FNB Banking Company Form 10-KSB

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

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

¨ Transition Report Pursuant to Section13 or 15(d) of THE SECURITIES EXCHANGE ACT OF 1934

Securities registered pursuant to Section 12(b) of the Act: 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 or 15(d) of the Exchange Act during the past 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 / /

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

Registrant is not required to be registered under the Securities Exchange Act of 1934.

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

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

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 of Griffin (the “Bank”). As a result of this transaction, the former shareholders of the Bank became the shareholders of the Company, and the Bank became the wholly-owned subsidiary of the Company. On May 31, 2002, the Company completed the acquisition of American Community Bank of Georgia (“ACB”), and subsequently merged ACB into the Bank. ACB shareholders received $13.35 per share for each outstanding share of ACB. In addition to the Bank, the Company 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 the past 5 years, total assets of the Company have grown by $99,256,036 representing an increase of 48.9%.

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

The Bank offers a full range of depository accounts and services to both consumers and businesses. At December 31, 2003, the Bank’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 total deposits), and $31 million in time deposits of $100,000 or more (13% of total deposits). Management of the Bank is of the opinion that its time deposits of $100,000 or more are customer relationship-oriented and represent a reasonably stable source of funds.

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

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

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

Making loans to businesses to fund working capital is a traditional function of commercial banks. Such loans are expected to be repaid out of the cash flow of the commercial entity, and the ability of the borrower to service its debt is dependent upon the success of the commercial enterprise. It is the Bank’s policy to secure these loans with collateral. Many of the Bank’s commercial loans are secured by real estate collateral because such collateral is superior to other types of collateral available to small businesses. Loans secured by commercial real estate, however, particularly if collateral dependent, are subject to certain inherent risks. Commercial real estate may be substantially illiquid, and commercial real estate 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 minimum real estate loan-to-value standards. The Bank has adopted these federal standards as its minimum standards. These standards 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.

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

The loan review officer of the Company reviews the Bank’s loan portfolio to determine deficiencies and corrective action to be taken, if any. The results of the reviews by the loan review officer are presented to the President and the Executive Committee 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 summary report is reviewed monthly by the Board of Directors. The Board of Directors reviews all new loans over $25,000 whether current or past due each month. The Bank charges off loans with past-due amounts when they are believed to be uncollectible.

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

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 commercial banks. 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, the Company also competes for loans with insurance companies, regulated small loan companies, credit unions, and certain governmental agencies. In addition, the Company and any non-banking subsidiaries it may establish in the future compete and will compete with numerous other companies and financial institutions engaged in similar lines of business, such as other bank holding companies, leasing companies, and insurance companies.

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

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 to any collective bargaining agreement. Management believes that the Company has satisfactory relations with its employees.

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

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

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 is required 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 direct or indirect ownership or control of more than 5% of the voting shares of any bank that it does not already control; (2) it or any of its non-bank subsidiaries may acquire all or substantially all of the assets of a bank; and (3) it may merge or consolidate with any 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 not apply to activities listed in the Act or found by the Federal Reserve, by order or regulation, to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve has determined by regulation or order to be closely related to banking are:

Although the activities of bank holding companies have traditionally been limited to the business of banking and activities closely related 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 companies may elect to become financial holding companies which may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Activities that are deemed “financial in nature” include:

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

Under the Gramm-Leach-Bliley Act, the Federal Reserve Board serves as the primary “umbrella” regulator of financial holding companies with supervisory authority over each parent company and limited authority over its subsidiaries. The primary regulator of each subsidiary of a financial holding company will depend on the type of activity conducted by the subsidiary. For example, broker-dealer subsidiaries will be regulated largely by securities regulators and insurance subsidiaries 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. Under the Patriot Act, FDIC insured banks and commercial banks are required to increase their due diligence efforts for correspondent accounts and private banking customers. The Patriot Act requires the Bank to engage in additional record keeping and reporting, to obtain identification of account owners or customers of foreign bank account holders, and to restrict or prohibit certain correspondent accounts.

The laws of Georgia require annual registration with the Department of Banking and Finance (the “DBF”) by all Georgia bank 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 may also require such other information as is necessary to keep itself informed as to whether the provisions of Georgia law and the regulations and orders issued thereunder by the DBF have been complied with. The DBF may make examinations of each bank holding company 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 examined by, 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 and certain other charges collected or contracted for by the Bank are also subject to state usury laws or certain federal laws concerning interest rates.

The Bank is insured by the Federal Deposit Insurance Corporation (the “FDIC”). The major functions of the FDIC with respect to insured banks include paying depositors to the extent provided by law if an insured bank is closed without adequate provisions having been made to pay claims of depositors, acting as a receiver of state banks placed in receivership when appointed receiver 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’s taking the stock or securities of an “affiliate” as collateral for loans by the Bank to a borrower and (iv) the purchase of assets from the Company by the Bank. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.

The Company is a legal entity separate and distinct from the Bank. Most of the revenues of the Company result from dividends paid 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 the total of all dividends declared by the Board of Directors in any year will exceed (i) the total of the Bank’s net profits (as defined and interpreted by regulation) for that year, plus (ii) the Bank’s retained net profits (as defined and interpreted by 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 to maintain 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 the financial condition of a bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The FDIC and the OCC have issued policy statements providing that insured banks should generally only pay dividends out of current operating earnings. At December 31, 2003, the Bank’s retained earnings from which dividends could be paid is limited to 2004 earnings of the Bank. For 2003, the Company’s cash dividend payout to stockholders was 28 percent of net earnings.

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 market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand, or the business and earnings of the Bank.

The Federal Reserve and the OCC have implemented substantially identical risk-based rules for assessing bank and bank holding company capital adequacy. These regulations establish minimum capital standards in relation to assets and off-balance sheet exposures as adjusted for credit risk. Banks and bank holding companies are required to 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 four percent. In addition, the Federal Reserve and the OCC have established a minimum three percent leverage ratio of Tier One Capital to total assets (four percent for all but the most highly-rated banks and bank holding companies). “Tier One Capital” generally consists of common equity not including unrecognized gains and losses on securities, minority interests in equity accounts of consolidated subsidiaries, and certain perpetual preferred stock less certain intangibles. The Federal Reserve and the OCC use the leverage ratio in tandem with the risk-based ratio to assess the capital adequacy of banks and bank holding companies. The capital adequacy standards also provide for the consideration of interest rate risk in the overall determination of a bank’s capital ratio, requiring banks with greater interest rate risk to maintain adequate capital for 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 placed largely based on their capital positions. Regulators are permitted to take increasingly harsh action as a bank’s financial condition declines. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s tangible equity to total assets ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital.

