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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-K



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|x | Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required)
|- | ---------------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2004



| ̈ | Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required)
|- | ----------------------------------------------------------------------------------------------------



For the transition period from
 to



Commission File No. 000-49789



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HENRY COUNTY BANCSHARES, INC.

(Name of Issuer as Specified in Its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Georgia                                                        |  | 58-1485511                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



|                                             |  |           
|-------------------------------------------- |  | ----------
|4806 N. Henry Boulevard Stockbridge, Georgia |  | 30281     
|(Address of Principal Executive Offices)     |  | (Zip Code)



(770) 474-7293

Issuers Telephone Number, Including Area Code



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



Securities registered pursuant to Section 12(g) of the Act:



COMMON STOCK, $2.50 PAR VALUE

(Title of Class)



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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 past 90 days.    Yes  x    No ̈



Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K in this form, and no
disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x



Indicate by check mark whether
the registrant is an accelerated filer (as defined in Rule 126-2 of the Act)    Yes  x    No ̈



State the aggregate market value of the voting stock held by nonaffiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of June 30, 2004: $125,154,470 (based on the
stock price of $17.50 as of that date).



State the number of
shares outstanding of each of the issuers classes of common equity, as of the latest practicable date:



7,151,684 shares of $2.50 par value common stock as of February 8, 2005.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the information required by Part III of this Annual Report are incorporated by reference from the Registrants definitive Proxy
Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report.



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Part I



Item 1. GENERAL



Henry County Bancshares, Inc. (the Company), headquartered in Stockbridge, Georgia, is a Georgia business corporation which operates as a bank
holding company. The Company was incorporated on June 22, 1982 for the purpose of reorganizing The First State Bank (the Bank) to operate within a holding company structure. The Bank is a wholly owned subsidiary of the Company.



The Companys principal activities consist of owning and
supervising the Bank, which engages in a full service commercial and consumer banking business, as well as a variety of deposit services provided to its customers. The Company also conducts mortgage lending operations through its wholly owned
subsidiary, First Metro Mortgage Co., which provides the Companys customers with a wide range of mortgage banking services and products.



The Company, through the Bank and First Metro Mortgage Co., derives substantially all of its income from the furnishing of banking and banking related
services.



The Company directs the policies and coordinates the
financial resources of the Bank and of First Metro Mortgage Co. The Company provides and performs various technical and advisory services for its subsidiaries, coordinates their general policies and activities, and participates in their major
decisions.



The First State Bank



The Bank was chartered by the Georgia Department of
Banking and Finance in 1964. The Bank operates through its main office at 4806 North Henry Boulevard, Stockbridge, Georgia, as well as five (5) full service branches located at Hudson Bridge Road in Stockbridge, East Atlanta Road in Ellenwood, John
Frank Ward Boulevard in McDonough, Bill Gardner Parkway in Locust Grove and at Highway 155 in McDonough. The Bank owns two lots for the construction of future branches in Henry County at the intersection of Chambers Road and Jonesboro Road as well
as Highway 81 in McDonough. The Bank owns an additional parcel of real estate adjacent to its main office location in Stockbridge, Georgia, upon which is situated a small house leased to an unaffiliated insurance company.



The Bank engages in a full service commercial and consumer banking business
in its primary market area of Henry County and surrounding counties, as well as a variety of deposit services provided to its customers. The Bank offers on-line banking services to its customers. Checking, savings, money market accounts and other
time deposits are the primary sources of the Banks funds for loans and investments. The Bank offers a full complement of lending activities, including commercial, consumer installment, real estate, home equity and second mortgage loans, with
particular emphasis on short and medium term obligations. Commercial lending activities are directed principally to businesses whose demands for funds fall within the



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Banks lending limits. Consumer lending is oriented primarily to the needs of the Banks customers. Real estate loans include short term
acquisition and construction loans. The Bank focuses primarily on residential and commercial construction loans, commercial loans secured by machinery and equipment with a developed resale market, working capital loans on a secured short term basis
to established businesses in the primary service area, home equity loans of up to 80% of the current market value of the underlying real estate, residential real estate loans of up to 90% of value with adjustable rates or balloon payments due within
five (5) years, and loans secured by savings accounts, other time accounts, cash value of life insurance, readily marketable stocks and bonds, or general use machinery and equipment for which a resale market has developed. The Bank makes both
secured and unsecured loans to persons and entities which meet criteria established by the Bank and the executive committee. Approximately 88% of the Banks loan portfolio is concentrated in loans secured by real estate, most of which is
located in the Banks primary market area. The Bank, as a matter of policy, does not generally extend credit to any single borrower or group of related borrowers in excess of 25% of statutory capital, or approximately $10,000,000. The lending
policies and procedures of the Bank are periodically reviewed and modified by the Board of Directors of the Bank in order to ensure risks are acceptable and to protect the Banks financial position in the market. Among other services offered
are drive-up windows, night deposits, safe deposits, travelers checks, credit cards, cashiers checks, notary public and other customary bank services. The Bank does not offer trust services.



The Bank maintains correspondent relationships with Wachovia Bank, Bank of
America, The Bankers Bank, SunTrust Bank, Federal Home Loan Bank, and the Federal Reserve of Atlanta. These banks provide certain services to the Bank such as investing excess funds, wire transfer of funds, safekeeping of investment securities, loan
participation and investment advice.



The banking business in
and around Henry County, Georgia is highly competitive which includes certain major banks which have acquired formerly locally owned institutions. These banks have considerably greater resources and lending limits than the Bank. In addition to
commercial banks and savings banks, the Bank competes with other financial institutions, such as credit unions, agricultural credit associations, and investment firms which provide services similar to checking accounts and commercial lending. The
Bank competes with numerous institutions within the primary service areas, including local branches of Bank of America, SunTrust Bank, Wachovia, BB&T and South Trust Bank. As of December 31, 2004 the Bank held approximately 36% of the deposit
accounts in the Henry County area. Neither the Company nor the Bank generates a material amount of revenue from foreign countries, nor does either have material long-lived assets, customer relationships, mortgages or servicing rights, deferred
policy acquisition costs, or deferred tax assets in foreign countries. Thus, the Company has no significant risks attributable to foreign operations.



The Bank relies substantially on personal conduct of its officers, directors and shareholders, as well as a broad product line, competitive services, and
an aggressive local advertising campaign and promotional activities to attract business and to acquaint potential customers with the Banks personal services. The Banks marketing approach emphasizes the



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advantages of dealing with an independent, locally owned and headquartered commercial bank attuned to the particular needs of small to medium size
businesses, professionals and individuals in the community.



As
of February 8, 2005 the Bank had 134 full time employees and 22 part time employees. None of the Banks employees are represented by a collective bargaining group. The Bank considers its relationships with its employees to be good.



A history of the Banks financial position for the fiscal years ended
December 31, 2002, 2003 and 2004, is as follows:



|               |  |      |             |             |   |             |  |   |            
|-------------- |  | ---- | ----------- | ----------- | - | ----------- |  | - | -----------
|               |  |      |             | Years Ended
|               |  | 2004 |             | 2003        |   | 2002       
|Total Assets   |  | $    | 570,528,323 |             | $ | 515,137,333 |  | $ | 489,152,702
|Total Deposits |  | $    | 470,313,491 |             | $ | 427,033,134 |  | $ | 420,149,298
|Net Income     |  | $    | 8,383,164   |             | $ | 7,735,909   |  | $ | 7,333,838  



First Metro Mortgage Co.



First Metro Mortgage
Co. was formed in 1985 to provide mortgage loan origination services in the same primary market area as the Bank. Its offices are located at the Banks branch facility on Hudson Bridge Road in Stockbridge, Georgia. First Metro Mortgage Co.
initiates long term mortgage loans but immediately sells those loans in the secondary market to investors pursuant to agreements between the investors and the company prior to funding. All loans are sold without recourse, and the Bank does not
retain servicing rights or obligations with respect to those loans. First Metro Mortgage Co. realized net income of $26,239 for the 2004 fiscal year, $317,435 for the 2003 fiscal year, $108,468 in the 2002 fiscal year, and $213,126 in 2001. In 2003,
First Metro Mortgage Co. was merged into and became a subsidiary of The First State Bank, effective July 1, 2003.



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SUPERVISION AND REGULATION



Bank Holding Company Regulations - Henry County Bancshares, Inc.



The Company is a registered holding company under the federal Bank Holding
Company Act and the Georgia Bank Holding Company Act and is regulated under such act by the Board of Governors of Federal Reserve System (the Federal Reserve) and by the Georgia Department of Banking and Finance (the Georgia
Department), respectively.



Reporting
and Examination.



As a bank holding company, the Company
is required to file annual reports with the Federal Reserve and the Georgia Department and provide such additional information as the applicable regulator may require pursuant to the federal and Georgia Bank Holding Company Acts. The Federal Reserve
and the Georgia Department may also conduct examinations of the Company to determine whether the Company is in compliance with Bank Holding Company Acts and regulations promulgated thereunder.



Acquisitions.



The Federal Bank Holding Company Act requires every bank holding company to
obtain the prior approval of the Federal Reserve before: (1) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank; (2) acquiring all or substantially all of the assets of a bank; and (3) before merging
or consolidating with another bank holding company. A bank holding company is also generally prohibited from engaging in, or acquiring, direct or indirect control of more than five percent (5%) of the voting shares of any company engaged in
non-banking activities, unless the Federal Reserve has found those activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve has determined by
regulation to be proper incidents to the business of a bank holding company including making or servicing loans and certain types of leases, engaging in certain insurance and discount brokerage activities, performing certain data processing
services, acting in certain circumstances as a fiduciary or investment or financial advisor, owning savings associations, and making investments in certain corporations for projects designed primarily to promote community welfare.



The Georgia Department requires similar approval prior to the acquisition of
any additional banks. A Georgia bank holding company is generally prohibited from acquiring ownership or control of 5% or more of the voting shares of a bank unless the bank being acquired is either a bank for purposes of the Federal Bank Holding
Company Act, or a federal or state savings and loan association or savings bank or federal savings bank whose deposits are insured by the Federal Savings and Loan Insurance Corporation and such bank has been in existence and continuously operating
as a bank for a period of five years or more prior to the date of application to the Department for approval of such acquisition.



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Source of Strength to Subsidiary Banks.



The Federal Reserve (pursuant to regulation and published statements) has
maintained that a bank holding company must serve as a source of financial strength to its subsidiary banks. In adhering to the Federal Reserve policy, the Company may be required to provide financial support to its subsidiary banks at a time when,
absent such Federal Reserve policy, the Company may not deem it advisable to provide such assistance. Similarly, the Federal Reserve also monitors the financial performance and prospects of non-bank subsidiaries with an inspection process to
ascertain whether such non-banking subsidiaries enhance or detract from the Companys ability to serve as a source of strength for its subsidiary banks.



Capital Requirements.



The holding company is subject to regulatory capital requirements imposed by the Federal Reserve applied on a consolidated basis with banks owned by the
holding company. Bank holding companies must have capital (as defined in the rules) equal to eight (8) percent of risk-weighted assets. The risk weights assigned to assets are based primarily on credit risk. For example, securities with an
unconditional guarantee by the United States government are assigned the least risk category. A risk weight of 50% is assigned to loans secured by owner-occupied one-to-four family residential mortgages. The aggregate amount of assets assigned to
each risk category is multiplied by the risk weight assigned to that category to determine the weighted values, which are added together to determine total risk-weighted assets.



The Federal Reserve also requires the maintenance of minimum capital leverage ratios to be used in tandem with the
risk-based guidelines in assessing the overall capital adequacy of bank holding companies. The guidelines define capital as either Tier 1 (primarily shareholder equity) or Tier 2 (certain debt instruments and a portion of the allowance for loan
losses). Tier 1 capital for banking organizations includes common equity, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock and qualifying cumulative perpetual preferred stock.
(Cumulative perpetual preferred stock is limited to 25 percent of Tier 1 capital.) Tier 1 capital excludes goodwill; amounts of mortgage servicing assets, nonmortgage servicing assets, and purchased credit card relationships that, in the aggregate,
exceed 100 percent of Tier 1 capital; nonmortgage servicing assets and purchased credit card relationships that in the aggregate, exceed 25 percent of Tier 1 capital; all other identifiable intangible assets; and deferred tax assets that are
dependent upon future taxable income, net of their valuation allowance, in excess of certain limitations.



Effective June 30, 1998, the Federal Reserve has established a minimum ratio of Tier 1 capital to total assets of 3.0 percent for strong bank holding
companies (rated composite 1 under the BOPEC rating system of bank holding companies), and for bank holding companies that have implemented the Boards risk-based capital measure for market risk. For all other bank holding
companies, the minimum ratio of Tier 1 capital to total assets is 4.0 percent. Banking organizations with supervisory, financial, operational, or managerial weaknesses, as well as organizations that are anticipating or experiencing significant
growth, are expected to maintain capital ratios well above the minimum levels. Higher capital ratios may be required for any bank holding company if warranted by its particular circumstances or risk profile. Bank holding companies are required to
hold capital commensurate with the level and nature of the risks, including the volume and severity of problem loans, to which they are exposed.



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As of December 31, 2004 the Company maintained Tier 1 and Total Risk-Based Capital Ratios of 11.07% and
11.95% respectively. A more detailed analysis of the Companys capital and comparison to regulatory requirements is included in Note 12 in the audited financial statements included herein.



The Riegle-Neal Interstate Banking and Branching
Efficiency Act.



Prior to the enactment of the Interstate
Banking and Branching Efficiency Act of 1994 (the Riegle-Neal Act), interstate expansion of bank holding companies was prohibited, unless such acquisition was specifically authorized by a statute of the state in which the target bank was
located. Pursuant to the Riegle-Neal Act, effective September 29, 1995 an adequately capitalized and adequately managed holding company may acquire a bank across state lines, without regard to whether such acquisition is permissible under state law.
A bank holding company is considered to be adequately capitalized if it meets all applicable federal regulatory capital standards.



While the Riegle-Neal Act precludes a state from entirely insulating its banks from acquisition by an out-of-state holding company, a state may still
provide that a bank may not be acquired by an out-of-state company unless the bank has been in existence for a specified number of years, not to exceed five years. Additionally, the Federal Reserve is directed not to approve an application for the
acquisition of a bank across state lines if: (i) the applicant bank holding company, including all affiliated insured depository institutions, controls or after the acquisition would control, more than ten (10) percent of the total amount of
deposits of all insured depository institutions in the United States (the ten percent concentration limit) or (ii) the acquisition would result in the holding company controlling thirty (30) percent or more of the total deposits of
insured depository institutions in any state in which the holding company controlled a bank or branch immediately prior to the acquisition (the thirty percent concentration limit). States may waive the thirty percent concentration limit,
or may make the limits more or less restrictive, so long as they do no discriminate against out-of-state bank holding companies.



