**SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
D. C. 20549**
 **_______________**
 **FORM
10-KSB**
 
 **[X]**  **ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934**
 
 **For
the Fiscal Year Ended December 31, 2004**
 
 **OR**
 
 **[
]**  **TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934**
 
 Commission
File Number: 000-32399
 
 **FMB
      EQUIBANC, INC.**(Name
      of small business issuer in its charter)
 
 **Georgia**
    
    **58-2582553**(State
      or other jurisdiction of incorporation or organization)
    
    (IRS
      Employer Identification No.)**201
      North Main Street**
      **Statesboro,
      Georgia**
    
    **30458**(Address
      of principal executive office)
    
    (Zip
      Code)**(912)
      489-2600**(Issuer's
      telephone number, including area code)
 
 SECURITIES
REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: None
 
 SECURITIES
REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
 **Common
Stock, par value $1.00 per share**
  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
  Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ý
 
 The
Issuer’s revenues for its most recent fiscal year were $10,158,000.
 
 The
aggregate market value of the voting stock held by non-affiliates of Issuer
(312,282 shares) at February 28, 2005 was $11,242,000. No shares of non-voting
stock were outstanding. As of such date, no organized trading market existed for
the common stock of the Issuer. The aggregate market value was computed by
reference to the fair market value of the common stock of the Issuer based on
recent sales of the common stock. The number of shares outstanding of Issuer’s
common stock at February 28, 2005 was 362,600 shares.
 
 Transitional
Small Business Disclosure Format (Check one): Yes  o No x
  **DOCUMENTS
INCORPORATED BY REFERENCE**
 Portions
of the Issuer’s definitive Proxy Statement for the 2005 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days of the Registrant's fiscal year end is incorporated by reference in answer
to Part III, Items 9 through 12, and 14, of this Report.
 
 
 
  
 **PART
I**
 
 **Cautionary
Statement Regarding Forward-Looking Statements**
 
 This
Annual Report on Form 10-KSB contains forward-looking statements in addition to
historical information. The Company cautions that there are various important
factors that could cause actual results to differ materially from those
indicated in the forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995; accordingly, there can be no assurance
that such indicated results will be realized.
 
 The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company is required to note the variety of factors that could cause
the Company’s actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company’s
forward-looking statements. These factors include legislative and regulatory
initiatives regarding deregulation and restructuring of the banking industry;
the extent and timing of the entry of additional competition in the Company’s
markets; potential business strategies, including acquisitions or dispositions
of assets or internal restructuring, that may be pursued by the Company or state
and federal banking regulations; changes in or application of environmental and
other laws and regulations to which the Company is subject; political, legal and
economic conditions and developments; financial market conditions and the
results of financing efforts; changes in commodity prices and interest rates;
weather, natural disasters and other catastrophic events; and other factors
discussed in the Company’s filings with the Securities and Exchange Commission,
including its Annual Report on Form 10-KSB. The words “believe”, “expect”,
“anticipate”, “project” and similar expressions signify such forward-looking
statements.
 
 Readers
are cautioned not to place undue reliance on any forward-looking statements made
by or on behalf of the Company. Any such statement speaks only as of the date
the statement was made. The Company undertakes no obligation to update or revise
any forward-looking statements. Additional information with respect to factors
that may cause results to differ materially from those contemplated by such
forward-looking statements is included in the Company’s current and subsequent
filings with the Securities and Exchange Commission.
 
 **ITEM** **1** **.** **DESCRIPTION
OF BUSINESS**
 
 **The
Company**
 
 FMB
Equibanc, Inc. (the "Company") was incorporated as a Georgia corporation on
April 25, 2000, to serve as a bank holding company for Farmers & Merchants
Bank (the "Bank"). On November 1, 2000, the Company acquired all of the
outstanding shares of the Bank. The Company is a registered bank holding company
under the Bank Holding Company Act of 1956, as amended (the "BHC Act").
 
 The
Company has been organized to enhance the Bank's ability to serve its current
and future customers' requirements for financial services. The holding company
structure provides flexibility for expansion of the Company's banking business
through the acquisition of other financial institutions and the provision of
additional banking-related services which the traditional commercial bank may
not be able to provide under present laws. In addition, a holding company
structure facilitates raising capital for the Bank because the Company will be
able to issue securities without the need for prior banking regulatory approval,
and the proceeds of debt securities issued by the Company can be invested in the
Bank as primary capital.
  2
  
 At
December 31, 2004, the assets of the Company consisted primarily of its
ownership of the capital stock of the Bank.
  The
Company's executive offices are located at the Bank's main office, 201 North
Main Street, Statesboro, Georgia 30458. The Company's telephone number at such
location is (912) 489-2600. See "Item 2. Description of
Properties."
  **The
Bank**
  ****** The Bank
was incorporated as a Georgia banking corporation on February 4, 1948 for the
purpose of conducting a commercial banking business from Bulloch County,
Georgia. The Bank originally conducted its business from a main office located
in Brooklet, Bulloch County, Georgia. In 1991, the Bank relocated its main
office to Statesboro, Bulloch County, Georgia. The Bank retained its former main
office as a branch office. The Bank also maintains a branch office in
Statesboro, Georgia.
  **Market
Area and Competition** ****
 
 The
primary service area of the Bank is Bulloch County, Georgia. The Bank encounters
competition in its primary service area and in surrounding areas from eight
other financial institutions. These competitors offer a full range of banking
services and vigorously compete for all types of services, especially
deposits.
 
 The
following table illustrates the June 30, 2004 deposit base and market share of
the financial institutions located in Bulloch County, as reported by the Federal
Deposit Insurance Corporation (the “FDIC”), and adjusted for reported out of
market brokered deposits (dollars in millions).
 
 **Bulloch
      County**
    
    **Deposits**
    
    **Percent**
      **of
      Market********Financial
      Institutions**BB&T
    
    $
    190.0
    
    
    26.8Sea
      Island Bank
    
    
    175.1
    
    
    24.7Farmers
      & Merchants Bank
    
    
    129.2
    
    
    18.1Park
      Avenue Bank
    
    
    59.5
    
    
    8.4Wachovia
      Bank, National Association
    
    
    48.8
    
    
    6.9The
      First National Bank & Trust Company
    
    
    13.3
    
    
    1.9Core
      Credit Union
    
    
    29.3
    
    
    4.1The
      Heritage Bank
    
    
    0.2
    
    
    0.0First
      Southern National Bank
    
    
    64.8
    
    
    9.1
 
 While the
Bank experiences competition from financial institutions headquartered in
Bulloch County, some competition also comes from banks outside of Bulloch County
seeking to make loans in the Bank's primary service area. In addition, in
certain aspects of its banking business, the Bank also competes with credit
unions, small loan companies, consumer finance companies, brokerage houses,
insurance companies, money market funds and other financial institutions that
have recently entered the traditional banking markets.
 
 The
extent to which other types of financial institutions compete with commercial
banks has increased significantly within the past few years as a result of
federal and state legislation which has, in several respects, deregulated
financial institutions. See "Supervision and Regulation." The full impact of
this legislation and subsequent laws that will continue to further deregulate
the financial services industry cannot be fully assessed or
predicted.
  3
 **Deposits**
  The Bank
offers a wide range of commercial and consumer interest bearing and non-interest
bearing deposit accounts, including checking accounts, money market accounts,
negotiable order of withdrawal accounts, individual retirement accounts,
certificates of deposit and regular savings accounts. The sources of deposits
are the residents, businesses and employees of the businesses within the Bank's
primary service area, obtained through the personal solicitation of the Bank's
officers and directors, direct mail solicitation and advertisements published in
the local media. The Bank pays competitive interest rates on time and savings
deposits. In addition, the Bank has implemented a service charge fee schedule
competitive with other financial institutions in the Bank's primary service
area, covering such matters as maintenance fees on checking accounts, per item
processing fees on checking accounts, returned check charges and other similar
fees and charges.
 
 **Lending
Services**
  *Lending
Policy.*  **** The Bank
engages in a full complement of lending activities, including real estate loans,
commercial loans, consumer loans and agribusiness loans. Lending is directed
principally towards individuals and businesses whose demands fall within the
Bank's legal lending limits and who are potential deposit customers of the Bank.
This includes loans made to individual, partnership or corporate borrowers and
obtained for a variety of business purposes.
  The Bank
may either originate loans or, where loans exceed the Bank's lending limits,
participate with other banks. Management of the Bank does not believe that loan
participations necessarily pose any greater risk of loss than loans that the
Bank originates.
  To
address the risks inherent in making loans, the Bank maintains an allowance for
loan losses based on, among other things, an evaluation of the Bank's loan loss
experience, the amount of past due and nonperforming loans, current and
anticipated economic changes and the values of certain loan collateral. Based
upon such factors, the Bank's management makes various assumptions and judgments
about the ultimate collectibility of the loan portfolio and provides an
allowance for potential loan losses based upon a percentage of the outstanding
balances and for specific loans. However, because there are certain risks that
cannot be precisely quantified, management's judgment of the allowance is
necessarily an approximation and imprecise. The adequacy and methodology of the
allowance for loan losses is subject to regulatory examination and compared to a
peer group of financial institutions identified by the bank's regulatory
agencies.
 
 *Loan
Portfolio.* The
following is a description of each of the major categories of the Bank's loan
portfolio:
  *Real
Estate Loans.* ****** The Bank
makes a variety of commercial real estate, construction and development loans
and residential real estate loans. These loans include some commercial loans
where the Bank takes a security interest in real estate out of an abundance of
caution and not as the principal collateral for the loan, but excludes home
equity loans, which are classified as consumer loans. As of December 31, 2004,
real estate loans comprised 75.5% of the Bank's loan portfolio.
 
 ·
    *Commercial
      Real Estate Loans.*Commercial real estate loan terms generally are limited to five years or
      less, although payments may be structured on a longer amortization basis.
      Interest rates may be fixed or adjustable. The Bank generally charges an
      origination fee. The Bank attempts to reduce credit risk on its commercial
      real estate loans by emphasizing loans on owner-occupied office and retail
      buildings where the ratio of the loan principal to the value of the
      collateral as established by independent appraisal does not exceed 80% and
      net projected cash flow available for debt service equals 120% of the debt
      service requirement. In addition, the Bank may require personal guarantees
      from the principal owners of the property supported by a review by the
      Bank's management of the principal owners' personal financial statements.
      Risks associated with commercial real estate loans include fluctuations in
      the value of real estate, new job creation trends, tenant vacancy rates
      and the quality of the borrower's management. The Bank limits its risk by
      analyzing borrowers' cash flow and collateral value on an ongoing basis.
      The Bank competes for commercial real estate loans with competitors that
      are well established in its primary service
area.
  4
  
 
 ·
    *Construction
      and Development Loans.*Construction and development loans are made both on a pre-sold and
      speculative basis. If the borrower has entered into an agreement to sell
      the property prior to beginning construction, then the loan is considered
      to be on a pre-sold basis. If the borrower has not entered into an
      agreement to sell the property prior to beginning construction, then the
      loan is considered to be on a speculative basis. Construction and
      development loans are generally made with a term of six months and
      interest is paid periodically. The ratio of the loan principal to the
      value of the collateral as established by independent appraisal generally
      does not exceed 90%. Speculative loans are based on the borrower's
      financial strength and cash flow position. Loan proceeds are disbursed
      based on the percentage of completion and only after the project has been
      inspected by an experienced construction lender or appraiser. Risks
      associated with construction loans include fluctuations in the value of
      real estate and new job creation trends.
 
 **·**
    *Residential
      Real Estate Loans.*The Bank's residential real estate loans consist of residential first and
      second mortgage loans and residential construction loans. The Bank offers
      fixed and variable rates on its mortgages with the amortization of first
      mortgages with maturity dates of three years and beyond. These loans are
      made consistent with the Bank's appraisal policy and with the ratio of the
      loan principal to the value of collateral as established by independent
      appraisal generally not to exceed 90%. The Bank believes these
      loan-to-value ratios will be sufficient to compensate for fluctuations in
      real estate market value and to minimize losses that could result from a
      downturn in the residential real estate market. The Bank limits interest
      rate risk and credit risk on these loans by locking in the interest rate
      for each loan with the secondary market investor and receiving the
      investor's underwriting approval before funding the loan.
 
 *Commercial
Loans.* The Bank
makes a variety of loans for commercial purposes other than real estate in
various lines of businesses. The terms of these loans vary by purpose and by
type of underlying collateral, if any. The Bank typically makes equipment loans
for a term of five years or less at fixed or variable rates, with the loan fully
amortized over the term. Equipment loans generally are secured by the financed
equipment, and the ratio of the loan principal to the value of the financed
equipment or other collateral is generally 80% or less. Loans to support working
capital typically have terms not exceeding one year and are usually secured by
accounts receivable, inventory, or other collateral, as well as personal
guarantees of the principals of the business. For loans secured by accounts
receivable or inventory, principal is typically repaid as the assets securing
the loan are converted into cash, and for loans secured with other types of
collateral, principal is typically due at maturity. The quality of the
commercial borrower's management and its ability both to evaluate properly
changes in the supply and demand characteristics affecting its markets for
products and services and to respond effectively to such changes are significant
factors in a commercial borrower's creditworthiness. As of December 31, 2004,
commercial loans comprised 9.2% of the Bank's loan portfolio.
 
 *Consumer
Loans.* The Bank
makes a variety of loans to individuals for personal, family and household
purposes, including secured and unsecured installment and term loans, home
equity loans and home equity lines of credit. Consumer loan repayments depend
upon the borrower's financial stability and are more likely to be adversely
affected by divorce, job loss, illness and personal hardships. Because many
consumer loans are secured by depreciable assets such as boats, cars and
trailers, the loan should be amortized over the useful life of the asset. The
loan officers of the Bank review the borrower's past credit history, past income
level, debt history and, when applicable, cash flow to determine the impact of
all of these factors on the borrower's ability to make future payments as
agreed. As of December 31, 2004, consumer loans comprised 7.1% of the Bank's
loan portfolio.
  5
 
 *Agribusiness
Loans.* ****** The Bank
makes a variety of agribusiness loans, including real estate-based loans, crop
loans and equipment loans. Real estate-based agribusiness loans are made
consistent with the Bank's appraisal policy and with the ratio of loan principal
to value of the collateral as established by independent appraisal generally not
to exceed 90%. Loans secured by agricultural equipment typically have terms of
up to five years. As of December 31, 2004, agribusiness loans comprised 8.2% of
the Bank's loan portfolio.
  *Credit
Risks.* ** The
principal economic risk associated with each category of loans that the Bank
makes is the creditworthiness of the borrower. Borrower creditworthiness is
affected by general economic conditions and the strength of the relevant
business market segment. General economic factors affecting a borrower's ability
to repay include interest, inflation and employment rates, as well as other
factors affecting a borrower's customers, suppliers and employees.
 
 The
Bank's loan portfolio is heavily concentrated with real estate loans. With
respect to real estate loans generally, the ability of a borrower to repay a
real estate loan will depend upon a number of economic factors, including
employment levels and fluctuations in the value of real estate. In the case of a
real estate purchase loan, the borrower may be unable to repay the loans at the
end of the loan term and may thus be forced to refinance the loan at a higher
interest rate, or, in certain cases, the borrower may default as a result of its
inability to refinance the loan. In either case, the risk of nonpayment by the
borrower is increased. In the case of a real estate construction loan, there is
generally no income from the underlying property during the construction period,
and the developer's personal obligations under the loan are typically limited.
Each of these factors increases the risk of nonpayment by the borrower. The Bank
also faces additional credit risks to the extent that it engages in adjustable
rate mortgage loans. In the case of an adjustable rate mortgage loan, as
interest rates increase, the borrower's required payments increase, thus
increasing the potential for default. The marketability of all real estate
loans, including adjustable rate mortgage loans, is also generally affected by
the prevailing level of interest rates.
 
 With
respect to commercial loans, larger financial institutions are likely to make
proportionately more loans to medium- to large-sized businesses than the Bank
makes. Many of the commercial loans of the Bank are made to small- to
medium-sized businesses that may be less able to withstand competitive, economic
and financial pressures than large borrowers. The commercial loan portfolio of
the Bank consists of loans to individual, partnership and corporate borrowers
that are primarily located in the Bulloch County area. Accordingly, the Bank’s
commercial borrowers reflect the diversified businesses of this area, and
include services, retail trade and manufacturing firms. The risks associated
with commercial loans depend to a large extent upon various economic factors,
including the strength of the economy in the Bulloch County area and the ability
of the Bank's commercial borrowers to properly evaluate and respond to a
changing marketplace. In addition, the commercial borrowers of the Bank face
risks related specifically to the unique nature of their business. For example,
services and retail trade firms may incur risks associated with labor shortages
and consumer preference changes, and manufacturing firms may incur risks
associated with raw material and labor shortages, as well as currency
fluctuations.
 
 Consumer
loans generally involve more credit risks than other loans because of the type
and nature of the underlying collateral or because of the absence of any
collateral. Consumer loan repayments are dependent on the borrower's continuing
financial stability and are likely to be adversely affected by job loss, divorce
and illness. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans in the case of default. In most cases, any
repossessed collateral will not provide an adequate source of repayment of the
outstanding loan balance. Although the underwriting process for consumer loans
includes a comparison of the value of the security, if any, to the proposed loan
amount, the Bank cannot predict the extent to which the borrower's ability to
pay, and the value of the security, will be affected by prevailing economic and
other conditions.
  6
 Agribusiness
loans, including real estate-based loans, crop loans and equipment loans
generally involve more credit risk than residential real estate loans, because
of the typically larger loan amount. In addition, payments on loans are
dependent upon the successful operation or management of the farm property
securing the loan. The success of the loan may also be affected by many factors
outside the control of the farm borrower, such as weather, government farm
policy, domestic and international demand for agricultural products and changing
consumer preferences. Weather presents one of the greatest risks, as hail,
drought, floods, or other conditions can severely limit crop yields and thus
impair loan repayments and the value of the underlying collateral. This risk can
be reduced by the farm borrower with crop insurance which can guarantee set
yields to provide certainty of repayment. Unless the circumstances of the
borrower merit otherwise, the Bank generally will require its borrowers to
obtain crop insurance. Another risk is the uncertainty of government support
programs, where support payments are made with the requirement that a farmer
leave idle from production certain amounts of farm land. Some farmers rely on
the income from support programs to make loan payments, and if these programs
were discontinued or significantly changed, cash flow problems or defaults could
result. Finally, many farmers are dependent upon a limited number of key
individuals whose injury or death may result in an inability to operate the
farm.
  *Loan
Approval and Review.* ****** The loan
approval policies of the Bank provide for various levels of officer lending
authority. When the amount of aggregate loans to a single borrower exceeds that
individual officer's lending authority, the loan request is considered and
approved by an officer with a higher lending limit or by the Loan Committee of
the board of directors. The Bank does not make any loans to directors or
executive officers of the Bank unless the loan is approved by the board of
directors and is made on terms not more favorable to such person than would be
available to a person not affiliated with the Bank.
  *Lending
Limits.* ****** The
lending activities of the Bank are subject to a variety of lending limits
imposed by Georgia law. While differing limits apply in certain circumstances
based on the type of loan or the nature of the borrower (including the
borrower's relationship to the Bank), in general, the Bank is subject to a
loan-to-one-borrower limit of an amount equal to 15% of the Bank's unimpaired
capital and surplus or 25% of the unimpaired capital and surplus if the excess
over 15% is within the guidelines of the Georgia Department of Banking and
Finance as an exception to the 15% limit. The Bank's lending limit at December
31, 2004 was $1,200,000 plus an additional $800,000 for loans which meet the
guidelines of the Georgia Department of Banking and Finance. These limits will
increase or decrease as the Bank's capital increases or decreases as a result of
the Bank's earnings or losses, among other reasons.
  **Investments**
  As of
December 31, 2004, loans comprised approximately 81.6% of the Bank's assets and
investment securities comprised approximately 7.7% of the Bank's assets. The
Bank invests primarily in direct obligations of the United States, obligations
guaranteed as to principal and interest by the United States and obligations of
agencies of the United States. In addition, the Bank enters into federal funds
transactions with its principal correspondent banks, and primarily acts as a net
seller of such funds. The sale of federal funds amounts to a short term loan
from the Bank to another bank.
  7
 **Asset
and Liability Management**
  It is the
objective of the Bank to manage assets and liabilities to provide a
satisfactory, consistent level of profitability within the framework of
established cash, loan, investment, borrowing and capital policies. Certain
officers of the Bank are responsible for monitoring policies and procedures that
are designed to ensure an acceptable composition of asset/liability mix,
stability and leverage of all source of funds while adhering to prudent banking
practices. It is the overall philosophy of management to support asset growth
primarily through growth of core deposits, which include deposits of all
categories made by individuals, partnerships and corporations. Management of the
Bank seeks to invest the largest portion of the Bank's assets in real estate,
commercial, consumer and agribusiness loans.
  The Bank
regards certificates of deposit of $100,000 or more as volatile deposits. The
Bank has maintained sufficient liquidity to repay these deposits on maturity.
While the Bank does not generally pursue these types of deposits, at times it is
profitable to do so, and this option is exercised when deemed prudent by
management. These large certificates of deposit account for the volatility in
this liability category.
 
 The Bank
has available an overnight federal funds purchase line in the amount of
$3,700,000 which may be used to meet liquidity needs. As of December 31, 2004,
the Bank had no balances outstanding under this line. The Bank also has advances
available with the Federal Home Loan Bank where the Bank can purchase funds up
to 13% of total assets.
 
 The
Bank’s asset/liability mix is monitored on a daily basis with a quarterly report
reflecting interest sensitive assets and interest sensitive liabilities being
prepared and presented to the Bank's board of directors. The objective of this
policy is to control interest-sensitive assets and liabilities so as to minimize
the impact of substantial movements in interest rates on the earnings of the
Bank.
  **Correspondent
Banking**
  Correspondent
banking involves the providing of services by one bank to another bank, which
cannot provide that service for itself from an economic or practical standpoint.
The Bank is required to purchase correspondent services offered by larger banks,
including checking collections, purchase of federal funds, security safekeeping,
investment services, coin and currency supplies, overline and liquidity loan
participations and sales of loans to or participations with correspondent banks.
  **Employees**
  As of
December 31, 2004, the Bank had 60 total employees, comprised of 51 full-time
and 9 part-time. The Company does not have any employees who are not also
employees of the Bank.
 
 **Supervisions
and Regulation**
 
 Both the
Company and the Bank are subject to extensive state and federal banking
regulations that impose restrictions on and provide for general regulatory
oversight of their operations. These laws generally are intended to protect
depositors and not shareholders. The following discussion describes some of the
material elements of the regulatory framework applicable to bank holding
companies and their bank subsidiaries and provides some specific information
that applies to the Company. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions.
  8
 **The
Company**
 
 *General* . Since
the Company owns all of the capital stock of the Bank, the Company is a bank
holding company under the Bank Holding Company Act of 1956 (the “BHC Act”). As a
result, the Company **** is
primarily subject to the supervision, examination and reporting requirements of
the Bank Holding Company Act and the regulations of the Federal Reserve. As a
bank holding company located in Georgia, the Georgia Department of Banking and
Finance also regulates and monitors all significant aspects of the operations of
the Company
 
 *Bank
Holding Company Regulation.* The BHC
Act requires every bank holding company to obtain the Federal Reserve Board’s
prior approval before:
 
 ·
    acquiring
      direct or indirect ownership or control of any voting shares of any bank
      if, after the acquisition, the bank holding company will directly or
      indirectly own or control more than 5% of the bank’s voting
      shares;
 
 ·
    acquiring
      all or substantially all of the assets of any bank;
or
 
 ·
    merging
      or consolidating with any other bank holding
company.
 
 Subject
to certain state laws, under the BHC Act, a bank holding company that is
adequately capitalized and adequately managed may acquire the assets of banks
located both inside and outside of Georgia. In addition, the BHC Act provides
that the Federal Reserve Board may not approve any of these transactions if it
would result in or tend to create a monopoly or, substantially lessen
competition or otherwise function as a restraint of trade, unless the
anti-competitive effects of the proposed transaction are clearly outweighed by
the public interest in meeting the convenience and needs of the community to be
served. The Federal Reserve Board is also required to consider the financial and
managerial resources and future prospects of the bank holding companies and
banks concerned, and the convenience and needs of the community to be served.
The Federal Reserve Board’s consideration of financial resources generally
focuses on capital adequacy, which is discussed below. Furthermore, with certain
exceptions, the BHC Act prohibits bank holding companies from acquiring direct
or indirect ownership or control of voting shares in any company that is not a
bank or a bank holding company unless the Federal Reserve Board determines such
activities are incidental or closely related to the business of
banking.
 
 *Change
in Bank Control.* Subject
to various exceptions, the Change in Bank Control Act of 1978, together with
related regulations, requires Federal Reserve Board approval prior to any person
or company acquiring “control” of a bank holding company. Control is
conclusively presumed to exist if a company acquires 25% (5% if the “company” is
a bank holding company) or more of any class of voting securities of the bank
holding company.
 
 *Financial
Services Modernization* .
Under **** the
Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “Modernization
Act”), which amended the BHC Act, a bank holding company may qualify and elect
to become a financial holding company, permitting the bank holding company to
engage in a broader range of activities that are financial in nature or
incidental or complementary thereto than was permitted under prior law. The
Modernization Act allows insurers and other financial services companies to
acquire banks, and removes various restrictions that applied to bank holding
company ownership of securities firms and mutual fund advising companies. The
Modernization Act also establishes the overall regulatory structure applicable
to bank holding companies that engage in insurance and securities
operations.
 
 To
qualify to become a financial holding company, the Company and any of its
banking subsidiaries must be “well capitalized” and “well managed” under the
applicable regulatory standards, and must have a rating of at least
“satisfactory” under the Community Reinvestment Act of 1977. If the Company or
any of its banking subsidiaries fails to meet any such regulatory standards, the
Federal Reserve Board could, among other things, place limitations on the
Company’s ability to conduct these broader financial activities or, if the
deficiencies persisted, require the Company to divest the banking subsidiary.
The broader range of activities that financial holding companies are eligible to
engage in includes those that are determined to be “financial in nature”,
including insurance underwriting, securities underwriting and dealing, and
making merchant banking investments in commercial and financial
companies.
  9
 *Support
of Subsidiary Institutions.* **** Under
Federal Reserve Board policy, the Company **** is
expected to act as a source of financial strength for the Bank and to commit
resources to support the Bank. This support may be required at times when,
without this Federal Reserve Board policy, the Company **** might not
find itself able to provide it. In addition, any capital loans made by the
Company to the Bank will be repaid only after its deposits and various other
obligations are repaid in full. In the event of the Company’s bankruptcy, any
commitment by it to a federal bank regulatory agency to maintain the capital of
the Bank will be assumed by the bankruptcy trustee and entitled to a priority of
payment. ******
 
 *Restrictions
on Transactions with Affiliates* .The
Company and the Bank are deemed to be affiliates within the meaning of the
Federal Reserve Act, and transactions between affiliates are subject to certain
restrictions. Generally, the Federal Reserve Act limits the extent to which a
financial institution or its subsidiaries may engage in “covered transactions”
with an affiliate. It also requires all transactions with an affiliate, whether
or not “covered transactions,” to be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term “covered transaction” includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions.
 
 *Tie-In
Arrangements* . The
Company and the Bank cannot engage in certain tie-in arrangements in connection
with any extension of credit, sale or lease of property or furnishing of
services. For example, with certain exceptions, neither the Company nor the Bank
may condition an extension of credit on either a requirement that the customer
obtain additional services provided by either the Company or the Bank, or an
agreement by the customer to refrain from obtaining other services from a
competitor. The Federal Reserve Board has adopted exceptions to its anti-tying
rules that allow banks greater flexibility to package products with their
affiliates. These exceptions were designed to enhance competition in banking and
non-banking products and to allow banks and their affiliates to provide more
efficient, lower cost service to their customers.
 
 *Insider
Credit Transactions.* The Bank
is also subject to restrictions imposed by the Federal Reserve Act on extensions
of credit to its executive officers, directors, principal shareholders and their
related interests. These extensions of credit must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with third parties, and must not involve more
than the normal risk of repayment or present other unfavorable
features.
 
 *State
Law Restrictions* . **** As a
Georgia business corporation, the Company may be subject to certain limitations
and restrictions under applicable Georgia corporate law.
 
 **The
Bank**
 
 The Bank,
as a commercial bank chartered under the laws of the State of Georgia, is
subject to the supervision, examination and reporting requirements of the FDIC
and the Georgia Department of Banking and Finance (the “DBF”). The FDIC and the
DBF regularly examine the Bank’s operations and have the authority to approve or
disapprove mergers, the establishment of branches and similar corporate actions.
Both regulatory agencies have the power to prevent the continuance or
development of unsafe or unsound banking practices or other violations of law.
The Bank’s deposits are insured by the FDIC to the maximum extent provided by
law. Additionally, Georgia state laws regulate, among other things, the scope of
the Bank’s business, its investments, its payment of dividends to the Company,
its required legal reserves and the nature, lending limit, maximum interest
charged and amount of and collateral for loans. These laws are generally
intended to protect depositors and not shareholders. Following is a description
of some of the federal and state law requirements that apply to the
Bank.
  10
  *Interstate
Banking and Branching* . The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
“IBBEA”) permits nationwide interstate banking and branching under certain
circumstances. This legislation generally authorizes interstate branching and
relaxes federal law restrictions on interstate banking. Currently, bank holding
companies may purchase banks in any state, and states may not prohibit such
purchases. Additionally, banks are permitted to merge with banks in other states
as long as the home state of neither merging bank has “opted out.” The IBBEA
requires regulators to consult with community organizations before permitting an
interstate institution to close a branch in a low-income area. The IBBEA also
prohibits the interstate acquisition of a bank if, as a result, the bank holding
company would control more than ten percent of the total United States insured
depository deposits or more than thirty percent, or the applicable state law
limit, of deposits in the acquired bank’s state. Under recent FDIC regulations,
banks are prohibited from using their interstate branches primarily for deposit
production. The FDIC has accordingly implemented a loan-to-deposit ratio screen
to ensure compliance with this prohibition.
 
 Georgia
has “opted in” to the IBBEA and allows in-state banks to merge with out-of-state
banks subject to certain requirements. Georgia law generally authorizes the
acquisition of an in-state bank by an out-of-state bank by merger with a Georgia
financial institution that has been in existence for at least 3 years prior to
the acquisition. With regard to interstate bank branching, out-of-state banks
that do not already operate a branch in Georgia may not establish de novo
branches in Georgia.
 
 *Deposit
Insurance* . The
deposits of the Bank are currently insured to a maximum of $100,000 per
depositor through a fund administered by the FDIC. All insured banks are
required to pay semi-annual deposit insurance premium assessments to the
FDIC.
 
 *Community
Reinvestment Act.* The
Community Reinvestment Act of 1977 requires that, in connection with
examinations of financial institutions within their respective jurisdictions,
the FDIC evaluate the record of each financial institution in meeting the credit
needs of its local community, including low and moderate-income neighborhoods.
These factors are also considered in evaluating mergers, acquisitions and
applications to open a branch or facility. Failure to adequately meet these
criteria could impose additional requirements and limitations on the Bank.
 
 *State
and Federal Usury Laws.* Interest
and other charges collected or contracted for by the Bank are subject to state
usury laws and federal laws concerning interest rates. Under the Servicemembers
Civil Relief Act, a lender is generally prohibited from charging an annual
interest rate in excess of 6% on any obligation for which the borrower is a
person on active duty with the United States military.
 
 *Federal
Deposit Insurance Corporation Improvement Act* . Under
the Federal Deposit Insurance Corporation Improvement Act of 1991 (the
“FDICIA”), each federal banking agency has prescribed, by regulation, noncapital
safety and soundness standards for institutions under its authority. These
standards cover internal controls, information systems, and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation.
 
 **Capital
Adequacy**
 
 The
Company and the Bank are required to comply with the capital adequacy standards
established by the Federal Reserve Board and the FDIC. The Federal Reserve Board
has established a risk-based and a leverage measure of capital adequacy for bank
holding companies. The Bank is also subject to risk-based and leverage capital
requirements adopted by the FDIC, which are substantially similar to those
adopted by the Federal Reserve Board for bank holding companies. If capital
falls below minimum guideline levels, the Company or the Bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open new facilities.
  11
  The
risk-based capital standards used by the Federal Reserve Board and the FDIC are
designed to make regulatory capital requirements more sensitive to differences
in risk profiles among banks and bank holding companies, to account for
off-balance-sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance-sheet items, such as letters of credit and
unfunded loan commitments, are assigned to broad risk categories, each with
appropriate risk weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance-sheet items. The
guidelines are minimums, and the Federal Reserve Board has noted that bank
holding companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios well in
excess of the minimum. Total capital consists of two components, Tier 1 Capital
and Tier 2 Capital. The current guidelines require all bank holding companies
and federally-regulated banks to maintain a minimum risk-based total capital
ratio equal to 8%, of which at least 4% must be Tier 1 Capital. Tier 1 Capital
generally consists of common stock, minority interests in the equity accounts of
consolidated subsidiaries, noncumulative perpetual preferred stock and a limited
amount of qualifying cumulative perpetual preferred stock, less goodwill and
other specified intangible assets. Tier 2 Capital generally consists of
subordinated debt, other preferred stock and a limited amount of loan loss
reserves.
 
 The FDIC
and Federal Reserve Board also employ a leverage ratio, which is Tier 1 capital
as a percentage of total assets less intangibles, to be used as a supplement to
risk-based guidelines. The principal objective of the leverage ratio is to
constrain the maximum degree to which a bank holding company or bank may
leverage its equity capital base. A minimum leverage ratio of 3% is required for
the most highly rated bank holding companies and banks. Other bank holding
companies, banks and bank holding companies seeking to expand, however, are
required to maintain minimum leverage ratios of at least 4% to 5%.
 
 The
FDICIA created a statutory framework of supervisory actions indexed to the
capital level of the individual institution. Under regulations adopted by the
FDIC and the Federal Reserve Board, an institution is assigned to one of five
capital categories depending on its total risk-based capital ratio, Tier 1
risk-based capital ratio, and leverage ratio, together with certain subjective
factors. Institutions which are deemed to be “undercapitalized” depending on the
category to which they are assigned are subject to certain mandatory supervisory
corrective actions. Failure to meet capital guidelines could subject a bank or
bank holding company to a variety of enforcement remedies, including issuance of
a capital directive, the termination of deposit insurance by the FDIC, a
prohibition on accepting brokered deposits, and certain other restrictions on
its business. As described above, significant additional restrictions can be
imposed on FDIC-insured depository institutions that fail to meet applicable
capital requirements.
 
 **Payment
of Dividends**
 
 The
Company **** is a
legal entity separate and distinct from the Bank. The principal sources of cash
flow of the Company, including cash flow to pay dividends to its shareholders,
are dividends that the Bank pays to its sole shareholder, the Company. Statutory
and regulatory limitations apply to the Bank’s payment of dividends. If, in the
opinion of the federal banking regulator, the Bank were engaged in or about to
engage in an unsafe or unsound practice, the federal banking regulator could
require, after notice and a hearing, that it stop or refrain from engaging in
the questioned practice. The federal banking agencies have indicated that paying
dividends that deplete a depository institution’s capital base to an inadequate
level would be an unsafe and unsound banking practice. Federal regulatory
authorities have indicated that a bank may not pay any dividend if payment would
cause it to become undercapitalized or if it is already undercapitalized.
Moreover, federal agencies have issued policy statements that provide that bank
holding companies and insured banks should generally only pay dividends out of
current operating earnings.
  12
  In
addition, the DBF’s approval must be obtained before the Bank may pay cash
dividends out of retained earnings if: (i) the total classified assets at the
most recent examination of the Bank exceeded 80% of the equity capital; (ii) the
aggregate amount of dividends declared or anticipated to be declared in the
calendar year exceeds 50% of the net profits, after taxes but before dividends
for the previous calendar year; or (iii) the ratio of equity capital to adjusted
assets is less than 6%.
 
 **Privacy**
 
 Under the
Modernization Act, banks and other financial institutions are required to
disclose their policies for collecting and protecting confidential information.
Customers generally may prevent banks and other financial institutions from
sharing nonpublic personal financial information with nonaffiliated third
parties except under narrow circumstances, such as the processing of
transactions requested by the consumer or when the financial institution is
jointly sponsoring a product or service with a nonaffiliated third party.
Additionally, banks and other financial institutions generally may not disclose
consumer account numbers to any nonaffiliated third party for use in
telemarketing, direct mail marketing or other marketing to
consumers. ****
 
 **Other
Laws and Regulations**
 
 *International
Money Laundering Abatement and Anti-Terrorist Financing Act of
2001* . **** On
October 26, 2001, the USA PATRIOT Act was enacted. It includes the International
Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the
“IMLAFA”) and strong measures to prevent, detect and prosecute terrorism and
international money laundering. As required by the IMLAFA, the federal banking
agencies, in cooperation with the U.S. Treasury Department, established rules
that generally apply to insured depository institutions and U.S. branches and
agencies of foreign banks.
 
 Among
other things, the new rules require that financial institutions implement
reasonable procedures to: (i) verify the identity of any person opening an
account; (ii) maintain records of the information used to verify the person’s
identity; and (iii) determine whether the person appears on any list of known or
suspected terrorists or terrorist organizations. The rules also prohibit banks
from establishing correspondent accounts with foreign shell banks with no
physical presence and encourage cooperation among financial institutions, their
regulators and law enforcement to share information regarding individuals,
entities and organizations engaged in terrorist acts or money laundering
activities. The rules also limit a financial institution’s liability for
submitting a report of suspicious activity and for voluntarily disclosing a
possible violation of law to law enforcement.
 
 *Sarbanes-Oxley
Act of 2002* . The
Sarbanes-Oxley Act of 2002 (the “SOA”) was enacted to address corporate and
accounting fraud. It established a new accounting oversight board that enforces
auditing standards and restricts the scope of services that accounting firms may
provide to their public company audit clients. Among other things, it also (i)
requires chief executive officers and chief financial officers to certify to the
accuracy of periodic reports filed with the Securities and Exchange Commission
(the “SEC”); (ii) imposes new disclosure requirements regarding internal
controls, off-balance-sheet transactions, and pro forma (non-GAAP) disclosures;
(iii) accelerates the time frame for reporting of insider transactions and
periodic disclosures by certain public companies; and (iv) requires companies to
disclose whether or not they have adopted a code of ethics for senior financial
officers and whether the audit committee includes at least one “audit committee
financial expert.”
 
 The SOA
requires the SEC, based on certain enumerated factors, to regularly and
systematically review corporate filings. To deter wrongdoing, it (i) subjects
bonuses issued to top executives to disgorgement if a restatement of a company’s
financial statements was due to corporate misconduct; (ii) prohibits an officer
or director from misleading or coercing an auditor; (iii) prohibits insider
trades during pension fund “blackout periods”; (iv) imposes new criminal
penalties for fraud and other wrongful acts; and (v) extends the period during
which certain securities fraud lawsuits can be brought against a company or its
officers.
  13
  **Future
Legislation and Regulatory Action**
  New
regulations and statutes are regularly proposed that contain wide-ranging
proposals for altering the structures, regulations and competitive relationships
of banks and other financial institutions operating or doing business in the
United States. The Company cannot predict whether or in what form any proposed
regulation or statute will be adopted or the extent to which the Company may be
affected by any new regulation or statute.
 
 **Effect
of Governmental Monetary Polices**
 
 The
Company’s earnings are affected by domestic economic conditions and the monetary
and fiscal policies of the United States government and its agencies. The
Federal Reserve Board’s monetary policies have had, and are likely to continue
to have, an important impact on the operating results of commercial banks
through its power to implement national monetary policy in order, among other
things, to curb inflation or combat a recession. The monetary policies of the
Federal Reserve affect the levels of bank loans, investments and deposits
through its control over the issuance of United States government securities,
its regulation of the discount rate applicable to member banks and its influence
over reserve requirements to which member banks are subject. The
Company cannot
predict the nature or impact of future changes in monetary and fiscal policies
on the Company’s financial condition or results of operation.
 
 **ITEM
2.** **DESCRIPTION
OF PROPERTY**
 
 The
Company's executive office is located at the Bank’s main office, 201 North Main
Street, Statesboro, Georgia 30458. The Bank’s main office was constructed in
1991 and contains approximately 16,000 square feet. All of the executive
officers of the Company and the Bank are located at this facility as are all
bookkeeping and computer operations.
 
 The Bank
also has two branches, located at 620 Zetterower Avenue, Statesboro, Georgia and
29 North Parker Avenue, Brooklet, Georgia. The Bank’s main office and all
branches are owned by the Company.
 
 **ITEM
3.** **LEGAL
PROCEEDINGS**
 
 As of the
date of this Report, there are no material legal proceedings to which the
Company or any of its properties were subject.
 
 **ITEM
4.** **SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 No
matters were submitted for a vote of the Company’s shareholders during the
fourth quarter of 2004.
  14
  
 **PART
II**
 
 ****
**ITEM 5.**
    **MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND**
      **SMALL
      BUSINESS ISSUER PURCHASES OF EQUITY
  SECURITIES**
 ****
 
 **Market
for Common Stock**
 
 There is
no established trading market for the Company's common stock, and an active
public trading market is not expected to develop in the near future. The
approximate number of holders of record of the Company's common stock as of
December 31, 2004 was 505. Limited information is available as to the ranges at
which the Company’s common stock has been sold. To the best of management’s
knowledge, the last trade in 2004 was executed during the month of December at a
price of $36 per share. During 2004, to the best of management’s knowledge,
sales of the Company’s common stock ranged from $36 per share to $40 per share.
During 2003, to the best of management’s knowledge, sales of the Company’s
common stock ranged from $35 per share to $40 per share. The per share price
information regarding the common stock is provided for information purposes only
and should not be viewed as indicative of the actual or market value of the
common stock.
 
 **Dividends**
 
 The
Company declared dividends of $181,300, or $0.50 per share both in 2004 and
2003.
 
 The Bank
is subject to restrictions on the payment of dividends under Georgia law and the
regulations of the DBF. The Company is also subject to limits on payment of
dividends by the rules, regulations and policies of federal banking authorities.
The primary source of funds available for the payment of cash dividends by the
Company are dividends from the Bank. There are various statutory and regulatory
limitations on the payment of dividends by the Bank, as well as by the Company
to its shareholders. No assurance can be given that any dividends will be
declared by the Company in the future, or if declared, what amounts would be
declared or whether such dividends would continue.
 
 Future
dividends will be determined by the board of directors of the Company in light
of circumstances existing from time to time, including the Company’s growth,
financial condition and results of operations, the continued existence of
statutory and regulatory restrictions on the Bank’s ability to pay dividends and
other factors that the board of directors of the Company considers relevant.
Further, the Company's ability to pay dividends is subject to the financial
performance of the Bank, which is dependent upon, among other things, the local
economy, the success of the bank's lending activities, compliance of the bank
with applicable regulations, investment performance and the ability to generate
fee income.
 
 ****
 **Recent
Sales of Unregistered Securities**
 
 There
were no unregistered sales of securities in 2004.
 
 **ITEM
6.** **MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**
 
 The
following Management’s Discussion and Analysis (the “MD&A”) is intended to
address information relating to the financial condition and results of
operations of the Company that may not be readily apparent from a review of the
consolidated financial statements and notes thereto. Therefore, the MD&A
should be read in conjunction with information provided in the Company’s
consolidated financial statements and notes thereto.
 
  15
  **General**
 
 The
Company’s principal asset is the Bank. Accordingly, the Company’s results of
operations are primarily dependent upon the results of operations of the Bank.
The Bank conducts a commercial banking business which consists of attracting
deposits from the general public and applying those funds to the origination of
commercial, consumer and real estate loans (including commercial loans
collateralized by real estate). The Bank’s profitability depends primarily on
net interest income, which is the difference between interest income generated
from interest-earning assets, such as loans and investments, less the interest
expense incurred on interest-bearing liabilities, such as customer deposits and
borrowed funds. Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities, and the interest rate
paid and earned on these balances. Net interest income is dependent upon the
Bank’s interest rate spread, which is the difference between the average yield
earned on its interest-earning assets and the average rate paid on its
interest-bearing liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
interest income. The interest rate spread is impacted by interest rates, deposit
flows and loan demand. Additionally, and to a lesser extent, the profitability
of the Bank is affected by such factors as the level of noninterest income and
expenses, the provision for loan losses and the effective tax rate. Noninterest
income consists primarily of service charges on deposit accounts, other fees and
origination of mortgage loans. Noninterest expenses consist of compensation and
benefits, occupancy-related expenses and other operating expenses.
 
 **Critical
Accounting Policies**
 
 The
Company has established certain accounting and financial reporting policies to
govern the application of accounting principles generally accepted in the United
States of America in the preparation of its financial statements. The Company’s
significant accounting policies are described in the Notes to the consolidated
financial statements. Certain accounting policies involve significant judgments
and assumptions by management which have a material impact on the carrying value
of certain assets and liabilities; management considers these accounting
policies to be critical accounting policies. The judgments and assumptions used
by management are based on historical experience and other factors which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
the judgments and estimates adopted by management which could have a material
impact on the carrying values of assets and liabilities and the results of the
Company’s operations. The Company believes the following accounting policies are
the most critical accounting policies applied by the Company.
 
 Allowance
for Loan Losses
 ****
 The
Company believes the allowance for loan losses is a critical accounting policy
that requires the most significant judgments and estimates used in the
preparation of its consolidated financial statements. The allowance for loan
losses represents management’s estimate of probable loan losses inherent in the
loan portfolio. Calculation of the allowance for loan losses represents a
critical accounting estimate due to the significant judgment, assumptions and
estimates related to the amount and timing of estimated losses, consideration of
current and historical trends and the amount and timing of cash flows related to
impaired loans.
 
 Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance for loan losses based on their judgments about information available
to them at the time of their examination.
  16
  
 Considering
current information and events regarding a borrower’s ability to repay its
obligations, management considers a loan to be impaired when the ultimate
collectibility of all amounts due, according to the contractual terms of the
loan agreement, is in doubt. When a loan is considered to be impaired, the
amount of impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate. If the loan is
collateral-dependent, the fair value of the collateral is used to determine the
amount of impairment. Impairment losses are included in the allowance for loan
losses through a charge to the provision for losses on loans.
 
 Subsequent
recoveries are credited to the allowance for loan losses. Cash receipts for
accruing loans are applied to principal and interest under the contractual terms
of the loan agreement. Cash receipts on impaired loans for which the accrual of
interest has been discontinued are applied first to principal and then to
interest income.
 
 The
accounting for impaired loans described above applies to all loans, except for
large pools of smaller-balance, homogeneous loans that are collectively
evaluated for impairment, loans that are measured at fair value or at the lower
of cost or fair value, and debt securities. The allowance for loan losses for
large pools of smaller-balance, homogeneous loans is established through
consideration of such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, adequacy of the underlying collateral,
loan concentrations, historical charge-off trends, and economic conditions that
may affect the borrowers' ability to pay.
 
 A
substantial portion of the Bank’s loan portfolio is in the commercial real
estate and residential real estate sectors. Those loans are secured by real
estate in the Company’s primary market area. Therefore, the ultimate
collectibility of a substantial portion of the Bank’s loan portfolio is
susceptible to changes to market conditions in the Company’s primary market
area.
 
 The
Company is closely monitoring certain portions of its loan portfolio that the
Company believes have a higher credit risk profile under the current environment
based solely upon their industry classification which includes agricultural and
agribusiness loans. Based on current information, the Company has not identified
any problem credits included in these categories, which are not already
classified as nonperforming or impaired loans. However, if the economic recovery
takes longer than expected, the allowance for loan losses could be impacted by
adverse developments in these credits.
 
 Income
Taxes
 
 Statement
of Financial Accounting Standard (“SFAS”) No. 109, “Accounting for Income
Taxes,” requires the asset and liability approach for financial accounting and
reporting for deferred income taxes. The Company uses the asset and liability
method of accounting for deferred income taxes and provide deferred income taxes
for all significant income tax temporary differences. See Note 9 to the Notes to
consolidated financial statements for additional details.
 
 As part
of the process of preparing the consolidated financial statements, the Company
is required to estimate its income taxes in each of the jurisdictions in which
it operates. This process involves estimating the Company’s actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items, such as depreciation and the provision for loan losses, for
tax and financial reporting purposes. These differences result in deferred tax
assets and liabilities that are included in the Company’s consolidated balance
sheet.
 
 The
Company must also assess the likelihood that its deferred tax assets will be
recovered from future taxable income, and to the extent that the Company
believes that recovery is not likely, the Company must establish a valuation
allowance. Significant management judgment is required in determining the
Company’s provision for income taxes, its deferred tax assets and liabilities,
and any valuation allowance recorded against the Company’s net deferred tax
assets. To the extent the Company establishes a valuation allowance or adjusts
this allowance in a period, the Company must include an expense within the tax
provisions in the statement of income. At December 31, 2004, the Company
recorded on its consolidated balance sheet net deferred tax assets of
$555,000.
  17
  **Performance
Overview**
 
 The
Company reported net income of $1,963,000, or $5.36 per diluted common share in
2004, compared to $1,661,000, or $4.54 per diluted common share in 2003. The
return on average assets was 1.27% in 2004 compared to 1.18% in 2003, while the
return on average common shareholders’ equity was 15.52% in 2004 compared to
15.07% in 2003.
 
 The net
interest income of the Company increased $871,000, or 16.2%, to $6,258,000 in
2004 compared to $5,387,000 in 2003. The taxable equivalent net interest margin
earned on average interest earning assets during 2004 increased to 4.26% from
4.01% during 2003. The record low interest rate environment experienced during
2003 continued during the first six months of 2004. This rate environment along
with the strong growth of the Bank’s loan portfolio and the repricing of time
certificates at lower rates during the first six months of 2004 were the primary
factors in increasing the Bank’s net interest margin. Beginning in June 2004, as
a result of actions by the Federal Open Market Committee of the Federal Reserve
Bank, the U. S. financial markets experienced an increase in the prime lending
rate of 125 basis points through December 31, 2004. However, local market
competition for time certificates intensified at mid-year, and the rates paid to
retain time deposits increased faster than lending rates. The result was that
the net interest margin began to decline through the last half of the year.
 
 Noninterest
income increased $102,000, or 5.9%, to $1,839,000 in 2004 compared to $1,737,000
in 2003. Noninterest expense increased $365,000 or 8.9% during 2004. A detailed
discussion of these variances follows.
 
 **Results
of Operations**
  
 Earnings
Summary
 
 The
Company reported earnings of $1,963,000 for 2004 representing an increase of
$302,000, or 18.2%, compared to earnings of $1,661,000 for 2003. Diluted
earnings per common share were $5.36 in 2004 compared to $4.54 per diluted
common share in 2003. The
increase in the Company’s net earnings was primarily due to an increase in net
interest income, partially offset by an increase in noninterest
expenses.
 
 Net
Interest Income
 
 Net
interest income totaled $6,258,000 in 2004 **** representing
an increase of $871,000, or 16.2%, compared to net interest income of $5,387,000
in 2003. The increase in net interest income in 2004 was primarily attributable
to the growth of the loan portfolio of the Bank and the increase in the
percentage composition of loans in the balance sheet of the Bank.
 
 The
taxable equivalent net interest margin increased 25 basis points to 4.26% in
2004 from 4.01% in 2003. This increase in the net interest margin is a result of
the growth in the loan portfolio, both in actual dollars and as a percentage of
total assets, and a result of a greater decrease in the overall cost of funds
for the year as compared to the overall yield on earning assets.  Another
factor impacting the increase in net interest margin was the changing interest
rate environment during 2004. During the first half of 2004, the overall
interest rate environment did not change, but the Bank’s cost of interest
continued to decline as fixed rate time deposits matured and repriced at lower
rates. Therefore, while loan and total assets yields remained relatively stable
during the first six months of 2004, the cost of funds continued to decline, and
the result was an increase in the net interest margin during those months. As
the prime rate began to increase incrementally during the last half of 2004,
balances in variable rate loans and federal funds sold repriced immediately with
each rate change. However, the local market for time deposits became more
competitive based on interest rates paid, and during the last half of 2004, well
exceeded rates paid in other markets around Georgia. As a result, during the
last half of 2004, the Bank’s cost of funds increased faster than overall asset
yields, and the net interest margin declined, in spite of increases in the
overall rate environment.
  18
  As a tool
to manage cost of funds, the Bank began to rely on alternative funding sources
in 2004 that were cheaper in cost when compared to local market rates for time
deposits. Advances from the Federal Home Loan Bank were obtained either at fixed
rate maturities of up to 24 months or priced at variable rates tied to an index
other than the prime rate. Average borrowings increased $6,946,000 to $7,548,000
in 2004 from $602,000 in 2003.
 
 Average
earning assets increased $12,550,000, or 9.3%, to $147,565,000 in 2004 compared
to $135,015,000 in 2003. Average loans increased $16,782,000, or 15.1%, to
$127,948,000 in 2004 compared to $111,166,000 in 2003. Loan growth has remained
strong in the Bank’s market, and the Bank has continued to focus on quality loan
relationships secured by residential or commercial real estate. The average
balance of the Bank’s securities portfolio decreased $5,268,000, or 29.5% during
2004. Average investment securities represented 8.2% of total average assets in
2004 and 12.7% of total average assets in 2003. This percentage has decreased
because the growth in the Bank’s loan portfolio has been funded in part by
sales, maturities and principal payments received from investment
securities. All of the Bank’s investment securities are classified as available
for sale. Average earning assets as a percentage of total average assets was
95.5% in 2004 compared to 95.8% in 2003.
 
 Average
interest-bearing liabilities increased $8,927,000, or 8.2%, in 2004. Average
interest-bearing deposits increased $1,981,000, or 1.8%, in 2004 and is
reflected in the growth of savings and interest-bearing demand deposits offset
by a decrease in time deposits. Approximately 18% of total average deposits were
noninterest-bearing in 2004 compared to 16% for 2003. Total interest expense on
interest-bearing liabilities was $2,061,000 for the year ended December 31, 2004
compared to $2,438,000 for 2003. Although total interest bearing liabilities
increased 8.2%, total interest expense decreased as a result of a decrease in
the average rate paid from 2.24% in 2003 to 1.76% in 2004.
 
 Noninterest
Income
 
 Noninterest
income totaled $1,839,000 in 2004 compared to $1,737,000 in 2003, representing
an increase of $102,000 or 5.9%. The $102,000 increase is the result of a
$24,000 increase in service charges on deposit accounts, a $41,000 increase in
mortgage origination fees, a $52,000 increase in other service charges,
commissions and fees, as offset by a $15,000 decrease in other operating
income.
 
 The
$24,000 increase in service charges on deposit accounts is the result of an
increase in the volume of checking and savings accounts serviced as well as an
increase in the volume of excessive transactions on savings accounts. The Bank
also experienced a nominal increase in NSF fees, which are charges assessed for
checks presented for payment against insufficient funds.
 
 The
$41,000 increase in mortgage origination fees is attributable to the first full
year of the Bank’s expanded mortgage operations. During 2003, the mortgage
operation was expanded from one originator to two originators and one full-time
and one part-time loan processor. With an expanded staff and operation, the
volume of loans closed and fees collected for 2004 increased.
 
 The
$52,000 increase in other service charges, commissions and fees is wholly
attributable to a change in the recording of income and expenses on ATM and
“point of sale” transactions with debit and ATM cards. During 2004, the Bank’s
third party processor changed the method of recording these items by remitting
gross revenues and drafting for total expenses, whereas it previously would
remit a net amount of income or expense, and only the net transaction was
recorded by the Bank. Therefore, this change affected other expense as
well.
  19
  Following
is a comparison of noninterest income for 2004 and 2003:
 **Year
      Ended December 31,****2004**
    
    **2003****(Dollars
      in Thousands)**Service
      charges on deposit accounts
    
    **$**
    **1,035**
    
    $
    1,011Mortgage
      origination fees
    
    
    **604**
    
    
    563Other
      service charges, commissions and fees
    
    
    **191**
    
    
    139Securities
      losses, net
    
    
    **(12**
    **)**
    
    -Other
      operating income
    
    
    **21**
    
    
    24$
    **1,839**
    
    $
    1,737
 
 Noninterest
Expense
 
 Noninterest
expense increased $369,000 to $4,490,000 in 2004 as compared to $4,121,000 in
2003. Salaries and employee benefits increased $294,000; equipment and occupancy
expense increased $12,000; and all other expense increased $63,000.
 
