UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ý                                 ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year December 31, 2004

OR

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

For the transition period from                           to                         

Commission file number 333-74710

Georgia Bancshares, Inc.

(Exact name of registrant as specified in its charter)

770-631-9488

(Telephone Number)

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Common Stock

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B 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-K or any amendment to this Form 10-K.  ý

The aggregate market value of the voting and non-voting common equity held by non-affiliates (shareholders holding less than 5% of an outstanding class of stock, excluding directors and executive officers) as of March 9, 2005 was $33,378,266.  This calculation was based on the average bid and asked price of such common equity on March 9, 2005.

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

DOCUMENTS INCORPORATED BY REFERENCE

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

PART I

Item 1.           Description of Business

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

•                  significant increases in competitive pressure in the banking and financial services industries;

•                  changes in the interest rate environment which could reduce anticipated or actual margins;

•                  changes in political conditions or the legislative or regulatory environment;

•                  the level of allowance for loan loss;

•                  the rate of delinquencies and amounts of charge-offs;

•                  the rates of loan growth;

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

•                  general economic conditions, either nationally or regionally and especially in primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;

•                  changes occurring in business conditions and inflation;

•                  changes in technology;

•                  changes in monetary and tax policies;

•                  changes in the securities markets; and

•                  other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

General

Georgia Bancshares, Inc. was incorporated as a Georgia corporation on December 21, 2000 and became the holding company for The Bank of Georgia on May 18, 2001 following the consummation of a statutory share exchange.  Our bank commenced operations on February 18, 2000 and conducts a community-oriented commercial and retail banking business, focusing on the needs of individuals and small- to medium-sized businesses in Peachtree City, the rest of Fayette County, and portions of Coweta County in Georgia.  On November 12, 2002, we opened a new office at 100 Westpark Drive, Peachtree City, Georgia.  On January 3, 2003, we designated this office as our corporate headquarters and designated our former main office at 2008 Highway 54 West, Fayetteville, Georgia, as a branch office.  Our goal is to operate the leading community bank in our market area.  We intend to achieve this goal by increasing asset size through internal growth and branch expansion, providing personalized service with a community focus, hiring, developing, and retaining high caliber and motivated employees, maintaining high asset quality, and offering our customers a variety of competitive products and services.

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Deposit Products

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

Other Banking Services

Other bank services include drive up teller lanes and ATMs at each office, telephone banking, Visa check cards, safe deposit boxes, travelers checks, direct deposit of payroll and social security checks, and automatic drafts for various accounts.  We are also a member of the STAR and CIRRUS ATM networks.  We believe that by being associated with shared networks of ATMs, we can better serve our current customers and attract new customers who are accustomed to the convenience of using ATMs.  We also offer our own credit and debit cards.

Lending Activities

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

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

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

Commercial, Financial and Agricultural Loans.  At December 31, 2004, approximately 7.97% of our loan portfolio consisted of commercial, financial, and agricultural loans.  These loans consist of secured and unsecured loans, lines of credit, and working capital loans.  We make these loans to various types of businesses.  Included in this category are loans to purchase equipment, finance accounts receivable or inventory, and loans made for working capital purposes.  Generally, we secure our commercial loans with real estate instead of other business assets to provide greater security.

Consumer Loans.  At December 31, 2004, consumer loans made up approximately 3.67% of our loan portfolio.  These are loans made to individuals for personal and household purposes, such as secured and unsecured installment and term loans.  Automobiles and small recreational vehicles are pledged as security for loans associated with their purchase.

Underwriting Procedures, Collateral, and Risk.  We use our established credit policies and procedures when underwriting each type of loan.  Although there are minor variances in the characteristics and criteria for each loan type, which variances may require additional underwriting procedures, we generally evaluate borrowers using the following defined criteria:

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

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

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

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

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

It is our practice to obtain collateral for most loans to help mitigate the risk associated with lending.  We generally limit our loan-to-value ratio to 80%.  For example, we typically obtain a security interest in real estate for loans secured by real estate, including construction and development loans, and other commercial loans.  For commercial loans, we typically obtain security interests in equipment and other company assets.  For consumer loans used to purchase vehicles, we typically obtain appropriate title documentation.  For secured loans that are not associated with real estate, or for which the mortgaged real estate does not provide an acceptable loan-to-value ratio, we obtain other available collateral such as stocks and bonds.

