##### 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 March 31, 2004
 [   ]
    
    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 [   ] State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 3,150,298 shares of common stock, par value $.01 per share, were issued
and outstanding as of May 7, 2004. Transitional
Small Business Disclosure Format: Yes [   ] No [X}




---



TABLE OF CONTENTS  CONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECONDENSED 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-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO    Table of Contents  ebank Financial Services, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS 
 March 31,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Audited)ASSETSCash and due from banks
    
    $
    1,197,616
    
    
    $
    674,730Interest-bearing deposits in banks
    
    
    92,101
    
    
    
    70,118Federal funds sold
    
    
    1,815,000
    
    
    
    7,483,000Cash and cash equivalents
    
    
    3,104,717
    
    
    
    8,227,848Securities available for sale
    
    
    23,061,447
    
    
    
    20,761,358Other securities
    
    
    450,000
    
    
    
    450,000Loans, net of allowance for loan losses of $1,159,462 and
$1,204,754, respectively
    
    
    84,879,038
    
    
    
    79,814,908Premises and equipment, net
    
    
    522,901
    
    
    
    535,061Accrued interest receivable and other assets
    
    
    1,022,125
    
    
    
    1,777,279Total assets
    
    $
    113,040,228
    
    
    $
    111,566,454LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Deposits
    
    
    95,638,381
    
    
    
    95,487,429Other borrowings
    
    
    9,248,125
    
    
    
    9,372,444Accrued interest payable and other liabilities
    
    
    296,991
    
    
    
    347,670Total liabilities
    
    
    105,183,497
    
    
    
    105,207,543Shareholders equity:Series A preferred stock, $.01 par value, 8% cumulative,
convertible into one share of common stock; 10,000,000
shares authorized;
2,396,800 issued and outstanding; accumulated
undeclared dividends of $521,386 and $401,874
(liquidation preference of $5,992,000)
    
    
    23,968
    
    
    
    23,968Common stock, $.01 par value, 10,000,000 shares authorized,
3,150,298 and 2,074,723 shares issued and outstanding
    
    
    31,503
    
    
    
    20,747Capital surplus
    
    
    20,309,997
    
    
    
    19,173,141Accumulated deficit
    
    
    (12,531,822
    )
    
    
    (12,717,739
    )Accumulated other comprehensive income (loss)
    
    
    23,085
    
    
    
    (141,206
    )Total shareholders equity
    
    
    7,856,731
    
    
    
    6,358,911Total liabilities and shareholders equity
    
    $
    113,040,228
    
    
    $
    111,566,454
 The accompanying notes are an integral part of these condensed consolidated financial statements. 2




---



##### Table of Contents



ebank Financial Services, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) For the three months endedMarch 31,2004
    
    2003Interest income:Loans, including fees
    
    $
    1,444,086
    
    
    $
    1,298,683Interest-bearing deposits
    
    
    172
    
    
    
    2,998Investment securities:U.S. Government agencies and
corporations
    
    
    282,626
    
    
    
    210,359Other investments
    
    
    3,656
    
    
    
    5,629Federal funds sold
    
    
    19,378
    
    
    
    20,382Total interest income
    
    
    1,749,918
    
    
    
    1,538,051Interest expense:Deposits
    
    
    520,635
    
    
    
    533,065Other borrowings
    
    
    66,767
    
    
    
    84,520Total interest expense
    
    
    587,402
    
    
    
    617,585Net interest income
    
    
    1,162,516
    
    
    
    920,466Provision for loan losses
    
    
    31,000
    
    
    
    103,000Interest income after provision
for loan losses
    
    
    1,131,516
    
    
    
    817,466Other income:Deposit fees
    
    
    20,509
    
    
    
    23,369Gain on sale of loans held for sale (Maryland production)
    
    
    
    
    
    
    753,813Gain on sale of loans held for sale (Georgia production)
    
    
    
    
    
    
    5,861Loss on sales of securities available-for-sale
    
    
    
    
    
    
    (2,856
    )Miscellaneous
    
    
    5,555
    
    
    
    8,286Total other income
    
    
    26,064
    
    
    
