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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended March 31, 2004

For the Transition Period from                      to                     

Commission File Number 000-23261

SECURITY BANK CORPORATION

(Name of Small Business Issuer in its Charter)

SAME AS ABOVE

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 the past 90 days.    x  Yes    ¨  No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.    x  Yes    ¨  No

Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)    x  Yes    ¨  No

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

5,811,492 Shares of $1 par value common stock as of May 5, 2004

DOCUMENTS INCORPORATED BY REFERENCE

Table of Contents

SECURITY BANK CORPORATION AND SUBSIDIARIES

INDEX

Table of Contents

PART I, ITEM 1

Financial Information

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

ASSETS

The accompanying notes are an integral part of these condensed consolidated balance sheets.

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PART I, ITEM 1 (CONTINUED)

Financial Information

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

LIABILITIES AND STOCKHOLDERS’ EQUITY

The accompanying notes are an integral part of these condensed consolidated balance sheets.

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PART I, ITEM 1 (CONTINUED)

Financial Information

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PART I, ITEM 1 (CONTINUED)

Financial Information

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31

(UNAUDITED)

($ IN THOUSANDS)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PART I, ITEM 1 (CONTINUED)

Financial Information

SECURITY BANK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THREE MONTHS ENDED MARCH 31

(UNAUDITED)

($ IN THOUSANDS)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PART I, ITEM 1 (CONTINUED)

Financial Information

SECURITY BANK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) Basis of Presentation

The consolidated financial statements include Security Bank Corporation (the Company) and its wholly-owned subsidiaries, Security Bank of Bibb County (formerly Security National Bank), located in Macon, Georgia; Security Bank of Houston County (formerly Crossroads Bank of Georgia), located in Perry, Georgia and Security Bank of Jones County (formerly Bank of Gray) located in Gray, Georgia (the Banks). The financial statements of Security Bank of Bibb County include its wholly-owned subsidiary, Fairfield Financial Services, Inc. since its formation on August 1, 2000. All intercompany accounts have been eliminated in consolidation.

Segment Reporting

Reportable segments are business units which offer different products and services and require different management and marketing strategies. Management of Security Bank Corporation considers that all banking operations are essentially similar within each of its subsidiaries and that there are no reportable operating segments. However, fee income from mortgage loans originated and sold to investors increased significantly with the July 2000 acquisition of Fairfield Financial Services, Inc. (Fairfield). Consolidated other income for the period ended March 31, 2004 includes approximately $1,203,000 of Fairfield fee income. Such income may fluctuate significantly with increases or decreases in mortgage rates.

The financial information included herein is unaudited; however, such information reflects all adjustments which are, in the opinion of management, necessary to fairly state the financial position and results of operations for the interim periods presented.

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PART I, ITEM 1 (CONTINUED)

Financial Information

(2) Loans

Loans as of March 31, 2004 are comprised of the following:

Loans are generally reported at principal amount less unearned interest and fees. Impaired loans are recorded under Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan and SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures. Impaired loans are loans for which principal and interest are unlikely to be collected in accordance with the original loan terms and, generally, represent loans delinquent in excess of 90 days which have been placed on nonaccrual status and for which collateral values are less than outstanding principal and interest. Small balance, homogeneous loans are excluded from impaired loans. Generally, interest payments received on impaired loans are applied to principal. Upon receipt of all loan principal, additional interest payments are recognized as interest income on the cash basis.

Other nonaccrual loans are loans for which payments of principal and interest are considered doubtful of collection under original terms but collateral values equal or exceed outstanding principal and interest.

Fees and incremental direct costs associated with the loan origination process are deferred and amortized using the straight-line method as adjustments to yield over the respective loan terms.

