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**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D. C.  20549**

**_______________**

**FORM 10-KSB**

**ANNUAL REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

For the fiscal year ended December 31, 2003 - Commission File Number: 000-32399

_______________**    FMB EQUIBANC, INC.   **(Name of small business issuer in its charter)

| **Georgia**                                                    | **          ** | **58-2582553**                    |
|----------------------------------------------------------------|------------------------------------------------------------------|-----------------------------------|
| (State or other jurisdiction of incorporation or organization) |                                                             | (IRS Employer Identification No.) |
| **201 North Main StreetStatesboro, Georgia**                   |                                                             |  **30458**                   |
| (Address of principal executive office)                        |                                                             | (Zip Code)                        |
|                                                           |                                                             |                              |
| **(912) 489-2600**                                             |                                                             |                              |
| (Issuer's telephone number, including area code)               |                                                             |                              |

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:

| **Title of each class** | **Name of each exchange on which registered** |
|-------------------------|-----------------------------------------------|
| None                    | Not Applicable                                |

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:**                                                                            Common Stock, par value $1.00 per share**

Check whether the issuer (1) 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 RegulationS-B is contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ý

The Issuer’s revenues for its most recent fiscal year were $9,562,000.

The aggregate market value of the voting stock held by non-affiliates of Issuer (313,546shares) at February 29,  2004 was $12,307,000.  No shares of non-voting stock were outstanding.  As of such date, noorganized trading market existed for the common stock of the Issuer.  The aggregate market value was computed by reference tothe fair market value of the common stock of the Issuer based on recent sales of the common stock.  The number of sharesoutstanding of Issuer’s common stock at February 29, 2004 was 362,600 shares.

Transitional Small Business Disclosure Format (Check one): Yes                No   X   

**DOCUMENTS INCORPORATED BY REFERENCE**

**               **Portions of the Issuer’s definitive Proxy Statement for the 2004 Annual Meeting of Shareholders to be filed with theSecurities and Exchange Commission within 120 days of the Registrant's fiscal year end is incorporated by reference in answer toPart III of this Report.

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**PART I**

**ITEM****1.            DESCRIPTION OF BUSINESS**
**The Company**

FMBEquibanc, Inc. (the "Company") was incorporated as a Georgia corporation on April 25, 2000, to serve as a bank holding company forFarmers & Merchants Bank (the "Bank").  On November 1, 2000, the Company acquired all of the outstanding shares of theBank.  The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act")and the Financial Institutions Code of Georgia (the "FICG"). 

The Company hasbeen organizedto enhance theBank's ability to serve its current and future customers' requirements forfinancial services.  The holding company structure provides flexibility forexpansion of the Company's banking business through the acquisition of otherfinancial institutions and the provision of additional banking-related serviceswhich the traditional commercial bank may not be able to provide under presentlaws.  In addition, a holding company structure facilitates raising capitalfor the Bank because the Company will be able to issue securities without theneed for prior banking regulatory approval, and the proceeds of debt securitiesissued by the Company can be invested in the Bank as primary capital.

At December 31,2003, the assets of the Company consisted primarily of its ownership of thecapital stock of the Bank.

The Company'sexecutive offices are located at the Bank's main office, 201 North Main Street,Statesboro, Georgia 30458.  The Company's telephone number at such locationis (912) 489-2600.  See "Item 2.  Description of Properties."

**The Bank**

The Bank was incorporated as a Georgia banking corporation on February 4, 1948 for the purpose of conducting a commercial bankingbusiness from Bulloch County, Georgia.  The Bank originally conducted its business from a main office located in Brooklet,Bulloch County, Georgia.  In 1991, the bank relocated its main office to Statesboro, Bulloch County, Georgia.  The Bankretained its former main office as a branch office.  The Bank also maintains a branch office in Statesboro, Georgia.

**Market Area and Competition** 

The primaryservice area of the Bank is Bulloch County, Georgia.  The Bank encounterscompetition in its primary service area and in surroundingareas from seven other financial institutions.  These competitors offer afull range of banking services and vigorously compete for all types of services,especially deposits.

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The followingtable illustrates the June 30, 2003 deposit base and market share of thefinancial institutions located in Bulloch County, as reported by the FederalDeposit Insurance Corporation (the “FDIC”), and adjusted for reported out ofmarket deposits (dollars in millions).

**Bulloch County**

**Deposits**

**  PercentofMarket**

**Financial Institutions**
   
BB&T

$161.8

25.4

Sea Island Bank

156.6

24.6

Farmers & Merchants Bank

127.3

20.0

Eagle Bank and Trust

60.4

9.5

Wachovia Bank, National Association

50.7

7.9

The First National Bank & TrustCompany

8.6

1.3

Core Credit Union.

30.4

4.8

First Southern NationalBank

41.6

6.5

While the Bankexperiences competition from financial institutions headquartered in BullochCounty, some competition also comes from banks outside of Bulloch County seekingto make loans in the Bank's primary service area.  In addition, in certainaspects of its banking business, the Bank also competes with credit unions,small loan companies, consumer finance companies, brokerage houses, insurancecompanies, money market funds and other financial institutions that haverecently entered the traditional banking markets.

The extent towhich other types of financial institutions compete with commercial banks has increased significantly within the past few years asa result of federal and state legislation which has, in several respects, deregulated financial institutions.  See"Supervision and Regulation."  The full impact of this legislation and subsequent laws that will continue to furtherderegulate the financial services industry cannot be fully assessed or predicted.

**Deposits**

            The Bank offers a widerange of commercial and consumer interest bearing and non-interest bearing deposit accounts, including checking accounts,money market accounts, negotiable order of withdrawal accounts, individual retirement accounts, certificates of deposit and regularsavings accounts.  The sources of deposits are the residents, businesses and employees within the Bank's primary service area,obtained through the personal solicitation of the Bank's officers and directors, direct mail solicitation and advertisementspublished in the local media.  The Bank pays competitive interest rates on time and savings deposits.  In addition, theBank has implemented a service charge fee schedule competitive with other financial institutions in the Bank's primary servicearea, covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts, returned checkcharges and other similar fees and charges.

 

 

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**Lending Services**

***LendingPolicy.* ** The Bank engages in a full complement of lending activities, including real estate loans, commercialloans, consumer loans and agribusiness loans.  Lending is directed principally towards individuals and businesses whosedemands fall within the Bank's legal lending limits and who are potential deposit customers of the Bank.  This includes loansmade to individual, partnership or corporate borrowers and obtained for a variety of business purposes.

The Bank mayeither originate loans or, where loans exceed the Bank's lending limits,participate with other banks.  Management of the Bank does not believe thatloan participations necessarily pose any greater risk of loss than loans thatthe Bank originates. 

To address the risks inherent in making loans, the Bank maintains an allowance for loanlosses based on, among other things, an evaluation of the Bank's loan loss experience, the amount of past due and nonperformingloans, current and anticipated economic changes and the values of certain loan collateral.  Based upon such factors, theBank's management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides anallowance for potential loan losses based upon a percentage of the outstanding balances and for specific loans.  However,because there are certain risks that cannot be precisely quantified, management's judgment of the allowance is necessarily anapproximation and imprecise.  The adequacy and methodology of the allowance for loan losses is subject to regulatoryexamination and compared to a peer group of financial institutions identified by the bank's regulatory agencies.

***Loan Portfolio****. * The following is a description of eachof the major categories of the Bank's loan portfolio:

***Real Estate Loans.**** * The Bank makes a variety ofcommercial real estate, construction and development loans and residential real estate loans.  These loans include somecommercial loans where the Bank takes a security interest in real estate out of an abundance of caution and not as the principalcollateral for the loan, but excludes home equity loans, which are classified as consumer loans.  As of December 31, 2003,real estate loans comprised 72.4% of the Bank's loan portfolio.
- Commercial Real Estate Loans.   Commercial real estate loan terms generally are limited to five years or less,although payments may be structured on a longer amortization basis.  Interest rates may be fixed or adjustable.  The Bankgenerally charges an origination fee.  The Bank attempts to reduce credit risk on its commercial real estate loans byemphasizing loans on owner-occupied office and retail buildings where the ratio of the loan principal to the value of thecollateral as established by independent appraisal does not exceed 80% and net projected cash flow available for debt serviceequals 120% of the debt service requirement.  In addition, the Bank may require personal guarantees from the principal ownersof the property supported by a review by the Bank's management of the principal owners' personal financial statements.  Risksassociated with commercial real estate loans include fluctuations in the value of real estate, new job creation trends, tenantvacancy rates and the quality of the borrower's management.  The Bank limits its risk by analyzing borrowers' cash flow andcollateral value on an ongoing basis.  The Bank competes for commercial real estate loans with competitors that are wellestablished in its primary service area.

4- Construction and Development Loans.   Construction and development loans are made both on a pre-sold and speculativebasis.  If the borrower has entered into an agreement to sell the property prior to beginning construction, then the loan isconsidered to be on a pre-sold basis.  If the borrower has not entered into an agreement to sell the property prior tobeginning construction, then the loan is considered to be on a speculative basis.  Construction and development loans aregenerally made with a term of six months and interest is paid periodically.  The ratio of the loan principal to the value ofthe collateral as established by independent appraisal generally does not exceed 90%.  Speculative loans are based on theborrower's financial strength and cash flow position.  Loan proceeds are disbursed based on the percentage of completion andonly after the project has been inspected by an experienced construction lender or appraiser.  Risks associated withconstruction loans include fluctuations in the value of real estate and new job creation trends.
- Residential Real Estate Loans.   The Bank's residential real estate loans consist of residential first and secondmortgage loans and residential construction loans.  The Bank offers fixed and variable rates on its mortgages with theamortization of first mortgages with maturity dates of three years and beyond.  These loans are made consistent with theBank's appraisal policy and with the ratio of the loan principal to the value of collateral as established by independent appraisalgenerally not to exceed 90%.  The Bank believes these loan-to-value ratios will be sufficient to compensate for fluctuationsin real estate market value and to minimize losses that could result from a downturn in the residential real estate market. The Bank limits interest rate risk and credit risk on these loans by locking in the interest rate for each loan with the secondarymarket investor and receiving the investor's underwriting approval before funding the loan. 

*Commercial Loans. * The Bank makes a variety of loans for commercialpurposes other than real estate in various lines of businesses.  The terms of these loans vary by purpose and by type ofunderlying collateral, if any.  The Bank typically makes equipment loans for a term of five years or less at fixed or variablerates, with the loan fully amortized over the term.  Equipment loans generally are secured by the financed equipment, and theratio of the loan principal to the value of the financed equipment or other collateral is generally 80% or less.  Loans tosupport working capital typically have terms not exceeding one year and are usually secured by accounts receivable, inventory, orother collateral, as well as personal guarantees of the principals of the business.  For loans secured by accounts receivableor inventory, principal is typically repaid as the assets securing the loan are converted into cash, and for loans secured withother types of collateral, principal is typically due at maturity.  The quality of the commercial borrower's management andits ability both to evaluate properly changes in the supply and demand characteristics affecting its markets for products andservices and to respond effectively to such changes are significant factors in a commercial borrower's creditworthiness.  Asof December 31, 2003, commercial loans comprised 11.2% of the Bank's loan portfolio.

*Consumer Loans.*   The Bank makes a variety of loans to individuals forpersonal, family and household purposes, including secured and unsecured installment and term loans, home equity loans and homeequity lines of credit.  Consumer loan repayments depend upon the borrower's financial stability and are more likely to beadversely affected by divorce, job loss, illness and personal hardships.  Because many consumer loans are secured bydepreciable assets such as boats, cars and trailers, the loan should be amortized over the useful life of the asset.  The loan officers of the Bank review the borrower's past credit history, past income level, debt history and, when applicable, cashflow to determine the impact of all of these factors on the borrower's ability to make future payments as agreed.  As ofDecember 31, 2003, consumer loans comprised 9.4% of the Bank's loan portfolio.

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***Agribusiness Loans.**** * The Bank makes a variety ofagribusiness loans, including real estate-based loans, crop loans and equipment loans.  Real estate-based agribusiness loansare made consistent with the Bank's appraisal policy and with the ratio of loan principal to value of the collateral as establishedby independent appraisal generally not to exceed 90%.  Loans secured by agricultural equipment typically have terms of up tofive years.  As of December 31, 2003, agribusiness loans comprised 7.0% of the Bank's loan portfolio. 

***Credit Risks.**** * The principal economic risk associatedwith each category of loans that the Bank makes is the creditworthiness of the borrower.  Borrower creditworthiness isaffected by general economic conditions and the strength of the relevant business market segment.  General economic factorsaffecting a borrower's ability to repay include interest, inflation and employment rates, as well as other factors affecting aborrower's customers, suppliers and employees.

The Bank's loan portfolio is heavily concentrated with real estate loans.  Withrespect to real estate loans generally, the ability of a borrower to repay a real estate loan will depend upon a number of economicfactors, including employment levels and fluctuations in the value of real estate.  In the case of a real estate purchaseloan, the borrower may be unable to repay the loans at the end of the loan term and may thus be forced to refinance the loan at ahigher interest rate, or, in certain cases, the borrower may default as a result of its inability to refinance the loan.  Ineither case, the risk of nonpayment by the borrower is increased.  In the case of a real estate construction loan, there isgenerally no income from the underlying property during the construction period, and the developer's personal obligations under theloan are typically limited.  Each of these factors increases the risk of nonpayment by the borrower.  The Bank also facesadditional credit risks to the extent that it engages in adjustable rate mortgage loans.  In the case of an adjustable ratemortgage loan, as interest rates increase, the borrower's required payments increase, thus increasing the potential fordefault.  The marketability of all real estate loans, including adjustable rate mortgage loans, is also generally affected bythe prevailing level of interest rates.

With respect tocommercial loans, larger financial institutions are likely to makeproportionately more loans to medium- to large-sized businesses than the Bankmakes.  Many of the commercial loans of the Bank are made to small- tomedium-sized businesses that may be less able to withstand competitive, economicand financial pressures than large borrowers.  The commercial loanportfolio of the Bank consists of loans to individual, partnership and corporateborrowers that are primarily located in the Bulloch County area. Accordingly, our commercial borrowers reflect the diversified businesses of thisarea, and include services, retail trade and manufacturing firms.  Therisks associated with commercial loans depend to a large extent upon variouseconomic factors, including the strength of the economy in the Bulloch Countyarea and the ability of the Bank's commercial borrowers to properly evaluate andrespond to a changing marketplace.  In addition, the commercial borrowersof the Bank face risks related specifically to the unique nature of theirbusiness.  For example, services and retail trade firms may incur risksassociated with labor shortages and consumer preference changes, andmanufacturing firms may incur risks associated with raw material and laborshortages, as well as currency fluctuations.

Consumer loansgenerally involve more credit risks than other loans because of the type andnature of the underlying collateral or because of the absence of any collateral. Consumer loan repayments are dependent on the borrower's continuing financialstability and are likely to be adversely affected by job loss, divorce andillness.  Furthermore, the application of various federal and state laws,including federal and state bankruptcy and insolvency laws, may limit the amountwhich can be recovered on such loans in the case of default.  In mostcases, any repossessed collateral will not provide an adequate source ofrepayment of the outstanding loan balance.  Although the underwritingprocess for consumer loans includes a comparison of the value of the security,if any, to the proposed loan amount, the Bank cannot predict the extent to whichthe borrower's ability to pay, and the value of the security, will be affectedby prevailing economic and other conditions.

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Agribusiness loans, including real estate-based loans, crop loans and equipment loansgenerally involve more credit risk than residential real estate loans, because of the typically larger loan amount.  Inaddition, payments on loans are dependent upon the successful operation or management of the farm property securing the loan. The success of the loan may also be affected by many factors outside the control of the farm borrower, such as weather, governmentfarm policy, international demand for agricultural products and changing consumer preferences.  Weather presents one of thegreatest risks, as hail, drought, floods, or other conditions can severely limit crop yields and thus impair loan repayments andthe value of the underlying collateral.  This risk can be reduced by the farmer with crop insurance which can guarantee setyields to provide certainty of repayment.  Unless the circumstances of the borrower merit otherwise, the Bank generally willrequire its borrowers to obtain crop insurance.  Another risk is the uncertainty of government support programs, where supportpayments are made with the requirement that a farmer leave idle from production certain amounts of farm land.  Some farmersrely on the income from support programs to make loan payments, and if these programs were discontinued or significantly changed,cash flow problems or defaults could result.  Finally, many farmers are dependent upon a limited number of key individualswhose injury or death may result in an inability to operate the farm.

***Loan Approval and Review. *** The loan approval policies of theBank provide for various levels of officer lending authority.  When the amount of aggregate loans to a single borrower exceedsthat individual officer's lending authority, the loan request is considered and approved by an officer with a higher lending limitor by the Loan Committee of the board of directors.  The Bank does not make any loans to directors or executive officers ofthe Bank unless the loan is approved by the board of directors and is made on terms not more favorable to such person than would beavailable to a person not affiliated with the Bank.

***Lending Limits. *** The lending activities of the Bank are subjectto a variety of lending limits imposed by Georgia law.  While differing limits apply in certain circumstances based on thetype of loan or the nature of the borrower (including the borrower's relationship to the Bank), in general, the Bank is subject toa loan-to-one-borrower limit of an amount equal to 15% of the Bank's unimpaired capital and surplus or 25% of the unimpairedcapital and surplus if the excess over 15% is within the guidelines of the Georgia Department of Banking as an exception to the 15%limit.  The Bank's lending limit at December 31, 2003 was $1,200,000 plus an additional $800,000 for loans which meet theguidelines of the Georgia Department. These limits will increase or decrease as the Bank's capital increases or decreases as aresult of the Bank's earnings or losses, among other reasons.

**Investments **

As of December31, 2003, loans comprisedapproximately 83.1% of the Bank's assets and investment securities comprisedapproximately 10.9% of the Bank'sassets.  The Bank invests primarily in direct obligations of the UnitedStates, obligations guaranteed as to principal and interest by the United Statesand obligations of agencies of the United States.  In addition, the Bankenters into federal funds transactions with its principal correspondent banks,and primarily acts as a net seller of such funds.  The sale of federalfunds amounts to a short term loan from the Bank to another bank.

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**Asset and Liability Management**

It is the objective of the Bank to manage assets and liabilities to provide asatisfactory, consistent level of profitability within the framework of established cash, loan, investment, borrowing and capitalpolicies.  Certain officers of the Bank are responsible for monitoring policies and procedures that are designed to ensure anacceptable composition of asset/liability mix, stability and leverage of all source of funds while adhering to prudent bankingpractices.  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 individuals, partnerships and corporations.  Management of the Bank seeks toinvest the largest portion of the Bank's assets in real estate, commercial, consumer and agribusiness loans.

