SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

                         Commission File Number: 0-13086

                       FNB FINANCIAL SERVICES CORPORATION
             (Exact name of registrant as specified in its charter)

             North Carolina                               56 - 1382275
  (State or other jurisdiction of                        (I.R.S. Employer
  inc orporation or organization)                     Identification Number)

  202 South Main Street, Reidsville, North Carolina            27320
      (Address of principal executive offices)               (Zip Code)

                                 (336) 342-3346
              (Registrant's telephone number, including area code)

                                 Not Applicable
             (Former name, former address, and former fiscal years,
                         if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes |X|       No |_|

4,402,397 common shares were outstanding as of July 31, 2003, with a par value
per share of $1.00.

<PAGE>

                       FNB FINANCIAL SERVICES CORPORATION

                                    FORM 10-Q

                                      INDEX

                                                                            Page
                                                                            ----
  PART I  INANCIAL INFORMATION

  Item 1  Financial Statements

          Consolidated Balance Sheets                                          3
          June 30, 2003 and December 31, 2002

          Consolidated Statements of Income and Comprehensive Income Three     4
          Months and Six Months Ended June 30, 2003 and 2002

          Consolidated Statements of Cash Flows                                5
          Six months ended June 30, 2003 and 2002

          Notes to Consolidated Financial Statements                           7

  Item 2  Management's Discussion and Analysis of Financial Condition and     11
          Results of Operations

  Item 3  Quantitative and Qualitative Disclosures About Market Risk          19

  Item 4  Controls and Procedures                                             20

  PART II OTHER INFORMATION

  Item 1  Legal Proceedings                                                   20

  Item 2  Changes in Securities and Use of Proceeds                           20

  Item 3  Defaults Upon Senior Securities                                     20

  Item 4  Submission of Matters to a Vote of Security Holders                 21

  Item 5  Other Information                                                   21

  Item 6  Exhibits and Reports on Form 8 - K                                  21


                                       2
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

FNB Financial Services Corporation and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands except per share data)

<TABLE>
<CAPTION>
                                                                  June 30,    December 31,
                                                                    2003         2002
                                                                (Unaudited)    (Audited)
                                                                -----------   ------------
<S>                                                               <C>           <C>
ASSETS

Cash and due from banks                                           $ 39,915      $ 24,524
Investment securities:
  Securities available for sale                                    142,525       125,084
  Federal Home Loan Bank and Federal Reserve Bank Stock              2,775         3,732
Loans, net of allowance for credit losses of $7,092 at
  June 30, 2003 and $7,059 at December 31, 2002                    562,288       556,541
Premises and equipment, net                                         12,558        10,916
Accrued income and other assets                                     15,602        13,235
                                                                  --------      --------

    Total assets                                                  $775,663      $734,032
                                                                  ========      ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits:
  Noninterest bearing                                             $ 72,418      $ 61,651
  Interest bearing                                                 588,989       543,354
                                                                  --------      --------
    Total deposits                                                 661,407       605,005

Federal funds purchased and retail repurchase agreements             6,716         8,258
Other borrowings                                                    32,500        52,500
Accrued expenses and other liabilities                               9,549         3,936
                                                                  --------      --------

    Total liabilities                                              710,172       669,699
                                                                  --------      --------

Shareholders' Equity:
Preferred stock no par value; authorized 10,000,000 shares;
    none issued                                                         --            --
Common stock, $1.00 par value; authorized 40,000,000 shares;
    outstanding 4,404,404 at June 30, 2003 and
    4,467,239 at December 31, 2002                                   4,404         4,467
Paid-in capital                                                     22,626        23,833
Retained earnings                                                   36,835        34,549
Accumulated other comprehensive income                               1,626         1,484
                                                                  --------      --------

    Total shareholders' equity                                      65,491        64,333
                                                                  --------      --------

    Total liabilities and shareholders' equity                    $775,663      $734,032
                                                                  ========      ========
</TABLE>

            See notes to unaudited consolidated financial statements.


                                       3
<PAGE>

FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Income and Comprehensive Income
(Unaudited; dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                               Three Months Ended                 Six Months Ended
                                                                     June 30,                          June 30,
                                                           ----------------------------      ----------------------------
                                                               2003             2002             2003             2002
                                                           -----------      -----------      -----------      -----------
<S>                                                        <C>              <C>              <C>              <C>
Interest income
  Loans                                                    $     9,020      $     9,218      $    18,099      $    18,242
  Federal funds sold and overnight deposits                         28               23               41               43
  Investment securities
    Taxable                                                      1,017            1,221            2,280            2,752
    Tax exempt                                                     272               96              419              193
    Other                                                           45               58               95              119
                                                           -----------      -----------      -----------      -----------

    Total interest income                                       10,382           10,616           20,934           21,349
                                                           -----------      -----------      -----------      -----------

Interest expense
  Deposits                                                       3,979            4,243            8,096            9,141
  Federal funds purchased and other borrowings                     403              368              819              672
                                                           -----------      -----------      -----------      -----------

    Total interest expense                                       4,382            4,611            8,914            9,813
                                                           -----------      -----------      -----------      -----------

Net interest income                                              6,000            6,005           12,019           11,536
Provision for credit losses                                        282              680              777              965
                                                           -----------      -----------      -----------      -----------

Net interest income after provision for credit losses            5,718            5,325           11,242           10,571

Other income
  Service charges on deposit accounts                              871              663            1,631            1,245
  Net gain on sale of securities                                   240              318              562              318
  Net gain on disposition of asset                                   0               94                0              104
  Income from investment services                                  102               77              243              146
  Mortgage banking fees                                            482              282              946              442
  Other income                                                      72              114              180              223
                                                           -----------      -----------      -----------      -----------

    Total noninterest income                                     1,767            1,548            3,562            2,478

Other expenses
  Salaries and employee benefits                                 2,580            2,524            5,127            4,936
  Occupancy expense                                                275              270              557              529
  Furniture and equipment expense                                  578              482            1,109              979
  Insurance expense, including FDIC assessment                      48               52               96               97
  Marketing expense                                                 85               74              182              119
  Printing and supply expense                                       92               94              210              229
  Other expenses                                                 1,100            1,081            2,089            2,019
                                                           -----------      -----------      -----------      -----------

    Total noninterest expense                                    4,758            4,577            9,370            8,908

Income before income taxes                                       2,727            2,296            5,434            4,141
Income tax expense                                                 953              761            1,911            1,354
                                                           -----------      -----------      -----------      -----------

Net income                                                       1,774            1,535            3,524            2,787
Other comprehensive income (loss)                                  485              973              142              (87)
                                                           -----------      -----------      -----------      -----------

Comprehensive income                                       $     2,259      $     2,508      $     3,666      $     2,700
                                                           ===========      ===========      ===========      ===========
Per share data
  Net income, basic                                        $      0.40      $      0.33      $      0.79      $      0.60
  Net income, diluted                                      $      0.39      $      0.32      $      0.77      $      0.59
  Cash dividends                                           $      0.14      $      0.13      $      0.28      $      0.26
Weighted average shares outstanding, basic                   4,467,707        4,635,296        4,455,772        4,605,891
Weighted average shares outstanding, diluted                 4,610,202        4,739,204        4,581,468        4,694,325
</TABLE>

            See notes to unaudited consolidated financial statements.