    788,473Other expense:Salaries and other compensation
    
    
    450,595
    
    
    
    887,978Employee benefits
    
    
    79,237
    
    
    
    97,725Net occupancy and equipment expense
    
    
    213,029
    
    
    
    174,337Professional and other outside services
    
    
    99,387
    
    
    
    20,203Other expense
    
    
    129,415
    
    
    
    111,745Total other expenses
    
    
    971,663
    
    
    
    1,291,988Net earnings
    
    $
    185,917
    
    
    $
    313,951Preferred stock dividends arising during the quarter
    
    $
    (119,512
    )
    
    $
    (118,894
    )Net earnings attributable to common stockholders
    
    $
    66,405
    
    
    $
    195,102Basic earnings per common share
    
    $
    .03
    
    
    $
    .11Diluted earnings per common share
    
    $
    .04
    
    
    $
    .08
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




---



##### Table of Contents



ebank Financial Services, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) For the three months endedMarch 31,2004
    
    2003Net earnings
    
    $
    185,917
    
    
    $
    313,951Other comprehensive income:Unrealized gains on securities
available for sale:Holding gains arising during the period,
net of taxes of $100,524
    
    
    164,291
    
    
    
    Comprehensive income
    
    $
    350,208
    
    
    $
    313,951
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




---



##### Table of Contents



ebank Financial Services, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the three months endedMarch 31,2004
    
    2003Cash flows from operating activities:Net earnings
    
    $
    185,917
    
    
    $
    313,951Adjustments to reconcile net earnings
to net cash provided by operating activities:Amortization of premium on other borrowings
    
    
    681
    
    
    
    Net accretion of investment securities
    
    
    (1,782
    )
    
    
    20,171Depreciation expense
    
    
    72,020
    
    
    
    47,629Provision for loan losses
    
    
    31,000
    
    
    
    103,000Loss on sale of securities available-for-sale
    
    
    
    
    
    
    2,856Decrease in mortgage loans held for sale
    
    
    
    
    
    
    7,820,139Change in deferred loan fees and costs
    
    
    (6,345
    )
    
    
    (230,274
    )Change in other assets
    
    
    52,635
    
    
    
    199,710Change in accrued interest receivable
    
    
    211,557
    
    
    
    (60,465
    )Change in accrued interest payable
    
    
    (9,377
    )
    
    
    (13,133
    )Change in other liabilities
    
    
    (58,485
    )
    
    
    (597,220
    )Net cash provided by operating activities
    
    
    477,821
    
    
    
    7,606,364Cash flows from investing activities:Purchase of securities held-to-maturity
    
    
    
    
    
    
    (8,030,270
    )Maturities of securities held-to-maturity
    
    
    
    
    
    
    7,607,905Maturities of securities available for sale
    
    
    2,500,000
    
    
    
    Purchase of securities available-for-sale
    
    
    (5,530,434
    )
    
    
    (707,389
    )Proceeds from sale of securities available-for-sale
    
    
    1,000,000
    
    
    
    704,533Loans (originated) repaid, net of principal repayments
    
    
    (5,088,785
    )
    
    
    (5,999,178
    )Proceeds from sale of other real estate owned
    
    
    501,304
    
    
    
    Proceeds from sale of Peachtree Capital Corporation
    
    
    
    
    
    
    578,000Purchases of premises and equipment
    
    
    (59,861
    )
    
    
    (25,688
    )Net cash used by investing activities
    
    
    (6,677,776
    )
    
    
    (5,872,087
    )Cash flows from financing activities:Net increase (decrease) in deposits
    
    
    150,952
    
    
    
    (3,815,844
    )Repayments on other borrowings
    
    
    (125,000
    )
    
    
    (30,053
    )Cash dividend paid on preferred stock
    
    
    
    
    
    
    (20,250
    )Net proceeds from the sale of common stock
    
    
    1,147,613
    
    
    
    Deferred offering costs
    
    
    (96,741
    )
    
    
    Net cash provided (used) by financing activities
    
    
    1,076,824
    
    
    
