<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  FORM 10-KSB

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)

X  Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
-                                                                              
of 1934 (Fee Required) for the fiscal year ended December 31, 1998 or

__  Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required) for the transition period from ____________ to
____________.

                        Commission File Number 0-24172
                                               -------
                                        
                      GEORGIA BANK FINANCIAL CORPORATION
            (Exact Name of Registrant as Specified in its Charter)

GEORGIA                                                  58-2005097
-------                                                  ----------
(State or Other Jurisdiction                             (I.R.S. Employer
of Incorporation or Organization                         Identification No.)
                                                 
3530 Wheeler Road                                
Augusta, Georgia                                         30909
----------------                                         -----
(Address of Principal                                    (Zip Code)
Executive Office)                                
                                                 
Registrant's Telephone Number, Including         
  Area Code:                                             (706) 738-6990
                                                         --------------
Securities Registered Pursuant to
Section 12(b)of the Act:                                 None
                                                         ----

Securities Registered Pursuant to
 12(g) of the Act:

                    Common Stock, par value $3.00 per share

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes   X    No   __
                                                 -           

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[X]

     Issuer's revenues for its most recent fiscal year.  $25,113,977.

     The number of shares outstanding of the Registrant's Common Stock, as of
March 24, 1999 was 1,820,368.

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 24, 1999, based on the last sale price of $27.25 per
share on such date was approximately $23,824,674.

     Transitional Small Business Disclosure Format (check one):
Yes __      No  X
                -
     Incorporated Documents             Where Incorporated in Form 10-KSB
     ----------------------             ---------------------------------
1.  Certain portions of the Company's   Part III, Items 9, 10, 11 and 12
    Proxy Statement for Annual  
    Meeting of Shareholders to be 
    held on April 14, 1999.
<PAGE>
 
                                    PART I


ITEM 1.   DESCRIPTION OF BUSINESS

GENERAL

     Georgia Bank Financial Corporation (the "Company") is a Georgia corporation
that is a bank holding company registered with the Board of Governors of the
Federal Reserve System (the "Federal Reserve") under the Bank Holding Company
Act of 1956, as amended (the "BHCA"). The Company had total consolidated assets
of $295.4 million, total deposits of $251.5 million and total stockholders'
equity of $28.6 million at December 31, 1998. Through its wholly-owned
subsidiary, Georgia Bank and Trust Company of Augusta (the "Bank"), the Company
operates a total of seven banking offices in the greater Augusta area of
Richmond and Columbia Counties, Georgia.

     The Bank is community oriented and focuses primarily on offering real
estate, commercial and consumer loans and various deposit and other services to
individuals, small to medium sized businesses and professionals in its market
area. The Bank is the only locally owned and managed commercial bank operating
in Richmond and Columbia Counties. Each member of the Company management team is
a banking professional with many years of experience in the Augusta market with
this and other banking organizations. A large percentage of Bank management have
worked together for many years. The Bank competes against the larger regional
and super-regional banks operating in its market by emphasizing the stability
and accessibility of its management, management's long-term familiarity with the
market, immediate local decision making and the pride of local ownership.

     The Bank was organized by a group of local citizens from Richmond and
Columbia Counties and commenced business from the main office location at 3530
Wheeler Road in Augusta on August 28, 1989. The Bank opened its first Augusta
branch at 3111 Peach Orchard Road in December 1991 and its second Augusta branch
at 1530 Walton Way in December 1992. The Bank became a subsidiary of the Company
in February 1992 as a result of its holding company reorganization. The Company
acquired FCS Financial Corporation and First Columbia Bank ("First Columbia") on
December 31, 1992. This allowed the Company to expand into neighboring Columbia
County. In July 1993, First Columbia merged into the Bank, and the Bank now
operates the former main office of First Columbia at 4105 Columbia Road,
Martinez, Georgia as a branch. The Bank opened an additional branch in Columbia
County in November 1994 that is located in Evans, Georgia. In October 1995, the
Bank opened its sixth banking office at 3133 Washington Road. The Bank opened
its seventh location, July 1996, in a newly constructed Wal-Mart SuperCenter
located at 3029 Deans Bridge Road.

     The Bank was founded with an experienced management team, and that team has
continued to expand with the growth of the Bank. The Bank's President and Chief
Executive Officer, R. Daniel Blanton, and its Group Vice President and Director
of Marketing, Patricia E. Leopard, have worked together for over nine years with
the Bank and before that with a predecessor to First Union

                                       1
<PAGE>
 
National Bank, Georgia State Bank, for over 12 years. With the acquisition of
First Columbia, the Bank obtained its Executive Vice President and Chief
Operating Officer, Ronald L. Thigpen, who had served as Chief Executive Officer
of First Columbia since 1991, and before that served in various capacities with
First Union National Bank and its predecessors. J. Pierce Blanchard, Jr.,
Executive Vice President-Branch Administration/Business Development, joined the
team in 1994. He previously served for six years as President of Citizens Bank &
Trust Company in Evans, Georgia, and had prior experience with First Union
National Bank and its predecessors. The Bank's senior loan officer, Tom C.
McLaughlin, Group Vice President, has been associated with the Bank for eight
years, and worked together previously with Mr. Blanton and Mrs. Leopard at
Georgia State Bank, a predecessor to First Union National Bank.

MARKET AREA

     The Bank's market area includes Richmond and Columbia Counties and is
centered in West Augusta. This area represents a significant portion of the
Augusta-Aiken metropolitan area. Augusta-Aiken is one of 315 metropolitan
statistical areas (MSA) in the United States and its 1996 population of 453,049
ranked 106th in the nation. The Augusta market area has a diversified economy
based principally on health care, education, government, military,
manufacturing, wholesale and retail trade concerns. Augusta is one of the
leading medical centers in the Southeast with more than 25,000 people employed
in the medical community. Significant medical facilities include the Medical
College of Georgia, the University Hospital, Veteran's Administration Hospital,
Dwight D. Eisenhower Hospital, Gracewood State School and Hospital,
Columbia/Augusta Regional Hospital and St. Joseph's Hospital. Other major
employers in the Augusta market area include the Fort Gordon military
installation, E-Z Go (golf car manufacturer), International Paper Company
(bleached paper board manufacturer), Thermal Ceramics (insulating material
manufacturer), President Baking Company (cookie manufacturer), John P. King
Manufacturing (textile manufacturer) and Club Car (golf car manufacturer). The
area is served by Interstate 20, which connects it to Atlanta 140 miles to the
west and Columbia, South Carolina, 70 miles to the east. Augusta is also served
by a major commercial airport (Bush Field) and a commuter airport (Daniel
Field). The average unemployment rate in 1997, for the Augusta-Aiken MSA, was
6.0% but dropped to 5.3% in the first three quarters of 1998. Between June 1989
and June 1998, total commercial bank and thrift deposits in Richmond County
increased 7.5% from $1,803 million to $1,939 million, and total commercial bank
and thrift deposits in Columbia County increased 134.5% from $229 million to
$537 million. The demographic information as presented above is based upon
information and estimates provided by the Selig Center for Economic Growth at
the University of Georgia, Georgia Department of Labor and the Federal Deposit
Insurance Corporation.

LENDING ACTIVITIES

General

     The Bank offers a wide range of lending services, including real estate,
commercial and consumer loans, to individuals, and small to medium-sized
businesses and professionals that are located in, or conduct a substantial
portion of their business in, the Bank's market area. The Bank's total loans at
December 31, 1998, were $209.0 million, or 76.2% of total earning assets. An
analysis

                                       2
<PAGE>
 
of the composition of the Bank's loan portfolio is set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Composition of Loan Portfolio."

Real Estate Loans

     Loans secured by real estate are the primary component of the Bank's loan
portfolio, constituting $128.8 million, or 61.6% of the Bank's total loans, at
December 31, 1998. These loans consist of commercial real estate loans,
construction and development loans and residential real estate loans, but
exclude home equity loans, which are classified as consumer loans. See 
"-Consumer Loans."

     Commercial Real Estate Loans. At December 31, 1998, the Bank held $67.2
million of commercial real estate loans of various sizes secured by office
buildings, retail establishments, and other types of property. These commercial
real estate loans represented 31.2% of the Bank's total loans at December 31,
1998. Loan terms are limited to seven years and often do not exceed three years,
although the installment payments may be structured on a 20-year amortization
basis. Interest rates may be fixed or adjustable, and tend to be fixed in the
case of three-year term loans and adjustable in the case of five or seven year
term loans. The Bank generally charges an origination fee. Management attempts
to reduce credit risk in the commercial real estate portfolio by emphasizing
loans on owner-occupied office and retail buildings where the loan-to-value
ratio, established by independent appraisals, does not exceed 80%. In addition,
the Bank requires personal guarantees from the principal owners of the property
supported with an analysis by the Bank of the guarantors' personal financial
statements in connection with a substantial majority of such loans. A number of
the loans classified as commercial real estate loans are, in fact, commercial
loans for which a security interest in real estate has been taken as additional
collateral. These loans are subject to underwriting as commercial loans as
described below. The Bank experienced no net loan charge offs on commercial real
estate loans during 1998 and $19,000 or 0.03% of total commercial real estate
loans during 1997.

     Construction and Development Loans. Construction and development real
estate loans comprise $24.4 million, or 11.7% of the Bank's total loans at
December 31, 1998. Of this segment, only $10.4 million, or 5.0% of total loans,
are development loans. These are generally used to finance the development of
residential subdivision infrastructures. The remaining $14.0 million, or 6.7% of
total loans, represent residential construction loans.

     A construction and development loan portfolio represents special problems
and risks. This level of construction and development loans are representative
of the character of the Bank's market. Columbia County has been rated among the
top five in the State of Georgia in population growth during each of the last
four years. This growth has spawned a significant demand for residential housing
in Columbia County. The Bank subjects this type of loan to underwriting criteria
that include: certified appraisal and valuation of collateral; loan-to-value
margins (typically not exceeding 75%); cash equity requirements; evaluations of
borrowers' cash flows and alternative sources of repayment; and a determination
that the market is able to absorb the project on schedule.

     To further reduce the risk related to construction and development loans
generally, the Bank relies upon the long-standing relationships between its loan
officers (particularly R. Daniel Blanton)

                                       3
<PAGE>
 
and the developer and contractor borrowers. In most cases these relationships
exceed ten or more years. The Bank targets seasoned developers and contractors
who have experience in the local market. Various members of the Bank's Board of
Directors have close contacts with the construction industry: Robert W. Pollard,
Jr. owns and operates a lumber manufacturing company; E. G. Meybohm owns a
prominent real estate brokerage firm; Larry S. Prather owns a utility and
grading company and William J. Badger owns and operates a lumber company.
Through these connections to the industry, the Bank attempts to monitor current
economic conditions in the market place for residential real estate, and the
financial standing and on-going reputation of its construction and development
borrowers.

     Infrastructure development loans are generally made with an initial
maturity of one year, although the Bank may renew the loan for up to two
additional one-year terms to allow the developer to complete the sale of the
lots comprising the property before requiring the payment of the related loan.
These loans typically bear interest at a floating rate and the Bank typically
charges an origination fee. These loans are repaid, interest only, on a monthly
or quarterly basis until sales of lots begin, and then principal payments are
made as each lot is sold at a rate allowing the Bank to be repaid in full by the
time 75% of the lots have been sold. In order to reduce the credit risk
associated with these loans, the Bank requires the project's loan to value ratio
(on an as completed basis) to be not more than 70%. The Bank experienced no net
loan charge offs on these loans during 1998 and 1997.

     Residential construction loans are typically made for homes with a
completed value in the range of $110,000 to $250,000. Loans for the lower-value
homes are typically made for a term of six months, while loans for the larger
homes are typically made for a term of nine to 12 months. Typically, these loans
bear interest at a floating rate and the Bank collects an origination fee. The
Bank may renew these loans for one additional term (equal to the original term)
to allow the contractor time to market the home. In order to reduce the credit
risk with respect to these loans, the Bank restricts the loans that are made for
homes being built on a speculative basis, carefully manages its aggregate
lending relationship with each borrower, and requires approval of the Loan
Committee of the Board of Directors to lend more than $300,000 in the aggregate
to any borrower and its related interests.

     Residential Loans. The Bank originates, on a selective basis, residential
loans for its portfolio on single-and multi-family properties, both owner-
occupied and non-owner-occupied. At December 31, 1998, the Bank held $34.9
million of such loans (exclusive of home equity loans), representing 16.7% of
the Bank's loan portfolio, as compared to $30.5 million, or 17.8% of the Bank's
loan portfolio at December 31, 1997. The growth in this portfolio is due to the
relative importance of residential real estate lending in the Columbia County
market. This portfolio includes, typically 15 or 25-year adjustable rate
mortgage loans whose terms mirror those prevalent in the secondary market for
mortgage loans or, less typically, floating rate non-amortized term loans for
purposes other than acquisition of the underlying residential property. A
limited number of fixed rate loans are maintained in the portfolio when there
are compelling market reasons to do so. Generally, all fixed rate residential
loans are sold into the secondary market.

                                       4
<PAGE>
 
     The Bank originates residential loans for sale into the secondary market,
an activity that began with the acquisition of First Columbia. Residential real
estate lending for the purpose of sale of such loans was further expanded with
the acquisition of Georgia Union Mortgage Company in May of 1997. The Bank
originates both fixed and variable rate residential mortgage loans for sale with
servicing released. Loans originated for sale into the secondary market are
approved for purchase by an investor prior to closing and the Bank takes no
credit or interest rate risk with respect to these loans. The Bank generates
loan origination fees, typically ranging from 1.0% to 1.5% of the loan balance,
and servicing release fees, generally ranging from 0.25% to 0.75% of the loan
balance, both of which are recognized as income when the loan is sold. The Bank
limits interest rate and credit risk on these loans by locking the interest rate
for each loan with the secondary investor and receiving the investor's
underwriting approval prior to originating the loan.

Commercial Loans

     The Bank makes loans for commercial purposes in various lines of
businesses. At December 31, 1998, the Bank held $36.0 million of these loans,
representing 17.2% of the total loan portfolio, excluding for these purposes
commercial loans secured by real estate. See "-Real Estate." Equipment loans are
made for a term of up to five years (more typically three years) at fixed or
variable rates, with the loan being fully amortized over the term and secured by
the financed equipment with a loan-to-value ratio of 80% or less. Working
capital loans are made for a term typically not exceeding one year. These loans
are usually secured by accounts receivable or inventory, and principal is either
repaid as the assets securing the loan are converted into cash, or principal is
due at maturity. The Bank experienced net loan charge-offs on commercial loans
of $98,000 during 1998 and $17,000 during 1997.

Consumer Loans

     The Bank makes a variety of loans to individuals for personal and household
purposes, including secured and unsecured installment and term loans, home
equity loans and lines of credit, and revolving lines of credit such as credit
cards. At December 31, 1998, the Bank held $43.0 million of consumer loans,
representing 20.6% of total loans. These loans typically carry balances of less
than $25,000 and earn interest at a fixed rate. Non-revolving loans are either
amortized over a period not exceeding 48 months or are ninety-day term loans.
Revolving loans require monthly payments of interest and a portion of the
principal balance (typically 2 to 3% of the outstanding balance). In the case of
home equity loans and lines of credit, the underwriting criteria are the same as
applied by the Bank when making a first mortgage loan, as described above. Home
equity lines of credit typically expire ten years after their origination. The
Bank entered the indirect lending business in 1997 and currently purchases sales
finance contracts from dealers for new and used automobiles and home
improvements. At December 31, 1998, indirect loans outstanding totaled $15.5
million an increase of $13.2 million over the $2.3 million outstanding at
December 31, 1997. The Bank experienced net loan charge offs on consumer loans
of $159,000 during 1998 and $109,000 during 1997.

Loan Approval and Review

     The Bank's loan approval policies provide for various levels of officer
lending authority. When the aggregate amount of outstanding loans to a single
borrower exceeds that individual officer's lending authority, the loan request
must be considered and approved by an officer with a

                                       5
<PAGE>
 
higher lending limit or by the Officers' Loan Committee. Individual officers'
lending limits range from $5,000 to $300,000 depending on seniority and type of
loan. The Officers' Loan Committee has a lending limit of $100,000 for unsecured
and $300,000 for secured loans. Any loan in excess of the lending limit of the
Officers' Loan Committee must be approved by the Directors' Loan Committee.

     The Bank has a loan review procedure involving multiple officers of the
Bank which is designed to promote early identification of credit quality
problems. All loan officers are charged with the responsibility of rating all
their loans exceeding $25,000 and reviewing those loans on a periodic basis, the
frequency of which increases as the quality of the loans decreases. The Bank's
Senior Credit Officer is charged with the responsibility of ensuring that all
loans or lines of credit of $250,000 and above are reviewed annually. In
addition, the Senior Credit Officer is involved in the analysis of all loans
that require Officers' Loan Committee approval.

DEPOSITS

     The Bank offers a variety of deposit programs to individuals and to small
to medium-sized businesses and other organizations at interest rates generally
consistent with local market conditions. The following table sets forth the mix
of depository accounts at the Bank as a percentage of total deposits at the
dates indicated.

<TABLE>
<CAPTION>
                                  DEPOSIT MIX
 
                                             At December 31,
                                     1998          1997         1996
                                     ----          ----         ----  
     <S>                            <C>          <C>           <C>      
     Non-interest bearing demand     16.19%       17.41%        17.02%  
     Interest checking               14.28        12.51         12.24  
     Money management                 6.18         4.95         10.86 
     Savings                         32.02        29.73         22.26 
     Time Deposits                                                     
          Under $100,000             17.72        18.46         21.71 
          $100,000 and over          13.61        16.94         15.91 
                                    ------       ------        ------ 
                                    100.00%      100.00%       100.00%
                                    ------       ------        ------  
</TABLE>

     The Bank accepts deposits at its main office and six branch banking
offices, each of which maintains an automated teller machine. The Bank is a
member of the "HONOR" network of automated teller machines, which permits Bank
customers to perform certain transactions in many cities throughout Georgia and
other regions. The Bank controls deposit volumes primarily through the pricing
of deposits and to a certain extent through promotional activities such as "free
checking." In 1996, the Bank introduced and promoted a variable rate savings
account tied to the prime rate. This account more accurately reflected interest
rates paid by brokerage money market accounts and resulted in the movement of
funds from existing money management accounts and along with new deposit
accounts for the increase in the savings balances. Over the three years
reflected above the

                                       6
<PAGE>
 
Bank has reduced its dependence upon time deposits (certificates of deposit) as
it utilized other sources of funding, specifically Federal Home Loan Bank
borrowings. Deposit rates are set weekly by senior management of the Bank.
Management believes that the rates it offers are competitive with or, in some
cases, slightly above those offered by other institutions in the Bank's market
area. The Bank does not actively solicit deposits outside of its market area.

COMPETITION

     The banking business generally is highly competitive, and sources of
competition are varied. The Bank competes as a financial intermediary with other
commercial banks, savings and loan associations, credit unions, mortgage banking
companies, consumer finance companies, securities brokerages, insurance
companies, and money market mutual funds operating in Columbia and Richmond
Counties and elsewhere. In addition, recent legislative and regulatory changes
and technological advances have enabled customers to conduct banking activities
without regard to geographic barriers through computer-based banking and similar
services.

     Many of the financial organizations in competition with the Company have
much greater financial resources, more diversified markets and larger branch
networks than the Company, and are able to offer similar services at varying
costs with higher lending limits. In addition, with the enactment of federal and
state laws affecting interstate and bank holding company expansion, there have
been major interstate acquisitions involving Augusta financial institutions
which have offices in the Company's market area but are headquartered in other
states. The effect of such acquisitions (and the possible increase in size of
the financial institutions in the Company's market areas) may be to increase
further the competition faced by the Company. The Company believes, however,
that it will be able to use its local independent image to its advantage in
competing for business from certain Augusta individuals and businesses.

EMPLOYEES

     The Company had approximately 149 full-time equivalent employees at
December 31, 1998. The Company maintains training, educational and affirmative
action programs designed to prepare employees for positions of increasing
responsibility in both management and operations, and provides a variety of
benefit programs, including group life, health, accident and other insurance and
retirement plans. None of the Company's employees are covered by a collective
bargaining agreement, and the Company believes its employee relations are
generally good.

SUPERVISION AND REGULATION

     The Company and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions on, and provide
for general regulatory oversight with respect to, virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not stockholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
the Company. Beginning with the enactment of the Financial Institutions Reform,

                                       7
<PAGE>
 
Recovery and Enforcement Act of 1989 ("FIRREA") and following with the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), which was
enacted in 1991, numerous additional regulatory requirements have been placed on
the banking industry and additional changes have been proposed. The operations
of the Company and the Bank may be affected by legislative changes and the
policies of various regulatory authorities. The Company is unable to predict the
nature or the extent of the effect on its business and earnings that fiscal or
monetary policies, economic control, or new federal or state legislation may
have in the future.

Federal Bank Holding Company Regulation
---------------------------------------

     The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 (the "BHCA"). Under the BHCA, the Company is subject
to periodic examination by the Federal Reserve and is required to file periodic
reports of its operations and such additional information as the Federal Reserve
may require. The Company's and the Bank's activities are limited to banking,
managing or controlling banks, furnishing services to or performing services for
its subsidiaries, or engaging in any other activity that the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.

     Investments, Control, and Activities. With certain limited exceptions, the
BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any bank,
(ii) acquiring direct or indirect ownership or control of any voting shares of
any bank if after such acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or controls the majority of
such shares), or (iii) merging or consolidating with another bank holding
company.

     In addition, and subject to certain exceptions, the BHCA and the Change in
Bank Control Act, together with regulations thereunder, require Federal Reserve
approval (or, depending on the circumstances, no notice of disapproval) prior to
any person or company acquiring "control" of a bank holding company, such as the
Company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. In the case of the Company, under Federal Reserve regulations, control
will be rebutably presumed to exist if a person acquires at least 10% of the
outstanding shares of any class of voting securities. The regulations provide a
procedure for challenge of the rebutable control presumption.

     Under the BHCA, the Company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in nonbanking activities, unless the Federal Reserve, by order
or regulation, has found those activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Some of the
activities that the Federal Reserve has determined by regulation to be proper
incidents to the business of banking include making or servicing loans and
certain types of leases, engaging in certain insurance and brokerage activities,
performing certain data processing services, acting in certain circumstances as
a fiduciary or investment or financial advisor, owning savings associations, and
making investments in certain corporations or projects designed primarily to
promote community welfare. The Federal Reserve has adopted regulations governing
the approval requirements associated with permissible non-banking activities.

