**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-K**

 

**ý****                                ****ANNUAL REPORTUNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the fiscal year December 31,2004**

 

**OR**

 

**o****                                ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the transition period from                          to                         **

 

**Commission filenumber 333-74710**

 

**Georgia Bancshares, Inc.**

(Exact name of registrant as specifiedin its charter)

 
| **Georgia**                                        | ** ** | **58-2646154**                        |
|----------------------------------------------------|------------|---------------------------------------|
| (State  of Incorporation)                          |       | (I.R.S.  Employer Identification No.) |
|                                               |       |                                  |
| **100 Westpark  Drive   Peachtree, City, Georgia** | ** ** | **30269**                             |
| (Address  of principal executive offices)          |       | (Zip  Code)                           |

 

**770-631-9488**

(Telephone Number)

 

Securities registered pursuantto Section 12(b) of the Act:  **None**

 

Securities registered pursuantto Section 12(g) of the Act:  **Common Stock**

 

Check whether the issuer: (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for past 90 days.    Yes   ý    No  o

 

Check if there is no disclosure of delinquentfilers in response to Item 405 of Regulation S-B in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.  ý

 

The aggregate market value of the voting andnon-voting common equity held by non-affiliates (shareholders holding less than5% of an outstanding class of stock, excluding directors and executiveofficers) as of March 9, 2005 was $33,378,266.  This calculation was based on the average bidand asked price of such common equity on March 9, 2005.

 

There were 2,972,813 shares of the issuer’scommon stock issued and outstanding, as of March 9, 2005.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the issuer’s proxystatement for the 2005 annual meeting of shareholders to be held on May 11,2005 are incorporated by reference in Part III of this Form 10-K.

 

 

----

 

**PART I**

 

**Item 1.****           Description of Business**

 

This Report contains statements whichconstitute forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and the Securities Exchange Act of 1934.  These statements are based on manyassumptions and estimates and are not guarantees of future performance.  Our actual results may differ materially fromthose projected in any forward-looking statements, as they will depend on manyfactors about which we are unsure, including many factors which are beyond ourcontrol.  The words “may,” “would,” “could,”“will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate,” aswell as similar expressions, are meant to identify such forward-lookingstatements.  Potential risks anduncertainties include, but are not limited to:

 

•                  significantincreases in competitive pressure in the banking and financial servicesindustries;

 

•                  changesin the interest rate environment which could reduce anticipated or actualmargins;

 

•                  changesin political conditions or the legislative or regulatory environment;

 

•                  thelevel of allowance for loan loss;

 

•                  therate of delinquencies and amounts of charge-offs;

 

•                  therates of loan growth;

 

•                  adversechanges in asset quality and resulting credit risk-related losses and expenses;

 

•                  generaleconomic conditions, either nationally or regionally and especially in primaryservice area, becoming less favorable than expected resulting in, among otherthings, a deterioration in credit quality;

 

•                  changesoccurring in business conditions and inflation;

 

•                  changesin technology;

 

•                  changesin monetary and tax policies;

 

•                  changesin the securities markets; and

 

•                  otherrisks and uncertainties detailed from time to time in our filings with theSecurities and Exchange Commission.

 

**General**

 

Georgia Bancshares, Inc. was incorporated asa Georgia corporation on December 21, 2000 and became the holding companyfor The Bank of Georgia on May 18, 2001 following the consummation of astatutory share exchange.  Our bankcommenced operations on February 18, 2000 and conducts acommunity-oriented commercial and retail banking business, focusing on theneeds of individuals and small- to medium-sized businesses in Peachtree City,the rest of Fayette County, and portions of Coweta County in Georgia.  On November 12, 2002, we opened a newoffice at 100 Westpark Drive, Peachtree City, Georgia.  On January 3, 2003, we designated thisoffice as our corporate headquarters and designated our former main office at2008 Highway 54 West, Fayetteville, Georgia, as a branch office.  Our goal is to operate the leading communitybank in our market area.  We intend toachieve this goal by increasing asset size through internal growth and branchexpansion, providing personalized service with a community focus, hiring,developing, and retaining high caliber and motivated employees, maintaininghigh asset quality, and offering our customers a variety of competitiveproducts and services.

 

2

----

 

**Deposit Products**

 

We offer a fullrange of deposit products that are typically available in most banks andsavings and loan associations, including checking accounts, NOW accounts,savings accounts, and other time deposits of various types, ranging from dailymoney market accounts to longer-term certificates of deposit.  The transaction accounts and timecertificates are offered at rates competitive to those offered in our marketarea.  In addition, we offer retirementaccount services, such as Individual Retirement Accounts (IRAs).  All deposit accounts are insured by the FDICup to the maximum amount allowed by law.

 

**Other Banking Services**

 

Other bankservices include drive up teller lanes and ATMs at each office, telephonebanking, Visa check cards, safe deposit boxes, travelers checks, direct depositof payroll and social security checks, and automatic drafts for variousaccounts.  We are also a member of theSTAR and CIRRUS ATM networks.  We believethat by being associated with shared networks of ATMs, we can better serve ourcurrent customers and attract new customers who are accustomed to theconvenience of using ATMs.  We also offerour own credit and debit cards.

 

**Lending Activities**

 

*General*.  We emphasize a range of lending services,including real estate, commercial, and consumer loans to individuals and smallbusinesses that are located, or conduct a substantial portion of theirbusiness, in the Fayette and Coweta County areas.  The characteristics of our loan portfolio andour underwriting procedures, collateral types, risks, approval process andlending limits are discussed below.  Seealso “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations – Provision and Allowance for Loan Losses” on page 26 and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Analysis of Financial Condition — Loans” on page 23.

 

*Real Estate Construction and DevelopmentLoans.*  At December 31,2004, 55.34% of our loan portfolio was composed of personal and commercial realestate construction and land development loans. These loans are secured by the real estate for which construction isplanned.

 

*Real Estate Mortgage Loans.*   Real estate mortgage loans includeresidential real estate loans and non-farm and non-residential real estateloans.  Real estate mortgage loans aredefined as any loan secured by real estate, other than for constructionpurposes, regardless of the purposes of the loan.  These loans are secured generally by first orsecond mortgages on residential or commercial property.  At December 31, 2004, real estatemortgage loans comprised 33.02% of our loan portfolio.

 

*Commercial, Financial and AgriculturalLoans. *At December 31,2004, approximately 7.97% of our loan portfolio consisted of commercial,financial, and agricultural loans.  Theseloans consist of secured and unsecured loans, lines of credit, and workingcapital loans.  We make these loans tovarious types of businesses.  Included inthis category are loans to purchase equipment, finance accounts receivable orinventory, and loans made for working capital purposes.  Generally, we secure our commercial loanswith real estate instead of other business assets to provide greater security.

 

*Consumer Loans.*  At December 31, 2004, consumer loansmade up approximately 3.67% of our loan portfolio.  These are loans made to individuals forpersonal and household purposes, such as secured and unsecured installment andterm loans.  Automobiles and smallrecreational vehicles are pledged as security for loans associated with theirpurchase.

 

*Underwriting Procedures, Collateral, andRisk. *We useour established credit policies and procedures when underwriting each type ofloan.  Although there are minor variancesin the characteristics and criteria for each loan type, which variances mayrequire additional underwriting procedures, we generally evaluate borrowersusing the following defined criteria:

 

•                  Character– We evaluate whether the borrower has sound character and integrity byexamining the borrower’s history.

•                  Capital– We evaluate the borrower’s overall financial strength, as well as the equityinvestment in the asset being financed.

•                  Collateral– We evaluate whether the collateral is adequate from the standpoint ofquality, marketability, value and income potential.

•                  Capacity– We evaluate the borrower’s ability to service the debt.

 

3

----

 

•                  Conditions– We underwrite the credit in light of the effects of external factors, such aseconomic conditions and industry trends.

 

It is our practice to obtain collateral formost loans to help mitigate the risk associated with lending.  We generally limit our loan-to-value ratio to80%.  For example, we typically obtain asecurity interest in real estate for loans secured by real estate, includingconstruction and development loans, and other commercial loans.  For commercial loans, we typically obtainsecurity interests in equipment and other company assets.  For consumer loans used to purchase vehicles,we typically obtain appropriate title documentation.  For secured loans that are not associatedwith real estate, or for which the mortgaged real estate does not provide anacceptable loan-to-value ratio, we obtain other available collateral such asstocks and bonds.

 

Each type of loan carries a credit risk,simply defined as the potential that the borrower will not be willing or ableto repay the debt.  While real estateloans have various risks common to all types of loans, certain types of realestate loans have specific risk characteristics that vary according to thecollateral type securing the loan and the terms and repayment sources for theloan.  Real estate loans are allsensitive to fluctuations in the value of the real estate securing theloan.  In addition, commercial realestate loans have risk that the primary source of repayment will beinsufficient to service the debt.  Constructionand development real estate loans generally carry a higher degree of risk thanlong term financing of existing properties. These projects are usually dependent on the completion of the project onschedule and within cost estimates and on the timely sale of theproperty.  Inferior or improperconstruction techniques, changes in economic conditions during the constructionand marketing period, and rising interest rates which may slow the sale of theproperty are all risks unique to this type of loan.  Residential mortgage loans, in contrast tocommercial real estate loans, generally have longer terms and may have fixed oradjustable interest rates.  Commercialloans primarily have risk that the primary source of repayment will beinsufficient to service the debt.  Oftenthis occurs as the result of changes in local economic conditions or in theindustry in which the borrower operates which impact cash flow or collateralvalue.  Consumer loans, other than homeequity loan products, are generally considered to have more risk than loans toindividuals secured by first or second mortgages on real estate due todependence on the borrower’s employment status as the sole source ofrepayment.  By following definedunderwriting criteria as noted above, we can help to reduce these risks.  Additionally we help to reduce the risk thatthe underlying collateral may not be sufficient to pay the outstanding balanceby using appraisals or taking other steps to determine that the value of thecollateral is adequate, and lending amounts based upon lower loan-to-valueratios.  We control risks by monitoringand limiting concentrations in our loan portfolio of any one type of loan.

 

*Loan Approval and Review*.  Our loan approval policies provide forvarious levels of officer lending authority. When the amount of aggregate loans to a single borrower exceeds thatindividual officer’s lending authority, the loan request is considered by anofficer with a higher lending limit.  Anyloan in excess of this lending limit is approved by the directors’ loancommittee.  We do not make any loans toany of our directors or executive officers unless the loan is approved by theboard of directors of the bank and is made on terms not more favorable to suchperson than would be available to a person not affiliated with us.

 

*Lending Limits.*  Our lending activities are subject to avariety of lending limits imposed by federal law.  While differing limits apply to certain loantypes or borrowers, in general we are subject to a loan-to-one-borrowerlimit.  These limits increase or decreaseas our capital increases or decreases. Unless we sell participations in loans to other financial institutions,we are not able to meet all of the lending needs of loan customers requiringaggregate extensions of credit above these lending limits.  Loans above our internal limit of $2 millionbut under our legal lending limit, which is approximately $5.8 million, arepresented to our board of directors for board approval.

 

4

----

 

**Competition**

 

We engage in a generalcommercial and retail banking business, emphasizing the needs of small- tomedium-sized businesses, professional concerns, and individuals.  Our primary service area presentlyencompasses Peachtree City, as well as the rest of Fayette County, portions ofCoweta County and Fulton County.  Basedon relationships with our lending officers, we have a secondary lending area inneighboring Henry and Clayton Counties.

 

The banking business is highlycompetitive.  We compete with othercommercial banks, savings and loan associations, credit unions, and moneymarket mutual funds operating in the Fayette and Coweta County area andelsewhere.  As of June 30, 2004 (themost recent date for deposit data compiled by the Federal Deposit InsuranceCorporation), there were 40 banking offices representing 15 financialinstitutions operating in Fayette County holding over $1.49 billion indeposits.  In Coweta County, there were30 offices representing 10 financial institutions holding over $969 million indeposits.  We believe that our communitybank focus, with our emphasis on service to small- to medium-sized businesses,individuals, and professional concerns, gives us an advantage in these markets.  Nevertheless, a number of these competitorsare well established in the Fayette and Coweta County area.  Most of them have substantially greaterresources and lending limits than we have and offer services, such as extensiveand established branch networks and trust services that we do not currentlyprovide.  As a result of thesecompetitive factors, we may have to pay higher rates of interest to attractdeposits.

 

At June 30, 2004, our market share ofdeposits in Fayette County was 12.32%. Our branch offices in Newnan and Sharpsburg have attained a 3.33% marketshare for Coweta County since opening in July 2001 and April 2004,respectively.

 

**Employees**

 

#### **As ofDecember 31, 2004, we had 64 full-time employees and 6 part-timeemployees.  None of our employees iscovered by a collective bargaining agreement. We consider our relationship with our employees to be good.**

 

5

----

 

**SUPERVISIONAND REGULATION**

 

We are subject to extensive state and federalbanking laws and regulations which impose specific requirements or restrictionson, and provide for general regulatory oversight of, virtually all aspects ofoperations.  These laws and regulationsare generally intended to protect depositors, not shareholders.  The following summary is qualified by referenceto the statutory and regulatory provisions discussed.  Changes in applicable laws or regulations mayhave a material effect on our business and prospects.  Our operations may be affected by legislativechanges and the policies of various regulatory authorities.  We cannot predict the effect that fiscal ormonetary policies, economic control, or new federal or state legislation mayhave on our business and earnings in the future.

 

The following discussion is not intended to be a complete list of allthe activities regulated by the banking laws or of the impact of such laws andregulations on our operations.  It isintended only to briefly summarize some material provisions.

 

**USA Patriot Act of 2001**

 

In October 2001, the USA Patriot Act of2001 was enacted in response to the terrorist attacks in New York, Pennsylvaniaand Washington D.C. which occurred on September 11, 2001.  The Patriot Act is intended to strengthenU.S. law enforcement’s and the intelligence communities’ abilities to workcohesively to combat terrorism on a variety of fronts.  The potential impact of the Patriot Act onfinancial institutions is significant and wide ranging.  The Patriot Act contains sweeping anti-moneylaundering and financial transparency laws and imposes various regulations,including standards for verifying client identification at account opening, andrules to promote cooperation among financial institutions, regulators and lawenforcement entities in identifying parties that may be involved in terrorismor money laundering.

 

**Check 21**

 

On October 28, 2003, President Bushsigned into law the Check Clearing for the 21st Century Act, also known asCheck 21.  The new law, which was noteffective until October 28, 2004, gave “substitute checks,” such as adigital image of a check and copies made from that image, the same legalstanding as the original paper check. Some of the major provisions include:

 

•                  Allowscheck truncation without making it mandatory;

 

•                  Demandsthat every financial institution communicate to accountholders in writing adescription of its substitute check processing program and their rights underthe law;

 

•                  Legalizessubstitutions for and replacements of paper checks without agreement fromconsumers;

 

•                  Keepsin place the previously mandated electronic collection and return of checksbetween financial institutions only when individual agreements are in place;

 

•                  Cautionsthat when accountholder’s request verification, financial institutions mustproduce the original check (or a copy that accurately represents the original)and demonstrate that the account debit was accurate and valid; and

 

•                  Requiresrecrediting of funds to an individual’s account on the next business dayafter a consumer proves the financial institution has erred.

 

This new legislation will likely have adramatic impact on bank capital spending as many financial institutions assesswhether technological or operational changes are necessary to stay competitiveand take advantage of the new opportunities presented by Check 21.

 

6

----

 

**Georgia Bancshares, Inc.**

 

*The Gramm-Leach-Bliley Act.*  The Gramm-Leach-Bliley Act, previously knownas the Financial Services Modernization Act of 1999, was signed into law on November 12,1999.  Among other things, the Actrepeals the restrictions on banks affiliating with securities firms containedin sections 20 and 32 of the Glass-Steagall Act.  The Act also permits bank holding companiesthat become financial holding companies to engage in a statutorily provided listof financial activities, including insurance and securities underwriting andagency activities, merchant banking, and insurance company portfolio investmentactivities.  The Act also authorizesactivities that are “complementary” to financial activities.

 

The Act is intended, in part, to grant tocommunity banks certain powers as a matter of right that larger institutionshave accumulated on an ad hoc basis. Nevertheless, the Act may have the result of increasing the amount ofcompetition that we face from larger institutions and other types ofcompanies.  In fact, it is not possibleto predict the full effect that the Act will have on us.

 

Because our holding company, GeorgiaBancshares, Inc., owns the outstanding capital stock of our bank, our holdingcompany is a bank holding company under the federal Bank Holding Company Act of1956 and the Financial Institutions Code of Georgia.

 

*The Bank Holding Company Act.*  Under the Bank Holding Company Act, ourholding company is subject to periodic examination by the Federal Reserve andrequired to file periodic reports of its operations and any additionalinformation that the Federal Reserve may require.  Our activities at the holding company levelare limited to:

 

•                  bankingand managing or controlling banks;

•                  furnishingservices to or performing services for its subsidiaries; and

•                  engagingin other activities that the Federal Reserve determines to be so closelyrelated to banking and managing or controlling banks as to be a proper incidentthereto.

 

*Investments, Control, and Activities.*  With certain limited exceptions, the BankHolding Company Act requires every bank holding company to obtain the priorapproval of the Federal Reserve before:

 

•                  acquiringsubstantially all the assets of any bank;

•                  acquiringdirect or indirect ownership or control of any voting shares of any bank ifafter the acquisition it would own or control more than 5% of the voting sharesof such bank (unless it already owns or controls the majority of such shares);or

•                  mergingor consolidating with another bank holding company.

 

In addition, and subject to certainexceptions, the Bank Holding Company Act and the Change in Bank Control Actrequire Federal Reserve approval prior to any person or company acquiring “control”of a bank holding company.  Control isconclusively presumed to exist if an individual or company acquires 25% or moreof any class of voting securities of the bank holding company.  Control is rebuttably presumed to exist if aperson acquires 10% or more, but less than 25%, of any class of votingsecurities and either Georgia Bancshares, Inc. has registered securities under Section 12of the Securities Exchange Act of 1934, which we have done, or no other personowns a greater percentage of that class of voting securities immediately afterthe transaction.  The regulations providea procedure to challenge the rebuttable control presumption.

 

Under the BankHolding Company Act, a bank holding company is generally prohibited fromengaging in, or acquiring direct or indirect control of more than 5% of thevoting shares of any company engaged in non-banking activities unless theFederal Reserve Board, by order or regulation, has found those activities to beso closely related to banking or managing or controlling banks as to be aproper incident thereto.  Some of theactivities that the Federal Reserve Board has determined by regulation to beproper incidents to the business of a bank holding company include:

 

•                  makingor servicing loans and certain types of leases;

•                  engagingin certain insurance and discount brokerage activities;

•                  performingcertain data processing services;

•                  actingin certain circumstances as a fiduciary or investment or financial adviser;

•                  owningsavings associations; and

•                  makinginvestments in certain corporations or projects designed primarily to promotecommunity welfare.

 

7

----

 

The Federal Reserve Board imposes certaincapital requirements on our holding company under the Bank Holding Company Act,including a minimum leverage ratio and a minimum ratio of “qualifying” capitalto risk-weighted assets.  Theserequirements are described below under “Capital Regulations.”  Subject to capital requirements and certainother restrictions, our holding company is able to borrow money to make acapital contribution to our bank, and these loans may be repaid from dividendspaid from our bank to our holding company. Our ability to pay dividends will be subject to regulatory restrictionsas described below in “The Bank of Georgia– Dividends.”  Our holding company is also able to raisecapital for contribution to our bank by issuing securities without having toreceive regulatory approval, subject to compliance with federal and statesecurities laws.  As a bank holding companyregistered under the Financial Institutions Code of Georgia, we must providethe Georgia Department of Banking and Finance with information regarding thefinancial, management, and operating condition of our holding company and bank.

 

*Source of Strength; Cross-Guarantee.*  In accordance with Federal Reserve Boardpolicy, our holding company is expected to act as a source of financialstrength to our bank and to commit resources to support our bank incircumstances in which our holding company might not otherwise do so.  Under the Bank Holding Company Act, theFederal Reserve Board may require a bank holding company to terminate anyactivity or relinquish control of a non-bank subsidiary, other than a non-banksubsidiary of a bank, upon the Federal Reserve Board’s determination that suchactivity or control constitutes a serious risk to the financial soundness orstability of any subsidiary depository institution of the bank holdingcompany.  Further, federal bankregulatory authorities have additional discretion to require a bank holdingcompany to divest itself of any bank or non-bank subsidiary if the agencydetermines that divestiture may aid the depository institution’s financialcondition.

 

#### **TheBank of Georgia**

#### ** **

Our bank, The Bank of Georgia, operates as aGeorgia state bank incorporated under the laws of the State of Georgia andsubject to examination by the Georgia Department of Banking and Finance.  Deposits in the bank are insured by the FDICup to a maximum amount, which is generally $100,000 per depositor subject toaggregation rules.

 

The Georgia Department of Banking and Financeand the FDIC regulate or monitor virtually all areas of our bank’s operations,including:

 

•                  securitydevices and procedures;

•                  adequacyof capitalization and loss reserves;

•                  loans;

•                  investments;

•                  borrowings;

•                  deposits;

•                  mergers;

•                  issuancesof securities;

•                  paymentof dividends;

•                  interestrates payable on deposits;

•                  interestrates or fees chargeable on loans;

•                  establishmentof branches;

•                  corporatereorganizations;

•                  maintenanceof books and records; and

•                  adequacyof staff training to carry on safe lending and deposit gathering practices.

 

The Georgia Department of Banking and Financeand the FDIC require banks to maintain certain capital ratios, imposelimitations on banks’ aggregate investment in real estate, bank premises, andfurniture and fixtures, require banks to prepare quarterly reports on theirfinancial condition, and require banks to conduct annual audits of theirfinancial affairs in compliance with its minimum standards and procedures.

 

Under the FDIC Improvement Act, all insuredinstitutions must undergo regular on-site examinations by their appropriatebanking agency.  The cost of examinationsof insured depository institutions and any affiliates may be assessed by theappropriate agency against each institution or affiliate as it deems necessaryor appropriate.  Insured institutions arerequired to submit annual reports to the FDIC, and their state supervisor whenapplicable.  The FDIC Improvement Actdirects the FDIC to develop a method for insured depository institutions toprovide supplemental disclosure of the estimated fair market value of assetsand liabilities, to

 

8

----

 

the extent feasible and practicable, in any balance sheet, financialstatement, report of condition, or any other report of any insured depositoryinstitution.  The FDIC Improvement Actalso requires the federal banking regulatory agencies to prescribe, byregulation, standards for all insured depository institutions and depositoryinstitution holding companies relating, among other things, to the following:

 

•                  internalcontrols;

•                  informationsystems and audit systems;

•                  loandocumentation;

•                  creditunderwriting;

•                  interestrate risk exposure; and

•                  assetquality.

 

*Deposit Insurance.*  The FDIC has adopted a risk-based assessmentsystem for determining an insured depository institution’s insurance assessmentrate.  The system takes into account therisks attributable to different categories and concentrations of assets andliabilities.  An institution is placedinto one of three capital categories: (1) well capitalized; (2) adequately capitalized; or (3) undercapitalized.  The FDIC also assigns an institution to oneof three supervisory subgroups, based on the FDIC’s determination of theinstitution’s financial condition and the risk posed to the deposit insurancefunds.  Assessments range from 0 to 27cents per $100 of deposits, depending on the institution’s capital group andsupervisory subgroup.  In addition, theFDIC imposes assessments to help pay off the $780 million in annual interestpayments on the $8 billion Financing Corporation (FICO) bonds issued in thelate 1980s as part of the government rescue of the thrift industry.  Although we pay a quarterly FICO assessment,the FDIC assessment rate on our bank deposits currently is zero, but may changein the future.  The FDIC may increase ordecrease the assessment rate schedule on a semiannual basis.  An increase in the BIF assessment rate couldhave a material adverse effect on our earnings, depending on the amount of theincrease.

 

The FDIC may terminate its insurance ofdeposits if it finds that the institution has engaged in unsafe and unsoundpractices, is in an unsafe or unsound condition to continue operations, or hasviolated any applicable law, regulation, rule, order, or condition imposed bythe FDIC.

 

*Transactions With Affiliates and Insiders.*  Our bank is subject to the provisions of Section 23Aof the Federal Reserve Act, which place limits on the amount of loans orextensions of credit to, or investments in, or certain other transactions with,affiliates and on the amount of advances to third parties collateralized by thesecurities or obligations of affiliates. The aggregate of all covered transactions is limited in amount, as toany one affiliate, to 10% of our bank’s capital and surplus and, as to allaffiliates combined, to 20% of our bank’s capital and surplus.  Furthermore, within the foregoing limitationsas to amount, each covered transaction must meet specified collateralrequirements.  Compliance is alsorequired with certain provisions designed to avoid the taking of low qualityassets.

 

Our bank is also be subject to the provisionsof Section 23B of the Federal Reserve Act which, among other things,prohibits an institution from engaging in certain transactions with certainaffiliates unless the transactions are on terms substantially the same, or atleast as favorable to such institution or its subsidiaries, as those prevailingat the time for comparable transactions with nonaffiliated companies.  Our bank is subject to certain restrictionson extensions of credit to executive officers, directors, certain principalshareholders, and their related interests. Such extensions of credit (1) must be made on substantially the sameterms, including interest rates and collateral, as those prevailing at the timefor comparable transactions with third parties and (2) must not involve morethan the normal risk of repayment or present other unfavorable features.