    (3,866,147
    )Net decrease in cash and cash equivalents
    
    
    (5,123,131
    )
    
    
    (2,131,870
    )Cash and cash equivalents:Beginning of period
    
    
    8,227,848
    
    
    
    6,633,440End of period
    
    $
    3,104,717
    
    
    $
    4,501,570
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




---



##### Table of Contents



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 accounting
principles generally accepted in the United States of America 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 three-month period
ended March 31, 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
United States of America. Actual results could differ from these estimates. 6




---



##### Table of Contents



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 March 31, 2004 and March 31, 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 basic and diluted earnings
per common share. For the three months endedMarch 31,2004
    
    2003Net earnings attributable
to common stockholders
    
    As reported
    
    $
    66,405
    
    
    $
    195,102Effect of stock options grants
    
    
    (20,592
    )
    
    
    (35,784
    )Pro forma
    
    $
    45,813
    
    
    $
    159,318Basic earnings per share
    
    As reported
    
    $
    .03
    
    
    $
    .11Pro forma
    
    $
    .02
    
    
    $
    .09Diluted earnings per share
    
    As reported
    
    $
    .04
    
    
    $
    .08Pro forma
    
    $
    .04
    
    
    $
    .07
 7




---



##### Table of Contents



NOTE 2  EARNINGS PER COMMON SHARE Presented below is a summary of the components used to calculate basic and
diluted earnings per common share. For the three months endedMarch 31,2004
    
    2003Basic earnings per common share:Weighted average common shares outstanding
    
    
    2,140,799
    
    
    
    1,754,078Net earnings
    
    $
    185,917
    
    
    $
    313,951Preferred stock dividend
    
    
    (119,512
    )
    
    
    (118,849
    )Net earnings attributable to common stockholders
    
    $
    66,405
    
    
    $
    195,102Basic earnings per common share
    
    $
    .03
    
    
    $
    .11Diluted earnings per common share:Weighted average common shares outstanding
    
    
    2,140,799
    
    
    
    1,754,078Net 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
    
    
    2,396,800
    
    
    
    2,410,000Total weighted average common shares and
common stock equivalents outstanding
    
    
    4,537,599
    
    
    
    4,164,078Net earnings attributable to common stockholders
    
    $
    66,405
    
    
    $
    195,102Adjustment assuming all preferred stock converted to
common stock at beginning of period
    
    
    119,512
    
    
    
    118,849Adjusted
earnings attributable to common stockholders
    
    $
    185,917
    
    
    
    313,951Diluted earnings per common share
    
    $
    .04
    
    
    $
    .08
 NOTE 3  ISSUANCE OF COMMON STOCK In connection with the Companys current public offering of common stock,
the Company issued a total of 1,075,575 common shares as of March 31, 2004 and
received net proceeds from these stock sales of $1,147,613. After commencement
of the offering on February 11, 2004, we began accepting stock subscriptions
and will cease accepting subscriptions on May 11, 2004 unless we elect to
extend the stock offering for 30 days as provided for in the prospectus.
Deferred offering costs totaling $190,403 have been incurred related to this
offering and are included in other assets at March 31, 2004 and will be
reclassified to capital surplus upon completion of the offering during the
second quarter of 2004. 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 March 31, 2004, the accrued dividend on the Companys
Series A preferred stock totaled $521,386. 8




---



##### Table of Contents



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 has commenced in the amended action. There are no motions pending in this action. The Bank intends to
vigorously defend this lawsuit. 9




---



##### 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 the September 11, 2001
terrorist attacks on the World Trade Center and the Pentagon, and
the war in Iraq; and  
    
    other risks and uncertainties detailed from time to time in
our filings with the Securities and Exchange Commission. General ebank Financial Services, Inc., formerly known as ebank.com, 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 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. 10




