##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 
 FORM 10-KSB (Mark One)  þ
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2004o
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from  to Commission File Number THE PB FINANCIAL SERVICES CORPORATION  Georgia
    
    58-2466560(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 9570 Medlock Bridge Road, Duluth, Georgia
    
    30097(Address of principal executive offices)
    
    (Zip Code)
 Issuers telephone number (770) 814-8100 Securities registered
pursuant to Section 12(b) of the Exchange Act: None Securities registered
pursuant to Section 12(g) of the Exchange Act: Common Stock, Par
Value $5 Per Share Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or Section
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 requirement for the past
90 days. Yes þ                     No o Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not 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. þ State issuers revenues for its most recent fiscal year. $18,801,245 Aggregate market value of the voting stock held by non-affiliates computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such stock, as of a
specified date within the past 60 days: There is no public trading market for the Companys common
stock. The aggregate market value of the Companys common stock held by non-affiliates is
approximately $27,090,975, based on the last sale of the Companys common stock known to
management, which occurred on December 23, 2004 at $18.25 per share. APPLICABLE ONLY TO CORPORATE REGISTRANTS State the number of shares outstanding of each of the issuers classes of common equity, as of the
last practicable date. 1,484,437 as of March 31, 2005 Transitional Small Business Disclosure format (check one): Yes o No þ DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 2004, are
incorporated by reference into Part II. Portions of the Proxy Statement for the Annual Meeting of
Shareholders, scheduled to be held May 17, 2005, are incorporated by reference into Part III.




---



TABLE OF CONTENTS PAGEPART I.ITEM 1. DESCRIPTION OF BUSINESS
    
    
    3ITEM 2. DESCRIPTION OF PROPERTY
    
    
    16-17ITEM 3. LEGAL PROCEEDINGS
    
    
    17ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    18PART II.ITEM 5. MARKET AND REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
    
    
    18ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    18-41ITEM 7. FINANCIAL STATEMENTS
    
    
    41ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    42ITEM 8A. CONTROLS AND PROCEDURES
    
    
    42PART III.ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
    
    
    42-43ITEM 10. EXECUTIVE COMPENSATION
    
    
    43ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    
    
    43ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    43ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
    
    
    43-44ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    44EX-31.1 CERTIFICATION OF THE CEOEX-31.2 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION
  2




---



##### Table of Contents



A WARNING ABOUT FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report on Form 10-KSB contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, which statements generally can
be identified by the use of forward-looking terminology such as may, will, expect,
estimate, anticipate, believe, target, plan, project, or continue or the negatives
hereof or other variations thereon or similar terminology and are subject to risks and
uncertainties, including, but not limited to, economic conditions, competition, interest rate
sensitivity and exposure to regulatory and legislative changes. The above factors, in some cases,
have affected, and in the future could affect, the Companys financial performance and could cause
actual results for fiscal 2003 and beyond to differ materially from those expressed or implied in
such forward-looking statements. The Company does not undertake to publicly update or revise its
forward-looking statements even if experience or future changes make it clear that any projected
results expressed or implied therein will not be realized. 
 PART I 
 ITEM 1. DESCRIPTION OF BUSINESS The Company In July 1999, The PB Financial Services Corporation (the Company) became the holding company for
The Peachtree Bank (the Bank) upon regulatory and shareholder approvals. The Company is the sole
shareholder of The Peachtree Bank. The holding company structure provides flexibility for
expansion of the Companys banking business through the possible acquisition of other financial
institutions and the provision of additional banking-related services that a traditional commercial
bank may not provide under present laws. In addition, the holding company structure makes it
easier to raise capital for the Bank. For example, banking regulations require the Bank to
maintain a minimum ratio of capital to assets. In the event that the Banks growth prevents it
from maintaining this minimum ratio, the Company may borrow funds, subject to capital adequacy
guidelines of the Federal Reserve, and contribute them to the capital of the Bank and otherwise
raise capital in a manner unavailable to the Bank under the existing banking regulations. The Company has no present plans to acquire any additional operating subsidiaries. The Company
may, however, make additional acquisitions in the future in the event that the acquisitions are
deemed to be in the best interests of the Company and its shareholders. Any future acquisitions
would be subject to certain regulatory approvals and requirements. See Business  Bank Holding
Company Regulation. The Bank General In January 1998, the Georgia Department of Banking and Finance and the FDIC granted final approval
to the organizers of The Peachtree Bank to organize the Bank as a state-chartered commercial bank
and for FDIC insurance of the Banks deposits. The Bank began its banking operations on October 5,
1998. During the fourth quarter of 2002, the Bank became a member of 3




---



##### Table of Contents



the Federal Reserve System and consequently, the Federal Reserve replaced the FDIC as the Banks
primary federal regulator. The Bank is a full-service commercial bank, specializing in the banking needs of individuals and
small-to medium-sized businesses and professional affiliations. The Bank offers personal and
business checking accounts, money market accounts, interest-bearing accounts, savings accounts, and
various types of certificates of deposit. The Bank also offers installment loans, real estate
loans, construction loans, second mortgage loans, commercial loans and home equity lines of credit.
It also acts as an issuing agent for U.S. Savings Bonds, travelers checks, and cashiers checks.
It offers ATM cards, debit cards, official bank checks, telephone banking, bank by mail, direct
deposit of payroll and social security checks and wire transfer facilities. The Bank has a
drive-in teller facility, and automatic teller machine offering 24-hour transactions, safe deposit
boxes and night depository facilities. Market Area and Competition The Bank competes with other commercial banks, savings and loan associations, credit unions, and
money market mutual funds operating in the Banks market area. Currently, there are several
financial institutions with branch locations or main offices in the Banks primary market area of
northeast Fulton County, western Gwinnett County, and northern Dekalb County, Georgia. Several of
the financial institutions located in the Banks market area are large regional banks, such as
Wachovia, SunTrust, SouthTrust, First Union and Bank of America. The larger regional banks
presence in the area is through branch offices, with many of the customer service functions, as
well as authority for loan approval, being located outside of the Banks primary market area. The
Bank competes with the larger regional banks as well as other financial institutions in its market
area by emphasizing its local management and ownership and by focusing on personal service to its
customers and strong community involvement. Deposits The bank offers a wide range of commercial and consumer deposit accounts, including checking
accounts, money market accounts, a variety of certificates of deposit, and IRA accounts. The Bank
attracts deposits with an aggressive marketing plan, a broad product line, and competitive products
and services. The Bank pays competitive interest rates on money market accounts and certificates
of deposit and has implemented a service charge fee schedule competitive with other financial
institutions in the Banks market area. The primary sources of deposits are northeast Fulton
County, Georgia, western Gwinnett County, Georgia and northern Dekalb County, Georgia residents and
businesses and their employees. Loan Portfolio General. The Bank engages in a broad range of lending activities, including real estate-related
loans, construction loans for residential and commercial properties, consumer/installment loans and
home equity lines of credit to individuals, and commercial loans with particular emphasis on
small-and medium sized businesses and professional concerns. The principal economic risk
associated with each category of loans is the creditworthiness of the borrower. General economic
conditions and the strength of the services and retail market segments affect borrower
creditworthiness. Risks associated with real estate loans also include fluctuations in the value
of 4




---



##### Table of Contents



real estate, new job creation trends, tenant vacancy rates and, in the case of commercial
borrowers, the quality of the borrowers management. In addition, a commercial borrowers ability
to properly evaluate changes in the supply and demand characteristics affecting its markets for
products and services, and to respond effectively to these changes, are significant factors in
determining risks associated with the creditworthiness of a commercial borrower. Other economic
factors affecting a commercial borrowers ability to repay a loan include interest, inflation,
employment rates, customers, suppliers and employees. Loan Categories. The Bank makes commercial real estate loans, construction and development loans,
residential real estate and consumer loans in and around its primary market area. The Bank also
makes commercial loans where the Bank takes a security interest in real estate out of an abundance
of caution, but not as the principal collateral for the loan. Commercial Real Estate Loans. Commercial real estate loan terms are generally limited to five
years or less, although payments may be structured on a longer amortization basis. Interest rates
may be fixed or adjustable, although rates generally will not be fixed for a period exceeding 60
months. The Bank generally charges an origination fee on this type of loan. Credit risk on
commercial real estate loans is managed by: 1) emphasizing loans on owner-occupied office and
retail buildings; 2) limiting the ratio of the principal amount of the loan to the value of the
collateral, as established by an independent appraisal, to generally no more than 80%, and 3)
requiring that the net projected cash flow available for debt service comfortably exceeds the debt
service requirement. In addition, the Bank may require personal guarantees from the property owners supported by the
Banks review of the 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 tries to limit its risk by
analyzing borrowers cash flow and collateral value on an ongoing basis. 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, the loan is considered to be made 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 made on a speculative basis. Construction and development loans made on a
pre-sold basis are generally made with a term of nine months and interest is paid monthly.
Typically the ratio of the principal amount of the loan to the discounted cash flow value of the
collateral, as established by independent appraisal, generally does not exceed 75%. Speculative
loans are based on the borrowers financial strength and cash flow position. The ratio of the
principal amount of the loan to the discounted cash flow value of the collateral generally does not
exceed 75% on speculative loans. Loan proceeds are disbursed as the project is completed and only
after the project has been inspected by an experienced construction lender or board approved
appraiser. Risks associated with construction loans include fluctuations in the value of real
estate and new job creation trends. Commercial Loans.The Bank makes commercial loans to small-and medium-sized businesses and
professional concerns. The terms of these loans vary by their purpose and underlying collateral.
The Bank typically makes equipment loans for a term of seven years or less at fixed or variable
rates, with the loan being fully amortized over the term. Equipment loans are generally 5




---



##### Table of Contents



secured by the equipment, and normally the ratio of the loan amount to the value of the financed
equipment (or other collateral) is 75% or less. Loans to support working capital typically have
terms of one year or less and usually are secured by accounts receivable, inventory and/or personal
guarantees of the principals of the business. For loans secured by accounts receivable or
inventory, the 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, its ability to properly evaluate changes in
the supply and demand characteristics affecting its markets for products and services, and its
ability to respond effectively to such changes are significant factors in a commercial borrowers
continued creditworthiness. Consumer Loans. The Bank makes a variety of loans to individuals for personal, family and
household purposes, including secured and unsecured lines of credit. Consumer loan repayments
follow standard banking practices for repayment considering local area market conditions and
competition. Because depreciable assets such as boats, cars and trailers secure many consumer
loans, the Bank amortizes these loans over the useful life of the asset. The loan officer reviews
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. Investments Company invests primarily in obligations of the United States, corporate bonds, state and county
municipals, Federal Home Loan Bank stock and Federal Reserve Bank stock. The Company also engages
in Federal funds transactions with its principal correspondent banks and 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. Asset/Liability Management The Banks objective is to manage its assets and liabilities to provide a satisfactory and
consistent level of profitability within the framework of established cash, loan, investment,
borrowing, and capital policies. Certain Bank officers are responsible for developing and
monitoring policies and procedures that ensure acceptable composition of the asset/liability mix.
Managements overall philosophy is to support asset growth primarily through the growth of core
deposits, which include deposits of all categories made by individuals, partnerships, and
corporations. Management seeks to invest the largest portion of the Banks assets in commercial,
construction, and consumer loans. The Banks asset/liability mix is monitored daily, and a report reflecting interest-sensitive
assets and interest-sensitive liabilities is prepared and presented to the Banks Board of
Directors monthly. The objective of this regular review is to control interest-sensitive assets
and liabilities so as to minimize the impact of substantial movements in interest rates on the
Banks earnings. 6




---



##### Table of Contents



Employees At December 31, 2004, the Company employed 61 full time employees and 4 part-time employees through
its subsidiary, the Bank. The Company considers its relationship with its employees to be
excellent. SUPERVISION 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 are generally intended to protect depositors and not shareholders. The following discussion
describes the material elements of the regulatory framework that applies to us. The Company Since the Company owns all of the capital stock of the Bank, it is a bank holding company under the
federal Bank Holding Company Act of 1956. 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. Acquisitions of Banks.The Bank Holding Company Act requires every bank holding company to obtain
the Federal Reserve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. Additionally, the Bank Holding Company Act provides that the Federal Reserve 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 anticompetitive 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 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s
consideration of financial resources generally focuses on capital adequacy, which is discussed
below. Under the Bank Holding Company Act, if adequately capitalized and adequately managed, the Company
or any other bank holding company located in Georgia may purchase a bank located outside of
Georgia. Conversely, an adequately capitalized and adequately managed bank holding company located
outside of Georgia may purchase a bank located inside Georgia. In each case, however, restrictions
may be placed on the acquisition of a bank that has only been in existence for a limited amount of
time or will result in specified concentrations of deposits. For example, Georgia law prohibits a
bank holding company from acquiring control of a financial institution 7




---



##### Table of Contents



until the target financial institution has been incorporated for three years. Because the Bank has
been incorporated for more than three years, this limitation does not apply to the Bank or the
Company. Change in Bank Control.Subject to various exceptions, the Bank Holding Company Act and the Change
in Bank Control Act, together with related regulations, require Federal Reserve approval prior to
any person or company acquiring control of a bank holding company. Control is conclusively
presumed to exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Control is rebuttably presumed to exist if a person or
company acquires 10% or more, but less than 25%, of any class of voting securities and either:  
    the bank holding company has registered securities under Section 12 of the
Securities Act of 1934; or  
    no other person owns a greater percentage of that class of voting securities
immediately after the transaction. Our common stock is registered under the Securities Exchange Act of 1934. The regulations provide
a procedure for challenge of the rebuttable control presumption. Permitted Activities. A bank holding company is generally permitted under the Bank Holding Company
Act to engage in or acquire direct or indirect control of more than 5% of the voting shares of any
company engaged in the following activities:  
    Banking or managing or controlling banks; and  
    Any activity that the Federal Reserve determines to be so closely related to banking
as to be a proper incident to the business of banking. Activities that the Federal Reserve has found to be so closely related to banking as to be a proper
incident to the business of banking include:  
    Factoring accounts receivable;
    Making, acquiring, brokering or servicing loans and usual related activities;
    Leasing personal or real property;
    Operating a non-bank depository institution, such as a savings association;
    Trust company functions;
    Financial and investment advisory activities;
    Conducting discount securities brokerage activities;
    Underwriting and dealing in government obligations and money market instruments; 8




---



##### Table of Contents




    Providing specified management consulting and counseling activities;
    Performing selected data processing services and support services;
    Acting as agent or broker in selling credit life insurance and other types of
insurance in connection with credit transactions; and
    Performing selected insurance underwriting activities. Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to
terminate any of these activities or to terminate its ownership or control of any subsidiary when
it has reasonable cause to believe that the bank holding companys continued ownership, activity or
control constitutes a serious risk to the financial safety, soundness, or stability of it or any of
its bank subsidiaries. In addition to the permissible bank holding company activities listed above, a bank holding company
may qualify and elect to become a financial holding company, permitting the bank holding company to
engage in activities that are financial in nature or incidental or complementary to financial
activity. The Bank Holding Company Act expressly lists the following activities as financial in
nature:  
    Lending, trust and other banking activities;
    Insuring, guaranteeing, or indemnifying against loss or harm, or providing and
issuing annuities, and acting as principal, agent, or broker for these purposes, in any
state;
    Providing financial, investment, or advisory services;
    Issuing or selling instruments representing interests in pools of assets permissible
for a bank to hold directly;
    Underwriting, dealing in or making a market in securities;
    Other activities that the Federal Reserve may determine to be so closely related to
banking or managing or controlling banks as to be a proper incident to managing or
controlling banks;
    Foreign activities permitted outside of the United States if the Federal Reserve has
determined them to be usual in connection with banking operations abroad;
    Merchant banking through securities or insurance affiliates; and
    Insurance company portfolio investments. To qualify to become a financial holding company, the Bank and any other depository institution
subsidiary of the Company must be well capitalized and well managed and must have a Community
Reinvestment Act rating of at least satisfactory. Additionally, the Company must 9




---



##### Table of Contents



file an election with the Federal Reserve to become a financial holding company and must provide
the Federal Reserve with 30 days written notice prior to engaging in a permitted financial
activity. While the Company meets the qualification standards applicable to financial holding
companies, the Company has not elected to and has no plans to elect to become a financial holding
company at this time. Support of Subsidiary Institutions.Under Federal Reserve 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 policy, the Company might not
be inclined 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 unlikely
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. The Bank Since the Bank is a commercial bank chartered under the laws of the State of Georgia and is a
Federal Reserve member bank, it is primarily subject to the supervision, examination and reporting
requirements of the Georgia Department of Banking and Finance and the Federal Reserve Bank of
Atlanta. The Federal Reserve and the Georgia Department of Banking and Finance 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.
Additionally, the Banks deposits are insured by the FDIC to the maximum extent provided by law.
The Bank is also subject to numerous state and federal statutes and regulations that affect its
business, activities and operations. Branching.Under current Georgia law, the Bank may open branch offices throughout Georgia with the
prior approval of the Georgia Department of Banking and Finance. In addition, with prior
regulatory approval, the Bank may acquire branches of existing banks located in Georgia. The Bank
and any other national or state-chartered bank generally may branch across state lines by merging
with banks in other states if allowed by the applicable states laws. Georgia law, with limited
exceptions, currently permits branching across state lines through interstate mergers. Under the Federal Deposit Insurance Act, states may opt-in and allow out-of-state banks to branch
into their state by establishing a new start-up branch in the state. Currently, Georgia has not
opted-in to this provision. Therefore, interstate merger is the only method through which a bank
located outside of Georgia may branch into Georgia. This provides a limited barrier of entry into
the Georgia banking market, which protects us from an important segment of potential competition.
However, because Georgia has elected not to opt-in, our ability to establish a new start-up branch
in another state may be limited. Many states that have elected to opt-in have done so on a
reciprocal basis, meaning that an out-of-state bank may establish a new start-up branch only if
their home state has also elected to opt-in. Consequently, until Georgia changes its election, the
only way we will be able to branch into states that have elected to opt-in on a reciprocal basis
will be through interstate merger. 10