 Equipment
and occupancy expense increased $12,000 to $487,000 in 2004 compared to $475,000
in 2003. Depreciation expense increased $12,000, or 4.7%, from 2003 to 2004 as a
result of vehicles placed in service during 2004.
 
 Office
supplies increased $8,000, or 7.0%, to 122,000 in 2004 from $114,000 in 2003,
attributable primarily to the overall general growth in the operations of the
Bank.
 
 Data
processing fees increased $19,000, or 6.6%, to $306,000 in 2004 compared to
$287,000 in 2003. This increase in fees was attributable to a 5% increase
effective July 1, 2004 in the base fees from the Bank’s primary data processing
vendor, whose charges are based on the number of accounts maintained by the
Bank. In addition to experiencing a half-year effect of this price increase, the
Bank continued to add loan and deposit accounts, which added to the Bank’s total
cost.
 
 Professional
fees decreased $118,000, or 44.4%, to $148,000 in 2004 from $266,000 in 2003.
The decrease in professional fees is attributable to a decrease in legal fees
incurred. During 2003, the Company incurred additional expense relating to
implementation of the requirements of Sarbanes-Oxley rules and also accrued for
a portion of the fees that would be billed and paid in 2004 for public company
issues handled during 2003. Also, billings for some 2004 matters were not
received until late in the first quarter of 2005. In addition, the Bank
experienced during 2004 a larger recovery amount on legal fees expended in
collection efforts on problem loans.
 
 Advertising
and public relations increased $42,000, or 21.9%, to $234,000 in 2004 from
$192,000 in 2003. Additional expenses were incurred for advertising for new
products and services during the year and more aggressive efforts to build
goodwill within the community through various public relations efforts.
 
 All other
noninterest expense increased $108,000, or 14.2%, in 2004 to $866,000 from
$758,000 in 2003. The increase is reflected in most line items as a result of
the overall growth of the operations of the Bank. The larger increases are
reflected in expenses related to electronic banking of $36,000, in director fees
of $27,000, in state business occupation and local business license taxes of
$8,000, and in operational losses of $10,000. The increase in electronic banking
expense was previously discussed in “Noninterest Income.” The increase in
director fees is the result of the election of two additional individuals to the
Board of Directors in January 2004 and also an increase in the frequency of
meetings of certain committees of the Board of Directors. The state business
occupation and local business license taxes are based on the revenue of the
Bank, and as revenue has increased, these taxes have also increased. The
operational loss is the result of one forgery incident early in 2004.
  20
  In
compliance with the requirements of Financial Accounting Standards Board
(“FASB”) Statement No. 91, “Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases”, the Company allocated $317,000 of salaries to loan costs in 2004 and
$286,000 in 2003. After adjusting salaries and benefits for amounts allocated to
loan costs, total salaries and benefits increased $294,000, or 14.5%, to
$2,323,000 in 2004 compared to $2,029,000 in 2003. There are several reasons for
the increase. First, from December 31, 2003 to December 31, 2004, the number of
total full-time equivalent employees increased from 50 to 55. Included in this
increase was the addition of a senior executive. Also, 2004 was also the first
full year of operations of the expanded mortgage origination staff, as
previously discussed above in “Noninterest Income,” and the commissions paid are
a percentage of the fee income generated. Because mortgage income increased,
commissions increased. Another reason for the increase is routine annual salary
increases for existing staff. Along with these increases in salary expense, FICA
taxes increased as well. Finally, the Bank experienced an increase in the cost
of medical insurance premiums paid for its employees.
 
 Following
is a comparison of noninterest expense for 2004 and 2003.
 
 **Year
      Ended December 31,****2004**
    
    **2003****(Dollars
      in Thousands)**
 
 Salaries
      and employee benefits
    **$**
    **2,323**
    
    $
    2,029Equipment
      and occupancy
    
    **487**
    
    
    475Office
      Supplies
    
    **122**
    
    
    114Data
      processing fees
    
    **306**
    
    
    287Professional
      fees
    
    **148**
    
    
    266Advertising
      & Public Relations
    **234**
    192Other
      expense
    **866**
    758**$**
    **4,486**
    
    $
    4,121
 
 
 Income
Taxes
 
 Income
taxes totaled $1,108,000 in 2004 and $742,000 in 2003. The effective tax rate
was 36% for 2004 and 31% for 2003. The effective tax rate of 31% in 2003 was
lower because of benefits from deferred tax adjustments recorded during
2003.
 
 **Liquidity
and Capital Resources**
 
 Liquidity
management involves the matching of the cash flow requirements of customers, who
may be either depositors desiring to withdraw funds or borrowers needing
assurance that sufficient funds will be available to meet their credit needs,
and the ability of the Company and the Bank to meet those needs. As such, the
Company and the Bank seek to meet liquidity requirements primarily through
management of short-term investments (principally federal funds sold) and
monthly amortizing loans. Another source of liquidity is the repayment of
maturing single payment loans. In addition, the Bank maintains relationships
with correspondent banks which could provide funds to it on short notice, if
needed.
  21
  The
liquidity and capital resources of the Company and the Bank are monitored on a
periodic basis by state and federal regulatory authorities. At December 31,
2004, the Bank's short-term investments were adequate to cover any reasonable
anticipated immediate need for funds. During 2004, the Company increased its
capital by retaining net earnings of $1,782,000 after payment of dividends.
After recording a decrease in capital of $136,000 for unrealized losses on
securities available for sale, net of taxes, total capital increased $1,646,000
during 2004. At December 31, 2004, total capital of the Company amounted to
$13,370,000. The Company is aware of no events or trends likely to result in a
material change in liquidity of the Company or the Bank.
 
 In
accordance with risk capital guidelines issued by the Federal Reserve Board, the
Bank is required to maintain a minimum standard of total capital to
risk-weighted assets of 8%. Additionally, all member banks must maintain “core”
or “Tier 1” capital of at least 4% of total assets (“leverage ratio”). Member
banks operating at or near the 4% capital level are expected to have
well-diversified risks, including no undue interest rate risk exposure,
excellent control systems, good earnings, high asset quality, and well managed
on- and off-balance sheet activities; and, in general, be considered strong
banking organizations with a composite 1 rating under the CAMEL rating system of
banks. For all but the most highly rated banks meeting the above conditions, the
minimum leverage ratio is to be 4% plus an additional 100 to 200 basis
points.
 
 Capital
Resources
 
 The
following table summarizes the regulatory capital levels of the Bank at December
31, 2004.
 
 **Actual**
    
    **Required**
    
    **Excess****Amount**
    
    **Percent**
    
    **Amount**
    
    **Percent**
    
    **Amount**
    
    **Percent****(Dollars
      in Thousands)**Leverage
      capital
    $
    12,870
    
    7.8
    %
    
    $
    6,558
    
    4.00
    %
    
    $
    6,312
    
    3.8
    %Risk-based
      capital:Core
      capital
    
    12,870
    
    9.7
    
    
    
    5,297
    
    4.00
    
    
    
    7,573
    
    5.7Total
      capital
    
    14,530
    
    11.0
    
    
    
    10,594
    
    8.00
    
    
    
    3,936
    
    3.0
 
 Short-Term
Borrowings
 
 The
following table summarizes short-term borrowings for the periods indicated
(dollars in thousands):
 
 **Years
      Ended December 31,****2004**
    
    **2003****Average**
      **Balance**
    
    **Average**
      **Rate**
    
    **Average**
      **Balance**
    
    **Average**
      **Rate**Federal
      funds purchased
    
    
    
    
    
    
    **$**
    **8**
    
    **1.12**
    **%**
    
    $
    171
    
    1.26
    %**Total**
      **Balance**
    
    
    
    
    **Total**
      **Balance**Total
      maximum short-term borrowingsoutstanding
      at any month-end during the year
    
    
    
    
    
    
    **$**
    -
    
    
    
    
    $
    2,200
  22
  
 Contractual
Obligations
 
 The
following table sets forth certain information about contractual cash
obligations as of December 31, 2004 (dollars in thousands):
 
 **Payments
      Due After December 31, 2004****Total**
    
    
    **1
      Year**
      **Or
      Less**
    
    
    **1
      -3**
      **Years**
    
    
    **4
      -5**
      **Years**
    
    
    **After
      5**
      **Years**Time
      certificates of deposit
    
    $
    79,286
    
    $
    63,180
    
    $
    16,086
    
    $
    20
    
    $
    -Other
      borrowings
    
    
    11,423
    
    
    2,021
    
    
    9,045
    
    
    357
    
    
    -Operating
      leases
    
    
    28
    
    
    7
    
    
    15
    
    
    6
    
    
    -Total
      contractual cash obligations
    
    $
    90,737
    
    $
    65,208
    
    $
    25,146
    
    $
    383
    
    $
    -
 
 At
December 31, 2004 the Company and the Bank had $1,352,000 in binding commitments
for capital expenditures. These expenditures represent amounts for the
renovation of the Brooklet branch office and the construction of a new branch
office.
 
  Commitments
and Lines of Credit (Off-Balance Sheet Arrangements)
 
 
 In the
ordinary course of business, the Bank has granted commitments to extend credit
to approved customers. Generally, these commitments to extend credit have been
granted on a temporary basis for seasonal or inventory requirements and have
been approved by the Bank's Board of Directors. The Bank has also granted
commitments to approved customers for standby letters of credit. These
commitments are recorded in the financial statements when funds are disbursed or
the financial instruments become payable. The Bank uses the same credit policies
for these off balance sheet commitments as it does for financial instruments
that are recorded in the consolidated financial statements. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitment amounts expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
 
 Following
is a summary of the commitments outstanding at December 31, 2004 and
2003.
 
 **2004**
    
    **2003****(Dollars
      in Thousands)**
 
 Commitments
      to extend credit
    **$**
    **22,835**
    
    $
    13,838Standby
      letters of credit
    
    **651**
    
    
    491**$**
    **23,486**
    
    $
    14,329
 
 **Impact
of Inflation**
 
 The
consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with generally accepted
accounting principles and practices within the banking industry which require
the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates have a more significant impact on a
financial institution’s performance than the effects of general levels of
inflation.
   23
   **Selected
Statistical Information of the Company**
 
 The
following statistical information should be read in conjunction with the
MD&A and the consolidated financial statements and related notes included
elsewhere in this Annual Report and in the documents incorporated herein by
reference.
 
 **Average
Balances and Net Income Analysis**
 
 The
following tables set forth the amount of the Bank’s interest income or interest
expense for each category of interest-earning assets and interest-bearing
liabilities and the average interest rate for total interest-earning assets and
total interest-bearing liabilities, net interest spread and net yield on average
interest-earning assets. Federally tax-exempt income is presented on a
taxable-equivalent basis assuming a 34% federal tax rate.
 
 **Year
      Ended December 31,****2004**
    
    **2003******
    **Interest**
    ****
    **Average**
    ****
    ****
    ****
    **Interest**
    ****
    **Average**
    ********
    ****
    **Average**
    ****
    **Income/**
    ****
    **Yield/**
    ****
    **Average**
    ****
    **Income/**
    ****
    **Yield/**
    ********
    ****
    **Balance**
    ****
    **Expense**
    ****
    **Rate**
    ****
    **Balance**
    ****
    **Expense**
    ****
    **Rate****(Dollars
      in Thousands)****ASSETS**Interest-earning
      assets:Loans,
      net of unearned interest
    
    **$******
    ******127,948**
    
    **$******
    ******7,732**
    
    
    **6.04**
    **%**
    $
    111,166
    
    $
    7,040
    
    
    6.33
    %Investment
      securities:Taxable
    
    
    **11,460**
    
    
    **441**
    
    
    **3.85**
    
    
    16,726
    
    
    672
    
    
    4.02Nontaxable
    
    
    **1,146**
    
    
    **68**
    
    
    **5.93**
    
    
    1,148
    
    
    68
    
    
    5.94Interest-bearing
      deposits in banks
    
    
    **89**
    
    
    **1**
    
    
    **1.41**
    
    
    2,291
    
    
    26
    
    
    1.16Federal
      funds sold
    
    
    **6,922**
    
    
    **100**
    
    
    **1.44**
    
    
    3,684
    
    
    42
    
    
    1.14Total
      interest-earning assets
    
    
    **147,565**
    
    
    **8,342**
    
    
    **5.65**
    
    
    135,015
    
    
    7,848
    
    
    5.81Noninterest-earning
      assets:
    
    
    
    
    
    ****Cash
    
    
    **4,081**
    
    
    
    
    
    
    
    
    3,769Allowance
      for loan losses
    
    
    **(1,991**
    **)**
    
    
    
    
    
    
    
    (1,654
    )Other
      assets
    
    
    **4,802**
    
    
    
    
    
    
    
    
    3,832Total
      noninterest-earning assets
    
    
    **6,892**
    
    
    
    
    
    
    
    
    5,947Total
      assets
    
    **$******
    ******154,457**
    
    
    
    
    
    
    
    $
    140,962
   24
   **Average
Balances and Net Income Analysis (Continued)**
 
 **Year
      Ended December 31,****2004**
    
    
    **2003******
    ****
    ****
    **Interest**
    ****
    ****
    **Average**
    ****
    ****
    ****
    ****
    ****
    **Interest**
    ****
    ****
    **Average**
    ********
    ****
    ****
    **Average**
    ****
    ****
    **Income/**
    ****
    ****
    **Yield/**
    ****
    ****
    **Average**
    ****
    ****
    **Income/**
    ****
    ****
    **Yield/****Balance**
    ****
    ****
    **Expense**
    ****
    ****
    **Rate
      Paid**
    ****
    ****
    **Balance**
    ****
    ****
    **Expense**
    ****
    ****
    **Rate
      Paid****(Dollars in
      Thousands)****LIABILITIES
      AND****STOCKHOLDERS’
      EQUITY**Interest-bearing
      liabilities:Savings
      and interest-bearingdemand
      deposits
    
    **$******
    ******37,356**
    
    **$******
    ******267**
    
    
    **0.71**
    **%**
    $
    32,572
    
    $
    245
    
    
    0.75
    %Time
      deposits
    
    
    **72,390**
    
    
    **1,643**
    
    
    **2.27**
    
    
    75,193
    
    
    2,167
    
    
    2.88Other
      borrowings
    
    
    **7,548**
    
    
    **151**
    
    
    **1.99**
    
    
    602
    
    
    26
    
    
    4.29Total
      interest-bearingliabilities
    
    
    **117,294**
    
    
    **2,061**
    
    
    **1.76**
    
    
    108,367
    
    
    2,438
    
    
    2.24Noninterest-bearing
      liabilities andstockholders’
      equity:Demand
      deposits
    
    
    **23,849**
    
    
    
    
    
    
    
    
    21,029Other
      liabilities
    
    
    **666**
    
    
    
    
    
    
    
    
    545Stockholders’
      equity
    
    
    **12,648**
    
    
    
    
    
    
    
    
    11,021Total
      noninterest-bearing liabilitiesand
      stockholders’ equity
    
    
    **37,163**
    
    
    
    
    
    
    
    
    32,595Total
      liabilities andstockholders’
      equity
    
    **$******
    ******154,457**
    
    
    
    
    
    
    
    **$**
    ****140,962Interest
      rate spread
    
    
    
    
    
    
    
    
    3.89
    %
    
    
    
    
    
    
    
    3.57
    %Net
      interest income
    
    
    
    
    **$******
    ******6,281**
    
    
    
    
    
    
    
    $
    5,410Net
      interest margin
    
    
    
    
    
    
    
    
    4.26
    %
    
    
    
    
    
    
    
    4.01
    %
   25
   **Rate
and Volume Analysis**
 
 The
following table reflects the changes in net interest income resulting from
changes in interest rates and from asset and liability volume. Federally
tax-exempt interest is presented on a taxable-equivalent basis assuming a 34%
federal tax rate. The change in interest attributable to rate has been
determined by applying the change in rate between years to average balances
outstanding in the later year. The change in interest due to volume has been
determined by applying the rate from the earlier year to the change in average
balances outstanding between years. Thus, changes that are not solely due to
volume have been consistently attributed to rate.
 
 **Year
      Ended December 31,**
    
    
    **Year
      Ended December 31,****2004
      vs. 2003**
    
    
    **2003
      vs. 2002****Increase**
    
    
    **Changes
      Due To**
    
    
    **Increase**
    
    
    **Changes
      Due To****(Decrease)**
    
    
    **Rate**
    
    
    **Volume**
    
    
    **(Decrease)**
    
    
    **Rate**
    
    
    **Volume****(In
      Thousands)**
    
    
    **(In
      Thousands)**Increase
      (decrease) in:Income
      from earning assets:Interest
      and fees on loans
    
    $
    692
    
    $
    (371
    )
    $
    1,063
    
    $
    (85
    )
    $
    (1,189
    )
    $
    1,104Interest
      on securities:Taxable
    
    
    (231
    )
    
    (19
    )
    
    (212
    )
    
    (270
    )
    
    (191
    )
    
    (79
    )Tax
      exempt
    
    
    -
    
    
    -
    
    
    -
    
    
    (8
    )
    
    (4
    )
    
    (4
    )Interest-bearing
      deposits in banks
    
    
    (25
    )
    
    1
    
    
    (26
    )
    
    26
    
    
    -
    
    
    26Interest
      on federal funds sold
    
    
    58
    
    
    21
    
    
    37
    
    
    (27
    )
    
    (13
    )
    
    (14
    )Total
      interest income
    
    
    494
    
    
    (368
    )
    
    862
    
    
    (364
    )
    
    (1,397
    )
    
    1,033Expense
      from interest-bearing liabilities:Interest
      on savings and interest-bearing
      demand deposits
    
    
    22
    
    
    (14
    )
    
    36
    
    
    (197
    )
    
    (242
    )
    
    45Interest
      on time deposits
    
    
    (524
    )
    
    (443
    )
    
    (81
    )
    
    (257
    )
    
    (491
    )
    
    234Interest
      on other borrowings
    
    
    125
    
    
    (174
    )
    
    299
    
    
    (5
    )
    
    -
    
    
    (5
    )Total
      interest expense
    
    
    (377
    )
    
    (631
    )
    
    254
    
    
    (459
    )
    
    (733
    )
    
    274Net
      interest income
    
    $
    871
    
    $
    263
    
    $
    608
    
    $
    95
    
    $
    (664
    )
    $
    759
 
 
 
   26
   **Asset/Liability
Management**
 
 A
principal objective of the Company’s asset/liability management strategy is to
minimize its exposure to changes in interest rates by matching the maturity and
repricing horizons of interest-earning assets and interest-bearing liabilities.
This strategy is overseen in part through the direction of the Company’s Asset
and Liability Committee (the “ALCO Committee”) which establishes policies and
monitors results to control interest rate sensitivity.
 
