##### Table of Contents

---

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-K



---



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 for the fiscal year ended December 31, 2003
|- | --------------------------------------------------------------------------------------------------------------------------------



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 of Incorporation or Organization |  | (I.R.S. Employer Identification No.)
|                                                              | 
|3530 Wheeler Road Augusta, Georgia                            |  | 30909                               
|(Address of Principal Executive Office)                       |  | (Zip Code)                          



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 Section 12(g) of the Act: Common Stock



---



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 ̈



Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or
any amendment to this Form 10-K.    x



Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2):    Yes  x    No ̈



The number of shares outstanding of the Registrants Common Stock, as of December 31, 2003 was 5,247,204.



The aggregate market value of the common stock held by non-affiliates of
the Registrant, based on the last sale price of $23.64 per share on June 30, 2003, was approximately $93,876,260.



Certain portions of the Companys definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 14, 2004 (the Proxy
Statement) filed pursuant to Rule 14a-6 of the Securities Exchange Act of 1934, as amended, are incorporated by reference into this Form 10-K. Other than those portions of the Proxy Statement specifically incorporated by reference pursuant to
Items 10 through 13 of Part III hereof, no other portions of the Proxy Statement shall be deemed so incorporated.



---



---

##### Table of Contents

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 $630.6 million, total deposits of $484.0 million
and total stockholders equity of $53.7 million at December 31, 2003. Through its wholly-owned subsidiary, Georgia Bank & Trust Company of Augusta (the Bank), the Company operates a total of seven banking offices in the greater
Augusta area in Richmond and Columbia Counties, Georgia. The Bank also has mortgage operations in Augusta, Georgia, Savannah, Georgia, and Nashville, Tennessee.



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s 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 has 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 a second 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 Company opened a full service branch in May 2001
in Martinez, Georgia, the third Columbia County branch. In 2003, the Bank purchased its eighth banking location in downtown Augusta, Georgia. It will be located in the Cotton Exchange historic building and will open for business in mid 2004.



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, was involved in the organization of the Bank in 1988 and previously served with a predecessor to First Union
National Bank, Georgia State Bank, for over 13 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-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



2



---

##### Table of Contents

experience with First Union National Bank and its predecessors. The Banks senior loan officer and Group Vice
President, Tom C. McLaughlin, has been associated with the Bank for twelve years, and worked previously with Mr. Blanton at Georgia State Bank, a predecessor to First Union National Bank. Regina W. Mobley, Group Vice President, Bank Operations has
been with the Bank since the acquisition of First Columbia Bank. With over 26 years of bank operations experience, she previously served First Columbia Bank and C&S National Bank, as predecessor of Bank of America.



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-Richmond County, GA-SC metropolitan area. Augusta-Richmond County, GA-SC is one of 15 metropolitan statistical areas (MSA) in the United States and its 2002 population of 337,032 ranked 2nd in Georgia. The Augusta
market area has a diversified economy based principally on government, transportation, public utilities, health care, manufacturing, and wholesale and retail trade. Augusta is one of the leading medical centers in the Southeast. 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 Deere (tractor 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 for the Augusta-Richmond County MSA was 5.6% in 2002. Between June 2002 and June
2003 (the latest date for which FDIC information is available), total commercial bank and thrift deposits in Richmond County increased 4.8% from $2.1 billion to $2.2 billion, and total commercial bank and thrift deposits in Columbia County increased
25.4% from $709.2 million to $889.2 million. Based on data reported as of June 30, 2003, the Bank has 14.19% of all deposits in Richmond County and 17.84% in Columbia County. In both Richmond and Columbia Counties, the Bank has 15.2% of all deposits
and is the second largest depository institution. 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, 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,
2003, were $432.8 million, or 73.4% of total interest-earning assets. An analysis 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.



3



---

##### Table of Contents

Real Estate Loans. Loans secured by real estate are the primary component of the Banks loan
portfolio, constituting $325.5 million, or 75.2% of the Banks total loans, at December 31, 2003. These loans consist of commercial real estate loans, construction and development loans, residential real estate loans, and home equity loans. See
-Consumer Loans.



Commercial Real Estate Loans.At December 31, 2003, the Bank held $137.5 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 31.8% of the
Banks total loans at December 31, 2003. Loan terms are generally limited to five years and often do not exceed three years, although the installment payments may be structured on a 20-year amortization basis with a balloon payment at maturity.
Interest rates may be fixed or adjustable. 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.



Construction and Development Loans. Construction and development real estate loans comprise $90.3 million, or 20.9% of the Banks total loans at December 31, 2003.



A construction and development loan portfolio represents special problems and
risks. The nature of that portfolio is that it requires additional administration and monitoring. This is necessary since most loans are originated as lines of credit and the draws under the line require specific activities which add value to the
asset, such as progress on the completion of a building or the placement of utilities and roads in a development. This requires specialized knowledge on the part of our personnel to appraise and evaluate that progress, hence the higher level of
administration and monitoring. The 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,
the Bank generally relies upon the long-standing relationships between its loan officers 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 the largest
local 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.



4



---

##### Table of Contents

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
$25,000 in net loan charge-offs on these loans during 2003.



Residential construction loans are typically made for homes with a completed value in the range of $110,000 to $300,000. 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 twelve 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 $500,000 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, 2003, the Bank held $83.7 million of such loans, including home equity loans, representing 19.3% of the Banks loan portfolio, as compared to $75.2 million, or
19.0% of the Banks loan portfolio at December 31, 2002. There has been little growth in Residential Loans as most mortgage loans are sold in the secondary market. This portfolio includes, typically 15 or 30-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. 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 also 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 further expanded its secondary market mortgage operations
in June 2000 with the addition of experienced mortgage staff. The Bank moved its mortgage department from the Martinez Branch to its facilities located in the Operations Complex at 3515 Wheeler Road to accommodate this expansion. In September of
2000, the Bank acquired the mortgage origination offices of Prime Lending in Savannah, Georgia. In April of 2001, the Bank acquired the mortgage origination offices of Prime Lending in Nashville, Tennessee. The addition of experienced mortgage
personnel well known to our management staff provides an opportunity to participate in that dynamic market. 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



5



---

##### Table of Contents

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. The Bank had $14.0 million of such loans at December 31, 2003, representing 3.3% of the Banks total loans.



Commercial Loans. The Bank makes loans for commercial purposes in various lines of businesses. At December 31, 2003,
the Bank held $56.5 million of these loans, representing 13.07% of the total loan portfolio, excluding for these purposes commercial loans secured by real estate. See Real Estate Loans. 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 $249,000
during 2003 and $413,000 during 2002.



Consumer Loans.
The Bank makes a variety of loans to individuals for personal and household purposes, including secured and unsecured installment and term loans, and revolving lines of credit such as overdraft protection. At December 31, 2003, the Bank held $50.6
million of consumer loans, representing 11.7% 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 60 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). 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, 2003, indirect loans outstanding totaled $24.0 million. The Bank experienced net loan charge-offs on consumer loans of $624,000 during 2003 and
$547,000 during 2002.



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 higher lending limit or by the Directors Loan Committee. Individual officers lending limits range from $10,000 to $500,000 depending on seniority and the type of loan. Any loan in excess of
the lending limit of senior bank officers 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 and reviewing those loans on a periodic basis, the frequency of which increases as the quality of the loans decreases. The Banks Senior Vice President is charged
with the responsibility of ensuring that all lending relationships of $300,000 and above are reviewed annually. In addition, the Credit Administration Department, under the direction of the Senior Credit Officer is involved in the analysis of all
loans that require Directors Loan Committee approval.



6



---

##### Table of Contents

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.



Deposit Mix

12/31/2003



|                           |  |   |             |  |        |  
|-------------------------- |  | - | ----------- |  | ------ | -
|Noninterest-bearing demand |  | $ | 68,033,102  |  | 14.06  | %
|Interest checking          |  |   | 72,386,405  |  | 14.96  | %
|Money management           |  |   | 22,137,192  |  | 4.57   | %
|Savings                    |  |   | 194,366,425 |  | 40.16  | %
|Time deposits              |  |   |             |  |        |  
|Under $100,000             |  |   | 29,396,929  |  | 6.07   | %
|$100,00 and over           |  |   | 97,631,749  |  | 20.18  | %
|                           |  |   |             |  |        |  
|                           |  | $ | 483,951,802 |  | 100.00 | %
|                           |  |   |             |  |        |  



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. The Bank also
utilizes other sources of funding, specifically repurchase agreements and Federal Home Loan Bank borrowings and brokered certificates of deposit. Deposit rates are set weekly by executive 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



7



---

##### Table of Contents

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 further increase 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 243 full-time equivalent employees at December 31, 2003. 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



Both the Company and the Bank are subject to extensive state and federal banking regulations that impose restrictions on and provide for general
regulatory oversight of their operations. These laws generally are intended to protect depositors and not shareholders. The following discussion describes the material elements of the regulatory framework that applies to us.



The Company



Because the Company owns all of the capital stock of the Bank, it is
a bank holding company under the federal Bank Holding Company Act of 1956. As a result, the Company is primarily subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Federal
Reserve. As a bank holding company located in Georgia, the Georgia Department of Banking and Finance also regulates and monitors all significant aspects of the Banks operations.



Acquisitions of Banks.The Bank Holding Company Act requires every bank holding company to obtain the
Federal Reserves prior approval before:



| |  | acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control
more than 5% of the banks voting shares;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | acquiring all or substantially all of the assets of any bank; or
| | - | ----------------------------------------------------------------



| |  | merging or consolidating with any other bank holding company.
| | - | -------------------------------------------------------------



Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to
create a monopoly or, substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and



8



---

##### Table of Contents

needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial
resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserves consideration of financial resources generally focuses on capital adequacy,
which is discussed below.



Under the Bank Holding Company Act,
if adequately capitalized and adequately managed, the Company or any other bank holding company located in Georgia may purchase a bank located outside of Georgia. Conversely, an adequately capitalized and adequately managed bank holding company
located outside of Georgia may purchase a bank located inside Georgia. In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified
concentrations of deposits. Currently, Georgia law prohibits acquisitions of banks that have been incorporated for less than three years. Because the Bank has been incorporated for more than three years, this limitation does not apply to the Company
or to the Bank.



Change in Bank
Control.Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring control
of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is refutably presumed to exist if a person or company
acquires 10% or more, but less than 25%, of any class of voting securities and either:



| |  | the bank holding company has registered securities under Section 12 of the Securities Act of 1934; or
| | - | -----------------------------------------------------------------------------------------------------



| |  | no other person owns a greater percentage of that class of voting securities immediately after the transaction.
| | - | ---------------------------------------------------------------------------------------------------------------



Our common stock is registered under the Securities Exchange Act of 1934. The regulations
also provide a procedure for challenging the rebuttable presumption of control.



Permitted Activities. A bank holding company is generally permitted under the Bank Holding Company Act to engage in or acquire direct or indirect control of more than 5% of the voting shares of any
company engaged in the following activities:



| |  | Banking or managing or controlling banks; and
| | - | ---------------------------------------------



| |  | Any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



Activities that the Federal Reserve has found to be so closely related to
banking as to be a proper incident to the business of banking include:



| |  | Factoring accounts receivable;
| | - | ------------------------------



| |  | Making, acquiring, brokering or servicing loans and usual related activities;
| | - | -----------------------------------------------------------------------------



| |  | Leasing personal or real property;
| | - | ----------------------------------



| |  | Operating a non-bank depository institution, such as a savings association;
| | - | ---------------------------------------------------------------------------



9



---

##### Table of Contents

| |  | Trust company functions;
| | - | ------------------------



| |  | Financial and investment advisory activities;
| | - | ---------------------------------------------



| |  | Conducting discount securities brokerage activities;
| | - | ----------------------------------------------------



| |  | Underwriting and dealing in government obligations and money market instruments;
| | - | --------------------------------------------------------------------------------



| |  | Providing specified management consulting and counseling activities;
| | - | --------------------------------------------------------------------



| |  | Performing selected data processing services and support services;
| | - | ------------------------------------------------------------------



| |  | Acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------



| |  | Performing selected insurance underwriting activities.
| | - | ------------------------------------------------------



Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its
ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding companys continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of it or any of
its bank subsidiaries.



In addition to the permissible bank
holding company activities listed above, a bank holding company may qualify and elect to become a financial holding company, permitting the bank holding company to engage in activities that are financial in nature or incidental or complementary to
financial activity. The Bank Holding Company Act expressly lists the following activities as financial in nature:



| |  | Lending, trust and other banking activities;
| | - | --------------------------------------------



| |  | Insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent, or broker for these purposes, in any state;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Providing financial, investment, or advisory services;
| | - | ------------------------------------------------------



| |  | Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;
| | - | -----------------------------------------------------------------------------------------------------------------



| |  | Underwriting, dealing in or making a market in securities;
| | - | ----------------------------------------------------------



| |  | Other activities that the Federal Reserve may determine to be so closely related to banking or managing or controlling banks as to be a proper incident to managing or controlling
banks;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Foreign activities permitted outside of the United States if the Federal Reserve has determined them to be usual in connection with banking operations abroad;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Merchant banking through securities or insurance affiliates; and
| | - | ----------------------------------------------------------------



| |  | Insurance company portfolio investments.
| | - | ----------------------------------------



To qualify to become a financial holding company, the Bank and any other depository institution subsidiary of the Company must be well capitalized and
well managed and must have a Community Reinvestment Act rating of at least satisfactory. Additionally, the Company must file an election with the Federal Reserve to become a financial holding company and must provide the Federal Reserve
with 30 days written notice prior to engaging in a permitted financial activity. While the Company meets the qualification standards applicable to financial holding companies, the Company has not elected to become a financial holding company
at this time.



10



---

##### Table of Contents

Support of Subsidiary Institutions. Under Federal Reserve policy, the Company is expected
to act as a source of financial strength for the Bank and to commit resources to support the Bank. This support may be required at times when, without this Federal Reserve policy, the Company might not be inclined to provide it. In addition, any
capital loans made by the Company to the Bank will be repaid only after its deposits and various other obligations are repaid in full. In the unlikely event of the Companys bankruptcy, any commitment by it to a federal bank regulatory agency
to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.



The Bank



The Bank is subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of our
operations. These laws are generally intended to protect depositors and not shareholders. The following discussion describes the material elements of the regulatory framework that applies to us.



Because the Bank is a commercial bank chartered under the laws of the State
of Georgia, it is primarily subject to the supervision, examination and reporting requirements of the FDIC and the Georgia Department of Banking and Finance. The FDIC and Georgia Department of Banking and Finance regularly examine the Banks
operations and have the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. Both regulatory agencies have the power to prevent the continuance or development of unsafe or unsound banking practices
or other violations of law. Additionally, the Banks deposits are insured by the FDIC to the maximum extent provided by law. The Bank is also subject to numerous state and federal statutes and regulations that affect its business, activities
and operations.



Branching.Under current
Georgia law, the Bank may open branch offices throughout Georgia with the prior approval of the Georgia Department of Banking and Finance. In addition, with prior regulatory approval, the Bank may acquire branches of existing banks located in
Georgia. The Bank and any other national or state-chartered bank generally may branch across state lines by merging with banks in other states if allowed by the applicable states laws. Georgia law, with limited exceptions, currently permits
branching across state lines through interstate mergers.



Under
the Federal Deposit Insurance Act, states may opt-in and allow out-of-state banks to branch into their state by establishing a new start-up branch in the state. Currently, Georgia has not opted-in to this provision. Therefore, interstate
merger is the only method through which a bank located outside of Georgia may branch into Georgia. This provides a limited barrier of entry into the Georgia banking market, which protects us from an important segment of potential competition.
However, because Georgia has elected not to opt-in, our ability to establish a new start-up branch in another state may be limited. Many states that have elected to opt-in have done so on a reciprocal basis, meaning that an out-of-state bank may
establish a new start-up branch only if their home state has also elected to opt-in. Consequently, until Georgia changes its election, the only way we will be able to branch into states that have elected to opt-in on a reciprocal basis will be
through interstate merger.



Prompt Corrective
Action.The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking
regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and



11



---

##### Table of Contents

critically undercapitalized) in which all institutions are placed. The federal banking agencies have also specified by
regulation the relevant capital levels for each of the other categories. At December 31, 2003, the Bank qualified for the well-capitalized category.



Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect
to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or
conservator for an institution that is critically undercapitalized.



An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding
company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding companys obligation to fund a capital restoration plan is limited to the lesser of 5%
of an undercapitalized subsidiarys assets at the time it became undercapitalized or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution to a
lower capital category based on supervisory factors other than capital.



FDIC Insurance Assessments. The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of
assets and liabilities. The system assigns an institution to one of three capital categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized. These three categories are substantially similar to the prompt corrective
action categories described above, with the undercapitalized category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. The FDIC also
assigns an institution to one of three supervisory subgroups based on a supervisory evaluation that the institutions primary federal regulator provides to the FDIC and information that the FDIC determines to be relevant to the
institutions financial condition and the risk posed to the deposit insurance funds. Assessments range from 0 to 27 cents per $100 of deposits, depending on the institutions capital group and supervisory subgroup. In addition, the FDIC
imposes assessments to help pay off the $780 million in annual interest payments on the $8 billion Financing Corporation bonds issued in the late 1980s as part of the government rescue of the thrift industry. This assessment rate is adjusted
quarterly and is set at 1.54 basis points of assessable deposits for the first quarter of 2004.



The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.



Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions
within their respective jurisdictions, the Federal Reserve or the FDIC shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also
considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank.Additionally, we must publicly disclose
the terms of various Community Reinvestment Act-related agreements.



12



---

##### Table of Contents

Other Regulations. Interest and other charges collected or contracted for by the
Bank are subject to state usury laws and federal laws concerning interest rates. For example, under the Soldiers and Sailors Civil Relief Act of 1940, a lender is generally prohibited from charging an annual interest rate in excess of 6%
on any obligation for which the borrower is a person on active duty with the United States military.



The Banks loan operations are also subject to federal laws applicable to credit transactions, such as the:



| |  | federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
| | - | ------------------------------------------------------------------------------------------



| |  | 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;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| |  | Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
| | - | ---------------------------------------------------------------------------------------------------------------



| |  | Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
| | - | ---------------------------------------------------------------------------------------------------------------



| |  | Soldiers and Sailors Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.
| | - | -------------------------------------------------------------------------------------------------------------------------



In addition to the federal and state laws noted above, the Georgia Fair
Lending Act (GAFLA) imposes restrictions and procedural requirements on most mortgage loans made in Georgia, including home equity loans and lines of credit. On August 5, 2003, the Office of the Comptroller of the Currency issued a
formal opinion stating that the entirety of GAFLA is preempted by federal law for national banks and their operating subsidiaries. GAFLA contains a provision that preempts GAFLA as to state banks in the event that the Office of the Comptroller of
the Currency preempts GAFLA as to national banks. Therefore, the Bank and any of its operating subsidiaries that may be engaged in mortgage lending will be exempt from the requirements of GAFLA.



The Banks deposit operations are subject to:



| |  | the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and
customers rights and liabilities arising from the use of automated teller machines and other electronic banking services.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



---

##### Table of Contents

Capital Adequacy



The Company and the Bank are required to comply with the capital adequacy standards established by the Federal Reserve, in the case of the Company, and
the FDIC, in the case of the Bank. The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. The Bank is also subject to risk-based and leverage capital requirements adopted by the FDIC,
which are substantially similar to those adopted by the Federal Reserve for bank holding companies.



The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk
categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.



The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two
components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of qualifying
cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock, and a limited
amount of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. At December 31, 2003, the Banks ratio of total capital to risk-weighted assets was 11.58% and our ratio of Tier 1 Capital to risk-weighted
assets was 10.33%.



In addition, the Federal Reserve has
established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that
meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserves risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a leverage ratio of
at least 4%. At December 31, 2003, our leverage ratio was 8.40%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above
the minimum supervisory levels without reliance on intangible assets. The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.



Failure to meet capital guidelines could subject a bank or bank holding
company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and certain other restrictions on its business. As described
above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.



14



---

##### Table of Contents

Payment of Dividends



The Company is a legal entity separate and distinct from the Bank. The principal sources of the Companys cash flow, including cash flow to pay
dividends to its shareholders, are dividends that the Bank pays to its sole shareholder, the Company. Statutory and regulatory limitations apply to the Banks payment of dividends. If, in the opinion of the federal banking regulator, the Bank
were engaged in or about to engage in an unsafe or unsound practice, the federal banking regulator could require, after notice and a hearing, that it stop or refrain from engaging in the questioned practice. The federal banking agencies have
indicated that paying dividends that deplete a depository institutions capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository
institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks
should generally only pay dividends out of current operating earnings. See The BankPrompt Corrective Action.



The Georgia Department of Banking and Finance also regulates the Banks dividend payments and must approve dividend payments that would exceed 50% of
the Banks net income for the prior year. Our payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines.



In 2003, the Bank declared $2.0 million in cash dividends payable to the
Company. No cash dividends were declared in 2002. The Company paid a 10% stock dividend on August 29, 2003 and a 2:1 stock split on November 21, 2003.



Restrictions on Transactions with Affiliates



The Company and the Bank are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:



| |  | a banks loans or extensions of credit to affiliates;
| | - | -----------------------------------------------------



| |  | a banks investment in affiliates;
| | - | ----------------------------------



| |  | assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;
| | - | ------------------------------------------------------------------------------------------------------------------



| |  | loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates; and
| | - | --------------------------------------------------------------------------------------------------------------------------------



| |  | a banks guarantee, acceptance or letter of credit issued on behalf of an affiliate.
| | - | ------------------------------------------------------------------------------------



The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a banks capital
and surplus and, as to all affiliates combined, to 20% of a banks capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. The Bank
must also comply with other provisions designed to avoid the taking of low-quality assets.



15



---

##### Table of Contents

The Company and the Bank are also subject to the provisions of Section 23B of the Federal Reserve Act
which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those
prevailing at the time for comparable transactions with nonaffiliated companies.



The Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially
the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.



Privacy



Financial institutions are required to disclose their policies for collecting and protecting confidential information.
Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer or when
the financial institution is jointly sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in
telemarketing, direct mail marketing or other marketing to consumers.



Consumer Credit Reporting



On December
4, 2003, the President signed the Fair and Accurate Credit Transactions Act (the FAIR Act), amending the federal Fair Credit Reporting Act (the FCRA). Although an amendment relating to consumer credit information provided in connection with employee
investigations will become effective March 31, 2004, most of the amendments to the FCRA (the FCRA Amendments) will become effective in late 2004, depending on implementing regulations to be issued by the Federal Trade Commission and the federal bank
regulatory agencies.



The FCRA Amendments include,
among other things:



| |  | new requirements for financial institutions to develop policies and procedures to identify potential identity theft and, upon the request of a consumer, place a fraud alert in the
consumers credit file stating that the consumer may be the victim of identity theft or other fraud;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | new consumer notice requirements for lenders that use consumer report information in connection with risk-based credit pricing programs
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | for entities that furnish information to consumer reporting agencies (which would include the Bank), new requirements to implement procedures and policies regarding the accuracy and
integrity of the furnished information and regarding the correction of previously furnished information that is later determined to be inaccurate; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a new requirement for mortgage lenders to disclose credit scores to consumers.
| | - | ------------------------------------------------------------------------------



16



---

##### Table of Contents

The FCRA Amendments also will prohibit a business that receives consumer information from an affiliate
from using that information for marketing purposes unless the consumer is first provided a notice and an opportunity to direct the business not to use the information for such marketing purposes (the opt-out), subject to certain
exceptions. While the FCRA Amendments will limit the Companys ability to share information with its affiliates for marketing purposes, the actual impact of these limitations will depend on the extent to which our customers elect to
prohibit the use of their personal information for marketing purposes. We have no basis at this time to predict the volume of consumer opt-outs.



Prior to the effective date of the FCRA Amendments, the Company and its subsidiaries will implement policies and procedures to comply with the new rules.



Anti-Terrorism Legislation



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



Proposed Legislation and Regulatory Action



New regulations and statutes are regularly proposed that contain
wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating or doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute
will be adopted or the extent to which our business may be affected by any new regulation or statute.



Effect of Governmental Monetary Polices



Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Banks monetary policies have had, and are
likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the
Federal Reserve affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve
requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.



17



---

##### Table of Contents

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 three branch offices are located in Augusta, Georgia, two branches are located in Martinez, Georgia and
one branch is located in Evans, Georgia.



With the exception of
the Washington Road branch, 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 and the Washington Road branch. The main office contains approximately 14,000 square feet of space. The Washington
Road branch contains 1,800 square feet and was converted into a drive through only bank in May 2001 when the new Furys Ferry branch located in close proximity was opened. The new Furys Ferry branch is a 3,500 square feet, full-service banking office
on Furys Ferry Road in Columbia County.



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 operational functions were relocated. In June 2000, the mortgage operations were moved to this
Operations Complex, and occupied 4,500 square feet. In August 2001, with the expiration of a 3,000 square foot tenant lease, the mortgage department expanded operations and now occupies a total of 6,000 square feet. In December 2003, the remaining
1,500 square feet that was leased was renovated and the construction lending department now occupies this location.



In November 2002, the Bank purchased approximately 23,400 square feet of commercial office space on Walton Way Ext., located in close proximity to the
Operations Complex and Main Office. Approximately 10,400 square feet was renovated in 2003 to accommodate operational functions. Approximately 500 square feet of this property is used as a meeting room. 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.



18



---

##### Table of Contents

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, 2003.