(3) Earnings Per Share

SFAS No. 128 establishes standards for computing and presenting basic and diluted earnings per share. Basic earnings per share is calculated and presented based on income available to common stockholders divided by the weighted average number of shares outstanding during the reporting periods. Diluted earnings per share reflects the potential dilution that would occur if warrants and options were exercised and converted into common stock. The following presents earnings per share for the three months ended March 31, 2004 under the requirements of SFAS No. 128:

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PART I, ITEM 1 (CONTINUED)

Financial Information

(3) Earnings Per Share (Continued)

The assumed exercise of stock options is included in the diluted earnings per share computation using the treasury stock method and assuming an average market price for Security Bank Corporation stock of $30.5107 for the three-month period ended March 31, 2004. The Company’s stock is quoted on the NASDAQ market under the symbol SBKC.

Effective January 1, 2002, the Company adopted the fair value-based method of recording stock-based compensation contained in SFAS No. 123, Accounting for Stock-Based Compensation, which is considered the preferable accounting method for stock-based employee compensation. Historically the Company had applied the intrinsic value method permitted under SFAS No. 123, as defined in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for stock-based compensation plans. In adopting SFAS 123, the Company is allowed to choose from three alternative transition methods. The Company elected to apply SFAS 123 prospectively to all new awards. Stock-based compensation awards granted in previous years will continue to be accounted for under Opinion 25. No vesting of stock options under any of the Company’s plans occurred during the first quarter of 2004 or 2003. Accordingly, no compensation expense under SFAS No. 123 or disclosures under Opinion 25 are required.

(4) Allowance for Loan Losses

The allowance method is used in providing for losses on loans. Accordingly, all loan losses decrease the allowance and all recoveries increase it. The provision for loan losses is based on factors which, in management’s judgment, deserve current recognition in estimating possible loan losses. Such factors considered by management include growth and composition of the loan portfolio, economic conditions and the relationship of the allowance for loan losses to outstanding loans.

An allowance for loan losses is maintained for all impaired loans. Provisions are made for impaired loans upon changes in expected future cash flows or estimated net realizable value of collateral. When determination is made that impaired loans are wholly or partially uncollectible, the uncollectible portion is charged off.

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PART I, ITEM 1 (CONTINUED)

Financial Information

(4) Allowance for Loan Losses (Continued)

The following table presents the Company’s loan loss experience on all loans for the three months ended March 31:

(5) Derivative Financial Instruments

On July 1, 2003, the Company adopted SFAS No. 149, Amendment of Statements No. 133 on Derivative Instruments and Hedging Activities. This statement requires that all derivatives be recognized as assets or liabilities in the balance sheet and measured at fair value. Loan commitments related to the origination or acquisition of mortgage loans that will be held for sale must be accounted for as derivative instruments.

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PART I, ITEM 1 (CONTINUED)

Financial Information

(5) Derivative Financial Instruments (Continued)

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate-lock commitments). Rate-lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with related fees received from potential borrowers, are to be recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates. The Company has not recorded rate-lock commitments as derivative assets or liabilities as of March 31, 2004 as the effects did not have a material effect upon the consolidated financial statements.

(6) Investment Securities

The Company records investment securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. In accordance with the provisions of SFAS No. 115, the Company elected to classify securities individually as either available for sale or held to maturity. Securities classified as held to maturity are recorded at amortized cost. Those classified as available for sale are adjusted to market value through a tax-effected increase or reduction in stockholders’ equity.

Investment securities as of March 31, 2004 are summarized as follows:

Unrealized holding gains, net of tax, on securities available for sale in the amount of $1,334,000 have been credited to stockholders’ equity as of March 31, 2004.

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PART I, ITEM 1 (CONTINUED)

Financial Information

(7) Borrowed Money

Borrowed money is comprised of the following as of March 31, 2004:

Maturities of all FHLB and The Bankers Bank advances for each of the ensuing years are as follows:

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PART I, ITEM 1 (CONTINUED)

Financial Information

(7) Borrowed Money (Continued)

On December 31, 2003, the Company retroactively implemented FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, resulting in the deconsolidation of Security Bank Statutory Trust I. The implementation of this interpretation resulted in SBKC’s $557,000 investment in the common equity of the trust being included in the consolidated balance sheets as other assets and the interest income and interest expense received from and paid to the trust, respectively, being included in the consolidated statements of income as interest income and interest expense. The increase to other interest income and interest expense totaled $6,223 and $6,994 as of March 31, 2004 and 2003, respectively.

(8) Deposits

Components of deposits as of March 31, 2004 are as follows:

Brokered deposits are third-party time deposits placed by or through the assistance of a deposit broker. As of March 31, 2004, the Company had $66,041,000 in brokered deposits compared to $70,501,000 at December 31, 2003.

(9) Stockholders’ Equity

During 1996, the board of directors of Security Bank Corporation adopted the 1996 incentive stock option plan which authorizes 81,250 shares to be granted to certain officers and key employees. In May 1996, the board of directors granted key officers the right to purchase 81,250 shares of common stock at the price of $9.00, as adjusted for stock splits, representing the market value of the stock at the date of the option grant. Option holders may exercise in accordance with a vesting schedule beginning with 20 percent the first year and increasing 20 percent for each year thereafter such that 100 percent of granted options may be exercised by the end of the fifth year. Unexercised options expire at the end of the tenth year.

In 1999, the board of directors of Security Bank Corporation adopted another incentive stock option plan which authorizes 125,000 shares to be granted to certain officers and key employees. Those officers and key employees are granted the right to purchase shares of common stock at a price representing the market value of the stock at the date of the option grant. In May 1999, 73,500 options were granted at the price of $18.50 per share and an additional 10,000 options were granted at $17.94 per share in September 1999.

An additional 25,500 options were granted at $13.00 per share in August 2000 under this same plan. The terms of the 1999 incentive stock option plan are essentially the same as the 1996 incentive stock option plan.

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PART I, ITEM 1 (CONTINUED)

Financial Information

(9) Stockholders’ Equity (Continued)

During the first quarter of 2002, the board of directors of Security Bank Corporation adopted a performance-based incentive stock option plan. Under this plan, 105,000 options were granted in May 2002 at $19.51 per share, 7,500 were granted at $22.80 in November 2002, and an additional 5,000 options were granted at $23.50 in December 2002. The nonforfeitable provisions for these options are two-tiered. Options in the first tier are nonforfeitable over three years based on a 12 percent increase in earnings per share over the base year diluted earnings per share of $1.03 each year. If the maximum diluted earnings per share of $1.45 is reached during the three-year period, the nonforfeitable shares are doubled. Under the second tier, additional shares shall become nonforfeitable for two executive officers based on the same requirements except the diluted earnings per share must increase 15 percent a year to a maximum of $1.57 during the three-year period. The first year of nonforfeiture for this plan is based on the Company’s performance for 2001. One-third of the nonforfeitable options vest on each anniversary of the stock option agreements.

A summary of option transactions for the three months ended March 31, 2004 follows:

The Company is required to maintain minimum amounts of capital to total “risk weighted” assets, as defined by the banking regulations. As of March 31, 2004, the Company is required to have minimum Tier 1 and Total Capital Ratios of 4 percent and 8 percent, respectively, and a leverage ratio (Tier 1 Capital to average assets) of at least 4 percent. The Company’s actual ratios as of March 31, 2004 are as follows:

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PART I, ITEM 1 (CONTINUED)

Financial Information

(10) Noncash Investing Activities

Noncash investing activities for the three months ended March 31 are as follows:

(11) Other Comprehensive Income

For the three months ended March 31, 2004, other comprehensive income is comprised of the following:

(12) Acquisition of Assets

On July 31, 2000, Security Bank of Bibb County purchased the assets of Group Financial Southeast (dba Fairfield Financial) in a business combination accounted for as a purchase. The assets were placed in a newly formed subsidiary of Security Bank of Bibb County incorporated as Fairfield Financial Services, Inc. Fairfield Financial is primarily engaged in residential real estate mortgage lending in the state of Georgia. The results of operations of Fairfield Financial are included in the accompanying consolidated financial statements since the date of acquisition. The initial purchase price approximated $1,400,000, which consists of approximately $1,000,000 in cash and 32,345 shares of Security Bank Corporation stock valued at $388,140 at closing. The initial cost of the acquisition exceeded the fair value of the assets of Fairfield Financial by $988,000. The excess is recorded as goodwill and was amortized on the straight-line method over 10 years through December 31, 2001. As a result of the issuance of SFAS No. 142, the goodwill is no longer amortized but is reviewed for impairment.

The Asset Purchase Agreement provides for additional contingent payments of purchase price for years ended 2002-2005 based on the earnings of Fairfield Financial Services, Inc. The additional payments, if any, are to be payable in cash and stock. Cash payments for 2003 were equated to 40 percent of Fairfield Financial Services, Inc.’s earnings for the year. Stock payments for 2003 were based on 60 percent of 2003 earnings utilizing a specific formula for determining number of shares. The number of shares issued during any year cannot exceed 75,000. The maximum number of shares under the agreement cannot exceed 300,000 for years 2002-2005. All additional payments of cash and stock will be charged to goodwill. If Fairfield Financial sustains losses, no additional purchase price payments are due. The contingent payment made in 2004 as a result of 2003 earnings is a combination of cash and stock totaling approximately $3,700,000.

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PART I, ITEM 1 (CONTINUED)

Financial Information

(12) Acquisition of Assets (Continued)

On October 25, 2002, Security Bank Corporation executed a definitive agreement to acquire all outstanding shares of the Bank of Gray located in Gray (Jones County), Georgia. The stockholders of the Bank of Gray received $15,000,000 in cash and 1,571,000 common shares of the Company in a business combination accounted for as a purchase. The merger was approved at the Company’s annual meeting on May 29, 2003 and closed on May 30, 2003. Results of operations for the Bank of Gray are included in the consolidated financial statements since that date. The acquisition was made for the purpose of increasing the Company’s market share in the middle Georgia area.

The excess of the purchase price over book value has been allocated to the fair value of premises and equipment, the fair value of deposits and core deposits intangibles in the amounts of $1,168,000, $2,044,983 and $855,809, respectively. As of March 31, 2004, $170,415 of the deposit premium was accreted to interest expense. The Company amortized $4,417 of the premises and equipment premium and $42,790 of the core deposit intangibles during the three-months ended March 31, 2004. Goodwill of $20,964,250 was recorded as a result of this acquisition. The goodwill will not be deductible for tax purposes.

Following is a condensed balance sheet showing fair values of the assets acquired and the liabilities assumed as of the date of acquisition:

Following are proforma amounts assuming that the acquisition was made on January 1, 2003:

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PART I, ITEM 1 (CONTINUED)

Financial Information

(13) Restricted Stock-Unearned Compensation

In 2003, the board of directors of Security Bank Corporation adopted a restricted stock grant plan which awards certain executive officers common shares of the Company. The maximum number of shares which may be subject to restricted stock awards is 5,000. During 2003, all 5,000 shares were issued under this plan. The shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity. The cost of these shares is being amortized against earnings using the straight-line method over five years (the restriction period).

(14) Subsequent Events

On May 3, 2004, the Company closed on the sale of 588,000 shares of its common stock at an offering price of $30.25 per share through a firm commitment underwritten offering. The Company granted the underwriters an option to purchase up to an additional 88,200 shares to cover over-allotments. The underwriters exercised this option. All 88,200 additional shares have been issued.