The OCC regulations concerning the “prompt corrective action” provisions place financial institutions in the following five categories based upon capitalization ratios: (1) a “well capitalized” institution has a total risk-based capital ratio 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 One risk-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 a leverage ratio of under four percent; (4) a “significantly undercapitalized” institution has a total risk-based capital ratio 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 of the three undercapitalized categories would be prohibited from declaring dividends or making capital distributions. The OCC regulations also establish procedures for “downgrading” an institution to a lower capital category based on supervisory factors other than capital. Under the OCC’s regulations, the Bank was a “well capitalized” institution at December 31, 2003.

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

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

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

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

The executive offices of the Company and the main office of the Bank are located in a 33,000 square-foot facility, 318 South Hill Street, Griffin, Georgia. None of the owned properties of the Company is subject to encumbrances. The Company owns a building adjacent to its main office in Griffin which is used for storage of bulk supplies and to house the offices of Griffin Loans, Inc. The Company owns all of the properties, except the Kroger Griffin Branch Limited Office and the Eagles Landing Office. 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 the Company’s acquisition of ACB, is leased for a term of 10 years, which began in April 1998. All bank’s owned or leased property is in good condition.

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

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

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

There is no established public trading market for the Common Stock. At December 31, 2003, there were 385 shareholders of record. Management is aware of 8 sales of the Company’s stock in 2003, aggregating 17,771 shares in blocks ranging from 21 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 the Company’s stock in 2002, aggregating 4,376 shares in blocks ranging from 6 shares to 1,872 shares at a price of $45 per share.

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 of dividends, however, will be determined by the Company’s Board of Directors in light of earnings, capital requirements and the financial condition of the Company, and no assurances can be given that dividends will be paid in the future. Information on restrictions on the amount of dividends payable by the Company appears in Note 12 to the Company’s consolidated financial statements set forth in Item 7 hereof.

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

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The table sets forth options granted to J. Charles Copeland by the Executive Committee of the Board of Directors. Such grants were specific to Mr. Copeland. The exercise price for Mr. Copeland’s options is the book value per share of the Company’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 an incentive stock option arrangement with J. Charles Copeland, its Chief Executive Officer and President, whereby the Company would issue up to a maximum number of 1,000 shares of its Common Stock at book value (the exercise price) to Mr. Copeland based on the Bank’s performance. Under this agreement and based on the Bank’s 2002 performance, on December 23, 2002, the Company granted Mr. Copeland options to purchase 232 shares of the Company’s Common Stock at an exercise price equal to the book value per share as of the date of exercise. On December 23, 2003, the Company granted Mr. Copeland options to purchase 320 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.

Forward-Looking Statements
This discussion contains forward-looking statements under the private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Although the Company believes that the assumptions underlying 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 limited to: economic conditions (both generally and in the markets where the Company operates); competition from other providers of financial services offered by the Company; government regulation and legislation; changes in interest rates; material unforeseen changes in the financial stability and liquidity of the Company’s credit customers; all of which are difficult to predict and which may be beyond the control of the Company. The Company undertakes no obligation to revise forward-looking statements to reflect events or changes after the date of this discussion or to reflect the occurrence of unanticipated events.

Consolidated net earnings rose slightly to $4.0 million in 2003, from $3.9 million in the prior year, an increase of 1.9%. Because 2002 results for the Company were favorably impacted by a one-time gain from the sale of a long-term equity investment held by the Company, earnings for the core banking operation showed a more significant improvement in 2003 over the prior year. Core bank earnings, as adjusted for the effects of this transaction in 2002, totaled $4.1 million in 2003 as 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 equity of 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 very little 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.

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

The Company has made important strides in controlling non-interest expense in 2003, but those gains may be offset by some new challenges in 2004 and beyond. The Company will re-tool the drive-in facility at its Northside branch in the spring of 2004. The Company will face a full year of cost on its new imaging system as well. While these changes 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 of 2002 compliance implementation. The Sarbanes-Oxley Act of 2002 includes provisions addressing audits, financial reporting and disclosure, conflicts of interest and corporate governance at public companies. Section 404 of this Act deals with managements report on internal controls, and will require much in the way of resources to plan, implement and document internal controls. Some of the resources will be in the form of internal people hours, but a significant cost will likely be in increased accounting and consulting fees. The Company cannot quantify the costs with any accuracy, but based on recent industry surveys during the early part of 2004, even small companies are expecting costs in the tens of thousands of dollars.

General
The Company is a one-bank holding company registered under the Bank Holding Company Act of 1956 and was incorporated under the laws of the State of Georgia in 1983. All of the Company’s activities are currently conducted by its wholly owned subsidiary, the Bank. The Bank owns a consumer finance company, First Credit, Inc., which engages in the business of making small loans to individuals.

The Company’s subsidiary bank was most recently examined by its primary regulatory authority in September, 2003. There were no recommendations by the regulatory authority that, in management’s opinion, would have 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 and results of operations of the Company and should be read in conjunction with the consolidated financial statements and accompanying notes.

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

Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in the loan 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 probable of occurring and estimable, and (2) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The use of these values is inherently subjective and the actual losses could be greater or less than the estimates.

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

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

Business Combination
On May 31, 2002, the Company consummated an agreement to acquire all of the outstanding shares of ACB for approximately $9.9 million in cash ($13.35 per share) plus certain acquisition costs. ACB was a banking corporation based in Stockbridge (Henry County), Georgia with approximately $55.4 million in total assets, $40.8 million in loans and $46.3 million in deposits. The primary reason for the acquisition was to expand the Company’s banking franchise into the high growth area of eastern Henry County, Georgia. The Company accounted for this transaction using the purchase method and accordingly, the original purchase price was allocated to assets and liabilities acquired based upon their fair values at the date of the acquisition. The excess of the purchase price over the fair value of the net assets acquired (goodwill) was approximately $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 of borrowings 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 of the consolidated financial statements.

Statements of Earnings Review
Net earnings were $4.0 million in 2003, an increase of 1.9% from the $3.9 million earned in 2002. Net earnings per share were $5.46 for 2003, compared with $5.32 reported in 2002, an increase of 2.6%. Return on average assets 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. Net earnings 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 increased interest earning assets. Net interest income at December 31, 2003 was $14.4 million compared to $14.0 million in 2002. Low interest rates reduced the net yield (tax equivalent) on interest earning assets (5.23% in 2003 and 5.60% in 2002) by 37 basis points in 2003 from 2002. Net interest income at December 31, 2002 was $14.0 million compared to $11.6 million in 2001, an increase of $2.4 million or 20.6% in 2002. Net yield (tax equivalent) on interest earning assets (5.60% in 2002 and 5.34% in 2001) increased by 26 basis 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. Its earnings depend to a large degree on net interest income, which is the difference between the interest income received from its investments (such as loans, investment securities, federal funds sold, etc.) and the interest expense, which is paid on deposits and other liabilities.

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

The net interest spread (on a tax equivalent basis) was 4.92% in 2003, 5.18% in 2002 and 4.60% in 2001, while the net interest margin (on a tax-equivalent basis) was 5.23%, in 2003, 5.60% in 2002 and 5.34% in 2001.

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

Table 1
Average Consolidated Balance Sheets and Net Interest Analysis on a Tax Equivalent Basis
(in thousands)

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

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

Table 2
Changes in Interest Income and Expense on a Tax Equivalent Basis
(in thousands)

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

Total other operating expenses increased by $814,000 (7.51%) in 2003 over 2002. The increase is attributable to salaries and employee benefit costs and miscellaneous expenses. Salaries and employee benefit costs amounted to $6.6 million in 2003, a $231,000 (3.63%) increase over the $6.4 million reported in 2002. The increase in personnel costs was held to a minimum despite the additional costs associated with the ACB acquisition. Miscellaneous expenses increased to $3.0 million for 2003, a $600,000 (24.51%) increase over 2002. The increase included costs associated with two major projects, an imaging system conversion and an ATM and debit card conversion as well as costs related to a full year of processing at ACB. Some of the specific increases included $98,000 for ATM and debit card expenses, a single deposit fraud incident of $80,000, postage increase of $61,000, data processing increase of $50,000 and advertising increase of $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 or 39.5% primarily due to net gains on sales of securities and an increase in service charges associated with a larger number of deposit 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 of ACB. Occupancy expense increased $412,000 (25.5%) in 2002 from 2001 primarily due to the increase in lease expense of $77,000 on 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. Average deposits increased $20 million (9.4%) in 2003 over 2002. Average loans increased $26.2 million (12.8%) in 2003 over 2002. The acquisition 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 $4.6 million 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 accounts increased $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 equity securities, 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 sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits.

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

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


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 are anticipated to be repaid based on scheduled maturities and yields on tax exempt securities are calculated on a tax equivalent basis.

The following table presents loans by type 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 of credit		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)
Unearned interest and fees		(225)	(248)	(371)	(375)	(320)
Loans, net	$	228,831	229,919	172,651	162,514	153,487

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

		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 portfolio and the creation of an allowance for loan losses adequate to absorb such losses. The allowance for loan losses represented approximately 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 consumer bankruptcies throughout the year. Management believes that these levels of allowance are appropriate based upon the Company’s loan portfolio and the current economic conditions.

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 primarily attributable 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 are reviewed annually and placed in various loan grading categories which assist in developing lists of potential problem loans. These loans are regularly monitored by the loan review function to ensure early identification of repayment problems so that adequate allowances can be made through the provision for loan losses. The formal allowance for loss adequacy test is performed at each calendar quarter end. Specific amounts of loss are estimated on problem loans and historical loss percentages are applied to the balance of the portfolio using certain portfolio stratifications. Additionally, the evaluation takes into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions, regulatory examination results, and the existence of loan concentrations.

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

Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, regulators, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such regulators may require the Company to recognize additions to the allowance based on their judgments 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):

The Company did not allocate the allowance for loan losses to various loan categories in 2002. The entire allowance was available to absorb losses from any and all loans.

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


		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 and repossessions, and income that would have been reported on non‑accrual loans for each of the past five years:

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:

The balance of non-accrual loans at December 31, 2003 consists of thirteen (13) borrowing relationships, two of which total $2,499,500. One loan totaling $1.9 million to a health care company is collateralized by commercial real estate. The other loan relationship totaling approximately $600,000 to a construction enterprise is collateralized by commercial real estate, accounts receivable and equipment used in the business. A total of $895,000 of valuation allowances for non-accrual loans is included in the allowance for loan losses at December 31, 2003. There were no related 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 as conditions indicate, management is not aware of any potential problem or restructured loans that are not disclosed in the table above.

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

Deposits
Time deposits of $100,000 and greater totaled $31.2 million at December 31, 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.

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

Liquidity
The Bank must maintain, on a daily basis, sufficient funds to cover the withdrawals from depositors’ 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 the policy of the Bank to monitor its liquidity to meet regulatory requirements and their local funding requirements.

The Bank maintains relationships with correspondent banks that can provide funds to it on short notice, if needed. Presently, the Bank has arrangements with a commercial bank for short term unsecured Federal funds purchased 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. Cash inflows from operations totaled $6.7 million in 2003, while outflows from financing activities totaled $3.3 million. Included in financing activities were net repayments on notes payable of $554,000 and net FHLB borrowing repayments of $6.9 million which offset the $4.8 million increase in deposits. Additionally, $1.1 million of dividends paid to stockholders and $1 million for the repurchase and retirement of common stock were used by financing activities.

Investing activities provided $213,000 of cash and cash equivalents as proceeds from disposals of investments were offset by the repurchase of new investments. Other investing activities such as additions to premises and equipment were offset by net repayments of loans and maturities of interest bearing deposits with other banks.

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

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

For a more complete discussion of the actual and required capital ratios of the Company and 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 7,150 shares, 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. The ratio 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 a satisfactory, consistent level of profitability within the framework of established cash, loan, investment, borrowing and capital policies. Certain officers are charged with the responsibility for monitoring policies and procedures that are designed to ensure acceptable composition of the asset/liability mix. It is the overall philosophy of management to support asset growth primarily through 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 substantial movements in interest rates on earnings.

The asset/liability mix is monitored on a regular basis. A report reflecting the interest sensitive 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 all assets that reprice or mature within a given timeframe and subtracting all liabilities that reprice or mature within that timeframe. The difference between these two amounts is called the “gap”, the amount of either liabilities or assets that will reprice without a corresponding asset or liability repricing.

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

The following table summarizes the amounts of interest‑earning assets and interest‑bearing liabilities outstanding at December 31, 2003, that are expected to mature, prepay or reprice in each of the future time periods shown. Except as stated below, the amount of assets or liabilities that mature or reprice during a particular period was determined in accordance with the contractual terms of the asset or liability. Adjustable rate loans are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due, and fixed rate loans and mortgage‑backed securities are included in the periods in which they are anticipated to be repaid based on scheduled maturities. The Company’s savings accounts and interest‑bearing demand accounts (NOW and money market deposit accounts), 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.

		At December 31, 2003 Maturing or Repricing in
		Three Months or Less	Four Months to 12 Months	1 to 5 Years	Over 5 Years		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 assets repricing or maturing within one year was $51.5 million. Due to an excess of liabilities repricing or maturing within one year, a rise in interest rates would cause the Company’s net interest income to decline.

The internal model used by management to monitor interest rate gap sensitivity makes assumptions based on managements’ experience about the composition of the banks deposit and loan portfolios as well as historical trends. For example, fixed rate loans tend to payoff or reprice in a falling rate environment faster than the maturity schedule would suggest due to the ability of a customer to obtain favorable rates elsewhere. Additionally, a modest rise in interest rates in one category of deposit accounts will not entice all account holders to move to a different account type or require management to raise rates in all other categories. Compared to Table 12, the internal model which is reviewed quarterly by management, shows the bank more evenly balanced in the 12 month and five year time horizons and as asset sensitive in the under three 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 foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees or at different points in time to changes in market interest rates. Additionally, certain assets, such as adjustable‑rate mortgages, have features that restrict changes in interest rates, both on a short‑term basis and over the life of the asset. Changes in interest rates, prepayment rates, early withdrawal levels and the ability of borrowers to service their 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 transactions that are connected with meeting the financing needs of our customers. These off-balance sheet arrangements consist of letters of credit and commitments to extend credit. In notes 10 and 11 to our consolidated financial statements, we discuss in detail off-balance sheet arrangements.

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

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.

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

Item 8. Changes in and Disagreements 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 principal accountant for the Company. The Company had no disagreements with its accountants on any matters of accounting principle or practices or financial statement disclosure.

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

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

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

Directors are elected at each annual meeting of shareholders and hold office until the next annual meeting and until their successors are elected and qualified. John T. Newton, Jr. and David G. Newton are brothers and are first cousins of J. Henry Cheatham, 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 the Company.

The following table sets forth for each named executive officer of the Company (a) the person’s name, (b) his age at December 31, 2003, (c) the year he was first elected as an executive officer of the Company, and (d) his positions with the Company and the Bank.

The Company has an audit committee comprised of the following two individuals: John T. Newton, Jr. and David G. Newton. The Company’s audit committee does not have a financial expert as such term is defined in Item 401(e) of SEC Regulation S-B because 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 this definition.

Pursuant to Section 16(a) of the Securities Exchange Act of 1934, each executive officer, director and beneficial owner of 10% 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 such person becomes subject to the reporting requirement and a report on Form 4 or 5 must be filed to reflect changes in beneficial ownership occurring thereafter. Based solely on a review of filings with the Securities and Exchange Commission and written representations by each executive officer and director that no other reports were required, we believe that all of our directors and executive officers have complied with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, during fiscal 2003.

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

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

		Annual Compensation			Long-Term Compensation	All Other Compensation
Name and Principal Position	Year	Salary⁽¹⁾	Bonus	All Other Annual Compensation	Securities Underlying Options/ SAR	401K Contributions⁽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 Hammond Senior Vice President of the Bank, Henry County 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 for disclosure

_____________________
⁽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 of the Company’s
Common Stock as of year-end of the year indicated.
⁽⁵⁾ In addition to $720 in life insurance premiums paid by the Company, Mr. Hammond’s amount includes $126,500
in payments made in connection with the Company’s acquisition of ACB, Mr. Hammond’s previous employer.

The following table sets forth the number and potential realizable value of stock options granted in 2003.

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

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

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

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

The following table provides for each director of the Company, each named executive officer, and for all directors and officers of the 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. Unless otherwise indicated, the listed person is the record owner of, and has sole voting and investment powers over his shares.

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

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

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

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 the opportunity to make a statement if they desire to do so and to respond to appropriate questions. The Company anticipates that Porter 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 of its Form 10‑KSB and the review of the Company’s interim consolidated financial statements included within Forms 10‑QSB, the Company was billed approximately $103,300 in 2003 and $97,000 in 2002 by Porter Keadle Moore, LLP. This figure 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.

Audit-Related fees. The Company was billed approximately $21,500 in 2003 and $32,750 in 2002 by Porter Keadle Moore, LLP for merger and acquisition assistance in 2002, the audit of the Company’s employee benefit plan, and certain agreed 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 and preparation 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 to the 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 compatible with 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. The audit committee specifically approves the annual audit services engagement and has generally approved the provision of certain audit-related services and tax services by Porter Keadle Moore, LLP. Certain non-audit services that are permitted under the federal 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 were pre-approved by the audit committee.

We have audited the accompanying consolidated balance sheets of FNB Banking Company 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 financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FNB Banking Company and subsidiary as of December 31, 2003 and 2002, 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.

		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 cash equivalents		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
Total deposits		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
Total liabilities		272,115,761	273,234,449

Commitments

Stockholders’ equity:
Common stock, $1 par value; 5,000,000 shares authorized;
714,845 and 730,939 shares issued and outstanding		714,845	730,939
Retained earnings		27,961,279	26,093,271
Accumulated other comprehensive income		1,246,066	1,434,606
Total stockholders’ equity		29,922,190	28,258,816
	$	302,037,951	301,493,265

		2003	2002	2001
Interest and dividend income:
Interest on loans, including fees of $2,150,827, $2,536,193 and $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 other investments		96,300	97,888	98,351
Total interest income		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 interest expense		4,268,142	4,764,396	7,387,620
Net interest income		14,406,145	14,008,245	11,613,347
Provision for loan losses		636,283	1,071,475	672,136
Net interest income 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 other operating 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 other operating expenses		11,645,639	10,831,403	9,593,262

Earnings before income taxes		5,803,063	5,944,181	4,098,981

Income taxes		1,817,280	2,034,613	1,300,108
Net earnings	$	3,985,783	3,909,568	2,798,873

Net earnings per share	$	5.46	5.32	3.61

		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

		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 investment securities available for sale		(233,024)	(847,760)	(54,228)
Total other comprehensive income (loss) before tax		(304,097)	807,482	633,195
Income taxes related to other comprehensive income:
Unrealized holding gains (losses) on investment securities available for sale arising during period		7,638	(628,992)	(260,601)
Unrealized holding gains (losses) on derivative financial instruments classified as cash flow hedges arising during the period		19,370	-	-
Reclassification adjustment for (gains) losses on investment securities available for sale		88,549	322,149	20,607
Total income taxes related to other comprehensive income (loss)		115,557	(306,843)	(239,994)
Total other comprehensive income (loss), net of tax		(188,540)	500,639	393,201
Total comprehensive income	$	3,797,243	4,410,207	3,192,074

		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 cash provided
by operating activities:
Depreciation, amortization and accretion		488,070	336,474	496,255
Provision for loan losses		636,283	1,071,475	672,136
Provision for deferred income taxes		506,725	(121,607)	165,116
(Gains) losses on sales of investment securities		(233,024)	(847,760)	(54,228)
(Gains) losses on disposals of premises and equipment		-	(21,185)	48,822
Change in assets and liabilities, net of effects from purchase acquisition in 2002:
Mortgage loans held for sale		1,488,840	433,655	(1,678,464)
Interest receivable		69,643	151,854	275,647
Interest payable		(103,482)	(176,182)	(181,429)
Other, net		(127,607)	1,074,927	(26,512)
Net cash provided by operating 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 acquired of $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 for sale		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)

		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 funds purchased		5,000,000	-	-
Net change in securities sold under retail repurchase 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 common stock		(1,025,414)	(2,133,645)	(320,250)
Net cash (used) provided by financing activities		(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 on investment 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 options exercised	$	2,348	-	-

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

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

Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, First National Bank of Griffin (the “Bank”). All significant intercompany accounts and transactions have been eliminated in consolidation.

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

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

Reclassifications
Certain 2002 amounts have been reclassified to conform to the presentation used in 2003.

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

Investment Securities
The Company classifies its securities in one of three categories: trading, available for sale, 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 until maturity. 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 maturity securities are recorded at cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses, net of the related tax effect, on securities available for sale are excluded from earnings and are reported as a separate component of stockholders’ equity until realized. Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains or losses associated with transfers of securities from held to maturity to available for sale are recorded as a separate component of stockholders’ equity. The unrealized holding gains or losses included in the separate component of stockholders’ equity for securities transferred from available for sale to held to maturity are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with 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 maturity investment below cost that is deemed other than temporary is charged to earnings and establishes a new cost basis for the security.

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

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

Mortgage Loans Held for Sale
Mortgage 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 are included in the determination of net earnings of the period in which the change occurs. At December 31, 2003 and 2002, there was no valuation allowance associated with mortgage loans held for sale.

Loans, Loan Fees and Interest Income
Loans 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 amount outstanding.

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 such that collection of interest is doubtful. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is charged 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 are being amortized over the lives of the respective loans.

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

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

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

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

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

Goodwill
Goodwill represents the excess of the purchase price for American Community Bank over the fair value of its net assets acquired. Goodwill is tested annually for impairment unless events or circumstances arise that would indicate the need for more frequent testing. The impairment tests are performed at the reporting level which in the Company’s case is effectively the entire entity. There were no goodwill impairment losses in the financial statements.

Securities Sold Under Retail Repurchase Agreements
Securities sold under retail repurchase agreements are secured borrowings from customers and are treated as financing activities and are carried at the amounts at which the securities will be subsequently reacquired as specified in the respective agreements.

Income Taxes
The Company accounts for income taxes using the liability method and recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

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

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

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

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

Recent Accounting Pronouncements
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.

On May 31, 2002, the Company consummated an agreement to acquire all of the outstanding shares of American Community Bank (“ACB”) for approximately $9.9 million in cash ($13.35 per share) plus certain acquisition costs. The cash proceeds to consummate the purchase were obtained through a combination of borrowings under a line of credit with a correspondent bank and cash dividends paid to the Company by its bank subsidiary, First National Bank of Griffin. ACB was a banking corporation based in Stockbridge (Henry County), Georgia. The primary reason for the acquisition was to expand the Company’s banking franchise into the high growth area of eastern Henry County, Georgia. The Company accounted for this transaction using the purchase method and accordingly, the original purchase price was allocated to assets and liabilities acquired based upon their fair values at the date of the acquisition. The excess of the purchase price over the fair value of the net assets acquired (goodwill) was approximately $4.4 million, none of which will be deductible for income tax 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 adjustments and the resulting fair value of the assets acquired and liabilities assumed of ACB at May 31, 2002, the date of the acquisition:

(amounts in thousands)		Carrying Amount	Fair Value Adjustment	Resulting Fair Value Acquired

Assets:
Cash and cash equivalents	$	5,993	-	5,993
Investment securities and other investments		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 the deposit base intangible which is being amortized over seven years and $200,000 for a trademark. Amortization expense of approximately $18,000 was recorded for the deposit intangible in 2002. The trademark was sold in September 2002 with no resulting gain or loss.

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

		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 interest income		15,230,812	14,006,599
Provision for loan losses		(1,095,475)	(730,374)
Net interest income 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 before income taxes		6,408,174	4,904,340
Income taxes		(2,209,487)	(1,595,130)
Net earnings	$	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 purchase accounting adjustments were amortized over a period of one year. Net earnings were increased in the above unaudited proforma presentations for the amortization of this purchase accounting adjustment as follows:

Investment securities available for sale at December 31, 2003 and 2002 are as 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 investment category 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 securities available for sale at December 31, 2003, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

		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 equity securities:
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 and 2001 were $1,790,353, $4,459,008 and $3,044,600, respectively. Gross gains and losses are as follows:

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.

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

The Bank grants loans and extensions of credit to individuals and a variety of 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 and unimproved real estate and is dependent upon the real estate market in this geographical area.

The Bank was servicing approximately $3,585,000 and $6,165,000 of mortgage loans for the Federal Home Loan Mortgage Corporation at December 31, 2003 and 2002, respectively.

A summary of information pertaining to impaired loans for December 31, 2003, 2002 and 2001 is presented below.

There were no impaired loans without a valuation allowance at December 31, 2003, 2002 and 2001. Additionally, no interest income was recognized on impaired loans during the years ended December 31, 2003, 2002 and 2001.

Premises and equipment at December 31, 2003 and 2002, are summarized as follows:

Depreciation expense was $717,504, $681,615 and $536,676 for the years ended December 31, 2003, 2002, and 2002, respectively.

The aggregate amount of time deposit accounts with a minimum denomination of $100,000 was approximately $31,226,000 and $32,837,000 at December 31, 2003 and 2002, respectively. Deposits from related parties totaled approximately $10,624,000 and $6,134,000 at December 31, 2003 and 2002, respectively.

At December 31, 2003, the scheduled maturities of time deposits were as follows (in thousands):

At December 31, 2003, the Company had borrowings of $6,688,800 outstanding which are repayable in forty quarterly principal payments of $185,800 plus accrued interest at the prime rate less 110 basis points. The loan is collateralized by all of the common stock of the Bank. The loan agreement contains covenants and restrictions pertaining to the maintenance of certain financial ratios, limitations on the incurrence of additional debt, and the declaration of dividends or other capital transactions.

Aggregate maturities are $743,200 for each of the next five years and $2,972,800 thereafter.

The Bank has an agreement with the Federal Home Loan Bank (“FHLB”) whereby the FHLB agreed to provide the Bank credit facilities under the Agreement for Advances and Security Agreement. Any amounts advanced by the FHLB are collateralized under a Blanket Floating Lien covering all of the Bank’s 1-4 family first mortgage loans, which amounted to $30,502,000 at December 31, 2003. The Bank may draw advances up to $20,000,000 based on the agreement with the FHLB.

At December 31, 2003, the Bank had fixed and variable rate advances outstanding from FHLB of Atlanta amounting to $7,625,000. The following advances, which required monthly interest payments, were outstanding:

	Advance	Interest Rate	Maturity	Rate
$	1,000,000	1.65%	March 24, 2004	Fixed
	1,000,000	2.07%	March 24, 2005	Fixed
	1,000,000	2.81%	January 23, 2006	Fixed
	1,500,000	3.21%	March 26, 2007	Fixed
	1,000,000	3.57%	January 23, 2008	Fixed
	1,500,000	2.46%	March 31, 2008	Fixed
	625,000	5.50%	December 18, 2008	Fixed
$	7,625,000

At December 31, 2003, the Bank had an advance payable of $625,000 with a fixed interest rate of 5.5% payable monthly and with equal principal payments of $31,250 due quarterly until maturity in 2008.

Additionally, at December 31, 2003, the Bank had unused lines of credit totaling approximately $17,375,000. Those lines of credit included $5,000,000 for overnight borrowings from financial institutions and $12,375,000 of available credit with the FHLB.

The Company has a profit sharing plan covering substantially all employees, subject to minimum service requirements. The plan complies with the requirements of Section 401(k) of the Internal Revenue Code. The Company will match up to 6% of the participants’ before tax contributions. The Company’s matching contributions amounted to $388,000, $384,000 and $332,000 in 2003, 2002 and 2001, respectively.

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

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

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

By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the fair-value gain in a derivative. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes the Company, and, therefore, creates a repayment risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it has no repayment risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically.

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

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

At December 31, 2003, the swap is being accounted for as a cash flow hedge and its fair value is included in other comprehensive income, net of taxes. At December 31, 2003, the Company recorded a liability for $50,975 to reflect the fair value of the swap. No hedge ineffectiveness from this cash flow hedge was recognized in the consolidated statement of earnings.

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.

The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit, standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

The Bank generally requires collateral or other security to support financial instruments with credit risk.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management’s credit evaluation. Collateral held varies but may include unimproved and improved real estate, certificates of deposit, or personal property.

Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Letters of credit at December 31, 2003, are fully collateralized.

Additionally, the Company has a non-cancellable operating lease agreement through 2007 assumed in its purchase of ACB for office facilities. Future minimum lease payments under the lease are as follows:

Rent expense was approximately $133,000 and $66,500 for 2003 and 2002, respectively.

The Company redeemed and retired common stock of 16,326 shares for $1,025,414; 41,065 shares for $2,133,645; and 7,150 shares for $320,250 in 2003, 2002 and 2001, respectively.

Dividends paid by the Bank are the primary source of funds available to the Company. Banking regulations limit the amount of dividends that may be paid without prior approval of the regulatory authorities. The amount of dividends the Bank may pay in 2004 without prior approval is limited to 2004 earnings of the Bank.

The components of income tax expense (benefit) for the years ended December 31, 2003, 2002 and 2001 are as follows:

The differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to earnings before taxes are as follows:

The following summarizes the sources and expected tax consequences of future taxable deductions (income), which comprise the net deferred tax asset (liability).

		2003	2002
Deferred income tax assets:
Allowance for loan losses	$	1,080,392	991,810
Deferred compensation		2,886	53,182
Organizational cost		-	32,154
Purchase accounting fair value adjustments:
Time deposits		-	129,409
Operating lease		122,378	152,973
Net operating losses and credits		205,777	397,129
Non-accrual loan interest		106,590	109,150
Other		43,595	25,933
Total gross deferred income tax assets		1,561,618	1,891,740
Deferred income tax liabilities:
Deposit intangible acquired		(74,564)	(88,121)
Net unrealized gains on investment securities		(842,317)	(938,503)
Premises and equipment		(1,012,450)	(842,551)
Total gross deferred income tax liabilities		(1,929,331)	(1,869,175)
Net deferred income tax asset (liability)	$	(367,713)	22,565

At December 31, 2003, the company has remaining operating loss carryforwards of approximately $434,000 and $1,466,000 for Federal and State income tax purposes, respectively, which begin to expire in 2019. These carryforwards were acquired in the merger with ACB.