19



---

##### Table of Contents

PART II



Item 5. Market for the Companys Common Equity and Related Stockholder Matters



As of March 5, 2004, there were approximately 826 holders of record of the Companys common stock. As of March 5, 2004,
there were 5,247,204 shares of the Companys common stock outstanding. Transactions in the Companys common stock are generally negotiated through UBS PaineWebber and Robinson-Humphrey/Soloman Smith Barney Company, Inc. Both firms make a
market in the common stock of the Company via the over-the-counter bulletin board. The following table reflects the range of high and low bid quotations, adjusted for stock dividends and splits, in the Companys common stock for the past two
years:



Georgia Bank Financial Corporation Stock Price



|                   |  |     |       |      |   |      
|------------------ |  | --- | ----- | ---- | - | -----
|                   |  | Low |       | High
|Quarter ended      |  |     |       |      |   |      
|March 31, 2002     |  | $   | 15.45 |      | $ | 15.91
|June 30, 2002      |  |     | 15.91 |      |   | 19.09
|September 30, 2002 |  |     | 19.09 |      |   | 20.23
|December 31, 2002  |  |     | 18.18 |      |   | 20.00
|                   |  |    
|March 31, 2003     |  |     | 19.32 |      |   | 20.11
|June 30, 2003      |  |     | 20.00 |      |   | 23.64
|September 30, 2003 |  |     | 22.95 |      |   | 27.00
|December 31, 2003  |  |     | 26.30 |      |   | 34.00
|                   |  |    
|Period ended       |  |     |       |      |   |      
|February 27, 2004  |  |     | 27.95 |      |   | 29.25



No cash dividends were
paid on the common stock of the Company in 2002 or 2003. On January 23, 2004, the Company declared a cash dividend of $0.13 per share to shareholders of record on February 2, 2004. 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, regulations 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 when 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 as adverse as to repayment or recovery by the Georgia Department of Banking and Finance at the most recent examination of the Bank exceeds 80% of the Banks equity as reflected at such examination.



20



---

##### Table of Contents

Item 6. Selected Consolidated Financial Data



|                                                                 |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|---------------------------------------------------------------- |  | --------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                                 |  | 2003                                          |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|                                                                 |  | (Dollars in thousands, except per share data) |          
|Earnings                                                         |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total interest income                                            |  | $                                             | 32,337    |   |      | $ | 31,370    |      |  | $ | 32,561    |   |  | $    | 29,863    |   |  | $ | 24,167    |  
|Total interest expense                                           |  |                                               | 9,685     |   |      |   | 11,160    |      |  |   | 15,249    |   |  |      | 14,670    |   |  |   | 10,981    |  
|Net interest income                                              |  |                                               | 22,652    |   |      |   | 20,210    |      |  |   | 17,312    |   |  |      | 15,193    |   |  |   | 13,186    |  
|Provision for loan losses                                        |  |                                               | 1,694     |   |      |   | 2,414     |      |  |   | 1,825     |   |  |      | 1,063     |   |  |   | 1,314     |  
|Noninterest income                                               |  |                                               | 14,522    |   |      |   | 11,587    |      |  |   | 7,970     |   |  |      | 4,232     |   |  |   | 5,168     |  
|Noninterest expense                                              |  |                                               | 23,564    |   |      |   | 20,278    |      |  |   | 16,795    |   |  |      | 12,455    |   |  |   | 11,246    |  
|Net income                                                       |  |                                               | 7,933     |   |      |   | 6,010     |      |  |   | 4,561     |   |  |      | 4,002     |   |  |   | 3,970     |  
|                                                                 |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Per Share Data                                                   |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net income - Diluted                                             |  | $                                             | 1.48      |   |      | $ | 1.13      |      |  | $ | 0.86      |   |  | $    | 0.76      |   |  | $ | 0.75      |  
|Book value                                                       |  |                                               | 10.02     |   |      |   | 8.78      |      |  |   | 7.58      |   |  |      | 6.53      |   |  |   | 5.66      |  
|Weighted average common and common equivalent shares outstanding |  |                                               | 5,359,815 |   |      |   | 5,327,286 |      |  |   | 5,275,745 |   |  |      | 5,267,718 |   |  |   | 5,265,975 |  
|                                                                 |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Selected Average Balances                                        |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Assets                                                           |  | $                                             | 604,585   |   |      | $ | 526,337   |      |  | $ | 449,322   |   |  | $    | 372,233   |   |  | $ | 299,543   |  
|Loans (net of unearned income)                                   |  |                                               | 420,023   |   |      |   | 363,624   |      |  |   | 315,003   |   |  |      | 261,869   |   |  |   | 225,244   |  
|Deposits                                                         |  |                                               | 465,868   |   |      |   | 403,992   |      |  |   | 348,706   |   |  |      | 299,548   |   |  |   | 269,411   |  
|Stockholders equity                                             |  |                                               | 50,789    |   |      |   | 43,090    |      |  |   | 37,405    |   |  |      | 31,805    |   |  |   | 29,458    |  
|                                                                 |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Selected Year-End Balances                                       |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Assets                                                           |  | $                                             | 630,633   |   |      | $ | 569,832   |      |  | $ | 481,544   |   |  | $    | 405,791   |   |  | $ | 342,101   |  
|Loans (net of unearned income)                                   |  |                                               | 432,679   |   |      |   | 396,699   |      |  |   | 339,670   |   |  |      | 283,573   |   |  |   | 239,032   |  
|Allowance for loan losses                                        |  |                                               | 7,278     |   |      |   | 6,534     |      |  |   | 5,109     |   |  |      | 4,143     |   |  |   | 3,592     |  
|Deposits                                                         |  |                                               | 483,952   |   |      |   | 439,557   |      |  |   | 369,149   |   |  |      | 310,928   |   |  |   | 283,121   |  
|Other borrowings                                                 |  |                                               | 87,769    |   |      |   | 78,988    |      |  |   | 68,456    |   |  |      | 57,046    |   |  |   | 27,331    |  
|Stockholders equity                                             |  |                                               | 53,689    |   |      |   | 46,748    |      |  |   | 39,999    |   |  |      | 34,384    |   |  |   | 29,817    |  
|                                                                 |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Selected Ratios                                                  |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Return on average total assets                                   |  |                                               | 1.31      | % |      |   | 1.14      | %    |  |   | 1.02      | % |  |      | 1.08      | % |  |   | 1.21      | %
|Return on average equity                                         |  |                                               | 15.62     | % |      |   | 13.95     | %    |  |   | 12.19     | % |  |      | 12.58     | % |  |   | 13.48     | %
|Average earning assets to average total assets                   |  |                                               | 94.57     | % |      |   | 94.86     | %    |  |   | 93.38     | % |  |      | 93.71     | % |  |   | 92.27     | %
|Average loans to average deposits                                |  |                                               | 90.16     | % |      |   | 90.01     | %    |  |   | 90.33     | % |  |      | 87.72     | % |  |   | 83.61     | %
|Average equity to average total assets                           |  |                                               | 8.40      | % |      |   | 8.19      | %    |  |   | 8.32      | % |  |      | 8.56      | % |  |   | 9.83      | %
|Net interest margin                                              |  |                                               | 3.97      | % |      |   | 4.04      | %    |  |   | 4.13      | % |  |      | 4.36      | % |  |   | 4.40      | %
|Operating efficiency                                             |  |                                               | 63.04     | % |      |   | 64.02     | %    |  |   | 66.42     | % |  |      | 63.92     | % |  |   | 63.90     | %
|Net charge-offs to average loans                                 |  |                                               | 0.23      | % |      |   | 0.27      | %    |  |   | 0.27      | % |  |      | 0.20      | % |  |   | 0.19      | %
|Allowance for loan losses to net loans (year-end)                |  |                                               | 1.68      | % |      |   | 1.65      | %    |  |   | 1.50      | % |  |      | 1.46      | % |  |   | 1.50      | %
|Risk-based capital                                               |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Tier 1 capital                                                   |  |                                               | 10.33     | % |      |   | 10.15     | %    |  |   | 10.05     | % |  |      | 11.09     | % |  |   | 11.42     | %
|Total capital                                                    |  |                                               | 11.58     | % |      |   | 11.40     | %    |  |   | 11.30     | % |  |      | 12.34     | % |  |   | 12.69     | %
|Tier 1 leverage ratio                                            |  |                                               | 8.40      | % |      |   | 7.96      | %    |  |   | 8.02      | % |  |      | 8.67      | % |  |   | 8.91      | %



21



---

##### Table of Contents

Item 7. 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 operations 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



The Bank was organized by a group of local citizens and
commenced business on August 28, 1989. It began operations with one branch. Today, the Bank operates six full service branches and one drive through branch in Richmond and Columbia counties in Augusta, Martinez, and Evans, Georgia. The Bank operates
three mortgage origination offices in Augusta, Georgia, Savannah, Georgia, and Nashville, Tennessee. The Savannah, Georgia office also offers construction lending services. Bank and mortgage operations are located in Augusta, Georgia in two
operations campuses located in close proximity to the main office in Augusta, Georgia. Trust and retail investment services are located in the main office. The Bank is Augustas largest community banking company.



Richmond and Columbia counties have a diversified economy based primarily on
government, transportation, public utilities, health care, manufacturing, and wholesale and retail trade. Augusta is one of the leading medical centers in the Southeast. The 2002 population of the Augusta-Richmond County, GA-SC metropolitan area was
337,032, the second largest in Georgia.



The Banks
services include lending, residential and commercial real estate loans, construction and development loans, and commercial and consumer loans. The Bank also offers a variety of deposit programs, including noninterest-bearing demand, interest
checking, money management, savings, and time deposits. In both Richmond and Columbia counties, the Bank had 15.2% of all deposits and was the second largest depository institution at June 30, 2003, as cited from the Federal Deposit Insurance
Corporations website. Securities sold under repurchase agreements are also offered. Additional services include trust, retail investment, and mortgage. As a matter of practice, most mortgage loans are sold in the secondary market; however,
some mortgage loans are placed in the portfolio based on marketing and balance sheet considerations. The Bank continues to concentrate on increasing its market share through various new deposit and loan products and other financial services and by
focusing on the customer relationship management philosophy. The Bank is committed to building life-long relationships with its customers, employees, shareholders, and the communities it serves.



The Banks primary source of income is from its lending activities. In
2003, the Banks second largest source of income was from gain on sale of loans in the secondary market. As interest rates rise, this source of income is expected to decrease, while loan income is expected to increase due to the increased loan
volume. The Bank also generates income from its investment activities and service charges and fees on deposits. The Bank continues to concentrate on increasing trust service fees. Other significant contributors to income include retail investment
income and increase in cash surrender value of bank-owned life insurance.



The Bank has experienced steady growth. Over the past five years, assets grew from $342.1 million at December 31, 1999 to $630.6 at December 31, 2003. From year end 1999 to year end 2003,



22



---

##### Table of Contents

loans increased $193.6 million, and deposits increased $200.8 million. Also, from 1999 to 2003, return on average equity
increased from 13.48% to 15.62% and return on average assets increased from 1.21% to 1.31%. Net income for the year ended 1999 was $4.0 million compared to net income of $7.9 million at year end 2003. The Company has reached a level of maturity
evidenced by long-term financial performance and stability that resulted in the January 23, 2004 declaration of its first quarterly cash dividend of $0.13 per share.



The Bank meets its liquidity needs by managing cash and due from banks, federal funds purchased and sold, maturity of
investment securities, paydowns from mortgage backed securities, and draws on lines of credit. Additionally, liquidity can be managed through structuring deposit and loan maturities. The Bank funds loan and investment growth with core deposits,
securities sold under repurchase agreements and wholesale borrowings. During inflationary periods, interest rates generally increase. When interest rates rise, variable rate loans and investments produce higher earnings, however, deposit and other
borrowings interest expense and operating expenses also rise. The Bank monitors its interest rate risk in a ramp up and down annually 200 basis points (2%) scenario and a shock up and down 200 (2%) basis points scenario. The Bank monitors operating
expenses through responsibility center budgeting. See Interest Rate Sensitivity below.



Critical Accounting Estimates



The accounting and financial reporting policies of Georgia Bank Financial Corporation and subsidiary conform to generally accepted accounting principles and to general practices within the banking industry. Of these policies, management has
identified the allowance for loan losses as a critical accounting estimate that requires subjective judgment and is important to the presentation of the financial condition and results of operations of the Company.



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. 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, historical loss rates, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect a borrowers ability to repay.



The Company segments its allowance for loan losses into the following five
major categories: 1) identified losses for impaired loans; 2) general reserves for Classified/Watch loans; 3) general reserves for loans with satisfactory ratings; 4) general reserves based on economic and market risk qualitative factors, and 5) an
unallocated amount. Risk ratings are initially assigned in accordance with the Banks loan and collection policy. An organizationally independent department reviews grade assignments on an ongoing basis. Management reviews current information
and events regarding a borrowers financial condition and strengths, 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 loan, management classifies the loan accordingly. If the loan is determined to be impaired, management allocates a portion of the allowance for loan losses for that loan based upon the present
value of future cash flows discounted at the loans effective interest rate or the fair value of the collateral as the measure for the amount of the impairment.



23



---

##### Table of Contents

Impairment losses are included in the allowance for loan losses through a charge to the provision for losses on loans.
Subsequent recoveries are added to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of
interest has been discontinued are applied first to principal and then to interest income. Impaired and Classified/Watch loans are aggressively monitored. The reserves for loans rated satisfactory are further subdivided into various types of loans
as defined by call report codes. The qualitative factors are based upon economic, market and industry conditions that are specific to the Companys local two county markets. These qualitative factors include, but are not limited to, national
and local economic conditions, bankruptcy trends, unemployment trends, loan concentrations, dependency upon government installations and facilities, and competitive factors in the local market. These allocations for the qualitative factors are
included in the various individual components of the allowance for loan losses. The qualitative factors are subjective in nature and require considerable judgment on the part of the Banks management. However, it is the Banks opinion that
these factors do represent uncertainties in the Banks business environment that must be factored into the Banks analysis of the allowance for loan losses. The Bank is committed to developing more historical data in the future to reduce
the dependence on these qualitative factors. The unallocated component of the allowance is established for losses that specifically exist in the remainder of the portfolio, but have yet to be identified.



Management believes that the allowance for loan losses is adequate. While the
Company has 75.2% of its loan portfolio secured by real estate loans, this percentage is not significantly higher than in previous years. Commercial real estate comprises 31.8 % of the loan portfolio and is primarily owner occupied properties where
the operations of the commercial entity provide the necessary cash flow to service the debt. For this portion of real estate loans, repayment is not dependent upon liquidation of the real estate. Construction and development (20.9%) has been an
increasingly important portion of the real estate loan portfolio. The Company carefully monitors the loans in this category since the repayment of these loans is generally dependent upon the liquidation of the real estate and is impacted by national
and local economic conditions. The residential category represents those loans that the Company chooses to maintain in its portfolio rather than selling into the secondary market for marketing and competitive reasons. The residential held for sale
comprises loans that are in the process of being sold into the secondary market. The credit has been approved by the investor and the interest rate locked so the Company takes no credit or interest rate risk with respect to these loans. The Company
has no large loan concentrations to individual borrowers or industries. Only 11.7% of the Companys portfolio consists of consumer loans. Unsecured loans at December 31, 2003 were $8.9 million. 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.



Please see Provision for Loan Losses, Net Charge-offs, Non-Performing
Assets and Allowance for Loan Losses for a further discussion of the Companys loans, loss experience, and methodology in determining the allowance.



24



---

##### Table of Contents

Results of Operations



The Company achieved record income of $7.9 million in 2003. This was a $1.9 million, or 32.0%, increase over 2002. Gain on sale of mortgage loans in the
secondary market was the principal contributor, representing an increase of $3.0 million over 2002, to this increase. The Company anticipates a decrease in the gain on sale of mortgage loans as interest rates rise. Additionally, the Company
experienced loan growth of $36.0 million in 2003, which despite the lower rates, resulted in an increase in loan interest income of $973,000 over 2002. Loan fees increased $328,000 over 2002. There was a $16.7 million increase in investments in
2003. However, investment interest income decreased $285,000 due to the lower interest rates. Additionally, securities at low interest rates were sold at a loss to increase future income by purchasing higher rate investments. This loss on sale of
investments coupled with calls on high interest rate investments resulted in net investment losses of $203,000.



The Company had deposit growth of $44.4 million, or 10.7% in 2003. Despite the higher deposit volume, deposit expense decreased $1.4 million, due to a
lower interest rate environment in 2003. The Company was in a $10.4 federal funds purchased position at 2003 year end, as compared to a $3.7 million federal funds sold position at 2002 year end. The Company has used federal funds purchased as a low
interest rate funding source during 2003. The Company has also continued to utilize wholesale borrowings, including Federal Home Loan Bank borrowings, SunTrust Robinson Humphrey repurchase agreements, and brokered CDs, which totaled $76.0 million at
year end. The $2.7 million increase in salaries and employee benefits was primarily the result of additional commissions and bonuses related to the gain on sale of mortgage loans in the secondary market. However, new employees to accommodate growth
and additional salary continuation expense also contributed to the increase over the prior year. Other operating expenses increased $462,000 over 2002, primarily due to additional marketing, processing and loan costs. The Company continues to
monitor operating expenses and uses responsibility center budgeting to assist in this endeavor. The operating efficiency ratio of 63.04% in 2003 is a decrease of .98% from 2002. In addition, trust services continue to grow and trust fees increased
$126,000 over 2002. Total assets increased $60.8 million, or 10.7%, in 2003 compared to 2002, primarily due to loan and investment growth.



The earnings performance of the Company is reflected in its return on average assets and average equity of 1.31% and 15.62%, respectively, during 2003
compared to 1.14% and 13.95%, respectively, during 2002. The return on average assets and average equity was 1.02% and 12.19%, respectively, in 2001. Basic net income per share on weighted average common shares outstanding improved to $1.51 in 2003
compared to $1.15 in 2002 and $0.87 in 2001. Diluted net income per share on weighted average common and common equivalent shares outstanding improved to $1.48 in 2003 compared to $1.13 in 2002 and $0.87 in 2001. A 10% stock dividend was paid on
August 29, 2003 and a 2:1 stock split was paid November 21, 2003. A 15% stock dividend was paid by the Company on August 31, 2001.



25



---

##### Table of Contents

Net Interest Income



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:



Average Balances, Income and Expenses, Yields and Rates



|                                                                    |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       
|------------------------------------------------------------------- |  | ---------------------------- | ------- | ---------------------------- | ------------------- | ---- | - | ------------------- | - | ------------- |  | - | ------------------- | - |  | ------------------- | - |  | - | ------
|                                                                    |  | Year Ended December 31, 2003 |         | Year Ended December 31, 2002
|                                                                    |  | AverageAmount                |         |                              | AverageYield orRate |      |   | AmountPaid orEarned |   | AverageAmount |  |   | AverageYield orRate |   |  | AmountPaid orEarned
|                                                                    |  | (Dollars in thousands)      
|ASSETS                                                              |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       
|Interest-earning assets:                                            |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       
|Loans                                                               |  | $                            | 420,023 |                              |                     | 6.15 | % |                     | $ | 25,840        |  | $ | 363,624             |   |  | 6.75                | % |  | $ | 24,539
|Investments                                                         |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       
|Taxable                                                             |  |                              | 131,532 |                              |                     | 4.50 | % |                     |   | 5,914         |  |   | 118,340             |   |  | 5.32                | % |  |   | 6,291 
|Tax-exempt                                                          |  |                              | 11,810  |                              |                     | 4.16 | % |                     |   | 491           |  |   | 9,035               |   |  | 4.41                | % |  |   | 398   
|Federal funds sold                                                  |  |                              | 8,088   |                              |                     | 1.09 | % |                     |   | 88            |  |   | 7,761               |   |  | 1.61                | % |  |   | 125   
|Interest-bearing deposits in other banks                            |  |                              | 305     |                              |                     | 1.31 | % |                     |   | 4             |  |   | 517                 |   |  | 3.29                | % |  |   | 17    
|                                                                    |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       
|Total interest-earning assets                                       |  |                              | 571,758 |                              |                     | 5.66 | % |                     | $ | 32,337        |  |   | 499,277             |   |  | 6.28                | % |  | $ | 31,370
|                                                                    |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       
|Cash and due from banks                                             |  |                              | 13,230  |                              |                     |      |   |                     |   |               |  |   | 12,063              |   |  |                     |   |  |   |       
|Premises and equipment                                              |  |                              | 13,899  |                              |                     |      |   |                     |   |               |  |   | 12,694              |   |  |                     |   |  |   |       
|Other                                                               |  |                              | 12,706  |                              |                     |      |   |                     |   |               |  |   | 8,083               |   |  |                     |   |  |   |       
|Allowance for loan losses                                           |  |                              | (7,008  | )                            |                     |      |   |                     |   |               |  |   | (5,780              | ) |  |                     |   |  |   |       
|                                                                    |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       
|Total assets                                                        |  | $                            | 604,585 |                              |                     |      |   |                     |   |               |  | $ | 526,337             |   |  |                     |   |  |   |       
|                                                                    |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       
|Interest-bearing liabilities:                                       |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       
|NOW accounts                                                        |  | $                            | 64,006  |                              |                     | 0.55 | % |                     | $ | 353           |  | $ | 56,911              |   |  | 0.94                | % |  | $ | 535   
|Savings and money management accounts                               |  |                              | 206,295 |                              |                     | 1.68 | % |                     |   | 3,461         |  |   | 167,556             |   |  | 2.26                | % |  |   | 3,780 
|Time deposits                                                       |  |                              | 125,809 |                              |                     | 2.73 | % |                     |   | 3,437         |  |   | 119,017             |   |  | 3.61                | % |  |   | 4,295 
|Federal funds purchased/securities sold under repurchase agreements |  |                              | 47,204  |                              |                     | 1.37 | % |                     |   | 646           |  |   | 40,048              |   |  | 1.60                | % |  |   | 640   
|Other borrowings                                                    |  |                              | 35,678  |                              |                     | 5.01 | % |                     |   | 1,788         |  |   | 34,648              |   |  | 5.51                | % |  |   | 1,910 
|                                                                    |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       
|Total interest-bearing liabilities                                  |  |                              | 478,992 |                              |                     | 2.02 | % |                     |   | 9,685         |  |   | 418,180             |   |  | 2.67                | % |  |   | 11,160
|                                                                    |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       
|Noninterest-bearing demand deposits                                 |  |                              | 69,758  |                              |                     |      |   |                     |   |               |  |   | 60,508              |   |  |                     |   |  |   |       
|Other liabilities                                                   |  |                              | 5,049   |                              |                     |      |   |                     |   |               |  |   | 4,559               |   |  |                     |   |  |   |       
|Stockholders equity                                                |  |                              | 50,786  |                              |                     |      |   |                     |   |               |  |   | 43,090              |   |  |                     |   |  |   |       
|                                                                    |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       
|Total liabilities and stockholders equity                          |  | $                            | 604,585 |                              |                     |      |   |                     |   |               |  | $ | 526,337             |   |  |                     |   |  |   |       
|                                                                    |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       
|Net interest spread                                                 |  |                              |         |                              |                     | 3.63 | % |                     |   |               |  |   |                     |   |  | 3.61                | % |  |   |       
|Benefit of noninterest sources                                      |  |                              |         |                              |                     | 0.34 | % |                     |   |               |  |   |                     |   |  | 0.43                | % |  |   |       
|Net interest margin/income                                          |  |                              |         |                              |                     | 3.97 | % |                     | $ | 22,652        |  |   |                     |   |  | 4.04                | % |  | $ | 20,210
|                                                                    |  |                              |         |                              |                     |      |   |                     |   |               |  |   |                     |   |  |                     |   |  |   |       



The increase in
average loans of $56.4 million and the increase in average investments of $16.1 million were funded by increases in average deposits of $61.9 million, federal funds purchased and securities sold under repurchase agreements of $7.2 million, and
Federal Home Loan Bank borrowings of $1.3 million. For 2002, average total assets were $526.3 million, a 17.1% increase over 2001. Average interest earning assets for 2002 were $499.3 million, or 94.9% of average total assets.



Interest income is the largest contributor to income. Interest income on
loans, including loan fees, increased $1.3 million from 2002 to $25.8 million. The increase in loan interest income resulted from the increased loan volume, despite the lower interest rates. This increase in loan interest income was somewhat offset
by a decrease in investment income due to the lower investment yields in 2003,



26



---

##### Table of Contents

despite the increase in investment volume. Interest expense decreased $1.5 million from 2002 to $9.7 million in 2003.
Despite higher volumes of interest-bearing liabilities, interest expense decreased due to lower interest rates. The result was an increase in net interest income of $2.4 million or 12.1% in 2003 from 2002. Average yields on interest-earning assets
decreased to 5.66% in 2003, compared to 6.28% in 2002.



Net
interest income increased $2.9 million in 2002 compared to 2001 as a result of the growth in the volume of average earning assets somewhat offset by a decrease in interest rates. Interest earning assets averaged $499.3 million in 2002, an increase
of 34.1%, from the $372.2 million averaged in 2001. Average yields on earning assets decreased to 6.28% in 2002, compared to 7.76% in 2001.



A key performance measure for net interest income is the net interest margin, or net interest income divided by average interest-earning
assets. Unlike the net interest spread, the net interest margin is affected by the level of non-interest sources of funding used to support interest-earning assets. The Companys net interest margin decreased to 3.97% in 2003 from
4.04% in 2002. In 2001, the net interest margin was 4.13%. The net interest margin deteriorated in 2003 and 2002, as the average rate earned on interest earning assets decreased quicker than the average rate on interest-bearing deposits. 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 noninterest-bearing
source of funds and helps prevent further deterioration in the net interest margin. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing sources of funds.
The net interest spread eliminates the impact of noninterest-bearing funds and gives a direct perspective on the effect of market interest rate movements. As a result of changes in interest rates in 2003, the net interest spread increased 2 basis
points to 3.63% in 2003. The 2002 net interest spread of 3.61% represented an increase from 2001s 3.47%.