                                       8
<PAGE>
 
     The Federal Reserve has approved applications by bank holding companies to
engage through nonbank subsidiaries, in certain securities-related activities
(underwriting of municipal revenue bonds, commercial paper, consumer receivable-
related securities and one-to-four family mortgage-backed securities), provided
that the affiliates would not be "principally engaged" in such activities for
purposes of Section 20 of the Glass-Steagall Act. Holding companies are also
permitted in certain circumstances to underwrite and deal in corporate debt and
equity securities.

     Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances in which the
Company might not otherwise do so. Under the BHCA, the Federal Reserve may
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the
Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness or stability of any subsidiary
depository institution of the bank holding company. Further, federal bank
regulatory authorities have additional discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition. If the company controlled two or more banks, each bank may be
required to indemnify, or cross-guarantee, the FDIC against losses it incurs
were another of the bank subsidiaries to fail. Such arrangement would in effect
make a bank holding company's equity investments in healthy bank subsidiaries
available to the FDIC to assist any failing or failed bank subsidiary of each
holding company.

The Bank
--------

     General. The Bank is a Georgia banking corporation and state non-member
bank. The Georgia Department of Banking and Finance (the "Department") and the
Federal Deposit Insurance Corporation are the primary regulators for the Bank.
These regulatory authorities regulate or monitor all areas of the Bank's
operations, including security devices and procedures, adequacy of
capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuances of securities, payment of dividends, interest rates payable
on deposits, interest rates or fees chargeable on loans, establishment of
branches, corporate reorganizations, maintenance of books and records, and
adequacy of staff training to carry on safe lending and deposit gathering
practices. The Bank must maintain certain capital ratios and is subject to
limitations on aggregate investments in real estate, bank premises, and
furniture and fixtures.

     All insured institutions must undergo regular on-site examination by their
appropriate banking agency. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate agency
against each institution or affiliate as it deems necessary or appropriate.
Insured institutions are required to submit annual reports to the FDIC and the
appropriate agency (and state supervisor when applicable). The FDIC is also
required to develop with other appropriate agencies a method for insured
depository institutions to provide supplemental disclosure of the estimated fair
market value of assets and liabilities, to the extent feasible and practicable,
in any balance sheet, financial statement, report of condition or any other
report of any insured depository institution. The federal banking regulatory
agencies must also prescribe, by regulation, standards for all insured

                                       9
<PAGE>
 
depository institutions and depository institution holding companies relating,
among other things, to: (i) internal controls, information systems, and audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate
risk exposure; and (v) asset quality.

     Transactions With Affiliates and Insiders. The Bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which place limits on the
amount of loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. In addition, most
of these loans and certain other transactions must be secured in prescribed
amounts. The Bank is also subject to the provisions of Section 23B of the
Federal Reserve Act that, among other things, prohibit an institution from
engaging in certain transactions with certain affiliates unless the transactions
are on terms substantially the same, or at least as favorable to such
institution or its subsidiaries, as those prevailing at the time for comparable
transactions with non-affiliated companies. The Bank is subject to certain
restrictions on extensions of credit to executive officers, directors, certain
principal stockholders, and their related interests. Such extensions of credit
(i) must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
third parties and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.

     Branching. In addition to the main office, the Bank currently has four
branches in Richmond County and two branches in Columbia County. Under current
Georgia law, banks may establish branches throughout the state. Although the
Bank currently has no definitive plans for opening any other branch offices,
depending on profitability and community needs, other branches may be
considered. The Company, with prior regulatory approval, is also permitted to
acquire an interest in and operate banks throughout the State of Georgia. Under
Georgia law, any bank acquired by the Company could be merged into the Bank and
its offices could then be operated as branches of the Bank. There are currently
no definitive plans for the Company to make any such acquisition, but the
Company remains open to such acquisitions as part of its strategic growth plan.

     The BHCA, as amended by the interstate banking provisions of the Riegle-
Neal Interstate Banking and Branch Efficiency Act of 1994 ("Interstate Banking
Act) repealed the prior statutory restrictions on interstate acquisitions of
banks by bank holding companies, such that the Company and any other bank
holding company located in Georgia may now acquire a bank located in any other
state, and any bank holding company located outside Georgia may lawfully acquire
any bank based in another state, regardless of state law to the contrary, in
either case subject to certain deposit-percentage, aging requirements, and other
restrictions. The Interstate Banking Act also generally provides that national
and state-chartered banks may branch interstate through acquisitions of banks in
other states, subject to the right of states to "opt out" of such provisions.
Georgia law permits Georgia banks to establish branches in other states and
permits put of state banks to establish branches in Georgia through merger with
existing banks. Once in the state, the bank may establish branches similarly to
other Georgia based banks. The Georgia law also provides that an out-of-state
bank may not enter the State of Georgia through a de novo branch, nor may it
enter through the acquisition of less than substantially all of the assets of an
existing bank.

                                       10
<PAGE>
 
     Community Reinvestment Act. The Community Reinvestment Act requires that,
each insured depository institution shall be evaluated by its primary federal
regulator with respect to its record in meeting the credit needs of its local
community, including low and moderate income neighborhoods, consistent with the
safe and sound operation of those institutions. These factors are also
considered in evaluating mergers, acquisitions, and applications to open a
branch or facility. The Bank received a satisfactory rating in its most recent
evaluation.
     
     Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves, the Equal Credit Opportunity
Act prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit, the Fair Credit Reporting Act of 1978 governing the
use and provision of information to credit reporting agencies, the Fair Debt
Collection Act governing the manner in which consumer debts may be collected by
collection agencies, and the rules and regulations of the various federal
agencies charged with the responsibility of implementing such federal laws. The
deposit operations of the Bank also are subject to the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds Transfer Act and
Regulation E issued by the Federal Reserve Board to implement that act, which
governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services. The Bank is also subject to the
Bank Secrecy Act, requiring it to make reports of certain large or suspicious
transactions.
     
     Each federal banking regulatory agency is required to prescribe standards
for depository institutions and depository institution holding companies
relating to internal controls, information systems, internal audit system, loan
documentation, credit underwriting, interest rate exposure, asset growth
compensation, a maximum ratio of classified assets to capital, minimum earnings
sufficient to absorb losses, a minimum ratio of market value to book value for
publicly traded shares, and such other standards as the agency deems
appropriate. FDICIA also contains a variety of other provisions that may affect
the operations of the Company and the Bank, including reporting requirements,
regulatory standards for estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days prior notice to customers
and regulatory authorities before closing any branch, and a prohibition on the
acceptance or renewal of brokered deposits by depository institutions that are
not well capitalized or are adequately capitalized and have not received a
waiver from FDIC.

                                       11
<PAGE>
 
Enforcement Policies and Actions
--------------------------------

     The FDIC and other federal depository institution regulators monitor
compliance with laws, rules and regulations. In the event the Company or the
Bank violates a law, rule or regulations, or engages in unsafe or unsound
practices, the regulators are authorized to impose fines or penalties, require
that the institution cease and desist from certain activities or use other
enforcement powers. Under certain circumstances, the agencies may enforce these
remedies directly against officers, directors, employees or others participating
in the affairs of a bank or bank holding company.

Deposit Insurance
-----------------

     The deposits of the Bank are currently insured to a maximum of $100,000 per
depositor, subject to certain aggregation rules. The FDIC establishes rates for
the payment of premiums by federally insured banks and thrifts for deposit
insurance. Separate insurance funds, the Bank Insurance Fund (BIF) and the
Savings Association Insurance Fund (SAIF) are maintained for commercial banks
and thrifts, respectively, with insurance premiums from the industry used to
offset losses from insurance payouts when banks and thrifts fail.

     Because of the current level of reserves in the BIF, and as the Bank's risk
classification is the lowest allowable, the Bank was not required to pay an
assessment for deposit insurance in 1998 and currently is not required to do so
in 1999. The Bank is, however, required to pay a premium for the new "Financing
Corporation (FICO) payment" which is a result of the Deposit Insurance Act of
1996. Currently, the annual amount of this premium is $.01296 per $100 of
insured deposits. This assessment is subject to change. Any increase in deposit
insurance premiums (or related premiums such as the FICO payment) for the Bank
will increase its cost of funds, and there can be no assurance that such cost
can be passed on to the Bank's customers.

Dividends
---------

     The principal source of the Company's cash revenues comes from dividends
received from the Bank. The amount of dividends that may be paid by the Bank to
the Company depends on the Bank's earnings and capital position and is limited
by federal and state law, regulations, and policies. In addition, the Federal
Reserve has stated that bank holding companies should refrain from or limit
dividend increases or reduce or eliminate dividends under circumstances in which
the bank holding company fails to meet minimum capital requirements or in which
its earnings are impaired.

     Cash dividends on the Bank's common stock may be declared and paid only out
of its retained earnings, and dividends may not be declared at any time at which
the Bank's paid-in capital and appropriated retained earnings do not, in
combination, equal at least 20% of its capital stock account. In addition, the
Department's current rules and regulations require prior Department approval
before cash dividends may be declared and paid if: (i) the Bank's ratio of
equity capital to adjusted total assets is less than 6%; (ii) the aggregate
amount of dividends declared or anticipated to be declared in that calendar year
exceeds 50% of the Bank's net profits, after taxes but before dividends, for the
previous calendar year; or (iii) the percentage of the Bank's assets classified
as adverse as to repayment or

                                       12
<PAGE>
 
recovery by the Department at the most recent examination of the Bank exceeds
80% of the Bank's equity capital as reflected at such examination.

     The Bank is also prohibited from paying a cash dividend if, after paying
the dividend, the Bank would be undercapitalized. See "Capital Regulations"
below.

     No dividends were declared in 1998 or 1997. Previously, the Company's Board
of Directors declared a 15% stock dividend to holders of the Company's Common
Stock on record as of September 4, 1996, payable on September 25, 1996.

Capital Regulations
-------------------

     The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, account for off-balance sheet exposure,
and minimize disincentives for holding liquid assets. The resulting capital
ratios represent qualifying capital as a percentage of total risk weighted
assets and off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios well in excess of the minimums. The
current guidelines require all bank holding companies and federally regulated
banks to maintain a minimum risk-based total capital ratio equal to 8% of which
at least 4% must be Tier 1 capital. Tier 1 capital includes common stockholders
equity, qualifying perpetual preferred stock, and minority interest in equity
accounts of consolidated subsidiaries, but excludes goodwill and most other
intangibles and excludes the allowance for loan and lease losses. Tier 2 capital
includes the excess of any preferred stock not included in Tier 1 capital,
mandatory convertible securities, hybrid capital instruments, subordinated debt
and intermediate term preferred stock, and general allowances for loan and lease
losses up to 1.25% of risk-weighted assets.

     Under these guidelines, banks' and bank holding companies' assets are given
risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance sheet
items are given credit conversion factors to convert them to asset equivalent
amounts to which an appropriate risk-weight will apply. These computations
result in the total risk-weighted assets. Most loans are assigned to the 100%
risk category, except for first mortgage loans fully secured by residential
property and, under certain circumstances, residential construction loans, both
of which carry a 50% rating. Most investment securities are assigned to the 20%
category, except for municipal or state revenue bonds, which have a 50% rating,
and direct obligations of or obligations guaranteed by the United States
Treasury or United States Government agencies, which have a 0% rating.

     The federal bank regulatory authorities have also implemented a leverage
ratio, which is Tier 1 capital as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least 100
to 200 basis points resulting in a capital requirement of 4% to 5%.

                                       13
<PAGE>
 
     Provisions of federal law set forth a capital-based regulatory scheme
designed to promote early intervention for troubled banks and requires the FDIC
to choose the least expensive resolution of bank failures. The capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6%, and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. As of December 31, 1998, the
Company and the Bank were qualified as "well-capitalized." See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital."

     Under applicable regulations, the applicable agency can treat an
institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice. The
degree of regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital restoration
plan; (ii) raise additional capital; (iii) restrict their growth, deposit
interest rates, and other activities; (iv) improve their management; (v)
eliminate management fees; or (vi) divest themselves of all or a part of their
operations. Bank holding companies controlling financial institutions can be
called upon to boost the institutions' capital and to partially guarantee the
institutions' performance under their capital restoration plans.

     These capital guidelines can affect the Company in several ways. Rapid
growth, poor loan portfolio performance, or poor earnings performance, or a
combination of these factors, could change the Company's capital position in a
relatively short period of time, making an additional capital infusion necessary
or requiring other corrective action.

     The federal banking regulators continue to refine the risk-based capital
standards to take into consideration various risks that may not be adequately
addressed in the current framework. It is uncertain what affect these
regulations, when implemented, would have on the Company and the Bank.

     Both the Company and the Bank exceeded their respective regulatory capital
requirements at December 31, 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital."

                                       14
<PAGE>
 
Recent Legislative Developments
-------------------------------

     Revisions to the Bank Secrecy Act in 1996 affected numerous issues,
including suspicious activity reporting, funds transfer recording keeping,
interim exemption rules, and the definition of "exempt persons" and the way in
which banks designate exempt customers.

     The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("EGRPRA") was enacted in September 1996. This Act primarily provided
arrangements for the recapitalization of the SAIF and regulatory relief for bank
holding companies in several significant areas. Bank holding companies that also
owned savings associations and were therefore subject to regulation by the
Office of Thrift Supervision ("OTS") as savings and loan holding companies were
relieved of such duplicative regulation, and neither future acquisitions of
savings associations by bank holding companies nor mergers of savings
associations into banks will any longer require application to and approval by
the OTS. Acquisitions by well-capitalized and well-managed bank holding
companies of companies engaging in permissible nonbanking activities (other than
savings association) may now be made with only 12 days prior notice to the
Federal Reserve, and de novo engagement in such activities by such bank holding
companies may be commenced without prior notice and with only subsequent notice
to the Federal Reserve. The same legislation also gave regulatory relief to
banks in regard to corporate governance, branching, disclosure (under the Real
Estate Settlement Procedures Act and the Truth in Lending Act) and other
operational areas. On February 20, 1997, the Federal Reserve adopted, effective
April 21, 1997, amendments to its Regulation Y implementing certain provisions
of EGRPRA. Among other things, these amendments to Federal Reserve Regulation Y
reduce the notice and application requirements applicable to bank and nonbank
acquisitions and de novo expansion by well-capitalized and well managed holding
companies; expand the list of non-banking activities permitted under Regulation
Y and reduce certain limitations on previously permitted activities; and amend
Federal Reserve anti-tying restrictions to allow banks greater flexibility to
package products with their affiliates.

     In 1996, the FDIC adopted the Federal Financial Institutions Examination
Council's ("FFIEC") updated statement of policy entitled "Uniform Financial
Institutions Rating System " ("UFIRS") effective January 1, 1997. UFIRS is an
internal rating system used by the federal and state regulators for assessing
the soundness of financial institutions on a uniform basis and for identifying
those institutions requiring special supervisory attention. Under the previous
UFIRS, each financial institution was assigned a confidential composite rating
based on an evaluation and rating of five essential components of an
institution's financial condition and operations including Capital adequacy,
Asset quality, Management, Earnings and Liquidity. The major changes include an
increased emphasis on the quality of risk management practices and the addition
of a sixth component of Sensitivity to market risk. For most institutions, the
FDIC has indicated that market risk primarily reflects exposures to changes in
interest rates. When regulators evaluate this component, consideration is
expected to be given to management's ability to identify, measure, monitor and
control market risk; the institution's size; the nature and complexity of its
activities and its risk profile; and the adequacy of its capital and earnings in
relation to its level of market risk exposure. Market risk is rated based upon,
but not limited to, an assessment of the sensitivity of the financial
institution's earnings or the economic value of its capital to adverse changes
in interest rates, foreign exchange rates, commodity prices, or equity prices;

                                       15
<PAGE>
 
management's ability to identify, measure and control exposure to market risk;
and the nature and complexity of interest rate risk exposure arising from non
trading positions.

     The Federal Reserve also recently adopted regulations providing for a
streamlined application process in connection with acquisitions of banks and
bank holding companies by well-capitalized, well-managed bank holding companies.
During 1996, changes were also made to the current system used to rate banks. 

     The State of Georgia Department of Insurance and Department of Banking and
Finance also recently adopted regulations that will permit banks operating in
Georgia to engage in certain insurance sales activities, subject to compliance
with certain conditions.

     Other legislative and regulatory proposals regarding changes in banking,
and the regulation of banks, thrifts and other financial institutions and bank
and bank holding company powers are being considered by the executive branch of
the Federal government, Congress and various state governments, including
Georgia. Among other items under consideration are the possible combination of
the BIF and SAIF, changes in or repeal of the Glass-Steagall Act which separates
commercial banking from investment banking, and changes in the BHC Act to
broaden the powers of "financial services" companies to own and control
depository institutions and engage in activities not closely related to banking.
Certain of these proposals, if adopted, could significantly change the
regulation of banks and the financial services industry. It cannot be predicted
whether any of these proposals will be adopted, and, if adopted, how these
proposals will affect the Company and the Bank.

FISCAL AND MONETARY POLICY

     Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitutes the major portion of a bank's earnings. Thus,
the earnings and growth of the Company and the Bank are subject to the influence
of economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve. The Federal Reserve regulates the supply of money through
various means, including open market dealings in United States government
securities, the discount rate at which banks may borrow from the Federal
Reserve, and the reserve requirements on deposits.

     The monetary policies of the Federal Reserve historically have had a
significant effect on the operating results of commercial banks and will
continue to do so in the future. The conditions in the national and
international economies and money markets, as well as the actions and changes in
policy by monetary and fiscal authorities, and their effect on the Company and
the Bank cannot be predicted.

ITEM 2.   DESCRIPTION OF PROPERTY

     The Company currently operates a main office, six branches and an
operations center housed in a series of buildings adjacent to the main office.
The principal administrative offices of the Company are located at 3530 Wheeler
Road, Augusta, Georgia. The main office and four branch

                                       16
<PAGE>
 
offices are located in Augusta, Georgia, one branch is located in Martinez,
Georgia and one branch is located in Evans, Georgia. With the exception of the
Fury's Ferry and the Wal-Mart branches each banking office is a brick building
of Georgian architecture with a teller line, customer service area, offices for
the Bank's lenders, drive-in teller lanes, a vault with safe deposit boxes, and
a walk-up or drive-up automated teller machine. The banking offices are
generally 3,000 to 5,000 square foot buildings except for the main office, the
Fury's Ferry and Wal-Mart branches. The main office contains approximately
14,000 square feet of space. The Fury's Ferry branch contains 1,800 square feet
with all the facilities of the other branches except safe deposit boxes. The 
Wal-Mart branch, located inside the Wal-Mart SuperCenter, contains 517 square
feet and provides teller, customer service and lending areas. An automated
teller machine is also located on the premises. In 1997, the Company acquired
24,000 square feet of commercial office space located at 3515 Wheeler Road,
across the street from the main office. The Company renovated 17,000 square feet
of this newly acquired space to be utilized for a consolidation of all
operational functions, including data processing, deposit operations, human
resources, loan operations, security, credit administration, audit and
accounting. The objective of the Company in acquiring this property and planning
the renovation was to provide adequate space for existing operations and to meet
future requirements necessitated by growth of the Company. Renovations were
completed in June, 1998 and operations functions were relocated. The previous
location, consisting of 5,000 square feet has been placed on the market for
sale. The remaining 9,000 square feet continue to be leased as commercial office
space to the existing tenants. All properties owned by the Company are
adequately covered by the appropriate insurance for replacement value.

     The Company's automated teller machine network includes four drive-up
machines located in major retail shopping areas in addition to those located in
all branch offices.

     See Note 5 to the Consolidated Financial Statements for additional
information concerning the Bank's premises and equipment and Note 7 to the
Consolidated Financial Statements for additional information concerning the
Bank's commitments under various equipment leases.


ITEM 3.   LEGAL PROCEEDINGS

     In the ordinary course of business, the Company and the Bank are parties to
various legal proceedings. Although the amount of any ultimate liability with
respect to such matters cannot be determined, in the opinion of management,
there is no proceeding pending or, to the knowledge of management, threatened in
which an adverse decision would result in a material adverse change to the
consolidated results of operations or financial condition of the Company and the
Bank.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

     There were no matters submitted to a vote of the shareholders of the
Company during the fourth quarter of the Company's fiscal year ended December
31, 1998.

                                       17
<PAGE>
 
                                    PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


     As of March 26, 1999, there were approximately 720 holders of record of the
Company's Common Stock. As of March 26, 1999, there were 1,820,368 shares of the
Common Stock issued and outstanding. Transactions in the Company's Common Stock
are generally negotiated through J. C. Bradford & Co. and The Robinson-Humphrey
Company, Inc. Both firms make a market in the Common Stock of the Company. The
following table reflects the range of quotations in the Company's stock for the
past two years:


               GEORGIA BANK FINANCIAL CORPORATION STOCK PRICE(1)

              Quarter ended             Low               High    
              -------------             -------           ----    
              1997                                                
              ----                                                
              March 31, 1997            18 3/8            19 1/2  
              June 30, 1997             19 5/8            20      
              September 30, 1997        19 1/2            20 1/4  
              December 31, 1997(2)      18                19 3/8  
                                                                  
              1998                                                
              March 31, 1998            18 1/4            21 1/2  
              June 30, 1998             20 1/2            28      
              September 30, 1998        24 1/4            26 1/2  
              December 31, 1998         24                28       

____________________________
              (1)  The prices reflect inter-dealer prices, without retail
                   markup, mark-down or commission and may not represent actual
                   transactions.
              (2)  The Company completed an offering for the sale of 278,000
                   shares at a per share price of $18.00 on October 31, 1997.


     No cash dividends have been paid to date on the Common Stock of the
Company, and it is anticipated that earnings will be retained for the
foreseeable future to support the Company's rapid growth and expansion. The
Company currently has no source of income other than dividends and other
payments received from the Bank. The amount of dividends that may be paid by the
Bank to the Company depends upon the Bank's earnings and capital position and is
limited by federal and state law, regulation and policies.