 As part
of the Company’s interest rate risk management policy, the ALCO Committee
examines the extent to which its assets and liabilities are “interest
rate-sensitive” and monitors its interest rate-sensitivity “gap”. An asset or
liability is considered to be interest rate sensitive if it will reprice or
mature within the time period analyzed, usually one year or less. The interest
rate-sensitivity gap is the difference between the interest-earning assets and
interest-bearing liabilities scheduled to mature or reprice within such time
period. A gap is considered positive when the amount of interest rate-sensitive
assets exceeds the amount of interest rate-sensitive liabilities. A gap is
considered negative when the amount of interest rate-sensitive liabilities
exceeds the interest rate-sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income, while
a positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income, while a positive gap would tend to
adversely affect net interest income. If the Company’s assets and liabilities
were equally flexible and moved concurrently, the impact of any increase or
decrease in interest rates on net interest income would be minimal.
 
 A simple
interest rate “gap” analysis by itself may not be an accurate indicator of how
net interest income will be affected by changes in interest rates. Accordingly,
the ALCO Committee also evaluates how the repayment of particular assets and
liabilities is impacted by changes in interest rates. Income associated with
interest-earning assets and costs associated with interest-bearing liabilities
may not be affected uniformly by changes in interest rates. In addition, the
magnitude and duration of changes in interest rates may have a significant
impact on net interest income. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may not
react identically to changes in market interest rates. Interest rates on certain
types of assets and liabilities fluctuate in advance of changes in general
market interest rates, while interest rates on other types may lag behind
changes in general market rates. In addition, certain assets, such as adjustable
rate mortgage loans, have features (generally referred to as “interest rate
caps”) which limit changes in interest rates on a short-term basis and over the
life of the asset. In the event of a change in interest rates, prepayment and
early withdrawal levels also could deviate significantly from those assumed in
calculating the interest-rate gap. The ability of many borrowers to service
their debts also may decrease in the event of an interest-rate
increase.
 
   27
   The
following table sets forth the distribution of the repricing of the Bank’s
earning assets and interest-bearing liabilities as of December 31, 2004, the
interest rate sensitivity gap (i.e., interest rate sensitive assets divided by
interest rate sensitivity liabilities), the cumulative interest rate sensitivity
gap ratio (i.e., interest rate sensitive assets divided by interest rate
sensitive liabilities) and the cumulative sensitivity gap ratio. The table also
sets forth the time periods in which earning assets and liabilities will mature
or may reprice in accordance with their contractual terms. However, the table
does not necessarily indicate the impact of general interest rate movements on
the net interest margin since the repricing of various categories of assets and
liabilities is subject to competitive pressures and the needs of the Bank’s
customers. In addition, various assets and liabilities indicated as repricing
within the same period may in fact reprice at different times within such period
and at different rates.
 
 **At
      December 31, 2004****Maturing
      or Repricing Within****Zero
      to**
    
    **Three**
    
    **One
      to**
    
    **Over****Three**
    
    **Months
      to**
    
    **Five**
    
    **Five****Months**
    
    **One
      Year**
    
    **Years**
    
    **Years**
    
    **Total****(Dollars
      in Thousands)**
 
 **Earning
      assets:**Interest-bearing
      deposits in banksand
      federal funds sold
    $
    9,300
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    9,300Restricted
      stock
    
    844
    
    
    -
    
    
    -
    
    
    -
    
    
    844Investment
      securities
    
    934
    
    
    -
    
    
    10,964
    
    $
    161
    
    
    12,059Loans
    
    79,421
    
    
    27,649
    
    
    29,836
    
    
    1,371
    
    
    138,27790,499
    
    
    27,649
    
    
    40,800
    
    
    1,532
    
    
    160,480**Interest-bearing
      liabilities:**Interest-bearing
      demand deposits (1)
    
    -
    
    
    13,437
    
    
    -
    
    
    -
    
    
    13,437Savings
      (1)
    
    -
    
    
    22,554
    
    
    -
    
    
    -
    
    
    22,554Certificates
      less than $100,000
    
    7,979
    
    
    19,747
    
    
    7,221
    
    
    -
    
    
    34,947Certificates,
      $100,000 and over
    
    11,074
    
    
    24,379
    
    
    8,886
    
    
    -
    
    
    44,339Other
      borrowings
    
    4
    
    
    2,017
    
    
    9,388
    
    
    -
    
    
    11,40919,057
    
    
    82,134
    
    
    25,495
    
    
    -
    
    
    126,686**Interest
      rate sensitivity gap**
    $
    71,442
    
    $
    (54,485)
    
    $
    15,305
    
    $
    1,532
    
    $
    33,794**Cumulative
      interest rate sensitivity gap**
    $
    71,442
    
    $
    16,957
    
    $
    32,262
    
    $
    33,794**Interest
      rate sensitivity gap ratio**
    
    4.79
    
    
    0.34
    
    
    1.60
    
    
    -**Cumulative
      interest rate sensitivity gap ratio**
    
    4.79
    
    
    1.17
    
    
    1.25
    
    
    1.27
 
 (1)
    In
      recent years, the Bank has found that NOW and money-market checking
      deposits and savings deposits reprice on average between three months and
      one year, depending on the competition in the Bank’s market area and the
      general interest rate environment. Therefore, the Bank has placed these
      deposits in the three months to one year horizon.
 
  28
   **Investment
Portfolio**
 The Bank
manages the mix of asset and liability maturities in an effort to control the
effects of changes in the general level of interest rates on net interest
income. See “Asset/Liability Management.” Except for its effect on the general
level of interest rates, inflation does not have a material impact on the
portfolio due to the rate variability and short-term maturities of its earning
assets. In particular, approximately 77% of the loan portfolio is comprised of
loans which mature or reprice within one year or less. Mortgage loans, primarily
with five to fifteen year maturities, are also made on a variable rate basis
with rates being adjusted every one to five years. Additionally, 8% of the
investment portfolio matures or reprices within one year or less. All of the
Bank’s investment securities are classified as available for sale.
 
 **Types
of Investments**
 
 Securities
 
 Following
is a summary of the carrying value of investments, including restricted equity
securities, as of the end of each reported period:
 
 **December
      31,****2004**
    
    **2003****(Dollars
      in Thousands)**
 
 U.
      S. Government and agency securities
    **$**
    **7,237**
    
    $
    5,363State
      and municipal securities
    
    **1,131**
    
    
    1,162Corporate
      debt securities
    
    **2,082**
    
    
    3,234Mortgage-backed
      securities
    
    **1,609**
    
    
    5,558Restricted
      stock
    
    **844**
    
    
    408**$**
    **12,903**
    
    $
    15,725
 
 Maturities
  The
amounts of the securities available for sale in each category as of December 31,
2004 are shown in the following table according to contractual maturity
classifications (1) one year or less, (2) after one year through five years, (3)
after five years through ten years, and (4) after ten years. Restricted stock is
included in the classification “after ten years.”
 
 **U.
      S. Treasury****And
      Other U. S.****Government
      Agencies,****Corporations
      and Restricted Stock**
    
    **State
      and Political Subdivisions****Yield**
    
    
    
    **Yield****Amount**
    
    **(1)**
    
    **Amount**
    
    **(1)
      (2)****(Dollars
      in Thousands)**
 
 **Maturity:**One
      year or less
    $
    503
    
    6.20
    %
    
    $
    -
    
    -
    %After
      one year through five years
    
    10,013
    
    3.94
    
    
    
    970
    
    6.12After
      five years through ten years
    
    -
    
    -
    
    
    
    -
    
    -After
      ten years
    
    1,256
    
    4.35
    
    
    
    161
    
    6.65$
    11,772
    
    4.06
    %
    
    $
    1,131
    
    6.19
    %
 
 (1)
    Yields
      were computed using coupon interest, adding discount accretion or
      subtracting premium amortization, as appropriate, on a ratable basis over
      the life of each security. The weighted average yield for each maturity
      range was computed using the acquisition price of each security in that
      range.
  29
  (2)  Yields on
securities of state and political subdivisions are stated on a
taxable-equivalent basis, using a tax rate of 34%.
 
 
 **Loan
Portfolio**
 
 Types
of Loans
 
 Management
believes that the Bank’s loan portfolio is adequately diversified. The loan
portfolio contains no foreign or energy-related loans or significant
concentrations in any one industry, with the exception of residential and
commercial real estate mortgages, which constituted approximately 62% of the
Bank’s loan portfolio as of December 31, 2004. The amount of loans outstanding
at the indicated dates is shown in the following table according to type of
loans.
 
 **December
      31,****2004**
    
    **2003****(Dollars
      in Thousands)**Commercial,
      financial and agricultural
    
    **$**
    **16,104**
    
    $
    16,156Real
      estate - construction
    
    
    **26,135**
    
    
    14,828Real
      estate - mortgage
    
    
    **86,110**
    
    
    74,925Consumer
    
    
    **9,875**
    
    
    10,887Overdrafts
    
    
    **53**
    
    
    38**138,277**
    
    
    116,834Less
      reserve for possible loan losses
    
    
    **(2,058**
    **)**
    
    (1,758
    )Loans,
      net
    
    **$**
    **136,219**
    
    $
    115,076
 
 Maturities
and Sensitivity to Changes in Interest Rates
  The
maturities of the indicated loans at December 31, 2004 are shown in the
following table according to maturities of (1) one year or less, (2) after one
year through five years, and (3) after five years.
 **Maturing****One
      year**
      **or
      less**
    
    **After
      one**
      **year**
      **through**
      **five
      years**
    
    **After
      five**
      **years**
    
    **Total****(Dollars
      in
      Thousands)**Commercial,
      financial and agricultural
    
    $
    17,052
    
    $
    8,877
    
    $
    206
    
    $
    26,135Real
      estate - construction
    
    
    11,211
    
    
    4,711
    
    
    182
    
    
    16,104
 
 The
following table summarizes the loans presented in the table above at December
31, 2004 that mature after one year which (1) have predetermined interest
rates and (2) have floating or adjustable interest
rates.
 
 **(Dollars
      in****Thousands)**Predetermined
      interest rates
    $
    6,646Floating
      or adjustable interest rates
    
    7,330$
    13,976
 
  30
   Nonperforming
Loans
 
 A loan is
placed on nonaccrual status when, in management’s judgment, the collection of
the interest income appears doubtful. Interest receivable that has been accrued
in prior years and is subsequently determined to have doubtful collectibility is
charged to the allowance for possible loan losses. Interest on loans that are
classified as nonaccrual is recognized when received. Past due loans are loans
whose principal or interest is past due 90 days or more. In some cases, where
borrowers are experiencing financial difficulties, loans may be restructured to
provide terms significantly different from the original contractual
terms.
 
 **December
      31,**
      **(Dollars
      in Thousands)****2004**
    
    **2003**Loans
      accounted for on a nonaccrual basis
    **$**
    **631**
    
    $
    596Installment
      loans and term loans contractuallypast
      due ninety days or more as to interestor
      principal payments and still accruing
    
    **54**
    
    
    102
 
 In the
opinion of management, any loans classified by regulatory authorities as
doubtful, substandard or special mention that have not been disclosed above do
not (i) represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity or
capital resources, or (ii) represent material credits about which management is
aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms. Any loans
classified by regulatory authorities as loss have been charged off.
 
 Additional
interest income of $29,000 in 2004 would have been recorded if all loans
accounted for on a non-accrual basis in the table above had been current in
accordance with their original terms. No interest income has been recognized in
2004 on loans accounted for on a non-accrual basis.
 
 
  31
  
 Summary
of Loan Loss Experience
 
 The
allowance for loan losses represents a reserve for potential losses in the
Bank’s loan portfolio. The adequacy of the allowance for loan losses is
evaluated periodically based on a review of all significant loans, with a
particular emphasis on nonaccruing, past due and other loans that management
believes require attention. The Bank segregates its loan portfolio by type of
loan and utilize this segregation in evaluating exposure to risks within the
portfolio. In addition, based on internal reviews and external reviews performed
by independent auditors and regulatory authorities, the Bank further segregates
its loan portfolio by loan classifications within each type of loan based on an
assessment of risk for a particular loan or group of loans. Certain reviewed
loans require specific allowances. Allowances are provided for other types and
classifications of loans based on anticipated loss rates. Allowances are also
provided for loans that are reviewed by management and considered creditworthy
and loans for which management determines no review is required. In establishing
allowances, management considers historical loan loss experience with an
emphasis on current loan quality trends, current economic conditions and other
factors in the Bank’s market. Factors considered include among others,
unemployment rates, effect of weather on agriculture and significant local
economic events, such as major plant closings.
 
 
 The Bank
has developed a methodology for determining the adequacy of the loan loss
reserve, which is reviewed monthly by the Board of Directors. Procedures provide
for the assignment of a risk rating for every loan included in the Bank’s total
loan portfolio, with the exception of home equity and personal lines of credit.
The risk rating schedule provides eight ratings of which four ratings are
classified as pass ratings and four ratings are classified as criticized
ratings. Each risk rating is assigned a percent factor to be applied to the loan
balance to determine the adequate amount of reserve. Many of the larger loans
require an annual review by an independent loan officer. As a result of loan
reviews certain loans may be assigned specific reserve allocations. Other loans
that surface as problem loans may also be assigned specific reserves. Past due
loans are assigned risk ratings based on the number of days past due.
 
 The
provision for loan losses is a charge to earnings in the current period to
replenish the allowance and maintain it at a level management has determined to
be adequate. The provision for loan losses charged to earnings amounted to
$540,000 in 2004 and $600,000 in 2003. The decrease in the provision for loan
losses in 2004 resulted from a decrease in net charge-offs in 2004 and an
improvement in the quality of the loan portfolio.
 
 The
Bank’s allowance for loan losses was $2,058,000 at December 31, 2004,
representing 1.49% of year end total loans outstanding compared to $1,758,000 at
December 31, 2003, which represented 1.50% of year end total loans outstanding.
Management considers the allowance for loan losses adequate to cover anticipated
loan losses.
  32
  
 Allocation
of the Allowance for Loan Losses
 
 The
following table sets forth the breakdown of the allowance for loan losses by
loan category for the periods indicated. Management believes the allowance can
be allocated only on an approximate basis. The allocation of the allowance to
each category is not necessarily indicative of future losses and does not
restrict the use of the allowance to absorb losses in any other
category.
 
 **At
      December 31,**
      **(Dollars
      in Thousands)****2004**
    
    **2003****Amount**
    
    **Percent
      of**
      **Loans
      in**
      **Category**
      **to
      Total**
      **Loans**
    
    **Amount**
    
    **Percent
      of**
      **Loans
      in Category**
      **to
      Total**
      **Loans**
 
 Commercial,
      financial and agricultural
    **$**
    **720**
    
    **35**
    **%**
    
    $
    439
    
    25
    %Real
      estate - construction
    
    **412**
    
    **20**
    
    
    
    527
    
    30Real
      estate - mortgage
    
    **308**
    
    **15**
    
    
    
    440
    
    25Consumer
    
    **618**
    
    **30**
    
    
    
    352
    
    20**$**
    **2,058**
    
    **100**
    **%**
    
    $
    1,758
    
    100
    %
  The
following table presents an analysis of the Bank’s loan loss experience for the
periods indicated:
  **December
      31,****2004**
    
    
    **2003****(Dollars
      in Thousands)**Average
      amount of loans outstanding
    
    **$**
    **127,948**
    
    $
    111,166Balance
      of reserve for possible loanlosses
      at beginning of period
    
    **$**
    **1,758**
    
    $
    1,426Charge-offs:Commercial,
      financial andAgricultural
    
    
    **135**
    
    
    238Real
      estate -construction
    
    
    **1**
    
    
    —Real
      estate -mortgage
    
    
    **57**
    
    
    162Consumer
    
    
    **127**
    
    
    86Recoveries:Commercial,
      financial andAgricultural
    
    
    **24**
    
    
    73Real
      estate - construction
    
    
    **—**
    
    
    —Real
      estate - mortgage
    
    
    **27**
    
    
    124Consumer
    
    
    **29**
    
    
    21Net
      charge-offs
    
    
    **240**
    
    
    268Additions
      to reserve charged tooperating
      expenses
    
    
    **540**
    
    
    600Balance
      of reserve for possibleloan
      losses at end of period
    
    **$**
    **2,058**
    
    $
    1,758Ratio
      of net loan charge-offsto
      average loans
    
    
    **0.19**
    **%**
    
    0.24
    %
  33
   **Deposits**
 Average
amount of deposits and average rate paid thereon, classified as to
noninterest-bearing demand deposits, interest-bearing demand and savings
deposits and time deposits, for the periods indicated are presented
below.
 
 **Year
      Ended December 31,****2004**
    
    **2003****Amount**
    
    **Rate**
    
    
    **Amount**
    
    **Rate****(Dollars
      in Thousands)**
 
 Noninterest-bearing
      demand deposits
    **$**
    **23,849**
    
    **-**
    **%**
    
    $
    21,029
    
    -
    %Interest-bearing
      demand and savings deposits
    
    **37,356**
    
    **0.71**
    
    
    
    32,572
    
    0.75Time
      deposits
    
    **72,390**
    
    **2.27**
    
    
    
    75,193
    
    2.88Total
      deposits
    **$**
    **133,595**
    
    
    
    
    $
    128,794
 
 The time
deposits are principally certificates of deposit and individual retirement
accounts obtained for individual customers.
 
 The
amounts of time certificates of deposit issued in amounts of $100,000 or more as
of December 31, 2004, are shown below by category, which is based on time
remaining until maturity of (1) three months or less, (2) over three through six
months (3) over six through twelve months and (3) over twelve
months.
 
 **(Dollars
      in Thousands)**Three
      months or less
    
    $
    11,074Over
      three months through six months
    
    
    7,528Over
      six months through twelve months
    
    
    16,851Over
      twelve months
    
    
    8,886Total
    
    $
    44,339
 
  **Return
on Assets and Shareholders’ Equity**
 
 The following
rate of return information for the periods indicated is presented
below.
 
 **Year
      Ended December 31,****2004**
    
    **2003**Return
      on assets (1)
    
    
    **1.27**
    **%**
    
    1.18
    %Return
      on equity (2)
    
    
    **15.52**
    
    
    15.07Dividends
      payout ratio (3)
    
    
    **9.24**
    
    
    10.92Equity
      to assets ratio (4)
    
    
    **8.19**
    
    
    7.82
 
 (1)  Net
income divided by average total assets.
 (2)  Net
income divided by average equity.
 (3)  Dividends
declared per share divided by net income per share.
 (4)  Average
equity divided by average total assets.
 