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 noninterest-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 2003 to 2002, and 2002 to 2001. The analysis of changes in net interest
income included in the following table indicates that on an overall basis in 2003 and 2002, the increase in the balances or volumes of interest-earning assets created a positive impact in net income while the decreases in interest rates of
interest-earning assets created a negative impact on net interest income. The decreases in the interest rates of interest-bearing liabilities more than offset the increase in the balances or volume of interest-bearing liabilities. In 2001, the
volume of interest-earning assets had a positive impact on the net interest income while decreases in interest rates had a negative impact on interest income.



27



---

##### Table of Contents

Analysis of Changes in Net Interest Income



|                                                                      |  |                                   |       |   |                                   |   |        |          |  |   |       |   |  |               |        |   |      |   |       |          |  |   |        |   |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------- |  | --------------------------------- | ----- | - | --------------------------------- | - | ------ | -------- |  | - | ----- | - |  | ------------- | ------ | - | ---- | - | ----- | -------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                      |  | 2003 vs. 2002 Increase (Decrease) |       |   | 2002 vs. 2001 Increase (Decrease) |  
|                                                                      |  | AverageVolume                     |       |   | Rate                              |   |        | Combined |  |   | Total |   |  | AverageVolume |        |   | Rate |   |       | Combined |  |   | Total  |  
|                                                                      |  | (Dollars in thousands)            |      
|Interest income from interest-earning assets:                         |  |                                   |       |   |                                   |   |        |          |  |   |       |   |  |               |        |   |      |   |       |          |  |   |        |   |  |   |        |   |  |   |        |  
|                                                                      |  |                                   |       |   |                                   |   |        |         
|Loans                                                                 |  | $                                 | 3,807 |   |                                   | $ | (2,182 | )        |  | $ | (371  | ) |  | $             | 1,254  |   |      | $ | 4,053 |          |  | $ | (5,072 | ) |  | $ | (783   | ) |  | $ | (1,802 | )
|Investments, taxable                                                  |  |                                   | 702   |   |                                   |   | (970   | )        |  |   | (110  | ) |  |               | (378   | ) |      |   | 2,221 |          |  |   | (885   | ) |  |   | (370   | ) |  |   | 966    |  
|Investments, tax-exempt                                               |  |                                   | 122   |   |                                   |   | (23    | )        |  |   | (6    | ) |  |               | 93     |   |      |   | (14   | )        |  |   | (3     | ) |  |   | 0      |   |  |   | (17    | )
|Federal funds sold                                                    |  |                                   | 5     |   |                                   |   | (40    | )        |  |   | (1    | ) |  |               | (36    | ) |      |   | (141  | )        |  |   | (273   | ) |  |   | 85     |   |  |   | (329   | )
|Interest-bearing deposits in other banks                              |  |                                   | (7    | ) |                                   |   | (10    | )        |  |   | 3     |   |  |               | (14    | ) |      |   | 0     |          |  |   | (9     | ) |  |   | 0      |   |  |   | (9     | )
|                                                                      |  |                                   |       |   |                                   |   |        |          |  |   |       |   |  |               |        |   |      |   |       |          |  |   |        |   |  |   |        |   |  |   |        |  
|Total                                                                 |  | $                                 | 4,629 |   |                                   | $ | (3,225 | )        |  | $ | (485  | ) |  | $             | 919    |   |      | $ | 6,119 |          |  | $ | (6,242 | ) |  | $ | (1,068 | ) |  | $ | (1,191 | )
|                                                                      |  |                                   |       |   |                                   |   |        |          |  |   |       |   |  |               |        |   |      |   |       |          |  |   |        |   |  |   |        |   |  |   |        |  
|Interest expense on interest-bearing liabilities:                     |  |                                   |       |   |                                   |   |        |          |  |   |       |   |  |               |        |   |      |   |       |          |  |   |        |   |  |   |        |   |  |   |        |  
|                                                                      |  |                                   |       |   |                                   |   |        |         
|NOW accounts                                                          |  | $                                 | 67    |   |                                   | $ | (222   | )        |  | $ | (27   | ) |  | $             | (182   | ) |      | $ | 167   |          |  | $ | (187   | ) |  | $ | (52    | ) |  | $ | (72    | )
|Savings and money management accounts                                 |  |                                   | 876   |   |                                   |   | (972   | )        |  |   | (223  | ) |  |               | (319   | ) |      |   | 1,359 |          |  |   | (2,074 | ) |  |   | (557   | ) |  |   | (1,272 | )
|Time deposits                                                         |  |                                   | 245   |   |                                   |   | (1,047 | )        |  |   | (56   | ) |  |               | (858   | ) |      |   | (81   | )        |  |   | (2,732 | ) |  |   | 30     |   |  |   | (2,783 | )
|Federal funds purchased/ securities sold under repurchase aggreements |  |                                   | 114   |   |                                   |   | (92    | )        |  |   | (16   | ) |  |               | 6      |   |      |   | 354   |          |  |   | (296   | ) |  |   | (144   | ) |  |   | (86    | )
|Other borrowings                                                      |  |                                   | 57    |   |                                   |   | (173   | )        |  |   | (6    | ) |  |               | (122   | ) |      |   | 165   |          |  |   | (38    | ) |  |   | (3     | ) |  |   | 124    |  
|                                                                      |  |                                   |       |   |                                   |   |        |          |  |   |       |   |  |               |        |   |      |   |       |          |  |   |        |   |  |   |        |   |  |   |        |  
|Total                                                                 |  | $                                 | 1,359 |   |                                   | $ | (2,506 | )        |  | $ | (328  | ) |  | $             | (1,475 | ) |      | $ | 1,964 |          |  | $ | (5,327 | ) |  | $ | (726   | ) |  | $ | (4,089 | )
|                                                                      |  |                                   |       |   |                                   |   |        |          |  |   |       |   |  |               |        |   |      |   |       |          |  |   |        |   |  |   |        |   |  |   |        |  
|Change in net interest income                                         |  |                                   |       |   |                                   |   |        |          |  |   |       |   |  |               |        |   |      |   |       |          |  |   |        |   |  |   |        |   |  | $ | 2,898  |  
|                                                                      |  |                                   |       |   |                                   |   |        |          |  |   |       |   |  |               |        |   |      |   |       |          |  |   |        |   |  |   |        |   |  |   |        |  



The variances for each
major category of interest-earning assets and interest-bearing liabilities are attributable to (a) changes in volume (changes in volume times prior year rate), (b) changes in rate (changes in rate times prior year volume) and (c) combined (changes
in rate times the change in volume).



NonInterest Income



Noninterest income consists of revenues generated
from a broad range of financial services and activities, including gains on sales of loans, 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, trust services, and other activities. In addition, gains or losses realized from the sale of investment securities are included in noninterest income.



Noninterest income for 2003 was $23.6 million, an increase of $2.9 million or 25.3% from 2002. The increase is primarily
attributable to a $3.0 million increase in the gain on sale of loans in the secondary mortgage market. This $3.0 million increase is a product of the lower interest rates in 2003 increasing both home purchases and mortgage refinancings. Service
charges and fees on deposits were $4.5 million for the year ended 2003 and constitute the second largest contributor to noninterest income. Trust services continued to grow and accounted for $353,000 of the year end 2003 balance while retail
investment income accounted for $280,000.



28



---

##### Table of Contents

Noninterest income for 2002 was $11.4 million, an increase of $3.6 million or 46.1% from 2001. The
increase is primarily attributable to a $2.0 million increase in the gain on sale of loans in the secondary mortgage market. This $2.0 million increase is a product of the lower interest rates increasing both home purchases and mortgage
refinancings, as well as the expanded mortgage operations in Augusta and Savannah, Georgia and Nashville, Tennessee. Service charges and fees on deposits increased $1.4 million, primarily related to increases in NSF fees due to the Bounce Overdraft
Protection program implemented in October 2001 and increases in service charges related to higher volumes of deposits. Trust income increased $94,000 in 2002 compared to 2001 due to the second full year of operations. Investment security gains
increased $138,000, retail investment income increased $46,000 due to increased volume, and miscellaneous income decreased $80,000 due to a conversion allowance from a check vendor in 2001, decreases in ATM surcharge income, and fees earned from an
official check processing agreement slightly offset by an increase in credit card merchant fees.



The following table presents the principal components of noninterest income for the last three years:



Noninterest Income



|                                                           |  |                         |        |   |      |   |        |      |  |   |       |  
|---------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                           |  | Year Ended December 31, |       
|                                                           |  | 2003                    |        |   | 2002 |   |        | 2001 | 
|                                                           |  | (Dollars in thousands)  |       
|Service charges on deposit accounts                        |  | $                       | 4,514  |   |      | $ | 4,432  |      |  | $ | 2,989 |  
|Gain on sale of loans                                      |  |                         | 8,875  |   |      |   | 5,916  |      |  |   | 3,949 |  
|Retail investment income                                   |  |                         | 280    |   |      |   | 252    |      |  |   | 206   |  
|Trust income                                               |  |                         | 353    |   |      |   | 227    |      |  |   | 133   |  
|Investment securities (losses) gains                       |  |                         | (203   | ) |      |   | 207    |      |  |   | 69    |  
|Increase in cash surrender value of life insurance         |  |                         | 325    |   |      |   | 152    |      |  |   | 141   |  
|Other                                                      |  |                         | 378    |   |      |   | 402    |      |  |   | 483   |  
|                                                           |  |                         |        |   |      |   |        |      |  |   |       |  
|Total noninterest income                                   |  | $                       | 14,522 |   |      | $ | 11,588 |      |  | $ | 7,970 |  
|                                                           |  |                         |        |   |      |   |        |      |  |   |       |  
|Noninterest income as a percentage of total average assets |  |                         | 2.40   | % |      |   | 2.20   | %    |  |   | 1.77  | %
|                                                           |  |                         |       
|Noninterest income as a percentage of total income         |  |                         | 30.99  | % |      |   | 26.98  | %    |  |   | 19.66 | %



Noninterest Expense



Noninterest expense totaled $23.6 million in 2003, an increase of
16.2% from 2002 noninterest expense of $20.3 million. Salaries and employee benefits account for $2.7 million of this increase. The increase in salaries and employee benefits was the result of increases in mortgage commissions and salaries,
additional employees in 2003 due to the Companys continued growth and expansion, and increases in salary continuation expense and medical and dental insurance. Other operating expenses increased $462,000, an increase of 8.5% from 2002
primarily due to increases in marketing, processing and mortgage loan costs. While the increase in marketing is due to the Companys decision to increase marketing expenditures, processing expense increased primarily to ATM processing expenses
and retail checking expenses related to new product development. Loan costs increased primarily due to the increase in the volume of mortgage loans sold in the secondary market.



29



---

##### Table of Contents

Noninterest expense totaled $20.1 million in 2002, an increase of 20.8% from 2001 noninterest expense of
$16.7 million. Salaries and employee benefits account for $2.2 million of this increase. The increase in salaries and employee benefits was the result of increases in mortgage commissions, additional employees in 2002 due to the Companys
continued growth and expansion, an increase in the percentage contributed to the 401K plan and the incentive compensation plan, as well as normal increases in salaries and benefits. Other operating expenses increased $1.2 million, an increase of
27.0% from 2001 primarily due to increases in professional fees, contributions, loan costs, processing, and staff development.



The Company has improved its ability to monitor expenditures in all organizational units by implementing more specific cost accounting and reporting. In
2002, the Company implemented a departmental budgeting system. In 2004, the Company will implement Customer, Product and Organization profitability systems. 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 noninterest expense for the years ended December 31, 2003, 2002 and 2001.



Noninterest Expense



|                                                            |  |                         |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                            |  | Year Ended December 31, |       
|                                                            |  | 2003                    |        |   | 2002 |   |        | 2001 | 
|                                                            |  | (Dollars in thousands)  |       
|Salaries and employee benefits                              |  | $                       | 15,282 |   |      | $ | 12,598 |      |  | $ | 10,406 |  
|Occupancy expense                                           |  |                         | 2,395  |   |      |   | 2,255  |      |  |   | 2,083  |  
|Marketing & business development expense                    |  |                         | 1,034  |   |      |   | 728    |      |  |   | 684    |  
|Processing expense                                          |  |                         | 1,063  |   |      |   | 946    |      |  |   | 810    |  
|Legal and professional fees                                 |  |                         | 588    |   |      |   | 579    |      |  |   | 331    |  
|Supplies expense                                            |  |                         | 446    |   |      |   | 410    |      |  |   | 408    |  
|Other                                                       |  |                         | 2,756  |   |      |   | 2,762  |      |  |   | 2,073  |  
|                                                            |  |                         |        |   |      |   |        |      |  |   |        |  
|Total noninterest expense                                   |  | $                       | 23,564 |   |      | $ | 20,278 |      |  | $ | 16,795 |  
|                                                            |  |                         |        |   |      |   |        |      |  |   |        |  
|Noninterest expense as a percentage of total average assets |  |                         | 3.90   | % |      |   | 3.85   | %    |  |   | 3.74   | %
|                                                            |  |                         |       
|Operating efficiency ratio                                  |  |                         | 63.04  | % |      |   | 64.02  | %    |  |   | 66.61  | %



The Companys
efficiency ratio (noninterest expense as a percentage of net interest income and noninterest income, excluding gains and losses on the sale of investments) decreased to 63.04% in 2003 compared to 64.02% in 2002. In 2001, the efficiency ratio was
66.42%. The improvement in the efficiency ratio in 2003 and 2002 is due to the established mortgage, trust, and Furys Ferry branch operations, as well as additional monitoring of expenses. The additional income due to mortgage operations
during 2002 and 2003, allowed the Company to undertake new initiatives, such as marketing and consulting expenses, which resulted in incremental expenses.



30



---

##### Table of Contents

Income Taxes



Income tax expense increased $887,000 or 28.7% in 2003 from 2002, and increased $994,000 or 47.3% in 2002 from 2001. The
effective tax rate as a percentage of pre-tax income was 33.4% in 2003, 34.0% in 2002, and 31.5% in 2001. In 2003, the effective rate decreased, despite the increase in the federal income tax rate from 34% in 2002 to 35%, as 2003 income placed the
Company in a higher income tax bracket. The decrease in the effective tax rate for 2003 as compared to 2002 is due to the increase in tax-exempt interest income from increase in cash surrender value of bank-owned life insurance.



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



The provision for loan losses is the charge to operating earnings
necessary to maintain an adequate allowance for loan 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 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 the
allocated general allowance for all non-classified loans according to loan type determined through the Companys comprehensive loan methodology for the years indicated. The unallocated general allowance is based on managements evaluation
at the balance sheet date of various conditions that are not directly measurable in determining the allocated allowance considering the recognized uncertainty in estimating loan losses. These conditions include, but are not limited to, changes in
interest rates; trends in volumes, credit concentrations and terms of loans in the portfolio; national and local economic conditions; recent loss experience; and changes in lending policies and procedures. As reflected by the unallocated portion of
the allowance, the adequacy of the Companys allowance for



31



---

##### Table of Contents

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.



The Companys provision for loan losses in 2003 was $1,694,000, a decrease of $720,000 (29.8%) over the 2002 provision of $2,414,000. This decrease
is the result of the loan loss method, discussed under Critical Accounting Estimates, consistently applied to loans in 2003 and 2002. The provision for loan losses charged to earnings in 2001 was $1,825,000. In 2002 and 2001, the Company
made the decision to increase the provision for loan losses to provide a higher level of allowance for loan losses commensurate with the increasing risk in the Companys loan portfolio. This higher level reflected managements overall
evaluation of the loan portfolio and the significant growth of the loan portfolio.



Allocation of the Allowance for Loan Losses



|                                    |  |                        |       |            |        |   |        |      |            |  |        |        |  |            |       |  |        |   |            |   |       |        |        |            |  |   |       |  |        |  
|----------------------------------- |  | ---------------------- | ----- | ---------- | ------ | - | ------ | ---- | ---------- |  | ------ | ------ |  | ---------- | ----- |  | ------ | - | ---------- | - | ----- | ------ | ------ | ---------- |  | - | ----- |  | ------ | -
|                                    |  | December 31,           |      
|                                    |  | 2003                   |       |            | 2002   |   |        | 2001 |            |  | 2000   |        |  | 1999       |      
|                                    |  | Amount                 |       | Percent(1) |        |   | Amount |      | Percent(1) |  |        | Amount |  | Percent(1) |       |  | Amount |   | Percent(1) |   |       | Amount |        | Percent(1) | 
|                                    |  | (Dollars in thousands) |      
|Balance at End of Year              |  |                        |       |            |        |   |        |      |            |  |        |        |  |            |       |  |        |   |            |   |       |        |        |            |  |   |       |  |        |  
|Applicable to:                      |  |                        |       |            |        |   |        |      |            |  |        |        |  |            |       |  |        |   |            |   |       |        |        |            |  |   |       |  |        |  
|Commercial, financial, agricultural |  | $                      | 1,722 |            | 13.47  | % |        | $    | 1,286      |  | 14.04  | %      |  | $          | 916   |  | 14.53  | % |            | $ | 779   |        | 17.39  | %          |  | $ | 766   |  | 18.39  | %
|Real estate-construction            |  |                        | 1,249 |            | 20.87  | % |        |      | 1,187      |  | 20.04  | %      |  |            | 646   |  | 19.87  | % |            |   | 339   |        | 13.80  | %          |  |   | 278   |  | 11.85  | %
|Real estate-mortgage                |  |                        | 3,122 |            | 53.97  | % |        |      | 2,950      |  | 53.31  | %      |  |            | 2,036 |  | 52.00  | % |            |   | 1,704 |        | 47.54  | %          |  |   | 1,202 |  | 46.74  | %
|Consumer loans to individuals       |  |                        | 1,166 |            | 11.69  | % |        |      | 1,062      |  | 12.58  | %      |  |            | 814   |  | 13.54  | % |            |   | 692   |        | 21.13  | %          |  |   | 688   |  | 22.71  | %
|Lease financing                     |  |                        |      |            | 0.00   | % |        |      | 1          |  | 0.03   | %      |  |            | 1     |  | 0.06   | % |            |   | 5     |        | 0.14   | %          |  |   | 10    |  | 0.31   | %
|Unallocated                         |  |                        | 19    |            | 0.00   | % |        |      | 48         |  | 0.00   | %      |  |            | 696   |  | 0.00   | % |            |   | 624   |        | 0.00   | %          |  |   | 648   |  | 0.00   | %
|                                    |  |                        |       |            |        |   |        |      |            |  |        |        |  |            |       |  |        |   |            |   |       |        |        |            |  |   |       |  |        |  
|Balance at end of year              |  | $                      | 7,278 |            | 100.00 | % |        | $    | 6,534      |  | 100.00 | %      |  | $          | 5,109 |  | 100.00 | % |            | $ | 4,143 |        | 100.00 | %          |  | $ | 3,592 |  | 100.00 | %

---

|(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 allocation of $3.1 million of the allowance for loan losses to real estate-mortgage reflects the credit ratings
associated with these loans and the resulting higher reserve factor. The unallocated component of the allowance for loan losses is due to allocations made to the loan components of the allowance based on qualitative factors. These qualitative
factors include, but are not limited to, national and local economic conditions, bankruptcy trends, unemployment trends, loan concentrations, dependency upon government installations and facilities, and competitive factors in the local market.



32



---

##### Table of Contents

The following table provides details regarding charge-offs and recoveries by loan category during the
most recent five year period, as well as supplemental information relating to both net loan losses, the provision and the allowance for loan losses during each of the past five years. As the table indicates, net charge-offs for 2003 represented
0.21% of average loans outstanding, compared to 0.27% for 2002 and 0.27% for 2001. The Companys charge-off ratios continue to be below the average for the industry.



Allowances for Loan Losses



|                                                                 |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|---------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                 |  | At December 31,        |        
|                                                                 |  | 2003                   |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |        
|                                                                 |  | (Dollars in thousands) |        
|Total loans outstanding at end of period, net of unearned income |  | $                      | 432,679 |   |      | $ | 396,699 |      |  | $ | 339,670 |   |  | $    | 283,573 |   |  | $ | 239,032 |  
|                                                                 |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Average loans outstanding, net of unearned income                |  | $                      | 420,023 |   |      | $ | 363,624 |      |  | $ | 315,003 |   |  | $    | 261,869 |   |  | $ | 225,244 |  
|                                                                 |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Balance of allowance for loan losses at beginning of year        |  | $                      | 6,534   |   |      | $ | 5,109   |      |  | $ | 4,143   |   |  | $    | 3,592   |   |  | $ | 2,715   |  
|                                                                 |  |                        |         |   |     
|Charge-offs:                                                     |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial, financial and agricultural.                          |  |                        | 439     |   |      |   | 582     |      |  |   | 283     |   |  |      | 73      |   |  |   | 112     |  
|Real estate  construction                                       |  |                        | 25      |   |      |   | 36      |      |  |   |        |   |  |      |        |   |  |   |        |  
|Real estate  mortgage                                           |  |                        |        |   |      |   |        |      |  |   | 6       |   |  |      | 64      |   |  |   | 41      |  
|Consumer                                                         |  |                        | 1,102   |   |      |   | 1,009   |      |  |   | 781     |   |  |      | 485     |   |  |   | 396     |  
|                                                                 |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total charge-offs                                                |  |                        | 1,566   |   |      |   | 1,627   |      |  |   | 1,070   |   |  |      | 622     |   |  |   | 549     |  
|                                                                 |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Recoveries of previous loan losses:                              |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial, financial and agricultural.                          |  |                        | 190     |   |      |   | 169     |      |  |   | 1       |   |  |      | 9       |   |  |   | 23      |  
|Real estate  construction                                       |  |                        |        |   |      |   |        |      |  |   | 1       |   |  |      |        |   |  |   |        |  
|Real estate  mortgage                                           |  |                        | 3       |   |      |   | 7       |      |  |   |        |   |  |      | 2       |   |  |   | 2       |  
|Consumer                                                         |  |                        | 478     |   |      |   | 462     |      |  |   | 209     |   |  |      | 99      |   |  |   | 87      |  
|                                                                 |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total recoveries                                                 |  |                        | 671     |   |      |   | 638     |      |  |   | 211     |   |  |      | 110     |   |  |   | 112     |  
|                                                                 |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loan losses                                                  |  |                        | 895     |   |      |   | 989     |      |  |   | 859     |   |  |      | 512     |   |  |   | 437     |  
|                                                                 |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Provision for loan losses                                        |  |                        | 1,694   |   |      |   | 2,414   |      |  |   | 1,825   |   |  |      | 1,063   |   |  |   | 1,314   |  
|Balance of allowance for loan losses at end of period            |  |                        | 7,333   |   |      |   | 6,534   |      |  |   | 5,109   |   |  |      | 4,143   |   |  |   | 3,592   |  
|                                                                 |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Allowance for loan losses to period end loans                    |  |                        | 1.69    | % |      |   | 1.65    | %    |  |   | 1.50    | % |  |      | 1.46    | % |  |   | 1.50    | %
|Net charge-offs to average loans                                 |  |                        | 0.21    | % |      |   | 0.27    | %    |  |   | 0.27    | % |  |      | 0.20    | % |  |   | 0.19    | %



At December 31, 2003,
the allowance for loan losses was 1.69% of outstanding loans, up slightly from the 1.65% level at December 31, 2002 and the 1.50% level at December 31, 2001. Net charge-offs decreased $94,000 in 2003. In 2002, the economic environment resulted in
significantly higher levels of personal bankruptcy filings which translated into higher levels of consumer loan losses than the bank had previously experienced. Management considers the allowance 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



33



---

##### Table of Contents

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. See Critical Accounting Estimates.



Financial Condition



Composition of the Loan Portfolio



Loans are the primary component of the Companys interest 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 outstanding averaged $420.0 million in 2003 compared to $363.6 million in 2002 and $315.0 million in 2001. At December
31, 2003, loans totaled $432.7 million compared to $396.7 million in 2002, an increase of $36.0 million (9.07%). This compares to growth in 2002 of $57.0 million (16.8%), compared to $339.7 million at December 31, 2001.



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 institution. Commercial real
estate loans increased $25.5 million in 2003. Residential real estate held for sale decreased $10.3 million from 2002 as mortgage production has slowed down. Average loans as a percentage of average interest-earning assets and average total assets
was 73.5% and 69.5%, respectively, in 2003. This compares to average loans as a percentage of average interest-earning assets and average total assets of 72.8% and 69.1%, respectively, in 2002.



34



---

##### Table of Contents

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
of any of the years presented.