---



##### Table of Contents



Prompt Corrective Action.The Federal Deposit Insurance Corporation Improvement Act of 1991
establishes a system of prompt corrective action to resolve the problems of undercapitalized
financial institutions. Under this system, the federal banking regulators have established five
capital categories, well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, in which all institutions are placed. The federal
banking agencies have also specified by regulation the relevant capital levels for each of the
other categories. At December 31, 2004, we qualified for the well-capitalized category. Federal banking regulators are required to take some mandatory supervisory actions and are
authorized to take other discretionary actions with respect to institutions in the three
undercapitalized categories. The severity of the action depends upon the capital category in which
the institution is placed. Generally, subject to a narrow exception, the banking regulator must
appoint a receiver or conservator for an institution that is critically undercapitalized. An institution in any of the undercapitalized categories is required to submit an acceptable
capital restoration plan to its appropriate federal banking agency. A bank holding company must
guarantee that a subsidiary depository institution meets its capital restoration plan, subject to
various limitations. The controlling holding companys obligation to fund a capital restoration
plan is limited to the lesser of 5% of an undercapitalized subsidiarys assets at the time it
became undercapitalized or the amount required to meet regulatory capital requirements. An
undercapitalized institution is also generally prohibited from increasing its average total assets,
making acquisitions, establishing any branches or engaging in any new line of business, except
under an accepted capital restoration plan or with FDIC approval. The regulations also establish
procedures for downgrading an institution to a lower capital category based on supervisory factors
other than capital. FDIC Insurance Assessments.The FDIC has adopted a risk-based assessment system for insured
depository institutions that takes into account the risks attributable to different categories and
concentrations of assets and liabilities. The system assigns an institution to one of three
capital categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized.
These three categories are substantially similar to the prompt corrective action categories
described above, with the undercapitalized category including institutions that are
undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt
corrective action purposes. The FDIC also assigns an institution to one of three supervisory
subgroups based on a supervisory evaluation that the institutions primary federal regulator
provides to the FDIC and information that the FDIC determines to be relevant to the institutions
financial condition and the risk posed to the deposit insurance funds. Assessments range from 0 to
27 cents per $100 of deposits, depending on the institutions capital group and supervisory
subgroup. In addition, the FDIC imposes assessments to help pay off the $780 million in annual
interest payments on the $8 billion Financing Corporation bonds issued in the late 1980s as part of
the government rescue of the thrift industry. This assessment rate is adjusted annual and is set
at 1.44 cents per $100 of deposits for the first quarter of 2005. The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in
unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, rule, order or condition imposed by the FDIC. 11




---



##### Table of Contents



Community Reinvestment Act.The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their respective jurisdictions, the Federal Reserve
or the FDIC shall evaluate the record of each financial institution in meeting the credit needs of
its local community, including low and moderate-income neighborhoods. These facts 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 and the Company as a financial holding company. Additionally, we must publicly disclose
the terms of various Community Reinvestment Act-related agreements. Other Regulations.Interest and other charges collected or contracted for by the Bank are subject
to state usury laws and federal laws concerning interest rates. For example, under the Soldiers
and Sailors Civil Relief Act of 1940, a lender is generally prohibited from charging an annual
interest rate of more than 6% on any obligation for which the borrower is a person on active duty
with the United States Military. The Banks loan operations are also subject to federal laws
applicable to credit transactions, such as:  
    The federal Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
    The Home Mortgage Disclosure Act of 1975, requiring financial institutions to
provide information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing needs of
the community it serves;
    The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race,
creed or other prohibited factors in extending credit;
    The Fair Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting agencies;
    The Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies;
    The Soldiers and Sailors Relief Act of 1940, governing the repayment terms of, and
property rights underlying, secured obligations of persons in military service; and
    The rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal laws. In addition to the federal and state laws noted above, the Georgia Fair Lending Act (GAFLA)
imposes restrictions and procedural requirements on most mortgage loans made in Georgia, including
home equity loans and lines of credit. On August 5, 2003, the Office of the Comptroller of the
Currency issued a formal opinion stating that the entirety of GAFLA is preempted by federal law for
national banks and their operating subsidiaries. GAFLA contains a provision that preempts GAFLA as
to state banks in the event that the Office of the Comptroller of the Currency preempts GAFLA as to
national banks. Therefore, the Bank is exempt from the requirements of GAFLA. 12




---



##### Table of Contents



The deposit operations of the Bank are subject to:  
    The Right to Financial Privacy Act, which imposes a duty to maintain confidentiality
of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records; and  
    The Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to
implement that act, which govern automatic deposits to and withdrawals from deposit
accounts and customers rights and liabilities arising from the use of automated teller
machines and other electronic banking services. Capital Adequacy The Company and the Bank are required to comply with the capital adequacy standards established by
the Federal Reserve, in the case of the Company, and the FDIC and Georgia Department of Banking and
Finance, in the case of the Bank. The Federal Reserve 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 for bank holding companies. The risk-based capital standards 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 minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital
consists of two components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists
of common shareholders equity, minority interests in the equity accounts of consolidated
subsidiaries, qualifying noncumulative perpetual preferred stock, and a limited amount of
qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible
assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally
consists of subordinated debt, other preferred stock and hybrid capital and a limited amount of
loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. At
December 31, 2004, the Banks ratio of total capital to risk-weighted assets was 10.24% and the
Banks ratio of Tier 1 Capital to risk-weighted assets was 9.27%. In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding
companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less
goodwill and other specified intangible assets, of 3% for bank holding companies that meet
specified criteria, including having the highest regulatory rating and implementing the Federal
Reserves risk-based capital measure for market risk. All other bank holding companies generally
are required to maintain a leverage ratio of at least 4%. At December 31, 2004, our leverage ratio
was 8.91%. The guidelines also provide that bank holding companies experiencing internal growth or
making acquisitions will be expected to maintain strong capital positions substantially above the
minimum supervisory levels without reliance on intangible assets. The 13




---



##### Table of Contents



Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating
proposals for expansion or new activities. The Bank and the Company are also both subject to leverage capital guidelines issued by the Georgia
Department of Banking and Finance, which provide for minimum ratios of Tier 1 capital to total
assets. 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. See
Prompt Corrective Action. Payment of Dividends The Company is a legal entity separate and distinct from the Bank. The principal source of the
Companys cash flow, including cash flow to pay dividends to its shareholders, is dividends that
the Bank pays to it. Statutory and regulatory limitations apply to the Banks payment of dividends
to the Company as well as to the Companys payment of dividends to its shareholders. 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 cease and desist from its 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. Under the Federal Deposit Insurance Corporation
Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause
it to become undercapitalized or if it already is undercapitalized. Moreover, the 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. See Prompt Corrective Action
above. The Georgia Department of Banking and Finance also regulates the Banks dividend payments and must
approve dividend payments that would exceed 50% of the Banks net income for the prior year. Our
payment of dividends may also be affected or limited by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines. Restrictions on Transactions with Affiliates The Company and the Bank are subject to the provisions of Section 23A of the Federal Reserve Act.
Section 23A places limits on the amount of:  
    loans or extensions of credit to affiliates;
    investment in affiliates;
    the purchase of assets from affiliates, except for real and personal property
exempted by the Federal Reserve; 14




---



##### Table of Contents




    loans or extensions of credit to third parties collateralized by the
securities or obligations of affiliates; and
    any guarantee, acceptance or letter of credit issued on behalf of an affiliate. The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of
a banks capital and surplus and, as to all affiliates combined, to 20% of a banks capital and
surplus. In addition to the limitation on the amount of these transactions, each of the above
transactions must also meet specified collateral requirements. The Bank must also comply with
other provisions designed to avoid the taking of low-quality assets. The Company and the Bank are also subject to the provisions of Section 23B of the Federal Reserve
Act which, among other things, prohibit an institution from engaging in the above transactions with
affiliates unless the transactions are on terms substantially the same, or at least as favorable to
the institution or its subsidiaries, as those prevailing at the time for comparable transactions
with nonaffiliated companies. The Bank is also subject to restrictions on extensions of credit to its executive officers,
directors, principal shareholders and their related interests. These extensions of credit (1) 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 (2) must not involve
more than the normal risk of repayment or present other unfavorable features. Privacy Financial institutions are required to disclose their policies for collecting and protecting
confidential information. Customers generally may prevent 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. Additionally,
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. Consumer Credit Reporting On December 4, 2003, the President signed the Fair and Accurate Credit Transactions Act (the FACT
Act), amending the federal Fair Credit Reporting Act (the FCRA). These amendments to the FCRA (the
FCRA Amendments) became effective in 2004. The FCRA Amendments include, among other things:  
    new requirements for financial institutions to develop policies and procedures to
identify potential identity theft and, upon the request of a consumer, place a fraud
alert in the consumers credit file stating that the consumer may be the victim of
identity theft or other fraud;
    new consumer notice requirements for lenders that use consumer report information
in connection with risk-based credit pricing programs; 15




---



##### Table of Contents




    for entities that furnish information to consumer reporting agencies (which would
include the Bank), new requirements to implement procedures and policies regarding the
accuracy and integrity of the furnished information and regarding the correction of
previously furnished information that is later determined to be inaccurate; and
    a new requirement for mortgage lenders to disclose credit scores to consumers. The FCRA Amendments also will prohibit a business that receives consumer information from an
affiliate from using that information for marketing purposes unless the consumer is first provided
a notice and an opportunity to direct the business not to use the information for such marketing
purposes (the opt-out), subject to certain exceptions. Anti-Terrorism and Money Laundering Legislation The Bank is subject to the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism (the USA PATRIOT Act), the Bank Secrecy Act, and
rules and regulations of the Office of Foreign Assets Control (the OFAC). These statutes and
related rules and regulations impose requirements and limitations on specified financial
transactions and account relationships, intended to guard against money laundering and terrorism
financing. The Bank has established a customer identification program pursuant to Section 326 of
the USA PATRIOT Act and the Bank Secrecy Act, and otherwise have implemented policies and
procedures to comply with the foregoing rules. Proposed 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 financial institutions
operating or doing business in the United States. We cannot predict whether or in what form any
proposed regulation or statute will be
adopted or the extent to which our business may be affected by any new regulation or statute. Effect of Governmental Monetary Polices Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of
the United States government and its agencies. The Federal Reserve Bank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. We cannot predict the
nature or impact of future changes in monetary and fiscal policies. 
 ITEM 2. DESCRIPTION OF PROPERTY The main office of The Peachtree Bank is located on a 1.2-acre tract of land in northeast Fulton
County, Georgia, which was purchased at a price of approximately $610,000. The Banks 16




---



##### Table of Contents



operations
are conducted through its main office, which is located at this site. The Bank operates its
business in a building of approximately 16,000 square feet in size which was constructed and
furnished at cost, including all furnishings, site preparation, landscaping, paving, security
equipment and automatic teller machine, of approximately $3,297,000. Currently, the Bank utilizes
approximately 11,400 square feet of the space in the building. Additional space over and above
that required to operate the Bank is leased and generates lease income for the Bank. The Bank will
continue to lease this space until such time as the Bank requires use of the space. The building
is of brick construction and has six inside teller windows, four drive-in lanes and one drive-up
ATM. The Bank also leases and operates three full-service banking offices and one limited service
banking offices. (1) The Peachtree Bank of Dunwoody The full service banking office is located at 1725 Mount Vernon Road, Dunwoody, GA 30338 in
northern Dekalb County, Georgia and is 3,037 square feet. The lease expense is approximately
$4,000 per month, increasing 3% each year of the lease term. The lease expires on May 31, 2011. (2) The Peachtree Bank of Gwinnett The full service banking office is located at 185 Gwinnett Drive, Lawrenceville, GA 30045 in
western Gwinnett County, Georgia and is 5,200 square feet. The lease expense is approximately
$5,200 per month, increasing 4% each year of the lease term. The lease expires on June 30, 2008. (3) The Peachtree Bank of North Fulton The full service banking office is located at 695 Mansell Road, Roswell, GA 30076 in northwestern
Fulton County, Georgia. The space is approximately 5,600 square feet and the lease expense is
$5,800 per month, increasing 3% per each year of the lease term. The lease expires on October 30,
2013. (4) The Peachtree Bank of Forsyth The limited service loan production office is located at 2450 Atlanta Highway Suite 500, Cumming,
GA 30040 in south Forsyth County, Georgia. The space is approximately 2,300 square feet and the
lease expense is $2,000 per month, increasing 5% per each year of the lease term. The lease
expires on July 15, 2006. Other than normal real estate commercial lending activities of the Bank, the Company generally does
not invest in real estate, interests in real estate, real estate mortgages, or securities of or
interests in persons primarily engaged in real estate activities. 
 ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company is a party or of which any of
its properties is subject; nor are there material proceedings known to the Company to be 17




---



##### Table of Contents



contemplated by any governmental authority; nor are there material proceedings known to the
Company, pending or contemplated, in which any director, officer, or affiliate or any principal
security holder of the Company or any associate of any of the foregoing, is a party or has an
interest adverse to the Company. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Companys common stock is not traded on an established trading market. As a result, sales
prices known to the Company do not necessarily reflect the price that would be paid for the common
stock in an active market. A Fairness Opinion was conducted in conjunction with the private
placement which began in the third quarter of 2003, valuing the prices of The PB Financial Services
Corporation common stock at $18.25 per share. The sales price of all stock sales since this date
have been $18.25 per share. As of March 30, 2005, the number of holders of record of the Companys
common stock was 578. It is the policy of the Board of Directors of the Company to reinvest earnings for such period of
time as is necessary to ensure the success of the operations of the Company. There are no current
plans to initiate payment of cash dividends, and future dividend policy will depend on the
Companys earnings, capital requirements, financial condition and other factors considered relevant
by the Board of Directors. The Company declared no dividends in 2004 and 2003. In 2003, the Company issued 542,261 unregistered shares of common stock. Beginning on September
30, 2003, the Company sold shares of common stock, $5 par value, to its directors, accredited
investors and a limited number of unaccredited investors (who are employees of the Bank) through a
private placement. The price of the stock was $18.25 per share. The sale was completed as of
December 31, 2003. No discounts or commissions were paid in connection with the sale of the shares.
The sale of these shares of common stock qualified for the exemption from registration under Rule
506 of the Securities Act of 1933. There were no unregistered shares issued in 2004. 
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The following discussion of the Companys financial condition and results of operations should be
read in conjunction with the Companys financial statements, related notes and statistical
information included herein. The Banks main office is located in Duluth, Georgia in North Fulton County. The Bank currently has
three full service branch locations in the following areas: 18




---



##### Table of Contents




    Lawrenceville, Georgia operating under the trade name of The Peachtree Bank of
Gwinnett
    Dunwoody, Georgia operating under the trade name of The Peachtree Bank of Dunwoody
    Roswell, Georgia operating under the trade name of The Peachtree Bank of North Fulton In addition, the Bank has one loan production office in Cumming, Georgia. The Bank does have a Trust and Financial Services Division, however, at the March 2004, meeting of
the Board of Directors it was decided that the Bank would discontinue offering Trust services at
this time. Trust powers granted by the Georgia Department of Banking and Finance and FDIC still
remain but are currently inactive. The Company was formed on July 15, 1999, for the purpose of becoming a bank holding company by
acquiring and owning the capital stock of the Bank. Because the primary activity of the Company is
the ownership and operation of the Bank, the Companys financial performance has been determined
primarily by the operation of the Bank. Accordingly, the discussion below relates principally to
the operations of the Bank. Significant Accounting Policies The Companys accounting policies are fundamental to understanding managements discussion and
analysis of results of operations and financial condition. Many of the Companys accounting
policies require significant judgment regarding valuation of assets and liabilities and/or
significant interpretation of the specific accounting guidance. A description of the Companys
significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial
Statements in the Companys 2004 Annual Report to Shareholders. The following is a summary of the
more judgmental and complex accounting policies of the Company. Many of the Companys assets and liabilities are recorded using various valuation techniques that
require significant judgment as to recoverability. The collectibility of loans is reflected
through the Companys estimate of the allowance for loan losses. The Company performs periodic and
systematic detailed reviews of its lending portfolio to assess overall collectability. In
addition, certain assets and liabilities are reflected at their estimated fair value in the
consolidated financial statements. Such amounts are based on either quoted market prices or
estimated values derived by the Company utilizing dealer quotes or market comparisons . Use of Estimates Management of the Company has made a number of estimates and assumptions relating to reporting of
assets and liabilities and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates. 19




---



##### Table of Contents



RESULTS OF OPERATIONS The Companys results of operations are impacted by its ability to effectively manage interest
income and expense, to minimize loan and investment losses, to generate noninterest income and to
control noninterest expense. Because interest rates are determined by market forces and economic
conditions beyond the control of the Company, the ability to generate net interest income depends
on the Companys ability to maintain an adequate spread between the rate earned on interest-earning
assets and the rate paid on interest-bearing liabilities, such as deposits and borrowings. Thus,
net interest income is the key performance measure of income. Net interest income The Company reported net interest income of approximately $11,926,000 for the year ended December
31, 2004, compared to $7,467,000 as of December 31, 2003. The increase in interest income was
attributed to both the increase in volume of average earning assets and the increase in the yields
for average earning assets. Average interest-earning assets increased $94.0 million from 2003 and average total assets for 2004
grew $97.3. Both of these increases are due primarily to an increase of $92.9 million in average
loans outstanding. As of December 31, 2004 the yield on average earning assets was 5.85% compared
to 5.73% as of December 31, 2003. The increase in the yield on average-earning assets can be
attributed to the increases in the prime rate during the fourth quarter of 2004. Average interest-bearing liabilities increased by $72.6 million in 2004, while average
noninterest-bearing deposits grew by $14.7 million during the same period. The Banks cost of funds
for December 31, 2004 was 2.09% compared to 2.19% for the same period in 2003. Overall, the Companys net interest margin was 4.08% for the year ended December 31, 2004 compared
to 3.81% as of December 31, 2003. The Companys reported net interest income in 2003 was approximately $7,467,000 compared to
approximately $5,645,000 in 2002. This increase can be attributed a $56.2 million increase in
average interest-earning assets. Average assets for 2003 grew $58.4 million due primarily to a
year of strong loan demand in the Companys primary market area, the two branch locations opened in
mid-2001 also experienced large loan growth. The increase in interest income due to volume of
average earning assets was partially offset by the decreases in the yields on average earning
assets. As of December 31, 2003 the yield on average earning assets was 5.73% compared to 6.50%
for December 31, 2002. The decrease in the yield on average-earning assets can be attributed to
the reductions in the prime rate during 2003. The increases in average loans
outstanding and investments in 2002 were funded primarily with deposits. Average interest-bearing
liabilities increased by $46.2 million in 2003. The interest rate paid on average interest-bearing
liabilities was 2.19% in 2003 compared to 2.75% in 2002. 20