The Riegle-Neal Act also provides that, beginning on June 1, 1997, banks located in different states may merge and operate the resulting institution as a
bank with interstate branches. However, a state may (i) prevent interstate branching through mergers by passing a law prior to June 1, 1997 that expressly prohibits mergers involving out-of-state banks, or (ii) permit such merger transactions prior
to June 1, 1997. Under the Riegle-Neal Act, an interstate merger transaction may involve the acquisition of a branch of an insured bank without the acquisition of the bank itself, but only if the law of the state in which the branch is located
permits this type of transaction.



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Under the Riegle-Neal Act, a state may impose certain conditions on a branch of an out-of-state bank
resulting from an interstate merger so long as such conditions do not have the effect of discriminating against out-of-state banks or bank holding companies, other than on the basis of a requirement of nationwide reciprocal treatment. The ten (10)
percent concentration limit and the thirty (30) percent concentration limit described above, as well as the rights of the states to modify or waive the thirty (30) percent concentration limit, apply to interstate bank mergers in the same manner as
they apply to the acquisition of out-of-state banks.



A bank
resulting from an interstate merger transaction may retain and operate any office that any bank involved in the transaction was operating immediately before the transaction. After completion of the transaction, the resulting bank may establish or
acquire additional branches at any location where any bank involved in the transaction could have established or acquired a branch. The Riegle-Neal Act also provides that the appropriate federal banking agency may approve an application by a bank to
establish and operate an interstate branch in any state that has in effect a law that expressly permits all out-of-state banks to establish and operate such a branch.



In response to the Riegle-Neal Act, effective June 1, 1997, Georgia permitted interstate branching, although only through
merger and acquisition. In addition, Georgia law provides that a bank may not be acquired by an out-of-state company unless the bank has been in existence for five years. Georgia has also adopted the thirty percent concentration limit, but permits
state regulators to waive it on a case-by-case basis.



The Gramm-Leach-Bliley Act of 1999.



The
Gramm-Leach-Bliley Act (the GLB Act) dramatically increases the ability of eligible banking organizations to affiliate with insurance, securities, and other financial firms and insured depository institutions. The GLB Act permits
eligible banking organizations to engage in activities and to affiliate with nonbank firms engaged in activities that are financial in nature or incidental to such financial activities, and also includes some additional activities that are
complementary to such financial activities.



The definition of
activities that are financial in nature or that are incidental to such financial activities is handled by the GLB Act in two ways. First, there is a laundry list of activities that are designated as financial in nature. Second, the authorization of
new activities as financial in nature or incidental to a financial activity requires a consultative process between the Federal Reserve Board and the Secretary of the Treasury with each having the authority to veto proposals of the other. The
Federal Reserve Board has the discretion to determine what activities are complementary to financial activities.



The precise scope of the authority to engage in these new financial activities, however, depends on the type of banking organization, whether it is a
holding company, a subsidiary of a bank, or a bank. The GLB Act repealed two sections of the Glass-Stegall Act, Sections 20 and 32, which restricted affiliations between securities firms and banks. The GLB Act authorizes two types of banking
organizations to engage in expanded securities activities. The GLB Act authorizes a new type of bank holding company called a financial holding company to have a



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subsidiary company that engages in securities underwriting and dealing without limitation as to the types of securities involved. The GLB Act also permits a
bank to control a financial subsidiary that can engage in many of the expanded securities activities permitted for financial holding companies. However, additional restrictions apply to bank financial subsidiaries.



Since the Bank Holding Company Act of 1956, and its subsequent amendments,
federal law has limited the types of activities that are permitted for a bank holding company, and it is has also limited the types of companies that a bank holding company can control. The GLB Act retains the bank holding company regulatory
framework, but adds a new provision that authorizes enlarged authority for the new financial holding company form of organization to engage in any activity of a financial nature or incidental thereto. A new Section 4(k) of the Bank Holding Company
Act provides that a financial holding company may engage in any activity, and may acquire and retain shares of any company engaged in any activity, that the Federal Reserve Board in coordination with the Secretary of the Treasury determines by
regulation or order to be financial in nature or incidental to such financial activities, or is complementary to financial activities.



The GLB Act also amends the Bank Holding Company Act to prescribe eligibility criteria for financial holding companies, defines the scope of activities
permitted for bank holding companies that do not become financial holding companies, and establishes consequences for financial holding companies that cease to maintain the status needed to qualify as a financial holding company.



There are three special criteria to qualify for the enlarged activities and
affiliation. First, all the depository institutions in the bank holding company organization must be well-capitalized. Second, all of the depository institutions of the bank holding company must be well managed. Third, the bank holding company must
have filed a declaration of intent with the Federal Reserve Board stating that it intends to exercise the expanded authority under the GLB Act and certify to the Federal Reserve Board that the bank holding companys depository institutions meet
the well-capitalized and well managed criteria. The GLB Act also requires the bank to achieve a rating of satisfactory or better in meeting community credit needs at the most recent examination of such institution under the Community Reinvestment
Act.



Once a bank holding company has filed a declaration of
its intent to be a financial holding company, as long as there is no action by the Federal Reserve Board giving notice that it is not eligible, the company may proceed to engage in the activities and enter into the affiliations under the large
authority conferred by the GLB Acts amendments to the Bank Holding Company Act. The holding company does not need prior approval from the Federal Reserve Board to engage in activities that the GLB Act identifies as financial in nature or that
the Federal Reserve Board has determined to be financial in nature or incidental thereto by order or regulation.



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The GLB Act retains the basic structure of the Bank Holding Company Act. Thus, a bank holding company
that is not eligible for the expanded powers of a financial holding company is now subject to the amended Section 4(c)(8) of the Bank Holding Company Act which freezes the activities that are authorized and defined as closely related to banking
activities. Under this Section, a bank holding company is not eligible for the expanded activities permitted under new Section 4(k) and is limited to those specific activities previously approved by the Federal Reserve Board.



The GLB Act also addresses the consequences when a financial holding company
that has exercised the expanded authority fails to maintain its eligibility to be a financial holding company. The Federal Reserve Board may impose such limitations on the conduct or activities of a noncompliant financial holding company or any
affiliate of that company as the Board determines to be appropriate under the circumstances and consistent with the purposes of the Act.



The GLB Act is essentially a dramatic liberalization of the restrictions placed on banks, especially bank holding companies, regarding the areas of
financial businesses in which they are allowed to compete.



Regulation of Subsidiary Banks.



As a state-chartered bank, The First State Bank is examined and regulated by the Federal Deposit Insurance Corporation (FDIC) and the Georgia Department. The major functions of the FDIC with respect to insured banks include
paying depositors to the extent provided by law in the event an insured bank is closed without adequately providing for payment of the claim of depositors, acting as a receiver of state banks placed in receivership when so appointed by state
authorities, and preventing the continuance or development of unsound and unsafe banking practices. In addition, the FDIC also approves conversions, mergers, consolidations, and assumption of deposit liability transactions between insured banks and
noninsured banks or institutions to prevent capital or surplus diminution in such transactions where the resulting, continued or assumed bank is an insured nonmember state bank.



Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the federal Bank Holding Company
Act on any extension of credit to the bank holding company or any of its subsidiaries, on investment in the stock or other securities thereof and on the taking of such stock or securities as collateral for loans to any borrower. In addition, a bank
holding company and its subsidiaries are prohibited from engaging in certain tie-in-arrangements in connection with any extension of credit or provision of any property or services.



The Georgia Department regulates all areas of the banks banking operations, including mergers, establishment of
branches, loans, interest rates, and reserves. The Bank must have the approval of the Commissioner to pay cash dividends, unless at the time of such payment:



a. the total classified assets at the most recent examination of such bank do not exceed 80% of Tier 1 capital plus Allowance for Loan Losses as reflected at such
examination;



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b. the aggregate amount of dividends declared or anticipated to be declared in the calendar year does not exceed 50% of
the net profits, after taxes but before dividends, for the pervious calendar year; and



c. the ratio of Tier 1 Capital to Adjusted Total Assets shall not be less than six (6) percent.



State chartered banks are also subject to State of Georgia banking and usury laws restricting the amount of interest which it may charge in making loans
or other extensions of credit.



Expansion
through Branching, Merger or Consolidation.



With respect
to expansion, the banks were previously prohibited from establishing branch offices or facilities outside of the county in which their main office was located, except:



|(1) | in adjacent counties in certain situations, or
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|(2) | by means of merger or consolidation with a bank which has been in existence for at least five years.
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In addition, in the case of a merger or consolidation, the acquiring bank must have been in existence for at least 24 months prior to the
merger. However, effective July 1, 1998, Georgia law permits, with required regulatory approval, the establishment of de novo branches in an unlimited number of counties within the State of Georgia by the subsidiary bank(s) of bank holding companies
then engaged in the banking business in the State of Georgia. This law may result in increased competition in the market area of the Companys subsidiary banks.



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Capital Requirements.



The FDIC adopted risk-based capital guidelines that went into effect on
December 31, 1990 for all FDIC insured state chartered banks that are not members of the Federal Reserve System. Beginning December 31, 1992, all banks were required to maintain a minimum ratio of total capital to risk weighted assets of eight (8)
percent of which at least four (4) percent must consist of Tier 1 capital. Tier 1 capital of state chartered banks (as defined by the regulation) generally consists of: (i) common stockholders equity; (ii) qualifying noncumulative perpetual
preferred stock and related surplus; and (iii) minority interests in the equity accounts of consolidated subsidiaries. In addition, the FDIC adopted a minimum ratio of Tier 1 capital to total assets of banks, referred to as the leverage capital
ratio of three (3) percent if the FDIC determines that the institution is not anticipating or experiencing significant growth and has well-diversified risk, including no undue interest rate exposure, excellent asset quality, high liquidity, good
earnings and, in general is considered a strong banking organization, rated Composite 1 under the Uniform Financial Institutions Rating System (the CAMEL rating system) established by the Federal Financial Institutions Examination
Council. All other financial institutions are required to maintain leverage ratio of four (4) percent.



Effective October 1, 1998, the FDIC amended its risk-based and leverage capital rules as follows: (1) all servicing assets and purchase credit card
relationships (PCCRs) that are included in capital are each subject to a ninety percent (90%) of fair value limitation (also known as a ten percent (10%) haircut); (2) the aggregate amount of all servicing assets and PCCRs
included in capital cannot exceed 100% of Tier I capital; (3) the aggregate amount of nonmortgage servicing assets (NMSAs) and PCCRS included in capital cannot exceed 25% of Tier 1 capital; and (4) all other intangible assets (other than
qualifying PCCRS) must be deducted from Tier 1 capital.



Amounts of servicing assets and PCCRs in excess of the amounts allowable must be deducted in determining Tier 1 capital. Interest-only Strips receivable, whether or not in security form, are not subject to any regulatory capital limitation
under the amended rule.



FDIC Insurance
Assessments.



The Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), enacted in December, 1991, provided for a number of reforms relating to the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository institutions and
improvement of accounting standards. One aspect of the act is the requirement that banks will have to meet certain safety and soundness standards. In order to comply with the act, the Federal Reserve and the FDIC implemented regulations defining
operational and managerial standards relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth, director and officer compensation, fees and benefits, asset quality, earnings and stock valuation.



The regulations provide for a risk based premium system which
requires higher assessment rates for banks which the FDIC determines pose greater risks to the Bank Insurance Fund (BIF). Under the regulations, banks pay an assessment depending upon risk classification.



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To arrive at risk-based assessments, the FDIC places each bank in one of nine risk categories using a two
step process based on capital ratios and on other relevant information. Each bank is assigned to one of three groups: (i) well capitalized, (ii) adequately capitalized, or (iii) under capitalized, based on its capital ratios. The FDIC also assigns
each bank to one of three subgroups based upon an evaluation of the risk posed by the bank. The three subgroups include (i) banks that are financially sound with only a few minor weaknesses, (ii) banks with weaknesses which, if not corrected, could
result in significant deterioration of the bank and increased risk to the BIF, and (iii) those banks that pose a substantial probability of loss to the BIF unless corrective action is taken. FDICIA imposes progressively more restrictive constraints
on operations management and capital distributions depending on the category in which an institution is classified. As of December 31, 2004, The First State Bank met the definition of a well-capitalized institution.



Under FDICIA insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.



Community Reinvestment Act.



The Company and the Bank are subject to the provisions of the Community
Reinvestment Act of 1977, as amended (the CRA) and the federal banking agencies regulations issued thereunder. Under the CRA, all banks and thrifts have a continuing and affirmative obligation, consistent with its safe and sound
operation to help meet the credit needs for their entire communities, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an
institutions discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA.



The CRA requires a depository institutions primary federal regulator, in connection with its examination of the
institution, to assess the institutions record of assessing and meeting the credit needs of the community served by that institution, including low- and moderate-income neighborhoods. The regulatory agencys assessment of the
institutions record is made available to the public. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the records of each subsidiary depository
institution of the applicant bank holding company, and such records may be the basis for denying the application.



The evaluation system used to judge an institutions CRA performance consists of three tests: (1) a lending test; (2) an investment test; and (3) a
service test. Each of these tests will be applied by the institutions primary federal regulator taking into account such factors as: (i)



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demographic data about the community; (ii) the institutions capacity and constraints; (iii) the institutions product offerings and business
strategy; and (iv) data on the prior performance of the institution and similarly-situated lenders.



In addition, a financial institution will have the option of having its CRA performance evaluated based on a strategic plan of up to five years in length
that it had developed in cooperation with local community groups. In order to be rated under a strategic plan, the institution will be required to obtain the prior approval of its federal regulator.



The interagency CRA regulations provide that an institution evaluated under a
given test will receive one of five ratings for the test: (1) outstanding; (2) high satisfactory; (3) low satisfactory; (4) needs to improve; and (5) substantial noncompliance. An institution will receive a certain number of points for its rating on
each test, and the points are combined to produce an overall composite rating. Evidence of discriminatory or other illegal credit practices would adversely affect an institutions overall rating. The First State Bank received a satisfactory
rating as a result of its most recent CRA examination.



Anti-Terrorism Legislation.



In the wake of
the tragic events of September 11th, on October 26, 2001, the President signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act,
financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and know your customer standards in their dealings with foreign financial
institutions and foreign customers. For example, the enhanced due diligence policies, procedures, and controls generally require financial institutions to take reasonable steps:



| |  |  | to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any
suspicious transactions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest
of each such owner; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The USA PATRIOT Act requires financial institutions to establish anti-money laundering programs. The USA
PATRIOT Act sets forth minimum standards for these programs, including:



| |  |  | the development of internal policies, procedures, and controls;
| | - |  | ---------------------------------------------------------------



| |  |  | the designation of a compliance officer;
| | - |  | ----------------------------------------



| |  |  | an ongoing employee training program; and
| | - |  | -----------------------------------------



| |  |  | an independent audit function to test the programs.
| | - |  | ---------------------------------------------------



In addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt rules increasing the cooperation and information sharing between
financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any
financial institution complying with these rules will not be deemed to have violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed above.



Item 2. PROPERTIES



The assets of the Company consist almost entirely of its equity ownership in The First State Bank and First Metro Mortgage Co. The assets of First Metro
Mortgage Co. consist almost entirely of loans originated and the proceeds of those loans when sold to investors. The assets of the Bank consist primarily of loans and investment securities. However, it also owns the real estate and improvements
thereon from which it conducts its banking operations. Those locations are more particularly described as follows:



4806 N. Henry Boulevard, Stockbridge, Georgia - This location houses the Banks main office, a two-story building containing 20,800 square
feet constructed in 1965. It is a full service bank facility equipped with an ATM machine and four lane drive-up service.



4800 N. Henry Boulevard, Stockbridge, Georgia - This location houses the operations center for the Bank. It is a single story building constructed
in 1999, consisting of 20,622 square feet.



295 Fairview
Road, Ellenwood, Georgia - This is a full service banking location with ATM and drive-thru service. It is a single story building containing 3,520 square feet.



114 John Frank Ward Boulevard, McDonough, Georgia - This site contains a 4,000 square foot single story building with
ATM and drive-thru service.



1810 Hudson Bridge Road,
Stockbridge, Georgia - This location contains a two-story facility consisting of 4,787 square feet. The lower floor contains a full service banking location, with ATM and drive-thru service. The upper floor houses the operations of First Metro
Mortgage Co.



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4979 Bill Gardner Parkway, Locust Grove, Georgia - This location contains a one-story building
consisting of 4,000 square feet, with ATM and drive-thru service.



2316 Highway 155, McDonough, Georgia - This full service banking location is a single-story facility consisting of approximately 5,500 square feet with ATM and drive-thru service.



The Bank also owns two additional parcels of land located in Henry County at
the intersection of Chambers Road and Jonesboro Road and at Highway 81 in McDonough.



The Bank conducts its own data processing and owns the equipment used for that purpose. The Bank also owns the furniture, fixtures and equipment located on its premises and several automobiles.



Item 3. LEGAL PROCEEDINGS



The Bank is involved in various legal actions from normal business
activities. Management believes that the liability, if any, arising from such actions will not have a material adverse effect on the Companys financial statements. Neither the Bank nor the Company is a party to any proceeding to which any
director, officer or affiliate of the issuer, or any owner of more than five percent (5%) of its voting stock is a party adverse to the Bank or the Company.



Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.



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Part II



Item 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



General



There is no established public trading market for the Companys common stock. It is not traded on an exchange or in the
over-the-counter market. There is no assurance that an active market will develop for the Companys common stock in the future. Therefore, management of the Company is furnished with only limited information concerning trades of the
Companys common stock. The following table sets forth for each quarter during the most two recent fiscal years the number of shares traded and the high and low per share sales price to the extent known to management. In 2004, the Company
purchased 9,308 shares of treasury stock at a price of $18.50 per share.



|               |  |                       |  |                             |       |                            |   |      
|-------------- |  | --------------------- |  | --------------------------- | ----- | -------------------------- | - | -----
|YEAR 2004      |  | NUMBEROF SHARESTRADED |  | HIGH SALES PRICE(Per Share) |       | LOW SALES PRICE(Per Share)
|First Quarter  |  | 7,610                 |  | $                           | 19.00 |                            | $ | 17.00
|Second Quarter |  | 4,885                 |  | $                           | 20.00 |                            | $ | 17.50
|Third Quarter  |  | 12,244                |  | $                           | 18.00 |                            | $ | 17.50
|Fourth Quarter |  | 53,382                |  | $                           | 19.00 |                            | $ | 17.50



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---

|               |  |                        |  |                             |       |                            |   |      
|-------------- |  | ---------------------- |  | --------------------------- | ----- | -------------------------- | - | -----
|YEAR 2003      |  | NUMBER OF SHARESTRADED |  | HIGH SALES PRICE(Per Share) |       | LOW SALES PRICE(Per Share)
|First Quarter  |  | 24,307                 |  | $                           | 17.50 |                            | $ | 16.00
|Second Quarter |  | 3,789                  |  | $                           | 16.67 |                            | $ | 16.00
|Third Quarter  |  | 25,953                 |  | $                           | 16.50 |                            | $ | 16.50
|Fourth Quarter |  | 9,879                  |  | $                           | 20.00 |                            | $ | 16.50



The Company has
historically paid dividends on an annual basis. Any declaration and payment of dividends will be based on the Companys earnings, economic conditions, and the evaluation by the Board of Directors of other relevant factors. The Companys
ability to pay dividends is dependent on cash dividends paid to it by the Bank and by First Metro Mortgage Co. The ability of the Bank to pay dividends to the Company is restricted by applicable regulatory requirements. The following table sets
forth cash dividends which have been declared and paid by the Company since January 1, 2002:



|               |  |                                       |              
|-------------- |  | ------------------------------------- | -------------
|               |  | Cash Dividends Declared Per Share ($)
|Fiscal 2004    |  |                                       |              
|First Quarter  |  | $                                     | .09 per share
|Second Quarter |  | $                                     | .09 per share
|Third Quarter  |  | $                                     | .09 per share
|Fourth Quarter |  | $                                     | .14 per share
|               | 
|Fiscal 2003    |  |                                       |              
|First Quarter  |  | $                                     | .08 per share
|Second Quarter |  | $                                     | .08 per share
|Third Quarter  |  | $                                     | .08 per share
|Fourth Quarter |  | $                                     | .14 per share
|               |  |                                       |              
|               | 
|Fiscal 2002    |  |                                       |              
|First Quarter  |  | $                                     | .08 per share
|Second Quarter |  | $                                     | .08 per share
|Third Quarter  |  | $                                     | .08 per share
|Fourth Quarter |  | $                                     | .11 per share



-18-



---

As of February 8, 2005, 7,151,684 shares of common stock were outstanding held of record by approximately
533 persons (not including the number of persons or entities holding stock in nominee or street name through various brokerage houses).



The holders of the Companys common stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally
available. Funds for the payment of dividends of the Company are primarily obtained from dividends paid by the Bank.



There are no shares of the Companys common stock that are subject to outstanding options or warrants to purchase, or that are convertible into,
common equity of the Company, and there were no sales of unregistered securities of the Company in 2004.



ITEM 6. SELECTED FINANCIAL DATA



The
following table presents selected historical consolidated financial information for us and our subsidiaries and is derived from the consolidated financial statements and related notes included in this annual report. This information is only a
summary and should be read in conjunction with our historical financial statements and related notes.



|                                    |  |                                           |           |      |   |           |  |      |           |      |   |           |  |   |          
|----------------------------------- |  | ----------------------------------------- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                    |  | As of and For the Year Ended December 31,
|                                    |  | 2004                                      |           | 2003 |   | 2002      |  | 2001 |           | 2000
|Total Loans                         |  | $                                         | 486,723   |      | $ | 418,637   |  | $    | 350,277   |      | $ | 304,688   |  | $ | 271,529  
|Total Deposits                      |  |                                           | 470,313   |      |   | 427,033   |  |      | 420,149   |      |   | 436,664   |  |   | 387,133  
|Total Borrowings                    |  |                                           | 42,058    |      |   | 34,835    |  |      | 20,287    |      |   | 15,692    |  |   | 20,202   
|Total Assets                        |  |                                           | 570,528   |      |   | 515,137   |  |      | 489,153   |      |   | 496,185   |  |   | 446,019  
|Interest Income                     |  |                                           | 28,685    |      |   | 25,748    |  |      | 27,298    |      |   | 33,224    |  |   | 32,765   
|Interest Expense                    |  |                                           | 10,022    |      |   | 9,429     |  |      | 10,977    |      |   | 16,507    |  |   | 17,161   
|Net Interest Income                 |  |                                           | 18,663    |      |   | 16,319    |  |      | 16,321    |      |   | 16,717    |  |   | 15,604   
|Provision for Loan Losses           |  |                                           | 443       |      |   | 472       |  |      | 540       |      |   | 550       |  |   | 490      
|Net Interest Income After Provision |  |                                           | 18,220    |      |   | 15,847    |  |      | 15,781    |      |   | 16,167    |  |   | 15,114   
|Non-Interest Income                 |  |                                           | 4,322     |      |   | 5,531     |  |      | 4,546     |      |   | 4,644     |  |   | 3,753    
|Non-Interest Expense                |  |                                           | 9,548     |      |   | 9,417     |  |      | 9,134     |      |   | 8,782     |  |   | 8,172    
|Income Before Income Taxes          |  |                                           | 12,994    |      |   | 11,961    |  |      | 11,193    |      |   | 12,029    |  |   | 10,695   
|Provision for Income Taxes          |  |                                           | 4,611     |      |   | 4,225     |  |      | 3,859     |      |   | 4,056     |  |   | 3,507    
|Net Income                          |  |                                           | 8,383     |      |   | 7,736     |  |      | 7,334     |      |   | 7,973     |  |   | 7,188    
|                                    |  |                                           |           |      |  
|Net Income Per Share                |  |                                           | 1.17      |      |   | 1.08      |  |      | 1.02      |      |   | 1.11      |  |   | 1.00     
|                                    |  |                                           |           |      |  
|Cash Dividends Declared             |  |                                           | 0.41      |      |   | 0.38      |  |      | 0.35      |      |   | 0.38      |  |   | 0.35     
|Book Value Per Share                |  |                                           | 7.87      |      |   | 7.18      |  |      | 6.52      |      |   | 5.81      |  |   | 5.01     
|Weighted Average Shares             |  |                                           | 7,159,873 |      |   | 7,160,992 |  |      | 7,161,609 |      |   | 7,185,993 |  |   | 7,204,614



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QUARTERLY DATA



|                                                    |  |                                       |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|--------------------------------------------------- |  | ------------------------------------- | ----- | ------------ | - | ------------- |  | ------------ | ----- | ------------- | - | ------------ |  | ------------- | ----- | ------------ | - | ----- |  | - | ----- |  | - | -----
|                                                    |  | Years Ended December 31,             
|                                                    |  | 2004                                  |       | 2003        
|                                                    |  | FourthQuarter                         |       | ThirdQuarter |   | SecondQuarter |  | FirstQuarter |       | FourthQuarter |   | ThirdQuarter |  | SecondQuarter |       | FirstQuarter
|                                                    |  | (In thousands, except per share data)
|Interest income                                     |  | $                                     | 7,720 |              | $ | 7,257         |  | $            | 6,919 |               | $ | 6,789        |  | $             | 6,631 |              | $ | 6,351 |  | $ | 6,441 |  | $ | 6,325
|Interest expense                                    |  |                                       | 2,685 |              |   | 2,537         |  |              | 2,425 |               |   | 2,375        |  |               | 2,286 |              |   | 2,356 |  |   | 2,390 |  |   | 2,397
|                                                    |  |                                       |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|                                                    |  |                                       |       |              |   |               |  |             
|Net interest income                                 |  |                                       | 5,035 |              |   | 4,720         |  |              | 4,494 |               |   | 4,414        |  |               | 4,345 |              |   | 3,995 |  |   | 4,051 |  |   | 3,928
|Provision for loan losses                           |  |                                       | 45    |              |   | 103           |  |              | 145   |               |   | 150          |  |               | 72    |              |   | 100   |  |   | 150   |  |   | 150  
|                                                    |  |                                       |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|                                                    |  |                                       |       |              |   |               |  |             
|Net interest income after provision for loan losses |  |                                       | 4,990 |              |   | 4,617         |  |              | 4,349 |               |   | 4,264        |  |               | 4,273 |              |   | 3,895 |  |   | 3,901 |  |   | 3,778
|Noninterest income                                  |  |                                       | 1,039 |              |   | 1,080         |  |              | 1,148 |               |   | 1,055        |  |               | 1,332 |              |   | 1,330 |  |   | 1,435 |  |   | 1,434
|Noninterest expenses                                |  |                                       | 2,504 |              |   | 2,426         |  |              | 2,450 |               |   | 2,168        |  |               | 2,188 |              |   | 2,427 |  |   | 2,410 |  |   | 2,392
|                                                    |  |                                       |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|Income before income taxes                          |  |                                       | 3,525 |              |   | 3,271         |  |              | 3,047 |               |   | 3,151        |  |               | 3,417 |              |   | 2,798 |  |   | 2,926 |  |   | 2,820
|Provision for income taxes                          |  |                                       | 1,267 |              |   | 1,103         |  |              | 1,159 |               |   | 1,082        |  |               | 1,098 |              |   | 1,024 |  |   | 1,091 |  |   | 1,012
|                                                    |  |                                       |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|                                                    |  |                                       |       |              |   |               |  |             
|Net income                                          |  | $                                     | 2,258 |              | $ | 2,168         |  | $            | 1,888 |               | $ | 2,069        |  | $             | 2,319 |              | $ | 1,774 |  | $ | 1,835 |  | $ | 1,808
|                                                    |  |                                       |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|Earnings per share                                  |  | $                                     | .32   |              | $ | .30           |  | $            | .26   |               | $ | .29          |  | $             | 0.32  |              | $ | 0.25  |  | $ | 0.26  |  | $ | 0.25 
|                                                    |  |                                       |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      



ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following is a discussion of our financial condition and the financial condition of our bank subsidiary, The First State Bank and our mortgage subsidiary, First Metro Mortgage Co. at December 31, 2004 and 2003 and the results of
operations for the three years in the period ended December 31, 2004. The purpose of this discussion is to focus on information about our financial condition and results of operations that are not otherwise apparent from our audited financial
statements. Reference should be made to those statements and the selected financial data presented elsewhere in this report for an understanding of the following discussion and analysis.



A Warning About Forward-Looking Statements



We may from time to time make written or oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and
reports to stockholders. Statements made by us, other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties. Forward-looking statements are made based upon managements
belief as well as assumptions made by, and information currently available to, management pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from the
results anticipated in forward-looking statements due to a variety of factors, including governmental monetary and fiscal policies, deposit levels, loan demand, loan collateral values, securities portfolio values, interest rate risk management, the
effects of competition in the banking business from other commercial banks, thrifts,



-20-



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mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market funds and other financial
institutions operating in our market area and elsewhere, including institutions operating through the Internet, changes in governmental regulation relating to the banking industry, including regulations relating to branching and acquisitions,
failure of assumptions underlying the establishment of reserves for loan losses, including the value of collateral underlying delinquent loans and other factors. We caution that these factors are not exclusive. We do not undertake to update any
forward-looking statement that may be made from time to time by us, or on our behalf.



Critical Accounting Policies



Our accounting and reporting
policies are in accordance with accounting principles generally accepted in the United States of America as defined by the Public Company Accounting Oversight Board and conform to general practices within the banking industry. Our significant
accounting policies are described in the notes to the consolidated financial statements. Certain accounting policies require management to make significant estimates and assumptions, which have a material impact on the carrying value of certain
assets and liabilities, and we consider these to be critical accounting policies. The estimates and assumptions used are based on historical experience and other factors that management believes to be reasonable under the circumstances. Actual
results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods.



We believe the following are critical accounting policies that require the most
significant estimates and assumptions that are particularly susceptible to a significant change in the preparation of our financial statements.



Allowance for loan losses



A provision for loan losses is based on managements opinion of an amount that is adequate to absorb losses inherent in the existing loan portfolio. The allowance
for loan losses is established through a provision for loan losses based on managements evaluation of current economic conditions, volume and composition of the loan portfolio, the fair market value or the estimated net realizable value of
underlying collateral, historical charge off experience, the level of nonperforming and past due loans, and other indicators derived from reviewing the loan portfolio. The evaluation includes a review of all loans on which full collection may not be
reasonably assumed. Should the factors that are considered in determining the allowance for loan losses change over time, or should managements estimates prove incorrect, a different amount may be reported for the allowance and the associated
provision for loan losses. For example, if economic conditions in our market area experience an unexpected and adverse change, we may need to increase our allowance for loan losses by taking a charge against earnings in the form of an additional
provision for loan loss.



Overview



The year 2004 was highlighted by continued loan and core deposit growth as Henry County
continues to remain a growth leader in the metropolitan Atlanta area. Our loan portfolio grew in excess of $68 million, while our core deposit growth exceeded $31 million. Total deposits exceeded $43 million as we utilized wholesale deposits in
addition to core deposits to fund our loan growth. We continued to remain the market leader as measured by deposits in Henry County, representing 36% market share as of June 30, 2004. We reported net income of $8,383,164 in 2004 as compared to
$7,735,909 in 2003 and $7,333,838 in 2002. As a result of continued growth in average earning assets, coupled with a lower cost of funding during 2004, our net interest margins increased slightly to 3.61% at year end 2004, compared to 3.57% at year
end 2003.



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Our achievements in growth were a direct result of our commitment to quality customer service as evidenced by our
receiving the 2004 Industry of the Year Award presented by the Henry County Chamber of Commerce. We believe that our continued branch expansion within the Henry County market, as well as our commitment to quality customer service, will allow us to
take advantage of this continued growth.



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Financial Condition at December 31, 2004 and 2003



The following is a summary of our balance sheets for the periods indicated:



|                                   |  |                         |         |      |   |        
|---------------------------------- |  | ----------------------- | ------- | ---- | - | -------
|                                   |  | December 31,           
|                                   |  | 2004                    |         | 2003
|                                   |  | ( Dollars in Thousands)
|Cash and due from banks            |  | $                       | 17,106  |      | $ | 25,199 
|Interest-bearing deposits in banks |  |                         | 330     |      |   | 572    
|Federal funds sold                 |  |                         |        |      |   |       
|Securities                         |  |                         | 54,241  |      |   | 58,056 
|Loans held for sale                |  |                         | 578     |      |   | 1,673  
|Loans, net                         |  |                         | 482,234 |      |   | 414,458
|Premises and equipment             |  |                         | 9,097   |      |   | 9,099  
|Other assets                       |  |                         | 6,942   |      |   | 6,080  
|                                   |  |                         |         |      |   |        
|                                   |  | $                       | 570,528 |      | $ | 515,137
|                                   |  |                         |         |      |   |        
|Total deposits                     |  | $                       | 470,313 |      | $ | 427,033
|Other borrowings                   |  |                         | 42,058  |      |   | 34,835 
|Other liabilities                  |  |                         | 1,891   |      |   | 1,885  
|Stockholders equity               |  |                         | 56,266  |      |   | 51,384 
|                                   |  |                         |         |      |   |        
|                                   |  | $                       | 570,528 |      | $ | 515,137
|                                   |  |                         |         |      |   |        



As of December 31, 2004, we had total
assets of $570 million, an increase of 10.75% over December 31, 2003. Total interest-earning assets were $542 million at December 31, 2004 or 95% of total assets as compared to $479 million at December 31, 2003 or 93% of total assets. Our primary
interest-earning assets at December 31, 2004 were loans, which made up 90% of total interest-earning assets as compared to 87% at December 31, 2003. Increases of $43.2 million in deposit growth, coupled with increases in other borrowings of $7.2
million were primarily used to fund loan growth of $67.7 million. Additional funding of the loan portfolio was provided by decreases of $3.8 million in the securities portfolio, coupled with decreases in cash and due from banks of $8.1 million as
well as increased shareholders equity. The funding component of this change was accomplished through the continued emphasis on raising core deposits as well as using alternative funding sources such as wholesale certificates of deposit,
Federal Home Loan Bank Advances and other short term borrowings. The Company is favorably positioned for moderate increases in interest rates and will continue to accept opportunity cost in the short term to preserve earnings stability for the long
term.



The securities portfolio provides the Company with a source of liquidity
and a relatively stable source of income. The Companys investment policy focuses on the use of the securities portfolio to manage the interest rate risk created by the inherent mismatch of the loan and deposit portfolios. The Companys
asset/liability management committee meets quarterly to review economic trends and makes recommendations as to the structure of the securities portfolio based upon this review and the Companys projected funding needs. The Companys
securities portfolio continued to shorten in duration during 2004 as maturities and pay downs were being used to facilitate the funding of loans.



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Our securities portfolio, consisting of U.S. Government and Agency, mortgage-backed, municipal and equity securities
amounted to $54 million at December 31, 2004. Unrealized losses on securities available-for-sale were $165,627 at December 31, 2004 as compared to unrealized gains of $429,698 at December 31, 2003. Unrealized gains on securities held-to-maturity
were $10,916 at December 31, 2004 as compared to $25,333 at December 31, 2003. We have not specifically identified any securities for sale in future periods, which, if so designated, would require a charge to operations if the market value would not
be reasonably expected to recover prior to the time of sale.



Since lending
activities generate the primary source of revenue, the Companys main objective is to adhere to sound lending practices. The Board of Directors has delegated loan policy decisions and loan approval authority to the Executive Committee of the
Board of Directors. The Executive Committee is composed of five outside directors and the Chief Executive Officer. The Executive Committee establishes lending policies that include underwriting guidelines on the various types of loans made as well
as guidance on loan terms. The Company employs a loan approval process in which individual loan officers are provided with independent approval authority based upon their experience and training. When prospective loans are analyzed, both interest
rate and credit quality objectives are considered in determining whether to make a given loan. Parameters are set on the amount of credit that can be extended to one borrower. The largest amount that can generally be extended to any one borrower
without obtaining approval from the Executive Committee of the Board of Directors is $150,000. The Executive Committee is authorized to extend credit to one borrower on an unsecured basis of up to 15% of statutory capital or approximately $6.0
million and on a secured basis of up to 25% of statutory capital or approximately $10 million.



The Bank offers a variety of loans to retail customers in the communities we serve.



Consumer Loans:



Consumer loans in general carry a moderate degree of risk compared to other loans. They are generally more risky than traditional residential real estate but less risky than commercial loans. Risk of default is
generally determined by the well being of the national and local economies. During times of economic stress there is usually some level of job loss both nationally and locally, which directly affects the ability of the consumer to repay debt. Risk
on consumer type loans is generally managed through policy limitations on debt levels consumer borrowers may carry and limitations on loan terms and amounts depending upon collateral type.



Various types of consumer loans include the following:



| |  |  | Home equity loans - open and closed end
| | - |  | ---------------------------------------



| |  |  | Vehicle financing
| | - |  | -----------------



| |  |  | Loans secured by deposits
| | - |  | -------------------------



| |  |  | Secured and unsecured personal loans
| | - |  | ------------------------------------



The various types of consumer loans all carry varying degrees of risk for the Bank. Loans secured by deposits carry little or no risk and in our experience have had a
zero default rate. Home equity lines carry additional risk because of the increased difficulty of converting real estate to cash in the event of a default. However, underwriting policy provides mitigation to this risk in the form of a maximum loan
to value ratio of 90% on a collateral type that has historically appreciated in value. The Bank also requires the customer to carry adequate insurance coverage to pay all mortgage debt in full if the collateral is destroyed. Vehicle financing
carries



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additional risks over loans secured by real estate in that the collateral is declining in value over the life of the loan and is mobile. Risks inherent in
vehicle financing are managed by matching the loan term with the age and remaining useful life of the collateral to ensure the customer always has an equity position and is never upside down. Collateral is protected by requiring the
customer to carry insurance showing the bank as loss payee. The Bank also has a blanket policy that covers the Bank in the event of a lapse in the borrowers coverage and also provides assistance in locating collateral when necessary. Secured
personal loans carry additional risks over the previous types in that they are generally smaller and made to borrowers with somewhat limited financial resources and credit histories. These loans are secured by a variety of collateral with varying
degrees of marketability in the event of default. Risk on these types of loans is managed primarily at the underwriting level with guidelines for debt to income ratio limitations and conservative collateral valuations. Unsecured personal loans carry
the greatest degree of risk in the consumer portfolio. Without collateral, the Bank is completely dependent on the commitment of the borrower to repay and the stability of the borrowers income stream. Again, primary risk management occurs at
the underwriting stage with guidelines for debt to income ratios, time in present job and in industry and policy guidelines relative to loan size as a percentage of net worth and liquid assets.



Commercial and Industrial Loans



The Bank makes loans to small and medium sized businesses in our primary trade area for
purposes such as new or upgrades to plant and equipment, inventory acquisition and various working capital purposes. Commercial loans are granted to borrowers based on cash flow, ability to repay and degree of management expertise. This type loan
may be subject to many different types of risk, which will differ depending on the particular industry the borrower is involved with. General risks to an industry, or segment of an industry, are monitored by senior management on an ongoing basis,
when warranted. Individual borrowers who may be at risk due to an industry condition may be more closely analyzed and reviewed at a Loan Committee or Board of Directors level. On a regular basis, commercial and industrial borrowers are required to
submit statements of financial condition relative to their business to the Bank for review. These statements are analyzed for trends and the loan is assigned a credit grade accordingly. Based on this grade the loan may receive an increased degree of
scrutiny by management up to and including additional loss reserves being required.



This type loan is almost always collateralized. Generally, business assets are used and may consist of general intangibles, inventory, equipment or real estate. Collateral is subject to risk relative to conversion to a liquid asset if
necessary as well as risks associated with degree of specialization, mobility and general collectibility in a default situation. To mitigate this risk to collateral, it is underwritten to strict standards including valuations and general
acceptability based on the Banks ability to monitor its ongoing health and value.



Commercial Real Estate:



The Bank grants loans to borrowers
secured by commercial real estate located in our market area. In underwriting these type loans we consider the historic and projected future cash flows of the real estate, we make an assessment of the physical condition and general location of the
property and the effect these factors will have on its future desirability from a tenant standpoint. We will generally lend up to a maximum 75% loan to value ratio and require a minimum debt coverage ratio of 1.25% or other compensating factors.



Commercial real estate offers some risks not found in traditional residential
real estate lending. Repayment is dependent upon successful management and marketing of properties and on the level of expense necessary to maintain the property. Repayment of these loans may be adversely affected by conditions in the real estate
market or the general economy. Also commercial real estate loans typically involve relatively large loan balances to single borrowers. To mitigate these risks, we monitor our loan concentration and loans are audited



-25-



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by a third party auditor. This type loan generally has a shorter maturity than other loan types giving the Bank an opportunity to reprice, restructure or
decline to renew the credit. As with other loans, commercial real estate loans are graded depending upon strength of credit and performance. A lower grade will bring increased scrutiny by management and the Board of Directors.



Construction and Development Loans:



The Bank makes residential construction and development loans to customers in our market
area. Loans are granted for both speculative projects and those being built with end buyers already secured. This type loan is subject primarily to market and general economic risk caused by inventory build-up in periods of economic prosperity.
During times of economic stress this type loan has typically had a greater degree of risk than other loan types. To mitigate that risk, the Board of Directors and management reviews the entire portfolio on a monthly basis. The percentage of our
portfolio being built on a speculative basis is tracked very closely. On a quarterly basis the portfolio is segmented by market area to allow analysis of exposure and a comparison to current inventory levels in these areas. To further mitigate risk,
this type loan is accorded a larger percentage loan loss allowance than other loan types. Loan policy also provides for limits on speculative lending by borrower and by real estate project.



Loan Participations:



The Bank sells loan participations in the ordinary course of business when an originated loan exceeds its legal lending limit as defined by
state banking laws. These loan participations are sold to other financial institutions without recourse. (As of December 31, 2004 the Bank had no loan participations sold).



The Bank will also purchase loan participations from time to time from other banks in the ordinary course of business usually without
recourse. Purchased loan participations are underwritten in accordance with the Banks loan policy and represent a source of loan growth to the Bank. Although the originating financial institution provides much of the initial underwriting
documentation, management is responsible for the appropriate underwriting, approval and the on-going evaluation of the loan. One risk associated with purchasing loan participations is that the Bank often relies on information provided by the selling
bank regarding collateral value and the borrowers capacity to pay. To the extent this information is not accurate, the Bank may experience a loss on these participations. Otherwise, the Bank believes that the risk related to purchased loan
participations is consistent with other similar type loans in the loan portfolio. If a purchased loan participation defaults, the Bank usually has no recourse against the selling bank but will take other commercially reasonable steps to minimize its
loss. (As of December 31, 2004, the Bank had purchased 59 loan participations. The total principal amount of these participations comprised 9.60% of our total portfolio on December 31, 2004).



Through the Companys mortgage subsidiary, First Metro Mortgage Co., first mortgage
loans are originated for immediate sale to investors. The loans are sold with servicing rights attached. These loans sold are sold at par, therefore no gain or loss is recognized on the sale of the loan. The fees received from the investor for the
servicing rights along with other miscellaneous fees received from the borrower are included in mortgage banking income in the statements of income.



All loans originated by First Metro Mortgage Co. are classified as loans held for sale on the balance sheet because of the intention to immediately sell these loans. The
balance of the loans held for sale represents individual mortgage loans that have been funded for which



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proceeds from, the investor have not yet been received. Loans held for sale are carried at the lower of aggregate cost or fair value. However, because the
proceeds from the investors for the sale of these loans are usually received within fourteen days, the aggregate cost and fair value of these loans are the same.



For the year ended December 31, 2004, First Metro Mortgage Co. originated 284 loans totaling $41 million. These mortgage banking activities
are performed exclusively by First Metro Mortgage Co. No similar activities are conducted at the Bank level. All loans originated by the Bank are classified as held for investment.



We have 88% of our loan portfolio collateralized by real estate located in our primary market area of Henry County, Georgia and surrounding
counties. Our real estate mortgage portfolio consists of loans collateralized by one to four-family and multifamily residential properties (10%), construction loans to build one to four-family and multifamily residential properties (52%), and
nonresidential properties consisting primarily of small business commercial properties (38%).



Liquidity and Capital Resources



The
purpose of liquidity management is to ensure that there are sufficient cash flows to satisfy demands for credit, deposit withdrawals, and our other needs. Traditional sources of liquidity include asset maturities and growth in core deposits. A
company may achieve its desired liquidity objectives from the management of assets and liabilities and through funds provided by operations. Funds invested in short-term marketable instruments and the continuous maturing of other earning assets are
sources of liquidity from the asset perspective. The liability base provides sources of liquidity through deposit growth, the maturity structure of liabilities, and accessibility to market sources of funds.



Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit
flows fluctuate significantly, being influenced by interest rates and general economic conditions and competition. We attempt to price deposits to meet asset/liability objectives consistent with local market conditions.



Our liquidity and capital resources are monitored on a monthly basis by management and
periodically by State and Federal regulatory authorities. As determined under guidelines established by regulatory authorities and internal policy, our liquidity ratio of 13% at December 31, 2004 was considered satisfactory.



At December 31, 2004, we had loan commitments outstanding of $109 million. Because these
commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. If needed, we have the ability on a short-term basis to borrow and
purchase federal funds from other financial institutions. We had arrangements with two commercial banks for additional short-term advances of $21.6 million, of which $12.2 million had been drawn upon as of December 31, 2004. We also have the ability
to borrow up to $65 million, subject to available collateral, from the Federal Home Loan Bank.



At December 31, 2004, our capital ratios were considered adequate based on regulatory minimum capital requirements. Stockholders equity increased in 2004 by $4.9 million as net income of $8.4 million was offset
by a decrease in other comprehensive income related to our securities available-for-sale of $392,915, by dividends paid of $2.9 million, and by the purchase of $172,198 in treasury stock. For regulatory purposes, the net unrealized gains and losses
on securities available-for-sale are excluded in the computation of the capital ratios.



In the future, the primary source of funds available to us will be the payment of dividends by the Bank. Banking regulations limit the amount of the dividends that may be paid without prior approval of the Banks regulatory agency. At
December 31, 2004, the Bank could pay dividends of $4.2 million without regulatory approval.



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The minimum capital requirements to be considered well capitalized under prompt corrective action provisions and the
actual capital ratios for Henry County Bancshares, Inc. and the Bank as of December 31, 2004 are as follows:



|                           |  |              |   |  |       |   |  |                        |  
|-------------------------- |  | ------------ | - |  | ----- | - |  | ---------------------- | -
|                           |  | Actual       |  
|                           |  | Consolidated |   |  | Bank  |   |  | RegulatoryRequirements |  
|Leverage capital ratio     |  | 9.52         | % |  | 9.37  | % |  | 5.00                   | %
|Risk-based capital ratios: |  |              |   |  |       |   |  |                        |  
|Core capital               |  | 11.07        |   |  | 10.89 |   |  | 6.00                   |  
|Total capital              |  | 11.95        |   |  | 11.77 |   |  | 10.00                  |  



These ratios may decline as asset
growth continues, but are expected to exceed the regulatory minimum requirements to be considered well-capitalized. Anticipated future earnings will assist in keeping these ratios at satisfactory levels above the regulatory minimum requirement to be
considered well-capitalized.



We believe that our liquidity and capital
resources are adequate and will meet our foreseeable short and long-term needs. We anticipate that we will have sufficient funds available to meet current loan commitments and to fund or refinance, on a timely basis, our other material commitments
and liabilities.



Management is not aware of any other known trends, events or
uncertainties, other than those discussed above, that will have or that are reasonably likely to have a material effect on our liquidity, capital resources or operations. Management is also not aware of any current recommendations by the regulatory
authorities that, if they were implemented, would have such an effect.



Effects of Inflation



The impact of
inflation on banks differs from its impact on non-financial institutions. Banks, as financial intermediaries, have assets that are primarily monetary in nature and that tend to fluctuate in concert with inflation. A bank can reduce the impact of
inflation if it can manage its rate sensitivity gap. This gap represents the difference between rate sensitive assets and rate sensitive liabilities. We, through our asset-liability committee, attempt to structure the assets and liabilities and
manage the rate sensitivity gap, thereby seeking to minimize the potential effects of inflation. For information on the management of the Banks interest rate sensitive assets and liabilities, see the Asset/Liability Management
section.



We do not engage in any transactions or have relationships or other
arrangements with an unconsolidated entity. These include special purpose and similar entities or other off-balance sheet arrangements. We also do not trade in energy, weather or other commodity based contracts.



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Results of Operations For The Years Ended December 31, 2004, 2003 and 2002



The following is a summary of our operations for the years indicated.



|                          |  |                          |        |      |   |        |  |   |       
|------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------
|                          |  | Years Ended December 31,
|                          |  | 2004                     |        | 2003 |   | 2002  
|                          |  | (Dollars in Thousands)  
|Interest income           |  | $                        | 28,685 |      | $ | 25,748 |  | $ | 27,298
|Interest expense          |  |                          | 10,022 |      |   | 9,429  |  |   | 10,977
|                          |  |                          |        |      |   |        |  |   |       
|Net interest income       |  |                          | 18,663 |      |   | 16,319 |  |   | 16,321
|Provision for loan losses |  |                          | 443    |      |   | 472    |  |   | 540   
|Other income              |  |                          | 4,322  |      |   | 5,531  |  |   | 4,546 
|Other expenses            |  |                          | 9,548  |      |   | 9,417  |  |   | 9,134 
|                          |  |                          |        |      |   |        |  |   |       
|Pretax income             |  |                          | 12,994 |      |   | 11,961 |  |   | 11,193
|Income taxes              |  |                          | 4,611  |      |   | 4,225  |  |   | 3,859 
|                          |  |                          |        |      |   |        |  |   |       
|Net income                |  | $                        | 8,383  |      | $ | 7,736  |  | $ | 7,334 
|                          |  |                          |        |      |   |        |  |   |       



Net Interest Income



Our results of operations are determined
by our ability to manage interest income and expense effectively, to minimize loan and investment losses, to generate non-interest income, and to control operating expenses. Because interest rates are determined by market forces and economic
conditions beyond our control, our ability to generate net interest income depends on our ability to obtain an adequate net interest spread between the rate we pay on interest-bearing liabilities and the rate we earn on interest-earning assets.



The net yield on average interest-earning assets increased to 3.61% in 2004
from 3.57% in 2003. The average yield on interest-earning assets decreased to 5.55% in 2004 from 5.63 % in 2003. The average yield on interest-bearing liabilities decreased to 2.50% in 2004 from 2.67 % in 2003. By increasing higher yielding loan
assets, we were able to slightly increase our net interest income during 2004.



The net yield on average interest-earning assets decreased to 3.57% in 2003 from 3.73% in 2002. The average yield on interest-earning assets decreased to 5.63% in 2003 from 6.24% in 2002. The average yield on interest-earning liabilities
decreased to 2.67% in 2003 from 3.13% in 2002. By selectively repricing deposit liabilities, as well as converting assets to higher yielding loan assets, we were able to substantially maintain our net yield during this period of falling interest
rates.



Net interest income increased by $2.3 million in 2004 as compared to a
decrease of $2,000 in 2003 and decreased by $396 thousand in 2002 as compared to 2001. The increase in 2004 was attributed to an overall increase in interest-earning assets, particularly higher earning assets such as loans, coupled with a lower cost
of time deposits and short term borrowings.



Provision for Loan Losses



The provision for loan losses
decreased by $29,500 to $443,000 in 2004 and decreased by $68,000 to $472,500 in 2003. The amounts provided are due primarily to our assessment of the inherent risk in the loan portfolio. Please see the section titled Allowance for Loan
Losses for a more detailed explanation of our assessment



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criteria as it relates to providing for loan losses. We believe that the $4.5 million in the allowance for loan losses at December 31, 2004, or .92% of total
net outstanding loans and the $4.2 million in the allowance for loan losses at December 31, 2003, or 1.00% of total net outstanding loans, are adequate at their respective dates to absorb known risks in the portfolio based upon our historical
experience. Our net charge-offs were minimal in 2004, 2003 and 2002 as the ratio of charged-off loan to average loans outstanding was .03%, .03% and .03%, respectively. No assurance can be given, however, that increased loan volume, and adverse
economic conditions or other circumstances will not result in increased losses in our loan portfolio.



Other Income



Other income consists of service charges on deposit accounts, mortgage origination fees, gains and losses on securities transactions, gains on sale of land and other
miscellaneous revenues and fees. Other income was $4.3 million in 2004 as compared to $5.5 million in 2003. The decrease is due primarily to decreased mortgage banking income earned by First Metro Mortgage Co. of $916,000, as well as less
significant decreases in service charges on deposit accounts of $70,000. Mortgage banking income decreased significantly as a result of the slow down in mortgage re-financings during 2004.



The increase in other income to $5.5 million in 2003 from $4.5 million in 2002 was due to
increased service charges on deposit accounts of $206,000, increased mortgage banking income earned by First Metro Mortgage Co. of $556,000, as well as the gain of $217,000 on the sale of land adjacent to our Crumbley Road branch.



Other Expenses



Other expenses were $9.5 million in 2004 as compared to $9.4 million in 2003, an increase of
$130,951. Gross salaries and employee benefits decreased by $97,178, primarily as a result of a decrease of $235,000 in mortgage commissions paid offset by normal salary increases. The number of full time equivalent employees was 145 at
December 31, 2004 as compared to 144 at December 31, 2003. Salaries and employee benefits, net of capitalized loan fees of $1.4 million, amounted to $5.8 million at December 31, 2003 as compared to $5.7 million at December 31, 2002. Equipment
and occupancy expenses increased by $93,417 in 2004 as compared to 2003, primarily as a result of increase computer depreciation expense as a result of the Company upgrading its main frame computer system during 2004. Other operating expenses
increased by only $1,155 as there was no significant increase or decrease in individual other operating expense accounts, other than the costs normally associated with continued growth.



The increase in other expenses to $9.4 million in 2003 from $9.1 million in 2002 was due to increased salary and employee benefits of
$82,898, increased equipment and occupancy expense of $77,274 and increased other operating expenses of $122,865.



Income Tax



Income tax expense was $4.6 million in 2004 as compared to $4.2 million in 2003. The increase is due to higher pretax income, in addition to a lower volume of nontaxable
securities held in the securities portfolio. Income tax expense as a percentage of pretax income was 35% at December 31, 2004 and December 31, 2003.



The increase in income tax expense to $4.2 million in 2003 from $3.8 million in 2002 was due to lower pretax income and to a lower volume of nontaxable securities. Income
tax as a percentage of pretax income was 35% in 2003 and 34% in 2002.



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SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA



The tables and schedules on the following pages set forth certain financial information and
statistical data with respect to: the distribution of assets, liabilities and stockholders equity; interest rates and interest differentials; interest rate sensitivity gap ratios; the securities portfolio; the loan portfolio; including types
of loans, maturities and sensitivities to changes in interest rates and information on nonperforming loans; summary of the loan loss experience and allowance for loan losses; types of deposits; and the return on equity and assets.



The following table sets forth the amount of our interest income or interest expense for each
category of interest-earning assets and interest-bearing liabilities and the average interest yield/rate for total interest-earning assets and total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets.



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Table 1 - Distribution of Assets, Liabilities and Stockholders Equity Interest Rates and Interest Differentials



|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|-------------------------------------------- |  | ------------------------ | ------- | - | -------------- | - | ------------ | ---- | ---- | ------------------ |  | - | -------------- | - | ------------ | - | ------ | ------------------ | ---- | - | -------------- | - | ------------ | - |  | - | ------ |  | ---- | -
|                                             |  | Years Ended December 31, |        
|                                             |  | 2004                     |         |   | 2003           |   |              | 2002 |     
|                                             |  | AverageBalances(1)       |         |   | Income/Expense |   | Yields/Rates |      |      | AverageBalances(1) |  |   | Income/Expense |   | Yields/Rates |   |        | AverageBalances(1) |      |   | Income/Expense |   | Yields/Rates |  
|                                             |  | (Dollars in Thousands)   |        
|Taxable securities                           |  | $                        | 46,995  |   |                | $ | 1,365        |      | 2.90 | %                  |  | $ | 45,133         |   |              | $ | 1,340  |                    | 2.97 | % |                | $ | 67,412       |   |  | $ | 3,188  |  | 4.73 | %
|Nontaxable securities (4)                    |  |                          | 7,615   |   |                |   | 325          |      | 4.27 | %                  |  |   | 11,019         |   |              |   | 447    |                    | 4.06 |   |                |   | 17,282       |   |  |   | 700    |  | 4.05 |  
|Federal funds sold                           |  |                          | 6,115   |   |                |   | 82           |      | 1.34 | %                  |  |   | 21,574         |   |              |   | 218    |                    | 1.01 |   |                |   | 16,134       |   |  |   | 264    |  | 1.64 |  
|Interest-bearing deposits in banks           |  |                          | 351     |   |                |   | 7            |      | 1.99 | %                  |  |   | 810            |   |              |   | 23     |                    | 2.84 |   |                |   | 3,187        |   |  |   | 109    |  | 3.41 |  
|Loans (2) (3)                                |  |                          | 455,993 |   |                |   | 26,906       |      | 5.90 | %                  |  |   | 378,992        |   |              |   | 23,720 |                    | 6.26 |   |                |   | 333,224      |   |  |   | 23,037 |  | 6.91 |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Total interest-earning assets                |  |                          | 517,069 |   |                |   | 28,685       |      | 5.55 | %                  |  |   | 457,528        |   |              |   | 25,748 |                    | 5.63 |   |                |   | 437,239      |   |  |   | 27,298 |  | 6.24 |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Unrealized gains (losses) on securities      |  |                          | 173     |   |                |   |              |      |      |                    |  |   | 636            |   |              |   |        |                    |      |   |                |   | 658          |   |  |   |        |  |      |  
|Allowance for loan losses                    |  |                          | (4,394  | ) |                |   |              |      |      |                    |  |   | (4,061         | ) |              |   |        |                    |      |   |                |   | (3,632       | ) |  |   |        |  |      |  
|Cash and due from banks                      |  |                          | 21,002  |   |                |   |              |      |      |                    |  |   | 22,915         |   |              |   |        |                    |      |   |                |   | 23,088       |   |  |   |        |  |      |  
|Other assets                                 |  |                          | 18,095  |   |                |   |              |      |      |                    |  |   | 14,339         |   |              |   |        |                    |      |   |                |   | 14,453       |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Total                                        |  | $                        | 551,945 |   |                |   |              |      |      |                    |  | $ | 491,357        |   |              |   |        |                    |      |   |                | $ | 471,806      |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |     
|Interest-bearing demand & savings            |  | $                        | 138,513 |   |                |   | 2,113        |      | 1.53 | %                  |  | $ | 122,672        |   |              |   | 1,759  |                    | 1.43 |   |                | $ | 130,169      |   |  |   | 2,060  |  | 1.58 |  
|Time                                         |  |                          | 231,004 |   |                |   | 6,761        |      | 2.93 | %                  |  |   | 210,406        |   |              |   | 6,765  |                    | 3.22 |   |                |   | 199,496      |   |  |   | 7,993  |  | 4.01 |  
|Borrowings                                   |  |                          | 30,939  |   |                |   | 1,148        |      | 3.71 | %                  |  |   | 19,669         |   |              |   | 905    |                    | 4.60 |   |                |   | 20,548       |   |  |   | 924    |  | 4.50 |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Total interest-bearing liabilities           |  |                          | 400,456 |   |                |   | 10,022       |      | 2.50 | %                  |  |   | 352,747        |   |              |   | 9,429  |                    | 2.67 |   |                |   | 350,213      |   |  |   | 10,977 |  | 3.13 |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Noninterest-bearing demand                   |  |                          | 93,034  |   |                |   |              |      |      |                    |  |   | 86,162         |   |              |   |        |                    |      |   |                |   | 75,027       |   |  |   |        |  |      |  
|Other liabilities                            |  |                          | 4,049   |   |                |   |              |      |      |                    |  |   | 3,048          |   |              |   |        |                    |      |   |                |   | 2,506        |   |  |   |        |  |      |  
|Stockholders equity                         |  |                          | 54,406  |   |                |   |              |      |      |                    |  |   | 49,400         |   |              |   |        |                    |      |   |                |   | 44,060       |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Total                                        |  | $                        | 551,945 |   |                |   |              |      |      |                    |  | $ | 491,357        |   |              |   |        |                    |      |   |                | $ | 471,806      |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Net interest income                          |  |                          |         |   |                | $ | 18,663       |      |      |                    |  |   |                |   |              | $ | 16,319 |                    |      |   |                |   |              |   |  | $ | 16,321 |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Net interest spread                          |  |                          |         |   |                |   |              |      | 3.04 | %                  |  |   |                |   |              |   |        |                    | 2.96 | % |                |   |              |   |  |   |        |  | 3.11 | %
|Net yield on average interest-earning assets |  |                          |         |   |                |   |              |      | 3.61 | %                  |  |   |                |   |              |   |        |                    | 3.57 | % |                |   |              |   |  |   |        |  | 3.73 | %



|(1) | Average balances were determined using the daily average balances.
|--- | ------------------------------------------------------------------



|(2) | Average balances of loans include nonaccrual loans.
|--- | ---------------------------------------------------



|(3) | Interest and fees on loans include $218,000, $207,000, and $212,000 of loan fee income for the years ended December 31, 2004, 2003, and 2002, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Yields on nontaxable securities are not presented on a tax-equivalent basis.
|--- | ----------------------------------------------------------------------------



Table 2 - Rate and Volume Analysis



The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have
affected our interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) change in volume (change in volume multiplied
by old rate); (2) change in rate (change in rate multiplied by old volume); and (3) a combination of change in rate and change in volume. The changes in interest income and interest expense attributable to both volume and rate have been allocated
proportionately to the change due to volume and the change due to rate.



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|                                                                  |  |                                      |       |   |                                      |   |        |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |        |  
|----------------------------------------------------------------- |  | ------------------------------------ | ----- | - | ------------------------------------ | - | ------ | --- |  | - | ----- | - |  | ------ | ----- | - | --- | - | ------ | - |  | - | ------ | -
|                                                                  |  | Years Ended December 31,             |      
|                                                                  |  | 2004 to 2003                         |       |   | 2003 to 2002                         |  
|                                                                  |  | Increase (decrease) due to change in |       |   | Increase (decrease) due to change in |  
|                                                                  |  | Rate                                 |       |   | Volume                               |   |        | Net |  |   | Rate  |   |  | Volume |       |   | Net |  
|                                                                  |  | (Dollars in Thousands)               |      
|Income from interest-earning assets:                              |  |                                      |       |   |                                      |   |        |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |        |  
|Interest and fees on loans                                        |  | $                                    | 4,604 |   |                                      | $ | (1,418 | )   |  | $ | 3,186 |   |  | $      | 2,987 |   |     | $ | (2,304 | ) |  | $ | 683    |  
|Interest on taxable securities                                    |  |                                      | 54    |   |                                      |   | (29    | )   |  |   | 25    |   |  |        | (869  | ) |     |   | (979   | ) |  |   | (1,848 | )
|Interest on nontaxable securities                                 |  |                                      | (144  | ) |                                      |   | 22     |     |  |   | (122  | ) |  |        | (254  | ) |     |   | 1      |   |  |   | (253   | )
|Interest on federal funds sold                                    |  |                                      | (191  | ) |                                      |   | 55     |     |  |   | (136  | ) |  |        | 73    |   |     |   | (119   | ) |  |   | (46    | )
|Interest on interest-bearing deposits in banks                    |  |                                      | (10   | ) |                                      |   | (6     | )   |  |   | (16   | ) |  |        | (70   | ) |     |   | (16    | ) |  |   | (86    | )
|                                                                  |  |                                      |       |   |                                      |   |        |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |        |  
|Total interest income                                             |  |                                      | 4,313 |   |                                      |   | (1,376 | )   |  |   | 2,937 |   |  |        | 1,867 |   |     |   | (3,417 | ) |  |   | (1,550 | )
|                                                                  |  |                                      |       |   |                                      |   |        |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |        |  
|Expense from interest-bearing liabilities:                        |  |                                      |       |   |                                      |   |        |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |        |  
|Interest on interest-bearing demand deposits and savings deposits |  |                                      | 237   |   |                                      |   | 117    |     |  |   | 354   |   |  |        | (114  | ) |     |   | (187   | ) |  |   | (301   | )
|Interest on time deposits                                         |  |                                      | 631   |   |                                      |   | (635   | )   |  |   | (4    | ) |  |        | 420   |   |     |   | (1,648 | ) |  |   | (1,228 | )
|Interest on borrowings                                            |  |                                      | 443   |   |                                      |   | (200   | )   |  |   | 243   |   |  |        | (40   | ) |     |   | 21     |   |  |   | (19    | )
|                                                                  |  |                                      |       |   |                                      |   |        |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |        |  
|Total interest expense                                            |  |                                      | 1,311 |   |                                      |   | (718   | )   |  |   | 593   |   |  |        | 266   |   |     |   | (1,814 | ) |  |   | (1,548 | )
|                                                                  |  |                                      |       |   |                                      |   |        |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |        |  
|Net interest income                                               |  | $                                    | 3,002 |   |                                      | $ | (658   | )   |  | $ | 2,344 |   |  | $      | 1,601 |   |     | $ | (1,603 | ) |  | $ | (2     | )
|                                                                  |  |                                      |       |   |                                      |   |        |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |        |  



Asset/Liability Management



Our asset/liability mix is monitored on a regular basis
and a report evaluating the interest rate sensitive assets and interest rate sensitive liabilities is prepared and presented to the Board of Directors on a quarterly basis. The objective of this policy is to monitor interest rate sensitive assets
and liabilities so as to minimize the impact of substantial movements in interest rates on earnings. An asset or liability is considered to be interest rate-sensitive if it will reprice or mature within the time period analyzed, usually one year or
less. The interest rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such time period. A gap is considered positive when the amount of interest
rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the interest rate-sensitive assets. During a period of rising interest
rates, a negative gap would tend to 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 our assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net
interest income would be minimal.



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 interest rates. Accordingly, we also evaluate how the repayment of particular assets and liabilities is impacted by changes
in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest



-33-



---

rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although
certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in
general market rates, while interest rates on other types 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 and
floors) that limit the amount of changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts
also may decrease during periods of rising interest rates.



Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates and it is managements intention to continue this policy. If deposits are not priced in response to market rates, a
loss of deposits could occur which would negatively affect our liquidity position.



At December 31, 2004 our cumulative one year interest rate sensitivity gap ratio was 108%. Our targeted ratio is 80% to 120% in this time horizon. This indicates that our interest-earning assets will reprice during
this period at a rate faster than our interest-bearing liabilities.



The following table sets forth the distribution of the repricing of our interest-earning assets and interest-bearing liabilities as of December 31, 2004, the interest rate sensitivity gap (i.e., interest rate sensitive assets less interest
rate sensitive liabilities), the cumulative interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e., interest rate sensitive assets divided by interest rate sensitive liabilities) and the cumulative interest rate sensitivity gap
ratio.



The table also sets forth the time periods in which
interest-earning assets and interest-bearing liabilities will mature or may reprice in accordance with their contractual terms. However, the table does not necessarily indicate the impact of general interest rate movements on the net interest margin
since the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of our customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at
different times within such period and at different rates.



-34-



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|                                               |  |                        |         |                                        |   |         |                                      |  |                  |         |       |   |         |  |   |        
|---------------------------------------------- |  | ---------------------- | ------- | -------------------------------------- | - | ------- | ------------------------------------ |  | ---------------- | ------- | ----- | - | ------- |  | - | -------
|                                               |  | Within Three Months    |         | After Three Months But Within One Year |   |         | After One Year But Within Five Years |  | After Five Years |         | Total
|                                               |  | (Dollars in Thousands)
|Interest-earning assets:                       |  |                        |         |                                        |   |         |                                      |  |                  |         |       |   |         |  |   |        
|Interest-bearing deposits in banks             |  | $                      | 330     |                                        | $ |        |                                      |  | $                |        |       | $ |        |  | $ | 330    
|Federal funds sold                             |  |                        |        |                                        |   |        |                                      |  |                  |        |       |   |        |  |   |       
|Securities                                     |  |                        |        |                                        |   | 7,195   |                                      |  |                  | 36,363  |       |   | 10,849  |  |   | 54,407 
|Loans                                          |  |                        | 252,287 |                                        |   | 94,187  |                                      |  |                  | 128,879 |       |   | 11,947  |  |   | 487,300
|                                               |  |                        |         |                                        |   |         |                                      |  |                  |         |       |   |         |  |   |        
|Total interest-earning assets                  |  |                        | 252,617 |                                        |   | 101,382 |                                      |  |                  | 165,242 |       |   | 22,796  |  |   | 542,037
|                                               |  |                        |         |                                        |   |         |                                      |  |                  |         |       |   |         |  |   |        
|Interest-bearing liabilities:                  |  |                        |         |                                        |   |         |                                      |  |                  |         |       |   |         |  |   |        
|Interest-bearing demand and savings            |  | $                      | 146,779 |                                        | $ |        |                                      |  | $                |        |       | $ |        |  | $ | 146,779
|Time deposits                                  |  |                        | 57,117  |                                        |   | 110,275 |                                      |  |                  | 67,988  |       |   |        |  |   | 235,380
|Repurchase agreements                          |  |                        |        |                                        |   |        |                                      |  |                  | 5,000   |       |   |        |  |   | 5,000  
|Other borrowings                               |  |                        | 12,701  |                                        |   |        |                                      |  |                  | 11,000  |       |   | 13,357  |  |   | 37,058 
|                                               |  |                        |         |                                        |   |         |                                      |  |                  |         |       |   |         |  |   |        
|Total interest-bearing liabilities             |  | $                      | 216,597 |                                        | $ | 110,275 |                                      |  | $                | 83,988  |       | $ | 13,357  |  | $ | 424,217
|                                               |  |                        |         |                                        |   |         |                                      |  |                  |         |       |   |         |  |   |        
|Interest rate sensitivity gap                  |  | $                      | 36,020  |                                        | $ | (8,893  | )                                    |  | $                | 81,254  |       | $ | 9,439   |  | $ | 117,820
|                                               |  |                        |         |                                        |   |         |                                      |  |                  |         |       |   |         |  |   |        
|Cumulative interest rate sensitivity gap       |  | $                      | 36,020  |                                        | $ | 27,127  |                                      |  | $                | 108,381 |       | $ | 117,820 |  |   |        
|                                               |  |                        |         |                                        |   |         |                                      |  |                  |         |       |   |         |  |   |        
|Interest rate sensitivity gap ratio            |  |                        | 1.17    |                                        |   | .92     |                                      |  |                  | 1.98    |       |   | 1.71    |  |   |        
|                                               |  |                        |         |                                        |   |         |                                      |  |                  |         |       |   |         |  |   |        
|Cumulative interest rate sensitivity gap ratio |  |                        | 1.17    |                                        |   | 1.08    |                                      |  |                  | 1.26    |       |   | 1.28    |  |   |        
|                                               |  |                        |         |                                        |   |         |                                      |  |                  |         |       |   |         |  |   |        



We actively manage the
mix of asset and liability maturities to control the effects of changes in the general level of interest rates on net interest income. Except for its effect on the general level of interest rates, inflation does not have a material impact on us due
to the rate variability and short-term maturities of our earning assets. In particular, approximately 71% of the loan portfolio is comprised of loans that have variable rate terms or mature within one year. Most mortgage loans are made on a variable
rate basis with rates being adjusted every one to five years.



-35-



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INVESTMENT PORTFOLIO



Types of Investments



The carrying amounts of securities at the dates indicated are summarized as follows:



|                                      |  |                        |        |      |   |        |  |   |       
|------------------------------------- |  | ---------------------- | ------ | ---- | - | ------ |  | - | ------
|                                      |  | December 31,          
|                                      |  | 2004                   |        | 2003 |   | 2002  
|                                      |  | (Dollars in Thousands)
|U.S. Government and agency securities |  | $                      | 38,129 |      | $ | 33,770 |  | $ | 23,111
|Mortgage-backed securities            |  |                        | 7,878  |      |   | 13,987 |  |   | 26,021
|Municipal securities                  |  |                        | 5,875  |      |   | 9,316  |  |   | 13,856
|                                      |  |                        |        |      |   |        |  |   |       
|                                      |  |                        | 51,882 |      |   | 57,073 |  |   | 62,988
|Equity securities                     |  |                        | 2,359  |      |   | 983    |  |   | 1,483 
|                                      |  |                        |        |      |   |        |  |   |       
|                                      |  | $                      | 54,241 |      | $ | 58,056 |  | $ | 64,471
|                                      |  |                        |        |      |   |        |  |   |       



Maturities



The amounts of debt securities, including the weighted average yield in each category as of
December 31, 2004 are shown in the following table according to contractual maturity classifications (1) one year or less, (2) after one through five years, (3) after five through ten years and (4) after ten years. Equity securities are not included
in the table because they have no contractual maturity.



|                                      |  |                  |       |           |                              |   |        |                             |           |  |      |        |  |           |       |  |      |  
|------------------------------------- |  | ---------------- | ----- | --------- | ---------------------------- | - | ------ | --------------------------- | --------- |  | ---- | ------ |  | --------- | ----- |  | ---- | -
|                                      |  | One year or less |       |           | After one through five years |   |        | After fivethrough ten years |          
|                                      |  | Amount           |       | Yield (1) |                              |   | Amount |                             | Yield (1) |  |      | Amount |  | Yield (1) |      
|U.S. Government and agency securities |  | $                | 7,058 |           | 1.99                         | % |        | $                           | 31,071    |  | 2.71 | %      |  | $         |      |  |     | %
|Mortgage-backed securities            |  |                  |      |           |                             |   |        |                             | 2,130     |  | 3.21 |        |  |           | 703   |  | 5.37 |  
|Municipal securities                  |  |                  | 100   |           | 4.70                         |   |        |                             | 2,946     |  | 3.87 |        |  |           | 2,082 |  | 3.77 |  
|                                      |  |                  |       |           |                              |   |        |                             |           |  |      |        |  |           |       |  |      |  
|                                      |  | $                | 7,158 |           | 2.03                         |   |        | $                           | 36,147    |  | 2.83 |        |  | $         | 2,785 |  | 4.17 |  
|                                      |  |                  |       |           |                              |   |        |                             |           |  |      |        |  |           |       |  |      |  



|                                      |  |                 |       |           |       |   |        |   |           |  |      |  
|------------------------------------- |  | --------------- | ----- | --------- | ----- | - | ------ | - | --------- |  | ---- | -
|                                      |  | After ten years |       |           | Total |  
|                                      |  | Amount          |       | Yield (1) |       |   | Amount |   | Yield (1) | 
|U.S. Government and agency securities |  | $               |      |           |      | % |        | $ | 38,129    |  | 2.58 | %
|Mortgage-backed securities            |  |                 | 5,045 |           | 4.16  |   |        |   | 7,878     |  | 4.01 |  
|Municipal securities                  |  |                 | 747   |           | 5.31  |   |        |   | 5,875     |  | 4.02 |  
|                                      |  |                 |       |           |       |   |        |   |           |  |      |  
|                                      |  | $               | 5,792 |           | 4.30  |   |        | $ | 51,882    |  | 2.95 |  
|                                      |  |                 |       |           |       |   |        |   |           |  |      |  



|(1) | The weighted average yields were computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of
each security.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The weighted average yields for municipal securities are not stated on a tax-equivalent basis.
|--- | ----------------------------------------------------------------------------------------------



-36-



---

LOAN PORTFOLIO



Types of Loans



Loans by type of collateral are presented below:



|                               |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------ |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                               |  | December 31,           |        
|                               |  | 2004                   |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                               |  | (Dollars in Thousands) |        
|Commercial                     |  | $                      | 47,246  |   |      | $ | 55,075  |      |  | $ | 58,994  |   |  | $    | 51,486  |   |  | $ | 48,683  |  
|Real estate - construction     |  |                        | 223,907 |   |      |   | 156,821 |      |  |   | 102,602 |   |  |      | 71,955  |   |  |   | 60,345  |  
|Real estate  mortgage         |  |                        | 203,598 |   |      |   | 191,944 |      |  |   | 165,546 |   |  |      | 159,276 |   |  |   | 140,049 |  
|Consumer installment and other |  |                        | 11,972  |   |      |   | 14,797  |      |  |   | 23,135  |   |  |      | 21,971  |   |  |   | 22,452  |  
|                               |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                               |  |                        | 486,723 |   |      |   | 418,637 |      |  |   | 350,277 |   |  |      | 304,688 |   |  |   | 271,529 |  
|Less allowance for loan losses |  |                        | (4,489  | ) |      |   | (4,178  | )    |  |   | (3,827  | ) |  |      | (3,377  | ) |  |   | (2,884  | )
|                               |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loans                      |  | $                      | 482,234 |   |      | $ | 414,459 |      |  | $ | 346,450 |   |  | $    | 301,311 |   |  | $ | 268,645 |  
|                               |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  



Maturities and Sensitivities to
Changes in Interest Rates



Total loans as of December 31, 2004 are shown
in the following table according to contractual maturity classifications (1) one year or less, (2) after one year through five years, and (3) after five years.



|                             |  |                       |        
|---------------------------- |  | --------------------- | -------
|                             |  | (Dollarsin Thousands)
|Commercial                   |  |                       |        
|One year or less             |  | $                     | 17,585 
|After one through five years |  |                       | 27,040 
|After five years             |  |                       | 2,621  
|                             |  |                       |        
|                             |  |                       | 47,246 
|                             |  |                       |        
|Construction                 |  |                       |        
|One year or less             |  |                       | 217,856
|After one through five years |  |                       | 6,051  
|After five years             |  |                       | 0      
|                             |  |                       |        
|                             |  |                       | 223,907
|                             |  |                       |        
|Other                        |  |                       |        
|One year or less             |  |                       | 49,266 
|After one through five years |  |                       | 113,980
|After five years             |  |                       | 52,324 
|                             |  |                       |        
|                             |  |                       | 215,570
|                             |  |                       |        
|                             |  | $                     | 486,723
|                             |  |                       |        



-37-



---

The following table summarizes loans at December 31, 2004 with the due dates after one year for predetermined and
floating or adjustable interest rates.



|                                      |  |                       |        
|------------------------------------- |  | --------------------- | -------
|                                      |  | (Dollarsin Thousands)
|Predetermined interest rates          |  | $                     | 130,697
|Floating or adjustable interest rates |  |                       | 71,320 
|                                      |  |                       |        
|                                      |  | $                     | 202,017
|                                      |  |                       |        



Risk Elements



The following table presents the aggregate of nonperforming loans for the categories
indicated.



|                                                                                                                                                                               |  |                        |       |      |   |       |  |      |       |      |   |       |  |   |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                                                                                                                                                               |  | December 31,          
|                                                                                                                                                                               |  | 2004                   |       | 2003 |   | 2002  |  | 2001 |       | 2000
|                                                                                                                                                                               |  | (Dollars in Thousands)
|Loans accounted for on a nonaccrual basis                                                                                                                                      |  | $                      | 498   |      | $ | 346   |  | $    | 296   |      | $ | 304   |  | $ | 262  
|                                                                                                                                                                               |  |                        |       |      |  
|Loans contractually past due ninety days or more as to interest or principal payments and still Accruing                                                                       |  |                        | 3,251 |      |   | 1,654 |  |      | 1,048 |      |   | 1,197 |  |   | 7,469
|                                                                                                                                                                               |  |                        |       |      |  
|Loans, the term of which have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the
financial position of the borrower |  |                        |      |      |   |      |  |      |      |      |   |      |  |   |     
|                                                                                                                                                                               |  |                        |       |      |  
|Potential problem loans                                                                                                                                                        |  |                        |      |      |   | 15    |  |      | 120   |      |   |      |  |   |     



The reduction in interest income
associated with nonaccrual loans as of December 31, 2004 is as follows:



|                                                                                       |  |                       |   
|-------------------------------------------------------------------------------------- |  | --------------------- | --
|                                                                                       |  | (Dollarsin Thousands)
|Interest income that would have been recorded on nonaccrual loans under original terms |  | $                     | 47
|                                                                                       |  |                       |   
|Interest income that was recorded on nonaccrual loans                                  |  | $                     |  
|                                                                                       |  |                       |   



Potential problem loans are defined as
loans about which we have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may cause the loan to be placed on nonaccrual status, to become past due more than ninety days, or to be
restructured.



Our policy is to discontinue the accrual of interest income
when, in the opinion of management, collection of such interest becomes doubtful. This status is determined when; (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not
expected; and (2) the principal or interest is more than ninety days past due, unless the loan is both well-secured and in the process of collection. Accrual of interest on such loans is resumed when, in managements judgment, the collection of
interest and principal becomes probable. Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been included in the table above do not represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results, liquidity, or capital resources. These classified loans do not represent material credits about which management is aware and which causes management to have serious
doubts as to the ability of such borrowers to comply with the



-38-



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loan repayment terms. In the event of non-performance by the borrower, these loans have collateral pledged which would prevent the recognition of substantial
losses.



SUMMARY OF LOAN LOSS EXPERIENCE



The following table summarizes average loan balances for each year determined
using the daily average balances during the year; changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off; additions to the allowance which have been charged to expense; and the ratio of
net charge-offs during the year to average loans.



|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                            |  | December 31,           |        
|                                                                            |  | 2004                   |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                                                            |  | (Dollars in Thousands) |        
|Average amount of loans outstanding                                         |  | $                      | 455,993 |   |      | $ | 378,992 |      |  | $ | 333,224 |   |  | $    | 286,646 |   |  | $ | 245,088 |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Balance of allowance for loan losses at beginning of year                   |  | $                      | 4,178   |   |      | $ | 3,827   |      |  | $ | 3,377   |   |  | $    | 2,884   |   |  | $ | 2,453   |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loans charged off:                                                          |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate                                                                 |  |                        | (17     | ) |      |   | (25     | )    |  |   | (5      | ) |  |      | (29     | ) |  |   | (25     | )
|Commercial                                                                  |  |                        | (45     | ) |      |   | (15     | )    |  |   |        |   |  |      |        |   |  |   |        |  
|Consumer installment                                                        |  |                        | (91     | ) |      |   | (122    | )    |  |   | (124    | ) |  |      | (54     | ) |  |   | (94     | )
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                            |  |                        | (153    | ) |      |   | (162    | )    |  |   | (129    | ) |  |      | (83     | ) |  |   | (119    | )
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Recoveries of loans previously charged off:                                 |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate                                                                 |  |                        | 6       |   |      |   | 1       |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial                                                                  |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Consumer installment                                                        |  |                        | 15      |   |      |   | 40      |      |  |   | 39      |   |  |      | 26      |   |  |   | 60      |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                            |  |                        | 21      |   |      |   | 41      |      |  |   | 39      |   |  |      | 26      |   |  |   | 60      |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loans charged off during the year                                       |  |                        | (132    | ) |      |   | (121    | )    |  |   | (90     | ) |  |      | (57     | ) |  |   | (59     | )
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Additions to allowance charged to expense during year                       |  |                        | 443     |   |      |   | 472     |      |  |   | 540     |   |  |      | 550     |   |  |   | 490     |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Balance of allowance for loan losses at end of year                         |  | $                      | 4,489   |   |      | $ | 4,178   |      |  | $ | 3,827   |   |  | $    | 3,377   |   |  | $ | 2,884   |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Ratio of net loans charged off during the year to average loans outstanding |  |                        | 0.03    | % |      |   | 0.03    | %    |  |   | 0.03    | % |  |      | 0.02    | % |  |   | 0.02    | %
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  



Allowance for Loan Losses



The allowance for loan losses is maintained at a level that is deemed
appropriate by us to adequately cover all known and inherent risks in the loan portfolio. Our evaluation considers significant factors relative to the credit risk and loss exposure in the loan portfolio, including past due and classified loans,
historical experience, underlying collateral values, and current economic conditions that may affect the borrowers ability to repay. The allowance for loan losses is evaluated by segmenting the loan portfolio into unclassified and classified
loans. An allowance percentage is applied to the unclassified loans to establish a general allowance for loan losses. The allowance percentage determined is based upon our experience specifically and the historical experience of the banking industry
generally. The classified loans, including impaired loans, are analyzed



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---

individually in order to establish a specific allowance for loan losses. A loan is considered impaired when it is probable that we will be unable to collect
all principal and interest due in accordance with the contractual terms of the loan agreement.



As of the indicated dates, we had made no allocations of our allowance for loan losses to specifically correspond to the categories of loans listed below. Based on our best estimate, the allocation of the allowance
for loan losses to types of loans, as of the indicated dates, is as follows:



|                               |  |                        |       |                                             |        |   |        |      |                                             |  |        |        |  |                                             |       |  |        |   |                                             |   |       |        |        |                                             |  |   |       |  |        |  
|------------------------------ |  | ---------------------- | ----- | ------------------------------------------- | ------ | - | ------ | ---- | ------------------------------------------- |  | ------ | ------ |  | ------------------------------------------- | ----- |  | ------ | - | ------------------------------------------- | - | ----- | ------ | ------ | ------------------------------------------- |  | - | ----- |  | ------ | -
|                               |  | December 31,           |      
|                               |  | 2004                   |       |                                             | 2003   |   |        | 2002 |                                             |  | 2001   |        |  | 2000                                        |      
|                               |  | Amount                 |       | Percentof Loansin EachCategoryto TotalLoans |        |   | Amount |      | Percentof Loansin EachCategoryto TotalLoans |  |        | Amount |  | Percentof Loansin EachCategoryto TotalLoans |       |  | Amount |   | Percentof Loansin EachCategoryto TotalLoans |   |       | Amount |        | Percentof Loansin EachCategoryto TotalLoans | 
|                               |  | (Dollars in Thousands) |      
|Commercial                     |  | $                      | 647   |                                             | 9.71   | % |        | $    | 813                                         |  | 13.15  | %      |  | $                                           | 800   |  | 16.84  | % |                                             | $ | 675   |        | 16.90  | %                                           |  | $ | 577   |  | 17.93  | %
|Real estate-construction       |  |                        | 1,698 |                                             | 46.00  |   |        |      | 1,015                                       |  | 37.46  |        |  |                                             | 841   |  | 29.29  |   |                                             |   | 844   |        | 23.62  |                                             |  |   | 721   |  | 22.22  |  
|Real estate-mortgage           |  |                        | 1,526 |                                             | 41.83  |   |        |      | 1,625                                       |  | 45.85  |        |  |                                             | 1,530 |  | 47.26  |   |                                             |   | 1,351 |        | 52.28  |                                             |  |   | 1,154 |  | 51.58  |  
|Consumer installment and other |  |                        | 618   |                                             | 2.46   |   |        |      | 725                                         |  | 3.54   |        |  |                                             | 656   |  | 6.61   |   |                                             |   | 507   |        | 7.20   |                                             |  |   | 432   |  | 8.27   |  
|                               |  |                        |       |                                             |        |   |        |      |                                             |  |        |        |  |                                             |       |  |        |   |                                             |   |       |        |        |                                             |  |   |       |  |        |  
|Total allowance                |  |                        | 4,489 |                                             | 100.00 | % |        |      | 4,178                                       |  | 100.00 | %      |  | $                                           | 3,827 |  | 100.00 | % |                                             | $ | 3,377 |        | 100.00 | %                                           |  | $ | 2,884 |  | 100.00 | %
|                               |  |                        |       |                                             |        |   |        |      |                                             |  |        |        |  |                                             |       |  |        |   |                                             |   |       |        |        |                                             |  |   |       |  |        |  



DEPOSITS



Average amounts of deposits and average rates paid thereon, classified as
to noninterest-bearing demand deposits, interest-bearing demand and savings deposits and time deposits, are presented below. (1)



|                                             |  |                         |         |      |      |   |        |      |         |  |      |        |  |      |         |  |      |  
|-------------------------------------------- |  | ----------------------- | ------- | ---- | ---- | - | ------ | ---- | ------- |  | ---- | ------ |  | ---- | ------- |  | ---- | -
|                                             |  | Year Ended December 31, |        
|                                             |  | 2004                    |         |      | 2003 |   |        | 2002 |        
|                                             |  | Amount                  |         | Rate |      |   | Amount |      | Rate    |  |      | Amount |  | Rate |        
|                                             |  | (Dollars in Thousands)  |        
|Noninterest-bearing demand deposits          |  | $                       | 93,034  |      |     | % |        | $    | 86,162  |  |     | %      |  | $    | 75,027  |  |     | %
|Interest-bearing demand and savings deposits |  |                         | 138,513 |      | 1.53 |   |        |      | 122,672 |  | 1.43 |        |  |      | 130,169 |  | 1.58 |  
|Time deposits                                |  |                         | 231,004 |      | 2.93 |   |        |      | 210,406 |  | 3.22 |        |  |      | 199,496 |  | 4.01 |  
|                                             |  |                         |         |      |      |   |        |      |         |  |      |        |  |      |         |  |      |  
|Total deposits                               |  | $                       | 462,551 |      |      |   |        | $    | 419,240 |  |      |        |  | $    | 404,692 |  |      |  
|                                             |  |                         |         |      |      |   |        |      |         |  |      |        |  |      |         |  |      |  



|(1) | Average balances were determined using the daily average balances.
|--- | ------------------------------------------------------------------



The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 2004 are shown below by category, which is based on time remaining
until maturity of (1) three months or less, (2) over three through six months (3) over six through twelve months, and (4) over twelve months.



|                               |  |                       |       
|------------------------------ |  | --------------------- | ------
|                               |  | (Dollarsin Thousands)
|Three months or less           |  | $                     | 21,981
|Over three through six months  |  |                       | 15,721
|Over six through twelve months |  |                       | 27,284
|Over twelve months             |  |                       | 21,172
|                               |  |                       |       
|Total                          |  | $                     | 86,158
|                               |  |                       |       



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RETURN ON EQUITY AND ASSETS



The following rate of return information for the periods indicated is presented below.



|                           |  |                          |   |  |       |   |  |       |  
|-------------------------- |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                           |  | Years Ended December 31, |  
|                           |  | 2004                     |   |  | 2003  |   |  | 2002  |  
|Return on assets (1)       |  | 1.52                     | % |  | 1.57  | % |  | 1.55  | %
|Return on equity (2)       |  | 15.41                    |   |  | 15.66 |   |  | 16.65 |  
|Dividend payout ratio (3)  |  | 35.02                    |   |  | 35.18 |   |  | 34.31 |  
|Equity to assets ratio (4) |  | 9.86                     |   |  | 10.05 |   |  | 9.34  |  



|(1) | Net income divided by average total assets.
|--- | -------------------------------------------



|(2) | Net income divided by average equity.
|--- | -------------------------------------



|(3) | Dividends declared per share divided by earnings per share.
|--- | -----------------------------------------------------------



|(4) | Average equity divided by average total assets.
|--- | -----------------------------------------------



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We are exposed only to U.S. dollar interest rate changes and accordingly, we manage exposure by considering the possible changes in the net interest margin. We do not
have any trading instruments nor do we classify any portion of the investment portfolio as held for trading. We do not engage in any hedging activities or enter into any derivative instruments with a higher degree of risk than mortgage-backed
securities that are commonly pass through securities. Finally, we have no exposure to foreign currency exchange rate risk, commodity price risk, and other market risks. Interest rates play a major part in the net interest income of a financial
institution. The sensitivity to rate changes is known as interest rate risk. The repricing of interest earning assets and interest-bearing liabilities can influence the changes in net interest income. As part of our asset/liability
management program, the timing of repriced assets and liabilities is referred to as Gap management. It is our policy to maintain a Gap ratio in the one-year time horizon of .80 to 1.20.



GAP management alone is not enough to properly manage interest rate sensitivity, because interest rates do not respond at the same speed or
at the same level to market rate changes. For example, savings and money market rates are more stable than loans tied to a Prime rate and thus respond with less volatility to a market rate change.



We use a third party simulation model to monitor changes in net interest income due to
changes in market rates. The model of rising, falling and stable interest rate scenarios allow management to monitor and adjust interest rate sensitivity to minimize the impact of market rate swings. The analysis of impact on net interest margins as
well as market value of equity over a twelve-month period is subjected to a 200 basis point increase and decrease in rate. The 4thquarter model reflects an increase of 24% in net interest income and a 19% increase in economic value of equity for a 200 basis point increase in rates. The same model shows a 4% decrease in net interest income and a 13% decrease in
economic value of equity for a 200 basis point decrease in rates. Our investment committee monitors changes on a quarterly basis, measures the changing values based on the models performance and determines an appropriate interest rate policy
for management to follow in order to minimize the impact on earnings and market value equity in the projected rate environment.



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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTING DATA



The following consolidated financial statements of the Registrant and its subsidiaries are included on Exhibit 99.1 of this Annual Report on
Form 10-K:



Consolidated Balance Sheets - December 31, 2004
and 2003



Consolidated Statements of Income - Years Ended
December 31, 2004, 2003 and 2002



Consolidated Statements of
Comprehensive Income - Years Ended December 31, 2004, 2003 and 2002



Consolidated Statements of Stockholders Equity - Years Ended December 31, 2004, 2003 and 2002



Consolidated Statements of Cash Flows - Years Ended December 31, 2004, 2003 and 2002



Notes to Consolidated Financial Statements



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Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



Not applicable.



Item 9a. CONTROLS AND PROCEDURES



As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our Chief Executive Officer and the Principal Financial and Accounting Officer, of the design and operation of our disclosure controls and procedures. Based on this evaluation, our
Chief Executive Officer and principal Financial and Accounting Officer concluded that our disclosure controls and procedures provide reasonable assurance of their effectiveness for gathering, analyzing and disclosing the information that we are
required to disclose in the reports we file under the Securities Exchange Act of 1934, within the time periods specified in the SECs rules and forms. Our Chief Executive Officer and Principal Financial and Accounting Officer also concluded
that our disclosure controls and procedures provide reasonable assurance of their effectiveness in timely alerting them to material information relating to our company (including its consolidated subsidiaries) required to be included in our periodic
SEC filings. In connection with the new rules, we are in the process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make
changes designed to enhance their effectiveness and to ensure that our systems evolve with our business.



There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the
date of this evaluation, and there have been no corrective actions with respect to significant deficiencies or material weaknesses.



MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING



Pursuant to SEC Release No. 50754 (the Release), the Company has elected to complete its Form 10-K by filing an amendment within 45 days to
include the information required by Item 308(a) of Regulation S-B, managements annual report on internal control and the related attestation report of the registered public accounting firm. The Company qualifies under
the conditions set forth in the Release permitting the completion of this Form 10-K by amendment.



Item 9b



OTHER INFORMATION



The Company did not file a report on Form 8-K in 2004.



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Part III



Item 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT



The information required by this Item is incorporated by reference to the
Companys definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.



Code of Ethics



Henry County Bancshares, Inc. has adopted a Code of Ethics that applies to the Companys principal executive officer
and principal financial and accounting officers. A copy of the Henry County Bancshares, Inc. Code of Ethics will be provided to any person, without charge, upon written request made to Thomas L. Redding, Henry County Bancshares, Inc., 4806 N. Henry
Boulevard, Stockbridge, Georgia 30281.



Item 11. EXECUTIVE COMPENSATION



The information required by this Item is incorporated by
reference to the Companys definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.



Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The information required by this Item is incorporated by reference to the
Companys definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.



Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required by this Item is incorporated by reference to the
Companys definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.



-44-



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Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES



The information required by this Item is incorporated by reference to the Companys definitive Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.



Part IV



Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



(a) The following documents are filed as part of this report.



(1) The consolidated statements of financial conditions of Henry County Bancshares, Inc. and its subsidiaries as of December 31, 2003 and 2004, and the related consolidated statements of income, changes in
stockholders equity and cash flows for each of the years in the three-year period ended December 31, 2004, together with the related notes and the independent auditors report of Mauldin & Jenkins, LLC, independent accountants.



(2) Financial statement schedules:



All schedules are omitted as the required information is inapplicable or
the information is presented in the financial statements or related notes.



(3) A list of the Exhibits as required by Item 601 of Regulation S-K to be filed as part of this report is shown on the Exhibit Index filed herewith.





-45-



---

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



|                     |  |                               |  |                                      
|-------------------- |  | ----------------------------- |  | -------------------------------------
|                     |  | HENRY COUNTY BANCSHARES, INC.
|                     |  |                              
|Date: March 15, 2005 |  | By:                           |  | /s/ David H. Gill                    
|                     |  |                               |  | David H. Gill                        
|                     |  |                               |  | President and Chief Executive Officer



-46-



---

SIGNATURES



KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David H. Gill, his
true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.



Pursuant to the requirements of
the Securities Act of 1934, this report has been signed by the following persons in the capacities indicated on March 15, 2005.



|                         |  |                                             
|------------------------ |  | --------------------------------------------
|/s/ Paul J. Cates, Jr.   |  | Director                                    
|PAUL J. CATES, JR.       |  |                                             
|                         | 
|/s/ H. K. Elliott, Jr.   |  | Director                                    
|H. K. ELLIOTT, JR.       |  |                                             
|                         | 
|/s/ G. R. Foster, III    |  | Director                                    
|G. R. FOSTER, III        |  |                                             
|                         | 
|/s/ David H. Gill        |  | President, Chief Executive Officer, Director
|DAVID H. GILL            |  |                                             
|                         | 
|/s/ Edwin C. Kelley, Jr. |  | Director                                    
|EDWIN C. KELLEY, JR.     |  |                                             
|                         | 
|/s/ Mary Lynn E. Lambert |  | Director                                    
|MARY LYNN E. LAMBERT     |  |                                             
|                         | 
|/s/ Robert O. Linch      |  | Director and Chairman of the Board          
|ROBERT O. LINCH          |  |                                             
|                         | 
|/s/ Ronald M. Turpin     |  | Director                                    
|RONALD M. TURPIN         |  |                                             
|                         | 
|/s/ James C. Waggoner    |  | Director                                    
|JAMES C. WAGGONER        |  |                                             
|                         | 
|/s/ Thoms L. Redding     |  | Chief Financial and Accounting Officer      
|THOMAS L. REDDING        |  |                                             



-47-



---

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                   
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                       
|3.1         |  | Articles of Incorporation of Henry County Bancshares, Inc. (incorporated by reference to Exhibit 3(i) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789 dated July
30, 2002.)                        
|            | 
|3.2         |  | Articles of Correction dated June 24, 1982 (incorporated by reference to Exhibit 3(ii) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789, dated July 30,
2002.)                                      
|            | 
|3.3         |  | Articles of Amendment dated May 27, 1997 (incorporated by reference to Exhibit 3(iii) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789, dated July 30,
2002.)                                       
|            | 
|3.4         |  | Articles of Amendment dated September 16, 1997 (incorporated by reference to Exhibit 3(iv) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789, dated July 30,
2002.)                                  
|            | 
|3.5         |  | Bylaws of Henry County Bancshares, Inc. dated May 2, 1983 (incorporated by reference to Exhibit 3(v) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789, dated July
30, 2002.)                        
|            | 
|3.6         |  | Amendment to Bylaws of Henry County Bancshares, Inc. dated December 12, 1996 (incorporated by reference to Exhibit 3(vi) of the Registration Statement, Amendment No. 2, on Form 10, File No.
000-49789, dated July 30, 2002.)    
|            | 
|10.1        |  | Participation Agreement - Executive Salary Continuation Plan - David H. Gill (incorporated by reference to Exhibit 10(i) of the Registration Statement, Amendment No. 2, on Form 10, File No.
000-49789, dated July 30, 2002.)    
|            | 
|10.2        |  | Participation Agreement - Executive Salary Continuation Plan - William C. Strom (incorporated by reference to Exhibit 10(ii) of the Registration Statement, Amendment No. 2, on Form 10, File
No. 000-49789, dated July 30, 2002.)
|            | 
|11.1        |  | Statement of Computation of Net Earnings Per Share                                                                                                                                                                                
|            | 
|21.1        |  | Schedule of subsidiaries of the Registrant                                                                                                                                                                                        
|            | 
|24.1        |  | Power of Attorney relating to this Form 10-K is set forth on the signature page of this Form 10-K.                                                                                                                                
|            | 
|31.1        |  | Rule 13a-14(a)/15d-14(a) Certifications of the Registrants Chief Executive Officer                                                                                                                                               



---

|     |  |                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certifications of the Registrants Chief Financial and Accounting Officer
|     | 
|32.1 |  | Section 1350 Certifications                                                                       
|     | 
|99.1 |  | Consolidated Financial Statements of Registrant as of December 31, 2004 and 2003.