Loan Portfolio Composition

At December 31,



|                                       |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|-------------------------------------- |  | ---------------------- | ------- | - | ------ | - | ------ | ---- | ------- |  | ------ | ------ |  | ---- | ------- |  | ------ | - | - | - | ------- | ------ | ------ | - |  | - | ------- |  | ------ | -
|                                       |  | 2003                   |         |   | 2002   |   |        | 2001 |         |  | 2000   |        |  | 1999 |        
|                                       |  | Amount                 |         | % |        |   | Amount |      | %       |  |        | Amount |  | %    |         |  | Amount |   | % |   |         | Amount |        | % | 
|                                       |  | (Dollars in thousands) |        
|Commercial, financial and agricultural |  | $                      | 56,548  |   | 13.07  | % |        | $    | 55,702  |  | 14.04  | %      |  | $    | 49,345  |  | 14.53  | % |   | $ | 49,303  |        | 17.39  | % |  | $ | 43,959  |  | 18.39  | %
|                                       |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Real Estate                            |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Commercial                             |  | $                      | 137,516 |   | 31.78  | % |        | $    | 111,981 |  | 28.23  | %      |  | $    | 103,516 |  | 30.48  | % |   | $ | 84,561  |        | 29.82  | % |  | $ | 73,420  |  | 30.72  | %
|Residential                            |  |                        | 83,681  |   | 19.34  | % |        |      | 75,224  |  | 18.96  | %      |  |      | 63,914  |  | 18.82  | % |   |   | 62,431  |        | 22.02  | % |  |   | 49,755  |  | 20.82  | %
|Residential held for sale              |  |                        | 14,047  |   | 3.25   | % |        |      | 24,297  |  | 6.12   | %      |  |      | 9,185   |  | 2.70   | % |   |   | 1,961   |        | 0.69   | % |  |   | 668     |  | 0.28   | %
|Construction and development           |  |                        | 90,303  |   | 20.87  | % |        |      | 79,483  |  | 20.04  | %      |  |      | 67,497  |  | 19.87  | % |   |   | 39,136  |        | 13.80  | % |  |   | 28,324  |  | 11.85  | %
|                                       |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Total real estate                      |  |                        | 325,547 |   | 75.24  | % |        |      | 290,985 |  | 73.35  | %      |  |      | 244,112 |  | 71.87  | % |   |   | 188,089 |        | 66.33  | % |  |   | 152,167 |  | 63.66  | %
|                                       |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Lease financing                        |  |                        | 23      |   | 0.01   | % |        |      | 106     |  | 0.03   | %      |  |      | 204     |  | 0.06   | % |   |   | 398     |        | 0.14   | % |  |   | 735     |  | 0.31   | %
|Consumer                               |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Direct                                 |  |                        | 25,967  |   | 6.00   | % |        |      | 24,542  |  | 6.19   | %      |  |      | 21,514  |  | 6.33   | % |   |   | 18,144  |        | 6.40   | % |  |   | 16,714  |  | 6.99   | %
|Indirect                               |  |                        | 23,964  |   | 5.54   | % |        |      | 24,709  |  | 6.23   | %      |  |      | 23,961  |  | 7.05   | % |   |   | 27,054  |        | 9.54   | % |  |   | 24,976  |  | 10.45  | %
|Revolving                              |  |                        | 631     |   | 0.15   | % |        |      | 655     |  | 0.17   | %      |  |      | 534     |  | 0.16   | % |   |   | 585     |        | 0.21   | % |  |   | 481     |  | 0.20   | %
|                                       |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Total consumer                         |  |                        | 50,562  |   | 11.69  | % |        |      | 49,906  |  | 12.58  | %      |  |      | 46,009  |  | 13.55  | % |   |   | 45,783  |        | 16.15  | % |  |   | 42,171  |  | 17.64  | %
|                                       |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Total                                  |  | $                      | 432,680 |   | 100.00 | % |        | $    | 396,699 |  | 100.00 | %      |  | $    | 339,670 |  | 100.00 | % |   | $ | 283,573 |        | 100.00 | % |  | $ | 239,032 |  | 100.00 | %
|                                       |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  



Loans may be
periodically renewed with principal reductions and appropriate interest rate adjustments. Loan maturities as of December 31, 2003 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

At December 31, 2003



|                                               |  |                |         |                  |   |                 |  |       |        |  |   |        
|---------------------------------------------- |  | -------------- | ------- | ---------------- | - | --------------- |  | ----- | ------ |  | - | -------
|($ in thousands)                               |  | WithinOne Year |         | One to FiveYears |   | After FiveYears |  | Total
|Commercial, financial, agricultural and leases |  | $              | 32,062  |                  | $ | 16,675          |  | $     | 7,835  |  | $ | 56,572 
|Real Estate                                    |  |                |         |                  |   |                 |  |       |        |  |   |        
|Construction and development                   |  |                | 76,538  |                  |   | 13,092          |  |       | 673    |  |   | 90,303 
|Mortgage                                       |  |                | 93,118  |                  |   | 83,836          |  |       | 58,290 |  |   | 235,244
|Consumer                                       |  |                | 19,345  |                  |   | 29,979          |  |       | 1,237  |  |   | 50,561 
|                                               |  |                |         |                  |   |                 |  |       |        |  |   |        
|Total loans                                    |  | $              | 221,063 |                  | $ | 143,582         |  | $     | 68,035 |  | $ | 432,680
|                                               |  |                |         |                  |   |                 |  |       |        |  |   |        



35



---

##### Table of Contents

The following table presents an interest rate sensitivity analysis of the Companys loan portfolio
at December 31, 2003. 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, 2003



|                                      |  |                |         |                  |   |                 |  |       |        |  |   |        
|------------------------------------- |  | -------------- | ------- | ---------------- | - | --------------- |  | ----- | ------ |  | - | -------
|($ in thousands)                      |  | WithinOne year |         | One to FiveYears |   | After FiveYears |  | Total
|Loans maturing or repricing with:     |  |                |         |                  |   |                 |  |       |        |  |   |        
|Predetermined interest rates          |  | $              | 53,864  |                  | $ | 60,090          |  | $     | 23,704 |  | $ | 137,658
|Floating or adjustable interest rates |  |                | 277,620 |                  |   | 15,284          |  |       | 2,118  |  |   | 295,022
|                                      |  |                |         |                  |   |                 |  |       |        |  |   |        
|Total loans                           |  | $              | 331,484 |                  | $ | 75,374          |  | $     | 25,822 |  | $ | 432,680
|                                      |  |                |         |                  |   |                 |  |       |        |  |   |        



Non-Performing Assets.



As a result of managements ongoing review of the
loan portfolio, loans are classified as nonaccrual 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 nonaccrual,
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 nonaccrual, 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 nonaccruing loans had been accruing interest under their original terms, approximately $107,000 in 2003, $60,000 in 2002
and $101,000 in 2001 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 nonaccrual. The amount of the impairment is measured based on the present value of 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 nonaccrual and renegotiated loans. When other real estate owned 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 $3.0 million at December 31, 2003 or 0.70% of total loans and other real estate owned. This compares to $1.9 million or 0.48% of total loans and other real estate owned at December 31, 2002.



36



---

##### Table of Contents

The level of nonaccrual loans is due to an increase in consumer nonaccrual loans. This increase is the
result of increased bankruptcies and the adoption of stricter internal monitoring and reporting requirements.



At December 31, 2003 and 2001, there were no loans past due 90 days or more and still accruing. At December 31, 2002 there were $30,000 of loans past due
90 days or more and still accruing. All loans past due 90 days or more are now classified as nonaccrual loans. Management believes the Company will receive full payment of principal and accrued interest on the nonaccrual loans because of the
Companys collateral position and other factors, despite their past due status.



|                                                                     |  |                                               |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|-------------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                     |  | Non-Performing Assets Year Ended December 31, |       
|                                                                     |  | 2003                                          |        |   | 2002 |   |        | 2001 |  |   | 2000   |   |  | 1999 |       
|                                                                     |  | (Dollars in thousands)                        |       
|Nonaccrual loans                                                     |  | $                                             | 3,045  |   |      | $ | 1,897  |      |  | $ | 1,953  |   |  | $    | 1,950  |   |  | $ | 1,190  |  
|Other real estate owned                                              |  |                                               |       |   |      |   |       |      |  |   |       |   |  |      | 80     |   |  |   | 17     |  
|                                                                     |  |                                               |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming assets                                           |  | $                                             | 3,045  |   |      | $ | 1,897  |      |  | $ | 1,953  |   |  | $    | 2,030  |   |  | $ | 1,207  |  
|                                                                     |  |                                               |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Loans past due 90 days or more and still accruing interest           |  | $                                             |       |   |      | $ | 30     |      |  | $ |       |   |  | $    |       |   |  | $ | 27     |  
|                                                                     |  |                                               |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for loan losses to period end total loans                  |  |                                               | 1.69   | % |      |   | 1.65   | %    |  |   | 1.50   | % |  |      | 1.46   | % |  |   | 1.50   | %
|Allowance for loan losses to period end nonperforming loans          |  |                                               | 240.82 | % |      |   | 344.44 | %    |  |   | 261.33 | % |  |      | 212.46 | % |  |   | 297.60 | %
|Net charge-offs to average loans                                     |  |                                               | 0.21   | % |      |   | 0.27   | %    |  |   | 0.27   | % |  |      | 0.20   | % |  |   | 0.19   | %
|Nonperforming assets to period end loans                             |  |                                               | 0.70   | % |      |   | 0.48   | %    |  |   | 0.58   | % |  |      | 0.69   | % |  |   | 0.50   | %
|Nonperforming assets to period end loans and other real estate owned |  |                                               | 0.70   | % |      |   | 0.48   | %    |  |   | 0.58   | % |  |      | 0.69   | % |  |   | 0.50   | %



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) represent or result from trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or (2) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with
the loan repayment terms.



Off-Balance Sheet Arrangements, Commitments and
Contractual Obligations



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.



37



---

##### Table of Contents

Unfunded commitments to extend credit where contractual amounts represent potential credit risk totaled
$106,862,000 and $68,054,000 at December 31, 2003 and 2002, respectively. These commitments are primarily at variable interest rates.



The Companys commitments are funded through internal funding sources of scheduled repayments of loans and sales and maturities of investment
securities available for sale or external funding sources through acceptance of deposits from customers or borrowings from other financial institutions.



The following table is a summary of the Companys commitments to extend credit, commitments under contractual leases as well as the Company
contractual obligations, consisting of deposits, FHLB advances and borrowed funds by contractual maturity date for the next five years.



|                                                                      |  |      |         |      |   |        |  |      |        |      |   |        |  |   |       
|--------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|Commitments and Contractual
Obligations ($ in thousands)              |  | 2004 |         | 2005 |   | 2006   |  | 2007 |        | 2008
|Lines of credit                                                       |  | $    | 106,862 |      |   |       |  |      |       |      |   |       |  |   |      
|Mortgage loan commitments                                             |  |      | 72,027  |      |   |       |  |      |       |      |   |       |  |   |      
|Lease agreements                                                      |  |      | 134     |      |   | 64     |  |      | 38     |      |   | 31     |  |   |      
|Deposits                                                              |  |      | 215,877 |      |   | 90,653 |  |      | 70,113 |      |   | 31,570 |  |   | 28,694
|Federal funds purchased / Securities sold under repurchase agreements |  |      | 56,969  |      |   |       |  |      |       |      |   |       |  |   |      
|Other borrowings                                                      |  |      | 800     |      |   |       |  |      |       |      |   |       |  |   |      
|                                                                      |  |      |         |      |   |        |  |      |        |      |   |        |  |   |       
|Total commitments and contractual obligations                         |  | $    | 452,669 |      | $ | 90,717 |  | $    | 70,151 |      | $ | 31,601 |  | $ | 28,694
|                                                                      |  |      |         |      |   |        |  |      |        |      |   |        |  |   |       



Although management
regularly monitors the balance of outstanding commitments to fund loans to ensure funding availability should the need arise, management believes that the risk of all customers fully drawing on all these lines of credit at the same time is remote.



Investment Securities



The Companys investment securities portfolio increased 11.9% or $16.7
million to $156.8 million at year-end 2003 from 2002. 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, 2003, except



38



---

##### Table of Contents

for the U.S. Government agencies, there was no issuer who represented 10% or more of stockholders equity within the
investment portfolio. As of December 31, 2003 and 2002, the estimated fair value of investment securities as a percentage of their amortized cost was 101.0% and 102.4%, respectively. At December 31, 2003, the investment securities portfolio had
gross unrealized gains of $2,565,000 and gross unrealized losses of $732,000, for a net unrealized gain of $1,833,000. As of December 31, 2002 and 2001, the investment securities portfolio had net unrealized gains of $3,254,000 and $1,975,000,
respectively. The following table presents the amortized cost of investment securities held by the Company at December 31, 2003, 2002, and 2001.



Investment Securities



|                                                 |  |              |         |      |   |         |  |   |        
|------------------------------------------------ |  | ------------ | ------- | ---- | - | ------- |  | - | -------
|                                                 |  | December 31,
|(Dollars in thousands)                           |  | 2003         |         | 2002 |   | 2001   
|Available for sale:                              |  |              |         |      |   |         |  |   |        
|U.S. Government Agencies                         |  | $            | 51,578  |      | $ | 49,036  |  | $ | 37,651 
|Obligations of states and political subdivisions |  |              | 8,490   |      |   | 5,783   |  |   | 3,176  
|Mortgage-backed securities                       |  |              | 62,940  |      |   | 55,292  |  |   | 40,639 
|Corporate Bonds                                  |  |              | 17,638  |      |   | 15,868  |  |   | 16,290 
|Trust Preferred                                  |  |              | 6,493   |      |   | 2,250   |  |   | 1,250  
|Equity securities                                |  |              | 2,735   |      |   | 2,735   |  |   | 2,735  
|                                                 |  |              |         |      |   |         |  |   |        
|Total                                            |  | $            | 149,874 |      | $ | 130,964 |  | $ | 101,741
|                                                 |  |              |         |      |   |         |  |   |        
|                                                 | 
|                                                 |  | December 31,
|                                                 |  | 2003         |         | 2002 |   | 2001   
|Held to maturity:                                |  |              |         |      |   |         |  |   |        
|Obligations of states and political subdivisions |  | $            | 5,438   |      | $ | 6,139   |  | $ | 7,453  
|                                                 |  |              |         |      |   |         |  |   |        
|Total                                            |  | $            | 5,438   |      | $ | 6,139   |  | $ | 7,453  
|                                                 |  |              |         |      |   |         |  |   |        



39



---

##### Table of Contents

The following table represents maturities and weighted average yields of debt securities at December 31,
2003. 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.



Maturity Distribution
and Yields of

Investment Securities

(Dollars in thousands)



|                                 |  |                   |         |       |      |  
|-------------------------------- |  | ----------------- | ------- | ----- | ---- | -
|                                 |  | December 31, 2003 |        
|                                 |  | Amortized Cost    |         | Yield |     
|Available for Sale               |  |                   |         |       |      |  
|U.S. Government Agencies         |  |                   |         |       |      |  
|One year or less                 |  | $                 | 2,999   |       | 6.20 | %
|Over one through five years      |  |                   | 7,096   |       | 3.85 | %
|Over five through ten years      |  |                   | 34,509  |       | 4.95 | %
|Over ten years                   |  |                   | 6,972   |       | 5.13 | %
|                                 |  |                   |         |       |      |  
|Total U. S. Government Agencies  |  | $                 | 51,576  |       | 4.90 | %
|                                 |  |                   |         |       |      |  
|Municipal Securities(1)          |  |                   |         |       |      |  
|One year or less                 |  | $                 | 451     |       | 4.65 | %
|Over one through five years      |  |                   | 2,796   |       | 5.63 | %
|Over five through ten years      |  |                   | 1,148   |       | 2.80 | %
|Over ten years                   |  |                   | 4,095   |       | 5.76 | %
|                                 |  |                   |         |       |      |  
|Total Municipal Securities       |  | $                 | 8,490   |       | 4.33 | %
|                                 |  |                   |         |       |      |  
|Corporate Bonds                  |  |                   |         |       |      |  
|One year or less                 |  | $                 | 2,075   |       | 6.39 | %
|Over one through five years      |  |                   | 14,004  |       | 4.92 | %
|Over five through ten years      |  |                   | 1,559   |       | 7.11 | %
|                                 |  |                   |         |       |      |  
|Total Corporate Bonds            |  | $                 | 17,638  |       | 5.29 | %
|                                 |  |                   |         |       |      |  
|Trust Preferred                  |  |                   |         |       |      |  
|Over five through ten years      |  | $                 | 500     |       | 6.75 | %
|Over ten years                   |  |                   | 5,993   |       | 4.93 | %
|                                 |  |                   |         |       |      |  
|Total Trust Preferred Securities |  | $                 | 6,493   |       | 5.07 | %
|                                 |  |                   |         |       |      |  
|Mortgage Backed Securities       |  |                   |         |       |      |  
|Over one through five years      |  | $                 | 2,145   |       | 5.66 | %
|Over five through ten years      |  |                   | 19,737  |       | 4.66 | %
|Over ten years                   |  |                   | 41,059  |       | 4.11 | %
|                                 |  |                   |         |       |      |  
|Total Mortgage Backed Securities |  | $                 | 62,941  |       | 4.34 | %
|                                 |  |                   |         |       |      |  
|Total Available for Sale         |  | $                 | 147,138 |       | 4.61 | %
|                                 |  |                   |         |       |      |  
|Held to Maturity                 |  |                   |         |       |      |  
|Municipal Securities(1)          |  |                   |         |       |      |  
|One year or less                 |  | $                 | 865     |       | 7.01 | %
|Over one through five years      |  |                   | 1,105   |       | 6.07 | %
|Over five through ten years      |  |                   | 1,970   |       | 7.54 | %
|Over ten years                   |  |                   | 1,498   |       | 7.83 | %
|                                 |  |                   |         |       |      |  
|Total Municipal Securities       |  | $                 | 5,438   |       | 7.24 | %
|                                 |  |                   |         |       |      |  
|Total Held to Maturity           |  | $                 | 5,438   |       | 7.24 | %
|                                 |  |                   |         |       |      |  
|Total Investment Securities      |  | $                 | 152,576 |       | 4.70 | %
|                                 |  |                   |         |       |      |  

---

|(1) | 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 for the depositors and to provide an appropriate return
to stockholders on their investment.



40



---

##### Table of Contents

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 is one of the primary techniques employed by the Company in asset/liability management.
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 determine the
interest sensitivity gap.



The Company manages its sensitivity
to interest rate movements by adjusting the maturity of, and establishing rates on, the interest-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, 2003, 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, 2003. 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. Time deposits do not reprice and are presented according to their contractual maturity. Prime savings accounts
reprice at managements discretion when prime is below 5% and offer a tiered structuring based on the prime rate when prime is greater than 5%. In the table presented below, prime savings reprices in the after six through twelve months time
frame. Regular savings, money management and NOW accounts do not have a contractual



41



---

##### Table of Contents

maturity date, therefore, cash flows are based on managements judgement regarding their decay rates. All other
borrowings are shown in the first period in which they could reprice. In the one-year time period, the pricing mismatch on a cumulative basis was liability sensitive $35,000 or 9.78% of total interest-earning assets. Management has procedures in
place to carefully monitor the Companys interest rate sensitivity as the rate environment changes. It should also be 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 an adjustable basis, when prime is greater than 5%, is fifty to sixty percent of tiered Prime Rate. Therefore, as the Prime Rate adjusts 100 basis points, the rate on this liability only adjusts 5060 basis points. Moreover,
varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities. Investments prepayments are reflected at their current prepayment speeds in the interest sensitivity analysis report. No other
prepayments are reflected in the following 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, 2003



|                                                                   |  |                        |         |   |                             |   |         |                              |  |   |                 |   |  |                           |         |   |                |   |         |       |  |   |         |   |  |   |        
|------------------------------------------------------------------ |  | ---------------------- | ------- | - | --------------------------- | - | ------- | ---------------------------- |  | - | --------------- | - |  | ------------------------- | ------- | - | -------------- | - | ------- | ----- |  | - | ------- | - |  | - | -------
|                                                                   |  | WithinThreeMonths      |         |   | After ThreeThroughSixMonths |   |         | After SixThroughTwelveMonths |  |   | Within One Year |   |  | One YearThroughFive Years |         |   | Over FiveYears |   |         | Total
|                                                                   |  | (Dollars in thousands)
|Interest-earning assets:                                           |  |                        |         |   |                             |   |         |                              |  |   |                 |   |  |                           |         |   |                |   |         |       |  |   |         |   |  |   |        
|Loans                                                              |  | $                      | 294,097 |   |                             | $ | 14,099  |                              |  | $ | 23,288          |   |  | $                         | 331,484 |   |                | $ | 75,374  |       |  | $ | 25,822  |   |  | $ | 432,680
|Investment securities                                              |  |                        | 9,417   |   |                             |   | 5,386   |                              |  |   | 13,381          |   |  |                           | 28,184  |   |                |   | 52,538  |       |  |   | 75,610  |   |  |   | 156,332
|Federal Funds sold                                                 |  |                        |        |   |                             |   |        |                              |  |   |                |   |  |                           |        |   |                |   |        |       |  |   |        |   |  |   |       
|Interest-bearing deposits in other banks                           |  |                        |        |   |                             |   |        |                              |  |   |                |   |  |                           |        |   |                |   |        |       |  |   |        |   |  |   |       
|                                                                   |  |                        |         |   |                             |   |         |                              |  |   |                 |   |  |                           |         |   |                |   |         |       |  |   |         |   |  |   |        
|Total interest-earning assets                                      |  | $                      | 303,514 |   |                             | $ | 19,485  |                              |  | $ | 36,669          |   |  | $                         | 359,668 |   |                | $ | 127,912 |       |  | $ | 101,432 |   |  | $ | 589,012
|                                                                   |  |                        |         |   |                             |   |         |                              |  |   |                 |   |  |                           |         |   |                |   |         |       |  |   |         |   |  |   |        
|Interest-bearing liabilities:                                      |  |                        |         |   |                             |   |         |                              |  |   |                 |   |  |                           |         |   |                |   |         |       |  |   |         |   |  |   |        
|Money management accounts                                          |  | $                      | 3,431   |   |                             |   | 2,900   |                              |  |   | 4,520           |   |  |                           | 10,851  |   |                |   | 10,522  |       |  | $ | 764     |   |  | $ | 22,137 
|Savings accounts                                                   |  |                        | 663     |   |                             |   | 595     |                              |  |   | 188,603         |   |  |                           | 189,861 |   |                |   | 3,556   |       |  |   | 949     |   |  |   | 194,366
|NOW accounts                                                       |  |                        | 9,076   |   |                             |   | 7,934   |                              |  |   | 13,015          |   |  |                           | 30,025  |   |                |   | 37,395  |       |  |   | 4,966   |   |  |   | 72,386 
|Time deposits                                                      |  |                        | 45,465  |   |                             |   | 14,704  |                              |  |   | 26,552          |   |  |                           | 86,721  |   |                |   | 39,862  |       |  |   | 446     |   |  |   | 127,029
|Federal funds purchased/securities sold under repurchase ageements |  |                        | 56,969  |   |                             |   |        |                              |  |   |                |   |  |                           | 56,969  |   |                |   |        |       |  |   |        |   |  |   | 56,969 
|Federal Home Loan Bank advances                                    |  |                        | 30,000  |   |                             |   |        |                              |  |   |                |   |  |                           | 30,000  |   |                |   |        |       |  |   |        |   |  |   | 30,000 
|Notes and bonds payable                                            |  |                        | 800     |   |                             |   |        |                              |  |   |                |   |  |                           | 800     |   |                |   |        |       |  |   |        |   |  |   | 800    
|                                                                   |  |                        |         |   |                             |   |         |                              |  |   |                 |   |  |                           |         |   |                |   |         |       |  |   |         |   |  |   |        
|Total interest-bearing liabilities                                 |  | $                      | 146,404 |   |                             | $ | 26,133  |                              |  | $ | 232,690         |   |  | $                         | 405,227 |   |                | $ | 86,335  |       |  | $ | 7,125   |   |  | $ | 498,687
|                                                                   |  |                        |         |   |                             |   |         |                              |  |   |                 |   |  |                           |         |   |                |   |         |       |  |   |         |   |  |   |        
|Period gap                                                         |  | $                      | 167,520 |   |                             | $ | (6,648  | )                            |  | $ | (196,021        | ) |  | $                         | (35,149 | ) |                | $ | 41,577  |       |  | $ | 94,307  |   |  |   |        
|Cumulative gap                                                     |  | $                      | 167,520 |   |                             | $ | 160,872 |                              |  | $ | (35,149         | ) |  | $                         | (35,149 | ) |                | $ | 6,428   |       |  |   | 100,735 |   |  |   |        
|Ratio of cumulative gap to total interest-earning assets           |  |                        | 28.44   | % |                             |   | 27.31   | %                            |  |   | -5.97           | % |  |                           | -9.77   | % |                |   | 1.09    | %     |  |   | 1.21    | % |  |   |        



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



42



---

##### Table of Contents

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. The Company maintains a line of credit with the Federal Home Loan Bank at 10% of the Banks total assets. Federal Home Loan Bank advances are collateralized by 75% of
eligible first mortgages, specific commercial loans and investment securities. The Company also uses securities sold under repurchase agreements to fund loan growth. The Company had a federal funds purchased accommodation with The Bankers Bank,
Atlanta, Georgia, for advances up to $16,300,000 and with SunTrust Bank, Atlanta, Georgia, for advances up to $10,000,000. The Company maintains repurchase lines of credit with SunTrust Robinson Humphrey, Atlanta, Georgia, for advances up to
$20,000,000 and with The Bankers Bank, Atlanta, Georgia, for advances up to $10,000,000. At December 31, 2003, securities sold under repurchase agreements included $11,000,000 in reverse repurchase agreements with SunTrust Robinson Humphrey,
Atlanta, Georgia. 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.



Deposits



The Companys average deposits and other borrowings increased $69.9 million or 14.6% from 2002 to 2003. Average interest-bearing
liabilities increased $60.1 million or 14.5% while average noninterest-bearing deposits increased $9.3 million or 15.3% from 2002 to 2003. Average deposits and borrowings increased $71.3 million or 17.5% from 2001 to 2002. Average interest-bearing
liabilities increased $66.6 million or 23.0% from 2001 to 2002, while average noninterest bearing deposits increased $62.5 million or 17.6% during the same period. The majority of the growth in deposits since 1997 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, securities sold under agreements to repurchase with the Banks
commercial customers and reverse repurchase agreements with SunTrust Robinson Humphrey, federal funds purchased, and borrowings from the Federal Home Loan Bank. Brokered certificates of deposit included in Time Deposits over $100,000 at December 31,
2003 and 2002 were $35.0 million and $15.0 million, respectively.



43



---

##### Table of Contents

The following table presents the average amount outstanding and the average rate paid on deposits and
borrowings by the Company for the years 2003, 2002 and 2001:



Average Deposit and Borrowing Balances and Rates



|                                                                     |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|-------------------------------------------------------------------- |  | ----------------------- | ------- | ----------- | ---- | - | -------------- | ---- | ----------- |  | ---- | -------------- |  | ----------- | ------- |  | ---- | -
|                                                                     |  | Year ended December 31, |        
|                                                                     |  | 2003                    |         |             | 2002 |   |                | 2001 |            
|                                                                     |  | Average Amount          |         | AverageRate |      |   | Average Amount |      | AverageRate |  |      | Average Amount |  | AverageRate |        
|                                                                     |  | (Dollars in thousands)  |        
|Noninterest-bearing demand deposits                                  |  | $                       | 69,758  |             | 0.00 | % |                | $    | 60,508      |  | 0.00 | %              |  | $           | 51,728  |  | 0.00 | %
|Interest-bearing liabilities:                                        |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|NOW accounts                                                         |  |                         | 64,006  |             | 0.55 | % |                |      | 56,911      |  | 0.94 | %              |  |             | 44,548  |  | 1.36 | %
|Savings, money management accounts                                   |  |                         | 206,295 |             | 1.68 | % |                |      | 167,556     |  | 2.26 | %              |  |             | 132,073 |  | 3.83 | %
|Time deposits                                                        |  |                         | 125,809 |             | 2.73 | % |                |      | 119,017     |  | 3.61 | %              |  |             | 120,357 |  | 5.88 | %
|Federal funds purchased/ securities sold under repurchase agreements |  |                         | 47,204  |             | 1.37 | % |                |      | 40,048      |  | 1.60 | %              |  |             | 26,916  |  | 2.70 | %
|Other borrowings                                                     |  |                         | 35,678  |             | 5.01 | % |                |      | 34,648      |  | 5.51 | %              |  |             | 31,747  |  | 5.63 | %
|                                                                     |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total interest-bearing liabilities                                   |  | $                       | 478,992 |             | 2.02 | % |                | $    | 418,180     |  | 2.67 | %              |  | $           | 355,641 |  | 4.29 | %
|                                                                     |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total noninterest & interest-bearing liabilites                      |  | $                       | 548,750 |             |      |   |                | $    | 478,688     |  |      |                |  | $           | 407,369 |  |      |  



The following table
presents the maturities of the Companys time deposits over $100,000 and other time deposits at December 31, 2003:



Maturities of Time Deposits

(Dollars in Thousands)



|                          |  |                             |        |                     |   |        |  |   |        
|------------------------- |  | --------------------------- | ------ | ------------------- | - | ------ |  | - | -------
|                          |  | Time Deposits over $100,000 |        | Other Time Deposits |   | Total 
|Months to Maturity        |  |                             |        |                     |   |        |  |   |        
|Within 3 months           |  | $                           | 39,597 |                     | $ | 5,868  |  | $ | 45,465 
|After 3 through 6 months  |  |                             | 8,720  |                     |   | 5,984  |  |   | 14,704 
|After 6 through 12 months |  |                             | 18,581 |                     |   | 7,970  |  |   | 26,551 
|                          |  |                             |        |                     |   |        |  |   |        
|Within one year           |  |                             | 66,898 |                     |   | 19,822 |  |   | 86,720 
|After 12 months           |  |                             | 30,734 |                     |   | 9,575  |  |   | 40,309 
|                          |  |                             |        |                     |   |        |  |   |        
|Total                     |  | $                           | 97,632 |                     | $ | 29,397 |  | $ | 127,029
|                          |  |                             |        |                     |   |        |  |   |        



This table indicates
that the majority of time deposits, 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 time 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. At December 31, 2003, the Bank had $25.0
million of brokered certificates of deposit that mature after 12 months.



Capital



Total stockholders equity was
$53.7 million at December 31, 2003, increasing $6.9 million or 14.8% from the previous year. The increase was the combination of earnings in the amount of $7.9 million somewhat offset by a decrease in accumulated other comprehensive income of
$982,000. The decrease in accumulated other comprehensive income represents a reduction in unrealized gains in the available for sale investment portfolio. The Company purchased 18,771 shares of treasury stock in 2000 at a cost of $507,000, which is
shown as a reduction of stockholders equity.



44



---

##### Table of Contents

The Companys average equity to average total assets was 8.40% in 2003 compared to 8.19% in 2002 and
8.32% in 2001. The increase in 2003 reflects the higher level of earnings. The decrease in 2002 reflects the overall growth of the Company. Capital is considered to be 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 2003, 2002 and 2001.



Return on Equity and Assets



|                                       |  |                          |   |  |       |   |  |       |  
|-------------------------------------- |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                                       |  | Years ended December 31, |  
|                                       |  | 2003                     |   |  | 2002  |   |  | 2001  |  
|Return on average total assets         |  | 1.31                     | % |  | 1.14  | % |  | 1.02  | %
|                                       |  |                          |  
|Return on average equity               |  | 15.62                    | % |  | 13.95 | % |  | 12.19 | %
|                                       |  |                          |  
|Average equity to average assets ratio |  | 8.40                     | % |  | 8.19  | % |  | 8.32  | %



45



---

##### Table of Contents

At December 31, 2003, 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.



ANALYSIS OF CAPITAL



|                                   |  |                        |        |   |        |   |        |        |        |  |       |        |  |   |        |  |      |  
|---------------------------------- |  | ---------------------- | ------ | - | ------ | - | ------ | ------ | ------ |  | ----- | ------ |  | - | ------ |  | ---- | -
|                                   |  | Required               |        |   | Actual |   |        | Excess |       
|                                   |  | Amount                 |        | % |        |   | Amount |        | %      |  |       | Amount |  | % |       
|                                   |  | (Dollars in thousands) |       
|Georgia Bank Financial Corporation |  |                        |        |   |        |   |        |        |        |  |       |        |  |   |        |  |      |  
|12/31/2003                         |  |                        |        |   |        |   |        |        |        |  |       |        |  |   |        |  |      |  
|Risk-based capital:                |  |                        |        |   |        |   |        |        |        |  |       |        |  |   |        |  |      |  
|Tier 1 capital                     |  | $                      | 20,344 |   | 4.00   | % |        | $      | 52,546 |  | 10.33 | %      |  | $ | 32,202 |  | 6.33 | %
|Total capital                      |  |                        | 40,689 |   | 8.00   | % |        |        | 58,915 |  | 11.58 | %      |  |   | 18,226 |  | 3.58 | %
|Tier 1 leverage ratio              |  |                        | 25,009 |   | 4.00   | % |        |        | 52,546 |  | 8.40  | %      |  |   | 27,537 |  | 4.40 | %
|12/31/2002                         |  |                        |        |   |        |   |        |        |        |  |       |        |  |   |        |  |      |  
|Risk-based capital                 |  |                        |        |   |        |   |        |        |        |  |       |        |  |   |        |  |      |  
|Tier 1 capital                     |  | $                      | 17,583 |   | 4.00   | % |        | $      | 44,623 |  | 10.15 | %      |  | $ | 27,040 |  | 6.15 | %
|Total capital                      |  |                        | 35,165 |   | 8.00   | % |        |        | 50,130 |  | 11.40 | %      |  |   | 14,965 |  | 3.40 | %
|Tier 1 leverage ratio              |  |                        | 22,429 |   | 4.00   | % |        |        | 44,623 |  | 7.96  | %      |  |   | 22,194 |  | 3.96 | %
|                                   |  |                        |        |   |        |  
|Georgia Bank & Trust Company       |  |                        |        |   |        |   |        |        |        |  |       |        |  |   |        |  |      |  
|12/31/2003                         |  |                        |        |   |        |   |        |        |        |  |       |        |  |   |        |  |      |  
|Risk-based capital:                |  |                        |        |   |        |   |        |        |        |  |       |        |  |   |        |  |      |  
|Tier 1 capital                     |  | $                      | 20,280 |   | 4.00   | % |        | $      | 48,855 |  | 9.64  | %      |  | $ | 28,575 |  | 5.64 | %
|Total capital                      |  |                        | 40,561 |   | 8.00   | % |        |        | 55,204 |  | 10.89 | %      |  |   | 14,643 |  | 2.89 | %
|Tier 1 leverage ratio              |  |                        | 24,945 |   | 4.00   | % |        |        | 48,855 |  | 7.83  | %      |  |   | 23,910 |  | 3.83 | %
|12/31/2002                         |  |                        |        |   |        |   |        |        |        |  |       |        |  |   |        |  |      |  
|Risk-based capital                 |  |                        |        |   |        |   |        |        |        |  |       |        |  |   |        |  |      |  
|Tier 1 capital                     |  | $                      | 17,517 |   | 4.00   | % |        | $      | 42,899 |  | 9.80  | %      |  | $ | 25,382 |  | 5.80 | %
|Total capital                      |  |                        | 35,034 |   | 8.00   | % |        |        | 48,386 |  | 11.05 | %      |  |   | 13,352 |  | 3.05 | %
|Tier 1 leverage ratio              |  |                        | 22,363 |   | 4.00   | % |        |        | 42,899 |  | 7.67  | %      |  |   | 20,536 |  | 3.67 | %



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



46



---

##### Table of Contents

Recent Accounting Pronouncements



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such
guarantee. FIN 45 also requires additional disclosure about the guarantors obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Companys financial condition or results of operations.



FASB Interpretation No. 46, Consolidation of Variable
Interest Entities and Interpretation of ARB No. 51(FIN 46) was issued in January 2003 and was reissued in December 2003 as FASB Interpretation No. 46 (revised December 2003)  (FIN 46R). FIN 46 and FIN 46R establish the criteria for
consolidating variable interest entities. FIN 46 and FIN 46R are effective for fiscal years or interim periods beginning after June 15, 2003, to variable entities that were acquired before February 1, 2003. The adoption of FIN 46 and FIN 46R did not
have a material impact on the Companys financial condition or results of operations.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.SFAS No. 149 amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June
30, 2003. The adoption of SFAS No. 149 did not have a significant effect on the Companys consolidated financial statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.SFAS
No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and imposes certain additional disclosure requirements. The provisions of SFAS No. 150 are
generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard did not have a
significant effect on the Companys consolidated financial statements.



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



47



---

##### Table of Contents

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.



Item 7A. Quantitative and Qualitative Disclosures About Market Risk



Market risk reflects the risk of loss due to changes in the market prices
and interest rates. This loss could be reflected in diminished current market values or reduced net interest income in future periods.



The Companys market risk arises primarily from the interest rate risk inherent in its lending and deposit activities. This risk is managed primarily
by careful periodic analysis and modeling of the various components of the entire balance sheet. The investment portfolio is utilized to assist in minimizing interest rate risk in both loans and deposits due to the flexibility afforded in
structuring the investment portfolio with regards to various maturities, cash flows and fixed or variable rates.



The table below presents all rate sensitive assets and liabilities by contractual amounts and maturity dates. Cash flows from mortgage backed securities
reflect anticipated prepayments. For core deposits, without a contractual maturity date, cash flows are based on managements judgement regarding their decay rates or repricing behavior. The fair value of rate sensitive assets and liabilities
is presented in total. 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. 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.
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, securities
sold under repurchase agreements and variable interest rate borrowings approximated their fair values. The fair value of the fixed interest rate borrowings 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.



48



---

##### Table of Contents

Market Risk



|                                                  |  |         |   |  |        |   |  |        |   |  |        |   |  |        |   |  |            |   |  |         |   |  |          
|------------------------------------------------- |  | ------- | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ---------- | - |  | ------- | - |  | ---------
|(Dollars in thousands)                            |  | 2004    |   |  | 2005   |   |  | 2006   |   |  | 2007   |   |  | 2008   |   |  | Thereafter |   |  | Total   |   |  | FairValue
|Rate Sensitive Assets:                            |  |         |   |  |        |   |  |        |   |  |        |   |  |        |   |  |            |   |  |         |   |  |          
|Fixed interest rate loans                         |  | 53,864  |   |  | 29,204 |   |  | 17,441 |   |  | 9,165  |   |  | 4,279  |   |  | 23,704     |   |  | 137,657 |   |  | 138,493  
|Average interest rate                             |  | 6.95    | % |  | 6.90   | % |  | 7.01   | % |  | 7.13   | % |  | 6.62   | % |  | 5.99       | % |  | 6.79    | % |  |          
|                                                  |  |         |   |  |        |   |  |       
|Variable interest rate loans                      |  | 167,198 |   |  | 45,270 |   |  | 23,234 |   |  | 8,563  |   |  | 6,426  |   |  | 44,332     |   |  | 295,022 |   |  | 295,022  
|Average interest rate                             |  | 4.69    | % |  | 5.08   | % |  | 4.66   | % |  | 4.66   | % |  | 4.70   | % |  | 5.08       | % |  | 4.80    | % |  |          
|                                                  |  |         |   |  |        |   |  |       
|Fixed interest rate securities                    |  | 17,142  |   |  | 15,722 |   |  | 14,923 |   |  | 8,902  |   |  | 10,269 |   |  | 75,610     |   |  | 142,568 |   |  | 142,862  
|Average interest rate                             |  | 4.06    | % |  | 4.62   | % |  | 4.86   | % |  | 4.34   | % |  | 4.51   | % |  | 4.65       | % |  | 4.57    | % |  |          
|                                                  |  |         |   |  |        |   |  |       
|Variable interest rate securities                 |  | 2,231   |   |  | 1,548  |   |  | 1,074  |   |  | 745    |   |  | 517    |   |  | 7,649      |   |  | 13,764  |   |  | 14,283   
|Average interest rate                             |  | 3.72    | % |  | 3.72   | % |  | 3.72   | % |  | 3.72   | % |  | 3.72   | % |  | 3.90       | % |  | 3.82    | % |  |          
|                                                  |  |         |   |  |        |   |  |       
|Variable interest-bearing deposits in other banks |  | 17      |   |  |       |   |  |       |   |  |       |   |  |       |   |  |           |   |  | 17      |   |  | 17       
|Average interest rate                             |  | 1.06    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00       | % |  | 1.06    | % |  |          
|                                                  |  |         |   |  |        |   |  |       
|Rate Sensitive Liabilities:                       |  |         |   |  |        |   |  |        |   |  |        |   |  |        |   |  |            |   |  |         |   |  |          
|Noninterest-bearing deposits                      |  | 22,108  |   |  | 12,530 |   |  | 12,536 |   |  | 5,595  |   |  | 5,588  |   |  | 9,677      |   |  | 68,033  |   |  | 68,033   
|Average interest rate                             |  | 0.00    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00       | % |  | 0.00    | % |  |          
|                                                  |  |         |   |  |        |   |  |       
|Money market accounts                             |  | 10,852  |   |  | 4,175  |   |  | 4,175  |   |  | 1,087  |   |  | 1,085  |   |  | 764        |   |  | 22,137  |   |  | 22,137   
|Average interest rate                             |  | 1.19    | % |  | 1.19   | % |  | 1.19   | % |  | 1.19   | % |  | 1.19   | % |  | 1.19       | % |  | 1.19    | % |  |          
|                                                  |  |         |   |  |        |   |  |       
|Savings accounts                                  |  | 65,132  |   |  | 35,258 |   |  | 35,277 |   |  | 15,744 |   |  | 15,724 |   |  | 27,231     |   |  | 194,366 |   |  | 194,366  
|Average interest rate                             |  | 1.45    | % |  | 1.45   | % |  | 1.45   | % |  | 1.45   | % |  | 1.45   | % |  | 1.45       | % |  | 1.45    | % |  |          
|                                                  |  |         |   |  |        |   |  |       
|NOW accounts                                      |  | 30,026  |   |  | 13,927 |   |  | 13,927 |   |  | 4,770  |   |  | 4,770  |   |  | 4,966      |   |  | 72,386  |   |  | 72,386   
|Average interest rate                             |  | 0.55    | % |  | 0.55   | % |  | 0.55   | % |  | 0.55   | % |  | 0.55   | % |  | 0.55       | % |  | 0.55    | % |  |          
|                                                  |  |         |   |  |        |   |  |       
|Fixed interest rate time deposits < $100M         |  | 19,823  |   |  | 2,938  |   |  | 3,180  |   |  | 1,995  |   |  | 1,115  |   |  | 345        |   |  | 29,397  |   |  | 29,816   
|Average interest rate                             |  | 1.97    | % |  | 3.30   | % |  | 3.73   | % |  | 4.24   | % |  | 3.26   | % |  | 0.60       | % |  | 2.48    | % |  |          
|                                                  |  |         |   |  |        |   |  |       
|Fixed interest rate time deposits > $100M         |  | 66,898  |   |  | 21,825 |   |  | 6,018  |   |  | 2,379  |   |  | 412    |   |  | 101        |   |  | 97,632  |   |  | 98,097   
|Average interest rate                             |  | 2.02    | % |  | 2.45   | % |  | 4.36   | % |  | 3.92   | % |  | 3.41   | % |  | 1.24       | % |  | 2.20    | % |  |          
|                                                  |  |         |   |  |        |   |  |       
|Federal funds purchased/                          |  |         |   |  |        |   |  |        |   |  |        |   |  |        |   |  |            |   |  |         |   |  |          
|Securities sold under repurchase agreements       |  | 56,969  |   |  |       |   |  |       |   |  |       |   |  |       |   |  |           |   |  | 56,969  |   |  | 56,969   
|Average interest rate                             |  | 1.29    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00       | % |  | 1.29    | % |  |          
|                                                  |  |         |   |  |        |   |  |       
|Federal Home Loan Bank borrowings                 |  |        |   |  |       |   |  |       |   |  |       |   |  |       |   |  | 30,000     |   |  | 30,000  |   |  | 26,175   
|Average interest rate                             |  | 0.00    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 5.65       | % |  | 5.65    | % |  |          
|                                                  |  |         |   |  |        |   |  |       
|TT&L note borrowings                              |  | 800     |   |  |       |   |  |       |   |  |       |   |  |       |   |  |           |   |  | 800     |   |  | 800      
|Average interest rate                             |  | 0.64    | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00   | % |  | 0.00       | % |  | 0.64    | % |  |          



49



---

##### Table of Contents

Item 8. Financial Statements and Supplementary Data



GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY



Consolidated Financial Statements



December 31, 2003, 2002, and 2001



(With Independent Auditors Report Thereon)



50



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY



Table of Contents



|                                                                         |  |     
|------------------------------------------------------------------------ |  | ----
|                                                                         |  | Page
|Independent Auditors Report                                             |  | 52  
|                                                                         | 
|Consolidated Balance Sheets                                              |  | 53  
|                                                                         | 
|Consolidated Statements of Income                                        |  | 55  
|                                                                         | 
|Consolidated Statements of Stockholders Equity and Comprehensive Income |  | 57  
|                                                                         | 
|Consolidated Statements of Cash Flows                                    |  | 58  
|                                                                         | 
|Notes to Consolidated Financial Statements                               |  | 60  



51



---

##### Table of Contents

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, 2003 and 2002, 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, 2003. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the 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, 2003 and 2002, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.



KPMG LLP



Atlanta, Georgia

January 23, 2004



52



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY



Consolidated Balance Sheets



December 31, 2003 and 2002



|                                                                                                                 |  |      |             |      |            
|---------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | -----------
|                                                                                                                 |  | 2003 |             | 2002
|Assets                                                                                                           |  |      |             |      |            
|Cash and due from banks (note 2)                                                                                 |  | $    | 15,704,566  |      | 12,942,512 
|Federal funds sold                                                                                               |  |      |            |      | 3,691,000  
|Interest-bearing deposits in other banks                                                                         |  |      | 17,318      |      | 517,179    
|                                                                                                                 |  |      |             |      |            
|Cash and cash equivalents                                                                                        |  |      | 15,721,884  |      | 17,150,691 
|                                                                                                                 |  |      |             |      |            
|Investment securities (note 3):                                                                                  |  |      |             |      |            
|Available-for-sale                                                                                               |  |      | 151,394,463 |      | 133,971,802
|Held-to-maturity, at cost (fair values of $5,750,099 and $6,385,651 at December 31, 2003 and 2002, respectively) |  |      | 5,437,519   |      | 6,138,889  
|                                                                                                                 |  |     
|Loans held for sale                                                                                              |  |      | 14,047,080  |      | 24,296,598 
|                                                                                                                 |  |     
|Loans (note 4)                                                                                                   |  |      | 418,632,111 |      | 372,402,679
|Less allowance for loan losses                                                                                   |  |      | 7,277,589   |      | 6,534,417  
|                                                                                                                 |  |      |             |      |            
|Loans, net                                                                                                       |  |      | 411,354,522 |      | 365,868,262
|                                                                                                                 |  |      |             |      |            
|Premises and equipment, net (note 5)                                                                             |  |      | 14,250,543  |      | 13,882,987 
|Accrued interest receivable                                                                                      |  |      | 3,784,888   |      | 3,688,630  
|Intangible assets, net (note 6)                                                                                  |  |      | 139,883     |      | 139,883    
|Bank-owned life insurance                                                                                        |  |      | 10,971,633  |      | 2,646,751  
|Other assets                                                                                                     |  |      | 3,530,542   |      | 2,047,917  
|                                                                                                                 |  |      |             |      |            
|                                                                                                                 |  | $    | 630,632,957 |      | 569,832,410
|                                                                                                                 |  |      |             |      |            



See accompanying notes to consolidated
financial statements.



53



---

##### Table of Contents

|                                                                                                                   |  |      |             |   |      |             |  
|------------------------------------------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | ----------- | -
|                                                                                                                   |  | 2003 |             |   | 2002 |            
|Liabilities and Stockholders Equity                                                                               |  |      |             |   |      |             |  
|Deposits (note 8):                                                                                                 |  |      |             |   |      |             |  
|Noninterest-bearing                                                                                                |  | $    | 68,033,102  |   |      | 70,334,882  |  
|Interest-bearing:                                                                                                  |  |      |             |   |      |             |  
|NOW accounts                                                                                                       |  |      | 72,386,405  |   |      | 63,115,877  |  
|Savings                                                                                                            |  |      | 194,366,425 |   |      | 152,244,387 |  
|Money management accounts                                                                                          |  |      | 22,137,192  |   |      | 28,687,166  |  
|Time deposits over $100,000                                                                                        |  |      | 97,631,749  |   |      | 87,746,760  |  
|Other time deposits                                                                                                |  |      | 29,396,929  |   |      | 37,427,629  |  
|                                                                                                                   |  |      |             |   |      |             |  
|                                                                                                                   |  |      | 483,951,802 |   |      | 439,556,701 |  
|                                                                                                                   |  |     
|Federal funds purchased and securities sold under repurchase agreements (note 9)                                   |  |      | 56,968,754  |   |      | 42,987,681  |  
|Advances from Federal Home Loan Bank (note 9)                                                                      |  |      | 30,000,000  |   |      | 35,000,000  |  
|Other borrowed funds (note 9)                                                                                      |  |      | 800,000     |   |      | 1,000,000   |  
|Accrued interest and other liabilities                                                                             |  |      | 5,223,354   |   |      | 4,539,968   |  
|                                                                                                                   |  |      |             |   |      |             |  
|Total liabilities                                                                                                  |  |      | 576,943,910 |   |      | 523,084,350 |  
|                                                                                                                   |  |      |             |   |      |             |  
|Stockholders equity (notes 12, 14, and 16):                                                                       |  |      |             |   |      |             |  
|Common stock, $3.00 par value; 10,000,000 shares authorized; 5,284,746 shares issued; 5,247,204 shares outstanding |  |      | 15,854,238  |   |      | 14,424,306  |  
|Additional paid-in capital                                                                                         |  |      | 34,337,584  |   |      | 23,374,772  |  
|Retained earnings                                                                                                  |  |      | 3,001,079   |   |      | 7,471,434   |  
|Treasury stock, at cost 37,542 shares                                                                              |  |      | (507,360    | ) |      | (507,360    | )
|Accumulated other comprehensive income                                                                             |  |      | 1,003,506   |   |      | 1,984,908   |  
|                                                                                                                   |  |      |             |   |      |             |  
|Total stockholders equity                                                                                         |  |      | 53,689,047  |   |      | 46,748,060  |  
|                                                                                                                   |  |     
|Commitments (note 7)                                                                                               |  |      |             |   |      |             |  
|                                                                                                                   |  |      |             |   |      |             |  
|                                                                                                                   |  | $    | 630,632,957 |   |      | 569,832,410 |  
|                                                                                                                   |  |      |             |   |      |             |  