   34
   **ITEM
7.** **FINANCIAL
STATEMENTS**
 
 The
audited consolidated financial statements of the Company, including the notes
thereto, and the report of Mauldin & Jenkins LLC are included in this Report
beginning at page F-1.
 
 **ITEM
8.** **CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE**
 Not
Applicable.
 
 **ITEM
8A.** **CONTROLS
AND PROCEDURES**
 
 The Chief
Executive Officer and Chief Financial Officer of the Company. have concluded,
based on their evaluation as of December 31, 2004, that the Company’s disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports filed or submitted by it under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and include controls and procedures designed
to ensure that information required to be disclosed by the Company in such
reports is accumulated and communicated to the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
 
 The
Company made no significant changes in its internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation of those controls by the Chief Executive Officer and the Chief
Financial Officer.
 
 **ITEM
8B.** **OTHER
INFORMATION**
 
 Not
Applicable.
 
 **PART
III**
  ****
**ITEM 9.**
    **DIRECTORS, EXECUTIVE OFFICERS,
      PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
      EXCHANGE ACT**
 
 The
information appearing under the headings “Election of Directors,” “Executive
Officers” and “Section 16(a), Beneficial Ownership Reporting Compliance” in the
Proxy Statement (the “2005 Proxy Statement”) relating to the annual meeting of
shareholders of the Company, scheduled to be held on May 19, 2005, is
incorporated herein by reference. In addition, the Company has adopted a code of
ethics, which is entitled “Code of Conduct for Senior Executive and Financial
Officers,” that applies to the Company’s chief executive officer and chief
financial officer, a copy of which is filed as Appendix A to the Company’s 2004
Proxy Statement and incorporated herein by reference.
 
 **ITEM
10.** **EXECUTIVE
COMPENSATION**
 
 
 The
information appearing under the heading “Executive Compensation” in the 2005
Proxy Statement is incorporated herein by reference.
  35
  **ITEM
11.** **SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS**
 
 The
information appearing under the headings “Equity Compensation Plan Information”
and “Principal Shareholders” in the 2005 Proxy Statement is incorporated herein
by reference.
 
 **ITEM
12.** **CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS**
 
 The
information appearing under the caption “Certain Relationships and Transactions”
in the 2005 Proxy Statement is incorporated herein by reference.
 
 **ITEM
13.** **EXHIBITS**
 
 (a)
    1.The
      following financial statements of the Company as of and for the years
      ended December 31, 2004 and 2003 are filed and incorporated herein by
      reference as part of this Report:
 
 PageReport
      of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated
      Balance Sheets
    
    
    F-2Consolidated
      Statements of Income
    
    
    F-3Consolidated
      Statements of Comprehensive Income
    
    
    F-4Consolidated
      Statements of Stockholder's Equity
    
    
    F-5Consolidated
      Statements of Cash Flows
    
    
    F-6Notes
      to Consolidated Financial Statements
    
    
    F-7
      to F-26
 
 
 
 2.  The
following exhibits are filed or incorporated by reference as part of this
Report:
 
 **Exhibit
      No.**
    **Description**2.1
    Plan
      of Reorganization and Agreement to Merge, dated as of April 25, 2000,
      by and among the Company, FMB Interim Corp. and Farmers & Merchants
      Bank (Incorporated herein by reference to Exhibit 2.1 of the Company's
      Report on Form 8-K filed on February 27, 2001). (With regard to applicable
      cross references in this Report on Form 10-KSB, the Company’s Proxy
      Statements, Current, Quarterly, and Annual Reports, unless otherwise
      noted, are filed with the Commission under File No. 000-32399 and
      incorporated herein by reference).3.1
    Articles
      of Incorporation of FMB Equibanc, Inc. (Incorporated herein by reference
      to Exhibit 3.1 of the Company's Report on Form 8-K filed on February 27,
      2001)3.2
    Bylaws
      of FMB Equibanc, Inc. (Incorporated herein by reference to Exhibit 3.2 of
      the Company's Report on Form 8-K filed on February 27,
    2001).10.1*
    1998
      Nonqualified Stock Option Plan. (Incorporated by reference to Exhibit 10.1
      of the Company’s Annual Report on Form 10-KSB for the year ended December
      31, 2000).10.2*
    Form
      of Director Deferred Compensation Agreement. (Incorporated by reference to
      Exhibit 10.2 of the Company’s Annual Report on Form 10-KSB for the year
      ended December 31, 2000).
 
  36
  
 **Exhibit
      No.**
    **Description**10.3*
    Employment
      Agreement by and between Farmers & Merchants Bank and Charles R.
      Nessmith. (Incorporated by reference to Exhibit 10.3 of the Company’s
      Annual Report on Form 10-KSB for the year ended December 31,
      2002).10.4*
    Deferred
      Compensation Agreement by and between Farmers & Merchants Bank and
      Frank C. Rozier III. (Incorporated by reference to Exhibit 10.4 of the
      Company’s Annual Report on Form 10-KSB for the year ended December 31,
      2003).10.5*
    Deferred
      Compensation Agreement by and between Farmers & Merchants Bank and
      Gerald M. Edenfield. (Incorporated by reference to Exhibit 10.5 of the
      Company’s Annual Report on Form 10-KSB for the year ended December 31,
      2003).10.6*
    Deferred
      Compensation Agreement by and between Farmers & Merchants Bank and
      Leonard H. Blount. (Incorporated by reference to Exhibit 10.6 of the
      Company’s Annual Report on Form 10-KSB for the year ended December 31,
      2003).14.1
    Code
      of Conduct (Incorporated by reference to Appendix A of the Company’s 2004
      Proxy Statement on Form Def 14A filed on April 29,
    2004).21.1
    Subsidiaries
      of the Registrant.31.1
    Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
    Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32.1
    Section
      1350 Certification by the Chief Executive Officer32.2
    Section
      1350 Certification by the Chief Financial
Officer
 
 *Compensation
Plan or arrangement required to be listed as an Exhibit to Form
10-KSB.
 
 **ITEM
14.** **PRINCIPAL
ACCOUNTANT FEES AND SERVICES**
 
 The
information appearing under the heading “Fees Paid to Independent Accounting
Firms” in the 2005 Proxy Statement is incorporated herein by
reference.
  37
  
 **SIGNATURES**
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  **FMB EQUIBANC,
      INC.**Date:  March 29,
      2005
    By:
    /s/  Charles R.
      NessmithCharles
      R. Nessmith
      President
      and Chief Executive Officer
      (Principal
      Executive Officer)
 In
accordance with the Exchange
Act, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
 **Signature**
    
    **Title**
    
    **Date**/s/
      Charles R. Nessmith
    
    Director,
      President and
    
    March29,
      2005Charles
      R. Nessmith
    
    Chief
      Executive Officer
      (principal
      executive officer)/s/ Dwayne E. Rocker
    
    SecretaryDwayne
      E. Rocker
    
    (principal
      financial and
      accounting
      officer)
    
    March29,
      2005/s/
      Frank C. Rozier
    
    Chairman
      of the Board of Directors
    
    March29,
      2005Frank
      C. Rozier/s/
      Leonard H. Blount
    
    Director
    
    March29,
      2005Leonard
      H. Blount/s/
      F. Wendell Brannen
    
    Director
    
    March29,
      2005F.
      Wendell Brannen/s/
      R. Earl Dabbs
    
    Director
    
    March29,
      2005R.
      Earl Dabbs/s/
      Gerald M. Edenfield
    
    Director
    
    March29,
      2005Gerald
      M. Edenfield/s/
      William Hatcher
    
    Director
    
    March29,
      2005William
      Hatcher/s/
      William B. Nessmith
    
    Director
    
    March29,
      2005William
      B. Nessmith/s/
      Andrew C. Oliver
    
    Director
    
    March29,
      2005Andrew
      C. Oliver/s/
      Billy G. Tyson
    
    Director
    
    March29,
      2005Billy
      G. Tyson
 
  38





**FMB
EQUIBANC, INC. AND SUBSIDIARIES**





**CONSOLIDATED
FINANCIAL REPORT**


**DECEMBER
31, 2004**








**TABLE
OF CONTENTS**








**Page****REPORT
      OF INDEPENDENT REGISTERED****PUBLIC
      ACCOUNTING FIRM**
    **F-1****CONSOLIDATED
      FINANCIAL STATEMENTS****Consolidated
      balance sheets**
    **F-2****Consolidated
      statements of income**
    **F-3****Consolidated
      statements of comprehensive income**
    **F-4****Consolidated
      statements of stockholders' equity**
    **F-5****Consolidated
      statements of cash flows**
    **F-6****Notes
      to consolidated financial statements**
    **F-7-26**























**REPORT
OF INDEPENDENT REGISTERED**


**PUBLIC
ACCOUNTING FIRM**





**To
the Board of Directors**


**FMB
Equibanc, Inc.**


**Statesboro,
Georgia**








We have
audited the accompanying consolidated balance sheets of **FMB
Equibanc, Inc. and Subsidiaries** as of
December 31, 2004 and 2003, and the related consolidated statements of income,
comprehensive income, stockholders' equity and cash flows for each of the two
years in the period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of FMB Equibanc, Inc. and
Subsidiaries, as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for the each of the two years in the period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.




















Albany,
Georgia


January
27, 2005








F-1




**FMB
      EQUIBANC, INC. AND SUBSIDIARIES****CONSOLIDATED
      BALANCE SHEETS****DECEMBER
      31, 2004 AND 2003****(Dollars
      in thousands)****Assets**
    
    
    **2004**
    
    
    ******2003**Cash
      and due from banks
    
    **$**
    **3,235**
    
    $
    5,221Interest-bearing
      deposits at other financial institutions
    
    
    **33**
    
    
    27Federal
      funds sold
    
    
    **9,267**
    
    
    58Securities
      available for sale
    
    
    **12,059**
    
    
    15,317Restricted
      equity securities, at cost
    
    
    **844**
    
    
    408Loans
    
    
    **138,277**
    
    
    116,834Less
      allowance for loan losses
    
    
    **2,058**
    
    
    1,758Loans,
      net
    
    
    **136,219**
    
    
    115,076Premises
      and equipment, net
    
    
    **2,759**
    
    
    2,699Other
      assets
    
    
    **2,584**
    
    
    1,810Total
      assets
    
    **$**
    **167,000**
    
    $
    140,616**Liabilities
      and Stockholders' Equity**Liabilities:Deposits:Noninterest-bearing
    
    **$**
    **26,132**
    
    $
    22,576Interest-bearing
    
    
    **115,277**
    
    
    105,246Total
      deposits
    
    
    **141,409**
    
    
    127,822Other
      borrowings
    
    
    **11,423**
    
    
    442Other
      liabilities
    
    
    **798**
    
    
    628Total
      liabilities
    
    
    **153,630**
    
    
    128,892Commitments
      and contingent liabilitiesStockholders'
      equityCommon
      stock, $1 par value; 10,000,000 sharesauthorized;
      362,600 shares issued and outstanding
    
    
    **362**
    
    
    362Surplus
    
    
    **3,076**
    
    
    3,076Retained
      earnings
    
    
    **9,860**
    
    
    8,078Accumulated
      other comprehensive income
    
    
    **72**
    
    
    208Total
      stockholders' equity
    
    
    **13,370**
    
    
    11,724Total
      liabilities and stockholders' equity
    
    **$**
    **167,000**
    
    $
    140,616**See
      Notes to Consolidated Financial Statements.**




F-2




**FMB
      EQUIBANC, INC. AND SUBSIDIARIES****CONSOLIDATED
      STATEMENTS OF INCOME****YEARS
      ENDED DECEMBER 31, 2004 AND 2003****(Dollars
      in Thousands, Except Per Share
    Amounts)****2004**
    
    ******2003**Interest
      income:Loans,
      including fees
    
    **$**
    **7,732**
    
    $
    7,040Securities:Taxable
    
    
    **441**
    
    
    672Nontaxable
    
    
    **45**
    
    
    45Federal
      funds sold
    
    
    **100**
    
    
    42Interest-bearing
      deposits at other financial institutions
    
    
    **1**
    
    
    26Total
      interest income
    
    
    **8,319**
    
    
    7,825Interest
      expense:Deposits
    
    
    **1,910**
    
    
    2,412Other
      borrowings
    
    
    **151**
    
    
    26Total
      interest expense
    
    
    **2,061**
    
    
    2,438Net
      interest income
    
    
    **6,258**
    
    
    5,387Provision
      for loan losses
    
    
    **540**
    
    
    600Net
      interest income after provision for loan losses
    
    
    **5,718**
    
    
    4,787Other
      income:Service
      charges on deposit accounts
    
    
    **1,035**
    
    
    1,011Other
      service charges, commissions and fees
    
    
    **191**
    
    
    139Securities
      losses, net
    
    
    **(12**
    **)**
    
    -Mortgage
      origination fees
    
    
    **604**
    
    
    563Other
      operating income
    
    
    **21**
    
    
    24Total
      other income
    
    
    **1,839**
    
    
    1,737Other
      expenses:Salaries
      and employee benefits
    
    
    **2,323**
    
    
    2,029Occupancy
      and equipment expense
    
    
    **487**
    
    
    475Office
      supplies
    
    
    **122**
    
    
    114Data
      processing fees
    
    
    **306**
    
    
    287Professional
      fees
    
    
    **148**
    
    
    266Advertising
      and public relations
    
    
    **234**
    
    
    192Other
      operating expenses
    
    
    **866**
    
    
    758Total
      other expenses
    
    
    **4,486**
    
    
    4,121Income
      before income taxes
    
    
    **3,071**
    
    
    2,403Income
      tax expense
    
    
    **1,108**
    
    
    742Net
      income
    
    $
    1,963
    
    $
    1,661Basic
      earnings per share
    
    $
    5.41
    
    $
    4.58Diluted
      earnings per share
    
    $
    5.36
    
    $
    4.54**See
      Notes to Consolidated Financial Statements.**




F-3






**FMB
      EQUIBANC, INC. AND SUBSIDIARIES****CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME****YEARS
      ENDED DECEMBER 31, 2004 AND 2003****(Dollars
      in Thousands)****2004**
    
    ******2003**Net
      income
    
    $
    1,963
    
    $
    1,661Other
      comprehensive income (loss):Unrealized
      holding losses arising during the period,net
      of tax benefits of $95 and $81, respectively
    
    
    **(143**
    **)**
    
    (122
    )Reclassification
      adjustment for losses realized in net income,net
      of tax benefit of $5 in 2004
    
    
    **7**
    
    
    **-**Other
      comprehensive loss
    
    
    **(136**
    **)**
    
    (122
    )Comprehensive
      income
    
    $
    1,827
    
    $
    1,539**See
      Notes to Consolidated Financial Statements.**


F-4


****


****FMB
      EQUIBANC, INC. AND SUBSIDIARIES****CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY****YEARS
      ENDED DECEMBER 31, 2004 AND 2003****(Dollars
      in Thousands)****Accumulated****Other**
    
    **Total****Common
      Stock**
    
    
    
    **Retained**
    
    **Comprehensive**
    
    **Stockholders'****Shares**
    
    **Par
      Value**
    
    **Surplus**
    
    **Earnings**
    
    **Income
      (Loss)**
    
    **Equity****Balance,
      December 31, 2002**
    
    
    362,600
    
    $
    362
    
    $
    3,076
    
    $
    6,598
    
    $
    330
    
    $
    10,366Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    1,661
    
    
    -
    
    
    1,661Dividends
      declared,$0.50
      per share
    
    
    -
    
    
    -
    
    
    -
    
    
    (181
    )
    
    -
    
    
    (181
    )Other
      comprehensive loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (122
    )
    
    (122
    )**Balance,
      December 31, 2003**
    
    
    362,600
    
    
    362
    
    
    3,076
    
    
    8,078
    
    
    208
    
    
    11,724Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    1,963
    
    
    -
    
    
    1,963Dividends
      declared,$0.50
      per share
    
    
    -
    
    
    -
    
    
    -
    
    
    (181
    )
    
    -
    
    
    (181
    )Other
      comprehensive loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (136
    )
    
    (136
    )**Balance,
      December 31, 2004**
    
    
    362,600
    
    $
    362
    
    $
    3,076
    
    $
    9,860
    
    $
    72
    
    $
    13,370**See
      Notes to Consolidated Financial Statements.**

F-5**





**FMB
      EQUIBANC, INC. AND SUBSIDIARIES****CONSOLIDATED
      STATEMENTS OF CASH FLOWS****YEARS
      ENDED DECEMBER 31, 2004 AND 2003****(Dollars
      in Thousands)****2004**
    
    ******2003****OPERATING
      ACTIVITIES**Net
      income
    
    $
    1,963
    
    $
    1,661Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
    
    
    **256**
    
    
    244Provision
      for loan losses
    
    
    **540**
    
    
    600Loss
      on sales of securities
    
    
    **12**
    
    
    -Deferred
      income taxes
    
    
    **(96**
    **)**
    
    (220
    )(Increase)
      decrease in interest receivable
    
    
    **(191**
    **)**
    
    119Increase
      (decrease) in interest payable
    
    
    **101**
    
    
    (102
    )Other
      operating activities, net
    
    
    **157**
    
    
    37Net
      cash provided by operating activities
    
    
    **2,742**
    
    
    2,339**INVESTING
      ACTIVITIES**Increase
      in interest-bearing deposits at other financial
    institutions
    
    
    **(6**
    **)**
    
    (27
    )Purchases
      of securities available for sale
    
    
    **(8,789**
    **)**
    
    (7,150
    )Proceeds
      from maturities of securities available for sale
    
    
    **7,199**
    
    
    11,270Proceeds
      from sale of securities available for sale
    
    
    **4,071**
    
    
    -Net
      (increase) decrease in federal funds sold
    
    
    **(9,209**
    **)**
    
    13,167Net
      increase in loans
    
    
    **(22,065**
    **)**
    
    (17,115
    )Purchase
      of premises and equipment
    
    
    **(316**
    **)**
    
    (756
    )Net
      cash used in investing activities
    
    
    **(29,115**
    **)**
    
    (611
    )**FINANCING
      ACTIVITIES**Net
      increase (decrease) in deposits
    
    
    **13,587**
    
    
    (320
    )Principal
      repayments on other borrowings
    
    
    **(3,519**
    **)**
    
    (17
    )Proceeds
      from other borrowings
    
    
    **14,500**
    
    
    20Dividends
      paid
    
    
    **(181**
    **)**
    
    (181
    )Net
      cash provided by (used in) financing activities
    
    
    **24,387**
    
    
    (498
    )Net
      increase (decrease) in cash and due from banks
    
    
    **(1,986**
    **)**
    
    1,230Cash
      and due from banks at beginning of year
    
    
    **5,221**
    
    
    3,991Cash
      and due from banks at end of year
    
    $
    3,235
    
    $
    5,221**SUPPLEMENTAL
      DISCLOSURES**Cash
      paid for:Interest
    
    $
    1,960
    
    $
    2,540Income
      taxes
    
    $
    1,138
    
    $
    984**NONCASH
      TRANSACTIONS**Other
      real estate acquired in settlement of loans
    
    $
    322
    
    $
    160Financed
      sales of other real estate owned
    
    $
    -
    
    $
    145**See
      Notes to Consolidated Financial Statements.**








F-6


**FMB
EQUIBANC, INC. AND SUBSIDIARIES**


**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
1.** **SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES**





**Nature
of Operations**





FMB
Equibanc, Inc. (the “Company”) is a one-bank holding company whose principal
activity is the ownership and management of its wholly-owned commercial bank
subsidiary, Farmers & Merchants Bank (the “Bank”). The Bank is located in
Statesboro, Bulloch County, Georgia with the main office and one branch located
in Statesboro and one branch located in Brooklet, Georgia. The Bank provides a
full range of banking services to individual and corporate customers in its
primary market area of Bulloch County, Georgia and surrounding counties. In
2004, the Company formed a wholly-owned real-estate subsidiary, FMB Properties,
Inc., to handle all purchases and sales of foreclosed assets.