Each type of loan carries a credit risk, simply defined as the potential that the borrower will not be willing or able to repay the debt.  While real estate loans have various risks common to all types of loans, certain types of real estate loans have specific risk characteristics that vary according to the collateral type securing the loan and the terms and repayment sources for the loan.  Real estate loans are all sensitive to fluctuations in the value of the real estate securing the loan.  In addition, commercial real estate loans have risk that the primary source of repayment will be insufficient to service the debt.  Construction and development real estate loans generally carry a higher degree of risk than long term financing of existing properties.  These projects are usually dependent on the completion of the project on schedule and within cost estimates and on the timely sale of the property.  Inferior or improper construction techniques, changes in economic conditions during the construction and marketing period, and rising interest rates which may slow the sale of the property are all risks unique to this type of loan.  Residential mortgage loans, in contrast to commercial real estate loans, generally have longer terms and may have fixed or adjustable interest rates.  Commercial loans primarily have risk that the primary source of repayment will be insufficient to service the debt.  Often this occurs as the result of changes in local economic conditions or in the industry in which the borrower operates which impact cash flow or collateral value.  Consumer loans, other than home equity loan products, are generally considered to have more risk than loans to individuals secured by first or second mortgages on real estate due to dependence on the borrower’s employment status as the sole source of repayment.  By following defined underwriting criteria as noted above, we can help to reduce these risks.  Additionally we help to reduce the risk that the underlying collateral may not be sufficient to pay the outstanding balance by using appraisals or taking other steps to determine that the value of the collateral is adequate, and lending amounts based upon lower loan-to-value ratios.  We control risks by monitoring and limiting concentrations in our loan portfolio of any one type of loan.

Loan Approval and Review.  Our loan approval policies provide for various levels of officer lending authority.  When the amount of aggregate loans to a single borrower exceeds that individual officer’s lending authority, the loan request is considered by an officer with a higher lending limit.  Any loan in excess of this lending limit is approved by the directors’ loan committee.  We do not make any loans to any of our directors or executive officers unless the loan is approved by the board of directors of the bank and is made on terms not more favorable to such person than would be available to a person not affiliated with us.

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

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Competition

We engage in a general commercial and retail banking business, emphasizing the needs of small- to medium-sized businesses, professional concerns, and individuals.  Our primary service area presently encompasses Peachtree City, as well as the rest of Fayette County, portions of Coweta County and Fulton County.  Based on relationships with our lending officers, we have a secondary lending area in neighboring Henry and Clayton Counties.

The banking business is highly competitive.  We compete with other commercial banks, savings and loan associations, credit unions, and money market mutual funds operating in the Fayette and Coweta County area and elsewhere.  As of June 30, 2004 (the most recent date for deposit data compiled by the Federal Deposit Insurance Corporation), there were 40 banking offices representing 15 financial institutions operating in Fayette County holding over $1.49 billion in deposits.  In Coweta County, there were 30 offices representing 10 financial institutions holding over $969 million in deposits.  We believe that our community bank focus, with our emphasis on service to small- to medium-sized businesses, individuals, and professional concerns, gives us an advantage in these markets.  Nevertheless, a number of these competitors are well established in the Fayette and Coweta County area.  Most of them have substantially greater resources and lending limits than we have and offer services, such as extensive and established branch networks and trust services that we do not currently provide.  As a result of these competitive factors, we may have to pay higher rates of interest to attract deposits.

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

Employees

As of December 31, 2004, we had 64 full-time employees and 6 part-time employees.  None of our employees is covered by a collective bargaining agreement.  We consider our relationship with our employees to be good.