     Cash dividends on the Bank's common stock may be declared and paid only out
of its retained earnings, and dividends may not be declared at any time at which
the Bank's paid-in capital and appropriated earnings do not, in combination,
equal at least 20% of its capital stock account. In addition, the Georgia
Department of Banking and Finance's current rules and regulations require prior
approval before cash dividends may be declared and paid if: (1) the Bank's ratio
of equity capital to adjusted total assets is less than 6%; (ii) the aggregate
amount of dividends declared or anticipated to be declared in that calendar year
exceeds 50 % of the Bank's net profits, after taxes but before dividends, for
the previous calendar year; or (iii) the percentage of the Bank's loans
classified 

                                       18
<PAGE>
 
as adverse as to repayment or recovery by the Department at the most recent
examination of the Bank exceeds 80 percent of the Bank's equity as reflected at
such examination.

     The Company completed, on October 31, 1997, the sale of 278,000 shares of
Common Stock at an offering price of $18.00 per share.

                                       19
<PAGE>
 
Item 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS


         The purpose of this discussion is to focus on significant changes in
the financial condition and results of operation of the Company and the Bank
during the past three years. The discussion and analysis is intended to
supplement and highlight information contained in the accompanying consolidated
financial statements and related notes to the consolidated financial statements.

OVERVIEW

         In 1998, management of the Company continued to place special emphasis
on quality asset growth and expense control to help drive the improving earnings
performance. Growth was achieved as assets increased $43.2 million (or 17.1%)
and earnings increased $560,000 (or 23.8%) over 1997 levels. This growth rate
was accomplished with the existing branch facilities as the Company did not
build or expand any branch facilities in 1998. It did however, renovate
commercial office space to provide much needed area for operational support.
Geographically, the Company's branch facilities are strategically located
throughout the Metro Augusta market. Improvements in expense control were
reflected in the reduction in the operating efficiency ratio to 65.10% in 1998
from 68.29% in 1997. Non-interest expense as percentage of total average assets
decreased to 3.60% in 1998 from 3.69% in 1997.

RESULTS OF OPERATIONS

         The Company had record net income of $2,915,000 in 1998, compared to
$2,355,000 in 1997, an increase of $560,000 or 23.8%. The 1997 earnings of
$2,355,000 was an increase of $403,000 or 20.7% over 1996 earnings of
$1,952,000.

         The earnings increase in 1998 was primarily the result of increased
levels of net interest income and non-interest income. The increase in net
interest income was the result of higher levels of earning assets. Net interest
income grew 14.7% in 1998 on a net interest margin of 4.64%, a decrease from
4.72% in 1997. Non-interest income increased $903,000 (33.1%) in 1998 to
$3,614,000 compared to $2,711,000 in 1997. This increase was the result of
increases in service charges and fees on deposits as well as increases in the
gain on the sale of loans.

         The earnings performance of the Company is reflected in a return on
average assets and average equity of 1.06% and 11.27%, respectively, during 1998
compared to 0.99% and 13.05%, respectively during 1997. The return on average
assets and average equity was 0.97% and 12.65% in 1996. Basic earnings per share
on weighted average shares improved to $1.60 in 1998 compared to $1.48 in 1997
and $1.27 in 1996. The Company's average equity to average asset ratio increased
to 9.38% from 7.55% the previous year as a result of the secondary offering that
was completed during the fourth quarter of 1997. That Offering raised an
additional $5.0 million to support the Company's future growth. The average
equity to average asset ratio was 7.64% in 1996. The Company has never paid any
cash dividend. A 15% stock dividend was paid by the Company on September 25,
1996. 

                                       20
<PAGE>
 
     The improvement in the earnings of the Company represent the continued
leveraging of its investment in additional branch offices in prior years. The
offices are continuing to generate higher levels of earning assets and deposits.

Net Interest Income/Margins

     The primary source of earnings for the Company is net interest income,
which is the difference between income on interest-earning assets, such as loans
and investment securities, and interest expense incurred on interest-bearing
sources of funds, such as deposits and borrowings. The following table shows the
average balances of interest-earning assets and interest-bearing liabilities,
average yields earned and rates paid on those respective balances, and the
resulting interest income and interest expense for the periods indicated:

                                       21
<PAGE>
 
            AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES

<TABLE>
<CAPTION>
                                       Year Ended December 31, 1998    Year Ended December 31, 1997     Year Ended December 31, 1996
                                     -------------------------------  ------------------------------  ------------------------------
                                               Average     Amount               Average    Amount                Average    Amount
                                     Average    Yield      Paid or   Average     Yield     Paid or    Average     Yield    Paid or
                                     Amount    or Rate     Earned     Amount    or Rate    Earned     Amount     or Rate    Earned
                                     -----------------------------------------------------------------------------------------------
                                                                  (Amounts in thousands, except yields and rates)
<S>                                 <C>        <C>         <C>       <C>        <C>        <C>       <C>         <C>       <C>
ASSETS
Earning Assets:
   Loans........................... $189.369     9.38%     $17,762   $153,501     9.70%    $14,896   $128,592      9.70%   $12,470
   Investments
       Taxable.....................   54,030     6.01%       3,247     55,649     6.39%      3,555     43,863      6.36%     2,788
       Tax-free....................    2,319     4.74%         110      2,643     4.01%        106      1,635      4.71%        77

   Funds sold......................    6,429     5.93%         381      4,032     6.35%        256      5,615      6.09%       342
                                    --------               -------   --------             ---------  --------              -------
       Total earning assets........  252,147     8.53%      21,500    215,825     8.72%     18,813    179,705      8.72%    15,677
                                    --------               -------   --------             ---------  --------              -------
Cash and due from banks............   11,270                           11,467                          11,139
Premises and equipment.............   10,618                            9,568                           8,799
Other..............................    4,015                            3,820                           3,759
Allowance for loan losses..........   (2,380)                          (1,844)                         (1,441)
                                    --------                         --------                       ---------
     Total assets..................  275,670                         $238,836                        $201,961
                                    ========                         ========                       =========

LIABILITIES AND STOCKHOLDERS' EQUITY
   Interest-Bearing Liabilities:
   Interest-bearing transaction
      accounts.....................  $29,664     2.17%     $   645   $ 26,324     2.38%       $626   $ 20,454      2.54%   $   520
   Savings, MMA....................   86,438     4.65%       4,017     74,835     4.67%      3,495     55,661      4.38%     2,436
   Certificates....................   78,652     5.59%       4,400     74,810     5.50%      4,112     74,048      5.67%     4,196
   Funds purchased/repurchased
    securities agreements..........    5,798     3.50%         203      4,222     3.20%        135      1,068      4.12%        44
   Other borrowings................    8,780     6.31%         554      4,389     6.02%        264      2,713      6.52%       177
                                    --------              --------   --------            ---------  ---------              -------
        Total interest-bearing
      liabilities..................  209,332     4.69%       9,819    184,580     4.68%      8,632    153,944      4.79%     7,373
                                    --------              --------   --------            ---------  ---------              -------
Noninterest-bearing demand
       deposits....................                                    34,916                          31,253
Other liabilities..................    2,741                            1,299                           1,338
     Stockholders equity...........   25,864                           18,041                          15,426
                                    --------                         --------                       ---------
     Total Liabilities and
       stockholders' equity........ $275,670                         $238,836                        $201,961
                                    ========                         ========                       =========

Net interest spread................              3.84%                            4.04%                            3.93%
Benefit of non-interest sources....              0.80%                            0.68%                            0.69%
Net interest margin/income.........              4.64%     $11,681                4.72%     $10,181                4.62%   $ 8,304
                                                          ========                        =========                        =======
</TABLE>

          Net interest income was $11.7 million for 1998, a 14.7% increase from
     1997. Net interest income increased as a result of the growth in the volume
     of average earning assets. Earning assets averaged $252.1 million in 1998,
     an increase of 16.8% from the $215.8 million average in 1997. Average
     yields on earning assets declined to 8.53% in 1998, compared to 8.72% in
     1997. The impact of competitive pressures in the pricing of loans and a
     declining interest rate environment during the second half of 1998 both
     contributed to the decrease.

          A key performance measure for net interest income is the "net interest
     margin", or net interest income divided by the average interest-earning
     assets. Unlike the "net interest spread", net

                                       22
<PAGE>
 
interest margin is affected by the level of non-interest sources of funding used
to support earning assets. The Company's net interest margin decreased to 4.64%
in 1998 from 4.72% in 1997. In 1996, the net interest margin was 4.62%. The net
interest margin deteriorated as the average rate paid on interest-bearing
liabilities increased slightly to 4.69% in 1998 from 4.68% in 1997 and the
average yield on interest-earning assets declined to 8.53% from 8.72% in 1997.
The high level of competition in the local market for both loans and deposits
continues to influence the net interest margin. The net interest margin
continues to be supported by an increasing amount of demand deposits which
provide a non-interest source of funds and help prevent further deterioration in
the net interest margin. The net interest spread measures the difference between
the average yield on earning assets and the average rate paid on interest-
bearing sources of funds. The net interest spread eliminates the impact of non-
interest bearing funds and gives a direct perspective on the effect of market
interest rate movements. As a result of changes in interest rates in 1998, the
net interest spread decreased 20 basis points to 3.84% in 1998 from 4.04% in
1997. The 1997 net interest spread of 4.04% represented an increase from the
1996 level of 3.93%.

         Changes in the net interest income from period to period result from
increases or decreases in the volume of interest-earning assets and
interest-bearing liabilities, increases in the average rates earned and paid on
such assets and liabilities, the ability to manage the earning asset portfolio,
and the availability of particular sources of funds, such as non-interest
bearing deposits. The following table: "Analysis of Changes in Net Interest
Income" indicates the changes in the Company's net interest income as a result
of changes in volume and rate from 1997 to 1998, 1996 to 1997, and 1995 to 1996.
The analysis of changes in net interest income included in the following table
indicates that on an overall basis in 1998, the increase in the balances or
volumes of interest-earning assets created a positive impact in net interest
income that was partially offset by the decreases in interest rates. The
increases in the balances or volume of the interest-bearing liability categories
had a greater impact on the increase in interest expense than did any negative
changes in rates which would have served to reduce interest expense. In fact,
increases in interest expense as a result of rate increases exceeded any
decreases that might have been expected in a declining interest rate
environment. In 1997, the increase in the balances or volumes of
interest-earning assets created a positive impact in net interest income as
there were no significant changes in total rates applicable to those balance
sheet accounts which could have served to reduce interest income. In addition,
the positive changes in the balances or volumes of the interest-bearing
liability categories had a greater impact on the increase in interest expense
than did the negative changes in rates which served to reduce interest expense.

                                       23
<PAGE>
 
                  ANALYSIS OF CHANGES IN NET INTEREST INCOME

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31, 1998           YEAR ENDED DECEMBER 31, 1997        
                                                           COMPARED WITH 1997                      COMPARED WITH 1996            
                                                            VARIANCES DUE TO                        VARIANCES DUE TO             
                                                -------------------------------------------------------------------------------- 
                                                    VOLUME  RATE     RATE/        TOTAL    VOLUME     RATE     RATE/     TOTAL  
                                                                     VOLUME                                    VOLUME            
                                                ------------------- ----------------------------- ---------- --------- --------- 
                                                                                                         (Amounts in thousands)   
<S>                                             <C>         <C>      <C>         <C>      <C>         <C>      <C>       <C> 
INTEREST INCOME FROM EARNING ASSETS:                                                                       
Loans.........................................     $3,474   ($492)     ($116)    $2,866   $2,426      $  0       $ 0     $2,426  
Investments, taxable..........................       (103)   (210)         5       (308)     750        13         4        767  
Investments, tax-free.........................        (13)     17          0         4        47       (11)       (7)        29 
                                                                                                                                 
Funds sold....................................        152     (17)       (10)       125      (96)       14        (4)       (86) 
                                                -------------------------------------------------------------------------------- 
    Total                                          $3,510   ($702)     ($121)     2,687   $3,127      $ 16      ($ 7)    $3,136  
                                                --------------------------------------------------------------------------------  
                                                                                                           
INTEREST EXPENSE ON INTEREST BEARING LIABILITIES:                                                          
                                                                                                           
Interest-bearing transaction                                                                                                    
   accounts...................................     $   80   ($ 54)     ($  7)    $   19   $  148     ($ 33)     ($ 9)    $  106   
Savings and market rate                                                                                                           
   investments................................        541     (16)        (3)       522      841       162        56      1,059   
Certificates and other time                                                                                                       
   deposits...................................        215      69          4        288       43      (126)       (1)       (84)   
Funds purchased/                                                                                                                 
repurchased securities                                                                                                            
agreements....................................         50      13          5         68      130       (10)      (29)        91   
Other borrowings..............................        264      13         13        290      109       (14)       (8)        87   
                                                  ------------------------------------------------------------------------------  
    Total                                          $1,150    $ 25       $ 12     $1,187   $1,271     ($ 21)      $ 9     $1,259   
                                                  ------------------------------------------------------------------------------   
CHANGE IN NET INTEREST INCOME..........                                          $1,500                                  $1,877  
                                                                               ==========                              ========= 

<CAPTION> 
                                                                     YEAR ENDED DECEMBER 31, 1996
                                                                         COMPARED WITH 1995
                                                                          VARIANCES DUE TO
                                                            --------------------------------------------
                                                               VOLUME     RATE      RATE/       TOTAL
                                                                                   VOLUME
                                                            ----------  --------  --------    ----------
<S>                                                         <C>         <C>       <C>         <C>                   
INTEREST INCOME FROM EARNING ASSETS:                        
Loans........................................                  $1,479     ($478)    ($61)        $  940
Investments, taxable.........................                     785       (45)     (17)           723
Investments, tax-free........................                       2         6        0              8
                                                            
Funds sold...................................                       9       (28)      (1)           (20)
                                                            --------------------------------------------                         
    Total                                                      $2,275     ($545)    ($79)        $1,651                          
                                                            --------------------------------------------                         
                                                            
INTEREST EXPENSE ON INTEREST BEARING LIABILITIES:           
                                                            
Interest-bearing transaction                                
   accounts..................................                  $   31     ($ 37)    ($ 2)       ($   8)
Savings and market rate                                     
   investments...............................                     999       116        95        1,210
Certificates and other time                                 
   deposits..................................                    (293)     (229)       14         (508)
Funds purchased/                                           
repurchased securities                                      
agreements...................................                      32        (7)      (9)           16 
Other borrowings.............................                     (86)       32      (11)          (65)
                                                            --------------------------------------------
    Total                                                      $  683     ($125)     $87         $ 645
                                                            --------------------------------------------
CHANGE IN NET INTEREST INCOME................                                                    $1,006
                                                                                             =========== 
</TABLE> 

          The variances for each major category of interest-earning asset and
     interest-bearing liability are attributable to (a) changes in volume
     (changes in volume times old rate), (b) changes in rate (changes in rate
     times old volume) and (c) changes in rate/volume (changes in rate times the
     change in volume).

     Non-Interest Income

          Non-interest income consists of revenues generated from a broad range
     of financial services and activities, including service charges on deposit
     accounts, fee-based services, and products where commissions are earned
     through sales of products such as real estate mortgages, retail investment
     services and other activities. In addition, gains or losses realized from
     the sale of investment portfolio securities are included in non-interest
     income. Non-interest income for 1998 was $3.6 million, an increase of
     $903,000 or 33.3% from 1997. The increase is attributable to a $328,000 or
     14.3% increase in service charges on deposit accounts over 1997 levels
     resulting from a higher volume of deposits and increases in the overall
     pricing of accounts. Additionally, gain on the sale of loans increased
     $520,000 or 127.5% to $928,000 in 1998 from $408,000 in 1997. The gains on
     investment securities of $33,000 were generated as bonds were called and as
     investment securities

                                       24
<PAGE>
 
were liquidated to fund loan growth and is an increase from a loss of $21,000 in
1997. The following table presents the principal components of non-interest
income for the last three years:


<TABLE>
<CAPTION> 
                                                  NON-INTEREST INCOME
                                                                        YEAR ENDED
                                                                       DECEMBER 31,
                                                     -------------------------------------------------
                                                          1998             1997             1996
                                                     --------------   --------------   -------------------
                                                                  (Amounts in thousands)
<S>                                                  <C>              <C>              <C>                
Service charges on deposit accounts.............            $2,625           $2,297           $1,838
Gain on sale of loans...........................               929              408              312
Investment securities gains (losses)............                33              (21)               0
Other...........................................                27               27                1
                                                     --------------   --------------   -------------------
     Total non-interest income..................            $3,614           $2,711           $2,151
                                                     ==============   ==============   ===================

Non-interest income as a percentage of total                
average assets                                                1.31%            1.14%            1.07%
                                                                                                    
Non-interest income as a percentage of total                                                        
income                                                       14.39%           12.60%           12.06%
</TABLE> 


Non-Interest Expense

     Non-interest expense totaled $9.9 million in 1998, an increase of 12.8%
from 1997 non-interest expense of $8.8 million. The increase was primarily the
result of the Company's continued growth and expansion. The increases in the
salary and benefit expense reflect the commissions paid in response to the
growth in volumes of mortgage originations and retail investment sales.
     
     The Company has improved its ability to monitor expenditures in all
organizational units by implementing more specific cost accounting and
reporting. The Company has completed implementation of a system to define the
profitability of branch/departmental operations within its core banking business
and is committed to developing these measurement processes at the product and
account relationship levels. These systems will both monitor existing
expenditures and control future expenditures as well as provide management data
with which to make informed decisions in the overall operation of the Company.
The implementation of these systems emphasizes that management is committed to a
continuing emphasis on expense control. The following table presents the
principal components of non-interest expense for the years ended December 31,
1998, 1997 and 1996.

                                       25
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                   Non-Interest Expense

                                                                          Year Ended December 31,
                                                        ------------------------------------------------------
                                                                 1998                  1997              1996
                                                        --------------        --------------      ------------
                                                                          (Amounts in thousands)
<S>                                                     <C>                   <C>                 <C> 
Salaries and employee benefits.......................          $5,427                $4,596            $3,653
Occupancy expense....................................           1,655                 1,480             1,262
Amortization of intangible assets....................             123                   284               280
Business development expense.........................             587                   418               396
Communication expense................................             371                   304               515
Data processing expense..............................             550                   457               434
Insurance expense....................................              65                    58                37
Legal and professional fees..........................             217                   255               202
Office supplies expense..............................             274                   295               137
Other................................................             666                   658               306
                                                        --------------        --------------      ------------ 
     Total non-interest expense......................          $9,935                $8,805            $7,234
                                                        ==============        ==============      ============

Non-interest expense as a percentage
   of total average assets...........................           3.60%                 3.71%             3.58%

Operating efficiency ratio...........................          65.10%                68.29%            69.18%
</TABLE> 

     The Company's efficiency ratio (non-interest expense as a percentage of net
interest income and non-interest income, excluding gains and losses on the sale
of investments) improved to 65.1% in 1998 compared to 68.3% in 1997 and 69.2% in
1996. This improvement has occurred even though the Company has incurred
significant expense to expand its retail banking operations and add additional
products and services.

Income Taxes

     Income tax expense increased $611,000 or 63.8% in 1998 from 1997, and
increased $158,000 or 19.7% in 1997 from 1996 levels. The effective tax rate as
a percentage of pre-tax income was 35.0% in 1998, 28.9% in 1997, and 29.1% in
1996. The increase in effective tax rate for 1998 is due to increased state tax
expense as the Company has utilized all existing carryforwards of state tax
credits. The tax rates for 1997 and 1996 are lower than the statutory federal
tax rate of 34% due to interest on tax-exempt securities, the utilization of
state tax credit carryforwards and decreases in the valuation allowance for
deferred tax assets. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Based upon the level of
historical taxable income and projection of future taxable income over the
periods which the temporary differences resulting in the deferred tax assets are
deductible, management believes it is more likely than not that the Company will
realize the benefits of these deductible differences. In both 1997 and 1996, the
Company reduced its 

                                       26
<PAGE>
 
valuation allowance for the deferred tax assets based on this assessment of the
potential realization of the benefits of temporary differences.

Provision for Loan Losses, Net Charge-offs and Allowances for Losses

     The allowance for loan losses represents a reserve for losses in the loan
portfolio. The Company has developed policies and procedures for evaluating the
overall quality of its loan portfolio and the timely identification of problem
credits. Management continues to review these policies and procedures and makes
further improvements as needed. The adequacy of the Company's allowance for loan
losses and the effectiveness of the Company's internal policies and procedures
are also reviewed periodically by the Company's regulators, independent auditors
and the Company's internal loan review personnel. The Company's regulators may
require the Company to recognize additions to the allowance based upon their
judgments about information available to them at the time of their examination.

     The Company's Board of Directors, with the recommendation of management,
approves the appropriate level for the allowance for loan losses based upon
internal policies and procedures, historical loan loss ratios, loan volume, size
and character of the loan portfolio, concentrations of loans to specific
borrowers or industries, value of the collateral underlying the loans, specific
problem loans and present or anticipated economic conditions and trends. The
Company continues to refine the methodology on which the level of the allowance
for loan losses is based, by comparing historical loss ratios utilized to actual
experience and by classifying loans for analysis based on similar risk
characteristics.

     For significant problem loans, management's review consists of the
evaluation of the financial condition and strengths of the borrower, cash flows
available for debt repayment, the related collateral supporting the loan and the
effects of known and expected economic conditions. When the evaluation reflects
a greater than normal risk associated with the individual problem loan,
management classifies the loan accordingly and allocates a portion of the
allowance for loan losses for that loan based on the results of the evaluation
described above plus the historical loss rates and regulatory guidance relating
to classified loans. The table below indicates those allowances allocated for
loans classified as problem loans and also the unallocated general allowances
included in the allowance for loan losses for the years indicated. Unallocated
general allowances are based on the historical and expected loss rates applied
to the non-classified portion of the portfolio. As reflected by the unallocated
portion of the allowance, the adequacy of the Company's allowance for loan
losses is evaluated on an overall portfolio basis. Because these allocations are
based upon estimates and subjective judgment it is not necessarily indicative of
the specific amounts or loan categories in which loan losses may occur.

                                       27
<PAGE>
 
<TABLE> 
<CAPTION> 
                                      ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

                                    December 31,          December 31,      December 31,        December 31,       December 31, 
                                       1998                  1997              1996                 1995              1994 
                                ---------------------------------------------------------------------------------------------------
                                   Amount  Percent(1)  Amount Percent(1)  Amount Percent(1)  Amount  Percent(1)  Amount  Percent(1)
                                                                         (Amounts in thousands)         
<S>                             <C>          <C>        <C>      <C>       <C>     <C>        <C>     <C>          <C>      <C>   
Balance at End of Period Applicable to:                                                                 
   Commercial, financial,                                                                               
      agricultural...............  $  235    17.25%    $ 78     17.48%   $  189   23.77%     $257    18.78%       $115     17.31%
   Real estate-construction......     144    11.66%       0     13.67%       30    8.01%      111    11.02%          0     16.78%
   Real estate-mortgage..........   1,458    50.01%     931     52.54%      189   54.03%       85    57.56%        274     53.71%
   Consumer loans to                                                                                                        
      Individuals................     365    20.56%     138     16.03%       37   14.19%       21    12.64%         29     12.20%
   Lease financing...............       5     0.52%       0      0.28%        0      --         0       --           0        --
Unallocated......................     508       --      950        --     1,023      --       861       --         857        --

                                ---------------------------------------------------------------------------------------------------
Balance at Period End............  $2,715   100.00%  $2,097    100.00%   $1,468  100.00%   $1,335   100.00%     $1,275    100.00%
</TABLE> 

(1)  Percent of loans in each category to total loans


         Additions to the allowance for loan losses, which are expensed on the
Company's income statement as the "provision for loan losses", are made
periodically to maintain the allowance for loan losses at an appropriate level
based upon management's evaluation of the potential risk in the loan portfolio.

         The Company's provision for loan losses in 1998 was $875,000, an
increase of $101,000 (13.1%) over the 1997 provision of $774,000. This increase
in the provision in 1998 was necessary to maintain an adequate allowance to
support the growth of th e loan portfolio during the year. The provision for
loan losses charged to earnings in 1996 was $470,000.

         The following table provides details regarding loan losses and
recoveries by category of loan during the most recent five year period, as well
as supplemental information relating to both net loan losses and the provision
and allowance for loan losses during each of the past five years. As the table
indicates, net charge-offs for 1998 represented 0.14% of average loans
outstanding, compared to 0.09% for 1997 and 0.26% for 1996. The Company's
charge-off ratios continue to be below the average for the industry.

                                       28
<PAGE>
 
<TABLE> 
<CAPTION> 
                                            ALLOWANCES FOR LOAN LOSSES
                                                                          December 31,
                                            ---------------------------------------------------------------------
                                                       1998        1997      1996         1995          1994
                                                                  (AMOUNTS IN THOUSANDS)
<S>                                         <C>                  <C>       <C>          <C>           <C> 
Total loans outstanding at end of period,         
net of unearned income.  .                           $208,967    $172,431  $135,212     $120,427      $108,223
                                            =====================================================================
                                            
Daily average amount of loans outstanding,  
net of unearned income.                              $189,369    $153,501  $128,592     $113,977      $102,166
                                            =====================================================================

Balance of allowance for loan losses at 
beginning of year.  .  .  .  .  .  .  .  .           $  2,097    $  1,468  $  1,335     $  1,275      $  1,265
                                                     

Loan losses:
  Commercial, financial and agricultural.                 119         112        77           93           101

  Real estate - construction.  .  .  .  .                   0           0         0            0             0

  Real estate - mortgage.  .  .  .  .  .                    0          37       171           54            41
  Consumer.  .  .  .  .  .  .  .  .  .  .                 259         205       121           43            74
                                            ---------------------------------------------------------------------
     Total loan losses.  .  .  .  .  .  .                 378         354       369          190           216
                                            ---------------------------------------------------------------------

Recoveries of previous loan losses:
  Commercial, financial and agricultural                   21          95         7           21             0
  Real estate - construction                                0           0         0            0             0
  Real estate - mortgage                                    0          18         0            5             5
  Consumer                                                100          96        25           24            41
                                         ------------------------------------------------------------------------
     Total recoveries                                     121         209        32           50            46
                                         ------------------------------------------------------------------------

Net loan losses                                           257         145       337          140           170
                                         ------------------------------------------------------------------------
Provision for loan losses                                 875         774       470          200           180
Balance of allowance for loan losses at 
end of period                                        $  2,715    $  2,097  $  1,468     $  1,335      $  1,275
                                         ========================================================================
                                                       

Allowance for loan losses to period end 
loans.  .  .  .  .  .  .  .  .  .  .  .                  1.30%       1.22%     1.09%        1.11%         1.18%
Net charge-offs to average loans.  .                     0.14%       0.09%     0.26%        0.12%         0.17%       
</TABLE> 


     At December 31, 1998, the allowance for loan losses was 1.30% of
outstanding loans, an increase from the 1.22% level of December 31, 1997.
Management considers the increase appropriate based upon its analysis of the
potential risk in the portfolio using the methods previously discussed.
Management's judgment is based upon a number of assumptions about future events
which are believed to be reasonable, but which may or may not prove correct.
While it is the Company's policy to charge off in the current period the loans
in which a loss is considered probable, there are additional risks of future
losses which cannot be quantified precisely or attributed to a particular loan
or class of loans. Because these risks include present and forecasted economic
conditions, management's judgment as to the adequacy of the allowance is
necessarily approximate and imprecise. Thus, there can be no assurance that
charge-offs in future periods will not exceed the allowance for loan losses or
that additional increases in the allowance will not be required.  

                                       29
<PAGE>
 
FINANCIAL CONDITION

Composition of the Loan Portfolio

     Loans are the primary component of the Company's earning assets and
generally are expected to provide higher yields than the other categories of
earning assets. Those higher yields reflect the inherent credit risks associated
with the loan portfolio. Management attempts to control and balance those risks
with the rewards associated with higher returns.

     Loans averaged $189.4 million in 1998 compared to $153.5 million in 1997
and $128.6 million in 1996. At December 31, 1998, loans totaled $209.0 million
compared to $172.4 million in 1997, an increase of $36.6 million (21.2%). This
compares to growth in 1997 of $37.2 million (27.5%), up from $135.2 million at
December 31, 1996.

     The Company continues to experience significant increases in loan volumes
and balances. The increases are attributable to a stable local economy, the
Company's relatively small market share and the desire of a segment of the
community to do business with a locally owned and operated financial intuition.
Average loans as a percentage of average earning assets and average total assets
was 75.1% and 68.7% respectively, in 1998. This compares to 71.1% of average
earning assets and 64.7% of average total assets in 1997 and 71.6% and 63.7%,
respectively, in 1996.

     The following table sets forth the composition of the Company's loan
portfolio as of December 31 for the past five years. The Company's loan
portfolio does not contain any concentrations of loans exceeding 10% of total
loans which are not otherwise disclosed as a category of loans in this table.
The Company has not invested in loans to finance highly-leveraged transactions
("HLT"), such as leveraged buy-out transactions, as defined by the Federal
Reserve and other regulatory agencies. Loans made by a bank for re-
capitalization or acquisitions (including acquisitions by management or
employees) which result in a material change in the borrower's financial
structure to a highly-leveraged condition are considered HLT loans. The Company
had no foreign loans or loans to lesser-developed countries as of December 31,
1998.

                                       30
<PAGE>
 
 
 
                                                    LOAN PORTFOLIO COMPOSITION
<TABLE>                                                    AT DECEMBER 31,
<CAPTION> 
                                    1998             1997                  1996                1995               1994
                                                                                                           
                                Amount     %      Amount      %       Amount      %       Amount      %       Amount      %
                           -----------------------------------------------------------------------------------------------------
                                                              (Amount in thousands, except percentages)                   
<S>                        <C>           <C>     <C>        <C>       <C>       <C>      <C>       <C>       <C>        <C>
Commercial Financial                                                                                                  
and agricultural.......      $36,055     17.25%   $30,135    17.48%    $32,141   23.77%   $22,614   18.78%    $ 18,734   17.31%
                           ------------  ------- ---------  --------  --------  -------- --------  --------  -- ------- --------
Real Estate                                                                                                            
   Commercial...........     $67,168     32.14%   $58,518    33.94%    $48,422   35.81%   $43,649   36.24%    $ 34,336   31.73%
   Residential..........      34,939     16.72%    30,513    17.70%     24,156   17.87%    25,260   20.98%      23,452   21.67%
   Residential held for                                                                                                
      sale..............       2,380      1.14%     1,548     0.90%        477    0.35%       404    0.34%         341    0.32%
   Construction and                                                                                                    
     Development........      24,373     11.66%    23,567    13.67%     10,829    8.01%    13,273   11.02%      18,155   16.78%
                           ------------  ------- ---------  --------  --------  -------- --------  --------  -- ------- --------
      Total real estate (1)  128,860     61.67%   114,146    66.20%     83,884   62.04%    82,586   68.58%      76,284   70.49%
                           ------------  ------- ---------  --------  --------  -------- --------  --------  ---------  --------
Lease financing..........      1,084      0.52%       502     0.29%          0    0.00%         0    0.00%           0    0.00%  
Consumer                                                                                                                         
   Direct................     14,082      6.74%    12,819     7.43%     11,998    8.87%    10,874    9.03%       9,029    8.34%  
   Indirect..............     15,555      7.44%     2,300     1.33%          0    0.00%         0    0.00%           0    0.00%  
   Home equity...........     10,145      4.85%     9,557     5.54%      5,580    4.13%     2,928    2.43%       2,676    2.47%  
   Revolving (2).........      3,186      1.52%     2,972     1.72%      1,609    1.19%     1,425    1.18%       1,500    1.39%   
                           ------------  ------- ---------  --------   --------  -------- -------- ---------  --------- --------
     Total consumer......     42,968     20.56%    27,648    16.03%     19,187   14.19%    15,227   12.64%      13,205   12.20%
                           ------------  ------- --------   --------   --------  -------- -------- ---------  --------- --------
     Total...............   $208,967    100.00%  $172,431   100.00%   $135,212  100.00%  $120,427  100.00%    $108,223  100.00%
                           ============ ======= =========   ========  ========  ======== ========  =========  ========= ========
</TABLE> 

(1) Excluding home equity lines that, while secured by real estate and reported
    elsewhere herein as real estate loans, are included under the consumer loan
    category in this table.

(2) Includes credit cards and other revolving consumer lines, excluding home
    equity lines.


          Loans may be periodically renewed with principal reductions and
          appropriate interest rate adjustments. Loan maturities as of December
          31, 1998 are set forth in the following table based upon contractual
          terms. Actual cash flows may differ as borrowers have the right to
          prepay without prepayment penalties.

 
  
                                       LOAN MATURITY SCHEDULE
<TABLE>                                AT DECEMBER 31, 1998
<CAPTION>
                                                                                     One to         After
                                                                       Within         Five          Five
          ($ in thousands)                                            One Year        Years         Years        Total
          ----------------------------------------------------------------------------------------------------------------
         <S>                                                        <C>              <C>            <C>          <C> 
          Commercial, financial and agricultural                        $ 13,366      $ 22,431       $  258       $  36,055
          Real Estate
             Construction and development                                 24,373             0            0          24,373
             Mortgage                                                     55,327        29,488       20,756         105,571
          Consumer                                                        13,599        27,380        1,989          42,968
          -----------------------------------------------------------------------------------------------------------------
          Total loans                                                   $106,665      $ 79,299      $ 23,003      $ 208,967
          =================================================================================================================
</TABLE> 
         

                                       31
<PAGE>
 
     The following table presents an interest rate sensitivity analysis of the
Company's loan portfolio at December 31, 1998. The loans outstanding are shown
in the time period where they are first subject to repricing.

               SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES
                             AT DECEMBER 31, 1998

<TABLE> 
<CAPTION> 
                                                               ONE TO        AFTER    
                                                 WITHIN         FIVE         FIVE
($ IN THOUSANDS)                                ONE YEAR        YEARS        YEARS        TOTAL
----------------------------------------------------------------------------------------------------
<S>                                             <C>            <C>           <C>          <C> 
Loans maturing with:
   Predetermined interest rates                  $ 51,599       $57,754       $5,969     $115,322
   Floating or adjustable interest rates           84,661         6,597        2,387       93,645
----------------------------------------------------------------------------------------------------
Total loans                                      $136,260       $64,351       $8,356     $208,967
====================================================================================================
</TABLE> 


Non-Performing Assets.

         As a result of management's ongoing review of the loan portfolio, loans
are classified as non-accrual when it is not reasonable to expect collections of
interest and principal under the original terms, generally when a loan becomes
90 days or more past due. These loans are classified as non-accrual, even though
the presence of collateral or the borrower's financial strength may be
sufficient to provide for ultimate repayment. When a loan is placed on
non-accrual, the interest which has been accrued but remains unpaid is reversed
and deducted from current period interest income. No additional interest is
accrued and recognized as income on the loan balance until the collection of
both principal and interest becomes reasonably certain. Also, there may be
writedowns and, ultimately, the total charge-off of the principal balance of the
loan, which could necessitate additional charges to earnings through the
provision for loan losses.

         If non-accruing loans had been accruing interest under their original
terms, approximately $43,000 in 1998, $8,000 in 1997 and $28,000 in 1996 would
have been recognized as earnings.

         The Company accounts for impaired loans under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 114 "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures", which
requires that the Company evaluate the collectibility of both contractual
interest and principal of loans when assessing the need for a loss allowance.
The provisions of SFAS No. 114 do not apply to large pools of smaller balance
homogeneous loans which are collectively evaluated for impairment. A loan is
considered impaired, when based upon current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the note agreement. All loans determined to be impaired
are placed on non-accrual. The amount of the impairment is measured based on the
present value of 

                                       32
<PAGE>
 
future cash flows discounted at the loan's effective interest rate or the fair
value of collateral, less estimated selling expenses, if the loan is collateral
dependent or foreclosure is probable.

         Non-performing loans are defined as non-accrual and renegotiated loans.
When real estate acquired by foreclosure and held for sale is included with non-
performing loans, the result is non-performing assets. 
The following table, "Non-Performing Assets", presents information on these
assets and loans past due 90 days or more and still accruing interest as of
December 31, for the past five years. Non-performing assets were $2.9 million at
December 31, 1998 or 1.40% of total loans and real estate acquired by
foreclosure. This compares with $2.4 million or 1.37% of total loans and real
estate acquired by foreclosure at December 31, 1997. At December 31, 1998, all
nonaccrual loans were secured.

         Three credits totaling $2.4 million are included in the non-accrual
loan balance at December 31, 1998. These loans are secured by real estate
collateral and other collateral, as well as the personal guaranties of the
principals. Due to the superior lien position of the Company, management feels
there is minimum risk of loss although there is no assurance of this assessment
until the normal repayment and collection process are completed. Total allowance
for these impaired loans of $260,000 is included in the Table on page 29 titled
"Allocation of the Allowance for Loan Losses" under the heading Real
estate-mortgage.

         The increase in non-performing loans during 1998 reflects primarily the
deterioration of one of the credits previously mentioned. The overall reduction
in the remaining non-performing loans reflects the resolution of several prior
"problem loans" through the disposition of other real estate owned and
management's continuing focused emphasis on asset quality. At December 31, 1998,
loans past due 90 days or more and still accruing interest totaled $44,000, an
increase from $15,000 in 1997 and a decrease from $131,000 at the end of 1996.
Management believes the Company will receive full payment of principal and
accrued interest on these loans because of the Company's collateral position and
other factors, despite their past due status.

                                       33
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                 NON-PERFORMING ASSETS
                                                               AT YEAR ENDED DECEMBER 31,
                                        -------------------------------------------------------------------------
                                              1998         1997        1996              1995           1994
                                        -----------  -----------   ------------      ------------   -------------
                                                       (Amounts in thousands, except percentages)
<S>                                     <C>          <C>           <C>               <C>            <C> 
Non-accrual loans....................       $2,925       $2,092         $1,747           $   786        $  1,237
Restructured loans...................            0            0              0                 0               0
Other real estate owned..............            0          275            150                75               0
                                        -----------  -----------   ------------      ------------   -------------
     Total nonperforming assets......       $2,925       $2,367         $1,897           $   861        $  1,237
                                        ===========  ===========   ============      ============   =============

Loans past due 90 days or more and 
still accruing interest.............        $   44       $   15         $  131           $   279        $    131
                                        ===========  ===========   ============      ============   =============

Allowance for loan losses to period end 
total loans........................           1.30%        1.22%          1.09%             1.11%           1.18%
Allowance for loan losses to period end 
nonperforming assets ..............          92.82%       88.59%         77.38%           155.05%         103.07%
Net charge-offs to average loans...           0.14%        0.09%          0.26%             0.12%           0.17%
Nonperforming assets to period end 
loans..............................           1.40%        1.37%          1.40%             0.72%           1.14%
Nonperforming assets to period end loans 
and foreclosed property............           1.40%        1.37%          1.40%             0.72%           1.14%
</TABLE> 


         Management is not aware of any loans classified for regulatory purposes
as loss, doubtful, substandard, or special mention that have not been disclosed
which (1) represents or results from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources, or (2) represents material credits about which management
is aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.

Investment Securities

         The Company's investment securities portfolio increased 16.2% or $8.8
million to $63.1 million at year-end 1998 from 1997 levels. The Company
maintains an investment strategy of seeking portfolio yields within acceptable
risk levels, as well as providing liquidity. The Company maintains two
classifications of investments: "Held to Maturity" and "Available for Sale."
"Available for Sale" securities are carried at fair market value with related
unrealized gains or losses included in stockholders equity as accumulated other
comprehensive income, whereas the "Held to Maturity" securities are carried at
amortized cost. As a consequence, with a higher percentage of securities being
placed in the "Available for Sale" category, the Company's stockholders' equity
is more volatile than it would be if a larger percentage of investment
securities were placed in the "Held to Maturity" category. Although equity is
more volatile, management has discretion, with respect to the "Available for
Sale" securities, to proactively adjust to favorable market conditions in order
to provide liquidity and realize gains on the sales of securities. The changes
in values in the investment securities portfolio are not taken into account in
determining regulatory capital requirements. As of December 31, 1998, except for
the U.S. Government and its agencies, there was not any issuer who represented
10% or more of shareholders' equity within the investment portfolio. 

                                       34
<PAGE>
 
The following table presents the amortized cost and fair values of investment 
securities held by the Company at December 31, 1998, 1997, and 1996:

                            INVESTMENT SECURITIES 
                                                           
<TABLE> 
<CAPTION> 
                                                                         AS OF DECEMBER 31,
                         --------------------------------------------------------------------------------------------------------
                                                 1998                                             1997  
                         --------------------------------------------------------------------------------------------------------
                                                        UN-                                                     UN-     ESTIMATED
AVAILABLE-FOR-SALE       AMORTIZED     UNREALIZED    REALIZED     ESTIMATED       AMORTIZED     UNREALIZED    REALIZE      FAIR
                           COST          GAINS        LOSSES      FAIR VALUE         COST         GAINS        LOSES       VALUE
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                           (Amounts in Thousands)
<S>                      <C>           <C>           <C>          <C>             <C>           <C>           <C>       <C> 
U.S. Treasuries              $2,985       $   69       $0         $ 3,054         $ 4,461         $ 52          $0       $ 4,513 
U.S. Government                                                                                                                 
Agencies                     23,533          294      (17)         23,810          21,839          128         (76)       21,891
Mortgage-backed                                                                                                                 
securities                   15,563          126      (16)         15,673          14,240          103          (4)       14,339
REMICs                       12,440           21     (293)         12,168           8,487           12        (153)        8,346
Equity securities             1,487        2,728        0           4,215           1,339            0           0         1,339
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                
   Total                    $56,008       $3,238    ($326)        $58,920         $50,366         $295       ($233)      $50,428 
================================================================================================================================

<CAPTION> 
                        -------------------------------------------------
                                                 1996
                        -------------------------------------------------
                                       Un-          Un-
Available-for-sale      Amortized    realized     realized     Estimated 
                           Cost        Gains        Cost       Fair Value 
-------------------------------------------------------------------------
<S>                     <C>          <C>          <C>          <C> 
                  
U.S. Treasuries          $ 7,424       $ 32           ($8)         $7,448
U.S. Government                                           
Agencies                  24,245         75          (200)         24,120
Mortgage-backed                                           
securities               10,588          39           (38)         10,590
REMICs                   10,058          27          (206)          9,879
Equity securities           783           0             0             783
-------------------------------------------------------------------------
                                                          
   Total                 $53,098       $173         ($452)        $52,820
=========================================================================
</TABLE> 

<TABLE> 
<CAPTION> 
                                                 1998                                               1997                         
                         -------------------------------------------------------------------------------------------------------
                                                     Un-                                                 Un-                    
                         Amortized   Unrealized   realized     Estimated    Amortized    Unrealized    realized      Estimated  
Held-to-maturity           Cost        Gains       Losses      Fair Value      Cost        Gains         Loses       Fair Value 
--------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>         <C>          <C>          <C>          <C>          <C>           <C>           <C>        
Obligations of states                                                                                                           
and political                                                                                                                   
subdivisions              $3,386       $111         $0         $3,497         $2,860          $42          ($2)       $2,900    
                                                                                                                                
REMICs                       789         12          0            801          1,032           16            0         1,048    
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                
   Total                  $4,175       $123         $0         $4,298         $3,892          $58          ($2)       $3,948    
================================================================================================================================

<CAPTION> 
                                             1996
                           ----------------------------------------------
                                         Un-         Un-
                           Amortized   realized    realizes    Estimated
Held-to-maturity             Cost       Gains       Loses      Fair Value
-------------------------------------------------------------------------
<S>                        <C>         <C>         <C>         <C> 
Obligations of states      
and political              
subdivisions                 $2,492        $30         ($9)        $2,512
                                                             
REMICs                        1,999          5          (3)         2,001
-------------------------------------------------------------------------
                                                             
   Total                     $4,491        $35        ($12)        $4,513
=========================================================================
</TABLE> 


          The following table represents maturities and weighted average yields
     of securities at December 31, 1998 and 1997. Yields are based on the
     amortized cost of securities. Maturities are based on the contractual
     maturities. Expected maturities may differ from contractual maturities
     because issuers may have the right to call or prepay obligations with or
     without call or prepayment penalties.