**Basis
of Presentation and Accounting Estimates**





The
consolidated financial statements include the accounts of the Company and its
two subsidiaries. Significant intercompany transactions and balances have been
eliminated in consolidation.





In
preparing the consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the balance sheet date and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.





Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the allowance for loan losses, the
valuation of foreclosed real estate and contingent assets and liabilities. The
determination of the adequacy of the allowance for loan losses is based on
estimates that are susceptible to significant changes in the economic
environment and market conditions. In connection with the determination of the
estimated losses on loans and the valuation of foreclosed real estate,
management obtains independent appraisals for significant
collateral.





**Cash,
Due from Banks and Cash Flows**





For
purposes of reporting cash flows, cash and due from banks include cash on hand,
cash items in process of collection and amounts due from banks. Cash flows from
interest-bearing deposits at other financial institutions, loans, federal funds
sold and deposits are reported net.





The Bank
is required to maintain reserve balances in cash or on deposit with the Federal
Reserve Bank, based on a percentage of deposits. The total of those reserve
balances was approximately $896,000 and $785,000 at December 31, 2004 and 2003,
respectively.





**Securities**





Debt
securities that management has the positive intent and ability to hold to
maturity are classified as held to maturity and recorded at amortized cost.
Securities not classified as held to maturity, including equity securities with
readily determinable fair values, are classified as available for sale and
recorded at fair value with unrealized gains and losses excluded from earnings
and reported in accumulated other comprehensive income, net of the related
deferred tax effect. Equity securities, including restricted equity securities,
without a readily determinable fair value are classified as available for sale
and recorded at cost.





F-7








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
1.** **SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**





**Securities
(Continued)**





The
amortization of premiums and accretion of discounts are recognized in interest
income using methods approximating the interest method over the life of the
securities. Realized gains and losses, determined on the basis of the cost of
specific securities sold, are included in earnings on the settlement date.
Declines in the fair value of specific securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized
losses.





In
estimating other-than-temporary impairment losses, management considers (1) the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer and (3) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value.





**Loans**





Loans are
reported at their outstanding principal balances less unearned income and the
allowance for loan losses. Interest income is accrued on the outstanding
principal balance.





The
accrual of interest on loans is discontinued when, in management’s opinion, the
borrower may be unable to meet payments as they become due, unless the loan is
well-secured. Past due status is based on contractual terms of the loan. In all
cases, loans are placed on nonaccrual or charged off at an earlier date if
collection of principal or interest is considered doubtful. All interest accrued
but not collected for loans that are placed on nonaccrual or charged off is
reversed against interest income, unless management believes that the accrued
interest is recoverable through the liquidation of collateral. Interest income
on nonaccrual loans is recognized on the cash-basis or cost-recovery method
until the loans are returned to accrual status. Loans are returned to accrual
status when all the principal and interest amounts are brought current and
future payments are reasonably assured.





A loan is
considered impaired when it is probable, based in current information and
events, the Company will be unable to collect all principal and interest
payments due in accordance with the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment
status, collateral value and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Impaired
loans are measured by either the present value of expected future cash flows
discounted at the loan’s effective interest rate, the loan’s obtainable market
price, or the fair value of the collateral if the loan is collateral dependent.
The amount of impairment, if any, and any subsequent changes are included in the
allowance for loan losses. Interest on accruing impaired loans is recognized as
long as such loans do not meet the criteria for nonaccrual status.





**Allowance
for Loan Losses**





The
allowance for loan losses is established through a provision for loan losses
charged to expense. Loan losses are charged against the allowance when
management believes the collectibility of the principal is unlikely. Subsequent
recoveries, if any, are credited to the allowance.








F-8








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
1.** **SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**





**Allowance
for Loan Losses (Continued)**





The
allowance is an amount that management believes will be adequate to absorb
estimated losses relating to specifically identified loans, as well as probable
credit losses inherent in the balance of the loan portfolio, based on an
evaluation of the collectibility of existing loans and prior loss experience.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of loans in
light of historical experience, the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem loans, current economic
conditions that may affect the borrower's ability to pay, estimated value of any
underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.





The
evaluation does not include the effects of expected losses on specific loans or
groups of loans that are related to future events or expected changes in
economic conditions. While management uses the best information available to
make its evaluation, future adjustments to the allowance may be necessary if
there are significant changes in economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank’s allowance for loan losses, and may require the Bank to make additions
to the allowance based on their judgment about information available to them at
the time of their examinations.





The
allowance consists of specific, general and unallocated components. The specific
component relates to loans that are classified as either doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows, or collateral value or
observable market price of the impaired loan is lower than the carrying value of
that loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect management’s
estimate of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the
portfolio.





**Premises
and Equipment**





Land is
carried at cost. Premises and equipment are stated at cost less accumulated
depreciation computed principally by the straight-line method over the estimated
useful lives of the assets.





Building
    39.5
      yearsFurniture
      and equipment
    3
      to 7 years





**Other
Real Estate Owned**





Other
real estate owned represents properties acquired through or in lieu of loan
foreclosure and is initially recorded at the lower of cost or fair value less
estimated costs to sell. Any write-down to fair value at the time of transfer to
other real estate owned is charged to the allowance for loan losses. Costs of
improvements are capitalized, whereas costs relating to holding other real
estate owned and subsequent adjustments to the value are expensed. The Company
carried $322,000 in other real estate owned at December 31, 2004. There were no
amounts carried in other real estate owned at December  31,
2003.





F-9








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
1.** **SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**





**Income
      Taxes**





Deferred
income tax assets and liabilities are determined using the balance sheet method.
Under this method, the net deferred tax asset or liability is determined based
on the tax effects of the temporary differences between the book and tax bases
of the various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.





**Stock-Based
      Compensation**





The
Company has a stock-based employee compensation plan, which is described more
fully in Note 8. The Company accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25, *Accounting
for Stock Issued to Employees* , and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying stock on the date of grant.





The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, *Accounting
for Stock-Based Compensation* , to
stock-based employee compensation.





**Years
      Ended December 31,****2004**
    
    **2003****(Dollars
      in Thousands,**
      **Except
      Per Share Amounts)**Net
      income, as reported
    **$**
    **1,963**
    
    $
    1,661Deduct:
      Total stock-based employee compensationexpense
      determined under fair value basedmethod
      for all awards, net of related tax effects
    
    **-**
    
    
    **-**Pro
      forma net income
    **$**
    **1,963**
    
    $
    1,661Earnings
      per share:Basic
      - as reported
    **$**
    **5.41**
    
    $
    4.58Basic
      - pro forma
    **$**
    **5.41**
    
    $
    4.58Diluted
      - as reported
    **$**
    **5.36**
    
    $
    4.54Diluted
      - pro forma
    **$**
    **5.36**
    
    $
    4.54














F-10








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
1.** **SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**





**Earnings
Per Share**





Basic
earnings per share are computed by dividing net income by the weighted-average
number of shares of common stock outstanding. Diluted earnings per share are
computed by dividing net income by the sum of the weighted-average number of
shares of common stock outstanding and potential common shares. Potential common
shares consist of only stock options.





**Comprehensive
Income**





Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available for sale securities, are
reported as a separate component of the equity section of the balance sheet,
such items, along with net income, are components of comprehensive
income.





**Recent
Accounting Standards**





In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement
No. 123R, *Share-Based
Payment* , a
revision of FASB Statement No. 123, *Accounting
for Stock-Based Compensation.* This
Statement supersedes APB Opinion No. 25, *Accounting
for Stock Issued to Employees,* and its
related implementation guidance. This Statement establishes standards for
accounting for transactions in which an ** entity
exchanges its equity instruments for goods or services. It also
addresses ** transactions
in which an entity incurs liabilities in exchange for goods or services
that ** are based
on the fair value of the entity’s equity instruments or that may be settled
by ** the
issuance of those equity instruments. This Statement focuses primarily
on ** accounting
for transactions in which an entity obtains employee services in
share-based ** payment
transactions such as the issuance of stock options in exchange for employee
services. This Statement requires a public entity to measure the cost of
employee services ** received
in exchange for an award of equity instruments based on the grant-date
fair ** value of
the award (with limited exceptions). That cost will be recognized over
the ** period
during which an employee is required to provide service in exchange for
the ** award—the
requisite service period (usually the vesting period). The grant-date fair value
of employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those
instruments (unless observable market prices for the same or similar instruments
are available). This Statement is effective for public entities that file as
small business issuers - as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005. This Statement applies to
all awards granted or vesting after the required effective date and to awards
modified, repurchased or cancelled after that date.











F-11








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
2.** **SECURITIES**





The
amortized cost and fair value of securities available for sale are summarized as
follows (dollars in thousands):




****
    ****
    ****
    **Gross**
    ****
    ****
    **Gross**
    ****
    ****
    ****
    ********
    ****
    ****
    **Amortized**
    ****
    ****
    **Unrealized**
    ****
    ****
    **Unrealized**
    ****
    ****
    **Fair**
    ********
    ****
    ****
    **Cost**
    ****
    ****
    **Gains**
    ****
    ****
    **Losses**
    ****
    ****
    **Value****December
      31, 2004:****U.
      S. Treasury and U. S.****Government
      agencies**
    
    **$**
    **7,246**
    ****
    **$**
    **10**
    ****
    **$**
    **(19**
    **)**
    **$**
    **7,237**
    ******Mortgage-backed
      securities**
    ****
    ****
    **1,601**
    ****
    ****
    **17**
    ****
    ****
    **(9**
    **)**
    ****
    **1,609**
    ******State
      and municipal securities**
    ****
    ****
    **1,087**
    ****
    ****
    **44**
    ****
    ****
    **-**
    ****
    ****
    **1,131**
    ******Corporate
      bonds**
    ****
    ****
    **2,005**
    ****
    ****
    **77**
    ****
    ****
    **-**
    ****
    ****
    **2,082**
    ********
    ****
    **$**
    **11,939**
    ****
    **$**
    **148**
    ****
    **$**
    **(28**
    **)**
    **$**
    **12,059**December
      31, 2003:U.
      S. Treasury and U. S.Government
      agencies
    
    $
    5,328
    
    $
    35
    
    $
    -
    
    $
    5,363Mortgage-backed
      securities
    
    
    5,519
    
    
    43
    
    
    (4
    )
    
    5,558State
      and municipal securities
    
    
    1,095
    
    
    67
    
    
    -
    
    
    1,162Corporate
      bonds
    
    
    3,029
    
    
    205
    
    
    -
    
    
    3,234$
    14,971
    
    $
    350
    
    $
    (4
    )
    $
    15,317





The
amortized cost and fair value of securities available for sale as of December
31, 2004 by contractual maturity are shown below. Actual maturities may differ
from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties (dollars in
thousands):





**Amortized**
    
    **Fair******
    
    **Cost**
    
    **Value**Due
      within one year
    
    $
    501
    
    $
    503Due
      from one to five years
    
    
    9,682
    
    
    9,786Due
      from five to ten years
    
    
    -
    
    
    -Due
      after ten years
    
    
    155
    
    
    161Mortgage-backed
      securities
    
    
    1,601
    
    
    1,609$
    11,939
    
    $
    12,059





Securities
with a carrying value of $7,192,000 and $7,828,000 at December 31, 2004 and
2003, respectively, were pledged to secure public deposits and for other
purposes required or permitted by law.














F-12











**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
2.** **SECURITIES
(Continued)**





Gains and
losses on sales of securities available for sale consist of the following
(dollars in thousands):





**Years
      Ended December 31,******
    
    **2004**
    
    **2003**Gross
      gains
    
    **$**
    **26**
    
    $********
    ******-**Gross
      losses
    
    
    **(38**
    **)**
    
    **-**Net
      realized losses
    
    **$**
    **(12**
    **)**
    $********
    ******-**





The
following table shows the gross unrealized losses and fair value of securities,
aggregated by category and length of time that securities have been in a
continuous unrealized loss position at December 31, 2004 and 2003 (dollars in
thousands).










**Less
      Than 12 Months****Description
      of Securities**
    
    **Fair**
      **Value**
    
    **Unrealized**
      **Losses****December
      31, 2004:****U.
      S. Treasury and U. S. Government agencies**
    
    **$**
    **4,253**
    
    **$******
    ******19****Mortgage-backed
      securities**
    
    
    **822**
    
    
    **9****Total
      temporarily impaired securities**
    
    **$**
    **5,075**
    
    **$******
    ******28**December
      31, 2003:Mortgage-backed
      securities
    
    **$**
    **848**
    
    **$**
    **4**





Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation. The unrealized losses in the table above are considered temporary
because each security carries an acceptable investment grade and the repayment
sources of principal and interest are government backed.








F-13








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
3.** **LOANS**





The
composition of loans is summarized as follows (dollars in
thousands)





**December
      31,******
    
    **2004**
    
    **2003**Commercial,
      financial and agricultural
    
    $
    **16,104******
    
    $
    16,156Real
      estate - construction
    
    
    **26,135******
    
    
    14,828Real
      estate - mortgage
    
    
    **86,110******
    
    
    74,925Consumer
    
    
    **9,875******
    
    
    10,887Overdrafts
    
    
    **53******
    
    
    38Total
      loans
    
    
    **138,277******
    
    
    116,834Allowance
      for loan losses
    
    
    **(2,058**
    **)**
    
    (1,758
    )Loans,
      net
    
    **$**
    **136,219**
    
    $
    115,076





Changes
in the allowance for loan losses are as follows (dollars in
thousands):





**Years
      Ended December 31,****2004**
    
    **2003**Balance,
      beginning of year
    
    **$**
    **1,758**
    
    $
    1,426Provision
      for loan losses
    
    
    **540******
    
    
    600Loans
      charged off
    
    
    **(320**
    **)**
    
    (486
    )Recoveries
      of loans previously charged off
    
    
    **80******
    
    
    218Balance,
      end of year
    
    **$**
    **2,058**
    
    $
    1,758








The
following is a summary of information pertaining to impaired loans (dollars in
thousands):





**As
      of and for the Years Ended**
      **December
      31,****2004**
    
    **2003**Impaired
      loans without a valuation allowance
    
    $
    -
    
    $
    -Impaired
      loans with a valuation allowance
    
    
    **631**
    
    
    596Total
      impaired loans
    
    $
    631
    
    $
    596Valuation
      allowance related to impaired loans
    
    $
    99
    
    $
    117Average
      investment in impaired loans
    
    $
    809
    
    $
    451Interest
      income recognized on impaired loans
    
    $
    3
    
    $
    1








F-14








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
3.** **LOANS
(Continued)**





Loans on
nonaccrual status amounted to approximately $631,000 and $596,000 at December
31, 2004 and 2003, respectively. Loans past due ninety days or more and still
accruing interest amounted to $54,000 and $102,000 at December 31, 2004 and
2003, respectively.





In the
ordinary course of business, the Company has granted loans to certain related
parties, including executive officers, directors and their affiliates. The
interest rates on these loans were substantially the same as rates prevailing at
the time of the transaction and repayment terms are customary for the type of
loan. Changes in related party loans for the year ended December 31, 2004 are as
follows (dollars in thousands):





Balance,
      beginning of year
    
    $
    1,783Advances
    
    
    873Repayments
    
    
    (1,432
    )Balance,
      end of year
    
    $
    1,224








**NOTE
4.**  **PREMISES
AND EQUIPMENT**





Premises
and equipment are summarized as follows (dollars in thousands):





**December
      31****2004**
    
    
    **2003**Land
    
    **$**
    **953**
    
    $
    953Buildings
    
    
    **2,356**
    
    
    2,359Furniture
      and equipment
    
    
    **1,667**
    
    
    1,864Construction
      in progress; estimated cost to complete, $1,622
    
    
    **30**
    
    
    53Total
      cost
    
    
    **5,006**
    
    
    5,229Accumulated
      depreciation
    
    
    **(2,247**
    **)**
    
    (2,530
    )Net
      book value
    
    **$**
    **2,759**
    
    $
    2,699





**Leases**





During
2003 the Company entered into two noncancelable operating lease agreements for
purposes of erecting two drive-up ATMs. Each lease has an initial lease term of
five years with one five year renewal option. Rental expense under both leases
amounted to $7,200 and $1,200 for the years ended December 31, 2004 and 2003,
respectively.





Future
minimum lease payments on noncancelable operating leases are summarized as
follows:





2005
    
    $
    7,2002006
    
    
    7,2002007
    
    
    7,2002008
    
    
    6,000$
    27,600





F-15








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
5.** **DEPOSITS**





The
aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2004 and 2003 was $44,339,000 and $35,715,000, respectively. The
scheduled maturities of time deposits at December 31, 2004 are as follows
(dollars in thousands):





2005
    
    $
    63,1802006
    
    
    11,1562007
    
    
    4,9302008
    
    
    20$
    79,286





At
December 31, 2004, the Company held brokered time deposits in the amount of
$6,837,000. The Company had no brokered time deposits at December 31,
2003.








**NOTE
6.** **OTHER
BORROWINGS**





Other
borrowings consist of the following (dollars in thousands):





**December
      31,****2004**
    
    
    **2003**Federal
      Home Loan Bank advance with interest payablemonthly
      at a fixed rate of 2.17% maturing October 2005.
    
    **$**
    **2,000**
    
    $
    -Federal
      Home Loan Bank advance with interest payablemonthly
      at a fixed rate of 2.65% maturing April 2006.
    
    
    **2,000**
    
    
    -Federal
      Home Loan Bank advance with interest payable everythree
      months at a variable interest rate of 2 basis points above3
      month LIBOR (2.30% at December 31, 2004), maturing May
    2006.
    
    
    **4,000**
    
    
    -Federal
      Home Loan Bank advance with interest payable everythree
      months at a variable interest rate of 2 basis points above3
      month LIBOR (2.08% at December 31, 2004), maturing July 2006.
    