54



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Income

Years ended December 31, 2003, 2002, and 2001



|                                                                                                                                             |  |      |            |   |      |            |      |           
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | ---------- | ---- | ----------
|                                                                                                                                             |  | 2003 |            |   | 2002 |            | 2001
|Interest income:                                                                                                                             |  |      |            |   |      |            |      |           
|Loans, including fees                                                                                                                        |  | $    | 25,839,796 |   |      | 24,538,585 |      | 26,341,470
|Investment securities:                                                                                                                       |  |      |            |   |      |            |      |           
|Taxable                                                                                                                                      |  |      | 5,913,773  |   |      | 6,291,398  |      | 5,324,731 
|Tax-exempt                                                                                                                                   |  |      | 491,350    |   |      | 398,281    |      | 415,160   
|Federal funds sold                                                                                                                           |  |      | 88,506     |   |      | 124,931    |      | 453,551   
|Interest-bearing deposits in other banks                                                                                                     |  |      | 3,517      |   |      | 17,253     |      | 26,388    
|                                                                                                                                             |  |      |            |   |      |            |      |           
|Total interest income                                                                                                                        |  |      | 32,336,942 |   |      | 31,370,448 |      | 32,561,300
|                                                                                                                                             |  |      |            |   |      |            |      |           
|Interest expense:                                                                                                                            |  |      |            |   |      |            |      |           
|Deposits (including interest on time deposits over $100,000 of $2,490,017, $2,682,828, and $3,513,577 in 2003, 2002, and 2001,
respectively) |  |      | 7,251,075  |   |      | 8,609,816  |      | 12,736,646
|Federal funds purchased and securities sold under repurchase agreements                                                                      |  |      | 645,949    |   |      | 639,785    |      | 726,439   
|Other borrowings                                                                                                                             |  |      | 1,788,137  |   |      | 1,910,452  |      | 1,785,867 
|                                                                                                                                             |  |      |            |   |      |            |      |           
|Total interest expense                                                                                                                       |  |      | 9,685,161  |   |      | 11,160,053 |      | 15,248,952
|                                                                                                                                             |  |      |            |   |      |            |      |           
|Net interest income                                                                                                                          |  |      | 22,651,781 |   |      | 20,210,395 |      | 17,312,348
|                                                                                                                                             |  |      |           
|Provision for loan losses (note 4)                                                                                                           |  |      | 1,694,141  |   |      | 2,414,297  |      | 1,824,650 
|                                                                                                                                             |  |      |            |   |      |            |      |           
|Net interest income after provision for loan losses                                                                                          |  |      | 20,957,640 |   |      | 17,796,098 |      | 15,487,698
|                                                                                                                                             |  |      |            |   |      |            |      |           
|Noninterest income:                                                                                                                          |  |      |            |   |      |            |      |           
|Service charges and fees on deposits                                                                                                         |  |      | 4,514,269  |   |      | 4,431,475  |      | 2,988,622 
|Gain on sale of loans                                                                                                                        |  |      | 8,875,410  |   |      | 5,915,445  |      | 3,949,316 
|Investment securities (losses) gains, net (note 3)                                                                                           |  |      | (203,325   | ) |      | 207,241    |      | 68,608    
|Retail investment income                                                                                                                     |  |      | 279,717    |   |      | 252,138    |      | 206,454   
|Trust services fees                                                                                                                          |  |      | 353,115    |   |      | 227,136    |      | 133,064   
|Increase in cash surrender value of bank-owned life insurance                                                                                |  |      | 324,882    |   |      | 151,706    |      | 141,402   
|Miscellaneous income                                                                                                                         |  |      | 378,420    |   |      | 402,076    |      | 482,516   
|                                                                                                                                             |  |      |            |   |      |            |      |           
|Total noninterest income                                                                                                                     |  |      | 14,522,488 |   |      | 11,587,217 |      | 7,969,982 
|                                                                                                                                             |  |      |            |   |      |            |      |           
|Noninterest expense:                                                                                                                         |  |      |            |   |      |            |      |           
|Salaries                                                                                                                                     |  |      | 12,428,169 |   |      | 10,295,929 |      | 9,079,535 
|Employee benefits                                                                                                                            |  |      | 2,904,002  |   |      | 2,301,530  |      | 1,327,341 
|Occupancy expenses                                                                                                                           |  |      | 2,394,793  |   |      | 2,255,203  |      | 2,082,547 
|Other operating expenses (note 15)                                                                                                           |  |      | 5,837,064  |   |      | 5,424,880  |      | 4,305,757 
|                                                                                                                                             |  |      |            |   |      |            |      |           
|Total noninterest expense                                                                                                                    |  |      | 23,564,028 |   |      | 20,277,542 |      | 16,795,180
|                                                                                                                                             |  |      |            |   |      |            |      |           
|Income before income taxes                                                                                                                   |  |      | 11,916,100 |   |      | 9,105,773  |      | 6,662,500 
|                                                                                                                                             |  |      |           
|Income tax expense (note 10)                                                                                                                 |  |      | 3,982,999  |   |      | 3,095,648  |      | 2,101,496 
|                                                                                                                                             |  |      |            |   |      |            |      |           
|Net income                                                                                                                                   |  | $    | 7,933,101  |   |      | 6,010,125  |      | 4,561,004 
|                                                                                                                                             |  |      |            |   |      |            |      |           



(Continued)



55



---

##### Table of Contents

|                                                                           |  |      |           |      |           |      |          
|-------------------------------------------------------------------------- |  | ---- | --------- | ---- | --------- | ---- | ---------
|                                                                           |  | 2003 |           | 2002 |           | 2001
|Basic net income per share                                                 |  | $    | 1.51      |      | 1.15      |      | 0.87     
|                                                                           |  |      |          
|Diluted net income per share                                               |  |      | 1.48      |      | 1.13      |      | 0.86     
|                                                                           |  |      |          
|Weighted average common shares outstanding                                 |  |      | 5,247,204 |      | 5,247,204 |      | 5,247,204
|                                                                           |  |      |          
|Weighted average number of common and common equivalent shares outstanding |  |      | 5,359,815 |      | 5,327,286 |      | 5,275,745



See accompanying notes to consolidated
financial statements.



56



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Stockholders Equity and
Comprehensive Income

Years ended December 31, 2003, 2002, and 2001



|                                                                                                                               |  |                     |                 |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------- | --------------- | - | ------------ | --------- | ------------------------- | - | ---------------- |  | ---------- | ------------- | ----------- | - | ------------------------------------------- | -------- | - | ------------------------- | --------- | - |  | ---------- | -
|                                                                                                                               |  | ComprehensiveIncome |                 |   | Common stock |           | Additional paid-incapital |   | Retainedearnings |  |            | Treasurystock |             |   | Accumulated othercomprehensiveincome (loss) |          |   | Total stockholdersequity |          
|                                                                                                                               |  |                     | Number ofshares |   | Amount       |           |                           |   |                  | 
|Balance, December 31, 2000                                                                                                     |  |                     |                 |   |              | 4,186,304 |                           | $ | 12,558,912       |  | 14,980,499 |               | 7,168,491   |   |                                             | (507,360 | ) |                           | 183,002   |   |  | 34,383,544 |  
|                                                                                                                               |  |                     |                 |   |              |           |                           |  
|Comprehensive income:                                                                                                          |  |                     |                 |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|Net income                                                                                                                     |  | $                   | 4,561,004       |   |              |          |                           |   |                 |  |           |               | 4,561,004   |   |                                             |         |   |                           |          |   |  | 4,561,004  |  
|Other comprehensive income  unrealized gain on investment securities available for sale, net of income tax effect of
$541,274 |  |                     | 1,062,565       |   |              |          |                           |   |                 |  |           |               |            |   |                                             |         |   |                           | 1,062,565 |   |  | 1,062,565  |  
|                                                                                                                               |  |                     |                 |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|Total comprehensive income                                                                                                     |  | $                   | 5,623,569       |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|                                                                                                                               |  |                     |                 |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|Stock dividend declared  15%                                                                                                  |  |                     |                 |   |              | 621,798   |                           |   | 1,865,394        |  | 8,394,273  |               | (10,259,667 | ) |                                             |         |   |                           |          |   |  |           |  
|Cash paid for fractional shares                                                                                                |  |                     |                 |   |              |          |                           |   |                 |  |           |               | (8,519      | ) |                                             |         |   |                           |          |   |  | (8,519     | )
|                                                                                                                               |  |                     |                 |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|Balance, December 31, 2001                                                                                                     |  |                     |                 |   |              | 4,808,102 |                           |   | 14,424,306       |  | 23,374,772 |               | 1,461,309   |   |                                             | (507,360 | ) |                           | 1,245,567 |   |  | 39,998,594 |  
|                                                                                                                               |  |                     |                 |   |              |           |                           |  
|Comprehensive income:                                                                                                          |  |                     |                 |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|Net income                                                                                                                     |  | $                   | 6,010,125       |   |              |          |                           |   |                 |  |           |               | 6,010,125   |   |                                             |         |   |                           |          |   |  | 6,010,125  |  
|Other comprehensive income  unrealized gain on investment securities available for sale, net of income tax effect of
$409,478 |  |                     | 739,341         |   |              |          |                           |   |                 |  |           |               |            |   |                                             |         |   |                           | 739,341   |   |  | 739,341    |  
|                                                                                                                               |  |                     |                 |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|Total comprehensive income                                                                                                     |  | $                   | 6,749,466       |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|                                                                                                                               |  |                     |                 |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|Balance, December 31, 2002                                                                                                     |  |                     |                 |   |              | 4,808,102 |                           |   | 14,424,306       |  | 23,374,772 |               | 7,471,434   |   |                                             | (507,360 | ) |                           | 1,984,908 |   |  | 46,748,060 |  
|                                                                                                                               |  |                     |                 |   |              |           |                           |  
|Comprehensive income:                                                                                                          |  |                     |                 |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|Net income                                                                                                                     |  | $                   | 7,933,101       |   |              |          |                           |   |                 |  |           |               | 7,933,101   |   |                                             |         |   |                           |          |   |  | 7,933,101  |  
|Other comprehensive loss  unrealized gain on investment securities available for sale, net of income tax effect of
$(505,571) |  |                     | (981,402        | ) |              |          |                           |   |                 |  |           |               |            |   |                                             |         |   |                           | (981,402  | ) |  | (981,402   | )
|                                                                                                                               |  |                     |                 |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|Total comprehensive income                                                                                                     |  | $                   | 6,951,699       |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|                                                                                                                               |  |                     |                 |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|Stock dividend  10%                                                                                                           |  |                     |                 |   |              | 476,644   |                           |   | 1,429,932        |  | 10,962,812 |               | (12,392,744 | ) |                                             |         |   |                           |          |   |  |           |  
|Cash paid for fractional shares                                                                                                |  |                     |                 |   |              |          |                           |   |                 |  |           |               | (10,712     | ) |                                             |         |   |                           |          |   |  | (10,712    | )
|                                                                                                                               |  |                     |                 |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  
|Balance, December 31, 2003                                                                                                     |  |                     |                 |   |              | 5,284,746 |                           | $ | 15,854,238       |  | 34,337,584 |               | 3,001,079   |   |                                             | (507,360 | ) |                           | 1,003,506 |   |  | 53,689,047 |  
|                                                                                                                               |  |                     |                 |   |              |           |                           |   |                  |  |            |               |             |   |                                             |          |   |                           |           |   |  |            |  



|                                                                                         |  |      |            |   |      |         |      |          
|---------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | ------- | ---- | ---------
|                                                                                         |  |      |           
|                                                                                         |  | 2003 |            |   | 2002 |         | 2001
|Disclosure of reclassification amount:                                                   |  |      |            |   |      |         |      |          
|Unrealized holding (losses) gains arising during period, net of taxes                    |  | $    | (1,050,533 | ) |      | 876,120 |      | 1,107,846
|Less reclassification adjustment for (losses) gains included in net income, net of taxes |  |      | (69,131    | ) |      | 136,779 |      | 45,281   
|                                                                                         |  |      |            |   |      |         |      |          
|Net unrealized (losses) gains in securities                                              |  | $    | (981,402   | ) |      | 739,341 |      | 1,062,565
|                                                                                         |  |      |            |   |      |         |      |          



See accompanying notes to consolidated
financial statements.



57



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years ended December 31, 2003, 2002, and 2001



|                                                                                            |  |      |              |   |      |              |   |      |              |  
|------------------------------------------------------------------------------------------- |  | ---- | ------------ | - | ---- | ------------ | - | ---- | ------------ | -
|                                                                                            |  | 2003 |              |   | 2002 |              |   | 2001 |             
|Cash flows from operating activities:                                                       |  |      |              |   |      |              |   |      |              |  
|Net income                                                                                  |  | $    | 7,933,101    |   |      | 6,010,125    |   |      | 4,561,004    |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |      |              |   |      |              |   |      |              |  
|Depreciation and amortization                                                               |  |      | 1,279,202    |   |      | 1,376,645    |   |      | 1,245,835    |  
|Deferred income tax benefit                                                                 |  |      | (759,360     | ) |      | (443,926     | ) |      | (428,192     | )
|Provision for loan losses                                                                   |  |      | 1,694,141    |   |      | 2,414,297    |   |      | 1,824,650    |  
|Net investment securities losses (gains)                                                    |  |      | 203,325      |   |      | (207,241     | ) |      | (68,608      | )
|Net amortization (accretion) of premium/discount on investment securities                   |  |      | 745,988      |   |      | 501,313      |   |      | 8,528        |  
|Increase in cash surrender value of bank-owned life insurance                               |  |      | (324,882     | ) |      | (151,706     | ) |      | (141,402     | )
|(Gain) loss on disposal of premises and equipment                                           |  |      | (6,312       | ) |      | 31,935       |   |      | 69,817       |  
|Loss (gain) on the sale of other real estate                                                |  |      | 4,306        |   |      | (18,420      | ) |      | 8,042        |  
|Gain on sale of loans                                                                       |  |      | (8,875,410   | ) |      | (5,915,445   | ) |      | (3,949,316   | )
|Real estate loans originated for sale                                                       |  |      | (374,275,713 | ) |      | (267,233,862 | ) |      | (208,613,336 | )
|Proceeds from sales of real estate loans                                                    |  |      | 393,400,641  |   |      | 258,037,768  |   |      | 205,338,175  |  
|(Increase) decrease in accrued interest receivable                                          |  |      | (96,258      | ) |      | (358,219     | ) |      | 206,973      |  
|(Increase) decrease in other assets                                                         |  |      | (212,965     | ) |      | (78,569      | ) |      | 151,789      |  
|Increase in accrued interest and other liabilities                                          |  |      | 683,386      |   |      | 599,671      |   |      | 506,144      |  
|                                                                                            |  |      |              |   |      |              |   |      |              |  
|Net cash provided by (used in) operating activities                                         |  |      | 21,393,190   |   |      | (5,435,634   | ) |      | 720,103      |  
|                                                                                            |  |      |              |   |      |              |   |      |              |  
|Cash flows from investing activities:                                                       |  |      |              |   |      |              |   |      |              |  
|Proceeds from sales of available for sale securities                                        |  |      | 49,788,193   |   |      | 14,281,961   |   |      | 8,991,600    |  
|Proceeds from maturities of available for sale securities                                   |  |      | 57,801,211   |   |      | 45,001,836   |   |      | 33,425,337   |  
|Proceeds from maturities of held to maturity securities                                     |  |      | 700,000      |   |      | 1,305,000    |   |      | 1,150,808    |  
|Purchase of available for sale securities                                                   |  |      | (127,446,982 | ) |      | (88,796,204  | ) |      | (70,132,464  | )
|Purchase of FHLB stock                                                                      |  |      |             |   |      |             |   |      | (550,000     | )
|Net increase in loans                                                                       |  |      | (47,398,926  | ) |      | (43,457,091  | ) |      | (49,876,632  | )
|Purchase of Company-owned life insurance                                                    |  |      | (8,000,000   | ) |      |             |   |      | (1,155,000   | )
|Purchases of premises and equipment                                                         |  |      | (1,667,783   | ) |      | (2,824,783   | ) |      | (2,933,835   | )
|Proceeds from sale of other real estate                                                     |  |      | 209,491      |   |      | 568,303      |   |      | 218,604      |  
|Proceeds from sale of premises and equipment                                                |  |      | 27,337       |   |      | 58,001       |   |      | 33,981       |  
|                                                                                            |  |      |              |   |      |              |   |      |              |  
|Net cash used in investing activities                                                       |  |      | (75,987,459  | ) |      | (73,862,977  | ) |      | (80,827,601  | )
|                                                                                            |  |      |              |   |      |              |   |      |              |  



(Continued)



58



---

##### Table of Contents

(Continued)



|                                                                                        |  |      |            |   |      |             |   |      |             |  
|--------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | ----------- | - | ---- | ----------- | -
|                                                                                        |  | 2003 |            |   | 2002 |             |   | 2001 |            
|Cash flows from financing activities:                                                   |  |      |            |   |      |             |   |      |             |  
|Net increase in noninterest-bearing deposits                                            |  |      | (2,301,780 | ) |      | 13,532,819  |   |      | 6,663,587   |  
|Net increase in NOW accounts                                                            |  |      | 9,270,528  |   |      | 14,296,485  |   |      | 8,499,845   |  
|Net increase in savings accounts                                                        |  |      | 42,122,038 |   |      | 25,192,197  |   |      | 30,171,446  |  
|Net increase in money management accounts                                               |  |      | (6,549,974 | ) |      | 4,867,714   |   |      | 8,573,321   |  
|Net increase in time deposits over $100,000                                             |  |      | 9,884,989  |   |      | 26,111,498  |   |      | 7,309,851   |  
|Net (decrease) increase in other time deposits                                          |  |      | (8,030,700 | ) |      | (13,592,609 | ) |      | (2,997,217  | )
|Net increase in federal funds purchased and securities sold under repurchase agreements |  |      | 13,981,073 |   |      | 10,531,298  |   |      | 360,831     |  
|Proceeds from other borrowed funds                                                      |  |      |           |   |      |            |   |      | 50,000      |  
|Advances from Federal Home Loan Bank                                                    |  |      |           |   |      | 5,000,000   |   |      | 11,000,000  |  
|Payments of Federal Home Loan Bank advances                                             |  |      | (5,000,000 | ) |      | (5,000,000  | ) |      |            |  
|Principal payments on other borrowed funds                                              |  |      | (200,000   | ) |      |            |   |      |            |  
|Cash paid for fractional shares                                                         |  |      | (10,712    | ) |      |            |   |      | (8,519      | )
|                                                                                        |  |      |            |   |      |             |   |      |             |  
|Net cash provided by financing activities                                               |  |      | 53,165,462 |   |      | 80,939,402  |   |      | 69,623,145  |  
|                                                                                        |  |      |            |   |      |             |   |      |             |  
|Net (decrease) increase in cash and cash equivalents                                    |  |      | (1,428,807 | ) |      | 1,640,791   |   |      | (10,484,353 | )
|                                                                                        |  |      |           
|Cash and cash equivalents at beginning of year                                          |  |      | 17,150,691 |   |      | 15,509,900  |   |      | 25,994,253  |  
|                                                                                        |  |      |            |   |      |             |   |      |             |  
|Cash and cash equivalents at end of year                                                |  | $    | 15,721,884 |   |      | 17,150,691  |   |      | 15,509,900  |  
|                                                                                        |  |      |            |   |      |             |   |      |             |  
|Supplemental disclosures of cash paid during the year for:                              |  |      |            |   |      |             |   |      |             |  
|Interest                                                                                |  | $    | 9,968,518  |   |      | 11,425,787  |   |      | 15,575,863  |  
|Income taxes                                                                            |  |      | 4,543,500  |   |      | 3,625,000   |   |      | 2,381,406   |  
|                                                                                        |  |      |           
|Supplemental information on noncash investing activities:                               |  |      |            |   |      |             |   |      |             |  
|Loans transferred to other real estate                                                  |  | $    | 218,525    |   |      | 549,883     |   |      | 146,236     |  



See accompanying notes to consolidated
financial statements.



59



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



|(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 Counties area 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 accounting
principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of
America. 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.
In connection with the determination of the allowance for loan losses, 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, Federal funds sold, and short-term interest-bearing deposits in other banks. Generally, Federal
funds are sold for one-day periods.



| | (c) | Investment Securities
| | --- | ---------------------



The Bank classifies its investment securities into one of two categories: available for sale and held to maturity. 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.



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.



| |  |    |  |            
| |  | -- |  | -----------
| |  | 60 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



A decline in the fair 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. 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. 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, historical loss rates, 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 types of
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 fair value.



| |  |    |  |            
| |  | -- |  | -----------
| |  | 61 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



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 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 brought current.



| | (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.



| | (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 consists of goodwill.



SFAS No. 142, Goodwill and Other Intangible Assets eliminated amortization of goodwill and intangible assets that
have indefinite useful lives and requires annual tests of impairments of those assets. The Banks goodwill is not considered impaired at December 31, 2003.



| | (h) | Stock-Based Compensation
| | --- | ------------------------



In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entitys accounting policy decisions with
respect to stock-based employee compensation. Finally, SFAS No. 148 also amends Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in the interim financial information. The
Bank adopted the provisions of SFAS No. 148 effective December 31, 2002.



| |  |    |  |            
| |  | -- |  | -----------
| |  | 62 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



The Bank applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its stock option plans. Accordingly, compensation cost is measured as the excess, if any, of the quoted market price of the Banks stock at the date of grant over the amount an employee must pay to acquire the
stock. Had compensation cost been determined based upon the fair value of the options at the grant dates consistent with the method recommended by SFAS No. 123, on a pro forma basis, the Banks net income and income per share for the years
ended December 31, 2003, 2002, and 2001 is indicated below:



|                                                                                                                   |  |      |           |   |      |           |   |      |           |  
|------------------------------------------------------------------------------------------------------------------ |  | ---- | --------- | - | ---- | --------- | - | ---- | --------- | -
|                                                                                                                   |  | 2003 |           |   | 2002 |           |   | 2001 |          
|Net income                                                                                                         |  | $    | 7,933,101 |   |      | 6,010,125 |   |      | 4,561,004 |  
|Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effect |  |      | (157,625  | ) |      | (93,175   | ) |      | (26,816   | )
|                                                                                                                   |  |      |           |   |      |           |   |      |           |  
|Pro forma                                                                                                          |  | $    | 7,775,476 |   |      | 5,916,950 |   |      | 4,534,188 |  
|                                                                                                                   |  |      |           |   |      |           |   |      |           |  
|Basic net income per share:                                                                                        |  |      |           |   |      |           |   |      |           |  
|As reported                                                                                                        |  | $    | 1.51      |   |      | 1.15      |   |      | 0.87      |  
|Pro forma                                                                                                          |  |      | 1.48      |   |      | 1.13      |   |      | 0.86      |  
|Diluted net income per share:                                                                                      |  |      |           |   |      |           |   |      |           |  
|As reported                                                                                                        |  |      | 1.48      |   |      | 1.13      |   |      | 0.86      |  
|Pro forma                                                                                                          |  |      | 1.45      |   |      | 1.11      |   |      | 0.86      |  



| | (i) | 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 realized.



| | (j) | Income Per Share
| | --- | ----------------



Basic net income per share is computed on the weighted average number of shares outstanding in accordance with SFAS No. 128, Earnings Per Share.
Diluted net income per share is computed by dividing net income by weighted average shares outstanding plus common share equivalents resulting from dilutive stock options, determined using the treasury stock method.



| |  |    |  |            
| |  | -- |  | -----------
| |  | 63 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



On October 16, 2003, the Companys board of directors approved a 2 for 1 stock split payable on
November 21, 2003 to shareholders of record on October 31, 2003. All weighted average share and per share information in the accompanying financial statements has been restated to reflect the effect of the additional shares outstanding from the
stock split.



On July 18, 2003, the Companys board of
directors approved a 10% stock dividend payable on August 29, 2003 to shareholders of record on August 8, 2003. All weighted average share and per share information in the accompanying financial statements has been restated to reflect the effect of
the additional shares outstanding from the stock dividend.



On
July 18, 2001, the Companys board of directors approved a 15% stock dividend payable on August 10, 2001 to shareholders of record on August 31, 2001. All weighted average share and per share information in the accompanying financial statements
has been restated to reflect the effect of the additional shares outstanding from the stock dividend.



| | (k) | Other Comprehensive 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
| | --- | -------------------



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 operates as a single segment.



| | (m) | Recent Accounting Pronouncements
| | --- | --------------------------------



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others(FIN 45). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also requires
additional disclosure about the guarantors obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 and the disclosure requirements are effective after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Companys financial condition or results of operations.



