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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-QSB (Mark One) x
    
    QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2004o
    
    TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THESECURITIES 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: 5,779,738 shares of common stock, par value $.01 per share, were issued
and outstanding as of October 27, 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 Small Business Issuer Purchases of Equity SecuritiesItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESEX-10.1 SECOND AMENDMENT TO 1998 STOCK INCENTIVE PLANEX-10.2 STOCK OPTION AGREEMENTEX-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 September 30,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Audited)ASSETSCash and due from banks
    
    $
    886,823
    
    
    $
    674,730Interest-bearing deposits in banks
    
    
    79,725
    
    
    
    70,118Federal funds sold
    
    
    680,000
    
    
    
    7,483,000Cash and cash equivalents
    
    
    1,646,548
    
    
    
    8,227,848Securities available for sale
    
    
    22,479,216
    
    
    
    20,761,358Other securities
    
    
    450,000
    
    
    
    450,000Loans, net of allowance for loan losses of $893,888 and
$1,204,754, respectively
    
    
    85,824,912
    
    
    
    79,814,908Premises and equipment, net
    
    
    435,309
    
    
    
    535,061Accrued interest receivable and other assets
    
    
    2,077,530
    
    
    
    1,777,279Total assets
    
    $
    112,913,515
    
    
    $
    111,566,454LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Deposits
    
    $
    85,259,515
    
    
    $
    95,487,429Other borrowings
    
    
    17,000,000
    
    
    
    9,372,444Accrued interest payable and other liabilities
    
    
    253,165
    
    
    
    347,670Total liabilities
    
    
    102,512,680
    
    
    
    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
$761,723 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
    
    
    22,797,763
    
    
    
    19,173,141Accumulated deficit
    
    
    (12,416,695
    )
    
    
    (12,717,739
    )Accumulated other comprehensive loss
    
    
    (61,986
    )
    
    
    (141,206
    )Total shareholders equity
    
    
    10,400,835
    
    
    
    6,358,911Total liabilities and shareholders equity
    
    $
    112,913,515
    
    
    $
    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 nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interest income:Loans, including fees
    
    $
    1,335,160
    
    
    $
    1,352,852
    
    
    $
    4,177,607
    
    
    $
    3,988,915Interest-bearing deposits
    
    
    253
    
    
    
    336
    
    
    
    570
    
    
    
    5,232Investment securities
    
    
    316,440
    
    
    
    261,873
    
    
    
    868,369
    
    
    
    698,051Other investments
    
    
    3,938
    
    
    
    4,254
    
    
    
    11,575
    
    
    
    14,085Federal funds sold
    
    
    3,110
    
    
    
    7,054
    
    
    
    26,209
    
    
    
    30,537Total interest income
    
    
    1,658,901
    
    
    
    1,626,369
    
    
    
    5,084,330
    
    
    
    4,736,820Interest expense:Deposits
    
    
    452,552
    
    
    
    505,524
    
    
    
    1,445,070
    
    
    
    1,545,375Other borrowings
    
    
    92,973
    
    
    
    98,545
    
    
    
    230,244
    
    
    
    284,170Total interest expense
    
    
    545,525
    
    
    
    604,069
    
    
    
    1,675,314
    
    
    
    1,829,545Net interest income
    
    
    1,113,376
    
    
    
    1,022,300
    
    
    
    3,409,016
    
    
    
    2,907,275Provision for loan losses
    
    
    298,000
    
    
    
    0
    
    
    
    529,000
    
    
    
    689,000Net interest income after provision for loan losses
    
    
    815,376
    
    
    
    1,022,300
    
    
    
    2,880,016
    
    
    
    2,218,275Other income:Gain on sale of loans held for sale (MD)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    752,715Gain on sale of loans held for sale (GA)
    
    
    
    
    
    
    1,658
    
    
    
    
    
    
    
    10,209Gain on sale of investments
    
    
    50,018
    
    
    
    20,407
    
    
    
    50,018
    
    
    
    265,281Gain on sale of real estate owned
    
    
    
    
    
    
    18,634
    
    
    
    
    
    
    
    18,634Recovery of fraud loss
    
    
    
    
    
    
    18,000
    
    
    
    
    
    
    
    18,000Deposit fees
    
    
    29,835
    
    
    
    24,212
    
    
    
