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U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-KSB  [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003 [   ]
    
    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
incorporation or organization)
    
    (I.R.S. Employer
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
[X]  No [   ] 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. [X] State issuers revenues for its most recent fiscal year. $12,975,638 1




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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:
$27,090,975. 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 30,
2004 Transitional Small Business
Disclosure format (check one): Yes [   ]  No [X] DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 2003, are incorporated by reference into Part II. Portions of the
Proxy Statement for the Annual Meeting of Shareholders, scheduled to be held
May 18, 2004, are incorporated by reference into Part III. 2




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TABLE OF CONTENTS PAGEPART I.ITEM 1. DESCRIPTION OF BUSINESS
    
    
    4ITEM 2. DESCRIPTION OF PROPERTY
    
    
    17-18ITEM 3. LEGAL PROCEEDINGS
    
    
    18ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    18PART II.ITEM 5. MARKET AND REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
    
    
    19ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    20-43ITEM 7. FINANCIAL STATEMENTS
    
    
    43ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    43ITEM 8A. CONTROLS AND PROCEDURES
    
    
    44PART III.ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
    
    
    44ITEM 10. EXECUTIVE COMPENSATION
    
    
    44ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    
    
    44ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    44-45ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
    
    
    45-46ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    46EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO
  3




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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 4




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operations on October 5, 1998. During the fourth quarter of 2002, the Bank
became a member of 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, money orders 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 5




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creditworthiness. Risks associated with real estate
loans also include fluctuations in the value of
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. Speculative loans, as of December 31, 2003, were 74.1% of
total construction 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 6




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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 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 At December 31, 2003, investment securities comprised approximately 8.8% of the
Companys assets, with net loans comprising approximately 79.6% of assets. The
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. 7




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Employees At December 31, 2003, the Company employed 65 full time employees and 10
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 8




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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. To qualify to become a financial holding company, all
depository institution subsidiaries of a bank holding company must be well
capitalized and well managed and must have a Community Reinvestment Act rating
of at least satisfactory. Additionally, a bank holding company must 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. We have not made and have no current plans
to make such an election. Generally, if the Company qualifies and elects to become a financial holding
company, it may 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; 9




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
    
    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. In addition, 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;
    
    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. 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 10




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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. 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, 2003, 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 11




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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 1.54 cents per $100 of deposits for the first quarter of 2004. 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. 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 12




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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. 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. 13




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##### Table of Contents



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, 2003 our ratio of total capital to risk-weighted
assets was 13.0% and our ratio of Tier 1 Capital to risk-weighted assets was
12.1%. 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, 2003, our leverage ratio was 10.7%. 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 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 14




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##### Table of Contents



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;
    
    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. 15




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##### Table of Contents



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) will become
effective as early as February 2004, but more likely in the third or fourth
quarter of 2004, depending on implementing regulations to be issued by the
Federal Trade Commission and the federal bank regulatory agencies. The FCRA
Amendments that deal with employee investigation will become effective on March
31, 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;
    
    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. 16




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##### Table of Contents



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. Prior to the effective date of the FCRA Amendments, the Bank will implement
policies and procedures to comply with the new rules. Anti-Terrorism Legislation The Uniting and Strengthening America by Providing Appropriate Tools Required
to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, signed by the
President on October 26, 2001, imposed new requirements and limitations on
specified financial transactions and account relationships, intended to guard
against money laundering and terrorism. Most of these requirements and
limitations took effect in 2002. Additional know your customer rules became
effective in June 2003, requiring the Bank to establish a customer
identification program under Section 326 of the USA PATRIOT Act. The Bank has
implemented procedures and policies to comply with those rules prior to the
effective date of each of the 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 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 17




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##### Table of Contents



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 two full-service banking offices and two
limited service banking offices. (1) The Peachtree Bank of Dunwoody The full service banking office is located 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 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 expired on June 30, 2008. (3) The Peachtree Bank of North Fulton The limited service loan production office is located in northwestern Fulton
County, Georgia. However, effective during the first quarter of 2004 this
branch location will become a full service banking office. 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 in south Forysth 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 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. 18




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##### Table of Contents



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, 2004, 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 2003 and 2002. 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. The PB Financial Services Corporation Stock Option Plan Information The following table sets forth information regarding the number of shares
subject to options issued and reserved for future issuance under The Peachtree
Bank 1998 Stock Option Plan and The PB Financial Services Corporation
Directors Stock Option Plan. The Company does not maintain any other equity
compensation plan. Number ofshares remainingNumber of
    
    Weighted-
    
    available forsecurities to be
    
    average
    
    future issuanceissued upon
    
    exercise
    
    under the Planexercise of
    
    price of
    
    (excludesoutstanding
    
    outstanding
    
    outstandingoptions
    
    options
    
    options)Equity compensation
plans approved by
security holders
    
    
    282,748
    
    
    $
    11.26
    
    
    
    75,450Equity compensation
plans not approved
by security holders
    
    
    0
    
    
    
    N/A
    
    
    
    0Total
    
    
    282,748
    
    
    $
    11.26
    
    
    
    75,450
 19




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##### Table of Contents



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 a branch in Lawrenceville, Georgia operating under the
trade name of The Peachtree Bank of Gwinnett and another branch in Dunwoody,
Georgia operating under the trade name of The Peachtree Bank of Dunwoody. In
July 2001, the Bank received trust powers from the Georgia Department of
Banking and Finance and the FDIC. The Trust and Financial Services Division of
the Bank began operations during the first quarter of 2002. At the March 16,
2004 meeting of the Board of Directors, it was determined that the Bank would
discontinue offering trust services but would continue to offer wealth
management services to its existing customers as well as prospective customers.
During the second quarter of 2003, the Bank opened two loan production
offices, one in Roswell, Georgia and another in Cumming, Georgia. The Roswell,
Georgia location is expected to be moved to a permanent facility and begin
operations as a full service branch sometime during the first quarter of 2004. 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 2003 Annual Report to Shareholders. The
following is a summary of the more judgmental and complex accounting policies
of the Company. Many of the Companys assets and liabilities are recorded using various
valuation techniques that require significant judgment as to recoverability.
The 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. 20




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##### Table of Contents



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. 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 $7,467,000 for the year ended
December 31, 2003, compared to approximately $5,645,000 as of December 31,
2002. The increase can be attributed to a greater volume of interest-earning
assets that earn a higher interest rate than the rate paid on interest-bearing
liabilities. The increase in interest income due to volume of average earning
assets was partially offset by the decrease in the yields for average earning
assets. Average interest-earning assets increased $56.2 million from 2002 and average
assets for 2003 grew $58.4. Both of these increases are due primarily to an
increase of $45.3 million in average loans outstanding. As of December 31, 2003
the yield on average earning assets was 5.73% compared to 6.50% as of December
31, 2002. The decrease in the yield on average-earning assets can be
attributed to the reductions in the prime rate during 2003 and 2002. Average interest-bearing liabilities increased by $46.0 million in 2003, while
average noninterest-bearing deposits grew by $9.8 million during the same
period. The Banks cost of funds for December 31, 2003 was 2.19% compared to
2.77% for the same period in 2002. Overall, the Companys net interest margin was 3.81% for the year ended
December 31, 2003 compared to 4.01% as of December 31, 2002. The Company reported net interest income in 2002 was approximately $5,645,000
compared to approximately $3,780,000 in 2001. This increase can be
attributed a $44.5 million increase in average interest-earning assets, due
primarily to an in average loans outstanding which increased $40.3 million.
Average assets for 2002 grew $47.2 million due primarily to a year of strong
loan demand in the Companys primary market area and the addition of the two
branch locations in mid-2001. 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, 2002 the yield on average earning
assets was 6.50% compared to 8.26% for December 31, 2001. The decrease in the
yield on average-earning assets can be attributed to the reductions in the
prime rate during 2001. The increases in average loans outstanding and
investments in 2002 were funded primarily with deposits. Average
interest-bearing liabilities increased by $39.6 million in 21




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##### Table of Contents



2002, while average
noninterest-bearing deposits grew by $5.1 million during the same period. The
interest rate paid on average interest-bearing liabilities was 2.75% in 2002
compared to 4.86% in 2001. 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, 2003, 2002, and 2001 and the average rate of interest earned or
paid thereon. The data is presented using daily average balances. 22




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##### 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




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##### 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




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December 31, 2001
(Dollars in Thousands) Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    RateAverage AssetsInterest-earning assets:Taxable investment securities (1)
    
    $
    10,981
    
    
    $
    731
    
    
    
    6.66
    %Tax exempt investment securities (1) (2)
    
    $
    1,631
    
    
    
    92
    
    
    
    5.64
    %Interest-bearing deposits with banks
    
    
    46
    
    
    
    1
    
    
    
    2.17
    %Federal funds sold
    
    
    3,776
    
    
    
    141
    
    
    
    3.73
    %Net loans (including loan fees) (3)
    
    
    81,963
    
    
    
    7,166
    
    
    
    8.74
    %Total interest-earning assets
    
    
    98,397
    
    
    
    8,131
    
    
    
    8.26
    %Allowance for loan losses
    
    
    (806
    )Cash and due from banks
    
    
    2,992Other assets
    
    
    5,966Total average assets
    
    $
    106,549Average Liabilities and Stockholders EquityInterest-bearing liabilities:Deposits:Interest-bearing demand
    
    $
    26,848
    
    
    $
    822
    
    
    
    3.06
    %Savings
    
    
    348
    
    
    
    5
    
    
    
    1.44
    %Time, $100,000 or more
    
    
    33,282
    
    
    
    1,903
    
    
    
    5.72
    %Other time
    
    
    24,488
    
    
    
    1,442
    
    
    
    5.89
    %Repurchase agreements
    
    
    3,444
    
    
    
    127
    
    
    
    3.69
    %Fed funds purchased
    
    
    81
    
    
    
    3
    
    
    
    3.70
    %Other borrowings
    
    
    459
    
    
    
    23
    
    
    
    5.01
    %Total interest-bearing liabilities
    
    
    88,950
    
    
    
    4,325
    
    
    
    4.86
    %Noninterest-bearing deposits
    
    
    8,427Other liabilities
    
    
    659Total average liabilities
    
    
    9,086Stockholders equity
    
    
    8,513Total average liabilities and
stockholders equity
    
    $
    106,549Excess of interest-bearing assets over
interest-bearing liabilities
    
    $
    9,447Ratio of interest-earning assets to
interest-bearing liabilities
    
    
    110.62
    %Net interest income
    
    
    
    
    
    $
    3,806Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.40
    %Net yield on average interest-earning assets
    
    
    
    
    
    
    
    
    
    
    3.87
    %
  (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 $67,000 in 2001.(3)
    
    All loans are accruing interest. Interest earned on net loans includes $640,838 in loan fees. 25




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##### 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 to
the volume and rate components in proportion to the relationship of the dollar
amounts of the absolute changes in each. Year Ended December 31, 2003
Compared with Year Ended December 31, 2002 Total Increase
    
    Changes Due to(Decrease)
    
    Rate
    
    Volume(Dollars 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%. 26




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##### Table of Contents



Year Ended December 31, 2002
Compared with Year Ended December 31, 2001 Total Increase
    
    Changes Due to(Decrease)
    
    Rate
    
    Volume(Dollars in Thousands)Income from interest-earning assets:Taxable investment securities
    
    $
    (67
    )
    
    $
    (138
    )
    
    $
    71Tax exempt investment securities (1)
    
    
    133
    
    
    
    8
    
    
    
    125Deposits at other banks
    
    
    4
    
    
    
    
    
    
    
    4Federal funds sold
    
    
    (65
    )
    
    
    (88
    )
    
    
    23Loans and fees on loans
    
    
    1,155
    
    
    
    (1,832
    )
    
    
    2,987Total interest income
    
    
    1,160
    
    
    
    (2,050
    )
    
    
    3,210Expense from interest-bearing liabilities:Demand and money market
    
    
    (476
    )
    
    
    (627
    )
    
    
    151Savings
    
    
    53
    
    
    
    1
    
    
    
    52Time, $100,000 or more
    
    
    (317
    )
    
    
    (932
    )
    
    
    615Other time
    
    
    (50
    )
    
    
    (690
    )
    
    
    640Repurchase agreements
    
    
    (98
    )
    
    
    (50
    )
    
    
    (48
    )Other borrowings
    
    
    109
    
    
    
    (19
    )
    
    
    128Junior subordinated debentures
    
    
    7
    
    
    
    
    
    
    
    7Federal funds purchased
    
    
    3
    
    
    
    (1
    )
    
    
    4Total interest expense
    
    
    (769
    )
    
    
    (2,318
    )
    
    
    1,549Net interest income
    
    $
    1,929
    
    
    $
    268
    
    
    $
    1,661
  (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 $971,686 in 2003 compared to $406,209 in
2002. The increase in the provision for loan losses was attributable to loan
growth in 2003 of $65.9 million compared to loan growth in 2002 of $42.5
million. 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, 2003
and 2002. During 2003, there were net charges-offs of $230,852 compared to net
charge-offs of $5,232 in 2002. 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 $406,209 in 2002 compared to $240,010 in
2001. The increase in the provision for loan losses was attributable to fact
that loan growth in 2002 was $42.5 million compared to loan growth in 2001 of
$23.8 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 27




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##### Table of Contents



represented approximately .99% and 1.0% of total loans outstanding
at December 31, 2002 and 2001. During 2002, there was a net charge off of
$5,232 and no charge-offs in 2001. Noninterest income Below are the components of noninterest income at December 31, 2003, 2002 and
2001: December 31, 2003
    
    December 31, 2002
    
    December 31, 2001Service charges on deposit accounts
    
    $
    366,784
    
    
    $
    339,592
    
    
    $
    212,621Gain on sale of securities
    
    
    
    
    
    
    180,780
    
    
    
    47,500Mortgage referral commissions
    
    
    986,072
    
    
    
    389,749
    
    
    
    600,971Other
    
    
    329,461
    
    
    
    205,895
    
    
    
    122,588Total noninterest income
    
    $
    1,682,317
    
    
    $
    1,116,016
    
    
    $
    983,680
 Noninterest income for 2003 was $1,682,317 compared to $1,116,016 for the year
ended December 31, 2002, an increase of 50.7%. The increase in noninterest
income is largely attributable to the increase in mortgage referral fee
commissions of $596,323, a result of the additional mortgage originators at our
loan production offices in Roswell and Cumming. 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 or 60.0%. The largest component of this increase was a $73,834 gain
recognized on sale of two properties that were foreclosed on April 1, 2003 and
subsequently sold during the second quarter. Additionally, the trust
department recognized approximately $49,000 in income compared to $23,000 in
the previous year and the increase in cash surrender value of life insurance
income of $20,000 from the income recognized in 2002. 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. Noninterest income for 2002 was $1,116,016 compared to $983,680 for December
31, 2001, an increase of 13.45%. This was largely due to $180,780 of gains
recorded on the sales of investment securities during the third quarter of
2002. Additionally, service charges increased $126,971, largely due to the
22.9% increase in the number of demand deposit and savings accounts since
December 31, 2001. Other income increased $83,307 primarily due to an increase
in cash surrender value life insurance of approximately $43,000 and the $23,000
in fee income recognized from the trust operations which began operations
during the first quarter of 2002. These increases were offset by the decrease
in mortgage referral commissions of $211,222. This decrease is due to a reduced
number of mortgage originators at the Bank during 2002. 28




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##### Table of Contents



Non-interest expense Below are the components of noninterest expense at December 31, 2003, 2002 and
2001: December 31, 2003
    
    December 31, 2002
    
    December 31, 2001Salaries and employee benefits
    
    $
    3,985,688
    
    
    $
    2,438,737
    
    
    $
    2,186,245Occupancy expense
    
    
    722,875
    
    
    
    535,400
    
    
    
    438,049Other operating expense (1)
    
    
    2,165,230
    
    
    
    1,471,507
    
    
    
    1,139,095Total noninterest expense
    
    $
    6,873,793
    
    
    $
    4,445,644
    
    
    $
    3,763,389
  (1)
    
    Significant components (those greater than 1% of total income) of other operating expenses include: December 31, 2003
    
    December 31, 2002
    
    December 31, 2001Data processing
    
    
    224,133
    
    
    
    160,892
    
    
    
    135,147Directors fees
    
    
    264,600
    
    
    
    177,000
    
    
    
    92,200
 The largest component of noninterest expense is salaries and benefits, which
increased to $3,985,688 as of December 31, 2003 compared to $2,438,737 for the
same period in the prior year. This increase was primarily due the Buford
branch relocating to Lawrenceville during the second quarter of 2003. In
conjunction with this move an additional six employees were added to staff the
larger location. Also, the Bank opened two loan production offices 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 from $535,400 at December 31, 2003. This increase is primarily
attributed to relocation of our Gwinnett office to a larger location and the
opening of two loan production offices. Other expenses increased $693,723 from $1,471,507 as of December 31, 2002.
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 and an $104,000
increase in directors fees (directors fees increased from $1,000 per month to
$2,000 and committee fees increased to $600 per executive committee meetings
and $450 per other committee meetings). Additionally, legal fees increased
$50,000 due to an increased number of loan charge-offs during 2003 and other
various legal costs. 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. The bank also incurred an additional $12,000 in audit and
accounting fees during 2003, however, during 2004 a larger increase is expected
due expenses associated with compliance of the Sarbanes-Oxley Act. In
addition, due to a new customer relationship at our Dunwoody branch with a
significant number of transactions items, Federal Reserve service charges
increased $28,000. During the second quarter of 2003, the Company incurred
approximately $22,000 in other real estate owned expenses for loans that were
foreclosed in April 2003. The increases in noninterest expenses have a direct effect on the efficiency
ratio (noninterest expense divided by total income) which was 52.97% at
December 31, 2003 compared to 43.09% 29