---



##### Table of Contents



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 price was set at a
discount of approximately 26% of the book value of our common stock as of
September 30, 2003 ($1.46 per share). The offering will terminate 90 days
following its commencement (on May 11, 2004), although we may extend the
offering for one additional 30-day period at our sole discretion. For the first 30 days of the offering, we were accepting subscriptions on
a first come, first served basis only from holders of currently outstanding
shares of our common stock and our Series A preferred stock, and from our
directors and employees (including executive officers), who are residents of
those states in which this offering is being made. Following March 12, 2004,
the offering became open to all investors on a first come, first served
basis, regardless of any existing shareholder, employee or director status with
the Company. We are making 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 March 31, 2004, the Company had accepted subscription
agreements covering an aggregate of 1,075,575 shares of common stock, raising
gross proceeds of $1,161,621. We intend to use approximately $250,000 of the
proceeds to repay certain debt of the Company outstanding before we commenced
the offering. We expect to use substantially all 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 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. Effective as of April 1, 2004, we increased the size of the board to eight
upon our appointment, pursuant to the recommendation of our chairman of the
board Richard D. Jackson, of Kevin W. Link as a Class III director. Financial Condition Total consolidated assets increased by $1,473,774 to $113,040,228 during
the three-month period ended March 31, 2004. The increase in assets was
primarily related to increases in net loans and investments of approximately
$5.1 million and $2.3 million, respectively, offset by decreases in Federal
funds sold of approximately $5.7 million. The increase in net loans was
primarily attributable to an increase of approximately $5.3 million in
individual real estate loans. Consumer loans increased approximately $400
thousand during the period. Both commercial and commercial mortgage loans
decreased during the period by approximately $400 thousand and $300 thousand,
respectively. The loan portfolio mix 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 slightly by $24,046 to
$105,183,497 during the three-month period ended March 31, 2004. The decrease
in liabilities is primarily related to a $125 thousand decrease in other
borrowings and a $50 thousand decrease in accrued interest payable and other
liabilities offset by an increase in deposits of $151 thousand during the
three-month period ended March 31, 2004. Results of Operations  Three months ended March 31, 2004 compared to the three
months ended March 31, 2003: Net earnings for the three months ended March 31, 2004 was $185,917, or
$66,405 after taking into account $119,512 in dividends on preferred stock,
compared with net earnings of $313,951, or $195,102 after taking into account
$118,849 in dividends on preferred stock, for the three months ended March 31,
2003. Net interest income, before provision for loan losses, for the
three-month period ending March 31, 2004 totaled $1,162,516, compared to net
interest income, before provision for loan losses, of $920,466 for the
three-month period ending March 31, 2003. During the period ended March 31,
2003, 11




---



##### Table of Contents



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 three months ended March 31, 2004 and 2003 was
$26,064 and $788,473, respectively. Included in other income for the three
months ended March 31, 2004 were deposit fees and miscellaneous income totaling
$20,509 and $5,555, respectively. Included in other income for the three months
ended March 31, 2003 was $753,813 generated by the Maryland loan production
office. The income from the Maryland loan production office consisted of gains
on loans sold to investors in the secondary market. Operating expenses for the three-month period ending March 31, 2004 and
2003 totaled $971,663 and $1,291,988, respectively. Operating expenses for the
three-month period ending March 31, 2003 included Maryland loan production
office expenses totaling $359,293. The Maryland loan production office
expenses consisted primarily of incentive compensation and other benefits.
After adjusting for operating expenses incurred in connection with the Maryland
loan production office in 2003, total operating expenses for continuing
operations increased by approximately $39,000 for the three-month period ending
March 31, 2004 compared to the prior year period. The expense increase is
primarily due to a write-off in the amount of approximately $20,000 related to
our former banking platform provided by London Bridge Phoenix Software in
January and February, 2004 and will not recur. Management anticipates that a significant cost for 2004 will likely be
those associated with the Sarbanes-Oxley Act of 2002 compliance implementation.
The Sarbanes-Oxley Act of 2002 includes provisions addressing audits, financial
reporting and disclosure, conflicts of interest and corporate governance at
public companies. Section 404 of this Act deals with 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.
For the quarter ended March 31, 2004, the Company incurred approximately $5,000
in legal fees associated with compliance measures mandated by the
Sarbanes-Oxley Act of 2002 in connection with the preparation of the Companys
annual report on Form 10-KSB and Proxy Statement for the 2004 Annual Meeting of
Shareholders. The Company expects to incur significant additional costs with
respect to the implementation of other items of the Sarbanes-Oxley Act of 2002
during this fiscal year. 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 12




---



##### Table of Contents



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 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. 13




---



##### Table of Contents



For the three months ended March 31, 2004, there were thirteen loans
totaling $4,603,244 included in our Classified Asset Summary. These loans were
evaluated individually and were allocated $420,570 of the $1,159,462 allowance
for loan losses. The remaining $738,892 provision for loan losses is associated
with loans evaluated in groups. At March 31, 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
    
    $
    1,945,274
    
    
    
    7
    
    
    $
    228,352
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,945,274
    
    
    
    7
    
    
    $
    228,352
    
    
    $
    1,138,838
    
    
    
    6
    
    
    $
    136,983Real Estate 
Commercial
    
    
    2,616,846
    
    
    
    3
    
    
    
    189,084
    
    
    
    1,696,758
    
    
    
    2
    
    
    
    84,838
    
    
    
    920,088
    
    
    
    1
    
    
    
    104,246
    
    
    
    920,088
    
    
    
    1
    
    
    
    104,246Real Estate 
Individual
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Installment 
Individual
    
    
    41,124
    
    
    
    3
    
    
    
    3,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,124
    
    
    
    3
    
    
    
    3,134
    
    
    
    41,124
    
    
    
    3
    
    
    
    3,134Totals
    
    $
    4,603,244
    
    
    
    13
    
    
    $
    420,570
    
    
    $
    1,696,758
    
    
    
    2
    
    
    $
    84,838
    
    
    $
    2,906,486
    
    
    
    11
    
    
    $
    335,732
    
    
    $
    2,100,050
    
    
    
    10
    
    
    $
    244,363
 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. 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 three months ended March 31, 2004, there were twenty loans
delinquent over 30 days totaling approximately $2,425,000. Of this amount,
there were five delinquent commercial loans totaling $677,000, one delinquent
commercial real estate loan totaling $932,000, nine delinquent individual real
estate loans totaling $660,000 and five delinquent consumer loans totaling
$156,000. There were two loans totaling approximately $25,000 past due 90 days
or more, both of which remained on interest accrual at March 31, 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. 14




---



##### Table of Contents



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 three months ended March 31, 2004, our allowance for loan losses
amounted to $1,159,462, or 1.35% of total loans. The decrease in our allowance
for loan losses in the first quarter of $45,292 resulted from a $31,000
provision for loan losses and no recoveries, offset by three net loans charged
off of $76,292. 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 in 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. Allowance for Loan Losses The following table sets forth an analysis of our allowance for loan losses
for the periods indicated. For the Three
    
    For theMonths Ended
    
    Year EndedMarch 31,
    
    December 31,2004
    
    2003(Dollars in thousands)Average loans outstanding
    
    $
    84,984
    
    
    $
    81,003Loans outstanding at period end
    
    $
    86,039
    
    
    $
    81,020Total nonperforming loans
    
    $
    2,100
    
    
    $
    2,360Beginning balance of allowance
    
    $
    1,205
    
    
    $
    963Loans charged off:Commercial
    
    
    0
    
    
    
    (384
    )Real estate  commercial
    
    
    (60
    )
    
    
    0Installment loans to individuals
    
    
    (17
    )
    
    
    (269
    )Total charge-offs
    
    
    (77
    )
    
    
    (653
    )Recoveries of previous charge-offs:Installment loans to individuals
    
    
    0
    
    
    
    1Total recoveries
    
    
    0
    
    
    
    1Net loans charged-off
    
    
    (77
    )
    
    
    (652
    )Provision for loan losses
    
    
    31
    
    
    
    894Balance at period end
    
    $
    1,159
    
    
    $
    1,205Net charge-offs to average loans
    
    
    0.01
    %
    
    
    0.80
    %Allowance as percent of total loans
    
    
    1.35
    %
    
    
    1.49
    %Nonperforming loans as a percentage of
total loans
    
    
    2.44
    %
    
    
    2.91
    %Allowance as a percent of nonperforming
loans
    
    
    55.19
    %
    
    
    51.06
    %
 15




---



##### Table of Contents



At March 31, 2004 and December 31, 2003, the allowance was allocated as
follows: Percentage of
    