---



##### Table of Contents



Average balance sheets and net interest analysis The tables below show the year-end average balances for each category of interest-earning assets
and interest-bearing liabilities for the years ended December 31, 2004, 2003, and 2002 and the
average rate of interest earned or paid thereon. The data is presented using daily average
balances. 21




---



##### Table of Contents



December 31, 2004
(Dollars in Thousands) 
 Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    RateAverage AssetsInterest-earning assets:Taxable investment securities (1)
    
    $
    22,247
    
    
    $
    890
    
    
    
    4.00
    %Tax exempt investment securities (1) (2)
    
    
    2,004
    
    
    
    94
    
    
    
    4.69
    %Interest-bearing deposits with banks
    
    
    852
    
    
    
    15
    
    
    
    1.76
    %Federal funds sold
    
    
    7,536
    
    
    
    105
    
    
    
    1.39
    %Net loans (including loan fees) (3)
    
    
    260,434
    
    
    
    16,041
    
    
    
    6.16
    %Total interest-earning assets
    
    
    293,073
    
    
    
    17,145
    
    
    
    5.85
    %Allowance for loan losses
    
    
    (2,542
    )Cash and due from banks
    
    
    9,110Other assets
    
    
    9,830Total average assets
    
    $
    309,471Average Liabilities and Stockholders EquityInterest-bearing liabilities:Deposits:Interest-bearing demand
    
    $
    46,995
    
    
    $
    186
    
    
    
    0.40
    %Savings
    
    
    38,828
    
    
    
    834
    
    
    
    2.15
    %Time, $100,000 or more
    
    
    63,479
    
    
    
    1,754
    
    
    
    2.76
    %Other time
    
    
    75,040
    
    
    
    1,899
    
    
    
    2.53
    %Repurchase agreements
    
    
    19
    
    
    
    1
    
    
    
    5.26
    %Fed funds purchased
    
    
    558
    
    
    
    7
    
    
    
    1.25
    %Junior subordinated debentures
    
    
    4,120
    
    
    
    214
    
    
    
    5.19
    %Other borrowings
    
    
    18,228
    
    
    
    282
    
    
    
    1.55
    %Total interest-bearing liabilities
    
    
    247,267
    
    
    
    5,177
    
    
    
    2.09
    %Noninterest-bearing deposits
    
    
    38,036Other liabilities
    
    
    997Total average liabilities
    
    
    39,033Stockholders equity
    
    
    23,171Total average liabilities and
stockholders equity
    
    $
    309,471Excess of interest-bearing assets over
interest-bearing liabilities
    
    $
    45,806Ratio of interest-earning assets to
interest-bearing liabilities
    
    
    118.52
    %Net interest income
    
    
    
    
    
    $
    11,968Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.76
    %Net yield on average interest-earning assets
    
    
    
    
    
    
    
    
    
    
    4.08
    %
   (1)
    
    Average balance has been calculated based on amortized costs of investment securities.(2)
    
    Interest income on tax-exempt loans and securities is presented on a taxable-equivalent basis
basis, using a income tax rate of 38%. The taxable-equivalent amounts included in the above
table aggregated approximately $58,000 in 2004.(3)
    
    Interest earned on net loans includes $1,654,574 in loan fees. 22




---



##### Table of Contents



December 31, 2003
(Dollars in Thousands) 
 Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    RateAverage AssetsInterest-earning assets:Taxable investment securities (1)
    
    $
    15,672
    
    
    $
    584
    
    
    
    3.73
    %Tax exempt investment securities (1) (2)
    
    
    5,310
    
    
    
    297
    
    
    
    5.59
    %Interest-bearing deposits with banks
    
    
    790
    
    
    
    9
    
    
    
    1.14
    %Federal funds sold
    
    
    9,775
    
    
    
    100
    
    
    
    1.02
    %Net loans (including loan fees) (3)
    
    
    167,544
    
    
    
    10,417
    
    
    
    6.22
    %Total interest-earning assets
    
    
    199,091
    
    
    
    11,407
    
    
    
    5.73
    %Allowance for loan losses
    
    
    (1,614
    )Cash and due from banks
    
    
    6,370Other assets
    
    
    8,303Total average assets
    
    $
    212,150Average Liabilities and Stockholders EquityInterest-bearing liabilities:Deposits:Interest-bearing demand
    
    $
    42,165
    
    
    $
    259
    
    
    
    0.61
    %Savings
    
    
    15,514
    
    
    
    261
    
    
    
    1.68
    %Time, $100,000 or more
    
    
    47,768
    
    
    
    1,359
    
    
    
    2.85
    %Other time
    
    
    56,615
    
    
    
    1,587
    
    
    
    2.80
    %Repurchase agreements
    
    
    2,009
    
    
    
    16
    
    
    
    0.80
    %Fed funds purchased
    
    
    12
    
    
    
    
    
    
    
    0.00
    %Other borrowings
    
    
    6,500
    
    
    
    133
    
    
    
    2.05
    %Junior subordinated debentures
    
    
    4,120
    
    
    
    211
    
    
    
    5.12
    %Total interest-bearing liabilities
    
    
    174,703
    
    
    
    3,826
    
    
    
    2.19
    %Noninterest-bearing deposits
    
    
    23,288Other liabilities
    
    
    1,022Total average liabilities
    
    
    24,310Stockholders equity
    
    
    13,137Total average liabilities and
stockholders equity
    
    $
    212,150Excess of interest-bearing assets over
interest-bearing liabilities
    
    $
    24,388Ratio of interest-earning assets to
interest-bearing liabilities
    
    
    113.96
    %Net interest income
    
    
    
    
    
    $
    7,581Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.54
    %Net yield on average interest-earning assets
    
    
    
    
    
    
    
    
    
    
    3.81
    %
   (1)
    
    Average balance has been calculated based on amortized costs of investment securities.(2)
    
    Interest income on tax-exempt securities is presented on a taxable-equivalent basis
basis, using a income tax rate of 38%. The taxable-equivalent amounts included in the above
table aggregated approximately $101,000 in 2003.(3)
    
    Includes one non accrual loan with an approximate balance of $131,000 at December 31, 2003.
Interest earned on net loans includes $1,079,673 in loan fees. 23




---



##### Table of Contents



December 31, 2002
(Dollars in Thousands) 
 Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    RateAverage AssetsInterest-earning assets:Taxable investment securities (1)
    
    $
    12,123
    
    
    $
    659
    
    
    
    5.44
    %Tax exempt investment securities (1) (2)
    
    
    3,703
    
    
    
    225
    
    
    
    6.08
    %Interest-bearing deposits with banks
    
    
    322
    
    
    
    5
    
    
    
    1.55
    %Federal funds sold
    
    
    4,493
    
    
    
    76
    
    
    
    1.69
    %Net loans (including loan fees) (3)
    
    
    122,282
    
    
    
    8,321
    
    
    
    6.80
    %Total interest-earning assets
    
    
    142,923
    
    
    
    9,286
    
    
    
    6.50
    %Allowance for loan losses
    
    
    (1,172
    )Cash and due from banks
    
    
    4,834Other assets
    
    
    7,166Total average assets
    
    $
    153,751Average Liabilities and Stockholders EquityInterest-bearing liabilities:Deposits:Interest-bearing demand
    
    $
    32,735
    
    
    $
    346
    
    
    
    1.06
    %Savings
    
    
    3,313
    
    
    
    58
    
    
    
    1.75
    %Time, $100,000 or more
    
    
    46,781
    
    
    
    1,586
    
    
    
    3.39
    %Other time
    
    
    38,655
    
    
    
    1,392
    
    
    
    3.60
    %Repurchase agreements
    
    
    1,685
    
    
    
    29
    
    
    
    1.72
    %Fed funds purchased
    
    
    256
    
    
    
    6
    
    
    
    2.34
    %Other borrowings
    
    
    5,029
    
    
    
    132
    
    
    
    2.62
    %Junior subordinated debentures
    
    
    133
    
    
    
    7
    
    
    
    5.26
    %Total interest-bearing liabilities
    
    
    128,587
    
    
    
    3,556
    
    
    
    2.77
    %Noninterest-bearing deposits
    
    
    13,495Other liabilities
    
    
    519Total average liabilities
    
    
    14,014Stockholders equity
    
    
    11,150Total average liabilities and
stockholders equity
    
    $
    153,751Excess of interest-bearing assets over
interest-bearing liabilities
    
    $
    14,336Ratio of interest-earning assets to
interest-bearing liabilities
    
    
    111.15
    %Net interest income
    
    
    
    
    
    $
    5,730Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.73
    %Net yield on average interest-earning assets
    
    
    
    
    
    
    
    
    
    
    4.01
    %
   (1)
    
    Average balance has been calculated based on amortized costs of investment securities.(2)
    
    Interest income on tax-exempt loans and securities is presented on a taxable-equivalent basis
basis, using a income tax rate of 38%. The taxable-equivalent amounts included in the above
table aggregated approximately $86,000 in 2002.(3)
    
    Includes one non accrual loan with an approximate balance of $558,000 at December 31, 2002.
Interest earned on net loans includes $682,601 in loan fees. 24




---



##### Table of Contents



Rate and volume analysis The following tables reflect the changes in net interest income resulting from changes in interest
rates and from changes in the asset and liability volume. 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 change in average balance outstanding between years.
Thus, the change in interest due to both rate and volume has been allocated equally to the volume
and rate components. Year Ended December 31, 2004
Compared with Year Ended December 31, 2003 
 Total Increase
    
    
    Changes Due to(Decrease)
    
    
    Rate(Dollars in Thousands)Income from interest-earning assets:Taxable investment securities
    
    $
    306
    
    
    $
    52Tax exempt investment securities (1)
    
    
    (203
    )
    
    
    (33
    )Deposits at other banks
    
    
    6
    
    
    
    6Federal funds sold
    
    
    5
    
    
    
    32Loans and fees on loans
    
    
    5,624
    
    
    
    (124
    )Total interest income
    
    
    5,738
    
    
    
    (67
    )Expense from interest-bearing liabilities:Demand and money market
    
    
    (73
    )
    
    
    (97
    )Savings
    
    
    573
    
    
    
    127Time, $100,000 or more
    
    
    395
    
    
    
    (46
    )Other time
    
    
    312
    
    
    
    (179
    )Repurchase agreements
    
    
    (15
    )
    
    
    45Other borrowings
    
    
    71
    
    
    
    (62
    )Junior subordinated debentures
    
    
    81
    
    
    
    3Federal funds purchased
    
    
    7
    
    
    
    4Total interest expense
    
    
    1,351
    
    
    
    (205
    )Net interest income
    
    $
    4,387
    
    
    $
    138
   (1)
    
    Interest income on tax-exempt securities is presented on a taxable-equivalent basis, using an income
tax rate of 38%. 25




---



##### Table of Contents



Year Ended December 31, 2003
Compared with Year Ended December 31, 2002 
 Total Increase
    
    
    Changes Due to(Decrease)
    
    
    Rate
    
    
    VolumeDollars in Thousands)Income from interest-earning assets:Taxable investment securities
    
    $
    (75
    )
    
    $
    (238
    )
    
    $
    163Tax exempt investment securities (1)
    
    
    72
    
    
    
    (22
    )
    
    
    94Deposits at other banks
    
    
    4
    
    
    
    (2
    )
    
    
    6Federal funds sold
    
    
    24
    
    
    
    (47
    )
    
    
    71Loans and fees on loans
    
    
    2,096
    
    
    
    (851
    )
    
    
    2,947Total interest income
    
    
    2,121
    
    
    
    (1,160
    )
    
    
    3,281Expense from interest-bearing liabilities:Demand and money market
    
    
    (87
    )
    
    
    (166
    )
    
    
    79Savings
    
    
    203
    
    
    
    (6
    )
    
    
    209Time, $100,000 or more
    
    
    (227
    )
    
    
    (253
    )
    
    
    26Other time
    
    
    195
    
    
    
    (380
    )
    
    
    575Repurchase agreements
    
    
    (13
    )
    
    
    (18
    )
    
    
    5Other borrowings
    
    
    1
    
    
    
    (39
    )
    
    
    40Junior subordinated debentures
    
    
    204
    
    
    
    
    
    
    
    204Federal funds purchased
    
    
    (6
    )
    
    
    (3
    )
    
    
    (3
    )Total interest
expense
    
    
    270
    
    
    
    (865
    )
    
    
    1,135Net interest income
    
    $
    1,851
    
    
    $
    (295
    )
    
    $
    2,146
   (1)
    
    Interest income on tax-exempt securities is presented on a taxable-equivalent basis, using an income
tax rate of 38%. Provision for loan losses The provision for loan losses was $963,432 in 2004 compared to $971,686 in 2003. The provision for
loan losses reflects managements estimate of probable loan losses inherent in the portfolio and
the creation of an allowance for loan losses adequate to absorb such losses. The allowance for
loan losses represented approximately 1.0% of total loans outstanding at December 31, 2004 and
2003. During 2004, there were net charges-offs of $115,085 compared to net charge-offs of $230,852
in 2003. See additional discussion regarding the provision for loan losses and the allowance loan
losses under the section entitled Allowance for Loan Losses. The provision for loan losses was $971,686 in 2003 compared to $406,209 in 2002. The increase in
the provision for loan losses was attributable to fact that loan growth in 2003 was $65.9 million.
The provision for loan losses reflects managements estimate of potential loan losses inherent in
the portfolio and the creation of an allowance for loan losses adequate to absorb such losses. The
allowance for loan losses represented approximately 1.0% of total loans outstanding at December 31,
2003 and 2002. During 2002, there was a net charge off of $5,232. 26




---



##### Table of Contents



Noninterest income Below are the components of noninterest income at December 31, 2004, 2003 and 2002: December 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Service charges on deposit accounts
    
    $
    342,801
    
    
    $
    366,784
    
    
    $
    339,592Gain on sale of securities
    
    
    148,586
    
    
    
    
    
    
    
    180,780Mortgage referral commissions
    
    
    865,981
    
    
    
    986,072
    
    
    
    389,749Other
    
    
    340,334
    
    
    
    329,461
    
    
    
    205,895Total noninterest income
    
    $
    1,697,702
    
    
    $
    1,682,317
    
    
    $
    1,116,016
 Noninterest income for 2004 was $1,697,702 compared to $1,682,317 for the year ended December
31, 2003. The decrease in service charge on deposit accounts was primarily due to the
approximately $24,000 decrease in NSF & Overdraft fees during 2004. Mortgage referral commissions
decreased $120,091, primarily due to the fact that as rates began to rise the number of mortgage
originations decreased. These declines were offset by gain on sales of securities of $148,586 and
an increase of $10,873 in other income. This increase is partially attributable to the
approximately $10,000 increase in cash value life insurance income and the approximately $15,000
increase in income from our official check processor, Travelers Express. These increases are
offset by the decline in miscellaneous mortgage fees of approximately $28,000 again due to the
decrease in number of mortgage originations during 2004. Noninterest income for 2003 was $1,682,317 compared to $1,116,016 for December 31, 2002. This was
largely due to the increase in mortgage referral commissions of $596,323. Additionally, service
charges increased $27,192, largely due to the 41% increase in the number of demand deposit and
savings accounts since December 31, 2002. Other income increased $123,566 primarily due to a
$73,834 gain recognized on sale of two properties, $26,000 increase in Trust department income,
$20,000 increase in cash surrender value of life insurance income. In addition, miscellaneous
mortgage fees, which includes processing income increased $74,000 as a result of the additional
mortgage originators at out Roswell and Cumming locations and the related increase in the volume of
loans originated. These increases were offset by the decrease in gain on sales of securities as
there were no sales during the year ended 2003. Non-interest expense Below are the components of noninterest expense at December 31, 2004, 2003 and 2002: December 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Salaries and employee benefits
    
    $
    5,061,196
    
    
    $
    3,985,688
    
    
    $
    2,438,737Occupancy expense
    
    
    900,668
    
    
    
    722,875
    
    
    
    535,400Other operating expense (1)
    
    
    2,452,486
    
    
    
    2,165,230
    
    
    
    1,471,507Total noninterest expense
    
    $
    8,414,350
    
    
    $
    6,873,793
    
    
    $
    4,445,644
   (1)
    
    Significant components (those greater than 1% of total income) of other operating expenses include: December 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Data processing
    
    
    262,634
    
    
    
    224,133
    
    
    
    160,892Directors fees
    
    
    335,250
    
    
    
    264,600
    
    
    
    177,000
 27




---



##### Table of Contents



The largest component of noninterest expense is salaries and benefits, which increased to
$5,061,196 as of December 31, 2004 compared to $3,985,688 for the same period in the prior year.
This increase was primarily due the addition of the North Fulton and Cumming staff during late 2003
and therefore, realizing a full years salary on these approximately 12 full time employees In addition, the North Fulton and Cumming offices became fully operational in 2004 thus recognizing
a full years depreciation and occupancy expense at these locations. Thus explaining the
approximately $178,000 increase in occupancy expense. Last other operating expense increased $287,256 during 2004. This is partially attributable to
increases in branch offices, such as increases as $11,000 in ATM expenses, $39,000 in data
processing fees, $22,000 in donations, $35,000 in auto allowances and $21,000 in advertising
expenses. Other operating expense increases include $70,000 in directors fees due to an increase
in fees paid for committee meeting as well as an increase number of meetings in 2004, $62,000
increase in cash value life insurance expense from a change in the accounting treatment of such
plan, $28,000 in Federal Reserve charges due to a customer in our Dunwoody office who processes
large volumes of transactions. The bank also incurred an additional $17,000 in audit and accounting
fees during 2004, however, during 2005 a larger increase is expected due expenses associated with
compliance of the Sarbanes-Oxley Act. The increases in noninterest expenses have a direct effect on the efficiency ratio (noninterest
expense divided by total income) which was 44.8% at December 31, 2004 compared to 52.97% at
December 31, 2003. As a percentage of total average assets, noninterest expense was 2.72% and 3.2%
at December 31, 2004 and 2003, respectively. The increase in other operating expense in 2003 was primarily due branching that was implemented in
2003. Salary expense increased $1.5 million in 2003, due to the additional employees at our larger
Gwinnett location, and the North Fulton offices opened during the second quarter that resulted in
an additional six salaried employees and fourteen commission based mortgage department employees.
In addition, occupancy and furniture, fixture and equipment expense increased $187,475 in 2003.
This increase is primarily attributed to relocation of our Gwinnett office to a larger location and
the opening of our North Fulton and Cumming offices. Other expenses increased $693,723 from
$1,471,507 as of December 31, 2003. Other operating expenses associated with the new loan
production office locations were approximately $106,362. In addition other operating expenses
increased $96,000 related to our expanded branch at our Gwinnett location. Other factors
contributing to the increase in other expenses include a $42,000 increase in cash surrender value
life insurance benefit expense, a $104,000 increase in directors fees, legal fees increased
$50,000. In addition, due to the increase in the number of branch locations, the Bank has
experienced such increases as $63,000 in data processing and $25,000 in meals and entertainment,
$16,000 in dues and subscriptions, $17,000 in postage, $19,000 in telephone expense and a $30,000
increase in loan costs such as appraisals and legal fees incurred for new loan customers. Income tax expense The Companys effective tax rates were 37.9%, 34.6%, and 35.5% for the years ended December 31,
2004, 2003 and 2002, respectively. 28