                                       4
<PAGE>

FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; dollars in thousands)

<TABLE>
<CAPTION>
                                                                         Six Months Ended
                                                                              June 30,
                                                                      -----------------------
                                                                        2003           2002
                                                                      --------       --------
<S>                                                                   <C>            <C>
Cash flows from operating activities:
   Interest received                                                  $ 19,193       $ 19,738
   Fees and commissions received                                         3,880          2,280
   Interest paid                                                        (9,204)       (10,548)
   Noninterest expense paid                                            (10,141)        (8,682)
   Income taxes paid                                                    (1,963)        (2,026)
   Funding of loans held for sale                                      (47,503)       (12,232)
   Proceeds from sales of loans held for sale                           48,205         12,514
                                                                      --------       --------

    Net cash provided by operating activities                            2,467          1,044
                                                                      --------       --------

Cash flows from investing activities:
   Proceeds from sales or calls of securities available for sale        77,882         33,029
   Proceeds from maturities of securities available for sale               200             --
   Purchase of securities                                              (89,972)          (220)
   Capital expenditures                                                 (2,274)          (218)
   (Increase) decrease in other real estate owned                         (721)           823
   Increase in loans                                                    (4,543)        (8,033)
                                                                      --------       --------

    Net cash provided by (used in) investing activities                (19,428)        25,381
                                                                      --------       --------

Cash flows from financing activities:
   Increase (decrease) in demand, savings and interest
    checking accounts                                                   13,411         (2,908)
   Increase (decrease) in time deposits                                 42,991        (45,477)
   Decrease in federal funds purchased and
    Retail repurchase agreements                                        (1,542)          (779)
   Increase (decrease) in other borrowings                             (20,000)        15,000
   Proceeds from issuance of common stock                                  366          1,072
   Repurchase of common stock                                           (1,636)        (1,100)
   Dividends paid                                                       (1,238)        (1,199)
                                                                      --------       --------

    Net cash provided by (used in) financing activities                 32,352        (35,391)
                                                                      --------       --------

Net increase (decrease) in cash and cash equivalents                    15,391         (8,966)
Cash and cash equivalents, January 1                                    24,524         23,673
                                                                      --------       --------

Cash and cash equivalents, June 30                                    $ 39,915       $ 14,707
                                                                      ========       ========

Supplemental disclosure of non-cash transactions:
Non-cash transfers from loans to other real estate                    $    535       $    394
                                                                      ========       ========
</TABLE>

            See notes to unaudited consolidated financial statements.


                                       5
<PAGE>

FNB Financial Services Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited; dollars in thousands)

Reconciliation of net income to net cash provided by operating activities:

<TABLE>
<CAPTION>
                                                                              Six Months Ended
                                                                                   June 30,
                                                                           -----------------------
                                                                             2003           2002
                                                                           --------       --------
<S>                                                                        <C>            <C>
Net income                                                                 $  3,524       $  2,787

Adjustments to reconcile net income to net cash provided by operating
activities:
   Provision for credit losses                                                  777            965
   Depreciation                                                                 751            684
   Accretion and amortization                                                   330            102
   Gain on sale of securities available for sale                               (562)          (318)
   Funding of loans held for sale                                           (47,503)       (12,232)
   Proceeds from sales of loans held for sale                                48,205         12,514
   Gain on other assets                                                          (4)          (104)
   Increase in accrued income and other assets                               (1,563)        (2,557)
   Decrease in accrued expenses and other liabilities                        (1,488)          (797)
                                                                           --------       --------

    Net cash provided by operating activities                              $  2,467       $  1,044
                                                                           ========       ========
</TABLE>

            See notes to unaudited consolidated financial statements.


                                       6
<PAGE>

FNB Financial Services Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)

1.    Basis of Presentation

            The accompanying unaudited consolidated financial statements have
      been prepared in accordance with generally accepted accounting principles
      and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
      Accordingly, these statements do not include all of the information and
      footnotes required by generally accepted accounting principles for
      complete financial statements. In the opinion of management, all
      adjustments (consisting of normal recurring accruals) considered necessary
      for a fair presentation have been included. Operating results for the
      six-month period ended June 30, 2003 are not necessarily indicative of the
      results that may be expected for the year ending December 31, 2003.

2.    Significant Activities

            FNB Financial Services Corporation (the "Company") is a North
      Carolina financial holding company. The Company's wholly owned subsidiary,
      FNB Southeast (the "Bank"), is a North Carolina chartered commercial bank.
      As of June 30, 2003, the Bank operated thirteen banking offices in North
      Carolina and five banking offices in Virginia. The Bank has two wholly
      owned subsidiaries; FNB Southeast Investment Services, Inc., which
      operated three offices, and FNB Southeast Mortgage Corporation, which
      operated seven offices. The Company and the Bank are headquartered in
      Reidsville, North Carolina.

3.    Comprehensive Income

            The Company's other comprehensive income for the three and six month
      periods ended June 30, 2003 and 2002 consists of unrealized gains and
      losses on available for sale securities, net of related income taxes, as
      follows:

<TABLE>
<CAPTION>
      (Dollars in thousands)                    Three Months Ended          Six Months Ended
                                                     June 30,                    June 30,
                                              ---------------------       ---------------------
                                                2003          2002          2003          2002
                                              -------       -------       -------       -------
<S>                                           <C>           <C>           <C>           <C>
      Unrealized gains (losses) on
       available for sale securities          $ 1,033       $ 1,913       $   795       $   176

      Reclassification of realized gains         (240)         (318)         (562)         (318)
                                              -------       -------       -------       -------
      Other comprehensive income (loss)
        before tax                                793         1,595           233          (142)

      Income tax effect                          (310)         (622)          (91)           55
                                              -------       -------       -------       -------

      Other comprehensive income (loss)       $   483       $   973       $   142       $   (87)
                                              =======       =======       =======       =======
</TABLE>

4.    Segment Information

            The Company follows the provisions of Statement of Financial
      Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of an
      Enterprise and Related Information." SFAS 131 establishes standards for
      determining an entity's operating segments and the type and level of
      financial information to be disclosed in both annual and interim financial
      statements. It also establishes standards for related disclosures about
      products and services, geographic areas, and major customers.