    78,349
    
    
    
    70,293Miscellaneous fees
    
    
    4,126
    
    
    
    3,607
    
    
    
    16,288
    
    
    
    18,586Total other income
    
    
    83,979
    
    
    
    86,518
    
    
    
    144,655
    
    
    
    1,153,718Other expense:Salaries and other compensation
    
    
    396,963
    
    
    
    444,378
    
    
    
    1,251,630
    
    
    
    1,788,093Employee benefits
    
    
    75,124
    
    
    
    83,702
    
    
    
    227,793
    
    
    
    264,109Net occupancy and equipment expense
    
    
    187,640
    
    
    
    185,159
    
    
    
    588,506
    
    
    
    542,929Professional and other outside services
    
    
    105,850
    
    
    
    116,788
    
    
    
    298,867
    
    
    
    358,638Other expense
    
    
    114,934
    
    
    
    130,620
    
    
    
    356,830
    
    
    
    312,731Total other expenses
    
    
    880,511
    
    
    
    960,647
    
    
    
    2,723,626
    
    
    
    3,266,500Net earnings
    
    
    18,844
    
    
    
    148,171
    
    
    
    301,045
    
    
    
    105,493Preferred stock dividends
    
    
    (120,825
    )
    
    
    (121,490
    )
    
    
    (359,849
    )
    
    
    (360,510
    )Net earnings (loss) attributable to common stockholders
    
    $
    (101,981
    )
    
    $
    26,681
    
    
    $
    (58,804
    )
    
    $
    (255,017
    )Basic earnings (loss) per common share
    
    $
    (.02
    )
    
    $
    .01
    
    
    $
    (.01
    )
    
    $
    (.13
    )Diluted earnings (loss) per common share
    
    $
    (.02
    )
    
    $
    .01
    
    
    $
    (.01
    )
    
    $
    (.13
    )
 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 nine months endedSeptember 30,2004
    
    2003Net earnings
    
    $
    301,045
    
    
    $
    105,493Other comprehensive income (loss):Unrealized (losses) gains on
securities available for sale:Holding gains arising during
the nine-month period net of
taxes of $67,636 and $30,634
    
    
    110,251
    
    
    
    50,067Reclassification adjustment for
gain included in the net
earnings, net of taxes of
$18,987 and $100,701
    
    
    (31,031
    )
    
    
    (164,580
    )Total other comprehensive income
(loss)
    
    $
    79,220
    
    
    $
    (114,513
    )Comprehensive income (loss)
    
    $
    380,265
    
    
    $
    (9,020
    )
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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ebank Financial Services, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the nine months endedSeptember 30,2004
    
    2003Cash flows from operating activities:Net earnings
    
    $
    301,045
    
    
    $
    105,493Adjustments to reconcile net earnings
to net cash provided in operating activities:Net amortization of investment securities
    
    
    147
    
    
    
    17,088Depreciation expense
    
    
    167,132
    
    
    
    145,649Provision for loan losses
    
    
    529,000
    
    
    
    689,000Gain on sale of investments
    
    
    (50,018
    )
    
    
    (265,281
    )Gain on sale of real estate owned
    
    
    
    
    
    
    (18,634
    )Decrease in mortgage loans held for sale
    
    
    
    
    
    
    7,820,139Change in deferred loan fees and costs
    
    
    4,433
    
    
    
    (239,227
    )Change in other assets
    
    
    117,076
    
    
    
    195,160Change in accrued interest receivable
    
    
    (28,219
    )
    
    
    (154,972
    )Change in accrued interest payable
    
    
    (16,976
    )
    
    
    (36,740
    )Change in other liabilities
    
    
    (77,529
    )
    
    
    (658,840
    )Net cash provided by operating activities
    
    
    946,091
    
    
    
    7,598,835Cash flows from investing activities:Purchase of securities available for sale
    
    
    (12,145,469
    )
    
    
    (16,555,570
    )Proceeds from calls and maturities of securities available for
sale
    
    
    7,499,774
    
    
    
    2,000,000Proceeds from sale of securities available for sale
    
    
    3,105,400
    
    
    
    2,534,226Purchase 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
    
    
    
    
    
    
    3,950,329Proceeds from sale of other securities
    
    
    
    
    
    
    156,525Net change in loans
    
    
    (7,482,321
    )
    