---



##### Table of Contents



FINANCIAL CONDITION Balance at
    
    
    Balance at
    
    
    Balance atDecember 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Total assets
    
    $
    353,421
    
    
    $
    256,358
    
    
    $
    180,393Net loans
    
    $
    291,537
    
    
    $
    203,961
    
    
    $
    139,179Total deposits
    
    $
    303,905
    
    
    $
    220,273
    
    
    $
    155,989
 At December 31, 2004, the Companys total assets were approximately $353,421,000 compared to
approximately $256,358,000 at December 31, 2003. The increase in total assets from 2003 to 2004
was approximately $97,063 or 37.9%. Total assets as of December 31, 2004, principally consisted
of $20,212,000 in cash and cash equivalents, $29,066,000 in investment securities, and $291,537,000
in net loans. Total assets as of December 31, 2003, principally consisted of $19,743,000 in cash
and cash equivalents, $22,523,000 in investment securities, and $203,961,000 in net loans. At December 31, 2003, the Companys total assets were approximately $256,358,000 compared to
approximately $180,393,000 at December 31, 2002. The increase in total assets from 2002 to 2003
was approximately 42.1%. Total assets as of December 31, 2002, principally consisted of
$15,552,000 in cash and cash equivalents, $17,072,000 in investment securities, and $139,179,000 in
net loans. The growth in assets in 2002 from 2001 was primarily funded by the $64,284,000 increase
in deposits. Investments During 2004, investment securities increased $5.8 million due to excess liquidity from a
significant increase in deposit accounts. The investment portfolio consists of U.S. government agency and agency sponsored debt securities,
corporate bonds, state and county municipals, federal funds sold, Federal Home Loan Bank stock and
Federal Reserve Bank stock that provide the Bank with a source of liquidity and a long-term and
relatively stable source of income. Additionally, the investment portfolio provides a balance to
interest rate and credit risk in other categories of the balance sheet while providing a vehicle
for the investment of available funds, furnishing liquidity, and supplying securities to pledge as
required collateral for certain deposits. 29




---



##### Table of Contents



Types of investments The amortized cost and estimated market value of securities held to maturity are as follows: Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2004:Mortgage-backed securities
    
    
    2,774,383
    
    
    
    6,862
    
    
    
    
    
    
    $
    2,781,245$
    2,774,383
    
    
    $
    6,862
    
    
    $
    
    
    
    $
    2,781,245
 The amortized cost and estimated market value of securities available for sale are as follows: Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2004:U.S. Government agencies
    
    $
    12,402,144
    
    
    $
    21,088
    
    
    $
    34,106
    
    
    $
    12,389,126Municipal securities
    
    
    1,252,249
    
    
    
    8,197
    
    
    
    8,614
    
    
    $
    1,251,832Mortgage-backed securities
    
    
    9,709,693
    
    
    
    19,491
    
    
    
    99,141
    
    
    $
    9,630,043Corporate bonds
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    $
    1,000,000$
    24,364,086
    
    
    $
    48,776
    
    
    $
    141,861
    
    
    $
    24,271,001
 Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2003:U.S. Government agencies
    
    $
    9,524,748
    
    
    $
    97,355
    
    
    $
    56,956
    
    
    $
    9,565,147Municipal securities
    
    
    6,054,580
    
    
    
    188,379
    
    
    
    40,340
    
    
    $
    6,202,619Mortgage-backed securities
    
    
    5,754,433
    
    
    
    36,170
    
    
    
    35,511
    
    
    $
    5,755,092Corporate bonds
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    $
    1,000,000$
    22,333,761
    
    
    $
    321,904
    
    
    $
    132,807
    
    
    $
    22,522,858
 Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2002:U.S. Government agencies
    
    $
    7,158,707
    
    
    $
    185,124
    
    
    $
    
    
    
    $
    7,343,831Municipal securities
    
    
    4,195,870
    
    
    
    140,976
    
    
    
    74
    
    
    $
    4,336,772Mortgage-backed securities
    
    
    4,293,008
    
    
    
    98,367
    
    
    
    
    
    
    $
    4,391,375Corporate bonds
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    $
    1,000,000$
    16,647,585
    
    
    $
    424,467
    
    
    $
    74
    
    
    $
    17,071,978
 Other investments include equity securities with no readily determinable fair value. These
investments are carried at cost. The Company does not have investments to one issuer totaling more
than 10% of equity. 30




---



##### Table of Contents



Maturities of investments The carrying amounts of investment securities in each category as of December 31, 2004 is shown in
the following table according to maturity: U.S
    
    
    WTD
    
    
    
    
    
    
    WTD
    
    
    Mortgage
    
    
    WTD
    
    
    
    
    
    
    WTD
    
    
    
    
    
    
    WTDGovt
    
    
    Avg
    
    
    Municipal
    
    
    Avg
    
    
    Backed
    
    
    Avg
    
    
    Corporate
    
    
    Avg
    
    
    
    
    
    
    AvgAgencies
    
    
    Yield
    
    
    Securities (1)
    
    
    Yield
    
    
    Securities
    
    
    Yield
    
    
    Bonds
    
    
    Yield
    
    
    Total
    
    
    Yield(Dollars in thousands)MaturitiesWithin one year
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    After 1 to 5 years
    
    
    9,140
    
    
    
    3.64
    %
    
    
    527
    
    
    
    5.68
    %
    
    
    9,710
    
    
    
    3.25
    %
    
    
    
    
    
    
    
    
    
    
    19,377
    
    
    
    3.50
    %After 5 to 10 years
    
    
    3,262
    
    
    
    4.47
    %
    
    
    
    
    
    
    
    
    
    
    2,774
    
    
    
    5.03
    %
    
    
    
    
    
    
    
    
    
    
    6,036
    
    
    
    4.73
    %After 10 years
    
    
    
    
    
    
    
    
    
    
    726
    
    
    
    6.00
    %
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    9.00
    %
    
    
    1,726
    
    
    
    7.74
    %Total
    
    $
    12,402
    
    
    
    3.86
    %
    
    $
    1,253
    
    
    
    5.87
    %
    
    $
    12,484
    
    
    
    3.65
    %
    
    $
    1,000
    
    
    
    9.00
    %
    
    $
    27,139
    
    
    
    4.04
    %
   (1)
    
    -Average yields are presented on a tax equivalent basis and are based on amortized costs The above schedule excludes other investments which consists of Federal Home Loan Bank stock and Federal Reserve Bank stock which has no contractual maturity. Mortgage-backed security maturities are based on the average life at the projected
repayment speed. Loans The Companys total loans (net of the allowance for loan losses and deferred loan fees) increased
to approximately $291,537,000 at December 31, 2004, from approximately $203,961,000 at December 31,
2003. The majority of this increase was due to loan growth of approximately $21.4 million
Duluth officer, $11.0 million at Gwinnett office, $18.7 million in our Duluth branch construction
loans, and $25.3 million in new loans at our North Fulton office which became a full service branch
first quarter of 2004 and $11.6 million increase in loans at our Cumming loan production office. The Companys total loans (net of the allowance for loan losses and deferred loan fees) increased
to approximately $203,961,000 at December 31, 2003, from approximately $139,179,000 at December 31,
2002. This increase in net loans can be attributed to loan growth of approximately $21.6 million
at our expanded Gwinnett office, $21.0 million increase in new loans at our Roswell loan production
office and $4.2 million increase in new loans at our Cumming loan production office. In addition,
construction loans at our Duluth location increased $11.0 million. 31




---



##### Table of Contents



Types of Loans The composition of loans outstanding at the indicated dates is presented in the following table.
Management is not aware of any additional concentrations. December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Commercial
    
    $
    38,793
    
    
    $
    31,659
    
    
    $
    24,517
    
    
    $
    15,775
    
    
    $
    11,111Real estate  construction
    
    
    88,607
    
    
    
    59,214
    
    
    
    44,309
    
    
    
    24,707
    
    
    
    23,462Real estate  commercial and residential
    
    
    146,422
    
    
    
    100,712
    
    
    
    59,851
    
    
    
    48,814
    
    
    
    31,465Installment loans to individuals
    
    
    8,351
    
    
    
    9,314
    
    
    
    8,038
    
    
    
    5,686
    
    
    
    5,338Real estate  home equity
    
    
    12,891
    
    
    
    5,835
    
    
    
    4,138
    
    
    
    3,036
    
    
    
    2,527Total loans
    
    
    295,064
    
    
    
    206,734
    
    
    
    140,853
    
    
    
    98,018
    
    
    
    73,903Less: Allowance for loan losses
    
    
    2,972
    
    
    
    2,124
    
    
    
    1,383
    
    
    
    982
    
    
    
    742Net deferred loan fees
    
    
    555
    
    
    
    649
    
    
    
    291
    
    
    
    378
    
    
    
    258Loans, net
    
    $
    291,537
    
    
    $
    203,961
    
    
    $
    139,179
    
    
    $
    96,658
    
    
    $
    72,903
 Loans are reported at the gross amount outstanding, reduced by the net deferred loan fees and
the allowance for loan losses. Interest income is recognized over the term of the loans based on
the unpaid daily principal amount outstanding. Loan origination fees are deferred and recognized
as income over the actual life of the loan using the interest method. Maturities and Sensitivity of Loans to Changes in Interest Rates The following table summarizes major classifications of loans by contractual maturity of individual
loans as of December 31, 2004, including loans that may be subject to renewal at their contractual
maturity. Renewal of such loans is subject to review and credit approval, as well as modification
of terms upon their maturity. Actual repayments of loans may differ from maturities reflected
below because borrowers have the right to prepay obligations with or without prepayment penalties. 32




---



##### Table of Contents



Due AfterDue in
    
    
    1 Year but1 Year
    
    
    Less Than
    
    
    Due Afteror Less
    
    
    5 Years
    
    
    5 Years
    
    
    Total(Dollars in thousands)Loan category:Commercial
    
    $
    31,745
    
    
    $
    7,048
    
    
    $
    
    
    
    $
    38,793Real estate-construction
    
    
    88,470
    
    
    
    137
    
    
    
    
    
    
    
    88,607Real estate-commercial and
residential
    
    
    103,834
    
    
    
    42,248
    
    
    
    340
    
    
    
    146,422Installment loans to individuals
    
    
    8,469
    
    
    
    4,413
    
    
    
    9
    
    
    
    12,891Real estate-home equity
    
    
    8,351
    
    
    
    
    
    

    
    
    
    
    
    8,351Total loans
    
    $
    240,869
    
    
    $
    53,846
    
    
    $
    349
    
    
    $
    295,064
 For the above loans, the following is a presentation of an
analysis of sensitivities to
changes in interest rates at December 31, 2004
(dollars in thousands): Due AfterDue in
    
    
    1 Year but1 Year
    
    
    Less Than
    
    
    Due Afteror Less
    
    
    5 Years
    
    
    5 Years
    
    
    TotalInterest category:Predetermined interest rate
    
    $
    23,088
    
    
    $
    53,846
    
    
    $
    349
    
    
    $
    77,283Floating interest rate
    
    
    217,781
    
    
    
    
    
    
    
    
    
    
    
    217,781Total loans
    
    $
    240,869
    
    
    $
    53,846
    
    
    $
    349
    
    
    $
    295,064
 Loans are generally placed on nonaccrual status when the payment of principal and/or interest is
past due 90 days or more or when management of the Bank determines upon consideration of economic
and business factors affecting collection efforts that collection of interest is doubtful. A summary of non-performing assets at December 31, 2004, 2003, 2002, 2001, and 2000 Non performing Assets ($ in thousands) 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Non accrual loans
    
    $
    545
    
    
    $
    131
    
    
    $
    588
    
    
    $
    
    
    
    $
    Accruing loans 90 days or more past due
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    Loans past due more than 30 days
    
    
    2,888
    
    
    
    9
    
    
    
    632
    
    
    
    539
    
    
    
    357Interest on non accrual loans which would
have been reported
    
    
    15
    
    
    
    1
    
    
    
    30
    
    
    
    
    
    
    
    Interest recognized on non accrual loans
prior to reclassifications of loans to non accrual
    
    
    17
    
    
    
    9
    
    
    
    27
    
    
    
    
    
    
    
    
 33




---



##### Table of Contents



Allowance for Loan Losses The Companys allowance for loan losses was approximately $2,972,000 at December 31, 2004, compared
to $2,124,000 at December 31, 2003 and $1,383,000 at December 31, 2002, representing 1.0% of year
end total loans outstanding for December 31, 2004, 2003 and 2002. The allowance for loan losses reflects managements assessment and estimate of the risks associated
with extending credit and its evaluation of the quality of the loan portfolio. The Bank
periodically analyzes the loan portfolio in an effort to review asset quality and to establish an
allowance for loan losses that management believes will be adequate in light of anticipated risks
and loan losses. In assessing the adequacy of the allowance, size, quality and risk of loans in
the portfolio are reviewed. An analysis of the credit quality of the loan portfolio and the adequacy of the allowance for loan
losses is prepared by management and presented to the Board of Directors on a quarterly basis. In
addition, the Bank has engaged an outside loan review consultant to perform, and report on an
annual basis, an independent review of the quality of the loan portfolio relative to the accuracy
of the Banks loan grading system. The allowance for loan losses is established through charges to expense in the form of a provision
for loan losses. Loan losses and recoveries are charged and credited directly to the allowance. The Banks allowance for loan losses is also subject to regulatory examinations and determinations
as to adequacy, which may take into account such factors as the methodology used to calculate the
allowance for loan losses and the size of the allowance for loan losses compared to a group of peer
banks identified by the regulators. During their routine examinations of banks, the Federal
Reserve, FDIC and the Department of Banking and Finance may require the Company to recognize
additions to the allowance based on their judgments about information available to them at the time
of their examination. While it is the Banks policy to charge off in the current period loans for which a loss is
considered probable, there are additional risks of future losses which cannot be quantified
precisely or attributed to particular loans or classes of loans. Because these risks include the
state of the economy, managements judgment as to the adequacy of the allowance is necessarily
approximate and imprecise. After review of all relevant matters affecting loan collectability,
management believes the allowance for loan losses is appropriate. 34




---



##### Table of Contents



The following is an analysis of the allowance for loan losses for the years ended December 31,
2004, 2003, 2002, 2001 and 2000: The following summarizes the activity in the allowance for loan losses for the following periods: December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Average amount of loans outstanding
    
    $
    261,087,754
    
    
    $
    167,544,217
    
    
    $
    122,282,063
    
    
    $
    81,963,058
    
    
    $
    56,317,602Balance at beginning of period
    
    $
    2,123,509
    
    
    $
    1,382,676
    
    
    $
    981,639
    
    
    $
    741,629
    
    
    $
    399,991Charge-offs:Commercial
    
    
    86,334
    
    
    
    102,968
    
    
    
    
    
    
    
    
    
    
    
    Real estate-construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate-commercial and residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Installment loans to individuals
    
    
    52,317
    
    
    
    184,855
    
    
    
    10,682
    
    
    
    
    
    
    
    Real estate-home equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    138,651
    
    
    
    287,823
    
    
    
    10,682
    
    
    
    
    
    
    
    Recoveries:Commercial
    
    
    18,845
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    Real estate-construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate-commercial and residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Installment loans to individuals
    
    
    4,721
    
    
    
    46,970
    
    
    
    5,450
    
    
    
    
    
    
    
    Real estate-home equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    23,566
    
    
    
    56,970
    
    
    
    5,450
    
    
    
    
    
    
    
    Net charge-offs
    
    
    115,085
    
    
    
    230,853
    
    
    
    5,232
    
    
    
    
    
    
    
    Provision charged to operations
    
    
    963,432
    
    
    
    971,686
    
    
    
    406,269
    
    
    
    240,010
    
    
    
    341,638Balance at end of year
    
    $
    2,971,856
    
    
    $
    2,123,509
    
    
    $
    1,382,676
    
    
    $
    981,639
    
    
    $
    741,629Ratio of net charge-offs during the
period to average
loans outstanding during the period
    
    
    0.044
    %
    
    
    0.138
    %
    
    
    0.004
    %
    
    
    0.000
    %
    
    
    0.000
    %
 Deposits Deposits increased $83.6 million to $303.9 million during 2004. This growth is a result of an
increase of $24.0 million in noninterest-bearing demand, a $14.4 million decrease in interest-
bearing demand and money market accounts, a $34.1 million increase in certificate of deposit
accounts and an increase of $40.0 million in savings deposits. The majority of this increase is due the $40.0 million in savings deposits. This is largely
attributed to the attractiveness of The Peachtree Prime account. This product is available for
individuals and businesses with a rate of prime less 2.5%. In the anticipated rising rate
environment many customers feel that this fluctuating rate is an attractive one to place their
savings dollars. Due to the attractiveness of this rate compared to our money market rate many
customers have moved their money into this account thus explaining the decrease in interest bearing
demand including money market. Deposit growth at the various offices include: $29.2 million at
Duluth, $22.0 million at Gwinnett, $6.7 at Dunwoody, and $18.7 million in North 35