                                       7
<PAGE>

            Operating segments are components of an enterprise with separate
      financial information available for use by the chief operating decision
      maker to allocate resources and to assess performance. The Company has
      determined that it has one significant operating segment: the providing of
      general financial services to the customers of its wholly owned
      subsidiary, FNB Southeast. The various products offered by FNB Southeast
      are those generally offered by community banks, and the allocation of
      resources is based on the overall performance of the Company, rather than
      the individual performance of banking offices or products.

5.    Net Income Per Share

            Basic and diluted earnings per share amounts have been computed
      based upon net income as presented in the accompanying income statements
      divided by the weighted average number of common shares outstanding or
      assumed to be outstanding as summarized.

<TABLE>
<CAPTION>
                                                     Three Months Ended            Six Months Ended
                                                          June 30,                      June 30,
                                                  ------------------------      ------------------------
                                                     2003          2002           2003            2002
                                                  ---------      ---------      ---------      ---------
<S>                                               <C>            <C>            <C>            <C>
      Weighted average number of shares
        used in basic EPS                         4,467,707      4,635,296      4,455,772      4,605,891
      Effect of dilutive stock options              142,495        103,908        125,696         88,434
                                                  ---------      ---------      ---------      ---------

      Weighted average number of common
        shares and dilutive potential common
        shares used in dilutive EPS               4,610,202      4,739,204      4,581,468      4,694,325
                                                  =========      =========      =========      =========
</TABLE>

            As of June 30, 2003, there were 114,833 potentially dilutive share
      options not included in the weighted average calculation since the option
      exercise prices are greater than the fair market value of the common
      shares.

6.    Investment Securities

<TABLE>
<CAPTION>
                                           June 30, 2003            December 31, 2002
                                      -----------------------     -----------------------
   (Dollars in thousands)             Amortized        Fair       Amortized        Fair
                                         Cost          Value         Cost          Value
                                      ---------      --------     ---------      --------
<S>                                    <C>           <C>           <C>           <C>
Available for sale:
  U.S. Agency securities               $ 82,284      $ 83,644      $ 97,364      $ 99,024
  Mortgage backed securities             24,680        24,992        17,945        18,388
  State and municipal obligations        32,574        33,550         7,036         7,351
  Other                                     321           339           306           321
                                       --------      --------      --------      --------
  Total available for sale              139,859       142,525       122,651       125,084
Federal Reserve Bank and Federal
  Home Loan Bank stock                    2,775         2,775         3,732         3,732
                                       --------      --------      --------      --------
   Total investment securities         $142,634      $145,300      $126,383      $128,816
                                       ========      ========      ========      ========
</TABLE>


                                       8
<PAGE>

7.    Loans (net of unearned income)

      (Dollars in thousands)                            June 30,    December 31,
                                                          2003          2002
                                                        --------    ------------
      Loan Category:

       Real estate - commercial                         $163,561      $170,657
       Real estate - residential                          98,670       116,074
       Real estate - construction                        105,903        87,696
       Commercial, financial and agricultural             89,635        87,458
       Consumer                                          109,071        98,473
                                                        --------      --------

         Subtotal loans                                  566,840       560,358

       Loans held for sale                                 2,540         3,242
                                                        --------      --------

         Gross loans                                    $569,380      $563,600
                                                        ========      ========

8.    Allowance for Credit Losses

<TABLE>
<CAPTION>
                                        June 30, 2003             December 31, 2002
                                   ------------------------    ------------------------
                                                % of Loans                  % of Loans
(Dollars in thousands)                          in Each                     in Each
                                                Category to                 Category to
                                   Allowance    Total Loans    Allowance    Total Loans
                                   ---------    -----------    ---------    -----------
<S>                                 <C>              <C>         <C>              <C>
Balance at end of period
applicable to:

Real estate - construction               5            19         $    7            16
Real estate - mortgage                  58            46            180            51
Commercial                           5,102            16          5,201            16
Consumer                             1,927            19          1,671            17
                                    ------        ------         ------        ------

 Total                              $7,092           100%        $7,059           100%
                                    ======        ======         ======        ======
</TABLE>


                                       9
<PAGE>

9.    Analysis of Allowance for Credit Losses

<TABLE>
<CAPTION>
                                                              Six Months Ended
                                                                   June 30,
                                                           ----------------------
(Dollars in thousands)                                       2003           2002
                                                           -------        -------
<S>                                                        <C>            <C>
Balance, beginning of period                               $ 7,059        $ 6,731

Charge-offs                                                    906            857
Recoveries                                                    (162)           (69)
                                                           -------        -------

Net charge-offs                                                744            788
                                                           -------        -------

Allowance charged to operations                                777            965
                                                           -------        -------

Balance, end of period                                     $ 7,092        $ 6,908
                                                           =======        =======

Ratio of annualized net charge-offs during the
   period to average loans outstanding
   during the period                                          0.26%          0.29%
                                                           =======        =======

Ratio of allowance for credit losses to
   month end loans                                            1.25%          1.27%
                                                           =======        =======
</TABLE>

10.   Nonperforming Assets

<TABLE>
<CAPTION>
                                                               June 30,    December 31,
     (Dollars in thousands)                                      2003          2002
                                                               --------    ------------
<S>                                                             <C>           <C>
      Nonaccrual (1)                                            $8,913        $3,614
      Past due 90 days or more and still accruing interest          54            65
      Other real estate                                          1,847         1,662
      Renegotiated troubled debt                                    --            --
</TABLE>

      (1)   Other than amounts listed above, there are no other loans which: (a)
            represent or result from trends or uncertainties which management
            reasonably expects will materially affect future operating results,
            liquidity, or capital resources, or (b) represent material credits
            about which management is aware of any information which causes
            management to have serious doubts as to the ability of such
            borrowers to comply with the loan repayment terms.


                                       10
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Information set forth below contains various forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which statements represent the Company's
judgment concerning the future and are subject to risks and uncertainties that
could cause the Company's actual operating results to differ materially. Such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "may", "will", "expect", "anticipate", "estimate",
"believe", or "continue", or the negative thereof or other variations thereof or
comparable terminology. The Company cautions that such forward-looking
statements are further qualified by important factors that could cause the
Company's actual operating results to differ materially from those in the
forward-looking statements.