                                       35
<PAGE>
 
                      MATURITY DISTRIBUTION AND YIELDS OF
                             INVESTMENT SECURITIES

<TABLE> 
<CAPTION> 
                                                DECEMBER 31, 1998                  DECEMBER 31, 1997
                                            AMORTIZED COST     YIELD          AMORTIZED COST        YIELD
                                            --------------     -----          --------------        -----
<S>                                         <C>                <C>            <C>                   <C> 
Securities Available for Sale
U.S. Treasury
   One year or less......................  $   498,607          6.45%         $   498,844            5.92%
   Over one through five years...........    2,486,214          5.93%           3,962,431            6.35%
                                           ----------------------------------------------------------------
      Total U. S. Treasury...............  $ 2,984,821          6.02%         $ 4,461,275            6.30%
                                           ----------------------------------------------------------------

U.S. Government Agencies
   One year or less......................  $         0          0.00%         $    70,518            8.48%
   Over one through five years...........   23,709,745          6.03%          16,550,764            6.41%
   Over five through ten years(1)........    8,939,904          6.07%           8,341,668            6.44%
   Over ten years(2).....................   18,886,626          5.54%          19,602,719            6.06%
                                           ----------------------------------------------------------------
      Total U. S. Government Agencies ...  $51,536,276          5.85%         $44,565,669            6.25%
                                           ----------------------------------------------------------------

                                           ----------------------------------------------------------------
Total Securities Available for Sale......  $54,521,097          5.87%         $49,026,944            6.28%
                                           ----------------------------------------------------------------

SECURITIES HELD TO MATURITY

U.S. Government Agencies
   One year or less......................            0          0.00%                   0            0.00%
   Over one through five years...........      660,748          6.97%                   0            0.00%
   Over five through ten years...........            0          0.00%             659,991            6.98%
   Over ten years........................      128,078          7.74%             372,485            7.93%
                                           ----------------------------------------------------------------
      Total U. S. Government Agencies....      788,826          7.10%         $ 1,032,476            7.32%
                                           ----------------------------------------------------------------

Municipal Securities(3)
   One year or less......................      115,000          6.30%             984,967            5.43%
   Over one through five years...........      781,045          6.85%             697,713            7.90%
   Over five through ten years...........    1,301,501          5.84%             497,148            6.21%
   Over ten years........................    1,188,397          7.14%             680,000            7.29%
                                           ----------------------------------------------------------------
      Total Municipal Securities.........  $ 3,385,943          6.64%         $ 2,859,828            6.42%
                                           ----------------------------------------------------------------

                                           ----------------------------------------------------------------
Total Securities Held to Maturity........  $ 4,174,769          6.73%         $ 3,892,304            6.66%
                                           ----------------------------------------------------------------

                                           ----------------------------------------------------------------
Total Investment Securities..............  $58,695,866          5.93%         $52,919,248            6.30%
                                           ================================================================
</TABLE> 

(1)  Includes $1,000,271 and $500,755 in adjustable-rate mortgage-backed
     securities for 1998 and 1997, respectively.
(2)  Includes $11,267,675 and $14,899,786 in adjustable-rate mortgage-backed
     securities for 1998 and 1997, respectively.

(3)  Tax-equivalent yield


Asset/Liability Management, Interest Rate Sensitivity and Liquidity

     General.  It is the objective of the Company to manage assets and
liabilities to preserve the integrity and safety of the deposit and capital base
of the Company by protecting the Company from undue exposure to poor asset
quality and interest rate risk. Additionally, the Company pursues a consistent
level of earnings as further protection of the depositors and to provide an
appropriate return to stockholders on their investment.

                                       36
<PAGE>
 
     These objectives are achieved through compliance with an established
framework of asset/liability, interest rate risk, loan, investment, and capital
policies. Management is responsible for monitoring policies and procedures that
result in proper management of the components of the asset/liability function to
achieve stated objectives. The Company's philosophy is to support quality asset
growth primarily through growth of core deposits, which include non-volatile
deposits of individuals, partnerships and corporations. Management seeks to
invest the largest portion of the Company's assets in loans that meet the
Company's quality standards. Alternative investments are made in the investment
portfolio. The Company's asset/liability function and related components of
liquidity and interest rate risk are monitored on a continuous basis by
management. The Board of Directors reviews and monitors these functions on a
monthly basis.

     Interest Rate Sensitivity. The process of asset/liability management
involves monitoring the Company's balance sheet in order to determine the
potential impact that changes in the interest rate environment would have on net
interest income so that the appropriate strategies to minimize any negative
impact can be implemented. The primary objective of asset/liability management
is to continue the steady growth of net interest income, the Company's primary
earnings component within a context of liquidity requirements.

     In theory, interest rate risk can be minimized by maintaining a nominal
level of interest rate sensitivity. In practice, however, this is made difficult
because of uncontrollable influences on the Company's balance sheet, including
variations in both loan demand and the availability of funding sources.

     The measurement of the Company's interest rate sensitivity, or "gap", is
one of the principal techniques employed by the Company in asset/liability
management. Interest sensitive gap is the dollar difference between assets and
liabilities which are subject to interest rate repricing within a given time
period, including both floating rate or adjustable instruments and instruments
which are approaching maturity.

     The Company manages its sensitivity to interest rate movements by adjusting
the maturity of, and establishing rates on, the earning asset portfolio and
interest- bearing liabilities in line with management's expectations relative to
market interest rates. The Company would generally benefit from increasing
market interest rates when the balance sheet is asset sensitive and would
benefit from decreasing market rates when it is liability sensitive. At December
31, 1998, the Company's interest rate sensitivity position was liability
sensitive within the one-year horizon.

     The following table "Interest Sensitivity Analysis" details the interest
rate sensitivity of the Company at December 31, 1998. The principal balances of
the various interest-earning and interest-bearing balance sheet instruments are
shown in the time period where they are first subject to repricing, whether as a
result of floating or adjustable rate contracts or contractual maturity. In the
one-year time period, the pricing mismatch on a cumulative basis was liability
sensitive $19.8 million or 7.32% of total earning assets. In the current
interest rate environment, management considers this level of interest rate risk
to be acceptable although procedures are in place to carefully monitor the
Company's interest rate sensitivity as the rate environment changes. It should
also be

                                       37
<PAGE>
 
noted that all interest rates do not adjust at the same velocity. As an example,
the majority of the savings category listed below is priced on adjustable basis
that is sixty percent of Prime Rate. Therefore, as the Prime Rate adjusts 100
basis points, the rate on this liability only adjusts 60 basis points. Moreover,
varying interest rate environments can create unexpected changes in prepayment
levels of assets and liabilities which are not reflected in the interest
sensitivity analysis report. Prepayments may have significant effects on the
Company's net interest margin. Hence, gap is only a general indicator of
interest rate sensitivity and cannot be interpreted as an absolute measurement
of the Company's interest rate risk.

                         INTEREST SENSITIVITY ANALYSIS
                             AT DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                                     AFTER
                                                     THREE        AFTER SIX                ONE YEAR
                                       WITHIN       THROUGH        THROUGH                  THROUGH
                                       THREE          SIX           TWELVE       WITHIN       FIVE         OVER FIVE
                                       MONTHS        MONTHS         MONTHS      ONE YEAR      YEARS          YEARS       TOTAL
                                    ---------------------------------------------------------------------------------------------
                                                                (AMOUNTS IN THOUSANDS, EXCEPT RATIOS)
<S>                                 <C>           <C>           <C>           <C>          <C>          <C>             <C>        
EARNING ASSETS:
Loans.............................      $102,539     $  13,109      $ 20,612     $136,260      $64,351       $ 8,356    $208,967
Investment securities, taxable....         9,457         3,957         7,397       20,811       24,217        10,698      55,726
Investment securities, tax-free...           156           159           238          553        1,372         1,229       3,154
Interest-bearing deposits with 
banks.............................             0             0             0            0            0             0           0
Federal Funds sold................         2,370             0             0        2,370            0             0       2,370
                                    ------------- ------------- ------------- ------------ ------------ -------------------------
     Total earning assets.........      $114,522     $  17,225      $ 28,247     $159,994      $89,940       $20,283    $270,217
                                    ============= ============= ============= ============ ============ =========================

INTEREST BEARING LIABILITIES:
Money market accounts.............      $  9,329     $        0     $      0     $  9,329       $3,109       $ 3,109    $ 15,547
Savings deposits..................        76,066           236           471       76,773        3,769             0      80,542
NOW accounts......................        21,535             0             0       21,535        7,179         7,179      35,893
Time deposits.....................        19,733        13,682        35,102       68,517       10,104           185      78,806
Federal funds purchased/securities   
sold under repurchase agreements..         2,714             0             0        2,714            0             0       2,714
Federal Home Loan Bank               
advances..........................             0             0             0            0        9,000             0       9,000
Other borrowed funds..............           900             0             0          900            0             0         900
                                    ------------- ------------- ------------- ------------ ------------ -------------------------
     Total interest-bearing
liabilities.......................      $130,277     $  13,918      $ 35,573     $179,768      $33,161       $10,473    $223,402
                                    ============= ============= ============= ============ ============ =========================

Interest-free funds...............             0             0             0            0            0        46,815      46,815
                                    ------------- ------------- ------------- ------------ ------------ -------------------------
Funds supporting earning assets...      $130,277     $  13,918      $ 35,573     $179,768      $33,161       $57,288    $270,217
                                    ============= ============= ============= ============ ============ =========================

Period gap........................      $(15,755)    $   3,307      $ (7,326)    $(19,774)     $56,779      ($37,005)          0
Cumulative gap....................      $(15,755)    $ (12,448)     $(19,774)    $(19,774)     $37,005             0           0
Ratio of cumulative gap to total     
earning assets....................         -5.83%        -4.61%        -7.32%       -7.32%       13.69%            0           0
</TABLE>

                                       38
<PAGE>
 
     Liquidity. Management of the Company's liquidity position is closely
related to the process of asset/liability management. Liquidity represents the
ability to provide steady sources of funds for loan commitments and investment
activities, as well as to provide sufficient funds to cover deposit withdrawals
and payment of debt and operating obligations. The Company intends to meet its
liquidity needs by managing cash and due from banks, federal funds sold and
purchased, maturity of investment securities, paydowns received from mortgage-
backed securities and lines of credit as necessary. Additionally, liquidity
needs can be satisfied by the structuring of the maturities of investment
securities and the pricing and maturities on loans and deposits offered to
customers.

     Average liquid assets (cash and amounts due from banks, federal funds sold,
investment securities and other short term investments) were maintained at 31.8%
of average deposits in 1998 compared to 35.0% in 1997 and 34.3% in 1996.

Deposits

     The Company's average deposits, short-term borrowings and other borrowings
increased $27.6 million or 12.6% from 1997 to 1998. Average interest-bearing
liabilities increased $24.8 million or 13.4% while average non-interest bearing
deposits increased $2.8 million or 8.1%. Average deposits and borrowings
increased $34.3 million or 18.5% from 1996 to 1997. Average interest-bearing
liabilities increased $30.6 million or 19.9% from 1996 to 1997, while average
non-interest bearing deposits increased $3.7 million or 11.7% during the same
period. The majority of the growth in deposits since 1996 reflects the Company's
strategy of consistently emphasizing deposit growth, as deposits are the primary
source of funding for balance sheet growth. Borrowed funds consist of short-term
borrowings, primarily federal funds purchased, securities sold under agreements
to repurchase with the Bank's commercial customers, and borrowings from the
Federal Home Loan Bank. The following table presents the average amount
outstanding and the average rate paid on deposits and borrowings by the Company
for the years 1998, 1997 and 1996:

            AVERAGE DEPOSIT AND OTHER BORROWING BALANCES AND RATES

<TABLE> 
<CAPTION> 
                                                                    YEAR ENDED DECEMBER 31,
                                                1998                         1997                           1996
                                     --------------------------    -------------------------    ---------------------------
                                        AVERAGE        AVERAGE       AVERAGE        AVERAGE       AVERAGE        AVERAGE
                                         AMOUNT          RATE         AMOUNT         RATE          AMOUNT          RATE
---------------------------------------------------------------    -------------------------    ---------------------------
                                                       (Amounts in thousands, except percentages)
<S>                                  <C>               <C>         <C>              <C>         <C>              <C> 
Non-interest bearing demand
    deposits                              $ 37,733         0.00%      $ 34,916          0.00%      $ 31,253          0.00%
Interest-bearing liabilities:
   Transaction accounts                     29,664         2.17%        26,324          2.38%        20,454          2.54%
   Savings, money market                    86,438         4.65%        74,835          4.67%        55,661          4.38%
   Time                                     78,652         5.59%        74,810          5.50%        74,048          5.67%
   Funds purchased/repurchased               5,798         3.50%         4,222          3.20%         1,068          4.12%
       securities agreements
  Other borrowings                           8,780         6.31%         4,389          6.02%         2,713          6.52%
---------------------------------------------------------------------------------------------------------------------------
       Total interest-bearing
        liabilities                       $209,332         4.69%      $184,580          4.68%      $153,944          4.79%
===========================================================================================================================
Total non-interest & interest bearing
    liabilities                           $247,065                    $219,496                     $185,197
</TABLE> 

                                       39
<PAGE>
 
     The following table presents the maturities of the Company's time deposits
over $100,000 and other time deposits at December 31, 1998:

<TABLE> 
<CAPTION> 
                                              MATURITIES OF TIME DEPOSITS
                                            TIME DEPOSITS             OTHER TIME
                                            OVER $100,000              DEPOSITS              TOTAL
------------------------------------------------------------------------------------------------------
<S>                                      <C>                          <C>                    <C> 
Months to Maturity
   Within 3 months                                   $11,852                 $ 7,881          $19,733
   After 3 through 6 months                            7,404                   6,278           13,682
   After 6 through 12 months                          13,924                  21,178           35,102
                                         -------------------------------------------------------------
    Within one year                                   33,180                  35,337           68,517
   After 12 months                                     1,050                   9,239           10,289
                                         -------------------------------------------------------------

        Total                                        $34,230                 $44,576          $78,806
                                         =============================================================
</TABLE> 

     This table indicates that the majority of Certificates of Deposit,
regardless of size, have a maturity of less than twelve months. This is
reflective of both the Company's market and recent interest rate environments.
Large certificate of deposit customers tend to be extremely rate sensitive,
making these deposits a volatile source of funding for liquidity planning
purposes. However, dependent upon pricing, these deposits are virtually always
available in the Company's market. The Company does not presently solicit or
obtain large certificates of deposit from outside its local market area.

CAPITAL

     Total shareholders' equity was $28.6 million at December 31, 1998,
increasing $4.8 million or 20.0% from the previous year. The increase was
comprised of earnings of $2.9 million and an increase in accumulated other
comprehensive income of $1.9 million. The increase in accumulated other
comprehensive income represents unrealized gains on investments, including
equity securities. In 1996 and 1997, the Company made equity investments
totaling $150,000 in Towne Services, Inc. These investments were for the purpose
of providing capital to acquire and implement a processing system for equipment
and vehicle leasing. Towne Services, Inc. also provided processing services for
an automated asset management (accounts receivable) system. Based upon the
acceptance and success of its services and the resulting growth of the company,
Towne Services sold 4,000,000 shares of common stock in an initial public
offering in July of 1998 at a price of $8.00 per share.

     At December 31, 1998, the Company held 383,400 common shares of Towne
Services, Inc. which are included in investment securities and categorized as
available-for-sale in the Company's Consolidated Balance Sheet. Under the terms
and conditions of the initial public offering, the Company could not sell its
shares in Towne Services, Inc. until January 29, 1999. The Company continues to
analyze whether to hold or sell its holdings in Towne Services, Inc. Until July,
1998 no public market existed for the stock of Towns Services, Inc. and its
market value is subject to all the circumstances reflected in the price
volatility of similar offerings and the equity markets generally. At December
31, 1998, based upon the per share price of $7.50, the total market value of the
Company's shares in Towne Services, Inc. was $2,875,500.

                                       40
<PAGE>
 
     The Company's average equity to average total assets was 9.38% in 1998
compared to 7.55% in 1997 and 7.64% in 1996. The increase in 1998 reflects the
additional capital of $4.9 million raised from a common stock offering of
278,000 shares of Company common stock completed October 31, 1997. Capital is
considered to be very adequate to meet present operating needs and anticipated
future operating requirements. Management is not aware of any trends, events, or
uncertainties that are reasonably likely to have a material effect on the
Company's capital resources or operations. The following table presents the
return on equity and assets for the years 1998, 1997 and 1996.

<TABLE> 
<CAPTION> 
                                                 RETURN ON EQUITY AND ASSETS

                                                     1998           1997          1996
                                                     ----           ----          ----
<S>                                                 <C>            <C>           <C> 
Return on average total assets                       1.06%          0.99%         0.97%
                                                                               
Return on average equity                            11.27%         13.05%        12.65%
                                                                               
Average Equity to average assets ratio               9.38%          7.55%         7.64%
</TABLE> 

     At December 31, 1998, the Company was well above the minimum capital ratios
required under the regulatory risk-based capital guidelines. The following table
presents the capital ratios for the Company and the Bank.

                                       41
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                    ANALYSIS OF CAPITAL
                                               Required                    Actual                      Excess
--------------------------------------------------------------------------------------------------------------------------
                                            Amount       %           Amount         %            Amount         %
--------------------------------------------------------------------------------------------------------------------------
                                                    (Amounts in thousands, except percentages)
<S>                                          <C>       <C>           <C>          <C>            <C>           <C> 
GEORGIA BANK FINANCIAL CORPORATION
             12/31/98
Risk-based capital:
  Tier 1 capital                            $ 9,140    4.00%         $26,120      11.43%         $16,980       7.43%
  Total capital                              18,280    8.00%          30,062      13.16%          11,782       5.16%
Tier 1 leverage ratio                        11,701    4.00%          26,120       8.93%          14,419       4.93% 
             12/31/97
Risk-based capital
  Tier 1 capital                            $ 7,544    4.00%         $23,082      12.24%         $15,538       8.24%
  Total capital                              15,088    8.00%          25,179      13.35%          10,091       5.35%
Tier 1 leverage ratio                        10,132    4.00%          23,082       9.11%          12,950       5.11%

GEORGIA BANK & TRUST COMPANY
             12/31/98
Risk-based capital:
  Tier 1 capital                            $ 9,060    4.00%         $24,598      10.86%         $15,538       6.86%
  Total capital                              18,119    8.00%          27,668      12.22%           9,549       4.22%
Tier 1 leverage ratio                        11,599    4.00%          24,598       8.48%          12,999       4.48%
             12/31/97
Risk-based capital
  Tier 1 capital                            $ 7,448    4.00%         $21,553      11.58%         $14,105       7.58%
  Total capital                              14,896    8.00%          23,650      12.70%           8,754       4.70%
Tier 1 leverage ratio                        10,076    4.00%          21,553       8.56%          11,477       4.56% 
</TABLE> 

FORWARD-LOOKING STATEMENTS

     The Company may from time to time make written or oral forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission (the "Commission") and its reports to
shareholders. Statements made in the Annual Report, other than those concerning
historical information, should be considered forward-looking and subject to
various risks and uncertainties. Such forward-looking statements are made based
upon management's belief as well as assumptions made by, and information
currently available to, management pursuant to "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. The Company's actual results
may differ materially from the results anticipated in forward-looking statements
due to a variety of factors, including governmental monetary and fiscal
policies, deposit levels, loan demand, loan collateral values, securities
portfolio values, interest rate risk management; the effects of competition in
the banking business from other commercial banks, savings and loan associations,
mortgage banking firms, consumer finance companies, credit unions, securities
brokerage firms, insurance companies, money market mutual funds and other
financial institutions operating in the Company's market area and elsewhere,
including institutions operating through the Internet, changes in governmental
regulation relating to the banking industry, including regulations relating to
branching and acquisitions, failure of assumptions underlying the establishment
of reserves for loan losses, including the value of collateral underlying
delinquent loans, and other factors. The Company cautions that such factors are
not exclusive. The Company

                                       42
<PAGE>
 
does not undertake to update any forward-looking statement that may be made from
time to time by, or on behalf of, the Company.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS
No. 133). SFAS No. 133 is effective for financial statements for all fiscal
quarters of all fiscal years beginning after June 15, 1999. The Company does not
believe the provisions of SFAS No. 133 will have a significant impact on the
financial statements upon adoption.

YEAR 2000 ISSUE

         The Company recognizes the scope and potential problems associated with
the Year 2000 compliance program. The Company has adopted a plan of action and
has in place a team of key managers to define and implement steps to address the
problem for all of the Company's mission critical systems and hardware including
embedded chip devices. The Company has progressed through the awareness,
assessment and renovations phases and is well into the validation phase where
testing is conducted and results analyzed to confirm the changes made to bring
the affected system into compliance and that no problems surface as a result of
the changes. It is anticipated that validation of mission critical systems will
be substantially complete by March 31, 1999. In addition to systems compliance,
the Company has evaluated all significant credit customer relationships to
determine any risks represented to the Company by the impact of Year 2000 on
customer operations. Based upon this evaluation, the Company is not aware of
more than the normal credit risk associated with these relationships and no
special additions to the allowance for loan losses are believed to be necessary.
Also, the Company has incorporated Year 2000 compliance into its Loan Policy,
underwriting standards and loan documentation.

         In addition to assessing the Company's information technology system
and the risks of customer credit relationships, the Company has also assessed it
electronic equipment, such as building security, environmental systems and other
devices which contain embedded electronic circuits. With regards to these non-
information technology systems, the Company anticipates substantial, if not
complete, Year 2000 compliance no later than March 31, 1999.

         The management of the Company expects to incur expenses of
approximately $450,000, of which $250,000 was budgeted for 1998 and $200,000 for
1999, to modify its information systems appropriately to accurately process
information for the year 2000 and beyond. In 1998, the Company incurred costs of
$332,000 for the replacement of non-compliant hardware and software. The Company
continues to evaluate appropriate courses of corrective action including
replacement of certain systems whose associated costs would be recorded as
assets and amortized. Other ongoing costs such as personnel expense for testing
are being expensed as incurred. Management expects that the costs to convert the
Company's information systems to Year 2000 compliance will not have material
impact on the Company's consolidated financial statements or results of
operation. The costs of the Year 2000 project and the date which the Company
plans to complete the Year 2000 modifications are based upon management's best
estimates, which were derived utilizing numerous 

                                       43
<PAGE>
 
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.

         While not anticipated at this time, the Company could potentially
experience disruptions to some aspects of its various activities and operations
as a result of non-compliant systems utilized by the Company or unrelated third
parties. Contingency plans are, therefore under development to mitigate the
extent of any such disruption to business operation. The Company's contingency
plans are expected to be substantially complete by March 31, 1999.

         In its efforts to achieve Year 2000 compliance, as of December 31,
1998, the Company believes it has met all the regulatory requirements of the
Federal Financial Institutions Examination Council ("FFIEC").

EFFECTS OF INFLATION AND CHANGING PRICES

         Inflation generally increases the cost of funds and operating overhead,
and to the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction and to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation can increase a
financial institution's cost of goods and services purchased, the cost of
salaries and benefits, occupancy expense and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely affect liquidity, earnings, and
stockholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase, and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.

