

 

13,496,801

 

723,981

 

(15,596)

 

14,205,186

Mortgage-backed securities

 

9,335,282

 

142,719

 

(24,829)

 

9,453,172

Corporate securities

 

3,335,489

 

322,076

 

- 

 

3,657,565

Equity securities

 

193,257
 

797,453
 

- 
 

990,710
Total

$    

37,104,728
 

2,274,110
 

(57,488)
 

39,321,350
 

                                                    

      

**December 31, 2002**
 

 

 Amortized Cost
      

Gross Unrealized Gains
      

Gross Unrealized Losses
      

 Estimated Fair Value
U.S. Government agencies

$    

10,026,056

 

456,589

 

- 

 

10,482,645

State, county and municipal

 

12,419,945

 

495,181

 

  (30,802)

 

12,884,324

Mortgage-backed securities

 

10,322,104

 

377,032

 

- 

 

10,699,136

Corporate securities

 

4,673,430

 

373,693

 

  (27,242)

 

5,019,881

Equity securities

 

229,540
 

825,704
 

- 
 

  1,055,244
Total

$    

37,671,075
 

2,528,199
 

(58,044)
 

40,141,230
The following outlines the unrealized losses and fair value by investmentcategory and length of time that individual securities have been in a continuous unrealized loss position at December 31,2003:

                                                       

 
Less than 12 months
 
12 months or more
 
Total Description of securities
 
Fair Value
  
Unrealized Loss
  
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
U.S. Government agencies

$  

1,214,065

 

(17,063)

 

-

 

-

 

1,214,065

     

(17,063)

State, county and municipal

 
2,122,633

 
(15,596)

 
-

 
-

 
2,122,633

 
(15,596)

Mortgage-backed securities

 
5,311,367
 
(24,829)
 
-
 
-
 
5,311,367
 
(24,829)
Temporarily impaired securities

$   

8,648,065
     

(57,488)
     

-
     

-
 

8,648,065
 

(57,488)
The amortized cost and estimated fair value of investment securitiesavailable for sale at December 31, 2003, by contractual maturity, are shown below. Expected maturities will differ from contractualmaturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

F-13
Table of Contents

**FNB BANKING COMPANY AND SUBSIDIARY**

**Notes to Consolidated Financial Statements,continued**

**(3)    Investment Securities, continued**

                                                                                                       

 

Amortized Cost
     

Estimated Fair Value
U.S. Government agencies:

 
 
 
 
     Within 1 year

$    

-

  

-

     1 to 5 years

 

5,766,893

 

6,016,135

     5 to 10 years

 

4,977,006
 

4,998,582
 

$    

10,743,899
  

11,014,717
State, county and municipal:

 
 
 
 
     Within 1 year

$    

760,000

  

760,000

     1 to 5 years

 

1,358,660

 

1,427,491

     5 to 10 years

 

9,378,813

 

9,901,213

     More than 10 years

 

1,999,328
 

2,116,482
 

$    

13,496,801
  

14,205,186
Corporate:

 
 
 
 
     Within 1 year

$    

-

  

-

     1 to 5 years

 

2,852,065

 

3,107,915

     5 to 10 years

 

483,424
 

549,650
 

$    

3,335,489
  

3,657,565
Total securities other than mortgage- backed  and equitysecurities:

 
 
 
 
     Within 1 year

$    

760,000

 

760,000

     1 to 5 years

 

9,977,618

 

10,551,541

     5 to 10 years

 

14,839,243

 

15,449,445

     More than 10 years

 

1,999,328

 

2,116,482

     Mortgage-backed securities

 

9,335,282

 

9,453,172

     Equity securities

 

193,257
 

990,710
 

$    

37,104,728
 

39,321,350
Proceeds from sales of securities available for sale during 2003, 2002 and2001 were $1,790,353, $4,459,008 and $3,044,600, respectively. Gross gains and losses are as follows:

                                                  

  

2003     
2002     
2001
Gross gains

$

233,024

 

847,760

 

59,628 

Gross losses

 

-
 

-
 

  (5,400)
     Net gains (losses)

$

233,024
 

847,760
 

54,228 
Securities with a carrying value of approximately $28,699,000 and$31,674,000 at December 31, 2003 and 2002, respectively, were pledged to secure public deposits and for other purposes.

F-14
Table of Contents

**FNB BANKING COMPANY AND SUBSIDIARY**

**Notes to Consolidated Financial Statements,continued**

**(4)     Loans**

Major classifications of loans, by purpose, at December 31, 2003 and 2002are summarized as follows:

                                                                              
       
2003       
2002
Commercial

$    

145,669,102

 

139,441,818

Construction

 

25,144,939

 

25,959,809

Commercial accounts receivable

 

4,367,993

 

8,584,487

Consumer

 

51,195,197

 

52,455,736

Mortgage

 

6,179,066
 

7,000,178
Total loans

 

232,556,297

 

233,442,028

Less:  Allowance for loan losses

 

3,500,162

 

3,275,061

          Unearnedinterest and fees

 

225,236
 

248,437
Net loans

$    

228,830,899
     

229,918,530
The Bank grants loans and extensions of credit to individuals and a varietyof firms and corporations located in its trade area, primarily Spalding and Henry Counties, Georgia and surrounding counties.Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved andunimproved real estate and is dependent upon the real estate market in this geographical area.

Changes in the allowance for loan losses are summarized asfollows: