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

                                  FORM 10-KSB

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

(Mark One)

X    Annual report pursuant to section 13 or 15(d) of the Securities Exchange 
Act of 1934 (Fee Required) for the fiscal year ended December 31, 1996 or

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

                        Commission File Number 0-24172
                                               -------

                      GEORGIA BANK FINANCIAL CORPORATION
            (Exact Name of Registrant as Specified in its Charter)

GEORGIA                                                     58-2005097
-------                                                     ----------
(State or Other Jurisdiction                                (I.R.S. Employer
of Incorporation or Organization                            Identification No.)

3530 Wheeler Road
Augusta, Georgia                                            30909
----------------                                            -----
(Address of Principal 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 12(g) of the Act:

                    Common Stock, par value $3.00 per share

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

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

     Issuer's revenues for its most recent fiscal year. $15,440,979.

     The number of shares outstanding of the Registrant's Common Stock, as of 
March 15, 1997 was 1,542,368.

     The aggregate market value of the voting stock held by non-affiliates of 
the Registrant at March 15, 1997, based on the last sale price of $19.50 per 
share on such date was approximately $14,138,806.

     Transitional Small Business Disclosure Format (check one): Yes     No  X
                                                                    ---    ---

<PAGE>
 
                                    PART I


ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

     Georgia Bank Financial Corporation (the "Company") is a Georgia bank
holding company with total consolidated assets of $216.0 million, total deposits
of $195.7 million, and total stockholders' equity of $16.3 million at December
31, 1996.  Through its wholly owned subsidiary, Georgia Bank & Trust Company
(the "Bank"), the Company operates a total of seven banking offices in the
greater Augusta area of Richmond and Columbia Counties, Georgia.

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

     The Bank was organized by a group of local citizens from Richmond and
Columbia Counties and commenced business from its 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 1992 as a result of its holding company reorganization.  The Company
acquired FCS Financial Corporation and First Columbia Bank ("First Columbia") on
December 31, 1992.  This allowed the Company to expand into neighboring Columbia
County.  In July 1993, First Columbia merged into the Bank, and the Bank now
operates the former main office of First Columbia at 4105 Columbia Road,
Martinez, Georgia, as a branch.  The Bank opened an additional branch in
Columbia County in November 1994 that is located in Evans, Georgia.  In October
1995, the Bank opened its sixth banking office at 3133 Washington Road.  In July
1996, the Bank opened a seventh location in a newly constructed Wal-Mart
SuperCenter located at 3209 Deans Bridge Road.  This second location in the
heavily populated and consumer/retail oriented southern section of Richmond
County is anticipated to provide additional opportunities for consumer loans and
retail deposits.

     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, Patrick
G. Blanchard, its Executive Vice President and Senior Lending Officer, R. Daniel
Blanton, and its Chief Operations Officer, Patricia E. Leopard, have worked
together for over eight years with the Bank and before that with First Union
Bank of Georgia and its predecessor, Georgia State Bank for a period of 12
years.  With the acquisition of First Columbia, the Bank obtained its Chief
Financial 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 Bank and its predecessors.  J. Pierce Blanchard Jr., Group Vice
President-Branch 

                                       1
<PAGE>
 
Administration,. joined the team in 1994. He previously served for six years as
President of Citizens Bank & Trust Company in Evans, Georgia, and had prior
experience with First Union and its predecessor, Georgia Railroad Bank & Trust
Company.

MARKET AREA

     The Bank's market area includes Richmond and Columbia Counties and is
centered in West Augusta. This area represents a significant portion of the
Augusta-Aiken metropolitan area.  Aiken-Augusta is one of 313 metropolitan
statistical areas (MSA) in the United States and its 1995 population of 453,209
ranked 104th in the nation.  Between 1990 and 1995, the population increased
9.1%.  The Augusta market area has a diversified economy based principally on
health care, education, government, military, manufacturing, wholesale and
retail trade concerns. Augusta is one of the leading medical centers in the
Southeast with more than 25,000 people employed in the medical community.
Significant medical facilities include the Medical College of Georgia, the
University Hospital, Veteran's Administration Hospital, Dwight D. Eisenhower
Hospital, Gracewood State School and Hospital, Humana 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), Federated Paper
Board Company (bleached paper board manufacturer), Thermal Ceramics (insulating
material manufacturer), President Baking Company (cookie manufacturer), John P.
King Manufacturing (textile manufacturer) and Club Car (golf car manufacturer).
The area is served by Interstate 20, which connects it to Atlanta 140 miles to
the west and Columbia, South Carolina, 70 miles to the east.  Augusta is also
served by a major commercial airport (Bush Field) and a commuter airport (Daniel
Field).  The average unemployment rate for the first three quarters of 1996 for
the Augusta-Aiken MSA was 6.6% compared to 4.6% for the state of Georgia.
Between June 1989 and June 1996, total commercial bank and thrift deposits in
Richmond County increased 7.4% from $1,803 million to $1,936 million, and total
commercial bank and thrift deposits in Columbia County increased 50.6% from $229
million to $345 million.  The demographic information as presented above is
based upon information and estimates provided by the Selig Center for Economic
Growth at the University of Georgia and the Federal Deposit Insurance
Corporation.

LENDING ACTIVITIES

     General.  The Bank offers a range of lending services, including real
estate, commercial and consumer loans, to individuals and small to medium-sized
businesses and professionals that are located in, or conduct a substantial
portion of their business in, the Bank's market area.  The Bank's total loans at
December 31, 1996, were $135.2 million, or 69.7% of total 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."

     Real Estate Loans.  Loans secured by real estate are the primary component
of the Bank's loan portfolio, constituting $83.9 million, or 62.1% of the Bank's
total loans, at December 31, 1996.  These loans consist of commercial real
estate loans, construction and development loans and residential real estate
loans, but exclude home equity loans, which are classified as consumer loans.
See "Lending Activities Consumer Loans."

                                       2
<PAGE>
 
     At December 31, 1996, the Bank held $48.4 million of commercial real estate
loans of various sizes secured by office buildings, retail establishments, and
other types of property.  Loan terms are limited to five years and often do not
exceed three years, although the installment payments may be structured on a 15-
year amortization basis.  Interest rates may be fixed or adjustable, and tend to
be fixed in the case of three-year term loans and adjustable in the case of
five-year term loans.  The Bank generally charges an origination fee.
Management attempts to reduce credit risk in the commercial real estate
portfolio by emphasizing loans on owner-occupied office and retail buildings
where the loan-to-value ratio, established by independent appraisals, does not
exceed 80%.  In addition, the Bank typically requires personal guarantees from
the principal owners of the property supported with an analysis by the Bank of
the guarantors' personal financial statements.  A number of the loans classified
as commercial real estate loans are, in fact, commercial loans for which a
security interest in real estate has been taken as additional collateral.  These
loans are subject to underwriting as commercial loans as described below.  The
Bank experienced net loan charge offs on commercial real estate loans of $133.9
thousand during 1996 and no charge offs in 1995.

     Construction and Development Loans.  Construction and development real
estate loans comprise $10.8 million, or 8.0% of the Bank's total loans at
December 31, 1996.  Of this segment, only $2.7 million, or 2.0% of total loans,
are development loans.  These are generally used to finance the development of
residential subdivision infrastructures. The remaining $8.1 million, or 6.0% of
total loans, represent residential construction loans.

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

     To further reduce the risk related to construction and development loans
generally, the Bank relies upon the long-standing relationship between its loan
officers (particularly R. Daniel Blanton) on the one hand and the developer and
contractor borrowers, on the other.  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., manages a lumber manufacturing company; E. G. Meybohm, owns a
prominent real estate brokerage firm; Larry S. Prather, owns a utility and
grading company and William J. Badger owns and operates a lumber company.
Through these connections to the industry, the Bank attempts to monitor current
economic conditions in the market place for residential real estate, and the
financial standing and on-going reputation of its construction and development
borrowers.

     Infrastructure development loans are generally made with an initial
maturity of one year, although the Bank may renew the loan for up to two
additional one-year terms to allow the developer to complete the sale of the
lots comprising the property before requiring the payment of the related loan.
These loans typically bear interest at a floating rate and the Bank typically
charges an origination fee.  

                                       3
<PAGE>
 
These loans are repaid, interest only, on a monthly or quarterly basis until
sales of lots begin, and then principal reductions 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 net loan charge offs on these
loans of $37,000 during 1996 and no losses during 1995.

     Residential construction loans are typically made for homes with a
completed value in the range of $110,000 to $250,000.  Loans for the lower-value
homes are typically made for a term of 6 months, while loans for the larger
homes are typically made for a term of 9 to 12 months.  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 to allow the contractor time to
market the home.  In order to reduce the credit risk with respect to these
loans, the Bank:  restricts the loans that are made for homes being built on a
speculative basis; carefully manages its aggregate lending relationship with
each borrower; and requires approval of the Loan Committee of the Board of
Directors to lend more than $300,000 in the aggregate to any borrower and its
related interests.

     Residential Loans.  The Bank originates, on a selective basis, residential
loans for its portfolio on single-and multi-family properties, both owner-
occupied and non-owner-occupied.  At December 31, 1996, the Bank held $24.6
million of such loans (exclusive of home equity loans), representing 18.2% of
the Bank's loan portfolio, as compared to $25.7 million, or 21.0% of the Bank's
loan portfolio at December 31, 1995.  The growth in this portfolio is due to the
relative importance of residential real estate lending in the Columbia County
market.  This portfolio includes, typically 15 or 25-year adjustable rate
mortgage loans whose terms mirror those prevalent in the secondary market for
mortgage loans or, less typically, floating rate non-amortized term loans for
purposes other than acquisition of the underlying residential property.

     The Bank also originates residential loans for sale into the secondary
market, an activity that began with the acquisition of First Columbia and its
mortgage operations.  The Bank originates both fixed and variable rate
residential mortgage loans for sale with servicing released.  Loans originated
for sale into the secondary market are approved for purchase by an investor
prior to closing and the Bank takes no credit or interest rate risk with respect
to these loans.  The Bank generates loan origination fees, typically ranging
from 1.0% to 1.5% of the loan balance, and servicing release fees, generally
ranging from 0.25% to 0.75% of the loan balance, both of which are recognized as
income when the loan is sold.  The Bank limits interest rate and credit risk on
these loans by locking the interest rate for each loan with the secondary
investor and receiving the investor's underwriting approval prior to originating
the loan.

     Commercial Loans.  The Bank makes loans for commercial purposes in various
lines of businesses.  At December 31, 1996, the Bank held $32.1 million of these
loans, representing 23.7% of the loan portfolio, excluding for these purposes
commercial loans secured by real estate.  See "Lending Activities - Real
Estate."  Equipment loans are made for a term of up to five years (more
typically three years) at fixed or variable rates, with the loan being fully
amortized over the term and secured by the financed equipment with a loan-to-
value ratio of 80% or less.  Working capital loans are made for a term typically
not exceeding one year.  These loans are usually secured by accounts receivable
or inventory, and principal is either repaid as the assets securing the loan are
converted into cash, or principal is due at 

                                       4
<PAGE>
 
maturity. The Bank experienced net loan charge-offs on commercial loans of
$70,000 during 1996 and $72,000 during 1995.

     Consumer Loans.  The Bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment and
term loans, home equity loans and lines of credit and revolving lines of credit
such as credit cards.  At December 31, 1996, the Bank held $19.2 million of
consumer loans, representing 14.2% of total loans.  These loans typically carry
balances of less than $25,000 and earn interest at a fixed rate.  Non-revolving
loans are either amortized over a period not exceeding 48 months or are ninety-
day term loans.  Revolving loans require monthly payments of interest and a
portion of the principal balance (typically 2-3% of the outstanding balance).
In the case of home equity loans and lines of credit, the underwriting criteria
are the same as applied by the Bank when making a first mortgage loan, as
described above.  Home equity lines of credit typically expire ten years after
their origination.  The Bank experienced net loan charge offs on consumer loans
of $96,000 during 1996 and $19,000 during 1995.

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

     The Bank has a continuous loan review procedure involving multiple officers
of the Bank which is designed to promote early identification of credit quality
problems.  All loan officers are charged with the responsibility of rating all
their loans exceeding $25,000 and reviewing those loans on a periodic basis, the
frequency of which increases as the quality of the loans decreases.  The Bank's
Senior Credit Officer is charged with the responsibility of ensuring that all
loans or lines of credit of $200,000 and above are reviewed annually.  In
addition, the Senior Credit Officer is involved in the analysis and approval of
all loans that require Officers' Loan Committee approval.

DEPOSITS

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

                                       5
<PAGE>
 
                                  DEPOSIT MIX

<TABLE>
<CAPTION>
                                           At December 31,
                                   1996          1995         1994
                                   -----         -----        ----- 
<S>                               <C>            <C>         <C>
   Non-interest bearing demand     17.02%         17.11%      16.14%
   Interest checking               12.24          12.06       16.36
   Market rate investment          10.86          10.23       11.99
   Savings                         22.26          12.76        4.34
   Time Deposits                                           
       Under $100,000              21.71          27.15       31.29
       $100,000 and over           15.91          20.69       19.88
                                  ------         ------      ------
                                  100.00%        100.00%     100.00%
                                  ------         ------      ------
</TABLE>

     The Bank accepts deposits at its main office and six branch banking
offices, each of which maintains an automated teller machine. The Bank is a
member of the "HONOR" network of automated teller machines, which permits Bank
customers to perform certain transactions in major cities throughout Georgia and
other regions. The Bank controls deposit volumes primarily through the pricing
of deposits and to a certain extent through promotional activities such as "free
checking." In 1995 and 1994, the Bank adjusted the rates it paid on its interest
checking deposits downward to be more nearly in line with its competition,
resulting in a shift in its deposit base from interest checking accounts to time
deposits as customers sought the higher rates available in certificates of
deposit. This continued in 1996 and a significant shift to savings occurred when
the bank promoted a variable rate account tied to the prime rate. Deposit rates
are set weekly by senior management of the Bank. Management believes that the
rates it offers are competitive with or, in some cases, slightly above those
offered by other institutions in the Bank's market area. The Bank does not
actively solicit deposits outside of its market area.

COMPETITION

     The banking business generally is highly competitive, and sources of
competition are varied.  The Bank competes as a financial intermediary with
other commercial banks, savings and loan associations, credit unions, mortgage
banking companies, consumer finance companies, securities brokerages, insurance
companies, and money market mutual funds operating in Columbia and Richmond
Counties and elsewhere.

     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 regional
interstate banking laws by various states in the southeastern region, there have
been major interstate acquisitions involving Augusta financial institutions
which have offices in the Company's market area but are headquartered in other
southeastern states.  The effect of such acquisitions (and the possible increase
in size of the financial institutions in the Company's market areas) may be to
increase further the competition faced by the Company.  The Company believes,
however, that it will be able to 

                                       6
<PAGE>
 
use its local independent image to its advantage in competing for business from
certain Augusta individuals and businesses.

EMPLOYEES

     The Company had approximately 118 full-time equivalent employees at
December 31, 1996.

SUPERVISION AND REGULATION

     The Company and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions on, and provide
for general regulatory oversight with respect to, virtually all aspects of
operations.  These laws and regulations are generally intended to protect
depositors, not stockholders.  To the extent that the following summary
describes statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions.  Any change in
applicable laws or regulations may have a material effect on the business and
prospects of the Company.  Beginning with the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and
following with the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), which was enacted in 1991, numerous additional regulatory
requirements have been placed on the banking industry and additional changes
have been proposed.  The operations of the Company and the Bank may be affected
by legislative changes and the policies of various regulatory authorities.  The
Company is unable to predict the nature or the extent of the effect on its
business and earnings that fiscal or monetary policies, economic control, or new
federal or state legislation may have in the future.

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

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

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

     In addition, and subject to certain exceptions, the BHCA and the Change in
Bank Control Act, together with regulations thereunder, require Federal Reserve
approval (or, depending on the circumstances, no notice of disapproval) prior to
any person or company acquiring "control" of a bank holding company, such as the
Company.  Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company.  In the case

                                       7
<PAGE>
 
of the Company, under Federal Reserve regulations, control will be rebutably
presumed to exist if a person acquires at least 10% of the outstanding shares of
any class of voting securities once the Company registers the Common Stock under
the Exchange Act.  The regulations provide a procedure for challenge of the
rebutable control presumption.