Application of Critical Accounting Policies

      The Company's accounting policies are fundamental to understanding
management's discussion and analysis of results of operations and financial
condition. The Company's significant accounting policies are discussed in detail
in Note 1 of the consolidated financial statements included in the Company's
2002 Annual Report. The following is a summary of the allowance for credit
losses, one of the most complex and judgmental accounting policies of the
Company.

      The allowance for credit losses, which is utilized to absorb actual losses
in the loan portfolio, is maintained at a level consistent with management's
best estimate of probable credit losses incurred as of the balance sheet date.
The Company's allowance for credit losses is also analyzed quarterly by
management. This analysis includes a methodology that separates the total loan
portfolio into homogeneous loan classifications for purposes of evaluating risk.
The required allowance is calculated by applying a risk adjusted reserve
requirement to the dollar volume of loans within a homogenous group. Major loan
portfolio subgroups include: risk graded commercial loans, mortgage loans, home
equity loans, retail loans and retail credit lines. Management also analyzes the
loan portfolio on an ongoing basis to evaluate current risk levels, and risk
grades are adjusted accordingly. While management uses the best information to
make evaluations, future adjustments may be necessary, if economic or other
conditions differ substantially from the assumptions used.

Summary

      On January 27, 2003 the Company completed the acquisition of the
Harrisonburg, Virginia branch of another financial institution. The Company
acquired approximately $5.4 million in loans and $11.0 million in deposits.

      Assets at June 30, 2003 were $775.7 million, an increase of $41.6 million
since December 31, 2002. An increase in investment securities available for sale
of $17.4 million, combined with an increase in net loans of $5.8 million,
contributed to this increase in assets during the first six months of 2003. Over
the past six months, noninterest-bearing deposits increased $10.8 million, while
interest-bearing deposits rose $45.6 million.

      Net income for the quarter ended June 30, 2003, of $1.8 million was
$239,000, or 15.6%, higher than the amount earned in the second quarter last
year. Diluted earnings per share for the current quarter was $0.39 per share
compared to $0.32 per share last year. For the six months to date of 2003,
earnings of $3.5 million were $737,000, or 26.4%, higher than the same period a
year ago. Diluted earnings per share for the six months ended June 30, 2003 and
2002 were $0.77 and $0.59, respectively.

Interest Income and Interest Expense

      Total interest income was $10.4 million for the second quarter of 2003,
compared to $10.6 million during the same period in 2002. Average earning assets
for the current quarter were $717.5 million, an increase of 11.7% over the
second quarter average of $642.4 million a year ago. Interest income from loans
was $9.0 million, down 2.1% from $9.2 million in the second quarter of 2002. The
decrease in


                                       11
<PAGE>

interest income was driven primarily by a continuing decline in the prime
lending rate. Average loans of $573.5 million were 6.3% higher than the $539.4
million last year. For the six months ended on June 30, 2003, total interest
income was $20.9 million, compared to $21.3 million during the same period in
2002. Earning assets averaged $713.1 million during the first six months of
2003, a 9.6% increase over the 2002 average of $650.6 million.

      Interest income on investments totaled $1.3 million for the three months
ended June 30, 2003 and 2002. The $36.5 million, or 37.4%, increase in the
average balance of the investment portfolio was offset by a decline in the yield
from 5.95% in 2002 to 4.60% in 2003. Investment income for the six-month period
totaled $2.8 million in 2003 and $3.1 million in 2002. Market pressure continues
on yields as interest rates are at the lowest point in 45 years.

      Second quarter total interest expense was $4.4 million, compared to $4.6
million from the second quarter of last year, a 5.0% decrease. Average interest
bearing liabilities for the second quarter 2003 increased 13.5%, to $617.3
million from $543.8 million for the second quarter of 2002. Total interest
expense for the first six months of 2003 was $8.9 million, a 9.2% decrease from
the $9.8 million expense for the first six months of 2002. Overall cost of funds
for the six months ended June 30, 2003 and 2002 was 2.66% and 3.23%,
respectively.

      Interest expense on deposits for the second quarter decreased 6.2%, to
$4.0 million for 2003 from $4.2 million in 2002. Average interest bearing
deposits increased 15.9%, to $555.1 million, from $478.8 for the second quarter
of 2002. A campaign directed at increasing certificates of deposit accounted for
a significant amount of this growth. Deposit interest expense for the six months
ended June 30, 2003, decreased from $9.1 million in 2002 to $8.1 million in
2003. The average rate for the six months on interest bearing deposits decreased
to 2.97% in 2003; from 3.72% one year earlier while the average balance of
interest bearing deposits increased 11.0%, from $494.9 million in 2002 to $549.4
million in 2003.

      Interest expense on federal funds purchased and other borrowings was
$404,000 for the quarter ended June 30, 2003, up 9.4%, from $368,000 in the
second quarter of 2002. For the six months ended June 30, interest expense for
this category increased from $$673,000 in 2002 to $819,000 in 2003. The increase
was attributable primarily to an increase in the average balance of federal
funds purchased and other borrowings from $59.9 million in 2002 to $63.8 million
in 2003. This increase was partially offset by a decline in the average rate
paid on purchased funds from 3.23% for the first six months of 2002 to 2.66% for
the same period in 2003.

Comparable net interest margins are as follows:

<TABLE>
<CAPTION>
                                                        Liability
Time Period                       Asset Yield              Rate             Interest Rate Spread
-----------                       -----------              ----             --------------------
<S>                                  <C>                  <C>                       <C>
Second Quarter, 2003                 5.88%         -      2.85%       =             3.03%
Second Quarter, 2002                 6.66%         -      3.40%       =             3.26%

Year-To-Date, 2003                   5.98%         -      2.93%       =             3.05%
Year-To-Date, 2002                   6.65%         -      3.57%       =             3.08%
</TABLE>

Provision for Credit Losses

      A provision for credit losses is charged against earnings in order to
maintain the allowance for credit losses at a level that reflects management's
evaluation of the incurred losses inherent in the portfolio. The amount of the
provision is based on continuing assessments of nonperforming and "watch list"
loans, analytical reviews of loan loss experience in relation to outstanding
loans, loan charge-offs, nonperforming asset trends and management's judgment
with respect to current and expected economic conditions and their impact on the
existing credit portfolio.