 

The Federal Reserve Board has recently issuedRegulation W, which codifies prior regulations under Sections 23A and 23B ofthe Federal Reserve Act and interpretative guidance with respect to affiliatetransactions.  Regulation W incorporatesthe exemption from the affiliate transaction rules but expands the exemption tocover the purchase of any type of loan or extension of credit from anaffiliate.  In addition, under Regulation W:

 

•                  abank and its subsidiaries may not purchase a low-quality asset from anaffiliate;

•                  coveredtransactions and other specified transactions between a bank or itssubsidiaries and an affiliate must be on terms and conditions that areconsistent with safe and sound banking practices; and

•                  withsome exceptions, each loan or extension of credit by a bank to an affiliatemust be secured by collateral with a market value ranging from 100% to 130%,depending on the type of collateral, of the amount of the loan or extension ofcredit.

 

9

----

 

Regulation W generally excludes all non-bankand non-savings association subsidiaries of banks from treatment as affiliates,except to the extent that the Federal Reserve Board decides to treat thesesubsidiaries as affiliates.  Concurrentlywith the adoption of Regulation W, the Federal Reserve Board has proposed aregulation which would further limit the amount of loans that could bepurchased by a bank from an affiliate to not more than 100% of the bank’scapital and surplus.  This regulation hasnot yet been adopted.

 

*Dividends.*  Georgia state law and the Georgia Departmentof Banking and Finance limit a state bank’s ability to declare and paydividends.  A dividend may only be paidif: (i) the bank’s dividend does not exceed 50% of the previous calendar year’snet profit, after taxes, but before dividends; (ii) the bank’s dividend is paidout of the retained earnings of the bank; (iii) the bank’s total classifiedassets do not exceed 80% of Tier 1 capital plus the allowance for loan losses;and (iv) the ratio of Tier 1 capital to adjusted total assets of the bank isgreater than or equal to 6%.

 

*Branching.*Undercurrent Georgia law, our bank may open branch offices throughout Georgia withthe prior approval of the Georgia Department of Banking and Finance.  In addition, with prior regulatory approval,our bank may acquire existing branch operations in Georgia.

 

*Community Reinvestment Act.*  The Community Reinvestment Act requires that,in connection with examinations of financial institutions within theirrespective jurisdictions, the FDIC shall evaluate the record of each financialinstitution in meeting the credit needs of its local community, including lowand moderate income neighborhoods.  Thesefactors are also considered in evaluating mergers, acquisitions, andapplications to open a branch or facility. Failure to adequately meet these criteria could impose additionalrequirements and limitations on the bank. Under the Gramm-Leach-Bliley Act, banks with aggregate assets of notmore than $250 million will be subject to a Community Reinvestment Actexamination only once every 60 months if the bank receives an outstandingrating, once every 48 months if it receives a satisfactory rating, and asneeded if the rating is less than satisfactory. Additionally, under the Gramm-Leach-Bliley Act, banks are required topublicly disclose the terms of various Community Reinvestment Act-relatedagreements.

 

*The Gramm-Leach-Bliley Act.*   Under the Gramm-Leach-Bliley Act, subject tocertain conditions imposed by their respective banking regulators, national andstate-chartered banks are permitted to form “financial subsidiaries” that mayconduct financial or incidental activities, thereby permitting banksubsidiaries to engage in certain activities that previously wereimpermissible.  The Gramm-Leach-BlileyAct imposes several safeguards and restrictions on financial subsidiaries,including that the parent bank’s equity investment in the financial subsidiarybe deducted from the bank’s assets and tangible equity for purposes ofcalculating the bank’s capital adequacy. In addition, the Gramm-Leach-Bliley Act imposes new restrictions ontransactions between a bank and its financial subsidiaries similar torestrictions applicable to transactions between banks and nonbank affiliates.

 

The Gramm-Leach-Bliley Act also containsprovisions regarding consumer privacy. These provisions require financial institutions to disclose their policyfor collecting and protecting confidential information.  Customers generally may prevent financialinstitutions from sharing personal financial information with nonaffiliatedthird parties except for third parties that market an institution’s ownproducts and services.  Additionally,financial institutions generally may not disclose consumer account numbers toany nonaffiliated third party for use in telemarketing, direct mail marketing,or other marketing to the consumer.

 

*Other Regulations.*  Interest and certain other charges collectedor contracted for by our bank are subject to state usury laws and certainfederal laws concerning interest rates. The bank’s loan operations are also subject to certain federal lawsapplicable to credit transactions, such as:

 

•                  thefederal Truth-In-Lending Act, governing disclosures of credit terms to consumerborrowers;

•                  theHome Mortgage Disclosure Act of 1975, requiring financial institutions toprovide information to enable the public and public officials to determinewhether a financial institution is fulfilling its obligation to help meet thehousing needs of the community it serves;

•                  theEqual Credit Opportunity Act, prohibiting discrimination on the basis of race,creed, or other prohibited factors in extending credit;

•                  theFair Credit Reporting Act of 1978, governing the use and provision ofinformation to credit reporting agencies;

•                  theFair Debt Collection Act, governing the manner in which consumer debts may becollected by collection agencies; and

•                  therules and regulations of the various federal agencies charged with theresponsibility of implementing such federal laws.

 

10

----

 

The deposit operations of our bank also are subject to:

 

•                  theRight to Financial Privacy Act, which imposes a duty to maintain confidentialityof consumer financial records and prescribes procedures for complying withadministrative subpoenas of financial records; and

•                  theElectronic Funds Transfer Act and Regulation E issued by the Federal ReserveBoard to implement that act, which governs automatic deposits to andwithdrawals from deposit accounts and customers’ rights and liabilities arisingfrom the use of automated teller machines and other electronic bankingservices.

 

*Capital Regulations.*  The FDIC and the Georgia Department of Bankingand Finance have adopted risk-based capital guidelines for banks and bankholding companies that are designed to make regulatory capital requirementsmore sensitive to differences in risk profiles among banks and account foroff-balance sheet items.  The guidelinesare minimums, and the regulators have noted that banks and bank holdingcompanies contemplating significant expansion programs should not allowexpansion to diminish their capital ratios and should maintain ratios in excessof the minimums.  We have not receivedany notice indicating that either our bank or our holding company is subject tohigher capital requirements.  The currentguidelines require all bank holding companies and federally-regulated banks tomaintain a minimum risk-based total capital ratio equal to 8%, of which atleast 4% must be Tier 1 capital.  Tier 1capital includes common shareholders’ equity, qualifying perpetual preferredstock, and minority interests in equity accounts of consolidated subsidiaries,but excludes goodwill and most other intangibles and excludes the allowance forloan and lease losses.  Tier 2 capitalincludes the excess of any preferred stock not included in Tier 1 capital,mandatory convertible securities, hybrid capital instruments, subordinated debtand intermediate term-preferred stock, and general reserves for loan and leaselosses up to 1.25% of risk-weighted assets.

 

Under these guidelines, banks’ and bankholding companies’ assets are given risk-weights of 0%, 20%, 50%, or 100%.  In addition, certain off-balance sheet itemsare given credit conversion factors to convert them to asset equivalent amountsto which an appropriate risk-weight applies. These computations result in the total risk-weighted assets.  Most loans are assigned to the 100% riskcategory, except for first mortgage loans fully secured by residential propertyand, under certain circumstances, residential construction loans, both of whichcarry a 50% rating.  Most investmentsecurities are assigned to the 20% category, except for municipal or staterevenue bonds, which have a 50% rating, and direct obligations of orobligations guaranteed by the United States Treasury or United StatesGovernment agencies, which have a 0% rating.

 

The federal bank regulatory authorities havealso implemented a leverage ratio, which is equal to Tier 1 capital as apercentage of average total assets less intangibles, to be used as a supplementto the risk-based guidelines.  Theprincipal objective of the leverage ratio is to place a constraint on the maximumdegree to which a bank holding company may leverage its equity capitalbase.  The minimum required leverageratio for top-rated institutions is 3%, but most institutions are required tomaintain an additional cushion of at least 100 to 200 basis points.

 

The FDIC Improvement Act established a newcapital-based regulatory scheme designed to promote early intervention fortroubled banks which requires the FDIC to choose the least expensive resolutionof bank failures.  The new capital-basedregulatory framework contains five categories of compliance with regulatorycapital requirements, including “well capitalized,” “adequately capitalized,” “undercapitalized,”“significantly undercapitalized,” and “critically undercapitalized.”  To quality as a “well capitalized”institution, a bank must have a leverage ratio of no less than 5%, a Tier 1risk-based ratio of no less than 6%, and a total risk-based capital ratio of noless than 10%, and the bank must not be under any order or directive from theappropriate regulatory agency to meet and maintain a specific capitallevel.  Currently, we qualify as “wellcapitalized.”

 

Under the FDICImprovement Act regulations, the applicable agency can treat an institution asif it were in the next lower category if the agency determines (after noticeand an opportunity for hearing) that the institution is in an unsafe or unsoundcondition or is engaging in an unsafe or unsound practice.  The degree of regulatory scrutiny of afinancial institution increases, and the permissible activities of theinstitution decreases, as it moves downward through the capitalcategories.  Institutions that fall intoone of the three undercapitalized categories may be required to do some or allof the following:

 

•                  submita capital restoration plan;

•                  raiseadditional capital;

•                  restricttheir growth, deposit interest rates, and other activities;

•                  improvetheir management;

•                  eliminatemanagement fees; or

•                  divestthemselves of all or a part of their operations.

 

11

----

 

These capital guidelines can affect us inseveral ways.  If we grow at a rapidpace, our capital may be depleted too quickly, and a capital infusion from ourholding company may be necessary which could impact our ability to pay dividends.  Our capital levels currently are adequate;however, rapid growth, poor loan portfolio performance, poor earningsperformance, or a combination of these factors could change our capitalposition in a relatively short period of time. If we fail to meet these capital requirements, our bank would berequired to develop and file a plan with its primary federal banking regulatordescribing the means and a schedule for achieving the minimum capitalrequirements.  In addition, our bankwould generally not receive regulatory approval of any application thatrequires the consideration of capital adequacy, such as a branch or mergerapplication, unless our bank could demonstrate a reasonable plan to meet thecapital requirement within a reasonable period of time.  A bank that is not “well capitalized” is alsosubject to certain limitations relating to so-called “brokered” deposits.  Bank holding companies controlling financialinstitutions can be called upon to boost the institutions’ capital and topartially guarantee the institutions’ performance under their capitalrestoration plans.

 

*Enforcement Powers.*  The Financial Institution Reform Recovery andEnforcement Act expanded and increased civil and criminal penalties availablefor use by the federal regulatory agencies against depository institutions andcertain “institution-affiliated parties.” Institution-affiliated parties primarily include management, employees,and agents of a financial institution, as well as independent contractors andconsultants such as attorneys and accountants and others who participate in theconduct of the financial institution’s affairs. These practices can include the failure of an institution to timely filerequired reports or the filing of false or misleading information or thesubmission of inaccurate reports.  Civilpenalties may be as high as $1,000,000 a day for such violations.  Criminal penalties for some financialinstitution crimes have been increased to 20 years.  In addition, regulators are provided withgreater flexibility to commence enforcement actions against institutions andinstitution-affiliated parties.  Possibleenforcement actions include the termination of deposit insurance.  Furthermore, banking agencies’ power to issuecease-and-desist orders were expanded. Such orders may, among other things, require affirmative action tocorrect any harm resulting from a violation or practice, including restitution,reimbursement, indemnifications, or guarantees against loss.  A financial institution may also be ordered torestrict its growth, dispose of certain assets, rescind agreements orcontracts, or take other actions as determined by the ordering agency to beappropriate.

 

*Effect of Governmental Monetary Policies.*  Our earnings are affected by domesticeconomic conditions and the monetary and fiscal policies of the United Statesgovernment and its agencies.  The FederalReserve Bank’s monetary policies have had, and are likely to continue to have,an important impact on the operating results of commercial banks through itspower to implement national monetary policy in order, among other things, tocurb inflation or combat a recession. The monetary policies of the Federal Reserve Board have major effectsupon the levels of bank loans, investments and deposits through its open marketoperations in United States government securities, and through its regulationof the discount rate on borrowings of member banks and the reserve requirementsagainst member bank deposits.  It is notpossible to predict the nature or impact of future changes in monetary andfiscal policies.

 

*Proposed Legislation and Regulatory Action.*  New regulations and statutes are regularlyproposed that contain wide-ranging proposals for altering the structures,regulations, and competitive relationship of the nation’s financialinstitutions.  We cannot predict whetheror in what form any proposed regulation or statute will be adopted or theextent to which our business may be affected by any new regulation or statute.

 

12

----

 

**Item 2.****           Description of Property**

 

**Properties**

 

Our corporate main office is located at 100Westpark Drive, Peachtree City (Fayette County), Georgia.  This office was completed on November 12,2002 and was designated the main office on January 3, 2003.  Our former main office, located at 2008 Hwy.54 West, Fayetteville, Georgia now operates as a full-service branch.  On July 9, 2001, a full-service branchwas opened in Coweta County at 471 Hwy 29 N, Newnan, Georgia.  During 2003, two additional branches wereopened.  A full-service branch within theKroger Towne Center store at 805 South Glynn Street, Fayetteville, Georgia wasopened on June 20, 2003.  On August 26,2003, our new full-service branch at 1005 Tyrone Road, Tyrone (Fayette County),Georgia opened for business. On April 9, 2004, our new full service branchat 2015 Highway 154, Sharpsburg (Coweta County), Georgia was opened and the newfull-service branch at 8410 Senoia Road, Fairburn (Fulton County), Georgia wasopened on November 1, 2004.

 

The offices in Peachtree City, Newnan, Tyroneand Fairburn are owned.  Both of theFayetteville facilities and the branch in Sharpsburg are leased.

 

**Item 3.****           Legal Proceedings.**

 

On April 19,2001, shareholders of the bank approved the reorganization of the bank into aholding company structure pursuant to that certain Reorganization Agreement andPlan of Share Exchange dated March 10, 2001.  Upon consummation of the reorganization onMay 18, 2001, 2,080,078 shares of common stock of the bank were exchanged for2,080,078 shares of common stock of the company.  Pursuant to Section 14-2-1302 of theGeorgia Business Corporation Code, a record shareholder of a corporation isentitled to dissent from, and obtain payment of the fair value of his shares inthe event of certain corporate actions, including the consummation of a plan ofshare exchange.  Cede & Co., therecord holder of the remaining originally issued 68,359 shares of the bank’scommon stock, dissented from the bank’s reorganization into a holding companystructure.  The bank has an obligation topurchase this dissenting shareholder’s shares for fair value as of May 18,2001.  The bank has determined throughthe aid of an appraiser that these shares were worth $5.40 per share as of May18, 2001.  The dissenting shareholder,however, claimed that the shares were worth $12.93 per share.  The numbers of shares and prices per sharehave been adjusted to reflect 5-for4 stock splits declared by the board ofdirectors on August 16, 2001, September 19, 2002 and June 19,2003.  To resolve this matter inaccordance with Section 14-2-1330 of the Georgia Business CorporationCode, the bank filed a Petition for Determination of Fair Value of Sharesagainst Cede & Co. in the Superior Court of Fayette County, State ofGeorgia on September 14, 2001. Fayette Mortgage Company and Edgar E. Chapman, Jr. Individual RetirementAccount have subsequently replaced Cede & Co. as the real shareholders ininterest.

 

On April 12,2004 an order was received from the court establishing the aggregate principalsum of $657,730 to be paid to the dissenting shareholder.  This amount was paid on April 13, 2004.

 

The impact of thissettlement on the consolidated balance sheet of the Company as of April 13,2004 was the elimination of the $369,250 stock purchase obligation liabilityand a reduction of capital surplus in the amount of the differential, $288,480.

 

After consultationwith legal counsel, there are no proceedings pending or threatened againstGeorgia Bancshares or the Bank of Georgia that will, individually or in theaggregate, have a material adverse effect on the business or the consolidatedfinancial condition of Georgia Bancshares.

 

**Item 4.****           Submission of Mattersto a Vote of Security Holders.**

 

No matter was submitted to a vote of securityholders during the fourth quarter of the fiscal year covered by this report.

 

13

----

 

**PART II**

 

**Item 5.****           Market for CommonEquity and Related Stockholder Matters.**

 

Our common stock has been quoted on the OTCBulletin Board under the symbol “GABA” since June 2, 2002.  Market makers of our common stock includeMorgan Keegan & Company, Inc. and Schwab Capital Markets, L. P.  As of March 9, 2005, we hadapproximately 463 shareholders of record.

 

The following table sets forth the high andlow bid information as quoted on the OTC Bulletin Board during the periodsindicated.  The quotations reflectinter-dealer prices, without retail mark-up, mark-down or commission, and maynot represent actual transactions.

 
| ** **      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| ** **      | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First  Quarter  |       | $        | 15.25      |     | $          | 14.00 |   | $ | 15.20 |   | $ | 10.80 |   |
| Second  Quarter |       | $        | 14.00      |     | $          | 12.15 |   | $ | 14.00 |   | $ | 12.00 |   |
| Third  Quarter  |       | $        | 13.05      |     | $          | 12.35 |   | $ | 17.21 |   | $ | 14.20 |   |
| Fourth  Quarter |       | $        | 16.00      |     | $          | 12.75 |   | $ | 16.00 |   | $ | 15.00 |   |

 

 

The prices have been adjusted to reflect the 5 -for-4stock splits declared by our board of directors on August 16, 2001, September 19,2002, and June 19, 2003.

 

To date, we have not paid cash dividends onour common stock.  We currently intend toretain earnings to support operations and finance expansion and therefore donot anticipate paying cash dividends in the foreseeable future.  Our ability to pay cash dividends isdependent upon receiving cash in the form of dividends from The Bank ofGeorgia.  However, certain restrictionsexist regarding the ability of the bank to transfer funds to the company in theform of cash dividends.  A dividend mayonly be paid if: (i) the bank’s dividend does not exceed 50% of the previouscalendar year’s net profit, after taxes, but before dividends; (ii) the bank’sdividend is paid out of the retained earnings of the bank; (iii) the bank’stotal classified assets do not exceed 80% of Tier 1 capital plus the allowancefor loan losses; and (iv) the ratio of Tier 1 capital to adjusted total assetsof the bank is greater than or equal to 6%.  All of our outstanding shares of common stock are entitled to shareequally in dividends from funds legally available when, and if, declared by theboard of directors.

 

We issued no unregistered securities duringthe fiscal year ended December 31, 2004 and did not repurchase any sharesof our common stock during the fourth quarter of 2004.

 

#### **StockWarrants**

#### ** **

In connection with the formation of the bank,each of our organizers received, for no additional consideration, a warrant topurchase one share of common stock for $10.00 per share for each sharepurchased during the initial public offering of our wholly owned subsidiary,The Bank of Georgia.  Following the5-for-4 stock splits declared by our board of directors on August 16,2001, September 19, 2002, and June 19, 2003, the exercise price ofthese warrants has been adjusted to $5.12 per share.  The warrants are represented by separatewarrant agreements.  One-third of thewarrants vested on each of the first three anniversaries of the date of ourbank’s incorporation, and they are exercisable in whole or in part during theten year period ending on February 18, 2010.  The warrants may not be assigned,transferred, pledged, or hypothecated in any way.  The shares issued pursuant to the exercise ofsuch warrants are transferable, subject to compliance with applicablesecurities laws.  If the GeorgiaDepartment of Banking and Finance or the FDIC issues a capital directive orother order requiring the bank to obtain additional capital, the warrants willbe forfeited, if not immediately exercised.

 

14

----

 

**Item 6. SelectedFinancial Data**

 

**Selected Financial Data**

 
| ** **                                           | ** ** | **Year Ended December 31,**           | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                           | ** ** | **(in thousands, except per share  data)** | ** ** |
| For the  Year:                                       |       |                                       |       |   |   |   |   |   |   |
| Total  Interest Income                               |       | $                                          | 13,508     |   | $ | 11,198 |   | $ | 9,568 |   | $ | 7,776 |   |
| Total  Interest Expense                              |       | 4,243                                      |       | 4,546 |   | 4,837 |   | 4,682 |   |
| Net Interest  Income                                 |       | 9,265                                      |       | 6,652 |   | 4,731 |   | 3,094 |   |
| Provision  for Loan Losses                           |       | 585                                        |       | 266 |   | 885 |   | 660 |   |
| Net Interest  Income After Provision for Loan Losses |       | 8,680                                      |       | 6,386 |   | 3,846 |   | 2,434 |   |
| Total Other  Income                                  |       | 682                                        |       | 386 |   | 417 |   | 229 |   |
| Total Other  Expense                                 |       | 6,627                                      |       | 4,719 |   | 3,445 |   | 2,359 |   |
| Income  Before Income Taxes                          |       | 2,735                                      |       | 2,053 |   | 818 |   | 304 |   |
| Income Taxes                                         |       | 889                                        |       | 730 |   | 227 |   | 34 |   |
| Net Income                                           |       | 1,846                                      |       | 1,323 |   | 592 |   | 270 |   |
| Per Share  Data:                                     |       |                                       |       |   |   |   |   |   |   |
| Net Income                                           |       | 0.63                                       |       | 0.45 |   | 0.22 |   | 0.13 |   |
| Diluted Net  Income                                  |       | 0.55                                       |       | 0.36 |   | 0.17 |   | 0.10 |   |
| Cash  Dividends Declared                             |       | 0.00                                       |       | 0.00 |   | 0.00 |   | 0.00 |   |
| Book Value                                           |       | 7.10                                       |       | 6.56 |   | 6.25 |   | 5.22 |   |
| Tangible  Book Value                                 |       | 7.10                                       |       | 6.56 |   | 6.25 |   | 5.22 |   |
| At Year End:                                         |       |                                       |       |   |   |   |   |   |   |
| Total Loans                                          |       | 192,295                                    |       | 149,595 |   | 127,639 |   | 82,567 |   |
| Earning  Assets                                      |       | 231,921                                    |       | 190,535 |   | 161,998 |   | 113,662 |   |
| Assets                                               |       | 249,550                                    |       | 205,092 |   | 171,619 |   | 118,750 |   |
| Total  Deposits                                      |       | 212,258                                    |       | 181,968 |   | 142,559 |   | 106,268 |   |
| Shareholders’  Equity                           |       | 21,106                                     |       | 19,263 |   | 18,266 |   | 10,850 |   |
| Common  Shares Outstanding                           |       | 2,973                                      |       | 2,936 |   | 2,922 |   | 2,080 |   |
| Average  Balances:                                   |       |                                       |       |   |   |   |   |   |   |
| Total Loans                                          |       | 169,397                                    |       | 138,068 |   | 108,146 |   | 67,343 |   |
| Earning  Assets                                      |       | 213,992                                    |       | 176,409 |   | 140,772 |   | 93,533 |   |
| Assets                                               |       | 229,382                                    |       | 185,984 |   | 148,461 |   | 98,709 |   |
| Total  Deposits                                      |       | 203,074                                    |       | 162,932 |   | 126,217 |   | 84,080 |   |
| Shareholders’  Equity                           |       | 19,927                                     |       | 18,798 |   | 16,119 |   | 2,093 |   |
| Weighted  Average Shares Outstanding                 |       | 2,941                                      |       | 2,926 |   | 2,699 |   | 2,080 |   |
| Key  Performance Ratios:                             |       |                                       |       |   |   |   |   |   |   |
| Return on  Average Assets                            |       | 0.80                                       | %          | 0.71 | % | 0.40 | % | 0.27 | % |
| Return on  Average Equity                            |       | 9.26                                       | %          | 7.04 | % | 3.67 | % | 12.90 | % |
| Net Interest  Margin                                 |       | 4.33                                       | %          | 3.77 | % | 3.36 | % | 3.31 | % |
| Average  Equity to Average Assets                    |       | 8.69                                       | %          | 10.11 | % | 10.86 | % | 2.12 | % |
| Average  Loans to Average Deposits                   |       | 83.42                                      | %          | 84.74 | % | 85.68 | % | 80.09 | % |
| Overhead  (Efficiency) Ratio                         |       | 66.62                                      | %          | 67.05 | % | 66.91 | % | 70.99 | % |
|                                                      |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

15

----

 

**Item 7.****           Management’s Discussionand Analysis or Plan of Operation**

 

**Overview**

 

GeorgiaBancshares, Inc. is a Georgia corporation formed on December 21, 2000 toserve as the holding company for The Bank of Georgia, a Georgia state charteredbank incorporated on September 9, 1999. We commenced operations as The Bank of Georgia on February 18,2000.  On April 19, 2001,shareholders of The Bank of Georgia approved the reorganization of the bankinto a holding company structure.  Uponconsummation of the reorganization on May 18, 2001, shares of the bank’s commonstock were exchanged for shares of the holding company’s common stock.  On July 9, 2001, we expanded ouroperations by opening our first branch in Newnan, Georgia. In November 2002,we opened an office at 100 Westpark Drive in Peachtree City, Georgia. On January 3,2003 we designated that office as our corporate main office.  Our former main office at 2008 Highway 54West, Fayetteville remains open as a branch office.  In June 2003 a new branch was openedwithin the Kroger Towne Center Store in Fayetteville, and our new full-servicebranch was opened in Tyrone, Georgia on August 26, 2003.  In 2004 we opened a new branch on Highway 154in Sharpsburg in April and a new full-service branch was opened on Highway74 in Fairburn in November.

 

We conduct a community-oriented commercialand retail banking business focused on serving the banking needs of individualsand small-to medium-sized businesses. From the outset we have grown rapidly, and this trend continued during2004, as we increased from $205.1 million in total assets at December 31,2003 to $249.6 million in total assets at December 31, 2004.  We continue to operate profitably.  Profits increased from $1,323,047 for fiscalyear 2003 to $1,846,128 for fiscal year 2004.