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SUPERVISION AND REGULATION

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

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

USA Patriot Act of 2001

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

Check 21

On October 28, 2003, President Bush signed into law the Check Clearing for the 21st Century Act, also known as Check 21.  The new law, which was not effective until October 28, 2004, gave “substitute checks,” such as a digital image of a check and copies made from that image, the same legal standing as the original paper check.  Some of the major provisions include:

•                  Allows check truncation without making it mandatory;

•                  Demands that every financial institution communicate to accountholders in writing a description of its substitute check processing program and their rights under the law;

•                  Legalizes substitutions for and replacements of paper checks without agreement from consumers;

•                  Keeps in place the previously mandated electronic collection and return of checks between financial institutions only when individual agreements are in place;

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

•                  Requires recrediting of funds to an individual’s account on the next business day after a consumer proves the financial institution has erred.

This new legislation will likely have a dramatic impact on bank capital spending as many financial institutions assess whether technological or operational changes are necessary to stay competitive and take advantage of the new opportunities presented by Check 21.

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Georgia Bancshares, Inc.

The Gramm-Leach-Bliley Act.  The Gramm-Leach-Bliley Act, previously known as the Financial Services Modernization Act of 1999, was signed into law on November 12, 1999.  Among other things, the Act repeals the restrictions on banks affiliating with securities firms contained in sections 20 and 32 of the Glass-Steagall Act.  The Act also permits bank holding companies that become financial holding companies to engage in a statutorily provided list of financial activities, including insurance and securities underwriting and agency activities, merchant banking, and insurance company portfolio investment activities.  The Act also authorizes activities that are “complementary” to financial activities.

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

Because our holding company, Georgia Bancshares, Inc., owns the outstanding capital stock of our bank, our holding company is a bank holding company under the federal Bank Holding Company Act of 1956 and the Financial Institutions Code of Georgia.

The Bank Holding Company Act.  Under the Bank Holding Company Act, our holding company is subject to periodic examination by the Federal Reserve and required to file periodic reports of its operations and any additional information that the Federal Reserve may require.  Our activities at the holding company level are limited to:

•                  banking and managing or controlling banks;

•                  furnishing services to or performing services for its subsidiaries; and

•                  engaging in other activities that the Federal Reserve determines to be so closely related to banking and managing or controlling banks as to be a proper incident thereto.

Investments, Control, and Activities.  With certain limited exceptions, the Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

•                  acquiring substantially all the assets of any bank;

•                  acquiring direct or indirect ownership or control of any voting shares of any bank if after the 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

•                  merging or consolidating with another bank holding company.

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

Under the Bank Holding Company Act, a bank holding 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 non-banking activities unless the Federal Reserve Board, 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 Board has determined by regulation to be proper incidents to the business of a bank holding company 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 adviser;

•                  owning savings associations; and

•                  making investments in certain corporations or projects designed primarily to promote community welfare.

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The Federal Reserve Board imposes certain capital requirements on our holding company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets.  These requirements are described below under “Capital Regulations.”  Subject to capital requirements and certain other restrictions, our holding company is able to borrow money to make a capital contribution to our bank, and these loans may be repaid from dividends paid from our bank to our holding company.  Our ability to pay dividends will be subject to regulatory restrictions as described below in “The Bank of Georgia– Dividends.”  Our holding company is also able to raise capital for contribution to our bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.  As a bank holding company registered under the Financial Institutions Code of Georgia, we must provide the Georgia Department of Banking and Finance with information regarding the financial, management, and operating condition of our holding company and bank.

Source of Strength; Cross-Guarantee.  In accordance with Federal Reserve Board policy, our holding company is expected to act as a source of financial strength to our bank and to commit resources to support our bank in circumstances in which our holding company might not otherwise do so.  Under the Bank Holding Company Act, the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary, other than a non-bank subsidiary of a bank, upon the Federal Reserve Board’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 non-bank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

The Bank of Georgia

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

The Georgia Department of Banking and Finance and the FDIC regulate or monitor virtually all areas of our 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 Georgia Department of Banking and Finance and the FDIC require banks to maintain certain capital ratios, impose limitations on banks’ aggregate investment in real estate, bank premises, and furniture and fixtures, require banks to prepare quarterly reports on their financial condition, and require banks to conduct annual audits of their financial affairs in compliance with its minimum standards and procedures.