    
    
    
    
    Percentage ofThree Months
    
    loans in
    
    Year ended
    
    loans inEnded
    
    each category
    
    December 31,
    
    each categoryMarch 31, 2004
    
    to total loans
    
    2003
    
    to total loansCommercial
    
    $
    502,352
    
    
    
    17.52
    %
    
    $
    532,669
    
    
    
    19.11
    %Real estate 
individual
    
    
    317,084
    
    
    
    50.47
    %
    
    
    188,000
    
    
    
    47.02
    %Real estate 
commercial
    
    
    138,000
    
    
    
    23.96
    %
    
    
    232,531
    
    
    
    25.82
    %Installment loans
to
individuals
    
    
    199,134
    
    
    
    8.05
    %
    
    
    197,300
    
    
    
    8.05
    %Unallocated
    
    
    2,892
    
    
    
    
    %
    
    
    54,254
    
    
    
    
    %Total
    
    $
    1,159,462
    
    
    
    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. 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. 16




---



##### Table of Contents



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 three months
ended March 31, 2004: Interest-
    
    
    
    
    
    InterestEarning Assets/
    
    Average
    
    Income/
    
    Yield/Bearing Liabilities
    
    Balance
    
    Cost
    
    CostFederal funds sold
    
    $
    8,126,968
    
    
    $
    19,378
    
    
    
    .96
    %Interest-bearing deposits
    
    
    74,002
    
    
    
    172
    
    
    
    .93
    %Investment securities
    
    
    19,978,413
    
    
    
    286,282
    
    
    
    5.75
    %Loans
    
    
    84,984,482
    
    
    
    1,444,086
    
    
    
    6.82
    %Total
    
    $
    113,163,865
    
    
    $
    1,749,918
    
    
    
    6.20
    %Deposits
    
    
    90,081,468
    
    
    
    520,635
    
    
    
    2.32
    %Other borrowings
    
    
    9,331,231
    
    
    
    66,767
    
    
    
    2.87
    %Total
    
    $
    99,412,699
    
    
    $
    587,402
    
    
    
    2.37
    %Net interest income/spread
    
    
    
    
    
    $
    1,162,516
    
    
    
    3.83
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.12
    %
 The net interest margin for the first quarter of 2004 increased to 4.12%
as compared to 3.84% for the first quarter of 2003. Net interest margin
increased to 4.12% during the first quarter of 2004 from 3.72% for the full
2003 year. 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 March 31, 2004 financial statements evidence a satisfactory
liquidity position as total cash, cash equivalents, and federal funds sold
amounted to approximately $3.1 million, or 2.75% of total assets. Our ability
to maintain and expand our deposit base and borrowing capabilities are other
sources of liquidity. For the three-month period ended March 31, 2004, total
deposits increased slightly from $95.5 million to $95.6 million, representing a
increase of less than 1%. We will increase deposits as required to fund new
loan growth. Additionally, we may enter into security repurchase agreements
which enable us to borrow funds at favorable rates using certain investments
held in our investment portfolio. 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. 17




---



##### Table of Contents



Bank
    
    MinimumCapital
    
    RegulatoryRatio
    
    RequirementCapital ratios at March 31, 2004Tier 1 capital
    
    
    10.02
    %
    
    
    4.0
    %Tier 2 capital
    
    
    1.25
    %Total risk-based capital ratio
    
    
    11.27
    %
    
    
    8.0
    %Leverage ratio
    
    
    6.88
    %
    
    
    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. The most recent notice
from the Office of Thrift Supervision categorized the bank as well capitalized
under the regulatory framework for prompt corrective action. However, at
December 31, 2003, the bank temporarily fell below the requested 10.0% well
capitalized level for its total risk-based capital ratio. Management promptly
notified the OTS that its total risk based capital was 9.76% at December 31,
2003. The bank nevertheless remained adequately capitalized (above 8%) at
December 31, 2003. The holding company contributed $1.1 million in capital to
the bank during the first quarter of 2004 and the bank was well capitalized
with a total risk-based capital ratio of 11.27% at March 31, 2004. The banks
profitability during the period also contributed to its increased risk-based
capital ratio. We believe that, as of March 31, 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. 18