At the annual shareholders’ meeting, held on April 29, 2004, shareholders approved the 2004 Omnibus Stock Ownership and Long-Term Incentive Plan (the 2004 Plan) and the 2004 Employee Stock Purchase Plan (the Employee Plan). Under the 2004 Plan, incentive stock options and nonqualified options to acquire shares of stock, restricted stock, stock application rights and/or units may be granted to eligible employees. A total of 300,000 shares is authorized for grants under the 2004 Plan. The Employee Plan is designed to encourage and enable all eligible employees of the Company and its subsidiaries to purchase shares at 85 percent of the fair market value of the stock on the grant date. A total of 50,000 shares is authorized under this plan.

In addition to the approval of stock option plans, the shareholders also approved at the annual meeting an amendment to the Articles of Incorporation of the Company which would allow two-thirds of the Company’s board of directors to approve small merger transactions without shareholder approval. A small merger is defined as an acquisition in which the target company receives less than 20 percent of the stock of Security Bank Corporation.

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PART I, ITEM 2

Financial Information

SECURITY BANK CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following narrative presents management’s discussion and analysis of Security Bank Corporation and Subsidiaries (SBKC’s) financial condition and results of operations as of and for the three-month periods ended March 31, 2004 and 2003. The historical financial statements of SBKC are set forth elsewhere herein. This discussion should be read in conjunction with those financial statements and the other financial information included in this report.

Overview

SBKC is a Georgia corporation formed to act as a bank holding company for Security Bank of Bibb County (formerly Security National Bank) (SB-Bibb) under the federal Bank Holding Company Act of 1956, as amended, and the bank holding company laws of Georgia. SBKC was incorporated on February 10, 1994 at the instruction of management of SB-Bibb. At a special meeting of the stockholders of SB-Bibb on August 2, 1994, the stockholders of SB-Bibb voted in favor of a plan reorganization and agreement of merger pursuant to which SB-Bibb became a wholly-owned subsidiary of SBKC. The reorganization was effective on June 30, 1994, as a result of which the shares of common stock of SB-Bibb then issued and outstanding were converted into shares of the common stock of SBKC. SB-Bibb has operated as a wholly-owned subsidiary of SBKC since that time, although the functions and business of SB-Bibb, its board of directors, staff and physical office locations underwent no changes as a result of the reorganization.

SB-Bibb is a state-chartered bank that engages in the commercial banking business primarily in Bibb County, Georgia. SB-Bibb commenced operations on November 8, 1988. The bank operates eight full service banking offices and one limited service office in Macon, Georgia. The bank also operates one full service banking office in Brunswick, Georgia. On March 1, 1999, the bank converted its banking charter from a national to a state charter, and changed its name from Security National Bank to Security Bank of Bibb County.

On August 8, 1998, SBKC acquired a 100 percent interest in Crossroads Bancshares, Inc., the parent holding company of Crossroads Bank of Georgia in Perry and Warner Robins, Georgia. The two companies merged in a pooling of interest stock swap transaction. The parent company of Crossroads Bank was subsequently dissolved. On June 3, 1999, Crossroads Bank changed its name to Security Bank of Houston County (SB-Houston) and now operates as a wholly-owned subsidiary of SBKC, with four full service banking offices in Perry and Warner Robins. Construction began in January 2004 on a new branch in Warner Robins with an anticipated completion date of August 2004.

On July 31, 2000, SB-Bibb purchased the assets of Group Financial Southeast (dba Fairfield Financial) in a business combination accounted for as a purchase. The assets were placed in a newly formed subsidiary of SB-Bibb incorporated as Fairfield Financial Services, Inc. (Fairfield). The purchase transaction involved a combination of SBKC stock and cash consideration. Fairfield is a well-established real estate mortgage lending company with a number of production locations throughout Georgia and the Southeast, including offices in Macon, Warner Robins, Richmond Hill, Stockbridge, Fayetteville and St. Simons Island. The Company functions as a subsidiary of SB-Bibb.