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

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

The Bank
--------

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

     Under FDICIA, all insured institutions must undergo regular on-site
examination by their appropriate banking agency.  The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate.  Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency (and state supervisor when applicable).
FDICIA also directs the FDIC to develop with other appropriate agencies a method
for insured depository institutions to provide supplemental disclosure of the

                                       8
<PAGE>
 
estimated fair market value of assets and liabilities, to the extent feasible
and practicable, in any balance sheet, financial statement, report of condition
or any other report of any insured depository institution.  FDICIA also requires
the federal banking regulatory agencies to prescribe, by regulation, standards
for all insured depository institutions and depository institution holding
companies relating, among other things, to:  (i) internal controls, information
systems, and audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; and (v) asset quality.

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

     Branching.  In addition to the main office, the Bank currently has four
branches in Richmond County and two branches in Columbia County.  Under current
Georgia law, effective July 1, 1996 banks may branch into three additional
counties besides the county in which their principal office is located.  If the
Bank is part of a bank holding company, all affiliates would be treated as one
and the holding company would be limited to three counties.  Effective July 1,
1998 all intra state branching restrictions will be removed.  Although the Bank
currently has no definitive plans for opening any other branch offices,
depending on profitability and community needs, other branches may be
considered.  The Company, with prior regulatory approval, will be permitted to
acquire interest in and operate banks throughout the State of Georgia.  Under
Georgia law, any bank acquired by the Company could be merged into the Bank and
its offices could then be operated as branches of the Bank.  There are currently
no definitive plans for the Company to make any such acquisition, but the
Company remains open to such acquisitions as part of its strategic growth plan.

     The BHCA, as amended by the interstate banking provisions of the Riegle-
Neal Interstate Banking and Branch Efficiency Act of 1994 ("Interstate Banking
Act"), which became effective on September 29, 1995, repealed the prior
statutory restrictions on interstate acquisitions of banks y bank holding
companies, such that the Company and any other bank holding company located in
Georgia may now acquire a bank located in any other state, and any bank holding
company located outside Georgia may lawfully acquire any bank based in another
state, regardless of state law to the contrary, in either case subject to
certain deposit-percentage, aging requirements, and other restrictions.  The
Interstate Banking Act also generally provides that, after June 1, 1997,
national and state-chartered banks may branch interstate through acquisitions of
banks in other states.  By adopting legislation prior to that date, a state has
the ability either to "opt in" and accelerate the date after which interstate
branching is permissible or "opt out" and prohibit interstate branching
altogether.  In March 1996, the Georgia legislature adopted legislation opting
into interstate branching which will permit such mergers after June 1, 1997.
The Georgia legislation also 

                                       9
<PAGE>
 
provides that an out-of-state bank may not enter the State of Georgia through a
de novo branch, nor may it enter through the acquisition of less than
substantially all of the assets of an existing bank.

     Community Reinvestment Act.  The Community Reinvestment Act requires that,
each insured depository institution shall be evaluated by its primary federal
regulator with respect to its record in meeting the credit needs of its local
community, including low and moderate income neighborhoods, consistent with the
safe and sound operation of those institutions.  These factors are also
considered in evaluating mergers, acquisitions, and applications to open a
branch or facility.  The Bank received a satisfactory rating in its most recent
evaluation.

     Other Regulations.  Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates.  The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves, the Equal Credit Opportunity
Act prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit, the Fair Credit Reporting Act of 1978 governing the
use and provision of information to credit reporting agencies, the Fair Debt
Collection Act governing the manner in which consumer debts may be collected by
collection agencies, and the rules and regulations of the various federal
agencies charged with the responsibility of implementing such federal laws.  The
deposit operations of the Bank also are subject to the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds Transfer Act and
Regulation E issued by the Federal Reserve Board to implement that act, which
governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.

     FDICA directs that each federal banking regulatory agency prescribe
standards for depository institutions and depository institution holding
companies relating to internal controls, information systems, internal audit
system, loan documentation, credit underwriting, interest rate exposure, asset
growth compensation, a maximum ratio of classified assets to capital, minimum
earnings sufficient to absorb losses, a minimum ratio of market value to book
value for publicly traded shares, and such other standards as the agency deems
appropriate.  FDICIA also contains a variety of other provisions that my affect
the operations of the Company and the Bank, including new reporting
requirements, regulatory standards for estate lending, "truth in savings"
provisions, the requirement that a depository institution give 90 days prior
notice to customers and regulatory authorities before closing any branch, and a
prohibition on the acceptance or renewal of brokered deposits by depository
institutions that are not well capitalized or are adequately capitalized and
have not received a waiver from FDIC.

Enforcement Policies and Actions
--------------------------------

     FIRREA and subsequent federal legislation significantly increased the
enforcement authorities of the FDIC and other federal depository institution
regulators, and authorizes the imposition of civil money penalties up to $1
million per day.  Persons who are affiliated with depository institutions can be
removed from any office held in such institution and banned for life from
participating in the affairs of any such 

                                       10
<PAGE>
 
institution. The banking regulators have not hesitated to use the new
enforcement authorities provided under FIRREA.

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

     The deposits of the Bank are currently insured to a maximum of $100,000 per
depositor, subject to certain aggregation rules.  The FDIC establishes rates for
the payment of premiums by federally insured banks and thrifts for deposit
insurance.  Separate insurance funds (BIF and SAIF) are maintained for
commercial banks and thrifts, with insurance premiums from the industry used to
offset losses from insurance payouts when banks and thrifts fail.  Due to the
high rate of failures in recent years, the fees that commercial banks and
thrifts pay to BIF and SAIF have increased, and the FDIC has adopted a risk-
based deposit insurance premium system for all insured depository institutions,
including the Bank, which requires that a depository institution pay to BIF or
SAIF from $.04 to $.31 per $100 of insured deposits depending on its capital
levels and risk profile, as determined by its primary federal regulator on a
semiannual basis.

     In 1995, the FDIC declared the BIF fully funded, and assessments were
suspended on certain financial institutions until further notice.  The
assessment for the Bank was suspended through December 1996 under this ruling;
however, in 1996 the Bank was notified that assessments will be reinstated in
1997.  Because the Bank's risk classification is the lowest allowable, the Bank
will not be required to pay an assessment for deposit insurance in 1997.  The
Bank will be required to pay a premium for the new "Financing Corporation (FICO)
payment" which is a result of the Deposit Insurance Act of 1996.  The annual
amount of this premium is $.01296 of insured deposits.  This assessment is
subject to change.  Any increase in deposit insurance premiums for the Bank will
increase its cost of funds, and there can be no assurance that such cost can be
passed on to the Bank's customers.

Dividends
---------

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

     Cash dividends on the Bank's common stock may be declared and paid only out
of its retained earnings, and dividends may not be declared at any time at which
the Bank's paid-in capital and appropriated retained earnings do not, in
combination, equal at least 20% of its capital stock account.  In addition, the
Department's current rules and regulations require prior Department approval
before cash dividends may be declared and paid if:  (i) the Bank's ratio of
equity capital to adjusted total assets is less than 6%; (ii) the aggregate
amount of dividends declared or anticipated to be declared in that calendar year
exceeds 50% of the Bank's net profits, after taxes but before dividends, for the
previous calendar year; or (iii) the percentage of the Bank's assets classified
as adverse as to repayment or recovery by the Department at the most recent
examination of the Bank exceeds 80% of the Bank's equity capital as reflected at
such examination.

                                       11
<PAGE>
 
     Under FDICIA, the Bank may not pay a cash dividend if, after paying the
dividend, the Bank would be undercapitalized.  See "Capital Regulations" below.

     The Company's Board of Directors declared a 15% stock dividend to holders
of the Company's Common Stock on record as of September 4, 1996.  The dividend
was payable on September 25,1996.

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

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

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

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

     FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution of bank failures.  The new capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized."  To qualify as a "well capitalized" institution, a bank 

                                       12
<PAGE>
 
must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no
less than 6%, and a total risk-based capital ratio of no less than 10%, and the
bank must not be under any order or directive from the appropriate regulatory
agency to meet and maintain a specific capital level. As of December 31, 1996,
the Company and the Bank were qualified as "well-capitalized." See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital."

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

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

     FDICIA requires the federal banking regulators to revise the risk-based
capital standards to provide for explicit consideration of interest-rate risk,
concentration of credit risk, and the risks of non-traditional activities.  It
is uncertain what affect these regulations, when implemented, would have on the
Company and the Bank.

     Both the Company and the Bank exceeded their respective regulatory capital
requirements at December 31, 1996.  See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital."

Recent Legislative Developments
-------------------------------

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

     The Economic Growth and Regulatory Paperwork Reduction Act of 1996 was
enacted in September 1996.  This Act primarily provided arrangements for the
recapitalization of the SAIF and regulatory relief for bank holding companies in
several significant areas.  Bank holding companies that also owned savings
associations and were therefor subject to regulation by the Office of Thrift
Supervision ("OTS") as savings and loan holding companies were relieved of such
duplicative regulation, and neither future acquisitions of savings associations
by bank holding companies nor mergers of savings associations into banks will
any longer require application to and approval by the OTS.  Acquisitions by
well-capitalized and well-managed bank holding companies of companies engaging
in permissible nonbanking activities (other than savings association) may now be
made with only 12 days prior notice to the Federal 

                                       13
<PAGE>
 
Reserve, and de novo engagement in such activities by such bank holding
companies may be commenced without prior notice and with only subsequent notice
to the Federal Reserve. The same legislation also gave regulatory relief to
banks in regard to corporate governance, branching, disclosure (under the Real
Estate Settlement Procedures Act and the Truth in Lending Act) and other
operational areas.

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

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

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

Fiscal and Monetary Policy
--------------------------

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

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

ITEM 2. DESCRIPTION OF PROPERTY

     The Company currently operates a main office, six branches and an
operations center. The principal administrative offices of the Company are
located at 3530 Wheeler Road, Augusta, Georgia. 

                                       14
<PAGE>
 
The main office and four branch offices are located in Augusta, Georgia, one
branch is located in Martinez, Georgia and one branch is located in Evans,
Georgia. With the exception of the Fury's Ferry and the Wal-Mart branches each
banking office is a brick building of Georgian architecture with a teller line,
customer service area, offices for the Bank's lenders, drive-in teller lanes, a
vault with safe deposit boxes, and a walk-up or drive-up automated teller
machine. The banking offices are generally 3,000 - 5,000 square foot buildings
except for the main office and the Fury's Ferry Branch. The main office contains
approximately 14,000 square feet of space. The Fury's Ferry branch contains
1,800 square feet with all the facilities of the other branches except safe
deposit boxes. The Wal-Mart branch, located inside the Wal-Mart SuperCenter,
contains 517 square feet and provides teller, customer service and lending
areas. An automated teller machine is also located on the premises. The 5,000
square foot operations center is located in Grovetown, Georgia.

     The Company has expanded its automated teller machine network to include
two drive-up machines located in major retail shopping areas and has also
located four walk-up machines in convenience/gasoline outlets.

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

ITEM 3. LEGAL PROCEEDINGS

     In the ordinary course of business, the Company is a party to various legal
proceedings.  In the opinion of management, there is no proceeding pending or,
to the knowledge of management, threatened in which an adverse decision could
result in a material adverse change in the business or assets of the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     There were no matters submitted to a vote of the shareholders of the
Company during the fourth quarter of 1996.

                                       15
<PAGE>
 
                                    PART II

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

     As of March 15, 1997, there were approximately 502 holders of record of the
Company's Common Stock.  As of March 25, 1997, 1,542,368 shares of Common Stock
were issued and outstanding.  Transactions in the Company's Common Stock
generally are negotiated through J. C. Bradford & Company.  The following table
reflects the range of quotations  from J. C Bradford & Company since the fourth
quarter of 1995 when they began making a market in the Company's stock:

                GEORGIA BANK FINANCIAL CORPORATION STOCK PRICE *

<TABLE>
<CAPTION>
          QUARTER ENDED                             LOW       HIGH   
          -------------                             ---       ----   
          <S>                                       <C>       <C>     
          December 31, 1995                         13 1/4    15  
          March 31, 1996                            13 7/8    15 5/8  
          June 30, 1996                             14 1/4    16 3/8  
          September 30, 1996**                      16 1/16   16 5/8  
          December 31, 1996                         17 1/4    17 1/2   
</TABLE>

          *    The prices reflect inter-dealer prices, without retail markup,
               mark-down or commission and may not represent actual
               transactions. No formal market existed for the Company's stock
               prior to the fourth quarter of 1995.
          **   The Company issued a 15% stock dividend on September 25, 1996

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

     Cash dividends on the Bank's common stock may be declared and paid only out
of its retained earnings, and dividends may not be declared at any time at which
the Bank's paid-in capital and appropriated retained 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: (i)
the Bank's ratio of equity capital to adjusted total assets is less than 6%;
(ii) the aggregate amount of dividends declared or anticipated to be declared in
that calendar year exceeds 50% of the Bank's net profits, after taxes but before
dividends, for the previous calendar year; or (iii) the percentage of the Bank's
loans classified as adverse as to repayment or recovery by the Department at the
most recent examination of the bank exceeds 80% of the Bank's equity capital as
reflected at such examination.

     The Company's Board of Directors declared a 15% stock dividend to holders
of the Company's Common Stock on record as of September 4, 1996.  The dividend
was payable on September 25, 1996.  All per share information has been restated
to reflect the effect of this dividend.

                                       16
<PAGE>
 
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

OVERVIEW

     During 1996, management of the Company continued to emphasize the dual
objectives of asset growth and the improvement of earnings performance.
Following the acquisition of FCS Financial Corporation in December 1992 and the
merger of the two resulting subsidiary banks in 1993, it was important to
achieve the economies anticipated by the merger. In 1994, the Company continued
its expansion in Columbia County by extensively renovating the Martinez Office
and constructing a new branch in Evans, Georgia.  This expansion provided
additional access to an attractive customer base that will help sustain the
future growth of the Company.  In 1995, the Company took advantage of an
opportunity to open its sixth office in a heavily concentrated retail and
residential area of West Augusta, - a strategic location to help complete its
geographic positioning in the Metro Augusta market. The Company continued its
expansion in the market in 1996 with the opening of the Wal-Mart branch in a
newly constructed 230,000 square foot Wal-Mart SuperCenter located in the
southern portion of Richmond County.

RESULTS OF OPERATIONS

     The Company had record net income of  $1,952,000 in 1996 , compared to
$1,405,000 in 1995, an increase of 39%.  The 1995 earnings of $1,405,000 were a
26% increase above 1994 earnings of $1,118,000.

     The improvement in 1996 earnings resulted primarily from increased levels
of net interest income and non-interest income - specifically service charges
and fees on deposits.  The increase in net interest income was the result of
balance sheet growth with the resulting higher levels of earning assets. Net
interest income grew 13.8% in 1996 on a net interest margin of 4.62%, a decline
from the net interest margin of 4.78% in 1995.  Non-interest income increased
$736,000 (52.0%) in 1996 to $2.2 million compared to $1.4 million in 1995.

     The earnings performance of the Company is reflected in a return on average
assets and average equity of 0.97% and 12.65%, respectively, during 1996
compared to 0.82% and 10.23%, respectively, in 1995.  The return on average
assets and average equity was 0.73% and 9.44% in 1994.  Earnings per share
improved to  $1.27 in 1996 compared to $0.91 in 1995.  The Company's average
equity to average asset ratio decreased to 7.64% from 8.00% the previous year as
a result of an increase in average assets of 17.6%.  The average equity to
average asset ratio was 7.83% for 1994.  The Company did not pay any cash
dividends in 1996 or 1995. The Company declared a 15% stock dividend on
September 4, 1996, payable on September 25, 1996.

     The improved earnings of the Company represent, in part, the continued
leveraging of the Company's and the Bank's investment in additional offices
during prior years; these offices are maturing and  generating higher asset and
deposit levels.  In addition, the reduction of the Company's long-term debt
resulted in lower interest expense, which also contributed to the improved
earnings.

