**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, 2002 - Commission File Number:  000-32399

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**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 whichregistered   ** |
|-------------------------|----------------------------------------------------------------|
| 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   ý  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 $9,819,842.

The aggregate market value of the voting stock held by non-affiliates of Issuer (362,600shares) at February 28,  2003 was $11,093,000.  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 28, 2003 was 362,600 shares.

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

**DOCUMENTS INCORPORATED BY REFERENCE**

**         **Portions of the Issuer’s definitive Proxy Statement for the 2003 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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**CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS**

Certain of thestatements made in this Annual Report on Form 10-KSB and in documents incorporated by reference herein, including matters discussedunder the caption “Management’s Discussion and Analysis of Financial Condition and Results ofOperations, ” as well as oralstatements made by the FMB Equibanc, Inc. (the “Company”) or its officers, directors or employees may constituteforward-looking statements within the meaning of the federal securities laws.  Such forward-looking statements are based onmanagement’s beliefs, current expectations, estimates and projections about the financial services industry, the economy and aboutthe Company and its wholly-owned subsidiary, Farmers & Merchants Bank (the “Bank”) in general.  Forward-looking statementsinclude statements about the competitiveness of the banking industry, potential regulatory obligations, potential economic growthin our primary service area, our strategies and other statements that are not historical facts.  The words “expect,”“anticipate,” “intend,” “plan,” “seek,” “estimate” and similar expressions are intended to identify such forward-lookingstatements. Such forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties andother important factors that may cause actual performance or achievements of the Company to differ materially from any resultsexpressed or implied by such forward-looking statements.  Such factors include, without limitation, (i) increased competitionfrom other financial institutions, (ii) lack of sustained growth in the economy of Bulloch County, Georgia and neighboring areas,(iii) fluctuations in interest rates, and (iv) changes in the legislative and regulatory environment.  Many of such factorsare beyond the Company’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-lookingstatements.  The Company disclaims any obligation to update or revise any forward-looking statements contained in this Report,whether as a result of new information, future events or otherwise.

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# **PART I**

**ITEM 1.         DESCRIPTION OFBUSINESS**

**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 has beenorganized to enhance the Bank’s ability to serve its current and future customers’ requirements for financial services.  Theholding company structure provides flexibility for expansion of the Company’s banking business through the acquisition of otherfinancial institutions and the provision of additional banking-related services which the traditional commercial bank may not beable to provide under present laws.  In addition, a holding company structure facilitates raising capital for the Bank becausethe Company will be able to issue securities without the need for prior banking regulatory approval, and the proceeds of debtsecurities issued by the Company can be invested in the Bank as primary capital.

At December 31,2002, the assets of the Company consisted primarily of its ownership of the capital 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’stelephone number at such location is (912) 489-2600.  See “Item 2.  Description ofProperties.”

**The Bank**

 The Bank was incorporated as a Georgia banking corporation onFebruary 4, 1948 for the purpose of conducting a commercial banking business from Bulloch County, Georgia.  The Bankoriginally conducted its business from a main office located in Brooklet, Bulloch County, Georgia.  In 1991, the bankrelocated its main office to Statesboro, Bulloch County, Georgia.  The Bank retained its former main office as a branchoffice.  The Bank also maintains a branch office in Statesboro, Georgia.

**Market Area and Competition **

The  primary servicearea of the Bank is Bulloch County, Georgia.  The Bank encounters competition in its primary service area and in surroundingareas from seven other financial institutions.  These competitors offer a full range of banking services and vigorouslycompete for all types of services, especially deposits.

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The following table illustrates the June 30, 2002 deposit base and market share of thefinancial institutions located in Bulloch County, as reported by the Federal Deposit Insurance Corporation (the“FDIC”), (dollars in millions).

| **Bulloch County**                         | **Deposits** | **  PercentofMarket** |
|--------------------------------------------|--------------|----------------------------|
| **Financial Institutions**                 |              |
|                                       |         |                       |
| Sea Island Bank                            | $173.5       | 28.8                       |
| BB&T                              | 144.5        | 24.0                       |
| Farmers & Merchants Bank               | 115.9        | 19.2                       |
| Eagle Bank and Trust                       | 68.7         | 11.4                       |
| Wachovia Bank, National Association        | 51.2         |   8.5            |
| The First National Bank & TrustCompany | 6.6          |   1.1            |
| Core Credit Union.                         | 30.2         |   5.0            |
| First Southern NationalBank                | 12.7         |   2.1            |

While the Bank experiences competition from financial institutions headquartered inBulloch County, some competition also comes from banks outside of Bulloch County seeking to make loans in the Bank’s primaryservice area.  In addition, in certain aspects of its banking business, the Bank also competes with credit unions, small loancompanies, consumer finance companies, brokerage houses, insurance companies, money market funds, and other financial institutionsthat have recently entered the traditional banking markets.

The extent to which other types of financial institutions compete with commercial bankshas increased significantly within the past few years as a result of federal and state legislation which has, in several respects,deregulated financial institutions.  See “Supervision and Regulation.” The full impact of this legislation andsubsequent laws that will continue to further deregulate the financial services industry cannot be fully assessed orpredicted.

**Deposits**

The Bank offers a wide range of commercial and consumer interest bearing and non-interestbearing deposit accounts, including checking accounts, money market accounts, negotiable order of withdrawal accounts, individualretirement accounts, certificates of deposit and regular savings 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 officersand directors, direct mail solicitation and advertisements published in the local media.  The Bank pays competitive interestrates on time and savings deposits.  In addition, the Bank has implemented a service charge fee schedule competitive withother financial institutions in the Bank’s primary service area, covering such matters as maintenance fees on checking accounts,per item processing fees on checking accounts, returned check charges and other similar fees and charges.

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**Lending Services**

***Lending Policy.* ** The Bank engages in a full complement oflending activities, including real estate loans, commercial loans, consumer loans and agribusiness loans.  Lending is directedprincipally towards individuals and businesses whose demands fall within the Bank’s legal lending limits and who are potentialdeposit customers of the Bank.  This includes loans made to individual, partnership or corporate borrowers and obtained for avariety of business purposes.

The Bank may eitheroriginate loans or, where loans exceed the Bank’s lending limits, participate with other banks.  Management of the Bank doesnot believe that loan participations necessarily pose any greater risk of loss than loans that the Bankoriginates. 

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, 2002,real estate loans comprised 67.2% 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.
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   -  *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, 2002, commercial loans comprised 15.0% 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, 2002, consumer loans comprised 11.2% 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, 2002, agribusiness loans comprised 6.6% 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 make proportionately more loans to medium- to large-sized businessesthan the Bank makes.  Many of the commercial loans of the Bank are made to small- to medium-sized businesses that may be lessable to withstand competitive, economic and financial pressures than large borrowers.  The commercial loan portfolio of theBank consists of loans to individual, partnership and corporate borrowers that are primarily located in the Bulloch Countyarea.  Accordingly, our commercial borrowers reflect the diversified businesses of this area, and include services, retailtrade and manufacturing firms.  The risks associated with commercial loans depend to a large extent upon various economicfactors, including the strength of the economy in the Bulloch County area and the ability of the Bank’s commercial borrowers toproperly evaluate and respond to a changing marketplace.  In addition, the commercial borrowers of the Bank face risks relatedspecifically to the unique nature of their business.  For example, services and retail trade firms may incur risks associatedwith labor shortages and consumer preference changes, and manufacturing firms may incur risks associated with raw material andlabor shortages, as well as currency fluctuations.

            Consumer loansgenerally involve more credit risks than other loans because of the type and nature of the underlying collateral or because of theabsence of any collateral.  Consumer loan repayments are dependent on the borrower’s continuing financial stability and arelikely to be adversely affected by job loss, divorce and illness.  Furthermore, the application of various federal and statelaws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in thecase of default.  In most cases, any repossessed collateral will not provide an adequate source of repayment of theoutstanding loan balance.  Although the underwriting process for consumer loans includes a comparison of the value of thesecurity, if any, to the proposed loan amount, the Bank cannot predict the extent to which the borrower’s ability to pay, and thevalue of the security, will be affected by 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, 2002 was $750,000 plus an additional $500,000 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 December 31, 2002, loans comprised approximately 70.6% of the Bank’s assets andinvestment securities comprised approximately 14.3% of the Bank’s assets.  The Bank invests primarily in direct obligations ofthe United States, obligations guaranteed as to principal and interest by the United States and obligations of agencies of theUnited States.  In addition, the Bank enters into federal funds transactions with its principal correspondent banks, andprimarily acts as a net seller of such funds.  The sale of federal funds amounts to a short term loan from the Bank to anotherbank.

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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 deposits 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$2,500,000 which may be used to meet liquidity needs.  As of December 31, 2002, 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, 2002, the Bank had 50 total employees, comprised of 44 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 and Regulation**

**General**

The following discussion summarizes material elements of the federal and state regulatoryframework applicable to the Company and the Bank.  This discussion is qualified in its entirety by reference to applicablefederal and state statutes and regulations.  Furthermore, the statutes and regulations affecting the Company and the Bank maychange after the date of this Report, and any such changes may have a material adverse effect on the Company or theBank.

**Regulation of the Company**

The Company is a bank holding company registered with the Board of Governors of theFederal Reserve System (the “Federal Reserve”) and the Georgia Department of Banking and Finance (the “Georgia Department”) underthe BHC Act and the FICG.  As such, the Company is subject to the supervision, examination, and reporting requirements of theBHC Act and the FICG, and the regulations of the Federal Reserve and the Georgia Department.

 ***Acquisitions.**** * The BHC Act requires every bank holdingcompany to obtain the prior approval of the Federal Reserve before:
-  it may acquire direct or indirect ownership or control of any voting shares of any bank if, after such acquisition, the bankholding company will directly or indirectly own or control more than 5% of the voting shares of the bank; it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank; orit may merge or consolidate with any other bank holding company.
The BHC Act further provides that the Federal Reserve may not approve any acquisition thatwould result in monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize thebusiness of banking in any section of the United States, or the effect of which may be substantially to lessen competition or totend to create a monopoly in any section of the United States, or that in any other manner would be a restraint of trade, unlessthe anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenienceand needs of the community to be served.  The Federal Reserve is also required to consider the financial and managerialresources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community tobe served.  Consideration of financial resources generally focuses on capital adequacy, which is discussed below.

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994(“Riegle-Neal”), the restrictions on interstate acquisitions of banks by bank holding companies were repealed.  As a result,the Company, and any other bank holding company located in Georgia is able to acquire a bank located in any other state, and a bankholding company located outside of Georgia can acquire any Georgia-based bank, in either case subject to certain deposit percentageand other restrictions.  The legislation provides that unless an individual state has elected to prohibit out-of-state banksfrom operating interstate branches within its territory, adequately capitalized and managed bank holding companies are able toconsolidate their multistate banking operations into a single bank subsidiary and to branch interstate throughacquisitions.

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De novo branching by an out-of-state bank is permitted only if it is expressly permittedby the laws of the host state.  Georgia does not permit de novo branching by an out-of-state bank.  Therefore, the onlymethod by which an out-of-state bank or bank holding company may enter Georgia is through an acquisition.  Georgia has adoptedan interstate banking statute that removes the existing restrictions on the ability of banks to branch interstate through mergers,consolidations and acquisitions.

***Activities.**** * The BHC Act has generally prohibited a bankholding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiariesand from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined bythe Federal Reserve to be closely related to banking or managing or controlling banks as to be a proper incident thereto.  Provisions of the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”), discussed below, have expanded the permissible activities of abank holding company that qualifies as a financial holding company.  In determining whether a particular activity ispermissible, the Federal Reserve must consider whether the performance of such an activity can be reasonably expected to producebenefits to the public, such as a greater convenience, increased competition, or gains in efficiency, that outweigh possibleadverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsoundbanking practices.

***Gramm-Leach-Bliley Act*.**  The GLB Act implemented major changesin the statutory framework for providing banking and other financial services in the United States.  The GLB Act, among otherthings, eliminates many of the restrictions on affiliations among banks and securities firms, insurance firms, and other financialservice providers.  A bank holding company that qualifies as a financial holding company will be permitted to engage inactivities that are financial in nature or incidental or complimentary to a financial activity.  The activities that the GLBAct expressly lists as financial in nature include insurance activities, providing financial and investment advisory services,underwriting securities and limited merchant banking activities. 

To become eligible for these expanded activities, a bank holding company must qualify as afinancial holding company.  To qualify as a financial holding company, each insured depository institution controlled by thebank holding company must be well-capitalized, well-managed, and have at least a satisfactory rating under the CommunityReinvestment Act (the “CRA”).  In addition, the bank holding company must file a declaration with the Federal Reserve of itsintention to become a financial holding company.

The GLB Act is considered to be one of the most significant banking laws sinceDepression-era statutes were enacted.  The Company does not believe that the GLB Act will have a material adverse impact onits operations.  However, to the extent that it allows banks, securities firms, and insurance firms to affiliate, thefinancial services industry may experience further consolidation.  The GLB Act may have the result of increasing the amount ofcompetition that the Company faces from larger institutions and other companies offering financial products and services, many ofwhich may have substantially more financial resources than the Company.

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***Support of Subsidiary Institutions.***  Under Federal Reservepolicy, the Company is expected to act as a source of financial strength for, and to commit resources to support its bankingsubsidiaries.  This support may be required at times when, absent such Federal Reserve policy, the Company may not be inclinedto provide it.  In addition, any capital loans by a bank holding company to its banking subsidiaries are subordinate in rightof payment to deposits and to certain other indebtedness of such banks.  In the event of a bank holding company’s bankruptcy,any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a banking subsidiary willbe assumed by the bankruptcy trustee and entitled to a priority of payment.

**Regulation of the Bank**

As a state-chartered bank, the Bank is examined and regulated by the Federal DepositInsurance Corporation (the “FDIC”) and the Georgia Department.  The major functions of the FDIC with respect to insured banksinclude paying depositors to the extent provided by law in the event an insured bank is closed without adequately providing forpayment of the claims of depositors, acting as receiver of state banks placed in receivership when so appointed by stateauthorities, and preventing the continuance or development of unsound and unsafe banking practices.  In addition, the FDICalso approves conversions, mergers, consolidations, and assumption of deposit liability transactions between insured banks andnoninsured banks or institutions to prevent capital or surplus diminution in such transactions where the resulting bank is anuninsured bank.

The Georgia Department regulates all areas of the Bank’s banking operations, includingmergers, establishment of branches, loans, interest rates, and reserves.  The Bank is also subject to Georgia banking andusury laws restricting the amount of interest that it may charge in making loans or other extensions of credit.  With respectto expansion, the Bank was previously prohibited from establishing branch offices or facilities outside of the county in which itsmain office was located, with certain exceptions.  Georgia law now permits, with required regulatory approval, theestablishment of de novo branches in an unlimited number of counties within the State of Georgia by the subsidiary bank(s) of bankholding companies then engaged in the business of banking in Georgia. 

***Prompt Corrective Action.***  The Federal Deposit InsuranceCorporation  Improvement Act (“FDICIA”) establishes a system of prompt corrective action to resolve the problems of undercapitalizedinstitutions.  Under this system, the federal banking regulators are required to establish five capital categories (wellcapitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) and arerequired to take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect toinstitutions in the three undercapitalized categories, the severity of which will depend upon the capital category in which theinstitution is placed.  Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservatorfor an institution that is critically undercapitalized.  The federal banking regulators have specified by regulation therelevant capital level for each category.

An institution that is categorized as undercapitalized, significantly undercapitalized, orcritically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal bankingregulator.  A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan,subject to certain limitations.  The obligation of a controlling holding company to fund a capital restoration plan is limitedto the lesser of 5% of an undercapitalized subsidiary’s assets or the amount required to meet regulatory capitalrequirements.  An undercapitalized institution is also generally prohibited from increasing its average total assets, makingacquisitions, establishing any branches, or engaging in any new line of business, except in accordance with an accepted capitalrestoration plan or with the approval of the FDIC.  In addition, the appropriate federal banking regulator may treat anundercapitalized institution in the same manner as it treats a significantly undercapitalized institution if it determines thatthose actions are necessary.

****

-11-
   
At December 31, 2002,the Bank had the requisite capital levels to qualify as “well capitalized.”

***FDIC Insurance Assessments.*** The FDIC adopted a risk-based assessment system for insureddepository institutions that takes into account the risks attributable to different categories and concentrations of assets andliabilities.  The system assigns an institution to one of three capital categories:  (i) well capitalized; (ii)adequately capitalized; and (iii) undercapitalized.  These three categories are substantially similar to the prompt correctiveaction categories described above, with the “undercapitalized” category including institutions that are undercapitalized,significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes.  An institution is alsoassigned by the FDIC to one of three supervisory subgroups within each capital group.  An institution’s insurance assessmentrate is then determined based on the capital category and supervisory category to which it is assigned. Under the final risk-basedassessment system, there are nine assessment risk classifications to which different assessment rates are applied. Assessments range from 0 to 27 cents per $100 of deposits, depending on the institution’s capital group and supervisorysubgroup.

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.

***Safety and Soundness Standards.***  The Federal Deposit InsuranceAct (the “FDIA”), as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994, requires thefederal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to internal controls, informationsystems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, assetquality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as theagencies deem appropriate.  The federal bank regulatory agencies have adopted a set of guidelines prescribing safety andsoundness standards pursuant to FDICIA, as amended.  The guidelines establish general standards relating to internal controlsand information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth andcompensation, fees, and benefits.  In general, the guidelines require, among other things, appropriate systems and practicesto identify and manage the risks and exposures specified in the guidelines.  The guidelines prohibit excessive compensation asan unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate tothe services performed by  an executive officer, employee, director, or principal shareholders.  The federal banking agenciesdetermined that stock valuation standards were not appropriate.  In addition, the agencies adopted regulations that authorize,but do not require an agency to order an institution that has been given notice by an agency that it is not satisfying any of suchsafety and soundness standards to submit a compliance plan.  If, after being so notified, an institution fails to submit anacceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the agency must issue anorder directing action to correct the deficiency and may issue an order directing other actions of the types to which anundercapitalized association is subject under the “prompt corrective action” provisions of FDICIA.  If an institution fails tocomply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil moneypenalties.  The federal bank regulatory agencies also proposed guidelines for asset quality and earnings standards.

-12-
   
***Community Reinvestment Act.***  The Bank is subject to theprovisions of the CRA, which requires the FDIC, in connection with its regular examination of the Bank, to assess the Bank’s recordof meeting the credit needs of the communities it serves, including low- and moderate-income neighborhoods, consistent with safeand sound banking practices.

Regulations promulgated under the CRA are intended to set distinct assessment standardsfor financial institutions.  The regulations provide for streamlined procedures for institutions with assets of less than $250million.  The regulations contain the following three evaluation tests:
-  a lending test, which compares the institution’s market share of loans in low- and moderate-income areas to its market share ofloans in its entire service area;a service test, which evaluates the provision of services that promote the availability of credit to low- and moderate-incomeareas; andan investment test, which evaluates the institution’s record of investments in organizations designed to foster communitydevelopment, small- and minority-owned businesses and affordable housing lending, including state and local government housing orrevenue bonds.
Institutions are required to make public disclosure of their written CRA evaluations madeby regulatory agencies.  This promotes enforcement of CRA requirements by providing the public with the status of a particularinstitution’s community investment record.  In addition to public disclosure of an institution’s CRA assessment, regulatoryauthorities are required to consider an institution’s CRA assessment when an institution applies for approval to establish a newbranch which will accept deposits, to relocate an existing branch or to merge with another federally regulated financialinstitution.

***Privacy. *** The GLB Act also contains provisions regardingconsumer privacy.  These provisions require financial institutions to disclose their policy for collecting and protectingconfidential information.  Customers generally may prevent financial institutions from sharing personal financial informationwith nonaffiliated third parties, other than third parties that market the institution’s own products and services. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for usein telemarketing, direct mail marketing or other marketing through electronic means to the consumer.

**Payment of Dividends** 

The Company is a legal entity separate and distinct from the Bank.  The principalsources of revenues to the Company, including  cash flow to pay dividends to its shareholders, are dividends from the Bank. There are statutory and regulatory limitations on the payment of dividends by the Bank, as well as by the Company to itsshareholders.

If, in the opinion of a federal banking regulator, a depository institution under itsjurisdiction is engaged in or is about to engage in an  unsafe or unsound practice (which, depending on the financial condition ofthe depository institution could include the payment of dividends), such regulator may require, after notice and hearing, that suchinstitution cease and desist from such practice.  The federal banking regulators have indicated

-13-
   
that paying dividends that deplete a depository institution’s capital base to aninadequate level would be an unsafe and unsound banking practice.  Under FDICIA, a depository institution may not pay anydividend if payment would cause it to become undercapitalized or if it already is undercapitalized.  Moreover, the federalbanking regulators have issued policy statements that provide that bank holding companies and insured banks should generally onlypay dividends out of current operating earnings.  The payment of dividends by the Company and its banking subsidiary may alsobe affected or limited by other factors, such as the requirement to maintain adequate capital above regulatoryguidelines.

Georgia law provides additional restrictions on the payment of dividends by the Bank tothe Company.  The Bank must have the approval of the Georgia Department to pay cash dividends, unless at the time of suchpayment:
-  the total classified assets at the most recent examination of the Bank do not exceed 80% of Tier 1 Capital (as defined in“Capital Adequacy” below) plus allowance for loan losses as reflected at such examination;the aggregate amount of dividends declared or anticipated to be declared in the calendar year does not exceed 50% of the netprofits, after taxes, but before dividends, for the previous calendar year; andthe ratio of Tier 1 Capital to Adjusted Total Assets will not be less than 6%.
**Capital Adequacy**

The Company and the Bank are required to comply with the capital adequacy standardsestablished by the Federal Reserve, in the case of the Company, and the FDIC, in the case of the Bank. The Federal Reserve hasestablished two basic measures of capital adequacy for bank holding companies: (i) a risk-based measure, and (ii) a leveragemeasure.  A bank holding company must satisfy all applicable capital standards to be considered in compliance.

The risk-based capital standards are designed to make regulatory capital requirements moresensitive to differences in risk profile 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 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%. At least half of total capital must be comprised of common stock, minority interests in the equity accounts of consolidatedsubsidiaries, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwilland certain other intangible assets, or “Tier I capital.” The remainder may consist of subordinated debt, otherpreferred stock, and a limited amount of loan loss reserves, or “Tier II capital.”  At December 31, 2002, the Company’sconsolidated total risk-based capital ratio and its Tier I risk-based capital ratio (i.e., the ratio of Tier I capital torisk-weighted assets) were 11.2% and 9.9%, respectively. 

-14-
   
In addition, the Federal Reserve has established minimum leverage ratio guidelines forbank holding companies.  These guidelines provide for a minimum ratio of Tier I capital to average assets, less goodwill andcertain other intangible assets, of 3% for bank holding companies that meet certain specified criteria, including those having thehighest regulatory rating.  All other bank holding companies generally are required to maintain a leverage ratio of at least3%, plus an additional cushion of 1% to 2%.  The Company’s leverage ratio at December 31, 2002 was 7.2%. 

The guidelines also provide that bank holding companies experiencing internal growth ormaking acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levelswithout significant reliance on intangible assets.  Furthermore, the Federal Reserve has indicated that it will consider atangible Tier I capital leverage ratio (deducting all intangibles) and other indications of capital strength in evaluatingproposals for expansion or new activities.

The Bank is 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 Bank was in compliance with applicable minimum capital requirements as of December 31,2002.  The Company has not been advised by any regulator of any specific minimum capital ratio requirement applicable to it orthe Bank. 

Failure to meet capital guidelines could subject a bank to a variety of enforcementremedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on the takingof brokered deposits, and certain other restrictions on its business.  As described above, substantial additional restrictionscan be imposed upon FDIC-insured depository institutions that fail to meet applicable capital requirements.

**Restrictions on Transactions with Affiliates**

The Company and the Bank are subject to the provisions of Section 23A of the FederalReserve 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;the amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates;anda bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.
The total amount 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, to 20% of a bank’s capital and surplus.  Inaddition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateralrequirements.  The Bank must also comply with other provisions designed to avoid the taking of low-quality assets.

-15-
   
The Company and the Bank are also subject to the provisions of Section 23B of the FederalReserve Act which, among other things, prohibits an institution from engaging in the above transactions with affiliates unless thetransactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as thoseprevailing at the time for comparable transactions with nonaffiliated companies.

The Bank is also subject to restrictions on extensions of credit to its executiveofficers, directors, principal shareholders and their related interests.  These extensions of credit (i) must be made onsubstantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactionswith third parties, and (ii) must not involve more than the normal risk of repayment or present other unfavorablefeatures.

**Monetary Policy**

 The earnings of the Bank, as well as the Company, will be affected by domestic and foreign conditions, particularly by the monetary andfiscal policies of the United States government and its agencies.  The Federal Reserve has had, and will continue to have, animportant impact on the operating results of commercial banks through its power to implement national monetary policy in order,among other things, to mitigate recessionary and inflationary pressures by regulating the national money supply.  Thetechniques used by the Federal Reserve include setting the reserve requirements of member banks and establishing the discount rateon member bank borrowings.  The Federal Reserve also conducts open market transactions in United States governmentsecurities.

****
****
-16-
   
**ITEM 2.         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.          SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

No matters were submitted for a vote of the Company’s shareholders during the fourthquarter of 2002.
****
 

-17-
   **PART II******
**ITEM 5.         MARKET FOR COMMONEQUITY AND RELATED STOCKHOLDER                         MATTERS**
**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, 2002 was 511.

**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; anddividends 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.

Prior to consummation of the holding company reorganization, the Bank declared annualdividends of $181,300, or $.50 per share in 2000.

 The Companydeclared dividends  of $181,300, or $.50 per share both in 2002 and 2001.
 
-18-
   
**Recent Sales of Unregistered Securities**

There were no unregistered sales of securities in 2002.

 

****

-19-
   
**ITEM 6.         MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL                       CONDITION AND RESULTS OF OPERATIONS**

This analysis has beenprepared to provide insight into the consolidated financial condition of the Company and to address the factors which the Companybelieves have affected the Company’s results of operations.

As the holding companyreorganization pursuant to which the Company became the sole shareholder of the Bank became effective November 1, 2000, allfinancial information for earlier periods relates to the Bank, rather than the Company.

**Critical Accounting Policies**

 Theaccounting and financial reporting policies of the Company conform to generally accepted accounting principles and to generalpractices within the banking industry.  Of these policies, management has identified the allowance for loan losses as acritical accounting policy that requires subjective judgment and is important to the presentation of the financial condition andresults of operations of the Company.

The allowance for loanlosses is established through a provision for loan losses charged to expense.  Loans are charged against the allowance forloan losses when management believes that the collectibility of the principal is unlikely.  Subsequent recoveries are added tothe allowance.  The allowance is an amount that management believes will be adequate to absorb losses on existing loans thatbecome uncollectible, based on evaluations of the collectibilty of loans.  The evaluations take into consideration suchfactors as changes in the nature and volume of the loan portfolio, historical loss rates, overall portfolio quality, review ofspecific problem loans, and current economic conditions and trends that may affect a borrower’s ability torepay. 

Please see“Provision for Loan Losses” and “Credit Losses” for further discussions of the Company’s methodologyin determining the allowance for loan losses and historical loss experience.

 **Results of Operations**

The Company and the Bank reported consolidated net income of $1,466,915 ($4.05 earningsper share) for the year ended December 31, 2002 compared to $1,277,446 ($3.52 earnings per share) for the year endedDecember 31, 2001.  Net interest income after provision for loan losses was $4,830,015, $4,053,101 and $3,705,878 for thethree years ended December 31, 2002, 2001, and 2000, respectively.  The provision for loan losses was $720,000, $425,000 and$170,000 for the three years ended December 31, 2002, 2001 and 2000, respectively.  Non-interest income totaled$1,373,114, $1,084,446 and $855,776 for the three years ended December 31, 2002, 2001 and 2000, respectively and noninterestexpenses totaled $3,777,922, $3,144,042 and $2,734,854 for the three years ended December 31, 2002, 2001 and 2000,respectively.

The Company believes the increase in net income over these periods can be attributedprincipally to a 15.2% increase in the loan portfolio, a 26.3% increase in non-interest income, and a decrease in interest ratespaid on deposit accounts.  The following table summarizes the results of operations of the Company for the three years endedDecember 31, 2002.
 
-20-
     
 Years        Ended December 31,
 

 

2002
 

2001
 

2000
Interest income
 

$ 8,446,728
 

$ 8,385,337
 

$ 7,170,494
Interest expense
 

2,896,713
 

3,907,236
 

3,294,616
Net interest        income
 

5,550,015
 

4,478,101
 

3,875,878
Provision for loan        losses
 

720,000
 

425,000
 

170,000
Noninterest income
 

1,373,114
 

1,084,446
 

855,776
Noninterest        expenses
 

3,777,922
 

3,144,042
 

2,734,854
Income before        taxes
 

2,425,207
 

1,993,505
 

1,826,800
Income taxes
 

958,292
 

716,059
 

651,723
Net        income
 

$        1,466,915
 

$        1,277,446
 

$        1,175,077
 

 

 

 

 

 

 
  
 Years        Ended December 31,
 

 

 

 

 

 

 

 

 

2002
 

2001
 

2000
Return on assets        (net income divided
 

 

 

 

 

 

   by        average total assets)
 

1.15%
 

1.24%
 

1.39%
Return on equity        (net income divided by
 

 

 

 

 

   average        equity)
 

15.26%
 

15.32%
 

16.76%
Dividend payout        ratio (dividends declared
 

 

 

 

 

 

   per        share divided by diluted net income
 

 

 

 

 

 

   per        share)
 

12.35%
 

14.20%
 

15.40%
Average equity        divided by average total
 

 

 

 

 

 

   assets
 

7.55%
 

9.15%
 

9.04%
 

 

 

 

 

 

 

-21-
   **Management’s Discussion and Analysis**
**Table 1 – Net Interest Income and Average Balances ($ inthousands)**

 

2002
 

2001
 

2000
 

 

 

Interest
   

Rate
 

 

 

Interest
 

Rate
 

 

 

Interest
 

Rate
 

Average
 

Income/
 

Earned/
 

Average
 

Income/
 

Earned/
 

Average
 

Income/
 

Earned/
 

Balance
 

Expense
 

Paid
 

Balance
 

Expense
 

Paid
 

Balance
 

Expense
 

Paid
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning      assets:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits in other      banks
 

 

 

 

N/A
 

$            124
 

$      2
 

1.61%
 

$       25
 

$             1
 

4.00%
Taxable investment      securities
$ 18,250
 

$ 927
 

5.08%
 

15,608
 

925
 

5.93%
 

15,952
 

982
 

6.16%
Nontaxable      investment securities
1,208
 

50
 

5.89%
 

748
 

32
 

6.78%
 

307
 

13
 

6.71%
Federal funds sold
4,600
 

69
 

1.49%
 

2,681
 

87
 

3.25%
 

3,135
 

195
 

6.22%
Total loans
96,252
 

7,401
 

7.69%
 

77,949
 

7,340
 

9.42%
 

60,537
 

5,980
 

9.88%
Total      interest-earning assets
120,310
 

8,447
 

 

 

97,110
 

8,386
 

 

 

79,956
 

7,171
 

 

Yield on average
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        interest-earning      assets
 

 

 

 

7.04%
 

 

 

 

 

8.66%
 

 

 

 

 

9.12%
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning      assets:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from      banks
3,775
 

 

 

 

 

2,780
 

 

 

 

 

2,395
 

 

 

 

Premises and      equipment
2,173
 

 

 

 

 

2,012
 

 

 

 

 

1,975
 

 

 

 

Other real estate      owned
13
 

 

 

 

 

1
 

 

 

 

 

268
 

 

 

 

Interest receivable      and other assets
1,828
 

 

 

 

 

1,938
 

 

 

 

 

1,694
 

 

 

 

Allowance for loan      losses
(1,260)
 

 

 

 

 

(924)
 

 

 

 

 

(1,228)
 

 

 

 

Total noninterest-earning      assets
6,529
 

 

 

 

 

5,807
 

 

 

 

 

5,104
 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS
$ 126,839
 

 

 

 

 

$ 102,917
 

 

 

 

 

$ 85,060
 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing      liabilities:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW/Money Market
$ 22,878
 

345
 

1.51%
 

$ 18,140
 

479
 

2.64%
 

$ 12,651
 

337
 

2.66%
Savings and time      deposits
75,266
 

2,522
 

3.35%
 

59,481
 

3,295
 

5.54%
 

52,013
 

2,907
 

5.59%
Federal funds      purchased
167
 

3
 

2.15%
 

125
 

5
 

4.32%
 

17
 

1
 

5.88%
Federal Home Loan      Bank advances
564
 

27
 

4.79%
 

2,916
 

128
 

4.39%
 

822
 

50
 

6.08%
Total      interest-bearing liabilities
98,875
 

2,897
 

 

 

80,662
 

3,907
 

 

 

65,503
 

3,295
 

 

Cost of average      interest-bearing
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   liabilities
 

 

 

 

2.93%
 

 

 

 

 

4.84%
 

 

 

 

 

5.03%
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing      liabilities:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits
17,584
 

 

 

 

 

13,293
 

 

 

 

 

11,500
 

 

 

 

Interest payable and      other liabilities
618
 

 

 

 

 

737
 

 

 

 

 

713
 

 

 

 

Total noninterest-bearing      liabilities
18,202
 

 

 

 

 

14,030
 

 

 

 

 

12,213
 

 

 

 

Total liabilities
117,077
 

 

 

 

 

94,692
 

 

 

 

 

77,716
 

 

 

 

Stockholders' equity
9,762
 

 

 

 

 

8,225
 

 

 

 

 

7,344
 

 

 

 

Total liabilities      and
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   stockholders' equity
$ 126,839
 

 

 

 

 

$ 102,917
 

 

 

 

 

$ 85,060
 

 

 

 

Net interest income
 

 

$ 5,550
 

 

 

 

 

$ 4,479
 

 

 

 

 

$ 3,876
 

 

Net yield on      interest-earning
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   assets
 

 

 

 

4.63%
 

 

 

 

 

4.63%
 

 

 

 

 

4.85%
-22-
   **Management’s Discussion and Analysis**
**Table 2 – Rate/Volume Variance Analysis ($ in thousands)**

The table below sets forth certain information regarding changes in interest income andinterest expense resulting from changes in volume and rates for the periods indicated.  The change in interest attributable tovolume has been determined by applying the rate from the earlier year to the change in average balances outstanding betweenyears.  The change in interest attributable to rate has been determined by applying the change in rate between years toaverage balances outstanding in the later year.  Accordingly, changes in interest due to both rate and volume have beenallocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change ofeach.
  
Year Ended      December 31  
2001      compared to 2002 
2000      compared to 2001  Increase      (Decrease) Increase      (Decrease)  
Due      to
 
Due      to
  
Volume
 
Rate
 
Net
 
Volume
 
Rate
 
Net
Interest      income                    Deposits in other      banks 
-   
 
-   
 
-  
 
 $               4 
  $             (3) 
 $               1 
        Taxable investment      securities 
 $              116 
 
 $             (116)
 -   (21) (36) (57)        Nontaxable investment      securities 19  (1) 
 $            18 
 19  -   19         Federal funds sold 43  (61) (18) (28) (80) (108)        Loans 
1,731 
 
(1,665)
 
66 
 
1,784 
 
(424)
 
1,360 
             Total 
1,909 
 
(1,843)
 
66 
 
1,758 
 
(543)
 
1,215 
             Interest      expense                   NOW/Money Market 107  (241) (134) 135  -   135         Savings and time      deposits 737  (1,510) (773) 418  (30) 388         Federal funds      purchased 1  (3) (2) 6  (2) 4         Repurchase agreements -     -    -   -    -   -          Federal Home Loan Bank      advances 
(111)
 
10 
 
(101)
 
127 
 
(49)
 
78 
             Total 
734 
 
(1,744)
 
(1,010)
 
686 
 
(81)
 
605 
              Net      interest income 
 $           1,175 
 
 $         (99)
 
 $           1,076 
 
 $           1,072 
 
 $             (462)
 
 $          610 
**Net Interest Income**
Net interest income isthe Company’s primary source of income.  It is the net of income generated by interest-earning assets less the interest paidon interest-bearing liabilities.  Interest-earning assets for the Company include loans, investment securities, federal fundssold, and interest-earning deposits in other banks.  The Company’s interest-bearing liabilities include deposits, federalfunds purchased, and Federal Home Loan Bank advances. 

In 2002, net interestincome was $5,550,015, representing an increase of 23.94% from $4,478,101 in 2001.  The average yield on interest earningassets decreased to 7.04% in 2002 from 8.66% in 2001, and the average rate paid on interest-bearing liabilities decreased to 2.93%in 2002 from 4.84% in 2001.  The net yield on interest-earning assets (net interest income divided by average interest-earningassets) for 2002 and 2001 was 4.63%. 

In 2001, net interestincome was $4,478,101, representing an increase of 15.54% from $3,875,878 in 2000.  The average yield on interest-earningassets decreased to 8.66% in 2001 from 9.12% in 2000, and the average rate paid on interest-bearing liabilities decreased to 4.84%in 2001 from 5.03% in 2000.  The net interest income (net interest income divided by average interest earning assets)decreased to 4.63% in 2001 from 4.92% in 2000.  This decrease is primarily attributable to a significant decrease in the primerate in 2001.

-23-
   
**Management’s Discussion and Analysis**

**Provision for Loan Losses**

Credit risk is inherentin the business of making loans.  The Bank sets aside an allowance for loan losses through charges to earnings, which chargesare reflected in the income statement as the provision for loan losses.  The provision for loan losses represents the amountcharged against current period earnings to achieve an allowance for loan losses that in management’s judgment is adequate to absorbthe losses inherent in the Bank’s loan portfolio.

The allowance for loan losses represents management’s assessment of the risk associatedwith extending credit and its evaluation of the quality of the loan portfolio.  Management analyzes the loan portfolio todetermine the adequacy of the allowance for loan losses and the appropriate provision required to maintain a level consideredadequate to absorb anticipated loan losses.  In assessing the adequacy of the allowance, management reviews the size, qualityand risk of loans in the portfolio.  Management also considers such factors as the collectibility of past due loans, volume ofnew loans, composition of the loan portfolio, and general economic outlook.  The Bank has two principal methods for analyzingthe reserve:  the historical method (past trend percentage plus classified loan percentage) and the one percent method (onepercent of total loans plus classified loan percentage).  At December 31, 2002, the allowance for loan losses wasbelieved to be adequate to provide for potential losses in the loan portfolio.

The Bank’s allowancefor loan losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account suchfactors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses incomparison to a group of peer banks identified by the regulators.  During their routine examinations of banks, regulatoryagencies may require a bank to make additional provisions to its allowance for loan losses when, in the opinion of the regulators,credit evaluations and allowance for loan loss methodology differ materially from those of management.

The provision for loanlosses was $720,000 for the year ended December 31, 2002, compared to $425,000 for the year ended December 31, 2001.  Theratio of the allowance for loan losses to total loans at the end of the period was 1.43% and 1.24% as of December 31, 2002 and2001, respectively.  Gross loans increased $13,184,000 or 15.2% from December 31, 2001 to December 31, 2002, and the provisionfor loan losses was increased in order to maintain the adequacy of the allowance for loan losses.

-24-
   **Management’s Discussion and Analysis**
**Noninterest Income**

Noninterest income consists of revenues generated from a range of financial services andactivities.  The majority of noninterest income is a result of service charges on deposit accounts including charges forinsufficient funds, checks and fees charged for nondeposit services.  Table 3 below provides a summary of noninterest incomefor the years ended December 31, 2002, 2001 and 2000.
**Table 3 – Sources of Noninterest Income**     
              For the years ended      December 31,
     
2002
 
2001
 
2000
          
Service      charges on deposit accounts
  $          1,047,451  $             845,801  $               674,217
Other      service charges and fees
                 291,243                 221,218                      168,062
Gain on      sale of investment securities
                   19,726                      -                          -
Other      income

  
                  16,694
 
                  17,427
 
                       13,497

Total      noninterest Income 

  
 $          1,375,114
 
 $          1,084,446
 
 $                  855,776

Noninterest incomeincreased by $288,668 in 2002 or 26.6% compared to 2001.  Service charges on deposit accounts increased by $201,650 for theyear ended December 31, 2002.  The increase in service charges on deposit accounts is due to an increase in the amount ofinsufficient fee income both in the per item fee and volume of insufficient items generated and an increase in the volume ofdeposit accounts.

Noninterest incomeincreased by $228,670 in 2001 or 26.7% compared to 2000. Service charges on deposit accounts increased by $171,584 for theyear ended December 31, 2001.  The increase in service charges on deposit accounts is due to an increase in the amount ofinsufficient fee income and an increase in deposit accounts.
**Noninterest Expenses**
The major components ofnoninterest expenses for the years ended December 31, 2002, 2001 and 2000 are disclosed in Table 4.
**Table 4 – Sources of Noninterest Expenses**    
For      the years ended December 31,
    
2002
 
2001
 
2000
          Salary      and benefits  $          1,964,603   $          1,581,081   $          1,310,698 Occupancy      expense                 209,518                  202,686                  195,007 Equipment      expense                 232,253                  170,122                  218,155 Loss      on sale of foreclosed real estate                    4,000                      -                      - Other   
             1,367,548
 
             1,190,153
 
             1,010,994
  Total      Noninterest Expenses
 $          3,777,922
 
 $          3,144,042
 
 $          2,734,854

Noninterest expensesincreased during 2002 by $633,880 or 20.2% compared to 2001.  This increase was primarily due to an increase in salaries andemployee benefits of $383,522 and an increase in other expenses of $177,395.

-25-
   **Management’s Discussion and Analysis****Table 4 – Sources of Noninterest Expense (Continued)**
Noninterest expensesincreased during 2001 by $409,188 or 15% compared to 2000.  This increase was primarily due to an increase in salaries andemployee benefits of $270,383 and an increase in other expenses of $179,159.

The overhead ratio ofnoninterest expense to operating income decreased from 56.52% in 2001 to 54.61% for the year ended December 31,2002. 

**Analysis of Financial Condition**

**Table 5 – Average Asset Mix ($ in thousands)**
     For      the years ended December 31,     
2002
 
2001
     Average   Average       
Balance
 
%
 
Balance
 
%
            **Earning      assets:**                 Loans, net         $         94,992 74.89%  $         77,025 74.87%        Investment securities                  19,458       15.34%            16,356       15.90%        Federal funds sold                     4,600       3.63%              2,681       2.61%        Interest-bearing bank      balances      
                   -      
 
0.00%
 
                124      
 
0.12%
            Total earning assets       
          119,050      
 
93.86%
 
           96,186      
 
93.49%
             **Nonearning      assets:**                Cash and due from      banks                    3,775       2.81%              2,780       2.81%        Property and equipment                    2,173       1.71%              2,012       1.96%        Other real estate      owned                        13       0.01%                    1       0.00%        Other assets        
             1,828      
 
1.44%
 
             1,901      
 
1.85%
           Total nonearning      assets       
             7,789      
 
5.97%
 
             6,694      
 
6.61%
                       Total assets        
 $       126,839
 
100.00%
 
 $       102,880
 
100.00%

Average earning assetsincreased 23.15% from December 31, 2001 to December 31, 2002.  Total earning assets represent 93.86% of total average assetsat December 31, 2002 compared to 93.49% at December 31, 2001.  For 2002, average loans represented 74.89% of total averageassets compared to 74.87% for 2001.  Investments decreased from 15.90% in 2001 to 15.47% in 2002.  The percent mix ofaverage assets of loans and investments have changed minimally from 2001 to 2002.

**Loans**

***Types ofLoans***. The loan portfolio is dominated by real estate loans, which made up 70% of the total loan portfolio atDecember 31, 2002.  Commercial loans accounted for 15% of the loan portfolio, which are generally made to provide operatinglines of credit, to finance the purchase of inventory or equipment and for other business purposes.  Consumer loans accountedfor 11% of the loan portfolio as of December 31, 2002. Consumer loans are made primarily for vehicle purchases, home improvements,personal needs and overdraft protection.  The amount of loans outstanding by type at December 31, 2002 and 2001 is presentedin Table 6.

-26-
   **Management’s Discussion and Analysis**
**Table 6 – Loan Portfolio Summary ($ in thousands)**
     
At      December 31,
     
2002
 
2001
     
Amount
 
%
 
Amount
 
%
 Construction      and development  $            5,341 5.34%  $            3,269 3.77% 1-4      family residential               29,319 29.32%              26,129 30.10% 5      or more family residential                2,890 2.89%                  739 0.85% Farmland                  3,022 3.02%                3,434 3.96% Nonfarm,      nonresidential 
             29,650
 
29.66%
 
             23,969
 
27.62%
          Total real estate              70,222 70.23%              57,540 66.29%             Agriculture                 3,584 3.58%                1,785 2.06% Commercial      and industrial              14,997 15.00%              16,487 18.99% Consumer               11,034 11.04%              10,922 12.58% Other  
                 145
 
0.15%
 
                   63
 
0.07%
  Total  
 $          99,982
 
100.00%
 
 $          86,797
 
100.00%

***Maturities and Sensitivities to Changes in InterestRates****. * Total loans as of December 31, 2002 are shown in the following table according to type andcontractual maturity classifications of (i) one year or less, (ii) one year to five years and (iii) over five years.

**Table 7 – Maturity Schedule of Loans ($ in thousands)**
Commercial/Financial/Agricultural             One      year or less      
 $
  11,820 After      one through five years   6,261 After      five years    
  
500  Total    
 $
      18,581       
 
Real      Estate - Construction    
          One      year or less    
 $
      5,081 After      one through five years   260 After      five years    
 -
  Total    
 $
       5,341       
 
        The      following table summarizes loans at December 31, 2002 with the due dates      after one year that have  predetermined      and floating or adjustable interest rates (dollars in thousands):          Predetermined      interest rates    $      3,820 Floating      or adjustable interest rates  3,201  Total    
 $
      7,021       
 
        
Actual repayments of loans may differ from contractual maturities reflected above becauseborrowers have the right to prepay obligations with and without prepayment penalties.  Additionally, the refinancing of suchloans or the potential delinquency of such loans could also cause differences between the contractual maturities reflected aboveand the actual repayment of such loans.

-27-
   **Management’s Discussion and Analysis**
Interest rates charged on loans vary with the degree of risk, maturity and amount of theloan.  Competitive pressures and availability of funds influence interest rates.  On average, loans yielded 7.69% for theyear ended December 31, 2002 compared to an average yield of 9.42% in 2001.

**Investment Securities**

The Company uses its investment portfolio as a source of income in addition to its loanincome and also as a source of liquidity for unexpected deposit decreases.

The investment portfolio is a conservative portfolio consisting mostly of U.S. governmentagencies and mortgage-backed securities.  In purchasing investments, management not only considers the income to be generated,but also the liquidity needs of the Company.  Since all the investments are classified as available for sale, management doeshave the option to sell securities prior to their maturity if the need arises.

The investment portfolio yielded the Company an approximate yield of 5.13% in 2002compared to 5.27% in 2001.

**Table 8 – Investment Securities ($ in thousands)**

The following table summarizes the maturity of the Bank’s investment securities andweighted average yield at December 31, 2002.

**December 31, 2002, Available for Sale**
   In      One One      Year After      Five        Year Through Five Through After      Ten      
or      Less
 
Years
 
Ten      Years
 
Years
 
Total
 **Investment      securities:**            U.S.      Treasuries  -    $                324 -   -    $            324 U.S.      Government agencies   $         1,039                 8,140  $          1,054 -              10,233 Mortgage-backed      securities  -                   1,159              1,415  $          2,060             4,634 State      and municipal securities                100                    443                553                165             1,261 Corporate      debt securities  -                   2,646                560    -             3,206 Equiity      securities  
-  
 
-  
 
-  
 
               367
 
               367
          Total   
 $         1,139
 
 $            12,712
 
 $          3,582
  
             2,592
 
 $        20,025
              **Weighted      average yields:**            U.S.      Treasuries  -    2.02% -    -    2.02% U.S.      Government agencies  5.52% 3.82% 5.39% -    4.11% Mortgage-backed      securities    6.95% 5.28% 4.74% 5.64% State      and municipal securities  6.82% 6.15% 6.57% 6.95% 6.00% Corporate      debt securities  
-   
 
6.16%
 
6.45%
 
-   
 
6.21%
          Consolidated  
5.63%
 
4.63%
 
5.69%
 
4.91%
 
4.90%
 
-28-
   **Management’s Discussion and Analysis**
**Table 8 – Investment Securities(continued) ($ in thousands)**

**December 31, 2001, Available for Sale**
   In      One One      Year After      Five       Year Through      Five Through After      Ten     
or      Less
 
Years
 
Ten      Years
 
Years
 
Total
**Investment      securities:**           U.S.      Government agencies   $           511  $            3,254  $         4,474 -    $        8,239Mortgage-backed      securities                179                1,512            1,280  $        3,281            6,252State      and municipal securities  -                     102               945               157            1,204Corporate      debt securities  -                  2,334            1,048 -              3,382Other      securities  
              300
 
-  
 
-  
 
-  
 
              300
         Total   
 $           990
 
 $            7,202
 
 $        7,747
  
 $        3,438
 
 $      19,377
            **Weighted      average yields:**           U.S.      Government agencies  5.45% 5.15% 4.20% -    
4.60%
Mortgage-backed      securities  6.29% 6.88% 6.03% 5.23% 
5.82%
State      and municipal securities  -    4.37% 4.03% 4.38% 
4.10%
Corporate      debt securities  -    6.33% 6.29% -    
6.33%
Other      securities  
5.82%
 
-   
 
-   
 
-   
 
5.82%
         Consolidated  
6.12%
 
5.95%
 
4.74%
 
5.18%
 
5.27%

The following table summarizes the book value and market value and distribution of theBank’s investment securities as of the dates indicated.  All securities held at December 31, 2002 and 2001 werecategorized as available for sale.
 
 

At December 31,
 
 

2002
 
2001
 
 

Book Value
 
Market Value
 
Book Value

 

Market Value
  
*(dollars in thousands)*

U.S. Treasuries
 
    $     321
 
    $       324
 
                 -
 
                  -

U.S. Government   Agencies
 
      10,056
 
       10,233
 
   $    8,181
 
     $    8,241

Mortgage-backed   Securities
 
         4,482
 
          4,634
 
         6,183
 
            6,251

State and municipal   Securities
 
         1,204
 
          1,261
 
         1,212

           1,203

Corporate debt   Securities
 
         3,045
 
          3,206
 
         3,320

           3,382

Other securities
 
           367
 
            367
 
           300

            300

Total
 
    $19,475
 
    $  20,025

   $  19,196

     $  19,377

-29-
   
**Management’s Discussion and Analysis**

Federal funds sold averaged $4,600,000 for the year ended December 31, 2002 compared to$2,681,000 for 2001.  Federal funds are the Company’s most liquid asset and the lowest yielding portion of earningassets.  Management makes every effort to maintain federal funds at the lowest level possible and still maintain enough fundsfor loan demand.

**Deposits**

The Bank relies on deposits generated in the market area to provide the majority of fundsneeded by the Company to fund loans and invest in liquid assets.  The Bank specifically relies on core deposits as the primaryfunding source.

There was a 24.2% increase in total deposits at December 31, 2002 from December 31,2001.  The largest growth was an increase of $14,000,000 in certificates of deposit over $100,000.  The Bank also hasstrong noninterest-bearing deposits, which represented 14.4% of total deposits at December 31, 2002 and 18.0% at December 31,2001.

The average amounts outstanding and the average rate paid on interest-bearingdeposits for the periods indicated are presented below.

**Table 9 – Average Deposits ($ in thousands)**
  
December      31, 2002
 
December      31, 2001
  
Balance
 
%
 
Balance
 
%
**Interest-bearing      deposits:**               Now Accounts $               11,287 1.03%  $                   8,044 2.21%       Money Market                         11,592 1.98%                         10,096 2.98%       Savings                           6,691 1.45%                           4,187 2.33%       Small denomination certificates                         35,209  3.56%                         34,126 5.67%       Large denomination certificates 
                        33,364
 
3.51%
 
                        21,168
 
5.96%
         Total interest-bearing deposits 
 $             98,143
 
2.92%
 
 $               77,621
 
4.86%

Table 10 provides a maturity schedule for certificates of deposit of $100,000 and over atDecember 31, 2002.

**Table 10 – Large Time Deposit Maturities ($ in thousands)**

Analysis of time deposits for $100,000 or more at December 31, 2002:
        Remaining maturity of three months or less    $              11,344        Remaining maturity of three through six months                      9,590        Remaining maturity six months through twelve months                  16,309        Remaining maturity over twelve months    
                   6,782
          Total time deposits of $100,000 or more   
 $              44,025

Even though the Company has seen a large increase in large deposits, management has notaggressively solicited the more volatile deposits.  The strategy of management is to fund loan and investment growth withlargely core deposits.

-32-
   
**Nonperforming and Problem Assets**

There are certain credit risks associated in making loans.  Management assesses theserisks and attempts to manage them effectively.  The Company adheres to internal loan policies and procedures to reduce therisks associated with lending.  The policies include officer and customer limits, with anything outside the officer’slimit being approved by the Loan Committee of the Board of Directors.  The Company has documentation software in place to helptrack documentation exceptions by officer.

**Table 11 – Nonperforming Assets ($ in thousands)**

The following table contains information concerning the outstanding balances ofnonperforming assets at December 31 for the past five years.
     
2002
 
2001
 
2000
 
1999
 
1998
 Nonaccrual       loans   $            496  $            357  $            466  $            102  $            136 Loans      past due over 90 days and                    still accruing  
235
 
94
 
65
 
3
 
 54
               Total   
 $            731
 
 $            451
 
 $            531
 
 $            105
 
 $            190

Nonaccrual loans were .50% and .41% of outstanding loans at December 31, 2002 and 2001,respectively.

The reduction in interest income associated with nonaccrual loans is asfollows:
     
2002
 
2001
 
2000
 
1999
 
1998
 Interest      income that would have been                    recorded on nonaccrual loans under                  original terms  
 $              51
  $              33  $              14  $                2  $                2               Interest      income actually recorded on                  nonaccrual loans  
48
  
20
 
10
 
                   -
 
                   -
                Reduction      in interest income 
 $                3
 
 $              13
 
 $                4
 
 $                2
 
 $                2

 It is thegeneral policy of the Bank to stop accruing interest income and place the recognition of interest on a cash basis when anycommercial, consumer or real estate loan is past due as to principal or interest, and the ultimate collection of either is indoubt.  Accrual of interest income on consumer installment loans is suspended when any payment of principal or interest, orboth, is more than 90 days delinquent.

**Credit Losses**

The allowance for loan losses is established to provide for expected losses in theCompany’s loan portfolio.  Loan losses and recoveries are charged or credited directly to the allowance. Management determines the provision for loan losses required to maintain an allowance adequate to provide for probablelosses.  Generally, the factors considered in making this decision are the collectibility of past due loans, volume of newloans, composition of the loan portfolio and general economic outlook.  The Company has two methods for analyzing the reserve:the historical method (past trend percentage plus classified loan percentage) and the one percent method (one percent of totalloans plus classified loan percentage).  Based on the two methods, the Company believes that the reserve is adequate at thistime.

The provision for loan losses and the activity in the allowance for credit losses aredetailed in Table 12.

-33-
   **Management’s Discussion and Analysis****Table 12 – Credit Losses ($ in thousands)**    For      the years ended December 31,    
2002
 
2001
 
2000
 
1999
 
1998
Average      Loans Outstanding $           96,252 $           77,025 $           59,309 $           50,411 $           42,452              Allowance      at beginning of period 1,073 793 858 767 724            Loans      Charged off: 
                                -      
  -        -        -      
  Commercial      & Agricultural 345           -       40 40 65 Real      Estate - Construction                                 -               -                -         -          -       Real      Estate - Other 221 37 35                         -         -       Installment      & Other Consumer 
91
 
205
 
239
 
118
 
99
  Total  
657
 
242
 
314
 
158
 
164
               Recoveries      on loans previously charged off          Commercial      & Agricultural 225    -               -          -       11  Real      Estate - Construction     -          -               -          -         -       Real      Estate - Other 21 27 57 26 92 Installment      & Other Consumer 
44
 
70
 
22
 
40
 
26
  Total 
290
 
97
 
79
 
66

129
             Net      Charge-offs  
367
 
145
 
235
 
92

35
             Additions      to Allowance charged to            Operations 
720
 
425
 
170
 
183
 
78
             Balance      at year-end 
 $                1,426
 
 $             1,073
 
 $                793
 
 $                858
 
 $                767

Management allocated the reserve for loan losses to specific loan classes as follows ($ inthousands): 
  
At      December 31,
  
2002
 
2001
    Percent of   Percent of    Loans in   Loans in    Category to   Category to  
Amount
 
Total Losses
 
Amount
 
Total Losses
Real      estate - Construction 
 $              43
 3%        
 $              32
 3%Real      estate - Mortgage 856 60%  676 63%Commercial      and agricultural 285 20%  225 21%Consumer 
242
 17% 
140
 13%  
 $         1,426
   
 $         1,073
  
 

-34-
   
**Management’s Discussion and Analysis**

The Bank’s allowance for loan losses is also subject to regulatory examinations anddeterminations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loanlosses and the size of the allowance for loan losses in comparison to a group of peer banks identified by the regulators. During their routine examinations of banks, regulatory agencies may require a bank to make additional provisions to its allowancefor loan losses when, in the opinion of the regulators, credit evaluations and allowance for loan loss methodology differmaterially from those of management.

**Commitments and Lines of Credit**

 In theordinary course of business, the Bank has granted commitments to extend credit and standby letters of credit to approvedcustomers.  These commitments are recorded in the financial statements when they are funded.  Commitments generally havefixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments expirewithout being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The following tablesummarizes the commitments outstanding at December 31, 2002 and 2001:

($ in thousands)

2002
 
2001

Commitments to extend credit

$         10,764
 
$         11,435

Standby letters of credit

 855
 
682
 
$         11,619
 
$         12,117

Commitments toextend credit include unused commitments for open-end lines secured by real estate, marketable securities, accounts receivable,crops, inventory, equipment and personal property.  Commitments and standby letters of credit decreased by $497,000 fromDecember 31, 2001 to December 31, 2002, a decrease of 4.10%.

**Liquidity**

 Liquidityrepresents the ability to meet the needs of customers to withdraw funds from deposit accounts, to borrow funds and to meet theircredit needs.  The Bank manages its liquidity needs in such a way that the needs of depositors and borrowers are met on atimely basis so that the operations of the Bank are not interrupted.  While the Bank looks primarily to core deposits as itsprincipal source of liquidity, Federal funds, securities available for sale, maturities of securities, and principal payments onloans are also available to meet the Bank’s liquidity needs.  Access to funds through relationships with correspondent banksprovides an additional source of liquidity.  Liquidity needs at the Bank can also be met through loan participations sold toother financial institutions.

The table below presents the pertinent liquidity balances and ratio for the periods endedDecember 31, 2002 and 2001.
 
December 31,

               ($ inthousands)

2002
 
2001
      
        Cash and due from banks

$
3,991
 $
 6,021

        Federal funds sold
 
  13,225 
  
    -

        Investment securities
 
  20,025
  
  19,377

        Time deposits over $100,000           to total depositsratio
 
              ..34
  
 .29

        Loan to deposit ratio
 
              ..78
  
                .83

-35-
   
Cash and due from bankstotaled $4,000,000 at December 31, 2002, a decrease of 33.72% compared to 2001.  The Bank had federal funds sold at December31, 2002 of $13,230,000, and none at December 31, 2001.  Federal funds are the Bank’s most liquid interest earning asset, butprovide the lowest yield of earning assets.  Management makes every effort to maintain federal funds at the lowest levelpossible and still maintain enough funds for loan demand.

At December 31, 2002, the liquidity position of the Bank was considered by management ofthe Bank to be adequate.  Management knows of no trends, demands, commitments, events or uncertainties that are reasonablylikely to result in the Company’s liquidity increasing or decreasing in any material way in the foreseeable future.

**Asset and Liability Management**

 It is theBank’s objective to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the frameworkof established cash, loan, investment, borrowing, and capital policies.  Certain officers of the Bank are charged with theresponsibility for monitoring policies and procedures that are designed to ensure acceptable composition of the asset/liabilitymix.

The Bank’sasset/liability mix is monitored on a regular basis with a report reflecting the interest rate sensitive assets and interest ratesensitive liabilities prepared and presented to the board of directors of the Bank and the Bank’s Asset/Liability Committee on aquarterly basis.  This process allows the Bank to monitor interest rate sensitive assets and liabilities so as to minimize theimpact of substantial movements in interest rates on earnings.  An asset or liability is considered to be interest ratesensitive if it will reprice or mature within the time period analyzed, usually one year or less.  The interest ratesensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature orreprice within such time period.  A gap is considered positive when the amount of interest rate sensitive assets exceeds theamount of interest rate sensitive liabilities.  A gap is considered negative when the amount of interest rate sensitiveliabilities exceeds the interest rate sensitive assets.  During a period of rising interest rates, a negative gap would tendto adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income,while a positive gap would tend to adversely affect net interest income.  If the Bank’s assets and liabilities were equallyflexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would beminimal.

A simple interest rate“gap” analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interestrates.  Accordingly, the Bank 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 react in different degrees to changes in market interest rates.  Interest rateson certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on othertypes may lag behind changes in general market rates.  In addition, certain assets, such as adjustable rate mortgage loans,have features (generally referred to as “interest rate caps”) which limit changes in interest rates.  Prepayment and earlywithdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap.  The ability ofmany borrowers to service their debts also may decrease in the event of an interest rate increase.

-36-
   
The following table summarizes interest-sensitive assets and liabilities for the Bank asof December 31, 2002. 

**Table 13 – Interest Rate Sensitivity ($ in thousands)**
  
Maturing      or Repricing within
ASSETS      SUBJECT TO INTEREST RATE 3 Months 3 to 12      ADJUSTMENT      WITHIN TIME HORIZON 
or Less
 
Months
 
1 to 5 Years
 
Over 5 Years
 
Total
                                     Loans $       25,839  $           28,293  $        41,888 $          3,961  $           99,981Securities 100  1,039  12,727 6,174  20,040Federal      Funds Sold and Repos 
13,225 
 
               - 
 
                          -
 
       - 
 
13,225
         Total Interest Earning Assets 
39,164 
 
29,332 
 
54,615
 
10,135 
 
133,246
           Non-interest      Earnings Assets 
         - 
 
   - 
 
                          -
 
6,250 
 
6,250
                           TOTAL 
$  39,164 
 
$           29,332 
 
$    4,615
 
$   16,385 
 
$        139,496
           LIABILITIES      SUBJECT TO INTEREST RATE          ADJUSTMENT      WITHIN TIME HORIZON                     NOW      & Money Market Accounts $         22,213             -                            - 
 - 
 $            22,213           Other      Savings Accounts 6,892  
      - 
                           - 
        - 
 6,892           Time      Deposits $100M & Over 11,345  
$             25,898 
 
$            6,782
 
   - 
 44,025           Time      Deposits Less Than $100M 7,285  23,890  5,382 
 - 
 36,557           Other      Borrowings 
3 
 
11 
 
69
 
356 
 
439
                    Total Interest bearing Liabilities 47,738  49,799  12,233 356  110,126           Interest      free deposits 
                            - 
 
                             - 
                           - 18,455  18,455           Other      Interest free liabilities & Equity 
                            - 
 
                             - 
                           - 10,915  10,915                          TOTAL 
$       47,738 
 
$            49,799 
 
$    2,233
 
$           29,726
 
$    139,496
           Interest      Sensitivity Gap $   (8,574) $           (20,467) $   42,382 $        (13,341)                           -           Cumulative      Gap $   (8,574) $           (29,041) $   13,341                           -                            -            Net      Interest Rate Sensitivity Gap                   as a Percent of Interest Earning Assets (21.9) (69.8) 77.6 (81.4)                           -           Cumulative      Gap as a Percent of Cumulative (21.9) (42.4) 10.8                           -                            -         Interest earning Assets          
-37-
   
As evidenced by the table above, the Bank is cumulatively liability sensitive withinone year. Beyond one year, the bank is cumulatively asset sensitive, and is particularly asset sensitive in the range of one tofive years.  In a rising interest rate environment, an asset sensitive position indicated by a positive gap, is generally moreadvantageous as earning assets are repriced sooner than the liabilities.  Conversely, in a declining interest rateenvironment, a liability sensitive position, indicated by a negative gap, is generally more advantageous since liabilities arerepriced sooner than assets.

**Capital Adequacy**

 The Bankis subject to minimum capital standards set forth by the federal bank regulatory agencies.  The Bank’s capital for regulatorypurposes differs from the Bank’s equity as determined under generally accepted accounting principles.  Generally,“Tier 1”regulatory capital will equal capital as determined under generally accepted accounting principles less any unrealized gains orlosses on securities available for sale while “Tier 2” capital includes the allowance for loan losses up to certainlimitations.  Total risk based capital is the sum of Tier 1 and Tier 2 capital.  The Bank’s capital ratios and therequired minimums at December 31, 2002 are shown below: 

MinimumRegulatory Requirement

Actual

Total capital to risk adjusted assets..................

8.00

11.18

Tier I capital to risk adjusted assets.................

4.00

9.92

Tier I leverage ratio (to average assets)............

4.00

7.24

Total capital of the Bank also has an important effect on the amount of FDIC insurancepremiums paid.  Institutions not considered well capitalized are subject to higher rates for FDIC insurance.

**Effect of Inflation**

 Inflationimpacts the growth in  total assets in the banking industry and causes a need to increase equity capital at higher than normal ratesto meet capital adequacy requirements.  The Bank addresses the effects of inflation through effectively managing its interestrate sensitivity gap position, by periodically reviewing and adjusting its pricing of services to consider current costs, andthrough managing its dividend payout policy relative to its level of net income.  The impact of inflation has been minimal tothe Bank in recent years.

**ITEM 7.          FINANCIALSTATEMENTS**

The audited consolidated financial statements of the Company, including the notes thereto,and the report of  Dabbs, Hickman, Hill & Cannon, LLP are included in this Report beginning at page F-1 and areincorporated herein by reference.

**ITEM 8.         CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON                        ACCOUNTING AND FINANCIAL DISCLOSURE**

Not applicable.

-38-
   **PART III**
**ITEM 9.         DIRECTORS, EXECUTIVEOFFICERS, PROMOTORS AND CONTROL                        PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT**

The  information appearing under the headings “Election of Directors,”“Executive Officers” and “Section 16(a), Beneficial Ownership Reporting Compliance” in the Proxy Statement(the “2003 Proxy Statement”) relating to the annual meeting of shareholders of the Company, scheduled to be held onMay 22, 2003, is incorporated herein by reference.

**ITEM 10.        EXECUTIVECOMPENSATION**

The information appearing under the heading “Executive Compensation” in the2003 Proxy Statement is incorporated herein by reference.

**ITEM 11.       SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND                        MANAGEMENT**

The informationappearing under the heading “Principal Shareholders” in the 2003 Proxy Statement is incorporated herein byreference.

**ITEM 12.        CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

The information appearing under the caption “Certain Relationships andTransactions” in the 2003 Proxy Statement is incorporated herein by reference.

-39-
   **ITEM 13.        EXHIBITS AND REPORTS ON FORM8-K**
(a)        Exhibits.  Periodic reports,registration statements and other information filed by the Company with the SEC pursuant to the informational requirements of theSecurities Act of 1993, as amended, and the Securities Exchange Act of 1934, as amended, may be inspected and copied at the SEC’sPublic Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549, and the public may obtain information on the operation ofthe Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC also maintains an Internet site (http://www.sec.gov)that makes available reports, proxy statements and other information regarding the Company.

Exhibit No.

Description

2.1

 Plan 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)).

3.1

 Articles of Incorporation of FMB Equibanc,Inc. (Incorporated herein by reference to Exhibit 3.1 of the Company’s Report on Form 8-K filed on February 27, 2001 (CommissionFile No. 000-32399)).

3.2

 Bylaws of FMB Equibanc, Inc. (Incorporated hereinby reference to Exhibit 3.2 of the Company’s Report on Form 8-K filed on February 27, 2001 (Commission File No.000-32399)).

10.1

 1998 NonqualifiedStock Option. (Incorporated by reference to Exhibit 10.1 of the Company’s Annual Report on Form 10-KSB for the year endedDecember 31, 2000 (Commission File No. 000-32399)).

10.2

 Form of DirectorDeferred Compensation Agreement. (Incorporated by reference to Exhibit 10.2 of the Company’s Annual Report on Form 10-KSB forthe year ended December 31, 2000 (Commission File No. 000-32399)).

10.3*

 Employment Agreement by andbetween Farmers & Merchants Bank and Charles R. Nessmith.

21.1

 Subsidiaries of theRegistrant. (Incorporated by reference to Exhibit 21.1 of the Company’s Annual Report on Form 10-KSB for the year endedDecember 31, 2000 (Commission File No. 000-32399)).

99.1

 Certificationpursuant to 18 U. S. C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002 (filed herewith)

*Compensation Plan or arrangement required to be listed as an Exhibit to Form10-KSB.

(b)        Reports on Form 8-K.

None.

**ITEM 14.        CONTROLS ANDPROCEDURES**

As required by SEC rules, we have evaluated the effectiveness of the design and operationof our disclosure controls and procedures within 90 days of the filing date of this quarterly report. This evaluation was carriedout under the supervision and with the participation of our management, including our principal executive officer and principalfinancial officer.  Based on this evaluation, these officers have concluded that the design and operation of our disclosurecontrols and procedures are effective.  There were no significant changes to our internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of their evaluation.

-40-
   
Disclosure controls andprocedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periodsspecified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act isaccumulated and communicated to our management, including our principal executive officer and principal financial officer, asappropriate, to allow timely decisions regarding required disclosure.

-41-
   
**SIGNATURES**

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

Dated:  March    28  , 2003

FMB EQUIBANC, INC.

By:/s/ Charles R.Nessmith        Charles R. Nessmith      President and Chief Executive Officer      (Principal Executive Officer)
****
-42-
   
In accordance with theExchange 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     28  , 2003
   
/s/ Dwayne E.Rocker                     Dwayne E. Rocker

Secretary(principal financial andaccounting officer)

March     28  , 2003
   
/s/ Frank C.Rozier                           

Chairman of the Board of Directors

March     28  , 2003

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

Director

March     28  , 2003
   
/s/ F. WendellBrannen                  

Director

March     28  , 2003

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

Director

March     28  , 2003
   
/s/ Gerald M.Edenfield                  

Director

March     28  , 2003

Gerald M. Edenfield
     
/s/ WilliamHatcher                         

Director

March     28  , 2003

William Hatcher
     
/s/ Billy G.Tyson                            

Director

March     28  , 2003

Billy G. Tyson
     
-43-
   
CERTIFICATION

I, Charles R. Nessmith, certify that:

1.          I have reviewed this annual report on Form 10-KSB of FMB Equibanc, Inc.;

2.          Based on my knowledge, this annual report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annual report;

3.          Based on my knowledge, the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report; 

4.          The registrant’s other certifying officer and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

a)          Designed such disclosure controls and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this annual report is being prepared;

b)          Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c)          Presented in this annual report our conclusions about the effectiveness of the disclosure controlsand procedures based on our evaluation as of the Evaluation Date;

5.          The registrant’s other certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

a)          All significant deficiencies in the design or operation of internal controls which could adverselyaffect the registrant’s ability to record, process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

b)          Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6.          The registrant’s other certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

Date:  March 28, 2003

/s/ Charles R.Nessmith                        Charles R. NessmithPresident and Chief Executive Officer

-44-
   
CERTIFICATION

I, Dwayne E. Rocker, certify that:

1.         I have reviewed this annual report on Form 10-KSB of FMB Equibanc, Inc.;

2.         Based on my knowledge, this annual report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annual report;

3.         Based on my knowledge, the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report; 

4.         The registrant’s other certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

a)         Designed such disclosure controls and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this annual report is being prepared;

b)         Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c)         Presented in this annual report our conclusions about the effectiveness of the disclosure controlsand procedures based on our evaluation as of the Evaluation Date;

5.         The registrant’s other certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

a)         All significant deficiencies in the design or operation of internal controls which could adverselyaffect the registrant’s ability to record, process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

b)         Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6.         The registrant’s other certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

Date:  March 28, 2003

/s/ Dwayne E.Rocker                            Dwayne E. Rocker      Secretary

-45-
   
**FMB EQUIBANC, INC.**

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED

DECEMBER 31, 2002, 2001 AND 2000
   **TABLE OF CONTENTS** 
 
Page   
Independent Auditor’s Report
 
F-2
   
Consolidated Balance Sheets
 
F-3
   
Consolidated Statements of Income
 
F-4
   
Consolidated Statements of Changes in Stockholders’ Equity
 
F-5
   
Consolidated Statements of Cash Flows
 
F-6
   
Notes to Consolidated Financial Statements
 
F-7

F-1
   ***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-2
   
**FMB      EQUIBANC, INC. AND SUBSIDIARY**
     
CONSOLIDATED      BALANCE SHEETS
     
A      S S E T S
       DECEMBER      31, DECEMBER      31, 
2002
 
2001
Cash      and due from banks
$
   3,991,014
 
 $
  6,021,185
Federal      funds sold 13,225,000  - Investment      securities available for sale, at fair value 20,024,824  19,377,441Loans,      less allowance for loan losses of $1,426,081 and         $1,073,186 98,555,851  85,724,307Bank      premises and equipment, net 2,187,433  2,065,651Accrued      interest receivable 1,156,784  1,347,766Deferred      income taxes 66,535  191,732Other      assets
292,915
 
357,082
                            TOTAL ASSETS
 $
 139,500,356
 
$
 115,085,164
 
 
 
 
      
L      I A B I L I T I E S    A      N D 

S      T O C K H O L D E R S'    E      Q U I T Y
      Deposits            Demand
 $
   18,455,406
 
 $
   18,573,297
       Money market and NOW accounts 22,213,360  20,241,212       Savings 6,891,621  5,116,169       Time deposits, $100,000 and over 44,024,881  29,867,632       Other time deposits
36,557,119
 
29,355,794
                      Total deposits 128,142,387  103,154,104       Accrued      interest payable 289,111  348,906Income      taxes payable                               -  209,091Federal      funds purchased                               -  1,763,000Federal      Home Loan Bank advances 438,601   451,623Other      liabilities
263,733
 
298,813
                      Total liabilities
129,133,832
 
106,225,537
      Commitments      and contingent liabilities           Stockholders'      equity            Common stock, $1 par value; authorized 10,000,000              shares; 362,600 shares issued and outstanding 362,600  362,600       Surplus 3,075,660  3,075,660       Appropriated retained earnings 3,561,740  3,561,740       Unappropriated retained earnings 3,036,425  1,750,810       Accumulated other comprehensive income
330,099
 
108,817
                      Total stockholders' equity
10,366,524
 
8,859,627
                            TOTAL LIABILITIES AND                             STOCKHOLDERS' EQUITY
 $
139,500,356
 
$
115,085,164
 
 
 
 
      
 

F-3
   **FMB      EQUIBANC, INC. AND SUBSIDIARY**       CONSOLIDATED      STATEMENTS OF INCOME         
YEARS      ENDED
  DECEMBER      31, DECEMBER      31, DECEMBER      31,  
2002
 
2001
 
2000
INTEREST      INCOME              Interest and fees on loans 
 $

 7,401,148  $  7,339,762  $ 5,979,620       Interest and dividends on investment              securities 977,003 958,968 996,340       Interest on federal funds sold 
68,577
 
86,607
 
194,534
             Total interest income 
8,446,728
 
8,385,337
 
7,170,494
       INTEREST      EXPENSE             Interest on deposits 2,866,340 3,773,891 3,244,256       Interest on federal funds purchased 3,577 5,403 774       Interest on Federal Home Loan Bank Advances 
26,796
 
127,942
 
49,586
             Total interest expense 
2,896,713
 
3,907,236
 
3,294,616
      NET      INTEREST INCOME 5,550,015 4,478,101 3,875,878       PROVISION      FOR LOAN LOSSES 
720,000
 
425,000
 
170,000
       NET      INTEREST INCOME AFTER            PROVISION FOR LOAN LOSSES 
4,830,015
 
4,053,101
 
3,705,878
       NONINTEREST      INCOME              Service charges on deposit accounts 1,047,451 845,801 674,217       Other service charges, commissions, and fees 291,243 221,218 168,062       Net gain on sales and calls of investment securities 19,726                              -                              -       Other 
16,694
 
17,427
 
13,497
             Total noninterest income 
1,375,114
 
1,084,446
 
855,776
      NONINTEREST      EXPENSES             Salaries and employee benefits 1,964,603 1,581,081 1,310,698       Occupancy expense 209,518 202,686 195,007       Equipment expense 232,253 170,122 218,155       Loss on sale of foreclosed real estate 4,000                              -                              -       Other 
1,369,548
 
1,190,153
 
1,010,994
             Total noninterest expenses 
3,779,922
 
3,144,042
 
2,734,854
       INCOME      BEFORE INCOME TAXES 2,425,207 1,993,505 1,826,800       INCOME      TAXES 
958,292
 
716,059
 
651,723
       NET      INCOME  $      1,466,915 $      1,277,446 $      1,175,077  
 

 

 
   EARNINGS      PER SHARE  $      4.05 $      3.52 $3.24  
 

 
  
F-4
   
**FMB EQUIBANC,        INC. AND SUBSIDIARY**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED        STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYYEARS ENDED        DECEMBER 31, 2002, 2001 AND 2000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
             
Accumulated

 

 

 

 

 

 
Appropriated
 

Unappropriated

 

Other

 

 

Common Stock                                        
Retained

Retained
Comprehensive             
 

Shares

 

Par Value

 

Surplus

 

Earnings

 

Earnings

 

Income

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 1999

362,600

 

$362,600

 

$3,075,660

 

$1,561,740

 

$1,660,887 

 

$(248,941)

 

$6,411,946 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

  Net income

- 

 

- 

 

- 

 

- 

 

1,175,077 

 

-  

 

1,175,077 

  Other comprehensive        income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

    Change in        unrealized losses on investment

 

 

 

 

 

 

 

 

 

 

 

 

 

     securities        available for sale, net of deferred tax              of $140,535

- 

 

- 

 

- 

 

- 

 

-  

 

210,803 

 

210,803 

                 Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

1,385,880 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared, $.50        per share on              362,600 shares

- 

 

- 

 

- 

 

- 

 

(181,300)

 

-  

 

(181,300)

Balance, December 31, 2000

            362,600

 

             362,600

 

            3,075,660

 

            1,561,740

 

               2,654,664 

 

                  (38,138)

 

                 7,616,526 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfers

- 

 

- 

 

- 

 

2,000,000

 

(2,000,000)

 

-  

 

-  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

  Net income

- 

 

- 

 

- 

 

- 

 

1,277,446 

 

-  

 

1,277,446 

  Other comprehensive        income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

     Change in        unrealized gains/losses on investment             securities        available for sale, net of deferred tax             of $97,971

- 

 

- 

 

- 

 

- 

 

-  

 

146,955 

 

146,955 

                 Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

1,424,401 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared, $.50        per share on               362,600 shares

- 

 

- 

 

- 

 

- 

 

                (181,300)

 

-  

 

(181,300)

Balance, December 31, 2001

362,600

 

362,600

 

 3,075,660

 

 3,561,740

 

1,750,810 

 

  108,817 

 

 8,859,627 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

  Net income

- 

 

- 

 

- 

 

- 

 

1,466,915 

 

-  

 

1,466,915 

  Other comprehensive        income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

     Change in        unrealized gains/losses on investment             securities        available for sale, net of deferred tax             of $147,521

- 

 

- 

 

- 

 

- 

 

-  

 

221,282 

 

221,282 

                 Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

1,688,197 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared, $.50        per share on               362,600 shares

- 

 

- 

 

- 

 

- 

 

                (181,300)

 

-  

 

(181,300)

Balance, December 31, 2002

362,600

 

 $   362,600

 

 $  3,075,660

 

 $  3,561,740

 

 $   3,036,425 

 

 $   330,099 

 

 $   10,366,524 

        
        
        
        
        
        
        
 

F-5
   
CONSOLIDATED      STATEMENTS OF CASH FLOWS
               
YEARS      ENDED
  
DECEMBER      31,
  DECEMBER      31, DECEMBER      31,  
2002
 
2001
 
2000
CASH      FLOWS FROM OPERATING ACTIVITIES             Net income        $  1,466,915   $1,277,446   $   1,175,077        Adjustments to      reconcile net income to net                          cash provided by      operating activities:                      Provision for loan      losses       720,000  425,000  170,000            Gain from sales and      calls of available for sale securities, net      (19,726) -   -             Loss from foreclosed      real estate and other repossessions      6,000  -   -             Depreciation       224,194  167,225  197,562            Deferred income taxes       125,197  1,136  6,520            Other, net       -   (45,944) (13,356)           (Increase) decrease in      operating assets:                              Accrued interest      receivable       190,982  (202,530)(337,096)             Refundable income      taxes       -   29,802 (29,802)             Other assets       64,167  (31,460) 55,396            Increase (decrease) in      operating liabilities:                               Accrued interest      payable       (59,795) (228) 27,047              Income taxes payable       (209,001) 209,091  (36,104)             Other liabilities       
(35,170)
 
124,627 
 
(55,069)
               Net cash provided by      operating activities      
2,473,763 
 
1,954,165 
 
1,160,175 
       CASH      FLOWS FROM INVESTING ACTIVITIES             Net (increase)      decrease in federal funds sold       (13,225,000) 3,030,000  1,650,000        Net increase      (decrease) in federal funds purchased       (1,763,000) 1,763,000  -         Purchases of      investment securities available for sale       (15,333,196)       (14,245,657) (2,173,949)       Proceeds from sale and      calls of investment securities                     available for sale       8,632,902  -   -         Matured or redeemed      investment securities                     available for sale       6,240,919  10,702,785  1,482,627        Net increase in loans       (13,551,544) (17,919,288) (15,958,102)       Additions to bank      premises and equipment       (345,976) (287,850) (147,258)       Proceeds from sale of      other real estate       
                    47,000       
 
  -       
 
528,684  
               Net cash used by      investing activities       
(29,297,895)
 
(16,957,010)
 
(14,617,998)
       CASH      FLOWS FROM FINANCING ACTIVITIES             Net increase in      deposits       24,988,283  17,488,420  13,632,946        Increase (decrease) in      Federal Home Loan Bank                     advances       (13,022) (1,712,023) 1,688,897        Dividends paid       
(181,300)
 
(181,300)
 
(181,300)
               Net cash provided by      financing                             activities       
24,793,961 
 
15,595,097 
 
15,140,543 
       NET      INCREASE (DECREASE) IN CASH AND             DUE FROM BANKS       (2,030,171) 592,252   1,682,720        CASH      AND DUE FROM BANKS, JANUARY 1 
6,021,185 
 
5,428,933 
 
3,746,213 
       CASH      AND DUE FROM BANKS, DECEMBER 31  $3,991,014   $6,021,185   $5,428,933  
 
 
 
 

 

 

F-6
   **FMB EQUIBANC, INC. AND SUBSIDIARY**
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001 AND 2000

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

OrganizationFMB Equibanc, Inc. (the Company) was incorporated in Georgia on April 25, 2000 for thepurpose of reorganizing Farmers and Merchants Bank (the Bank) into a one-bank holding company.

Business CombinationsIn business combinations accounted for as pooling of interests, the financial position andresults of operations and cash flows of the respective companies are restated as though the companies were combined for allhistorical periods.

Nature of OperationsThe Company is a one-bank holding company with the Bank as its only subsidiary.  TheBank conducts its banking operations through its main office and a branch office in Statesboro, Georgia and a branch office inBrooklet, Georgia.

Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and theBank.  All material intercompany accounts and transactions have been eliminated in consolidation.  Certain amounts inprevious years have been reclassified to conform to the current year’s presentation.

Use of EstimatesThe preparation of financial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues andexpenses during the reporting period.  Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to thedetermination of the allowance for losses on loans and the valuation of foreclosed real estate.  In connection with thedetermination of the estimated losses on loans and foreclosed real estate, management obtains independent appraisals forsignificant properties.

While management uses available information to recognize losses on loans and foreclosedreal estate, further reductions in the carrying amounts of loans and foreclosed assets may be necessary based on changes in localeconomic conditions.  In addition, regulatory agencies, as an integral part of their examination process, periodically reviewthe estimated losses on loans and foreclosed real estate.  Such agencies may require the Bank to recognize additional lossesbased on their judgments about information available to them at the time of their examination.  Because of these factors, itis reasonably possible that the estimated losses on loans and foreclosed real estate may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

Cash and Cash EquivalentsFor purposes of reporting cash flows, cash and cash equivalents are defined as thoseamounts included in the balance sheet caption “cash and due from banks.”

Investment SecuritiesDebt securities that management has the ability and intent to hold to maturity areclassified as held to maturity and carried at cost, adjusted for amortization of premium and accretion of discounts using methodsapproximating the interest method.  Other marketable securities are classified as available for sale and are carried at fairvalue.

F-7
   **FMBEQUIBANC, INC. AND SUBSIDIARY**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

Investment Securities(Continued)Unrealized gains and losses, net of tax, on securities available for sale are reported inother comprehensive income.  Realized gains (losses) on securities available for sale are included in other income (expense)and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income.  Gains andlosses on sales of securities are determined on the specific identification method.  Declines in the fair value of held tomaturity securities and available for sale securities below their cost that are other than temporary result in write-downs of theindividual securities to their fair value.  The related write-downs are included in earnings as realized losses.

Allowance for Loan LossesThe allowance for loan losses is maintained at a level which, in management’s judgment, isadequate to absorb credit losses inherent in the loan portfolio.  The amount of the allowance is based on management’sevaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends inhistorical loss experience, specific impaired loans, economic conditions, and other risks inherent in the portfolio. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cashflows.  The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs,net of recoveries.

Interest Income on LoansInterest on loans is accrued and credited to income based on the principal amountoutstanding.  Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans.  Theaccrual of interest on loans is discontinued either when reasonable doubt exists as to the full, timely collection of interest orprincipal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal.  When a loanis placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interestincome.  Income on such loan­s is then recognized only to the extent that cash is received and where the future collectionof principal is probable.  Interest accruals are recorded on such loans only when they are brought fully current with respectto interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to bothinterest and principal.

Bank Premises and EquipmentBank premises and equipment are stated at cost.  Depreciation is computed using thestraight-line method over the useful lives of the assets that range from 3 to 40 years.

Foreclosed Real EstateForeclosed real estate, if any, includes both formally foreclosed property andin-substance foreclosed property.  In-substance foreclosed properties are those properties for which the bank has takenphysical possession, regardless of whether formal foreclosure proceedings have taken place.

At the time of the foreclosure, foreclosed real estate is recorded at the lower of thecarrying amount or fair value less cost to sell, which becomes the property’s new basis.  Any write-downs based on the asset’sfair value at date of acquisition are charged to the allowance for loan losses.  After foreclosure, property held for sale iscarried at the lower of the new cost basis or fair value less cost to sell.  Costs incurred in maintaining foreclosed realestate and subsequent adjustments to the carrying amount of the property are included in income (loss) on foreclosed realestate.

Advertising CostsAdvertising costs are expensed as incurred.  Advertising expense for the years endedDecember 31, 2002, 2001 and 2000 was $69,167, $95,797, and $111,952, respectively.

F-8
   **FMBEQUIBANC, INC. AND SUBSIDIARY**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

Income TaxesIncome taxes are provided for the tax effects of the transactions reported in thefinancial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis ofavailable for sale securities, allowance for loan losses, deferred compensation and accumulated depreciation for financial andincome tax reporting.  The deferred tax assets and liabilities represent the future taxreturn consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recoveredor settled.  Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which thedeferred tax assets or liabilities are expected to be realized or settled.  As changes in tax laws or rates are enacted,deferred tax assets and liabilities are adjusted through the provision for income taxes.

Earnings Per ShareEarnings per share of common stock is computed by dividing net income by the weightedaverage number of shares outstanding during the year.

Off-Balance Sheet Financial InstrumentsIn the ordinary course of business, the Bank has entered into off-balance sheet financialinstruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of creditand standby letters of credit.  Such financial instruments are recorded in the financial statements when they are funded orrelated fees are incurred or received.

**NOTE 2 - BUSINESS COMBINATION**

On November 1, 2000, the Bank reorganized into a one-bank holding company structure,becoming a wholly owned subsidiary of the Company.  The reorganization was accomplished through the merger of FMB InterimCorp., a Georgia Corporation and a wholly owned subsidiary of the Company (“Interim”), with and into the Bank, underthe charter of the Bank and with the name of the Bank.  Each outstanding share of Farmers and Merchants Bank’s commonstock was converted into and exchanged for one share of the Company’s common stock.  The merger was accounted for as apooling of interests, and accordingly, all historical financial information for the Company has been restated to include Farmersand Merchants Bank’s historical information for all periods presented herein.

****

F-9
   **FMBEQUIBANC, INC. AND SUBSIDIARY**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

**NOTE 3 - INVESTMENT SECURITIES**Investment securities have been classified according to management’s intent.  Theamortized cost and fair values of investment securities are as follows:
      Gross Gross    Amortized Unrealized Unrealized     
Cost
 
Gains
 
Losses
 
Fair Value
 **Securities available for      sale**                   December 31, 2002:         U. S. government agencies      obligations 
 $ 

      10,056,150  $      176,180                        -  $      10,232,330 U. S. government treasury      securities 321,122               2,971                        - 324,093 Mortgage-backed securities 4,481,613            153,152                        - 4,634,765 State and municipal securities 1,203,521 57,870                        - 1,261,391 Corporate debt securities 3,045,458 166,031 
 $

      5,769
 3,205,720 Other securities 
366,525
 
                     -
 
                       -
 
366,525
    $      19,474,389 $
      556,204 $      5,769 $      20,024,824   
  
  
  
  December 31, 2001:         U. S. government agencies      obligations  $      8,180,809 $      84,038  $      23,965 $      8,240,882 Mortgage-backed securities 6,183,117 
             85,999
 17,867 6,251,249 State and municipal securities 1,211,502 1,801 9,818 1,203,485 Corporate debt securities 3,320,525 73,469 12,2943,381,700 Other securities 
300,125
 
                     -
 
                       -

300,125
    $      19,196,078  $      245,307 $      63,944 $      19,377,441    
  
  
  
 
The scheduled maturities of securities available for sale at December 31, 2002are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call orprepay obligations with or without call or prepayment penalties.
   
Securities      Available for Sale
   Amortized Fair   
Cost
 
Value
 Due in      one year or less 
 $
   1,100,000 
 $
   1,138,750 Due      from one year through five years 
11,288,987
 
11,552,661
 Due in      more than five years 
2,237,264
 
2,332,123
   
14,626,251
 15,023,534 Mortgage-backed      securities 
4,481,613
 4,634,765 Other      securities 
366,525
 
366,525
   
 $
19,474,389 $20,024,824   
 
 
During 2002, there were gross realized gains of approximately $43,000 and gross realizedlosses of approximately $23,000 from total proceeds from sales and calls of securities $8,600,000.  There were no sales ofinvestment securities during 2001.

The Bank is a member of the Federal Home Loan Bank of Atlanta (FHLB) and is required tomaintain a minimum stock holding in FHLB stock.  Each member’s required minimum holding of FHLB stock is calculatedannually by the FHLB.  The investment in FHLB stock is carried at cost, which represents fair value.  The carrying valueof FHLB stock included in other securities at December 31, 2002 and 2001 is $317,100 and $250,700, respectively.

F-10
   **FMBEQUIBANC, INC. AND SUBSIDIARY**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

**NOTE 3 - INVESTMENT SECURITIES (Continued)**Investment securities with a carrying amount of approximately $13,580,234 and $7,927,584at December 31, 2002 and 2001, respectively, were pledged to secure public deposits as required or permitted bylaw.

**NOTE 4 - LOANS**Major classifications of loans are as follows:
   
2002
 
2001
 Commercial 
 $ 
      18,580,340   $      18,271,855  Commercial      real estate 32,671,848  27,402,928  Residential      real estate 29,748,563  24,988,330  Real      estate construction            5,341,230             3,268,842  Consumer      and other installment          13,494,917           12,801,568  Overdrafts 
145,034 
 
63,970 
              Total loans 99,981,932  86,797,493  Allowance      for loan losses 
(1,426,081)
 
(1,073,186)
              Loans, net 
 $ 
      98,555,851   $       85,724,307    
 
 
 
Loans on which the accrual of interest has been discontinued or reduced amounted to$495,022, $356,823 and $466,391 at December 31, 2002, 2001 and 2000, respectively.  If interest on those loans had beenaccrued, such income would have approxi­mated $47,909, $20,422 and $9,747 for 2002, 2001 and 2000, respectively.

Changes in the allowance for loanlosses were as follows:
   
2002
 
2001
 
2000
 Balance,      beginning of year  $   1,073,186  $   793,473  $    857,947  Provision      charged to operations 720,000 425,000 170,000  Loans      charged off (657,354)(242,203)(313,535) Recoveries 
290,249 

96,916 

79,061 
 Balance,      end of year  $      1,426,081  $      1,073,186  $      793,473    
 
  
  **NOTE 5 - BANK PREMISES AND EQUIPMENT**Major classifications of these assets are summarized as follows:   
2002
 
2001
 Land  $   330,992   $   330,992  Buildings 2,359,326  2,296,453  Furniture      and equipment 1,766,111  1,499,641  Auto 
16,632 
 
                         - 
              Total cost 4,473,061  4,127,086  Accumulated      depreciation 
(2,285,628)
 
(2,061,435)
              Net book value  $      2,187,433   $      2,065,651    
  
 
F-11
   **FMBEQUIBANC, INC. AND SUBSIDIARY**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

**NOTE 5 - BANK PREMISES AND EQUIPMENT (Continued)**Depreciation expense amounted to $224,194, $167,225 and $197,562 for 2002, 2001 and 2000,respectively.

Certain facilities and equipment are leased under various operating leases.  Rentalexpense for 2002, 2001 and 2000 was $19,192, $18,674 and $16,788, respectively. 

**NOTE 6 - DEPOSITS**At December 31, 2002, the scheduled maturities of certificates of deposit are asfollows:
 2003  $  68,503,062 2004              9,411,409 2005              1,517,529 2006 
1,150,000
    $      80,582,000    
 
**NOTE 7 - FEDERAL HOME LOAN BANK ADVANCE**

The Federal Home Loan Bank Advance at December 31, 2002 consists of a Community InvestmentProgram (CIP) advance taken on December 10, 1998, payable in monthly installments, including interest at 5.48 percent, throughDecember 10, 2008.  The advance is collateralized by the Bank’s wholly owned residential (1-4 units) first mortgage loanportfolio.

Maturities of the advance for each of the next five years and in the aggregate are asfollows:
 
Year      ending December 31
   2003 
 $

      14,102 2004 15,273 2005 16,540 2006 17,913 2007 19,400 Later      years 
355,373
   
 $

      438,601   
 
F-12
   **FMBEQUIBANC, INC. AND SUBSIDIARY**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
**NOTE 8 - INCOME TAXES**The consolidated provision for income taxes consists of the following:
   
2002
 
2001
 
2000
 Current:               Federal  $ 879,741   $ 724,358   $ 578,506          State 
145,086 
 
85,772 
 
66,697 
   
1,024,827 
 
810,130 
 
645,203 
         Deferred:               Federal  (55,114) (79,960) 5,541          State 
(11,421)
 
(14,111)
 
979 
   
(66,535)
 
(94,071)
 
6,520 
                          Total income taxes  $      958,292   $      716,059   $       651,723    
  
  
 
A reconciliation of the federal statutory income tax rate with the effective income taxrate reflected in the consolidated financial statements is as follows:
   
2002
 
2001
 
2000
 Tax      based on statutory rate $824,571  34.0% $677,792  34.0% $621,112  34.0% Effect      of tax-exempt income (17,686) (0.7)   (9,100)  (0.5)   (4,151) (0.2)    Dividends      received deduction (3,782) (0.2)   (4,546) (0.2)   (4,614) (0.3)    Nondeductible      expenses 5,397  0.2     5,386   0.3    6,407   0.4     Other,      net 
16,127 
 
0.7    
 
(25,134)
 
(1.3)  
 
(34,707)
 
(1.9)   
   
$824,627 
 
34.0%
 
$644,398
 
32.3%
 
$584,047 
 
32.0%

 The components of the deferred income tax asset are as follows:
   
2002
 
2001
 Deferred      tax assets  $    286,601   $
   363,596  Deferred      tax liabilities 
             (220,066)
 
            (171,864)
                Net deferred tax asset  $      66,535  
 $ 

      191,732    
  
  
**NOTE 9 - PROFIT SHARING PLAN**The Bank participates in a 401(k) profit sharing plan.  All employees of the Bank whomeet age and employment tenure qualifications specified in the plan are eligible to participate.  The Bank can contribute tothe plan out of the net income such amount as may be determined and authorized by the Board of Directors, but in no year shall thetotal contributed exceed 15 percent of the total compensation paid to employees who are eligible to participate for thatyear.  Participants may ­make voluntary contributions by payroll deduction or cash payment.  The Bank matchesvoluntary contributions made by participants up to 4 percent of the participant’s total compensation.  Including matchingcontributions, the Bank contributed $27,443, $31,126 and $25,929 to the plan for 2002, 2001 and 2000, respectively.

F-13
   **FMBEQUIBANC, INC. AND SUBSIDIARY**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
****

**NOTE 10 - DEFERRED COMPENSATION AGREEMENTS**The Bank has entered into deferred compensation agreements with certain directors of theBank to defer portions of their director fees and to receive equal monthly installments for 120 consecutive months after a certainretirement age (age 65 in most instances).  If the director dies before retirement age, the monthly benefit will be paid tothe director’s designated beneficiary beginning the month following the death of the director.  Should the director die afterretirement age before receiving the entire 120 monthly installments, the remaining monthly installments will be paid to thedirector’s designated beneficiary.  The Bank is currently funding the deferred compensation agreements with annuity contractson each participating director.  Annuity contracts with a present value of approximately $75,461 and $71,794 are included inother assets at December 31, 2002 and 2001, respectively.  A deferred compensation liability has been set up whichapproximates the present value of the future payments related to service rendered to date.  The deferred compensationliability at December 31, 2002 and 2001, was $70,462 and $66,102, respectively.

**NOTE 11 -****RELATED PARTY TRANSACTIONS**At December 31, 2002 and 2001, certain employees, officers, directors, significantstockholders, and their affiliates (related parties) were indebted to the Bank in the aggregate amount of $1,560,518 and$2,606,032, respectively.  During 2002, new loans to such related parties amounted to $1,496,584 and repayments amounted to$2,542,098. 

During the years ended December 31, 2002, 2001 and 2000, approximately $43,176,$16,631 and $15,400, respectively, in legal fees were paid to a legal firm in which one of the directors is a partner.

During the years ended December 31, 2002, 2001 and 2000, approximately $36,797,$47,844 and $11,100, respectively, in insurance premiums were paid to an insurance agency in which one of the directors is apartner.

**NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK**In the normal course of business, the Bank has entered into off-balance-sheet financialinstruments which are not reflected in the financial statements.  Those financial instruments include commitments to extendcredit and standby letters of credit.  Such financial instruments are included in the financial statements when funds aredisbursed or the instruments become payable.  Those instruments involve, to varying degrees, elements of credit risk in excessof the amount recognized in the balance sheet.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitmentsto extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments.  TheBank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheetinstruments.  A summary of the Bank’s commitments is as follows:
   
2002
 
2001
 Commitments      to extend credit  $   10,764,493  $      11,435,127 Standby      letters of credit 
                855,332
 
              681,500
    $       11,619,825  $      12,116,627   
  
 
F-14
   **FMBEQUIBANC, INC. AND SUBSIDIARY**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
****

**NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)**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 credit risk involved inissuing these financial instruments is essentially the same as that involved in extending loans to customers.  The Bankevaluates each customer’s creditworthiness on a case-by-case basis.  The amount and type of collateral obtained, if deemednecessary by the Bank upon extension of credit, varies and is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate and improvements, marketable securities, accounts receivable, crops, inventory,equipment and personal property.

Standby letters of credit are conditional commitments issued by the Bank to guarantee theperformance of a customer to a third party.  Standby letters of credit generally have fixed expiration dates or othertermination clauses and may require payment of a fee.  The credit risk involved in issuing letters of credit is essentiallythe same as that involved in extending loans to customers.  The Bank’s policy for obtaining collateral, and the nature of suchcollateral, is essentially the same as that involved in making commitments to extend credit.

**NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES**At December 31, 2002, the Bank had unused federal funds lines of credit totaling$2,500,000with correspondent banks.

During 2001, the Bank entered into a data processing agreement with a computer servicecenter.  The agreement is for a five-year term expiring June, 2006 and includes automatic renewal for the same term unlessterminated within 180 days prior to the expiration date.  Monthly fees for the data processing service vary based on requiredservices.  Total fees paid in 2002, 2001 and 2000 were approximately $148,517, $115,500 and $101,000, respectively.

**NOTE 14 - CONCENTRATIONS OF CREDIT**All of the Bank’s loans, commitments, and standby letters of credit have been granted tocustomers in the Bank’s market area which is primarily Bulloch County, Georgia and surrounding counties.  The concentrationsof credit by type of loan are set forth in Note 4.  The Bank has the practice of maintaining cash balances in excess offederally insured limits with correspondent banks.

**NOTE 15 - DISCLOSURES RELATING TO STATEMENT OF CASH FLOWS**Cash paid during the year for interest and income taxes was as follows:
   
2002
 
2001
 
2000
 Interest  $2,896,713  $      3,907,464  $      3,267,569 Income      taxes 979,200 545,259 709,287 Other      real estate acquired through              loan foreclosure 51,000                          -                          -
Noncash investing activities for 2002, 2001 and 2000 included an increase in the unrealized gain on investment securities availablefor sale of $368,803, $244,926 and $351,338.

F-15
   **FMBEQUIBANC, INC. AND SUBSIDIARY**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
**NOTE 16 - REGULATORY MATTERS**The Company is subject to various regulatory capital requirements administered by thefederal and state banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financialstatements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company mustmeet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balancesheet items as calculated under regulatory accounting practices.  The Company’s capital amounts and classification under theprompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings,and other factors.

Quantitative measures established by regulation to ensure capital adequacy require theCompany to maintain minimum amounts and ratios of total risk-based capital and Tier I capital to risk-weighted assets (as definedin the regulations) and Tier I capital to average total assets (as defined).  Management believes, as of December 31, 2002,the Company meets all capital adequacy requirements to which it is subject.

As of December 13, 2002, the most recent notification from the FDIC categorized the Bankas well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, theCompany must maintain minimum total risk-based, Tier I risked-based, and Tier I leverage ratios as set forth in thetable.  There are no conditions or events since that notification that management believes have changed the Company’s promptcorrective action category.

The Company’s actual capital amounts and ratios are also presented in thetable.

(000’s Omitted)
           To      Be Well           Capitalized      Under       For      Capital Prompt      Corrective   
Actual
 
Adequacy      Purposes
 
Action      Provisions
   
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 As of      December 31, 2002:                    Total Capital                      (to Risk Weighted Assets) 
 $

      11,220 11.18% 
 $

      8,036 8.00% 
 $

      10,028 10.00%        Tier I Capital                      (to Risk Weighted Assets) 9,964 9.92%  4,011 4.00% 6,017 6.00%        Tier I Capital                      (to Average Assets) 9,964 7.24% 5,491 4.00% 8,236 6.00% As of      December 31, 2001:                   Total Capital                      (to Risk Weighted Assets) 
 $ 

      9,824 11.13% 
 $

      7,062 8.00% 
 $

      8,827 10.00%        Tier I Capital                      (to Risk Weighted Assets) 8,751 9.91%  3,531 4.00% 5,296 6.00%        Tier I Capital                      (to Average Assets) 8,751 7.66%  4,570 4.00% 6,856 6.00%              
F-16
   **FMBEQUIBANC, INC. AND SUBSIDIARY**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

**NOTE 17 - APPROPRIATED RETAINED EARNINGS**Appropriated retained earnings at December 31, 2002 represent retained earnings designatedby the Company’s board of directors as unavailable for dividends.

**NOTE 18 - STOCK OPTIONS**Under the terms of the 1998 Executive Incentive Plan (the “Plan”), officersand key employees of the Company are eligible to receive nonqualified stock options. There are 18,000 shares of the Company’scommon stock reserved for issuance under the Plan.  The Options expire ten years from the date of grant.  Outstanding nonqualified options first became exercisable on December 31, 2002.  At December 31, 2002, options to purchase6,000 shares of common stock of the Company were outstanding at an exercise price of $15.27.

A summary of the status of the Plan and the activity follows:
     Weighted      Average   Weighted      Average   
2002
 
Exercise Price
 
2001
 
Exercise Price
 Outstanding at beginning of      year            18,000 
 $             15.27                   
                18,000 
 $          15.27
        Granted                    -                          -          Terminated 
         (12,000)
 
       15.27
 
                       -
   Outstanding at end of year 
             6,000
 
       15.27
 
               18,000
 
 $      15.27

The following table summarizes information about stock options outstanding at December 31,2002:
   Number Remaining   Exercise Outstanding Contractual Weighted      Average 
Price
 
At      12-31-02
 
Life
 
Exercise      Price
  $      15.27 6,000 5.0 $15.27         
The Company accounts for its stock-based compensation under Accounting Principles BoardOpinion 25.  The Company has adopted SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS123”) for disclosure purposes.  For SFAS 123 purposes, the fair value of each option grant of $21.59, $14.56, and $10.49as of December 31, 2002, 2001 and 2000, respectively, has been estimated as of the date of the grant using the Black-Scholes optionpricing model with the following weighted average assumptions:
   
2002
 
2001
 
2000
 Expected      Life (years) 5 6 7 Risk-free      Interest Rate 1.50% 2.00% 6.75% Expected      Volatility 32.08% 32.50% 11.11%
F-17
   **FMBEQUIBANC, INC. AND SUBSIDIARY**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
**NOTE 18 - STOCK OPTIONS (Continued)**Had the compensation cost for the Company’s stock options granted been determinedbased on the fair market value at the grant dates for awards under this plan consistent with a method prescribed in SFAS 123utilizing the assumptions described above, the Company’s net income and net income per share for the year endedDecember 31, 2002 would have changed to the pro-forma amounts indicated below:
    
For      the year ended
    
December      31, 2002
 
December      31, 2001
 
December      31, 2000
Net      Income:        As Reported   $              1,466,915  $             1,277,446  $             1,175,077 Pro Forma                      1,450,823                    1,234,462                    1,148,041        Net      Income per Share:      As reported -Basic  $                            4.05  $                         3.52  $                         3.24  Diluted                              3.98                             3.36                             3.09           Pro      Forma - Basic  $                          4.00  $                         3.40  $                         3.17  Diluted                              3.94                             3.24                             3.02
F-18
   **FMBEQUIBANC, INC. AND SUBSIDIARY**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
**NOTE 19 - EARNING PER SHARE**Basic and diluted net income per common and potential common share have been calculatedbased on the weighted average number of shares outstanding in accordance with SFAS 128.  In accordance with SFAS 128, thefollowing schedule reconciles the numerators and denominators of the basic and diluted net income per common and potential commonshare for the years presented. 
    For      the year ended    
December      31, 2002
    Income Shares Per Share    
(Numerator)
  
(Denominator)
 
Amount
 Net      Income  $      1,466,915     Basic      EPS          1,466,915               362,600  $      4.05 Effect      of Dilutive        Securities - Options to        purchase common shares 
 
 
                 6,000
 
 
 Diluted      EPS  $      1,466,915               368,600  $ 3.98    
  
  
     For      the year ended    December      31, 2001    Income Shares Per Share    
(Numerator)
 
(Denominator)
 
Amount
 Net      Income 
 $
      1,277,446     Basic      EPS 
         1,277,446
               362,600  $      3.52 Effect      of Dilutive        Securities - Options to        purchase common shares 
 
 
                18,000
 
 
 Diluted      EPS 
 $
      1,277,446               380,600  $  3.36    
  
  
     For      the year ended    
December      31, 2000
    Income Shares Per Share    
(Numerator)
 
(Denominator)
 
Amount
 Net      Income  $      1,175,077     Basic      EPS          1,175,077               362,600         3.24 Effect      of Dilutive        Securities - Options to        purchase common shares 
 
 
                18,000
 
 
 Diluted      EPS  $      1,175,077               380,600  $ 3.09  
  
  
 
F-19
   **FMBEQUIBANC, INC. AND SUBSIDIARY**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
**NOTE 20 - FMB EQUIBANC, INC. (PARENT ONLY) FINANCIALINFORMATION**FMB Equibanc, Inc. condensed balance sheets and the related condensedstatements of income and cash flows are as follows:

 **CONDENSED BALANCE SHEETS**
        
 December      31, 
   
2002
 
2001
Assets            Cash and due from bank   $
         3                               -       Investment in subsidiary  
                      10,294
 
 $
         8,906       Other Assets  
                            69
 
                              -
           Total Assets  
 $
      10,366  $      8,906      Liabilities      and Stockholders' Equity            Other liabilities                                -  $      46       Stockholders Equity   $
  10,366 
                        8,860
              Total   $      10,366  $       8,906   
  
 
**CONDENSED      STATEMENTS OF  INCOME**
      
Years      Ended December 31,
 
2002
 
2001
 
2000 
      Income            Dividends from subsidiary
 $

      284 
 $

      182 
 $  

      45 
                          284
 
                          182
 
                            45
      General      and administrative expenses
                           50
 
                            42
 
                              4
             Income before income taxes and equity                in undistributed income of subsidiaries                         234                           140                             41             Income tax benefit
                            20
 
                              -
 
                              -
             Income before equity in undistributed                 income of subsidiaries
                          254
 
                          140
 
                            41
             Equity in undistributed income of                 subsidiaries
                        1,213
 
                        1,137
 
                        1,134
      Net      income $          1,467  $      1,277  $         1,175 
    
  
 
F-20
   **FMBEQUIBANC, INC. AND SUBSIDIARY**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
**NOTE 20 - FMB EQUIBANC, INC. (PARENT ONLY) FINANCIAL INFORMATION(Continued)**
**Condensed      Statements of Cash Flows** 
Years      Ended December 31,
 
2002
 
2001
 
2000
Operating      Activities             Net Income $1,467  $1,277  $1,175        Adjustments to reconcile net income to net cash               provided by operating activities:                 Earnings of subsidiaries (1,497) (1,319)  (1,179)            (Increase) decrease in other assets(69) 50         (50)            Increase (decrease) in other liabilities
 - 
 
(8)
 
54 
               Net cash used by operating activities(99)  -         -              Cash flow from investing activities                 Dividends received from subsidiary 283    181         45             Cash flow from financing activities                 Dividends paid
 (181)
 
(181)
 
                     (45)
            Increase (decrease) in cash and due from banks3           -                                  Cash and due from banks, beginning of year
- 
 
         - 
 
          -
       Cash and due from banks, end of year $3   $    -   $   - 
  
  
  
**NOTE 21 - OTHER NONINTEREST EXPENSES**Components of other noninterest expense exceeding 1% of total revenues include thefollowing:
   December      31,   
2002
 
2001
 
2000
 Data      processing 
 $
   222,906  $   154,951  $   127,528 Professional      fees 175,820 137,298 102,094 Public      relations and marketing 168,764 140,891 138,776 Supplies 
              125,325
               108,503               74,995        
 

F-21