---



##### Table of Contents



The table below shows the interest rate sensitivity of our assets and
liabilities as of March 31, 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
    
    $
    92
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    92Loans
    
    
    49,013
    
    
    
    6,396
    
    
    
    9,842
    
    
    
    20,890
    
    
    
    86,141Investment securities
    
    
    450
    
    
    
    
    
    
    
    
    
    
    
    23,061
    
    
    
    23,511Federal funds sold
    
    
    1,815
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,815Total earning assets
    
    
    51,370
    
    
    
    6,396
    
    
    
    9,842
    
    
    
    43,951
    
    
    
    111,559Interest-bearing liabilities:Money market and NOW
    
    
    30,876
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,876Savings deposits
    
    
    625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    625Time deposits
    
    
    7,438
    
    
    
    30,406
    
    
    
    18,850
    
    
    
    
    
    
    
    56,694Other liabilities
    
    
    
    
    
    
    5,248
    
    
    
    
    
    
    
    4,000
    
    
    
    9,248Total interest-bearing liabilities
    
    
    38,939
    
    
    
    35,654
    
    
    
    18,850
    
    
    
    4,000
    
    
    
    97,443Interest-sensitivity gap
    
    $
    12,431
    
    
    $
    (29,258
    )
    
    $
    (9,008
    )
    
    $
    39,951
    
    
    $
    14,116Cumulative interest-sensitivity gap
    
    $
    12,431
    
    
    $
    (16,827
    )
    
    $
    (25,835
    )
    
    $
    14,116
    
    
    $
    14,116Ratio of interest-sensitivity gap
to total earning assets
    
    
    11.14
    %
    
    
    -26.23
    %
    
    
    -8.07
    %
    
    
    35.81
    %
    
    
    12.65
    %Ratio of cumulative interest-
sensitivity gap to total earning
assets
    
    
    11.14
    %
    
    
    -15.08
    %
    
    
    -23.16
    %
    
    
    12.65
    %
 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. 19




---



##### Table of Contents



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 $84,984,482
for the three-month period ended March 31, 2004. Total gross loans outstanding
at March 31, 2004 were $86,140,853. The following table summarizes the composition of the loan portfolio at
March 31, 2004: PercentAmount
    
    of totalCommercial
    
    $
    15,093,846
    
    
    
    17.52
    %Real estate  individual
    
    
    43,472,871
    
    
    
    50.47
    %Real estate  commercial
    
    
    20,639,752
    
    
    
    23.96
    %Installment loans to individuals
    
    
    6,934,384
    
    
    
    8.05
    %Gross loans
    
    
    86,140,853
    
    
    
    100.00
    %Less: Net deferred loan fees
    
    
    (102,053
    )Allowance for loan loss
    
    
    (1,159,462
    )Total net loans
    
    $
    84,879,338
 The principal components of our loan portfolio at March 31, 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 pursuant to 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. 20




---



##### 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 has commenced in the
amended action. There are no motions pending in this action. We intend to vigorously defend
this lawsuit. 
 Item 2. Changes in Securities and Use of Proceeds. None. 
 Item 3. Defaults Upon Senior Securities. None. 
 Item 4. Submission of Matters to a Vote of Security Holders. None. 
 Item 5. Other Information. None. 21




---



##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits.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 2002.32.1
    
    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.(b)
    
    Reports on Form 8-K  There were no reports were filed on
Form 8-K for the period ended March 31, 2004. 22




---



##### 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: May 12, 2004
    
    By:
    
    /s/ James L. BoxJames L. BoxPresident and Chief Executive OfficerBy:
    
    /s/ Wayne W. ByersWayne W. ByersChief Financial Officer
 23