                                       17
<PAGE>
 
NET INTEREST INCOME/MARGINS

     The primary source of revenue 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 earning assets and interest-bearing liabilities, average
yields earned and rates paid on those respective balances, and the resulting
interest income and expense for the periods indicated:

<TABLE> 
<CAPTION> 

                              AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES                                             
                                                                                                                                   
                                YEAR ENDED DECEMBER 31, 1996        YEAR ENDED DECEMBER 31, 1995      YEAR ENDED DECEMBER 31, 1994 
                             -------------------------------------------------------------------------------------------------------
                               AVERAGE    AVERAGE   AMOUNT PAID    AVERAGE    AVERAGE     AMOUNT     AVERAGE    AVERAGE     AMOUNT 
                               AMOUNT     YIELD OR   OR EARNED     AMOUNT     YIELD OR    PAID OR    AMOUNT     YIELD OR    PAID OR
                                            RATE                                RATE      EARNED                  RATE      EARNED  
                             -------------------------------------------------------------------------------------------------------
                                                               (Amounts in thousands, except yields and rates)                      
<S>                          <C>          <C>       <C>            <C>        <C>         <C>        <C>        <C>         <C> 
ASSETS:                                                                                                                             
Loans......................    $128,592   9.70%       $12,470      $113,977    10.12%     $11,530    $102,166    9.16%       $9,355 
Investments                                                                                                                         
  Taxable..................      43,863   6.36%         2,788        31,795     6.50%       2,068      24,723    5.84%        1,443 
  Tax-free.................       1,635   4.71%            77         1,583     4.30%          68       1,545    3.95%           61 
Interest-bearing deposits                                                                                              
  with banks...............          --     --             --            --       --           (2)         66    4.55%            3 
Federal funds sold.........       5,615   6.09%           342         5,479     6.61%         362       5,133    4.27%          219 
                               --------               -------      --------               -------    --------               ------- 
  Total earning assets.....     179,705   8.72%        15,677       152,834     9.18%      14,026     133,633    8.30%       11,081 
                               --------               -------      --------               -------    --------               -------
Cash and due from banks....      11,139                               9,148                             7,416                       
Premises and equipment.....       8,799                               8,375                             7,626                       
Other................             3,759                               2,643                             3,764                       
Allowance for loan losses..      (1,441)                             (1,267)                           (1,269)                      
                               --------                            --------                          --------                       
  Total assets.............    $201,961                            $171,733                          $151,170                       
                               ========                            ========                          ========                       
                                                                                                                                    
LIABILITIES AND SHAREHOLDERS' EQUITY:      
Interest-bearing transaction      
  accounts.................    $ 20,454   2.54%        $  520      $ 19,314     2.73%     $   528    $ 26,185    2.72%      $   713 
Savings, MMA...............      55,661   4.38%         2,436        30,674     4.00%       1,226      23,596    2.78%          657 
Certificates...............      74,048   5.67%         4,196        78,953     5.96%       4,705      65,828    4.31%        2,841 
Federal funds purchased/          
  Repurchase agreements....       1,068   4.12%            44           486     5.56%          27         404    3.47%           14 
Other borrowings...........       2,713   6.52%           177         4,198     5.76%         242       2,629    5.43%          143 
                               --------               -------       -------               -------    --------               ------- 
  Total interest-bearing                                      
  liabilities..............     153,944   4.79%         7,373       133,625     5.03%       6,728     118,642    3.68%        4,368 
                               --------               -------       -------               -------    --------               ------- 
Demand deposits............      31,253                              23,623                            19,685                       
Other liabilities..........       1,338                                 745                             1,001                       
Shareholders' equity.......      15,426                              13,740                            11,842                       
                               --------                             -------                          --------                       
  Total Liabilities and 
    shareholders' equity...    $201,961                            $171,733                          $151,170                       
                               ========                            ========                          ========                       
                                                                                                                                    
Net interest spread........               3.93%                                  4.15%                           4.62%              
Benefit of non-interest 
  sources..................               0.69%                                  0.63%                           0.41%              
Net interest margin/income.               4.62%       $ 8,304                    4.78%     $7,298                5.03%       $6,713 
                                                      =======                             =======                           ======= 
</TABLE>

     Net interest income was $8.3 million for 1996, a 13.8% increase from 1995.
Net interest income increased as a result of an increase in the volume of
average earning assets, which was offset partially by a decrease in the rate on
those earning assets.  Earning assets averaged $179.7 million in 1996, an
increase of 17.6% from 1995. Average rates on earning assets decreased to 8.72%
from 9.18% in 1995.  These decreases were due primarily to a declining interest
rate environment and competitive pressures in the pricing of loans.

                                       18
<PAGE>
 
     A key performance measure for net interest income is the "net interest
margin", or net interest income divided by the average interest-earning assets.
Unlike "net interest spread", net interest margin is affected by the level of
non-interest sources of  funding used to support earning assets.  The Company's
net interest margin decreased to 4.62% in 1996 from 4.78% in 1995.  In 1994, the
net interest margin was 5.03%.  The net interest margin decreased as the average
rate earned on earning assets declined at a faster rate than the decline in the
average rate paid on interest-bearing liabilities and the amount of earning
assets increased more that the amount of interest-bearing liabilities.
Increased competition in the local market for both loans and deposits also
negatively impacted the net interest margin.  The net interest margin was
assisted, however, by an increasing amount of demand deposits which function as
a non-interest source of funds.

     Changes in net interest income from period to period result from increases
or decreases in volume of interest-earning assets and interest-bearing
liabilities, increases or decreases in the average rates earned and paid on such
assets and liabilities, the ability to manage the earning asset portfolio, and
the availability of particular sources of funds, such as non-interest bearing
deposits.  The table:  "Analysis of Changes in Net Interest Income" which
follows indicates the changes in the Company's net interest income as a result
of changes in volume and rate from 1995 to 1996, 1994 to 1995, and 1993 to 1994.
The analysis of changes in net interest income included in the following table
indicates that on an overall basis in 1996, positive changes in the balances or
volumes of the interest-earning assets had a greater impact on the increase in
interest income than the negative changes in yields and rates applicable to
those balance sheet accounts which served to reduce interest income, and the
positive changes in the balances or volume of the interest bearing liability
categories had a greater impact on the increase in interest expense than did
negative changes in yields and rates which served to reduce interest expense.
In 1995, positive changes in the balances or volumes of the interest earning
assets and in the yields contributed to the increase in interest income, and
interest expense increased as a result of both positive changes in the balances
or volume of and the rates paid on of interest-bearing liabilities.

                                       19
<PAGE>
 
                  ANALYSIS OF CHANGES IN NET INTEREST INCOME

<TABLE> 
<CAPTION> 
                                 YEAR ENDED DECEMBER 31,       YEAR ENDED DECEMBER 31,         YEAR ENDED DECEMBER 31,    
                                          1996                          1995                            1994             
                                   COMPARED WITH 1995             COMPARED WITH 1994              COMPARED WITH 1993     
                                    VARIANCES DUE TO               VARIANCES DUE TO                VARIANCES DUE TO      
                              -------------------------------------------------------------------------------------------- 
                                                 RATE/                              RATE/                              RATE/
                                VOLUME   RATE   VOLUME   TOTAL    VOLUME   RATE    VOLUME   TOTAL    VOLUME   RATE    VOLUME   TOTAL
                              ----------------  --------------- ----------------  ----------------  ---------------  ---------------
                                                                       (AMOUNTS IN THOUSANDS)
<S>                           <C>      <C>       <C>    <C>        <C>     <C>     <C>     <C>       <C>     <C>      <C>    <C>
INTEREST INCOME FROM EARNING ASSETS:
Loans....................      $1,479  ($478)    ($61)  $  940     $1,082  $  981  $113    $2,176    $1,004  $  325   $  40  $1,369
Investments, taxable.....         785    (45)     (17)     723        413     163    47       623        (4)     48       0      44
Investments, tax-free....           2      6        0        8          2       5     0         7        38      (9)     (9)     20
Interest-bearing deposits                                                                                                          
    with banks...........           0      0        0        0         (4)     (4)    4        (4)       (7)     (1)      0        
Federal funds sold.......           9    (28)      (1)     (20)        15     120     8       143       (88)    137     (54)    (54)
                              --------------------------------- ----------------------------------  --------------------------------
    Total                      $2,275  ($545)    ($79)  $1,651     $1,508  $1,265  $172    $2,945    $  943  $  500    ($23)  1,420
                              --------------------------------- ----------------------------------  --------------------------------

INTEREST EXPENSE ON INTEREST BEARING LIABILITIES:
Interest-bearing transaction   
    accounts.............      $   31   ($37)     ($2)     ($8)     ($188) $    2   ($2)    ($188)    ($207)   ($76)  $  16   ($2**)
Savings and market rate
    investments..........         999    116       95    1,210        196     287    86       569        82     (14)     (2)
Certificates and other time
    deposits.............        (293)  (229)      14     (508)       565   1,086   216     1,867       612     (61)    (16)     5**
Federal funds purchased..          32     (7)      (9)      16          3       8     2        13       (12)     36     (27)     (3)
Other borrowings.........         (86)    32      (11)     (65)        85       9     5        99      (172)    (52)     26    (198)
                              --------------------------------- ----------------------------------  --------------------------------
    Total................      $  683  ($125)   $  87   $  645     $  661  $1,392  $307    $2,360    $  303   ($167)    ($3) $  133
                              --------------------------------- ----------------------------------  --------------------------------

CHANGE IN NET INTEREST INCOME.  .  .  .                 $1,006                               $585                            $1,2**
                                                        =======                            =======                           =======
</TABLE>

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

NON-INTEREST INCOME

     Non-interest income for 1996 was $2.2 million, an increase of $736,000 from
1995.  The increase is attributable to a 50.7% increase in service charges on
deposit accounts resulting from a higher volume of deposits and increases in the
overall pricing of accounts.  A decrease in losses on investment securities of
$21,000 also contributed to the increase in non-interest income.  The following
table presents the principal components of non-interest income for the last
three years.

                                       20
<PAGE>
 
                              NON-INTEREST INCOME

<TABLE>
<CAPTION>
                                                                                            YEAR ENDED DECEMBER 31,
                                                                                 ------------------------------------------
                                                                                       1996           1995          1994
                                                                                 -----------------  ------------  ---------
                                                                                 (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
                 <S>                                                             <C>                <C>           <C> 
                 Service charges on deposit accounts...........................          $2,150        $1,427        $1,014
                 Investment securities gains...................................               0           (21)         (117)
                 Other.........................................................               1             8             3
                                                                                 -----------------  ------------  ---------
                      Total non-interest income................................          $2,151        $1,414        $  900
                                                                                 =================  ============  =========
                 Non-interest income as a percentage                             
                 of total average assets.......................................           1.07%         0.82%         0.60%
</TABLE>

NON-INTEREST EXPENSE

     Non-interest expense totaled $7.2 million in 1996, up 14.1% from 1995 non-
interest expense of $6.3 million.  The increase was the result of  the Company's
continued growth and expansion.  The Company experienced a full year of
operating expenses associated with the Fury's Ferry branch which opened in
October, 1995 in addition to the opening and operating expenses of the Wal-Mart
branch which opened in July, 1996.  This increase in non-interest expense is
necessary to support the Company's continued growth and to better position
itself with strategic locations in the market.

     Management continues to place a significant emphasis on expense control and
continues to improve its ability to monitor growth in discretionary expense
categories and to maintain improved control over future increases. The following
table presents the principal components of non-interest expense for the years
ended December 31, 1996, 1995 and 1994.

                              NON-INTEREST EXPENSE

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                                   ------------------------------------------
                                                                         1996           1995          1994
                                                                   --------------    ----------    ----------
                                                                    (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
       <S>                                                         <C>               <C>           <C>
       Salaries and employee benefits.........................             $3,653        $3,146        $2,798
       Occupancy expense......................................              1,262         1,032           924
       Amortization of intangible assets......................                280           287           298
       Business development expense...........................                402           290           180
       Communication expense..................................                515           419           359
       Data processing expense................................                137           150           199
       Insurance expense......................................                 37           198           325
       Legal and professional fees............................                202           210           193
       Office Supplies........................................                434           328           272
       Other..................................................                312           281           223
                                                                   --------------    ----------    ----------
            Total non-interest expense........................             $7,234        $6,341        $5,771
                                                                   ==============    ==========    ==========
                                         
       Non-interest expense as a percentage
          of total average assets.............................              3.58%         3.69%         3.82%
</TABLE>

                                       21
<PAGE>
 
     The Company's efficiency ratio (non-interest expense as a percentage of net
interest income and non-interest income, excluding gains and losses on the sale
of investment securities) improved to 69.2% in 1996 compared to 72.6% in 1995
and 74.7% in 1994.  This improvement continues even through though the Company
incurs significant expense associated with the expansion of facilities to
deliver the Company's products and services.

COMPOSITION OF THE LOAN PORTFOLIO

     Loans are the primary component of the Bank's earning assets and,
generally, are expected to provide higher yields than the other types 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 the higher returns.

      Loans averaged $128.6 million in 1996 compared to $114.0 million in 1995
and $102.2 million in 1994.  At December 31, 1996, loans totaled $135.2
million, compared to $120.4 million at the end of 1995, or an increase of $14.8
million (12.3%), and $108.2 million at the end of 1994, an increase during 1995
of $12.2 million (11.3%).

     The Company continues to experience significant increases in loan volumes
and balances.  These increases are attributable to a continued stable local
economy and the Company's relatively small market share.  The successful
expansion in Columbia County (acquisition of FCS Financial Corporation at the
end of 1992 and branch expansion in November 1994), and the continued expansion
in Richmond County (opening of the Fury's Ferry branch in October, 1995 and the
Wal-Mart branch in July, 1996) have provided significant opportunities to grow
the loan portfolio.  While absolute loan growth continues in double digits, loan
growth as a percentage of average earning assets and average total assets
decreased in 1996;  average loans constituted 71.6% of average earning assets
and 63.7% of average total assets as compared with 76.4% of average earning
assets and 66.4% of average total assets during 1995, and 74.6% of average
earning assets and 67.6% of average total assets in 1994.   This decrease in
percentage illustrates that deposit growth increased at a faster pace than loan
growth during the year.

     The following table sets forth the composition of the Company's loan
portfolio as of December 31, for the past five years.

                                       22
<PAGE>
 
                          LOAN PORTFOLIO COMPOSITION

<TABLE>
<CAPTION>
                                     1996                 1995                 1994                 1993                 1992

                               AMOUNT       %       AMOUNT       %       AMOUNT       %       AMOUNT       %       AMOUNT       %   
                               ------    -------    ------    -------    ------    -------    ------    -------    ------    -------
                                                             (AMOUNT IN THOUSANDS, EXCEPT PERCENTAGES)                             
<S>                           <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C> 
Real Estate                                                                                                                         
  Commercial.............     $ 48,422    35.81%   $ 44,053    36.58%   $ 34,336    31.73%   $ 30,413    31.71%   $ 35,907    42.49%
  Residential............       24,156    17.87%     24,856    20.64%     23,452    21.67%     17,646    18.40%     11,746    13.89%
  Residential held for                                                                                                              
    sale.................          477     0.35%        404     0.34%        341     0.32%      1,048     1.09%        381     0.45%
  Construction and                                                                                                                  
    Development..........       10,829     8.01%     13,273    11.02%     18,155    16.78%     19,002    19.81%     11,068    13.09%
                              --------   -------   --------   -------   --------   -------   --------   -------   --------   -------
  Total real                                                                                                                        
    estate (1)...........       83,884    62.04%     82,586    68.58%     76,284    70.49%     68,109    71.02%     59,102    69.92%
                              --------   -------   --------   -------   --------   -------   --------   -------   --------   -------
Commercial                                                                                                                          
  Financial and                                                                                                                     
  agricultural...........       32,141    23.77%     22,614    18.78%     18,734    17.31%     15,292    15.95%     14,722    17.41%
                              --------   -------   --------   -------   --------   -------   --------   -------   --------   -------
Lease financing..........           --       --          --       --          --       --          --       --          --       -- 
Consumer                                                                                                                            
  Direct.................       11,998     8.87%     10,874     9.03%      9,029     8.34%      8,413     8.77%      7,940     9.39%
  Indirect...............           --       --          --       --          --       --          --       --          --       -- 
  Home equity............        5,580     4.13%      2,928     2.43%      2,676     2.47%      2,171     2.26%      1,847     2.18%
  Revolving (2)..........        1,609     1.19%      1,425     1.18%      1,500     1.39%      1,917     2.00%        928     1.10%
                              --------   -------   --------   -------   --------   -------   --------   -------   --------   -------
    Total consumer.......       19,187    14.19%     15,227    12.64%     13,205    12.20%     12,501    13.04%     10,715    12.67%
                              --------   -------   --------   -------   --------   -------   --------   -------   --------   -------
    Total................     $135,212   100.00%   $120,427   100.00%   $108,223   100.00%    $95,902   100.00%    $84,539   100.00%
                              ========   =======   ========   =======   ========   =======   ========   =======   ========   =======
</TABLE>


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

LOAN QUALITY

     Allowance for Loan Losses. The allowance for loan losses represents a
reserve for potential losses in the loan portfolio. The Bank 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 Bank's allowance for loan losses and the effectiveness of the
Bank's internal policies and procedures are also reviewed periodically by the
Bank's regulators, independent auditors and the Bank's internal loan reviewer.
The Bank's regulators 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's Board of Directors, with the recommendation of management,
approves the appropriate level for the allowance for loan losses based upon the
internal policies and procedures, historical loan loss ratios and present or
anticipated economic conditions.

     For significant problem loans, management's review consists of evaluation
of the financial condition and strengths of the borrower, the related collateral
supporting the loan, and the effects of  current and expected economic
conditions.  When the evaluation reflects a greater than normal risk associated
with the individual problem loan, management classifies the loan 

                                      23

<PAGE>
 
accordingly and allocates a portion of the allowance for loan losses for that
loan. The table below indicates those specific allowances allocated for problem
loans and also the unallocated general allowances included in allowances for
loan losses for the years indicated. As reflected by the unallocated portion of
the allowance, the adequacy of the Company's allowance for loan losses is
evaluated on an overall portfolio basis. Because these allocations are based on
estimates and subjective judgment it is not necessarily indicative of the
specific amounts or loan categories in which charge-offs may occur.

                 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSS(1)

<TABLE>
<CAPTION>
                                 DECEMBER 31,
                   (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGES)

                                            1996                1995               1994             1993
                                      Amount    %(2)      Amount    %(2)      Amount   %(2)    Amount    %(2)
                                      ------  ------      ------  ------      ------  ------   ------  ------
<S>                                   <C>     <C>         <C>     <C>         <C>     <C>      <C>     <C>         
Specific Reserves for
 Classified Loans
   Commercial, financial,
   and agricultural..............     $  189   23.77%     $  257   18.78%     $  115   17.31%  $   23   23.39%
   Real estate construction......         30    8.01%        111   11.02%        - -   16.78%      55   19.81%
   Real-estate mortgage..........        189   54.03%         85   57.56%        274   53.71%     123   48.16%
   Installment loans to
   individuals...................         37   14.19%         21   12.64%         29   12.20%      33    8.64%
Unallocated......................      1,023     - -         861     - -         857     - -    1,031     - -
                                      ------  ------      ------  ------      ------  ------   ------  ------
 
Balance at Period End............     $1,468  100.00%     $1,335  100.00%     $1,275  100.00%  $1,265  100.00%
                                    ========              ======              ======           ======
</TABLE>

(1)  Prior to 10-KSB Registration in 1993, Company used an unallocated General
     Reserve
(2)  Percent of loans in 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 actual amount of the provision is determined by evaluating the level of
loans outstanding, the level of non-performing loans, historical loan loss
ratios, that amount of loan losses actually charged against the reserve,
delinquency trends, and an assessment of present and anticipated economic
conditions.

     The Company's provision for loan losses in 1996 was $470,000, an increase
of $270,000 over the provision in 1995.  The provision in 1996 was necessary to
maintain an adequate allowance and support the growth of the loan portfolio
during the year.  The provision for loan losses charged to earnings in 1994 was
$180,000.

     The following table, "Allowance for Loan Losses," provides details
regarding loan losses and recoveries by category of loan during the most recent
five-year period, as well as supplemental information relating to both net loan
losses and the provision and allowance for loan losses during each of the past
five years.  As the following table indicates, net charge-offs for 1996
represented 0.26% of average loans outstanding, compared to 0.12%  for 1995 and
0.17% for 1994.  The Company's charge-off ratios continue to be significantly
below the average for the industry.

                                       24
<PAGE>
 
                           ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
 
                                                        (Amounts in thousands, except percentages)           
                                                  ----------------------------------------------------       
                                                                  YEAR-ENDED DECEMBER 31,                    
                                                      1996       1995       1994       1993      1992        
                                                      ----       ----       ----       ----      ----          
                                                  ----------------------------------------------------       
<S>                                                 <C>        <C>        <C>        <C>       <C>           
Total loans outstanding at end of                                                                            
   period, net of unearned income...........        $135,212   $120,427   $108,223   $95,902   $84,539       
                                                  ====================================================       
Daily average amount of loans                                                                                
   outstanding , net of unearned income.....        $128,592   $113,977   $102,166   $90,744   $43,975       
                                                  ====================================================       
Balance of allowance for loan losses                                                                         
at beginning of year........................        $  1,335   $  1,275   $  1,265   $ 1,377   $   363       
                                                                                                             
Charge-offs:                                                                                                 
  Commercial, financial and                                                                                  
     agricultural...........................              77         93        101        51        50       
  Real estate - construction................             - -        - -        - -       - -       - -       
  Real estate - mortgage....................             171         54         41        19       - -       
  Consumer..................................             121         43         74        61        15       
     Total loan losses......................             369        190        216       131        65       
                                                  ----------------------------------------------------       
                                                                                                             
Recoveries of previous charge-offs:                                                                          
  Commercial, financial and                                                                                  
  agricultural..............................               7         21        - -       - -       - -       
  Real estate - construction................             - -        - -        - -       - -       - -       
  Real estate - mortgage....................             - -          5          5        22       - -       
  Consumer..................................              25         24         41        26         2       
                                                  ----------------------------------------------------       
     Total recoveries.......................              32         50         46        48         2       
                                                  ----------------------------------------------------       
                                                                                                             
Net charge-offs.............................             337        140        170        83        63       
                                                  ----------------------------------------------------       
Provision for loan losses...................             470        200        180       - -       247       
Adjustment for sale of Branch                            - -        - -        - -       (29)      - -       
Adjustment for FCS Acquisition                           - -        - -        - -       - -       830       
Balance of allowance for loan losses at                                                                      
at end of period............................        $  1,468   $  1,335   $  1,275   $ 1,265   $ 1,377       
                                                  ====================================================       
                                                                                                             
Allowance for loan losses to period end                                                                      
 loans......................................            1.09%      1.11%      1.18%     1.36%     1.63%      
Net charge-offs to average loans............            0.26%      0.12%      0.17%     0.09%     0.14%       
</TABLE>

     At December 31, 1996, the allowance for loan losses was 1.09% of
outstanding loans, a slight decline from the 1.11% level of December 31, 1995.
Management considers the decline in the allowance, measured as a percentage of
loans, to be acceptable based on 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.  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.

                                       25
<PAGE>
 
     Non-Performing Assets.  As a result of management's ongoing review of the
loan portfolio, loans are classified as non-accrual when it is not reasonable to
expect collection of interest  and principal under the original terms, generally
when a loan becomes 90 days or more past due. These loans are classified as non-
accrual, even though the presence of collateral or the borrower's financial
strength may be sufficient to provide for ultimate repayment.  There are a
number of adverse implications for the earnings of the Company when a loan is
placed on non-accrual.  The interest which has been accrued but remains unpaid
is reversed and deducted from current period interest income.  No additional
interest is accrued on the loan balance until the collection of both principal
and interest becomes reasonably certain.  Also, there may be a write-down 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.  During 1996, 1995, and 1994, approximately $28,000, $58,000, and
$37,000 respectively, in additional interest income would have been recognized
as earnings if the Company's non-accrual loans had been current under their
original terms.  The total amount of interest recognized as earnings on the non-
accrual loans in 1996 was $106,188.

     Non-performing loans are defined as non-accrual and renegotiated loans.
When real estate acquired by foreclosure and held for sale is included with non-
performing loans, the result comprises 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 approximately $1.9 million at
December 31, 1996, or 1.4% of total loans and real estate acquired by
foreclosure, compared to $861,000 in non-performing assets at December 31, 1995
or 0.72% of total loans and real estate acquired by foreclosure and $1.2 million
at December 31, 1994, or 1.14% of total loans and real estate acquired by
foreclosure.  One credit for $1.1 million accounts for a significant portion of
the total non-accrual loan balance at December 31, 1996.  That loan is secured
by real estate collateral and other collateral as well as the personal guaranty
of the principal.  Due to the superior lien position of the Bank, management
feels there is minimum risk of loss although there is no assurance of this
assessment until the normal repayment and collection process are completed.

     The increase in non-performing loans during 1996 reflects primarily the
deterioration of the credit previously mentioned.  The reduction in the
remaining non-performing loans represents the  resolution of several prior
"problem loans" and management's continued emphasis on asset quality.  At
December 31, 1996, loans past due 90 days or more and still accruing interest
totaled $131,000 a decrease from $279,000 at the end of 1995 and equivalent to
the $131,000 at the end of 1994.  Management currently believes the Company will
receive full payment of principal and interest on these loans despite their past
due status because of the Company's collateral position and other factors.  This
amount of loans past due 90 days or more does not indicate a deterioration in
loan quality or portend a future increase in non-accruals.

                                       26
<PAGE>
 
                             NON-PERFORMING ASSETS

                  (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
                            YEAR ENDED DECEMBER 31,

<TABLE>
<CAPTION> 
                                                                1996      1995      1944      1993     1992
                                                              ------   -------   -------   -------   ------
<S>                                                           <C>      <C>       <C>       <C>       <C> 
Non-accrual loans.....................................        $1,747   $   786   $ 1,237   $   726   $  303
Restructured loans....................................             0         0         0        21        0
Other real estate owned...............................           150        75         0        24    1,245
                                                            -----------------------------------------------
     Total nonperforming assets.......................        $1,897   $   861   $ 1,237   $   771   $1,548
                                                            =============================================== 
 
Loans past due 90 days or more and still accruing
 interest.............................................        $  131   $   279   $   131   $   260   $   99 
                                                            ===============================================     
  
Allowance for loan losses to period end
loans.................................................          1.09%     1.11%     1.18%     1.36%    1.63%
Allowance for loan losses to period end
 nonperforming loans..................................         84.03%   169.85%   103.07%   164.07%   88.95%
Net charge-offs to average loans......................          0.26%     0.12%     0.17%     0.09%    0.14%
Nonperforming assets to period end loans..............          1.40%     0.72%     1.14%     0.80%    1.70%
Nonperforming assets to period end loans and
 foreclosed property..................................          1.40%     0.72%     1.14%     0.80%    1.68%
</TABLE>

     Management is not aware of any loans classified for regulatory purposes as
loss, doubtful, substandard, or special mention that have not been disclosed
which 1) represents or 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.

ASSET/LIABILITY MANAGEMENT, INTEREST RATE SENSITIVITY AND LIQUIDITY

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

     These objectives are achieved through compliance with an established
framework of asset/liability, loan, investment and capital policies.  Management
is responsible for monitoring policies and procedures that ensure proper
management of the components of the asset/liability function to achieve the
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 those 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.

                                       27
<PAGE>
 
     Interest Sensitivity Analysis.  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 ensure the steady growth of the net interest income, the Company's primary
earnings component.

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

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

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

     The following table, "Interest Sensitivity Analysis," shows the interest
rate sensitivity of the Company's balance sheet as of December 31, 1996.  In
that table, the principal balances of the various interest-earning and interest-
bearing balance sheet instruments are shown in the time frame where they are
first subject to repricing, either as a result of floating or adjustable rate
contracts or a contractual maturity.  In the three-month time frame, the Company
had a liability sensitive gap of $23.7 million or 12.22% of total earning
assets.  In the one-year time frame, the pricing mismatch on a cumulative basis
was liability sensitive $34.4 million or 17.7% of total earning assets.  In the
current interest rate environment, management considers this level of interest
rate risk to be acceptable although procedures are in place to carefully monitor
and reduce this one-year cumulative gap as the interest rate environment
changes.  It should also be noted that all interest rates and yields do not
adjust at the same velocity.  As an example, the majority of the savings
category listed below is priced on an adjustable basis that is sixty percent of
Prime Rate.  Therefore, as Prime Rate adjusts 100 basis points, the  rate on
this liability only adjusts 60 basis points.  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.

                                       28
<PAGE>
 
                         INTEREST SENSITIVITY ANALYSIS

<TABLE>
<CAPTION>
                                                                         AT DECEMBER 31, 1996
                                WITHIN   AFTER THREE            AFTER SIX  WITHIN ONE  ONE YEAR          OVER FIVE   TOTAL         
                                THREE     THROUGH               THROUGH      YEAR      THROUGH             YEAR      
                                MONTHS   SIX MONTHS             TWELVE                   FIVE                        
                                                                MONTHS                   YEARS                  
                             ------------------------------------------------------------------------------------------------
                                               (AMOUNTS IN THOUSANDS, EXCEPT RATIOS)
<S>                          <C>         <C>                   <C>         <C>         <C>               <C>         <C> 
EARNING ASSETS:
Loans....................    $  83,430   $   7,308             $  12,950   $ 103,688   $30,234           $   1,290   $135,212
Investment securities,           7,799         135                 5,633      13,567    27,505              14,132     55,204
 taxable.................
Investment securities,             - -         - -                   225         225       970                 912      2,107
 tax-free
Interest-bearing deposits
 with banks..............          - -         - -                   - -         - -       - -                 - -        - -
Federal Funds sold.......        1,520         - -                   - -       1,520       - -                 - -      1,520
                             ---------   ---------             ---------   ---------   -------           ---------   -------- 
     Total earning assets    $  92,749   $   7,443             $  18,808   $ 119,000   $58,709           $  16,334   $194,043
                             =========   =========             =========   =========   =======           =========   ======== 
 
INTEREST BEARING LIABILITIES:
Money market accounts....    $  21,241   $     - -             $      --   $  21,241   $   - -           $     - -   $ 21,241
Savings deposits.........       43,558         - -                   - -      43,558       - -                 - -     43,558
NOW accounts.............       23,942         - -                   - -      23,942       - -                 - -     23,942
Time deposits............       25,304      18,332                18,692      62,328    11,292                 - -     73,620
Federal Home Loan
 advances/ securities            1,225         - -                   - -       1,225       - -                 - -      1,225
 repurchased.............
Notes and Bonds payable..        1,187         - -                   - -       1,187       - -                 - -      1,187
                             ---------   ---------             ---------   ---------   -------           ---------   -------- 
   Total interest-bearing    $ 116,457   $  18,332             $  18,692   $ 153,481   $11,292           $     - -   $164,773
    liabilities..........
                             =========   =========             =========   =========   =======           =========   ======== 
 
Interest-free funds......            -           -                     -           -                        29,270     29,270
                             ---------   ---------             ---------   ---------   -------           ---------   -------- 
Funds supporting earning     $ 116,457   $  18,332             $  18,692   $ 153,481   $11,292           $  29,270   $194,043
 assets..................
                             =========   =========             =========   =========   =======           =========   ======== 
 
Period gap...............     ($23,708)   ($10,889)            $     116    ($34,481)  $47,417            ($12,936)       - -
Cumulative gap...........     ($23,708)   ($34,597)             ($34,481)   ($34,481)   12,936                 - -        - -
Ratio of cumulative gap to
total earning assets.....       -12.22%     -17.83%               -17.77%     -17.77%     6.67%                - -        - -
</TABLE>

     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.  These funds can be obtained by
converting assets to cash or by attracting new deposits.

     Average liquid assets (cash and amounts due from banks, federal funds sold,
investment securities and other short term investments) were maintained at 33.6%
of average deposits in 1996 compared to 30.5% in 1995 and 28.1 % in 1994.

     The  structure of the loan portfolio with regards to repricing and the
resulting sensitivity to changes in interest rates are important in the overall
management of the Company's asset/liability position.  The following table sets
forth the repricing maturity distribution, 

                                       29
<PAGE>
 
classified according to sensitivity to changes in interest rates, for selected
components of the loan portfolio at December 31, 1996.