FASB Interpretation No. 46, Consolidation of Variable Interest Entities
and Interpretation of ARB No. 51(FIN 46) was issued in January 2003 and was reissued in December 2003 as FASB Interpretation No. 46 (revised December 2003)  (FIN 46R). FIN 46 and FIN 46R establish the criteria for consolidating variable
interest entities. FIN 46 and FIN 46R are effective for fiscal years or interim periods beginning after June 15, 2003, to variable entities that were acquired before February 1, 2003. The adoption of FIN 46 and FIN 46R did not have a material impact
on the Companys financial condition or results of operations.



| |  |    |  |            
| |  | -- |  | -----------
| |  | 64 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities.SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a significant effect on the Companys consolidated financial statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and Equity.SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity,
and imposes certain additional disclosure requirements. The provisions of SFAS No. 150 are generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this standard did not have a significant effect on the Companys consolidated financial statements.



|(2) | Cash and Due From Banks
|--- | -----------------------



The subsidiary bank is required by the Federal Reserve Bank to maintain average daily cash balances. These required balances were $25,000 at December 31,
2003 and 2002, respectively.



| |  |    |  |            
| |  | -- |  | -----------
| |  | 65 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



|(3) | Investment Securities
|--- | ---------------------



A summary of investment securities as of December 31, 2003 and 2002 is as follows:



|                                                 |  |                |             |                      |           |                       |          |   |                      |            
|------------------------------------------------ |  | -------------- | ----------- | -------------------- | --------- | --------------------- | -------- | - | -------------------- | -----------
|                                                 |  | 2003          
|                                                 |  | Amortized cost |             | Grossunrealizedgains |           | Grossunrealizedlosses |          |   | Estimated fair value
|Held to maturity:                                |  |                |             |                      |           |                       |          |   |                      |            
|Obligations of states and political subdivisions |  | $              | 5,437,519   |                      | 312,580   |                       |         |   |                      | 5,750,099  
|                                                 |  |                |             |                      |           |                       |          |   |                      |            
|Available for sale:                              |  |                |             |                      |           |                       |          |   |                      |            
|Obligations of U.S. Government agencies          |  | $              | 51,577,543  |                      | 549,322   |                       | (219,399 | ) |                      | 51,907,466 
|Obligations of states and political subdivisions |  |                | 8,489,952   |                      | 231,692   |                       | (123,071 | ) |                      | 8,598,573  
|Mortgage-backed securities                       |  |                | 62,940,355  |                      | 463,791   |                       | (368,706 | ) |                      | 63,035,440 
|Corporate bonds                                  |  |                | 17,638,375  |                      | 911,512   |                       |         |   |                      | 18,549,887 
|Trust preferred securities                       |  |                | 6,493,053   |                      | 95,884    |                       | (20,561  | ) |                      | 6,568,376  
|Equity securities                                |  |                | 2,734,721   |                      |          |                       |         |   |                      | 2,734,721  
|                                                 |  |                |             |                      |           |                       |          |   |                      |            
|                                                 |  | $              | 149,873,999 |                      | 2,252,201 |                       | (731,737 | ) |                      | 151,394,463
|                                                 |  |                |             |                      |           |                       |          |   |                      |            



|                                                 |  |                |             |                      |           |                       |         |   |                      |            
|------------------------------------------------ |  | -------------- | ----------- | -------------------- | --------- | --------------------- | ------- | - | -------------------- | -----------
|                                                 |  | 2002          
|                                                 |  | Amortized cost |             | Grossunrealizedgains |           | Grossunrealizedlosses |         |   | Estimated fair value
|Held to maturity:                                |  |                |             |                      |           |                       |         |   |                      |            
|Obligations of states and political subdivisions |  | $              | 6,138,889   |                      | 249,914   |                       | (3,152  | ) |                      | 6,385,651  
|                                                 |  |                |             |                      |           |                       |         |   |                      |            
|Available for sale:                              |  |                |             |                      |           |                       |         |   |                      |            
|Obligations of U.S. Government agencies          |  | $              | 49,035,869  |                      | 873,615   |                       | (9,403  | ) |                      | 49,900,081 
|Obligations of states and political subdivisions |  |                | 5,783,464   |                      | 134,478   |                       | (6,373  | ) |                      | 5,911,569  
|Mortgage-backed securities                       |  |                | 55,291,893  |                      | 1,236,823 |                       | (80,480 | ) |                      | 56,448,236 
|Corporate bonds                                  |  |                | 15,868,419  |                      | 862,239   |                       | (3,463  | ) |                      | 16,727,195 
|Trust preferred securities                       |  |                | 2,250,000   |                      |          |                       |        |   |                      | 2,250,000  
|Equity securities                                |  |                | 2,734,721   |                      |          |                       |        |   |                      | 2,734,721  
|                                                 |  |                |             |                      |           |                       |         |   |                      |            
|                                                 |  | $              | 130,964,366 |                      | 3,107,155 |                       | (99,719 | ) |                      | 133,971,802
|                                                 |  |                |             |                      |           |                       |         |   |                      |            



| |  |    |  |            
| |  | -- |  | -----------
| |  | 66 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



The following investments available for sale have an unrealized loss at December 31, 2003 for which
an other than temporary impairment has not been recognized.



|                                                                                                 |  |                      |            |                 |        
|------------------------------------------------------------------------------------------------ |  | -------------------- | ---------- | --------------- | -------
|                                                                                                 |  | Estimated fair value |            | Unrealized loss
|Obligations of U.S. government agencies with an unrealized loss for less than 12 months          |  | $                    | 9,812,461  |                 | 219,399
|Obligations of states and political subdivisions with an unrealized loss for less than 12 months |  |                      | 3,490,204  |                 | 123,071
|Mortgage-backed securities with an unrealized loss for less than 12 months                       |  |                      | 30,495,121 |                 | 368,705
|Trust preferred securities with an unrealized loss for less than 12 months                       |  |                      | 1,459,386  |                 | 20,562 
|                                                                                                 |  |                      |            |                 |        
|                                                                                                 |  | $                    | 45,257,172 |                 | 731,737
|                                                                                                 |  |                      |            |                 |        



At December 31, 2003,
there were seven obligations of U.S. government agencies, eight obligations of states and political subdivisions, 26 mortgage-based securities, and one equity security with an unrealized loss for less than 12 months. The total estimated fair value
of the securities with an unrealized loss at December 31, 2003 represented 98.4% of the book value; therefore, the impairment is not considered severe. While the duration of the impairment is dependent on the market and fluctuating yield curve, 25%
of the duration of the existing unrealized loss could be shortened by the issuing agency calling the securities.



The amortized cost and estimated fair value of securities held to maturity and available for sale, other than equity securities, as of December 31, 2003,
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.



|                                   |  |                             |           |                               |           |               |             |                      |            
|---------------------------------- |  | --------------------------- | --------- | ----------------------------- | --------- | ------------- | ----------- | -------------------- | -----------
|                                   |  | Securities held to maturity |           | Securities available for sale
|                                   |  | Amortizedcost               |           | Estimatedfair value           |           | Amortizedcost |             | Estimated fair value
|One year or less                   |  | $                           | 864,663   |                               | 877,538   |               | 5,525,793   |                      | 5,668,664  
|After one year through five years  |  |                             | 1,104,628 |                               | 1,149,279 |               | 23,895,856  |                      | 24,763,027 
|After five years through ten years |  |                             | 1,969,926 |                               | 2,118,588 |               | 37,217,183  |                      | 37,612,271 
|After ten years                    |  |                             | 1,498,302 |                               | 1,604,694 |               | 11,067,039  |                      | 11,011,964 
|                                   |  |                             |           |                               |           |               |             |                      |            
|                                   |  |                             | 5,437,519 |                               | 5,750,099 |               | 77,705,871  |                      | 79,055,926 
|                                   |  |                             |           |                              
|Mortgage-backed securities         |  |                             |          |                               |          |               | 62,940,355  |                      | 63,035,440 
|                                   |  |                             |           |                               |           |               |             |                      |            
|                                   |  | $                           | 5,437,519 |                               | 5,750,099 |               | 140,646,226 |                      | 142,091,366
|                                   |  |                             |           |                               |           |               |             |                      |            



| |  |    |  |            
| |  | -- |  | -----------
| |  | 67 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



Proceeds from sales of securities available for sale during 2003, 2002, and 2001 were $49,788,193
$14,281,961, and $8,991,600, respectively. Gross realized gains of $253,013 and $228,439 were realized on those sales in 2003 and 2002, respectively, and gross realized losses of $456,338, $21,198, and $20,817, were realized on those sales in 2003,
2002, and 2001, respectively.



Investment securities with a
carrying amount of approximately $102,641,000 and $90,077,000 at December 31, 2003 and 2002, respectively, were pledged to secure public and trust deposits, and for other purposes required by law.



|(4) | Loans
|--- | -----



Loans at December 31, 2003 and 2002 are summarized as follows:



|                                        |  |      |             |      |            
|--------------------------------------- |  | ---- | ----------- | ---- | -----------
|                                        |  | 2003 |             | 2002
|Commercial, financial, and agricultural |  | $    | 56,570,802  |      | 55,807,756 
|Real estate  construction/development  |  |      | 90,302,771  |      | 79,483,205 
|Other loans secured by real estate:     |  |      |             |      |            
|Single-family                           |  |      | 83,680,560  |      | 75,224,104 
|Commercial                              |  |      | 137,516,429 |      | 111,981,495
|Consumer installment                    |  |      | 50,561,549  |      | 49,906,119 
|                                        |  |      |             |      |            
|                                        |  |      | 418,632,111 |      | 372,402,679
|                                        |  |     
|Less allowance for loan losses          |  |      | 7,277,589   |      | 6,534,417  
|                                        |  |      |             |      |            
|                                        |  | $    | 411,354,522 |      | 365,868,262
|                                        |  |      |             |      |            



As of December 31,
2003 and 2002, the Bank had nonaccrual loans aggregating $3,045,260 and $1,896,670, respectively. Interest that would have been recorded on nonaccrual loans had they been in accruing status was approximately $107,000 in 2003, $60,000 in 2002, and
$101,000 in 2001.



At December 31, 2003 and 2002, the Bank had
impaired loans with an outstanding balance of $80,000 and $518,000, respectively, with a related valuation allowance of $40,000 and $155,000 at December 31, 2003 and 2002. The average balance of impaired loans was approximately $80,000, $380,000,
and $847,000 for the years ended December 31, 2003, 2002, and 2001, respectively. The interest recognized on such loans in 2003, 2002, and 2001 was immaterial.



The following is a summary of the activity in the allowance for loan losses for the years ended December 31, 2003, 2002, and 2001:



|                           |  |      |            |   |      |            |   |      |            |  
|-------------------------- |  | ---- | ---------- | - | ---- | ---------- | - | ---- | ---------- | -
|                           |  | 2003 |            |   | 2002 |            |   | 2001 |           
|Balance, beginning of year |  | $    | 6,534,417  |   |      | 5,109,447  |   |      | 4,142,841  |  
|Provision for loan losses  |  |      | 1,694,141  |   |      | 2,414,297  |   |      | 1,824,650  |  
|Charge-offs                |  |      | (1,621,086 | ) |      | (1,626,813 | ) |      | (1,069,925 | )
|Recoveries                 |  |      | 670,116    |   |      | 637,486    |   |      | 211,881    |  
|                           |  |      |            |   |      |            |   |      |            |  
|Balance, end of year       |  | $    | 7,277,588  |   |      | 6,534,417  |   |      | 5,109,447  |  
|                           |  |      |            |   |      |            |   |      |            |  



| |  |    |  |            
| |  | -- |  | -----------
| |  | 68 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



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, 2003:



|                             |  |   |             |  
|---------------------------- |  | - | ----------- | -
|Balance at beginning of year |  | $ | 16,954,593  |  
|New loans                    |  |   | 17,414,322  |  
|Principal repayments         |  |   | (20,865,516 | )
|                             |  |   |             |  
|Balance at end of year       |  | $ | 13,503,399  |  
|                             |  |   |             |  



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, 2003, available
balances on these commitments to these persons aggregated approximately $6,611,000.



|(5) | Premises and Equipment
|--- | ----------------------



Premises and equipment at December 31, 2003 and 2002 are summarized as follows:



|                              |  |      |            |   |      |           
|----------------------------- |  | ---- | ---------- | - | ---- | ----------
|                              |  | 2003 |            |   | 2002
|Land                          |  | $    | 2,399,285  |   |      | 2,278,905 
|Buildings                     |  |      | 11,966,821 |   |      | 10,868,094
|Furniture and equipment       |  |      | 6,704,675  |   |      | 6,513,146 
|                              |  |      |            |   |      |           
|                              |  |      | 21,070,781 |   |      | 19,660,145
|                              |  |     
|Less accumulated depreciation |  |      | (6,820,238 | ) |      | 5,777,158 
|                              |  |      |            |   |      |           
|                              |  | $    | 14,250,543 |   |      | 13,882,987
|                              |  |      |            |   |      |           



Depreciation expense
amounted to $1,279,202, $1,269,893, and $1,122,749 in 2003, 2002, and 2001, respectively.



|(6) | Intangible Assets
|--- | -----------------



Intangible assets at December 31, 2003 and 2002 consist of goodwill of $139,883. Amortization expense of core deposit premium amounted to $106,752 in
2001.



| |  |    |  |            
| |  | -- |  | -----------
| |  | 69 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



|(7) | Commitments
|--- | -----------



The Bank is committed under various operating leases for office space and equipment. At December 31, 2003, minimum future lease payments under
noncancelable real property and equipment operating leases are as follows:



|     |  |   |        
|---- |  | - | -------
|2004 |  | $ | 133,893
|2005 |  |   | 63,610 
|2006 |  |   | 38,460 
|2007 |  |   | 30,700 
|     |  |   |        
|     |  | $ | 266,663
|     |  |   |        



Rent expense for all
building, equipment, and furniture rentals totaled $244,137, $237,171, and $210,801 for the years ended December 31, 2003, 2002, and 2001, 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 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 $106,862,000 and $68,054,000 at December 31, 2003 and 2002, respectively. These commitments are primarily at variable interest rates.



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 above 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) | Deposits
|--- | --------



At December 31, 2003, scheduled maturities of certificates of deposit are as follows:



|                          |  |   |            
|------------------------- |  | - | -----------
|Years ending December 31: |  |   |            
|2004                      |  | $ | 86,720,455 
|2005                      |  |   | 24,762,858 
|2006                      |  |   | 9,198,216  
|2007                      |  |   | 4,373,391  
|2008                      |  |   | 1,527,273  
|Thereafter                |  |   | 446,485    
|                          |  |   |            
|Total                     |  | $ | 127,028,678
|                          |  |   |            



| |  |    |  |            
| |  | -- |  | -----------
| |  | 70 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



|(9) | Borrowings
|--- | ----------



The securities sold under repurchase agreements at December 31, 2003 are collateralized by obligations of the U.S. Government or its corporations and
agencies, state and municipal securities, corporate bonds, or mortgage-backed securities with an aggregate carrying value of $113,853,143, which are held by independent trustees. Under such agreements, the Bank agrees to repurchase identical
securities as those sold. The repurchase agreements at December 31, 2003 mature on demand. The following summarizes pertinent data related to the securities sold under the agreements to repurchase as of and for the years ended December 31, 2003,
2002, and 2001.



|                                            |  |      |            |   |      |            |   |      |            |  
|------------------------------------------- |  | ---- | ---------- | - | ---- | ---------- | - | ---- | ---------- | -
|                                            |  | 2003 |            |   | 2002 |            |   | 2001 |           
|Weighted average borrowing rate at year-end |  |      | 1.26       | % |      | 1.59       | % |      | 1.66       | %
|Average daily balance during the year       |  | $    | 45,108,754 |   |      | 39,540,854 |   |      | 26,916,000 |  
|Maximum month-end balance during the year   |  |      | 50,586,502 |   |      | 48,079,709 |   |      | 35,527,000 |  
|Balance at year-end                         |  |      | 46,556,754 |   |      | 42,987,681 |   |      | 32,456,383 |  



At December 31, 2003,
the Bank had securities sold under agreements to repurchase with one counterparty aggregating approximately $23,559,000.



At December 31, 2003, the Bank and federal funds purchased of $10,412,000.



The Bank has an available line of credit from the Federal Home Loan Bank of Atlanta (FHLB) in an amount not to exceed 10% of
total assets. The line of credit is reviewed annually by the FHLB. The following fixed-rate advances were outstanding under this line at December 31, 2003 and 2002.



|                              |  |      |            |   |      |            |  
|----------------------------- |  | ---- | ---------- | - | ---- | ---------- | -
|                              |  | 2003 |            |   | 2002 |           
|Due December 30, 2003, 1.41%  |  | $    |           |   |      | 5,000,000  |  
|Due March 22, 2010, 6.18%     |  |      | 7,000,000  |   |      | 7,000,000  |  
|Due March 30, 2010, 6.02%     |  |      | 5,000,000  |   |      | 5,000,000  |  
|Due September 29, 2010, 5.82% |  |      | 5,000,000  |   |      | 5,000,000  |  
|Due October 18, 2010, 5.46%   |  |      | 7,000,000  |   |      | 7,000,000  |  
|Due May 2, 2011, 4.80%        |  |      | 6,000,000  |   |      | 6,000,000  |  
|                              |  |      |            |   |      |            |  
|                              |  | $    | 30,000,000 |   |      | 35,000,000 |  
|                              |  |      |            |   |      |            |  
|Weighted average rate         |  |      | 5.65       | % |      | 5.04       | %



The FHLB has the
option to convert the fixed-rate advances to three-month, LIBOR-based floating-rate advances at various dates throughout the terms of the advances.



At December 31, 2003 and 2002, 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.



| |  |    |  |            
| |  | -- |  | -----------
| |  | 71 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



Other borrowed funds at December 31, 2003 and 2002 consist of a treasury, tax, and loan account with
the Federal Reserve Bank of $800,000 and $1,000,000, respectively.



|(10) | Income Taxes
|---- | ------------



Income tax expense (benefit) for the years ended December 31, 2003, 2002, and 2001 consists of the following:



|                         |  |      |           |   |      |           |   |      |           |  
|------------------------ |  | ---- | --------- | - | ---- | --------- | - | ---- | --------- | -
|                         |  | 2003 |           |   | 2002 |           |   | 2001 |          
|Current tax expense:     |  |      |           |   |      |           |   |      |           |  
|Federal                  |  | $    | 4,215,197 |   |      | 3,106,235 |   |      | 2,314,823 |  
|State                    |  |      | 527,162   |   |      | 433,339   |   |      | 214,865   |  
|                         |  |      |           |   |      |           |   |      |           |  
|Total current            |  |      | 4,742,359 |   |      | 3,539,574 |   |      | 2,529,688 |  
|                         |  |      |           |   |      |           |   |      |           |  
|Deferred tax benefit:    |  |      |           |   |      |           |   |      |           |  
|Federal                  |  |      | (658,442  | ) |      | (376,939  | ) |      | (364,064  | )
|State                    |  |      | (100,918  | ) |      | (66,987   | ) |      | (64,128   | )
|                         |  |      |           |   |      |           |   |      |           |  
|Total deferred           |  |      | (759,360  | ) |      | (443,926  | ) |      | (428,192  | )
|                         |  |      |           |   |      |           |   |      |           |  
|Total income tax expense |  | $    | 3,982,999 |   |      | 3,095,648 |   |      | 2,101,496 |  
|                         |  |      |           |   |      |           |   |      |           |  



Income tax expense
differed from the amount computed by applying the statutory Federal corporate tax rate of 35% in 2003 and 34% in 2002 and 2001 to income before income taxes as follows:



|                                                   |  |                         |           |   |      |           |   |      |           |  
|-------------------------------------------------- |  | ----------------------- | --------- | - | ---- | --------- | - | ---- | --------- | -
|                                                   |  | Years ended December 31 |          
|                                                   |  | 2003                    |           |   | 2002 |           |   | 2001 |          
|Computed expected tax expense                    |  | $                       | 4,170,635 |   |      | 3,095,963 |   |      | 2,265,250 |  
|Increase (decrease) resulting from:                |  |                         |           |   |      |           |   |      |           |  
|Tax-exempt interest income                         |  |                         | (265,263  | ) |      | (249,304  | ) |      | (277,385  | )
|Nondeductible interest expense                     |  |                         | 21,359    |   |      | 23,506    |   |      | 38,443    |  
|State income tax, net of Federal tax effect        |  |                         | 277,059   |   |      | 241,792   |   |      | 99,486    |  
|Earnings on cash surrender value of life insurance |  |                         | (113,709  | ) |      | (51,580   | ) |      | (48,505   | )
|Meals, entertainment, and club dues                |  |                         | 34,116    |   |      | 31,622    |   |      | 28,449    |  
|Change in statutory rate                           |  |                         | (77,550   | ) |      |          |   |      |          |  
|Other, net                                         |  |                         | (63,648   | ) |      | 3,649     |   |      | (4,242    | )
|                                                   |  |                         |           |   |      |           |   |      |           |  
|                                                   |  | $                       | 3,982,999 |   |      | 3,095,648 |   |      | 2,101,496 |  
|                                                   |  |                         |           |   |      |           |   |      |           |  



| |  |    |  |            
| |  | -- |  | -----------
| |  | 72 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 31, 2003 and 2002 are presented below:



|                                                            |  |      |           |   |      |            |  
|----------------------------------------------------------- |  | ---- | --------- | - | ---- | ---------- | -
|                                                            |  | 2003 |           |   | 2002 |           
|Deferred tax assets:                                        |  |      |           |   |      |            |  
|Allowance for loan losses                                   |  | $    | 2,633,145 |   |      | 2,238,801  |  
|Deferred compensation                                       |  |      | 566,142   |   |      | 289,113    |  
|Other                                                       |  |      | 30,271    |   |      | 10,042     |  
|                                                            |  |      |           |   |      |            |  
|Total deferred tax assets                                   |  |      | 3,229,558 |   |      | 2,537,956  |  
|                                                            |  |      |           |   |      |            |  
|Deferred tax liabilities:                                   |  |      |           |   |      |            |  
|Depreciation                                                |  |      | (51,214   | ) |      | (118,972   | )
|Unrealized gain on investment securities available for sale |  |      | (516,957  | ) |      | (1,022,528 | )
|                                                            |  |      |           |   |      |            |  
|Total deferred tax liabilities                              |  |      | (568,171  | ) |      | (1,141,500 | )
|                                                            |  |      |           |   |      |            |  
|Net deferred tax asset                                      |  | $    | 2,661,387 |   |      | 1,396,456  |  
|                                                            |  |      |           |   |      |            |  



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.



|(11) | 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,
2003, these deposits totaled approximately $9,000,000.



During
the years ended December 31, 2003, 2002, and 2001, the Bank paid approximately $18,000, $26,000, and $12,000, respectively, in legal fees in the normal course of business to a law firm in which a director is a member.



|(12) | 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.



| |  |    |  |            
| |  | -- |  | -----------
| |  | 73 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



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, 2003, that the Bank meets all capital adequacy requirements to which it is subject.



As of December 31, 2003, 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, 2003 which would affect the bank subsidiarys well capitalized classification.



Actual capital amounts and ratios for the Bank are presented in the table below as of December 31, 2003 and 2002, on a
consolidated basis and for the bank subsidiary individually (dollars in thousands):



|                                                                |  |        |        |       |                              |   |        |                                                              |        |  |      |        |  |       |  |    
|--------------------------------------------------------------- |  | ------ | ------ | ----- | ---------------------------- | - | ------ | ------------------------------------------------------------ | ------ |  | ---- | ------ |  | ----- |  | ---
|                                                                |  | Actual |        |       | For capitaladequacy purposes |   |        | To be wellcapitalized underpromptcorrective actionprovisions
|                                                                |  | Amount |        | Ratio |                              |   | Amount |                                                              | Ratio  |  |      | Amount |  | Ratio
|Georgia Bank Financial Corporation and subsidiary consolidated: |  |        |        |       |                              |   |        |                                                              |        |  |      |        |  |       |  |    
|As of December 31, 2003:                                        |  |        |        |       |                              |   |        |                                                              |        |  |      |        |  |       |  |    
|Total Capital (to risk-weighted assets)                         |  | $      | 58,915 |       | 11.58                        | % |        | $                                                            | 40,689 |  | 8.00 | %      |  | N/A   |  | N/A
|Tier I Capital - risk-based (to risk-weighted assets)           |  |        | 52,546 |       | 10.33                        | % |        |                                                              | 20,344 |  | 4.00 | %      |  | N/A   |  | N/A
|Tier I Capital - leverage (to average assets)                   |  |        | 52,546 |       | 8.40                         | % |        |                                                              | 25,009 |  | 4.00 | %      |  | N/A   |  | N/A
|As of December 31, 2002:                                        |  |        |        |       |                              |   |        |                                                              |        |  |      |        |  |       |  |    
|Total Capital (to risk-weighted assets)                         |  |        | 50,130 |       | 11.40                        | % |        |                                                              | 35,165 |  | 8.00 | %      |  | N/A   |  | N/A
|Tier I Capital - risk-based (to risk-weighted assets)           |  |        | 44,623 |       | 10.15                        | % |        |                                                              | 17,583 |  | 4.00 | %      |  | N/A   |  | N/A
|Tier I Capital - leverage (to average assets)                   |  |        | 44,623 |       | 7.96                         | % |        |                                                              | 22,429 |  | 4.00 | %      |  | N/A   |  | N/A



| |  |    |  |            
| |  | -- |  | -----------
| |  | 74 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



|                                                      |  |        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|----------------------------------------------------- |  | ------ | ------ | ----- | ---------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                                      |  | Actual |        |       | For capitaladequacy purposes |   |        | To be wellcapitalized underprompt correctiveaction provisions |       
|                                                      |  | Amount |        | Ratio |                              |   | Amount |                                                               | Ratio  |  |      | Amount |  | Ratio |       
|Georgia Bank & Trust Company:                         |  |        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|As of December 31, 2003:                              |  |        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|Total Capital (to risk-weighted assets)               |  | $      | 55,204 |       | 10.89                        | % |        | $                                                             | 40,561 |  | 8.00 | %      |  | $     | 50,701 |  | 10.00 | %
|Tier I Capital - risk-based (to risk-weighted assets) |  |        | 48,855 |       | 9.64                         | % |        |                                                               | 20,280 |  | 4.00 | %      |  |       | 30,421 |  | 6.00  | %
|Tier I Capital - leverage (to average assets)         |  |        | 48,855 |       | 7.83                         | % |        |                                                               | 24,945 |  | 4.00 | %      |  |       | 31,182 |  | 5.00  | %
|As of December 31, 2002:                              |  |        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|Total Capital (to risk-weighted assets)               |  |        | 48,386 |       | 11.05                        | % |        |                                                               | 35,034 |  | 8.00 | %      |  |       | 43,792 |  | 10.00 | %
|Tier I Capital - risk-based (to risk-weighted assets) |  |        | 42,899 |       | 9.80                         | % |        |                                                               | 17,517 |  | 4.00 | %      |  |       | 26,275 |  | 6.00  | %
|Tier I Capital - leverage (to average assets)         |  |        | 42,899 |       | 7.67                         | % |        |                                                               | 22,363 |  | 4.00 | %      |  |       | 27,954 |  | 5.00  | %



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.



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 2004 is approximately $3,978,000, subject to maintenance of the minimum capital requirements. As a result of this restriction, at December 31, 2003, approximately $46,021,000
of the Parent Companys investment in its subsidiary was restricted from transfer in the form of dividends.



|(13) | 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, 2003, 2002, and 2001, the Bank contributed $523,197, $437,238, and $437,238, respectively, to the Plan, which is 5% of the annual salary of all eligible employees for 2003, 2002, and 2001.



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 $207,835, $143,729, and $185,438 during 2003, 2002, and 2001, respectively, related to this plan.



| |  |    |  |            
| |  | -- |  | -----------
| |  | 75 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



|(14) | Stock Option Plan
|---- | -----------------



During 2000, the Bank adopted the 2000 Long-Term Incentive Plan (the 2000 Plan) which allows for stock option awards for up to 100,000 shares of the
Companys common stock to key employees of the Bank. Under the provisions of the 2000 Plan, the option price is determined by a committee of the board of directors at the time of grant and may not be less than 100% of the fair market value of
the common stock on the date of grant of such option. When granted, these options vest over a five-year period. All options must be exercised within a ten-year period.



The following table summarizes activity in the 2000 Plan by shares under option and weighted average exercise price per
share:



|                                        |  |         |  |                      |      
|--------------------------------------- |  | ------- |  | -------------------- | -----
|                                        |  | Shares  |  | Exercise price/share
|Options outstanding  December 31, 2000 |  | 31,625  |  | $                    | 9.63 
|Granted in 2001                         |  | 13,915  |  |                      | 13.30
|                                        |  |         |  |                      |      
|Options outstanding  December 31, 2001 |  | 45,540  |  |                      | 10.75
|Granted in 2002                         |  | 79,200  |  |                      | 15.05
|                                        |  |         |  |                      |      
|Options outstanding  December 31, 2002 |  | 124,740 |  |                      | 13.48
|Granted in 2003                         |  | 64,300  |  |                      | 22.36
|                                        |  |         |  |                      |      
|Options outstanding  December 31, 2003 |  | 189,040 |  | $                    | 16.50
|                                        |  |         |  |                      |      



The following options
are exercisable at December 31, 2003:



|       |  |                |      
|------ |  | -------------- | -----
|Shares |  | Exercise price
|12,650 |  | $              | 9.63 
|2,784  |  |                | 13.30
|       |  |                |      
|15,434 |  |                |      
|       |  |                |      



| |  |    |  |            
| |  | -- |  | -----------
| |  | 76 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



The following table summarizes information about options outstanding under the 2000 Plan at December
31, 2003:



|                                     |  |                                                  |  |                |      
|------------------------------------ |  | ------------------------------------------------ |  | -------------- | -----
|Numberoutstanding atDecember 31,2003 |  | Weightedaverageremainingcontractuallife in years |  | Exercise price
|31,625                               |  | 6.4                                              |  | $              | 9.63 
|13,915                               |  | 7.2                                              |  |                | 13.30
|79,200                               |  | 8.1                                              |  |                | 15.05
|36,300                               |  | 9.1                                              |  |                | 19.32
|28,000                               |  | 9.8                                              |  |                | 26.30
|                                     |  |                                                  |  |                |      
|189,040                              |  |                                                  |  |                |      
|                                     |  |                                                  |  |                |      



SFAS No. 123,
Accounting for Stock-Based Compensation, encourages but does not require entities to compute the fair value of options at the date of grant and to recognize such costs as compensation expense immediately if there is no vesting period or
ratably over the vesting period of the options. The Bank has chosen not to adopt the cost recognition principles of this statement.



The fair value of each option grant is estimated on the date of grant using a minimum value option price assessment with weighted average assumptions used
and estimated fair values as follows:



|                                       |  |      |          |   |      |   |          |      |  |   |          |  
|-------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                       |  | 2003 |          |   | 2002 |   |          | 2001 | 
|Options granted                        |  |      | 64,300   |   |      |   | 79,200   |      |  |   | 13,915   |  
|Risk-free interest rate                |  |      | 4.13     | % |      |   | 3.82     | %    |  |   | 4.92     | %
|Dividend yield                         |  |      | 0.00     | % |      |   | 0.00     | %    |  |   | 0.00     | %
|Expected life at date of grant         |  |      | 10 years |   |      |   | 10 years |      |  |   | 10 years |  
|Volatility                             |  |      | 38.59    | % |      |   | 23.02    | %    |  |   | 23.93    | %
|Weighted average grant-date fair value |  | $    | 12.85    |   |      | $ | 6.42     |      |  | $ | 6.17     |  



| |  |    |  |            
| |  | -- |  | -----------
| |  | 77 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



|(15) | Other Operating Expenses
|---- | ------------------------



Components of other operating expenses exceeding 1% of total revenues include the following for the years ended December 31, 2003, 2002, and 2001:



|                                           |  |      |           |      |         |      |        
|------------------------------------------ |  | ---- | --------- | ---- | ------- | ---- | -------
|                                           |  | 2003 |           | 2002 |         | 2001
|Marketing and business development expense |  | $    | 1,034,022 |      | 728,122 |      | 684,095
|Processing expense                         |  |      | 1,062,784 |      | 946,217 |      | 809,504
|Legal and professional fees                |  |      | 588,492   |      | 578,970 |      | 331,349
|Communication expense                      |  |      | 346,026   |      | 345,090 |      | 293,741
|Office supplies expense                    |  |      | 445,990   |      | 409,771 |      | 408,053
|Postage and courier                        |  |      | 374,305   |      | 359,885 |      | 360,735



|(16) | Condensed Financial Statements of Georgia Bank Financial Corporation (Parent Only)
|---- | ----------------------------------------------------------------------------------



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



Condensed Balance Sheets



|                                                                                                                   |  |             |            |   |      |            |  
|------------------------------------------------------------------------------------------------------------------ |  | ----------- | ---------- | - | ---- | ---------- | -
|                                                                                                                   |  | December 31 |           
|                                                                                                                   |  | 2003        |            |   | 2002 |           
|Assets                                                                                                             |  |             |            |   |      |            |  
|                                                                                                                   |  |            
|Cash and due from banks                                                                                            |  | $           | 1,110,631  |   |      | 99,550     |  
|Investment securities available for sale                                                                           |  |             | 500,000    |   |      | 500,000    |  
|Investment in subsidiary                                                                                           |  |             | 49,998,947 |   |      | 45,024,241 |  
|Premises and equipment, net                                                                                        |  |             | 1,079,469  |   |      | 1,124,269  |  
|Due from subsidiary                                                                                                |  |             | 1,000,000  |   |      |           |  
|                                                                                                                   |  |             |            |   |      |            |  
|                                                                                                                   |  | $           | 53,689,047 |   |      | 46,748,060 |  
|                                                                                                                   |  |             |            |   |      |            |  
|Stockholders Equity                                                                                               |  |             |            |   |      |            |  
|                                                                                                                   |  |            
|Stockholders equity:                                                                                              |  |             |            |   |      |            |  
|Common stock, $3.00 par value; 10,000,000 shares authorized; 5,284,746 shares issued; 5,247,204 shares outstanding |  | $           | 15,854,238 |   |      | 14,424,306 |  
|Additional paid-in capital                                                                                         |  |             | 34,337,584 |   |      | 23,374,772 |  
|Retained earnings                                                                                                  |  |             | 3,001,079  |   |      | 7,471,434  |  
|Treasury stock, at cost; 37,542 shares                                                                             |  |             | (507,360   | ) |      | (507,360   | )
|Accumulated other comprehensive income                                                                             |  |             | 1,003,506  |   |      | 1,984,908  |  
|                                                                                                                   |  |             |            |   |      |            |  
|                                                                                                                   |  | $           | 53,689,047 |   |      | 46,748,060 |  
|                                                                                                                   |  |             |            |   |      |            |  



| |  |    |  |            
| |  | -- |  | -----------
| |  | 78 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



Condensed Statements of Income



|                                                                    |  |                         |           |      |           |   |      |           |  
|------------------------------------------------------------------- |  | ----------------------- | --------- | ---- | --------- | - | ---- | --------- | -
|                                                                    |  | Years ended December 31 |          
|                                                                    |  | 2003                    |           | 2002 |           |   | 2001 |          
|Income:                                                             |  |                         |           |      |           |   |      |           |  
|Dividends from subsidiary                                           |  | $                       | 2,000,000 |      |          |   |      |          |  
|Interest income on investment securities                            |  |                         | 139       |      | 302       |   |      | 461       |  
|Miscellaneous income                                                |  |                         | 91,200    |      | 91,200    |   |      | 91,200    |  
|Investment securities gains                                         |  |                         |          |      |          |   |      | 2,125     |  
|                                                                    |  |                         |           |      |           |   |      |           |  
|                                                                    |  |                         | 2,091,339 |      | 91,502    |   |      | 93,786    |  
|                                                                    |  |                         |           |      |           |   |      |           |  
|Expense:                                                            |  |                         |           |      |           |   |      |           |  
|Occupancy expense                                                   |  |                         | 44,800    |      | 44,800    |   |      | 44,800    |  
|Other operating expense                                             |  |                         | 69,546    |      | 72,181    |   |      | 80,829    |  
|                                                                    |  |                         |           |      |           |   |      |           |  
|                                                                    |  |                         | 114,346   |      | 116,981   |   |      | 125,629   |  
|                                                                    |  |                         |           |      |           |   |      |           |  
|Income (loss) before equity in undistributed earnings of subsidiary |  |                         | 1,976,993 |      | (25,479   | ) |      | (31,843   | )
|                                                                    |  |                         |          
|Equity in undistributed earnings of subsidiary                      |  |                         | 5,956,108 |      | 6,035,604 |   |      | 4,592,847 |  
|                                                                    |  |                         |           |      |           |   |      |           |  
|Net income                                                          |  | $                       | 7,933,101 |      | 6,010,125 |   |      | 4,561,004 |  
|                                                                    |  |                         |           |      |           |   |      |           |  



| |  |    |  |            
| |  | -- |  | -----------
| |  | 79 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



Condensed Statements of Cash Flows



|                                                                                            |  |                         |            |   |      |            |   |      |            |  
|------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | ---------- | - | ---- | ---------- | -
|                                                                                            |  | Years ended December 31 |           
|                                                                                            |  | 2003                    |            |   | 2002 |            |   | 2001 |           
|Cash flows from operating activities:                                                       |  |                         |            |   |      |            |   |      |            |  
|Net income                                                                                  |  | $                       | 7,933,101  |   |      | 6,010,125  |   |      | 4,561,004  |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |                         |            |   |      |            |   |      |            |  
|Depreciation                                                                                |  |                         | 44,800     |   |      | 44,800     |   |      | 44,800     |  
|Equity in undistributed earnings of subsidiary                                              |  |                         | (5,956,108 | ) |      | (6,035,604 | ) |      | (4,592,847 | )
|Net investment securities gains                                                             |  |                         |           |   |      |           |   |      | (2,125     | )
|Decrease in other liabilities                                                               |  |                         |           |   |      | (2,435     | ) |      | (27,016    | )
|Decrease in due from subsidiary                                                             |  |                         | (1,000,000 | ) |      |           |   |      |           |  
|                                                                                            |  |                         |            |   |      |            |   |      |            |  
|Net cash provided by (used in) operating activities                                         |  |                         | 1,021,793  |   |      | 16,886     |   |      | (16,184    | )
|                                                                                            |  |                         |            |   |      |            |   |      |            |  
|Cash flows from investing activities:                                                       |  |                         |            |   |      |            |   |      |            |  
|Proceeds from sales and maturities of available for sale securities                         |  |                         |           |   |      |           |   |      | 16,639     |  
|                                                                                            |  |                         |            |   |      |            |   |      |            |  
|Cash flows from financing activities:                                                       |  |                         |            |   |      |            |   |      |            |  
|Cash paid for fractional shares                                                             |  |                         | (10,712    | ) |      |           |   |      | (8,519     | )
|                                                                                            |  |                         |            |   |      |            |   |      |            |  
|Net increase (decrease) in cash and cash equivalents                                        |  |                         | 1,011,081  |   |      | 16,886     |   |      | (8,064     | )
|                                                                                            |  |                         |           
|Cash and cash equivalents at beginning of year                                              |  |                         | 99,550     |   |      | 82,664     |   |      | 90,728     |  
|                                                                                            |  |                         |            |   |      |            |   |      |            |  
|Cash and cash equivalents at end of year                                                    |  | $                       | 1,110,631  |   |      | 99,550     |   |      | 82,664     |  
|                                                                                            |  |                         |            |   |      |            |   |      |            |  



| |  |    |  |            
| |  | -- |  | -----------
| |  | 80 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



|(17) | 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.



| | (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.



| |  |    |  |            
| |  | -- |  | -----------
| |  | 81 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



| | (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, due to their short-term nature, approximate their fair values. The carrying amount of related accrued interest payable approximates its fair value.



| | (e) | Federal Funds Sold 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 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.



| | (h) | Commitments
| | --- | -----------



The carrying values and fair values of commitments to extend credit are not significant.



The carrying amounts and estimated fair values of the Banks financial instruments at December 31, 2003 and 2002 are as
follows:



|                                                                        |  |                |             |                      |             |                |             |                      |            
|----------------------------------------------------------------------- |  | -------------- | ----------- | -------------------- | ----------- | -------------- | ----------- | -------------------- | -----------
|                                                                        |  | December 31   
|                                                                        |  | 2003           |             | 2002                
|                                                                        |  | Carryingamount |             | Estimated fair value |             | Carryingamount |             | Estimated fair value
|Financial assets:                                                       |  |                |             |                      |             |                |             |                      |            
|Cash and cash equivalents                                               |  | $              | 15,721,884  |                      | 15,721,884  |                | 17,150,691  |                      | 17,150,691 
|Investment securities                                                   |  |                | 156,831,982 |                      | 157,144,562 |                | 140,110,691 |                      | 140,357,452
|Loans, net                                                              |  |                | 425,401,602 |                      | 426,238,058 |                | 390,164,860 |                      | 391,398,355
|Financial liabilities:                                                  |  |                |             |                      |             |                |             |                      |            
|Deposits                                                                |  |                | 483,951,802 |                      | 484,835,675 |                | 439,556,701 |                      | 440,654,462
|Federal funds purchased and securities sold under repurchase agreements |  |                | 56,968,754  |                      | 56,968,754  |                | 42,987,681  |                      | 42,987,681 
|Other borrowed funds                                                    |  |                | 800,000     |                      | 800,000     |                | 1,000,000   |                      | 1,000,000  
|Advances from FHLB                                                      |  |                | 30,000,000  |                      | 26,174,543  |                | 35,000,000  |                      | 36,895,966 



| |  |    |  |            
| |  | -- |  | -----------
| |  | 82 |  | (Continued)



---

##### Table of Contents

GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001



|(18) | Quarterly Financial Data (Unaudited)
|---- | ------------------------------------



The supplemental quarterly financial data for the years ended December 31, 2003 and 2002 is summarized as follows:



|                               |  |                |           |              |           |                   |           |                   |          
|------------------------------ |  | -------------- | --------- | ------------ | --------- | ----------------- | --------- | ----------------- | ---------
|                               |  | Quarters ended
|                               |  | March 31,2003  |           | June 30,2003 |           | September 30,2003 |           | December 31, 2003
|Interest income                |  | $              | 7,913,202 |              | 8,077,123 |                   | 8,127,958 |                   | 8,218,259
|Interest expense               |  |                | 2,590,817 |              | 2,552,705 |                   | 2,317,809 |                   | 2,223,830
|Net interest income            |  |                | 5,322,385 |              | 5,524,418 |                   | 5,810,149 |                   | 5,994,829
|Provision for loan losses      |  |                | 474,750   |              | 431,805   |                   | 218,833   |                   | 568,753  
|Noninterest income             |  |                | 3,209,591 |              | 3,948,084 |                   | 4,306,754 |                   | 3,058,059
|Noninterest expense            |  |                | 5,236,997 |              | 5,986,927 |                   | 6,741,647 |                   | 5,598,457
|Net income                     |  |                | 1,852,187 |              | 1,976,974 |                   | 2,096,630 |                   | 2,007,310
|Net income per share  basic   |  |                | 0.35      |              | 0.38      |                   | 0.40      |                   | 0.38     
|Net income per share  diluted |  |                | 0.35      |              | 0.37      |                   | 0.39      |                   | 0.37     



|                               |  |                |           |              |           |                   |           |                   |          
|------------------------------ |  | -------------- | --------- | ------------ | --------- | ----------------- | --------- | ----------------- | ---------
|                               |  | Quarters ended
|                               |  | March 31,2002  |           | June 30,2002 |           | September 30,2002 |           | December 31, 2002
|Interest income                |  | $              | 7,537,000 |              | 7,731,353 |                   | 8,040,750 |                   | 8,061,345
|Interest expense               |  |                | 2,869,237 |              | 2,782,054 |                   | 2,810,886 |                   | 2,697,876
|Net interest income            |  |                | 4,667,763 |              | 4,949,299 |                   | 5,229,864 |                   | 5,363,469
|Provision for loan losses      |  |                | 669,990   |              | 414,828   |                   | 789,096   |                   | 540,383  
|Noninterest income             |  |                | 2,449,626 |              | 2,637,584 |                   | 3,112,625 |                   | 3,387,382
|Noninterest expense            |  |                | 4,580,679 |              | 4,928,727 |                   | 5,050,462 |                   | 5,717,674
|Net income                     |  |                | 1,260,720 |              | 1,457,328 |                   | 1,660,931 |                   | 1,631,146
|Net income per share  basic   |  |                | 0.24      |              | 0.28      |                   | 0.32      |                   | 0.31     
|Net income per share  diluted |  |                | 0.24      |              | 0.27      |                   | 0.31      |                   | 0.31     



| |  |    |  |            
| |  | -- |  | -----------
| |  | 83 |  | (Continued)



---

##### Table of Contents

Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosures



None.



Item 9A. Controls and Procedures



As of the end of the period covered by this report, our management, including our Chief Executive Officer and Chief Operating Officer (who serves as the
Companys principal financial officer), reviewed and evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the
Companys Chief Executive Officer and Chief Operating Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated
subsidiaries) that is required to be included in the Companys periodic filings with the Securities and Exchange Commission. There have been no significant changes in the Companys internal controls or, to managements knowledge, in
other factors that could significantly affect those internal controls subsequent to the date management carried out its evaluation, and there have been no corrective actions with respect to significant deficiencies or material weaknesses.



PART III



Item 10: Directors and Executive Officers of the Registrant



The Company has adopted a Code of Ethics applicable to its senior financial
officers. A copy is attached to this report as an exhibit. The remaining information in response to this item is incorporated by reference to the Companys definitive Proxy Statement for use in connection with the 2004 annual meeting of
shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 30, 2004).



Item 11: 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 2004
annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 30, 2004).



84



---

##### Table of Contents

Item 12: Security Ownership of Certain Beneficial Owners and Management



The following table provides information regarding compensation plans under
which equity securities of the Company are authorized for issuance. All data is presented as of December 31, 2003.



Equity Compensation Plan Table



|                                                           |  |                                                                                              |  |                                                                               |  |                                                                                                                                           
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|Plan Category                                              |  | Number of securities to beissued upon exercise ofoutstanding
options,warrants and rights (a) |  | Weighted-average exerciseprice of outstanding options, warrants andrights (b) |  | Number of securitiesremaining available forfuture issuance
underequity compensation plans(excluding securitiesreflected in column (a)) (c)
|Equity compensation plans approved by security holders     |  | 189,040                                                                                      |  | 16.50                                                                         |  | 63,960                                                                                                                                    
|Equity compensation plans not approved by security holders |  |                                                                                              |  |                                                                               |  |                                                                                                                                           
|                                                           |  |                                                                                              |  |                                                                               |  |                                                                                                                                           
|Total                                                      |  | 189,040                                                                                      |  | 16.50                                                                         |  | 63,960                                                                                                                                    
|                                                           |  |                                                                                              |  |                                                                               |  |                                                                                                                                           



Additional information
in response to this item is incorporated by reference to the Companys definitive Proxy Statement for use in connection with the 2004 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later
than April 30, 2004).



Item 13: 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 2004 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the commission not later than April 30, 2004).



Item 14. Principal Accountant Fees and Services



Information in response to this item is incorporated by reference to the
Companys definitive Proxy Statement for use in connection with the 2004 annual meeting of shareholders (which definitive Proxy Statement shall be filed with the Commission not later than April 30, 2004).



PART IV



Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K



| | (a) (1) | See Item 8 for a list of the financial statements as filed as a part of this report.
| | ------- | ------------------------------------------------------------------------------------



| | (2) | No financial statement schedules are applicable as the required information is included in the financial statements in Item 8.
| | --- | ------------------------------------------------------------------------------------------------------------------------------



85



---

##### Table of Contents

| | (3) | The following exhibits are filed as part of this report:
| | --- | --------------------------------------------------------



Exhibit No. and Document



|     |  |                                                                                                                                                                             
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Articles of Incorporation of the Company (Incorporated by reference to 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)                                                                         
|     | 
|10.1 |  | Blanton Employment Contract (Incorporated by reference to the Companys Annual Report on Form 10-K, filed on March 29, 2001)                                                
|     | 
|10.2 |  | Thigpen Employment Contract (Incorporated by reference to the Companys Annual Report on Form 10-K, filed on March 29, 2001)                                                
|     | 
|10.3 |  | 2000 Long Term Incentive Plan (Incorporated by reference to the Companys definitive Proxy Statement, filed on March 29, 2001)                                              
|     | 
|11.1 |  | Statement Re: Computation of Net Income Per Share                                                                                                                           
|     | 
|14.1 |  | Code of Ethics                                                                                                                                                              
|     | 
|21.1 |  | Subsidiaries of the Company                                                                                                                                                 
|     | 
|31.1 |  | Certification by the Chief Executive Officer (principal executive officer)                                                                                                  
|     | 
|31.2 |  | Certification by the Chief Operating Officer (principal financial officer)                                                                                                  
|     | 
|32.1 |  | Certification by the Chief Executive Officer and Chief Operating Officer                                                                                                    



| | (b) | Reports on Form 8-K
| | --- | -------------------



None.



86



---

##### Table of Contents

SIGNATURES



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



GEORGIA BANK FINANCIAL CORPORATIONBy:

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




March 12, 2004



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.



March 12, 2004



|                                                 |  |                                                                                                            
|------------------------------------------------ |  | -----------------------------------------------------------------------------------------------------------
|SIGNATURE                                        |  | TITLE                                                                                                      
|/s/ Robert W. Pollard, Jr.Robert W. Pollard, Jr. |  | Chairman of the Board, and Director                                                                        
|                                                 | 
|/s/ Edward G. MeybohmEdward G. Meybohm           |  | Vice Chairman of the Board and Director                                                                    
|                                                 | 
|/s/ R. Daniel BlantonDaniel Blanton              |  | President, Chief Executive Officer and Director (Principal Executive Officer)                              
|                                                 | 
|/s/ Ronald L. ThigpenRonald L. Thigpen           |  | Executive Vice President, Chief Operating Officer (Principal Financial and Accounting Officer) and Director
|                                                 | 
|/s/ William J. Badger                            |  | Director                                                                                                   
|William J. Badger                                |  |                                                                                                            



87



---

##### Table of Contents

|                                                   |  |         
|-------------------------------------------------- |  | --------
|                                                   | 
|/s/ Warren A. DanielWarren A. Daniel               |  | Director
|                                                   | 
|/s/ Randolph R. Smith, M.D.Randolph R. Smith, M.D. |  | Director
|                                                   | 
|/s/ John W. Trulock, Jr.John W. Trulock, Jr.       |  | Director



88



---

##### Table of Contents

EXHIBIT INDEX



|    |  |          |  |                                                                                                                                                                              |  |    
|--- |  | -------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|    |  | Page    
|    |  |         
|(a) |  | Exhibits |  |                                                                                                                                                                             
|    |  |          | 
|    |  | 3.1      |  | Articles of Incorporation of the Company (Incorporated by reference to the Companys registration statement on Form SB-2 filed August 20, 1997 (Registration No. 333-34037)) |  |    
|    |  |          | 
|    |  | 3.3      |  | Bylaws of the Company (Incorporated by reference to the Companys Form 10-SB, dated April 29, 1994)                                                                          |  |    
|    |  |          | 
|    |  | 10.4     |  | Blanton Employment Contract (Incorporated by reference to the Companys Annual Report on Form 10-K, filed on March 29, 2001)                                                 |  |    
|    |  |          | 
|    |  | 10.5     |  | Thigpen Employment Contract (Incorporated by reference to the Companys Annual Report on Form 10-K, filed on March 29, 2001)                                                 |  |    
|    |  |          | 
|    |  | 10.6     |  | 2000 Long Term Incentive Plan (Incorporated by reference to the Companys definitive Proxy Statement, filed on March 29, 2001)                                               |  |    
|    |  |          | 
|    |  | 11.1     |  | Statement Re: Computation of Net Income Per Share                                                                                                                            |  | 90 
|    |  |          | 
|    |  | 14.1     |  | Code of Ethics                                                                                                                                                               |  | 91 
|    |  |          | 
|    |  | 21.1     |  | Subsidiaries of the Company                                                                                                                                                  |  | 96 
|    |  |          | 
|    |  | 31.1     |  | Certification by the Chief Executive Officer (principal executive officer)                                                                                                   |  | 97 
|    |  |          | 
|    |  | 31.2     |  | Certification by the Chief Operating Officer (principal financial officer)                                                                                                   |  | 99 
|    |  |          | 
|    |  | 32.1     |  | Certification by the Chief Executive Officer and Chief Operating Officer                                                                                                     |  | 101



89