The Bank regards certificates of deposit of $100,000 or more as volatile deposits. The Bank has maintained sufficient liquidity to repay these deposits on maturity.  While the Bank does not generally pursuethese types of deposits, at times it is profitable to do so, and this option is exercised when deemed prudent by management. These large certificates of deposit account for the volatility in this liability category.

The Bank has available an overnight federal funds purchase line in the amount of$3,300,000 which may be used to meet liquidity needs.  As of December 31, 2003, the Bank had no balances outstanding underthis line.   The Bank also has advances available with the Federal Home Loan Bank where the Bank can purchase funds up to13% of total assets.

The Bank’s asset/liability mix is monitored on a daily basis with a quarterlyreport reflecting interest sensitive assets and interest sensitive liabilities being prepared and presented to the Bank's board ofdirectors.  The objective of this policy is to control interest-sensitive assets and liabilities so as to minimize the impactof substantial movements in interest rates on the earnings of the Bank.

**Correspondent Banking **

Correspondent banking involves the providing of services by one bank to another bank,which cannot provide that service for itself from an economic or practical standpoint.  The Bank is required to purchasecorrespondent services offered by larger banks, including checking collections, purchase of federal funds, security safekeeping,investment services, coin and currency supplies, overline and liquidity loan participations and sales of loans to or participationswith correspondent banks. 

**Employees **

As of December 31, 2003, the Bank had 54 total employees, comprised of 48 full-time and 6part-time.  The Company does not have any employees who are not also employees of the Bank.

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**SUPERVISION & REGULATION**

Both FMB Equibanc, Inc. and Farmers & Merchants Bank are subject to extensive stateand federal banking regulations that impose restrictions on and provide for general regulatory oversight of their operations. These laws generally are intended to protect depositors and not shareholders.  The following discussion describes the materialelements of the regulatory framework that applies to us.

**FMB Equibanc, Inc.**

Since FMBEquibanc, Inc. owns all of the capital stock of Farmers & Merchants Bank, it is a bank holding company under the federal BankHolding Company Act of 1956.  As a result, FMB Equibanc, Inc.is primarily subject to the supervision, examination andreporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve.  As a bank holding companylocated in Georgia, the Georgia Department of Banking and Finance also regulates and monitors all significant aspects of theoperations of FMB Equibanc, Inc.

***Acquisitions of Banks****.*   The Bank Holding Company Actrequires every bank holding company to obtain the Federal Reserve’s prior approval before:
-  acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holdingcompany will directly or indirectly own or control more than 5% of the bank’s voting shares; 
-  acquiring all or substantially all of the assets of any bank; or 
-  merging or consolidating with any other bank holding company. 

Additionally,the Bank Holding Company Actprovides that the Federal Reserve may not approve any of these transactions ifit would result in or tend to create a monopoly or, substantially lessencompetition or otherwise function as a restraint of trade, unless theanti-competitive effects of the proposed transaction are clearly outweighed bythe public interest in meeting the convenience and needs of the community to beserved.  The Federal Reserve is also required to consider the financial andmanagerial resources and future prospects of the bank holding companies andbanks concerned and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources generally focuses oncapital adequacy, which is discussed below.

Under the Bank Holding Company Act, if adequately capitalized and adequately managed, FMBEquibanc, Inc.****or any other bank holding company located in Georgia may purchase a bank located outside of Georgia. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Georgia may purchase a banklocated inside Georgia.  In each case, however, restrictions may be placed on the acquisition of a bank that has only been inexistence for a limited amount of time or will result in specified concentrations of deposits.   Currently, Georgia lawprohibits acquisitions of banks that have been incorporated for less than three years.  Because Farmers & Merchants Bankhas been incorporated formore than three years, this limitation does not apply to Farmers & Bank or to FMB Equibanc,Inc.

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***Change in Bank Control****.*****Subject to various exceptions,the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserveapproval prior to any person or company acquiring “control” of a bank holding company.  Control is conclusivelypresumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holdingcompany.  Control is refutably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any classof voting securities and either:
-  the bank holding company has registered securities under Section 12 of the Securities Act of 1934; or 
-  no other person owns a greater percentage of that class of voting securities immediately after the transaction.  

Our common stock is registered under the Securities Exchange Act of 1934.  Theregulations also provide a procedure for challenging the rebuttable presumption of control.

 ***PermittedActivities***.  A bank holding company is generally permitted under the Bank Holding Company Act to engage in or acquiredirect or indirect control of more than 5% of the voting shares of any company engaged in the following activities:
-  Banking or managing or controlling banks; and 
-  Any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the businessof banking. 

Activities that the Federal Reserve has found to be so closely related to banking as to bea proper incident to the business of banking include:
-  Factoring accounts receivable; 
-  Making, acquiring, brokering or servicing loans and usual related activities; 
-  Leasing personal or real property; 
-  Operating a non-bank depository institution, such as a savings association; 
-  Trust company functions; 
-  Financial and investment advisory activities; 
-  Conducting discount securities brokerage activities; 
-  Underwriting and dealing in government obligations and money market instruments; 
-  Providing specified management consulting and counseling activities; 
-  Performing selected data processing services and support services; 
-  Acting as agent or broker in selling credit life insurance and other types of insurance in connection with credittransactions; and 
-  Performing selected insurance underwriting activities. 

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Despite prior approval, the Federal Reserve may order a bank holding company or itssubsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonablecause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to thefinancial safety, soundness, or stability of it or any of its bank subsidiaries.

 In addition to thepermissible bank holding company activities listed above, a bank holding company may qualify and elect to become a financialholding company, permitting the bank holding company to engage in activities that are financial in nature or incidental orcomplementary to financial activity.  The Bank Holding Company Act expressly lists the following activities as financial innature:
-  Lending, trust and other banking activities; 
-  Insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal,agent, or broker for these purposes, in any state; 
-  Providing financial, investment, or advisory services; 
-  Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; 
-  Underwriting, dealing in or making a market in securities; 
-  Other activities that the Federal Reserve may determine to be so closely related to banking or managing or controlling banks asto be a proper incident to managing or controlling banks; 
-  Foreign activities permitted outside of the United States if the Federal Reserve has determined them to be usual in connectionwith banking operations abroad; 
-  Merchant banking through securities or insurance affiliates; and 
-  Insurance company portfolio investments. 

To qualify to become a financial holding company, Farmers & Merchants Bank and anyother depository institution subsidiary of FMB Equibanc, Inc. must be well capitalized and well managed and must have a CommunityReinvestment Act rating of at least “satisfactory.”  Additionally, FMB Equibanc, Inc. must file an election withthe Federal Reserve to become a financial holding company and must provide the Federal Reserve with 30 days’ written noticeprior to engaging in a permitted financial activity. While FMB Equibanc, Inc. meets the qualification standards applicable tofinancial holding companies, FMB Equibanc, Inc. has not elected to become a financial holding company at this time.

***Support of Subsidiary Institutions.***  Under FederalReserve policy, FMB Equibanc, Inc.is expected to act as a source of financial strength for Farmers & Merchants Bank andto commit resources to support Farmers & Merchants Bank.  This support may be required at times when, without this FederalReserve policy, FMB Equibanc, Inc.might not be inclined to provide it.  In addition, any capital loans made by FMBEquibanc, Inc. to Farmers & Merchants Bank will be repaid only after its deposits and various other obligations are repaid infull.  In the unlikely event of FMB Equibanc, Inc.’s bankruptcy, any commitment by it to a federal bank regulatoryagency to maintain the capital of Farmers & Merchants Bank will be assumed by the bankruptcy trustee and entitled to a priorityof payment.

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**Farmers & Merchants Bank**

Farmers & Merchants Bank is subject to extensive state and federal banking regulationsthat impose restrictions on and provide for general regulatory oversight of our operations.  These laws are generally intendedto protect depositors and not shareholders. The following discussion describes the material elements of the regulatory frameworkthat applies to us.

Since Farmers & Merchants Bankis a commercial bank chartered under the laws ofthe State of Georgia, it is primarily subject to the supervision, examination and reporting requirements of the FDIC and theGeorgia Department of Banking and Finance.  The FDIC and Georgia Department of Banking and Finance regularly examine Farmers& Merchants Bank’s operations and have the authority to approve or disapprove mergers, the establishment of branches andsimilar corporate actions.  Both regulatory agencies have the power to prevent the continuance or development of unsafe orunsound banking practices or other violations of law.   Additionally, Farmers & Merchants Bank’s deposits areinsured by the FDIC to the maximum extent provided by law.  Farmers & Merchants Bank is also subject to numerous state andfederal statutes and regulations that affect its business, activities and operations. 

***Branching****. * Under current Georgia law, Farmers &Merchants Bank may open branch offices throughout Georgia with the prior approval of the Georgia Department of Banking andFinance.  In addition, with prior regulatory approval, Farmers & Merchants Bank may acquire branches of existing bankslocated in Georgia.  Farmers & Merchants Bank and any other national or state-chartered bank generally may branch acrossstate lines by merging with banks in other states if allowed by the applicable states’ laws.  Georgia law, with limitedexceptions, currently permits branching across state lines through interstate mergers.

Under the Federal Deposit Insurance Act, states may “opt-in” and allowout-of-state banks to branch into their state by establishing a new start-up branch in the state.  Currently, Georgia has notopted-in to this provision.  Therefore, interstate merger is the only method through which a bank located outside of Georgiamay branch into Georgia.  This provides a limited barrier of entry into the Georgia banking market, which protects us from animportant segment of potential competition.  However, because Georgia has elected not to opt-in, our ability to establish anew start-up branch in another state may be limited.  Many states that have elected to opt-in have done so on a reciprocalbasis, meaning that an out-of-state bank may establish a new start-up branch only if their home state has also elected toopt-in.  Consequently, until Georgia changes its election, the only way we will be able to branch into states that haveelected to opt-in on a reciprocal basis will be through interstate merger.

***Prompt Corrective Action****. * The Federal Deposit InsuranceCorporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalizedfinancial institutions.  Under this system, the federal banking regulators have established five capital categories (wellcapitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in which allinstitutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each of theother categories.  At December 31, 2003, Farmers & Merchants Bank qualified for the well-capitalized category.

Federal bankingregulators are required to take various mandatory supervisory actions and areauthorized to take other discretionary actions with respect to institutions inthe three undercapitalized categories.  The severity of the action dependsupon the capital category in which the institution is placed.  Generally,subject to a narrow exception, the banking regulator must appoint a receiver orconservator for an institution that is critically undercapitalized. 

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An institution that is categorized as undercapitalized, significantly undercapitalized, orcritically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal bankingagency.  A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan,subject to various limitations.  The controlling holding company’s obligation to fund a capital restoration plan islimited to the lesser of 5% of an undercapitalized subsidiary’s assets at the time it became undercapitalized or the amountrequired to meet regulatory capital requirements.  An undercapitalized institution is also generally prohibited fromincreasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, exceptunder an accepted capital restoration plan or with FDIC approval.  The regulations also establish procedures for downgradingan institution to a lower capital category based on supervisory factors other than capital. 

***FDIC Insurance Assessments****.*  The FDIC has adopted arisk-based assessment system for insured depository institutions that takes into account the risks attributable to differentcategories and concentrations of assets and liabilities.  The system assigns an institution to one of three capitalcategories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized.  These three categories aresubstantially similar to the prompt corrective action categories described above, with the “undercapitalized” categoryincluding institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for promptcorrective action purposes.  The FDIC also assigns an institution to one of three supervisory subgroups based on a supervisoryevaluation that the institution’s primary federal regulator provides to the FDIC and information that the FDIC determines tobe relevant to the institution’s financial condition and the risk posed to the deposit insurance funds.  Assessmentsrange from 0 to 27 cents per $100 of deposits, depending on the institution’s capital group and supervisory subgroup. In addition, the FDIC imposes assessments to help pay off the $780 million in annual interest payments on the $8 billion FinancingCorporation bonds issued in the late 1980s as part of the government rescue of the thrift industry.  This assessment rate isadjusted quarterly and is set at $1.54 per $100 of deposits for the first quarter of 2004.

The FDIC may terminate its insurance of deposits if it finds that the institution hasengaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated anyapplicable law, regulation, rule, order or condition imposed by the FDIC.

***Community Reinvestment Act****.*  The Community ReinvestmentAct requires that, in connection with examinations of financial institutions within their respective jurisdictions, the FederalReserve or the FDIC shall evaluate the record of each financial institution in meeting the credit needs of its local community,including low and moderate-income neighborhoods.  These facts are also considered in evaluating mergers, acquisitions andapplications to open a branch or facility.  Failure to adequately meet these criteria could impose additional requirements andlimitations on Farmers & Merchants Bank.  Since our aggregate assets are not more than $250 million, under theGramm-Leach-Bliley Act, we are generally subject to a Community Reinvestment Act examination only once every 60 months if wereceive an “outstanding” rating, once every 48 months if we receive a “satisfactory” rating and as neededif our rating is “less than satisfactory.”  Additionally, we must publicly disclose the terms of various CommunityReinvestment Act-related agreements.

***Other Regulations****.*  Interest and other charges collectedor contracted for by Farmers & Merchants Bank are subject to state usury laws and federal laws concerning interest rates. For example, under the Soldiers’ and Sailors’ Civil Relief Act of 1940, a lender is generally prohibited from chargingan annual interest rate in excess of 6% on any obligation for which the borrower is a person on active duty with the United Statesmilitary.

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Farmers &Merchants Bank’s loan operationsare also subject to federal laws applicable to credit transactions, such as the:
-  federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; 
-  Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and publicofficials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the communityit serves; 
-  Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extendingcredit; 
-  Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; 
-  Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; 
-  Soldiers’ and Sailors’ Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying,secured obligations of persons in military service; and 
-  rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws. 

In addition to the federal and state laws noted above, the Georgia Fair Lending Act(“GAFLA”) imposes restrictions and procedural requirements on most mortgage loans made in Georgia, including homeequity loans and lines of credit.  On August 5, 2003, the Office of the Comptroller of the Currency issued a formal opinionstating that the entirety of GAFLA is preempted by federal law for national banks and their operating subsidiaries.  GAFLAcontains a provision that preempts GAFLA as to state banks in the event that the Office of the Comptroller of the Currency preemptsGAFLA as to national banks.  Therefore, Farmers & Merchants Bank is exempt from the requirements of GAFLA.

The depositoperations of Farmers & Merchants Bank are subject to:
-  the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records andprescribes procedures for complying with administrative subpoenas of financial records; and 
-  the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automaticdeposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automatedteller machines and other electronic banking services. 

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***Capital Adequacy***

FMB Equibanc, Inc. and Farmers & Merchants Bank are required to comply with thecapital adequacy standards established by the Federal Reserve, in the case of FMB Equibanc, Inc., and the FDIC, in the case ofFarmers & Merchants Bank.  The Federal Reserve has established a risk-based and a leverage measure of capital adequacy forbank holding companies.  Since FMB Equibanc Inc.’s consolidated total assets are less than $150 million, under theFederal Reserve’s capital guidelines, our capital adequacy is measured on a bank-only basis, as opposed to a consolidatedbasis.  Farmers & Merchants Bank is also subject to risk-based and leverage capital requirements adopted by the FDIC,which are substantially similar to those adopted by the Federal Reserve for bank holding companies.

The risk-based capital standards are designed to make regulatory capital requirements moresensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure and tominimize disincentives for holding liquid assets.  Assets and off-balance-sheet items, such as letters of credit and unfundedloan commitments, are assigned to broad risk categories, each with appropriate risk weights.  The resulting capital ratiosrepresent capital as a percentage of total risk-weighted assets and off-balance-sheet items.

The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components, Tier 1 Capital and Tier 2 Capital.  Tier 1 Capital generally consists of commonstock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock and alimited amount of qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible assets.  Tier1 Capital must equal at least 4% of risk-weighted assets.  Tier 2 Capital generally consists of subordinated debt, otherpreferred stock and a limited amount of loan loss reserves.  The total amount of Tier 2 Capital is limited to 100% of Tier 1Capital.   At December 31, 2003, Farmers & Merchants Bank’s ratio of total capital to risk-weighted assets was 11.8%and our ratio of Tier 1 Capital to risk-weighted assets was 10.5%.

In addition, the Federal Reserve has established minimum leverage ratio guidelines forbank holding companies.  These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill andother specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highestregulatory rating and implementing the Federal Reserve’s risk-based capital measure for market risk.  All other bankholding companies generally are required to maintain a leverage ratio of at least 4%.  At December 31, 2003, our leverageratio was 8.2%.  The guidelines also provide that bank holding companies experiencing internal growth or making acquisitionswill be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance onintangible assets.  The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluatingproposals for expansion or new activities.

Failure to meet capital guidelines could subject a bank or bank holding company to avariety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, aprohibition on accepting brokered deposits, and certain other restrictions on its business.  As described above, significantadditional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capitalrequirements.

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**Payment of Dividends **

FMB Equibanc, Inc.is a legal entity separate and distinct from Farmers &Merchants Bank.  The principal sources of cash flow of FMB Equibanc, Inc., including cash flow to pay dividends to itsshareholders, are dividends that Farmers & Merchants Bank pays to its sole shareholder, FMB Equibanc, Inc.  Statutory andregulatory limitations apply to Farmers & Merchants Bank’s payment of dividends.  If, in the opinion of the federalbanking regulator, Farmers & Merchants Bank were engaged in or about to engage in an unsafe or unsound practice, the federalbanking regulator could require, after notice and a hearing, that it stop or refrain from engaging in the questionedpractice.  The federal banking agencies have indicated that paying dividends that deplete a depository institution’scapital base to an inadequate level would be an unsafe and unsound banking practice.  Under the Federal Deposit InsuranceCorporation Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to becomeundercapitalized or if it already is undercapitalized.  Moreover, the federal agencies have issued policy statements thatprovide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. See “Farmers & Merchants Bank—Prompt Corrective Action.”

The Georgia Department of Banking and Finance also regulates Farmers & MerchantsBank’s  dividend payments and must approve dividend payments that would exceed 50% of Farmers & MerchantsBank’s  net income for the prior year.  Our payment of dividends may also be affected or limited by other factors,such as the requirement to maintain adequate capital above regulatory guidelines.

At December 31, 2003, Farmers & Merchants Bank could pay cash dividends ofapproximately $873,000 without prior regulatory approval.

**Restrictions on Transactions with Affiliates**

FMBEquibanc, Inc. and Farmers & Merchants Bank are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:
-  a bank’s loans or extensions of credit to affiliates; 
-  a bank’s investment in affiliates; 
-  assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve; 
-  loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates;and 
-  a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate. 

The totalamount of the above transactions is limited in amount, as to any one affiliate,to 10% of a bank’s capital and surplus and, as to all affiliates combined, to20% of a bank’s capital and surplus.  In addition to the limitation on theamount of these transactions, each of the above transactions must also meetspecified collateral requirements.  Farmers & Merchants Bank must alsocomply with other provisions designed to avoid the taking of low-quality assets.

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FMB Equibanc, Inc. andFarmers & Merchants Bank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among otherthings, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on termssubstantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time forcomparable transactions with nonaffiliated companies. 

Farmers & Merchants Bank is also subject to restrictions on extensions of credit toits executive officers, directors, principal shareholders and their related interests.  These extensions of credit (1) must bemade on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparabletransactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorablefeatures.

**Privacy**

Financial institutions are required to disclose their policies for collecting andprotecting confidential information.  Customers generally may prevent financial institutions from sharing nonpublic personalfinancial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactionsrequested by the consumer or when the financial institution is jointly sponsoring a product or service with a nonaffiliated thirdparty.  Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated thirdparty for use in telemarketing, direct mail marketing or other marketing to consumers.****

**Consumer Credit Reporting**

On December 4, 2003, the President signed the Fair and Accurate Credit Transactions Act (the FAIR Act), amending thefederal Fair Credit Reporting Act (the FCRA).  These amendments to the FCRA (the FCRA Amendments) will become effective asearly as February 2004, but more likely in the third or fourth quarter of 2004, depending on implementing regulations to be issuedby the Federal Trade Commission and the federal bank regulatory agencies.  The FCRA Amendments that deal with employeeinvestigation will become effective on March 31, 2004. 

The FCRAAmendments include,among other things:
-  new requirements for financial institutions to develop policies and procedures to identify potential identitytheft and, upon the request of a consumer, place a fraud alert in the consumer’s credit file stating that the consumer may bethe victim of identity theft or other fraud; 
-  for entities that furnish information to consumer reporting agencies (which would include Farmers & MerchantsBank), new requirements to implement procedures and policies regarding the accuracy and integrity of the furnished information andregarding the correction of previously furnished information that is later determined to be inaccurate; and 
-  a new requirement for mortgage lenders to disclose credit scores to consumers. 

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The FCRA Amendmentsalso will prohibit a business that receives consumer information from an affiliate from using that information for marketingpurposes unless the consumer is first provided a notice and an opportunity to direct the business not to use the information forsuch marketing purposes (the “opt-out”), subject to certain exceptions. ** ** We do not plan to share consumerinformation among our affiliated companies for marketing purposes, except as may be allowed under exceptions to the notice andopt-out requirements.  Because no affiliate of FMB Equibanc, Inc. currently sharing consumer information with any otheraffiliate of FMB Equibanc, Inc. for marketing purposes, the new limitations on sharing of information for marketing purposes willnot have a significant impact on FMB Equibanc, Inc.

Prior to the effectivedate of the FCRA Amendments, FMB Equibanc, Inc. and its subsidiary will implement policies and procedures to comply with the newrules.

**Anti-Terrorism Legislation**

The Uniting and Strengthening America by Providing Appropriate Tools Required to Interceptand Obstruct Terrorism (USA PATRIOT) Act of 2001, signed by the President on October 26, 2001, imposed new requirements andlimitations on specified financial transactions and account relationships, intended to guard against money laundering andterrorism.  Most of these requirements and limitations took effect in 2002.  Additional “know your customer”rules became effective in June 2003, requiring Farmers & Merchants Bank to establish a customer identification program underSection 326 of the USA PATRIOT Act.  FMB Equibanc Inc. and its subsidiary implemented procedures and policies to comply withthose rules prior to the effective date of each of the rules. 

**Proposed Legislation and Regulatory Action**

New regulations and statutes are regularly proposed that contain wide-ranging proposalsfor altering the structures, regulations and competitive relationships of financial institutions operating or doing business in theUnited States.  We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent towhich our business may be affected by any new regulation or statute.

**Effect of Governmental Monetary Polices**

Our earnings are affected by domestic economic conditions and the monetary and fiscalpolicies of the United States government and its agencies.  The Federal Reserve Bank’s monetary policies have had, andare likely to continue to have, an important impact on the operating results of commercial banks through its power to implementnational monetary policy in order, among other things, to curb inflation or combat a recession.  The monetary policies of theFederal Reserve affect the levels of bank loans, investments and deposits through its control over the issuance of United Statesgovernment securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirementsto which member banks are subject.  We cannot predict the nature or impact of future changes in monetary and fiscalpolicies.

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**ITEM 2.            DESCRIPTION OF PROPERTIES**

The Company's executive office is located at the Bank’s main office, 201 North MainStreet, Statesboro, Georgia 30458.  The Bank’s main office was constructed in 1991 and contains approximately 16,000square feet.  All of the executive officers of the Company and the Bank are located at this facility as are all bookkeepingand computer operations.

The Bank also has two branches, located at 620 Zetterower Avenue, Statesboro, Georgia and29 North Parker Avenue, Brooklet, Georgia.  The Bank’s main office and all branches are owned by the Company.

**ITEM 3.             LEGALPROCEEDINGS**

As of the date of this Report, there are no material legal proceedings to which theCompany or any of its properties were subject.

**ITEM 4.            SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

No matters were submitted for a vote of the Company’s shareholders during the fourthquarter of 2003.
 
 

 

 

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**PART II**
**ITEM 5.****MARKET FORCOMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND  SMALL BUSINESS ISSUER PURCHASES OF EQUITYSECURITIES**
**Market for Common Stock**

Prior to the acquisition of its common stock by the Company, the Bank's common stock wastraded from time to time on an individual basis, but there was no established trading market.  There is no established tradingmarket for the Company's common stock, and an active public trading market is not expected to develop in the near future.  Theapproximate number of holders of record of the Company's common stock as of December 31, 2003 was 506.

**Dividends**

The Company is a legal entity separate and distinct from the Bank.  The principalsources of the Company's cash flow, including cash flow to pay dividends to its shareholders, are dividends paid by the Bank to theCompany.  Statutory and regulatory limitations apply to the Bank's payment of dividends to the Company as well as to theCompany's payment of dividends to its shareholders.

Dividends are payable with respect to the Bank common stock only when and if declared bythe Bank's board of directors.  The Bank is restricted in its ability to pay dividends by the FICG, which provides that a bankmay not pay dividends when it is insolvent or when the payment thereof would render the bank insolvent or when the declaration orpayment would be contrary to any restrictions contained in a bank's articles of incorporation.  It then places the followingfurther restrictions on the payment of dividends:
-  dividends may not be declared or paid at any time the Bank does not have paid-in capital and appropriated retained earningswhich, in combination, equal at least 20% of its capital stock; and 
-   dividends may not be paid without the prior approval of the Georgia Department, if the dividends are in excess of specifiedamounts fixed by regulation of the Georgia Department. 

With respect to the Company, dividends may be paid out of funds legally available thereforin accordance with the provisions of the Georgia Business Corporation Code (the "GBCC").  Under the GBCC, whether dividendsmay be paid is determined by implementing two basic tests:  an equity insolvency test and a balance sheet test.  Theequity insolvency test prohibits the payment of a dividend if, after giving it effect, the corporation would not be able to pay itsdebts as they become due in the usual course of business.  The balance sheet test prohibits the payment of a dividend if,after giving it effect, the corporation's total assets would be less than the sum of its total liabilities plus the amount thatwould be needed to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to thosereceiving the dividend.  In addition, the Federal Reserve generally prohibits a bank holding company from paying any dividendson its common stock if at such time its debt to equity ratio is equal to or greater than 30%.  Further, the Company's abilityto pay dividends is subject to the financial performance of the Bank, which is dependent upon, among other things, the localeconomy, the success of the bank's lending activities, compliance of the bank with applicable regulations, investment performanceand the ability to generate fee income.

The Companydeclared dividends of $181,300, or $.50 per share both in 2003 and 2002.

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**Recent Sales of Unregistered Securities**

There were no unregistered sales of securities in 2003.

****

**ITEM 6.           MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

**Cautionary Statement Regarding Forward-Looking Statements**

The 2003Annual Report of FMB Equibanc, Inc. (the “Company”) contains forward-looking statements in addition to historicalinformation.  The Company cautions that there are various important factors that could cause actual results to differmaterially from those indicated in the forward-looking statements within the meaning of the Private Securities Litigation ReformAct of 1995; accordingly, there can be no assurance that such indicated results will be realized. 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor forforward-looking statements.  In order to comply with the terms of the safeharbor, the Company is required to note the variety of factors that could causethe Company’s actual results and experience to differ materially from theanticipated results or other expectations expressed in the Company’sforward-looking statements.  These factors include legislative andregulatory initiatives regarding deregulation and restructuring of the bankingindustry; the extent and timing of the entry of additional competition in theCompany’s markets; potential business strategies, including acquisitions ordispositions of assets or internal restructuring, that may be pursued by theCompany or state and federal banking regulations; changes in or application ofenvironmental and other laws and regulations to which the Company is subject;political, legal and economic conditions and developments; financial marketconditions and the results of financing efforts; changes in commodity prices andinterest rates; weather, natural disasters and other catastrophic events; andother factors discussed in the Company’s filings with the Securities andExchange Commission, including its Annual Report on Form 10-KSB.  The words“believe”, “expect”, “anticipate”, “project” and similar expressions signifysuch forward-looking statements. 

Readers are cautioned not to place undue reliance on any forward-lookingstatements made by or on behalf of the Company.  Any such statement speaksonly as of the date the statement was made.  The Company undertakes noobligation to update or revise any forward-looking statements.  Additionalinformation with respect to factors that may cause results to differ materiallyfrom those contemplated by such forward-looking statements is included in theCompany’s current and subsequent filings with the Securities and ExchangeCommission.

**CRITICAL ACCOUNTING POLICIES**

The Company has established certain accounting and financial reporting policiesto govern the application of accounting principles generally accepted in theUnited States of America in the preparation of our financial statements. Our significant accounting policies are described in the Notes to theConsolidated Financial Statements. Certain accounting policies involvesignificant judgments and assumptions by management which have a material impacton the carrying value of certain assets and liabilities; management considersthese accounting policies to be critical accounting policies.  Thejudgments and assumptions used by management are based on historical experienceand other factors which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management,actual results could differ from the judgments and estimates adopted bymanagement which could have a material impact on the carrying values of assetsand liabilities and the results of the Company’s operations.  We believethe following accounting policies applied by the Company represent criticalaccounting policies.       

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**Allowance for Loan Losses**

We believe the allowance for loan losses is a critical accounting policy thatrequires the most significant judgments and estimates used in the preparation ofour consolidated financial statements.  The allowance for loan lossesrepresents management’s estimate of probable loan losses inherent in the loanportfolio.  Calculation of the allowance for loan losses represents acritical accounting estimate due to the significant judgment, assumptions andestimates related to the amount and timing of estimated losses, consideration ofcurrent and historical trends and the amount and timing of cash flows related toimpaired loans.

Managementbelieves that the allowance for loan losses is adequate.  While managementuses available information to recognize losses on loans, future additions to theallowance for loan losses may be necessary based on changes in economicconditions. In addition, various regulatory agencies, as an integral part oftheir examination process, periodically review the Bank's allowance for loanlosses. Such agencies may require the subsidiary bank to recognize additions tothe allowance for loan losses based on their judgments about informationavailable to them at the time of their examination.

Considering current information and events regarding a borrower’s ability to repay its obligations, management considers aloan to be impaired when the ultimate collectibility of all amounts due, according to the contractual terms of the loan agreement,is in doubt. When a loan is considered to be impaired, the amount of impairment is measured based on the present value of expectedfuture cash flows discounted at the loan's effective interest rate.  If the loan is collateral-dependent, the fair value ofthe collateral is used to determine the amount of impairment. Impairment losses are included in the allowance for loan lossesthrough a charge to the provision for losses on loans.

Subsequent recoveries are credited to the allowance for loan losses.  Cashreceipts for accruing loans are applied to principal and interest under thecontractual terms of the loan agreement.  Cash receipts on impaired loansfor which the accrual of interest has been discontinued are applied first toprincipal and then to interest income.

The accounting for impaired loans described above applies to all loans, exceptfor large pools of smaller-balance, homogeneous loans that are collectivelyevaluated for impairment, loans that are measured at fair value or at the lowerof cost or fair value, and debt securities.  The allowance for loan lossesfor large pools of smaller-balance, homogeneous loans is established throughconsideration of such factors as changes in the nature and volume of theportfolio, overall portfolio quality, adequacy of the underlying collateral,loan concentrations, historical charge-off trends, and economic conditions thatmay affect the borrowers' ability to pay.

Certain economic and interest rate factors could have a material impact on thedetermination of the allowance for loan losses.  The national economyshowed signs of rebounding during the fourth quarter of 2003.  If theeconomy’s momentum continues, certain factors could evolve which wouldpositively impact our net interest margin.  An increase in interest ratesby the Federal Reserve Bank would favorably impact our net interest margin. An improving economy could result in the expansion of businesses and creation ofjobs which would positively affect the Company’s loan growth and improve ourgross revenue stream.  Conversely, certain factors could result from anexpanding economy which could increase our credit costs and adversely impact ournet earnings.  A significant rapid rise in interest rates could createhigher borrowing costs and shrinking corporate profits which could have amaterial impact on borrowers’ ability to pay.  We will continue toconcentrate on maintaining a high quality loan portfolio through strictadministration of our loan policy.

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A substantialportion of our loan portfolio is in the commercial real estate and residential real estate sectors.  Those loans are securedby real estate in the Company’s primary market area.  Therefore, the ultimate collectibility of a substantial portion ofour loan portfolio is susceptible to changes to market conditions in the Company’s primary market area.

We are closely monitoring certain portions of our loan portfolio that we believehave a higher credit risk profile under the current environment based solelyupon their industry classification which includes agricultural and agribusinessloans.  Based on current information, we have not identified any problemcredits included in these categories, which are not already classified asnonperforming or impaired loans.  However, if the economic recovery takeslonger than expected, the allowance for loan losses could be impacted by adversedevelopments in these credits.

**Income Taxes**

SFAS No. 109,“Accounting for Income Taxes,” requires the asset and liability approach for financial accounting and reporting fordeferred income taxes.  We use the asset and liability method of accounting for deferred income taxes and provide deferredincome taxes for all significant income tax temporary differences.  See Note 9 to the Notes to Consolidated FinancialStatements for additional details.

As part of the process of preparing our consolidated financial statements we arerequired to estimate our income taxes in each of the jurisdictions in which weoperate.  This process involves estimating our actual current tax exposuretogether with assessing temporary differences resulting from differing treatmentof items, such as depreciation and the provision for loan losses, for tax andfinancial reporting purposes.  These differences result in deferred taxassets and liabilities that are included in our consolidated balance sheet.

We must also assess the likelihood that our deferred tax assets will berecovered from future taxable income, and to the extent we believe that recoveryis not likely, we must establish a valuation allowance.  Significantmanagement judgment is required in determining our provision for income taxes,our deferred tax assets and liabilities and any valuation allowance recordedagainst our net deferred tax assets.  To the extent we establish avaluation allowance or adjust this allowance in a period, we must include anexpense within the tax provisions in the statement of income.  We haverecorded on our consolidated balance sheet net deferred tax assets of $369,000.

**Performance Overview**

We reported net income of $1,661,000, or $4.54 per diluted common share in 2003, compared to $1,467,000, or $4.01per diluted common share in 2002.  The return on average assets was 1.18% in 2003 compared to 1.16% in 2002, while the returnon average common shareholders’ equity was 15.07% in 2003 compared to 15.03% in 2002.

In spite of the record low interest rate environment during 2003, our netinterest income increased $98,000 or 1.85% to $5,387,000 in 2003 compared to$5,289,000 in 2002.  The net interest margin earned on interest earningassets during 2003 dropped to 4.01% from 4.42% during 2002.  To lessen theadverse impact on net interest margins, we lowered the interest rates paid onall deposit products, and particularly focused on lowering the rates paid oncertificates of deposit.  The strategic goal was to allow certain of thesedeposits to leave the Bank and build a higher concentration of deposits investedin loans rather than in much lower yielding assets such as federal funds sold orinvestment securities.  Although this strategy lessened the adverse impacton interest margins, it resulted in a loss of total deposits of $320,000 fromDecember 31, 2002 to December 31, 2003. 

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Although noninterestexpense increased $617,000 or 17.6% during 2003, this increase was less than theprojections made at the beginning of the year and was the result of closemonitoring of these expenses.

**RESULTS OF OPERATIONS**

**General**

Our principal asset is the ownership of Farmers &Merchants Bank (the “Bank”).  Accordingly, our results of operations are primarily dependent upon the  results ofoperations of the Bank.  The Bank conducts a commercial banking business which consists of attracting deposits from thegeneral public and applying those funds to the origination of commercial, consumer and real estate loans (including commercialloans collateralized by real estate).  The Bank’s profitability depends primarily on net interest income, which is thedifference between interest income generated from interest-earning assets, such as loans and investments, less the interest expenseincurred on interest-bearing liabilities, such as customer deposits and borrowed funds.  Net interest income is affected bythe relative amounts of interest-earning assets and interest-bearing liabilities, and the interest rate paid and earned on thesebalances.  Net interest income is dependent upon the Bank’s interest rate spread, which is the difference between theaverage yield earned on its interest-earning assets and the average rate paid on its interest-bearing liabilities.  Wheninterest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generateinterest income.  The interest rate spread is impacted by interest rates, deposit flows and loan demand.  Additionally,and to a lesser extent, the profitability of the Bank is affected by such factors as the level of noninterest income and expenses,the provision for loan losses and the effective tax rate.  Noninterest income consists primarily of service charges on depositaccounts, other fees and origination of mortgage loans.  Noninterest expenses consist of compensation and benefits,occupancy-related expenses and other operating expenses.

**Earnings Summary**

We reported earnings of $1,661,000 for 2003 representing an increase of $194,000or 13.2% compared to earnings of $1,467,000 for 2002.  Diluted earnings percommon share were $4.54 in 2003 compared to $4.01 per diluted common share in 2002.

Net interest income increased 1.85% in 2003 to $5,387,000 from $5,289,000 in 2002. The net interest margin decreased 41 basis points to 4.01% in 2003 from 4.42% in 2002.  The decline in general interest ratesis a result of actions undertaken by the Federal Reserve over the past three years and has resulted in a compression of our netinterest margin.

Our provision for loan losses totaled $600,000 in 2003 and $720,000 in2002.  The allowance for loan losses represented 1.50% of total loans outstanding at December 31, 2003 and 1.43% of totalloans outstanding at December 31, 2002.  The allowance for loan losses is discussed in more detail under “Summary ofLoan Loss Experience.”

Noninterest income increased $377,000 or 27.7% to $1,737,000 in 2003compared to $1,360,000 in 2002.  The increase in noninterest income in 2003 is attributable to the Bank’s expansion ofits mortgage origination activities.  During 2003, the Bank dedicated additional staff to the mortgage lending function, andcoupled with the historical lows in the long-term interest rates experienced nationally, experienced a significant increase inmortgage origination income. 

24
Noninterest expense increased $617,000 to $4,121,000 in 2003 as compared to$3,504,000 in 2002.  Salaries and employee benefits increased $340,000; equipment and occupancy expense increased $33,000; andall other expense increased $244,000.

**Net Interest Income**

Net interest income totaled $5,387,000 in 2003 representing an increase of$98,000 or 1.85% compared to net interest income of $5,289,000 in 2002. The decrease in net interest income in 2003 was attributable to a decrease ingeneral interest rates as a result of actions undertaken by the Federal Reserveover the past three years.  In 2003, the net interest spread declined 33basis points resulting in a net interest margin decline of 41 basis points. Net interest income in 2003 reflected a decrease in the average yield on earningassets of 102 basis points, while the average cost of interest-bearingliabilities declined 69 basis points.

The yield on loans decreased 107 basispoints in 2003 as a significant portion of our loan portfolio repriced as Wall Street prime rate fell 50 basis points in November2002 and another 25 basis points in June 2003.  The cost of interest-bearing liabilities decreased 69 basis points in 2003 asdeposits repriced as interest rates declined.  The effects of changes in rates and average volumes are set forth in the tabletitled “Rate/Volume Analysis.”

Average earning assets increased $14,705,000, or 12.2%, to $135,015,000 in 2003compared to $120,310,000 in 2002.  Average loans increased $14,914,000, or15.5%, to $111,166,000 in 2003 compared to $96,252,000 in 2002.  Loangrowth has remained strong in our market, and we have continued to focus onquality loan relationships secured by residential or commercial real estate. The average balance of our securities portfolio decreased $1,584,000, or 8.1%during 2003.  Average investment securities represented 12.7% of totalaverage assets in 2003 and 15.3% of total average assets in 2002.  Thispercentage has decreased because the growth in our loan portfolio has beenfunded in part by maturities and principal payments received from our investmentsecurities.  All of our investment securities are classified as availablefor sale.  Average earning assets as a percentage of total average assetswas 95.8% in 2003 compared to 94.9% in 2002.

Average interest-bearing liabilitiesincreased $9,493,000, or 9.6%, in 2003.  Average interest-bearing deposits increased $9,623,000, or 9.8%, in 2003.  Theincrease in average interest-bearing deposits in 2003 was primarily the result of steady growth in the overall deposit base of theBank during 2002, and experiencing a relatively level deposit base during 2003.  Approximately 16% of total average depositswere noninterest-bearing in 2003 compared to 15% for 2002.

Average short-term borrowings do not represent a material source of funds andthe average amounts outstanding during the last two years have remained fairlyconstant.  Other borrowings represent primarily advances by the FederalHome Loan Bank, but also include Federal Funds Purchased.  Average otherborrowings decreased $129,000, or 17.6%, to $602,000 in 2003 compared to$731,000 in 2002.  The decrease in average other borrowings in 2003 wasattributable to less reliance on Federal Fund Purchased to meet temporaryliquidity needs of the Bank.

25
**Noninterest Income**

Noninterest income totaled $1,737,000in 2003 compared to $1,360,000 in 2002, representing an increase of $377,000 or 27.7%.  The $377,000 increase is the result ofa $423,000 increase in mortgage origination fees offset primarily by a $36,000 decrease in service charges on depositaccounts.  The Bank originates long-term mortgage loans, which are acquired by other banks on a nonrecourse basis concurrentwith the closing of each loan.  Until 2003, the bank had only one staff person originating and closing these loans. During the second quarter of 2003, the Bank expanded its mortgage staff by adding a loan origination officer and one full-time andone part-time processor.  With the expanded staff along with historical lows in the long-term interest rates experiencednationally, the number of loans closed and the resulting origination and commission fees collected by the Bank increased $423,000from 2002.  The $36,000 decrease in service charges on deposits accounts is attributable to a decrease in NSF Fees, which arecharges assessed for checks presented for payment against insufficient funds.  This decrease is attributable to one specificcommercial checking account customer which significantly reduced during 2003 its occurrences of presenting checks for paymentagainst insufficient funds.

Followingis a comparison of noninterest income for 2003 and 2002.
  
**Year Ended December 31,**
  
**2003**
 

**2002**
  
**(Dollars in Thousands)**
 ** **** **   
Service charges on deposit accounts

**$**

**1,011**
       
$

1,047

Mortgage origination fees
     
**563**
  
140

Other service charges, commissions and fees
 
**139**
  
151

Gain on sale of securities
 
**- **
  
5

Other operating income
 
**24**
  
17
                                                                                           
**$**

**1,737**
 
$

1,360

**Noninterest Expense**

Incompliance with the requirements of FASB Statement No. 91, “Accounting for Nonrefundable Fees and Costs Associated withOriginating or Acquiring Loans and Initial Direct Costs of Leases”, we allocated $286,000 of salaries to loan costs in 2003and $276,000 in 2002.  After adjusting salaries and benefits for amounts allocated to loan costs, total salaries and benefitsincreased $340,000, or 20.1%, to $2,029,000 in 2003 compared to $1,689,000 in 2002.  The total full-time equivalent employeesremained at approximately 50 employees at December 31, 2003 and 2002.  Total salary and benefit expense increased in 2003 forseveral different reasons.  First we added approximately thirteen staff positions throughout the year 2002, and 2003 was thefirst year of a full-year effect of this increased staff.  Second, our typical salary increases for existing staff averagedapproximately 4% for 2003.  Another reason for the increase in total salary and benefits is the increase of $187,000 incommissions paid on mortgage origination activities.  A final reason is that we also experienced an increase of $36,000 or23.3% in employee health insurance premiums, due in part to the increased staff and also to an approximate 15% increase in the costof premiums for medical coverage.

Equipment and occupancy expense increased $33,000 to $475,000 in 2003 compared to $442,000 in 2002.  Depreciation expense increased $20,000 or 9.1% from 2002 to 2003 as a result of a full-yeareffect of depreciation on computer equipment and vehicles placed in service during 2002 and 2003.  Expenses relating tomaintenance and maintenance contracts increased $6,000 or 12.4%.

26
Office supplies decreased $11,000 or 8.8% to $114,000 in 2003 from $125,000 in2002, primarily as a result of closer monitoring and control of these expenses.

Data processing fees increased $64,000 or 28.7% to $287,000 in 2003 compared to$223,000 in 2002.  This increase in fees was attributable to a 5% increaseeffective July 1, 2002 in the cost from our primary data processing vendor,whose charges are based on the number of accounts maintained by the Bank. In addition to experiencing a full-year effect of this price increase during2003, we continued to add loan and deposit accounts, which added to our totalcost.  We also incurred additional expense relating to the monitoring andinternal security of our data systems and also to upgrading our datacommunication lines to all of banking locations.    

Professional fees increased $90,000 or 51.1% to $266,000 in 2003 from $176,000in 2002.  Additional expense was incurred for both legal and accountingmatters.  Legal fees increased approximately $50,000, primarily as a resultof work and research regarding implementation and compliance with newSarbanes-Oxley rules and also as a result of increased legal activity. Accounting fees increased approximately $40,000, primarily as a result ofincreased fees from the Company’s previous accounting firm.

All other noninterest expense increased $78,000 or 11.5% in 2003 to $758,000 from $680,000 in 2002.  The increase was attributable toincreases in several areas.  Telephone expense increased $18,000 in part to additional charges from our carrier for providingthe upgraded data communications capability previously discussed.  Our expense relating to our external loan review,compliance, and strategic planning consultants also increased $18,000 as a result of fee increases and additional servicesperformed.  Director fees increased $15,000 as a result of increased per meeting fees adopted by the Board of Directors inlate 2002 effective for the year 2003.  Our state business occupation and local business license taxes increased $14,000 in2003.  These taxes are based on the revenue of the Bank, and as revenue has increased, these taxes have also increased. Our postage expense also increased $9,000 in 2003. 

Followingis a comparison of noninterest expense for 2003 and 2002.
 
**YearEnded December 31** 
**2003**
 
**2002**
 
**(Dollars in Thousands)**
Salaries and employee benefits

**$**

**2,029**

$

1,689

Equipment and occupancy
 
**475**
 
442

Office Supplies
 
**114**
 
125

Data processing fees
 
**287**
 
223

Professional fees
 
**266**
 
176

Advertising & Public Relations

**192**

169

Other expense

**758**

680
 
**$**

**4,121**

$

3,504

**Income Taxes**

Income taxes totaled $742,000 in 2003 and $958,000 in 2002.  The effectivetax rate was 31% for 2003 and 40% for 2002.

27
**Liquidity and Capital Resources**

Liquidity management involves the matching of the cash flow requirements ofcustomers, who may be either depositors desiring to withdraw funds or borrowersneeding assurance that sufficient funds will be available to meet their creditneeds, and the ability of the Company and the Bank to meet those needs.  Weseek to meet liquidity requirements primarily through management of short-terminvestments (principally federal funds sold) and monthly amortizing loans. Another source of liquidity is the repayment of maturing single payment loans. In addition, the Bank maintains relationships with correspondent banks whichcould provide funds to it on short notice, if needed.

The liquidity and capital resources of the Company and the Bank are monitored ona periodic basis by state and federal regulatory authorities.  At December31, 2003, the Bank's short-term investments were adequate to cover anyreasonable anticipated immediate need for funds.  During 2003, we increasedour capital by retaining net earnings of $1,480,000 after payment of dividends. After recording a decrease in capital of $122,000 for unrealized losses onsecurities available for sale, net of taxes, total capital increased $1,358,000during 2003.  At December 31, 2003, total capital of the Company amountedto $11,724,000.  We are aware of no events or trends likely to result in amaterial change in our liquidity. 

The following table summarizes short-term borrowings for the periods indicated(dollars in thousands):
 
**Years Ended December 31,** 
**2003**** **
**2002** 
**AverageBalance**

**AverageRate**
 
**AverageBalance**
 
**AverageRate**
            
 Federal funds purchased

**$**

**171**
 
**1.26**

**%**
      
$

286
 
2.08

%
              
**TotalBalance**
    
**TotalBalance**
   
Total maximum short-term borrowings
             
    outstanding at any month-end during the year

**$**

**2,200**
    
$

1,500
   
            Thefollowing table sets forth certain information about contractual cash obligations as of December 31, 2003 (dollars inthousands).
     
**Payments Due After December 31, 2003**  
**Total**
** **
**1 YearOr Less**
** **
**1-3Years** 
**4 -5Years**
 
**After 5Years**

Time certificates of deposit

 
$

67,577

    
$

58,731

    
$

8,846

    
$

-  

     
$

-  

Other borrowings
  
442
  
19
  
43
  
380
   
-  

Operating leases
  
35
  
7
  
15
  
13
   
-  

     Total contractual cash obligations
 
$

68,054
 
$

58,757
 
$

8,904
 
$

393
  
$

-  

At December 31, 2003, we had $152,000 in binding commitments for capitalexpenditures. 

28
In accordance with risk capital guidelines issued by the Federal Reserve Board,we are required to maintain a minimum standard of total capital to risk-weightedassets of 8%.  Additionally, all member banks must maintain “core” or “Tier1” capital of at least 4% of total assets (“leverage ratio”).  Member banksoperating at or near the 4% capital level are expected to have well-diversifiedrisks, including no undue interest rate risk exposure, excellent controlsystems, good earnings, high asset quality, and well managed on- and off-balancesheet activities; and, in general, be considered strong banking organizationswith a composite 1 rating under the CAMEL rating system of banks.  For allbut the most highly rated banks meeting the above conditions, the minimumleverage ratio is to be 4% plus an additional 100 to 200 basis points.

The following table summarizes the regulatorycapital levels of the Bank at December 31, 2003.
 
**Actual**
 
**Required**
 
**Excess**
 
**Amount**

**Percent**
 
**Amount**
 
**Percent**
 
**Amount**

**Percent**
 
**(Dollars in Thousands)**
                                                                                                                                                    
Leverage capital

$

11,444
 
8.2

%
 
$

5,605
 
4.00

%
 
$

5,839
 
4.2

%

Risk-based capital:
                 
Core capital
 
11,444
 
10.5
   
4,342
 
4.00
   
7,102
 
6.5
 
Total capital
 
12,806
 
11.8
   
8,685
 
8.00
   
4,121
 
3.8
 
**Commitments and Lines of Credit**

In the ordinary course of business, the Bank has granted commitments toextend credit to approved customers.  Generally, these commitments toextend credit have been granted on a temporary basis for seasonal or inventoryrequirements and have been approved by the Bank's Board of Directors.  TheBank has also granted commitments to approved customers for standby letters ofcredit.  These commitments are recorded in the financial statements whenfunds are disbursed or the financial instruments become payable.  The Bankuses the same credit policies for these off balance sheet commitments as it doesfor financial instruments that are recorded in the consolidated financialstatements.  Commitments generally have fixed expiration dates or othertermination clauses and may require payment of a fee.  Since many of thecommitment amounts expire without being drawn upon, the total commitment amountsdo not necessarily represent future cash requirements.

Following is a summary of the commitments outstanding at December 31,2003 and 2002.
 
**2003**     
** 2002** 
**(Dollars in Thousands)**
Commitments to extend credit

**$**

**13,838**
 
$

10,764

Standby letters of credit
 
**491**
  
855
                                                                                                                                
**$**

**14,329**
 
$

11,619

**Impact of Inflation**

The consolidated financial statements and related consolidated financialdata presented herein have been prepared in accordance with generally acceptedaccounting principles and practices within the banking industry which requirethe measurement of financial position and operating results in terms ofhistorical dollars without considering the changes in the relative purchasingpower of money over time due to inflation.  Unlike most industrialcompanies, virtually all the assets and liabilities of a financial institutionare monetary in nature.  As a result, interest rates have a moresignificant impact on a financial institution’s performance than the effects ofgeneral levels of inflation. 

29
**SELECTED STATISTICAL INFORMATION OF FMB EQUIBANC, INC.**

Thefollowing statistical information should be read in conjunction with“Management’s Discussion and Analysis of Financial Condition and Results ofOperation” andthe financial statements and related notes included elsewhere in this AnnualReport and in the documents incorporated herein by reference.

**Average Balances and Net IncomeAnalysis**

The following tables set forth the amount of the our interest income orinterest expense for each category of interest-earning assets andinterest-bearing liabilities and the average interest rate for total interest-earning assets and total interest-bearingliabilities, net interest spread and net yield on average interest-earningassets.  Federally tax-exempt income is presented on a taxable-equivalentbasis assuming a 34% federal tax rate.
** **  
  **Year Ended December 31,****                                                                                              **  
 ** 2003**** **** **
** 2002**
**ASSETS**
  
  **AverageBalance**      
  **InterestIncome/Expense**     
  **AverageYield/Rate Paid**       
 **AverageBalance**      
 **InterestIncome/Expense**      
 **AverageYield/Rate Paid**
     Interest-earning assets:
  
 **(Dollars in Thousands)**
           Loans, net ofunearned interest

**$**

**111,166 **
 
**$**

**7,040**
 
**6.33**

**%**
 
$

96,252 
 
$

7,125
 
7.40

%

     Investment securities:
                   
          Taxable
   
**16,726 **
  
**672**
 
**4.02**
   
18,250 
  
942
 
5.16
 
          Nontaxable
   
**1,148 **
  
**68**
 
**5.94**
   
1,208 
  
76
 
6.24
 
     Interest-bearing deposits in banks
 
**2,291 **
  
**26**
 
**1.16**
   
-  
  
- 
 
-
 
     Federal funds sold
   
**3,684 **
  
**42**
 
**1.14**
   
4,600 
  
69
 
1.49
 
              Totalinterest-earning assets
 
**135,015 **
  
**7,848**
 
**5.81**
   
120,310 
  
8,212
 
6.83
                     
   Noninterest-earning assets:
     
** **
        
 
   
       Cash
   
**3,769 **
        
3,775 
      
       Allowance for loanlosses
 
**(1,654)**
        
(1,260)
      
       Unrealized gain (loss) onavailable
                 
         for sale securities
   
**-  **
        
-  
      
      Other assets
   
**3,832 **
        
4,014 
      
    Total noninterest-earningassets
 
**5,947 **
        
6,529 
                                                                                
             Total assets
  
**$**

**140,962 **
       
$

126,839 
      
 

30
**Average Balances and Net Income Analysis(Continued)**
   
**Year Ended December 31,**   
**2003**
 
**2002**
   **AverageBalance** **InterestIncome/Expense** **AverageYield/Rate Paid** **AverageBalance** **InterestIncome/Expense** **AverageYield/Rate Paid**
**  LIABILITIES AND**
                   
     **STOCKHOLDERS’ EQUITY**
                                     
  Interest-bearing liabilities:
                   
  Savings and interest-bearing
                   
    demand deposits
  
**$**

**32,572**
 
**$**

**245**
 
**0.75**

**%**
 
$

29,568
 
$

442
 
1.49

%

  Time deposits
   
**75,193**
  
**2,167**
 
**2.88**
   
68,575
  
2,424
 
3.54
 
  Other borrowings
   
**602**
  
**26**
 
**4.29**
   
731
  
31
 
4.16
 
     Total interest-bearing
                   
         liabilities
   
**108,367**
  
**2,438**
 
**2.24**
   
98,874
  
2,897
 
2.93
                     
  Noninterest-bearing liabilities and
                 
    stockholders’ equity:
                   
  Demand deposits
   
**21,029**
        
17,585
      
  Other liabilities
   
**545**
        
618
      
  Stockholders’ equity
   
**11,021**
        
9,762
      
      Total noninterest-bearingliabilities
                 
        and stockholders’equity
   
**32,595**
        
27,965
                          
        Total liabilities and
                   
        stockholders’equity
  
**$**

**140,962**
       
**$**

126,839
                          
Interest rate spread
        
**3.57**

**%**
       
3.90

%
                    
Net interest income
     
**$**

**5,410**
       
$

5,315
                       
Net interest margin
        
**4.01**

**%**
       
4.42

%

31
**Rate and VolumeAnalysis**

The following table reflects the changes in net interest income resultingfrom changes in interest rates and from asset and liability volume. Federally tax-exempt interest is presented on a taxable-equivalent basisassuming a 34% federal tax rate. The change in interest attributable to rate hasbeen determined by applying the change in rate between years to average balancesoutstanding in the later year.  The change in interest due to volume hasbeen determined by applying the rate from the earlier year to the change inaverage balances outstanding between years.  Thus, changes that are notsolely due to volume have been consistently attributed to rate.
 