                            LOAN REPRICING SCHEDULE

<TABLE>
<CAPTION>
                                                                             AT DECEMBER 31, 1996

                                                                              AFTER ONE
                                                                  ONE YEAR     THROUGH      AFTER
                                                                     OR       FIVE YEARS     FIVE      
                                                                    LESS                    YEARS      TOTAL
                                                               -----------------------------------------------
                                                                       (AMOUNTS IN THOUSANDS)
<S>                                                            <C>               <C>          <C>     <C> 
Commercial , financial and agricultural..................           $ 28,360     $ 3,746      $   35  $ 32,141
Real estate-construction.................................             10,829         - -         - -    10,829
All other loans..........................................             64,499      26,488       1,255    92,242
                                                               -----------------------------------------------
     Total loan..........................................           $103,688     $30,234      $1,290  $135,212

==============================================================================================================
Loans maturing after one year with:
   Fixed interest rates..................................                        $29,900      $1,290  $ 31,190
   Floating interest rates...............................                            334         - -       334
                                                               -----------------------------------------------
     Total Loans.........................................                        $30,234      $1,290  $ 31,524
</TABLE>

     The investment securities portfolio is intended primarily to provide a
steady source of interest income, but also serves as a secondary source of
liquidity.  Maturities of the portfolio are intentionally staggered to provide a
predictable source of liquidity for the Company.  The following table sets forth
the scheduled maturities and average yields of securities held in the investment
portfolio at December 31, for the past three years.

                                       30
<PAGE>
 
                      MATURITY DISTRIBUTION AND YIELDS OF
                             INVESTMENT SECURITIES

                                 DECEMBER 31,
<TABLE>
<CAPTION>
                                                                           1996                   1995         
                                                                           ----                   ----    
     1994                                                                                
     ----                                                                                
                                                                   AMORTIZED              AMORTIZED             AMORTIZED
                                                                   ---------              ---------             ---------
                                                                      COST       YIELD       COST      YIELD       COST       YIELD
                                                                      ----       -----       ----      -----       ----       -----
<S>                                                                <C>           <C>      <C>           <C>     <C>           <C>  
SECURITIES AVAILABLE FOR SALE                                                                                                      
U.S. Treasury                                                                                                                      
   One year or less.....................................           $   499,318    7.51%   $ 1,507,300    6.37%  $   472,800    6.02%
   Over one through five years..........................             6,924,910    5.90%     1,024,500    7.00%    1,958,150    6.08%
                                                                   -----------   -----    -----------   -----   -----------   ----- 
      Total U. S. Treasury..............................           $ 7,424,228    6.01%   $ 2,531,800    6.62%    2,440,950    6.65%
                                                                                                                                   
U.S. Government Agency                                                                                                             
   One year or less.....................................                   - -     - -        477,533    7.41%    1,256,952    8.13%
   Over one through five years..........................            21,357,845    6.35%    14,469,979    6.36%    6,006,188    6.25%
   Over five through ten years.(1)......................             7,168,442(1) 6.86%     5,514,602    6.64%    3,952,507    5.73%
   Over ten years(2)....................................            16,365,026(2) 6.43%     9,714,589(3) 5.85%    9,104,319(4) 7.06%
                                                                   -----------   -----    -----------   -----   -----------   ----- 
      Total U. S. Government  Agency....................           $44,891,313    6.46%   $30,176,703    6.26%   20,319,966    6.40%
                                                                                                                                   
Other Equity Securities                                                                                                            
   One year or less.....................................               783,121    6.00%       726,021    6.00%      725,921    6.00%
                                                                   ===========            ===========           ===========        
                                                                                                                                   
Total Securities Available for Sale.....................           $53,098,662    6.39%   $33,434,524    6.28%   23,486,837    6.41%
                                                                                                                                   
SECURITIES HELD TO MATURITY                                                                                                        
U.S. Government Agency                                                                                                             
   One year or less.....................................                   - -     - -            - -     - -           - -     - -
   Over one through five years..........................                   - -     - -            - -     - -           - -     - -
   Over five through ten years..........................               659,532    7.02%           - -     - -           - -     - -
   Over ten years.......................................             1,339,956    7.24%            --     - -            --     - -
                                                                   -----------   -----    -----------   -----   -----------   ----- 
      Total U.S. Government Agency......................           $ 1,999,488    7.17%           - -     - -           - -     - -
                                                                                                                                   
Municipal Securities (5)                                                                                                           
   One year or less.....................................               359,980    5.82%       255,000    5.80%      197,535    5.16%
   Over one through five years..........................             1,219,847    6.04%     1,579,654    5.61%    1,714,495    5.83%
   Over five through ten years..........................               731,830    5.88%           - -     - -       120,000    8.71%
   Over ten years.......................................               180,000    7.29%       180,000    7.29%          - -    0.00%
                                                                   -----------   -----    -----------   -----   -----------   ----- 
      Total Municipal Securities........................             2,491,657    6.05%   $ 2,014,654    5.78%    2,032,030    5.94%
                                                                   ===========            ===========           ===========        
                                                                                                                                   
Total Securities Held to Maturity.......................           $ 4,491,143    6.54%   $ 2,014,654    5.78%    2,032,030    5.94%
                                                                                                                                   
Total Investment Securities.............................           $57,589,807    6.40%   $35,449,178    6.25%  $25,518,867    6.39%
                                                                   ===========            ===========           ===========         

</TABLE> 
 
(1)  Includes $2,631,651 in adjustable-rate mortgage-backed securities
(2)  Includes $5,170,925 in adjustable-rate mortgage-backed securities
(3)  Includes $6,896,651 in adjustable, mortgage-backed securities
(4)  Includes $8,008,493 in adjustable, mortgage-backed securities
(5)  Tax-equivalent yield

                                       31
<PAGE>
 
          The following table presents the amortized cost and fair value of
investment securities held by the Company at December 31, 1996, 1995 and 1994.

                             INVESTMENT SECURITIES

<TABLE>
<CAPTION>
                                                  1996                                               1995 
                             ------------------------------------------------      -------------------------------------
                                             Un-         Un-                                        Un-          Un-    
 Available-for-sale          Amortized    realized     realized    Estimated       Amortized     realized      realized  
 ($ in thousands)              Cost         Gains       Losses     Fair Value         Cost         Gains        Losses   
------------------------------------------------------------------------------------------------------------------------
<S>                          <C>          <C>          <C>         <C>             <C>           <C>           <C> 
U.S. Treasuries                  7,424          32           (8)        7,448          2,492           39            --     
U.S. Government Agencies        24,245          75         (200)       24,120         16,037           56            -- 
Mortgage-backed securities      10,588          39          (38)       10,590          3,294           23           (33) 
REMICs                          10,058          27         (206)        9,879         11,107           65          (372)    
Equity securities                  783          --           --           783            726           --            --     
                             ------------------------------------------------      -------------------------------------
                                53,098         173         (452)       52,820         33,656          183          (405)    

<CAPTION>
                                 1995                         1994
                              ----------   --------------------------------------------
                                                          Un-       Un-                          
 Available-for-sale           Estimated    Amortized   realized  realized    Estimated          
 ($ in thousands)             Fair Value     Cost        Gains    Losses     Fair Value              
---------------------------------------------------------------------------------------
<S>                           <C>          <C>         <C>       <C>         <C>   
U.S. Treasuries                    2,532       2,466         --       (25)        2,441
U.S. Government Agencies          16,093       3,215         --       (38)        3,177
Mortgage-backed securities         3,284       3,955         --      (215)        3,740 
REMICs                            10,800       9,869         --      (363)        9,506
Equity securities                    726         726         --        --           726
                              ----------   --------------------------------------------
                                  33,435      20,231         --      -641        19,590              
</TABLE> 

<TABLE> 
<CAPTION> 
                                1996                                                  1995                                 
                             -------------------------------------------------     ------------------------------------------------ 
                             Amortized        Un          Un        Estimated      Amortized       Un           Un       Estimated  
 Held-to-maturity               Cost       realized    realized     Fair Value        Cost      realized     realized    Fair Value 
 ($ in thousands)                            Gains      Losses                                   Gains        Losses     
-----------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>           <C>         <C>          <C>            <C>          <C>          <C>         <C>   
Obligations of                                                                                                                     
states and political
subdivisions                     2,492           30          (9)         2,512         2,015          25          (16)        2,024 
U.S. Government         
Agencies                            --           --          --             --            --          --           --            --
REMICs                           1,999            5          (3)         2,001            --          --           --            --
                             -------------------------------------------------     ------------------------------------------------ 
                                 4,491           35         (12)         4,513         2,015          25          (16)        2,024

<CAPTION> 
                                          1994
                                       -------------------------------------------------     
                                       Amortized        Un          Un        Estimated   
 Held-to-maturity                         Cost       realized    realized     Fair Value            
 ($ in thousands)                                      Gains      Losses                                         
----------------------------------------------------------------------------------------
<S>                                    <C>           <C>         <C>          <C> 
Obligations of                                                                                        
states and political       
subdivisions                               2,032           --         (86)         1,946 
U.S. Government                                                                              
Agencies                                   3,897           --          --          3,897     
REMICs                                        --           --          --             --     
                                       -------------------------------------------------    
                                           5,929           --         (86)         5,843    
</TABLE> 

          On the liability side of the balance sheet, liquidity is enhanced
through the pricing of certificates of deposit at various maturities and by the
Company's excellent reputation in its market, which allows the Company to
maintain borrowing lines and a stable base of deposits.  Historically, this has
allowed the Company to meet its liquidity needs successfully.  Management
anticipates that deposits, particularly its base of core deposits, will continue
to grow and continue to be the Company's primary source of funding in the
future. Average loans were 69.4% of average deposits in 1996 compared to 72.5%
in 1995 and 73.9% in 1994.

          The scheduled maturities of the Company's time deposits over $100,000
at December 31, 1996, are shown in the table below.

                                       32
<PAGE>
 
                           MATURITY OF TIME DEPOSITS

                              AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                   Within   After Three    After Six    After
                                    Three     Through       Through     Twelve
                                   Months   Six Months   Twelve Months  Months   Total
                                 --------------------------------------------------------
                                                (Amounts in thousands)
<S>                                <C>      <C>          <C>            <C>     <C>
Certificates of deposit
of $100,000 or more                $14,160       $9,103         $7,204    $619  $31,122
</TABLE>

          Almost forty-six percent of those time deposits had scheduled
maturities within three months.  This is typical of the Company's market where
the majority of certificate of deposits, regardless of size have had a maturity
of six months or less in recent interest environments.  Large certificate of
deposit customers tend to be extremely rate sensitive, making these deposits
less stable sources of funding for liquidity planning purposes. However,
dependent upon pricing, these certificates are virtually always available in the
Company's market.  The Company does not obtain large certificates of deposit
from outside its local market area.

          Overnight and short-term borrowed funds can also be used as a source
of liquidity.  However, the Company does not often utilize such funding.  The
Company maintains overnight borrowing lines, but they are seldom used.  The
Company does utilize from time to time borrowings from the Federal Home Loan
Bank.  These borrowings often provide a lower cost source of funds.  At December
31, 1996, the Company had no borrowings outstanding from the Federal Home Loan
Bank.

CAPITAL

          Total shareholders' equity was $16.3 million at December 31, 1996,
increasing $1.9 million from the previous year. While the increase in
shareholders' equity was comprised primarily of earnings of $1.9 million, it
does reflect an increase in the unrealized losses on investment securities of
$37,000 and the cash paid in lieu of fractional shares for the stock dividend of
$6,000.
 
          The Company's average equity-to-assets ratio was 7.64% in 1996,
compared to 8.00% in 1995 and 7.83% in 1994.  Both the Company and the Bank
exceeded their respective regulatory capital requirements at December 31, 1996,
as is reflected in the following table:

                                       33
<PAGE>
 
                              ANALYSIS OF CAPITAL

<TABLE>
<CAPTION>
                                                     Required                Actual                   Excess
-----------------------------------------------------------------------------------------------------------------------------
                                                   Amount            %       Amount           %       Amount          %
-----------------------------------------------------------------------------------------------------------------------------
                                                                         (Amounts in thousands, except percentages)
<S>                                               <C>            <C>         <C>         <C>         <C>          <C>
GEORGIA BANK FINANCIAL CORPORATION
     DECEMBER 31, 1996
Risk-based capital:
   Tier 1 capital............................       5,850        4.00%       15,650      10.70%      9,800        6.70%
   Total capital.............................      11,700        8.00%       17,182      11.84%      5,575        3.84%
Tier 1 leverage ratio........................       8,506        4.00%       15,650       7.36%      7,144        3.36%
     DECEMBER 31, 1995
Risk-based capital:
   Tier 1 capital............................       5,160        4.00%       13,101      10.15%      7,941        6.15%
   Total capital.............................      10,321        8.00%       14,439      11.19%      4,115        3.19%
Tier 1 leverage ratio........................       7,179        4.00%       13,101       7.30%      5,922        3.30%

GEORGIA BANK & TRUST COMPANY
     DECEMBER 31, 1996
Risk-based capital:
   Tier 1 capital............................       5,741        4.00%       14,325       9.98%      8,584        5.98%
   Total capital.............................      11,483        8.00%       15,793      11.00%      4,310        3.00%
Tier 1 leverage ratio........................       8,451        4.00%       14,325       6.78%      5,874        2.78%
     DECEMBER 31, 1995
Risk-based capital:
   Tier 1 capital............................       5,077        4.00%       12,466       9.82%      7,389        5.82%
   Total capital.............................      10,155        8.00%       13,801      10.87%      3,646        2.87%
Tier 1 leverage ratio........................       7,134        4.00%       12,466       6.99%      5,332        2.99%
</TABLE>

                                       34
<PAGE>
 
FORWARD-LOOKING STATEMENTS

          The Company may from time to time make written or oral forward-looking
statements, including statements contained in the Company's filings with the
securities and Exchange Commission (the "Commission") and its reports to
shareholders.  Statements made in this Annual Report, other than those
concerning historical information, should be considered forward-looking and
subject to various risks and uncertainties.  Such forward looking statements are
made based on 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
these forward-looking statements due to a variety of factors, including
governmental monetary and fiscal policies, on deposit levels, loan demand, loan
collateral values, securities portfolio values and 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 government 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.

                                       35
<PAGE>
 
ITEM 7:  FINANCIAL STATEMENTS

       The consolidated financial statements of the Company as of December 31,
1996 and 1995 and for each of the years in the three year period ended December
31, 1996, are set forth in the following pages.

<TABLE>
<CAPTION>
                                                                      Page
<S>                                                                   <C>
 
Reports of Independent Auditor, KPMG Peat Marwick LLP                 37
Reports of Independent Audit, Cherry Bekaert & Holland LLP            38
 
   Consolidated Balance Sheets as of December 31, 1996 and 1995       39-40
                                                             
   Consolidated Statements of Income for Years Ended                  41
    December 31, 1996, 1995 and 1994                         
                                                             
   Consolidated Statements of Stockholders' Equity for                42
    Years Ended December 31, 1996, 1995 and 1994             
                                                             
   Consolidated Statements of Cash Flows for Years Ended              43-44
    December 31, 1996, 1995 and 1994                         
                                                             
   Notes to Consolidated Financial Statements                         45-61
 </TABLE>

                                       36
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT


The Board of Directors
Georgia Bank Financial Corporation:


We have audited the accompanying consolidated balance sheet of Georgia Bank
Financial Corporation and subsidiary (the "Bank") as of December 31, 1996, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the year then ended. 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 audit. The
accompanying financial statements of Georgia Bank Financial Corporation and
subsidiary for the years ended December 31, 1995 and 1994 were audited by other
auditors whose report dated February 2, 1996 expressed an unqualified opinion on
those statements.

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

In our opinion, the 1996 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, 1996, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.


                                                           KPMG PEAT MARWICK LLP



Atlanta, Georgia
January 10, 1997

                                       37
<PAGE>
 
               Report of Independent Certified Public Accountant

The Board of Directors
Georgia Bank Financial Corporation
 and Subsidiary
Augusta, Georgia

We have audited the accompanying consolidated balance sheets of Georgia Bank
Financial Corporation and Subsidiary as of December 31, 1995, 1994 and 1993, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Corporations' management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. 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 the Corporation as
of December 31, 1995, 1994 and 1993, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.

                                   CHERRY, BEKAERT & HOLLAND, L.L.P.  