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##### Table of Contents



at December 31, 2002. As a percentage of
total average assets, noninterest expense was 3.2% and 2.9% at December 31,
2003 and 2002, respectively. The increase in noninterest expense in 2002 from 2001 is a direct result of the
growth the Bank has experienced through branching in 2001. The largest
component of noninterest expense is salaries and benefits, which increased to
$2,438,737 compared to $2,186,245 in the prior year. This is due to the
recognition of a full year of salary and benefits for ten full time equivalent
employees that were added during the second quarter of 2001. In addition, occupancy and furniture, fixture and equipment expense has
increased $97,351. This is primarily due to the infrastructure added for the
additional branch locations during 2001 and the recognition of a full year of
deprecation on these assets. Other expenses increased $332,426. This increase is due to a combination of
many factors, including $40,000 in trust department expenses, a $63,000
increase is cash surrender value life insurance benefit expense and $22,000 in
operating losses. In addition, a $85,000 increase in directors fees (directors
received fees for twelve months in 2002 and only nine months in 2001). In
addition, due to the increased number of branch locations, the Bank experienced
other increases such as $15,000 in courier fees, $26,000 in data processing,
$12,000 in dues and subscriptions as well as a $22,000 increase in audit and
accounting fees. The increases in noninterest expenses have a direct effect on
the efficiency ratio which was 43.09% at December 31, 2002 compared to 41.4% at
December 31, 2001. As a percentage of total average assets, noninterest
expense was 2.9% and 3.5% at December 31, 2002 and 2001, respectively. Income tax expense The Companys effective tax rates were 34.6%, 35.5% and 37.3% for the years
ended December 31, 2003, 2002 and 2001, respectively. FINANCIAL CONDITION Balance at
    
    Balance at
    
    Balance atDecember 31, 2002
    
    December 31, 2002
    
    December 31, 2001Total assets
    
    $
    256,358
    
    
    $
    180,393
    
    
    $
    127,331Net loans
    
    $
    203,961
    
    
    $
    139,179
    
    
    $
    96,658Total deposits
    
    $
    220,273
    
    
    $
    155,989
    
    
    $
    109,332
 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 $75,965,000 or
42.1%. 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. 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. At December 31, 2002, the Companys total assets were approximately
$180,393,000 compared to approximately $127,331,000 at December 31, 2001. The
increase in total assets from 2001 to 30




---



##### Table of Contents



2002 was approximately $53,062,000 or
41.7%. Total assets as of December 31, 2001, principally consisted of
$11,629,000 in cash and cash equivalents, $12,175,000 in investment securities,
and $96,658,000 in net loans. The growth in assets in 2002 from 2001 was
primarily funded by the $46,657,000 increase in deposits. Investments During 2003, investment securities increased $5.5 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. 31




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##### Table of Contents



Types of investments The amortized cost and estimated market value of securities available for sale are as follows: 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
 Amortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueDecember 31, 2001:U.S. Government agencies
    
    $
    2,992,034
    
    
    $
    44,656
    
    
    $
    40,184
    
    
    $
    2,996,506Municipal securities
    
    
    3,296,535
    
    
    
    1,762
    
    
    
    78,230
    
    
    $
    3,220,067Mortgage-backed securities
    
    
    3,675,164
    
    
    
    121,774
    
    
    
    
    
    
    $
    3,796,938Corporate bonds
    
    
    2,028,511
    
    
    
    132,888
    
    
    
    
    
    
    $
    2,161,399$
    11,992,244
    
    
    $
    301,080
    
    
    $
    118,414
    
    
    $
    12,174,910
 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. 32




---



##### Table of Contents



Maturities of investments The carrying amounts of investment securities in each category as of December
31, 2003 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
    
    $
    6,079
    
    
    
    3.92
    %
    
    $
    518
    
    
    
    3.45
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    6,597
    
    
    
    3.88
    %After 1 to 5 years
    
    
    3,446
    
    
    
    3.62
    %
    
    
    3,058
    
    
    
    4.38
    %
    
    
    5,754
    
    
    
    2.97
    %
    
    
    
    
    
    
    
    
    
    
    12,258
    
    
    
    3.51
    %After 5 to 10 years
    
    
    
    
    
    
    
    
    
    
    1,476
    
    
    
    6.64
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,476
    
    
    
    6.64
    %After 10 years
    
    
    
    
    
    
    
    
    
    
    1,003
    
    
    
    6.29
    %
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    9.00
    %
    
    
    2,003
    
    
    
    7.64
    %Total
    
    $
    9,525
    
    
    
    3.81
    %
    
    $
    6,055
    
    
    
    5.18
    %
    
    $
    5,754
    
    
    
    2.97
    %
    
    $
    1,000
    
    
    
    9.00
    %
    
    $
    22,334
    
    
    
    4.20
    %
  (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 in the amount
of $355,000 and Federal Reserve Bank stock in the amount of $405,000 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 $203,961,000 at December 31, 2003, from
approximately $139,179,000 at December 31, 2002. The majority of this increase
was due 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. The Companys total loans (net of the allowance for loan losses and deferred
loan fees) increased to approximately $139,179,000 at December 31, 2002, from
approximately $96,658,000 at December 31, 2001. This increase in net loans of
44.0% can be attributed to continued lending activities in a relatively high
growth area of metropolitan Atlanta where new residential construction and
commercial development continues to be strong. The branch locations added in
mid 2001, also contributed significantly to the increase in loans. At December
31, 2002, the two branches had total loans outstanding of approximately
$38,415,000. 33




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##### 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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Commercial
    
    $
    31,659
    
    
    $
    24,517
    
    
    $
    15,775
    
    
    $
    11,111
    
    
    $
    5,645Real estate-construction
    
    
    59,214
    
    
    
    44,309
    
    
    
    24,707
    
    
    
    23,462
    
    
    
    11,911Real estate-commercial and residential
    
    
    100,712
    
    
    
    59,851
    
    
    
    48,814
    
    
    
    31,465
    
    
    
    18,454Installment loans to individuals
    
    
    9,314
    
    
    
    8,038
    
    
    
    5,686
    
    
    
    5,338
    
    
    
    2,956Real estate-home equity
    
    
    5,835
    
    
    
    4,138
    
    
    
    3,036
    
    
    
    2,527
    
    
    
    1,332Total loans
    
    
    206,734
    
    
    
    140,853
    
    
    
    98,018
    
    
    
    73,903
    
    
    
    40,298Less: Allowance for loan losses
    
    
    2,124
    
    
    
    1,383
    
    
    
    982
    
    
    
    742
    
    
    
    400Net deferred loan fees
    
    
    649
    
    
    
    291
    
    
    
    378
    
    
    
    258
    
    
    
    135Loans, net
    
    $
    203,961
    
    
    $
    139,179
    
    
    $
    96,658
    
    
    $
    72,903
    
    
    $
    39,763
  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, 2003, 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. 34




---



##### 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
    
    $
    21,965
    
    
    $
    9,694
    
    
    $
    
    
    
    $
    31,659Real estate-construction
    
    
    58,263
    
    
    
    53,271
    
    
    
    109
    
    
    
    111,643Real estate-commercial and
residential
    
    
    47,229
    
    
    
    902
    
    
    
    148
    
    
    
    48,279Installment loans to individuals
    
    
    5,734
    
    
    
    3,554
    
    
    
    30
    
    
    
    9,318Real estate-home equity
    
    
    5,730
    
    
    
    105
    
    
    
    
    
    
    
    5,835Total loans
    
    $
    138,921
    
    
    $
    67,526
    
    
    $
    287
    
    
    $
    206,734
 For the above loans, the following is a presentation of an analysis of
sensitivities to changes in interest rates at December 31, 2003 (dollars in
thousands): Due AfterDue in
    
    1 Year but1 Year
    
    Less Than
    
    Due Afteror Less
    
    5 Years
    
    5 Years
    
    TotalInterest category:Predetermined interest rate
    
    $
    20,174
    
    
    $
    67,526
    
    
    $
    287
    
    
    $
    87,987Floating interest rate
    
    
    118,747
    
    
    
    
    
    
    
    
    
    
    
    118,747Total loans
    
    $
    138,921
    
    
    $
    67,526
    
    
    $
    287
    
    
    $
    206,734
 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, 2003, 2002, 2001, 2000 and
1999, Non performing Assets ($ in thousands) 2003
    
    2002
    
    2001
    
    2000
    
    1999Non accrual loans
    
    $
    131
    
    
    $
    588
    
    
    $
    
    
    
    $
    
    
    
    $
    Accruing loans 90 days or more past due
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    Loans past due more than 30 days
    
    
    9
    
    
    
    632
    
    
    
    539
    
    
    
    357
    
    
    
    Interest on non accrual loans which would
have been reported
    
    
    1
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    Interest recognized on non accrual loans
prior to reclassifications of loans to non accrual
    
    
    9
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    
 35




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##### Table of Contents



Allowance for Loan Losses The Companys allowance for loan losses was approximately $2,124,000 at
December 31, 2003, compared to $1,383,000 at December 31, 2002 and 982,000 at
December 31, 2001, representing 1.0% of year end total loans outstanding for
December 31, 2003, 2002 and 2001. 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. The following is an analysis of the allowance for loan losses for the years
ended December 31, 2003, 2002, 2001, 2000 and 1999: 36




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##### Table of Contents



December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Average amount of loans outstanding
    
    $
    167,544,217
    
    
    $
    122,282,063
    
    
    $
    81,963,058
    
    
    $
    56,317,602
    
    
    $
    25,142,297Balance at beginning of period
    
    $
    1,382,676
    
    
    $
    981,639
    
    
    $
    741,629
    
    
    $
    399,991
    
    
    $
    81,621Charge-offs:Commercial
    
    
    102,968
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate-construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate-commercial and residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Installment loans to individuals
    
    
    184,855
    
    
    
    10,682
    
    
    
    
    
    
    
    
    
    
    
    458Real estate-home equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    287,823
    