---



##### Table of Contents



Fulton. The ratio
of loans to deposits was 95.9% at December 31, 2004 and 92.6% at December 31, 2003. The Companys total deposits increased to approximately $220,273,000 at December 31, 2003 from
$155,989,000 at December 31, 2002. A large reason for this increase is due the $30.5 million
increase in deposits at our expanded Gwinnett office. This growth was primarily in certificates of
deposits. In addition, deposits at our Dunwoody location increased $28.5 million. Finally,
deposits associated with our loan production office in Roswell were $3.0 million. Average amount of deposits and average rate paid thereon, classified as to noninterest-bearing
demand deposits, interest-bearing demand deposits, savings deposits, and time deposits, for
December 31, 2004, 2003 and 2002 are presented below: December 31,2004
    
    

    
    
    
    
    December 31, 2003
    
    
    December 31, 2002Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageAmount
    
    
    Rate Paid
    
    
    Amount
    
    
    Rate Paid
    
    
    Amount
    
    
    Rate Paid(Dollars in thousands)Deposits:Noninterest-bearing demand
    
    $
    38,036
    
    
    
    
    
    
    $
    23,288
    
    
    
    
    
    
    $
    13,495
    
    
    
    Interest-bearing demand
    
    
    46,995
    
    
    
    0.40
    %
    
    
    42,165
    
    
    
    0.61
    %
    
    
    32,735
    
    
    
    1.06
    %Savings
    
    
    38,828
    
    
    
    2.15
    %
    
    
    15,514
    
    
    
    1.68
    %
    
    
    3,313
    
    
    
    1.75
    %Time
    
    
    138,519
    
    
    
    2.64
    %
    
    
    104,383
    
    
    
    2.82
    %
    
    
    85,436
    
    
    
    3.49
    %Total
    
    $
    262,378
    
    
    
    
    
    
    $
    185,350
    
    
    
    
    
    
    $
    134,979
 Maturities of Time Deposits of $100,000 or more Maturities of time certificates of deposit of $100,000 or more
outstanding at December
31, 2004 are summarized as follows: (Dollars in thousands)Months to maturity:3 or less
    
    $
    22,2573 to 6
    
    
    17,4796 to 12
    
    
    20,953Over 12
    
    
    17,147Total
    
    $
    77,836
 Liquidity The Bank must maintain, on a daily basis, sufficient funds to cover the withdrawals from
depositors accounts and to supply new borrowers with funds. To meet these obligations, the Bank
keeps cash on hand, maintains account balances with its correspondent banks, and purchases and
sells federal funds and other short-term investments. Asset and liability maturities 36




---



##### Table of Contents



are monitored
in an attempt to match these to meet liquidity needs. It is the policy of the Bank to monitor its
liquidity to meet regulatory requirements and their local funding requirements. Liquidity represents the ability to provide steady sources of funds for loan commitments and
investment activities, as well as to maintain sufficient funds to cover deposit withdrawals and
payment of debt and operating obligations. These funds can be obtained by converting assets to
cash or by attracting new deposits. The Companys primary source of liquidity is its ability to
maintain and increase deposits through the Bank. Deposits increased by $46.7 million in 2004. The following are the key liquidity balances and ratios for the year ended December 31, 2004: Cash and cash equivalents
    
    $
    20,211,803Investment securities available for sale
    
    $
    24,271,001CDs over $100,000 to total deposits ratio
    
    
    25.6
    %Loan to deposit ratio
    
    
    95.9
    %
 At December 31, 2004 cash and cash equivalents amounted to $20.2 million, representing 5.7% of
total assets. Securities available for sale provide a secondary source of liquidity and amounted
to $24.3 million at December 31, 2004. At December 31, 2004, certificates of deposit over $100,000 represented 25.6% of total deposits.
Certificates of deposit over $100,000 are generally more volatile than other deposits. As a
result, management continually monitors the competitiveness of the rates it pays on certificates of
deposit over $100,000 and periodically adjusts its rates in accordance with market demands.
Significant withdrawals of the large certificates of deposit may have a material adverse effect on
the Banks liquidity. As a majority of the certificates of deposit were obtained by Bank customers
in its market area, management believes the volatility of the deposits is lower than if such
deposits were obtained from depositors outside its market area, as outside depositors are more
likely to be interest rate sensitive. The Bank maintains relationships with correspondent banks that can provide funds to it on short
notice, if needed. The Bank currently has arrangements with correspondent banks for short-term
unsecured advances up to $12,000,000. Capital Adequacy In 2003, the Company issued 542,261 unregistered shares of common stock through a private placement
at a price on $18.25 per share. The net proceeds of this offering $9,880,444 (after deducting
issuance costs of $15,819) were used to increase the Banks regulatory capital ratios and for
general corporate purposes. 37




---



##### Table of Contents



The following table presents the Companys and Banks regulatory capital position at December 31,
2004: As of December 31, 2004: Actual Ratio
    
    
    Required RatioTotal Capital (to Risk-Weighted Assets)Consolidated
    
    
    10.38
    %
    
    
    8.0
    %Bank
    
    
    10.24
    %
    
    
    8.0
    %Tier 1 Capital (to Risk-Weighted Assets)Consolidated
    
    
    9.42
    %
    
    
    4.0
    %Bank
    
    
    9.27
    %
    
    
    4.0
    %Tier 1 Capital (to Average Assets)Consolidated
    
    
    8.91
    %
    
    
    4.0
    %Bank
    
    
    8.28
    %
    
    
    4.0
    %
 The above ratios indicate that the capital position of the Bank is sound and that the Bank is
well positioned for future growth. For a more complete discussion of the actual and required
ratios of the Bank as of December 31, 2004, see note 12 to the financial statements. Selected Ratios The rate of return information for the December 31, 2004, 2003 and 2002 are presented below. Year Ended December 31,2004
    
    
    2003
    
    
    2002Return on assets
    
    
    0.85
    %
    
    
    0.40
    %
    
    
    0.80
    %Return on equity
    
    
    11.38
    %
    
    
    6.43
    %
    
    
    11.04
    %Dividend payout ratio
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Equity to assets ratio
    
    
    7.49
    %
    
    
    6.25
    %
    
    
    7.25
    %
 Junior Subordinated Debentures (related to Trust Preferred Securities) In December 2002, the Company issued, through a wholly owned Delaware statutory trust, PB Capital
Trust I (the Trust), $4,000,000 of guaranteed preferred beneficial interests in the Companys
junior subordinated deferrable interest debentures that qualify as Tier I capital under Federal
Reserve Board guidelines within certain limitations. All of the common securities of the Trust are
owned by the Company. The proceeds from the issuance of the common securities and the trust
preferred securities were used by the Trust to purchase $4,120,000 of junior subordinated
debentures of the Company, which carry a deferrable floating rate equal to the Wall Street Journal
prime rate plus 100 basis points. At December 31, 2004, this rate was 5.75%. The proceeds received
by the Company from the sale of the junior subordinated debentures were used to strengthen the
capital position of the Company and to accommodate current and future growth. The debentures and
related accrued interest represent the sole assets of the Trust. 38




---



##### Table of Contents



The trust preferred securities accrue and pay distributions quarterly, equal to the Wall Street
Journal prime rate plus 100 basis points per annum of the stated liquidation value of $50,000 per
capital security. The Company has entered into contractual arrangements which, taken collectively,
fully and unconditionally guarantee payment of accrued and unpaid distributions required to be paid
on the trust preferred securities, the redemption price with respect to any trust preferred
securities called for redemption by the Trust, and payments due upon a voluntary or involuntary
dissolution, winding up, or liquidation of the Trust. The trust preferred securities are mandatorily redeemable upon maturity of the debentures on
December 31, 2032, or upon earlier redemption as provided in the indenture. The Company has the
right to redeem the debentures purchased by the Trust in whole or in part, on or after December 31,
2007. As specified in the indenture, if the debentures are redeemed prior to maturity, the
redemption price will be the unpaid principal amount, plus any accrued unpaid interest. Asset/Liability Management It is the Companys objective to manage assets and liabilities to provide a satisfactory,
consistent level of profitability within the framework of established cash, loan, and investment,
borrowing and capital policies. Certain officers are charged with the responsibility of monitoring
policies and procedures that are designed to ensure acceptable composition of the asset/liability
mix. It is the overall philosophy of management to support asset growth primarily through the
growth of core deposits, which include deposits of all categories made by local individuals,
partnerships and corporations. The objective of the policy is to control interest-sensitive assets
and liabilities so as to minimize the impact of substantial movements in interest rates on
earnings. The asset/liability mix is monitored on a regular basis. A report reflecting the
interest-sensitive assets and interest-sensitive liabilities is prepared and presented to the Board
of Directors on a monthly basis. One method used to measure a banks interest rate exposure is through its repricing gap. The gap
is calculated by determining all assets that reprice or mature within a given time frame and
subtracting all liabilities that reprice or mature within the same time frame. The difference
between these two amounts is called the gap, which is the amount of either liabilities or assets
that will reprice without a corresponding asset or liability repricing. A negative gap (more liabilities repricing that assets) generally indicates that a banks net
interest income will decrease if interest rates rise and will increase if interest rates fall. A
positive gap generally indicates that a banks net interest income will decrease if interest rates
fall and will increase if interest rates rise. The following table sets forth the distribution of the repricing of the Companys interest earning
assets and interest-bearing liabilities as of December 31, 2004, the interest rate sensitivity gap
(i.e., interest rate sensitive assets less interest rate sensitive liabilities), the cumulative
interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e., interest rate
sensitive assets divided by interest rate sensitive liabilities) and the difference to total
interest earning assets. 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. Adjustable rate
loans are included in the period in 39




---



##### Table of Contents



which interest rates are next scheduled to adjust rather than in the period in which they are due,
and fixed rate loans and mortgage-backed securities are included in the periods in which they are
anticipated to be repaid based on scheduled maturities. The Banks savings accounts and
interest-bearing demand accounts (NOW and money market deposit accounts), which are generally
subject to immediate withdrawal, are included in the Three Months or Less category, although
historical experience has proven these deposits to be more stable over the course of a year.
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 indicted as repricing within the same period may in fact reprice at
different times within such period and at different rates. Interest Rate Gap Sensitivity At December 31, 2004
(Dollars in Thousands) Three
    
    
    Four to
    
    
    One to
    
    
    OverMonths
    
    
    Twelve
    
    
    Five
    
    
    Fiveor Less
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalInterest-earning assets:Federal funds sold
    
    $
    5,755
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,755Investment securities (1)
    
    
    
    
    
    
    
    
    
    
    9,636
    
    
    
    17,409
    
    
    $
    27,045Loans
    
    
    225,295
    
    
    
    15,574
    
    
    
    53,846
    
    
    
    349
    
    
    $
    295,064Total interest-earning assets
    
    $
    231,050
    
    
    $
    15,574
    
    
    $
    63,482
    
    
    $
    17,758
    
    
    $
    327,864Interest-bearing liabilitiesDepositsInterest-bearing demand and
savings
    
    $
    97,598
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    97,598Time, $100,000 or more
    
    
    22,257
    
    
    
    17,479
    
    
    
    38,100
    
    
    
    
    
    
    
    77,836Other time
    
    
    16,160
    
    
    
    22,920
    
    
    
    37,014
    
    
    
    
    
    
    
    76,094Repurchase agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other borrowings
    
    
    17,100
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    18,100Junior subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,120
    
    
    
    4,120Total
interest-bearing liabilities
    
    $
    153,115
    
    
    $
    41,399
    
    
    $
    75,114
    
    
    $
    4,120
    
    
    $
    273,748Interest rate sensitivity gap
per period
    
    $
    77,935
    
    
    $
    (25,825
    )
    
    $
    (11,632
    )
    
    $
    13,638
    
    
    $
    54,116Interest rate sensitivity gap ratio
    
    
    150.90
    %
    
    
    37.62
    %
    
    
    84.51
    %
    
    
    431.02
    %
    
    
    119.77
    %Cumulative interest rate sensitivity
gap
    
    $
    77,935
    
    
    $
    52,110
    
    
    $
    40,478
    
    
    $
    54,116Cumulative difference to
total interest earning assets
    
    
    23.77
    %
    
    
    15.89
    %
    
    
    12.35
    %
    
    
    16.51
    %
   (1)   The above schedule excludes stock in Federal Home Loan Bank and stock in the
Federal Reserve Bank, which has no contractual maturity. 40




---



##### Table of Contents



Certain shortcomings are inherent in the method of analysis presented in the foregoing table.
For example, although certain assets and liabilities may have similar maturities or periods to
repricing, they may react, in different degrees, or at different points in time, to changes in
market interest rates. Changes in interest rates, prepayment rates, early withdrawal levels and
the ability of borrowers to service their debt, among other factors, may vary significantly from
the assumptions made in the table. The Company actively manages the mix of asset and liability
maturities to control the effects of changes in the general level of interest rates on net interest
income. Except for its effect on the general level of interest rates, inflation does not have a
material impact on the Company due to the rate variability and short-term maturities of its earning
assets. In particular, approximately 57.4% of the loan portfolio is comprised of loans that are
variable rate terms or short-term obligations. Contractual Obligations and Off-Balance-Sheet Arrangements The Companys contractual obligations and other commitments as of December 31, 2004 are summarized
in the table below. The Companys contractual obligations include the repayment of principal and
interest related to FHLB advances and junior subordinated debentures, as well as payments under
current lease agreements. One toWithin one
    
    
    Three
    
    
    Three to
    
    
    Five Yearsyear
    
    
    years
    
    
    Five Years
    
    
    or More
    
    
    TotalContractual Cash ObligationsFHLB advances
    
    $
    17,100,000
    
    
    $
    1,000,000
    
    
    
    
    
    
    
    
    
    
    $
    18,100,000Junior subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,120,000
    
    
    
    4,120,000Operating lease obligations
    
    
    219,491
    
    
    
    214,309
    
    
    
    205,773
    
    
    
    860,537
    
    
    
    1,500,100Total
    

    $
    17,319,491
    
    
    
    1,214,309
    
    
    
    205,773
    
    
    
    4,980,537
    
    
    $
    23,720,100
 Other commitments include commitments to extend credit. Because not all of these commitments
to extend credit will be drawn upon, the actual cash requirements are likely to be significantly
less than the amounts reported for other commitments below. Other CommitmentsCommitments to extend credit
    
    $
    89,249,000Standby letters of credit
    
    $
    1,495,000
 
 ITEM 7. FINANCIAL STATEMENTS The following financial statements, notes thereto and report of independent registered public
accounting firm are included in the Companys Annual Report to Shareholders are incorporated herein by
reference. Report of Independent Registered Public Accounting Firm Financial Statements Consolidated Balance Sheets dated as of December 31, 2004 and 2003 41




---



##### Table of Contents



Consolidated Statements of Earnings for the years ended December 31, 2004 and 2003 Consolidated Statements of Shareholders Equity for the years ended December 31, 2004 and
2003 Consolidated Statements of Comprehensive Income for the years ended December 31, 2004 and
2003 Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003 Notes to Consolidated Financial Statements 
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 
 ITEM 8A. CONTROLS AND PROCEDURES Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, and as of the date of this report, our
management, including our Chief Executive Officer and Chief Financial Officer, reviewed the
effectiveness and design of our disclosure controls and procedures under Exchange Act Rule 13a-14.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
such disclosure controls and procedures are adequate to ensure that material information relating
to the Company, including its consolidated subsidiary, that is required to be included in its
periodic filings with the Securities and Exchange Commission, is timely made known to them. During
the quarter ended December 31, 2004, there were no significant changes in internal controls, or to
managements knowledge, in other factors that could significantly affect those internal controls,
and there has been no corrective action with respect to significant deficiencies or material
weaknesses. ITEM 8B. OTHER INFORMATION None 
 PART III 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT The responses to this Item are included in the Companys proxy statement for the Annual Meeting of
Shareholders to be held May 17, 2005, under the headings, Proposal 1  Election of Directors 
(Nominees and Continuing Directors), Ownership of PB Financial Services Common Stock, and
Compliance with Section 16(a) of the Exchange Act and are incorporated herein by reference. 42




---



##### Table of Contents



The Company has adopted a Code of Ethics that applies to its principal executive, financial and
accounting officers. The Code of Ethics has been posted on the Companys website at
www.thepeachtreebank.com. A copy may also be obtained, without charge, upon written request
addressed to The PB Financial Services Corporation, 9570 Medlock Bridge Road, Duluth, Georgia
30097, Attention: Corporate Secretary. The request may also be delivered by fax to the Corporate
Secretary at (770) 814-8804. 
 ITEM 10. EXECUTIVE COMPENSATION The responses to this Item are included in the Companys proxy statement for the Annual Meeting of
Shareholders to be held May 17, 2005, under the heading. Compensation of Directors and Executive
Officers, and are incorporated herein by reference. 
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The responses to this Item are included in the Companys proxy statement for the Annual Meeting of
Shareholders to be held May 17, 2005, under the headings, Ownership of PB Financial Services
Common Stock and are incorporated herein by reference. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The responses to this Item are included in the Companys proxy statement for the Annual Meeting of
Shareholders to be held May 17, 2005, under the headings, Certain Transactions and Compensation
of Directors and Executive Officers, and are incorporated herein by reference. 
 ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number
    
    Exhibit3.1
    
    Articles of Incorporation (1)3.2
    
    Bylaws (2)4.1
    
    Instruments Defining the Rights of Security Holders. See Articles of
Incorporation at Exhibit 3.1 hereto and Bylaws at Exhibit 3.2 hereto.10.1*
    
    Employment Agreement between Monty G. Watson and The Peachtree Bank dated as
of January 13, 1998 (3)10.2*
    
    The PB Financial Services 1998 Outside Directors Option Plan. (4)
 43




---



##### Table of Contents



Exhibit Number
    
    Exhibit13.1
    
    The PB Financial Services Corporation 2004 Annual Report to shareholders.
Except with respect to those portions specifically incorporated by reference into this
Report, the Companys 2004 Annual Report to Shareholders is not deemed to be filed as
part of this Report.21.1
    
    Subsidiaries of The PB Financial Services Corporation. (4)24.1
    
    Power of Attorney (appears on the signature pages to this Annual Report on
10-KSB).31.1
    
    Certification of Chief Executive Officer pursuant Rule 13a-14(a).31.2
    
    Certification of Chief Financial Officer pursuant Rule 13a-14(a).32.1
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Compensatory plan or arrangement(1)
    
    Incorporated herein by reference to Exhibit 2(a) in The PB Financial Services
Corporations Registration Statement on Form 8-A, Commission File No. 000-26725, filed
July 15, 1999.(2)
    