 

The following table sets forth selectedmeasures of our financial performance for the periods indicated:

 
| ** **            | ** ** | **Georgia Bancshares, Inc.**           | ** **  | **Georgia Bancshares, Inc.**           | ** ** |
|-----------------------|------------|----------------------------------------|-------------|----------------------------------------|------------|
| ** **            | ** ** | **Year Ended  December 30, 2004** | ** **  | **Year Ended  December 31, 2003** | ** ** |
| ** **            | ** ** | **(Audited)**                          | ** **  | **(Audited)**                          | ** ** |
| **Income  Statement** |       |                                   |        |                                   |       |
| Total  Revenues (1)   |       | $                                      | 14,190,618  |                                   | $          | 11,583,605 |   |
| Net Income            |       | $                                      | 1,846,128   |                                   | $          | 1,323,047 |   |
|                  |       |                                   |        |                                   |       |
| ** **            | ** ** | **Georgia Bancshares, Inc.**           | ** **  | **Georgia Bancshares, Inc.**           | ** ** |
| ** **            | ** ** | **at December 31, 2004**          | ** **  | **at December 31, 2003**          | ** ** |
| ** **            | ** ** | **(Audited)**                          | ** **  | **(Audited)**                          | ** ** |
| **Balance  Sheet**    |       |                                   |        |                                   |       |
| Total Assets          |       | $                                      | 249,550,051 |                                   | $          | 205,091,630 |   |
| Total  Loans(2)       |       | $                                      | 189,640,547 |                                   | $          | 147,463,301 |   |
| Total  Deposits       |       | $                                      | 212,258,018 |                                   | $          | 181,967,776 |   |

 

----

(1)          Total revenue equalstotal interest income plus total non-interest income.

(2)          Total loans reported netof loan loss reserve and unearned income.

 

In summary, management is well pleased withthe results for 2004 and the bank’s financial position as of December 31,2004.  Despite the lowest interest rateenvironment in recent history, the bank experienced a 39.3% increase in netinterest income in 2004 when compared to 2003. The net interest margin increased from 3.77% to 4.33% during thisperiod.  Our goal is to achieve and maintaina net interest margin in excess of 4.00%. We are pleased that we were able to achieve this goal during 2004.  The increase in the volume of loansoutstanding during 2004 has positively impacted our increase in net interestincome, but the lowering of the cost of our interest-bearing liabilities hasalso made a significant contribution. This has been influenced by our strategy to continue to serve ourdesignated markets with seasoned loan originators and develop a strong branchnetwork to service our new and existing customers. Beginning with our singlelocation in Fayetteville in 2000, we have added a branch in Newnan in 2001, anew location in Peachtree City in 2002, and two locations (Fayetteville – TowneCenter and Tyrone) in 2003.  Two additionalbranches were opened during 2004 (Sharpsburg and Fairburn).  We have seen positive results from theexpansion of our

 

16

----

 

branch network during 2004. Total deposits increased to $212,258,018 at December 31, 2004 from$181,967,776 at December 31, 2003. Of this $30,290,242 increase, $22,049,488 was in non-interest-bearingand interest-bearing transaction accounts. We believe that the sustained additions of quality loans and lower costdeposits will positively impact our results in coming years.

 

The following discussion describes ourresults of operations for 2004 as compared to 2003 and to 2002, and alsoanalyzes our financial condition as of December 31, 2004 as compared to December 31,2003.  Like most community banks, wederive most of our income from interest we receive on our loans andinvestments.  Our primary source of fundsfor making these loans and investments is our deposits, on which we payinterest.  Consequently, one of the keymeasures of our success is our amount of net interest income, or the differencebetween the incomes on our interest-earning assets, such as loans andinvestments, and the expense on our interest-bearing liabilities, such asdeposits.  Another key measure is thespread between the yield we earn on these interest-earning assets and the ratewe pay on our interest-bearing liabilities.

 

We have included a number of tables to assistin our description of these measures. For example, the “Average Consolidated Balance Sheets and Net InterestAnalysis” table shows the average balance during 2004, 2003, and 2002 of eachcategory of our assets and liabilities, as well as the yield we earned or therate we paid with respect to each category. A review of this table shows that our loans typically provide higherinterest yields than do other types of interest earning assets, which is why weintend to channel a substantial percentage of our earning assets into our loanportfolio.  Similarly, the “Changes inInterest Income and Expense” table helps demonstrate the impact of changinginterest rates and changing volume of assets and liabilities during the yearsshown.  We also track the sensitivity ofour various categories of assets and liabilities to changes in interest rates,and we have included a “Interest Rate Sensitivity” to help explain this.  Finally, we have included a number of tablesthat provide detail about our investment securities, or loans and our depositsand other borrowings.

 

Of course, there are risks inherent in all loans,so we maintain an allowance for loan losses to absorb probable losses onexisting loans that may become uncollectible. We establish and maintain this allowance by charging a provision forloan losses against our operating earnings. In the following section we have included a detailed discussion ofthis process, as well as several tables describing our allowance for loanlosses and the allocation of this allowance among our various categories ofloans.

 

In addition to earning interest on our loansand investments, we earn income through fees and other expenses we charge toour customers.  We describe variouscomponents of this non-interest income, as well as our non-interest expense, inthe following discussion.

 

The following discussion and analysis alsoidentifies significant factors that have affected our financial position andoperating results during the periods included in the accompanying financialstatements.  We encourage you to readthis discussion and analysis in conjunction with the financial statements andthe related notes and other statistical information also included in thisreport.  Analysis of the results shouldbe made with an understanding of our relatively short history.

 

**Critical Accounting Policies**

 

The accounting and financial reportingpolicies of Georgia Bancshares, Inc. and its subsidiary, The Bank of Georgia,conform to accounting principles generally accepted in the United States ofAmerica and to general practices within the financial services industry.  The only accounting policy that we havedeemed “critical” relates to the provision and allowance for loan losses asdiscussed in detail on page 26 herein. In determining which accounting policies are critical in nature, we haveidentified the policy that requires significant judgment or complexestimates.  The application of thispolicy has a significant impact on our financial statements.  Our financial results could differsignificantly if different judgments or estimates are applied in theapplication of this policy.

 

17

----

 

**Analysis of the Fiscal Years Ended December 31,2004, December 31, 2003, and December 31, 2002**

 

**Results of Operations**

 

During 2004, total assets increased $44.5million, or 21.7%, to $249.6 million when compared to December 31,2003.  The primary reason for thisincrease in assets were increases in loans of $42.2 million.  Total deposits increased $30.3 million, or16.6%, from the December 31, 2003 amount of $182.0 million.  Shareholders’ equity was $21.2 million at December 31,2004.

 

At December 31, 2003, total assets were$205.1 million.  Net loans totaled $147.5million, total deposits were $182.0 million and shareholders’ equity equaled$19.3 million.  Net interest income,after a provision for loan losses of $266,000, was $6.4 million for the yearended December 31, 2003.

 

At December 31, 2002, we had totalassets of $171.6 million.  Loans net ofloan loss reserve and unearned income totaled $125.7million.  After deductions for interest expense andprovision for loan losses, our net interest income was $3.8 million for theyear ended December 31, 2002.  Totaldeposits were $142.6 million at December 31, 2002.  As of December 31, 2002, shareholders’equity was $18.3 million.

 

*Net Income*.  For the years ended December 31, 2004, December 31,2003, and December 31, 2002, our net income was $1,846,128, $1,323,047 and$591,933 respectively.

 

*Net Interest Income*.  Our primary source of revenue is net interestincome, which is the difference between the income on interest-earning assetsand expense on interest-bearing liabilities. Our net interest income totaled $9.3 million for the year ended December 31,2004 as compared to $6.7 million during the same period of 2003.  The comparative net interest income for 2002 was$4.7 million.  The net interest marginwas 4.33% for the year ended December 31, 2004, 3.77% for the same periodof 2003, and 3.36% for the year ended December 31, 2002.  Average earning assets were $214.0 millionduring 2004 as compared to $176.4 million during 2003 and $140.8 million during2002.

 

*Average Balances, Income and Expenses andRates.*  Thefollowing tables set forth, for the periods indicated, information related toour average balance sheet and average yields on assets and average rates paidon liabilities.  We derived these yieldsor rates by dividing income or expense by the average balance of thecorresponding assets or liabilities.  Wederived average balances from the daily balances throughout the periodsindicated.

 

18

----

 

**TABLE 1**

**Average Consolidated Balance Sheets and NetInterest Analysis**

**(in thousands)**

 
| ** **                                                           | ** ** | **For the Years ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                           | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                           | ** ** | **Average  Balance**                      | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| Assets:                                                              |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest earning assets:                                             |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments:                                                         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold and interest-bearing deposits                     |       | $                                         | 8,865      |   | $ | 136 |   | 1.53 | % | $ | 4,816 |   | $ | 52 |   | 1.08 | % | $ | 3,369 |   | $ | 59 |   | 1.75 | % |
| Taxable                                                              |       | 26,912                                    |       | 928 |   | 3.45 | % | 27,474 |   | 965 |   | 3.51 | % | 26,167 |   | 1,313 |   | 5.02 | % |
| Tax exempt                                                           |       | 8,819                                     |       | 338 |   | 3.83 | % | 6,070 |   | 226 |   | 3.72 | % | 3,931 |   | 157 |   | 3.99 | % |
| Total Investments                                                    |       | 44,596                                    |       | 1,402 |   | 3.14 | % | 38,360 |   | 1,243 |   | 3.24 | % | 33,467 |   | 1,529 |   | 4.57 | % |
| Loans (including loan fees)                                          |       | 169,396                                   |       | 12,106 |   | 7.15 | % | 136,066 |   | 9,955 |   | 7.32 | % | 106,726 |   | 8,039 |   | 7.53 | % |
| Total interest earning assets                                        |       | 213,992                                   |       | 13,508 |   | 6.31 | % | 174,426 |   | 11,198 |   | 6.42 | % | 140,193 |   | 9,568 |   | 6.82 | % |
| Other non-interest earning assets                                    |       | 15,390                                    |       |   |   |   |   | 11,557 |   |   |   |   |   | 8,268 |   |   |   |   |   |
| Total assets                                                         |       | $                                         | 229,382    |   |   |   |   |   | $ | 185,983 |   |   |   |   |   | $ | 148,461 |   |   |   |   |   |
|                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities and shareholders’ equity:                           |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                            |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                                                               |       | $                                         | 36,590     |   | 420 |   | 1.15 | % | $ | 20,257 |   | 226 |   | 1.12 | % | $ | 16,000 |   | 243 |   | 1.52 | % |
| Savings                                                              |       | 2,821                                     |       | 21 |   | 0.74 | % | 1,462 |   | 13 |   | 0.89 | % | 774 |   | 10 |   | 1.29 | % |
| Time                                                                 |       | 136,968                                   |       | 3,656 |   | 2.67 | % | 127,127 |   | 4,262 |   | 3.35 | % | 100,330 |   | 4,488 |   | 4.47 | % |
| FHLB advances & other borrowings                                 |       | 5,158                                     |       | 146 |   | 2.83 | % | 2,993 |   | 45 |   | 1.50 | % | 4,959 |   | 96 |   | 1.94 | % |
| Total interest-bearing liabilities                                   |       | 181,537                                   |       | 4,243 |   | 2.34 | % | 151,839 |   | 4,546 |   | 2.99 | % | 122,063 |   | 4,837 |   | 3.96 | % |
|                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest bearing deposits                                        |       | 26,698                                    |       |   |   |   |   | 14,086 |   |   |   |   |   | 9,113 |   |   |   |   |   |
| Other liabilities                                                    |       | 1,220                                     |       |   |   |   |   | 1,260 |   |   |   |   |   | 1,166 |   |   |   |   |   |
| Shareholders’ equity                                            |       | 19,927                                    |       |   |   |   |   | 18,798 |   |   |   |   |   | 16,119 |   |   |   |   |   |
| Total liabilities and shareholders’ equity                      |       | $                                         | 229,382    |   |   |   |   |   | $ | 185,983 |   |   |   |   |   | $ | 148,461 |   |   |   |   |   |
|                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Excess of interest-bearing assets over  interest-bearing liabilities |       | $                                         | 32,455     |   |   |   |   |   | $ | 22,587 |   |   |   |   |   | $ | 18,130 |   |   |   |   |   |
|                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ratio of interest-earning assets to interest-bearing  liabilities    |       | 117.88                                    | %          |   |   |   |   | 114.88 | % |   |   |   |   | 114.85 | % |   |   |   |   |
|                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                  |       |                                      |       | $ | 9,265 |   |   |   |   |   | $ | 6,652 |   |   |   |   |   | $ | 4,731 |   |   |   |
|                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest spread                                                  |       |                                      |       |   |   | 3.98 | % |   |   |   |   | 3.43 | % |   |   |   |   | 2.86 | % |
|                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest margin                                                  |       |                                      |       |   |   | 4.33 | % |   |   |   |   | 3.77 | % |   |   |   |   | 3.36 | % |
|                                                                      |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

19

----

 

*Analysis ofChanges in Net Interest Income.*  Net interest can also be analyzed in terms ofthe impact of changing rates and changing volume.  The following table describes the extent towhich changes in interest rates and changes in volume of earning assets andinterest-bearing liabilities have affected our interest income and interestexpenses during the periods indicated. Information on changes in each category attributable to (i) changes dueto volume (change in volume multiplied by prior period rate); and (ii) changesdue to rates (changes in rates multiplied by prior period volume) is providedin the table below.  No recognition ofexemption from federal, state, or local taxation has been computed.   Although an overall reduction in interestrates has had a significant impact on net interest income, our rapid growth ina strong local economic environment has been a more important factor and hasresulted in an increase in net interest income of $2,613,110 for the year endedDecember 31, 2004 over the year ended December 31, 2003.  The change in net interest income has beenaffected primarily by increases in volume of both loans and deposits ratherthan changes in average rates.

 

**TABLE 2**

**Changes in Interest Income and Expense**

**(in thousands)**

 
| ** **                                        | ** ** | **Increase (decrease) due to  changes in:** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **2004 over 2003**                          | ** ** | **2003 over 2002** | ** ** |
| ** **                                        | ** ** | **Volume**                                  | ** ** | **Rate** | ** ** | **Net  Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net  Change** | ** ** |
| Interest  income on:                              |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Federal  funds sold and interest-bearing deposits |       | $                                           | 44         |   | $ | 40 |   | $ | 84 |   | $ | 25 |   | $ | (32 | ) | $ | (7 | ) |
| Taxable  investments                              |       | (20                                         | )          | (17 | ) | (37 | ) | 66 |   | (414 | ) | (348 | ) |
| Non-taxable  investments                          |       | 102                                         |       | 10 |   | 112 |   | 85 |   | (16 | ) | 69 |   |
| Loans  (including loan fees)                      |       | 2,439                                       |       | (288 | ) | 2,151 |   | 2,210 |   | (294 | ) | 1,916 |   |
| Total  Interest Income                            |       | 2,565                                       |       | (255 | ) | 2,310 |   | 2,386 |   | (756 | ) | 1,630 |   |
|                                              |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Interest  expense on:                             |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Demand                                            |       | 182                                         |       | 12 |   | 194 |   | 65 |   | (82 | ) | (17 | ) |
| Savings                                           |       | 12                                          |       | (4 | ) | 8 |   | 9 |   | (6 | ) | 3 |   |
| Time                                              |       | 330                                         |       | (936 | ) | (606 | ) | 1,199 |   | (1,425 | ) | (226 | ) |
| FHLB  advances & other borrowings             |       | 33                                          |       | 68 |   | 101 |   | (38 | ) | (13 | ) | (51 | ) |
| Total Interest  Expense                           |       | 557                                         |       | (860 | ) | (303 | ) | 1,234 |   | (1,525 | ) | (291 | ) |
|                                              |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Increase in  net interest income                  |       | $                                           | 2,008      |   | $ | 605 |   | $ | 2,613 |   | $ | 1,152 |   | $ | 769 |   | $ | 1,921 |   |

 

20

----

 

**Other Income and Expense**

 

*Other Income. *Other income was $682,168 for the year ended December 31,2004; $385,526 for the year ended December 31, 2003 and $416,833 for theyear ended December 31, 2002. Service fees on deposit accounts, the largest component of non-interestincome, have increased steadily from $168,293 in 2002, to $222,145 in 2003 andto $310,987 in 2004.  The growth inservice charges and portions of other operating income is attributable to thegrowth in the number of deposit accounts serviced by The Bank of Georgia and anincrease in fee-related transactions by bank customers.  The most significant impact to thenon-interest income portion of the Company’s earnings was the establishment ofa mortgage division within the Bank in July of 2004.  During the last six months of 2004, theMortgage Division generated mortgage-origination fees of $245,338.  This amount is included in the Otheroperating income figure in the Consolidated Statements of Earnings.  A loss $12,128 was realized during 2004 fromthe sale of certain repossessed assets, whereas a gain of $56,001 was realizedfrom the sale of other investments in 2002. The sale of available-for-sale investment securities produced anaggregate loss of $50,808 in 2004 and gains of $85,697 and $124,139,respectively, in 2003 and 2002.

 

*Other Expense*.  Total other expense was $6.6 million for theyear ended December 31, 2004; $4.7 million for the year ended December 31,2003 and $3.4 million for the year ended December 31, 2002.  This increase was primarily due to thecontinued growth we realized in 2004 and the cost associated with our branchbuilding program.  Salary and employeebenefits expense totaled $4.0 million in 2004, an increase of 52.3% over the$2.6 million recorded in 2003 and compared to the $2.0 million incurred in2002.  The increase in salary andemployee benefits expense is due to hiring additional staff that wasnecessitated by internal growth, and salary increases granted during the normalcourse of business.  As a point ofreference, the number of full time employees has increased from 22 at thebeginning of 2002 to 64 at the end of 2004. Occupancy and equipment expense, data processing expense and otheroperating expenses increased each year as the number of full-service brancheshave also increased each year. Depreciation expense was $380,672 in 2004, $297,720 in 2003 and $155,393in 2002.  Data processing expenseincreased to $598,206 in 2004 from $454,844 in 2003 and from $324,563 during2002.  Other operating expenses were$1,294,490 in 2004, $1,079,005 in 2003 and $800,704 in 2002.

 

# **Analysisof Financial Condition**

# ** **

At December 31, 2004, total consolidatedassets were $249.6 million.  Our primaryassets were net loans of $189.6 million and securities available-for-sale of$35.0 million.  Our liabilities at December 31,2004 were $228.4 million, consisting primarily of deposits of $212.3 millionand junior subordinated debentures of $6.7 million.  At December 31, 2004, total shareholders’equity totaled $21.1 million.

 

At December 31, 2003, total consolidatedassets were $205.1 million.  Our primaryassets were net loans of $147.5 million, securities available-for-sale of $34.1million, and cash and deposits due from correspondent banks of $8.5million.  Our liabilities at December 31,2003 were $185.9 million, consisting primarily of deposits of $182.0 millionand Federal Home Loan Bank of Atlanta advances of $2 million.  At December 31, 2003, total shareholders’equity totaled $19.3 million.

 

At December 31, 2002, total consolidatedassets were $171.6 million.  Our primaryassets were net loans of $125.8 million and securities available-for-sale of$34.8 million.  Our liabilities at December 31,2002 were $153.4 million, consisting primarily of deposits of $142.6 million.At December 31, 2002, total shareholders’ equity totaled $18.3 million.

 

# **Investments**

# ** **

Our available-for-sale investment portfolioof $35.0 million as December 31, 2004 consisted primarily of debtsecurities, which provide the Bank with a source of liquidity, a stable sourceof income and serve as a vehicle to implement asset and liability managementstrategies.  This represented an increaseof $0.9 million (2.6%) over the $34.1 million held at December 31,2003.  The Company believes theinvestment portfolio provides a balance to interest rate and credit risk inother categories of the balance sheet while providing a vehicle for theinvestment of available funds and supplying securities to pledge as requiredcollateral for certain public deposits. Investment securities in the available-for sale category are stated atfair value.  These securities may besold, retained until maturity, or pledged as collateral for liquidity andborrowing in response to changing interest rates, changes in prepayment risk andother factors as part of the Company’s overall asset liability managementstrategy.

 

21

----

 

**TABLE 3**

**Investment Portfolio**

**(in thousands)**

 
| **Available-for-Sale**       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |     |       |
| United  States agencies      |       | $        | 8,258      |     | $          | 4,432    |       | $ | 6,072 |   |
| State,  county and municipal |       | 9,569    |       | 8,818    |       | 5,002    |       |
| Mortgage-backed  securities  |       | 16,713   |       | 20,648   |       | 23,735   |       |
| Corporate  bonds             |       | 249      |       | 250      |       | 0        |       |
| Trust  Preferred Securities  |       | 250      |       | 0        |       | 0        |       |
|                         |       |     |       |     |       |     |       |
| Total  available-for-sale    |       | $        | 35,039     |     | $          | 34,148   |       | $ | 34,809 |   |
|                              |            |          |            |          |            |          |            |  |  |  |  |

 

The following table presents the expectedmaturity of the amortized cost of securities by maturity date and averageyields based on amortized cost at December 31, 2004.  The composition and maturity/re-pricingdistribution of the securities portfolio is subject to change depending on ratesensitivity, capital and liquidity needs.

 

**TABLE 4**

**Expected Maturity of Securities**

**(in thousands)**

 
| **Maturities  at  December 31, 2004** | ** ** | **United  States  Agencies** | ** ** | **Wtd.  Avg.  Yld.** | ** ** | **State,  County.and  Municipal** | ** ** | **Wtd.  Avg.  Yld.** | ** ** | **Mortgage-  Backed  Securities** | ** ** | **Wtd.  Avg.  Yld.** | ** ** | **Corporate  Bonds** | ** ** | **Wtd.  Avg.  Yld.** | ** ** | **Trust  Preferred  Securities** | ** ** | **Wtd.  Avg.  Yld.** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|----------------------|------------|-----------------------------------|------------|----------------------|------------|-----------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------------------|------------|----------------------|------------|
|                                       |       |                         |       |                 |       |                              |       |                 |       |                              |       |                 |       |                 |       |                 |       |                             |       |                 |       |
| Within 1 year                              |       | $                            | 7,008      |                 | 3.15       | %                                 | $          | 0                    |       | 0.00                              | %          | $                    | 0          |                 | 0.00       | %                    | $          | 0                                |       | 0.00                 | %          | $ | 0 |   | 0.00 | % |
|                                       |       |                         |       |                 |       |                              |       |                 |       |                              |       |                 |       |                 |       |                 |       |                             |       |                 |       |
| After 1 thru 5 years                       |       | 500                          |       | 3.33                 | %          | 0                                 |       | 0.00                 | %          | 1,744                             |       | 4.12                 | %          | 0                    |       | 0.00                 | %          | 0                                |       | 0.00                 | %          |
|                                       |       |                         |       |                 |       |                              |       |                 |       |                              |       |                 |       |                 |       |                 |       |                             |       |                 |       |
| After 5 thru 10 years                      |       | 0                            |       | 0.00                 | %          | 929                               |       | 3.91                 | %          | 6,438                             |       | 4.41                 | %          | 0                    |       | 0.00                 | %          | 0                                |       | 0.00                 | %          |
|                                       |       |                         |       |                 |       |                              |       |                 |       |                              |       |                 |       |                 |       |                 |       |                             |       |                 |       |
| After 10 years                             |       | 780                          |       | 5.93                 | %          | 8,497                             |       | 4.05                 | %          | 8,599                             |       | 4.27                 | %          | 250                  |       | 6.25                 | %          | 250                              |       | 4.75                 | %          |
|                                       |       |                         |       |                 |       |                              |       |                 |       |                              |       |                 |       |                 |       |                 |       |                             |       |                 |       |
| Totals                                     |       | $                            | 8,288      |                 | 4.14       | %                                 | $          | 9,426                |       | 4.05                              | %          | $                    | 16,781     |                 | 4.27       | %                    | $          | 250                              |       | 6.25                 | %          | $ | 250 |   | 4.75 | % |
|                                       |       |                         |       |                 |       |                              |       |                 |       |                              |       |                 |       |                 |       |                 |       |                             |       |                 |       |
| Fair value                                 |       | $                            | 8,258      |                 |       |                              | $          | 9,570                |       |                              |       | $                    | 16,713     |                 |       |                 | $          | 249                              |       |                 |       | $ | 250 |   |   |   |

 

Mortgage-backed securities are included inthe maturities categories in which they are anticipated to be repaid based onscheduled maturities.  The actual cashflow of mortgage-backed securities differs with this assumption.  Additionally, some agency securities in theportfolio have call features.  The aboveanalysis assumes that callable agencies will mature on their final maturitydate.  The actual cash flow of agencysecurities may differ from this assumption.

 

22

----

 

**Loans**

 

Loans are our largest category of earningassets and typically provide higher yields than our other types of earningassets.  At December 31, 2004, netloans (gross loans less the allowance for loan losses and unearned fees)totaled $189.6 million, or 82.0% of earning assets, which totaled $231.2million.  Earning assets consisted ofloans of $189.6 million, or 82.0%, investment securities available-for-sale of$35.0 million, or 15.1%, interest bearing deposits with other banks totaling$5.1 million, or 2.2%, and other investments (consisting of stock in CommunityFinancial Services, Inc. (the holding company for The Bankers Bank), FederalHome Loan Bank of Atlanta stock and stock in two community banks) of $1.5million, or .6%.  Average gross loanstotaled $169.4 million during 2004 with a yield of 7.15%.

 

At December 31, 2003, net loans totaled$147.5 million, or 77.7% of earning assets, which totaled $189.9 million.  Earning assets consisted of loans of $147.5million, or 77.7%, investment securities available-for-sale of $34.1 million,or 18.0%, interest bearing deposits with other banks and Federal Funds sold of$6.9 million, or 3.6%, and other investments (consisting of stock in CommunityFinancial Services, Inc. and Federal Home Loan Bank of Atlanta stock) of $1.4million or, .7%.  Average gross loanstotaled $136.1 million during 2003 with a yield of 7.32%.

 

At December 31, 2002, net loans totaled$125.8 million, or 77.8% of earning assets, which totaled $161.8 million.  Earning assets consisted of loans of $125.8million, investment securities available-for-sale of $34.8 million, or 21.5%,interest bearing deposits with other banks of $.5 million, or .3%, and otherinvestments (described above) of $.7 million or 0.4%.  Average gross loans totaled $106.7 millionduring 2002 with a yield of 7.53%.

