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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-QSB (Mark One) þ
    
    QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 March 31, 2005
 o
    
    TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 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 þ No o State the number of shares outstanding of each of the issuers classes of common equity, as of
the latest practicable date: 6,371,458 shares of common stock, par value $.01 per share, were issued and outstanding as of
May 2, 2005. Transitional Small Business Disclosure Format: Yes o No þ




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ebank Financial Services, Inc. and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)
    
    
    (Audited)ASSETSCash and due from banks
    
    $
    537,565
    
    
    $
    327,054Interest-bearing deposits in banks
    
    
    41,625
    
    
    
    58,212Federal funds sold
    
    
    561,000
    
    
    
    1,539,000Cash and cash equivalents
    
    
    1,140,190
    
    
    
    1,924,266Securities available for sale
    
    
    17,591,972
    
    
    
    17,798,362Other securities
    
    
    958,900
    
    
    
    964,700Loans, net of allowance for loan losses of $936,779 and
$1,013,372, respectively
    
    
    90,645,656
    
    
    
    85,657,038Premises and equipment, net
    
    
    401,311
    
    
    
    411,708Accrued interest receivable and other assets
    
    
    2,408,983
    
    
    
    2,015,701Total assets
    
    $
    113,147,012
    
    
    $
    108,771,775LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Deposits
    
    $
    84,336,786
    
    
    $
    71,487,957Other borrowings
    
    
    17,959,000
    
    
    
    26,500,000Accrued interest payable and other liabilities
    
    
    257,881
    
    
    
    252,529Total liabilities
    
    
    102,553,667
    
    
    
    98,240,486Shareholders equity:Series A preferred stock, $.01 par value, 8% cumulative,
convertible into one share of common stock; 10,000,000
shares authorized;
2,369,312 and 2,374,312 issued and outstanding;
accumulated undeclared dividends of $989,269 and
$874,267 (liquidation preference of $5,923,280)
    
    
    23,693
    
    
    
    23,743Common stock, $.01 par value, 10,000,000 shares authorized,
6,371,458 and 6,364,423 shares issued and outstanding
    
    
    63,715
    
    
    
    63,644Capital surplus
    
    
    23,362,492
    
    
    
    23,363,077Accumulated deficit
    
    
    (12,568,016
    )
    
    
    (12,781,559
    )Accumulated other comprehensive loss
    
    
    (288,539
    )
    
    
    (137,616
    )Total shareholders equity
    
    
    10,593,345
    
    
    
    10,531,289Total liabilities and shareholders equity
    
    $
    113,147,012
    
    
    $
    108,771,775
 The accompanying notes are an integral part of these condensed consolidated financial statements.




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ebank Financial Services, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) For the three months endedMarch 31,2005
    
    
    2004Interest income:Loans, including fees
    
    $
    1,518,922
    
    
    $
    1,444,086Interest-bearing deposits
    
    
    385
    
    
    
    172Investment securities:U.S. Government agencies and
corporations
    
    
    237,527
    
    
    
    282,626Other investments
    
    
    10,425
    
    
    
    3,656Federal funds sold
    
    
    26,090
    
    
    
    19,378Total interest income
    
    
    1,793,349
    
    
    
    1,749,918Interest expense:Deposits
    
    
    473,120
    
    
    
    520,635Other borrowings
    
    
    166,922
    
    
    
    66,767Total interest expense
    
    
    640,042
    
    
    
    587,402Net interest income
    
    
    1,153,307
    
    
    
    1,162,516Provision for loan losses
    
    
    27,000
    
    
    
    31,000Interest income after provision
for loan losses
    
    
    1,126,307
    
    
    
    1,131,516Other income:Deposit fees
    
    
    28,746
    
    
    
    20,509Miscellaneous
    
    
    5,037
    
    
    
    5,555Total other income
    
    
    33,783
    
    
    
    26,064Other expense:Salaries and other compensation
    
    
    423,924
    
    
    
    450,595Employee benefits
    
    
    85,940
    
    
    
    79,237Net occupancy and equipment expense
    
    
    179,191
    
    
    