The Company conducts transactions with its directors and officers, including companies in which they have beneficial interest, in the normal course of business. It is the policy of the Company that loan transactions with directors and officers be made on substantially the same terms as those prevailing at the time for comparable loans to other persons. The following is a summary of activity for related party loans for 2003:

Components of other operating expenses which are greater than 1% of interest income and other operating income are as follows:

The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

Cash and Cash Equivalents
For cash, due from banks and federal funds sold, the carrying amount is a reasonable estimate of fair value.

Interest-bearing Deposits with Other Banks
The carrying value of interest-bearing deposits with other banks is a reasonable estimate of fair value.

Investment Securities
Fair values for investment securities are based on quoted market prices.

Other Investments
The carrying value of other investments approximates fair value.

Loans and Mortgage Loans Held for Sale
The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value.

Deposits
The fair value of demand deposits, savings accounts, NOW accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity time deposits is estimated by discounting the future cash flows using current rates at which comparable time deposits would be issued.

Federal Funds Purchased and Securities Sold Under Retail Repurchase Agreements
The carrying value of federal funds purchased and securities sold under retail repurchase agreements approximates fair value.

FHLB Advances
The fair value of the FHLB fixed rate borrowings are estimated using discounted cash flows, based on the current incremental borrowing rates for similar types of borrowing arrangements. For variable rate advances, the carrying amount is a reasonable estimate of fair value.

Note Payable
The Company’s note payable bears interest based on a percentage of the prime rate and as such, the carrying amount approximates the fair value.

Commitments to Extend Credit and Standby Letters of Credit
Because commitments to extend credit and standby letters of credit are made using variable rates, or were recently executed, the fair value is immaterial.

Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The carrying amount and estimated fair values of the Company’s financial instruments at December 31, 2003 and 2002 are as follows (in thousands):

		2003		2002
		Carrying	Estimated	Carrying	Estimated
		Amount	Fair Value	Amount	Fair Value
Assets:
Cash and cash equivalents	$	16,851	16,851	13,201	13,201
Interest-bearing deposits with other banks	$	-	-	394	394
Investment securities	$	39,321	39,321	40,141	40,141
Other investments	$	1,255	1,255	1,275	1,275
Loans and mortgage loans held for sale, net of allowance	$	229,674	237,399	232,250	232,945

Liabilities:
Deposits	$	238,217	241,934	233,382	234,630
Federal funds purchased	$	5,000	5,000	-	-
Securities sold under retail repurchase agreements	$	12,476	12,476	16,045	16,045
FHLB advances	$	7,625	7,639	14,500	14,660
Note payable	$	6,689	6,689	7,242	7,242

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2003, the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2003 and 2002, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The consolidated and bank only actual capital amounts and ratios for 2003 and 2002 are also presented in the table below (in thousands).

		Actual		For Capital Adequacy Purposes		To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount	Ratio	Amount	Ratio	Amount	Ratio
As of December 31, 2003:
Total Risk-Based Capital (to Risk- Weighted Assets):
Consolidated	$	27,186	10.90%	19,961	8.00%	N/A	N/A
Bank	$	33,637	13.49%	19,945	8.00%	24,932	10.00%
Tier I Capital (to Risk-Weighted Assets):
Consolidated	$	24,065	9.64%	9,980	4.00%	N/A	N/A
Bank	$	30,516	12.24%	9,973	4.00%	14,959	6.00%
Tier I Capital (to Average Assets):
Consolidated	$	24,065	8.08%	11,905	4.00%	N/A	N/A
Bank	$	30,516	10.29%	11,863	4.00%	14,829	5.00%

As of December 31, 2002:
Total Risk-Based Capital (to Risk- Weighted Assets):
Consolidated	$	25,234	10.54%	19,092	8.00%	N/A	N/A
Bank	$	32,650	13.69%	19,078	8.00%	23,848	10.00%
Tier I Capital (to Risk-Weighted Assets):
Consolidated	$	22,190	9.29%	9,546	4.00%	N/A	N/A
Bank	$	29,655	12.44%	9,539	4.00%	14,309	6.00%
Tier I Capital (to Average Assets):
Consolidated	$	22,190	7.52%	11,805	4.00%	N/A	N/A
Bank	$	29,655	10.12%	11,725	4.00%	14,656	5.00%

		2003	2002	2001
Income:
Interest and dividends	$	38,275	36,128	39,303
Other		146,838	722,170	1,000
Dividends from subsidiary		3,205,068	5,149,930	1,367,993
		3,390,181	5,908,228	1,408,296

Other operating expenses		420,995	190,284	72,794

Earnings before income taxes and equity in undistributed earnings of bank subsidiary		2,969,186	5,717,944	1,335,502

Income tax (expense) benefit		105,070	(206,018)	24,001

Earnings before equity in undistributed earnings of bank subsidiary		3,074,256	5,511,926	1,359,503

Equity in undistributed earnings of bank subsidiary		911,527	-	1,439,370
Dividends received in excess of earnings of bank subsidiary		-	(1,602,358)	-

Net earnings	$	3,985,783	3,909,568	2,798,873

(18) FNB Banking Company (Parent Company Only) Financial Information, continued

		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 cash provided by operating activities:
Equity in undistributed earnings of bank subsidiary		(911,527)	1,602,358	(1,439,370)
Gain on sale of securities		(146,838)	(722,170)	-
Change in other assets and liabilities, net		(258,129)	(18,969)	(1,789)
Net cash provided by operating activities		2,669,289	4,770,787	1,357,714

Cash flows from investing activities:
Proceeds from the sale of securities		183,121	1,018,640	-
Payment for purchase of subsidiary		(136,714)	(9,858,135)	-
Net cash provided (used) by investing activities		46,407	(8,839,495)	-
Cash flows from financing activities:
Repayments of note payable		(557,400)	-	-
Borrowings on note payable		3,874	7,242,326	-
Dividends paid		(1,096,383)	(1,052,135)	(1,051,323)
Purchase and retirement of stock		(1,025,414)	(2,133,645)	(320,250)
Proceeds from sale of stock		9,252	-	-
Net cash provided (used) by financing activities		(2,666,071)	4,056,546	(1,371,573)

Net change in cash		49,625	(12,162)	(13,859)

Cash at beginning of the period		10,299	22,461	36,320

Cash at end of the period	$	59,924	10,299	22,461

Pursuant to the requirements of Section 13 or 15(d) 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.