 

Associated with loan yields are inherentcredit and liquidity risks, which we attempt to control andcounterbalance.  The interest rates we chargeon loans vary with the degree of risk and the maturity and amount of theloan.  Competitive pressures, moneymarket rates, availability of funds, and government regulations also influenceinterest rates.

 

Real estate mortgage loans and construction anddevelopment loans constitute the principal components of our loanportfolio.  For the year ended December 31,2004, gross loans totaled $192.5 million with residential andnon-residential/non-farm mortgage loans totaling $63.6 million and representing33.0% of our portfolio, construction and development loans totaling $106.5million and representing 55.3% of our portfolio, and non-real estate loanstotaling $22.4 million and accounting for 11.7% of our loan portfolio.

 

For the year ended December 31, 2003,gross loans totaled $149.8 million with residential andnon-residential/non-farm mortgage loans totaling $52.5 million and representing35.0% of our portfolio, construction and development loans totaling $81.1million and representing 54.2% of our portfolio, and non-real estate loanstotaling $16.2 million and accounting for 10.8% of our loan portfolio.

 

For the year ended December 31, 2002,gross loans totaled $127.8 million with residential and non-residential/non-farm mortgages loans totaling $47.3 million and representing 37.0% of ourportfolio, construction and development loans totaling $69.0 million andrepresenting 54.0% of our portfolio, and non-real estate loans totaling $11.5million and accounting for 9.0% of our loan portfolio.

 

In the context of this discussion, a “realestate mortgage loan” is defined as any loan, other than loans for constructionpurposes, secured by real estate, regardless of the purpose of the loan.  Most of our real estate loans are secured byresidential or commercial property.  Wedo not generally make traditional long term residential mortgages, but we domake traditional second mortgage residential real estate loans and home equitylines of credit.  We follow the commonpractice of financial institutions in our area of obtaining a security interestin real estate whenever possible, in addition to any other availablecollateral.  This collateral is taken toreinforce the likelihood of the ultimate repayment of the loan and tends toincrease the magnitude of the real estate loan portfolio component.  Generally, we limit our loan-to-value ratioto 80%.  Due to the short time ourportfolio has existed, the current mix may not be indicative of the ongoingportfolio mix.  We attempt to maintain arelatively diversified loan portfolio to help reduce the risk inherent inconcentrations of collateral.

 

23

----

 

We have been able to rapidly grow our loanportfolio since we commenced operations by refinancing loans with borrowersfrom other financial institutions and by originating new loans from individualsand businesses in the community.  Ourdirectors and officers have utilized banking relationships established duringtheir previous employment with other financial institutions in our market areato generate loan business.  A majority ofour initial loans consisted of refinancing of seasoned credit or thecontinuation of business from borrowers who had preexisting bankingrelationships with our directors and officers. Our loan growth resulting from refinancing of seasoned credit has slowedas our business has continued to mature. In 2003 and 2004, we added additional seasoned loan personnel to augmentour loan origination efforts and in the future we believe that most of ourloans will originate from new business from existing and new customers.  We also continue to seek new ways to tap intonew markets both from new product lines in our current markets and from newgeographic areas.

 

The following table shows the composition ofour loan portfolio by category at December 31, 2004, December 31,2003, December 31, 2002, December 31, 2001 and December 31,2000.

 

**TABLE 5**

**Loan Portfolio**

**(in thousands)**

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                      |       |                  |       |   |   |   |   |   |   |   |   |
| Commercial,  financial & agricultural |       | $                     | 15,350     |   | $ | 11,705 |   | $ | 8,841 |   | $ | 6,601 |   | $ | 6,720 |   |
|                                      |       |                  |       |   |   |   |   |   |   |   |   |
| Real estate  - construction               |       | 106,540               |       | 81,133 |   | 69,000 |   | 44,197 |   | 5,972 |   |
|                                      |       |                  |       |   |   |   |   |   |   |   |   |
| Real estate  - mortgage                   |       | 63,553                |       | 52,465 |   | 47,262 |   | 29,767 |   | 32,712 |   |
|                                      |       |                  |       |   |   |   |   |   |   |   |   |
| Consumer  loans                           |       | 7,067                 |       | 4,458 |   | 2,661 |   | 2,113 |   | 1,228 |   |
|                                      |       |                  |       |   |   |   |   |   |   |   |   |
|                                      |       | 192,510               |       | 149,761 |   | 127,764 |   | 82,678 |   | 46,632 |   |
|                                      |       |                  |       |   |   |   |   |   |   |   |   |
| Less:  Unearned interest and fees         |       | (215                  | )          | (166 | ) | (125 | ) | (112 | ) | (108 | ) |
|                                      |       |                  |       |   |   |   |   |   |   |   |   |
| Allowance  for loan losses                |       | (2,654                | )          | (2,132 | ) | (1,889 | ) | (1,114 | ) | (455 | ) |
|                                      |       |                  |       |   |   |   |   |   |   |   |   |
| Loans, net                                |       | $                     | 189,641    |   | $ | 147,463 |   | $ | 125,750 |   | $ | 81,452 |   | $ | 46,069 |   |

 

24

----

 

The following table sets forth the maturitydistribution and interest rate sensitivity, for selected components of our loanportfolio as of December 31, 2004. The information in this table is based on the contractual maturities ofthe individual loans, including loans, which may be subject to renewal at theircontractual maturity.  Renewal of theseloans is subject to review and credit approval, as well as modification ofterms upon their maturity.  Actualrepayments of loans may differ from maturities reflected above becauseborrowers may have the right to prepay obligations with or without prepaymentpenalties.

 

**TABLE 6**

**Loan Portfolio Maturity**

**(in thousands)**

 
| ** **                               | ** ** | **One  Year  or Less** | ** ** | **Wtd.  Avg.  Yld.** | ** ** | **Over  One  to Five  Years** | ** ** | **Wtd.  Avg.  Yld.** | ** ** | **Over  Five  Years** | ** ** | **Wtd.  Avg.  Yld.** | ** ** | **Total**                  | ** ** | **Wtd.  Avg.  Yld.** | ** ** |
|------------------------------------------|------------|------------------------|------------|----------------------|------------|-------------------------------|------------|----------------------|------------|-----------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|
|                                     |       |                   |       |                 |       |                          |       |                 |       |                  |       |                 |       |                       |       |                 |       |
| Commercial, financial & agricultural |       | $                      | 10,497     |                 | 6.70       | %                             | $          | 5,042                |       | 6.86                  | %          | $                    | 472        |                       | 6.14       | %                    | $          | 16,011 |   | 6.73 | % |
|                                     |       |                   |       |                 |       |                          |       |                 |       |                  |       |                 |       |                       |       |                 |       |
| Real estate - construction               |       | 93,646                 |       | 6.24                 | %          | 12,635                        |       | 6.58                 | %          | 259                   |       | 5.32                 | %          | 106,540                    |       | 6.28                 | %          |
|                                     |       |                   |       |                 |       |                          |       |                 |       |                  |       |                 |       |                       |       |                 |       |
| Real estate - mortgage                   |       | 14,935                 |       | 6.29                 | %          | 38,697                        |       | 6.99                 | %          | 9,922                 |       | 6.69                 | %          | 63,554                     |       | 6.77                 | %          |
|                                     |       |                   |       |                 |       |                          |       |                 |       |                  |       |                 |       |                       |       |                 |       |
| Consumer                                 |       | 3,380                  |       | 7.62                 | %          | 3,025                         |       | 7.53                 | %          | 0                     |       | 0.00                 | %          | 6,405                      |       | 7.58                 | %          |
|                                     |       |                   |       |                 |       |                          |       |                 |       |                  |       |                 |       |                       |       |                 |       |
| Totals                                   |       | $                      | 122,458    |                 | 6.32       | %                             | $          | 59,399               |       | 6.92                  | %          | $                    | 10,653     |                       | 6.63       | %                    | $          | 192,510 |   | 6.52 | % |
|                                     |       |                   |       |                 |       |                          |       |                 |       |                  |       |                 |       |                       |       |                 |       |
| **Variable / Fixed Rate Mix**            |       |                   |       |                 |       |                          |       |                 |       |                  |       |                 |       |                       |       |                 |       |
|                                     |       |                   |       |                 |       |                          |       |                 |       |                  |       |                 |       |                       |       |                 |       |
| ** **                               | ** ** | ** **             | ** ** | ** **           | ** ** | **Variable  Interest  Rates** | ** ** | **Wtd.  Avg.  Yld.** | ** ** | ** **            | ** ** | ** **           | ** ** | **Fixed  Interest  Rates** | ** ** | **Wtd.  Avg.  Yld.** | ** ** |
|                                     |       |                   |       |                 |       |                          |       |                 |       |                  |       |                 |       |                       |       |                 |       |
| Commercial, financial & agricultural |       |                   |       |                 |       | $                             | 2,668      |                 | 7.34       | %                     |       |                 |       |                       | $          | 13,343               |       | 6.66 | % |
|                                     |       |                   |       |                 |       |                          |       |                 |       |                  |       |                 |       |                       |       |                 |       |
| Real estate - construction               |       |                   |       |                 |       | 29,766                        |       | 6.26                 | %          |                  |       |                 |       | 76,774                     |       | 6.24                 | %          |
|                                     |       |                   |       |                 |       |                          |       |                 |       |                  |       |                 |       |                       |       |                 |       |
| Real estate - mortgage                   |       |                   |       |                 |       | 8,343                         |       | 5.86                 | %          |                  |       |                 |       | 55,211                     |       | 7.25                 | %          |
|                                     |       |                   |       |                 |       |                          |       |                 |       |                  |       |                 |       |                       |       |                 |       |
| Consumer                                 |       |                   |       |                 |       | 0                             |       | 0.00                 | %          |                  |       |                 |       | 6,405                      |       | 7.58                 | %          |
|                                     |       |                   |       |                 |       |                          |       |                 |       |                  |       |                 |       |                       |       |                 |       |
| Totals                                   |       |                   |       |                 |       | $                             | 40,777     |                 | 6.25       | %                     |       |                 |       |                       | $          | 151,733              |       | 6.70 | % |

 

25

----

 

*Provision and Allowance for Loan Losses.*  We have established an allowance for loanlosses through a provision for loan losses charged to expense.  The allowance represents an amount which webelieve will be adequate to absorb probable losses on existing loans that maybecome uncollectible.  Our judgment indetermining the adequacy of the allowance is based on evaluations of thecollectibility of loans, including consideration of such factors as the balanceof impaired loans, 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 a review of specific problem loans.  On a quarterly basis, we perform an analysisof the adequacy of the loan loss allowance. In addition, we obtain an independent external loan review on aquarterly basis.  Both the internal andexternal review use an eight point grade system to rate the loan portfolio.  The eight categories we use are 1-Excellent,2-Superior, 3-Average, 4-Below average, 5-Watch, 6-Substandard, 7-Doubtful,8-Loss.  Each category of the allowancecarries a specific allocation ranging from 1% of the loan balance to 100%.  For example, a loan rated substandard willhave a 15% allowance allocation.  Weadjust the amount of the allowance periodically based on changing circumstancesand the internal and external reviews. Moreover, each loan is assigned a rating at origination and thenreviewed annually by the loan officer.  Amajority of the loans are also reviewed quarterly during the independentexternal review.  Except for the consumerportfolio, which is rated as a group, loans are rated individually.  On a monthly basis, we also monitorconcentrations of credit, particularly in the areas of acquisition and developmentand construction lending.

 

Based on present information and ongoing evaluation, we consider theallowance for loan losses to be adequate to meet presently known and inherentrisks in the loan portfolio.  Ourjudgment as to the adequacy of the allowance is based upon a number ofassumptions about future events that we believe to be reasonable, but which mayor may not prove to be accurate.  Ourlosses will undoubtedly vary from our estimates, and there is a possibilitythat charge-offs in future periods will exceed the allowance for loan losses asestimated at any point in time.  Thus,there can be no assurance that charge-offs in future periods will not exceedthe allowance for loan losses or that additional increases in the allowance forloan losses will not be required.

 

Recognized losses are charged to the allowance for loan losses, whilesubsequent recoveries are added to the allowance.  A loan is impaired when it is probable thatwe will be unable to collect all principal and interest payments due inaccordance with the terms of the loan agreement.  Individually identified impaired loans aremeasured based on the present value of expected payments, using the contractualloan rate as the discount rate. Alternatively, measurement may be based on observable market prices, or,for loans that are solely dependent on the collateral for repayment, the fairvalue of the collateral.  If the recordedinvestment in the impaired loan exceeds the measure of fair value, a valuationallowance is established as a component of the allowance for loan losses.  Changes to the valuation allowance arerecorded as a component of the provision for loan losses.

 

In addition, regulatory agencies, as an integral part of theirexamination process, periodically review our allowance for loan losses, andthey may require us to record additions to the allowance based on their reviewof information available to them at the time of their examinations.

 

We calculate the allowance for loan losses based on our grossloans.  Banks generally use theirhistorical loss ratios as a benchmark for maintaining an adequate loan lossreserve.  Because our bank did not have ahistorical loss ratio when we opened in February 2000, we initially establishedan allowance of one percent.  Since thattime we have periodically increased the allowance, based upon our evaluation ofthe factors previously discussed and our analysis of local and nationaleconomic trends.  We also believe thatthe size of our loan portfolio is a component of overall risk. At December 31,2004, our allowance for loan losses was $2,654,334, or 1.38% of outstandingloans, compared to an allowance for loan losses of $2,131,752, or 1.43% ofoutstanding loans, at December 31, 2003. The allowance for loan losses at December 31, 2002 was $1,889,306 or1.48% of outstanding loans, at December 31, 2001 was $1,114,411, or 1.35% ofoutstanding loans, and at December 31, 2000 (the initial year of our operationsas a commercial bank) the allowance totaled $455,000, or .98% of outstandingloans.  We will continue to monitor andevaluate the risk in our loan portfolio throughout the year and we will adjustour philosophy and allowance targets if needed.

 

26

----

 

The following table sets forth certain information with respect to ourallowance for loan losses and the composition of charge-offs and recoveries forthe years ended December 31, 2000, December 31, 2001, December 31, 2002,December 31, 2003 and December 31, 2004. It should be noted that the informationas of December 31, 2000 is for The Bank of Georgia, as Georgia Bancshares, Inc.did not become the holding company for the Bank until May 18, 2001.

 

**TABLE 7**

**Allowance for Loan Losses**

**(in thousands)**

 
| ** **                                                               | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                                     |       |             |       |   |   |   |   |   |   |   |   |
| Balance at beginning of year                                             |       | $                | 2,132      |   | $ | 1,889 |   | $ | 1,114 |   | $ | 455 |   | $ | 0 |   |
|                                                                     |       |             |       |   |   |   |   |   |   |   |   |
| Charge-offs:                                                             |       |             |       |   |   |   |   |   |   |   |   |
| Commercial, financial and agricultural                                   |       | 40               |       | 17 |   | 56 |   |   |   |   |   |
| Real estate - construction                                               |       |             |       |   |   | 2 |   |   |   |   |   |
| Real estate - mortgage                                                   |       |             |       |   |   | 25 |   |   |   |   |   |
| Consumer loans                                                           |       | 44               |       | 10 |   | 28 |   | 1 |   |   |   |
| Total charge-offs                                                        |       | 84               |       | 27 |   | 111 |   | 1 |   | 0 |   |
|                                                                     |       |             |       |   |   |   |   |   |   |   |   |
| Recoveries:                                                              |       |             |       |   |   |   |   |   |   |   |   |
| Commercial, financial and agricultural                                   |       | 20               |       | 1 |   |   |   |   |   |   |   |
| Real estate - construction                                               |       |             |       | 2 |   |   |   |   |   |   |   |
| Real estate - mortgage                                                   |       |             |       |   |   |   |   |   |   |   |   |
| Consumer loans                                                           |       | 1                |       | 1 |   | 1 |   |   |   |   |   |
| Total recoveries                                                         |       | 21               |       | 4 |   | 1 |   | 0 |   | 0 |   |
|                                                                     |       |             |       |   |   |   |   |   |   |   |   |
| Net charge-offs                                                          |       | (63              | )          | (23 | ) | (110 | ) | (1 | ) | 0 |   |
|                                                                     |       |             |       |   |   |   |   |   |   |   |   |
| Provision for loan losses                                                |       | 585              |       | 266 |   | 885 |   | 660 |   | 455 |   |
|                                                                     |       |             |       |   |   |   |   |   |   |   |   |
| Balance at end of year                                                   |       | $                | 2,654      |   | $ | 2,132 |   | $ | 1,889 |   | $ | 1,114 |   | $ | 455 |   |
|                                                                     |       |             |       |   |   |   |   |   |   |   |   |
| Ratio of net charge-offs during the period  to average loans outstanding |       | 0.04             | %          | 0.02 | % | 0.10 | % | 0.00 | % | 0.00 | % |
|                                                                     |       |             |       |   |   |   |   |   |   |   |   |
| Ratio of allowance to average total loans                                |       | 1.55             | %          | 1.54 | % | 1.75 | % | 1.65 | % | 2.33 | % |
|                                                                     |       |             |       |   |   |   |   |   |   |   |   |
| Ratio of allowance to loans at year-end                                  |       | 1.38             | %          | 1.43 | % | 1.48 | % | 1.35 | % | 0.98 | % |
|                                                                     |       |             |       |   |   |   |   |   |   |   |   |
| Average loans outstanding                                                |       | $                | 171,730    |   | $ | 138,068 |   | $ | 108,146 |   | $ | 67,343 |   | $ | 19,550 |   |
|                                                                     |       |             |       |   |   |   |   |   |   |   |   |
| Gross loans outstanding at end of period                                 |       | $                | 192,295    |   | $ | 149,595 |   | $ | 127,639 |   | $ | 82,557 |   | $ | 46,524 |   |

 

27

----

 

We discontinue accrual of interest on a loan when we conclude it isdoubtful that we will be able to collect interest from the borrower.  We reach this conclusion by taking intoaccount factors such as the borrower’s financial condition, economic andbusiness conditions, and the results of our previous collection efforts.  Generally, we will place a delinquent loan innon-accrual status when the loan becomes 90 days or more past due.  When we place a loan in non-accrual status,we will reverse all interest which has been accrued on the loan but remainsunpaid, and we will deduct this interest from earnings as a reduction ofreported interest income.  We will notaccrue any additional interest on the loan balance until we conclude thecollection of both principal and interest is reasonably certain.  The recorded investment in loans onnon-accrual was $154,381 at December 31, 2004, $100,680 at December 31, 2003and $13,857 at December 31, 2002.  Duringthe years 2000 and 2001 and at December 31, 2000 and December 31, 2001, therewas no recorded investment in impaired loans. At December 31, 2004, December 31, 2003, December 31, 2002, December 31,2001, and December 31, 2000, there were no loans which were 90 days or morepast due and still accruing interest, and we did not have any restructuredloans.

 

We do not include loans that are current as to principal and interestin our non-performing assets categories. However, we will still classify a current loan as a potential problemloan if we develop serious doubts about the borrower’s future performance underthe terms of the loan contract.  Weconsider the level of potential problem loans in our determination of theadequacy of the allowance for loan losses. At December 31, 2000 and at December 31, 2001, we did not have any loanswe considered to be potential problem loans. At December 31, 2002, we had loans with balances totaling $2,168,275 andat December 31, 2003, we had loans with balances of $2,159,382 which wereconsidered to be potential problem loans. At December 31, 2004, this amount totaled $4,615,607.  These loans were current as to collection ofprincipal and interest as of December 31, 2004.

 

**TABLE 8**

**Non-Performing Assets**

**(in thousands)**

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|------------------|------------|
| ** **                               | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                     |       |             |       |   |   |   |   |   |   |   |   |
| Other real estate and repossessions      |       | $                | 0          |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
|                                     |       |             |       |   |   |   |   |   |   |   |   |
| Non-accrual loans                        |       | 154              |       | 101 |   | 14 |   |   | 0 |   |   | 0 |   |
|                                     |       |             |       |   |   |   |   |   |   |   |   |
| Loans 90 days past due still accruing    |       |             | 0          |   |   | 0 |   |   | 0 |   |   | 0 |   |   | 0 |   |
|                                     |       |             |       |   |   |   |   |   |   |   |   |
| Total Non-performing assets              |       | $                | 154        |   | $ | 101 |   | $ | 4 |   | $ | 0 |   | $ | 0 |   |
|                                     |       |             |       |   |   |   |   |   |   |   |   |
| Non-performing assets as% of total loans |       | 0.08             | %          | 0.07 | % | 0.01 | % | 0.00 | % | 0.00 | % |
|                                     |       |             |       |   |   |   |   |   |   |   |   |
| Average loans outstanding                |       | $                | 171,730    |   | $ | 138,068 |   | $ | 108,146 |   | $ | 67,343 |   | $ | 19,550 |   |
|                                     |       |             |       |   |   |   |   |   |   |   |   |
| Gross loans outstanding at end of period |       | $                | 192,295    |   | $ | 149,595 |   | $ | 127,639 |   | $ | 82,557 |   | $ | 46,524 |   |

 

28

----

 

**Deposits**

 

Time deposits of $100,000 and greater totaled $78.2 million at December31, 2004 compared with $62.7 million at year-end 2003 and $55.9 million at year-end2002.  The following table sets forth theselected maturities of time deposits of $100,000 and greater at December 31,2004.

 

**TABLE 9**

**Deposits - $100,000 and greater**

**(in thousands)**

 
| Within 3 months           |   | $      | 35,700 |   |
|---------------------------|--------|--------|--------|--------|
| After 3 through 6 months  |   | 5,210  |   |
| After 6 through 12 months |   | 10,698 |   |
| After 12 months           |   | 26,636 |   |
|                      |   |   |   |
| Total                     |   | $      | 78,244 |   |

 

**Capital**

 

Total shareholders’ equity increased from $19.3 million at December 31,2003 to $21.1 million at December 31, 2004. This increase is primarily attributable to net income of $1,846,128, anincrease in net unrealized gains on securities available-for-sale amounting to$85,072, the exercise of director stock warrants of $166,666, the exercise ofemployee stock options of $33,982; all offsetting a reduction of $288,480resulting from the settlement of a stock purchase obligation in 2004.

 

We are subject to various regulatory capital requirements administeredby our federal bank regulators.  Failureto meet minimum capital requirements can initiate certain mandatory andpossibly additional discretionary actions by regulators that, if undertaken,could have a direct material effect on our financial statements.   Under these capital guidelines, we mustmaintain a minimum total risk-based capital ratio of 8%, with at least 4% beingTier 1 capital.  Our Tier 1 capitalconsists of common shareholders’ equity, although Tier 1 capital could alsoinclude other components, such as qualifying perpetual preferred stock andminority interests in equity accounts of consolidated subsidiaries.  We are also required to maintain a minimumTier 1 leverage ratio (Tier 1 capital to total average assets) of at least4%.  To be considered “well-capitalized,”we must maintain total risk-based capital of at least 10%, Tier 1 capital of atleast 6%, and a leverage ratio of at least 5%.

 

We were considered to be “well capitalized” for regulatory purposes atDecember 31, 2003, as our Tier 1 capital ratio was 10.38%, our total risk-basedcapital ratio was 12.36%, and our Tier 1 leverage ratio was 11.13%.  We were also considered to be “wellcapitalized” at December 31, 2002, as our Tier 1 capital ratio was 12.06%, ourtotal risk-based capital ratio was 13.38%, and our Tier 1 leverage ratio was12.13%.  Our Tier 1 capital ratio of11.00%, our total risk-based capital ratio of 12.69% and our Tier 1 leverageratio of 11.51% indicated that we were also considered to be “well capitalized”at December 31, 2001.  The followingtable presents the Company’s regulatory capital position at December 31, 2004:

 

29

----

 

**TABLE 10**

**Capital Ratio**

 
| ** **                               | ** ** | **As of December 31, 2004** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|
|                                     |       |                        |       |
| Tier 1 Capital (to risk weighted assets) |       | 12.45                       | %          |
|                                     |       |                        |       |
| Tier 1 Capital minimum requirement       |       | 4.00                        | %          |
|                                     |       |                        |       |
| Excess                                   |       | 8.45                        | %          |
|                                     |       |                        |       |
| Total Capital (to risk weighted assets)  |       | 13.65                       | %          |
|                                     |       |                        |       |
| Total Capital minimum requirement        |       | 8.00                        | %          |
|                                     |       |                        |       |
| Excess                                   |       | 5.65                        | %          |

 

**LeverageRatio**

 
| ** **                                                     | ** ** | **As of December 31, 2004** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|
|                                                           |       |                        |       |
| Tier 1 Capital to average assets (“Leverage  Ratio”) |       | 9.94                        | %          |
|                                                           |       |                        |       |
| Minimum leverage requirement                                   |       | 4.00                        | %          |
|                                                           |       |                        |       |
| Excess                                                         |       | 5.94                        | %          |

 

**Liquidity Management**

 

Liquidity is the ability to meet current and future obligations throughliquidation or maturity of existing assets or the acquisition of additionalliabilities.  We manage both assets andliabilities to achieve appropriate levels of liquidity.  Cash and federal funds sold are our primarysources of asset liquidity.  These fundsprovide a cushion against short-term fluctuations in cash flow from bothdeposits and loans.  Securitiesavailable-for-sale, which totaled $35.0 million at December 31, 2004, serve asa ready source of secondary liquidity. However, the availability of this source of funds is influenced bymarket conditions and the liquidation of securities may not always be the mostdesirable course of action.

 

Individual and commercial deposits are our primary source of funds forbanking activities.  We obtain depositsfrom customers by offering competitive deposit rates and by offering depositproducts that we believe are desired by our local market.  We also access other deposits markets,including “brokered” or out of market deposits, when the local market does notprovide sufficient funds to meet our loan demand and when interest rates onthose deposits satisfy our asset-liability requirements.

 

Our bank is a member of the Federal Home Loan Bank of Atlanta, and weare eligible to receive advances from the Federal Home Loan Bank, subject toits approval.  Our bank has received andhas repaid such advances in past.  It isour practice to use such advances to meet short-term liquidity needs whenappropriate, and to consider the use of longer term advances to fund loans.

 

We also have arrangementswith commercial banks for short-term unsecured “federal funds” advances of upto $14.7 million.  At December 31, 2004,we had $5.5 million outstanding against these lines. We believe that ourliquidity sources are adequate to meet our operating needs.

 

30

----

 

A review of theConsolidated Statements of Cash Flows within the consolidated financialstatements on page 41, will provide historical trends in cash flows from ouroperating, investing and financing activities. Our increase in net income has provided the largest impact on net cashprovided by operating activities in 2004, 2003 and 2002.  We anticipate this trend to continue.  Cash used in investing activities has beenutilized primarily in the increase in net loans during 2004 and 2003 and in theincrease of net loans and the net purchase of available-for-sale securities in2002.  Based on our growth strategies, weanticipate continued growth in net loans for the immediate future.  The primary contributor to net cash providedby financing activities has been the net increase in deposits in 2004, 2003 and2002.  As discussed earlier in thisreport, our aggressive growth program in our branch network has provided asignificant increase in deposit accounts and we anticipate this trend tocontinue as we add new branch locations. Also noteworthy in the cash provided by financing activities in 2004 wasthe issuance of $6.7 million of junior subordinated debentures.

 

*Interest Rate Sensitivity.*  A significant portion of our assets andliabilities are monetary in nature, and consequently they are very sensitive tochanges in interest rates.  This interestrate risk is our primary market risk exposure, and it can have a significanteffect on our net interest income and cash flows.  We review our exposure to market risk on aregular basis, and we manage the pricing and maturity of our assets andliabilities to diminish the potential adverse impact that changes in interestrates could have on our net interest income.

 

We measure interest ratesensitivity “gap,” which is the difference between the amount ofinterest-earning assets and interest-bearing liabilities, which either re-priceor mature within a given period of time. The difference, or the interest rate re-pricing “gap,” provides anindication of the extent to which an institution’s interest rate spread will beaffected by changes in interest rates.  Agap is considered positive when the amount of interest-rate sensitive assetsexceeds the amount of interest-rate sensitive liabilities, and it is considerednegative when the amount of interest-rate sensitive liabilities exceeds theamount of interest-rate sensitive assets. We generally would benefit from increasing market interest rates when wehave an asset-sensitive, or a positive, interest rate gap, and we wouldgenerally benefit from decreasing market interest rates when we haveliability-sensitive, or a negative, interest rate gap.  When measured on a “gap” basis, we areasset-sensitive over the cumulative one-year time frame as of December 31,2004.  Interest rate cuts by the FederalReserve Board during the years 2002 and 2003 contributed to a narrowed netinterest margin.  During 2004, our netinterest margin improved marginally from 3.77% at December 31, 2003 to 4.33% atDecember 31, 2004.  Although the FederalReserve Board began to increase the discount rate late in 2004, we cannotpredict whether the Federal Reserve Board will continue to increase thediscount rate in the future.  Gapanalysis is not a precise indicator of our interest sensitivity position.  The analysis presents only a static view ofthe timing of maturities and re-pricing opportunities, without taking intoconsideration that changes in interest rates do not affect all assets andliabilities equally.  For example, ratespaid on a substantial portion of interest-bearing checking and savings accountsmay change rapidly within a relatively short time frame, but we believe thoserates are significantly less interest-sensitive than market-based rates such asthose paid on certificates of deposit.

 

Net interest income is also affected by other significant factors,including changes in the volume and mix of interest-earning assets andinterest-bearing liabilities.  We performasset/liability modeling to assess the impact of varying interest rates and theimpact that balance sheet mix assumptions will have on net interestincome.  We attempt to manage interestrate sensitivity by re-pricing assets or liabilities, selling securitiesavailable-for-sale, replacing an asset or liability at maturity, or adjustingthe interest rate during the life of an asset or liability.  Managing the amount of assets and liabilitiesthat re-price in the same time interval helps us to hedge risks and minimizethe impact on net interest income of rising or falling interest rates.  We evaluate interest sensitivity risk andthen formulate guidelines regarding asset generation and re-pricing, fundingsources and pricing, and off-balance sheet commitments in order to decreaseinterest rate sensitivity risk.

 

The following table summarizes the amounts of interest-earning assetsand interest-bearing liabilities outstanding at December 31, 2004 that areexpected to mature, prepay, or re-price in each of the future time periodsshown.  Except as stated in the followingtables, the amount of assets or liabilities that mature or re-price during aparticular period was determined in accordance with the contractual terms ofthe asset or liability.  Adjustable rateloans are included in the period in which interest rates are next scheduled toadjust rather than in the period in which they are due, and fixed rate loansare included in the periods in which they are anticipated to be repaid based onscheduled maturities.  We included oursavings accounts and interest-bearing demand accounts (NOW and money market depositaccounts), which are generally subject to immediate withdrawal, in the “OneYear or Less” category, although historical experience has proven thesedeposits to be more stable over the course of a year.

 

31

----

 

**TABLE 11**

**Interest Rate Sensitivity**

**(in thousands)**

 
| ** **                                 | ** ** | **At December 31, 2004  Maturing or Repricing in** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                 | ** ** | **One Year  or Less**                              | ** ** | **Over One  Year Thru  Three Years** | ** ** | **Over Three  Years Thru  Five Years** | ** ** | **Over Five  Years** | ** ** | **Total** | ** ** |
| Interest-earning assets:                   |       |                                               |       |   |   |   |   |   |   |   |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest-bearing deposits with other banks |       | $                                                  | 5,116      |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 5,116 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Federal funds sold                         |       | 0                                                  |       | 0 |   | 0 |   | 0 |   | 0 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Investment securities                      |       | 10,217                                             |       | 1,128 |   | 2,527 |   | 21,167 |   | 35,039 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Loans: Fixed rate                          |       | 35,771                                             |       | 34,107 |   | 11,303 |   | 444 |   | 81,625 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Variable rate                              |       | 107,249                                            |       | 381 |   | 2,511 |   | 0 |   | 110,141 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Total interest-earning assets:             |       | 158,353                                            |       | 35,616 |   | 16,341 |   | 21,611 |   | 231,921 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:              |       |                                               |       |   |   |   |   |   |   |   |   |
| Deposits:                                  |       |                                               |       |   |   |   |   |   |   |   |   |
| Demand                                     |       | 29,140                                             |       | 0 |   | 0 |   | 0 |   | 29,140 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Savings                                    |       | 29,341                                             |       | 0 |   | 0 |   | 0 |   | 29,341 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Time deposits                              |       | 83,150                                             |       | 35,782 |   | 12,179 |   | 0 |   | 131,111 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Federal funds purchased                    |       | 5,500                                              |       | 0 |   | 0 |   | 0 |   | 5,500 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| FHLB advances and other borrowings         |       | 2,529                                              |       | 0 |   | 0 |   | 6,702 |   | 9,231 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities         |       | 149,660                                            |       | 35,782 |   | 12,179 |   | 6,702 |   | 204,323 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest sensitivity difference            |       | 8,693                                              |       | (166 | ) | 4,162 |   | 14,909 |   | $ | 27,598 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Cumulative interest sensitivity difference |       | $                                                  | 8,693      |   | $ | 8,527 |   | $ | 12,689 |   | $ | 27,598 |   |   |   |
|                                       |       |                                               |       |   |   |   |   |   |   |   |   |
| Cumulative difference to total assets      |       | 3.48                                               | %          | 3.42 | % | 5.08 | % | 11.06 | % |   |   |

 

32

----

 

**Impact ofInflation and Changing Prices**

 

The financial statements and related financial data presented in thisreport have been prepared in accordance with accounting principles generallyaccepted in the United States of America which require the measurement offinancial position and operating results in terms of historical dollars,without considering changes in relative purchasing power over time due toinflation.  Unlike most industrialcompanies, virtually all of the assets and liabilities of a financialinstitution are monetary in nature.  As aresult, interest rates generally have a more significant impact on a financialinstitution’s performance than does the effect of inflation.

 

While the effect of inflation on a bank is normally not as significantas its influence on those businesses that have large investments in plant andinventories, it does have an effect. Interest rates generally increase as the rate of inflation increases,but the magnitude of the change in rates may not be the same.  While interest rates have traditionally movedwith inflation, the effect on income is diminished because both interest earnedon assets and interest paid on liabilities vary directly with each other unlesswe are in a highly liability-sensitive position.  Also, general increases in the price of goodsand services will result in increased operating expenses.

 

**Item 8.    Financial Statementsand Supplementary Data**

 

Our consolidated financial statements, including our consolidatedbalance sheet as of December 31, 2004 and 2003, and consolidated statements ofincome, changes in shareholders’ equity, and cash flows for the years endedDecember 31, 2004, 2003 and 2002, together with the audit reports of PorterKeadle Moore, LLP, dated March 11, 2005, and of Abbott, Jordan & Koon, LLC,dated February 4, 2004, and the notes containing certain supporting informationare attached hereto as pages 35 – 58.

 

**Supplementary Data**

 
| ** **                                            | ** ** | **Quarterly Financial Information**                    | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                            | ** ** | **(unaudited - in thousands, except per share  data)** | ** ** |
| ** **                                            | ** ** | **2004 Quarters**                                      | ** ** | **2003 Quarters** | ** ** |
| ** **                                            | ** ** | **First**                                              | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|                                                  |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                       |       | $                                                      | 3,064      |   | $ | 3,127 |   | $ | 3,535 |   | $ | 3,782 |   | $ | 2,659 |   | $ | 2,747 |   | $ | 2,802 |   | $ | 2,991 |   |
|                                                  |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                   |       | 2,036                                                  |       | 2,122 |   | 2,475 |   | 2,632 |   | 1,469 |   | 1,597 |   | 1,680 |   | 1,906 |   |
|                                                  |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for loan losses                             |       | 80                                                     |       | 70 |   | 280 |   | 155 |   | 75 |   | 75 |   | 18 |   | 98 |   |
|                                                  |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                            |       | 597                                                    |       | 706 |   | 724 |   | 708 |   | 400 |   | 554 |   | 554 |   | 546 |   |
|                                                  |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                            |       | 387                                                    |       | 493 |   | 486 |   | 480 |   | 273 |   | 348 |   | 367 |   | 336 |   |
|                                                  |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per share - basic                            |       | 0.13                                                   |       | 0.17 |   | 0.17 |   | 0.16 |   | 0.09 |   | 0.15 |   | 0.13 |   | 0.11 |   |
|                                                  |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per share - diluted                          |       | 0.11                                                   |       | 0.15 |   | 0.14 |   | 0.14 |   | 0.08 |   | 0.12 |   | 0.11 |   | 0.10 |   |
|                                                  |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding -  basic   |       | 2,936                                                  |       | 2,936 |   | 2,937 |   | 2,941 |   | 2,922 |   | 2,338 |   | 2,923 |   | 2,926 |   |
|                                                  |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding -  diluted |       | 3,429                                                  |       | 3,379 |   | 3,386 |   | 3,369 |   | 3,249 |   | 2,825 |   | 3,395 |   | 3,405 |   |
|                                                       |            |                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

33

----

 

**GEORGIA BANCSHARES, INC. AND SUBSIDIARY**

**CONSOLIDATED FINANCIAL STATEMENTS**

Years Ended December 31, 2004 and 2003

 

TABLE OF CONTENTS

 
| Independent auditors’ reports                               | 35     |
|------------------------------------------------------------------|--------|
|                                                             |   |
| Consolidated balance sheets                                      | 37     |
|                                                             |   |
| Consolidated statements of earnings                              | 38     |
|                                                             |   |
| Consolidated statements of comprehensive income                  | 39     |
|                                                             |   |
| Consolidated statements of changes in  shareholders’ equity | 40     |
|                                                             |   |
| Consolidated statements of cash flows                            | 41     |
|                                                             |   |
| Notes to consolidated financial statements                       | 42     |

 

34

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

The Board ofDirectors and ShareholdersGeorgia Bancshares, Inc. and Subsidiary

 

We have auditedthe accompanying consolidated balance sheets of Georgia Bancshares, Inc. andsubsidiary as of December 31, 2004, and the related consolidated statements ofearnings, comprehensive income, changes in shareholders’ equity and cash flowsfor year then ended.  These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit. The financial statements of Georgia Bancshares,Inc. for the years ended December 31, 2003 and 2002 were audited by otherauditors whose report, dated February 4, 2004, expressed an unqualified opinionon those statements.

 

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

In our opinion,the 2004 consolidated financial statements referred to above present fairly, inall material respects, the financial position of Georgia Bancshares, Inc. andsubsidiary as of December 31, 2004, and the results of their operations andtheir cash flows for the year then ended, in conformity with accountingprinciples generally accepted in the United States of America.

 

/s/ Porter KeadleMoore, LLP

 

 

Atlanta, Georgia

March 11, 2005

 

35

----

 

INDEPENDENT AUDITORS’ REPORT

 

The Board of Directors and StockholdersGeorgia Bancshares, Inc.Peachtree City, Georgia  30269

 

We have audited the accompanying consolidated statements of financialcondition of Georgia Bancshares, Inc. and subsidiary as of December 31, 2003and 2002, and the related consolidated statements of income, changes instockholders’ equity, and cash flows for the years then ended.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provides areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of GeorgiaBancshares, Inc. and subsidiary as of December 31, 2003 and 2002, and theresults of its operations and its cash flows for the years then ended inconformity with accounting principles generally accepted in the United Statesof America.

 

 
| /s/ Abbott, Jordan & Koon, LLC    |   |
|---------------------------------------|--------|
| *** ***                          |
| ***Abbott, Jordan  & Koon, LLC*** |
| Manchester, Georgia                   |
| February 4, 2004                      |

 

36

----

 

**GEORGIA BANCSHARES, INC. AND SUBSIDIARY**

 

**Consolidated Balance Sheets**

** **

**December 31, 2004 and 2003**

 
| ** **                                                                                                                      | ** ** | **2004**    | ** **      | **2003**    | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-----------------|-------------|------------|
| **Assets:**                                                                                                                     |       |        |            |        |       |
| Cash and cash equivalents:                                                                                                      |       |        |            |        |       |
| Cash and due from banks, including  reserverequirement of $1,671,000 and $545,000                                               |       | $           | 4,631,303       |        | $          | 8,516,138 |   |
| Interest-bearing deposits in other banks                                                                                        |       | 5,115,984   |            | 29,860      |       |
| Federal funds sold                                                                                                              |       | 0           |            | 6,887,000   |       |
| Cash and cash equivalents                                                                                                       |       | 9,747,287   |            | 15,432,998  |       |
| Investments:                                                                                                                    |       |        |            |        |       |
| Securities available-for-sale                                                                                                   |       | 35,039,356  |            | 34,147,840  |       |
| Other investments                                                                                                               |       | 1,540,466   |            | 1,357,566   |       |
|                                                                                                                            |       | 36,579,822  |            | 35,505,406  |       |
|                                                                                                                            |       |        |            |        |       |
| Loans net of allowance for loan losses of  $2,654,334 and $2,131,752 respectively                                               |       | 189,640,547 |            | 147,463,301 |       |
|                                                                                                                            |       |        |            |        |       |
| Accrued interest receivable                                                                                                     |       | 1,612,109   |            | 1,340,445   |       |
| Premises and equipment, net                                                                                                     |       | 6,212,760   |            | 4,772,339   |       |
| Bank owned life insurance                                                                                                       |       | 4,715,027   |            | 0           |       |
| Other assets                                                                                                                    |       | 1,042,499   |            | 577,141     |       |
| **Total assets**                                                                                                                | ** ** | **$**       | **249,550,051** | ** **  | **$**      | **205,091,630** | ** ** |
|                                                                                                                            |       |        |            |        |       |
| **Liabilities:**                                                                                                                |       |        |            |        |       |
| Deposits:                                                                                                                       |       |        |            |        |       |
| Noninterest-bearing                                                                                                             |       | $           | 22,666,896      |        | $          | 23,448,570 |   |
| NOW                                                                                                                             |       | 29,139,505  |            | 6,308,343   |       |
| Savings                                                                                                                         |       | 29,340,650  |            | 19,018,079  |       |
| Time deposits $100,000 and over                                                                                                 |       | 78,243,539  |            | 62,745,922  |       |
| Other time deposits                                                                                                             |       | 52,867,428  |            | 70,446,862  |       |
| Total deposits                                                                                                                  |       | 212,258,018 |            | 181,967,776 |       |
|                                                                                                                            |       |        |            |        |       |
| Securities sold under agreements to  repurchase                                                                                 |       | 529,358     |            | 670,052     |       |
| Federal funds purchased                                                                                                         |       | 5,500,000   |            | 0           |       |
| Federal Home Loan Bank advances                                                                                                 |       | 2,000,000   |            | 2,000,000   |       |
| Junior subordinated debentures                                                                                                  |       | 6,702,000   |            | 0           |       |
| Stock purchase obligation                                                                                                       |       | 0           |            | 369,250     |       |
| Accrued interest payable and other  liabilities                                                                                 |       | 1,454,492   |            | 821,737     |       |
| Total liabilities                                                                                                               |       | 228,443,868 |            | 185,828,815 |       |
|                                                                                                                            |       |        |            |        |       |
| **Commitments**                                                                                                                 |       |        |            |        |       |
|                                                                                                                            |       |        |            |        |       |
| **Shareholders’ Equity**                                                                                                   |       |        |            |        |       |
| Common stock; no par value, 10,000,000  shares authorized; 2,972,813 and 2,936,119 shares issued and outstanding,  respectively |       | 17,217,471  |            | 17,305,303  |       |
| Retained earnings                                                                                                               |       | 3,861,473   |            | 2,015,345   |       |
| Accumulated other comprehensive income  (loss)                                                                                  |       | 27,239      |            | (57,833     | )          |
| Total shareholders’ equity                                                                                                 |       | 21,106,183  |            | 19,262,815  |       |
| **Total liabilities and shareholders’ equity**                                                                             | ** ** | **$**       | **249,550,051** | ** **  | **$**      | **205,091,630** | ** ** |

 

See accompanying notes to consolidatedfinancial statements.

 

37

----

 

**GEORGIA BANCSHARES, INC. AND SUBSIDIARY**

** **

**Consolidated Statements of Earnings**

 

**For the Years Ended December 31, 2004, 2003 and2002**

** **
| ** **                                                  | ** ** | **2004**   | ** **    | **2003**   | ** ** | **2002**      | ** ** |
|-------------------------------------------------------------|------------|------------|---------------|------------|------------|---------------|------------|
| **Interest income:**                                        |       |       |          |       |       |          |       |
| Interest and fees on loans                                  |       | $          | 12,106,445    |       | $          | 9,954,967     |       | $ | 8,039,216 |   |
| Interest and dividends on investments                       |       | 1,328,625  |          | 1,190,788  |       | 1,469,897     |       |
| Interest on federal funds sold and other  interest income   |       | 73,380     |          | 52,324     |       | 59,272        |       |
| Total interest income                                       |       | 13,508,450 |          | 11,198,079 |       | 9,568,385     |       |
|                                                        |       |       |          |       |       |          |       |
| **Interest expense:**                                       |       |       |          |       |       |          |       |
| Interest on deposits                                        |       | 4,097,080  |          | 4,500,511  |       | 4,741,038     |       |
| Interest on securities sold under  agreements to repurchase |       | 6,389      |          | 17,683     |       | 72,611        |       |
| Interest on other borrowed funds                            |       | 139,737    |          | 27,751     |       | 23,355        |       |
| Total interest expense                                      |       | 4,243,206  |          | 4,545,945  |       | 4,837,004     |       |
|                                                        |       |       |          |       |       |          |       |
| **Net interest income**                                     |       | 9,265,244  |          | 6,652,134  |       | 4,731,381     |       |
|                                                        |       |       |          |       |       |          |       |
| Provision for loan losses                                   |       | 585,000    |          | 266,000    |       | 885,000       |       |
|                                                        |       |       |          |       |       |          |       |
| **Net interest income after provision for  loan losses**    |       | 8,680,244  |          | 6,386,134  |       | 3,846,381     |       |
|                                                        |       |       |          |       |       |          |       |
| **Other income:**                                           |       |       |          |       |       |          |       |
| Service charges on deposit accounts                         |       | 310,987    |          | 222,145    |       | 168,293       |       |
| Gains (losses) on sale of other assets                      |       | (12,128    | )             | 0          |       | 56,001        |       |
| Gains (losses) on sales of securities  available-for-sale   |       | (50,808    | )             | 85,697     |       | 124,139       |       |
| Other operating income                                      |       | 434,117    |          | 77,684     |       | 68,400        |       |
| Total other income                                          |       | 682,168    |          | 385,526    |       | 416,833       |       |
|                                                        |       |       |          |       |       |          |       |
| **Other expense:**                                          |       |       |          |       |       |          |       |
| Salaries and employee benefits                              |       | 3,983,274  |          | 2,614,936  |       | 1,986,738     |       |
| Occupancy and equipment expense                             |       | 751,314    |          | 569,828    |       | 332,776       |       |
| Data processing                                             |       | 598,206    |          | 454,844    |       | 324,563       |       |
| Other operating expenses                                    |       | 1,294,490  |          | 1,079,005  |       | 800,704       |       |
| Total other expense                                         |       | 6,627,284  |          | 4,718,613  |       | 3,444,781     |       |
|                                                        |       |       |          |       |       |          |       |
| **Income before income taxes**                              |       | 2,735,128  |          | 2,053,047  |       | 818,433       |       |
|                                                        |       |       |          |       |       |          |       |
| Income tax expense                                          |       | 889,000    |          | 730,000    |       | 226,500       |       |
|                                                        |       |       |          |       |       |          |       |
| **Net earnings**                                            | ** ** | **$**      | **1,846,128** | ** ** | **$**      | **1,323,047** | ** ** | **$** | **591,933** | ** ** |
|                                                        |       |       |          |       |       |          |       |
| **Basic earnings per share**                                |       | $          | 0.63          |       | $          | 0.45          |       | $ | 0.22 |   |
|                                                        |       |       |          |       |       |          |       |
| **Diluted earnings per share**                              |       | $          | 0.55          |       | $          | 0.39          |       | $ | 0.20 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

38

----

 

**GEORGIA BANCSHARES, INC. AND SUBSIDIARY**

 

**Consolidated Statements of Comprehensive Income**

 

**For the Years Ended December 31, 2004, 2003 and2002**

 

** **
| ** **                                                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002**  | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
|                                                                                                 |       |     |       |     |       |      |       |
| Net earnings                                                                                         |       | $        | 1,846,128  |     | $          | 1,323,047 |       | $ | 591,933 |   |
| Other comprehensive income:                                                                          |       |     |       |     |       |      |       |
| Unrealized holding gains (losses) on  investment securities available-for-sale arising during period |       | 182,368  |       | (712,337 | )          | 429,596   |       |
| Reclassification adjustment for gains  (losses) on investment securities available-for-sale          |       | (50,808  | )          | 85,697   |       | 124,139   |       |
| Total other comprehensive income (loss)  before tax                                                  |       | 131,560  |       | (626,640 | )          | 553,735   |       |
| Income taxes related to other comprehensive  income:                                                 |       |     |       |     |       |      |       |
| Unrealized holding gains (losses) on  investment securities available-for-sale arising during period |       | (64,440  | )          | 242,194  |       | (146,063  | )          |
| Reclassification adjustment for gains  (losses) on investment securities available-for-sale          |       | 17,952   |       | (29,137  | )          | (42,207   | )          |
| Total income taxes related to other  comprehensive income (loss)                                     |       | (46,488  | )          | 213,057  |       | (188,270  | )          |
| Total other comprehensive (loss) income,  net of tax                                                 |       | 85,072   |       | (413,583 | )          | 365,465   |       |
|                                                                                                 |       |     |       |     |       |      |       |
| Total comprehensive income                                                                           |       | $        | 1,931,200  |     | $          | 909,464   |       | $ | 957,398 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

39

----

 

**GEORGIA BANCSHARES, INC. AND SUBSIDIARY**

 

**Consolidated Statements of Changes in Shareholders’Equity**

 

**For the Years Ended December 31, 2004, 2003 and2002**

 
| ** **                                                               | ** ** | ** **       | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** **             | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------|------------|------------------|------------|--------------|------------|-------------------|------------|-----------------|------------|------------------------|------------|------------|------------|
| ** **                                                               | ** ** | ** **       | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**       | ** ** | ** **             | ** ** | **Total**  | ** ** |
| ** **                                                               | ** ** | **Common Stock** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Treasury**    | ** ** | **Shareholders’** | ** ** |
| ** **                                                               | ** ** | **Shares**       | ** ** | **Amount**   | ** ** | **Earnings**      | ** ** | **Income**      | ** ** | **Stock**              | ** ** | **Equity** | ** ** |
| Balance, December 31, 2001                                               |       | 1,331,250        |       | $            | 10,755,290 |              | $          | 104,882         |       | $                      | (9,715     | )          | $          | (160 | ) | $ | 10,850,297 |   |
|                                                                     |       |             |       |         |       |              |       |            |       |                   |       |       |       |
| Proceeds from the sale of common stock, net  of issuance cost of $89,257 |       | 538,897          |       | 6,459,454    |       |              |       |            |       |                   |       | 6,459,454  |       |
| Unrealized gains on securities available-for-sale,  net of tax           |       |             |       |         |       |              |       | 365,465         |       |                   |       | 365,465    |       |
| Treasury stock transactions                                              |       |             |       | 40           |       |              |       |            |       | (1,612                 | )          | (1,572     | )          |
| Stock split                                                              |       | 467,426          |       |         |       |              |       |            |       |                   |       |       |       |
| Net earnings                                                             |       |             |       |         |       | 591,933           |       |            |       |                   |       | 591,933    |       |
| Balance, December 31, 2002                                               |       | 2,337,573        |       | 17,214,784   |       | 696,815           |       | 355,750         |       | (1,772                 | )          | 18,265,577 |       |
|                                                                     |       |             |       |         |       |              |       |            |       |                   |       |       |       |
| Unrealized losses on securities available-for-sale,  net of tax          |       |             |       |         |       |              |       | (413,583        | )          |                   |       | (413,583   | )          |
| Treasury stock transactions                                              |       |             |       | (2,454       | )          |              |       |            |       | 1,772                  |       | (682       | )          |
| Exercise of stock options                                                |       | 14,319           |       | 92,973       |       |              |       |            |       |                   |       | 92,973     |       |
| Stock split                                                              |       | 584,227          |       |         |       | (4,517            | )          |            |       |                   |       | (4,517     | )          |
| Net earnings                                                             |       |             |       |         |       | 1,323,047         |       |            |       |                   |       | 1,323,047  |       |
| Balance, December 31, 2003                                               |       | 2,936,119        |       | 17,305,303   |       | 2,015,345         |       | (57,833         | )          | 0                      |       | 19,262,815 |       |
|                                                                     |       |             |       |         |       |              |       |            |       |                   |       |       |       |
| Unrealized gains on securities available-for-sale,  net of tax           |       |             |       |         |       |              |       | 85,072          |       |                   |       | 85,072     |       |
| Exercise of stock warrants                                               |       | 32,552           |       | 166,666      |       |              |       |            |       |                   |       | 166,666    |       |
| Exercise of stock options                                                |       | 4,142            |       | 33,982       |       |              |       |            |       |                   |       | 33,982     |       |
| Settlement of stock purchase obligation                                  |       |             |       | (288,480     | )          |              |       |            |       |                   |       | (288,480   | )          |
| Net earnings                                                             |       |             |       |         |       | 1,846,128         |       |            |       |                   |       | 1,846,128  |       |
| Balance, December 31, 2004                                               |       | 2,972,813        |       | $            | 17,217,471 |              | $          | 3,861,473       |       | $                      | 27,239     |       | $          | 0 |   | $ | 21,106,183 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

40

----

 

**GEORGIA BANCSHARES, INC. AND SUBSIDIARY**

 

**Consolidated Statements of Cash Flows**

 

**For the Years Ended December 31, 2004, 2003 and2002**

 
| ** **                                                                           | ** ** | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                                 |       |        |       |        |       |        |       |
| **Cash flows from operating activities:**                                            |       |        |       |        |       |        |       |
| Net earnings                                                                         |       | $           | 1,846,128  |        | $          | 1,323,047   |       | $ | 591,933 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities: |       |        |       |        |       |        |       |
| Depreciation, amortization and accretion                                             |       | 500,222     |       | 143,991     |       | (97,547     | )          |
| Provision for loan losses                                                            |       | 585,000     |       | 266,000     |       | 885,000     |       |
| (Gains) losses on sales of securities  available-for-sale                            |       | 50,808      |       | (85,697     | )          | (124,139    | )          |
| Loss on sale of other assets                                                         |       | 12,128      |       | 0           |       | (56,001     | )          |
| Deferred income taxes                                                                |       | (198,325    | )          | 37,612      |       | (178,010    | )          |
| Changes in operating assets and  liabilities:                                        |       |        |       |        |       |        |       |
| Unearned loan fees, net                                                              |       | 49,395      |       | 40,671      |       | 12,996      |       |
| Accrued interest receivable                                                          |       | (271,664    | )          | (444,294    | )          | (230,578    | )          |
| Increase in bank owned life insurance                                                |       | (15,027     | )          | 0           |       | 0           |       |
| Other assets                                                                         |       | (325,648    | )          | (47,668     | )          | (55,220     | )          |
| Accrued interest payable and other  liabilities                                      |       | 632,755     |       | (172,590    | )          | (268,997    | )          |
| Net cash provided by operating activities                                            |       | 2,865,772   |       | 1,061,072   |       | 479,437     |       |
|                                                                                 |       |        |       |        |       |        |       |
| **Cash flows from investing activities:**                                            |       |        |       |        |       |        |       |
| Purchases of available-for-sale securities                                           |       | (19,368,534 | )          | (29,593,174 | )          | (32,205,615 | )          |
| Proceeds from sales and pay downs of  securities available-for-sale                  |       | 13,167,366  |       | 28,017,432  |       | 19,164,490  |       |
| Proceeds from maturities of securities  available-for-sale                           |       | 5,270,853   |       | 1,850,000   |       | 1,054,016   |       |
| Purchase of other investments                                                        |       | (233,100    | )          | (706,400    | )          | 0           |       |
| Proceeds from sale of other investments                                              |       | 50,200      |       | 0           |       | 183,750     |       |
| Net increase in loans                                                                |       | (42,811,641 | )          | (22,019,835 | )          | (45,195,704 | )          |
| Purchase of bank owned life insurance                                                |       | (4,700,000  | )          | 0           |       | 0           |       |
| Purchase of premises and equipment                                                   |       | (1,821,093  | )          | (1,241,353  | )          | (2,090,991  | )          |
| Net cash used in investing activities                                                |       | (50,445,949 | )          | (23,693,330 | )          | (59,090,054 | )          |
|                                                                                 |       |        |       |        |       |        |       |
| **Cash flows from financing activities:**                                            |       |        |       |        |       |        |       |
| Net increase in deposits                                                             |       | 30,290,242  |       | 39,408,976  |       | 36,291,293  |       |
| Net change in federal funds purchased                                                |       | 5,500,000   |       | (4,200,000  | )          | 4,200,000   |       |
| Net change in securities sold under  agreements to repurchase                        |       | (140,694    | )          | (2,560,508  | )          | 3,230,560   |       |
| Proceeds from Federal Home Loan Bank  advances                                       |       | 0           |       | 8,500,000   |       | 10,800,000  |       |
| Payments on Federal Home Loan Bank advances                                          |       | 0           |       | (8,500,000  | )          | (8,800,000  | )          |
| Proceeds from junior subordinated  debentures                                        |       | 6,702,000   |       | 0           |       | 0           |       |
| Net change in common stock                                                           |       | 200,648     |       | 87,774      |       | 6,457,882   |       |
| Settlement of stock purchase obligation                                              |       | (657,730    | )          | 0           |       | 0           |       |
| Net cash provided by financing activities                                            |       | 41,894,466  |       | 32,736,242  |       | 52,179,735  |       |
|                                                                                 |       |        |       |        |       |        |       |
| **Net change in cash and cash equivalents**                                          |       | (5,685,711  | )          | 10,103,984  |       | (6,430,882  | )          |
|                                                                                 |       |        |       |        |       |        |       |
| **Cash and cash equivalents at beginning of  year**                                  |       | 15,432,998  |       | 5,329,014   |       | 11,759,896  |       |
| **Cash and cash equivalents at end of period**                                       |       | $           | 9,747,287  |        | $          | 15,432,998  |       | $ | 5,329,014 |   |
|                                                                                 |       |        |       |        |       |        |       |
| Supplemental disclosures of cash flows:                                              |       |        |       |        |       |        |       |
| Cash paid during the year for interest                                               |       | $           | 3,952,830  |        | $          | 4,587,262   |       | $ | 5,209,448 |   |
| Cash paid during the year for income taxes                                           |       | $           | 1,152,909  |        | $          | 765,776     |       | $ | 359,232 |   |
|                                                                                 |       |        |       |        |       |        |       |
| Non-cash investing and financing  activities:                                        |       |        |       |        |       |        |       |
| Unrealized gains (losses) on securities available-for-sale,  net of tax              |       | $           | 85,072     |        | $          | (413,583    | )          | $ | 365,465 |   |
| Stock purchase obligation                                                            |       | $           | (369,250   | )           | $          | 0           |       | $ | 0 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

41

----

 

**GEORGIA BANCSHARES, INC. AND SUBSIDIARY**

 

**Notes to Consolidated Financial Statements**

 

**(1)       SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

**Basis of Presentation and Nature ofOperations**

The consolidated financial statements include the accounts of GeorgiaBancshares, Inc. (the “Company”) and its wholly owned subsidiary, The Bank ofGeorgia (the “Bank”). All significant intercompany accounts and transactionshave been eliminated in consolidation.

 

On March 18, 2001, the Bank completed the formation of a one-bankholding company and a plan to exchange all Bank stock shares for shares of theholding company.  Subsequent to thereorganization, all of the shares of the Bank were owned by the Company.

 

The Bank is a community oriented commercial bank with emphasis onretail banking and offers such customary banking services as consumer andcommercial checking accounts, savings accounts, certificates of deposit,commercial and consumer loans, money transfers and a variety of other bankingservices. The Bank has seven banking offices. The main office is in PeachtreeCity, Georgia, and conducts its banking activities primarily in Fayette andsurrounding counties.   The branches arelocated in Fayette, Coweta, and Fulton Counties in Georgia.

 

The accounting principles followed by the Company and the methods ofapplying these principles conform with accounting principles generallyaccepted  in the United States of America(“GAAP”) and with general practices within the banking industry. In preparingfinancial statements in conformity with GAAP, management is required to makeestimates and assumptions that affect the reported amounts in the financialstatements. Actual results could differ significantly from those estimates.Material estimates common to the banking industry that are particularly susceptibleto significant change in the near term include, but are not limited to, thedetermination of the allowance for loan losses, the valuation of real estateacquired in connection with or in lieu of foreclosure on loans, and valuationallowances associated with deferred tax assets, the recognition of which arebased on future taxable income.

 

**Cash and Cash Equivalents**

Cash equivalents include amounts due from banks, interest-bearingdeposits in banks, and federal funds sold. Federal funds are generally sold for one-day periods andinterest-bearing deposits in banks mature within a period of less than 90 days.

 

**Investment Securities**

The Company classifies its securities in one of three categories:trading, available-for-sale, or held-to-maturity. Trading securities are boughtand held principally for the purpose of selling them in the near term.Held-to-maturity securities are those securities for which the Company has theability and intent to hold the security until maturity. All other securitiesnot included in trading or held-to-maturity are classified asavailable-for-sale. At December 31, 2004 and 2003, all securities wereclassified as available-for-sale.

 

Available-for-sale securities are recorded at fair value.Held-to-maturity securities are recorded at cost, adjusted for the amortizationor accretion of premiums or discounts. Unrealized holding gains and losses, netof the related tax effect, on securities available-for-sale are excluded fromearnings and are reported as a separate component of shareholders’ equity untilrealized. Transfers of securities between categories are recorded at fair valueat the date of transfer. Unrealized

 

42

----

 

holding gains or losses associated with transfers of securities fromheld-to-maturity to available-for-sale are recorded as a separate component ofshareholders’ equity. The unrealized holding gains or losses included in theseparate component of shareholders’ equity for securities transferred fromavailable-for-sale to held-to-maturity are maintained and amortized intoearnings over the remaining life of the security as an adjustment to yield in amanner consistent with the amortization or accretion of premium or discount onthe associated security.

 

A decline in the market value of any available-for-sale orheld-to-maturity investment below cost that is deemed other than temporary ischarged to earnings and establishes a new cost basis for the security.

 

Premiums and discounts are amortized or accreted over the life of therelated security as an adjustment to the yield. Realized gains and losses forsecurities classified as available-for-sale and held-to-maturity are includedin earnings and are derived using the specific identification method fordetermining the cost of securities sold.

 

43

----

 

**Other Investments**

Other investments include equity securities which have no readilydetermined fair value. These investments are carried at cost.

 

**Loans, Loan Fees and Interest Income on Loans**

Loans are stated at the principal amount outstanding, net of theallowance for loan losses. Interest on loans is calculated by using the simpleinterest method on daily balances of the principal amount outstanding.

 

Accrual of interest is discontinued on a loan when management believes,after considering economic and business conditions and collection efforts, theborrower’s financial condition is such that collection of interest is doubtful.When a loan is placed on nonaccrual status, previously accrued and uncollectedinterest is charged to interest income on loans. Generally, payments onnonaccrual loans are applied to principal.

 

Impaired loans are measured based on the present value of expectedfuture cash flows discounted at the loan’s effective interest rate, or at theloans observable market price or at the fair value of the collateral, if theloan is collateral dependent.  A loan isimpaired when, based on current information and events, it is probable that allamounts that are due according to the contract and terms of the loan agreementwill not be collected.

 

Loan fees, net of certain origination costs, are deferred and amortizedover the lives of the respective loans.

 

**Allowance for Loan Losses**

The allowance for loan losses is established through a provision forloan losses charged to expense. Loans are charged against the allowance forloan losses when management believes the collection of the principal isunlikely. The allowance represents an amount, which in management’s judgment,will be adequate to absorb probable losses on existing loans that may becomeuncollectible.

 

Management’s judgment in determining the adequacy of the allowance isbased on evaluations of the collectibility of loans. These evaluations takeinto consideration such factors as changes in the nature and volume of the loanportfolio, current economic conditions that may affect the borrower’s abilityto pay, overall portfolio quality, and review of specific problem loans.  In determining the adequacy of the allowancefor loan losses, management uses a loan grading system that rates loans ineight different categories.  Grades fivethrough eight are assigned allocations of loss based on management’s estimateof potential loss, which is generally based on discounted, collateraldeficiencies or loss percentages by grade used by the federal bankregulators.  Loans graded one throughfour are stratified by type and allocated loss ranges based on peer group lossexperience, regulatory guidelines and the Bank’s loss history.  The combination of these results are comparedmonthly to the recorded allowance for loan losses and material differences areadjusted by increasing or decreasing the provision for loan losses.

 

Management uses an outsourced independent loan review specialist on aannual basis to corroborate and challenge the internal loan grading system andmethods used to determine the adequacy of the allowance for loan losses.

 

Management believes the allowance for loan losses is adequate. Whilemanagement uses available information to recognize losses on loans, futureadditions to the allowance may be necessary based on changes in economicconditions. In addition, regulatory agencies, as an integral part of theirexamination process, periodically review the allowance for loan losses. Suchregulators may require additions to the allowance based on their judgments ofinformation available to them at the time of their examination.

 

44

----

 

**Premises and Equipment**

Premises and equipment are carried at cost less accumulateddepreciation. Depreciation is computed using the straight-line method over theestimated useful lives of the related asset. When assets are retired orotherwise disposed, the cost and related accumulated depreciation are removedfrom the accounts, and any resulting gain or loss is reflected in income forthe period. The cost of maintenance and repairs which do not improve or extendthe useful life of the respective asset is charged to expense as incurred,whereas significant renewals and improvements are capitalized. The range ofestimated useful lives for premises and equipment are:

 
| Buildings                |   | 40 years     |
|--------------------------|--------|--------------|
| Leasedhold  improvements |   | 3 - 25 years |
| Equipment and  furniture |   | 3 - 10 years |

 

**Securities Sold Under Agreements toRepurchase**

Securities sold under agreements to repurchase are secured borrowingsfrom customers and are treated as financing activities and are carried at theamounts at which the securities will be subsequently reacquired as specified inthe respective agreements.

 

**Income Taxes**

The Company uses the liability method of accounting for income taxes,which requires the recognition of deferred tax assets and liabilities for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax basis. Additionally, this method requires the recognition offuture tax benefits, such as net operating loss carryforwards, to the extentthat realization of such benefits is more likely than not. Deferred tax assetsand liabilities are measured using enacted tax rates expected to apply totaxable income in the years in which the assets and liabilities are expected tobe recovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income tax expense in the period thatincludes the enactment date.

 

In the event the future tax consequences of differences between thefinancial reporting bases and the tax bases of the Company’s assets andliabilities results in deferred tax assets, an evaluation of the probability ofbeing able to realize the future benefits indicated by such asset is required.A valuation allowance is provided for the portion of the deferred tax assetwhen it is more likely than not that some portion or all of the deferred taxasset will not be realized. In assessing the realization of the deferred taxassets, management considers the scheduled reversals of deferred taxliabilities, projected future taxable income, and tax planning strategies.

 

**Net Earnings Per Share**

Basic net earnings per share is based on the weighted average number ofcommon shares outstanding during the period. Diluted net earnings per share includes the effects of potential commonshares outstanding during the period. The average market price during the year is used to compute equivalentshares.  The reconciliation of theamounts used in the computation of both basic earnings per share and dilutedearnings per share for the years ended December 31, 2004, 2003 and 2002  are as follows:

 

45

----

** **

** **
| ** **                                | ** ** | **Net  Earnings** | ** ** | **Average  Shares  Outstanding** | ** ** | **Per  Share  Amount** | ** ** |
|-------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|
| For the year ended December 31, 2004:     |       |              |       |                             |       |                   |       |
| Net earnings – basic                 |       | $                 | 1,846,128  |                             | 2,940,743  |                   | $          | 0.63 |   |
| Effect of dilutive stock warrants/options |       | 0                 |       | 428,072                          |       |                   |       |
| Net earnings – diluted               |       | $                 | 1,846,128  |                             | 3,368,815  |                   | $          | 0.55 |   |
| For the year ended December 31, 2003:     |       |              |       |                             |       |                   |       |
| Net earnings – basic                 |       | $                 | 1,323,047  |                             | 2,925,653  |                   | $          | 0.45 |   |
| Effect of dilutive stock warrants/options |       | 0                 |       | 479,636                          |       |                   |       |
| Net earnings – diluted               |       | $                 | 1,323,047  |                             | 3,405,289  |                   | $          | 0.39 |   |
| For the year ended December 31, 2002:     |       |              |       |                             |       |                   |       |
| Net earnings – basic                 |       | $                 | 591,933    |                             | 2,699,089  |                   | $          | 0.22 |   |
| Effect of dilutive stock warrants/options |       | 0                 |       | 316,389                          |       |                   |       |
| Net earnings – diluted               |       | $                 | 591,933    |                             | 3,015,478  |                   | $          | 0.20 |   |

 

**Stock-Based Compensation**

The Company’s stock-based compensation plan is accounted for underAccounting Principles Board Opinion No. 25 and related interpretations. Nocompensation expense has been recognized related to the grant of the incentivestock options. Had compensation cost been determined based upon the fair valueof the options at the grant dates, the Company’s net earnings and net earningsper share would have been reduced to the proforma amounts indicated below. Fordisclosure purposes, the Company immediately recognized the expense associatedwith the option grants assuming that all awards vest upon grant.

 
| ** **                  | ** ** | ** **                         | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|-----------------------------|------------|------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings                |       | As reported                        |       | $          | 1,846,128  |       | $          | 1,323,047  |       | $ | 591,933 |   |
|                        |       | Effect of  grants, net of tax      |       | (76,957    | )          | (78,098    | )          | (30,906    | )          |
|                        |       | Effect of  forfeitures, net of tax |       | 5,022      |       | 0          |       | 0          |       |
|                        |       | Proforma                           |       | $          | 1,774,193  |       | $          | 1,244,949  |       | $ | 561,027 |   |
|                        |       |                               |       |       |       |       |       |       |       |   |   |   |
| Basic  earnings per share   |       | As reported                        |       | $          | 0.63       |       | $          | 0.45       |       | $ | 0.22 |   |
|                        |       | Proforma                           |       | $          | 0.60       |       | $          | 0.43       |       | $ | 0.21 |   |
|                        |       |                               |       |       |       |       |       |       |       |   |   |   |
| Diluted  earnings per share |       | As reported                        |       | $          | 0.55       |       | $          | 0.39       |       | $ | 0.20 |   |
|                        |       | Proforma                           |       | $          | 0.53       |       | $          | 0.37       |       | $ | 0.19 |   |

 

The weighted average fair value of options at grant date in 2004, 2003and 2002 was $4.56, $4.04 and $3.03, respectively. The fair value of eachoption is estimated on the date of grant using the Minimum Valueoptions-pricing model with the following weighted average assumptions used forgrants in 2004, 2003 and 2002, respectively - dividend yield of 4.00%, 3.00%and 2.80%, respectively; risk-free interest rate of 4.03%, 4.00% and 5.00%,respectively; and an expected life of 10 years for all periods presented.

 

46

----

** **

## ** **

## **Recent AccountingPronouncements**

## ** **

***Meaning ofOther-Than-Temporary-Impairment***

In March 2004, The Emerging Issues Task Force (“EITF”) issued EITF03-1, The Meaning of Other-Than-Temporary Impairment and its Application toCertain Investments (“EITF 03-1”).  EITF03-1 provides guidance for evaluating whether an investment isother-than-temporarily impaired.  Thedisclosure guidance was fully effective for other-than-temporary impairmentevaluations made in reporting periods ending after June 15, 2004, whereas therecognition and measurement guidance has been deferred.  The disclosures required by EITF 03-1 areincluded in note 2 to the consolidated financial statements.  The Company did not recognize an impairmentloss on any investment in 2004 or 2003.

 

***Share-Based Payment***

In December 2004, the FASB revised SFAS No. 123 (“SFAS No. 123 (R)”).  SFAS No. 123 (R), Share-Based Payment,requires all share-based payments to employees and directors, including grantsof employee stock options, to be recognized in the financial statements basedon their fair values.  Pro formadisclosure is no longer an alternative to financial statement recognition.  For the Company, SFAS No. 123 (R) iseffective beginning January 1, 2006. Since the Company currently has unvested share-based plans, the adoptionof these requirements will have an impact on the Company’s financial statementsbeginning January 1, 2006.

 

**Reclassifications**

Certain amounts in the 2003 and 2002 consolidated financial statementshave been restated to conform to the 2004 presentation.

 

47

----

 

**(2)           INVESTMENT SECURITIES**

Investment securities available for sale at December 31, 2004 and 2003are as follows:

 
| ** **                  | ** ** | **December  31, 2004** | ** ** |
|-----------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **Amortized  Cost**    | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
| ** **                  | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  Government agencies   |       | $                      | 8,287,952  |   | $ | 67 |   | $ | 30,378 |   | $ | 8,257,641 |   |
| Mortgage  backed securities |       | 16,781,330             |       | 46,741 |   | 115,248 |   | 16,712,823 |   |
| Municipal  securities       |       | 9,426,140              |       | 205,563 |   | 62,186 |   | 9,569,517 |   |
| Corporate  securities       |       | 250,000                |       | 0 |   | 625 |   | 249,375 |   |
| Trust  preferred securities |       | 250,000                |       | 0 |   | 0 |   | 250,000 |   |
|                        |       |                   |       |   |   |   |   |   |   |
|                        |       | $                      | 34,995,422 |   | $ | 252,371 |   | $ | 208,437 |   | $ | 35,039,356 |   |

 
| ** **                  | ** ** | **December  31, 2003** | ** ** |
|-----------------------------|------------|------------------------|------------|
| ** **                  | ** ** | ** **             | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                  | ** ** | **Amortized**          | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                  | ** ** | **Cost**               | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                  | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  Government agencies   |       | $                      | 4,385,858  |   | $ | 47,003 |   | $ | 998 |   | $ | 4,431,863 |   |
| Mortgage  backed securities |       | 20,742,303             |       | 70,634 |   | 164,769 |   | 20,648,168 |   |
| Municipal  securities       |       | 8,857,304              |       | 123,923 |   | 163,418 |   | 8,817,809 |   |
| Corporate  securities       |       | 250,000                |       | 0 |   | 0 |   | 250,000 |   |
|                        |       | $                      | 34,235,465 |   | $ | 241,560 |   | $ | 329,185 |   | $ | 34,147,840 |   |
|                             |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following outlines the unrealized losses and fair value byinvestment category and length of time that individual securities have been ina continuous unrealized loss position at December 31, 2004 and 2003:

 
| ** **                  | ** ** | **December  31, 2004**  | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
| ** **                  | ** ** | **Fair  Value**         | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** |
| U.S.  Government agencies   |       | $                       | 5,579,280  |   | $ | 20,720 |   | $ | 1,270,443 |   | $ | 9,658 |   | $ | 6,849,723 |   | $ | 30,378 |   |
| Mortgage  backed securities |       | 0                       |       | 0 |   | 11,112,381 |   | 115,248 |   | 11,112,381 |   | 115,248 |   |
| Municipal  securities       |       | 0                       |       | 0 |   | 2,863,342 |   | 62,186 |   | 2,863,342 |   | 62,186 |   |
| Corporate  securities       |       | 0                       |       | 0 |   | 249,375 |   | 625 |   | 249,375 |   | 625 |   |
|                        |       | $                       | 5,579,280  |   | $ | 20,720 |   | $ | 15,495,541 |   | $ | 187,717 |   | $ | 21,074,821 |   | $ | 208,437 |   |

 
| ** **                  | ** ** | **December  31, 2003**  | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
| ** **                  | ** ** | **Fair  Value**         | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** |
| U.S.  Government agencies   |       | $                       | 0          |   | $ | 0 |   | $ | 430,332 |   | $ | 998 |   | $ | 430,332 |   | $ | 998 |   |
| Mortgage  backed securities |       | 0                       |       | 0 |   | 15,755,308 |   | 164,769 |   | 15,755,308 |   | 164,769 |   |
| Municipal  securities       |       | 0                       |       | 0 |   | 4,655,801 |   | 163,418 |   | 4,655,801 |   | 163,418 |   |
|                        |       | $                       | 0          |   | $ | 0 |   | $ | 20,841,441 |   | $ | 329,185 |   | $ | 20,841,441 |   | $ | 329,185 |   |

 

48

----

 

At December 31, 2004, unrealized losses in the investment securitiesportfolio related to debt securities totaled $208,437.  The unrealized losses on these debtsecurities arose due to changing interest rates and are considered to betemporary.  From the December 31, 2004table above 4 out of 5 securities issued by U.S. government agencies, 7 out of26 securities issued by municipalities, 19 out of 27 mortgage backed securitiesand the corporate security contained unrealized losses.  These unrealized losses are consideredtemporary because of acceptable investment grades on each security and therepayment sources of principal and interest are government backed.