    213,029Professional and other outside services
    
    
    126,483
    
    
    
    99,387Other expense
    
    
    128,972
    
    
    
    129,415Total other expenses
    
    
    944,510
    
    
    
    971,663Net earnings
    
    
    215,580
    
    
    
    185,917Preferred stock dividends paid during the quarter upon
conversion of shares of preferred stock
    
    
    (2,036
    )
    
    
    Preferred stock dividends arising during the quarter
    
    
    (116,843
    )
    
    
    (119,512
    )Net earnings attributable to common stockholders
    
    $
    96,701
    
    
    $
    66,405Basic earnings per common share
    
    $
    .02
    
    
    $
    .03
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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ebank Financial Services, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 For the three months endedMarch 31,2005
    
    
    2004Net earnings
    
    $
    215,580
    
    
    $
    185,917Other comprehensive income:Unrealized (losses) gains on securities
available for sale:Holding (losses) gains arising during the period,
net of taxes of $92,344 and $100,524, respectively.
    
    
    (150,923
    )
    
    
    164,291Comprehensive income
    
    $
    64,657
    
    
    $
    350,208
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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ebank Financial Services, Inc. and Subsidiary CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 For the three months endedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net earnings
    
    $
    215,580
    
    
    $
    185,917Adjustments to reconcile net earnings
to net cash provided by operating activities:Amortization of premium on other borrowings
    
    
    
    
    
    
    681Net accretion of investment securities
    
    
    1,717
    
    
    
    (1,782
    )Depreciation expense
    
    
    44,979
    
    
    
    72,020Provision for loan losses
    
    
    27,000
    
    
    
    31,000Change in deferred loan fees and costs
    
    
    14,777
    
    
    
    (6,345
    )Change in other assets
    
    
    18,758
    
    
    
    52,635Change in accrued interest receivable
    
    
    86,526
    
    
    
    211,557Change in accrued interest payable
    
    
    42,180
    
    
    
    (9,377
    )Change in other liabilities
    
    
    (36,827
    )
    
    
    (58,485
    )Net cash provided by operating activities
    
    
    414,690
    
    
    
    477,821Cash flows from investing activities:Maturities of securities available for sale
    
    
    1,000,000
    
    
    
    2,500,000Purchase of securities available-for-sale
    
    
    (1,038,595
    )
    
    
    (5,530,434
    )Proceeds from sale of securities available-for-sale
    
    
    
    
    
    
    1,000,000Proceeds from sale of other investments
    
    
    5,800
    
    
    
    Loans originated, net of principal repayments
    
    
    (5,436,617
    )
    
    
    (5,088,785
    )Proceeds from sale of other real estate owned
    
    
    
    
    
    
    501,304Purchases of premises and equipment
    
    
    (34,583
    )
    
    
    (59,861
    )Net cash used by investing activities
    
    
    (5,503,995
    )
    
    
    (6,677,776
    )Cash flows from financing activities:Net increase in deposits
    
    
    12,848,829
    
    
    
    150,952Proceeds from overnight borrowings
    
    
    2,959,000
    
    
    
    Repayments on other borrowings
    
    
    (11,500,000
    )
    
    
    (125,000
    )Net proceeds from the sale of common stock
    
    
    
    
    
    
    1,147,613Stock offering costs
    
    
    (2,600
    )
    
    
    (96,741
    )Net cash provided by financing activities
    
    
    4,305,229
    
    
    
    1,076,824Net decrease in cash and cash equivalents
    
    
    (784,076
    )
    
    
    (5,123,131
    )Cash and cash equivalents:Beginning of period
    
    
    1,924,266
    
    
    
    8,227,848End of period
    
    $
    1,140,190
    
    
    $
    3,104,717
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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ebank Financial Services, Inc. and Subsidiary
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, 2005 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2005. 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 2004 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 March 31, 2005 and March 31, 2004 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 earnings per common share. For the three months endedMarch 31,2005
    
    
    2004Net earnings
attributable to common
stockholders
    
    As reported
    
    $
    96,701
    
    
    $
    66,405Effect of stock options grants
    
    
    (3,058
    )
    