    
    (9,187,384
    )Net proceeds from the sale of real estate owned
    
    
    501,304
    
    
    
    138,634Purchases of premises and equipment
    
    
    (67,381
    )
    
    
    (137,398
    )Proceeds from sale of Peachtree Capital Corporation
    
    
    
    
    
    
    578,000Net cash used by investing activities
    
    
    (8,588,693
    )
    
    
    (17,616,356
    )Cash flows from financing activities:Net change in deposits
    
    
    (10,227,914
    )
    
    
    (1,751,723
    )Proceeds from other borrowings
    
    
    
    
    
    
    491,000Repayments on other borrowings
    
    
    (372,444
    )
    
    
    (30,053
    )Net proceeds from sale of common stock
    
    
    3,661,660
    
    
    
    Proceeds from repurchase agreements
    
    
    8,000,000
    
    
    
    6,000,000Cash dividend paid on preferred stock
    
    
    
    
    
    
    (20,250
    )Net cash provided by financing activities
    
    
    1,061,302
    
    
    
    4,688,974Net change in cash and cash equivalents
    
    
    (6,581,300
    )
    
    
    (5,328,547
    )Cash and cash equivalents:Beginning of period
    
    
    8,227,848
    
    
    
    6,633,440End of period
    
    $
    1,646,548
    
    
    $
    1,304,893
 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 nine-month period ended September 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 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 September 30, 2004 and September
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 nine months endedSeptember 30,2004
    
    2003Net loss attributable to common stockholders
    
    
    
    $
    (58,804
    )
    
    $
    (255,017
    )Effect of stock options grants
    
    
    (92,162
    )
    
    
    (107,350
    )Pro forma
    
    $
    (150,966
    )
    
    $
    (362,367
    )Basic loss per share
    
    As reported
    
    $
    (.01
    )
    
    $
    (.13
    )Pro forma
    
    $
    (.04
    )
    
    $
    (.18
    )Diluted loss per share
    
    As reported
    
    $
    (.01
    )
    
    $
    (.13
    )Pro forma
    
    $
    (.04
    )
    
    $
    (.18
    )
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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 September
30, 2004 and 2003. For the three months endedSeptember 302004
    
    2003Basic Earnings (Loss) Per Common Share:Weighted average common shares outstanding
    
    
    5,778,427
    
    
    
    2,060,639Net earnings
    
    $
    18,844
    
    
    $
    148,171Preferred stock dividend accumulated during the period
    
    
    (120,825
    )
    
    
    (121,490
    )Net earnings (loss) attributable to common stockholders
    
    $
    (101,981
    )
    
    $
    26,681Basic earnings (loss) per common share
    
    $
    (.02
    )
    
    $
    .01Diluted Earnings (Loss) Per Common Share:Weighted average common shares outstanding
    
    
    5,778,427
    
    
    
    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
    
    
    5,778,427
    
    
    
    2,060,639Net earnings (loss) attributable to common
Stockholders
    
    $
    (101,981
    )
    
    $
    26,681Diluted earnings (loss) per common share
    
    $
    (.02
    )
    
    $
    .01
 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 nine months ended September
30, 2004 and 2003. For the nine months endedSeptember 302004
    
    2003Basic Loss Per Common Share:Weighted average common shares outstanding
    
    
    4,059,378
    
    
    
    1,959,575Net earnings
    
    $
    301,045
    
    
    $
    105,493Preferred stock dividend
    
    
    (359,849
    )
    
    
    (360,510
    )Net loss attributable to common stockholders
    
    $
    (58,804
    )
    
    $
    (255,017
    )Basic loss per common share
    
    $
    (.01
    )
    
    $
    (.13
    )Diluted Loss Per Common Share:Weighted average common shares outstanding
    
    
    4,059,378
    
    
    
    1,959,575Net 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
    
    
    4,059,378
    
    
    
    1,959,575Net loss
attributable to common stockholders
    
    $
    (58,804
    )
    
    $
    (255,017
    )Diluted loss per common share
    
    $
    (.01
    )
    
    $
    (.13
    )
 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 and
received net proceeds from these stock sales of $3,661,660. 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 September 30, 2004, the cumulative undeclared dividends on
the Companys Series A preferred stock totaled $761,723. 9




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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 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