 

The amortized cost and estimated fair value of securities available forsale at December 31, 2004, by contractual maturity, are shown below. Expectedmaturities will differ from contractual maturities because borrowers have theright to call or prepay obligations with or without call or prepaymentpenalties.

 
| ** **                  | ** ** | **Amortized   Cost** | ** ** | **Estimated   Fair Value** | ** ** |
|-----------------------------|------------|----------------------|------------|----------------------------|------------|
| Less than 1  year           |       | $                    | 7,008,193  |                       | $          | 6,987,540 |   |
| 1 to 5 years                |       | 500,000              |       | 498,600                    |       |
| 5 to 10  years              |       | 929,516              |       | 942,500                    |       |
| More than 10  years         |       | 9,776,383            |       | 9,897,893                  |       |
| Mortgage  backed securities |       | 16,781,330           |       | 16,712,823                 |       |
|                        |       |                 |       |                       |       |
|                        |       | $                    | 34,995,422 |                       | $          | 35,039,356 |   |

 

Proceeds from sales of investment securities in 2004, 2003 and 2002totaled $6,512,718, $17,163,553 and $12,908,000, respectively. Gross gains andlosses are as follows:

 

| ** **             | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross gains  on sales  |       | $          | 21,363     |       | $          | 156,224    |       | $ | 165,407 |   |
| Gross losses  on sales |       | (76,965    | )          | (72,527    | )          | (38,923    | )          |
| Gross gains  on calls  |       | 4,794      |       | 2,000      |       | 0          |       |
| Gross losses  on calls |       | 0          |       | 0          |       | (2,345     | )          |
| Net gains  (losses)    |       | $          | (50,808    | )          | $          | 85,697     |       | $ | 124,139 |   |

 

Securities with a carrying value of $10,835,241 and $18,932,326 atDecember 31, 2004 and 2003, respectively, were pledged to collateralize publicdeposits and for other purposes.

 

49

----

 

**(3)****                                 LOANS**

Major classifications of loans at December 31, 2004 and 2003 aresummarized as follows:

 

| ** **  | ** **                | **2004**    | ** ** | **2003**    | ** ** |
|-------------|---------------------------|-------------|------------|-------------|------------|
| ** **  | ** **                | ** **  | ** ** | ** **  | ** ** |
| Commercial  |                      | $           | 15,350,256 |        | $          | 11,705,627 |   |
| Real estate |                      | 170,093,157 |       | 133,597,470 |       |
| Consumer    |                      | 7,066,434   |       | 4,457,527   |       |
|        |                      |        |       |        |       |
|        |                      | 192,509,847 |       | 149,760,624 |       |
| Less:       | Allowance for loan losses |        | 2,654,334  |        | 2,131,752  |   |
|        | Net unearned loan fees    |        | 214,966    |        | 165,571    |   |
|        |                      |        |       |        |       |   |
|        | Net loans                 |        | $          | 189,640,547 |       | $ | 147,463,301 |   |

 

An analysis of theactivity in the allowance for loan losses is presented below:

 

| ** **                       | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  beginning of year    |       | $          | 2,131,752  |       | $          | 1,889,306  |       | $ | 1,114,411 |   |
| Provision  for loan losses       |       | 585,000    |       | 266,000    |       | 885,000    |       |
| Loans  charged off               |       | (83,995    | )          | (27,028    | )          | (111,198   | )          |
| Recoveries  on loans charged off |       | 21,577     |       | 3,474      |       | 1,093      |       |
|                             |       |       |       |       |       |       |       |
|                             |       | $          | 2,654,334  |       | $          | 2,131,752  |       | $ | 1,889,306 |   |

 

The Bank grants loans and extensions of credit to individuals and avariety of firms and corporations located primarily in Fayette, Coweta andother surrounding Georgia counties.  Asubstantial portion of the loan portfolio is collateralized by improved andunimproved real estate and is dependent upon the real estate market.

 

The Company originates certain fixed rate mortgage loans and commitsthese loans for sale.  The commitments tooriginate fixed rate mortgage loans and the commitments to sell these loans toa third party are both derivative contracts. These derivative contracts, which exactly and equally offset each other,are entered into simultaneously and therefore have no effect on the recordedamounts in the financial statements.

 

The Bank had $154,381and $100,680 of loans classified as impaired at December 31, 2004 and 2003respectively.

 

**(4)****                                 PREMISESAND EQUIPMENT**

Premises and equipment at December 31, 2004 and 2003, are summarized asfollows:

 

| ** **                                      | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Land                                            |       | $          | 1,995,062  |       | $          | 1,123,650 |   |
| Building                                        |       | 2,653,152  |       | 2,222,477  |       |
| Leasehold  improvements                         |       | 357,325    |       | 306,381    |       |
| Equipment,  furniture and vehicles              |       | 2,219,779  |       | 1,751,717  |       |
|                                            |       |       |       |       |       |
|                                            |       | 7,225,318  |       | 5,404,225  |       |
| Less  accumulated depreciation and amortization |       | 1,012,558  |       | 631,886    |       |
|                                            |       |       |       |       |       |
|                                            |       | $          | 6,212,760  |       | $          | 4,772,339 |   |

 

Depreciation expense and leasehold amortization were $380,672, $297,720and $155,393 for the years ended December 31, 2004, 2003 and 2002,respectively.

 

50

----

 

**(5)****                                 DEPOSITS**

At December 31, 2004, the scheduled maturities of time deposits are asfollows:

 

| 2005   |   | $          | 83,150,335  |   |
|--------|--------|------------|-------------|--------|
| 2006   |   | 27,481,378 |        |
| 2007   |   | 8,300,197  |        |
| 2008   |   | 6,821,289  |        |
| 2009   |   | 5,357,768  |        |
|   |   | $          | 131,110,967 |   |

 

The Bank had brokered time deposits at December 31, 2004 and 2003, ofapproximately $26,221,000 and $20,049,000, respectively.  Brokered time deposits at December 31, 2004had a weighted average interest rate of 2.64%.

 

**(6)****                                 JUNIORSUBORDINATED DEBENTURES**

On September 29, 2004,the Company issued, through a wholly owned Delaware statutory trust, GeorgiaBancshares Capital Trust I (the “Trust”), $6,500,000 of preferred beneficialinterests in the Company’s unsecured junior subordinated debentures (trustpreferred securities) that qualify as Tier I capital under Federal ReserveBoard guidelines within certain limitations. The Company owns all of the commonsecurities of the Trust. The proceeds from the issuance of the commonsecurities and the trust preferred securities were used by the Trust topurchase $6,702,000 of junior subordinated debentures of the Company, whichcarry a floating rate of interest adjusted every three months to thethree-month London Interbank Offered Rate (LIBOR) plus 2.60%.  At December 31, 2004, this rate was4.67%.  Of the proceeds received by theCompany from the sale of the junior subordinated debentures, $202,000 was usedfor the common securities of the Trust and $6,500,000 was used to strengthenthe capital position of the Bank to accommodate current and future growth. Thedebentures and related accrued interest represent the sole assets of the Trust.

 

Thetrust preferred securities accrue and pay distributions quarterly, at aninterest rate equal to the three-month LIBOR rate plus 2.60%. The Company hasentered into contractual arrangements which, taken collectively, fully andunconditionally guarantee payment of accrued and unpaid distributions requiredto be paid on the trust preferred securities, the redemption price with respectto any trust preferred securities called for redemption by the Trust, andpayments due upon a voluntary or involuntary dissolution, winding up, orliquidation of the Trust.

 

Thetrust preferred securities are mandatorily redeemable upon maturity of thedebentures on October 18, 2034, or upon earlier redemption as provided in theindenture. The Company has the right to redeem the debentures purchased by theTrust in whole or in part, on or after October 18, 2009. As specified in theindenture, if the debentures are redeemed prior to maturity, the redemptionprice will be the unpaid principal amount, plus any accrued unpaid interest.

 

51

----

 

**(7)**                                 **FHLB BORROWING AGREEMENT**

In 2003, the Bank entered into an agreement with the Federal Home LoanBank (“FHLB”) whereby the FHLB agreed to provide the Bank credit facilities.Any amounts advanced by the FHLB would be collateralized under a BlanketFloating Lien covering all of the Bank’s 1-4 family first mortgage loans andcommercial real estate loans. The Bank may draw advances up to 75% and 50%respectively, of the outstanding balance of these loans based on the agreementwith the FHLB.  Additionally, the FHLBallows for borrowing utilizing other assets as collateral such as investments,cash balances and other types of loans. At December 31, 2004, the Bank had $2 million in advances outstandingunder this facility with total collateral valued at $12,108,944.

 

**(8)****                                 INCOMETAXES**

The components of income tax expense for the years ended December 31,2004, 2003 and 2002 are as follows:

 

| ** **                     | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current                        |       | $          | 1,087,325  |       | $          | 692,388    |       | $ | 404,510 |   |
| Deferred                       |       | (146,124   | )          | (10,914    | )          | (178,010   | )          |
| Change in  valuation allowance |       | (52,201    | )          | 48,526     |       | 0          |       |
|                           |       |       |       |       |       |       |       |
|                           |       | $          | 889,000    |       | $          | 730,000    |       | $ | 226,500 |   |

 

The difference between income tax expense and the amount computed byapplying the statutory federal income tax rate to income before taxes for theyears ended December 31, 2004, 2003 and 2002 are as follows:

 

| ** **                           | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pretax  income at statutory rate     |       | $          | 929,944    |       | $          | 698,036    |       | $ | 278,267 |   |
| Add:                                 |       |       |       |       |       |       |       |
| Tax exempt  income                   |       | (114,831   | )          | (81,127    | )          | (64,312    | )          |
| Other,  primarily state income taxes |       | 73,887     |       | 113,091    |       | 12,545     |       |
|                                 |       |       |       |       |       |       |       |
|                                 |       | $          | 889,000    |       | $          | 730,000    |       | $ | 226,500 |   |

 

The following summarizes the sources and expected tax consequences offuture taxable deductions (income), which comprise the net deferred taxes atDecember 31, 2004 and 2003.

 
| ** **                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred  income tax assets:                              |       |     |       |     |       |
| Allowance  for loan losses                                |       | $        | 908,012    |     | $          | 722,810 |   |
| Net  unrealized losses on investment securities           |       | 0        |       | 29,793   |       |
| Other                                                     |       | 4,277    |       | 2,880    |       |
|                                                      |       |     |       |     |       |
| Total gross  deferred income tax assets                   |       | 912,289  |       | 755,483  |       |
| Deferred  income tax liabilities:                         |       |     |       |     |       |
| Premises and  equipment                                   |       | (255,358 | )          | (214,883 | )          |
| Net unrealized gains on investment  securities            |       | (16,695  | )          | 0        |       |
|                                                      |       |     |       |     |       |
| Total gross  deferred income tax liabilities              |       | (272,053 | )          | (214,883 | )          |
|                                                      |       |     |       |     |       |
| Net deferred  income tax asset before valuation allowance |       | 640,236  |       | 540,600  |       |
|                                                      |       |     |       |     |       |
| Valuation  allowance                                      |       | 0        |       | (52,201  | )          |
|                                                      |       |     |       |     |       |
| Net deferred  income tax asset                            |       | $        | 640,236    |     | $          | 488,399 |   |

 

52

----

 

**(9)****                                 EMPLOYEEAND DIRECTOR BENEFIT PROGRAMS**

The Company has a 2001 Stock Incentive Plan (the “Plan”) wherebycertain stock-based rights, such as stock options, may be granted to eligibledirectors and employees.  The number ofshares issuable under the Plan is equal to 15% of the outstanding shares ofstock of the Company, or 443,153 shares at December 31, 2004.

 

Under the Plan, the Company granted incentive stock options to certaineligible employees in order that they may purchase Company stock at a priceequal to the fair market value on the date of the grant.  All options granted vest over a four-yearperiod.  All options expire after tenyears.  A summary of the activity in thePlan is presented below:

 
| ** **                      | ** ** | **2004**   | ** ** | **2003**                                        | ** ** | **2002**   | ** ** |
|---------------------------------|------------|------------|------------|-------------------------------------------------|------------|------------|------------|
| ** **                      | ** ** | **Shares** | ** ** | **Weighted  Average  Option  Price  Per Share** | ** ** | **Shares** | ** ** | **Weighted  Average  Option  Price  Per Share** | ** ** | **Shares** | ** ** | **Weighted  Average  Option  Price  Per Share** | ** ** |
|                            |       |       |       |                                            |       |       |       |   |   |   |   |   |   |
| Outstanding,  beginning of year |       | 187,264    |       | $                                               | 7.55       |       | 186,806    |   | $ | 6.65 |   | 98,436 |   | $ | 5.40 |   |
| Granted  during the year        |       | 200,275    |       | $                                               | 14.20      |       | 29,131     |   | $ | 12.61 |   | 90,702 |   | $ | 8.00 |   |
| Forfeited  during the year      |       | (16,269    | )          | $                                               | 9.22       |       | (14,354    | ) | $ | 7.07 |   | (2,332 | ) | $ | 6.69 |   |
| Exercised  during the year      |       | (4,142     | )          | $                                               | 8.20       |       | (14,319    | ) | $ | 6.49 |   | 0 |   | — |   |
|                            |       |       |       |                                            |       |       |       |   |   |   |   |   |   |
| Outstanding,  end of year       |       | 367,128    |       | $                                               | 11.10      |       | 187,264    |   | $ | 7.55 |   | 186,806 |   | $ | 6.65 |   |
|                            |       |       |       |                                            |       |       |       |   |   |   |   |   |   |
| Number of  shares exercisable   |       | 98,190     |       | $                                               | 6.70       |       | 60,334     |   | $ | 6.24 |   | 24,316 |   | $ | 5.40 |   |

 

Options outstanding at December 31, 2004 are exercisable at optionprices ranging from $5.40 to $15.00, as presented in the table below.  Such options have a weighted averageremaining contractual life of approximately eight years.

 
| ** **                    | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                               | ** ** |
|-------------------------------|------------|-------------------------|------------|-------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Shares  Outstanding** | ** ** | **Weighted-   Average  Remaining  Contractual  Life** | ** ** | **Weighted-   Average  Exercise  Price** | ** ** | **Shares  Exercisable** | ** ** | **Weighted-   Average  Exercise  Price** | ** ** |
|                          |       |                    |       |                                                  |       |   |   |   |   |   |   |
| $5.40 - $8.00                 |       | 143,086                 |       | 7 years                                               |       | $ | 6.53 |   | 91,830 |   | $ | 6.28 |   |
| $11.60 - $15.00               |       | 224,042                 |       | 9 years                                               |       | $ | 14.04 |   | 6,360 |   | $ | 12.76 |   |
| Outstanding at end of year    |       | 367,128                 |       | 8 years                                               |       | $ | 11.10 |   | 98,190 |   | $ | 6.70 |   |

 

The Company sponsors a defined contribution plan, intended to complywith the requirements of section 401(k) of the Internal Revenue Code, coveringsubstantially all employees subject to certain minimum age and servicerequirements.  Contributions to the planare made each payroll period and are approved annually by the Board ofDirectors.  The Company matched eachparticipant’s contributions up to 6% of the participant’s eligiblecompensation, which amounted to $146,705, $90,409 and $35,048 in 2004, 2003 and2002, respectively.

 

**(10)****                          SHAREHOLDERS’EQUITY**

In consideration of their efforts in organizing the Bank and theircommitment to serve as its initial directors, the organizers received warrantsentitling each of them, for each share purchased by the organizer in theinitial stock offering, to purchase at any time before February 18, 2010, anadditional share of common stock at the offering price of $10, which adjustedfor subsequent stock splits now equals $5.12. Rights to purchase 680,015 (adjusted for stock splits)

 

53

----

 

shares were granted to the organizers. At December 31, 2004 rights to purchase 582,359 shares remainedoutstanding.  Organizers may not sell orotherwise transfer the warrants without the prior written consent of theCompany.

 

54

----

 

The warrants were not immediately exercisable.  The right to exercise the warrants vestedwith respect to one-third of the warrant shares per year and all were fullyvested by September 9, 2002.  The Companyhas the right, upon notice from its regulators that the Bank is capitaldeficient, to require each organizer to exercise or forfeit all of his/herwarrants within a specified deadline of the Company’s call for the exercise ofthe warrants.

 

The consolidated balance sheet as of December 31, 2003, reflects aliability of $369,250 described as “Stock purchase obligation.”  This amount was recorded in 2001 followingthe dissention by a minority shareholder to the plan of share exchange torecognize the bank into a holding company structure.  On April 12, 2004, an order was received fromthe court establishing the aggregate principal sum of $657,730 to be paid tothe dissenting shareholder.  This amountwas paid on April 13, 2004.  The impactof this settlement on the consolidated balance sheet of the Company was theelimination of the $369,250 stock purchase obligation liability and a reductionof common stock in the amount of the differential, $288,480.

 

**(11)****                          DIVIDENDRESTRICTIONS**

Dividends paid by the Bank are the primary source of funds available tothe Company.  Banking regulations limitthe amount of dividends that may be paid without prior approval of theregulatory authorities.  The amount ofdividends the Bank may pay in 2005 without prior approval is approximately$1,011,000.

 

**(12)****                          REGULATORYMATTERS**

The Company and the Bank are subject to various regulatory capitalrequirements administered by the federal banking agencies. Failure to meetminimum capital requirements can initiate certain mandatory - and possiblyadditional discretionary - actions by regulators that, if undertaken, couldhave a direct material effect on the Company’s financial statements. Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Company and the Bank must meet specific capital guidelines thatinvolve quantitative measures of assets, liabilities, and certainoff-balance-sheet items as calculated under regulatory accounting practices.Capital amounts and classification are also subject to qualitative judgments bythe regulators about components, risk weightings, and other factors.

 

Quantitative measures established by regulations to ensure capitaladequacy require the Company and the Bank to maintain minimum amounts andratios (set forth in the table below) of total and Tier I capital (as definedin the regulations) to risk-weighted assets (as defined), and of Tier I capital(as defined) to average assets (as defined). Management believes, as ofDecember 31, 2004 and 2003, that the Company and the Bank met all capitaladequacy requirements to which they are subject.

 

As of December 31, 2004, the most recent regulatory notificationcategorized the Bank as well capitalized under the regulatory framework forprompt corrective action.  To becategorized as well capitalized the Bank must maintain minimum totalrisk-based, Tier I risk-based, and Tier I leverage ratios as set forth in thetable.

 

Actual capital amounts and ratios are also presented in the table(amounts presented in thousands).

 

55

----

 
| ** **                                         | ** ** | **Actual** | ** ** | **For Capital  Adequacy  Purposes** | ** ** | **To be  Well Capitalized** | ** ** |
|----------------------------------------------------|------------|------------|------------|-------------------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **Amount** | ** ** | **Ratio**                           | ** ** | **Amount**                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **As of December 31, 2004:**                       |       |       |       |                                |       |                        |       |   |   |   |   |   |   |
| Total  Risk-Based Capital to Risk-Weighted Assets: |       |       |       |                                |       |                        |       |   |   |   |   |   |   |
| Consolidated                                       |       | $          | 30,233     |                                | 13.65%     |                        | $          | 17,723 |   | 8.00% |   | N/A |   | N/A |   |
| Bank                                               |       | $          | 29,001     |                                | 13.16%     |                        | $          | 17,630 |   | 8.00% |   | $ | 22,037 |   | 10.00% |   |
|                                               |       |       |       |                                |       |                        |       |   |   |   |   |   |   |   |   |   |
| Tier I  Capital to Risk-Weighted Assets:           |       |       |       |                                |       |                        |       |   |   |   |   |   |   |
| Consolidated                                       |       | $          | 27,579     |                                | 12.45%     |                        | $          | 8,861 |   | 4.00% |   | N/A |   | N/A |   |
| Bank                                               |       | $          | 26,347     |                                | 11.96%     |                        | $          | 8,815 |   | 4.00% |   | $ | 13,222 |   | 6.00% |   |
|                                               |       |       |       |                                |       |                        |       |   |   |   |   |   |   |   |   |   |
| Tier I  Capital to Average Assets                  |       |       |       |                                |       |                        |       |   |   |   |   |   |   |
| Consolidated                                       |       | $          | 27,579     |                                | 9.94%      |                        | $          | 11,098 |   | 4.00% |   | N/A |   | N/A |   |
| Bank                                               |       | $          | 26,347     |                                | 10.55%     |                        | $          | 9,992 |   | 4.00% |   | $ | 12,490 |   | 5.00% |   |
|                                               |       |       |       |                                |       |                        |       |   |   |   |   |   |   |   |   |   |
| **As of December 31, 2003:**                       |       |       |       |                                |       |                        |       |   |   |   |   |   |   |
| Total  Risk-Based Capital to Risk-Weighted Assets: |       |       |       |                                |       |                        |       |   |   |   |   |   |   |
| Consolidated                                       |       | $          | 21,453     |                                | 12.36%     |                        | $          | 13,881 |   | 8.00% |   | N/A |   | N/A |   |
| Bank                                               |       | $          | 17,957     |                                | 10.41%     |                        | $          | 13,805 |   | 8.00% |   | $ | 17,256 |   | 10.00% |   |
|                                               |       |       |       |                                |       |                        |       |   |   |   |   |   |   |   |   |   |
| Tier I  Capital to Risk-Weighted Assets:           |       |       |       |                                |       |                        |       |   |   |   |   |   |   |
| Consolidated                                       |       | $          | 19,321     |                                | 11.13%     |                        | $          | 6,941 |   | 4.00% |   | N/A |   | N/A |   |
| Bank                                               |       | $          | 15,825     |                                | 9.17%      |                        | $          | 6,902 |   | 4.00% |   | $ | 10,354 |   | 6.00% |   |
|                                               |       |       |       |                                |       |                        |       |   |   |   |   |   |   |   |   |   |
| Tier I  Capital to Average Assets:                 |       |       |       |                                |       |                        |       |   |   |   |   |   |   |
| Consolidated                                       |       | $          | 19,321     |                                | 10.38%     |                        | $          | 7,444 |   | 4.00% |   | N/A |   | N/A |   |
| Bank                                               |       | $          | 15,825     |                                | 8.54%      |                        | $          | 7,415 |   | 4.00% |   | $ | 9,269 |   | 5.00% |   |

 

**(13)****                          MISCELLANEOUSOPERATING EXPENSES**

Components of other operating expenses whichare greater than 1% of interest income and other operating income are asfollows: 

 

| ** **                | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|---------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Legal and accounting fees |       | $          | 221,153    |       | $          | 166,517    |       | $ | 151,264 |   |
| Business development      |       | $          | 153,688    |       | $          | 113,880    |       | $ | 59,698 |   |
| Supplies                  |       | $          | 124,424    |       | $          | 127,688    |       | $ | 99,483 |   |

 

**(14)****                          RELATED PARTYTRANSACTIONS**

The Bank conducts transactions with directors and executive officers,including companies in which they have beneficial interest, in the normalcourse of business. It is the policy of the Bank that loan transactions withdirectors and executive officers be made on substantially the same terms asthose prevailing at the time for comparable loans to other persons. Thefollowing is a summary of activity for related party loans for 2004:

 

| Beginning  balance |   | $          | 1,928,118 |   |
|--------------------|--------|------------|-----------|--------|
| Loans  advanced    |   | 3,016,925  |      |
| Repayments         |   | (2,965,658 | )         |
|               |   |       |      |
| Ending  balance    |   | $          | 1,979,385 |   |

 

56

----

 

The aggregate amount of deposits of directors and executive officersand their affiliates amounted to $4,532,297 and $2,273,811 at December 31, 2004and 2003, respectively.

 

57

----

 

**(15)****                          COMMITMENTS**

The Bank is a party to financial instruments with off-balance-sheetrisk in the normal course of business to meet the financing needs of its customers.These financial instruments could include commitments to extend credit, standbyletters of credit and financial guarantees. Those instruments involve, tovarying degrees, elements of credit risk in excess of the amount recognized inthe balance sheet. The contract amounts of those instruments reflect the extentof involvement the Bank has in particular classes of financial instruments.

 

The exposure to credit loss in the event of nonperformance by the otherparty to the financial instrument for commitments to extend credit and standbyletters of credit and financial guarantees written is represented by thecontractual amount of those instruments. The Bank uses the same credit policiesin making commitments and conditional obligations as it does for on-balance-sheetinstruments.

 

In most cases, the Bank requires collateral or other security tosupport financial instruments with credit risk.

 
| ** **                                                           | ** ** | **Approximate   Contract Amount** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                           | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| Financial  instruments whose contract amounts represent credit risk: |       |                              |       |   |   |
| Commitments  to extend credit                                        |       | $                                 | 34,864,762 |   | $ | 38,498,728 |   |
| Standby  letters of credit                                           |       | $                                 | 2,452,472  |   | $ | 666,974 |   |

 

Commitments to extend credit are agreements to lend to a customer, aslong as there is no violation of any condition established in the contract.Commitments generally have fixed expiration dates or other termination clausesand may require payment of a fee. Since many of the commitments may expirewithout being drawn upon, the total commitment amounts do not necessarilyrepresent future cash requirements. The Bank evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained, ifdeemed necessary by the Bank, upon extension of credit is based on management’scredit evaluation. Collateral held varies but may include unimproved andimproved real estate, certificates of deposit, or personal property.

 

Standby letters of credit and financial guarantees written areconditional commitments issued by the Bank to guarantee the performance of acustomer to a third party. Those guarantees are primarily issued to localbusinesses. The credit risk involved in issuing letters of credit isessentially the same as that involved in extending loan facilities tocustomers.

 

The Bank has obtained lines of credit available with correspondentbanks to purchase federal funds.  AtDecember 31, 2004, unused lines of credit totaled $9,200,000.