         Various information shown elsewhere herein will assist in the
understanding of how well the Company is positioned to react to changing
interest rates and inflationary trends. In particular, the summary of net
interest income, the maturity distributions and compositions of the loan and
security portfolios and the data on the interest sensitivity of loans and
deposits should be considered.

                                       44
<PAGE>
 
ITEM 7:  FINANCIAL STATEMENTS

         The consolidated financial statements of the Company as of December 31,
1998 and 1997 and for each of the years in the three-year period ended December
31, 1998, are set forth on the following pages.

                                                                           Page
                                                                           ---- 

<TABLE> 
<CAPTION> 
<S>                                                                        <C> 
Report of Independent Auditors, KPMG LLP                                    46


   Consolidated Balance Sheets as of December 31, 1998 and 1997             47

   Consolidated Statements of Income for Years Ended
     December 31, 1998, 1997 and 1996                                       48

   Consolidated Statements of Stockholders' Equity and Comprehensive
     Income for Years Ended December 31, 1998, 1997 and 1996                49

   Consolidated Statements of Cash Flows for Years Ended
     December 31, 1998, 1997 and 1996                                       50

Notes to Consolidated Financial Statements                                  52
</TABLE> 

                                       45
<PAGE>
 
                         Independent Auditors' Report


The Board of Directors
Georgia Bank Financial Corporation:

We have audited the accompanying consolidated balance sheets of Georgia Bank
Financial Corporation and subsidiary (the "Bank") as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholders' equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Georgia Bank
Financial Corporation and subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.



                                                    KPMG LLP

Atlanta, Georgia
January 8, 1999

                                       46
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
                          Consolidated Balance Sheets
                          December 31, 1998 and 1997

<TABLE> 
<CAPTION> 
                                    ASSETS                                               1998                  1997
                                                                                    -----------          ------------
<S>                                                                                 <C>                   <C>      
Cash and due from banks (note 2)                                                   $  7,546,911            12,309,983
Federal funds sold                                                                    2,370,000               860,000
                                                                                    -----------           -----------  
        Cash and cash equivalents                                                     9,916,911            13,169,983
                                                                                    -----------           -----------
Investment securities (note 3):
  Available-for-sale                                                                58,919,609             50,428,295
  Held-to-maturity, at cost (fair values of $4,298,350
      and $3,948,755 at December 31, 1998 and 1997,
      respectively)                                                                   4,174,769             3,892,304

Loans (note 4)                                                                      208,967,142           172,430,560
  Less allowance for loan losses                                                      2,714,638             2,097,036
                                                                                 
                                                                                    -----------           -----------
           Loans, net                                                               206,252,504           170,333,524
                                                                                    -----------           -----------

Premises and equipment, net (note 5)                                                 11,025,425             9,895,090
Accrued interest receivable                                                           2,111,933             1,643,476
Other real estate                                                                           --                275,146
Intangible assets, net (note 6)                                                         615,891               738,977
Other assets                                                                          2,414,738             1,854,064
                                                                                   ------------           -----------
                                                                                   $295,431,780           252,230,859
                                                                                   ============           ===========

<CAPTION>                                                                          ------------           -----------
                     LIABILITIES AND STOCKHOLDERS' EQUITY                               1998                  1997
                                                                                   ------------           -----------
Deposits:
<S>                                                                               <C>                      <C>  
  Noninterest bearing                                                              $ 40,718,719            36,596,135
  Interest-bearing:
     NOW accounts                                                                    35,892,756            26,323,128
     Savings                                                                         80,541,816            62,506,983
     Money management accounts                                                       15,546,821            10,413,159
     Time deposits over $100,000                                                     34,229,532            35,600,295
     Other time deposits                                                             44,575,842            38,752,078
                                                                                   ------------          ------------
                                                                                    251,505,486           210,191,778
Securities sold under repurchase agreements (note 8)                                  2,714,257             5,938,111
Advances from Federal Home Loan Bank (note 8)                                         9,000,000             9,000,000
Other borrowed funds (note 8)                                                           900,000             1,000,000
Accrued interest and other liabilities                                                2,684,965             2,241,520
                                                                                   ------------          ------------
        Total liabilities                                                           266,804,708           228,371,409
                                                                                   ------------          ------------
Stockholders' equity (notes 11 and 14):
  Common stock, $3.00 par value; 10,000,000
    shares authorized; shares issued and outstanding
    of 1,820,368 in 1998 and 1997                                                     5,461,104             5,461,104
  Additional paid-in capital                                                         14,440,355            14,440,355
  Retained earnings                                                                   6,834,639             3,919,255
  Accumulated other comprehensive income                                              1,890,974                38,736
                                                                                   ------------          ------------ 
        Total stockholders' equity                                                   28,627,072            23,859,450
                                                                                   ------------          ------------
Commitments (note 7)
                                                                                   $295,431,780           252,230,859
                                                                                   ============          ============
</TABLE> 

                                       47
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
                       Consolidated Statements of Income
                  Year ended December 31, 1998, 1997 and 1996

<TABLE> 
<CAPTION> 
                                                                      1998               1997                1996
                                                                ------------        ------------          ------------  
<S>                                                             <C>                 <C>                   <C>   
Interest income:
  Loans, including fees                                         $ 17,762,188          14,896,322            12,469,638
  Investment securities:
     Taxable                                                       3,247,066           3,555,470             2,788,829
     Tax-exempt                                                      110,100             105,739                76,557
  Federal funds sold                                                 380,851             255,677               342,264
                                                                ------------        ------------          ------------
          Total interest income                                   21,500,205          18,813,208            15,677,288
                                                               -------------        ------------          ------------
Interest expense:
  Deposits (including interest on time deposits over
    $100,000 of $2,054,299, $1,901,076, in
    in 1998, and 1997, respectively),                              9,062,585           8,232,985             7,151,635
  Federal funds purchased and securities sold
    under repurchase agreements                                      203,280             134,998                43,774
  Other borrowings                                                   553,505             263,947               177,271
                                                               -------------        ------------          ------------
          Total interest expense                                   9,819,370           8,631,930             7,372,680
                                                               -------------        ------------          ------------

          Net interest income                                     11,680,835          10,181,278             8,304,608

Provision for loan losses (note 4)                                   875,000             774,012               470,000
                                                               -------------        ------------          ------------
          Net interest income after provision
             for loan losses                                      10,805,835           9,407,266             7,834,608
                                                               -------------        ------------          ------------

Noninterest income:
    Service charges and fees on deposits                           2,625,080           2,297,345             1,838,622
    Gain on sale of loans                                            928,383             407,579               311,728
    Investment securities gains (losses), net (note 3)                33,001             (20,616)                  (92)
    Miscellaneous income                                              27,308              26,656                   495
                                                               -------------        ------------          ------------
          Total noninterest income                                 3,613,772           2,710,964             2,150,753
                                                               -------------        ------------          ------------
Noninterest expense:
    Salaries                                                       4,286,770           3,719,315             3,074,532
    Employee benefits                                              1,139,794             876,303               578,844
    Occupancy expenses                                             1,655,242           1,480,404             1,262,475
    Other operating expenses (note 13)                             2,853,417           2,728,795             2,317,686
                                                               -------------        ------------          ------------
          Total noninterest expense                                9,935,223           8,804,817             7,233,537
                                                               -------------        ------------          ------------

          Income before income taxes                               4,484,384           3,313,413             2,751,824

Income tax expense (note 9)                                        1,569,000             958,488               799,659
                                                               -------------        ------------          ------------

          Net income                                            $  2,915,384           2,354,925             1,952,165
                                                               =============        ============          ============

Basic income per share                                          $       1.60                1.48                  1.27
                                                               =============        ============          ============

Weighted average common shares outstanding                         1,820,368           1,588,828             1,542,368
                                                               =============        ============          ============
</TABLE> 

(note 1(i))



See accompanying notes to consolidated financial statements.

                                       48
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY
             Consolidated  Statements of Stockholders' Equity and
                   Comprehensive Income Years ended December
                           31, 1998, 1997, and 1996

<TABLE> 
<CAPTION> 
                                                                                                           Accumu-
                                                                         Common stock                    lated other   Total
                                                                  ---------------------------
                                                                                    Additional               compre-     stock- 
                                                 Comprehensive  Number of            paid-in      Retained   hensive     holders'
                                                     Income      shares     Amount   capital      earnings   income      equity
                                                 -----------------------------------------------------------------------------------

<S>                                              <C>           <C>       <C>         <C>         <C>          <C>       <C> 
Balance, December 31, 1995                                     1,341,479 $4,024,437  7,122,998     3,435,381  (144,135)  14,438,681
Stock dividend declared - 15%                                    200,889    602,667  3,214,224    (3,816,891)       --           --
Cash paid in lieu of fractional shares                                                                                          
     for  stock dividend                                             --          --         --        (6,325)       --       (6,325)
                                                                                                                                 
Comprehensive income:                                                                                                            
 Net income                                        $1,952,165         --         --         --     1,952,165        --    1,952,165 
 Other comprehensive income (loss)-unrealized                                                                                   
   loss on investment securities available-for--                                                                                
   sale, net of income tax effect of $19,946(see                                                                                
   below)                                             (37,043)        --         --         --            --   (37,043)     (37,043)
                                                   -----------    
             Total comprehensive income            $1,915,122
                                                   ===========
                                                   ---------------------------------------------------------------------------------


Balance, December 31, 1996                                     1,542,368 $4,627,104 10,337,222     1,564,330  (181,178)  16,347,478
   Issuance of shares of common stock, net of
         expenses of $67,000                                     278,000    834,000  4,103,133            --        --    4,937,133

Comprehensive income:
  Net income                                        2,354,925         --         --         --     2,354,925        --    2,354,925
  Other comprehensive income - unrealized          
     gain on investment securities available-for   
     sale, net of income tax effect of $118,415    
     (see below)                                      219,914                                                  219,914      219,914
                                                   ----------
             Total comprehensive income            $2,574,839
                                                   ==========
                                                   ---------------------------------------------------------------------------------

Balance, December 31, 1997                                     1,820,368  5,461,104 14,440,355     3,919,255    38,736   23,859,450

Comprehensive income:
  Net income                                        2,915,384         --         --         --     2,915,384        --    2,915,384
  Other comprehensive income - unrealized           
     gain on investment securities available-for    
     sale, net of income tax effect of $997,359     
    (see below)                                     1,852,238         --         --         --          --   1,852,238    1,852,238
                                                   ----------
             Total comprehensive income            $4,767,622
                                                   ==========
                                                   ---------------------------------------------------------------------------------

Balance, December 31, 1998                                     1,820,368 $5,461,104 14,440,355     6,834,639 1,890,974   28,627,072
                                                   =================================================================================

                                                                  1998       1997     1996
                                                   --------------------------------------------
Disclosure of reclassification amount:
  Unrealized holding gains (losses) arising  
     during period net of taxes                               $1,874,019    206,308    (37,104)
  Less:  Reclassification adjustment for gains (losses) 
      included in net income, net of taxes                        21,781    (13,606)       (61)
                                                   --------------------------------------------  
             Net unrealized gains (losses) in                 $1,852,238    219,914    (37,043)
                                                   ============================================
</TABLE> 

See accompanying notes to consolidated financial statements

                                      49
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                     Consolidated Statements of Cash Flows

                 Years ended December 31, 1998, 1997, and 1996

<TABLE> 
<CAPTION> 
                                                                               1998                1997               1996
                                                                         -----------------  ------------------ ------------------
Cash flows from operating activities:
<S>                                                                      <C>                <C>                <C> 
  Net income                                                             $       2,915,384           2,354,925          1,952,165
  Adjustments to reconcile net income to net
    cash provided by operating activities
    Depreciation and amortization                                                1,064,844           1,066,710            894,858
    Deferred income tax benefit                                                   (231,635)           (464,426)          (253,995)
    Provision for loan losses                                                      875,000             774,012            470,000
    Net investment securities (gains) losses                                       (33,001)             20,616                 92
    Net amortization (accretion) of premium/
      discount on investment securities                                             60,334             (28,363)           (36,686)
    Gain on disposal of premises and equipment                                     (25,322)                --                 --
    (Gain) loss on the sale of other real estate                                   (10,220)             41,982                --
    Gain on sale of loans                                                         (928,383)           (407,579)          (311,728)
    Real estate loans originated for sale                                      (47,851,350)        (23,563,390)       (21,443,710)
    Proceeds from sales of real estate loans                                    47,947,727          22,900,277         21,682,180
    Increase in accrued interest receivable                                       (468,457)           (149,185)          (140,117)
    Increase in other assets                                                    (1,476,400)            (26,938)          (101,890)
    Increase in accrued interest and other liabilities                             443,445             660,806            222,994
                                                                         -----------------  ------------------ ------------------
           Net cash provided by operating activities                             2,281,966           3,179,447          2,934,163
                                                                         -----------------  ------------------ ------------------

Cash flows from investing activities:
  Proceeds from sales of available-for-sale securities                           6,333,289          29,366,026         16,629,955
  Proceeds from maturities of available-for-sale securities                     22,553,824           7,286,156          3,687,473
  Proceeds from maturities of held-to-maturity securities                        1,233,308             360,000            400,993
  Purchase of held-to-maturity securities                                       (1,312,526)           (730,563)        (2,879,762)
  Purchase of available-for-sale securities                                    (34,609,408)        (32,945,163)       (39,720,902)
  Net increase in loans                                                        (35,794,908)        (36,731,975)       (15,125,013)
  Purchases of premises and equipment                                           (2,102,045)         (2,046,466)        (1,003,071)
  Proceeds from sale of other real estate                                          118,300             272,952                --
  Proceeds from the sale of premises and equipment                                  55,274             296,180                --
  Purchase of other investments                                                         --             (50,000)          (100,000)
  Purchase of GA Union Mortgage, net of cash                                               
    and cash equivalents acquired                                                       --            (145,000)               --
                                                                         -----------------  ------------------ ------------------
             Net cash used in investing activities                             (43,524,892)        (35,067,853)       (38,110,327)
                                                                         -----------------  ------------------ ------------------

Cash flows from financing activities:
  Net increase in noninterest-bearing deposits                                   4,122,584           3,290,032          6,405,594
  Net increase in NOW accounts                                                   9,569,628           2,381,010          4,982,608
  Net increase in savings accounts                                              18,034,833          18,949,200         23,512,309
  Net increase (decrease) in money management accounts                           5,133,662         (10,827,963)         5,169,621
  Net (decrease) increase in time deposits over $100,000                        (1,370,763)          4,478,274         (1,393,678)
  Net increase (decrease) in other time deposits                                 5,823,764          (3,746,303)          (158,666)
</TABLE> 

                                      50
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                     Consolidated Statements of Cash Flows

                 Years ended December 31, 1998, 1997, and 1996

<TABLE> 
<CAPTION> 
                                                                               1998                1997               1996
                                                                         -----------------  ------------------ ------------------
Net (decrease) increase in federal funds purchased              
<S>                                                                      <C>                <C>                <C> 
  and securities sold under repurchase agreements                             (3,223,854)        4,712,817           (536,233)
Proceeds from issuance of common stock, net                                          --          4,937,133                --
Proceeds from other borrowed funds                                                   --                --           1,000,000
Advances from Federal Home Loan Bank                                           4,000,000         9,000,000                --
Payments of Federal Home Loan Bank advances                                   (4,000,000)              --          (4,000,000)
Principal payments on other borrowed funds                                      (100,000)         (186,668)          (453,332)
Cash paid for fractional shares related to stock dividend                            --                --              (6,325)
                                                                         -----------------  ------------------ ------------------
                Net cash provided by financing activities                     37,989,854        32,987,532         34,521,898
                                                                         -----------------  ------------------ ------------------
                                                                      
                Net (decrease) increase in cash and cash              
                  equivalents, carried forward                           $    (3,253,072)        1,099,126           (654,266)
                                                                         =================  ================== ==================
                Net (decrease) increase in cash and cash              
                equivalents, brought forward                             $    (3,253,072)        1,099,126           (654,266)
                                                                      
          Cash and cash equivalents at beginning of year                      13,169,983        12,070,857         12,725,123
                                                                         -----------------  ------------------ ------------------
                                                                      
Cash and cash equivalents at end of year                                 $     9,916,911        13,169,983         12,070,857
                                                                         =================  ================== ==================
Supplemental disclosures of cash paid during 
  the year for:
    Interest                                                             $     9,687,272         8,432,520          7,460,076
                                                                         =================  ================== ==================

    Income taxes                                                         $     2,074,402         1,208,000          1,026,463
                                                                         =================  ================== ==================
Supplemental information on noncash
  investing activities:
    Loans transferred to other real estate                               $        55,934           439,765            153,373
                                                                         =================  ================== ==================

    Sales of other real estate financed with
      loans from the Bank                                                $       223,000               --              78,000
                                                                         =================  ================== ==================
    Other investments converted to investment
      securities available-for-sale                                      $       150,000               --                 --
                                                                         =================  ================== ==================
</TABLE> 

See accompanying notes to consolidated financial statements. 

                                      51
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       Georgia Bank Financial Corporation (the "Company") and subsidiary
       (collectively the "Bank") offer a wide range of lending services,
       including real estate, commercial, and consumer loans to individuals and
       small to medium-sized businesses and professionals that are located in,
       or conduct a substantial portion of their business in, the Richmond and
       Columbia County areas of Georgia. The Bank is subject to competition from
       other financial institutions and is also subject to the regulations of
       certain Federal and state agencies and undergoes periodic examinations by
       those regulatory authorities.

       The accounting and reporting policies of the Bank conform to generally
       accepted accounting principles and to general practice within the banking
       industry. The following is a description of the more significant of those
       policies the Bank follows in preparing and presenting its consolidated
       financial statements.

       (A)    BASIS OF PRESENTATION

              The consolidated financial statements include the accounts of
              Georgia Bank Financial Corporation and its wholly owned
              subsidiary, Georgia Bank & Trust Company of Augusta. Significant
              intercompany transactions and accounts are eliminated in
              consolidation.
              
              The consolidated financial statements have been prepared in
              conformity with generally accepted accounting principles. In
              preparing the consolidated financial statements, management is
              required to make estimates and assumptions that affect the
              reported amounts of assets and liabilities and the disclosure of
              contingent assets and liabilities as of the date of the balance
              sheet and revenues and expenses for the period. Actual results
              could differ significantly from those estimates.
              
              Material estimates that are particularly susceptible to
              significant change in the near term relate to the determination of
              the allowance for loan losses and the valuation of real estate
              acquired in connection with foreclosures or in satisfaction of
              loans. In connection with the determination of the allowances for
              loan losses and real estate owned, management obtains independent
              appraisals for significant properties.

              A substantial portion of the Bank's loans is secured by real
              estate in Augusta, Georgia and the surrounding area. Accordingly,
              the ultimate collectibility of a substantial portion of the Bank's
              loan portfolio is susceptible to changes in real estate market
              conditions in the Augusta, Georgia and surrounding area.
               
       (B)    CASH AND CASH EQUIVALENTS

              Cash and cash equivalents include cash and due from banks and
              federal funds sold. Generally, federal funds are sold for one-day
              periods.

                                       52
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

       (C)    INVESTMENT SECURITIES

              The Bank classifies its investment securities into one of three
              categories: available for sale, held to maturity, or trading. Held
              to maturity securities are those securities for which the Bank has
              the ability and intent to hold the security until maturity. All
              other securities are classified as available for sale. The Bank
              does not hold any trading securities.
              
              Held to maturity securities are recorded at cost adjusted for the
              amortization or accretion of premiums or discounts. Available for
              sale securities are recorded at fair value. Unrealized holding
              gains and losses, net of related tax effects, on securities
              available for sale are excluded from earnings and are reported
              within stockholders' equity as a component of accumulated other
              comprehensive income until realized.
              
              Mortgage-backed securities held to maturity are stated at their
              unpaid principal balances, adjusted for unamortized premiums and
              unaccreted discounts.

              A decline in the market value of any available for sale or held to
              maturity security below cost that is deemed other than temporary
              results in a charge to earnings and the establishment of a new
              cost basis for the security.

              Premiums and discounts are amortized or accreted over the life of
              the related investment security as an adjustment to yield using a
              method which approximates the effective interest method and takes
              into consideration prepayment assumptions. Dividends and interest
              income are recognized when earned. Realized gains and losses for
              investment securities available for sale which are sold are
              included in earnings and are derived using the specific
              identification method for determining the cost of securities sold.

       (D)    LOANS AND ALLOWANCE FOR LOAN LOSSES

              Loans are stated at the amount of unpaid principal outstanding,
              reduced by an allowance for loan losses. Interest on loans is
              calculated using the simple interest method on daily balances of
              the principal amount outstanding. Accrual of interest is
              discontinued on loans that become past due 90 days or more and for
              which collateral is inadequate to cover principal and interest, or
              immediately if management believes, after considering economic and
              business conditions and collection efforts, that a borrower's
              financial condition is such that collection is doubtful. When a
              loan is placed on nonaccrual status, all previously accrued but
              uncollected interest is reversed against current period interest
              income. Future collections are applied first to principal and then
              to interest until such loans are brought current, at which time
              loans may be returned to accrual status.

              The allowance for loan losses is established through a provision
              for loan losses charged to expense. Loans are charged against the
              allowance for loan losses when management believes that the
              collectibility of the principal is unlikely. Subsequent recoveries
              are added to the allowance.
              

                                       53
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

              The allowance is an amount that management believes will be
              adequate to absorb losses on existing loans that become
              uncollectible, based on evaluations of the collectibility of
              loans. The evaluations take into consideration such factors as
              changes in the nature and volume of the loan portfolio, overall
              portfolio quality, review of specific problem loans, and current
              economic conditions and trends that may affect a borrower's
              ability to pay. The allowance is evaluated on a regular basis
              utilizing estimated loss factors for specific problem loans. Such
              loss factors are periodically reviewed and adjusted as necessary
              based on actual losses.

              Management believes that the allowance for loan losses is
              adequate. While management uses available information to recognize
              losses on loans, future additions to the allowance may be
              necessary based on changes in economic conditions. In addition,
              various regulatory agencies, as an integral part of their
              examination process, periodically review the Bank's allowance for
              loan losses. Such agencies may require the Bank to recognize
              additions to the allowance based on their judgments about
              information available to them at the time of their examination.