    
    
    10,682
    
    
    
    
    
    
    
    
    
    
    
    458Recoveries:Commercial
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate-construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate-commercial and residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Installment loans to individuals
    
    
    46,970
    
    
    
    5,450
    
    
    
    
    
    
    
    
    
    
    
    Real estate-home equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    56,970
    
    
    
    5,450
    
    
    
    
    
    
    
    
    
    
    
    Net charge-offs
    
    
    230,853
    
    
    
    5,232
    
    
    
    
    
    
    
    
    
    
    
    458Provision charged to operations
    
    
    971,686
    
    
    
    406,269
    
    
    
    240,010
    
    
    
    341,638
    
    
    
    318,828Balance at end of year
    
    $
    2,123,509
    
    
    $
    1,382,676
    
    
    $
    981,639
    
    
    $
    741,629
    
    
    $
    399,991Ratio of net charge-offs during the period to
average loans outstanding during the period
    
    
    0.138
    %
    
    
    0.004
    %
    
    
    0.000
    %
    
    
    0.000
    %
    
    
    0.002
    %
 Deposits Deposits increased $64.3 million to $220.3 million during 2003. This growth is
a result of an increase of $12.6 million in noninterest-bearing demand, a $13.7
million increase in interest-bearing demand and money market accounts, a $21.7
million increase in certificate of deposit accounts and an increase of $16.3
million in savings deposits. The majority of these increases are due to an increase of $30.5 million in
deposit accounts at our expanded Gwinnett office. This growth was primarily in
certificates of deposits. In addition, deposits at our Dunwoody location have
increased $28.5 million which is the result of a new deposit relationship which
has resulted in an average monthly balance of $5.0 million in
noninterest-bearing accounts and $10.0 million in interest bearing demand. In
addition, the Dunwoody office has a new IOLTA account that has an average
balance of over $6 million. Finally, deposits associated with our loan
production office in Roswell were $3.0 million and the growth is expected to
continue when the branch is moved to the permanent location in the first
quarter of 2004. The increase in savings deposits was primarily attributable to
the The Peachtree Prime account. This product is available for individuals
and businesses with a rate of prime less 2.5%. The ratio of loans to deposits
was 92.6% at December 31, 2003 and 90.1% at December 31, 2002. 37




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##### Table of Contents



The Companys total deposits increased to approximately $155,989,000 at
December 31, 2002, a 42.7% increase from the December 31, 2001, balance of
approximately $109,332,000. The majority of this deposit growth was in time
deposits which increased $30,700,000 and savings deposits which increased
$7,333,0000. Savings deposits increased due to the introduction of The
Peachtree Prime account in April 2002. Time deposit growth is attributed to
the bank offering a competitive interest rate in order to fund loan demand. In
addition during 2002, there was a continued emphasis on noninterest and
interest bearing demand deposits which increased $4,937,000 and $3,686,000
respectively. Interest-bearing demand is primarily composed of money market
accounts that offer tiered rates that are competitive with similar products
offered by investment brokerage firms. 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, 2003, 2002 and 2001 are presented
below: December 31, 2003
    
    December 31, 2002
    
    December 31, 2001Average
    
    Average
    
    Average
    
    Average
    
    Average
    
    AverageAmount
    
    Rate Paid
    
    Amount
    
    Rate Paid
    
    Amount
    
    Rate Paid(Dollars in thousands)Deposits:Noninterest-bearing demand
    
    $
    23,288
    
    
    
    
    
    
    $
    13,495
    
    
    
    
    
    
    $
    8,427
    
    
    
    Interest-bearing demand
    
    
    42,165
    
    
    
    0.61
    %
    
    
    32,735
    
    
    
    1.06
    %
    
    
    26,848
    
    
    
    3.06
    %Savings
    
    
    15,514
    
    
    
    1.68
    %
    
    
    3,313
    
    
    
    1.75
    %
    
    
    348
    
    
    
    1.44
    %Time
    
    
    104,383
    
    
    
    2.82
    %
    
    
    85,436
    
    
    
    3.49
    %
    
    
    57,770
    
    
    
    5.79
    %Total
    
    $
    185,350
    
    
    
    
    
    
    $
    134,979
    
    
    
    
    
    
    $
    93,393
 Maturities of Time Deposits of $100,000 or more Maturities of time certificates of deposit of $100,000 or more outstanding at December
31, 2003 are summarized as follows: (Dollars in thousands)Months to maturity:3 or less
    
    
    
    
    
    $
    6,8033 to 6
    
    
    
    
    
    
    15,4006 to 12
    
    
    
    
    
    
    19,786Over 12
    
    
    
    
    
    
    9,484Total
    
    $
    51,473
 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 38




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##### Table of Contents



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 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
2003. The following are the key liquidity balances and ratios for the year ended
December 31, 2003: Cash and cash equivalents
    
    $
    19,743,113Investment securities available for sale
    
    $
    22,522,858CDs over $100,000 to total deposits ratio
    
    
    23.4
    %Loan to deposit ratio
    
    
    92.6
    %
 At December 31, 2003 cash and cash equivalents amounted to $19.7 million,
representing 7.7% of total assets. Securities available for sale provide a
secondary source of liquidity and amounted to $22.5 million at December 31,
2003 and 8.8% of total assets. At December 31, 2003, certificates of deposit over $100,000 represented 23.4%
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. 39




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##### Table of Contents



The following table presents the Companys and Banks regulatory capital
position at December 31, 2003: Actual Ratio
    
    Required RatioAs of December 31, 2003:Total Capital (to Risk-Weighted Assets)Consolidated
    
    
    13.0
    %
    
    
    8.0
    %Bank
    
    
    12.9
    %
    
    
    8.0
    %Tier 1 Capital (to Risk-Weighted Assets)Consolidated
    
    
    12.1
    %
    
    
    4.0
    %Bank
    
    
    11.9
    %
    
    
    4.0
    %Tier 1 Capital (to Average Assets)Consolidated
    
    
    10.7
    %
    
    
    4.0
    %Bank
    
    
    10.5
    %
    
    
    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,
2003, see note 12 to the financial statements. Selected Ratios The rate of return information for the December 31, 2003, 2002 and 2001 are
presented below. Year Ended December 31,2003
    
    2002
    
    2001Return on assets
    
    
    0.40
    %
    
    
    0.80
    %
    
    
    0.45
    %Return on equity
    
    
    6.43
    %
    
    
    11.04
    %
    
    
    5.59
    %Dividend payout ratio
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Equity to assets ratio
    
    
    6.25
    %
    
    
    7.25
    %
    
    
    7.99
    %
 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, 2003, this rate was 5.00%. 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. 40




---



##### 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 determing 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, 2003, 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 which interest rates are next scheduled to adjust
rather than in the period in which they are due, 41




---



##### Table of Contents



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, 2003
(Dollars in Thousands) Three
    
    Four to
    
    One to
    
    OverMonths
    
    Twelve
    
    Five
    
    Fiveor Less
    
    Months
    
    Years
    
    Years
    
    TotalInterest-earning assets:Federal funds sold
    
    $
    10,077
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10,077Investment securities (1)
    
    
    887
    
    
    
    9,092
    
    
    
    12,258
    
    
    
    97
    
    
    $
    22,334Loans
    
    
    122,955
    
    
    
    15,966
    
    
    
    67,526
    
    
    
    287
    
    
    $
    206,734Total interest-earning assets
    
    $
    133,919
    
    
    $
    25,058
    
    
    $
    79,784
    
    
    $
    384
    
    
    $
    239,145Interest-bearing liabilitiesDepositsInterest-bearing demand and savings
    
    $
    72,067
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    72,067Time, $100,000 or more
    
    
    6,803
    
    
    
    35,186
    
    
    
    9,484
    
    
    
    
    
    
    
    51,473Other time
    
    
    8,080
    
    
    
    49,707
    
    
    
    10,530
    
    
    
    
    
    
    
    68,317Repurchase agreements
    
    
    477
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    477Other borrowings
    
    
    
    
    
    
    7,100
    
    
    
    
    
    
    
    
    
    
    
    7,100Junior
subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,120
    
    
    
    4,120Total
interest-bearing liabilities
    
    $
    87,427
    
    
    $
    91,993
    
    
    $
    20,014
    
    
    $
    4,120
    
    
    $
    203,554Interest rate sensitivity gap
per period
    
    $
    46,492
    
    
    $
    (66,935
    )
    
    $
    59,770
    
    
    $
    (3,736
    )
    
    $
    35,591Interest rate sensitivity gap ratio
    
    
    153.18
    %
    
    
    27.24
    %
    
    
    398.64
    %
    
    
    9.32
    %
    
    
    117.48
    %Cumulative interest rate sensitivity gap
    
    $
    46,492
    
    
    $
    (20,443
    )
    
    $
    39,327
    
    
    $
    35,591Cumulative difference to
total interest earning assets
    
    
    19.44
    %
    
    
    -8.55
    %
    
    
    16.44
    %
    
    
    14.88
    %
 (1) The above schedule excludes stock in Federal Home Loan Bank of
$355,000 and stock in the Federal Reserve Bank of $405,000, which has no
contractual maturity. 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 42




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##### Table of Contents



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,
2003 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
    
    $
    7,100,000

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,100,000Junior subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,120,000
    
    
    