    
    **3,000**
    
    
    -Federal
      Home Loan Bank advance with interest andprincipal
      payable monthly through December 2008at
      a fixed interest rate of 5.48%.
    
    
    **409**
    
    
    424Note
      payable to Ford Motor Credit with principal payablethrough
      May 2008, 0% interest rate, secured by abank-owned
      vehicle.
    
    
    **14**
    
    
    18**$**
    **11,423**
    
    $
    442











F-16








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
6.** **OTHER
BORROWINGS (Continued)**





Contractual
maturities of other borrowings as of December 31, 2004 are as follows (dollars
in thousands):





2005
    
    $
    2,0212006
    
    
    9,0222007
    
    
    232008
    
    
    357$
    11,423





Advances
from the Federal Home Loan Bank are secured by certain qualifying loans of
approximately $33,163,000.





The
Company and the Bank have available unused lines of credit with various
financial institutions totaling $13,959,000 at December 31, 2004. There were no
other advances outstanding at December  31, 2004
or 2003.








**NOTE
7.** **EMPLOYEE
BENEFIT PLANS**





**Profit
Sharing Plan**





The
Company has a 401(k) Employee Profit-Sharing Plan available to all eligible
employees, subject to certain minimum age and service requirements. The
contributions expensed were approximately $43,000 and $38,000 for the years
ended December 31, 2004 and 2003, respectively.





**Deferred
Compensation Plan**





The
Company has a deferred compensation plan providing for death and retirement
benefits for certain directors. The estimated amounts to be paid under the
compensation plan have been partially funded through the purchase of either life
insurance policies or annuities contracts on the participating directors.
Accrued deferred compensation of $242,000 and $232,600 is included in other
liabilities as of December 31, 2004 and 2003, respectively. Cash surrender
values of $246,000 and $236,900 on the insurance policies is included in other
assets at December 31, 2004 and 2003, respectively.








**NOTE
8.** **STOCK-BASED
COMPENSATION**





The
Company has a nonqualified stock option plan reserving 18,000 shares of common
stock for the granting of options to officers and key employees. Option prices
reflect the fair market value of the Company’s common stock on the dates the
options are granted. The options may be exercised over a period of ten years in
accordance with vesting schedules determined by the Board of
Directors.




















F-17








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
8.** **STOCK-BASED
COMPENSATION (Continued)**





Other
pertinent information related to the options is as follows:





**2004**
    
    
    **2003****Shares**
    
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**
    
    
    **Shares**
    
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**Outstanding
      at beginning of year
    
    
    **6,000**
    
    **$******
    ******15.27**
    
    
    6,000
    
    $
    15.27Granted
    
    
    **-**
    
    
    **-**
    
    
    -
    
    
    -Exercised
    
    
    **-**
    
    
    **-**
    
    
    -
    
    
    -Terminated
    
    
    **-**
    
    
    **-**
    
    
    -
    
    
    -Outstanding
      at end of year
    
    
    **6,000**
    
    **$******
    ******15.27**
    
    
    6,000
    
    $
    15.27Options
      exercisable at year-end
    
    
    **6,000**
    
    **$******
    ******15.27**
    
    
    6,000
    
    $
    15.27Weighted-average
      fair value of optionsgranted
      during the year
    
    
    
    
    **$******
    ******-**
    
    
    
    
    $
    -








Information
pertaining to options outstanding at December 31, 2004 is as
follows:





**Options
      Outstanding**
    
    
    **Options
      Exercisable****Exercise Price**
    
    
    ****Number**
      **Outstanding****
    
    
    **Weighted-**
      **Average**
      **Remaining**
      **Contractual**
      **Life**
    
    
    ****
      **Weighted-**
      **Average**
      **Exercise
      Price**
    
    
    ****
      **Number**
      **Exercisable**
    
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**$15.27
    
    
    6,000
    
    
    3.0
      years
    
    $
    15.27
    
    
    6,000
    
    $
    15.27








**NOTE
9** **INCOME
TAXES**





The
components of income tax expense are as follows (dollars in
thousands):





**Years
      Ended December 31,**
    ********
    ****
    ****
    **2004**
    ****
    ****
    **2003**Current
    
    $
    1,204
    
    $
    962Deferred
    
    
    **(96**
    **)**
    
    (220
    )$
    1,108
    
    **$**
    ****742











F-18








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
9.** **INCOME
TAXES (Continued)**





The
Company's income tax expense differs from the amounts computed by applying the
federal income tax statutory rates to income before income taxes. A
reconciliation of the differences is as follows (dollars in
thousands):





**Years
      Ended December 31,**
    ********
    ****
    ****
    **2004**
    ****
    ****
    **2003**Tax
      provision at statutory federal rate
    
    **$**
    **1,044**
    
    $
    817Tax-exempt
      income
    
    
    **(14**
    **)**
    
    (14
    )State
      income taxes
    
    
    **89**
    
    
    69Other
    
    
    **(11**
    **)**
    
    (130
    )Income
      tax expense
    
    **$**
    **1,108**
    
    $
    742





The
components of deferred income taxes are as follows (dollars in
thousands):





**Years
      Ended December 31,****2004**
    
    
    **2003**Deferred
      tax assets:Loan
      loss reserves
    
    **$**
    **673**
    
    $
    553Deferred
      compensation
    
    
    **92**
    
    
    87Nonaccrual
      interest
    
    
    **18**
    
    
    18**783**
    
    
    658Deferred
      tax liabilities:Depreciation
    
    
    **180**
    
    
    151Securities
      available for sale
    
    
    **48**
    
    
    138**228**
    
    
    289Net
      deferred tax assets
    
    **$**
    **555**
    
    $
    369








F-19








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
10.** **EARNINGS
PER SHARE**





Presented
below is a summary of the components used to calculate basic and diluted
earnings per share:





**Years
      Ended December 31,****2004**
    
    
    **2003**Net
      income
    
    **$**
    **1,963,000**
    
    $
    1,661,000Weighted
      average number of common shares outstanding
    
    ****
    **362,600**
    
    
    362,600Effect
      of dilutive options
    
    
    **3,455**
    
    
    3,455Weighted
      average number of common shares outstandingused
      to calculate dilutive earnings per share****
    **366,055**
    
    
    366,055








**NOTE
11.** **COMMITMENTS
AND CONTINGENCIES**





**Loan
Commitments**





The
Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. They involve, to varying degrees, elements of credit risk and
interest rate risk in excess of the amount recognized in the balance sheets. The
majority of all commitments to extend credit and standby letters of credit are
variable rate instruments.





The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments as it does for
on-balance-sheet instruments. A
summary of the Company's commitments is as follows (dollars in
thousands):





**December
      31,****2004**
    
    
    **2003**Commitments
      to extend credit
    
    **$**
    **22,835**
    
    $
    13,838Financial
      standby letters of credit
    
    
    **651**
    
    
    491**$**
    **23,486**
    
    $
    14,329





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management’s credit evaluation of
the party. Collateral held varies, but may include accounts receivable, crops,
livestock, inventory, property and equipment, residential real estate and
income-producing commercial properties.





F-20








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
11.** **COMMITMENTS
AND CONTINGENCIES (Continued)**





**Loan
Commitments (Continued)**





Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. Collateral held varies as specified above and
is required in instances which the Company deems necessary.





At
December 31, 2004 and 2003, the carrying amount of liabilities related to the
Company’s obligation to perform under standby letters of credit was
insignificant. The Company has not been required to perform on any standby
letters of credit, and the Company has not incurred any losses on financial
standby letters of credit for the years ended December 31, 2004 and
2003.





At
December 31, 2004 and 2003, the Company had guaranteed the debt of certain
customers’ liabilities at another financial institution totaling $35,000. These
guarantees represent the available credit line of those certain Bank customers.
The Company has not been required to perform on any of these guarantees for the
years ended December 31, 2004 and 2003. Credit card commitments are
unsecured.





**Contingencies**





In the
normal course of business, the Company is involved in various legal proceedings.
In the opinion of management, any liability resulting from such proceedings
would not have a material adverse effect on the Company's financial
statements.








**NOTE
12.** **CONCENTRATIONS
OF CREDIT**





The
Company originates primarily commercial, commercial real estate, residential
real estate, construction and development and consumer loans to customers in
Bulloch and surrounding counties. The ability of the majority of the Company’s
customers to honor their contractual obligations is dependent on the local
economy.





81.2%
percent of the Company's loan portfolio is concentrated in loans secured by real
estate primarily in the Company's market area. Accordingly, the ultimate
collectibility of the Company's loan portfolio is susceptible to changes in
market conditions in the Company's market areas. The other significant
concentrations of credit by type of loan are set forth in Note 3.





The
Company, as a matter of policy, does not extend credit to any single borrower or
group of related borrowers in excess of 25% of the Bank’s statutory capital, or
approximately $2,000,000.





The Bank
has a concentration of funds on deposit at The Bankers Bank at December 31, 2004
and 2003 as follows (dollars in thousands).





F-21








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
12.** **CONCENTRATIONS
OF CREDIT (Continued)**





Concentration
over insured limits (dollars in thousands):





**2004**
    ****
    **2003**Noninterest-bearing
      accounts
    
    $
    1,270
    
    $
    3,677Federal
      funds sold
    
    
    **9,267**
    
    
    58$
    10,537
    
    $
    3,735








**NOTE
13.** **REGULATORY
MATTERS**





The Bank
is subject to certain restrictions on the amount of dividends that may be
declared without prior regulatory approval. At December 31, 2004, approximately
$994,000 of retained earnings were available for dividend declaration without
regulatory approval.





The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company’s and the Bank’s assets, liabilities and
certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.





Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, as defined and of Tier I capital to average
assets. Management believes, as of December 31, 2004, the Company and the Bank
met all capital adequacy requirements to which they are subject.





As of
December 31, 2004, the most recent notification from the Federal Deposit
Insurance Corporation categorized Farmers & Merchants Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
following table. There are no conditions or events since that notification that
management believes have changed the Bank’s categories. Prompt corrective action
provisions are not applicable to bank holding companies.








F-22








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
13.**  **REGULATORY
MATTERS (Continued)**





The
Company and Bank’s actual capital amounts and ratios are presented in the
following table.





**To
      Be Well****For
      Capital**
    
    **Capitalized
      Under****Adequacy**
    
    **Prompt
      Corrective****Actual**
    
    **Purposes**
    
    **Action
      Provisions****Amount**
    
    **Ratio**
    
    **Amount**
    
    **Ratio**
    
    **Amount**
    
    **Ratio****(Dollars
      in Thousands)****As
      of December 31, 2004:**
    
    
    
    
    
    
    
    
    ******Total
      Capital to Risk Weighted Assets:****Consolidated**
    **$**
    **14,962**
    
    **11.3%**
    
    **$**
    **10,620**
    
    **8.0%**
    
    
    **N/A**
    
    **N/A****Farmers
      & Merchants Bank**
    **$**
    **14,530**
    
    **11.0%**
    
    **$**
    **10,594**
    
    **8.0%**
    
    **$**
    **13,243**
    
    **10.0%****Tier
      I Capital to Risk Weighted Assets:****Consolidated**
    **$**
    **13,298**
    
    **10.0%**
    
    **$**
    **5,310**
    
    **4.0%**
    
    
    **N/A**
    
    **N/A****Farmers
      & Merchants Bank**
    **$**
    **12,870**
    
    **9.7%**
    
    **$**
    **5,297**
    
    **4.0%**
    
    **$**
    **7,946**
    
    **6.0%****Tier
      I Capital to Average Assets:****Consolidated**
    **$**
    **13,298**
    
    **8.1%**
    
    **$**
    **6,565**
    
    **4.0%**
    
    
    **N/A**
    
    **N/A****Farmers
      & Merchants Bank**
    **$**
    **12,870**
    
    **7.8%**
    
    **$**
    **6,558**
    
    **4.0%**
    
    **$**
    **8,197**
    
    **5.0%**As
      of December 31, 2003:
    
    
    
    
    
    
    
    
    ****Total
      Capital to Risk Weighted Assets:Consolidated
    $
    12,878
    
    11.9%
    
    $
    8,690
    
    8.0%
    
    
    N/A
    
    N/AFarmers
      & Merchants Bank
    $
    12,806
    
    11.8%
    
    $
    8,685
    
    8.0%
    
    $
    10,856
    
    10.0%Tier
      I Capital to Risk Weighted Assets:Consolidated
    $
    11,516
    
    10.6%
    
    $
    4,345
    
    4.0%
    
    
    N/A
    
    N/AFarmers
      & Merchants Bank
    $
    11,444
    
    10.5%
    
    $
    4,342
    
    4.0%
    
    $
    6,514
    
    6.0%Tier
      I Capital to Average Assets:Consolidated
    $
    11,516
    
    8.2%
    
    $
    5,607
    
    4.0%
    
    
    N/A
    
    N/AFarmers
      & Merchants Bank
    $
    11,444
    
    8.2%
    
    $
    5,605
    
    4.0%
    
    $
    7,006
    
    5.0%








**NOTE
14.** **FAIR
VALUE OF FINANCIAL INSTRUMENTS**





The
fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company’s various financial
instruments. In cases where quoted market prices are not available, fair value
is based on discounted cash flows or other valuation techniques. These
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the instrument. SFAS
No. 107, *Disclosures
about Fair Value of Financial Instruments,* excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
may not necessarily represent the underlying fair value of the
Company.





F-23








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
14.** **FAIR
VALUE OF FINANCIAL INSTRUMENTS (Continued)**





The
following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:





**Cash,
Due From Banks, Interest-Bearing Deposits at Other Financial Institutions and
Federal Funds Sold:** The
carrying amount of cash, due from banks, interest-bearing deposits at other
financial institutions and federal funds sold approximates fair
value.





**Securities:** Fair
value of securities is based on available quoted market prices. The carrying
amount of equity securities with no readily determinable fair value approximates
fair value.





**Loans:** The
carrying amount of variable-rate loans that reprice frequently and have no
significant change in credit risk approximates fair value. The fair value of
fixed-rate loans is estimated based on discounted contractual cash flows, using
interest rates currently being offered for loans with similar terms to borrowers
with similar credit quality. The fair value of impaired loans is estimated based
on discounted contractual cash flows or underlying collateral values, where
applicable.





**Deposits:** The
carrying amount of demand deposits, savings deposits, and variable-rate
certificates of deposit approximates fair value. The fair value of
fixed- rate certificates of deposit is estimated based on discounted contractual cash flows
using interest rates currently being offered for certificates of similar
maturities.





**Other
Borrowings:** The
carrying amount of variable rate borrowings approximate fair value. **** The fair
value of fixed rate other borrowings are estimated based on discounted
contractual cash flows using the current incremental borrowing rates for similar
type borrowing arrangements.





**Accrued
Interest:** The
carrying amount of accrued interest approximates their fair value.





**Off-Balance-Sheet** **Instruments:** The
carrying amount of commitments to extend credit and standby letters of credit
approximates fair value. The carrying amount of the off-balance-sheet financial instruments is based on fees charged to enter into such agreements.





The
carrying amount and estimated fair value of the Company's financial instruments
were as follows:





**December
      31, 2004**
    
    **December
      31, 2003****Carrying**
      **Amount**
    
    **Fair**
      **Value**
    
    **Carrying**
      **Amount**
    
    **Fair**
      **Value****(Dollars
      in Thousands)**Financial
      assets:Cash,
      due from banks, interest-bearing
      deposits at other financialinstitutions
      andfederalfunds sold
    **$**
    **12,535**
    
    **$**
    **12,535**
    
    $
    5,306
    
    $
    5,306Securities
    
    **12,903**
    
    
    **12,903**
    
    
    15,725
    
    
    15,725Loans
    
    **136,219**
    
    
    **136,305**
    
    
    115,076
    
    
    118,700Accrued
      interest receivable
    
    **1,229**
    
    
    **1,229**
    
    
    1,038
    
    
    1,038Financial
      liabilities:Deposits
    
    **141,409**
    
    
    **141,349**
    
    
    127,822
    
    
    128,417Other
      borrowings
    
    **11,423**
    
    
    **11,412**
    
    
    442
    
    
    483Accrued
      interest payable
    
    **289**
    
    
    **289**
    
    
    188
    
    
    188





F-24








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
15.** **PARENT
COMPANY FINANCIAL INFORMATION**





The
following information presents the condensed balance sheets as of December 31,
2004 and 2003 and statements of income and cash flows of FMB Equibanc, Inc. for
the periods ended December 31, 2004 and 2003 (dollars in thousands).





**CONDENSED
      BALANCE SHEETS****2004**
    ****
    ****
    **2003****Assets**Cash
    **$**
    **33**
    
    $
    37Investment
      in subsidiaries
    
    **13,263**
    
    
    11,652Other
      assets
    
    **76**
    
    
    60Total
      assets
    **$**
    **13,372**
    
    $
    11,749**Accounts
      payable**
    **$**
    **2**
    
    $
    25**Stockholders’
      equity**
    
    **13,370**
    
    
    11,724Total
      liabilities and stockholders’ equity
    **$**
    **13,372**
    
    $
    11,749








**CONDENSED
      STATEMENTS OF INCOME****2004**
    
    **2003****Income,**dividends
      from subsidiaries
    **$**
    **563**
    
    $
    266**Expenses,
      other**
    
    **42**
    
    
    145Income
      before income tax benefit and equityin
      undistributed income of subsidiaries
    
    **521**
    
    
    121**Income
      tax benefit**
    
    **16**
    
    
    60Income
      before equity in undistributed incomeof
      subsidiaries
    
    **537**
    
    
    181**Equity
      in undistributed income of subsidiaries**
    
    **1,426**
    
    
    1,480Net
      income
    **$**
    **1,963**
    
    $
    1,661








F-25








**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
15.** **PARENT
COMPANY FINANCIAL INFORMATION (Continued)**





**CONDENSED
      STATEMENTS OF CASH FLOWS**




**2004**
    
    **2003****OPERATING
      ACTIVITIES**Net
      income
    
    $
    1,963
    
    $
    1,661Adjustments
      to reconcile net income to netcash
      provided by operating activities:Undistributed
      income of subsidiaries
    
    
    **(1,426**
    **)**
    
    (1,480
    )Other
      operating activities
    
    
    **(38**
    **)**
    
    34Net
      cash provided by operating activities
    
    
    **499**
    
    
    215**INVESTING
      ACTIVITIES**Capital
      injection in non-bank subsidiary
    
    
    **(322**
    **)**
    
    -Net
      cash used in investing activities
    
    
    **(322**
    **)**
    
    -**FINANCING
      ACTIVITIES**Dividends
      paid
    
    
    **(181**
    **)**
    
    (181
    )Net
      cash used in financing activities
    
    
    **(181**
    **)**
    
    (181
    )Net
      increase (decrease) in cash
    
    
    **(4**
    **)**
    
    34Cash
      at beginning of period
    
    
    **37**
    
    
    3Cash
      at end of year
    
    **$**
    **33**
    
    $
    37














F-26