      The provision for credit losses in the second quarter of 2003 was $282,000
compared to $680,000 in 2002. The allowance for credit losses as a percentage of
gross loans outstanding was 1.25% at June 30, 2003 and December 31, 2002,
compared to 1.27% at June 30, 2002. Annualized net credit losses, as a


                                       12
<PAGE>

percent of average loans, was 0.26% and 0.38% for the quarters ended June 30,
2003 and 2002, respectively. Year to date annualized net credit loss declined to
0.26% of average loans in 2003, compared to 0.29% for the same period in 2002.
For the first six months of 2003, the provision was $777,000, compared to
$965,000 for the same period a year ago.

Noninterest Income and Expense

      Noninterest income in the second quarter of this year increased 14.2% to
$1.8 million from $1.5 million in the same period last year. For the current
quarter, $240,000 of net gains from sales of investment securities were
recognized, a decrease from $318,000 of net gains in the second quarter of last
year. Deposit service charges of $871,000 for the second quarter of 2003
increased 31.3% from the $663,000 in the second quarter of 2002. The
introduction in the second quarter of 2002 of a new fee-based overdraft
protection product contributed to this increase. Noninterest income in the
second quarter of 2003 included $482,000 in mortgage banking fees and $102,000
in investment service fees compared to revenues of $282,000 and $77,000,
respectively, for the previous year. The increase in mortgage banking fees for
the first half of 2003 was attributable to the continuing growth of the mortgage
banking subsidiary, combined with the refinancing activity associated with the
declining interest rate environment. Total noninterest income for the first half
of 2003 totaled $3.6 million; a 43.7% increase over the $2.5 million earned in
the first half of 2002. Deposit service charges of $1.6 million for the six
months were 31.0% higher than the $1.2 million recorded in the same period last
year. Mortgage banking fees totaled $946,000 for the first six months of 2003,
compared to $442,000 for the same period in 2002, an increase of 113.8%.

      Noninterest expense for the second quarter of 2003 was $4.8 million, a
4.0% increase over the $4.6 million expense in the second quarter of 2002.
Salaries and employee benefits increased $56,000 because of higher insurance and
retirement costs and furniture and equipment expense rose $96,000, compared to
second quarter 2002. Other expense for the second quarters of 2003 and 2002
totaled $1.1 million. Other expense in the first half of 2003 totaled $2.1
million, an increase of $70,000 from the first half of 2002. This year's
six-month noninterest expense of $9.4 million was 5.2% higher than the $8.9
million in the same period last year.

Income Taxes

      The effective income tax rate of 35.2% for the first six months of 2003
was higher than the 32.7% rate for the same period of 2002. The lower effective
tax rate for 2002 was primarily due to the reduced amount of current expense
required to provide adequate income tax provision during the first six months of
2002. The Company anticipates the effective tax rate for the 2003 full year will
be similar to the results of the first six months of 2003.

Financial Condition

      The Company's total assets at June 30, 2003 and 2002 were $775.7 million
and $671.3 million, respectively. The $104.3 million growth represents a 15.5%
increase over one year earlier. Since December 31, 2002, assets have increased
$41.6 million. An increase of $16.5 million in investment securities available
for sale, combined with a $9.1 million rise in interest-bearing balances due
from banks, contributed to the increase in total assets. Average earning assets
for the second quarter of 2003 were $717.5 million, or 11.7%, higher than the
$642.4 million average for the same quarter last year.

      Loans at June 30, 2003 totaled $569.4 million, compared to $543.5 million
one year earlier, an increase of 4.8%. Loans have increased 1.0% from $563.6
million at December 31, 2002. Average loans for the second quarter of 2003 were
$573.5 million, a 6.3% increase over the $539.4 million average in this same
period last year.

      Investment securities of $145.3 million at June 30, 2003 were 56.3% higher
than the $92.9 million balance a year ago. Average investment securities were
$134.0 million and $97.5 million for the second quarter of 2003 and 2002,
respectively. The Company elected to use the proceeds from successful campaigns
directed at increasing core deposits to fund the growth in the investment
portfolio.


                                       13
<PAGE>

      Deposits totaled $661.4 million at June 30, 2003, a 22.9% increase versus
$538.4 million one year ago, and a 9.3% increase from the $605.0 million
recorded at December 31, 2002. At the end of the second quarter 2003,
noninterest-bearing deposits were $72.4 million, or 10.9% of total deposits. The
increase in deposits was the result of campaigns designed to attract demand
deposits and certificates of deposit with a nine-month maturity. As mentioned in
the preceding paragraph, the growth in deposits funded the rise in the
investment portfolio, as well as contributing to the decrease in other
borrowings.

      At June 30, 2003, borrowings at the Federal Home Loan Bank of Atlanta
(FHLB) totaled $32.5 million, a decrease of 38.1% compared to $52.5 million at
December 31, 2002. Federal funds purchased and retail repurchase agreements
totaled $6.7 million at June 30, 2003, a decrease of $1.5 million from December
31, 2002.

      Shareholders' equity increased to $65.5 million at the end of the second
quarter 2003, compared to $64.3 million at December 31, 2002. The Company paid
dividends of $0.14 per share during the quarter ended June 30, 2003, a 7.7%
increase over the $0.13 per share dividend rate for the second quarter of 2002.
Year to date dividends per share for 2003 were $0.28, compared to $0.26 in 2002.
A second stock repurchase program of the outstanding common stock, initiated
during the fourth quarter of 2002, continued in 2003. This program is intended
to help the Company achieve its goal of building shareholder value while
maintaining appropriate capital levels. A total of 223,851 shares are eligible
to be repurchased, and through June 30, 2003, a total of 106,453 shares have
been purchased at an average price of $17.568. In accordance with state law,
repurchased shares are cancelled and are no longer considered issued.

Asset Quality

      The credit loss allowance ratio was 1.25% at June 30, 2003 and December
31, 2002; and 1.27% at June 30, 2002. For the second quarter of 2003, provision
charges against earnings totaled $282,000, compared to $680,000 in the second
quarter of 2002. Net charge-offs for the second quarter of 2003 totaled
$366,000, or a 0.26% annualized loss ratio based on average loans outstanding.
This is a decrease from the net charge-offs for the second quarter of 2002
totaling $514,000, or 0.38% annualized loss ratio. Annualized net charge-offs
for the first six months of 2003 and 2002 were 0.26% and 0.29%, respectively,
based on average loans outstanding.