    4,120,000Operating lease obligations
    
    
    189,576
    
    
    
    422,688
    
    
    
    385,026
    
    
    
    643,317
    
    
    
    1,640,607Total
    
    $
    7,289,576
    
    
    
    422,488
    
    
    
    385,026
    
    
    
    4,763,317
    
    
    
    12,860,607
 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
    
    $
    68,638,000Standby letters of credit
    
    $
    1,268,000
 
 ITEM 7. FINANCIAL STATEMENTS The consolidated financial statements, notes thereto and report independent
certified public accountants are included in the Companys Annual Report to
Shareholders for the year ended December 31, 2003 and is incorporated herein by
reference. See Exhibit 13.1. 
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 43




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ITEM 8A. CONTROLS AND PROCEDURES As of the end of the period covered by 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. There were no significant changes in internal controls, or
to managements knowledge, in other factors that could significantly affect
those internal controls subsequent to the date on which management carried out
its evaluation, and there has been no corrective action with respect to
significant deficiencies or material weaknesses. 
 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 18, 2004, 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. 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 18, 2004, 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 April 29, 2003, 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 18, 2004, under the headings,
Certain Transactions 44




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##### Table of Contents



and Compensation of Directors and Executive Officers,
and are incorporated herein by reference. 
 ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K  (a)
    
    Financial Statements: The following financial statements are included in the Companys Annual Report
to Shareholders are incorporated herein by reference.  Report of Independent Certified Public AccountantsFinancial StatementsConsolidated
Balance Sheets dated as of December 31, 2003 and 2002Consolidated Statements of Earnings for the years ended December 31, 2003
and 2002Consolidated Statements of Shareholders Equity for the years ended
December 31, 2003 and 2002Consolidated Statements of Comprehensive Income for the years ended
December 31, 2003 and 2002Consolidated Statements of Cash Flows for the years ended December 31,
2003 and 2002Notes to
Consolidated Financial Statements  (b)
    
    Reports on Form 8-K  No Reports on Form 8-K were filed during the fourth quarter of 2003.  (c)
    
    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)
 45




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##### Table of Contents



Exhibit Number
    
    Exhibit13.1
    
    The PB Financial Services Corporation 2003 Annual Report to
shareholders. Except with respect to those portions specifically
incorporated by reference into this Report, the Companys 2003 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,
2003.(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. 
 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 18, 2004, under
the heading Fees Paid to Independent Auditors and is incorporated herein by
reference. 46




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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. Watson
President and Chief Executive Officer/s/Kelly J. JohnsonKelly J. Johnson
Chief and Principal Financial OfficerDate:
    
    March 30, 2004
 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 30, 2004Robert D. Cheeley, Director/s/ Daniel B. Cowart
    
    DATE: March 30, 2004Daniel B. Cowart, Director/s/ Paul D. Donaldson
    
    DATE: March 30, 2004Paul D. Donaldson, Director
 47




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##### Table of Contents



/s/ Charles L. Douglas
    
    DATE: March 30, 2004Charles L. Douglas, Director/s/ Dexter R. Floyd
    
    DATE: March 30, 2004Dexter R. Floyd, Director/s/ J. Edwin Howard
    
    DATE: March 30, 2004J. Edwin Howard, Director/s/ John J. Howard
    
    DATE: March 30, 2004John J. Howard, Director/s/ J. Stephen Hurst
    
    DATE: March 30, 2004J. Stephen Hurst, Director/s/ Kelly J. Johnson
    
    DATE: March 30, 2004Kelly J. Johnson, Chief Financial Officer(Principal Financial and Accounting Officer)/s/ Charles Machemehl, III
    
    DATE: March 30, 2004Charles Machemehl, III, Director/s/ J. Paul Maggard
    
    DATE: March 30, 2004J. Paul Maggard, Director/s/ Monty G. Watson
    
    DATE: March 30, 2004Monty G. Watson, Director, President, andChief Executive Officer
 48




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THE PB FINANCIAL SERVICES CORPORATION Consolidated Financial Statements December 31, 2003 and 2002 (with Independent Accountants Report thereon)




---



##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 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, 2003 and 2002, 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 auditing standards generally
accepted in the United States of America. 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, 2003 and 2002, 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. (SIGNATURE)Atlanta, Georgia
February 20, 2004




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION 
 Consolidated Balance Sheets December 31, 2003 and 2002 2003
    
    2002AssetsCash and due from banks
    
    $
    9,058,785
    
    
    
    8,092,709Interest-bearing deposits with banks
    
    
    607,328
    
    
    
    647,729Federal funds sold
    
    
    10,077,000
    
    
    
    6,812,000Cash and cash equivalents
    
    
    19,743,113
    
    
    
    15,552,438Investment securities available for sale
    
    
    22,522,858
    
    
    
    17,071,978Other investments
    
    
    760,000
    
    
    
    670,600Loans, net
    
    
    203,960,746
    
    
    
    139,178,889Premises and equipment, net
    
    
    4,256,429
    
    
    
    4,031,909Accrued interest receivable and other assets
    
    
    5,114,813
    
    
    
    3,887,038$
    256,357,959
    
    
    
    180,392,852Liabilities and Shareholders EquityDeposits:Noninterest-bearing demand
    
    $
    28,416,175
    
    
    
    15,825,206Interest-bearing demand
    
    
    48,024,945
    
    
    
    34,295,234Savings
    
    
    24,041,970
    
    
    
    7,767,153Time, $100,000 or more
    
    
    51,473,112
    
    
    
    49,870,527Other time
    
    
    68,316,716
    
    
    
    48,230,919Total deposits
    
    
    220,272,918
    
    
    
    155,989,039Securities sold under retail repurchase agreements
    
    
    477,120
    
    
    
    1,379,781Note payable and other borrowings
    
    
    7,100,000
    
    
    
    6,400,000Junior subordinated debentures
    
    
    4,120,000
    
    
    
    4,120,000Accrued interest payable and other liabilities
    
    
    1,973,158
    
    
    
    666,748Total liabilities
    
    
    233,943,196
    
    
    
    168,555,568CommitmentsShareholders equity:Common stock, $5 par value, 10,000,000 shares authorized,
1,484,437 and 942,176 shares issued and outstanding
    
    
    7,422,185
    
    
    
    4,710,880Additional paid-in capital
    
    
    12,464,914
    
    
    
    5,295,775Retained earnings
    
    
    2,402,860
    
    
    
    1,550,530Accumulated other comprehensive income
    
    
    124,804
    
    
    
    280,099Total shareholders equity
    
    
    22,414,763
    
    
    
    11,837,284$
    256,357,959
    
    
    
    180,392,852
 See accompanying notes to consolidated financial statements. F-1




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION 
 Consolidated Statements of Earnings For the Years Ended December 31, 2003 and 2002 2003
    
    2002Interest income:Interest and fees on loans
    
    $
    10,416,783
    
    
    
    8,320,849Interest on federal funds sold
    
    
    99,670
    
    
    
    76,316Interest on investment securities:U.S. Government agencies and mortgage-backed securities
    
    
    459,852
    
    
    
    469,697Municipals
    
    
    184,168
    
    
    
    139,236Trust preferred securities
    
    
    90,000
    
    
    
    176,343Other
    
    
    42,848
    
    
    
    17,974Total interest income
    
    
    11,293,321
    
    
    
    9,200,415Interest expense:Interest-bearing demand deposits
    
    
    259,185
    
    
    
    345,741Savings deposits
    
    
    261,117
    
    
    
    58,187Time deposits
    
    
    2,945,902
    
    
    
    2,978,172Other
    
    
    359,772
    
    
    
    173,482Total interest expense
    
    
    3,825,976
    
    
    
    3,555,582Net interest income
    
    

    7,467,345
    
    
    
    5,644,833Provision for loan losses
    
    
    971,686
    
    
    
    406,269Net interest income after provision for loan losses
    
    
    6,495,659
    
    
    
    5,238,564Other income:Service charges
    
    
    366,784
    
    
    
    339,592Gain on sale of securities
    
    
    
    
    
    
    180,780Mortgage referral commissions
    
    
    986,072
    
    
    
    389,749Other
    
    
    329,461
    
    
    
    205,895Total other income
    
    
    1,682,317
    
    
    
    1,116,016Other expenses:Salaries and employee benefits
    
    
    3,985,688
    
    
    
    2,438,737Occupancy
    
    
    722,875
    
    
    
    535,400Other operating
    
    
    2,165,230
    
    
    
    1,471,507Total other expenses
    
    
    6,873,793
    
    
    
    4,445,644Earnings before income taxes
    
    
    1,304,183
    
    
    
    1,908,936Income tax expense
    
    
    451,853
    
    
    
    677,447Net earnings
    
    $
    852,330
    
    
    
    1,231,489Basic earnings per share
    
    $
    0.86
    
    
    
    1.31Diluted earnings per share
    
    $
    0.79
    
    
    
    1.23
 See accompanying notes to consolidated financial statements. F-2




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION 
 Consolidated Statements of Changes in Shareholders Equity For the Years Ended December 31, 2003 and 2002 AccumulatedCommon Stock
    
    Additional
    
    
    
    
    
    OtherPaid-In
    
    Retained
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Earnings
    
    Income
    
    TotalBalance, December 31, 2001
    
    
    915,244
    
    
    $
    4,576,220
    
    
    