              The Bank originates mortgages to be held for sale only for loans
              that have been individually pre-approved by the investor. The Bank
              bears minimal interest rate risk on these loans and only holds the
              loans temporarily until documentation can be completed to finalize
              sale to the investor. Such loans are stated at the lower of cost
              or aggregate market.

              The Bank accounts for impaired loans under the provisions of
              Statement of Financial Accounting Standards (SFAS) No. 114,
              Accounting by Creditors for Impairment of a Loan, as amended by
              SFAS No. 118, Accounting by Creditors for Impairment of a
              Loan-Income Recognition and Disclosures. A loan is considered
              impaired when, based on current information and events, it is
              probable that the Bank will be unable to collect all amounts due
              according to the contractual terms of the note agreement. The
              provisions of SFAS No. 114 do not apply to large pools of smaller
              balance homogeneous loans, such as consumer and installment loans,
              which are collectively evaluated for impairment. Impairment losses
              are included in the allowance for loan losses through a charge to
              the provision for loan losses, and are measured based on the
              present value of expected future cash flows, discounted at the
              loan's effective interest rate, or at the loan's observable market
              price, or the fair value of the collateral if the loan is
              collateral dependent. Cash receipts on impaired loans which are
              accruing interest are applied to principal and interest under the
              contractual terms of the loan agreement. Cash receipts on impaired
              loans for which the accrual of interest has been discontinued are
              applied first to reduce the principal amount of such loans until
              all contractual principal payments have been made and are
              recognized as interest income thereafter.

       (E)    PREMISES AND EQUIPMENT

              Premises and equipment are stated at cost less accumulated
              depreciation. Depreciation is provided on the straight-line basis
              over the estimated useful lives of the related assets, which range
              from three to forty years.

                                       54
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

       (F)    OTHER REAL ESTATE

              Other real estate is carried at the lower of its cost or fair
              value less estimated costs to sell. Any excess of the loan balance
              at the time of foreclosure over the fair value of the collateral
              is treated as a loan loss and is charged against the allowance for
              loan losses. A provision for estimated losses on other real estate
              is charged to earnings upon subsequent declines in value. Costs
              related to the development and improvement of property are
              capitalized; holding costs are charged to expense.

       (G)    INTANGIBLE ASSETS

              Intangible assets relate to certain acquisitions and consist of
              goodwill and deposit base premiums. The core deposit intangible is
              being amortized on a straight-line basis over the estimated lives
              of the related deposits, which is estimated to be 10 years.
              Goodwill is being amortized over 15 years using the straight-line
              method.

              The Bank assesses the recoverability of goodwilll by determining
              whether the amortization of the goodwill balance over its
              remaining life can be recovered through undiscounted future
              operating cash flows of the acquired operation. The assessment of
              the recoverability of goodwill will be impacted if estimated
              future operating cash flows are not achieved.
              
       (H)    INCOME TAXES

              The Bank accounts for income taxes under the asset and liability
              method. Deferred tax assets and liabilities are recognized for the
              future tax consequences attributable to differences between the
              financial statement carrying amounts of existing assets and
              liabilities and their respective tax bases. Deferred tax assets
              and liabilities are measured using enacted tax rates expected to
              apply to taxable income in the years in which those temporary
              differences are expected to be recovered or settled. The effect on
              deferred tax assets and liabilities of a change in tax rates is
              recognized in income in the period that includes the enactment
              date. A deferred tax valuation allowance is provided to the extent
              it is more likely than not that deferred tax assets will not be
              utilized.

       (I)    INCOME PER SHARE

              Basic income per share is computed on the weighted average number
              of shares outstanding in accordance with SFAS No. 128, Earnings
              Per Share. The Bank has no potential common shares outstanding,
              and thus does not present diluted earnings per share.
              

                                       55
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

       (J)    RECLASSIFICATIONS

              For comparability, certain of the 1997 and 1996 amounts have been
              reclassified, where appropriate, to conform with the financial
              statement presentation used in 1998.

       (K)    OTHER COMPREHENSIVE INCOME

              Effective January 1, 1998, the Bank adopted the provisions of SFAS
              No. 130, Reporting Comprehensive Income. This statement
              establishes standards for reporting and displaying comprehensive
              income and its components in a full set of general purpose
              financial statements. SFAS No. 130 requires all items that are
              required to be recognized under accounting standards as components
              of comprehensive income be reported in a financial statement that
              is displayed in equal prominence with the other financial
              statements. The term "comprehensive income" is used in the
              statement to describe the total of all components of comprehensive
              income including net income. "Other comprehensive income" for the
              Bank consists of items recorded directly in equity under SFAS No.
              115, Accounting for Certain Investments in Debt and Equity
              Securities.

       (L)    SEGMENT DISCLOSURES

              Effective January 1, 1998, the Bank adopted the provisions of SFAS
              No. 131, Disclosures about Segments of an Enterprise and Related
              Information. SFAS No. 131 establishes standards for the
              disclosures made by public business enterprises to report
              information about operating segments in annual financial
              statements and requires those enterprises to report selected
              information about operating segments in interim financial reports
              issued to shareholders. It also establishes standards for related
              disclosures about products and services, geographic areas, and
              major customers. The Bank does not have any separate segments that
              are considered material.

       (M)    RECENT ACCOUNTING PRONOUNCEMENT

              In June 1998, the Financial Accounting Standards Board (FASB)
              issued SFAS No. 133, Accounting for Derivative Instruments and
              Hedging Activities (SFAS No. 133). SFAS No. 133 is effective for
              financial statements for all fiscal quarters of all fiscal years
              beginning after June 15, 1999. The Company does not believe the
              provisions of SFAS No. 133 will have a significant impact on the
              financial statements upon adoption.
              

                                       56
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

(2)    CASH AND DUE FROM BANKS

       The subsidiary bank is required by the Federal Reserve Bank to maintain
       average daily cash balances. These balances were $2,956,000 and
       $2,575,000 at December 31, 1998 and 1997, respectively.
       
(3)    INVESTMENT SECURITIES

       A summary of investment securities as of December 31, 1998 and 1997 is as
       follows:

<TABLE>
<CAPTION>
                                                                                    1998
                                           -----------------------------------------------------------------------------------------
                                                                         GROSS                  GROSS
                                                AMORTIZED              UNREALIZED             UNREALIZED              ESTIMATED
                                                   COST                  GAINS                  LOSSES               FAIR VALUE
                                           --------------------    ------------------     ------------------     -------------------
       <S>                                 <C>                     <C>                    <C>                    <C> 
       Held-to-maturity:          
         Obligations of states and
            political subdivisions         $     3,385,944              110,595                    --                  3,496,539
         REMICs                                    788,825               12,986                    --                    801,811
                                           ----------------------    ----------------     ------------------     -------------------
                                                                                
                                                                                
                                           $     4,174,769              123,581                    --                  4,298,350
                                           ======================    ================     ==================     ===================
                                                                                
       Available-for-sale:                                                      
         Obligations of U.S.                                                    
            Government agencies            $    23,532,876              294,657                17,405                 23,810,128
         U.S. Treasury notes                     2,984,821               68,939                    --                  3,053,760
         Mortgage-backed securities             15,563,592              124,730                15,217                 15,673,105
         REMICs                                 12,439,808               21,689               293,702                 12,167,795
         Equity securities                       1,486,885            2,727,936                    --                  4,214,821
                                           ----------------------    ----------------     ------------------     -------------------
                                                                                
                                                                                
                                           $    56,007,982            3,237,951               326,324                 58,919,609
                                           ====================    ==================     ==================     ===================

</TABLE> 

<TABLE> 
<CAPTION> 
                                                                                    1997
                                           -----------------------------------------------------------------------------------------
                                                                         GROSS                  GROSS
                                                AMORTIZED              UNREALIZED             UNREALIZED              ESTIMATED
                                                   COST                  GAINS                  LOSSES               FAIR VALUE
                                           --------------------    ------------------     ------------------     -------------------
       <S>                                 <C>                     <C>                    <C>                    <C> 
       Held-to-maturity:          
         Obligations of states and
            political subdivisions         $   2,859,828                41,895                 1,660                2,900,063
         REMICs                                1,032,476                16,216                    --                1,048,692
                                           --------------------    ------------------     ------------------     -------------------

                                  
                                           $   3,892,304                58,111                 1,660                3,948,755
                                           ====================    ==================     ==================     ===================

       Available-for-sale:        
         Obligations of U.S.      
            Government agencies            $  21,838,852               128,496                76,228               21,891,120
         U.S. Treasury notes                   4,461,275                51,545                    --                4,512,820
         Mortgage-backed securities           14,240,110               103,192                 3,754               14,339,548
         REMICs                                8,486,707                11,633               152,854                8,345,486
         Equity securities                     1,339,321                    --                    --                1,339,321
                                           --------------------    ------------------     ------------------     -------------------


                                           $  50,366,265               294,866               232,836               50,428,295
                                           ====================    ==================     ==================     ===================

</TABLE> 

                                       57
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

       The amortized cost and estimated fair value of securities held-to-
       maturity and available-for-sale other than equity securities as of
       December 31, 1998, by contractual maturity, are shown below. Expected
       maturities may differ from contractual maturities because borrowers may
       have the right to call or prepay obligations with or without call or
       prepayment penalties.
       
<TABLE> 
<CAPTION> 
                                                               SECURITIES                                SECURITIES
                                                            HELD-TO-MATURITY                          AVAILABLE-FOR-SALE
                                               ----------------------------------------   -----------------------------------------
                                                    AMORTIZED              ESTIMATED          AMORTIZED               ESTIMATED
                                                       COST                FAIR VALUE            COST                FAIR VALUE
                                               --------------------    ----------------   ------------------     -------------------

       <S>                                     <C>                     <C>                <C>                    <C> 
       One year or less                        $      115,000              116,372             498,607                504,220
       After one through five years                 1,441,793            1,478,893          20,020,844             20,323,177
       After five years through ten years           1,301,501            1,315,479           7,740,243              7,742,313
       After ten years                              1,316,475            1,387,606          10,697,811             10,461,973
                                               --------------------    ----------------   ------------------     -------------------
                                                                 
                                                    4,174,769            4,298,350          38,957,505             39,031,683
       Mortgage-backed securities                          --                   --          15,563,592             15,673,105
                                               --------------------    ----------------   ------------------     -------------------
                                                                 
                                                                                      
                                               $    4,174,769            4,298,350          54,521,097             54,704,788
                                               ====================    ================   ==================     ===================

</TABLE> 

       Proceeds from sales of investment securities during 1998, 1997, and 1996
       were $6,333,289, $29,366,026, and $16,629,955, respectively. Gross
       realized gains of $38,330, $13,882, and $115,883 and gross realized
       losses of $5,329, $34,498, and $115,975 were realized on those sales in
       1998, 1997, and 1996, respectively.
       
       Investment securities with a carrying amount of approximately $37,912,000
       and $23,478,000 at December 31, 1998 and 1997, respectively, were pledged
       to secure public and trust deposits, and for other purposes required by
       law.

(4)    LOANS

       Loans at December 31, 1998 and 1997 are summarized as follows:

<TABLE>
<CAPTION>
                                                                            1998                      1997
                                                                   ----------------------     ---------------------
       <S>                                                         <C>                        <C> 
       Commercial, financial, and agricultural                     $   36,055,343                 30,134,522
       Real estate - construction/development                          24,372,901                 23,567,249
       Other loans secured by real estate:    
           Single-family                                               45,083,957                 30,512,801
           Commercial                                                  67,168,366                 58,518,066
       Real estate loans originated for sale                            2,380,156                  1,548,150
       Consumer installment                                            33,906,419                 28,149,772
                                                                   ----------------------     ---------------------
                                                                      208,967,142                172,430,560
       Less allowance for loan losses                                   2,714,638                  2,097,036
                                                                   ----------------------     ---------------------
                                                                   $ 206,252,504                170,333,524
                                                                   ======================     =====================
</TABLE> 

                                       58
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

       As of December 31, 1998 and 1997, the Bank had nonaccrual loans
       aggregating $2,925,000 and $2,092,000, respectively. Interest that would
       have been recorded on nonaccrual loans had they been in accruing status
       was approximately $43,000 in 1998, $8,100 in 1997, and $28,000 in 1996.
       
       At December 31, 1998 and 1997, the Bank had impaired loans with an
       outstanding balance of $1,860,000 and $1,921,000, respectively, with a
       related valuation allowance of $260,000 at December 31, 1998 and 1997.
       The average balance of impaired loans was approximately $1,891,000,
       $1,264,000, and $1,228,000 for the years ended December 31, 1998, 1997,
       and 1996, respectively.
       
       The following is a summary of the activity in the allowance for loan
       losses for the years ended December 31, 1998, 1997, and 1996:

<TABLE>
<CAPTION>
                                                          1998                    1997                     1996                  
                                                   -------------------    --------------------     ---------------------         
       <S>                                         <C>                    <C>                      <C>                           
       Balance, beginning of year                  $    2,097,036              1,467,702                1,335,275                
       Provision for loan losses                          875,000                774,012                  470,000                
       Charge-offs                                       (378,783)              (354,294)                (369,423)               
       Recoveries                                         121,385                209,616                   31,850                
                                                   -------------------    --------------------     ---------------------         
       Balance, end of year                        $    2,714,638              2,097,036                1,467,702                
                                                   ===================    ====================     =====================          
</TABLE> 

       In the ordinary course of business, the Bank has direct and indirect
       loans outstanding to certain executive officers, directors, and principal
       holders of equity securities (including their associates). Management
       believes such loans are made substantially on the same terms, including
       interest rate and collateral, as those prevailing at the time for
       comparable transactions with other customers.
       
       The following is a summary of the activity in loans outstanding to
       officers, directors, and their associates for the year ended December 31,
       1998:

<TABLE>
       <S>                                                                              <C> 
       Balance at beginning of year                                                     $   10,946,113
       New loans                                                                            16,038,953
       Principal repayments                                                                (19,251,473)
                                                                                        ---------------
       Balance at end of year                                                           $    7,733,593
                                                                                        ===============
</TABLE> 

       The Bank is also committed to extend credit to certain directors and
       executives of the Bank, including companies in which they are principal
       owners, through personal lines of credit, letters of credit and other
       loan commitments. As of December 31, 1998, available balances on these
       commitments to these persons aggregated approximately $3,927,000.

                                       59
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

(5)    PREMISES AND EQUIPMENT

       Premises and equipment at December 31, 1998 and 1997 are summarized as
       follows:

<TABLE>
<CAPTION>
                                                                             1998                     1997
                                                                     ---------------------    ---------------------
       <S>                                                           <C>                      <C>                  
       Land                                                          $     1,959,585                1,959,585
       Buildings                                                           7,926,413                6,914,852
       Furniture and equipment                                             4,849,985                3,819,164
                                                                     ---------------------    ---------------------
                                                                          14,735,983                12,693,601
       Less accumulated depreciation                                       3,710,558                2,798,511
                                                                     ---------------------    ---------------------
                                                                                                             
                                                                     $    11,025,425                9,895,090 
                                                                     =====================    =====================
</TABLE> 

       Depreciation expense amounted to $941,758, $782,598, and $614,841 in
       1998, 1997, and 1996, respectively.

(6)    INTANGIBLE ASSETS

       Intangible assets, net of accumulated amortization, at December 31, 1998
       and 1997 are summarized as follows:

<TABLE>
<CAPTION>
                                                                                 1998                   1997
                                                                           -----------------     ------------------
       <S>                                                                 <C>                   <C> 
       Core deposit premium                                                $    427,008               533,760
       Goodwill                                                                 188,883               205,217
                                                                           -----------------     ------------------

                                                                           $    615,891               738,977
                                                                           =================     ==================
</TABLE> 

       Amortization expense amounted to $123,086, $284,112, and $280,017 in
       1998, 1997, and 1996, respectively.

(7)    COMMITMENTS

       The Bank is committed under various operating leases for office space and
       equipment. At December 31, 1998, minimum future lease payments for each
       of the next five years under noncancelable real property and equipment
       operating leases are as follows:
       
                1999                               $   178,524
                2000                                   177,170
                2001                                   140,888
                2002                                   111,850
                2003                                    91,200
                                                   ----------------

                                                   $   699,632
                                                   ================

                                       60
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

       Rent expense for all building, equipment and furniture rentals totaled
       $260,108, $369,130, and $292,671 for the years ended December 31, 1998,
       1997, and 1996, respectively.

       The Bank is party to lines of credit with off-balance sheet risk in the
       normal course of business to meet the financing needs of its customers.
       Lines of credit are unfunded commitments to extend credit. These
       instruments involve, in varying degrees, exposure to credit and interest
       rate risk in excess of the amounts recognized in the financial
       statements. The Bank's exposure to credit loss in the event of
       nonperformance by the other party to the financial instrument for
       unfunded commitments to extend credit and letters of credit is
       represented by the contractual amount of those instruments. The Bank
       follows the same credit policies in making commitments and conditional
       obligations as it does for on-balance sheet instruments.

       Unfunded commitments to extend credit where contract amounts represent
       potential credit risk totaled $40,362,000 and $34,346,000 at December 31,
       1998 and 1997, respectively. Such commitments are at variable interest
       rates, such that the Bank has essentially no fixed rate unfunded
       commitments.

       Lines of credit are legally binding contracts to lend to a customer, as
       long as there is no violation of any condition established in the
       contract. These commitments have fixed termination dates and generally
       require payment of a fee. As commitments often expire prior to being
       drawn, the amounts shown do not necessarily represent the future cash
       requirements of the commitments. Credit worthiness is evaluated on a case
       by case basis, and if necessary, collateral is obtained to support the
       commitment.

(8)    BORROWINGS

       The securities sold under repurchase agreements at December 31, 1998 are
       collateralized by obligations of the U.S. Government or its corporations
       and agencies, state and municipal securities, or mortgage-backed
       securities, which are held by independent trustees. Under such
       agreements, the Bank agrees to repurchase identical securities as those
       sold. The following summarizes pertinent data related to the securities
       sold under the agreements to repurchase as of and for the years ended
       December 31, 1998, 1997, and 1996.

<TABLE> 
<CAPTION> 
                                                          1998               1997             1996
                                                       ----------         ---------       --------- 
<S>                                                    <C>                <C>             <C> 
Weighted-average borrowing rate at year-end                  2.72%             3.38            4.08  
                                                       ==========         =========       =========   
                                                                                                     
Weighted-average borrowing rate during                                                               
    the year                                                 3.50              3.20            4.12  
                                                      ===========         =========       =========  
                                                                                                     
Average daily balance during the year                 $ 5,798,000         4,222,000       1,068,000  
                                                      ===========         =========       =========  
Maximum month-end balance during the year             $ 7,121,000         5,938,000       1,225,000  
                                                      ===========         =========       =========  
</TABLE> 

                                       61
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

       At December 31, 1998, the Bank had securities sold under agreements to
       repurchase with one counterparty aggregating approximately $1,686,000.

       The Bank has a $14,000,000 available line of credit from the Federal Home
       Loan Bank of Atlanta (FHLB) which is reviewed annually by the FHLB. At
       December 31, 1998, $5,000,000 of advances were outstanding with a related
       interest rate of 5.75% and a maturity date of October 2, 2002, and
       $4,000,000 of advances were outstanding with a related interest rate of
       5.52% and a maturity date of April 12, 2003. The weighted-average
       interest rate during 1998 on such borrowings was 5.65%. At December 31,
       1997, $9,000,000 of advances were outstanding under this line.

       At December 31, 1998, the Bank has pledged, under a blanket floating
       lien, first mortgage loans with unpaid balances which, when discounted at
       75% of such unpaid principal balances, equals or exceeds the advances
       outstanding.

       Other borrowed funds at December 31, 1998 and 1997 consist of a treasury,
       tax, and loan account with the Federal Reserve Bank of $900,000 and
       $1,000,000, respectively.

 (9)   INCOME TAXES

       Income tax expense (benefit) for the years ended December 31, 1998, 1997,
       and 1996 consists of the following:

<TABLE> 
<CAPTION> 
                                               1998              1997               1996
                                           -----------        ---------          ---------       
<S>                                       <C>                 <C>                <C> 
Current tax expense:                                                        
    Federal                                $ 1,675,110        1,383,467          1,053,654
    State                                      125,525           39,447                --
                                           -----------        ---------          --------- 
         Total current                       1,800,635        1,422,914          1,053,654
                                           -----------        ---------          --------- 
                                                                            
Deferred tax benefit:                                                       
    Federal                                   (208,791)        (394,983)          (216,019)
    State                                      (22,844)         (69,443)           (37,976)
                                           -----------        ---------          ---------  
         Total deferred                       (231,635)        (464,426)          (253,995)
                                           -----------        ---------          --------- 
                                                                            
         Total income tax expense          $ 1,569,000          958,488            799,659
                                           ===========        =========          =========
</TABLE> 

                                       62
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996


       Income tax expense differed from the amount computed by applying the
       statutory Federal corporate tax rate of 34% to income before income taxes
       as follows:

<TABLE> 
<CAPTION> 
                                                                 YEARS ENDED DECEMBER 31,
                                                          --------------------------------------
                                                               1998          1997        1996
                                                          ------------     --------     -------
<S>                                                       <C>             <C>           <C> 
Computed "expected" tax expense                           $  1,524,691     1,126,560     935,620
Increase (decrease) resulting from:
    Tax-exempt interest income                                 (89,610)      (68,889)    (25,893)
    Nondeductible interest expense                              12,942        10,253       4,953
    State income tax, net of Federal
      tax effect                                                67,769       (19,797)    (25,064)
    Change in valuation allowance                                   --      (162,698)   (150,000)
    Meals, entertainment, and club dues                         16,295        11,628      11,149
    Other, net                                                  36,913        61,431      48,894
                                                          ------------     ---------    --------
                                                          $  1,569,000       958,488     799,659
                                                          ============     =========    ========
</TABLE> 

       The tax effects of temporary differences that give rise to significant
       portions of the deferred tax assets and deferred tax liabilities at
       December 31, 1998 and 1997 are presented below:

<TABLE> 
<CAPTION> 
                                                                             1998                     1997
                                                                     ---------------------    ---------------------
<S>                                                                <C>                        <C> 
Deferred tax assets:
                     Allowance for loan losses                     $      915,658                  678,560  
    Deferred compensation                                                  73,852                   66,061  
    Other                                                                   1,245                   17,091  
                                                                    ----------------------      ------------------
           Total deferred tax assets                                      990,755                  761,712  
                                                                    ----------------------      ------------------
                                                                                                            
Deferred tax liabilities:                                                                                   
    Depreciation                                                          (39,781)                 (42,373) 
    Unrealized gain on investment securities                                                                
      available for sale                                               (1,020,653)                 (23,294) 
                                                                    ----------------------      ------------------
           Total deferred tax liabilities                              (1,060,434)                 (65,667) 
                                                                    ----------------------      ------------------
                                                                                                            
           Net deferred tax (liability) asset                      $      (69,679)                 696,045   
                                                                     =====================      ==================
</TABLE> 

       In assessing the realizability of deferred tax assets, management
       considers whether it is more likely than not that some portion or all of
       the deferred tax assets will not be realized. The ultimate realization of
       deferred tax assets is dependent upon the generation of future taxable
       income during the periods in which those temporary differences become
       deductible. Management considers taxes paid in the carryback period, the
       scheduled reversal of deferred tax liabilities, projected future taxable
       income, and tax planning strategies in making this assessment. Based upon
       the level of historical taxable income and projection for future taxable
       income over the periods which the temporary differences resulting in the
       deferred tax assets are deductible, management believes it is more likely
       than not that the Bank will realize the benefits of these deductible
       differences.