Under the FDIC Improvement Act, all insured institutions must undergo regular on-site examinations 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 their state supervisor when applicable.  The FDIC Improvement Act directs the FDIC to develop a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to

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the extent feasible and practicable, in any balance sheet, financial statement, report of condition, or any other report of any insured depository institution.  The FDIC Improvement Act 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 the following:

•                  internal controls;

•                  information systems and audit systems;

•                  loan documentation;

•                  credit underwriting;

•                  interest rate risk exposure; and

•                  asset quality.

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

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

Transactions With Affiliates and Insiders.  Our 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.  The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of our bank’s capital and surplus and, as to all affiliates combined, to 20% of our bank’s capital and surplus.  Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements.  Compliance is also required with certain provisions designed to avoid the taking of low quality assets.

Our bank is also be subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits 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 nonaffiliated companies.  Our bank is subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests.  Such extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (2) must not involve more than the normal risk of repayment or present other unfavorable features.

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

•                  a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;

•                  covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and

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

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

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

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

Community Reinvestment Act.  The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the FDIC shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate income neighborhoods.  These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.  Failure to adequately meet these criteria could impose additional requirements and limitations on the bank.  Under the Gramm-Leach-Bliley Act, banks with aggregate assets of not more than $250 million will be subject to a Community Reinvestment Act examination only once every 60 months if the bank receives an outstanding rating, once every 48 months if it receives a satisfactory rating, and as needed if the rating is less than satisfactory.  Additionally, under the Gramm-Leach-Bliley Act, banks are required to publicly disclose the terms of various Community Reinvestment Act-related agreements.

The Gramm-Leach-Bliley Act.   Under the Gramm-Leach-Bliley Act, subject to certain conditions imposed by their respective banking regulators, national and state-chartered banks are permitted to form “financial subsidiaries” that may conduct financial or incidental activities, thereby permitting bank subsidiaries to engage in certain activities that previously were impermissible.  The Gramm-Leach-Bliley Act imposes several safeguards and restrictions on financial subsidiaries, including that the parent bank’s equity investment in the financial subsidiary be deducted from the bank’s assets and tangible equity for purposes of calculating the bank’s capital adequacy.  In addition, the Gramm-Leach-Bliley Act imposes new restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks and nonbank affiliates.

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

Other Regulations.  Interest and certain other charges collected or contracted for by our 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.

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The deposit operations of our 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.

Capital Regulations.  The FDIC and the Georgia Department of Banking and Finance 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 profiles among banks and account for off-balance sheet items.  The guidelines are minimums, and the 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 in excess of the minimums.  We have not received any notice indicating that either our bank or our holding company is subject to higher capital requirements.  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 shareholders’ equity, qualifying perpetual preferred stock, and minority interests 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 applies.  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 equal to 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.

The FDIC Improvement Act established a new capital-based regulatory scheme designed to promote early intervention for troubled banks which 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 quality as a “well capitalized” institution, a bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less than 6%, and a total risk-based capital ratio of no less than 10%, and the bank must not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level.  Currently, we qualify as “well capitalized.”

Under the FDIC Improvement Act 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 increases, and the permissible activities of the institution decreases, as it moves downward through the capital categories.  Institutions that fall into one of the three undercapitalized categories may be required to do some or all of the following:

•                  submit a capital restoration plan;

•                  raise additional capital;

•                  restrict their growth, deposit interest rates, and other activities;

•                  improve their management;

•                  eliminate management fees; or

•                  divest themselves of all or a part of their operations.

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These capital guidelines can affect us in several ways.  If we grow at a rapid pace, our capital may be depleted too quickly, and a capital infusion from our holding company may be necessary which could impact our ability to pay dividends.  Our capital levels currently are adequate; however, rapid growth, poor loan portfolio performance, poor earnings performance, or a combination of these factors could change our capital position in a relatively short period of time.  If we fail to meet these capital requirements, our bank would be required to develop and file a plan with its primary federal banking regulator describing the means and a schedule for achieving the minimum capital requirements.  In addition, our bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless our bank could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time.  A bank that is not “well capitalized” is also subject to certain limitations relating to so-called “brokered” deposits.  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.