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PART I, ITEM 2 (CONTINUED)

Financial Information

Overview (Continued)

On May 30, 2003, SBKC acquired all outstanding shares of the Bank of Gray located in Gray, Georgia. The two companies merged in a business combination accounted for as a purchase. The stockholders of the Bank of Gray received a combination of SBKC stock and cash consideration. On the acquisition date the Bank of Gray officially changed its name to Security Bank of Jones County (SB-Jones).

As of March 31, 2004, SBKC had 293 employees on a full-time equivalent basis.

Substantially all of the business of SBKC is conducted through its three subsidiary banks. Each bank offers a full range of lending services including the specialized Fairfield mortgage subsidiary, deposit products, Internet banking, automated teller machines, safe deposit boxes, credit cards, night depositories, and other services for the convenience of its customers, who mainly reside in Bibb, Jones and Houston Counties.

Like most financial institutions, our profitability depends largely upon net interest income, which is the difference between the interest received on earning assets, such as loans and investment securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Our results of operations are also affected by our provision for loan losses; noninterest expenses, such as salaries, employee benefits and occupancy expenses; and noninterest income, such as mortgage loan fees and service charges on deposit accounts.

SBKC’s net income for the three-month period ended March 31, 2004 was $2,682,000 or $0.52 diluted earnings per share compared to $1,568,000 or $0.46 for the same period of the preceding year. The increase in net income for the three-month period ended March 31, 2004 primarily relates to the growth in the loan portfolio and core deposits in addition to our success in maintaining net interest margins.

Annualized return on average assets of 1.18 percent and 1.13 percent was recorded for the three-month periods ended March 31, 2004 and 2003. Return on average equity of 13.81 percent was recorded for the three-month period ended March 31, 2004 compared to 15.55 percent for the same period in 2003.

At March 31, 2004, total assets were $936,800,000 compared to $911,300,000 at December 31, 2003. At March 31, 2003, total assets were $568,000,000 compared to $581,300,000 at December 31, 2002. Total interest-earning assets increased $33,600,000 or 4.08 percent to $856,600,000 at March 31, 2004 from $823,000,000 at December 31, 2003. The increases in total assets and interest-earning assets compared to December 31, 2003 are primarily due to increases in loan volumes, mainly in the real estate-construction and real estate-mortgage loans.

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PART I, ITEM 2 (CONTINUED)

Financial Information

Financial Condition

Cash and Cash Equivalents

Cash and due from banks and interest-bearing deposits decreased approximately $8,200,000 or 20.6 percent to $31,700,000 at March 31, 2004 from $39,900,000 at December 31, 2003. Federal funds sold decreased by $800,000 to $9,700,000 at March 31, 2004 from $10,500,000 at December 31, 2003. The causes of these decreases are most evident in the analysis of cash flows from investing activities, which reports cash outflows from loans of approximately $44,049,000.

Investment Securities

Investment securities have decreased $5,800,000 or 5.86 percent since December 31, 2003 when investment securities totaled $98,900,000. As of March 31, 2004, investment securities were $93,100,000. Our Company’s investment in securities is largely comprised of U.S. Government Agency securities.

Loans Receivable, Net

Loans receivable, excluding loans held for sale, were $740,800,000 at March 31, 2004, an increase of $43,100,000 or 6.18 percent (25 percent on an annualized basis) from $697,700,000 at December 31, 2003. Our Company continues to experience good growth in its loan portfolio, particularly in the real estate construction loans. Loans held for sale decreased $3,700,000 or 33 percent from $11,400,000 at December 31, 2003 to $7,700,000 at March 31, 2004, primarily as a result of a decline in mortgage refinance activity.

Nonperforming Assets

Our Company’s total nonperforming assets were $5,900,000 or 0.63 percent of total assets at March 31, 2004 compared to $8,200,000 or 0.90 percent at December 31, 2003. Nonperforming loans decreased $200,000 or 4.76 percent to $4,000,000 from $4,200,000 at December 31, 2003. The amount of other real estate owned that was held by our Company on March 31, 2004 totaled $1,900,000, a decrease of $2,100,000 since December 31, 2003. Of the balance in other real estate owned, 27 percent of the total is related to the foreclosure on one relationship.