Augusta, Georgia
February 2, 1996

                                       38
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                          Consolidated Balance Sheets

                          December 31, 1996 and 1995

<TABLE>
<CAPTION>
                 Assets                                          1996         1995     
                 ------                                          ----         ----     
<S>                                                          <C>           <C>         
Cash and due from banks (note 2)                             $ 10,550,857   12,725,123 
Federal funds sold                                              1,520,000         -    
                                                              -----------  ----------- 
      Cash and cash equivalents                                12,070,857   12,725,123 
                                                              -----------  ----------- 
                                                                                       
Investment securities (note 3):                                                        
  Available-for-sale                                           52,819,926   33,434,524 
  Held-to-maturity, at cost (fair values of $4,513,828                                 
    and $2,024,126 at December 31, 1996 and 1995,                                      
    respectively)                                               4,491,145    2,014,654 
                                                                                       
Loans (note 4)                                                135,212,336  120,427,011 
  Less allowance for loan losses                                1,467,702    1,335,275
                                                              -----------  -----------
      Loans, net                                              133,744,634  119,091,736
                                                              -----------  -----------
 
Premises and equipment, net (note 5)                            8,927,402    8,539,172
Accrued interest receivable                                     1,494,291    1,354,174
Other real estate                                                 150,315       74,942
Intangible assets, net (note 6)                                   878,089    1,158,106
Other assets (note 9)                                           1,431,023      955,237
                                                              -----------  -----------
 
                                                             $216,007,682  179,347,668
                                                              ===========  ===========
</TABLE>

                                                                     (Continued)

                                       39
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                          Consolidated Balance Sheets

<TABLE>
<CAPTION>
       Liabilities and Stockholders' Equity                       1996           1995
       ------------------------------------                       ----           ----  
<S>                                                           <C>            <C>
Deposits:
   Noninterest bearing                                        $ 33,306,103    26,900,509
   Interest-bearing:     
      NOW accounts                                              23,942,118    18,959,510
      Savings                                                   43,557,783    20,045,474
      Money management accounts                                 21,241,122    16,071,501
      Time deposits over $100,000                               31,122,021    32,515,699
      Other time deposits                                       42,498,381    42,657,047
                                                               -----------   -----------
                                                               195,667,528   157,149,740
Federal funds purchased and securities sold
 under repurchase agreements                                     1,225,294     1,761,527
Advances from Federal Home Loan Bank (note 8)                         -        4,000,000
Other borrowed funds (note 8)                                    1,186,668       640,000
Accrued interest and other liabilities                           1,580,714     1,357,720
                                                               -----------   -----------
        Total liabilities                                      199,660,204   164,908,987
                                                               -----------   ----------- 
 
Stockholders' equity (notes 11 and 14):
   Common stock, $3.00 par value; 10,000,000                
    shares authorized; shares issued and outstanding    
    of 1,542,368 in 1996 and 1,341,479 in 1995                   4,627,104     4,024,437
   Additional paid-in capital                                   10,337,222     7,122,998
   Retained earnings                                             1,564,330     3,435,381
   Unrealized loss on investment securities available-      
    for-sale, net of deferred income tax benefit            
    of $97,558 in 1996 and $75,222 in 1995                        (181,178)     (144,135)
                                                               -----------   -----------
          Total stockholders' equity                            16,347,478    14,438,681

Commitments (note 7)
 
                                                               -----------   ----------- 

                                                              $216,007,682   179,347,668
                                                               ===========   =========== 
</TABLE> 

See accompanying notes to consolidated financial statements.

                                       40
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                       Consolidated Statements of Income

                 Years ended December 31, 1996, 1995, and 1994

<TABLE>
<CAPTION>
                                                                       1996          1995           1994        
                                                                       ----          ----           ----        
<S>                                                                 <C>            <C>            <C>           
Interest income:                                                                                                
     Loans, including fees                                          $12,469,638    11,529,864      9,355,191    
     Investment securities:                                                                                     
          Taxable                                                     2,788,829     2,068,874      1,442,195    
          Tax-exempt                                                     76,557        67,494         61,249    
     Federal funds sold                                                 342,264       360,126        219,117    
     Deposits in banks                                                      -             -            2,997    
                                                                    -----------    ----------     ----------    
           Total interest income                                     15,677,288    14,026,358     11,080,749   
                                                                    -----------    ----------     ----------     
 
Interest expense:
     Deposits (including interest on time deposits over
          $100,000 of $1,814,916, $1,757,452, and
          $1,109,419 in 1996, 1995, and 1994,
          respectively)                                               7,151,635     6,458,661      4,210,731                       
     Federal funds purchased and securities sold                                                                                 
          under repurchase agreements                                    43,774        27,332         14,271                     
     Other borrowings                                                   177,271       242,118        142,883                     
                                                                    -----------    ----------     ----------                     
           Total interest expense                                     7,372,680     6,728,111      4,367,885                     
                                                                    -----------    ----------     ----------                     
                                                                                                                                 
           Net interest income                                        8,304,608     7,298,247      6,712,864                     
                                                                                                                                 
Provision for loan losses (note 4)                                      470,000       200,000        180,000                     
                                                                    -----------    -----------    ---------- 
           Net interest income after provision for                                                            
            loan losses                                               7,834,608     7,098,247      6,532,864   
                                                                    -----------    ----------     ----------
 
Noninterest income:
     Service charges and fees on deposits                             2,150,350     1,426,964      1,013,936
     Miscellaneous income                                                   495         8,336          3,232
     Investment securities losses, net (note 3)                             (92)      (20,679)      (117,464)
                                                                    -----------    ----------     ----------
           Total noninterest income                                   2,150,753     1,414,621        899,704
                                                                    -----------    ----------     ----------
 
Noninterest expense:
     Salaries                                                         3,074,532     2,578,618      2,242,262 
     Employee benefits                                                  578,844       567,075        556,115 
     Occupancy expenses                                               1,262,475     1,032,349        923,758  
     Other operating expenses (note 13)                               2,317,686     2,163,401      2,048,478
                                                                    -----------    ----------     ----------
           Total noninterest expense                                  7,233,537     6,341,443      5,770,613
                                                                    -----------    ----------     ----------
                                                                                                   
           Income before income taxes                                 2,751,824     2,171,425      1,661,955
                                                                                              
Income tax expense (note 9)                                             799,659       766,359        543,519
                                                                    -----------    ----------     ----------
                                                                                              
           Net income                                               $ 1,952,165     1,405,066      1,118,436
                                                                    ===========    ==========     ==========
                                                                                              
Income per share                                                          $1.27          0.91           0.77  
                                                                    ===========    ==========     ==========  
                                                                                              
Weighted average common shares outstanding                                                    
     (note 1(i))                                                      1,542,368     1,538,025      1,459,912 
                                                                    ===========    ==========     ========== 
</TABLE>

See accompanying notes to consolidated financial statements.

                                       41
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                Consolidated Statements of Stockholders' Equity

                 Years ended December 31, 1996, 1995, and 1994

<TABLE>
<CAPTION>
                                                                                                         Unrealized       
                                                                                                          loss on         
                                                                                                         investment       
                                                                                                         securities       
                                                                                                       available-for-     
                                                       Common stock                                     sale, net of     
                                                       ------------            Additional                 deferred         Total  
                                                    Number                      paid-in     Retained     income tax    stockholders'
                                                  of shares        Amount       capital     earnings       benefit        equity
                                                  -----------      ------       -------     --------       -------        ------    
<S>                                               <C>              <C>          <C>         <C>        <C>             <C>
Balance, December 31, 1993                          1,175,044      $3,525,133   6,120,272     911,879          -        10,557,284
Issuance of shares of common stock                    141,667         425,000     841,500         -            -         1,266,500
Net income                                                -               -           -     1,118,436          -         1,118,436
Change in unrealized loss on investment 
securities available-for-sale, net
     of deferred income tax benefit                       -               -           -           -       (483,781)       (483,781)
                                                    ---------      ----------  ----------  ----------   ----------      ----------
Balance, December 31, 1994                          1,316,711       3,950,133   6,961,772   2,030,315     (483,781)     12,458,439
 
Issuance of shares of common stock                     24,768          74,304     161,226         -            -           235,530
Net income                                                -               -           -     1,405,066          -         1,405,066
Change in unrealized loss on investment
 securities available-for-sale, net
     of deferred income tax benefit                       _               -           -           -        339,646         339,646
                                                    ---------      ----------  ----------  ----------   ----------      ----------
Balance, December 31, 1995                          1,341,479       4,024,437   7,122,998   3,435,381     (144,135)     14,438,681
 
Stock dividend declared - 15%                         200,889         602,667   3,214,224  (3,816,891)         -               -
Cash paid in lieu of fractional shares for
 stock dividend                                           -               -           -        (6,325)         -            (6,325)
Net income                                                -               -           -     1,952,165          -         1,952,165
Change in unrealized loss on investment
 securities available-for-sale, net
     of deferred income tax benefit                       -               -           -            -       (37,043)        (37,043)
                                                    ---------      ----------  ----------  ----------   ----------      ----------
 
Balance, December 31, 1996                          1,542,368      $4,627,104  10,337,222   1,564,330     (181,178)     16,347,478
                                                    =========      ==========  ==========  ==========   ==========      ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       42
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                     Consolidated Statements of Cash Flows

                 Years ended December 31, 1996, 1995, and 1994

<TABLE>
<CAPTION>
                                                                      1996              1995             1994
                                                                      ----              ----             ----               
<S>                                                               <C>               <C>              <C>           
Cash flows from operating activities:                                                                              
     Net income                                                   $  1,952,165        1,405,066        1,118,436   
     Adjustments to reconcile net income to net cash                                                               
          provided by operating activities                                                                         
            Depreciation and amortization                              894,858          757,221          670,230   
            Deferred income tax benefit                               (253,995)          (1,032)         (19,508)  
            Provision for loan losses                                  470,000          200,000          180,000   
            Net investment securities losses                                92           20,679          117,464   
            Amortization/(accretion) of premium/discount                                                           
             on investment securities                                  (36,686)         (72,884)          26,428   
            Real estate loans originated for sale                  (21,443,710)     (18,093,358)      (7,334,824)  
            Proceeds from sales of real estate loans                21,370,452       16,714,800        8,041,550   
            Increase in accrued interest receivable                   (140,117)        (329,250)        (127,184)  
            (Increase) decrease in other assets                       (101,890)         250,860         (869,237)  
            Increase in accrued interest and other liabilities         222,994          430,148          168,240   
                                                                  ------------      -----------      -----------   
             Net cash provided by operating activities               2,934,163        1,282,250        1,971,595   
                                                                  ------------      -----------      -----------    
 
Cash flows from investing activities:
     Net decrease in interest-bearing deposits in banks                    -                -             99,000    
     Proceeds from sales and maturities of available-                                                               
          for-sale securities                                       20,317,428       15,185,367       13,776,811    
     Proceeds from maturities of held-to-maturity                                                                   
          securities                                                   400,993           95,000              -      
     Purchase of held-to-maturity securities                        (2,879,762)        (180,000)             -      
     Purchase of available-for-sale securities                     (39,720,902)     (24,638,825)      (6,787,460)   
     Net increase in loans                                         (15,125,013)     (11,040,151)     (13,173,539)   
     Purchases of premises and equipment                            (1,003,071)        (686,741)      (2,230,472)   
     Proceeds from sale of land                                            -            232,535              -      
     Purchase of other investments                                    (100,000)              -               -      
                                                                  ------------      -----------      -----------    
             Net cash used in investing activities                 (38,110,327)     (21,032,815)      (8,315,660)   
                                                                  ------------      -----------      -----------     
</TABLE>
                                                                   (Continued)

                                       43
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                     Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                              1996            1995           1994      
                                                                              ----            ----           ----      
<S>                                                                        <C>             <C>            <C> 
Cash flows from financing activities:                                                                                  
     Net increase in noninterest-bearing deposits                          $ 6,405,594      4,078,520      5,346,608   
     Net increase (decrease) in NOW accounts                                 4,982,608     (4,166,061)    (5,581,758)  
     Net increase (decrease) in savings accounts                            23,512,309     13,904,836       (468,132)  
     Net increase (decrease) in money management                                                                       
          accounts                                                           5,169,621       (883,002)     1,696,278   
     Net (decrease) increase in time deposits                                                                          
          over $100,000                                                     (1,393,678)     4,424,931      6,321,807   
     Net (decrease) increase in other time deposits                           (158,666)    (1,574,948)    11,041,270   
     Net (decrease) increase in federal funds purchased                                                                
          and securities sold under repurchase agreements                     (536,233)     1,445,605         97,342   
     Proceeds from issuance of common stock                                       -           237,750      1,266,500   
     Proceeds from other borrowed funds                                      1,000,000           -            50,000   
     Payments of Federal Home Loan Bank advances                            (4,000,000)          -          (500,000)  
     Principal payments on other borrowed funds                               (453,332)      (678,333)    (2,078,333)  
     Cash paid for fractional shares related to                                                                        
          stock dividend                                                        (6,325)          -              -     
     Cash paid for fractional shares related to reverse                                                                
          stock split                                                             -            (2,220)          -     
                                                                           -----------     ----------    -----------     
             Net cash provided by financing activities                      34,521,898     16,787,078     17,191,582    
                                                                           -----------     ----------     ----------    
 
             Net (decrease) increase in cash and cash
                equivalents                                                   (654,266)    (2,963,487)    10,847,517    
                                                                                                                        
Cash and cash equivalents at beginning of year                              12,725,123     15,688,610      4,841,093    
                                                                           -----------     ----------     ----------     
 
Cash and cash equivalents at end of year                                   $12,070,857     12,725,123     15,688,610    
                                                                           ===========    ===========     ==========     
 
Supplemental disclosures of cash paid during
     the year for:
          Interest$                                                          7,460,076      6,510,982      4,104,649    
                                                                           ===========     ==========     ==========    
                                                                                                                        
          Income taxes                                                     $ 1,026,463        769,459        543,519    
                                                                           ===========     ==========     ==========    
                                                                                                                        
Supplemental information on noncash                                                                                     
     investing activities:                                                                                              
          Loans transferred to other real estate                           $   153,373         74,943           -      
                                                                           ===========     ==========     ==========    
                                                                                                                        
          Sales of other real estate financed with                                                                      
            loans from the Bank                                            $    78,000         14,916           _      
                                                                           ===========     ==========     ==========     
</TABLE>

See accompanying notes to consolidated financial statements.

                                       44
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                       December 31, 1996, 1995, and 1994


(1)  Summary of Significant Accounting Policies
     ------------------------------------------
 
     The accounting and reporting policies of Georgia Bank Financial Corporation
     and subsidiary (the Bank) conform to generally accepted accounting
     principles and to general practice within the banking industry. The
     following is a description of the more significant of those policies the
     Bank follows in preparing and presenting its consolidated financial
     statements.
 
          (a)  Basis of Presentation
               ---------------------
 
               The consolidated financial statements include the accounts of
               Georgia Bank Financial Corporation and its wholly owned
               subsidiary, Georgia Bank & Trust Company of Augusta. Significant
               intercompany transactions and accounts are eliminated in
               consolidation.

               The consolidated financial statements have been prepared in
               conformity with generally accepted accounting principles. In
               preparing the consolidated financial statements, management is
               required to make estimates and assumptions that affect the
               reported amounts of assets and liabilities and the disclosure of
               contingent assets and liabilities as of the date of the balance
               sheet and revenues and expenses for the period. Actual results
               could differ significantly from those estimates.

               Material estimates that are particularly susceptible to
               significant change in the near term relate to the determination
               of the allowance for loan losses and the valuation of real estate
               acquired in connection with foreclosures or in satisfaction of
               loans. In connection with the determination of the allowances for
               loan losses and real estate owned, management obtains independent
               appraisals for significant properties.

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

          (b)  Cash and Cash Equivalents
               -------------------------

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

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

               The Bank adopted the provisions of Statement of Financial
               Accounting Standards (SFAS) No. 115, Accounting for Certain
               Investments in Debt and Equity Securities, effective January 1,
               1994. Under SFAS No. 115, the Bank classifies its investment
               securities into one of three categories: available for sale, held
               to maturity, or trading. Held to maturity securities are those
               securities for which the Bank has the ability and intent to hold
               the security until maturity. All other securities are classified
               as available for sale. The Bank does not hold any trading
               securities or engage in the trading or holding of financial
               derivatives.