    Incorporated herein by reference to Exhibit 2(b) in The PB Financial Services
Corporations Registration Statement on Form 8-A, Commission File No. 000-26725, filed
July 15, 1999.(3)
    
    Incorporated by reference to exhibit of same number in the Companys Third Quarter
Form 10QSB for the quarter ended September 30, 2004.(4)
    
    Incorporated by reference to exhibit of same number in the Companys Annual Report on
Form 10KSB for the year ended December 31, 1999. (b) Reports on Form 8-K No Reports on Form 8-K were filed during the fourth quarter of 2004. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is included in the Companys proxy statement for the Annual
Meeting of Shareholders to be held May 17, 2005, under the heading Fees Paid to Independent
Auditors and is incorporated herein by reference. 44




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized. THE PB FINANCIAL SERVICES CORPORATIONBy:
    
    /s/ Monty G. WatsonMonty G. WatsonPresident and Chief Executive Officer/s/Kelly J. JohnsonKelly J. JohnsonChief and Principal Financial OfficerDate:
    
    March 31, 2005
 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on the signature page to
this Report constitutes and appoints Monty G. Watson and Kelly J. Johnson, and each of them, his
true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution,
for him and in his name, place, and stead, in any and all capacities, to sign any and all
amendments to this Report, and to file the same, with all exhibits hereto, and other documents in
connection herewith with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated. /s/ Robert D. Cheeley
    
    DATE: March 31, 2005Robert D. Cheeley, Director/s/ Daniel B. Cowart
    
    DATE: March 31, 2005Daniel B. Cowart, Director
 45




---



##### Table of Contents



/s/ Paul D. Donaldson
    
    DATE: March 31, 2005Paul D. Donaldson, Director/s/ Charles L. Douglas
    
    DATE: March 31, 2005Charles L. Douglas, Director/s/ Dexter R. Floyd
    
    DATE: March 31, 2005Dexter R. Floyd, Director/s/ J. Edwin Howard
    
    DATE: March 31, 2005J. Edwin Howard, Director/s/ John J. Howard
    
    DATE: March 31, 2005John J. Howard, Director/s/ J. Stephen Hurst
    
    DATE: March 31, 2005J. Stephen Hurst, Director/s/ Kelly J. Johnson
    
    DATE: March 31, 2005Kelly J. Johnson, Chief Financial Officer(Principal Financial and Accounting Officer)/s/ Charles Machemehl, III
    
    DATE: March 31, 2005Charles Machemehl, III, Director/s/ J. Paul Maggard
    
    DATE: March 31, 2005J. Paul Maggard, Director/s/ Monty G. Watson
    
    DATE: March 31, 2005Monty G. Watson, Director, President, andChief Executive Officer
 46




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Consolidated Financial Statements December 31, 2004 and 2003 (with Independent Accountants Report thereon)




---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders
The PB Financial Services Corporation
Duluth, Georgia We have audited the accompanying consolidated balance sheets of The PB Financial Services
Corporation as of December 31, 2004 and 2003, and the related consolidated statements of earnings,
changes in shareholders equity, comprehensive income and cash flows for the years then ended.
These financial statements are the responsibility of management. Our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our audits 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 The PB Financial Services Corporation as of December
31, 2004 and 2003, and the results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United States of America. /s/
Porter Keadle Moore, LLP Atlanta, Georgia
February 25, 2005, except for Note 17 as to
which the date is March 29, 2005




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Consolidated Balance Sheets December 31, 2004 and 2003 2004
    
    
    2003AssetsCash and due from banks
    
    $
    13,605,257
    
    
    
    9,058,785Interest-bearing deposits with banks
    
    
    851,546
    
    
    
    607,328Federal funds sold
    
    
    5,755,000
    
    
    
    10,077,000Cash and cash equivalents
    
    
    20,211,803
    
    
    
    19,743,113Investment securities available for sale
    
    
    24,271,001
    
    
    
    22,522,858Investment securities held to maturity, fair value of $2,781,245
    
    
    2,774,383
    
    
    
    Other investments
    
    
    2,022,750
    
    
    
    760,000Loans, net
    
    
    291,536,663
    
    
    
    203,960,746Premises and equipment, net
    
    
    4,418,128
    
    
    
    4,256,429Bank owned life insurance
    
    
    4,153,731
    
    
    
    2,586,729Accrued interest receivable and other assets
    
    
    4,032,360
    
    
    
    2,528,084$
    353,420,819
    
    
    
    256,357,959Liabilities and Shareholders EquityDeposits:Noninterest-bearing demand
    
    $
    52,377,541
    
    
    
    28,416,175Interest-bearing demand
    
    
    33,598,579
    
    
    
    48,024,945Savings
    
    
    63,999,141
    
    
    
    24,041,970Time, $100,000 or more
    
    
    77,835,516
    
    
    
    51,473,112Other time
    
    
    76,093,746
    
    
    
    68,316,716Total deposits
    
    
    303,904,523
    
    
    
    220,272,918Securities sold under retail repurchase agreements
    
    
    
    
    
    
    477,120Note payable and other borrowings
    
    
    18,100,000
    
    
    
    7,100,000Junior subordinated debentures
    
    
    4,120,000
    
    
    
    4,120,000Accrued interest payable and other liabilities
    
    
    2,432,090
    
    
    
    1,973,158Total liabilities
    
    
    328,556,613
    
    
    
    233,943,196CommitmentsShareholders equity:Common stock, $5 par value, 10,000,000 shares authorized,
1,484,437 shares issued and outstanding
    
    
    7,422,185
    
    
    
    7,422,185Additional paid-in capital
    
    
    12,464,914
    
    
    
    12,464,914Retained earnings
    
    
    5,038,543
    
    
    
    2,402,860Accumulated other comprehensive income (loss)
    
    
    (61,436
    )
    
    
    124,804Total shareholders equity
    
    
    24,864,206
    
    
    
    22,414,763$
    353,420,819
    
    
    
    256,357,959
 See accompanying notes to consolidated financial statements. F-2




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Consolidated Statements of Earnings For the Years Ended December 31, 2004 and 2003 2004
    
    
    2003Interest income:Interest and fees on loans
    
    $
    16,040,700
    
    
    
    10,416,783Interest on federal funds sold
    
    
    105,094
    
    
    
    99,670Interest and dividends on investment securities:U.S. Government agencies and mortgage-backed securities
    
    
    725,479
    
    
    
    459,852Municipals
    
    
    57,815
    
    
    
    184,168Trust preferred securities
    
    
    90,000
    
    
    
    90,000Other
    
    
    84,455
    
    
    
    42,848Total interest income
    
    
    17,103,543
    
    
    
    11,293,321Interest expense:Interest-bearing demand deposits
    
    
    185,482
    
    
    
    259,185Savings deposits
    
    
    834,119
    
    
    
    261,117Time deposits
    
    
    3,653,684
    
    
    
    2,945,902Other
    
    
    503,784
    
    
    
    359,772Total interest expense
    
    
    5,177,069
    
    
    
    3,825,976Net interest income
    
    
    11,926,474
    
    
    
    7,467,345Provision for loan losses
    
    
    963,432
    
    
    
    971,686Net interest income after provision for loan losses
    
    
    10,963,042
    
    
    
    6,495,659Other income:Service charges
    
    
    342,801
    
    
    
    366,784Gain on sale of securities
    
    
    148,586
    
    
    
    Mortgage referral commissions
    
    
    865,981
    
    
    
    986,072Other
    
    
    340,334
    
    
    
    329,461Total other income
    
    
    1,697,702
    
    
    
    1,682,317Other expenses:Salaries and employee benefits
    
    
    5,061,196
    
    
    
    3,985,688Occupancy
    
    
    900,668
    
    
    
    722,875Other operating
    
    
    2,452,486
    
    
    
    2,165,230Total other expenses
    
    
    8,414,350
    
    
    
    6,873,793Earnings before income taxes
    
    
    4,246,394
    
    
    
    1,304,183Income tax expense
    
    
    1,610,711
    
    
    
    451,853Net earnings
    
    $
    2,635,683
    
    
    
    852,330Basic earnings per share
    
    $
    1.78
    
    
    
    0.86Diluted earnings per share
    
    $
    1.66
    
    
    
    0.79
 See accompanying notes to consolidated financial statements. F-3




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Consolidated Statements of Changes in Shareholders Equity For the Years Ended December 31, 2004 and 2003 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    TotalBalance, December 31, 2002
    
    
    942,176
    
    
    $
    4,710,880
    
    
    
    5,295,775
    
    
    
    1,550,530
    
    
    
    280,099
    
    
    
    11,837,284Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    852,330
    
    
    
    
    
    
    
    852,330Issuance of common stock, net of
issuance costs of $15,819
    
    
    542,261
    
    
    
    2,711,305
    
    
    
    7,169,139
    
    
    
    
    
    
    
    
    
    
    
    9,880,444Change in net unrealized gain on
investment securities available
for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (155,295
    )
    
    
    (155,295
    )Balance, December 31, 2003
    
    
    1,484,437
    
    
    
    7,422,185
    
    
    
    12,464,914
    
    
    
    2,402,860
    
    
    
    124,804
    
    
    
    22,414,763Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,635,683
    
    
    
    
    
    
    
    2,635,683Change in net unrealized gain on
investment securities available
for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (186,240
    )
    
    
    (186,240
    )Balance, December 31, 2004
    
    
    1,484,437
    
    
    $
    7,422,185
    
    
    
    12,464,914
    
    
    
    5,038,543
    
    
    
    (61,436
    )
    
    
    24,864,206
 See accompanying notes to consolidated financial statements. F-4




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2004 and 2003 2004
    
    
    2003Net earnings
    
    $
    2,635,683
    
    
    
    852,330Other comprehensive income (loss):Unrealized (losses) arising during the period, net of taxes
of $45,423 and $80,001, respectively
    
    
    (88,173
    )
    
    
    (155,295
    )Reclassification adjustment for gains on sales of investment
securities available for sale included in net earnings, net of
taxes of $50,519 in 2004
    
    
    (98,067
    )
    
    
    Other comprehensive (loss), net of tax
    
    
    (186,240
    )
    
    
    (155,295
    )Comprehensive income
    
    $
    2,449,443
    
    
    
    697,035
 See accompanying notes to consolidated financial statements. F-5




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Consolidated Statements of Cash Flows For the Years Ended December 31, 2004 and 2003 2004
    
    
    2003Cash flows from operating activities:Net earnings
    
    $
    2,635,683
    
    
    
    852,330Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation, amortization and accretion
    
    
    319,357
    
    
    
    619,852Provision for loan losses
    
    
    963,432
    
    
    
    971,686Deferred income taxes
    
    
    (298,160
    )
    
    
    (395,252
    )Gain on sale of investment securities
    
    
    148,586
    
    
    
    Gain on sales of other real estate
    
    
    
    
    
    
    (73,834
    )Change in:Net deferred loan fees
    
    
    (93,883
    )
    
    
    358,176Cash surrender value life insurance
    
    
    (105,100
    )
    
    
    (94,207
    )Accrued interest receivable and other assets
    
    
    (1,116,128
    )
    
    
    (262,938
    )Accrued interest payable and other liabilities
    
    
    458,932
    
    
    
    1,306,410Net cash provided by operating activities
    
    
    2,912,719
    
    
    
    3,282,223Cash flows from investing activities:Purchase of investment securities available for sale
    
    
    (15,985,918
    )
    
    
    (30,616,649
    )Purchase of investment securities held to maturity
    
    
    (2,995,313
    )
    
    
    Proceeds from calls and maturities of investment securities
available for sale
    
    
    8,797,552
    
    
    
    24,684,081Proceeds from calls and maturities of investment securities
held to maturity
    
    
    221,367
    
    
    
    Proceeds from sales of investment securities available for sale
    
    
    5,147,853
    
    
    
    Purchase of other investments
    
    
    (1,262,750
    )
    
    
    (89,400
    )Purchase of cash value life insurance
    
    
    (1,462,000
    )
    
    
    (395,000
    )Net change in loans
    
    
    (88,445,466
    )
    
    
    (67,210,620
    )Purchases of premises and equipment
    
    
    (613,839
    )
    
    
    (419,170
    )Construction in process
    
    
    
    
    
    
    (172,717
    )Proceeds from sales of other real estate
    
    
    
    
    
    
    1,171,910Net cash used by investing activities
    
    
    (96,598,514
    )
    
    
    (73,047,565
    )Cash flows from financing activities:Net change in deposits
    
    
    83,631,605
    
    
    
    64,283,879Net change in securities sold under retail repurchase agreements
    
    
    (477,120
    )
    
    
    (902,661
    )Proceeds from Federal Home Loan Bank borrowings
    
    
    18,000,000
    
    
    
    3,000,000Repayments on Federal Home Loan Bank borrowings
    
    
    (7,000,000
    )
    
    
    (2,300,000
    )Transaction costs associated with junior subordinated debentures
    
    
    
    
    
    
    (5,645
    )Proceeds from issuance of common stock, net of issuance costs
    
    
    
    
    
    
    9,880,444Net cash provided by financing activities
    
    
    94,154,485
    
    
    
    73,956,017Net change in cash and cash equivalents
    
    
    468,690
    
    
    
    4,190,675Cash and cash equivalents at beginning of year
    
    
    19,743,113
    
    
    
    15,552,438Cash and cash equivalents at end of year
    
    $
    20,211,803
    
    
    
    19,743,113
 F-6




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Consolidated Statements of Cash Flows, continued For the Years Ended December 31, 2004 and 2003 2004
    
    
    2003Supplemental disclosures of cash flow information:Cash paid during the year for:Interest
    
    $
    4,943,601
    
    
    
    3,872,444Income taxes
    
    $
    1,551,000
    
    
    
    708,000Noncash investing and financing activities:Change in net unrealized gain on investment
securities available for sale, net of tax
    
    $
    (186,240
    )
    
    
    (155,295
    )Transfer of loans to other real estate
    
    $
    
    
    
    
    1,098,901
 See accompanying notes to consolidated financial statements. F-7




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements  (1)
    Summary of Significant Accounting PoliciesOrganization

The Peachtree Bank (the Bank) was organized in January 1998 upon receipt of its banking
charter from the
Georgia Department of Banking and Finance. In 2002, the Bank was approved to become a member
of the Federal Reserve Bank. The Bank is primarily regulated by the Federal Reserve Bank and
undergoes periodic examinations by this regulatory agency. The Bank, whose main office is in
Duluth, Georgia, provides a full range of commercial and consumer banking services primarily
in Fulton County, Georgia and the surrounding metropolitan Atlanta area.On July 15, 1999, the Bank became a subsidiary of The PB Financial Services Corporation (the
Company) as a result of a tax-free reorganization in which the shareholders of the Bank
exchanged all outstanding Bank stock for stock in the Company.In December 2002, the Company formed PB Capital Trust I (the Trust) for the purpose of
issuing trust preferred securities.Principles of Consolidation
The consolidated financial statements include the financial statements of the Company and its
wholly owned subsidiary, the Bank. All significant intercompany balances and transactions have
been eliminated in consolidation.Basis of Presentation
The accounting principles followed by the Company and the Bank, and the methods of applying
these principles, conform with accounting principles generally accepted in the United States
of America (GAAP) and with general practices in the banking industry. In preparing the
financial statements in conformity with GAAP, management is required to make estimates and
assumptions that affect the reported amounts in the financial statements. Actual results could
differ significantly from these estimates. Material estimates common to the banking industry
that are particularly susceptible to significant change in the near term include, but are not
limited to, the determination of the allowance for loan losses and the valuation of other real
estate owned.Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing
deposits with banks and federal funds sold.Investment Securities
The Bank classifies its securities in one of three categories: trading, available for sale, or
held to maturity. Trading securities are bought and held principally for sale in the near
term. Held to maturity securities are those securities for which the Bank has the ability and
intent to hold the security until maturity. All other securities not included in trading or
held to maturity are classified as available for sale. At December 31, 2004 and 2003, the Bank
classified all of its investment securities as available for sale and held to maturity.Available for sale securities are recorded at fair value. Held to maturity securities are
recorded at cost, adjusted for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses, net of the related tax effect, on securities available
for sale are excluded from earnings and are reported as a separate component of shareholders
equity until realized. Transfers of securities between categories are recorded at fair value
at the date of transfer. Unrealized holding gains or losses associated with transfers of
securities from held to maturity to available for sale are recorded as a separate component of
shareholders equity. The unrealized holding gains or losses included in the separate
component of shareholders equity for securities transferred from available for sale to held
to maturity are maintained and amortized into earnings over the remaining life of the security
as an adjustment to yield in a manner consistent with the amortization or accretion of premium
or discount on the associated security.Management has the positive intent and ability to hold held to maturity securities to
maturity.A decline in the market value of any available for sale or held to maturity investment below
cost that is deemed other than temporary is charged to earnings and establishes a new cost
basis for the security. F-8




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (1)
    Summary of Significant Accounting Policies, continuedInvestment Securities, continued
Premiums and discounts are amortized or accreted over the life of the related security as an
adjustment to the yield. Realized gains and losses for securities classified as available for
sale and held to maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.Other Investments
Other investments include equity securities of the Federal Reserve Bank and Federal Home Loan
Bank, which do not have readily determinable fair values. These investments are carried at
cost.Loans and Allowance for Loan Losses
Loans are stated at principal amount outstanding, net of the allowance for loan losses and
deferred loan fees. Interest on loans is calculated by using the simple interest method on
daily balances of the principal amount outstanding. Loan origination fees, net of direct loan
origination costs, are deferred and recognized as income over the life of the related loan on
a level-yield basis.A loan is considered impaired when, based on current information and events, it is probable
that all amounts due according to the contractual terms of the loan will not be collected.
Impaired loans are measured based on the present value of expected future cash flows,
discounted at the loans effective interest rate, or at the loans observable market price, or
the fair value of the collateral if the loan is collateral dependent.Accrual of interest is discontinued on a loan when management believes, after considering
economic conditions and collection efforts, that the borrowers financial condition is such
that collection of interest is doubtful. Interest previously accrued but not collected is
reversed against current period earnings and interest is recognized on a cash basis when such
loans are placed on nonaccrual status.The allowance for loan losses is established through a provision for loan losses charged to
earnings. Loans are charged against the allowance for loan losses when management believes the
collectibility of the principal is unlikely. The allowance represents an amount which, in
managements judgment, will be adequate to absorb probable losses on existing loans that may
become uncollectible.Managements judgment in determining the adequacy of the allowance is based on evaluations of
the collectibility of loans. These evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, current economic conditions that may affect
the borrowers ability to pay, overall portfolio quality, and review of specific problem
loans. In determining the adequacy of the allowance for loan losses, management uses a loan
grading system that rates individual loans into nine risk classifications. These risk
categories are assigned allocations of loss based on managements estimate of potential loss
which is generally based on an analysis of historical loss experience, current economic
conditions, performance trends, and discounted collateral deficiencies. The combination of
these results is compared monthly to the recorded allowance for loan losses and material
differences are adjusted by increasing or decreasing the provision for loan losses. Management
uses an independent external loan reviewer to challenge and corroborate the loan grading
system and provide additional analysis in determining the adequacy of the allowance for loan
losses and the future provisions for estimated losses.While management uses available information to recognize losses on loans, future additions to
the allowance 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 based on judgments different than those of management. F-9