      The Company's allowance for credit losses is analyzed quarterly by
management. This analysis includes a methodology that segments the loan
portfolio by selected types and considers the current status of the portfolio,
historical charge-off experience, current levels of delinquent, impaired and
non-performing loans, as well as economic and other risk factors. It is also
subject to regulatory examinations and determinations as to adequacy, which may
take into account such factors as the methodology employed and other analytical
measures in comparison to a group of peer banks. Management believes the
allowance for loan losses is sufficient to absorb known risk in the portfolio.
No assurances can be given that future economic conditions will not adversely
affect borrowers and result in increased losses.

      Other real estate owned at June 30, 2003 was $1.8 million, compared to
$1.7 million at December 31, 2002. Approximately $535,000 has been transferred
from loans into other real estate and approximately $360,000 of such assets were
disposed of during the first six months of 2003. A net loss of $31,000 has been
recorded on disposition of other real estate in the current year.

Capital Resources

      Banks and financial holding companies, as regulated institutions, must
meet required levels of capital. The Office of the Commissioner of Banks in
North Carolina and the Board of Governors of the Federal Reserve, which are the
primary regulatory agencies for FNB Southeast and the Company, respectively,
have adopted minimum capital regulations or guidelines that categorize
components and the level of risk associated with various types of assets.
Financial institutions are required to maintain a level of capital commensurate
with the risk profile assigned to their assets in accordance with the
guidelines.


                                       14
<PAGE>

      As shown in the following table, the Company and its wholly-owned banking
subsidiary have capital levels exceeding the minimum levels for "well
capitalized" banks and financial holding companies as of June 30, 2002.

                              Regulatory Guidelines
                            --------------------------
                               Well         Adequately                 FNB
     Ratio                  Capitalized    Capitalized    Company   Southeast
     -----                  -----------    -----------    -------   ---------

     Total Capital             10.0%            8.0%       11.9%       11.6%
     Tier 1 Capital             6.0             4.0        10.7        10.4
     Leverage Capital           5.0             4.0         8.4         8.1

New Accounting Pronouncements

      During the first half of 2003, the Securities and Exchange Commission
promulgated rules to implement several provisions of the Sarbanes-Oxley Act of
2002. These rules included conditions for using financial measures that excluded
information that would be required under generally accepted accounting
principles, ("non-GAAP financial measures"). Additionally, new rules expand the
number of events that require current reporting on Form 8-K. Furthermore, new
rules have been issued pertaining to an audit committee and its need for a
financial expert and code of ethics requirements for senior management. Also,
new rules were issued defining audit committee responsibility for external
auditor retention and determination of external auditor independence. Additional
rules have been promulgated to implement provisions requiring management to
certify its responsibilities for establishing, maintaining and monitoring
internal reporting and disclosure controls. Management anticipates additional
costs to implement the various provisions of this law; however, it is difficult
to determine the full impact of implementation until such time as all rules have
been promulgated.

      In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 requires that obligations associated with the
retirement of a tangible long-lived asset to be recorded as a liability when
those obligations are incurred, with the amount of the liability initially
measured at fair value. SFAS 143 will be effective for financial statements
issued for fiscal years beginning after June 15, 2002, with early application
encouraged. Management does not anticipate the implementation of this Statement
to have a material impact on the Company's consolidated financial statements.

      The FASB has issued SFAS 145 "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145).
This Statement rescinds SFAS No.4,"Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, SFAS 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS 44,"Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS 13,"Accounting for Leases," to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS 145 also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions of SFAS 145 related to the rescission of SFAS 4 shall
be applied in fiscal years beginning after May 15, 2002. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in Opinion 30 for
classification as an extraordinary item shall be reclassified. Early application
of the provisions of this Statement related to the rescission of SFAS 4 is
encouraged. The provisions in paragraphs 8 and 9(c) of SFAS 145 related to SFAS
13 shall be effective for transactions occurring after May 15, 2002, with early
application encouraged. All other provisions of SFAS 145 shall be effective for
financial statements issued on or after May 15, 2002, with early application
encouraged. Management does not anticipate the implementation of this Statement
to have a material impact on the Company's consolidated financial statements.


                                       15
<PAGE>

      In June 2002 the FASB issued SFAS 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. Management
does not anticipate the implementation of this Statement to have a material
impact on the Company's financial statement.

      The FASB has issued SFAS 147,"Acquisitions of Certain Financial
Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9" (SFAS 147). FASB Statement No. 72,"Accounting for Certain
Acquisitions of Banking or Thrift Institutions," and FASB Interpretation No.
9,"Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution Is Acquired in a Business Combination Accounted for by the
Purchase Method," provided interpretive guidance on the application of the
purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, SFAS 147 removes
acquisitions of financial institutions from the scope of both Statement 72 and
Interpretation 9 and requires that those transactions be accounted for in
accordance with FASB Statements No. 141,"Business Combinations," and No.
142,"Goodwill and Other Intangible Assets." Thus, the requirement in paragraph 5
of Statement 72 to recognize (and subsequently amortize) any excess of the fair
value of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset no longer
applies to acquisitions within the scope of SFAS 147.

      In addition, SFAS 147 amends FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS 144 requires for other long-lived assets that
are held and used. Paragraph 5 of SFAS 147, which relates to the application of
the purchase method of accounting, is effective for acquisitions for which the
date of acquisition is on or after October 1, 2002.The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 are effective on October 1, 2002, with earlier application
permitted. Management does not anticipate the implementation of this Statement
to have a material impact on the Company's financial statements.

      In December 2002, the FASB issued FASB Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" (SFAS 148), which amends
FASB Statement No. 123, "Accounting for Stock Based Compensation" (SFAS 123), to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. The provisions of the statement were effective December 31, 2002.
Management currently intends to continue to account for stock-based compensation
under the intrinsic value method set forth in Accounting Principles Board
("APB") Opinion 25 and related interpretations. For this reason, the transition
guidance of SFAS 148 does not have an impact on the Company's consolidated
balance sheet or consolidated statements of income and comprehensive income. The
Statement does amend existing guidance with respect to required disclosures,
regardless of the method of accounting used. The revised disclosure requirements
are presented herein.


                                       16
<PAGE>

      The proforma impact on net income and net income per share as if the fair
value of stock-based compensation plans had been recorded as a component of
compensation expense in the consolidated financial statements as of the date of
grant of awards related to such plans, pursuant to the provisions of SFAS 123
and SFAS 148, is disclosed as follows.