    
    (20,592
    )Pro forma
    
    $
    93,643
    
    
    $
    45,813Basic earnings per share
    
    As reported
    
    $
    .02
    
    
    $
    .03Pro forma
    
    $
    .01
    
    
    $
    .02
 7




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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 31,2005
    
    
    2004Basic earnings per common share:Weighted average common shares outstanding
    
    
    6,365,986
    
    
    
    2,140,799Net earnings
    
    $
    215,580
    
    
    $
    185,917Preferred stock dividend paid upon conversion of
shares of preferred stock
    
    
    (2,036
    )
    
    
    Preferred stock dividend
    
    
    (116,843
    )
    
    
    (119,512
    )Net earnings attributable to common stockholders
    
    $
    96,701
    
    
    $
    66,405Basic earnings per common share
    
    $
    .02
    
    
    $
    .03
 All potentially diluted common shares would have an anti-dilutive effect, therefore, diluted
earnings per share is the same as basic earnings per common share for the three months ending March
31, 2005 and 2004. NOTE 3  ISSUANCE OF COMMON STOCK 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, 2005, the cumulative dividend on the Companys Series A preferred stock totaled
$989,269. 8




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Controls and ProceduresPART IIItem 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-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  
 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 9




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retail customers, including checking and money market accounts, CDs, ATM cards, home equity loans,
mortgage loans, commercial loans, credit cards, and bill payment services. Financial Condition Total consolidated assets increased by $4,375,237 or 4.0% to $113,147,012 during the
three-month period ended March 31, 2005. The increase in assets was primarily related to an
increase in net loans of approximately $5.0 million partially offset by decreases in cash and cash
equivalents of approximately $784 thousand. The increase in net loans was primarily attributable
to a $5.2 million increase in individual real estate loans. Consumer loans increased
approximately $575 thousand during the period while commercial and commercial mortgage loans
decreased during the period by approximately $556 thousand and $314 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 increased by $4,313,181 to $102,553,667 during the three-month
period ended March 31, 2005. The increase in liabilities is primarily related to a $12.8 million
increase in deposits partially offset by an $8.5 million decrease in other borrowings during the
three-month period ended March 31, 2005. We launched a successful campaign in mid-January focusing
on increasing our money market balances in order to fund new loan growth and to repay other
borrowings. During the quarter, we funded new loan growth of $4.4 million and repaid $8.5 million
in other borrowings. Our money market promotion expired on April 25, 2005 and was simultaneously
replaced by a new promotion focusing on generating demand deposits. We expect continued strong
loan demand and will use new deposits generated by the demand deposit promotion and other funding
as needed to provide the required liquidity. Results of Operations Three months ended March 31, 2005 compared to the three months
ended March 31, 2004: Net earnings for the three months ended March 31, 2005 was $215,580, or $96,701 after taking
into account $116,843 in dividends on preferred stock arising during the quarter and $2,036 in
dividends on preferred stock paid in connection with a preferred stock conversion during the
quarter, compared with net earnings of $185,917, or $66,405 after taking into account $119,512 in
dividends on preferred stock arising during the quarter, for the three months ended March 31, 2004.
Net interest income, before provision for loan losses, for the three-month period ending March 31,
2005 totaled $1,153,307, compared to net interest income, before provision for loan losses, of
$1,162,516 for the three-month period ending March 31, 2004. Other income earned for the three months ended March 31, 2005 and 2004 was $33,783 and
$26,064, respectively. Included in other income for the three months ended March 31, 2005 were
deposit fees and miscellaneous income totaling $28,746 and $5,037, 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. Operating expenses for the three-month period ending March 31, 2005 and 2004 totaled $944,510
and $971,663, respectively. Operating expenses for the three-month period ending March 31, 2005
declined by $27,153 or 2.8% over the prior year three-month period. Salaries and other
compensation, net occupancy and equipment and other expense declined by $26,671, $33,838 and $443,
respectively. Employee benefits and professional fees and other outside services increased by
$6,703 and $27,096, respectively. The increase in professional fees and other outside services is
primarily related to expenses incurred in connection with the Companys marketing initiatives
totaling approximately $23,211. In the first quarter, marketing initiatives included a successful
money market campaign, development of a new product brochure, design of a new company logo and
enhancements to our website. 10