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (1)
    Summary of Significant Accounting Policies, continuedPremises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the assets (or the
lesser of the estimated useful lives or lease terms for leasehold improvements). When assets
are retired or otherwise disposed, the cost and related accumulated depreciation are removed
from the accounts, and any gain or loss is reflected in earnings for the period. The cost of
maintenance and repairs which do not improve or extend the useful life of the respective asset
is charged to expense as incurred, whereas significant renewals and improvements are
capitalized. The range of estimated useful lives for premises and equipment are generally as
follows: Buildings and improvements
    
    10 - 40 yearsFurniture and equipment
    
    3 - 10 yearsLeasehold improvements
    
    10 years
  Securities Sold Under Retail Repurchase
Agreements

Securities sold under retail repurchase agreements are secured borrowings from customers and
are treated as financing activities, and are carried at the amounts at which the securities
will be repurchased as specified in the respective agreements.Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Additionally, the recognition of future
tax benefits is required to the extent that realization of such benefits is more likely than
not. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which the assets and liabilities are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income tax expense in the period that includes the enactment date.In the event the future tax consequences of differences between the financial reporting bases
and the tax bases of the Banks assets and liabilities results in deferred tax assets, an
evaluation of the probability of being able to realize the future benefits indicated by such
asset is required. A valuation allowance is provided for the portion of the deferred tax asset
when it is more likely than not that some portion or all of the deferred tax asset will not be
realized. In assessing the realizability of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable income, and tax
planning strategies.Mortgage Referral Commissions

The Company earns commissions from third party investors who fund residential mortgage loans
for which the Company performs certain loan origination services. Accordingly, the loans are
not funded or recorded by the Company, and the commissions are recorded as they are earned
(i.e., when the loan closes) in the accompanying consolidated statements of earnings as
mortgage referral commissions. F-10




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (1)
    Summary of Significant Accounting Policies,
continuedStock-Based Compensation

The Companys stock-based compensation plan is accounted for under Accounting Principles Board
Opinion No. 25 and related interpretations. No compensation expense has been recognized
related to the grant of the stock options. Had compensation cost been determined based upon
the fair value of the options at the grant dates, the Companys net earnings and net earnings
per share would have been reduced to the proforma amounts indicated below. 2004
    
    
    2003Net earnings
    
    As reported
    
    $
    2,635,683
    
    
    
    852,330Effect of stock options, net of tax
    
    
    (58,644
    )
    
    
    (38,547
    )Proforma
    
    $
    2,577,039
    
    
    
    813,783Basic earnings per share
    
    As reported
    
    $
    1.78
    
    
    
    0.86Effect of stock options, net of tax
    
    
    (0.04
    )
    
    
    (0.04
    )Proforma
    
    $
    1.74
    
    
    
    0.82Diluted earnings per share
    
    As reported
    
    $
    1.66
    
    
    
    0.79Effect of stock options, net of tax
    
    
    (0.04
    )
    
    
    (0.04
    )Proforma
    
    $
    1.62
    
    
    
    0.75
  The weighted average grant-date fair value of options granted in 2004 and 2003 was $6.11
and $6.27, respectively. The fair value of each option is estimated on the date of grant using
the Minimum Value options-pricing model with the following weighted average assumptions used
for grants in 2004 and 2003: dividend yield of 0%, risk-free interest rate of 4%,
respectively, and an expected life of ten years.Net Earnings Per Share

Basic earnings per share are based on the weighted average number of common shares outstanding
during the period while the effects of potential shares outstanding during the period are
included in diluted earnings per share. The average market price during the year is used to
compute equivalent shares.The reconciliation of the amounts used in the computation of both basic earnings per share
and diluted earnings per share for each period is presented as follows:For the year ended December 31, 2004 Net
    
    
    Common
    
    
    Per ShareEarnings
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    $
    2,635,683
    
    
    
    1,484,437
    
    
    $
    1.78Effect of stock options
    
    
    
    
    
    
    104,297Diluted earnings per share
    
    $
    2,635,683
    
    
    
    1,588,734
    
    
    $
    1.66
 For the year ended
December 31, 2003 Net
    
    
    Common
    
    
    Per ShareEarnings
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    $
    852,330
    
    
    
    992,034
    
    
    $
    0.86Effect of stock options
    
    
    
    
    
    
    89,452Diluted earnings per share
    
    $
    852,330
    
    
    
    1,081,486
    
    
    $
    0.79
 F-11




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (1)
    Summary of Significant Accounting Policies,
continuedRecent Accounting Pronouncements Meaning of Other-Than-Temporary-Impairment

In March 2004, The Emerging Issues Task Force (EITF) issued EITF 03-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-1).
EITF 03-1 provides guidance for evaluating whether an investment is other-than-temporarily
impaired. The disclosure guidance was fully effective for other-than-temporary impairment
evaluations made in reporting periods ending after June 15, 2004, whereas the recognition and
measurement guidance has been deferred. The disclosures required by EITF 03-1 are included in
note 2 to the consolidated financial statements. The Bank did not recognize an impairment
loss on any investment in 2004 or 2003.Share-Based Payment

In December 2004, the FASB revised SFAS No. 123 (SFAS
No. 123 (R)). SFAS No. 123 (R),
Share-Based Payment, requires all share-based payments to employees and directors, including
grants of employee stock options, to be recognized in the financial statements based on their
fair values. Pro forma disclosure is no longer an alternative to financial statement
recognition. For the Company, SFAS No. 123 (R) is effective beginning January 1, 2006. The
financial statement impact is not expected to be materially different from that shown in the
existing proforma disclosure required under the original SFAS No. 123.(2)
    Investment Securities

Investment securities available for sale at December 31, 2004 and 2003 are as follows: December 31, 2004Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. Government agencies
    
    $
    12,402,144
    
    
    
    21,088
    
    
    
    34,106
    
    
    
    12,389,126Municipal securities
    
    
    1,252,249
    
    
    
    8,197
    
    
    
    8,614
    
    
    
    1,251,832Trust preferred securities
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Mortgage-backed securities
    
    
    9,709,693
    
    
    
    19,491
    
    
    
    99,141
    
    
    
    9,630,043Total
    
    $
    24,364,086
    
    
    
    48,776
    
    
    
    141,861
    
    
    
    24,271,001
 December 31, 2003Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. Government agencies
    
    $
    9,524,748
    
    
    
    97,355
    
    
    
    56,956
    
    
    
    9,565,147Municipal securities
    
    
    6,054,580
    
    
    
    188,379
    
    
    
    40,340
    
    
    
    6,202,619Trust preferred securities
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Mortgage-backed securities
    
    
    5,754,433
    
    
    
    36,170
    
    
    
    35,511
    
    
    
    5,755,092Total
    
    $
    22,333,761
    
    
    
    321,904
    
    
    
    132,807
    
    
    
    22,522,858
 Investment securities held to maturity at December 31, 2004 are as follows: December 31, 2004Amortized
    
    
    Gross
 Unrealized
    
    
    Gross
 Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMortgage-backed securities
    
    $
    2,774,383
    
    
    
    6,862
    
    
    
    
    
    
    
    2,781,245
 F-12




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (2)
    Investment Securities, continued

The current fair value and associated unrealized losses on investments in debt
securities with unrealized losses at December 31, 2004 are summarized in the table below. Less than 12 Months
    
    
    Greater than 12 MonthsEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesU.S. Government agencies
    
    $
    5,404,250
    
    
    
    34,106
    
    
    
    
    
    
    
    Municipal securities
    
    $
    853,635
    
    
    
    8,614
    
    
    
    
    
    
    
    Mortgage-backed securities
    
    $
    5,410,605
    
    
    
    66,051
    
    
    
    2,787,400
    
    
    
    33,090
  All investment securities with an unrealized loss as of December 31, 2003 had been in an
unrealized loss position for less than 12 months.The unrealized losses on debt securities as of December 31, 2004 arose due to changing
interest rates and are considered to be temporary. At December 31, 2004, four out of
seventeen securities issued by municipalities and six out of nineteen securities issued by
U.S. government agencies and government sponsored corporations, including mortgage-backed
securities contained unrealized losses and are included in the table above. These unrealized
losses are considered temporary because the repayment sources of principal and interest are
government backed and the investment risk grades on each security are acceptable.The amortized cost and estimated fair value of investment securities held to maturity and
available for sale at December 31, 2004, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers have the right to call or
prepay obligations with or without call or prepayment penalties. Held to Maturity
    
    
    Available for SaleAmortized
    
    
    Estimated
    
    
    Amortized
    
    
    EstimatedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueDue from one to five years
    
    $
    
    
    
    
    
    
    
    
    9,666,977
    
    
    
    9,635,545Due from five to ten years
    
    
    
    
    
    
    
    
    
    
    3,261,795
    
    
    
    3,278,116Due after ten years
    
    
    
    
    
    
    
    
    
    
    1,725,621
    
    
    
    1,727,297Mortgage-backed securities
    
    
    2,774,383
    
    
    
    2,781,245
    
    
    
    9,709,693
    
    
    
    9,630,043$
    2,774,383
    
    
    
    2,781,245
    
    
    
    24,364,086
    
    
    
    24,271,001
  For the year ended December 31, 2004, the Company sold investment securities available
for sale for $5,147,853 and realized gross gains of $154,234 and gross losses of $5,648 on
those sales.At December 31, 2004 and 2003 securities with a carrying value of approximately $8,159,000 and
$4,638,000, respectively, were pledged to secure public deposits and for other purposes as
required by law. Investment securities with a carrying value of approximately $1,244,000 at
December 31, 2003, were allocated by the Bank for collateral under retail repurchase
agreements.  (3)
    Loans

Major classifications of loans at December 31, 2004 and 2003 are summarized as follows: 2004
    
    
    2003Commercial
    
    $
    38,793,340
    
    
    
    31,659,251Real estate  commercial and residential
    
    
    146,421,435
    
    
    
    100,711,590Real estate  construction
    
    
    88,607,022
    
    
    
    59,213,970Real estate  home equity
    
    
    8,351,273
    
    
    
    5,834,477Consumer
    
    
    12,890,848
    
    
    
    9,314,249295,063,918
    
    
    
    206,733,537Less: Allowance for loan losses
    
    
    2,971,856
    
    
    
    2,123,509Net deferred loan fees
    
    
    555,399
    
    
    
    649,282$
    291,536,663
    
    
    
    203,960,746
 F-13




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (3)
    Loans, continued

The Bank grants loans and extensions of credit to individuals and a variety of firms and
corporations located primarily in Fulton, DeKalb and Gwinnett Counties, Georgia. Although the
Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is
collateralized by improved and unimproved real estate and is dependent upon the real estate
market.Changes in the allowance for loan losses were as follows: 2004
    
    
    2003Balance at beginning of year
    
    $
    2,123,509
    
    
    
    1,382,676Provision charged to operations
    
    
    963,432
    
    
    
    971,686Loans charged off
    
    
    (138,651
    )
    
    
    (287,823
    )Recoveries
    
    
    23,566
    
    
    
    56,970Balance at end of year
    
    $
    2,971,856
    
    
    
    2,123,509
  (4)
    Premises and Equipment

Major classifications of premises and equipment are summarized as follows: 2004
    
    
    2003Land
    
    $
    610,482
    
    
    
    610,482Buildings and improvements
    
    
    2,729,907
    
    
    
    2,674,132Furniture and equipment
    
    
    2,671,168
    
    
    
    2,073,360Leasehold improvements
    
    
    348,507
    
    
    
    241,746Construction in process
    
    
    11,057
    
    
    
    172,7176,371,121
    
    
    
    5,772,437Less accumulated depreciation
    
    
    1,952,993
    
    
    
    1,516,008$
    4,418,128
    
    
    
    4,256,429
 Depreciation expense was $452,140 and $367,367 for the years ended December 31, 2004 and
2003, respectively. The Bank leases certain office facilities to third parties. For the years ended December 31,
2004 and 2003, rental income totaled approximately $55,000 and $63,000, respectively  (5)
    Deposits

At December 31, 2004, the scheduled maturities of time deposits are as follows: 2005
    
    $
    126,007,3622006
    
    
    17,556,9562007
    
    
    2,230,2742008
    
    
    2,523,5512009
    
    
    5,611,119$
    153,929,262
  (6)
    Note Payable and Other Borrowings

During 2002, the Company obtained a $250,000 line of credit with another financial
institution. The debt is collateralized by 100% of the stock of the Bank, and calls for
interest to be paid quarterly at the prime rate less 50 basis points. The line of credit
matures in December 2005. The loan agreement contains covenants relating to the level of the
allowance for loan losses, payments of dividends, regulatory capital adequacy and return on
average assets. At December 31, 2004, the Company was in compliance with all loan covenants.
The Company had no balances outstanding under this line of credit at December 31, 2004 and
2003. F-14




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (6)
    Note Payable and Other Borrowings, continued

The Bank is party to a credit facility with the Federal Home Loan Bank (FHLB) of
Atlanta, whereby the FHLB provides credit to the Bank under varying terms. Amounts advanced
by the FHLB are collateralized by a blanket lien on all 14 family first mortgage loans and
selected commercial loans. At December 31, 2004, the carrying amount of loans pledged as
collateral totaled approximately $27,871,000.  The FHLB advances at December 31, 2004 and 2003 are summarized as follows: Interest
    
    
    RateMaturity Date
    
    Rate
    
    
    Type
    
    
    2004
    
    
    2003August 11, 2005
    
    
    1.98
    %
    
    Fixed
    
    $
    5,000,000
    
    
    
    March 17, 2006
    
    
    2.52
    %
    
    Adjustable
    
    
    8,000,000
    
    
    
    May 12, 2006
    
    
    2.30
    %
    
    Adjustable
    
    
    1,000,000
    
    
    
    June 24, 2005
    
    
    2.69
    %
    
    Adjustable
    
    
    2,100,000
    
    
    
    June 23, 2004
    
    
    2.08
    %
    
    Fixed
    
    
    
    
    
    
    2,100,000December 23, 2004
    
    
    2.31
    %
    
    Fixed
    
    
    
    
    
    
    2,000,000November 12, 2004
    
    
    1.83
    %
    
    Fixed
    
    
    
    
    
    
    3,000,000November 22, 2005
    
    
    2.73
    %
    
    Daily
    
    
    2,000,000
    
    
    
    $
    18,100,000
    
    
    
    7,100,000
  Additionally, the Bank has $12,000,000 available for the purchase of overnight federal
funds from three correspondent financial institutions.  (7)
    Junior Subordinated Debentures

In December 2002, the Company issued, through a wholly owned Delaware statutory trust, PB
Capital Trust I (the Trust), $4,000,000 of guaranteed preferred beneficial interests in the
Companys junior subordinated deferrable interest debentures (trust preferred securities) that
qualify as Tier I capital under Federal Reserve Board guidelines within certain limitations.
All of the common securities of the Trust are owned by the Company. The proceeds from the
issuance of the common securities and the trust preferred securities were used by the Trust to
purchase $4,120,000 of junior subordinated debentures of the Company, which carry a deferrable
floating rate equal to the Wall Street Journal prime rate plus 100 basis points. At December
31, 2004, this rate was 6.25%. The proceeds received by the Company from the sale of the
junior subordinated debentures were used to strengthen the capital position of the Bank and to
accommodate current and future growth. The debentures and related accrued interest represent
the sole assets of the Trust.The trust preferred securities accrue and pay distributions quarterly, equal to the Wall
Street Journal prime rate plus 100 basis points per annum of the stated liquidation value of
$50,000 per capital security. The Company has entered into contractual arrangements which,
taken collectively, fully and unconditionally guarantee payment of accrued and unpaid
distributions required to be paid on the trust preferred securities, the redemption price with
respect to any trust preferred securities called for redemption by the Trust, and payments due
upon a voluntary or involuntary dissolution, winding up, or liquidation of the Trust.The trust preferred securities are mandatorily redeemable upon maturity of the debentures on
December 31, 2032, or upon earlier redemption as provided in the indenture. The Company has
the right to redeem the debentures purchased by the Trust in whole or in part, on or after
December 31, 2007. As specified in the indenture, if the debentures are redeemed prior to
maturity, the redemption price will be the unpaid principal amount, plus any accrued unpaid
interest. F-15




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (8)
    Income Taxes

The components of income tax expense are as follows: 2004
    
    
    2003Current
    
    $
    1,908,871
    
    
    
    847,105Deferred
    
    
    (298,160
    )
    
    
    (395,252
    )$
    1,610,711
    
    
    
    451,853
  The differences between income tax expense and the amount computed by applying the
statutory federal income tax rate to earnings before income taxes are as follows: 2004
    
    
    2003Pre-tax income at statutory rates
    
    $
    1,443,774
    
    
    
    443,422Differences:Nondeductible meals and entertainment
    
    
    12,525
    
    
    
    12,620State taxes, net of federal benefit
    
    
    114,694
    
    
    
    55,789Tax exempt interest
    
    
    (26,076
    )
    
    
    (62,820
    )Increase in cash surrender value of life insurance
    
    
    (35,700
    )
    
    
    (32,030
    )Other
    
    
    101,494
    
    
    
    34,872$
    1,610,711
    
    
    
    451,853
  The following summarizes the tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities. The net deferred
tax asset is included as a component of other assets at December 31, 2004 and 2003. 2004
    
    
    2003Deferred tax assets:Allowance for loan losses
    
    $
    1,083,330
    
    
    
    766,540Deferred loan fees
    
    
    210,829
    
    
    