      (Dollars in thousands, except per share data)        June 30,     June 30,
                                                             2003         2002
                                                             ----         ----
      Net income, as reported                               $3,524       $2,787
      Less: Stock based compensation as calculated per
      fair value method, net of tax effect                    (173)        (349)
                                                            ------       ------
      Proforma net income                                   $3,351       $2,438

      Earnings per share:
      Basic - as reported                                   $  .79       $  .60
      Basic - proforma                                      $  .75       $  .53
      Diluted - as reported                                 $  .77       $  .59
      Diluted - proforma                                    $  .75       $  .52

      The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used in 2003 and 2002: dividend yield of 3.26% and 3.30%; expected
volatility of 4.58% and 16.0%; risk free interest rates of 3.50% and 3.47%, and
expected lives of seven years for both periods.

      These plans provide that shares granted come from the Company's authorized
but unissued or reacquired common stock. The price of the options granted
pursuant to these plans will not be less than 100 percent of the fair market
value of the shares on the date of grant. The options granted in 1989, 1992, and
1995 vest ratably over a five-year period, and the options granted in 1996 and
thereafter vest ratably over a four-year period. No option will be exercisable
after ten years from the date granted.

      On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"),"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (an interpretation of
FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No.
34)." FIN 45 clarifies the requirements of FASB Statement No. 5 (SFAS
5),"Accounting for Contingencies," relating to a guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees. For guarantees that
fall within the scope of FIN 45, the Interpretation requires that guarantors
recognize a liability equal to the fair value of the guarantee upon its
issuance. The Corporation's primary guarantees included within the scope of FIN
45 relates to financial standby letters of credit issued to commercial
customers. FIN 45 requires the liability recognized in standalone arm's-length
transactions to be the premium received or receivable by the guarantor.
Management does not anticipate the implementation of this interpretation to have
a material impact on the Company's financial statements.

      In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN
46"),"Consolidation of Variable Interest Entities (an interpretation of ARB
No.51)." FIN 46 addresses the consolidation by business enterprises of certain
variable interest entities. Management does not anticipate the implementation of
this interpretation to have a material impact on the Company's financial
statements.

      In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." FSAB Statements No. 133 "Accounting for Derivative Instruments and
Hedging Activities" and No. 138 "Accounting for Certain Derivative Instruments
and Certain Hedging Activities," establish accounting and reporting standards
for derivative instruments including derivatives embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. This
Statement 149 amends Statement 133 for certain decisions made by the Board as
part of the Derivatives Implementation Group (DIG) process. This Statement
contains amendments relating to FASB Concepts Statement No. 7, "Using Cash Flow
Information and Present Value in Accounting Measurements," and FASB Statements
No. 65, "Accounting for Certain Mortgage Banking Activities," No. 91 "Accounting
for Nonrefundable Fees and Costs Associated with


                                       17
<PAGE>

Originating or Acquiring Loans and Initial Direct Costs of Leases," No. 95,
"Statement of Cash Flows," and No. 126, "Exemption from Certain Required
Disclosures about Financial Instruments for Certain Nonpublic Entities." The
Company is presently evaluating the effect of this pronouncement.

      In May 2003, FASB issued Statement of Financial Accounting Standards No.
150 "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, Elements of
Financial Statements. The remaining provisions of this Statement are consistent
with the Board's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own equity
shares, depending on the nature of the relationship established between the
holder and the issuer. While the Board still plans to revise that definition
through an amendment to Concepts Statement 6, the Board decided to defer issuing
that amendment until it has concluded its deliberations on the next phase of
this project. That next phase will deal with certain compound financial
instruments including puttable shares, convertible bonds, and dual-indexed
financial instruments. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of nonpublic entities. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. Management does not anticipate the implementation
of this statement to have a material impact on the Corporation's consolidated
financial position or consolidated results of operations.

      Based on the Company's operations as of June 30, 2003, none of these
standards are expected to have a material effect on the Company's financial
statements.

Sarbanes-Oxley Act of 2002

      On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law and
became some of the most sweeping federal legislation addressing accounting,
corporate governance and disclosure issues. The impact of the Sarbanes-Oxley Act
is wide-ranging as it applies to all public companies and imposes significant
new requirements for public company governance and disclosure requirements. Some
of the provisions of the Sarbanes-Oxley Act became effective immediately while
others will be implemented over the coming months.

      In general, the Sarbanes-Oxley Act mandates important new corporate
governance and financial reporting requirements intended to enhance the accuracy
and transparency of public companies' reported financial results. It establishes
new responsibilities for corporate chief executive officers, chief financial
officers and audit committees in the financial reporting process and creates a
new regulatory body to oversee auditors of public companies. It backs these
requirements with new SEC enforcement tools, increases criminal penalties for
federal mail, wire and securities fraud, and creates new criminal penalties for
document and record destruction in connection with federal investigations. It
also increases the opportunity for more private litigation by lengthening the
statute of limitations for securities fraud claims and providing new federal
corporate whistleblower protection.

      The full impact of the Sarbanes-Oxley Act cannot be fully measured until
the SEC acts to implement the numerous provisions for which Congress has
delegated implementation authority. The economic and operational effects of this
new legislation on public companies, including the Bank, will be significant in
terms of the time, resources and costs associated with complying with the new
law. Because the Sarbanes-Oxley Act, for the most part, applies equally to
larger and smaller public companies, the Bank will be presented with additional
challenges as a smaller, community-oriented financial institution seeking to
compete with larger financial institutions in its market.


                                       18
<PAGE>

Liquidity Management

      Liquidity management refers to the ability to meet day-to-day cash flow
requirements based primarily on activity in loan and deposit accounts of the
Company's customers. Deposit withdrawals, loan funding and general corporate
activity create a need for liquidity for the Company. Liquidity is derived from
sources such as deposit growth; maturity, calls, or sales of investment
securities; principal and interest payments on loans; access to borrowed funds
or lines of credit; and profits.

      During the first six months of 2003 the Company had net cash provided by
operating activities of $2.5 million. This was an increase from $1.4 million of
net cash provided by operating activities in the first half of 2002. The
increase is primarily attributable to the rise of $1.6 million in fees and
commissions received.

      Net cash used in investing activities in the first six months of 2003
totaled $19.4 million. Purchases of investment securities in the current year
totaled $90.0 million and proceeds from sales, calls, or maturity of securities
were $78.1 million. This compares to the first half of 2002 when proceeds from
sales and/or calls of securities totaled $33.0 million, resulting in net cash
provided by investment activities of $25.4 million. An increase in loans
outstanding used $4.5 million in cash during 2003, compared to an increase in
outstanding loans in 2002 that used $8.0 million of cash during the same period
in 2002. Capital expenditures used $2.3 million in 2003, compared to $218,000 in
2002.