                                       45
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements


               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 as
               a separate component of stockholders' equity until realized.

               Mortgage-backed securities held to maturity are stated at their
               unpaid principal balances, adjusted for unamortized premiums and
               unaccreted discounts.

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

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

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

               The allowance for loan losses is established through a provision
               for loan losses charged to expense. Loans are charged against the
               allowance for loan losses when management believes that the
               collectibility of the principal is unlikely. Subsequent
               recoveries are added to the allowance. The allowance is an amount
               that management believes will be adequate to absorb losses on
               existing loans that may become uncollectible, based on
               evaluations of the collectibility of loans. The evaluations take
               into consideration such factors as changes in the nature and
               volume of the loan portfolio, overall portfolio quality, review
               of specific problem loans, and current economic conditions and
               trends that may affect a borrower's ability to pay.

                                       46
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

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

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

               The Bank adopted the provisions of 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, on January 1, 1995, and the impact
               to the consolidated financial statements was not material. Under
               the provisions of SFAS Nos. 114 and 118, a loan is considered
               impaired when, based on current information and events, it is
               probable that the Bank will be unable to collect all amounts due
               according to the contractual terms of the note agreement. The
               provisions of SFAS No. 114 do not apply to large pools of smaller
               balance homogeneous loans, such as consumer and installment
               loans, which are collectively evaluated for impairment.
               Impairment losses are included in the allowance for loan losses
               through a charge to the provision for loan losses, and are
               measured based on the present value of expected future cash
               flows, discounted at the loan's effective interest rate, or at
               the loan's observable market price, or the fair value of the
               collateral if the loan is collateral dependent. Cash receipts on
               impaired loans which are accruing interest are applied to
               principal and interest under the contractual terms of the loan
               agreement. Cash receipts on impaired loans for which the accrual
               of interest has been discontinued are applied to reduce the
               principal amount of such loans until the principal has been
               recovered and are recognized as interest income thereafter.

          (e)  Premises and Equipment
               ----------------------

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

          (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.

                                       47
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements


          (g)  Intangible Assets
               -----------------

               Intangible assets relate to certain acquisitions and consist of
               goodwill, a noncompete agreement, deposit base premiums, and
               organization costs. The core deposit intangible is being
               amortized on a straight-line basis over the estimated lives of
               the related deposits, which is estimated to be 10 years. The cost
               of a noncompetition agreement is being amortized over a 60-month
               period using the straight-line method. Goodwill is being
               amortized over 15 years using the straight-line method.
               Organization costs represent costs incurred for organizational
               activities and are being amortized using the straight-line method
               over 60 months.

          (h)  Income Taxes
               ------------

               The Bank accounts for income taxes under the asset and liability
               method. Deferred tax assets and liabilities are recognized for
               the future tax consequences attributable to differences between
               the financial statement carrying amounts of existing assets and
               liabilities and their respective tax bases. Deferred tax assets
               and liabilities are measured using enacted tax rates expected to
               apply to taxable income in the years in which those temporary
               differences are expected to be recovered or settled. The effect
               on deferred tax assets and liabilities of a change in tax rates
               is recognized in income in the period that includes the enactment
               date.

          (i)  Income Per Share
               ----------------

               Income per share is computed on the weighted average number of
               shares outstanding. On April 21, 1995, the Company effected a 1
               for 3 reverse stock split that increased the par value of common
               stock to $3.00 per share and reduced the number of outstanding
               shares. On August 21, 1996, the Board of Directors approved a 15%
               stock dividend payable on September 25, 1996. All weighted
               average share and per share information in the accompanying
               consolidated financial statements have been restated to reflect
               the effect of the above-mentioned transactions.

          (j)  Reclassifications
               -----------------

               For comparability, certain of the 1995 and 1994 amounts have been
               reclassified, where appropriate, to conform with the financial
               statement presentation used in 1996.

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

     The subsidiary bank is required to maintain average daily cash balances
with the Federal Reserve. These balances were $1,299,000 and $994,000 at
December 31, 1996 and 1995, respectively.

                                       48
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

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

     A summary of investment securities as of December 31, 1996 and 1995 is as
     follows:

<TABLE>
<CAPTION>
 
                                                                                        1996                               
                                                                   ------------------------------------------------
                                                                                 Gross        Gross                   
                                                                    Amortized   unrealized  unrealized   Estimated    
                                                                       cost        gains      losses     fair value     
                                                                       ----        -----      ------     ----------    
     <S>                                                         <C>            <C>         <C>          <C>          
     Held-to-maturity:                                                                                                
        Obligations of states and political subdivisions         $  2,491,657      30,151      (9,376)   2,512,432    
        REMICs                                                      1,999,488       4,829      (2,921)   2,001,396    
                                                                  -----------  ----------   ---------    ---------    
                                                                                                                      
                                                                 $  4,491,145      34,980     (12,297)   4,513,828    
                                                                  ===========  ==========   =========    =========    
                                                                                                                      
     Available-for-sale:                                                                                              
        Obligations of U.S. Government agencies                  $ 24,245,222      74,464    (199,928)  24,119,758    
        U.S. Treasury notes                                         7,424,228      32,169      (8,417)   7,447,980    
        Mortgage-backed securities                                 10,588,197      39,424     (38,012)  10,589,609    
        REMICs                                                     10,057,894      27,387    (205,823)   9,879,458    
        Equity securities                                             783,121         -           -        783,121    
                                                                  -----------  ----------   ---------   ----------    
                                                                                                                      
                                                                 $ 53,098,662     173,444    (452,180)  52,819,926    
                                                                  ===========  ==========   =========   ==========     
 </TABLE> 

<TABLE> 
<CAPTION> 
                                                                                        1995
                                                                  ------------------------------------------------
                                                                                 Gross        Gross                   
                                                                    Amortized   unrealized  unrealized   Estimated    
                                                                       cost        gains      losses     fair value     
                                                                       ----        -----      ------     ---------- 
     <S>                                                         <C>            <C>         <C>         <C>          
     Held-to-maturity: 
        Obligations of states and political subdivisions         $  2,014,654      25,161     (15,689)   2,024,126 
                                                                  ===========   =========   =========   ========== 
                                                                                                                   
     Available-for-sale:                                                                                           
        Obligations of U.S. Government agencies                  $ 16,036,655      56,260         -     16,092,915   
        U.S. Treasury notes                                         2,492,516      39,284         -      2,531,800   
        Mortgage-backed securities                                  3,294,422      23,265     (32,711)   3,284,976   
        REMICs                                                     11,106,702      64,455    (372,345)  10,798,812   
        Equity securities                                             726,021         -           -        726,021   
                                                                 ------------   ---------   ---------   ---------- 
                                                                                                                     
                                                                 $ 33,656,316     183,264    (405,056)  33,434,524   
                                                                  ===========   =========   =========   ==========  
</TABLE>

The amortized cost and estimated fair value of securities held-to-maturity and
available-for-sale other than equity securities as of December 31, 1996, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
 
                                                               Securities                      Securities      
                                                            held-to-maturity               available-for-sale  
                                                    --------------------------------  ------------------------------      
                                                       Amortized       Estimated        Amortized       Estimated          
                                                          cost         fair value         cost          fair value         
                                                          -----        ----------         ----          ----------        
<S>                                                 <C>                <C>              <C>             <C>                   
                                                                                                                          
     One year or less                                  $  359,980          360,437         499,319           507,655       
     After one through five years                       1,219,847        1,226,360      26,670,678        27,164,386       
     After five years through ten years                 1,391,362        1,394,759       5,031,375         4,451,135       
     After ten years                                    1,519,956        1,532,272       9,525,972         9,324,020       
                                                       ----------        ---------      ----------        ----------       
                                                        4,491,145        4,513,828      41,727,344        41,447,196       
     Mortgage-backed securities                                -                -       10,588,197        10,589,609       
                                                       ----------        ---------      ----------        ----------       

                                                       $4,491,145        4,513,828      52,315,541        52,036,805       
                                                       ==========        =========      ==========        ==========        
</TABLE>

                                       49
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

     Proceeds from sales of investment securities during 1996, 1995, and 1994
     were $16,629,955, $11,062,692, and $9,130,351, respectively. Gross realized
     gains of $115,883, $67,319, and $32,764 and gross realized losses of
     $115,975, $87,998, and $150,228 were realized on those sales in 1996, 1995,
     and 1994, respectively.

     Proceeds from maturities and principal repayments of investment securities
     during 1996, 1995, and 1994 were $4,088,466, $4,217,675, and $4,646,460,
     respectively.

     Investment securities with a carrying amount of approximately $24,341,000
     and $20,356,000 at December 31, 1996 and 1995, respectively, were pledged
     to secure public and trust deposits, and for other purposes required by
     law.

(4)                                                           Loans
                                                              -----

     Loans at December 31, 1996 and 1995 are summarized as follows:

<TABLE>
<CAPTION>
                                                                              
                                                    1996         1995           
                                                    ----         ----           
     <S>                                        <C>           <C>               
     Commercial, financial, and agricultural    $ 32,141,492   22,613,637       
     Real estate - construction/development       10,829,416   13,273,177       
     Other loans secured by real estate:                                        
      Single-family                               24,155,487   24,856,440       
      Commercial                                  48,421,500   44,053,490       
     Real estate loans originated for sale           477,458      404,200       
     Consumer installment                         19,186,983   15,226,067       
                                                ------------  -----------       
                                                 135,212,336  120,427,011       
     Less allowance for loan losses                1,467,702    1,335,275       
                                                ------------  -----------       
                                                                                
                                                $133,744,634  119,091,736       
                                                ============  ===========       
</TABLE>

     As of December 31, 1996 and 1995, the Bank had nonaccrual loans aggregating
     $1,747,684 and $792,515, respectively. Interest that would have been
     recorded on nonaccrual loans had they been in accruing status was
     approximately $28,000 in 1996, $58,000 in 1995, and $34,000 in 1994.

     At December 31, 1996, pursuant to the definitions within SFAS No. 114, the
     Bank had one impaired loan with an outstanding balance of $1,186,100 with a
     related valuation allowance of $178,000. There were no impaired loans at
     December 31, 1995. The average balance of impaired loans was $1,227,800 for
     the year ended December 31, 1996.

    The following is a summary of the activity in the allowance for loan losses
    for the years ended December 31, 1996, 1995, and 1994:

<TABLE>
<CAPTION>
 
                                       1996        1995        1994
                                       ----        ----        ----      
     <S>                           <C>          <C>         <C> 
     Balance, beginning of year    $1,335,275   1,274,686   1,264,902   
     Provision for loan losses        470,000     200,000     180,000   
     Charge-offs                     (369,423)   (190,265)   (215,720)  
     Recoveries                        31,850      50,854      45,504   
                                   ----------   ---------   ---------   
                                                                        
     Balance, end of year          $1,467,702   1,335,275   1,274,686   
                                   ==========   =========   =========    
</TABLE>

                                       50
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


     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,
     1996: 

<TABLE> 
<CAPTION>  
        <S>                                             <C>   
        Balance at beginning of year                    $ 4,362,200   
        New loans                                         2,851,507   
        Principal repayments                             (2,201,687)  
                                                          ---------
        Balance at end of year                          $ 5,012,020   
                                                          =========    
</TABLE>

     The Bank is also committed to extend credit to certain directors and
     executives of the Bank, including companies in which they are principal
     owners, through personal lines of credit, letters of credit and other loan
     commitments. As of December 31, 1996, available balances on these
     commitments to these persons aggregated $3,372,169.

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

     Premises and equipment at December 31, 1996 and 1995 are summarized as
     follows:

<TABLE>
<CAPTION>
                                                    1996          1995     
                                                    ----          ----    
          <S>                                   <C>             <C>       
          Land                                  $ 1,882,097     1,882,097 
          Buildings                               6,033,667     6,033,667 
          Furniture and equipment                 3,036,098     2,066,547 
                                                -----------     --------- 
                                                 10,951,862     9,982,311 
          Less accumulated depreciation           2,024,460     1,443,139 
                                                -----------     --------- 
                                                                          
                                                $ 8,927,402     8,539,172 
                                                ===========     ========= 
</TABLE>

     Depreciation expense amounted to $614,841, $470,539, and $372,497 in 1996,
     1995, and 1994, respectively.

                                       51
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

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

     Intangible assets, net of accumulated amortization, at December 31, 1996
     and 1995 are summarized as follows:

<TABLE> 
 <CAPTION> 
                                         1996         1995       
                                         ----         ----       
     <S>                               <C>         <C>         
     Core deposit premium              $640,512      747,264    
     Noncompetition agreements           99,996      199,992    
     Goodwill                            73,329       79,996    
     Organization costs                  64,252      130,854    
                                       --------    ---------    
                                                                
                                       $878,089    1,158,106    
                                       ========    =========     
</TABLE>

     Amortization expense amounted to $280,017, $286,682, and $297,733 in 1996,
     1995, and 1994, respectively.

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

     The Bank is committed under various operating leases for office space and
     equipment. At December 31, 1996, minimum future lease payments for each of
     the next five years under noncancelable real property and equipment
     operating leases are as follows:

<TABLE>
<CAPTION>
                          <S>         <C>                     
                          1997        $249,329   
                          1998         180,086   
                          1999         133,108   
                          2000         131,452   
                          2001         103,459   
                                      --------   
                                                 
                                      $797,434   
                                      ========    
</TABLE>

     Rent expense for all building, equipment and furniture rentals totaled
     $292,671, $288,785, and $664,818 for the years ended December 31, 1996,
     1995, and 1994, respectively.

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

     Unfunded commitments to extend credit where contract amounts represent
     potential credit risk totaled $32,431,722 and $16,712,315 at December 31,
     1996 and 1995, respectively.

                                       52
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

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

(8)  Other Borrowed Funds
     --------------------

     Other borrowed funds at December 31, 1996 consist of Development Authority
     Industrial Development Revenue Bonds (the revenue bonds) payable to
     SunTrust Bank of Augusta of $186,668 and a treasury, tax, and loan account
     with the Federal Reserve Bank of $1,000,000. The bonds require principal to
     be paid in 60 equal installments plus accrued interest at 64% of prime, not
     to exceed 11% per annum or be less than 6% per annum, and are
     collateralized by certain buildings, furniture, fixtures and equipment.
     Other borrowed funds at December 31, 1995 consist of $240,000 outstanding
     related to the revenue bonds and a note payable of $400,000 with Columbus
     Bank & Trust. The note payable accrued interest at Columbus Bank & Trust's
     prime rate floating daily, and was collateralized by 100% of the
     outstanding stock of the bank subsidiary.

     Aggregate maturities on the revenue bonds for years subsequent to December
     31, 1996 are estimated to be as follows:

<TABLE>
<CAPTION>
                    <S>                  <C>              
                    1997                 $ 53,332    
                    1998                   53,332    
                    1999                   53,332    
                    2000                   26,672    
                                         --------    
                                                     
                                         $186,668    
                                         ========     
</TABLE>

     The Bank has a $14,000,000 available line of credit from the Federal Home
     Loan Bank of Atlanta (FHLB) which is reviewed annually by the FHLB. At
     December 31, 1996, no advances were outstanding under this line. At
     December 31, 1995, $4,000,000 of advances were outstanding with a related
     interest rate of 5.63%.