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##### 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 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 3,703,704 shares of common
stock, raising gross proceeds of $4 million. After deducting offering related
expenses incurred to date, the Company generated net proceeds of $3,661,660
through its stock offering. As of September 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 $1.3 million to $112,913,515 during
the nine-month period ended September 30, 2004. The increase in assets is
primarily related to increases in loans and investments of $5.7 and $1.7
million, respectively, offset by a decrease in Federal funds sold of $6.8
million. The $5.7 million increase in our loan portfolio is composed of
increases in our mortgage, commercial real estate and consumer loans of $4.0,
$2.5 and $0.7 million, respectively, offset by a decline of $1.5 million in our
commercial loans. The continued increase in individual real estate mortgage
loans during the period reflects managements efforts to diversify the loan
portfolio by decreasing its reliance on commercial and commercial real estate
loans. Total consolidated liabilities decreased by $2.7 million to $102,512,680
during the nine-month period ended September 30, 2004. The decrease in
liabilities is primarily related to a $10.2 million decrease in deposits,
offset by an increase in other borrowings of $7.6 million, respectively. The
$10.2 million decrease in deposits is primarily related to decreases in
certificates of deposit and money market balances of $8.6 and $3.2 million
offset by increases in demand deposit and savings balances of $1.3 million and
$0.3 million, respectively. The increase in other borrowings in primarily
related to $8.0 million in short-term borrowings secured by investments offset
by repayments of $0.4 million. During the third quarter, we continued 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  Nine months ended September 30, 2004 compared to the
nine months ended September 30, 2003: Net earnings (loss) for the nine months ended September 30, 2004 was
$301,045, or $(58,804) after taking into account $359,849 in dividends on
preferred stock, compared with net earnings (loss) of $105,493, or ($255,017)
after taking into account $360,510 in dividends on preferred stock, for the
nine months ended September 30, 2003. Net interest income, before provision for
loan losses, for the nine- 11




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##### Table of Contents



month period ending September 30, 2004 totaled
$3,409,016, compared to net interest income, before provision for loan losses,
of $2,907,275 for the nine-month period ending September 30, 2003. During the
prior year period ended September 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 nine months ended September 30, 2004 and 2003
was $144,655 and $1,153,718, respectively. Other income for the nine months
ended September 30, 2004 consisted primarily of $78,349 in deposit fee income
and $50,018 in gains on sales of investments. Included in other income for the
nine months ended September 30, 2003 was $752,715 generated by the Maryland
loan production office, $265,281 in gains on sales of investments and $70,293
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 nine-month periods ending September 30, 2004
and 2003 totaled $2,723,626 and $3,266,500, 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 $2,905,957 for the nine-month period ending September 30,
2003 as compared to $2,723,626 for the nine-month period ending September 30,
2004, resulting in a $182,331 reduction in operating expenses for the first
nine months of 2004. Maryland loan production office operating expenses for the
nine-month period ending September 30, 2003 consisted primarily of incentive
compensation and other benefits. Results of Operations  Three months ended September 30, 2004 compared to the
three months ended September 30, 2003: Net earnings for the three months ended September 30, 2004 was $18,844, or
a net loss of ($101,981) after taking into account $120,825 in dividends on
preferred stock, compared with net earnings of $148,171, or $26,681 after
taking into account $121,490 in dividends on preferred stock, for the three
months ended September 30, 2003. Net interest income, before provision for loan
losses, for the three-month period ending September 30, 2004 totaled
$1,113,376, compared to net interest income, before provision for loan losses,
of $1,022,300 for the three-month period ending September 30, 2003. Other income earned for the three months ended September 30, 2004 and 2003
was $83,979 and $86,518, respectively. Other income for the three months ended
September 30, 2004 consists primarily of gain on sale of investments of $50,018
and $29,835 in deposit fee income. Included in other income for the three
months ended September 30, 2003 is a gain on sale of investments totaling
$20,407, deposit fee income of $24,212, gain on sale of real estate owned of
$18,634 and an $18,000 fraud loss recovery. Operating expenses for the three-month periods ending September 30, 2004
and 2003 totaled $880,511 and $960,647, 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 $959,397 for the three-month period ending September 30,
2003 as compared to $880,511 for the three-month period ending September 30,
2004, resulting in a $78,886 reduction in third quarter 2004 operating
expenses. Management anticipates that a significant expense over the next 12 to 18
months will likely be incurred associated with the Sarbanes-Oxley Act of 2002
compliance implementation. This Act includes provisions addressing audits,
financial reporting and disclosure, conflicts of interest and corporate
governance at public companies. Through the first nine months of 2004, the
Company has incurred approximately $5,000 in legal fees associated with
compliance measures mandated by the Sarbanes-Oxley Act of 2002. 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. Management presently is not 12




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##### Table of Contents



able to
estimate the total amount of these costs, or the ultimate impact on the
Companys results of operations. 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 14




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##### Table of Contents



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. For the nine months ended September 30, 2004, there were eleven loans
totaling $5,317,824 included in our Classified Asset Summary. These loans were
evaluated individually and were allocated $393,814 of the $893,888 allowance
for loan losses. The remaining $500,074 provision for loan losses is associated
with loans evaluated in groups. At September 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
    
    $
    1,507,843
    
    
    
    5
    
    
    $
    214,658
    
    
    $
    781,347
    
    
    
    1
    
    
    $
    16,408
    
    
    $
    726,496
    
    
    
    4
    
    
    $
    198,250
    
    
    $
    726,496
    
    
    
    4
    
    
    $
    198,250Real Estate 
Commercial
    
    
    3,115,423
    
    
    
    4
    
    
    
    159,868
    
    
    
    752,099
    
    
    
    1
    
    
    
    19,555
    
    
    
    2,363,324
    
    
    
    3
    
    
    
    140,313
    
    
    
    2,363,324
    
    
    
    3
    
    
    
    140,313Real Estate 
Individual
    
    
    652,558
    
    
    
    2
    
    
    
    18,448
    
    
    
    363,600
    
    
    
    1
    
    
    
    4,000
    
    
    
    288,958
    
    
    
    1
    
    
    
    14,448
    
    
    
    288,958
    
    
    
    1
    
    
    
    14,448Installment 
Individual
    
    
    42,000
    
    
    
    1
    
    
    
    840
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,000
    
    
    
    1
    
    
    
    840
    
    
    
    42,000
    
    
    
    1
    
    
    
    840Totals
    
    $
    5,317,824
    
    
    
    12
    
    
    $
    393,814
    
    
    $
    1,897,046
    
    
    
    3
    
    
    $
    39,963
    
    
    $
    3,420,778
    
    
    
    9
    
    
    $
    353,851
    
    
    $
    3,420,778
    
    
    
    9
    
    
    $
    353,851
 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 nine months ended September 30, 2004, there were thirty-three
loans delinquent over 30 days totaling approximately $4,275,000. Of this
amount, there were eleven delinquent commercial loans totaling $1,168,000,
three delinquent commercial real estate loans totaling $1,178,000, ten
delinquent individual real estate loans totaling $1,610,000 and nine delinquent
consumer loans totaling $319,000. Included in the delinquency loan amount
above are eight loans totaling approximately $1,377,000 that had matured prior
to quarter end. Since the matured loans were not renewed or repaid prior to
quarter end, these loans appear on our delinquency listing. We expect to renew
seven of the eight loans totaling approximately $1,077,000 and to receive
repayment of one loan totaling approximately $299,000 early in the fourth
quarter. Therefore, delinquent loans net of matured loans not renewed or
repaid by quarter end total approximately $2,898,000. 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 nine months ended September 30, 2004, our allowance for loan
losses amounted to $893,888, or 1.03% of total loans. The decrease of $310,866
in our allowance for loan losses during the first nine months of 2004 resulted
from $529,000 in additional provision for loan losses with no recoveries,
offset by eleven net loans charged off totaling $839,866. 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 an $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 Nine
    
    For theMonths Ended
    
    Year EndedSeptember 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Average loans outstanding
    
    $
    84,678
    
    
    $
    81,003Loans outstanding at period end
    
    $
    86,719
    
    
    $
    81,020Total nonperforming loans
    
    $
    3,421
    
    
    $
    2,360Beginning balance of allowance
    
    $
    1,205
    
    
    $
    963Loans charged off:Commercial
    
    
    (736
    )
    
    
    (384
    )Real estate  commercial
    
    
    (60
    )
    
    
    0Installment loans to individuals
    
    
    (44
    )
    
    
    (269
    )Total charge-offs
    
    
    (840
    )
    
    
    (653
    )Recoveries of previous charge-offs:Installment loans to individuals
    
    
    0
    
    
    
    1Total recoveries
    
    
    0
    
    
    
    1Net loans charged-off
    
    
    (840
    )
    
    
    (652
    )Provision for loan losses
    
    
    529
    
    
    
    894Balance at period end
    
    $
    894
    
    
    $
    1,205Net charge-offs to average loans
    
    
    0.99
    %
    
    
    0.80
    %Allowance as percent of total loans
    
    
    1.03
    %
    
    
    1.49
    %Nonperforming loans as a percentage of
total loans
    
    
    3.94
    %
    
    
    2.91
    %Allowance as a percent of nonperforming
loans
    
    
    26.13
    %
    
    
    51.06
    %
 At September 30, 2004 and December 31, 2003, the allowance was allocated as
follows: Nine Months
    
    Percentage of
    
    
    
    
    
    Percentage ofEnded
    
    loans in each
    
    Year ended
    
    loans inSeptember 30,
    
    category to
    
    December 31,
    
    each category2004
    
    total loans
    
    2003
    
    to total loansCommercial
    
    $
    468,658
    
    
    
    16.11
    %
    
    $
    532,669
    
    
    
    19.11
    %Real estate 
individual
    
    
    282,868
    
    
    
    48.50
    %
    
    
    188,000
    
    
    
    47.02
    %Real estate 
commercial
    
    
    92,448
    
    
    
    27.09
    %
    
    
    232,531
    
    
    
    25.82
    %Installment loans
to individuals
    
    
    49,914
    
    
    
    8.30
    %
    
    
    197,300
    
    
    
    8.05
    %Unallocated
    
    
    0
    
    
    
    
    %
    
    
    54,254
    
    
    
    
    %Total
    
    $
    893,888
    
    
    
    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 nine months
ended September 30, 2004: Interest-
    
    
    
    
    
    InterestEarning Assets/
    
    Average
    
    Income/
    
    Yield/Bearing Liabilities
    
    Balance
    
    Cost
    
    CostFederal funds sold
    
    $
    4,031,861
    
    
    $
    26,210
    
    
    
    .87
    %Interest-bearing deposits
    
    
    72,089
    
    
    
    570
    
    
    
    1.05
    %Investment securities
    
    
    20,719,740
    
    
    
    879,944
    
    
    
    5.66
    %Loans
    
    
    84,678,347
    
    
    
    4,177,606
    
    
    
    6.57
    %Total
    
    $
    109,502,037
    
    
    $
    5,084,330
    
    
    
    6.19
    %Deposits
    
    $
    84,872,691
    
    
    $
    1,445,070
    
    
    
    2.27
    %Other borrowings
    
    
    10,773,242
    
    
    
    230,244
    
    
    
    2.85
    %Total
    
    $
    95,645,933
    
    
    $
    1,675,314
    
    
    
    2.33
    %Net interest income/spread
    
    
    
    
    
    $
    3,409,016
    
    
    
    3.86
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.15
    %
 The net interest margin for the first nine months of 2004 increased to
4.15% as compared to 3.86% for the first nine 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 September 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 1.46% of total assets.
Additionally, our ability to maintain and expand our deposit base and borrowing
capabilities are a source of liquidity. For the nine-month period ended
September 30, 2004, total deposits decreased from $95.5 million to $85.3
million, representing a decrease of 10.71%. We will increase deposits as
required to fund loan growth, loan purchases in the secondary markets and for
purchases of investments. During the third quarter, the decline of $10.2
million in deposits was primarily related to an $8.6 million and a $3.2 million
decline in certificates of deposit and money market accounts, respectively,
partially offset by increases in demand and savings deposits of $1.3 and $.3
million, respectively. The decline in 18




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##### Table of Contents



certificates of deposit resulted from
declines of $6.1 million and $2.5 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 maturing certificates. Management
anticipates that it will issue both retail and brokered deposits and the
Federal Home Loan Bank of Atlanta advances later in the fourth quarter 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 September 30, 2004Tier 1 capital
    
    
    12.58
    %
    
    
    4.0
    %Tier 2 capital
    
    
    1.14
    %Total risk-based capital ratio
    
    
    13.72
    %
    
    
    8.0
    %Leverage ratio
    
    
    8.78
    %
    
    
    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 September 30, 2004. We believe that, as of September 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 19




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##### Table of Contents



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. The table below shows the interest rate sensitivity of our assets and
liabilities as of September 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
    
    $
    80
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    80Loans
    
    
    45,245
    
    
    
    13,990
    
    
    
    8,576
    
    
    
    19,021
    
    
    
    86,832Investment securities
    
    
    450
    
    
    
    
    
    
    
    
    
    
    
    22,479
    
    
    
    22,929Federal funds sold
    
    
    680
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    680Total earning assets
    
    
    46,455
    
    
    
    13,990
    
    
    
    8,576
    
    
    
    41,500
    
    
    
    110,521Interest-bearing liabilities:Money market and NOW
    
    
    24,779
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,779Savings deposits
    
    
    637
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    637Time deposits
    
    
    20,820
    
    
    
    16,247
    
    
    
    15,123
    
    
    
    
    
    
    
    52,190Other liabilities
    
    
    13,000
    
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    17,000Total interest-bearing liabilities
    
    
    59,236
    
    
    
    16,247
    
    
    
    15,123
    
    
    
    4,000
    
    
    
    94,606Interest-sensitivity gap
    
    $
    (12,781
    )
    
    $
    (2,257
    )
    
    $
    (6,547
    )
    
    $
    37,500
    
    
    $
    15,915Cumulative interest-sensitivity gap
    
    $
    (12,781
    )
    
    $
    (15,038
    )
    
    $
    (21,585
    )
    
    $
    15,915
    
    
    $
    15,915Ratio of interest-sensitivity gap
to total earning assets
    
    
    -11.56
    %
    
    
    -2.04
    %
    
    
    -5.92
    %
    
    
    33.93
    %
    
    
    14.40
    %Ratio of cumulative interest-
sensitivity gap to total earning
assets
    
    
    -11.56
    %
    
    
    -13.61
    %
    
    
    -19.53
    %
    
    
    14.40
    %
 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 $84,678,347
for the nine-month period ended September 30, 2004. Total gross loans
outstanding at September 30, 2004 were $86,831,631. 20




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##### Table of Contents



The following table summarizes the composition of the loan portfolio at
September 30, 2004: PercentAmount
    
    of totalCommercial
    
    $
    13,989,001
    
    
    
    16.11
    %Real estate  individual
    
    
    42,117,286
    
    
    
    48.50
    %Real estate  commercial
    
    
    23,521,771
    
    
    
    27.09
    %Installment loans to individuals
    
    
    7,203,573
    
    
    
    8.30
    %Gross loans
    
    
    86,831,631
    
    
    
    100.00
    %Less: Net deferred loan fees
    
    
    (112,831
    )Allowance for loan loss
    
    
    (893,888
    )Total net loans
    
    $
    85,824,912
 The principal components of our loan portfolio at September 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. None. 
 Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities.  (a)
    
    Effective August 9, 2004, the Company granted a nonqualified
stock option to the Chief Executive Officer to purchase 150,000
shares of the Companys common stock at an exercise price of $1.25
per share, the fair market value of the common stock on the date of
grant. These options are exercisable immediately and expire ten
years from the date of grant. These options represent a single
grant issued outside of the terms of the Companys 1998 Stock
Incentive Plan. We believe that this issuance of unregistered
securities was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof because such
issuance did not involve a public offering or sale. No
underwriters, brokers or finders were involved in this transaction. 
 Item 3. Defaults Upon Senior Securities. None. 
 Item 4. Submission of Matters to a Vote of Security Holders. None. 
 Item 5. Other Information. None. 
 Item 6. Exhibits. 10.1
    
    
    Second Amendment to 1998 Stock Incentive Plan.*10.2
    
    
    ebank Financial Services, Inc. Stock Option Agreement with
James L. Box dated August 9, 2004.*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.
 *Denotes management contract or compensatory plan or arrangement. 22




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##### Table of Contents



SIGNATURES In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. ebank Financial Services, Inc.Date:
    
    November 12, 2004
    
    By:
    
    /s/ James L. BoxJames L. BoxPresident and Chief Executive OfficerNovember 12, 2004
    
    By:
    
    /s/ Wayne W. ByersWayne W. ByersChief Financial Officer
 23