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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. On March 2, 2005, the SEC formally extended
the Section 404 compliance dates for non-accelerated filers. According to the SEC, non-accelerated
filers must comply with the requirements of Section 404 of the Act for the first fiscal year ending
on or after July 15, 2006. Accordingly, the Company does not expect to incur significant Section
404 compliance costs until fiscal year 2006. 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 11




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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. 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. Additionally, management utilizes an independent external loan review firm as an added control to evaluate the reasonableness of the loan ratings and the controls over the loan rating process. For the three months ended March 31, 2005, there were eleven loans totaling $3,824,585 included in our Classified Asset Summary. These loans were evaluated individually and were allocated $316,186 of the $936,779 allowance for loan losses. The remaining $620,593 provision for loan losses is associated with loans evaluated in groups. 12




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##### Table of Contents



At March 31, 2005, the allowance for loan loss allocation associated with classified
loans is as follows: Total
    
    
    
    
    
    
    Allocated
    
    
    Potential Problem
    
    
    
    
    
    
    Allocated
    
    
    
    
    
    
    
    
    
    
    Allocated
    
    
    Non-performing
    
    
    
    
    
    
    AllocatedClassified Loans
    
    
    No.
    
    
    Provision
    
    
    Loans
    
    
    No.
    
    
    Provision
    
    
    Impaired Loans
    
    
    No.
    
    
    Provision
    
    
    Loans
    
    
    No.
    
    
    ProvisionCommercial
    
    $
    1,296,794
    
    
    
    5
    
    
    $
    282,196
    
    
    $
    756,345
    
    
    
    1
    
    
    
    15,127
    
    
    $
    540,449
    
    
    
    4
    
    
    $
    267,069

    
    
    $
    540,449
    
    
    
    4
    
    
    $
    267,069Real Estate -
Commercial
    
    
    2,043,761
    
    
    
    3
    
    
    
    17,737
    
    
    
    1,130,426
    
    
    
    2
    
    
    
    12,257
    
    
    
    913,335
    
    
    
    1
    
    
    
    5,480
    
    
    
    913,335
    
    
    
    1
    
    
    
    5,480Real Estate -
Individual
    
    
    484,030
    
    
    
    3
    
    
    
    16,253
    
    
    
    360,077
    
    
    
    1
    
    
    
    360
    
    
    
    123,953
    
    
    
    2
    
    
    
    15,893
    
    
    
    123,953
    
    
    
    2
    
    
    
    15,893Installment -
Individual
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Totals
    
    $
    3,824,585
    
    
    
    11
    
    
    $
    316,186
    
    
    $
    2,246,848
    
    
    
    4
    
    
    $
    27,744
    
    
    $
    1,577,737
    
    
    
    7
    
    
    $
    288,442
    
    
    $
    1,577,737
    
    
    
    7
    
    
    $
    288,442
 For the year ended December 31, 2004, there were fourteen loans totaling $4,148,551
included in our Classified Asset Summary. These loans were evaluated individually and were
allocated $370,144 of the $1,013,372 allowance for loan losses. The remaining $643,228 provision
for loan losses is associated with loans evaluated in groups. At December 31, 2004, the allowance for loan loss allocation associated with classified loans
is as follows: Total
    
    
    
    
    
    
    Allocated
    
    
    Potential Problem
    
    
    
    
    
    
    Allocated
    
    
    
    
    
    
    
    
    
    
    Allocated
    
    
    Non-performing
    
    
    
    
    
    
    AllocatedClassified Loans
    
    
    No.
    
    
    Provision
    
    
    Loans
    
    
    No.
    
    
    Provision
    
    
    Impaired Loans
    
    
    No.
    
    
    Provision
    
    
    Loans
    
    
    No.
    