    5,066,056
    
    
    
    319,041
    
    
    
    120,560
    
    
    
    10,081,877Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,231,489
    
    
    
    
    
    
    
    1,231,489Issuance of common stock
    
    
    26,332
    
    
    
    131,660
    
    
    
    226,719
    
    
    
    
    
    
    
    
    
    
    
    358,379Exercise of stock options
    
    
    600
    
    
    
    3,000
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    6,000Change in net unrealized gain on
investment securities available
for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159,539
    
    
    
    159,539Balance, 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
    
    
    
    22,414,763
 See accompanying notes to consolidated financial statements. F-3




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THE PB FINANCIAL SERVICES CORPORATION 
 Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2003 and 2002 2003
    
    2002Net earnings
    
    $
    852,330
    
    
    
    1,231,489Other comprehensive income (loss):Unrealized gains (losses) arising during the period, net of taxes
of $(80,001) and $143,652, respectively
    
    
    (155,295
    )
    
    
    278,854Reclassification adjustment for gains on sales of investment
securities available for sale included in net earnings, net of
taxes of $61,465 in 2002
    
    
    
    
    
    
    (119,315
    )Other comprehensive income (loss), net of tax
    
    
    (155,295
    )
    
    
    159,539Comprehensive income
    
    $
    697,035
    
    
    
    1,391,028
 See accompanying notes to consolidated financial statements. F-4




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THE PB FINANCIAL SERVICES CORPORATION 
 Consolidated Statements of Cash Flows For the Years Ended December 31, 2003 and 2002 2003
    
    2002Cash flows from operating activities:Net earnings
    
    $
    852,330
    
    
    
    1,231,489Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation, amortization and accretion
    
    
    619,852
    
    
    
    392,727Provision for loan losses
    
    
    971,686
    
    
    
    406,269Deferred income taxes
    
    
    (395,252
    )
    
    
    (152,524
    )Gain on sale of investment securities
    
    
    
    
    
    
    (180,780
    )Gain on sales of other real estate
    
    
    (73,834
    )
    
    
    Change in:Net deferred loan fees
    
    
    358,176
    
    
    
    (86,779
    )Cash surrender value life insurance
    
    
    (94,207
    )
    
    
    (73,946
    )Accrued interest receivable and other assets
    
    
    (262,938
    )
    
    
    (123,617
    )Accrued interest payable and other liabilities
    
    
    1,306,410
    
    
    
    96,051Net cash provided by operating activities
    
    
    3,282,223
    
    
    
    1,508,890Cash flows from investing activities:Purchase of investment securities available for sale
    
    
    (30,616,649
    )
    
    
    (9,529,163
    )Proceeds from calls and maturities of investment securities
available for sale
    
    
    24,684,081
    
    
    
    2,765,692Proceeds from sales of investment securities available for sale
    
    
    
    
    
    
    2,204,200Purchase of other investments
    
    
    (89,400
    )
    
    
    (485,600
    )Investment in unconsolidated subsidiary
    
    
    
    
    
    
    (120,000
    )Purchase of cash value life insurance
    
    
    (395,000
    )
    
    
    (716,000
    )Net change in loans
    
    
    (67,210,620
    )
    
    
    (42,840,042
    )Purchases of premises and equipment
    
    
    (419,170
    )
    
    
    (262,953
    )Construction in process
    
    
    (172,717
    )
    
    
    Proceeds from sales of other real estate
    
    
    1,171,910
    
    
    
    Net cash used by investing activities
    
    
    (73,047,565
    )
    
    
    (48,983,866
    )Cash flows from financing activities:Net change in deposits
    
    
    64,283,879
    
    
    
    46,656,627Net change in note payable
    
    
    
    
    
    
    (280,000
    )Net change in securities sold under retail repurchase agreements
    
    
    (902,661
    )
    
    
    (1,986,362
    )Proceeds from Federal Home Loan Bank borrowings
    
    
    3,000,000
    
    
    
    6,400,000Repayments on Federal Home Loan Bank borrowings
    
    
    (2,300,000
    )
    
    
    (3,700,000
    )Proceeds from issuance of junior subordinated debentures
    
    
    
    
    
    
    4,120,000Transaction costs associated with junior subordinated debentures
    
    
    (5,645
    )
    
    
    (175,986
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    6,000Proceeds from issuance of common stock, net of issuance costs
    
    
    9,880,444
    
    
    
    358,379Net cash provided by financing activities
    
    
    73,956,017
    
    
    
    51,398,658Net change in cash and cash equivalents
    
    
    4,190,675
    
    
    
    3,923,682Cash and cash equivalents at beginning of year
    
    
    15,552,438
    
    
    
    11,628,756Cash and cash equivalents at end of year
    
    $
    19,743,113
    
    
    
    15,552,438
 F-5




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Consolidated Statements of Cash Flows, continued For the Years Ended December 31, 2003 and 2002 2003
    
    2002Supplemental disclosures of cash flow information:Cash paid during the year for:Interest
    
    $
    3,872,444
    
    
    
    3,546,275Income taxes
    
    $
    708,000
    
    
    
    703,000Noncash investing and financing activities:Change in net unrealized gain on investment
securities available for sale, net of tax
    
    $
    (155,295
    )
    
    
    159,539Transfer of loans to other real estate
    
    $
    1,098,901
    
    
    
    
 See accompanying notes to consolidated financial statements. F-6




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION 
 Notes to Consolidated Financial Statements  (1)
    
    Summary of Significant Accounting PoliciesOrganizationThe 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 ConsolidationThe 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 PresentationThe 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 EquivalentsCash and cash equivalents include cash on hand, amounts due from banks,
interest-bearing deposits with banks and federal funds sold.Investment SecuritiesThe 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, 2003
and 2002, the Bank classified all of its investment securities as available
for sale.Available for sale securities are recorded at fair value. Unrealized
holding gains and losses, net of the related tax effect, are excluded from
earnings and are reported as a separate component of shareholders equity
until realized.A decline in the market value of any available for sale investment below
cost that is deemed other than temporary is charged to earnings and
establishes a new cost basis for the security.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 are included in earnings
and are derived using the specific identification method for determining
the cost of securities sold.Other InvestmentsOther 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. F-7




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (1)
    
    Summary of Significant Accounting Policies, continuedLoans and Allowance for Loan LossesLoans 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.Premises and EquipmentPremises 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. F-8




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (1)
    
    Summary of Significant Accounting Policies, continuedIncome TaxesDeferred 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 CommissionsThe 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.Stock-Based CompensationThe 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
incentive 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. 2003
    
    2002Net earnings
    
    As reported
    
    $
    852,330
    
    
    
    1,231,489Effect of stock option grant, net of tax
    
    
    (38,547
    )
    
    
    (23,905
    )Proforma
    
    $
    813,783
    
    
    
    1,207,584Basic earnings per share
    
    As reported
    
    $
    0.86
    
    
    
    1.31Effect of stock option grant, net of tax
    
    
    (0.04
    )
    
    
    (0.02
    )Proforma
    
    $
    0.82
    
    
    
    1.29Diluted earnings per share
    
    As reported
    
    $
    0.79
    
    
    
    1.23Effect of stock option grant, net of tax
    
    
    (0.04
    )
    
    
    (0.02
    )Proforma
    
    $
    0.75
    
    
    
    1.21
  The weighted average grant-date fair value of options granted in 2003
and 2002 was $6.27 and $4.35, 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
2003 and 2002: dividend yield of 0%, risk-free interest rate of 4% and 5%,
respectively, and an expected life of ten years. F-9




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (1)
    
    Summary of Significant Accounting Policies, continuedNet Earnings Per ShareBasic 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: Net
    
    Common
    
    Per ShareFor the year ended December 31, 2003
    
    Earnings
    
    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
 Net
    
    Common
    
    Per ShareFor the year ended December 31, 2002
    
    Earnings
    
    Shares
    
    AmountBasic earnings per share
    
    $
    1,231,489
    
    
    
    939,212
    
    
    $
    1.31Effect of stock options
    
    
    
    
    
    
    59,088Diluted earnings per share
    
    $
    1,231,489
    
    
    
    998,300
    
    
    $
    1.23
  Recent Accounting PronouncementsIn January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities  An
Interpretation of ARB No. 51 (FIN 46). In December 2003, the FASB issued a
revised version of FIN 46 to resolve certain questions and confusion related to
the application of the original FIN 46. The Company adopted FIN 46 (Revised) as
of December 31, 2003, and as a result, the Companys wholly owned subsidiary,
PB Capital Trust I, is no longer included in these consolidated financial
statements. The consolidated financial statements have been restated for all
periods presented to reflect this change in accounting, and the adoption of FIN
46 (Revised) had no impact on the Companys reported results of operations or
shareholders equity. F-10




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (2)
    
    Investment SecuritiesInvestment securities available for sale at December 31, 2003 and 2002 are
as follows: 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
 December 31, 2002Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Gains
    
    Losses
    
    Fair ValueU.S. Government agencies
    
    $
    7,158,707
    
    
    
    185,124
    
    
    
    
    
    
    
    7,343,831Municipal securities
    
    
    4,195,870
    
    
    
    140,976
    
    
    
    74
    
    
    
    4,336,772Trust preferred securities
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Mortgage-backed securities
    
    
    4,293,008
    
    
    
    98,367
    
    
    
    
    