Enforcement Powers.  The Financial Institution Reform Recovery and Enforcement Act expanded and increased civil and criminal penalties available for use by the federal regulatory agencies against depository institutions and certain “institution-affiliated parties.”  Institution-affiliated parties primarily include management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs.  These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports.  Civil penalties may be as high as $1,000,000 a day for such violations.  Criminal penalties for some financial institution crimes have been increased to 20 years.  In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties.  Possible enforcement actions include the termination of deposit insurance.  Furthermore, banking agencies’ power to issue cease-and-desist orders were expanded.  Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications, or guarantees against loss.  A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.

Effect of Governmental Monetary Policies.  Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies.  The Federal Reserve Bank’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession.  The monetary policies of the Federal Reserve Board have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities, and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits.  It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

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

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Item 2.           Description of Property

Properties

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

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

Item 3.           Legal Proceedings.

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

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

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

After consultation with legal counsel, there are no proceedings pending or threatened against Georgia Bancshares or the Bank of Georgia that will, individually or in the aggregate, have a material adverse effect on the business or the consolidated financial condition of Georgia Bancshares.

Item 4.           Submission of Matters to a Vote of Security Holders.

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

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PART II

Item 5.           Market for Common Equity and Related Stockholder Matters.

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

The following table sets forth the high and low bid information as quoted on the OTC Bulletin Board during the periods indicated.  The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

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

To date, we have not paid cash dividends on our common stock.  We currently intend to retain earnings to support operations and finance expansion and therefore do not anticipate paying cash dividends in the foreseeable future.  Our ability to pay cash dividends is dependent upon receiving cash in the form of dividends from The Bank of Georgia.  However, certain restrictions exist regarding the ability of the bank to transfer funds to the company in the form of cash dividends.  A dividend may only be paid if: (i) the bank’s dividend does not exceed 50% of the previous calendar year’s net profit, after taxes, but before dividends; (ii) the bank’s dividend is paid out of the retained earnings of the bank; (iii) the bank’s total classified assets do not exceed 80% of Tier 1 capital plus the allowance for loan losses; and (iv) the ratio of Tier 1 capital to adjusted total assets of the bank is greater than or equal to 6%.   All of our outstanding shares of common stock are entitled to share equally in dividends from funds legally available when, and if, declared by the board of directors.

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

Stock Warrants

In connection with the formation of the bank, each of our organizers received, for no additional consideration, a warrant to purchase one share of common stock for $10.00 per share for each share purchased during the initial public offering of our wholly owned subsidiary, The Bank of Georgia.  Following the 5-for-4 stock splits declared by our board of directors on August 16, 2001, September 19, 2002, and June 19, 2003, the exercise price of these warrants has been adjusted to $5.12 per share.  The warrants are represented by separate warrant agreements.  One-third of the warrants vested on each of the first three anniversaries of the date of our bank’s incorporation, and they are exercisable in whole or in part during the ten year period ending on February 18, 2010.  The warrants may not be assigned, transferred, pledged, or hypothecated in any way.  The shares issued pursuant to the exercise of such warrants are transferable, subject to compliance with applicable securities laws.  If the Georgia Department of Banking and Finance or the FDIC issues a capital directive or other order requiring the bank to obtain additional capital, the warrants will be forfeited, if not immediately exercised.

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Item 6. Selected Financial Data

Selected Financial Data

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Item 7.           Management’s Discussion and Analysis or Plan of Operation

Overview

Georgia Bancshares, Inc. is a Georgia corporation formed on December 21, 2000 to serve as the holding company for The Bank of Georgia, a Georgia state chartered bank incorporated on September 9, 1999.  We commenced operations as The Bank of Georgia on February 18, 2000.  On April 19, 2001, shareholders of The Bank of Georgia approved the reorganization of the bank into a holding company structure.  Upon consummation of the reorganization on May 18, 2001, shares of the bank’s common stock were exchanged for shares of the holding company’s common stock.  On July 9, 2001, we expanded our operations by opening our first branch in Newnan, Georgia. In November 2002, we opened an office at 100 Westpark Drive in Peachtree City, Georgia. On January 3, 2003 we designated that office as our corporate main office.  Our former main office at 2008 Highway 54 West, Fayetteville remains open as a branch office.  In June 2003 a new branch was opened within the Kroger Towne Center Store in Fayetteville, and our new full-service branch was opened in Tyrone, Georgia on August 26, 2003.  In 2004 we opened a new branch on Highway 154 in Sharpsburg in April and a new full-service branch was opened on Highway 74 in Fairburn in November.

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

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

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

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

In summary, management is well pleased with the results for 2004 and the bank’s financial position as of December 31, 2004.  Despite the lowest interest rate environment in recent history, the bank experienced a 39.3% increase in net interest income in 2004 when compared to 2003.  The net interest margin increased from 3.77% to 4.33% during this period.  Our goal is to achieve and maintain a net interest margin in excess of 4.00%.  We are pleased that we were able to achieve this goal during 2004.  The increase in the volume of loans outstanding during 2004 has positively impacted our increase in net interest income, but the lowering of the cost of our interest-bearing liabilities has also made a significant contribution.  This has been influenced by our strategy to continue to serve our designated markets with seasoned loan originators and develop a strong branch network to service our new and existing customers. Beginning with our single location in Fayetteville in 2000, we have added a branch in Newnan in 2001, a new location in Peachtree City in 2002, and two locations (Fayetteville – Towne Center and Tyrone) in 2003.  Two additional branches were opened during 2004 (Sharpsburg and Fairburn).  We have seen positive results from the expansion of our

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

The following discussion describes our results of operations for 2004 as compared to 2003 and to 2002, and also analyzes our financial condition as of December 31, 2004 as compared to December 31, 2003.  Like most community banks, we derive most of our income from interest we receive on our loans and investments.  Our primary source of funds for making these loans and investments is our deposits, on which we pay interest.  Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the incomes on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits.  Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

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

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

In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers.  We describe various components of this non-interest income, as well as our non-interest expense, in the following discussion.

The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements.  We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and other statistical information also included in this report.  Analysis of the results should be made with an understanding of our relatively short history.

Critical Accounting Policies

The accounting and financial reporting policies of Georgia Bancshares, Inc. and its subsidiary, The Bank of Georgia, conform to accounting principles generally accepted in the United States of America and to general practices within the financial services industry.  The only accounting policy that we have deemed “critical” relates to the provision and allowance for loan losses as discussed in detail on page 26 herein.  In determining which accounting policies are critical in nature, we have identified the policy that requires significant judgment or complex estimates.  The application of this policy has a significant impact on our financial statements.  Our financial results could differ significantly if different judgments or estimates are applied in the application of this policy.

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

Results of Operations

During 2004, total assets increased $44.5 million, or 21.7%, to $249.6 million when compared to December 31, 2003.  The primary reason for this increase in assets were increases in loans of $42.2 million.  Total deposits increased $30.3 million, or 16.6%, from the December 31, 2003 amount of $182.0 million.  Shareholders’ equity was $21.2 million at December 31, 2004.

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

At December 31, 2002, we had total assets of $171.6 million.  Loans net of loan loss reserve and unearned income totaled $125.7million.  After deductions for interest expense and provision for loan losses, our net interest income was $3.8 million for the year ended December 31, 2002.  Total deposits were $142.6 million at December 31, 2002.  As of December 31, 2002, shareholders’ equity was $18.3 million.

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

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

Average Balances, Income and Expenses and Rates.  The following tables set forth, for the periods indicated, information related to our average balance sheet and average yields on assets and average rates paid on liabilities.  We derived these yields or rates by dividing income or expense by the average balance of the corresponding assets or liabilities.  We derived average balances from the daily balances throughout the periods indicated.