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints J. Charles Copeland and John T. Newton, Jr., or each of them, his attorney-in-fact, each with full power of substitution, for him in his name, place and stead, in any and all capacities, to sign any amendments to this Report on Form 10-KSB, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby ratifies and confirms all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this Report on Form 10–KSB has been signed by the following persons in the capacities indicated on the 23^rd day of March 2004.

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

		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

		2003			2002			2001
		Balance	Interest	Average Yield/	Balance	Interest	Average Yield/	Balance	Interest	Average Yield/
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%

		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

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

	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%

Plan Category	(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


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

		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

	Allocation of Allowance for Loan Losses			% of Allowance for Loan Losses			% of Loans by Category to Total 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	%

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

	Actual as of December 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	%

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 Executive Officer, President and Director of the Bank
C. A. Knowles	71	1982	Marketing Advisor of the Company, Retired President of the Company and the Bank, Director of the 1888 Mills.

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

Name and Address	Number of Shares Beneficially 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 February 26, 2004.
⁽²⁾	Includes (i) 17,553 shares held by Mr. David G. Newton as trustee for the benefit of his niece and nephew, (ii) 13,244 shares 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. 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 of his niece and nephew, (ii) 13,244 shares in the name of the John T. Newton, Sr. Estate, of which Mr. David G. Newton serves as co-executor, (iii) 250 shares owned by Mr. John T. Newton Jr.’s wife, as to which Mr. John T. Newton disclaims beneficial ownership, 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 benefit of 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’s address is 2761 Highway 16 West, Griffin, Georgia 30223.
⁽⁷⁾	Includes 6,024 shares owned by his son. Mr. John Henry Cheatham’s address is 2773 Hwy 16 West, Griffin, Georgia 30223.

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%

(1)	The percentages shown are based on 714,878 shares of Common Stock outstanding on February 26, 2004, which includes, as to each person and group listed, the number of shares of Common Stock deemed owned by such holder pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, assuming the exercise of options held by such holder that are exercisable within 60 days of March 3, 2003.
(2)	Includes 16,016 shares held by his children. Mr. James G. Cheatham’s address is 2761 Highway 16 West, Griffin, Georgia 30223.
(3)	Includes 6,024 shares held by Mr. John Henry Cheatham as custodian for the benefit of his son. 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) 13,244 shares 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. 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.
(5)	Includes (i) 15,742 shares held by Mr. John T. Newton, Jr. as trustee for the benefit of his niece and nephew, (ii) 13,244 shares in the name of the John T. Newton, Sr. Estate, of which Mr. David G. Newton serves as co-executor, (iii) 250 shares owned by Mr. John T. Newton Jr.’s wife, as to which Mr. John T. Newton disclaims beneficial ownership, 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. Knowles disclaims beneficial ownership. Mr. Knowles address is 1119 Pine Valley Road, Griffin, Georgia 30224.

Exhibit. No.	Document
2.0	Agreement and Plan of Reorganization, dated as of September 20, 2002, by and between American Community Bank of Georgia and FNB Banking Company, as amended. (Incorporated by reference from Exhibit 2.0 to the Company’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 October 12, 1982, as amended on April 16, 1987. (Incorporated by reference from Exhibit 3.1 to the Company’s annual report on Form 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 to the 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, as amended, 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 Act of 2002.
31.2	Certification of Principal Accounting and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.0	Joint Certification of the Chief Executive Officer and the Principal Accounting and Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

Buildings and improvements	10 - 40 years
Furniture and equipment	3 - 10 years

		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

		2003	2002
Land and improvements	$	1,362,384	1,362,384
Buildings and improvements		7,443,334	7,443,334
Furniture and equipment		6,010,515	5,257,346
		14,816,233	14,063,064
Less: Accumulated depreciation		7,091,650	6,374,146
	$	7,724,583	7,688,918

		Approximate Contractual Amount
		2003	2002
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	55,109,000	51,847,000
Standby letters of credit and financial guarantees written	$	772,000	1,107,000

Beginning balance	$	9,050,755
Loans advanced		4,893,820
Repayments		(5,367,654)
Ending balance	$	8,576,921

		2003	2002
Cash	$	59,924	10,299
Investment in First National Bank of Griffin		35,993,418	35,221,310
Investment securities available for sale		990,710	1,055,244
Dividends receivable from subsidiary		584,725	548,204
	$	37,628,777	36,835,057

Liabilities and Stockholders’ Equity

Other liabilities	$	445,911	785,711
Line of credit		6,688,800	7,242,326
Dividends payable		571,876	548,204
Stockholders’ equity		29,922,190	28,258,816
	$	37,628,777	36,835,057

Signature	Title
/s/ John T. Newton, Jr. John T. Newton, Jr.	Chairman of the Board of Directors
/s/ J. Charles Copeland J. Charles Copeland	President, Treasurer, and Director (principal executive officer)
/s/ Mark A. Flowers Mark A. Flowers	Assistant Treasurer (principal accounting and financial officer)
/s/ J. Henry Cheatham, III J. Henry Cheatham, III	Director
/s/ James G. Cheatham James G. Cheatham	Director
/s/ David G. Newton David G. Newton	Director
/s/ C.A. Knowles C.A. Knowles	Director

Exhibit No.	Description of Exhibit
14.0	Code of Ethics
21.0	Subsidiaries of FNB Banking Company
24.0	A Power of Attorney is set forth on the signature page to this Form 10-KSB.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Accounting and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.0	Joint Certification of the Chief Executive Officer and the Principal Accounting and Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.