    
    
    4,391,375Total
    
    $
    16,647,585
    
    
    
    424,467
    
    
    
    74
    
    
    
    17,071,978
  The current fair value and associated unrealized losses on investments in
debt securities with unrealized losses at December 31, 2003 are summarized
in the table below. Less than 12 MonthsEstimated
    
    UnrealizedFair Value
    
    LossesU.S. Government agencies
    
    $
    1,908,657
    
    
    
    56,956Municipal securities
    
    
    1,642,491
    
    
    
    40,340Mortgage-backed securities
    
    
    3,218,811
    
    
    
    35,511$
    6,769,959
    
    
    
    132,807
  There were no securities in the portfolio as of December 31, 2003 that had
been in a continuous unrealized loss position greater than twelve months.
The unrealized losses on debt securities as of December 31, 2003 arose due
to changing interest rates and are considered to be temporary. At December
31, 2003, 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. F-11




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (2)
    
    Investment Securities, continuedThe amortized cost and estimated fair value of investment securities
available for sale at December 31, 2003, 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. Amortized
    
    EstimatedCost
    
    Fair ValueDue within one year
    
    $
    6,596,435
    
    
    
    6,677,439Due from one to five years
    
    
    6,504,148
    
    
    
    6,481,175Due from five to ten years
    
    
    1,476,091
    
    
    
    1,586,959Due after ten years
    
    
    2,002,654
    
    
    
    2,022,193Mortgage-backed securities
    
    
    5,754,433
    
    
    
    5,755,092$
    22,333,761
    
    
    
    22,522,858
  For the year ended December 31, 2002, the Company sold investment
securities available for sale for $2,204,200 and realized gross gains of
$180,780 on those sales. No investment securities were sold during 2003.  At December 31, 2003 and 2002 securities with a carrying value of
approximately $4,638,000 and $5,845,000, 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 and
$2,714,000 at December 31, 2003 and 2002, respectively, were allocated by
the Bank for collateral under retail repurchase agreements.  (3)
    
    LoansMajor classifications of loans at December 31, 2003 and 2002 are summarized
as follows: 2003
    
    2002Commercial
    
    $
    31,659,251
    
    
    
    24,516,918Real estate  commercial and residential
    
    
    100,711,590
    
    
    
    59,851,148Real estate  construction
    
    
    59,213,970
    
    
    
    44,308,943Real estate  home equity
    
    
    5,834,477
    
    
    
    4,138,049Consumer
    
    
    9,314,249
    
    
    
    8,037,613206,733,537
    
    
    
    140,852,671Less: Allowance for loan losses
    
    
    2,123,509
    
    
    
    1,382,676Net deferred loan fees
    
    
    649,282
    
    
    
    291,106$
    203,960,746
    
    
    
    139,178,889
  The Bank grants loans and extensions of credit to individuals and a variety
of firms and corporations located primarily in Fulton 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. F-12




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (3)
    
    Loans, continuedChanges in the allowance for loan losses were as follows: 2003
    
    2002Balance at beginning of year
    
    $
    1,382,676
    
    
    
    981,639Provision charged to operations
    
    
    971,686
    
    
    
    406,269Loans charged off
    
    
    (287,823
    )
    
    
    (10,682
    )Recoveries
    
    
    56,970
    
    
    
    5,450Balance at end of year
    
    $
    2,123,509
    
    
    
    1,382,676
  (4)
    
    Premises and EquipmentMajor classifications of premises and equipment are summarized as follows: 2003
    
    2002Land
    
    $
    610,482
    
    
    
    610,482Buildings and improvements
    
    
    2,674,132
    
    
    
    2,674,132Furniture and equipment
    
    
    2,073,360
    
    
    
    1,654,189Leasehold improvements
    
    
    241,746
    
    
    
    241,746Construction in process
    
    
    172,717
    
    
    
    5,772,437
    
    
    
    5,180,549Less accumulated depreciation
    
    
    1,516,008
    
    
    
    1,148,640$
    4,256,429
    
    
    
    4,031,909
  Depreciation expense was $367,367 and $308,017 for the years ended December
31, 2003 and 2002, respectively.  The Bank leases certain office facilities to third parties. For the years
ended December 31, 2003 and 2002, rental income totaled approximately
$63,000 and $78,000, respectively.  (5)
    
    DepositsAt December 31, 2003, the scheduled maturities of time deposits are as
follows: 2004
    
    $
    99,776,2922005
    
    
    15,669,9662006
    
    
    670,6942007
    
    
    1,388,9592008
    
    
    2,283,917$
    119,789,828
  (6)
    
    Note Payable and Other BorrowingsDuring 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 2004. 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, 2003, the Company was in compliance with
all loan covenants. The Company had no balances outstanding under this line
of credit at December 31, 2003 and 2002.  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, 2003, the carrying amount of loans pledged as collateral
totaled approximately $12,800,000. F-13




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (6)
    
    Note Payable and Other Borrowings, continuedThe FHLB advances at December 31, 2003 and 2002 are summarized as follows: Interest
    
    RateMaturity Date
    
    Rate
    
    Type
    
    2003
    
    2002November 10, 2003
    
    
    1.80
    %
    
    Fixed
    
    $
    
    
    
    
    2,300,000June 23, 2004
    
    
    2.08
    %
    
    Fixed
    
    
    2,100,000
    
    
    
    2,100,000December 23, 2004
    
    
    2.31
    %
    
    Fixed
    
    
    2,000,000
    
    
    
    2,000,000November 12, 2004
    
    
    1.83
    %
    
    Fixed
    
    
    3,000,000
    
    
    
    $
    7,100,000
    
    
    
    6,400,000
  Additionally, the Bank has $12,000,000 available for the purchase of
overnight federal funds from three correspondent financial institutions.  (7)
    
    Junior Subordinated DebenturesIn 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, 2003, this rate was 5.00%. 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. As discussed in note 1, the Trust is not
consolidated by the Company under FIN 46.  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.  (8)
    
    Income TaxesThe components of income tax expense are as follows: 2003
    
    2002Current
    
    $
    847,105
    
    
    
    829,971Deferred
    
    
    (395,252
    )
    
    
    (152,524
    )$
    451,853
    
    
    
    677,447
 F-14




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (8)
    
    Income Taxes, continuedThe 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: 2003
    
    2002Pre-tax income at statutory rates
    
    $
    443,422
    
    
    
    649,038Differences:Nondeductible meals and entertainment
    
    
    12,620
    
    
    
    8,597State taxes, net of federal benefit
    
    
    55,789
    
    
    
    48,594Tax exempt interest
    
    
    (62,820
    )
    
    
    (47,340
    )Increase in cash surrender value of life insurance
    
    
    (32,030
    )
    
    
    (25,142
    )Other
    
    
    34,872
    
    
    
    43,700$
    451,853
    
    
    
    677,447
  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, 2003 and 2002. 2003
    
    2002Deferred tax assets:Allowance for loan losses
    
    $
    766,540
    
    
    
    505,848Deferred loan fees
    
    
    246,467
    
    
    
    110,504Deferred organizational costs
    
    
    2,763
    
    
    
    27,037Deferred compensation
    
    
    131,082
    
    
    
    54,352Other
    
    
    3,311
    
    
    
    11,318Total gross deferred tax assets
    
    
    1,150,163
    
    
    
    709,059Deferred tax liabilities:Unrealized gain on investment securities available for sale
    
    
    (64,293
    )
    
    
    (144,294
    )Accumulated depreciation
    
    
    (150,505
    )
    
    
    (104,653
    )Total gross deferred tax liabilities
    
    
    (214,798
    )
    
    
    (248,947
    )Net deferred tax asset
    
    $
    935,365
    
    
    
    460,112
  (9)
    
    Related Party TransactionsThe 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 2003: Beginning balance
    
    $
    4,008,000New loans
    
    
    19,821,000Repayments
    
    
    (16,500,000
    )Ending balance
    
    $
    7,329,000
  At December 31, 2003 and 2002, the Bank had deposit relationships with
related parties of approximately $4,366,000 and $3,128,000, 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 $1,069 plus
certain executory costs. F-15




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (10)
    
    CommitmentsThe 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, 2003 are as follows: Year Ending December 31,2004
    
    $
    189,5762005
    
    
    213,9352006
    
    
    208,7532007
    
    
    200,2172008
    
    
    184,809Thereafter
    
    
    643,317Total minimum obligation
    
    $
    1,640,607
  The total rent expense was approximately $119,000 and $71,000 for 2003 and
2002, 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 Amount2003
    
    2002Financial instruments whose contract
amounts represent credit risk:Commitments to extend credit
    
    $
    68,638,000
    
    
    
    33,995,000Standby letters of credit
    
    $
    1,268,000
    
    
    
    1,527,000
  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-16




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (11)
    
    Benefit PlansThe 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 $25,400 and $15,800 to the plan in 2003 and 2002,
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 157,612 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, 2003, 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: 2003
    
    2002Weighted
    
    
    
    
    
    WeightedOption
    
    Average Option
    
    Option
    
    Average OptionShares
    
    Price Per Share
    
    Shares
    
    Price Per ShareOutstanding, beginning of year
    
    
    247,698
    
    
    $
    10.41
    
    
    
    228,698
    
    
    $
    10.04Granted during the year
    
    
    35,050
    
    
    $
    17.26
    
    
    