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PART I, ITEM 2 (CONTINUED)

Financial Information

Financial Condition (Continued)

Nonperforming Assets (Continued)

The following table presents our nonperforming assets as of March 31, 2004:

Deposits

Total deposits increased $18,035,000 or 2.43 percent (9.72 percent on an annualized basis) from $743,301,000 at December 31, 2003 to $761,336,000 at March 31, 2004. This increase is due to an increase of $12,000,000 in interest-bearing demand and savings accounts and $5,300,000 in local certificates of deposit. Brokered and wholesale certificates of deposit increased $253,000 over balances held at December 31, 2003. Further discussion of our Company’s use of brokered and wholesale certificates of deposit is included in the liquidity and capital adequacy section of this discussion.

Borrowed Money

Borrowed money totaled $89,200,000 as of March 31, 2004, an increase of 3.72 percent (14.88 percent on an annualized basis) since December 31, 2003 when borrowed money totaled $86,000,000. Borrowings from the FHLB amounted to $53,300,000 or 60 percent of total borrowed money as of March 31, 2004. Management utilized the majority of these borrowings to fund additional loan requests. A line of credit at The Bankers Bank, with available credit totaling $17,000,000, had an outstanding balance of $10,000,000 at March 31, 2004. This line of credit is primarily used to provide capital injections as necessary to our subsidiary banks.

Subordinated debentures, issued December 2002, had an outstanding balance of $18,557,000. The proceeds from the offering were used to retire holding company debt and to fund the acquisition of the Bank of Gray. The subordinated debentures are included in borrowed funds on the consolidated balance sheets, but subject to certain limitations, qualify as Tier 1 capital for regulatory capital purposes.

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PART I, ITEM 2 (CONTINUED)

Financial Information

Financial Condition (Continued)

Equity

At March 31, 2004, total equity was $80,600,000 or 8.60 percent of total assets compared to $75,800,000 or 8.32 percent of total assets as of December 31, 2003. Total equity increased approximately $1,700,000 due to the stock portion of the 2003 contingent payment for the July 31, 2000 acquisition of Fairfield Financial Services. The remaining increase is due to the retention of net income during the period, net of dividends paid.

Results of Operations

Net Income

Our Company’s net income increased 71 percent to $2,682,000 for the three months ended March 31, 2004, compared to $1,569,000 recorded in the comparable prior period. The increase in net income is primarily due to the increase in average total loans from $471,000,000 at March 31, 2003 to $719,700,000 at March 31, 2004, coupled with the Company’s success in maintaining its net interest margin.

Net Interest Income

The annualized net interest margin of the Company, net interest income divided by average earning assets, was 4.38 percent for the three-month period ended March 31, 2004 compared to 4.33 for the same three-month period of the preceding year. Our Company has been successful in maintaining its margins despite the downward pressure on margins in the industry as a whole. SBKC’s success is the result of our Company’s effective use of external debt and noncore deposits, coupled with focused marketing efforts to grow low-cost core deposits.

Total interest income increased to $12,300,000 for the three-month period ended March 31, 2004, from $8,300,000 during the comparable prior year period. The increase is due to the increase in average loans primarily due to the Bank of Gray acquisition.

Total interest expense increased 17.05 percent for the three months ended March 31, 2004 compared to the prior period ended March 31, 2003. The increase is primarily due to an increase in average interest-bearing liabilities of 63 percent compared to the prior period, most of which was a result of the Bank of Gray acquisition. The increase due to volume variance was offset due to the lower interest rate environment which allowed SBKC to re-price interest-bearing liabilities at lower rates compared to the same periods in the prior year.

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PART I, ITEM 2 (CONTINUED)

Financial Information

Results of Operations (Continued)

Net Interest Income (Continued)

The following table represents the effective yields and costs of funds for the three-month periods ended March 31: