##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-QSB (Mark One) x
    
    QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2004
 o
    
    TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission File No. 000-24043 ebank Financial Services, Inc. 
  Georgia
    
    58-2349097(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 2410 Paces Ferry Road, Suite 190, Atlanta, Georgia 30339 
  (770) 863-9225 
  Not Applicable 
  Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past
90 days. : Yes
x       No o State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 5,778,427 shares of common stock, par value $.01 per share, were issued
and outstanding as of August 6, 2004. Transitional Small Business Disclosure Format: Yes o
       No x




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TABLE OF CONTENTS  CONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSPART I  FINANCIAL INFORMATIONItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Controls and ProceduresPART II OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Changes in Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. Exhibits and Reports on Form 8-KSIGNATURESEX-3.1 ARTICLES OF INCORPORATION, AMENDEDEX-3.2 CERTIFICATION OF DESIGNATIONS, AS AMENDEDEX-3.3 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATIONEX-10.1 AMENDMENT TO EMPLOYMENT AGREEMENTEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO ebank Financial Services, Inc. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Audited)ASSETSCash and due from banks
    
    $
    729,337
    
    
    $
    674,730Interest-bearing deposits in banks
    
    
    86,329
    
    
    
    70,118Federal funds sold
    
    
    800,000
    
    
    
    7,483,000Cash and cash equivalents
    
    
    1,615,666
    
    
    
    8,227,848Securities available for sale
    
    
    21,294,021
    
    
    
    20,761,358Other securities
    
    
    450,000
    
    
    
    450,000Loans, net of allowance for loan losses of $1,205,385 and
$1,204,754, respectively
    
    
    87,567,647
    
    
    
    79,814,908Premises and equipment, net
    
    
    475,640
    
    
    
    535,061Accrued interest receivable and other assets
    
    
    1,309,324
    
    
    
    1,777,279Total assets
    
    $
    112,712,298
    
    
    $
    111,566,454LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Deposits
    
    $
    87,834,401
    
    
    $
    95,487,429Other borrowings
    
    
    14,681,000
    
    
    
    9,372,444Accrued interest payable and other liabilities
    
    
    221,324
    
    
    
    347,670Total liabilities
    
    
    102,736,725
    
    
    
    105,207,543Shareholders equity:Preferred stock, $.01 par value, 10,000,000 shares authorized:Series A preferred stock, 8% cumulative, convertible
into one share of common stock; 2,396,800 issued and
outstanding; accumulated undeclared dividends of
$640,898 and $401,874 (liquidation preference of
$5,992,000)
    
    
    23,968
    
    
    
    23,968Common stock, $.01 par value, 15,000,000 shares authorized,
5,778,427 and 2,074,723 shares issued and outstanding
    
    
    57,785
    
    
    
    20,747Capital surplus
    
    
    22,807,441
    
    
    
    19,173,141Accumulated deficit
    
    
    (12,435,539
    )
    
    
    (12,717,739
    )Accumulated other comprehensive loss
    
    
    (478,082
    )
    
    
    (141,206
    )Total shareholders equity
    
    
    9,975,573
    
    
    
    6,358,911Total liabilities and shareholders equity
    
    $
    112,712,298
    
    
    $
    111,566,454
 The accompanying notes are an integral part of these condensed consolidated financial statements. 2




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ebank Financial Services, Inc. 
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(Unaudited)
 For the three months ended
    
    For the six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Interest income:Loans, including fees
    
    $
    1,398,361
    
    
    $
    1,337,379
    
    
    $
    2,842,447
    
    
    $
    2,636,063Interest-bearing deposits
    
    
    145
    
    
    
    1,898
    
    
    
    317
    
    
    
    4,896Investment securities
    
    
    269,303
    
    
    
    225,820
    
    
    
    551,929
    
    
    
    436,178Other investments
    
    
    3,981
    
    
    
    4,203
    
    
    
    7,637
    
    
    
    9,831Federal funds sold
    
    
    3,722
    
    
    
    3,101
    
    
    
    23,100
    
    
    
    23,483Total interest income
    
    
    1,675,512
    
    
    
    1,572,401
    
    
    

    3,425,430
    
    
    
    3,110,451Interest expense:Deposits
    
    
    471,884
    
    
    
    506,787
    
    
    
    992,519
    
    
    
    1,039,851Other borrowings
    
    
    70,503
    
    
    
    101,104
    

    
    
    137,270
    
    
    
    185,625Total interest expense
    
    
    542,387
    
    
    
    607,891
    
    
    
    1,129,789
    
    
    
    1,225,476Net interest income
    
    
    1,133,125
    
    
    
    964,510
    
    
    
    2,295,641
    
    
    
    1,884,975Provision for loan losses
    
    
    200,000
    
    
    
    586,000
    
    
    
    231,000
    
    
    
    689,000Net interest income after provision
for loan losses
    
    
    933,125
    
    
    
    378,510
    
    
    
    2,064,641
    
    
    
    1,195,975Other income:Gain on sale of loans held for sale (MD)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    752,715Gain on sale of loans held for sale (GA)
    
    
    
    
    
    
    2,691
    
    
    
    
    
    
    
    8,551Gain on sale of investments
    
    
    
    
    
    
    244,874
    
    
    
    
    
    
    
    244,874Deposit fees
    
    
    28,005
    
    
    
    22,711
    
    
    
    48,514
    
    
    
    46,081Miscellaneous fees
    
    
    6,606
    
    
    
    5,595
    
    
    
    12,161
    
    
    
    14,979Total other income
    
    
    34,611
    
    
    
    275,871
    
    
    
    60,675
    
    
    
    1,067,200Other expense:Salaries and other compensation
    
    
    404,071
    
    
    
    455,737
    
    
    
    854,666
    
    
    
    1,343,715Employee benefits
    
    
    73,432
    
    
    
    81,667
    
    
    
    152,669
    
    
    
    180,407Net occupancy and equipment expense
    
    
    187,837
    
    
    
    183,433
    
    
    
    400,866
    
    
    
    357,770Professional and other outside services
    
    
    93,631
    
    
    
    160,350
    
    
    
    193,018
    
    
    
    241,850Other expense
    
    
    112,481
    
    
    
    129,823
    
    
    
    241,896
    
    
    
    182,111Total other expenses
    
    
    871,452
    
    
    
    1,011,010
    
    
    
    1,843,115
    
    
    
    2,305,853Net earnings (loss)
    
    
    96,284
    
    
    
    (356,629
    )
    
    
    282,201
    
    
    
    (42,678
    )Preferred stock dividends
    
    
    (119,512
    )
    
    
    (120,170
    )
    
    
    (239,024
    )
    
    
    (239,019
    )Net earnings (loss) attributable to common stockholders
    
    $
    (23,228
    )
    
    $
    (476,799
    )
    
    $
    43,177
    
    
    $
    (281,697
    )Basic earnings (loss) per common share
    
    $
    (.01
    )
    
    $
    (.23
    )
    
    $
    .01
    
    
    $
    (.15
    )Diluted earnings (loss) per common share
    
    $
    (.01
    )
    
    $
    (.23
    )
    
    $
    .01
    
    
    $
    (.15
    )
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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ebank Financial Services, Inc. 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 For the six months endedJune 30,2004
    
    2003Net earnings (loss)
    
    $
    282,201
    
    
    $
    (42,678
    )Other comprehensive loss:Unrealized (losses) gains on
securities available for sale:Holding (losses) gains
arising during the six-month
period net of taxes of
$206,122 and $179,431
    
    
    (336,876
    )
    
    
    293,253Reclassification adjustment for
gain included in the net loss,
net of taxes of $92,954
    
    
    
    
    
    
    (151,920
    )Total other comprehensive income
(loss)
    
    
    (336,876
    )
    
    
    141,333Comprehensive income (loss)
    
    $
    (54,675
    )
    
    $
    98,655
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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Financial Services, Inc. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 For the six months endedJune 30,2004
    
    2003Cash flows from operating activities:Net earnings (loss)
    
    $
    282,201
    
    
    $
    (42,678
    )Adjustments to reconcile net earnings (loss)
to net cash provided in operating activities:Net amortization of investment securities
    
    
    (1,047
    )
    
    
    15,914Depreciation expense
    
    
    120,614
    
    
    
    96,035Provision for loan losses
    
    
    231,000
    
    
    
    689,000Gain on sale of investments
    
    
    
    
    
    
    (244,874
    )Decrease in mortgage loans held for sale
    
    
    
    
    
    
    7,820,139Change in deferred loan fees and costs
    
    
    16,821
    
    
    
    (230,274
    )Change in other assets
    
    
    207,828
    
    
    
    279,128Change in accrued interest receivable
    
    
    (35,055
    )
    
    
    (53,371
    )Change in accrued interest payable
    
    
    (11,940
    )
    
    
    (21,421
    )Change in other liabilities
    
    
    (114,406
    )
    
    
    (757,189
    )Net cash provided by operating activities
    
    
    696,016
    
    
    
    7,550,409Cash flows from investing activities:Purchase of securities available for sale
    
    
    (9,574,388
    )
    
    
    (1,563,852
    )Proceeds from calls and maturities of securities available for
sale
    
    
    7,499,774
    
    
    
    Proceeds from sale of securities available for sale
    
    
    1,000,000
    
    
    
    1,020,344Purchase of securities held-to-maturity
    
    
    
    
    
    
    (14,720,038
    )Proceeds from calls and maturities of securities held-to-maturity
    
    
    
    
    
    
    13,626,320Proceeds from sale of securities held-to-maturity
    
    
    
    
    
    
    3,950,329Net change in loans
    
    
    (8,000,560
    )
    
    
    (12,532,448
    )Net proceeds from the sale of real estate owned
    
    
    501,304
    
    
    
    Purchases of premises and equipment
    
    
    (61,195
    )
    
    
    (28,934
    )Proceeds from sale of Peachtree Capital Corporation
    
    
    
    
    
    
    578,000Net cash used by investing activities
    
    
    (8,635,065
    )
    
    
    (9,670,279
    )Cash flows from financing activities:Net change in deposits
    
    
    (7,653,028
    )
    
    
    7,618,422Proceeds from other borrowings
    
    
    5,681,000
    
    
    
    Repayments on other borrowings
    
    
    (372,444
    )
    
    
    (30,053
    )Net proceeds from sale of common stock
    
    
    3,671,339
    
    
    
    Cash dividend paid on preferred stock
    
    
    
    
    
    
    (20,250
    )Net cash provided by financing activities
    
    
    1,326,867
    
    
    
    7,568,119Net change in cash and cash equivalents
    
    
    (6,612,182
    )
    
    
    5,448,249Cash and cash equivalents:Beginning of period
    
    
    8,227,848
    
    
    
    6,633,440End of period
    
    $
    1,615,666
    
    
    $
    12,081,689
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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ebank Financial Services, Inc. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 1  BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete annual financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended June 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. For further information, refer to our consolidated
financial statements and footnotes included in our annual report on Form
10-KSB. ebank Financial Services, Inc. (the Company) provides a full range of
banking and bank-related services to individual and corporate customers through
its wholly owned bank subsidiary, ebank, located in north Atlanta, Georgia.
ebank Financial Services, Inc. and its subsidiary are subject to intense
competition for all banking services, including Internet banking, from other
financial institutions and nonbank financial service companies. ebank Financial Services, Inc. was incorporated under the laws of the
State of Georgia on August 22, 1997 to operate as a unitary thrift holding
company under the supervision of the Office of Thrift Supervision. ebank began
as a general banking business on August 17, 1998, as a wholly owned subsidiary
of the Company. The consolidated financial statements include the accounts of
the Company and ebank. All significant intercompany accounts and transactions
have been eliminated in consolidation. Significant Accounting Policies The Companys accounting policies are fundamental to understanding
managements discussion and analysis of results of operations and financial
condition. Many of the Companys accounting policies require significant
judgment regarding valuation of assets and liabilities and/or significant
interpretation of the specific accounting guidance. A description of the
Companys significant accounting policies can be found in Note 1 of the Notes
to Consolidated Financial Statements in the Companys 2003 annual report to
shareholders. The following is a summary of the more judgmental and complex
accounting policies of the Company. Many of the Companys assets and liabilities are recorded using various
valuation techniques that require significant judgment as to recoverability.
The collectability of loans is reflected through the Companys estimate of the
allowance for loan losses. The Company performs periodic and systematic
detailed reviews of its lending portfolio to assess overall collectability. In
addition, certain assets and liabilities are reflected at their estimated fair
value in the consolidated financial statements. Such amounts are based on
either quoted market prices or estimated values derived by the Company
utilizing dealer quotes or market comparisons. Use of Estimates Management of the Company has made a number of estimates and assumptions
relating to reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these
consolidated financial statements in conformity with accounting principles
generally accepted in the in the United States of America. Actual results
could differ from these estimates. 6




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Stock Compensation Plans Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over
the amount an employee must pay to acquire the stock. Accordingly, the Company
has recorded no expense in the quarters ended June 30, 2004 and June 30, 2003
related to its stock options. The Company has elected to continue with the
accounting methodology in Opinion No. 25 and, as a result, has provided the
following pro forma disclosures of net earnings and loss and basic and diluted
earnings and loss per common share. For the six months ended June 30,2004
    
    2003Net earnings (loss) attributable
to common stockholders
    
    $
    43,177
    
    
    $
    (281,697
    )Effect of stock
options
grants
    
    
    (23,041
    )
    
    
    (71,567
    )Pro forma
    
    $
    20,136
    
    
    $
    (353,264
    )Basic earnings (loss) per shareAs reported
    
    $
    .01
    
    
    $
    (.15
    )Pro forma
    
    $
    .01
    
    
    $
    (.19
    )Diluted earnings (loss) per shareAs reported
    
    $
    .01
    
    
    $
    (.15
    )Pro forma
    
    $
    .01
    
    
    $
    (.19
    )
 7




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NOTE 2  EARNINGS (LOSS) PER COMMON SHARE Presented below is a summary of the components used to calculate basic and
diluted earnings (loss) per common share for the three months ended June 30,
2004 and 2003. For the three months endedJune 302004
    
    2003Basic Loss Per Common Share:Weighted average common shares outstanding
    
    
    4,240,016
    
    
    

    2,060,639Net earnings (loss)
    
    $
    96,284
    
    
    $
    (356,629
    )Preferred stock dividend accumulated during the period
    
    
    (119,512
    )
    
    
    (120,170
    )Net loss attributable to common stockholders
    
    $
    (23,228
    )
    
    $
    (476,799
    )Basic loss per common share
    
    $
    (.01
    )
    
    $
    (.23
    )Diluted Loss Per Common Share:Weighted average common shares outstanding
    
    
    4,240,016
    
    
    
    2,060,639Net effect of the assumed exercise of stock
options and warrants based on the treasury stock
method using average market prices for the year
    
    
    
    
    
    
    Net effect of convertible preferred stock
    
    
    
    
    
    
    Total weighted average common shares and
common stock equivalents outstanding
    
    
    4,240,016
    
    
    
    2,060,639Net loss attributable to common
Stockholders
    
    $
    (23,228
    )
    
    $
    (476,799
    )Diluted loss per common share
    
    $
    (.01
    )
    
    $
    (.23
    )
 8




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Presented below is a summary of the components used to calculate basic and
diluted earnings (loss) per common share for the six months ended June 30, 2004
and 2003. For the six months endedJune 302004
    
    2003Basic Earnings (Loss) Per Common Share:Weighted average common shares outstanding
    
    
    3,190,407
    
    
    
    1,908,205Net earnings (loss)
    
    $
    282,201
    
    
    $
    (42,678
    )Preferred stock dividend
    
    
    (239,024
    )
    
    
    (239,019
    )Net earnings (loss) attributable to common stockholders
    
    $
    43,177
    
    
    $
    (281,697
    )Basic earnings (loss) per common share
    
    $
    .01
    
    
    $
    (.15
    )Diluted Loss Per Common Share:Weighted average common shares outstanding
    
    
    3,190,407
    
    
    
    1,908,205Net effect of the assumed exercise of stock
options and warrants based on the treasury stock
method using average market prices for the year
    
    
    
    
    
    
    Net effect of convertible preferred stock
    
    
    
    
    
    
    Total weighted average common shares and
common stock equivalents outstanding
    
    
    3,190,407
    
    
    
    1,908,205Net earnings (loss) attributable to common
stockholders
    
    $
    43,177
    
    
    $
    (281,697
    )Diluted earnings (loss) per common share
    
    $
    .01
    
    
    $
    (.15
    )
 The effects of both the stock options and the convertible preferred stock
on the calculations of earnings (loss) per share are anti-dilutive for all
periods presented, and therefore their effects have been omitted in these
computations. NOTE 3 ISSUANCE OF COMMON STOCK In connection with a public offering of common stock which concluded on
June 10, 2004, the Company issued a total of 3,703,704 common shares as of June
30, 2004 and received net proceeds from these stock sales of $3,671,339. The
Companys offering of common stock was fully subscribed. The Company is obligated to pay cumulative dividends at a rate of 8% on
the outstanding shares of Series A cumulative convertible preferred stock. The
dividends on each share accrue from the date of purchase, whether or not
declared. At the Companys option, the Company may pay these dividends in cash
or in additional shares of its common stock. The most recent common stock
dividend was paid on March 25, 2003 to Series A preferred stock shareholders of
record on February 28, 2003. The dividend, which was based on the closing
price of the Companys common stock on the record date, resulted in the
issuance of 332,416 shares of common stock. The Companys board of directors
has not declared a dividend accrued on its Series A preferred stock from March
1, 2003 to date. At June 30, 2004, the cumulative undeclared dividends on the
Companys Series A preferred stock totaled $640,898. 9




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NOTE 4  CONTINGENCY In May 2003, Thacker & Loucks, Inc., d/b/a Thacker & Loucks Financial
Services, a Georgia corporation (Thacker), filed an action against the
Company in the State Court of Fulton County alleging a breach of contract by
the Company. The breach of contract alleged by Thacker relates to a Servicing
Representative Agreement dated as of August 3, 2001 (the Agreement) by and
between the Bank and Thacker. Under the Agreement, the Bank agreed to discount
from time to time an indeterminate number of certain types of contracts which
met the Banks underwriting criteria. Pursuant to the terms of the Agreement,
in February the Bank provided Thacker with written notice of the Banks
intention to terminate the Agreement after the expiration of a 180-day notice
period. The complaint filed by Thacker alleged that the Company failed to approve
loans which met or exceeded the underwriting criteria and failed to communicate
with Thacker. The complaint filed by Thacker seeks contractual damages in the
amount of $3,500,000, plus reasonable attorneys fees and costs of the
litigation. Management believes that the Bank has abided by all applicable terms of
the Agreement, including those terms related to continuing performance during
the notice period prior to termination, and that the claim asserted by Thacker
is without merit. Thacker filed its original lawsuit against the Company, which was not a
party to the Agreement and was therefore the wrong entity. The Company filed
its answer in June 2003, denying all claims and informing Thacker that it had
sued the wrong entity. Thacker agreed to file a joint consent order dismissing
the Company from the action and substituting the Bank, the actual party to the
Agreement, as the actual defendant. The consent order stipulated that the Bank
would be given an opportunity to file its own answer. This answer was filed in
December 2003 and discovery commenced in the amended action. Effective June 26, 2004, the Bank entered into an agreement with Thacker
to settle and release all claims in the action brought by Thacker against the
Bank. As part of this agreement, the Bank agreed to pay $5,000 to Thacker
without admitting to any liability. In exchange, Thacker agreed to dismiss the
current lawsuit with prejudice and release and discharge the Bank from any and
all claims relating to the business relationship between the Bank and Thacker
pursuant to the Agreement. 10




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##### Table of Contents



PART I  FINANCIAL INFORMATION 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations. This Report, including but not limited to, matters described in Item 2,
Managements Discussion and Analysis of Financial Condition and Results of
Operations, may contain certain statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the safe harbor created by those sections. These statements may relate to,
among others, our future financial position, business prospects and strategy,
projected costs and plans and objectives for future operations, growth and
liquidity. Forward-looking statements generally can be identified by the use of
words such as may, would, could, will, expect, anticipate,
believe, intend, consider, plan, estimate, project, or continue
or words of similar meaning. These statements are subject to a number of risks
and uncertainties that could cause our actual results to differ materially from
our historical results or from those anticipated or implied as of the date of
this Report. Some of the factors that could cause such a variance are:  
    
    significant increases in competitive pressure in the banking
and financial services industries;  
    
    changes in the interest rate environment which could reduce anticipated or actual margins;  
    
    changes in political conditions or the legislative or regulatory environment;  
    
    general economic conditions, either nationally or regionally
and especially in our primary service area, becoming less favorable
than expected resulting in, among other things, a deterioration in
credit quality;  
    
    changes occurring in business conditions and inflation;  
    
    changes in technology;  
    
    changes in monetary and tax policies;  
    
    changes in the securities markets;  
    
    the potential economic effects of terrorist attacks, such as
those that occurred on September 11, 2001, as well as other acts of
violence or war, including the ongoing military actions in Iraq and
Afghanistan; and  
    
    other risks and uncertainties detailed from time to time in
our filings with the Securities and
Exchange Commission. General ebank Financial Services, Inc., a Georgia corporation, is the holding
company for ebank, a federal savings bank. We provide banking and other
financial services to small business and retail customers through our offices
in Atlanta, Georgia and via the Internet. Our business strategy emphasizes our
traditional banking business and focuses on developing cost-effective
strategies utilizing the Internet as 11




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##### Table of Contents



one of our delivery channels. We provide a
broad array of financial products and services to our small business and retail
customers, including checking accounts, money markets, CDs, ATM cards, home
equity loans, mortgage loans, commercial loans, credit cards, and bill payment
services. On February 11, 2004, we commenced an offering to raise up to $4 million
of new capital through the sale of up to 3,703,704 shares of the Companys
common stock at a price of $1.08 per share. The offering terminated 120 days
following its commencement on June 10, 2004 and was fully subscribed. We made the offering to raise up to $4 million of new capital to support
the future growth and development of the business of ebank Financial Services,
Inc. As of the termination of the offering, the Company had accepted
subscription agreements covering an aggregate of 3,704,703 shares of common
stock, raising gross proceeds of $4 million. After deducting offering related
expenses incurred to date, the Company generated net proceeds of $3,671,339
through its stock offering. We expect to incur additional offering related
expenses not to exceed $10,000 in the third quarter. As of June 30, 2004, we
used $3,000,000 of the proceeds as additional regulatory and working capital
for ebank. We used approximately $250,000 of the proceeds to repay certain
debt of the Company outstanding before we commenced the offering. We expect to
use a significant portion of the remaining proceeds as additional regulatory
and working capital for our subsidiary bank, ebank, to support future growth in
its deposits and asset base. In recent months, we have seen increased
opportunities to expand the banks deposit base and a corresponding increase in
demand for loans which management believes will enhance the profitability of
ebank. We may need additional capital to enable the bank to take advantage of
these opportunities while continuing to meet or exceed all applicable capital
requirements of the Office of Thrift Supervision, the banks primary regulator. Financial Condition Total consolidated assets increased by $1.2 million to $112,712,298 during
the six-month period ended June 30, 2004. The increase in assets is primarily
related to increases in loans and investments of $7.8 and $.5 million,
respectively, offset by a decrease in Federal funds sold of $6.7 million. The
$7.8 million increase in our loan portfolio is composed of increases in our
mortgage, consumer and commercial loans of $6.3, $1.0 and $1.0 million,
respectively, offset by a decline $.5 million in our commercial real estate
loans. The continued increase in individual real estate mortgage loans during
the period reflects managements continued efforts to diversify the loan
portfolio by decreasing its reliance on commercial and commercial real estate
loans. Total consolidated liabilities decreased by $2.5 million to $102,736,725
during the six-month period ended June 30, 2004. The decrease in liabilities
is primarily related to a $7.7 million decrease in deposits, offset by an
increase in other borrowings of $5.3 million, respectively. The $7.7 million
decrease in deposits is primarily related to decreases in certificates of
deposit and money market balances of $6.2 and $1.4 million. The increase in
other borrowings in primarily related to $5.0 million in short-term borrowings
secured by investments. During the second quarter, we decided to use short-term borrowings secured
by investments to supplement our liquidity requirements rather than issuing
higher cost certificates of deposits to replace maturing certificates. Our
decision was primarily based on managements analysis of the yield curve during
the period. The relative steepness of the yield curve presents an opportunity
to take advantage of lower cost short-term funding opportunities. This
opportunity is not expected to continue through the remainder of the year as it
is expected that the yield curve will flatten as short-term rates increase and
long-term rates stabilize. Results of Operations  Six months ended June 30, 2004 compared to the six
months ended June 30, 2003: 12




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##### Table of Contents



Net earnings for the six months ended June 30, 2004 was $282,201, or
$43,177 after taking into account $239,024 in dividends on preferred stock,
compared with a net loss of ($42,678), or ($281,697) after taking into account
$239,019 in dividends on preferred stock, for the six months ended June 30,
2003. Net interest income, before provision for loan losses, for the six-month
period ending June 30, 2004 totaled $2,295,641, compared to net interest
income, before provision for loan losses, of $1,884,975 for the six-month
period ending June 30, 2003. During the prior year period ended June 30, 2003,
net interest income of $51,452 was generated from loans held for sale by our
former Maryland loan production office. Other income earned for the six months ended June 30, 2004 and 2003 was
$60,675 and $1,067,200, respectively. Other income for the six months ended
June 30, 2004 consisted primarily of $48,514 in deposit fee income. Included
in other income for the six months ended June 30, 2003 was $752,715 generated
by the Maryland loan production office, $244,874 in gains on sales of
investments and $46,081 in deposit fee income. The income from the Maryland
loan production office consisted of gains on loans sold to investors in the
secondary market. Operating expenses for the six-month periods ending June 30, 2004 and 2003
totaled $1,843,115 and $2,305,853, respectively. After adjusting for $360,543
in operating expenses incurred in connection with the Maryland loan production
office in the prior year, total operating expenses for continuing operations
totaled $1,945,310 for the six-month period ending June 30, 2003 as compared to
$1,843,115 for the six-month period ending June 30, 2004, resulting in a
$102,195 reduction in operating expenses for the first half of 2004. Maryland
loan production office operating expenses for the six-month period ending June
30, 2003 consisted primarily of incentive compensation and other benefits. Results of Operations  Three months ended June 30, 2004 compared to the three
months ended June 30, 2003: Net earnings for the three months ended June 30, 2004 was $96,284, or a
net loss of ($23,228) after taking into account $119,512 in dividends on
preferred stock, compared with a net loss of ($356,629), or ($476,799) after
taking into account $120,170 in dividends on preferred stock, for the three
months ended June 30, 2003. Net interest income, before provision for loan
losses, for the three-month period ending June 30, 2004 totaled $1,133,125,
compared to net interest income, before provision for loan losses, of $964,510
for the three-month period ending June 30, 2003. Other income earned for the three months ended June 30, 2004 and 2003 was
$34,611 and $275,871, respectively. Other income for the three months ended
June 30, 2004 consists primarily of $28,005 in deposit fee income. Included in
other income for the three months ended June 30, 2003 is a gain on sale of
investments totaling $244,874 and deposit fee income of $22,711. Operating expenses for the three-month periods ending June 30, 2004 and
2003 totaled $871,452 and $1,011,010, respectively. After adjusting for $1,250
in operating expenses incurred in connection with the Maryland loan production
office in the prior year, total operating expenses for continuing operations
totaled $1,009,760 for the three-month period ending June 30, 2003 as compared
to $871,452 for the three-month period ending June 30, 2004, resulting in a
$138,308 reduction in second quarter 2004 operating expenses. Management anticipates that a significant expense for 2004 will likely be
incurred associated with the Sarbanes-Oxley Act of 2002 compliance
implementation. The Sarbanes-Oxley Act of 2002 includes provisions addressing
audits, financial reporting and disclosure, conflicts of interest and corporate
governance at public companies. Section 404 of this Act deals with managements
report on internal controls, and will require much in the way of resources to
plan, implement and document internal controls. Some of the resources will be
in the form of management effort devoted to complying with the new rules, but a
significant cost will likely be in increased accounting and consulting fees. 13




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##### Table of Contents



Allowance for Loan Losses We have established an allowance for loan losses through a provision for
loan losses charged to expense. The allowance represents an amount which we
believe will be adequate to absorb losses on existing loans that may become
uncollectible. Determining the amount of the allowance for loan losses
necessarily involves a high degree of judgment. Our judgment in determining the
adequacy of the allowance is based on evaluations of the collectibility of
loans, including consideration of such factors as the balance of impaired,
non-performing and potential problem loans, changes in the nature and volume of
the loan portfolio, delinquency levels, loss experience, current economic
conditions and other factors that may affect the borrowers ability to pay, and
overall portfolio quality. Management reviews the level of the allowance on a
monthly basis, at a minimum, and establishes the allowance for loan losses
based on the foregoing factors. We adjust the amount of the allowance
periodically based on changing circumstances. Recognized losses are charged to
the allowance for loan losses, while subsequent recoveries are added to the
allowance. The methodology we use for determining the amount and adequacy of our
allowance involves a monthly review of specific loans and groups of loans that
make up the loan portfolio. Loans are reviewed to determine whether they should
be reported as performing, potential problem, non-performing or impaired.
Performing loans are generally grouped with similar loans and the allowance is
calculated based on the group. The percentage of the allowance is based on
historical loss experience of the bank or of other institutions with portfolios
with similar characteristics. The allowance requirement associated with the
banks performing loans is added to the allowance requirement for all other
loans including potential problem, non-performing and impaired loans. The
requirement for the total portfolio is compared to the allowance on a monthly
basis and the allowance is adjusted as necessary. Potential problem, non-performing and impaired loans are reported in the
Classified Asset Summary report. Potential problem loans are loans that are
current with respect to principal and interest. Therefore, these loans are
still on interest accrual and are not reported as non-performing. However, we
classify a current loan as a potential problem loan if we develop serious
doubts about the borrowers future performance under the terms of the loan
contract. A loan is determined to be non-performing when we conclude it is doubtful
that we will be able to collect all interest due from the borrower. Once this
determination is made, we place the loan on nonaccrual status. This conclusion
may be based on the borrowers financial condition, economic and business
conditions, and the results of our previous collection efforts. Generally, we
will place a delinquent loan in nonaccrual status when the loan becomes 90 days
or more past due. When we place a loan in nonaccrual status, we reverse all
interest which has been accrued on the loan but remains unpaid and we deduct
this interest from earnings as a reduction of reported interest income. We do
not accrue any additional interest on the loan balance until we conclude the
collection of both principal and interest is reasonably certain. Since interest
income is not recorded for nonaccrual loans, all loans placed on nonaccrual are
reported as non-performing loans. When it is probable that we will be unable to collect all principal and
interest payments due in accordance with the terms of the loan agreement, a
loan is also determined to be impaired. Individually identified impaired loans
are measured based on the present value of expected payments, using the
contractual loan rate as the discount rate. Alternatively, measurement may be
based on obtainable market prices, or, for loans that are solely dependent on
the collateral for repayment, the fair value of the collateral. If the recorded
investment in the impaired loan exceeds the measure of fair value, a valuation
allowance is established as a component of the allowance for loan losses.
Changes to the valuation allowance are recorded as a component of the provision
for loan losses. Loans included in the Classified Asset Summary report are further
classified into one of four categories, including (1) Special Mention, (2)
Substandard, (3) Doubtful and (4) Loss. Each classification requires a
different provision percentage with the Loss classification requiring a 100%
allowance. In 14




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##### Table of Contents



order to determine the appropriate level of allowance for loan
losses for specific loans included in our Classified Asset Summary, we may use
either our historical loss experience or the historical loss experience of
institutions with similar loans. However, if a classified loan is deemed
impaired and the impaired loan amount exceeds the appropriately determined fair
value, the allowance for loan losses is increased by the amount of the
shortfall using a valuation allowance. The valuation allowance is a component
of the total allowance for loan losses. Specific reserves may also be set aside
for certain loans where repayment is not probable and there is a deficiency in
the underlying collateral. In general, the aggregate allowance for loan losses
is calculated by first adding together the allocated allowance for loan losses
associated with performing loans and the allocated allowance for loan losses
identified in the Classified Asset Summary report to arrive at an initial
total. Management then considers the amount of the allowance so derived in
light of general risk factors which are relevant to the determination of an
appropriate overall allowance, but are not associated with any specific loans.
These factors may include changes in lending policies and procedures, changes
in existing general economic and business conditions affecting our primary
lending areas, credit quality trends, collateral value, loan volumes and
concentrations, seasoning of the loan portfolio, specific industry conditions
within portfolio segments, recent loss experience in particular segments of the
portfolio, duration of the current business cycle and bank regulatory
examination results. Management then determines, in light of its assessment of
these factors, any additional, unallocated amounts which should be added to the
sum of the allocated allowances to arrive at the total allowance for loan
losses. In addition, regulatory agencies, as an integral part of their examination
process, periodically review our allowance for loan losses, and they may
require us to record additions to the allowance based on their review of
information available to them at the time of their examinations. For the six months ended June 30, 2004, there were eleven loans totaling
$4,721,187 included in our Classified Asset Summary. These loans were evaluated
individually and were allocated $403,323 of the $1,205,385 allowance for loan
losses. The remaining $802,063 provision for loan losses is associated with
loans evaluated in groups. At June 30, 2004, the allowance for loan loss allocation associated with
classified loans is as follows: Total
    
    
    
    
    
    
    
    
    
    Potential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Classified
    
    
    
    
    
    Allocated
    
    Problem
    
    
    
    
    
    Allocated
    
    Impaired
    
    
    
    
    
    Allocated
    
    performing
    
    
    
    
    
    AllocatedLoans
    
    No.
    
    Provision
    
    Loans
    
    No.
    
    Provision
    
    Loans
    
    No.
    
    Provision
    
    Loans
    
    No.
    
    ProvisionCommercial
    
    $
    1,774,906
    
    
    
    5
    
    
    $
    197,766
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,774,906
    
    
    
    5
    
    
    $
    197,766
    
    
    $
    981,057
    
    
    
    4
    
    
    $
    107,823Real Estate
 Commercial
    
    
    2,604,172
    
    
    
    3
    
    
    
    188,451
    
    
    
    1,684,084
    
    
    
    2
    
    
    
    84,205
    
    
    
    920,088
    
    
    
    1
    
    
    
    104,246
    
    
    
    920,088
    
    
    
    1
    
    
    
    104,246Real Estate 
Individual
    
    
    288,958
    
    
    
    1
    
    
    
    14,448
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288,958
    
    
    
    1
    
    
    
    14,448
    
    
    
    288,958
    
    
    
    1
    
    
    
    14,448Installment 
Individual
    
    
    53,151
    
    
    
    2
    
    
    
    2,658
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,151
    
    
    
    2
    
    
    
    2,658
    
    
    
    53,151
    
    
    
    2
    
    
    
    2,658Totals
    
    $
    4,721,187
    
    
    
    11
    
    
    $
    403,323
    
    
    $
    1,684,084
    
    
    
    2
    
    
    $
    84,205
    
    
    $
    3,037,103
    
    
    
    9
    
    
    $
    319,118
    
    
    $
    2,243,254
    
    
    
    8
    
    
    $
    229,175
 For the year ended December 31, 2003, there were twenty loans totaling
$3,950,738 included in our Classified Asset Summary. These loans were evaluated
individually and were allocated $350,500 of the $1,204,754 allowance for loan
losses. The remaining $854,254 provision for loan losses is associated with
loans evaluated in groups. 15




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##### Table of Contents



At December 31, 2003, the allowance for loan loss allocation associated
with classified loans is as follows: Total
    
    
    
    
    
    
    
    
    
    Potential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Classified
    
    
    
    
    
    Allocated
    
    Problem
    
    
    
    
    
    Allocated
    
    Impaired
    
    
    
    
    
    Allocated
    
    performing
    
    
    
    
    
    AllocatedLoans
    
    No.
    
    Provision
    
    Loans
    
    No.
    
    Provision
    
    Loans
    
    No.
    
    Provision
    
    Loans
    
    No.
    
    ProvisionCommercial
    
    $
    2,128,529
    
    
    
    11
    
    
    $
    243,669
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,128,529
    
    
    
    11
    
    
    $
    243,669
    
    
    $
    1,306,297
    
    
    
    10
    
    
    $
    150,510Real Estate 
Commercial
    
    
    1,690,622
    
    
    
    2
    
    
    
    84,531
    
    
    
    768,534
    
    
    
    1
    
    
    
    38,427
    
    
    
    922,088
    
    
    
    1
    
    
    
    46,104
    
    
    
    922,088
    
    
    
    1
    
    
    
    46,104Real Estate 
Individual
    
    
    29,332
    
    
    
    1
    
    
    
    5,866
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,332
    
    
    
    1
    
    
    
    5,866
    
    
    
    29,332
    
    
    
    1
    
    
    
    5,866Installment 
Individual
    
    
    102,255
    
    
    
    6
    
    
    
    16,434
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,255
    
    
    
    6
    
    
    
    16,434
    
    
    
    102,255
    
    
    
    6
    
    
    
    16,434Totals
    
    $
    3,950,738
    
    
    
    20
    
    
    $
    350,500
    
    
    $
    768,534
    
    
    
    1
    
    
    $
    38,427
    
    
    $
    3,182,204
    
    
    
    19
    
    
    $
    312,073
    
    
    $
    2,359,972
    
    
    
    18
    
    
    $
    218,914
 For the six months ended June 30, 2004, there were eleven loans delinquent
over 30 days totaling approximately $2,520,000. Of this amount, there were
three delinquent commercial loans totaling $273,000, two delinquent commercial
real estate loan totaling $1,738,000, two delinquent individual real estate
loans totaling $198,000 and four delinquent consumer loans totaling $311,000.
There was one loan totaling approximately $148,000 past due 90 days or more
which remained on interest accrual at June 30, 2004. For the fiscal year ended December 31, 2003, there were twenty-one loans
delinquent over 30 days totaling approximately $3,494,000. Of this amount,
there were eight delinquent commercial loans totaling $1,457,000, two
delinquent commercial real estate loans totaling $883,000, eight delinquent
individual real estate loans totaling $1,049,000 and three delinquent consumer
loans totaling $105,000. There were three loans, totaling approximately
$326,000, past due 90 days or more. One of the three 90-day plus delinquent
loans in the amount of $291,000 remained on interest accrual at December 31,
2003 as a result of significant principal payments received in December. Two
loans totaling approximately $35,000 were classified as non-performing at
December 31, 2003. Of these two loans, one loan in the amount of $22,528 was
fully repaid in January 2004. For the six months ended June 30, 2004, our allowance for loan losses
amounted to $1,205,385, or 1.36% of total loans. The increase of $631 in our
allowance for loan losses during the first six months of 2004 resulted from a
$231,000 additional provision for loan losses with no recoveries, offset by
eight net loans charged off totaling $230,369. At December 31, 2003, our
allowance for loan losses amounted to $1,204,754, or 1.49% of total loans. We
strengthened our provision for loan losses during the year ended December 31,
2003 by $894,000. The increase in our allowance for loan losses during the year
ended December 31, 2003 of $241,453 resulted from a $894,000 provision for loan
losses and recoveries of $828, partially offset by five net loans charged off
of $653,375. 16




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##### Table of Contents



Allowance for Loan Losses The following table sets forth an analysis of our allowance for loan losses for
the periods indicated. For the Six
    
    For theMonths Ended
    
    Year EndedJune 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Average loans outstanding
    
    $
    84,201
    
    
    $
    81,003Loans outstanding at period end
    
    $
    88,773
    
    
    $
    81,020Total nonperforming loans
    
    $
    2,243
    
    
    $
    2,360Beginning balance of allowance
    
    $
    1,205
    
    
    $
    963Loans charged off:Commercial
    
    
    (127
    )
    
    
    (384
    )Real estate  commercial
    
    
    (60
    )
    
    
    0Installment loans to individuals
    
    
    (44
    )
    
    
    (269
    )Total charge-offs
    
    
    (231
    )
    
    
    (653
    )Recoveries of previous charge-offs:Installment loans to individuals
    
    
    0
    
    
    
    1Total recoveries
    
    
    0
    
    
    
    1Net loans charged-off
    
    
    (231
    )
    
    
    (652
    )Provision for loan losses
    
    
    231
    
    
    
    894Balance at period end
    
    $
    1,205
    
    
    $
    1,205Net charge-offs to average loans
    
    
    0.27
    %
    
    
    0.80
    %Allowance as percent of total loans
    
    
    1.36
    %
    
    
    1.49
    %Nonperforming loans as a percentage of
total loans
    
    
    2.53
    %
    
    
    2.91
    %Allowance as a percent of nonperforming
loans
    
    
    53.73
    %
    
    
    51.06
    %
 At June 30, 2004 and December 31, 2003, the allowance was allocated as follows: Percentage of
    
    
    
    
    
    Percentage ofSix Months
    
    loans in
    
    Year ended
    
    loans inEnded
    
    each category
    
    December 31,
    
    each categoryJune 30, 2004
    
    to total loans
    
    2003
    
    to total loansCommercial
    
    $
    505,765
    
    
    
    18.50
    %
    
    $
    532,669
    
    
    
    19.11
    %Real estate 
individual
    
    
    156,448
    
    
    
    49.97
    %
    
    
    188,000
    
    
    
    47.02
    %Real estate 
commercial
    
    
    320,451
    
    
    
    23.01
    %
    
    
    232,531
    
    
    
    25.82
    %Installment loans
to
individuals
    
    
    222,658
    
    
    
    8.52
    %
    
    
    197,300
    
    
    
    8.05
    %Unallocated
    
    
    63
    
    
    
    
    %
    
    
    54,254
    
    
    
    
    %Total
    
    $
    1,205,385
    
    
    
    100.00
    %
    
    $
    1,204,754
    
    
    
    100.00
    %
 Changes in the allocation of loan loss allowance to each loan category are
driven by several factors, including (1) changes in the relative mix of the
loan categories from period to period, (2) changes arising from the loan loss
reserve percentages applied to performing loans and to loans evaluated
separately in the Classified Asset Summary, and (3) changes in the
composition of loans within the Classified Asset Summary. 17




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##### Table of Contents



Although we believe that we use the best information available to
establish the allowance for loan losses, future adjustments to the allowance
for loan losses may be necessary and results of operations could be adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while we believe we have established
our allowance for loan losses in conformity with accounting principles
generally accepted in the United States of America, there can be no assurance
that regulators, in reviewing our loan portfolio, will not request us to
increase our allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there
can be no assurance that the existing allowance for loan losses is adequate or
that increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase
in the allowance for loan losses may adversely affect our financial condition
and results of operations. Average Balances, Income and Expense, and Rates Net interest income represents the difference between interest received on
interest-earning assets and interest paid on interest-bearing liabilities. The
following represents, in a tabular form, the main components of
interest-earning assets and interest-bearing liabilities for the six months
ended June 30, 2004: Interest-
    
    
    
    
    
    InterestEarning Assets/
    
    Average
    
    Income/
    
    Yield/Bearing Liabilities
    
    Balance
    
    Cost
    
    CostFederal funds sold
    
    $
    5,021,338
    
    
    $
    23,100
    
    
    
    .92
    %Interest-bearing deposits
    
    
    68,599
    
    
    
    317
    
    
    
    .92
    %Investment securities
    
    
    20,145,214
    
    
    
    559,566
    
    
    
    5.56
    %Loans
    
    
    84,200,798
    
    
    
    2,842,447
    
    
    
    6.75
    %Total
    
    $
    109,435,949
    
    
    $
    3,425,430
    
    
    
    6.26
    %Deposits
    
    $
    86,359,463
    
    
    $
    992,519
    
    
    
    2.30
    %Other borrowings
    
    
    9,680,410
    
    
    
    137,270
    
    
    
    2.84
    %Total
    
    $
    96,039,873
    
    
    $
    1,129,789
    
    
    
    2.35
    %Net interest income/spread
    
    
    
    
    
    $
    2,295,641
    
    
    
    3.91
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.20
    %
 The net interest margin for the first six months of 2004 increased to
4.20% as compared to 3.88% for the first six months of 2003 and 3.72% for the
full year in 2003. Liquidity and Sources of Capital Liquidity is our ability to meet all deposit withdrawals immediately,
while also providing for the credit needs of customers. Our primary sources of
funds are principal and interest payments on loans receivable, cash flows from
operations, increases in deposits and advances from the Federal Home Loan Bank
of Atlanta. The June 30, 2004 financial statements evidence a satisfactory
liquidity position as total cash, cash equivalents, and federal funds sold
amounted to approximately $1.6 million, or 1.43% of total assets.
Additionally, our ability to maintain and expand our deposit base and borrowing
capabilities are a source of liquidity. For the six-month period ended June
30, 2004, total deposits decreased from $95.5
million to $87.8 million, representing a decrease of 8.06%. We will
increase deposits as required to fund loan growth, loan purchases in the
secondary markets and for purchases of investments. During the second quarter,
the decline of $7.7 million in deposits was primarily related to a $6.2 million
and $1.4 million decline in certificates of deposit and money market accounts,
respectively. The decline in certificates of deposit resulted from declines of
$4.9 million and $1.3 million in retail and brokered certificates,
respectively. Management decided to use short-term borrowings secured by
investments to supplement our liquidity requirements rather than issuing higher
cost certificates of deposits to replace 18




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##### Table of Contents



maturing certificates. Management
anticipates that it will issue both retail and brokered deposits later in the
year and will decrease its use of short-term borrowings as short-term rates
rise. We closely monitor and attempt to maintain appropriate levels of
interest-earning assets and interest-bearing liabilities so that maturities of
assets are such that adequate funds are available to meet our customer
withdrawals and loan demand. We believe that our existing funding sources are
adequate to ensure sufficient cash flow to meet our current and future
obligations. The bank maintains adequate levels of capitalization as measured by the
following capital ratios and the respective minimum capital requirements by the
Office of Thrift Supervision, the banks primary regulator. Bank
    
    MinimumCapital
    
    RegulatoryRatio
    
    RequirementCapital ratios at June 30, 2004Tier 1 capital
    
    
    12.47
    %
    
    
    4.0
    %Tier 2 capital
    
    
    1.25
    %Total risk-based capital ratio
    
    
    13.72
    %
    
    
    8.0
    %Leverage ratio
    
    
    8.71
    %
    
    
    4.0
    %
 The Office of Thrift Supervision has established a 3.0% minimum leverage
ratio requirement. The leverage ratio is computed by dividing Tier 1 capital
into average assets. For all except the highest rated banks, the minimum
leverage ratio should be 3.0% plus an additional cushion of at least 1 to 2
percent, depending upon risk profiles and other factors. The Office of Thrift Supervision may issue directives that impose capital
requirements which are higher than the generally applicable minimum
requirements if it determines that our capital is or may become inadequate.
The Office of Thrift Supervision has issued no directive to the bank and has
made no determination of capital inadequacy, but it requested in the third
quarter of 2003 that the bank maintain a total risk-based capital ratio of
10.0% or higher (the threshold to be categorized as well capitalized),
effective September 30, 2003. The Office of Thrift Supervision based its
request on the fact that the proportion of the banks loan portfolio which
consists of non-homogenous (i.e.nonresidential mortgage) loans is somewhat
higher than that of the average thrift institution. As of the quarter just
ended, the bank was well capitalized with a total risk-based capital ratio of
13.72% at June 30, 2004. We believe that, as of June 30, 2004, we meet all capital requirements to
which we are subject. Liquidity And Rate Sensitivity Asset/liability management is the process by which we monitor and control
the mix and maturities of our assets and liabilities. The essential purposes of
asset/liability management are to ensure adequate liquidity and to maintain an
appropriate balance between interest sensitive assets and liabilities to
minimize potentially adverse impacts on earnings from changes in market
interest rates. We measure interest rate sensitivity as the difference between amounts of
interest-earning assets and interest-bearing liabilities, which either reprice
or mature within a given period of time. The difference, or the interest rate
repricing gap, provides an indication of the extent to which an institutions
interest rate spread will be affected by changes in interest rates. A gap is
considered positive when the amount of interest-rate sensitive assets exceeds
the amount of interest-sensitive liabilities, and is considered negative when
the amount of interest-rate sensitive liabilities exceeds the amount of
interest-sensitive assets. Generally, during a period of rising interest
rates, a negative gap within shorter maturities would adversely affect net
interest income, while a positive gap within shorter maturities would result in
an increase in net interest income, and during a period of falling interest
rates, a negative gap within shorter maturities would result in an increase in
net interest income while a positive gap within shorter maturities would have
the opposite effect. 19




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##### Table of Contents



The table below shows the interest rate sensitivity of our assets and
liabilities as of June 30, 2004: After threeWithin
    
    but within
    
    After one
    
    Afterthree
    
    twelve
    
    but within
    
    fivemonths
    
    months
    
    five years
    
    years
    
    Total(Dollars in Thousands)Interest-earning assets:Interest-earning deposits
    
    $
    86
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    86Loans
    
    
    39,527
    
    
    
    16,335
    
    
    
    13,410
    
    
    
    19,626
    
    
    
    88,898Investment securities
    
    
    450
    
    
    
    
    
    
    
    
    
    
    
    21,294
    
    
    
    21,744Federal funds sold
    
    
    800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    800Total earning assets
    
    
    40,863
    
    
    
    16,335
    
    
    
    13,410
    
    
    
    40,920
    
    
    
    111,528Interest-bearing liabilities:Money market and NOW
    
    
    26,952
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,952Savings deposits
    
    
    388
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    388Time deposits
    
    
    5,969
    
    
    
    33,562
    
    
    
    15,046
    
    
    
    
    
    
    
    54,577Other liabilities
    
    
    5,681
    
    
    
    5,000
    
    
    
    
    
    
    
    4,000
    
    
    
    14,681Total interest-bearing liabilities
    
    
    38,990
    
    
    
    38,562
    
    
    
    15,046
    
    
    
    4,000
    
    
    
    96,598Interest-sensitivity gap
    
    $
    1,873
    
    
    $
    (22,227
    )
    
    $
    (1,636
    )
    
    $
    36,920
    
    
    $
    14,930Cumulative interest-sensitivity gap
    
    $
    1,873
    
    
    $
    (20,354
    )
    
    $
    (21,990
    )
    
    $
    14,930
    
    
    $
    14,930Ratio of interest-sensitivity gap
to total earning assets
    
    
    1.68
    %
    
    
    -19.93
    %
    
    
    -1.47
    %
    
    
    33.10
    %
    
    
    13.39
    %Ratio of cumulative
interest-sensitivity gap to total earning
assets
    
    
    1.68
    %
    
    
    -18.25
    %
    
    
    -19.72
    %
    
    
    13.39
    %
 As evidenced by the table above, we are cumulatively liability-sensitive
at one year. However, our gap analysis is not a precise indicator of its
interest sensitivity position. The analysis presents only a static view of the
timing of maturities and repricing opportunities, without taking into
consideration that changes in interest rates do not affect all assets and
liabilities equally. Net interest income may be impacted by other significant
factors in a given interest rate environment, including changes in the volume
and mix of earning assets and interest-bearing liabilities. Loan Portfolio Because loans typically provide higher interest yields than do other types
of earning assets, our intent is to channel a substantial percentage of our
earning assets into the loans category. Average gross loans were $84,200,798
for the six-month period ended June 30, 2004. Total gross loans outstanding at
June 30, 2004 were $88,898,251. 20




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##### Table of Contents



The following table summarizes the composition of the loan portfolio at
June 30, 2004: PercentAmount
    
    of totalCommercial
    
    $
    16,449,302
    
    
    
    18.50
    %Real estate  individual
    
    
    44,425,641
    
    
    
    49.97
    %Real estate  commercial
    
    
    20,451,928
    
    
    
    23.01
    %Installment loans to individuals
    
    
    7,571,380
    
    
    
    8.52
    %Gross loans
    
    
    88,898,251
    
    
    
    100.00
    %Less: Net deferred loan fees
    
    
    (125,219
    )Allowance for loan loss
    
    
    (1,205,385
    )Total net loans
    
    $
    87,567,647
 The principal components of our loan portfolio at June 30, 2004 were
mortgage loans and commercial loans, which represented approximately 92% of the
portfolio. We will attempt to maintain a relatively diversified loan portfolio
to help reduce the risk inherent in concentration of collateral. Regulatory Matters From time to time, various bills are introduced in the United States
Congress with respect to the regulation of financial institutions. Certain of
these proposals, if adopted, could significantly change the regulation of banks
and the financial services industry. We cannot predict whether any of these
proposals will be adopted or, if adopted, how these proposals would affect us. 
 Item 3. Controls and Procedures. As of the end of the period covered by this quarterly report on Form
10-QSB, an evaluation was performed under Rule 13a-15 of the Securities
Exchange Act of 1934 under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective. No change in our internal control over financial reporting occurred
during the period covered by this quarterly report that materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting. 21




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##### Table of Contents



PART II
OTHER INFORMATION 
 Item 1. Legal Proceedings. In May 2003, Thacker & Loucks, Inc., d/b/a Thacker & Loucks Financial
Services, a Georgia corporation (Thacker), filed an action against the
holding company in the State Court of Fulton County alleging a breach of
contract by the holding company. The breach of contract alleged by Thacker
relates to a Servicing Representative Agreement dated as of August 3, 2001 (the
Agreement) by and between ebank, the holding companys subsidiary, and
Thacker. Under the Agreement, ebank agreed to discount from time to time an
indeterminate number of certain types of contracts which met ebanks
underwriting criteria. Pursuant to the terms of the Agreement, in February
ebank provided Thacker with written notice of ebanks intention to terminate
the Agreement after the expiration of a 180-day notice period. The complaint filed by Thacker alleged that the holding company failed to
approve loans which met or exceeded the underwriting criteria and failed to
communicate with Thacker. The complaint filed by Thacker seeks contractual
damages in the amount of $3,500,000, plus reasonable attorneys fees and costs
of the litigation. Management believes that ebank has abided by all applicable terms of the
Agreement, including those terms related to continuing performance during the
notice period prior to termination, and that the claim asserted by Thacker is
without merit. Thacker filed its original lawsuit against the holding company, which was
not a party to the Agreement and was therefore the wrong entity. The holding
company filed its answer in June 2003, denying all claims and informing Thacker
that it had sued the wrong entity. Thacker agreed to file a joint consent
order dismissing the holding company from the action and substituting ebank,
the actual party to the Agreement, as the actual defendant. The consent order
stipulated that ebank would be given an opportunity to file its own answer.
This answer was filed in December 2003 and discovery commenced in the amended
action. Effective June 26, 2004, ebank entered into an agreement with Thacker to
settle and release all claims in the action brought by Thacker against ebank.
As part of this agreement, ebank agreed to pay $5,000 to Thacker without
admitting to any liability. In exchange, Thacker agreed to dismiss the current
lawsuit with prejudice and release and discharge ebank from any and all claims
relating to the business relationship between ebank and Thacker pursuant to the
Agreement. 
 Item 2. Changes in Securities and Use of Proceeds. None. 
 Item 3. Defaults Upon Senior Securities. None. 22




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders. Our annual meeting of the shareholders was held on June 2, 2004, for the
following purposes:  1.
    
    to elect three Class III directors to serve for three-year terms; and2.
    
    to approve an amendment to the Articles of Incorporation to
increase the number of authorized shares of common stock from
10,000,000 to 15,000,000. Only shareholders of record at the close of business on April 8, 2004,
were entitled to vote at the Annual Meeting. Proxies for the meeting were
solicited pursuant to the Georgia Business Corporation Code, and there was no
solicitation in opposition to managements solicitations. Proxies and ballots
were received from the holders of 2,239,925 shares of our common stock,
representing 71.10% of the shares of common stock entitled to vote. The
results were as follows: The three individuals nominated to serve as Class III directors were
elected with the number of votes for, against, and withheld as indicated below: CLASS II
    
    FOR
    
    AGAINST
    
    WITHHELDRichard D. Jackson
    
    
    2,208,117
    
    
    
    -0-
    
    
    
    31,808James L. Box
    
    
    2,207,117
    
    
    
    -0-
    
    
    
    32,808Kevin W. Link
    
    
    2,208,117
    
    
    
    -0-
    
    
    
    31,808
 In addition, the terms of the following directors continued after that meeting:
Terry L. Ferrero, Walter Drakeford, Gary M. Bremer, Don B. Stout and Gregory J.
Corona. The amendment to the Articles of Incorporation was approved as indicated
by the number of votes for, against, and abstain as indicated below: FOR
    
    AGAINST
    
    ABSTAIN2,200,597
    
    
    26,628
    
    
    
    12,700
 
 Item 5. Other Information. None. 
 Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits. 3.1
    
    Articles of Incorporation, as amended.3.2
    
    Certificate of Designations relating to the Series A Preferred Stock, as amended.3.3
    
    Articles of Amendment to Articles of Incorporation approved on June 2, 2004.10.1
    
    *Amendment to Employment Agreement of James L. Box.31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 23




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##### Table of Contents



32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 *Denotes management contract or compensatory plan or arrangement.  (b)
    
    Reports on Form 8-K  The following reports were filed on Form 8-K for
the period ended June 30, 2003:  1.
    
    Form 8-K filed with the SEC on May 11, 2004, announcing the
extension of the Companys public offering.2.
    
    Form 8-K/A filed with the SEC on May 13, 2003, that corrected
an inadvertent typographical error in the May 11, 2004 Form 8-K
regarding the extended expiration date of the Companys public
offering.3.
    
    Form 8-K filed with the SEC on June 2, 2004, announcing the
preliminary results of the Companys public offering.4.
    
    Form 8-K filed with the SEC on June 14, 2004, announcing the
termination of the Companys public offering. 24




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##### Table of Contents



SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. ebank Financial Services, Inc.Date: August 12, 2004
    
    By:
    
    /s/ James L. BoxJames L. BoxPresident and Chief Executive OfficerBy:
    
    /s/ Wayne W. ByersWayne W. ByersChief Financial Officer
 25