    
    ProvisionCommercial
    
    $
    2,244,933
    
    
    
    6
    
    
    $
    313,411
    
    
    $
    768,846
    
    
    
    1
    
    
    $
    26,295
    
    
    $
    1,476,087
    
    
    
    5
    
    
    $
    287,116
    
    
    $
    1,476,087
    
    
    
    5
    
    
    $
    287,116Real Estate 
Commercial
    
    
    745,813
    
    
    
    1
    
    
    
    4,475
    
    
    
    745,813
    
    
    
    1
    
    
    
    4,475
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real Estate 
Individual
    
    
    1,115,805
    
    
    
    6
    
    
    
    50,998
    
    
    
    585,631
    
    
    
    3
    
    
    
    1,478
    
    
    
    530,174
    
    
    
    3
    
    
    
    49,520
    
    
    
    530,174
    
    
    
    3
    
    
    
    49,520Installment 
Individual
    
    
    42,000
    
    
    
    1
    
    
    
    1,260
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,000
    
    
    
    1
    
    
    
    1,260
    
    
    
    42,000
    
    
    
    1
    
    
    
    1,260Totals
    
    $
    4,148,551
    
    
    
    14
    
    
    $
    370,144
    
    
    $
    2,100,290
    
    
    
    5
    
    
    $
    32,248
    
    
    $
    2,048,261
    
    
    
    9
    
    
    $
    337,896
    
    
    $
    2,048,261
    
    
    
    9
    
    
    $
    337,896
 For the three months ended March 31, 2005, there were only five loans delinquent over 30
days totaling approximately $179,000. Of this amount, there were five delinquent commercial loans
totaling $179,000. There were no loans past due 90 days or more. For the fiscal year ended December 31, 2004, there were ten loans delinquent over 30 days
totaling approximately $1,017,000. Of this amount, there were two delinquent commercial loans
totaling $59,000, one delinquent commercial real estate loan totaling $403,000, six delinquent
individual real estate loans totaling $485,000 and one delinquent consumer loan totaling $70,000.
There were no loans past due 90 days or more at December 31, 2004. For the three months ended March 31, 2005, our allowance for loan losses amounted to $936,779,
or 1.02% of total loans. The decrease in our allowance for loan losses in the first quarter of
$76,593 resulted from a $27,000 provision for loan losses and no recoveries, offset by three net
loans charged off of $103,592. At December 31, 2004 our allowance for loan losses amounted to $1,013,372 or
1.17% of total loans. We strengthened our provision for loan losses during the year ended December
31, 2004 by $1,156,000. The decrease in our allowance for loan losses during the year ended
December 31, 2004 of 13




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##### Table of Contents



$191,382 resulted from a $1,156,000 provision for loan losses and no
recoveries, offset by seventeen net loans charged off of $1,347,382. 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 31,2005
    
    
    2004(Dollars in thousands)Average loans outstanding
    
    $
    88,873
    
    
    $
    84,801Loans outstanding at period end
    
    $
    91,582
    
    
    $
    86,670Total nonperforming loans
    
    $
    1,578
    
    
    $
    2,048Beginning balance of allowance
    
    $
    1,013
    
    
    $
    1,205Loans charged off:Commercial
    
    
    0
    
    
    
    (983
    )Real estate  commercial
    
    
    (15
    )
    
    
    (209
    )Real estate  individual
    
    
    0
    
    
    
    (91
    )Installment loans to individuals
    
    
    (88
    )
    
    
    (65
    )Total charge-offs
    
    
    (103
    )
    
    
    (1,348
    )Recoveries of previous charge-offs:Installment loans to individuals
    
    
    0
    
    
    
    0Total recoveries
    
    
    0
    
    
    
    0Net loans charged-off
    
    
    (103
    )
    
    
    (1,348
    )Provision for loan losses
    
    
    27
    
    
    