    246,467Deferred compensation
    
    
    207,741
    
    
    
    131,082Unrealized loss on investment securities and available for sale
    
    
    31,649
    
    
    
    Other
    
    
    6,590
    
    
    
    6,074Total gross deferred tax assets
    
    
    1,540,139
    
    
    
    1,150,163Deferred tax liabilities:Unrealized gain on investment securities available for sale
    
    
    
    
    
    
    (64,293
    )Accumulated depreciation
    
    
    (210,672
    )
    
    
    (150,505
    )Total gross deferred tax liabilities
    
    
    (210,672
    )
    
    
    (214,798
    )Net deferred tax asset
    
    $
    1,329,467
    
    
    
    935,365
  (9)
    Related Party Transactions

The Bank conducts transactions with directors and executive officers, including companies in
which they have beneficial interests, in the normal course of business. It is the policy of
the Bank that loan transactions with directors and officers be made on substantially the same
terms as those prevailing at the time made for comparable loans to other customers. The
following is a summary of activity for related party loans for 2004: Beginning balance
    
    $
    7,328,983New loans
    
    
    8,503,700Repayments
    
    
    (9,534,452
    )Ending balance
    
    $
    6,298,231
 F-16




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (9)
    Related Party Transactions, continued
At December 31, 2004 and 2003, the Bank had deposit relationships with related parties of
approximately $13,433,000 and $4,366,000, respectively.The Bank had a lease agreement with one of its directors for office space located in the
Banks building. Although the lease expired December 31, 2001, the Bank continues to lease
the space to this director on a month-to-month basis and receives monthly lease payments of
$2,037 plus certain executory costs.(10)
    Commitments

The Bank leases various banking facilities and equipment under operating lease arrangements.
Future minimum lease payments required for all operating leases having a remaining term in
excess of one year at December 31, 2004 are as follows: Year Ending December 31,2005
    
    $
    219,4912006
    
    
    214,3092007
    
    
    205,7732008
    
    
    190,3652009
    
    
    167,073Thereafter
    
    
    503,099Total minimum obligation
    
    $
    1,500,110
  The total rent expense was approximately $203,000 and $119,000 for 2004 and 2003,
respectively.The Bank 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. Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in the balance
sheet. The contract amounts of those instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.The 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 Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet instruments.In most cases, the Bank does require collateral or other security to support financial
instruments with credit risk Contractual Amount2004
    
    
    2003Financial instruments whose contract amounts represent credit risk:Commitments to extend credit
    
    $
    89,249,000
    
    
    
    68,638,000Standby letters of credit
    
    $
    1,495,000
    
    
    
    1,268,000
  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 may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank, upon extension of credit is based on managements credit evaluation.
Collateral held varies but may include unimproved and improved real estate, certificates of
deposit, or personal property.Standby letters of credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to
businesses in the Banks delineated trade area. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers. The
Bank holds real estate, equipment, automobiles and customer deposits as collateral supporting
those commitments for which collateral is deemed necessary. F-17




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (11)
    Benefit Plans

The Bank has a 401(k) plan for the benefit of employees with eligibility subject to certain
minimum age and service requirements. Under this plan, employees may contribute from two to
fifteen percent of their salaries, up to the legal contribution limit. At its discretion,
the Bank may match a portion of participants contributions. The Bank may also make an
annual discretionary profit sharing contribution to the plan. The Bank contributed
approximately $64,600 and $25,400 to the plan in 2004 and 2003, respectively.The Company has an employee stock option plan and a director stock option plan. The plans
were adopted for the benefit of directors and key officers and employees in order that they
may purchase Company stock at a price equal to the fair market value on the date of grant. A
total of 200,000 shares were reserved for possible issuance under the employee stock option
plan. A total of 158,198 shares were reserved for possible issuance under the director stock
option plan. The options vest over periods of time as specified in the option agreements and
expire after ten years. At December 31, 2004, the options have a weighted average remaining
contractual life of approximately six years.A summary of activity in these stock option plans is presented below: 2004
    
    
    2003Weighted
    
    
    
    
    
    
    WeightedOption
    
    
    Average Option
    
    
    Option
    
    
    Average OptionShares
    
    
    Price Per Share
    
    
    Shares
    
    
    Price Per ShareOutstanding, beginning of year
    
    
    281,648
    
    
    $
    11.26
    
    
    
    247,698
    
    
    $
    10.41Granted during the year
    
    
    34,450
    
    
    $
    18.25
    
    
    
    33,950
    
    
    $
    17.26Cancelled during the year
    
    
    (5,750
    )
    
    $
    18.25
    
    
    
    
    
    
    
    Exercised during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding, end of year
    
    
    310,348
    
    
    $
    11.88
    
    
    
    281,648
    
    
    $
    11.26Number of shares exercisable
    
    
    230,638
    
    
    $
    10.38
    
    
    
    214,598
    
    
    $
    10.07
 A summary of options outstanding as of December 31, 2004 is presented below: WeightedAverage OptionOptions
    
    
    Price Per Share ofOptions
    
    
    Price
    
    
    Years
    
    
    Currently
    
    
    Options CurrentlyOutstanding
    
    Per Share
    
    
    Remaining
    
    
    Exercisable
    
    
    Exercisable219,698
    
    
    $
    10.00
    
    
    
    4
    
    
    
    212,718
    
    
    $
    10.0035,500
    
    
    $
    13.61
    
    
    
    8
    
    
    
    13,200
    
    
    $
    13.6155,150
    
    
    $
    18.25
    
    
    
    9-10
    
    
    
    4,720
    
    
    $
    18.25310,348
    
    
    $
    11.98
    
    
    
    
    
    
    
    230,638
    
    
    $
    10.38
  During 2001, the Company adopted a post-retirement benefit plan to provide retirement benefits
to certain of the Companys executive officers and its board of directors and to provide
death benefits for the designated beneficiaries. Under this plan, single-premium,
split-dollar, whole-life insurance contracts were purchased on the lives of certain
executive officers and members of the board of directors. The increase in the cash
surrender value of the contracts, less the Banks cost of funds, constitutes the Companys
contribution to the plan each year. In the event the insurance contracts fail to produce
positive returns, the Company has no obligation to contribute to the plan. At December 31,
2004 and 2003, the cash surrender value of the insurance contracts was $4,153,731 and
$2,586,729, respectively, and is included in the consolidated balance sheet as a component
of other assets. For the years ended December 31, 2004 and 2003, the Company recorded
income, representing the increase in the cash surrender value of the contracts, of
approximately $105,000 and $94,000, respectively, and incurred expenses of approximately
$185,000 and $114,000, respectively. F-18




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (12)
    Regulatory Matters

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 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
assets, liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The 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 (set forth in the table below) of
total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets (all
as defined). Management believes, as of December 31, 2004, that the Company and the Bank meet
all capital adequacy requirements to which they are subject.As of December 31, 2004 the most recent notification from regulatory authorities
categorized the 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 1 risk-based and Tier 1 leverage ratios as set forth in the table.
There are no conditions or events since that notification that management believes have
changed the Banks category. 

As discussed in note 7, PB Capital Trust I is not consolidated by the Company under
FIN 46; however, for regulatory purposes, the Trust continues to be consolidated with the
Company and, to the extent allowable under regulatory guidelines, the trust preferred
securities issued by the Trust continue to be reported as Tier 1 capital.The Companys and the Banks actual capital amounts and ratios are presented below. To Be WellCapitalized UnderFor Capital
    
    
    Prompt CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(dollars in thousands)As of December 31, 2004:Total Capital (to Risk-Weighted Assets)Consolidated
    
    $
    32,017
    
    
    
    10.38
    %
    
    $
    24,665
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    31,516
    
    
    
    10.24
    %
    
    $
    24,624
    
    
    
    8.0
    %
    
    $
    30,780
    
    
    
    10.0
    %Tier 1 Capital (to Risk-Weighted Assets)Consolidated
    
    $
    29,045
    
    
    
    9.42
    %
    
    $
    12,332
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    28,544
    
    
    
    9.27
    %
    
    $
    12,312
    
    
    
    4.0
    %
    
    $
    18,468
    
    
    
    6.0
    %Tier 1 Capital (to Average Assets)Consolidated
    
    $
    29,045
    
    
    
    8.91
    %
    
    $
    13,033
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    28,544
    
    
    
    8.28
    %
    
    $
    13,783
    
    
    
    4.0
    %
    
    $
    17,229
    
    
    
    5.0
    %As of December 31, 2003:Total Capital (to Risk-Weighted Assets)Consolidated
    
    $
    28,414
    
    
    
    13.0
    %
    
    $
    17,456
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    28,017
    
    
    
    12.9
    %
    
    $
    17,426
    
    
    
    8.0
    %
    
    $
    21,783
    
    
    
    10.0
    %Tier 1 Capital (to Risk-Weighted Assets)Consolidated
    
    $
    26,290
    
    
    
    12.1
    %
    
    $
    8,728
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    25,893
    
    
    
    11.9
    %
    
    $
    8,713
    
    
    
    4.0
    %
    
    $
    13,070
    
    
    
    6.0
    %Tier 1 Capital (to Average Assets)Consolidated
    
    $
    26,290
    
    
    
    10.7
    %
    
    $
    9,836
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    25,893
    
    
    
    10.5
    %
    
    $
    9,826
    
    
    
    4.0
    %
    
    $
    12,283
    
    
    
    5.0
    %
 F-19




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (13)
    Shareholders Equity

Dividends paid by the Bank are the primary source of funds available to the Company. Banking
regulations limit the amount of dividends that may be paid without prior approval of the
regulatory authorities. These restrictions for the Bank are based on the level of regulatory
classified assets, prior years earnings, and the ratio of equity capital to total assets. At
December 31, 2004 and 2003, total shareholders equity of the Bank was $28,481,058 and
$26,018,111, respectively. The amount of dividends that the Bank could pay in 2005 without
obtaining prior regulatory approval is approximately $1,318,000.During 2003, the Company sold 542,261 shares of common stock, through a private placement at a
price of $18.25 per share. The proceeds of this offering were used to increase the Banks
regulatory capital ratios and for general corporate purposes.(14)
    Other Operating Expense

Other operating expense for the years ended December 31, 2004 and 2003 included the
following items that exceeded one percent of total revenues: 2004
    
    
    2003Data processing
    
    $
    262,634
    
    
    
    224,133Directors fees
    
    $
    335,250
    
    
    
    264,600
  (15)
    Fair Value of Financial Instruments

The Company is required to disclose fair value information about financial instruments,
whether or not recognized on the face of the balance sheet, for which it is practicable to
estimate that value. The assumptions used in the estimation of the fair value of the Companys
financial instruments are detailed below. Where quoted prices are not available, fair values
are based on estimates using discounted cash flows and other valuation techniques. The use of
discounted cash flows can be significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. The following disclosures should not be
considered a surrogate of the liquidation value of the Company, but rather a good faith
estimate of the increase or decrease in value of financial instruments held by the Company
since purchase, origination, or issuance.Cash and Cash Equivalents

For cash, due from banks, interest-bearing deposits with banks and federal funds sold, the
carrying amount is a reasonable estimate of fair value.Investment Securities

Fair values for investment securities are based on quoted market prices.Other Investments

The carrying amount of other investments approximates fair value.Loans

The fair value of fixed rate loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with similar credit
ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value.Cash Surrender Value of Life Insurance

The cash surrender value of life insurance policies are carried at the value for which such
policies may be redeemed for cash. F-20




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (15)
    Fair Value of Financial Instruments, continuedDeposits

The fair value of demand deposits, interest-bearing demand deposits, and savings is the amount
payable on demand at the reporting date. The fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using the rates currently offered
for deposits of similar remaining maturities.Securities Sold Under Retail Repurchase Agreements

The carrying value of securities sold under retail repurchase agreements approximates fair
value.FHLB Advances

The fair value of FHLB advances is estimated based upon discounted future cash flows
using a discount rate comparable to the current market rate for such borrowings.Junior Subordinated Debentures

Because the Companys junior subordinated debentures were issued at a floating rate, the
carrying amount is a reasonable estimate of fair value.Commitments to Extend Credit and Standby Letters of
Credit

Commitments to extend credit and standby letters of credit are generally short-term and at
variable interest rates. Therefore, both the carrying value and estimated fair value
associated with these instruments are immaterial.Limitations

Fair value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the Companys entire
holdings of a particular financial instrument. Because no market exists for a significant
portion of the Companys financial instruments, fair value estimates are based on many
judgments. These estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.Fair value estimates are based on existing on and off-balance-sheet financial instruments
without attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include deferred income taxes and
premises and equipment. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value estimates and have not
been considered in the estimates.The carrying amount and estimated fair values of the Companys financial instruments at
December 31, 2004 and 2003 are as follows: 2004
    
    
    2003Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    20,211,803
    
    
    
    20,211,803
    
    
    
    19,743,113
    
    
    
    19,743,113Investment securities available for sale
    
    $
    24,271,001
    
    
    
    24,271,001
    
    
    
    22,522,858
    
    
    
    22,522,858Investment securities held to maturity
    
    $
    2,774,383
    
    
    
    2,781,245
    
    
    
    
    
    
    
    Other investments
    
    $
    2,022,500
    
    
    
    2,022,500
    
    
    
    760,000
    
    
    
    760,000Loans, net
    
    $
    291,536,663
    
    
    
    291,170,552
    
    
    
    203,960,746
    
    
    
    204,185,425Cash surrender value of life insurance
    
    $
    4,153,731
    
    
    
    4,153,731
    
    
    
    2,586,729
    
    
    
    2,586,729Liabilities:Deposits
    
    $
    303,904,523
    
    
    
    303,742,151
    
    
    
    220,272,918
    
    
    
    220,915,118Securities sold under retail
repurchase agreements
    
    $
    
    
    
    
    
    
    
    
    477,120
    
    
    
    477,120Federal Home Loan Bank advances
    
    $
    18,100,000
    
    
    
    18,069,820
    
    
    
    7,100,000
    
    
    
    7,123,246Junior subordinated debentures
    
    $
    4,120,000
    
    
    
    4,120,000
    
    
    
    4,120,000
    
    
    
    4,120,000
 F-21




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (16)
    The PB Financial Services Corporation (Parent Company Only) Financial Information Balance Sheets December 31, 2004 and 2003 2004
    
    
    2003AssetsCash
    
    $
    17,714
    
    
    
    94,060Investment in Bank
    
    
    28,481,058
    
    
    
    26,018,111Investment in Trust (unconsolidated)
    
    
    120,000
    
    
    
    120,000Other assets
    
    
    395,505
    
    
    
    320,792$
    29,014,277
    
    
    
    26,552,963Liabilities and Shareholders EquityOther liabilities
    
    $
    30,071
    
    
    
    18,200Junior subordinated debentures
    
    
    4,120,000
    
    
    
    4,120,000Shareholders equity
    
    
    24,864,206
    
    
    
    22,414,763$
    29,014,277
    
    
    
    26,552,963
 Statements of Earnings For the Years Ended December 31, 2004 and 2003 2004
    
    
    2003Dividend income from Bank
    
    $
    213,933
    
    
    
    211,355Dividend income from Trust
    
    
    6,200
    
    
    
    3,455Interest expense
    
    
    (213,933
    )
    
    
    (214,810
    )Other operating expenses
    
    
    (99,721
    )
    
    
    (61,843
    )Loss before income tax benefit and equity in
undistributed earnings of Bank
    
    
    (93,521
    )
    
    
    (61,843
    )Income tax benefit
    
    
    80,017
    
    
    
    83,500Earnings (loss) before equity in undistributed
earnings of Bank
    
    
    (13,504
    )
    
    
    21,657Equity in undistributed earnings of Bank
    
    
    2,649,187
    
    
    
    830,673Net earnings
    
    $
    2,635,683
    
    
    
    852,330
 F-22




---



##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued (16) The PB Financial Services Corporation (Parent Company Only) Financial Information, continued Statements of Cash Flows For the Years Ended December 31, 2004 and 2003 2004
    
    
    2003Cash flows from operating activities:Net earnings
    
    $
    2,635,683
    
    
    
    852,330Adjustments to reconcile net earnings to net cash used by
operating activities:Equity in undistributed earnings of Bank
    
    
    (2,649,187
    )
    
    
    (830,673
    )Amortization
    
    
    6,053
    
    
    
    6,093Deferred income taxes
    
    
    
    
    
    
    (23,500
    )Change in other assets
    
    
    (80,766
    )
    
    
    (55,996
    )Change in other liabilities
    
    
    11,871
    
    
    
    13,689Net cash used by operating activities
    
    
    (76,346
    )
    
    
    (38,057
    )Cash flows used by investing activities, consisting of
capital infusions in Bank
    
    
    
    
    
    
    (9,896,268
    )Cash flows from financing activities:Proceeds (repayments) of note payable
    
    
    
    
    
    
    Proceeds from issuance of junior subordinated debentures
    
    
    
    
    
    
    Transaction costs associated with junior subordinated debentures
    
    
    
    
    
    
    (5,645
    )Issuance of common stock
    
    
    
    
    
    
    9,880,444Proceeds from exercise of stock options
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    
    
    
    
    9,874,799Net change in cash
    
    
    (76,346
    )
    
    
    (59,526
    )Cash at beginning of year
    
    
    94,060
    
    
    
    153,586Cash at end of year
    
    $
    17,714
    
    
    
    94,060
 (17) Subsequent
Event

On March 29, 2005, the Company issued $5,000,000 of guaranteed preferred beneficial interests in
the Companys junior subordinated deferrable interest debentures (trust preferred securities) that
qualify as Tier I capital under Federal Reserve Board guidelines within certain limitations. The
proceeds from the issuance of the common securities and the trust preferred securities were used by
the Trust to purchase $5,150,000 of junior subordinated debentures of the Company, which carry a
deferrable floating rate equal to the 3 month Libor rate + 195 basis points. The trust preferred
securities are mandatorily redeemable upon maturity of the debentures on March 29, 2035 or upon
earlier redemption as provided in the indenture. The Company has the right to redeem the debentures
purchased by the Trust in whole or in part, on or after March 29, 2010. As specified in the
indenture, if the debentures are redeemed prior to maturity, the redemption price will be the
unpaid principal amount, plus any accrued unpaid interest. The proceeds received by the Company
from the sale of the junior subordinated debentures will be used to strengthen the capital position
of the Bank and to accommodate current and future growth. F-23