                                       63
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

(10)   RELATED PARTIES

       Deposits include accounts with certain directors and executives of the
       Bank, including companies in which they are principal owners. As of
       December 31, 1998, these deposits totaled approximately $5,129,000.

       During the years ended December 31, 1998, 1997, and 1996, the Bank paid
       approximately $17,000, $24,000, and $17,000, respectively, in legal fees
       in the normal course of business to a law firm in which a director is a
       member.

(11)   REGULATORY CAPITAL REQUIREMENTS

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

       Quantitative measures established by regulation to ensure capital
       adequacy, require the Bank to maintain minimum amounts and ratios (set
       forth in the table below) of total and Tier I capital (as defined in the
       regulations) to risk-weighted assets (as defined), and of Tier I capital
       (as defined) to average assets (as defined). Management believes, as of
       December 31, 1998, that the Bank meets all capital adequacy requirements
       to which it is subject.

       As of December 31, 1998, the most recent notification from the Federal
       Reserve Bank of Atlanta categorized the bank subsidiary as well
       capitalized under the regulatory framework for prompt corrective action.
       To be categorized as well capitalized, the bank subsidiary must maintain
       minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
       as set forth in the table below. Management is not aware of the existence
       of any conditions or events occurring subsequent to December 31, 1998,
       which would affect the bank subsidiary's well-capitalized classification.

                                       64
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

Actual capital amounts and ratios for the Bank are presented in the table
below as of December 31, 1998 and 1997, on a consolidated basis and for the bank
subsidiary individually (dollars in thousands):

<TABLE> 
<CAPTION> 
                                                                                                               TO BE WELL
                                                                                                            CAPITALIZED UNDER
                                                                                  FOR CAPITAL               PROMPT CORRECTIVE
                                                     ACTUAL                    ADEQUACY PURPOSES            ACTION PROVISIONS
                                           ---------------------------    --------------------------    -------------------------
                                               AMOUNT         RATIO           AMOUNT         RATIO         AMOUNT         RATIO
                                           --------------  -----------    ---------------  ---------     -------------- ---------
<S>                                        <C>             <C>            <C>              <C>           <C>            <C> 
Georgia Bank Financial Corporation
  and subsidiary consolidated:
     As of December 31, 1998:
       Total Capital (to risk-weighted
         assets)                             $  30,062        13.16%      $  18,280           8.0%           N/A              N/A
       Tier I Capital - risk-based (to risk-
         weighted assets)                       26,120        11.43          11,701           4.0            N/A              N/A
       Tier I Capital - leverage (to
         average assets)                        26,120         8.93           9,140           4.0            N/A              N/A


     As of December 31, 1997:
       Total Capital (to risk-weighted
         assets)                             $  25,179        13.35%      $  15,088           8.0%           N/A              N/A
       Tier I Capital - risk-based (to risk-
         weighted assets)                       23,082        12.24           7,544           4.0            N/A              N/A
       Tier I Capital - leverage (to
         average assets)                        23,082         9.11          10,132           4.0            N/A              N/A


<CAPTION> 
                                                                                                               TO BE WELL
                                                                                                            CAPITALIZED UNDER
                                                                                  FOR CAPITAL               PROMPT CORRECTIVE
                                                     ACTUAL                    ADEQUACY PURPOSES            ACTION PROVISIONS
                                           ---------------------------    --------------------------    -------------------------
                                               AMOUNT         RATIO           AMOUNT         RATIO         AMOUNT           RATIO
                                           --------------  -----------    ---------------  ---------     -------------- ---------
<S>                                        <C>             <C>            <C>              <C>           <C>            <C> 
Georgia Bank & Trust Company:
  As of December 31, 1998:
     Total Capital (to risk-weighted
       assets)                               $  27,668        12.22%      $  18,119           8.0%      $  22,649           10.0%
     Tier I Capital - risk-based (to risk-
       weighted assets)                      $  24,598        10.86       $   9,060           4.0          13,589            6.0
     Tier I Capital - leverage (to
       average assets)                       $  24,598         8.48       $  11,599           4.0          14,499            5.0

  As of December 31, 1997:
     Total Capital (to risk-weighted
       assets)                               $  23,650        12.70%      $  14,896           8.0%      $  18,625           10.0%
     Tier I Capital - risk-based (to risk-
       weighted assets)                      $  21,553        11.58       $   7,448           4.0       $  11,168            6.0
     Tier I Capital - leverage (to
       average assets)                       $  21,553         8.56       $  10,076           4.0       $  12,589            5.0
</TABLE> 

                                       65
<PAGE>
 
              GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY 

                  Notes to Consolidated Financial Statements 

                       December 31, 1998, 1997, and 1996

(12)   EMPLOYEE BENEFIT PLANS

       The Bank has an employee savings plan (the Plan) that qualifies as a
       deferred salary arrangement under Section 401(k) of the Internal Revenue
       Code. Under the Plan, participating employees may defer a portion of
       their pretax earnings, up to the Internal Revenue Service annual
       contribution limit. The Bank has the option to make an annual
       discretionary payment to the Plan. For the years ended December 31, 1998,
       1997, and 1996, the Bank contributed $143,641, $83,812, and $73,018,
       respectively, to the Plan, which is 4% of the annual salary of all
       eligible employees for 1998 and 3% of the annual salary of all eligible
       employees for 1997 and 1996.

       During 1994, the Bank adopted a nonqualified deferred bonus plan for
       officers of the Bank. This plan was discontinued during 1998 and amounts
       were disbursed to the officers. For the years ended December 31, 1997 and
       1996, the Bank contributed $37,692 and $32,733, respectively, to the
       plan.

       In 1997 the Bank established a nonqualified Long-Term Incentive Plan
       designed to motivate and sustain high levels of individual performance
       and align the interests of key officers with those of shareholders by
       rewarding capital appreciation and earnings growth. Stock appreciation
       rights may be awarded annually to those key officers whose performance
       during the year has made a significant contribution to the Bank's growth.
       Such stock appreciation rights are granted at a strike price equal to the
       trading price of the Company's stock at date of grant, and are earned
       over a five-year appreciation period. Officers vest in such rights over a
       10-year period. The Bank recognized expense of $98,221 and $6,865 during
       1998 and 1997, respectively, related to this plan.

(13)   OTHER OPERATING EXPENSES

       Components of other operating expenses exceeding 1% of total revenues
       include the following for the years ended December 31, 1998, 1997, and
       1996:

<TABLE> 
<CAPTION> 
                                                                    1998                    1997                     1996     
                                                            --------------------    --------------------     ---------------------
          <S>                                               <C>                     <C>                      <C>                 
          Amortization of intangible assets                 $    123,086                284,112                  280,017         
          Business development expense                           587,353                418,710                  395,787         
          Communication expense                                  371,578                304,460                  514,595         
          Data processing expense                                550,142                457,318                  433,538         
          Insurance expense                                       65,264                 57,594                   36,993         
          Legal and professional fees                            216,531                254,697                  201,673         
          Office supplies expense                                273,784                294,958                  137,272         
</TABLE> 

                                       66
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

(14)   CONDENSED FINANCIAL STATEMENTS OF GEORGIA BANK FINANCIAL CORPORATION
       (PARENT ONLY)0

       The following represents Parent Company only condensed financial
       information of Georgia Bank Financial Corporation:

<TABLE> 
<CAPTION> 
                                              CONDENSED BALANCE SHEETS

                                                                                   DECEMBER 31,
                                                                   -------------------------------------------
                            ASSETS                                           1998                  1997
                                                                   -----------------------    ----------------
<S>                                                                <C>                        <C> 
Cash and due from banks                                               $      69,200                   32,955
Investment securities available for sale                                  2,050,500                       --
Investment in subsidiary                                                 25,846,218               22,330,661
Premises and equipment, net                                               1,303,469                1,348,269
Other assets                                                                 38,000                  150,000
                                                                   -----------------------    ----------------
                                                                      $  29,307,387               23,861,885
                                                                   =======================    ================

             LIABILITIES AND STOCKHOLDERS' EQUITY

Accrued interest and other liabilities                                $       2,435                   2,435
Deferred taxes                                                              677,880                      --
                                                                     ---------------------    ----------------
           Total liabilities                                                680,315                   2,435
                                                                     ---------------------    ----------------

Stockholders' equity:
    Common stock, $3.00 par value, 10,000,000 shares
      authorized; shares issued and outstanding of
      1,820,368 in 1998 and 1997                                          5,461,104               5,461,104
    Additional paid-in capital                                           14,440,355              14,440,355
    Retained earnings                                                     6,834,639               3,919,255
    Accumulated other comprehensive income                                1,890,974                  38,736
                                                                     ---------------------    ----------------
           Total stockholders' equity                                    28,627,072              23,859,450
                                                                     ---------------------    ----------------
                                                                      $  29,307,387              23,861,885
                                                                     =====================    ================
</TABLE> 

                                       67
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

                        CONDENSED STATEMENTS OF INCOME

<TABLE> 
<CAPTION> 
                                                                       YEARS ENDED DECEMBER 31,
                                                        -----------------------------------------------------------------
                                                               1998                    1997                   1996
                                                        -------------------    --------------------    ------------------
Income:
<S>                                                     <C>                    <C>                     <C>  
    Dividends from bank subsidiary                      $          --                  75,000                  525,000
    Miscellaneous income                                       91,200                  91,200                   91,200
                                                        -------------------    --------------------    ------------------
                                                               91,200                 166,200                  616,200
                                                        -------------------    --------------------    ------------------
Expense:
    Interest expense                                               --                  10,049                   13,685
    Occupancy expense                                          44,800                  44,800                   60,681
    Other operating expense                                    53,255                 109,146                   89,947
                                                        -------------------    --------------------    ------------------
                                                               98,055                 163,995                  164,313
                                                        -------------------    --------------------    ------------------
         (Loss) income before equity in
           undistributed earnings of
           subsidiary                                          (6,855)                  2,205                  451,887

Equity in undistributed earnings of
    subsidiary                                              2,922,239               2,352,720                1,500,278
                                                        -------------------    --------------------    ------------------

         Net income                                     $   2,915,384               2,354,925                1,952,165
                                                        ===================    ====================    ==================
</TABLE> 

                                       68
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

                      CONDENSED STATEMENTS OF CASH FLOWS

<TABLE> 
<CAPTION> 
                                                                      YEARS ENDED DECEMBER 31,
                                                       ----------------------------------------------------------------
                                                             1998                  1997                   1996
                                                       -------------------   ------------------     -------------------
Cash flows from operating activities:
<S>                                                    <C>                   <C>                    <C>  
    Net income                                         $  2,915,384              2,354,925              1,952,165
    Adjustments to reconcile net income to
      net cash provided by operating
      activities:
        Depreciation and amortization                        44,800                109,052                124,561
        Equity in undistributed earnings of
          subsidiary                                     (2,922,239)            (2,352,720)            (1,500,278)
        Increase in other liabilities                            --                  1,457                     --
        Increase in other assets                            (38,000)                    --                     --
                                                       -------------------   ------------------     -----------------
           Net cash (used in) provided by
             operating activities                               (55)               112,714                576,448
                                                       -------------------   ------------------     -----------------

Cash flows from investing activities:
    Proceeds from sales and maturities of
      available for sale securities                          36,300                     --                     --
    Capital contributions to Bank subsidiary                     --             (4,800,000)                    --
    Purchase of other investment                                 --                (50,000)              (100,000)
                                                       -------------------   ------------------     -----------------
           Net cash provided by (used in)
             investing activities                            36,300             (4,850,000)              (100,000)
                                                       -------------------   ------------------     -----------------

Cash flows from financing activities:
    Principal payments on notes and bonds
      payable                                                    --               (186,668)              (453,332)
    Proceeds from issuance of common stock                       --              4,937,133                     --
    Cash paid for fractional shares related to
      stock dividend                                             --                     --                 (6,325)
                                                       -------------------   ------------------     -----------------
           Net cash provided by (used in)
             financing activities                                --              4,750,465               (459,657)
                                                       -------------------   ------------------     -----------------

           Net increase in cash and cash
             equivalents                                     36,245                 13,179                 16,791

Cash and cash equivalents at beginning of
    year                                                     32,955                 19,776                  2,985
                                                       -------------------    ------------------     -------------------

Cash and cash equivalents at end of year               $     69,200                 32,955                 19,776
                                                       ===================    ==================     ===================

Supplemental information on noncash
    investing activities - other assets converted
    to investment securities available for sale       $     150,000                     --                     --
                                                       ===================    ==================     ===================
</TABLE> 

The Department of Banking and Finance of the State of Georgia (DBF) requires
that state banks in Georgia generally maintain a minimum ratio of primary
capital, as defined, to total assets of six percent (6%). Additionally, banks
and their holding companies are subject to certain risk-based capital
requirements based on their respective asset composition.

                                       69
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

       The DBF requires its prior approval for a bank to pay dividends in excess
       of 50% of the preceding year's earnings. Based on this limitation, the
       amount of cash dividends available from the bank subsidiary for payment
       in 1998 is approximately $1,461,000, subject to maintenance of the
       minimum capital requirements. As a result of this restriction, at
       December 31, 1998, approximately $24,385,000 of the Parent Company's
       investment in its subsidiary was restricted from transfer in the form of
       dividends.

(15)   FAIR VALUE OF FINANCIAL INSTRUMENTS

       SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
       requires disclosure of fair value information about financial
       instruments, whether or not recognized in the balance sheet, for which it
       is practicable to estimate that value. Fair value estimates are made at a
       specific point in time, based on relevant market information and
       information about the financial instrument. These estimates do not
       reflect any premium or discount that could result from offering for sale
       at one time the Bank's entire holdings of a particular financial
       instrument. Because no market exists for a portion of the Bank's
       financial instruments, fair value estimates are based on judgments
       regarding future expected loss experience, current economic conditions,
       risk characteristics of various financial instruments, and other factors.
       These estimates are subjective in nature and involve uncertainties and
       matters of significant judgment and, therefore, cannot be determined with
       precision. Changes in assumptions could significantly affect the
       estimates. Fair value estimates are based on existing on and off-balance
       sheet financial instruments without attempting to estimate the value of
       anticipated future business and the value of assets and liabilities that
       are not considered financial instruments. In addition, the tax
       ramifications related to the realization of the unrealized gains and
       losses can have a significant effect on fair value estimates and have not
       been considered in any of the estimates. The assumptions used in the
       estimation of the fair value of the Bank's financial instruments are
       explained below. Where quoted market prices are not available, fair
       values are based on estimates using discounted cash flow and other
       valuation techniques. Discounted cash flows can be significantly affected
       by the assumptions used, including the discount rate and estimates of
       future cash flows. The following fair value estimates cannot be
       substantiated by comparison to independent markets and should not be
       considered representative of the liquidation value of the Bank's
       financial instruments, but rather a good-faith estimate of the fair value
       of financial instruments held by the Bank. SFAS No. 107 excludes certain
       financial instruments and all nonfinancial instruments from its
       disclosure requirements.

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

       (a)    CASH AND CASH EQUIVALENTS

              Fair value equals the carrying value of such assets due to their
              nature.

                                       70
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

       (b)    INVESTMENT SECURITIES

              The fair value of investment securities is based on quoted market
              prices, where available. If quoted market prices are not
              available, fair values are based on quoted market prices of
              comparable instruments.

       (c)    LOANS

              The fair value of loans is calculated using discounted cash flows
              by loan type. The discount rate used to determine the present
              value of the loan portfolio is an estimated market rate that
              reflects the credit and interest rate risk inherent in the loan
              portfolio. The estimated maturity is based on the Bank's
              historical experience with repayments adjusted to estimate the
              effect of current market conditions. The carrying amount of
              related accrued interest receivable approximates its fair value.
              The carrying amount of real estate loans originated for sale
              approximates their fair value.

       (d)    DEPOSITS

              Fair Values for certificates of deposit have been determined using
              discounted cash flows. The discount rate used is based on
              estimated market rates for deposits of similar remaining
              maturities. The carrying amounts of all other deposits, by
              definition, approximate their fair values. The carrying amount of
              related accrued interest payable approximates its fair value.

       (e)    FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE
              AGREEMENTS

              Fair value approximates the carrying value of such liabilities due
              to their short-term nature.

       (f)    OTHER BORROWED FUNDS

              Fair value approximates the carrying value of such liabilities as
              the borrowings are at a variable rate of interest.

       (g)    ADVANCES FROM FHLB

              The fair value of the variable rate advances from the FHLB
              approximates the carrying value. The fair value of the fixed rate
              advances from the FHLB is calculated by discounting contractual
              cash flows using an estimated interest rate based on the current
              rates available to the Bank for debt of similar remaining
              maturities and collateral terms.

                                       71
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997, and 1996

       The carrying amounts and estimated fair values of the Bank's financial
       instruments at December 31, 1998 and 1997 are as follows:

<TABLE> 
<CAPTION> 
                                                     DECEMBER 31, 1998                            DECEMBER 31, 1997
                                           -------------------------------------     -------------------------------------------
                                                 CARRYING            ESTIMATED             CARRYING              ESTIMATED
                                                  AMOUNT            FAIR VALUE             AMOUNT               FAIR VALUE
                                           --------------------  ---------------     ------------------     --------------------
Financial assets:
<S>                                        <C>                   <C>                 <C>                    <C>  
  Cash and cash equivalents                $    9,916,911            9,916,911            13,169,983             13,169,983   
  Investment securities                        63,094,378           63,217,959            54,320,599             54,377,050   
  Loans, net                                  206,252,504          200,095,691           170,333,524            169,317,576   
Financial liabilities:                                                                                                        
  Deposits                                    251,505,486          251,757,955           210,191,778            210,210,817   
  Federal funds purchased and                                                                                                 
     securities sold under repurchase                                                                                         
     agreements                                2,714,257             2,714,257             5,938,111              5,938,111   
  Other borrowed funds                           900,000               900,000             1,000,000              1,000,000   
  Advances from FHLB                           9,000,000             8,539,000             9,000,000              8,997,432    
</TABLE> 

                                       72
<PAGE>
 
ITEM 8:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURES

         None

                                       73
<PAGE>
 
                                   PART III

ITEM 9:  DIRECTORS; EXECUTIVE OFFICERS; PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Information in response to this item is incorporated by reference to
the Company's definitive Proxy Statement for use in connection with the 1999
annual meeting of shareholders (which definitive Proxy Statement shall be filed
with the commission not later than April 30, 1999).

ITEM 10: EXECUTIVE COMPENSATION

         Information in response to this item is incorporated by reference to
the Company's definitive Proxy Statement for use in connection with the 1999
annual meeting of shareholders (which definitive Proxy Statement shall be filed
with the commission not later than April 30, 1999).

ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information in response to this item is incorporated by reference to
the Company's definitive Proxy Statement for use in connection with the 1999
annual meeting of shareholders (which definitive Proxy Statement shall be filed
with the commission not later than April 30, 1999).

ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information in response to this item is incorporated by reference to
the Company's definitive Proxy Statement for use in connection with the 1999
annual meeting of shareholders (which definitive Proxy Statement shall be filed
with the commission not later than April 30, 1999).

ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K

         (A)      EXHIBITS

                  3.1  Articles of Incorporation of the Company Incorporated by
reference from the Company's registration statement on Form SB-2 filed August
20, 1997 (Registration No. 333-34037)

                  3.2  Bylaws of the Company (Incorporated by reference to the
Company's Form 10-SB, dated April 29, 1994)

                  11.1 Statement Re:  Computation of Earnings Per Share

                                       74
<PAGE>
 
                  21.1 Subsidiaries of the Company

                  27.1 Financial Data Schedule

         (B)      REPORTS ON FORM 8-K

                  None

                                       75
<PAGE>
 
                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                  GEORGIA BANK FINANCIAL CORPORATION



                                  By: /s/ Robert W. Pollard, Jr.
                                     -------------------------------- 
                                          Robert W. Pollard, Jr.
                                          Chairman of the Board

March 24, 1998

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant in the capacities and on the date indicated.

         SIGNATURE                                  TITLE


/s/ Robert W. Pollard, Jr.                  Chairman of the Board,
---------------------------
    Robert W. Pollard, Jr.                  and Director


/s/ Edward G. Meybohm                       Vice Chairman of the Board
---------------------------
    Edward G. Meybohm                       and Director


/s/ R. Daniel Blanton                       President, Chief Executive Officer
---------------------------
    R. Daniel Blanton                       and Director


/s/ Ronald L. Thigpen                       Executive Vice President, Chief
---------------------------
    Ronald L. Thigpen                       Operating Officer (Principal
                                            Financial and Accounting Officer) 
                                            and Director

/s/ Travers W. Paine III                    Corporate Secretary and Director
---------------------------
    Travers W. Paine III

                                       76
<PAGE>
 
/s/ William J. Badger                       Director
---------------------------
    William J. Badger


/s/ William P. Copenhaver                   Director
---------------------------
    William P. Copenhaver


/s/ Randolph R. Smith, M.D.                 Director
---------------------------
    Randolph R. Smith, M.D.


/s/ John W. Trulock, Jr.                    Director
---------------------------
    John W. Trulock, Jr.

                                       77
<PAGE>
 
                                 EXHIBIT INDEX

(a)  Exhibits                                                 Page
 
     11.1  Statement Re: Computation of Earnings Per Share     79

     21.1  Subsidiaries of the Company                         80

     27.1  Financial Data Schedule                             80 

(b)  Reports of Form 8-K

           None