(9)  Income Taxes
     ------------

     Income tax expense (benefit) for the years ended December 31, 1996, 1995,
     and 1994 consists of the following:

<TABLE>
<CAPTION>
                                                1996       1995      1994
                                             ----------  --------  --------
     <S>                                     <C>         <C>       <C> 
     Current tax expense:              
       Federal                             $ 1,053,654   767,391   563,027
       State                                       -         -       -
                                             ---------   -------   -------  
         Total current                       1,053,654   767,391   563,027
                                             ---------   -------   -------  
                                   
     Deferred tax benefit:         
       Federal                                (216,019)     (930)  (17,577)
       State                                   (37,976)     (102)   (1,931)
                                             ---------   -------   -------  
         Total deferred                       (253,995)   (1,032)  (19,508)
                                             ---------   -------   -------  
                                   
         Total income tax expense          $   799,659   766,359   543,519
                                             =========   =======   =======
</TABLE>

                                       53
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


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

<TABLE>
<CAPTION>
 
                                                               Years ended December 31,                        
                                                         -------------------------------------                      
                                                           1996          1995         1994     
                                                           ----          ----         ----            
     <S>                                                 <C>             <C>          <C> 
     Computed "expected" tax expense                     $ 935,620       738,285      565,065     
     Increase (decrease) resulting from:                                                          
       Tax-exempt interest income                          (25,893)      (22,498)     (25,840)    
       Nondeductible interest expense                        4,953         4,226       15,399     
       Life insurance                                          -           9,052        8,863     
       Change in valuation allowance                      (150,000)      (54,408)      27,140     
       Meals, entertainment, and club dues                  11,149        10,134       20,302     
       Other, net                                           23,830        81,568      (67,410)    
                                                         ---------       -------      -------     
                                                                                                  
                                                         $ 799,659       766,359      543,519     
                                                         =========       =======      =======      
</TABLE>

     The tax effects of temporary differences that give rise to significant
     portions of the deferred tax assets and deferred tax liabilities at
     December 31, 1996 and 1995 are presented below:

<TABLE>
<CAPTION>
 
     1996                                                             1995
     ----                                                             ----
     <S>                                                           <C>              <C>
      Deferred tax assets:                                                    
        Unrealized loss on investment securities                              
         available for sale                                        $  97,558          75,222      
        Allowance for loan losses                                    418,716         326,436      
        Deferred compensation                                         24,326             -        
        State net operating loss carryforward                            -            11,117      
        Other                                                         12,497             -        
                                                                   ---------        --------      
            Total gross deferred tax assets before                                                
              valuation allowance                                    553,097         412,775      
                                                                                                  
        Valuation allowance                                         (162,698)       (312,698)     
                                                                   ---------        --------                               
            Total deferred tax assets                                390,399         100,077      
                                                                                                  
      Deferred tax liabilities - depreciation                        (37,928)        (23,937)     
                                                                   ---------        --------      
                                                                                                  
            Net deferred tax asset                                 $ 352,471          76,140      
                                                                   =========        ========       
 </TABLE>

                                       54
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements


     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 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, giving consideration to the valuation
     allowance recorded.

(10) Related Parties
     ---------------

     Deposits include accounts with certain directors and executives of the
     Bank, including companies in which they are principal owners. As of
     December 31, 1996, these deposits totaled approximately $5,080,245.

     In the normal course of business, the Bank paid approximately $17,000 in
     legal fees to a law firm in which a director is a member.

(11) Regulatory Capital Requirements
     -------------------------------

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

     Quantitative measures established by regulation to ensure capital adequacy,
     require the Bank to maintain minimum amounts and ratios (set forth in the
     table below) of total and Tier I capital (as defined in the regulations) to
     risk-weighted assets (as defined), and of Tier I capital (as defined) to
     average assets (as defined). Management believes, as of December 31, 1996,
     that the Bank meets all capital adequacy requirements to which it is
     subject.

     As of December 31, 1996, 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 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, 1996 which would affect the
     bank subsidiary's well capitalized classification.

                                       55
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

     Actual capital amounts and ratios for the Bank are presented in the table
     below as of December 31, 1996 and 1995, on a consolidated basis and for the
     bank subsidiary individually (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                                  To be well                  
                                                                                                  capitalized                 
                                                                           For capital            under prompt           
                                                                             adequacy           corrective action        
                                                         Actual               purposes              provisions     
                                                    -----------------      ---------------      -----------------     
                                                     Ratio     Amount      Ratio    Amount       Ratio    
                                                    --------   -------     -----    ------      -------    
     <S>                                            <C>        <C>         <C>      <C>          <C> 
      Georgia Bank Financial Corporation and                                                                          
       subsidiary consolidated:                                                                                       
       As of December 31, 1996:                                                                                       
         Total Capital (to risk-weighted assets)    $17,182     11.84%      $11,607   8.0%        N/A   N/A              
         Tier I Capital - risk-based (to risk-                                                                              
         weighted assets)                            15,650     10.70         5,850   4.0         N/A   N/A                 
         Tier I Capital - leverage (to average                                                                              
         assets)                                     15,650      7.36         8,505   4.0         N/A   N/A                 
       As of December 31, 1995:                                                                                             
         Total Capital (to risk-weighted assets)     14,439     11.19        10,321   8.0         N/A   N/A           
         Tier I Capital - risk-based (to risk-                                                                              
         weighted assets)                            13,101     10.15         5,160   4.0         N/A   N/A                 
         Tier I Capital - leverage (to average                                                                              
         assets)                                     13,101      7.30         7,179   4.0         N/A   N/A                  
                                                                                                                            
      Georgia Bank & Trust Company:                                                                                         
       As of December 31, 1996:                                                                                             
         Total Capital (to risk-weighted assets)    $15,793     11.00%      $11,483   8.0%   $ 14,354  10.0%   
                                                                                                                            
         Tier I Capital - risk-based (to risk-                                                                              
         weighted assets)                            14,325      9.98         5,741   4.0       8,612   6.0                  
         Tier I Capital - leverage (to average                                                                               
         assets)                                     14,325      6.78         8,451   4.0      10,564   5.0                  
       As of December 31, 1995:                                                                                              
         Total Capital (to risk-weighted assets)     13,801     10.87        10,155   8.0      12,693  10.0                  
         Tier I Capital - risk-based (to risk-                                                                               
         weighted assets)                            12,466      9.82         5,077   4.0       7,616   6.0                  
         Tier I Capital - leverage (to average                                                                               
         assets)                                     12,466      6.99         7,134   4.0       8,918   5.0                  
</TABLE>

(12) Employee Benefit Plans
     ----------------------

     The Bank has an employee savings 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, 1996, 1995, and 1994, the Bank contributed
     $73,018, $64,063, and $48,589, respectively, to the Plan, which is 3% of
     the annual salary of all eligible employees.

     During 1994, the Bank adopted a nonqualified deferred bonus plan for
     officers of the Bank. Under the plan, the Bank has the option to make an
     annual discretionary payment to the plan. For the years ended December 31,
     1996, 1995, and 1994, the Bank contributed $32,733, $28,608, and $24,860,
     respectively, to the plan.

                                       56
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

(13) Other Operating Expenses
     ------------------------

     Components of other operating expenses exceeding 1% of total revenues
     include the following for the years ended December 31, 1996, 1995, and
     1994, respectively: 

<TABLE> 
<CAPTION>
                                                                              
                                                          1996         1995         1994                
                                                        --------      -------      -------              
      <S>                                               <C>           <C>          <C>                  
      Amortization of intangible assets                 $280,017      286,681      297,734              
      Business development expense                       401,787      289,636      179,673              
      Communication expense                              514,595      418,932      358,753              
      Data processing expense                            137,272      150,277      198,893              
      Insurance expense                                   36,993      197,585      324,936              
      Legal and professional fees                        201,673      210,202      193,003              
      Office supplies expense                            433,538      328,309      271,875               
     </TABLE>                                                                  

(14) 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
                           ------------------------

<TABLE>
<CAPTION>
                                                           December 31,        
                                                       ----------------------- 
                        Assets                            1996         1995    
                        ------                            ----         ----    
  <S>                                                 <C>           <C>        
                                                                               
  Cash and due from banks                             $    19,776        2,985 
  Investment in subsidiary                             14,958,027   13,494,792 
  Premises and equipment, net                           1,393,069    1,453,250 
  Intangible assets                                        64,252      128,632 
  Other assets                                            100,000          -   
                                                      -----------   ---------- 
                                                                               
                                                      $16,535,124   15,079,659 
                                                      ===========   ==========  
 
                     Liabilities and Stockholders' Equity
                     ------------------------------------             
 
  Accrued interest and other liabilities              $       978          978  
  Bonds payable                                           186,668      640,000  
                                                      -----------   ----------  
       Total liabilities                                  187,646      640,978  
                                                      -----------   ----------  
                                                                                
  Stockholders' equity:                                                         
    Common stock, $3.00 par value, 10,000,000 shares                            
    authorized; shares issued and outstanding of                                
    1,542,368 in 1996 and 1,341,479 in 1995             4,627,104    4,024,437  
    Additional paid-in capital                         10,337,222    7,122,998  
    Retained earnings                                   1,564,330    3,435,381  
    Net unrealized loss on investment securities                                
    available for sale                                   (181,178)    (144,135)
                                                      -----------   ----------  
       Total stockholders' equity                      16,347,478   14,438,681  
                                                      -----------   ----------  
                                                                                
                                                      $16,535,124   15,079,659  
                                                      ===========   ========== 
</TABLE>

                                       57
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                        Condensed Statements of Income
                        ------------------------------

<TABLE>
<CAPTION>
 
                                                                                Years ended December 31,
                                                                           --------------------------------- 
                                                                           1996          1995          1994        
                                                                           ----          -----         ----         
  <S>                                                                    <C>            <C>           <C>                  
  Income:                                                                                                          
    Dividends from bank subsidiary                                       $  525,000       460,000     1,168,226    
    Miscellaneous income                                                     91,200        91,200        84,600    
                                                                         ----------     ---------     ---------    
                                                                            616,200       551,200     1,252,826    
                                                                         ----------     ---------     ---------    
  Expense:                                                                                                         
    Interest expense                                                         13,685        79,782       129,612    
    Occupancy expense                                                        60,681        29,416        29,416    
    Other operating expense                                                  89,947       105,006        78,518    
                                                                         ----------     ---------     ---------    
                                                                            164,313       214,204       237,546    
                                                                         ----------     ---------     ---------    
                                                                                                                   
      Income before equity in undistributed                                                                        
       earnings of subsidiary                                               451,887       336,996     1,015,280    
                                                                                                                   
  Equity in undistributed earnings of subsidiary                          1,500,278     1,068,070       103,156    
                                                                         ----------     ---------     ---------    
                                                                                                                   
      Net income                                                         $1,952,165     1,405,066     1,118,436    
                                                                         ==========     =========     =========     
</TABLE>
                      Condensed Statements of Cash Flows
                      ----------------------------------

<TABLE>
<CAPTION>
                                                                                Years ended December 31,
                                                                           --------------------------------------  
                                                                            1996          1995          1994
                                                                            ----          ----          ----        
  <S>                                                                   <C>            <C>            <C> 
  Cash flows from operating activities:
   Net income                                                           $ 1,952,165     1,405,066     1,118,436
   Adjustments to reconcile net income to net
    cash provided by operating activities:
     Depreciation and amortization                                          124,561        93,796        93,796
     Equity in undistributed earnings of subsidiary                      (1,500,278)   (1,068,070)     (103,156)
                                                                         ----------     ---------     ---------
      Net cash provided by operating activities                             576,448       430,792     1,109,076
                                                                         ----------     ---------     ---------    
 
  Cash flows from investing activities:
   Capital expenditures                                                         -             -        (453,757)
   Purchase of other investment                                            (100,000)          -             -
                                                                         ----------     ---------     ---------    
      Net cash used in investing activities                                (100,000)          -        (453,757)
                                                                         ----------     ----------    ---------
 
  Cash flows from financing activities:
   Principal payments on notes and bonds payable                           (453,332)     (678,333)   (2,078,333)
   Proceeds from issuance of notes payable                                      -             -          50,000
   Proceeds from issuance of common stock                                       -         237,750     1,266,500
   Cash paid for fractional shares related to stock dividend                 (6,325)            -             -
   Cash paid for fractional shares related to reverse stock split               -          (2,220)            -
                                                                         ----------     ---------     ---------    
      Net cash used in financing activities                                (459,657)     (442,803)     (761,833)
                                                                         ----------     ---------     ---------    
 
      Net increase (decrease) in cash and cash equivalents                   16,791       (12,011)     (106,514)    

  Cash and cash equivalents at beginning of year                              2,985        14,996       121,510      
                                                                         ----------    ----------     ---------
  Cash and cash equivalents at end of year                               $   19,776         2,985        14,996
                                                                         ==========    ==========     =========
</TABLE>

                                       58
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements


     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
     1997 is approximately $1,013,000, subject to maintenance of the minimum
     capital requirements. As a result of this restriction, at December 31,
     1996, approximately $13,945,000 of the Bank's investment in its subsidiary
     was restricted from transfer in the form of dividends.

(15) Fair Value of Financial Instruments
     -----------------------------------

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

     The following methods and assumptions were used by the Bank in estimating
     the fair value of its financial instruments:
 
     (a)  Cash and Cash Equivalents Fair value equals the carrying value of such
          assets due to their nature.

                                       59
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements


     (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.

     (d)  Deposits
          --------

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

     (e)  Federal Funds Purchased and Securities Sold Under Repurchase
          ------------------------------------------------------------
          Agreements
          ----------

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

     (f)  Other Borrowed Funds
          --------------------

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

     (g)  Advances from FHLB
          ------------------

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

                                       60
<PAGE>
 
               GEORGIA BANK FINANCIAL CORPORATION AND SUBSIDIARY

                  Notes to Consolidated Financial Statements


     The carrying amounts and estimated fair values of the Bank's financial
     instruments at December 31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
 
                                                   December 31, 1996           December 31, 1995                
                                                  -----------------            -----------------
                                               Carrying      Estimated      Carrying      Estimated    
                                                amount       fair value      amount       fair value   
                                                ------       ----------     -------       ----------   
  <S>                                        <C>           <C>            <C>           <C>               
  Financial assets:                                                                                      
    Cash and cash equivalents                $ 12,070,857   12,070,857     12,725,123    12,725,123      
    Investment securities                      57,311,071   57,333,754     35,499,178    35,458,650      
    Loans, net                                133,744,634  134,547,543    119,091,736   119,264,282      
  Financial liabilities:                                                                                 
    Deposits                                  195,667,528  195,734,454    157,149,740   157,164,330      
    Federal funds purchased and                                                                          
    securities sold under repurchase                                                                     
    agreements                                  1,225,294    1,225,294      1,761,527     1,761,527      
    Other borrowed funds                        1,186,668    1,186,668        640,000       640,000      
    Advances from FHLB                                -            -        4,000,000     4,000,000       
</TABLE>

                                       61
<PAGE>
 
ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURES.

     As reported on Form 8-K, filed April 23, 1996, Cherry, Bekaert & Holland
LLP was previously the principal accountants for Georgia Bank Financial
Corporation. On April 17, 1996, that firm was not re-elected as principal
accountants and KPMG Peat Marwick LLP was engaged as principal accountants. The
decision to change accountants was recommended by the Audit Committee and
approved by the Board of Directors.

     In connection with the audits of the two fiscal years ended December 31,
1995, and the subsequent interim period through April 17, 1996, there were no
disagreements with Cherry, Bekaert & Holland LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement.

     The Audit reports of December 31, 1995 on the consolidated financial
statements of Georgia Bank Financial Corporation and subsidiaries as of and for
the years ended December 31, 1995 and 1994, did not contain any adverse opinion
of disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles.

                                       62
<PAGE>
 
                                   PART III

ITEMS 9, 10, 11, AND 12. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT; EXECUTIVE
COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT;
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Information in response to these items is incorporated by reference to the
Company's definitive Proxy Statement for use in connection with the 1997 annual
meeting (which definitive Proxy Statement shall be filed with the commission not
later than April 30, 1997).

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

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

          21.1  Subsidiaries of the Company

     (b)  Reports on Form 8-K
                None

                                       63
<PAGE>
 
                                  SIGNATURES

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

                              GEORGIA BANK FINANCIAL CORPORATION

                                  /s/ Robert W. Pollard, Jr.
                              By:-----------------------------
                                    Robert W. Pollard, Jr.
                                    Chairman of the Board and
                                    Chief Executive Officer

March 17, 1997

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

     SIGNATURE                           TITLE

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

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

/s/ Patrick G. Blanchard
---------------------------------   President and Director
Patrick G. Blanchard

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

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

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

                                       64
<PAGE>
 
/s/ William J. Badger
---------------------------------   Director
William J. Badger

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

/s/ Warren A. Daniel  
---------------------------------   Director
Warren A. Daniel 

/s/ C. Linton DeVaughn III 
---------------------------------   Director
C. Linton DeVaughn III 

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

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

                                       65
<PAGE>
 
                                 EXHIBIT INDEX

<TABLE> 
<CAPTION> 
(a)  Exhibits                                                         Page
<S>  <C>                                                              <C> 
     11.1   Statement Re: Computation of Earnings Per Share            67

     21.1   Subsidiaries of the Company                                68

(b)  Reports on Form 8-K

            None
</TABLE>