    1,156Balance at period end
    
    $
    937
    
    
    $
    1,013Net charge-offs to average loans
    
    
    0.12
    %
    
    
    1.59
    %Allowance as percent of total loans
    
    
    1.02
    %
    
    
    1.17
    %Nonperforming loans as a percentage of
total loans
    
    
    1.72
    %
    
    
    2.36
    %Allowance as a percent of
nonperforming loans
    
    
    59.38
    %
    
    
    49.47
    %
 At March 31, 2005 and December 31, 2004, the allowance was allocated as follows: Percentage of
    
    
    
    
    
    
    Percentage of loansloans in
    
    
    
    
    
    
    in eacheach category
    
    
    Year ended
    
    
    categoryThree Months Ended
    
    
    to total
    
    
    December 31,
    
    
    to totalMarch 31, 2005
    
    
    loans
    
    
    2004
    
    
    loansCommercial
    
    $
    629,789
    
    
    
    13.46
    %
    
    $
    696,639
    
    
    
    14.87
    %Real estate  individual
    
    
    102,253
    
    
    
    52.58
    %
    
    
    127,998
    
    
    
    49.54
    %Real estate  commercial
    
    
    129,737
    
    
    
    24.40
    %
    
    
    118,475
    
    
    
    26.15
    %Installment loans to individuals
    
    
    75,000
    
    
    
    9.56
    %
    
    
    70,260
    
    
    
    9.44
    %Total
    
    $
    936,779
    
    
    
    100.00
    %
    
    $
    1,013,372
    
    
    
    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. 14




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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 three
months ended March 31, 2005: Interest-
    
    
    
    
    
    InterestEarning Assets/
    
    Average
    
    
    Income/
    
    
    Yield/Bearing Liabilities
    
    Balance
    
    
    Cost
    
    
    CostFederal funds sold
    
    $
    4,411,744
    
    
    $
    26,090
    
    
    
    2.40
    %Interest-bearing deposits
    
    
    85,552
    
    
    
    385
    
    
    
    1.83
    %Investment securities
    
    
    18,332,240
    
    
    
    247,952
    
    
    
    5.49
    %Loans
    
    
    88,872,637
    
    
    
    1,518,922
    
    
    
    6.93
    %Total
    
    $
    111,702,173
    
    
    $
    1,793,349
    
    
    
    6.51
    %Deposits
    
    $
    74,467,020
    
    
    $
    473,120
    
    
    
    2.58
    %Other borrowings
    
    
    21,842,757
    
    
    
    166,922
    
    
    
    3.10
    %Total
    
    $
    96,309,777
    
    
    $
    640,042
    
    
    
    2.70
    %Net interest income/spread
    
    
    
    
    
    $
    1,153,307
    
    
    
    3.81
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.19
    %
 The net interest margin for the first quarter of 2005 increased to 4.19% as compared to 4.12%
for the first quarter of 2004. Net interest margin remained at 4.19% during the first quarter 2005
compared to 4.19% for the full year in 2004. 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, 2005 financial statements evidence a satisfactory
liquidity position as total cash, cash equivalents, and federal funds sold amounted to
approximately $1.1 million, or 1.01% 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, 2005, total deposits increased from $71.5 million to $84.3 million, representing an
increase of 18%. As discussed above under Financial Condition, we used the deposits generated
during the quarter to fund loan growth and to repay other borrowings. We will continue to increase
deposits as required to fund new loan growth, loan purchases in the secondary markets and for
purchases of investments. Additionally, we may enter into security
repurchase agreements which enable us to borrow funds at favorable rates using certain
investments held 15




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##### Table of Contents



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. Bank
    
    
    MinimumCapital
    
    
    RegulatoryRatio
    
    
    RequirementCapital ratios at March 31, 2005Tier 1 capital
    
    
    12.80
    %
    
    
    4.0
    %Tier 2 capital
    
    
    1.16
    %Total risk-based capital ratio
    
    
    13.96
    %
    
    
    8.0
    %Leverage ratio
    
    
    9.15
    %
    
    
    4.0
    %
 The Office of Thrift Supervision has established a 4.0% minimum leverage ratio requirement for
all banks except those with the highest regulatory rating. The leverage ratio is computed by
dividing Tier 1 capital into average assets. 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 13.96% at March 31, 2005. We believe that, as of March 31, 2005, 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. 16