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TABLE 1

Average Consolidated Balance Sheets and Net Interest Analysis

(in thousands)

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

TABLE 2

Changes in Interest Income and Expense

(in thousands)

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Other Income and Expense

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

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

Analysis of Financial Condition

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

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

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

Investments

Our available-for-sale investment portfolio of $35.0 million as December 31, 2004 consisted primarily of debt securities, which provide the Bank with a source of liquidity, a stable source of income and serve as a vehicle to implement asset and liability management strategies.  This represented an increase of $0.9 million (2.6%) over the $34.1 million held at December 31, 2003.  The Company believes the investment portfolio provides a balance to interest rate and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds and supplying securities to pledge as required collateral for certain public deposits.  Investment securities in the available-for sale category are stated at fair value.  These securities may be sold, retained until maturity, or pledged as collateral for liquidity and borrowing in response to changing interest rates, changes in prepayment risk and other factors as part of the Company’s overall asset liability management strategy.

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TABLE 3

Investment Portfolio

(in thousands)

The following table presents the expected maturity of the amortized cost of securities by maturity date and average yields based on amortized cost at December 31, 2004.  The composition and maturity/re-pricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs.

TABLE 4

Expected Maturity of Securities

(in thousands)

Mortgage-backed securities are included in the maturities categories in which they are anticipated to be repaid based on scheduled maturities.  The actual cash flow of mortgage-backed securities differs with this assumption.  Additionally, some agency securities in the portfolio have call features.  The above analysis assumes that callable agencies will mature on their final maturity date.  The actual cash flow of agency securities may differ from this assumption.

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Loans

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

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

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

Associated with loan yields are inherent credit and liquidity risks, which we attempt to control and counterbalance.  The interest rates we charge on loans vary with the degree of risk and the maturity and amount of the loan.  Competitive pressures, money market rates, availability of funds, and government regulations also influence interest rates.

Real estate mortgage loans and construction and development loans constitute the principal components of our loan portfolio.  For the year ended December 31, 2004, gross loans totaled $192.5 million with residential and non-residential/non-farm mortgage loans totaling $63.6 million and representing 33.0% of our portfolio, construction and development loans totaling $106.5 million and representing 55.3% of our portfolio, and non-real estate loans totaling $22.4 million and accounting for 11.7% of our loan portfolio.

For the year ended December 31, 2003, gross loans totaled $149.8 million with residential and non-residential/non-farm mortgage loans totaling $52.5 million and representing 35.0% of our portfolio, construction and development loans totaling $81.1 million and representing 54.2% of our portfolio, and non-real estate loans totaling $16.2 million and accounting for 10.8% of our loan portfolio.

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

In the context of this discussion, a “real estate mortgage loan” is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan.  Most of our real estate loans are secured by residential or commercial property.  We do not generally make traditional long term residential mortgages, but we do make traditional second mortgage residential real estate loans and home equity lines of credit.  We follow the common practice of financial institutions in our area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral.  This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component.  Generally, we limit our loan-to-value ratio to 80%.  Due to the short time our portfolio has existed, the current mix may not be indicative of the ongoing portfolio mix.  We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentrations of collateral.

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We have been able to rapidly grow our loan portfolio since we commenced operations by refinancing loans with borrowers from other financial institutions and by originating new loans from individuals and businesses in the community.  Our directors and officers have utilized banking relationships established during their previous employment with other financial institutions in our market area to generate loan business.  A majority of our initial loans consisted of refinancing of seasoned credit or the continuation of business from borrowers who had preexisting banking relationships with our directors and officers.  Our loan growth resulting from refinancing of seasoned credit has slowed as our business has continued to mature.  In 2003 and 2004, we added additional seasoned loan personnel to augment our loan origination efforts and in the future we believe that most of our loans will originate from new business from existing and new customers.  We also continue to seek new ways to tap into new markets both from new product lines in our current markets and from new geographic areas.

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

TABLE 5

Loan Portfolio

(in thousands)