      Financing activities in the 2003 first half provided $32.4 million, based
primarily on $56.4million rise in deposits. These cash inflows were partially
offset by a repayment of other borrowings of $21.5 million during the first six
months. During the 2002 first half, financing activities used $35.4 million. An
outflow of $48.4 deposits was partially of set by an increase of $14.2 million
in borrowings.

      Overall cash and cash equivalents totaled $39.9 million at June 30, 2003
compared to $24.5 million at December 31, 2002 and $14.7 million at June 30,
2002.

      Liquidity is further enhanced by an approximately $115 million line of
credit with the FHLB collateralized by FHLB stock, investment securities and
qualifying 1-4 family residential mortgage loans, and qualifying commercial real
estate loans. The Company provides various reports to the FHLB on a regular
basis throughout the year to maintain the availability of the credit line. Each
borrowing request to the FHLB is initiated through an advance application that
is subject to approval by the FHLB before funds are advanced under the credit
agreement.

      The Company also has unsecured overnight borrowing lines totaling $19
million available through four financial institutions. These lines are used to
manage the day to day, short-term liquidity needs of the Company. Each Federal
funds line has a requirement to repay the line in full on a frequent basis,
typically within five to ten business days.

Effects of Inflation

      Inflation affects financial institutions in ways that are different from
most commercial and industrial companies, which have significant investments in
fixed assets and inventories. The effect of inflation on interest rates can
materially impact bank operations, which rely on net interest margins as a major
source of earnings. Non-interest expenses, such as salaries and wages, occupancy
and equipment cost are also negatively impacted by inflation.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

      Market risk is the possible chance of loss from unfavorable changes in
market prices and rates. These changes may result in a reduction of current and
future period net interest income, which is the


                                       19
<PAGE>

favorable spread earned from the excess of interest income on interest-earning
assets, over interest expense on interest-bearing liabilities.

      The Company considers interest rate risk to be its most significant market
risk, which could potentially have the greatest impact on operating earnings.
The Company is asset sensitive, which means that falling interest rates could
result in a reduced amount of net interest income. The monitoring of interest
rate risk is part of the Company's overall asset/liability management process.
The primary oversight of asset/liability management rests with the Company's
Asset and Liability Committee. The Committee meets on a regular basis to review
asset/liability activities and to monitor compliance with established policies.

      The Company has not experienced any substantive changes in portfolio risk
during the six months ended June 30, 2003.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

      Within 90 days prior to the date of this report, the Company's Chief
Executive Officer and the Chief Financial Officer evaluated the effectiveness of
the Company's disclosure controls and procedures in accordance with Rule 13a-14
under the Exchange Act. Based on their evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Company's disclosure controls
and procedures enable the Company to record, process, summarize and report in a
timely manner the information that the Company is required to disclose in its
Exchange Act reports.

Changes in internal controls

      There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation referred to above.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

         None.

Item 2.  Changes in Securities and Use of Proceeds

         None.

Item 3.  Defaults Upon Senior Securities

         Not Applicable.


                                       20
<PAGE>

Item 4.     Submission of Matters to a Vote of Security Holders

            On May 15, 2003, at the Annual Meeting of the Company's
            shareholders, the following two proposals were voted on by
            shareholders.

            Proposal One

            To elect three members of the Board of Directors as follows:

            Three Directors to serve three-year terms ending in 2006. Votes for
            each nominee were as follows:

            Nominee                       For                  Withheld
            Ernest J. Sewell          3,237,245                 127,732
            Charles A. Britt          3,309,728                  55,249
            Barry Z. Dodson           3,343,735                  21,243

            The following directors remain in office: O. Eddie Green, E. Reid
            Teague, Gary G. Blosser, Joseph H. Kinnarney, Elton H. Trent, Jr.,
            and Kenan C. Wright.

            Proposal Two

            To ratify the appointment of PricewaterhouseCoopers LLP as the
            Company's independent accountants for the year ending December 31,
            2003. The votes for this proposal were as follows:

            For :      3,327,730
            Against:      13,300
            Abstain:       23,948

Item 5.     Other Information

            None.

Item 6.     Exhibits and Reports on Form 8-K

      (a)   Exhibits

         Exhibit No.  Description
         -----------  -----------

         3.01         Amended and Restated Articles of Incorporation.

         3.02         Bylaws of Company, as amended.

         4.01         Specimen Common Stock Certificate.

         10.01        Stock Compensation Plan of the Registrant approved April
                      11, 1989, by the shareholders of the Registrant, with
                      forms of stock option and stock bonus agreements attached.

         10.02        Omnibus Equity Compensation Plan of the Registrant.

         10.03        Severance Policy for Senior Officers of the Registrant
                      (employed for five years or more).

         10.04        Revised Severance Plan for Senior Officers of the
                      Registrant (employed for five years or more).

         10.05        Severance Policy for Senior Officers of the Registrant
                      (employed for less than five years).

         10.07        Benefit Equivalency Plan of the Registrant effective
                      January 1, 1994.

         10.08        Annual Management Incentive Plan of the Registrant.

         10.09        Long Term Incentive Plan of the Registrant.

         10.10        Long Term Incentive Plan of the Registrant for certain
                      Senior Management employees.


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<PAGE>

         10.11        Employment Agreement dated May 18, 1995, between the
                      Registrant, as employer, and Ernest J. Sewell, President
                      and Chief Executive Officer of the Registrant.

         10.12        Amendment to Employment Agreement between the Registrant,
                      as employer, and Ernest J. Sewell, President and Chief
                      Executive Officer of the Registrant dated May 16, 2002.

         10.13        Split-Dollar Agreement dated January 27, 1995, between the
                      Registrant and Ernest J. Sewell.

         10.14        Lease, dated January 31, 1997, between the Registrant and
                      Landmark Commercial, Inc., relating to the Wilmington
                      branch office.

         10.15        Amendment to Benefit Equivalency Plan of the Registrant
                      effective January 1, 1998.

         10.15        Amendment to Benefit Equivalency Plan of the Registrant
                      effective January 1, 1998.

         10.15        Amendment to Benefit Equivalency Plan of the Registrant
                      effective January 1, 1998.

         10.15        Amendment to Benefit Equivalency Plan of the Registrant
                      effective January 1, 1998.

      (b)   Reports on Form 8-K

            None.

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                FNB FINANCIAL SERVICES CORPORATION
                                (Registrant)


August 12, 2003                     /s/ Michael W. Shelton
                                    --------------------------------------------
                                                Michael W. Shelton
                                       (Vice President, Secretary and Treasurer)


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