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##### Table of Contents



The table below shows the interest rate sensitivity of our assets and liabilities as of March
31, 2005: After threeWithin
    
    
    but within
    
    
    After onethree
    
    
    twelve
    
    
    but within
    
    
    After fivemonths
    
    
    months
    
    
    five years
    
    
    years
    
    
    Total(Dollars in Thousands)Interest-earning assets:Interest-earning deposits
    
    $
    42
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    42Loans
    
    
    61,562
    
    
    
    4,404
    
    
    
    8,103
    
    
    
    17,643
    
    
    
    91,712Investment securities
    
    
    959
    
    
    
    
    
    
    
    1,038
    
    
    
    16,554
    
    
    
    18,551Federal funds sold
    
    
    561
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    561Total earning assets
    
    
    63,124
    
    
    
    4,404
    
    
    
    9,141
    
    
    
    34,197
    
    
    
    110,866Interest-bearing liabilities:Money market and NOW
    
    
    35,223
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,223Savings deposits
    
    
    350
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350Time deposits
    
    
    8,956
    
    
    
    21,045
    
    
    
    12,920
    
    
    
    
    
    
    
    42,921Other liabilities
    
    
    2,959
    
    
    
    6,000
    
    
    
    5,000
    
    
    
    4,000
    
    
    
    17,959Total interest-bearing liabilities
    
    
    47,488
    
    
    
    27,045
    
    
    
    17,920
    
    
    
    4,000
    
    
    
    96,453Interest-sensitivity gap
    
    $
    15,636
    
    
    $
    (22,641
    )
    
    $
    (8,779
    )
    
    $
    30,197
    
    
    $
    14,413Cumulative interest-sensitivity gap
    
    $
    15,636
    
    
    $
    (7,005
    )
    
    $
    (15,784
    )
    
    $
    14,413Ratio of interest-sensitivity gap
to total earning assets
    
    
    14.10
    %
    
    
    (20.42
    %)
    
    
    (7.92
    %)
    
    
    27.24
    %
    
    
    13.00
    %Ratio of cumulative interest-
sensitivity gap to total earning
assets
    
    
    14.10
    %
    
    
    (6.32
    %)
    
    
    (14.24
    %)
    
    
    13.00
    %
 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. 17




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##### 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 $88,872,637 for the three-month period ended March 31, 2005. Total gross
loans outstanding at March 31, 2005 were $91,711,571. The following table summarizes the composition of the loan portfolio at March 31, 2005: PercentAmount
    
    
    of totalCommercial
    
    $
    12,345,199
    
    
    
    13.46
    %Real estate  individual
    
    
    48,219,311
    
    
    
    52.58
    %Real estate  commercial
    
    
    22,377,144
    
    
    
    24.40
    %Installment loans to individuals
    
    
    8,769,917
    
    
    
    9.56
    %Gross loans
    
    
    91,711,571
    
    
    
    100.00
    %Less: Net deferred loan fees
    
    
    (129,136
    )Allowance for loan loss
    
    
    (936,779
    )Total net loans
    
    $
    90,645,656
 The principal components of our loan portfolio at March 31, 2005 were mortgage loans and
commercial loans, which represented approximately 90% 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. 18




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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. In March 2005, we issued 5,000 shares of common stock to one holder of our Series A
Convertible Preferred Stock, upon conversion, pursuant to the one-for-one conversion ratio of the
Series A preferred stock. In addition, we issued 2,035 shares of common stock to such converting
holder in payment of accrued but unpaid dividends on such preferred stock through the date of
conversion. The issuance of these shares of common stock was made pursuant to an exemption from
registration contained in Section 3(a)(9) of the Securities Act. 
 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. Exhibits.  10.1
    Employment Agreement Amendment of James L. Box effective as of March 28, 2005
(Incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed on April 1,
2005, File No. 000-24023.)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. 19




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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 13, 2005
    By:
    /s/ James L. BoxJames L. BoxPresident and Chief Executive Officer By:
    /s/ Wayne W. ByersWayne W. ByersChief Financial Officer 20