**Year Ended December 31,**
 
**Year Ended December 31,**
 
**2003 vs. 2002**
 
**2002 vs. 2001**
 
**(Dollars inThousands)** 
**(Dollars inThousands)**                                                                                      
**Increase(Decrease)** 
**Rate** 
**Volume** 
**Increase(Decrease)** 
**Rate** 
**Volume**
Increase (decrease) in:
                 
     Income from earning assets:
                 
          Interest and fees on loans

$

(85)
 
$

(1,189)
 
$

1,104 
 
$

52 
 
$

(1,608)
 
$

1,660 

     Interest on securities:
                
          Taxable
 
(270)
  
(191)
  
(79)
  
17 
  
(140)
  
157 

          Tax exempt
 
(8)
  
(4)
  
(4)
  
25 
  
(6)
  
31 

     Interest-bearing deposits in banks
 
26 
  
-  
  
26 
  
(2)
  
-  
  
(2)

     Interest on federal funds
 
(27)
  
(13)
  
(14)
  
(18)
  
(80)
  
62 

          Total interest income
 
(364)
  
(1,397)
  
1,033 
  
74 
  
(1,834)
  
1,908 
                   
Expense from interest-bearing liabilities:
      
   
         
 
 
     Interest on savings and interest-
                  
          bearing demand deposits
 
(197)
  
(242)
  
45
  
(134)
  
(321)
  
187 

     Interest on time deposits
 
(257)
  
(491)
  
234
  
(774)
  
(1,542)
  
768 

     Interest on short-term borrowings
 
(5)
  
-  
  
(5)
  
(103)
  
(2)
  
(101)

     Interest on other borrowings
 
-  
  
-  
  
-  
  
-  
  
-  
  
-  

     Interest on trust preferred securities
 
-  
  
-  
  
-  
  
-  
  
-  
  
-  

          Total interest expense
 
(459)
  
(733)
  
274 
  
(1,011)
  
(1,865)
  
854 
                   
          Net interest income

$

95 
 
$

(664)
 
$

759 
 
$

1,085 
 
$

31 
 
$

1,054 

32
**Asset/Liability Management**

Aprincipal objective of our asset/liability management strategy is to minimize its exposure to changes in interest rates by matchingthe maturity and repricing horizons of interest-earning assets and interest-bearing liabilities.   This strategy is overseenin part through the direction of our Asset and Liability Committee (the “ALCO Committee”) which establishes policiesand monitors results to control interest rate sensitivity.

As part of our interest rate risk management policy, theALCO Committee examines the extent to which its assets and liabilities are “interest rate-sensitive” and monitors itsinterest rate-sensitivity “gap”.  An asset or liability is considered to be interest rate sensitive if it will reprice or mature within the time period analyzed, usually one year or less.  The interest rate-sensitivity gap is thedifference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such timeperiod.  A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interestrate-sensitive liabilities.  A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds theinterest rate-sensitive assets.  During a period of rising interest rates, a negative gap would tend to adversely affect netinterest income, while a positive gap would tend to result in an increase in net interest income.  During a period of fallinginterest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend toadversely affect net interest income.  If our assets and liabilities were equally flexible and moved concurrently, the impactof any increase or decrease in interest rates on net interest income would be minimal.

A simple interest rate “gap” analysis byitself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Accordingly, the ALCO Committee also evaluates how the repayment of particular assets and liabilities is impacted by changes ininterest rates.  Income associated with interest-earning assets and costs associated with interest-bearing liabilities may notbe affected uniformly by changes in interest rates.  In addition, the magnitude and duration of changes in interest rates mayhave a significant impact on net interest income.  For example, although certain assets and liabilities may have similarmaturities or periods of repricing, they may not react identically to changes in market interest rates.  Interest rates oncertain types of assets and liabilities fluctuate in advance of changes in general market interest rates, while interest rates onother types may lag behind changes in general market rates.  In addition, certain assets, such as adjustable rate mortgageloans, have features (generally referred to as “interest rate caps”) which limit changes in interest rates on ashort-term basis and over the life of the asset.  In the event of a change in interest rates, prepayment and early withdrawallevels also could deviate significantly from those assumed in calculating the interest-rate gap.  The ability of manyborrowers to service their debts also may decrease in the event of an interest-rate increase.

33
 The following table sets forth the distribution of the repricing of our earning assets and interest-bearing liabilities as of December 31, 2003, the interest rate sensitivity gap (i.e.,interest rate sensitive assets divided by interest rate sensitivity liabilities), the cumulative interest rate sensitivity gapratio (i.e., interest rate sensitive assets divided by interest rate sensitive liabilities) and the cumulative sensitivity gapratio.  The table also sets forth the time periods in which earning assets and liabilities will mature or may reprice inaccordance with their contractual terms.  However, the table does not necessarily indicate the impact of general interest ratemovements on the net interest margin since the repricing of various categories of assets and liabilities is subject to competitivepressures and the needs of our customers.  In addition, various assets and liabilities indicated as repricing within the sameperiod may in fact reprice at different times within such period and at different rates.
 **At December 31, 2003****Maturing or Repricing within**  **Zero toThreeMonths** **ThreeMonths toOne Year** **One toFiveYears**  
**OverFiveYears** 
**Total** 
**(Dollars in Thousands)**

**Earning assets:**
               
Interest-bearing deposits in banks

      and federal funds sold

$

85
 
$

-  
 
$

-  
 
$

-  
 
$

85

Restricted stock
 
408
  
-  
  
-  
  
-  
  
408

Investment securities
 
-  
  
334 
  
9,779
 
 

5,204
  
15,317

Loans
 
47,658
  
29,751 
  
36,766
  
2,659
  
116,834
  
48,151
  
30,085 
  
46,545
  
7,863
  
132,644

**Interest-bearing liabilities:**
              
Interest-bearing demand deposits (1)
 
-  
  
15,016 
  
-  
  
-  
  
15,016

Savings (1)
 
-  
  
22,653 
  
-  
  
-  
  
22,653

Certificates less than $100,000
 
7,407
  
20,866 
  
3,588
  
-  
  
31,861

Certificates, $100,000 and over
 
11,052
  
19,406 
  
5,258
  
-  
  
35,716

Other borrowings
 
4
  
11 
  
409
  
-  
  
424
  
18,463
  
77,952 
  
9,255
  
-  
  
105,670
               
**Interest rate sensitivity gap**

$

29,688
 
$ 

(47,867)
 
$

37,290
 
$

7,863
 
$

26,974
               
**Cumulative interest rate sensitivity gap**

$

29,688
 
$

(18,179)
 
$

19,111
 
$

26,974
                  
**Interest rate sensitivity gap ratio**
 
2.61
  
0.39 
  
5.03
  
-  
                  
**Cumulative interest rate sensitivity gap ratio**
 
2.61
  
0.81 
  
1.18
  
1.26
       (1)    In recent years, we have found that NOW and money-market checking deposits    and savings deposits reprice on average between threemonths and one year, depending on the competition in our market area and the general interest rate environment.  Therefore, wehave placed these deposits in the three months to one year horizon. 
34
**INVESTMENT PORTFOLIO**

We manage the mix of asset and liability maturities in an effort tocontrol the effects of changes in the general level of interest rates on netinterest income. See “–Asset/Liability Management.”  Except for its effecton the general level of interest rates, inflation does not have a materialimpact on the portfolio due to the rate variability and short-term maturities ofits earning assets.  In particular, approximately 66% of the loan portfoliois comprised of loans which mature or reprice within one year or less. Mortgage loans, primarily with five to fifteen year maturities, are also made ona variable rate basis with rates being adjusted every one to five years. Additionally, 2% of the investment portfolio matures or reprices within one yearor less.

**Types of Investments**

**Securities**

Following is a summary of the carrying value of investments, includingrestricted equity securities, as of the end of each reported period:
** **** December 31,**** **** 2003**** **** 2002**** **** (Dollars in Thousands)**
U. S. Government and agency securities

**$**

**5,363**
 
$

10,556

State and municipal securities
 
**1,162**
  
1,261

Corporate debt securities
 
**3,234**
  
3,206

Mortgage-backed securities
 
**5,558**
  
4,635

Restricted stock
 
**408**
  
367
 
**$**

**15,725**
 
$

20,025

**Maturities**

The amounts of securities available for sale in each category as ofDecember 31, 2003 are shown in the following table according to contractualmaturity classifications (1) one year or less, (2) after one year through fiveyears, (3) after five years through ten years, and (4) after ten years.
** **** ****U.S. TreasuryAnd Other U.S.Government Agenciesand Corporations**** **
**State andPolitical  Subdivisions**** **
**Amount**
 
**Yield(1)**
 
**Amount**
 
 **Yield(1) (2)** **(Dollars in Thousands)**
**Maturity:**
                      
      One year or less

$

334
 
2.28

%
 
$

-   
 
-  

%

      After one year through five years
 
9,341
 
4.35
   
438 
 
5.60
 
      After five years through ten years
 
1,017
 
2.70
   
557 
 
5.98
 
      After ten years
 
3,463
 
1.10
   
167
 
6.34
  $
14,155
 
3.39

%
 
$

1,162
 
5.88

%

 
(1)Yieldswere computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratablebasis over the life of each security.  The weighted average yield for each maturity range was computed using the acquisitionprice of each security in that range.(2)Yieldson securities of state and political subdivisions are stated on a taxable-equivalent basis, using a tax rate of 34%.
35
**LOAN PORTFOLIO**

**Types of Loans**

Management believes that our loan portfolio is adequately diversified.The loan portfolio contains no foreign or energy-related loans or significantconcentrations in any one industry, with the exception of residential andcommercial real estate mortgages, which constituted approximately 64% of ourloan portfolio as of December 31, 2003.  The amount of loans outstanding atthe indicated dates is shown in the following table according to type of loans.
 
**December 31,** 
**2003** 
**2002** 
**(Dollars in Thousands)**
Commercial, financial and agricultural

**$**

**16,156 **
 
$

18,580 

Real estate - construction
 
**14,828 **
  
5,341 

Real estate - mortgage
 
**74,925 **
  
64,881 

Consumer
 
**10,887 **
  
11,035 

Overdrafts
 
**38 **
  
145 
  
**116,834 **
  
99,982 

Less reserve for possible loan losses
 
**(1,758)**
  
(1,426)

   Loans, net

**$**

**115,076 **
 
$

98,556 

**Maturities and Sensitivity to Changes in InterestRates**

Total loans as of December 31, 2003 are shown in thefollowing table according to maturity or repricing opportunities (1) one year or less, (2) after one year through five years, and(3) after five years.
 
**(Dollars in**
 
**Thousands)**

**Maturity or Repricing Within:**
  
One year or less

$

77,409

After one year through five years
 
36,766

After five years
 
2,659
 
$

116,834

The following table summarizes loans at December 31, 2003that mature or reprice after one year which (1) have predetermined interest rates and (2) have floating or adjustable interestrates.
 
**(Dollars in**
 
**Thousands)**
   
Predetermined interest rates

$

24,896

Floating or adjustable interest rates
 
14,529
 
$

39,425

Records were not available to present the above information in eachcategory listed in the first paragraph above and could not be reconstructedwithout undue burden.

 

 

36
**Nonperforming Loans**

A loan is placed on nonaccrual status when, inmanagement’s judgment, the collection of the interest income appears doubtful. Interest receivable that has been accrued inprior years and is subsequently determined to have doubtful collectibility is charged to the allowance for possible loanlosses.  Interest on loans that are classified as nonaccrual is recognized when received.  Past due loans are loans whoseprincipal or interest is past due 90 days or more.  In some cases, where borrowers are experiencing financial difficulties,loans may be restructured to provide terms significantly different from the original contractual terms.
 
**December 31,**
 
**2003**

**2002**

**2001**

**2000**

**1999**
 
**(Dollars in Thousands)**
                     
Loans accounted for on a nonaccrual basis

**$**

**596**

$

496
 
$

357
 
$

466

$

102
               
Installment loans and term loans contractually
              
    past due ninety days or more as to interest
              
    or principal payments and still accruing
 
**102**
  
235
  
94
  
65
  
3
               
Loans, the terms of which have been renegotiated
 
**-  **
  
-  
  
-  
  
-
  
-  

    to provide a reduction or deferral of interest
              
    or principal because of deterioration in the
              
    financial position of the borrower
                               
Loans now current about which there are serious
 
** -  **
  
-  
  
-  
  
-
  
-  

    doubts as to the ability of the borrower to
              
    comply with present loan repayment terms
              
In the opinion of management, any loans classified byregulatory authorities as doubtful, substandard or special mention that have not been disclosed above do not (i) represent orresult from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidityor capital resources, or (ii) represent material credits about which management is aware of any information which causes managementto have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.  Any loans classified byregulatory authorities as loss have been charged off.

37
 **SUMMARY OF LOAN LOSSEXPERIENCE**

Theallowance for loan losses represents a reserve for potential losses in the loan portfolio.  The adequacy of the allowance forloan losses is evaluated periodically based on a review of all significant loans, with a particular emphasis on nonaccruing, pastdue and other loans that management believes require attention.  We segregate our loan portfolio by type of loan and utilizethis segregation in evaluating exposure to risks within the portfolio.  In addition, based on internal reviews and externalreviews performed by independent auditors and regulatory authorities, we further segregate our loan portfolio by loanclassifications within each type of loan based on an assessment of risk for a particular loan or group of loans.  Certainreviewed loans require specific allowances.  Allowances are provided for other types and classifications of loans based onanticipated loss rates.  Allowances are also provided for loans that are reviewed by management and considered creditworthyand loans for which management determines no review is required.  In establishing allowances, management considers historicalloan loss experience with an emphasis on current loan quality trends, current economic conditions and other factors in theBank’s market.  Factors considered include among others, unemployment rates, effect of weather on agriculture andsignificant local economic events, such as major plant closings.

We have developed a methodology for determining the adequacy of the loan lossreserve, which is reviewed monthly by the Board of Directors.  Proceduresprovide for the assignment of a risk rating for every loan included in our totalloan portfolio, with the exception of home equity and personal lines of credit. The risk rating schedule provides eight ratings of which four ratings areclassified as pass ratings and four ratings are classified as criticizedratings.  Each risk rating is assigned a percent factor to be applied tothe loan balance to determine the adequate amount of reserve.  Many of thelarger loans require an annual review by an independent loan officer.  As aresult of loan reviews certain loans may be assigned specific reserveallocations.  Other loans that surface as problem loans may also beassigned specific reserves.  Past due loans are assigned risk ratings basedon the number of days past due.

The provision for loan losses is a charge to earnings in the current period toreplenish the allowance and maintain it at a level management has determined tobe adequate.  The provision for loan losses charged to earnings amounted to$600,000 in 2003 and $720,000 in 2002.  The decrease in the provision forloan losses in 2003 resulted from a decrease in net charge-offs in 2003 and animprovement in the quality of the loan portfolio.

Our allowance for loan losses was $1,758,000 at December 31, 2003, representing1.51% of year end total loans outstanding compared to $1,426,000 at December 31,2002, which represented 1.43% of year end total loans outstanding. Management considers the allowance for loan losses adequate to cover potentialloan losses.

38**Allocation of the Allowancefor Loan Losses**
The following table sets forth the breakdown of the allowance for loanlosses by loan category for the periods indicated. Management believes theallowance can be allocated only on an approximate basis.  The allocation of the allowance toeach category is not necessarily indicative of future losses and does notrestrict the use of the allowance to absorb losses in any other category.
 
**At December 31,**
 
**2003**
      
**2002**

**Amount**

**Percent ofLoans inCategoryto TotalLoans**

**Amount**

**Percent ofLoans inCategoryto TotalLoans**

Commercial, financial, industrial and agricultural

**$**

**439**

 
**25**

**%**

 
$

285

 
20

%

Real estate
 
**967**
 
**55**
   
899
 
63
 
Consumer
 
**352**
 
**20**
   
242
 
17
 
Unallocated
 
**-  **
 
**-  **
   
-  
 
- 
 
**$**

**1,758**
 
**100**

**%**
 
$

1,426

100

%

The following table presents an analysis of our loan loss experience forthe periods indicated:
  
 **December 31,**  **2003** **2002** **2001** **2000** **1999** 
**(Dollars in Thousands)**
 
Average amount of loans outstanding

**$**

**111,166**

 
$

96,252

$

77,025

 
$

59,309

 
$

50,411
                 
Balance of reserve for possible loan
               
   losses at beginning of period

**$**

**1,426**
 
$

1,073
 
$

793
 
$

858
 
$

767
                 
Charge-offs:
                
   Commercial, financial and
               
       Agricultural
 
**238**
  
345
  
-
  
40
  
40
 
   Real estate
 
**162**
  
221
  
37
  
35
  
-
 
   Consumer
 
**86**
  
91
  
205
  
239
  
118
 
Recoveries:
                
   Commercial, financial and
                
       Agricultural
 
**73**
  
225
  
-
  
-
  
-
 
   Real estate
 
**124**
  
21
  
27
  
57
  
26
 
   Consumer
 
**21**
  
44
   
70
  
22
  
40
 
       Net charge-offs
 
**268**
  
367
  
145
  
235
  
92
                 
Additions to reserve charged to
               
   operating expenses
 
**600**
  
720
  
425
  
170
  
183
                 
Balance of reserve for possible
               
   loan losses at end of period

**$**

**1,758**
 
$

1,426
 
$

1,073
 
$

793

$

858
                 
Ratio of net loan charge-offs
               
   to average loans
 
**0.24%**
  
0.38
 % 
0.19
 % 
0.40
%  
0.18
%
39
**DEPOSITS**

Average amount of deposits and average rate paid thereon, classified as to noninterest-bearing demand deposits,interest-bearing demand and savings deposits and time deposits, for the periods indicated are presented below.
 
**YearEnded December 31,** 
**2003** 
**2002**
 **Amount** **Rate** **Amount** **Rate** 
**(Dollars in Thousands)**

Noninterest-bearing demand deposits

**$**

**21,029**

 
**-**

**%**

 
$

17,585

 
-

%

Interest-bearing demand and savings deposits
 
**32,572**
 
**0.75**
   
29,568
 
1.49
 
Time deposits
 
**75,193**
 
**2.88**
   
68,574
 
3.54
 
                    Total deposits

**$**

**128,794**
    
$

115,727
   
The time deposits are principally certificates of deposit and individual retirement accounts obtained forindividual customers.

The amounts of time certificates of deposit issued in amounts of $100,000or more as of December 31, 2003, are shown below by category, which is based ontime remaining until maturity of (1) three months or less, (2) over threethrough twelve months and (3) over twelve months.
 
**(Dollars inThousands)**
    
Three months or less

$

11,052

Over three through twelve months
 
19,406

Over twelve months
 
5,258

Total

$

35,716

**RETURN ON ASSETS ANDSHAREHOLDERS’ EQUITY**

Thefollowing rate ofreturn informationfor the periods indicated is presented below.
 
**Year Ended December 31,**
 
**2003**
 
**2002**
        
Return on assets (1)

**1.18**

**%**
 
1.16

%
      
Return on equity (2)

**15.07**
  
15.03
       
Dividends payout ratio (3)

**10.92**
  
12.36
       
Equity to assets ratio (4)

**7.82**
  
7.70
 
(1)        Netincome divided by average total assets.(2)        Netincome divided by average equity.(3)        Dividends declared per share divided by net income pershare.(4)        Average equity divided by average totalassets.

 

40
**ITEM 7.          FINANCIALSTATEMENTS**

The audited consolidated financial statements of the Company, including the notes thereto,and the report of  Mauldin & Jenkins LLC are included in this Report beginning at page F-1.
**ITEM 8.****CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**
Thefinancial statements of FMB Equibanc, Inc. as of December 31, 2003, and for the year then ended, contained in this Form 10-KSB havebeen included in reliance upon the report of Mauldin & Jenkins, LLC, Albany, Georgia, independent certified public accountants,and upon the authority of such firm as experts in accounting and auditing. The financial statements of FMB Equibanc, Inc. asof December 31, 2002, and for the year then ended, were included in reliance upon the report of Dabbs, Hickman, Hill & Cannon,LLP, Statesboro, Georgia, independent certified public accountants, and upon the authority of such firm as experts in accountingand auditing.

The Audit Committee ofthe Board of Directors of FMB Equibanc, Inc. decided to change its independent accountant that performs audits of the Company'sfinancial statements for external reporting purposes.  The Company previously used the independent accounting firm of Dabbs,Hickman, Hill & Cannon, LLP, Statesboro, Georgia, to perform audits of the Company's financial statements for externalreporting purposes.  Effective December 1, 2003, the Company dismissed Dabbs, Hickman, Hill & Cannon, LLP as itsindependent accountant that audits the Company's financial statements for external reporting purposes.  Also effective onDecember 1, 2003, the Company engaged Mauldin & Jenkins, LLC, Albany, Georgia, to perform audits of the Company's financialstatements for external reporting purposes for periods after December 31, 2002.  The Company will continue to use Dabbs,Hickman, Hill & Cannon, LLP to perform the Company's internal audits and other matters.

 The reports of Dabbs,Hickman, Hill & Cannon, LLP on the Company's financial statements during the years ended December 31, 2002 and 2001 did notcontain an adverse opinion or disclaimer of opinion, and were not modified as to uncertainty, audit scope or accountingprinciples.  During the Company's fiscal years ended December 31, 2002 and 2001 and on December 1, 2003, the Company did nothave any disagreement with Dabbs, Hickman, Hill & Cannon, LLP on any matter of accounting principles or practices, financialstatement disclosure, or auditing scope or procedure, which, if not resolved to Dabbs, Hickman, Hill & Cannon, LLP'ssatisfaction, would have caused Dabbs, Hickman, Hill & Cannon, LLP to make reference to the subject matter of the disagreementwith its reports.

**ITEM 8A.        CONTROLS ANDPROCEDURES**

The Chief ExecutiveOfficer and Chief Financial Officer of FMB Equibanc, Inc. have concluded, based on their evaluation as of the end of the periodcovered by this Form 10-KSB, 2003, that FMB Equibanc, Inc.'s disclosure controls and procedures are effective to ensure thatinformation required to be disclosed by FMB Equibanc, Inc. in the reports filed or submitted by it under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and formsof the Securities and Exchange Commission, and include controls and procedures designed to ensure that information required to bedisclosed by FMB Equibanc, Inc. in such reports is accumulated and communicated to FMB Equibanc, Inc.'s management, including FMBEquibanc, Inc.'s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

41
**PART III**

**ITEM 9.          DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT**

The information appearing under the headings “Election of Directors,”“Executive Officers” and “Section 16(a), Beneficial Ownership Reporting Compliance” in the Proxy Statement(the “2004 Proxy Statement”) relating to the annual meeting of shareholders of the Company, scheduled to be held onMay 20, 2004, is incorporated herein by reference.

**ITEM 10.       EXECUTIVECOMPENSATION**

The information appearing under the heading “Executive Compensation” in the2004 Proxy Statement is incorporated herein by reference.
**ITEM 11.     SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND                     RELATED STOCKHOLDER MATTERS**
The informationappearing under the headings “Principal Shareholders” and “ExecutiveCompensation” in the 2004 Proxy Statementis incorporated herein by reference.

**ITEM 12.     CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

The information appearing under the caption “Certain Relationships andTransactions” in the 2004 Proxy Statement is incorporated herein by reference.

42
**ITEM 13.        EXHIBITSAND REPORTS ON FORM 8-K**

                      (a)            The following financial statements are filed as part of thisReport:
  Page    Independent Auditor's ReportF-2 and F-3 Consolidated Balance Sheets F-4 Consolidated Statements of Income F-5 Consolidated Statements of Comprehensive Income F-6 Consolidated Statements of Stockholder's Equity F-7 Consolidated Statements of Cash Flows F-8 Notes to Consolidated Financial StatementsF-9 - F-27
(b)           Exhibits.  Periodic reports, registration statements and other information filed by the Company with the SEC pursuantto the informational requirements of the Securities Act of 1993, as amended, and the Securities Exchange Act of 1934, as amended,may be inspected and copied at the SEC's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549, and the public mayobtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC also maintainsan Internet site (http://www.sec.gov) that makes available reports, proxy statements and other information regarding theCompany.

Exhibit No.Description
  
2.1Plan ofReorganization and Agreement to Merge, dated as of April 25, 2000, by and among the Company, FMB Interim Corp. and Farmers& Merchants Bank (Incorporated herein by reference to Exhibit 2.1 of the Company's Report on Form 8-K filed on February 27,2001 (Commission File No. 000-32399)).
  
3.1Articles of Incorporation of FMB Equibanc, Inc. (Incorporated herein by reference to Exhibit 3.1 of the Company's Report on Form8-K filed on February 27, 2001 (Commission File No. 000-32399)).
  
3.2Bylaws of FMB Equibanc, Inc. (Incorporated herein byreference to Exhibit 3.2 of the Company's Report on Form 8-K filed on February 27, 2001 (Commission File No.000-32399)).
  
10.11998 Nonqualified Stock Option. (Incorporated    by reference to Exhibit 10.1 of the Company’s Annual Report on Form 10-KSB    for the year ended December 31, 2000 (Commission File No. 000-32399)).
  
10.2Form of Director Deferred Compensation    Agreement. (Incorporated by reference to Exhibit 10.2 of the Company’s    Annual Report on Form 10-KSB for the year ended December 31, 2000    (Commission File No. 000-32399)).
  
10.3*Employment Agreement by and between Farmers & Merchants Bank and Charles R. Nessmith.  (Incorporated by reference to Exhibit 10.3 of the Company’s Annual Report on Form 10-KSB for the year endedDecember 31, 2003 (Commission File No. 000-32399)).
  
10.4Deferred Compensation Agreement by and between Farmers & Merchants Bank and FrankC. Rozier III.
  
10.5Deferred Compensation Agreement by and between Farmers & Merchants Bank andGerald M. Edenfield.
43
Exhibit No.Description
  
10.6 Deferred Compensation Agreement by and    between Farmers & Merchants Bank and Leonard H. Blount.
  
21.1Subsidiaries of the Registrant. (Incorporated    by reference to Exhibit 21.1 of the Company’s Annual Report on Form 10-KSB    for the year ended December 31, 2000 (Commission File No. 000-32399)).
  
31.1Rule 13a-14(a)/15d-14(a) Certification of Chief    Executive Officer
  
31.2Rule 13a-14(a)/15d-14(a) Certification of Chief    Financial Officer
  
32.1Section 1350 Certification by the Chief    Executive Officer  
32.2 Section 1350 Certification by the Chief    Financial Officer
*Compensation Plan or arrangement required to be listed as an Exhibit to Form10-KSB.

(c)            Reports on Form8-K.

On December 5, 2003 theCompany filed a Form 8-K with the Commission regarding a change in the Company’scertifying accountant.
**ITEM 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES FEES PAID TO INDEPENDENT                     ACCOUNTING    FIRMS**
**Fees Paid to Independent Accounting Firms**

**AuditFees.**  During 2003, the aggregate amount of fees billed to the Company by Mauldin & Jenkins, LLC for services renderedby it for the audit of the Company's financial statements and for services normally provided in connection with statutory andregulatory filings was $48,500.  During 2003, Dabbs, Hickman, Hill & Cannon, LLP billed $10,245 for such services prior tothe change in accountants.  In 2002, Dabbs, Hickman, Hill & Cannon, LLP billed $43,026 for such services.

**Audit-RelatedFees**.  During 2003, the aggregate amount of fees billed to the Company by Dabbs, Hickman, Hill & Cannon, LLP andMauldin & Jenkins, LLC for assurance and consultation concerning financial accounting and reporting standards reasonablyrelated to the performance of the audit services rendered by them were $18,162 and $5,750, respectively.  In 2002, Dabbs,Hickman, Hill & Cannon, LLP billed $17,340 for such services.

**Tax Fees**. During 2003, the aggregate amount of fees billed to the Company by Mauldin & Jenkins, LLC for tax compliance services was$3,500.  During 2003, Dabbs, Hickman, Hill & Cannon, LLP billed $5,125 for such services prior to the change inaccountants.  In 2002, Dabbs, Hickman, Hill & Cannon, LLP billed $11,839 for such services.

**OtherFees.**  Mauldin & Jenkins, LLC did not bill the Company any amounts for other services during 2003.  Dabbs,Hickman, Hill & Cannon, LLP provided $4,483 and $15,619 in 2003 and 2002, respectively.  These fees were primarily relatedto non-audit services in connection with employee benefits, payroll and for other miscellaneous accounting matters.

The Company didnot engage Mauldin & Jenkins, LLC to provide any non-audit related services tothe Company during the period covered by this report.

44
The Audit Committee isalso responsible for the pre-approval of all non-audit services provided by the independent auditors.  Non-audit services areonly provided by the Company's auditors to the extent permitted by law.  Pre-approval is required unless a "de minimus"exception is met.  To qualify for the "de minimus" exception, the aggregate amount of all such non-audit services provided tothe Company must constitute not more than five percent of the total amount of revenues paid by the Company to its independentauditors during the fiscal year in which the non-audit services are provided; such services were not recognized by the Company atthe time of the engagement to be non-audit services; and the non-audit services are promptly brought to the attention of theCommittee and approved prior to the completion of the audit by the Committee or by one or more members of the Committee to whomauthority to grant such approval has been delegated by the Committee. 

 

 

 

45
**SIGNATURES**

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 

 

Dated:  March     29  , 2004

FMB EQUIBANC, INC.

 

By:/s/ Charles R.Nessmith                 Charles R. Nessmith      President and Chief Executive Officer      (Principal Executive Officer)

               In accordance with the Exchange Act, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.

**Signature**

**Title**

**Date**

/s/ Charles R.Nessmith                  Charles R. Nessmith

Director, President andChief Executive Officer(principal executive officer)

March     29  , 2004
      
/s/ Dwayne E.Rocker                     Dwayne E. Rocker

Secretary(principal financial andaccounting officer)

March     29  , 2004
  
/s/ Frank C.Rozier                           

Chairman of the Board of Directors

March     29  , 2004

Frank C. Rozier
    
/s/ Leonard H.Blount                     Leonard H. Blount

Director

March     29  , 2004
   
/s/ F. WendellBrannen                  

Director

March     29  , 2004

F. Wendell Brannen
     
/s/ R. EarlDabbs                             R. Earl Dabbs

Director

March     29  , 2004
   
/s/ Gerald M.Edenfield                  

Director

March     29  , 2004

Gerald M. Edenfield
     
/s/ WilliamHatcher                         

Director

March     29  , 2004

William Hatcher
     
/s/ William B.Nessmith                  

Director

March     29  , 2004

William B. Nessmith
    
/s/ Andrew C.Oliver                       

Director

March     29  , 2004

Andrew C. Oliver
   
/s/ Billy G.Tyson                            

Director

March     29  , 2004

Billy G. Tyson
 
 

**FMB EQUIBANC, INC. AND SUBSIDIARY**

**CONSOLIDATED FINANCIAL REPORTDECEMBER 31, 2003**

 

**TABLE OF CONTENTS**

 
 **Page**
 **INDEPENDENT AUDITOR'SREPORT**
** **
**F-2-3****CONSOLIDATED FINANCIAL STATEMENTS**
** **
** ****        Consolidated balancesheets****F-4****             Consolidated statements of income****F-5****        Consolidated statements of comprehensiveincome****F-6****        Consolidated statements of stockholders'equity****F-7****        Consolidated statements of cashflows****F-8****             Notes to consolidated financial statements****F-9 -27**
 

 

 

 

 

 

F-1
 

**INDEPENDENT AUDITOR’S REPORT**

 

**To the Board of DirectorsFMB Equibanc, Inc.Statesboro, Georgia**
                    We have audited the accompanying consolidated balance sheet of **FMB Equibanc, Inc. and Subsidiary** as of December 31, 2003, and the related statements of income, comprehensive income, stockholders' equity and cash flows for the year then ended.  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 audit.  The financial statements of FMB Equibanc, Inc. and Subsidiary for the year ended December 31, 2002 were audited by other auditors, whose report dated February 28, 2003 expressed an unqualified opinion on those statements.

                    We conducted our audit 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 audit provides a reasonable basis for our opinion.
                    In our opinion, the 2003 financial statements referred to above present fairly, in all material respects, the financial position of FMB Equibanc, Inc. and Subsidiary, as of December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
***/s/ Mauldin & Jenkins, LLC***

Albany, GeorgiaMarch 4, 2004

 

F-2***DABBS, HICKMAN, HILL & CANNON, LLP***Certified Public Accountants
Statesboro, Georgia 30458

 

INDEPENDENT AUDITOR'S REPORT

 

Board of DirectorsFMB Equibanc, Inc.Statesboro, Georgia 30458

 

We have audited the accompanying consolidated balance sheets of FMB Equibanc, Inc. and itssubsidiary as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders'equity, and cash flows for the years ended December 31, 2002, 2001 and 2000. These consolidated financial statements are theresponsibi­lity of the Company's manage­ment. Our responsibility is to express an opinion on these financial statementsbased on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, inall material respects, the financial position of FMB Equibanc, Inc. and subsidiary as of December 31, 2002 and 2001, and theresults of their operations and their cash flows for the years ended December 31, 2002, 2001 and 2000 in conformity withaccounting principles generally accepted in the United States of America.

 

 

/s/Dabbs, Hickman, Hill & Cannon, LLP

February 28, 2003

F-3**FMB EQUIBANC, INC. ANDSUBSIDIARY** **CONSOLIDATED BALANCE SHEETS****DECEMBER 31, 2003 AND 2002****(Dollars in thousands)** **Assets****2003****2002** Cash and due from banks**$****      5,221**$      3,991Interest-bearing deposits at other financial institutions**           27**  -  Federal funds sold**           58**    13,225Securities available for sale
**    15,317**    19,658Restricted equity securities, at cost**         408**         367Loans** 116,834**    99,982Less allowance for loan losses** **
**      1,758**       1,426          Loans, net
**  115,076**    98,556Premises and equipment, net
**      2,699**      2,187Other assets** **
**      1,810**       1,516          Total assets**$**
**  140,616**$  139,500**Liabilities and Stockholders' Equity**Liabilities:  Deposits:     Noninterest-bearing**$****   22,576**$    18,455     Interest-bearing** **** 105,246**   109,687          Total deposits** 127,822**  128,142Other borrowings**         442**         439Other liabilities** ****         628**          553          Total liabilities** **** 128,892**   129,134Commitments and contingent liabilitiesStockholders' equity  Common stock, $1 par value; 10,000,000 shares     authorized; 362,600 shares issued and outstanding**          362**         362  Surplus**       3,076**      3,076  Retained earnings**       8,078**      6,598  Accumulated other comprehensive income** ****          208**          330          Total stockholders' equity** ****    11,724**     10,366Total liabilities and stockholders' equity**$****  140,616**$  139,500      
F-4
 
**FMB EQUIBANC, INC. ANDSUBSIDIARY****CONSOLIDATED STATEMENTS OFINCOME****YEARS ENDED DECEMBER 31, 2003 AND2002****(Dollars in Thousands, Except Per ShareAmounts)****2003**       **2002**Interest income:  Loans, including fees**$****  7,040**$  7,125  Securities:       Taxable**     672**     942       Nontaxable**        45**       50  Federal funds sold**        42**       69 Interest-bearing deposits at other financial institutions** ****        26**   -             Total interest income** ****  7,825**   8,186Interest expense:  Deposits**  2,412**  2,866  Other borrowings** ****        26**        31          Total interest expense** ****  2,438**   2,897          Net interest income**  5,387**  5,289Provision for loan losses** ****     600**      720          Net interest income after provision for loan losses** ****  4,787**   4,569Other income:  Service charges on deposit accounts**  1,011**  1,047  Other service charges, commissions and fees**     139**     151  Securities gains, net**           -**         5  Mortgage origination fees**     563**     140  Other operating income** ****        24**        17          Total other income** ****  1,737**   1,360Other expense:  Salaries and employee benefits**  2,029**  1,689  Occupancy and equipment expense**     475**     442  Office supplies**     114**     125  Data processing fees**     287**     223  Professional fees**     266**     176  Advertising and public relations**     192**     169  Other operating expenses** ****     758**      680          Total other expenses** ****  4,121**   3,504Income before income taxes**  2,403**  2,425Income tax expense** ****     742**      958          Net income**$****  1,661**$  1,467Basic earnings per share**$****    4.58**$    4.05Diluted earnings per share**$****    4.54**$    4.01**See Notes to Consolidated Financial Statements.**
 

F-5
 
**FMB EQUIBANC, INC. ANDSUBSIDIARY****CONSOLIDATED STATEMENTS OF COMPREHENSIVEINCOME****YEARS ENDED DECEMBER 31, 2003 AND2002****(Dollars in Thousands)**     **2003****2002**Net income**$****  1,661 **$  1,467 Other comprehensive income (loss):   Unrealized holding gains (losses) arising during the period,     net of tax (benefits) of $(81) and $149, respectively**    (122)**     224 Reclassification adjustment for gains realized in net income,    net of taxes of $2 in 2002** **  -         (3)Other comprehensive income (loss)** ****    (122)**      221 Comprehensive income**$**** 1,539 **$  1,688 **See Notes to Consolidated Financial Statements.**
 

F-6**FMB EQUIBANC, INC. ANDSUBSIDIARY**                 **CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY****YEARS ENDED DECEMBER 31, 2003 AND2002****(Dollars in Thousands)**                                                                                                                                            **Accumulated**             **Other** **Total** **Common Stock**    **Retained** **Comprehensive** **Stockholders'** **Shares** **Par Value** **Surplus** **Earnings** **Income** **Equity**  **Balance, December 31, 2001**   362,600$       362$  3,076$       5,312 $               109  $          8,859   Net income--  -1,467   -  1,467   Dividends declared,      $0.50 per share-- -(181)-   (181)  Other comprehensive income-  -  - -   221    221 **Balance, December 31, 2002** 362,600       3623,0766,598 330  10,366   Net income- --1,661 -   1,661   Dividends declared,      $0.50 per share-- -(181) -   (181)  Other comprehensive loss- - - -  (122)   (122)**Balance, December 31, 2003**362,600$       362$  3,076$ 8,078 $208  $ 11,724   **See Notes to Consolidated FinancialStatements.**           
 
F-7 **FMB EQUIBANC, INC. ANDSUBSIDIARY**       **CONSOLIDATED STATEMENTS OF CASHFLOWS****YEARS ENDED DECEMBER 31, 2003 AND2002****(Dollars in Thousands)**                                                                                                                                  **2003**     **2002****OPERATING ACTIVITIES**     
Net income**$****      1,661**  $     1,467 
 Adjustments to reconcile net income to net cash     
provided by operating activities:     
Depreciation **         244**           224 
Provision for loan losses **         600**           720 
Gain on sales of securities **              -**              (5)
Deferred income taxes **        (220)**           (67)
Decrease in interest receivable **         119**           191 
Decrease in interest payable **        (102)**           (60)
Other operating activities, net** **  **            37**             16       
 Net cash provided by operatingactivities** **  **      2,339**        2,486       **INVESTING ACTIVITIES**     
  Increase in interest-bearing deposits at other financialinstitutions **          (27)**   - 
  Purchases of securities available for sale **    (7,150)**    (15,333)
  Proceeds from maturities of securities available for sale **    11,270**      13,322 
  Proceeds from sale of securities available for sale  -         1,539 
  Net (increase) decrease in federal funds sold **    13,167**     (13,225)
  Net increase in loans **  (17,115)**    (13,504)
  Purchase of premises and equipment** ****        (756)**         (346)      
Net cash usedin investing activities ** ****        (611)**    (27,547)      **FINANCING ACTIVITIES**     
  Net increase (decrease) in deposits **        (320)**     24,988 
  Net decrease in federal funds purchased  -       (1,763)
  Principal repayments on other borrowings **          (17)**           (13)
  Proceeds from other borrowings **            20**     -   
  Dividends paid** ****        (181)**         (181)      
Net cashprovided by (used in) financing activities** ****        (498)**     23,031       Net increase (decrease) in cash and due from banks **      1,230**       (2,030)      Cash and due from banks at beginning of year** ****      3,991**        6,021       Cash and due from banks at end of year**$****      5,221**  $     3,991       **SUPPLEMENTAL DISCLOSURES**        Cash paid for:              Interest**$****      2,540**  $     2,957                Income taxes**$****         984**  $        979       **NONCASH TRANSACTIONS**     
Other realestate acquired in settlement of loans**$****         160**  $          51       
Financed salesof other real estate owned**$****         145**  $          47             **See Notes to Consolidated Financial Statements.**     
 

F-8
 

**FMB EQUIBANC, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.         SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

**Nature of Operations**

FMB Equibanc, Inc. (the “Company”) is a one-bank holding company whoseprincipal activity is the ownership and management of its wholly-owned commercial bank subsidiary, Farmers & Merchants Bank(the “Bank”).  The Bank is located in Statesboro, Bulloch County, Georgia with the main office and one branchlocated in Statesboro and one branch located in Brooklet, Georgia.  The Bank provides a full range of banking services toindividual and corporate customers in its primary market area of Bulloch County, Georgia and surrounding counties.

**Basis of Presentation and Accounting Estimates**

The consolidated financial statements include the accounts of the Company and theBank.  Significant intercompany transactions and balances have been eliminated in consolidation.

In preparing the consolidated financial statements in accordance with accountingprinciples generally accepted in the United States of America, management is required to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

Material estimates that are particularly susceptible to significant change relate to thedetermination of the allowance for loan losses, the valuation of foreclosed real estate and contingent assets andliabilities.  The determination of the adequacy of the allowance for loan losses is based on estimates that are susceptible tosignificant changes in the economic environment and market conditions.  In connection with the determination of the estimatedlosses on loans and the valuation of foreclosed real estate, management obtains independent appraisals for significantcollateral.

**Cash, Due from Banks and Cash Flows**

For purposes of reporting cash flows, cash and due from banks include cash on hand, cashitems in process of collection and amounts due from banks.  Cash flows from interest-bearing deposits at other financialinstitutions, loans, federal funds sold and deposits are reported net.

The Bank is required to maintain reserve balances in cash or on deposit with the FederalReserve Bank, based on a percentage of deposits.  The total of those reserve balances was approximately $785,000 and $699,000at December 31, 2003 and 2002, respectively.

**Securities**

Debt securities that management has the positive intent and ability to hold to maturityare classified as held to maturity and recorded at amortized cost.  Securities not classified as held to maturity, includingequity securities with readily determinable fair values, are classified as available for sale and recorded at fair value withunrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income, net of the relateddeferred tax effect.  Equity securities, including restricted equity securities, without a readily determinable fair value areclassified as available for sale and recorded at cost.

F-9
 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.         SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)**

**Securities (Continued)**

The amortization of premiums and accretion of discounts are recognized in interest incomeusing methods approximating the interest method over the life of the securities.  Realized gains and losses, determined on thebasis of the cost of specific securities sold, are included in earnings on the settlement date.  Declines in the fair value ofspecific securities below their cost that are deemed to be other than temporary are reflected in earnings as realizedlosses.

**Loans**

Loans are reported at their outstanding principal balances less unearned income and theallowance for loan losses.  Interest income is accrued on the outstanding principal balance.

The accrual of interest on loans is discontinued when, in management’s opinion, theborrower may be unable to meet payments as they become due, unless the loan is well-secured.  All interest accrued but notcollected for loans that are placed on nonaccrual or charged off is reversed against interest income, unless management believesthat the accrued interest is recoverable through the liquidation of collateral.  Interest income on nonaccrual loans isrecognized on the cash-basis or cost-recovery method until the loans are returned to accrual status.  Loans are returned toaccrual status when all the principal and interest amounts are brought current and future payments are reasonablyassured.

A loan is considered impaired when it is probable, based in current information andevents, the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms ofthe loan agreement.  Impaired loans are measured by either the present value of expected future cash flows discounted at theloan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan iscollateral dependent.  The amount of impairment, if any, and any subsequent changes are included in the allowance for loanlosses.  Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrualloans.

**Allowance for Loan Losses**

The allowance for loan losses is established through a provision for loan losses chargedto expense.  Loan losses are charged against the allowance when management believes the collectibility of the principal isunlikely.  Subsequent recoveries, if any, are credited to the allowance.

The allowance is an amount that management believes will be adequate to absorb estimatedlosses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio,based on an evaluation of the collectibility of existing loans and prior loss experience.  The evaluation also takes intoconsideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specificproblem loans, concentrations and current economic conditions that may affect the borrower’s ability to pay.  Thisevaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future eventsor expected changes in economic conditions.  While management uses the best information available to make its evaluation,future adjustments to the allowance may be necessary if there are significant changes in economic conditions.  In addition,regulatory agencies, as an integral part of  their examination process, periodically review the Bank’s allowance forloan losses, and may require the Bank to make additions to the allowance based on their judgment about information available tothem at the time of their examinations. 

F-10
 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.         SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)**

**Allowance for Loan Losses (Continued)**

The allowance consists of specific, general and unallocated components.  The specificcomponent relates to loans that are classified as either doubtful, substandard or special mention.  For such loans that arealso classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable marketprice) of the impaired loan is lower than the carrying value of that loan.  The general component covers non-classified loansand is based on historical loss experience adjusted for qualitative factors.  An unallocated component is maintained to coveruncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowancereflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific andgeneral losses in the portfolio.

**Premises and Equipment**

Land is carried at cost.  Premises and equipment are stated at cost less accumulateddepreciation computed principally by the straight-line method over the estimated useful lives of the assets.

Building

39.5 years

Furniture and equipment

3 to 7 years

**Other Real Estate Owned**

Other real estate owned represents properties acquired through or in lieu of loanforeclosure and is initially recorded at the lower of cost or fair value less estimated costs to sell.  Any write-down to fairvalue at the time of transfer to other real estate owned is charged to the allowance for loan losses.  Costs of improvementsare capitalized, whereas costs relating to holding other real estate owned and subsequent adjustments to the value areexpensed.  There were no amounts carried in other real estate owned at December 31, 2003 and 2002.

**Income Taxes**

Deferred income tax assets and liabilities are determined using the balance sheetmethod.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporarydifferences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition tochanges in tax rates and laws.

**Stock-Based Compensation**

The Company has a stock-based employee compensation plan, which is described more fully inNote 8.  The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25,*Accounting for Stock Issued to Employees*, and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlyingstock on the date of grant. 

F-11
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.         SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)**

**Stock-Based Compensation (Continued)**

The following table illustrates the effect on net income and earnings per share if theCompany had applied the fair value recognition provisions of FASB Statement No. 123, Accounting*for Stock-BasedCompensation*, to stock-based employee compensation (dollars in thousands).

**Years Ended December 31,**

**2003**
     
**2002**

**(Dollars in Thousands,Except Per Share Amounts)**

Net income, as reported

**$**

**1,661**
     
$

1,467 

Deduct: Total stock-based employee compensation

   expense determined under fair value based

   method for all awards, net of related tax effects

**-  **

(14)

Pro forma net income

**$**

**1,661**

$

1,453 

Earnings per share:

Basic - as reported

**$**

**4.58**

$

4.05 

Basic - pro forma

**$**

**4.58**

$

4.01 

Diluted - as reported

**$**

**4.54**

$

4.01 

Diluted - pro forma

**$**

**4.54**

$

3.97 

**Earnings Per Share**

Basic earnings per share are computed by dividing net income by the weighted-averagenumber of shares of common stock outstanding.  Diluted earnings per share are computed by dividing net income by the sum ofthe weighted-average number of shares of common stock outstanding and potential common shares.  Potential common sharesconsist of stock options.

**Comprehensive Income**

Accounting principles generally require that recognized revenue, expenses, gains andlosses be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses onavailable for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, alongwith net income, are components of comprehensive income.

**Reclassifications**

Certain reclassifications have been made to the 2002 financial statements to conform tothe 2003 presentation with no effect on total assets or net income.

 
F-12
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.         SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)**

**Recent Accounting Standards**

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and a rescission of FASBInterpretation No. 34".  The interpretation elaborates on the disclosuresto be made by a guarantor in its interim and annual financial statements aboutits obligations under guarantees issued.  It also clarifies that aguarantor is required to recognize, at inception of a guarantee, a liability forthe fair value of the obligation undertaken in issuing a guarantee.  The initial recognition and initial measurement provisions of theinterpretation are applicable to guarantees issued or modified after December31, 2002.  The disclosure requirements in the interpretation are effectivefor financial statements of interim or annual periods ending after December 15,2002.  The adoption of the interpretation did not have a material effect onthe Company’s financial condition or results of operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASBStatement No. 123".  The Statement amends Statement No. 123, "Accountingfor Stock-Based Compensation", to provide alternative methods of transition fora voluntary change to the fair value method of accounting for stock-basedemployee compensation.  In addition, the statement amends the disclosurerequirements of Statement No. 123 to require prominent disclosures in bothannual and interim financial statements about the method of accounting forstock-based compensation and the effect on reported results ofoperations.  The disclosure requirements of the statement are required forfiscal years ending after December 15, 2002 and interim periods beginning after December 15, 2002.  The Company has not adopted StatementNo. 123 for accounting for stock-based compensation as of December 31, 2003;however, all required disclosures of Statement No. 148 are included above underthe heading “Stock-Based Compensation”.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51", and on December 24, 2003, the FASB issued FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” which replaced FIN 46.  The interpretation addresses consolidation by business enterprises of variable interest entities.  A variable interest entity is defined as an entity subject to consolidation according to the provisions of the interpretation.  The revised interpretation provided for special effective dates for entities that had fully or partially applied the original interpretation as of December 24, 2003.  Otherwise, application of the interpretation is required in financial statements of public entities that have interests in special-purpose entities, or SPEs, for periods ending after December 15, 2003.  Application by public entities, other than small business issuers, for all other types of variable interest entities (i.e., non-SPEs) is required in financial statements for periods ending after March 15, 2004.  Application by small business issuers to variable interest entities other than SPEs and by nonpublic entities to all types of variable interest entities is required at various dates in 2004 and 2005.  The interpretations have not had a material effect on the Company’s financial condition or results of operations.
F-13
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1.         SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)**

**Recent Accounting Standards (Continued)**

In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity".  The statement establishes standardsfor how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  The statement requires than an issuer classify a financial instrument that is within its scope as a liability. Many of those instruments were previously classified as equity.  The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities.  Mandatorily redeemable financial instruments of nonpublic entities are subject to the provisions of the statement for the first fiscal period beginning after December 15, 2003.  The adoption of the statement did not have a material effect on the Company’s financial condition or results of operations.
**NOTE 2.         SECURITIES**

The amortized cost and fair value of securities available for sale are summarized as follows (dollars in thousands):
**  **** **** **** ****Gross**** ****Gross**** ** ** **** ****Amortized**** ****Unrealized**** ****Unrealized**** **** **** **** **
**Cost**
** **
**Gains**
** **
**Losses**
** **
**Fair Value**
         **December 31, 2003:**** **** **** **** **** **** **** **** ****U. S. Treasury and U.S.****    Government agencies**** **
** $ **

**5,328**** **** $****35**** ****$               - **** **** $****5,363****Mortgage-backed securities**** ****5,519**** ****43**** ****(4)**** ****5,558****State and municipal securities**** ****1,095**** ****67**** ****  - **** ****1,162****Corporate bonds**** ****3,029**** ****205**** **** **
** - **
** ****3,234** ** **** $****14,971**** $**
**350**** $****(4)**** $****15,317**  
  
  
  
 December 31, 2002:        U. S. Treaasury and U.S.     Government agencies  $10,377 $179  $-  $10,556Mortgage-backed securities 4,482 
153 -  4,635State and municipal securities 1,203 58 -  1,261Corporate bonds 3,046 166 (6) 3,206   $      19,108  $556 $(6) $19,658   
  
  
  
 
 
 
F-14
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 2.         SECURITIES(Continued)**

The amortized cost and fair value of securities available for sale as of December 31, 2003 by contractual maturity are shown below.  Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands):

**Amortized**

**Fair**

**Cost**

**Value**

Due within one year

$         310

$           312

Due from one to five years

7,451

7,705

Due from five to ten years

1,535

1,575

Due after ten years

156

167

Mortgage-backed securities

5,519

5,558

$    14,971

$      15,317

Securities with a carrying value of $7,828,000 and $13,580,000 at December 31, 2003 and2002, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Gains and losses on sales and calls of securities available for sale consist of thefollowing (dollars in thousands):

**Years Ended December 31,**

**2003**

**2002**

Gross gains

**$**

**-  **

$

23

Gross losses

**-  **

18

Net realized gains

**$**

**-  **

$

5

The following table shows the gross unrealized losses and fair value of securities,aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2003(dollars in thousands).
 
**Less Than 12 Months****Description of Securities** 
**FairValue**
 
**UnrealizedLosses**
Mortgage-backed securities

$

848

 
$

4

 

F-15
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 3.         LOANS**

The composition of loans is summarized as follows (dollars in thousands)
  December 31,  
**2003**
 
2002
Commercial, financial and agricultural 
** $ **
**16,156 **  $18,580 Real      estate - construction **14,828 ** 5,341 Real      estate - mortgage **74,925 ** 64,881 Consumer **10,887 ** 11,035 Overdrafts 
**38 ** 
145              Total loans **116,834 ** 99,982 Allowance      for loan losses 
**(1,758)**
 
(1,426)
             Loans, net 
** $ **
**115,076 **  $ 98,556   
** **
 
 
Changes in the allowance for loan losses are as follows (dollars in thousands):
           
**2003**          
2002Balance,      beginning of year 
** $****1,426 ** $1,073    Provision      charged to operations **600 **720    Loans      charged off **(486)**(657)   Recoveries 
**218 **
290 Balance,      end of year ** $****1,758 ** $1,426   
 
  
The following is a summary of information pertaining to impaired loans (dollars inthousands):
 
**As of and for the Years EndedDecember 31, **

**2003**
     
**2002**

Impaired loans without a valuation allowance

**$**

**-  **

$

-  

Impaired loans with a valuation allowance

**596**

496

Total impaired loans

**$**

**596**

$

496

Valuation allowance related to impaired loans

**$**

**117**

$

89

Average investment in impaired loans

**$**

**451**

$

334

Interest income recognized on impaired loans

**$**

**1**

$

-

F-16
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 3.         LOANS(Continued)**

Loans on nonaccrual status amounted to approximately $596,000 and $496,000 at December 31,2003 and 2002, respectively.  Loans past due ninety days or more and still accruing interest amounted to $102,000 and $235,000at December 31, 2003 and 2002, respectively.

In the ordinary course of business, the Company has granted loans to certain relatedparties, including executive officers, directors and their affiliates.  The interest rates on these loans were substantiallythe same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan.  Changesin related party loans for the year ended December 31, 2003 are as follows (dollars in thousands):

Balance, beginning of year

$

1,829 

Advances

2,832 

Repayments

(2,878)

Balance, end of year

$

1,783 
**NOTE 4.         PREMISES ANDEQUIPMENT**
Premises and equipment are summarized as follows (dollars in thousands):
  **December 31**  
**2003**
** **
**2002**
Land ** $****953 **  $331 Buildings **2,359 ** 2,359 Furniture      and equipment **1,864 ** 1,783 Construction in progress 
**53 ** 
       - 
             Total cost **5,229 ** 4,473 Accumulated      depreciation 
**(2,530)**
 
(2,286)
             Net book value ** $****2,699 **  $2,187  
  
 
 **Leases**

During 2003 the Company entered into two noncancelable operating lease agreements forpurposes of erecting two drive-up ATMs.  Each lease has an initial lease term of five years with one five year renewaloption.  Rental expense under both leases amounted to $1,200 for the year ended December 31, 2003.  There was no rentalexpense under operating leases during 2002.

Future minimum lease payments on noncancelable operating leases are summarized asfollows:

2004

$

7,200

2005

7,200

2006 

7,200

2007

7,200

2008

6,000

$

34,800

 F-17
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 5.         DEPOSITS**

The aggregate amount of time deposits in denominations of $100,000 or more at December 31,2003 and 2002 was $35,715,000 and $44,025,000, respectively.  The scheduled maturities of time deposits at December 31, 2003are as follows (dollars in thousands):

2004

$
58,731
2005

7,117
2006

1,729
$

67,577
The Company had no brokered time deposits at December 31, 2003.

**NOTE 6.       OTHER BORROWINGS**

Other borrowings consist of the following (dollars in thousands):
 
**December 31,** 
**2003**
 
**2002**

Federal Home Loan Bank advance with interest and
          
     principal payable monthly through December 2008

     at a fixed interest rate of 5.48%.

**$**

**424**

$

439

Note payable to Ford Motor Credit with principal payable

     through May 2008, 0% interest rate, secured by a

     bank-owned vehicle.

**18**

-  

**$**

**442**

$

439

Contractual maturities of other borrowings as of December 31, 2003 are as follows (dollarsin thousands):
2004
$
192005 
21
2006

 
22
2007

23
2008

357
$

442
The advance from the Federal Home Loan Bank is secured by certain qualifying loans ofapproximately $31,408,000.

The Company and the Bank have available unused lines of credit with various financialinstitutions totaling $23,575,000 at December 31, 2003.  There were no other advances outstanding at December 31, 2003 or2002.

F-18 
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 7.         EMPLOYEE BENEFITPLANS**

**Profit Sharing Plan**

The Company has a 401(k) Employee Profit-Sharing Plan available to all eligible employees,subject to certain minimum age and service requirements.  The contributions expensed were approximately $38,000 and $27,000for the years ended December 31, 2003 and 2002, respectively.

**Deferred Compensation Plan**

The Company has a deferred compensation plan providing for death and retirement benefitsfor certain directors.  The estimated amounts to be paid under the compensation plan have been partially funded through thepurchase of either life insurance policies or annuities contracts on the participating directors.  Accrued deferredcompensation of $232,600 and $70,000 is included in other liabilities as of December 31, 2003 and 2002, respectively.  Cashsurrender values of $236,900 and $75,000 on the insurance policies is included in other assets at December 31, 2003 and 2002,respectively.

**NOTE 8.         STOCK-BASEDCOMPENSATION**

The Company has a nonqualified stock option plan reserving 18,000 shares of common stock for the granting of options to officers and key employees.  Option prices****reflect the fair market value of the Company’s common stock on the dates the options are granted.  The options may be exercised over a period of ten years in accordance with vesting schedules determined by the Board of Directors.

Other pertinent information related to the options is as follows:
  **2003** 
**2002**  ** **** ****Weighted      -Average**** **** **** ****Weighted-Average**                                                                   
**Shares**
** **
**ExercisePrice**
** **
**Shares**
** **
**ExercisePrice**
Outstanding at beginning of      year 
**       6,000**
** **
** $  15.27 **
 
               18,000  
 $         15.27
       Granted 
** -**** **
**  -** 
   -  
**  -**      Exercised 
** -**** **
**  -** 
        -  
**  -     **       Terminated 
**   -**
** **
**-** 
  (12,000)
 
**-     **Outstanding at end of year 
** 6,000**
** **
**$  15.27**
 
6,000 
 
 $   15.27
         Options exercisable at year-end 
**6,000** 
** $  15.27 **
 
6,000 
 $   15.27
Weighted-average fair value of options           granted during the year   
**$         - **
   
 $          -  

F-19
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 8.         STOCK-BASED COMPENSATION(Continued)**

Information pertaining to options outstanding at December 31, 2003 is asfollows:
      
**Options Outstanding**
 
**Options Exercisable**

**Exercise Price**
 
**NumberOutstanding**
     
**Weighted-AverageRemainingContractualLife**
     
**Weighted-AverageExercise Price**
     
**NumberExercisable**
     
**Weighted-AverageExercisePrice**

$15.27

6,000

4.0 years

$

15.27

6,000

  $

15.27

**NOTE 9.         INCOME TAXES**

The components of income tax expense are as follows (dollars in thousands):

**Years Ended December 31,**

**2003**

**2002**

Current

**$**

**962 **

$

1,025 

Deferred

**(220)**

(67)

**$**

**742 **

**$**

958 

The Company's income tax expense differs from the amounts computed by applying the federalincome tax statutory rates to income before income taxes.  A reconciliation of the differences is as follows (dollars inthousands):

**Years Ended December 31,**

**2003**

**2002**

Tax provision at statutory federal rate

**$**

**817 **

$

825 

   Tax-exempt income

**(14)**

(18)

   State income taxes

**69 **

61 

   Other

**(130)**

90 

Income tax expense

**$**

**742 **

$

958 

 

F-20
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 9.         INCOME TAXES(Continued)**

The components of deferred income taxes are as follows (dollars in thousands):

**Years Ended December 31,**

**2003**

**2002**

Deferred tax assets:

     Loan loss reserves

**$**

**553**

$

328

     Deferred compensation

**87**

81

     Nonaccrual interest

**18**

19

**658**

428

Deferred tax liabilities:

     Depreciation

**151**

141

     Securities available for sale

**138**

220

**289**

361

Net deferred tax assets

**$**

**369**

$

67

**NOTE 10.       EARNINGS PER SHARE**

Presented below is a summary of the components used to calculate basic and dilutedearnings per share:
 
**Years Ended December 31,**
  
**2003**
 
**2003**

Net income

**$**

**1,661,000**

$

1,467,000

Weighted average number of

   common shares outstanding

**362,600**

362,600

Effect of dilutive options

**3,455**

3,382

Weighted average number of common

   shares outstanding used to calculate

   dilutive earnings per share

**366,055**

365,982

 

 

F-21
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 11.       COMMITMENTS ANDCONTINGENCIES**

** Loan Commitments**

The Company is a party to financial instruments with off-balance-sheet risk in the normalcourse of business to meet the financing needs of its customers.  These financial instruments include commitments to extendcredit and standby letters of credit.  They involve, to varying degrees, elements of credit risk and interest rate risk inexcess of the amount recognized in the balance sheets.  The majority of all commitments to extend credit and standby lettersof credit are variable rate instruments.

The Company's exposure to credit loss in the event of nonperformance by the other party tothe financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount ofthose instruments.   The Company uses the same credit policies in making commitments as it does for on-balance-sheetinstruments.  A summary of the Company's commitments is as follows (dollars in thousands):
 
**December 31,**
 
**2003**
 
**2002**
 ** **** **   
Commitments to extend credit

**$**

**13,838**

$

10,764

Financial standby letters of credit

**491**

855

**$**

**14,329**

$

11,619

Commitments to extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Commitments generally have fixed expiration dates or othertermination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without beingdrawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The amount of collateralobtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of theparty.  Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment,residential real estate and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guaranteethe performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowingarrangements.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extendingloans to customers.  Collateral held varies as specified above and is required in instances which the Company deemsnecessary.

At December 31, 2003 and 2002, the carrying amount of liabilities related to theCompany’s obligation to perform under standby letters of credit was insignificant.  The Company has not been required toperform on any standby letters of credit, and the Company has not incurred any losses on financial standby letters of credit forthe years ended December 31, 2003 and 2002.

At December 31, 2003 and 2002, the Company had guaranteed the debt of certaincustomers’ liabilities at another financial institution totaling $35,000 and $13,000, respectively.  These guaranteesrepresent the available credit line of those certain Bank customers.  The Company has not been required to perform on any ofthese guarantees for the years ended December 31, 2003 and 2002.  Credit card commitments are unsecured.

F-22
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 11.       COMMITMENTS AND CONTINGENCIES(Continued)**

**Contingencies**

In the normal course of business, the Company is involved in various legalproceedings.  In the opinion of management, any liability resulting from such proceedings would not have a material adverseeffect on the Company's financial statements.

**NOTE 12.       CONCENTRATIONS OF CREDIT**

The Company originates primarily commercial, commercial real estate, residential realestate, construction and development and consumer loans to customers in Bulloch and surrounding counties.  The ability of themajority of the Company’s customers to honor their contractual obligations is dependent on the local economy.

76.8% percent of the Company's loan portfolio is concentrated in loans secured by realestate in the Company's primary market area.  Accordingly, the ultimate collectibility of the Company's loan portfolio issusceptible to changes in market conditions in the Company's market areas.  The other significant concentrations of credit bytype of loan are set forth in Note 3.

The Company, as a matter of policy, does not extend credit to any single borrower or groupof related borrowers in excess of 25% of the Bank’s statutory capital, or approximately $2,000,000.

The Bank has a concentration of funds on deposit at The Bankers Bank at December 31, 2003and 2002 as follows (dollars in thousands).

Concentration over insured limits (dollars in thousands):

**2003**

**2002**

Noninterest-bearing accounts

**$**

**3,677**

$

2,499

Federal funds sold

**58**

13,225

**$**

**3,735**

$

15,724

**NOTE 13.       REGULATORY MATTERS**

The Bank is subject to certain restrictions on the amount of dividends that may bedeclared without prior regulatory approval.  At December 31, 2003, approximately $873,000 of retained earnings were availablefor dividend declaration without regulatory approval.

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

 F-23
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 13.       REGULATORY MATTERS(Continued)**

Quantitative measures established by regulation to ensure capital adequacy require theCompany and the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, as defined and ofTier I capital to average assets.  Management believes, as of December 31, 2003, the Company and the Bank met all capitaladequacy requirements to which they are subject.

As of December 31, 2003, the most recent notification from the Federal Deposit InsuranceCorporation categorized Farmers & Merchants Bank as well capitalized under the regulatory framework for prompt correctiveaction.  To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier Ileverage ratios as set forth in the following table.  There are no conditions or events since that notification thatmanagement believes have changed the Bank’s categories.  Prompt corrective action provisions are not applicable to bankholding companies.

The Company and Bank’s actual capital amounts and ratios are presented in thefollowing table.

**To Be Well**

**For Capital**

**Capitalized Under**

**Adequacy**

**Prompt Corrective**

**Actual**

**Purposes**

**Action Provisions**

**Amount**

**Ratio**

**Amount**

**Ratio**

**Amount**

**Ratio**
                                                                                 
**(Dollars in Thousands)**

**As of December 31, 2003:**
               
** **
          
**Total Capital to Risk Weighted Assets:**

**     Consolidated**

**$**

**12,878**

**11.9%**

**$**

**8,690**

**8.0%**

**N/A**

**N/A**

**     Farmers & Merchants Bank**

**$**

**12,806**

**11.8%**

**$**

**8,685**

**8.0%**

**$**

**10,856**

**10.0%**

**Tier I Capital to Risk Weighted Assets:**

**     Consolidated**

**$**

**11,516**

**10.6%**

**$**

**4,345**

**4.0%**

**N/A**

**N/A**

**     Farmers & Merchants Bank**

**$**

**11,444**

**10.5%**

**$**

**4,342**

**4.0%**

**$**

**6,514**

**6.0%**

**Tier I Capital to Average Assets:**

**     Consolidated**

**$**

**11,516**

**8.2%**

**$**

**5,607**

**4.0%**

**N/A**

**N/A**

**     Farmers & Merchants Bank**

**$**

**11,444**

**8.2%**

**$**

**5,605**

**4.0%**

**$**

**7,006**

**5.0%**

As of December 31, 2002:

** **

Total Capital to Risk Weighted Assets:

     Consolidated

$

11,292

11.3%

$

8,028

8.0%

N/A

N/A

     Farmers & Merchants Bank

$

11,220

11.2%

$

8,022

8.0%

$

10,028

10.0%

Tier I Capital to Risk Weighted Assets:

     Consolidated

$

10,036

10.0%

$

4,014

4.0%

N/A

N/A

     Farmers & Merchants Bank

$

9,964

9.9%

$

4,010

4.0%

$

6,017

6.0%

Tier I Capital to Average Assets:

     Consolidated

$

10,036

7.3%

$

5,492

4.0%

N/A

N/A

     Farmers & Merchants Bank

$

9,964

7.2%

$

5,491

4.0%

$

6,864

5.0%

F-24
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 14.       FAIR VALUE OF FINANCIALINSTRUMENTS**

The fair value of a financial instrument is the current amount that would be exchangedbetween willing parties, other than in a forced liquidation.  Fair value is best determined based upon quoted marketprices.  However, in many instances, there are no quoted market prices for the Company’s various financialinstruments.  In cases where quoted market prices are not available, fair value is based on discounted cash flows or othervaluation techniques.  These techniques are significantly affected by the assumptions used, including the discount rate andestimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediate settlement of theinstrument.  SFAS No. 107, *Disclosures about Fair Value of Financial Instruments,* excludes certain financialinstruments and all nonfinancial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amountspresented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used by the Company in estimating the fairvalue of its financial instruments:

**Cash, Due From Banks, Interest-Bearing Deposits at Other Financial Institutions andFederal Funds Sold: **The carrying amount of cash, due from banks,interest-bearing deposits at other financial institutions and federal funds sold approximates fair value.

**Securities: **Fair value ofsecurities is based on available quoted market prices.  The carrying amount of equity securities with no readily determinablefair value approximates fair value.

**Loans: **The carrying amount ofvariable-rate loans that reprice frequently and have no significant change in credit risk approximates fair value.  The fairvalue of fixed-rate loans is estimated based on discounted contractual cash flows, using interest rates currently being offered forloans with similar terms to borrowers with similar credit quality.  The fair value of impaired loans is estimated based ondiscounted contractual cash flows or underlying collateral values, where applicable.

**Deposits: **The carrying amount ofdemand deposits, savings deposits, and variable-rate certificates of deposit approximates fair value.  The fair value offixed-rate certificates of deposit is estimated based on discounted contractual cashflows using interest rates currently being offered for certificates of similar maturities.

**Other Borrowings: **The carryingamount of variable rate borrowings approximate fair value.** ** The fair value of  fixed rate other borrowings areestimated based on discounted contractual cash flows using the current incremental borrowing rates for similar type borrowingarrangements. 

**Accrued Interest: **The carryingamount of accrued interest approximates their fair value.

**Off-Balance-Sheet Instruments: **The carrying amount of commitments to extend credit andstandby letters of credit approximates fair value.  The carrying amount of the off-balance-sheet financial instruments isbased on fees charged to enter into such agreements.

F-25
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 14.       FAIR VALUE OF FINANCIAL INSTRUMENTS(Continued)**

The carrying amount and estimated fair value of the Company's financial instruments wereas follows:

**December 31, 2003**

**December 31, 2002**

**CarryingAmount**
     
**FairValue**
     
**CarryingAmount**
     
**FairValue**
                                                                       
**(Dollars in Thousands)**

Financial assets:

   Cash, due from banks, interest-

       bearing deposits at other financial

       institutions and federal funds sold

**$**

**5,306**

**$**

**5,306**

$

17,216

$

17,216

   Securities

**15,725**

**15,725**

20,025

20,025

   Loans

**115,076**

**118,700**

98,556

101,187

   Accrued interest receivable

**1,038**

**1,038**

1,157

1,157

Financial liabilities:

  Deposits

**127,822**

**128,417**

128,142

129,322

   Other borrowings

**442**

**483**

439

496

   Accrued interest payable

**188**

**188**

289

289

**NOTE 15.       PARENT COMPANY FINANCIALINFORMATION**

The following information presents the condensed balance sheets as of December 31, 2003and 2002 and statements of income and cash flows of FMB Equibanc, Inc. for the periods ended December 31, 2003 and 2002 (dollars inthousands).

**CONDENSED BALANCE SHEETS**

**2003**
     
**2002**

 

**Assets**

 

  Cash

**$**

**37**

$

3

 

  Investment in subsidiary

**11,652**

10,294

 

  Other assets

**60**

69

 

      Total assets

**$**

**11,749**

$

10,366

 

 

**Accounts payable**

**$**

**25**

$

-  

 

**Stockholders’ equity**

**11,724**

10,366

 

      Total liabilities and stockholders’ equity

**$**

**11,749**

$

10,366

 

 

F-26
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 15.       PARENT COMPANY FINANCIAL INFORMATION(Continued)**

**CONDENSED STATEMENTS OF INCOsME**

**2003**
     
**2002**

**Income**

Dividends from subsidiary

**$**

**266**

$

284

**Expenses, other**

**145**

50

       Income before income tax benefit andequity

           in undistributed income ofsubsidiary

**121**

234

**Income tax benefit**

**60**

20

       Income before equity in undistributedincome

          of subsidiary

**181**

254

**Equity in undistributed income of subsidiary**

**1,480**

1,213

         Net income

**$**

**1,661**

$

1,467

 

**CONDENSED STATEMENTS OF CASH FLOWS**    
 
**2003**

     
**2002**

**OPERATING ACTIVITIES**

     Net income

**$**

**1,661 **

$

1,467 

     Adjustments to reconcile net income to net

          cash provided by operating activities:

          Undistributed income of subsidiary

**(1,480)**

(1,213)

          Other operating activities

**34 **

(70)

                    Net cash provided by operating activities

**215 **

184 

**FINANCING ACTIVITIES**

     Dividends paid

**(181)**

(181)

                    Net cash used in financing activities

**(181)**

(181)

Net increase in cash

**34 **

3 

Cash at beginning of period

**3 **

- 

Cash at end of year

**$**

**37 **

$

3 

F-27