 

The Company leases various office space for banking facilities underoperating lease arrangements.  Futureminimum lease payments required for all operating leases having a remainingterm in excess of one year at December 31, 2004 are as follows:

 

| 2005                      |   | $      | 84,000  |   |
|---------------------------|--------|--------|---------|--------|
| 2006                      |   | 66,000 |    |
| 2007                      |   | 34,500 |    |
| 2008                      |   | 30,000 |    |
|                      |   |   |    |
| Total  minimum obligation |   | $      | 214,500 |   |

 

Total rent expense was $72,000, $37,133 and $37,342  for 2004, 2003 and 2002, repectively.

 

58

----

 

**(16)****                          FAIRVALUE OF FINANCIAL INSTRUMENTS**

The assumptions used in the estimation of the fair value of the Company’sfinancial instruments are detailed below. Where quoted prices are notavailable, fair values are based on estimates using discounted cash flows andother valuation techniques. The use of discounted cash flows can besignificantly affected by the assumptions used, including the discount rate andestimates of future cash flows. The following disclosures should not beconsidered a surrogate of the liquidation value of the Company, but rather agood-faith estimate of the increase or decrease in value of financialinstruments held by the Company since purchase, origination or issuance.

 

Cash and Cash Equivalents

For cash, due from banks, interest-bearing deposits in other banks andfederal funds sold, the carrying amount is a reasonable estimate of fair value.

 

Securities Available-for-Sale

Fair values for securities available-for-sale are based on quotedmarket prices.

 

Other Investments

The carrying value of other investments approximates fair value.

 

Loans

The fair value of fixed rate loans is estimated by discounting thefuture cash flows using the current rates at which similar loans would be madeto borrowers with similar credit ratings. For variable rate loans, the carryingamount is a reasonable estimate of fair value.

 

Bank Owned Life Insurance

The carrying value of bank owned life insurance reasonably approximatesits fair value.

 

Deposits

The fair value of demand deposits, savings accounts, NOW accounts andmoney market deposits is the amount payable on demand at the reporting date.The fair value of fixed maturity certificates of deposit is estimated bydiscounting the future cash flows using current rates at which comparablecertificates would be issued.

 

Securities Sold Under Agreements to Repurchase

The carrying value of securities sold under agreements to repurchaseapproximates fair value.

 

Federal Funds Purchased

The carrying value of federal funds purchased approximates fair value.

 

FHLB Advances

The fair value of FHLB advances is estimated based upon discountedfuture cash flows using a discount rate comparable to the current market ratefor such borrowings.

 

Junior Subordinated Debentures

Because the junior subordinated debentures carry a variable interestrate that reprices frequently, their carrying value approximates fair value.

 

Commitments to Extend Credit and Standby Letters ofCredit 

Because commitments to extend credit and standby letters of credit aremade using variable rates and have short maturities, the carrying value and thefair value are immaterial.

 

Limitations

Fair value estimates are made at a specific point in time, based onrelevant market information and information about the financial instrument.These estimates do not reflect any premium or discount that could result fromoffering for sale at one time the Company’s entire holdings of a particular financialinstrument. Because no market exists for a significant portion of the Company’sfinancial instruments, fair value estimates are based on

 

59

----

 

many judgments. These estimates are subjective in nature and involveuncertainties and matters of significant judgment and therefore cannot bedetermined with precision. Changes in assumptions could significantly affectthe estimates.

 

60

----

 

Fair value estimates are based on existing on- and off-balance-sheetfinancial instruments without attempting to estimate the value of anticipatedfuture business and the value of assets and liabilities that are not consideredfinancial instruments. Significant assets and liabilities that are notconsidered financial instruments include, deferred income taxes and premisesand equipment. In addition, the tax ramifications related to the realization ofthe unrealized gains and losses can have a significant effect on fair valueestimates and have not been considered in the estimates.

 

The carrying amount and estimated fair values (in thousands) of theCompany’s financial instruments at December 31,2004 and 2003 are as follows:

 
| ** **                                      | ** ** | **2004**             | ** ** | **2003**                  | ** ** |
|-------------------------------------------------|------------|----------------------|------------|---------------------------|------------|
| ** **                                      | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair Value** | ** ** |
| **Assets:**                                     |       |                 |       |                      |       |   |   |   |   |
| Cash and  cash equivalents                      |       | $                    | 9,747      |                      | $          | 9,747 |   | $ | 15,433 |   | $ | 15,433 |   |
| Securities  available-for-sale                  |       | $                    | 35,039     |                      | $          | 35,039 |   | $ | 34,148 |   | $ | 34,148 |   |
| Other  securities                               |       | $                    | 1,540      |                      | $          | 1,540 |   | $ | 1,358 |   | $ | 1,358 |   |
| Loans, net                                      |       | $                    | 189,641    |                      | $          | 189,419 |   | $ | 147,463 |   | $ | 147,912 |   |
| Bank owned life insurance                       |       | $                    | 4,715      |                      | $          | 4,715 |   | $ | 0 |   | $ | 0 |   |
|                                            |       |                 |       |                      |       |   |   |   |   |
| **Liabilities:**                                |       |                 |       |                      |       |   |   |   |   |
| Deposits                                        |       | $                    | 212,258    |                      | $          | 212,857 |   | $ | 181,968 |   | $ | 183,743 |   |
| Securities  sold under agreements to repurchase |       | $                    | 529        |                      | $          | 529 |   | $ | 670 |   | $ | 670 |   |
| Federal  funds purchased                        |       | $                    | 5,500      |                      | $          | 5,500 |   | $ | 0 |   | $ | 0 |   |
| Federal Home  Loan Bank advances                |       | $                    | 2,000      |                      | $          | 1,998 |   | $ | 2,000 |   | $ | 1,996 |   |
| Junior  subordinated debentures                 |       | $                    | 6,702      |                      | $          | 6,702 |   | $ | 0 |   | $ | 0 |   |
|                                                 |            |                      |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |

 

61

----

 

**(17)****                          CONDENSEDFINANCIAL INFORMATION OF GEORGIA BANCSHARES, INC.**

** **

**CONDENSED BALANCE SHEETS**

**as of December 31, 2004 and 2003**

 
| ** **                                      | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
| Assets                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash                                            |       | $          | 345,651    |       | $          | 2,542,486 |   |
| Investment in subsidiary                        |       | 26,373,758 |       | 15,766,929 |       |
| Other investments                               |       | 1,158,900  |       | 956,900    |       |
|                                            |       |       |       |       |       |
| Total assets                                    |       | $          | 27,878,309 |       | $          | 19,266,315 |   |
|                                            |       |       |       |       |       |
| Liabilities  and Shareholders’ Equity      |       |       |       |       |       |
|                                            |       |       |       |       |       |
| Junior subordinated debentures                  |       | $          | 6,702,000  |       | $          | 0 |   |
| Other liabilities                               |       | 70,126     |       | 3,500      |       |
| Total liabilities                               |       | 6,772,126  |       | 3,500      |       |
|                                            |       |       |       |       |       |
| Shareholders’ equity                       |       | 21,106,183 |       | 19,262,815 |       |
|                                            |       |       |       |       |       |
| Total liabilities and shareholders’ equity |       | $          | 27,878,309 |       | $          | 19,266,315 |   |

 

**CONDENSED STATEMENTS OF EARNINGS**

**for the year ended December 31, 2004, 2003and 2002**

 
| ** **                                                                                | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Income:                                                                                   |       |      |       |      |       |      |       |
| Interest income from bank subsidiary                                                      |       | $         | 15,305     |      | $          | 47,213    |       | $ | 80,856 |   |
| Interest and dividends on investments                                                     |       | 5,660     |       | 0         |       | 0         |       |
| Total income                                                                              |       | 20,965    |       | 47,213    |       | 80,856    |       |
|                                                                                      |       |      |       |      |       |      |       |
| Expenses:                                                                                 |       |      |       |      |       |      |       |
| Interest expense                                                                          |       | 80,883    |       | 0         |       | 3,385     |       |
| Legal and accounting                                                                      |       | 71,236    |       | 46,210    |       | 13,059    |       |
| Other expenses                                                                            |       | 44,475    |       | 47,016    |       | 23,610    |       |
| Total expenses                                                                            |       | 196,594   |       | 93,226    |       | 40,054    |       |
|                                                                                      |       |      |       |      |       |      |       |
| Income (loss) before income taxes and equity  in undistributed net earnings of subsidiary |       | (175,629  | )          | (46,013   | )          | 40,802    |       |
|                                                                                      |       |      |       |      |       |      |       |
| Income taxes                                                                              |       | 0         |       | 0         |       | 8,500     |       |
|                                                                                      |       |      |       |      |       |      |       |
| Income (loss) before equity in  undistributed net earnings of subsidiary                  |       | (175,629  | )          | (46,013   | )          | 32,302    |       |
|                                                                                      |       |      |       |      |       |      |       |
| Equity in undistributed net earnings of  subsidiary                                       |       | 2,021,757 |       | 1,369,060 |       | 559,631   |       |
|                                                                                      |       |      |       |      |       |      |       |
| Net earnings                                                                              |       | $         | 1,846,128  |      | $          | 1,323,047 |       | $ | 591,933 |   |
|                                                                                           |            |           |            |           |            |           |            |  |  |  |  |  |  |

 

62

----

 

 

**CONDENSED STATEMENTS OF CASH FLOWS**

**for the year ended December 31, 2004, 2003and 2002**

 
| ** **                                                                                     | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Cash flows from operating activities:                                                          |       |       |       |       |       |       |       |
| Net earnings                                                                                   |       | $          | 1,846,128  |       | $          | 1,323,047  |       | $ | 591,933 |   |
| Adjustments to reconcile net earnings to  net cash provided by (used in) operating activities: |       |       |       |       |       |       |       |
| Equity in undistributed net earnings of  subsidiary                                            |       | (2,021,757 | )          | (1,369,060 | )          | (559,631   | )          |
| Other operating activities                                                                     |       | 66,626     |       | (5,000     | )          | 49,674     |       |
|                                                                                           |       |       |       |       |       |       |       |
| Net cash provided by (used in) operating  activities                                           |       | (109,003   | )          | (51,013    | )          | 81,976     |       |
|                                                                                           |       |       |       |       |       |       |       |
| Cash flows from investing activities:                                                          |       |       |       |       |       |       |       |
| Capital infusion to subsidiary                                                                 |       | (8,500,000 | )          | (500,000   | )          | (2,500,000 | )          |
| Purchase of other investments                                                                  |       | (202,000   | )          | (650,900   | )          | 0          |       |
| Payments on other borrowings                                                                   |       | 0          |       | 0          |       | (400,000   | )          |
|                                                                                           |       |       |       |       |       |       |       |
| Net cash used in investing activities                                                          |       | (8,702,000 | )          | (1,150,900 | )          | (2,900,000 | )          |
|                                                                                           |       |       |       |       |       |       |       |
| Cash flows from financing activities:                                                          |       |       |       |       |       |       |       |
| Proceeds from junior subordinated  debentures                                                  |       | 6,702,000  |       | 0          |       | 0          |       |
| Net proceeds of stock offering                                                                 |       | 0          |       | 0          |       | 6,459,454  |       |
| Proceeds from exercise of warrants and  options                                                |       | 200,648    |       | 92,973     |       | 0          |       |
| Payments on fractional shares                                                                  |       | 0          |       | (4,517     | )          | 0          |       |
| Proceeds from sale of treasury stock                                                           |       | 0          |       | 42,185     |       | 200        |       |
| Purchase of treasury stock                                                                     |       | 0          |       | (42,867    | )          | (1,772     | )          |
| Settlement of stock purchase obligation                                                        |       | (288,480   | )          | 0          |       | 0          |       |
|                                                                                           |       |       |       |       |       |       |       |
| Net cash provided by financing activities                                                      |       | 6,614,168  |       | 87,774     |       | 6,457,882  |       |
|                                                                                           |       |       |       |       |       |       |       |
| Net increase in cash                                                                           |       | (2,196,835 | )          | (1,114,139 | )          | 3,639,858  |       |
|                                                                                           |       |       |       |       |       |       |       |
| Cash at beginning of year                                                                      |       | 2,542,486  |       | 3,656,625  |       | 16,767     |       |
|                                                                                           |       |       |       |       |       |       |       |
| Cash at end of year                                                                            |       | $          | 345,651    |       | $          | 2,542,486  |       | $ | 3,656,625 |   |

 

63

----

 

**Item 9.****           Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A.  Controls and Procedures**

 

As of the end of theperiod covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as defined in Exchange Act Rule13a-15(e).  Based upon that evaluation,our Chief Executive Officer and Chief Financial Officer have concluded that ourcurrent disclosure controls and procedures are effective as of December 31,2004.

 

The design of any systemof controls and procedures is based in part upon certain assumptions about thelikelihood of future events.  There canbe no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions, regardless of how remote.

 

**Item 9B.  Other Information**

 

There is no information required to be disclosed in a report on Form8-K during the fourth quarter of 2004 that has not been reported.

 

**PART III**

 

Someinformation required by Part III is omitted from this annual report because wewill file a definitive proxy statement pursuant to Regulation 14A of theSecurities Exchange Act of 1934 not later than 120 days after the end of thefinancial year covered by this annual report, and this information isincorporated herein by reference into this annual report.

 

**Item 10.****    Directors, Executive Officers, Promoters andControl Persons; Compliance with Section 16(a) of the Exchange Act**

 

The information required by this item isincorporated herein by reference from our proxy statement for the annualmeeting of shareholders to be held on May 11, 2005.

 

**Item 11.****    Executive Compensation**

 

The information required by this item isincorporated herein by reference from our proxy statement for the annual meetingof shareholders to be held on May 11, 2005.

 

**Item 12. Security Ownership of Certain Beneficial Owners and Management**

 

The information required by this item isincorporated herein by reference from our proxy statement for the annualmeeting of shareholders to be held on May 11, 2005.

 

**Item 13. Certain Relationships and Related Transactions**

 

The information required by this item isincorporated herein by reference from our proxy statement for the annualmeeting of shareholders to be held on May 11, 2005.

 

**Item 14. Principal Accountant Fees and Services**

 

The information required by this item is incorporated herein byreference from our proxy statement for the annual meeting of shareholders to beheld on May 11, 2005.

 

64

----

 

**Item 15.****    Exhibit and Financial Statement Schedules**

 

(a)                                  (1)List of All Financial Statements.  Thefollowing consolidated financial statements and report of independent certifiedpublic accountants of Georgia Bancshares are included in this Annual Report onForm 10-K:

 

•                  Independent Auditors’Reports

 

•                  ConsolidatedBalance Sheets as of December 31, 2004 and 2003

 

•                  ConsolidatedStatements of Operations for the Years Ended December 31, 2004, 2003, and 2002

 

•                  ConsolidatedStatements of Shareholders’ Equity for the Years Ended December 31, 2004, 2003and 2002

 

•                  ConsolidatedStatements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002

 

•                  Notes toConsolidated Financial Statements

 

(a)                                  (2)  The financial statement schedules are eitherincluded in the financial statements or are not applicable

 

(a)                                  (3)  Exhibits Required by Item 601.  The following exhibits are attached hereto orincorporated by reference herein                         (numbered tocorrespond to Item 601(a) of Regulation S-K, as promulgated by the Securitiesand Exchange                                                                                     Commmission):

 

3.1                                 Articlesof Incorporation of the Company (incorporated by reference to Exhibit 3.1 ofthe Company’s Registration Statement on Form SB-2, File No. 333-74710).

 

3.2                                 Bylawsof the Company (incorporated by reference to Exhibit 3.2 of the Company’sRegistration Statement on Form SB-2, File No. 333-74710).

 

4.1                                 SeeExhibits 3.1 and 3.2 for provisions in Georgia Bancshares’ Articles ofIncorporation and Bylaws defining the rights of holders of the common stock.

 

4.2                                 Formof certificate of common stock (incorporated by reference to Exhibit 4.2 of theCompany’s Registration Statement on Form SB-2, File No. 333-74710).

 

4.3                                 GeorgiaBancshares, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit10.1 of the Company’s Registration Statement on Form SB-2; File No. 333-74710).

 

4.4                                 Formof Warrant Agreement (incorporated by reference to Exhibit 10.2 of the Company’sRegistration Statement on Form SB-2; File No. 333-74710).

 

4.5                                 Formof First Amendment to Warrant Agreement (incorporated by reference to Exhibit10.3 of the Company’s Registration Statement on Form SB-2; File No. 333-74710).

 

4.6                                 Formof Second Amendment to Warrant Agreement (incorporated by reference to Exhibit10.4 of the Company’s Registration Statement on Form SB-2; File No. 333-74710).

 

4.7                                 Formof Third Amendment to Warrant Agreement. (incorporated by reference to Exhibit4.7 of the Second Amendment to the Company's Annual Report on Form 10-KSB forthe year ended December 31, 2002; File No. 333-74710)

 

5.1                                 OpinionRegarding Legality (incorporated by reference to Exhibit 5.1 of theRegistration Statement on Form SB-2, File No. 333-74710).

 

10.1                           Real Estate Agreement dated June 1, 1999 between The Bank of Georgia and Charles B. Miles & S. Reid Hutchings (incorporated by reference to Exhibit 10.5 of the Company’s Registration Statement on Form SB-2; File No. 333-74710).

 

65

 

10.2                           Guarantee Agreement between the Company and Wilmington Trust Company, dated September 29, 2004 (incorporated by reference to Exhibit 10.1 of the Company’s Report of Form 8-K; File No. 000-50188)

 

10.3                           Amended and Restated Trust Agreement among the Company, Wilmington Trust Company and certain administrative trustees, dated September 29, 2004 (incorporated by reference to Exhibit 10.2 of the Company’s Report on Form 8-K; File No. 000-50188)

 

21                                    Subsidiaries.

 

23.1                           Consentof Porter Keadle Moore, LLP.

 

23.2                           Consentof Abbott, Jordan & Koon, LLC.

 

24                                    Powerof Attorney (contained on signature page hereof).

 

31.1                           Certificationof the Chief Executive Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

 

31.2                           Certificationof the Chief Financial Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

 

32                                    Certificationsof Chief Executive Officer and Chief Financial Officer pursuant to Section 906of the Sarbanes-Oxley Act of 2002.  Thisexhibit is not “filed” for purposes of Section 18 of the Securities ExchangeAct of 1934 but is instead furnished as provided by applicable rules of theSecurities and Exchange Commission.

 

66

----

 

**SIGNATURES**

 

Pursuant tothe 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 theundersigned, thereunto duly authorized.

 
|   | **GEORGIA BANCSHARES, INC.** |
|--------|------------------------------|
|   |                         |   |
| Date:  |   March 29, 2005   |   | By: | /s/ Ira P. Shepherd, III |   |
|   |                         | Ira P. Shepherd, III |
|   |                         | President and Chief Executive Officer |
|        |                              |  |  |  |  |

 

KNOW ALL MENBY THESE PRESENTS, that each person whose signature appears below constitutesand appoints Ira P. Shepherd, III, his true and lawful attorney-in-fact andagent, with full power of substitution and resubstitution, for him and in hisname, place and stead, in any and all capacities, to sign any and allamendments to this Annual Report on Form 10-KSB, and to file the same, with allexhibits thereto, and other documents in connection therewith, with theSecurities and Exchange Commission, granting unto attorney-in-fact and agentfull power and authority to do and perform each and every act and thingrequisite or necessary to be done in and about the premises, as fully to allintents and purposes as he might or could do in person, hereby ratifying andconfirming all that attorney-in-fact and agent, or his substitute orsubstitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant in thecapacities and on the dates indicated.

 
| **Signatures**                 | ** ** | **Title**                                                                         | ** ** | **Date**       |
|--------------------------------|------------|-----------------------------------------------------------------------------------|------------|----------------|
|                           |       |                                                                              |       |           |
|  /s/ Ira P. Shepherd, III |       |                                                                              |       |           |   |
| Ira P. Shepherd, III           |       | President, Chief Executive Officer *(principal  executive officer)*, and Director |       | March 29, 2005 |
|                           |       |                                                                              |       |           |
|  /s/ C. Lynn Gable        |       |                                                                              |       |           |   |
| C. Lynn Gable                  |       | Chief Financial Officer (*principal accounting and  financial officer)*           |       | March 29, 2005 |
|                           |       |                                                                              |       |
|                           |       |                                                                              |       |           |
|  /s/ Arlie C. Aukerman    |       |                                                                              |       |           |   |
| Arlie C. Aukerman              |       | Director                                                                          |       | March 29, 2005 |
|                           |       |                                                                              |       |
|                           |       |                                                                              |       |           |
|  /s/ Joseph S. Black      |       |                                                                              |       |           |   |
| Joseph  S. Black               |       | Vice Chairman, Director                                                           |       | March 29, 2005 |
|                           |       |                                                                              |       |           |
|                           |       |                                                                              |       |           |
|  /s/ Rick  A. Duncan      |       |                                                                              |       |           |   |
| Rick  A. Duncan                |       | Director, Executive Vice President                                                |       | March 29, 2005 |
|                           |       |                                                                              |       |
|                           |       |                                                                              |       |
|  /s/ Dale K. Geeslin      |       |                                                                              |       |           |   |
| Dale  K. Geeslin               |       | Secretary, Director                                                               |       | March 29, 2005 |
|                           |       |                                                                              |       |
|                           |       |                                                                              |       |           |
|  /s/  Malcolm R. Godwin   |       |                                                                              |       |           |   |
| Malcolm  R. Godwin             |       | Director, Executive Vice President                                                |       | March 29, 2005 |

 

67

----

 
|  /s/ W.  Robert Hancock   |   |               |   |           |   |
|--------------------------------|--------|--------------------|--------|----------------|--------|
| W.  Robert Hancock             |   | Director           |   | March 29, 2005 |
|                           |   |               |   |
|                           |   |               |   |
|  /s/  Vincent M. Rossetti |   |               |   |           |   |
| Vincent  M. Rossetti           |   | Director           |   | March 29, 2005 |
|                           |   |               |   |
|                           |   |               |   |           |
|  /s/ Donnie  H. Russell   |   |               |   |           |   |
| Donnie  H. Russell             |   | Director           |   | March 29, 2005 |
|                           |   |               |   |           |
|                           |   |               |   |           |
|  /s/ Thomas  G. Sellmer   |   |               |   |           |   |
| Thomas  G. Sellmer             |   | Director           |   | March 29, 2005 |
|                           |   |               |   |           |
|                           |   |               |   |           |
|  /s/ Enrico  A. Stanziale |   |               |   |           |   |
| Enrico  A. Stanziale           |   | Chairman, Director |   | March 29, 2005 |
|                           |   |               |   |           |
|                           |   |               |   |           |
|  /s/ James  H. Webb, Jr.  |   |               |   |           |   |
| James  H. Webb, Jr.            |   | Director           |   | March 29, 2005 |

 

68

----

 

**Exhibit List**

 

3.1                                 Articlesof Incorporation of the Company (incorporated by reference to Exhibit 3.1 ofthe Company’s Registration Statement on Form SB-2, File No. 333-74710).

 

3.2                                 Bylawsof the Company (incorporated by reference to Exhibit 3.2 of the Company’sRegistration Statement on Form SB-2, File No. 333-74710).

 

4.1                                 SeeExhibits 3.1 and 3.2 for provisions in Georgia Bancshares’ Articles ofIncorporation and Bylaws defining the rights of holders of the common stock.

 

4.2                                 Formof certificate of common stock (incorporated by reference to Exhibit 4.2 of theCompany’s Registration Statement on Form SB-2, File No. 333-74710).

 

4.3                                 GeorgiaBancshares, Inc. 2001 Stock Incentive Plan (incorporated by reference toExhibit 10.1 of the Company’s Registration Statement on Form SB-2; File No.333-74710).

 

4.4                                 Formof Warrant Agreement (incorporated by reference to Exhibit 10.2 of the Company’sRegistration Statement on Form SB-2; File No. 333-74710).

 

4.5                                 Formof First Amendment to Warrant Agreement (incorporated by reference to Exhibit 10.3of the Company’s Registration Statement on Form SB-2; File No. 333-74710).

 

4.6                                 Formof Second Amendment to Warrant Agreement (incorporated by reference to Exhibit10.4 of the Company’s Registration Statement on Form SB-2; File No. 333-74710).

 

4.7                                 Formof Third Amendment to Warrant Agreement. (incorporated by reference to Exhibit4.7 of the Second Amendment to the Company's Annual Report on Form 10-KSB forthe year ended December 31, 2002; File No. 333-74710)

 

10.1                           Real Estate Agreement dated June 1, 1999 between The Bank of Georgia and Charles B. Miles & S. Reid Hutchings (incorporated by reference to Exhibit 10.5 of the Company’s Registration Statement on Form SB-2; File No. 333-74710).

 

10.2                           Guarantee Agreement between the Company and Wilmington Trust Company, dated September 29, 2004 (incorporated by reference to Exhibit 10.1 of the Company’s Report of Form 8-K; File No. 000-50188)

 

10.3                           Amended and Restated Trust Agreement among the Company, Wilmington Trust Company and certain administrative trustees, dated September 29, 2004 (incorporated by reference to Exhibit 10.2 of the Company’s Report on Form 8-K; File No. 000-50188)

 

21                                    Subsidiaries.

 

23.1                           Consentof Porter Keadle Moore, LLP.

 

23.2                           Consentof Abbott, Jordan & Koon, LLC.

 

24                                    Powerof Attorney (contained on signature page hereof).

 

31.1                           Certificationof the Chief Executive Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

 

31.2                           Certificationof the Chief Financial Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

 

32                                    Certificationsof Chief Executive Officer and Chief Financial Officer pursuant to Section 906of the Sarbanes-Oxley Act of 2002.  Thisexhibit is not “filed” for purposes of Section 18 of the Securities ExchangeAct of 1934 but is instead furnished as provided by applicable rules of theSecurities and Exchange Commission.

 

69

----