    25,500
    
    
    $
    13.61Cancelled during the year
    
    
    
    
    
    
    
    
    
    
    (5,900
    )
    
    $
    10.00Exercised during the year
    
    
    
    
    
    
    
    
    
    
    (600
    )
    
    $
    10.00Outstanding, end of year
    
    
    282,748
    
    
    $
    11.26
    
    
    
    247,698
    
    
    $
    10.41Number of shares exercisable
    
    
    214,598
    
    
    $
    10.07
    
    
    
    201,398
    
    
    $
    10.01
  A summary of options outstanding as of December 31, 2003 is presented
below: WeightedAverage OptionOptions
    
    Price Per Share ofOptions
    
    Price
    
    Years
    
    Currently
    
    Options CurrentlyOutstanding
    
    Per Share
    
    Remaining
    
    Exercisable
    
    Exercisable219,698
    
    $
    10.00
    
    
    
    5
    
    
    
    205,298
    
    
    $
    10.0035,500
    
    $
    13.61
    
    
    
    9
    
    
    
    9,300
    
    
    $
    13.6127,550
    
    $
    18.25
    
    
    
    10
    
    
    
    
    
    
    
    282,748
    
    $
    11.26
    
    
    
    6
    
    
    
    214,598
    
    
    $
    10.07
  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, 2003 and 2002, the
cash surrender value of the insurance contracts was $2,586,729 and
$2,097,522, respectively, and is included in the consolidated balance sheet
as a component of other assets. For the years ended December 31, 2003 and
2002, the Company recorded income, representing the increase in the cash
surrender value of the contracts, of approximately
$94,000 and $74,000, respectively, and incurred expenses of approximately
$114,000 and $72,000, respectively. F-17




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (12)
    
    Regulatory MattersThe 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, 2003, that the Company and the Bank
meet all capital adequacy requirements to which they are subject.As of December 31, 2003 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, 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
    %As of December 31, 2002:Total Capital (to Risk-Weighted Assets)Consolidated
    
    $
    16,940
    
    
    
    11.1
    %
    
    $
    12,215
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    16,549
    
    
    
    10.9
    %
    
    $
    12,195
    
    
    
    8.0
    %
    
    $
    15,244
    
    
    
    10.0
    %Tier 1 Capital (to Risk-Weighted Assets)Consolidated
    
    $
    15,409
    
    
    
    10.1
    %
    
    $
    6,107
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    15,166
    
    
    
    10.0
    %
    
    $
    6,098
    
    
    
    4.0
    %
    
    $
    9,147
    
    
    
    6.0
    %Tier 1 Capital (to Average Assets)Consolidated
    
    $
    15,409
    
    
    
    9.1
    %
    
    $
    6,777
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    15,166
    
    
    
    9.0
    %
    
    $
    6,771
    
    
    
    4.0
    %
    
    $
    8,463
    
    
    
    5.0
    %
 F-18




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (13)
    
    Shareholders EquityDividends 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, 2003 and 2002, total shareholders equity of the Bank was
$26,018,111 and $15,446,465, respectively. The amount of dividends that the
Bank could pay in 2004 without obtaining prior regulatory approval is
approximately $521,000.During 2003, the Company sold 542,261 shares of common stock, respectively,
through a private placement at a price of $18.25 per share. The net
proceeds of this offering of $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.During 2002 and 2001, the Company sold 26,332 and 139,869 shares of common
stock, respectively, through a private placement at a price of $13.61
per share. The private placement resulted in the sale of a total of
166,201 shares of common stock (total proceeds of
$2,261,996) and was completed on February 28, 2002. The proceeds of
this offering were used to increase the Banks regulatory capital
ratios and for general corporate purposes.(14)
    
    Other Operating ExpenseOther operating expense for the years ended December 31, 2003 and 2002
included the following items that exceeded one percent of total revenues: 2003
    
    2002Data processing
    
    $
    224,133
    
    
    
    160,892Directors fees
    
    $
    264,600
    
    
    
    177,000
  (15)
    
    Fair Value of Financial InstrumentsThe 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 EquivalentsFor cash, due from banks, interest-bearing deposits with banks and federal
funds sold, the carrying amount is a reasonable estimate of fair value.Investment SecuritiesFair values for investment securities are based on quoted market prices.Other InvestmentsThe carrying amount of other investments approximates fair value.LoansThe 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 InsuranceThe cash surrender value of life insurance policies are carried at the
value for which such policies may be redeemed for cash. F-19




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##### Table of Contents



THE PB FINANCIAL SERVICES CORPORATION Notes to Consolidated Financial Statements, continued  (15)
    
    Fair Value of Financial Instruments, continuedDepositsThe 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 AgreementsThe carrying value of securities sold under retail repurchase agreements
approximates fair value.FHLB AdvancesThe 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 DebenturesBecause 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.LimitationsFair 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, 2003 and 2002 are as follows: 2003
    
    2002Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    19,743,113
    
    
    
    19,743,113
    
    
    
    15,552,438
    
    
    
    15,552,438Investment securities available for sale
    
    
    22,522,858
    
    
    
    22,522,858
    
    
    
    17,071,978
    
    
    
    17,071,978Other investments
    
    
    760,000
    
    
    
    760,000
    
    
    
    670,600
    
    
    
    670,600Loans, net
    
    
    203,960,746
    
    
    
    204,185,425
    
    
    
    139,178,889
    
    
    
    139,704,187Cash surrender value of life insurance
    
    
    2,586,729
    
    
    
    2,586,729
    
    
    
    2,097,522
    
    
    
    2,097,522Liabilities:Deposits
    
    $
    220,272,918
    
    
    
    220,915,118
    
    
    
    155,989,039
    
    
    
    156,803,370Securities sold under retail
repurchase agreements
    
    
    477,120
    
    
    
    477,120
    
    
    
    1,379,781
    
    
    
    1,379,781Federal Home Loan Bank advances
    
    
    7,100,000
    
    
    
    7,123,246
    
    
    
    6,400,000
    
    
    
    6,413,568Junior subordinated debentures
    
    
    4,120,000
    
    
    
    4,120,000
    
    
    
    4,120,000
    
    
    
    4,120,000
 F-20




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##### 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, 2003 and 2002 2003
    
    2002AssetsCash
    
    $
    94,060
    
    
    
    153,586Investment in Bank
    
    
    26,018,111
    
    
    
    15,446,465Investment in Trust (unconsolidated)
    
    
    120,000
    
    
    
    120,000Other assets
    
    
    320,792
    
    
    
    241,744$
    26,552,963
    
    
    
    15,961,795Liabilities
and Shareholders EquityOther liabilities
    
    $
    18,200
    
    
    
    4,511Junior subordinated debentures
    
    
    4,120,000
    
    
    
    4,120,000Shareholders equity
    
    
    22,414,763
    
    
    
    11,837,284$
    26,552,963
    
    
    
    15,961,795
 Statements of Earnings For the Years Ended December 31, 2003 and 2002 2003
    
    2002Dividend income from Bank
    
    $
    211,355
    
    
    
    Dividend income from Trust
    
    
    3,455
    
    
    
    Interest expense
    
    
    (214,810
    )
    
    
    (33,812
    )Other operating expenses
    
    
    (61,843
    )
    
    
    (24,116
    )Loss before income tax benefit and equity in
undistributed earnings of Bank
    
    
    (61,843
    )
    
    
    (57,928
    )Income tax benefit
    
    
    83,500
    
    
    
    22,012Earnings (loss) before equity in undistributed
earnings of Bank
    
    
    21,657
    
    
    
    (35,916
    )Equity in undistributed earnings of Bank
    
    
    830,673
    
    
    
    1,267,405Net earnings
    
    $
    852,330
    
    
    
    1,231,489
 F-21




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##### 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, 2003 and 2002 2003
    
    2002Cash flows from operating activities:Net earnings
    
    $
    852,330
    
    
    
    1,231,489Adjustments to reconcile net earnings to net cash used by
operating activities:Equity in undistributed earnings of Bank
    
    
    (830,673
    )
    
    
    (1,267,405
    )Amortization
    
    
    6,093
    
    
    
    Deferred income taxes
    
    
    (23,500
    )
    
    
    (56,229
    )Change in other assets
    
    
    (55,996
    )
    
    
    30,217Change in other liabilities
    
    
    13,689
    
    
    
    4,511Net cash used by operating activities
    
    
    (38,057
    )
    
    
    (57,417
    )Cash flows used by investing activities, consisting of
capital infusions in Bank
    
    
    (9,896,268
    )
    
    
    (3,882,098
    )Cash flows from financing activities:Proceeds (repayments) of note payable
    
    
    
    
    
    
    (280,000
    )Proceeds from issuance of junior subordinated debentures
    
    
    
    
    
    
    4,120,000Transaction costs associated with junior subordinated debentures
    
    
    (5,645
    )
    
    
    (175,986
    )Issuance of common stock
    
    
    9,880,444
    
    
    
    358,379Proceeds from exercise of stock options
    
    
    
    
    
    
    6,000Net cash provided by financing activities
    
    
    9,874,799
    
    
    
    4,028,393Net change in cash
    
    
    (59,526
    )
    
    
    88,878Cash at beginning of year
    
    
    153,586
    
    
    
    64,708Cash at end of year
    
    $
    94,060
    
    
    
    153,586
 F-22